-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LY69AJDoccGrVTTSbxMi/ZxVUHn+ydPZQcedbvMCznul2rafiw5lPx8upJhCt0U7 +Grb/ZDBw+nXvLrWdcoNOw== 0000950123-97-007841.txt : 19970918 0000950123-97-007841.hdr.sgml : 19970918 ACCESSION NUMBER: 0000950123-97-007841 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970801 FILED AS OF DATE: 19970915 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: VOLT INFORMATION SCIENCES INC CENTRAL INDEX KEY: 0000103872 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-HELP SUPPLY SERVICES [7363] IRS NUMBER: 135658129 STATE OF INCORPORATION: NY FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-09232 FILM NUMBER: 97680283 BUSINESS ADDRESS: STREET 1: 1221 AVENUE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10020 BUSINESS PHONE: 2127042400 MAIL ADDRESS: STREET 1: 1133 6TH AVENUE STREET 2: 24H FLOOR CITY: NEW YORK STATE: NY ZIP: 10036 FORMER COMPANY: FORMER CONFORMED NAME: VOLT TECHNICAL CORP DATE OF NAME CHANGE: 19680913 10-Q 1 FORM 10-Q 1 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 Nine Months Ended August 1, 1997 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.) 1221 Avenue of the Americas, New York, New York 10020 - ----------------------------------------------- ----- (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 The number of shares of common stock, $.10 par value, outstanding as of September 5, 1997 was 14,837,718. 2 VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES FORM 10-Q TABLE OF CONTENTS PART I - FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Statements of Income - Nine Months and Three Months Ended August 1, 1997 and August 2, 1996 3 Condensed Consolidated Balance Sheets - August 1, 1997 and November 1, 1996 4 Condensed Consolidated Statements of Cash Flows - Nine Months Ended August 1, 1997 and August 2, 1996 5 Notes to Condensed Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 PART II - OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders 24 Item 5. Other Information 24 Item 6. Exhibits and Reports on Form 8-K 24 SIGNATURE 25
2 3 PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Nine Months Ended Three Months Ended ----------------- ------------------ August 1, August 2, August 1, August 2, 1997 1996 1997 1996 ---- ---- ---- ---- (Dollars in thousands, except per share data) REVENUES: Sales of services $941,153 $672,483 $344,495 $237,533 Sales of products--Note I 59,980 63,352 22,135 21,287 Equity in net income of joint ventures--Note F 6,824 82 3,224 1,865 Interest income 1,055 1,729 466 547 Gain on sale of interest in subsidiaries--Note H 3,666 Other income (expense) - net--Note B 532 (775) 344 (59) --------- ------- ------- ------- 1,009,544 740,537 370,664 261,173 --------- ------- ------- ------- COSTS AND EXPENSES: Cost of sales Services--Note J 873,460 615,372 318,894 216,732 Products--Note I 35,650 41,750 12,910 13,614 Selling and administrative 37,965 36,932 13,093 12,845 Research, development and engineering 9,912 9,952 3,879 4,294 Depreciation and amortization 15,324 12,051 5,151 4,276 Foreign exchange (gain) loss - net (155) 304 24 27 Interest expense 4,318 3,537 1,396 1,177 --------- ------- ------- ------- 976,474 719,898 355,347 252,965 --------- ------- ------- ------- Income from continuing operations before income taxes and items shown below 33,070 20,639 15,317 8,208 Minority interests in net loss (income) of consolidated subsidiaries--Note H 455 387 (86) 485 Income tax provision 12,076 8,944 5,957 3,909 --------- ------- ------- ------- Income from continuing operations 21,449 12,082 9,274 4,784 Loss from discontinued operations--Note I (119) (191) (91) --------- ------- ------- ------- NET INCOME $21,330 $11,891 $9,274 $4,693 ========= ======= ======= ======= (Per share data) Income from continuing operations $1.42 $0.82 $0.61 $0.32 Loss from discontinued operations (0.01) (0.01) (0.01) --------- ------- ------- ------- Net income $1.41 $0.81 $0.61 $0.31 ========= ======= ======= ======= Number of shares used in computations--Note G 15,119,112 14,698,416 15,303,754 15,053,229 ========== ========== ========== ==========
See accompanying notes. 3 4 VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
August 1, November 1, 1997 1996 (a) ------------- ------------ (Dollars in thousands) ASSETS CURRENT ASSETS Cash and cash equivalents $28,207 $13,277 Short-term investments 104 4,458 Trade accounts receivable less allowances of $4,820 (1997) and $5,191 (1996)--Note B 200,042 170,484 Inventories--Note C 30,697 31,646 Deferred income taxes 8,897 11,757 Prepaid expenses and other assets--Note F 22,432 11,524 ------- ------- TOTAL CURRENT ASSETS 290,379 243,146 Investment in securities 3,750 Investment in joint venture--Note F 11,179 Property, plant and equipment less allowances for depreciation and amortization of $46,067 (1997) and $38,761 (1996)--Note D 63,561 64,869 Deferred income taxes and other assets 4,035 2,493 Intangible assets-net of accumulated amortization of $8,653 (1997) and $6,459 (1996)--Note H 14,820 15,457 -------- -------- $376,545 $337,144 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Notes payable to banks--Note B $4,209 $5,414 Current portion of long-term debt--Note D 1,949 1,949 Accounts payable 40,665 43,345 Accrued wages and commissions 33,106 29,998 Other accruals 34,001 29,712 Customer advances and other liabilities 26,565 16,215 Income taxes 3,784 3,022 -------- -------- TOTAL CURRENT LIABILITIES 144,279 129,655 Long-term debt--Note D 55,921 57,395 -------- -------- 200,200 187,050 -------- -------- Minority interests--Note H 19,274 19,857 -------- -------- STOCKHOLDERS' EQUITY--Notes D, E, F, and G Preferred stock, par value $1.00; Authorized--500,000 shares; issued--none Common stock, par value $.10; Authorized--30,000,000 shares; issued 14,834,208 shares (1997) and 9,692,143 shares (1996) 1,483 969 Paid-in capital 33,311 27,763 Retained earnings 122,835 101,505 Other (558) -------- -------- 157,071 130,237 -------- -------- $376,545 $337,144 ======== ========
(a) The Balance Sheet at November 1, 1996 has been derived from the audited financial statements at that date. See accompanying notes. 4 5 VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended --------------------------- August 1, August 2, 1997 1996 ----------- -------- (Dollars in thousands) CASH PROVIDED BY (APPLIED TO) OPERATING ACTIVITIES Net income $21,330 $11,891 Adjustments to reconcile to cash provided by (used in) operating activities: Loss from discontinued operations 119 191 Depreciation and amortization 15,324 12,051 Gain on sale of interest in subsidiaries (3,666) Equity in net income of joint ventures (6,824) (82) Distributions from joint venture 4,329 2,282 Minority interests in net loss of consolidated subsidiaries (455) (387) Accounts receivable provisions 1,992 2,315 Gains on foreign currency translation (710) (364) Loss on dispositions of property, plant and equipment 35 Deferred income tax provision 37 1,160 Other 76 (251) Changes in operating assets and liabilities: (Increase) decrease in accounts receivable (32,907) 14,094 Decrease (increase) in inventories 674 (2,603) Increase in prepaid expenses and other current assets (3,081) (2,571) (Increase) decrease in other assets (493) 1,781 Decrease in accounts payable (2,539) (741) Increase (decrease) in accrued expenses 8,161 (9,369) Increase in customer advances and other liabilities 5,807 2,247 Increase (decrease) in income taxes payable 2,767 (10,972) ----- ------- NET CASH PROVIDED BY OPERATING ACTIVITIES 13,607 17,041 ------ ------
