-----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, I6RgJ6/OyCs50TcNmt4TxPkOpP5Vv/M3eDoY1Iq42UUI7Bqp9rNTFIxK8ZF0cBPS EUk9XxuwfvxZU15vU+8C2g== 0001157523-09-002089.txt : 20090313 0001157523-09-002089.hdr.sgml : 20090313 20090313164628 ACCESSION NUMBER: 0001157523-09-002089 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20090201 FILED AS OF DATE: 20090313 DATE AS OF CHANGE: 20090313 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: 1101 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09232 FILM NUMBER: 09680733 BUSINESS ADDRESS: STREET 1: 560 LEXINGTON AVENUE CITY: NEW YORK STATE: NY ZIP: 10022-2928 BUSINESS PHONE: 2127042400 MAIL ADDRESS: STREET 1: 560 LEXINGTON AVENUE CITY: NEW YORK STATE: NY ZIP: 10022-2928 FORMER COMPANY: FORMER CONFORMED NAME: VOLT INFORMATION SCIENCES INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: VOLT TECHNICAL CORP DATE OF NAME CHANGE: 19680913 10-Q 1 a5916723.txt VOLT INFORMATION SCIENCES, INC. 10-Q 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 Three Months Ended February 1, 2009. 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 a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. Large Accelerated Filer Accelerated Filer X ----- ----- Non-Accelerated Filer Smaller Reporting Company ----- ----- Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No X --- --- The number of shares of the registrant's common stock, $.10 par value, outstanding as of March 9, 2009 was 20,842,806. 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 (Unaudited) - Three Months Ended February 1, 2009 and January 27, 2008 3 Condensed Consolidated Balance Sheets - February 1, 2009 (Unaudited) and November 2, 2008 4 Condensed Consolidated Statements of Cash Flows (Unaudited) - Three Months Ended February 1, 2009 and January 27, 2008 5 Notes to Condensed Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 19 Item 3. Quantitative and Qualitative Disclosures about Market Risk 45 Item 4. Controls and Procedures 47 PART II - OTHER INFORMATION Item 6. Exhibits 48 SIGNATURE 48 2 PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended February 1, January 27, 2009 2008 ------------ ------------ (In thousands, except per share amounts) NET SALES $ 499,699 $ 581,054 COST AND EXPENSES: Cost of sales 477,916 567,085 Selling and administrative 22,046 22,337 Impairment and restructuring costs 8,680 1,504 Depreciation and amortization 8,865 9,589 ------------ ------------ 517,507 600,515 ------------ ------------ OPERATING LOSS (17,808) (19,461) OTHER INCOME (EXPENSE): Interest income 613 1,302 Other expense, net (244) (1,650) Foreign exchange gain (loss), net 282 (309) Interest expense (1,613) (1,622) ------------ ------------ Loss from continuing operations before minority interest and income taxes (18,770) (21,740) Minority interest 352 33 ------------ ------------ Loss from continuing operations before income taxes (18,418) (21,707) Income tax benefit 5,360 8,069 ------------ ------------ Loss from continuing operations ($ 13,058) ($ 13,638) Discontinued operations, net of taxes -- 430 ------------ ------------ NET LOSS ($ 13,058) ($ 13,208) ============ ============ Per Share Data -------------- Basic and Diluted: Loss from continuing operations ($0.63) ($0.61) Discontinued operations -- 0.02 ------------ ------------ Net loss ($0.63) ($0.59) ============ ============ Weighted average number of shares 20,843 22,301 ============ ============ See accompanying notes to condensed consolidated financial statements (unaudited).
3
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS February 1, 2009 November 2, 2008 (Unaudited) (Audited) ---------------- ---------------- ASSETS (In thousands, except share amounts) CURRENT ASSETS Cash and cash equivalents $ 134,708 $ 120,929 Restricted cash 28,160 48,581 Short-term investments 3,830 4,178 Trade accounts receivable, net of allowances of $4,147 (2009) and $5,328 (2008) 399,301 488,482 Inventories, net of allowances of $3,638 (2009) and $4,145 (2008) 20,948 29,025 Recoverable income taxes 8,222 -- Deferred income taxes 8,626 9,685 Prepaid insurance and other assets 29,754 36,684 ---------------- ---------------- TOTAL CURRENT ASSETS 633,549 737,564 Property, plant and equipment, net 66,799 68,173 Insurance and other assets 1,448 1,276 Deferred income taxes 17,491 17,081 Goodwill 51,442 57,481 Other intangible assets, net 42,231 44,204 ---------------- ---------------- TOTAL ASSETS $ 812,960 $ 925,779 ================ ================ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Short-term borrowings, including current portion of long-term debt $ 117,364 $ 108,216 Accounts payable 171,400 215,265 Accrued wages and commissions 41,533 50,918 Accrued taxes other than income taxes 22,870 22,227 Accrued insurance and other accruals 35,053 33,327 Deferred income and other liabilities 12,798 14,183 Income taxes payable -- 55,569 ---------------- ---------------- TOTAL CURRENT LIABILITIES 401,018 499,705 Long-term debt, excluding current portion 11,912 12,082 Deferred income 3,497 3,360 Income taxes payable 937 937 Deferred income taxes 13,780 14,551 Minority interest 1,000 2,010 STOCKHOLDERS' EQUITY Preferred stock, par value $1.00; Authorized--500,000 shares; issued--none -- -- Common stock, par value $.10; Authorized--120,000,000 shares; issued --23,498,103 shares 2,350 2,350 Paid-in capital 51,016 51,006 Retained earnings 369,432 381,832 Accumulated other comprehensive loss (328) (400) ---------------- ---------------- 422,470 434,788 Less treasury stock--2,655,297 shares, at cost (41,654) (41,654) ---------------- ---------------- TOTAL STOCKHOLDERS' EQUITY 380,816 393,134 ---------------- ---------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 812,960 $ 925,779 ================ ================ See accompanying notes to condensed consolidated financial statements (unaudited).
4 VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended ---------------------------- February 1, January 27, 2009 2008 ------------ ------------ (In thousands) CASH PROVIDED BY OPERATING ACTIVITIES Net loss ($13,058) ($13,208) Discontinued operations, net of taxes -- (430) ------------ ------------ Net loss from continuing operations (13,058) (13,638) Adjustments to reconcile net loss to cash provided by operating activities: Depreciation and amortization 8,865 9,589 Impairment of goodwill 6,039 -- Accounts receivable provisions 26 4,163 Minority interest (352) (33) Gain on dispositions of property, plant and equipment (119) -- Impairment charge - property, plant and equipment 1,211 -- (Gain) loss on foreign currency translation (382) 91 Deferred income tax benefit (37) (8,095) Share-based compensation expense related to employee stock options 10 37 Changes in operating assets and liabilities, net of assets acquired : Accounts receivable 88,986 38,058 Reduction in securitization of accounts receivable -- (20,000) Inventories 8,333 21,645 Prepaid insurance and other current assets 7,320 8,734 Insurance and other long-term assets (182) (631) Accounts payable (23,277) (17,978) Accrued expenses (6,592) (2,117) Deferred income and other liabilities (2,078) 394 Income taxes (63,350) (9,334) ------------ ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 11,363 10,885 ------------ ------------
5 VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)--Continued
Three Months Ended ---------------------------- February 1, January 27, 2009 2008 ------------ ------------ (In thousands) CASH USED IN INVESTING ACTIVITIES Sales of investments $ 446 $ 696 Purchases of investments (463) (727) Decrease in restricted cash 20,421 2,936 Decrease in payables related to restricted cash (20,421) (2,936) Proceeds from disposals of property, plant and equipment, net 257 2 Purchases of property, plant and equipment (7,348) (7,745) ------------ ------------ NET CASH USED IN INVESTING ACTIVITIES (7,108) (7,774) ------------ ------------ CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES Payment of long-term debt (167) (123) Purchase of treasury shares -- (8,081) Proceeds of short term borrowings 9,131 1,768 ------------ ------------ NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 8,964 (6,436) ------------ ------------ Effect of exchange rate changes on cash 560 1,382 ------------ ------------ CASH FLOWS FROM DISCONTINUED OPERATIONS Operating activities from discontinued operations -- 5,100 Investing activities from discontinued operations -- 534 ------------ ------------ CASH PROVIDED BY DISCONTINUED OPERATIONS -- 5,634 ------------ ------------ NET INCREASE IN CASH AND CASH EQUIVALENTS 13,779 3,691 Increase in discontinued operations cash -- (21) ------------ ------------ NET INCREASE IN CASH AND CASH EQUIVALENTS 13,779 3,670 Cash and cash equivalents, beginning of period 120,929 40,343 ------------ ------------ CASH AND CASH EQUIVALENTS, END OF PERIOD $ 134,708 $ 44,013 ============ ============ SUPPLEMENTAL INFORMATION Cash paid during the period: Interest expense $ 1,654 $ 1,724 Income taxes $ 58,480 $ 9,831 See accompanying notes to condensed consolidated financial statements (unaudited).
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 February 1, 2009 and consolidated results of operations and consolidated cash flows for the three months ended February 1, 2009 and January 27, 2008. 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 fiscal year ended November 2, 2008. 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. Effective November 3, 2008, the Company adopted Statement of Financial Accounting Standard ("SFAS") No. 157, "Fair Value Measurements" for certain financial assets and liabilities. This standard establishes a framework for measuring fair value and requires enhanced disclosures about fair value measurements. SFAS 157 clarifies that fair value is an exit price, representing the amount that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. SFAS 157 also establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The statement requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories: Level 1: Quoted market prices in active markets for identical assets or liabilities. Level 2: Quoted prices in active markets for similar assets and liabilities, quoted prices for identically similar assets or liabilities in markets that are not active and models for which all significant inputs are observable either directly or indirectly. Level 3: Unobservable inputs reflecting the reporting entity's own assumptions or external inputs for inactive markets. The determination of where assets and liabilities fall within this hierarchy is based upon the lowest level of input that is significant to the fair value measurement. As of February 1, 2009, the Company held approximately $165.2 million of "level 1" cash equivalents, restricted cash, short-term investments and investments in securities are measured at fair value on a recurring basis. The Company does not have any assets or liabilities that are based on "level 2" or "level 3" inputs. Certain amounts in the first quarter of fiscal 2008 have been reclassified to conform to the fiscal 2009 presentation. 7 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE B--Inventories Inventories of accumulated unbilled costs, principally work in process, and materials, net of related reserves, by segment are as follows: February 1, November 2, 2009 2008 ------------ ------------ (In thousands) Telecommunications Services $ 11,682 $ 16,874 Computer Systems 6,297 8,090 Printing and Other 2,969 4,061 ------------ ------------ Total $ 20,948 $ 29,025 ============ ============ The cumulative amounts billed under service contracts at February 1, 2009 and November 2, 2008 of $33.3 million and $21.7 million, respectively, are credited against the related costs in inventory. In addition, inventory reserves at February 1, 2009 and November 2, 2008 of $3.6 million and $4.1 million, respectively, are credited against the related costs in inventory primarily for the Telecommunications Services segment. NOTE C--Short-Term Borrowings At February 1, 2009, the Company had credit facilities with various banks and financial conduits which provided for borrowings and letters of credit of up to an aggregate of $326.8 million, including the Company's $175.0 million five-year accounts receivable securitization program (the "Amended Securitization Program"), a $42.0 million five-year unsecured revolving credit agreement ("Credit Agreement") and the Company's wholly owned subsidiary, Volt Delta Resources, LLC's ("Volt Delta") $100.0 million secured, syndicated revolving credit agreement ("Delta Credit Facility"). The Company had total outstanding short-term borrowings of $116.7 million as of February 1, 2009. Included in these borrowings were $22.7 million of foreign currency borrowings which provide economic hedges against foreign denominated net assets. Amended Securitization Program - ------------------------------ On June 3, 2008, the Company's $200.0 million accounts receivable securitization program, which was due to expire within the next year, was transferred to a multi-buyer program administered by PNC Bank. The Amended Securitization Program has a five-year term. The conduits' commercial paper facilities are backed by liquidity agreements which are periodically renewed with the sponsor banks and have initial terms of 364 days ("364 day liquidity"). On January 7, 2009, the Amended Securitization Program was further amended to reduce the size of the facility from $200.0 million to $175.0 million and to extend the 364-day liquidity to January 6, 2010. The scheduled expiration of the Amended Securitization Program was not amended, and remains 2013. Under the Amended 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 Inc. ("Volt Funding"), a wholly-owned special purpose subsidiary of the Company. Volt Funding, in turn, borrows from two commercial paper conduits (Market Street Funding LLC, a PNC Bank affiliate, and Relationship Funding LLC), secured by an undivided percentage ownership interest in the pool of receivables Volt Funding acquires from the Company. The Company retains the servicing responsibility for the accounts receivable. 8 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--Continued NOTE C--Short-Term Borrowings--Continued The Amended Securitization Program is not an off-balance sheet arrangement as Volt Funding is a 100% owned consolidated subsidiary of the Company. The receivables and related borrowings remain on the balance sheet since Volt Funding effectively retains control over the receivables, which are no longer treated as sold assets. Accordingly, pledged receivables are included as trade accounts receivable, net, while the corresponding borrowings are included as short-term borrowings on the condensed consolidated balance sheet. At February 1, 2009, Volt Funding had borrowed $42.9 million and $17.1 million from Market Street Funding and Relationship Funding, respectively. At February 1, 2009, borrowings bear a weighted-average interest rate of 2.3% per annum, excluding a facility fee of 0.75% per annum paid on the entire facility and a program fee of 0.5% paid on the outstanding borrowings. The Company incurred charges of $1.5 million in the prior year fiscal quarter in connection with the sale of receivables under the Expiring Securitization Program, which are included in Other Expense in the consolidated statement of operations. The equivalent cost of funds in the Expiring Securitization Program was 5.6% per annum in the first quarter of fiscal 2008. The Amended Securitization Program is subject to termination by PNC Bank (with the consent of the majority purchasers) under certain circumstances, including, among other things, the default rate, as defined, on receivables exceeding a specified threshold, or the rate of collections on receivables failing to meet a specified threshold. At February 1, 2009, the Company was in compliance with all requirements of the Amended Securitization Program. Credit Agreement - ---------------- On February 28, 2008, the Company entered into the Credit Agreement to replace the Company's then expiring $40.0 million secured credit agreement with an unsecured 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 and $25.0 million for borrowing in alternative currencies. At February 1, 2009, $12.0 million was drawn on this facility. The administrative agent for the Credit Facility is Bank of America, N.A. The other banks participating in the Credit Facility are JP Morgan Chase Bank, N.A. as syndicated agent, Wells Fargo Bank, N.A. and HSBC Bank USA, N.A. Borrowings under the Credit Agreement bear interest at various rate options selected by the Company at the time of each borrowing. Certain rate options, together with a facility fee, are based on a leverage ratio, as defined. Based upon the Company's leverage ratio at February 1, 2009, if a three-month U.S. Dollar LIBO rate were the interest rate option selected by the Company, borrowings would have borne interest at the rate of 1.9% per annum, excluding a fee of 0.2% per annum paid on the entire facility. The Credit Agreement provides for the maintenance of various financial ratios and covenants, including, among other things, a requirement that the Company maintain a consolidated tangible net worth, as defined; a limitation on cash dividends, capital stock purchases and redemptions by the Company in any one fiscal year to 50% of consolidated net income, as defined, for the prior year; a limitation on total funded debt to EBITDA of 3.0 to 1.0; and a requirement that the Company maintain a minimum ratio of EBITDA, as defined, to interest expense, as defined, of 4.0 to 1.0 for the twelve months ended as of the last day of each fiscal quarter. The Credit Agreement also imposes limitations on, among other things, the incurrence of additional indebtedness, 9 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--Continued NOTE C--Short-Term Borrowings--Continued the level of annual capital expenditures, and the amount of investments, including business acquisitions and mergers, and loans that may be made by the Company to its subsidiaries. At February 1, 2009, the Company was in compliance with all requirements of the Credit Agreement. Delta Credit Facility - --------------------- In December 2006, Volt Delta entered into the secured Delta Credit Facility, which expires in December 2009, with Wells Fargo, N.A. as the administrative agent and arranger, and as a lender thereunder. Wells Fargo and two of the other three lenders under the Delta Credit Facility, Bank of America, N.A. and JPMorgan Chase, also participate in the Company's $42.0 million unsecured revolving Credit Facility. Neither the Company nor Volt Delta guarantees each other's facility but certain subsidiaries of each are guarantors of their respective parent company's facility. The Delta Credit Facility allows for the issuance of revolving loans and letters of credit in the aggregate of $100.0 million with a sublimit of $10.0 million on the issuance of letters of credit. At February 1, 2009, $40.6 million was drawn on this facility. Certain interest rate options, as well as the commitment fee, are based on a leverage ratio, as defined, which resets quarterly. Based upon Volt Delta's leverage ratio at February 1, 2009, if a three-month U.S. Dollar LIBO rate were the interest rate option selected by the Company, borrowings would have borne interest at the rate of 1.2% per annum. Volt Delta also pays a commitment fee on the unused portion of the Delta Credit Facility which varies based on Volt Delta's leverage ratio. At February 1, 2009, the commitment fee was 0.3% per annum. The Delta Credit Facility provides for the maintenance of various financial ratios and covenants, including, among other things, a total debt to EBITDA ratio, as defined, which cannot exceed 2.0 to 1.0 on the last day of any fiscal quarter, a fixed charge coverage ratio, as defined, which cannot be less than 2.5 to 1.0 for the twelve months ended as of the last day of each fiscal quarter and the maintenance of a consolidated net worth, as defined. The Delta Credit Facility also imposes limitations on, among other things, incurrence of additional indebtedness or liens, the amount of investments including business acquisitions, creation of contingent obligations, sales of assets (including sale leaseback transactions) and annual capital expenditures. At February 1, 2009, the Company was in compliance with all requirements of the Delta Credit Facility. 