News Column

VOLT INFORMATION SCIENCES, INC. - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

January 31, 2014

Overview The demand for our services in all segments, both in the United States and internationally, is dependent upon general economic conditions. Our business suffers during economic downturns. In our Staffing Services segment customer demand is dependent on the strength of the labor market, with improving economic growth typically requiring an increase in labor resulting in greater demand for our staffing services. Conversely, during periods of weak economic growth or economic contraction the demand for our staffing services typically declines. During periods of increasing demand we typically are able to leverage our existing resources and not increase our selling, administrative and other operating costs as quickly as our revenues and direct margins, resulting in improved profitability ratios. When demand declines we typically do not decrease our selling, administrative and other operating costs as quickly as our revenues and direct margins because we seek to safeguard our long-term potential to support increases, and this typically results in decreased profitability ratios. Our Staffing Services segment's revenue and operating income are typically lowest in our first fiscal quarter due to the Thanksgiving , Christmas and New Year holidays, customer facility closures during the holidays in some cases for up to two weeks, and closures caused by severe winter weather conditions. The demand for our staffing services typically increases during the third and fourth quarters of the fiscal year when customers increase the use of our administrative and industrial labor during the summer vacation period. Our second fiscal quarter typically has the lowest margins as most payroll tax contributions restart each year in January. Margins typically then increase in subsequent fiscal quarters as annual payroll tax contribution maximums are met, particularly for higher salaried employees. We increased our Staffing Services segment focus during 2013 on achieving acceptable operating income from our traditional time and materials staffing services in North America and exiting or reducing business levels with customers where profitability or business terms are unfavorable, and experienced lower staffing levels at a few of our large customers related to their particular business demand level. As a result, as compared to a year ago we have lower traditional staffing revenue levels but our traditional staffing margins increased as a percentage of revenue. Our traditional staffing operating income compared to a year ago is lower primarily due to the lower revenue levels, and as a percentage of revenue is down primarily as a result of our reductions in selling, administrative and other operating cost decreases lagging the decrease in revenue. Our European operations revenues and operating income increased compared to a year ago as the European economy improved during the year. Our call center, games testing and other project-based revenue and operating income are somewhat lower compared to a year ago resulting primarily from lower games testing volumes due to delayed new console releases from the major games hardware vendors, offset by higher revenue and operating income from call center operations. Our Computer Systems segment has seen the decline continue in 2013 in the volume of directory assistance transactions and in lower data pricing, along with reduced directory assistance project revenue, as consumers increasingly utilize free listings offered by alternative sources such as listings available on the Internet, as well as from consolidation in the telecommunications industry. As a result, telecommunications companies are no longer starting large new system development projects, and the amortization of previously deferred revenue net of deferred costs is declining as the previous large implementations reach the end of the maintenance periods over which the projects were being amortized. During 2012 and 2013 we continued our investment in developing our directory assistance software platform into full-featured call center software ("OnDemand") that can take advantage of that growing market, although this investment combined with the declining revenues from directory assistance and relatively fixed data acquisition costs negatively impacted segment results. In the summer of 2009 Volt commenced a reexamination of historical accounting practices as a result of an inquiry from the Securities and Exchange Commission ("SEC") that ultimately led to a restatement of our fiscal year 2008 financial statements. In connection with the restatement, experienced independent counsel investigated 22 -------------------------------------------------------------------------------- Table of Contents the circumstances surrounding the significant restatement areas and then-senior management's involvement with the underlying transactions. As a result of the ongoing restatement process, Volt did not file quarterly or annual financial statements from June of 2009 until the completion of the internal investigations in 2012 and restatement process in April of 2013. Following the completion of the restatement there were delinquent filings for which financial statements, audits, and filings were completed during fiscal 2013. Financial and legal consulting, audit, and related costs of approximately $147 million were incurred during the restatement, SEC inquiry, internal investigations and subsequent delinquent filing remediation process, excluding the 2012 audit and Form 10-K filing related legal fees, through completion during fiscal year 2013. We have a very low effective income tax rate, primarily because we have a valuation allowance for substantially all United States domestic net deferred income tax assets. Accordingly, most current period income and losses are added or subtracted from our net operating loss carryforwards but these changes have substantially offsetting changes in our income tax valuation allowance. Realization of deferred tax assets is dependent upon reversals of existing taxable temporary differences, taxable income in prior carryback years, and future taxable income. Accounting guidance restricts the amount of reliance a company can place on projected taxable income to support the recovery of the deferred tax assets, and a three-year cumulative loss is significant negative evidence. Beginning in the second quarter of fiscal year 2010 and continuing through the end of fiscal year 2013, our cumulative United States domestic results for each three-year period then ended were a loss, with a significant portion of that loss resulting from our restatement and related costs. Accordingly, we maintain a valuation allowance against substantially all United States domestic net deferred tax assets. At such time as our cumulative United States domestic results for the immediately preceding three-year period are no longer a loss, the required valuation allowance may decrease depending on our expectations for future taxable income against which we can utilize our net loss carryforwards, tax credit carryforwards, and other deferred tax assets considering factors such as the United States domestic demand for contingent staffing, software systems and other services. Our fiscal year ends on the Sunday nearest October 31st . As a result, most fiscal years contain 52 weeks and a 53rd week is added every five or six years. The 2013 fiscal year consists of 53 weeks while the 2012 and 2011 fiscal years consisted of 52 weeks. As a result, the fourth quarter of fiscal 2013 included an additional week. Non-GAAP Measures-Unrecognized Revenue We sometimes provide services despite a customer arrangement not yet being finalized, or continue to provide services under an expired arrangement while a renewal arrangement is being finalized. Generally Accepted Accounting Principles ("GAAP") usually requires that services revenue be deferred until arrangements are finalized or in some cases until cash is received, which causes some periods to include the expense of providing services although the related revenue is not recognized until a subsequent period ("Unrecognized Revenue"). The following discussion refers to financial data determined both using GAAP as well as on a non-GAAP proforma basis. The non-GAAP proforma basis includes adjustments for Unrecognized Revenue so that revenue is shown in the same period as the related services are provided. This non-GAAP financial information is used by management and provided herein primarily to provide a more complete understanding of the Company's business results and trends. This non-GAAP information should not be considered an alternative for, or in isolation from, the financial information prepared and presented in accordance with GAAP. In addition, this measure may not be comparable to similarly titled measures used by other companies. 23 -------------------------------------------------------------------------------- Table of Contents Consolidated Results of Operations and Financial Highlights (Fiscal 2013 vs. Fiscal 2012): Results of Operations by Segment (Fiscal 2013 vs. Fiscal 2012) Year ended November 3, 2013 Year ended October 28, 2012 Staffing Computer Staffing Computer (in thousands) Total Services Systems Other Total Services Systems Other Net Revenue $ 2,090,937 $ 1,899,723 $ 73,465 $ 117,749 $ 2,246,127 $ 2,027,601 $ 99,679 $ 118,847 Expenses Direct cost of staffing services revenue 1,634,365 1,634,365 - - 1,738,933 1,738,933 - - Cost of other revenue 160,199 - 65,680 94,519 163,853 - 68,281 95,572 Selling, administrative and other operating costs 284,748 239,105 24,314 21,329 300,116 251,410 26,897 21,809 Amortization of purchased intangible assets 1,369 34 858 477 1,382 47 859 476 Restructuring costs 4,726 781 3,945 - - - - - Segment operating income (loss) 5,530 25,438 (21,332) 1,424 41,843 37,211 3,642 990 Corporate general and administrative 9,286 10,731 Gain on sale of building - (4,418) Restatement and associated investigations 24,828 42,906 Operating loss (28,584) (7,376) Other expense, net (1,822) (3,836) Income tax provision 469 2,391 Net loss $ (30,875) $ (13,603) NON-GAAP PROFORMA TABLE Year ended November 3, 2013 Year ended October 28, 2012 Staffing Computer Staffing Computer (in thousands) Total Services Systems Other Total Services Systems Other Net Revenue $ 2,090,937 $ 1,899,723 $ 73,465 $ 117,749 $ 2,246,127 $ 2,027,601 $ 99,679 $ 118,847 Recognition of previously unrecognized revenue (11,166) (11,166) - - (30,090) (30,090) - - Additions to unrecognized revenue 4,869 4,869 - - 11,731 11,731 - - Net non-GAAP proforma adjustment (6,297) (6,297) - - (18,359) (18,359) - - Non-GAAP proforma net revenue 2,084,640 1,893,426 73,465 117,749 2,227,768 2,009,242 99,679 118,847 Expenses Direct cost of staffing services revenue 1,634,365 1,634,365 - - 1,738,933 1,738,933 - - Cost of other revenue 160,199 - 65,680 94,519 163,853 - 68,281 95,572 Selling, administrative and other operating costs 284,748 239,105 24,314 21,329 300,116 251,410 26,897 21,809 Amortization of purchased intangible assets 1,369 34 858 477 1,382 47 859 476 Restructuring costs 4,726 781 3,945 - - - - - Non-GAAP proforma segment operating income (loss) (767) 19,141 (21,332) 1,424 23,484 18,852 3,642 990 Non-GAAP proforma operating loss (34,881) (25,735) Non-GAAP proforma net loss $ (37,172) $ (31,962) 24 -------------------------------------------------------------------------------- Table of Contents Consolidated Results of Operations (Fiscal 2013 vs. Fiscal 2012) Net Revenue: Net revenue in fiscal 2013 decreased $155.2 million to $2,090.9 million from $2,246.1 million in fiscal 2012, and proforma net revenue decreased by $143.2 million or 6.4% to $2,084.6 million from $2,227.8 million in fiscal 2012. The change in revenue, including the impact of fiscal 2013 consisting of 53 weeks while fiscal 2012 consisted of 52 weeks, was primarily the result of decreased Staffing Services revenues by $127.9 million (proforma of $115.8 million ) resulting from our increased focus on exiting or reducing business levels with customers where profitability or business terms are unfavorable, lower staffing levels at a few large customers related to their particular business demand level, slightly lower managed services revenue, and $12.1 million lower recognition of previously Unrecognized Revenue, and from lower Computer Systems revenues of $26.2 million from lower transaction volumes, pricing and maintenance levels as well as several large implementations reaching the end of the maintenance periods over which the projects were being amortized. Revenue and proforma revenue included recognition of previously deferred software systems revenues, net of current period deferrals, of $7.6 million in fiscal 2013 and $31.6 million in fiscal 2012, a decrease of $24.0 million . Direct Cost of Staffing Services Revenue: Direct cost of Staffing Services revenue in fiscal 2013 decreased $104.5 million , or 6.0%, to $1,634.4 million from $1,738.9 million in fiscal 2012. This decrease was primarily the result of fewer contingent staff on assignment and lower managed service program costs consistent with the related decrease in revenues. Direct margin of Staffing Services revenue as a percent of staffing revenue and proforma staffing revenue in fiscal 2013 was 14.0% and 13.7% from 14.2% and 13.5% in fiscal 2012, respectively. The direct margin improved by 0.2% primarily due to higher margins resulting from our initiative focusing on achieving acceptable operating income and exiting or reducing business levels with customers where profitability or business terms are unfavorable, offset by lower margins on our call center, games testing and other project-based revenue. This improvement was offset in the GAAP percentage by 0.4% from the impact of the change in net Unrecognized Revenue. Cost of Other Revenue: Cost of other revenue in fiscal 2013 decreased $3.7 million , or 2.2%, to $160.2 million from $163.9 million in fiscal 2012. This decrease was primarily a result of decreased costs, although with higher margins, from our telecommunications infrastructure services offset by increased costs at slightly lower margins for our information technology infrastructure services. It also includes decreased Computer Systems costs, although not proportional with the decrease in Computer Systems revenue due to both our ongoing investment in developing our directory assistance software platform into full featured call center software ("OnDemand") and relatively fixed data acquisition costs. Selling, Administrative and Other Operating Costs: Selling, administrative and other operating costs in fiscal 2013 decreased $15.4 million , or 5.1%, to $284.7 million from $300.1 million in fiscal 2012. This decrease was primarily in our Staffing Services segment and included a $3.0 million indirect tax recovery, although the expense decrease lagged the decrease in revenue. In addition, our Computer Systems segment decreased administrative costs in reaction to the lower business levels, although this was offset by higher selling costs as we increased efforts to sell our full-featured call center software. Restructuring Costs: Restructuring costs in fiscal 2013 was comprised of workforce reductions in our Computer Systems and Staffing Services Segments. Due to the continued decline in the Computer Systems business both domestically and internationally in fiscal 2013, we reduced headcount in North America , the United Kingdom and Germany , incurring severance related restructuring costs. We also reduced headcount in our Staffing Services segment in connection with our focus on achieving acceptable operating income from our traditional time and materials Staffing Services in North America and exiting or reducing business levels with customers where profitability or business terms are unfavorable. Restatement and Associated Investigations: Restatement and associated investigations were comprised of financial and legal consulting, audit, and related costs and in fiscal 2013 amounted to $24.8 million compared to $42.9 million in fiscal 2012. The decreased costs were a result of the resolution of the SEC investigation and completion of the restatement, audits and filing of delinquent SEC reports during 2013, compared with fiscal 25 -------------------------------------------------------------------------------- Table of Contents 2012 when significant efforts were expended on completing investigations, accounting and control assessments and auditing. Operating Loss: Operating loss in fiscal 2013 of $28.6 million included restatement and associated investigation expenses of $24.8 million , restructuring costs of $4.7 million and recognition of previously deferred software systems revenues and costs, net of current period deferrals, of $7.9 million . Without these items we would have had an operating loss of $7.0 million and a proforma operating loss of $13.3 million . Operating loss in fiscal 2012 of $7.4 million included restatement and associated investigation expenses of $42.9 million and recognition of previously deferred software systems revenues and costs, net of current period deferrals, of $19.1 million . Without these items we would have had operating income of $16.4 million and a proforma operating loss of $1.9 million . Operating results and proforma operating results were lower in fiscal 2013 than fiscal 2012 due to the above reasons and a decrease in Computer Systems results of $9.9 million due to lower transaction volumes, pricing and maintenance levels with relatively fixed costs of revenue and investment in developing our directory assistance software platform into full-featured call center software ("OnDemand"), and a gain on sale of building of $4.4 million in 2012 with no similar gain in 2013. The decreases were partially offset by an increase in Staffing Services results of $1.0 million primarily due to higher traditional staffing margins, although on lower revenues. Other Income (Expense), net: Other expense in fiscal 2013 decreased $2.0 million , or 52.5%, to $1.8 million from $3.8 million in fiscal 2012, primarily related to foreign exchange gains and losses. Income Tax Provision: Income tax provision in fiscal 2013 amounted to $0.5 million compared to a provision of $2.4 million in fiscal 2012, primarily related to locations outside of the United States . We have a valuation allowance for substantially all United States domestic net deferred tax assets because our three-year cumulative loss raises significant doubt that future taxable income will be available to offset them. Results of Operations by Segments (Fiscal 2013 vs. Fiscal 2012) Staffing Services Net Revenue: The segment's net revenue in fiscal 2013 decreased $127.9 million to $1,899.7 million from $2,027.6 million in fiscal 2012, and proforma net revenue decreased by $115.8 million , or 5.8%, to $1,893.4 million from $2,009.2 million in fiscal 2012. This decrease was primarily due to our increased focus on exiting or reducing business levels with customers where profitability or business terms are unfavorable, lower staffing levels at a few large customers related to their particular business demand level, slightly lower managed services revenue, and $12.1 million lower recognition of previously Unrecognized Revenue. Direct Cost of Staffing Services Revenue: The segment's direct cost of Staffing Services revenue in fiscal 2013 decreased $104.5 million , or 6.0%, to $1,634.4 million from $1,738.9 million in fiscal 2012. This decrease was primarily the result of fewer contingent staff on assignment and lower managed service program costs consistent with the related decrease in revenues. Direct margin of Staffing Services revenue as a percent of staffing revenue and proforma staffing revenue in fiscal 2013 was 14.0% and 13.7% from 14.2% and 13.5% in fiscal 2012, respectively. The direct margin improved by 0.2% primarily due to higher margins resulting from our initiative focusing on achieving acceptable operating income and exiting or reducing business levels with customers where profitability or business terms are unfavorable, offset by lower margins on our call center, games testing and other project-based revenue. This improvement was offset in the GAAP percentage by 0.4% from the impact of the change in net Unrecognized Revenue. Selling, Administrative and Other Operating Costs: The segment's selling, administrative and other operating costs in fiscal 2013 decreased $12.3 million , or 4.9%, to $239.1 million from $251.4 million in fiscal 2012. As a percent of staffing revenue and proforma staffing revenue in fiscal 2013 these costs were 12.6% and 12.6% from 12.4% and 12.5% in fiscal 2012, respectively. The decrease was primarily the result of reductions in selling, administrative and other operating costs including a $3.0 million indirect tax recovery, although the expense decrease lagged the decrease in revenue. 