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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For The Six Months Ended May 4, 2003
Or
|_| Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______________ to
Commission File No. 1-9232
VOLT INFORMATION SCIENCES, INC.
(Exact name of registrant as specified in its charter)
New York 13-5658129
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
560 Lexington Avenue, New York, New York 10022
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 704-2400
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes |X| No |_|
Indicate by check mark whether Registrant is an accelerated filer (as defined in
Rule 12b-2 of the Exchange Act). Yes |X| No |_|
The number of shares of the Registrant's common stock, $.10 par value,
outstanding as of June 13, 2003 was 15,217,415.
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations -
Six Months and Three Months Ended May 4, 2003 and May 5, 2002 3
Condensed Consolidated Balance Sheets -
May 4, 2003 and November 3, 2002 4
Condensed Consolidated Statements of Cash Flows -
Six Months Ended May 4, 2003 and May 5, 2002 5
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 15
Item 3. Qualitative and Quantitative Disclosures about Market Risk 32
Item 4. Controls and Procedures 32
PART II - OTHER INFORMATION
Item 5. Submission of Matters to a Vote of Security Holders 33
Item 6. Exhibits and Reports on Form 8-K 33
SIGNATURE 34
CERTIFICATIONS BY PRINCIPAL EXECUTIVE AND FINANCIAL OFFICERS 35
2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Six Months Ended Three Months Ended
----------------------------- -----------------------------
May 4, May 5, May 4, May 5,
2003 2002(a) 2003 2002(a)
----------- ----------- ----------- -----------
(Dollars in thousands, except per share data)
NET SALES $ 755,941 $ 696,370 $ 403,406 $ 362,274
COST AND EXPENSES:
Cost of sales 715,024 663,994 379,018 341,676
Selling and administrative 33,722 34,881 17,776 19,453
Depreciation and amortization 11,636 10,752 5,893 5,243
----------- ----------- ----------- -----------
760,382 709,627 402,687 366,372
----------- ----------- ----------- -----------
OPERATING (LOSS) PROFIT (4,441) (13,257) 719 (4,098)
OTHER INCOME (EXPENSE):
Interest income 480 406 298 208
Other expense - net--Notes A, B and E (1,471) (2,196) (915) (1,878)
Foreign exchange loss - net--Note J (90) (61) (175) (48)
Interest expense (1,198) (3,041) (555) (1,218)
----------- ----------- ----------- -----------
Loss from continuing operations before income taxes (6,720) (18,149) (628) (7,034)
Income tax benefit 2,485 7,015 196 2,623
----------- ----------- ----------- -----------
Loss from continuing operations (4,235) (11,134) (432) (4,411)
Discontinued operations, net of taxes--Note H 4,310
Cumulative effect of a change in accounting--Note K:
Goodwill impairment (31,927)
----------- ----------- ----------- -----------
NET LOSS ($4,235) ($38,751) ($432) ($4,411)
=========== =========== =========== ===========
Per Share Data
--------------
Basic and Diluted:
Loss from continuing operations per share ($0.28) ($0.73) ($0.03) ($0.29)
Gain from discontinued operations per share 0.28
Cumulative effect of a change in accounting per share (2.10)
----------- ----------- ----------- -----------
Net loss per share ($0.28) ($2.55) ($0.03) ($0.29)
=========== =========== =========== ===========
Weighted average number of shares--Note G 15,217,415 15,215,777 15,217,415 15,215,888
=========== =========== =========== ===========
(a) Pursuant to the Company's adoption of SFAS No. 145, results for the six
and three months ended May 5, 2002 have been restated to give effect to
the reclassification of a charge of $2.1 million ($1.3 million, net of
taxes) arising from the March 2002 early payment of the Company's Senior
Notes to Other Expense, previously presented as an extraordinary item.
As previously announced, the Company has changed the method of reporting
the revenues of its Professional Employee Organization ("PEO") subsidiary
from gross billing to a net revenue basis. Accordingly, reported PEO
revenues and related cost of sales for the six and three months ended May
5, 2002 have been reduced and restated by $9.8 million and $5.2 million,
respectively, with no effect on operating profit or the net results of the
Company.
See accompanying notes to condensed consolidated financial statements.
3
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
May 4, November 3,
2003 2002 (a)
----------- -----------
(Unaudited)
ASSETS (Dollars in thousands)
CURRENT ASSETS
Cash and cash equivalents, including restricted cash of $21,399 (2003) and
$11,458 (2002)--Note J $ 47,124 $ 43,620
Short-term investments 3,758 3,754
Trade accounts receivable less allowances of $10,274 (2003) and $10,994 (2002)--Note B 299,616 300,670
Inventories--Note C 33,800 29,690
Recoverable income taxes 10,155 6,552
Deferred income taxes 8,310 8,343
Prepaid expenses and other assets 18,187 15,212
--------- ---------
TOTAL CURRENT ASSETS 420,950 407,841
Property, plant and equipment less allowances for depreciation and amortization of
$97,917 (2003) and $87,769 (2002)--Note E 87,026 89,294
Deposits and other assets 2,861 3,380
Intangible assets-net of accumulated amortization of $1,319 (2003) and $1,258
(2002)--Note K 9,014 9,075
--------- ---------
TOTAL ASSETS $ 519,851 $ 509,590
========= =========
CURRENT LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable to banks--Note D $ 4,148 $ 2,424
Current portion of long-term debt--Note E 356 1,524
Accounts payable 156,378 154,054
Accrued wages and commissions 39,121 39,529
Accrued taxes other than income taxes 14,938 18,525
Other accruals 11,973 8,276
Customer advances and other liabilities 31,137 19,009
--------- ---------
TOTAL CURRENT LIABILITIES 258,051 243,341
Long-term debt--Note E 14,287 14,469
Deferred income taxes 14,602 14,743
STOCKHOLDERS' EQUITY--Notes A, B, E and F
Preferred stock, par value $1.00; Authorized--500,000 shares; issued--none
Common stock, par value $.10; Authorized--30,000,000 shares; issued--15,217,415 shares 1,522 1,522
Paid-in capital 41,036 41,036
Retained earnings 190,727 194,962
Accumulated comprehensive loss (374) (483)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 232,911 237,037
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 519,851 $ 509,590
========= =========
(a) The Balance Sheet at November 3, 2002 has been derived from the audited
financial statements at that date.
See accompanying notes to condensed consolidated financial statements.
4
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
-------------------------
May 4, May 5,
2003 2002
-------- --------
(In thousands)
CASH PROVIDED BY (APPLIED TO) OPERATING ACTIVITIES
Net loss ($ 4,235) ($38,751)
Adjustments to reconcile net loss to cash provided by operating activities:
Discontinued operations (4,310)
Loss on early payment of debt 2,093
Cumulative effect of a change in accounting - goodwill impairment 31,927
Depreciation and amortization 11,636 10,752
Equity in net loss of joint venture 10
Accounts receivable provisions 2,678 5,481
(Gain) loss on foreign currency translation (24) 28
Deferred income tax (benefit) provision (157) 558
Loss on disposition of fixed assets 114 24
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (1,450) 56,413
Proceeds from securitization of accounts receivable 50,000
(Increase) decrease in inventories (4,110) 7,195
Increase in prepaid expenses and other current assets (2,622) (4,798)
Decrease in other assets 239 1,122
Increase (decrease) in accounts payable 2,244 (2,091)
Decrease in accrued expenses (223) (15,771)
Increase in customer advances and other liabilities 12,081 8,700
Net change in income taxes (3,603) (9,241)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 12,568 99,341
-------- --------
5
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)--Continued
Six Months Ended
-------------------------
May 4, May 5,
2003 2002
-------- --------
(In thousands)
CASH PROVIDED BY (APPLIED TO) INVESTING ACTIVITIES
Sales of investments $ 502 $ 577
Purchases of investments (446) (633)
Proceeds from disposals of property, plant and equipment 71 601
Purchases of property, plant and equipment (9,475) (6,956)
Proceeds from sale of subsidiary 24,233
Other (48) (77)
-------- --------
NET CASH (APPLIED TO) PROVIDED BY INVESTING ACTIVITIES (9,396) 17,745
-------- --------
CASH PROVIDED BY (APPLIED TO) FINANCING ACTIVITIES
Payment of long term-debt (1,350) (33,315)
Exercise of stock options 25
Increase (decrease) notes payable to bank 1,856 (61,775)
-------- --------
NET CASH PROVIDED BY (APPLIED TO) FINANCING ACTIVITIES 506 (95,065)
-------- --------
Effect of exchange rate changes on cash (174) (452)
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 3,504 21,569
Cash and cash equivalents, including restricted cash, beginning of period 43,620 18,474
-------- --------
CASH AND CASH EQUIVALENTS, INCLUDING RESTRICTED CASH END OF PERIOD $ 47,124 $ 40,043
======== ========
SUPPLEMENTAL INFORMATION
Cash paid during the period:
Interest expense $ 1,255 $ 3,896
Income taxes, net of refunds $ 1,390 $ 4,242
See accompanying notes to condensed consolidated financial statements.
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note A--Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions for Form 10-Q and Article 10 of
Regulation S-X and, therefore, do not include all information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation of the
Company's consolidated financial position at May 4, 2003 and consolidated
results of operations for the six and three months ended May 4, 2003 and May 5,
2002 and consolidated cash flows for the six months ended May 4, 2003 and May 5,
2002. Operating results for interim periods are not necessarily indicative of
the results that may be expected for the fiscal year.
