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 For the fiscal year ended October 29, 2006
or
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from ______________ to ______________
Commission file number: 1-9232
VOLT INFORMATION SCIENCES, INC.
(Exact Name of Registrant as Specified in Its Charter)
New York 13-5658129
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
560 Lexington Avenue, New York, New York 10022
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (212) 704-2400
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
Common Stock, $.10 par value New York Stock Exchange, Inc.
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Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes No X
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Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes No X
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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
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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 a large accelerated filer, an
accelerated filer or a non-accelerated filer (as defined in Exchange Act Rule
12b-2).
Large Accelerated Filer Accelerated Filer X Non-Accelerated Filer
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Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes No X
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The aggregate market value of the common stock held by non-affiliates of the
Registrant was approximately $243 million, based on the closing price of $31.38
per share on the New York Stock Exchange on April 30, 2006 (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 5, 2007 was
15,437,983.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement for its 2007 Annual Meeting are
incorporated by reference into Part III of this Report.
TABLE OF CONTENTS
Page
PART I
Item 1. Business 2
Item 1A. Risk Factors 15
Item 1B. Unresolved Staff Comments 20
Item 2. Properties 21
Item 3. Legal Proceedings 22
Item 4. Submission of Matters to a Vote of Security Holders 22
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities 24
Item 6. Selected Financial Data 25
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 26
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk 51
Item 8. Financial Statements and Supplementary Data 53
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 87
Item 9A. Controls and Procedures 87
Item 9B. Other Information 90
PART III
Item 10. Directors and Executive Officers of the Registrant 90
Item 11. Executive Compensation 90
Item 12. Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters 90
Item 13. Certain Relationships and Related Transactions 90
Item 14. Principal Accountant Fees and Services 90
PART IV
Item 15. Exhibits and Financial Statement Schedules 91
1
PART I
ITEM 1. BUSINESS
General
Volt Information Sciences, Inc. is a New York corporation, incorporated in 1957.
We sometimes refer to Volt Information Sciences, Inc. and its subsidiaries
collectively as "Volt" or the "Company," unless the context otherwise requires.
Volt operates in the following two businesses 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 North
America and Europe and has commenced operations in Asia. These
services fall within three major functional areas:
o Staffing Solutions - provides a full spectrum of managed staffing,
temporary/contract personnel employment, direct hire placement and
workforce solutions.
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 markets.
o E-Procurement Solutions - provides global vendor neutral human capital
acquisition and management solutions by combining web-based tools and
business process outsourcing services.
Telecommunications and Information Solutions
(2) Telephone Directory - This segment publishes independent telephone
directories in the United States and publishes telephone directories
in Uruguay; provides telephone directory production, commercial
printing, database management, sales and marketing services; and
licenses directory production and contract management software systems
to directory publishers and others.
(3) Telecommunications Services - This segment provides telecommunications
services, including design, engineering, construction, installation,
maintenance and removals in the outside plant and central offices of
telecommunications and cable companies and within 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 services the global market and
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 29, 2006, and those assets identifiable within
each segment at the end of each of those fiscal years. This information should
be read in conjunction with Management's Discussion and Analysis of Financial
Condition and Results of Operations and the Consolidated Financial Statements in
Items 7 and 8, respectively, of this Report.
October October October
29, 2006 30, 2005 31, 2004
----------- ----------- -----------
NET SALES (In thousands)
Staffing Services:
Sales to unaffiliated customers
Staffing $1,910,416 $1,759,683 $1,580,225
Managed Services 1,109,315 1,157,168 1,148,116
----------- ----------- -----------
Total gross sales 3,019,731 2,916,851 2,728,341
Less Non-recourse Managed Services--Note 1 (1,052,682) (1,121,196) (1,120,079)
Intersegment sales 5,233 6,155 3,839
----------- ----------- -----------
1,972,282 1,801,810 1,612,101
----------- ----------- -----------
Telephone Directory:
Sales to unaffiliated customers 79,351 82,298 72,194
Intersegment sales - - 1
----------- ----------- -----------
79,351 82,298 72,195
----------- ----------- -----------
Telecommunications Services:
Sales to unaffiliated customers 118,081 137,799 134,266
Intersegment sales 781 1,212 1,132
----------- ----------- -----------
118,862 139,011 135,398
----------- ----------- -----------
Computer Systems:
Sales to unaffiliated customers 173,972 161,867 110,055
Intersegment sales 13,958 11,252 9,962
----------- ----------- -----------
187,930 173,119 120,017
----------- ----------- -----------
Elimination of intersegment sales (19,972) (18,619) (14,934)
----------- ----------- -----------
TOTAL NET SALES $2,338,453 $2,177,619 $1,924,777
=========== =========== ===========
SEGMENT PROFIT (LOSS)
Staffing Services $58,799 $31,179 $36,718
Telephone Directory 15,828 14,895 10,115
Telecommunications Services (1,168) (2,429) (2,838)
Computer Systems 28,447 35,801 30,846
----------- ----------- -----------
Total segment profit 101,906 79,446 74,841
General corporate expenses (43,350) (38,839) (30,812)
----------- ----------- -----------
TOTAL OPERATING PROFIT 58,556 40,607 44,029
Interest income and other (expense) income, net (4,663) (2,234) (3,471)
Gain on sale of real estate - - 3,295
Interest expense (1,819) (1,825) (1,817)
Foreign exchange (loss) gain (505) (255) 97
----------- ----------- -----------
Income from continuing operations before
income taxes and minority interest $51,569 $36,293 $42,133
=========== =========== ===========
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 net sales.
October October October
29, 2006 30, 2005 31, 2004
----------- ----------- -----------
(In thousands)
IDENTIFIABLE ASSETS
Staffing Services $457,204 $446,990 $422,658
Telephone Directory 50,442 55,238 55,740
Telecommunications Services 38,800 53,173 52,770
Computer Systems 138,625 103,720 102,487
----------- ----------- -----------
685,071 659,121 633,655
Cash, investments and other corporate assets 14,050 29,591 56,381
----------- ----------- -----------
Total assets $699,121 $688,712 $690,036
=========== =========== ===========
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 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 broad-based spectrum of staffing and workforce solutions,
such as managed services, direct placement services, temporary/contract
staffing and referred employee management through more than 300 locations
to a wide range of customers, from local companies to multinational
corporations. Volt's business offerings assist customers in managing
productivity, achieving process efficiencies and managing workforce spend.
VOLT SERVICES GROUP/VOLT TECHNICAL SERVICES/VOLT EUROPE/VOLT HUMAN
RESOURCES/VOLT ASIA ENTERPRISES (STAFFING SOLUTIONS GROUP)
Staffing and other workforce solutions provided by this segment are
generally identified and branded throughout the United States as "Volt
Services Group," and "Volt Technical Services," throughout Europe as "Volt
Europe," throughout Canada as "Volt Human Resources" and in Asia as "Volt
Asia Enterprises" (the "Staffing Solutions Group"). Business offerings are
provided to customers in many industry segments and include
temporary/contract employment and referred employee management in a broad
range of categories, including accounting, finance, administrative,
engineering, human resources, information technology, life sciences,
manufacturing and assembly, technical communications and media, technical
and warehousing and fulfillment.
In addition, branch offices that have developed a specialty in one or more
of the above listed disciplines often use the name "Volt" followed by their
specialty disciplines to identify themselves, e.g. "Volt Computer
Services", "Volt Life Sciences", "Volt Accounting Specialists", "Volt
Automotive Services" and "Volt Aerospace Services." Other branch offices
have adopted other names to differentiate themselves from traditional
temporary staffing when their focus is more discipline-oriented.
4
The Staffing Solutions Group maintains a database of available workers to
match to employer assignments and, as a result, competes both to recruit
and maintain a database of potential employees and to attract customers to
employ such contingent workers. Contingent workers are provided for varying
periods of time to companies and other organizations (including government
agencies and non-profit entities) in a broad range of industries that have
a need for such personnel, but are unable, or choose not to, engage certain
personnel as their own employees. Customers range from those that require
one or two temporary employees at a time to national accounts that require
as many as several thousand at one time.
The Staffing Solutions Group provides skilled employees, such as computer
and other IT specialties, engineering, design, scientific and technical
support, in its Technical Placement division. This group, in its
Administrative and Industrial division, also provides accounting and
financial personnel as well as lesser skilled employees, such as
administrative, clerical, call center, light industrial and other
personnel.
Contingent workers are provided to meet specific customer requirements,
such as to complete a specific project (with employees typically being
retained until its completion), to enable customers to scale their
workforce according to business conditions, meet a particular need that has
arisen, substitute for regular employees during vacation or sick leave,
staff high turnover positions, fill in during the full-time hiring process
or during a hiring freeze, and staff seasonal peaks, conversions, inventory
taking and offices that are downsizing. Many large organizations utilize
contingent labor as a strategic element of their overall workforce,
allowing them to more efficiently meet their fluctuating staffing
requirements. In certain instances, the Staffing Solutions Group also
provides management personnel to coordinate and manage special projects and
to supervise temporary employees.
Volt's Staffing Solutions also include Managed Services Programs, sometimes
branded as "VoltSourcesm", which provide dedicated account management in an
on- or off-site capacity that fulfill customer workforce initiatives,
improve overall staffing process efficiencies, and manage associate vendor
relationships. Many of the Company's larger customers, particularly those
with national agreements, have contracted for managed services programs
under which the Company, in addition to itself providing staffing services,
performs various administrative functions depending on the program. These
include centralized order processing and procurement of other qualified
staffing providers as subcontractors, commonly referred to as "associate
vendors," to provide service in areas where the Company does not maintain
an office or cannot recruit sufficient qualified personnel and to supply
secondary source back-up recruiting or provide assistance in meeting the
customer's stated diversity and/or subcontracting goals. In other managed
services programs, requisitions are sent simultaneously to a number of
approved staffing firms, and Volt must compete for each placement. Other
features of managed services programs include customized and consolidated
billing to the customer for all of Volt's and associate vendors' services,
and detailed management reports on staffing usage and costs. Some managed
services programs are tailored to the customer's unique needs for single
source consolidated billing, reporting and payment. In most cases, Volt is
required to pay the associate vendor only after Volt receives payment from
its customer. Volt also acts as an associate vendor to other national
providers in their managed services programs to assist them in meeting
their obligations to their customers. The bidding process for these managed
service and national contracts, in general, is very competitive. The
Staffing Solutions Group has been successful in obtaining a number of large
national contracts, that typically require on-site Volt representation and
fulfillment at multiple customer facilities. 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. Many of these contracts require
considerable start-up costs and may take from six to twelve months to reach
anticipated revenue levels and reaching those levels is dependent on the
customer's requirements at that time. The Staffing Solutions Group
maintains a group dedicated to the acquisition, implementation and service
of national accounts; however, there can be no assurance that Volt will be
able to retain accounts that it currently serves, or that Volt can obtain
additional national accounts on satisfactory terms.
5
The Staffing Solutions Group maintains centralized databases, containing
resumes of candidates from which it fills customers' job requirements.
Other candidates are referred by the customer itself for assignment as Volt
employees. Volt Europe maintains similar computerized databases containing
resumes of candidates from the United Kingdom and continental Europe.
Higher skilled individuals employed by the Staffing Solutions Group are
frequently willing to relocate to fill assignments while lesser skilled
employees are generally recruited and assigned locally. In addition to
maintaining proprietary Internet recruiting sites, the segment has numerous
contracts with independent web-based job search companies.
Individuals hired by the Staffing Solutions Group typically become Volt
employees or contractors during the period of their assignment. As employer
of record, Volt is responsible for the payment of wages, payroll taxes,
workers' compensation and unemployment insurance and other benefits, which
may include paid sick days, holidays, vacations and medical insurance.
Increases in payroll taxes and costs of workers' compensation and
unemployment insurance and other benefits have had and will continue to
have a significant effect on the Company's profitability, competitiveness
and financial performance.
The Staffing Solutions Group provides direct placement services as well. In
the United States, these services are provided through Volt Professional
Placement, an employment search organization specializing in the
recruitment and direct hire of individuals, including information
technology, engineering, technical, accounting, finance and administrative
support disciplines. The direct placement recruiters operate within Volt's
existing United States and European branch offices. In addition, some
customers will convert contingent staff to permanent positions if their
needs require permanent staff, and in some cases the Company may receive a
conversion fee.
Another service offering is Recruitment Process Outsourcing services,
branded as "Momentum, a Volt Information Sciences CompanyTM", which
delivers end-to-end hiring solutions and technology for customers, starting
at the requisition process and extending through sourcing and onboarding of
the customer's employees.
The domestic and global staffing services industry is highly competitive.
The Company currently competes in major markets in North America, Europe,
and Asia with many global staffing companies, as well as many regional and
local competitors, to recruit and maintain a database of potential
employees and to obtain and service customers who require contingent
staffing and other workforce solutions.
Volt has made and will continue to make substantial investments in
technological solutions that focus on core recruiting competencies,
improving productivity and reducing costs and 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 enable the Staffing Solutions Group to be competitive or
that the segment will continue to develop new solutions or that they will
be successful.
Information Technology Solutions
VMC Consulting
Information Technology Project Management Solutions, branded as VMC
Consulting, include a varied portfolio of project-based professional
services, often utilizing contingent staff sourced by Volt Staffing
Solutions Group. With locations and customers in North America, Europe, and
Asia, VMC's services are delivered via outsourcing and in-sourcing models,
whether onsite, offsite, onshore, near-shore, offshore or hybrid
engagements. Projects range from product development, enterprise technology
implementation and integration, to technical call center services.
Offerings include electronic game testing, hardware and software testing,
technical communications, technical call center support, data center
management, enterprise technology implementation and integration and
corporate help desk services. Consulting, project management, and services
currently are delivered to companies in the following industries: consumer
products, financial services, manufacturing, media/entertainment,
pharmaceuticals, software and technology.
6
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
ProcureStaff, Ltd. offers internet-based procurement and spend management
solutions for FORTUNE 100 and other customers. ProcureStaff focuses on
automating, managing and validating a customer's entire procurement cycle.
At the core of the ProcureStaff's service offerings are ConsolSM and HRP,
business-to-business e-commerce applications that streamline client and
vendor functions while significantly reducing costs and the risks of
non-compliance with client policies.
ProcureStaff maintains significant international operations tailored to
local country laws and market conditions and is aggressively seeking new
global customers and markets. ProcureStaff also automates and manages the
source-to-settle process (from identification of initial requirement
through billing for final deliverable) for resource-based services to
provide visibility and centralized control over all categories of
enterprise-wide service expenditures, including statement of work, project
work and deliverable based services. ProcureStaff provides this
source-to-settle process to its customers with web-based access, the
creation of project bid requests, requisition management, electronic
procurement, relationship management, vendor management, time and expense
keeping, consolidated invoicing, consolidated billing and payment and
sophisticated on-line management reporting. Program implementation imposes
start up costs on ProcureStaff which may take up to a year to recover.
ProcureStaff competes with other companies which provide similar vendor
neutral solutions, some of which are affiliated with competitive staffing
companies.
Although ProcureStaff continues its efforts to obtain new customers and to
develop and enhance its services and systems, there is no assurance that
its present or future services will be competitive, that it will continue
to obtain new customers or renew existing customer contracts or develop new
services or that present services or new services will continue to be
successfully marketed.
During the week ended October 29, 2006, the entire Staffing Services segment
provided approximately 41,000 (43,000 in 2005) 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 North America, Europe and Asia, general
economic conditions in specific geographic areas or industrial sectors affect
the profitability of the segment. The segment has also experienced margin
erosion caused by increased competition, electronic auctions and customers
leveraging their buying power by consolidating the number of vendors with whom
they deal. While the segment has reduced workers compensation costs and is
committed to further efficiencies designed to increase profitability, there can
be no assurances that profitability will increase. In addition, this segment
could be adversely affected by changes in laws, regulations and government
policies, including the results of pending litigation and governmental activity
regarding the staffing services industry, and related litigation expenses,
customers' attitudes toward outsourcing and temporary personnel, any decreases
in rates of unemployment in the future and higher wages sought by temporary
workers, especially those in certain technical fields often characterized by
labor shortages.
Through VMC, the segment has increased the number of higher margin
project-oriented services to its customers and thus assumed greater
responsibility for the finished product in contrast to traditional staffing
services. The risks of unsuccessful performance, including claims by customers
and the potential for uncompensated rework and other liabilities are greater in
this division. While the Company believes that it can successfully implement its
project-based contracts, there can be no assurance that such claims and costs of
rework will not increase.
7
The ability of the entire Staffing Services segment to compete successfully for
customers depends on its reputation, pricing and quality of service provided and
its ability to engage, in a timely manner, personnel meeting customer
requirements. Competition varies from market to market and country to country.
In most areas there are few significant barriers to entry and no single provider
has a dominant share of the market. The staffing services market is highly
competitive and pricing pressure from customers and competitors continues to be
significant. Many of the contracts entered into by this segment are of a
relatively short duration, and awarded on the basis of competitive proposals
that are periodically re-bid by the customer. Under many of these contracts,
there is no assurance of any minimum amount of work that will actually be
available and the Company is frequently required to compete for each placement.
Although the Company has been successful in obtaining various short and
long-term contracts in the past, in many instances margins under these contracts
have decreased. There can be no assurance that existing contracts will be
renewed on satisfactory terms or that additional or replacement contracts will
be awarded to the Company, or that revenues or profitability from an expired
contract will be replaced. Some of this segment's national contracts are large,
and the loss of any large contract could have a significantly negative effect on
this segment's business unless, and until, the business is replaced. The segment
competes with many staffing firms, some of which are larger and have
substantially greater financial resources than Volt, as well as with individuals
seeking direct employment with the Company's existing and potential customers.
Telephone Directory Segment
Volt's Telephone Directory segment publishes independent telephone directories
in the United States and publishes telephone directories in Uruguay; provides
telephone directory production, commercial printing, database management, sales
and marketing services; and licenses directory production and contract
management software systems to directory publishers and others. This segment has
transitioned in the United States from the production of telephone directories
for others to primarily publishing its own independent telephone directories and
in 2005 commenced doing the same in Uruguay. This segment consists of
DataNational, Directory Systems/Services and the Uruguay division.
DataNational
DataNational, Volt's independent telephone directory publisher, principally
publishes community-based directories, primarily in the mid-Atlantic and
southeastern portions of the United States. DataNational's community-based
directories provide consumers with information concerning businesses that
provide services within their local geographic area. The directories may
also include features that are unique to the community, such as school
information, maps and a calendar of events. All of the DataNational
directories are also available on the Internet at www.communitybook.info.
The division identifies markets where demographics and local shopping
patterns are favorable to the division's community-oriented product and
adjusts accordingly. During fiscal 2006, the division published 139
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 at
the local level. DataNational's revenues are generated from yellow page
advertising sold in its directories. The Company believes that advertisers
are attracted to DataNational's community directories because the
directories enable them to specifically target their local markets at a
much lower cost than directories covering larger markets. Some competitors
are much larger than DataNational and have greater financial resources to
enable them to compete aggressively in the same 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.
8
Uruguay
In 2006, Volt's Uruguay division published yellow pages telephone
directories as an independent publisher. Revenues are generated from the
sale of yellow pages advertising.
In addition to the directory business, Volt's Uruguay division owns and
operates an advanced directory printing facility, which includes, among
other presses, a high speed, four-color, heat set printing press that is
used to print not only its own telephone directories, but also directories
for publishers in other South American countries. In addition, this
facility does commercial printing, including magazines and periodicals, for
various customers in Uruguay and elsewhere in South and Central America.
The Telephone Directory segment's ability to compete depends on its reputation,
technical capabilities, price, quality of service and ability to meet customer
requirements in a timely manner. The segment faces intense competition for all
of its services and products from other suppliers and from in-house facilities
of potential customers. Some of this segment's significant competitors are
companies that are larger and have substantially greater financial resources
than the Company. This segment's sales and profitability are highly dependent on
advertising revenue, which has been and continues to be affected by general and
local economic conditions.
Although economic conditions in Uruguay and neighboring countries are slowly
improving, they continue to have a significant adverse impact on advertising and
printing revenue and operating profits of the Uruguay operation. The printing
operations are facing intense competition from other suppliers in neighboring
countries.
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. In addition, the segment's sales
and profitability are highly dependent on advertising revenue from
DataNational's directories, which could be affected by general economic
conditions.
Telecommunications Services Segment
Volt's Telecommunications Services segment provides telecommunications and other
services, including design, engineering, construction, installation, maintenance
and removal of telecommunications equipment for the outside plant and central
offices of telecommunications and cable companies, and within end-user premises,
in the United States. This segment also provides complete turnkey services for
wireless telecommunications carriers and wireless infrastructure suppliers,
provides limited distribution of products and provides some
non-telecommunications engineering and construction services for other
utilities.
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 aerial, underground and other
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.
9
o Enterprise infrastructure solutions, including structured cabling and
wiring and field installation and repair services involving the
design, engineering, installation and maintenance of various types of
local and wide-area networks, utilizing copper wiring, coaxial and
fiber optics, for voice, data and video, and digital subscriber lines
(DSL) and other broadband installation and maintenance services to
operating telephone companies, telecommunications equipment
manufacturers, cable companies and large end-users, in both the
government and private sectors.
o Central Office services, including engineering, furnishing and
installing (EF&I) services, maintenance and removal of transmission
systems, distribution frame systems, AC/DC power systems, wiring and
cabling, switch peripheral systems, equipment assembly and system
integration and controlled environment structures, and other network
support services, such as grounding surveys and asset management.
o Wireless services, including complete turnkey services to both fixed
and mobile wireless providers. This includes establishing or enhancing
network infrastructure, design, engineering and
construction/installation services, site selection, RF engineering,
tower erection, antenna installation and inside cabling and wiring
services. In performing these services, the segment employs the latest
technologies, such as GPS mapping of facilities.
This segment resells telecommunications equipment to customers. In addition,
this segment offers the added value of being able to provide total management of
multi-discipline projects because of its ability to integrate efforts on a
single project and to assume responsibility for programs that require a single
point of contact and uniform quality. The segment performs these services on a
project and/or contract personnel placement basis in the outside plant, central
offices, wireless sector and within end-user premises. Customers include
telephone operating companies, local exchange carriers, wireless carriers,
telecommunications equipment manufacturers, cable television providers,
electric, gas, water and water-services utilities, federal, state and municipal
government units and private industry.
This segment faces substantial competition with respect to all of its
telecommunications services from other suppliers and many customers provide the
same type of services as the segment, which means that the segment faces
competition from its own customers as well as from third parties. Construction
services have been, and could be in the future, adversely affected by weather
conditions, because much of the business is performed outdoors. Some of this
segment's significant competitors are larger and have substantially greater
financial resources than the Company. There are few significant barriers to
entry into certain of the markets in which the segment operates, and many
competitors are small, local companies that generally have lower overhead. The
Company's ability to compete in this segment depends upon its reputation,
technical capabilities, pricing, quality of service and ability to meet customer
requirements in a timely manner. The Company believes that its competitive
position in this segment is augmented by its ability to draw upon the expertise
and resources of other Volt segments.
A portion of the Company's business in this segment is obtained through the
submission of competitive proposals for contracts that typically expire within
one to three years and upon expiration are re-bid and price is often an
important factor in the award of such agreements. Many of this segment's
long-term contracts contain cancellation provisions under which the customer can
cancel the contract, even if the segment is not in default under the contract.
Under many of these contracts, including master service contracts, there is no
assurance of any minimum amount of work that will actually be available.
Therefore, these contracts do not give the assurance that long-term contracts
typically provide. While the Company believes it can secure renewals and/or
extensions of some of these contracts, some of which are material to this
segment, and obtain new business and customers, there can be no assurance that
contracts will be renewed or extended or that additional or replacement
contracts will be awarded to the Company on satisfactory terms or that the
Company can obtain new business and customers. In addition, the results of the
segment continue to be affected by the decline in capital spending by telephone
companies caused by the consolidation within the segment's telecommunications
industry wire-line customer base and an increasing shift by consumers to
wireless communications and alternatives. This factor has also increased
competition for available work, pressuring pricing and gross margins throughout
the segment.
10
Computer Systems Segment
Volt's Computer Systems segment provides its customers worldwide with telephone
directory services, information services and other operator services systems,
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 through VoltDelta Resources, LLC.
and its subsidiaries (collectively "VDR"). The segment also provides third party
IT and data services to others. This segment is comprised of three synergistic
business units: VoltDelta Resources ("VoltDelta"), DataServ and Maintech.
VoltDelta
VoltDelta markets information services to telephone companies and
inter-exchange carriers worldwide. The unit sells information service
systems to its customers and in addition, provides an Application Service
Provider ("ASP") model which also provides information services, including
infrastructure and database content, on a transactional use fee basis.
VoltDelta has service agreements with major telecommunications carriers in
North America, South America and Europe.
To meet the needs of customers who desire to upgrade their operator
services capabilities by procuring services as an alternative to making a
capital investment, the unit has deployed and is marketing enhanced
directory assistance and other information service capabilities as a
transaction-based ASP service, charging a fee per transaction. One ASP
service is marketed as DirectoryExpress, which provides access to over 180
million United States and Canadian business, residential and government
listings to directory assistance operators worldwide. Another ASP service
is Directory Assistance Automation ("DAA"), which is currently deployed by
major wireline and wireless carriers. VoltDelta owns and operates its own
proprietary systems and provides its customers access to a national
database sourced from listings obtained by VoltDelta from various telephone
companies and other independent sources. In addition, VoltDelta continues
to provide customers with new systems, as well as enhancements to existing
systems, equipment and software. The ASP model generally requires
significant capital expenditure before any revenue is realized, usually on
a transaction basis.
