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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2007
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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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Commission File Number
001-31451
BEARINGPOINT, INC.
(Exact name of Registrant as
specified in its charter)
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DELAWARE
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22-3680505
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(State or other jurisdiction
of
incorporation or organization)
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(IRS Employer
Identification No.)
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1676 International Drive, McLean, VA
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22102
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(Address of principal executive
offices)
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(Zip Code)
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(703) 747-3000
(Registrants telephone
number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of each class
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Name of each exchange on which registered
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Common Stock, $.01 Par Value
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New York Stock Exchange
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Series A Junior Participating Preferred Stock Purchase
Rights
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the
Act: None
Indicate by check mark if the Registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. YES o NO þ
Indicate by check mark if the Registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. YES o NO þ
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. YES þ NO o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of Registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicated by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a
non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act.
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Large accelerated
filer þ
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Accelerated
filer o
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Non-accelerated
filer o
(Do not check if a smaller reporting company)
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Smaller reporting
company o
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Indicate by check mark whether the Registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). YES o NO þ
As of June 30, 2007, the aggregate market value of the
voting stock held by non-affiliates of the Registrant, based
upon the closing price of such stock on the New York Stock
Exchange on June 29, 2007, was approximately
$1.5 billion.
The number of shares of common stock of the Registrant
outstanding as of February 1, 2008 was 215,220,077.
PART I.
FORWARD-LOOKING
STATEMENTS
Some of the statements in this Annual Report on
Form 10-K
(this Annual Report) constitute
forward-looking statements within the meaning of the
United States Private Securities Litigation Reform Act of 1995.
These statements relate to our operations and are based on our
current expectations, estimates and projections. Words such as
may, will, could,
would, should, anticipate,
predict, potential,
continue, expects, intends,
plans, projects, believes,
estimates, goals, in our
view and similar expressions are used to identify these
forward-looking statements. The forward-looking statements
contained in this Annual Report include statements about our
internal control over financial reporting, our results of
operation and our financial condition. Forward-looking
statements are only predictions and as such, are not guarantees
of future performance and involve risks, uncertainties and
assumptions that are difficult to predict. Forward-looking
statements are based upon assumptions as to future events or our
future financial performance that may not prove to be accurate.
Actual outcomes and results may differ materially from what is
expressed or forecast in these forward-looking statements. The
reasons for these differences include changes that occur in our
continually changing business environment and the risk factors
enumerated in Item 1A, Risk Factors. As a
result, these statements speak only as of the date they were
made, and we undertake no obligation to publicly update or
revise any forward-looking statements, whether as a result of
new information, future events or otherwise.
AVAILABLE
INFORMATION
We were incorporated as a business corporation under the laws of
the State of Delaware in 1999. Our principal offices are located
at 1676 International Drive, McLean, Virginia 22102. Our main
telephone number is
(703) 747-3000.
Our website address is www.bearingpoint.com. Copies of
our Annual Report on
Form 10-K,
Quarterly Reports on
Form 10-Q
and Current Reports on
Form 8-K,
as well as any amendments to those reports, are available free
of charge through our website as soon as reasonably practicable
after they are electronically filed with or furnished to the
Securities and Exchange Commission (the SEC).
Information contained or referenced on our website is not
incorporated by reference into and does not form a part of this
Annual Report.
You may read and copy any materials we file with the SEC at the
SECs Public Reference Room at 100 F Street,
N.E., Washington, D.C. 20549. You may obtain information on the
operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330.
The SEC maintains an Internet site
(http://www.sec.gov)
that contains reports, proxy and information statements, and
other information regarding issuers that file electronically
with the SEC.
In this Annual Report, we use the terms
BearingPoint, we, the
Company, our Company, our and
us to refer to BearingPoint, Inc. and its
subsidiaries. All references to years, unless
otherwise noted, refer to our twelve-month fiscal year.
General
BearingPoint, Inc. is one of the worlds leading providers
of management and technology consulting services to Forbes
Global 2000 companies as well as government organizations.
Our core services, which include management consulting,
technology solutions, application services and managed services,
are designed to help our clients generate revenue, increase
cost-effectiveness, manage regulatory compliance, integrate
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information and transition to next-generation
technology. We believe we differentiate our services from others
through our results, approach and people. Our collaborative and
flexible approach, including our passionate and dedicated people
who bring both deep management and technology experience to bear
on solving our clients issues, is well recognized for
producing innovative and effective solutions.
In North America, we deliver consulting services through our
Public Services, Commercial Services and Financial Services
industry groups (our North American Industry
Groups), which provide significant industry-specific
knowledge and service offerings. Outside of North America, we
are organized on a geographic basis Europe, the
Middle East and Africa (EMEA), the Asia Pacific
region and Latin America (including Mexico). For a discussion of
risks attendant to our international operations, see the
discussion in Item 1A, Risk Factors Risks
Related to Our Business.
For more information about our operating segments, see
North American Industry Groups and
International Operations, Item 7,
Managements Discussion and Analysis of Financial
Condition and Results of Operation Segments,
and Note 18, Segment Information, of the Notes
to Consolidated Financial Statements.
Strategy
We want to be recognized as the world leader in management and
technology consulting, admired for our passion and respected for
our ability to solve our clients most important
challenges. We recognize that in 2008, we must show significant
progress toward becoming profitable and improving our cash flow.
To achieve these objectives, we are organizing our business
priorities for 2008 around three overarching strategies:
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Leveraging Opportunities Across Our Global Footprint. We
must strengthen our global delivery model by creating greater
opportunities and scaling those offerings and solutions that
offer the greatest opportunities for growth and profitability.
We believe that operating globally will help us better serve our
clients needs, provide us with an advantage over regional
competitors and allow us to maintain a diverse portfolio that
can help to sustain our business during economic downturns.
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We intend to leverage our
best-in-class
government solutions and offerings developed in our
U.S. Federal, state and local markets to offer them to
governments around the world. Optimizing our global capabilities
delivered through our Global Development Centers
(GDCs) in China, India and the United States
(Hattiesburg, Mississippi) and providing highly skilled
professionals at a lower cost for application development and
support also will be an important part of achieving our goals.
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Attracting, Developing and Retaining a
World-Class Employee Base. As a professional services
company, our employees are the cornerstone of our success. We
must attract, develop and retain world-class talent. Under the
leadership of our new Executive Vice President, Human Resources,
our goal is to build a world-class human resources function that
will help us hire and retain our employees and provide
outstanding training and career opportunities for our people.
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We believe that providing a pay-for-performance culture that is
communicated both clearly and consistently to our employees will
enhance their understanding of how to succeed within our
company. In 2008, we will strive to bring more clarity and
consistency to our bonus and equity programs to effectively
provide proper incentives to motivate and reward our employees
for their contributions to the success of our business.
We are committed to reinforcing a culture consistent with our
values and improving the quality of our employees
professional lives, and, to do so, we will seek their feedback
more frequently and systematically.
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Striving For Operational Excellence and Profitability. We
must strive to drive higher operating margins through
operational excellence and financial discipline. We will monitor
the metrics that we believe are critical to driving
profitability and positive cash flow, and we will hold our
employees
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accountable for their performance. To further a culture of
accountability, each of our operating segments will be measured
according to key performance indicators of our business
operations. For information on these key performance indicators,
see Item 7, Managements Discussion and Analysis
of Financial Condition and Results of Operation
Overview Key Performance Indicators.
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In addition, we will continue efforts to align our people
pyramid, further reducing the number of managing directors
and senior managers, while increasing the number of analysts and
consultants to lower our costs of service.
For more information regarding the business priorities we will
pursue in 2008 to implement these strategies, see Item 7,
Managements Discussion and Analysis of Financial
Condition and Results of Operation
Overview Principal Business Priorities for 2008 and
Beyond.
North
American Industry Groups
Our North American operations are managed on an industry basis,
enabling us to capitalize on our significant industry-specific
knowledge. This focus enhances our ability to monitor global
trends and observe best practice behavior, to design specialized
service offerings relevant to the marketplaces in which our
clients operate, and to build sustainable solutions. All of our
industry groups provide management consulting, technology
solutions, application services and managed services to their
respective clients.
Our three North American Industry Groups are:
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Public Services serves a broad range of both public and
private clients, including agencies of the U.S. Federal
government such as the Departments of Defense, Homeland
Security, and Health and Human Services; provincial, state and
local governments; public healthcare companies and private
sector healthcare agencies; aerospace and defense companies; and
higher education clients. We believe that our Public Services
business will continue to be our largest revenue producer,
generating opportunities for both strong growth in North America
and in our international operations by leveraging our
differentiated solutions, as well as our experience and
expertise, to governments around the world.
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Commercial Services supports a highly diversified range
of clients, including those in the life sciences and energy
markets, as well as technology, consumer markets, manufacturing,
transportation, communications and private and public utilities.
In 2008, our Commercial Services business will focus on
providing differentiated solutions to priority segments and
accounts, and will transition from lower margin, transactional
commodity services to higher margin, value-added services in
order to generate sustainable relationships and revenue.
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Financial Services directs its solutions to many of the
worlds leading banking, insurance, securities, real
estate, hospitality and professional services institutions. In
2008, our Financial Services business will concentrate its focus
within high growth markets, deepen relationships with our key
accounts and middle market clients, particularly at the
C-suite level, and seek to improve profitability by
targeting niche markets for our differentiated solutions.
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International
Operations
Our operations outside of North America are organized on a
geographic basis, with alignment to our three North American
Industry Groups enabling consistency in our global
strategy and execution.
After extensive analysis and discussion, we have concluded that
over the long term, we can create more value for our
shareholders, our customers and our people by further
integrating our businesses and operating model, not further
distancing them. Our management team feels strongly that our
unique global footprint
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provides us with opportunities to increase profitability by
leveraging our global delivery model for multi-national clients
and delivering
best-in-class
government offerings and solutions developed in our
U.S. Federal, state, and local markets to governments
around the world.
Our three geographic regions are:
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EMEA. Our EMEA region will continue to be a key part of
our strategy. Consequently, in late 2007 we decided to continue
to own and operate our EMEA segment as part of our consolidated
business rather than move forward with a sale of that business
to our EMEA managing directors.