26 -------------------------------------------------------------------------------- Table of Contents Restructuring Costs: The segment's focus in fiscal 2013 on achieving acceptable operating income from our traditional time and materials staffing services in North America and exiting or reducing business levels with customers where profitability or business terms are unfavorable led to workforce re-alignments and reductions with costs for employee severance of $0.8 million . Segment Operating Income: The segment's operating income in fiscal 2013 decreased $11.8 million to $25.4 million from $37.2 million in fiscal 2012, and proforma operating income increased by $0.2 million or 1.5% to $19.1 million from $18.9 million in fiscal 2012. The change in operating income is primarily due to a $3.0 million indirect tax recovery, lower traditional staffing revenue, although at higher margin ratios, and selling, administrative and other operating cost decreases lagging the decrease in revenue. GAAP results include $12.1 million lower recognition of previously Unrecognized Revenue. Computer Systems Net Revenue: The segment's net revenue in fiscal 2013 decreased by $26.2 million , or 26.3%, to $73.5 million from $99.7 million in fiscal 2012. This decrease was primarily a result of lower transaction revenues by $12.4 million due to both lower volumes and pricing, lower maintenance revenue by $5.0 million , and lower systems revenues by $8.8 million from several large implementations reaching the end of the maintenance periods over which the revenue of projects were being amortized and were not replaced by similar levels of new system implementations. Year ended November 3, October 28, (in millions, except as noted) 2013 2012 New system acceptances $ 3.3 $ 6.1 Elements of segment operating income (loss): Computer systems segment revenues: Maintenance revenue $ 26.1 $ 31.1 Transaction revenue 36.2 48.6 System revenue amortization 11.2 20.0 Total computer systems segment net revenues: 73.5 99.7 Computer systems segment costs: Current period costs, net of deferrals 91.2 88.9 Amortization of deferred costs 3.6 7.2 Total computer systems segment costs 94.8 96.1 Segment operating income (loss) $ (21.3) $ 3.6 As of November 3, 2013 , we had deferred revenue associated with software system sales of $15.7 million and related deferred costs of $3.8 million that will be recognized as accounting requirements are met and are expected to increase revenue, costs, and operating income in each of the following fiscal years: Balance as of Dependent Upon (in millions) November 3, 2013 2014 2015 Thereafter Future Events Expected recognition of Deferred Revenue $15.7 $12.1 $1.1 $0.3 $2.2 Expected recognition of Deferred Costs $ 3.8 $ 3.3 $0.3 $0.1 $0.1 Expected impact on Operating Income $11.9 $ 8.8 $0.8 $0.2 $2.1 Cost of Other Revenue: The segment's cost of revenue in fiscal 2013 decreased $2.6 million , or 3.8%, to $65.7 million from $68.3 million in fiscal 2012. Computer systems costs did not decrease proportionally with the decrease in Computer Systems revenue due to our ongoing investment in developing our directory assistance software platform into full-featured call center software ("OnDemand") and relatively fixed data acquisition costs. 27 -------------------------------------------------------------------------------- Table of Contents Selling, Administrative and Other Operating Costs: The segment's selling, administrative and other operating costs in fiscal 2013 decreased $2.6 million , or 9.6%, to $24.3 million from $26.9 million in fiscal 2012, primarily the result of decreased administrative costs in reaction to the lower business levels offset by higher selling costs as we increased efforts to sell our full-featured call center software. Restructuring Costs: Due to the continued decline in the Computer Systems business both domestically and internationally in fiscal 2013, we reduced headcount in North America , the United Kingdom and Germany , incurring $3.9 million of severance related restructuring costs. Segment Operating Income (Loss): The segment's operating results in fiscal 2013 decreased by $24.9 million to a loss of $21.3 million compared to income of $3.6 million in fiscal 2012 primarily due to lower amortization of previously deferred revenue and previously deferred costs of $11.2 million as several large system implementations reaching the end of the maintenance periods over which the revenue and costs of projects are being amortized. Without the recognition of previously deferred software systems revenues and costs, segment operating loss would have been $29.3 million in 2013 and $15.5 million in 2012. The decline was primarily due to $9.9 million of lower transaction and maintenance revenues with relatively fixed data acquisition costs and restructuring costs of $3.9 million as we reduced headcount in response to lower revenue levels. Other Net Revenue: The segment's net revenue in fiscal 2013 decreased $1.1 million , or 0.9%, to $117.7 million from $118.8 million in fiscal 2012. The decrease was due to lower telecommunications infrastructure services revenue primarily due to lower volume of projects partially offset by higher information technology infrastructure services revenue driven primarily by a higher volume of business resulting primarily from new customers and to a lesser extent from net expanded business with existing customers at billing rates that remained relatively consistent between the periods. Cost of Other Revenue: The segment's cost of other revenue in fiscal 2013 decreased $1.1 million , or 1.1%, to $94.5 million from $95.6 million in fiscal 2012. The decrease was driven primarily by lower telecommunications infrastructure services costs as these costs were reduced commensurate with the related revenue decreases and the remaining projects achieved higher margins than in 2012, offset by higher information technology infrastructure services costs commensurate with the related higher revenues, although at slightly lower margins due to ramp-up costs associated with the new customers. Selling, Administrative and Other Operating Costs: The segment's selling, administrative and other operating costs in fiscal 2013 decreased $0.5 million , or 2.2%, to $21.3 million from $21.8 million in fiscal 2012, primarily through lower administrative costs partially offset by higher selling costs associated with the higher information technology infrastructure services revenue. Segment Operating Income: The segment's operating income remained relatively flat at $1.4 million in fiscal 2013 from $1.0 million in fiscal 2012. 28 -------------------------------------------------------------------------------- Table of Contents Consolidated Results of Operations and Financial Highlights (Fiscal 2012 vs. Fiscal 2011) Results of Operations by Segment (Fiscal 2012 vs. Fiscal 2011) Year ended October 28, 2012 Year ended October 30, 2011 Staffing Computer Staffing Computer (in thousands) Total Services Systems Other Total Services Systems Other Net Revenue $ 2,246,127 $ 2,027,601 $ 99,679 $ 118,847 $ 2,238,109 $ 1,957,905 $ 165,349 $ 114,855 Expenses Direct cost of staffing services revenue 1,738,933 1,738,933 - - 1,698,711 1,698,711 - - Cost of other revenue 163,853 - 68,281 95,572 166,211 - 76,022 90,189 Selling, administrative and other operating costs 300,116 251,410 26,897 21,809 294,410 244,343 28,835 21,232 Amortization of purchased intangible assets 1,382 47 859 476 1,347 15 855 477 Segment operating income 41,843 37,211 3,642 990 77,430 14,836 59,637 2,957 Corporate general and administrative 10,731 8,472 Gain on sale of building (4,418) - Restatement and associated investigations 42,906 49,193 Operating income (loss) (7,376) 19,765 Other expense, net (3,836) (4,484) Income tax provision (benefit) 2,391 (348) Net income (loss) $ (13,603) $ 15,629 NON-GAAP PROFORMA TABLE Year ended October 28, 2012 Year ended October 30, 2011 Staffing Computer Staffing Computer (in thousands) Total Services Systems Other Total Services Systems Other Net Revenue $ 2,246,127 $ 2,027,601 $ 99,679 $ 118,847 $ 2,238,109 $ 1,957,905 $ 165,349 $ 114,855 Recognition of previously unrecognized revenue (30,090) (30,090) - - (10,642) (10,642) - - Additions to unrecognized revenue 11,731 11,731 - - 27,214 27,214 - - Net non-GAAP proforma adjustment (18,359) (18,359) - - 16,572 16,572 - - Non-GAAP proforma total net revenue 2,227,768 2,009,242 99,679 118,847 2,254,681 1,974,477 165,349 114,855 Expenses Direct cost of staffing services revenue 1,738,933 1,738,933 - - 1,698,711 1,698,711 - - Cost of other revenue 163,853 - 68,281 95,572 166,211 - 76,022 90,189 Selling, administrative and other operating costs 300,116 251,410 26,897 21,809 294,410 244,343 28,835 21,232 Amortization of purchased intangible assets 1,382 47 859 476 1,347 15 855 477 Non-GAAP proforma segment operating income 23,484 18,852 3,642 990 94,002 31,408 59,637 2,957 Non-GAAP proforma operating income (loss) (25,735) 36,337 Non-GAAP proforma net income (loss) $ (31,962) $ 32,201 29 -------------------------------------------------------------------------------- Table of Contents Consolidated Results of Operations (Fiscal 2012 vs. Fiscal 2011) Net Revenue: Net revenue in fiscal 2012 increased $8.0 million to $2,246.1 million from $2,238.1 million in fiscal 2011, and non-GAAP net revenue decreased by $26.9 million or 1.2% to $2,227.8 million from $2,254.7 million in fiscal 2011. The change in revenue was primarily the result of lower Computer Systems revenues of $65.7 million from several large implementations reaching the end of the maintenance periods over which the projects were being amortized and lower transaction volumes, pricing and maintenance levels, offset by increased Staffing Services revenues of $69.7 million (non-GAAP $34.8 million ) resulting from more contingent staff on assignments, an increase in call center, games testing and other project-based staffing services revenues and a change in net deferral of staffing revenues of $34.9 million . Revenue and non-GAAP revenue included recognition of previously deferred software systems revenues, net of current period deferrals, of $31.6 million in fiscal 2012 and $70.1 million in fiscal 2011, a decrease of $38.5 million . Direct Cost of Staffing Services Revenue: Direct cost of Staffing Services revenue in fiscal 2012 increased $40.2 million , or 2.4%, to $1,738.9 million from $1,698.7 million in fiscal 2011. This increase was primarily a result of increased contingent staff on assignment at slightly lower margins and a decrease of $3.9 million in the HIRE Act payroll tax benefits offset by slightly higher project-based margins compared to fiscal 2011. Direct margin of Staffing Services revenue as a percent of staffing revenue and non-GAAP staffing revenue in fiscal 2012 was 14.2% and 13.2% from 13.3% and 14.0% in fiscal 2011, respectively. The GAAP percentage increase was primarily due to the change in net Unrecognized Revenue. The non-GAAP percentage decrease was primarily due to the lower payroll tax benefits. Cost of Other Revenue: Cost of other revenue in fiscal 2012 decreased $2.3 million , or 1.4%, to $163.9 million from $166.2 million in fiscal 2011. This decrease was primarily a result of Computer Systems costs that did not decrease proportionally with the decrease in computer systems revenue due to our ongoing investment in developing our directory assistance software platform into full featured call center software ("OnDemand") and relatively fixed data acquisition costs and decreased costs for the telecommunications and publishing and printing businesses offset by increased costs related to higher IT maintenance revenue. Selling, Administrative and Other Operating Costs: Selling, administrative and other operating costs in fiscal 2012 increased $5.7 million , or 1.9%, to $300.1 from $294.4 million in fiscal 2011, generally in line with the similar revenues in each period. Restatement and Associated Investigations: Restatement and associated investigations are comprised of legal, consulting and accounting expenses and amounted to $42.9 million and $49.2 million in fiscal 2012 and fiscal 2011, respectively. The decreased costs were a result of the decreased level of effort of outside consultants as fiscal 2011 focused on data gathering which had largely been completed by that year end and fiscal 2012 was focused on completing accounting and control assessments and auditing. Operating Income (Loss): Operating loss in fiscal 2012 of $7.4 million included restatement and associated investigation expenses of $42.9 million and recognition of previously deferred software systems revenues and costs, net of current period deferrals, of $19.1 million . Without these items we would have had operating income of $16.4 million and a non-GAAP operating loss of $1.9 million . Operating income in fiscal 2011 of $19.8 million included restatement and associated investigation expenses of $49.2 million and recognition of previously deferred software systems revenues and costs, net of current period deferrals, of $62.3 million . Without these items we would have had operating income of $6.7 million and non-GAAP operating income of $23.2 million . Operating results and non-GAAP operating results were lower in fiscal 2012 than fiscal 2011 primarily due to the above reasons and a decrease in Computer Systems results of approximately $12.8 million due to lower transaction volumes, pricing and maintenance levels with relatively fixed costs of revenue and investment in developing our directory assistance software platform into full-featured call center software ("OnDemand") and a decrease in Staffing Services non-GAAP results of approximately $12.6 million due to lower traditional staffing margins on higher revenues and efforts to expand our higher margin retail business. 30 -------------------------------------------------------------------------------- Table of Contents Other Income (Expense), net: Other expense remained relatively flat at $3.8 million in fiscal 2012 and $4.5 million in fiscal 2011. Income Tax Provision (Benefit): Income tax provision in fiscal 2012 amounted to $2.4 million primarily related to locations outside of the United States , compared to a benefit of $0.3 million in fiscal 2011. Result of Operations by Segment (Fiscal 2012 vs. Fiscal 2011) Staffing Services Net Revenue: The segment's net revenue in fiscal 2012 increased $69.7 million to $2,027.6 million from $1,957.9 million in fiscal 2011, and non-GAAP net revenue increased by $34.7 million , or 1.8%, to $2,009.2 million from $1,974.5 million in fiscal 2011. This increase was primarily due to more contingent staff on assignments, an increase in call center, games testing and other project-based Staffing Services revenues and recognition of $34.9 million of previously deferred revenue, net of current period deferrals. On average, approximately 32,000 U.S. staffing employees were on assignment throughout fiscal 2012, compared to approximately 31,600 in 2011. Direct Cost of Staffing Services Revenue: The segment's direct cost of Staffing Services revenue in fiscal 2012 increased $40.2 million , or 2.4%, to $1,738.9 million from $1,698.7 million in fiscal 2011. This increase was primarily a result of increased contingent staff on assignment at slightly lower margins and a decrease of $3.9 million in the HIRE Act payroll tax benefits offset by slightly higher project-based margins compared to fiscal 2011. Direct margin of Staffing Services revenue as a percent of staffing revenue and non-GAAP staffing revenue in fiscal 2012 was 14.2% and 13.2% from 13.3% and 14.0% in fiscal 2011, respectively. The GAAP percentage increase was primarily due to the change in net deferrals and recognition of staffing revenues. The non-GAAP percentage decrease was primarily due to the lower payroll tax benefits. Selling, Administrative and Other Operating Costs: The segment's selling, administrative and other operating costs in fiscal 2012 increased $7.1 million , or 2.9%, to $251.4 million from $244.3 million in fiscal 2011. The increase was primarily the result of efforts to expand our higher-margin retail business resulting in hiring more sales, delivery and support employees while revenues lag these costs during the sales cycle ramp-up, although at full ramp-up these costs remain proportionately higher than our larger national accounts business. Segment Operating Income: The segment's operating income in fiscal 2012 increased $22.4 million to $37.2 million from $14.8 million in fiscal 2011, and non-GAAP operating income decreased by $12.5 million or 40.0% to $18.9 million from $31.4 million in fiscal 2011. The change in operating income is primarily due to a change in net deferral of staffing revenues of $34.9 million . In addition, non-GAAP operating income was lower in fiscal 2012 than fiscal 2011 due to lower traditional staffing margins on the increased revenues, lower HIRE Act payroll tax benefits, and our efforts to expand our higher margin retail business. 