EX-99.6 9 ex996financialstatementsof.htm EXHIBIT 99.6 FINANCIAL STATEMENTS OF MODUSLINK GLOBAL SOLUTIONS INC EX 99.6 Financial Statements of ModusLink Global Solutions, Inc.


EXHIBIT 99.6                                                
ModusLink Global Solutions, Inc.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
 
 
Page
Report of Independent Registered Public Accounting Firm
1
Consolidated Balance Sheets at July 31, 2013 and 2012
2
Consolidated Statements of Operations for the years ended July 31, 2013, 2012, and 2011
3
Consolidated Statements of Comprehensive Loss for the years ended July 31, 2013, 2012 and 2011
4
Consolidated Statements of Stockholders’ Equity for the years ended July 31, 2013, 2012, and 2011
5
Consolidated Statements of Cash Flows for the years ended July 31, 2013, 2012, and 2011
6
Notes to Consolidated Financial Statements
7




Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
ModusLink Global Solutions, Inc.:
We have audited the accompanying consolidated balance sheets of ModusLink Global Solutions, Inc. and subsidiaries as of July 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows for each of the years in the three-year period ended July 31, 2013. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ModusLink Global Solutions, Inc. and subsidiaries as of July 31, 2013 and 2012, and the results of their operations and their cash flows for each of the years in the three-year period ended July 31, 2013, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), ModusLink Global Solutions, Inc.’s internal control over financial reporting as of July 31, 2013, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated October 15, 2013 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
 
 
 
 
/s/ KPMG LLP
 
Boston, Massachusetts
October 15, 2013
 
 


1



MODUSLINK GLOBAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
 
 
 
July 31,
 
 
2013
 
2012
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
77,916

 
$
52,369

Available-for-sale securities
 
61

 
131

Accounts receivable, trade, net of allowance for doubtful accounts of $64 and $344, at July 31, 2013 and 2012, respectively
 
142,098

 
148,931

Inventories, net
 
61,322

 
83,990

Prepaid expenses and other current assets
 
9,689

 
10,466

Total current assets
 
291,086

 
295,887

Property and equipment, net
 
34,290

 
40,772

Investments in affiliates
 
7,970

 
10,803

Goodwill
 
3,058

 
3,058

Other intangible assets, net
 
1,764

 
2,897

Other assets
 
5,528

 
5,465

Total assets
 
$
343,696

 
$
358,882

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Current installments of obligations under capital leases
 
$
98

 
$
73

Accounts payable
 
110,148

 
110,520

Accrued restructuring
 
4,670

 
1,724

Accrued expenses
 
34,748

 
41,753

Other current liabilities
 
26,157

 
26,778

Current liabilities of discontinued operations
 
610

 
1,528

Total current liabilities
 
176,431

 
182,376

Long-term portion of accrued restructuring
 
494

 
—

Obligations under capital leases, less current installments
 
303

 
69

Other long-term liabilities
 
9,563

 
11,012

Non-current liabilities of discontinued operations
 
—

 
293

Long-term liabilities
 
10,360

 
11,374

Total liabilities
 
186,791

 
193,750

Commitments and contingencies (notes 13 and 16)
 
—

 
—

Stockholders’ equity:
 
 
 
 
Preferred stock, $0.01 par value per share. 5,000,000 shares authorized; zero issued or outstanding shares at July 31, 2013 and 2012
 
—

 
—

Common stock, $0.01 par value per share. 1,400,000,000 shares authorized; 51,575,893 issued and outstanding shares at July 31, 2013; 43,926,622 issued and outstanding shares at July 31, 2012
 
516

 
439

Additional paid-in capital
 
7,419,806

 
7,390,027

Accumulated deficit
 
(7,277,130
)
 
(7,236,775
)
Accumulated other comprehensive income
 
13,713

 
11,441

Total stockholders’ equity
 
156,905

 
165,132

Total liabilities and stockholders’ equity
 
$
343,696

 
$
358,882


The accompanying notes are an integral part of these consolidated financial statements.

2


MODUSLINK GLOBAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
 
 
 
Years Ended July 31,
 
 
2013
 
2012
 
2011
Net revenue
 
$
754,504

 
$
713,947

 
$
844,277

Cost of revenue
 
680,134

 
645,388

 
763,661

Gross profit
 
74,370

 
68,559

 
80,616

Operating expenses:
 
 
 
 
 
 
Selling, general and administrative
 
86,972

 
94,737

 
80,710

Amortization of intangible assets
 
1,133

 
1,139

 
4,750

Impairment of goodwill and long-lived assets
 
—

 
1,128

 
15,889

Restructuring, net
 
14,497

 
6,416

 
795

Total operating expenses
 
102,602

 
103,420

 
102,144

Operating loss
 
(28,232
)
 
(34,861
)
 
(21,528
)
Other income (expense):
 
 
 
 
 
 
Interest income
 
300

 
380

 
238

Interest expense
 
(612
)
 
(373
)
 
(462
)
Other gains (losses), net
 
(2,642
)
 
14,390

 
8,892

Equity in losses of affiliates and impairments
 
(4,365
)
 
(4,109
)
 
(4,308
)
Total other income (expense)
 
(7,319
)
 
10,288

 
4,360

Loss from continuing operations before income taxes
 
(35,551
)
 
(24,573
)
 
(17,168
)
Income tax expense
 
3,779

 
3,035

 
819

Loss from continuing operations
 
(39,330
)
 
(27,608
)
 
(17,987
)
Discontinued operations, net of income taxes:
 
 
 
 
 
 
Loss from discontinued operations, net of gain of $594 on the disposition of TFL during the year ended July 31, 2013
 
(1,025
)
 
(10,500
)
 
(16,478
)
Net loss
 
$
(40,355
)
 
$
(38,108
)
 
$
(34,465
)
Basic and diluted loss per share:
 
 
 
 
 
 
Loss from continuing operations
 
$
(0.84
)
 
$
(0.63
)
 
$
(0.42
)
Loss from discontinued operations
 
(0.02
)
 
(0.24
)
 
(0.38
)
Net loss
 
$
(0.86
)
 
$
(0.87
)
 
$
(0.80
)
Shares used in computing basic loss per share
 
46,654

 
43,565

 
43,294

Shares used in computing diluted loss per share
 
46,654

 
43,565

 
43,294


The accompanying notes are an integral part of these consolidated financial statements.

3



MODUSLINK GLOBAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
 
 
 
Years Ended July 31,
 
 
2013
 
2012
 
2011
Net loss
 
$
(40,355
)
 
$
(38,108
)
 
$
(34,465
)
Other comprehensive income (loss):
 
 
 
 
 
 
Foreign currency translation adjustment
 
3,057

 
(10,650
)
 
11,344

Pension adjustments
 
(831
)
 
(3,545
)
 
128

Net unrealized holding gain (loss) on securities
 
46

 
—

 
(73
)
 
 
2,272

 
(14,195
)
 
11,399

Comprehensive loss
 
$
(38,083
)
 
$
(52,303
)
 
$
(23,066
)


The accompanying notes are an integral part of these consolidated financial statements.

4



MODUSLINK GLOBAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share amounts)
 
 
 
Number of
Shares
 
Common
Stock
 
Treasury
Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Income
 
Total
Stockholders’
Equity
Balance at July 31, 2010
 
44,039,938

 
$
440

 
$
(1,992
)
 
$
7,427,031

 
$
(7,164,202
)
 
$
14,237

 
$
275,514

Net loss
 
—

 
—

 
—

 
—

 
(34,465
)
 
—

 
(34,465
)
Issuance of common stock pursuant to employee stock purchase plan and stock option exercises
 
42,807

 
1

 
—

 
207

 
—

 
—

 
208

Restricted stock grants
 
334,533

 
3

 
—

 
(3
)
 
—

 
—

 
—

Restricted stock forfeitures
 
(23,003
)
 
—

 
—

 
—

 
—

 
—

 
—

Share-based compensation
 
—

 
—

 
—

 
3,481

 
—

 
—

 
3,481

Repurchase of common stock (215,514 shares)
 
—

 
—

 
(1,394
)
 
—

 
—

 
—

 
(1,394
)
Retirement of treasury stock
 
(565,178
)
 
(6
)
 
3,386

 
(3,626
)
 
—

 
—

 
(246
)
Special dividend payment
 
—

 
—

 
—

 
(39,955
)
 
