Black Box Corporation 10-Q/A
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 29, 2007
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 0-18706
Black Box Corporation
(Exact name of registrant as specified in its charter)
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| Delaware
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95-3086563 |
| (State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.) |
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| 1000 Park Drive, Lawrence, Pennsylvania
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15055 |
| (Address of principal executive offices)
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(Zip Code) |
Registrant’s telephone number, including area code: 724-746-5500
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. þ Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one):
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). o Yes þ No
As of February 1, 2008, there were 17,706,305 shares of common stock, par value $.001 (the “common
stock”), outstanding.
BLACK BOX CORPORATION
FOR THE QUARTER ENDED DECEMBER 29, 2007
INDEX
2
EXPLANATORY NOTE
In this Quarterly Report on Form 10-Q/A for the quarter ended December 29, 2007 (“Form 10-Q/A”),
Black Box Corporation (“Black Box” or the “Company”) is restating its Consolidated Balance Sheets
as of December 29, 2007, Consolidated Statements of Income for the three (3) and nine (9) month
periods ended December 29, 2007 and Consolidated Statements of Cash Flows for the nine (9) month
period ended December 29, 2007 and the related Notes to the Consolidated Financial Statements.
This Form 10-Q/A also includes the amendment of “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” presented in the Company’s Quarterly Report on Form 10-Q for
the quarter ended December 29, 2007 (the “3Q08 Form 10-Q”) as it relates to the three (3) and nine
(9) month periods ended December 29, 2007. All restated information identified above is
collectively referred to as the “Restatement.” References herein to “Fiscal Year” or “Fiscal” mean
the Company’s Fiscal Year ended March 31 for the year referenced. All dollar amounts in this Form
10-Q/A are presented in thousands except per share amounts. The Restatement reflects an adjustment
to reverse a pre-tax charge of $4,687 of previously-recognized non-cash stock-based compensation
expense relating to the Company’s valuation methodologies for certain stock option transactions
that occurred during the third quarter of Fiscal 2008, the nature of which is described below.
Nature of Restatement
The Audit Committee (the “Audit Committee”) of the Company’s Board of Directors (the “Board”)
completed its previously-disclosed independent review of the Company’s historical stock option
granting practices as more fully described in the “Explanatory Note” preceding Part I, Item 1 of
the Company’s most recent Annual Report on Form 10-K as filed with the Securities and Exchange
Commission (“SEC”) for the fiscal year ended March 31, 2007 (the “Form 10-K”). Please see the Form
10-K for more information regarding the Audit Committee’s review and related matters. Following
the completion of this review, the Company determined that certain stock option grants which were
originally issued with exercise prices that were below fair market value for income tax purposes,
which vested or may vest after December 31, 2004 and which remained outstanding (i.e., unexercised)
as of December 31, 2005, were subject to adverse income taxation under Section 409A
(“Section 409A”) of the Internal Revenue Code of 1986, as amended (the “Code”). For purposes of
this Form 10-Q/A, these below-fair market value stock option grants are referred to as “Affected
Stock Option Grants.” Under Section 409A, individuals who hold Affected Stock Option Grants may be
subject to a 20% federal income tax and an interest penalty tax in addition to the regular income
tax liability plus interest on the value of these stock option grants at the time of vesting (not
exercise).
During the third quarter of Fiscal 2008, the Company conducted a tender offer to current
non-officer employees subject to taxation in the United States who held such Affected Stock Option
Grants that afforded those employees the opportunity to avoid unfavorable tax consequences under
Section 409A. The provisions of the tender offer amended each Affected Stock Option Grant to
increase the original exercise price to the lower of: (i) the fair market value of the common stock
on the corrected measurement date (as determined for tax purposes) or (ii) the fair market value of
the common stock on the trading day immediately following the expiration of the tender offer
(December 19, 2007), provided that the new exercise price was in no event lower than the original
exercise price of the stock option grant. Additionally, and as part of the tender offer, the
Company offered current non-officer employees the right to receive a cash payment equal to the
increase, if any, in the exercise price of the Affected Stock Option Grant.
In instances where the original exercise price of a stock option grant was less than the new
exercise price (as determined above), the Company increased the original exercise price to the new
exercise price (“Amended Stock Option Grant”) and paid a cash bonus to the employee. The Company
accounted for the impact of the Amended Stock Option Grant as a stock option modification under
Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-Based Payment”
(“SFAS 123R”). As a result of the modification and the partial cash settlement, the Company
recognized $250 of additional stock-based compensation expense due to the increase in the fair
market value of these stock option grants that was recorded in Selling, general & administrative
expense within the Company’s Consolidated Statements of Income.
In instances where the current exercise price of a stock option grant was greater than the new
exercise price, the original stock option grant was canceled and immediately replaced with a new
stock option grant under the 1992 Stock Option Plan, as amended (the “Employee Plan”), that had the
same terms as the canceled stock option grant, including the same exercise price per share and no
loss of vesting or change to the expiration date of the stock option grant term, but with a new
grant date (“Cancellation and New Stock Option Grant”). The Company accounted for each
Cancellation and New Stock Option Grant as two separate transactions (i.e., the cancellation of the
original stock option grant and the issuance of a new stock option grant) and computed a fair
market value for the new stock option grant on the new grant date determined in accordance with the
provisions of SFAS 123R. As a result, the Company recognized a pre-tax charge of $4,687 of
non-cash stock-based compensation expense equal to the fair market value of the new stock option
grant on the new grant date (December 19, 2007) that was recorded in Selling, general &
administrative expense within the Company’s Consolidated Statements of Income.
3
During the fourth quarter of Fiscal 2008, the Company re-evaluated its valuation methodology for
both the Amended Stock Option Grant and the Cancellation and New Stock Option Grant. The Company’s
valuation methodology (i.e., modification under SFAS 123R) for the Amended Stock Option Grant was
correct. However, the Cancellation and New Stock Option Grant qualifies as a “cancellation of an
award accompanied by the concurrent grant of a replacement award,” as defined in SFAS 123R, which
should have been accounted for as a modification. Under SFAS 123R, incremental compensation cost
is measured as the excess, if any, of the fair market value of the modified award over the fair
market value of the original award immediately before its terms are modified. With respect to the
Cancellation and New Stock Option Grant, there were no changes to any of the terms of the original
stock option grant, thus the Company should have recorded $0 of non-cash stock-based compensation
expense for the third quarter of Fiscal 2008 as compared to a pre-tax charge of $4,687 of non-cash
stock-based compensation that had been previously-recognized.
The table below reflects the impact of the adjustment to reverse a pre-tax charge of $4,687 of
previously-recognized non-cash stock-based compensation expense on the Company’s Consolidated
Statements of Income. As a result of this adjustment, the Company’s projected effective income tax
rate for Fiscal 2008, as of December 29, 2007, decreased from 38.0% to 37.7%. See Note 17 of the
Notes to Consolidated Financial Statements for reference to footnote disclosure that reconciles the
previously-issued financial information to the restated financial information.
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(As |
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Adjust- |
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(As |
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(As |
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Previously |
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Adjust- |
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(As |
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Previously |
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Restated) |
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Reported) |
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Income |
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net of |
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Restated) |
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Reported) |
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Adjust- |
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Diluted |
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Net income |
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Pre-Tax |
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tax |
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Income tax |
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Net income |
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Diluted EPS |
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ment |
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EPS |
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3Q08 |
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$ |
8,286 |
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$ |
4,687 |
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$ |
(1,632 |
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$ |
3,055 |
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$ |
11,341 |
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$ |
0.47 |
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$ |
0.17 |
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$ |
0.64 |
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3QYTD08 |
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27,784 |
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4,687 |
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(1,632 |
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3,055 |
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30,839 |
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1.57 |
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0.17 |
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1.74 |
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This Form 10-Q/A generally does not reflect events that have occurred after February 8, 2008, the
original filing date of the 3Q08 Form 10-Q, or modify or update the disclosures originally
presented in the 3Q08 Form 10-Q except to reflect the effects of the Restatement. Accordingly,
only the following items of the 3Q08 Form 10-Q have been amended and only to the extent necessary
to reflect the Restatement:
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Part I
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Item 1
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Financial Statements (Unaudited) |
Part I
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Item 2
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Part II
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Item 6
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Exhibits |
4
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
BLACK BOX CORPORATION
CONSOLIDATED BALANCE SHEETS
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December 29, 2007 |
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| In thousands, except par value |
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(Unaudited) |
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(As Restated) (1) |
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March 31, 2007* |
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Assets |
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Cash and cash equivalents |
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$ |
20,109 |
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$ |
17,157 |
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Accounts receivable, net of allowance for doubtful accounts of $12,741
and $14,253 |
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179,537 |
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161,733 |
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Inventories, net |
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74,224 |
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72,807 |
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Costs/estimated earnings in excess of billings on uncompleted contracts |
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59,693 |
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61,001 |
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Prepaid and other current assets |
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23,246 |
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31,057 |
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Total current assets |
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356,809 |
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343,755 |
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Property, plant and equipment, net |
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34,413 |
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39,051 |
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Goodwill, net |
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580,211 |
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568,647 |
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Intangibles: |
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Customer relationships, net |
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68,909 |
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68,016 |
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Other intangibles, net |
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31,855 |
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33,258 |
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Other assets |
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21,526 |
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37,364 |
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Total assets |
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$ |
1,093,723 |
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$ |
1,090,091 |
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Liabilities |
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Accounts payable |
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$ |
79,664 |
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$ |
74,727 |
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Accrued compensation and benefits |
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23,321 |
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21,811 |
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Deferred revenue |
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34,611 |
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35,630 |
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Billings in excess of costs/estimated earnings on uncompleted contracts |
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22,012 |
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19,027 |
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Income taxes |
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9,154 |
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13,430 |
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Other liabilities |
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49,558 |
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62,071 |
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Total current liabilities |
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218,320 |
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226,696 |
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Long-term debt |
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219,830 |
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238,194 |
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Other liabilities |
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21,024 |
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25,505 |
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Total liabilities |
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459,174 |
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490,395 |
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Stockholders’ equity |
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Preferred stock authorized 5,000, par value $1.00, none issued |
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Common stock authorized 100,000, par value $.001, 17,683 and 17,527
shares issued and outstanding |
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25 |
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25 |
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Additional paid-in capital |
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444,648 |
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441,283 |
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Retained earnings |
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472,577 |
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450,022 |
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Accumulated other comprehensive income |
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34,335 |
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25,399 |
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Treasury stock, at cost 7,436 and 7,436 shares |
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(317,036 |
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(317,033 |
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Total stockholders’ equity |
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634,549 |
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599,696 |
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Total liabilities and stockholders’ equity |
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$ |
1,093,723 |
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$ |
1,090,091 |
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(1) See Note 10 and 17 of the Notes to the Consolidated Financial Statements
* Derived from audited financial statements
See Notes to the Consolidated Financial Statements
5
BLACK BOX CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
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Three-month period ended |
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Nine-month period ended |
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December 29 and 30, |
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December 29 and 30, |
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| In thousands, except per |
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2007 |
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2007 |
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| share amounts |
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(As Restated) (1) |
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2006 |
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(As Restated) (1) |
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2006 |
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Revenues |
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Hotline products |
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$ |
59,269 |
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$ |
57,770 |
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$ |
175,027 |
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$ |
165,058 |
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On-Site services |
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199,055 |
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207,036 |
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596,218 |
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601,468 |
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Total |
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258,324 |
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264,806 |
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771,245 |
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766,526 |
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Cost of sales |
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Hotline products |
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30,891 |
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29,887 |
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91,710 |
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83,195 |
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On-Site services |
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133,312 |
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138,234 |
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401,895 |
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401,766 |
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Total |
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164,203 |
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168,121 |
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493,605 |
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484,961 |
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Gross profit |
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94,121 |
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96,685 |
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277,640 |
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281,565 |
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Selling, general &
administrative expenses |
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68,522 |
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73,940 |
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208,049 |
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217,741 |
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Intangibles amortization |
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1,382 |
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2,677 |
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5,044 |
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6,114 |
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Operating income |
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24,217 |
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20,068 |
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64,547 |
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57,710 |
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Interest expense (income), net |
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5,780 |
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4,061 |
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15,203 |
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13,222 |
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Other expenses (income), net |
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(16 |
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(122 |
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(156 |
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65 |
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Income before provision for
income taxes |
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18,453 |
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16,129 |
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49,500 |
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44,423 |
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Provision for income taxes |
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7,112 |
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5,636 |
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18,661 |
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15,442 |
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Net income |
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$ |
11,341 |
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$ |
10,493 |
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$ |
30,839 |
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$ |
28,981 |
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Earnings per common share |
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Basic |
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$ |
0.64 |
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$ |
0.60 |
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$ |
1.75 |
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$ |
1.66 |
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Diluted |
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$ |
0.64 |
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$ |
0.59 |
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$ |
1.74 |
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$ |
1.63 |
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Weighted average common
shares outstanding |
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Basic |
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17,683 |
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17,398 |
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17,601 |
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17,451 |
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Diluted |
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17,742 |
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17,780 |
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17,689 |
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17,809 |
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Dividends per share |
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$ |
0.06 |
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$ |
0.06 |
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$ |
0.18 |
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$ |
0.18 |
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(1)
See Note 10 and 17 of the Notes to the Consolidated Financial Statements
See
Notes to the Consolidated Financial Statements
6
BLACK BOX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Nine-month period ended December 29 and 30, |
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2007 |
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| In thousands |
|
(As Restated) (1) |
|
|
2006 |
|
| |
Operating Activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
30,839 |
|
|
$ |
28,981 |
|
Adjustments to reconcile net income to net cash provided
by (used for) operating activities: |
|
|
|
|
|
|
|
|
Intangibles amortization and depreciation |
|
|
13,464 |
|
|
|
15,333 |
|
Loss on sale of property |
|
|
441 |
|
|
|
-- |
|
Deferred taxes |
|
|
4,110 |
|
|
|
(730) |
|
Tax impact from stock options |
|
|
4,320 |
|
|
|
662 |
|
Stock compensation expense |
|
|
2,719 |
|
|
|
7,476 |
|
Change in fair value of interest-rate swap |
|
|
2,021 |
|
|
|
1,308 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
|
(13,493) |
|
|
|
(644) |
|
Inventories, net |
|
|
705 |
|
|
|
(6,629) |
|
All other current assets excluding deferred tax asset |
|
|
9,759 |
|
|
|
707 |
|
Liabilities exclusive of long-term debt |
|
|
(18,149) |
|
|
|
(21,868) |
|
|
|
|
|
|
|
|
Net cash provided by (used for) operating activities |
|
$ |
36,736 |
|
|
$ |
24,596 |
|
|
|
|
|
|
|
|
|
|
Investing Activities |
|
|
|
|
|
|
|
|
Capital expenditures |
|
$ |
(2,412) |
|
|
$ |
(3,475) |
|
Capital disposals |
|
|
86 |
|
|
|
543 |
|
Acquisition of businesses (payments)/recoveries |
|
|
(10,657) |
|
|
|
(132,878) |
|
Prior merger-related (payments)/recoveries |
|
|
(2,196) |
|
|
|
(1,431) |
|
|
|
|
|
|
Net cash provided by (used for) investing activities |
|
$ |
(15,179) |
|
|
$ |
(137,241) |
|
|
|
|
|
|
|
|
|
|
Financing Activities |
|
|
|
|
|
|
|
|
Proceeds from borrowings |
|
$ |
153,275 |
|
|
$ |
314,021 |
|
Repayment of borrowings |
|
|
(172,378) |
|
|
|
(184,946) |
|
Repayment on discounted lease rentals |
|
|
-- |
|
|
|
(27) |
|
Proceeds from exercise of options |
|
|
5,172 |
|
|
|
12,141 |
|
Payment of dividends |
|
|
(3,165) |
|
|
|
(3,157) |
|
Purchase of treasury stock |
|
|
(3) |
|
|
|
(20,206) |
|
|
|
|
|
|
Net cash provided by (used for) financing activities |
|
$ |
(17,099) |
|
|
$ |
117,826 |
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange impact on cash |
|
$ |
(1,506) |
|
|
$ |
(1,026) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase / (decrease) in cash and cash equivalents |
|
$ |
2,952 |
|
|
$ |
4,155 |
|
Cash and cash equivalents at beginning of period |
|
$ |
17,157 |
|
|
$ |
11,207 |
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
20,109 |
|
|
$ |
15,362 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow: |
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
13,505 |
|
|
$ |
11,264 |
|
Cash paid for income taxes |
|
|
14,535 |
|
|
|
13,850 |
|
Non-cash financing activities: |
|
|
|
|
|
|
|
|
Dividends payable |
|
|
1,061 |
|
|
|
1,047 |
|
Capital leases |
|
|
669 |
|
|
|
349 |
|
| |
(1)
See Note 10 and 17 of the Notes to the Consolidated Financial Statements
See Notes to the Consolidated Financial Statements
7
BLACK BOX CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1: Basis of Presentation
The accompanying unaudited interim consolidated financial statements of Black Box Corporation
(“Black Box” or the “Company”) have been prepared in accordance with accounting principles
generally accepted in the United States and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and footnotes required by
accounting principles generally accepted in the United States for complete financial statements.
The Company believes that these consolidated financial statements reflect all normal, recurring
adjustments needed to present fairly the Company’s results for the interim periods presented. The
results as of and for interim periods may not be indicative of the results of operations for any
other interim period or for the full year. These financial statements should be read in
conjunction with the financial statements and notes thereto included in the Company’s most recent
Annual Report on Form 10-K as filed with the Securities and Exchange Commission (“SEC”) for the
fiscal year ended March 31, 2007 (the “Form 10-K”).