VoltDelta's InfoExpress suite of services includes iExpress, a service that
enables its transaction-based customers to offer, for example,
operator-assisted yellow pages, driving directions and location-based
information services. For consumers (the end-users), especially cellular
and PCS users, InfoExpress provides a more convenient and efficient level
of directory assistance service since, among other things, consumers may
obtain enhanced directory and yellow pages information without having to
know the correct area code or even the name of the business. Enhanced
information services are particularly attractive in the wireless market,
where there is no access to printed telephone directories. The unit's ASP
services are being delivered over the switched telephone and VoIP networks
to live operators, and recently, through DAA voice portals using speech
recognition technologies.
DataServ
DataServ was established in fiscal year 2002 as a separate division of VDR
to target non-telco enterprise customers with enhanced directory assistance
and information services. The division's services utilize the most accurate
consumer and business databases to allow companies to improve their
operations and marketing capabilities. Working with VoltDelta and other
data aggregators, DataServ's information is updated daily and is
substantially augmented with specialized information unique to the
non-telco enterprise customer. DataServ integrates customer applications
access via XML and other advanced technologies with its various databases.
DataServ has agreements with several agents and resellers to distribute its
services into targeted industries.
In order to fulfill its commitments under its contracts, VoltDelta and
DataServ are required to develop advanced computer software programs and
purchase substantial amounts of computer equipment, as well as license data
content, from several suppliers. Most of the equipment and data content
required for these contracts is purchased as needed and is readily
available from a number of suppliers.
11
Maintech
Maintech, a division of VDR is an Independent Services Organization (ISO)
providing managed IT service solutions to mid-size and large corporate
clients across the United States, including many of those who have
purchased systems from VoltDelta. Its service offerings are tailored to
mission-critical, multi-platform operating environments where standards of
system availability of 99+% are the norm. Maintech's target markets include
banking and brokerage, telecommunications, aerospace, healthcare and
manufacturing.
Clients may engage Maintech for an enterprise-wide single source IT
Outsourcing Solutions commitment that includes program management,
technology planning, transition management, Wintel/UNIX/Linux system
administration, network administration, Network Operations Center ("NOC")
monitoring services, hardware maintenance and LAN/WAN/Voice services.
Clients may also choose Maintech for any subset of services including
support of large Wintel/UNIX/Linux server farms and storage networks and
corporate Desktop/Deskside support. As an ISO, the demand for Maintech's
single source, vendor neutral, unbiased services profile is rapidly growing
in an IT marketplace where infrastructure optimization via multiple OEM's
is the norm.
This segment operates in a business environment which is highly competitive.
Some of this segment's principal competitors are larger and have substantially
greater financial resources than the Company. This segment's results are highly
dependent on the volume of transactions which are processed by the segment under
existing contracts, the segment's ability to continue to secure comprehensive
listings from others, its ability to obtain additional customers for these
services and on its continued ability to sell products and services to new and
existing customers. This segment's position in its market depends largely upon
its reputation, quality of service and ability to develop, maintain and
implement information systems on a cost competitive basis. Although the segment
continues its investment in research and development, there is no assurance that
this segment's present or future products will be competitive, that the segment
will continue to develop new products or that present products or new products
can be successfully marketed.
Some of this segment's contracts expired in 2006, while others were renewed and
new contracts were awarded to the segment. Other contracts are scheduled to
expire in 2007 through 2009. 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. In addition, the segment has recently experienced a reduction in
transaction volume due to lower access to directory assistance by wire-line
carrier customers. This trend may continue.
On December 29, 2005, VDR purchased from Nortel Networks its 24% minority
interest in VDR. Under the terms of the agreement, VDR was required to pay
Nortel Networks approximately $56.4 million for its minority interest in VDR,
and a cash distribution of approximately $5.4 million. Under the terms of the
agreement, VDR paid $25.0 million on December 29, 2005 and paid the remaining
$36.8 million on February 15, 2006. The transaction resulted in an increase of
approximately $8.2 million in goodwill and $9.3 million in intangible assets.
On December 30, 2005, Volt Delta Resources, LLC purchased varetis Solutions
GmbH, headquartered in Munich, Germany. Varetis Solutions adds technology in the
area of wireless and wire-line database management, directory assistance/inquiry
automation, and wireless handset information delivery to the segment's
significant technology portfolio. It also adds products that the segment can now
sell to VoltDelta's North American market. During 2006, Varetis Solutions was
successfully integrated with VoltDelta Europe, an existing subsidiary of Volt
Delta. The combined entity, operating as Volt Delta International, now allows
the company to better focus on the evolving global market for directory
information systems and services.
Although VDR was successful during fiscal year 2006 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 they 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 the current level of profitability.
12
Research, Development and Engineering
During fiscal years 2006, 2005 and 2004, the Company expended approximately $2.7
million, $1.1 million and $4.7 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'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 systems.
In fiscal 2006, 2005 and 2004, expenditures for internal-use software were $18.7
million, $21.1 million and $19.3 million, respectively, of which $4.1 million,
$4.4 million and $7.3 million were 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 2006, the Telecommunications Services segment's sales to three
customers accounted for approximately 24%, 22% and 18% of the total sales of
that segment; the Computer Systems segment's sales to two customers accounted
for approximately 25% and 14% of the total sales of that segment and the
Staffing Services segment's sales to one customer accounted for approximately
13% of the total sales of that segment. In fiscal 2006, the sales to seven
operating units of one customer, Microsoft Corporation, accounted for 11% of the
Company's consolidated net sales of $2.3 billion and 7% of the Company's
consolidated gross billings of $3.4 billion under a number of different
contracts. 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.
Revenue for these services is recognized net of associated vendor costs in the
period the services are rendered. The Company believes that gross billing is a
meaningful measure, which reflects actual volume by the customers.
The loss of one or more of these customers, unless the business is replaced by
the Company or the segment, respectively, could result in an adverse effect on
the results for the Company or that segment's business.
In fiscal 2005, the Telecommunications Services segment's sales to two customers
accounted for approximately 30% and 14% of the total sales of that segment; the
Computer Systems segment's sales to two customers accounted for approximately
31% and 13% of the total sales of that segment; and the Staffing Services
segment's sales to one customer accounted for approximately 13% of the total
sales of that segment. In fiscal 2005, the sales to seven operating units of one
customer, Microsoft Corporation, accounted for 11% of the Company's consolidated
net sales of $2.2 billion and 7% of the Company's consolidated gross billings of
$3.3 billion.
In fiscal 2004, the Telecommunications Services segment's sales to four
customers accounted for approximately 17%, 15%, 12% and 11% of the total sales
of that segment; and 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.
13
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 in its Technical Placement division and increased use
of Administrative and Industrial services during the summer vacation period.
Employees
During the week ended October 29, 2006, Volt employed approximately 46,000
persons, including approximately 41,000 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.
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 Relations/Corporate Governance section, as
soon as reasonably practicable after they are electronically filed with the SEC.
Copies of the Company's Code of Business Conduct and Ethics and other
significant corporate documents (the Corporate Governance Guidelines, Governance
Committee Charter, Audit Committee Charter, Compensation Committee Charter,
Financial Code Of Ethics, Whistleblower Policy, Foreign Corrupt Practices Act
Policy, Insider Trading Policy and Addition to Volt Insider Trading Policy, and
the Electronic Communication Policy) are also available at the Company's website
in the Investor Relations/Corporate Governance 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.
Pursuant to Section 303A.12(a) of the Rules of the NYSE, a company's annual
report to its shareholders must disclose that the previous year's 12(a) CEO
Certification was submitted to the NYSE. As required, the Company's 12(a) CEO
Certification for the previous year was submitted to the NYSE on May 1, 2006,
and certifies that the CEO was not aware of any violation by the Company of
NYSE's Corporate Governance listing standards.
14
ITEM 1A. RISK FACTORS
Forward-Looking Statements
This report and other reports and statements issued by the Company and its
officers from time to time contain certain "forward-looking statements." Words
such as "may," "should," "likely," "could," "seek," "believe," "expect,"
"anticipate," "estimate," "project," "intend," "strategy," "design to," and
similar expressions are intended to identify forward-looking statements about
the Company's future plans, objectives, performance, intentions and
expectations. These forward-looking statements are subject to a number of known
and unknown risks and uncertainties including, but are not limited to, those set
forth below under "Factors That May Affect Future Results." Such risks and
uncertainties could cause the Company's actual results, performance and
achievements to differ materially from those described in or implied by the
forward-looking statements. Accordingly, readers should not place undue reliance
on any forward-looking statements made by or on behalf of the Company. The
Company does not assume any obligation to update any forward-looking statements
after the date they are made.
FACTORS THAT MAY AFFECT FUTURE RESULTS
THE COMPANY'S BUSINESS IS DEPENDENT UPON GENERAL ECONOMIC, COMPETITIVE AND OTHER
BUSINESS CONDITIONS, INCLUDING THE UNITED STATES AND EUROPEAN ECONOMIES AND
OTHER GENERAL CONDITIONS, SUCH AS CUSTOMERS OUTSOURCING ACTIVITIES TO OTHER
COUNTRIES.
The demand for the Company's services in all segments is dependent upon general
economic conditions. Accordingly, the Company's business tends to suffer during
economic downturns. In addition, in the past few years major United States
companies, many of which are customers of the Company, have increasingly
outsourced business to foreign countries with lower labor rates, less costly
employee benefit requirements and fewer regulations than the United States.
There could be an adverse effect on the Company if customers and potential
customers continue to move manufacturing and servicing operations off-shore,
reducing their need for temporary and permanent workers within the United
States. It is also important for the Company to diversify its pool of available
temporary personnel to offer greater support to the service sector of the
economy and other businesses that have more difficulty in moving off-shore, as
well as expanding its retail customer base which generally affords higher margin
opportunities. In addition, the Company's other segments may be adversely
affected if they are required to compete from the Company's United States based
operations against competitors based in such other countries. Although the
Company has begun to expand its operations 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 with labor shortages could affect the
Company's ability to meet its customers' demands in these fields and the
Company's profit margins. The segment has also experienced margin erosion caused
by increased competition, electronic auctions and customers leveraging their
buying power by consolidating the number of vendors with which they deal.
Increased workers' compensation costs and unemployment insurance, other payroll
taxes and business taxes, some of which the Company is unable to pass on to
customers, may also place pressure on margins.
15
While the markets for the entire Staffing Services segment's services include a
broad range of industries throughout North America, Europe and Asia, general
economic conditions in specific geographic areas or industrial sectors affect
the profitability of the segment. The segment has also experienced margin
erosion caused by increased competition, increased unemployment insurance and
workers' compensation rates, electronic auctions and customers leveraging their
buying power by consolidating the number of vendors with whom they deal. The
segment is committed to further efficiencies designed to increase profitability,
however, there can be no assurances that profitability will increase. In
addition, this segment could be adversely affected by changes in laws,
regulations and government policies, as well as the results of pending
litigation and related litigation expenses and governmental activity regarding
the staffing services industry, customers' attitudes toward outsourcing and
temporary/contract personnel, any decreases in rates of unemployment in the
future and higher wages sought by temporary/contract workers, especially those
in certain technical fields often characterized by labor shortages.
Customer use of the Company's telecommunications services is similarly affected
by a weakened economy in that some of the Company's customers reduce their use
of outside services in order to provide work to their in-house departments.
Actions by major long-distance telephone companies to reduce marketing of local
residential service and consolidation in the telecommunications industry could
also negatively impact both sales and margins of the segment.
MANY OF THE COMPANY'S CONTRACTS EITHER PROVIDE NO MINIMUM PURCHASE REQUIREMENTS
OR ARE CANCELABLE DURING THE TERM, OR BOTH.
In all segments, many of the Company's contracts, even those master service
contracts whose duration spans a number of years, provide no assurance of any
minimum amount of work that will actually be available under any contract. Most
staffing services contracts are not sole source, so the segment must compete for
each placement at the customer. Similarly, many telecommunications master
contracts require competition in order to obtain each individual work project.
In addition, many of the Company's long-term contracts contain cancellation
provisions under which the customer can cancel the contract, even if the Company
is not in default under the contract. Therefore, these contracts do not give the
assurances that long-term contracts often provide.
THE COMPANY'S STAFFING SERVICES BUSINESS AND ITS OTHER SEGMENTS SUBJECT IT TO
EMPLOYMENT-RELATED AND OTHER CLAIMS.
The Company's staffing services business employs individuals on a temporary
basis and places them in a customer's workplace. The Company's ability to
control the customer workplace is often limited, and the Company risks incurring
liability to its employees for injury (which results in increased workers'
compensation costs) or other harm that they suffer at the customer's workplace.
Increases in workers' compensation costs adversely affect the Company's
competitive position and its ability to retain business and obtain new business.
Although the Company has not historically suffered materially from such harm
suffered by its employees, other than increases in workers' compensation costs,
there can be no assurance that future claims will not materially adversely
affect the Company.
Additionally, the Company risks liability to its customers for the actions of
the Company's employees that may result in harm to the Company's customers. Such
actions may be the result of negligence or misconduct on the part of the
Company's temporary employees. These same factors apply to all of the Company's
business units, although the risk may be reduced where the Company itself
controls the employees and/or the workplace. Nevertheless, the risk is present
in all segments.
There has been an increase in litigation in the United States by temporary
workers against users and providers of temporary services claiming that
temporary workers are entitled to various rights given to traditional employees,
that certain temporary employees should be classified as the customers'
employees and are entitled to participate in certain of the customers' benefit
programs, and for violations of applicable labor codes. The Company does not
know the effect, if any, the resolution of these cases will have on the industry
or upon the Staffing Solutions Group's business, but adverse decisions may
adversely affect the business of the Staffing Services segment.
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.
16
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 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
outcome of governmental activity will have on the industry in general or upon
the Staffing Solutions Group's business.
In addition, certain private and governmental entities have focused on the
contingent staffing industry in particular and, in addition to their potential
to impose additional requirements and costs, they and their supporters could
cause changes in customers' attitudes toward the use of outsourcing and
temporary personnel in general. This could have an adverse effect on the
Company's contingent staffing business.
THE COMPANY IS DEPENDENT UPON ITS ABILITY TO ATTRACT AND RETAIN CERTAIN
TECHNOLOGICALLY QUALIFIED PERSONNEL.
The Company's future success is dependent upon its ability to attract and retain
certain classifications of technologically qualified personnel for its own use,
particularly in the areas of research and development, implementation and
upgrading of internal systems, as well as in its staffing services segment. The
availability of such personnel is dependent upon a number of economic and
demographic conditions. The Company may in the future find it difficult or more
costly to hire such personnel in the face of competition from other companies.
THE INDUSTRIES IN WHICH THE COMPANY DOES BUSINESS ARE VERY COMPETITIVE.
The Company operates in very competitive industries with, in most cases, limited
barriers to entry. Some of the Company's principal competitors are larger and
have substantially greater financial resources than the Company. Accordingly,
these competitors may be better able than the Company to attract and retain
qualified personnel and may be able to offer their customers more favorable
pricing terms than the Company. In many businesses, small competitors can offer
similar services at lower prices because of lower overheads.
17
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 its efforts 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. Although Volt continues its investment in research and
development, there is no assurance that this segment's present or future
products and systems will be competitive, that the segment will continue to
develop new products and systems or that present products and systems or new
products and systems can be successfully marketed. In addition, the Company's
products and systems are subject to risks inherent in new product introductions,
such as start-up delays, cost overruns and uncertainty of customer acceptance,
the Company's dependence on third parties for some product components and in
certain technical fields with labor shortages, the Company's ability to hire and
retain such specialized employees, all of which could affect the Company's
ability to meet its customers' demands in these fields and the Company's profit
margins.
In addition to these general statements, the following information applies to
the specific segments identified below.
The Company's Staffing Services segment is in a very competitive industry with
few significant barriers to entry. There are many temporary service firms in the
United States and Europe, many with only one or a few offices that service only
a small market and generally have lower overhead. On the other hand, some of
this segment's principal competitors are larger and have substantially greater
financial resources than the Company and service the multi-national accounts
whose business the Company solicits. Accordingly, these competitors may be
better able than the Company to attract and retain qualified personnel and may
be able to offer their customers more favorable pricing terms than the Company.
Furthermore, in the staffing industry contingent workers are provided to
customers and most customers are more protective of their full-time workforce
than contingent workers.
The results of the Company's Computer Systems segment are highly dependent on
the volume of directory assistance calls to this segment's customers which are
processed by the segment under existing contracts, the segment's ability to
continue to secure comprehensive listings from others at acceptable pricing, its
ability to obtain additional customers for these services and on its continued
ability to sell products and services to new and existing customers. The volume
of transactions with this segment's customers and the revenues received by the
Company are subject to reduction as consumers utilize free listings offered by
alternative sources, including on the Internet and from consolidation in the
telecommunications industry. 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.
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
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 Services segment performs much of its services
outdoors, and its business can be adversely affected by inclement weather. Some
of this segment's significant competitors are larger and have substantially
greater financial resources than the Company. There are relatively few
significant barriers to entry into certain of the markets in which the segment
operates, and many competitors are small, local companies that generally have
lower overhead. The Company's ability to compete in this segment depends upon
its reputation, technical capabilities, pricing, quality of service and ability
to meet customer requirements in a timely manner, as well as the economic health
of the telecom industry. Volt believes that its competitive position in this
segment is augmented by its ability to draw upon the expertise and resources of
other Volt segments.
In the Telephone Directory segment, the timing of delivery of telephone
directories affects the timing of revenue recognition. Additionally, in all
segments, the degree and timing of customer acceptance of systems and of
obtaining new contracts and the rate of renewals of existing contracts, as well
as customers' utilization of the Company's services, could adversely affect the
Company's businesses.
18
THE COMPANY MUST COMPLETE THE INTEGRATION OF VARETIS SOLUTIONS INTO THE
COMPANY'S COMPUTER SYSTEMS SEGMENT
On December 30, 2005, VoltDelta Resources, LLC ("VoltDelta"), a wholly-owned
subsidiary of the Company, acquired varetis AG's (now known as GoYellow AG
("GoYellow")) Varetis Solutions subsidiary, which is engaged in the business of
providing wireless and wire-line database management, directory
assistance/inquiry automation, and wireless handset information delivery.
Together with its subsidiaries, VoltDelta is reported as the Company's Computer
Systems segment. On September 6, 2006, the Company was first notified of a
decision in an action brought in Germany by several shareholders of GoYellow.
The decision, dated August 24, 2006, by the trial court held, in substance, that
the consent on December 29, 2005 by the shareholders of GoYellow to the contract
relating to the sale of Varetis Solutions by GoYellow was invalid, because the
shareholders were not given adequate information prior to the meeting. This
decision is against GoYellow and neither the Company nor any of its subsidiaries
nor any of its or their officers or directors is or was a party. Go Yellow has
appealed the decision. The Company has been advised by counsel in Germany that,
there is little risk that the purchase by Volt Delta of Varetis Solutions could
be set aside. In fiscal 2006, the revenue of Varetis Solutions comprised less
than 1% of the Company's net consolidated sales. The Company believes that the
effect of the litigation will not have a material adverse effect on the Company.
THE COMPANY MUST STAY IN COMPLIANCE WITH ITS SECURITIZATION PROGRAM AND OTHER
LOAN AGREEMENTS
The Company is required to maintain a sufficient credit rating to enable it to
continue its securitization program and maintain its existing credit rating in
order to avoid any increase in fees under other credit agreements. In addition,
the Company must also comply with the financial and other covenants applicable
under the various agreements and other borrowing instruments.
While the Company was in compliance with all such requirements at the end of the
fiscal year and believes it will remain in compliance throughout the next twelve
months, there can be no assurance that will be the case or that waivers may not
be required.
THE COMPANY MUST STAY IN COMPLIANCE WITH THE SARBANES-OXLEY ACT
The Company believes it is in compliance with the Sarbanes-Oxley Act of 2002.
The cost of compliance adversely affected the Company's operating results for
its 2006 fiscal year and costs of continued compliance with such Act will affect
the Company's operating results in the future. While the Company expects to be
in compliance with such Act, there can be no assurance that it will be able to
do so.
THE COMPANY'S PRINCIPAL SHAREHOLDERS OWN A SIGNIFICANT PERCENTAGE OF THE COMPANY
AND WILL BE ABLE TO EXERCISE SIGNIFICANT INFLUENCE OVER THE COMPANY AND THEIR
INTERESTS MAY DIFFER FROM THOSE OF OTHER SHAREHOLDERS.
As of December 31, 2006, the Company's principal shareholders, who are related
family members, controlled in excess of 39% 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.
19
THE COMPANY'S STOCK PRICE COULD BE EXTREMELY VOLATILE AND, AS A RESULT,
INVESTORS MAY NOT BE ABLE TO RESELL THEIR SHARES AT OR ABOVE THE PRICE THEY PAID
FOR THEM.
Among the factors that could affect the Company's stock price are:
o limited float notwithstanding that the Company's stock is traded on
the New York Stock Exchange;
o industry trends and the business success of the Company's customers;
o loss of a key customer;
o fluctuations in the Company's results of operations;
o the Company's failure to meet the expectations of the investment
community and changes in investment community recommendations or
estimates of the Company's future results of operations;
o strategic moves by the Company's competitors, such as product
announcements or acquisitions;
o regulatory developments, including compliance with the Sarbanes-Oxley
Act of 2002;
o litigation;
o general market conditions; and
o other domestic and international macroeconomic factors unrelated to
the Company's performance.
The stock market has experienced and may in the future experience extreme
volatility that has often been unrelated to the operating performance of
particular companies. These broad market fluctuations may adversely affect the
market price of the Company's common stock.
In the past, following periods of volatility in the market price of a company's
securities, securities class action litigation has often been instituted. If a
securities class action suit is filed against the Company, it would incur
substantial legal fees and management's attention and resources would be
diverted from operating its business in order to respond to the litigation.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
20
ITEM 2. PROPERTIES
The Company occupies approximately 44,000 square feet of space at 560 Lexington
Avenue, New York, New York under leases that expire in 2009. The facility serves
as the Company's corporate headquarters, the headquarters for the Company's
Computer Systems segment and a base for certain operations of the Company's
Staffing Services segment. The following table sets forth certain information as
to each of the Company's other major facilities:
Approximate Sq. Ft. If Leased, Year of
Location Business Segment Leased Or Owned Lease Expiration
-------- ---------------- ------------------- ------------------
Orange, West Region Headquarters 200,000 Owned (1)
California Accounting Center
Staffing Services
Computer Systems
El Segundo, Staffing Services 20,000 Owned
California
San Diego, Staffing Services 20,000 Owned
California
Montevideo, Telephone Directory 93,000 2007
Uruguay
Blue Bell, Telephone Directory 55,000 2007
Pennsylvania Computer Systems
Redmond, Staffing Services 46,000 2010
Washington 47,000 2007
Wallington, Computer Systems 32,000 2008
New Jersey
Rochester, Computer Systems 39,000 2008
New York
Toronto, Staffing Services 81,000 2010
Canada
Munich, Staffing Services 36,000 2009
Germany
(1) See Note F of Notes to Consolidated Financial Statements for information
regarding a term loan secured by a deed of trust on this property.
The Company leases space in approximately 240 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 2007 until 2014.
At times, the Company leases space to others in the buildings that it owns or
leases, if it does not require the space for its own business. The Company
believes that its facilities are adequate for its presently anticipated uses and
that it is not dependent upon any individually leased premises.
For additional information pertaining to lease commitments, see Note O of Notes
to Consolidated Financial Statements.
21
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. 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.
22
EXECUTIVE OFFICERS
STEVEN A. SHAW, 47, has been President, Chief Executive Officer and Chief
Operating Officer of the Company since March 2006. Prior thereto he served as
Executive Vice President, co-Chief Executive Officer and Chief Operating Officer
of the Company since September 2005. He served as Executive Vice President and
Chief Operating Officer of the Company from March 2005 and Senior Vice President
of the Company from November 2000 until March 2005. He has been employed by the
Company in executive capacities since November 1995.
JEROME SHAW, 80, 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.
HOWARD B. WEINREICH, 64, 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, 52, 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, 55, has been Senior Vice President of the Company since April
2006, Treasurer of the Company since January 1994 and has been employed in
executive capacities by the Company since 1976.
JACK EGAN, 57, has been Senior Vice President and Principal Financial Officer of
the Company since April 2006. Prior thereto he served as Vice President -
Corporate Accounting and Principal Accounting Officer since January 1992. He has
been employed in executive capacities by the Company since 1979.
DANIEL G. HALLIHAN, 58, has been Vice President - Accounting Operations since
January 1992 and has been employed in executive capacities by the Company since
1986.
RONALD KOCHMAN, 47, has been Vice President of the Company since March 2005 and
has been employed by the Company in executive capacities in its financial
departments since 1987.
LOUISE ROSS, 58, has been Vice President - Human Resources of the Company since
September 2006 and has been employed by the Company in executive capacities in
its human resource departments since 1993.
Steven A. Shaw is the son of Jerome Shaw. Deborah Shaw, a director of the
Company, is the cousin of Steven A. Shaw. Bruce G. Goodman, a director of the
Company, is the husband of Deborah Shaw's sister. Deborah Shaw and her sister
are co-executors of the Estate of William Shaw. William Shaw was Jerome Shaw's
brother and a founder of the Company, and was President and Co-Chief Executive
Officer at the time of his death in March 2006. There are no other family
relationships among the executive officers or directors of the Company.
23
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 29, 2006:
2006 2005
---------------------- ----------------------
Fiscal Period High Low High Low
------------- ------ ------ ------ ------
First Quarter $25.09 $18.05 $31.99 $24.57
Second Quarter 32.44 23.85 32.51 19.67
Third Quarter 48.48 28.05 27.21 19.10
Fourth Quarter 44.47 33.15 27.59 17.52
As of January 5, 2007, there were approximately 326 holders of record of the
Company's common stock, exclusive of shareholders whose shares were held by
brokerage firms, depositories and other institutional firms in "street name" for
their customers.