Pursuant to the Company's adoption of SFAS No. 145, results for the six and
three months ended May 5, 2002 have been restated to give effect to the
reclassification of a charge of $2.1 million ($1.3 million, net of taxes)
arising from the March 2002 early payment of the Company's Senior Notes to Other
Expense, previously presented as an extraordinary item (see Note E). In addition
as previously announced, the Company has changed the method of reporting the
revenues of its Professional Employee Organization ("PEO") subsidiary from gross
billing to a net revenue basis. Accordingly, reported PEO revenues and related
cost of sales for the six and three months ended May 5, 2002 have been reduced
and restated by $9.8 million and $5.2 million, respectively, with no effect on
operating profit or the net results of the Company.
The Company has elected to follow 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. Had
compensation cost for these plans been determined at the grant dates for awards
under the alternative accounting method provided for in SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure - an
Amendment of FASB Statement No. 123," net loss and loss per share, on a pro
forma basis, would have been:
Six Months Ended Three Months Ended
------------------------ -----------------------
May 4, May 5, May 4, May 5,
2003 2002 2003 2002
------- -------- ------- -------
(Dollars in thousands)
Net loss as reported ($4,235) ($38,751) ($432) ($4,411)
Pro forma compensation expense, net of taxes (98) (181) (44) (84)
------- -------- ------- -------
Pro forma net loss ($4,333) ($38,932) ($476) ($4,495)
======= ======== ======= =======
Pro forma net loss per share-basic and diluted ($0.28) ($2.56) ($0.03) ($0.30)
======= ======== ======= =======
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 2003 and 2002, respectively: risk-free
interest rates of 2.0% and 2.7%, respectively; expected volatility of .50 and
..52, respectively; an expected life of the options of five years; and no
dividends. The weighted average fair value of stock options granted during
fiscal years 2003 and 2002 were $5.93 and $10.59, respectively.
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
Note A--Basis of Presentation--Continued
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities" to provide new guidance with respect to the
consolidation of all previously unconsolidated entities, including special
purpose entities. The Company has no unconsolidated subsidiaries. However, the
Company will continue to evaluate the impact of the adoption of the
interpretation on the Company's consolidated financial position and results of
operations.
These statements should be read in conjunction with the financial statements and
footnotes included in the Company's Annual Report on Form 10-K for the year
ended November 3, 2002. Except as discussed in this Report, the accounting
policies used in preparing these financial statements are the same as those
described in that Report. The Company's fiscal year ends on the Sunday nearest
October 31.
Note B--Securitization Program
Effective April 15, 2002, the Company entered into a $100.0 million, three-year
accounts receivable securitization program ("Securitization Program"). Under the
Securitization Program, receivables related to the United States operations of
the staffing solutions business of the Company and its subsidiaries are sold
from time-to-time by the Company to Volt Funding Corp., a wholly owned special
purpose subsidiary of the Company ("Volt Funding"). Volt Funding, in turn, sells
to Three Rivers Funding Corporation ("TRFCO"), an asset backed commercial paper
conduit sponsored by Mellon Bank, N.A. 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 $100.0 million). The Company retains the servicing responsibility
for the accounts receivable. At May 4, 2003, TRFCO had purchased from Volt
Funding a participation interest of $60.0 million (increased to $70.0 million
subsequent to the end of the quarter) out of a pool of approximately $169.7
million of receivables.
The Securitization Program is not an off-balance sheet arrangement as Volt
Funding is a 100% owned consolidated subsidiary of the Company. Accounts
receivable are only reduced to reflect the fair value of receivables actually
sold. The Company entered into this arrangement as it provided a low-cost
alternative to other financing.
The Securitization Program is designed to enable receivables sold by the Company
to Volt Funding to constitute true sales of those receivables. As a result, the
receivables are available to satisfy Volt Funding's own obligations to its own
creditors before being available, through the Company's residual equity interest
in Volt Funding, to satisfy the Company's creditors (subject also, as described
in Note E, to the security interest that the Company has granted in the common
stock of Volt Funding in favor of the lenders under the Company's Credit
Facility). TRFCO has no recourse to the Company (beyond its interest in the pool
of receivables owned by Volt Funding) for any of the sold receivables.
In the event of termination of the Securitization Program, new purchases of a
participation interest in receivables by TRFCO would cease and collections
reflecting TRFCO's interest would revert to it. The Company believes TRFCO's
aggregate collection amounts should not exceed the pro rata interests sold.
There are no contingent liabilities or commitments associated with the
Securitization Program.
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
Note B--Securitization Program--Continued
The Company accounts for the securitization of accounts receivable in accordance
with SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities." At the time a participation interest in the
receivables is sold, the receivable representing that interest is removed from
the 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 on
TRFCO's commercial paper, are charged to the consolidated statement of
operations.
The Company incurred charges, related to the Securitzation Program, of $0.7
million and $0.4 million in the six and three months ended May 4, 2003,
respectively, compared to $0.1 million in the same periods of fiscal 2002, which
are included in Other Expense on the condensed consolidated statement of
operations. The equivalent cost of funds in the Securitization Program was 2.5%
and 2.8% per annum in the six-month 2003 and 2002 fiscal periods, 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 performs sensitivity analyses, changing various
key assumptions, which also indicates the retained interest in receivables
approximated fair values.
At May 4, 2003 and November 3, 2002, the Company's carrying retained interest in
a revolving pool of receivables of approximately $169.7 million and $168.2
million, respectively, net of a service fee liability, was approximately $109.6
million and $108.1 million, respectively. The outstanding balance of the
undivided interest sold to TRFCO was $60.0 million at May 4, 2003 and November
3, 2002. Accordingly, the trade accounts receivable included on the May 4, 2003
and November 3, 2002 condensed consolidated balance sheets have been reduced to
reflect the $60.0 million participation interest sold.
The Securitization Program is subject to termination at TRFCO's option, under
certain circumstances, including the default rate, as defined, on receivables
exceeding a specified threshold, the rate of collections on receivables failing
to meet a specified threshold 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. The Company's most recent long-term debt rating
was "BBB-" with a neutral rating outlook.
Note C--Inventories
Inventories of accumulated unbilled costs and materials by segment are as
follows:
May 4, November 3,
2003 2002
------- -----------
(In thousands)
Staffing Services $ 1 $ 32
Telephone Directory 14,385 11,355
Telecommunications Services 15,754 14,394
Computer Systems 3,660 3,909
------- -------
Total $33,800 $29,690
======= =======
The cumulative amounts billed under service contracts at May 4, 2003 and
November 3, 2002 of $3.6 million and $2.1 million, respectively, are credited
against the related costs in inventory.
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
Note D--Short-Term Borrowings
At May 5, 2003, the Company had total outstanding bank borrowings of $4.1
million under credit lines with domestic and foreign banks that expire at
various times during fiscal 2003 unless renewed, and that provide for borrowings
and letters of credit up to an aggregate of $10.8 million. Borrowings in foreign
currencies provide a hedge against devaluation in foreign currency denominated
assets.
Note E--Long-Term Debt
Long-term debt consists of the following:
May 4, November 3,
2003 2002
------- ----------
(In thousands)
Term loan (a) $14,643 $14,810
Note payable (b) 1,183
------- -------
14,643 15,993
Less amounts due within one year 356 1,524
------- -------
Total long-term debt $14,287 $14,469
======= =======
(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. 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 land and buildings (carrying
amount at May 4, 2003, $11.3 million). The obligation is guaranteed by the
Company.
(b) On February 9, 1999, the Company entered into a $5.6 million installment
payment agreement to finance the purchase and support of an Enterprise
Resource Planning system for internal use as an accounting and back office
system, which has been capitalized and is being amortized over a five to
seven-year period. The agreement provided for interest, calculated at 6%,
and principal payments in five equal annual installments of $1.3 million,
which began in February 1999. The final payment was made in February 2003.
During the fiscal 2002 first quarter, the Company decided to prepay the
remaining $30.0 million of its 7.92% Senior Notes in lieu of seeking amendments
to the agreements under which the Senior Notes were issued that would have been
required in order for the Company to implement the Securitization Program
discussed in Note B and that may have been required, depending upon the size of
the Company's then expected first quarter loss. The Company prepaid the Senior
Notes on March 5, 2002, which otherwise would have been due in installments over
the next two and one-half years. The "make whole" premium paid to the holders of
the Senior Notes of $2.1 million was recognized as Other Expense in the second
quarter of fiscal 2002 for the early payment of that debt.
Effective April 15, 2002, the Company entered into a $40.0 million, two-year,
secured, syndicated, revolving credit agreement ("Credit Agreement") which
established a credit facility ("Credit Facility") in favor of the Company and
designated subsidiaries, of which up to $15.0 million may be used for letters of
credit. Borrowings by subsidiaries are limited to $25.0 million in the
aggregate. The administrative agent arranger for the secured Credit Facility is
JP Morgan Chase Bank. The other banks participating in the Credit Facility are
Mellon Bank, NA, Wells Fargo, N. A. and Lloyds TSB Bank PLC. Borrowings and
letters of credit under the Credit Facility are
10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
Note E--Long-Term Debt--Continued
limited to a specified borrowing base, which is based upon the level of
specified receivables, generally at the end of the fiscal month preceding a
borrowing. At May 4, 2003, the borrowing base was approximately $34.6 million.
Borrowings under the Credit Facility are to bear interest at various rate
options selected by the Company at the time of each borrowing, certain of which
rate options are based on a leverage ratio, as defined, as is the facility fee.