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Asia Pacific. In Asia Pacific, our growth strategy will
focus on taking advantage of client successes to leverage new
opportunities within Japan and China, and to improve our
profitability in Korea and the South Asia Pacific countries by
focusing our solutions on our key client accounts within these
countries.
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Latin America. In Latin America, we have streamlined our
in-country operations in order to strategically focus upon the
countries in which we believe we will be most successful. We
will continue to serve clients within Latin America from our
offices in Brazil and Mexico.
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Our
Joint Marketing Relationships
As of December 31, 2007, our alliance program had
approximately 40 relationships with key technology providers
that support and complement our service offerings. Through this
program, we have created joint marketing relationships to
enhance our ability to provide our clients with high value
services. Those relationships typically entail some combination
of commitments regarding joint marketing, sales collaboration,
training and service offering development.
Our most significant joint marketing and product development
technology relationships are with Oracle Corporation, Microsoft
Corporation, SAP AG, Hewlett-Packard Company and IBM
Corporation. We work together to develop comprehensive solutions
to common business issues, offer the expertise required to
deliver those solutions, develop new products, build our talent
capabilities, capitalize on joint marketing opportunities and
remain at the forefront of technology advances.
Competition
We operate in a highly competitive and rapidly changing market
and compete with a variety of organizations that sell services
similar to those we offer. Our competitors include specialized
consulting firms, systems consulting and implementation firms,
former Big 4 and other large accounting and
consulting firms, application software firms providing
implementation and modification services, service and consulting
groups of computer equipment companies, outsourcing companies,
systems integration companies, aerospace and defense contractors
and general management consulting firms. We also compete with
our clients internal resources. Some of our competitors
have significantly greater financial and marketing resources,
name recognition and market share than we do.
In 2008, we intend to focus our skills and resources to best
capitalize on our competitive advantages, selectively choosing
only those offerings, solutions and markets where we can
effectively differentiate ourselves from our competition. We
feel that deepening our relationships with key, existing clients
and through repeat marketing of developed, successful industry
offerings and solutions, we will be better positioned to achieve
higher margins.
We believe that the principal competitive factors in the markets
in which we operate include scope of services, service delivery
approach, technical and industry expertise, value added,
availability of appropriate talent and resources, global reach,
pricing and relationships.
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Intellectual
Property
Our success has resulted in part from our methodologies and
other proprietary intellectual property rights. We rely upon a
combination of nondisclosure and other contractual arrangements,
non-solicitation agreements, trade secrets, copyright and
trademark laws to protect our proprietary rights and the rights
of third parties from whom we license intellectual property. We
also enter into confidentiality and intellectual property
agreements with our employees that limit the distribution of
proprietary information. We currently have only a limited
ability to protect our important intellectual property rights.
We selectively pursue efforts to capture, protect and
commercialize BearingPoint proprietary information. We are
striving to identify potentially reusable solutions or other
intellectual property sooner in the design process and to take
measures that will safeguard our proprietary rights and
commercialization opportunities. We anticipate certain of these
initiatives will add value to particular client and market
categories, and increase our earnings from proprietary assets.
Our solution suites, such as our Risk, Compliance and Security
Solution Suite, are an example of these efforts.
Customer
Dependence
During 2007 and 2006, our revenue from the U.S. Federal
government, inclusive of government sponsored enterprises, was
$981.6 million and $983.1 million, respectively,
representing 28.4% and 28.5% of our total revenue, respectively.
For 2007 and 2006, this included approximately
$378.7 million and $389.8 million of revenue from the
U.S. Department of Defense, respectively, representing
approximately 11.0% and 11.3% of our total revenue for 2007 and
2006, respectively. A loss of all or a substantial portion of
our contracts with the U.S. Federal government would have a
material adverse effect on our business and results of
operation. While most of our government agency clients have the
ability to unilaterally terminate their contracts, our
relationships are seldom with political appointees, and we have
not historically experienced a loss of U.S. Federal government
business with a change in administration. For more information
regarding government proceedings and risks associated with
U.S. government contracts, see Item 1A, Risk
Factors, Item 3, Legal Proceedings, and
Note 11, Commitments and Contingencies, of the
Notes to Consolidated Financial Statements.
Employees
As of December 31, 2007, we had approximately
17,100 full-time employees, including approximately 14,400
billable professionals.
As management and technology consultants, our future success
largely depends upon our ability to attract, motivate and retain
world-class talent, particularly professionals with the advanced
information technology skills necessary to perform the services
we offer. Our professionals possess significant industry
experience, understand the latest technology and know how to
apply it to solve our clients business challenges. We are
committed to the long-term development of our employees and will
continue to dedicate significant resources to making
BearingPoint a great place to do great work. We strive to
reinforce our employees commitment to our clients, culture
and values through a comprehensive performance management
system, innovative training programs, and a competitive
compensation philosophy that rewards individual performance and
teamwork.
For 2007, our voluntary annualized attrition rate was 24.7%, a
slight improvement over our attrition rate of 25.6% in 2006.
Reducing attrition remains a top priority, and we have taken
steps to enhance our ability to attract and retain our
employees. For additional information regarding these efforts,
see Managements Discussion and Analysis of Financial
Condition and Results of Operation Principal
Business Priorities for 2008 and Beyond Attract,
Develop and Retain a World-Class Employee Base.
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Risks
that Relate to Our Business
Our business may be adversely impacted as a result of
changes in demand, both globally and in individual market
segments, for our consulting and systems integration
services.
Our business tends to lag behind economic cycles; consequently,
we may experience rapid decreases in demand at the onset of
significant economic downturns while the benefits of economic
recovery may take longer to realize. Economic and political
uncertainties adversely impact our clients demand for our
services. During an economic downturn, our clients and potential
clients often cancel, reduce or defer existing contracts and
delay entering into new engagements, thereby reducing new
contract bookings. In general, companies also reduce the amount
of spending on information technology products and services
during difficult economic times, resulting in limited
implementations of new technology and smaller engagements.
Our contracts funded by U.S. Federal government agencies,
inclusive of government sponsored enterprises, accounted for
approximately 28.4% of our revenue in 2007. We depend
particularly on contracts funded by clients within the
Department of Defense, which accounted for approximately 11.0%
of our revenue in 2007. We believe that our U.S. Federal
government contracts will continue to be a source of a
significant amount of our revenue for the foreseeable future.
Our business could be materially harmed if the U.S. Federal
government reduces its spending or reduces the budgets of its
departments or agencies. Reduced budget and other political and
regulatory factors may cause these departments and agencies to
reduce their purchases under, or exercise their rights to
terminate, existing contracts, or may result in fewer or smaller
new contracts to be awarded to us.
Our operating results will suffer if we are not able to
maintain our billing and utilization rates or control our
costs.
Our operating results are largely a function of the rates we are
able to charge for our services and the utilization rates, or
chargeability, of our professionals. Accordingly, if we are not
able to maintain the rates we charge for our services or an
appropriate utilization rate for our professionals, or if we
cannot manage our cost structure, our operating results will be
negatively impacted, we will not be able to sustain our margins
and our ability to generate profits will suffer.
Factors affecting the rates we are able to charge for our
services include:
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our clients perception of our ability to add value through
our services;
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our ability to access and use of lower-cost service delivery
personnel, as compared to the ability of our competitors to do
so;
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introduction of new services or products by us or our
competitors;
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pricing policies of our competitors; and
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general economic conditions in the United States and abroad.
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Factors affecting our utilization rates include:
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seasonal trends, primarily as a result of our hiring cycle and
holiday and summer vacations;
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our ability to transition employees from completed projects to
new engagements;
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our ability to forecast demand for our services and thereby
maintain an appropriately balanced and sized workforce;
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our ability to manage attrition; and
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our ability to mobilize our workforce quickly or economically,
especially outside the United States.
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Our operating results are also a function of our ability to
control our costs. If we are unable to control these costs, such
as costs associated with the production of financial statements,
settlement of lawsuits or management of a significantly larger
and more diverse workforce, our results of operation could be
materially and adversely affected.
If we are unable to timely and properly implement and
operate our new financial reporting system, we may be unable to
timely file our SEC periodic reports or conclude that our
internal control over financial reporting is effective, either
of which could have a material adverse effect on our business,
financial condition or results of operation.
We are currently in the process of replacing our North American
financial reporting systems. We expect that once the new North
American financial reporting system has been implemented, it
will help us to maintain the timely filing of our SEC periodic
reports and provide the Company with current and timely
financial information and reduce our selling, general and
administrative (SG&A) expenses. The
implementation of a new financial system is complex and subject
to many risks, including our ability to manage and implement a
financial system of this scope and magnitude. See
Risks that Relate to our Failure to Timely File Periodic Reports
with the SEC and our Internal Control over Financial
Reporting and Item 7, Managements Discussion
and Analysis of Financial Condition and Results of
Operation Principal Business Priorities for 2008 and
Beyond Drive Operational Excellence
Replace our North American Financial Reporting Systems.
For example, in 2005 our Audit Committee determined that the
implementation of our current North American financial systems
was attempted without adequate testing and training or
sufficient backup capability, which contributed to:
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our inability to timely file our SEC periodic reports;
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the substantial increase in our SG&A expenses, including
finance and accounting and audit costs; and
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the material weaknesses identified in our 2004 through 2007
audits and the conclusion by management that our internal
control over financial reporting was not effective.
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For so long as we are unable to implement and operate our new
North American financial system, we will continue to experience
a higher than normal probability of the occurrence of these
types of risks.
We continue to incur SG&A expenses as a percentage of
revenue at levels significantly higher than those of our
competitors. If we are unable to significantly reduce SG&A
expenses as a percentage of revenue over the near term, our
ability to achieve our goals in net income and profitability
will remain in jeopardy.
