UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

 

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
     For the fiscal year ended October 28, 2012

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
     For the transition period from          to         .

 

 

Commission File Number: 001-09232

 

 

VOLT INFORMATION SCIENCES, INC.

(Exact name of registrant as specified in its charter)

 

New York   13-5658129
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer Identification No.)
1065 Avenue of Americas, New York, New York   10018
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code:

(212) 704-2400

Securities Registered Pursuant to Section 12(b) of the Act:

 

Title of each class   Name of each exchange on which registered
None   None

Securities Registered Pursuant to Section 12(g) of the Act:

Common Stock, $.10 Par Value

(Title of class)

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes      No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes      No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes      No x

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes      No x

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨   Accelerated filer x   Non-accelerated filer ¨   Smaller reporting company ¨
    (Do not check if a smaller reporting company)  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes      No x

As of April 26, 2013, there were 20,882,800 shares of common stock outstanding. The aggregate market value of the voting and non-voting common stock held by non-affiliates as of April 26, 2013 was $91,282,000, calculated by using the closing price of the common stock on such date on the over-the-counter market of $8.08.

As of November 1, 2013, there were 20,922,800 shares of common stock outstanding.

 

 

 


VOLT INFORMATION SCIENCES, INC.

ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED OCTOBER 28, 2012

TABLE OF CONTENTS

 

          Page

EXPLANATORY NOTE

   1

CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS

   2

PART I

     

ITEM 1.

   Business    3

ITEM 1A.

   Risk Factors    10

ITEM 1B.

   Unresolved Staff Comments    20

ITEM 2.

   Properties    20

ITEM 3.

   Legal Proceedings    21

ITEM 4.

   Mine Safety Disclosures    21

PART II

     

ITEM 5.

  

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

   22

ITEM 6.

   Selected Financial Data    25

ITEM 7.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    26

ITEM 7A.

   Quantitative and Qualitative Disclosures About Market Risk    70

ITEM 8.

   Financial Statements and Supplementary Data    72

ITEM 9.

   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure    72

ITEM 9A.

   Controls and Procedures    72

ITEM 9B.

   Other Information    77

PART III

     

ITEM 10.

   Directors, Executive Officers and Corporate Governance    78

ITEM 11.

   Executive Compensation    81

ITEM 12.

  

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

   99

ITEM 13.

   Certain Relationships and Related Transactions and Director Independence    102

ITEM 14.

   Principal Accounting Fees and Services    104

PART IV

     

ITEM 15.

   Exhibits, Financial Statement Schedules    105

Signatures

      110


EXPLANATORY NOTE

Financial Reports for the Company’s 2008, 2009 and 2010 Fiscal Years.

On April 9, 2013 Volt Information Sciences, Inc. (the “Company” or “Volt”) filed with the Securities and Exchange Commission (the “SEC”) its Annual Report on Form 10-K for the fiscal year ended October 31, 2010 (the “2010 Form 10-K”). The 2010 Form 10-K contained financial information for the Company’s fiscal years ended November 2, 2008 (the “2008 Fiscal Year”), November 1, 2009 (the “2009 Fiscal Year”) and October 31, 2010 (the “2010 Fiscal Year”) as well as quarterly financial information for each of the first three quarters of the Company’s 2009 Fiscal Year and its 2010 Fiscal Year. That report was filed in lieu of amending or filing separate annual reports on Form 10-K for these fiscal years as well as quarterly reports on Form 10-Q for the first three quarters of the 2009 Fiscal Year and 2010 Fiscal Year.

Financial Reports for the Company’s 2011 and 2012 Years.

This Annual Report on Form 10-K for the fiscal year ended October 28, 2012 (the “2012 Form 10-K”) contains the financial information for the Company’s fiscal years ended October 30, 2011 (the “2011 Fiscal Year”) and October 28, 2012 (the “2012 Fiscal Year”), as well as quarterly financial information for each of the first three quarters of the Company’s 2011 Fiscal Year and its 2012 Fiscal Year.

Readers should be aware that this report differs in several respects from other annual reports. First, the report covers multiple fiscal years, namely, the Company’s 2011 Fiscal Year and its 2012 Fiscal Year, and is being filed in lieu of the Company filing separate Annual Reports on Form 10-K for those fiscal years as well as Quarterly Reports on Form 10-Q for the first three quarters of those fiscal years. Second, although this report relates to the two years ended October 28, 2012, certain information is presented as of the time this report is being filed, rather than as of October 28, 2012. In particular, except as expressly stated, the information in Item 1. Business, Item 1A. Risk Factors, Item 2. Properties and Item 3. Legal Proceedings, as well as information about prices of our common stock and dividends in Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities, is presented as of the time this report is being filed or as close to the time this report is filed as is practicable. Our business and financial condition at the date this report is filed is different from what our business and financial condition was at October 28, 2012. Additionally, this report, as it relates to the Company’s 2011 Fiscal Year, is deficient as it does not meet all of the requirements of a Form 10-K for the 2011 Fiscal Year.

 

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Certain statements contained in this report are “forward-looking” statements within the meaning of that term in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and are made in reliance upon the protections provided by such acts for forward-looking statements. Forward-looking statements include statements that reflect the current views of our senior management with respect to our financial performance and future events of our business and industry in general. The terms “expect,” “intend,” “plan,” “believe,” “project,” “forecast,” “estimate,” “may,” “should,” “anticipate” and similar statements of a future or forward-looking nature identify forward-looking statements. Forward-looking statements address matters that involve risks and uncertainties. Accordingly, there are or will be important factors that could cause our actual results to differ materially from those indicated in these forward-looking statements. We believe that these factors include, but are not limited to, the following:

 

   

the circumstances resulting in the restatement of our financial statements and the material weaknesses in our internal control over financial reporting and in our disclosure controls and procedures;

 

   

the fact that we are not presently current with the filing requirements of the SEC with respect to our periodic reports;

 

   

the delisting of our common stock and our ability to successfully regain a listing on a national securities exchange;

 

   

our ability to comply with the financial ratios and covenants in our credit agreements;

 

   

our Staffing Services segment is in a very competitive industry with few significant barriers to entry;

 

   

off-shoring by companies to which we supply contingent employees adversely affects our revenue;

 

   

our project-related businesses are subject to project delays, unanticipated costs and cancellations;

 

   

many of our contracts either provide no minimum purchase requirements, are cancellable during the term, or both;

 

   

our Computer Systems segment is highly dependent on our customers’ call volume;

 

   

we rely extensively on our information technology systems and are vulnerable to damage and interruption;

 

   

our business may be negatively affected if we are not able to keep pace with rapid changes in technology;

 

   

the loss of any key customers would adversely impact our business;

 

   

we are dependent upon our key personnel and upon our ability to attract and retain technologically qualified personnel;

 

   

new and increased government regulation, employment costs or taxes could have a material adverse effect on our business, especially for our contingent staffing business;

 

   

the outcome of any future litigation or regulatory proceedings, including those related to the restatement of our consolidated financial statements; and

 

   

changes in general economic conditions.

The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this report, including under the caption Risk Factors in Item 1A of this report. If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. Readers should not place undue reliance on any forward-looking statements contained in this report, which speak only as of the date of this report. We undertake no obligation to update any forward-looking statements after the date of this report to conform such statements to actual results or to changes in our expectations.

 

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PART I

ITEM 1. BUSINESS

Volt Information Sciences, Inc. (the “Company” or “Volt”) is a leading international provider of staffing services, contact center computer systems, telecommunications services and other information solutions. Operating through an international network of servicing locations we fulfill accounting, finance, administrative, engineering, human resources, information technology, life sciences, customer care, manufacturing and assembly, warehousing and fulfillment, technical communications and media workforce requirements of our customers for contingent personnel, managed services programs and personnel recruitment services. Contact center computer systems are primarily directory assistance, operator services, call centers and database management. Telecommunication services include the design, engineering, construction, installation and maintenance of voice, data, video and utility infrastructure. Other information solutions include IT managed services and maintenance, and telephone directory publishing and printing. The Company was incorporated in New York in 1957. Unless the context otherwise requires, throughout this report, the words “Volt,” “the Company,” “we,” “us” and “our” refer to Volt Information Sciences, Inc. and its consolidated subsidiaries.

Geographic Regions and Segments:

Volt operates 192 locations globally with employees in every U.S. state, with approximately 90% of revenues generated in the United States. Principal non-U.S. markets include Canada, the United Kingdom, Germany and Uruguay. For financial information concerning our domestic and international operations and segment reporting, see our Segment Disclosure footnote to our Consolidated Financial Statements included in this report.

Prior to the first quarter of fiscal year 2011, we reported our activities in four business segments: Staffing Services, Computer Systems, Telecommunications Services and Other. The Company determined that in the first quarter of 2011, the Telecommunications Services business did not meet any of the quantitative thresholds to be reported as a separate segment. The change in segments occurred primarily as a result of the Company exiting certain unprofitable businesses and focusing on projects with lower risk profiles beginning in the later part of 2010. Accordingly, we now report our activities in three reportable segments: Staffing Services, Computer Systems and Other. Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 addresses each of these segments. Our operating segments have been determined in accordance with our internal management structure, which is based on operating activities. We evaluate performance based upon several factors, of which the primary financial measure is segment operating income. We believe operating income provides management and investors a measure to analyze operating performance of each business segment against historical and competitors’ data, although historical results, including operating income, may not be indicative of future results as operating income is highly contingent on many factors, including the state of the economy, competitive conditions and customer preferences.

We allocate all costs to the segments except for certain corporate-wide general and administrative costs, intangible asset and goodwill impairment charges, and fees related to the restatement of our financial statements and associated investigations. These allocations are included in the calculation of each segment’s operating income. The following is a brief description of the reportable segments and the predominant source of their revenues.

Staffing Services

This segment provides staffing solutions and consulting services. Staffing solutions services are provided through a network of approximately 160 locations providing a broad spectrum of contingent staffing, master staffing vendor contracting and management, direct placement and other employment services and workforce solutions. Contingent staff are provided to customers in a broad range of occupations including accounting, finance, administrative, engineering, human resources, information technology, life sciences, customer care, manufacturing and assembly, warehousing and fulfillment, technical communications and media. Contingent staffing is provided for varying periods of time to companies and other organizations (including government

 

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agencies), and our clients range from smaller retail accounts that may require ten or fewer contingent workers at a time to national accounts that require as many as several thousand contingent workers at one time. Our national accounts typically enter into longer term procurement agreements with us resulting in lower direct margins as compared to our retail accounts.

Contingent staff are provided to meet specific client requirements such as enabling clients to scale their workforce according to business conditions, meet a particular need that has arisen, complete a specific project (with workers typically being retained until project completion), secure the services of a worker who can provide niche skills on an as-needed basis, substitute for regular employees during vacation or other temporary absences, staff high turnover positions, or to meet seasonal peaks in staffing needs. Many large organizations utilize a contingent workforce as a strategic element of their overall workforce, allowing them to more efficiently meet their fluctuating staffing requirements. In certain instances, we provide management personnel at the customer’s location to coordinate and manage special projects or to supervise contingent workers.

Contingent staff are recruited through proprietary Internet recruiting sites and independent web-based job search companies through which we build proprietary databases of candidates from which we can fulfill specific current and future customer needs. Contingent workers become our employees during the period of their assignment and we are responsible for the payment of wages, payroll taxes, workers’ compensation insurance, unemployment insurance and other benefits. Customers will sometimes hire the contingent workers as their own employees after a period of time, for which we may receive a fee.

We also provide recruitment and direct placement services of individuals in the information technology, engineering, technical, accounting, finance and administrative support disciplines. We primarily perform these searches on a contingency basis; thus, fees are only earned if our clients ultimately hire the candidates.

For some customers we provide master staffing vendor services under which we are primarily responsible for managing a customer’s contingent workforce program. Our responsibilities for these programs usually include, if we are unable to fill a particular position, procurement of contingent workers from other qualified staffing providers as subcontractors. In most cases, we are only required to pay subcontractors after we receive payment from our customer.

We also provide managed service programs (“MSPs”), a comprehensive service for customers with large contingent workforces in which we manage the procurement and on-boarding of contingent workers and a broad range of specialized solutions that includes managing suppliers and providing sourcing and recruiting support, supplier performance measurement, consolidated customer billing, supplier payment and analysis and benchmarking of spend demographics and rates. The workforce placed on assignment through our MSPs is usually provided by third-party staffing providers (“associate vendors”) or through our staffing solutions services. In most cases, we are only required to pay associate vendors after we receive payment from our customer. We also act as a subcontractor or associate vendor to other national providers in their managed services programs to assist them in meeting their obligations to their customers.

We provide MSPs through the use of vendor management system software (“VMS”) using either our proprietary systems or systems licensed from various other providers. Our proprietary VMS software, Consol and HRP, are also offered for licensing to non-MSP customers to support the recruiting process for workers and the sourcing of professional services, improvement of spend management, supplier management, time and expense processing and billing, and compliance with customer hiring policies.

Our technology consulting and outsourcing services and solutions provide flexible and scalable quality assurance, development and integration activities, and customer care solutions including end-user and technical, sales and retention support for customers in the gaming, consumer products and technology industries. Consulting projects include the full lifecycle of software application development and hardware testing, technical documentation, technical communications, electronic game testing, IT infrastructure outsource services, customer call center solutions, data center management, enterprise technology implementation and integration and corporate help desk services. Services are currently delivered to companies in the consumer products, financial services, manufacturing, media/entertainment, pharmaceuticals, software and technology industries.

 

4


Computer Systems

Our Computer Systems segment provides customers worldwide with operator services, information services, computer hardware and software, hosted OnDemand contact center service solutions and database services. This includes design, integration and development of highly reliable and scalable directory assistance systems which we market to telephone companies and inter-exchange carriers worldwide. These services include traditional directory assistance (known in the United States as 411 service), as well as directory assistance enhanced services, such as reverse number lookup, weather, sports scores, and travel directions, together with Short Message Services (“SMS”) messaging features and directory assistance automated services. We both license systems to our customers and also provide an Application Service Provider (“ASP”) model in which we host and manage the equipment.

We created our OnDemand business focused on delivering state-of-the-art call center and voice self-service solutions with Software as a Service (“SaaS”) performance and efficiency. OnDemand’s core technology is a combination of proprietary and third-party technology that is designed to allow organizations to consolidate the management of multiple contact centers and remote agents within a unified framework of skills-based call routing with elements of personalization and universal queue management.

We also use our directory assistance residential and business databases covering the entire United States, Canada and some European countries to allow companies to improve their operations and marketing capabilities by providing database services, data processing, listing verification and online and offline data integration solutions. With the development of smartphones and cloud-based applications, the Company has begun to aggregate data from other sources, including wireless and Voice over Internet Protocol (“VoIP”) networks, and is making such information available on a real-time basis.

Other Segment

Our Other reportable segment consists of our computer maintenance business, telecommunications infrastructure and our telephone directory publishing and printing business.

Our computer maintenance business operates as an independent services organization (“ISO”) providing cost-effective, customized service solutions as an alternative to those offered by original equipment manufacturers (“OEMs”). We deliver IT infrastructure services to clients across the United States and in select locations globally. Those services include hardware maintenance and computer/network operations support in large data centers for multinational clients, as well as managing large-scale corporate technology refresh programs. We sell our services directly to corporate clients as well as in partnership with data center and network product OEMs. We also have selling relationships with a network of value added resellers. Our target industries include financial, telecommunications, aerospace, healthcare and manufacturing.

Our telecommunications infrastructure services business designs, engineers, constructs, installs and maintains voice, data, video and utility infrastructure to the telecommunications and cable industries and their utilities, as well as to large corporations and governmental entities throughout the United States. In addition, we provide a wide range of services for telephone and telecommunications lines and equipment located within cable and telephone company offices. In late 2010, the Company decided to focus on projects with lower risk profiles and exit certain unprofitable businesses. The telecommunications services business’ dispositions were not sufficiently material to require presentation as a discontinued operation in the Company’s Consolidated Financial Statements included in this report.

Our telephone directory publishing and printing business publishes telephone directories in Uruguay under contract with the Uruguayan telephone company, which includes the sale of yellow pages and web portal advertising and the printing of the white pages. This business also owns and operates an advanced printing facility in Uruguay, which prints the Uruguay telephone directories, as well as directories for other publishers in other countries. In addition, this facility does commercial printing, including books, magazines, periodicals and advertising material, for various customers in South America.

 

5


Business Strategy

We believe we are positioned for growth in profitability and shareholder value, building upon our brands and strong client relationships. Our vision is to be a preeminent provider of business solutions with a commitment to innovative products, services and solutions. Key elements of our strategy include the following:

Expand Margins and Profitability

We are focused on driving increased profitability and have multiple initiatives to increase our operating income, including expanding margins and reducing operating expenses. We are pursuing the following margin improvement initiatives along with promoting a culture of disciplined execution to further expand our operating income:

 

   

increase development focus on achieving acceptable operating income and exiting or reducing business levels with customers where profitability or business terms are unfavorable;

 

   

increasing the percentage of our revenue represented by higher-margin business;

 

   

generating staffing placement efficiency improvements through process standardization and diagnostic tools;

 

   

achieving greater economies of scale thus reducing general and administrative expense as a percentage of revenues;

 

   

further sales channel development and productivity improvements; and

 

   

achieving cost savings from restructuring activities including exiting facilities and reducing the workforce or relocating positions to lower cost geographies.