—

 
—

 
(39,955
)
Other comprehensive items
 
—

 
—

 
—

 
—

 
—

 
11,399

 
11,399

Balance at July 31, 2011
 
43,829,097

 
$
438

 
$
—

 
$
7,387,135

 
$
(7,198,667
)
 
$
25,636

 
$
214,542

Net loss
 
 
 
 
 
 
 
 
 
(38,108
)
 
 
 
(38,108
)
Issuance of common stock pursuant to employee stock purchase plan and stock option exercises
 
45,977

 
—

 
—

 
91

 
—

 
—

 
91

Restricted stock grants
 
217,359

 
2

 
—

 
(2
)
 
—

 
—

 
—

Restricted stock forfeitures
 
(165,811
)
 
(1
)
 
—

 
(187
)
 
—

 
—

 
(188
)
Share-based compensation
 
—

 
—

 
—

 
2,990

 
—

 
—

 
2,990

Other comprehensive items
 
—

 
—

 
—

 
—

 
—

 
(14,195
)
 
(14,195
)
Balance at July 31, 2012
 
43,926,622

 
$
439

 
$
—

 
$
7,390,027

 
$
(7,236,775
)
 
$
11,441

 
$
165,132

Net loss
 
—

 
—

 
—

 
—

 
(40,355
)
 
—

 
(40,355
)
Issuance of common stock to Steel Partners Holdings, L.P., net of transaction costs of $2.3 million
 
7,500,000

 
75

 
—

 
27,600

 
—

 
—

 
27,675

Issuance of common stock pursuant to employee stock purchase plan and stock option exercises
 
11,986

 
—

 
—

 
31

 
 
 
 
 
31

Restricted stock grants
 
278,220

 
3

 
—

 
(3
)
 
—

 
—

 
—

Restricted stock forfeitures
 
(140,935
)
 
(1
)
 
—

 
(157
)
 
—

 
—

 
(158
)
Share-based compensation
 
—

 
—

 
—

 
2,308

 
—

 
—

 
2,308

Other comprehensive items
 
—

 
—

 
—

 
—

 
—

 
2,272

 
2,272

Balance at July 31, 2013
 
51,575,893

 
$
516

 
$
—

 
$
7,419,806

 
$
(7,277,130
)
 
$
13,713

 
$
156,905


The accompanying notes are an integral part of these consolidated financial statements.


5



MODUSLINK GLOBAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
 
Years Ended July 31,
 
 
2013
 
2012
 
2011
Cash flows from operating activities of continuing operations:
 
 
 
 
 
 
Net loss
 
$
(40,355
)
 
$
(38,108
)
 
$
(34,465
)
Loss from discontinued operations
 
(1,025
)
 
(10,500
)
 
(16,478
)
Loss from continuing operations
 
(39,330
)
 
(27,608
)
 
(17,987
)
Adjustments to reconcile loss from continuing operations to net cash provided by (used in) operating activities of continuing operations:
 
 
 
 
 
 
Depreciation
 
14,118

 
13,920

 
16,705

Amortization of intangible assets
 
1,133

 
1,139

 
4,750

Amortization of deferred financing costs
 
353

 
—

 
—

Impairment of goodwill and long-lived assets
 
—

 
1,128

 
15,889

Share-based compensation
 
2,308

 
2,990

 
3,481

Non-operating (gains) losses, net
 
2,642

 
(14,390
)
 
(8,892
)
Equity in losses of affiliates and impairments
 
4,365

 
4,109

 
4,308

Changes in operating assets and liabilities:
 
 
 
 
 
 
Trade accounts receivable, net
 
8,583

 
(9,783
)
 
19,116

Inventories
 
22,434

 
(18,084
)
 
3,060

Prepaid expenses and other current assets
 
2,356

 
(2,328
)
 
3,097

Accounts payable, accrued restructuring and accrued expenses
 
(5,851
)
 
8,800

 
(38,016
)
Refundable and accrued income taxes, net
 
(3,652
)
 
(5,766
)
 
(3,297
)
Other assets and liabilities
 
(787
)
 
7,560

 
(4,586
)
Net cash provided by (used in) operating activities of continuing operations
 
8,672

 
(38,313
)
 
(2,372
)
Cash flows from investing activities of continuing operations:
 
 
 
 
 
 
Additions to property and equipment
 
(7,296
)
 
(11,118
)
 
(8,870
)
Change in restricted cash
 
(691
)
 
—

 
—

Proceeds from the disposition of the TFL business, net of transaction costs of $81
 
1,269

 
—

 
—

Proceeds from the sale of available-for-sale securities
 
96

 
—

 
115

Proceeds from the sale of equity investments in affiliates
 
207

 
24

 
238

Investments in affiliates
 
(1,712
)
 
(2,912
)
 
(3,473
)
Net cash used in investing activities of continuing operations
 
(8,127
)
 
(14,006
)
 
(11,990
)
Cash flows from financing activities of continuing operations:
 
 
 
 
 
 
Payment of dividends
 
—

 
—

 
(40,001
)
Proceeds from revolving line of credit
 
—

 
10,000

 
—

Repayments of revolving line of credit
 
—

 
(10,000
)
 
—

Payment of deferred financing costs
 
(1,416
)
 
—

 
—

Repayments on capital lease obligations
 
(60
)
 
(124
)
 
(106
)
Proceeds from issuance of common stock, net of transaction costs of $2,325 during the year ended July 31, 2013
 
27,675

 
91

 
204

Repurchase of common stock
 
(158
)
 
(188
)
 
(1,633
)
Net cash provided by (used in) financing activities of continuing operations
 
26,041

 
(221
)
 
(41,536
)
Cash flows from discontinued operations:
 
 
 
 
 
 
Operating cash flows
 
(1,645
)
 
(1,126
)
 
(2,507
)
Investing cash flows
 
—

 
(446
)
 
(98
)
Net cash used in discontinued operations
 
(1,645
)
 
(1,572
)
 
(2,605
)
Net effect of exchange rate changes on cash and cash equivalents
 
606

 
(4,744
)
 
8,364

Net increase (decrease) in cash and cash equivalents
 
25,547

 
(58,856
)
 
(50,139
)
Cash and cash equivalents at beginning of period
 
52,369

 
111,225

 
161,364

Cash and cash equivalents at end of period
 
$
77,916

 
$
52,369

 
$
111,225


The accompanying notes are an integral part of these consolidated financial statements.

6



MODUSLINK GLOBAL SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
(1)
NATURE OF OPERATIONS
ModusLink Global Solutions, Inc. (together with its consolidated subsidiaries, “ModusLink Global Solutions” or the “Company”), through its wholly owned subsidiaries, ModusLink Corporation (“ModusLink”) and ModusLink PTS, Inc. (“ModusLink PTS”), is a leader in global supply chain business process management serving clients in markets such as consumer electronics, communications, computing, medical devices, software, and retail. The Company designs and executes critical elements in its clients’ global supply chains to improve speed to market, product customization, flexibility, cost, quality and service. These benefits are delivered through a combination of industry expertise, innovative service solutions, integrated operations, proven business processes, expansive global footprint and world-class technology.
The Company has an integrated network of strategically located facilities in various countries, including numerous sites throughout North America, Europe and Asia. The Company previously operated under the names CMGI, Inc. and CMG Information Services, Inc. and was incorporated in Delaware in 1986.
 