Cash dividends have not been paid during the reported periods. The Company's
credit agreement contains financial covenants, one of which limits dividends in
any fiscal year to 50% of the prior year's consolidated net income, as defined.
Therefore, the amount available for dividends at October 30, 2006 was $15.3
million.
On December 19, 2006, the Board of Directors approved a three for two split of
the Company's common stock, in the form of a 50% stock dividend payable January
26, 2007 to record holders as of January 15, 2007.
The following table sets forth certain information, as at October 29, 2006, 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 101,985 (a) $23.78 - (a)
Equity compensation plans not - - -
approved by security holders ------- ------ ------
Total 101,985 $23.78 -
======= ====== ======
(a) The Company's 1995 Non-Qualified Stock Option Plan, the Company's only
equity compensation plan terminated on May 16, 2005 except for options
previously granted under the plan.
No information of the type called for by Items 701 and 703 of Regulation S-K
(relating to unregistered sales of equity securities by the Company and
purchases of equity securities by the Company and affiliated purchasers) is
required to be included in this Form 10-K.
24
ITEM 6. SELECTED FINANCIAL DATA
Year Ended (Notes 1 and 2)
---------------------------------------------------------------
October October October November November
29, 2006 30, 2005 31, 2004 2, 2003 3, 2002
---------------------------------------------------------------
(In thousands, except per share data)
Net Sales $2,338,453 $2,177,619 $1,924,777 $1,609,491 $1,468,093
===============================================================
Income (loss) from continuing
operations - before items shown below
--Note 3 $30,650 $17,040 $24,196 $4,205 ($5,096)
Discontinued operations
--Note 4 9,520 4,310
Cumulative effect of a change in
accounting - goodwill impairment
--Note 3 (31,927)
---------------------------------------------------------------
Net income (loss) $30,650 $17,040 $33,716 $4,205 ($32,713)
===============================================================
Per Share Data
Basic:
Income (loss) from continuing
operations - before items shown below $1.98 $1.11 $1.59 $0.28 ($0.33)
Discontinued operations 0.62 0.28
Cumulative effect of a change in
accounting (2.10)
---------------------------------------------------------------
Net income (loss) $1.98 $1.11 $2.21 $0.28 ($2.15)
===============================================================
Weighted average number of shares 15,485 15,320 15,234 15,218 15,217
===============================================================
Diluted:
Income (loss) income from continuing
operations - before items shown below $1.97 $1.11 $1.58 $0.28 ($0.33)
Discontinued operations 0.62 0.28
Cumulative effect of a change in
accounting (2.10)
---------------------------------------------------------------
Net income (loss) $1.97 $1.11 $2.20 $0.28 ($2.15)
===============================================================
Weighted average number of shares 15,592 15,417 15,354 15,225 15,217
===============================================================
Total assets $699,121 $688,712 $690,036 $540,483 $511,569
===============================================================
Long-term debt, net of current portion $12,827 $13,297 $15,588 $14,098 $14,469
===============================================================
Note 1 -- Fiscal years 2002 through 2006 consisted of 52 weeks.
Note 2 -- Cash dividends were not paid during the five-year period ended
October 29, 2006.
Note 3 -- Fiscal 2004 included a gain from the sale of real estate of $3.3
million ($2.0 million, net of taxes, or $0.13 per share).
Fiscal 2002 included a non-cash charge of $31.9 million, or $2.10 per
share, recognized for goodwill impairment as of November 5, 2001
presented as a cumulative effect of a change in accounting.
Amortization of goodwill, included in continuing operations net of
taxes, which was not permitted to be amortized beginning in fiscal
year 2002 under Statement of Financial Accounting Standards No. 142,
is included in fiscal year 2001 as follows: $2.0 million, or $0.13 per
share.
Note 4 -- Fiscal 2004 included a gain from discontinued operations of $9.5
million (net of taxes of $4.6 million), or $0.62 per share, from the
sale of real estate previously leased to the Company's former 59%
owned subsidiary, Autologic International, Inc. ("Autologic").
Fiscal 2002 included a net gain of $4.3 million, or $0.28 per share,
including a tax benefit of $1.7 million (resulting from a taxable loss
versus a gain for financial statement purposes), from discontinued
operations resulting from the Company's sale of its 59% interest in
Autologic. This amount included a $4.5 million gain on the sale,
partially offset by a $0.2 million loss on operations.
25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's discussion and analysis of its financial position and results of
operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires
management to make estimates, judgments, assumptions and valuations that affect
the reported amounts of assets, liabilities, revenues and expenses and related
disclosures. Future reported results of operations could be impacted if the
Company's estimates, judgments, assumptions or valuations made in earlier
periods prove to be wrong. Management believes the critical accounting policies
and areas that require the most significant estimates, judgments, assumptions or
valuations used in the preparation of the Company's financial statements are as
follows:
Revenue Recognition - The Company derives its revenues from several sources. The
revenue recognition methods, which are consistent with those prescribed in Staff
Accounting Bulletin 104 ("SAB 104"), "Revenue Recognition in Financial
Statements," are described below in more detail for the significant types of
revenue within each of its segments.
Staffing Services:
Staffing: Sales are derived from the Company's Staffing Solutions Group
supplying its own temporary personnel to its customers, for which the
Company assumes the risk of acceptability of its employees to its
customers, and has credit risk for collecting its billings after it has
paid its employees. The Company reflects revenues for these services on a
gross basis in the period the services are rendered. In fiscal 2006, this
revenue comprised approximately 77% of the Company's net sales.
Managed Services: Sales are generated by the Company's E-Procurement
Solutions subsidiary, ProcureStaff, for which the Company receives an
administrative fee for arranging for, billing for and collecting the
billings related to staffing companies ("associate vendors") who have
supplied personnel to the Company's customers. The administrative fee is
either charged to the customer or subtracted from the Company's payment to
the associate vendor. The customer is typically responsible for assessing
the work of the associate vendor, and has responsibility for the
acceptability of its personnel, and in most instances the customer and
associate vendor have agreed that the Company does not pay the associate
vendor until the customer pays the Company. Based upon the revenue
recognition principles in Emerging Issues Task Force ("EITF") 99-19,
"Reporting Revenue Gross as a Principal versus Net as an Agent," revenue
for these services, where the customer and the associate vendor have agreed
that the Company is not at risk for payment, is recognized net of
associated costs in the period the services are rendered. In addition,
sales for certain contracts generated by the Company's Staffing Solutions
Group's managed services operations have similar attributes. In fiscal
2006, this revenue comprised approximately 2% of the Company's net sales.
Outsourced Projects: Sales are derived from the Company's Information
Technology Solutions operation providing outsource services for a customer
in the form of project work, for which the Company is responsible for
deliverables, in accordance with AICPA Statement of Position ("SOP") 81-1,
"Accounting for Performance of Construction-Type Contracts". The Company's
employees perform the services and the Company has credit risk for
collecting its billings. Revenue for these services is recognized on a
gross basis in the period the services are rendered when on a time and
material basis, and when the Company is responsible for project completion,
revenue is recognized when the project is complete and the customer has
approved the work. In fiscal 2006, this revenue comprised approximately 5%
of the Company's net sales.
26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
Critical Accounting Policies--Continued
Telephone Directory:
Directory Publishing: Sales are derived from the Company's sales of
telephone directory advertising for books it publishes as an independent
publisher in the United States and Uruguay. The Company's employees perform
the services and the Company has credit risk for collecting its billings.
Revenue for these services is recognized on a gross basis in the period the
books are printed and distributed. In fiscal 2006, this revenue comprised
approximately 2% of the Company's net sales.
Ad Production and Other: Sales are generated when the Company performs
design, production and printing services, and database management for other
publishers' telephone directories. The Company's employees perform the
services and the Company has credit risk for collecting its billings.
Revenue for these services is recognized on a gross basis in the period the
Company has completed its production work and upon customer acceptance. In
fiscal 2006, this revenue comprised approximately 1% of the Company's net
sales.
Telecommunications Services:
Construction: Sales are derived from the Company supplying aerial,
underground and other 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 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 or by the percentage of
completion method, when applicable. In fiscal 2006, this revenue comprised
approximately 3% of the Company's net sales.
Non-Construction: Sales are derived from the Company performing design,
engineering and business systems integrations work. The Company's employees
perform the services and the Company has credit risk for collecting its
billings. Revenue for these services is recognized on a gross basis in the
period in which services are performed, and if applicable, any completed
units are delivered and accepted by the customer. In fiscal 2006, this
revenue comprised approximately 2% of the Company's net sales.
Computer Systems:
Database Access: Sales are derived from the Company granting access to its
proprietary telephone listing databases to telephone companies,
inter-exchange carriers and non-telco enterprise customers. The Company
uses its own databases and has credit risk for collecting its billings. The
Company recognizes revenue on a gross basis in the period in which the
customers access the Company's databases based upon transaction volume. In
fiscal 2006, this revenue comprised approximately 5% of the Company's net
sales.
IT Maintenance: Sales are derived from the Company providing hardware
maintenance services to the general business community, including customers
who utilize the Company's systems on a time and material basis or a
contract basis. The Company uses its own employees and inventory in the
performance of the services, and has credit risk for collecting its
billings. Revenue for these services is recognized on a gross basis in the
period in which the services are performed, contingent upon customer
acceptance when on a time and material basis, or over the life of the
contract, as appropriate. In fiscal 2006, this revenue comprised
approximately 2% of the Company's net sales.
Telephone Systems: Sales are derived from the Company providing telephone
operator services-related systems and enhancements to existing systems,
equipment and software to customers. The Company uses its own employees and
has credit risk for collecting its billings. The Company relies upon the
principles in
27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
Critical Accounting Policies--Continued
SOP 97-2, "Software Revenue Recognition" and EITF 00-21, "Revenue
Arrangements with Multiple Deliverables" to recognize revenue on a gross
basis upon customer acceptance of each part of the system based upon its
fair value or by the percentage of completion method in accordance with SOP
81-1, "Accounting for Performance of Construction-Type Contracts," when
applicable. In fiscal 2006, this revenue comprised approximately 1% of the
Company's net sales.
The Company records provisions for estimated losses on contracts when losses
become evident. Accumulated unbilled costs on contracts are carried in inventory
at the lower of actual cost or estimated realizable value.
Allowance for Uncollectable Accounts - The establishment of an allowance
requires the use of judgment and assumptions regarding potential losses on
receivable balances. Allowances for doubtful accounts receivable are maintained
based upon historical payment patterns, aging of accounts receivable and actual
write-off history. The Company believes that its allowances are adequate;
however, changes in the financial condition of customers could have an effect on
the allowance balance required, resulting in a related charge or credit to
earnings.
Goodwill - Under Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets," goodwill and indefinite-lived intangible
assets are subject to annual impairment testing using fair value methodologies.
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 or accelerated
methods at rates calculated to allocate the cost of the assets over their period
of use. 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 exceeds the estimated fair value of the asset or asset
group. The impairment loss is measured as the amount by which the carrying
amount exceeds fair value.
28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
Critical Accounting Policies--Continued
Capitalized Software - The Company's software technology personnel are involved
in the development and acquisition of internal-use software to be used in its
Enterprise Resource Planning system and software used in its operating segments,
some of which are customer accessible. The Company accounts for the
capitalization of software in accordance with AICPA Statement of Position No.
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." Subsequent to the preliminary project planning and approval
stage, all appropriate costs are capitalized until the point at which the
software is ready for its intended use. Subsequent to the software being used in
operations, the capitalized costs are transferred from costs-in-process to
completed property, plant and equipment, and are accounted for as such. All
post-implementation costs, such as maintenance, training and minor upgrades that
do not result in additional functionality, are expensed as incurred.
Securitization Program - The Company accounts for the securitization of accounts
receivable in accordance with SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." At the time a
participation interest in the receivables is sold, that interest is removed from
the consolidated balance sheet. The outstanding balance of the undivided
interest sold to Three Rivers Funding Corporation ("TRFCO"), an asset backed
commercial paper conduit sponsored by Mellon Bank, N.A., was $110 million at
October 29, 2006 and $100 million at October 30, 2005, respectively.
Accordingly, the trade receivables included on the October 29, 2006 and October
30, 2005 balance sheets have been reduced to reflect the participation interest
sold. TRFCO has no recourse to the Company (beyond its interest in the pool of
receivables owned by Volt Funding, a wholly-owned special purpose subsidiary of
the Company) for any of the sold receivables.
Primary Casualty Insurance Program - The Company is insured with highly rated
insurance companies under a program that provides primary workers' compensation,
employer's liability, general liability and automobile liability insurance under
a loss sensitive program. In certain mandated states, the Company purchases
workers' compensation insurance through participation in state funds and the
experience-rated premiums in these state plans relieve the Company of any
additional liability. In the loss sensitive program, initial premium accruals
are established based upon the underlying exposure, such as the amount and type
of labor utilized, number of vehicles, etc. The Company establishes accruals
utilizing actuarial methods to estimate the future cash payments that will be
made to satisfy the claims, including an allowance for incurred-but-not-reported
claims. This process also includes establishing loss development factors, based
on the historical claims experience of the Company and the industry, and
applying those factors to current claims information to derive an estimate of
the Company's ultimate premium liability. In preparing the estimates, the
Company considers the nature and severity of the claims, analyses provided by
third party actuaries, as well as current legal, economic and regulatory
factors. The insurance policies have various premium rating plans that establish
the ultimate premium to be paid. Adjustments to premiums are based upon the
level of claims incurred at a future date up to three years after the end of the
respective policy year. Management evaluates the accrual, and the underlying
assumptions, regularly throughout the year and makes adjustments as needed. The
ultimate premium cost may be greater or less than the established accrual. While
management believes that the recorded amounts are adequate, there can be no
assurance that changes to management's estimates will not occur due to
limitations inherent in the estimation process. In the event it is determined
that a smaller or larger accrual is appropriate, the Company would record a
credit or a charge to cost of services in the period in which such determination
is made.
29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
Critical Accounting Policies--Continued
Medical Insurance Program - Beginning in April 2004, the Company became
self-insured for the majority of its medical benefit programs. The Company
remains insured for a portion of its medical program (primarily HMOs) as well as
the entire dental program. The Company provides the self-insured medical
benefits through an arrangement with a third party administrator. However, the
liability for the self-insured benefits is limited by the purchase of stop loss
insurance. The contributed and withheld funds and related liabilities for the
self-insured program together with unpaid premiums for the insured programs,
other than the current provision, are held in an IRS Code Section 501(c)(9)
employee welfare benefit trust and do not appear on the balance sheet of the
Company. In order to establish the self-insurance reserves, the Company utilized
actuarial estimates of expected losses based on statistical analyses of
historical data. The provision for future payments is initially adjusted by the
enrollment levels in the various plans. Periodically, the resulting liabilities
are monitored and will be adjusted as warranted by changing circumstances.
Should the amount of claims occurring exceed what was estimated or medical costs
increase beyond what was expected, accrued liabilities might not be sufficient,
and additional expense may be recorded.
30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
FISCAL 2006 COMPARED TO FISCAL 2005
EXECUTIVE OVERVIEW
Volt Information Sciences, Inc. ("Volt") is a leading national provider of
staffing services and telecommunications and information solutions with a
material portion of its revenue coming from Fortune 100 customers. The Company
operates in four segments and the management discussion and analysis addresses
each. A brief description of these segments and the predominant source of their
sales follows:
Staffing Services: This segment is divided into three major functional
areas and operates through a network of over 300 branch offices.
o Staffing Solutions provides a full spectrum of managed staffing,
temporary/contract personnel employment, direct hire placement and
workforce solutions.
o E-Procurement Solutions provides global vendor neutral human capital
acquisition and management solutions by combining web-based tools and
business process outsourcing 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 markets.
Telephone Directory: This segment publishes independent telephone
directories, provides telephone directory production services, database
management and printing.
Telecommunications Services: This segment provides a full spectrum of
telecommunications construction, installation, and engineering services in
the outside plant and central offices of telecommunications and cable
companies as well as for large commercial and governmental entities.
Computer Systems: This segment provides directory and operator systems and
services primarily for the telecommunications industry, and provides IT
maintenance services.
Several historical seasonal factors usually affect the sales and profits of the
Company. The Staffing Services segment's sales are always lowest in the
Company's first fiscal quarter due to the Thanksgiving, Christmas and New Year
holidays, as well as certain customer facilities closing for one to two weeks.
During the third and fourth quarters of the fiscal year, this segment benefits
from a reduction of payroll taxes when the annual tax contributions for higher
salaried employees have been met, and customers increase the use of the
Company's administrative and industrial labor during the summer vacation period.
In addition, the Telephone Directory segment's DataNational division publishes
more directories during the second half of the fiscal year.
Numerous non-seasonal factors impacted sales and profits in the current fiscal
year. In fiscal 2006, the Company's sales and operating profits were the highest
in its history, with the Staffing Services and Computer Systems segments
reporting record annual sales and the Staffing Services and Telephone Directory
segments reporting record annual operating profits.
In fiscal 2006, the sales of the Staffing Services segment, in addition to the
factors noted above, were positively impacted by a continued increase in
customer use of contingent staff supplied by the segment's Technical Placement
division, and, to a lesser extent, the Administrative and Industrial division.
Operating profits for the year were higher than in fiscal 2005 due to the sales
increase including higher direct placement business, a reduction in overhead
costs as a percentage of sales and lower workers' compensation and payroll
31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
FISCAL 2006 COMPARED TO FISCAL 2005--Continued
EXECUTIVE OVERVIEW--Continued
tax costs. The most significant aspect of the reduction in overhead costs as a
percentage of sales was a reduction of approximately $4.2 million in general
liability insurance costs as a result of retrospective adjustments related to
the segment's positive claims experience. The reduction in workers' compensation
costs for fiscal 2006, which have decreased by approximately $9.1 million from
the prior fiscal year, are due to the Company working closely with customers to
better manage workers' compensation costs, and to the improved regulatory
environment within several states. The Company is anticipating a comparable
level of workers' compensation costs to continue through at least fiscal 2007.
In 2006, the sales of the Telecommunications Services segment decreased from the
prior year, but due to improved gross margins and reductions in overhead costs,
the operating losses of the segment decreased from the prior year. The most
significant aspect of the increase in gross margins was a reduction in workers'
compensation costs for fiscal 2006, which have decreased by approximately $1.6
million from the prior fiscal year. The Company is anticipating a comparable
level of workers' compensation costs to continue through at least fiscal 2007.
As noted in last year's financial statements, this segment restructured its
operations in the fourth quarter of fiscal 2005, and now operates in two
divisions, Construction and Engineering, and Network Enterprise Solutions.
In 2006, the operating profit of the Computer Systems segment was lower than in
the prior year primarily due to decreased gross margins and increased overhead
costs necessary to support its increase in sales and the amortization related to
its increased intangible assets.
The Company has, and will continue to focus on aggressively increasing its
market share, while attempting to maintain margins and minimize overhead
increases in order to increase profits.
The Company continues its effort to streamline its processes to manage the
business and protect its assets through the continued deployment of its Six
Sigma initiatives, upgrading its financial reporting systems, and its compliance
with the Sarbanes-Oxley Act.
RESULTS OF OPERATIONS
The information that appears below relates to prior periods. The results of
operations for those periods are not necessarily indicative of the results which
may be expected for any subsequent period. The following discussion should be
read in conjunction with the Operating Segment Data in Item 1 of this Report and
the Consolidated Financial Statements and Notes thereto which appear in Item 8
of this Report.
RESULTS OF OPERATIONS - SUMMARY
In fiscal 2006, consolidated net sales increased by $160.8 million, or 7%, to
$2.3 billion, from fiscal 2005. The increase in fiscal 2006 net sales resulted
from increases in Staffing Services of $170.5 million and Computer Systems of
$14.8 million, partially offset by decreases in Telecommunications Services of
$20.1 million and Telephone Directory of $2.9 million.
32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
FISCAL 2006 COMPARED TO FISCAL 2005--Continued
RESULTS OF OPERATIONS - SUMMARY--Continued
The net income for fiscal 2006 was $30.7 million compared to $17.0 million in
the prior fiscal year.
The Company's fiscal 2006 income from continuing operations before income taxes
was $50.5 million compared to $29.3 million in fiscal 2005. The Company's
operating segments reported an operating profit of $101.9 million in fiscal
2006, an increase of $22.5 million, or 28%, from the prior year. The change in
operating profit was due to the increased operating profits of the Staffing
Services segment of $27.6 million, and the Telephone Directory segment of $0.9
million, a decreased operating loss in the Telecommunications Services segment
of $1.3 million, partially offset by a reduction in the operating profit of in
the Computer Systems segment of $7.4 million.
General corporate expenses increased by $4.5 million, or 12%, due to costs
incurred relating to compliance with the Sarbanes-Oxley Act, and a one-time
accrual of $1.2 million related to death benefits for two senior corporate
officers.
RESULTS OF OPERATIONS - BY SEGMENT
STAFFING SERVICES
Year Ended
------------------------------------------
October 29, 2006 October 30, 2005
------------------------------------------
% of % of Favorable Favorable
Staffing Services Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
=======================================================================================================
Staffing Sales (Gross) $1,915.7 $1,765.8 $149.9 8.5%
-------------------------------------------------------------------------------------------------------
Managed Service Sales (Gross) $1,109.3 $1,157.2 ($47.9) (4.1%)
-------------------------------------------------------------------------------------------------------
Sales (Net) * $1,972.3 $1,801.8 $170.5 9.5%
-------------------------------------------------------------------------------------------------------
Gross Profit $313.1 15.9% $276.3 15.3% $36.8 13.3%
-------------------------------------------------------------------------------------------------------
Overhead $254.3 12.9% $245.1 13.6% ($9.2) (3.8%)
-------------------------------------------------------------------------------------------------------
Operating Profit $58.8 3.0% $31.2 1.7% $27.6 88.5%
-------------------------------------------------------------------------------------------------------
* Sales (Net) only includes the gross margin on managed service sales.
The sales increase of the Staffing Services segment in the fiscal 2006 from the
prior year was due to increased staffing business in both the Technical
Placement and the Administrative and Industrial divisions, despite a sales
decrease in the VMC Consulting business of the Technical Placement division.
The increase in the operating profit of the segment in fiscal 2006 was due to
increased profits in both the Technical Placement and Administrative and
Industrial divisions, partially offset by a decrease in the VMC Consulting
operation within the Technical Placement division.
33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
FISCAL 2006 COMPARED TO FISCAL 2005--Continued
RESULTS OF OPERATIONS - BY SEGMENT--Continued
STAFFING SERVICES--Continued
Year Ended
------------------------------------------
October 29, 2006 October 30, 2005
------------------------------------------
% of % of Favorable Favorable
Technical Placement Division Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
=======================================================================================================
Sales (Gross) $2,306.6 $2,226.5 $80.1 3.6%
-------------------------------------------------------------------------------------------------------
Sales (Net) $1,283.1 $1,129.1 $154.0 13.6%
-------------------------------------------------------------------------------------------------------
Gross Profit $207.5 16.2% $188.8 16.7% $18.7 9.9%
-------------------------------------------------------------------------------------------------------
Overhead $158.0 12.3% $152.3 13.5% ($5.7) (3.7%)
-------------------------------------------------------------------------------------------------------
Operating Profit $49.5 3.9% $36.5 3.2% $13.0 35.8%
-------------------------------------------------------------------------------------------------------
The Technical Placement division's increase in net sales in fiscal 2006 from the
prior year was due to a $138.9 million, or 14.2%, sales increase in traditional
alternative staffing, an $18.7 million, or 56.9% increase in net managed service
associate vendor sales, partially offset by a $3.6 million, or 3.1%, decrease in
VMC Consulting project management and consulting sales. The increase in the
operating profit was the result of the increase in sales and the decrease in
overhead as a percentage of net sales, partially offset by the decrease in gross
margin percentage. The decrease in gross margin percentage was due to reduced
markups within VMC Consulting, along with an increase in the workers'
compensation costs of $1.4 million resulting from negative claims experience
within the division, partially offset by increased higher margin direct
placement sales. The most significant factor in the reduction in overhead as a
percentage of sales was a reduction of $2.6 million in general liability
insurance costs within the division as a result of the division's positive
claims experience.
Year Ended
------------------------------------------
October 29, 2006 October 30, 2005
------------------------------------------
Administrative & % of % of Favorable Favorable
Industrial Division Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
=======================================================================================================
Sales (Gross) $718.4 $696.5 $21.9 3.1%
-------------------------------------------------------------------------------------------------------
Sales (Net) $689.2 $672.7 $16.5 2.5%
-------------------------------------------------------------------------------------------------------
Gross Profit $105.6 15.3% $87.5 13.0% $18.1 20.7%
-------------------------------------------------------------------------------------------------------
Overhead $96.3 14.0% $92.8 13.8% ($3.5) (3.8%)
-------------------------------------------------------------------------------------------------------
Operating Profit (Loss) $9.3 1.3% ($5.3) (0.8%) $14.6 274.9%
-------------------------------------------------------------------------------------------------------
The Administrative and Industrial division's increase in gross sales in fiscal
2006 resulted from revenue from both new accounts and increased business from
existing accounts. The improved operating results were the result of the sales
increase, the increased gross margin percentage, partially offset by the slight
increase in overhead as a percentage of sales. The increase in gross margin
percentage was primarily due to a $10.4 million reduction in workers'
compensation costs resulting from improvements in claims experience and the
regulatory environment within several states, together with higher margin direct
placement sales and decreases in payroll taxes. The slight increase in overhead
percentage for the year was moderated by a reduction of $1.6 million in general
liability insurance costs due to the division's positive claims experience.