We expect these initiatives to achieve increased margins and reduced operating expenses as a percentage of revenues, thus driving increased operating income.

Capture Additional Market Share across our Portfolio of Services

While we have a leading market presence in a number of the markets we serve, most of our markets have numerous competitors of varying size. We believe that scale and service capabilities become increasingly important as complexity grows within our customers’ organizations.

Continue to Invest in and Expand our Sales Capabilities to Enter New Markets and Better Penetrate Existing Markets

Our go-to-market strategy allows us to reach customers across industries while allowing them to interact with Volt businesses in a way that fits their organization. We intend to continue investing in our direct sales force to optimize their market focus and improve segmentation. We also plan to utilize our sales force to grow the middle market and local customer account business, which oftentimes can yield higher direct margins, with the intention of improving profitability.

Retain, Recruit and Develop Talent Globally

We are focused on developing a workforce that has both exceptional technical capabilities and the leadership skills that are required to support our business strategy. Our strategy is to be a leader in the markets we serve, which will be achieved by developing new workforce capabilities and a committed, diverse executive team with the highest level of ethics and integrity.

 

6


Customers

The Company serves multinational, national and local clients with an emphasis on the technology, telecommunication and financial industries. The Company had no single customer that accounted for more than 10% of consolidated net revenue in the fiscal years 2012, 2011 and 2010. Our top 10 clients represented approximately 34%, 34% and 30% of our fiscal 2012, 2011 and 2010 revenue, respectively. The loss of one or more of these customers, unless the business is replaced, could have an adverse effect on our results of operations.

For the fiscal years ended October 28, 2012, October 30, 2011 and October 31, 2010, 89.9%, 89.6% and 92.1% of our revenue, respectively, were from customers in the United States.

Competition

The markets for the Company’s staffing services are highly competitive. There are few barriers to entry, so new entrants frequently appear resulting in considerable market fragmentation. There are over 100 competitors with annual revenues over $300 million, some of whom are larger and have greater resources than we do. These large competitors collectively represent less than half of all staffing services revenues, and there are countless smaller companies competing in varying degrees at local levels.

Several similar staffing companies compete with our Staffing Services segment on a global basis. Our direct staffing competitors include Adecco, Randstand, Manpower, Allegis, Recruit, Hays, Kelly Services, USG People, Robert Half, Tempstaff and CDI Corp. Our Computer Systems business is experiencing technology shifts in directory assistance in which consumers increasingly obtain information from alternative sources (primarily on-line sources using devices such as smartphones and computers) instead of traditional contact over telephone lines. Our specialized directory assistance technology and proprietary listings databases provide us with financial synergies in our directory assistance services, but we do not have the same degree of synergies in other call center applications of our technology, and so we face a broader range of competitors. Additionally, the change in how consumers obtain data is increasingly moving to on-line access from numerous platforms including mobile devices where competitors face relatively fewer barriers to entry than in our traditional directory assistance services.

Our computer maintenance business competes with large system integration firms as well as other traditional hardware providers that are increasingly offering services to support their products. Many of our competitors are able to offer a wide range of global services, and some of our competitors benefit from significant brand recognition.

Our telecommunications infrastructure services business has competition from a wide range of contractors, many of which have greater resources and breadth of experience. Successfully competing in this market requires us to focus on those areas where we believe our expertise and capability is greater than our competitors and where we can deliver services with a cost structure that will permit us to achieve acceptable margins at acceptable risk levels.

In addition, we compete with numerous smaller local companies in the various geographic markets in which we operate. Companies in our industries compete on price, service quality, new capabilities and technologies, client attraction methods, and speed of completing assignments.

Research, Development and Engineering

We have project experience and expertise across multiple technologies and have made significant investments in research, development and engineering to keep abreast of the latest technology developments. The experience gained from particular projects and research, development and engineering efforts in each business we operate is utilized across all services in those businesses. As a result, we are able to react to customers’ needs

 

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quickly and efficiently. We believe that our ability to work with new technologies allows us to foster long-term relationships by having the skill set to continually address the needs of both existing and new customers. The majority of research and development expenditures are incurred by the Computer Systems segment.

Intellectual Property

VOLT is the principal registered trademark for our brand in the United States. ARCTERN, A VOLT INFORMATION SCIENCES COMPANY, DATASERV, DIRECTDA, DIRECTORY ONE, DIRECTORY EXPRESS, FNCS & DESIGN, LSSI, LSSIDATA, MAINTECH, PARTNER WITH US. COMPETE WITH ANYBODY, PROCURESTAFF TECHNOLOGIES, PROCURESTAFF GETTING THE WORLD BACK TO BUSINESS & DESIGN, SMARTMATCH, TEAM WITH US. COMPETE WITH ANYBODY, VOLT DELTA, VOLT DELTA CONNECTING PEOPLE & INFORMATION, VOLTDELTA & DESIGN, and VOLTSOURCE are other registered trademarks in the United States. The Company also owns and uses common law trademarks and service marks.

We also own copyrights and patents and license technology from many providers. We rely on a combination of intellectual property rights in the United States and abroad to protect our brand and proprietary technology.

Seasonality

Our staffing service revenue and operating income are usually lowest in our first fiscal quarter due to the Thanksgiving, Christmas and New Year holidays, as well as certain customer facilities closing during the holidays for one to two weeks. During the third and fourth quarter of the fiscal year, the Staffing Services segment benefits from a reduction of payroll taxes when the annual tax contributions for higher salaried employees have been met, and customers increase the use of our administrative and industrial labor during the summer vacation period. Our other services do not face significant seasonality impacts.

Employees

As of July 28, 2013, Volt employed approximately 34,700 people, including approximately 30,500 who were on contingent staffing assignments for the Staffing Services segment. Those people on contingent staffing assignments are on our payroll for the length of their assignment.

We are focused on developing a workforce that has both exceptional technical capabilities and the leadership skills that are required to support our growth. Our strategy is to be a leader in the markets we serve which will be achieved by developing new workforce capabilities and a committed, diverse executive team with the highest level of ethics and integrity.

Volt is a party to one collective bargaining agreement, which covers a small number of our employees. Some of our employees outside the United States have rights under agreements with local work councils. We believe that our relations with our employees are satisfactory. While claims and legal actions related to staffing matters arise on a routine basis, we believe they are inherent in maintaining a large contingent workforce.

Regulation

Some states in the United States and certain foreign countries license and regulate contingent staffing service firms and employment agencies. In connection with some foreign sales by certain segments, we are subject to export controls, including restrictions on the export of certain technologies. The sale of certain hardware and software by our Computer Systems segment in certain countries is permitted pursuant to a general export license. When we sell to countries designated by the United States as sensitive or develop products subject to restriction, sales would be subject to more restrictive export regulations. Compliance with applicable present federal, state and local environmental laws and regulations has not had, and we believe that compliance with those laws and regulations in the future will not have, a material effect on our earnings, capital expenditures or competitive position.

 

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Access to Our Information

We electronically file our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports with the SEC. These and other SEC reports filed by us are available to the public at the SEC’s website at www.sec.gov and in the Investors & Governance section at our website at www.volt.com, as soon as reasonably practicable after filing with the SEC.

Copies of our Code of Business Conduct and Ethics and other significant corporate documents (our Corporate Governance Guidelines, Governance Committee Charter, Audit Committee Charter, Compensation Committee Charter, Executive Committee Charter, Financial Code of Ethics, Whistleblower Policy, Foreign Corrupt Practices Act Policy, Insider Trading Policy and Electronic Communication Policy) are also available in the Investors & Governance section at our website. Copies are also available without charge upon request to Volt Information Sciences, Inc., 1065 Avenue of the Americas, New York, NY 10018, Attention: Shareholder Relations, or by calling us at (212) 704-2400.

 

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ITEM 1A. RISK FACTORS

Risk Factors

You should carefully consider the following risks along with the other information contained in this report. The following risks could materially adversely affect our business and, as a result, our financial condition, results of operations, and the market price of our common stock. Other risks and uncertainties not known to us or that we currently do not recognize as material also could materially adversely affect our business and, as a result, our financial condition, results of operations, and the market price of our common stock.

Risks Related to the Restatement and Other Accounting Issues

We have identified various material weaknesses in our internal control over financial reporting which have materially and adversely affected our ability to timely and accurately report our results of operations and financial condition. These material weaknesses have not been fully remediated as of the filing date of this report.

As previously disclosed in Item 9A of our Annual Report on Form 10-K for the period ended October 31, 2010, we reported material weaknesses in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act). The previous Form 10-K was issued on April 9, 2013, which was subsequent to the period covered by this report. Accordingly, the previously reported material weaknesses remain unchanged for this period and remediation is ongoing. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

Though we have taken steps to remediate the material weakness in our internal controls over financial reporting, if we fail to effectively implement our remediation plan, or if we encounter difficulties during implementation, additional material weaknesses or material misstatements in our financial statements could occur. These material weaknesses could result in a future restatement of our financial statements, could cause us to fail to meet our reporting obligations or could cause investors to lose confidence in our reported financial information, leading to a decline in our stock price.

The Restatement and related investigations have been time consuming and expensive and had a material adverse effect on our financial condition, results of operations and cash flows.

We have devoted substantial resources to the completion of the Restatement. As a result of these efforts, as of July 28, 2013, we have incurred approximately $145 million in fees and expenses, primarily for additional audit, financial, legal consulting and related costs. We expect to continue to incur significant additional fees and expenses until we are in compliance with our SEC reporting requirements and have remediated the existing material weaknesses in our internal control over financial reporting. These costs, as well as the substantial management time devoted to address these issues, have had, and could continue to have, a material adverse effect on our financial condition, results of operations and cash flows.

Although we recently settled an investigation by the SEC, we may be the subject of litigation relating to the Restatement, which could adversely affect our business and results of operations.

As previously reported, the Company was the subject of a non-public investigation by the SEC related to the Company’s accounting practices that led to the restatement of the Company’s 2008 financial statements. On January 10, 2013, the SEC filed a settled enforcement action against the Company in the United States District Court for the Southern District of New York.

Although the Company has settled this matter with the SEC, additional regulatory inquiries may also be commenced. In addition, we may in the future be subject to additional litigation by investors, employees or other parties, or other proceedings or actions arising in relation to the restatement of our historical financial statements

 

10


or the accounting matters that were addressed in the SEC investigation or related matters. Litigation and any regulatory proceeding or action may be time consuming, expensive and distracting from the conduct of our business. In the event that there is an adverse ruling in any legal or regulatory proceeding or action, we may be required to make payments to third parties that could have a material adverse effect on our business, financial condition and results of operations. Furthermore, regardless of the merits of any claim, legal proceedings may result in substantial legal expense and could also result in the diversion of time and attention by our management.

Our insurance coverage may not fully cover any costs and expenses related to this potential litigation. In addition, we indemnify our officers, directors and certain employees for certain events or occurrences while the employee, officer or director is, or was, serving at our request in such capacity, as permitted under New York law. We have paid and continue to pay legal counsel fees incurred by our present and former directors, officers and employees who are involved with the SEC inquiry, the Restatement, and related review by the Board of Directors. We currently hold insurance policies for the benefit of our current and former directors and officers, although our insurance coverage may not be sufficient in some or all of these matters. Furthermore, the insurers may seek to deny or limit coverage in some or all of these matters, in which case we may have to self-fund all or a substantial portion of our indemnification obligations.

Our failure to timely comply with our reporting obligations under the Exchange Act may have an adverse effect on our ability to raise capital and compensate our employees.

As a result of our failure to timely comply with our reporting obligations under the Exchange Act, we are subject to a number of restrictions regarding the registration of our securities, including our common stock, under federal securities laws. Until such time as we have regained compliance with our reporting obligations under the Exchange Act and meet certain other conditions, we will be unable to use shorter and less costly filings, such as Registration Statements on Form S-3 and Form S-8. Being required to use the Registration Statement Form S-1 is likely to be more costly and time consuming. These restrictions reduce our access to capital markets, which may adversely affect our business.

Risks Relating to the Economy and our Industry

Our business is adversely affected by current economic and other business conditions.

The world economy has been experiencing a prolonged economic downturn and slow recovery, characterized by high unemployment, limited availability of credit and decreased consumer and business spending. In the past our business has suffered during such downturns, and our business has similarly suffered during the recent downturn.

A weakened economy in which unemployment levels are relatively high may result in decreased demand for contingent and permanent personnel, which adversely impacts our Staffing Services segment. When economic activity slows, many of our customers reduce their use of contingent workers before undertaking layoffs of their own employees, resulting in decreased demand for contingent workers. Decreased demand and higher unemployment levels result in lower levels of pay rate increases and increased pressure on our markup of staffing service rates and direct margins. Since employees are also reluctant to risk changing employers, there are fewer openings available and, therefore, reduced activity in permanent placements. In recent years, many of our customers have significantly reduced their workforce, including their use of contingent labor. The continuation of the current business climate is likely to continue to adversely affect our business.

In all of our business segments, we have experienced greater competition and pressure on price, margins and markups for renewals of customers’ contracts than previously experienced. In addition, some customers and large vendors have sought to impose more onerous contractual terms on us. While we have taken, and will continue to take, action to meet competition in our highly competitive markets and negotiate reasonable contracts, there can be no assurance that we will be able to do so without impacting revenue or margins. While we attempt to manage our costs in relation to our business volumes, these efforts may not be successful, and the timing of these efforts and associated earnings charges may adversely affect our business.

 

11


The contingent staffing industry is very competitive with few significant barriers to entry.

Our Staffing Services segment is in a very competitive industry with few significant barriers to entry. The worldwide contingent staffing industry is also highly fragmented. In the United States, approximately 100 competitors operate nationally and approximately 6,000 smaller companies compete in varying degrees at local levels, many of which have just one or a few offices that only service a small market. Some of our principal competitors in this segment are larger and have greater financial resources than us and service multi-national accounts, which is business we also solicit. These competitors may be better able than we are to attract and retain qualified personnel, to offer more favorable pricing and terms, and otherwise attract and retain the business that we seek. In addition, some of the segment’s customers, generally larger companies, are mandated or otherwise motivated to utilize the services of small or minority-owned companies rather than publicly held corporations such as Volt, and have redirected substantial amounts of their staffing business to those companies. We also face the risk that certain of our current and prospective customers may decide to provide similar services internally.

There has been a significant increase in the number of customers consolidating their staffing services purchases with a single provider or a small number of providers. This trend to consolidate purchases has, in some cases, made it more difficult for us to obtain or retain customers. Additionally, pricing pressures have intensified as customers have continued to competitively bid new contracts. This trend is expected to continue for the foreseeable future. As a result, we cannot assure you that we will not encounter increased competition and lower margins in the future.

One of the effects of the increase in the number of customers consolidating their staffing service purchases is an increase in the use of managed service providers. Managed service providers coordinate the provision of contingent staffing services to their customers using Internet-enabled applications (often supplied by others) that act as a mechanism for businesses to manage and procure contingent and other staffing services. However, some of these managed service providers assume all payment obligations to their customers’ suppliers, such as Volt. These managed service providers may present greater credit risks than the end-customer and some of these customers have in the past, and could in the future, default on their obligations to us, adversely impacting our business. The bidding process for these national contracts is very competitive. Many contracts are for a one-to-three year time period, at which time they typically are re-bid. Others are for shorter periods or may be for the duration of a particular project or need that has arisen, which requires additional or substitute personnel. Many of these contracts require considerable start-up costs and may take an extended amount of time to reach anticipated revenue levels that are dependent on the customer’s actual requirements at that time. It also takes an extended period of time to recover these start-up costs. There can be no assurance that we will be able to retain accounts that we currently serve, or that we can obtain additional accounts on satisfactory terms.

Off-shoring by companies to which we supply contingent employees adversely affects our revenue.

In recent years, United States companies, some of which are customers of Volt, increasingly have outsourced manufacturing and service operations to foreign countries with lower labor rates, less costly employee benefit requirements and fewer regulations than in the United States. This outsourcing reduces their need for contingent and permanent workers in the United States. We continue to expand our global pool of resources to offer greater support to the service sector of the economy and other businesses that have more difficulty in moving operations to foreign countries, as well as expanding our regional and local customer base that generally affords higher margin opportunities. We may not be successful in these efforts.

In addition, we have been, and may continue to be, adversely affected if we compete from our United States-based operations against competitors based in lower-cost countries. There can be no assurance that efforts to expand our operations in foreign countries and the establishment of subsidiaries in foreign countries will be successful or that we can successfully compete with competitors based overseas or who have more well-established foreign operations. Our international expansion further subjects us to additional risks and challenges caused by the effect of foreign laws and regulations that could harm our business and profitability, as well as exposure from the risk of currency fluctuation as the values of foreign currencies fluctuate against the dollar.

 

12


Risks Related to our Capital Structure and Finances

Our credit agreement contains restrictive covenants.

Our credit facility requires us to maintain minimum unrestricted cash or availability under our accounts receivable securitization program of $15 million. Our existing credit facility includes restrictive covenants which limit our ability to, among other things, change our lines of business and engage in consolidations, mergers, liquidations, or dissolutions. These covenants could limit our ability to react to market conditions or to otherwise engage in transactions that might be considered beneficial to us.