10 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--Continued NOTE D--Long-Term Debt and Financing Arrangements Long-term debt consists of the following: February 1, November 2, 2009 2008 ------------ ------------ (Dollars in thousands) 8.2% term loan (a) $ 12,182 $ 12,316 Note payable for an acquisition (b) 425 450 ------------ ------------ 12,607 12,766 Less amounts due within one year 695 684 ------------ ------------ Total long-term debt $ 11,912 $ 12,082 ============ ============ (a) In September 2001, a subsidiary of the Company entered into a $15.1 million loan agreement with General Electric Capital Business Asset Funding Corporation. Principal payments have reduced the loan to $12.2 million at February 1, 2009. The 20-year loan, which bears interest at 8.2% per annum and requires principal and interest payments of $0.4 million per quarter, is secured by a deed of trust on certain land and buildings that had a carrying amount at February 1, 2009 of $9.5 million. The obligation is guaranteed by the Company. (b) Represents the present value of a $0.6 million payment due in sixty monthly installments, discounted at 5% per annum. NOTE E--Stockholders' Equity Changes in the major components of stockholders' equity for the three months ended February 1, 2009 are as follows:
Common Paid-In Retained Treasury Stock Capital Earnings Stock --------------- --------------- --------------- --------------- (In thousands) Balance at November 2, 2008 $ 2,350 $ 51,006 $ 381,832 ($41,654) Amortization of restricted stock and stock units 7 Compensation expense - stock options 3 Change in fair value of minority interest 658 Net loss for the three months (13,058) --------------- --------------- --------------- --------------- Balance at February 1, 2009 $ 2,350 $ 51,016 $ 369,432 ($41,654) =============== =============== =============== ===============
Another component of stockholders' equity, the accumulated other comprehensive income, consists of cumulative unrealized foreign currency translation loss, net of taxes, of $0.3 million and $0.4 million at February 1, 2009 and November 2, 2008, respectively, and unrealized loss in marketable securities, net of taxes, of $22,000 and $23,000 at February 1, 2009 and November 2, 2008, respectively. Changes in these items, net of income taxes, are included in the calculation of comprehensive (loss) income as follows: 11 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--Continued NOTE E--Stockholders' Equity Three Months Ended ------------------ February 1, January 27, 2009 2008 -------- -------- (In thousands) Net loss ($13,058) ($13,208) Change in fair value of minority interest 658 (50) Foreign currency translation adjustments, net 71 (272) Unrealized gain (loss) on marketable securities, net 1 (43) -------- -------- Comprehensive loss ($12,328) ($13,573) ======== ======== NOTE F--Per Share Data In calculating basic earnings per share, the dilutive effect of stock options is excluded. Diluted earnings per share are computed on the basis of the weighted average number of shares of common stock outstanding and the assumed exercise of dilutive outstanding stock options based on the treasury stock method. Three Months Ended ------------------ February 1, January 27, 2009 2008 ---------- ---------- Denominator for basic earnings per share: Weighted average number of shares 20,842,806 22,301,204 Effect of dilutive securities: Employee stock options -- -- ---------- ---------- Denominator for diluted earnings per share: Adjusted weighted average number of shares 20,842,806 22,301,204 ========== ========== Options to purchase 200,085 and 251,111 shares of the Company's common stock were outstanding at February 1, 2009 and January 27, 2008, respectively, but were not included in the computation of diluted earnings per share because the effect of inclusion would have been antidilutive. NOTE G--Segment Disclosures The Company's operating segments have been determined in accordance with the Company's internal management structure, which is based on operating activities. The Company evaluates performance based upon several factors, of which the primary financial measure is segment operating profit. Operating profit provides management, investors and equity analysts a measure to analyze operating performance of each business segment against historical and competitors' data, although historical results, including operating profit, may not be indicative of future results, as operating profit is highly contingent on many factors, including the state of the economy and customer preferences. 12 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--Continued NOTE G--Segment Disclosures--Continued On September 5, 2008, the Company sold the net assets of its DataNational and Directory Systems and Services divisions, whose operations for the current and comparable three-month periods have been reclassified to Discontinued Operations, with the remainder of the segment being renamed Printing and Other. The operations of this segment were part of the Telephone Directory segment until the fourth quarter of fiscal 2008. Total sales include both sales to unaffiliated customers, as reported in the Company's consolidated statements of operations, and intersegment sales. Sales between segments are generally priced at fair market value. Segment operating profit is comprised of segment sales less its overhead, selling and administrative costs and depreciation, and excludes general corporate expenses, interest income earned by the Company on excess cash generated by its segments, interest expended on corporate debt necessary to finance the segments' operations and capital expenditures, fees related to sales of interests in accounts receivable, foreign exchange gains and losses and income taxes. General corporate expenses consists of the Company's shared service centers, and includes, among other items, enterprise resource planning, human resources, corporate accounting and finance, treasury, legal and executive functions. In order to leverage the Company's infrastructure, these functions are operated under a centralized management platform, providing support services throughout the organization. The costs of these functions are included within general corporate expenses as they are not directly allocable to a specific segment. Financial data concerning the Company's sales and segment operating profit (loss) by reportable operating segment for the three months ended February 1, 2009 and January 27, 2008 are summarized in the table below. During the three months ended February 1, 2009, consolidated assets decreased by $112.8 million primarily due to decreases in accounts receivable in all segments due to the decrease in sales, reduced levels in inventory primarily in the Telecommunication Services and a reduction in Corporate prepaid expenses and other current assets due to the reduction of insurance deposits related to the Casualty Program. Three Months Ended ------------------ February 1, January 27, 2009 2008 --------- --------- (In thousands) Net Sales: - ---------- Staffing Services Staffing $ 412,650 $ 468,571 Managed Services 255,749 296,545 --------- --------- Total Gross Sales 668,399 765,116 Less: Non-Recourse Managed Services (243,411) (283,312) --------- --------- Net Staffing Services 424,988 481,804 Telecommunications Services 24,376 47,203 Computer Systems 48,487 50,783 Printing and Other 5,852 5,229 Elimination of intersegment sales (4,004) (3,965) --------- --------- Total Net Sales $ 499,699 $ 581,054 ========= ========= 13 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--Continued NOTE G--Segment Disclosures--Continued Three Months Ended ------------------ February 1, January 27, 2009 2008 -------- -------- (In thousands) Segment Operating (Loss) Profit: - -------------------------------- Staffing Services ($10,602) $ 5,469 Telecommunications Services (46) (19,165) Computer Systems 2,428 3,252 Printing and Other 188 (113) -------- -------- Total Segment Operating Loss (8,032) (10,557) General corporate expenses (9,776) (8,904) -------- -------- Total Operating Loss (17,808) (19,461) Interest income and other (expense), net 369 (348) Foreign exchange gain (loss), net 282 (309) Interest expense (1,613) (1,622) -------- -------- Loss from continuing operations before minority interest and income taxes ($18,770) ($21,740) ======== ======== NOTE H--Derivative Financial Instruments, Hedging and Restricted Cash The Company enters into derivative financial instruments only for hedging purposes. All derivative financial instruments, such as interest rate swap contracts, foreign currency options and exchange contracts, are recognized in the consolidated financial statements at fair value regardless of the purpose or intent for holding the instrument. Changes in the fair value of derivative financial instruments are either recognized periodically in income or in stockholders' equity as a component of comprehensive income, depending on whether the derivative financial instrument qualifies for hedge accounting, and, if so, whether it qualifies as a fair value hedge or cash flow hedge. Generally, changes in fair values of derivatives accounted for as fair value hedges are recorded in income along with the portions of the changes in the fair values of the hedged items that relate to the hedged risks. Changes in fair values of derivatives accounted for as cash flow hedges, to the extent they are effective as hedges, are recorded in other comprehensive income, net of deferred taxes. Changes in fair values of derivatives not qualifying as hedges are reported in the results of operations. As of February 1, 2009, the Company had no outstanding foreign derivative instruments. Restricted cash at February 1, 2009 and November 2, 2008 was $28.2 million and $48.6 million, respectively, to cover obligations that were reflected in accounts payable at that date. These amounts primarily related to certain contracts with customers, for which the Company manages the customers' alternative staffing requirements, including the payments to associate vendors. 14 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--Continued NOTE I--Sale and Acquisitions of Businesses On September 5, 2008, the Company sold the net assets of its directory systems and services and North American publishing operations to Yellow Page Group for cash proceeds of $179.3 million. The transaction included the net assets of Volt Directory Systems and DataNational but excluded the Uruguayan operations, which combined were historically reported as the Company's Telephone Directory segment. The Company recorded a pre-tax gain of $156.4 million ($93.3 million net of taxes) that was included in discontinued operations in the consolidated statement of operations in the fourth quarter of fiscal 2008. In accordance with SFAS No. 144, the results of operations of Volt Directory Systems and DataNational have been classified as discontinued in the prior period. The following summarizes the discontinued operations: Three Months Ended ------------------ January 27, 2008 -------- (In thousands) Revenue $ 10,484 ======== Income before taxes $ 718 Income tax provision (288) -------- Income from discontinued operations $ 430 ======== NOTE J--Goodwill and Intangibles Under SFAS 142, goodwill and indefinite-lived intangible assets are subject to annual impairment testing using fair value methodologies, which compare the fair value of each reporting unit to its carrying value. The Company performs its annual impairment testing during its second fiscal quarter, or more frequently if indicators of impairment arise. The timing of the impairment test may result in charges to earnings in a quarter that could not have been reasonably foreseen in prior periods. The Company generally determines the fair value of a reporting unit using the income approach, which is based on the present value of estimated future cash flows, or the market approach, which compares the business unit's multiples of sales and EBITDA to those multiples of the business unit's competitors. If the carrying value of the reporting unit's net assets including goodwill exceeds the fair value of the reporting unit, then the Company performs step two of the impairment test which allocates the fair value of the reporting unit's assets and liabilities in a manner similar to a purchase price allocation, with any residual fair value being allocated to goodwill. If the carrying value of a reporting unit's goodwill exceeds its implied fair value, then an impairment of goodwill has occurred for such amount, and is reported as a component of operating income. Based upon indicators of impairment in the fourth quarter of fiscal 2008, which included a significant decrease in market capitalization, a decline in recent operating results, and a decline in the Company's business outlook primarily due to the macroeconomic environment, the Company performed an interim impairment test as of November 2, 2008. The Company completed step one of the impairment analysis and concluded that, as of November 2, 2008, the fair value of the Computer Systems and Staffing Services segments were below their respective carrying values including goodwill. Step two of the impairment test, as required in SFAS 142, was initiated but, due to the time consuming nature, had not been completed. The Company recorded estimates of impairment in the amount of $41.5 million and $4.9 million, in the Computer Systems and Staffing Services 15 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--Continued NOTE J--Goodwill and Intangibles -- Continued segments, respectively as of November 2, 2008. During the first quarter of fiscal 2009, the Company completed the step two analyses and recorded an additional impairment in the amount of $6.0 million in the Staffing Services segment. Intangible assets, other than goodwill and indefinite-lived intangible assets, are tested for recoverability whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. An impairment loss is recognized when the carrying amount exceeds the estimated fair value of the asset or asset group. The impairment loss is measured as the amount by which the carrying amount exceeds fair value. The following table represents the balance of intangible assets:
February 1, 2009 November 2, 2008 ---------------- ---------------- Gross Carrying Accumulated Gross Carrying Accumulated Amount Amortization Amount Amortization ------- ------- ------- ------- (In thousands) Customer relationships $41,298 $11,134 $41,298 $ 9,862 Existing technology 13,164 5,120 13,164 4,714 Contract backlog 3,200 2,467 3,200 2,266 Trade names (a) 2,936 253 2,936 207 Reseller network 816 314 816 289 Non-compete agreements and trademarks 451 346 451 323 ------- ------- ------- ------- Total $61,865 $19,634 $61,865 $17,661 ======= ======= ======= =======