34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
FISCAL 2006 COMPARED TO FISCAL 2005--Continued
RESULTS OF OPERATIONS - BY SEGMENT--Continued
STAFFING SERVICES--Continued
Although the markets for the segment's services include a broad range of
industries throughout the United States, Europe and Asia, general economic
difficulties in specific geographic areas or industrial sectors have in the past
and could in the future affect the profitability of the segment. Much of the
segment's business is obtained through submission of competitive proposals for
staffing services and other contracts which are frequently re-bid after
expiration. Many of this segment's long-term contracts contain cancellation
provisions under which the customer can cancel the contract, even if the segment
is not in default under the contract, and generally do not provide for a minimum
amount of work to be awarded to the segment. While the Company has historically
secured new contracts and believes it can secure renewals and/or extensions of
most of these contracts, some of which are material to this segment, and obtain
new business, there can be no assurance that contracts will be renewed or
extended, or that additional or replacement contracts will be awarded to the
Company on satisfactory terms.
TELEPHONE DIRECTORY
Year Ended
------------------------------------------
October 29, 2006 October 30, 2005
------------------------------------------
% of % of Favorable Favorable
Telephone Directory Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
=======================================================================================================
Sales (Net) $79.4 $82.3 ($2.9) (3.6%)
-------------------------------------------------------------------------------------------------------
Gross Profit $41.3 52.1% $42.5 51.6% ($1.2) (2.6%)
-------------------------------------------------------------------------------------------------------
Overhead $25.5 32.2% $27.6 33.5% $2.1 7.3%
-------------------------------------------------------------------------------------------------------
Operating Profit $15.8 19.9% $14.9 18.1% $0.9 6.3%
-------------------------------------------------------------------------------------------------------
The components of the Telephone Directory segment's slight sales decrease for
fiscal 2006 from the prior year was a decrease of $1.5 million in the printing
and telephone directory publishing operation in Uruguay, a decrease of $1.5
million in telephone production and other sales, partially offset by an increase
in the DataNational community telephone directory publishing sales of $0.1
million. The sales variance in the telephone production operations and other
were predominantly due to the sale of the ViewTech division in the third quarter
of fiscal 2005. The sales decrease in Uruguay was comprised of a decrease of
$3.3 million in publishing sales, partially offset by an increase of $1.8
million in printing sales. The sales variances in telephone production
publishing at DataNational and Uruguay were due to the timing of the delivery of
their directories. The increase in the segment's operating profit from fiscal
2005 was the result of the decrease in overhead costs and the increase in the
gross margin percentage, partially offset by the decrease in sales. The decrease
in overhead costs was primarily due to the sale of the ViewTech division.
Other than the DataNational division, which accounted for 68% of the segment's
fiscal 2006 sales, the segment's business is obtained through submission of
competitive proposals for production and other contracts. These short and
long-term contracts are re-bid after expiration. Many of this segment's
long-term contracts contain cancellation provisions under which the customer can
cancel the contract, even if the segment is not in default under the contract
and generally do not provide for a minimum amount of work to be awarded to the
35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
FISCAL 2006 COMPARED TO FISCAL 2005--Continued
RESULTS OF OPERATIONS - BY SEGMENT--Continued
TELEPHONE DIRECTORY--Continued
segment. While the Company has historically secured new contracts and believes
it can secure renewals and/or extensions of most of these contracts, some of
which are material to this segment, and obtain new business, there can be no
assurance that contracts will be renewed or extended, or that additional or
replacement contracts will be awarded to the Company on satisfactory terms. In
addition, this segment's sales and profitability are highly dependent on
advertising revenue from DataNational's directories, which could be affected by
general economic conditions.
TELECOMMUNICATIONS SERVICES
Year Ended
------------------------------------------
October 29, 2006 October 30, 2005
------------------------------------------
% of % of Favorable Favorable
Telecommunications Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
=======================================================================================================
Sales (Net) $118.9 $139.0 ($20.1) (14.5%)
-------------------------------------------------------------------------------------------------------
Gross Profit $25.3 21.3% $25.0 18.0% $0.3 1.2%
-------------------------------------------------------------------------------------------------------
Overhead $26.5 22.3% $27.4 19.7% $0.9 3.5%
-------------------------------------------------------------------------------------------------------
Operating Loss ($1.2) (1.0%) ($2.4) (1.7%) $1.2 51.9%
-------------------------------------------------------------------------------------------------------
The Telecommunications Services segment's sales decrease from the prior fiscal
year was due to decreases of $16.6 million, or 19%, in the Construction and
Engineering division, and $3.5 million, or 7% in the Network Enterprise
Solutions division. The sales decrease in the Construction and Engineering
division in fiscal 2006 was largely due to the customer acceptance and the
recognition in fiscal 2005 of a large construction job accounted for using the
completed-contract method. The sales decrease in the Network Enterprise
Solutions division was primarily due to the loss of a few customers resulting
from consolidations within the industry. The significant improvement in
operating results was due to the increase in gross margins, partially offset by
the increase in overhead costs as a percentage of sales, along with the sales
decrease. The improvement in gross margins was primarily due to a $1.6 million
reduction in workers' compensation costs as a result of positive claims
experience and the legislative environment within several states, along with the
mix of jobs completed. 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 consolidation within the segment's telecommunications
industry wire-line customer base and an increasing shift by consumers to
wireless communications and alternatives. This factor has also increased
competition for available work, pressuring pricing and gross margins throughout
the segment.
A substantial portion of the business in this segment is obtained through the
submission of competitive proposals for contracts, which typically expire within
one to three years and are re-bid. Many of this segment's long-term contracts
contain cancellation provisions under which the customer can cancel the
contract, even if the segment is not in default under the contract and generally
do not provide for a minimum amount of work to be awarded to the segment. While
the Company believes it can secure renewals and/or extensions of most of
36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
FISCAL 2006 COMPARED TO FISCAL 2005--Continued
RESULTS OF OPERATIONS - BY SEGMENT--Continued
TELECOMMUNICATIONS SERVICES--Continued
these contracts, some of which are material to this segment, and obtain new
business, there can be no assurances that contracts will be renewed or extended
or that additional or replacement contracts will be awarded to the Company on
satisfactory terms.
COMPUTER SYSTEMS
Year Ended
----------------------------------------------
October 29, 2006 October 30, 2005
----------------------------------------------
% of % of Favorable Favorable
Computer Systems Net Net (Unfavorable) $ (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales Change % Change
=======================================================================================================
Sales (Net) $187.9 $173.1 $14.8 8.6%
-------------------------------------------------------------------------------------------------------
Gross Profit $97.2 51.7% $91.8 53.0% $5.4 5.9%
-------------------------------------------------------------------------------------------------------
Overhead $68.8 36.6% $56.0 32.4% ($12.8) (22.7%)
-------------------------------------------------------------------------------------------------------
Operating Profit $28.4 15.1% $35.8 20.7% ($7.4) (20.5%)
-------------------------------------------------------------------------------------------------------
The Computer Systems segment's sales increase in fiscal 2006 over the prior year
was primarily due to increases in the Maintech division's IT maintenance sales
of $9.4 million, or 21%, $15.5 million of new business as a result of its
acquisition of Varetis Solutions in December 2005, partially offset by decreases
in the segment's database access transaction fee revenue, including ASP
directory assistance, of $5.8 million, or 9%, and product and other revenue
recognized of $4.3 million, or 7%. The decrease in the transaction fee revenue
was a result of a decreased number of transactions, partially offset by certain
transaction price increases. The decrease in operating profit from the prior
year was the result of the decreased gross margins, the increase in overhead
costs necessary to support its increase in sales, and the amortization of
intangible assets from acquisitions, partially offset by the sales increase.
During the first quarter of fiscal 2006, Volt Delta, the principal business unit
of the Computer Systems segment, purchased from Nortel Networks its 24% minority
interest in Volt Delta for $62.0 million. Nortel Networks had originally
purchased its 24% interest in August 2004, and under the terms of the original
purchase agreement, each party had a one year option to cause Nortel Networks to
sell and Volt Delta to buy the minority interest for an amount ranging from $25
million to $70 million. The Company purchased Nortel's minority interest prior
to this contract provision becoming effective. During the first quarter, Volt
Delta also purchased Varetis Solutions GmbH from varetis AG for $24.8 million.
The acquisition provides Volt Delta with the resources to focus on the evolving
global market for directory information systems and services. Varetis Solutions
adds technology in the area of wireless and wireline database management,
directory assistance/inquiry automation, and wireless handset information
delivery to Volt Delta's significant technology portfolio.
37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
FISCAL 2006 COMPARED TO FISCAL 2005--Continued
COMPUTER SYSTEMS--Continued
This segment's results are highly dependent on the volume of calls to the
segment's customers that are processed by the segment under existing contracts
with telephone companies, the segment's ability to continue to secure
comprehensive telephone listings from others, its ability to obtain additional
customers for these services and its continued ability to sell products and
services to new and existing customers.
RESULTS OF OPERATIONS - OTHER
Year Ended
-----------------------------------------
October 29, 2006 October 30, 2005
-----------------------------------------
% of % of Favorable Favorable
Other Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
=================================================================================================
Selling & Administrative $97.2 4.2% $92.9 4.3% ($4.3) (4.7%)
-------------------------------------------------------------------------------------------------
Depreciation & Amortization $34.8 1.5% $29.6 1.4% ($5.2) (17.7%)
-------------------------------------------------------------------------------------------------
Interest Income $3.2 0.1% $2.6 0.1% $0.6 20.3%
-------------------------------------------------------------------------------------------------
Other Expense ($7.8) (0.3%) ($4.9) (0.2%) ($2.9) (60.8%)
-------------------------------------------------------------------------------------------------
Foreign Exchange Loss ($0.5) - ($0.3) - ($0.2) (98.0%)
-------------------------------------------------------------------------------------------------
Interest Expense ($1.8) (0.1%) ($1.8) (0.1%) - -
-------------------------------------------------------------------------------------------------
Other items, discussed on a consolidated basis, affecting the results of
operations for the fiscal years were:
The increase in selling and administrative expenses in fiscal 2006 from the
prior year was a result of increased salaries, professional fees and a one-time
accrual of $1.2 million for death benefits related to two senior corporate
executives.
The increase in depreciation and amortization for fiscal 2006 from the prior
year was attributable to increases in fixed assets, primarily in the Computer
Systems and Staffing Services segments, as well as increased amortization of
intangibles in the Computer Systems segment due to fiscal 2006 acquisitions.
Interest income increased due to higher interest rates together with additional
funds available for investment.
The increase in other expense was primarily due to an increase in the amount of
accounts receivable sold under the Company's Securitization Program and an
increased average cost of funds rate.
The Company's effective tax rate on its financial reporting pre-tax income from
continuing operations was 38.6% in fiscal 2006 compared to 33.7% in fiscal 2005.
The increased effective tax rate in fiscal 2006 was due to lower general
business credits.
38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
FISCAL 2005 COMPARED TO FISCAL 2004
RESULTS OF OPERATIONS - SUMMARY
In fiscal 2005, consolidated net sales increased by $252.8 million, or 13%, to
$2.2 billion, from fiscal 2004. The increase in fiscal 2005 net sales resulted
from increases in Staffing Services of $189.7 million, Computer Systems of $53.1
million, Telephone Directory of $10.1 million, and Telecommunications Services
of $3.6 million.
The net income for fiscal 2005 was $17.0 million compared to $33.7 million in
the prior fiscal year. The consolidated results for fiscal 2004 included income
from discontinued operations of $9.5 million (net of taxes of $4.6 million) from
the sale of real estate previously leased to the Company's former 59% owned
subsidiary, Autologic International, Inc.
The Company's fiscal 2005 income from continuing operations before income taxes
was $29.3 million compared to $39.7 million in fiscal 2004. The Company's
operating segments reported an operating profit of $79.4 million in fiscal 2005,
an increase of $4.6 million, or 6%, from the prior year. The change in operating
profit was due to the increased operating profits of the Telephone Directory
segment of $4.8 million and the Computer Systems segment of $5.0 million, the
reduced operating loss of the Telecommunications segment of $0.4 million,
partially offset by a reduction in the operating profit of the Staffing Services
segment of $5.5 million.
General corporate expenses increased by $8.0 million due to costs incurred
relating to compliance with the Sarbanes-Oxley Act and to meet the disaster
recovery requirements of redundancy and business continuity for corporate
systems and communication networks, as well as salary and professional fee
increases.
RESULTS OF OPERATIONS - BY SEGMENT
STAFFING SERVICES
Year Ended
------------------------------------------
October 30, 2005 October 31, 2004
------------------------------------------
% of % of Favorable Favorable
Staffing Services Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
=======================================================================================================
Staffing Sales (Gross) $1,765.8 $1,584.1 $181.7 11.5%
-------------------------------------------------------------------------------------------------------
Managed Service Sales (Gross) $1,157.2 $1,148.1 $9.1 0.8%
-------------------------------------------------------------------------------------------------------
Sales (Net) * $1,801.8 $1,612.1 $189.7 11.8%
-------------------------------------------------------------------------------------------------------
Gross Profit $276.3 15.3% $256.4 15.9% $19.9 7.7%
-------------------------------------------------------------------------------------------------------
Overhead $245.1 13.6% $219.7 13.6% ($25.4) (11.5%)
-------------------------------------------------------------------------------------------------------
Operating Profit $31.2 1.7% $36.7 2.3% ($5.5) (15.0%)
-------------------------------------------------------------------------------------------------------
* Sales (Net) only includes the gross margin on managed service sales.
The sales increase of the Staffing Services segment in the fiscal 2005 from the
prior year was due to increased staffing business in both the Technical
Placement and the Administrative and Industrial divisions, and the VMC
Consulting business of the Technical Placement division.
39
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
FISCAL 2005 COMPARED TO FISCAL 2004--Continued
RESULTS OF OPERATIONS - BY SEGMENT--Continued
STAFFING SERVICES--Continued
The decrease in the operating profit of the segment in fiscal 2005 was due to
decreased profits in tfhe VMC Consulting operation within the Technical
Placement division, increased losses in the Administrative and Industrial
division, partially offset by increased operating profits in the other staffing
and managed service operations of the Technical Placement division.
Year Ended
------------------------------------------
October 30, 2005 October 31, 2004
------------------------------------------
% of % of Favorable Favorable
Technical Placement Division Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
=======================================================================================================
Sales (Gross) $2,226.5 $2,072.4 $154.1 7.4%
-------------------------------------------------------------------------------------------------------
Sales (Net) $1,129.1 $974.9 $154.2 15.8%
-------------------------------------------------------------------------------------------------------
Gross Profit $188.8 16.7% $170.3 17.5% $18.5 10.9%
-------------------------------------------------------------------------------------------------------
Overhead $152.3 13.5% $130.5 13.4% ($21.8) (16.7%)
-------------------------------------------------------------------------------------------------------
Operating Profit $36.5 3.2% $39.8 4.1% ($3.3) (8.4%)
-------------------------------------------------------------------------------------------------------
The Technical Placement division's increase in net sales in fiscal 2005 from the
prior year was due to a $135.0 million, or 16%, sales increase in traditional
alternative staffing, a $12.0 million, or 11%, increase in VMC Consulting
project management and consulting sales, and a $7.3 million, or 28%, increase in
net managed service associate vendor sales. The decrease in the operating profit
was the result of the decrease in gross margin percentage and the increase in
overhead as a percentage of net sales, partially offset by the increased sales.
The decrease in gross margin percentage was due to higher payroll taxes
throughout the division and reduced markups within VMC Consulting. The increase
in overhead dollars was principally due to an increase in indirect labor and
related payroll costs incurred to sustain the sales growth of the division,
including the VMC Consulting business.
Year Ended
------------------------------------------
October 30, 2005 October 31, 2004
------------------------------------------
Administrative & % of % of Favorable Favorable
Industrial Division Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
=======================================================================================================
Sales (Gross) $696.5 $659.7 $36.8 5.6%
-------------------------------------------------------------------------------------------------------
Sales (Net) $672.7 $637.2 $35.5 5.6%
-------------------------------------------------------------------------------------------------------
Gross Profit $87.5 13.0% $86.1 13.5% $1.4 1.6%
-------------------------------------------------------------------------------------------------------
Overhead $92.8 13.8% $89.2 14.0% ($3.6) (4.0%)
-------------------------------------------------------------------------------------------------------
Operating Loss ($5.3) (0.8%) ($3.1) (0.5%) ($2.2) (69.9%)
-------------------------------------------------------------------------------------------------------
The Administrative and Industrial division's increase in gross sales in fiscal
2005 resulted from revenue from both new accounts and increased business from
existing accounts. The increased operating loss was a result of the decreased
gross margin percentage, partially offset by the increased sales and the
decrease in overhead as a percentage of sales. The decrease in gross margin
percentage was primarily due to higher payroll taxes and the increase in
overhead dollars was due to increases in indirect labor.
40
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
FISCAL 2005 COMPARED TO FISCAL 2004--Continued
RESULTS OF OPERATIONS - BY SEGMENT--Continued
TELEPHONE DIRECTORY
Year Ended
------------------------------------------
October 30, 2005 October 31, 2004
------------------------------------------
% of % of Favorable Favorable
Telephone Directory Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
=======================================================================================================
Sales (Net) $82.3 $72.2 $10.1 14.0%
-------------------------------------------------------------------------------------------------------
Gross Profit $42.5 51.6% $39.4 54.6% $3.1 7.8%
-------------------------------------------------------------------------------------------------------
Overhead $27.6 33.5% $29.3 40.6% $1.7 5.9%
-------------------------------------------------------------------------------------------------------
Operating Profit $14.9 18.1% $10.1 14.0% $4.8 47.3%
-------------------------------------------------------------------------------------------------------
The components of the Telephone Directory segment's sales increase for fiscal
2005 from the prior year were increases of $4.9 million in printing sales in
Uruguay, $3.1 million in publishing sales and $2.8 million in systems sales,
partially offset by a $0.7 million decrease in other sales. The increase in
publishing sales was comprised of a $2.2 million increase in the sales of the
DataNational community telephone directory operation and a $1.6 million increase
in the Uruguayan directory operation due to the timing of the delivery of its
directories, partially offset by a $0.7 million sales reduction related to the
elimination of a directory publication sold in fiscal 2004. The decrease in
other sales was predominantly due to the sale of the ViewTech division in the
third quarter, resulting in a sales reduction in the current year of $1.3
million. The gain on the sale of the division was $0.1 million in fiscal 2005.
The DataNational and Uruguayan variances in sales were due to the changes in the
number of directories printed and delivered. The increase in the segment's
operating profit from fiscal 2004 was the result of the sales increase and the
decrease in overhead, primarily due to $1.0 million of expenses incurred in
fiscal 2004 in connection with an investigation in Uruguay, partially offset by
lower margins recognized on the Uruguayan telephone directories published in the
period.
TELECOMMUNICATIONS SERVICES
Year Ended
------------------------------------------
October 30, 2005 October 31, 2004
------------------------------------------
% of % of Favorable Favorable
Telecommunications Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
=======================================================================================================
Sales (Net) $139.0 $135.4 $3.6 2.7%
-------------------------------------------------------------------------------------------------------
Gross Profit $25.0 18.0% $31.0 22.9% ($6.0) (19.4%)
-------------------------------------------------------------------------------------------------------
Overhead $27.4 19.7% $33.8 25.0% $6.4 19.0%
-------------------------------------------------------------------------------------------------------
Operating Loss ($2.4) (1.7%) ($2.8) (2.1%) $0.4 14.4%
-------------------------------------------------------------------------------------------------------
The Telecommunications Services segment's sales increase of $3.6 million, or 3%,
in fiscal 2005 from the prior year was due a to $24.5 million, or 40%, increase
in sales for the Construction and Engineering division, partially offset by a
sales reduction in the other divisions within the segment of $20.9 million, or
28%. The decrease in the operating loss was due to the sales increase and a
decrease in overhead (which in fiscal 2004
41
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
FISCAL 2005 COMPARED TO FISCAL 2004--Continued
RESULTS OF OPERATIONS - BY SEGMENT--Continued
TELECOMMUNICATIONS SERVICES--Continued
included a previously reported $1.3 million charge related to a domestic
consulting contract for services), partially offset by a gross margin decrease.
The sales increase in the Construction and Engineering division in fiscal 2005
resulted from customer acceptance of several large construction jobs accounted
for using the completed-contract method. Despite an emphasis on cost controls,
the results of the segment continue to be affected by the decline in capital
spending by telephone companies caused by the depressed conditions within the
segment's telecommunications industry customer base. This factor has also
increased competition for available work, pressuring pricing and gross margins
throughout the segment. Actions by major long-distance telephone companies to
reduce marketing of local residential service have negatively impacted sales and
continue to impact margins of the segment.
As a result of losses in its Telecommunications Services segment, in August
2005, the Company restructured the Telecommunications Services segment which is
expected to result in a reduction of future overhead within the segment of
approximately $3.9 million on an annual basis. The restructuring resulted in the
segment reducing its overhead headcount, consolidating two divisions and closing
and consolidating several of its leased locations. In accordance with SFAS No.
146, "Accounting for Costs Associated with Exit or Disposal Activities", the
Company incurred a charge for employee severance and lease termination costs of
$0.4 million in the fourth quarter of fiscal 2005, which is when the liabilities
were incurred.
COMPUTER SYSTEMS
Year Ended
----------------------------------------------
October 30, 2005 October 31, 2004
----------------------------------------------
% of % of Favorable Favorable
Computer Systems Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
=================================================================================================
Sales (Net) $173.1 $120.0 $53.1 44.3%
-------------------------------------------------------------------------------------------------
Gross Profit $91.8 53.0% $72.1 60.1% $19.7 27.4%
-------------------------------------------------------------------------------------------------
Overhead $56.0 32.4% $41.2 34.4% ($14.8) (35.6%)
-------------------------------------------------------------------------------------------------
Operating Profit $35.8 20.7% $30.9 25.7% $4.9 16.1%
-------------------------------------------------------------------------------------------------
The Computer Systems segment's sales increase in fiscal 2005 over the prior year
was due to improvements in the segment's operator services business, including
ASP directory assistance, which reflected a $31.8 million, or 48%, growth in
sales during the period, a sales increase of $2.9 million, or 36%, in DataServ's
data services which are provided to non-telco enterprise customers, a $5.5
million, or 14%, sales growth in the Maintech division's IT maintenance
services, and a $12.9 million, or 239%, increase in product revenue recognized.
The sales for the year included $31.1 million of the business acquired from
Nortel Networks, which represented 18% of the segment's sales for fiscal 2005,
as compared to $8.1 million of sales included in the prior year, representing 7%
of the segment's sales. The prior year results included only the fourth quarter
42
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
FISCAL 2005 COMPARED TO FISCAL 2004--Continued
RESULTS OF OPERATIONS - BY SEGMENT--Continued
COMPUTER SYSTEMS--Continued
results of operation from the acquired business. The growth in operating profit
from fiscal 2004 was the result of the increase in sales and the decrease in
overhead as a percentage of sales, partially offset by the decrease in gross
margin percentage. The lower gross margin percentage in fiscal 2005, as compared
to fiscal 2004, was partially due to the favorable settlement of vendor disputes
and refunds in fiscal 2004 approximating $1.2 million, lower margins recognized
in fiscal 2005 related to product revenue recognition, and the increase in the
Nortel-related business in fiscal 2005, the margins of which are lower than the
segment average.
Volt Delta, the entity which operates the Computer Systems segment, acquired
certain assets and liabilities of Nortel Networks on August 2, 2004 in exchange
for a 24% equity interest in the segment (which was acquired on December 29,
2005). This acquisition permits Volt Delta to provide the combined customer base
with new solutions and an expanded suite of products, content and enhanced
services.
RESULTS OF OPERATIONS - OTHER
Year Ended
-----------------------------------------
October 30, 2005 October 31, 2004
-----------------------------------------
% of % of Favorable Favorable
Other Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
==================================================================================================
Selling & Administrative $92.9 4.3% $83.1 4.3% ($9.8) (11.8%)
--------------------------------------------------------------------------------------------------
Depreciation & Amortization $29.6 1.4% $25.5 1.3% ($4.1) (15.9%)
--------------------------------------------------------------------------------------------------
Interest Income $2.6 0.1% $0.9 - $1.7 185.7%
--------------------------------------------------------------------------------------------------
Other Expense ($4.9) 0.2% ($4.4) 0.2% ($0.5) (11.0%)
--------------------------------------------------------------------------------------------------
Gain on Sale of Real Estate - - $3.3 0.2% ($3.3) (100.0%)
--------------------------------------------------------------------------------------------------
Foreign Exchange (Loss)
Gain ($0.3) - $0.1 - ($0.4) (362.9%)
--------------------------------------------------------------------------------------------------
Interest Expense ($1.8) 0.1% ($1.8) 0.1% - -
--------------------------------------------------------------------------------------------------
Other items, discussed on a consolidated basis, affecting the results of
operations for the fiscal years were:
The increase in selling and administrative expenses in fiscal 2005 from the
prior year was a result of increased corporate general and administrative
expenses related to compliance with the Sarbanes-Oxley Act. In addition, the
Company incurred increased salaries, professional fees and costs to meet the
disaster recovery requirements of redundancy and business continuity for
corporate systems and communications networks.
The increase in depreciation and amortization for fiscal 2005 from the prior
year was attributable to increases in fixed assets, primarily in the Computer
Systems and Staffing Services segments, and the increased amortization of
intangible assets in the Computer Systems segment.
Interest income increased due to higher interest rates together with additional
funds available for investment.
43
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
RESULTS OF OPERATIONS - OTHER--Continued
Other expense in both fiscal years is primarily the charges related to the
Company's Securitization Program as well as business taxes and sundry expenses.
The Company's effective tax rate on its financial reporting pre-tax income from
continuing operations was 33.7% in fiscal 2005 compared to 36.8% in fiscal 2004.