Risks Related to our Particular Customers and the Projects on which We Work

Our project related businesses are subject to delays, unanticipated costs and cancellations that may result in unforeseen costs, reductions in revenues or the payment of liquidated damages.

In all of our business segments, we, in some circumstances, guarantee certain results of a project, such as completion by a scheduled date, performance testing levels, results and other performance requirements. Failure to meet those criteria could result in additional costs or penalties, including liquidated damages, which could exceed our projected profit. Many projects involve engineering, procurement and construction phases that may occur over extended time periods, sometimes over several years. We may encounter difficulties in designing or engineering, delays in receiving designs or materials provided by our customers or third parties, delays in equipment and material delivery, schedule changes, delays from our customers’ failure to timely obtain rights required to perform or complete a project, weather-related delays and other factors, some of which are beyond our control, that could impact our ability to complete projects in accordance with the original delivery schedules. In addition, we may contract with third-party subcontractors to assist us with the completion of contracts. Any delay or failure by subcontractors in the satisfactory completion of their portion of projects may result in delays in the overall progress of projects or may cause us to incur additional costs, or both. Delays and additional costs may be substantial, we may not be able to recover all of these costs, and our revenues and operating income could be significantly reduced. We also may be required to invest significant working capital to fund cost overruns. Delays or cancellations also may impact our reputation or relationships with customers, adversely affecting our ability to secure new contracts.

At times, project contracts may require customers or other parties to provide the specifications, design, engineering information, equipment or materials to be used on a project. In some cases, the project schedule or the design, engineering information, equipment or materials may be deficient or delivered later than required by the project schedule. In addition, our customers may change or delay various elements of a project after commencement, resulting in additional direct or indirect costs.

Under these circumstances, we generally attempt to negotiate with the customer with respect to the amount of additional time required and the compensation to be paid to us. We are subject to the risk that we may be unable to obtain, through negotiation, arbitration, litigation or otherwise, adequate amounts to compensate us for the additional work or expenses incurred by us due to customer-requested change orders or failure by the customer to timely deliver items, such as engineering or design drawings, specifications, or materials required to be provided by the customer. Litigation, arbitration or mediation of claims for compensation may be lengthy and costly, and it is often difficult to predict when and for how much the claims will be resolved. A failure to obtain adequate compensation for these matters could adversely affect our results of operations and cash flow.

Delays and additional costs may be substantial, we may not be able to recover any or all of these costs, and our revenues and operating income could be significantly reduced. We also may be required to invest significant working capital to fund cost overruns. Delays or cancellations also may impact our reputation or relationships with customers, adversely affecting our ability to secure new contracts.

 

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Many of our contracts either provide no minimum purchase requirements, are cancellable during the term, or both.

In our Staffing Services segment, most contracts are not sole source, and many of our contracts, even those with multi-year terms, provide no assurance of any minimum amount of revenue. Under many of these contracts we still must compete for each individual placement or project. Similarly, in our telecommunications segment many master contracts require competition in order to obtain each individual work project. In addition, many of our long-term contracts contain cancellation provisions under which the customer can cancel the contract at any time or on relatively short notice, even if we are not in default under the contract. Therefore, these contracts do not provide the assurances that typical long-term contracts often provide and are inherently uncertain with respect to the revenues and earnings we may recognize with respect to our customer contracts. Additionally, in all our business segments, the degree and timing of customer acceptance of systems and of obtaining new contracts and the rate of renewals of existing contracts, as well as customers’ utilization of our services, could adversely affect our financial statements with respect to the revenues and earnings we may recognize with respect to our customer contracts.

Our Computer Systems segment is highly dependent on our customers’ call volume.

The results of our Computer Systems segment are highly dependent on the volume of directory assistance calls to this segment’s customers that are processed by the segment under existing contracts, the segment’s ability to continue to secure comprehensive listings from others at acceptable pricing, and our continued ability to sell products and services to new and existing customers. The volume of transactions with this segment’s customers and the revenues received by us has been, and may continue to be, reduced as consumers utilize free listings offered by alternative sources, including listings available on the Internet, and from consolidation in the telecommunications industry which results in increased downward pressure on our rates from fewer but larger customers. Revenue earned under many of our contracts in this segment is variable based on the volumes processed, while our costs of meeting the contractual service levels are not. Decreases in volumes that we are not able to offset with lowered costs could adversely affect our results of operations and cash flows.

We rely extensively on our information technology systems and are vulnerable to damage and interruption.

We rely on our information technology systems and infrastructure to process transactions, summarize results, and manage our business, including maintaining client information. Our information technology systems are potentially vulnerable to outages and deliberate intrusion. Likewise, data security incidents and breaches by employees and others with or without permitted access to our systems pose a risk that sensitive data may be exposed to unauthorized persons or to the public. Additionally, we utilize third parties, including cloud providers, to store, transfer and process data. While we have taken measures to protect our data and information technology systems, there can be no assurance that our efforts will prevent outages or security breaches in our systems that could adversely affect our results of operations and cash flows, as well as our business reputation.

Our business may be negatively affected if we are not able to keep pace with rapid changes in technology.

We must obtain or produce products and systems, principally in the information technology environment, to satisfy customer requirements and to remain competitive. To do so, we must make significant investments to deploy, maintain and upgrade advanced computer software and purchase substantial amounts of computer equipment. These investments, beyond requiring significant capital, also entail large technological obsolescence risk and require specialized talent to operate. There can be no assurance that in the future we will be able to foresee changes and to identify, develop and commercialize innovative and competitive products, systems and services in a timely and cost effective manner and to achieve customer acceptance of our products, systems and services in markets characterized by rapidly changing technology and frequent new product introductions.

The loss of any key customers would adversely impact our business.

Although we had no customer that represented over 10% of revenues in fiscal years 2011 or 2012, reductions, delays or cancellation of contracts with any of our key customers or the loss of one or more key

 

14


customers could materially reduce our revenue and operating income. There is no assurance that our current customers will continue to do business with us or that contracts with existing customers will continue at current or historical levels.

We are dependent upon our key personnel.

Our operations are dependent on the continued efforts of our senior management. In addition, we are dependent on the performance and productivity of our local managers and field personnel. Our ability to attract and retain business is significantly affected by local relationships and the quality of service rendered. The loss of those key personnel and members of management with significant experience in our industry may cause a significant disruption to our business. Moreover, the loss of key managers and field personnel may jeopardize existing client relationships with businesses that continue to use our services based upon relationships with these managers and field personnel.

We are dependent upon our ability to attract and retain qualified personnel.

Our operations are dependent upon our ability to attract and retain qualified personnel, particularly in the areas of research and development, implementation and upgrading of internal systems, as well as for contingent staffing assignments to customers of our Staffing Services segment. The availability of such personnel is dependent upon a number of economic and demographic conditions. We may in the future find it difficult or more costly to hire such personnel in the face of competition from other companies.

In addition, variations in the rate of unemployment and higher wages sought by contingent workers in certain technical fields that continue to experience labor shortages could affect our ability to meet our customers’ demands in these fields and adversely affect our results of operations.

Risks Related to Legal Compliance and Litigation

We are subject to employment–related and other claims and losses that could have a material adverse effect on our business.

Our Staffing Services segment employs or engages individuals on a contingent basis and places them in a customer’s workplace. Our ability to control the customer’s workplace is limited, and we risk incurring liability to our employees for injury (which can result in increased workers’ compensation costs) or other harm that they suffer at the customer’s workplace. Increases in workers’ compensation costs can adversely affect our competitive position and our ability to retain business and obtain new business. Other risks specifically related to our Staffing Services segment include:

 

   

claims that we have violated wage and hour requirements that govern the relationship between employers and employees;

 

   

claims of discrimination or harassment by us or our customers;

 

   

claims for retroactive entitlement to employee benefits;

 

   

claims of misconduct or negligence on the part of our employees;

 

   

claims related to the employment of undocumented or unlicensed personnel;

 

   

claims related to workers’ compensation, general liability, automobile liability and employee group health insurance;

 

   

errors and omissions by our employees and contingent workers, particularly in the case of professionals;

 

   

claims related to our employees’ misuse of customers’ proprietary information, misappropriation of funds, other criminal activity or torts or other similar claims; and

 

15


   

claims relating to the misclassification of independent contractors.

Additionally, we risk liability to our customers for the actions or inactions of our employees that may result in harm to our customers. Such actions may be the result of negligence or misconduct on the part of our employees, damage to customer facilities due to negligence, criminal activity and other similar claims. In many cases, we must indemnify our customers for the acts of our employees, and certain customers have negotiated increases in the scope of such indemnification agreements. We also may incur fines, penalties and other losses that are not covered by insurance or negative publicity with respect to these matters. There can be no assurance that the corporate policies in place to help reduce our exposure to these risks will be effective or that we will not experience losses as a result of these risks. These same factors apply to all of our business units, although the risk may be reduced where we control the employees and/or the workplace.

We are subject to expenses and losses relating to legal proceedings.

From time to time we are subject to legal proceedings, as well as 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 of the loss 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. Accruals are based on the best information available at the time. As additional information becomes available, a reassessment is performed of the potential liability related to pending claims and litigation and may revise our estimates. Potential legal liabilities and the revision of estimates of potential legal liabilities, as well as, the legal expenses of such matters could have a material adverse impact on our business.

Improper disclosure of sensitive or confidential employee or client data, including personal data, could result in liability and harm our reputation.

Our business involves the use, storage and transmission of information about our full-time and contingent employees, clients and other individuals. This information may contain sensitive or confidential employee and client data, including personal data. Additionally, our employees may have access or exposure to customer data and systems, the misuse of which could result in legal liability. We and our third-party service providers have established policies and procedures to help protect the security and privacy of this information. It is possible that our security controls over sensitive or confidential data and other practices we and our third party service providers follow may not prevent the improper access to or disclosure of such information. Such disclosure could harm our reputation and subject us to liability under our contracts and laws that protect sensitive or personal data and confidential information, resulting in increased costs or loss of revenue. Further, data privacy is subject to frequently changing rules and regulations, which sometimes conflict among jurisdictions and countries in which we provide services. Our failure to adhere to or successfully implement processes in response to changing regulatory requirements in this area could result in legal liability or impairment to our reputation in the marketplace.

The possession and use of personal information and data in conducting our business subjects us to legislative and regulatory burdens. We may be required to incur significant expenses to comply with mandatory privacy and security standards and protocols imposed by law, regulation, industry standards or contractual obligations.

New and increased government regulation, employment costs or taxes could have a material adverse effect on our business, especially for our contingent staffing business.

Certain of our businesses are subject to licensing and regulation in some states and most foreign jurisdictions. There can be no assurance that we will continue to be able to comply with these requirements, or that the cost of compliance will not become material. Additionally, the jurisdictions in which we do or intend to do business may:

 

   

create new or additional regulations that prohibit or restrict the types of services that we currently provide;

 

16


   

impose new or additional employment costs that we may not be able to be pass on to customers or that would cause customers to reduce their use of our services, especially in our Staffing Services segment, which would adversely impact our business;

 

   

require us to obtain additional licenses; and

 

   

increase taxes (especially payroll and other employment-related taxes) or enact new or different taxes payable by the providers or users of services such as those offered by us, thereby increasing our costs, some of which we may not be able to pass on to customers or that would cause customers to reduce their use of our services especially in our Staffing Services segment, which would adversely impact our ability to conduct our business.

In some of our foreign markets, contingent staffing services are more heavily regulated than in the United States. Litigation and regulatory activity in the European Union and certain other countries is being directed at the way the staffing industry generally does business. In addition to imposing additional requirements and costs, this regulatory activity could cause changes in customers’ attitudes regarding the use of outsourcing and contingent personnel in general, which could have an adverse effect on our contingent staffing business.

Insurance has limits and exclusions and we retain risk.

We maintain insurance policies for various exposures including, but not limited to, general liability, auto liability, workers compensation and employer’s liability, directors’ and officers’ insurance, professional liability, employment practices, loss to real and personal property, business interruption, fiduciary and other management liability. Insurance products are purchased both as required by law and to minimize the risk that unknown events have a material impact on our operations. However, insurance has limitations in that certain events may not be covered (either uninsurable, subject to high deductibles or exceeding the limits purchased). Even when appropriate insurance is purchased, certain events may have a material impact of a nature that cannot be fully compensated through insurance.

Risks Related to Our Common Stock

Our common stock was delisted from the New York Stock Exchange and is not listed on any other national securities exchange which may negatively impact the trading price of our common stock and the levels of liquidity available to our stockholders.

Trading in the Company’s common stock on the New York Stock Exchange (“NYSE”) was suspended on January 26, 2011. The Company’s common stock was delisted from the NYSE on May 30, 2011. On January 27, 2011, the Company’s common stock began trading under the symbol “VISI” through the facilities of the OTC Markets Group, Inc.

We can provide no assurance that we will be able to relist our common stock on a national securities exchange or that the stock will continue being traded on the OTC marketplace. The trading of our common stock on the OTC marketplace rather than the NYSE may negatively impact the trading price of our common stock and the levels of liquidity available to our stockholders.

Risks of trading in an over-the-counter market.

Securities traded in the over-the-counter market generally have significantly less liquidity than securities traded on a national securities exchange due to factors such as the reduced number of investors that will consider investing in the securities, the reduced number of market makers in the securities, and the reduced number of securities analysts that follow such securities. As a result, holders of our common stock may find it difficult to resell their shares at prices quoted in the market or at all. Furthermore, because of the limited market and generally low volume of trading in our common stock that could occur, the share price of our common stock could be more likely to be affected by broad market fluctuations, general market conditions, fluctuations in our

 

17


operating results, changes in the market’s perception of our business, and announcements made by us, our competitors, parties with whom we have business relationships or third parties. The lack of liquidity in our common stock may also make it difficult for us to issue additional securities for financing or other purposes, or to otherwise arrange for any financing we may need in the future.

Our stock price could be volatile and, as a result, investors may not be able to resell their shares at or above the price they paid for them.

Our stock price has in the past, and could in the future, fluctuate as a result of a variety of factors, including the following, some of which are beyond our control:

 

   

the restatement of our financial statements;

 

   

fluctuations in our results of operations;

 

   

our failure to meet the expectations of the investment community and changes in investment community viewpoints or estimates of our future results of operations;

 

   

industry trends and the business success of our customers;

 

   

loss of one or more key customers;

 

   

strategic moves by our competitors, such as product or service announcements or acquisitions;

 

   

regulatory developments;

 

   

litigation;

 

   

general economic conditions, such as the current recession;

 

   

general market conditions; and

 

   

other domestic and international macroeconomic factors unrelated to our performance.

The stock market has experienced, and may in the future experience, volatility that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may also adversely affect the market price of our common stock.

Our principal shareholders own a significant percentage of our common stock and will be able to exercise significant influence over Volt. Their interests may differ from those of other shareholders.

As of September 30, 2013, our principal shareholders, who are related family members, controlled approximately 42% of our outstanding common stock. Accordingly, these shareholders, if they vote in the same manner, would effectively be able to control the composition of our board of directors and many other matters requiring shareholder approval and would continue to have significant influence over our affairs, and the interests of our principal shareholders may not align with those of our other shareholders.

Furthermore, the provisions of the New York Business Corporation Law, to which we are subject, requires the affirmative vote of the holders of two-thirds of all of our outstanding shares entitled to vote in order to adopt a plan of merger or consolidation between us and another entity and to approve a sale, lease, exchange or other disposition of all or substantially all of our assets not made in our usual and regular course of business. Accordingly, our principal shareholders, acting alone, could prevent the approval of such transactions even if such transactions are in the best interests of our other shareholders.

 

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New York law and our Articles of Incorporation and By-laws contain provisions that could make the takeover of Volt more difficult.

Certain provisions of New York law and our articles of incorporation and by-laws could have the effect of delaying or preventing a third party from acquiring Volt, even if a change in control would be beneficial to our shareholders. These provisions of our articles of incorporation and by-laws include:

 

   

providing for a classified board of directors with directors having staggered, two-year terms;

 

   

permitting removal of directors only for cause;

 

   

providing that vacancies on the board of directors will be filled by the remaining directors then in office; and

 

   

requiring advance notice for shareholder proposals and director nominees.

In addition to the voting power of our principal shareholders discussed above, our board of directors could choose not to negotiate with a potential acquirer that it did not believe was in our strategic interests. If an acquirer is discouraged from offering to acquire Volt or prevented from successfully completing an acquisition by these or other measures, our shareholders could lose the opportunity to sell their shares at a more favorable price.

 

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ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

Our corporate headquarters is located in approximately 18,700 square feet at 1065 Avenue of the Americas, New York, New York under a lease that expires in 2015. A summary of our principal leased and owned properties (those exceeding 20,000 square feet) that are currently in use is set forth below:

United States

 

Location

 

Business Segment/Purpose

 

Own/Lease

 

Lease Expiration

  Approximate
Square Feet
 

Orange County, California

  Staffing Services and General and Administrative Offices   Own (1)   -     200,000   

Redmond, Washington

  Staffing Services   Lease   Between 2013 and 2015     86,000   

Rochester, New York

  Computer Systems   Lease   2018     51,000   

San Antonio, Texas (2)

  Staffing Services   Lease   2015     36,000   

Wallington, New Jersey

  Other   Lease   2015     32,000   

 

(1) See Note 11 in our Consolidated Financial Statements for information regarding a term loan secured by a deed of trust on this property. We sublease approximately 39,000 square feet of these premises to an unaffiliated third party with a term through October 31, 2015, with the tenant having two additional 60-month lease renewal options and certain rights of early termination.