(2)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements reflect the application of certain significant accounting policies described below.
Principles of Consolidation
The accompanying consolidated financial statements of the Company include the results of its wholly-owned and majority-owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. The Company accounts for investments in businesses in which it owns between 20% and 50% of the voting interest using the equity method, if the Company has the ability to exercise significant influence over the investee company. All other investments over which the Company does not have the ability to exercise significant influence, or for which there is not a readily determinable market value, are accounted for under the cost method of accounting.
Use of Estimates
The preparation of the Company’s consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. On an ongoing basis the Company evaluates its estimates including those related to revenue recognition, inventories, investments, intangible assets, income taxes, restructuring, valuation of long-lived assets, impairments, contingencies and litigation. Accounting estimates are based on historical experience and various assumptions that are considered reasonable under the circumstances. However, because these estimates inherently involve judgments and uncertainties, actual results could differ materially from those estimated.
Revenue Recognition
The Company’s revenue primarily comes from the sale of supply chain management services to our clients. Amounts billed to clients under these arrangements include revenue attributable to the services performed as well as for materials procured on our clients’ behalf as part of our service to them. Other sources of revenue include the sale of products and other services. Revenue is recognized for services when the services are performed and for product sales when the products are shipped assuming all other applicable revenue recognition criteria are met.
The Company recognizes revenue in accordance with the provisions of the Accounting Standards Codification (“ASC”) Topic 605, “Revenue Recognition” (“ASC Topic 605”). Specifically, the Company recognizes revenue when persuasive evidence of an arrangement exists, title and risk of loss have passed or services have been rendered, the sales price is fixed or determinable and collection of the related receivable is reasonably assured. The Company’s shipping terms vary by client and can include FOB shipping point, which means that risk of loss passes to the client when it is shipped from the Company’s location, as well as other terms such as ex-works, meaning that title and risk of loss transfer upon delivery of product to the customer’s designated carrier. The Company also evaluates the terms of each major client contract relative to a number of criteria that management considers in making its determination with respect to gross versus net reporting of revenue for transactions with its clients. Management’s criteria for making these judgments place particular emphasis on determining the primary obligor in a transaction and which party bears general inventory risk. The Company records all shipping and handling fees billed to clients as revenue, and related costs as cost of sales, when incurred.
The Company applies the provisions of ASC Topic 985, “Software” (“ASC Topic 985”), with respect to certain transactions involving the sale of software products by our e-Business operations.
The Company also follows the guidance of ASC Topic 605 for determining whether an arrangement involving more than one deliverable contains more than one unit of accounting and how the arrangement consideration should be measured and allocated to the separate units of accounting. Under this guidance, when vendor specific objective evidence or third party evidence for deliverables in an arrangement cannot be determined, a best estimate of the selling price is required to separate deliverables and allocate arrangement consideration using the relative selling price method. For those contracts which contain multiple deliverables, management must first determine whether each service, or deliverable, meets the separation criteria. In general, a deliverable (or a group of deliverables) meets the separation criteria if the deliverable has standalone value to the client. Each deliverable that meets the separation criteria is considered a “separate unit of accounting.” Management allocates the total arrangement consideration to each separate unit of accounting based on the relative selling price of each separate unit of accounting. After the arrangement consideration has been allocated to each separate unit of accounting, management applies the appropriate revenue recognition method for each separate unit of accounting as described previously based on the nature of the arrangement. All deliverables that do not meet the separation criteria are combined into one unit of accounting and the appropriate revenue recognition method is applied.
Foreign Currency Translation
All assets and liabilities of the Company’s foreign subsidiaries, whose functional currency is the local currency, are translated to U.S. dollars at the rates in effect at the balance sheet date. All amounts in the Consolidated Statements of Operations are translated using the average exchange rates in effect during the year. Resulting translation adjustments are reflected in the accumulated other comprehensive income (loss) component of stockholders’ equity. Settlement of receivables and payables in a foreign currency that is not the functional currency result in foreign currency transaction gains and losses. Foreign currency transaction gains and losses are included in “Other gains (losses), net” in the Consolidated Statements of Operations.
Cash, Cash Equivalents and Short-term Investments
The Company considers all highly liquid investments with original maturities of 90 days or less at the time of purchase to be cash equivalents. Investments with maturities greater than 90 days to twelve months at the time of purchase are considered short-term investments.
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, accounts receivable, accounts payable, current liabilities and the revolving line of credit approximate fair value because of the short maturity of these instruments. The carrying value of capital lease obligations approximates fair value, as estimated by using discounted future cash flows based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.
Investments
Marketable securities held by the Company which meet the criteria for classification as available-for-sale are carried at fair value. Unrealized holding gains and losses on securities classified as available-for-sale are carried net of income taxes, when applicable, as a component of accumulated other comprehensive income (loss) in the Consolidated Statements of Stockholders’ Equity.
The Company maintains interests in several privately held companies primarily through its various venture capital funds. The Company’s venture capital investment portfolio, @Ventures, invests in early-stage technology companies. These investments are generally made in connection with a round of financing with other third-party investors. Investments in which the Company’s interest is less than 20% and which are not classified as available-for-sale securities are carried at the lower of cost or net realizable value unless it is determined that the Company exercises significant influence over the investee company, in which case the equity method of accounting is used. For those investments in which the Company’s voting interest is between 20% and 50%, the equity method of accounting is generally used. Under this method, the investment balance, originally recorded at cost, is adjusted to recognize the Company’s share of net earnings or losses of the investee company as they occur, limited to the extent of the Company’s investment in, advances to and commitments for the investee. The Company’s share of net income or losses of the investee are reflected in “Equity in losses of affiliates and impairments” in the Company’s Consolidated Statements of Operations.
The Company assesses the need to record impairment losses on its investments and records such losses when the impairment of an investment is determined to be other than temporary in nature. The process of assessing whether a particular

7


equity investment’s net realizable value is less than its carrying cost requires a significant amount of judgment. This valuation process is based primarily on information that the Company obtains from these privately held companies who are not subject to the same disclosure and audit requirements as the reports required of U.S. public companies. As such, the timeliness and completeness of the data may vary. Based on the Company’s evaluation, it recorded impairment charges related to its investments in privately held companies of approximately $2.8 million, $2.9 million, and $2.5 million for the fiscal years ended July 31, 2013, 2012 and 2011, respectively. These impairment losses are reflected in “Equity in losses of affiliates and impairments” in the Company’s Consolidated Statements of Operations.
At the time an equity method investee issues its stock to unrelated parties, the Company accounts for that share issuance as if the Company has sold a proportionate share of its investment. The Company records any gain or loss resulting from an equity method investee’s share issuance in its Consolidated Statements of Operations.
Inventory
Inventories are stated at the lower of cost or market. Cost is determined by both the moving average and the first-in, first-out methods. Materials that the Company typically procures on behalf of its clients that are included in inventory include materials such as compact discs, printed materials, manuals, labels, hardware accessories, hard disk drives, consumer packaging, shipping boxes and labels, power cords and cables for client-owned electronic devices.
Inventories consisted of the following:
 
 
 
July 31,
 
 
2013
 
2012
 
 
(In thousands)
Raw materials
 
$
46,920

 
$
56,198

Work-in-process
 
1,256

 
2,154

Finished goods
 
13,146

 
25,638

 
 
$
61,322

 
$
83,990

The Company continuously monitors inventory balances and records inventory provisions for any excess of the cost of the inventory over its estimated market value. The Company also monitors inventory balances for obsolescence and excess quantities as compared to projected demands. The Company’s inventory methodology is based on assumptions about average shelf life of inventory, forecasted volumes, forecasted selling prices, write-down history of inventory and market conditions. While such assumptions may change from period to period, in determining the net realizable value of its inventories, the Company uses the best information available as of the balance sheet date. If actual market conditions are less favorable than those projected, or the Company experiences a higher incidence of inventory obsolescence because of rapidly changing technology and client requirements, additional inventory provisions may be required. Once established, write-downs of inventory are considered permanent adjustments to the cost basis of inventory and cannot be reversed due to subsequent increases in demand forecasts. Accordingly, if inventory previously written down to its net realizable value is subsequently sold, gross profit margins would be favorably impacted.
Long-Lived Assets, Goodwill and Other Intangible Assets
The Company follows ASC Topic 360, “Property, Plant, and Equipment” (“ASC Topic 360”). Under ASC Topic 360, the Company tests certain long-lived assets or group of assets for recoverability whenever events or changes in circumstances indicate that the Company may not be able to recover the asset’s carrying amount. ASC Topic 360 defines impairment as the condition that exists when the carrying amount of a long-lived asset or group, including property and equipment and other intangible assets, exceeds its fair value. The Company evaluates recoverability by determining whether the undiscounted cash flows expected to result from the use and eventual disposition of that asset or group cover the carrying value at the evaluation date. If the undiscounted cash flows are not sufficient to cover the carrying value, the Company measures an impairment loss as the excess of the carrying amount of the long-lived asset or group over its fair value. Management may use third party valuation experts to assist in its determination of fair value.

The Company is required to test goodwill for impairment annually or if a triggering event occurs in accordance with the provisions of ASC Topic 350, “Goodwill and Other” (“ASC Topic 350”). The Company’s policy is to perform its annual impairment testing for all reporting units, determined to be the Americas, Europe, Asia, e-Business, and ModusLink PTS operating segments, on July 31 of each fiscal year.