(a) Certain trade names have an indefinite life and are not amortized. NOTE K--Primary Insurance Casualty Program The Company is insured with a highly rated insurance company under a program that provides primary workers' compensation, employer's liability, general liability and automobile liability insurance under a loss sensitive program. In certain mandated states, the Company purchases workers' compensation insurance through participation in state funds, and the experience-rated premiums in these state plans relieve the Company of any additional liability. In the loss sensitive program, initial premium accruals are established based upon the underlying exposure, such as the amount and type of labor utilized, number of vehicles, etc. The Company establishes accruals utilizing actuarial methods to estimate the future cash payments that will be made to satisfy the claims, including an allowance for incurred-but-not-reported claims. This process also includes establishing loss development factors, based on the historical claims experience of the Company and the industry, and applying those factors to current claims information to derive an estimate of the Company's ultimate premium liability. In preparing the estimates, the Company considers the nature and severity of the claims, analyses provided by third-party actuaries, as well as current legal, economic and regulatory factors. The insurance policies have various premium rating plans that establish the ultimate premium to be paid. Adjustments to premiums are made based upon the level of claims incurred at a future date up to three years after the end of the respective policy period. For each policy year, management evaluates the accrual, and the underlying assumptions, regularly throughout the year and makes adjustments as needed. The ultimate premium cost may be greater or less than the established accrual. While management believes that the recorded amounts are adequate, there can be no assurances that changes to management's estimates will not occur due to limitations inherent in the estimation process. In the event it is determined that a smaller or larger accrual is appropriate, the Company would record a credit or a charge to cost of sales in the period in which such determination is made. At February 1, 2009, the Company's net prepaid for the outstanding policy years was $16.1 million compared to $23.1 million at November 2, 2008. 16 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--Continued NOTE L--Incentive Stock Plans The Non-Qualified Option Plan adopted by the Company in fiscal 1995 terminated on May 16, 2005 except for options previously granted under the plan. Unexercised options expire ten years after grant. Outstanding options at February 1, 2009 were granted at 100% of the market price on the date of grant and become fully vested within one to five years after the grant date. The Company recorded compensation expense of $2,000 and $7,000 for the three-month periods ended February 1, 2009 and January 27, 2008, respectively. Compensation expense is recognized in the selling and administrative expenses in the Company's statement of operations on a straight-line basis over the vesting periods. As of February 1, 2009, there was $5,000 of total unrecognized compensation cost related to non-vested share-based compensation arrangements under the 1995 plan to be recognized over a weighted average period of 0.5 years. There were no options exercised under the 1995 plan during the three-month periods ended February 1, 2009 and January 27, 2008. In April 2007, the shareholders of the Company approved the Volt Information Sciences, Inc. 2006 Incentive Stock Plan ("2006 Plan"). The 2006 Plan permits the grant of Incentive Stock Options, Non-Qualified Stock Options, Restricted Stock and Restricted Stock Units to employees and non-employee directors of the Company through September 6, 2016. The maximum aggregate number of shares that may be issued pursuant to awards made under the 2006 Plan shall not exceed one million five hundred thousand (1,500,000) shares. Compensation expense of $7,000 was recognized in selling and administrative expenses in the Company's condensed consolidated statement of operations for both the three-month periods ended February 1, 2009 and January 27, 2008, on a straight-line basis over the vesting period for grants issued in fiscal 2008. As of February 1, 2009, there was $32,000 of total unrecognized compensation cost related to non-vested share-based compensation arrangements for these options to be recognized over a weighted average period of 1.2 years. On December 18, 2007, the Company granted to employees (i) 233,000 restricted stock units and (ii) non-qualified stock options to purchase 152,996 shares of the Company's common stock at $13.32 per share under the 2006 Plan. If certain net income targets are met in fiscal years 2007 through 2011, the restricted stock units begin to vest over a five-year period through 2016. Similarly, if certain net income targets are met in fiscal years 2008 through 2012, substantially all the stock options will vest over a four-year period and expire on December 17, 2017. There was no compensation expense recognized on the grants with certain targets for the three-month period ended February 1, 2009. Compensation expense of $1,500 was recognized in cost of sales in the Company's condensed consolidated statement of operations for the three-month period ended February 1, 2009 for options without targets. Compensation expense of $22,000 was recognized in cost of sales for the three-month period ended January 27, 2008. As of February 1, 2009, there was $16,000 of unrecognized compensation costs related to non-vested share-based compensation arrangements to be recognized over a weighted average period of 2.4 years. There were no options granted during the three months ended February 1, 2009. 17 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--Continued NOTE M--Restructuring During the first quarter of fiscal 2009, the Company recorded a pre-tax restructuring charge of approximately $2.7 million ($1.9 million, net of taxes) related to the elimination of employee positions in the Staffing Services and Computer Services segments from a series of cost cutting initiatives and the closing of a facility in the Staffing Services segment due to the early termination of a contract. The restructuring charge included: (1) $0.9 million in severance, which was paid in the first quarter of fiscal 2009; (2) a $1.2 million non-cash charge for the impairment of property, plant and equipment and the closed facility; and (3) an accrual of $0.6 million in rent for the remaining term of the lease at the closed facility, which will be paid during fiscal 2009. These costs are presented on a separate line item in the Company's condensed consolidated statement of operations. During the first quarter of fiscal 2008, the Company recorded a pre-tax restructuring charge of approximately $1.5 million ($0.9 million net of taxes) related to the elimination of employee positions in Europe and North America. The workforce reduction at Volt Delta resulted from the integration of LSSiData into the segment's database access line of business. The restructuring charge consists of severance and termination benefits for the affected employees and is presented on a separate line item in the Company's condensed consolidated statement of operations. The restructuring charge was paid during fiscal 2008. NOTE N--Legal Contingencies The Company is subject to certain legal proceedings, as well as demands, claims and threatened litigation that arise in the normal course of the Company's business. A quarterly review is performed of each significant matter to assess any potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the amount can be reasonably estimated, a liability and an expense are recorded for the estimated loss. Significant judgment is required in both the determination of probability and the determination of whether an exposure is reasonably estimable. Any accruals are based on the best information available at the time. As additional information becomes available, a reassessment is performed of the potential liability related to any pending claims and litigation and may revise the Company's estimates. Potential legal liabilities and the revision of estimates of potential legal liabilities could have a material adverse impact on the Company's results of operations. As of February 1, 2009, the Company had accrued costs related to a number of purported class actions brought by current and former employees working in California alleging various violations of California law. NOTE O -- Subsequent Events As previously announced, on February 12, 2009, the Delta Credit Facility was voluntarily reduced from $100.0 million to $75.0 million. In response to the decrease in Staffing Services revenue and ongoing economic uncertainty, the Company is consolidating operations to reduce redundancies and achieve economies of scale and efficiencies. As a result of these changes, including office consolidations, the segment anticipates taking a restructuring charge of approximately $4.4 million in the second quarter. 18 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Organization of Information - --------------------------- Management's discussion and analysis of financial condition and results of operations ("MD&A") is provided as a supplement to our consolidated financial statements and notes thereto included in Part I of this Form 10-Q and to provide an understanding of our consolidated results of operations, financial condition and changes in financial condition. Our MD&A is organized as follows: o Forward-Looking Statements - This section describes some of the language and assumptions used in this document that may have an impact on the readers' interpretation of the financial statements. o Executive Overview - This section provides a general description of our business segments and provides a brief overview of the results of operations during the accounting period. o Consolidated Results of Operations - This section provides an analysis of the line items on the Statements of Operations for the current and comparative accounting periods. o Results of Operations by Segment - This section provides a summary of the results of operations by segment in tabular format and an analysis of the line items by segment for the current and comparative accounting periods. o Liquidity and Capital Resources - This section provides an analysis of our liquidity and cash flows, as well as our discussion of our commitments, securitization program and credit lines. o Critical Accounting Policies - This section discusses those accounting policies that are considered to be both important to our financial condition and results of operations and require us to exercise subjective or complex judgments in their application. o New Accounting Pronouncements - This section includes a discussion of recently published accounting authoritative literature that may have an impact on our historical or prospective results of operations or financial condition. o Related Person Transactions - This section describes any business relationships, or transaction or series of similar transactions, between the Company and its directors, executive officers, shareholders (with a 5% or greater interest in the Company), or any entity in which an executive officer has more than a 10% equity ownership interest, as well as members of the immediate families of any of the foregoing persons during the first quarter of fiscal year 2008 and 2009. Excluded from the transactions are employment compensation and directors' fees. 19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Continued Forward-Looking Statements - -------------------------- This report and other reports and statements issued by the Company and its officers from time to time contain certain "forward-looking statements." Words such as "may," "should," "likely," "could," "seek," "believe," "expect," "anticipate," "estimate," "project," "intend," "strategy," "design to," and similar expressions are intended to identify forward-looking statements about the Company's future plans, objectives, performance, intentions and expectations. These forward-looking statements are subject to a number of known and unknown risks and uncertainties including, but are not limited to, those set forth in the Company's Annual Report on Form 10-K, in this Form 10-Q and in the Company's press releases and other public filings. Such risks and uncertainties could cause the Company's actual results, performance and achievements to differ materially from those described in or implied by the forward-looking statements. Accordingly, readers should not place undue reliance on any forward-looking statements made by or on behalf of the Company. The Company does not assume any obligation to update any forward-looking statements after the date they are made. 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. Executive Overview - ------------------ Volt Information Sciences, Inc. ("Volt") is a leading national provider of staffing services and telecommunications and information solutions with a material portion of its revenue coming from Fortune 100 customers. The Company operates in four segments and the management discussion and analysis addresses each. A brief description of these segments and the predominant source of their sales follows: Staffing Services: This segment is divided into three major functional areas and operates through a network of over 300 branch offices. o Staffing Solutions provides a full spectrum of managed staffing, temporary/contract personnel employment, and workforce solutions. This functional area is comprised of the Technical Resources ("Technical") division and the Administrative and Industrial ("A&I") division. The employees and contractors on assignment are usually on the payroll of the Company for the length of their assignment and are then eligible to be re-assigned to another customer. This functional area also uses employees and subcontractors from other staffing providers ("associate vendors") when necessary. This functional area also provides direct placement services and, upon request from customers, subject to contractual conditions, will allow the customer to convert the temporary employees to full-time customer employees, under negotiated terms. In addition, the Company's Recruitment Process Outsourcing ("RPO") services deliver end-to-end recruitment and hiring outsourced solutions to customers. The Technical division provides skilled employees, such as computer and other IT specialties, engineering, design, life sciences and technical support. The A&I division provides administrative, clerical, office automation, accounting and financial, call center and light industrial personnel. The length of an employee's assignments in the Technical division may be as short as a few weeks but in many cases can last for six to twelve months. Assignments in the A&I division are generally shorter than in the Technical division. 20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Continued Executive Overview--Continued - ------------------ o E-Procurement Solutions provides global competitively bid human capital acquisition and management solutions by combining web-based tools and business process outsourcing services. The employees and contractors on assignment are usually from associate vendor firms, although at times, Volt-recruited employees and contractors may be selected to fill some assignments, but in those cases, Volt competes on an equal basis with other unaffiliated firms. The Company receives a fee for managing the process, and the revenue for such services is recognized net of its associated costs. This functional area, which is part of the Technical division, is comprised of the ProcureStaff operation. o Information Technology Solutions provides a wide range of services including consulting, outsourcing and turnkey project management in the software and hardware development, IT infrastructure services and customer contact markets. This functional area offers higher margin project-oriented services to its customers and assumes greater responsibility in contrast to the other areas within the segment. This functional area, which is part of the Technical division, is comprised of the VMC Consulting operation. Telecommunications Services: This segment provides a full spectrum of turnkey telecommunications and related services solutions for commercial and government sectors. It designs, engineers, constructs, installs and maintains voice, data, video and utility infrastructure for public and private businesses, military and government agencies. This segment also installs distribution piping for potable and re-use water systems for municipalities. Computer Systems: This segment provides directory and operator systems and services primarily for the telecommunications industry and provides IT maintenance services. The segment also sells information service systems to its customers and, in addition, provides an Application Service Provider ("ASP") model which also provides information services, including infrastructure and database content, on a transactional fee basis. It also provides third-party IT and data services to others. This segment is comprised of VoltDelta, Volt Delta International, LSSiDATA and the Maintech computer maintenance division. Printing and Other: This segment provides printing services and publishes telephone directories in Uruguay. The telephone directory revenues of this segment are derived from the sales of telephone directory advertising for the books it publishes. The operations of this segment were part of the Telephone Directory segment until the third quarter of fiscal 2008. In September 2008, the Company sold the net assets of its DataNational and Directory Systems divisions, whose operations for the prior fiscal years have been reclassified to Discontinued Operations in these financial statements, with the remainder of the segment being renamed Printing and Other. This report includes information extracted from consolidated financial information that is not required by Generally Accepted Accounting Principles ("GAAP") to be presented in the financial statements. Certain of this information is considered "non-GAAP financial measures" as defined by Securities Exchange Commission ("SEC") rules. Some of these measures are as follows: Gross profit for a segment is comprised of its total net sales less direct costs. 