Black Box Corporation 10-Q/A
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
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(Mark One) |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended September 30, 2006
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from to
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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
(Address of principal executive offices)
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15055
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Registrants 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. o Yes þ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule
12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
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 November 6, 2006, there were 17,357,753 shares of common stock, par value $.001 (the common
stock), outstanding.
BLACK BOX CORPORATION
INDEX
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EXPLANATORY NOTE
In this Quarterly Report on Form 10-Q/A for the quarter ended September 30, 2006 (Form 10-Q/A),
Black Box Corporation (Black Box or the Company) is restating its Consolidated Balance Sheets
as of September 30, 2006 and March 31, 2006, Consolidated Statements of Income and Consolidated
Statements of Cash Flows for the three (3) and six (6) month periods ended September 30, 2006 and
October 1, 2005 and the related Notes to the Consolidated Financial Statements. This Form 10-Q/A
also includes the amendment of Managements Discussion and Analysis of Financial Condition and
Results of Operations presented in the Companys Quarterly Report on Form 10-Q for the quarter
ended September 30, 2006 (the 2Q07 Form 10-Q) as it relates to the three (3) and six (6) month
periods ended September 30, 2006 and October 1, 2005. All restated information identified above is
collectively referred to as the Restatement. References herein to Fiscal Year or Fiscal mean
the Companys Fiscal Year ended March 31 for the year referenced.
The Restatement reflects adjustments arising from the determinations of the Audit Committee (the
Audit Committee) of the Companys Board of Directors (the Board), with the assistance of
outside legal counsel, and the Companys management to record additional non-cash charges for
stock-based compensation expense and the related income tax effects, relating to certain stock
option grants during the period from 1992 through September, 2006. Additionally, the Company has
recorded an adjustment to its financial statements for the quarter ended September 30, 2006 to
reflect the proper accounting treatment for an interest rate swap entered into during the quarter.
Following the filing of this Form 10-Q/A, the Company will file its Quarterly Report on Form 10-Q
for the quarter ended December 30, 2006 (the 3Q07 Form 10-Q) and its Annual Report on Form 10-K
for the period ended March 31, 2007 (the FY07 Form 10-K). The 3Q07 Form 10-Q will include
restated financial information for the three (3) and nine (9) month periods ended December 30,
2006 and December 31, 2005 and as of March 31, 2006 and December 30, 2006. In the FY07 Form 10-K,
the Company will restate its Consolidated Balance Sheet at March 31, 2006, its Consolidated
Statements of Income for the years ended March 31, 2006 and 2005, its Consolidated Statements of
Changes in Stockholders Equity for the years ended March 31, 2006, 2005 and as of April 1, 2004,
its Consolidated Statements of Cash Flows for the years ended March 31, 2006 and 2005, its
quarterly financial data as of and for the quarters ended in the fiscal year ended March 31, 2006
and its Selected Financial Data as of and for the years ended March 31, 2006, 2005, 2004 and 2003.
The Company has not amended and does not intend to amend any of its other previously-filed reports
on Form 10-K or Form 10-Q for the periods affected by the Restatement other than those specifically
stated above and its Quarterly Report on Form 10-Q/A for the three (3) month period ended July 1,
2006. As previously disclosed, the consolidated financial statements and related financial
information contained in such previously filed reports should no longer be relied upon.
Restatement through March 31, 2006
Background
On November 13, 2006, Black Box received a letter of informal inquiry from the Enforcement Division
of the Securities and Exchange Commission (the SEC) relating to the Companys stock option
practices from January 1, 1997 to present. As a result, the Audit Committee, with the assistance
of outside legal counsel, commenced an independent review of the Companys historical stock option
grant practices and related accounting for stock option grants during the period from 1992 to the
present (the Review Period).
On February 1, 2007, the Company announced that, while the review of option grant practices was
continuing, it believed that it would need to record additional non-cash charges for stock-based
compensation expense relating to certain stock option grants and, accordingly, cautioned investors
about relying on its historical financial statements until the Company could determine with
certainty whether a restatement would be required and, if so, the extent of any such restatement
and the periods affected.
On March 19, 2007, although the Audit Committee had not yet completed its review, the Audit
Committee concluded that the exercise price of certain stock option grants differed from the fair
market value of the underlying shares on the appropriate measurement date. At that time, the
Company and the Audit Committee announced that it was currently expected that the Companys
additional non-cash, pre-tax charges for stock-based compensation expense relating to certain stock
option grants would approximate $63 million for the Review Period. In addition, the Company and
the Audit Committee concluded that the Company would need to restate its previously-issued
financial statements contained in reports previously filed by the Company with the SEC.
Accordingly, on March 19, 2007, the Company and the Audit Committee concluded that the Companys
previously-issued financial statements and other historical financial information and related
disclosures for the Review Period, including applicable reports of its current or former
independent registered public accounting firms and related press releases, should not be relied
upon.
On May 25, 2007, the Company was advised by the Enforcement Division of the SEC that a Formal Order
of Private Investigation arising out of the Companys stock option practices had been entered and
on May 29, 2007 the Company received a subpoena that was issued by the SEC.
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On May 31, 2007, the Company announced that, as a result of the ongoing review of stock option
practices, Company management and the Audit Committee expected that the Companys additional
non-cash, pre-tax charges for stock-based compensation expense relating to certain stock option
grants would approximate $70 million for the Review Period.
Findings of the Audit Committee
During the Review Period, the Company granted stock options pursuant to an employee stock option
plan and a director stock option plan to acquire approximately 10.9 million shares of common stock.
Such plans at all relevant times provided for option grants to be approved by a designated
committee of non-employee directors or, in the case of the director stock option plan, by the
Board. Approximately 2,000 stock option grants were awarded during the Review Period with 69
recorded grant dates. No stock options have been granted since September, 2006. The Audit
Committee reviewed all stock options granted during the Review Period, including option grants to
the Companys directors, officers and rank and file employees (including grants to new employees,
grants awarded in connection with Company acquisitions and grants made as individual or group
performance awards). The Audit Committees review of the Companys stock option granting practices
included a comprehensive examination of reasonably available relevant physical and electronic
documents as well as interviews with current and former directors, officers and Company personnel.
The Audit Committees review was initially focused on determining whether the Companys prior stock
option granting practices were in compliance with the plans granting provisions and applicable law
or called into question its accounting for such options. Once it became evident that such issues
and accounting implications existed, the inquiry focused on those matters necessary: to determine
whether any accounting charges were material and whether a restatement of the Companys
previously-issued financial statements would be required; to establish a basis for effecting any
required restatement; to assure that, on as timely a basis as possible, the Company could file any
required curative disclosures with the SEC and assure its continued eligibility for listing on The
NASDAQ Stock Market (NASDAQ); and to provide an informed basis for the Companys response to the
identified issues, including appropriate corrective and remedial actions.
The following information summarizes certain of the findings of the Audit Committee. The findings
identified approximately $71.5 million of unrecorded expense at the time of grant (i.e., the
difference between the fair market value of the common stock on the appropriate measurement date
and the stated exercise price), net of forfeitures, during the Review Period, of which $70.0
million was recorded in the Companys Consolidated Financial Statements through March 31, 2006 and
$1.5 million of unrecorded expense at the time of grant will be included, beginning at April 1,
2006, in the Companys computation of compensation expense in accordance with Statement of
Financial Accounting Standards (SFAS) No. 123 (revised 2004) Share-Based Payment (SFAS
123(R)). The following summarizes the unrecorded expense at the time of grant by time period and
category of recipient:
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$4.2 million for the period from Fiscal 1993 through Fiscal 1997 ($0.2 million for
directors, $2.5 million for officers and $1.5 million for rank and file employees) |
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$45.6 million for the period from Fiscal 1998 through August 2002 ($1.1 million for
directors, $25.7 million for officers and $18.7 million for rank and file employees) |
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$21.8 million for the period from August 2002 to the present ($0.04 million for directors,
$0.6 million for officers and $21.1 million for rank and file employees) |
The Audit Committees additional key findings are summarized below:
Lack of Adequate Documentation: For a majority of grants issued by the Company during the
Review Period, there is either no or inadequate documentation of approval actions that satisfies
the requisites for establishing a measurement date under Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees (APB 25). Of the 69 recorded grant dates, there
are documented approval actions by the Board or the Option or Compensation Committee of the Board
(the Compensation Committee) with respect to particular grants for 12 dates. In the period
December 1992 to May 1996, neither the minutes of the Compensation Committee nor of the Board
reflect any action to approve specific grants. In some instances, evidence of single director (the
chairman of the Compensation Committee) approval actions exists. This absence of non-employee
director level documentation also applies to a majority of grants with a recorded grant date after
1996. In some cases, Compensation Committee minutes contain a reference to
reports on the status of the option pool but do not document any action to approve specific grants.
Approval documentation for certain grants has internal inconsistencies or conflicts with other
documents thereby rendering this documentation unreliable as a basis for establishing a measurement
date. In some cases, the only existing documentation is the executed option agreement and/or the
entry of the option grant into the option database. Notwithstanding these approval documentation
inadequacies, the Company entered into option agreements with grantees and has honored such grants.
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Grant Approvals: During the Review Period, relatively few option grants were approved in
complete compliance with the Companys stock option plans. Available documentation reflects that
the Company approved option grants in a variety of ways. With respect to the employee stock option
plan, grants were approved by the Compensation Committee as contemplated by the plan at various
times, by the full Board in 1998 and 1999, by a single director (the chairman of the Compensation
Committee) on nine recorded grant dates during the period 1994 through 2001 and by the Companys
Chief Executive Officer (CEO) at various times. With respect to the director stock option plan,
grants were generally approved by the designated Board committee and, in a few cases, by the
chairman of the Compensation Committee. In one instance in 2000, there is no conclusive
documentary evidence of the approval of director grants other than the signed director option
agreements.
The delegation of authority by the Compensation Committee to the CEO with respect to grants to rank
and file employees was not fully documented. However, there was an understood and accepted
practice between the CEO and the Compensation Committee whereby the CEO made certain awards to
individual employees. In some instances, this involved the allocation among rank and file
employees of blocks of shares approved by the Compensation Committee; in three (3) such instances,
the number of shares ultimately awarded pursuant to this process exceeded the approved size of the
block, which was contrary to the understanding of the Compensation Committee members. Further,
contrary to the understanding of Committee members, the award and/or documentation of those
individual grants often significantly lagged the approval of the block grant. In August 2005, the
Compensation Committee specifically acknowledged a prior grant of delegated authority to the CEO to
make option grants to rank and file employees and ratified all prior awards by the CEO. In some
cases, documentation of approval action is either inconclusive or missing, and the Company
therefore has been unable to determine what entity or person actually approved specific grants.
Option Pricing: The recorded grant dates for a majority of grants do not match the
applicable measurement dates as determined under APB 25. The grants of options with exercise
prices lower than the fair market values of the stock on the actual measurement dates did not
satisfy the fair market pricing requirement in the Companys plans, as amended in 1998, and were
not consistent with the Companys disclosures in SEC filings stating that the exercise price of
options was equal to the fair market value of the stock on the date of the grant.
The relationship between the stated exercise price of options and the fair market value of the
Companys stock on the date of the identifiable approval actions varied from grant to grant. In
some cases, the exercise price of grants reflected the fair market value of the underlying shares
on the date of any documented approval action. In other cases, the exercise prices reflected the
fair market value of the underlying shares on a date either prior or subsequent to any such
documented approval action and the exercise price was lower than the fair market value on the date
of any such action. In several such cases before August 2002, the use of such grant dates and
lower exercise prices (together with other available evidence) supports a finding that the recorded
grant dates and corresponding exercise prices were selected with the benefit of hindsight. For
certain grants where the mismatch between the recorded grant date and the approval action was only
a matter of days, however, the mismatch appears to have been attributable to inaccurate recording
or administrative delays. In some cases, the apparent approval action did not identify all
grantees; for example, there are cases where a block grant was approved subject to a later
determination of individual grant recipients and grants were recorded with a grant date, and
corresponding exercise price, that matched the date of the apparent approval of the block grant and
the fair market value of the common stock on that date although individual grant recipients may
have been identified some time after approval of the block grant. Finally, in some cases, the
approval action for specific grants is not adequately documented. Where the recorded grant date
did not satisfy the requisites for a measurement date under APB 25, the Company relied on default
methodologies to determine an appropriate measurement date.
Internal Controls: As outlined above, the Companys historical administration of its
options program lacked discipline as it relates to proper adherence to the plan requirements,
corporate recordkeeping and documentation. Since November 2003, however, the Company has properly
administered the stock option program as it relates to awards to directors and officers. During
the investigation, the Company identified control gaps related to grants made throughout the Review
Period. As of March 31, 2007, the Company implemented additional procedures to its process that
are focused on formalized documentation of appropriate approvals and determination of grant terms
to employees.
Procedural and Remedial Actions
The Audit Committee and other relevant Board committees are committed to a continued review and
implementation of procedural enhancements and remedial actions in light of the foregoing findings.
Consistent with its obligation to act in the best interests of the Company taking into account all
relevant facts and circumstances, the Audit Committee is continuing to assess the appropriateness
of a broad range of possible procedural enhancements and potential remedial measures in light of
the findings of its investigation. While the Audit Committee has not completed its consideration
of all such steps, procedural enhancements may include recommendations regarding improved stock
option administration procedures and controls, training and monitoring compliance with those
procedures, corporate recordkeeping, corporate risk assessment, evaluation of the internal
compliance environment and other remedial steps that may be appropriate. The Audit Committee is
also expected to address issues of individual conduct or responsibility, including those of the
Board, CEOs and Chief Financial Officers (CFOs) serving during the Review Period. Potential
remedial measures may include an evaluation of the role of and possible claims or other remedial
actions against current and former Company personnel who may be found
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to have been responsible for
identified problems during the Review Period. The Audit Committee expects to recommend to the
Board and/or its appropriate committees procedural enhancements and remedial measures that
appropriately address the issues raised by its findings. In advance of action by the Audit
Committee, as noted above, the Company has 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.
Restatement Methodologies
As of April 1, 2006, the Company adopted SFAS 123(R) using the modified prospective transition
method. Under this transition method, compensation expense is to be recognized for all share-based
compensation awards granted after the date of adoption and for all unvested awards existing on the
date of adoption. Prior to April 1, 2006, the Company accounted for stock-based compensation
awards to directors, officers and rank and file employees using the intrinsic value method in
accordance with APB 25 as allowed under SFAS No. 123 Accounting for Stock-Based Compensation
(SFAS 123). Under the intrinsic value method, no share-based compensation expense related to
stock options was required to be recognized if the exercise price of the stock option was at least
equal to the fair market value of the common stock on the measurement date. APB 25 defines the
measurement date as the first date on which are known both (1) the number of shares that an
individual grant recipient is entitled to receive and (2) the option or purchase price, if any.
In light of the Audit Committees review of the Companys stock option granting practices during
the Review Period and as to those cases in which the Company previously used a recorded grant date
as the measurement date that the Company determined could no longer be relied upon, the Company has
developed and applied the following methodologies to remeasure those stock option grants and record
the relevant charges in accordance with APB 25 by considering the following sources of information:
(i) meeting minutes of the Board and of committees thereof and related materials, (ii) Unanimous
Written Consents of the Board and of committees thereof, (iii) the dates on which stock option
grants were entered into the Companys stock option database (create date), (iv) relevant email
correspondence reflecting stock option grant approval actions, (v) individual stock option
agreements and related materials, (vi) employee and Board offer letters, (vii) documents relating
to acquisitions, (viii) reports on Form 4 filed with the SEC and (ix) guidance of the Office of the
Chief Accountant of the SEC on stock option matters as set forth in its letter dated September 19,
2006.
Grants with Appropriate Committee Approval. With respect to grants of approximately 1.0 million
shares, or approximately 9% of the total grants in the Review Period, the Company has evidence to
support the approval of the grant under the stock option plans by the relevant committee of the
Board, and such evidence includes the number of options each individual was entitled to receive and
the option price. However, the relationship between these documented approval actions and the
originally-recorded grant dates and exercise prices for the options so approved varied during the
Review Period. In some cases, grants were recorded with a grant date and a corresponding exercise
price that matched the date of the approval action or were otherwise consistent with the terms of
the approval actions. In other cases, however, the recorded grant dates and corresponding exercise
prices of the grants reflected the fair market value of the common stock on a date prior to the
committees documented approval actions. The Company has restated the compensation expense for
stock option grants relating to approximately 0.4 million shares of common stock by using the date
of the documented approval action as the measurement date. The total additional non-cash, pre-tax
charge for these grants is approximately $1.8 million, net of forfeitures, amortized over the
appropriate vesting period through March 31, 2006, of which $0.07 million relates to director
options, $1.3 million relates to officer options and $0.4 million relates to rank and file employee
options.
Grants with Other Approvals. With respect to grants of approximately 1.9 million shares, or
approximately 18% of the total grants in the Review Period, the Company has evidence to support the
approval of the grant by the Board, an outside director or the Companys CEO and the identification
of the number of options each individual was entitled to receive together with the option price.
These grants are distinguished from the grants described in the prior paragraph in that the nature
of the approval was not fully consistent with the terms of the relevant stock option plan. As with
the grants discussed in the preceding paragraph, the relationship between these documented approval
actions and the originally-recorded grant dates and exercise prices for the options so approved
varied during the
Review Period. In some cases, grants were recorded with a grant date and a corresponding exercise
price that matched the date of the approval action or were otherwise consistent with the terms of
the approval action. In other cases, however, the recorded grant dates and corresponding exercise
prices of the grants reflected the fair market value of the Companys stock on a date prior to the
approval action. The Company has restated the compensation expense for stock option grants
relating to approximately 1.6 million shares of common stock by using the date of the documented
approval action as the measurement date. The total additional non-cash, pre-tax charge for these
grants is approximately $7.6 million, net of forfeitures, amortized over the appropriate vesting
period through March 31, 2006, of which $0.5 million relates to director options, $2.6 million
relates to officer options and $4.5 million relates to rank and file employee options.
Grants Lacking Adequate Documentation. With respect to grants of approximately 7.9 million shares
(5.0 million shares to rank and file employees), or 73.0% of the total grants in the Review Period,
the Company has been unable to locate adequate documentation of approval actions that would satisfy
the requisites for a measurement date under APB 25. For these grants, management considered all
available relevant information to form a reasonable conclusion as to the most reasonable
measurement date. For all grants in this category, the Company has established default
methodologies for determining the most appropriate measurement date under APB 25.
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With respect to grants entered into the Companys stock option database after September 9, 1999,
when the database began to reflect a create date which is the date on which a grant was entered
into the system, the Company has determined to use the individual create date for each grant as
the APB 25 measurement date, which was in most cases different from the originally-recorded grant
date. The Company believes that this create date is the most appropriate methodology in the
absence of sufficient evidence of approvals for these grants as it represents the earliest point in
time at which the evidence shows that all requisites for the establishment of the measurement date
had been satisfied. Such create dates preceded, often by a significant amount of time, the
execution of stock option agreements, which, generally, were manually signed by the Companys CEO
and manually signed and dated by the grantee. In addition, in almost all cases, a grant entered
into the database, which established the create date, ultimately resulted in the creation of a
stock option agreement reflecting such grant. Accordingly, while execution of the stock option
agreements constituted a clear acknowledgement by the grantee and the Company of the grantees
legal entitlement to the grant the Company believes the create date more accurately reflects the
date of approval than does the signed option agreement. The Company has restated the compensation
expense for stock option grants relating to approximately 4.2 million shares of common stock by
using the create date as the measurement date. The total additional non-cash, pre-tax charge for
these grants is approximately $49.8 million, net of forfeitures, amortized over the appropriate
vesting period through March 31, 2006, of which $0.5 million relates to director options, $17.2
million relates to officer options and $32.2 million relates to rank and file employee options.
The Companys procedures for evaluating the appropriateness of measurement dates fixed with
reference to such create dates included a sensitivity analysis which provided an understanding of
the differences between the additional recorded charge for stock-based compensation expense and the
charges that would result from using other identified alternative methods for determining
measurement dates. The Companys sensitivity analysis included identifying the range of
potential grant dates defined by the recorded grant date and the create date for each grant. The
Company then identified the low and high closing prices of the common stock within that range of
potential grant dates and applied both the low and high closing prices of the common stock to the
number of shares granted for which the create date methodology was utilized to determine the
range of potential adjustments to stock-based compensation expense for these grants, which was
$0.09 million to $73.8 million, net of forfeitures, as compared to the additional non-cash, pre-tax
charge for these grants of approximately $49.8 million, net of forfeitures, included in the
Restatement.
For options entered into the Companys option database before September 9, 1999, the Company
determined the measurement date generally by reference to signed option agreements (or the deemed
signature date for certain options as discussed below). The executed option agreements
(hereinafter signed option agreements), manually signed by the Companys CEO and manually signed
and dated by the grantee, constituted an acknowledgement by the grantee and the Company of the
grantees legal entitlement to the grant and, in the absence of authoritative information as to
when all the requisites for the establishment of the measurement date had been satisfied, provides
a measurement date framework based on entitlement. The Company has restated the compensation
expense for stock option grants relating to approximately 1.4 million shares of common stock by
using the signed option agreements as the measurement date. The total additional non-cash, pre-tax
charge for these grants is approximately $6.4 million, net of forfeitures, amortized over the
appropriate vesting period through March 31, 2006, of which $0.3 million relates to director
options, $3.6 million relates to officer options and $2.5 million relates to rank and file employee
options. The Company believes this methodology was the most appropriate in the absence of
sufficient evidence of approvals for these grants as it represents the earliest point in time at
which the evidence shows that all requisites for the establishment of the measurement date had been
satisfied for these grants. The Companys procedures for evaluating the appropriateness of
measurement dates fixed with reference to the dating of signed option agreements included a
sensitivity analysis which provided an understanding of the differences between the additional
recorded charge for stock-based compensation expense and the charges that would result from using
other identified alternative methods for determining measurement dates. The Companys sensitivity
analysis included identifying the range of potential grant dates defined by the recorded grant date
and the date of the grantees signature on the stock option agreement for each grant. The Company
then identified the low and high closing prices of the common stock within that range of potential
grant dates and applied both the low and high closing prices of the common
stock to the number of shares granted for which the signed option agreements methodology was
utilized to determine the range of potential adjustments to stock-based compensation expense for
these grants, which was $0.03 million to $9.6 million, net of forfeitures, as compared to the
additional non-cash, pre-tax charge for these grants of approximately $6.4 million, net of
forfeitures, included in the Restatement.
In those cases where no reliably-dated signed option agreement could be located and where no
post-September 9, 1999 create date exists (stock option grants totaling approximately 0.9 million
shares), the Company used the average period between recorded grant date and date of the signatures
on all other grantee signed option agreements with the same grant date as the measurement date.
For example, if there were four stock option grants with a grant date of January 1, 1996, the
Company had the signed option agreements for three of these stock option grants and the average
number of days between the grant date and the signature dates of these three signed option
agreements was 20 days, January 21, 1996 was used as the measurement date for the grant for which
no signed option agreement could be located. The Company has restated the compensation expense for
stock option grants relating to approximately 0.7 million shares of common stock using this
average days to sign agreement method. The total additional non-cash, pre-tax charge for these
grants is approximately $4.4 million, net of forfeitures, amortized over the appropriate vesting
period through March 31, 2006, of which $0.06 million relates to director options, $4.2 million
relates to officer options and $0.2 million relates to rank and file employee options. The Company
believes this methodology was the most appropriate in the absence of sufficient evidence of
approvals for these grants because it gives a reasonable approximation of the measurement date
related to these options in light of the available evidence. The Company
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conducted a sensitivity
analysis by comparing the Companys current default methodology (i.e., average days to sign
agreement) with another default methodology. For this analysis, the Company identified the range
of potential grant dates defined by the earliest signed option agreement and the latest signed
option agreement. The Company then identified the low and high closing prices of the common stock
over the range of potential grant dates and applied both the low and high closing prices of the
common stock to the number of shares granted to determine the range of potential adjustments to
stock-based compensation expense for these grants, which was $2.6 million to $5.9 million, net of
forfeitures. The Companys analyses indicate that stock-based compensation expense computed using
other identified alternative default methodologies would not materially differ from stock-based
compensation expense computed using the average days to sign agreement methodology. The
Companys procedures for evaluating the appropriateness of measurement dates fixed with reference
to the average days to sign agreements also included a sensitivity analysis which provided an
understanding of the differences between the additional recorded charge for stock-based
compensation expense and the charges that would result from using other identified alternative
methods for determining measurement dates. The Companys sensitivity analysis included identifying
the range of potential grant dates defined by the recorded grant date and the average days to sign
agreement for each grant. The Company then identified the low and high closing prices of the
common stock within that range of potential grant dates and applied both the low and high closing
prices of the common stock to the number of shares granted to determine the range of potential
adjustments to stock-based compensation expense for these grants, which was $0.03 million to $6.1
million, net of forfeitures, as compared to the additional non-cash, pre-tax charge for these
grants of approximately $4.4 million, net of forfeitures, included in the Restatement.
Given the volatility of the common stock during much of the Review Period, the use of methodologies
and measurement dates different from those described above could have resulted in a higher or lower
cumulative compensation expense which would have caused net income or loss to be different from the
amounts reported in the restated consolidated financial statements. The Companys procedures for
evaluating the appropriateness of measurement dates fixed using the default methodologies described
above also included a sensitivity analysis which provided an understanding of the differences
between the additional recorded charge for stock-based compensation expense and the charges that
would result from using other identified alternative methods for determining measurement dates.
The Companys sensitivity analysis included identifying the range of potential grant dates defined
by the recorded grant date and the appropriate measurement date for each grant. The Company then
identified the low and high closing prices of the common stock within that range of potential grant
dates and applied both the low and high closing prices of the common stock to the number of shares
granted to determine the range of potential adjustments to stock-based compensation expense for
these grants, which was $9.3 million to $99.3 million, net of forfeitures, as compared to the
additional non-cash, pre-tax charge for these grants of approximately $70.0 million, net of
forfeitures, included in the Restatement.
Other adjustments through March 31, 2006
From 1994 through 1998, the Company did not properly account for stock options for one officer that
were modified after the grant date pursuant to a separation agreement. Some of these modifications
were not identified in the Companys financial reporting processes and were therefore not properly
reflected in its financial statements. As a result, the Company has recorded a non-cash charge for
stock-based compensation of $1.0 million during Fiscal 1999.
Summary
In summary, the Company recorded cumulative non-cash charges for stock-based compensation of $70.9
million through March 31, 2006, offset in part by a cumulative income tax benefit of $27.7 million,
for a total after-tax charge of $43.2 million. These charges had no impact on net sales or cash
and cash equivalents as previously reported in the Companys financial statements; as a result, no
changes to these items are reflected in the Restatement. Non-cash charges for stock-based
compensation expense have been recorded as adjustments to Selling, General, and Administrative
Expenses within the Companys Consolidated Statements of Income.
1Q07 and 2Q07 Restatement
Stock-based compensation expense
In addition to the Restatement noted above through March 31, 2006, the Company has recorded a
non-cash charge for stock-based compensation of $0.8 million and $2.4 million for the three (3) and
six (6) month periods ended September 30, 2006, offset in part by income tax benefits of $0.3
million and $1.0 million, or total after-tax charges of $0.5 million and $1.4 million. This charge
was recorded to reflect additional non-cash, stock-based compensation expense recognized under the
fair value method (SFAS 123(R)) because the exercise price for certain stock option grants prior
to, but not vested as of March 31, 2006, differed from the fair market value of the underlying
shares on the appropriate measurement date, some of which occurred during Fiscal 2007.
8
Accounting for derivatives
On July 26, 2006, the Company entered into an interest rate swap to reduce its exposure from
fluctuating interest rates. SFAS No.133 Accounting for Derivative Instruments and Hedging
Activities (SFAS 133) requires that all derivative instruments be recorded on the balance sheet
as either an asset or liability measured at their fair value, and that changes in the derivatives
fair value be recognized currently in earnings unless specific hedge accounting criteria are met.
From inception of the hedge, the Company had applied a method of cash flow hedge accounting under
SFAS 133 to account for the interest rate swap that allowed the Company to assume no
ineffectiveness in such agreements, called the short-cut method.