Additionally, interest and the facility fees can be increased or decreased upon
a change in the Company's long-term debt rating provided by a nationally
recognized rating agency. Based upon the Company's leverage ratio and debt
rating at May 4, 2003, if a three-month LIBO rate was the interest rate option
selected by the Company, borrowings would have borne interest at the rate of
2.8% per annum. At May 4, 2003, the facility fee was 0.5% per annum. The Company
has not borrowed, and no letters of credit have been issued, under the Credit
Facility since its inception in April 2002.
The Credit Agreement provides for the maintenance of various financial ratios
and covenants, including, among other things, a requirement that the Company
maintain a consolidated tangible net worth, as defined, of $220.0 million (the
Company's consolidated tangible net worth as of May 4, 2003 was $225.2 million);
a limitation on cash dividends and capital stock repurchases and redemptions by
the Company in any one fiscal year to 25% of consolidated net income, as
defined, for the prior fiscal year; 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. As a result
of the loss sustained by the Company in fiscal 2002, the Company is currently
restricted from paying dividends, and making stock repurchases and stock
redemptions. 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 May
4, 2003, the Company was in compliance with all covenants in the Credit
Agreement and believes it will be in compliance with all covenants through at
least the remainder of fiscal 2003.
The Company is liable on all loans made to it and all letters of credit issued
at its request, and is jointly and severally liable as to loans made to
subsidiary borrowers. However, unless also a guarantor of loans, a subsidiary
borrower is not liable with respect to loans made to the Company or letters of
credit issued at the request of the Company, or with regard to loans made to any
other subsidiary borrower. Six subsidiaries of the Company are guarantors of all
loans made to the Company or to subsidiary borrowers under the Credit Facility.
At May 4, 2003, four of those guarantors have pledged approximately $43.8
million of accounts receivable, other than those in the Securitization Program,
as collateral security for their guarantee obligations. Under certain
circumstances, other subsidiaries of the Company also may be required to become
guarantors under the Credit Facility. The Company has pledged all of the stock
of Volt Funding (see Note B) as collateral security for the Company's
obligations under the Credit Facility.
11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
Note F--Stockholders' Equity
Changes in the major components of stockholders' equity for the six months ended
May 4, 2003 are as follows:
Common Paid-In Retained
Stock Capital Earnings
----- ------- --------
(In thousands)
Balance at November 3, 2002 $1,522 $41,036 $194,962
Net loss for the six months (4,235)
------ ------- --------
Balance at May 4, 2003 $1,522 $41,036 $190,727
====== ======= ========
Another component of stockholders' equity, the accumulated other comprehensive
loss, consists of cumulative unrealized foreign currency translation losses, net
of taxes, of $388,000 and $490,000 at May 4, 2003 and November 3, 2002,
respectively, and an unrealized gain, net of taxes, of $14,000 and $7,000 in
marketable securities at May 4, 2003 and November 3, 2002, respectively. Changes
in these items, net of income taxes, are included in the calculation of
comprehensive loss as follows:
Six Months Ended Three Months Ended
--------------------------- -----------------------
May 4, May 5, May 4, May 5,
2003 2002 2003 2002
------- -------- ------ -------
(In thousands)
Net loss ($4,235) ($38,751) ($432) ($4,411)
Foreign currency translation adjustments-net 102 70 63 84
Unrealized gain (loss) on marketable securities-net 7 14 12 (14)
------- -------- ----- -------
Total comprehensive loss ($4,126) ($38,667) ($357) ($4,341)
======= ======== ===== =======
Note G--Per Share Data
In calculating basic earnings per share, the dilutive effect of stock options
are 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.
Six Months Ended Three Months Ended
----------------------------- -----------------------------
May 4, May 5, May 4, May 5,
2003 2002 2003 2002
---------- ---------- ---------- ----------
Denominator for basic earnings per share:
Weighted average number of shares 15,217,415 15,215,777 15,217,415 15,215,888
Effect of dilutive securities:
Employee stock options
---------- ---------- ---------- ----------
Denominator for diluted earnings per share:
Adjusted weighted average number of shares 15,217,415 15,215,777 15,217,415 15,215,888
========== ========== ========== ==========
12
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
Note G--Per Share Data--Continued
Due to a pre-tax loss in the six months and three months ended May 4, 2003 and
May 5, 2002, none of the options to purchase 592,730 and 573,153 shares,
respectively, of the Company's common stock were included in the computation of
diluted earnings per share because the effect would be antidilutive.
Note H--Sale and Acquisitions of Subsidiaries and Businesses
On November 30, 2001, the Company's 59% owned publicly-held subsidiary,
Autologic Information International, Inc. ("Autologic"), that comprised the
Company's Electronic Publication and Typesetting segment, was acquired by Agfa
Corporation through a tender offer for all of Autologic's outstanding shares and
a subsequent merger. The Company received $24.2 million for its shares. The
Company's gain on the sale of $4.5 million, including a tax benefit of $1.7
million (resulting from a taxable loss versus a gain for financial purposes), is
reflected in the Company's first six months of fiscal 2002. The results of
operations of Autologic have been classified as discontinued.
The following results related to Autologic are included (through the sale and
disposal date of November 30, 2001) in discontinued operations for the six
months ended May 5, 2002:
Six Months Ended
May 5, 2002
----------------
(In thousands)
Revenue $ 3,296
=======
Loss before taxes and minority interest ($ 488)
Income tax benefit 153
Minority interest 138
-------
Loss from operations (197)
-------
Gain on disposal before tax benefit 2,761
Income tax benefit 1,746
-------
Gain on disposal 4,507
-------
Gain from discontinued operations $ 4,310
=======
Note I--Segment Disclosures
Financial data concerning the Company's sales and segment operating profit
(loss) by reportable operating segment for the six and three months ended May 4,
2003 and May 5, 2002, included on page 19 of this Report, is an integral part of
these condensed consolidated financial statements. During the six months ended
May 4, 2003, consolidated assets increased by $10.3 million, primarily due to an
increase in the level of inventory of the Telephone Directory and
Telecommunications Services segments and increases in restricted cash and cash
equivalents, recoverable income taxes and prepaid expenses and other current
assets.
13
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
Note J--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 other 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 May 4, 2003, the Company had outstanding foreign
currency option and forward contracts in the aggregate notional amount
equivalent to $7.6 million, which approximated the Company's net investment in
foreign operations and is accounted for as a hedge under SFAS No. 52.
Included in cash and cash equivalents at May 4, 2003 and November 3, 2002 was
approximately $21.4 million and $11.5 million, respectively, restricted to cover
obligations that were reflected in accounts payable at that date. These amounts
primarily relate to certain contracts with customers in which the Company
manages the customers' alternative staffing requirements, including the payment
of associate vendors.
Note K--Goodwill
As of the beginning of fiscal 2002, the Company adopted SFAS No. 142, "Goodwill
and Other Intangible Assets." Under the new rules, goodwill and other
intangibles with indefinite lives are no longer amortized, but are subject to
testing, annually and whenever events or changes in circumstances indicate that
their carrying amounts may not be recoverable, using fair value methodology. The
Company engaged independent valuation firms to assist in the determination of
impairment, which may have existed in the $39.8 million of goodwill recorded at
the beginning of fiscal 2002. The result of testing goodwill, upon adoption of
SFAS No. 142, resulted in a non-cash charge of $31.9 million, which is reported
under the caption "Cumulative Effect of a Change in Accounting" in fiscal 2002.
The Company completed its annual impairment tests on the remaining $9.0 million
of goodwill during the second quarter of fiscal 2003 and determined the carrying
value approximated fair value.
The fiscal 2002 impairment charge in the Staffing Services segment related to
the Company's European Technical Placement division and the Commercial and Light
Industrial division, which had been adversely affected by the economic declines
in Europe and the United States, respectively. Accordingly, an impairment charge
of $23.9 million (including $2.6 million, the total carrying amount of goodwill
for the Commercial and Light Industrial division as of November 5, 2001) was
recognized.
The fiscal 2002 impairment charge in the Company's Telephone Directory business
related to its independent telephone directory publishing division ($6.9
million) of that segment, and the Company's then owned 50% interest in the
westVista joint venture ($1.1 million), which also published independent
directories. Due to the fact that some of the directories purchased had not
performed as well as projected, an impairment charge of $8.0 million was
recognized.