5 6 VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)--Continued
Nine Months Ended ----------------- August 1, August 2, 1997 1996 ---- ---- (Dollars in thousands) CASH PROVIDED BY(APPLIED TO) INVESTING ACTIVITIES Maturities of investments 6,933 3,159 Purchases of investments (6,323) (3,182) Investment in joint venture (157) (6,403) Cash of acquired subsidiaries, less transaction costs 8,421 Acquisitions (1,396) (2,122) Proceeds from disposals of property, plant and equipment 288 82 Purchases of property, plant and equipment (11,915) (13,192) Proceeds from sale of joint venture 10,115 -------- ------- NET CASH APPLIED TO INVESTING ACTIVITIES (2,455) (13,237) -------- -------- CASH PROVIDED BY (APPLIED TO) FINANCING ACTIVITIES Payment of long-term debt (1,474) (1,500) Exercise of stock options 5,564 71 Increase in minority interests 331 (Decrease) increase in notes payable to banks (854) 148 Payment in lieu of fractional shares (2) -------- -------- NET CASH PROVIDED BY (APPLIED TO) FINANCING ACTIVITIES 3,234 (950) -------- -------- Effect of exchange rate changes on cash 544 517 -------- -------- NET INCREASE IN CASH AND CASH EQUIVALENTS 14,930 3,371 Cash and cash equivalents, beginning of period 13,277 25,350 -------- -------- CASH AND CASH EQUIVALENTS, END OF PERIOD $28,207 $28,721 ======== ======== SUPPLEMENTAL INFORMATION Cash paid during the period: Interest expense $3,300 $4,220 Income taxes, net of refunds $7,002 $18,494
See accompanying notes. 6 7 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 necessary for a fair presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles. 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 August 1, 1997 and consolidated results of operations for the nine and three months ended August 1, 1997 and August 2, 1996 and consolidated cash flows for the nine months ended August 1, 1997 and August 2, 1996. Operating results for the nine and three months ended August 1, 1997 are not necessarily indicative of the results that may be expected for the fiscal year ending October 31, 1997. 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 1, 1996. The accounting policies used in preparing these financial statements are the same as those described in that Report. The 1996 financial statements have been reclassified to conform with the current year's presentation. The Company's fiscal year ends on the Friday nearest October 31. Note B--Financing Arrangements On July 2, 1997, the Company entered into a $75,000,000, three-year, syndicated, unsecured, revolving Credit Agreement with a group of banks for which The Chase Manhattan Bank ("Chase") and Fleet Bank, N.A. are serving as co-agents. Borrowings under the facility will bear interest at various interest rates. The Company has the option to select the most favorable rate at the time of borrowing, currently LIBOR plus 40 basis points, which includes a facility fee rate of 15 basis points. The Agreement provides for the maintenance of various financial ratios and covenants, including a requirement that the Company maintain consolidated net worth (as defined) of $110,000,000 plus 50% of consolidated net income for each completed fiscal year, beginning with the fiscal year ending October 31, 1997, and certain limitations on the extent to which the Company and its subsidiaries may incur additional indebtedness, liens and sale of assets. Outstanding borrowings under the Agreement at August 1, 1997 were $2,111,000. The Agreement replaced the Company's previous $10,000,000 revolving facility with Chase and its previous $45,000,000 accounts receivable securitization program. The accounts receivable securitization agreement was entered into in October 1993 and was amended in March 1995. It entitled the Company to sell, on a limited recourse basis, up to $45,000,000 of undivided interests in a designated pool of certain eligible accounts receivable. At November 1, 1996, $13,000,000 of interests in accounts receivable had been sold under this agreement. The sold accounts receivable are reflected as a reduction of receivables in the accompanying November 1, 1996 balance sheet. The Company paid fees based primarily on the purchaser's borrowing costs incurred on short-term commercial paper which financed the purchase of receivables. Other income (expense) in the accompanying 1997 and 1996 statements of income includes fees related to the agreement of $314,000 and $1,664,000 for the nine months ended, and $52,000 and $606,000 for the three months ended August 1, 1997 and August 2, 1996, respectively. 7 8 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--Continued Note C--Inventories Inventories consist of:
August 1, November 1, 1997 1996 --------- ----------- (Dollars in thousands) Services: Accumulated unbilled costs on: Service contracts $20,989 $17,651 Long-term contracts 877 1,694 ------- ------- 21,866 19,345 ------- ------- Products: Materials and work-in-process 5,483 7,911 Service parts 2,004 2,396 Finished goods 1,344 1,994 ------- ------- 8,831 12,301 ------- ------- Total $30,697 $31,646 ======= =======
The cumulative amounts billed, principally under long-term contracts, at August 1, 1997 and November 1, 1996, of $16,643,000 and $3,418,000, respectively, are credited against the related costs in inventory. Substantially all of the amounts billed have been collected. Inventories have been reduced by valuation allowances and accumulated amortization of rotable spare parts of $14,488,000 and $15,514,000 at August 1, 1997 and November 1, 1996, respectively. 8 9 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--Continued Note D--Long-Term Debt Long-term debt consists of the following:
August 1, November 1, 1997 1996 ------- ------- (Dollars in thousands) 7.92% Senior Notes (a) $50,000 $50,000 Term loan (b) 5,325 6,000 Notes payable (c) & (d) 2,545 3,344 ------- ------- 57,870 59,344 Less amounts due within one year 1,949 1,949 ------- ------- Total long-term debt $55,921 $57,395 ======= =======
(a) On August 28, 1996, the Company issued $50,000,000 of Senior Notes in a private placement with institutional investors. The notes, which have a term of eight years, bear interest at 7.92% per annum, payable semi-annually on February 28 and August 28, and provide for amortization of principal in five equal annual installments, beginning in August 2000. The notes were issued pursuant to Note Purchase Agreements, which contain various affirmative and negative covenants, including one which requires the Company to maintain a consolidated net worth of $93,225,000. However, the terms of the Company's revolving Credit Agreement require the Company to maintain a consolidated net worth of $110,000,000 plus 50% of consolidated net income for each completed fiscal year, beginning with the fiscal year ending October 31, 1997 (see Note B). (b) In October 1994, the Company entered into a $10,000,000 loan agreement with Fleet Bank, which is secured by a deed of trust on land and buildings (book value at August 1, 1997 - $14,574,000). The loan, which bears interest at 7.86% per annum, requires principal payments of $225,000 per quarter and a final payment of $1,725,000 due October 2001. (c) Includes a note payable (which bears interest at 90 day commercial paper rates) for $550,000 due on January 2, 1998. The balance at November 1, 1996 included two notes payable, each for $550,000. (d) An unsecured loan of $2,493,000 from The Chase Manhattan Bank was made to a foreign subsidiary on January 18, 1996 to finance the acquisition of a printing press. The five-year loan, guaranteed by the Company, is to be repaid in semi-annual payments of $249,000, plus interest calculated at LIBOR (5.75% at August 1, 1997) plus .25%, through September 15, 2001. 9 10 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--Continued Note E--Stockholders' Equity Changes in the major components of stockholders' equity for the nine months ended August 1, 1997 are as follows:
Common Paid-In Retained Stock Capital Earnings ----- ------- -------- (Dollars in thousands) Balance at November 1, 1996 $969 $27,763 $101,505 Net income for the nine months 21,330 Issuance of 12,423 shares to ESOP 1 499 Stock options exercised - 204,590 shares 21 5,514 Stock award - 1,000 shares 29 Issuance of 4,920,088 shares of common stock resulting from three-for-two stock split (including payment for fractional shares) 492 (494) -------- -------- -------- Balance at August 1, 1997 $1,483 $33,311 $122,835 ======== ======== ========
On April 17, 1997, the Board of Directors declared a three-for-two stock split of the Company's common stock effected by a 50% stock dividend (including fractional shares) distributed on May 27, 1997 to shareholders of record as of the close of business on May 12, 1997. The other components of stockholders' equity are an unrealized gain on marketable securities and a cumulative unrealized foreign currency translation adjustment due to a European subsidiary of the Company and its investment in its Australian joint venture, whose functional currencies are the local currencies. Note F--Summarized Financial Information of Joint Ventures On September 4, 1997, the Company and Telstra Corporation, Ltd., its principal partner in an Australian joint venture, agreed to accelerate the Company's right to exercise an option to sell its entire 12 1/2% interest in the joint venture to Telstra for $23,300,000 in cash. The transaction closed in the fourth quarter of 1997 and resulted in a pretax gain of approximately $13,000,000 to be reported in that quarter. This venture, which commenced operations in July 1991, assumed responsibility throughout Australia for the marketing, sales and compilation functions of all yellow pages directories of Telstra. In January 1997, the Company sold its interest in Telelistas Editora Ltda., a Brazilian joint venture, which is the official publisher of telephone directories in Rio de Janeiro for the government-owned telephone company. Due to the Company's guarantee of certain of the venture's obligations, the gain on the sale of approximately $2,550,000 has been deferred until the Company's obligations, if any, under such guarantees are determined. However, income earned by the venture in fiscal 1997 of $3,192,000, through the date of sale, is included in Equity in net income of joint ventures. 10 11 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--Continued Note F--Summarized Financial Information of Joint Ventures (Continued) Consolidated retained earnings at August 1, 1997 included $4,880,000, representing the undistributed earnings of the Australian joint venture. United States income taxes have been provided for the anticipated remittance of such earnings. The following summarizes certain financial information of the joint ventures:
August 1, 1997 November 1, 1996 -------------- ---------------- (Dollars in thousands) Company's Company's Total Equity Total Equity ----- --------- ----- --------- Current assets $321,928 $308,561 Noncurrent assets 14,135 16,275 Current liabilities (283,324) (257,310) Due to Volt (754) $754 Noncurrent liabilities (149) (209) --------- --------- Combined equity of joint ventures $52,590 $66,563 ========= ========= Equity of Australian joint venture $52,590 $9,896 $62,227 11,179 Equity of Brazilian joint venture 4,336 4,153 --------- --------- --------- --------- $52,590 $66,563 ========= ========= Total investments in and advances to joint ventures $9,896 $16,086 ========= ========= Balance sheet classification: Prepaid expenses and other assets (a) $9,896 $4,907 Investment in joint venture 11,179 --------- --------- $9,896 $16,086 ========= =========
(a) The advances to and equity in the Brazilian joint venture at November 1, 1996 and the Australian joint venture at August 1, 1997 are included in the Prepaid expenses and other assets due to the sales of the Company's interests in January 1997 and September 1997, respectively. 11 12 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--Continued Note F--Summarized Financial Information of Joint Ventures--(Continued)
Nine Months Ended -------------------------------------------------- August 1, 1997 August 2, 1996 -------------- -------------- (Dollars in thousands) Company's Company's Total Equity Total Equity ----- --------- ----- --------- Revenues $539,534 $488,425 Costs and expenses 489,099 451,578 Income tax provision 17,343 14,127 -------- -------- Net income $33,092 $22,720 ======= ======= Net income of Australian joint venture $29,900 $3,632 $26,508 $3,216 Net income (loss) of Brazilian joint venture 3,192 3,192 (3,788) (3,134) -------- -------- ------- ------- $33,092 $22,720 ======== ======= Company's equity in net income of joint ventures $6,824 $82 ======== ======= Three Months Ended -------------------------------------------------- August 1, 1997 August 2, 1996 -------------- -------------- (Dollars in thousands) Company's Company's Total Equity Total Equity ----- --------- ----- --------- Revenues $284,027 $266,730 Costs and expenses 242,605 230,714 Income tax provision 15,019 12,818 --------- --------- Net income $26,403 $23,198 ========= ======= Net income of Australian joint venture $26,403 $3,224 $24,340 $2,971 Net loss of Brazilian joint venture (1,142) (1,106) --------- -------- --------- --------- $26,403 $23,198 ========= ========= Company's equity in net income of joint ventures $3,224 $1,865 ========= =========
12 13 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--Continued Note G--Per Share Data Per share data are computed on the basis of the weighted average number of shares of common stock outstanding and, if applicable, the assumed exercise of dilutive outstanding stock options based on the treasury stock method. Per share data have been adjusted for the nine and three months ended August 2, 1996 for the effect of a three-for-two stock split declared on April 17, 1997 and distributed on May 27, 1997 to shareholders of record as of the close of business on May 12, 1997. In February 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings per Share", which is required to be adopted by the Company in fiscal year 1998. At that time, the Company will be required to change the method currently used to compute earnings per share and to restate all prior periods. Under the new requirements for calculating "basic" earnings per share, the dilutive effect of stock options will be excluded. Basic earnings per share are therefore expected to be slightly higher than per share data reported in the accompanying financial statements. Note H--Acquisition and Sale of Subsidiaries On January 29, 1996, the Company merged its wholly-owned subsidiary, Autologic, Incorporated and related foreign subsidiaries ("Autologic"), representing its Electronic Publication and Typesetting Systems segment, with Information International, Inc. ("Triple-I"), resulting in the formation of a new publicly traded company, Autologic Information International, Inc. ("AII"). Triple-I was, and AII is, a publicly traded company in the business