Subsequently, the Company analyzed its eligibility for the short-cut method in light of certain
clarifications delivered by the Office of the Chief Accountant of the SEC, and determined that its
interest rate swap did not qualify for the short-cut method under SFAS 133 because certain
prepayment features relating to the underlying actual debt were not identical to those contained in
the interest rate swap. Because the Companys documentation at hedge inception reflected the short-cut
method rather than the long haul method for determining hedge ineffectiveness, the derivative
did not meet the requirements for a cash flow hedge. Documentation for the long haul method of
accounting at hedge inception cannot be retrospectively applied under SFAS 133. Therefore,
fluctuations in the interest rate swaps fair value should have been recorded through the Companys
Consolidated Statement of Income instead of through Other Comprehensive Income (Loss), which is a
component of stockholders equity. The adjustment for 2Q07 will decrease reported net income and
increase Other Comprehensive Income by approximately $1.4 million. This change in accounting for
this derivative instrument could result in significant volatility in the Companys reported net
income and earnings per share due to increases and decreases in the fair value of the interest rate
swap. However, the derivative instrument remains highly effective and the change in accounting for
this derivative instrument does not impact operating cash flows or total stockholders equity.
The table below reflects the impact of the additional non-cash charges for stock-based compensation
expense and the non-cash charge related to the interest rate swap on the Companys Consolidated
Statements of Income, including the cumulative adjustment to Retained Earnings as of March 31, 2006
and September 30, 2006 on the Companys Consolidated Balance Sheet. See Note 3 of the Notes to
Consolidated Financial Statements for reference to footnote disclosure that reconciles the
previously filed annual financial information to the restated annual financial information. All
dollar amounts are presented in thousands except per share amounts. Per share amounts may not
total due to rounding.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(As |
|
|
|
|
|
|
|
|
|
|
Adjust- |
|
|
|
|
|
|
(As |
|
|
|
|
|
|
(As |
|
|
|
previously |
|
|
Adjust- |
|
|
Income |
|
|
ment, |
|
|
(As |
|
|
previously |
|
|
|
|
|
|
Restated) |
|
|
|
reported) |
|
|
ment, |
|
|
Tax |
|
|
Net of |
|
|
Restated) |
|
|
reported) |
|
|
Adjust- |
|
|
Diluted |
|
|
|
Net Income |
|
|
Pre-Tax |
|
|
Benefit |
|
|
Tax |
|
|
Net Income |
|
|
Diluted EPS |
|
|
ment |
|
|
EPS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FY 94 |
|
$ |
13,370 |
|
|
$ |
43 |
|
|
$ |
(19 |
) |
|
$ |
24 |
|
|
$ |
13,346 |
|
|
$ |
0.83 |
|
|
$ |
-- |
|
|
$ |
0.83 |
|
FY 95 |
|
|
14,515 |
|
|
|
461 |
|
|
|
(144 |
) |
|
|
317 |
|
|
|
14,198 |
|
|
|
0.89 |
|
|
|
(0.02 |
) |
|
|
0.87 |
|
FY 96 |
|
|
18,278 |
|
|
|
406 |
|
|
|
(151 |
) |
|
|
255 |
|
|
|
18,023 |
|
|
|
1.10 |
|
|
|
(0.01 |
) |
|
|
1.09 |
|
FY 97 |
|
|
24,792 |
|
|
|
1,172 |
|
|
|
(456 |
) |
|
|
716 |
|
|
|
24,076 |
|
|
|
1.40 |
|
|
|
(0.04 |
) |
|
|
1.36 |
|
FY 98 |
|
|
32,404 |
|
|
|
3,595 |
|
|
|
(1,393 |
) |
|
|
2,202 |
|
|
|
30,202 |
|
|
|
1.79 |
|
|
|
(0.12 |
) |
|
|
1.67 |
|
FY 99 |
|
|
38,145 |
|
|
|
4,506 |
|
|
|
(1,732 |
) |
|
|
2,774 |
|
|
|
35,371 |
|
|
|
2.09 |
|
|
|
(0.15 |
) |
|
|
1.94 |
|
FY 00 |
|
|
48,852 |
|
|
|
5,778 |
|
|
|
(2,209 |
) |
|
|
3,569 |
|
|
|
45,283 |
|
|
|
2.60 |
|
|
|
(0.19 |
) |
|
|
2.41 |
|
FY 01 |
|
|
64,190 |
|
|
|
10,290 |
|
|
|
(3,953 |
) |
|
|
6,337 |
|
|
|
57,853 |
|
|
|
3.22 |
|
|
|
(0.32 |
) |
|
|
2.90 |
|
FY 02 |
|
|
62,042 |
|
|
|
11,333 |
|
|
|
(4,381 |
) |
|
|
6,952 |
|
|
|
55,090 |
|
|
|
2.97 |
|
|
|
(0.33 |
) |
|
|
2.64 |
|
FY 03 |
|
|
48,685 |
|
|
|
8,927 |
|
|
|
(2,328 |
) |
|
|
6,599 |
|
|
|
42,086 |
|
|
|
2.39 |
|
|
|
(0.32 |
) |
|
|
2.07 |
|
FY 04 |
|
|
47,243 |
|
|
|
8,197 |
|
|
|
(4,156 |
) |
|
|
4,041 |
|
|
|
43,202 |
|
|
|
2.52 |
|
|
|
(0.22 |
) |
|
|
2.30 |
|
FY 05 |
|
|
29,912 |
|
|
|
5,178 |
|
|
|
(2,312 |
) |
|
|
2,866 |
|
|
|
27,046 |
|
|
|
1.68 |
|
|
|
(0.16 |
) |
|
|
1.52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative 03/31/05 |
|
$ |
442,428 |
|
|
$ |
59,886 |
|
|
$ |
(23,234 |
) |
|
$ |
36,652 |
|
|
$ |
405,776 |
|
|
$ |
23.48 |
|
|
$ |
(1.89 |
) |
|
$ |
21.59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1Q06 |
|
|
7,394 |
|
|
|
1,120 |
|
|
|
(442 |
) |
|
|
678 |
|
|
|
6,716 |
|
|
|
0.43 |
|
|
|
(0.04 |
) |
|
|
0.39 |
|
2Q06 |
|
|
12,797 |
|
|
|
1,126 |
|
|
|
(444 |
) |
|
|
682 |
|
|
|
12,115 |
|
|
|
0.74 |
|
|
|
(0.04 |
) |
|
|
0.70 |
|
3Q06 |
|
|
12,511 |
|
|
|
2,431 |
|
|
|
(959 |
) |
|
|
1,472 |
|
|
|
11,039 |
|
|
|
0.70 |
|
|
|
(0.08 |
) |
|
|
0.62 |
|
4Q06 |
|
|
4,656 |
|
|
|
6,368 |
|
|
|
(2,612 |
) |
|
|
3,756 |
|
|
|
900 |
|
|
|
0.26 |
|
|
|
(0.21 |
) |
|
|
0.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FY 06 |
|
$ |
37,358 |
|
|
$ |
11,045 |
|
|
$ |
(4,457 |
) |
|
$ |
6,588 |
|
|
$ |
30,770 |
|
|
$ |
2.13 |
|
|
$ |
(0.37 |
) |
|
$ |
1.76 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative 03/31/06 |
|
$ |
479,786 |
|
|
$ |
70,931 |
|
|
$ |
(27,691 |
) |
|
$ |
43,240 |
|
|
$ |
436,546 |
|
|
$ |
25.61 |
|
|
$ |
(2.26 |
) |
|
$ |
23.35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1Q07 |
|
|
7,807 |
|
|
|
1,629 |
|
|
|
(635 |
) |
|
|
994 |
|
|
|
6,813 |
|
|
|
0.43 |
|
|
|
(0.06 |
) |
|
|
0.37 |
|
2Q07 |
|
|
13,079 |
|
|
|
2,210 |
|
|
|
(806 |
) |
|
|
1,404 |
|
|
|
11,675 |
|
|
|
0.74 |
|
|
|
(0.08 |
) |
|
|
0.66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2QYTD07 |
|
$ |
20,886 |
|
|
$ |
3,839 |
|
|
$ |
(1,441 |
) |
|
$ |
2,398 |
|
|
$ |
18,488 |
|
|
$ |
1.18 |
|
|
$ |
(0.14 |
) |
|
$ |
1.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative 09/30/06 |
|
$ |
500,672 |
|
|
$ |
74,770 |
|
|
$ |
(29,132 |
) |
|
$ |
45,638 |
|
|
$ |
455,034 |
|
|
$ |
26.78 |
|
|
$ |
(2.39 |
) |
|
$ |
24.39 |
|
|
9
For the convenience of the reader, this Form 10-Q/A sets forth Part I of the 2Q07 Form 10-Q
in its entirety, as amended by, and to reflect, the Restatement. This Form 10-Q/A generally does
not reflect events that have occurred after November 9, 2006, the original filing date of the 2Q07
Form 10-Q, or modify or update the disclosures originally presented in the 2Q07 Form 10-Q except to
reflect the effects of the Restatement, to reflect changes in the Companys evaluation of
disclosure controls and procedures. Accordingly, only the following items of the 2Q07 Form 10-Q
have been amended:
|
|
|
|
|
Part I
|
|
Item 1
|
|
Financial Statements (Unaudited) |
Part I
|
|
Item 2
|
|
Managements Discussion and Analysis of Financial Condition and Results of Operations |
Part I
|
|
Item 4
|
|
Controls and Procedures |
Part II
|
|
Item 6
|
|
Exhibits |
Income Tax Considerations
In the course of the investigation, the Company determined that a number of officers may have
exercised options for which the application of Section 162(m) of the Internal Revenue Code of 1986,
as amended (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 APB 25. If such options are deemed to be
granted at less than fair market value, pursuant to Section 162(m) of the Code (Section 162(m)),
any compensation to officers, including proceeds from options exercised in any given tax year, in
excess of $1.0 million 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 $3.6 million. The Company may also incur interest and penalties if it were to incur
any such tax liability, which could be material.
In addition, the Company is considering the application of Section 409A of the Code (Section
409A) to those options for which it incorrectly applied the measurement date as defined in APB 25.
It is possible that these options will be treated as having been granted at less than fair market
value for federal income tax purposes and thus subject to Section 409A. Accordingly, the Company
may adopt measures to address the application of Section 409A. 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 expenses for legal fees and external audit firm fees, in the aggregate
amount of approximately $0.6 million, in the fiscal year ended March 31, 2007, in relation to (i)
the Audit Committees review of the Companys historical stock option practices and related
accounting for stock option grants, (ii) the informal inquiry and formal order of investigation by
the Securities and Exchange Commission regarding its past stock option practices, (iii) the
derivative action relating to the Companys historical stock option practices filed against the
Company as a nominal defendant and certain of the Companys current and former directors and
officers as to whom it may have indemnification obligations and (iv) related matters. Further, the
Company expects to incur significant additional expense related to the foregoing matters in the
fiscal year ending March 31, 2008. It is anticipated that certain of those expenses will be
reimbursed under the Companys directors & officers indemnification insurance.
10
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
BLACK BOX CORPORATION
CONSOLIDATED BALANCE SHEETS (1)
|
|
|
|
|
|
|
|
|
|
|
(As Restated) |
|
|
(As Restated) |
|
In thousands, except par value |
|
September 30, 2006 |
|
|
March 31, 2006 |
|
|
|
(Unaudited) |
|
|
(Unaudited) |
|
|
Assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
15,758 |
|
|
$ |
11,207 |
|
Accounts receivable, net of allowance for doubtful accounts of
$14,783 and $9,517 |
|
|
185,333 |
|
|
|
116,713 |
|
Inventories, net |
|
|
71,877 |
|
|
|
53,926 |
|
Costs and estimated earnings in excess of billings on uncompleted contracts |
|
|
56,553 |
|
|
|
23,803 |
|
Deferred tax asset |
|
|
9,489 |
|
|
|
8,973 |
|
Prepaid and other current assets |
|
|
27,606 |
|
|
|
16,502 |
|
|
|
|
|
|
Total current assets |
|
|
366,616 |
|
|
|
231,124 |
|
Property, plant and equipment, net |
|
|
41,595 |
|
|
|
35,124 |
|
Goodwill, net |
|
|
586,273 |
|
|
|
468,724 |
|
Intangibles: |
|
|
|
|
|
|
|
|
Customer relationships, net |
|
|
53,996 |
|
|
|
24,657 |
|
Other intangibles, net |
|
|
34,799 |
|
|
|
30,783 |
|
Deferred tax asset |
|
|
18,526 |
|
|
|
19,909 |
|
Other assets |
|
|
4,343 |
|
|
|
5,091 |
|
|
|
|
|
|
Total assets |
|
$ |
1,106,148 |
|
|
$ |
815,412 |
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
87,127 |
|
|
$ |
44,943 |
|
Accrued compensation and benefits |
|
|
20,656 |
|
|
|
13,954 |
|
Deferred revenue |
|
|
51,120 |
|
|
|
22,211 |
|
Restructuring reserve |
|
|
14,246 |
|
|
|
3,292 |
|
Billings in excess of costs and estimated earnings on uncompleted contracts |
|
|
20,571 |
|
|
|
8,648 |
|
Current maturities of long-term debt |
|
|
608 |
|
|
|
1,049 |
|
Other liabilities |
|
|
62,352 |
|
|
|
37,358 |
|
|
|
|
|
|
Total current liabilities |
|
|
256,680 |
|
|
|
131,455 |
|
Long-term debt |
|
|
251,945 |
|
|
|
122,673 |
|
Other liabilities |
|
|
27,708 |
|
|
|
8,293 |
|
|
|
|
|
|
Total liabilities |
|
|
536,333 |
|
|
|
262,421 |
|
|
Stockholders Equity |
|
|
|
|
|
|
|
|
Preferred Stock authorized 5,000, par value $1.00, none issued |
|
|
-- |
|
|
|
-- |
|
Common Stock authorized 100,000, par value $.001, 17,349
and 17,593 shares outstanding |
|
|
25 |
|
|
|
25 |
|
Additional paid-in capital |
|
|
430,061 |
|
|
|
418,141 |
|
Treasury stock, at cost 7,376 and 6,935 shares |
|
|
(314,411 |
) |
|
|
(296,824 |
) |
Accumulated other comprehensive income |
|
|
19,141 |
|
|
|
13,036 |
|
Retained earnings |
|
|
434,999 |
|
|
|
418,613 |
|
|
|
|
|
|
Total stockholders equity |
|
|
569,815 |
|
|
|
552,991 |
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
1,106,148 |
|
|
$ |
815,412 |
|
|
|
|
|
|
|
(1) See Note 3 of the Notes to Consolidated Financial Statements
See Notes to Consolidated Financial Statements
11
BLACK BOX CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (1)
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|
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Unaudited |
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Unaudited |
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|
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Three months ended |
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Six months ended |
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|
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September 30 and October 1, |
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September 30 and October 1, |
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In thousands, except per share |
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(As Restated) |
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|
(As Restated) |
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|
(As Restated) |
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|
(As Restated) |
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amounts |
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2006 |
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|
2005 |
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|
2006 |
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|
2005 |
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Revenues: |
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|
|
|
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|
|
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Hotline products |
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$ |
55,063 |
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|
$ |
54,056 |
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|
$ |
107,288 |
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|
$ |
107,508 |
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On-Site services |
|
|
216,262 |
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|
|
130,994 |
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|
|
394,432 |
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|
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256,824 |
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|
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Total |
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271,325 |
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|
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185,050 |
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|
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501,720 |
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|
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364,332 |
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Cost of sales: |
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Hotline products |
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27,847 |
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26,829 |
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53,308 |
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52,703 |
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On-Site services |
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144,442 |
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|
|
84,339 |
|
|
|
263,532 |
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|
|
166,807 |
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|
|
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Total |
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172,289 |
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|
|
111,168 |
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|
|
316,840 |
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|
219,510 |
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Gross profit |
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99,036 |
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73,882 |
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184,880 |
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|
144,822 |
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Selling, general &
administrative expenses |
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73,599 |
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|
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51,773 |
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|
|
143,801 |
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|
|
103,813 |
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Restructuring and other charges |
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|
-- |
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|
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-- |
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|
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-- |
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|
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5,290 |
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Intangibles amortization |
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1,931 |
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|
1,328 |
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3,437 |
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|
|
2,886 |
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Operating income |
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23,506 |
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|
20,781 |
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37,642 |
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32,833 |
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Interest expense (income), net |
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5,521 |
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|
2,330 |
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9,161 |
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|
|
4,289 |
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Other expenses (income), net |
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|
72 |
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|
40 |
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|
|
187 |
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(35 |
) |
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Income before provision for
income taxes |
|
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17,913 |
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|
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18,411 |
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28,294 |
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|
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28,579 |
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Provision for income taxes |
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6,238 |
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6,296 |
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9,806 |
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9,748 |
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Net income |
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$ |
11,675 |
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$ |
12,115 |
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$ |
18,488 |
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$ |
18,831 |
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Earnings per common share: |
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Basic |
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$ |
0.67 |
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|
$ |
0.71 |
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|
$ |
1.06 |
|
|
$ |
1.11 |
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Diluted |
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$ |
0.66 |
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|
$ |
0.70 |
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|
$ |
1.04 |
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|
$ |
1.09 |
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Weighted average common shares
outstanding |
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Basic |
|
|
17,513 |
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|
|
17,022 |
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|
|
17,415 |
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|
|
16,933 |
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Diluted |
|
|
17,743 |
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|
|
17,374 |
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|
|
17,766 |
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|
|
17,208 |
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Dividends per share |
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$ |
0.06 |
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|
$ |
0.06 |
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|
$ |
0.12 |
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|
$ |
0.12 |
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|
(1) See Note 3 of the Notes to Consolidated Financial Statements
See Notes to Consolidated Financial Statements
12
BLACK BOX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (1)
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(Unaudited) |
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Six months ended |
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September 30 and October 1, |
|
In thousands |
|
(As Restated) |
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|
(As Restated) |
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|
|
2006 |
|
|
2005 |
|
|
Operating Activities |
|
|
|
|
|
|
|
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Net income |
|
$ |
18,488 |
|
|
$ |
18,831 |
|
Adjustments to reconcile net income to net cash provided
by (used for) operating activities: |
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|
|
|
|
|
|
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Intangibles amortization and depreciation |
|
|
9,453 |
|
|
|
7,380 |
|
Deferred taxes |
|
|
318 |
|
|
|
24 |
|
Stock compensation expense |
|
|
5,636 |
|
|
|
2,246 |
|
Tax benefit from exercised stock options |
|
|
327 |
|
|
|
(992 |
) |
Change in fair value of interest rate swap |
|
|
1,395 |
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|
|
-- |
|
Changes in operating assets and liabilities: |
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|
|
|
|
|
|
|
Accounts receivable, net |
|
|
(3,518 |
) |
|
|
(8,913 |
) |
Inventories, net |
|
|
(4,734 |
) |
|
|
5,704 |
|
All other current assets excluding deferred tax asset |
|
|
(1,380 |
) |
|
|
(2,356 |
) |
Liabilities exclusive of long term debt |
|
|
(4,262 |
) |
|
|
550 |
|
|
|
|
|
|
Net cash provided by (used for) operating activities |
|
$ |
21,723 |
|
|
$ |
22,474 |
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|
|
|
|
|
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Investing Activities |
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|
|
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Capital expenditures |
|
$ |
(2,112 |
) |
|
$ |
(1,600 |
) |
Capital disposals |
|
|
403 |
|
|
|
1,001 |
|
Acquisition of businesses (payments)/recoveries |
|
|
(127,402 |
) |
|
|
(26,854 |
) |
Prior merger-related (payments)/recoveries |
|
|
(1,389 |
) |
|
|
(165 |
) |
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|
|
|
|
Net cash provided by (used for) investing activities |
|
$ |
(130,500 |
) |
|
$ |
(27,618 |
) |
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|
|
|
|
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|
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Financing Activities |
|
|
|
|
|
|
|
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Proceeds from borrowings |
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$ |
258,519 |
|
|
$ |
105,948 |
|
Repayment of borrowings |
|
|
(131,236 |
) |
|
|
(105,235 |
) |
Repayment on discounted lease rentals |
|
|
(24 |
) |
|
|
(667 |
) |
Proceeds from exercise of options |
|
|
6,611 |
|
|
|
7,452 |
|
Payment of dividends |
|
|
(2,116 |
) |
|
|
(2,021 |
) |
Purchase of treasury stock |
|
|
(17,587 |
) |
|
|
(10 |
) |
|
|
|
|
|
Net cash provided by (used for) financing activities |
|
$ |
114,167 |
|
|
$ |
5,467 |
|
Foreign currency exchange impact on cash |
|
$ |
(839 |
) |
|
$ |
10 |
|
|
|
|
|
|
Increase / (decrease) in cash and cash equivalents |
|
$ |
4,551 |
|
|
$ |
333 |
|
Cash and cash equivalents at beginning of period |
|
$ |
11,207 |
|
|
$ |
11,592 |
|
|
|
|
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Cash and cash equivalents at end of period |
|
$ |
15,758 |
|
|
$ |
11,925 |
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Supplemental Cash Flow: |
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|
|
|
|
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Cash paid for interest |
|
$ |
6,358 |
|
|
$ |
4,285 |
|
Cash paid for income taxes |
|
|
7,391 |
|
|
|
6,212 |
|
Non-cash financing activities: |
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|
|
|
|
|
|
|
Dividends payable |
|
|
1,041 |
|
|
|
1,028 |
|
Capital leases |
|
|
127 |
|
|
|
683 |
|
|
(1) See Note 3 of the Notes to Consolidated Financial Statements
See Notes to Consolidated Financial Statements
13
BLACK BOX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1: Basis of Presentation
The accompanying unaudited interim consolidated financial statements of Black Box Corporation (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 Companys results for the interim periods presented. The results for interim
periods may not be indicative of the results of operations for any other interim period or for the
full year. As previously disclosed, the financial statements and notes thereto included in the
Companys most recent Annual Report on Form 10-K as filed with the Securities and Exchange
Commission (SEC) for the fiscal year ended March 31, 2006 (Form 10-K) will need to be restated
and, therefore, should not be relied upon. See Note 3 of the Notes to Consolidated Financial
Statements.
The Companys 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 as of September 30, 2006 and 2005 were September 30, 2006 and October 1, 2005,
respectively. References to Fiscal Year or Fiscal mean the Companys 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 and intangible assets. 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 and six months ended September 30, 2006.
Note 2: Significant Accounting Policies
The significant accounting policies used in the preparation of the Companys Consolidated
Financial Statements are disclosed in Note 1 within Form 10-K. Additional significant accounting
policies adopted during Fiscal 2007 are disclosed below.
Stock-Based Compensation
On April 1, 2006, the Company adopted Statement of Financial Accounting Standards (SFAS) No.
123 (revised 2004), Share-Based Payment (SFAS 123(R)) which requires companies to estimate the
fair value of share-based payment awards and recognize compensation expense over the requisite
service period for the portion of the award that is ultimately expected to vest. Prior to the
adoption of SFAS 123(R), the Company accounted for share-based awards to employees and directors
using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25) as allowed under SFAS No. 123, Accounting
for Stock-Based Compensation (SFAS 123). Under the intrinsic value method, no stock-based
compensation expense related to stock options was required to be recognized if the exercise price
of the Companys stock options granted to employees and directors was equal to or greater than the
fair market value of the underlying stock on the measurement date.
The Company adopted SFAS 123(R) using the modified prospective transition method which requires
compensation cost to be recognized for all share-based payments granted after the date of adoption
and for all unvested awards existing on the date of adoption. In accordance with the modified
prospective transition method, the Companys Consolidated Financial Statements for prior periods
have not been retroactively adjusted to reflect, and do not include, the impact of SFAS 123(R).
However, the modified prospective transition method does require the Company to provide pro forma
disclosure of specific income statement line items for periods prior to the adoption of SFAS 123(R)
as if the fair-value-based method had been applied to all awards. See Note 14 of the Notes to
Consolidated Financial Statements.
14
SFAS 123(R) requires companies to estimate the fair value of share-based payment awards on the
grant-date using an option-pricing model. Upon adoption of SFAS 123(R), the Company began using the
Black-Scholes option pricing model as the method of valuation for the Companys stock options. The
model requires the use of various assumptions. The key assumptions are summarized as follows:
Expected volatility: The Company estimates the volatility of its common stock at the date of
grant based on the historical volatility of its common stock.
Dividend yield: The Company estimates the dividend yield assumption based on the Companys
historical and projected dividend payouts.
Risk-free interest rate: The Company bases risk-free interest rate on the observed interest rates
appropriate for the term of the Companys employee stock options.
Annual forfeiture rate and expected holding period: The Company estimates the annual forfeiture
rate and expected holding period based on historical experience.
Amortization period: The Company recognizes the fair value of awards into expense over the
requisite service periods associated with the award.
Recent Accounting Pronouncements
Income Taxes
In July 2006, the Financial Accounting Standards Board (the FASB) issued FASB Interpretation No.
(FIN) 48, Accounting for Uncertainty in Income Taxes (FIN 48). This Interpretation 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. The Interpretation 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 plans to adopt the Interpretation as of April 1, 2007 as required.
The Interpretation is currently being evaluated by the Company for its full impact and, at this
time, the Company believes it has properly and adequately provided for all income tax positions and
therefore expects minimal impact from adopting the Interpretation.
Stock-Based Compensation
In December 2004, the FASB issued SFAS 123 (R). SFAS 123 (R) is a revision of SFAS No. 123, Accounting
for Stock-Based Compensation (SFAS 123), supersedes APB 25 and amends SFAS No. 95, Statement of
Cash Flows. SFAS 123(R) requires that companies recognize all share-based payments to employees,
including grants of employee stock options, in the financial statements. The recognized cost is
based on the fair value of the equity or liability instruments issued. Pro forma disclosure of this
cost is no longer an alternative under SFAS 123(R). This Statement was effective for public
companies at the beginning of the first annual reporting period beginning after June 15, 2005.
As permitted by SFAS 123, the Company accounted for its stock-based compensation plans under APB
25s intrinsic value method and, as such, recognized stock-based compensation expense if the
exercise price of the Companys stock options granted to employees and directors was equal to or
greater than the fair market value of the underlying stock on the measurement date. The adoption of
SFAS 123(R)s fair value method has had no impact on the Companys overall financial position or
cash flows. Based on SFAS 123(R), the Company transitioned to the new requirements by using the
modified prospective transition method. This transition method requires compensation cost to be
recognized for all share-based payments granted after the date of adoption and for all unvested
awards existing on the date of adoption.
SFAS 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost
be reported as a financing cash flow, rather than as an operating cash flow as required under past
standards. This requirement will reduce net operating cash flows and increase net financing cash
flows in periods after adoption when the benefits of tax deductions are in excess of recognized
compensation cost.
The Company adopted the provisions of SFAS 123(R) as of April 1, 2006. See Significant Accounting
Policies and Note 14 of the Notes to Consolidated Financial Statements for further reference to the
disclosures required by SFAS 123(R).
15
Note 3: Restatement of Consolidated Financial Statements
Restatement through March 31, 2006
Background
On November 13, 2006, Black Box received a letter of informal inquiry from the Enforcement Division
of the SEC relating to the Companys stock option practices from January 1, 1997 to present. As a
result, the Audit Committee, with the assistance of outside legal counsel, commenced an independent
review of the Companys historical stock option grant practices and related accounting for stock
option grants during the period from 1992 to the present (the Review Period).
On February 1, 2007, the Company announced that, while the review of option grant practices was
continuing, it believed that it would need to record additional non-cash charges for stock-based
compensation expense relating to certain stock option grants and, accordingly, cautioned investors
about relying on its historical financial statements until the Company could determine with
certainty whether a restatement would be required and, if so, the extent of any such restatement
and the periods affected.
On March 19, 2007, although the Audit Committee had not yet completed its review, the Audit
Committee concluded that the exercise price of certain stock option grants differed from the fair
market value of the underlying shares on the appropriate measurement date. At that time, the
Company and the Audit Committee announced that it was currently expected that the Companys
additional non-cash, pre-tax charges for stock-based compensation expense relating to certain stock
option grants would approximate $63 million for the Review Period. In addition, the Company and
the Audit Committee concluded that the Company would need to restate its previously-issued
financial statements contained in reports previously filed by the Company with the SEC.
Accordingly, on March 19, 2007, the Company and the Audit Committee concluded that the Companys
previously-issued financial statements and other historical financial information and related
disclosures for the Review Period, including applicable reports of its current or former
independent registered public accounting firms and related press releases, should not be relied
upon.
On May 25, 2007, the Company was advised by the Enforcement Division of the SEC that a Formal Order
of Private Investigation arising out of the Companys stock option practices had been entered and
on May 29, 2007 the Company received a subpoena that was issued by the SEC.