14
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Forward-Looking Statements Disclosure
This Report and other reports and statements issued by the Company and its
officers, from time-to-time, contain certain statements concerning the Company's
future plans, objectives, performance, intentions and expectations. Words such
as "may," "should," "could," "seek," "believe," "expect," "anticipate,"
"estimate," "project," "strategy," "intend," "likely," and similar expressions
are intended to identify forward-looking statements about the Company's future
plans, objectives, performance, intentions and expectations. Although the
Company believes that its assumptions are reasonable, these forward-looking
statements are subject to a number of known and unknown risks and uncertainties
that could cause the Company's actual results, performance and achievements to
differ materially from those described or implied in the forward-looking
statements. These risks and uncertainties include, but are not limited to:
o general economic, competitive and other business conditions, including the
effects of weakened domestic and international economies
o the uncertainty of the world political situation, including the possible
effects of military action and terrorism
o continued financial strength of the Company's customers, some of which
have experienced layoffs, unfavorable financial results, investigations by
government agencies and lowered financial expectations for the near term
o the degree and timing of obtaining new contracts and the rate of renewals
of existing contracts, as well as customers' degree of utilization of the
Company's services
o material changes in demand from larger customers, including those with
which the Company has national contracts
o the effect of litigation by temporary employees and government activity
regarding, temporary help companies and the customers with which they do
business
o variations in the rate of unemployment and higher wages sought by
temporary workers in certain technical fields particularly characterized
by labor shortages, which could affect the Company's ability to meet its
customers' demands and the Company's profit margins
o changes in customer attitudes toward the use of outsourcing and temporary
personnel
o the adverse effect of customers and potential customers involving
manufacturing offshore, reducing their need for temporary workers
o the need for the Company to diversify its available temporary personnel to
offer greater support to the service sector of the economy
o the Company's ability to attract and retain certain classifications of
technologically qualified personnel for its own use, particularly in the
areas of research and development, implementation and upgrading of
internal systems
o the Company's ability to meet competition in highly competitive markets
with minimal impact on margins
o the Company's ability to achieve customer acceptance of its products and
systems in markets characterized by rapidly changing technology and
frequent new product introductions
o the Company's ability to foresee changes and to identify, develop and
commercialize innovative and competitive products and systems in a timely
and cost effective manner
o risks inherent in new product introductions, such as start-up delays, cost
overruns and uncertainty of customer acceptance
o the timing of customer acceptances of systems
o the Company's dependence on third parties for some product components
o changes in laws, regulations and government policies, including increased
taxes which, because of economic and competitive conditions may not be
able to be passed on to the customer
o the degree and effects of inclement weather
o the Company's ability to maintain a sufficient credit rating to enable it
to continue its securitization program
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
Forward-Looking Statements Disclosure--Continued
o the Company's ability to maintain its existing credit rating in order to
avoid any increase in the cost of financing and any increase in fees under
its revolving credit facility, as well as its ability to comply with the
financial and other covenants applicable under its credit facility and
other borrowing instruments
These and certain other factors are discussed in the Company's Annual Report on
Form 10-K for the fiscal year ended November 3, 2002 and, from time-to-time, in
the Company's other reports filed with the Securities and Exchange Commission.
Critical Accounting Policies
Management's discussion and analysis of its financial position and results of
operations are based upon the Company's condensed 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 recognizes revenue as services are rendered,
products are shipped, or directories are published. Within the Company's
operating segments, these services include the billing of labor, material and
directory assistance transactions as they are provided. In addition, the Company
may provide services under long-term contracts. Revenue and costs applicable to
long-term contracts, including those providing for software customization or
modification, are recognized under the completed contract method, upon customer
acceptance, in accordance with the AICPA Statement of Positions No. 81-1,
"Accounting for Performance of Construction-Type and Certain Production-Type
Contracts" and No. 97-2, "Software Revenue Recognition" and related
interpretations and amendments. The Company records provisions for estimated
losses on contracts when losses become evident. Accumulated unbilled costs on
contracts are carried in inventory at the lower of actual cost or estimated
realizable value.
On April 1, 2003, the Company issued a press release stating that it would
change the method of reporting the revenues of its Professional Employee
Organization ("PEO") subsidiary, Shaw & Shaw, Inc., which historically accounted
for approximately 2% of the Company's revenues, from gross billing to a net
revenue basis based on the PEO industry's interpretation of Emerging Issues Task
Force ("EITF") 99-19, "Reporting Revenue Gross as a Principal Versus Net as an
Agent." The change in reporting, which is reflected in all current and prior
periods, resulted in a reduction in both reported PEO revenues and related costs
of sales, with no effect on the Company's operating results.
Under certain other contracts with customers, the Company manages the customers'
alternative staffing requirements, including transactions between the customer
and other staffing vendors ("associate vendors"). When payments to associate
vendors are subject to receipt of the customers' payment to the Company and the
Company does not bear credit responsibility, the arrangements are considered
non-recourse against the Company and the revenue, other than management fees
payable to the Company, is excluded from sales.
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
Critical Accounting Policies - Continued
Allowance for Uncollectable Accounts - The establishment of an allowance
requires the use of judgment and assumptions regarding potential losses on
receivable balances. Allowances for doubtful accounts receivable are maintained
based upon historical payment patterns, aging of accounts receivable and actual
write-off history. The Company believes that its allowances are adequate;
however, changes in the financial condition of customers could have an effect on
the allowance balance required and a related charge or credit to earnings.
Long-Lived Assets - As of the beginning of fiscal 2002, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets." Under these new rules, goodwill and other intangibles
with indefinite lives are no longer amortized, but are subject to annual testing
using fair value methodology. An impairment charge is recognized for the amount,
if any, by which the carrying value of an intangible asset exceeds its fair
value. The Company engaged independent valuation firms, which primarily used
comparable multiples of revenue and EBITDA and other valuation methods to assist
the Company in the determination of the fair value of the reporting units
measured. An impairment charge of $31.9 million was recognized for the amount by
which the carrying value of goodwill exceeded its implied fair value as of the
beginning of fiscal 2002. The Company completed its annual impairment tests on
the remaining $9.0 million of goodwill during the second quarter of fiscal 2003
and determined the carrying value approximated fair value. Intangible assets
with finite, measurable lives continue to be amortized over their respective
useful lives.
Property, plant and equipment is recorded at cost, and depreciation and
amortization are provided on the straight-line and accelerated methods at rates
calculated to depreciate the cost of the assets over their estimated lives.
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 annually and whenever events or changes in
circumstances indicate that their carrying amounts may not be recoverable. The
fair values of the assets are based upon Company estimates of the discounted
cash flows that are expected to result from the use and eventual disposition of
the assets or that amount that would be realized from an immediate sale. An
impairment charge is recognized for the amount, if any, by which the carrying
value of an asset exceeds its fair value. No impairment charge was recognized in
the first half of fiscal 2003 as no events or circumstances indicated the
existence of impairment. Although the Company believes its estimates are
appropriate, the fair value measurements of the Company's long-lived assets
could be affected by using different estimates and assumptions in these
valuation techniques.
Capitalized Software - The Company's software technology personnel are involved
in the development and acquisition of internal-use software to be used in its
Enterprise Resource Planning system and software used in its operating segments,
some of which are customer accessible. The Company accounts for the
capitalization of software in accordance with AICPA Statement of Position No.
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." Subsequent to the preliminary project planning and approval
stage, all appropriate costs are capitalized until the point at which the
software is ready for its intended use. Subsequent to the software being used in
operations, the capitalized costs are transferred from costs-in-process to
completed property, plant and equipment, and are accounted for as such. All
post-implementation costs, such as maintenance, training and minor upgrades that
do not result in additional functionality, are expensed as incurred.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
Critical Accounting Policies - Continued
Securitization Program - The Company accounts for the securitization of accounts
receivables in accordance with SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." At the time a
participation interest in the receivables is sold, that interest is removed from
the condensed consolidated balance sheet. On April 15, 2002, under a new
securitization program, the Company, through a special purpose subsidiary, sold
a participation interest of $50.0 million out of an initial pool of
approximately $162.0 million of receivables. In August 2002, the participation
interest sold increased to $60.0 million and remained at that level as of May 4,
2003. Accordingly, the trade receivables included in the May 4, 2003 balance
sheet have been reduced to reflect the $60.0 million participation interest sold
and no debt was recorded.
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
Results of Operations
The information, which appears below, relates to current and prior periods, the
results of operations for which periods are not indicative of the results which
may be expected for any subsequent periods.
Six Months Ended Three Months Ended
----------------------------- ---------------------------
May 4, May 5, May 4, May 5,
2003 2002 2003 2002
----------- --------- --------- ---------
Net Sales: (In thousands)
Staffing Services
Traditional Staffing (a) $ 599,211 $ 543,007 $ 317,625 $ 282,507
Managed Services 500,853 273,921 264,918 154,469
----------- --------- --------- ---------
Total Gross Sales (a) 1,100,064 816,928 582,543 436,976
Less: Non-Recourse Managed Services (464,029) (244,428) (242,984) (137,662)
----------- --------- --------- ---------
Net Staffing Services (a) 636,035 572,500 339,559 299,314
Telephone Directory 27,424 31,103 14,953 20,479
Telecommunications Services 55,490 60,603 29,633 27,533
Computer Systems 42,071 39,685 21,697 18,168
Elimination of inter-segment sales (5,079) (7,521) (2,436) (3,220)
----------- --------- --------- ---------
Total Net Sales (a) $ 755,941 $ 696,370 $ 403,406 $ 362,274
=========== ========= ========= =========
Segment Operating Profit (Loss):
Staffing Services $ 3,534 $ 3,145 $ 4,880 $ 5,473
Telephone Directory 456 (876) 658 (510)
Telecommunications Services (1,053) (8,034) (890) (5,068)
Computer Systems 5,574 3,965 3,182 1,854
----------- --------- --------- ---------
Total Segment Operating Profit (Loss) 8,511 (1,800) 7,830 1,749
General corporate expenses (12,952) (11,457) (7,111) (5,847)
----------- --------- --------- ---------
Total Operating (Loss) Profit (4,441) (13,257) 719 (4,098)
Interest income and other expense (b) (991) (1,790) (617) (1,670)
Foreign exchange loss-net (90) (61) (175) (48)
Interest expense (1,198) (3,041) (555) (1,218)
----------- --------- --------- ---------
Loss from Continuing Operations Before Income Taxes ($ 6,720) ($ 18,149) ($ 628) ($ 7,034)
=========== ========= ========= =========
(a) As previously announced, the Company has changed the method of reporting
the revenues of its Professional Employee Organization ("PEO") subsidiary
from gross billing to a net billing basis. Accordingly, reported PEO
revenues and related cost of sales for the six and three months ended May
5, 2002 have been reduced and restated by $9.8 million and $5.2 million,
respectively, with no effect on operating profit or the net results of the
Company.