In recent years we have experienced exceptionally high levels of
SG&A expenses as a percentage of revenue, primarily as a
result of continuing issues related to our North American
financial reporting systems and our internal controls, higher
than average costs associated with hiring and retaining our
employees and other assorted costs, including legal expenses
associated with various disputes and litigation. During 2007, we
incurred external costs of approximately $83.5 million
related to the preparation of our financial statements, our
auditors review and audit of our financial statements and
the testing of internal controls, compared with approximately
$128.2 million in 2006. In addition, we also currently
expect to incur approximately $33.5 million in costs in
2008 related to the implementation of our new North American
financial reporting system, of which $8.9 million is
expected to be expensed and $24.6 million is expected to be
capitalized, compared with approximately $25.3 million of
such costs in 2007, of which $10.2 million was expensed and
$15.1 million was capitalized. It is likely that higher
than normal SG&A expenses will continue through 2008 and
2009 as we seek to achieve our objectives of timely preparing
and filing our financial statements and SEC periodic reports,
remediating material weaknesses in our internal control over
financial reporting and completing the replacement of our North
American financial reporting systems.
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Our ability to reduce future SG&A expenses is dependent,
among other things, on:
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improving our controls around the financial closing process;
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remediating deficiencies in our internal controls;
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reducing the amount of time and effort spent to substantiate the
accuracy and completeness of our financial results;
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reducing redundant systems and activities;
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streamlining the input and capture of data;
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hiring and retaining skilled finance and accounting personnel
while decreasing the number of personnel required to support our
financial close process, including reliance on contractors;
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achieving further reductions in the number of offices and square
feet of space occupied by us; and
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achieving further cost savings in our various corporate
services, including legal, information technology and human
resources.
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If we are unable to achieve these objectives, offset these costs
through other expense reductions, or if we encounter additional
difficulties or setbacks in achieving these objectives, our
SG&A expenses could significantly exceed current expected
levels, and, consequently, materially and adversely affect our
competitive position, financial condition, results of operation
and cash flows.
The systems integration consulting markets are highly
competitive, and we may not be able to compete effectively if we
are not able to maintain our billing rates or control our costs
related to these engagements.
Systems integration consulting constitutes a significant part of
our business. Historically, these markets have included a large
number of participants and have been highly competitive. Recent
increases in the number and availability of competing global
delivery alternatives for systems integration work create ever
increasing pricing pressures in these markets. We frequently
compete with companies that have greater global delivery
capabilities and alternatives, financial resources, name
recognition and market share than we do. If we are unable to
maintain our billing rates through delivering unique and
differentiated systems integration solutions and control our
costs through proper management of our workforce, global
delivery centers and other available resources, we may lose the
ability to compete effectively for this significant portion of
our business.
Contracting with the U.S. Federal government is inherently
risky and exposes us to risks that may materially and adversely
affect our business.
We depend on contracts with U.S. Federal government
agencies, particularly with the Department of Defense, for a
significant portion of our revenue and consequently, we are
exposed to various risks inherent in the government contracting
process, including the following:
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Our government contracts are subject to laws and regulations
that provide government clients with rights and remedies not
typically found in commercial contracts, which are unfavorable
to us. These rights and remedies allow government clients, among
other things, to:
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establish temporary holdbacks of funds due and owed to us under
contracts for various reasons;
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terminate our facility security clearances and thereby prevent
us from receiving classified contracts;
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cancel multi-year contracts and related orders if funds for
contract performance for any subsequent year become unavailable;
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claim rights in products, systems and technology produced by us;
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prohibit future procurement awards with a particular agency if
it is found that our prior relationship with that agency gives
us an unfair advantage over competing contractors;
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subject the award of contracts to protest by competitors, which
may require the suspension of our performance pending the
outcome of the protest or our resubmission of a bid for the
contract, or result in the termination, reduction or
modification of the awarded contract; and
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prospectively reduce our pricing based upon achieving certain
agreed service volumes or other metrics and reimburse any
previously charged amounts subsequently found to have been
improperly charged under the contract.
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Our failure to obtain and maintain necessary security clearances
may limit our ability to perform classified work for government
clients, which could cause us to lose business. In addition,
security breaches in sensitive government systems that we have
developed could damage our reputation and eligibility for
additional work and expose us to significant losses.
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The U.S. Federal government audits and reviews our performance
on contracts, pricing and cost allocation practices, cost
structure, systems, and compliance with applicable laws,
regulations and standards. If the government finds that our
costs are not reimbursable, have not been properly determined or
are based on outdated estimates of our costs, we may not be
allowed to bill for all or part of those costs, or we may have
to refund cash that we have already collected, which may
materially affect our operating margin and the expected timing
of our cash flows.
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Government contracting officers have wide latitude in their
ability to conclude as to the financial responsibility of
companies that contract with agencies of the U.S. Federal
government. Officers who conclude that a company is not
financially responsible may withhold new engagements and
terminate recently contracted engagements for which significant
expenditures and outlays already may have been made.
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If the government uncovers improper or illegal activities in the
course of audits or investigations, we may be subject to civil
and criminal penalties and administrative sanctions, including
termination of contracts, forfeiture of profits, suspension of
payments, fines and suspension or debarment from doing business
with U.S. Federal government agencies. These consequences could
materially and adversely affect our revenue and operating
results. The inherent limitations of internal controls, even
when adequate, may not prevent or detect all improper or illegal
activities.
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Government contracts, and the proceedings surrounding them, are
often subject to more extensive scrutiny and publicity than
other commercial contracts. Negative publicity related to our
government contracts, regardless of its accuracy, may further
damage our business by affecting our ability to compete for new
contracts.
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The impact of any of these occurrences or conditions could
affect not only our business with the agency or department
involved, but also other agencies and departments within the
U.S. Federal government. Depending on the size of the project or
the magnitude of the budget reduction, potential costs,
penalties or negative publicity involved, any of these
occurrences or conditions could have a material adverse effect
on our business or our results of operation.
Our ability to attract, retain and motivate our managing
directors and other key employees is critical to the success of
our business. We continue to experience sustained,
higher-than-industry average levels of voluntary turnover among
our workforce, which has impacted our ability to grow our
business.
Our success depends largely on our general ability to attract,
develop, motivate and retain highly skilled professionals.
Competition for skilled personnel in the consulting and
technology services business is intense.
The following additional attrition risks are unique to our
business:
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In light of our current issues related to our North American
financial reporting systems and our internal control over
financial reporting, it is particularly critical that we
continue to attract and retain experienced finance personnel.
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Higher than average attrition creates recruiting, training and
retention costs and benefits that place significant demands on
our resources.
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Our inability to timely file our periodic reports with the SEC
from 2005 through 2007 materially and negatively affected our
ability to deliver freely tradable equity incentives to our
people.
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Rumors, misperceptions and misrepresentations regarding our
financial stability or ongoing operations may create career
uncertainties for our employees.
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The continuing loss of significant numbers of our professionals
or the inability to attract, hire, develop, train and retain
additional skilled personnel for these or other reasons could
have a serious negative effect on us, including our ability to
obtain and successfully complete important engagements and thus
maintain or increase our revenue.
Our contracts can be terminated by our clients with short
notice, or our clients may cancel or delay projects.
Our clients typically retain us on a non-exclusive,
engagement-by-engagement
basis, rather than under exclusive long-term contracts. Most of
our consulting engagements are less than twelve months in
duration. Most of our contracts can be terminated by our clients
upon short notice and without significant penalty. Large client
projects involve multiple engagements or stages, and there are
risks that a client may choose not to retain us for additional
stages of a project or that a client will cancel or delay
additional planned engagements. These terminations,
cancellations or delays could result from factors unrelated to
our work product or the progress of the project, but could be
related to business or financial conditions of the client or the
economy generally. When contracts are terminated, cancelled or
delayed, we lose the associated revenue, and we may not be able
to eliminate associated costs in a timely manner. Consequently,
our operating results in subsequent periods may be adversely
impacted.
If we are not able to keep up with rapid changes in
technology or maintain strong relationships with software
providers, our business could suffer.
Our success depends, in part, on our ability to develop service
offerings that keep pace with rapid and continuing changes in
technology, evolving industry standards and changing client
preferences. Our success also depends on our ability to develop
and implement ideas for the successful application of existing
and new technologies. We may not be successful in addressing
these developments on a timely basis, or our ideas may not be
successful in the marketplace. Also, products and technologies
developed by our competitors may make our services or product
offerings less competitive or obsolete. Any of these
circumstances could have a material adverse effect on our
ability to obtain and successfully complete client engagements.
In addition, we generate a significant portion of our revenue
from projects to implement software developed by others. Our
future success in the software implementation business depends,
in part, on the continuing viability of these companies, their
ability to maintain market leadership and our ability to
maintain a good relationship with these companies.
Loss of our joint marketing relationships could reduce our
revenue and growth prospects.
Our most significant joint marketing relationships are with
Oracle Corporation, Microsoft Corporation, SAP AG,
Hewlett-Packard Company and IBM Corporation. These relationships
enable us to increase revenue by providing us additional
marketing exposure, expanding our sales coverage, increasing the
training of our professionals and developing and co-branding
service offerings that respond to customer demand. The loss of
one or more of these relationships could adversely affect our
business by terminating current joint marketing and product
development efforts or otherwise decreasing our revenue and
growth prospects. Because most of our significant joint
marketing relationships are nonexclusive, if our competitors are
more successful in, among other things, building leading-edge
products and services, these entities may form closer or
preferred arrangements with other consulting organizations,
which could materially reduce our revenue.
10
We are not likely to be able to significantly grow our
business through mergers and acquisitions in the near
term.
We have had limited success in valuing and integrating
acquisitions into our business. Given past experiences, the
current competing demands for our capital resources and
limitations contained in our senior secured credit facility, we
are unlikely to grow our business through significant
acquisitions. Our inability to do so may competitively
disadvantage us or jeopardize our independence.
There will not be a consistent pattern in our financial
results from quarter to quarter, which may result in increased
volatility of our stock price.
Our quarterly revenue and profitability have varied in the past
and are likely to vary significantly from quarter to quarter,
making them difficult to predict. This may lead to volatility in
our stock price. Factors that could cause variations in our
quarterly financial results include:
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the business decisions of our clients regarding the use of our
services;
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seasonality, including the number of work days and holidays and
summer vacations;
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the stage of completion of existing projects or their
termination;
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cost overruns or revenue write-offs resulting from unexpected
delays or delivery issues on engagements;
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periodic differences between our clients estimated and
actual levels of business activity associated with ongoing
engagements;
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our ability to transition employees quickly from completed
projects to new engagements;
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the introduction of new products or services by us or our
competitors;
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changes in our pricing policies or those of our competitors;
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our ability to manage costs, including personnel costs and
support services costs, particularly outside the United States
where local labor laws may significantly affect our ability to
mobilize personnel quickly or economically;
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currency exchange fluctuations;
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ongoing costs associated with our efforts to remediate material
weaknesses in our internal control over financial reporting, and
to produce timely and accurate financial information despite the
continuing existence of these material weaknesses;
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changes in, or the application of changes to, accounting
principles generally accepted in the United States, particularly
those related to revenue recognition; and
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global, regional and local economic and political conditions and
related risks, including acts of terrorism.