The Company’s fiscal year ends on March 31. The fiscal quarters consist of 13 weeks and end on the
Saturday nearest each calendar quarter end. The actual ending dates for the periods presented in
these Notes to the Consolidated Financial Statements as of December 31, 2007 and 2006 were December
29, 2007 and December 30, 2006. References to “Fiscal Year” or “Fiscal” mean the Company’s fiscal
year ended March 31 for the year referenced. All references to dollar amounts herein are presented
in thousands, except per share amounts.
Principles of Consolidation
The consolidated financial statements include the accounts of the parent company and its
subsidiaries. All significant intercompany accounts and transactions have been eliminated in
consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America 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 revenues and expenses during
the reporting period. Significant estimates in these financial statements include allowances for
doubtful accounts receivable, sales returns, net realizable value of inventories, loss
contingencies, warranty reserves, intangible assets and goodwill. Actual results could differ from
those estimates. Management believes the estimates made are reasonable.
Reclassification
Certain reclassifications have been made to the financial statements for prior periods in order to
conform to the presentation for the three (3) and nine (9) month periods ended December 31, 2007.
Note 2: Significant Accounting Policies / Recent Accounting Pronouncements
Significant Accounting Policies
The significant accounting policies used in the preparation of the Company’s Consolidated Financial
Statements are disclosed in Note 2 of the Notes to the Consolidated Financial Statements within the
Form 10-K. Additional significant accounting policies adopted during Fiscal 2008 are disclosed
below.
Uncertainty in Income Taxes:
The Company requires that the realization of an uncertain income tax position must be “more likely
than not” (i.e., greater than 50% likelihood of receiving a benefit) before it can be recognized in
the financial statements. The benefit to be recorded in the financial statements is the amount most
likely to be realized assuming a review by tax authorities having all relevant information and
applying current conventions. The Company includes interest and penalties related to uncertain tax
positions within the Provision for income taxes within the Company’s Consolidated Statements of
Income.
8
Recent Accounting Pronouncements
Business Combinations
In December, 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial
Accounting Standards (“SFAS”) No. 141 (revised 2007), “Business Combinations” (“SFAS 141(R)”).
SFAS 141(R) retains the fundamental requirements of the original pronouncement requiring that the
purchase method be used for all business combinations. SFAS 141(R) defines the acquirer as the
entity that obtains control of one or more businesses in the business combination, establishes the
acquisition date as the date that the acquirer
achieves control and requires the acquirer to recognize the assets acquired, liabilities assumed
and any non-controlling interest at their fair values as of the acquisition date. SFAS 141(R)
requires, among other things, that acquisition-related costs be recognized separately from the
acquisition. For the Company, SFAS 141(R) applies prospectively to business combinations for which
the acquisition date is on or after April 1, 2009.
Fair Value Option for Financial Assets and Financial Liabilities
In February, 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and
Financial Liabilities—Including an Amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159
permits an entity to elect to measure eligible items at fair value (“fair value option”) including
many financial instruments. The provisions of SFAS 159 are effective for the Company as of April 1,
2008. If the fair value option is elected, the Company will report unrealized gains and losses on
items for which the fair value option has been elected in earnings at each subsequent reporting
date. Upfront costs and fees related to items for which the fair value option is elected shall be
recognized in earnings as incurred and not deferred. The fair value option may be applied for a
single eligible item without electing it for other identical items, with certain exceptions, and
must be applied to the entire eligible item and not to a portion of the eligible item. The Company
is currently evaluating the irrevocable election of the fair value option pursuant to SFAS 159.
Fair Value Measurements
In September, 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which
defines fair value, establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value measurements. SFAS 157 is effective
for the Company beginning on April 1, 2008. The requirements of SFAS 157 will be applied
prospectively except for certain derivative instruments that would be adjusted through the opening
balance of retained earnings in the period of adoption. In November 2007, the FASB agreed to a
one-year deferral of the effective date of SFAS 157 for all nonfinancial assets and liabilities,
except those that are recognized or disclosed at fair value in the financial statements on a
recurring basis. The Company is evaluating the impact of the adoption of SFAS 157 on its
consolidated financial statements.
Uncertainty in Income Taxes
In July, 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes” (“FIN 48”). FIN 48 requires that realization of an uncertain income tax position must be
“more likely than not” (i.e., greater than 50% likelihood of receiving a benefit) before it can be
recognized in the financial statements. Further, FIN 48 prescribes the benefit to be recorded in
the financial statements as the amount most likely to be realized assuming a review by tax
authorities having all relevant information and applying current conventions. FIN 48 also clarifies
the financial statement classification of tax-related penalties and interest and sets forth new
disclosures regarding unrecognized tax benefits. FIN 48 is effective for the next fiscal year
beginning after December 15, 2006. The Company adopted FIN 48 as of April 1, 2007, as required. The
adoption of FIN 48 resulted in a decrease to beginning retained earnings of $5,110 representing the
cumulative effect adjustment. The adjustment to beginning retained earnings is summarized in the
following table. See “Significant Accounting Policies” within this Note 2 and Note 14 for further
reference.
| |
|
|
|
|
| |
|
|
Retained Earnings |
|
| |
Balance as of April 1, 2007 |
|
$ |
450,022 |
|
Adjustment for adoption of FIN 48 |
|
|
(5,110) |
|
|
|
|
Balance as currently reported |
|
$ |
444,912 |
|
| |
Definition of Settlement in FIN 48
In May, 2007, the FASB issued staff position No. FIN 48-1, “Definition of Settlement in FASB
Interpretation No. 48” (“FSP FIN 48-1”) which amended FIN 48 to provide guidance about how an
enterprise should determine whether a tax position is effectively settled for the purpose of
recognizing previously unrecognized tax benefits. Under FSP FIN 48-1, a tax position could be
effectively settled on completion of an examination by a taxing authority. The Company adopted FSP
FIN 48-1 in conjunction with adoption of FIN 48 as of April 1, 2007. The adoption of FSP FIN 48-1
did not have a material impact on the Company’s consolidated financial statements.
Note 3: Inventories
The Company’s inventories consist of the following:
| |
|
|
|
|
|
|
|
|
| |
|
|
December 31, 2007 |
|
|
|
March 31, 2007 |
|
| |
Raw materials |
|
$ |
1,794 |
|
|
$ |
1,774 |
|
Finished goods |
|
|
93,572 |
|
|
|
93,794 |
|
|
|
|
|
|
Subtotal |
|
$ |
95,366 |
|
|
$ |
95,568 |
|
Excess and obsolete inventory reserves |
|
|
(21,142) |
|
|
|
(22,761) |
|
|
|
|
|
|
Inventory, net |
|
$ |
74,224 |
|
|
$ |
72,807 |
|
| |
9
Note 4: Goodwill
The following table summarizes changes to goodwill at the Company’s reporting units during the
period.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
North America |
|
|
Europe |
|
|
All Other |
|
|
Total |
|
| |
Balance as of March 31, 2007 |
|
$ |
493,462 |
|
|
$ |
73,065 |
|
|
$ |
2,120 |
|
|
$ |
568,647 |
|
Currency translation |
|
|
(13 |
) |
|
|
4,971 |
|
|
|
59 |
|
|
|
5,017 |
|
Current period acquisitions (See Note 8) |
|
|
5,481 |
|
|
|
-- |
|
|
|
-- |
|
|
|
5,481 |
|
Prior period acquisitions |
|
|
1,016 |
|
|
|
-- |
|
|
|
50 |
|
|
|
1,066 |
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2007 |
|
$ |
499,946 |
|
|
$ |
78,036 |
|
|
$ |
2,229 |
|
|
$ |
580,211 |
|
| |
As disclosed in the Form 10-K, the Company’s Goodwill is subject to, at a minimum, an annual
impairment assessment of its carrying value. Goodwill impairment is deemed to exist if the net book
value of a reporting unit exceeds its estimated fair value. Estimated fair values of the reporting
units are estimated using an earnings model and a discounted cash flow valuation model. The
discounted cash flow model incorporates the Company’s estimates of future cash flows, allocations
of certain assets and cash flows among reporting units, future growth rates and management’s
judgment regarding the applicable discount rates used to discount those estimated cash flows. If
the Company’s estimates and assumptions used in the discounted cash flow valuation model should
prove inaccurate at some future date, the results of operations for the period could be materially
affected by an impairment of goodwill. The Company recently conducted its annual impairment
assessment during the third quarter of Fiscal 2008, and concluded that no impairment existed.
Note 5: Intangible Assets
The following table summarizes the gross carrying amount, accumulated amortization and net carrying
amount by intangible asset class:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, 2007 |
|
|
March 31, 2007 |
|
| |
|
|
Gross |
|
|
|
|
|
|
|
Net |
|
|
|
Gross |
|
|
|
|
|
|
|
Net |
|
| |
|
|
Carrying |
|
|
|
Accum. |
|
|
|
Carrying |
|
|
|
Carrying |
|
|
|
Accum. |
|
|
|
Carrying |
|
| |
|
|
Amount |
|
|
|
Amort. |
|
|
|
Amount |
|
|
|
Amount |
|
|
|
Amort. |
|
|
|
Amount |
|
| |
Definite-lived |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-compete agreements |
|
$ |
8,693 |
|
|
$ |
4,577 |
|
|
$ |
4,116 |
|
|
$ |
7,963 |
|
|
$ |
3,414 |
|
|
$ |
4,549 |
|
Customer relationships |
|
|
75,824 |
|
|
|
6,915 |
|
|
|
68,909 |
|
|
|
71,989 |
|
|
|
3,973 |
|
|
|
68,016 |
|
Acquired backlog |
|
|
10,862 |
|
|
|
10,862 |
|
|
|
-- |
|
|
|
10,783 |
|
|
|
9,813 |
|
|
|
970 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
95,379 |
|
|
$ |
22,354 |
|
|
$ |
73,025 |
|
|
$ |
90,735 |
|
|
$ |
17,200 |
|
|
$ |
73,535 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks |
|
|
35,992 |
|
|
|
8,253 |
|
|
|
27,739 |
|
|
|
35,992 |
|
|
|
8,253 |
|
|
|
27,739 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
131,371 |
|
|
$ |
30,607 |
|
|
$ |
100,764 |
|
|
$ |
126,727 |
|
|
$ |
25,453 |
|
|
$ |
101,274 |
|
| |
The Company’s indefinite-lived intangible assets consist solely of the Company’s trademark
portfolio obtained through business acquisitions. The Company’s definite-lived intangible assets
are comprised of employee non-compete contracts, backlog and customer relationships also obtained
through business acquisitions.
The following table summarizes the changes to carrying amounts of intangible assets during the
period:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
Non-Competes |
|
|
|
Customer |
|
|
|
|
|
| |
|
|
Trademarks |
|
|
|
and Backlog |
|
|
|
Relationships |
|
|
|
Total |
|
| |
Balance at March 31, 2007 |
|
$ |
27,739 |
|
|
$ |
5,519 |
|
|
$ |
68,016 |
|
|
$ |
101,274 |
|
Amortization expense |
|
|
-- |
|
|
|
(2,102) |
|
|
|
(2,942) |
|
|
|
(5,044) |
|
Currency translation |
|
|
-- |
|
|
|
20 |
|
|
|
-- |
|
|
|
20 |
|
Current period acquisitions (See Note 8) |
|
|
-- |
|
|
|
795 |
|
|
|
4,883 |
|
|
|
5,678 |
|
Prior period acquisitions |
|
|
-- |
|
|
|
(116) |
|
|
|
(1,048) |
|
|
|
(1,164) |
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007 |
|
$ |
27,739 |
|
|
$ |
4,116 |
|
|
$ |
68,909 |
|
|
$ |
100,764 |
|
| |
10
During the three (3) month periods ended December 31, 2007 and 2006, the Company recognized
intangible amortization expense of $1,382 and $2,677, respectively. During the nine (9) month
periods ended December 31, 2007 and 2006, the Company recognized intangible amortization expense of
$5,044 and $6,114, respectively.
The following table details the estimated intangible amortization expense during the remainder of
Fiscal 2008, each of the succeeding five fiscal years and the periods thereafter. These estimates
are based on the carrying amounts of intangible assets as of December 31, 2007 that are subject to
change pending the outcome of purchase accounting related to certain acquisitions:
|
|
|
|
|
| Fiscal years ending March 31, |
|
|
|
|
| |
2008 |
|
$ |
1,400 |
|
2009 |
|
|
5,533 |
|
2010 |
|
|
5,398 |
|
2011 |
|
|
4,825 |
|
2012 |
|
|
4,475 |
|
2013 |
|
|
4,267 |
|
Thereafter |
|
|
47,127 |
|
|
|
|
|
Total |
|
$ |
73,025 |
|
| |
Note 6: Indebtedness
The Company’s long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
| |
|
|
December 31, 2007 |
|
|
|
March 31, 2007 |
|
| |
Revolving credit agreement |
|
$ |
218,380 |
|
|
$ |
236,715 |
|
Capital lease obligations |
|
|
2,330 |
|
|
|
2,123 |
|
Other |
|
|
28 |
|
|
|
42 |
|
|
|
|
|
|
Total debt |
|
$ |
220,738 |
|
|
$ |
238,880 |
|
Less: current portion (included in Other liabilities) |
|
|
(908) |
|
|
|
(686) |
|
|
|
|
|
|
Long-term debt |
|
$ |
219,830 |
|
|
$ |
238,194 |
|
| |
Revolving Credit Agreement - On March 28, 2006, the Company entered into a Second Amendment to the
Second Amended and Restated Credit Agreement dated January 24, 2005, as amended February 17, 2005
(collectively, the “Credit Agreement”) with Citizens Bank of Pennsylvania, as agent, and a group of
lenders. The Credit Agreement expires on March 28, 2011. Borrowings under the Credit Agreement are
permitted up to a maximum amount of $310,000, which includes up to $15,000 of swing line loans and
$25,000 of letters of credit. The Credit Agreement may be increased by the Company up to an
additional $90,000 with the approval of the lenders and may be unilaterally and permanently reduced
by the Company to not less than the then outstanding amount of all borrowings. Interest on
outstanding indebtedness under the Credit Agreement accrues, at the Company’s option, at a rate
based on either: (a) the greater of (i) the prime rate per annum of the agent then in effect and
(ii) 0.50% plus the rate per annum announced by the Federal Reserve Bank of New York as being the
weighted average of the rates on overnight Federal funds transactions arranged by Federal funds
brokers on the previous trading day or (b) a rate per annum equal to the LIBOR rate plus 0.75% to
1.25% (determined by a leverage ratio based on the Company’s EBITDA). The Credit Agreement requires
the Company to maintain compliance with certain non-financial and financial covenants such as
minimum net worth, leverage and fixed charge coverage ratios. As of December 31, 2007, the Company
was in compliance with all financial covenants under the Credit Agreement.
On January 30, 2008, the Company entered into a Third Amended and Restated Credit Agreement dated
January 30, 2008 (the “New Credit Agreement”) with Citizens Bank of Pennsylvania, as agent, and a
group of lenders. The New Credit Agreement replaces the Credit Agreement. See Note 16 of the
Notes to the Consolidated Financial Statements for details of the New Credit Agreement.
The maximum amount of debt outstanding under the Credit Agreement, the weighted average balance
outstanding under the Credit Agreement and the weighted average interest-rate on all outstanding
debt for the three (3) month period ended December 31, 2007 was $256,830, $245,209 and 6.31%,
respectively, compared to $276,985, $266,763 and 6.25%, respectively, for the three (3) month
period ended December 31, 2006. The maximum amount of debt outstanding under the Credit Agreement,
the weighted average balance outstanding under the Credit Agreement and the weighted average
interest-rate on all outstanding debt for the nine (9) month period ended December 31, 2007 was
$270,825, $249,036 and 6.51%, respectively, compared to $284,470, $251,153 and 6.20%, respectively,
for the nine (9) month period ended December 31, 2006.
11
Capital
lease obligations - The capital lease obligations are primarily for equipment. The lease
agreements have remaining terms ranging from less than one year to five years with interest-rates
ranging from 3.83% to 11.73%.
Other - Other debt is comprised of various bank and third party loans secured by specific pieces of
equipment and real property. The loans have remaining terms of less than one to three years with
interest-rates ranging from 0.0% to 5.9%.
Unused available borrowings - As of December 31, 2007, the Company had $5,234 outstanding in
letters of credit and $86,386 available under the Credit Agreement.
Note 7: Derivative Instruments and Hedging Activities
Foreign Currency Forward Contracts:
The Company enters into foreign currency forward contracts to hedge exposure to variability in
expected fluctuations in foreign currencies. As of December 31, 2007, the Company had open
contracts in Australian and Canadian dollars, Danish krone, Euros, Mexican pesos, Norwegian kroner,
Pounds sterling, Swedish krona, Swiss francs and Japanese yen which have been designated as cash
flow hedges. These contracts had a notional amount of approximately $74,523 and a fair value of
$75,307 and mature within the next fifteen months.
As of December 31, 2007, an unrecognized loss of $17 ($10 net of tax) on all open foreign currency
forward contracts is included within the Company’s Consolidated Balance Sheets as a component of
Other comprehensive income (“OCI”). This unrecognized loss is expected to be credited to earnings
over the life of the maturing contracts as the hedged forecasted transaction occurs and it is
expected that the gain will be offset by currency losses on the items being hedged.
During the three (3) month periods ended December 31, 2007 and 2006, the Company recognized gains
of $251 ($153 net of tax) and $17, respectively, on matured contracts. During the nine (9) month
periods ended December 31, 2007 and 2006, the Company recognized gains of $76 ($45 net of tax) and
$309, respectively, on matured contracts. There was no hedge ineffectiveness for the nine (9) month
periods ended December 31, 2007 and 2006.
Interest-rate Swap:
To mitigate the risk of interest-rate fluctuations associated with the Company’s variable rate
long-term debt, the Company has implemented an interest-rate risk management strategy that
incorporates the use of derivative instruments to minimize significant unplanned fluctuations in
earnings caused by interest-rate volatility. The Company’s goal is to manage interest-rate
sensitivity by modifying the re-pricing characteristics of certain balance sheet liabilities so
that the net-interest margin is not, on a material basis, adversely affected by the movements in
interest-rates.