The reduced effective tax rate in fiscal 2005 was due to federal and state
income taxes attributable to the minority interest treated as a partnership
interest, higher general business credits, and lower taxes on foreign earnings,
partially offset by higher non-tax deductible items.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased by $23.5 million to $38.5 million in fiscal
2006, increased by $17.7 million to $62.0 million in fiscal 2005 and increased
by $1.1 million to $44.3 million in fiscal 2004.
The cash provided by operating activities of continuing operations in fiscal
2006 was $80.5 million compared to $45.1 million and $6.4 million in fiscal
years 2005 and 2004, respectively.
The cash provided by operating activities in fiscal 2006, exclusive of changes
in operating assets and liabilities, was $66.4 million, as the Company's net
income of $30.7 million included non-cash charges primarily for depreciation and
amortization of $34.8 million, accounts receivable provisions of $4.0 million
and income attributable to the minority interest of $1.0 million, partially
offset by a deferred income tax benefit of $4.3 million. The cash provided by
operating activities in fiscal 2005, exclusive of changes in operating assets
and liabilities, was $54.5 million, as the Company's net income of $17.0 million
included non-cash charges primarily for depreciation and amortization of $29.6
million, accounts receivable provisions of $3.8 million and income attributable
to the minority interest of $7.0 million, partially offset by a deferred income
tax benefit of $3.0 million. The cash provided by operating activities in fiscal
2004, exclusive of changes in operating assets and liabilities, was $52.2
million, as the Company's net income of $33.7 million included non-cash charges
primarily for depreciation and amortization of $25.5 million, accounts
receivable provisions of $7.8 million and income attributable to the minority
interest of $2.4 million, partially offset by income from discontinued
operations of $9.5 million, a gain from dispositions of property, plant and
equipment of $3.4 million and a deferred income tax benefit of $4.2 million.
Changes in operating assets and liabilities in fiscal 2006 provided $14.1
million of cash, net, principally due to increases in the level in accounts
payable of $11.0 million, proceeds from the Securitization Program of $10.0
million, decreases in the level of accounts receivable of $6.3 million and
inventory of $5.0 million and an increase in income tax liability of $2.5
million partially offset by increases in prepaid insurance and other assets of
$16.9 million and decreases in the levels of deferred income and other
liabilities of $3.4 million. Changes in operating assets and liabilities in
fiscal 2005 used $9.4 million of cash, net, principally due to increases in the
level of accounts receivable of $24.1 million, prepaid expenses and other assets
of $5.1 million and inventories of $1.1 million, decreases in the level of
deferred income and other liabilities of $5.2 million, income tax liability of
$2.5 million, and accounts payable of $1.5 million, partially offset by proceeds
from the Securitization Program of $30.0 million. In fiscal 2004, changes in
operating assets and liabilities used $45.8 million of cash, net, principally
due to an increase in the level of accounts receivable of $101.7 million,
partially offset by increases in accrued expenses of $24.7 million, accounts
payable of $12.3 million, and deferred income and other liabilities of $6.1
million, and decreases in the level of inventories of $6.7 million, recoverable
income taxes of $2.8 million and prepaid expenses and other assets of $2.6
million.
44
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
LIQUIDITY AND CAPITAL RESOURCES--Continued
Cash used in investing activities in fiscal 2006 was $104.7 million, principally
due to acquisitions of $83.5 million and purchases of property, plant and
equipment totaling $22.4 million. Cash used in investing activities in fiscal
2005 was $26.4 million, principally due to purchases of property, plant and
equipment totaling $28.5 million, partially offset by proceeds from the sale of
other assets of $1.9 million. In fiscal 2004, the cash used in investing
activities was $10.1 million, principally due to purchases of property, plant
and equipment totaling $30.7 million and acquisitions of businesses of $1.9
million, partially offset by proceeds from the sale of real estate and other
assets of $22.4 million.
The cash provided by financing activities in fiscal 2006 of $0.9 million,
primarily resulted from employee exercises of stock options of $5.3 million
offset by $2.4 million for repayment of long-term debt and a $2.2 million
decrease in bank loans In fiscal 2005, the cash used in financing activities was
$0.6 million, primarily resulting from a $1.4 million decrease in bank loans,
partially offset by $1.2 million from employee exercises of stock options. In
2004, the cash provided by financing activities of $4.6 million, primarily
resulted from a $3.6 million increase in bank loans and $1.4 million from
employee exercises of stock options.
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 29, 2006:
Contractual Cash Obligations
Payments Due By Period
----------------------------------------------------------------------
Less than 1- 3 3 - 5 After 5
Total 1 year years years years
----------------------------------------------------------------------
(In thousands)
Term Loan $13,297 $470 $1,065 $1,253 $10,509
Notes Payable to Banks 4,639 4,639
----------------------------------------------------------------------
Total Debt (a) 17,936 5,109 1,065 1,253 10,509
Accrued Insurance (b) 11,240 6,480 4,760
Deferred Compensation (c) 5,538 5,538
Operating Leases (d) 52,032 20,421 23,622 7,168 821
----------------------------------------------------------------------
Total Contractual Cash Obligations $86,746 $37,548 $29,447 $8,421 $11,330
======================================================================
(a) Debt does not include interest.
(b) Includes $5.0 million for the Company's Primary Insurance Casualty
Program and $6.2 million for the Company's Medical Insurance Program.
See Note A of Notes to Consolidated Financial Statements.
(c) Includes $4.7 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 M to Consolidated
Financial Statements.
(d) See Note O of Notes to Consolidated Financial Statements.
45
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 $4,024 $4,024
Revolving Credit Facility, available 40,000 $40,000
Securitization Program, available 90,000 90,000
Standby Letters of Credit,
outstanding 542 542
------------------------------------------
Total Commercial Commitments $134,566 $4,566 $130,000
==========================================
Securitization Program
The Company has an accounts receivable securitization program ("Securitization
Program"), which was amended effective January 31, 2006 to increase the level
from $150.0 million to $200.0 million and amended effective August 31, 2006 to
extend the maturity date to April 2009. 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 $200.0 million). The Company retains the
servicing responsibility for the accounts receivable. At October 29, 2006, TRFCO
had purchased from Volt Funding a participation interest of $110.0 million out
of a pool of approximately $275.2 million of receivables.
The Securitization Program is not an off-balance sheet arrangement as Volt
Funding is a 100%-owned consolidated subsidiary of the Company, with accounts
receivable only reduced to reflect the fair value of receivables actually sold.
The Company entered into this arrangement as it provided a low-cost alternative
to other forms of financing.
The Securitization Program is designed to enable the sale of receivables by the
Company to Volt Funding to constitute true sales of those receivables. As a
result, the receivables are available to satisfy Volt Funding's own obligations
to its own creditors before being available, through the Company's residual
equity interest in Volt Funding, to satisfy the Company's creditors (subject
also, as described above, to the security interest that the Company granted in
the common stock of Volt Funding in favor of the lenders under the Company's
Credit Facility). TRFCO has no recourse to the Company beyond its interest in
the pool of receivables owned by Volt Funding.
46
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 29, 2006, the Company was in compliance with all requirements of its
Securitization Program.
Credit Lines
In the first quarter of fiscal 2006, the Company's $40.0 million secured,
syndicated revolving credit agreement ("Credit Agreement") was amended to (i)
permit the consummation of the acquisition by the Company of Varetis Solutions
GmbH ("Varetis Solutions") and the twenty-four percent interest in Volt Delta
Resources LLC ("Volt Delta") owned by Nortel Networks Inc. ("Nortel Networks"),
(ii) modify certain of the financial covenants contained in the Credit Agreement
and (iii) increase the amount of financing permitted under the securitization
program. The Credit Agreement expires in April 2008.
The Credit Agreement established a secured credit facility ("Credit Facility")
in favor of the Company and designated subsidiaries, of which up to $15.0
million may be used for letters of credit. Borrowings by subsidiaries are
limited to $25.0 million in the aggregate. The administrative agent for the
Credit Facility is JPMorgan Chase Bank. The other banks participating in the
Credit Facility are Mellon Bank, N.A., Wells Fargo Bank, N.A., Lloyds TSB Bank
PLC and Bank of America, N.A..
Borrowings under the Credit Facility are to bear interest at various rate
options selected by the Company at the time of each borrowing. Certain rate
options, together with a facility fee, are based on a leverage ratio, as
defined. Additionally, interest and the facility fees can be increased or
decreased upon a change in the Company's long-term debt rating provided by a
nationally recognized rating agency. As amended, in lieu of the previous
borrowing base formulation, the Credit Agreement now requires the maintenance of
specified accounts receivable collateral in excess of any outstanding
borrowings. Based upon the Company's leverage ratio and debt rating at October
29, 2006, if a three-month U.S. Dollar LIBO rate were the interest rate option
selected by the Company, borrowings would have borne interest at the rate of
6.5% per annum, including a facility fee of 0.25% per annum.
47
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
Credit Lines--Continued
The Credit Agreement provides for the maintenance of various financial ratios
and covenants, including, among other things, a requirement that the Company
maintain a consolidated tangible net worth, as defined; a limitation on cash
dividends, capital stock purchases and redemptions by the Company in any one
fiscal year to 50% of consolidated net income, as defined, for the prior fiscal
year; and a requirement that the Company maintain a ratio of EBIT, as defined,
to interest expense, as defined, of 1.25 to 1.0 for the twelve months ending as
of the last day of each fiscal quarter. The Credit Agreement also imposes
limitations on, among other things, the incurrence of additional indebtedness,
the incurrence of additional liens, sales of assets, the level of annual capital
expenditures, and the amount of investments, including business acquisitions and
investments in joint ventures, and loans that may be made by the Company and its
subsidiaries. At October 29, 2006, the Company was in compliance with all
covenants in the Credit Agreement.
The Company is liable on all loans made to it and all letters of credit issued
at its request, and is jointly and severally liable as to loans made to
subsidiary borrowers. However, unless also a guarantor of loans, a subsidiary
borrower is not liable with respect to loans made to the Company or letters of
credit issued at the request of the Company, or with regard to loans made to any
other subsidiary borrower. Five subsidiaries of the Company are guarantors of
all loans made to the Company or to subsidiary borrowers under the Credit
Facility. At October 29, 2006, four of those guarantors have pledged
approximately $56.6 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.
At October 29, 2006, the Company had credit lines with domestic and foreign
banks which provided for borrowings and letters of credit up to an aggregate of
$48.7 million, including $40.0 million under the Credit Agreement and the
Company had total outstanding foreign currency bank borrowings of $4.6 million,
none of which were under the Credit Agreement. These bank borrowings provide a
hedge against devaluation in foreign currency denominated assets.
In December 2005, the Credit Agreement was amended to consent to the
consummation of the acquisition by the Company of the twenty-four (24%) percent
interest in Volt Delta owned by Nortel Networks and to modify certain of the
financial covenants contained in the Credit Agreement and increase the amount of
financing permitted under the Securitization Program.
Effective December 19, 2006, the Company's wholly owned subsidiary, Volt Delta
Resources ("Delta") entered into a stand-alone three-year $70.0 million secured,
syndicated, revolving credit agreement ("Delta Credit Facility") with Wells
Fargo,N.A. as the administrative agent and arranger, and as a lender thereunder.
Wells Fargo and the other three lenders under the Delta Credit Facility, Lloyd
TSB Bank Plc, Bank of America, N.A and JPMorgan Chase also participate in the
Company's $40.0 million revolving credit facility. Neither the Company nor Delta
guarantee each other's facility but certain subsidiaries of both are guarantors
of their respective parent companies. Under the Delta Credit Facility, Delta is
required to pay down approximately $38.0 million in intercompany debt owed to
the Company within 30 days of closing.
As of January 1, 2007, the Company currently had no outstanding debt under its
own revolving facility but has $100.0 million currently financed under its
$200.0 million securitization program.
48
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
Summary
The Company believes that its current financial position, working capital,
future cash flows from operations, credit lines and accounts receivable
Securitization Program will be sufficient to fund its presently contemplated
operations and satisfy its obligations through, at least, the next twelve
months.
New Accounting Pronouncements and New Laws to be Effective in Fiscal 2007
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections, - a replacement of APB Opinion No. 20 and FASB Statement No. 3".
This Statement establishes, unless impracticable, retrospective application as
the required method for reporting a change in accounting principle in the
absence of explicit transition requirements specific to the newly adopted
accounting principle. The provisions of this Statement are effective for
accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. Early adoption is permitted for accounting changes and
corrections of errors made in fiscal years beginning after the date this
Statement was issued. The Company does not believe that the adoption of this
Statement in fiscal 2007 will have a material impact on the Company's
consolidated financial position or results of operations.
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid
Financial Instruments - an amendment of FASB Statements No. 133 and 140". This
Statement, among other things, allows a preparer to elect fair value measurement
of instruments in cases in which a derivative would otherwise have to be
bifurcated. The provisions of this Statement are effective for all financial
instruments acquired or issued in fiscal years beginning after September 15,
2006. Early adoption is permitted for instruments that an entity holds at the
date of adoption on an instrument-by-instrument basis. The Company does not
believe that the adoption of this Statement in fiscal 2007 will have a material
impact on the Company's consolidated financial position or results of
operations.
In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of
Financial Assets-an amendment of FASB Statement No. 140." This Statement amends
SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities", with respect to the accounting for separately
recognized servicing assets and servicing liabilities. The provisions of this
Statement are effective for all financial instruments acquired or issued in
fiscal years beginning after September 15, 2006. Early adoption is permitted for
instruments that an entity holds at the date of adoption on an
instrument-by-instrument basis. The Company does not believe that the adoption
of this Statement in fiscal 2007 will have a material impact on the Company's
consolidated financial position or results of operations.
In July 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty
in Income Taxes - an interpretation of FASB Statement No. 109" ("FIN 48") which
prescribes a recognition threshold and measurement attribute, as well as
criteria for subsequently recognizing, derecognizing and measuring uncertain tax
positions for financial statement purposes. FIN 48 also requires expanded
disclosure with respect to the uncertainty in income taxes assets and
liabilities. FIN 48 is effective for fiscal years beginning after December 15,
2006 and is required to be recognized as a change in accounting principle
through a cumulative-effect adjustment to retained earnings as of the beginning
of the year of adoption. The Company is currently evaluating the impact of
adopting the provisions of FIN 48 in fiscal 2008.
49
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
Related Party Transactions
During fiscal 2006, 2005 and 2004, the Company paid or accrued $0.9 million,
$0.8 million and $1.9 million, respectively, to the law firms of which Lloyd
Frank, a director of the Company, is or was of counsel, for services rendered to
the Company and expenses reimbursed.
In October 2006, the Company purchased 200,000 shares of common stock from the
Estate of William Shaw at a price of $39.75 per share, for a total of
$7,950,000. The Company intends to use these shares to fund awards under the
Volt Information Sciences, Inc. 2006 Incentive Stock Plan. The shares were
purchased at a price below the price at which the Company's common stock was
then being traded on the New York Stock Exchange (the low trade for the day was
$39.94 and the high trade was $40.85). The decision to make the purchase was
made by senior management of the Company. The funds were transferred in November
2007.
In fiscal 2006, the Company advanced $162,400 directly to the attorneys for Mr.
Thomas Daley, an executive officer of the Company ($95,800 of which had
previously been reported in the Company's proxy statement for its 2006 annual
meeting). In 2006, the Company also paid $336,100 for legal fees of the
independent counsel to the Audit committee of the Company ($260,000 of which had
previously been reported in the Company's proxy statement for its 2006 annual
meeting.
From time-to-time the Company has employed, and will continue to employ,
relatives of executive officers, as well as relatives of other full time
employees for amounts less than specified in Item 404 of Regulation S-K. The
Company believes that it has always employed, and will continue to employ, those
individuals on the same terms that it employs unrelated individuals.
50
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 $200 million accounts
receivable securitization program to provide the Company with additional
liquidity to meet its short-term financing needs.
The interest rates on these borrowings and financing are variable and,
therefore, interest and other expense and interest income are affected by the
general level of U.S. and foreign interest rates. Based upon the current levels
of cash invested, notes payable to banks and utilization of the securitization
program, on a short-term basis, as noted below in the tables, a hypothetical
100-basis-point (1%) increase or decrease in interest rates would increase or
decrease its annual net interest expense and securitization costs by $0.5
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 $13.7 million
at October 29, 2006. This fair value was calculated by applying the appropriate
fiscal year-end interest rate 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 29, 2006, the total market value of these
investments was $4.7 million, all of which are being held for the benefit of
participants in a non-qualified deferred compensation plan with no risk to the
Company.
The Company has a number of overseas subsidiaries and is, therefore, subject to
exposure from the risk of currency fluctuations as the value of foreign
currencies fluctuates against the dollar, which may impact reported earnings. As
of October 29, 2006, the total of the Company's net investment in foreign
operations was $5.8 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 29, 2006, the total of the Company's foreign exchange contracts was $1.3
million, leaving a balance of net foreign exposure of $4.5 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 29, 2006 by 10%
would result in a pretax gain of $0.6 million related to these positions.
Similarly, a hypothetical strengthening of the U.S. dollar against these
currencies at October 29, 2006 by 10% would result in a pretax loss of $0.5
million related to these positions.
The tables below provide information about the Company's financial instruments
that are sensitive to either interest rates or exchange rates at October 29,
2006. For cash and debt obligations, the table presents principal cash flows and
related weighted average interest rates by expected maturity dates. For foreign
exchange agreements, the table presents the currencies, notional amounts and
weighted average exchange rates by contractual maturity dates. The information
is presented in U.S. dollar equivalents, which is the Company's reporting
currency.
51
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK--Continued
Interest Rate Market Risk Payments Due By Period as of October 29, 2006
-----------------------------------------------------------------------------------------------
Less than 1-3 3-5 After 5
Total 1 Year Years Years Years
------------------------------------------------------------
(Dollars in thousands of US$)
Cash and Cash Equivalents and
Restricted Cash $69,194 $69,194
Money Market and Cash Accounts
Weighted Average Interest Rate 5.14% 5.14%
--------------------------
Total Cash, Restricted Cash and
Cash Equivalents $69,194 $69,194
==========================
Securitization Program
Accounts Receivable Securitization $110,000 $110,000
Finance Rate 5.30% 5.30%
--------------------------
Securitization Program $110,000 $110,000
==========================
Interest Rate Market Risk Payments Due By Period as of October 29, 2006
-----------------------------------------------------------------------------------------------
Less than 1 - 3 3 - 5 After 5
Total 1 Year Years Years Years
------------------------------------------------------------
(Dollars in thousands of US$)
Debt
Term Loan $13,297 470 1,065 1,253 10,509
Interest Rate 8.2% 8.2% 8.2% 8.2% 8.2%
Notes Payable to Banks 4,639 4,639
Weighted Average Interest Rate 5.54% 5.54% - - -
----------------------------------------------------------
Total Debt $17,936 $5,109 $1,065 $1,253 $10,509
==========================================================
Foreign Exchange Market Risk
Contract Values
Contractual Fair Value
Exchange Less than Option
Rate Total 1 Year Premium (1)
-------------------------------------------------------
(Dollars in thousands of US $)
Option Contracts
Euro to US$ 1.273 $1,273 $1,273 $15
(1) Represents the cost of the options purchased on October 27, 2006.
52
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
of Volt Information Sciences, Inc.
We have audited the accompanying consolidated balance sheets of Volt Information
Sciences, Inc. and subsidiaries as of October 29, 2006 and October 30, 2005, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended October 29, 2006. Our
audits also included the financial statement schedule listed in the Index at
Item 15(a)(2). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Volt Information
Sciences, Inc. and subsidiaries at October 29, 2006 and October 30, 2005 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended October 29, 2006, in conformity with U.S.
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
As discussed in Note K to the consolidated financial statements, on October 31,
2005, the Company adopted Statement of Financial Accounting Standards No.
123(R), "Share-Based Payment."
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Volt
Information Sciences, Inc. and subsidiaries' internal control over financial
reporting as of October 29, 2006, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission and our report dated January 11, 2007 expressed an
unqualified opinion thereon.
/s/ ERNST & YOUNG
New York, New York
January 11, 2007
53
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
October October
29, 30,
2006 2005
------------------
(Dollars in
ASSETS thousands)
CURRENT ASSETS
Cash and cash equivalents $38,481 $61,988
Restricted cash 30,713 26,131
Short-term investments 4,709 4,213
Trade accounts receivable, net of allowances of
$7,491 (2006) and $7,527 (2005) 390,799 399,677
Inventories 28,735 33,758
Deferred income taxes 9,167 10,246
Prepaid insurance and other assets 37,280 19,788
------------------
TOTAL CURRENT ASSETS 539,884 555,801
Investment in securities 188 141
Property, plant and equipment, net 74,135 83,272
Deposits and other assets 2,059 1,961
Goodwill 50,896 32,623
Other intangible assets, net of accumulated
amortization of $5,207 (2006) and $1,396 (2005) 31,959 14,914
------------------
TOTAL ASSETS $699,121 $688,712
==================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable to banks $4,639 $6,622
Current portion of long-term debt 470 2,404
Accounts payable 190,431 172,788
Accrued wages and commissions 59,387 55,081
Accrued taxes other than income taxes 20,186 17,586
Accrued insurance and other accruals 29,241 35,173
Deferred income and other liabilities 37,519 30,628
Income taxes payable 3,626 1,686
------------------
TOTAL CURRENT LIABILITIES 345,499 321,968
Accrued insurance 4,760 1,630
Long-term debt 12,827 13,297
Deferred income taxes 10,787 13,358
Minority Interest - 43,444
STOCKHOLDERS' EQUITY
Preferred stock, par value $1.00; Authorized--
500,000 shares; issued--none
Common stock, par value $.10; Authorized--
30,000,000 shares;
issued--15,637,983 shares (2006) and
15,339,255 shares (2005) 1,564 1,534
Paid-in capital 50,985 43,694
Retained earnings 280,404 249,754
Accumulated other comprehensive income 245 33
------------------
333,198 295,015
Less treasury stock--200,000 shares (2006),
at cost (7,950) -
------------------
TOTAL STOCKHOLDERS' EQUITY 325,248 295,015
------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $699,121 $688,712
==================
See Notes to Consolidated Financial Statements
54
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended
October 29, October 30, October 31,
2006 2005 2004
-------------------------------------------
(In thousands, except per share data)
NET SALES $2,338,453 $2,177,619 $1,924,777
COSTS AND EXPENSES:
Cost of sales 2,147,823 2,014,551 1,772,087
Selling and administrative 97,227 92,858 83,124
Depreciation and amortization 34,847 29,603 25,537
-------------------------------------------
2,279,897 2,137,012 1,880,748
-------------------------------------------
OPERATING PROFIT 58,556 40,607 44,029
OTHER INCOME (EXPENSE):
Interest income 3,185 2,648 927
Other expense, net (7,848) (4,882) (4,398)
Gain on sale of real estate - - 3,295
Foreign exchange (loss) gain, net (505) (255) 97
Interest expense (1,819) (1,825) (1,817)
-------------------------------------------
Income from continuing operations before items
shown below 51,569 36,293 42,133
Minority interest (1,021) (7,024) (2,420)
-------------------------------------------
Income from continuing operations before taxes 50,548 29,269 39,713
Income tax provision (19,898) (12,229) (15,517)
-------------------------------------------
Income from continuing operations 30,650 17,040 24,196
Discontinued operations, net of taxes - - 9,520
-------------------------------------------
NET INCOME $30,650 $17,040 $33,716
===========================================
Per Share Data
-------------------------------------------
Basic:
Income from continuing operations $1.98 $1.11 $1.59
Discontinued operations - - 0.62
-------------------------------------------
Net income $1.98 $1.11 $2.21
===========================================
Weighted average number of shares outstanding-
basic 15,485 15,320 15,234
===========================================
Diluted:
Income from continuing operations $1.97 $1.11 $1.58
Discontinued operations - - 0.62
-------------------------------------------
Net income $1.97 $1.11 $2.20
===========================================
Weighted average number of shares outstanding-
diluted 15,592 15,417 15,354
===========================================
See Notes to Consolidated Financial Statements.
55
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND
COMPREHENSIVE INCOME (LOSS)
Accumulated Other Comprehensive
Income (loss)
-------------------------------
Unrealized
Gain (Loss)
Common Stock Foreign Currency On
$.10 Par Value Paid-In Retained Treasury Translation Marketable Comprehensive
Shares Amount Capital Earnings Stock Adjustment Securities Income (Loss)
-------------------------------------------------------------------------------------------
(Dollars in thousands)
Balance at November 2,
2003 15,220,415 $1,522 $41,091 $198,998 ($508) $92
Stock options exercised
- including a tax
benefit of $214 62,210 6 1,362
Unrealized foreign
currency translation
adjustment - net of
taxes of $126 294 $294
Unrealized gain on
marketable securities -
net of tax benefit of
$37 (56) (56)
Net income for the year 33,716 33,716
-------------------------------------------------------------------------------------------
Balance at October 31,
2004 15,282,625 1,528 42,453 232,714 - (214) 36 $33,954
=============
Stock options exercised
- including a tax
benefit of $199 56,630 6 1,241
Unrealized foreign
currency translation
adjustment - net of
taxes of $80 186 $186
Unrealized gain on
marketable securities -
net of taxes of $16 25 25
Net income for the year 17,040 17,040
-------------------------------------------------------------------------------------------
Balance at October 30,
2005 15,339,255 1,534 43,694 249,754 - (28) 61 $17,251
=============
Stock options exercised
- including a tax
benefit of $1,912 298,728 30 7,217
Compensation expense -
stock options 74
Purchase of common stock
for treasury ($7,950)
Unrealized foreign
currency translation
adjustment - net of
taxes of $94 220 $220
Unrealized loss on
marketable securities -
net of tax benefit of
$6 (8) (8)
Net income for the year 30,650 30,650
-------------------------------------------------------------------------------------------
Balance at October 29,
2006 15,637,983 $1,564 $50,985 $280,404 ($7,950) $192 $53 $30,862
===========================================================================================
There were no shares of preferred stock issued or outstanding in any of the
reported periods.