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Our performance may be negatively affected due to
financial, regulatory and operational risks inherent in
worldwide operations.
In 2007, approximately 36.0% of our revenue was attributable to
activities outside North America. Our results of operation are
affected by our ability to manage risks inherent in our doing
business abroad. These risks include exchange rate fluctuation,
regulatory concerns, terrorist activity, restrictions with
respect to the movement of currency, access to highly skilled
workers, political and economic stability, unauthorized and
improper activities of employees and our ability to protect our
intellectual property. Despite our best efforts, we may not be
in compliance with all regulations around the world and may be
subject to penalties and fines as a result. These penalties and
fines may materially and adversely affect our performance.
11
Some of our services are performed in high-risk locations, such
as Iraq and Afghanistan, where the country or location is
suffering from political, social or economic issues, or war or
civil unrest. In those locations, we incur substantial costs to
maintain the safety of our personnel. Despite these precautions,
the safety of our personnel in these locations may continue to
be at risk. Despite our best efforts, we may suffer the loss of
our employees or those of our contractors. The risk of these
losses and the costs of protecting against them may become
prohibitive. If so, we may face taking a decision regarding
removing our employees from one or more of these countries and
ceasing to seek new work or complete the existing contracts that
we have in those countries or regions. Such a decision could,
directly or indirectly, materially and adversely affect our
current and future revenue, as well as our performance.
We may bear the risk of cost overruns relating to our
services, thereby adversely affecting our performance.
The effort and cost associated with the completion of our
systems integration, software development and implementation or
other services are difficult to estimate and, in some cases, may
significantly exceed the estimates made at the time we commence
the services. We often provide these services under
level-of-effort and fixed-price contracts. The level-of-effort
contracts are usually based on time and materials or direct
costs plus a fee. Under these arrangements, we are able to bill
our client based on the actual cost of completing the services,
even if the ultimate cost of the services exceeds our initial
estimates. However, if the ultimate cost exceeds our initial
estimate by a significant amount, we may have difficulty
collecting the full amount that we are due under the contract,
depending upon many factors, including the reasons for the
increase in cost, our communication with the client throughout
the project, and the clients satisfaction with the
services. As a result, we could incur losses with respect to
these services even when they are priced on a level-of-effort
basis. If we provide these services under a fixed-price
contract, we bear the risk that the ultimate cost of the project
will materially exceed the price to be charged to the client. If
we fail to accurately estimate our costs or the time required to
perform under a contract, our ability to generate profits on
these contracts may be materially and adversely affected.
We may face legal liabilities and damage to our
professional reputation from claims made against our
work.
Many of our engagements involve projects that are critical to
the operation of our clients businesses. If we fail to
meet our contractual obligations, we could be subject to legal
liability, which could adversely affect our business, operating
results and financial condition. The provisions we typically
include in our contracts that are designed to limit our exposure
to legal claims relating to our services and the applications we
develop may not protect us or may not be enforceable in all
cases. Moreover, as a consulting firm, we depend to a large
extent on our relationships with our clients and our reputation
for high caliber professional services and integrity to retain
and attract clients and employees. As a result, claims made
against our work may be more damaging in our industry than in
other businesses. Negative publicity related to our client
relationships, regardless of its accuracy, may further damage
our business by affecting our ability to compete for new
engagements.
Our services may infringe upon the intellectual property
rights of others.
We cannot be sure that our services do not infringe on the
intellectual property rights of others, and we may have
infringement claims asserted against us. These claims may harm
our reputation, cost us money and prevent us from offering some
services. In some contracts, we have agreed to indemnify our
clients for certain expenses or liabilities resulting from
claimed infringements of the intellectual property rights of
third parties. In some instances, the amount of these
indemnities may be greater than the revenue we receive from the
client. Any claims or litigation in this area may be costly and
result in large awards against us and, whether we ultimately win
or lose, could be time-consuming, may injure our reputation, may
result in costly delays or may require us to enter into royalty
or licensing arrangements. If there is a successful claim of
infringement or if we fail to develop non-infringing technology
or license the proprietary rights we require on a timely basis,
our
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ability to use certain technologies, products, services and
brand names may be limited, and our business may be harmed.
We have only a limited ability to protect our intellectual
property rights, which are important to our success.
Our success depends, in part, upon our plan to develop, capture
and protect re-usable proprietary methodologies and other
intellectual property. We rely upon a combination of trade
secrets, confidentiality policies, nondisclosure and other
contractual arrangements, and patent, copyright and trademark
laws to protect our intellectual property rights. Our efforts in
this regard may not be adequate to prevent or deter infringement
or other misappropriation of our intellectual property, and we
may not be able to detect the unauthorized use of, or take
appropriate and timely action to enforce, our intellectual
property rights.
Depending on the circumstances, we may be required to grant a
specific client certain intellectual property rights in
materials developed in connection with an engagement, in which
case we would seek to cross-license the use of such rights. In
limited situations, however, we forego certain intellectual
property rights in materials we help create, which may limit our
ability to re-use such materials for other clients. Any
limitation on our ability to re-use such materials could cause
us to lose revenue-generating opportunities and require us to
incur additional cost to develop new or modified materials for
future projects.
Risks
that Relate to Our Liquidity
Our current cash resources might not be sufficient to meet
our expected cash needs over time. Beginning in early 2009, we
will begin to become subject to significant required payments
under our 2007 Credit Facility and various series of our
debentures. We continue to believe that our cash balances,
together with cash generated from operating activities and
borrowings previously made under our 2007 Credit Facility, will
be sufficient to provide adequate funds for our anticipated
internal growth, operating needs and debt service obligations.
However, if we cannot consistently generate sufficient positive
cash flows from operating activities to fund these required
payments and service our indebtedness, our business, financial
condition and results of operations could be materially and
adversely effected.
We have experienced recurring net losses. We have generated
positive cash flows from operating activities in only five
quarters since the beginning of 2005. Historically, we have
often failed, sometimes significantly, to achieve
managements periodic operating budgets and cash forecasts.
For each fiscal year ending on or after December 31, 2008,
we are required by our 2007 Credit Facility to repay principal
in an amount equal to 50% of our Excess Cash Flow (as defined in
the 2007 Credit Facility) for such year on or before the tenth
business day when we are required to deliver financial
statements for the applicable fiscal year, subject to certain
credits for other voluntary payments we have made in any such
year and certain exceptions. On April 15, 2009, we are
obligated to honor the rights of the holders of our $200,000,000
5.00% Convertible Senior Subordinated Debentures to demand
payment of up to the entire principal amount of those
debentures. We currently expect most, if not all, of these
debentures to be tendered for payment at that time. We will
continue to have varying amounts of maturity payments
and/or
mandatory payment rights on other series of debentures in 2010,
2011 and beyond. For additional information regarding our
debentures and the timing of such option, see
Risks that Relate to Our Liquidity and
Note 6, Notes Payable, of the Notes to
Consolidated Financial Statements. These ongoing, annual
required payments will present a significant additional demand
on our cash that we have not experienced in prior years.
Therefore, we must begin to consistently generate positive cash
flows from operating activities if we are to service these
payments from cash generated from our business. If we are unable
to service our indebtedness, whether in the ordinary course of
business or upon acceleration of such indebtedness, our
financial condition, cash flows and results of operation would
be materially affected.
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If we cannot consistently generate sufficient positive cash
flows from operating activities, we will need to meet operating
shortfalls and required prepayments with existing cash on hand,
avail ourselves of the capital or credit markets or implement or
seek alternative strategies. These alternative strategies could
include seeking improvements in working capital management,
reducing or delaying capital expenditures, restructuring or
refinancing our indebtedness, seeking additional debt or equity
capital and selling assets. There can be no assurances that
existing cash will be sufficient, we will have timely access to
the capital or credit markets or that any of these strategies
can be implemented on satisfactory terms, on a timely basis, or
at all.
Our 2007 Credit Facility imposes a number of restrictions
on the way in which we operate our business and may negatively
affect our ability to finance future needs, or do so on
favorable terms. If we violate these restrictions, we will be in
default under the 2007 Credit Facility, which may cross-default
to our other indebtedness.
On May 18, 2007, we entered into a $400 million senior
secured credit facility and on June 1, 2007, we amended and
restated the credit facility to increase the aggregate
commitments under the facility to $500 million (the
2007 Credit Facility). The 2007 Credit Facility
consists of term loans in an aggregate principal amount of
$300 million (of which $297.8 million was outstanding
as of December 31, 2007) and a letter of credit facility in
an aggregate face amount at any time outstanding not to exceed
$200 million (of which $86.9 million remained
available as of December 31, 2007). For more information on
our 2007 Credit Facility, see Managements Discussion
and Analysis of Financial Condition and Results of
Operation Liquidity and Capital Resources.
Under the 2007 Credit Facility, certain of our corporate
activities are restricted, which include, among other things,
limitations on: disposition of assets; mergers and acquisitions;
payment of dividends; stock repurchases and redemptions;
incurrence of additional indebtedness; making of loans and
investments; creation of liens; prepayment of other
indebtedness; and engaging in certain transactions with
affiliates. Any event of default under the 2007 Credit Facility
or agreements governing our other significant indebtedness could
lead to an acceleration of debt under the 2007 Credit Facility
or other debt instruments that contain cross-default provisions.
If the indebtedness under the 2007 Credit Facility were to be
accelerated, our assets may not be sufficient to repay amounts
due under the 2007 Credit Facility and the other debt securities
then accelerated.
We may be unable to obtain new surety bonds, letters of
credit or bank guarantees in support of client engagements on
acceptable terms.