(b) Pursuant to the Company's adoption of SFAS No. 145, results for the six
and three months ended May 5, 2002 have been restated to give effect to
the reclassification of a charge of $2.1 million ($1.3 million, net of
taxes) arising from the March 2002 early payment of the Company's 7.92%
$30 million Senior Notes to Other Expense, previously presented as an
extraordinary item.
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
SIX MONTHS ENDED MAY 4, 2003 COMPARED
TO THE SIX MONTHS ENDED MAY 5, 2002
Results of Operations - Summary
In the six-month period of fiscal 2003, consolidated net sales increased by
$59.6 million, or 9%, to $755.9 million, from the comparable period in fiscal
2002. The increase in fiscal 2003 net sales resulted primarily from a $63.5
million increase in sales in the Staffing Services segment.
The Company's six-month fiscal 2003 loss from continuing operations before
income taxes was $6.7 million compared to a loss of $18.1 million in the first
six months of fiscal 2002. The Company's segments accounted for $10.3 million of
the $11.4 million improvement in results. The Company's operating segments
reported an operating profit of $8.5 million for the first six months of fiscal
2003 compared to an operating loss of $1.8 million in the comparable fiscal 2002
period. Contributing to the improvement was a $7.0 million decrease in operating
loss sustained by the Telecommunications Services segment and increases in
operating profit reported by the Computer Systems, Telephone Directory and
Staffing Services segments of $1.6 million, $1.3 million and $0.4 million,
respectively. In addition, results from continuing operations for the six months
of fiscal 2002 included a $2.1 million charge, reported as other expense, for
the early payment of the remaining $30.0 million outstanding Company's 7.92%
Senior Notes.
The net loss for the first six months of fiscal 2003 was $4.2 million compared
to a net loss of $38.8 million in the prior year first six-month period. The
consolidated results for the six-month period of fiscal 2002 included a non-cash
charge of $31.9 million for impairment of goodwill and a $4.3 million net gain
from discontinued operations.
The results for the first six months are historically lower than the second half
due to reduced customer staffing requirements, the temporary closing of some
customer facilities during the holiday season, higher payroll taxes and the
publishing schedule of the Telephone Directory segment. Also, the operating
results for the six months were adversely affected by economic conditions,
particularly in the telecommunications and high tech industries, which account
for the major portion of the Company's revenues.
Several of the Company's large customers in these industries have implemented
widespread layoffs and, especially in the telecommunications industry, have
significantly reduced expenditures. These factors adversely affected the results
of the Company's Staffing Services and Telecommunications Services segments. To
counteract these factors and strengthen the Company's future results, the
Company has continued its cost containment programs and reorganized its
Telecommunications Services segment, which have mitigated some of the
above-mentioned negative effects of the economy.
Results of Operations - By Segment
Staffing Services
Sales of the Staffing Services segment increased by $63.5 million, or 11%, to
$636.0 million in the six-month period of fiscal 2003 and the segment reported
an operating profit of $3.5 million compared to $3.1 million in the first six
months of fiscal 2002. The sales increase was primarily from traditional
staffing in the Commercial and Light Industrial division.
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
SIX MONTHS ENDED MAY 4, 2003 COMPARED
TO THE SIX MONTHS ENDED MAY 5, 2002--Continued
Results of Operations - By Segment--Continued
Staffing Services--Continued
The Commercial Light and Industrial division sustained a loss of $5.9 million on
sales of $237.6 million in the first half of fiscal 2003 compared to an
operating loss of $7.2 million on sales of $186.9 million in the prior year
comparable period. The decrease in operating loss was the result of the sales
increase, partially offset by a decrease in gross margin of 2.3 percentage
points, due to higher taxes and workers compensation rates, increased
competition, electronic auctions and customers leveraging their buying power by
consolidating the number of vendors with whom they deal.
The Technical Placement division reported an operating profit of $9.4 million on
net sales of $398.4 million for the six months of fiscal 2003 compared with an
operating profit of $10.3 million on net sales of $385.6 million in the prior
year six-month period. The 3% increase in net sales was primarily due to
increased VMC Consulting project management and consulting revenue. Gross sales
in the Technical Placement division increased 36% from $677.9 million in the
first six months of fiscal 2002 to $921.1 million in the first six months of
fiscal 2003 due to new ProcureStaff accounts. However, substantially all of
ProcureStaff sales are deducted in arriving at net sales due to the use of
associate vendors who have agreed to be paid subject to the receipt of the
customers' payment to the Company. The decrease in operating profit for the
period was the result of a decrease in gross margin for traditional staffing of
0.9 percentage points and higher overhead costs, due to on-going development of
new products and the implementation of new ProcureStaff accounts as well as the
increased business of VMC Consulting. ProcureStaff sustained an increased
operating loss in the first six months of fiscal 2003 due to the higher costs.
However, VMC Consulting reported a significant increase in operating profit due
to its increased revenue.
While the segment is committed to continued cost controls designed to increase
profitability for fiscal 2003, a return to substantially higher profit levels is
likely to depend on the timing and strength of a general economic recovery. The
Company expects that high unemployment and the need for state and local
governments to align their revenues with expenditures will result in continued
pressures on margins as jurisdictions increase payroll and various other taxes.
Although the markets for the segment's services include a broad range of
industries throughout the United States and Europe, general economic
difficulties in specific geographic areas or industrial sectors have in the
past, and could in the future, affect the profitability of the segment.
Telephone Directory
The Telephone Directory segment's sales decreased by $3.7 million, or 12%, to
$27.4 million in the first half of fiscal 2003; however, it reported an
operating profit of $0.5 million in the six month period of fiscal 2003 compared
with an operating loss of $0.9 million in the comparable fiscal 2002 period. The
decrease in sales was due to a $3.5 million decrease in Uruguay's printing
revenue related to the economic instability in Uruguay and its neighboring
countries and a $0.9 million decrease in production revenue primarily due to the
previously reported loss of a contract with a telecommunications company, which
will terminate towards the end of the fiscal year, partially offset by a $1.3
million increase in independent directory and toll-free directory publishing
sales. The improvement in operating results was the result of a $2.1 million
increase in sales in the
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
SIX MONTHS ENDED MAY 4, 2003 COMPARED
TO THE SIX MONTHS ENDED MAY 5, 2002--Continued
Results of Operations - By Segment--Continued
Telephone Directory--Continued
DataNational operation due to a change in the publication schedule of its
community directories and a 15% decrease in overhead costs throughout the
segment, primarily due to a cost reductions and lower bad debt expense as a
result of a more stringent credit policy. Historically, the segment has produced
most of its profits in the third and fourth quarters of the fiscal year.
Telecommunications Services
The Telecommunications Services segment's sales decreased by $5.1 million, or
8%, to $55.5 million in the first six months of fiscal 2003; however, its
operating loss decreased by $7.0 million to a loss of $1.0 million in the first
six months of fiscal 2003 from a loss of $8.0 million in the comparable fiscal
2002 period. The sales reduction was due to the decline in expenditures by many
of the companies in the segment's telecommunications customer base. The decrease
in operating loss was achieved by increased gross margins of 3.2 percentage
points and a reduction of overhead costs by 28%. Overhead costs were
significantly reduced from the prior year's comparable period through cost
control initiatives and the reorganization of the segment's operations during
the last half of fiscal 2002.
Computer Systems
The Computer Systems segment's sales increased by $2.4 million, or 6%, to $42.1
million in the first half of fiscal 2003 and its operating profit increased by
$1.6 million, or 41%, to $5.6 million. The increase in revenue was due to the
continued expansion of the segment's directory assistance out-sourcing business
and growth of IT services provided by the segment's Maintech division, partially
offset by a reduction in European project revenue. The growth in operating
profit from the comparable period in fiscal 2002 was the result of the increase
in sales and a decrease in overhead costs.
Results of Operations - Other
Other items, discussed on a consolidated basis, affecting the results of
operations for the six-month periods were:
Selling and administrative expenses decreased by $1.2 million, or 3%, to $33.7
million in the first six months of fiscal 2003 from the comparable fiscal 2002
period as a result of reduced overhead costs in the operating segments (see
discussion by segment above), partially offset by increased corporate general
and administrative expenses related to costs to meet the disaster recovery
requirements of redundancy and business continuity for corporate systems and
communications networks. Selling and administrative expenses, expressed as a
percentage of sales, were 4.5% in the six-month period of fiscal 2003 and 5.0%
in the comparable fiscal 2002 period.
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
SIX MONTHS ENDED MAY 4, 2003 COMPARED
TO THE SIX MONTHS ENDED MAY 5, 2002--Continued
Results of Operations - Other--Continued
Depreciation and amortization increased by $0.9 million, or 8%, to $11.6 million
in the first six months of fiscal 2003. The increase was attributable to an
increase in fixed assets over last year's comparable period.
Other Expense decreased by $0.7 million, or 33%, from $2.2 million in the first
six months of fiscal 2002 to $1.5 million in the first six months of fiscal
2003. The fiscal 2003 six month expense is primarily the result of costs related
to the Company's Securitization Program, which began in April 2002 and
significantly reduced interest expense, as well as other sundry expenses, while
the fiscal 2002 expense was the result of a $2.1 million charge for the early
payment of the Company's remaining $30.0 million outstanding Senior Notes.
