NOTE 10: Income Taxes

Income (loss) before income taxes is derived from (in thousands):


	Year ended

	October 28, 2012			October 30, 2011		October 31, 2010


U.S. Domestic	$	(18,008	)	$	3,511	$	(38,419	)
International, principally Europe		6,796			11,770		4,658

	$	(11,212	)	$	15,281	$	(33,761	)

Income tax expense (benefit) by taxing jurisdiction consists of (in thousands):


	Year ended

	October 28, 2012			October 30, 2011			October 31, 2010


Current:
U.S. Federal	$	(558	)	$	991		$	(8,728	)
State and local		75			(528	)		216
International, principally Europe		1,068			4,122			3,875

	$	585		$	4,585		$	(4,637	)

Deferred:
U.S. Federal	$	-		$	-		$	54,904
State and local		-			(2,500	)		13,160
International, principally Europe		1,806			(2,433	)		(813	)

		1,806			(4,933	)		67,251

	$	2,391		$	(348	)	$	62,614

The difference between the income tax provision (benefit) on income (loss) and the amount computed at the U.S. federal statutory rate is due to (in thousands):


	Year ended

	October 28, 2012			October 30, 2011			October 31, 2010


U.S. federal statutory rate	$	(3,924	)	$	5,349		$	(11,816	)
State income tax, net of US federal tax benefits		(95	)		495			11,479
Income from international sources		2,127			5,312			2,832
Foreign permanent differences		(286	)		841			1,246
International tax rate differentials		98			(1,274	)		(589	)
Foreign tax credit		-			(1,857	)		(3,675	)
General business credits		(2,967	)		(5,363	)		(1,300	)
Meals and entertainment		1,713			2,013			1,742
Other, net		(770	)		1,732			(75	)
Change in valuation allowance for deferred tax assets		6,495			(7,596	)		62,770

	$	2,391		$	(348	)	$	62,614

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and also include operating loss carry forwards. The significant components of the Company’s deferred tax assets and liabilities are as follows (in thousands):


	Year ended

	October 28, 2012			October 30, 2011


Deferred tax assets:
Net operating loss carryforwards	$	35,163		$	22,488
U.S. federal tax credit carryforwards		20,018			15,781
Purchased intangible assets		15,683			16,274
Deferred income		13,809			23,073
Compensation accruals		7,949			7,791
Accelerated tax depreciation and amortization		1,538			369
Other accruals, reserves and allowances		519			1,686
Other, net		5,585			8,279

Total deferred tax assets		100,264			95,741
Less valuation allowance		(82,952	)		(76,374	)

Deferred tax assets, net	$	17,312		$	19,367


	Year ended

	October 28, 2012			October 30, 2011


Deferred tax liabilities:
Unremitted earnings from foreign subsidiaries	$	8,974		$	8,833
Software development costs		891			718
Other, net		5,139			5,681

Total deferred tax liabilities		15,004			15,232

Net deferred tax asset	$	2,308		$	4,135

Balance sheet classification
Current assets	$	1,321		$	3,382
Non-current assets		6,019			6,461
Current liabilities		(2,273	)		(2,216	)
Non-current liabilities		(2,759	)		(3,492	)

Net deferred tax asset	$	2,308		$	4,135

Current deferred tax assets are included in Other Current Assets and current deferred tax liabilities are included in Accrued Insurance and Other in the consolidated balance sheet.

At October 28, 2012, the Company has available unused U.S. federal net operating loss (NOL) carry forwards of $63.4 million, U.S. state NOL carry forwards of $188.6 million, and international NOL carry forwards of $27.6 million. As of October 28, 2012, the U.S. federal NOL carry forwards can be carried forward through 2032, the U.S. state NOL carry forwards expire at various dates through 2032, and the international NOL carry forwards expire at various dates with some indefinite. The Company expects the temporary differences associated with deferred income to result in additional NOL carry forwards that, along with the rest of the net deferred tax assets, will be primarily dependent upon future taxable income for realization.

A valuation allowance has been recognized due to the uncertainty of realization of the loss carry forwards and other deferred tax assets, primarily because beginning in fiscal year 2010 the Company’s cumulative U.S. domestic and certain non-US results for each three-year period were a loss. Accordingly, the Company recorded a full valuation allowance against U.S. domestic and certain non-U.S. deferred tax assets as a non-cash charge to income tax expense. The cumulative loss continued in fiscal years 2011 and 2012 so the Company maintained a full valuation allowance against its U.S. domestic and certain non-U.S. deferred tax assets resulting in a total valuation allowance of $83.0 million and $76.4 million for fiscal 2012 and fiscal 2011, respectively. In reaching this conclusion, the Company considered the U.S. domestic demand for contingent staffing, software systems and other services and a decline in recent operating results which led to operating losses causing the Company to be in a three-year cumulative loss position. Management believes that the remaining deferred tax assets, primarily related to international locations, are more likely than not to be realized based upon consideration of all positive and negative evidence, including scheduled reversal of deferred tax liabilities and tax planning strategies determined on a jurisdiction by jurisdiction basis.

At October 28, 2012, the undistributed earnings of the Company’s non-U.S. subsidiaries are not intended to be permanently invested outside of the U.S., therefore, U.S. deferred taxes have been provided on the unremitted earnings.

The Company recognizes income tax benefits for tax positions determined more likely than not to be sustained upon examination, based on the technical merits of the positions. The following table sets forth the change in the accrual for uncertain tax positions, excluding interest and penalties (in thousands):


	Year ended
	October 28, 2012			October 30, 2011
Balance, beginning of year	$	10,287		$	9,601
Increase related to current year tax provisions		1,069			710
Lapse of statute of limitations		(284	)		(24	)

	$	11,072		$	10,287

Of the total unrecognized tax benefits, at October 28, 2012 and October 30, 2011, approximately $5.9 million and $5.7 million, respectively, would affect the Company’s effective income tax rate, if and when recognized in future years. The amount accrued for related potential interest and penalties at October 28, 2012 and October 30, 2011 was $2.5 million and $2.0 million, respectively. The Company does not currently anticipate that its existing reserves related to uncertain tax positions as of October 28, 2012 will significantly increase or decrease in subsequent periods; however, various events could cause the Company’s current expectations to change in the future.

The Company is subject to taxation at the federal, state and local level in the U.S. and in various international jurisdictions. With few exceptions, the Company is generally no longer subject to examination by the U.S. federal, state, local or non-U.S. income tax authorities for years before fiscal 2004. The Company is currently under examination by the Canada Revenue Authority for tax years 2007-2010.

The following describes the open tax years, by major tax jurisdiction, as of October 28, 2012:



United States – Federal		2004-present

United States – State		2004-present

Canada		2006-present

Germany		2006-present

United Kingdom		2006-present