Some of our clients, primarily in the state and local markets,
require us to obtain surety bonds, letters of credit or bank
guarantees in support of client engagements. During 2007, we
were required by our surety providers to fully collateralize
(via cash or letters of credit) our obligations under our surety
bonds. We expect this requirement of full collateralization of
surety bonds to continue for the foreseeable future. If we
cannot obtain or maintain surety bonds, letters of credit or
bank guarantees on acceptable terms, we may be unable to
maintain existing client engagements or to obtain additional
client engagements that require them. In turn, our current and
planned revenue, particularly from the State, Local and
Education (SLED) sector of our Public Services
industry group, could be materially and adversely affected. At
December 31, 2007, we had $86.9 million remaining
under the letter of credit facility of our 2007 Credit Facility.
Downgrades of our credit ratings may increase our
borrowing costs and materially and adversely affect our
business, financial condition or results of operation.
On February 6, 2007, Standard & Poors
Rating Services (Standard & Poors)
withdrew our senior unsecured rating of B- and our subordinated
debt rating of CCC+ and removed them from CreditWatch.
Separately, on December 7, 2007, Moodys confirmed our
B2 corporate family rating, assigned us a negative rating
outlook and downgraded the ratings of our Series A and B
Debentures to Caa1 from B3.
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On or after October 31, 2008, the administrative agent
under our 2007 Credit Facility may require us to use
commercially reasonable efforts to have our corporate credit
rated by Moodys or Standard & Poors. There
can be no assurance we could obtain or retain a specific rating
or any rating by either entity.
Actions or refusals to act by the rating agencies may affect our
ability to obtain financing or the terms on which such financing
may be obtained. Our inability to obtain additional financing,
or obtain additional financing on terms favorable to us, could
hinder our ability to fund general corporate requirements,
affect our stock price, limit our ability to retain existing
clients or compete for new business, and increase our
vulnerability to adverse economic and industry conditions.
Our leverage may adversely affect our business and
financial performance and may restrict our operating
flexibility.
The level of our indebtedness and our ongoing cash flow
requirements for debt service and collateral maintenance:
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limit cash flow available for general corporate purposes, such
as capital expenditures;
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limit our ability to obtain, or obtain on favorable terms,
additional debt financing in the future;
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limit our flexibility in reacting to competitive and other
changes in our industry and economic conditions generally;
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expose us to a risk that a substantial decrease in net operating
cash flows due to economic developments or adverse developments
in our business could make it difficult to meet debt service
requirements; and
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expose us to risks inherent in interest rate fluctuations
because borrowings may be at variable rates of interest, which
could result in high interest expense in the event of increases
in interest rates.
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The holders of our debentures have the right, at their
option, to require us to purchase some or all of our debentures
upon certain dates or upon the occurrence of certain designated
events, which could have a material adverse effect on our
liquidity.
The holders of certain of our debentures have the right (a
put right), as of a specified date or upon a
designated event, to require us to repurchase all or a portion
of our debentures, in each case, at a price in cash equal to the
principal amount of the debentures plus accrued and unpaid
interest, if any.
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The following table lists the maturity date and the put dates of
our debentures:
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Debentures
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Maturity Date
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Put Date
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$250.0 Million 2.50% Series A
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Convertible Subordinated Debentures due 2024
(the Series A Debentures)
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December 15, 2024
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December 15, 2011
December 15, 2014
December 15, 2019
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$200.0 Million 2.75% Series B
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Convertible Subordinated Debentures due 2024
(the Series B Debentures and together with
Series A Debentures, the Subordinated
Debentures)
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December 15, 2024
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December 15, 2014
December 15, 2019
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$200.0 Million 5.00% Convertible
Senior Subordinated Debentures due 2025
(the April 2005 Convertible Debentures)
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April 15, 2025
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April 15, 2009
April 15, 2013
April 15, 2015
April 15, 2020
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$40.0 Million 0.50% Convertible
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Senior Subordinated Debentures due 2010
(the July 2005 Convertible Debentures)
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July 15, 2010
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N/A
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If we cannot generate sufficient positive cash flows from
operating activities or otherwise honor the put rights or
maturities on our debentures with our existing cash balances,
there can be no assurance that future borrowings or equity
financing will be available for the payment or refinancing of
the debentures.
The holders of our debentures also have the right to require us
to repurchase any outstanding debentures upon certain dates and
designated events. These events include certain change of
control transactions and a termination of trading, if our common
stock is no longer listed for trading on a U.S. national
securities exchange. If we are unable to repurchase any of our
debentures when due or otherwise breach any other debenture
covenants, we may be in default under the related indentures,
which could lead to an acceleration of unpaid principal and
accrued interest under the indentures. Any such acceleration
could lead to an acceleration of amounts outstanding under our
2007 Credit Facility. In the event of any acceleration of unpaid
principal and accrued interest under our 2007 Credit Facility or
under the debentures, we will not be permitted to make payments
to the holders of the debentures until the unpaid principal and
accrued interest under our 2007 Credit Facility have been fully
paid.
For additional information regarding our debentures, see
Note 6, Notes Payable, of the Notes to
Consolidated Financial Statements.
Risks
that Relate to our Failure to Timely File Periodic Reports with
the SEC and our Internal Control over Financial
Reporting
The process, training and systems issues related to financial
accounting for our North American operations and the material
weaknesses in our internal control over financial reporting
continue to materially affect our financial condition and
results of operation. So long as we are unable to resolve these
issues and remediate these material weaknesses, we will be in
jeopardy of being unable to timely file our periodic reports
with the SEC as they come due, and it is likely that our
financial condition and results of operation will continue to be
materially and adversely affected. Furthermore, any subsequent
failures to timely file any future periodic reports with the SEC
could increase the likelihood or frequency of occurrence and
severity of the impact of any of the risks described below.
16
Our continuing failure to timely file certain periodic
reports with the SEC poses significant risks to our business,
each of which could materially and adversely affect our
financial condition and results of operation.
We did not timely file with the SEC our
Forms 10-K
for 2004, 2005 and 2006 or our
Forms 10-Q
for 2005, 2006 and 2007. Consequently, from March 16, 2005
to December 3, 2007 we did not timely comply with the
reporting requirements under the Securities Exchange Act of 1934
(the Exchange Act) or the listing rules of the New
York Stock Exchange (the NYSE).
If we are unable to timely file our periodic reports with the
SEC, we may be subject to a number of significant risks,
including:
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If we are not timely in filing our periodic reports on or after
October 31, 2008, (i) an event of default could be
declared by our lenders under our senior secured credit
facility, which may result in the lenders declaring our
outstanding loans due and payable in whole or in part, and
potentially resulting in a cross-default to one or more series
of our convertible subordinated debentures and other
indebtedness,
and/or
(ii) an event of default could be claimed by holders of one
or more series of our subordinated debentures, resulting in a
cross-default under our senior secured credit facility. See
Risks that Relate to Our Liquidity.
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If the NYSE does not grant us extensions to file our periodic
reports with the NYSE, it has the right to begin proceedings to
delist our common stock. A delisting of our common stock would
have a material adverse effect on us by, among other things:
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reducing the liquidity and market price of our common stock;
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resulting in a possible event of default under and acceleration
of our senior secured credit facility and triggering a right to
the holders of our debentures to request us to repurchase all
then outstanding debentures; and
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reducing the number of investors willing to hold or acquire our
common stock, thereby restricting our ability to obtain equity
financing.
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We may have difficulty retaining our clients and obtaining new
clients.
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We would not be eligible to use a registration statement to
offer and sell freely tradable securities, thereby preventing us
from accessing the public capital or credit markets or
delivering shares under our equity plans.
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Any of these events could materially and adversely affect our
financial condition and results of operation.
In 2004, we identified material weaknesses in our internal
control over financial reporting, the remediation of which
continues to materially and adversely affect our business and
financial condition, and as of December 31, 2007, certain
material weaknesses remain.
Our management has conducted an assessment of the effectiveness
of our internal control over financial reporting as of
December 31, 2007 and has identified a number of material
weaknesses in our internal control over financial reporting as
of December 31, 2007. These material weaknesses also
contributed to managements conclusion as to the
effectiveness of our internal control over financial reporting
for 2004 through 2006. A detailed description of each of these
remaining material weaknesses is described in Item 9A of
this Annual Report. Due to these material weaknesses, management
has concluded that we did not maintain effective internal
control over financial reporting as of December 31, 2007.
The existence of these material weaknesses continues to cause us
to rely on additional procedures and other measures as needed to
assist us with meeting the objectives otherwise fulfilled by an
effective control environment.
Moreover, we continue to experience difficulty in internally
producing accurate and timely forecasted financial information
due, in part, to issues related to the material control
weaknesses and other deficiencies
17
identified as part of managements assessment of internal
control over financial reporting, and, until the filing of our
Form 10-Q
for the quarterly period ended September 30, 2007, to the
delays in filing our periodic reports with the SEC. While we
continue to address many of the underlying issues that have
affected our ability to produce accurate internal financial
forecasts, there can be no assurance that our ability to produce
such forecasts has sufficiently improved to enable us to
accurately and timely predict and assess the ongoing cash
demands or financial needs of our business. Moreover, our
difficulties in producing accurate internal financial forecasts
could jeopardize the accuracy of any financial guidance we
provide publicly.
We have engaged in, and continue to engage in, substantial
efforts to address the material weaknesses in our internal
control over financial reporting. We cannot be certain that any
remedial measures we have taken or plan to take will ensure that
we design, implement and maintain adequate controls over our
financial processes and reporting in the future or will be
sufficient to address and eliminate these material weaknesses.
Our inability to remedy these identified material weaknesses or
any additional deficiencies or material weaknesses that may be
identified in the future, could, among other things, cause us to
fail to file our periodic reports with the SEC in a timely
manner, result in the need to restate financial results for
prior periods, prevent us from providing reliable and accurate
financial information and forecasts or from avoiding or
detecting fraud, result in the loss of government contracts, or
require us to incur further additional costs or divert
management resources. Due to its inherent limitations, effective
internal control over financial reporting can provide only
reasonable assurances that transactions are properly recorded,
or that the unauthorized acquisition, use or disposition of our
assets, or inappropriate reimbursements and expenditures, will
be detected. These limitations may not prevent or detect all
misstatements or fraud, regardless of their effectiveness.