On May 31, 2007, the Company announced that, as a result of the ongoing review of stock option
practices, Company management and the Audit Committee expected that the Companys additional
non-cash, pre-tax charges for stock-based compensation expense relating to certain stock option
grants would approximate $70 million for the Review Period.
Findings of the Audit Committee
During the Review Period, the Company granted stock options pursuant to an employee stock option
plan and a director stock option plan to acquire approximately 10.9 million shares of the Companys
common stock, par value $.001 per share (the common stock). Such plans at all relevant times
provided for option grants to be approved by a designated committee of non-employee directors or,
in the case of the director stock option plan, by the Companys Board of Directors (the Board).
Approximately 2,000 stock option grants were awarded during the Review Period with 69 recorded
grant dates. No stock options have been granted since September, 2006. The Audit Committee
reviewed all stock options granted during the Review Period, including option grants to the
Companys directors, officers and rank and file employees (including grants to new employees,
grants awarded in connection with Company acquisitions and grants made as individual or group
performance awards). The Audit Committees review of the Companys stock option granting practices
included a comprehensive examination of reasonably available relevant physical and electronic
documents as well as interviews with current and former directors, officers and Company personnel.
The Audit Committees review was initially focused on determining whether the Companys prior
stock option granting practices were in compliance with the plans granting provisions and
applicable law or called into question its accounting for such options. Once it became evident
that such issues and accounting implications existed, the inquiry focused on those matters
necessary: to determine whether any accounting charges were material and whether a restatement of
the Companys previously-issued financial statements would be required; to establish a basis for
effecting any required restatement; to assure that, on as timely a basis as possible, the Company
could file any required curative disclosures with the SEC and assure its continued eligibility for
listing on The NASDAQ Stock Market; and to provide an informed basis for the Companys response to
the identified issues, including appropriate corrective and remedial actions.
The following information summarizes certain of the findings of the Audit Committee. The
findings identified approximately $71.5 million of unrecorded expense at the time of grant (i.e.,
the difference between the fair market value of the common stock on the appropriate measurement
date and the stated exercise price), net of forfeitures, during the Review Period, of which $70.0
million was
16
recorded in the Companys Consolidated Financial Statements through March 31, 2006 and
$1.5 million of unrecorded expense at the time of grant will be included, beginning at April 1,
2006, in the Companys computation of compensation expense in accordance with SFAS 123(R). The
following summarizes the unrecorded expense at the time of grant by time period and category of
recipient:
|
|
|
$4.2 million for the period from Fiscal 1993 through Fiscal 1997 ($0.2 million for
directors, $2.5 million for officers and $1.5 million for rank and file employees) |
|
|
|
|
$45.6 million for the period from Fiscal 1998 through August 2002 ($1.1 million for
directors, $25.7 million for officers and $18.7 million for rank and file employees) |
|
|
|
|
$21.8 million for the period from August 2002 to the present ($0.04 million for directors,
$0.6 million for officers and $21.1 million for rank and file employees) |
The Audit Committees additional key findings are summarized below:
Lack of Adequate Documentation: For a majority of grants issued by the Company during the
Review Period, there is either no or inadequate documentation of approval actions that satisfies
the requisites for establishing a measurement date under APB 25. Of the 69 recorded grant dates,
there are documented approval actions by the Board or the Option or Compensation Committee of the
Board (the Compensation Committee) with respect to particular grants for 12 dates. In the period
December 1992 to May 1996, neither the minutes of the Compensation Committee nor of the Board
reflect any action to approve specific grants. In some instances, evidence of single director (the
chairman of the Compensation Committee) approval actions exists. This absence of non-employee
director level documentation also applies to a majority of grants with a recorded grant date after
1996. In some cases, Compensation Committee minutes contain a reference to reports on the status
of the option pool but do not document any action to approve specific grants. Approval
documentation for certain grants has internal inconsistencies or conflicts with other documents
thereby rendering this documentation unreliable as a basis for establishing a measurement date. In
some cases, the only existing documentation is the executed option agreement and/or the entry of
the option grant into the option database. Notwithstanding these approval documentation
inadequacies, the Company entered into option agreements with grantees and has honored such grants.
Grant Approvals: During the Review Period, relatively few option grants were approved
in complete compliance with the Companys stock option plans. Available documentation reflects
that the Company approved option grants in a variety of ways. With respect to the employee stock
option plan, grants were approved by the Compensation Committee as contemplated by the plan at
various times, by the full Board in 1998 and 1999, by a single director (the chairman of the
Compensation Committee) on nine recorded grant dates during the period 1994 through 2001 and by the
Companys Chief Executive Officer (CEO) at various times. With respect to the director stock
option plan, grants were generally approved by the designated Board committee and, in a few cases,
by the chairman of the Compensation Committee. In one instance in 2000, there is no conclusive
documentary evidence of the approval of director grants other than the signed director option
agreements.
The delegation of authority by the Compensation Committee to the CEO with respect to grants to rank
and file employees was not fully documented. However, there was an understood and accepted
practice between the CEO and the Compensation Committee whereby the CEO made certain awards to
individual employees. In some instances, this involved the allocation among rank and file
employees of blocks of shares approved by the Compensation Committee; in three (3) such instances,
the number of shares ultimately awarded pursuant to this process exceeded the approved size of the
block, which was contrary to the understanding of the Compensation Committee members. Further,
contrary to the understanding of Committee members, the award and/or documentation of those
individual grants often significantly lagged the approval of the block grant. In August 2005, the
Compensation Committee specifically acknowledged a prior grant of delegated authority to the CEO to
make option grants to rank and file employees and ratified all prior awards by the CEO. In some
cases, documentation of approval action is either inconclusive or missing, and the Company
therefore has been unable to determine what entity or person actually approved specific grants.
Option Pricing: The recorded grant dates for a majority of grants do not match the
applicable measurement dates as determined under APB 25. The grants of options with exercise
prices lower than the fair market values of the stock on the actual measurement dates did not
satisfy the fair market pricing requirement in the Companys plans, as amended in 1998, and were
not consistent with the Companys disclosures in SEC filings stating that the exercise price of
options was equal to the fair market value of the stock on the date of the grant.
The relationship between the stated exercise price of options and the fair market value of the
Companys stock on the date of the identifiable approval actions varied from grant to grant. In
some cases, the exercise price of grants reflected the fair market value of the underlying shares
on the date of any documented approval action. In other cases, the exercise prices reflected the
fair market value of the underlying shares on a date either prior or subsequent to any such
documented approval action and the exercise price was lower than the fair market value on the date
of any such action. In several such cases before August 2002, the use of such grant dates and lower exercise prices
(together with other available evidence) supports a finding that the recorded grant dates and
corresponding exercise prices were selected with the benefit of hindsight. For certain grants
where the mismatch between the recorded grant date and the approval action
17
was only a matter of days, however, the mismatch appears to have been attributable to inaccurate recording or
administrative delays. In some cases, the apparent approval action did not identify all grantees;
for example, there are cases where a block grant was approved subject to a later determination of
individual grant recipients and grants were recorded with a grant date, and corresponding exercise
price, that matched the date of the apparent approval of the block grant and the fair market value
of the common stock on that date although individual grant recipients may have been identified some
time after approval of the block grant. Finally, in some cases, the approval action for specific
grants is not adequately documented. Where the recorded grant date did not satisfy the requisites
for a measurement date under APB 25, the Company relied on default methodologies to determine an
appropriate measurement date.
Internal Controls: As outlined above, the Companys historical administration of its
options program lacked discipline as it relates to proper adherence to the plan requirements,
corporate recordkeeping and documentation. Since November 2003, however, the Company has properly
administered the stock option program as it relates to awards to directors and officers. During
the investigation, the Company identified control gaps related to grants made throughout the Review
Period. As of March 31, 2007, the Company implemented additional procedures to its process that
are focused on formalized documentation of appropriate approvals and determination of grant terms
to employees.
Procedural and Remedial Actions
The Audit Committee and other relevant Board committees are committed to a continued review
and implementation of procedural enhancements and remedial actions in light of the foregoing
findings. Consistent with its obligation to act in the best interests of the Company taking into
account all relevant facts and circumstances, the Audit Committee is continuing to assess the
appropriateness of a broad range of possible procedural enhancements and potential remedial
measures in light of the findings of its investigation. While the Audit Committee has not
completed its consideration of all such steps, procedural enhancements may include recommendations
regarding improved stock option administration procedures and controls, training and monitoring
compliance with those procedures, corporate recordkeeping, corporate risk assessment, evaluation of
the internal compliance environment and other remedial steps that may be appropriate. The Audit
Committee is also expected to address issues of individual conduct or responsibility, including
those of the Board, CEOs and Chief Financial Officers (CFOs) serving during the Review Period.
Potential remedial measures may include an evaluation of the role of and possible claims or other
remedial actions against current and former Company personnel who may be found to have been
responsible for identified problems during the Review Period. The Audit Committee expects to
recommend to the Board and/or its appropriate committees procedural enhancements and remedial
measures that appropriately address the issues raised by its findings. In advance of action by the
Audit Committee, as noted above, the Company has 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.
Restatement Methodologies
As of April 1, 2006, the Company adopted SFAS 123(R) using the modified prospective transition
method. Under this transition method, compensation expense is to be recognized for all share-based
compensation awards granted after the date of adoption and for all unvested awards existing on the
date of adoption. Prior to April 1, 2006, the Company accounted for stock-based compensation
awards to directors, officers and rank and file employees using the intrinsic value method in
accordance with APB 25 as allowed under SFAS 123. Under the intrinsic value method, no share-based
compensation expense related to stock options was required to be recognized if the exercise price
of the stock option was at least equal to the fair market value of the common stock on the
measurement date. APB 25 defines the measurement date as the first date on which are known both
(1) the number of shares that an individual grant recipient is entitled to receive and (2) the
option or purchase price, if any.
In light of the Audit Committees review of the Companys stock option granting practices
during the Review Period and as to those cases in which the Company previously used a recorded
grant date as the measurement date that the Company determined could no longer be relied upon, the
Company has developed and applied the following methodologies to remeasure those stock option
grants and record the relevant charges in accordance with APB 25 by considering the following
sources of information: (i) meeting minutes of the Board and of committees thereof and related
materials, (ii) Unanimous Written Consents of the Board and of committees thereof, (iii) the dates
on which stock option grants were entered into the Companys stock option database (create date),
(iv) relevant email correspondence reflecting stock option grant approval actions, (v) individual
stock option agreements and related materials, (vi) employee and Board offer letters, (vii)
documents relating to acquisitions, (viii) reports on Form 4 filed with the SEC and (ix) guidance of
the Office of the Chief Accountant of the SEC on stock option matters as set forth in its letter
dated September 19, 2006.
Grants with Appropriate Committee Approval. With respect to grants of approximately 1.0 million
shares, or approximately 9% of the total grants in the Review Period, the Company has evidence to
support the approval of the grant under the stock option plans by the relevant committee of the
Board, and such evidence includes the number of options each individual was entitled to receive and
the option price. However, the relationship between these documented approval actions and the
originally-recorded grant dates and exercise prices for the options so approved varied during the
Review Period. In some cases, grants were recorded with a grant date and a corresponding
18
exercise price that matched the date of the approval action or were otherwise consistent with the terms of
the approval actions. In other cases, however, the recorded grant dates and corresponding exercise
prices of the grants reflected the fair market value of the common stock on a date prior to the
committees documented approval actions. The Company has restated the compensation expense for
stock option grants relating to approximately 0.4 million shares of common stock by using the date
of the documented approval action as the measurement date. The total additional non-cash, pre-tax
charge for these grants is approximately $1.8 million, net of forfeitures, amortized over the
appropriate vesting period through March 31, 2006, of which $0.07 million relates to director
options, $1.3 million relates to officer options and $0.4 million relates to rank and file employee
options.
Grants with Other Approvals. With respect to grants of approximately 1.9 million shares, or
approximately 18% of the total grants in the Review Period, the Company has evidence to support the
approval of the grant by the Board, an outside director or the Companys CEO and the identification
of the number of options each individual was entitled to receive together with the option price.
These grants are distinguished from the grants described in the prior paragraph in that the nature
of the approval was not fully consistent with the terms of the relevant stock option plan. As with
the grants discussed in the preceding paragraph, the relationship between these documented approval
actions and the originally-recorded grant dates and exercise prices for the options so approved
varied during the Review Period. In some cases, grants were recorded with a grant date and a
corresponding exercise price that matched the date of the approval action or were otherwise
consistent with the terms of the approval action. In other cases, however, the recorded grant
dates and corresponding exercise prices of the grants reflected the fair market value of the
Companys stock on a date prior to the approval action. The Company has restated the compensation
expense for stock option grants relating to approximately 1.6 million shares of common stock by
using the date of the documented approval action as the measurement date. The total additional non-cash,
pre-tax charge for these grants is approximately $7.6 million, net of forfeitures, amortized over
the appropriate vesting period through March 31, 2006, of which $0.5 million relates to director
options, $2.6 million relates to officer options and $4.5 million relates to rank and file employee
options.
Grants Lacking Adequate Documentation. With respect to grants of approximately 7.9 million shares
(5.0 million shares to rank and file employees), or 73.0% of the total grants in the Review Period,
the Company has been unable to locate adequate documentation of approval actions that would satisfy
the requisites for a measurement date under APB 25. For these grants, management considered all
available relevant information to form a reasonable conclusion as to the most reasonable
measurement date. For all grants in this category, the Company has established default
methodologies for determining the most appropriate measurement date under APB 25.
With respect to grants entered into the Companys stock option database after September 9, 1999,
when the database began to reflect a create date which is the date on which a grant was entered
into the system, the Company has determined to use the individual create date for each grant as
the APB 25 measurement date, which was in most cases different from the originally-recorded grant
date. The Company believes that this create date is the most appropriate methodology in the
absence of sufficient evidence of approvals for these grants as it represents the earliest point in
time at which the evidence shows that all requisites for the establishment of the measurement date
had been satisfied. Such create dates preceded, often by a significant amount of time, the
execution of stock option agreements, which, generally, were manually signed by the Companys CEO
and manually signed and dated by the grantee. In addition, in almost all cases, a grant entered
into the database, which established the create date, ultimately resulted in the creation of a
stock option agreement reflecting such grant. Accordingly, while execution of the stock option
agreements constituted a clear acknowledgement by the grantee and the Company of the grantees
legal entitlement to the grant the Company believes the create date more accurately reflects the
date of approval than does the signed option agreement. The Company has restated the compensation
expense for stock option grants relating to approximately 4.2 million shares of common stock by
using the create date as the measurement date. The total additional non-cash, pre-tax charge for
these grants is approximately $49.8 million, net of forfeitures, amortized over the appropriate
vesting period through March 31, 2006, of which $0.5 million relates to director options, $17.2
million relates to officer options and $32.2 million relates to rank and file employee options.
The Companys procedures for evaluating the appropriateness of measurement dates fixed with
reference to such create dates included a sensitivity analysis which provided an understanding of
the differences between the additional recorded charge for stock-based compensation expense and the
charges that would result from using other identified alternative methods for determining
measurement dates. The Companys sensitivity analysis included identifying the range of potential
grant dates defined by the recorded grant date and the create date for each grant. The Company
then identified the low and high closing prices of the common stock within that range of potential
grant dates and applied both the low and high closing prices of the common stock to the number of
shares granted for which the create date methodology was utilized to determine the range of
potential adjustments to stock-based compensation expense for these grants, which was $0.09 million
to $73.8 million, net of forfeitures, as compared to the additional non-cash, pre-tax charge for
these grants of approximately $49.8 million, net of forfeitures, included in the Restatement.
For options entered into the Companys option database before September 9, 1999, the Company
determined the measurement date generally by reference to signed option agreements (or the deemed
signature date for certain options as discussed below). The executed option agreements
(hereinafter signed option agreements), manually signed by the Companys CEO and manually signed
and dated by the grantee, constituted an acknowledgement by the grantee and the Company of the
grantees legal entitlement to the grant and, in the absence of authoritative information as to
when all the requisites for the establishment of the measurement date had been satisfied, provides
a measurement date framework based on entitlement. The Company has restated the compensation
expense for stock option grants relating to approximately 1.4 million shares of common stock by
using the signed option agreements as the measurement date.
19
The total additional non-cash, pre-tax charge for these grants is approximately $6.4 million, net of forfeitures, amortized over the
appropriate vesting period through March 31, 2006, of which $0.3 million relates to director
options, $3.6 million relates to officer options and $2.5 million relates to rank and file employee
options. The Company believes this methodology was the most appropriate in the absence of
sufficient evidence of approvals for these grants as it represents the earliest point in time at
which the evidence shows that all requisites for the establishment of the measurement date had been
satisfied for these grants. The Companys procedures for evaluating the appropriateness of
measurement dates fixed with reference to the dating of signed option agreements included a
sensitivity analysis which provided an understanding of the differences between the additional
recorded charge for stock-based compensation expense and the charges that would result from using
other identified alternative methods for determining measurement dates. The Companys sensitivity
analysis included identifying the range of potential grant dates defined by the recorded grant date
and the date of the grantees signature on the stock option agreement for each grant. The Company
then identified the low and high closing prices of the common stock within that range of potential
grant dates and applied both the low and high closing prices of the common stock to the number of
shares granted for which the signed option agreements methodology was utilized to determine the
range of potential adjustments to stock-based compensation expense for these grants, which was
$0.03 million to $9.6 million, net of forfeitures, as compared to the additional non-cash, pre-tax
charge for these grants of approximately $6.4 million, net of forfeitures, included in the
Restatement.
In those cases where no reliably-dated signed option agreement could be located and where no
post-September 9, 1999 create date exists (stock option grants totaling approximately 0.9 million
shares), the Company used the average period between recorded grant date and date of the signatures
on all other grantee signed option agreements with the same grant date as the measurement date.
For example, if there were four stock option grants with a grant date of January 1, 1996, the
Company had the signed option agreements for three of these stock option grants and the average
number of days between the grant date and the signature dates of these three signed option
agreements was 20 days, January 21, 1996 was used as the measurement date for the grant for which
no signed option agreement could be located. The Company has restated the compensation expense for
stock option grants relating to approximately 0.7 million shares of common stock using this
average days to sign agreement method. The total additional non-cash, pre-tax charge for these
grants is approximately $4.4 million, net of forfeitures, amortized over the appropriate vesting
period through March 31, 2006, of which $0.06 million relates to director options, $4.2 million
relates to officer options and $0.2 million relates to rank and file employee
options. The Company believes this methodology was the most appropriate in the absence of
sufficient evidence of approvals for these grants because it gives a reasonable approximation of
the measurement date related to these options in light of the available evidence. The Company
conducted a sensitivity analysis by comparing the Companys current default methodology (i.e.,
average days to sign agreement) with another default methodology. For this analysis, the Company
identified the range of potential grant dates defined by the earliest signed option agreement and
the latest signed option agreement. The Company then identified the low and high closing prices of
the common stock over the range of potential grant dates and applied both the low and high closing
prices of the common stock to the number of shares granted to determine the range of potential
adjustments to stock-based compensation expense for these grants, which was $2.6 million to $5.9
million, net of forfeitures. The Companys analyses indicate that stock-based compensation expense
computed using other identified alternative default methodologies would not materially differ from
stock-based compensation expense computed using the average days to sign agreement methodology.
The Companys procedures for evaluating the appropriateness of measurement dates fixed with
reference to the average days to sign agreements also included a sensitivity analysis which
provided an understanding of the differences between the additional recorded charge for stock-based
compensation expense and the charges that would result from using other identified alternative
methods for determining measurement dates. The Companys sensitivity analysis included identifying
the range of potential grant dates defined by the recorded grant date and the average days to sign
agreement for each grant. The Company then identified the low and high closing prices of the
common stock within that range of potential grant dates and applied both the low and high closing
prices of the common stock to the number of shares granted to determine the range of potential
adjustments to stock-based compensation expense for these grants, which was $0.03 million to $6.1
million, net of forfeitures, as compared to the additional non-cash, pre-tax charge for these
grants of approximately $4.4 million, net of forfeitures, included in the Restatement.
Given the volatility of the common stock during much of the Review Period, the use of methodologies
and measurement dates different from those described above could have resulted in a higher or lower
cumulative compensation expense which would have caused net income or loss to be different from the
amounts reported in the restated consolidated financial statements. The Companys procedures for
evaluating the appropriateness of measurement dates fixed using the default methodologies described
above also included a sensitivity analysis which provided an understanding of the differences
between the additional recorded charge for stock-based compensation expense and the charges that
would result from using other identified alternative methods for determining measurement dates.
The Companys sensitivity analysis included identifying the range of potential grant dates defined
by the recorded grant date and the appropriate measurement date for each grant. The Company then
identified the low and high closing prices of the common stock within that range of potential grant
dates and applied both the low and high closing prices of the common stock to the number of shares
granted to determine the range of potential adjustments to stock-based compensation expense for
these grants, which was $9.3 million to $99.3 million, net of forfeitures, as compared to the
additional non-cash, pre-tax charge for these grants of approximately $70.0 million, net of
forfeitures, included in the Restatement.
20
Other adjustments through March 31, 2006
From 1994 through 1998, the Company did not properly account for stock options for one officer that
were modified after the grant date pursuant to a separation agreement. Some of these modifications
were not identified in the Companys financial reporting processes and were therefore not properly
reflected in its financial statements. As a result, the Company has recorded a non-cash charge for
stock-based compensation of $1.0 million during Fiscal 1999.
Summary
In summary, the Company recorded cumulative non-cash charges for stock-based compensation of $70.9
million through March 31, 2006, offset in part by a cumulative income tax benefit of $27.7 million,
for a total after-tax charge of $43.2 million. These charges had no impact on net sales or cash
and cash equivalents as previously reported in the Companys financial statements; as a result, no
changes to these items are reflected in the Restatement. Non-cash charges for stock-based
compensation expense have been recorded as adjustments to Selling, General, and Administrative
Expenses within the Companys Consolidated Statements of Income.
1Q07 and 2Q07 Restatement
Stock-based compensation expense
In addition to the Restatement noted above through March 31, 2006, the Company has recorded a
non-cash charge for stock-based compensation of $0.8 million and $2.4 million for the three (3) and
six (6) month periods ended September 30, 2006, offset in part by income tax benefits of $0.3
million and $1.0 million, or total after-tax charges of $0.5 million and $1.4 million. This charge
was recorded to reflect additional non-cash, stock-based compensation expense recognized under the
fair value method (SFAS 123(R)) because the exercise price for certain stock option grants prior
to, but not vested as of March 31, 2006, differed from the fair market value of the underlying
shares on the appropriate measurement date, some of which occurred during Fiscal 2007.
Accounting for derivatives
On July 26, 2006, the Company entered into an interest rate swap to reduce its exposure from
fluctuating interest rates. SFAS No.133 Accounting for Derivative Instruments and Hedging
Activities (SFAS 133) requires that all derivative instruments be recorded on the balance sheet
as either an asset or liability measured at their fair value, and that changes in the derivatives
fair value be recognized currently in earnings unless specific hedge accounting criteria are met.
From inception of the hedge, the Company had applied a method of cash flow hedge accounting under
SFAS 133 to account for the interest rate swap that allowed the Company to assume no
ineffectiveness in such agreements, called the short-cut method.
Subsequently, the Company analyzed its eligibility for the short-cut
method in light of certain
clarifications delivered by the Office of the Chief Accountant of the SEC, and determined that its
interest rate swap did not qualify for the short-cut method under SFAS 133 because certain
prepayment features relating to the underlying actual debt were not identical to those contained in
the interest rate swap. Because the Companys documentation at hedge inception reflected the short-cut
method rather than the long haul method for determining hedge ineffectiveness, the derivative
did not meet the requirements for a cash flow hedge. Documentation for the long haul method of
accounting at hedge inception cannot be retrospectively applied under SFAS 133. Therefore,
fluctuations in the interest rate swaps fair value should have been recorded through the Companys
Consolidated Statement of Income instead of through Other Comprehensive Income (Loss), which is a
component of stockholders equity. The adjustment for 2Q07 will decrease reported net income and
increase Other Comprehensive Income by approximately $1.4 million. This change in accounting for
this derivative instrument could result in significant volatility in the Companys reported net
income and earnings per share due to increases and decreases in the fair value of the interest rate
swap. However, the derivative instrument remains highly effective and the change in accounting for
this derivative instrument does not impact operating cash flows or total stockholders equity.
The table below reflects the impact of the additional non-cash charges for stock-based compensation
expense and the non-cash charge related to the interest rate swap on the Companys Consolidated
Statements of Income, including the cumulative adjustment to Retained Earnings as of March 31, 2006
and September 30, 2006 on the Companys Consolidated Balance Sheet. All
dollar amounts are presented in thousands except per share amounts. Per share amounts may not
total due to rounding.
21
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(As |
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(As |
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Adjust- |
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previously |
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(As |
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previously |
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Adjust- |
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Income |
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ment, |
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reported) |
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Restated) |
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reported) |
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ment, |
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|
Tax |
|
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Net of |
|
|
(As Restated) |
|
|
Diluted |
|
|
Adjust- |
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|
Diluted |
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|
|
Net Income |
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Pre-Tax |
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|
Benefit |
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|
Tax |
|
|
Net Income |
|
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EPS |
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|
ment |
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EPS |
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|
FY 94 |
|
$ |
13,370 |
|
|
$ |
43 |
|
|
$ |
(19 |
) |
|
$ |
24 |
|
|
$ |
13,346 |
|
|
$ |
0.83 |
|
|
$ |
-- |
|
|
$ |
0.83 |
|
FY 95 |
|
|
14,515 |
|
|
|
461 |
|
|
|
(144 |
) |
|
|
317 |
|
|
|
14,198 |
|
|
|
0.89 |
|
|
|
(0.02 |
) |
|
|
0.87 |
|
FY 96 |
|
|
18,278 |
|
|
|
406 |
|
|
|
(151 |
) |
|
|
255 |
|
|
|
18,023 |
|
|
|
1.10 |
|
|
|
(0.01 |
) |
|
|
1.09 |
|
FY 97 |
|
|
24,792 |
|
|
|
1,172 |
|
|
|
(456 |
) |
|
|
716 |
|
|
|
24,076 |
|
|
|
1.40 |
|
|
|
(0.04 |
) |
|
|
1.36 |
|
FY 98 |
|
|
32,404 |
|
|
|
3,595 |
|
|
|
(1,393 |
) |
|
|
2,202 |
|
|
|
30,202 |
|
|
|
1.79 |
|
|
|
(0.12 |
) |
|
|
1.67 |
|
FY 99 |
|
|
38,145 |
|
|
|
4,506 |
|
|
|
(1,732 |
) |
|
|
2,774 |
|
|
|
35,371 |
|
|
|
2.09 |
|
|
|
(0.15 |
) |
|
|
1.94 |
|
FY 00 |
|
|
48,852 |
|
|
|
5,778 |
|
|
|
(2,209 |
) |
|
|
3,569 |
|
|
|
45,283 |
|
|
|
2.60 |
|
|
|
(0.19 |
) |
|
|
2.41 |
|
FY 01 |
|
|
64,190 |
|
|
|
10,290 |
|
|
|
(3,953 |
) |
|
|
6,337 |
|
|
|
57,853 |
|
|
|
3.22 |
|
|
|
(0.32 |
) |
|
|
2.90 |
|
FY 02 |
|
|
62,042 |
|
|
|
11,333 |
|
|
|
(4,381 |
) |
|
|
6,952 |
|
|
|
55,090 |
|
|
|
2.97 |
|
|
|
(0.33 |
) |
|
|
2.64 |
|
FY 03 |
|
|
48,685 |
|
|
|
8,927 |
|
|
|
(2,328 |
) |
|
|
6,599 |
|
|
|
42,086 |
|
|
|
2.39 |
|
|
|
(0.32 |
) |
|
|
2.07 |
|
FY 04 |
|
|
47,243 |
|
|
|
8,197 |
|
|
|
(4,156 |
) |
|
|
4,041 |
|
|
|
43,202 |
|
|
|
2.52 |
|
|
|
(0.22 |
) |
|
|
2.30 |
|
FY 05 |
|
|
29,912 |
|
|
|
5,178 |
|
|
|
(2,312 |
) |
|
|
2,866 |
|
|
|
27,046 |
|
|
|
1.68 |
|
|
|
(0.16 |
) |
|
|
1.52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
03/31/05 |
|
$ |
442,428 |
|
|
$ |
59,886 |
|
|
$ |
(23,234 |
) |
|
$ |
36,652 |
|
|
$ |
405,776 |
|
|
$ |
23.48 |
|
|
$ |
(1.89 |
) |
|
$ |
21.59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1Q06 |
|
|
7,394 |
|
|
|
1,120 |
|
|
|
(442 |
) |
|
|
678 |
|
|
|
6,716 |
|
|
|
0.43 |
|
|
|
(0.04 |
) |
|
|
0.39 |
|
2Q06 |
|
|
12,797 |
|
|
|
1,126 |
|
|
|
(444 |
) |
|
|
682 |
|
|
|
12,115 |
|
|
|
0.74 |
|
|
|
(0.04 |
) |
|
|
0.70 |
|
3Q06 |
|
|
12,511 |
|
|
|
2,431 |
|
|
|
(959 |
) |
|
|
1,472 |
|
|
|
11,039 |
|
|
|
0.70 |
|
|
|
(0.08 |
) |
|
|
0.62 |
|
4Q06 |
|
|
4,656 |
|
|
|
6,368 |
|
|
|
(2,612 |
) |
|
|
3,756 |
|
|
|
900 |
|
|
|
0.26 |
|
|
|
(0.21 |
) |
|
|
0.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FY 06 |
|
$ |
37,358 |
|
|
$ |
11,045 |
|
|
$ |
(4,457 |
) |
|
$ |
6,588 |
|
|
$ |
30,770 |
|
|
$ |
2.13 |
|
|
$ |
(0.37 |
) |
|
$ |
1.76 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
03/31/06 |
|
$ |
479,786 |
|
|
$ |
70,931 |
|
|
$ |
(27,691 |
) |
|
$ |
43,240 |
|
|
$ |
436,546 |
|
|
$ |
25.61 |
|
|
$ |
(2.26 |
) |
|
$ |
23.35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1Q07 |
|
|
7,807 |
|
|
|
1,629 |
|
|
|
(635 |
) |
|
|
994 |
|
|
|
6,813 |
|
|
|
0.43 |
|
|
|
(0.06 |
) |
|
|
0.37 |
|
2Q07 |
|
|
13,079 |
|
|
|
2,210 |
|
|
|
(806 |
) |
|
|
1,404 |
|
|
|
11,675 |
|
|
|
0.74 |
|
|
|
(0.08 |
) |
|
|
0.66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2QYTD07 |
|
$ |
20,886 |
|
|
$ |
3,839 |
|
|
$ |
(1,441 |
) |
|
$ |
2,398 |
|
|
$ |
18,488 |
|
|
$ |
1.18 |
|
|
$ |
(0.14 |
) |
|
$ |
1.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
09/30/06 |
|
$ |
500,672 |
|
|
$ |
74,770 |
|
|
$ |
(29,132 |
) |
|
$ |
45,638 |
|
|
$ |
455,034 |
|
|
$ |
26.78 |
|
|
$ |
(2.39 |
) |
|
$ |
24.39 |
|
|
Income Tax Considerations
In the course of the investigation, the Company determined that a number of officers may have
exercised options for which the application of Section 162(m) of the Internal Revenue Code of 1986,
as amended (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 APB 25. If such options are deemed to be
granted at less than fair market value, pursuant to Section 162(m) of the Code (Section 162(m)),
any compensation to officers, including proceeds from options exercised in any given tax year, in
excess of $1.0 million 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 $3.6 million. The Company may also incur interest and penalties if it were to incur
any such tax liability, which could be material.