On July 26, 2006, the Company entered into a five-year interest-rate swap (“interest-rate swap”)
which has been used to effectively convert a portion of the Company’s variable rate debt to fixed
rate. The interest-rate swap has a notional value of $100,000 reducing to $50,000 after three
years and does not qualify for hedge accounting. The Company recognizes gains/losses related to the
change in fair value of the interest-rate swap which is included in Interest expense (income)
within the Company’s Consolidated Statements of Income. During the three (3) month periods ended
December 31, 2007 and 2006, the Company recognized a loss of $1,583 and a gain of $87,
respectively, related to the change in fair value of the interest-rate swap. During the nine (9)
month periods ended December 31, 2007 and 2006, the Company recognized losses of $2,021 and $1,308,
respectively, related to the change in fair value of the interest-rate swap. As of December 31,
2007, the Company has recorded a liability of $3,756 related to the cumulative change in fair value
of the interest-rate swap which is a long-term liability recorded in Other liabilities within the
Company’s Consolidated Balance Sheets.
Note 8: Acquisitions
Fiscal 2008 acquisitions:
On October 16, 2007, the Company announced the acquisition of B & C Telephone, Inc. (“B&C”), a
privately-held company based out of Spokane, Washington. B&C has an active customer base which
includes commercial, financial, healthcare and various government agency accounts. In connection
with the B&C acquisition, the Company has made a preliminary allocation to goodwill and
definite-lived intangible assets, respectively. The definite-lived intangible assets recorded
represent the estimated fair market value of customer relationships and non-compete agreements.
The Company estimates that the definite-lived intangibles are to be amortized over a period of five
to 20 years. The acquisition of B&C did not have a material impact on the Company’s consolidated
financial statements.
12
Fiscal 2007 acquisitions:
During the fourth quarter of Fiscal 2007, the Company acquired ADS Telecom, Inc. (“ADS”), a
privately-held company based out of Orlando, Florida. ADS has an active customer base which
includes commercial, financial, healthcare and various government agency accounts. In connection
with the ADS acquisition, the Company has made a preliminary allocation to goodwill and
definite-lived intangible assets, respectively. The definite-lived intangible assets recorded
represent the estimated fair market value of customer relationships and non-compete agreements. The
Company estimates that the definite-lived intangibles are to be amortized over a period of five to
20 years.
During the third quarter of Fiscal 2007, the Company acquired Nortech Telecommunications Inc.
(“NTI”), a privately-held company based out of Chicago, Illinois. In connection with the NTI
acquisition, the Company has made allocations to goodwill and definite-lived intangible assets,
respectively. The definite-lived intangible assets recorded represent the estimated fair market
value of customer relationships and non-compete agreements. The Company estimates that the
definite-lived intangibles are to be amortized over a period of five to 20 years.
The acquisitions of ADS and NTI, taken individually and in the aggregate, did not have a material
impact on the Company’s consolidated financial statements.
During the first quarter of Fiscal 2007, the Company acquired the privately-held USA Commercial and
Government and Canadian operations of NextiraOne, LLC (“NextiraOne”). The acquired operations
service commercial and various government agency clients. In connection with the NextiraOne
acquisition, the Company has allocated $73,995 and $24,100 to goodwill and definite-lived
intangible assets, respectively. The definite-lived intangible assets recorded represent the fair
market value of customer relationships and non-compete agreements. These definite-lived intangibles
are to be amortized over a period of one to 20 years.
Also, during first quarter of Fiscal 2007, the Company acquired Nu-Vision Technologies, Inc. and
Nu-Vision Technologies, LLC (collectively referred to as “NUVT”). The acquired operations provide
planning, installation, monitoring and maintenance services for voice and data network systems.
NUVT has an active customer base, which includes commercial, education and various government
agency accounts. In connection with the NUVT acquisition, the Company has allocated $15,058 and
$18,601 to goodwill and definite-lived intangible assets, respectively. The definite-lived
intangible assets recorded represent the fair market value of acquired backlog, customer
relationships and non-compete agreements. These definite-lived intangibles are to be amortized over
a period of one to 20 years.
As disclosed above, the allocation of the purchase price for B&C and ADS is based on preliminary
estimates of the fair values of certain assets acquired and liabilities assumed as of the date of
the acquisition. Management is currently assessing the fair values of the tangible and intangible
assets acquired and liabilities assumed. The preliminary allocations of purchase price are
dependant upon certain estimates and assumptions, which are preliminary and may vary from the
amounts reported herein.
The results of operations of B&C, ADS, NTI, NextiraOne and NUVT are included within the Company’s
Consolidated Statements of Income beginning on their respective acquisition dates.
Note 9: Restructuring
In connection with acquisitions during Fiscal 2007, the Company has incurred costs related to
facility consolidations, such as idle facility rent obligations and the write-off of leasehold
improvements, and employee severance in an attempt to right-size the organization and more
appropriately align the expense structure with anticipated revenues and changing market demand for
its solutions and services. The majority of Fiscal 2007 costs were incurred in connection with
acquisitions and as such were included in the purchase price allocation. Employee severance is
generally payable within the next twelve months with certain facility costs extending through
Fiscal 2014.
During the three (3) and nine (9) month periods ended December 31, 2007, the Company incurred
$1,374 of costs related to employee severance and $4,965 of costs related to facility
consolidations and employee severance, respectively. These costs have been recorded in Selling,
general & administrative expenses in the Company’s Consolidated Statements of Income.
The following table summarizes the changes to the restructuring reserve during the period:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Employee Severance |
|
|
|
Facility Closures |
|
|
|
Total |
|
| |
Balance at March 31, 2007 |
|
$ |
3,006 |
|
|
$ |
16,422 |
|
|
$ |
19,428 |
|
Restructuring charge |
|
|
3,745 |
|
|
|
1,220 |
|
|
|
4,965 |
|
Asset write-downs |
|
|
-- |
|
|
|
(411) |
|
|
|
(411) |
|
Cash expenditures |
|
|
(5,144) |
|
|
|
(5,371) |
|
|
|
(10,515) |
|
|
|
|
|
|
|
|
Balance at December 31, 2007 |
|
$ |
1,607 |
|
|
$ |
11,860 |
|
|
$ |
13,467 |
|
| |
Of the $13,467 above, $7,444 is classified as a current liability under Other liabilities on the
Company’s Consolidated Balance Sheets for the period ended December 31, 2007.
13
Note 10: Stock-based Compensation
Stock-Based Compensation
The Company has two stock option plans, the 1992 Stock Option Plan, as amended (the “Employee
Plan”), and the 1992 Director Stock Option Plan, as amended (the “Director Plan”). As of December
31, 2007, the Employee Plan is authorized to issue stock options and stock appreciation rights
(“SARs”) for up to 9,200,000 shares of common stock, par value $.001 (the “common stock”). The
Employee Plan provides that options are to be granted by a committee appointed by the Company’s
Board of Directors (the “Board”) to employees of the Company; such stock options generally become
exercisable in equal amounts over a three-year period. As of December 31, 2007, the Director Plan
is authorized to issue stock options and SARs for up to 270,000 shares of common stock. The
Director Plan provides that options are to be granted by the Board or a committee appointed by the
Board; such options generally become exercisable in equal amounts over a three-year period. No
SARs have been issued under either plan.
During the three (3) month periods ended December 31, 2007 and 2006, the Company recognized
stock-based compensation expense of $98 ($60 net of tax) or $0.01 per diluted share and $1,840
($1,196 net of tax) or $0.07 per diluted share, respectively. During the nine (9) month periods
ended December 31, 2007 and 2006, the Company recognized stock-based compensation expense of $2,970
($1,850 net of tax) or $0.10 per diluted share and $7,476 ($4,860 net of tax) or $0.27 per diluted
share, respectively. Included in stock-based compensation expense for Fiscal 2008 is $250 which
resulted from the previously-disclosed tender offer regarding certain stock options under the
Employee Plan that had been granted with a below-fair market value exercise price for income tax
purposes, which vested or may vest after December 31, 2004 and have unfavorable tax consequences
under Section 409A (“Section 409A”) of the Internal Revenue Code of 1986, as amended (the “Code”),
the details of which are described below. Stock-based compensation expense is recorded in Selling,
general & administrative expense within the Company’s Consolidated Statements of Income.
The following table summarizes the Company’s stock option activity for the nine (9) month period
ended December 31, 2007.
|
|
|
|
|
|
|
|
|
| |
|
Nine-month period ended December 31, 2007 |
| |
|
|
|
|
|
Weighted-Average |
|
| Shares in thousands |
|
|
Shares |
|
|
|
Exercise Price (per share) |
|
| |
Outstanding at beginning of period |
|
|
4,621 |
|
|
$ |
38.66 |
|
Granted |
|
|
567 |
|
|
|
40.16 |
|
Exercised |
|
|
(156) |
|
|
|
33.19 |
|
Forfeited or expired |
|
|
(2,266) |
|
|
|
37.87 |
|
|
|
|
|
|
Outstanding at end of period |
|
|
2,766 |
|
|
$ |
40.28 |
|
Exercisable at end of period |
|
|
2,678 |
|
|
$ |
40.39 |
|
Weighted average fair value of options granted during the period |
|
|
|
|
|
$ |
8.26 |
|
| |
The weighted average fair value of stock options granted during the period were based on the
Black-Scholes option pricing model using the following weighted average assumptions. The Company
granted 567 shares during the period which resulted from the previously-disclosed tender offer
(noted above). See below for reference to the Company’s valuation methodologies for these grants.
|
|
|
|
|
|
|
| |
|
3Q08 |
|
|
|
|
| |
Expected life (in years) |
|
3.85 |
|
|
|
|
Risk free interest rate |
|
4.02% |
|
|
|
|
Annual forfeiture rate |
|
0.0% |
|
|
|
|
Volatility |
|
29.27% |
|
|
|
|
Dividend yield |
|
0.61% |
|
|
|
|
| |
Remedial Measures
The Audit Committee of the Board (the “Audit Committee”) has now completed its previously-disclosed
independent review of the Company’s historical stock option granting practices. See the
“Explanatory Note” preceding Part I, Item 1 of the Form 10-K for more information regarding the
Audit Committee’s review and related matters. In light of the findings of its review, the Audit
Committee recommended to the Board, and the Board adopted, enhancements to the Company’s corporate
record-keeping and stock option granting procedures. The Audit Committee continues to consider
additional remedial measures. In advance of this action by the Audit Committee and the Board, the
Company had implemented additional procedures to its process for approving stock option grants that
are focused on formalized documentation of appropriate approvals and determination of grant terms
to employees.
14
The Audit Committee’s review included an evaluation of the role of current and former Company
personnel in identified problems during the period from 1992 to the present (the “Review Period”),
and the Audit Committee’s consideration of remedial actions has included and will continue to
include a review of claims that have been or may be asserted against such current or former Company
personnel as well as
other remedial actions that may be appropriate under all circumstances. As previously reported,
based on the findings of the Audit Committee as to Fred C. Young, the Company’s former Chief
Executive Officer who resigned on May 20, 2007, the Audit Committee concluded and recommended to
the Board, and the Board determined, that Mr. Young could have been terminated due to Cause for
Termination (as defined in his agreement dated May 11, 2004) at the time Mr. Young resigned as a
director and as an officer of the Company on May 20, 2007. In light of that determination and the
terms of the agreements with Mr. Young, all outstanding stock options held by Mr. Young
(1,455,402 shares) terminated as of the date of his resignation, which occurred during the first
quarter of Fiscal 2008. Accordingly, the Company has determined that the consequences of these
events should be considered a first quarter of Fiscal 2008 event for accounting purposes. These
events had the following impacts on the Company’s consolidated financial statements and related
notes for the nine (9) month period ended December 31, 2007: (1) a decrease in outstanding stock
options of 1,455,402, (2) immaterial impact on the Diluted earnings per common share computation,
(3) a decrease in deferred tax assets of $4,637 with the offsetting entry of $3,899 to Additional
paid-in capital and (4) additional tax expense impact of approximately $738.
The following table summarizes certain information regarding the Company’s outstanding stock
options at December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Options Outstanding |
|
Options Exercisable |
| |
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
| |
|
Shares |
|
|
Average |
|
|
Weighted |
|
|
Average |
|
|
Shares |
|
|
Average |
|
|
Weighted |
|
|
Average |
|
| |
|
Out- |
|
|
Remaining |
|
|
Average |
|
|
Intrinsic |
|
|
Exer- |
|
|
Remaining |
|
|
Average |
|
|
Intrinsic |
|
| Range of |
|
standing |
|
|
Contractual |
|
|
Exercise |
|
|
Value |
|
|
cisable |
|
|
Contractual |
|
|
Exercise |
|
|
Value |
|
| Exercise Prices |
|
(000’s) |
|
|
Life (Years) |
|
|
Price |
|
|
(000’s) |
|
|
(000’s) |
|
|
Life (Years) |
|
|
Price |
|
|
(000’s) |
|
| |
$19.95 - $26.60 |
|
|
2 |
|
|
|
0.8 |
|
|
$ |
21.94 |
|
|
$ |
35 |
|
|
|
2 |
|
|
|
0.8 |
|
|
$ |
21.94 |
|
|
$ |
35 |
|
$26.60 - $33.25 |
|
|
71 |
|
|
|
2.7 |
|
|
|
29.99 |
|
|
|
500 |
|
|
|
71 |
|
|
|
2.7 |
|
|
|
29.99 |
|
|
|
500 |
|
$33.25 - $39.90 |
|
|
1,256 |
|
|
|
7.3 |
|
|
|
37.99 |
|
|
|
953 |
|
|
|
1,168 |
|
|
|
7.3 |
|
|
|
38.06 |
|
|
|
875 |
|
$39.90 - $46.55 |
|
|
1,394 |
|
|
|
3.7 |
|
|
|
42.47 |
|
|
|
-- |
|
|
|
1,394 |
|
|
|
3.7 |
|
|
|
42.47 |
|
|
|
-- |
|
$46.55 - $53.20 |
|
|
24 |
|
|
|
2.6 |
|
|
|
50.69 |
|
|
|
-- |
|
|
|
24 |
|
|
|
2.6 |
|
|
|
50.69 |
|
|
|
-- |
|
$53.20 - $59.85 |
|
|
17 |
|
|
|
2.4 |
|
|
|
58.15 |
|
|
|
-- |
|
|
|
17 |
|
|
|
2.4 |
|
|
|
58.15 |
|
|
|
-- |
|
$59.85 - $66.50 |
|
|
2 |
|
|
|
2.0 |
|
|
|
63.22 |
|
|
|
-- |
|
|
|
2 |
|
|
|
2.0 |
|
|
|
63.22 |
|
|
|
-- |
|
| |
|
|
|
|
$19.95 - $66.50 |
|
|
2,766 |
|
|
|
5.3 |
|
|
$ |
40.28 |
|
|
$ |
1,488 |
|
|
|
2,678 |
|
|
|
5.3 |
|
|
$ |
40.39 |
|
|
$ |
1,410 |
|
| |
The aggregate intrinsic value in the preceding table represents the total pre-tax intrinsic value,
based on the Company’s average stock price (i.e., the average of the open and close prices of the
common stock) on December 28, 2007 of $37.08, which would have been received by the option holders
had all option holders exercised their options as of that date. As of December 31, 2007, there was
approximately $897 of total unrecognized pre-tax stock-based compensation expense related to
non-vested stock options granted under the plans which is expected to be recognized over a weighted
average period of 1.75 years.
Section 409A Remedial Measures
Following the completion of the Audit Committee’s independent review of the Company’s historical
stock option granting practices, the Company determined that certain stock option grants which were
originally issued with exercise prices that were below fair market value for income tax purposes,
which vested or may vest after December 31, 2004 and which remained outstanding (i.e., unexercised)
as of December 31, 2005, were subject to adverse income taxation under Section 409A. For purposes
of this Quarterly Report on Form 10-Q/A for the period ending December 29, 2007 (this “Form
10-Q/A”), these below-fair market value stock option grants are referred to as “Affected Stock
Option Grants.” Under Section 409A, individuals who hold Affected Stock Option Grants may be
subject to a 20% federal income tax and an interest penalty tax in addition to the regular income
tax liability plus interest on the value of these stock option grants at the time of vesting (not
exercise).
During the third quarter of Fiscal 2008, the Company conducted a tender offer to current
non-officer employees subject to taxation in the United States who held Affected Stock Option
Grants that afforded those employees the opportunity to avoid unfavorable tax consequences under
Section 409A. The provisions of the tender offer amended each Affected Stock Option Grant to
increase the original exercise price to the lower of: (i) the fair market value of the common stock
on the corrected measurement date (as determined for tax purposes) or (ii) the fair market value of
the common stock on the trading day immediately following the expiration of the tender offer
(December 19, 2007), provided that the new exercise price was in no event lower than the original
exercise price of the stock option grant. Additionally, and as part of the tender offer, the
Company offered current non-officer employees the right to receive a cash payment equal to the
increase, if any, in the exercise price of the Affected Stock Option Grant.
15
In instances where the original exercise price of a stock option grant was less than the new
exercise price (as determined above), the Company increased the original exercise price to the new
exercise price (“Amended Stock Option Grant”) and paid a cash bonus to the employee. The total
cash bonus due to employees was $456 which is recorded in Accrued compensation and benefits within
the Company’s Consolidated Balance Sheets for the period ending December 31, 2007. This cash bonus
was paid during January 2008. The Company accounted for the impact of the Amended Stock Option
Grant as a stock option modification under SFAS No. 123 (revised
2004), “Share-Based Payment” (“SFAS 123R”). As a result of the modification and the partial cash
settlement, the Company recognized $250 of additional stock-based compensation expense due to the
increase in the fair market value of these stock option grants that was recorded in Selling,
general & administrative expense within the Company’s Consolidated Statements of Income.