Furthermore, in order to sustain the timely production of our
financial statements and SEC periodic reports, we must reduce
the time required to prepare our financial statement accounts
and balances. Until our material weaknesses have been
remediated, we will not be able to fully minimize the time
required to prepare our financial statement accounts and
balances. Our ability to remain timely in our SEC periodic
reports will depend on, among other things, our ability to
increase the focus of, and maximize the cooperation from, our
client engagement teams and other corporate services in
providing financial information and updates into our financial
closing process on a timely basis. If we are unable to achieve
these efficiencies, we may be unable to sustain being timely in
our SEC periodic reports.
Risks
that Relate to Our Common Stock
The price of our common stock may decline due to the
number of shares that may be available for sale in the
future.
Sales of a substantial number of shares of our common stock, or
the perception that such sales could occur, could adversely
affect the market price of our common stock.
18
Upon conversion or exercise of our outstanding convertible debt
and warrants, including upon certain change of control
transactions, we will issue the following number of shares of
our common stock, subject to anti-dilution protection and other
adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial Per Share
|
|
|
|
|
|
Total
|
|
|
|
Conversion
|
|
|
Initial
|
|
|
Approximate
|
|
|
|
Price/Exercise
|
|
|
Conversion
|
|
|
Number of
|
|
Convertible Debt and Warrants
|
|
Price($)
|
|
|
Dates
|
|
|
Shares
|
|
|
Series A Debentures
|
|
$
|
10.50
|
|
|
|
March 31, 2005
|
(1)
|
|
|
23.8 million
|
|
Series B Debentures
|
|
|
10.50
|
|
|
|
March 31, 2005
|
(1)
|
|
|
19.0 million
|
|
April 2005 Convertible Debentures
|
|
|
6.60
|
|
|
|
April 27, 2005
|
|
|
|
30.3 million
|
|
July 2005 Convertible Debentures
|
|
|
6.75
|
|
|
|
July 15, 2006
|
|
|
|
5.9 million
|
|
Warrants issued in connection with the July 2005 Senior
Debentures (the July 2005 Warrants)
|
|
|
8.00
|
|
|
|
July 15, 2006
|
|
|
|
3.5 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
82.5 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The holders of the Series A
Debentures and Series B Debentures have the right to
convert the debentures into shares of common stock only upon the
occurrence of certain triggering events. For additional
information regarding the triggering events, see Note 6,
Notes Payable Series A and Series B
Convertible Subordinated Debentures, of the Notes to
Consolidated Financial Statements.
|
As of December 31, 2007, our employees held stock options
to purchase 30.7 million shares, representing approximately
14% of our 215,156,077 shares of common stock then
outstanding and of which 30.0 million shares are currently
vested. An additional number of stock options generally will
vest and become exercisable, at the exercise price indicated,
during the calendar years indicated below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise Price
|
|
|
|
|
Number of Shares
|
|
Range
|
|
|
Average
|
|
|
Calendar Year
|
|
|
|
428,520
|
|
|
$
|
4.71 $8.77
|
|
|
$
|
8.07
|
|
|
|
2008
|
|
|
200,000
|
|
|
$
|
7.89 $8.70
|
|
|
$
|
8.30
|
|
|
|
2009
|
|
Since 2005 we have significantly increased the issuance of
equity in the form of restricted stock units (RSUs)
and performance share units (PSUs) (collectively,
stock units) to managing directors and other key
employees, as a means of better aligning the interests of these
employees with our shareholders and to enhance the retention of
current managing directors. As of December 31, 2007, an
aggregate of 12.2 million RSUs and 18.2 million PSUs,
net of share settlements and forfeitures, were issued and
outstanding. The following shares of common stock are expected
to be delivered upon settlement of these stock units during the
calendar years indicated below (assuming the vesting of PSUs at
100%):
|
|
|
|
|
Number of Shares
|
|
Calendar Year
|
|
|
4,030,861
|
|
|
2008
|
|
2,066,161
|
|
|
2009
|
|
24,195,155
|
|
|
2010 and thereafter
|
Under the terms of our 2007 Credit Facility, we are limited in
our ability to repurchase shares and apply share withholding for
payroll tax obligations due from employees in connection with
the settlement of their RSUs. Consequently, upon settlement of
these RSUs, our employees are likely to sell significant numbers
of their shares into the market in order to pay for their tax
withholding obligations.
19
There are significant limitations on the ability of any
person or company to acquire the Company without the approval of
our Board of Directors (the Board).
We have adopted a stockholders rights plan. Under this
plan, after the occurrence of specified events that may result
in a change of control, our stockholders will be able to
purchase stock from us or our successor at half the then current
market price. This right will not extend, however, to persons
participating in takeover attempts without the consent of our
Board or to persons whom the Board determines to be adverse to
the interests of the stockholders. Accordingly, this plan could
deter takeover attempts.
In addition, our certificate of incorporation and bylaws each
contains provisions that may make the acquisition of our company
more difficult without the approval of our Board. These
provisions include the following, among others:
|
|
|
|
|
our Board is classified into three classes, each of which will
serve for staggered three-year terms;
|
|
|
|
a director may be removed by our stockholders only for cause and
then only by the affirmative vote of two-thirds of our voting
stock;
|
|
|
|
only our Board or the Chairman of the Board may call special
meetings of our stockholders;
|
|
|
|
our stockholders may not take action by written consent;
|
|
|
|
our stockholders must comply with advance notice procedures in
order to nominate candidates for election to our Board or to
place stockholders proposals on the agenda for
consideration at meetings of the stockholders;
|
|
|
|
if stockholder approval is required by applicable law, any
mergers, consolidations and sales of all or substantially all of
our assets must be approved by the affirmative vote of at least
two-thirds of our voting stock; and
|
|
|
|
our stockholders may amend or repeal any of the foregoing
provisions of our certificate of incorporation or our bylaws
only by a vote of two-thirds of our voting stock.
|
|
|
ITEM 1B.
|
UNRESOLVED
STAFF COMMENTS
|
None.
Our properties consist of leased office facilities for specific
client contracts and for sales, support, research and
development, consulting, administrative and other professional
personnel. Our corporate headquarters consists of approximately
235,000 square feet in McLean, Virginia. As of
December 31, 2007, we occupied approximately 88 additional
offices in the United States and approximately 60 offices in
Latin America, Canada, the Asia Pacific region and EMEA. All of
our office space generally is leased pursuant to operating
leases that expire over various periods during the next
10 years. Portions of our office space are sublet under
operating lease agreements that expire over various periods
during the next 7 years and are also being marketed for
sublease or disposition. Although we believe our facilities are
adequate to meet our needs in the near future, our business
requires that our lease holdings accommodate the dynamic needs
of our various consulting engagements and, given business
demands, the makeup of our leasehold portfolio may change within
the next twelve-month period to address these demands.
In May 2007, in connection with the settlement of our dispute
with KPMG LLP (KPMG) regarding the transition
services agreement entered into with KPMG in connection with our
initial public offering, we amended certain real estate
documents relating to a number of properties that we currently
sublet from KPMG to either allow us to further sublease these
properties to third parties, or to return certain properties we
no
20
longer utilize to KPMG, in return for a reduction of the amount
of our sublease obligations to KPMG for those properties.
|
|
ITEM 3.
|
LEGAL
PROCEEDINGS
|
Overview
We currently are a party to a number of disputes that involve or
may involve litigation or other legal or regulatory proceedings.
Generally, there are three types of legal proceedings to which
we may be made a party:
|
|
|
|
|
Claims and investigations arising from our inability to timely
file periodic reports under the Exchange Act, and the
restatement of our financial statements for certain prior
periods to correct accounting errors and departures from
generally accepted accounting principles for those years
(SEC Reporting Matters);
|
|
|
|
Claims and investigations being conducted by agencies or
officers of the U.S. Federal government and arising in
connection with our provision of services under contracts with
agencies of the U.S. Federal government (Government
Contracting Matters); and
|
|
|
|
Claims made in the ordinary course of business by clients
seeking damages for alleged breaches of contract or failure of
performance, by current or former employees seeking damages for
alleged acts of wrongful termination or discrimination, and by
creditors or other vendors alleging defaults in payment or
performance.
|
We currently maintain insurance in types and amounts customary
in our industry, including coverage for professional liability,
general liability and management and director liability. Based
on managements current assessment and insurance coverages
believed to be available, we believe that the Companys
financial statements include adequate provision for estimated
losses that are likely to be incurred with regard to all matters
of the types described above.
SEC
Reporting Matters
2005 Class Action Suits. In and after April 2005,
various separate complaints were filed in the U.S. District
Court for the Eastern District of Virginia, alleging that the
Company and certain of its current and former officers and
directors violated Section 10(b) of the Exchange Act,
Rule 10b-5
promulgated thereunder and Section 20(a) of the Exchange
Act by, among other things, making materially misleading
statements between August 14, 2003 and April 20, 2005
with respect to our financial results in our SEC filings and
press releases. On January 17, 2006, the court certified a
class, appointed class counsel and appointed a class
representative. The plaintiffs filed an amended complaint on
March 10, 2006 and the defendants, including the Company,
subsequently filed a motion to dismiss that complaint, which was
fully briefed and heard on May 5, 2006. We were awaiting a
ruling when, on March 23, 2007, the court stayed the case,
pending the U.S. Supreme Courts decision in the case
of Makor Issues & Rights, Ltd v. Tellabs,
argued before the Supreme Court on March 28, 2007. On
June 21, 2007, the Supreme Court issued its opinion in the
Tellabs case, holding that to plead a strong inference of
a defendants fraudulent intent under the applicable
federal securities laws, a plaintiff must demonstrate that such
an inference is not merely reasonable, but cogent and at least
as compelling as any opposing inference of non-fraudulent
intent. On September 12, 2007, the court dismissed with
prejudice this complaint, granting motions to dismiss filed by
the Company and the other named defendants. In granting the
Companys motion to dismiss, the court ruled that the
plaintiff failed to meet the scienter pleading requirements set
forth in the Private Securities Litigation Reform Act of 1995,
as amended. On September 26, 2007, the plaintiffs filed a
motion that seeks a reversal of the courts order
dismissing the case or an amendment to the courts order
that would allow the plaintiffs to replead. The Company filed
its brief on October 17, 2007 and although a hearing on the
plaintiffs motion was scheduled
21
for November 16, 2007, the court canceled the hearing as
not necessary. On November 19, 2007, the court issued an
order denying the plaintiffs motion to amend or alter the
courts September 12, 2007 dismissal of this matter.