In addition, the Company is considering the application of Section 409A of the Code (Section
409A) to those options for which it incorrectly applied the measurement date as defined in APB 25.
It is possible that these options will be treated as having been granted at less than fair market
value for federal income tax purposes and thus subject to Section 409A. Accordingly, the Company
may adopt measures to address the application of Section 409A. 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 expenses for legal fees and external audit firm fees, in the aggregate
amount of approximately $0.6 million, in the fiscal year ended March 31, 2007, in relation to (i)
the Audit Committees review of the Companys historical stock option practices and related
accounting for stock option grants, (ii) the informal inquiry and formal order of investigation by
the Securities and Exchange
Commission regarding its past stock option practices, (iii) the derivative action relating to the
Companys historical stock option practices filed against the Company as a nominal defendant and
certain of the Companys current and former directors and officers as to whom it may have
indemnification obligations and (iv) related matters. Further, the Company expects to incur
significant additional expense related to the foregoing matters in the fiscal year ending March 31,
2008. It is anticipated that certain of those expenses will be reimbursed under the Companys
directors & officers indemnification insurance.
22
Restatement Impact on the Consolidated Statements of Income
The following tables reconcile the Companys Consolidated Statements of Income from the previously
reported results to the restated results for the three (3) and six (6) month periods ended
September 30, 2006 and October 1, 2005. All dollar amounts are in thousands, except per share
amounts. Per share amounts may not sum due to rounding.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Month Period Ended September 30, 2006 (Unaudited) |
|
|
|
As Previously |
|
|
|
|
|
|
|
|
|
Reported |
|
|
Adjustment |
|
|
As Restated |
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Hotline products |
|
$ |
55,063 |
|
|
$ |
-- |
|
|
$ |
55,063 |
|
On-Site services |
|
|
216,262 |
|
|
|
-- |
|
|
|
216,262 |
|
|
|
|
|
|
Total |
|
|
271,325 |
|
|
|
-- |
|
|
|
271,325 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales: |
|
|
|
|
|
|
|
|
|
|
|
|
Hotline products |
|
|
27,847 |
|
|
|
-- |
|
|
|
27,847 |
|
On-Site services |
|
|
144,442 |
|
|
|
-- |
|
|
|
144,442 |
|
|
|
|
|
|
Total |
|
|
172,289 |
|
|
|
-- |
|
|
|
172,289 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
99,036 |
|
|
|
-- |
|
|
|
99,036 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general & administrative expenses |
|
|
72,784 |
|
|
|
815 |
|
|
|
73,599 |
|
Restructuring and other charges |
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Intangibles amortization |
|
|
1,931 |
|
|
|
-- |
|
|
|
1,931 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
24,321 |
|
|
|
(815 |
) |
|
|
23,506 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense (income), net |
|
|
4,126 |
|
|
|
1,395 |
|
|
|
5,521 |
|
Other expenses (income), net |
|
|
72 |
|
|
|
-- |
|
|
|
72 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for
income taxes |
|
|
20,123 |
|
|
|
(2,210 |
) |
|
|
17,913 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
|
7,044 |
|
|
|
(806 |
) |
|
|
6,238 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
13,079 |
|
|
$ |
(1,404 |
) |
|
$ |
11,675 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.75 |
|
|
$ |
(0.08 |
) |
|
$ |
0.67 |
|
|
|
|
|
|
Diluted |
|
$ |
0.74 |
|
|
$ |
(0.08 |
) |
|
$ |
0.66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
17,513 |
|
|
|
-- |
|
|
|
17,513 |
|
|
|
|
|
|
Diluted |
|
|
17,743 |
|
|
|
-- |
|
|
|
17,743 |
|
|
|
|
|
|
Dividends per share |
|
$ |
0.06 |
|
|
$ |
-- |
|
|
$ |
0.06 |
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Month Period Ended October 1, 2005 (Unaudited) |
|
|
|
As Previously |
|
|
|
|
|
|
|
|
|
Reported |
|
|
Adjustment |
|
|
As Restated |
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Hotline products |
|
$ |
54,056 |
|
|
$ |
-- |
|
|
$ |
54,056 |
|
On-Site services |
|
|
130,994 |
|
|
|
-- |
|
|
|
130,994 |
|
|
|
|
|
|
Total |
|
|
185,050 |
|
|
|
-- |
|
|
|
185,050 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales: |
|
|
|
|
|
|
|
|
|
|
|
|
Hotline products |
|
|
26,829 |
|
|
|
-- |
|
|
|
26,829 |
|
On-Site services |
|
|
84,339 |
|
|
|
-- |
|
|
|
84,339 |
|
|
|
|
|
|
Total |
|
|
111,168 |
|
|
|
-- |
|
|
|
111,168 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
73,882 |
|
|
|
-- |
|
|
|
73,882 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general & administrative expenses |
|
|
50,647 |
|
|
|
1,126 |
|
|
|
51,773 |
|
Restructuring and other charges |
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Intangibles amortization |
|
|
1,328 |
|
|
|
-- |
|
|
|
1,328 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
21,907 |
|
|
|
(1,126 |
) |
|
|
20,781 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense (income), net |
|
|
2,330 |
|
|
|
-- |
|
|
|
2,330 |
|
Other expenses (income), net |
|
|
40 |
|
|
|
-- |
|
|
|
40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for
income taxes |
|
|
19,537 |
|
|
|
(1,126 |
) |
|
|
18,411 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
|
6,740 |
|
|
|
(444 |
) |
|
|
6,296 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
12,797 |
|
|
$ |
(682 |
) |
|
$ |
12,115 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.75 |
|
|
$ |
(0.04 |
) |
|
$ |
0.71 |
|
|
|
|
|
|
Diluted |
|
$ |
0.74 |
|
|
$ |
(0.04 |
) |
|
$ |
0.70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
17,022 |
|
|
|
-- |
|
|
|
17,022 |
|
|
|
|
|
|
Diluted |
|
|
17,374 |
|
|
|
-- |
|
|
|
17,374 |
|
|
|
|
|
|
Dividends per share |
|
$ |
0.06 |
|
|
$ |
-- |
|
|
$ |
0.06 |
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Month Period Ended September 30, 2006 (Unaudited) |
|
|
|
As Previously |
|
|
|
|
|
|
|
|
|
Reported |
|
|
Adjustment |
|
|
As Restated |
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Hotline products |
|
$ |
107,288 |
|
|
$ |
-- |
|
|
$ |
107,288 |
|
On-Site services |
|
|
394,432 |
|
|
|
-- |
|
|
|
394,432 |
|
|
|
|
|
|
Total |
|
|
501,720 |
|
|
|
-- |
|
|
|
501,720 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales: |
|
|
|
|
|
|
|
|
|
|
|
|
Hotline products |
|
|
53,308 |
|
|
|
-- |
|
|
|
53,308 |
|
On-Site services |
|
|
263,532 |
|
|
|
-- |
|
|
|
263,532 |
|
|
|
|
|
|
Total |
|
|
316,840 |
|
|
|
-- |
|
|
|
316,840 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
184,880 |
|
|
|
-- |
|
|
|
184,880 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general & administrative expenses |
|
|
141,357 |
|
|
|
2,444 |
|
|
|
143,801 |
|
Restructuring and other charges |
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Intangibles amortization |
|
|
3,437 |
|
|
|
-- |
|
|
|
3,437 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
40,086 |
|
|
|
(2,444 |
) |
|
|
37,642 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense (income), net |
|
|
7,766 |
|
|
|
1,395 |
|
|
|
9,161 |
|
Other expenses (income), net |
|
|
187 |
|
|
|
-- |
|
|
|
187 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for
income taxes |
|
|
32,133 |
|
|
|
(3,839 |
) |
|
|
28,294 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
|
11,247 |
|
|
|
(1,441 |
) |
|
|
9,806 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
20,886 |
|
|
$ |
(2,398 |
) |
|
$ |
18,488 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.20 |
|
|
$ |
(0.14 |
) |
|
$ |
1.06 |
|
|
|
|
|
|
Diluted |
|
$ |
1.18 |
|
|
$ |
(0.14 |
) |
|
$ |
1.04 |
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
17,415 |
|
|
|
-- |
|
|
|
17,415 |
|
|
|
|
|
|
Diluted |
|
|
17,766 |
|
|
|
-- |
|
|
|
17,766 |
|
|
|
|
|
|
Dividends per share |
|
$ |
0.12 |
|
|
$ |
-- |
|
|
$ |
0.12 |
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Month Period Ended October 1, 2005 (Unaudited) |
|
|
|
As Previously |
|
|
|
|
|
|
|
|
|
Reported |
|
|
Adjustment |
|
|
As Restated |
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Hotline products |
|
$ |
107,508 |
|
|
$ |
-- |
|
|
$ |
107,508 |
|
On-Site services |
|
|
256,824 |
|
|
|
-- |
|
|
|
256,824 |
|
|
|
|
|
|
Total |
|
|
364,332 |
|
|
|
-- |
|
|
|
364,332 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales: |
|
|
|
|
|
|
|
|
|
|
|
|
Hotline products |
|
|
52,703 |
|
|
|
-- |
|
|
|
52,703 |
|
On-Site services |
|
|
166,807 |
|
|
|
-- |
|
|
|
166,807 |
|
|
|
|
|
|
Total |
|
|
219,510 |
|
|
|
-- |
|
|
|
219,510 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
144,822 |
|
|
|
-- |
|
|
|
144,822 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general & administrative expenses |
|
|
101,567 |
|
|
|
2,246 |
|
|
|
103,813 |
|
Restructuring and other charges |
|
|
5,290 |
|
|
|
-- |
|
|
|
5,290 |
|
Intangibles amortization |
|
|
2,886 |
|
|
|
-- |
|
|
|
2,886 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
35,079 |
|
|
|
(2,246 |
) |
|
|
32,833 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense (income), net |
|
|
4,289 |
|
|
|
-- |
|
|
|
4,289 |
|
Other expenses (income), net |
|
|
(35 |
) |
|
|
-- |
|
|
|
(35 |
) |
|
|
|
|
|
|
Income before provision for
income taxes |
|
|
30,825 |
|
|
|
(2,246 |
) |
|
|
28,579 |
|
|
Provision for income taxes |
|
|
10,634 |
|
|
|
(886 |
) |
|
|
9,748 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
20,191 |
|
|
$ |
(1,360 |
) |
|
$ |
18,831 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.19 |
|
|
$ |
(0.08 |
) |
|
$ |
1.11 |
|
|
|
|
|
|
Diluted |
|
$ |
1.17 |
|
|
$ |
(0.08 |
) |
|
$ |
1.09 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
16,933 |
|
|
|
-- |
|
|
|
16,933 |
|
|
|
|
|
|
Diluted |
|
|
17,208 |
|
|
|
-- |
|
|
|
17,208 |
|
|
|
|
|
|
Dividends per share |
|
$ |
0.12 |
|
|
$ |
-- |
|
|
$ |
0.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
Restatement Impact on the Consolidated Balance Sheets
The following tables reconcile the Companys Consolidated Balance Sheets from the previously
reported results to the restated results as of September 30, 2006 and March 31, 2006. All dollar
amounts are in thousands.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006 (Unaudited) |
|
|
|
As Previously |
|
|
|
|
|
|
|
|
|
Reported |
|
|
Adjustment |
|
|
As Restated |
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
15,758 |
|
|
$ |
-- |
|
|
$ |
15,758 |
|
Accounts receivable, net |
|
|
185,333 |
|
|
|
-- |
|
|
|
185,333 |
|
Inventories, net |
|
|
71,877 |
|
|
|
-- |
|
|
|
71,877 |
|
Costs / estimated earnings in excess of
billings on uncompleted contracts |
|
|
56,553 |
|
|
|
-- |
|
|
|
56,553 |
|
Deferred tax asset |
|
|
9,489 |
|
|
|
-- |
|
|
|
9,489 |
|
Prepaid and other current assets |
|
|
27,606 |
|
|
|
-- |
|
|
|
27,606 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
366,616 |
|
|
|
-- |
|
|
|
366,616 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
|
41,595 |
|
|
|
-- |
|
|
|
41,595 |
|
Goodwill, net |
|
|
586,273 |
|
|
|
-- |
|
|
|
586,273 |
|
Intangibles: |
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships, net |
|
|
53,996 |
|
|
|
-- |
|
|
|
53,996 |
|
Other intangibles, net |
|
|
34,799 |
|
|
|
-- |
|
|
|
34,799 |
|
Deferred tax asset |
|
|
2,654 |
|
|
|
15,872 |
|
|
|
18,526 |
|
Other assets |
|
|
4,343 |
|
|
|
-- |
|
|
|
4,343 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,090,276 |
|
|
$ |
15,872 |
|
|
$ |
1,106,148 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
87,127 |
|
|
$ |
-- |
|
|
$ |
87,127 |
|
Accrued compensation and benefits |
|
|
20,656 |
|
|
|
-- |
|
|
|
20,656 |
|
Deferred revenue |
|
|
51,120 |
|
|
|
-- |
|
|
|
51,120 |
|
Restructuring reserve |
|
|
14,246 |
|
|
|
-- |
|
|
|
14,246 |
|
Billings in excess of costs / estimated
earnings on uncompleted contracts |
|
|
20,571 |
|
|
|
-- |
|
|
|
20,571 |
|
Current maturities of long-term debt |
|
|
608 |
|
|
|
-- |
|
|
|
608 |
|
Other liabilities |
|
|
59,253 |
|
|
|
3,099 |
|
|
|
62,352 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
253,581 |
|
|
|
3,099 |
|
|
|
256,680 |
|
|
Long-term debt |
|
|
251,945 |
|
|
|
-- |
|
|
|
251,945 |
|
Other liabilities |
|
|
27,708 |
|
|
|
-- |
|
|
|
27,708 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
533,234 |
|
|
|
3,099 |
|
|
|
536,333 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity |
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock |
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Common Stock |
|
|
25 |
|
|
|
-- |
|
|
|
25 |
|
Additional paid-in capital |
|
|
373,045 |
|
|
|
57,016 |
|
|
|
430,061 |
|
Treasury stock |
|
|
(314,411 |
) |
|
|
-- |
|
|
|
(314,411 |
) |
Accumulated other comprehensive income |
|
|
17,746 |
|
|
|
1,395 |
|
|
|
19,141 |
|
Retained earnings |
|
|
480,637 |
|
|
|
(45,638 |
) |
|
|
434,999 |
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
557,042 |
|
|
|
12,773 |
|
|
|
569,815 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
1,090,276 |
|
|
$ |
15,872 |
|
|
$ |
1,106,148 |
|
|
|
|
|
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2006 (Unaudited) |
|
|
|
As Previously |
|
|
|
|
|
|
|
|
|
Reported |
|
|
Adjustment |
|
|
As Restated |
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
11,207 |
|
|
$ |
-- |
|
|
$ |
11,207 |
|
Accounts receivable, net |
|
|
116,713 |
|
|
|
-- |
|
|
|
116,713 |
|
Inventories, net |
|
|
53,926 |
|
|
|
-- |
|
|
|
53,926 |
|
Costs / estimated earnings in excess of
billings on uncompleted contracts |
|
|
23,803 |
|
|
|
-- |
|
|
|
23,803 |
|
Deferred tax asset |
|
|
8,973 |
|
|
|
-- |
|
|
|
8,973 |
|
Prepaid and other current assets |
|
|
16,502 |
|
|
|
-- |
|
|
|
16,502 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
231,124 |
|
|
|
-- |
|
|
|
231,124 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
|
35,124 |
|
|
|
-- |
|
|
|
35,124 |
|
Goodwill, net |
|
|
468,724 |
|
|
|
-- |
|
|
|
468,724 |
|
Intangibles: |
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships, net |
|
|
24,657 |
|
|
|
-- |
|
|
|
24,657 |
|
Other intangibles, net |
|
|
30,783 |
|
|
|
-- |
|
|
|
30,783 |
|
Deferred tax asset |
|
|
4,231 |
|
|
|
15,678 |
|
|
|
19,909 |
|
Other assets |
|
|
5,091 |
|
|
|
-- |
|
|
|
5,091 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
799,734 |
|
|
$ |
15,678 |
|
|
$ |
815,412 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
44,943 |
|
|
$ |
-- |
|
|
$ |
44,943 |
|
Accrued compensation and benefits |
|
|
13,954 |
|
|
|
-- |
|
|
|
13,954 |
|
Deferred revenue |
|
|
22,211 |
|
|
|
-- |
|
|
|
22,211 |
|
Restructuring reserve |
|
|
3,292 |
|
|
|
-- |
|
|
|
3,292 |
|
Billings in excess of costs / estimated
earnings on uncompleted contracts |
|
|
8,648 |
|
|
|
-- |
|
|
|
8,648 |
|
Current maturities of long-term debt |
|
|
1,049 |
|
|
|
-- |
|
|
|
1,049 |
|
Other liabilities |
|
|
33,771 |
|
|
|
3,587 |
|
|
|
37,358 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
127,868 |
|
|
|
3,587 |
|
|
|
131,455 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
122,673 |
|
|
|
-- |
|
|
|
122,673 |
|
Other liabilities |
|
|
8,293 |
|
|
|
-- |
|
|
|
8,293 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
258,834 |
|
|
|
3,587 |
|
|
|
262,421 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity |
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock |
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Common Stock |
|
|
25 |
|
|
|
-- |
|
|
|
25 |
|
Additional paid-in capital |
|
|
362,810 |
|
|
|
55,331 |
|
|
|
418,141 |
|
Treasury stock |
|
|
(296,824 |
) |
|
|
-- |
|
|
|
(296,824 |
) |
Accumulated other comprehensive income |
|
|
13,036 |
|
|
|
-- |
|
|
|
13,036 |
|
Retained earnings |
|
|
461,853 |
|
|
|
(43,240 |
) |
|
|
418,613 |
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
540,900 |
|
|
|
12,091 |
|
|
|
552,991 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
799,734 |
|
|
$ |
15,678 |
|
|
$ |
815,412 |
|
|
|
|
|
|
|
|
|
28
Restatement Impact on the Consolidated Statement of Cash Flows
The following tables reconcile the Companys Consolidated Statements of Cash Flows from the
previously reported results to the restated results for the six (6) month periods ended September
30, 2006 and October 1, 2005. All dollar amounts are in thousands.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Month Period Ended September 30, 2006 (Unaudited) |
|
|
As Previously |
|
|
|
|
|
|
|
|
|
Reported |
|
|
Adjustment |
|
|
As Restated |
|
|
Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
20,886 |
|
|
$ |
(2,398 |
) |
|
$ |
18,488 |
|
Adjustments to reconcile net income to net cash provided
by (used for) operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Intangibles amortization and depreciation |
|
|
9,453 |
|
|
|
-- |
|
|
|
9,453 |
|
Deferred taxes |
|
|
1,166 |
|
|
|
(848 |
) |
|
|
318 |
|
Stock compensation expense |
|
|
3,192 |
|
|
|
2,444 |
|
|
|
5,636 |
|
Tax benefit from exercised stock options |
|
|
(432 |
) |
|
|
759 |
|
|
|
327 |
|
Change in fair value of interest rate swap |
|
|
-- |
|
|
|
1,395 |
|
|
|
1,395 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
|
(3,518 |
) |
|
|
-- |
|
|
|
(3,518 |
) |
Inventories, net |
|
|
(4,734 |
) |
|
|
-- |
|
|
|
(4,734 |
) |
All other current assets excluding deferred tax asset |
|
|
(516 |
) |
|
|
(864 |
) |
|
|
(1,380 |
) |
Liabilities exclusive of long term debt |
|
|
(3,774 |
) |
|
|
(488 |
) |
|
|
(4,262 |
) |
|
|
|
|
|
Net cash provided by (used for) operating activities |
|
$ |
21,723 |
|
|
$ |
-- |
|
|
$ |
21,723 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
$ |
(2,112 |
) |
|
$ |
-- |
|
|
$ |
(2,112 |
) |
Capital disposals |
|
|
403 |
|
|
|
-- |
|
|
|
403 |
|
Acquisition of businesses (payments)/recoveries |
|
|
(127,402 |
) |
|
|
-- |
|
|
|
(127,402 |
) |
Prior merger-related (payments)/recoveries |
|
|
(1,389 |
) |
|
|
-- |
|
|
|
(1,389 |
) |
|
|
|
|
|
Net cash provided by (used for) investing activities |
|
$ |
(130,500 |
) |
|
$ |
-- |
|
|
$ |
(130,500 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from borrowings |
|
$ |
258,519 |
|
|
$ |
-- |
|
|
$ |
258,519 |
|
Repayment of borrowings |
|
|
(131,236 |
) |
|
|
-- |
|
|
|
(131,236 |
) |
Repayment on discounted lease rentals |
|
|
(24 |
) |
|
|
-- |
|
|
|
(24 |
) |
Proceeds from exercise of options |
|
|
6,611 |
|
|
|
-- |
|
|
|
6,611 |
|
Payment of dividends |
|
|
(2,116 |
) |
|
|
-- |
|
|
|
(2,116 |
) |
Purchase of treasury stock |
|
|
(17,587 |
) |
|
|
-- |
|
|
|
(17,587 |
) |
|
|
|
|
|
Net cash provided by (used for) financing activities |
|
$ |
114,167 |
|
|
$ |
-- |
|
|
$ |
114,167 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange impact on cash |
|
$ |
(839 |
) |
|
$ |
-- |
|
|
$ |
(839 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase / (decrease) in cash and cash equivalents |
|
$ |
4,551 |
|
|
$ |
-- |
|
|
$ |
4,551 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period |
|
$ |
11,207 |
|
|
$ |
-- |
|
|
$ |
11,207 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
15,758 |
|
|
$ |
-- |
|
|
$ |
15,758 |
|
|
|
|
|
|
Supplemental Cash Flow: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
6,358 |
|
|
$ |
-- |
|
|
$ |
6,358 |
|
Cash paid for income taxes |
|
|
7,391 |
|
|
|
-- |
|
|
|
7,391 |
|
Non-cash financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Dividends payable |
|
|
1,041 |
|
|
|
-- |
|
|
|
1,041 |
|
Capital leases |
|
|
127 |
|
|
|
-- |
|
|
|
127 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Month Period Ended October 1, 2005 (Unaudited) |
|
|
As Previously |
|
|
|
|
|
|
|
|
|
Reported |
|
|
Adjustment |
|
|
As Restated |
|
|
Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
20,191 |
|
|
$ |
(1,360 |
) |
|
$ |
18,831 |
|
Adjustments to reconcile net income to net cash provided
by (used for) operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Intangibles amortization and depreciation |
|
|
7,380 |
|
|
|
-- |
|
|
|
7,380 |
|
Deferred taxes |
|
|
(2,053 |
) |
|
|
2,077 |
|
|
|
24 |
|
Stock compensation expense |
|
|
-- |
|
|
|
2,246 |
|
|
|
2,246 |
|
Tax benefit from exercised stock options |
|
|
(1,971 |
) |
|
|
979 |
|
|
|
(992 |
) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
|
(8,913 |
) |
|
|
-- |
|
|
|
(8,913 |
) |
Inventories, net |
|
|
5,704 |
|
|
|
-- |
|
|
|
5,704 |
|
All other current assets excluding deferred tax asset |
|
|
1,586 |
|
|
|
(3,942 |
) |
|
|
(2,356 |
) |
Liabilities exclusive of long term debt |
|
|
550 |
|
|
|
-- |
|
|
|
550 |
|
|
|
|
|
|
Net cash provided by (used for) operating activities |
|
$ |
22,474 |
|
|
$ |
-- |
|
|
$ |
22,474 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
$ |
(1,600 |
) |
|
$ |
-- |
|
|
$ |
(1,600 |
) |
Capital disposals |
|
|
1,001 |
|
|
|
-- |
|
|
|
1,001 |
|
Acquisition of businesses (payments)/recoveries |
|
|
(26,854 |
) |
|
|
-- |
|
|
|
(26,854 |
) |
Prior merger-related (payments)/recoveries |
|
|
(165 |
) |
|
|
-- |
|
|
|
(165 |
) |
|
|
|
|
|
Net cash provided by (used for) investing activities |
|
$ |
(27,618 |
) |
|
$ |
-- |
|
|
$ |
(27,618 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from borrowings |
|
$ |
105,948 |
|
|
$ |
-- |
|
|
$ |
105,948 |
|
Repayment of borrowings |
|
|
(105,235 |
) |
|
|
-- |
|
|
|
(105,235 |
) |
Repayment on discounted lease rentals |
|
|
(667 |
) |
|
|
-- |
|
|
|
(667 |
) |
Proceeds from exercise of options |
|
|
7,452 |
|
|
|
-- |
|
|
|
7,452 |
|
Payment of dividends |
|
|
(2,021 |
) |
|
|
-- |
|
|
|
(2,021 |
) |
Purchase of treasury stock |
|
|
(10 |
) |
|
|
-- |
|
|
|
(10 |
) |
|
|
|
|
|
Net cash provided by (used for) financing activities |
|
$ |
5,467 |
|
|
$ |
-- |
|
|
$ |
5,467 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange impact on cash |
|
$ |
10 |
|
|
$ |
-- |
|
|
$ |
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase / (decrease) in cash and cash equivalents |
|
$ |
333 |
|
|
$ |
-- |
|
|
$ |
333 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period |
|
$ |
11,592 |
|
|
$ |
-- |
|
|
$ |
11,592 |
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
11,925 |
|
|
$ |
-- |
|
|
$ |
11,925 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
4,285 |
|
|
$ |
-- |
|
|
$ |
4,285 |
|
Cash paid for income taxes |
|
|
6,212 |
|
|
|
-- |
|
|
|
6,212 |
|
Non-cash financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Dividends payable |
|
|
1,028 |
|
|
|
-- |
|
|
|
1,028 |
|
Capital leases |
|
|
683 |
|
|
|
-- |
|
|
|
683 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
Note 4: Inventories
The Companys inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006 |
|
|
March 31, 2006 |
|
Raw materials |
|
$ |
1,681 |
|
|
$ |
1,426 |
|
Finished goods |
|
|
95,117 |
|
|
|
66,787 |
|
|
|
|
|
|
Subtotal |
|
|
96,798 |
|
|
|
68,213 |
|
Excess and obsolete inventory reserves |
|
|
(24,921 |
) |
|
|
(14,287 |
) |
|
|
|
|
|
Inventory, net |
|
$ |
71,877 |
|
|
$ |
53,926 |
|
|
|
|
|
|
|
Note 5: Goodwill and Other Intangible Assets
As required by SFAS No. 142 Goodwill and Other Intangible Assets, goodwill and intangible assets
with indefinite useful lives are not amortized. The Company is required to perform an impairment
test annually, or as often as impairment indicators are present. The Companys policy is to
evaluate its non-amortizable intangible assets for impairment during the third quarter of each
fiscal year. The Company performed the most recent test during the third quarter of Fiscal 2006,
and concluded that no impairment existed. The Companys intangibles, as identified in SFAS No. 141
Business Combinations (SFAS 141), other than goodwill, are its trademarks, non-compete
agreements, customer relationships and acquired backlog.