8


The Company’s valuation methodology for assessing impairment of long-lived assets, goodwill and other intangible assets requires management to make judgments and assumptions based on historical experience and on projections of future operating performance. Management may use third party valuation advisors to assist in its determination of the fair value of reporting units subject to impairment testing. The Company operates in highly competitive environments and projections of future operating results and cash flows may vary significantly from actual results. If our assumptions used in estimating our valuations of the Company’s reporting units for purposes of impairment testing differ materially from actual future results, the Company may record impairment charges in the future and our financial results may be materially adversely affected.
Restructuring Expenses
The Company follows the provisions of ASC Topic 420, “Exit or Disposal Cost Obligations”, which addresses financial accounting and reporting for costs associated with exit or disposal activities. The statement requires companies to recognize costs associated with exit or disposal activities when a liability has been incurred rather than at the date of a commitment to an exit or disposal plan. The Company records liabilities that primarily include estimated severance and other costs related to employee benefits and certain estimated costs related to equipment and facility lease obligations and other service contracts. These contractual obligations principally represent future obligations under non-cancelable real estate leases. Restructuring estimates relating to real estate leases involve consideration of a number of factors including: potential sublet rental rates, estimated vacancy period for the property, brokerage commissions and certain other costs. Estimates relating to potential sublet rates and expected vacancy periods are most likely to have a material impact on the Company’s results of operations in the event that actual amounts differ significantly from estimates. These estimates involve judgment and uncertainties, and the settlement of these liabilities could differ materially from recorded amounts.
Property and Equipment
Property, plant and equipment are stated at cost. The costs of additions and improvements are capitalized, while maintenance and repairs are charged to expense as incurred. Depreciation and amortization is provided on the straight-line basis over the estimated useful lives of the respective assets. The Company capitalizes certain computer software development costs when incurred in connection with developing or obtaining computer software for internal use. The estimated useful lives are as follows:
 
 
 
 
Buildings
  
32 years
Machinery & equipment
  
3 to 5 years
Furniture & fixtures
  
5 to 7 years
Automobiles
  
5 years
Leasehold improvements
  
Shorter of the remaining lease term or the estimated useful life of the asset
Software
  
3 to 8 years
Income Taxes
Income taxes are accounted for under the provisions of ASC Topic 740, “Income Taxes” (“ASC Topic 740”), using the asset and liability method whereby deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. ASC Topic 740 also requires that the deferred tax assets be reduced by a valuation allowance, if based on the weight of available evidence, it is more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods. This methodology is subjective and requires significant estimates and judgments in the determination of the recoverability of deferred tax assets and in the calculation of certain tax liabilities.
In accordance with ASC Topic 740, the Company applies the criteria that an individual tax position must satisfy for some or all of the benefits of that position to be recognized in a company’s financial statements. ASC Topic 740 prescribes a recognition threshold of more-likely-than-not, and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order for those tax positions to be recognized in the financial statements. In accordance with the Company’s accounting policy, interest and penalties related to uncertain tax positions is included in the “income tax expense” line of the Consolidated Statements of Operations. See Note 16, “Income Taxes,” for additional information.

9


Earnings (Loss) Per Share
The Company calculates earnings per share in accordance with ASC Topic 260, “Earnings per Share” and ASC Topic 260-10, formerly FASB Staff Position EITF No. 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” Under ASC Topic 260-10, unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. All of the Company’s nonvested shares are considered participating securities because they contain non-forfeitable rights to dividends. However, holders of nonvested shares do not have an obligation to fund losses, and therefore, are only allocated a portion of the earnings for the earnings per share calculation when the Company reports net income.
Under the two-class method, net income is reduced by the amount of dividends declared in the period for each class of common stock and participating securities. The remaining undistributed earnings are then allocated to common stock and participating securities as if all of the net income for the period had been distributed. Basic earnings per share excludes dilution and is calculated by dividing net income allocable to common shares by the weighted average number of common shares outstanding for the period. Diluted earnings per share is calculated by dividing net income allocable to common shares by the weighted-average number of common shares for the period, as adjusted for the potential dilutive effect of non-participating share-based awards. The following table reconciles earnings per share for the fiscal years ended July 31, 2013, 2012 and 2011.
 
 
 
Years Ended July 31,
 
 
2013
 
2012
 
2011
 
 
(In thousands)
BASIC
 
 
 
 
 
 
Loss from continuing operations
 
$
(39,330
)
 
$
(27,608
)
 
$
(17,987
)
Loss from discontinued operations
 
(1,025
)
 
(10,500
)
 
(16,478
)
Net loss available for basic common shares
 
$
(40,355
)
 
$
(38,108
)
 
$
(34,465
)
Weighted average common shares outstanding
 
46,654

 
43,565

 
43,294

Basic net loss per common share from continuing operations
 
$
(0.84
)
 
$
(0.63
)
 
$
(0.42
)
Basic net loss per common share from discontinued operations
 
(0.02
)
 
(0.24
)
 
(0.38
)
 
 
$
(0.86
)
 
$
(0.87
)
 
$
(0.80
)
DILUTED
 
 
 
 
 
 
Loss from continuing operations
 
$
(39,330
)
 
$
(27,608
)
 
$
(17,987
)
Loss from discontinued operations
 
(1,025
)
 
(10,500
)
 
(16,478
)
Net loss available for diluted common shares
 
$
(40,355
)
 
$
(38,108
)
 
$
(34,465
)
Weighted average common shares outstanding
 
46,654

 
43,565

 
43,294

Weighted average common equivalent shares arising from dilutive stock options
 
—

 
—

 
—

Weighted average number of common and potential common shares
 
46,654

 
43,565

 
43,294

Diluted net loss per common share from continuing operations
 
$
(0.84
)
 
$
(0.63
)
 
$
(0.42
)
Diluted net loss per common share from discontinued operations
 
(0.02
)
 
(0.24
)
 
(0.38
)
 
 
$
(0.86
)
 
$
(0.87
)
 
$
(0.80
)
Approximately 3.4 million, 2.9 million, and 3.2 million common stock equivalent shares were excluded from the denominator in the calculation of diluted earnings per share for the fiscal years ended July 31, 2013, 2012, and 2011, respectively, as the Company has recorded a net loss for those periods.

Share-Based Compensation Plans
The Company recognizes share-based compensation in accordance with the provisions of ASC Topic 718, “Compensation—Stock Compensation” (“ASC Topic 718”) which requires the measurement and recognition of compensation expense for all share- based payment awards made to employees and directors including employee stock options and employee stock purchases based on estimated fair values.
The Company estimates the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service

10


periods. The Company estimates forfeitures at the time of grant and revises those estimates, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
The Company uses a binomial-lattice option-pricing model (“binomial-lattice model”) for valuation of share-based awards with time-based vesting. The Company believes that the binomial-lattice model is an accurate model for valuing employee stock options since it reflects the impact of stock price changes on option exercise behavior. For share-based awards based on market conditions, specifically, the Company’s stock price, the compensation cost and derived service periods are estimated using the Monte Carlo valuation method. The Company uses third party analyses to assist in developing the assumptions used in its binomial-lattice model and Monte Carlo valuations and the resulting fair value used to record compensation expense. The Company’s determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by the Company’s stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to the Company’s expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors. Any changes in these assumptions may materially affect the estimated fair value of the share-based award.
Major Clients and Concentration of Credit Risk
Sales to one client, Hewlett-Packard, accounted for approximately 29%, 31%, and 29% of the Company’s consolidated net revenue for the fiscal years ended July 31, 2013, 2012, and 2011, respectively. To manage risk, the Company performs ongoing credit evaluations of its clients’ financial condition. The Company generally does not require collateral on accounts receivable. The Company maintains an allowance for doubtful accounts based on its assessment of the collectability of accounts receivable.
Financial instruments which potentially subject the Company to concentrations of credit risk are cash, cash equivalents, available-for-sale securities and accounts receivable. The Company’s cash equivalent portfolio is diversified and consists primarily of short-term investment grade securities placed with high credit quality financial institutions.
Recent Accounting Pronouncements
In July 2013, the FASB issued ASU 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” This update amends ASC 740, “Income Taxes,” to require that in certain cases, an unrecognized tax benefit, or portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward when such items exist in the same taxing jurisdiction. The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. Early adoption is permitted. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date, and retrospective application is permitted. The Company is currently evaluating the impact this update will have on its financial statements.
In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-02, “Reporting Amounts Reclassified Out of Accumulated Other Comprehensive Income,” which amends Accounting Standards Codification (“ASC”) 220, “Comprehensive Income.” The amended guidance requires entities to provide information about the amounts reclassified out of accumulated other comprehensive income by component. Additionally, entities are required to present, either on the face of the financial statements or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income. The amended guidance does not change the current requirements for reporting net income or other comprehensive income. The amendment is effective prospectively for annual periods, and interim periods within those annual periods, beginning after December 15, 2012. The Company believes adoption of this new guidance will not have a material impact on the Company’s financial statements as these updates have an impact on presentation only.