The plaintiffs have appealed the matter to the U.S. Court
of Appeals for the Fourth Circuit.
2005 Shareholders Derivative Demand. On
May 21, 2005, we received a letter from counsel
representing one of our shareholders requesting that we initiate
a lawsuit against our Board and certain present and former
officers of the Company, alleging breaches of the officers
and directors duties of care and loyalty to the Company
relating to the events disclosed in our report filed on
Form 8-K,
dated April 20, 2005. On January 21, 2006, the
shareholder filed a derivative complaint in the Circuit Court of
Fairfax County, Virginia, that was not served on the Company
until March 2006. The shareholders complaint alleged that
his demand was not acted upon and alleged the breach of
fiduciary duty claims previously stated in his demand. The
complaint also included a non-derivative claim seeking the
scheduling of an annual meeting in 2006. On May 18, 2006,
following an extensive audit committee investigation, our Board
responded to the shareholders demand by declining at that
time to file a suit alleging the claims asserted in the
shareholders demand. The shareholder did not amend the
complaint to reflect the refusal of his demand. We filed
demurrers on August 11, 2006, which effectively sought to
dismiss the matter related to the fiduciary duty claims. On
November 3, 2006, the court granted the demurrers and
dismissed the fiduciary claims, with leave to file amended
claims. As a result of our annual meeting of stockholders held
on December 14, 2006, the claim seeking the scheduling of
an annual meeting became moot. On January 3, 2007, the
plaintiff filed an amended derivative complaint re-asserting the
previously dismissed derivative claims and alleging that the
Boards refusal of his demand was not in good faith. The
Company and the other defendants renewed their motion to dismiss
all remaining claims by filing demurrers, which argument was
heard on March 23, 2007. On February 20, 2008, the
court granted the demurrers and dismissed the claims with
prejudice.
SEC Investigation. On April 13, 2005, pursuant to
the same matter number as its inquiry concerning our restatement
of certain financial statements issued in 2003, the staff of the
SECs Division of Enforcement requested information and
documents relating to our March 18, 2005
Form 8-K.
On September 7, 2005, we announced that the staff had
issued a formal order of investigation in this matter. We
subsequently have received subpoenas from the staff seeking
production of documents and information, including certain
information and documents related to an investigation conducted
by our Audit Committee. We continue to provide information and
documents to the SEC as requested. The investigation is ongoing
and the SEC is in the process of taking the testimony of a
number of our current and former employees, as well as one of
our former directors.
In connection with the investigation by our Audit Committee, we
became aware of incidents of possible non-compliance with the
Foreign Corrupt Practices Act and our internal controls in
connection with certain of our operations in China and
voluntarily reported these matters to the SEC and
U.S. Department of Justice in November 2005. Both the SEC
and the Department of Justice are investigating these matters in
connection with the formal investigation described above. On
March 27, 2006, we received a subpoena from the SEC
regarding information related to these matters and has responded
to their requests through the summer of 2006. We have not
received any further requests since that time.
Government
Contracting Matters
A significant portion of our business relates to providing
services under contracts with the U.S. Federal government
or state and local governments, inclusive of government
sponsored enterprises. These contracts are subject to extensive
legal and regulatory requirements and, from time to time,
agencies of the U.S. Federal government or state and local
governments investigate whether our operations are being
conducted in accordance with these requirements and the terms of
the relevant contracts. In the ordinary course of business,
various government investigations are ongoing. U.S. Federal
government investigations of the Company, whether relating to
these contracts or conducted for other reasons, could result in
administrative, civil or criminal liabilities, including
repayments, fines or penalties being imposed upon us, or could
lead to suspension or debarment from future U.S. Federal
government contracting. It cannot be determined at this time
22
whether any findings, conclusions, penalties, fines or other
amounts determined to be applicable to us in any such
investigation could have a material effect on our results of
operation, outlook or business prospects.
|
|
ITEM 4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
As previously reported, on November 5, 2007, we held our
2007 Annual Meeting of Stockholders. Set forth below is
information concerning each matter submitted to a vote at the
meeting.
|
|
|
|
(1)
|
Election of Directors. Our stockholders elected
the following persons as Class I directors to hold office
until the annual meeting of stockholders to be held in 2010 and
their respective successors have been duly elected and qualified.
|
|
|
|
|
|
|
|
|
|
Nominee for Class I Director
|
|
For
|
|
|
Withhold
|
|
|
Douglas C. Allred
|
|
|
152,960,864
|
|
|
|
28,469,643
|
|
Betsy J. Bernard
|
|
|
153,017,163
|
|
|
|
28,413,344
|
|
Spencer C. Fleischer
|
|
|
179,134,849
|
|
|
|
2,295,658
|
|
|
|
|
|
(2)
|
Ratification of Appointment of Ernst & Young
LLP. Our stockholders ratified the appointment of
Ernst & Young LLP as our independent registered public
accounting firm for 2007.
|
|
|
|
|
|
|
|
|
|
For
|
|
Against
|
|
|
Abstain
|
|
|
178,240,625
|
|
|
567,529
|
|
|
|
2,622,353
|
|
23
Executive
Officers of the Registrant
Information about our executive officers as of February 1,
2008, is provided below.
Judy A. Ethell, 49, has been Chief Financial Officer
since October 2006 and Executive Vice President
Finance and Chief Accounting Officer since July 2005.
Previously, she held various positions with
PricewaterhouseCoopers LLP between 1982 and 2005. From 2003 to
2005, Ms. Ethell was a Partner and Tax Site Leader of
PricewaterhouseCoopers LLP, where her duties included managing
client service, human resources, marketing, and management of
the St. Louis, Missouri Tax office. From 2001 to 2003,
Ms. Ethell was a National Tour Partner (Tax) of
PricewaterhouseCoopers LLP.
F. Edwin Harbach, 54, has been Chief Executive
Officer and a member of our Board since December 2007.
Mr. Harbach has also served as our President and Chief
Operating Officer from January 2007 to December 2007. From 1976
until his retirement in 2004, Mr. Harbach held various
positions with and served in leadership roles at Accenture Ltd,
a global management consulting, technology services and
outsourcing company, including Chief Information Officer,
Managing Partner of Japan and Managing Director of Quality and
Client Satisfaction.
Laurent C. Lutz, 47, has been General Counsel and
Secretary since March 2006. From 1999 to 2006, Mr. Lutz was
Assistant General Counsel, Corporate Finance and Securities, of
Accenture Ltd, a global management consulting, technology
services and outsourcing company.
The term of office of each officer continues until the election
and qualification of a successor, or otherwise in the discretion
of the Board.
There is no arrangement or understanding between any of the
above-listed officers and any other person pursuant to which any
such officer was elected as an officer.
None of the above-listed officers has any family relationship
with any director or other executive officer. See Item 13,
Certain Relationships and Related Transactions, and
Director Independence Related
Transactions Judy Ethell/Robert Glatz, for
information about Ms. Ethells relationship with
Robert Glatz, a former managing director and former member of
our management team.
24
PART II.
|
|
ITEM 5.
|
MARKET
FOR THE REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Market
Information
Our common stock is traded on the NYSE under the trading symbol
BE.
The following table sets forth the high and low sales prices for
our common stock as reported on the NYSE for the quarterly
periods indicated.
Price
Range of Common Stock
|
|
|
|
|
|
|
|
|
|
|
Price Range of
|
|
|
|
Common Stock
|
|
|
|
High
|
|
|
Low
|
|
|
2007
|
|
|
|
|
|
|
|
|
Fourth Quarter
|
|
|
5.19
|
|
|
|
2.45
|
|
Third Quarter
|
|
|
7.64
|
|
|
|
3.83
|
|
Second Quarter
|
|
|
8.00
|
|
|
|
6.90
|
|
First Quarter
|
|
|
8.56
|
|
|
|
7.33
|
|
2006
|
|
|
|
|
|
|
|
|
Fourth Quarter
|
|
|
8.89
|
|
|
|
7.44
|
|
Third Quarter
|
|
|
9.00
|
|
|
|
7.36
|
|
Second Quarter
|
|
|
9.59
|
|
|
|
7.55
|
|
First Quarter
|
|
|
9.16
|
|
|
|
7.77
|
|
Holders
At December 31, 2007, we had approximately 838 stockholders
of record.
Dividends
We have never paid cash dividends on our common stock, and we do
not anticipate paying any cash dividends on our common stock for
at least the next 12 months. We intend to retain all of our
earnings, if any, for general corporate purposes, and, if
appropriate, to finance the expansion of our business. Our 2007
Credit Facility contains limitations on our payment of
dividends. Our future dividend policy will also depend on our
earnings, capital requirements, financial condition and other
factors considered relevant by our Board.