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Continued Executive Overview--Continued - ------------------ Segment operating profit is comprised of segment gross profit less its overhead, selling and administrative costs and depreciation, and has limitations as an analytical tool. It should not be considered in isolation or as a substitute for analysis of the Company's results as reported under GAAP. Some of these limitations are due to the omission of: (a) general corporate expenses; (b) interest income earned by the Company on excess cash generated by its segments; (c) interest expended on corporate debt necessary to finance the segments' operations and capital expenditures; and (d) interest and fees related to sales of interests in accounts receivable. Because of these limitations, segment operating profit (loss) should only be used on a supplemental basis combined with GAAP results when evaluating the Company's performance. Overhead is comprised of indirect costs required to support each segment's operations, and is included in cost of sales in the statements of operations, along with selling and administrative and depreciation expenses, which are reflected separately in the statements of operations. General corporate expenses are comprised of the Company's shared service centers, and include, among other items, enterprise resource planning, human resource, corporate accounting and finance, treasury, legal and executive functions. In order to leverage the Company's infrastructure, these functions are operated under a centralized management platform, providing support services throughout the organization. The costs of these functions are included within general corporate expenses as they are not directly allocable to a specific segment. The Company's operating segments have been determined in accordance with the Company's internal management structure, which is based on operating activities. The Company evaluates performance based upon several factors, of which the primary financial measure is segment operating profit. Operating profit provides management, investors and equity analysts a measure to analyze operating performance of each business segment against historical and competitors' data, although historical results, including operating profit, may not be indicative of future results, as operating profit is highly contingent on many factors, including the state of the economy and customer preferences. Several historical seasonal factors usually affect the sales and profits of the Company. The Staffing Services segment's sales and operating profit are always lowest in the Company's first fiscal quarter due to the Thanksgiving, Christmas and New Year holidays, as well as certain customer facilities closing for one to two weeks. During the third and fourth quarters of the fiscal year, this segment benefits from a reduction of payroll taxes when the annual tax contributions for higher salaried employees have been met, and customers increase the use of the Company's administrative and industrial labor during the summer vacation period. Due to the fact that the Company's fiscal year-end is the last Sunday closest to the end of October, periodically its fiscal year is comprised of 53 weeks. Fiscal year 2008 was comprised of 53 weeks. The demand for the Company's services in all segments, both domestically and in its foreign operations, is dependent upon general economic conditions. The Company's business tends to suffer during economic downturns, such as the current recession. The slowing of the economy which has continued into the first quarter of fiscal 2009 has adversely affected the Company's revenue and operating profit. In the three-month period of fiscal 2009, the Company's consolidated net sales totaled $499.7 million and consolidated segment operating loss totaled $8.0 million. The explanations by segment for the three-month period of fiscal 2009 are detailed below. 22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Continued Executive Overview-Continued - ------------------ Staffing Services: The Staffing Services segment's net sales for the three-month period of fiscal 2009 decreased by $56.8 million, or 12%, from the comparable fiscal quarter of 2008. The operating results for the current three-month period decreased by $16.1 million, or 294%, from the comparable fiscal 2008 period. The decrease in operating results in the current quarter from the comparable fiscal 2008 quarter was primarily due to impairment and restructuring charges, the sales decrease and a decrease in gross margin percentage. Telecommunications Services: The Telecommunications Services segment's sales decreased by $22.8 million, or 48%, from the three-month period of fiscal 2008 year; however, the operating results improved by $19.2 million. The improved operating results for three-month period of fiscal 2009 were due to the absence of a $19.3 million reserve taken in the first quarter of fiscal 2008 for certain costs included in inventory related to work performed and for additional costs expected to be incurred to complete work under an installation contract. The installation work on this contract is complete. The Company continues to negotiate with the customer in order for it to be reimbursed for disputed billings under this contract. Computer Systems: The Computer Systems segment's sales decreased by $2.3 million, or 5%, from the three-month period of fiscal 2009, while its operating profit decreased by $0.9 million, or 25%, in the three-month period of fiscal 2009. The decrease in operating results in the three-month period of fiscal 2009 was primarily due to increased overhead costs. Printing and Other: On September 5, 2008, the Company sold the net assets of its directory systems and services and North American telephone directory publishing operations to Yellow Page Group ("YPG"). The net purchase price of $179.3 million was paid in cash at closing. The transaction included the operations of Volt Directory Systems and DataNational, formerly part of the Telephone Directory segment, but excluded the Uruguayan printing and telephone directory operations, which now comprise this new segment. The results of operations of Volt Directory Systems and DataNational have been classified as discontinued and the prior period results have been reclassified. The Printing and Other segment's sales increased by $0.6 million from the three-month period of fiscal 2008, and its operating profit increased by $0.3 million in three-month period of fiscal 2009 due to an increase in the gross margin percentage. The Company has focused, and will continue to focus, on aggressively increasing its market share while attempting to maintain margins in order to increase profits. Despite an increase in costs to solidify and expand their presence in their respective markets, the segments have emphasized cost-containment measures, along with improved credit and collections procedures designed to improve the Company's cash flow. While the Company has implemented a series of cost cutting initiatives, including branch closings, designed to improve performance, a return to historical profit levels will be dependent on a significant economic recovery. 23 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Continued THREE MONTHS ENDED FEBRUARY 1, 2009 COMPARED TO THE THREE MONTHS ENDED JANUARY 27, 2008 Results of Operations - --------------------- The information that appears below relates to prior periods. The results of operations for those periods are not necessarily indicative of the results which may be expected for any subsequent period. The following discussion should be read in conjunction with the Consolidated Financial Statements and Notes thereto which appear in Item 1 of this Report. Consolidated Results of Operations - ---------------------------------- In the first three months of fiscal 2009, consolidated net sales decreased by $81.4 million, or 14%, to approximately $499.7 million, from the comparable period of fiscal 2008. The decrease in the three months' net sales resulted from decreases in Staffing Services of $56.8 million, Telecommunications Services of $22.8 million and Computer Systems of $2.3 million, partially offset by an increase in Printing and Other of $0.6 million. Cost of sales decreased by $89.3 million, or 16%, to $477.8 million, and was 96% of sales, in the three months of fiscal 2009 as compared to 98% of sales in the comparable period of fiscal 2008. The decrease in the cost of sales percentage was primarily due to the $19.3 million loss reserve established in the first quarter of fiscal 2008 in the Telecommunication Services segment. Selling and administrative costs decreased by $0.2 million, or 1%, in the current three-month period from the comparable period in fiscal 2008, and was 4.4% of sales, as compared to 3.8% of sales in the comparable period of fiscal 2008. The increase as a percentage of sales was due to the 14% reduction in sales with no comparable reduction in costs. Impairment and restructuring charges totaled $8.7 million in fiscal 2009. Based upon indicators of impairment in the fourth quarter of fiscal 2008, which included a significant decrease in market capitalization, a decline in recent operating results, and a decline in the Company's business outlook primarily due to the macroeconomic environment, the Company performed an interim impairment test as of November 2, 2008. The Company completed step one of the impairment analysis and concluded that, as of November 2, 2008, the fair value of the Computer Systems and Staffing Services segments were below their respective carrying values including goodwill. Step two of the impairment test was initiated but, due to the time-consuming nature, had not been completed. The Company recorded estimates of impairment in the amount of $41.5 million and $4.9 million, in the Computer Systems and Staffing Services segments, respectively, as of November 2, 2008. During the first quarter of fiscal 2009, the Company completed the step two analysis and recorded an additional impairment in the amount of $6.0 million in the Staffing Services segment. In addition, during the first quarter of fiscal 2009, the Company recorded a pre-tax restructuring charge of approximately $2.7 million related to the elimination of employee positions in the Staffing Services and Computer Services segments from a series of cost cutting initiatives and the closing of a facility in the Staffing Services segment due to the early termination of a contract. In the first quarter of fiscal 2008, a restructuring charge of $1.5 million in the Computer Systems segment was due to the reduction of foreign and domestic personnel as a result of the acquisition and integration of LSSi. Depreciation and amortization decreased by $0.7 million, or 8%, in the current three-month period from the comparable period in fiscal 2008, and was 1.8% of sales, as compared to 1.7% of sales in the comparable period of fiscal 2008. The decrease in depreciation and amortization in the current three months from the comparable 2008 fiscal period was attributable to assets becoming fully depreciated during fiscal 2008. 24 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Continued THREE MONTHS ENDED FEBRUARY 1, 2009 COMPARED TO THE THREE MONTHS ENDED JANUARY 27, 2008--Continued Consolidated Results of Operations -- Continued - ---------------------------------- The Company reported an operating loss of $17.8 million in the current three months, as compared to $19.4 million in the comparable period of fiscal 2008 due to a decrease in segment operating losses of $2.5 million, or 24%, partially offset by an increase of $0.9 million, or 10%, in general corporate expenses. The decrease in segment operating losses was attributable to the decreased operating losses of the Telecommunications Services segment of $19.2 million and increased operating profits in the Printing and Other segment of $0.3 million, partially offset by decreased operating results of the Staffing Services segment of $16.1 million and the Computer Systems segment of $0.9 million. Other expense decreased by $1.4 million, or 85%, in the current three months from the comparable period in fiscal 2008 due to an amended securitization program which resulted in a reduction in securitization fees and an increase in interest expense. Interest expense remained at $1.6 million as a decrease in interest expense due to the reduction in borrowings under the Delta Credit Facility was substantially offset by increases from the aforementioned amended securitization program and increased borrowing under the Company's Credit Facility. The loss from continuing operations before income taxes for the three months of fiscal 2009 totaled $18.8 million compared to a loss from continuing operations of $21.7 million in the comparable three months of fiscal 2008. The Company's effective tax benefit rate on its financial reporting pre-tax loss was 29.1 % in the three months of fiscal 2009 compared to 37.2% in the comparable period in fiscal 2008. Discontinued operations totaled $0.4 million (net of income taxes of $0.3 million) in the three months of fiscal 2008. The net loss in the three months of fiscal 2009 was $13.1 million compared to a net loss of $13.2 million in the comparable period of fiscal 2008. 25 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Continued THREE MONTHS ENDED FEBRUARY 1, 2009 COMPARED TO THE THREE MONTHS ENDED JANUARY 27, 2008--Continued Results of Operations by Segment - -------------------------------- The following two tables reconcile the operating profit by segment to the consolidated statements of operations for the three months ended February 1, 2009:
Three Months Ended February 1, 2009 ----------------------------------- (Dollars in Millions) Staffing Telecommunications Computer Printing Corporate & Total Services Services Systems and Other Eliminations -------- -------- ------- ------- ------ ------- Net Sales $ 499.7 $ 425.0 $ 24.4 $ 48.5 $ 5.8 ($ 4.0) Direct Costs 403.3 363.3 17.6 22.0 4.4 (4.0) Overhead 74.5 51.2 6.1 17.2 -- -- -------- -------- ------- ------- ------ ------- Cost of Sales 477.8 414.5 23.7 39.2 4.4 (4.0) Selling and Administrative 22.1 9.8 0.1 1.8 1.0 9.4 Impairment and Restructuring Costs 8.7 8.2 -- 0.5 -- -- Depreciation and Amortization 8.9 3.1 0.6 4.6 0.2 0.4 -------- -------- ------- ------- ------ ------- Operating (Loss) Profit (17.8) (10.6) -- 2.4 0.2 (9.8) Interest Income 0.6 -- -- -- -- 0.6 Other Expense, net (0.3) -- -- -- -- (0.3) Foreign Exchange Gain 0.3 -- -- -- -- 0.3 Interest Expense (1.6) -- -- -- -- (1.6) -------- -------- ------- ------- ------ ------- (Loss) Income from Continuing Operations before Minority Interest and Income Taxes ($ 18.8) ($ 10.6) -- $ 2.4 $ 0.2 (10.8) ======== ======== ======= ======= ====== =======
26 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Continued THREE MONTHS ENDED FEBRUARY 1, 2009 COMPARED TO THE THREE MONTHS ENDED JANUARY 27, 2008--Continued
Three Months Ended January 27, 2008 ----------------------------------- (Dollars in Millions) Staffing Telecommunications Computer Printing Corporate & Total Services Services Systems and Other Eliminations -------- -------- ------- ------- ------ ------- Net Sales $ 581.1 $ 481.8 $ 47.2 $ 50.8 $ 5.2 ($ 3.9) Direct Costs 484.6 409.3 51.4 23.6 4.2 (3.9) Overhead 82.5 52.7 14.3 15.5 -- -- -------- -------- ------- ------- ------ ------- Cost of Sales 567.1 462.0 65.7 39.1 4.2 (3.9) Selling and Administrative 22.3 11.0 0.1 2.1 0.9 8.2 Impairment and Restructuring Costs 1.5 -- -- 1.5 -- -- Depreciation and Amortization 9.6 3.3 0.6 4.8 0.2 0.7 -------- -------- ------- ------- ------ ------- Operating (Loss) Profit (19.4) 5.5 (19.2) 3.3 (0.1) (8.9) Interest Income 1.3 -- -- -- -- 1.3 Other Expense, net (1.7) -- -- -- -- (1.7) Foreign Exchange Loss (0.3) -- -- -- -- (0.3) Interest Expense (1.6) -- -- -- -- (1.6) -------- -------- ------- ------- ------ ------- (Loss) Income from Continuing Operations before Minority Interest and Income Taxes ($ 21.7) $ 5.5 ($ 19.2) $ 3.3 ($ 0.1) ($ 11.2) ======== ======== ======= ======= ====== =======
Staffing Services - -----------------
Three Months Ended ------------------ February 1, 2009 January 27, 2008 ---------------- ---------------- % of % of Favorable Favorable Net Net (Unfavorable) (Unfavorable) (Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change ------- ----- ------- ----- -------- -------- - -------------------------------------------------------------------------------------------------------------------------------- Gross Staffing Sales $412.7 $468.6 ($55.9) (11.9%) - -------------------------------------------------------------------------------------------------------------------------------- Managed Service Sales (Gross) $255.7 $296.5 ($40.8) (13.7%) - -------------------------------------------------------------------------------------------------------------------------------- Net Sales * $425.0 $481.8 ($56.8) (11.8%) - -------------------------------------------------------------------------------------------------------------------------------- Direct Costs $363.3 85.5% $409.3 85.0% $46.0 11.3% - -------------------------------------------------------------------------------------------------------------------------------- Gross Profit $61.7 14.5% $72.5 15.0% ($10.8) (14.9%) - -------------------------------------------------------------------------------------------------------------------------------- Overhead $51.2 12.1% $52.7 10.9% $1.5 2.8% - -------------------------------------------------------------------------------------------------------------------------------- Selling & Administrative $9.8 2.3% $11.0 2.3% $1.2 11.4% - -------------------------------------------------------------------------------------------------------------------------------- Impairment and restructuring costs $8.2 1.9% -- -- ($8.2) (100.0%) - -------------------------------------------------------------------------------------------------------------------------------- Depreciation & Amortization $3.1 0.7% $3.3 0.7% $0.2 5.5% - -------------------------------------------------------------------------------------------------------------------------------- Segment Operating (Loss) Profit ($10.6) (2.5%) $5.5 1.1% ($16.1) (293.8%) - --------------------------------------------------------------------------------------------------------------------------------
*Net Sales only includes the gross margin on managed service sales. 27 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Continued THREE MONTHS ENDED FEBRUARY 1, 2009 COMPARED TO THE THREE MONTHS ENDED JANUARY 27, 2008--Continued The decrease in net sales of the Staffing Services segment for the three months of fiscal 2009 from the comparable period in fiscal 2008 was comprised of decreases of $34.8 million, or 23%, in net A&I sales and $22.0 million, or 7%, in net Technical sales. Foreign generated net sales for the three months decreased by 29% from the comparable three months of fiscal 2008, and accounted for 6% of total net Staffing Services sales for the current three months. On a constant currency basis, foreign sales increased by 9% from the comparable 2008 three months. In the current three months, the segment's permanent placement sales decreased by 42% and RPO sales decreased by 63% from the comparable three months of fiscal 2008. The decrease in sales was affected by the economic downturn as many of the segment's customers announced layoffs and hiring freezes. The decrease in the segment's operating profit was comprised of decreases of $11.2 million in the Technical division and $4.9 million in the A&I division. The segment's gross margin percentage decreased by 0.5 percentage point, due to decreases of 1.8 percentage points in the A&I division. Overhead percentage increased by 1.2 percentage points from the comparable 2008 period percentages, due to increases of 1.8 percentage points in the A&I division and 1.0 percentage points in the Technical division. While the segment has implemented a series of cost cutting initiatives, including branch closings, designed to improve performance, a return to historical profit levels will be dependent on a significant economic recovery.