The following table summarizes changes to goodwill at the Companys reporting units during the
period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North |
|
|
|
|
|
|
|
|
|
|
|
|
America |
|
|
Europe |
|
|
All Other |
|
|
Total |
|
|
Balance as of March 31, 2006 |
|
$ |
400,998 |
|
|
$ |
65,684 |
|
|
$ |
2,042 |
|
|
$ |
468,724 |
|
Currency translation |
|
|
29 |
|
|
|
3,828 |
|
|
|
(3 |
) |
|
|
3,854 |
|
Current Period Acquisitions (Note 10) |
|
|
117,383 |
|
|
|
-- |
|
|
|
-- |
|
|
|
117,383 |
|
Prior Period Acquisitions |
|
|
(3,707 |
) |
|
|
-- |
|
|
|
-- |
|
|
|
(3,707 |
) |
Earn-out payments |
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Other |
|
|
19 |
|
|
|
-- |
|
|
|
-- |
|
|
|
19 |
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2006 |
|
$ |
514,722 |
|
|
$ |
69,512 |
|
|
$ |
2,039 |
|
|
$ |
586,273 |
|
|
At September 30, 2006, certain merger agreements provided for contingent payments (earn-out) of up
to $4,588. If future operating performance goals of the acquired companies are met, goodwill will
be adjusted for the amount of the contingent payments.
The following table summarizes the gross carrying amount, accumulated amortization and net carrying
amount by major intangible asset class:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006 |
|
|
March 31, 2006 |
|
|
|
Gross |
|
|
|
|
|
|
Net |
|
|
Gross |
|
|
|
|
|
|
Net |
|
|
|
Carrying |
|
|
Accum. |
|
|
Carrying |
|
|
Carrying |
|
|
Accum. |
|
|
Carrying |
|
|
|
Amount |
|
|
Amort. |
|
|
Amount |
|
|
Amount |
|
|
Amort. |
|
|
Amount |
|
|
Trademarks |
|
$ |
35,992 |
|
|
$ |
8,253 |
|
|
$ |
27,739 |
|
|
$ |
35,992 |
|
|
$ |
8,253 |
|
|
$ |
27,739 |
|
Non-compete agreements |
|
|
7,754 |
|
|
|
2,619 |
|
|
|
5,135 |
|
|
|
4,894 |
|
|
|
1,851 |
|
|
|
3,043 |
|
Customer relationships |
|
|
56,364 |
|
|
|
2,368 |
|
|
|
53,996 |
|
|
|
25,654 |
|
|
|
997 |
|
|
|
24,657 |
|
Acquired backlog |
|
|
7,231 |
|
|
|
5,306 |
|
|
|
1,925 |
|
|
|
3,935 |
|
|
|
3,934 |
|
|
|
1 |
|
|
|
|
|
|
Total |
|
$ |
107,341 |
|
|
$ |
18,546 |
|
|
$ |
88,795 |
|
|
$ |
70,475 |
|
|
$ |
15,035 |
|
|
$ |
55,440 |
|
|
The Companys indefinite lived intangible assets not subject to amortization consist solely of the
Companys trademark portfolio obtained through business acquisitions. The Companys definite-lived
intangible assets subject to amortization are comprised of employee non-compete contracts, backlog
and customer relationships also obtained through business acquisitions. Intangible asset
amortization is computed using the straight-line method based upon the estimated useful lives of
the respective assets, which range from one to 20 years.
31
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, 2006 |
|
$ |
27,739 |
|
|
$ |
3,044 |
|
|
$ |
24,657 |
|
|
$ |
55,440 |
|
Amortization expense |
|
|
-- |
|
|
|
(2,066 |
) |
|
|
(1,371 |
) |
|
|
(3,437 |
) |
Currency translation |
|
|
-- |
|
|
|
58 |
|
|
|
-- |
|
|
|
58 |
|
Current Period Acquisitions (Note 10) |
|
|
-- |
|
|
|
5,282 |
|
|
|
27,134 |
|
|
|
32,416 |
|
Prior Period Acquisitions |
|
|
-- |
|
|
|
742 |
|
|
|
3,576 |
|
|
|
4,318 |
|
|
|
|
Balance at September 30, 2006 |
|
$ |
27,739 |
|
|
$ |
7,060 |
|
|
$ |
53,996 |
|
|
$ |
88,795 |
|
|
Intangible asset amortization expense was $1,931 and $3,437 for the three and six months ended
September 30, 2006, respectively. Intangible asset amortization expense was $1,328 and $2,886 for
the three and six months ended September 30, 2005, respectively. The Company acquired
definite-lived intangibles from the completion of two acquisitions during the six month period
ended September 30, 2006 (see Note 10 of the Notes to the Consolidated Financial Statements). The
estimated definite-lived intangibles recorded of $32,416 were based on a preliminary allocation
pending completion of third party valuation, which is expected to be completed during the third
quarter of Fiscal 2007. The Company recorded amortization expense of $1,266 and $2,110 for the
three and six month periods ended September 30, 2006 for these newly acquired definite-lived
assets.
The following table details the estimated intangible amortization expense for the next five years.
These estimates are based on the carrying amounts of intangible assets as of September 30, 2006
that are subject to change pending the outcome of purchase accounting related to our current
acquisitions:
|
|
|
|
|
Years Ending March 31, |
|
2007 |
|
$ |
7,242 |
|
2008 |
|
|
4,561 |
|
2009 |
|
|
4,139 |
|
2010 |
|
|
4,010 |
|
2011 |
|
|
3,438 |
|
Thereafter |
|
|
41,103 |
|
|
|
|
Total |
|
$ |
64,493 |
|
|
Note 6: Indebtedness
Long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006 |
|
|
March 31, 2006 |
|
Revolving credit agreement |
|
$ |
249,400 |
|
|
$ |
121,303 |
|
Interest rate swap fair value (see Note 7) |
|
|
1,395 |
|
|
|
-- |
|
Capital lease obligations |
|
|
1,563 |
|
|
|
1,891 |
|
Other |
|
|
195 |
|
|
|
528 |
|
|
|
|
|
|
Total debt |
|
|
252,553 |
|
|
|
123,722 |
|
Less: current portion |
|
|
(608 |
) |
|
|
(1,049 |
) |
|
|
|
|
|
Long-term debt |
|
$ |
251,945 |
|
|
$ |
122,673 |
|
|
|
|
|
|
|
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 Companys 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 Companys 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 September 30, 2006, the Company was in compliance with all required
covenants under the Credit Agreement.
32
During the six month period ended September 30, 2006, the Company increased net borrowings
under the Credit Agreement by approximately $128,097. The Company utilized the proceeds from net
borrowings to fund the acquisitions of the USA Commercial and Government and Canadian operations of
NextiraOne, LLC (NextiraOne) and Nu-Vision Technologies, Inc. and Nu-Vision Technologies, LLC
(collectively referred to as NUVT) during the first quarter Fiscal 2007 (see Note 10 of the Notes
to the Consolidated Financial Statements) and to repurchase common stock during the second quarter
Fiscal 2007.
During the three month period ended September 30, 2006, the maximum amount and weighted average
balance outstanding under the Credit Agreement were $284,470 and $265,437, respectively. The
weighted average interest rate on all outstanding debt was approximately 6.26% and 5.04% for the
three month periods ended September 30, 2006 and 2005, respectively. During the six month period
ended September 30, 2006, the maximum amount and weighted average balance outstanding under the
Credit Agreement were $284,470 and $243,390, respectively. The weighted average interest rate on
all outstanding debt was approximately 6.17% and 4.53% for the six month periods ended September
30, 2006 and 2005, respectively.
Capital Lease Obligations:
The capital lease obligations are primarily for facilities and equipment. The lease agreements have
remaining terms ranging from less than one year to four years with interest rates ranging from
3.83% to 10.83%.
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 year to five years
with interest rates ranging from 0.0% to 7.1%.
Unused Available Borrowings:
As of September 30, 2006, the Company had $4,565 outstanding in letters of credit and $56,035
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 September 30, 2006, the Company had open
contracts in Australian and Canadian dollar, Danish krone, Euro, Japanese yen, Norwegian kroner,
Pound sterling, Swedish krona and Swiss franc, which have been designated as cash flow hedges.
These contracts had a notional amount of approximately $53,518 and a fair value of $52,175 and
mature within the next thirty months.
As of September 30, 2006, an unrecognized gain of $1,203 on all open foreign currency forward
contracts is included in the Companys Consolidated Balance Sheets as a component of Other
Comprehensive Income (loss) (OCI). This unrecognized gain 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 and six month period ending September 30, 2006, the Company recognized $106 and
$292, respectively, into earnings on matured contracts. There was no hedge ineffectiveness during
the six month period ending September 30, 2006.
Interest Rate Swap:
To mitigate the risk of interest-rate fluctuations associated with the Companys 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 Companys 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 an interest rate swap which has been used to effectively
convert a portion of the Companys 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. For the three and six month periods ended September 30, 2006, the Company recognized a
loss of $1,395 related to the change in fair value of the interest rate swap included in Interest
Expense (Income) in the Companys Consolidated Statements of Income. The loss is recorded as a
component of Long Term Debt in the Companys Consolidated Balance Sheet.
33
Note 8: Earnings Per Share
The following table details the computation of basic and diluted earnings per common share from
continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three month period ended |
|
|
Six month period ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
(As Restated) |
|
|
(As Restated) |
|
|
(As Restated) |
|
|
(As Restated) |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
Net income, as reported |
|
$ |
11,675 |
|
|
$ |
12,115 |
|
|
$ |
18,488 |
|
|
$ |
18,831 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding (basic) |
|
|
17,513 |
|
|
|
17,022 |
|
|
|
17,415 |
|
|
|
16,933 |
|
Effect of dilutive securities from employee stock options |
|
|
230 |
|
|
|
352 |
|
|
|
351 |
|
|
|
275 |
|
|
|
|
|
|
Weighted average common shares outstanding (diluted) |
|
|
17,743 |
|
|
|
17,374 |
|
|
|
17,766 |
|
|
|
17,208 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share |
|
$ |
0.67 |
|
|
$ |
0.71 |
|
|
$ |
1.06 |
|
|
$ |
1.11 |
|
|
|
|
|
|
Dilutive earnings per common share |
|
$ |
0.66 |
|
|
$ |
0.70 |
|
|
$ |
1.04 |
|
|
$ |
1.09 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. There
were 3,240,830 and 1,957,098 non-dilutive stock options outstanding during the three month periods
ended September 30, 2006 and 2005, respectively, that are not included in the corresponding period
Weighted Average Common Shares Outstanding (diluted) computation. There were 774,038 and 2,595,489
non-dilutive stock options outstanding during the six month-periods ended September 30, 2006 and
2005, respectively that are not included in the corresponding period Weighted Average Common Shares
Outstanding (diluted) computation.
Note 9: Comprehensive Income and Stockholders Equity
The following table details the computation of comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three month period ended |
|
|
Six month period ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
(As Restated) |
|
|
(As Restated) |
|
|
(As Restated) |
|
|
(As Restated) |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
Net income |
|
$ |
11,675 |
|
|
$ |
12,115 |
|
|
$ |
18,488 |
|
|
$ |
18,831 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment |
|
|
(481 |
) |
|
|
718 |
|
|
|
6,044 |
|
|
|
(9,046 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains/(losses) on
derivatives designated and qualified
as cash flow hedges, net of
reclassification of unrealized
gains/(losses) on expired derivatives |
|
|
293 |
|
|
|
75 |
|
|
|
61 |
|
|
|
233 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
11,487 |
|
|
$ |
12,908 |
|
|
$ |
24,593 |
|
|
$ |
10,018 |
|
|
The components of Accumulated Other Comprehensive Income consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
(As Restated) |
|
|
March 31, 2006 |
|
|
|
September 30, 2006 |
|
|
|
|
|
|
Foreign currency translation adjustment |
|
$ |
17,938 |
|
|
$ |
11,894 |
|
Unrealized gains/(losses) on derivatives
designated and qualified as cash flow
hedges, net of reclassification of
unrealized gains/(losses) on expired
derivatives |
|
|
1,203 |
|
|
|
1,142 |
|
|
|
|
|
|
Total accumulated other comprehensive income |
|
$ |
19,141 |
|
|
$ |
13,036 |
|
|
34
Note 10: Acquisitions
During the first quarter Fiscal 2007, the Company acquired the USA Commercial and Government and
Canadian operations of NextiraOne. The following table summarizes the preliminary fair value of the
NextiraOne assets acquired and liabilities assumed at the date of acquisition.
|
|
|
|
|
|
|
At April 30, 2006 |
|
|
Current assets, primarily consisting of accounts receivable and inventories |
|
$ |
87,864 |
|
Property, plant and equipment |
|
|
10,806 |
|
Other non-current assets |
|
|
1,386 |
|
Intangible assets |
|
|
19,743 |
|
Goodwill |
|
|
96,665 |
|
|
|
|
Total assets acquired |
|
$ |
216,464 |
|
|
|
|
|
|
Current liabilities, primarily consisting of deferred revenue,
restructuring reserve and accrued expenses |
|
$ |
106,801 |
|
Other non-current liabilities, primarily consisting of restructuring
reserve |
|
|
22,319 |
|
|
|
|
Total liabilities acquired |
|
$ |
129,120 |
|
|
|
|
|
|
|
|
|
Net assets acquired |
|
$ |
87,344 |
|
|
The following table details the amounts recorded to each major intangible asset class:
|
|
|
|
|
|
|
At April 30, 2006 |
|
|
Backlog |
|
$ |
3,300 |
|
Customer relationships and contracts |
|
|
16,443 |
|
|
|
|
Total intangible assets* |
|
$ |
19,743 |
|
|
* The estimated weighted average amortization period for these definite-lived assets is 16.8
years.
The transaction resulted in $96,665 of goodwill. The Company paid this premium for NextiraOne
in order to further expand its operational footprint in the voice and data technology markets. In
addition, the purchase increased the Companys solutions offerings, providing for a stronger
worldwide technical services partner for its collective clients.
The Company paid a cash total of $97,305 for the outstanding interests in NextiraOne which included
an estimate for the equity book value (total assets less total liabilities, as adjusted by the
parties for certain items) as of the closing date. The actual equity book value adjustment is
expected to be confirmed during the third quarter, at which time the final purchase price will be
determined.
As of September 30, 2006, the equity book value adjustment resulted in a $10,535
receivable from the seller. This receivable is recorded in Other Current Assets and is considered
fully collectible. The costs of the acquisitions were funded with borrowings under the Credit
Agreement described in Note 6 of the Notes to the Consolidated Financial Statements.
Included in the total cash paid at closing was $42,143 that was allocated to escrow accounts,
including a general escrow, and an escrow for certain specified items regarding litigation,
accounts receivable, deposits and credits, equipment leases, accounts payable, workers
compensation and real estate leases. The amounts in escrow have been and will continue to be
released to NextiraOnes seller or to the Company in accordance with the terms of the agreements.
After consummation of the acquisition, the Company began to integrate NextiraOne products,
employees and facilities with its own. In so doing, the Company incurred $15,726 of costs related
to facility consolidations and $8,857 of severance costs for the separation of approximately 250
employees. In accordance with SFAS 141, these costs were properly included in the purchase price
allocation for NextiraOne. The majority of the severance costs will be paid in Fiscal 2007 with
certain facility costs extending through Fiscal 2014.
In connection with the NextiraOne acquisition, the Company obtained various contractual obligations
in the form of operating leases for facilities and vehicles. The following table summarizes the
payments due by period related to those contractual obligations:
|
|
|
|
|
Payments Due by Period |
|
|
Less than 1 year |
|
$ |
15,872 |
|
1-3 years |
|
|
18,271 |
|
3-5 years |
|
|
977 |
|
More than 5 years |
|
|
-- |
|
|
|
|
Total |
|
$ |
35,120 |
|
|
35
Also, during first quarter Fiscal 2007, the Company acquired NUVT. In connection with the NUVT
acquisition, the Company has made a preliminary allocation of $20,718 and $12,673 to goodwill and
definite-lived intangible assets, respectively. The definite-lived intangible assets recorded
represent the estimated fair market value of acquired backlog, customer relationships and
non-compete agreements. The Company estimates that the definite-lived intangibles are to be
amortized over a period of one to 20 years.
The allocation of the purchase price of these acquisitions is based on preliminary estimates of the
fair values of certain assets acquired and liabilities assumed as of the date of the acquisition.
Management, with the assistance of independent valuation specialists, 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.
NextiraOne and NUVT contributed on-site services revenues of $88,259 and $148,433 during the three
and six month periods ended September 30, 2006, respectively.
The following unaudited pro forma summary presents the Companys results of operations as if the
acquisitions of NextiraOne and NUVT had occurred on April 1, 2005 and does not purport to represent
what the Companys results of operations would have been had the acquisitions occurred on such date
or at the beginning of the period indicated, or to project the Companys results of operations for
any future date or period, or to be a fair reflection of the assets purchased at the date of
acquisition. The pro forma results of operations exclude the impact of nonrecurring or
extraordinary adjustments, together with related income tax effects. These pro forma results of
operations do not include the effects of cost synergies and one-time nonrecurring transactions
associated with the acquisition.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended |
|
|
For the six months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
(As Restated) |
|
|
(As Restated) |
|
|
(As Restated) |
|
|
(As Restated) |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
Revenue (Pro forma) |
|
$ |
271,325 |
|
|
$ |
310,496 |
|
|
$ |
532,366 |
|
|
$ |
646,438 |
|
Net Income from continuing
operations (Pro forma), net of tax |
|
$ |
11,675 |
|
|
$ |
11,919 |
|
|
$ |
16,691 |
|
|
$ |
22,712 |
|
Earnings per common share (Pro forma) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.67 |
|
|
$ |
0.70 |
|
|
$ |
0.96 |
|
|
$ |
1.34 |
|
Diluted |
|
$ |
0.66 |
|
|
$ |
0.69 |
|
|
$ |
0.96 |
|
|
$ |
1.32 |
|
|
Purchase Price Allocation Update (prior year acquisitions):
During first quarter Fiscal 2006, the Company acquired 100% of the issued and outstanding equity
interests of Telecommunication Systems Management, Inc. (TSM), GTC Technology Group, Inc. and
Technology Supply, Inc. (collectively referred to as GTC) and Business Communications, Inc.,
Bainbridge Communication, Inc., BCI of Tampa, LLC and Networx, L.L.C. (collectively referred to as
BCI). These companies primarily provide full-service voice communication solutions and services
in the Florida and Virginia markets. In connection with the acquisitions, the Company has allocated
$8,385 and $5,846 to goodwill and definite-lived intangible assets, respectively. The
definite-lived intangible assets recorded represent the fair market value of acquired customer
relationships and non-compete agreements. The definite-lived intangibles are being amortized over a
period of five to 20 years.
During second quarter Fiscal 2006, the Company acquired substantially all of the assets and certain
liabilities of Universal Solutions of North America, L.L.C. and related entities (Universal).
Universal primarily provides planning, installation and maintenance services for voice
and data network systems in 14 states. In connection with the acquisition, the Company has
allocated $9,430 and $8,000 to goodwill and definite-lived intangible assets, respectively. The
definite-lived intangible assets recorded represent the estimated fair market value of acquired
customer relationships and non-compete agreements. The definite-lived intangibles are being
amortized over a period of five to 20 years.
During third quarter Fiscal 2006, the Company purchased 100% of the issued and outstanding equity
interests of Communication is World InterActive Networking, Inc. (C=WIN) and Converged Solutions
Group, LLC (CSG). C=WIN has an active customer base which includes commercial and various
government agency accounts. CSG has an active customer base which includes commercial, education,
health care and various government agency accounts. The C=WIN and CSG acquisitions primarily
provide planning, installation and maintenance services for voice and data network systems in 15
states. In connection with the acquisitions, the Company has made a preliminary allocation of
$9,153 and $6,779 to goodwill and definite-lived intangible assets, respectively. The
definite-lived intangible assets recorded represent the estimated fair market value of acquired
customer relationships and non-compete agreements. The Company estimates that the definite-lived
intangibles are to be amortized over a period of four to 20 years.
The results of operations of TSM, GTC, BCI, Universal, C=WIN and CSG are included in the Companys
Consolidated Statements of Income beginning on their respective acquisition dates. The acquisitions
taken individually did not have a material impact on the Companys results of operations.
36
The following acquired companies will collectively be referred to as Acquired Companies: TSM,
GTC, BCI, Universal, C=WIN, CSG, NextiraOne and NUVT.
Note 11: Commitments and Contingencies
Litigation
The Company is involved in, or has pending, various legal proceedings, claims, suits and complaints
arising out of the normal course of business. Based on the facts currently available to the
Company, management believes its litigation matters are adequately provided for, covered by
insurance or a third party indemnification obligation, without merit or not probable that a
material unfavorable outcome will result.
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 Companys best
estimate of probable liability under those warranties. As of September 30, 2006 and March 31, 2006,
the Company has recorded a warranty reserve of $5,059 and $1,383, respectively.
There has been no significant or unusual activity during the three and six month periods ended
September 30, 2006 other than the acquisitions as discussed in Note 10 of the Notes to the
Consolidated Financial Statements.
Note 12: Pension Plan Costs
On April 30, 2006, the Company acquired NextiraOne who is a sponsor of a non-contributory defined
benefit plan (the CWA Plan) for the Communication Workers of America Local 1109 (CWA 1109).
Benefits from the CWA Plan are based upon years of service and rates negotiated by the Company and
CWA 1109. Pension costs are funded to satisfy minimum requirements prescribed by the Employee
Retirement Income Security Act of 1974.
The following table summarizes the components of net periodic benefit cost for the three and six
month periods ended September 30, 2006. Six month results include the net periodic benefit cost
from May 1, 2006 (date following acquisition) through September 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
For the three months |
|
|
For the six months |
|
|
|
ended September 30, |
|
|
ended September 30, |
|
|
|
2006 |
|
|
2006 |
|
|
Service cost |
|
$ |
148 |
|
|
$ |
219 |
|
Interest cost |
|
|
465 |
|
|
|
581 |
|
Expected return on plan assets |
|
|
(514 |
) |
|
|
(622 |
) |
Amortization of prior service cost |
|
|
-- |
|
|
|
-- |
|
Amortization of unrealized gains and losses |
|
|
(42 |
) |
|
|
-- |
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
57 |
|
|
$ |
178 |
|
|
As of April 30, 2006, the projected benefit obligation, accumulated benefit obligation and fair
value of plan assets were $25,400, $25,400 and $18,697, respectively. A liability of $6,703
representing the unfunded portion of the CWA Plan is included in Other Liabilities within the
Consolidated Balance Sheets.
The following are the weighted-average assumptions utilized for this plan:
|
|
|
|
|
|
|
April 30, 2006 |
|
Discount rate |
|
|
5.50 |
% |
Rate of compensation increase |
|
|
N/A |
Expected long-term rate of return |
|
|
8.00 |
% |
|
Note 13: Restructuring and Other Charges
The Company incurred $15,726 of costs related to facility consolidations and $8,857 of severance
costs for the separation of approximately 250 employees. In accordance with SFAS 141, these costs
were properly included in the purchase price allocation for NextiraOne. The majority of the
severance costs will be paid in Fiscal 2007 with certain facility costs extending through Fiscal
2014. The Company paid $3,590 and $7,132 during the three and six month periods ended September
2006, respectively, relating to such obligations.
37
The following table summarizes the changes to the restructuring reserve during the period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee |
|
|
Facility |
|
|
|
|
|
|
Severance |
|
|
Closures |
|
|
Total |
|
|
Balance at March 31, 2006 |
|
$ |
260 |
|
|
$ |
10,438 |
|
|
$ |
10,698 |
|
Acquisition adjustments (see Note 10) |
|
|
8,857 |
|
|
|
15,843 |
|
|
|
24,700 |
|
Cash expenditures |
|
|
(4,997 |
) |
|
|
(4,173 |
) |
|
|
(9,170 |
) |
|
|
|
|
|
|
|
Balance at September 30, 2006 |
|
$ |
4,120 |
|
|
$ |
22,108 |
|
|
$ |
26,228 |
|
|
Note 14: 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 September
30, 2006, the Employee Plan is authorized to issue stock options and stock appreciation rights
(SARs) for up to 9,200,000 shares of common stock. The Employee Plan provides that options are
to be granted by a committee appointed by the Companys Board to key employees of the Company; such
stock options generally become exercisable in equal amounts over a three-year period. As of
September 30, 2006, 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.
Stock-based compensation expense recognized in the Companys Consolidated Statements of Income for
the three and six months ended September 30, 2006 includes (i) compensation expense for share-based
awards granted prior to, but not yet vested as of March 31, 2006, based on the grant-date fair
value estimated in accordance with the pro forma provisions of SFAS 123 and (ii) compensation
expense for the share-based payment awards granted subsequent to March 31, 2006 based on the
grant-date fair value estimated in accordance with the provisions of SFAS 123(R).
As a result of the Restatement through March 31, 2006, the Company has recorded an additional
non-cash charge for stock-based compensation for the three (3) and six (6) months periods
ended September 30, 2006. This charge was recorded to reflect additional non-cash, stock-based
compensation expense recognized under the fair value method (SFAS 123(R)) because the exercise
price for certain stock option grants prior to, but not vested as of March 31, 2006, differed from
the fair market value of the underlying shares on the appropriate measurement date, some of which
occurred during Fiscal 2007. The following table reconciles the Companys stock-based compensation
expense from the previously reported results to the restated results for the three (3) and six (6)
month periods ended September 30, 2006 and 2005. All dollar amounts are in thousands. Stock-based
compensation expense is recorded to Selling, General, and Administrative expense.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-Based Compensation Expense, Pre-Tax |
|
|
|
(As Previously |
|
|
|
|
|
|
|
Three Months Ended |
|
Reported) |
|
|
Adjustment |
|
|
(As Restated) |
|
|
September 30, 2006 |
|
$ |
1,572 |
|
|
$ |
815 |
|
|
$ |
2,387 |
|
September 30, 2005 |
|
|
-- |
|
|
|
1,126 |
|
|
|
1,126 |
|
|
As noted above, the restated stock-based compensation expense for the three (3) months ended
September 30, 2006 and September 30, 2005 was $2,387 ($1,551 net of tax), or approximately $0.09
per diluted share and $1,126 ($732 net of tax), or approximately $0.04 per diluted share
respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-Based Compensation Expense, Pre-Tax |
|
|
|
(As Previously |
|
|
|
|
|
|
|
Six Months Ended |
|
Reported) |
|
|
Adjustment |
|
|
(As Restated) |
|
|
September 30, 2006 |
|
$ |
3,192 |
|
|
$ |
2,444 |
|
|
$ |
5,636 |
|
September 30, 2005 |
|
|
-- |
|
|
|
2,246 |
|
|
|
2,246 |
|
|
As noted above, the restated stock-based compensation expense for the six (6) months ended
September 30, 2006 and September 30, 2005 was $5,636 ($3,664 net of tax), or approximately $0.21
per diluted share and $2,246 ($1,460 net of tax), or approximately $0.08 per diluted share
respectively.