of electronic publishing prepress systems. In connection with the merger, the stockholders of Triple-I received 41% of AII's common stock, based on one share of AII being issued for each outstanding share of Triple-I, and the Company received 59% of the outstanding shares of AII common stock. The merger has been accounted for as a purchase of a 59% interest in Triple-I and a corresponding sale of a 41% interest in Autologic to the former shareholders of Triple-I. The accompanying financial statements include the accounts of AII, with the former Triple-I shareholders' 41% interest in AII shown as a minority interest in the condensed consolidated balance sheets. The results of operations of Triple-I are included in the accompanying condensed consolidated statements of income since the date of acquisition. The sale of 41% of Autologic resulted in a pretax gain of $3,666,000, net of transaction costs, and also resulted in 41% of Autologic's assets being reflected in the 1996 balance sheet at fair value, resulting in an intangible asset of $5,215,000, with a corresponding increase in the minority interest. In addition, the purchase of the assets of Triple-I resulted in an intangible of $3,847,000. These intangibles are being amortized over a period of five years. In connection with the merger, Autologic restructured its operations and incurred a charge of $700,000 related principally to a reduction in Autologic's workforce as a result of the merger. Such charge is included in the results of operations for the nine months ended August 2, 1996. 13 14 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--Continued Note H--Acquisition and Sale of Subsidiaries (Continued) The following unaudited pro forma information presents a summary of consolidated results of operations as if the acquisition had occurred at the beginning of the fiscal 1996 first quarter, with pro forma adjustments to give effect to amortization of intangibles, minority interests in operations and certain income tax adjustments. The pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations which actually would have resulted had the merger occurred on the date indicated or which may result in the future. Nine Months Ended ----------------- August 2, 1996 --------- (Dollars in thousands, except per share amounts) Revenues $752,723 Net income $12,341 Net income per share $0.84 In the nine months ended August 1, 1997, the Company's DataNational division acquired community-based directories in North Carolina and West Virginia for a total of $1,396,000 in cash and notes, which resulted in a $1,396,000 increase in intangible assets. Note I--Discontinued Operations During the first quarter of 1997, AII, the Company's 59% owned subsidiary, disposed of the assets and discontinued Digiflex, its advertisement delivery operation. Digiflex was acquired at the end of January 1996. The 1997 loss from discontinued operations represents the Company's portion (59%) of the operating loss and loss on disposal related to Digiflex. No income tax benefits have been allocated to the 1997 loss. The loss from discontinued operations for the nine months ended August 2, 1996 includes the Company's portion of Digiflex's operating loss of $325,000, net of a $199,000 tax benefit, on revenues of $181,000. The 1996 amounts have been reclassified to conform with the current year's presentation. Note J--Significant Item in Operating Results Net income for the nine months ended August 2, 1996 includes a cost reduction of $2,625,000 ($1,600,000, net of taxes), or $0.11 per share, as a result of an agreement to pay a premium to an insurance carrier to close out prior years' retrospective insurance policies at an amount less than related liabilities for workers' compensation insurance previously provided by the Company. This adjustment had a favorable impact on the operating profit of the Technical Services and Temporary Personnel segment for the nine months ended August 2, 1996 of $2,100,000. In addition, due to a new arrangement with its insurance carrier, the Company's ongoing premiums have been at a significantly lower rate. 14 15 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NINE MONTHS AND THREE MONTHS ENDED AUGUST 1, 1997 COMPARED TO THE NINE MONTHS AND THREE MONTHS ENDED AUGUST 2, 1996 The information which appears below relates to current and prior periods, the results of operations for which periods are not necessarily indicative of the results which may be expected for any subsequent periods. The following summarizes the unaudited results of operations by segment:
For the Nine For the Three Months Ended Months Ended ------------ ------------ August 1, August 2, August 1, August 2, 1997 1996 1997 1996 ---- ---- ---- ---- (Dollars in thousands) Revenues: - --------- Technical Services and Temporary Personnel $732,090 $506,599 $269,616 $180,677 Telephone Directory 57,302 48,955 20,390 18,659 Telecommunications Services 105,515 62,962 42,192 20,420 Computer Systems 52,845 56,815 15,070 18,931 Electronic Publication and Typesetting Systems 60,322 63,878 22,312 21,497 Equity in net income of joint ventures 6,824 82 3,224 1,865 Gain on sale of interest in subsidiaries 3,666 Interest and other income - net 1,587 954 810 488 Elimination of intersegment revenues (6,941) (3,374) (2,950) (1,364) --------- --------- --------- --------- $1,009,544 $740,537 $370,664 $261,173 ========= ========= ========= ========== Income from Continuing Operations Before - ---------------------------------------- Minority Interests and Income Taxes: ------------------------------------ Operating Profit (Loss): - ------------------------ Technical Services and Temporary Personnel $19,318 $19,264 $7,788 $6,114 Telephone Directory 2,512 (1,171) 1,654 399 Telecommunications Services 13,664 5,587 5,338 1,859 Computer Systems 1,030 6,029 (151) 2,632 Electronic Publication and Typesetting Systems 24 (2,541) 640 (1,361) Elimination (12) (69) (71) --------- --------- --------- ---------- Total Operating Profit 36,536 27,099 15,269 9,572 Equity in net income of joint ventures 6,824 82 3,224 1,865 Gain on sale of interest in subsidiaries 3,666 Interest and other income - net 1,587 954 810 488 General corporate expenses (7,714) (7,321) (2,566) (2,513) Interest expense (4,318) (3,537) (1,396) (1,177) Foreign exchange gain (loss) - net 155 (304) (24) (27) --------- --------- --------- --------- Income from Continuing Operations Before Minority Interests and Income Taxes $33,070 $20,639 $15,317 $8,208 ========== ========= ========= =========