See Notes to Consolidated Financial Statements.
56
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended
----------------------------------------------
October 29, October 30, October 31,
2006 2005 2004
----------------------------------------------
(In thousands)
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net income $30,650 $17,040 $33,716
Adjustments to reconcile net income to cash provided by
operating activities
Discontinued operations - - (9,520)
Depreciation and amortization 34,847 29,603 25,537
Accounts receivable provisions 4,003 3,838 7,784
Minority interest 1,021 7,024 2,420
Loss (gain) on foreign currency translation 20 (16) (43)
Loss (gain) on dispositions of property, plant and
equipment 342 (9) (3,432)
Deferred income tax benefit (4,345) (2,978) (4,240)
Share-based compensation expense related to employee
stock options 74 - -
Excess tax benefits from share-based compensation (194) - -
Changes in operating assets and liabilities, net of
assets acquired:
Accounts receivable 6,300 (24,084) (101,672)
Proceeds from securitization program 10,000 30,000 -
Inventories 5,030 (1,082) 6,662
Prepaid insurance and other assets (16,907) (5,063) 2,553
Deposits and other assets (97) (520) 667
Accounts payable 11,048 (1,519) 12,297
Accrued expenses (375) 478 24,748
Deferred income and other liabilities (3,386) (5,193) 6,119
Income taxes 2,451 (2,451) 2,754
----------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 80,482 45,068 6,350
----------------------------------------------
57
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--Continued
Year Ended
----------------------------------------------
October 29 October 30, October 31,
2006 2005 2004
----------------------------------------------
(In thousands)
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
Sales of investments 1,296 1,119 1,476
Purchases of investments (1,491) (904) (1,419)
(Increase) decrease in restricted cash (4,582) 17,591 (24,852)
Increase (decrease) in payables related to restricted cash 4,582 (17,591) 24,852
Acquisitions - business (83,503) - (1,864)
Proceeds from disposals of property, plant and equipment, net 1,348 1,885 3,933
Purchases of property, plant and equipment (22,365) (28,511) (30,737)
Proceeds from sale of real estate (discontinued operations) - - 18,500
----------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (104,715) (26,411) (10,111)
----------------------------------------------
CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
Payment of long-term debt (2,433) (399) (340)
Exercises of stock options 5,335 1,247 1,368
Excess tax benefits from share-based compensation 194 - -
Payment of notes payable-bank (71,969) (84,750) (62,683)
Proceeds from notes payable-bank 69,813 83,346 66,274
----------------------------------------------
NET CASH (USED IN) PROVIDED BY FINANCING
ACTIVITIES 940 (556) 4,619
----------------------------------------------
Effect of exchange rate changes on cash (214) (422) 264
----------------------------------------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (23,507) 17,679 1,122
Cash and cash equivalents, beginning of year 61,988 44,309 43,187
----------------------------------------------
CASH AND CASH EQUIVALENTS,
CASH, END OF YEAR $38,481 $61,988 $44,309
==============================================
SUPPLEMENTAL INFORMATION
Cash paid during the year:
Interest expense $1,788 $1,868 $1,616
Income taxes $22,090 $17,694 $15,934
Non-cash financing activities:
Tendered common stock for stock option exercises $1,216
See Notes to Consolidated Financial Statements.
58
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A--Summary of Significant Accounting Policies
Business: The Company operates in two major businesses, Staffing Services and
Telecommunications and Information Solutions, consisting of four operating
segments: Staffing Services; Telephone Directory; Telecommunications Services
and Computer Systems.
Fiscal Year: The Company's fiscal year ends on the Sunday nearest October 31.
The 2004 through 2006 fiscal years each consisted of 52 weeks.
Consolidation: The consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany transactions have
been eliminated upon consolidation. The Company accounts for the securitization
of accounts receivable in accordance with Financial Accounting Standards Board
("FASB") Statement of Financial Accounting Standards ("SFAS") No. 140,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities" (see Note B).
Use of Estimates: The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
Reclassification: Certain amounts in fiscal years 2005 and 2004 have been
reclassified to conform to the 2006 presentation.
Stock-Based Compensation: Prior to October 31, 2005, the Company elected to
follow Accounting Principles Board ("APB") Opinion 25, "Accounting for Stock
Issued to Employees," to account for its Non-Qualified Stock Option Plan under
which no compensation cost is recognized because the option exercise price is
equal to at least the market price of the underlying stock on the date of grant.
Effective October 31, 2005, the Company adopted the fair-value recognition
provisions of SFAS No. 123R "Share Based Payment" and the Securities and
Exchange Commission Staff Accounting Bulletin No. 107 using the
modified-prospective transition method; therefore, prior periods have not been
restated. Compensation cost recognized in the twelve month period ended October
29, 2006 includes compensation cost for all share-based payments granted prior
to, but not yet vested as of, October 31, 2005, based on the grant date fair
value estimated in accordance with the original provisions of SFAS No. 123.
Revenue Recognition: The Company derives its revenues from several sources. The
revenue recognition methods, which are consistent with those prescribed in Staff
Accounting Bulletin 104 ("SAB 104"), "Revenue Recognition in Financial
Statements," are described below in more detail for the significant types of
revenue within each of its segments.
Staffing Services:
Staffing: Sales are derived from the Company's Staffing Solutions Group
supplying its own temporary personnel to its customers, for which the
Company assumes the risk of acceptability of its employees to its
customers, and has credit risk for collecting its billings after it has
paid its employees. The Company reflects revenues for these services on a
gross basis in the period the services are rendered. In fiscal 2006, this
revenue comprised approximately 77% of the Company's net sales.
59
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: Sales are generated by the Company's E-Procurement
Solutions subsidiary, ProcureStaff, for which the Company receives an
administrative fee for arranging for, billing for and collecting the
billings related to staffing companies ("associate vendors") who have
supplied personnel to the Company's customers. The administrative fee is
either charged to the customer or subtracted from the Company's payment to
the associate vendor. The customer is typically responsible for assessing
the work of the associate vendor, and has responsibility for the
acceptability of its personnel, and in most instances the customer and
associate vendor have agreed that the Company does not pay the associate
vendor until the customer pays the Company. Based upon the revenue
recognition principles in Emerging Issues Task Force ("EITF") 99-19,
"Reporting Revenue Gross as a Principal versus Net as an Agent," revenue
for these services, where the customer and the associate vendor have agreed
that the Company is not at risk for payment, is recognized net of
associated costs in the period the services are rendered. In addition,
sales for certain contracts generated by the Company's Staffing Solutions
Group's managed services operations have similar attributes. In fiscal
2006, this revenue comprised approximately 2% of the Company's net sales.
Outsourced Projects: Sales are derived from the Company's Information
Technology Solutions operation providing outsource services for a customer
in the form of project work, for which the Company is responsible for
deliverables, in accordance with AICPA Statement of Position ("SOP") 81-1,
"Accounting for Performance of Construction-Type Contracts". The Company's
employees perform the services and the Company has credit risk for
collecting its billings. Revenue for these services is recognized on a
gross basis in the period the services are rendered when on a time and
material basis, and when the Company is responsible for project completion,
revenue is recognized when the project is complete and the customer has
approved the work. In fiscal 2006, this revenue comprised approximately 5%
of the Company's net sales.
Telephone Directory:
Directory Publishing: Sales are derived from the Company's sales of
telephone directory advertising for books it publishes as an independent
publisher in the United States and Uruguay. The Company's employees perform
the services and the Company has credit risk for collecting its billings.
Revenue for these services is recognized on a gross basis in the period the
books are printed and distributed. In fiscal 2006, this revenue comprised
approximately 2% of the Company's net sales.
Ad Production and Other: Sales are generated when the Company performs
design, production and printing services, and database management for other
publishers' telephone directories. The Company's employees perform the
services and the Company has credit risk for collecting its billings.
Revenue for these services is recognized on a gross basis in the period the
Company has completed its production work and upon customer acceptance. In
fiscal 2006, this revenue comprised approximately 1% of the Company's net
sales.
60
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE A--Summary of Significant Accounting Policies--Continued
Revenue Recognition: --Continued
Telecommunications Services:
Construction: Sales are derived from the Company supplying aerial,
underground and other 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 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 or by the percentage of
completion method, when applicable. In fiscal 2006, this revenue comprised
approximately 3% of the Company's net sales.
Non-Construction: Sales are derived from the Company performing design,
engineering and business systems integrations work. The Company's employees
perform the services and the Company has credit risk for collecting its
billings. Revenue for these services is recognized on a gross basis in the
period in which services are performed, and if applicable, any completed
units are delivered and accepted by the customer. In fiscal 2006, this
revenue comprised approximately 2% of the Company's net sales.
Computer Systems:
Database Access: Sales are derived from the Company granting access to its
proprietary telephone listing databases to telephone companies,
inter-exchange carriers and non-telco enterprise customers. The Company
uses its own databases and has credit risk for collecting its billings. The
Company recognizes revenue on a gross basis in the period in which the
customers access the Company's databases based upon transaction volume. In
fiscal 2006, this revenue comprised approximately 5% of the Company's net
sales.
IT Maintenance: Sales are derived from the Company providing hardware
maintenance services to the general business community, including customers
who have the Company's systems, on a time and material basis or a contract
basis. The Company uses its own employees and inventory in the performance
of the services, and has credit risk for collecting its billings. Revenue
for these services is recognized on a gross basis in the period in which
the services are performed, contingent upon customer acceptance when on a
time and material basis, or over the life of the contract, as appropriate.
In fiscal 2006, this revenue comprised approximately 2% of the Company's
net sales.
Telephone Systems: Sales are derived from the Company providing telephone
operator services-related systems and enhancements to existing systems,
equipment and software to customers. The Company uses its own employees and
has credit risk for collecting its billings. The Company relies upon the
principles in SOP 97-2, "Software Revenue Recognition" and EITF 00-21,
"Revenue Arrangements with Multiple Deliverables" to recognize revenue on a
gross basis upon customer acceptance of each part of the system based upon
its fair value or by the use of the percentage of completion method, in
accordance with AICPA Statement of Position ("SOP") 81-1, "Accounting for
Performance of Construction-Type Contracts", when applicable. In fiscal
2006, this revenue comprised approximately 1% of the Company's net sales.
The Company records provisions for estimated losses on contracts when losses
become evident. Accumulated unbilled costs on contracts are carried in inventory
at the lower of actual cost or estimated realizable value.
Cash Equivalents: Cash equivalents consist of investments in short-term, highly
liquid securities having an initial maturity of three months or less.
61
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 SFAS No. 142, "Goodwill and Other Intangible Assets," goodwill
and indefinite-lived assets are subject to annual impairment testing using fair
value methodologies. The Company performs its impairment testing using
comparable multiples of sales and EBITDA and other valuation methods to assist
the Company in the determination of the fair value of the reporting units
measured.
Long-Lived Assets: Property, plant and equipment are recorded at cost, and
depreciation and amortization are provided on the straight-line or accelerated
methods at rates calculated to allocate the cost of the assets over their period
of use. Intangible assets, other than goodwill, and property, plant and
equipment are reviewed for impairment in accordance with SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." Under SFAS No.
144, these assets are tested for recoverability whenever events or changes in
circumstances indicate that their carrying amounts may not be recoverable.
Circumstances which could trigger a review include, but are not limited to:
significant decreases in the market price of the asset; significant adverse
changes in the business climate or legal factors; the accumulation of costs
significantly in excess of the amount originally expected for the acquisition or
construction of the asset; current period cash flow or operating losses combined
with a history of losses or a forecast of continuing losses associated with the
use of the asset; and a current expectation that the asset will more likely than
not be sold or disposed of significantly before the end of its estimated useful
life. Recoverability is assessed based on the carrying amount of the asset and
the sum of the undiscounted cash flows expected to result from the use and the
eventual disposal of the asset or asset group. An impairment loss is recognized
when the carrying amount exceeds the estimated fair value of the asset or asset
group. The impairment loss is measured as the amount by which the carrying
amount exceeds fair value.
62
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE A--Summary of Significant Accounting Policies--Continued
The weighted-average amortization period for other intangible assets in fiscal
2006, 2005 and 2004 was 8 years, 15 years and 15 years, respectively.
Fully depreciated assets are retained in property, plant and equipment and the
related accumulated 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 any 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
Software 3 to 7 years
Property, plant and equipment consisted of: October 29, October 30,
2006 2005
------------------------------------
(In thousands)
Land and buildings $23,379 $23,120
Machinery and equipment 138,122 121,456
Leasehold improvements 12,523 12,021
Software 76,487 71,968
------------------------------------
250,511 228,565
Less allowances for depreciation and amortization (176,376) (145,293)
------------------------------------
$74,135 $83,272
====================================
A term loan is secured by a deed of trust on land and buildings with a carrying
amount at October 29, 2006 of $9.9 million (see Note F).
Primary Insurance Casualty Program: The Company is insured with highly rated
insurance companies under a program that provides primary workers' compensation,
employer's liability, general liability and automobile liability insurance under
a loss sensitive program. In certain mandated states, the Company purchases
workers' compensation insurance through participation in state funds and the
experience-rated premiums in these state plans relieve the Company of any
additional liability. In the loss sensitive program, initial premium accruals
are established based upon the underlying exposure, such as the amount and type
of labor utilized, number of vehicles, etc. The Company establishes accruals
utilizing actuarial methods to estimate the future cash payments that will be
made to satisfy the claims, including an allowance for incurred-but-not-reported
claims. This process also includes establishing loss development factors, based
on the historical claims experience of the Company and the industry, and
applying those factors to current claims information to derive an estimate of
the Company's ultimate premium liability. In preparing the estimates, the
Company considers the nature and severity of the claims, analyses provided by
third party actuaries, as well as current legal, economic and regulatory
factors. The insurance policies have various premium rating plans that establish
the ultimate premium to be paid. Adjustments to premiums are made based upon the
level of claims incurred at a future date up to three years after the end of the
respective policy period. Management evaluates the accrual
63
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
and the underlying assumptions regularly throughout the year and makes
adjustments as needed. The ultimate premium cost may be greater or less than the
established accrual. While management believes that the recorded amounts are
adequate, there can be no assurances that changes to management's estimates will
not occur due to limitations inherent in the estimation process. In the event it
is determined that a smaller or larger accrual is appropriate, the Company would
record a credit or a charge to cost of sales in the period in which such
determination is made.
In fiscal 2006, as a result of its annual review of its insurance accruals, the
Company reduced cost of sales by approximately $11.1 million to reduce its
workers' compensation accruals due to its working closely with customers to
better manage workers' compensation costs, and to the improved regulatory
environment within several states. The Company is anticipating a comparable
level of workers' compensation costs to continue during fiscal 2007. The Company
also reduced cost of sales by approximately $4.8 million to recognize a
reduction in general liability insurance costs as a result of retrospective
adjustments related to the Company's positive claims experience.
At October 29, 2006, the Company's net prepaid for the outstanding policy years
was $18.9 million compared to $1.6 million at October 30, 2005.
Medical Insurance Program: Beginning in April 2004, the Company became
self-insured for the majority of its medical benefit programs. The Company
remains insured for a portion of its medical program (primarily HMOs) as well as
the entire dental program. The Company provides the self-insured medical
benefits through an arrangement with a third-party administrator. However, the
liability for the self-insured benefits is limited by the purchase of stop loss
insurance. Contributed and withheld funds and related liabilities for the
self-insured program together with unpaid premiums for the insured programs,
other than the current provision, are held in an IRS Code Section 501(c)(9)
employee welfare benefit trust and do not appear on the balance sheet of the
Company. In order to establish the self-insurance reserves, the Company utilizes
actuarial estimates of expected losses based on statistical analyses of
historical data. The provision for future payments is initially adjusted by the
enrollment levels in the various plans. Periodically, the resulting liabilities
are monitored and adjusted as warranted by changing circumstances. Should the
amount of claims occurring exceed what was estimated or medical costs increase
beyond what was expected, liabilities might not be sufficient, and additional
expense may be recorded.
Capitalized Software: The Company's software technology personnel are involved
in the development and acquisition of internal-use software to be used in its
Enterprise Resource Planning system and software used in its operating segments,
some of which are customer accessible. The Company accounts for the
capitalization of software in accordance with AICPA SOP No. 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use."
Subsequent to the preliminary project planning and approval stage, all
appropriate costs are capitalized until the point at which the software is ready
for its intended use. Subsequent to the software being used in operations, the
capitalized costs are transferred from costs-in-process to completed property,
plant and equipment, and are accounted for as such. All post-implementation
costs, such as maintenance, training and minor upgrades that do not result in
additional functionality, are expensed as incurred.
64
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE A--Summary of Significant Accounting Policies--Continued
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 $110.0 million at
October 29, 2006 and $100.0 million at October 30, 2005. Accordingly, the trade
receivables included on the October 29, 2006 and October 30, 2005 balance sheets
have been reduced to reflect the participation interest sold. TRFCO has no
recourse to the Company (beyond its interest in the pool of receivables owned by
Volt Funding Corp., a wholly-owned special purpose subsidiary of the Company)
for any of the sold receivables.
Income Taxes: Income taxes are provided using the liability method. Deferred
taxes reflect the tax consequences on future years of differences between the
tax bases of assets and liabilities and their financial reporting amounts. The
carrying value of the Company's deferred tax assets is dependent upon the
Company's ability to generate sufficient future taxable income in certain tax
jurisdictions. Should the Company determine that it would not be able to realize
all or part of its deferred tax assets in the future, a valuation allowance to
the deferred tax assets would be established in the period such determination
was made (see Note G).
Translation of Foreign Currencies: The U.S. dollar is the Company's functional
currency throughout the world, except for certain European and Canadian
subsidiaries. Where the U.S. dollar is used as the functional currency, foreign
currency gains and losses are included in operations. The translation
adjustments recorded as a separate component of stockholders' equity result from
changes in exchange rates affecting the reported assets and liabilities of
foreign 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.
Treasury Stock: In fiscal 2006, the Company began holding repurchased shares of
its common stock as treasury stock. The Company accounts for treasury stock
under the cost method and includes treasury stock as a component of
stockholders' equity.
Derivatives and Hedging Activities: Gains and losses on foreign currency option
and forward contracts designated as hedges of existing assets and liabilities
and of identifiable firm commitments are deferred and included in the
measurement of the related foreign currency transaction. The Company enters into
derivative financial instrument contracts only for hedging purposes and accounts
for them in accordance with SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities", as amended. (see Note N).
65
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE A--Summary of Significant Accounting Policies--Continued
New Accounting Pronouncements: In May 2005, the FASB issued SFAS No. 154,
"Accounting Changes and Error Corrections, - a replacement of APB Opinion No. 20
and FASB Statement No.3". The Statement establishes, unless impracticable,
retrospective application as the required method for reporting a change in
accounting principle in the absence of explicit transition requirements specific
to the newly adopted accounting principle. The provisions of this Statement are
effective for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005. Early adoption is permitted for accounting
changes and corrections of errors made in fiscal years beginning after the date
this Statement was issued. The Company does not believe that the adoption of
this Statement in fiscal 2007 will have a material impact on the Company's
financial position or result of operations.
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid
Financial Instruments - and amendment of FASB Statements No. 133 and 140". This
Statement, among other things, allows a preparer to elect fair value measurement
of instruments in cases in which a derivative would otherwise have to be
bifurcated. The provisions of this Statement are effective for all financial
instruments acquired or issued in fiscal years beginning after September 15,
2006. Early adoption is permitted for instruments that an entity holds at the
date of adoption on an instrument-by-instrument basis. The Company does not
believe that the adoption of this Statement in fiscal 2007 will have a material
impact on the Company's consolidated financial position or results of
operations.
In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of
Financial Assets-an amendment of FASB Statement No. 140" This Statement amends
SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities", with respect to the accounting for separately
recognized servicing assets and servicing liabilities. The provisions of this
Statement are effective for all financial instruments acquired or issued in
fiscal years beginning after September 15, 2006. Early adoption is permitted for
instruments that an entity holds at the date of adoption on an
instrument-by-instrument basis. The Company does not believe that the adoption
of this Statement is fiscal 2007 will have material impact on the Company's
consolidated financial position or results of operations.
In July 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty
in Income Taxes - an interpretation of FASB Statement No. 109" ("FIN 48") which
prescribes a recognition threshold and measurement attribute, as well as
criteria for subsequently recognizing, derecognizing and measuring uncertain tax
positions for financial statement purposes. FIN 48 also requires expanded
disclosure with respect to the uncertainty in income taxes assets and
liabilities. FIN 48 is effective for fiscal years beginning after December 15,
2006 and is required to be recognized as a change in accounting principle
through a cumulative-effect adjustment to retained earnings as of the beginning
of the year of adoption. The Company is currently evaluating the impact of
adopting the provisions of FIN 48 in fiscal 2008.
NOTE B--Securitization Program
The Company has an accounts receivable securitization program ("Securitization
Program"), which was amended effective January 31, 2006 to increase the level
from $150.0 million to $200.0 million and amended effective August 31, 2006 to
extend the maturity date to April 2009. 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
66
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE B--Securitization Program--Continued
conduit sponsored by Mellon Bank, N.A. and unaffiliated with the Company, an
undivided percentage ownership interest in the pool of receivables Volt Funding
acquires from the Company (subject to a maximum purchase by TRFCO in the
aggregate of $200.0 million). The Company retains the servicing responsibility
for the accounts receivable. At October 29, 2006, TRFCO had purchased from Volt
Funding a participation interest of $110.0 million out of a pool of
approximately $275.2 million of receivables.
The Securitization Program is not an off-balance sheet arrangement as Volt
Funding is a 100%-owned consolidated subsidiary of the Company. Accounts
receivable are only reduced to reflect the fair value of receivables actually
sold. The Company entered into this arrangement as it provided a low-cost
alternative to other financing.
The Securitization Program is designed to enable the sale of receivables by the
Company to Volt Funding to constitute true sales of those receivables. As a
result, the receivables are available to satisfy Volt Funding's own obligations
to its own creditors before being available, through the Company's residual
equity interest in Volt Funding, to satisfy the Company's creditors. TRFCO has
no recourse to the Company beyond its interest in the pool of receivables owned
by Volt Funding.
In the event of termination of the Securitization Program, new purchases of a
participation interest in receivables by TRFCO would cease and collections
reflecting TRFCO's interest would revert to it. The Company believes TRFCO's
aggregate collection amounts should not exceed the pro rata interests sold.
There are no contingent liabilities or commitments associated with the
Securitization Program.
The Company accounts for the securitization of accounts receivable in accordance
with SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities." At the time a participation interest in the
receivables is sold, the receivable representing that interest is removed from
the condensed consolidated balance sheet (no debt is recorded) and the proceeds
from the sale are reflected as cash provided by operating activities. Losses and
expenses associated with the transactions, primarily related to discounts
incurred by TRFCO on the issuance of its commercial paper, are charged to the
consolidated statement of operations.
The Company incurred charges in connection with the sale of receivables under
the Securitization Program, of $6.7 million in the fiscal year ended October 29,
2006 compared to $3.4 million and $1.7 million in the fiscal years ended October
30, 2005 and October 31, 2004, respectively, which are included in Other Expense
on the consolidated statement of operations. The equivalent cost of funds in the
Securitization Program was 5.6%, 4.2% and 2.7% per annum in the fiscal years
2006, 2005 and 2004, respectively. The Company's carrying retained interest in
the receivables approximated fair value due to the relatively short-term nature
of the receivable collection period. In addition, the Company performed a
sensitivity analysis, changing various key assumptions, which also indicated the
retained interest in receivables approximated fair value.
At October 29, 2006 and October 30, 2005, the Company's carrying retained
interest in a revolving pool of receivables was approximately $164.2 million and
$182.5 million, respectively, net of a service fee liability, out of a total
pool of approximately $275.2 million and $283.3 million, respectively. The
outstanding balance of the undivided interest sold to TRFCO was $110.0 million
and $100.0 million at October 29, 2006 and October 30, 2005, respectively.
Accordingly, the trade accounts receivable included on the October 29, 2006 and
October 30, 2005 balance sheets have been reduced to reflect the participation
interest sold of $110.0 million and $100.0 million, respectively.
67
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE B--Securitization Program--Continued
The Securitization Program is subject to termination at TRFCO's option, under
certain circumstances, including the default rate, as defined, on receivables
exceeding a specified threshold, the rate of collections on receivables failing
to meet a specified threshold or the Company failing to maintain a long-term
debt rating of "B" or better, or the equivalent thereof, from a nationally
recognized rating organization. At October 29, 2006, the Company was in
compliance with all requirements of the Securitization Program.
NOTE C--Short-Term Investments and Investments in Securities
At October 29, 2006 and October 30, 2005 short-term investments consisted of
$4.7 million and $4.2 million, respectively, invested in mutual funds for the
Company's deferred compensation plan (see Note M).
At October 29, 2006 and October 30, 2005, the Company had an available-for-sale
investment in equity securities of $188,000 and $141,000, respectively. During
fiscal 2006, the Company purchased equity securities at a cost of $61,000. The
gross unrealized gains of $87,500 and $101,500 at October 29, 2006 and October
30, 2005, respectively, were included as a component of accumulated other
comprehensive income (loss).
NOTE D--Inventories
Inventories of accumulated unbilled costs, principally work in process, and
materials by segment are as follows:
October 29, October 30,
2006 2005
------------ ------------
(In thousands)
Telephone Directory $11,527 $10,508
Telecommunications Services 12,606 17,734
Computer Systems 4,602 5,516
------------ ------------
Total $28,735 $33,758
============ ============
The cumulative amounts billed under service contracts at October 29, 2006 and
October 30, 2005 of $10.9 million and $9.6 million, respectively, are credited
against the related costs in inventory. In addition, inventory reserves at
October 29, 2006 and October 30, 2005 of $4.5 million and $2.9 million,
respectively, are credited against the related costs in inventory.