(3)
STATEMENT OF CASH FLOWS SUPPLEMENTAL INFORMATION
Cash used for operating activities reflect cash payments for interest and income taxes as follows:
 
 
 
Years Ended July 31,
 
 
2013
 
2012
 
2011
 
 
(In thousands)
Cash paid for interest
 
$
30

 
$
26

 
$
4

Cash paid for income taxes
 
$
4,632

 
$
3,538

 
$
5,419

Cash paid for taxes can be higher than income tax expense as shown on the Company’s consolidated statements of operations due to prepayments made in certain jurisdictions as well as to the timing of required payments in relation to recorded expense, which can cross fiscal years.

11


Non-cash financing activities during the fiscal years ended July 31, 2013, 2012, and 2011 included the issuance of approximately 0.3 million, 0.2 million, and 0.3 million shares, respectively, of nonvested common stock, valued at approximately $0.8 million, $1.1 million, and $2.3 million, respectively, to certain employees of the Company.
 
(4)
SEGMENT INFORMATION
The Company has five operating segments: Americas; Asia; Europe; e-Business; and ModusLink PTS. Based on the information provided to the Company’s chief operating decision-maker (“CODM”) for purposes of making decisions about allocating resources and assessing performance and quantitative thresholds, the Company has determined that it has three reportable segments: Americas; Asia; and Europe. The Company reports the ModusLink PTS operating segment in aggregation with the Americas operating segment as part of the Americas reportable segment. In addition to its three reportable segments, the Company reports an All Other category. The All Other category primarily represents the e-Business operating segment. The Company also has Corporate-level activity, which consists primarily of costs associated with certain corporate administrative functions such as legal and finance, which are not allocated to the Company’s reportable segments and administration costs related to the Company’s venture capital activities. The Corporate-level balance sheet information includes cash and cash equivalents, available-for-sale securities, investments and other assets, which are not identifiable to the operations of the Company’s operating segments.
Management evaluates segment performance based on segment net revenue, operating income (loss) and “adjusted operating income (loss)”, which is defined as the operating income (loss) excluding net charges related to depreciation, amortization of intangible assets, goodwill and long-lived asset impairment, share-based compensation and restructuring. These items are excluded because they may be considered to be of a non-operational or non-cash nature. Historically, the Company has recorded significant impairment and restructuring charges and therefore management uses adjusted operating income to assist in evaluating the performance of the Company’s core operations.

Summarized financial information of the Company’s continuing operations by operating segment is as follows:
 

12


 
 
Years Ended July 31,
 
 
2013
 
2012
 
2011
 
 
(In thousands)
Net revenue:
 
 
 
 
 
 
Americas
 
$
268,490

 
$
249,940

 
$
296,362

Asia
 
212,963

 
218,880

 
233,724

Europe
 
237,222

 
211,319

 
275,065

All Other
 
35,829

 
33,808

 
39,126

 
 
$
754,504

 
$
713,947

 
$
844,277

Operating income (loss):
 
 
 
 
 
 
Americas
 
$
(230
)
 
$
(14,108
)
 
$
(29,984
)
Asia
 
22,841

 
21,450

 
29,168

Europe
 
(22,091
)
 
(15,718
)
 
(6,181
)
All Other
 
349

 
634

 
1,889

Total segment operating income (loss)
 
869

 
(7,742
)
 
(5,108
)
Corporate-level activity
 
(29,101
)
 
(27,119
)
 
(16,420
)
Total operating loss
 
$
(28,232
)
 
$
(34,861
)
 
$
(21,528
)
Adjusted operating income (loss):
 
 
 
 
 
 
Americas
 
$
5,708

 
$
(7,675
)
 
$
(6,029
)
Asia
 
30,230

 
26,811

 
36,155

Europe
 
(7,679
)
 
(6,061
)
 
198

All Other
 
2,920

 
2,941

 
3,811

Total segment adjusted operating income
 
31,179

 
16,016

 
34,135

Corporate-level activity
 
(27,355
)
 
(25,284
)
 
(14,043
)
Total adjusted operating income (loss)
 
$
3,824

 
$
(9,268
)
 
$
20,092

Adjusted operating income (loss)
 
$
3,824

 
$
(9,268
)
 
$
20,092

Adjustments:
 
 
 
 
 
 
Depreciation
 
(14,118
)
 
(13,920
)
 
(16,705
)
Amortization of intangible assets
 
(1,133
)
 
(1,139
)
 
(4,750
)
Impairment of goodwill and long-lived assets
 
—

 
(1,128
)
 
(15,889
)
Share-based compensation
 
(2,308
)
 
(2,990
)
 
(3,481
)
Restructuring, net
 
(14,497
)
 
(6,416
)
 
(795
)
Operating loss
 
$
(28,232
)
 
$
(34,861
)
 
$
(21,528
)
Other income (expense), net
 
(7,319
)
 
10,288

 
4,360

Income tax expense
 
(3,779
)
 
(3,035
)
 
(819
)
Loss from discontinued operations
 
(1,025
)
 
(10,500
)
 
(16,478
)
Net loss
 
$
(40,355
)
 
$
(38,108
)
 
$
(34,465
)
 
 
 
July 31,
 
 
2013
 
2012
 
 
(In thousands)
Total assets:
 
 
 
 
Americas
 
$
65,790

 
$
73,057

Asia
 
93,547

 
114,158

Europe
 
97,524

 
105,073

All Other
 
17,369

 
20,758

Sub-total—segment assets
 
274,230

 
313,046

Corporate
 
69,466

 
43,086

Discontinued operations
 
—

 
2,750

 
 
$
343,696

 
$
358,882


13


As of July 31, 2013, approximately 58%, 18% and 24% of the Company’s long-lived assets were located in the Americas, Asia and Europe, respectively. As of July 31, 2012, approximately 59%, 21% and 20% of the Company’s long-lived assets were located in the Americas, Asia and Europe, respectively.
The Company generated revenue of $147.3 million and $91.8 million in China and the Netherlands, respectively, from external clients during the fiscal year ended July 31, 2013. The Company generated revenue of $141.9 million and $106.5 million in China and the Netherlands, respectively, from external clients during the fiscal year ended July 31, 2012. The Company generated revenue of $140.2 million and $123.6 million in China and the Netherlands, respectively, from external clients during the fiscal year ended July 31, 2011.
 
(5)
DISCONTINUED OPERATIONS AND DIVESTITURES
On January 11, 2013, the Company’s wholly-owned subsidiary, Tech for Less LLC (“TFL”) sold substantially all of its assets to Encore Holdings, LLC (“Encore”). The consideration paid by Encore for the assets was $1.6 million, which consisted of a gross purchase price of $1.9 million less certain adjustments. At the time of sale, the Company received $1.4 million of the purchase price, with the remaining $0.2 million held in escrow for the satisfaction of any post-closing claims. During the fourth quarter of fiscal 2013, the Company reached a settlement agreement with Encore whereby the Company received $0.1 million of the escrow amount, with the remainder reverting to Encore. As a result of the settlement of the escrow amount, the Company’s gain on the sale of TFL was reduced by $0.1 million from $0.7 million to $0.6 million. In conjunction with the asset sale agreement, the Company entered into a transition support agreement with Encore to provide certain administrative services for a period of 90 days from the closing date of the transaction. The Company’s obligations under the transition support agreement were completed during the third quarter of fiscal year 2013. The Company did not generate significant continuing cash flows from the transition support agreement.
The Company’s other discontinued operations relate to a lease obligation associated with a previously vacated facility. In July 2013, the Company reached an agreement with its landlord for the early termination of the lease agreement. As part of the lease termination agreement, the Company paid $0.4 million to the landlord on August 1, 2013 and was released from any future obligations associated with the leased facility. The Company also assigned its interest in its sublease rental income to the landlord.
Summarized financial information for the discontinued operations of the Company are as follows:
 
 
 
Years Ended July 31,
 
 
2013
 
2012
 
2011
 
 
(in thousands)
Results of operations:
 
 
 
 
 
 
Net revenue
 
$
4,592

 
$
25,944

 
$
29,471

Other gains (losses), net
 
582

 
627

 
(10
)
Total expenses
 
(6,199
)
 