38
The following table summarizes certain information regarding the Companys outstanding stock
options as of and for the period ending September 30, 2006.
|
|
|
|
|
|
|
|
|
|
|
Six month period ended September 30, 2006 |
|
|
|
|
|
|
|
Weighted-Average Exercise |
|
|
|
Shares |
|
Price (per share) |
Outstanding at March 31, 2006 |
|
|
5,055 |
|
|
$ |
38.28 |
|
Granted |
|
|
70 |
|
|
|
39.12 |
|
Exercised |
|
|
(197 |
) |
|
|
33.61 |
|
Forfeited or expired |
|
|
(58 |
) |
|
|
38.62 |
|
|
|
|
|
|
Outstanding at September 30, 2006 |
|
|
4,870 |
|
|
$ |
38.48 |
|
Exercisable at September 30, 2006 |
|
|
4,377 |
|
|
$ |
38.91 |
|
Weighted average fair value of
options granted during the
period using Black-Scholes
option pricing model |
|
|
|
|
|
$ |
17.88 |
|
|
The weighted average fair value of stock options granted during the period of $17.88 and the
stock-based compensation expense recognized during the three and six month periods ended September
30, 2006 were based on the Black-Scholes option pricing model using the following weighted average
assumptions.
|
|
|
|
|
|
2Q07 |
|
|
Expected life (in years) |
|
|
5.7 |
|
Risk free interest rate |
|
|
4.18 |
% |
Annual forfeiture rate |
|
|
1.53 |
% |
Volatility |
|
|
44.75 |
% |
Dividend yield |
|
|
0.60 |
% |
|
The following table summarizes information about stock options outstanding at September 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
Options Exercisable |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Weighted |
|
|
Average |
|
|
|
|
|
|
Weighted |
|
|
Average |
|
|
|
Shares |
|
|
Remaining |
|
|
Average |
|
|
Intrinsic |
|
|
Shares |
|
|
Average |
|
|
Intrinsic |
|
Range of |
|
Outstanding |
|
|
Contractual |
|
|
Exercise |
|
|
Value |
|
|
Exercisable |
|
|
Exercise |
|
|
Value |
|
Exercise Prices |
|
(000s) |
|
|
Life (Years) |
|
|
Price |
|
|
(000s) |
|
|
(000s) |
|
|
Price |
|
|
(000s) |
|
|
|
|
|
|
$19.95 - $26.60 |
|
|
258 |
|
|
|
1.8 |
|
|
$ |
21.85 |
|
|
$ |
4,422 |
|
|
|
258 |
|
|
$ |
21.85 |
|
|
$ |
4,422 |
|
$26.60 - $33.25 |
|
|
356 |
|
|
|
2.6 |
|
|
|
30.07 |
|
|
|
3,174 |
|
|
|
356 |
|
|
|
30.07 |
|
|
|
3,174 |
|
$33.25 - $39.90 |
|
|
1,951 |
|
|
|
8.6 |
|
|
|
37.04 |
|
|
|
3,758 |
|
|
|
1,458 |
|
|
|
37.82 |
|
|
|
1,674 |
|
$39.90 - $46.55 |
|
|
2,147 |
|
|
|
5.2 |
|
|
|
42.37 |
|
|
|
-- |
|
|
|
2,147 |
|
|
|
42.37 |
|
|
|
-- |
|
$46.55 - $53.20 |
|
|
154 |
|
|
|
3.1 |
|
|
|
49.39 |
|
|
|
-- |
|
|
|
154 |
|
|
|
49.39 |
|
|
|
-- |
|
$53.20 - $59.85 |
|
|
2 |
|
|
|
3.3 |
|
|
|
55.88 |
|
|
|
-- |
|
|
|
2 |
|
|
|
55.88 |
|
|
|
-- |
|
$59.85 - $66.50 |
|
|
2 |
|
|
|
3.2 |
|
|
|
63.22 |
|
|
|
-- |
|
|
|
2 |
|
|
|
63.22 |
|
|
|
-- |
|
|
|
|
|
|
$19.95 - $66.50 |
|
|
4,870 |
|
|
|
6.1 |
|
|
$ |
38.48 |
|
|
$ |
11,354 |
|
|
|
4,377 |
|
|
$ |
38.91 |
|
|
$ |
9,270 |
|
|
|
|
|
|
The aggregate intrinsic value in the preceding table represents the total pre-tax intrinsic value,
based on the Companys average stock price on September 30, 2006 of $38.97, which would have been
received by the option holders had all option holders exercised their options as of that date. As
of September 30, 2006, there was approximately $8,192 of total unrecognized pre-tax compensation
expense related to non-vested stock options granted under the plans which is expected to be
recognized over a weighted average period of 3.0 years.
Pro forma Information
The Company adopted SFAS 123(R) using the modified prospective transition method. The modified
prospective transition method requires the Company to provide pro forma disclosure of specific
income statement line items for periods prior to the adoption of SFAS 123(R) as if the
fair-value-based method had been applied to all awards. The following table illustrates the pro
forma effect on net income (loss) and net income (loss) per share prior to the adoption of SFAS
123(R). This table only shows pro forma amounts for the three (3) and six (6) month period ending
September 30, 2005 since the Company adopted the fair value recognition provisions of SFAS 123(R)
on April 1, 2006 and, therefore, compensation expenses are recognized in the consolidated income
statement for all share-based payments granted prior to, but not yet vested as of March 31, 2006.
Per share amounts may not total due to rounding.
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2005 |
|
|
|
As previously |
|
|
|
|
|
|
|
|
|
reported |
|
|
Adjustment |
|
|
As Restated |
|
|
Net income (As reported) |
|
$ |
12,797 |
|
|
$ |
(682 |
) |
|
$ |
12,115 |
|
Plus: Stock-based
compensation expense
included in reported net
income, net of related
tax |
|
|
-- |
|
|
|
1,126 |
|
|
|
1,126 |
|
Less: Stock-based
compensation expense
determined by the fair
value method for all
awards, net of related
tax |
|
|
(2,645 |
) |
|
|
(3,162 |
) |
|
|
(5,807 |
) |
|
|
|
|
|
|
|
Net Income (Pro forma) |
|
$ |
10,152 |
|
|
$ |
(2,718 |
) |
|
$ |
7,434 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share |
|
|
|
|
|
|
|
|
|
|
|
|
Basic as reported |
|
$ |
0.75 |
|
|
$ |
(0.04 |
) |
|
$ |
0.71 |
|
Basic pro forma |
|
$ |
0.60 |
|
|
$ |
(0.16 |
) |
|
$ |
0.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted as reported |
|
$ |
0.74 |
|
|
$ |
(0.04 |
) |
|
$ |
0.70 |
|
Diluted pro forma |
|
$ |
0.58 |
|
|
$ |
(0.15 |
) |
|
$ |
0.43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended September 30, 2005 |
|
|
|
As previously |
|
|
|
|
|
|
|
|
|
reported |
|
|
Adjustment |
|
|
As Restated |
|
|
Net income (As reported) |
|
$ |
20,191 |
|
|
$ |
(1,360 |
) |
|
$ |
18,831 |
|
Plus: Stock-based
compensation expense
included in reported net
income, net of related
tax |
|
|
-- |
|
|
|
2,246 |
|
|
|
2,246 |
|
Less: Stock-based
compensation expense
determined by the fair
value method for all
awards, net of related
tax |
|
|
(5,222 |
) |
|
|
(5,944 |
) |
|
|
(11,166 |
) |
|
|
|
|
|
|
|
Net Income (Pro forma) |
|
$ |
14,969 |
|
|
$ |
(5,058 |
) |
|
$ |
9,911 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share |
|
|
|
|
|
|
|
|
|
|
|
|
Basic as reported |
|
$ |
1.19 |
|
|
$ |
(0.08 |
) |
|
$ |
1.11 |
|
Basic pro forma |
|
$ |
0.88 |
|
|
$ |
(0.29 |
) |
|
$ |
0.59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted as reported |
|
$ |
1.17 |
|
|
$ |
(0.08 |
) |
|
$ |
1.09 |
|
Diluted pro forma |
|
$ |
0.87 |
|
|
$ |
(0.29 |
) |
|
$ |
0.58 |
|
|
The pro forma impacts computed above were based on the Black-Scholes option pricing model using the
following weighted average assumptions.
|
|
|
|
|
|
|
2Q06 |
|
Expected life (in years) |
|
|
5.1 |
|
Risk free interest rate |
|
|
3.9 |
% |
Volatility |
|
|
59.0 |
% |
Dividend yield |
|
|
0.70 |
% |
|
40
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 Companys reportable segments by
geographic region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
(As Restated) |
|
|
(As Restated) |
|
|
(As Restated) |
|
|
(As Restated) |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
North America |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
231,297 |
|
|
$ |
146,754 |
|
|
$ |
423,869 |
|
|
$ |
283,615 |
|
Operating income |
|
|
18,122 |
|
|
|
15,411 |
|
|
|
27,519 |
|
|
|
26,150 |
|
Depreciation |
|
|
3,580 |
|
|
|
2,057 |
|
|
|
5,741 |
|
|
|
4,017 |
|
Amortization |
|
|
1,911 |
|
|
|
1,270 |
|
|
|
3,368 |
|
|
|
2,475 |
|
Segment assets (as of September 30, 2006) |
|
|
1,038,242 |
|
|
|
762,403 |
|
|
|
1,038,242 |
|
|
|
762,403 |
|
Europe |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
30,844 |
|
|
$ |
29,199 |
|
|
$ |
60,189 |
|
|
$ |
62,949 |
|
Operating income |
|
|
3,489 |
|
|
|
3,427 |
|
|
|
6,632 |
|
|
|
3,060 |
|
Depreciation |
|
|
112 |
|
|
|
166 |
|
|
|
231 |
|
|
|
362 |
|
Amortization |
|
|
11 |
|
|
|
50 |
|
|
|
51 |
|
|
|
393 |
|
Segment assets (as of September 30, 2006) |
|
|
125,745 |
|
|
|
123,837 |
|
|
|
125,745 |
|
|
|
123,837 |
|
All Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
9,184 |
|
|
$ |
9,097 |
|
|
$ |
17,662 |
|
|
$ |
17,768 |
|
Operating income |
|
|
1,895 |
|
|
|
1,943 |
|
|
|
3,491 |
|
|
|
3,623 |
|
Depreciation |
|
|
24 |
|
|
|
38 |
|
|
|
44 |
|
|
|
115 |
|
Amortization |
|
|
9 |
|
|
|
8 |
|
|
|
18 |
|
|
|
18 |
|
Segment assets (as of September 30, 2006) |
|
|
15,888 |
|
|
|
14,955 |
|
|
|
15,888 |
|
|
|
14,955 |
|
|
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 Restated) |
|
|
(As Restated) |
|
|
|
September 30, 2006 |
|
|
March 31, 2006 |
|
|
Segment assets for North America, Europe and All Other |
|
$ |
1,179,875 |
|
|
$ |
894,557 |
|
Corporate eliminations |
|
|
(73,727 |
) |
|
|
(79,145 |
) |
|
|
|
|
|
Total consolidated assets |
|
$ |
1,106,148 |
|
|
$ |
$815,412 |
|
|
The following table presents financial information about the Company by service type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30 |
|
|
Six months ended September 30 |
|
|
|
|
2006 |
|
|
|
2005 |
|
|
|
2006 |
|
|
|
2005 |
|
|
|
|
|
|
Data Services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
46,447 |
|
|
$ |
52,584 |
|
|
$ |
90,978 |
|
|
$ |
105,485 |
|
Gross Profit |
|
|
13,907 |
|
|
|
15,482 |
|
|
|
27,224 |
|
|
|
31,006 |
|
Voice Services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
169,815 |
|
|
$ |
78,410 |
|
|
$ |
303,454 |
|
|
$ |
151,339 |
|
Gross Profit |
|
|
57,913 |
|
|
|
31,173 |
|
|
|
103,676 |
|
|
|
59,011 |
|
Hotline Services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
55,063 |
|
|
$ |
54,056 |
|
|
$ |
107,288 |
|
|
$ |
107,508 |
|
Gross Profit |
|
|
27,216 |
|
|
|
27,227 |
|
|
|
53,980 |
|
|
|
54,805 |
|
|
The sum of service type revenues and gross profit equals consolidated revenues and gross profit.
41
Note 16: Subsequent Events
Regulatory Matters
As previously disclosed, on November 13, 2006, the Company received a letter of informal inquiry
from the Enforcement Division of the Securities and Exchange Commission (the SEC) relating to the
Companys 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, is conducting an independent
review of the Companys historical stock option grant practices and related accounting for stock
option grants. See the Explanatory Note preceding Part I, Item 1 of this Form 10-Q/A for more
information regarding this and related matters.
On September 20, 2006, the Company received formal notice from the Internal Revenue Service (IRS)
regarding its intent to begin an audit of the Companys tax years 2004 and 2005. In connection
with this normal recurring audit, the IRS has requested certain documentation with respect to stock
options for the Companys 2004 and 2005 tax years. The Company has produced various documents
requested by the IRS and is currently in the process of responding to additional documentation
requests.
At the conclusion of these regulatory matters, the Company could be subject to additional taxes,
fines or penalties 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 Companys 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 Companys
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 Internal
Revenue Code of 1986, as amended, produced and disseminated false financial statements and SEC
filings to the Companys 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 a consolidated amended complaint on January 29, 2007. The parties have stipulated
that responses by the defendants, including the Company, are due on or before August 1, 2007. 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.
Acquisitions:
On October 31, 2006, the Company announced the acquisition of Nortech Telecommunications, Inc.
(NTI), a privately-held company based out of Chicago, IL. NTI has an active customer base which
includes commercial, education and various government agency accounts. Annual historical revenues
of NTI are approximately $8,000.
42
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Item 2. |
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Managements Discussion and Analysis of Financial Condition and Results of
Operations. |
The discussion and analysis set forth below in this Item 2 has been amended to reflect the
Restatement as described in the Explanatory Note and in Note 3 of the Notes to Consolidated
Financial Statements. For this reason, the data set forth in this section may not be comparable to
discussions and data in the Companys previously filed Quarterly Reports on Form 10-Q. All dollar
amounts are presented in thousands unless otherwise noted.
Restatement through March 31, 2006
Background
On November 13, 2006, Black Box received a letter of informal inquiry from the Enforcement Division
of the SEC relating to the Companys stock option practices from January 1, 1997 to present. As a
result, the Audit Committee, with the assistance of outside legal counsel, commenced an independent
review of the Companys historical stock option grant practices and related accounting for stock
option grants during the Review Period.
On February 1, 2007, the Company announced that, while the review of option grant practices was
continuing, it believed that it would need to record additional non-cash charges for stock-based
compensation expense relating to certain stock option grants and, accordingly, cautioned investors
about relying on its historical financial statements until the Company could determine with
certainty whether a restatement would be required and, if so, the extent of any such restatement
and the periods affected.
On March 19, 2007, although the Audit Committee had not yet completed its review, the Audit
Committee concluded that the exercise price of certain stock option grants differed from the fair
market value of the underlying shares on the appropriate measurement date. At that time, the
Company and the Audit Committee announced that it was currently expected that the Companys
additional non-cash, pre-tax charges for stock-based compensation expense relating to certain stock
option grants would approximate $63 million for the Review Period. In addition, the Company and
the Audit Committee concluded that the Company would need to restate its previously-issued
financial statements contained in reports previously filed by the Company with the SEC.
Accordingly, on March 19, 2007, the Company and the Audit Committee concluded that the Companys
previously-issued financial statements and other historical financial information and related
disclosures for the Review Period, including applicable reports of its current or former
independent registered public accounting firms and related press releases, should not be relied
upon.
On May 25, 2007, the Company was advised by the Enforcement Division of the SEC that a Formal Order
of Private Investigation arising out of the Companys stock option practices had been entered and
on May 29, 2007 the Company received a subpoena that was issued by the SEC.
On May 31, 2007, the Company announced that, as a result of the ongoing review of stock option
practices, Company management and the Audit Committee expected that the Companys additional
non-cash, pre-tax charges for stock-based compensation expense relating to certain stock option
grants would approximate $70 million for the Review Period.
Findings of the Audit Committee
During the Review Period, the Company granted stock options pursuant to an employee stock option
plan and a director stock option plan to acquire approximately 10.9 million shares of common stock.
Such plans at all relevant times provided for option grants to be approved by a designated
committee of non-employee directors or, in the case of the director stock option plan, by the
Board. Approximately 2,000 stock option grants were awarded during the Review Period with 69
recorded grant dates. No stock options have been granted since September, 2006. The Audit
Committee reviewed all stock options granted during the Review Period, including option grants to
the Companys directors, officers and rank and file employees (including grants to new employees,
grants awarded in connection with Company acquisitions and grants made as individual or group
performance awards). The Audit Committees review of the Companys stock option granting practices
included a comprehensive examination of reasonably available relevant physical and electronic
documents as well as interviews with current and former directors, officers and Company personnel.
The Audit Committees review was initially focused on determining whether the Companys prior stock
option granting practices were in compliance with the plans granting provisions and applicable law
or called into question its accounting for such options. Once it became evident that such issues
and accounting implications existed, the inquiry focused on those matters necessary: to determine
whether any accounting charges were material and whether a restatement of the Companys
previously-issued financial statements would be required; to establish a basis for effecting any
required restatement; to assure that, on as timely a basis as possible, the Company could file any
43
required curative disclosures with the SEC and assure its continued eligibility for listing on
NASDAQ; and to provide an informed basis for the Companys response to the identified issues,
including appropriate corrective and remedial actions.
The following information summarizes certain of the findings of the Audit Committee. The findings
identified approximately $71.5 million of unrecorded expense at the time of grant (i.e., the
difference between the fair market value of the common stock on the appropriate measurement date
and the stated exercise price), net of forfeitures, during the Review Period, of which $70.0
million was recorded in the Companys Consolidated Financial Statements through March 31, 2006 and
$1.5 million of unrecorded expense at the time of grant will be included, beginning at April 1,
2006, in the Companys computation of compensation expense in accordance with SFAS 123(R). The
following summarizes the unrecorded expense at the time of grant by time period and category of
recipient:
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$4.2 million for the period from Fiscal 1993 through Fiscal 1997 ($0.2 million for
directors, $2.5 million for officers and $1.5 million for rank and file employees) |
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$45.6 million for the period from Fiscal 1998 through August 2002 ($1.1 million for
directors, $25.7 million for officers and $18.7 million for rank and file employees) |
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$21.8 million for the period from August 2002 to the present ($0.04 million for directors,
$0.6 million for officers and $21.1 million for rank and file employees) |
The Audit Committees additional key findings are summarized below:
Lack of Adequate Documentation: For a majority of grants issued by the Company during the
Review Period, there is either no or inadequate documentation of approval actions that satisfies
the requisites for establishing a measurement date under APB 25. Of the 69 recorded grant dates,
there are documented approval actions by the Board or the Option or Compensation Committee with
respect to particular grants for 12 dates. In the period December 1992 to May 1996, neither the
minutes of the Compensation Committee nor of the Board reflect any action to approve specific
grants. In some instances, evidence of single director (the chairman of the Compensation
Committee) approval actions exists. This absence of non-employee director level documentation also
applies to a majority of grants with a recorded grant date after 1996. In some cases, Compensation
Committee minutes contain a reference to reports on the status of the option pool but do not
document any action to approve specific grants. Approval documentation for certain grants has
internal inconsistencies or conflicts with other documents thereby rendering this documentation
unreliable as a basis for establishing a measurement date. In some cases, the only existing
documentation is the executed option agreement and/or the entry of the option grant into the option
database. Notwithstanding these approval documentation inadequacies, the Company entered into
option agreements with grantees and has honored such grants.
Grant Approvals: During the Review Period, relatively few option grants were approved in
complete compliance with the Companys stock option plans. Available documentation reflects that
the Company approved option grants in a variety of ways. With respect to the employee stock option
plan, grants were approved by the Compensation Committee as contemplated by the plan at various
times, by the full Board in 1998 and 1999, by a single director (the chairman of the Compensation
Committee) on nine recorded grant dates during the period 1994 through 2001 and by the Companys
CEO at various times. With respect to the director stock option plan, grants were generally
approved by the designated Board committee and, in a few cases, by the chairman of the Compensation
Committee. In one instance in 2000, there is no conclusive documentary evidence of the approval of
director grants other than the signed director option agreements.
The delegation of authority by the Compensation Committee to the CEO with respect to grants to rank
and file employees was not fully documented. However, there was an understood and accepted
practice between the CEO and the Compensation Committee whereby the CEO made certain awards to
individual employees. In some instances, this involved the allocation among rank and file
employees of blocks of shares approved by the Compensation Committee; in three (3) such instances,
the number of shares ultimately awarded pursuant to this process exceeded the approved size of the
block, which was contrary to the understanding of the Compensation Committee members. Further,
contrary to the understanding of Committee members, the award and/or documentation of those
individual grants often significantly lagged the approval of the block grant. In August 2005, the
Compensation Committee specifically acknowledged a prior grant of delegated authority to the CEO to
make option grants to rank and file employees and ratified all prior awards by the CEO. In some
cases, documentation of approval action is either inconclusive or missing, and the Company
therefore has been unable to determine what entity or person actually approved specific grants.
Option Pricing: The recorded grant dates for a majority of grants do not match the
applicable measurement dates as determined under APB 25. The grants of options with exercise
prices lower than the fair market values of the stock on the actual measurement dates did not
satisfy the fair market pricing requirement in the Companys plans, as amended in 1998, and were
not consistent with the Companys disclosures in SEC filings stating that the exercise price of
options was equal to the fair market value of the stock on the date of the grant.
The relationship between the stated exercise price of options and the fair market value of the
Companys stock on the date of the
44
identifiable approval actions varied from grant to grant. In
some cases, the exercise price of grants reflected the fair market value of the underlying shares
on the date of any documented approval action. In other cases, the exercise prices reflected the
fair market value of the underlying shares on a date either prior or subsequent to any such
documented approval action and the exercise price was lower than the fair market value on the date
of any such action. In several such cases before August 2002, the use of such grant dates and
lower exercise prices (together with other available evidence) supports a finding that the recorded
grant dates and corresponding exercise prices were selected with the benefit of hindsight. For
certain grants where the mismatch between the recorded grant date and the approval action was only
a matter of days, however, the mismatch appears to have been attributable to inaccurate recording
or administrative delays. In some cases, the apparent approval action did not identify
all grantees; for example, there are cases where a block grant was approved subject to a later
determination of individual grant recipients and grants were recorded with a grant date, and
corresponding exercise price, that matched the date of the apparent approval of the block grant and
the fair market value of the common stock on that date although individual grant recipients may
have been identified some time after approval of the block grant. Finally, in some cases, the
approval action for specific grants is not adequately documented. Where the recorded grant date
did not satisfy the requisites for a measurement date under APB 25, the Company relied on default
methodologies to determine an appropriate measurement date.
Internal Controls: As outlined above, the Companys historical administration of its
options program lacked discipline as it relates to proper adherence to the plan requirements,
corporate recordkeeping and documentation. Since November 2003, however, the Company has properly
administered the stock option program as it relates to awards to directors and officers. During
the investigation, the Company identified control gaps related to grants made throughout the Review
Period. As of March 31, 2007, the Company implemented additional procedures to its process that
are focused on formalized documentation of appropriate approvals and determination of grant terms
to employees.
Procedural and Remedial Actions
The Audit Committee and other relevant Board committees are committed to a continued review and
implementation of procedural enhancements and remedial actions in light of the foregoing findings.
Consistent with its obligation to act in the best interests of the Company taking into account all
relevant facts and circumstances, the Audit Committee is continuing to assess the appropriateness
of a broad range of possible procedural enhancements and potential remedial measures in light of
the findings of its investigation. While the Audit Committee has not completed its consideration
of all such steps, procedural enhancements may include recommendations regarding improved stock
option administration procedures and controls, training and monitoring compliance with those
procedures, corporate recordkeeping, corporate risk assessment, evaluation of the internal
compliance environment and other remedial steps that may be appropriate. The Audit Committee is
also expected to address issues of individual conduct or responsibility, including those of the
Board, CEOs and CFOs serving during the Review Period. Potential remedial measures may include an
evaluation of the role of and possible claims or other remedial actions against current and former
Company personnel who may be found to have been responsible for identified problems during the
Review Period. The Audit Committee expects to recommend to the Board and/or its appropriate
committees procedural enhancements and remedial measures that appropriately address the issues
raised by its findings. In advance of action by the Audit Committee, as noted above, the Company
has 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.
Restatement Methodologies
As of April 1, 2006, the Company adopted SFAS 123(R) using the modified prospective transition
method. Under this transition method, compensation expense is to be recognized for all share-based
compensation awards granted after the date of adoption and for all unvested awards existing on the
date of adoption. Prior to April 1, 2006, the Company accounted for stock-based compensation
awards to directors, officers and rank and file employees using the intrinsic value method in
accordance with APB 25 as allowed under SFAS 123. Under the intrinsic value method, no share-based
compensation expense related to stock options was required to be recognized if the exercise price
of the stock option was at least equal to the fair market value of the common stock on the
measurement date. APB 25 defines the measurement date as the first date on which are known both
(1) the number of shares that an individual grant recipient is entitled to receive and (2) the
option or purchase price, if any.
In light of the Audit Committees review of the Companys stock option granting practices during
the Review Period and as to those cases in which the Company previously used a recorded grant date
as the measurement date that the Company determined could no longer be relied upon, the Company has
developed and applied the following methodologies to remeasure those stock option grants and record
the relevant charges in accordance with APB 25 by considering the following sources of information:
(i) meeting minutes of the Board and of committees thereof and related materials, (ii) Unanimous
Written Consents of the Board and of committees thereof, (iii) create date, (iv) relevant email
correspondence reflecting stock option grant approval actions, (v) individual stock option
agreements and related materials, (vi) employee and Board offer letters, (vii) documents relating
to acquisitions, (viii) reports on Form 4 filed with the SEC and (ix) guidance of the Office of the
Chief Accountant of the SEC on stock option matters as set forth in its letter dated September 19,
2006.
45
Grants with Appropriate Committee Approval. With respect to grants of approximately 1.0 million
shares, or approximately 9% of the total grants in the Review Period, the Company has evidence to
support the approval of the grant under the stock option plans by the relevant committee of the
Board, and such evidence includes the number of options each individual was entitled to receive and
the option price. However, the relationship between these documented approval actions and the
originally-recorded grant dates and exercise prices for the options so approved varied during the
Review Period. In some cases, grants were recorded with a grant date and a corresponding exercise
price that matched the date of the approval action or were otherwise consistent with the terms of
the approval actions. In other cases, however, the recorded grant dates and corresponding exercise
prices of the grants reflected the fair market value of the common stock on a date prior to the
committees documented approval actions. The Company has restated the compensation expense for
stock option grants relating to approximately 0.4 million shares of common stock by using the date
of the documented approval action as the measurement date. The total additional non-cash, pre-tax
charge for these grants is approximately $1.8 million, net of forfeitures, amortized over the
appropriate vesting
period through March 31, 2006, of which $0.07 million relates to director options, $1.3 million
relates to officer options and $0.4 million relates to rank and file employee options.
Grants with Other Approvals. With respect to grants of approximately 1.9 million shares, or
approximately 18% of the total grants in the Review Period, the Company has evidence to support the
approval of the grant by the Board, an outside director or the Companys CEO and the identification
of the number of options each individual was entitled to receive together with the option price.