Three Months Ended ------------------ February 1, 2009 January 27, 2008 ---------------- ---------------- Technical Resources % of % of Favorable Favorable Division Net Net (Unfavorable) (Unfavorable) (Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change ------- ----- ------- ----- -------- -------- - ------------------------------------------------------------------------------------------------------------------------------ Gross Sales $546.2 $604.5 ($58.3) (9.7%) - ------------------------------------------------------------------------------------------------------------------------------ Net Sales * $306.0 $328.0 ($22.0) (6.7%) - ------------------------------------------------------------------------------------------------------------------------------ Direct Costs $260.9 85.3% $279.9 85.3% $19.0 6.8% - ------------------------------------------------------------------------------------------------------------------------------ Gross Profit $45.1 14.7% $48.1 14.7% ($3.0) (6.4%) - ------------------------------------------------------------------------------------------------------------------------------ Overhead $34.0 11.1% $33.0 10.1% ($1.0) (3.1%) - ------------------------------------------------------------------------------------------------------------------------------ Selling & Administrative $7.0 2.3% $7.8 2.4% $0.8 10.4% - ------------------------------------------------------------------------------------------------------------------------------ Impairment and Restructuring Costs $8.1 2.6% -- -- ($8.1) (100.0%) - ------------------------------------------------------------------------------------------------------------------------------ Depreciation & Amortization $2.5 0.8% $2.6 0.8% $0.1 3.4% - ------------------------------------------------------------------------------------------------------------------------------ Division Operating (Loss) Profit ($6.5) (2.1%) $4.7 1.4% ($11.2) (238.9%) - ------------------------------------------------------------------------------------------------------------------------------
*Net Sales only includes the gross margin on managed service sales. The Technical division's decrease in gross sales in the current three months of fiscal 2009 from the comparable prior year period included decreases of approximately $6 million from customers whose business with the Company either ceased or was substantially lower than in the comparable three months of fiscal 2009, as well as $68 million attributable to net decreases in sales to continuing customers. This was partially offset by increases of approximately $16 million of sales to new customers or customers with substantial increased business. The Technical division's decrease in net sales in the three months of fiscal 2009 from the comparable period in fiscal 2008 was comprised of decreases of $21.9 million, or 8%, in traditional alternative staffing and $0.5 million, or 4%, in net managed service associate vendor sales partially offset by a $0.4 million increase in VMC Consulting project management and consulting sales. 28 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Continued THREE MONTHS ENDED FEBRUARY 1, 2009 COMPARED TO THE THREE MONTHS ENDED JANUARY 27, 2008--Continued Staffing Services--Continued - ----------------- The decrease in the division's operating profit was the result of the sales decrease and the impairment and restructuring costs. Based upon indicators of impairment in the fourth quarter of fiscal 2008, which included a significant decrease in market capitalization, a decline in recent operating results, and a decline in the Company's business outlook primarily due to the macroeconomic environment, the Company performed an interim impairment test at of November 2, 2008. The Company completed step one of the impairment analysis and concluded that, as of November 2, 2008, the fair value of the Staffing Services segment was below its carrying value including goodwill. Step two of the impairment test was initiated but, due to the time-consuming nature, had not been completed. The Company recorded an estimate of impairment in the amount of $4.9 million as of November 2, 2008. During the first quarter of fiscal 2009, the Company completed the step two analyses and recorded an additional impairment in the amount of $6.0 million in the Staffing Services segment. In addition, the division recorded $2.1 million in restructuring costs due the elimination of employee positions from a series of cost cutting initiatives and the closing of a facility due to the early termination of a contract. The restructuring charge included: (1) $0.3 million in severance, which was paid in the first quarter of fiscal 2009; (2) a $1.2 million non-cash charge for the impairment of property, plant and equipment and the closed facility; and (3) an accrual of $0.6 million in rent for the remaining term of the lease at the closed facility. The Company is currently evaluating its overhead structure to determine where additional reductions can be made.
Three Months Ended ------------------ February 1, 2009 January 27, 2008 ---------------- ---------------- Administrative & % of % of Favorable Favorable Industrial Division Net Net (Unfavorable) (Unfavorable) (Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change ------- ----- ------- ----- -------- -------- - --------------------------------------------------------------------------------------------------------------------------- Gross Sales $122.2 $160.6 ($38.4) (23.9%) - --------------------------------------------------------------------------------------------------------------------------- Net Sales * $119.0 $153.8 ($34.8) (22.6%) - --------------------------------------------------------------------------------------------------------------------------- Direct Costs $102.4 86.0% $129.4 84.2% $27.0 21.0% - --------------------------------------------------------------------------------------------------------------------------- Gross Profit $16.6 14.0% $24.4 15.8% ($7.8) (31.6%) - --------------------------------------------------------------------------------------------------------------------------- Overhead $17.2 14.6% $19.7 12.8% $2.5 12.6% - --------------------------------------------------------------------------------------------------------------------------- Selling & Administrative $2.8 2.3% $3.2 2.1% $0.4 13.6% - --------------------------------------------------------------------------------------------------------------------------- Restructuring costs $0.1 -- -- -- ($0.1) (100.0%) - --------------------------------------------------------------------------------------------------------------------------- Depreciation & Amortization $0.6 0.5% $0.7 0.4% $0.1 13.9% - --------------------------------------------------------------------------------------------------------------------------- Division Operating (Loss) Profit ($4.1) (3.4%) $0.8 0.5% ($4.9) (641.7%) - ---------------------------------------------------------------------------------------------------------------------------
*Net Sales only includes the gross margin on managed service sales. The A&I division's decrease in gross sales in the first three months of fiscal 2009 as compared to the comparable period of fiscal 2008 included a decline of approximately $14 million of sales to customers which the Company either ceased or substantially reduced servicing in the current year, as well as $33 million attributable to net decreases in sales to continuing customers. This was partially offset by a growth of approximately $9 million from new customers, or customers whose business with the Company in the comparable fiscal period was substantially below their volume for the first three-months of fiscal 2009. 29 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Continued THREE MONTHS ENDED FEBRUARY 1, 2009 COMPARED TO THE THREE MONTHS ENDED JANUARY 27, 2008--Continued Staffing Services--Continued - ----------------- The decreased operating results were primarily due to the sales decrease, the decrease in gross margin percentage and the increase in overhead as a percentage of sales. The decrease in gross margin percentage was primarily due to a 0.4 percentage point decrease in markup on recruited sales, a 0.6 percentage point increase in workers' compensation costs as a percentage of direct labor, a $1.2 million reduction in higher margin permanent placement sales, partially offset by a 0.4 percentage reduction in payroll taxes as a percentage of sales. The increase in workers' compensation costs was a result of a $1.2 million adjustment recognized in the first quarter of fiscal 2008 related to improvements in claims experience and the regulatory environment in several states. These improvements are now reflected in lower accrual rates and no further adjustment was required in the first quarter of fiscal 2009. The payroll tax reduction is expected to continue throughout the remainder of the fiscal year. Although overheads have decreased from the comparable 2008 quarter, the increase in overhead percentage in the first three months of fiscal 2009 is a result of the sales reduction with a slower decrease in overhead. The indirect labor headcount has been decreased by 5% from the comparable quarter in fiscal 2008, and the Company is currently evaluating its overhead structure to determine where additional overhead reductions can be made. Although the markets for the segment's services include a broad range of industries throughout the United States, Europe and Asia, general economic difficulties in specific geographic areas or industrial sectors have in the past and could in the future affect the profitability of the segment. Much of the segment's business is obtained through submission of competitive proposals for staffing services and other contracts which are frequently re-bid after expiration. Many of this segment's long-term contracts contain cancellation provisions under which the customer can cancel the contract, even if the segment is not in default under the contract, and generally do not provide for a minimum amount of work to be awarded to the segment. While the Company has historically secured new contracts and believes it can secure renewals and/or extensions of most of these contracts, some of which are material to this segment, and obtain new business, there can be no assurance that contracts will be renewed or extended, or that additional or replacement contracts will be awarded to the Company on satisfactory terms. Telecommunications Services - ---------------------------
Three Months Ended ------------------ February 1, 2009 January 27, 2008 ---------------- ---------------- % of % of Favorable Favorable Net Net (Unfavorable) (Unfavorable) (Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change ------- ----- ------- ----- -------- -------- - ----------------------------------------------------------------------------------------------------------------------------- Net Sales $24.4 $47.2 ($22.8) (48.4%) - ----------------------------------------------------------------------------------------------------------------------------- Direct Costs $17.6 72.2% $51.4 108.8% $33.8 65.7% - ----------------------------------------------------------------------------------------------------------------------------- Gross Profit (Loss) $6.8 27.8% ($4.2) (8.8%) $11.0 262.5% - ----------------------------------------------------------------------------------------------------------------------------- Overhead $6.1 25.0% $14.3 30.3% $8.2 57.2% - ----------------------------------------------------------------------------------------------------------------------------- Selling & Administrative $0.1 0.4% $0.1 0.3% -- -- - ----------------------------------------------------------------------------------------------------------------------------- Depreciation & Amortization $0.6 2.4% $0.6 1.2% -- -- - ----------------------------------------------------------------------------------------------------------------------------- Segment Operating Loss -- -- ($19.2) (40.6%) $19.2 100.0% - -----------------------------------------------------------------------------------------------------------------------------
30 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Continued THREE MONTHS ENDED FEBRUARY 1, 2009 COMPARED TO THE THREE MONTHS ENDED JANUARY 27, 2008--Continued Telecommunications Services--Continued - --------------------------- The Telecommunications Services segment's sales decrease in the first three months of fiscal 2009 from the comparable period of fiscal 2008 was due to decreases of $22.3 million, or 59% in the Construction and Engineering division and $0.5 million, or 6%, in other divisions. The sales decrease in the Construction and Engineering division in the first three months of fiscal 2009 was largely due to a large installation contract with substantial revenue in the first quarter of fiscal 2008 that was completed by the end of fiscal 2008, partially offset by a net increase in the recognition of revenue in fiscal 2009 for several large contracts accounted for using the percentage-of-completion method of accounting. The segment's sales backlog at the end of the first quarter of fiscal 2009 was $30 million, as compared to a backlog of approximately $69 million at the end of the comparable 2008 quarter. The increased operating results for the three months were due to a $19.3 million loss reserve established in the first quarter of fiscal 2008 for certain costs included in inventory related to work performed and for additional costs expected to be incurred to complete work under that contract. That contract was completed at the end of fiscal 2008, and the Company continues to negotiate with the customer to be reimbursed for disputed billings under the contract. The decreased overhead for the first three months of fiscal 2009 was related to an indirect headcount reduction of approximately 50% from the first quarter of fiscal 2008. The segment continues to focus on reducing overhead costs to compensate for lower sales. A substantial portion of the business in this segment is obtained through the submission of competitive proposals for contracts, which typically expire within one to three years and are re-bid. Many of this segment's long-term contracts contain cancellation provisions under which the customer can cancel the contract, even if the segment is not in default under the contract and generally do not provide for a minimum amount of work to be awarded to the segment. While the Company believes it can secure renewals and/or extensions of most of these contracts, some of which are material to this segment, and obtain new business, there can be no assurances that contracts will be renewed or extended or that additional or replacement contracts will be awarded to the Company on satisfactory terms. Computer Systems - ----------------
Three Months Ended ------------------ February 1, 2009 January 27, 2008 ---------------- ---------------- % of % of Favorable Favorable Net Net (Unfavorable) (Unfavorable) (Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change ------- ----- ------- ----- -------- -------- - ----------------------------------------------------------------------------------------------------------- Net Sales $48.5 $50.8 ($2.3) (4.5%) - ----------------------------------------------------------------------------------------------------------- Direct Costs $22.0 45.4% $23.6 46.4% $1.6 6.7% - ----------------------------------------------------------------------------------------------------------- Gross Profit $26.5 54.6% $27.2 53.6% ($0.7) (2.6%) - ----------------------------------------------------------------------------------------------------------- Overhead $17.2 35.5% $15.5 30.6% ($1.7) (11.0%) - ----------------------------------------------------------------------------------------------------------- Selling & Administrative $1.8 3.7% $2.1 4.0 % $0.3 12.6% - ----------------------------------------------------------------------------------------------------------- Restructuring $0.5 1.0% $1.5 3.0% $1.0 69.1% - ----------------------------------------------------------------------------------------------------------- Depreciation & Amortization $4.6 9.4% $4.8 9.6% $0.2 6.2% - ----------------------------------------------------------------------------------------------------------- Segment Operating Profit $2.4 5.0% $3.3 6.4% ($0.9) (25.3%) - -----------------------------------------------------------------------------------------------------------
31 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Continued THREE MONTHS ENDED FEBRUARY 1, 2009 COMPARED TO THE THREE MONTHS ENDED JANUARY 27, 2008--Continued Computer Systems--Continued - ---------------- The Computer Systems segment's sales decrease in the three months of fiscal 2009 from the comparable period of fiscal 2008 was comprised of a decrease of $4.2 million, or 22%, in database access transaction fee revenue, including ASP directory assistance, partially offset by increases of $1.4 million, or 9%, in the Maintech division's IT maintenance and $0.5 million, or 3%, in projects and other. The reduction in sales in fiscal 2009 from the comparable 2008 fiscal quarter included decreases of approximately $3 million of sales from customers whose business with the Company either ceased or was substantially lower than in the first quarter of fiscal 2008, as well as $3 million attributable to net decreases in sales to continuing customers. This was partially offset by sales increases of approximately $4 million to new customers, or customers with substantial increased business. The decrease in transaction fee revenue was primarily due to a reduction of such services to a major customer as the customer agreement transitions to a fixed monthly fee model from a variable transaction-based pricing model, partially offset by an increase at a major customer. The segment's decreased operating profit was primarily due to the decrease in sales and the increase in overhead in dollars and as a percentage of sales, partially offset by the increase in gross margin percentage. The increased gross profit percentage was a result of increased margins from the database access fees and projects and other revenue. The increased overhead costs were primarily due to increased communications costs related to a new business initiative, along with increased indirect labor. This segment's results are highly dependent on the volume of calls to the segment's customers that are processed by the segment under existing contracts with telephone companies, the segment's ability to continue to secure comprehensive telephone listings from others, its ability to obtain additional customers for these services, its continued ability to sell products and services to new and existing customers and consumer demands for its customers' services. Printing and Other - ------------------