31 -------------------------------------------------------------------------------- Table of Contents Computer Systems Net Revenue: The segment's net revenue in fiscal 2012 decreased by $65.7 million , or 39.7%, to $99.7 million from $165.4 million in fiscal 2011. This decrease was primarily a result of lower systems revenues by $19.9 million from several large implementations reaching the end of the maintenance periods over which the revenue of projects were being amortized, lower transaction revenues by $36.2 million due to both lower volumes and pricing, and lower maintenance revenue by $9.6 million . Year ended October 28, October 30, (in millions, except as noted) 2012 2011 New system acceptances $ 6.1 $ 30.3 Elements of segment operating income: Computer systems segment revenues: Maintenance revenue $ 31.1 $ 40.7 Transaction revenue 48.6 84.8 System revenue amortization 20.0 39.9 Total computer systems segment net revenues: 99.7 165.4 Computer systems segment costs: Current period costs, net of deferrals 88.9 88.0 Amortization of deferred costs 7.2 17.8 Total computer systems segment costs 96.1 105.8 Segment operating income $ 3.6 $ 59.6 As of October 28, 2012 , we had deferred revenue associated with software system sales of $23.3 million and related deferred costs of $3.5 million that will be recognized as accounting requirements are met and are expected to increase revenue, costs, and operating income. Cost of Other Revenue: The segment's cost of revenue in fiscal 2012 decreased $7.7 million , or 10.2%, to $68.3 million from $76.0 million in fiscal 2011, primarily the result of lower amortization of deferred costs of $7.2 million compared to $17.8 million for fiscal 2011. Computer systems costs did not decrease proportionally with the decrease in Computer Systems revenue due to our ongoing investment in developing our directory assistance software platform into full featured call center software ("OnDemand") and relatively fixed data acquisition costs. Selling, Administrative and Other Operating Costs: The segment's selling, administrative and other operating costs in fiscal 2012 decreased $1.9 million , or 6.7%, to $26.9 million from $28.8 million in fiscal 2011, primarily due to cost reductions in response to the overall segment business levels decline. Segment Operating Income: The segment's operating income in fiscal 2012 decreased by $56.0 million to $3.6 million compared to $59.6 million in fiscal 2011 primarily due to lower amortization of previously deferred revenue and previously deferred costs as several large system implementations reached the end of the maintenance periods over which the revenue and costs of projects are being amortized. Other Net Revenue: The segment's net revenue in fiscal 2012 increased $3.9 million , or 3.5%, to $118.8 million from $114.9 million in fiscal 2011. The increase was primarily attributable to an increase in IT maintenance revenue of $13.2 million offset by a decrease in telecommunications revenues of $5.6 million and publishing and printing revenue of $3.7 million as compared to fiscal 2011. The IT maintenance revenue increase was driven primarily by a higher volume of business resulting primarily from new customers and to a lesser extent from net expanded business with existing customers as billing rates remained relatively consistent between the periods. The decrease 32 -------------------------------------------------------------------------------- Table of Contents in telecommunications revenues was primarily the result of exiting certain unprofitable business lines, and the publishing and printing revenue decrease was primarily due to the printing of a telephone directory for one of the segment's large customers in fiscal 2011 that is printed on an every-other-year basis and therefore was not printed in fiscal 2012. Cost of Other Revenue: The segment's cost of other revenue in fiscal 2012 increased $5.4 million , or 6.0%, to $95.6 million from $90.2 million in fiscal 2011. The increase was driven by costs associated with the increased IT maintenance revenues, primarily from increased labor and consulting costs to deliver the higher IT maintenance revenues offset by decreased costs in the telecommunications business primarily from the result of exiting certain unprofitable business lines and decreased costs for the publishing and printing business primarily due to the cost of printing of a telephone directory for one of the segment's large customers in fiscal 2011 that did not reoccur in fiscal 2012. Selling, Administrative and Other Operating Costs: The segment's selling, administrative and other operating costs in fiscal 2012 increased $0.6 million , or 2.7%, to $21.8 million from $21.2 million in fiscal 2011, generally in line with the similar revenues in each period. Segment Operating Income: The segment's operating income in fiscal 2012 decreased $2.0 million to $1.0 million from $3.0 million in fiscal 2011, as a result of the factors discussed above. Consolidated Results of Operations and Financial Highlights (Q3 2013 YTD vs. Q3 2012 YTD) Results of Operations by Segment (Q3 2013 YTD vs. Q3 2012 YTD) Nine months ended July 28, 2013 Nine months ended July 29, 2012 Staffing Computer Staffing Computer (in thousands) Total Services Systems Other Total Services Systems Other Net Revenue $ 1,544,142 $ 1,406,939 $ 54,478 $ 82,725 $ 1,674,568 $ 1,508,649 $ 78,112 $ 87,807 Expenses Direct cost of staffing services revenue 1,215,541 1,215,541 - - 1,298,333 1,298,333 - - Cost of other revenue 117,221 - 48,947 68,274 124,490 - 52,485 72,005 Selling, administrative and other operating costs 210,348 178,603 17,345 14,400 220,967 186,310 19,098 15,559 Amortization of purchased intangible assets 1,028 27 643 358 1,034 35 642 357 Restructuring costs 1,911 559 1,352 - - - - - Segment operating income (loss) (1,907) 12,209 (13,809) (307) 29,744 23,971 5,887 (114) Corporate general and administrative 7,109 8,621 Restatement and associated investigations 22,366 28,000 Operating loss (31,382) (6,877) Other expense, net (398) (2,421) Income tax provision 715 2,293 Net loss $ (32,495) $ (11,591) 33 -------------------------------------------------------------------------------- Table of Contents NON-GAAP PROFORMA TABLE Nine months ended July 28, 2013 Nine months ended July 29, 2012 Staffing Computer Staffing Computer (in thousands) Total Services Systems Other Total Services Systems Other Net Revenue $ 1,544,142 $ 1,406,939 $ 54,478 $ 82,725 $ 1,674,568 $ 1,508,649 $ 78,112 $ 87,807 Recognition of previously unrecognized revenue (11,140) (11,140) - - (23,131) (23,131) - - Additions to unrecognized revenue 6,713 6,713 - - 7,130 7,130 - - Net non-GAAP proforma adjustment (4,427) (4,427) - - (16,001) (16,001) - - Non-GAAP proforma net revenue 1,539,715 1,402,512 54,478 82,725 1,658,567 1,492,648 78,112 87,807 Expenses Direct cost of staffing services revenue 1,215,541 1,215,541 - - 1,298,333 1,298,333 - - Cost of other revenue 117,221 - 48,947 68,274 124,490 - 52,485 72,005 Selling, administrative and other operating costs 210,348 178,603 17,345 14,400 220,967 186,310 19,098 15,559 Amortization of purchased intangible assets 1,028 27 643 358 1,034 35 642 357 Restructuring costs 1,911 559 1,352 - - - - - Non-GAAP proforma segment operating income (loss) (6,334) 7,782 (13,809) (307) 13,743 7,970 5,887 (114) Non-GAAP proforma operating loss (35,809) (22,878) Non-GAAP proforma net loss $ (36,922) $ (27,592) Consolidated Results of Operations (Q3 2013 YTD vs. Q3 2012 YTD) Net Revenue: Net revenue in the first nine months of fiscal 2013 decreased $130.5 million to $1,544.1 million from $1,674.6 million in fiscal 2012, and proforma net revenue decreased by $118.9 million or 7.2% to $1,539.7 million from $1,658.6 million in fiscal 2012. The change in revenue was primarily the result of decreased Staffing Services revenues by $101.7 million (proforma of $90.1 million ) resulting from our increased focus on exiting or reducing business levels with customers where profitability or business terms are unfavorable, lower staffing levels at a few large customers related to their particular business demand level, slightly lower managed services revenue, and $11.6 million lower recognition of previously Unrecognized Revenue, and from lower Computer Systems revenues of $23.6 million from lower transaction volumes, pricing and maintenance levels as well as several large implementations reaching the end of the maintenance periods over which the projects were being amortized. Direct Cost of Staffing Services Revenue: Direct cost of Staffing Services revenue in the first nine months of fiscal 2013 decreased $82.8 million , or 6.4%, to $1,215.5 million from $1,298.3 million in fiscal 2012. This decrease was primarily the result of fewer contingent staff on assignment and lower managed service program costs consistent with the related decrease in revenues. Direct margin of Staffing Services revenue as a percent of staffing revenue and proforma staffing revenue in fiscal 2013 was 13.6% and 13.3% from 13.9% and 13.0% in fiscal 2012, respectively. The direct margin improved by 0.3% primarily due to higher margins resulting from our initiative focusing on achieving acceptable operating income and exiting or reducing business levels with customers where profitability or business terms are unfavorable, offset by lower margins on our call center, games testing and other project-based revenue. This improvement was offset in the GAAP percentage by 0.6% from the impact of the change in net Unrecognized Revenue. 34 -------------------------------------------------------------------------------- Table of Contents Cost of Other Revenue: Cost of other revenue in the first nine months of fiscal 2013 decreased $7.3 million , or 5.8%, to $117.2 million from $124.5 million in fiscal 2012. This decrease was primarily a result of decreased costs, although with higher margins, from our telecommunications infrastructure services offset by increased costs and slightly lower margins for our information technology infrastructure services. It also includes Computer Systems costs that did not decrease proportionally with the decrease in Computer systems revenue due to both our ongoing investment in developing our directory assistance software platform into full featured call center software ("OnDemand") and relatively fixed data acquisition costs. Selling, Administrative and Other Operating Costs: Selling, administrative and other operating costs in the first nine months of fiscal 2013 decreased $10.7 million , or 4.8%, to $210.3 million from $221.0 million in fiscal 2012. This decrease was primarily in our Staffing Services segment and included a $3.0 million indirect tax recovery, although the expense decrease lagged the decrease in revenue. In addition, our Computer Systems segment decreased administrative costs in reaction to the lower business levels, although this was offset by higher selling costs as we increased efforts to sell our full-featured call center software. Restructuring Costs: Restructuring costs in the first nine months of fiscal 2013 was comprised of workforce reductions in our Computer Systems and Staffing Services Segments. Due to the continued decline in the Computer Systems business both domestically and internationally in fiscal 2013, we reduced headcount in North America , the United Kingdom and Germany , incurring primarily severance related restructuring costs. We also reduced headcount in our Staffing Services segment in connection with our focus on achieving acceptable operating income from our traditional time and materials Staffing Services in North America and exiting or reducing business levels with customers where profitability or business terms are unfavorable. Restatement and Associated Investigations: Restatement and associated investigations were comprised of financial and legal consulting, audit, and related costs and in the first nine months of fiscal 2013 amounted to $22.4 million compared to $28.0 million in fiscal 2012, respectively. The decreased costs were a result of the resolution of the SEC investigation and completion of the restatement, audits and filing of delinquent SEC reports during 2013, compared with fiscal 2012 when significant efforts were expended on completing investigations, accounting and control assessments and auditing. Operating Loss: Operating loss in the first nine months of fiscal 2013 of $31.4 million included restatement and associated investigation expenses of $22.4 million , restructuring costs of $1.9 million and recognition of previously deferred software systems revenues and costs, net of current period deferrals, of $3.3 million . Without these items we would have had an operating loss of $10.4 million and a proforma operating loss of $14.8 million . Operating loss in the first nine months of fiscal 2012 of $6.9 million included restatement and associated investigation expenses of $28.0 million and recognition of previously deferred software systems revenues and costs, net of current period deferrals, of $19.9 million . Without these items we would have had operating income of $1.2 million and a proforma operating loss of $14.8 million . Operating results and proforma operating results were lower in the first nine months of fiscal 2013 than fiscal 2012 due to the above reasons and a decrease in Computer Systems results of $1.7 million due to lower transaction volumes, pricing and maintenance levels with relatively fixed costs of revenue and investment in developing our directory assistance software platform into full-featured call center software ("OnDemand"), offset by an increase in Staffing Services results of $0.4 million primarily due to higher traditional staffing margins, although on lower revenue. Other Income (Expense), net: Other expense in the first nine months of fiscal 2013 decreased $2.0 million , or 83.6%, to $0.4 million from $2.4 million in fiscal 2012, primarily related to foreign exchange gains and losses. Income Tax Provision: Income tax provision in the first nine months of fiscal 2013 amounted to $0.7 million compared to a provision of $2.3 million in fiscal 2012, primarily related to locations outside of the United States . 35 -------------------------------------------------------------------------------- Table of Contents Results of Operations by Segments (Q3 2013 YTD vs. Q3 2012 YTD) Staffing Services Net Revenue: The segment's net revenue in the first nine months of fiscal 2013 decreased $101.7 million to $1,406.9 million from $1,508.6 million in fiscal 2012, and proforma net revenue decreased by $90.1 million , or 6.0%, to $1,402.5 million from $1,492.6 in fiscal 2012. This decrease is primarily due to our increased focus on exiting or reducing business levels with customers where profitability or business terms are unfavorable, lower staffing levels at a few of our large customers related to their particular business demand level, slightly lower managed services revenue, and $11.6 million lower recognition of previously Unrecognized Revenue. Direct Cost of Staffing Services Revenue: The segment's direct cost of Staffing Services revenue in the first nine months of fiscal 2013 decreased $82.8 million , or 6.4%, to $1,215.5 million from $1,298.3 million in fiscal 2012. This decrease was primarily the result of fewer contingent staff on assignment and lower managed service program costs consistent with the related decrease in revenues. Direct margin of Staffing Services revenue as a percent of staffing revenue and proforma staffing revenue in fiscal 2013 was 13.6% and 13.3% from 13.9% and 13.0% in fiscal 2012, respectively. The direct margin improved by 0.3% primarily due to higher margins resulting from our initiative focusing on achieving acceptable operating income and exiting or reducing business levels with customers where profitability or business terms are unfavorable, offset by lower margins on our call center, games testing and other project-based revenue. This improvement was offset in the GAAP percentage by 0.6% from the impact of the change in net Unrecognized Revenue. Selling, Administrative and Other Operating Costs: The segment's selling, administrative and other operating costs in the first nine months of fiscal 2013 decreased $7.7 million , or 4.1%, to $178.6 million from $186.3 million in fiscal 2012. The decrease was primarily the result of reductions in selling, administrative and other operating costs including a $3.0 million indirect tax recovery, although the expense decrease lagged the decrease in revenue. Restructuring Costs: The focus in fiscal 2013 on achieving acceptable operating income from our traditional time and materials staffing services in North America and exiting or reducing business levels with customers where profitability or business terms are unfavorable led to workforce re-alignment and reductions with costs, primarily employee severance of $0.6 million . Segment Operating Income: The segment's operating income in the first nine months of fiscal 2013 decreased $11.8 million to $12.2 million from $24.0 million in fiscal 2012, and proforma operating income decreased by $0.2 million or 2.4% to $7.8 million from $8.0 million in fiscal 2012. The change in operating income is primarily due to a $3.0 million indirect tax recovery, lower traditional staffing revenue, although at higher margin ratios, and selling, administrative and other operating cost decreases lagging the decrease in revenue. GAAP results include $11.6 million lower recognition of previously Unrecognized Revenue. Computer Systems Net Revenue: The segment's net revenue in the first nine months of fiscal 2013 decreased by $23.6 million , or 30.3%, to $54.5 million from $78.1 million in fiscal 2012. This decrease was primarily a result of lower transaction revenues due to both lower volumes and pricing, lower maintenance revenue, and lower systems revenues from several large implementations reached the end of the maintenance periods over which the revenue of projects were being amortized and were not replaced by similar levels of new system implementations. Cost of Other Revenue: The segment's cost of revenue in the first nine months of fiscal 2013 decreased $3.6 million , or 6.7%, to $48.9 million from $52.5 million in fiscal 2012. Computer Systems costs did not decrease proportionally with the decrease in Computer Systems revenue due to our ongoing investment in developing our directory assistance software platform into full-featured call center software ("OnDemand") and relatively fixed data acquisition costs. 