(3) RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS

On February 15, 2012, the Division of Enforcement of the Securities and Exchange Commission (“SEC”) initiated with the Company an informal inquiry, and later a formal action, regarding the Company’s treatment of rebates associated with volume discounts provided by vendors (the “SEC Inquiry”).

On March 12, 2012, in its Form 10-Q for the quarterly period ended January 31, 2012, the Company announced the pendency of the SEC Inquiry.

In providing its supply chain services, the Company enters into contracts with its clients that employ various arrangements for pricing, including “fixed-price,” “cost-plus,” or “cost-pass-through” pricing models. Although the specifications and terms of the pricing model can frequently vary from client to client, and among the products or programs for a single client, under a “fixed-price” model, the Company and its client will typically negotiate a fixed unit price for the supply chain services to be provided, where the level of costs incurred by the Company does not affect the contractual, negotiated price. Under a “cost-plus” model, the client agrees to pay the costs incurred by the Company to purchase materials, together with an agreed-to percentage mark-up on those costs. Finally, with regard to a “cost-pass-through” model, materials and other costs incurred by the Company are passed through directly to the client, and the client agrees to pay a separate negotiated fee for specified services provided by the Company. Arrangements with clients can include the use of any one or more of these pricing models, depending on the client program involved and the location from which the Company services the client. In addition, continued price and cost discussions with clients through the course of the relationship can sometimes result in an accepted change in the pricing model applied. Consequently, the implication and interpretation of the cost and price terms applicable to any particular client relationship can vary across client programs and products, at different periods in time, and based on the locations from which a client may be serviced.

In the course of the Company’s contractual relationships, clients often demand lower costs over time, typically attributable to efficiency gains in service offerings. The Company accomplishes this in various ways, including for example, by shifting production to lower cost regions, redesigning clients’ packaging and supply chains, and strategically sourcing materials. As part of these services and in the normal course of its business, the Company purchases certain commodity types of materials, including, but not limited to, print, packaging, media and labels, to meet client requirements, often in quantities well in excess of those required by any one client. As a result, the Company receives improved pricing on materials. Frequently, the Company also received and retained rebates based on aggregate volumes of purchases or other criteria established by the vendor. The retention of rebates produced a positive impact on the Company’s revenue, and, therefore, also positively affected the Company’s profitability and operating income.

As previously reported in the Company’s Current Report on Form 8-K dated June 9, 2012, the Audit Committee, in consultation with management and the Board of Directors, concluded that the Company’s previously issued financial statements for the fiscal years ended July 31, 2009 through 2011 and the first two quarters of fiscal year 2012, and selected unaudited financial data for fiscal years 2007 and 2008, should no longer be relied upon. Accordingly, the Company’s consolidated financial statements for the fiscal years ended July 31, 2011, 2010 and 2009 have been restated.

Several principal adjustments were made to historic financial statements as a result of the restatement. 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”), which decreased working capital in the period. 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. When, and to the extent that, the Company is able to conclude that the accrued pricing liabilities have been extinguished for less than the amounts accrued, the Company will record the difference as other income. In the course of its business with certain clients, the Company has received releases of claims from such clients which have resulted in the Company concluding that the accrued pricing liabilities for those clients have been extinguished. For the three months ended October 31, 2012 and 2011, no accrued pricing liabilities were extinguished. The remaining accrued pricing liabilities at October 31, 2012 will be derecognized when there is 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.

In addition to the errors described above, the restated financial statements also include other adjustments to correct certain immaterial errors for previously unrecorded adjustments identified in audits of prior years’ financial statements (the “other adjustments”). The previously unrecorded audit adjustments are being recorded as part of the restatement process although none of these adjustments is individually material.

In the tables below, the column labeled “Restatement Pricing Adjustments” sets forth the pricing adjustments and the column labeled “Restatement Other Adjustments” sets forth the other adjustments.

The restatement adjustments decreased revenues by $0.2 million, decreased net income by $24 thousand, and did not change basic and diluted earnings per share, which remained at $0.03 for the three months ended October 31, 2011.