Three Months Ended ------------------ February 1, 2009 January 27, 2008 ---------------- ---------------- % of % of Favorable Favorable Net Net (Unfavorable) (Unfavorable) (Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change ------- ----- ------- ----- -------- -------- - -------------------------------------------------------------------------------------------------------- Net Sales $5.8 $5.2 $0.6 11.9% - -------------------------------------------------------------------------------------------------------- Direct Costs $4.4 75.5% $4.2 80.8% ($0.2) (4.5%) - -------------------------------------------------------------------------------------------------------- Gross Profit $1.4 24.5% $1.0 19.2% $0.4 43.0% - -------------------------------------------------------------------------------------------------------- Selling & Administrative $1.0 18.1% $0.9 17.6% ($0.1) (15.2%) - -------------------------------------------------------------------------------------------------------- Depreciation & Amortization $0.2 3.2% $0.2 3.8% -- -- - -------------------------------------------------------------------------------------------------------- Segment Operating Profit (Loss) $0.2 3.2% ($0.1) (2.2%) $0.3 266.4% - --------------------------------------------------------------------------------------------------------
On September 5, 2008, the Company sold the net assets of its directory systems and services and North American telephone directory publishing operations to Yellow Page Group. The net purchase price of approximately $179 million was paid in cash at closing. 32 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Continued THREE MONTHS ENDED FEBRUARY 1, 2009 COMPARED TO THE THREE MONTHS ENDED JANUARY 27, 2008--Continued Printing and Other - Continued - ------------------ The transaction included the operations of Volt Directory Systems and Services and DataNational, formerly part of the Telephone Directory segment, but excluded the Uruguayan printing and telephone directory operations, which now comprise this new segment. The results of operations of Volt Directory Systems and DataNational have been classified as discontinued operations in the prior period results. The Printing and Other segment's sales increased by $0.6 million from the comparable three-month period in fiscal 2008. The sales increase was comprised of printing sales. The Printing and Other sales in the first three months of fiscal 2009 as compared to the comparable period of fiscal 2008 included a growth of approximately $1.1 million from new customers, or customers whose business with the Company in the comparable fiscal period was substantially below the volume for the three-month 2009 fiscal period volume, partially offset by a decline of approximately $0.3 million of sales to customers which the Company either ceased or substantially reduced servicing in the first quarter of fiscal 2009, as well as $0.2 million attributable to net decreases in sales to continuing customers. The improved operating results for the three months of fiscal 2009 were predominantly due to the increase in sales and gross margin percentage. General Corporate Expenses and Other Income (Expense) - -----------------------------------------------------
Three Months Ended ------------------ February 1, 2009 January 27, 2008 ---------------- ---------------- % of % of Favorable Favorable Net Net (Unfavorable) (Unfavorable) (Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change ------- ----- ------- ----- -------- -------- - ---------------------------------------------------------------------------------------------------- Selling & Administrative $9.4 1.9% $8.2 1.4% ($1.2) (13.9%) - ---------------------------------------------------------------------------------------------------- Depreciation & Amortization $0.4 0.1% $0.7 0.1% $0.3 38.0% - ---------------------------------------------------------------------------------------------------- Interest Income $0.6 0.1% $1.3 0.2% ($0.7) (52.9%) - ---------------------------------------------------------------------------------------------------- Other Expense ($0.3) -- ($1.7) (0.3%) $1.4 85.2% - ---------------------------------------------------------------------------------------------------- Foreign Exchange Gain (Loss) $0.3 0.1% ($0.3) (0.1%) $0.6 191.3% - ---------------------------------------------------------------------------------------------------- Interest Expense ($1.6) (0.3%) ($1.6) (0.3%) -- -- - ----------------------------------------------------------------------------------------------------
The changes in general corporate expenses and other income (expense) for the three months of fiscal 2009 as compared to the comparable 2008 period, were: The increase in selling and administrative expenses in the current three months from the comparable 2008 fiscal period was primarily the result of increased labor and communications costs. The decrease in depreciation and amortization in the three months of fiscal 2009 from the comparable 2008 fiscal period was due to portions of the corporate resource planning system becoming fully amortized. The decrease in interest income from the comparable period in fiscal 2008 was due to lower interest rates and a reduction in premium deposits held by insurance companies and restricted cash. The decrease in other expense from the comparable period in fiscal 2008 was due to an amended securitization program which resulted in a reduction in securitization fees and an increase in interest expense. 33 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Continued THREE MONTHS ENDED FEBRUARY 1, 2009 COMPARED TO THE THREE MONTHS ENDED JANUARY 27, 2008--Continued Interest expense reflected no change from the comparable period in fiscal 2008 due to lower borrowings under the securitization agreement offset by the aforementioned amendment to the securitization program. Liquidity and Capital Resources - ------------------------------- Cash and cash equivalents, increased by $13.8 million to $134.7 million in the three months ended February 1, 2009. Operating activities provided $11.4 million of cash in the first three months of fiscal 2009. In the comparable fiscal 2008 period, operating activities provided $10.9 million in cash. Operating activities in the first three months of fiscal 2009, exclusive of changes in operating assets and liabilities, provided $2.2 million of cash, as the Company's net loss of $13.1 million included non-cash charges primarily for depreciation and amortization of $8.9 million, goodwill impairment of $6.0 million and the impairment of property, plant and equipment of $1.2 million. Operating activities in the first three months of fiscal 2008, exclusive of changes in operating assets and liabilities, used $7.9 million of cash, as the Company's net loss of $13.2 million included non-cash charges primarily for depreciation and amortization of $9.6 million, accounts receivable provisions of $4.2 million partially offset by a deferred tax benefit of $8.1 million. Changes in operating assets and liabilities produced $9.2 million of cash, net, in the first three months of fiscal 2009 principally due to a decrease in the level of accounts receivable of $89.0 million and a decrease in the level of inventory, primarily in the Telecommunications Services segment, of $8.3 million offset by a decrease in income tax liability of $63.4 million, and a decrease in accounts payable of $23.3 million. Changes in operating assets and liabilities produced $18.8 million of cash, net, in the first three months of fiscal 2008 principally due to a decrease in the level of accounts receivable of $38.1 million and a decrease in the level of inventory, primarily in the Telecommunications Services segment, of $21.6 million offset by a reduction in securitization of receivables of $20.0 million and a decrease in accounts payable of $18.0 million. The $7.1 million of cash applied to investing activities for the first three months of fiscal 2009 resulted from the expenditures for net additions to property, plant and equipment. The $7.8 million of cash applied to investing activities for the first three months of fiscal 2008 resulted primarily from the expenditures of $7.7 million for net additions to property, plant and equipment. The principal factor in the $9.0 million of cash provided by financing activities in the first three months of fiscal 2009 was an increase in notes payable. The principal factors in the $6.4 million of cash used by financing activities in the first three months of fiscal 2008 were a payment of $8.1 million for the purchase of treasury shares partially offset by an increase in notes payable of $1.8 million. Commitments - ----------- There has been no material change through February 1, 2009 in the Company's contractual obligations and other commercial commitments from that reported in the Company's Annual Report on Form 10-K for the fiscal year ended November 2, 2008. 34 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Continued Off-Balance Sheet Financing - --------------------------- The Company has no off-balance sheet financing arrangements, as that term has meaning in Item 303(a) (4) of Regulation S-K. Credit Lines - ------------ At February 1, 2009, the Company had credit facilities with various banks and financial conduits which provided for borrowings and letters of credit of up to an aggregate of $326.8 million, including the Company's $175.0 million five-year accounts receivable securitization program (the "Amended Securitization Program"), $42.0 million five-year unsecured revolving credit agreement ("Credit Agreement") and the Company's wholly owned subsidiary, Volt Delta Resources, LLC's ("Volt Delta") $100.0 million secured, syndicated revolving credit agreement ("Delta Credit Facility").The Company had total outstanding borrowings of $116.7 million as of February 1, 2009. Included in these borrowings were $22.7 million of foreign currency borrowings which provide economic hedges against foreign denominated net assets. Amended Securitization Program - ------------------------------ On June 3, 2008, the Company's $200.0 million accounts receivable securitization program (see Note B), which was due to expire within the next year, was transferred to a multi-buyer program administered by PNC Bank. The Amended Securitization Program has a five-year term. The conduits' commercial paper facilities are backed by liquidity agreements which are periodically renewed with the sponsor banks and have initial terms of 364 days ("364 day liquidity"). Under the Amended 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, borrows from two commercial paper conduits (Market Street Funding LLC, a PNC Bank affiliate, and Relationship Funding LLC), secured by an undivided percentage ownership interest in the pool of receivables Volt Funding acquires from the Company. The Company retains the servicing responsibility for the accounts receivable. The Amended Securitization Program is not an off-balance sheet arrangement as Volt Funding is a 100% owned consolidated subsidiary of the Company. The receivables and related borrowings remain on the balance sheet since Volt Funding effectively retains control over the receivables, which are no longer treated as sold assets. Accordingly, pledged receivables are included as trade accounts receivable, net, while the corresponding borrowings are included as short-term borrowings on the condensed consolidated balance sheet. At February 1, 2009, Volt Funding had borrowed from $42.9 million and $17.1 million from Market Street Funding and Relationship Funding, respectively. At February 1, 2009, borrowings bear a weighted-average interest rate of 2.3% per annum, excluding a facility fee of 0.75% per annum paid on the entire facility and a program fee of 0.5% paid on the outstanding borrowings. The Amended Securitization Program is subject to termination by PNC Bank (with the consent of the majority purchasers) under certain circumstances, including, among other things, the default rate, as defined, on receivables exceeding a specified threshold, or the rate of collections on receivables failing to meet a specified threshold. At February 1, 2009, the Company was in compliance with all requirements of the Amended Securitization Program. 35 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Continued Credit Lines--Continued - ------------ Credit Agreement - ---------------- On February 28, 2008, the Company entered into the Credit Agreement to replace the Company's then expiring $40.0 million secured credit agreement with an unsecured 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 and $25.0 million for borrowing in alternative currencies. At February 1, 2009, $12.0 million was drawn on this facility. The administrative agent for the Credit Facility is Bank of America, N.A. The other banks participating in the Credit Facility are JP Morgan Chase Bank, N.A. as syndicated agent, Wells Fargo Bank, N.A. and HSBC Bank USA, N.A. Borrowings under the Credit Agreement bear interest at various rate options selected by the Company at the time of each borrowing. Certain rate options, together with a facility fee, are based on a leverage ratio, as defined. Based upon the Company's leverage ratio at February 1, 2009, if a three-month U.S. Dollar LIBO rate were the interest rate option selected by the Company, borrowings would have borne interest at the rate of 1.9% per annum, excluding a fee of 0.2% per annum paid on the entire facility. The Credit Agreement provides for the maintenance of various financial ratios and covenants, including, among other things, a requirement that the Company maintain a consolidated tangible net worth, as defined; a limitation on total funded debt to EBITDA of 3.0 to 1.0; and a requirement that the Company maintain a minimum ratio of EBITDA, as defined, to interest expense, as defined, of 4.0 to 1.0 for the twelve months ended as of the last day of each fiscal quarter. The Credit Agreement also imposes limitations on, among other things, the incurrence of additional indebtedness, the level of annual capital expenditures, and the amount of investments, including business acquisitions and mergers, and loans that may be made by the Company to its subsidiaries. The Company was in compliance with all covenants of the Credit Agreement at February 1, 2009. Delta Credit Facility - --------------------- In December 2006, Volt Delta entered into the secured Delta Credit Facility, which expires in December 2009, with Wells Fargo, N.A. as the administrative agent and arranger, and as a lender thereunder. Wells Fargo and two of the other three lenders under the Delta Credit Facility, Bank of America, N.A. and JPMorgan Chase, also participate in the Company's $42.0 million unsecured revolving Credit Facility. Neither the Company nor Volt Delta guarantees each other's facility but certain subsidiaries of each are guarantors of their respective parent company's facility. The Delta Credit Facility allows for the issuance of revolving loans and letters of credit in the aggregate of $100.0 million with a sublimit of $10.0 million on the issuance of letters of credit. At February 1, 2009, $40.6 million was drawn on this facility. Certain interest rate options, as well as the commitment fee, are based on a leverage ratio, as defined, which resets quarterly. Based upon Volt Delta's leverage ratio at February 1, 2009, if a three-month U.S. Dollar LIBO rate were the interest rate option selected by the Company, borrowings would have borne interest at the rate of 1.2% per annum. Volt Delta also pays a commitment fee on the unused portion of the Delta Credit Facility which varies based on Volt Delta's leverage ratio. At February 1, 2009, the commitment fee was 0.3% per annum. The Delta Credit Facility provides for the maintenance of various financial ratios and covenants, including, among other things, a total debt to EBITDA ratio, as defined, which cannot exceed 2.0 to 1.0 on the last day of any fiscal quarter, a fixed charge coverage ratio, as defined, which cannot be less than 2.5 to 1.0 for the twelve months ended as of the last day of each fiscal quarter and the maintenance of a consolidated net worth, as 36 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Continued Credit Lines--Continued - ------------ defined. The Delta Credit Facility also imposes limitations on, among other things, incurrence of additional indebtedness or liens, the amount of investments including business acquisitions, creation of contingent obligations, sales of assets (including sale leaseback transactions) and annual capital expenditures. At February 1, 2009, Volt Delta was in compliance with all covenants in the Delta Credit Facility. On February 12, 2009, the Delta Credit Facility was voluntarily reduced from $100.0 million to $75.0 million. Summary - ------- The Company believes that its current financial position, working capital, future cash flows from operations, credit lines and accounts receivable Securitization Program will be sufficient to fund its presently contemplated operations and satisfy its obligations through at least the next twelve months. Critical Accounting Policies - ---------------------------- Management's discussion and analysis of its financial position and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates, judgments, assumptions and valuations that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures. Future reported results of operations could be impacted if the Company's estimates, judgments, assumptions or valuations made in earlier periods prove to be different from what actually occurs. Management believes the critical accounting policies and areas that require the most significant estimates, judgments, assumptions or valuations used in the preparation of the Company's financial statements are as follows: Revenue Recognition - The Company derives its revenues from several sources. The revenue recognition methods, which are consistent with those prescribed in Staff Accounting Bulletin 104 ("SAB 104"), "Revenue Recognition in Financial Statements," are described below in more detail for the significant types of revenue within each of its segments. Revenue is generally recognized when persuasive evidence of an arrangement exists, we have delivered the product or performed the service, the fee is fixed and determinable and collectibility is probable. The determination of whether and when some of the criteria below have been satisfied sometimes involves assumptions and judgments that can have a significant impact on the timing and amount of revenue we report. Staffing Services: Staffing: Sales are derived from the Company's Staffing Solutions Group supplying its own temporary personnel to its customers, for which the Company assumes the risk of acceptability of its employees to its customers, and has credit risk for collecting its billings after it has paid its employees. The Company reflects revenues for these services on a gross basis in the period the services are rendered. In the first three months of fiscal 2009, this revenue comprised approximately 76% of the Company's net consolidated sales. 