36 -------------------------------------------------------------------------------- Table of Contents Selling, Administrative and Other Operating Costs: The segment's selling, administrative and other operating costs in the first nine months of fiscal 2013 decreased $1.8 million , or 9.2%, to $17.3 million from $19.1 million in fiscal 2012, primarily the result of decreased administrative costs in reaction to the lower business levels offset by higher selling costs as we increased efforts to sell our full-featured call center software. Restructuring Costs: Due to the continued decline in the Computer Systems business both domestically and internationally in fiscal 2013, we reduced headcount in North America , the United Kingdom and Germany , incurring approximately $1.4 million of severance related restructuring costs. Segment Operating Income(Loss): The segment's operating results in the first nine months fiscal 2013 decreased by $19.7 million to a loss of $13.8 million compared to income of $5.9 million in fiscal 2012 primarily due to lower transaction revenues due to both lower volumes and pricing, lower maintenance revenue, and lower systems revenues from several large implementations reached the end of the maintenance periods over which the revenue of projects were being amortized and were not replaced by similar levels of new system implementations, relatively fixed data acquisition costs, and our continued investment in developing our directory assistance software platform into full-featured call center software ("OnDemand") and related sales efforts and restructuring costs as we reduced headcount in response to lower revenue levels. Other Net Revenue: The segment's net revenue in the first nine months of fiscal 2013 decreased $5.1 million , or 5.8%, to $82.7 million from $87.8 million in fiscal 2012. The decrease was due to lower telecommunications infrastructure services revenue primarily due to lower volume of projects partially offset by higher information technology infrastructure services revenue driven primarily by a higher volume of business resulting primarily from new customers and to a lesser extent from net expanded business with existing customers at billing rates that remained relatively consistent between the periods. Cost of Other Revenue: The segment's cost of other revenue in the first nine months fiscal 2013 decreased $3.7 million , or 5.2%, to $68.3 million from $72.0 million in fiscal 2012. The decrease was driven primarily by lower telecommunications infrastructure services costs as these costs were reduced commensurate with the related revenue decreases and the remaining projects achieved higher margins than in 2012, offset by higher information technology infrastructure services costs commensurate with the related higher revenues, although at slightly lower margins due to ramp-up costs associated with the new customers. Selling, Administrative and Other Operating Costs: The segment's selling, administrative and other operating costs in the first nine months of fiscal 2013 decreased $1.2 million , or 7.4%, to $14.4 million from $15.6 million in fiscal 2012, primarily through lower administrative costs partially offset by higher selling costs associated with the higher information technology infrastructure services revenue. Segment Operating Loss: The segment's operating loss in the first nine months of fiscal 2013 increased $0.2 million to $0.3 million from $0.1 million in fiscal 2012, as a result of the factors discussed above. 37 -------------------------------------------------------------------------------- Table of Contents Consolidated Results of Operations and Financial Highlights (Q3 2013 vs. Q3 2012) Results of Operations by Segment (Q3 2013 vs. Q3 2012) Three months ended July 28, 2013 Three months ended July 29, 2012 Staffing Computer Staffing Computer (in thousands) Total Services Systems Other Total Services Systems Other Net Revenue $ 504,213 $ 455,848 $ 15,500 $ 32,865 $ 558,032 $ 508,154 $ 21,888 $ 27,990 Expenses Direct cost of staffing services revenue 390,432 390,432 - - 441,124 441,124 - - Cost of other revenue 37,595 - 14,390 23,205 38,296 - 15,914 22,382 Selling, administrative and other operating costs 69,689 58,602 5,792 5,295 74,294 62,821 6,568 4,905 Amortization of purchased intangible assets 337 3 214 120 344 11 213 120 Restructuring costs 223 141 82 - - - - - Segment operating income (loss) 5,937 6,670 (4,978) 4,245 3,974 4,198 (807) 583 Corporate general and administrative 2,439 3,799 Restatement and associated investigations 1,159 9,800 Operating income (loss) 2,339 (9,625) Other expense, net (727) (56) Income tax provision (benefit) (444) 1,560 Net income (loss) $ 2,056 $ (11,241) NON-GAAP PROFORMA TABLE Three months ended July 28, 2013 Three months ended July 29, 2012 Staffing Computer Staffing Computer (in thousands) Total Services Systems Other Total Services Systems Other Net Revenue $ 504,213 $ 455,848 $ 15,500 $ 32,865 $ 558,032 $ 508,154 $ 21,888 $ 27,990 Recognition of previously unrecognized revenue (7,798) (7,798) - - (6,487) (6,487) - - Additions to unrecognized revenue 6,381 6,381 - - 4,852 4,852 - - Net non-GAAP proforma adjustment (1,417) (1,417) - - (1,635) (1,635) - - Non-GAAP proforma net revenue 502,796 454,431 15,500 32,865 556,397 506,519 21,888 27,990 Expenses Direct cost of staffing services revenue 390,432 390,432 - - 441,124 441,124 - - Cost of other revenue 37,595 - 14,390 23,205 38,296 - 15,914 22,382 Selling, administrative and other operating costs 69,689 58,602 5,792 5,295 74,294 62,821 6,568 4,905 Amortization of purchased intangible assets 337 3 214 120 344 11 213 120 Restructuring costs 223 141 82 - - - - - Non-GAAP proforma segment operating income (loss) 4,520 5,253 (4,978) 4,245 2,339 2,563 (807) 583 Non-GAAP proforma operating income (loss) 922 (11,260) Non-GAAP proforma net income (loss) $ 639 $ (12,876) 38 -------------------------------------------------------------------------------- Table of Contents Consolidated Results of Operations (Q3 2013 vs. Q3 2012) Net Revenue: Net revenue in the third quarter of fiscal 2013 decreased $53.8 million to $504.2 million from $558.0 million in fiscal 2012, and proforma net revenue decreased by $53.6 million or 9.6% to $502.8 million from $556.4 million in fiscal 2012. The change in revenue was primarily the result of decreased Staffing Services revenues by $52.4 million (proforma of $52.1 million ) resulting from our increased focus on exiting or reducing business levels with customers where profitability or business terms are unfavorable, lower staffing levels at a few large customers related to their particular business demand level, slightly lower managed services revenue, and $0.2 million lower recognition of previously Unrecognized Revenue, and from lower Computer Systems revenues of $6.4 million from several large implementations reaching the end of the maintenance periods over which the projects were being amortized and lower transaction volumes, pricing and maintenance levels. Direct Cost of Staffing Services Revenue: Direct cost of Staffing Services revenue in the third quarter of fiscal 2013 decreased $50.7 million , or 11.5%, to $390.4 million from $441.1 million in fiscal 2012. This decrease was primarily the result of fewer contingent staff on assignment and lower managed service program costs consistent with the related decrease in revenues. Direct margin of Staffing Services revenue as a percent of staffing revenue and proforma staffing revenue in fiscal 2013 was 14.4% and 14.1% from 13.2% and 12.9% in fiscal 2012, respectively. The direct margin improved by 1.2% primarily due to higher margins resulting from our initiative focusing on achieving acceptable operating income and exiting or reducing business levels with customers where profitability or business terms are unfavorable, offset by lower margins on our call center, games testing and other project-based revenue. The GAAP percentage was not impacted by the change in net Unrecognized Revenue. Cost of Other Revenue: Cost of other revenue in the third quarter of fiscal 2013 decreased $0.7 million , or 1.8%, to $37.6 million from $38.3 million in fiscal 2012. This decrease was primarily a result of Computer Systems costs that did not decrease proportionally with the decrease in Computer systems revenue due to both our ongoing investment in developing our directory assistance software platform into full featured call center software ("OnDemand") and relatively fixed data acquisition costs as well as decreased costs and higher margins for our telecommunications infrastructure services offset by increased costs at slightly lower margins for our information technology infrastructure service. Selling, Administrative and Other Operating Costs: Selling, administrative and other operating costs in the third quarter of fiscal 2013 decreased $4.6 million , or 6.2%, to $69.7 million from $74.3 million in fiscal 2012. This decrease was primarily in our Staffing Services segment, although the expense decrease lagged the decrease in revenue, as well as in our Computer Systems segment where we decreased administrative costs in reaction to the lower business levels, although this was offset by higher selling costs as we increased efforts to sell our full-featured call center software. Restatement and Associated Investigations: Restatement and associated investigations were comprised of financial and legal consulting, audit, and related costs and in the third quarter of fiscal 2013 amounted to $1.2 million compared to $9.8 million in fiscal 2012. The decreased costs were a result of the resolution of the SEC investigation and completion of the restatement, audits and filing of delinquent SEC reports during 2013, compared with fiscal 2012 when significant efforts were expended on completing investigations, accounting and control assessments and auditing. Operating Income (Loss): Operating income in the third quarter of fiscal 2013 of $2.3 million included restatement and associated investigation expenses of $1.2 million and recognition of previously deferred software systems revenues and costs, net of current period deferrals, of $6.1 million . Without these items we would have had operating loss of $2.6 million and a proforma operating loss of $4.0 million . Operating loss in the third quarter of fiscal 2012 of $9.6 million included restatement and associated investigation expenses of $9.8 million and recognition of previously deferred software systems revenues and 39 -------------------------------------------------------------------------------- Table of Contents costs, net of current period deferrals, of $4.0 million . Without these items we would have had an operating loss of $3.8 million and a proforma operating loss of $5.5 million . Operating results and proforma operating results were higher in the third quarter of fiscal 2013 than fiscal 2012 due to the above reasons and an increase in Staffing Services results of approximately $2.7 million primarily due to higher traditional staffing margin, although on lower revenues, partially offset by a decrease in Computer Systems results of approximately $6.3 million due to lower transaction volumes, pricing and maintenance levels with relatively fixed costs of revenue and investment in developing our directory assistance software platform into full-featured call center software ("OnDemand"). Other Income (Expense), net: Other expense in the third quarter of fiscal 2013 increased $0.6 million to $0.7 million from $0.1 million in fiscal 2012, primarily related to foreign exchange gains and losses. Income Tax Provision (Benefit): Income tax benefit in the third quarter of fiscal 2013 amounted to $0.4 million compared to a provision of $1.6 million in fiscal 2012. The benefit in fiscal 2013 primarily related to locations outside of the United States . Results of Operations by Segments (Q3 2013 vs. Q3 2012 ) Staffing Services Net Revenue: The segment's net revenue in the third quarter of fiscal 2013 decreased $52.4 million to $455.8 million from $508.2 million in fiscal 2012, and proforma net revenue decreased by $52.1 million , or 10.3%, to $454.4 million from $506.5 million in fiscal 2012. This decrease was primarily due to our increased focus on exiting or reducing business levels with customers where profitability or business terms are unfavorable, lower staffing levels at a few of our large customers related to their particular business demand level, slightly lower managed services revenue, and $0.2 million lower recognition of previously Unrecognized Revenue. Direct Cost of Staffing Services Revenue: The segment's direct cost of Staffing Services revenue in the third quarter of fiscal 2013 decreased $50.7 million , or 11.5%, to $390.4 million from $441.1 million in fiscal 2012. This decrease was primarily the result of fewer contingent staff on assignment and lower managed service program costs consistent with the related decrease in revenues. Direct margin of Staffing Services revenue as a percent of staffing revenue and proforma staffing revenue in fiscal 2013 was 14.4% and 14.1% from 13.2% and 12.9% in fiscal 2012, respectively. The direct margin improved by 1.2% primarily due to higher margins resulting from our initiative focusing on achieving acceptable operating income and exiting or reducing business levels with customers where profitability or business terms are unfavorable, offset by lower margins on our call center, games testing and other project-based revenue. This GAAP percentage was not impacted by the change in net Unrecognized Revenue. Selling, Administrative and Other Operating Costs: The segment's selling, administrative and other operating costs in the third quarter of fiscal 2013 decreased $4.2 million , or 6.7%, to $58.6 million from $62.8 million in fiscal 2012. The decrease was primarily the result of reductions in selling, administrative and other operating cost decreases lagging the decrease in revenue. Segment Operating Income: The segment's operating income in the third quarter of fiscal 2013 increased $2.5 million to $6.7 million from $4.2 million in fiscal 2012, and proforma operating income increased by $2.7 million to $5.3 million from $2.6 million in fiscal 2012. The change in operating income is primarily due to lower traditional staffing revenue, although at higher margin ratios, and selling, administrative and other operating cost decreases lagging the decrease in revenue. GAAP results include $0.2 million lower recognition of previously Unrecognized Revenue. Computer Systems Net Revenue: The segment's net revenue in the third quarter of fiscal 2013 decreased by $6.4 million , or 29.2%, to $15.5 million from $21.9 million in fiscal 2012. This decrease was primarily a result of lower systems 40 -------------------------------------------------------------------------------- Table of Contents revenues from several large implementations reaching the end of the maintenance periods over which the revenue of projects were being amortized and were not replaced by similar levels of new system implementations, lower transaction revenues due to both lower volumes and pricing, and lower maintenance revenue. Cost of Other Revenue: The segment's cost of revenue in the third quarter of fiscal 2013 decreased $1.5 million , or 9.6%, to $14.4 million from $15.9 million in fiscal 2012. Computer Systems costs did not decrease proportionally with the decrease in Computer Systems revenue due to our ongoing investment in developing our directory assistance software platform into full-featured call center software ("OnDemand") and relatively fixed data acquisition costs. Selling, Administrative and Other Operating Costs: The segment's selling, administrative and other operating costs in the third quarter of fiscal 2013 decreased $0.8 million , or 11.8%, to $5.8 million from $6.6 million in fiscal 2012, primarily the result of decreased administrative costs in reaction to the lower business levels offset by higher selling costs as we increased efforts to sell our full-featured call center software. Segment Operating Loss: The segment's operating loss in the third quarter fiscal 2013 increased by $4.2 million to a loss of $5.0 million compared to a loss of $0.8 million in fiscal 2012 primarily due to lower amortization of previously deferred revenue and previously deferred costs as several large system implementations reached the end of the maintenance periods over which the revenue and costs of projects are being amortized, relatively fixed data acquisition costs, and our continued investment in developing our directory assistance software platform into full-featured call center software ("OnDemand") and related sales efforts. Other Net Revenue: The segment's net revenue in the third quarter of fiscal 2013 increased $4.9 million , or 17.4%, to $32.9 million from $28.0 million in fiscal 2012. The increase was due to higher information technology infrastructure services revenue driven primarily by the recognition of previously deferred revenue, as well as higher volume of business resulting primarily from new customers and to a lesser extent from net expanded business with existing customers at billing rates that remained relatively consistent between the periods offset by lower telecommunications infrastructure services revenue primarily due to lower volume of projects. Cost of Other Revenue: The segment's cost of other revenue in the third quarter of fiscal 2013 increased $0.8 million , or 3.7%, to $23.2 million from $22.4 million in fiscal 2012. The increase was due to higher information technology infrastructure services revenue driven primarily by a higher volume of business resulting primarily from new customers and to a lesser extent from net expanded business with existing customers at billing rates that remained relatively consistent between the periods offset by lower revenue primarily due to lower volume of projects. Selling, Administrative and Other Operating Costs: The segment's selling, administrative and other operating costs in the third quarter of fiscal 2013 increased $0.4 million , or 8.0%, to $5.3 million from $4.9 million in fiscal 2012, primarily from higher selling costs associated with the higher information technology infrastructure services revenue offset by lower administrative costs in telecommunications infrastructure services. Segment Operating Income: The segment's operating income in the third quarter of fiscal 2013 increased $3.6 million to $4.2 million from $0.6 million in fiscal 2012, as a result of the factors discussed above. 