These grants are distinguished from the grants described in the prior paragraph in that the nature
of the approval was not fully consistent with the terms of the relevant stock option plan. As with
the grants discussed in the preceding paragraph, the relationship between these documented approval
actions and the originally-recorded grant dates and exercise prices for the options so approved
varied during the Review Period. In some cases, grants were recorded with a grant date and a
corresponding exercise price that matched the date of the approval action or were otherwise
consistent with the terms of the approval action. In other cases, however, the recorded grant
dates and corresponding exercise prices of the grants reflected the fair market value of the
Companys stock on a date prior to the approval action. The Company has restated the compensation
expense for stock option grants relating to approximately 1.6 million shares of common stock by
using the date of the documented approval action as the measurement date. The total additional
non-cash, pre-tax charge for these grants is approximately $7.6 million, net of forfeitures,
amortized over the appropriate vesting period through March 31, 2006, of which $0.5 million relates
to director options, $2.6 million relates to officer options and $4.5 million relates to rank and
file employee options.
Grants Lacking Adequate Documentation. With respect to grants of approximately 7.9 million shares
(5.0 million shares to rank and file employees), or 73.0% of the total grants in the Review Period,
the Company has been unable to locate adequate documentation of approval actions that would satisfy
the requisites for a measurement date under APB 25. For these grants, management considered all
available relevant information to form a reasonable conclusion as to the most reasonable
measurement date. For all grants in this category, the Company has established default
methodologies for determining the most appropriate measurement date under APB 25.
With respect to grants entered into the Companys stock option database after September 9, 1999,
when the database began to reflect a create date which is the date on which a grant was entered
into the system, the Company has determined to use the individual create date for each grant as
the APB 25 measurement date, which was in most cases different from the originally-recorded grant
date. The Company believes that this create date is the most appropriate methodology in the
absence of sufficient evidence of approvals for these grants as it represents the earliest point in
time at which the evidence shows that all requisites for the establishment of the measurement date
had been satisfied. Such create dates preceded, often by a significant amount of time, the
execution of stock option agreements, which, generally, were manually signed by the Companys CEO
and manually signed and dated by the grantee. In addition, in almost all cases, a grant entered
into the database, which established the create date, ultimately resulted in the creation of a
stock option agreement reflecting such grant. Accordingly, while execution of the stock option
agreements constituted a clear acknowledgement by the grantee and the Company of the grantees
legal entitlement to the grant the Company believes the create date more accurately reflects the
date of approval than does the signed option agreement. The Company has restated the compensation
expense for stock option grants relating to approximately 4.2 million shares of common stock by
using the create date as the measurement date. The total additional non-cash, pre-tax charge for
these grants is approximately $49.8 million, net of forfeitures, amortized over the appropriate
vesting period through March 31, 2006, of which $0.5 million relates to director options, $17.2
million relates to officer options and $32.2 million relates to rank and file employee options.
The Companys procedures for evaluating the appropriateness of measurement dates fixed with
reference to such create dates included a sensitivity analysis which provided an understanding of
the differences between the additional recorded charge for stock-based compensation expense and the
charges that would result from using other identified alternative methods for determining
measurement dates. The Companys sensitivity analysis included identifying the range of potential
grant dates defined by the recorded grant date and the create date for each grant. The Company
then identified the low and high closing prices of the common stock within that range of potential
grant dates and applied both the low and high closing prices of the common stock to the number of
shares granted for which the create date methodology was utilized to determine the range of
potential adjustments to stock-based compensation expense for these grants, which was $0.09 million
to $73.8 million, net of forfeitures, as compared to the additional non-cash, pre-tax charge for
these grants of approximately $49.8 million, net of forfeitures, included in the Restatement.
For options entered into the Companys option database before September 9, 1999, the Company
determined the measurement date
46
generally by reference to signed option agreements (or the deemed signature date for certain
options as discussed below). The executed option agreements (hereinafter signed option
agreements), manually signed by the Companys CEO and manually signed and dated by the grantee,
constituted an acknowledgement by the grantee and the Company of the grantees legal entitlement to
the grant and, in the absence of authoritative information as to when all the requisites for the
establishment of the measurement date had been satisfied, provides a measurement date framework
based on entitlement. The Company has restated the compensation expense for stock option grants
relating to approximately 1.4 million shares of common stock by using the signed option agreements
as the measurement date. The total additional non-cash, pre-tax charge for these grants is
approximately $6.4 million, net of forfeitures, amortized over the appropriate vesting period
through March 31, 2006, of which $0.3 million relates to director options, $3.6 million relates to
officer options and $2.5 million relates to rank and file employee options. The Company believes
this methodology was the most appropriate in the absence of sufficient evidence of approvals for
these grants as it represents the earliest point in time at which the evidence shows that all
requisites for the establishment of the measurement date had been satisfied for these grants. The
Companys procedures for evaluating the appropriateness of measurement dates fixed with reference
to the dating of signed option agreements included a sensitivity analysis which provided an
understanding of the differences between the additional recorded charge for stock-based
compensation expense and the charges that would result from using other identified alternative
methods for determining measurement dates. The Companys sensitivity analysis included identifying
the range of potential grant dates defined by the recorded grant date and the date of the grantees
signature on the stock option agreement for each grant. The Company then identified the low and
high closing prices of the common stock within that range of potential grant dates and applied both
the low and high closing prices of the common stock to the number of shares granted for which the
signed option agreements methodology was utilized to determine the range of potential adjustments
to stock-based compensation expense for these grants, which was $0.03 million to $9.6 million, net
of forfeitures, as compared to the additional non-cash, pre-tax charge for these grants of
approximately $6.4 million, net of forfeitures, included in the Restatement.
In those cases where no reliably-dated signed option agreement could be located and where no
post-September 9, 1999 create date exists (stock option grants totaling approximately 0.9 million
shares), the Company used the average period between recorded grant date and date of the signatures
on all other grantee signed option agreements with the same grant date as the measurement date.
For example, if there were four stock option grants with a grant date of January 1, 1996, the
Company had the signed option agreements for three of these stock option grants and the average
number of days between the grant date and the signature dates of these three signed option
agreements was 20 days, January 21, 1996 was used as the measurement date for the grant for which
no signed option agreement could be located. The Company has restated the compensation expense for
stock option grants relating to approximately 0.7 million shares of common stock using this
average days to sign agreement method. The total additional non-cash, pre-tax charge for these
grants is approximately $4.4 million, net of forfeitures, amortized over the appropriate vesting
period through March 31, 2006, of which $0.06 million relates to director options, $4.2 million
relates to officer options and $0.2 million relates to rank and file employee options. The Company
believes this methodology was the most appropriate in the absence of sufficient evidence of
approvals for these grants because it gives a reasonable approximation of the measurement date
related to these options in light of the available evidence. The Company conducted a sensitivity
analysis by comparing the Companys current default methodology (i.e., average days to sign
agreement) with another default methodology. For this analysis, the Company identified the range
of potential grant dates defined by the earliest signed option agreement and the latest signed
option agreement. The Company then identified the low and high closing prices of the common stock
over the range of potential grant dates and applied both the low and high closing prices of the
common stock to the number of shares granted to determine the range of potential adjustments to
stock-based compensation expense for these grants, which was $2.6 million to $5.9 million, net of
forfeitures. The Companys analyses indicate that stock-based compensation expense computed using
other identified alternative default methodologies would not materially differ from stock-based
compensation expense computed using the average days to sign agreement methodology. The
Companys procedures for evaluating the appropriateness of measurement dates fixed with reference
to the average days to sign agreements also included a sensitivity analysis which provided an
understanding of the differences between the additional recorded charge for stock-based
compensation expense and the charges that would result from using other identified alternative
methods for determining measurement dates. The Companys sensitivity analysis included identifying
the range of potential grant dates defined by the recorded grant date and the average days to sign
agreement for each grant. The Company then identified the low and high closing prices of the
common stock within that range of potential grant dates and applied both the low and high closing
prices of the common stock to the number of shares granted to determine the range of potential
adjustments to stock-based compensation expense for these grants, which was $0.03 million to $6.1
million, net of forfeitures, as compared to the additional non-cash, pre-tax charge for these
grants of approximately $4.4 million, net of forfeitures, included in the Restatement.
Given the volatility of the common stock during much of the Review Period, the use of methodologies
and measurement dates different from those described above could have resulted in a higher or lower
cumulative compensation expense which would have caused net income or loss to be different from the
amounts reported in the restated consolidated financial statements. The Companys procedures for
evaluating the appropriateness of measurement dates fixed using the default methodologies described
above also included a sensitivity analysis which provided an understanding of the differences
between the additional recorded charge for stock-based compensation expense and the charges that
would result from using other identified alternative methods for determining measurement dates. The
Companys sensitivity analysis included identifying the range of potential grant dates defined by
the recorded grant date and the appropriate measurement date for each grant. The Company then identified the low and high
closing prices of the common stock within that range of potential grant dates and applied both the
low and high closing prices of the common stock to the number of shares granted to determine the
range of potential adjustments to stock-
47
based compensation expense for these grants, which was
$9.3 million to $99.3 million, net of forfeitures, as compared to the additional non-cash, pre-tax
charge for these grants of approximately $70.0 million, net of forfeitures, included in the
Restatement.
Other adjustments through March 31, 2006
From 1994 through 1998, the Company did not properly account for stock options for one officer that
were modified after the grant date pursuant to a separation agreement. Some of these modifications
were not identified in the Companys financial reporting processes and were therefore not properly
reflected in its financial statements. As a result, the Company has recorded a non-cash charge for
stock-based compensation of $1.0 million during Fiscal 1999.
Summary
In summary, the Company recorded cumulative non-cash charges for stock-based compensation of $70.9
million through March 31, 2006, offset in part by a cumulative income tax benefit of $27.7 million,
for a total after-tax charge of $43.2 million. These charges had no impact on net sales or cash
and cash equivalents as previously reported in the Companys financial statements; as a result, no
changes to these items are reflected in the Restatement. Non-cash charges for stock-based
compensation expense have been recorded as adjustments to Selling, General, and Administrative
Expenses within the Companys Consolidated Statements of Income.
1Q07 and 2Q07 Restatement
Stock-based compensation expense
In addition to the Restatement noted above through March 31, 2006, the Company has recorded a
non-cash charge for stock-based compensation of $0.8 million and $2.4 million for the three (3) and
six (6) month periods ended September 30, 2006, offset in part by income tax benefits of $0.3
million and $1.0 million, or total after-tax charges of $0.5 million and $1.4 million. This charge
was recorded to reflect additional non-cash, stock-based compensation expense recognized under the
fair value method (SFAS 123(R)) because the exercise price for certain stock option grants prior
to, but not vested as of March 31, 2006, differed from the fair market value of the underlying
shares on the appropriate measurement date, some of which occurred during Fiscal 2007.
Accounting for derivatives
On July 26, 2006, the Company entered into an interest rate swap to reduce its exposure from
fluctuating interest rates. SFAS 133 requires that all derivative instruments be recorded on the
balance sheet as either an asset or liability measured at their fair value, and that changes in the
derivatives fair value be recognized currently in earnings unless specific hedge accounting
criteria are met. From inception of the hedge, the Company had applied a method of cash flow hedge
accounting under SFAS 133 to account for the interest rate swap that allowed the Company to assume
no ineffectiveness in such agreements, called the short-cut method.
Subsequently, the Company analyzed its eligibility for the short-cut
method in light of certain
clarifications delivered by the Office of the Chief Accountant of the SEC, and determined that its
interest rate swap did not qualify for the short-cut method under SFAS 133 because certain
prepayment features relating to the underlying actual debt were not identical to those contained in
the interest rate swap. Because the Companys documentation at hedge inception reflected the short-cut
method rather than the long haul method for determining hedge ineffectiveness, the derivative
did not meet the requirements for a cash flow hedge. Documentation for the long haul method of
accounting at hedge inception cannot be retrospectively applied under SFAS 133. Therefore,
fluctuations in the interest rate swaps fair value should have been recorded through the Companys
Consolidated Statement of Income instead of through Other Comprehensive Income (Loss), which is a
component of stockholders equity. The adjustment for 2Q07 will decrease reported net income and
increase Other Comprehensive Income by approximately $1.4 million. This change in accounting for
this derivative instrument could result in significant volatility in the Companys reported net
income and earnings per share due to increases and decreases in the fair value of the interest rate
swap. However, the derivative instrument remains highly effective and the change in accounting for
this derivative instrument does not impact operating cash flows or total stockholders equity.
The table below reflects the impact of the additional non-cash charges for stock-based compensation
expense and the non-cash charge related to the interest rate swap on the Companys Consolidated
Statements of Income, including the cumulative adjustment to Retained Earnings as of March 31, 2006
and September 30, 2006 on the Companys Consolidated Balance Sheet. See Note 3 of the Notes to
Consolidated Financial Statements for reference to footnote disclosure that reconciles the
previously filed annual financial information to the restated annual financial information. All
dollar amounts are presented in thousands except per share amounts. Per share
amounts may not total due to rounding.
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|
|
|
|
|
|
(As |
|
|
|
|
|
|
|
|
|
|
Adjust- |
|
|
|
|
|
|
(As |
|
|
|
|
|
|
(As |
|
|
|
previously |
|
|
Adjust- |
|
|
Income |
|
|
ment, |
|
|
(As |
|
|
previously |
|
|
|
|
|
|
Restated) |
|
|
|
reported) |
|
|
ment, |
|
|
Tax |
|
|
Net of |
|
|
Restated) |
|
|
reported) |
|
|
Adjust- |
|
|
Diluted |
|
|
|
Net Income |
|
|
Pre-Tax |
|
|
Benefit |
|
|
Tax |
|
|
Net Income |
|
|
Diluted EPS |
|
|
ment |
|
|
EPS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FY 94 |
|
$ |
13,370 |
|
|
$ |
43 |
|
|
$ |
(19 |
) |
|
$ |
24 |
|
|
$ |
13,346 |
|
|
$ |
0.83 |
|
|
$ |
-- |
|
|
$ |
0.83 |
|
FY 95 |
|
|
14,515 |
|
|
|
461 |
|
|
|
(144 |
) |
|
|
317 |
|
|
|
14,198 |
|
|
|
0.89 |
|
|
|
(0.02 |
) |
|
|
0.87 |
|
FY 96 |
|
|
18,278 |
|
|
|
406 |
|
|
|
(151 |
) |
|
|
255 |
|
|
|
18,023 |
|
|
|
1.10 |
|
|
|
(0.01 |
) |
|
|
1.09 |
|
FY 97 |
|
|
24,792 |
|
|
|
1,172 |
|
|
|
(456 |
) |
|
|
716 |
|
|
|
24,076 |
|
|
|
1.40 |
|
|
|
(0.04 |
) |
|
|
1.36 |
|
FY 98 |
|
|
32,404 |
|
|
|
3,595 |
|
|
|
(1,393 |
) |
|
|
2,202 |
|
|
|
30,202 |
|
|
|
1.79 |
|
|
|
(0.12 |
) |
|
|
1.67 |
|
FY 99 |
|
|
38,145 |
|
|
|
4,506 |
|
|
|
(1,732 |
) |
|
|
2,774 |
|
|
|
35,371 |
|
|
|
2.09 |
|
|
|
(0.15 |
) |
|
|
1.94 |
|
FY 00 |
|
|
48,852 |
|
|
|
5,778 |
|
|
|
(2,209 |
) |
|
|
3,569 |
|
|
|
45,283 |
|
|
|
2.60 |
|
|
|
(0.19 |
) |
|
|
2.41 |
|
FY 01 |
|
|
64,190 |
|
|
|
10,290 |
|
|
|
(3,953 |
) |
|
|
6,337 |
|
|
|
57,853 |
|
|
|
3.22 |
|
|
|
(0.32 |
) |
|
|
2.90 |
|
FY 02 |
|
|
62,042 |
|
|
|
11,333 |
|
|
|
(4,381 |
) |
|
|
6,952 |
|
|
|
55,090 |
|
|
|
2.97 |
|
|
|
(0.33 |
) |
|
|
2.64 |
|
FY 03 |
|
|
48,685 |
|
|
|
8,927 |
|
|
|
(2,328 |
) |
|
|
6,599 |
|
|
|
42,086 |
|
|
|
2.39 |
|
|
|
(0.32 |
) |
|
|
2.07 |
|
FY 04 |
|
|
47,243 |
|
|
|
8,197 |
|
|
|
(4,156 |
) |
|
|
4,041 |
|
|
|
43,202 |
|
|
|
2.52 |
|
|
|
(0.22 |
) |
|
|
2.30 |
|
FY 05 |
|
|
29,912 |
|
|
|
5,178 |
|
|
|
(2,312 |
) |
|
|
2,866 |
|
|
|
27,046 |
|
|
|
1.68 |
|
|
|
(0.16 |
) |
|
|
1.52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative 03/31/05 |
|
$ |
442,428 |
|
|
$ |
59,886 |
|
|
$ |
(23,234 |
) |
|
$ |
36,652 |
|
|
$ |
405,776 |
|
|
$ |
23.48 |
|
|
$ |
(1.89 |
) |
|
$ |
21.59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1Q06 |
|
|
7,394 |
|
|
|
1,120 |
|
|
|
(442 |
) |
|
|
678 |
|
|
|
6,716 |
|
|
|
0.43 |
|
|
|
(0.04 |
) |
|
|
0.39 |
|
2Q06 |
|
|
12,797 |
|
|
|
1,126 |
|
|
|
(444 |
) |
|
|
682 |
|
|
|
12,115 |
|
|
|
0.74 |
|
|
|
(0.04 |
) |
|
|
0.70 |
|
3Q06 |
|
|
12,511 |
|
|
|
2,431 |
|
|
|
(959 |
) |
|
|
1,472 |
|
|
|
11,039 |
|
|
|
0.70 |
|
|
|
(0.08 |
) |
|
|
0.62 |
|
4Q06 |
|
|
4,656 |
|
|
|
6,368 |
|
|
|
(2,612 |
) |
|
|
3,756 |
|
|
|
900 |
|
|
|
0.26 |
|
|
|
(0.21 |
) |
|
|
0.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FY 06 |
|
$ |
37,358 |
|
|
$ |
11,045 |
|
|
$ |
(4,457 |
) |
|
$ |
6,588 |
|
|
$ |
30,770 |
|
|
$ |
2.13 |
|
|
$ |
(0.37 |
) |
|
$ |
1.76 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative 03/31/06 |
|
$ |
479,786 |
|
|
$ |
70,931 |
|
|
$ |
(27,691 |
) |
|
$ |
43,240 |
|
|
$ |
436,546 |
|
|
$ |
25.61 |
|
|
$ |
(2.26 |
) |
|
$ |
23.35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1Q07 |
|
|
7,807 |
|
|
|
1,629 |
|
|
|
(635 |
) |
|
|
994 |
|
|
|
6,813 |
|
|
|
0.43 |
|
|
|
(0.06 |
) |
|
|
0.37 |
|
2Q07 |
|
|
13,079 |
|
|
|
2,210 |
|
|
|
(806 |
) |
|
|
1,404 |
|
|
|
11,675 |
|
|
|
0.74 |
|
|
|
(0.08 |
) |
|
|
0.66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2QYTD07 |
|
$ |
20,886 |
|
|
$ |
3,839 |
|
|
$ |
(1,441 |
) |
|
$ |
2,398 |
|
|
$ |
18,488 |
|
|
$ |
1.18 |
|
|
$ |
(0.14 |
) |
|
$ |
1.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative 09/30/06 |
|
$ |
500,672 |
|
|
$ |
74,770 |
|
|
$ |
(29,132 |
) |
|
$ |
45,638 |
|
|
$ |
455,034 |
|
|
$ |
26.78 |
|
|
$ |
(2.39 |
) |
|
$ |
24.39 |
|
|
Income Tax Considerations
In the course of the investigation, the Company determined that a number of officers may have
exercised options for which the application of 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 APB 25. If such options are deemed to be 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 $1.0 million 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 $3.6 million. The Company may also incur interest and
penalties if it were to incur any such tax liability, which could be material.
In addition, the Company is considering the application of Section 409A to those options for which
it incorrectly applied the measurement date as defined in APB 25. It is possible that these
options will be treated as having been granted at less than fair market value for federal income
tax purposes and thus subject to Section 409A. Accordingly, the Company may adopt measures to
address the application of Section 409A. 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 expenses for legal fees and external audit firm fees, in the aggregate
amount of approximately $0.6 million, in the fiscal year ended March 31, 2007, in relation to (i)
the Audit Committees review of the Companys historical stock option practices and related
accounting for stock option grants, (ii) the informal inquiry and formal order of investigation by
the Securities and
Exchange Commission regarding its past stock option practices, (iii) the derivative action relating
to the Companys historical stock option practices filed against the Company as a nominal defendant
and certain of the Companys current and former directors and officers as to whom it may have
indemnification obligations and (iv) related matters. Further, the Company expects to incur
significant additional expense related to the foregoing matters in the fiscal year ending March 31,
2008. It is anticipated that certain of those expenses will be reimbursed under the Companys
directors & officers indemnification insurance.
49
The Company
The Company offers one-source network infrastructure services for: data networks (Data Services),
including structured cabling for wired and wireless systems; voice systems (Voice Services),
including new and upgraded telephony systems; and 24/7/365 hotline technical support (Hotline
Services) for more than 118,000 network infrastructure products that it sells through its catalog,
Internet Web site and 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 below for further
analysis.
The Company has completed several acquisitions previously defined as the Acquired Companies from
the first quarter of Fiscal 2006 through the second quarter of Fiscal 2007 that have a significant
impact on the Companys consolidated financial statements and, more specifically, North America
Voice Services for the periods under review. 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 current and an estimate of future
acquisition related expenses based on the acquisition activity through September 30, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1Q07 |
|
|
2Q07 |
|
|
3Q07 |
|
|
4Q07 |
|
|
FY07 Total |
|
|
Thereafter |
|
|
SGA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset write-up
depreciation
expense on
acquisitions |
|
$ |
-- |
|
|
$ |
1,197 |
|
|
$ |
713 |
|
|
$ |
652 |
|
|
$ |
2,562 |
|
|
$ |
3,560 |
|
Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of
intangible assets
on acquisitions |
|
|
1,439 |
|
|
|
1,892 |
|
|
|
1,849 |
|
|
|
1,863 |
|
|
|
7,043 |
|
|
|
56,772 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,439 |
|
|
$ |
3,089 |
|
|
$ |
2,562 |
|
|
$ |
2,515 |
|
|
$ |
9,605 |
|
|
$ |
60,332 |
|
|
50
Information on revenues and operating income by reportable geographic segment (North America,
Europe and All Other) is presented below. The tables below should be read in conjunction with the
following discussion. The additional non-cash charges for stock-based compensation expense was
recorded in Selling, General and Administrative expense which is included in the Companys measure
of Operating Income. See Note 3 of the Notes to Consolidated Financial Statement.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Six months ended September 30, |
|
|
|
(As Restated) |
|
|
(As Restated) |
|
|
(As Restated) |
|
|
(As Restated) |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
|
total |
|
|
|
|
|
|
total |
|
|
|
|
|
|
total |
|
|
|
|
|
|
total |
|
|
|
|
$ |
|
|
revenue |
|
|
|
$ |
|
|
revenue |
|
|
|
$ |
|
|
revenue |
|
|
|
$ |
|
|
revenue |
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
231,297 |
|
|
|
85.2 |
% |
|
$ |
146,754 |
|
|
|
79.3 |
% |
|
$ |
423,869 |
|
|
|
84.5 |
% |
|
$ |
283,615 |
|
|
|
77.8 |
% |
Europe |
|
|
30,844 |
|
|
|
11.4 |
% |
|
|
29,199 |
|
|
|
15.8 |
% |
|
|
60,189 |
|
|
|
12.0 |
% |
|
|
62,949 |
|
|
|
17.3 |
% |
All Other |
|
|
9,184 |
|
|
|
3.4 |
% |
|
|
9,097 |
|
|
|
4.9 |
% |
|
|
17,662 |
|
|
|
3.5 |
% |
|
|
17,768 |
|
|
|
4.9 |
% |
|
|
|
|
|
Total |
|
$ |
271,325 |
|
|
|
100 |
% |
|
$ |
185,050 |
|
|
|
100 |
% |
|
$ |
501,720 |
|
|
|
100 |
% |
|
$ |
364,332 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
18,122 |
|
|
|
|
|
|
$ |
15,411 |
|
|
|
|
|
|
$ |
27,519 |
|
|
|
|
|
|
$ |
26,150 |
|
|
|
|
|
% of North America
revenues |
|
|
7.8 |
% |
|
|
|
|
|
|
10.5 |
% |
|
|
|
|
|
|
6.5 |
% |
|
|
|
|
|
|
9.2 |
% |
|
|
|
|
Europe |
|
$ |
3,489 |
|
|
|
|
|
|
$ |
3,427 |
|
|
|
|
|
|
$ |
6,632 |
|
|
|
|
|
|
$ |
3,060 |
|
|
|
|
|
% of Europe
revenues |
|
|
11.3 |
% |
|
|
|
|
|
|
11.7 |
% |
|
|
|
|
|
|
11.0 |
% |
|
|
|
|
|
|
4.9 |
% |
|
|
|
|
All Other |
|
$ |
1,895 |
|
|
|
|
|
|
$ |
1,943 |
|
|
|
|
|
|
$ |
3,491 |
|
|
|
|
|
|
$ |
3,623 |
|
|
|
|
|
% of All
Other revenues |
|
|
20.6 |
% |
|
|
|
|
|
|
21.4 |
% |
|
|
|
|
|
|
19.8 |
% |
|
|
|
|
|
|
20.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
23,506 |
|
|
|
8.7 |
% |
|
$ |
20,781 |
|
|
|
11.2 |
% |
|
$ |
37,642 |
|
|
|
7.5 |
% |
|
$ |
32,833 |
|
|
|
9.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciling items: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
5,472 |
|
|
|
|
|
|
$ |
2,400 |
|
|
|
|
|
|
$ |
11,269 |
|
|
|
|
|
|
$ |
7,899 |
|
|
|
|
|
Europe |
|
|
-- |
|
|
|
|
|
|
|
-- |
|
|
|
|
|
|
|
-- |
|
|
|
|
|
|
|
3,742 |
|
|
|
|
|
All Other |
|
|
-- |
|
|
|
|
|
|
|
-- |
|
|
|
|
|
|
|
-- |
|
|
|
|
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
5,472 |
|
|
|
2.0 |
% |
|
$ |
2,400 |
|
|
|
1.3 |
% |
|
$ |
11,269 |
|
|
|
2.2 |
% |
|
$ |
11,641 |
|
|
|
3.2 |
% |
|
51
Information on revenues and gross profit by service type (Data Services, Voice Services and
Hotline Services) is presented below. The additional non-cash charges for stock-based compensation
expense were recorded in Selling, General and Administrative expense which is not included in the
Companys measure of Gross Profit and therefore does not impact the following table or the
corresponding discussions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Six months ended September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
|
total |
|
|
|
|
|
|
total |
|
|
|
|
|
|
total |
|
|
|
|
|
|
total |
|
|
|
|
$ |
|
|
revenue |
|
|
|
$ |
|
|
revenue |
|
|
|
$ |
|
|
revenue |
|
|
|
$ |
|
|
revenue |
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Data
Services(1) |
|
$ |
46,447 |
|
|
|
17.1 |
% |
|
$ |
52,584 |
|
|
|
28.4 |
% |
|
$ |
90,978 |
|
|
|
18.1 |
% |
|
$ |
105,485 |
|
|
|
29.0 |
% |
Voice
Services(1) |
|
|
169,815 |
|
|
|
62.6 |
% |
|
|
78,410 |
|
|
|
42.4 |
% |
|
|
303,454 |
|
|
|
60.5 |
% |
|
|
151,339 |
|
|
|
41.5 |
% |
Hotline
Services |
|
|
55,063 |
|
|
|
20.3 |
% |
|
|
54,056 |
|
|
|
29.2 |
% |
|
|
107,288 |
|
|
|
21.4 |
% |
|
|
107,508 |
|
|
|
29.5 |
% |
|
|
|
|
|
Total |
|
$ |
271,325 |
|
|
|
100 |
% |
|
$ |
185,050 |
|
|
|
100 |
% |
|
$ |
501,720 |
|
|
|
100 |
% |
|
$ |
364,332 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Data Services |
|
$ |
13,907 |
|
|
|
|
|
|
$ |
15,482 |
|
|
|
|
|
|
$ |
27,224 |
|
|
|
|
|
|
$ |
31,006 |
|
|
|
|
|
% of Data
Services revenues |
|
|
29.9 |
% |
|
|
|
|
|
|
29.4 |
% |
|
|
|
|
|
|
29.9 |
% |
|
|
|
|
|
|
29.4 |
% |
|
|
|
|
Voice Services |
|
$ |
57,913 |
|
|
|
|
|
|
$ |
31,173 |
|
|
|
|
|
|
$ |
103,676 |
|
|
|
|
|
|
$ |
59,011 |
|
|
|
|
|
% of Voice
Services revenues |
|
|
34.1 |
% |
|
|
|
|
|
|
39.8 |
% |
|
|
|
|
|
|
34.2 |
% |
|
|
|
|
|
|
39.0 |
% |
|
|
|
|
Hotline
Services |
|
$ |
27,216 |
|
|
|
|
|
|
$ |
27,227 |
|
|
|
|
|
|
$ |
53,980 |
|
|
|
|
|
|
$ |
54,805 |
|
|
|
|
|
% of Hotline
Services revenues |
|
|
49.4 |
% |
|
|
|
|
|
|
50.4 |
% |
|
|
|
|
|
|
50.3 |
% |
|
|
|
|
|
|
51.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
99,036 |
|
|
|
36.5 |
% |
|
$ |
73,882 |
|
|
|
39.9 |
% |
|
$ |
184,880 |
|
|
|
36.8 |
% |
|
$ |
144,822 |
|
|
|
39.8 |
% |
|
(1) Data Services and Voice Services may also be collectively referred to as
On-Site Services.