The effects of the restatement adjustments on the Company’s unaudited condensed consolidated statements of operations for the three months ended October 31, 2011 are as follows:


	Three months ended
	October 31, 2011 (Unaudited)
	As			Restatement			Restatement
	Previously			Pricing			Other			As
	Reported			Adjustments			Adjustments			Restated
Net revenue	$	206,151			(417	)		174		$	205,908
Cost of revenue		180,658			—			(221	)		180,437

Gross profit		25,493			(417	)		395			25,471

Operating expenses:
Selling, general and administrative		22,198			—			—			22,198
Amortization of intangible assets		332			—			—			332
Impairment of goodwill and long-lived assets		—			—			—			—
Restructuring, net		755			—			—			755

Total operating expenses		23,285			—			—			23,285

Operating income (loss)		2,208			(417	)		395			2,186

Other income (expense):
Interest income		122			—			—			122
Interest expense		(88	)		—			(2	)		(90	)
Other gains		1,225			—			—			1,225
Equity in losses of affiliates and impairments		(427	)		—			—			(427	)

		832			—			(2	)		830

Income (loss) from continuing operations before income taxes		3,040			(417	)		393			3,016
Income tax expense		1,871			—			—			1,871

Income (loss) from continuing operations		1,169			(417	)		393			1,145
Discontinued operations, net of income taxes:
Income (loss) from discontinued operations		—			—			—			—

Net income (loss)	$	1,169		$	(417	)	$	393		$	1,145

Basic and diluted income (loss) per share:
Income (loss) from continuing operations	$	0.03		$	(0.01	)	$	0.01		$	0.03
Income (loss) from discontinued operations		—			—			—			—

Net income (loss)	$	0.03		$	(0.01	)	$	0.01		$	0.03
Shares used in computing basic loss per share:		43,315			—			—			43,315

Shares used in computing diluted loss per share:		43,318			—			—			43,318

The effects of the restatement adjustments on the Company’s unaudited condensed consolidated statement of cash flows for the three months ended October 31, 2011 are as follows:


	Three months ended
	October 31, 2011 (Unaudited)
	As			Restatement			Restatement
	Previously			Pricing			Other			As
	Reported			Adjustments			Adjustments			Restated
Cash flows from operating activities of continuing operations:
Net income	$	1,169		$	(417	)	$	393		$	1,145
Adjustments to reconcile net income to net cash provided by continuing operations:
Depreciation		3,735			—			13			3,748
Amortization of intangible assets		332			—			—			332
Share-based compensation		882			—			—			882
Non-operating gains, net		(1,225	)		—			—			(1,225	)
Equity in losses of affiliates and impairments		427			—			—			427
Changes in operating assets and liabilities:
Trade accounts receivable, net		(42,894	)		—			—			(42,894	)
Inventories		(18,470	)		—			(219	)		(18,689	)
Prepaid expenses and other current assets		315			—			—			315
Accounts payable, accrued restructuring and accrued expenses		57,000			—			—			57,000
Refundable and accrued income taxes, net		645			—			—			645
Other assets and liabilities		3,304			417			(173	)		3,548

Net cash provided by operating activities of continuing operations		5,220			—			14			5,234

Cash flows from investing activities of continuing operations:
Additions to property and equipment		(1,750	)		—			—			(1,750	)
Investments in affiliates		(1,052	)		—			—			(1,052	)

Net cash used in investing activities of continuing operations		(2,802	)		—			—			(2,802	)

Cash flows from financing activities of continuing operations:
Repayments on capital lease obligations		(15	)		—			(14	)		(29	)
Proceeds from issuance of common stock		29			—			—			29
Repurchase of common stock		(173	)		—			—			(173	)

Net cash used in financing activities of continuing operations		(159	)		—			(14	)		(173	)

Cash flows from discontinued operations:
Operating cash flows		(386	)		—			—			(386	)

Net cash used in discontinued operations		(386	)		—			—			(386	)

Net effect of exchange rate changes on cash and cash equivalents		(1,572	)		—			—			(1,572	)

Net increase in cash and cash equivalents		301			—			—			301
Cash and cash equivalents at beginning of year		111,225			—			—			111,225

Cash and cash equivalents at end of year	$	111,526		$	—		$	—		$	111,526