Interest expense decreased by $1.8 million, or 61%, to $1.2 million in the first
six months of fiscal 2003. The decrease was the result of lower borrowings under
the Company's credit facilities and the early repayment of the remaining $30.0
million of 7.92% Senior Notes in March 2002 in contemplation of the lower cost
accounts receivable Securitization Program. The Securitization Program, the
costs of which are reflected in Other Expense (see above), also eliminated
higher cost borrowings under the revolving credit facility. The Company also
benefited from significantly lower borrowing levels in Uruguay.
The Company's effective tax benefit rate on its financial reporting pre-tax
losses was 37.0% in the first six months of fiscal 2003 compared to an effective
tax rate benefit of 38.7% in fiscal 2002. The decreased rate was attributable to
higher 2003 foreign losses for which no tax benefit was provided.
The consolidated results for the first quarter of fiscal 2002 also included a
net gain from discontinued operations of $4.3 million which was comprised of a
$4.5 million gain, including a tax benefit of $1.7 million, on the sale of the
Company's interest in the Company's former 59% owned publicly-owned subsidiary,
Autologic Information International, Inc., partially offset by a loss from
discontinued operations through the November 30, 2001 disposal date of $0.2
million.
In accordance with SFAS No. 142, the Company performed the first of the required
impairment tests of goodwill and other intangible assets as of the beginning of
fiscal 2002. At that date, the Company's goodwill, related to prior
acquisitions, amounted to approximately $40.0 million. The Company's revaluation
under the new accounting rules was completed during the second quarter of 2002,
and a $31.9 million impairment write-down was taken, reflecting declines in the
market value of the acquisitions since they were purchased. The write-down was
reported as a Cumulative Effect of a Change in Accounting. The Company completed
its annual impairment tests on the remaining $9.0 million of goodwill during the
second quarter of fiscal 2003 and determined the carrying value approximated
fair value.
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED MAY 4, 2003 COMPARED
TO THE THREE MONTHS ENDED MAY 5, 2002
Results of Operations - Summary
In the second quarter of fiscal 2003, consolidated net sales increased by $41.1
million, or 11%, to $403.4 million from the comparable period in fiscal 2002.
The increase in fiscal 2003 net sales resulted primarily from a $40.2 million
increase in sales in the Staffing Services segment, a $3.5 million increase in
the Computer Systems segment and a $2.1 million increase in the
Telecommunications Services segment, partially offset by a $5.5 million decrease
reported by the Telephone Directory segment.
The Company's second quarter fiscal 2003 loss from continuing operations before
income taxes was $0.6 million, compared to $7.0 million in fiscal 2002. The
Company's operating segments reported an operating profit of $7.8 million in the
second quarter of fiscal 2003 compared to $1.7 million in the fiscal 2002 second
quarter. The increase in segment operating profit was primarily the result of a
$4.2 million decrease in operating loss reported by the Telecommunications
Services segment; a $1.3 million increase in operating profit by the Computer
Systems segment; an operating profit of $0.7 million in the second quarter of
fiscal 2003 compared with an operating loss of $0.5 million in the second
quarter of fiscal 2002 reported by the Telephone Directory segment; partially
offset by a $0.6 million decrease in operating profit reported by the Staffing
Services segment. Non-recurring items affecting results from continuing
operations for the second quarter of fiscal 2002 included a $2.1 million charge,
reported as Other Expense, for the early payment of the Company's remaining
$30.0 million outstanding 7.92% Senior Notes.
The Company incurred a net loss of $0.4 million in the second quarter of fiscal
2003 compared to a net loss of $4.4 million in the second quarter of 2002.
Results of Operations - By Segment
Staffing Services
Sales of the Staffing Services segment increased by $40.2 million, or 13%, to
$339.6 million in the second quarter of fiscal 2003 while the segment reported
an operating profit of $4.9 million compared to $5.5 million in the second
quarter of fiscal 2002. The sales increase was primarily from traditional
staffing in the Commercial and Light Industrial division and the VMC Consulting
and ProcureStaff businesses of the Technical Placement division.
The Commercial Light & Industrial division sustained an operating loss of $2.8
million in both the second quarters of fiscal 2003 and 2002 on sales of $123.3
million and $97.8 million, respectively. The comparable operating loss, despite
the increased revenue, was the result of a decrease in gross margin of 2.3
percentage points, due to higher tax and workers compensation rates, increased
competition, electronic auctions and customers leveraging their buying power by
consolidating the number of vendors with whom they deal, and a slight increase
in the dollar amount of overhead.
The Technical Placement division reported an operating profit of $7.7 million on
net sales of $216.2 million for the second quarter of fiscal 2003 compared with
an operating profit of $8.3 million on net sales of $201.5
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED MAY 4, 2003 COMPARED
TO THE THREE MONTHS ENDED MAY 5, 2002--Continued
Results of Operations - By Segment--Continued
Staffing Services--Continued
million in the prior year's second quarter. The 7% increase in net sales was
primarily due to increases in the ProcureStaff and VMC Consulting businesses.
Gross sales in the Technical Placement division increased 34% from $366.0
million in the second quarter of fiscal 2002 to $489.4 million in the second
quarter of fiscal 2003 due to new ProcureStaff accounts. However, substantially
all of ProcureStaff sales are deducted in arriving a net sales due to the use of
associate vendors who have agreed to be paid subject to the receipt of the
customers' payment to the Company. The decrease in operating profit for the
period was the result of a decrease in gross margin for traditional staffing of
0.9 percentage points and higher overhead costs, due to on-going development of
new products and the implementation of new ProcureStaff accounts, as well as the
increased business of VMC Consulting. ProcureStaff sustained an operating loss
in the second quarter of fiscal 2003, due to the higher costs. However, VMC
Consulting reported a significant increase in operating profit due to its
increased revenue.
Telephone Directory
The Telephone Directory segment's sales decreased by $5.5 million, or 27%, to
$15.0 million in the fiscal 2003 second quarter; however, it reported an
operating profit of $0.7 million in the second quarter of fiscal 2003 compared
with an operating loss of $0.5 million in the second quarter of fiscal 2002. The
decrease in sales was primarily due to decreases in independent directory and
toll-free directory publishing sales due to a change in the publishing schedule
of its community directories, lower printing sales in Uruguay and lower
production sales primarily due to the previously reported loss of a contract
with a telecommunications company, which will terminate towards the end of the
fiscal year. Despite the decline in revenue, increases in gross margin of 7.5
percentage points and a significant reduction in overhead and bad debt expense
enabled the segment to have an operating profit for the second quarter of fiscal
2003.
Telecommunications Services
The Telecommunications Services segment's sales increased by $2.1 million, or
8%, to $29.6 million in the second quarter of fiscal 2003, and it sustained an
operating loss of $0.9 million compared with an operating loss of $5.1 million
in the fiscal 2002 second quarter. The increase in sales was primarily
attributable to a $1.3 million increase in the Construction and Engineering
division. The significant decrease in operating loss was the result of the
increase in revenue, a 5.6 percentage point increase in gross margin and an 18%
decrease in overhead costs.
Computer Systems
The Computer Systems segment's sales increased by $3.5 million, or 19%, to $21.7
million in the fiscal 2003 second quarter and its operating profit increased by
$1.3 million, or 72%, to $3.2 million. The increase in sales was due to the
expansion in sales in the segment's directory assistance business of $1.7
million and project revenue of $1.9 million due to customer acceptance of
systems in both the United States and Europe. The growth in operating profit is
the result of the increased sales partially offset by slightly lower gross
margin percentages.
25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED MAY 4, 2003 COMPARED
TO THE THREE MONTHS ENDED MAY 5, 2002--Continued
Results of Operations - Other
Other items, discussed on a consolidated basis, affecting the results of
operations for the three-month periods were:
Selling and administrative expenses decreased by $1.7 million, or 9%, to $17.8
million in the second quarter of fiscal 2003 from the comparable period in
fiscal 2002 as a result of reduced overhead costs in the operating segments (see
discussion by segment above), partially offset by increased corporate general
and administrative expenses related to costs to meet the disaster recovery
requirements of redundancy and business continuity for corporate systems and
communications networks. Selling and administrative expenses, expressed as a
percentage of sales, were 4.4% in the second quarter of fiscal 2003 and 5.4% in
the comparable fiscal 2002 period.
Depreciation and amortization increased by $0.7 million, or 12%, to $5.9 million
in the fiscal 2003 second quarter. The increase was attributable to increases in
fixed assets over last year's comparable period.
Other Expense of $0.9 million in the second quarter of fiscal 2003 million
resulted primarily from expenses related to the Company's Securitization
Program, which began in April 2002 and significantly reduced interest expense,
as well as other sundry expenses. Other expense in the second quarter of fiscal
2002 of $1.9 million was primarily due to a $2.1 million charge for the early
payment of the Company's Senior Notes, partially offset by the Company's share
of earnings of its joint venture, westVista Advertising Services, which was
liquidated in August 2002.
The foreign exchange loss in the second quarter of fiscal 2003 was $0.2 million
compared to a foreign exchange loss of $48,000 in fiscal 2002. The increased
loss was the result of unfavorable currency movements in the European currency
markets. To reduce the potential adverse impact from foreign currency changes on
the Company's foreign currency receivables and firm commitments, the Company
utilizes foreign currency option and forward contracts, when required, that
generally settle on the last weekday of each quarter.