Second Quarter Fiscal 2007 (2Q07) Compared to Second Quarter Fiscal 2006 (2Q06):
Total Revenues
Total revenues for 2Q07 were $271,325, an increase of 47% compared to 2Q06 total revenues of
$185,050. The increase was primarily due to the incremental revenue from the Acquired Companies,
which added $99,775 and $5,062 of revenues to the 2Q07 and 2Q06 results, respectively. Excluding
the effects of the acquisitions and the positive impact of exchange rates of
$1,610 relative to the U.S. dollar, revenues would have decreased 6% from $179,988 to $169,940
between periods for the reasons discussed below.
Revenues by Geography
North America Revenues
Revenues in North America were $231,297 for 2Q07, an increase of 58% compared to 2Q06 revenues of
$146,754. The increase was primarily due to the incremental revenue from the Acquired Companies,
which added $99,775 and $5,062 of revenues to the 2Q07 and 2Q06 results, respectively. Excluding
the effects of these acquisitions, revenues would have decreased 7% from $141,692 to $131,522
between periods. The Company believes the overall decrease is due to the completion of several
nonrecurring projects, offset in part by success in the Companys DVH (Data, Voice and Hotline)
Services cross-selling initiatives.
Europe Revenues
Revenues in Europe were $30,844 for 2Q07, an increase of 6% compared to 2Q06 revenues of $29,199.
Excluding the positive impact of exchange rates of $1,340 relative to the U.S. dollar, revenues
would have increased 1% to $29,504 for 2Q07. The Company believes the overall increase is due to
the success in the Companys DVH (Data, Voice and Hotline) Services cross-selling initiatives
partially offset by a decrease from nonrecurring projects.
All Other Revenues
Revenues for All Other were $9,184 for 2Q07, an increase of 1% compared to $9,097 for 2Q06. Excluding the negative
impact of exchange rates of $120 relative to the U.S. dollar, revenues would have increased 2% to $9,304 for 2Q07.
52
Revenue by Service Type
Data Services
Revenues from Data Services were $46,447 for 2Q07, a decrease of 12% compared to $52,584 for 2Q06.
Excluding the positive impact of exchange rates of $834 relative to the U.S. dollar, revenues would
have decreased 13% to $45,613 for 2Q07. The Company believes the overall decrease in Data Services
revenue was due to the completion of several nonrecurring projects.
Voice Services
Revenues from Voice Services were $169,815 for 2Q07, an increase of 117% compared to $78,410 for
2Q06. The increase was primarily due to the incremental revenue from the Acquired Companies, which
added $99,775 and $5,062 of revenues to the 2Q07 and 2Q06 results, respectively. Excluding the
effects of these acquisitions, revenues would have decreased 5% from $73,348 to $70,040 between
periods. The Company believes that this overall decrease in Voice Services revenue is primarily due
to the completion of nonrecurring projects.
Hotline Services
Revenues from Hotline Services were $55,063 for 2Q07, an increase of 2% compared to $54,056 for
2Q06. Excluding the positive impact of exchange rates of $781 relative to the U.S. dollar, revenues
would have been $54,282 for 2Q07. The Company believes the overall increase in Hotline Services
revenues was driven by the success in the Companys DVH (Data, Voice and Hotline) Services
cross-selling initiatives.
Gross Profit
Gross profit dollars for 2Q07 increased to $99,036 from $73,882 for 2Q06. The increase in gross
profit dollars over the prior year was due to the increase in revenues related to the Acquired
Companies. Gross profit as a percent of revenues for 2Q07 decreased to 36.5% of revenues from 39.9%
of revenues for 2Q06. The decrease in gross profit percentage was due primarily to the impact of
lower gross profit in its Voice Services segment driven by the acquisition of NextiraOne.
Gross profit dollars for Data Services were $13,907, or 29.9% of revenues, for 2Q07 compared to
$15,482, or 29.4% of revenues, for 2Q06. Gross profit dollars for Voice Services were $57,913, or
34.1% of revenues, for 2Q07 compared to $31,173, or 39.8% of revenues, for 2Q06. Gross profit
dollars for Hotline Services were $27,216, or 49.4% of revenues, for 2Q07 compared to $27,227, or
50.4% of revenues, for 2Q06.
SG&A Expenses
Selling, general and administrative (SG&A) expenses for 2Q07 were $73,599, an increase of $21,826
over SG&A expenses of $51,773 for 2Q06. The increase in SG&A expense dollars over the prior year
was due primarily to the Acquired Companies. SG&A expenses as a percent of revenue for 2Q07 were
27.1% of revenues comparable to 28.0% of revenues for 2Q06. The decrease in SG&A as a percent of
revenue was due primarily to lower SG&A as a percent of revenues related to the Acquired Companies
offset in part by an increase to non-cash stock-based compensation expense of $1,261.
Intangibles Amortization
Intangibles amortization for 2Q07 increased to $1,931 from $1,328 for 2Q06. The increase was
primarily attributable to the amortization of intangible assets acquired through the purchase of
the Acquired Companies. See Note 10 for further details related to the Acquired Companies.
Operating Income
Operating income for 2Q07 was $23,506, or 8.7% of revenues, compared to $20,781, or 11.2% of
revenues, for 2Q06.
Interest Expense, Net
Net interest expense for 2Q07 increased to $5,521 from $2,330 for 2Q06. The increase in interest
expense is due to an increase in the weighted average outstanding debt and weighted average
interest rate from approximately $161,735 and 5.04% for 2Q06, respectively, to approximately
$265,437 and 6.26% for 2Q07, respectively. The increase in debt relates primarily to the
acquisitions of NextiraOne and NUVT during the first quarter Fiscal 2007. Also included in
interest expense for 2Q07 is $1,395 related to the change in fair value
of the Companys interest rate swap.
53
Provision for Income Taxes
The tax provision for 2Q07 was $6,238, an effective tax rate of 34.8%. This compares to the tax
provision for 2Q06 of $6,296, an effective tax rate of 34.2%. The tax rate for 2Q07 was higher than
2Q06 due to changes in the overall mix of taxable income among worldwide offices.
Net Income
As a result of the foregoing, net income for 2Q07 was $11,675, or 4.3% of revenues, compared to
$12,115, or 6.5% of revenues, for 2Q06.
Six Months Fiscal 2007 (2QYTD07) Compared to Six Months Fiscal 2006 (2QYTD06):
Total Revenues
Total revenues for 2QYTD07 were $501,720, an increase of 38% compared to 2QYTD06 total revenues of
$364,332. The increase was primarily due to the incremental revenue from the Acquired Companies,
which added $182,166 and $19,393 of revenues to the 2QYTD07 and 2QYTD06 results, respectively.
Excluding the effects of the acquisitions and the positive impact of exchange rates of $1,883
relative to the U.S. dollar, revenues would have decreased 8% from $344,939 to $317,671 between
periods for the reasons discussed below.
Revenues by Geography
North America Revenues
Revenues in North America were $423,869 for 2QYTD07, an increase of 49% compared to 2QYTD06
revenues of $283,615. The increase was primarily due to the incremental revenue from the Acquired
Companies, which added $182,166 and $19,393 of revenues to the 2QYTD07 and 2QYTD06 results,
respectively. Excluding the effects of these acquisitions, revenues would have decreased 9% from
$264,222 to $241,703 between periods. The Company believes the overall decrease is due to the
completion of several nonrecurring projects, offset in part by success in the Companys DVH (Data,
Voice and Hotline) Services cross-selling initiatives.
Europe Revenues
Revenues in Europe were $60,189 for 2QYTD07, a decrease of 4% compared to 2QYTD06 revenues of
$62,949. Excluding the positive impact of exchange rates of $1,246 relative to the U.S. dollar,
revenues would have decreased 6% to $58,943 for 2QYTD07. The Company believes the overall decrease
is due to the completion of nonrecurring projects offset in part by the success in the Companys
DVH (Data, Voice and Hotline) Services cross-selling initiatives.
All Other Revenues
Revenues for All Other were $17,662 for 2QYTD07, a decrease of 1% compared to $17,768 for 2QYTD06.
Excluding the negative impact of exchange rates of $271 relative to the U.S. dollar, revenues would
have increased 1% to $17,933 for 2QYTD07.
Revenue by Service Type
Data Services
Revenues from Data Services were $90,978 for 2QYTD07, a decrease of 14% compared to $105,485 for
2QYTD06. Excluding the positive impact of exchange rates of $1,144 relative to the U.S. dollar,
revenues would have decreased 15% to $89,834 for 2QYTD07. The Company believes the overall decrease
in Data Services revenue was due to the completion of several nonrecurring projects.
Voice Services
Revenues from Voice Services were $303,454 for 2QYTD07, an increase of 101% compared to $151,339
for 2QYTD06. The increase
was primarily due to the incremental revenue from the Acquired Companies, which added $182,166 and
$19,393 of revenues to the 2QYTD07 and 2QYTD06 results, respectively. Excluding the effects of
these acquisitions, revenues would have decreased 8% from $131,946 to $121,288 between periods. The
Company believes that this overall decrease in Voice Services revenue is primarily due to planned
post-merger client attrition from the acquisition of Norstan, Inc. in 4Q05 and nonrecurring
projects.
54
Hotline Services
Revenues from Hotline Services were $107,288 for 2QYTD07 compared to $107,508 for 2QYTD06.
Excluding the positive impact of exchange rates of $739 relative to the U.S. dollar, revenues would
have decreased 1% to $106,549 for 2QYTD07. The Company believes the stabilization is due in part to
the success in the Companys DVH (Data, Voice and Hotline) Services cross-selling initiatives.
Gross Profit
Gross profit dollars for 2QYTD07 increased to $184,880 from $144,822 for 2QYTD06. The increase in
gross profit dollars over the prior year was due to the increase in revenues related to the
Acquired Companies. Gross profit as a percent of revenues for 2QYTD07 decreased to 36.8% of
revenues from 39.8% of revenues for 2QYTD06. The decrease in gross profit percentage was due
primarily to the impact of lower gross profit in its Voice Services segment driven by the
acquisition of NextiraOne.
Gross profit dollars for Data Services were $27,224, or 29.9% of revenues, for 2QYTD07 compared to
$31,006, or 29.4% of revenues, for 2QYTD06. Gross profit dollars for Voice Services were $103,676,
or 34.2% of revenues, for 2QYTD07 compared to $59,011, or 39.0% of revenues, for 2QYTD06. Gross
profit dollars for Hotline Services were $53,980, or 50.3% of revenues, for 2QYTD07 compared to
$54,805, or 51.0% of revenues, for 2QYTD06.
SG&A Expenses
SG&A expenses for 2QYTD07 were $143,801, an increase of $39,988 over SG&A expenses of $103,813 for
2QYTD06. The increase in SG&A expense dollars over the prior year was due primarily to the Acquired
Companies. SG&A expenses as a percent of revenue for 2QYTD07 were 28.7% of revenues comparable to
28.5% of revenues for 2QYTD06. The decrease in SG&A as a percent of revenue was due primarily to
lower SG&A as a percent of revenues related to the Acquired Companies offset in part by an increase
to non-cash stock-based compensation expense of $3,390.
Restructuring Charges
The Company did not record any restructuring charges during 2QYTD07. In the first quarter of Fiscal
2006, the Company recorded a restructuring charge of $5,290. This charge was comprised of $3,473
for staffing level adjustments and $1,817 for real estate consolidations in Europe and North
America. Of this charge, $3,742 and $1,548 related to Europe and North America, respectively.
Intangibles Amortization
Intangibles amortization for 2QYTD07 increased to $3,437 from $2,886 for 2QYTD06. The increase was
primarily attributable to the amortization of intangible assets acquired through the purchase of
the Acquired Companies. See Note 10 for further details related to the Acquired Companies.
Operating Income
Operating income for 2QYTD07 was $37,642, or 7.5% of revenues, compared to $32,833, or 9.0% of
revenues, for 2QYTD06.
Interest Expense, Net
Net interest expense for 2QYTD07 increased to $9,161 from $4,289 for 2QYTD06. The increase in
interest expense is due to an increase in the weighted average outstanding debt and weighted
average interest rate from approximately $164,294 and 4.53% for 2QYTD06, respectively, to
approximately $243,390 and 6.17% for 2QYTD07, respectively. The increase in debt relates primarily
to the acquisitions of NextiraOne and NUVT during the first quarter Fiscal 2007. Also included in
interest expense for 2QYTD07 is $1,395 related to the change in fair value of the Companys
interest rate swap.
Provision for Income Taxes
The tax provision for 2QYTD07 was $9,806, an effective tax rate of 34.7%. This compares to the tax
provision for 2QYTD06 of $9,748, an effective tax rate of 34.1%. The tax rate for 2QYTD07 was
higher than 2QYTD06 due to changes in the overall mix of taxable income among worldwide offices.
55
Net Income
As a result of the foregoing, net income for 2QYTD07 was $18,488, or 3.7% of revenues, compared to
$18,831, or 5.2% of revenues, for 2QYTD06.
Liquidity and Capital Resources
Cash Flows from Operating Activities
Net cash provided by operating activities during 2QYTD07 was $21,723. Significant factors
contributing to the source of cash were: net income of $18,488 inclusive of non-cash charges of
$9,453 and $5,636 for amortization / depreciation expense and stock compensation expense,
respectively, an increase in accounts payable of $13,064 and an increase in billings in excess of
costs of $6,061. Significant factors contributing to a use of cash were: increase in net inventory
of $4,734, an increase in net accounts receivable of $3,518, an increase in costs in excess of
billings of $8,567, a decrease in the restructuring reserve of $9,218 and a decrease in accrued
compensation of $6,453. Changes in the above accounts are based on average Fiscal 2007 exchange
rates.
Net cash provided by operating activities during 2QYTD06 was $22,474. Significant factors
contributing to a source of cash were: net income of $18,831 inclusive of non-cash charges of
$7,380 and $2,246 for amortization / depreciation expense and stock compensation expense,
respectively, and a decrease in net inventory of $5,704. A significant factor contributing to a use
of cash was an increase in accounts receivable of $8,913. Changes in the above accounts are based
on average Fiscal 2006 exchange rates.
As of September 30, 2006 and 2005, the Company had cash and cash equivalents of $15,758 and
$11,925, respectively, working capital of $109,936 and $109,601, respectively, and a current ratio
of 1.43 and 1.78, respectively.
The Company believes that its cash provided by operating activities and availability under its
credit facility will be sufficient to fund the Companys 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 2QYTD07 was $130,500. Significant factors contributing
to a use of cash were: $2,112 for gross capital expenditures and $127,402 to acquire NextiraOne and
NUVT. See Note 10 of the Notes to Consolidated Financial Statements for additional details
regarding the acquisitions of NextiraOne and NUVT.
Net cash used by investing activities during 2QYTD06 was $27,618. Significant factors contributing
to a use of cash were: $1,600 for gross capital expenditures and $26,854 to acquire TSM, GTC and
BCI, net of cash acquired in the transactions.
Cash Flows from Financing Activities
Net cash provided by financing activities during 2QYTD07 was $114,167. Significant factors
contributing to the cash inflow were $127,283 of net borrowings on long term debt and $6,611 of
proceeds from the exercise of stock options. Significant uses of cash were $17,587 for the
repurchase of common stock and $2,116 for the payment of dividends.
Net cash provided by financing activities during 2QYTD06 was $5,467. Significant factors
contributing to the cash inflow were $7,452 of proceeds from the exercise of stock options.
Significant uses of cash were $2,021 for the payment of dividends.
Total Debt
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, and previously
defined as 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 Companys 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 Companys 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 September 30, 2006, the Company was in compliance
with all required covenants under the Credit Agreement.
56
As of September 30, 2006, the Company had total debt outstanding of $252,553. Total debt was
comprised of $249,400 outstanding under the credit agreement, $1,395 for the fair value of the
interest rate swap, $1,563 of obligations under capital leases and $195 of various other
third-party, non-employee loans. The weighted average interest rate on all indebtedness of the
Company during 2Q07 and 2QYTD07 was approximately 6.26% and 5.04%, respectively. The weighted
average interest rate on all indebtedness of the Company during 2Q06 and 2QYTD06 was approximately
6.17% and 4.53%, respectively.
Dividends
During 1Q07, the Board declared a cash dividend of $0.06 per share on all outstanding shares of
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. During 2Q07, the Board declared a cash dividend of $0.06
per share on all outstanding shares of 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. 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
During 2Q07, the Company repurchased approximately 441,000 shares of common stock for $17,587.
Since inception of the repurchase program in April 1999 through September 30, 2006, the Company has
repurchased in aggregate approximately 7,376,027 shares of common stock for approximately $314,411.
Funding for the stock repurchases came primarily from existing cash flow from operations.
Additional repurchases of stock may occur from time to time depending upon factors such as the
Companys 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.
Significant Accounting Policies
The Companys significant accounting policies are described in Note 1 within the Notes to
Consolidated Financial Statements for the year ended March 31, 2006 contained in the Form 10-K.
There have been no significant changes to those significant accounting policies during the
subsequent periods.
Recent Accounting Pronouncements
Tax Effects of Share-Based Payment Awards
On November 10, 2005, the FASB issued Staff Position No. SFAS 123(R)-3, Transition Election
Related to Accounting for Tax Effects of Share-Based Payment Awards (SFAS 123(R)-3). The
alternative transition method includes simplified methods to establish the beginning balance of the
additional paid-in capital pool (APIC pool) related to the tax effects of employee share-based
compensation, and to determine the subsequent impact on the APIC pool and Consolidated Statements
of Cash Flows of the tax effects of employee share-based compensation awards that are outstanding
upon adoption of SFAS 123(R). The Company is in the process of evaluating whether to adopt the
provisions of SFAS 123(R)-3.
Defined Benefit Pension and Other Postretirement Plans
In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit Pension
and Other Postretirement Plans (SFAS 158) that would amend SFAS No. 87, Employers Accounting
for Pensions, SFAS No. 88, Employers Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits, SFAS No. 106, Employers Accounting for
Postretirement Benefits Other Than Pensions and SFAS No. 132 (Revised 2003), Employers
Disclosures about Pensions and Other Postretirement Benefits. This standard requires, among other
things, companies to recognize on the balance sheet the funded or unfunded status of pension and
other postretirement benefit plans and to recognize the change in funded status in the period the
change occurs through comprehensive income. The provisions of FAS 158 are effective as of the
Companys fiscal year end March 31, 2007. The Company is currently evaluating the impact of
adopting FAS 158 on its consolidated financial statements.
Income Taxes
In July 2006, the FASB issued FIN 48. This Interpretation 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. The Interpretation
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 plans to adopt the Interpretation as of
April 1, 2007 as required. The Interpretation is currently being evaluated by the Company for its
full impact and, at this time, the Company believes it has properly and adequately provided for all
income tax positions and therefore expects minimal impact from adopting the Interpretation.
Stock-Based Compensation
The Company adopted the provisions of SFAS 123(R) as of April 1, 2006. See Note 2 of the Notes to
Consolidated Financial Statements for reference.
57
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 Company is evaluating the impact of the adoption of
SFAS 157 on the Companys 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 effects of
inflation through improved productivity and cost reduction programs as well as price adjustments
within the constraints of market competition.
Cautionary Forward Looking Statements
When included in this Quarterly Report on Form 10-Q/A 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 timing and
final outcome of the ongoing review of the Companys stock option practices, including the related
SEC investigation, shareholder derivative lawsuit, NASDAQ process
regarding listing of the common stock and tax matters, and the impact of any actions that may be required or taken
as a result of such review, SEC investigation, shareholder derivative lawsuit, NASDAQ
process or tax 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 (Data, Voice, and Hotline) Services, successful
implementation of our 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 and various other matters, many of which are
beyond the Companys 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
this Quarterly Report on Form 10-Q/A. The Company expressly disclaims any obligation or undertaking
to release publicly any updates or any changes in the Companys expectations with regard thereto or
any change in events, conditions or circumstances on which any statement is based.
58
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company is exposed to market risks in the ordinary course of business that include
interest rate volatility and foreign currency exchange rates volatility. Market risk is measured as
the potential negative impact on earnings, cash flows or fair values resulting from a hypothetical
change in interest rates or foreign currency exchange rates over the next year.
Interest Rate Risk
The Companys primary interest rate risk relates to its long-term debt obligations. As of September
30, 2006, the Company had total long-term obligations of $252,553, including the current portion of
those obligations of $608. Of the outstanding debt, $1,758 was in fixed rate obligations, $100,000
was in variable rate debt that was effectively converted to a fixed rate through an interest rate
swap agreement and $150,795 was in variable rate obligations. As of September 30, 2006, an
instantaneous 100 basis point increase in the interest rate of the variable rate debt would reduce
the Companys net income in the subsequent quarter by $245 assuming the Company employed no
intervention strategies.
To mitigate the risk of interest-rate fluctuations associated with the Companys 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 Companys 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 an interest rate swap which has been used to effectively
convert a portion of the Companys 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. Changes in the fair market value of the interest rate swap are recorded as an asset or
liability in the Companys Consolidated Balance Sheet and Interest Expense (Income) in the
Companys Consolidated Statements of Income.
Foreign Exchange Rate Risk
The Company has operations, clients and suppliers worldwide, thereby exposing the Companys
financial results to foreign currency fluctuations. In an effort to reduce this risk of foreign
currency fluctuations, the Company generally sells and purchases inventory based on prices
denominated in U.S. dollars. Intercompany sales to subsidiaries are generally denominated in the
subsidiaries local currency. The Company has entered and will continue in the future, on a
selective basis, to enter into foreign currency forward contracts to reduce the foreign currency
exposure related to certain intercompany transactions, primarily trade receivables and loans. All
of the foreign currency forward contracts have been designated and qualify as cash flow hedges. The
effective portion of any changes in the fair value of the derivative instruments is recorded in OCI
until the hedged forecasted transaction occurs or the recognized currency transaction affects
earnings. Once the forecasted transaction occurs or the recognized currency transaction affects
earnings, the effective portion of any related gains or losses on the cash flow hedge is
reclassified from OCI to other income (expense) in the Companys Consolidated Statement of Income.
In the event it becomes probable that the hedged forecasted transaction will not occur, the
ineffective portion of any gain or loss on the related cash flow hedge would be reclassified from
OCI to other income (expense).
As of September 30, 2006, the Company had open foreign exchange contracts in Australian and
Canadian dollars, Danish krone, Euro, Japanese yen, Norwegian kroner, Pound sterling, Swedish krona
and Swiss franc. The open contracts have contract rates ranging from 1.2950 to 1.3407 Australian
dollar, 1.1141 to 1.1167 Canadian dollar, 5.7065 to 5.8428 Danish krone, 0.7698 to 0.8222 Euro,
105.47 to 110.10 Japanese yen, 5.9442 to 6.5690 Norwegian kroner, 0.5244 to 0.5588 Pound sterling,
7.0283 to 7.2983 Swedish krona and 1.1813 to 1.2423 Swiss franc, all per U.S. dollar. The total
open contracts had a notional amount of approximately $53,518, have a fair value of $52,175 and
will expire within thirty months.
The Company does not hold or issue any other financial derivative instruments nor does it engage in
speculative trading of financial derivatives.
59
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Item 4. |
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Controls and
Procedures. |
Evaluation of Disclosure Controls and Procedures
As disclosed in the Explanatory Note and in Note 3 of the Notes to Consolidated Financial
Statements in this Form 10-Q/A, and as previously disclosed, the Audit Committee, with the
assistance of outside legal counsel, commenced an independent review of the Companys historical
stock option grant practices and related accounting for stock option grants for the Review Period.
On March 19, 2007, the Audit Committee concluded that the exercise price of certain stock option
grants differed from the fair market value of the underlying shares on the appropriate measurement
date. At that time, the Company and the Audit Committee announced that it was currently expected
that the Companys additional non-cash, pre-tax charges for stock-based compensation expense
relating to certain stock option grants would approximate $63 million (subsequently adjusted as set
forth elsewhere in this Form 10-Q/A) for the Review Period. In addition, the Company and the Audit
Committee concluded that the Company would need to restate its previously-issued financial
statements contained in reports previously filed by the Company with the SEC. Accordingly, on
March 19, 2007, the Company and the Audit Committee concluded that the Companys previously-issued
financial statements and other historical financial information and related disclosures for the
Review Period, including applicable reports of its current or former independent registered public
accounting firms and related press releases, should not be relied upon.
In connection with the preparation of this Form 10-Q/A, an evaluation was performed, under the
supervision and with the participation of Company management, including the CEO and the CFO, of the
effectiveness of the design and operation of the Companys disclosure controls and procedures (as
defined in Rule 13a-15(e)) under the Securities Exchange Act of 1934, as amended (the Exchange
Act), as of September 30, 2006. Based on that evaluation and the foregoing, management, including
the CEO and the CFO, has concluded that, as of September 30, 2006, the Company had a material
weakness in internal control over financial reporting with respect to the Companys stock option
grant practices and related accounting for stock option grants and that, as a result of this
material weakness in internal control over financial reporting, its disclosure controls and
procedures were not effective as of September 30, 2006.
There are inherent limitations to the effectiveness of any system of disclosure controls and
procedures, including cost limitations, judgments used in decision making, assumptions regarding
the likelihood of future events, soundness of internal controls, fraud, the possibility of human
error and the circumvention or overriding of the controls and procedures. Accordingly, even
effective disclosure controls and procedures can provide only reasonable, and not absolute,
assurance of achieving their control objectives.
Changes in Internal Control Over Financial Reporting
During the three and six months periods ended September 30, 2006, there had been no change in the
Companys internal control over financial reporting that has materially affected, or is reasonably
likely to materially affect, the Companys internal control over financial reporting.
As of the date of filing of this Form 10-Q/A, Management has made significant revisions to the
Companys internal control structure surrounding the Companys stock option grant practices,
including the formalization of documentation with respect to appropriate approvals for stock option
grants and additional levels of review with respect to stock option grant terms, which Management
believes should facilitate the prevention and/or detection of material errors in future periods.
Also, as of the date of filing of this Form 10-Q/A, the Audit Committee has completed its review of
the Companys stock option grant practices and continues to analyze the facts discovered in its
review in order to make additional recommendations for appropriate remedial actions regarding the
Companys stock option grant practices and related accounting for stock option grants. It is
anticipated that the Company will adopt and implement any such additional recommendations. Pending
the Audit Committees consideration of and the Companys implementation of these recommendations,
the Company has not made and does not intend to make any stock option grants. The Company also
took action to suspend the exercise of outstanding stock options. It is anticipated that the
Company will permit stock option exercises following the filing of this Form 10-Q/A, the 3Q07 Form
10-Q and the FY07 Form 10-K.
The scope of Managements assessment of the effectiveness of internal controls over financial
reporting includes all of the Companys material businesses except for NextiraOne, a material business acquired on April 30, 2006. The NextiraOne portion of the
business will be included in the current year assessment to be completed as of March 31, 2007.
60
PART II OTHER INFORMATION
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|
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Exhibit |
|
|
Number |
|
Description |
|
|
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31.1
|
|
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities and
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 and
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 and 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) |
61
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.
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BLACK BOX CORPORATION
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Dated: July 23, 2007
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By: |
/s/ Michael McAndrew
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Michael McAndrew, Vice President, |
|
|
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Chief Financial Officer, Treasurer, Secretary
and Principal Accounting Officer |
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62
EXHIBIT INDEX
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
31.1
|
|
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities and
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 and
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 and 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) |
63