37 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Continued Critical Accounting Policies--Continued - ---------------------------- Managed Services: Sales are generated by the Company's E-Procurement Solutions subsidiary, ProcureStaff, for which the Company receives an administrative fee for arranging for, billing for and collecting the billings related to staffing companies ("associate vendors") who have supplied personnel to the Company's customers. The administrative fee is either charged to the customer or subtracted from the Company's payment to the associate vendor. The customer is typically responsible for assessing the work of the associate vendor, and has responsibility for the acceptability of its personnel, and in most instances the customer and associate vendor have agreed that the Company does not pay the associate vendor until the customer pays the Company. Based upon the revenue recognition principles prescribed in Emerging Issues Task Force ("EITF") 99-19, "Reporting Revenue Gross as a Principal versus Net as an Agent," revenue for these services, where the customer and the associate vendor have agreed that the Company is not at risk for payment, is recognized net of associated costs in the period the services are rendered. In addition, sales for certain contracts generated by the Company's Staffing Solutions Group's managed services operations have similar attributes. In the first three months of fiscal 2009, this revenue comprised approximately 2% of the Company's net consolidated sales. Outsourced Projects: Sales are derived from the Company's Information Technology Solutions operation providing outsource services for a customer in the form of project work, for which the Company is responsible for deliverables, in accordance with the American Institute of Certified Public Accountants ("AICPA") Statement of Position ("SOP") 81-1, "Accounting for Performance of Construction-Type Contracts." The Company's employees perform the services and the Company has credit risk for collecting its billings. Revenue for these services is recognized on a gross basis in the period the services are rendered when on a time and material basis, and when the Company is responsible for project completion, revenue is recognized when the project is complete and the customer has approved the work. In the first three months of fiscal 2009, this revenue comprised approximately 7% of the Company's net consolidated sales. Telecommunications Services: Construction: Sales are derived from the Company supplying aerial and underground construction services. The Company's employees perform the services, and the Company takes title to all inventory, and has credit risk for collecting its billings. The Company relies upon the principles in SOP 81-1, using the completed-contract method, to recognize revenue on a gross basis upon customer acceptance of the project or by the percentage-of-completion method, when applicable. When using the percentage-of-completion method, revenue is recognized based on the extent of progress towards completion of the contract. For those contracts in which the customers approve the progress of our work, the extent of progress towards completion is measured based on the ratio of revenue approved-to-date to the total estimated revenue at completion of the job. For those contracts in which the customers do not approve the progress of our work, the extent of progress towards completion is measured based on the ratio of direct labor incurred-to-date to the total estimated direct labor at completion of the contract. In the first three months of fiscal 2009, this revenue comprised approximately 3% of the Company's net consolidated sales. Non-Construction: Sales are derived from the Company performing design, engineering and business systems integrations work. The Company's employees perform the services and the Company has credit risk for collecting its billings. Revenue for these services is recognized on a gross basis in the period in which services are performed, and, if applicable, any completed units are delivered and accepted by the customer. In the first three months of fiscal 2009, this revenue comprised approximately 2% of the Company's net consolidated sales. 38 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Continued Critical Accounting Policies--Continued - ---------------------------- Computer Systems: Database Access: Sales are derived from the Company granting access to its proprietary telephone listing databases to telephone companies, inter-exchange carriers and non-telco enterprise customers. The Company uses its own databases and has credit risk for collecting its billings. The Company recognizes revenue on a gross basis in the period in which the customers access the Company's databases. In the first three months of fiscal 2009, this revenue comprised approximately 3% of the Company's net consolidated sales. IT Maintenance: Sales are derived from the Company providing hardware maintenance services to the general business community, including customers who have our systems, on a time and material basis or a contract basis. The Company uses its own employees and inventory in the performance of the services, and has credit risk for collecting its billings. Revenue for these services is recognized on a gross basis in the period in which the services are performed, contingent upon customer acceptance when on a time and material basis, or over the life of the contract, as applicable. In the first three months of fiscal 2009, this revenue comprised approximately 3 % of the Company's net consolidated sales. Telephone Systems: Sales are derived from the Company providing telephone operator services-related systems and enhancements to existing systems, equipment and software to customers. The Company uses its own employees and has credit risk for collecting its billings. The Company relies upon the principles in SOP 97-2 "Software Revenue Recognition" and EITF 00-21, "Revenue Arrangements with Multiple Deliverables" to recognize revenue on a gross basis upon customer acceptance of each part of the system based upon its fair value or by the use of the percentage-of-completion method, when applicable. In the first three months of fiscal 2009, this revenue comprised approximately 3% of the Company's net consolidated sales. Printing and Other: Printing: Sales are derived from the Company's sales of printing services in Uruguay. The Company's employees perform the services and the Company has credit risk for collecting its billings. Revenue for these services is recognized on a gross basis in the period the printed documents have been delivered. In the first three months of fiscal 2009, this revenue comprised approximately 1% of the Company's net consolidated sales. Other: Sales are derived from the Company's sales of telephone directory advertising for books it publishes as an independent publisher in Uruguay. The Company's employees perform the services and the Company has credit risk for collecting its billings. Revenue for these services is recognized on a gross basis in the period the books are printed and delivered. In the first three months of fiscal 2009, this revenue comprised less than 1% of the Company's net consolidated sales. For those contracts accounted for under SOP 81-1, 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. 39 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Continued Critical Accounting Policies--Continued - ---------------------------- Allowance for Uncollectible Accounts - The establishment of an allowance requires the use of judgment and assumptions regarding potential losses on receivable balances. Allowances for accounts receivable are maintained based upon historical payment patterns, aging of accounts receivable and actual write-off history. The Company also makes judgments about the creditworthiness of significant customers based upon ongoing credit evaluation, and might assess current economic trends that might impact the level of credit losses in the future. However, since a reliable prediction of future changes in the financial stability of customers is not possible, the Company cannot guarantee that allowances will continue to be adequate. If actual credit losses are significantly higher or lower than the allowance established, it would require a related charge or credit to earnings. Goodwill and Indefinite-Lived Intangible Assets - Under Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," goodwill and indefinite-lived intangible assets are subject to annual impairment testing using fair value methodologies, which compare the fair value of each reporting unit to its carrying value. The Company performs its annual impairment testing during its second fiscal quarter, or more frequently if indicators of impairment arise. The timing of the impairment test may result in charges to earnings in a quarter that could not have been reasonably foreseen in prior periods. The Company generally determines the fair value of a reporting unit using the income approach, which is based on the present value of estimated future cash flows, or the market approach, which compares the business unit's multiples of sales and EBITDA to those multiples of its competitors. If the carrying value of the reporting unit's net assets including goodwill exceeds the fair value of the reporting unit, then the Company performs step two of the impairment test which allocates the fair value of the reporting unit's assets and liabilities in a manner similar to a purchase price allocation, with any residual fair value being allocated to goodwill. If the carrying value of a reporting unit's goodwill exceeds its implied fair value, then an impairment of goodwill has occurred for such amount and is reported as a component of operating income. If these estimates or their related assumptions used in the impairment test change in the future as a result of changes in strategy and/or market conditions, the Company may be required to record an impairment charge in the future. Based upon indicators of impairment in the fourth quarter of fiscal 2008, which included a significant decrease in market capitalization, a decline in recent operating results, and a decline in the Company's business outlook primarily due to the current macroeconomic environment, the Company performed an interim impairment test as of November 2, 2008 on each of its four segments. The Company completed step one of the impairment analysis and concluded that, as of November 2, 2008, the fair value of the Computer Systems and Staffing Services segments were below their respective carrying values including goodwill. Step two of the impairment test was initiated but, due to the time-consuming nature, had not been completed at that time. The Company recorded estimates of impairment in the amount of $41.5 million and $4.9 million, in the Computer Systems and Staffing Services segments, respectively, as of November 2, 2008. During the first quarter of fiscal 2009, the Company completed the step two analyses and recorded an additional impairment in the amount of $6.0 million in the Staffing Services segment. The Company considered the income, market and cost approaches in arriving at our indicators of value. The Company relied on the income and market approaches to arrive at its valuation conclusion. The cost approach was viewed as the floor for the value of the reporting units and was calculated based on the book value of working capital. The income approach was given greater weight than the market approach due to the lack of strongly comparable companies, the significant fluctuations in the financial markets and the lack of recently comparable transactions. The material assumptions used for the income approach were the forecasted revenue growth by reporting unit as well as the discount rate and long-term growth rate. The Company considered historical rates and current market conditions when determining the discount and growth rates used in its analyses. For the market approach the material assumptions were financial data for comparable companies, 40 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Continued Critical Accounting Policies--Continued - ---------------------------- adjusted for differences in size, diversification and profitability. The Company also considered the control premium (which can be defined as the difference between fair value and market price) and other qualitative factors including its low float, concentrated ownership and limited analyst coverage. Long-Lived Assets - Property, plant and equipment are recorded at cost, and depreciation and amortization are provided on the straight-line or accelerated methods at rates calculated to allocate the cost of the assets over their period of use. Intangible assets, other than goodwill and indefinite-lived intangible assets, and property, plant and equipment are reviewed for impairment in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." Under SFAS No. 144, these assets are tested for recoverability whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. Circumstances which could trigger a review include, but are not limited to: significant decreases in the market price of the asset; significant adverse changes in the business climate or legal factors; the accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of the asset; current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the asset; and a current expectation that the asset will more likely than not be sold or disposed of significantly before the end of its estimated useful life. Recoverability is assessed based on the carrying amount of the asset and the sum of the undiscounted cash flows expected to result from the use and the eventual disposal of the asset or asset group. An impairment loss is recognized when the carrying amount exceeds the estimated fair value of the asset or asset group. The impairment loss is measured as the amount by which the carrying amount exceeds fair value. 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 SOP No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." Subsequent to the preliminary project planning and approval stage, all appropriate costs are capitalized until the point at which the software is ready for its intended use. Subsequent to the software being used in operations, the capitalized costs are transferred from costs-in-process to completed property, plant and equipment, and are accounted for as such. All post-implementation costs, such as maintenance, training and minor upgrades that do not result in additional functionality, are expensed as incurred. The capitalization process involves judgment as to what types of projects and tasks are capitalizable. Although the Company believes the decisions made in the past concerning the accounting treatment of these software costs have been reasonable and appropriate, different decisions could materially impact financial results. 41 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Continued Critical Accounting Policies--Continued - ---------------------------- Income Taxes - Estimates of Effective Tax Rates, Deferred Taxes and Valuation Allowance - When the financial statements are prepared, the Company estimates its income taxes based on the various jurisdictions in which business is conducted. Significant judgment is required in determining the Company's worldwide income tax provision. Liabilities for anticipated tax audit issues in the United States and other tax jurisdictions are based on estimates of whether, and the extent to which, additional taxes will be due. The recognition of these provisions for income taxes is recorded in the period in which it is determined that such taxes are due. If in a later period it is determined that payment of this additional amount is unnecessary, a reversal of the liability is recognized. As a result, the ongoing assessments of the probable outcomes of the audit issues and related tax positions require judgment and can materially increase or decrease the effective tax rate and materially affect the Company's operating results. This also requires the Company to estimate its current tax exposure and to assess temporary differences that result from differing treatments of certain items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are reflected on the balance sheet. The Company must then assess the likelihood that its deferred tax assets will be realized. To the extent it is believed that realization is not likely, a valuation allowance is established. When a valuation allowance is increased or decreased, a corresponding tax expense or benefit is recorded in the statement of operations. The deferred tax asset at February 1, 2009 was $11.8 million, net of the valuation allowance of $5.6 million. The valuation allowance was recorded to reflect uncertainties about whether the Company will be able to utilize some of its deferred tax assets (consisting primarily of foreign net operating loss carryforwards) before they expire. The valuation allowance is based on estimates of taxable income for the applicable jurisdictions and the period over which the deferred tax assets will be realizable. Effective October 29, 2007, the Company adopted the provisions of FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109" ("FIN 48"). FIN 48 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. There was no material impact on the Company's consolidated financial position and results of operations as a result of the adoption of the provisions of FIN 48. Securitization Program - On June 3, 2008, the Company's $200.0 million accounts receivable securitization program (see Note B), which was due to expire within the next year, was transferred to a multi-buyer program administered by PNC Bank. The Amended Securitization Program has a five-year term (subject to 364 day liquidity). On January 7, 2009, the Amended Securitization Program was further amended to reduce the size of the facility from $200.0 million to $175.0 million and to extend the 364-day liquidity to January 6, 2010. The scheduled expiration of the Amended Securitization Program was not amended, and remains 2013. Under the Amended 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, a wholly-owned special purpose subsidiary of the Company. Volt Funding, in turn, borrows from two commercial paper conduits (Market Street Funding LLC, a PNC Bank affiliate, and Relationship Funding LLC), secured by an undivided percentage ownership interest in the pool of receivables Volt Funding acquires from the Company. The Company retains the servicing responsibility for the accounts receivable. The Amended Securitization Program is not an off-balance sheet arrangement as Volt Funding is a 100% owned consolidated subsidiary of the Company. The receivables and related borrowings remain on the balance sheet since Volt Funding effectively retains control over the receivables, which are no longer treated as sold assets. Accordingly, pledged receivables are included as trade accounts receivable, net, while the corresponding 42 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Continued Critical Accounting Policies--Continued - ---------------------------- borrowings are included as short-term borrowings on the condensed consolidated balance sheet. At February 1, 2009, Volt Funding had borrowed $42.9 million and $17.1 million from Market Street Funding and Relationship Funding, respectively. At February 1, 2009, borrowings bear a weighted-average interest rate of 2.3% per annum, excluding a facility fee of 0.75% per annum paid on the entire facility and a program fee of 0.5% paid on the outstanding borrowings. Primary Casualty Insurance Program - The Company is insured with a highly rated insurance company under a program that provides primary workers' compensation, employer's liability, general liability and automobile liability insurance under a loss sensitive program. In certain mandated states, the Company purchases workers' compensation insurance through participation in state funds, and the experience-rated premiums in these state plans relieve the Company of any additional liability. In the loss sensitive program, initial premium accruals are established based upon the underlying exposure, such as the amount and type of labor utilized, number of vehicles, etc. The Company establishes accruals utilizing actuarial methods to estimate the future cash payments that will be made to satisfy the claims, including an allowance for incurred-but-not-reported claims. This process also includes establishing loss development factors, based on the historical claims experience of the Company and the industry, and applying those factors to current claims information to derive an estimate of the Company's ultimate premium liability. In preparing the estimates, the Company considers the nature and severity of the claims, analyses provided by third party actuaries, as well as current legal, economic and regulatory factors. The insurance policies have various premium rating plans that establish the ultimate premium to be paid. Adjustments to premiums are made based upon the level of claims incurred at a future date up to three years after the end of the respective policy period. For each policy year, management evaluates the accrual, and the underlying assumptions, regularly throughout the year and makes adjustments as needed. The ultimate premium cost may be greater or less than the established accrual. While management believes that the recorded amounts are adequate, there can be no assurances that changes to management's estimates will not occur due to limitations inherent in the estimation process. In the event it is determined that a smaller or larger accrual is appropriate, the Company would record a credit or a charge to cost of services in the period in which such determination is made. Medical Insurance Program -The Company is self-insured for the majority of its medical benefit programs. The Company remains insured for a portion of its medical program (primarily HMOs) as well as the entire dental program. The Company provides the self-insured medical benefits through an arrangement with a third party administrator. However, the liability for the self-insured benefits is limited by the purchase of stop loss insurance. The contributed and withheld funds and related liabilities for the self-insured program together with unpaid premiums for the insured programs are held in a 501(c)9 employee welfare benefit trust. These amounts, other than the current provisions, do not appear on the balance sheet of the Company. In order to establish the self-insurance reserves, the Company utilized actuarial estimates of expected losses based on statistical analyses of historical data. The provision for future payments is initially adjusted by the enrollment levels in the various plans. Periodically, the resulting liabilities are monitored and will be adjusted as warranted by changing circumstances. Should the amount of claims occurring exceed what was estimated or medical costs increase beyond what was expected, liabilities might not be sufficient, and additional expense may be recorded by the Company. 