 

(2) Effective July 1, 2013 the Company increased the San Antonio, Texas space by approximately 35,000 square feet bringing the total leased space to approximately 71,000 square feet. The new lease expires in April 2019.

International

 

Location

 

Business Segment/Purpose

 

Own/Lease

 

Lease Expiration

  Approximate
Square Feet

Montevideo, Uruguay

  Other   Own   -   93,000

Bangalore, India

  Other   Lease   2015   30,000

We lease space in approximately 167 other facilities worldwide, excluding month-to-month leases, each of which consists of less than 20,000 square feet. These leases expire at various times from 2013 until 2018.

At times we lease space to others in the buildings that we own or lease if we do not require the space for our own business. We believe that our facilities are adequate for our presently anticipated uses, and we are not dependent upon any individual leased premises.

For additional information pertaining to lease commitments, see our note on Commitments and Contingencies to our Consolidated Financial Statements included in this report.

 

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ITEM 3. LEGAL PROCEEDINGS

SEC Civil Action

As previously reported, Volt was the subject of a non-public investigation by the SEC that we settled on January 18, 2013. Also arising from the investigation, the SEC filed a civil injunctive complaint on January 10, 2013, against Jack Egan, Volt’s former Chief Financial Officer, in the United States District Court for the Southern District of New York. The Commission alleges that Egan participated in a scheme in violation of Section 17(a) of the Securities Act; Sections 10(b) and 13(b)(5) of the Exchange Act; and Exchange Act Rules 10b-5, 13b2-1, 13b2-2, and 13a-14 to materially overstate revenue causing our net income for our fourth quarter and fiscal year ended October 28, 2007 to be materially overstated and to mislead our external auditors. The Commission seeks that Egan be permanently enjoined, be ordered to pay a civil money penalty, and be prohibited from acting as an officer or director.

Other Legal Proceedings

From time to time, the Company is subject to claims in legal proceedings arising in the ordinary course of its business, including those related to payroll related matters and various employment related matters. All litigation pending against the Company relates to matters that have arisen in the ordinary course of business and the Company believes that it will not have a materially adverse effect on its consolidated financial condition or results of operations.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

 

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Until January 26, 2011, our common stock was listed on the NYSE under the symbol “VOL”. Since then it has traded in the over-the-counter market under the symbol “VISI.” The following table sets forth, for the periods indicated, the high and low sales prices (for periods during which our common stock was traded on the NYSE, ending with the fourth quarter of 2010) or the high and low bid quotations (for periods during which our common stock was traded on the over-the-counter market starting with the first quarter of 2011) for our common stock for the years ended November 3, 2013, October 28, 2012, October 30, 2011, and October 31, 2010. The over-the-counter market bid quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.

 

Fiscal Period

        First Quarter      Second Quarter      Third Quarter      Fourth Quarter  
2013    High    $ 7.81       $ 8.74       $ 8.10       $ 8.90   
   Low    $ 6.20       $ 7.79       $ 6.65       $ 6.85   
2012    High    $ 7.00       $ 7.19       $ 7.35       $ 7.14   
   Low    $ 5.45       $ 5.89       $ 6.57       $ 6.23   
2011    High    $ 9.49       $ 10.75       $ 10.80       $ 9.15   
   Low    $ 5.92       $ 6.65       $ 9.10       $ 6.00   
2010    High    $ 11.94       $ 13.36       $ 13.50       $ 9.21   
   Low    $ 7.55       $ 8.80       $ 7.09       $ 6.16   

Cash dividends have not been paid for the five years ended October 28, 2012 and through the date of this report. One of our credit agreements contains a covenant that limits cash dividends, capital stock purchases and redemptions in any one fiscal year to 50% of our prior year’s consolidated net income, as defined. There was $5.0 million available for cash dividends, capital stock purchases and redemptions under this covenant at October 28, 2012.

On November 1, 2013, the last sale price of our common stock reported on the over-the-counter market was $8.60. On that date there were approximately 289 holders of record of our common stock, exclusive of stockholders whose shares were held by brokerage firms, depositories and other institutional firms in “street name” for their customers.

 

22


Issuer Purchases of Equity Securities

On June 2, 2008, our Board of Directors authorized the repurchase of up to 1,500,000 shares of our common stock from time to time in open market or private transactions at management’s discretion, subject to market conditions and other factors. The timing and exact number of shares purchased will depend on market conditions and is subject to institutional approval for purchases in excess of $32.1 million in fiscal year 2009 under the terms of our credit agreements.

Our purchases of our common stock from July 28, 2008 to September 30, 2013 were as follows:

 

Period

   Total
Number
of Shares
Purchased
     Average
Price
Paid per
Share
     Total
Number of
Shares
Purchased
as Part of
Publicly
Announced
Plan or
Program
     Maximum
Number of
Shares that
May Yet be
Purchased
Under Plan
or Program
 

July 28, 2008 - August 24, 2008

     -           -           -           1,500,000   

August 25, 2008 - September 21, 2008

     255,637       $ 10.84         255,637         1,244,363   

September 22, 2008 - November 2, 2008

     903,098       $ 8.75         903,098         341,265   

June 28, 2009 - August 2, 2009

     32,010       $ 7.08         32,010         309,255   
  

 

 

       

 

 

    

Total

     1,190,745            1,190,745      
  

 

 

       

 

 

    

 

23


Performance Information

 

LOGO

Shareholder Return Performance Graph

The Company’s Peer Group Index includes companies having market capitalizations that are within 5% of the market capitalization of the Company’s Common Stock at the end of the Company’s latest fiscal year-end (this peer group has been historically selected by the Company because the Company has operated in diverse business segments).

Other Events

We maintain a 401(k) retirement savings plan that is available to substantially all of our U.S. employees. The plan contains as an investment alternative an “Employer Stock Fund” that invests in our common stock and, until February 17, 2011, the plan allowed participants to allocate some or all of their account balances to interests in the Employer Stock Fund. In February 2011, we informed the participants in the 401(k) plan that they would no longer be allowed to allocate their account balance to the Employer Stock Fund because the Company had not been timely filing periodic reports with the Securities and Exchange Commission.

The Volt Information Sciences, Inc. common stock held in the Employer Stock Fund was not purchased from the Company; rather, the plan trustee accumulated the plan contributions that were directed to the Employer

 

24


Stock Fund and purchased shares of our common stock in open market transactions. Nevertheless, because we sponsor the plan, we may be required to register certain transactions in the plan related to shares of our common stock, and we filed registration statements on Form S-8 with respect to shares offered and sold through the Employer Stock Fund.

Purchases of shares for the Employer Stock Fund made from approximately September 15, 2009 through February 17, 2011 (the date as of which participants were no longer allowed to allocate their account balances to the Employer Stock Fund) occurred when we were not filing periodic reports with the Securities and Exchange Commission on a current basis. Consequently, our registration statements on Form S-8 may not have been available to cover these offers and sales to plan participants to the extent registration may have been required. During this period, the participants purchased through the Employer Stock Fund approximately 161,000 shares of our common stock.

ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data reflects the results of operations and balance sheet data for the fiscal years ended October 28, 2012, October 30, 2011, October 31, 2010, November 1, 2009 and November 2, 2008. The data below should be read in conjunction with, and is qualified by reference to, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Company’s Consolidated Financial Statements and notes thereto. Certain reclassifications have been made to prior years’ financial statements in order to conform to the current year’s presentation. The financial information presented may not be indicative of our future performance.

 

For the years ended,

(in thousands, except per share data)

   October 28,
2012
    October 30,
2011
    October 31,
2010
    November 1,
2009
    November 2,
2008
 
     52 weeks     52 weeks     52 weeks     52 weeks     53 weeks  

Revenue

          

Staffing services revenue

   $ 2,027,601      $ 1,957,905      $ 1,732,348      $ 1,717,255      $ 2,376,396   

Other revenue

     218,526        280,204        224,064        246,754        349,642   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net revenue

     2,246,127        2,238,109        1,956,412        1,964,009        2,726,038   

Direct cost of staffing services revenue

     1,738,933        1,698,711        1,479,562        1,458,720        2,012,977   

Cost of other revenue

     163,853        166,211        178,268        230,031        340,131   

Selling, administrative and other operating costs

     310,847        302,882        294,564        288,404        358,406   

Amortization of purchased intangible assets

     1,382        1,347        1,434        1,435        10,520   

Restructuring costs

     -          -          3,149        10,739        1,504   

Impairment of purchased intangibles and goodwill

     -          -          -          -          135,232   

Gain on sale of building

     (4,418     -          -          -          -     

Fees related to restatement and associated investigations

     42,906        49,193        29,158        924        -     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (7,376     19,765        (29,723     (26,244     (132,732

Other income (expense), net

     (3,836     (4,484     (4,038     (3,493     (2,771

Income tax provision (benefit)

     2,391        (348     62,614        (3,493     (24,461

Income (loss) from continuing operations

     (13,603     15,629        (96,375     (26,244     (111,042

Income from discontinued operations, net of taxes

     -          -          -          -          99,325   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (13,603     15,629        (96,375     (26,244     (11,717

PER SHARE DATA:

          

Basic:

          

Net income (loss) from continuing operations

   $ (0.65   $ 0.75      $ (4.63   $ (1.26   $ (5.05

Weighted average number of shares

     20,813        20,813        20,812        20,833        21,982   

Diluted:

          

Net income (loss) from continuing operations

   $ (0.65   $ 0.75      $ (4.63   $ (1.26   $ (5.05

Weighted average number of shares

     20,813        20,896        20,812        20,833        21,982   

For the years ended,

(in thousands)

   October 28,
2012
    October 30,
2011
    October 31,
2010
    November 1,
2009
    November 2,
2008
 
     52 weeks     52 weeks     52 weeks     52 weeks     53 weeks  

Cash and cash equivalents

   $ 26,483      $ 44,567      $ 51,084      $ 118,765      $ 120,929   

Working capital

     90,435        111,218        127,011        201,449        195,526   

Total assets

     557,572        579,479        599,124        658,343        816,805   

Long-term debt, current portion

     768        708        652        601        553   

Long-term debt, excluding current portion

     9,033        9,801        10,509        11,161        11,762   

Total stockholders’ equity

     143,117        156,663        140,137        237,285        261,853   

Note - Cash dividends were not paid during the above periods.

          

 

25


ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

The demand for our services in all segments, both domestically and in our foreign operations, is dependent upon general economic conditions. Our business suffers during economic downturns. Since late fiscal 2008, the slowing of the economy adversely affected our revenue. Although unemployment rates in the United States remained high during 2011 and 2012, throughout fiscal 2011 and 2012 the domestic U.S. economic growth resulted in increased demand for our staffing and consulting services. The overall job growth in the economy has shown a gradual upward trend from 2011. While we experienced modest growth in our staffing business in fiscal 2011 and 2012, our revenues remain lower than pre-2008 recession levels.

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, certain customer facilities closures during the holidays for one 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 annual payroll tax contribution maximums for higher salaried employees have been met, and customers increase the use of our administrative and industrial labor during the summer vacation period.

Our Computer Systems segment has seen a decline in the volume of directory assistance transactions and 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 systems 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 2011 and 2012 we increased our investment in developing our directory assistance software platform into full-featured call center software that can take advantage of that growing market, although this investment combined with the declining revenues from directory assistance negatively impacted segment results.

Our fiscal year ends on the Sunday nearest October 31. As a result, most fiscal years contain 52 weeks and a 53rd week is added every five or six years. The 2012, 2011 and 2010 fiscal years each consisted of 52 weeks.

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 revised contract 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 (“Unrecognized Revenue”) is not recognized until a subsequent period. The following tables provide financial data determined both using GAAP as well as on a non-GAAP basis. The non-GAAP basis includes adjustments for Unrecognized Revenue so that services 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.

 

26


Consolidated Results of Operations and Financial Highlights (Fiscal 2012 vs. Fiscal 2011):

 

    Year ended October 28, 2012         Year ended October 30, 2011  
(in thousands)   Total     Staffing
Services
    Computer
Systems
    Other         Total     Staffing
Services
    Computer
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             -           

Fees related to restatement and associated investigations

    42,906                49,193         
 

 

 

           

 

 

       

Operating income (loss)

    (7,376             19,765         
 

 

 

           

 

 

       

Other income (expense), net

    (3,836             (4,484      

Income tax provision (benefit)

    2,391                (348      
 

 

 

           

 

 

       

Net income (loss)

  $ (13,603           $ 15,629         
 

 

 

           

 

 

       

NON-GAAP TABLE

 

    Year ended October 28, 2012         Year ended October 30, 2011  

(in thousands)

  Total     Staffing
Services
    Computer
Systems
    Other         Total     Staffing
Services
    Computer
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 adjustment

    (18,359     (18,359     -          -            16,572        16,572        -          -     
 

 

 

     

 

 

 

Non-GAAP 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 segment operating income

    23,484        18,852        3,642        990          94,002        31,408        59,637        2,957   

Corporate general and administrative

    10,731                8,472         

Gain on sale of building

    (4,418             -           

Fees related to restatement and associated investigations

    42,906                49,193         
 

 

 

           

 

 

       

Non-GAAP operating income (loss)

  $ (25,735           $ 36,337         
 

 

 

           

 

 

       

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 as several large implementations reached 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 is 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

 

27


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.

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 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.

Fees Related to Restatement and Associated Investigations: Fees related to our 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 fees related to the restatement and associated investigations 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 fees related to the restatement and associated investigations 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 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.

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.

Results of Operations by Segments (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 in fiscal 2011. This increase is 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.

 

28


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 is 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.

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 as several large implementations reached 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  
(in millions, except as noted)    October 28,
2012
     October 30,
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 in each of the following fiscal years as follows:

 

(in millions)    Balance as of
October 28, 2012
     2013      2014      Thereafter      Dependent Upon
Future Events
 

Expected recognition of Deferred Revenue

   $ 23.3       $ 17.0       $ 3.9       $ 0.4       $ 2.0   

Expected recognition of Deferred Costs

   $ 3.5       $ 2.3       $ 1.0       $ 0.2       $ 0.0   

Expected impact on Operating Income

   $ 19.8       $ 14.7       $ 2.9       $ 0.2       $ 2.0   

 

29


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 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 is 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 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.

 

30


Consolidated Results of Operations and Financial Highlights (Q3 2012 YTD vs. Q3 2011 YTD)

 

    Nine months ended July 29, 2012         Nine months ended July 31, 2011  
(in thousands)   Total     Staffing
Services
    Computer
Systems
    Other         Total     Staffing
Services
    Computer
Systems
    Other  

Net Revenue

  $ 1,674,568      $ 1,508,649      $ 78,112      $ 87,807        $ 1,649,911      $ 1,454,440      $ 116,822      $ 78,649   

Expenses

                 

Direct cost of staffing services revenue

    1,298,333        1,298,333        -          -            1,264,170        1,264,170        -          -     

Cost of other revenue

    124,490        -          52,485        72,005          120,035        -          55,730        64,305   

Selling, administrative and other operating costs

    220,967        186,310        19,098        15,559          219,305        183,122        21,365        14,818   

Amortization of purchased intangible assets

    1,034        35        642        357          1,002        3        641        358   
 

 

 

     

 

 

 

Segment operating income (loss)

    29,744        23,971        5,887        (114       45,399        7,145        39,086        (832

Corporate general and administrative

    8,621                6,087         

Fees related to restatement and associated investigations

    28,000                37,753         
 

 

 

           

 

 

       

Operating income (loss)

    (6,877             1,559         
 

 

 

           

 

 

       

Other income (expense), net

    (2,421             (4,085      

Income tax provision (benefit)

    2,293                (2,151      
 

 

 

           

 

 

       

Net loss

  $ (11,591           $ (375      
 

 

 

           

 

 

       

NON-GAAP TABLE

 

    Nine months ended July 29, 2012         Nine months ended July 31, 2011  
(in thousands)   Total     Staffing
Services
    Computer
Systems
    Other         Total     Staffing
Services
    Computer
Systems
    Other  

Net Revenue

  $ 1,674,568      $ 1,508,649      $ 78,112      $ 87,807        $ 1,649,911      $ 1,454,440      $ 116,822      $ 78,649   

Recognition of previously unrecognized revenue

    (23,131     (23,131     -          -            (10,366     (10,366     -          -     

Additions to unrecognized revenue

    7,130        7,130        -          -            20,403        20,403        -          -     
 

 

 

     

 

 

 

Net non-GAAP adjustment

    (16,001     (16,001     -          -            10,037        10,037        -          -     
 

 

 

     

 

 

 

Non-GAAP total net revenue

    1,658,567        1,492,648        78,112        87,807          1,659,948        1,464,477        116,822        78,649   
 

 

 

     

 

 

 

Expenses

                 

Direct cost of staffing services revenue

    1,298,333        1,298,333        -          -            1,264,170        1,264,170        -          -     

Cost of other revenue

    124,490        -          52,485        72,005          120,035        -          55,730        64,305   

Selling, administrative and other operating costs

    220,967        186,310        19,098        15,559          219,305        183,122        21,365        14,818   

Amortization of purchased intangible assets

    1,034        35        642        357          1,002        3        641        358   
 

 

 

     

 

 

 

Non-GAAP segment operating income (loss)

    13,743        7,970        5,887        (114       55,436        17,182        39,086        (832

Corporate general and administrative

    8,621                6,087         

Fees related to restatement and associated investigations

    28,000                37,753         
 

 

 

           

 

 

       

Non-GAAP operating income (loss)

  $ (22,878           $ 11,596         
 

 

 

           

 

 

       

Consolidated Results of Operations (Q3 2012 YTD vs. Q3 2011 YTD)

Net Revenue: Net revenue in the first nine months of fiscal 2012 increased $24.7 million to $1,674.6 million from $1,649.9 million in fiscal 2011, and non-GAAP net revenue decreased by $1.3 million or 0.1% to $1,658.6 million from $1,659.9 in fiscal 2011. The change in revenue was primarily the result of lower Computer Systems revenues of $38.7 million as several large implementations reached the end of the maintenance periods over which the revenue of projects were being amortized and lower transaction volumes, pricing and maintenance levels, offset by increased Staffing Services revenues of $54.2 million (non-GAAP $28.1 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 $26.0 million.