(37,071
)
 
(45,939
)
Loss from discontinued operations
 
$
(1,025
)
 
$
(10,500
)
 
$
(16,478
)
 
 
 
July 31,
 
 
2013
 
2012
 
 
(in thousands)
Financial position:
 
 
 
 
Current liabilities
 
$
(610
)
 
$
(1,528
)
Non-current liabilities
 
—

 
(293
)
Net liabilities of discontinued operations
 
$
(610
)
 
$
(1,821
)

(6)
PROPERTY AND EQUIPMENT
Property and equipment at cost, consists of the following:
 

14


 
 
July 31,
 
 
2013
 
2012
 
 
(In thousands)
Buildings
 
$
21,020

 
$
20,299

Machinery and equipment
 
17,012

 
18,565

Leasehold improvements
 
18,327

 
18,482

Software
 
43,905

 
40,461

Other
 
4,473

 
5,449

 
 
104,737

 
103,256

Less: Accumulated depreciation and amortization
 
(70,447
)
 
(62,484
)
Property and equipment, net
 
$
34,290

 
$
40,772

Assets under capital leases which are included in the amounts above are summarized as follows:
 
 
 
July 31,
 
 
2013
 
2012
 
 
(In thousands)
Machinery and equipment
 
$
343

 
$
445

Other
 
178

 
—

 
 
521

 
445

Less: Accumulated depreciation and amortization
 
(455
)
 
(275
)
 
 
$
66

 
$
170

The Company recorded depreciation expense of $14.1 million, $13.9 million, and $16.7 million for the fiscal years ended July 31, 2013, 2012, and 2011, respectively. Depreciation expense within the Americas, Asia, Europe, and All Other was $4.0 million, $4.8 million, $4.6 million, and $0.7 million, respectively, for fiscal year 2013, $4.3 million, $4.4 million, $4.5 million, and $0.8 million, respectively, for fiscal year 2012, and $5.2 million, $4.6 million, $6.0 million, and $0.9 million, respectively, for fiscal year 2011. Amortization of assets recorded under capital leases is included in the depreciation expense amounts.
 
(7)
GOODWILL AND INTANGIBLE ASSETS
The Company conducts its annual goodwill impairment test on July 31 of each fiscal year. In addition, if and when events or circumstances change that would more likely than not reduce the fair value of any of its reporting units below its carrying value, an interim test would be performed. In making this assessment, the Company relies on a number of factors including operating results, business plans, economic projections, anticipated future cash flows, transactions and marketplace data. The Company’s reporting units are the same as the operating segments: Americas, Asia, Europe, e-Business, and ModusLink PTS. As disclosed in Note 5, the Company disposed of its TFL operating segment during the second quarter of fiscal year 2013. Impairment charges related to TFL for all periods presented have been classified within discontinued operations within the accompanying consolidated statements of operations.
The Company’s remaining goodwill of $3.1 million as of July 31, 2013 relates to the Company’s e-Business reporting unit. During the fourth quarter of fiscal year 2013, the Company completed its annual impairment analysis of goodwill. The Company concluded that its goodwill was not impaired as of July 31, 2013.
During the third quarter of fiscal year 2012, indicators of potential impairment caused the Company to conduct an interim impairment test for the fixed assets of its facility in Kildare, Ireland. These indicators included declining revenue and increasingly adverse trends that resulted in further deterioration of current operating results and future prospects of the Kildare facility. These adverse trends included declines in sales volumes resulting from the loss of certain client programs, pricing pressure from existing clients, and the emergence and growth of new competitors for the services performed in Kildare.
As a result of the impairment test, in connection with the preparation of financial statements for the period ended April 30, 2012, the Company concluded that Kildare’s fixed assets were impaired and recorded a $1.1 million non-cash impairment charge. This charge has been recorded as a component of “impairment of goodwill and long-lived assets” in the consolidated statements of operations. The fixed asset impairment charge for Kildare is deductible as depreciation for tax purposes over time. The impairment charge did not affect the Company’s liquidity or cash flows.


15


During the second quarter of fiscal year 2011, indicators of potential impairment caused the Company to conduct an interim impairment test for goodwill and other long-lived assets of the ModusLink PTS reporting unit in connection with the preparation of its quarterly financial statements for the quarter ended January 31, 2011. These indicators included continued operating losses, the departure of key personnel, and increasingly adverse trends that resulted in further deterioration of current operating results and future prospects for ModusLink PTS.
As a result of the 2011 interim impairment tests, in connection with the preparation of financial statements for the period ended January 31, 2011, the Company concluded that its goodwill was impaired and recorded a non-cash goodwill impairment charge of $7.1 million for ModusLink PTS. Also in connection with the preparation of such financial statements, the Company determined that its intangible assets were impaired and recorded a non-cash intangible asset impairment charge of $8.8 million for ModusLink PTS. The goodwill and intangible asset impairment charges for ModusLink PTS are not deductible for tax purposes. The impairment charges did not affect the Company’s liquidity or cash flows.
In preparing the 2011 interim goodwill impairment test, the Company lowered its forecast of revenue growth and gross profit margins for ModusLink PTS for fiscal years 2011 to 2018. Revenue growth rates and gross profit margins are the variables which make the most significant impact to the discounted cash flow models for this reporting unit. The decline in the forecast for ModusLink PTS was attributable to our consideration of the operating losses for these reporting units during the first half of fiscal year 2011, the consideration of the impact that the departure of key personnel could have on our future operating results for the reporting unit, and increasingly adverse trends that resulted in further deterioration of current and future operating results.
In connection with completing the 2011 interim goodwill impairment analysis, the Company also evaluated the recoverability of its long-lived assets at the ModusLink PTS reporting unit. The asset group for ModusLink PTS is at the reporting unit level. Recoverability of this asset group is determined by comparing forecasted undiscounted net cash flows of the reporting unit to its respective carrying value. If the asset group’s cash flows are determined to be unable to recover the carrying amount of its net assets, then a loss is recognized equal to the amount by which the asset’s carrying value exceeds its fair value. The loss is then allocated amongst the long-lived assets based on their relative carrying amounts, with the exception that a loss allocated to an individual asset should not reduce the carrying amount of that asset below its fair value. Based upon this evaluation, the Company determined that the estimated future undiscounted cash flows related to the asset groups was below its carrying value, and therefore the asset groups was impaired.
The estimated fair values of our reporting units for the goodwill impairment test were evaluated using an income approach by calculating the present value of estimated future cash flows. We believe the use of the income approach is appropriate due to lack of comparability to guideline companies and the lack of comparable transactions under the market approach. The income approach incorporates many assumptions including future growth rates, discount factors, expected capital expenditures and income tax cash flows. In developing an appropriate discount rate to apply in its estimated cash flow models the Company developed an estimate of its weighted-average cost of capital.
The changes in the carrying amount of goodwill allocated to the Company’s operating segments are as follows:
 
 
 
Americas
 
Asia
 
Europe
 
All
Other
 
Consolidated
Total
 
 
(in thousands)
Balance as of July 31, 2011
 
 
 
 
 
 
 
 
 
 
Goodwill
 
$
94,477

 
$
73,948

 
$
30,108

 
$
5,857

 
$
204,390

Accumulated impairment charges
 
(94,477
)
 
(73,948
)
 
(30,108
)
 
(2,799
)
 
(201,332
)
 
 
$
—

 
$
—

 
$
—

 
$
3,058

 
$
3,058

Balance as of July 31, 2012
 
 
 
 
 
 
 
 
 
 
Goodwill
 
$
94,477

 
$
73,948

 
$
30,108

 
$
5,857

 
$
204,390

Accumulated impairment charges
 
(94,477
)
 
(73,948
)
 
(30,108
)
 
(2,799
)
 
(201,332
)
 
 
$
—

 
$
—

 
$
—

 
$
3,058

 
$
3,058

Balance as of July 31, 2013
 
 
 
 
 
 
 
 
 
 
Goodwill
 
$
94,477

 
$
73,948

 
$
30,108

 
$
5,857

 
$
204,390

Accumulated impairment charges
 
(94,477
)
 
(73,948
)
 
(30,108
)
 
(2,799
)
 
(201,332
)
 
 
$
—

 
$
—

 
$
—

 
$
3,058

 
$
3,058




16


The components of intangible assets are as follows:
 
 
 
July 31, 2013
 
July 31, 2012
(in thousands)
 