15 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Continued NINE MONTHS ENDED AUGUST 1, 1997 COMPARED TO THE NINE MONTHS ENDED AUGUST 2, 1996 --Continued This discussion and analysis contains forward-looking statements which, in addition to assuming a continuation of the degree and timing of customer utilization and rate of renewals of contracts with the Company at historical levels, are subject to a number of other known and unknown risks and uncertainties, including general economic, competitive and other business conditions in the United States, as well as outside the country, changes in laws, regulations and government policies, material changes in demand from larger customers, including those with which the Company has national contracts, availability of qualified labor, technological changes, the Company's performance on contracts and changes in customer's attitudes toward outsourcing that could cause actual results, performance and achievements to differ materially from those described or implied in the forward-looking statements. These and certain other factors are discussed in the Company's Annual Report on Form 10-K for the year ended November 1, 1996 and may be discussed in reports thereafter and hereafter filed with the Securities and Exchange Commission, including this Report. Results of Operations - Summary - ------------------------------- In the nine-month period of fiscal 1997, revenues increased by $269,007,000, or 36%, from fiscal 1996, as sales increased by $265,298,000, or 36%. The increase in 1997 sales resulted primarily from a $225,491,000 increase in sales of the Technical Services and Temporary Personnel segment, a $42,553,000 increase in sales of the Telecommunications Services segment and an $8,347,000 increase in sales of the Telephone Directory segment, partially offset by a $3,970,000 decrease in sales of the Computer Systems segment and a $3,556,000 decrease in sales of the Electronic Publication and Typesetting Systems segment, each of which are discussed below. Revenues in 1997 included the Company's portion of joint venture earnings of $6,824,000, compared with $82,000 in 1996. The 1996 period included a gain of $3,666,000 from the sale of an interest in the Company's Electronic Publication and Typesetting Systems segment. The Company's 1997 nine-month pretax income from continuing operations before minority interests increased by $12,431,000, or 60%, to $33,070,000. The 1997 income included an increase of $6,742,000 in the Company's portion of joint venture earnings while the 1996 income included the $3,666,000 non-recurring pretax gain discussed above. The operating profit of the Company's segments increased by $9,437,000, or 35%, to $36,536,000 in 1997. The principal increases in the segments' operating profit were from the Telecommunications Services segment, with an increase of $8,077,000, or 145%, to $13,664,000, the Telephone Directory segment with an improvement of $3,683,000, to a profit of $2,512,000 and the Electronic Publication and Typesetting Systems segment with an improvement of $2,565,000 to a profit of $24,000. The improvement in operating profit was partially offset by a decrease in the Computer Systems segment of $4,999,000, or 83%, to $1,030,000. The net income in the nine months of 1997 was $21,330,000, compared to net income of $11,891,000 in the nine months of 1996. 16 17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Continued NINE MONTHS ENDED AUGUST 1, 1997 COMPARED TO THE NINE MONTHS ENDED AUGUST 2, 1996--Continued Results of Operations - By Segment - ---------------------------------- The Technical Services and Temporary Personnel segment's sales increased by $225,491,000, or 45%, in 1997 to $732,090,000, while the segment's operating profit increased by $54,000, to $19,318,000, compared with $19,264,000 in 1996. Approximately $62,538,000, or 28%, of the segment's 1997 sales increase was due to pass-through costs primarily related to the use of subcontractors to service large national contracts billed without a mark-up and $34,324,000 was due to new customers. The remaining increase of $136,423,000 was with existing customers, partially offset by the loss of $7,794,000 of sales to a high margin customer which, since April 1996, has no longer required the segment's services. The increase in the segment's operating profit was due to the increase in sales volume, partially offset by a decrease in gross margin of approximately 1.0 percentage point, higher overhead costs and the absence, in 1997, of a non-recurring 1996 favorable $2,100,000 retrospective workers' compensation insurance adjustment (see Note J of Notes to Condensed Consolidated Financial Statements). The decrease in gross margin percentage was due to higher subcontractor usage billed without a mark-up, and the loss of the high margin customer discussed above, offset, in part, by lower workers' compensation insurance premiums. Overhead costs increased due to start-up costs related to new offices and staffing for recently won national accounts, which are in the initial stages of their contracts. As revenues from the new national accounts have begun to reach their anticipated levels, operating profits have begun to increase and, although there can be no assurances, are anticipated to continue to increase. The Telephone Directory segment's sales increased by $8,347,000, or 17%, to $57,302,000 in fiscal 1997, and its operating profit was $2,512,000 in 1997, compared with an operating loss of $1,171,000 in 1996. The sales increase was principally due to a $2,736,000 increase in Uruguayan printing volume, a $2,633,000 increase in telephone directory production volume and a $1,203,000 increase in system sales. The profitability in 1997 was due to the higher sales volume and the absence, in 1997, of non-recurring costs incurred in 1996 by the Uruguayan operation (due to a move to a new facility and installation of new equipment). This segment's services are rendered under various short and long-term contracts. A contract with one customer, which accounted for 19% of the segment's revenues for the nine months of fiscal 1997, is scheduled to expire on June 30, 1998. However, the segment has obtained several significant new contracts which have begun in fiscal 1997. Other contracts are scheduled to expire in 1997 through 1999. The Telecommunications Services segment's sales increased by $42,553,000, or 68%, to $105,515,000 in fiscal 1997 and its operating profit increased by $8,077,000, or 145%, to $13,664,000 in fiscal 1997. The sales increase was due to a 52% increase in the Construction division and a 72% increase in the Business Systems division. The sales increases resulted from several factors, including required upgrading of core telecommunications infrastructure by existing customers, the demand for the segment's services in the wireless area, and the continued emphasis of outsourcing by the major telecommunications providers. Operating results improved due to the increased sales volume and favorable gross margins on existing business resulting in a 4.0 percentage point increase in gross margins, compared to fiscal 1996. 17 18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Continued NINE MONTHS ENDED AUGUST 1, 1997 COMPARED TO THE NINE MONTHS ENDED AUGUST 2, 1996--Continued Results of Operations - By Segment --Continued - ----------------------------------------------- The Computer Systems segment's sales decreased by $3,970,000, or 7%, to $52,845,000 in 1997 and its operating profit was $1,030,000, compared with an operating profit of $6,029,000 in 1996. The decrease in sales and operating profit was primarily due to decreased sales and profits on conservation services to utilities due to the phase-out under a large contract with a customer which no longer requires the segment's services and decreased profit on customer acceptance of Delta Operating Service Systems in 1997. Under the completed contract method of accounting used by this segment, revenues together with related costs are recognized in income upon acceptance by the customer. This segment's results on a quarter-to-quarter basis are highly dependent on the acceptance by customers under contract for the segment's directory assistance systems, which occurs periodically rather than evenly. The Electronic Publication and Typesetting Systems segment's sales decreased by $3,556,000, or 6%, to $60,322,000 in 1997, while the segment reported an operating profit of $24,000, compared with a loss of $2,541,000 in 1996. Since January 29, 1996, the segment has been comprised of the Company's former Autologic, Incorporated subsidiary and related foreign subsidiaries ("Autologic"), which were merged on that date with Information International Incorporated ("Triple-I") to form Autologic Information International, Inc. ("AII"), a publicly held company (see Note I in the Notes to Condensed Consolidated Financial Statements). The results of operations for the nine months of 1996 reflect the three-month results of Autologic on a stand-alone basis and the six-month results of the merged operations, while results for fiscal 1997 reflect the results of merged operations for all nine months. The fiscal 1997 sales decrease resulted from a decrease in sales of systems and equipment, primarily in the European market, partially offset by an increase of customer service sales in the domestic market. The increased profitability in 1997 was due to a 7.3 percentage point improvement in gross margins, and the absence of a $700,000 restructuring charge related to the mergers which was recorded in the first quarter of fiscal 1996, partially offset by decreased sales volume, an increase in operating expenses and charges of $1,602,000 for amortization of intangibles resulting from the merger, compared to $1,068,000 in 1996. Systems and equipment gross margins increased by 8.9 percentage points due principally to the sale of a greater proportion of higher margin products and customer service gross margins improved by 6.4 percentage points due primarily to workforce reductions. The operating expenses increased due to the development of additional new products and expansion into new markets. The markets in which the segment competes are marked by rapidly changing technology, with sales in fiscal 1997 of equipment introduced within the last three years comprising approximately 88% of equipment sales. Results of Operations - Other - ------------------------------- Other items, discussed on a consolidated basis, affecting the results of operations for the nine-month periods were: Interest income decreased by $674,000, or 39%, in 1997, primarily due to the use of excess funds to reduce sales of receivables under the Company's securitization program. Other income (expense) changed favorably by $1,307,000 in 1997 primarily due to a $1,350,000 reduction in fees paid resulting from the elimination during the nine months of sales of receivables under the Company's securitization program. 18 19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Continued NINE MONTHS ENDED AUGUST 1, 1997 COMPARED TO THE NINE MONTHS ENDED AUGUST 2, 1996--Continued Results of Operations - Other -- Continued - -------------------------------------------- The Company's portion of joint venture earnings was $6,824,000 in 1997, compared to $82,000 in 1996. The improvement was due to an increase in the Company's portion of earnings from its Brazilian and Australian joint ventures. On September 4, 1997, the Company and Telstra Corporation, Ltd., its principal partner in the Australian joint venture, agreed to accelerate the Company's right to exercise an option to sell its entire 12 1/2% interest in the joint venture to Telstra for $23,300,000 in cash. The transaction closed in the fourth quarter of 1997 and resulted in a pretax gain of approximately $13,000,000 to be reported in that quarter. In January 1997, the Company sold its interest in its Brazilian joint venture. Due to the guarantee of certain of the venture's obligations, the gain on the sale of approximately $2,550,000 has been deferred until the Company's obligations, if any, under such guarantees are determined. However, income earned by the venture in fiscal 1997 of $3,192,000, due to the publication of the Yellow Pages directory in Rio de Janeiro, through the date of sale, is included in Equity in net income of joint ventures. Research, development and engineering expenditures decreased by $40,000 to $9,912,000 in 1997. The decrease was due to a reduction of expenditures by the Telephone Directories segment, partially offset by additional product development by the Computer Systems and the Electronic Publication and Typesetting Systems segments. Depreciation and amortization increased by $3,273,000, or 27%, to $15,324,000 in 1997. The increase was due to increased fixed asset acquisitions in fiscal 1996 and the first three quarters of 1997 and the amortization of intangibles which resulted from the 1996 Autologic transaction. The foreign exchange gain was $155,000 in fiscal 1997 compared to a loss in 1996 of $304,000. The gain in 1997 was due to favorable, and the loss in 1996 was due to unfavorable, currency movements in the European currency markets. To reduce the potential adverse impact from foreign currency changes on the Company's foreign currency receivables, sales and firm commitments, foreign currency options and forward contracts are purchased. Interest expense increased by $781,000, or 22%, to $4,318,000 in 1997. The increase was primarily due to an increase in long-term debt caused by the issuance in a private placement, in August 1996, of $50,000,000 of 7.92% Senior Notes, offset, in part, by the retirement of $22,855,000 of 12-3/8% Subordinated Debentures in September 1996 using proceeds from the private placement. The Company's effective tax rate was reduced to 37% in 1997 from 43% in 1996 principally due to the Company's share of the net income of its Brazilian joint venture in fiscal 1997 which was offset against previous joint venture losses for which no tax benefit had been recognized. 19 20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Continued THREE MONTHS ENDED AUGUST 1, 1997 COMPARED TO THE THREE MONTHS ENDED AUGUST 2, 1996 Results of Operations - Summary - ------------------------------- In the three-month period of fiscal 1997, revenues increased by $109,491,000, or 42%, from fiscal 1996, as sales increased by $107,810,000, or 42%. Revenues in 1997 included the Company's portion of joint venture earnings of $3,224,000, compared with $1,865,000 in 1996. The increase in 1997 sales resulted primarily from an $88,939,000 increase in sales of the Technical Services and Temporary Personnel segment, a $21,772,000 increase in sales of the Telecommunications Services segment and a $1,731,000 increase in sales of the Telephone Directory segment, partially offset by a $3,861,000 decrease in sales of the Computer Systems segment. The Company's 1997 pretax income from continuing operations before minority interests increased by $7,109,000, or 87%, to $15,317,000. The 1997 income included an increase of $1,359,000 in the Company's portion of joint venture earnings. The operating profit of the Company's segments increased by $5,697,000, or 60%, to $15,269,000 in 1997. The principal increases in the segments' operating profit were from the Telecommunications Services segment, with an increase of $3,479,000, or 187%, to $5,338,000, the Electronic Publication and Typesetting Systems segment, with an improvement of $2,001,000 to a profit of $640,000, the Technical Services and Temporary Personnel segment, with an increase of $1,674,000, or 27%, to $7,788,000 and the Telephone Directory segment, with an increase of $1,255,000, or 315%, to $1,654,000. The improvements in operating profit were partially offset by a decrease in the Computer Systems segment of $2,783,000, to a loss of $151,000, compared with a profit of $2,632,000 in 1996. The net income in the three months of 1997 was $9,274,000, compared