Direct Cost of Staffing Services Revenue: Direct cost of staffing services revenue in the first nine months of fiscal 2012 increased $34.1 million, or 2.7%, to $1,298.3 million from $1,264.2 million in fiscal 2011. This increase is primarily a result of increased contingent staff on assignment at slightly lower margins 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 13.9% and 13.0% from 13.1% and 13.7% in fiscal 2011, respectively. The GAAP percentage increase was primarily due to the change in net deferral and recognition of staffing revenues. The non-GAAP percentage decrease was primarily due to slightly lower margins on traditional staffing revenues.

 

31


Cost of Other Revenue: Cost of other revenue in the first nine months of fiscal 2012 increased $4.5 million, or 3.7%, to $124.5 million from $120.0 million in fiscal 2011. This increase 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 and relatively fixed data acquisition cost, increased costs related to higher IT maintenance revenues offset by decreased costs for the telecommunications business primarily from the result of exiting certain unprofitable business lines.

Selling, Administrative and Other Operating Costs: Selling, administrative and other operating costs in the first nine months of fiscal 2012 increased $1.7 million, or 0.8%, to $221.0 from $219.3 million in fiscal 2011, generally in line with the similar revenues in each period.

Fees Related to Restatement and Associated Investigations: Fees related to our restatement and associated investigations are comprised of legal, consulting and accounting expenses and amounted to $28.0 million and $37.8 million in the first nine months of 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 the first nine months of fiscal 2012 of $6.9 million included fees related to the restatement and associated investigations 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 non-GAAP operating loss of $14.8 million.

Operating income in the first nine months of fiscal 2011 of $1.6 million included fees related to the restatement and associated investigations of $37.8 million and recognition of previously deferred software systems revenues and costs, net of current period deferrals, of $42.5 million. Without these items we would have had an operating loss of $3.1 million and non-GAAP operating income of $6.9 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 Staffing Services non-GAAP results of approximately $9.2 million due to lower traditional staffing margins on higher revenues and efforts to expand our higher margin retail business offset by a decrease in Computer Systems results of approximately $10.6 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.

Other Income (Expense), net: Other expense in the first nine months of fiscal 2012 decreased $1.7 million, or 40.7%, to $2.4 million from $4.1 million in fiscal 2011 primarily related to foreign exchange gains and losses.

Income Tax Provision (Benefit): Income tax provision in the first nine months of fiscal 2012 amounted to $2.3 million primarily related to locations outside of the United States, compared to a benefit of $2.2 million in fiscal 2011.

Results of Operations by Segments (Q3 2012 YTD vs. Q3 2011 YTD)

Staffing Services

Net Revenue: The segment’s net revenue in the first nine months of fiscal 2012 increased $54.2 million to $1,508.6 million from $1,454.4 million in fiscal 2011, and non-GAAP net revenue increased by $28.1 million or 1.9% to $1,492.6 million from $1,464.5 million in fiscal 2011. This increase is primarily due to increased contingent staffing, although at lower average bill rates, an increase in call center, games testing and other project-based staffing services revenue from increased volume in all practice areas, and recognition of $26.0 million of previously deferred revenue, net of current period deferrals. On average, approximately 31,600 U.S. staffing employees were on assignment in the first nine months of fiscal 2012, compared to approximately 31,500 in fiscal 2011.

 

32


Direct Cost of Staffing Services Revenue: The segment’s direct cost of staffing services revenue in the first nine months of fiscal 2012 increased $34.1 million, or 2.7%, to $1,298.3 million from $1,264.2 million in fiscal 2011. This increase is primarily a result of increased contingent staff on assignment at slightly lower margins 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 13.9% and 13.0% from 13.1% and 13.7% in fiscal 2011, respectively. The GAAP percentage increase was primarily due to the change in net deferral and recognition of staffing revenues. The non-GAAP percentage decrease was primarily due to slightly lower margins on traditional staffing revenues.

Selling, Administrative and Other Operating Costs: The segment’s selling, administrative and other operating costs in the first nine months of fiscal 2012 increased $3.2 million, or 1.7%, to $186.3 million from $183.1 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 the first nine months of fiscal 2012 increased $16.9 million to $24.0 million from $7.1 million in fiscal 2011, and non-GAAP operating income decreased by $9.2 million or 53.6% to $8.0 million from $17.2 million in fiscal 2011. The change in operating income is primarily due to a change in net deferral of staffing revenues of $26.0 million.

Computer Systems

Net Revenue: The segment’s net revenue in the first nine months of fiscal 2012 decreased by $38.7 million, or 33.1%, to $78.1 million from $116.8 million in fiscal 2011. This decrease was primarily a result of lower systems revenues as several large implementations reached the end of the maintenance periods over which the revenue of projects were being amortized, 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 first nine months of fiscal 2012 decreased $3.2 million, or 5.8%, to $52.5 million in fiscal 2012 from $55.7 million in fiscal 2011, primarily the result of lower amortization of deferred costs compared to 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 and relatively fixed data acquisition costs

Selling, Administrative and Other Operating Costs: The segment’s selling, administrative and other operating costs in the first nine months of fiscal 2012 decreased $2.3 million, or 10.6%, to $19.1 million from $21.4 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 the first nine months of fiscal 2012 decreased by $33.2 million to $5.9 million compared to $39.1 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 first nine months of fiscal 2012 increased $9.2 million, or 11.6%, to $87.8 million from $78.6 million in fiscal 2011. The increase is primarily attributable to an increase in IT maintenance revenue offset by a decrease in telecommunications revenues 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 in telecommunications revenues was primarily the result of exiting certain unprofitable business lines.

Cost of Other Revenue: The segment’s cost of other revenue in the first nine months of fiscal 2012 increased $7.7 million, or 12.0%, to $72.0 million from $64.3 million in fiscal 2011. The increase was driven by costs

 

33


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.

Selling, Administrative and Other Operating Costs: The segment’s selling, administrative and other operating costs in the first nine months of fiscal 2012 increased $0.8 million, or 5.0%, to $15.6 million from $14.8 million in fiscal 2011, generally in line with the similar revenues in each period.

Segment Operating Loss: The segment’s operating loss in the first nine months of fiscal 2012 decreased $0.7 million to $0.1 million from $0.8 million in fiscal 2011. This decrease was predominantly a result of our telecommunications business exiting certain unprofitable business lines in fiscal 2011 as well as higher IT maintenance revenue.

Consolidated Results of Operations and Financial Highlights (Q3 2012 vs. Q3 2011)

 

    Three months ended July 29, 2012         Three months ended July 31, 2011  
(in thousands)   Total     Staffing
Services
    Computer
Systems
    Other         Total     Staffing
Services
    Computer
Systems
    Other  

Net Revenue

  $ 558,032      $ 508,154      $ 21,888      $ 27,990        $ 555,930      $ 490,997      $ 39,109      $ 25,824   

Expenses

                 

Direct cost of staffing services revenue

    441,124        441,124        -          -            430,081        430,081        -          -     

Cost of other revenue

    38,296        -          15,914        22,382          40,658        -          19,466        21,192   

Selling, administrative and other operating costs

    74,294        62,821        6,568        4,905          73,989        61,336        7,389        5,264   

Amortization of purchased intangible assets

    344        11        213        120          345        12        213        120   
 

 

 

     

 

 

 

Segment operating income (loss)

    3,974        4,198        (807     583          10,857        (432     12,041        (752

Corporate general and administrative

    3,799                2,647         

Fees related to restatement and associated investigations

    9,800                9,821         
 

 

 

           

 

 

       

Operating loss

    (9,625             (1,611      
 

 

 

           

 

 

       

Other income (expense), net

    (56             (322      

Income tax provision

    1,560                110         
 

 

 

           

 

 

       

Net loss

  $ (11,241           $ (2,043      
 

 

 

           

 

 

       

NON-GAAP TABLE

 

    Three months ended July 29, 2012         Three months ended July 31, 2011  
(in thousands)   Total     Staffing
Services
    Computer
Systems
    Other         Total     Staffing
Services
    Computer
Systems
    Other  

Net Revenue

  $ 558,032      $ 508,154      $ 21,888      $ 27,990        $ 555,930      $ 490,997      $ 39,109      $ 25,824   

Recognition of previously unrecognized revenue

    (6,487     (6,487     -          -            (8,508     (8,508     -          -     

Additions to unrecognized revenue

    4,852        4,852        -          -            16,522        16,522        -          -     
 

 

 

     

 

 

 

Net non-GAAP adjustment

    (1,635     (1,635     -          -            8,014        8,014        -          -     
 

 

 

     

 

 

 

Non-GAAP total net revenue

    556,397        506,519        21,888        27,990          563,944        499,011        39,109        25,824   
 

 

 

     

 

 

 

Expenses

                 

Direct cost of staffing services revenue

    441,124        441,124        -          -            430,081        430,081        -          -     

Cost of other revenue

    38,296        -          15,914        22,382          40,658        -          19,466        21,192   

Selling, administrative and other operating costs

    74,294        62,821        6,568        4,905          73,989        61,336        7,389        5,264   

Amortization of purchased intangible assets

    344        11        213        120          345        12        213        120   
 

 

 

     

 

 

 

Non-GAAP segment operating income (loss)

    2,339        2,563        (807     583          18,871        7,582        12,041        (752

Corporate general and administrative

    3,799                2,647         

Fees related to restatement and associated investigations

    9,800                9,821         
 

 

 

           

 

 

       

Non-GAAP operating income (loss)

  $ (11,260           $ 6,403         
 

 

 

           

 

 

       

Consolidated Results of Operations (Q3 2012 vs. Q3 2011)

Net Revenue: Net revenue in the third quarter of fiscal 2012 increased $2.1 million to $558.0 million from $555.9 million in fiscal 2011, and non-GAAP net revenue decreased by $7.5 million or 1.3% to $556.4 million from $563.9 in fiscal 2011. The change in revenue was primarily the result of lower Computer Systems revenues by $17.2 million as several large implementations reached the end of the maintenance periods over which the

 

34


revenue of projects were being amortized and lower transaction volumes, pricing and maintenance levels, offset by increased Staffing Services revenues of $17.2 million (non-GAAP $7.5 million) resulting from more contingent staff on assignments and a change in net deferral of staffing revenues of $9.6 million.

Direct Cost of Staffing Services Revenue: Direct cost of staffing services revenue in the third quarter fiscal 2012 increased $11.0 million, or 2.6%, to $441.1 million from $430.1 million in fiscal 2011. This increase is primarily a result of increased contingent staff on assignment at slightly lower margins 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 13.2% and 12.9% from 12.4% and 13.8% in fiscal 2011, respectively. The GAAP percentage increase was primarily due to the change in net deferral and recognition of staffing revenues. The non-GAAP percentage decrease was primarily due to slightly lower margins on traditional staffing revenues.

Cost of Other Revenue: Cost of other revenue in the third quarter of fiscal 2012 decreased $2.4 million, or 5.8%, to $38.3 million from $40.7 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 and relatively fixed data acquisition cost, increased costs related to higher IT maintenance revenues offset by decreased costs in the telecommunications business primarily from the result of exiting certain unprofitable business.

Selling, Administrative and Other Operating Costs: Selling, administrative and other operating costs in the third quarter of fiscal 2012 increased $0.3 million, or 0.4%, to $74.3 million from $74.0 million in fiscal 2011, generally in line with the similar revenues in each period.

Fees Related to Restatement and Associated Investigations: Fees related to our restatement and associated investigations are comprised of legal, consulting and accounting expenses and remained consistent at $9.8 million in the third quarters of fiscal 2012 and fiscal 2011.

Operating Loss: Operating loss in the third quarter of fiscal 2012 of $9.6 million included fees related to the restatement and associated investigations of $9.8 million and recognition of previously deferred software systems revenues and 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 non-GAAP operating loss of $5.5 million.

Operating loss in the third quarter of fiscal 2011 of $1.6 million included fees related to the restatement and associated investigations of $9.8 million and recognition of previously deferred software systems revenues and costs, net of current period deferrals, of $14.1 million. Without these items we would have had an operating loss of $5.9 million and non-GAAP operating income of $2.1 million.

Operating results and non-GAAP operating results were lower in the third quarter of fiscal 2012 than fiscal 2011 primarily due to the above reasons and a decrease in Computer Systems results of approximately $2.7 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 and a decrease in Staffing Services non-GAAP results of approximately $5.0 million due to lower traditional margins on higher revenues and efforts to expand our higher margin retail business.

Other Income (Expense), net: Other expense in the third quarter of fiscal 2012 remained consistent in the amount of $0.1 million from $0.3 million in the third quarter of fiscal 2011.

Income Tax Provision: Income tax provision in the third quarter of fiscal 2012 increased $1.5 million to $1.6 million from $0.1 million in fiscal 2011 with expense in both years primarily related to locations outside of the United States.

 

35


Results of Operations by Segments (Q3 2012 vs. Q3 2011)

Staffing Services

Net Revenue: The segment’s net revenue in the third quarter of fiscal 2012 increased $17.2 million to $508.2 million from $491.0 million in fiscal 2011, and non-GAAP net revenue increased by $7.5 million or 1.5% to $506.5 million from $499.0 million in fiscal 2011. This increase is primarily due to increased contingent staffing, although at lower average bill rates, an increase in call center, games testing and other project-based staffing services revenue from increased volume in all practice areas, offset by current period deferrals of $1.6 million.

Direct Cost of Staffing Services Revenue: The segment’s direct cost of staffing services revenue in the third quarter fiscal 2012 increased $11.0 million, or 2.6%, to $441.1 million from $430.1 million in fiscal 2011. This increase is primarily a result of increased contingent staff on assignment at slightly lower margins 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 13.2% and 12.9% from 12.4% and 13.8% in fiscal 2011, respectively. The GAAP percentage increase was primarily due to the change in net deferral and recognition of staffing revenues. The non-GAAP percentage decrease was primarily due to slightly lower margins on traditional staffing revenues.

Selling, Administrative and Other Operating Costs: The segment’s selling, administrative and other operating costs in the third quarter of fiscal 2012 increased $1.5 million, or 2.4%, to $62.8 million from $61.3 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 the third quarter of fiscal 2012 increased $4.6 million to $4.2 million from an operating loss of $0.4 million in fiscal 2011, and non-GAAP operating income decreased by $5.0 million or 66.2% to $2.6 million from $7.6 million in fiscal 2011. The change in operating income is primarily due to a change in net deferral of staffing revenues of $9.6 million offset by lower margins on traditional staffing services.

Computer Systems

Net Revenue: The segment’s net revenue in the third quarter of fiscal 2012 decreased by $17.2 million, or 44.0%, to $21.9 million from $39.1 million in fiscal 2011. This decrease was primarily a result of lower systems revenues as several large implementations reached the end of the maintenance periods over which the revenue of projects were being amortized, 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 2012 decreased $3.6 million, or 18.2%, to $15.9 million in fiscal 2012 from $19.5 million in fiscal 2011, primarily the result of lower amortization of deferred costs compared to 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 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 2012 decreased $0.8 million, or 11.1%, to $6.6 million from $7.4 million in fiscal 2011, primarily due to cost reductions in response to the overall segment business levels decline.

Segment Operating Income (Loss): The segment’s operating results in the third quarter of fiscal 2012 decreased by $12.8 million to operating loss of $0.8 million compared to operating income of $12.0 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.

 

36


Other

Net Revenue: The segment’s net revenue in third quarter of fiscal 2012 increased $2.2 million, or 8.4%, to $28.0 million from $25.8 million in fiscal 2011. The increase is primarily attributable to an increase in IT maintenance revenue offset by a decrease in telecommunications revenues 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 in telecommunications revenues was primarily the result of exiting certain unprofitable business lines.