41 -------------------------------------------------------------------------------- Table of Contents Consolidated Results of Operations and Financial Highlights (Q2 2013 YTD vs. Q2 2012 YTD) Results of Operations by Segment (Q2 2013 YTD vs. Q2 2012 YTD) Six months ended April 28, 2013 Six months ended April 29, 2012 Staffing Computer Staffing Computer (in thousands) Total Services Systems Other Total Services Systems Other Net Revenue $ 1,039,929 $ 951,091 $ 38,978 $ 49,860 $ 1,116,536 $ 1,000,495 `$ 56,224 $ 59,817 Expenses Direct cost of staffing services revenue 825,109 825,109 - - 857,209 857,209 - - Cost of other revenue 79,626 - 34,557 45,069 86,194 - 36,571 49,623 Selling, administrative and other operating costs 140,659 120,001 11,553 9,105 146,673 123,489 12,530 10,654 Amortization of purchased intangible assets 691 24 429 238 690 24 429 237 Restructuring costs 1,688 418 1,270 - - - - - Segment operating income (loss) (7,844) 5,539 (8,831) (4,552) 25,770 19,773 6,694 (697) Corporate general and administrative 4,670 4,822 Restatement and associated investigations 21,207 18,200 Operating income (loss) (33,721) 2,748 Other income (expense), net 329 (2,365) Income tax provision 1,159 733 Net loss $ (34,551) $ (350) NON-GAAP PROFORMA TABLE Six months ended April 28, 2013 Six months ended April 29, 2012 Staffing Computer Staffing Computer (in thousands) Total Services Systems Other Total Services Systems Other Net Revenue $ 1,039,929 $ 951,091 $ 38,978 $ 49,860 $ 1,116,536 $ 1,000,495 $ 56,224 $ 59,817 Recognition of previously unrecognized revenue (11,115) (11,115) - - (22,795) (22,795) - - Additions to unrecognized revenue 8,105 8,105 - - 8,429 8,429 - - Net non-GAAP proforma adjustment (3,010) (3,010) - - (14,366) (14,366) - - Non-GAAP proforma net revenue 1,036,919 948,081 38,978 49,860 1,102,170 986,129 56,224 59,817 Expenses Direct cost of staffing services revenue 825,109 825,109 - - 857,209 857,209 - - Cost of other revenue 79,626 - 34,557 45,069 86,194 - 36,571 49,623 Selling, administrative and other operating costs 140,659 120,001 11,553 9,105 146,673 123,489 12,530 10,654 Amortization of purchased intangible assets 691 24 429 238 690 24 429 237 Restructuring costs 1,688 418 1,270 - - - - - Non-GAAP proforma segment operating income (loss) (10,854) 2,529 (8,831) (4,552) 11,404 5,407 6,694 (697) Non-GAAP proforma operating loss (36,731) (11,618) Non-GAAP proforma net loss $ (37,561) $ (14,716) 42 -------------------------------------------------------------------------------- Table of Contents Consolidated Results of Operations (Q2 2013 YTD vs. Q2 2012 YTD) Net Revenue: Net revenue in the first six months of fiscal 2013 decreased $76.6 million to $1,039.9 million from $1,116.5 million in fiscal 2012, and proforma net revenue decreased by $65.3 million or 5.9% to $1,036.9 million from $1,102.2 million in fiscal 2012. The change in revenue was primarily the result of decreased Staffing Services revenues of $49.4 million (proforma of $38.0 million ) resulting from our increased focus on exiting or reducing business levels with customers where profitability or business terms are unfavorable, lower staffing levels at a few large customers related to their particular business demand level, slightly lower managed services revenue, and $11.4 million lower recognition of previously Unrecognized Revenue, and from lower Computer Systems revenues of $17.2 million from lower transaction volumes, pricing and maintenance levels, as well as several large implementations reaching the end of the maintenance periods over which the projects were being amortized. Direct Cost of Staffing Services Revenue: Direct cost of Staffing Services revenue in the first six months of fiscal 2013 decreased $32.1 million , or 3.7%, to $825.1 million from $857.2 million in fiscal 2012. This decrease was primarily the result of fewer contingent staff on assignment and lower managed service program costs consistent with the related decrease in revenues. Direct margin of Staffing Services revenue as a percent of staffing revenue and proforma staffing revenue in fiscal 2013 was 13.2% and 13.0% from 14.3% and 13.1% in fiscal 2012, respectively. The direct margin remained approximately consistent as higher margins resulting from our initiative focusing on achieving acceptable operating income and exiting or reducing business levels with customers where profitability or business terms are unfavorable were offset by lower margins on our call center, games testing and other project-based revenue. This was offset in the GAAP percentage by the 1.0% impact of the change in net Unrecognized Revenue. Cost of Other Revenue: Cost of other revenue in the first six months of fiscal 2013 decreased $6.6 million , or 7.6%, to $79.6 million from $86.2 million in fiscal 2012. This decrease was primarily a result of decreased costs, although with higher margins, from our telecommunications infrastructure services offset by increased costs and at slightly lower margins for our information technology infrastructure service. It also includes decreased Computer Systems costs, although not proportional with the decrease in Computer systems revenue due to both our ongoing investment in developing our directory assistance software platform into full featured call center software ("OnDemand") and relatively fixed data acquisition costs. Selling, Administrative and Other Operating Costs: Selling, administrative and other operating costs in the first six months of fiscal 2013 decreased $6.0 million , or 4.1%, to $140.7 million from $146.7 million in fiscal 2012. This decrease was a result of a decrease in our telecommunications infrastructure services attributable to the decrease in revenue from prior year, as well as decreased administrative costs in our Computer Systems segment in reaction to the lower business levels offset by higher selling costs as we increased efforts to sell our full-featured call center software. The Staffing Services segment decrease was primarily the result of a $3.0 million indirect tax recovery. Restructuring Costs: Restructuring costs in the first six months of fiscal 2013 was comprised of workforce reductions in our Computer Systems and Staffing Services Segments. Due to the continued decline in the Computer Systems business both domestically and internationally in fiscal 2013, we reduced headcount in North America , the United Kingdom and Germany , incurring primarily severance related restructuring costs. We also reduced headcount in our Staffing Services segment in connection with our focus on achieving acceptable operating income from our traditional time and materials Staffing Services in North America and exiting or reducing business levels with customers where profitability or business terms are unfavorable. Restatement and Associated Investigations: Restatement and associated investigations were comprised of financial and legal consulting, audit, and related costs and in the first six months of fiscal 2013 amounted to $21.2 million compared to $18.2 million in fiscal 2012. The increased costs were a result of the significant work performed to complete the restatement, audits and filing of delinquent SEC reports during 2013, compared with fiscal 2012 when efforts were expended on completing investigations, accounting and control assessments and auditing. 43 -------------------------------------------------------------------------------- Table of Contents Operating Income (Loss): Operating loss in the first six months of fiscal 2013 of $33.7 million included restatement and associated investigation expenses of $21.2 million , restructuring costs of $1.7 million and deferral of software systems revenues and costs, net of current period deferrals, of $2.8 million . Without these items we would have had an operating loss of $8.0 million and a proforma operating loss of $11.0 million . Operating income in the first six months of fiscal 2012 of $2.7 million included restatement and associated investigation expenses of $18.2 million and recognition of previously deferred software systems revenues and costs, net of current period deferrals, of $15.9 million . Without these items we would have had operating income of $5.0 million and a proforma operating loss of $9.3 million . Operating results and proforma operating results were lower in the first six months of fiscal 2013 than fiscal 2012 due to the above reasons and a decrease in Staffing Services results of $2.5 million due to higher traditional staffing margins, although on lower revenue, as well as Other results of $3.9 million due to revenue deferrals. Other Income (Expense), net: Other income in the first six months of fiscal 2013 increased $2.7 million to $0.3 million from an expense of $2.4 million in fiscal 2012, primarily related to foreign exchange gains and losses. Income Tax Provision: Income tax provision in the first six months of fiscal 2013 amounted to $1.2 million compared to $0.7 million in fiscal 2012. The provision in fiscal 2013 primarily related to locations outside of the United States . Results of Operations by Segments (Q2 2013 YTD vs. Q2 2012 YTD) Staffing Services Net Revenue: The segment's net revenue in the first six months of fiscal 2013 decreased $49.4 million to $951.1 million from $1,000.5 million in fiscal 2012, and proforma net revenue decreased by $38.0 million , or 3.9%, to $948.1 million from $986.1 million in fiscal 2012. This decrease was primarily due to our increased focus on exiting or reducing business levels with customers where profitability or business terms are unfavorable, lower staffing levels at a few of our large customers related to their particular business demand level, slightly lower managed services revenue, and $11.4 million lower recognition of previously Unrecognized Revenue. Direct Cost of Staffing Services Revenue: The segment's direct cost of staffing services revenue in the first six months of fiscal 2013 decreased $32.1 million , or 3.7%, to $825.1 million from $857.2 million in fiscal 2012. This decrease was primarily the result of fewer contingent staff on assignment and lower managed service program costs consistent with the related decrease in revenues. Direct margin of Staffing Services revenue as a percent of staffing revenue and proforma staffing revenue in fiscal 2013 was 13.2% and 13.0% from 14.3% and 13.1% in fiscal 2012, respectively. The direct margin remained approximately consistent as higher margins resulting from our initiative focusing on achieving acceptable operating income and exiting or reducing business levels with customers where profitability or business terms are unfavorable were offset by lower margins on our call center, games testing and other project-based revenue. This was offset in the GAAP percentage by the 1.0% impact of the change in net Unrecognized Revenue. Selling, Administrative and Other Operating Costs: The segment's selling, administrative and other operating costs in the first six months of fiscal 2013 decreased $3.5 million , or 2.8%, to $120.0 million from $123.5 million in fiscal 2012. The decrease was primarily the result of a $3.0 million indirect tax recovery. Restructuring Costs: The focus in fiscal 2013 on achieving acceptable operating income from our traditional time and materials staffing services in North America and exiting or reducing business levels with customers where profitability or business terms are unfavorable led to workforce re-alignment and reductions with costs for employee severance of $0.4 million . 44 -------------------------------------------------------------------------------- Table of Contents Segment Operating Income: The segment's operating income in the first six months of fiscal 2013 decreased $14.3 million to $5.5 million from $19.8 million in fiscal 2012, and proforma operating income decreased by $2.9 million or 53.2% to $2.5 million from $5.4 million in fiscal 2012. The change in operating income is due to a $3.0 million indirect tax recovery, lower traditional staffing revenue, although at higher margin ratios, and selling, administrative and other operating cost decreases that lagged the decrease in revenue. GAAP results include a $11.4 million lower recognition of previously Unrecognized Revenue. Computer Systems Net Revenue: The segment's net revenue in the first six months of fiscal 2013 decreased by $17.2 million , or 30.7%, to $39.0 million from $56.2 million in fiscal 2012. This decrease was primarily from lower transaction volumes, pricing and maintenance levels, as well as several large implementations reaching the end of the maintenance periods over which the projects were being amortized. Cost of Other Revenue: The segment's cost of revenue in the first six months of fiscal 2013 decreased $2.0 million , or 5.5%, to $34.6 million from $36.6 million in fiscal 2012. Computer Systems costs did not decrease proportionally with the decrease in Computer Systems revenue due to our ongoing investment in developing our directory assistance software platform into full-featured call center software ("OnDemand") and relatively fixed data acquisition costs. Selling, Administrative and Other Operating Costs: The segment's selling, administrative and other operating costs in the first six months of fiscal 2013 decreased $0.9 million , or 7.8%, to $11.6 million from $12.5 million in fiscal 2012, primarily the result of decreased administrative costs in reaction to the lower business levels offset by higher selling costs as we increased efforts to sell our full-featured call center software. Restructuring Costs: Due to the continued decline in the Computer Systems business both domestically and internationally in fiscal 2013, we reduced headcount in North America , the United Kingdom and Germany , incurring approximately $1.3 million of severance related restructuring costs. Segment Operating Income(Loss): The segment's operating results in the first six months fiscal 2013 decreased by $15.5 million to a loss of $8.8 million compared to income of $6.7 million in fiscal 2012 primarily due to lower transaction volumes, pricing and maintenance levels, and as several large implementations reached the end of the maintenance periods over which the projects were being amortized, relatively fixed data acquisition costs, our continued investment in developing our directory assistance software platform into full-featured call center software ("OnDemand") and related sales efforts and restructuring costs as we reduced headcount in response to lower revenue levels. Other Net Revenue: The segment's net revenue in the first six months of fiscal 2013 decreased $9.9 million , or 16.6%, to $49.9 million from $59.8 million in fiscal 2012. The decrease was due to information technology infrastructure services revenue deferrals and lower telecommunications infrastructure services revenue primarily due to lower volume of projects. Cost of Other Revenue: The segment's cost of other revenue in the first six months of fiscal 2013 decreased $4.5 million , or 9.2%, to $45.1 million from $49.6 million in fiscal 2012. The decrease was driven primarily by lower telecommunications infrastructure services costs as these costs were reduced commensurate with the related revenue decreases and the remaining projects achieved higher margins than in 2012, offset by higher information technology infrastructure services costs commensurate with the related higher revenues, although at slightly lower margins due to ramp-up costs associated with the new customers. Selling, Administrative and Other Operating Costs: The segment's selling, administrative and other operating costs in the first six months of fiscal 2013 decreased $1.6 million , or 14.5%, to $9.1 million from $10.7 million in fiscal 2012, primarily though lower administrative costs partially offset by higher selling costs associated with the higher information technology infrastructure services revenue. 45 -------------------------------------------------------------------------------- Table of Contents Segment Operating Loss: The segment's operating loss in the first six months of fiscal 2013 increased $3.9 million to $4.6 million from $0.7 million in fiscal 2012, primarily due to information technology infrastructure services revenue deferrals. Consolidated Results of Operations and Financial Highlights (Q2 2013 vs. Q2 2012) Results of Operations by Segment (Q2 2013 vs. Q2 2012) Three months ended April 28, 2013 Three months ended April 29, 2012 Staffing Computer Staffing Computer (in thousands) Total Services Systems Other Total Services Systems Other Net Revenue $ 519,724 $ 476,729 $ 18,752 $ 24,243 $ 573,443 $ 521,278 $ 22,322 $ 29,843 Expenses Direct cost of staffing services revenue 413,116 413,116 - - 441,341 441,341 - - Cost of other revenue 39,873 - 16,742 23,131 42,759 - 17,803 24,956 Selling, administrative and other operating costs 72,612 62,058 6,024 4,530 75,029 63,782 6,263 4,984 Amortization of purchased intangible assets 346 12 215 119 345 12 215 118 Restructuring costs 948 133 815 - - - - - Segment operating income (loss) (7,171) 1,410 (5,044) (3,537) 13,969 16,143 (1,959) (215) Corporate general and administrative 2,380 1,974 Restatement and associated investigations 7,387 9,169 Operating income (loss) (16,938) 2,826 Other income (expense), net 60 (1,948) Income tax provision 583 331 Net income (loss) $ (17,461) $ 547 NON-GAAP PROFORMA TABLE Three months ended April 28, 2013 Three months ended April 29, 2012 Staffing Computer Staffing Computer (in thousands) Total Services Systems Other Total Services Systems Other Net Revenue $ 519,724 $ 476,729 $ 18,752 $ 24,243 $ 573,443 $ 521,278 $ 22,322 $ 29,843 Recognition of previously unrecognized revenue (8,632) (8,632) - - (19,512) (19,512) - - Additions to unrecognized revenue 8,164 8,164 - - 6,325 6,325 - - Net non-GAAP proforma adjustment (468) (468) - - (13,187) (13,187) - - Non-GAAP proforma net revenue 519,256 476,261 18,752 24,243 560,256 508,091 22,322 29,843 Expenses Direct cost of staffing services revenue 413,116 413,116 - - 441,341 441,341 - - Cost of other revenue 39,873 - 16,742 23,131 42,759 - 17,803 24,956 Selling, administrative and other operating costs 72,612 62,058 6,024 4,530 75,029 63,782 6,263 4,984 Amortization of purchased intangible assets 346 12 215 119 345 12 215 118 Restructuring costs 948 133 815 - - - - - Non-GAAP proforma segment operating income (loss) (7,639) 942 (5,044) (3,537) 782 2,956 (1,959) (215) Non-GAAP proforma operating loss (17,406) (10,361) Non-GAAP proforma net loss $ (17,929) $ (12,640) 46 -------------------------------------------------------------------------------- Table of Contents Consolidated Results of Operations (Q2 2013 vs. Q2 2012) Net Revenue: Net revenue in the second quarter of fiscal 2013 decreased $53.7 million to $519.7 million from $573.4 million in fiscal 2012, and proforma net revenue decreased by $41.0 million or 7.3% to $519.3 million from $560.3 million in fiscal 2012. The change in revenue was primarily the result of decreased Staffing Services revenues of $44.6 million (proforma of $31.8 million ) resulting from our increased focus on exiting or reducing business levels with customers where profitability or business terms are unfavorable, lower staffing levels at a few large customers related to their particular business demand level, slightly lower managed services revenue, and $12.7 million lower recognition of previously Unrecognized Revenue, and from lower Computer Systems revenues of $3.6 million from lower transaction volumes, pricing and maintenance levels, as well as several large implementations reaching the end of the maintenance periods over which the projects were being amortized. Direct Cost of Staffing Services Revenue: Direct cost of Staffing Services revenue in the second quarter of fiscal 2013 decreased $28.2 million , or 6.4%, to $413.1 million from $441.3 million in fiscal 2012. This decrease was primarily the result of fewer contingent staff on assignment and lower managed service program costs consistent with the related decrease in revenues. Direct margin of Staffing Services revenue as a percent of staffing revenue and proforma staffing revenue in fiscal 2013 was 13.3% and 13.3% from 15.3% and 13.1% in fiscal 2012, respectively. The direct margin improved by 0.2% primarily due to higher margins resulting from our initiative focusing on achieving acceptable operating income and exiting or reducing business levels with customers where profitability or business terms are unfavorable, offset by lower margins on our call center, games