with net income of $4,693,000 in the three months of 1996. Results of Operations - By Segment - ---------------------------------- The Technical Services and Temporary Personnel segment's sales increased by $88,939,000, or 49%, in 1997 to $269,616,000, while the segment's operating profit increased by $1,674,000, or 27%, to $7,788,000, compared with $6,114,000 in 1996. Approximately $25,534,000, or 29%, of the segment's 1997 sales increase was due to pass-through costs primarily related to the use of subcontractors to service large national contracts billed without a mark-up, and $14,093,000 was from business with new customers. The remaining increase of $49,312,000 was with existing customers. The increase in the segment's operating profit was due to the increase in sales volume, partially offset by a decrease in gross margin of approximately 1.2 percentage points and higher overhead costs. The decrease in gross margin percentage was due to higher subcontractor usage billed without a mark-up. Overhead costs have increased due to start-up costs related to new offices and staffing for recently won national accounts, which are in the initial stages of their contracts. As revenues from the new national accounts have begun to reach their anticipated levels, operating profits have begun to increase and, although there can be no assurances, are anticipated to continue to increase. 20 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Continued THREE MONTHS ENDED AUGUST 1, 1997 COMPARED TO THE THREE MONTHS ENDED AUGUST 2, 1996--Continued Results of Operations - By Segment -- Continued - ----------------------------------------------- The Telephone Directory segment's sales increased by $1,731,000, or 9%, to $20,390,000 in fiscal 1997, and its operating profit increased to $1,654,000 in 1997 from $399,000 in 1996. The sales increase was primarily due to a $1,424,000 increase in telephone directory production volume and a $212,000 increase in Uruguayan printing volume, partially offset by a decrease in independent directory sales of $460,000. The decrease in independent directory sales was due to two directories which were published in the third quarter of 1996, but which will be published in the fourth quarter of fiscal 1997, offset, in part, by three new directories published in the third quarter of 1997. The increase in the operating profit in 1997 was due to the higher volume discussed above and higher gross margins achieved by the Uruguayan printing operation. As discussed above, this segment's services are rendered under various short and long-term contracts. The Telecommunications Services segment's sales increased by $21,772,000, or 107%, to $42,192,000 in fiscal 1997 and its operating profit increased by $3,479,000, or 187%, to $5,338,000 in fiscal 1997. The sales increase was due to a 99% increase in the Construction division and a 73% increase in the Business Systems division. The sales increases resulted from several factors, including required upgrading of core telecommunications infrastructure by existing customers, the demand for the segment's services in the wireless area, and the continued emphasis of outsourcing by the major telecommunications providers. Operating results improved due to the increased sales volume and favorable gross margins on existing business resulting in a 3.2 percentage point increase in gross margins, compared with fiscal 1996. The Computer Systems segment's sales decreased by $3,861,000, or 20%, to $15,070,000 in 1997 and its operating loss was $151,000, compared with an operating profit of $2,632,000 in 1996. The decrease in sales and operating profit was primarily due to a decrease in sales and profits on conservation services to utilities due to the phase-out under a large contract with a customer which no longer requires the segment's services and a decrease in sales of Delta Operating Service Systems in 1997, compared to 1996. Under the completed contract method of accounting used by this segment, revenues together with related costs are recognized in income upon acceptance by the customer. This segment's results on a quarter-to-quarter basis are highly dependent on the acceptance by customers under contract for the segment's directory assistance systems, which occurs periodically rather than evenly. The Electronic Publication and Typesetting Systems segment's sales increased by $815,000, or 4%, to $22,312,000 in 1997, and its operating profit was $640,000, compared with an operating loss of $1,361,000 in 1996. The fiscal 1997 sales increase resulted primarily from an increase in sales of systems and equipment and customer service sales in the domestic market. The increase in 1997 operating profit was due to a 6.6 percentage point increase in gross margins, a decrease in overhead expenses and an increase in sales volume. Systems and equipment gross margins increased by 8.5 percentage points due principally to the sale of a greater proportion of higher margin products and customer service gross margins improved by 2.5 percentage points due primarily to lower operating costs. The markets in which the segment competes are marked by rapidly changing technology, with sales in fiscal 1997 of equipment introduced within the last three years comprising approximately 87% of equipment sales. 21 22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Continued THREE MONTHS ENDED AUGUST 1, 1997 COMPARED TO THE THREE MONTHS ENDED AUGUST 2, 1996--Continued Results of Operations - Other - ------------------------------- Other items, discussed on a consolidated basis, affecting the results of operations for the three-month periods were: Interest income decreased by $81,000, or 15%, in 1997, primarily due to the reduction of funds available for investment as excess funds were used to eliminate sales of receivables under the Company's securitization program. Other income (expense) changed favorably by $403,000 in 1997 primarily due to $554,000 of lower fees paid resulting from the elimination of sales of receivables under the Company's securitization program, partially offset by an increase in sundry expenses. The Company's share of the net income of its joint ventures was $3,224,000 in 1997, compared to $1,865,000 in 1996. The improvement was due to the absence, in 1997, of the Company's share of net loss of its Brazilian joint venture, and an increase in the Company's share of the net income of its Australian joint venture. Research, development and engineering expenditures decreased by $415,000, or 10%, to $3,879,000 in 1997. The decrease was due to a decrease in product development by the Telephone Directory and Electronic Publication and Typesetting Systems segments. Depreciation and amortization increased by $875,000, or 20%, to $5,151,000 in 1997. The increase was due to increased fixed asset acquisitions in the fourth quarter of fiscal 1996 and the first three quarters of 1997. Interest expense increased by $219,000, or 19%, to $1,396,000 in 1997. The increase was primarily due to an increase in long-term debt caused by the issuance in a private placement, in August 1996, of $50,000,000 of 7.92% Senior Notes, offset, in part, by the retirement of $22,855,000 of 12-3/8% Subordinated Debentures in September 1996 . The Company's effective tax rate was reduced to 39% in 1997 from 48% in 1996. The 1996 tax provision was unfavorably impacted by the effect of Brazilian joint venture losses for which no tax benefit was provided. 