In instances where the current exercise price of a stock option grant was greater than the new
exercise price, the original stock option grant was canceled and immediately replaced with a new
stock option grant under the Employee Plan that had the same terms as the canceled stock option
grant, including the same exercise price per share and no loss of vesting or change to the
expiration date of the stock option grant term, but with a new grant date (“Cancellation and New
Stock Option Grant”). The Company accounted for the Cancellation and New Stock Option Grant as two
separate transactions (i.e., the cancellation of the original stock option grant and the issuance
of a new stock option grant) and computed a fair market value for the new stock option grant on the
new grant date determined in accordance with the provisions of SFAS 123R. As a result, the Company
recognized a pre-tax charge of $4,687 of non-cash stock-based compensation expense equal to the
fair market value of the new stock option grant on the new grant date (December 19, 2007) that was
recorded in Selling, general & administrative expense within the Company’s Consolidated Statements
of Income.
During the fourth quarter of Fiscal 2008, the Company re-evaluated its valuation methodology for
both the Amended Stock Option Grant and the Cancellation and New Stock Option Grant. The Company’s
valuation methodology (i.e., modification under SFAS 123R) for the Amended Stock Option Grant was
correct. However, the Cancellation and New Stock Option Grant qualifies as a “cancellation of an
award accompanied by the concurrent grant of a replacement award,” as defined in SFAS 123R, which
should have been accounted for as a modification. Under SFAS 123R, incremental compensation cost
is measured as the excess, if any, of the fair market value of the modified award over the fair
market value of the original award immediately before its terms are modified. With respect to the
Cancellation and New Stock Option Grant, there were no changes to any of the terms of the original
stock option grant, thus, the Company should have recorded $0 of non-cash stock-based compensation
expense compared to a pre-tax charge of $4,687 of non-cash stock-based compensation that had been
previously-recognized. See Note 17 for reference to footnote disclosure that reconciles the
previously-issued financial information to the restated financial information.
With respect to certain employees who exercised stock options subject to Section 409A during
calendar year 2007, the Company made a bonus payment (“Calendar 2007 bonus payment”) to such
employees during January 2008 in an aggregate amount of $313. The Calendar 2007 bonus payment
includes amounts to compensate the employee for the additional Section 409A taxes that they will be
required to pay as well as an amount to gross-up such amount for the additional income and payroll
taxes owed on such payments. The Calendar 2007 bonus payment is recorded in Selling, general &
administrative expense within the Company’s Consolidated Statements of Income and in Accrued
compensation and benefits within the Company’s Consolidated Balance Sheets as of and for the period
ending December 31, 2007.
With respect to certain employees who exercised stock options subject to Section 409A during
calendar year 2006, the Company intends to submit a cash payment (“Calendar 2006 cash payment”)
directly to the Internal Revenue Service (“IRS”) in an aggregate amount of $726. The Calendar 2006
cash payment includes any applicable Section 409A additional taxes as well as an amount to gross up
such amount for the additional income and payroll taxes owed on such payments. The Calendar 2006
cash payment is recorded in Selling, general & administrative expense within the Company’s
Consolidated Statements of Income and in Accrued compensation and benefits within the Company’s
Consolidated Balance Sheets as of and for the period ending December 31, 2007.
The Company continues to consider the application of Section 409A for other options that have been
granted with a below-fair market value exercise price for tax purposes, and which vested or may
vest after December 31, 2004. Accordingly, the Company may adopt measures to address the
application of Section 409A for these other options. The Company does not currently know what
impact Section 409A will have, or any such measures, if adopted, would have on its results of
operations, financial position or cash flows, although such impact could be material.
16
Note 11: Earnings Per Share
The following table details the computation of basic and diluted earnings per common share from
continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three-month period |
|
|
Nine-month period |
|
| |
|
ended December 31, |
|
ended December 31, |
| |
|
2007 |
|
|
|
|
|
|
2007 |
|
|
|
|
| |
|
(As |
|
|
|
|
|
(As |
|
|
|
|
| |
|
|
Restated) |
|
|
|
2006 |
|
|
|
Restated) |
|
|
|
2006 |
|
| |
Net income |
|
$ |
11,341 |
|
|
$ |
10,493 |
|
|
$ |
30,839 |
|
|
$ |
28,981 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding (basic) |
|
|
17,683 |
|
|
|
17,398 |
|
|
|
17,601 |
|
|
|
17,451 |
|
Effect of dilutive securities from employee stock
options |
|
|
59 |
|
|
|
382 |
|
|
|
88 |
|
|
|
358 |
|
| |
|
|
|
|
Weighted average common shares outstanding
(diluted) |
|
|
17,742 |
|
|
|
17,780 |
|
|
|
17,689 |
|
|
|
17,809 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share |
|
$ |
0.64 |
|
|
$ |
0.60 |
|
|
$ |
1.75 |
|
|
$ |
1.66 |
|
| |
|
|
|
|
Dilutive earnings per common share |
|
$ |
0.64 |
|
|
$ |
0.59 |
|
|
$ |
1.74 |
|
|
$ |
1.63 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
The Weighted average common shares outstanding (diluted) computation is not impacted during any
period where the exercise price of a stock option is greater than the average market price. During
the three (3) month periods ended December 31, 2007 and 2006, there were 2,206,313 and 824,240
non-dilutive stock options outstanding, respectively, that are not included in the corresponding
period Weighted average common shares outstanding (diluted) computation. During the nine (9) month
periods ended December 31, 2007 and 2006, there were 2,171,313 and 825,240 non-dilutive stock
options outstanding, respectively, that are not included in the corresponding period Weighted
average common shares outstanding (diluted) computation.
Note 12: Comprehensive income and Accumulated other comprehensive income (“AOCI”)
The following table details the computation of comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three-month period |
|
|
Nine-month period |
|
| |
|
ended December 31, |
|
ended December 31, |
| |
|
2007 |
|
|
|
|
|
|
2007 |
|
|
|
|
| |
|
|
(As Restated) |
|
|
|
2006 |
|
|
|
(As Restated) |
|
|
|
2006 |
|
| |
Net income |
|
$ |
11,341 |
|
|
$ |
10,493 |
|
|
$ |
30,839 |
|
|
$ |
28,981 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment |
|
|
1,021 |
|
|
|
5,191 |
|
|
|
9,323 |
|
|
|
11,235 |
|
Net change in fair value of cash flow hedging
instruments |
|
|
81 |
|
|
|
(290) |
|
|
|
(342) |
|
|
|
63 |
|
Amounts reclassified into results of operations |
|
|
(153) |
|
|
|
(17) |
|
|
|
(45) |
|
|
|
(309) |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income |
|
$ |
949 |
|
|
$ |
4,884 |
|
|
$ |
8,936 |
|
|
$ |
10,989 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
12,290 |
|
|
$ |
15,377 |
|
|
$ |
39,775 |
|
|
$ |
39,970 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
The components of AOCI consisted of the following:
|
|
|
|
|
|
|
|
|
| |
|
|
December 31, 2007 |
|
|
|
March 31, 2007 |
|
| |
Foreign currency translation adjustment |
|
$ |
32,675 |
|
|
$ |
23,352 |
|
Unrealized gains/(losses) on derivatives
designated and qualified as cash flow
hedges |
|
|
(10) |
|
|
|
377 |
|
Unrecognized gain on defined benefit pension |
|
|
1,670 |
|
|
|
1,670 |
|
|
|
|
|
|
Accumulated other comprehensive income |
|
$ |
34,335 |
|
|
$ |
25,399 |
|
| |
17
Note 13: Commitments and Contingencies
Regulatory Matters
As previously disclosed, on November 13, 2006, the Company received a letter of informal inquiry
from the Enforcement Division of the SEC relating to the Company’s stock option practices from
January 1, 1997 to present. On May 24, 2007, the SEC issued a formal order
of investigation in connection with this matter, and, on May 29, 2007, the Company received a
document subpoena from the SEC acting pursuant to such order. The Company has cooperated with the
SEC in this matter and intends to continue to do so.
As previously disclosed, the Audit Committee, with the assistance of outside legal
counsel, conducted an independent review of the Company’s historical stock option granting
practices and related accounting for stock option grants. See the “Explanatory Note” preceding
Part I, Item 1 of the Form 10-K for more information regarding the Audit Committee’s review and
related matters. The Audit Committee has concluded its review and has presented to the Board
recommendations concerning procedural enhancements, which the Board has adopted. The Audit
Committee continues to consider additional remedial measures.
On September 20, 2006, the Company received formal notice from the IRS regarding its intent to
begin an audit of the Company’s tax years 2004 and 2005. On August 3, 2007, the Company received
formal notice from the IRS regarding its intent to begin an audit of the Company’s 2006 tax year.
In connection with these normal recurring audits, the IRS has requested certain documentation with
respect to stock options for the Company’s 2004, 2005 and 2006 tax years. The Company has produced
various documents requested by the IRS and is currently in the process of responding to additional
documentation requests. In connection with the Audit Committee’s review of the Company’s
historical stock option granting practices, the Company determined that a number of officers may
have exercised options for which the application of Section 162(m) (“Section 162(m)”) of the Code
may apply. It is possible that these options will be treated as having been granted at less than
fair market value for federal income tax purposes because the Company incorrectly applied the
measurement date as defined in Accounting Principles Board Opinion No. 25, “Accounting for Stock
Issued to Employees” (“APB 25”). If such options are deemed to have been granted at less than fair
market value, pursuant to Section 162(m), any compensation to officers, including proceeds from
options exercised in any given tax year, in excess of $1,000 will be disallowed as a deduction for
tax purposes. The Company estimates that the potential tax-effected liability for any such
disallowed Section 162(m) deduction would approximate $3,587, which was recognized as expense
during prior periods and is currently recorded as a current liability within Income taxes within
the Company’s Consolidated Balance Sheets. The Company may also incur interest and penalties if it
were to incur any such tax liability, which could be material.
With respect to the previously-disclosed matter regarding a United States General Services
Administration (“GSA”) Multiple Award Schedule contract, on October 2, 2007, the Company was
contacted by the United States Department of Justice which informed the Company that it was
reviewing allegations by the GSA that certain of the Company’s pricing practices under the GSA
contract violated the Civil False Claims Act. The Company has executed an agreement with the
United States tolling the statute of limitations on any action by the United States through April
2, 2008 in order for the parties to discuss the merits of these allegations prior to the possible
commencement of any litigation by the United States.
At the conclusion of these regulatory matters, the Company could be subject to additional taxes,
fines, penalties or other costs which could be material.
Litigation Matters
In November 2006, two stockholder derivative lawsuits were filed against the Company itself, as a
nominal defendant, and several of the Company’s current and former officers and directors in the
United States District Court for the Western District of Pennsylvania. The two substantially
identical stockholder derivative complaints allege that the individual defendants improperly
backdated grants of stock options to several officers and directors in violation of the Company’s
stockholder-approved stock option plans during the period 1996-2002, improperly recorded and
accounted for backdated stock options in violation of generally accepted accounting principles,
improperly took tax deductions based on backdated stock options in violation of the Code, produced
and disseminated false financial statements and SEC filings to the Company’s stockholders and to
the market that improperly recorded and accounted for the backdated option grants, concealed the
alleged improper backdating of stock options and obtained substantial benefits from sales of
Company stock while in the possession of material inside information. The complaints seek damages
on behalf of the Company against certain current and former officers and directors and allege
breach of fiduciary duty, unjust enrichment, securities law violations and other claims. The two
lawsuits have been consolidated into a single action as In re Black Box Corporation Derivative
Litigation, Master File No. 2:06-CV-1531-TMH, and plaintiffs filed an amended consolidated
shareholder derivative complaint on August 31, 2007. The parties have stipulated that responses by
the defendants, including the Company, are due on or before May 2, 2008, and the court has entered
an order to that effect. The Company may have indemnification obligations arising out of this
matter to its current and former directors and officers named in this litigation. The Company has
made a claim for such costs under an insurance policy.
The Company is, as a normal part of its business operations, a party to legal proceedings in
addition to those described in current and previous filings.
Based on the facts currently available to the Company, management believes the matters described
under this caption “Litigation Matters” are adequately provided for, covered by insurance, without
merit or not probable that an unfavorable outcome will result.
18
Product Warranties
Estimated future warranty costs related to certain products are charged to operations in the period
the related revenue is recognized. The product warranty liability reflects the Company’s best
estimate of probable liability under those warranties. As of December 31, 2007 and March 31, 2007,
the Company has recorded a warranty reserve of $4,643 and $4,214, respectively.
There has been no other significant or unusual activity during Fiscal 2008.
Expenses Incurred by the Company
The Company has incurred significant expenses, in excess of its insurance deductible of $500, in
Fiscal 2007 and Fiscal 2008, and expects to continue to incur additional expenses through the end
of Fiscal 2008, in relation to (i) the Audit Committee’s review of the Company’s historical stock
option granting practices and related accounting for stock option grants, (ii) the informal inquiry
and formal order of investigation by the SEC regarding the Company’s past stock option practices,
(iii) the previously-disclosed derivative action relating to the Company’s historical stock option
granting practices filed against the Company as a nominal defendant and certain of the Company’s
current and former directors and officers, as to whom it may have indemnification obligations and
(iv) related matters. As of December 31, 2007, the total amount of such fees is approximately
$5,150, of which $2,801 has been reimbursed by the insurance company. The Company expensed $542 in
Fiscal 2007 and $134 and $1,152 during the three (3) and nine (9) month period ended December 31,
2007, respectively. The Company and the insurance company for its directors’ and officers’
indemnification insurance are currently in discussions with respect to which of these
non-reimbursed expenses in excess of the deductible will be paid by the insurance company.
Accordingly, there can be no assurance that all expenses submitted or to be submitted to the
insurance company for reimbursement will be reimbursed under the Company’s directors’ and officers’
indemnification insurance. The amount of such expenses not reimbursed by the insurance company
could be material.
Note 14: Uncertainty in Income Taxes
As discussed in Note 2, the Company adopted FIN 48 on April 1, 2007. As a result of the adoption of
FIN 48, the Company recorded a $5,110 reduction to the beginning balance of Retained earnings
representing the cumulative effect of a change in accounting principle, an increase to current
liabilities of $3,656 recorded within Income taxes and a decrease to non-current assets of $1,454
recorded within Other assets, each of which is reflected within the Company’s Consolidated Balance
Sheets. At the adoption date of April 1, 2007, the gross liability for income taxes associated
with uncertain tax positions was $6,974. If the uncertain tax positions are recognized, they would
all favorably affect the Company’s effective tax rate. The Company includes interest and penalties
related to uncertain tax positions within the Provision for income taxes within the Company’s
Consolidated Statements of Income. As of April 1, 2007, the Company has recorded approximately
$806 of interest and penalties related to uncertain tax positions. During the nine (9) month
period ended December 31, 2007, the Company recorded an additional increase to current liabilities
within Income taxes of $454 related to uncertain tax positions.
The IRS commenced an examination of the Company’s U.S. federal income tax return for Fiscal 2004,
Fiscal 2005 and Fiscal 2006. The IRS has not yet proposed any adjustment to the Company’s filing
positions in connection with this examination. Upon completion of this examination, it is
reasonably possible that the total amount of unrecognized benefits will change. Any adjustment to
the unrecognized tax benefits would impact the effective tax rate. The Company cannot make an
estimate of the impact on the effective rate for any potential adjustment at this time.
Fiscal 2007 remains open to examination by the IRS. Fiscal 2004 through Fiscal 2007 remain open to
examination by state and foreign taxing jurisdictions.
19
Note 15: Segment Reporting
Management reviews financial information for the consolidated Company accompanied by disaggregated
information on net revenues, operating income and assets by geographic region for the purpose of
making operational decisions and assessing financial performance. Additionally, Management is
presented with and reviews net revenues and gross profit by service type. The accounting policies
of the individual operating segments are the same as those of the Company.