Interest expense decreased by $0.7 million, or 54%, to $0.6 million in the
second quarter of fiscal 2003. The decrease was the result of lower borrowings
under the Company's credit facilities and the early repayment of the remaining
$30.0 million of 7.92% Senior Notes in March 2002 in contemplation of the lower
cost accounts receivable Securitization Program. The Securitization Program, the
costs of which are reflected in Other Expense (see above), also eliminated
higher cost borrowings under the revolving credit facility. The Company also
benefited from significantly lower borrowing levels in Uruguay.
The Company's effective tax benefit rate on its financial reporting pre-tax
losses was 31.2% in the second quarter of fiscal 2003 compared to an effective
tax rate benefit of 37.3% in fiscal 2002. The decreased rate was attributable to
higher 2003 foreign losses for which no tax benefit was provided.
26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
Liquidity and Capital Resources
Cash and cash equivalents, including restricted cash held in escrow for
ProcureStaff and Viewtech clients of $21.4 million and $11.5 million at May 4,
2003 and November 3, 2002, respectively, increased by $3.5 million to $47.1
million in the six months ended May 4, 2003. Unrestricted cash and cash
equivalents decreased to $25.7 million at May 4, 2003 from $32.2 million at
November 3, 2002 resulting from increased working capital requirements.
Operating activities provided $12.6 million of cash in the first half of fiscal
2003 compared to $99.3 million in the first half of fiscal 2002. The first half
of fiscal 2002 included cash generated by decreases in the levels of accounts
receivable of $56.4 million and proceeds from the Company's Securitization
Program of $50.0 million.
Operating activities in the first six months of fiscal 2003, exclusive of
changes in operating assets and liabilities, produced $10.0 million of cash, as
the Company's net loss of $4.2 million included non-cash charges primarily for
depreciation and amortization of $11.6 million and accounts receivable
provisions of $2.7 million. In the first half of fiscal 2002, operating
activities, exclusive of changes in operating assets and liabilities, produced
$7.8 million of cash, as the Company's net loss of $38.8 million included
non-cash charges of $31.9 million for goodwill impairment, depreciation and
amortization of $10.8 million, accounts receivable provisions of $5.5 million
and a $2.1 million charge for the early payment of the Company's Senior Notes,
partially offset by income from discontinued operations of $4.3 million.
Changes in operating assets and liabilities produced $2.6 million of cash in the
first half of fiscal 2003, principally due to cash provided by increases in
customer advances and other liabilities of $12.1 million, partially offset by
$4.1 million increase in the level of inventory and a $3.6 million reduction in
net income taxes. In the first half of fiscal 2002, changes in operating assets
and liabilities produced $91.5 million of cash, net, principally due to cash
provided by decreases in the levels of accounts receivable of $56.4 million and
inventory of $7.2 million, proceeds from the new securitization program of $50.0
million and an increase of $8.7 million in customer advances, partially offset
by a $17.9 million reduction of accounts payable and accrued expenses and a $9.2
million reduction in net income taxes.
The principal factor in the $9.4 million of cash applied to investing activities
for the first six months of fiscal 2003 was expenditures of $9.5 million for
property plant and equipment. In the first six months of fiscal 2002, the
primary factor in the cash provided by investing activities was the proceeds
received from the sale of Autologic of $24.2 million, partially offset by the
expenditure of $7.0 million for property, plant and equipment.
Cash provided by financing activities in the first six months of fiscal 2003
resulted from an increase of $1.9 million in bank loans, substantially offset by
$1.4 million in payment of long-term debt. Financing activities used $95.1
million in the prior year's comparable period for the payment of $61.8 million
in bank loans and a $33.3 million payment of debt, including the early payment
of the $30.0 million outstanding of Senior Notes.
Commitments
In fiscal 2000, the Company began development of a new web-enabled front-end
system designed to improve efficiency and connectivity in the recruiting,
assignment, customer maintenance and other functions in the branch offices of
the Staffing Services segment. The total costs to develop and install this
system are currently anticipated to be approximately $16.0 million, of which
approximately $7.0 million has been incurred and capitalized to date. The
Company has no other material capital commitments.
27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
Liquidity and Sources of Capital--Continued
There has been no material change through May 4, 2003 in the Company's
contractual cash obligations and other commercial commitments from that reported
in the Company's Annual Report on Form 10-K for the fiscal year ended November
3, 2002.
Credit Lines
At May 4, 2003, the Company had credit lines with domestic and foreign banks
that provide for borrowings and letters of credit up to an aggregate of $50.8
million, including a $40.0 million credit facility (the "Credit Facility") in
favor of the Company and designated subsidiaries under a secured syndicated
revolving credit agreement (the "Credit Agreement").
The Credit Facility of $40.0 million, which is scheduled to expire in April
2004, includes a $15.0 million letter of credit sub-facility. Borrowings by
subsidiaries are limited to $25.0 million in the aggregate. The administrative
agent arranger for the secured Credit Facility is JP Morgan Chase Bank. The
other banks participating in the Credit Facility are Mellon Bank, NA, Wells
Fargo, NA and Lloyds TSB Bank, PLC. This two-year Credit Facility, along with a
three-year accounts receivable Securitization Program (see below), replaced the
Company's $115.5 million credit agreement which was due to expire in September
2002. Borrowings and letters of credit under the Credit Facility are limited to
a specified borrowing base, which is based upon the level of specified
receivables, generally at the end of the fiscal month preceding a borrowing. At
May 4, 2003, the borrowing base was approximately $34.6 million. Borrowings
under the Credit Facility are to bear interest at various options selected by
the Company at the time of each borrowing, certain of which rate options are
based on a leverage ratio, as defined, as is the facility fee. Additionally,
interest and the facility fees can be increased or decreased upon a change in
the Company's long-term debt rating provided by a nationally recognized rating
agency. Based upon the Company's leverage ratio and debt rating at May 4, 2003,
if a three-month LIBO rate was the interest rate option selected by the Company,
borrowings would have borne interest at the rate of 2.8% per annum. At May 4,
2003, the facility fee was 0.5% per annum. The Company has not borrowed, and no
letters of credit have been issued, under the Credit Facility since its
inception in April 2002.
The Credit Agreement provides for the maintenance of various financial ratios
and covenants, including, among other things, a requirement that the Company
maintain a consolidated tangible net worth, as defined, of $220.0 million (the
Company's consolidated tangible net worth, as defined, as of May 4, 2003 was
$225.2 million); a limitation on cash dividends and capital stock repurchases
and redemptions by the Company in any one fiscal year to 25% of consolidated net
income, as defined, for the prior fiscal year; 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. As a result of the loss sustained by the Company in fiscal 2002, the
Company is currently restricted from paying dividends, and making stock
repurchases and stock redemptions. 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 May 4, 2003, the Company was in compliance with all covenants
in the Credit Agreement and believes it will be in compliance with all covenants
through the remainder of fiscal 2003.
The Company is liable on all loans made to it and all letters of credit issued
at its request, and is jointly and
28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
Liquidity and Sources of Capital--Continued
severally liable as to loans made to subsidiary borrowers. However, unless also
a guarantor of loans, a subsidiary borrower is not liable with respect to loans
made to the Company or letters of credit issued at the request of the Company,
or with regard to loans made to any other subsidiary borrower. Six subsidiaries
of the Company are guarantors of all loans made to the Company or to subsidiary
borrowers under the Credit Facility. At May 4, 2003, four of those guarantors
have pledged approximately $43.8 million of accounts receivable, other than
those in the Securitization Program, as collateral security for their guarantee
obligations. Under certain circumstances, other subsidiaries of the Company also
may be required to become guarantors under the Credit Facility. The Company has
pledged all of the stock of its Volt Funding Corp. subsidiary (discussed below)
as collateral security for its own obligations under the Credit Facility.
Securitization Program
Effective April 15, 2002, the Company entered into a $100.0 million three-year
accounts receivable securitization program ("Securitization Program"). Under the
Securitization Program, receivables related to the United States operations of
the staffing solutions business of the Company and its subsidiaries are sold
from time-to-time by the Company to Volt Funding Corp., a wholly owned special
purpose subsidiary of the Company ("Volt Funding"). Volt Funding, in turn, sells
to Three Rivers Funding Corporation ("TRFCO"), an asset backed commercial paper
conduit sponsored by Mellon Bank, N.A., an undivided percentage ownership
interest in the pool of receivables Volt Funding acquires from the Company
(subject to a maximum purchase by TRFCO in the aggregate of $100.0 million). The
Company retains the servicing responsibility for the accounts receivable. On
April 15, 2002, TRFCO initially purchased from Volt Funding a participation
interest of $50.0 million out of an initial pool of approximately $162.0 million
of receivables. Of the $50.0 million cash paid by Volt Funding to the Company,
$35.0 million was used to repay the entire outstanding principal balance under
the Company's former revolving credit facility. At May 4, 2003, TRFCO had
purchased from Volt Funding a participation interest of $60.0 million (increased
to $70.0 million subsequent to the end of the quarter) out of a pool of
approximately $169.7 million of receivables.
The Securitization Program is not an off-balance sheet arrangement as Volt
Funding is a 100% owned consolidated subsidiary of the Company, with accounts
receivable only reduced to reflect the fair value of receivables actually sold.
The Company entered into this arrangement as it provided a low-cost alternative
to other forms of financing.
The Securitization Program is designed to enable receivables sold by the Company
to Volt Funding to constitute true sales of those receivables. As a result, the
receivables are available to satisfy Volt Funding's own obligations to its own
creditors before being available, through the Company's residual equity interest
in Volt Funding, to satisfy the Company's creditors (subject also, as described
above, to the security interest that the Company has granted in the common stock
of Volt Funding in favor of the lenders under the Company's Credit Facility).