Cost of Other Revenue: The segment’s cost of other revenue in the third quarter of fiscal 2012 increased $1.2 million, or 5.6%, to $22.4 million from $21.2 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.

Selling, Administrative and Other Operating Costs: The segment’s selling, administrative and other operating costs in the third quarter of fiscal 2012 decreased $0.4 million, or 6.8%, to $4.9 million from $5.3 million in fiscal 2011, generally flat period over period.

Segment Operating Income (Loss): The segment’s operating income in the third quarter of fiscal 2012 increased $1.4 million to $0.6 million from an operating loss of $0.8 million in fiscal 2011, as a result of the items noted above.

Consolidated Results of Operations and Financial Highlights (Q2 2012 YTD vs. Q2 2011 YTD)

 

    Six months ended April 29, 2012         Six months ended May 1, 2011  
(in thousands)   Total     Staffing
Services
    Computer
Systems
    Other         Total     Staffing
Services
    Computer
Systems
    Other  

Net Revenue

  $ 1,116,536      $ 1,000,495      $ 56,224      $ 59,817        $ 1,093,981      $ 963,443      $ 77,713      $ 52,825   

Expenses

                 

Direct cost of staffing services revenue

    857,209        857,209        -          -            834,089        834,089        -          -     

Cost of other revenue

    86,194        -          36,571        49,623          79,377        -          36,264        43,113   

Selling, administrative and other operating costs

    146,673        123,489        12,530        10,654          145,316        121,786        13,976        9,554   

Amortization of purchased intangible assets

    690        24        429        237          657        (9     428        238   
 

 

 

     

 

 

 

Segment operating income (loss)

    25,770        19,773        6,694        (697       34,542        7,577        27,045        (80

Corporate general and administrative

    4,822                3,440         

Fees related to restatement and associated investigations

    18,200                27,932         
 

 

 

           

 

 

       

Operating income

    2,748                3,170         
 

 

 

           

 

 

       

Other income (expense), net

    (2,365             (3,763      

Income tax provision (benefit)

    733                (2,261      
 

 

 

           

 

 

       

Net income (loss)

    $ (350             $ 1,668         
 

 

 

           

 

 

       

 

37


NON-GAAP TABLE

 

    Six months ended April 29, 2012         Six months ended May 1, 2011  
(in thousands)   Total     Staffing
Services
    Computer
Systems
    Other         Total     Staffing
Services
    Computer
Systems
    Other  

Net Revenue

  $ 1,116,536      $ 1,000,495      $ 56,224      $ 59,817        $ 1,093,981      $ 963,443      $ 77,713      $ 52,825   

Recognition of previously unrecognized revenue

    (22,795     (22,795     -          -            (6,705     (6,705     -          -     

Additions to unrecognized revenue

    8,429        8,429        -          -            8,728        8,728        -          -     
 

 

 

     

 

 

 

Net non-GAAP adjustment

    (14,366     (14,366     -          -            2,023        2,023        -          -     
 

 

 

     

 

 

 

Non-GAAP total net revenue

    1,102,170        986,129        56,224        59,817          1,096,004        965,466        77,713        52,825   
 

 

 

     

 

 

 

Expenses

                 

Direct cost of staffing services revenue

    857,209        857,209        -          -            834,089        834,089        -          -     

Cost of other revenue

    86,194        -          36,571        49,623          79,377        -          36,264        43,113   

Selling, administrative and other operating costs

    146,673        123,489        12,530        10,654          145,316        121,786        13,976        9,554   

Amortization of purchased intangible assets

    690        24        429        237          657        (9     428        238   
 

 

 

     

 

 

 

Non-GAAP segment operating income (loss)

    11,404        5,407        6,694        (697       36,565        9,600        27,045        (80

Corporate general and administrative

    4,822                3,440         

Fees related to restatement and associated investigations

    18,200                27,932         
 

 

 

           

 

 

       

Non-GAAP operating income (loss)

    $ (11,618             $ 5,193         
 

 

 

           

 

 

       

Consolidated Results of Operations (Q2 2012 YTD vs. Q2 2011 YTD)

Net Revenue: Net revenue in the first six months of fiscal 2012 increased $22.5 million to $1,116.5 million from $1,094.0 million in fiscal 2011, and non-GAAP net revenue increased by $6.2 million or 0.6% to $1,102.2 million from $1,096.0 in fiscal 2011. The change in revenue was primarily the result of lower Computer Systems revenues by $21.5 million as several large implementations reached the end of the maintenance periods over which the revenue of projects were being amortized and lower transaction volumes, pricing and maintenance levels, offset by increased Staffing Services revenues of $37.1 million (non-GAAP $20.6 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 $16.4 million.

Direct Cost of Staffing Services Revenue: Direct cost of staffing services revenue in the first six months of fiscal 2012 increased $23.1 million, or 2.8%, to $857.2 million from $834.1 million in fiscal 2011. This increase is primarily a result of increased contingent staff on assignment at slightly lower margins 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 14.3% and 13.1% from 13.4% and 13.6% in fiscal 2011, respectively. The GAAP percentage increase was primarily due to the change in net deferral and recognition of staffing revenues. The non-GAAP percentage decrease was primarily due to lower margins on traditional staffing revenues.

Cost of Other Revenue: Cost of other revenue in the first six months of fiscal 2012 increased $6.8 million, or 8.6%, to $86.2 million from $79.4 million in fiscal 2011. This increase 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 and relatively fixed data acquisition cost, and increased costs related to higher IT maintenance revenues.

Selling, Administrative and Other Operating Costs: Selling, administrative and other operating costs in the first six months of fiscal 2012 increased $1.4 million, or 0.9%, to $146.7 million from $145.3 million in fiscal 2011, generally in line with the similar revenues in each period.

Fees Related to Restatement and Associated Investigations: Fees related to our restatement and associated investigations are comprised of legal, consulting and accounting expenses and amounted to $18.2 million and $27.9 million in the first six months of 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.

 

38


Operating Income : Operating income in the first six months of fiscal 2012 of $2.7 million included fees related to the restatement and associated investigations 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 non-GAAP operating loss of $9.3 million.

Operating income in the first six months of fiscal 2011 of $3.2 million included fees related to the restatement and associated investigations of $27.9 million and recognition of previously deferred software systems revenues and costs, net of current period deferrals, of $28.4 million. Without these items we would have had operating income of $2.7 million and non-GAAP operating income of $4.7 million.

Operating results and non-GAAP operating results were lower in the first six months of fiscal 2012 than fiscal 2011 primarily due to the above reasons and a decrease in Computer Systems results of approximately $7.9 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 and a decrease in Staffing Services non-GAAP results of approximately $4.2 million due to lower traditional staffing margins on higher revenues and efforts to expand our higher margin retail business.

Other Income (Expense), net: Other expense in the first six months of fiscal 2012 decreased $1.4 million, or 37.2%, to $2.4 million from $3.8 million in fiscal 2011 primarily related to foreign exchange gains and losses.

Income Tax Provision (Benefit): Income tax provision in the first six months of fiscal 2012 amounted to $0.7 million primarily related to locations outside of the United States, compared to a benefit of $2.3 million in fiscal 2011.

Results of Operations by Segments (Q2 2012 YTD vs. Q2 2011 YTD)

Staffing Services

Net Revenue: The segment’s net revenue in the first six months of fiscal 2012 increased $37.1 million to $1,000.5 million from $963.4 million in fiscal 2011, and non-GAAP net revenue increased by $20.6 million or 2.1% to $986.1 million from $965.5 in fiscal 2011. This increase is primarily due to increased contingent staffing, although at lower average bill rates, an increase in call center, games testing and other project-based staffing services revenue from increased volume in all practice areas, and a change in net deferral of staffing revenues of $16.4 million, net of current period deferrals. On average, approximately 31,200 U.S. staffing employees were on assignment throughout the first six month of fiscal 2012, compared to approximately 31,600 in fiscal 2011.

Direct Cost of Staffing Services Revenue: The segment’s direct cost of staffing services revenue in the first six months of fiscal 2012 increased $23.1 million, or 2.8%, to $857.2 million from $834.1 million in fiscal 2011. This increase is primarily a result of increased contingent staff on assignment at slightly lower margins 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 14.3% and 13.1% from 13.4% and 13.6% in fiscal 2011, respectively. The GAAP percentage increase was primarily due to the change in net deferral and recognition of staffing revenues. The non-GAAP percentage decrease was primarily due to the lower margins on traditional staffing revenues.

Selling, Administrative and Other Operating Costs: The segment’s selling, administrative and other operating costs in the first six months of fiscal 2012 increased $1.7 million, or 1.4%, to $123.5 million from $121.8 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 the first six months of fiscal 2012 increased $12.2 million to $19.8 million from $7.6 million in fiscal 2011, and non-GAAP operating income decreased by

 

39


$4.2 million or 43.7% to $5.4 million from $9.6 million in fiscal 2011. The change in operating income is primarily due to a change in net deferral of staffing revenues of $16.4 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 and our efforts to expand our higher margin retail business.

Computer Systems

Net Revenue: The segment’s net revenue in the first six months of fiscal 2012 decreased $21.5 million, or 27.7%, to $56.2 million from $77.7 million in fiscal 2011. This decrease was primarily a result of lower systems revenues as several large implementations reached the end of the maintenance periods over which the revenue of projects were being amortized, 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 first six months of fiscal 2012 decreased $0.3 million, or 0.8%, to $36.6 million from $36.3 million in fiscal 2011, primarily the result of lower amortization of deferred costs compared to 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 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 2012 decreased $1.5 million, or 10.3%, to $12.5 million from $14.0 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 the first six months of fiscal 2012 decreased by $20.3 million to $6.7 million compared to $27.0 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 first six months of fiscal 2012 increased $7.0 million, or 13.2%, to $59.8 million from $52.8 million in fiscal 2011. The increase is primarily attributable to IT maintenance revenue primarily from 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 increase in IT maintenance revenue was offset by a decrease in publishing and printing revenue primarily due to the printing of a telephone directory in fiscal 2011 that is printed on an every-other-year basis and therefore did not reoccur in fiscal 2012.

Cost of Other Revenue: The segment’s cost of other revenue in the first six months of fiscal 2012 increased $6.5 million, or 15.1%, to $49.6 million from $43.1 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.

Selling, Administrative and Other Operating Costs: The segment’s selling, administrative and other operating costs in the first six months of fiscal 2012 increased $1.1 million, or 11.5%, to $10.7 million from $9.6 million in fiscal 2011, generally in line with the increase in revenues in each period.

Segment Operating Loss: The segment’s operating loss in the first six months of fiscal 2012 increased $0.6 million to $0.7 million from $0.1 million in fiscal 2011. This increase was predominantly a result of our publishing and printing business decrease in print orders offset by higher IT maintenance revenue.

 

40


Consolidated Results of Operations and Financial Highlights (Q2 2012 vs. Q2 2011)

 

    Three months ended April 29, 2012         Three months ended May 1, 2011  
(in thousands)   Total     Staffing
Services
    Computer
Systems
    Other         Total     Staffing
Services
    Computer
Systems
    Other  

Net Revenue

  $ 573,443      $ 521,278      $ 22,322      $ 29,843        $ 558,296      $ 494,277      $ 37,939      $ 26,080   

Expenses

                 

Direct cost of staffing services revenue

    441,341        441,341        -          -            431,057        431,057        -          -     

Cost of other revenue

    42,759        -          17,803        24,956          38,507        -          17,776        20,731   

Selling, administrative and other operating costs

    75,029        63,782        6,263        4,984          73,839        62,107        7,221        4,511   

Amortization of purchased intangible assets

    345        12        215        118          344        11        214        119   
 

 

 

     

 

 

 

Segment operating income (loss)

    13,969        16,143        (1,959     (215       14,549        1,102        12,728        719   

Corporate general and administrative

    1,974                1,381         

Fees related to restatement and associated investigations

    9,169                12,415         
 

 

 

           

 

 

       

Operating income

    2,826                753         
 

 

 

           

 

 

       

Other income (expense), net

    (1,948             (2,914      

Income tax provision

    331                110         
 

 

 

           

 

 

       

Net income (loss)

    $ 547                $ (2,271      
 

 

 

           

 

 

       

NON-GAAP TABLE

 

    Three months ended April 29, 2012         Three months ended May 1, 2011  
(in thousands)   Total     Staffing
Services
    Computer
Systems
    Other         Total     Staffing
Services
    Computer
Systems
    Other  

Net Revenue

  $ 573,443      $ 521,278      $ 22,322      $ 29,843        $ 558,296      $ 494,277      $ 37,939      $ 26,080   

Recognition of previously unrecognized revenue

    (19,512     (19,512     -          -            (4,056     (4,056     -          -     

Additions to unrecognized revenue

    6,325        6,325        -          -            8,857        8,857        -          -     
 

 

 

     

 

 

 

Net non-GAAP adjustment

    (13,187     (13,187     -          -            4,801        4,801        -          -     
 

 

 

     

 

 

 

Non-GAAP total net revenue

    560,256        508,091        22,322        29,843          563,097        499,078        37,939        26,080   
 

 

 

     

 

 

 

Expenses

                 

Direct cost of staffing services revenue

    441,341        441,341        -          -            431,057        431,057        -          -     

Cost of other revenue

    42,759        -          17,803        24,956          38,507        -          17,776        20,731   

Selling, administrative and other operating costs

    75,029        63,782        6,263        4,984          73,839        62,107        7,221        4,511   

Amortization of purchased intangible assets

    345        12        215        118          344        11        214        119   
 

 

 

     

 

 

 

Non-GAAP segment operating income (loss)

    782        2,956        (1,959     (215       19,350        5,903        12,728        719   

Corporate general and administrative

    1,974                1,381         

Fees related to restatement and associated investigations

    9,169                12,415         
 

 

 

           

 

 

       

Non-GAAP operating income (loss)

    $ (10,361             $ 5,554         
 

 

 

           

 

 

       

Consolidated Results of Operations (Q2 2012 vs. Q2 2011)

Net Revenue: Net revenue in the second quarter of fiscal 2012 increased $15.1 million to $573.4 million from $558.3 million in fiscal 2011, and non-GAAP net revenue decreased by $2.8 million or 0.5% to $560.3 million from $563.1 in fiscal 2011. The change in revenue was primarily the result of increased Staffing Services revenues of $27.0 million (non-GAAP $9.0 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 $18.0 million offset by lower Computer Systems revenues by $15.6 million as several large implementations reached the end of the maintenance periods over which the revenue of 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 second quarter of fiscal 2012 increased $10.2 million, or 2.4%, to $441.3 million from $431.1 million in fiscal 2011. This increase is primarily a result of increased contingent staff on assignment. Direct margin of staffing services revenue as a percent of staffing revenue and non-GAAP staffing revenue in fiscal 2012 was 15.3% and 13.1% from 12.8% and 13.6% in fiscal 2011, respectively. The GAAP percentage increase was primarily due to the change in net deferral and recognition of staffing revenues. The non-GAAP percentage decrease was primarily due to lower traditional staffing margins offset by increased project based margins.

 

41


Cost of Other Revenue: Cost of other revenue in the second quarter of fiscal 2012 increased $4.3 million, or 11.0%, to $42.8 million from $38.5 million in fiscal 2011. This increase 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 and relatively fixed data acquisition cost and increased costs related to higher IT maintenance revenues.

Selling, Administrative and Other Operating Costs: Selling, administrative and other operating costs in the second quarter of fiscal 2012 increased $1.2 million, or 1.6%, to $75.0 million from $73.8 million in fiscal 2011, generally in line with the similar revenues in each period.

Fees Related to Restatement and Associated Investigations: Fees related to our restatement and associated investigations are comprised of legal, consulting and accounting expenses and amounted to $9.2 million and $12.4 million in the second quarter of 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 : Operating income in the second quarter of fiscal 2012 of $2.8 million included fees related to the restatement and associated investigations 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 non-GAAP operating loss of $4.1 million.

Operating income in the second quarter of fiscal 2011 of $0.8 million included fees related to the restatement and associated investigations of $12.4 million and recognition of previously deferred software systems revenues and costs, net of current period deferrals, of $13.6 million. Without these items we would have had operating loss of $0.4 million and non-GAAP operating income of $4.4 million.

Non-GAAP operating results were lower in the second quarter of fiscal 2012 than fiscal 2011 primarily due to the above reasons and a decrease in Computer Systems results of approximately $4.0 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 and a decrease in Staffing Services non-GAAP results of approximately $2.9 million due to lower traditional staffing margins on higher revenues and efforts to expand our higher margin retail business.

Other Income (Expense), net: Other expense in the second quarter of fiscal 2012 decreased $1.0 million, or 33.2%, to $1.9 million from $2.9 million, in fiscal 2011 primarily related to foreign exchange gains and losses.

Income Tax Provision: Income tax provision was relatively flat at $0.3 million in the second quarter of fiscal 2012 and $0.1 million in fiscal 2011 with expense in both years primarily related to locations outside of the United States.

Results of Operations by Segments (Q2 2012 vs. Q2 2011)

Staffing Services

Net Revenue: The segment’s net revenue in the second quarter of fiscal 2012 increased $27.0 million to $521.3 million from $494.3 million in fiscal 2011, and non-GAAP net revenue increased by $9.0 million or 1.8% to $508.1 million from $499.1 in fiscal 2011. This increase is primarily due to increased contingent staffing, although at lower average bill rates, an increase in call center, games testing and other project-based staffing services revenue from increased volume in all practice areas, and a change in net deferral of staffing revenue of $18.0 million.