The following table presents financial information about the Company’s reportable segments by
geographic region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three-month period |
|
|
Nine-month period |
|
| |
|
ended December 31, |
|
ended December 31, |
| |
|
2007 |
|
|
|
2006 |
|
|
|
2006 |
|
|
2006 |
|
| |
|
|
(As Restated) |
|
|
|
|
|
|
|
(As Restated) |
|
|
|
|
|
| |
North America |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
210,635 |
|
|
$ |
220,391 |
|
|
$ |
637,639 |
|
|
$ |
644,260 |
|
Operating income |
|
|
16,280 |
|
|
|
13,685 |
|
|
|
44,966 |
|
|
|
41,204 |
|
Depreciation |
|
|
2,602 |
|
|
|
3,047 |
|
|
|
8,008 |
|
|
|
8,788 |
|
Amortization |
|
|
1,356 |
|
|
|
2,644 |
|
|
|
4,965 |
|
|
|
6,012 |
|
Segment assets |
|
|
992,713 |
|
|
|
1,033,503 |
|
|
|
992,713 |
|
|
|
1,033,503 |
|
Europe |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
37,303 |
|
|
$ |
34,610 |
|
|
$ |
103,808 |
|
|
$ |
94,799 |
|
Operating income |
|
|
5,966 |
|
|
|
4,502 |
|
|
|
14,206 |
|
|
|
11,134 |
|
Depreciation |
|
|
107 |
|
|
|
133 |
|
|
|
327 |
|
|
|
364 |
|
Amortization |
|
|
15 |
|
|
|
23 |
|
|
|
47 |
|
|
|
74 |
|
Segment assets |
|
|
151,333 |
|
|
|
133,554 |
|
|
|
151,333 |
|
|
|
133,554 |
|
All Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
10,386 |
|
|
$ |
9,805 |
|
|
$ |
29,798 |
|
|
$ |
27,467 |
|
Operating income |
|
|
1,971 |
|
|
|
1,881 |
|
|
|
5,375 |
|
|
|
5,372 |
|
Depreciation |
|
|
28 |
|
|
|
23 |
|
|
|
85 |
|
|
|
67 |
|
Amortization |
|
|
11 |
|
|
|
10 |
|
|
|
32 |
|
|
|
28 |
|
Segment assets |
|
|
20,583 |
|
|
|
17,065 |
|
|
|
20,583 |
|
|
|
17,065 |
|
| |
The sum of segment revenues, operating income, depreciation and amortization equals the
consolidated revenues, operating income, depreciation and amortization. The following reconciles
segment assets to total consolidated assets:
|
|
|
|
|
|
|
|
|
| |
|
As of December 31, |
| |
|
2007 |
|
|
|
2006 |
|
| |
|
|
(As Restated) |
|
|
|
|
|
| |
Segment assets for North America, Europe and All Other |
|
$ |
1,164,629 |
|
|
$ |
1,184,122 |
|
Corporate eliminations |
|
|
(70,906) |
|
|
|
(72,204) |
|
|
|
|
|
|
Total consolidated assets |
|
$ |
1,093,723 |
|
|
$ |
1,111,918 |
|
| |
20
The following table presents financial information about the Company by service type:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three-month period |
|
|
Nine-month period |
|
| |
|
ended December 31, |
|
|
ended December 31, |
|
| |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
| |
Data Services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
50,474 |
|
|
$ |
46,350 |
|
|
$ |
146,839 |
|
|
$ |
137,328 |
|
Gross profit |
|
|
15,911 |
|
|
|
14,236 |
|
|
|
44,462 |
|
|
|
41,460 |
|
Voice Services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
148,581 |
|
|
$ |
160,686 |
|
|
$ |
449,379 |
|
|
$ |
464,140 |
|
Gross profit |
|
|
49,832 |
|
|
|
54,566 |
|
|
|
149,861 |
|
|
|
158,242 |
|
Hotline Services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
59,269 |
|
|
$ |
57,770 |
|
|
$ |
175,027 |
|
|
$ |
165,058 |
|
Gross profit |
|
|
28,378 |
|
|
|
27,883 |
|
|
|
83,317 |
|
|
|
81,863 |
|
| |
The sum of service type revenues and gross profit equals consolidated revenues and gross profit.
Note 16: Subsequent Events
On January 30, 2008, the Company entered into the New Credit Agreement with Citizens Bank of
Pennsylvania, as agent, and a group of lenders. The New Credit Agreement, which replaces the
Credit Agreement, expires on January 30, 2013. Borrowings under the New Credit Agreement are
permitted up to a maximum amount of $350,000, which includes up to $20,000 of swing line loans and
$25,000 of letters of credit. The New Credit Agreement may be increased by the Company up to an
additional $100,000 with the approval of the lenders and may be unilaterally and permanently
reduced by the Company to not less than the then outstanding amount of all borrowings. Interest on
outstanding indebtedness under the New Credit Agreement accrues, at the Company’s option, at a rate
based on either: (a) the greater of (i) the prime rate per annum of the agent then in effect and
(ii) 0.50% plus the rate per annum announced by the Federal Reserve Bank of New York as being the
weighted average of the rates on overnight Federal funds transactions arranged by Federal funds
brokers on the previous trading day or (b) a rate per annum equal to the LIBOR rate plus 0.50% to
1.125% (determined by a leverage ratio based on the Company’s consolidated EBITDA). The New Credit
Agreement requires the Company to maintain compliance with certain non-financial and financial
covenants such as leverage and fixed charge coverage ratios.
Note 17: Restatement of Consolidated Financial Statements
The Company is restating its Consolidated Balance Sheets as of December 29, 2007, Consolidated
Statements of Income for the three (3) and nine (9) month periods ended December 29, 2007 and
Consolidated Statements of Cash Flows for the nine (9) month period ended December 29, 2007 and the
Notes related to the restated financial information. All restated information identified above is
collectively referred to as the “Restatement.” The Restatement reflects an adjustment to reverse a
pre-tax charge of $4,687 of previously-recognized non-cash stock-based compensation expense
relating to the Company’s valuation methodologies for certain stock option transactions during the
third quarter of Fiscal 2008, the nature of which is described in Note 10. As a result of this
adjustment, the Company’s projected effective income tax rate for Fiscal 2008, as of December 29,
2007, decreased from 38.0% to 37.7%.
21
Restatement Impact on the Consolidated Statements of Income
The following tables reconcile the Company’s Consolidated Statements of Income from the
previously-issued results to the restated results for the three (3) and nine (9) month periods
ended December 29, 2007. All dollar amounts are in thousands, except per share amounts.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Three Month Period Ended December 29, 2007 (Unaudited) |
| |
|
As Previously |
|
|
|
|
|
|
|
| |
|
Reported |
|
|
Adjustment |
|
|
As Restated |
|
| |
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
Hotline products |
|
$ |
59,269 |
|
|
$ |
-- |
|
|
$ |
59,269 |
|
On-Site services |
|
|
199,055 |
|
|
|
-- |
|
|
|
199,055 |
|
|
|
|
|
|
|
|
Total |
|
|
258,324 |
|
|
|
-- |
|
|
|
258,324 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotline products |
|
|
30,891 |
|
|
|
-- |
|
|
|
30,891 |
|
On-Site services |
|
|
133,312 |
|
|
|
-- |
|
|
|
133,312 |
|
|
|
|
|
|
|
|
Total |
|
|
164,203 |
|
|
|
-- |
|
|
|
164,203 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
94,121 |
|
|
|
-- |
|
|
|
94,121 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general & administrative expenses |
|
|
73,209 |
|
|
|
(4,687) |
|
|
|
68,522 |
|
Intangibles amortization |
|
|
1,382 |
|
|
|
-- |
|
|
|
1,382 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
19,530 |
|
|
|
4,687 |
|
|
|
24,217 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense (income), net |
|
|
5,780 |
|
|
|
-- |
|
|
|
5,780 |
|
Other expenses (income), net |
|
|
(16) |
|
|
|
-- |
|
|
|
(16) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for
income taxes |
|
|
13,766 |
|
|
|
4,687 |
|
|
|
18,453 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
|
5,480 |
|
|
|
1,632 |
|
|
|
7,112 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
8,286 |
|
|
$ |
3,055 |
|
|
$ |
11,341 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.47 |
|
|
$ |
0.17 |
|
|
$ |
0.64 |
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.47 |
|
|
$ |
0.17 |
|
|
$ |
0.64 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
17,683 |
|
|
|
-- |
|
|
|
17,683 |
|
|
|
|
|
|
|
|
Diluted |
|
|
17,742 |
|
|
|
-- |
|
|
|
17,742 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends per share |
|
$ |
0.06 |
|
|
$ |
-- |
|
|
$ |
0.06 |
|
| |
22
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Nine Month Period Ended December 29, 2007 (Unaudited) |
|
| |
|
As Previously |
|
|
|
|
|
|
|
| |
|
Reported |
|
|
Adjustment |
|
|
As Restated |
|
| |
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
Hotline products |
|
$ |
175,027 |
|
|
$ |
-- |
|
|
$ |
175,027 |
|
On-Site services |
|
|
596,218 |
|
|
|
-- |
|
|
|
596,218 |
|
|
|
|
|
|
|
|
Total |
|
|
771,245 |
|
|
|
-- |
|
|
|
771,245 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
|
|
|
|
|
|
|
|
|
|
|
Hotline products |
|
|
91,710 |
|
|
|
-- |
|
|
|
91,710 |
|
On-Site services |
|
|
401,895 |
|
|
|
-- |
|
|
|
401,895 |
|
|
|
|
|
|
|
|
Total |
|
|
493,605 |
|
|
|
-- |
|
|
|
493,605 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
277,640 |
|
|
|
-- |
|
|
|
277,640 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general & administrative expenses |
|
|
212,736 |
|
|
|
(4,687) |
|
|
|
208,049 |
|
Intangibles amortization |
|
|
5,044 |
|
|
|
-- |
|
|
|
5,044 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
59,860 |
|
|
|
4,687 |
|
|
|
64,547 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense (income), net |
|
|
15,203 |
|
|
|
-- |
|
|
|
15,203 |
|
Other expenses (income), net |
|
|
(156) |
|
|
|
-- |
|
|
|
(156) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for
income taxes |
|
|
44,813 |
|
|
|
4,687 |
|
|
|
49,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
|
17,029 |
|
|
|
1,632 |
|
|
|
18,661 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
27,784 |
|
|
$ |
3,055 |
|
|
$ |
30,839 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.58 |
|
|
$ |
0.17 |
|
|
$ |
1.75 |
|
|
|
|
|
|
|
|
Diluted |
|
$ |
1.57 |
|
|
$ |
0.17 |
|
|
$ |
1.74 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
17,601 |
|
|
|
-- |
|
|
|
17,601 |
|
|
|
|
|
|
|
|
Diluted |
|
|
17,689 |
|
|
|
-- |
|
|
|
17,689 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends per share |
|
$ |
0.18 |
|
|
$ |
-- |
|
|
$ |
0.18 |
|
| |
23
Restatement Impact on the Consolidated Balance Sheets
The following tables reconcile the Company’s Consolidated Balance Sheets from the previously-issued
results to the restated results as of December 29, 2007. All dollar amounts are in thousands.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 29, 2007 (Unaudited) |
|
| |
|
As Previously |
|
|
|
|
|
|
|
| |
|
Reported |
|
|
Adjustment |
|
|
As Restated |
|
| |
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
20,109 |
|
|
$ |
-- |
|
|
$ |
20,109 |
|
Accounts receivable, net |
|
|
179,537 |
|
|
|
-- |
|
|
|
179,537 |
|
Inventories, net |
|
|
74,224 |
|
|
|
-- |
|
|
|
74,224 |
|
Costs / estimated earnings in excess of
billings on uncompleted contracts |
|
|
59,693 |
|
|
|
-- |
|
|
|
59,693 |
|
Prepaid and other current assets |
|
|
23,246 |
|
|
|
-- |
|
|
|
23,246 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
356,809 |
|
|
|
-- |
|
|
|
356,809 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
|
34,413 |
|
|
|
-- |
|
|
|
34,413 |
|
Goodwill, net |
|
|
580,211 |
|
|
|
-- |
|
|
|
580,211 |
|
Intangibles: |
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships, net |
|
|
68,909 |
|
|
|
-- |
|
|
|
68,909 |
|
Other intangibles, net |
|
|
31,855 |
|
|
|
-- |
|
|
|
31,855 |
|
Other assets |
|
|
21,002 |
|
|
|
524 |
|
|
|
21,526 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,093,199 |
|
|
$ |
524 |
|
|
$ |
1,093,723 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
79,664 |
|
|
$ |
-- |
|
|
$ |
79,664 |
|
Accrued compensation and benefits |
|
|
23,321 |
|
|
|
-- |
|
|
|
23,321 |
|
Deferred revenue |
|
|
34,611 |
|
|
|
-- |
|
|
|
34,611 |
|
Billings in excess of costs / estimated
earnings on uncompleted contracts |
|
|
22,012 |
|
|
|
-- |
|
|
|
22,012 |
|
Income taxes |
|
|
9,169 |
|
|
|
(15) |
|
|
|
9,154 |
|
Other liabilities |
|
|
49,558 |
|
|
|
-- |
|
|
|
49,558 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
218,335 |
|
|
|
(15) |
|
|
|
218,320 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
219,830 |
|
|
|
-- |
|
|
|
219,830 |
|
Other liabilities |
|
|
21,024 |
|
|
|
-- |
|
|
|
21,024 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
459,189 |
|
|
|
(15) |
|
|
|
459,174 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity |
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock |
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Common stock |
|
|
25 |
|
|
|
-- |
|
|
|
25 |
|
Additional paid-in capital |
|
|
447,164 |
|
|
|
(2,516) |
|
|
|
444,648 |
|
Retained earnings |
|
|
469,522 |
|
|
|
3,055 |
|
|
|
472,577 |
|
Accumulated other comprehensive income |
|
|
34,335 |
|
|
|
-- |
|
|
|
34,335 |
|
Treasury stock |
|
|
(317,036) |
|
|
|
-- |
|
|
|
(317,036) |
|
|
|
|
|
|
|
|
Total stockholders’ equity |
|
|
634,010 |
|
|
|
539 |
|
|
|
634,549 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity |
|
$ |
1,093,199 |
|
|
$ |
524 |
|
|
$ |
1,093,723 |
|
|
|
|
|
|
|
|
| |
24
Restatement Impact on the Consolidated Statement of Cash Flows
The following tables reconcile the Company’s Consolidated Statements of Cash Flows from the
previously-issued results to the restated results for the nine (9) month period ended December 29,
2007. All dollar amounts are in thousands.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Nine Month Period Ended December 29, 2007 (Unaudited) |
|
| |
|
As Previously |
|
|
|
|
|
|
|
| |
|
Reported |
|
|
Adjustment |
|
|
As Restated |
|
| |
Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
27,784 |
|
|
$ |
3,055 |
|
|
$ |
30,839 |
|
Adjustments to reconcile net income to net cash provided
by (used for) operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Intangibles amortization and depreciation |
|
|
13,464 |
|
|
|
-- |
|
|
|
13,464 |
|
Loss on sale of property |
|
|
441 |
|
|
|
-- |
|
|
|
441 |
|
Deferred taxes |
|
|
292 |
|
|
|
3,818 |
|
|
|
4,110 |
|
Tax impact from stock options |
|
|
6,491 |
|
|
|
(2,171) |
|
|
|
4,320 |
|
Stock compensation expense |
|
|
7,406 |
|
|
|
(4,687) |
|
|
|
2,719 |
|
Change in fair value of interest-rate swap |
|
|
2,021 |
|
|
|
-- |
|
|
|
2,021 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
|
(13,493) |
|
|
|
-- |
|
|
|
(13,493) |
|
Inventories, net |
|
|
705 |
|
|
|
-- |
|
|
|
705 |
|
All other current assets excluding deferred tax asset |
|
|
9,759 |
|
|
|
-- |
|
|
|
9,759 |
|
Liabilities exclusive of long-term debt |
|
|
(18,134) |
|
|
|
(15) |
|
|
|
(18,149) |
|
|
|
|
|
|
|
|
Net cash provided by (used for) operating activities |
|
$ |
36,736 |
|
|
$ |
-- |
|
|
$ |
36,736 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
$ |
(2,412) |
|
|
$ |
-- |
|
|
$ |
(2,412) |
|
Capital disposals |
|
|
86 |
|
|
|
-- |
|
|
|
86 |
|
Acquisition of businesses (payments)/recoveries |
|
|
(10,657) |
|
|
|
-- |
|
|
|
(10,657) |
|
Prior merger-related (payments)/recoveries |
|
|
(2,196) |
|
|
|
-- |
|
|
|
(2,196) |
|
|
|
|
|
|
|
|
Net cash provided by (used for) investing activities |
|
$ |
(15,179) |
|
|
$ |
-- |
|
|
$ |
(15,179) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from borrowings |
|
$ |
153,275 |
|
|
$ |
-- |
|
|
$ |
153,275 |
|
Repayment of borrowings |
|
|
(172,378) |
|
|
|
-- |
|
|
|
(172,378) |
|
Repayment on discounted lease rentals |
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Proceeds from exercise of options |
|
|
5,172 |
|
|
|
-- |
|
|
|
5,172 |
|
Payment of dividends |
|
|
(3,165) |
|
|
|
-- |
|
|
|
(3,165) |
|
Purchase of treasury stock |
|
|
(3) |
|
|
|
-- |
|
|
|
(3) |
|
|
|
|
|
|
|
|
Net cash provided by (used for) financing activities |
|
$ |
(17,099) |
|
|
$ |
-- |
|
|
$ |
(17,099) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange impact on cash |
|
$ |
(1,506) |
|
|
$ |
-- |
|
|
$ |
(1,506) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase / (decrease) in cash and cash equivalents |
|
$ |
2,952 |
|
|
$ |
-- |
|
|
$ |
2,952 |
|
Cash and cash equivalents at beginning of period |
|
$ |
17,157 |
|
|
$ |
-- |
|
|
$ |
17,157 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
20,109 |
|
|
$ |
-- |
|
|
$ |
20,109 |
|
|
|
|
|
|
|
|
Supplemental Cash Flow: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
13,505 |
|
|
$ |
-- |
|
|
$ |
13,505 |
|
Cash paid for income taxes |
|
|
14,535 |
|
|
|
-- |
|
|
|
14,535 |
|
Non-cash financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Dividends payable |
|
|
1,061 |
|
|
|
-- |
|
|
|
1,061 |
|
Capital leases |
|
|
669 |
|
|
|
-- |
|
|
|
669 |
|
| |
25
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations.
The discussion and analysis for the three (3) and nine (9) month periods ended December 31, 2007
and 2006 (the “discussion and analysis”) as set forth below in this Item 2 has been amended to
reflect the Restatement as described in the Explanatory Note and in Note 10 and Note 17 of the
Notes to the Consolidated Financial Statements. For this reason, the data set forth in this
section may not be comparable to the discussion and analysis in the Company’s previously-issued
3Q08 Form 10-Q. The discussion and analysis should be read in conjunction with the response to
Part 1, Item 1 of this report and the consolidated financial statements of Black Box, including the
related notes, and “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” included in the Form 10-K. The Company’s fiscal year ends on March 31. The fiscal
quarters consist of 13 weeks and end on the Saturday nearest each calendar quarter end. The actual
ending dates for the periods presented as of December 31, 2007 and 2006 were December 29, 2007 and
December 30, 2006. References to “Fiscal Year” or “Fiscal” mean the Company’s fiscal year ended
March 31 for the year referenced. All dollar amounts are presented in thousands unless otherwise
noted.