TRFCO has no recourse to the Company (beyond its interest in the pool of
receivables owned by Volt Funding) for any of the sold receivables.
In the event of termination of the Securitization Program, new purchases of a
participation interest in receivables by TRFCO would cease and collections
reflecting TRFCO's interest would revert to it. The Company believes TRFCO's
aggregate collection amounts should not exceed the pro rata interests sold.
There are no contingent liabilities or commitments associated with the
Securitization Program.
29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
Liquidity and Sources of Capital--Continued
The Company accounts for the securitization of accounts receivable in accordance
with SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities." At the time a participation interest in the
receivables is sold, the receivable representing that interest is removed from
the consolidated balance sheet (no debt is recorded) and the proceeds from the
sale are reflected as cash provided by operating activities. Losses and expenses
associated with the transactions, primarily related to discounts on TRFCO's
commercial paper, are charged to the consolidated statement of operations.
The Securitization Program is subject to termination at TRFCO's option, under
certain circumstances, including, among other things, the default rate, as
defined, on receivables exceeding a specified threshold, the rate of collections
on receivables failing to meet a specified threshold, the Company failing to
maintain a long-term debt rating of "B" or better or the equivalent thereof from
a nationally recognized rating organization or a default occurring and
continuing on indebtedness for borrowed money of at least $5.0 million. The
Company's most recent long-term debt rating was "BBB-" with a neutral rating
outlook.
Summary
The Company believes that its current financial position, working capital,
future cash flows from operations, credit lines and accounts receivable
Securitization Program are sufficient to fund its presently contemplated
operations through the remainder of fiscal 2003 and satisfy its debt
obligations.
New Accounting Pronouncements to be Effective in Fiscal 2003
In April 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No.
145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of SFAS No. 13,
and Technical Corrections" ("SFAS No. 145"). SFAS No. 145 updates, clarifies and
simplifies existing accounting pronouncements, by rescinding SFAS No. 4, which
required all gains and losses from the extinguishment of debt to be aggregated
and, if material, classified as an extraordinary item, net of related income tax
effect. As a result, the criteria in Accounting Principles Board Opinion No. 30
will now be used to classify those gains and losses. Additionally, SFAS No. 145
also makes technical corrections to existing pronouncements. While those
corrections are not substantive in nature, in some instances, they may change
accounting practice. The provisions of SFAS No. 145 that amend SFAS No. 13 were
adopted by the Company in its consolidated financial statements for the first
quarter of fiscal 2003. The adoption of SFAS No. 145 will not have a material
impact on the Company's consolidated financial position or results of
operations, but required a reclassification of the extraordinary item arising
from the March 2002 early payment of the Company's Senior Notes to Other Expense
in the second quarter of fiscal 2003.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred and nullifies Emerging Issues Task Force No. 94-3. The Company's
adoption of SFAS No. 146 at the beginning of fiscal 2003 did not have a material
impact on the Company's consolidated financial position or results of
operations.
30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an Amendment to FASB Statement No.
123." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based
Compensation," to provide new guidance concerning the transition when a company
changes from the intrinsic value method to the fair value method of accounting
for employee stock-based compensation cost. As amended by SFAS No. 148, SFAS No.
123 also requires additional disclosure regarding such cost in annual financial
statements and in condensed interim financial statements. As required, certain
provisions of SFAS No. 148 were adopted by the Company in the condensed
consolidated financial statements for the second quarter of fiscal 2003 included
in this Report (see Note A of Notes to Condensed Consolidated Financial
Statements). The Company believes that the adoption of SFAS No. 148 will not
have a material impact on the Company's consolidated financial position or
results of operations.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities" to provide new guidance with respect to the
consolidation of all previously unconsolidated entities, including special
purpose entities. The Company has no unconsolidated subsidiaries. However, the
Company continues to evaluate the impact of the adoption of the interpretation
on the Company's consolidated financial position and results of operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities," to amend and clarify financial
accounting and improve reporting for derivative instruments and for hedging
activities under FASB Statement No. 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS No. 149 is effective for contracts entered into or
modified after June 30, 2003. The Company believes that the adoption of SFAS No.
149 will not have a material impact on the Company's consolidated financial
position or results of operations.
31
ITEM 3 - QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to market risk exposure in the following areas:
Interest Rate Market Risk
The Company has cash and cash equivalents ($47.1 million at May 4, 2003) on
which interest income is earned at variable rates. At May 4, 2003, the Company
had short-term borrowings totaling $4.1 million under credit lines with various
domestic and foreign banks and also had sold a participation interest of $60.0
million (increased to $70.0 million on May 14, 2003) in accounts receivable
under the Securitization Program. The interest rates on investments and
borrowings and the cost of the Securitization Program, the latter of which is
based, in part, on prevailing interest rates in the commercial paper market, are
variable and, therefore, interest income, interest expense and the cost of the
Securitization Program are affected by the general level of U.S. and foreign
interest rates. Increases in interest rates would result in higher interest
expense and higher securitization costs that could be substantially offset by an
increase in interest income, depending upon the levels of cash and cash
equivalents, borrowings and financing under the Securitization Program. The
Company's policy is to take actions that would mitigate risk when appropriate
and available.
The Company's long-term debt of $14.3 million at May 4, 2003 consists of
borrowings at fixed interest rates, and the Company's interest expense related
to these borrowings is not exposed to changes in interest rates in the near
term.
Equity Price Risk
The Company holds short-term investments in mutual funds for the Company's
deferred compensation plan. At May 4, 2003, the total market value of these
investments was $3.8 million, all of which were being held for the benefit of
participants in a non-qualified deferred compensation plan with no risk to the
Company.
Foreign Exchange Market Risk
The Company has a number of overseas subsidiaries and is, therefore, subject to
exposure from the risk of currency fluctuations as the value of foreign
currencies fluctuate against the dollar, which may impact reported earnings. The
Company attempts to reduce these risks by utilizing foreign currency contracts
and borrowings to hedge the adverse impact on foreign currency net assets when
the value of the dollar strengthens against the related foreign currency. At May
4, 2003, the Company had entered into foreign currency options and forward
contracts in the aggregate notional amount of $7.4 million, which approximately
offset the Company's exposure in foreign currencies at that date. As a result,
the Company does not believe that it is exposed to material foreign exchange
market risk.
ITEM 4 - CONTROLS AND PROCEDURES
Under the supervision and with the participation of the Company's management,
including the Company's Chief Executive Officer and Chief Financial Officer, the
Company has evaluated the effectiveness of the design and operation of its
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14(c)
within 90 days of the filing date of this quarterly report. Based upon the
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that these disclosure controls and procedures are effective. There
were no significant changes in the Company's internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of their evaluation.
32
PART II - OTHER INFORMATION
ITEM 5 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's 2003 Annual Meeting of shareholders held on April 11, 2003,
shareholders:
(a) elected the following to serve as Class II directors of the Company
to serve until the 2005 Annual Meeting of the shareholders by the
following votes:
For Vote Withheld
--- -------------
William Shaw 13,086,640 637,452
Jerome Shaw 13,087,447 636,645
James J. Groberg 13,163,490 560,602
William H. Turner 13,550,378 173,714
(b) ratified the action of the Board of Directors in appointing Ernst &
Young LLP as the Company's independent public accountants for the
fiscal year ending November 2, 2003 by the following vote:
For Against Abstain
--- ------- -------
13,640,955 57,765 25,372
There were no broker non-votes on either of the matters voted upon.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit Description
- ------- -----------
15.01 Letter from Ernst & Young LLP regarding Independent Accountants'
Review Report
15.02 Letter from Ernst & Young LLP regarding Rule 436(c) of the
Securities Act of 1933
99.01 Certification of Principal Executive Officer pursuant to 18 U.S.C
section 1350 as adopted pursuant to Section 906 of Sarbanes-Oxley
Act of 2002
99.02 Certification of Principal Financial Officer pursuant to 18 U.S.C.
section 1350 as adopted pursuant to Section 906 of Sarbanes-Oxley
Act of 2002
(b) Reports on Form 8-K:
During the quarter ended May 4, 2003, the Company filed a Report on Form 8-K
dated April 1, 2003 (date of earliest event reported) reporting under Item 5,
Other Events and Item 7, Financial Statements and Exhibits. No financial
statements were filed with this report.
33
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VOLT INFORMATION SCIENCES, INC.
(Registrant)
BY: /s/ JACK EGAN
------------------------------
Date: June 13, 2003 JACK EGAN
Vice President - Corporate Accounting
(Principal Accounting Officer)
34
CERTIFICATION BY PRINCIPAL EXECUTIVE OFFICER
I, William Shaw, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Volt Information
Sciences, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
June 13, 2003 /s/ William Shaw
-----------------------
William Shaw
Chairman of the Board,
President and Principal
Executive Officer
35
CERTIFICATION BY PRINCIPAL FINANCIAL OFFICER
I, James J. Groberg, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Volt Information
Sciences, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
June 13, 2003 /s/ James J. Groberg
----------------------------
James J. Groberg
Senior Vice President and
Principal Financial Officer
36
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
15.01 Letter from Ernst & Young LLP regarding Independent Accountants'
Review Report
15.02 Letter from Ernst & Young LLP regarding Rule 436(c) of the
Securities Act of 1933
99.01 Certification of Principal Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
99.02 Certification of Principal Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002