Direct Cost of Staffing Services Revenue: The segment’s direct cost of staffing services revenue in the second quarter of fiscal 2012 increased $10.2 million, or 2.4%, to $441.3 million from $431.1 million in fiscal 2011. This increase is primarily a result of increased contingent staff on assignment. Direct margin of staffing services revenue as a percent of staffing revenue and non-GAAP staffing revenue in fiscal 2012 was 15.3% and 13.1% from 12.8% and 13.6% in fiscal 2011, respectively. The GAAP percentage increase was primarily due to the change in net deferral and recognition of staffing revenues. The non-GAAP percentage decrease was primarily due to lower traditional staffing margins offset by increased project based margins.

 

42


Selling, Administrative and Other Operating Costs: The segment’s selling, administrative and other operating costs in the second quarter of fiscal 2012 increased $1.7 million, or 2.7%, to $63.8 million from $62.1 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 the second quarter of fiscal 2012 increased $15.0 million to $16.1 million from $1.1 million in fiscal 2011, and non-GAAP operating income decreased by $2.9 million or 49.9% to $3.0 million from $5.9 million in fiscal 2011. The change in operating income is primarily due to a change in net deferral of staffing revenues of $18.0 million.

Computer Systems

Net Revenue: The segment’s net revenue in the second quarter of fiscal 2012 decreased by $15.6 million, or 41.2%, to $22.3 million from $37.9 million in fiscal 2011. This decrease was primarily a result of lower systems revenues as several large implementations reached the end of the maintenance periods over which the revenue of projects were being amortized, lower transaction revenues due to both lower volumes and pricing, and lower maintenance revenue.

Cost of Other Revenue: The segment’s cost of revenue remained consistent in the amount of $17.8 million in the second quarter of fiscal 2012 and fiscal 2011 primarily the result of 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 and relatively fixed data acquisition costs offset by lower amortization of deferred costs for fiscal 2011.

Selling, Administrative and Other Operating Costs: The segment’s selling, administrative and other operating costs in the second quarter of fiscal 2012 decreased $0.9 million, or 13.3%, to $6.3 million from $7.2 million in fiscal 2011, primarily due to cost reductions in response to the overall segment business levels decline.

Segment Operating Income (Loss): The segment’s operating results in the second quarter of fiscal 2012 decreased by $14.7 million to operating loss of $2.0 million compared to operating income of $12.7 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 the second quarter of fiscal 2012 increased $3.7 million, or 14.4%, to $29.8 million from $26.1 million in fiscal 2011. The increase is primarily attributable to an increase in IT maintenance revenue offset by a decrease in telecommunications revenues and publishing and printing revenue 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, offset by decreased revenues in the telecommunications business primarily from the result of exiting certain unprofitable business lines and decreased revenues in the publishing and printing business due to the reduction of print orders.

Cost of Other Revenue: The segment’s cost of other revenue in the second quarter of fiscal 2012 increased $4.3 million, or 20.4%, to $25.0 million from $20.7 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.

Selling, Administrative and Other Operating Costs: The segment’s selling, administrative and other operating costs in the second quarter of fiscal 2012 increased $0.5 million, or 10.5%, to $5.0 million from $4.5 million in fiscal 2011, generally in line with the similar revenues in each period.

 

43


Segment Operating Income (Loss): The segment’s operating results in the second quarter of fiscal 2012 decreased $0.9 million to operating loss of $0.2 million from operating income of $0.7 million in fiscal 2011, as a result of the items noted above.

Consolidated Results of Operations and Financial Highlights (Q1 2012 YTD vs. Q1 2011 YTD)

 

     Three months ended January 29, 2012     Three months ended January 30, 2011  
(in thousands)    Total     Staffing
Services
    Computer
Systems
     Other     Total     Staffing
Services
    Computer
Systems
     Other  

Net Revenue

   $ 543,093      $ 479,217      $ 33,902       $ 29,974      $ 535,685      $ 469,166      $ 39,774       $ 26,745   

Expenses

                  

Direct cost of staffing services revenue

     415,868        415,868        -           -          403,032        403,032        -           -     

Cost of other revenue

     43,435        -          18,768         24,667        40,870        -          18,488         22,382   

Selling, administrative and other operating costs

     71,644        59,707        6,267         5,670        71,477        59,679        6,755         5,043   

Amortization of purchased intangible assets

     345        12        214         119        313        (20     214         119   
  

 

 

   

 

 

 

Segment operating income (loss)

     11,801        3,630        8,653         (482     19,993        6,475        14,317         (799

Corporate general and administrative

     2,848               2,059          

Fees related to restatement and associated investigations

     9,031               15,517          
  

 

 

          

 

 

        

Operating income (loss)

     (78            2,417          
  

 

 

          

 

 

        

Other income (expense), net

     (417            (849       

Income tax provision (benefit)

     402               (2,371       
  

 

 

          

 

 

        

Net income (loss)

   $ (897          $ 3,939          
  

 

 

          

 

 

        
NON-GAAP TABLE                   
     Three months ended January 29, 2012     Three months ended January 30, 2011  
(in thousands)    Total     Staffing
Services
    Computer
Systems
     Other     Total     Staffing
Services
    Computer
Systems
     Other  

Net Revenue

   $ 543,093      $ 479,217      $ 33,902       $ 29,974      $ 535,685      $ 469,166      $ 39,774       $ 26,745   

Recognition of previously unrecognized revenue

     (11,837     (11,837     -           -          (7,726     (7,726     -           -     

Additions to unrecognized revenue

     10,658        10,658        -           -          4,948        4,948        -           -     
  

 

 

   

 

 

 

Net non-GAAP adjustment

     (1,179     (1,179     -           -          (2,778     (2,778     -           -     
  

 

 

   

 

 

 

Non-GAAP total net revenue

     541,914        478,038        33,902         29,974        532,907        466,388        39,774         26,745   
  

 

 

   

 

 

 

Expenses

                  

Direct cost of staffing services revenue

     415,868        415,868        -           -          403,032        403,032        -           -     

Cost of other revenue

     43,435        -          18,768         24,667        40,870        -          18,488         22,382   

Selling, administrative and other operating costs

     71,644        59,707        6,267         5,670        71,477        59,679        6,755         5,043   

Amortization of purchased intangible assets

     345        12        214         119        313        (20     214         119   
  

 

 

   

 

 

 

Non-GAAP segment operating income (loss)

     10,622        2,451        8,653         (482     17,215        3,697        14,317         (799

Corporate general and administrative

     2,848               2,059          

Fees related to restatement and associated investigations

     9,031               15,517          
  

 

 

          

 

 

        

Non-GAAP operating loss

   $ (1,257          $ (361       
  

 

 

          

 

 

        

Consolidated Results of Operations (Q1 2012 YTD vs. Q1 2011 YTD)

Net Revenue: Net revenue in the first quarter of fiscal 2012 increased $7.4 million to $543.1 million from $535.7 million in fiscal 2011, and non-GAAP net revenue increased by $9.0, million or 1.7%, to $541.9 million from $532.9 in fiscal 2011. The change in revenue was primarily the result of increased Staffing Services revenues of $10.0 million (non-GAAP $11.6 million) resulting from an increase in call center, games testing and other project-based staffing services revenues offset by a change in net deferral of staffing revenues of $1.6 million. The increase was offset by lower Computer Systems revenues of $5.9 million as several large implementations reached the end of the maintenance periods over which the revenue of 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 first quarter of fiscal 2012 increased $12.9 million, or 3.2%, to $415.9 million from $403.0 million in fiscal 2011. This increase is primarily a result of an increase in call center, games testing and other project-based staffing services revenues. Direct margin of staffing services revenue as a percent of staffing revenue and non-GAAP staffing

 

44


revenue in fiscal 2012 was 13.2% and 13.0% from 14.1% and 13.6% in fiscal 2011, respectively. The GAAP percentage increase was primarily due to the change in net deferral and recognition of staffing revenues. The non-GAAP percentage decrease was primarily due to a decrease of $3.9 million in the HIRE Act payroll tax benefits.

Cost of Other Revenue: Cost of other revenue in the first quarter of fiscal 2012 increased $2.5 million, or 6.3%, to $43.4 million from $40.9 million in fiscal 2011. This increase 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 and relatively fixed data acquisition cost, increased costs related to higher IT maintenance revenues offset by decreased costs the publishing and printing business due to a reduction in the number of print orders.

Selling, Administrative and Other Operating Costs: Selling, administrative and other operating costs in the first quarter of fiscal 2012 increased $0.1 million, or 0.2%, to $71.6 million from $71.5 million in fiscal 2011, generally in line with the similar revenues in each period.

Fees Related to Restatement and Associated Investigations: Fees related to our restatement and associated investigations are comprised of legal, consulting and accounting expenses and amounted to $9.0 million and $15.5 million in the first quarter of 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 the first quarter of fiscal 2012 of $0.1 million included fees related to the restatement and associated investigations 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 operating loss of $4.1 million and a non-GAAP operating loss of $5.3 million.

Operating income in the first quarter of fiscal 2011 of $2.4 million included fees related to the restatement and associated investigations of $15.5 million and recognition of previously deferred software systems revenues and costs, net of current period deferrals, of $14.8 million. Without these items we would have had operating income of $3.1 million and non-GAAP operating income of $0.3 million.

Operating results and non-GAAP operating results were lower in the first quarter of fiscal 2012 than fiscal 2011 primarily due to the above reasons and a decrease in Computer Systems results of approximately $3.9 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 and a decrease in Staffing Services non-GAAP results of approximately $1.2 million due to lower traditional staffing margins on higher revenues and efforts to expand our higher margin retail business.

Other Income (Expense), net: Other expense in the first quarter of fiscal 2012 remained consistent in the amount of $0.4 million from $0.8 million in fiscal 2011.

Income Tax Provision (Benefit): Income tax provision in the first quarter of fiscal 2012 amounted to $0.4 million primarily related to locations outside of the United States, compared to a benefit of $2.4 million in fiscal 2011.

Results of Operations by Segments (Q1 2012 YTD vs. Q1 2011 YTD) 

Staffing Services

Net Revenue: The segment’s net revenue in the first quarter of fiscal 2012 increased $10.0 million to $479.2 million from $469.2 million in fiscal 2011, and non-GAAP net revenue increased by $11.6 million or 2.5% to $478.0 million in fiscal 2012 from $466.4 in fiscal 2011. This increase is primarily due to an increase in call center, games testing and other project-based staffing services revenues offset by a change in net deferral of staffing revenues of $1.6 million. On average, approximately 31,500 U.S. staffing employees were on assignment in the first quarter of fiscal 2012, compared to approximately 32,300 in fiscal 2011.

 

45


Direct Cost of Staffing Services Revenue: The segment’s direct cost of staffing services revenue in the first quarter of fiscal 2012 increased $12.9 million, or 3.2%, to $415.9 million from $403.0 million in fiscal 2011. This increase is primarily a result of an increase in call center, games testing and other project-based staffing services revenues. Direct margin of staffing services revenue as a percent of staffing revenue and non-GAAP staffing revenue in fiscal 2012 was 13.2% and 13.0% from 14.1% and 13.6% in fiscal 2011, respectively. The GAAP percentage increase was primarily due to the change in net deferral and recognition of staffing revenues. The non-GAAP percentage decrease was primarily due to a decrease of $3.9 million in the HIRE Act payroll tax benefits.

Selling, Administrative and Other Operating Costs: The segment’s selling, administrative and other operating costs remained consistent in fiscal 2012 and fiscal 2011 in the amount of $59.7 million generally in line with the similar revenues in each period.

Segment Operating Income: The segment’s operating income in the first quarter of fiscal 2012 decreased $2.9 million to $3.6 million from $6.5 million in fiscal 2011, and non-GAAP operating income decreased by $1.2 million or 33.7% to $2.5 million from $3.7 million in fiscal 2011. The change in operating income is primarily due to a change in net deferral of staffing revenues of $1.6 million. In addition, operating income and non-GAAP operating income were lower in fiscal 2012 than fiscal 2011 due to lower traditional staffing margins on the increased revenues and our efforts to expand our higher margin retail business.

Computer Systems

Net Revenue: The segment’s net revenue in the first quarter of fiscal 2012 decreased by $5.9 million, or 14.8%, to $33.9 million from $39.8 million in fiscal 2011. This decrease was primarily a result of lower systems revenues as several large implementations reached the end of the maintenance periods over which the revenue of projects were being amortized, lower transaction revenues due to both lower volumes and pricing, and lower maintenance revenue.

Cost of Other Revenue: The segment’s cost of other revenue in the first quarter of fiscal 2012 increased $0.3 million, or 1.5%, to $18.8 million from $18.5 million in fiscal 2011, primarily the result of lower amortization of deferred costs compared to 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 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 2012 decreased $0.5 million, or 7.2%, to $6.3 million from $6.8 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 the first quarter of fiscal 2012 decreased $5.6 million to $8.7 million compared to $14.3 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 first quarter of fiscal 2012 increased $3.3 million, or 12.1%, to $30.0 million from $26.7 million in fiscal 2011. The increase is primarily attributable to an increase in IT maintenance revenue offset by a decrease in publishing and printing revenue 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 in publishing and printing revenue was primarily due to a reduction in the number of print orders.

Cost of Other Revenue: The segment’s cost of other revenue in the first quarter of fiscal 2012 increased $2.3 million, or 10.2%, to $24.7 million from $22.4 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 publishing and printing business primarily due to a reduction in the number of print orders.

 

46


Selling, Administrative and Other Operating Costs: The segment’s selling, administrative and other operating costs in the first quarter of fiscal 2012 increased $0.7 million, or 12.4%, to $5.7 million from $5.0 million in fiscal 2011, generally in line with the similar revenues in each period.

Segment Operating Loss: The segment’s operating loss in the first quarter of fiscal 2012 remained relatively flat at $0.5 million from $0.8 million in fiscal 2011.

Consolidated Results of Operations and Financial Highlights (Fiscal 2011 vs. Fiscal 2010)

 

     Year ended October 30, 2011      Year ended October 31, 2010  
(in thousands)    Total     Staffing
Services
     Computer
Systems
     Other      Total     Staffing
Services
     Computer
Systems
     Other  

Net Revenue

   $ 2,238,109      $ 1,957,905       $ 165,349       $ 114,855       $ 1,956,412      $ 1,732,348       $ 101,814       $ 122,250   

Expenses

                     

Direct cost of staffing services revenue

     1,698,711        1,698,711         -           -           1,479,562        1,479,562         -           -     

Cost of other revenue

     166,211        -           76,022         90,189         178,268        -           68,685         109,583   

Selling, administrative and other operating costs

     294,410        244,343         28,835         21,232         284,526        232,701         29,464         22,361   

Amortization of purchased intangible assets

     1,347        15         855         477         1,434        100         857         477   

Restructuring costs

     -          -           -           -           3,149        1,336         1,813         -     
  

 

 

    

 

 

 

Segment operating income (loss)

     77,430        14,836         59,637         2,957         9,473        18,649         995         (10,171

Corporate general and administrative

     8,472                 10,038           

Fees related to restatement and associated investigations

     49,193                 29,158           
  

 

 

            

 

 

         

Operating income (loss)

     19,765                 (29,723        
  

 

 

            

 

 

         

Other income (expense), net

     (4,484              (4,038        

Income tax provision (benefit)

     (348              62,614           
  

 

 

            

 

 

         

Net income (loss)

   $ 15,629               $ (96,375        
  

 

 

            

 

 

         

Consolidated Results of Operations (Fiscal 2011 vs. Fiscal 2010)

Net Revenue: Net revenue in fiscal 2011 increased $281.7 million or 14.4% to $2,238.1 million compared to $1,956.4 million in fiscal 2010. The increase in revenue was primarily the result of increased Staffing Services revenues of $225.6 million or 13.0% resulting from more contingent staff on assignments, an increase in call center, games testing and other project-based staffing services revenues, and an increase in workforce managed service program revenues offset by a net deferral of staffing revenues of $16.6 million. The increase was also a result of higher Computer Systems revenues of $63.5 million primarily due to the commencement at the end of fiscal 2010 of the amortization of previously deferred revenue over the remaining maintenance period upon the completion of a large system installation and the termination in fiscal 2011 of a large system installation project upon which previously deferred revenue was recognized.

Direct Cost of Staffing Services Revenue: Direct cost of staffing services revenue in fiscal 2011 increased by $219.1 million, or 14.8%, to $1,698.7 million compared to $1,479.6 million in fiscal 2010. This increase was primarily a result of increased employees on assignment. Direct margin of staffing services revenue as a percent of staffing revenue in fiscal 2011 was 13.2% compared with 14.6% in fiscal 2010, primarily due to lower traditional staffing margins on contingent staff on assignments and the increased project-based staffing services and workforce managed service program revenues.