Nature of Restatement
The Audit Committee completed its previously-disclosed independent review of the Company’s
historical stock option granting practices as more fully described in the “Explanatory Note”
preceding Part I, Item 1 of the Form 10-K. Please see the Form 10-K for more information regarding
the Audit Committee’s review and related matters. Following the completion of this review, the
Company determined that certain stock option grants which were originally issued with exercise
prices that were below fair market value for income tax purposes, which vested or may vest after
December 31, 2004 and which remained outstanding (i.e., unexercised) as of December 31, 2005, were
subject to adverse income taxation under Section 409A. For purposes of this Form 10-Q/A, these
below-fair market value stock option grants are referred to as “Affected Stock Option Grants.”
Under Section 409A, individuals who hold Affected Stock Option Grants may be subject to a 20%
federal income tax and an interest penalty tax in addition to the regular income tax liability plus
interest on the value of these stock option grants at the time of vesting (not exercise).
During the third quarter of Fiscal 2008, the Company conducted a tender offer to current
non-officer employees subject to taxation in the United States who held such Affected Stock Option
Grants that afforded those employees the opportunity to avoid unfavorable tax consequences under
Section 409A. The provisions of the tender offer amended each Affected Stock Option Grant to
increase the original exercise price to the lower of: (i) the fair market value of the common stock
on the corrected measurement date (as determined for tax purposes) or (ii) the fair market value of
the common stock on the trading day immediately following the expiration of the tender offer
(December 19, 2007), provided that the new exercise price was in no event lower than the original
exercise price of the stock option grant. Additionally, and as part of the tender offer, the
Company offered current non-officer employees the right to receive a cash payment equal to the
increase, if any, in the exercise price of the Affected Stock Option Grant.
In instances where the original exercise price of a stock option grant was less than the new
exercise price (as determined above), the Company increased the original exercise price to the new
exercise price (“Amended Stock Option Grant”) and paid a cash bonus to the employee. The Company
accounted for the impact of the Amended Stock Option Grant as a stock option modification under
SFAS 123R. As a result of the modification and the partial cash settlement, the Company recognized
$250 of additional stock-based compensation expense due to the increase in the fair market value of
these stock option grants that was recorded in Selling, general & administrative expense within the
Company’s Consolidated Statements of Income.
In instances where the current exercise price of a stock option grant was greater than the new
exercise price, the original stock option grant was canceled and immediately replaced with a new
stock option grant under the Employee Plan, that had the same terms as the canceled stock option
grant, including the same exercise price per share and no loss of vesting or change to the
expiration date of the stock option grant term, but with a new grant date (“Cancellation and New
Stock Option Grant”). The Company accounted for each Cancellation and New Stock Option Grant as
two separate transactions (i.e., the cancellation of the original stock option grant and the
issuance of a new stock option grant) and computed a fair market value for the new stock option
grant on the new grant date determined in accordance with the provisions of SFAS 123R. As a
result, the Company recognized a pre-tax charge of $4,687 of non-cash stock-based compensation
expense equal to the fair market value of the new stock option grant on the new grant date
(December 19, 2007) that was recorded in Selling, general & administrative expense within the
Company’s Consolidated Statements of Income.
During the fourth quarter of Fiscal 2008, the Company re-evaluated its valuation methodology for
both the Amended Stock Option Grant and the Cancellation and New Stock Option Grant. The Company’s
valuation methodology (i.e., modification under SFAS 123R) for the Amended Stock Option Grant was
correct. However, the Cancellation and New Stock Option Grant qualifies as a “cancellation of an
award accompanied by the concurrent grant of a replacement award,” as defined in SFAS 123R, which
should have been accounted for as a modification. Under SFAS 123R, incremental compensation cost
is measured as the excess, if any, of the fair market
value of the modified award over the fair market value of the original award immediately before its
terms are modified. With respect to the Cancellation and New Stock Option Grant, there were no
changes to any of the terms of the original stock option grant, thus the Company should have
recorded $0 of non-cash stock-based compensation expense for the third quarter of Fiscal 2008 as
compared to a pre-tax charge of $4,687 of non-cash stock-based compensation that had been
previously-recognized.
26
The table below reflects the impact of the adjustment to reverse a pre-tax charge of $4,687 of
previously-recognized non-cash stock-based compensation expense on the Company’s Consolidated
Statements of Income. As a result of this adjustment, the Company’s projected effective income tax
rate for Fiscal 2008, as of December 29, 2007, decreased from 38.0% to 37.7%. See Note 17 of the
Notes to the Consolidated Financial Statements for reference to footnote disclosure that reconciles
the previously-issued financial information to the restated financial information.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
(As |
|
|
|
|
|
|
|
|
|
Adjust- |
|
|
|
|
|
(As |
|
|
|
|
|
(As |
| |
|
Previously |
|
Adjust- |
|
|
|
|
|
ment, |
|
(As |
|
Previously |
|
|
|
Restated) |
| |
|
Reported) |
|
ment, |
|
Income |
|
net of |
|
Restated) |
|
Reported) |
|
Adjust- |
|
Diluted |
| |
|
Net income |
|
Pre-Tax |
|
tax |
|
Income tax |
|
Net income |
|
Diluted EPS |
|
ment |
|
EPS |
| |
3Q08
|
|
$ |
8,286 |
|
|
$ |
4,687 |
|
|
$ |
(1,632) |
|
|
$ |
3,055 |
|
|
$ |
11,341 |
|
|
$ |
0.47 |
|
|
$ |
0.17 |
|
|
$ |
0.64 |
|
3QYTD08
|
|
|
27,784 |
|
|
|
4,687 |
|
|
|
(1,632) |
|
|
|
3,055 |
|
|
|
30,839 |
|
|
|
1.57 |
|
|
|
0.17 |
|
|
|
1.74 |
|
| |
The Company
Black Box is the world’s largest dedicated network infrastructure services provider. Black Box
offers one-source network infrastructure services for communication systems. The Company’s service
offerings include design, installation, integration, monitoring and maintenance of voice, data and
integrated communication systems. The Company’s primary service offering is voice solutions, while
providing premise cabling and other data-related services and products. The Company provides
24/7/365 technical support for all of its solutions which encompass all major voice and data
manufacturers as well as 118,000 network infrastructure products that it sells through its catalog
and Internet web site and its Voice and Data services (collectively referred to as “On-Site
services”) offices.
Management is presented with and reviews revenues and operating income by geographical segment. In
addition, revenues and gross profit information by service type are provided herein for purposes of
further analysis.
The Company has completed several acquisitions from April 1, 2006 through December 31, 2007 that
have a significant impact on the Company’s consolidated financial statements and, more
specifically, North America Voice Services for the periods under review. During Fiscal 2008, the
Company acquired B & C Telephone, Inc. (“B&C”). Fiscal 2007 acquisitions include (i) USA
Commercial and Government and Canadian operations of NextiraOne, LLC (“NextiraOne”), (ii) Nu-Vision
Technologies, Inc. and Nu-Vision Technologies, LLC (collectively referred to as “NUVT”), (iii)
Nortech Telecommunications Inc. (“NTI”) and (iv) ADS Telecom, Inc. (“ADS”). The acquisitions noted
above are collectively referred to as the “Acquired Companies.” The results of operations of the
Acquired Companies are included in the Company’s Consolidated Statements of Income beginning on
their respective acquisition dates.
In connection with certain acquisitions, the Company incurs expenses that it excludes when
evaluating the continuing operations of the Company. The following table is included to provide a
schedule of the past acquisition-related expenses during Fiscal 2007 (by quarter).
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
1Q07 |
|
|
2Q07 |
|
|
3Q07 |
|
|
4Q07 |
|
|
Fiscal 2007 |
|
| |
| |
Selling general & administrative expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset write-up depreciation expense on
acquisitions |
|
$ |
-- |
|
|
$ |
1,191 |
|
|
$ |
713 |
|
|
$ |
742 |
|
|
$ |
2,646 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets on
acquisitions |
|
|
1,433 |
|
|
|
1,894 |
|
|
|
2,621 |
|
|
|
4,127 |
|
|
|
10,075 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,433 |
|
|
$ |
3,085 |
|
|
$ |
3,334 |
|
|
$ |
4,869 |
|
|
$ |
12,721 |
|
| |
27
The following table is included to provide a schedule of the current and an estimate of future
acquisition-related expenses for Fiscal 2008 (by quarter) based on the acquisition activity through
December 31, 2007.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
1Q08 |
|
|
2Q08 |
|
|
3Q08 |
|
|
4Q08 |
|
|
Fiscal 2008 |
|
| |
Selling general & administrative expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset write-up depreciation expense on
acquisitions |
|
$ |
659 |
|
|
$ |
448 |
|
|
$ |
457 |
|
|
$ |
472 |
|
|
$ |
2,036 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets on
acquisitions |
|
|
2,269 |
|
|
|
1,298 |
|
|
|
1,335 |
|
|
|
1,363 |
|
|
|
6,265 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,928 |
|
|
$ |
1,746 |
|
|
$ |
1,792 |
|
|
$ |
1,835 |
|
|
$ |
8,301 |
|
| |
28
The following table provides information on revenues and operating income by reportable geographic
segment (North America, Europe and All Other). The table below should be read in conjunction with
the following discussion. The adjustment to reverse a pre-tax charge of $4,687 of
previously-recognized non-cash stock-based compensation expense relating to the Company’s valuation
methodologies for certain stock option transactions during the third quarter of Fiscal 2008
was recorded in Selling, general and administrative expense within the Company’s Consolidated
Income Statement which is included in the Company’s measure of Operating income. See Note 10 and
Note 17 of the Notes to the Consolidated Financial Statements.
The Company’s reconciling items of $4,628 and $5,174 for the three (3) month periods ended December
31, 2007 and 2006, respectively, and $18,094 and $16,443 for the nine (9) months ended December 31,
2007 and 2006, respectively, include restructuring charges, severance costs, other acquisition
integration costs, amortization of intangible assets on acquisitions, stock-based compensation
expense, asset write-up depreciation expense on acquisitions, historical stock option granting
practices investigation costs and expenses incurred as a result of measures taken by the Company to
address the application of Section 409A (“409A expenses”).
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three-month period ended December 31, |
|
|
Nine-month period ended December 31, |
|
| |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
| |
|
(As Restated) |
|
|
|
|
(As Restated) |
|
|
|
| |
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
| |
|
|
|
|
|
total |
|
|
|
|
|
|
total |
|
|
|
|
|
|
total |
|
|
|
|
|
|
total |
|
| |
|
$ |
|
|
revenue |
|
|
$ |
|
|
revenue |
|
|
$ |
|
|
revenue |
|
|
$ |
|
|
revenue |
|
| |
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
210,635 |
|
|
|
81.5% |
|
|
$ |
220,391 |
|
|
|
83.2% |
|
|
$ |
637,639 |
|
|
|
82.7% |
|
|
$ |
644,260 |
|
|
|
84.0% |
Europe |
|
|
37,303 |
|
|
|
14.5% |
|
|
|
34,610 |
|
|
|
13.1% |
|
|
|
103,808 |
|
|
|
13.4% |
|
|
|
94,799 |
|
|
|
12.4% |
|
All Other |
|
|
10,386 |
|
|
|
4.0% |
|
|
|
9,805 |
|
|
|
3.7% |
|
|
|
29,798 |
|
|
|
3.9% |
|
|
|
27,467 |
|
|
|
3.6% |
|
| |
|
|
|
|
Total |
|
$ |
258,324 |
|
|
|
100% |
|
|
$ |
264,806 |
|
|
|
100% |
|
|
$ |
771,245 |
|
|
|
100% |
|
|
$ |
766,526 |
|
|
|
100% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
16,280 |
|
|
|
|
|
|
$ |
13,685 |
|
|
|
|
|
|
$ |
44,966 |
|
|
|
|
|
|
$ |
41,204 |
|
|
|
|
|
% of North America
revenues |
|
|
7.7% |
|
|
|
|
|
|
|
6.2% |
|
|
|
|
|
|
|
7.1% |
|
|
|
|
|
|
|
6.4% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe |
|
$ |
5,966 |
|
|
|
|
|
|
$ |
4,502 |
|
|
|
|
|
|
$ |
14,206 |
|
|
|
|
|
|
$ |
11,134 |
|
|
|
|
|
% of Europe revenues |
|
|
16.0% |
|
|
|
|
|
|
|
13.0% |
|
|
|
|
|
|
|
13.7% |
|
|
|
|
|
|
|
11.7% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other |
|
$ |
1,971 |
|
|
|
|
|
|
$ |
1,881 |
|
|
|
|
|
|
$ |
5,375 |
|
|
|
|
|
|
$ |
5,372 |
|
|
|
|
|
% of All Other revenues |
|
|
19.0% |
|
|
|
|
|
|
|
19.2% |
|
|
|
|
|
|
|
18.0% |
|
|
|
|
|
|
|
19.6% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
24,217 |
|
|
|
9.4% |
|
|
$ |
20,068 |
|
|
|
7.6% |
|
|
$ |
64,547 |
|
|
|
8.4% |
|
|
$ |
57,710 |
|
|
|
7.5% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciling items |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
4,628 |
|
|
|
|
|
|
$ |
5,174 |
|
|
|
|
|
|
$ |
18,094 |
|
|
|
|
|
|
$ |
16,443 |
|
|
|
|
|
Europe |
|
|
-- |
|
|
|
|
|
|
|
-- |
|
|
|
|
|
|
|
-- |
|
|
|
|
|
|
|
-- |
|
|
|
|
|
All Other |
|
|
-- |
|
|
|
|
|
|
|
-- |
|
|
|
|
|
|
|
-- |
|
|
|
|
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
4,628 |
|
|
|
1.8% |
|
|
$ |
5,174 |
|
|
|
2.0% |
|
|
$ |
18,094 |
|
|
|
2.3% |
|
|
$ |
16,443 |
|
|
|
2.1% |
|
| |
29
The following table provides information on revenues and gross profit by service type (Data
Services, Voice Services and Hotline Services). The adjustment to reverse a pre-tax charge of
$4,687 of previously-recognized non-cash stock-based compensation expense relating to the Company’s
valuation methodologies for certain stock option transactions during the third quarter of Fiscal
2008 was recorded in Selling, general and administrative expense within the Company’s
Consolidated Income Statement which is not included in the Company’s measure of Gross profit and,
therefore, does not impact the following table or the corresponding discussions.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three-month period ended December 31, |
|
|
Nine-month period ended December 31, |
|
| |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
| |
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
| |
|
|
|
|
|
total |
|
|
|
|
|
|
total |
|
|
|
|
|
|
total |
|
|
|
|
|
|
total |
|
| |
|
$ |
|
|
revenue |
|
|
$ |
|
|
revenue |
|
|
$ |
|
|
revenue |
|
|
$ |
|
|
revenue |
|
| |
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Data Services |
|
$ |
50,474 |
|
|
|
19.5% |
|
|
$ |
46,350 |
|
|
|
17.5% |
|
|
$ |
146,839 |
|
|
|
19.0% |
|
|
$ |
137,328 |
|
|
|
17.9% |
|
Voice Services |
|
|
148,581 |
|
|
|
57.5% |
|
|
|
160,686 |
|
|
|
60.7% |
|
|
|
449,379 |
|
|
|
58.3% |
|
|
|
464,140 |
|
|
|
60.6% |
|
Hotline Services |
|
|
59,269 |
|
|
|
22.9% |
|
|
|
57,770 |
|
|
|
21.8% |
|
|
|
175,027 |
|
|
|
22.7% |
|
|
|
165,058 |
|
|
|
21.5% |
|
| |
|
|
|
Total |
|
$ |
258,324 |
|
|
|
100% |
|
|
$ |
264,806 |
|
|
|
100% |
|
|
$ |
771,245 |
|
|
|
100% |
|
|
$ |
766,526 |
|
|
|
100% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Data Services |
|
$ |
15,911 |
|
|
|
|
|
|
$ |
14,236 |
|
|
|
|
|
|
$ |
44,462 |
|
|
|
|
|
|
$ |
41,460 |
|
|
|
|
|
% of Data Services
revenues |
|
|
31.5% |
|
|
|
|
|
|
|
30.7% |
|
|
|
|
|
|
|
30.3% |
|
|
|
|
|
|
|
30.2% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voice Services |
|
$ |
49,832 |
|
|
|
|
|
|
$ |
54,566 |
|
|
|
|
|
|
$ |
149,861 |
|
|
|
|
|
|
$ |
158,242 |
|
|
|
|
|
% of Voice
Services revenues |
|
|
33.5% |
|
|
|
|
|
|
|
34.0% |
|
|
|
|
|
|
|
33.3% |
|
|
|
|
|
|
|
34.1% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotline Services |
|
$ |
28,378 |
|
|
|
|
|
|
$ |
27,883 |
|
|
|
|
|
|
$ |
83,317 |
|
|
|
|
|
|
$ |
81,863 |
|
|
|
|
|
% of Hotline
Services revenues |
|
|
47.9% |
|
|
|
|
|
|
|
48.3% |
|
|
|
|
|
|
|
47.6% |
|
|
|
|
|
|
|
49.6% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
94,121 |
|
|
|
36.4% |
|
|
$ |
96,685 |
|
|
|
36.5% |
|
|
$ |
277,640 |
|
|
|
36.0 |
% |
|
$ |
281,565 |
|
|
|
36.7% |
|
| |
The Company’s distribution agreement with Avaya, Inc. terminated on September 8, 2007. The Company
evaluated the financial impact of this event including potential business strategies to minimize
such impact. The Company continues to anticipate that this event will not have a material impact
on its Fiscal 2008 operating results.
THIRD QUARTER FISCAL 2008 (“3Q08”) COMPARED TO THIRD QUARTER FISCAL 2007 (“3Q07”):
Total Revenues
Total revenues for 3Q08 were $258,324, a decrease of 2% compared to total revenues for 3Q07 of
$264,806. The Acquired Companies contributed incremental revenue of $68,970 and $84,237 for 3Q08
and 3Q07, respectively. Excluding the effects of the acquisitions and the positive exchange rate
impact of $5,130 in 3Q08 relative to the U.S. dollar, total revenues would have increased 2% from
$180,569 to $184,224 for the reasons discussed below.