NOTE E--Short-Term Borrowings
In the first quarter of fiscal 2006, the Company's $40.0 million secured,
syndicated revolving credit agreement ("Credit Agreement") was amended to (i)
permit the consummation of the acquisition by the Company of Varetis Solutions
GmbH ("Varetis Solutions") and the twenty-four percent interest in Volt Delta
Resources LLC (Volt Delta') owned by Nortel Networks Inc. ("Nortel Networks"),
(ii) modify certain of the financial covenants contained in the Credit Agreement
and (iii) increase the amount of financing permitted under the Securitization
Program. The Credit Agreement expires in April 2008.
68
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE E--Short-Term Borrowings--Continued
The Credit Agreement established a secured credit facility ("Credit Facility")
in favor of the Company and designated subsidiaries, of which up to $15.0
million may be used for letters of credit. Borrowings by subsidiaries are
limited to $25.0 million in the aggregate. The administrative agent for the
Credit Facility is JPMorgan Chase Bank. The other banks participating in the
Credit Facility are Mellon Bank, N.A., Wells Fargo Bank, N.A., Lloyds TSB Bank
PLC and Bank of America, N.A.
Borrowings under the Credit Facility are to bear interest at various rate
options selected by the Company at the time of each borrowing. Certain rate
options, together with a facility fee, are based on a leverage ratio, as
defined. Additionally, interest and the facility fees can be increased or
decreased upon a change in the Company's long-term debt rating provided by a
nationally recognized rating agency. As amended, in lieu of the previous
borrowing base formulation, the Credit Agreement now requires the maintenance of
specified accounts receivable collateral in excess of any outstanding
borrowings. Based upon the Company's leverage ratio and debt rating at October
29, 2006, if a three-month U.S. Dollar LIBO rate were the interest rate option
selected by the Company, borrowings would have borne interest at the rate of
6.5% per annum; including a facility fee of 0.25% per annum.
The Credit Agreement provides for the maintenance of various financial ratios
and covenants, including, among other things, a requirement that the Company
maintain a consolidated tangible net worth, as defined; a limitation on cash
dividends, capital stock purchases and redemptions by the Company in any one
fiscal year to 50% of consolidated net income, as defined, for the prior fiscal
year; and a requirement that the Company maintain a ratio of EBIT, as defined,
to interest expense, as defined, of 1.25 to 1.0 for the twelve months ended as
of the last day of each fiscal quarter. The Credit Agreement also imposes
limitations on, among other things, the incurrence of additional indebtedness,
the incurrence of additional liens, sales of assets, the level of annual capital
expenditures, and the amount of investments, including business acquisitions and
investments in joint ventures, and loans that may be made by the Company and its
subsidiaries. At October 29, 2006, the Company was in compliance with all
covenants in the Credit Agreement.
The Company is liable on all loans made to it and all letters of credit issued
at its request, and is jointly and severally liable as to loans made to
subsidiary borrowers. However, unless also a guarantor of loans, a subsidiary
borrower is not liable with respect to loans made to the Company or letters of
credit issued at the request of the Company, or with regard to loans made to any
other subsidiary borrower. Five subsidiaries of the Company are guarantors of
all loans made to the Company or to subsidiary borrowers under the Credit
Facility. At October 29, 2006, four of those guarantors have pledged
approximately $56.6 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.
At October 29, 2006, the Company had credit lines with domestic and foreign
banks which provided for borrowings and letters of credit up to an aggregate of
$48.7 million, including $40.0 million under the Credit Agreement and the
Company had total outstanding foreign currency bank borrowings of $4.6 million,
none of which were under the Credit Agreement. These bank borrowings provide a
hedge against devaluation in foreign currency denominated assets.
69
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE F--Long-Term Debt and Financing Arrangements
October 29, October 30,
2006 2005
------------------------------
Long-term debt consists of the (In thousands)
following:
8.2% term loan (a) $13,297 $13,730
Payable to Nortel Networks(b) - 1,971
------------------------------
13,297 15,701
Less amounts due within one year 470 2,404
------------------------------
Total long-term debt $12,827 $13,297
==============================
(a) In September 2001, a subsidiary of the Company entered into a $15.1
million loan agreement with General Electric Capital Business Asset
Funding Corporation. Principal payments have reduced the loan to $13.3
million at October 29, 2006. The fair value of the loan was
approximately $13.7 million at October 29, 2006. The 20-year loan,
which bears interest at 8.2% per annum and requires principal and
interest payments of $0.4 million per quarter, is secured by a deed of
trust on certain land and buildings that had a carrying amount at
October 29, 2006 of $9.9 million. The obligation is guaranteed by the
Company.
(b) Paid to Nortel Networks in February 2006.
Principal payment maturities on long-term debt outstanding at October 29, 2006
are:
Fiscal Year Amount
(In thousands)
2007 $470
2008 511
2009 554
2010 601
2011 652
Thereafter 10,509
--------
$13,297
========
70
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE G--Income Taxes
The components of the Company's income from continuing operations before income
taxes and minority interest by location, and the related income tax provision
are as follows:
Year Ended
--------------------------------------------------
October 29, October 30, October 31,
2006 2005 2004
--------------------------------------------------
(In thousands)
The components of income from continuing
operations before income taxes and minority
interest, based on the location of
operations, consist of the following:
Domestic $47,547 $30,318 $36,530
Foreign 4,022 5,975 5,603
--------------------------------------------------
$51,569 $36,293 $42,133
==================================================
The components of the income tax provision
include:
Current:
Federal (a) $16,961 $9,880 $13,040
Foreign 3,155 1,508 2,608
State and local 4,127 3,819 4,109
--------------------------------------------------
Total current 24,243 15,207 19,757
--------------------------------------------------
Deferred:
Federal ($2,521) ($2,711) ($3,450)
Foreign (1,241) 201 (19)
State and local (583) (468) (771)
--------------------------------------------------
Total deferred (4,345) (2,978) (4,240)
--------------------------------------------------
Total income tax provision $19,898 $12,229 $15,517
==================================================
(a) Reduced in 2006, 2005 and 2004 by benefits of $1.1 million, $1.4
million and $0.9 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 29, October 30, October 31,
2006 2005 2004
--------------------------------------------------
Statutory rate 35.0% 35.0% 35.0%
State and local taxes, net of federal
tax benefit 5.3 8.0 6.3
Tax effect of foreign operations (0.4) - 2.4
Goodwill amortization (3.9) (0.7) (1.3)
General business credits (1.5) (3.9) (2.2)
Minority interest (0.7) (7.5) (2.2)
Deferred tax adjustments 3.4 2.4 -
Other-net, principally non deductible items 1.4 0.4 (1.2)
--------------------------------------------------
Effective tax rate 38.6% 33.7% 36.8%
==================================================
71
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 29, October 30,
2006 2005
------------------------------------------
(In thousands)
Deferred Tax Assets:
Allowance for doubtful accounts $2,822 $2,688
Inventory valuation 1,785 1,679
Loss carryforwards 1,712 2,746
Goodwill 1,484 2,740
Compensation accruals and deferrals 5,465 4,806
Warranty accruals 106 105
Other-net 754 578
------------------------------------------
Total deferred tax assets 14,128 15,342
Less valuation allowance for deferred tax
assets 2,258 4,760
------------------------------------------
Deferred tax assets, net of valuation
allowance 11,870 10,582
------------------------------------------
Deferred Tax Liabilities:
Software development costs 2,443 3,324
Earnings not currently taxable - 53
Deferred revenue 1,100 -
Accelerated book depreciation 4,236 5,742
Intangible assets 5,711 4,575
------------------------------------------
Total deferred tax liabilities 13,490 13,694
------------------------------------------
Net deferred tax liabilities ($1,620) ($3,112)
==========================================
Balance sheet classification:
Current assets $9,167 $10,246
Non-current liabilities (10,787) (13,358)
------------------------------------------
Net deferred tax liabilities ($1,620) ($3,112)
==========================================
72
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE G--Income Taxes--Continued
At October 29, 2006, the Company had foreign net operating loss carryforwards of
$5.6 million, which range in expiration date between October 29, 2009, and
extend forward with no limitation to the carryforward period. For financial
statement purposes, a full valuation allowance of $2.3 million has been
recognized due to the uncertainty of the realization of the foreign loss
carryforwards and other foreign deferred tax assets. The valuation reserve
decreased during 2006 by $2.5 million, principally due to the release of
valuation allowance related to goodwill.
Substantially all of the undistributed earnings of foreign subsidiaries of $20.5
million at October 29, 2006 are considered permanently invested and,
accordingly, no federal income taxes thereon have been provided. Should these
earnings be distributed, foreign tax credits would reduce the additional federal
income tax that would be payable. Availability of credits is subject to
limitations; accordingly, it is not practicable to estimate the amount of the
ultimate deferred tax liability, if any, on accumulated earnings.
NOTE H--Goodwill and Intangible Assets
Goodwill and intangibles with indefinite lives 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 goodwill or an indefinite-lived
intangible asset exceeds its estimated 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.
Intangible assets are amortized over the following periods:
Customer relationships 5 to 10 years
Existing technology 7.9 to 8.5 years
Contract backlog 4 years
Reseller network 8 years
Non-compete agreements and trademarks 3 years
The following table represents the balance of intangible assets as of the end of
fiscal 2006 and 2005:
October 29, 2006 October 30, 2005
-----------------------------------------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
-----------------------------------------------------------
(In thousands)
Customer relationships $17,645 $2,890 $15,485 $1,289
Existing technology 13,164 1,466 800 100
Contract backlog 3,200 667 - -
Trade name (a) 2,016 - - -
Reseller network 816 85 - -
Non-compete agreements and
trademarks 325 99 25 7
-----------------------------------------------------------
Total $37,166 $5,207 $16,310 $1,396
===========================================================
(a) Trade names have an indefinite life and are not amortized.
73
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE H--Goodwill and Intangible Assets--Continued
In fiscal 2006, the total intangible assets acquired were $20.9 million for
acquisition of businesses (see Note J). In fiscal 2005, the total intangible
assets acquired were $24,000.
Amortization expense in fiscal 2006, 2005 and 2004 was $3.8 million, $1.1
million and $0.3 million, respectively. In each of the succeeding five years,
the amount of amortization expense for other intangible assets is estimated to
be as follows:
Fiscal Year Amount
----------- ------
2007 $4,351
2008 $4,343
2009 $4,214
2010 $3,499
2011 $3,366
The following table represents the change in the carrying amount of goodwill for
each segment during each fiscal year.
Carrying Carrying Carrying
Value Value Value
October Additions October Additions October
Segment 31, 2004 2005 30, 2005 2006 29, 2006
---------------------------------------------------------------------------
(In thousands)
Staffing Services $8,340 $8,340 $8,340
Computer Systems 20,804 $3,479 (a) 24,283 18,273(b) 42,556
--------------------------------------------------------
Total $29,144 $3,479 $32,623 $18,273 $50,896
========================================================
(a) Adjustments to the purchase price allocation of the Nortel
acquisition.
(b) Acquisition of Varetis Solutions and the minority interest in Delta.
(see Note J).
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 29, October 30, October 31,
2006 2005 2004
-----------------------------------------
(In thousands)
Denominator for basic earnings per share -
Weighted average number of shares 15,485 15,320 15,234
Effect of dilutive securities:
Stock options 107 97 120
-----------------------------------------
Denominator for diluted earnings per share -
Adjusted weighted average number of shares 15,592 15,417 15,354
=========================================
74
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE I--Per Share Data--Continued
Options to purchase 21,700, 163,700 and 45,400 shares of the Company's common
stock were outstanding at October 29, 2006, October 30, 2005 and October 31,
2004, respectively, but were not included in the computation of diluted earnings
per share because the effect of inclusion would have been antidilutive.
NOTE J--Acquisition of Businesses
On December 29, 2005, Volt Delta purchased from Nortel Networks its 24% minority
interest in Volt Delta. Under the terms of the agreement, Volt Delta was
required to pay Nortel Networks approximately $56.4 million for its minority
interest in Volt Delta, and an excess cash distribution of approximately $5.4
million. Under the terms of the agreement, Volt Delta paid $25.0 million on
December 29, 2005 and paid the remaining $36.8 million on February 15, 2006. The
transaction resulted in an increase in goodwill and intangible assets of
approximately $7.0 million and $5.6 million, respectively, and the elimination
of a deferred tax liability of $5.0 million.
On December 30, 2005, Volt Delta acquired varetis AG's Varetis Solutions
subsidiary for $24.8 million. The acquisition of Varetis Solutions provides Volt
Delta with the resources to focus on the evolving global market for directory
information systems and services. Varetis Solutions adds technology in the area
of wireless handset information delivery to Volt Delta's significant technology
portfolio.
The Company is presently valuing both transactions to determine the final
allocation of the purchase price to various types of potential intangible
assets. The types of intangible assets being reviewed which might exist as of
consummation of the transactions are: the existing technology of the business,
the value of their customer relationships, the value of trade names, the value
of contact backlogs, the value of non-compete agreements and the value of its
reseller network. The value of each of the intangible assets identified will be
determined with the use of a discounted cash flow methodology. This methodology
involves discounting forecasted revenues and earnings attributable to each of
the potential intangible assets. The allocation, which is subject to
finalization of certain adjustments, is expected to be completed before the end
of the first quarter of fiscal 2007.
The assets and liabilities of Varetis Solutions are accounted for under the
purchase method of accounting at the date of acquisition at their fair values.
The results of operations have been included in the Consolidated Statements of
Operations since the acquisition date.
75
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE J--Acquisition of Businesses--Continued
The preliminary purchase price allocation of the fair value of assets acquired
and liabilities assumed and established is as follows:
(In thousands)
Cash $3,310
Accounts receivable 8,878
Inventories 7
Prepaid expenses and other assets 324
Property, plant and equipment 1,318
Goodwill 11,269
Intangible assets 15,300
------
Total Assets 40,406
------
Accrued wages and commissions (1,012)
Other accrued expenses (3,325)
Other liabilities (2,114)
Income taxes payable (1,266)
Deferred income tax (7,876)
-------
Total Liabilities (15,593)
-------
Purchase price $24,813
=======
The following unaudited pro forma information reflects the purchase from Nortel
Networks of its 24% minority interest in Volt Delta and combines the
consolidated results of operations of the Company with those of the Varetis
Solutions business as if the transactions had occurred in November 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 beginning of fiscal 2004.
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 combined
operations.
Year Ended
---------------------------------------------
October 29, October 30, October 31,
2006 2005 2004
---------------------------------------------
(In thousands, except per share amounts)
Net sales $2,342,392 $2,199,825 $1,944,303
=============================================
Operating profit $59,091 $42,897 $40,035
=============================================
Net income $31,563 $22,504 $32,780
=============================================
Earnings per share
Basic $2.04 $1.47 $2.15
=============================================
Diluted $2.02 $1.46 $2.13
=============================================
76
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE K--Stock Option Plan
The Non-Qualified Option Plan adopted by the Company in fiscal 1995 terminated
on May 16, 2005 except for options previously granted under the plan.
Unexercised options expire ten years after grant. Outstanding options at October
29, 2006 were granted at 100% of the market price on the date of grant and
become fully vested within one to five years after the grant date.
As a result of adopting SFAS No. 123R, the Company's income before taxes for the
fiscal year ended October 29, 2006 is $74,000 lower than it would have been if
the Company had continued to account for stock-based compensation under APB No.
25. Compensation expense is recognized in the selling and administrative
expenses in the Company's statement of operations on a straight-line basis over
the vesting periods. Basic and dilutive net income per share for the fiscal year
ended October 29, 2006 would not have been different if the Company had not
adopted SFAS No. 123R, compared to the reported basic and dilutive net income
per share of $1.98 and $1.97, respectively. As of October 29, 2006, there was
$0.1 million of total unrecognized compensation cost related to non-vested
share-based compensation arrangements to be recognized over a weighted average
period of 0.93 years.
The intrinsic values of options exercised during the periods ended October 29,
2006 and October 30, 2005 were $4.8 million and $0.6 million, respectively. The
total cash received from the exercise of stock options was $5.3 million and $1.3
million in the fiscal years ended October 29, 2006 and October 30, 2005,
respectively, and is classified as financing cash flows in the statement of cash
flows. Prior to the adoption of SFAS 123R, the Company presented all tax benefit
deductions resulting from the exercise of stock options as operating cash flows.
SFAS 123R requires that cash flows from tax benefits attributable to tax
deductions in excess of the compensation cost recognized for those options
(excess tax benefits) be classified as financing cash flows. The actual tax
benefit realized from the exercise of stock options for the fiscal year ended
October 29, 2006 was $1.9 million.
The table below presents the pro forma effect on net loss and loss per share if
the Company had applied the fair value recognition provision to options granted
under the Company's stock option plan for fiscal year ended October 30, 2005.
For purposes of this pro forma disclosure, the value of the options granted is
estimated using the Black-Scholes option-pricing model and amortized to expense
over the options' vesting periods. If the Company had adopted the fair value
based method for the fiscal year ended October 30, 2005 and October 31, 2004,
additional compensation expense of $164,000 and $216,000 would have been
recognized in the statement of operations.
2005 2004
------------------------------
(In thousands, except per
share date)
Net income as reported $17,040 $33,716
Pro forma compensation expense, net of
taxes (99) (130)
------------------------------
Pro forma net income $16,941 $33,586
==============================
(In thousands, except per share data)
Basic:
Net income as reported per share $1.11 $2.21
Pro forma compensation expense, net of
taxes per share (0.01) (0.01)
------------------------------
Pro forma net income per share $1.10 $2.20
==============================
Diluted:
Net income as reported per share $1.11 $2.20
Pro forma compensation expense, net of
taxes (0.01) (0.01)
------------------------------
Pro forma net income per share $1.10 $2.19
==============================
77
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE K--Stock Option Plan
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: risk-free interest rates of 4.1%;
expected volatility of .47; an expected life of the options of five years; and
no dividends. The weighted average fair value of stock options granted during
fiscal year 2004 was $14.62. There were no options granted during fiscal years
2005 and 2006.
Transactions involving outstanding stock options under the plan were:
Weighted
Number of Average
Shares Exercise Price
------------------------------
Outstanding-November 2, 2003 582,539 $20.48
Granted 13,800 $25.39
Exercised (62,210) $18.55
Forfeited (6,376) $25.67
---------------
Outstanding-October 31, 2004 527,753 $20.77
Exercised (56,630) $18.49
Forfeited (30,225) $22.59
---------------
Outstanding-October 30, 2005 440,898 $20.94
Exercised (327,633) $20.00
Forfeited (11,280) $22.79
---------------
Outstanding - October 29, 2006 101,985 $23.78
===============
Price ranges of outstanding and exercisable options as of October 29, 2006 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 - $18.13 21,300 6 $11.73 7,900 $12.96
$18.53 - $18.81 25,300 4 $18.68 22,900 $18.70
$19.34 - $23.17 21,685 5 $22.48 16,585 $22.27
$23.59 - $40.03 31,700 2 $35.15 28,700 $35.74
$50.56 - $50.56 2,000 1 $50.56 2,000 $50.56
78
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE L--Segment Disclosures
Financial data concerning the Company's sales, segment profit (loss) and
identifiable assets by reportable operating segment for fiscal years 2006, 2005
and 2004 are presented in tables below.
Total sales include both sales to unaffiliated customers, as reported in the
Company's consolidated statements of operations, and intersegment sales. Sales
between segments are generally priced at fair market value. The Company
evaluates performance based on segment profit or loss from operations before
general corporate expenses, interest income and other expense, interest expense,
foreign exchange gains and losses and income taxes.
The accounting policies of the reportable segments are the same as those
described in the summary of significant accounting policies. Therefore, the
Company's operating profit is the total segment profit less general corporate
expenses. Identifiable assets are those assets that are used in the Company's
operations in the particular operating segment. Corporate assets consist
principally of cash and cash equivalents, investments and an Enterprise Resource
Planning system.
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 North America and Europe and
has commenced operations in Asia. These services fall within three major
functional areas: Staffing Solutions, Information Technology Solutions and
E-Procurement Solutions. Staffing Solutions provides a full spectrum of managed
staffing and temporary/contract personnel employment and direct hire placement
and workforce solutions. Information Technology Solutions provides a wide range
of services, including consulting, outsourcing, turnkey project management in
the product development lifecycle, IT and customer contact markets.
E-Procurement Solutions provides global vendor neutral procurement and human
capital management solutions by combining web-based tools and business process
outsourcing services.
Telephone Directory - This segment publishes independent telephone directories
in the United States and publishes telephone directories in Uruguay; provides
telephone directory production, commercial printing, database management, sales
and marketing services and licenses directory production and contract management
software systems to directory publishers and others.
Telecommunications Services - This segment provides telecommunications services,
including design, engineering, construction, installation, maintenance and
removals in the outside plant and central office of telecommunications and cable
companies, and within their customers' premises, as well as for 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 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 third parties.
79
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 29, October 30, October 31,
2006 2005 2004
------------------------------------------
Net Sales (In thousands)
Staffing Services:
Sales to unaffiliated customers
Staffing $1,910,416 $1,759,683 $1,580,225
Managed Services 1,109,315 1,157,168 1,148,116
------------------------------------------
Total gross sales 3,019,731 2,916,851 2,728,341
Less Non-recourse Managed Services (1,052,682) (1,121,196) (1,120,079)
Intersegment sales 5,233 6,155 3,839
------------------------------------------
1,972,282 1,801,810 1,612,101
------------------------------------------
Telephone Directory:
Sales to unaffiliated customers 79,351 82,298 72,194
Intersegment sales - - 1
------------------------------------------
79,351 82,298 72,195
------------------------------------------
Telecommunications Services:
Sales to unaffiliated customers 118,081 137,799 134,266
Intersegment sales 781 1,212 1,132
------------------------------------------
118,862 139,011 135,398
------------------------------------------
Computer Systems:
Sales to unaffiliated customers 173,972 161,867 110,055
Intersegment sales 13,958 11,252 9,962
------------------------------------------
187,930 173,119 120,017
------------------------------------------
Elimination of intersegment sales (19,972) (18,619) (14,934)
------------------------------------------
Total Net Sales $2,338,453 $2,177,619 $1,924,777
==========================================
Segment Profit (Loss)
Staffing Services $58,799 $31,179 $36,718
Telephone Directory 15,828 14,895 10,115
Telecommunications Services (1,168) (2,429) (2,838)
Computer Systems 28,447 35,801 30,846
------------------------------------------
Total segment profit 101,906 79,446 74,841
General corporate expenses (43,350) (38,839) (30,812)
------------------------------------------
Total Operating Profit $58,556 $40,607 $44,029
==========================================
80
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE L--Segment Disclosures--Continued
October 29, October 30,
2006 2005
-------------------------
(In thousands)
Assets:
Staffing Services $457,204 $446,990
Telephone Directory 50,442 55,238
Telecommunications Services 38,800 53,173
Computer Systems 138,625 103,720
-------------------------
685,071 659,121
Cash, investments and other corporate assets 14,050 29,591
-------------------------
Total assets $699,121 $688,712
=========================
Sales to external customers and assets of the Company by geographic area are as
follows:
Year Ended
----------------------------------------------
October 29, October 30, October 31,
2006 2005 2004
----------------------------------------------
(In thousands)
Sales:
Domestic $2,207,853 $2,058,661 $1,822,544
International, principally Europe 130,600 118,958 102,233
----------------------------------------------
$2,338,453 $2,177,619 $1,924,777
==============================================
Year Ended
-----------------------------
October 29, October 30,
2006 2005
-----------------------------
(In thousands)
Assets:
Domestic $602,575 $633,381
International, principally Europe 96,546 55,331
-----------------------------
$699,121 $688,712
=============================
In fiscal 2006, the Telecommunications Services segment's sales to three
customers accounted for approximately 24%, 22% and 18%, respectively, of the
total sales of that segment; the Computer Systems segment's sales to two
customers accounted for approximately 25% and 14%, respectively, of the total
sales of that segment; the Staffing Services segment's sales to one customer
accounted for approximately 13% of the total sales of that segment. In fiscal
2006, the sales to seven operating units of one customer, Microsoft Corporation,
accounted for 11% of the Company's net sales.
81
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE L--Segment Disclosures--Continued
In fiscal 2005, the Telecommunications Services segment's sales to two customers
accounted for approximately 30% and 14%, respectively, of the total sales of
that segment; the Computer Systems segment's sales to two customers accounted
for approximately 31% and 13%, respectively, of the total sales of that segment;
the Staffing Services segment's sales to one customer accounted for
approximately 13% of the total sales of that segment. In fiscal 2005, the sales
to seven operating units of one customer, Microsoft Corporation, accounted for
11% of the Company's net sales.
In fiscal 2004, the Telecommunications Services segment's sales to four
customers accounted for approximately 17%, 15%, 12%, and 11%, respectively, of
the total sales of that segment; the Computer Systems segment's sales to one
customer accounted for approximately 28% of the total sales of that segment; the
Staffing Services segment's sales to one customer accounted for approximately
14% of the total sales of that segment; and the Telephone Directory segment's
sales to one customer accounted for approximately 10% of the total sales of that
segment. In fiscal 2004, the sales to seven operating units of one customer,
Microsoft Corporation, accounted for 12% of the Company's net sales.