22 23 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Continued Liquidity and Sources of Capital - -------------------------------- Cash and cash equivalents increased by $14,930,000 in 1997 to $28,207,000, and working capital increased by $32,609,000 to $146,100,000. Operating activities provided $13,607,000 of cash flows in the nine months of fiscal 1997. Primary among the factors providing cash flows to operating activities in 1997 were the Company's net income of $21,330,000, augmented by $15,324,000 of depreciation and amortization. Among the principal uses of cash in operating activities for the nine months ended August 1, 1997 were an increase in the level of accounts receivable of $32,907,000, due to a $13,000,000 reduction in interests in accounts receivable sold at August 1, 1997, compared to November 1, 1996 under the Company's terminated securitization program (see Note B in the Notes to Condensed Consolidated Financial Statements), increased sales volume and the timing of customer payments. The principal factors in the cash applied to investing activities of $2,455,000 were expenditures for property, plant and equipment of $11,915,000 and acquisitions of community-based phone directories totaling $1,396,000 (see Note H in the Notes to Condensed Consolidated Financial Statements), partially offset by proceeds of $10,115,000 received on the sale of the Brazilian joint venture. Financing activities provided $3,234,000 of cash from the exercise of employee stock options of $5,564,000 offset, in part, by a decrease in borrowings of $2,328,000. In addition to its cash and cash equivalents, at August 1, 1997, the Company has a $75,000,000, three-year, syndicated, unsecured credit line with a group of banks under a revolving credit agreement which extends to July 2, 2000 (see Note B in the Notes to Condensed Consolidated Financial Statements). The Company had outstanding bank borrowings under that line of $2,111,000 at August 1, 1997. The Company believes that its current financial position, working capital, future cash flows and credit lines will be sufficient to fund its presently contemplated operations and satisfy its debt obligations. The Company has no material capital commitments. The Company may determine, from time-to-time in the future, to buy shares of its common stock. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation," which establishes a fair value based method of accounting for stock-based compensation plans. As permitted by SFAS 123, the Company has determined it will adopt the disclosure-only provision of SFAS 123 and will otherwise continue to report under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." 23 24 PART II - OTHER INFORMATION ITEM 4-- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the Company's 1997 Annual Meeting of Shareholders held on June 16, 1997, shareholders: (a) elected the following to serve as directors of the Company until the 1997 Annual Meeting of the Shareholders by the following votes: For Vote Withheld --- ------------- William Shaw 7,136,415 43,173 Jerome Shaw 7,136,419 43,169 James J. Groberg 7,135,965 43,623 (b) ratified the action of the Board of Directors in appointing Ernst & Young LLP as the Corporation's independent public accountants for the fiscal year ending October 31, 1997 by the following vote: For: 7,176,873 Against: 1,575 Abstain: 1,140 There were no broker non-votes on either matter voted upon. ITEM 5-- OTHER INFORMATION On September 4, 1997, the Company and Telstra Corporation, Ltd., its principal partner in the Australian joint venture, agreed to accelerate the Company's right to exercise an option to sell its entire 12 1/2% interest in the joint venture to Telstra for $23,300,000 in cash. The transaction closed in the fourth quarter of 1997 and resulted in a pretax gain of approximately $13,000,000 that will be reported in that quarter. ITEM 6-- EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 15.01 Acknowledgment letter from Ernst & Young LLP 15.02 Independent Accountants' Report on Review of Interim Financial Information from Ernst & Young LLP 27.01 Financial Data Schedule (b) Reports on Form 8-K: The only Report on Form 8-K filed during the quarter ended August 1, 1997 was a report dated July 2, 1997 (date of earliest event reported) reporting Item 5: Other Events and Item 7: Financial Statement, Pro Forma Financial Information and Exhibits. No financial statements or pro forma financial information were filed with that Report. 24 25 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: September 11, 1997 JACK EGAN Vice President - Corporate Accounting (Principal Accounting Officer) 25 26 Exhibit Index 15.01 Acknowledgment letter from Ernst & Young LLP 15.02 Independent Accountants' Report on Review of Interim Financial Information from Ernst & Young LLP 27.01 Financial Data Schedule EX-15.01 2 ACKNOWLEDGMENT LETTER 1 September 10, 1997 Securities and Exchange Commission Washington, DC 20549 We are aware of the incorporation by reference in Post-Effective Amendment No. 2 to Registration Statement No. 2-75618 on Form S-8 dated September 12, 1988, Post-Effective Amendment No. 3 to Registration Statement No. 2-70180 on Form S-8 dated April 8, 1983, Registration Statement No. 33-18565 on Form S-8 dated December 14, 1987 and Registration Statement No. 333-13369 on Form S-8 dated October 3, 1996 of Volt Information Sciences, Inc., of our report dated September 2, 1997 relating to the unaudited condensed consolidated interim financial statements of Volt Information Sciences, Inc. which are included in its Form 10-Q for the quarter ended August 1, 1997. Pursuant to Rule 436(c) of the Securities Act of 1933 our report is not a part of the registration statement prepared or certified by accountants within the meaning of Section 7 or 11 of the Securities Act of 1933. Ernst & Young LLP New York, New York EX-15.02 3 INDEPENDENT ACCOUNTANTS REPORT 1 ERNST & YOUNG LLP 787 Seventh Avenue Phone 212-773-3000 New York, New York 10019 INDEPENDENT ACCOUNTANTS' REPORT ON REVIEW OF INTERIM FINANCIAL INFORMATION To the Stockholders Volt Information Sciences, Inc. We have reviewed the accompanying unaudited condensed consolidated balance sheet of Volt Information Sciences, Inc. and subsidiaries as of August 1, 1997, and the related condensed consolidated statements of income for the nine and three month periods ended August 1, 1997 and August 2, 1996, and the related condensed consolidated statements of cash flows for the nine month periods ended August 1, 1997 and August 2, 1996. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, which will be performed for the full year with the objective of expressing an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated interim financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of Volt Information Sciences, Inc. as of November 1, 1996, and the related consolidated statements of income and cash flows for the year then ended, not presented herein; and in our report dated January 8, 1997, we expressed an unqualified opinion on these consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of November 1, 1996, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. Ernst & Young LLP September 2, 1997 EX-27.01 4 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS OCT-31-1997 AUG-01-1997 28,207 104 204,862 4,820 30,697 290,379 109,628 46,067 376,545 144,279 55,921 0 0 1,483 155,588 376,545 59,980 1,009,544 35,650 909,110 61,054 1,992 4,318 33,070 12,076 21,449 (119) 0 0 21,330 1.41 0
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