Revenues by Geography
North America
Revenues in North America for 3Q08 were $210,635, a decrease of 4% compared to revenues for 3Q07 of
$220,391. The Acquired Companies contributed incremental revenue of $68,970 and $84,237 for 3Q08
and 3Q07, respectively. The decrease in Acquired Companies contributed revenue is primarily due to
expected post-merger client attrition from the NextiraOne acquisition. Excluding the effects of
the acquisitions and the positive exchange rate impact of $1,093 in 3Q08 relative to the U.S.
dollar, North American revenues would have increased 3% from $136,154 to $140,572. The Company
believes this increase is due to the success in the Company’s Data, Voice and Hotline (“DVH”)
cross-selling initiatives.
30
Europe
Revenues in Europe for 3Q08 were $37,303, an increase of 8% compared to revenues for 3Q07 of
$34,610. Excluding the positive exchange rate impact of $3,584 in 3Q08 relative to the U.S. dollar,
Europe revenues would have decreased 3% from $34,610 to $33,719. The Company believes the decrease
is due to softer demand for its Hotline Services during the quarter.
All Other
Revenues for All Other for 3Q08 were $10,386, an increase of 6% compared to revenues for 3Q07 of
$9,805. Excluding the positive exchange rate impact of $453 in 3Q08 relative to the U.S. dollar,
All Other revenues would have increased 1% from $9,805 to $9,933.
Revenue by Service Type
Data Services
Revenues from Data Services for 3Q08 were $50,474, an increase of 9% compared to revenues for 3Q07
of $46,350. Excluding the positive exchange rate impact of $1,963 in 3Q08 relative to the U.S.
dollar for its International Data Services, Data Services revenues would have increased 5% from
$46,350 to $48,511. The Company believes the increase in Data Services revenues is due to the
success of the Company’s DVH cross-selling initiatives coupled with stable end-user markets.
Voice Services
Revenues from Voice Services for 3Q08 were $148,581, a decrease of 8% compared to revenues for 3Q07
of $160,686. The Acquired Companies contributed incremental revenue of $68,970 and $84,237 for
3Q08 and 3Q07, respectively. The decrease in Acquired Companies contributed revenue is primarily
due to expected post-merger client attrition from the NextiraOne acquisition. Excluding the
effects of the acquisitions, Voice Services revenues would have increased 4% from $76,449 to
$79,611. The Company believes that the increase in Voice Services revenues is primarily due to the
success of the Company’s DVH cross-selling initiatives coupled with stable end-user markets. There
was no exchange rate impact on Voice Services revenues as all of the Company’s Voice Services
revenues are denominated in U.S. dollars.
Hotline Services
Revenues from Hotline Services for 3Q08 were $59,269, an increase of 3% compared to revenues for
3Q07 of $57,770. Excluding the positive exchange rate impact of $3,167 in 3Q08 relative to the U.S.
dollar for its International Hotline Services, Hotline Services revenues would have decreased 3%
from $57,770 to $56,102. The Company believes this decrease in Hotline Services revenues is
primarily due to softer demand for this service during the quarter, offset in part by the success
of the Company’s DVH cross-selling initiatives.
Gross profit
Gross profit dollars for 3Q08 were $94,121, a decrease of 3% compared to gross profit dollars for
3Q07 of $96,685. This decrease in gross profit dollars relates to reduced revenues in Voice
Services which, as disclosed above, was primarily due to expected post-merger attrition from the
NextiraOne acquisition. Gross profit as a percent of revenues for 3Q08 was 36.4% which is
equivalent to gross profit as a percentage of revenues for 3Q07 of 36.5%.
Gross profit dollars for Data Services for 3Q08 were $15,911, or 31.5% of revenues, compared to
gross profit dollars for 3Q07 of $14,236, or 30.7% of revenues. Gross profit dollars for Voice
Services for 3Q08 were $49,832, or 33.5% of revenues, compared to gross profit dollars for 3Q07 of
$54,566, or 34.0% of revenues. Gross profit dollars for Hotline Services for 3Q08 were $28,378, or
47.9% of revenues, compared to gross profit dollars for 3Q07 of $27,883, or 48.3% of revenues.
Selling, general & administrative expenses
Selling, general & administrative expenses for 3Q08 were $68,522, a decrease of $5,418 compared to
Selling, general & administrative expenses for 3Q07 of $73,940. Selling, general & administrative
expenses as a percent of revenue for 3Q08 were 26.5% compared to 27.9% for 3Q07. The decrease in
Selling, general & administrative expense dollars and Selling, general & administrative expenses as
a percent of revenue over the prior year was primarily due to the Company’s continued effort to
right-size the organization and more properly align the expense structure with anticipated revenues
and changing market demand for its solutions and services and a decrease in stock-based
compensation expense of $1,742 partially offset by increases in restructuring/integration costs of
$1,513 and 409A expenses of $1,091.
31
Intangibles amortization
Intangibles amortization for 3Q08 was $1,382, a decrease of $1,295 compared to Intangibles
amortization for 3Q07 of $2,677. The decrease was primarily attributable to the amortization
run-out for certain intangible assets partially offset by the finalization of purchase accounting
and the addition of intangible assets from acquisitions completed subsequent to 3Q07.
Operating income
Operating income for 3Q08 was $24,217, or 9.4% of revenues, an increase of $4,149 compared to
Operating income for 3Q07 of $20,068, or 7.6% of revenues.
Interest expense, net
Net interest expense for 3Q08 was $5,780, an increase of $1,719 compared to net interest expense
for 3Q07 of $4,061. The Company’s interest-rate swap contributed a loss of $1,583 and a gain of $87
for 3Q08 and 3Q07, respectively. Excluding the effect of interest-rate swap, net interest expense
would have increased $49 from $4,148 to $4,197. This increase in net interest expense is due to an
increase in the weighted average interest-rate from 6.25% for 3Q07 to 6.31% for 3Q08 partially
offset by decreases in the weighted average outstanding debt from $266,763 for 3Q07 to $245,209 for
3Q08.
Provision for Income Taxes
The tax provision for 3Q08 was $7,112, an effective tax rate of 38.5%. This compares to the tax
provision for 3Q07 of $5,636, an effective tax rate of 34.9%. The tax rate for 3Q08 was higher
than 3Q07 due to the expected write-off of deferred tax assets related to book stock-based
compensation expense, changes in the overall mix of taxable income among worldwide offices and the
loss of the extraterritorial income deduction for federal income tax purposes.
Net Income
As a result of the foregoing, Net income for 3Q08 was $11,341, or 4.4% of revenues, compared to Net
income for 3Q07 of $10,493, or 4.0% of revenues.
NINE-MONTHS FISCAL 2008 (“3QYTD08”) COMPARED TO NINE-MONTHS FISCAL 2007 (“3QYTD07”):
Total Revenues
Total revenues for 3QYTD08 were $771,245, an increase of 1% compared to total revenues for 3QYTD07
of $766,526. The Acquired Companies contributed incremental revenue of $209,088 and $232,670 for
3QYTD08 and 3QYTD07, respectively. Excluding the effects of the acquisitions and the positive
exchange rate impact of $10,533 in 3QYTD08 relative to the U.S. dollar, total revenues would have
increased 3% from $533,856 to $551,624 for the reasons discussed below.
Revenues by Geography
North America
Revenues in North America for 3QYTD08 were $637,639, a decrease of 1% compared to revenues for
3QYTD07 of $644,260. The Acquired Companies contributed incremental revenue of $209,088 and
$232,670 for 3QYTD08 and 3QYTD07, respectively. The decrease in Acquired Companies contributed
revenue is primarily due to expected post-merger client attrition from the NextiraOne acquisition.
Excluding the effects of the acquisitions and the positive exchange rate impact of $1,613 in
3QYTD08 relative to the U.S. dollar, North American revenues would have increased 4% from $411,590
to $426,938. The Company believes this increase is due to the success of the Company’s DVH
cross-selling initiatives.
Europe
Revenues in Europe for 3QYTD08 were $103,808, an increase of 10% compared to revenues for 3QYTD07
of $94,799. Excluding the positive exchange rate impact of $8,183 in 3QYTD08 relative to the U.S.
dollar, Europe revenues would have increased 1% from $94,799 to $95,625. The Company believes the
increase is due to the success of the Company’s DVH cross-selling initiatives.
All Other
Revenues for All Other for 3QYTD08 were $29,798, an increase of 8% compared to revenues for 3QYTD07
of $27,467. Excluding the positive exchange rate impact of $737 in 3QYTD08 relative to the U.S.
dollar, All Other revenues would have increased 6% from $27,467 to $29,061.
32
Revenue by Service Type
Data Services
Revenues from Data Services for 3QYTD08 were $146,839, an increase of 7% compared to revenues for
3QYTD07 of $137,328. Excluding the positive exchange rate impact of $4,125 in 3QYTD08 relative to
the U.S. dollar for its International Data Services, Data Services revenues would have increased 4%
from $137,328 to $142,714. The Company believes the increase in Data Services revenues is due to
the success of the Company’s DVH cross-selling initiatives coupled with stable end-user markets.
Voice Services
Revenues from Voice Services for 3QYTD08 were $449,379, a decrease of 3% compared to revenues for
3QYTD07 of $464,140. The Acquired Companies contributed incremental revenue of $209,088 and
$232,670 for 3QYTD08 and 3QYTD07, respectively. The decrease in Acquired Companies contributed
revenue is primarily due to expected post-merger client attrition from the NextiraOne acquisition.
Excluding the effects of the acquisitions, Voice Services revenues would have increased 4% from
$231,470 to $240,291. The Company believes that the increase in Voice Services revenues is
primarily due to the success of the Company’s DVH cross-selling initiatives coupled with stable
end-user markets. There was no exchange rate impact on Voice Services revenues as all of the
Company’s Voice Services revenues are denominated in U.S. dollars.
Hotline Services
Revenues from Hotline Services for 3QYTD08 were $175,027, an increase of 6% compared to revenues
for 3QYTD07 of $165,058. Excluding the positive exchange rate impact of $6,408 in 3QYTD08 relative
to the U.S. dollar for its International Hotline Services, Hotline Services revenues would have
increased 2% from $165,058 to $168,619. The Company believes this increase in Hotline Services
revenues is primarily due to the success of the Company’s DVH cross-selling initiatives and
increases in web-based sales coupled with stable end-user markets during this nine-month period.
Gross profit
Gross profit dollars for 3QYTD08 were $277,640, a decrease of 1% compared to gross profit dollars
for 3QYTD07 of $281,565. Gross profit as a percent of revenues for 3QYTD08 was 36.0%, a decrease
of 0.7% compared to gross profit as a percentage of revenues for 3QYTD07 of 36.7%. The Company
believes the percent decrease was due primarily to the impact of lower gross profit in its Voice
Services segment driven by the acquisition of NextiraOne, several strategic investments in the
Voice Services segment and the impact of lower gross profit in its Hotline Services segment driven
by increased product costs and product mix.
Gross profit dollars for Data Services for 3QYTD08 were $44,462, or 30.3% of revenues, compared to
gross profit dollars for 3QYTD07 of $41,460, or 30.2% of revenues. Gross profit dollars for Voice
Services for 3QYTD08 were $149,861, or 33.3% of revenues, compared to gross profit dollars for
3QYTD07 of $158,242, or 34.1% of revenues. Gross profit dollars for Hotline Services for 3QYTD08
were $83,317, or 47.6% of revenues, compared to gross profit dollars for 3QYTD07 of $81,863, or
49.6% of revenues.
Selling, general & administrative expenses
Selling, general & administrative expenses for 3QYTD08 were $208,049, a decrease of $9,692 compared
to Selling, general & administrative expenses for 3QYTD07 of $217,741. Selling, general &
administrative expenses as a percent of revenue for 3QYTD08 were 27.0% compared to 28.4% for
3QYTD07. The decrease in Selling, general & administrative expense dollars and decrease in
Selling, general & administrative expenses as a percent of revenue over the prior year was
primarily due to the Company’s continued effort to right-size the organization and more properly
align the expense structure with anticipated revenues and changing market demand for the Company’s
solutions and services and a decrease in stock-based compensation expense of $4,506 partially
offset by increases in restructuring/integration costs of $5,301, historical stock option review
costs of $1,152 and 409A expenses of $1,091.
Intangibles amortization
Intangibles amortization for 3QYTD08 was $5,044, a decrease of $1,070 compared to Intangibles
amortization for 3QYTD07 of $6,114. The decrease was primarily attributable to the amortization
run-out for certain intangible assets partially offset by the finalization of purchase accounting
and the addition of intangible assets from acquisitions completed subsequent to 3Q07.
Operating income
Operating income for 3QYTD08 was $64,547, or 8.4% of revenues, an increase of $6,837 compared to
Operating income for 3QYTD07 of $57,710, or 7.5% of revenues.
33
Interest expense, net
Net interest expense for 3QYTD08 was $15,203, an increase of $1,981 compared to net interest
expense for 3QYTD07 of $13,222. The Company’s interest-rate swap contributed losses of $2,021 and
$1,308 for 3QYTD08 and 3QYTD07, respectively. Excluding the effect of interest-rate swap, net
interest expense would have increased $1,268 from $11,914 to $13,182. This increase in net interest
expense is due to an increase in the weighted average interest-rate from 6.20% for 3QYTD07 to 6.51%
for 3QYTD08 partially offset by decreases in the weighted average outstanding debt from $251,153
for 3QYTD07 to $249,036 for 3QYTD08.
Provision for Income Taxes
The tax provision for 3QYTD08 was $18,661, an effective tax rate of 37.7%. This compares to the
tax provision for 3QYTD07 of $15,442, an effective tax rate of 34.8%. The tax rate for 3QYTD08 was
higher than 3QYTD07 due to the expected write-off of deferred tax assets related to book
stock-based compensation expense, changes in the overall mix of taxable income among worldwide
offices and the loss of the extraterritorial income deduction for federal income tax purposes.
Net Income
As a result of the foregoing, Net income for 3QYTD08 was $30,839, or 4.0% of revenues, compared to
Net income for 3QYTD07 of $28,981, or 3.8% of revenues.
Liquidity and Capital Resources
Cash Flows from Operating Activities
Net cash provided by operating activities during 3QYTD08 was $36,736. Significant factors
contributing to the source of cash were: net income of $30,839 inclusive of non-cash charges of
$13,464 and $2,719 for amortization / depreciation expense and stock compensation expense,
respectively, a decrease in other current assets of $9,759, increases in accounts payable of $2,874
and billings in excess of costs of $2,597, and a decrease in costs in excess of billings of $1,769.
Significant factors contributing to a use of cash were: an increase in accounts receivable of
$13,493, decreases in accrued expenses and restructuring reserves of $10,262 and $5,966,
respectively, and a decrease in deferred revenue of $1,638. Changes in the above accounts are
based on average Fiscal 2008 exchange rates.
Net cash provided by operating activities during 3QYTD07 was $24,596. Significant factors
contributing to the source of cash were: net income of $28,981 inclusive of non-cash charges of
$15,333 and $7,476 for amortization / depreciation expense and stock compensation expense,
respectively and an increase in billings in excess of costs and uncompleted contracts of $5,700.
Significant factors contributing to a use of cash were: increase in net inventory of $6,629, an
increase in costs in excess of billings of $10,161, a decrease in restructuring reserve of $13,992
and a decrease in deferred revenue of $5,559. Changes in the above accounts are based on average
Fiscal 2007 exchange rates.
As of December 31, 2007 and 2006, the Company had cash and cash equivalents of $20,109 and $15,362,
respectively, working capital of $138,489 and $126,879, respectively, and a current ratio of 1.63
and 1.52, respectively.
The Company believes that its cash provided by operating activities and availability under its
credit facility will be sufficient to fund the Company’s working capital requirements, capital
expenditures, dividend program, potential stock repurchases, potential future acquisitions or
strategic investments and other cash needs for the next 12 months.
Cash Flows from Investing Activities
Net cash used by investing activities during 3QYTD08 was $15,179. Significant factors contributing
to a use of cash were: $2,412 for gross capital expenditures, $10,657 to acquire B&C and $2,196 for
holdbacks and contingent fee payments related to prior period acquisitions. See Note 8 of the
Notes to the Consolidated Financial Statements for additional details regarding the acquisition of
B&C.
Net cash used by investing activities during 3QYTD07 was $137,241. Significant factors
contributing to a use of cash were: $3,475 for gross capital expenditures and $132,878 to acquire
NextiraOne, NUVT and NTI. See Note 8 of the Notes to the Consolidated Financial Statements for
additional details regarding the acquisitions of NextiraOne, NUVT and NTI.
Cash Flows from Financing Activities
Net cash used by financing activities during 3QYTD08 was $17,099. Significant factors contributing
to the cash outflow were $19,103 of net payments on long-term debt and $3,165 for the payment of
dividends. Significant factors contributing to the cash inflow were $5,172 of proceeds from the
exercise of stock options.
34
Net cash provided by financing activities during 3QYTD07 was $117,826. Significant factors
contributing to the cash inflow were $129,075 of net borrowings on long term debt and $12,141 of
proceeds from the exercise of stock options. Significant uses of cash were $20,206 for the
repurchase of common stock and $3,157 for the payment of dividends.
Total Debt
Revolving Credit Agreement - On March 28, 2006, the Company entered into the Second Amendment to
the Second Amended and Restated Credit Agreement dated January 24, 2005, as amended February 17,
2005 (collectively, the “Credit Agreement”) with Citizens Bank of Pennsylvania, as agent, and a
group of lenders. The Credit Agreement expires on March 28, 2011. Borrowings under the Credit
Agreement are permitted up to a maximum amount of $310,000, which includes up to $15,000 of swing
line loans and $25,000 of letters of credit. The Credit Agreement may be increased by the Company
up to an additional $90,000 with the approval of the lenders and may be unilaterally and
permanently reduced by the Company to not less than the then outstanding amount of all borrowings.