(in thousands)
Gross
Carrying
Amount
 
Accumulated
Amortization/
Impairment
 
Net Book
Value
 
Weighted
Average
Amortization
Period
 
Gross
Carrying
Amount
 
Accumulated
Amortization/
Impairment
 
Net Book
Value
 
Weighted
Average
Amortization
Period
Client Relationships
 
$
34,500

 
$
33,475

 
$
1,025

 
7 years
 
$
34,500

 
$
32,847

 
$
1,653

 
7 years
Developed  Technology
 
13,992

 
13,375

 
617

 
3 to 7 years
 
13,992

 
12,990

 
1,002

 
3 to 7 years
Trade Names
 
5,405

 
5,283

 
122

 
3 to 7 years
 
5,405

 
5,174

 
231

 
3 to 7 years
Non-Competes
 
713

 
713

 
—

 
1 to 5 years
 
713

 
702

 
11

 
1 to 5 years
Total
 
$
54,610

 
$
52,846

 
$
1,764

 
 
 
$
54,610

 
$
51,713

 
$
2,897

 
 
Amortization expense for intangible assets for the fiscal years ended July 31, 2013, 2012, and 2011 totaled $1.1 million, $1.3 million, and $5.5 million, respectively.
Estimated annual amortization expense for intangible assets for the next two years ending July 31, is as follows:
 
 
 
Fiscal Year
Amount
 
(in thousands)
2014
$
1,098

2015
$
666

 
(8)
RESTRUCTURING
The following tables summarize the activity in the restructuring accrual for the fiscal years ended July 31, 2013, 2012, and 2011:
 

17


 
 
Employee
Related
Expenses
 
Contractual
Obligations
 
Total
 
 
(In thousands)
Accrued restructuring balance at July 31, 2010
 
$
181

 
$
3,451

 
$
3,632

Restructuring charges
 
1,099

 
—

 
1,099

Restructuring adjustments
 
53

 
(357
)
 
(304
)
Cash paid
 
(1,081
)
 
(1,926
)
 
(3,007
)
Non-cash adjustments
 
44

 
—

 
44

Accrued restructuring balance at July 31, 2011
 
$
296

 
$
1,168

 
$
1,464

Restructuring charges
 
5,274

 
1,442

 
6,716

Restructuring adjustments
 
(439
)
 
139

 
(300
)
Cash paid
 
(4,645
)
 
(1,759
)
 
(6,404
)
Non-cash adjustments
 
(44
)
 
108

 
64

Restructuring charges, discontinued operations
 
944

 
95

 
1,039

Cash paid, discontinued operations
 
(760
)
 
(95
)
 
(855
)
Accrued restructuring balance at July 31, 2012
 
$
626

 
$
1,098

 
$
1,724

Restructuring charges
 
13,638

 
1,112

 
14,750

Restructuring adjustments
 
(232
)
 
(21
)
 
(253
)
Cash paid
 
(9,947
)
 
(999
)
 
(10,946
)
Non-cash adjustments
 
133

 
—

 
133

Restructuring charges, discontinued operations
 
42

 
112

 
154

Cash paid, discontinued operations
 
(243
)
 
(97
)
 
(340
)
Reclassification of restructuring charges of discontinued operations
 
(43
)
 
(15
)
 
(58
)
Accrued restructuring balance at July 31, 2013
 
$
3,974

 
$
1,190

 
$
5,164

It is expected that the payments of employee-related charges will be substantially completed during the fiscal year ending July 31, 2014. The remaining contractual obligations primarily relate to facility lease obligations for vacant space resulting from the previous restructuring activities of the Company. The Company anticipates that contractual obligations will be substantially fulfilled by August 2015.

During the fiscal year ended July 31, 2013, the Company recorded a net restructuring charge of $14.5 million. Of this amount, $13.4 million primarily related to the workforce reduction of 465 employees across all operating segments, and $1.1 million related to contractual obligations related to a facility closure in Hungary.
During the fiscal year ended July 31, 2012 the Company recorded a net restructuring charge of approximately $6.4 million. Of this amount, $4.8 million primarily related to the workforce reduction of 270 employees in the Americas, Asia, and Europe, $1.6 million related to contractual obligations related to facility closure at the Raleigh facility. These restructuring charges are net of $0.3 million in reductions to initial estimates for recorded employee-related expenses and facilities lease obligations primarily based on changes in underlying assumptions.
During the fiscal year ended July 31, 2011 the Company recorded a net restructuring charge of approximately $0.8 million. Of this amount, approximately $1.2 million primarily related to the workforce reduction of 55 employees in the Americas and Asia and approximately $(0.4) million of the recorded net restructuring charge related to changes in estimates for previously recorded facilities lease obligations primarily based on changes to the underlying assumptions.
The net restructuring charges for the fiscal years ended July 31, 2013, 2012, and 2011 would have been allocated as follows had the Company recorded the expense and adjustments within the functional department of the restructured activities:
 
 
 
July 31,
 
 
2013
 
2012
 
2011
 
 
(In thousands)
Cost of revenue
 
$
10,625

 
$
3,960

 
$
437

Selling, general and administrative
 
3,872

 
2,456

 
358

 
 
$
14,497

 
$
6,416

 
$
795


18


The following tables summarize the restructuring accrual by operating segment, the All Other category and the corporate-level activity category for the fiscal years ended July 31, 2013, 2012, and 2011:
 
 
 
Americas
 
Asia
 
Europe
 
All Other
 
Discontinued
Operations
 
Consolidated
Total
 
 
(In thousands)
Accrued restructuring balance at July 31, 2010
 
$
3,148

 
$
—

 
$
484

 
$
—

 
$
—

 
$
3,632

Restructuring charges
 
501

 
593

 
5

 
—

 
—

 
1,099

Restructuring adjustments
 
(303
)
 
(7
)
 
6

 
—

 
—

 
(304
)
Cash paid
 
(1,993
)
 
(586
)
 
(428
)
 
—

 
—

 
(3,007
)
Non-cash adjustments
 
(7
)
 
—

 
51

 
—

 
—

 
44

Restructuring charges, discontinued operations
 
—

 
—

 
—

 
—

 
—

 
—

Cash paid, discontinued operations
 
—

 
—

 
—

 
—

 
—

 
—

Accrued restructuring balance at July 31, 2011
 
$
1,346

 
$
—

 
$
118

 
$
—

 
$
—

 
$
1,464

Restructuring charges
 
1,706

 
702

 
3,766

 
542

 
—

 
6,716

Restructuring adjustments
 
(94
)
 
(56
)
 
(85
)
 
(65
)
 
—

 
(300
)
Cash paid
 
(1,933
)
 
(647
)
 
(3,690
)
 
(134
)
 
—

 
(6,404
)
Non-cash adjustments
 
61

 
1

 
(58
)
 
—

 
60

 
64

Restructuring charges, discontinued operations
 
—

 
—

 
—

 
—

 
1,039

 
1,039

Cash paid, discontinued operations
 
—

 
—

 
—

 
—

 
(855
)
 
(855
)
Accrued restructuring balance at July 31, 2012
 
$
1,086

 
$
—

 
$
51

 
$
343

 
$
244

 
$
1,724

Restructuring charges
 
1,614

 
2,516

 
9,610

 
1,010

 
—

 
14,750

Restructuring adjustments
 
(21
)
 
(89
)
 
27

 
(170
)
 
—

 
(253
)
Cash paid
 
(2,284
)
 
(1,899
)
 
(5,517
)
 
(1,246
)
 
—

 
(10,946
)
Non-cash adjustments
 
(13
)
 
(8
)
 
85

 
69

 
—

 
133

Restructuring charges, discontinued operations
 
—

 
—

 
—

 
—

 
154

 
154

Cash paid, discontinued operations
 
—

 
—

 
—

 
—

 
(340
)
 
(340
)
Reclassification of restructuring charges of discontinued operations
 
—

 
—

 
—

 
—

 
(58
)
 