testing and other project-based revenue. This improvement was offset in the GAAP percentage by the 2.2% impact of the change in net Unrecognized Revenue. Cost of Other Revenue: Cost of other revenue in the second quarter of fiscal 2013 decreased $2.9 million , or 6.7%, to $39.9 million from $42.8 million in fiscal 2012. This decrease was primarily a result of decreased costs and higher margins for our telecommunications infrastructure services, as well as Computer Systems costs that did not decrease proportionally with the decrease in Computer Systems revenue due to both our ongoing investment in developing our directory assistance software platform into full featured call center software ("OnDemand") and relatively fixed data acquisition costs. These decreases were offset by increased costs at slightly lower margins for our information technology infrastructure service. Selling, Administrative and Other Operating Costs: Selling, administrative and other operating costs in the second quarter of fiscal 2013 decreased $2.4 million , or 3.2%, to $72.6 million from $75.0 million in fiscal 2012. This decrease was primarily in our Staffing Services segment, although the decrease in expense lagged the decrease in revenue. Restructuring Costs: Restructuring costs in the second quarter of fiscal 2013 was comprised of workforce reductions in our Computer Systems and Staffing Services Segments. Due to the continued decline in the Computer Systems business both domestically and internationally in fiscal 2013, we reduced headcount in North America , the United Kingdom and Germany , incurring primarily severance related restructuring costs. We also reduced headcount in our Staffing Services segment in connection with our focus on achieving acceptable operating income from our traditional time and materials Staffing Services in North America and exiting or reducing business levels with customers where profitability or business terms are unfavorable. Restatement and Associated Investigations: Restatement and associated investigations were comprised of financial and legal consulting, audit, and related costs in the second quarter of fiscal 2013 and amounted to $7.4 million compared to $9.2 million in fiscal 2012. The decreased costs were a result of the resolution of the SEC investigation and completion of the restatement, audits and filing of delinquent SEC reports during 2013, compared with fiscal 2012 when significant efforts were expended on completing investigations, accounting and control assessments and auditing. Operating Income (Loss): Operating loss in the second quarter of fiscal 2013 of $16.9 million included restatement and associated investigation expenses of $7.4 million , deferral of software systems revenues and 47 -------------------------------------------------------------------------------- Table of Contents costs, net of current period deferrals of $2.0 million , and restructuring costs of $0.9 million as we reduced headcount in response to lower revenue levels. Without these items we would have had an operating loss of $6.6 million and a proforma operating loss of $7.1 million . Operating income in the second quarter of fiscal 2012 of $2.8 million included restatement and associated investigation expenses of $9.2 million and recognition of previously deferred software systems revenues and costs, net of current period deferrals, of $2.9 million . Without these items we would have had operating income of $9.1 million and a proforma operating loss of $4.1 million . Operating results and proforma operating results were lower in the second quarter of fiscal 2013 than fiscal 2012 primarily due to the above reasons and a decrease in Staffing Services results of approximately $2.0 million due to higher traditional staffing margins, although on lower revenues, as well as Other of $3.3 million due to revenue deferrals. Other Income (Expense), net: Other income in the second quarter of fiscal 2013 increased $2.0 million to $0.1 million from expense of $1.9 million in fiscal 2012, primarily related to foreign exchange gains and losses. Income Tax Provision: Income tax provision in the second quarter of fiscal 2013 amounted to $0.6 million compared to a provision of $0.3 million in fiscal 2012. The provision in fiscal 2013 primarily related to locations outside of the United States . Results of Operations by Segments (Q2 2013 vs. Q2 2012 ) Staffing Services Net Revenue: The segment's net revenue in the second quarter of fiscal 2013 decreased $44.6 million to $476.7 million from $521.3 million in fiscal 2012, and proforma net revenue decreased by $31.8 million , or 6.3%, to $476.3 million from $508.1 million in fiscal 2012. This decrease is primarily due to our increased focus on exiting or reducing business levels with customers where profitability or business terms are unfavorable, lower staffing levels at a few large customers related to their particular business demand level, slightly lower managed services revenue, and $12.7 million lower recognition of previously Unrecognized Revenue. Direct Cost of Staffing Services Revenue: Direct cost of Staffing Services revenue in the second quarter of fiscal 2013 decreased $28.2 million , or 6.4%, to $413.1 million from $441.3 million in fiscal 2012. This decrease was primarily the result of fewer contingent staff on assignment and lower managed service program costs consistent with the related decrease in revenues. Direct margin of Staffing Services revenue as a percent of staffing revenue and proforma staffing revenue in fiscal 2013 was 13.3% and 13.3% from 15.3% and 13.1% in fiscal 2012, respectively. The direct margin improved by 0.2% primarily due to higher margins resulting from our initiative focusing on achieving acceptable operating income and exiting or reducing business levels with customers where profitability or business terms are unfavorable, offset by lower margins on our call center, games testing and other project-based revenue. This improvement was offset in the GAAP percentage of 2.2% impact of the change in net Unrecognized Revenue. Selling, Administrative and Other Operating Costs: The segment's selling, administrative and other operating costs in the second quarter of fiscal 2013 decreased $1.7 million , or 2.7%, to $62.1 million from $63.8 million in fiscal 2012. This decrease was primarily the result of reductions in selling, administrative and other operating cost decreases lagging the decrease in revenue. Segment Operating Income: The segment's operating income in the second quarter of fiscal 2013 decreased $14.7 million to $1.4 million from $16.1 million in fiscal 2012, and proforma operating income decreased by $2.1 million or 68.1% to $0.9 million from $3.0 million in fiscal 2012. The change in operating income is due to lower traditional staffing revenue, although at higher margin ratios, and selling, administrative and other operating cost decreases lagging the decrease in revenue. GAAP results include $12.7 million lower recognition of previously Unrecognized Revenue. 48 -------------------------------------------------------------------------------- Table of Contents Computer Systems Net Revenue: The segment's net revenue in the second quarter of fiscal 2013 decreased by $3.5 million , or 16.0%, to $18.8 million from $22.3 million in fiscal 2012. This decrease was primarily a result of lower transaction volumes, pricing and maintenance levels as well as several large implementations reaching the end of the maintenance periods over which the projects were being amortized. Cost of Other Revenue: The segment's cost of revenue in the second quarter of fiscal 2013 decreased $1.1 million , or 6.0%, to $16.7 million from $17.8 million in fiscal 2012. Computer Systems costs did not decrease proportionally with the decrease in Computer Systems revenue due to our ongoing investment in developing our directory assistance software platform into full-featured call center software ("OnDemand") and relatively fixed data acquisition costs. Selling, Administrative and Other Operating Costs: The segment's selling, administrative and other operating costs in the second quarter of fiscal 2013 decreased $0.3 million , or 3.8%, to $6.0 million from $6.3 million in fiscal 2012. The decrease was primarily the result of decreased administrative costs in reaction to the lower business levels offset by higher selling costs as we increased efforts to sell our full-featured call center software. Restructuring Costs: Due to the continued decline in the Computer Systems business both domestically and internationally in fiscal 2013, we reduced headcount in North America , the United Kingdom and Germany , incurring approximately $0.8 million of severance related restructuring costs. Segment Operating Loss: The segment's operating loss in the second quarter fiscal 2013 increased by $3.0 million to a loss of $5.0 million from $2.0 million in fiscal 2012 primarily due to lower transaction volumes, pricing and maintenance levels and as several large implementations reached the end of the maintenance periods over which the projects were being amortized, relatively fixed data acquisition costs, our continued investment in developing our directory assistance software platform into full-featured call center software ("OnDemand") and related sales efforts, and restructuring costs as we reduced headcount in response to lower revenue levels. Other Net Revenue: The segment's net revenue in the second quarter of fiscal 2013 decreased $5.6 million , or 18.8%, to $24.2 million from $29.8 million in fiscal 2012. The decrease was due to lower telecommunications infrastructure services revenue primarily due to lower volume of projects, as well as information technology infrastructure services revenue deferrals. Cost of Other Revenue: The segment's cost of other revenue in the second quarter of fiscal 2013 decreased $1.9 million , or 7.3%, to $23.1 million from $25.0 million in fiscal 2012. The decrease was due to lower telecommunications infrastructure services revenue primarily due to lower volume of projects offset by higher information technology infrastructure services revenue driven primarily by a higher volume of business resulting primarily from new customers and to a lesser extent from net expanded business with existing customers at billing rates that remained relatively consistent between the periods. Selling, Administrative and Other Operating Costs: The segment's selling, administrative and other operating costs in the second quarter of fiscal 2013 decreased $0.5 million , or 9.1%, to $4.5 million from $5.0 million in fiscal 2012, primarily from lower administrative costs in telecommunications infrastructure services offset by higher selling costs associated with the higher information technology infrastructure services revenue. Segment Operating Income: The segment's operating loss in the second quarter of fiscal 2013 increased $3.3 million to $3.5 million from $0.2 million in fiscal 2012, as a result of information technology infrastructure services revenue deferrals. 49 -------------------------------------------------------------------------------- Table of Contents Consolidated Results of Operations and Financial Highlights (Q1 2013 YTD vs. Q1 2012 YTD) Results of Operations by Segment (Q1 2013 YTD vs. Q1 2012 YTD) Three months ended January 27, 2013 Three months ended January 29, 2012 Staffing Computer Staffing Computer (in thousands) Total Services Systems Other Total Services Systems Other Net Revenue $ 520,205 $ 474,362 $ 20,226 $ 25,617 $ 543,093 $ 479,217 $ 33,902 $ 29,974 Expenses Direct cost of staffing services revenue 411,993 411,993 - - 415,868 415,868 - - Cost of other revenue 39,753 - 17,815 21,938 43,435 - 18,768 24,667 Selling, administrative and other operating costs 68,047 57,943 5,529 4,575 71,644 59,707 6,267 5,670 Amortization of purchased intangible assets 345 12 214 119 345 12 214 119 Restructuring costs 740 285 455 - - - - - Segment operating income (loss) (673) 4,129 (3,787) (1,015) 11,801 3,630 8,653 (482) Corporate general and administrative 2,290 2,848 Restatement and associated investigations 13,820 9,031 Operating loss (16,783) (78) Other income (expense), net 269 (417) Income tax provision 576 402 Net loss $ (17,090) $ (897) NON-GAAP PROFORMA TABLE Three months ended January 27, 2013 Three months ended January 29, 2012 Staffing Computer Staffing Computer (in thousands) Total Services Systems Other Total Services Systems Other Net Revenue $ 520,205 $ 474,362 $ 20,226 $ 25,617 $ 543,093 $ 479,217 $ 33,902 $ 29,974 Recognition of previously unrecognized revenue (9,113) (9,113) - - (11,837) (11,837) - - Additions to unrecognized revenue 6,571 6,571 - - 10,658 10,658 - - Net non-GAAP proforma adjustment (2,542) (2,542) - - (1,179) (1,179) - - Non-GAAP proforma net revenue 517,663 471,820 20,226 25,617 541,914 478,038 33,902 29,974 Expenses Direct cost of staffing services revenue 411,993 411,993 - - 415,868 415,868 - - Cost of other revenue 39,753 - 17,815 21,938 43,435 - 18,768 24,667 Selling, administrative and other operating costs 68,047 57,943 5,529 4,575 71,644 59,707 6,267 5,670 Amortization of purchased intangible assets 345 12 214 119 345 12 214 119 Restructuring costs 740 285 455 - - - - - Non-GAAP proforma segment operating income (loss) (3,215) 1,587 (3,787) (1,015) 10,622 2,451 8,653 (482) Non-GAAP proforma operating loss (19,325) (1,257) Non-GAAP proforma net loss $ (19,632) $ (2,076) 50 -------------------------------------------------------------------------------- Table of Contents Consolidated Results of Operations (Q1 2013 vs. Q1 2012) Net Revenue: Net revenue in the first quarter of fiscal 2013 decreased $22.9 million to $520.2 million from $543.1 million in fiscal 2012, and proforma net revenue decreased by $24.2 million or 4.5% to $517.7 million from $541.9 million in fiscal 2012. The change in revenue was primarily the result of decreased Staffing Services revenues of $4.8 million (proforma of $6.2 million ) resulting from our increased focus on exiting or reducing business levels with customers where profitability or business terms are unfavorable, lower staffing levels at a few large customers related to their particular business demand level, slightly lower managed services revenue, and $1.4 million higher recognition of previously Unrecognized Revenue, and from lower Computer Systems revenues of $13.7 million from lower transaction volumes, pricing and maintenance levels, as well as several large implementations reaching the end of the maintenance periods over which the projects were being amortized. Direct Cost of Staffing Services Revenue: Direct cost of Staffing Services revenue in the first quarter of fiscal 2013 decreased $3.9 million , or 0.9%, to $412.0 million from $415.9 million in fiscal 2012. This decrease was primarily the result of fewer contingent staff on assignment and lower managed service program costs consistent with the related decrease in revenues. Direct margin of Staffing Services revenue as a percent of staffing revenue and proforma staffing revenue in fiscal 2013 was 13.1% and 12.7% from 13.2% and 13.0% in fiscal 2012, respectively. The direct margin declined by 0.3% primarily due to lower margins on our call center, games testing and other project-based revenue. This decline was offset in the GAAP percentage by the 0.2% impact of the change in net Unrecognized Revenue. Cost of Other Revenue: Cost of other revenue in the first quarter of fiscal 2013 decreased $3.6 million , or 8.5%, to $39.8 million from $43.4 million in fiscal 2012. This decrease was primarily a result of decreased costs and higher margins from our telecommunications infrastructure services, as well as Computer Systems costs that did not decrease proportionally with the decrease in Computer systems revenue due to both our ongoing investment in developing our directory assistance software platform into full featured call center software ("OnDemand") and relatively fixed data acquisition costs. These decreases were offset by increased costs at slightly lower margins for our information technology infrastructure services. Selling, Administrative and Other Operating Costs: Selling, administrative and other operating costs in the first quarter of fiscal 2013 decreased $3.6 million , or 5.0%, to $68.0 million from $71.6 million in fiscal 2012. This decrease was primarily in our Staffing Services segment attributable to a $3.0 million indirect tax recovery, our telecommunications infrastructure services attributable to the decrease in revenue from prior year, as well as in our Computer Systems segment where we decreased administrative costs in reaction to the lower business levels offset by higher selling costs as we increased efforts to sell our full-featured call center software ("OnDemand"). Restructuring Costs: Restructuring costs in the first quarter of fiscal 2013 was comprised of workforce reductions in our Computer Systems and Staffing Services Segments. Due to the continued decline in the Computer Systems business both domestically and internationally in fiscal 2013, we reduced headcount in North America , the United Kingdom and Germany , incurring primarily severance related restructuring costs. We also reduced headcount in our Staffing Services segment in connection with our focus on achieving acceptable operating income from our traditional time and materials staffing services in North America and exiting or reducing business levels with customers where profitability or business terms are unfavorable. Restatement and Associated Investigations: Restatement and associated investigations were comprised of financial and legal consulting, audit, and related costs and in the first quarter of fiscal 2013 amounted to $13.8 million compared to $9.0 million in fiscal 2012. The increased costs were a result of the significant work performed to complete the restatement, audits and filing of delinquent SEC reports during 2013, compared with fiscal 2012 when efforts were expended on completing investigations, accounting and control assessments and auditing. Operating Loss: Operating loss in the first quarter of fiscal 2013 of $16.8 million included restatement and associated investigation expenses of $13.8 million , restructuring costs of $0.7 million as we reduced headcount in 51 -------------------------------------------------------------------------------- Table of Contents response to lower revenue levels and deferral of software systems revenues and costs, net of current period deferrals, of $0.8 million . Without these items we would have had an operating loss of $1.5 million and a proforma operating loss of $4.0 million . Operating loss in the first quarter of fiscal 2012 of $0.1 million included restatement and associated investigation expenses of $9.0 million and recognition of previously deferred software systems revenues and costs, net of current period deferrals, of $13.0 million . Without these items we would have had an operating loss of $4.1 million and a proforma operating loss of $5.3 million . Operating results and proforma operating results were lower in the first quarter of fiscal 