Interest on outstanding indebtedness under the Credit Agreement accrues, at the Company’s option,
at a rate based on either: (a) the greater of (i) the prime rate per annum of the agent then in
effect and (ii) 0.50% plus the rate per annum announced by the Federal Reserve Bank of New York as
being the weighted average of the rates on overnight Federal funds transactions arranged by Federal
funds brokers on the previous trading day or (b) a rate per annum equal to the LIBOR rate plus
0.75% to 1.25% (determined by a leverage ratio based on the Company’s EBITDA). The Credit
Agreement requires the Company to maintain compliance with certain non-financial and financial
covenants such as minimum net worth, leverage and fixed charge coverage ratios. As of December 31,
2007, the Company was in compliance with all financial covenants under the Credit Agreement.
As of December 31, 2007, the Company had total debt outstanding of $220,738. Total debt was
comprised of $218,380 outstanding under the credit agreement, $2,330 of obligations under capital
leases and $28 of various other third-party, non-employee loans. The maximum amount of debt
outstanding under the Credit Agreement, the weighted average balance outstanding under the Credit
Agreement and the weighted average interest-rate on all outstanding debt for the three (3) month
period ended December 31, 2007 was $256,830, $245,209 and 6.31%, respectively, compared to
$276,985, $266,763 and 6.25%, respectively, for the three (3) month period ended December 31, 2006.
The maximum amount of debt outstanding under the Credit Agreement, the weighted average balance
outstanding under the Credit Agreement and the weighted average interest-rate on all outstanding
debt for the nine (9) month period ended December 31, 2007 was $270,825, $249,036 and 6.51%,
respectively, compared to $284,470, $251,153 and 6.20%, respectively, for the nine (9) month period
ended December 31, 2006.
On January 30, 2008, the Company entered into a Third Amended and Restated Credit Agreement dated
January 30, 2008 (the “New Credit Agreement”) with Citizens Bank of Pennsylvania, as agent, and a
group of lenders. The New Credit Agreement, which replaces the Credit Agreement, expires on
January 30, 2013. Borrowings under the New Credit Agreement are permitted up to a maximum amount
of $350,000, which includes up to $20,000 of swing line loans and $25,000 of letters of credit.
The New Credit Agreement may be increased by the Company up to an additional $100,000 with the
approval of the lenders and may be unilaterally and permanently reduced by the Company to not less
than the then outstanding amount of all borrowings. Interest on outstanding indebtedness under the
New Credit Agreement accrues, at the Company’s option, at a rate based on either: (a) the greater
of (i) the prime rate per annum of the agent then in effect and (ii) 0.50% plus the rate per annum
announced by the Federal Reserve Bank of New York as being the weighted average of the rates on
overnight Federal funds transactions arranged by Federal funds brokers on the previous trading day
or (b) a rate per annum equal to the LIBOR rate plus 0.50% to 1.125% (determined by a leverage
ratio based on the Company’s consolidated EBITDA). The New Credit Agreement requires the Company
to maintain compliance with certain non-financial and financial covenants such as leverage and
fixed charge coverage ratios.
Dividends
Fiscal 2008
3Q08 - The Board declared a cash dividend of $0.06 per share on all outstanding shares of the
common stock. The dividend totaled $1,061 and was paid on January 11, 2008 to stockholders of
record at the close of business on December 28, 2007.
2Q08 - The Board declared a cash dividend of $0.06 per share on all outstanding shares of the
common stock. The dividend totaled $1,061 and was paid on October 12, 2007 to stockholders of
record at the close of business on September 28, 2007.
1Q08 - The Board declared a cash dividend of $0.06 per share on all outstanding shares of the
common stock. The dividend totaled $1,052 and was paid on July 13, 2007 to stockholders of record
at the close of business on June 29, 2007.
Fiscal 2007
3Q07 - The Board declared a cash dividend of $0.06 per share on all outstanding shares of the
common stock. The dividend totaled $1,047 and was paid on January 15, 2007 to stockholders of
record at the close of business on December 29, 2006.
35
2Q07 - The Board declared a cash dividend of $0.06 per share on all outstanding shares of the
common stock. The dividend totaled $1,041 and was paid on October 13, 2006 to stockholders of
record at the close of business on September 29, 2006.
1Q07 - The Board declared a cash dividend of $0.06 per share on all outstanding shares of the
common stock. The dividend totaled $1,061 and was paid on July 14, 2006 to stockholders of record
at the close of business on June 30, 2006.
While the Company expects to continue to declare dividends for the foreseeable future, there can be
no assurance as to the timing or amount of such dividends.
Repurchase of Common Stock
Fiscal 2008
3Q08 - During the three (3) month period ended December 31, 2007, the Company repurchased 56 shares
of its common stock for an aggregate purchase price of $2, or an average purchase price per share
of $38.38.
2Q08 - During the three (3) month period ended September 30, 2007, the Company repurchased 28
shares of its common stock for an aggregate purchase price of $1, or an average purchase price per
share of $43.00.
1Q08 - There were no repurchases of common stock during the three (3) month period ended June 30,
2007.
Fiscal 2007
3Q07 - During the three (3) month period ended December 31, 2006, the Company repurchased 60,028
shares of its common stock for an aggregate purchase price of $2,620, or an average purchase price
per share of $43.64.
2Q07 - During the three (3) month period ended September 30, 2006, the Company repurchased 440,628
shares of its common stock for an aggregate purchase price of $17,587, or an average purchase price
per share of $39.91.
1Q07 - There were no repurchases of common stock during the three (3) month period ended June 30,
2006.
Since the inception of the repurchase program in April 1999 through December 2007, the Company has
repurchased 7,436,195 shares of its common stock for an aggregate purchase price of $317,036, or an
average purchase price per share of $42.63. Additional repurchases of common stock may occur from
time to time depending upon factors such as the Company’s cash flows and general market conditions.
While the Company expects to continue to repurchase shares of common stock for the foreseeable
future, there can be no assurance as to the timing or amount of such repurchases.
Potential Tax Payments
In connection with the independent review by the Audit Committee of the Company’s historical stock
option granting practices, the Company determined that a number of officers may have exercised
options for which the application of Section 162(m) (“Section 162(m)”) of the Code may apply. It
is possible that these options will be treated as having been granted at less than fair market
value for federal income tax purposes because the Company incorrectly applied the measurement date
as defined in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to
Employees” (“APB 25”). If such options are deemed to have been granted at less than fair market
value, pursuant to Section 162(m), any compensation to officers, including proceeds from options
exercised in any given tax year, in excess of $1,000 will be disallowed as a deduction for tax
purposes. The Company estimates that the potential tax-effected liability for any such disallowed
Section 162(m) deduction would approximate $3,587, which was recognized as an expense during prior
periods and is currently recorded as a current liability within Income taxes within the Company’s
Consolidated Balance Sheets. The Company may also incur interest and penalties if it were to incur
any such tax liability, which could be material.
36
Other Section 409A Remedial Measures and other potential Section 409A Payments
With respect to certain employees who exercised stock options subject to Section 409A during
calendar year 2007, the Company made a bonus payment (“Calendar 2007 bonus payment”) to such
employees during January 2007 in an aggregate amount of $313. The Calendar 2007 bonus payment
includes amounts to compensate the employee for the additional Section 409A taxes that they will be
required to pay as well as an amount to gross-up such amount for the additional income and payroll
taxes owed on such payments. The Calendar 2007 bonus payment is recorded in Selling, general &
administrative expense within the Company’s Consolidated Statements of Income and in Accrued
compensation and benefits within the Company’s Consolidated Balance Sheets as of and for the period
ending December 31, 2007.
With respect to employees who exercised stock options subject to Section 409A during calendar year
2006, the Company intends to submit a cash payment (“Calendar 2006 cash payment”) directly to the
Internal Revenue Service (“IRS”) in an aggregate amount of $726. The Calendar 2006 cash payment
includes any applicable Section 409A additional taxes as well as an amount to “gross up” such
amount for the additional income and payroll taxes owed on such payments. The Calendar 2006 cash
payment is recorded in Selling, general & administrative expense within the Company’s Consolidated
Statements of Income and in Accrued compensation and benefits within the Company’s Consolidated
Balance Sheets as of and for the period ending December 31, 2007.
The Company continues to consider the application of Section 409A for other options that have been
granted with a below-fair market value exercise price for tax purposes, and which vested or may
vest after December 31, 2004. Accordingly, the Company may adopt measures to address the
application of Section 409A for these other options. The Company does not currently know what
impact Section 409A will have, or any such measures, if adopted, would have on its results of
operations, financial position or cash flows, although such impact could be material.
Expenses Incurred by the Company
The Company has incurred significant expenses, in excess of its insurance deductible of $500, in
Fiscal 2007 and Fiscal 2008, and expects to continue to incur additional expenses through the end
of Fiscal 2008, in relation to (i) the Audit Committee’s review of the Company’s historical stock
option granting practices and related accounting for stock option grants, (ii) the informal inquiry
and formal order of investigation by the SEC regarding the Company’s past stock option granting
practices, (iii) the previously-disclosed derivative action relating to the Company’s historical
stock option granting practices filed against the Company as a nominal defendant and certain of the
Company’s current and former directors and officers, as to whom it may have indemnification
obligations and (iv) related matters. As of December 31, 2007, the total amount of such fees is
approximately $5,150, of which $2,801 has been reimbursed by the insurance company. The Company
expensed $542 in Fiscal 2007 and $134 and $1,152 during the three (3) and nine (9) month period
ended December 31, 2007, respectively. The Company and the insurance company for its directors’
and officers’ indemnification insurance are currently in discussions with respect to which of these
non-reimbursed expenses in excess of the deductible will be paid by the insurance company.
Accordingly, there can be no assurance that all expenses submitted or to be submitted to the
insurance company for reimbursement will be reimbursed under the Company’s directors’ and officers’
indemnification insurance. The amount of such expenses not reimbursed by the insurance company
could be material.
Legal Proceedings
Please also see the matters discussed in Part II, Item 1, Legal Proceedings of this Quarterly
Report on Form 10-Q (the “Form 10-Q”), which information is incorporated herein by reference.
Significant Accounting Policies
The significant accounting policies used in the preparation of the Company’s consolidated financial
statements are disclosed in Note 2 of the Notes to the Consolidated Financial Statements within the
Form 10-K. Additional significant accounting policies or amendments to previously-disclosed
policies adopted during Fiscal 2008 are disclosed below.
Uncertainty in Income Taxes:
The Company requires that the realization of an uncertain income tax position must be “more likely
than not” (i.e., greater than 50% likelihood of receiving a benefit) before it can be recognized in
the financial statements. The benefit to be recorded in the financial statements is the amount
most likely to be realized assuming a review by tax authorities having all relevant information and
applying current conventions. The Company includes interest and penalties related to uncertain tax
positions within the Provision for income taxes within the Company’s Consolidated Statements of
Income.
37
Impact of Recently Issued Accounting Pronouncements
Business Combinations
In December, 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141 (revised
2007), “Business Combinations” (“SFAS 141(R)”). SFAS 141(R) retains the fundamental requirements
of the original pronouncement requiring that the purchase method be used for all business
combinations. SFAS 141(R) defines the acquirer as the entity that obtains control of one or more
businesses in the business combination, establishes the acquisition date as the date that the
acquirer achieves control and requires the acquirer to recognize the assets acquired, liabilities
assumed and any non-controlling interest at their fair values as of the acquisition date. SFAS
141(R) requires, among other things, that acquisition-related costs be recognized separately from
the acquisition. For the Company, SFAS 141(R) applies prospectively to business combinations for
which the acquisition date is on or after April 1, 2009.
Fair Value Option for Financial Assets and Financial Liabilities
In February, 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and
Financial Liabilities—Including an Amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159
permits an entity to elect to measure eligible items at fair value (“fair value option”), including
many financial instruments. The provisions of SFAS 159 are effective for the Company as of April
1, 2008. If the fair value option is elected, the Company will report unrealized gains and losses
on items for which the fair value option has been elected in earnings at each subsequent reporting
date. Upfront costs and fees related to items for which the fair value option is elected shall be
recognized in earnings as incurred and not deferred. The fair value option may be applied for a
single eligible item without electing it for other identical items, with certain exceptions, and
must be applied to the entire eligible item and not to a portion of the eligible item. The Company
is currently evaluating the irrevocable election of the fair value option pursuant to SFAS 159.
Fair Value Measurements
In September, 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which
defines fair value, establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value measurements. SFAS 157 is effective
for the Company beginning on April 1, 2008. In November 2007, the FASB agreed to a one-year
deferral of the effective date of SFAS 157 for all nonfinancial assets and liabilities, except
those that are recognized or disclosed at fair value in the financial statements on a recurring
basis. The Company is evaluating the impact of the adoption of SFAS 157 on the Company’s
consolidated financial statements.
Uncertainty in Income Taxes
In July, 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes” (“FIN 48”). FIN 48 requires that realization of an uncertain income tax position must be
“more likely than not” (i.e., greater than 50% likelihood of receiving a benefit) before it can be
recognized in the financial statements. Further, FIN 48 prescribes the benefit to be recorded in
the financial statements as the amount most likely to be realized assuming a review by tax
authorities having all relevant information and applying current conventions. FIN 48 also
clarifies the financial statement classification of tax-related penalties and interest and sets
forth new disclosures regarding unrecognized tax benefits. FIN 48 is effective for the next fiscal
year beginning after December 15, 2006. The Company adopted FIN 48 as of April 1, 2007, as
required. The adoption of FIN 48 resulted in a decrease in accumulated deficit and a decrease in
tax liabilities through a cumulative effect adjustment of $5,110. The adjustment to accumulated
deficit is summarized in the following table. See Note 2 and Note 14 of the Notes to the
Consolidated Financial Statements for further reference.
| |
|
|
|
|
| |
|
Retained Earnings |
|
| |
Balance as of April 1, 2007 |
|
$ |
450,022 |
|
Adjustment for adoption of FIN 48 |
|
|
(5,110) |
|
|
|
|
|
Balance as currently reported |
|
$ |
444,912 |
|
| |
Definition of Settlement in FIN 48
In May, 2007, the FASB issued staff position No. FIN 48-1, “Definition of Settlement in FASB
Interpretation No. 48” (“FSP FIN 48-1”) which amended FIN 48 to provide guidance about how an
enterprise should determine whether a tax position is effectively settled for the purpose of
recognizing previously unrecognized tax benefits. Under FSP FIN 48-1, a tax position could be
effectively settled on completion of an examination by a taxing authority. The Company adopted FSP
FIN 48-1 in conjunction with adoption of FIN 48 as of April 1, 2007. The adoption of FSP FIN 48-1
did not have a material impact on the Company’s Consolidated Financial Statements.
Inflation
The overall effects of inflation on the Company have been nominal. Although long-term inflation
rates are difficult to predict, the Company continues to strive to minimize the effect of inflation
through improved productivity and cost reduction programs as well as price adjustments within the
constraints of market competition.
38
Cautionary Forward Looking Statements
When included in the Form 10-Q or in documents incorporated herein by reference, the words
“expects,” “intends,” “anticipates,” “believes,” “estimates” and analogous expressions are intended
to identify forward-looking statements. Such statements are inherently subject to a variety of
risks and uncertainties that could cause actual results to differ materially from those projected.
Such risks and uncertainties include, among others, the final outcome of the review of the
Company’s stock option granting practices, including the related SEC investigation, shareholder
derivative lawsuit, tax matters and insurance/indemnification matters, and the impact of any
actions that may be required or taken as a result of such review, SEC investigation, shareholder
derivative lawsuit, tax matters or insurance/indemnification matters, levels of business activity
and operating expenses, expenses relating to corporate compliance requirements, cash flows, global
economic and business conditions, successful integration of acquisitions, including the NextiraOne
business, the timing and costs of restructuring programs, successful marketing of DVH services,
successful implementation of the Company’s M&A program, including identifying appropriate targets,
consummating transactions and successfully integrating the businesses, competition, changes in
foreign, political and economic conditions, fluctuating foreign currencies compared to the U.S.
dollar, rapid changes in technologies, client preferences, the ability of the Company to identify,
acquire and operate additional technical services companies, the Company’s arrangements with
suppliers of voice equipment and technology and various other matters, many of which are beyond the
Company’s control. These forward-looking statements are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995 and speak only as of the date of
the Form 10-Q. The Company expressly disclaims any obligation or undertaking to release publicly
any updates or any changes in the Company’s expectations with regard thereto or any change in
events, conditions or circumstances on which any statement is based.
39
Item 6. Exhibits.
| |
|
|
| Exhibit |
|
|
| Number |
|
Description |
|
|
|
31.1
|
|
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended, and Section 302 of the Sarbanes-Oxley Act of 2002
(1) |
|
|
|
31.2
|
|
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended, and Section 302 of the Sarbanes-Oxley Act of 2002
(1) |
|
|
|
32.1
|
|
Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Rule
13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (1) |
40
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
| |
|
|
|
|
|
|
| |
|
BLACK BOX CORPORATION |
|
|
|
|
|
|
|
|
|
Dated: May 9, 2008 |
|
|
|
|
|
|
|
|
By:
|
|
/s/ Michael McAndrew |
|
|
|
|
|
|
Michael McAndrew, Vice President,
|
|
|
|
|
|
|
Chief Financial Officer, Treasurer, Secretary |
|
|
|
|
|
|
and Principal Accounting Officer |
|
|
41
EXHIBIT INDEX
| |
|
|
| Exhibit |
|
|
| Number |
|
Description |
|
|
|
31.1
|
|
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended, and Section 302 of the Sarbanes-Oxley Act of 2002
(1) |
|
|
|
31.2
|
|
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended, and Section 302 of the Sarbanes-Oxley Act of 2002
(1) |
|
|
|
32.1
|
|
Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Rule
13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (1) |
42