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 29, October 30, October 31,
2006 2005 2004
----------------------------------------------
(In thousands)
Capital Expenditures:
Staffing Services $10,513 $17,061 $9,270
Telephone Directory 394 151 391
Telecommunications Services 1,781 2,973 1,803
Computer Systems 7,450 6,520 17,491
----------------------------------------------
Total segments 20,138 26,705 28,955
Corporate 2,227 1,806 1,782
----------------------------------------------
$22,365 $28,511 $30,737
==============================================
Depreciation and Amortization (a):
Staffing Services $12,046 $10,399 $9,365
Telephone Directory 1,886 1,848 2,067
Telecommunications Services 1,402 1,771 2,862
Computer Systems 14,193 9,840 5,744
----------------------------------------------
Total segments 29,527 23,858 20,038
Corporate 6,204 5,745 5,499
----------------------------------------------
$35,731 $29,603 $25,537
==============================================
(a) Includes depreciation and amortization of property, plant and
equipment for fiscal years 2006, 2005 and 2004 of $31.0 million, $28.5
million and $25.2 million, respectively.
82
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE M--Employee Benefits
The Company has various savings plans that permit eligible employees to make
contributions on a pre-tax salary reduction basis in accordance with the
provisions of Section 401(k) of the Internal Revenue Code. In January 2000, the
Company amended the savings plan for permanent employees to provide a Company
contribution in the form of a 50% match of the first 3% of salary contributed by
eligible participants. For participants with less than five years of service,
the Company's matching contributions vest at 20% per year over a five-year
period. Company contributions to the plan are made semi-annually. Under the
plan, the Company's contributions of $1.8 million, $1.7 million and $1.4 million
in fiscal 2006, fiscal 2005 and fiscal 2004, respectively, were accrued and
charged to compensation expense.
The Company has a non-qualified deferred compensation and supplemental savings
plan, which permits eligible employees to defer a portion of their salary. This
plan consists solely of participant deferrals and earnings thereon, which are
reflected as a current liability under accrued wages and commissions. The
Company invests the assets of the plan in mutual funds based upon investment
preferences of the participants.
NOTE N--Derivative Financial Instruments, Hedging and Restricted Cash
The Company enters into derivative financial instruments only for hedging
purposes. All derivative financial instruments, such as interest rate swap
contracts, foreign currency options and exchange contracts, are recognized in
the consolidated financial statements at fair value regardless of the purpose or
intent for holding the instrument. Changes in the fair value of derivative
financial instruments are either recognized periodically in income or in
stockholders' equity as a component of comprehensive income, depending on
whether the derivative financial instrument qualifies for hedge accounting, and
if so, whether it qualifies as a fair value hedge or cash flow hedge. Generally,
changes in fair values of derivatives accounted for as fair value hedges are
recorded in income along with the portions of the changes in the fair values of
the hedged items that relate to the hedged risks. Changes in fair values of
derivatives accounted for as cash flow hedges, to the extent they are effective
as hedges, are recorded in other comprehensive income, net of deferred taxes.
Changes in fair values of derivatives not qualifying as hedges are reported in
the results of operations. At October 29, 2006, the Company had outstanding
foreign currency option contracts in the aggregate notional amount equivalent to
$1.3 million, to hedge a portion of its net investment in foreign operations and
is accounted for as a hedge under SFAS No. 52.
Restricted cash at October 29, 2006 and October 30, 2005 included $30.7 million
and $26.1 million, respectively, was restricted to cover obligations that were
reflected in accounts payable at that date. These amounts primarily related to
certain contracts with customers, for whom the Company manages the customers'
alternative staffing requirements, including the payment of associate vendors.
83
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE O--Leases
The future minimum rental commitments as of October 29, 2006 for all
non-cancelable operating leases were as follows:
Fiscal Year Total Office Space Equipment
---------------------------------------------------------------------
(In thousands)
2007 $20,421 $19,822 $599
2008 14,654 14,548 106
2009 8,968 8,941 27
2010 4,937 4,929 8
2011 2,231 2,231 -
Thereafter 821 821 -
-------------------------------------------------------
$52,032 $51,292 $740
=======================================================
Many of the leases also require the Company to pay and contribute to property
taxes, insurance and ordinary repairs and maintenance.
Rental expense for all operating leases for fiscal years 2006, 2005 and 2004 was
$31.6 million, $29.9 million and $25.6 million, respectively.
NOTE P--Related Party Transactions
During fiscal 2006, 2005 and 2004, the Company paid or accrued $0.9 million,
$0.8 million and $1.9 million, respectively, to the law firms of which Lloyd
Frank, a director of the Company, is or was of counsel, for services rendered to
the Company and expenses reimbursed.
In October 2006, the Company purchased 200,000 shares of common stock from the
Estate of William Shaw at a price of $39.75 per share, for a total of
$7,950,000. The Company intends to use these shares to fund awards under the
Volt Information Sciences, Inc. 2006 Incentive Stock Plan. The shares were
purchased at a price below the price at which the Company's common stock was
then being traded on the New York Stock Exchange (the low trade for the day was
$39.94 and the high trade was $40.85). The decision to make the purchase was
made by senior management of the Company. The funds were transferred in November
2007.
In fiscal 2006, the Company advanced $162,400 directly to the attorneys for Mr.
Thomas Daley, an executive officer of the Company ($95,800 of which had
previously been reported in the Company's proxy statement for its 2006 annual
meeting). In 2006, the Company also paid $336,100 for legal fees of the
independent counsel to the Audit committee of the Company ($260,000 of which had
previously been reported in the Company's proxy statement for its 2006 annual
meeting.
84
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE Q--Subsequent Events
Effective December 19, 2006, the Company's wholly owned subsidiary, Volt Delta
entered into a stand-alone three year $70.0 million secured, syndicated,
revolving credit agreement ("Delta Credit Facility") with Wells Fargo,N.A. as
the administrative agent and arranger, and as a lender there under. Wells Fargo
and the other three lenders under the Delta Credit Facility, Lloyd TSB Bank Plc,
Bank of America, N.A and JPMorgan Chase also participate in the Company's $40.0
million revolving Credit Facility. Neither the Company nor Volt Delta guarantee
each other's facility but certain subsidiaries of both are guarantors of their
respective parent companies. Under the Credit Facility, Volt Delta is required
to pay down approximately $38.0 million in intercompany debt owed to the Company
within 30 days of closing. The Company currently has no outstanding debt under
its own revolving facility but has $100.0 million currently financed under its
$200.0 million Securitization Program.
On December 19, 2006, that the Company's Board of Directors authorized and
approved a three for two split effected in the form of a dividend on the
Company's common stock, par value $.10 per share. Shares of common stock will be
paid on January 26, 2007, to all stockholders of record as of January 15, 2007.
The accompanying financial statements do not give any effect of the stock split.
In September 6, 2006, the Company's Board of Directors adopted the "Volt
Information Sciences, Inc. 2006 Incentive Stock Plan" subject to approval by
vote of shareholders of the Company. The Plan permits the grant of Incentive
Stock Options, Non-Qualified Stock Options, Restricted Stock and Restricted
Stock Units to Employees and Non-Employee Directors of the Company through
September 6, 2016. The maximum aggregate number of Shares that may be issued
pursuant to awards made under the Plan shall not exceed One Million Five Hundred
Thousand (1,500,000) Shares.
85
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE R--Quarterly Results of Operations (Unaudited)
The following is a summary of unaudited quarterly results of operations for the
fiscal years ended October 29, 2006 and October 30, 2005. Each quarter contained
thirteen weeks.
Fiscal 2006 Quarter
-----------------------------------------------------
First Second Third Fourth
-----------------------------------------------------
(In thousands, except per share data)
Net sales $549,508 $593,811 $584,914 $610,220
=====================================================
Gross profit $34,041 $49,438 $49,186 $57,965
=====================================================
Net (loss) income ($377) $9,110 $8,353 $13,564
=====================================================
Net (loss) income-basic $(0.02) $0.59 $0.54 $0.87
=====================================================
Net (loss) income-diluted $(0.02) $0.59 $0.53 $0.86
=====================================================
Fiscal 2005 Quarter
-----------------------------------------------------
First Second Third Fourth
-----------------------------------------------------
(In thousands, except per share data)
Net sales $497,835 $546,045 $543,515 $590,224
=====================================================
Gross profit $29,662 $39,722 $40,943 $52,741
=====================================================
Net (loss) income ($808) $4,527 $4,966 $8,355
=====================================================
Net (loss) income-basic ($0.05) $0.30 $0.32 $0.54
=====================================================
Net (loss) income-diluted ($0.05) $0.29 $0.32 $0.54
=====================================================
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.
86
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company's management, under the supervision and with the participation of
the Company's Chief Executive Officer and Chief Financial Officer, carried out
an evaluation of the effectiveness of the design and operation of the Company's
disclosure controls and procedures as of October 29, 2006 (the "Evaluation").
Based upon the Evaluation, the Company's Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures (as defined in Exchange Act Rule 13a-15(e)) are effective in ensuring
that material information relating to the Company, including its consolidated
subsidiaries, is made known to them by others within those entities as
appropriate to allow timely decisions regarding required disclosure,
particularly during the period in which this annual report was being prepared.
Management's Report on Internal Control Over Financial Reporting
The Company's management is responsible for establishing and maintaining
adequate "internal control over financial reporting' (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)). Management evaluates the effectiveness of the
Company's internal control over financial reporting using criteria set forth by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal - Integrated Framework Management, under the supervision and with the
participation of the Company's Chief Executive Officer and Chief Financial
Officer, assessed the effectiveness of the Company's internal control over
financial reporting as of October 29, 2006 and concluded that it is effective.
The Company acquired Varetis Solutions GmbH ("Varetis") on December 30, 2005,
and has excluded Varetis from its assessment of, and conclusion on, the
effectiveness of the Company's internal control over financial reporting.
Varetis accounted for 2% and less than 1% of total and net assets, respectively
as of October 29, 2006 and less than 1% and 1% of revenues and net income,
respectively, for the year then ended.
The Company independent registered public accounting firm, Ernst & Young LLP,
has audited the effectiveness of the Company's internal control over financial
reporting and management's assessment of the effectiveness of such controls as
of October 29, 2006, as stated in their report which is included herein.
87
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of
Volt Information Sciences, Inc.
We have audited management's assessment, included in the accompanying
Management's Annual Report on Internal Control Over Financial Reporting, that
Volt Information Sciences, Inc. and subsidiaries maintained effective internal
control over financial reporting as of October 29, 2006, based on criteria
established in Internal Control--Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (the COSO criteria). Volt
Information Sciences, Inc. and subsidiaries' management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express an opinion on management's assessment and an
opinion on the effectiveness of the Company's internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
As indicated in the accompanying Management's Annual Report on Internal Control
Over Financial Reporting, management's assessment of and conclusion on the
effectiveness of internal control over financial reporting did not include the
internal controls of Varetis Solutions, GmbH, which is included in the 2006
consolidated financial statements of Volt Information Sciences, Inc. and
subsidiaries and constituted 2% and less than 1% of total and net assets,
respectively, as of October 29, 2006 and less than 1% and 1% of revenues and net
income, respectively, for the year then ended. Our audit of internal control
over financial reporting of Volt Information Sciences, Inc. and subsidiaries
also did not include an evaluation of the internal control over financial
reporting of Varetis Solutions, GmbH.
88
In our opinion, management's assessment that Volt Information Sciences, Inc. and
subsidiaries maintained effective internal control over financial reporting as
of October 29, 2006, is fairly stated, in all material respects, based on the
COSO criteria. Also, in our opinion, Volt Information Sciences, Inc. and
subsidiaries maintained, in all material respects, effective internal control
over financial reporting as of October 29, 2006, based on the COSO criteria.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
Volt Information Sciences, Inc. and subsidiaries as of October 29, 2006 and
October 30, 2005, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended October 29, 2006 and our report dated January 11, 2007 expressed an
unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
New York, New York
January 11, 2007
89
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 2007
Annual Meeting of Shareholders, which the Company intends to file within 120
days after the close of its fiscal year ended October 29, 2006 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.
90
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 29, 2006 and October 30, 2005 54
Consolidated Statements of Operations -- Years ended October 29, 2006,
October 30, 2005 and October 31, 2004 55
Consolidated Statements of Stockholders' Equity -- Years ended October
29, 2006, October 30, 2005 and October 31, 2004 56
Consolidated Statements of Cash Flows--Years ended October 29, 2006,
October 30, 2005 and October 31, 2004 57
Notes to Consolidated Financial Statements 59
15(a)(2). Financial Statement Schedule
The following consolidated financial statement schedule of Volt
Information Sciences, Inc. and subsidiaries is included in response
to Item 15(d):
Schedule II--Valuation and qualifying accounts S-1
Other schedules (Nos. I, III, IV and V) for which provision is made in
the applicable accounting regulation of the Securities and Exchange
Commission are not required under the related instructions or are not
applicable and, therefore, have been omitted.
91
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, 2005, 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 Corporation
and Volt Information Sciences, Inc. (Exhibit 4.02 to the Company's
Quarterly Report on Form 10-Q for the quarter ended May 2, 2004, File
No. 1-9232).
4.1(c) Third Amendment to Receivables Purchase Agreement dated as of April 8,
2005 among Volt Funding Corp., Three Rivers Funding Corporation and
Volt Information Sciences, Inc. (Exhibit 99.1 to the Company's Current
Report on Form 8-K dated April 14, 2005, File No. 1-9232).
4.1(d) Fourth Amendment to Receivables Purchase Agreement dated as of January
17, 2006 among Volt Funding Corp., Three Rivers Funding Corporation
and Volt Information Sciences, Inc. (Exhibit 99.1 to the Company's
Current Report on Form 8-K dated February 6, 2006, File No. 1-9232).
4.1(e) Fifth Amendment to Receivables Purchase Agreement dated as of June 6,
2006 among Volt Funding Corp., Three Rivers Funding Corporation and
Volt Information Sciences, Inc. (Exhibit 99.1 to the Company's Current
Report on Form 8-K dated June 12, 2006, File No. 1-9232).
4.1(f) Sixth Amendment to Receivables Purchase Agreement dated as of August
18, 2006 among Volt Funding Corp., Three Rivers Funding Corporation
and Volt Information Sciences, Inc. (Exhibit 99.1 to the Company's
Current Report on Form 8-K dated September 5, 2006, File No. 1-9232).
4.1(g) Second Amended and Restated Credit Agreement, dated as of April 14,
2005 among Volt Information Sciences, Inc. and Gatton Volt Consulting
Group Limited, the guarantors party thereto, the lenders party thereto
and JP Morgan Chase Bank, as administrative agent. (Exhibit 99.1 to
the Company's Current Report on Form 8-K dated April 19, 2005 File No.
1-9232).
4.1(h) Consent and First Amendment to the Second Amended and Restated Credit
Agreement dated as of November 15, 2005, among Volt Information
Sciences, Inc. and Gatton Volt Consulting Group Limited, the
guarantors party thereto, the lenders party thereto and J.P. Morgan
Chase Bank, as administrative agent.
4.1(i) Consent and Second Amendment to the Second Amended and Restated Credit
Agreement dated as of December 27, 2005, among Volt Information
Sciences, Inc. and Gatton Volt Consulting Group Limited, the
guarantors party thereto, the lenders party thereto and J.P. Morgan
Chase Bank, as administrative agent (Exhibit 99.1 to the Company's
Current Report on Form 8-K dated January 4, 2006, File No. 1-9232).
92
15(a)(3). Exhibits--Continued
Exhibit Description
4.1(j) Credit Agreement dated as of December 19, 2006 among Volt Delta
Resources, LLC, the lenders party thereto and Wells Fargo Bank N.A.,
as administrative agent (Exhibit 99.1 to the Company's Current Report
on Form 8-K dated December 22, 2006, File No. 1-9232).
4.1(k) Guarantee and Collateral Agreement dated as of December 19, 2006 made
by each grantor thereto in favor of Wells Fargo Bank N.A., as
administrative agent for all lenders party to the Credit Agreement
(Exhibit 99.2 to the Company's Current Report on Form 8-K dated
December 22, 2006, File No. 1-9232).
10.1+ 1995 Non-Qualified Stock Option Plan, as amended. (Exhibit 10.1(b) to
the Company's Annual Report on Form 10-K for the fiscal year ended
October 30, 1998, File No. 1-9232).
10.2(a)+ Employment Agreement, dated as of May 1, 1987, between the Company and
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).
10.2(b)+ Amendment, dated January 3, 1989, to Employment Agreement between the
Company and Jerome Shaw (Exhibit 19.02(b) to the Company's Annual
Report on Form 10-K for the fiscal year ended October 28, 1988, File
No. 1-9232).
10.3(a)+ Employment Agreement entered into on or about August 25, 2004 between
the Company and Thomas Daley (Exhibit 10.4(a) to the Company's Annual
Report on Form 10-K for the fiscal year ended October 30, 2005, File
No. 1-9232).
10.3(b)+ Undertaking dated August 5, 2005 from Thomas Daley to the Company
(Exhibit 10.4(a) to the Company's Annual Report on Form 10-K for the
fiscal year ended October 30, 2005, File No. 1-9232).
10.3(c)+ Employment Agreement entered on March 16, 2006 between the Company and
Jack Egan (Exhibit 99.1 to the Company's Current Report on Form 8-K
dated March 22, 2006, File No. 1-9232).
10.3(d)+ Amendment No. 1 dated as of April 6, 2006, to the Employment Agreement
made and entered into on or about August 25, 2004 between the Company
and Thomas Daley (Exhibit 99.1 to the Company's Current Report on Form
8-K dated April 10, 2006, File No. 1-9232).
10.3(e)+ Employment Agreement entered on May 26, 2006 between the Company and
Ludwig M. Guarino (Exhibit 99.1 to the Company's Current Report on
Form 8-K dated May 31, 2006, File No. 1-9232).
10.4(a)+ Form of Indemnification Agreement (Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended July 31, 2005,
File No. 1-9232).
10.4(b)+* Form of Indemnification Agreement.
93
15(a)(3). Exhibits--Continued
Exhibit Description
14. Volt Information Sciences, Inc. and Subsidiaries Code of Ethical
Conduct for Financial Managers (Exhibit 14 to the Company's Annual
Report on Form 10-K for the fiscal year ended November 2, 2003, File
No. 1-9232).
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.
94
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.
95
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/Steven A. Shaw
January 11, 2007 -------------------
Steven A. Shaw
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/Steven A, Shaw President, and Chief Executive Officer January 11, 2007
---------------------
Steven A. Shaw
/s/Jack Egan Senior President January 11, 2007
--------------------- (Principal Financial Officer)
Jack Egan
/s/Lloyd Frank Director January 11, 2007
---------------------
Lloyd Frank
/s/Theresa A. Havell Director January 11, 2007
---------------------
Theresa A. Havell
/s/Mark N. Kaplan Director January 11, 2007
---------------------
Mark N. Kaplan
/s/Bruce G. Goodman Director January 11, 2007
---------------------
Bruce G. Goodman
/s/William H. Turner Director January 11, 2007
---------------------
William H. Turner
/s/Deborah Shaw Director January 11, 2007
---------------------
Deborah Shaw
96
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E
------------------------------- ----------- ---------------------- ------------ ------------
Additions
----------------------
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
of Period Expenses Accounts Deductions Period
----------- ---------- ---------- ------------ ------------
(In thousands)
Year ended October 29, 2006
Deducted from asset accounts:
Allowance for uncollectable
accounts $7,527 $4,003 $4,039 (a,b) $7,491
Inventory reserve 2,864 1,654 4,518
Allowance for deferred tax
assets 4,760 2,502 (c) 2,258
Unrealized gain on marketable
securities (101) $14 (d) (87)
Year ended October 30, 2005
Deducted from asset accounts:
Allowance for uncollectable
accounts $10,210 $3,838 $6,521 (a,b) $7,527
Work in process inventory
reserve 157 2,707 2,864
Allowance for deferred tax
assets 3,948 $812 (c) 4,760
Unrealized gain on marketable
securities (60) (41)(d) (101)
Year ended October 31, 2004
Deducted from asset accounts:
Allowance for uncollectable
accounts $10,498 $7,784 $8,072 (a,b) $10,210
Work in process inventory
reserve 545 388 (e) 157
Allowance for deferred tax
assets 3,635 $313 (c) 3,948
Unrealized gain on marketable
securities (153) 93 (d) (60)
(a)--Includes write-off of uncollectable accounts.
(b)--Includes foreign currency translation loss of $7 in 2006 and gains of $91
and $117 in 2005 and 2004, respectively.
(c)--Charge or credit to income tax provision.
(d)--Charge (credit) to stockholders' equity.
(e)--Credited to cost of sales.
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, 2005, 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 Corporation
and Volt Information Sciences, Inc. (Exhibit 4.02 to the Company's
Quarterly Report on Form 10-Q for the quarter ended May 2, 2004, File
No. 1-9232).
4.1(c) Third Amendment to Receivables Purchase Agreement dated as of April 8,
2005 among Volt Funding Corp., Three Rivers Funding Corporation and
Volt Information Sciences, Inc. (Exhibit 99.1 to the Company's Current
Report on Form 8-K dated April 14, 2005, File No. 1-9232).
4.1(d) Fourth Amendment to Receivables Purchase Agreement dated as of January
17, 2006 among Volt Funding Corp., Three Rivers Funding Corporation
and Volt Information Sciences, Inc. (Exhibit 99.1 to the Company's
Current Report on Form 8-K dated February 6, 2006, File No. 1-9232).
4.1(e) Fifth Amendment to Receivables Purchase Agreement dated as of June 6,
2006 among Volt Funding Corp., Three Rivers Funding Corporation and
Volt Information Sciences, Inc. (Exhibit 99.1 to the Company's Current
Report on Form 8-K dated June 12, 2006, File No. 1-9232).
4.1(f) Sixth Amendment to Receivables Purchase Agreement dated as of August
18, 2006 among Volt Funding Corp., Three Rivers Funding Corporation
and Volt Information Sciences, Inc. (Exhibit 99.1 to the Company's
Current Report on Form 8-K dated September 5, 2006, File No. 1-9232).
4.1(g) Second Amended and Restated Credit Agreement, dated as of April 14,
2005 among Volt Information Sciences, Inc. and Gatton Volt Consulting
Group Limited, the guarantors party thereto, the lenders party thereto
and JP Morgan Chase Bank, as administrative agent. (Exhibit 99.1 to
the Company's Current Report on Form 8-K dated April 19, 2005 File No.
1-9232).
4.1(h) Consent and First Amendment to the Second Amended and Restated Credit
Agreement dated as of November 15, 2005, among Volt Information
Sciences, Inc. and Gatton Volt Consulting Group Limited, the
guarantors party thereto, the lenders party thereto and J.P. Morgan
Chase Bank, as administrative agent.
4.1(i) Consent and Second Amendment to the Second Amended and Restated Credit
Agreement dated as of December 27, 2005, among Volt Information
Sciences, Inc. and Gatton Volt Consulting Group Limited, the
guarantors party thereto, the lenders party thereto and J.P. Morgan
Chase Bank, as administrative agent (Exhibit 99.1 to the Company's
Current Report on Form 8-K dated January 4, 2006, File No. 1-9232).
97
Exhibit Description
4.1(j) Credit Agreement dated as of December 19, 2006 among Volt Delta
Resources, LLC, the lenders party thereto and Wells Fargo Bank N.A.,
as administrative agent (Exhibit 99.1 to the Company's Current Report
on Form 8-K dated December 22, 2006, File No. 1-9232).
4.1(k) Guarantee and Collateral Agreement dated as of December 19, 2006 made
by each grantor thereto in favor of Wells Fargo Bank N.A., as
administrative agent for all lenders party to the Credit Agreement
(Exhibit 99.2 to the Company's Current Report on Form 8-K dated
December 22, 2006, File No. 1-9232).
10.1+ 1995 Non-Qualified Stock Option Plan, as amended. (Exhibit 10.1(b) to
the Company's Annual Report on Form 10-K for the fiscal year ended
October 30, 1998, File No. 1-9232).
10.2(a)+ Employment Agreement, dated as of May 1, 1987, between the Company and
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).
10.2(b)+ Amendment, dated January 3, 1989, to Employment Agreement between the
Company and Jerome Shaw (Exhibit 19.02(b) to the Company's Annual
Report on Form 10-K for the fiscal year ended October 28, 1988, File
No. 1-9232).
10.3(a)+ Employment Agreement entered into on or about August 25, 2004 between
the Company and Thomas Daley (Exhibit 10.4(a) to the Company's Annual
Report on Form 10-K for the fiscal year ended October 30, 2005, File
No. 1-9232).
10.3(b)+ Undertaking dated August 5, 2005 from Thomas Daley to the Company
(Exhibit 10.4(a) to the Company's Annual Report on Form 10-K for the
fiscal year ended October 30, 2005, File No. 1-9232).
10.3(c)+ Employment Agreement entered on March 16, 2006 between the Company and
Jack Egan (Exhibit 99.1 to the Company's Current Report on Form 8-K
dated March 22, 2006, File No. 1-9232).
10.3(d)+ Amendment No. 1 dated as of April 6, 2006, to the Employment Agreement
made and entered into on or about August 25, 2004 between the Company
and Thomas Daley (Exhibit 99.1 to the Company's Current Report on Form
8-K dated April 10, 2006, File No. 1-9232).
10.3(e)+ Employment Agreement entered on May 26, 2006 between the Company and
Ludwig M. Guarino (Exhibit 99.1 to the Company's Current Report on
Form 8-K dated May 31, 2006, File No. 1-9232).
10.4(a)+ Form of Indemnification Agreement (Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended July 31, 2005,
File No. 1-9232).
10.4(b)+* Form of Indemnification Agreement.
98
Exhibit Description
14. Volt Information Sciences, Inc. and Subsidiaries Code of Ethical
Conduct for Financial Managers (Exhibit 14 to the Company's Annual
Report on Form 10-K for the fiscal year ended November 2, 2003, File
No. 1-9232).
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.
99