Cost of Other Revenue: Cost of other revenue in fiscal 2011 decreased by $12.1 million, or 6.8%, to $166.2 million from $178.3 million in fiscal 2010. This decrease was primarily due to the telecommunications business exiting certain non-profitable business in fiscal 2010, offset by higher amortization of deferred costs in our Computer Systems segment, increased costs in our IT maintenance business, primarily labor and consulting costs, due to the increase in revenue as well as increased costs in publishing and printing due to additional orders.

Selling, Administrative and Other Operating Costs: Selling, administrative and other operating costs in fiscal 2011 increased $9.9 million, or 3.5%, to $294.4 million from $284.5 million in fiscal 2010. The increase in selling, operating and administrative expenses was in support of expanded sales and our focus on expanding

 

47


retail business, which has led to the hiring of additional sales, delivery and support employees as our retail business utilizes more salespeople than our larger national accounts business, an increase in volume within our IT maintenance business as well as higher advertising and commission expense in the printing and publishing business.

Restructuring Costs: Restructuring costs decreased $3.1 million in fiscal 2011 from fiscal 2010 due to the completion of the restructuring program during fiscal 2010.

Fees Related to Restatement and Associated Investigations: Fees related to the restatement and associated investigations in fiscal 2011 increased $20.0 million, or 68.7% to $49.2 million from $29.2 million in fiscal 2010 and were comprised primarily of legal, consulting and accounting expenses. The increased costs are a result of the increased level of effort in fiscal 2011 over fiscal 2010.

Operating Income (Loss): Operating income in fiscal 2011 was $19.8 million, compared to an operating loss of $29.7 million in fiscal 2010, as a result of the factors discussed above. Operating income in fiscal 2011 included fees related to the restatement and associated investigations of $49.2 million and recognition of previously deferred software systems revenues and costs, net of current period deferrals, of $63.5 million. Without these items we would have had operating income of $5.5 million. Revenues included current period deferrals of $16.6 million, net of previously deferred revenue, and without these deferrals non-GAAP operating income would have been $22.1 million.

Other Income (Expense), net: Other expense in fiscal 2011 remained relatively flat at $4.5 million and $4.0 million in fiscal 2010.

Income Tax Provision (Benefit): Income tax benefit in fiscal 2011 amounted to $0.3 million from a provision of $62.6 million in fiscal 2010 primarily from the significant valuation allowance established in fiscal 2010.

Result of Operations by Segment (Fiscal 2011 vs. Fiscal 2010)

Staffing Services

Net Revenue: The segment’s net revenue in fiscal 2011 increased $225.6 million, or 13.0%, to $1,957.9 million from $1,732.3 million in fiscal 2010. This increase in revenue was primarily the result of more contingent staff on assignments, an increase in call center, games testing and other project-based staffing services revenues, and an increase in workforce managed service program revenues offset by an increase in net deferral of staffing revenues.

Direct Cost of Staffing Services Revenue: The segment’s direct cost of staffing services revenue in fiscal 2011 increased $219.1 million, or 14.8%, to $1,698.7 million from $1,479.6 million in fiscal 2010. This increase was primarily a result of increased employees on assignment. Direct margin of staffing services revenue as a percent of staffing revenue in fiscal 2011 was 13.2% compared with 14.6% in fiscal 2010, primarily due to lower traditional staffing margins on contingent staff on assignments and the increased project-based staffing services and workforce managed service program revenues.

Selling, Administrative and Other Operating Costs: The segment’s selling, administrative and other operating costs in fiscal 2011 increased $11.6 million, or 5.0%, to $244.3 million from $232.7 million in fiscal 2010. The increase was in support of expanded sales and our focus on expanding retail business, which has led to the hiring of additional sales, delivery and support employees as our retail business utilizes more salespeople than our larger national accounts business.

Segment Operating Income: The segment’s operating income in fiscal 2011 decreased $3.8 million to $14.8 million from $18.6 million in fiscal 2010 primarily due to lower traditional staffing margins and our focus on expanding our retail business.

 

48


Computer Systems

Net Revenue: The segment’s net revenue in fiscal 2011 increased $63.5 million, or 62.4%, to $165.3 million from $101.8 million in fiscal 2010. This increase is primarily attributable to the completion of a major system installation during the fourth quarter of fiscal 2010 and resulting commencement of amortization into revenue over the remaining maintenance period and the termination of a large system installation project and resulting revenue recognition. The large system amortization contributed approximately $27.0 million of the total segment revenue increase in fiscal 2011, impacting both system and transaction revenue. The termination of the fiscal 2011 system installation project contributed approximately $9.0 million as all revenues and related costs previously deferred under the project were recognized upon termination of the contract and cancellation of future deliverables.

 

     Year ended  
(in millions, except as noted)    October 30,
2011
     October 31,
2010
 

New system acceptances

     $             30.3         $             32.0   

Elements of segment operating income

     

Computer systems segment revenues:

     

Maintenance revenue

     $ 40.7         $ 30.9   

Transaction revenue

     84.8         56.6   

System revenue amortization

     39.9         14.3   
  

 

 

    

 

 

 

Total computer systems segment net revenues:

     165.4         101.8   
  

 

 

    

 

 

 

Computer systems segment costs:

     

Current period costs, net of deferrals

     88.0         93.8   

Amortization of deferred costs

     17.8         7.0   
  

 

 

    

 

 

 

Total computer systems segment costs

     105.8         100.8   
  

 

 

    

 

 

 

Segment operating income

     $ 59.6         $ 1.0   
  

 

 

    

 

 

 

Cost of Other Revenue: The segment’s cost of revenue in fiscal 2011 increased $7.3 million, or 10.7%, to $76.0 million from $68.7 million in fiscal 2010, primarily the result of higher amortization of deferred costs of $17.8 million compared to $7.0 million for fiscal 2010.

Selling, Administrative and Other Operating Costs: The segment’s selling, administrative and other operating costs remained consistent in fiscal 2011 and fiscal 2010 in the amount of $28.8 million and $29.5 million, respectively.

Segment Operating Income: The segment’s operating income in fiscal 2011 increased $58.6 million to $59.6 million from $1.0 million in fiscal 2010. The increase was primarily attributable to the completion of a major system installation during the fourth quarter of fiscal 2010 and resulting commencement of amortization into revenue over the remaining maintenance period and the termination of a large system installation project during fiscal 2011 and resulting revenue recognition.

Other

Net Revenue: The segment’s net revenue in fiscal 2011 decreased $7.4 million, or 6.0%, to $114.9 million from $122.3 million in fiscal 2010. The decrease was primarily due to the telecommunications business decrease which primarily resulted from our decision in late fiscal 2010 to exit certain non-profitable businesses, primarily larger projects connecting facilities over long distances. The decrease in the telecommunications business was offset by a net increase in IT maintenance revenue and publishing and printing revenue. The IT maintenance revenue increase was driven primarily by increased volumes as billing rates remained relatively consistent between the years, and resulted primarily from new customers and to a lesser extent from net expanded business with existing customers. The publishing and printing revenue increase was primarily due to certain customers placing orders for additional White and Yellow page directories in fiscal 2011.

Cost of Other Revenue: The segment’s cost of other revenue in fiscal 2011 decreased $19.4 million, or 17.7%, to $90.2 million from $109.6 million in fiscal 2010. This decrease was primarily due to the telecommunications

 

49


business exiting certain non-profitable businesses in fiscal 2010, offset by increased costs in our IT maintenance business, primarily labor and consulting costs, due to the increase in revenue as well as increased costs in publishing and printing due to additional orders.

Selling, Administrative and Other Operating Costs: The segment’s selling, administrative and other operating costs remained consistent in fiscal 2011 and fiscal 2010 in the amount of $21.2 million and $22.4 million, respectively.

Segment Operating Income (Loss): The segment’s operating results in fiscal 2011 increased $13.2 million to operating income of $3.0 million from an operating loss of $10.2 million in fiscal 2010 as a result of the items noted above.

Consolidated Results of Operations (Q3 2011 YTD vs. Q3 2010 YTD)

 

     Nine Months Ended July 31, 2011     Nine Months Ended August 1, 2010  
(in thousands)    Total     Staffing
Services
     Computer
Systems
     Other     Total     Staffing
Services
    Computer
Systems
    Other  

Net Revenue

   $ 1,649,911      $ 1,454,440       $ 116,822       $ 78,649      $ 1,402,270      $ 1,249,307      $ 63,937      $ 89,026   

Expenses

                  

Direct cost of staffing services revenue

     1,264,170        1,264,170         -           -          1,080,728        1,080,728        -          -     

Cost of other revenue

     120,035        -           55,730         64,305        132,798        -          50,530        82,268   

Selling, administrative and other operating costs

     219,305        183,122         21,365         14,818        211,655        172,736        22,945        15,974   

Amortization of purchased intangible assets

     1,002        3         641         358        1,076        75        507        494   

Restructuring costs

     -          -           -           -          2,248        1,132        1,116        -     
  

 

 

   

 

 

 

Segment operating income (loss)

     45,399        7,145         39,086         (832     (26,235     (5,364     (11,161     (9,710

Corporate general and administrative

     6,087                7,082         

Fees related to restatement and associated investigations

     37,753                19,102         
  

 

 

           

 

 

       

Operating income (loss)

     1,559                (52,419      
  

 

 

           

 

 

       

Other income (expense), net

     (4,085             (1,649      

Income tax provision (benefit)

     (2,151             58,649         
  

 

 

           

 

 

       

Net loss

     $ (375             $ (112,717      
  

 

 

           

 

 

       

Consolidated Results of Operations (Q3 2011 YTD vs. Q3 2010 YTD)

Net Revenue: Net revenue in the first nine months of fiscal 2011 increased $247.6 million or 17.7% to $1,649.9 million compared to $1,402.3 million in fiscal 2010. The increase in revenue was primarily the result of increased Staffing Services revenues of $205.1 million or 16.4% resulting from more contingent staff on assignments, an increase in call center, games testing and other project-based staffing services revenues. The increase was also a result of higher Computer Systems revenues of $52.9 million primarily due to the commencement at the end of fiscal 2010 of the amortization of previously deferred revenue over the remaining maintenance period upon the completion of a large system installation and the termination in fiscal 2011 of a large system installation project upon which previously deferred revenue was recognized.

Direct Cost of Staffing Services Revenue: Direct cost of staffing services revenue in the first nine months of fiscal 2011 increased by $183.5 million, or 17.0%, to $1,264.2 million compared to $1,080.7 million in fiscal 2010. This increase was primarily a result of increased contingent staff on assignment and an increase in call center, games testing and other project-based staffing services revenues. Direct margin of staffing services revenue as a percent of staffing revenue in fiscal 2011 was 13.1% from 13.5% in fiscal 2010, primarily due to lower traditional staffing margins.

Cost of Other Revenue: Cost of other revenue in the first nine months of fiscal 2011 decreased by $12.8 million, or 9.6%, to $120.0 million from $132.8 million in fiscal 2010. This decrease was primarily due to the telecommunications business exiting certain non-profitable businesses in fiscal 2010, offset by higher amortization of deferred costs in our Computer Systems segment, increased costs in our IT maintenance business, primarily labor and consulting costs, due to the increase in revenue.

 

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Selling, Administrative and Other Operating Costs: Selling, administrative and other operating costs in the first nine months of fiscal 2011 increased $7.6 million, or 3.6%, to $219.3 million from $211.7 million in fiscal 2010. The increase in selling, administrative and operating expenses was in support of expanded sales and our focus on expanding retail business, which has led to the hiring of additional sales, delivery and support employees as our retail business utilizes more salespeople than our larger national accounts business, and an increase in volume within our IT maintenance business.

Restructuring Costs: Restructuring costs in the first nine months of fiscal 2011 decreased $2.2 million from fiscal 2010 due to the completion of the restructuring program during fiscal 2010.

Fees Related to Restatement and Associated Investigations: Fees related to the restatement and associated investigations in the first nine months of fiscal 2011 increased $18.7 million, or 97.6% to $37.8 million in fiscal 2011 from $19.1 million in fiscal 2010 and were comprised primarily of legal, consulting and accounting expenses. The increased costs are a result of the increased level of effort in fiscal 2011 over fiscal 2010.

Operating Income (Loss): Operating income in the first nine months of fiscal 2011 was $1.6 million, compared to an operating loss of $52.4 million in fiscal 2010, as a result of the factors discussed above.

Other Income (Expense), net: Other expense in the first nine months of fiscal 2011 increased $2.5 million to $4.1 million from $1.6 million in fiscal 2010 primarily related to foreign exchange gains and losses.

Income Tax Provision (Benefit): Income tax benefit in the first nine months of fiscal 2011 amounted to $2.2 million from a provision of $58.6 million in fiscal 2010 primarily from the significant valuation allowance established in fiscal 2010.

Results of Operations by Segments (Q3 2011 YTD vs. Q3 2010 YTD)

Staffing Services

Net Revenue: The segment’s net revenue in the first nine months of fiscal 2011 increased $205.1 million, or 16.4%, to $1,454.4 million from $1,249.3 million in fiscal 2010. This increase is comprised of more contingent staff on assignments, an increase in call center, games testing and other project-based staffing services revenues offset by an increase in net deferral of staffing revenues.

Direct Cost of Staffing Services Revenue: The segment’s direct cost of staffing services revenue in the first nine months of fiscal 2011 increased $183.5 million, or 17.0%, to $1,264.2 million from $1,080.7 million in fiscal 2010. This increase was primarily a result of increased contingent staff of assignment and an increase in call center, games testing and other project-based staffing services revenues. Direct margin of staffing services revenue as a percent of staffing revenue in fiscal 2011 was 13.1% from 13.5% in fiscal 2010, primarily due to lower traditional staffing margins.

Selling, Administrative and Other Operating Costs: The segment’s selling, administrative and other operating costs in the first nine months of fiscal 2011 increased $10.4 million, or 6.0%, to $183.1 million from $172.7 million in fiscal 2010. The increase was in support of expanded sales and our focus on expanding retail business, which has led to the hiring of additional sales, delivery and support employees as our retail business utilizes more salespeople than our larger national accounts business.

Segment Operating Income: The segment’s operating income in the first nine months of fiscal 2011 increased $12.5 million to $7.1 million from an operating loss of $5.4 million in fiscal 2010, as a result of the factors discussed above.

Computer Systems

Net Revenue: The segment’s net revenue in the first nine months of fiscal 2011 increased $52.9 million, or 82.7%, to $116.8 million from $63.9 million in fiscal 2010. This increase is primarily attributable to the

 

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completion of a major system installation during the fourth quarter of fiscal 2010 and resulting commencement of amortization into revenue over the remaining maintenance period and the termination of a large system installation project and resulting revenue recognition.

Cost of Other Revenue: The segment’s cost of other revenue in the first nine months of fiscal 2011 increased by $5.2 million, or 10.3%, to $55.7 million from $50.5 million in fiscal 2010. This increase was primarily due to higher amortization of deferred costs.

Selling, Administrative and Other Operating Costs: The segment’s selling, administrative and other operating costs remained consistent in the first nine months of fiscal 2011 and fiscal 2010 in the amount of $21.4 million and $22.9 million, respectively.

Segment Operating Income (Loss): The segment’s operating income in the first nine months of fiscal 2011increased $50.3 million to $39.1 million from an operating loss of $11.2 million in fiscal 2010, as a result of the factors discussed above.

Other

Net Revenue: The segment’s net revenue in the first nine months of fiscal 2011 decreased $10.4 million, or 11.7%, to $78.6 million from $89.0 million in fiscal 2010. The decrease was primarily due to the telecommunications business net revenue decrease which primarily resulted from our decision in late fiscal 2010 to exit certain non-profitable businesses, primarily larger projects connecting facilities over distances. The decrease in the telecommunications business was offset by a net increase in IT maintenance revenue primarily from increased volumes as billing rates remained relatively consistent between the years, and resulted primarily from new customers and to a lesser extent from net expanded business with existing customers.

Cost of Other Revenue: The segment’s cost of other revenue in the first nine months of fiscal 2011 decreased $18.0 million, or 21.8%, to $64.3 million from $82.3 million in fiscal 2010. This decrease was primarily due to the telecommunications business exiting certain non-profitable businesses in fiscal 2010, offset by increased costs in our IT maintenance business, primarily labor and consulting costs, due to the increase in revenue.

Selling, Administrative and Other Operating Costs: The segment’s selling, administrative and other operating costs remained constant in the first nine months of fiscal 2011 and fiscal 2010 in the amount of $14.8 million and $16.0 million, respectively.

Segment Operating Loss: The segment’s operating loss in the first nine months of fiscal 2011 decreased $8.9 million to $0.8 million from an operating loss of $9.7 million in fiscal 2010, as a result of the factors discussed above.

Consolidated Results of Operations and Financial Highlights (Q3 2011 vs. Q3 2010)

 

     Three Months Ended July 31, 2011          Three Months Ended August 1, 2010  
(in thousands)    Total     Staffing
Services
    Computer
Systems
     Other          Total     Staffing
Services
     Computer
Systems
    Other  

Net Revenue

   $ 555,930      $ 490,997      $ 39,109       $ 25,824         $ 491,949      $ 444,533       $ 21,069      $ 26,347   

Expenses

                     

Direct cost of staffing services revenue

     430,081        430,081        -           -             382,548        382,548         -          -     

Cost of other revenue

     40,658        -          19,466         21,192           41,625        -           16,789