43 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Continued New Accounting Pronouncements to be Effective in Fiscal 2010 - ------------------------------------------------------------ In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business Combinations." This statement amends the requirements for an acquirer's recognition and measurement of the assets acquired and the liabilities assumed in a business combination. This statement is effective for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2008 and should be applied prospectively for all business combinations entered into after the adoption date. The impact of adopting this statement is not material. In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB NO. 51." This statement establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. This statement is effective for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2008. The Company is currently evaluating the impact of adopting this statement. In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133." This statement requires enhanced disclosures about an entity's derivative and hedging activities by explaining how and why derivatives are used by the entity, how they are accounted for under Statement 133, and how derivatives affect the entity's various financial statements. This statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early adoption encouraged. The Company is currently evaluating the impact of adopting this statement. In April 2008, the FASB issued FASB Staff Position ("FSP") No. 142-3, "Determination of the Useful Life of Intangible Assets." This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, "Goodwill and Other Intangible Assets." This statement is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. The Company is currently evaluating the impact of adopting this statement. Related Party Transactions - -------------------------- During the first three months of fiscal 2009 and 2008, the Company paid or accrued $0.6 million and $0.2 million, respectively, to the law firms of which Lloyd Frank, a director of the Company, is and was of counsel, for services rendered to the Company and expenses reimbursed. In addition, the Company paid or accrued $17,500 and $1,900, respectively, during the first three months of fiscal 2009 and 2008 to Michael Shaw, Ph.D., a brother of Steven Shaw, the Chief Executive Officer and a director of the Company, for services rendered to the Company. 44 ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk is the potential economic loss that may result from adverse changes in the fair value of financial instruments. The Company`s earnings, cash flows and financial position are exposed to market risks relating to fluctuations in interest rates and foreign currency exchange rates. The Company has cash and cash equivalents on which interest income is earned at variable rates. The Company also has credit lines with various domestic and foreign banks, which provide for borrowings and letters of credit, as well as a $175 million accounts receivable securitization program to provide the Company with additional liquidity to meet its short-term financing needs. The interest rates on these borrowings and financing are variable and, therefore, interest and other expense and interest income are affected by the general level of U.S. and foreign interest rates. Based upon the current levels of cash invested, notes payable to banks and utilization of the securitization program, on a short-term basis, as noted below in the tables, a hypothetical 100-basis-point (1%) increase in interest rates would increase the Company's annual net interest expense by $0.5 million. Similarly, a hypothetical 100-basis-point (1%) decrease in interest rates would decrease the Company's annual net interest expense by $27,000. The Company has a term loan, as noted in the table below, which consists of borrowings at fixed interest rates, and the Company's interest expense related to these borrowings is not affected by changes in interest rates in the near term. The fair value of the fixed rate term loan was approximately $13.9 million at February 1, 2009. This fair value was calculated by applying the appropriate fiscal year-end interest rate to the Company's present stream of loan payments. The Company holds short-term investments in mutual funds for the Company's deferred compensation plan. At February 1, 2009, the total market value of these investments was $3.8 million, all of which are being held for the benefit of participants in a non-qualified deferred compensation plan with no risk to the Company. The Company has a number of overseas subsidiaries and is, therefore, subject to exposure from the risk of currency fluctuations as the value of foreign currencies fluctuates against the dollar, which may impact reported earnings. As of February 1, 2009, the total of the Company's net investment in foreign operations was $11.3 million. The Company attempts to reduce these risks by utilizing foreign currency option and exchange contracts, as well as borrowing in foreign currencies, to hedge the adverse impact on foreign currency net assets when the dollar strengthens against the related foreign currency. As of February 1, 2009, the Company did not have any outstanding foreign currency option contracts. The amount of risk and the use of foreign exchange instruments described above are not material to the Company's financial position or results of operations and the Company does not use these instruments for trading or other speculative purposes. Based upon the current levels of net foreign assets, a hypothetical weakening of the U.S. dollar against these currencies at February 1, 2009 by 10% would result in a pretax gain of $1.1 million related to these positions. Similarly, a hypothetical strengthening of the U.S. dollar against these currencies at February 1, 2009 by 10% would result in a pretax loss of $1.1 million related to these positions. 45 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK--Continued The tables below provide information about the Company's financial instruments that are sensitive to either interest rates or exchange rates at February 1, 2009. For cash and debt obligations, the table presents principal cash flows and related weighted average interest rates by expected maturity dates. The information is presented in U.S. dollar equivalents, which is the Company's reporting currency.
Interest Rate Market Risk Payments Due By Period as of February 1, 2009 - ------------------------- --------------------------------------------- Less than 1-3 3-5 After 5 Total 1 Year Years Years Years ------ ------- ------ ------ ----- (Dollars in thousands of US$) Cash and Cash Equivalents and Restricted Cash - --------------------------------------------- Money Market and Cash Accounts $162,868 $162,868 Weighted Average Interest Rate 0.7% 0.7% -------- -------- Total Cash, Cash Equivalents and Restricted Cash $162,868 $162,868 ======== ======== Debt - ---- Term Loan $ 12,182 $565 $1,280 $1,506 $8,831 Interest Rate 8.2% 8.2% 8.2% 8.2% 8.2% Note Payable $425 $130 $188 $107 -- Interest Rate 5.0% 5.0% 5.0% 5.0% -------- -------- ------ ------ ------ Total Long Term Debt $ 12,607 $ 695 $1,468 $1,613 $8,831 Short-term Borrowings $116,669 $116,669 -- -- -- Weighted Average Interest Rate 2.9% 2.9% -- -- -- -------- ------- ------ ------ ------ Total Debt $129,276 $117,364 $1,468 $1,613 $8,831 ======== ======== ====== ====== ======
46 ITEM 4 - CONTROLS AND PROCEDURES Evaluation of disclosure controls and procedures The Company's management is responsible for maintaining adequate internal controls over financial reporting and for its assessment of the effectiveness of internal controls over financial reporting. The Company carried out an evaluation of the effectiveness of the design and operation of its "disclosure controls and procedures," as defined in, and pursuant to, Rule 13a-15 of the Securities Exchange Act of 1934, as of February 1, 2009 under the supervision and with the participation of the Company's management, including the Company's President and Principal Executive Officer and its Senior Vice President and Principal Financial Officer. Based on that evaluation, management concluded that the Company's disclosure controls and procedures are effective in ensuring that material information relating to the Company and its subsidiaries is made known to them on a timely basis. As of November 2, 2008, the Company's management concluded that the Company did not maintain effective internal controls over financial reporting at one of the Company's subsidiaries because of the effect of a material weakness in the Company's system of internal controls, based on criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Management concluded that the subsidiary did not maintain effective policies and procedures to timely review and evaluate the appropriate recognition of revenue related to sales contracts with multiple deliverables. Additionally, management concluded that the subsidiary did not timely and/or accurately review and monitor certain other transactional control functions. These deficiencies resulted in multiple adjustments which caused a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis. Remediation Efforts Related to the Material Weakness in Internal Controls The Company's management reviewed and evaluated the design of the control procedures relating to revenue recognition and other transactions, and is taking the following actions to remediate the reported material weakness in internal controls over financial reporting. Management continues its evaluation of the design of certain controls and the organizational structure of the subsidiary. During the financial statement close process for the first quarter of fiscal 2009, the subsidiary's management initiated revisions to existing processes to ensure timely execution of controls and corporate provided additional oversight over key accounting processes and the application of GAAP requirements to bolster the subsidiary's accounting accuracy and compliance. The Company's management has discussed this material weakness and initial corrective actions and future plans with the Audit Committee and the Company's Board of Directors who concurred with management's plans. Changes in Internal Control over Financial Reporting Except as set forth above, there were no changes in the Company's internal control over financial reporting that occurred during the Company's most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. 47 PART II OTHER INFORMATION ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: Exhibit Description - ------- ---------------------------------------------------------------------- 15.01 Letter from Ernst & Young LLP regarding Report of Independent Registered Public Accounting Firm 15.02 Letter from Ernst & Young LLP regarding Acknowledgement of Independent Registered Public Accounting Firm 31.01 Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.02 Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.01 Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.02 Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 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) Date: March 13, 2009 By: /s/Jack Egan --------------------------- Jack Egan Senior Vice President and Principal Financial Officer 48 EXHIBIT INDEX - ------------- Exhibit Number Description - ------ ----------- 15.01 Letter from Ernst & Young LLP regarding Report of Independent Registered Public Accounting Firm 15.02 Letter from Ernst & Young LLP regarding Acknowledgement of Independent Registered Public Accounting Firm 31.01 Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.02 Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.01 Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.02 Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 EX-15.01 2 a5916723ex15_01.txt EXHIBIT 15.01 EXHIBIT 15.01 Ernst & Young LLP 5 Times Square New York, New York 10036 Report of Independent Registered Public Accounting Firm Ernst & Young LLP 5 Times Square New York, NY 10036 The Board of Directors, Volt Information Sciences, Inc. We have reviewed the condensed consolidated balance sheet of Volt Information Sciences, Inc. and subsidiaries as of February 1, 2009, and the related condensed consolidated statements of operations for the three-month periods ended February 1, 2009 and January 27, 2008 and the condensed consolidated statements of cash flows for the three-month periods ended February 1, 2009 and January 27, 2008. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles. As discussed in Note A to the consolidated financial statements, the Company adopted FASB Interpretation No. 157 "Fair Value Measurements" effective November 3, 2008. We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Volt Information Sciences, Inc. and subsidiaries as of November 2, 2008, and the related consolidated statements of operations, shareholders' equity, and cash flows for the year then ended not presented herein and in our report dated February 2, 2009, we expressed an unqualified opinion on those consolidated financial statements and included an explanatory paragraph for the Company's adoption of the FASB Interpretation No. 48 "Accounting for Uncertainty in Income Taxes an Interpretation of FASB statement 109". In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of November 2, 2008, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ ERNST & YOUNG LLP New York, New York March 13, 2009 EX-15.02 3 a5916723ex15_02.txt EXHIBIT 15.02 EXHIBIT 15.02 Acknowledgement of Independent Registered Public Accounting Firm To the Board of Directors, Volt Information Sciences, Inc. We aware of the incorporation by reference in the Registration Statement No. 333-13369 on Form S-8 dated October 3, 1996, Registration Statement No. 333-45903 on Form S-8 dated February 9, 1998, Registration Statement No. 333-106245 on Form S-8 dated June 18, 2003, Registration Statement No. 333-148355 on Form S-8 dated December 27, 2007, and Registration Statement No. 333-152661 on Form S-8 dated July 31, 2008 of Volt Information Sciences, Inc. and subsidiaries of our report dated March 13, 2009, relating to the unaudited condensed consolidated interim financial statements of Volt Information Sciences, Inc. and subsidiaries that are included in its Form 10-Q for the quarter ended February 1, 2009. /s/ ERNST & YOUNG LLP New York, New York March 13, 2009 EX-31.01 4 a5916723ex31_01.txt EXHIBIT 31.01 EXHIBIT 31.01 CERTIFICATION BY PRINCIPAL EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Steven A. 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-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and d) disclosed in this quarterly report any changes in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. March 13, 2009 /s/ Steven A. Shaw -------------------------- Steven A. Shaw President and Principal Executive Officer EX-31.02 5 a5916723ex31_02.txt EXHIBIT 31.02 EXHIBIT 31.02 CERTIFICATION BY PRINCIPAL FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Jack Egan, 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-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and d) disclosed in this quarterly report any changes in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. March 13, 2009 /s/ Jack Egan ----------------------- Jack Egan Senior Vice President and Principal Financial Officer EX-32.01 6 a5916723ex32_01.txt EXHIBIT 32.01 EXHIBIT 32.01 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Volt Information Sciences, Inc. (the "Company") on Form 10-Q for the period ended February 1, 2009, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Steven A. Shaw, Principal Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 that, to the best of my knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. March 13, 2009 /s/Steven A. Shaw ----------------- Steven A. Shaw President and Principal Executive Officer A signed original of this written statement required by Section 906 has been provided to Volt Information Sciences, Inc. and will be retained by Volt Information Sciences, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. EX-32.01 7 a5916723ex32_02.txt EXHIBIT 32.01 EXHIBIT 32.02 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Volt Information Sciences, Inc. (the "Company") on Form 10-Q for the period ended February 1, 2009, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Jack Egan, Principal Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 that, to the best of my knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. March 13, 2009 /s/Jack Egan ------------------------- Jack Egan Senior Vice President and Principal Financial Officer A signed original of this written statement required by Section 906 has been provided to Volt Information Sciences, Inc. and will be retained by Volt Information Sciences, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----