2013 than fiscal 2012 due to the above reasons and a decrease in Staffing Services results of approximately $3.6 million primarily due to selling, administrative and other operating cost decreases lagging the decrease in revenue. Other Income (Expense), net: Other income in the first quarter of fiscal 2013 increased $0.7 million to income of $0.3 million from expense of $0.4 million in fiscal 2012, primarily related to foreign exchange gains and losses. Income Tax Provision: Income tax provision in the first quarter of fiscal 2013 amounted to $0.6 million compared to a provision of $0.4 million in fiscal 2012. The provision in fiscal 2013 primarily related to locations outside of the United States . Results of Operations by Segments (Q1 2013 vs. Q1 2012 ) Staffing Services Net Revenue: The segment's net revenue in the first quarter of fiscal 2013 decreased $4.8 million to $474.4 million from $479.2 million in fiscal 2012, and proforma net revenue decreased by $6.2 million , or 1.3%, to $471.8 million from $478.0 million in fiscal 2012. This decrease was primarily due to our increased focus on exiting or reducing business levels with customers where profitability or business terms are unfavorable, lower staffing levels at a few of our large customers related to their particular business demand level, slightly lower managed services revenue, and $1.4 million higher recognition of previously Unrecognized Revenue. Direct Cost of Staffing Services Revenue: The segment's direct cost of Staffing Services revenue in the first quarter of fiscal 2013 decreased $3.9 million , or 0.9%, to $412.0 million from $415.9 million in fiscal 2012. This decrease was primarily the result of fewer contingent staff on assignment and lower managed service program costs consistent with the related decrease in revenues. Direct margin of Staffing Services revenue as a percent of staffing revenue and proforma staffing revenue in fiscal 2013 was 13.1% and 12.7% from 13.2% and 13.0% in fiscal 2012, respectively. The direct margin declined by 0.3% primarily due to lower margins on our call center, games testing and other project-based revenue. This decline was offset in the GAAP percentage by the 0.2% impact of the change in net Unrecognized Revenue. Selling, Administrative and Other Operating Costs: The segment's selling, administrative and other operating costs in the first quarter of fiscal 2013 decreased $1.8 million , or 3.0%, to $57.9 million from $59.7 million in fiscal 2012. The decrease was primarily the result of a $3.0 million indirect tax recovery. Restructuring Costs: The focus in fiscal 2013 on achieving acceptable operating income from our traditional time and materials Staffing Services in North America and exiting or reducing business levels with customers where profitability or business terms are unfavorable led to workforce re-alignment and reductions with costs for employee severance of $0.3 million . Segment Operating Income: The segment's operating income in the first quarter of fiscal 2013 increased $0.5 million to $4.1 million from $3.6 million in fiscal 2012, and proforma operating income decreased by $0.9 million to $1.6 million from $2.5 million in fiscal 2012. The change in operating income is primarily due to a $3.0 million indirect tax recovery, and selling, administrative and other operating cost decreases lagging the decrease in revenue. GAAP results include $1.4 million higher recognition of previously Unrecognized Revenue. 52 -------------------------------------------------------------------------------- Table of Contents Computer Systems Net Revenue: The segment's net revenue in the first quarter of fiscal 2013 decreased by $13.7 million , or 40.3%, to $20.2 million from $33.9 million in fiscal 2012. This decrease was primarily a result from lower transaction volumes, pricing and maintenance levels, as well as several large implementations reaching the end of the maintenance periods over which the projects were being amortized. Cost of Other Revenue: The segment's cost of revenue in the first quarter of fiscal 2013 decreased $1.0 million , or 5.1%, to $17.8 million from $18.8 million in fiscal 2012. Computer Systems costs did not decrease proportionally with the decrease in Computer Systems revenue due to our ongoing investment in developing our directory assistance software platform into full-featured call center software ("OnDemand") and relatively fixed data acquisition costs. Selling, Administrative and Other Operating Costs: The segment's selling, administrative and other operating costs in the first quarter of fiscal 2013 decreased $0.8 million , or 11.8%, to $5.5 million from $6.3 million in fiscal 2012. The decrease was primarily the result of decreased administrative costs in reaction to the lower business levels offset by higher selling costs as we increased efforts to sell our full-featured call center software. Restructuring Costs: Due to the continued decline in the Computer Systems business both domestically and internationally in fiscal 2013, we reduced headcount in North America , the United Kingdom and Germany , incurring approximately $0.5 million of severance related restructuring costs. Segment Operating Income (Loss): The segment's operating results in the first quarter fiscal 2013 decreased by $12.5 million to a loss of $3.8 million from income of $8.7 million in fiscal 2012 primarily due to lower amortization of previously deferred revenue and previously deferred costs as several large system implementations reaching the end of the maintenance periods over which the revenue and costs of projects are being amortized, relatively fixed data acquisition costs, and our continued investment in developing our directory assistance software platform into full-featured call center software ("OnDemand") and related sales efforts. Other Net Revenue: The segment's net revenue in the first quarter of fiscal 2013 decreased $4.4 million , or 14.5%, to $25.6 million from $30.0 million in fiscal 2012. The decrease was due to lower telecommunications infrastructure services revenue primarily due to lower volume of projects offset by higher information technology infrastructure services revenue driven primarily by a higher volume of business resulting primarily from new customers and to a lesser extent from net expanded business with existing customers at billing rates that remained relatively consistent between the periods. Cost of Other Revenue: The segment's cost of other revenue in the first quarter of fiscal 2013 decreased $2.8 million , or 11.1%, to $21.9 million from $24.7 million in fiscal 2012. The decrease was due to lower telecommunications infrastructure services revenue primarily due to lower volume of projects offset by higher information technology infrastructure services revenue driven primarily by a higher volume of business resulting primarily from new customers and to a lesser extent from net expanded business with existing customers at billing rates that remained relatively consistent between the periods. Selling, Administrative and Other Operating Costs: The segment's selling, administrative and other operating costs in the first quarter of fiscal 2013 decreased $1.1 million , or 19.3%, to $4.6 million from $5.7 million in fiscal 2012, primarily from lower administrative costs in telecommunications infrastructure services offset by higher selling costs associated with the higher information technology infrastructure services revenue. Segment Operating Loss: The segment's operating loss in the first quarter of fiscal 2013 increased $0.5 million to $1.0 million from $0.5 million in fiscal 2012, as a result of the factors discussed above. 53 -------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources Cash Flows and Liquidity Our primary sources of liquidity are cash flows from operations and proceeds from short-term borrowing and credit facilities. On November 3, 2013 , the Company had cash and cash equivalents of $11.1 million and an additional $31.8 million of cash restricted as collateral for foreign currency credit lines and banking facilities. The Company also had approximately $25.5 million available from its short-term financing program. Excluding $8.9 million of long-term debt, the Company's consolidated borrowings were $167.3 million at November 3, 2013 , which included $22.3 million of foreign currency borrowings used primarily to hedge net investments in foreign subsidiaries that are fully collateralized by restricted cash, and $142.0 million drawn under the $200.0 million short-term financing program. The amount drawn under the short-term borrowing financing program was subsequently decreased to $120.0 million in January 2014 at which time there was approximately $20.3 million additional borrowing available. Cash flows from operating, investing and financing activities, as reflected in our Consolidated Statements of Cash Flows, are summarized in the following table: For the years ended, November 3, October 28, October 30, (in thousands) 2013 2012 2011 Net cash used in operating activities $ (31,089) $ (40,437) $ (28,352) Net cash used in investing activities (10,953) (7,642) (14,209) Net cash provided by financing activities 25,295 30,355 35,650 Effect of exchange rates on cash and cash equivalents 1,378 (360) 394 Net decrease in cash and cash equivalents $ (15,369) $ (18,084) $ (6,517) During fiscal 2013, the Company disbursed $37.3 million in connection with the restatement and related investigations and provided cash from all other operating activities of $6.2 million . The Company used $11.3 million for capital expenditures, net of $0.3 million received from the sale of property and equipment, and received $0.4 million for the sale of investments net of purchases. Borrowings under the accounts receivable securitization program increased by $22.0 million and decreases in restricted cash as collateral for foreign currency borrowings and banking facilities provided $3.8 million , offset by repayments of approximately $0.8 million of long-term debt. Fiscal Year Ended November 3, 2013 Compared to the Fiscal Year Ended October 28, 2012 Cash Flows - Operating Activities For the year ended November 3, 2013 , we used net cash flows in operating activities of $31.1 million ( $37.3 million in connection with the restatement and related investigations and $6.2 million provided by all other operating activities), compared to net cash used of $40.4 million ( $37.2 million in connection with the restatement and related investigations) for fiscal 2012, a decrease in net cash used of $9.3 million . The cash used in operating activities in fiscal 2013, exclusive of changes in operating assets and liabilities, was $18.3 million ; the 2013 net loss of $30.9 million included non-cash charges for depreciation and amortization of $14.9 million , a gain on unrealized foreign currency exchange of $1.3 million and a deferred tax benefit of $1.7 million . The cash provided by operating activities in fiscal 2012, exclusive of changes in operating assets and liabilities, was $0.3 million ; the 2012 net loss of $13.6 million included non-cash charges for depreciation and amortization of $16.5 million and a gain on dispositions of property, equipment and software of $4.9 million . 54 -------------------------------------------------------------------------------- Table of Contents Changes in operating assets and liabilities in fiscal 2013 resulted in a $12.8 million use of cash, net, principally due to a decrease in the level of accounts payable of $29.0 million and a decrease in the level of deferred revenue of $14.9 million . These uses of cash were partially offset by a decrease in accounts receivable of $41.1 million . Changes in operating assets and liabilities in fiscal 2012 resulted in a $40.8 million use of cash, net, principally due to a decrease in the level of deferred revenue of $26.4 million , an increase in the level of accounts receivable of $14.7 million and a decrease in the level of accounts payable of $13.1 million . These uses of cash were partially offset by a decrease in restricted cash related to customer contracts of $13.6 million . Cash Flows - Investing Activities Cash used in investing activities in fiscal 2013 was $11.0 million , principally for the purchase of property, equipment and software totaling $11.6 million partially offset by proceeds from disposals of $0.3 million , and net proceeds from sales of investments of $0.4 million . Cash used in investing activities in fiscal 2012 was $7.6 million , principally for the purchase of property, equipment and software totaling $13.7 million partially offset by proceeds from disposals of $7.7 million , $1.8 million for acquisitions as well as the net proceeds from sales of investments of $0.2 million . Cash Flows - Financing Activities For fiscal 2013, net cash provided by financing activities was $25.3 million , compared to $30.4 million for fiscal 2012, a decrease of $5.1 million . In fiscal 2013, the increase in short-term borrowings for the accounts receivable securitization program and short-term facilities totaled $22.3 million compared to $32.5 million in fiscal 2012. We also decreased our collateral pledged for the lines of credit by $3.8 million in fiscal 2013 compared to an increase of $1.4 million in fiscal 2012. Fiscal Year Ended October 28, 2012 Compared to the Fiscal Year Ended October 30, 2011 Cash Flows - Operating Activities For the year ended October 28, 2012 , we used net cash flows in operating activities of $40.4 million , compared to net cash used of $28.4 million for fiscal 2011, an increase in net cash used of $12.0 million . The cash used in operations was primarily a result of $37.2 million disbursed in connection with the restatement and related investigations and $3.2 million used for all other operating activities. We disbursed $46.8 million in fiscal 2011 in connection with the restatement and related investigations. The cash used in operating activities in fiscal 2012, exclusive of changes in operating assets and liabilities, was $0.3 million ; the 2012 net loss of $13.6 million included non-cash charges for depreciation and amortization of $16.5 million and a gain on dispositions of property, equipment and software of $4.9 million . The cash provided by operating activities in fiscal 2011, exclusive of changes in operating assets and liabilities, was $28.8 million ; the 2011 net income of $15.6 million included non-cash charges primarily for depreciation and amortization of $19.7 million a deferred tax benefit of $4.9 million , and a gain on dispositions of property, equipment and software of $2.0 million . Changes in operating assets and liabilities in fiscal 2012 resulted in a $40.8 million use of cash, net, principally due to a decrease in the level of deferred revenue of $26.4 million , an increase in the level of accounts receivable of $14.7 million and a decrease in the level of accounts payable of $13.1 million . These uses of cash were partially offset by a decrease in restricted cash related to customer contracts of $13.6 million . Changes in operating assets and liabilities in fiscal 2011 used $57.2 million of cash, net, principally due to a decrease in the level of deferred revenue of $56.9 million , a decrease to the level of accrued expenses of $5.8 million and a decrease to the level of accounts payable of $3.1 million . These uses of cash were partially offset by a decrease to the level of accounts receivable of $9.4 million . Cash Flows - Investing Activities Cash used in investing activities in fiscal 2012 was $7.6 million , principally for the purchase of property, equipment and software totaling $13.7 million partially offset by proceeds from disposals of $7.7 million , 55 -------------------------------------------------------------------------------- Table of Contents $1.8 million for acquisitions as well as the net proceeds from sales of investments of $0.2 million . Cash used in investing activities in fiscal 2011 was $14.2 million , principally for the purchase of property, equipment and software totaling $17.9 million , partially offset by proceeds from disposals of $3.8 million . Cash Flows - Financing Activities For fiscal 2012, net cash provided by financing activities was $30.4 million , compared to $35.7 million for fiscal 2011, a decrease in net cash provided of $5.3 million . In fiscal 2012, the increase in short-term borrowings for the accounts receivable securitization program and short-term facilities totaled $32.5 million compared to $40.1 million in fiscal 2011. We also increased our collateral pledged for the lines of credit by $1.4 million in fiscal 2012 compared to $3.8 million in fiscal 2011. Credit Markets and Availability of Credit At November 3, 2013 , we had short-term credit facilities which provided for borrowing and issuance of letters of credit of up to an aggregate of $245.0 million , including our $200.0 million accounts receivable securitization program ("Short-Term Financing Program") and our $45.0 million revolving credit agreement ("Short-Term Credit Facility"). Available borrowing under the Short-Term Financing Program is based on eligible receivable levels. Borrowings under the Short-Term Credit Facility require full cash collateralization as discussed in the notes to our Consolidated Financial Statements. As of November 3, 2013 , we had total outstanding short-term borrowings of $167.3 million and were required to maintain $31.8 million in cash collateral for certain outstanding short-term borrowings. At November 3, 2013 , the available borrowing under the short-term borrowing facilities included $25.5 million under the Short-Term Financing Program and $19.7 million under the Short-Term Credit Facility. The amount available under the Short-Term Financing Program decreased to $20.3 million as of January 2014 . Securitization Program The Short-Term Financing Program provides for borrowing under a credit agreement secured by receivables from the Staffing Services business that are sold to a wholly-owned, consolidated, bankruptcy-remote subsidiary and are available first to satisfy the lender. The program was amended on April 29, 2013 , to extend the program expiration date to December 31, 2014 and increase the maximum credit available from $150.0 million to $200.0 million . On August 28, 2013 , the benchmark interest rate for which interest is charged on the sale of receivables was changed from commercial paper to a LIBOR index. On December 27, 2013 , the Short-Term Financing Program was extended to December 31, 2016 . The program is subject to termination under certain circumstances including the default rate on receivables, as defined, exceeding a specified threshold or the rate of collections on receivables failing to meet a specified threshold. At November 3, 2013 , we were in compliance with the program covenants. At November 3, 2013 and October 28, 2012 , we had outstanding borrowing under the program of $142.0 million and $120.0 million , respectively, which bore a weighted average annual interest rate of 1.5% and 1.5%, respectively, inclusive of certain facility and program fees. The Company repaid $22.0 million and thereby reduced the borrowing to $120.0 million as of January 2014 . Credit Facilities The Short-Term Credit Facility provides for borrowing in various currencies secured by cash collateral covering 105% of certain baseline amounts. The facility is subject to a facility fee and borrowings bear various interest rate options calculated using a combination of LIBOR and prime rates plus a margin over those rates. The facility was amended on January 25, 2013 , to extend the expiration date to March 31, 2015 , increase the borrowing available to $45.0 million , increase the amount that may be used for letters of credit to $25.0 million , and require minimum liquidity of $15.0 million in unrestricted cash or Short-Term Financing Program borrowing availability. The amendment also removed financial ratio covenants and certain limitations previously placed on incurring additional indebtedness, the level of annual capital expenditures, the amount of investments, including 56 -------------------------------------------------------------------------------- Table of Contents business acquisitions and mergers, and the amount of loans that may be made by the Company to its subsidiaries. At November 3, 2013 , we were in compliance with the facility covenants. At November 3, 2013 and October 28, 2012 , we had drawn under the facility $22.3 million and $21.9 million , respectively, in various currencies used to hedge our net investment in certain foreign subsidiaries and $3.0 million in letters of credit outstanding. At November 3, 2013 and October 28, 2012 , borrowings bore a weighted average annual interest rate of 2.2% and 3.1%, respectively, inclusive of the facility fee. Off-Balance Sheet Arrangements There were no off-balance sheet transactions, arrangements or other relationships with unconsolidated entities or other persons in 2013 and 2012 that would have affected our liquidity or the availability of or requirements for capital resources. Contractual Obligations and Other Contingent Commitments The contractual obligations presented in the tables below represent our estimates of future payments under fixed contractual obligations and commitments undertaken in the normal course of business. Change in our business needs, cancellation provisions, changing interest rates and other factors may result in actual payments differing from these estimates. The following table summarizes our contractual cash obligations at November 3, 2013 : Payments Due by Period Less Than 1 1-3 3-5 After 5 (in thousands) Total Year Years Years Years Loan agreement $ 8,966 $ 839 $ 1,899 $ 2,236 $ 3,992 Interest on loan agreement 3,253 704 1,188 851 510 Securitization Program 142,000 142,000 - - - Notes Payable to Banks 25,275 25,275 - - - Total Debt (a) 176,241 168,114 1,899 2,236 3,992 Operating Leases 54,024 17,352 22,082 10,192 4,398 Total Contractual Cash Obligations $ 230,265 $ 185,466 $ 23,981 $ 12,428 $ 8,390 (a) Total debt excludes interest on loan agreement The Company's liability for uncertain tax positions of $9.2 million as of November 3, 2013 is not reflected in the above contractual obligations table as we are not able to reasonably estimate the timing of payments in individual years. The following table summarizes our contractual commitments as of November 3, 2013 (in millions): Total Commitment Amount by Expiration Period Less Than 1 1-3 3-5 After 5 Total Year Years Years Years Standby Letters of Credit $ 3.0 $ 3.0 $ - $ - $ - Other 5.5 4.8 0.7 - - Total Contractual Commitments $ 8.5 $ 7.8 $ 0.7 $ - $ - Critical Accounting Policies and Estimates Management's discussion and analysis of our financial position and results of operations are based upon our Consolidated Financial Statements, which are included in Item 8 of this report and have been prepared in accordance with accounting principles generally accepted in the United States . The preparation of these financial 57 -------------------------------------------------------------------------------- Table of Contents statements requires management to make estimates, judgments, assumptions and valuations that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures. While management believes that its estimates, judgments and assumptions are appropriate, significant differences in actual experience or significant changes in assumptions may materially affect our future results. Management believes the critical accounting policies and areas that require the most significant estimates, judgments, assumptions or valuations used in the preparation of our financial statements are those summarized below. Revenue Recognition Revenue is generally recognized when persuasive evidence of an arrangement exists, products have been delivered or services have been rendered, the fee is fixed or determinable, and collectability is reasonably assured. For arrangements within the scope of the multiple deliverable guidance, a deliverable constitutes a separate unit of accounting when it has stand-alone value and there are no customer-negotiated refunds or return rights for the delivered elements. For multiple-element arrangements, comprised only of hardware products and related services or only services, we allocate revenue to each element in an arrangement based on a selling price hierarchy. The selling price for a deliverable is based on its vendor-specific objective evidence ("VSOE") if applicable, third-party evidence ("TPE") if VSOE is not available, or estimated selling price ("ESP"), if neither VSOE nor TPE is available. Total transaction revenue is allocated to the multiple elements based on each element's relative selling price compared to the total selling price. We sometimes provide services despite a customer arrangement not yet being finalized, or continue to provide services under an expired arrangement while a revised contract is being finalized. In these cases revenue is deferred until arrangements are finalized or in some cases until cash is received, which causes some periods to include the expense of providing services although the related revenue is not recognized until a subsequent period. The cumulative revenue deferred for each arrangement is recognized in the period the revenue recognition criteria are met. The following paragraphs summarize the manner in which we account for specific transaction types. Staffing Services Revenue is primarily derived from supplying contingent staff to our customers or providing other services on a time and material basis. Contingent staff primarily consists of contingent employees working under a contract for a fixed period of time or on a specific customer project. Revenue is also derived from permanent placement services, which is generally recognized after placements are made and when the fees are not contingent upon any future event. Reimbursable costs, including those related to travel and out-of-pocket expenses, are also included in net revenue, and equivalent amounts of reimbursable costs are included in direct cost of staffing services revenue. Under certain of our service arrangements, contingent staff is provided to customers through contracts involving other vendors or contractors. When we are the principal in the transaction and therefore the primary obligor for the contingent staff, we record the gross amount of the revenue and expense from the service arrangement. When we act only as an agent for the customer and are not the primary obligor for the contingent staff, we record revenue net of vendor or contractor costs. We are generally the primary obligor when we are responsible for the fulfillment of the services under the contract, even if the contingent workers are neither employees of ours or directly contracted by us. Usually in these situations, the contractual relationship with the vendors and contractors is exclusively with us and we bear customer credit risk and generally have latitude in establishing vendor pricing and have discretion in vendor or contractor selection. We are generally not the primary obligor when we provide comprehensive administration of multiple vendors for customers that operate significant contingent workforces, referred to as Managed Service Programs. We are considered an agent in these transactions if we do not have responsibility for the fulfillment of the services by the vendors or contractors (referred to as associate vendors). In such arrangements we are typically designated by our customers to be a facilitator of consolidated associate vendor billing and a processor of the payments to be made to the associate vendors on behalf of the customer. Usually in these situations the 58 -------------------------------------------------------------------------------- Table of Contents contractual relationship is between the customers, the associate vendors and us, with the associate vendors being the primary obligor and assuming the customer credit risk and with us generally earning negotiated fixed mark-ups and not having discretion in supplier selection. Software Systems Revenue primarily relates to sales of telephone operator services-related software systems and enhancements to existing systems. These arrangements generally contain multiple elements including the software development and customization, sale of software licenses and computer hardware, installation, implementation and integration services, as well as post-contract customer support ("PCS"). Revenues are recognized under these arrangements following the Financial Accounting Standards Board's revenue recognition requirements, including guidance on software transactions, construction contracts and multiple element arrangements. Under these requirements, the aggregate arrangement fee for multiple element arrangements is required to be allocated to each of the elements in an amount equal to its fair value, generally based upon VSOE of fair value. Fees allocated to each element of the arrangement are then recognized as revenue when all other revenue recognition criteria have been met. As we have not established VSOE of fair value for the elements of these arrangements (including PCS and installation services), all revenue for these arrangements is deferred until customer acceptance of the delivered elements is received and the only undelivered elements are services that are not essential to the functionality of the software solution. At that time, revenue recognition commences and the arrangement fee is recognized ratably over the element with the longest remaining period of performance of the arrangement, which is typically the PCS period. The customer is generally invoiced upon delivery of the individual elements, which typically results in cash being collected prior to revenue being recognized. Database Access Services Revenue from stand-alone arrangements to access our proprietary telephone listing and other information databases by telephone companies, inter-exchange carriers and non-telecommunications customers is recognized in the period access is provided, based on fixed minimum fees or variable fees based on the volume of activity, provided that all other revenue recognition criteria are met. Maintenance and Other Technology Infrastructure Services Revenue from stand-alone PCS, hardware maintenance, and computer and network operations infrastructure services under fixed-price contracts is recognized ratably over the contract period, and the cost associated with these contracts is recognized as incurred, provided that all other revenue recognition criteria are met. For time and material contracts, we recognize revenue and costs as services are rendered, provided that all other revenue recognition criteria are met. Engineering and Construction Services Revenue from performing engineering and construction services is recognized either on the completed contract method for those contracts that are of a short-term nature, or on the percentage-of-completion method measuring progress using the cost-to-cost method, provided that all other revenue recognition criteria are met. Known or anticipated losses on contracts are provided for in the period they become evident. Claims and change orders that are in the process of being negotiated with customers for additional work or changes in the scope of work are included in the estimated contract value when it is deemed probable that the claim or change order will result in additional contract revenue and such amount can be reliably estimated. Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases as well as for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using current tax laws and rates in effect for the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax 59 -------------------------------------------------------------------------------- Table of Contents assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. We must then assess the likelihood that our deferred tax assets will be realized. If we do not believe that it is more likely than not that our deferred tax assets will be realized, a valuation allowance is established. When a valuation allowance is increased or decreased, a corresponding tax expense or benefit is recorded. Accounting for income taxes involves uncertainty and judgment in how to interpret and apply tax laws and regulations within our annual tax filings. Such uncertainties may result in tax positions that may be challenged and overturned by a tax authority in the future which would result in additional tax liability, interest charges and possible penalties. Interest and penalties are classified as a component of income tax expense. We recognize the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized upon ultimate settlement. Changes in recognition or measurement are reflected in the period in which the change in estimate occurs. Realization of deferred tax assets is dependent upon reversals of existing taxable temporary differences, taxable income in prior carryback years, and future taxable income. Significant weight is given to positive and negative evidence that is objectively verifiable. A company's three-year cumulative loss position is significant negative evidence in considering whether deferred tax assets are realizable and the accounting guidance restricts the amount of reliance we can place on projected taxable income to support the recovery of the deferred tax assets. A valuation allowance has been recognized due to the uncertainty of realization of our loss carryforwards and other deferred tax assets. Management believes that the remaining deferred tax assets are more likely than not to be realized based upon consideration of all positive and negative evidence, including scheduled reversal of deferred tax liabilities and tax planning strategies determined on a jurisdiction-by-jurisdiction basis. Casualty Insurance Program In certain states, we purchase workers' compensation insurance through mandated participation in state funds, and the experience-rated premiums in these state plans relieve us of any additional liability. Liability for workers' compensation in all other states as well as automobile and general liability is insured under a retrospective experience-rated insurance program for losses exceeding specified deductible levels and we are self-insured for losses below the specified deductible limits. We make payments to the insurance carrier for premiums based upon an estimate of the ultimate underlying exposure, such as the amount and type of labor utilized. The premiums are subsequently adjusted based on actual claims experience. The experience modification process includes establishing loss development factors, based on our historical claims experience as well as industry experience, and applying those factors to current claims information to derive an estimate of our ultimate claims liability. Adjustments to final paid premiums are determined as of a future date up to three years after the end of the respective policy year, using the level of claims paid and incurred. Under the insurance program, any additional losses incurred greater than the policy deductible limit arising from claims associated with an insurance policy are absorbed by the insurer and not the Company. We recognize expense and establish accruals for amounts estimated to fund incurred amounts up to the policy deductible, both reported and not yet reported, and for related legal and other costs. We develop estimates for losses incurred but not yet reported using actuarial principles and assumptions based on historical and projected claim incidence patterns, claim size and the length of time over which we expect to make payments. Actuarial estimates are updated as loss experience develops, additional claims are reported or settled and new information becomes available. Any changes in estimates are reflected in operating results in the period in which the estimates are changed. Medical Insurance Program We are self-insured for a majority of our medical benefit programs for internal employees. Eligible contingent staff on assignment with customers are offered medical benefits through a fully insured program 60 -------------------------------------------------------------------------------- Table of Contents administered through a third party. While we provide the majority of medical benefits for internal staff through a self-insured arrangement with a third-party administrator, we also maintain insurance coverage for a portion of that medical program (primarily through HMOs) as well as the entire dental program. Employees contribute a portion of the cost of these medical benefit programs. The liability for the self-insured medical benefits is limited on a per claimant basis through the purchase of stop-loss insurance. Our retained liability for the self-insured medical benefits is determined utilizing actuarial estimates of expected losses based on statistical analyses of historical data. Amounts contributed by employees and additional amounts necessary to fund the self-insured program administered by the third party are transferred to a 501(c)(9) employee welfare benefit trust. Accordingly, these amounts, other than the current liabilities for the employee contributions and expected loss amounts not yet remitted to the trust, do not appear on our consolidated balance sheets. We record the expense associated with the expected losses, net of employee contributions, in direct cost of staffing services revenue, cost of other revenue, or selling, administrative and other operating costs, depending on the employee's role. Legal Contingencies We are subject to certain legal proceedings as well as demands, claims and threatened litigation that arise in the normal course of our business. 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. As additional information becomes available, the Company will revise the estimates. New Accounting Standards For additional information regarding new accounting guidance see our Summary of Significant Accounting Policies Note to our Consolidated Financial Statements.


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Source: Edgar Glimpses


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