(58
)
Accrued restructuring balance at July 31, 2013
 
$
382

 
$
520

 
$
4,256

 
$
6

 
$
—

 
$
5,164


(9)
@VENTURES INVESTMENTS
The Company maintains interests in several privately held companies primarily through its interests in two venture capital funds which invest as “@Ventures.” The Company invests in early stage technology companies. These investments are generally made in connection with a round of financing with other third-party investors.
During the fiscal years ended July 31, 2013, 2012 and 2011, $1.7 million, $2.9 million, and $3.5 million, respectively, was invested by @Ventures in privately held companies. At July 31, 2013 and 2012, the Company’s carrying value of investments in privately held companies was $8.0 million and $10.8 million, respectively. During the fiscal years ended July 31, 2013, 2012, and 2011, the Company recorded $2.8 million, $2.9 million, and $2.5 million, respectively, of impairment charges related to certain investments in the @Ventures portfolio of companies. During the fiscal years ended July 31, 2013, 2012, and 2011, @Ventures received distributions of approximately $0.2 million, $0.0 million and $0.2 million, respectively.
Investments in which the Company’s interest is less than 20% and which are not classified as available-for-sale securities are carried at the lower of cost or net realizable value unless it is determined that the Company exercises significant influence over the investee company, in which case the equity method of accounting is used. For those investments in which the

19


Company’s voting interest is between 20% and 50%, the equity method of accounting is generally used. Under this method, the investment balance, originally recorded at cost, is adjusted to recognize the Company’s share of net earnings or losses of the investee company as they occur, limited to the extent of the Company’s investment in, advances to and commitments for the investee. These adjustments are reflected in “Equity in losses of affiliates and impairments” in the Company’s Consolidated Statements of Operations. For the fiscal years ended July 31, 2013, 2012, and 2011, the Company recorded its proportionate share of the affiliates’ losses of $1.6 million, $1.2 million, and $1.8 million, respectively.
The Company assesses the need to record impairment losses on its investments and records such losses when the impairment of an investment is determined to be other than temporary in nature. The process of assessing whether a particular investment’s net realizable value is less than its carrying cost requires a significant amount of judgment. In making this judgment, the Company carefully considers the investee’s cash position, projected cash flows (both short and long-term), financing needs, recent financing rounds, most recent valuation data, the current investing environment, management/ownership changes and competition. The valuation process is based primarily on information that the Company requests from these privately held companies and is not subject to the same disclosure and audit requirements as the reports required of U.S. public companies. As such, the reliability and the accuracy of the data may vary.
During the year ended July 31, 2013, the Company became aware in various quarters that there may be indicators of impairment for a certain investment in the @Ventures portfolio of companies. The Company completed evaluations for impairment in connection with the preparation of the financial statements for those periods and determined that the investment was impaired. As a result, the Company recorded impairment charges of $2.8 million during the year ended July 31, 2013.
During the year ended July 31, 2012, the Company became aware that there may be indicators of impairment for a certain investment in the @Ventures portfolio of companies. The Company completed its evaluation for impairment in connection with the preparation of the financial statements and determined that the investment was impaired. As a result, the Company recorded an impairment charge of approximately $2.9 million during the year ended July 31, 2012.
During the year ended July 31, 2011, the Company became aware that there may be indicators of impairment for a certain investment in the @Ventures portfolio of companies. The Company completed its evaluation for impairment in connection with the preparation of the financial statements and determined that the investment was impaired. As a result, the Company recorded an impairment charge of approximately $2.5 million.
As of July 31, 2013, the Company, through @Ventures, held investments in nine portfolio companies, although investments in four of these companies are nominal. From time to time, the Company may make new and follow-on venture capital investments and may from time to time receive distributions from investee companies. As of July 31, 2013, the Company is not committed to fund any follow-on investments in any of the @Ventures portfolio companies.

(10)
OTHER CURRENT LIABILITIES
The following schedule reflects the components of “Other Current Liabilities”:
 
 
 
July 31,
2013
 
July 31,
2012
 
 
(In thousands)
Accrued pricing liabilities
 
$
20,854

 
$
20,397

Other
 
5,303

 
6,381

 
 
$
26,157

 
$
26,778

As of July 31, 2013 and 2012, the Company had accrued pricing liabilities of approximately $20.9 million and $20.4 million. As previously reported by the Company, several principal adjustments were made to its historic financial statements for periods ending on or before January 31, 2012, the most significant of which related to the treatment of vendor rebates in its pricing policies. Where the retention of a rebate or a mark-up was determined to have been inconsistent with a client contract (collectively referred to as “pricing adjustments”), the Company concluded that these amounts were not properly recorded as revenue. Accordingly, revenue was reduced by an equivalent amount for the period that the rebate was estimated to have affected. A corresponding liability for the same amount was recorded in that period (referred to as accrued pricing liabilities). The Company believes that it may not ultimately be required to pay the accrued pricing liabilities, due in part to the nature of the interactions with its clients. The remaining accrued pricing liabilities at July 31, 2013 will be derecognized when there is

20


sufficient information for the Company to conclude that such liabilities have been extinguished, which may occur through payment, legal release, or other legal or factual determination.
 
(11)
OTHER GAINS (LOSSES), NET
The following schedule reflects the components of “Other gains (losses), net”:
 
 
 
Years Ended July 31,
 
 
2013
 
2012
 
2011
 
 
(in thousands)
Derecognition of accrued pricing liabilities
 
$
—

 
$
11,811

 
$
13,545

Foreign currency exchange gain (losses)
 
(2,050
)
 
2,948

 
(4,023
)
Gain on sale of investments
 
28

 
9

 
187

Gain (loss) on disposal of assets
 
69

 
(9
)
 
(14
)
Other, net
 
(689
)
 
(369
)
 
(803
)
 
 
$
(2,642
)
 
$
14,390

 
$
8,892

During the fiscal years ended July 31, 2012 and 2011, the Company recorded gains from the derecognition of accrued pricing liabilities of $11.8 million and $13.5 million, respectively (see Note (10)). The Company recorded foreign exchange gains (losses) of $(2.1) million, $2.9 million, and $(4.0) million during the fiscal year ended July 31, 2013, 2012, and 2011, respectively. These net gains and losses related primarily to realized and unrealized gains losses from foreign currency exposures and settled transactions in the Americas, Asia and Europe.
During the fiscal year ended July 31, 2011, the Company recorded a gain of approximately $0.2 million on the sale of investments. Approximately $0.1 million of the gain related to the sale of available-for-sale securities and approximately $0.1 million of the gain related to the distribution of proceeds from the acquisition by third parties of H2Gen Innovations, Inc. and M2E Power, Inc. due to the satisfaction of conditions leading to the release of funds held in escrow.
 
(12)
BORROWING ARRANGEMENTS
Prior to October 31, 2012, the Company and certain of its subsidiaries had a $15 million revolving credit facility (the “Credit Facility”) with Bank of America, N.A., Silicon Valley Bank and HSBC Bank USA, National Association. The Credit Facility terminated, by its terms, on October 31, 2012.
On October 31, 2012, the Company and certain of its domestic subsidiaries entered into a Credit Agreement (the “Credit Facility”) with Wells Fargo Bank, National Association as lender and agent for the lenders party thereto. The Credit Facility provides a senior secured revolving credit facility up to an initial aggregate principal amount of $50.0 million or the calculated
borrowing base and is secured by substantially all of the domestic assets of the Company. As of July 31, 2013, the calculated borrowing base was $29.9 million. The Credit Facility terminates on October 31, 2015. Interest on the Credit Facility is based on the Company’s options of LIBOR plus 2.5% or the base rate plus 1.5%. The Credit Facility includes one restrictive financial covenant, which is minimum EBITDA, and restrictions that limit the ability of the Company, to among other things, create liens, incur additional indebtedness, make investments, or dispose of assets or property without prior approval from the lenders. The Company did not have any outstanding indebtedness related to the Credit Facility as of July 31, 2013.
As of July 31, 2013 the Company had $0.6 million for letters of credit under the Credit Facility.
 
(13)
COMMITMENTS AND CONTINGENCIES
The Company leases facilities and certain other machinery and equipment under various non-cancelable operating leases and executory contracts expiring through December 2021. Certain non-cancelable leases are classified as capital leases and the leased assets are included in property, plant and equipment, at cost. Future annual minimum payments, including restructuring related obligations as of July 31, 2013, are as follows:
 

21


 
 
Operating
Leases
 
Stadium
Obligation
 
Capital
Lease
Obligations
 
Total
 
 
(in thousands)
For the fiscal years ended July 31:
 
 
 
 
 
 
 
 
2014
 
$
18,995

 
$
1,600

 
$
98

 
$
20,693

2015
 
13,415

 
1,600

 
70

 
15,085

2016
 
10,561

 
—

 
75

 
10,636

2017
 
7,224

 
—

 
158

 
7,382

2018
 
5,194

 
—

 
—

 
5,194

Thereafter
 
11,364

 
—

 
—

 
11,364

 
 
$