25
Equity
Compensation Plan Information
Equity
Compensation Plan Information
(as of December 31, 2007)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of securities
|
|
|
|
|
|
|
|
|
|
remaining available
|
|
|
|
Number of securities
|
|
|
Weighted-average
|
|
|
for future issuance
|
|
|
|
to be issued upon
|
|
|
exercise price of
|
|
|
under equity
|
|
|
|
exercise of
|
|
|
outstanding
|
|
|
compensation plans
|
|
|
|
outstanding options,
|
|
|
options, warrants
|
|
|
(excluding securities
|
|
Plan Category
|
|
warrants and rights
|
|
|
and rights
|
|
|
reflected in column (a))
|
|
|
Equity Compensation Plans Approved by Security Holders
|
|
|
58,494,576
|
|
|
$
|
11.30
|
|
|
|
46,246,324
|
(1)(2)
|
Equity Compensation Plans Not Approved by Security Holders
|
|
|
1,950,825
|
(3)
|
|
$
|
7.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
60,445,401
|
|
|
$
|
11.17
|
|
|
|
46,246,324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Includes 22,098,610 shares of
common stock available for grants of stock options, restricted
stock, stock appreciation rights and other stock-based awards
under our Amended and Restated 2000 Long-Term Incentive Plan
(the LTIP) and 24,147,714 shares of common
stock available for issuance under our Amended and Restated
Employee Stock Purchase Plan (the ESPP).
|
|
(2)
|
|
Under the LTIP, the number of
shares of common stock authorized for grants or awards is
92,179,333. Under the ESPP, the number of shares of our common
stock available for purchase is 3,766,096 shares, plus an
annual increase on the first day of each of our fiscal years
beginning on July 1, 2001 and ending on June 30, 2026
equal to the lesser of (i) 30 million shares,
(ii) three percent of the shares outstanding on the last
day of the immediately preceding fiscal year or (iii) a
lesser number of shares as determined by our Board or the
Compensation Committee of the Board.
|
|
(3)
|
|
Consists of 888,325 outstanding
RSUs held by Mr. Harbach; and 1,000,000 outstanding options
and 62,500 outstanding RSUs held by Mr. You, all of which
were non-LTIP grants.
|
Issuer
Purchases of Equity Securities
The following table provides information relating to our
purchase of shares of common stock of the Company in 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar Value of
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
Shares that May
|
|
|
|
|
|
|
|
|
|
Shares Purchased
|
|
|
Yet Be Purchased
|
|
|
|
|
|
|
|
|
|
as Part of
|
|
|
Under Publicly
|
|
|
|
|
|
|
|
|
|
Publicly
|
|
|
Announced Plans
|
|
|
|
Total Number of
|
|
|
Average Price
|
|
|
Announced Plans
|
|
|
or Programs
|
|
Period
|
|
Shares Purchased
|
|
|
per Share
|
|
|
or Programs(1)
|
|
|
($ in millions)(1)
|
|
|
December 1, 2007 December 31, 2007
|
|
|
624,482
|
(2)
|
|
$
|
2.59
|
|
|
|
|
|
|
$
|
64.3
|
|
|
|
|
(1)
|
|
In July 2001, our Board authorized
us to repurchase up to $100.0 million of our common stock.
Any shares so repurchased are held as treasury shares. During
2007, there were no open market purchases by the Company of our
common stock.
|
(2)
|
|
In December 2007, as permitted
under the LTIP, we acquired an aggregate of 624,482 shares
of our common stock for an aggregate price of $1.6 million
in connection with share withholding for payroll tax obligations
due from employees and former employees for the issuance of
shares of common stock upon settlement of RSUs.
|
26
COMPARATIVE
STOCK PERFORMANCE
Our Peer Group (the Peer Group) consists of
Accenture Ltd, Computer Sciences Corporation, Electronic Data
Systems Corporation and Cap Gemini SA. We believe that the
members of the Peer Group are most comparable to us in terms of
client base, service offerings and size.
The following graph compares the total stockholder return on our
common stock from 2003 through 2007 with the total return on the
Standard & Poors (S&P) 500 Index and
the Peer Group. The graph assumes that $100 is invested
initially and all dividends are reinvested.
|
|
ITEM 6.
|
SELECTED
FINANCIAL DATA
|
Our selected financial data is derived from our audited
Consolidated Financial Statements and related Notes included
elsewhere in this report as of and for the years ended
December 31, 2007, 2006 and 2005. The selected data as of
and for the year ended December 31, 2004, as of and for the
six months ended December 31, 2003, and as of and for the
year ended June 30, 2003, are also derived from audited
financial statements. Through June 30, 2003, our fiscal
year ended on June 30. In February 2004, our Board approved
a change in our fiscal year-end to a twelve-month period ending
December 31. As a requirement of this change, the results
for the six-month period from July 1, 2003 to
December 31, 2003 were reported as a six-month transition
period. Selected financial data should be read in conjunction
with Item 7, Managements Discussion and
Analysis of Financial Condition and Results of Operation,
and the Consolidated Financial Statements and the related Notes
included herein.
27
Statements
of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
|
|
|
Year Ended
|
|
|
Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2003
|
|
|
|
(in thousands, except per share amounts)
|
|
|
Revenue
|
|
$
|
3,455,562
|
|
|
$
|
3,444,003
|
|
|
$
|
3,388,900
|
|
|
$
|
3,375,782
|
|
|
$
|
1,522,503
|
|
|
$
|
3,157,898
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of service:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of service(1)
|
|
|
2,966,168
|
|
|
|
2,863,856
|
|
|
|
3,001,327
|
|
|
|
2,816,559
|
|
|
|
1,221,249
|
|
|
|
2,436,864
|
|
Lease and facilities restructuring charge
|
|
|
20,869
|
|
|
|
29,621
|
|
|
|
29,581
|
|
|
|
11,699
|
|
|
|
61,436
|
|
|
|
17,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs of service
|
|
|
2,987,037
|
|
|
|
2,893,477
|
|
|
|
3,030,908
|
|
|
|
2,828,258
|
|
|
|
1,282,685
|
|
|
|
2,454,147
|
|
Gross profit
|
|
|
468,525
|
|
|
|
550,526
|
|
|
|
357,992
|
|
|
|
547,524
|
|
|
|
239,818
|
|
|
|
703,751
|
|
Amortization of purchased intangible assets
|
|
|
|
|
|
|
1,545
|
|
|
|
2,266
|
|
|
|
3,457
|
|
|
|
10,212
|
|
|
|
45,127
|
|
Goodwill impairment charge(2)
|
|
|
|
|
|
|
|
|
|
|
166,415
|
|
|
|
397,065
|
|
|
|
127,326
|
|
|
|
|
|
Selling, general and administrative expenses(1)
|
|
|
701,317
|
|
|
|
748,250
|
|
|
|
750,867
|
|
|
|
641,176
|
|
|
|
272,250
|
|
|
|
550,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(232,792
|
)
|
|
|
(199,269
|
)
|
|
|
(561,556
|
)
|
|
|
(494,174
|
)
|
|
|
(169,970
|
)
|
|
|
108,526
|
|
Insurance settlement
|
|
|
|
|
|
|
38,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest / other expense, net(3)
|
|
|
(57,698
|
)
|
|
|
(19,774
|
)
|
|
|
(37,966
|
)
|
|
|
(17,644
|
)
|
|
|
(1,773
|
)
|
|
|
(10,493
|
)
|
Loss on early extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22,617
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before taxes
|
|
|
(290,490
|
)
|
|
|
(181,043
|
)
|
|
|
(599,522
|
)
|
|
|
(534,435
|
)
|
|
|
(171,743
|
)
|
|
|
98,033
|
|
Income tax expense(4)
|
|
|
72,233
|
|
|
|
32,397
|
|
|
|
122,121
|
|
|
|
11,791
|
|
|
|
4,872
|
|
|
|
65,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income applicable to common stockholders(5)
|
|
|
(362,723
|
)
|
|
|
(213,440
|
)
|
|
|
(721,643
|
)
|
|
|
(546,226
|
)
|
|
|
(176,615
|
)
|
|
|
32,691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings per share basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income applicable to common stockholders
|
|
$
|
(1.68
|
)
|
|
$
|
(1.01
|
)
|
|
$
|
(3.59
|
)
|
|
$
|
(2.77
|
)
|
|
$
|
(0.91
|
)
|
|
$
|
0.18
|
|
Balance
Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2003
|
|
|
|
(in thousands)
|
|
|
Cash, cash equivalents, and restricted cash(6)
|
|
$
|
468,518
|
|
|
$
|
392,668
|
|
|
$
|
376,587
|
|
|
$
|
265,863
|
|
|
$
|
122,475
|
|
|
$
|
121,790
|
|
Total assets
|
|
|
1,981,404
|
|
|
|
1,939,240
|
|
|
|
1,972,426
|
|
|
|
2,182,707
|
|
|
|
2,211,613
|
|
|
|
2,150,210
|
|
Long-term liabilities(7)
|
|
|
1,538,801
|
|
|
|
1,078,930
|
|
|
|
976,501
|
|
|
|
648,565
|
|
|
|
408,324
|
|
|
|
375,991
|
|
Total debt
|
|
|
974,643
|
|
|
|
671,850
|
|
|
|
674,760
|
|
|
|
423,226
|
|
|
|
248,228
|
|
|
|
277,176
|
|
Total liabilities(7)
|
|
|
2,450,693
|
|
|
|
2,116,541
|
|
|
|
2,017,998
|
|
|
|
1,558,009
|
|
|
|
1,141,618
|
|
|
|
1,006,990
|
|
Total stockholders (deficit) equity(7)
|
|
|
(469,289
|
)
|
|
|
(177,301
|
)
|
|
|
(45,572
|
)
|
|
|
624,698
|
|
|
|
1,069,995
|
|
|
|
1,143,220
|
|
|
|
|
(1)
|
|
During the year ended
December 31, 2007, an adjustment of $7.6 million was
recorded, comprised of $2.5 million within costs of service
and $5.1 million within selling, general and administrative
expenses, to true up the stock-based compensation expense
calculated with an estimated forfeiture rate and capture the
impact of unanticipated forfeitures that occurred in the fourth
quarter of 2007.
|
|
(2)
|
|
During the years ended
December 31, 2005 and 2004 and the six months ended
December 31, 2003, we recorded goodwill impairment charges
of $166.4 million, $397.1 million and
$127.3 million, respectively. For additional
|
28
|
|
|
|
|
information regarding these
goodwill impairment charges and international acquisitions, see
Note 5, Business Acquisitions, Goodwill and Other
Intangible Assets, of the Notes to Consolidated Financial
Statements.
|
|
(3)
|
|
During the year ended
December 31, 2004, we recorded a change in accounting
principle resulting in a charge of $0.5 million related to
the elimination of a one-month lag in reporting for certain Asia
Pacific subsidiaries, as well as a subsidiary within the EMEA
region. While the elimination of the one-month lag is considered
a change in accounting principle, the effect of the change is
included in other income (expense) due to the immateriality of
the change in relation to consolidated net loss.
|
|
(4)
|
|
During the year ended
December 31, 2005, we recorded a valuation allowance of
$55.3 million, primarily against our U.S. deferred tax
assets to reflect our conclusion that it is more likely than not
that these tax benefits would not be realized. For additional
information, see Note 14, Income Taxes, of the
Notes to Consolidated Financial Statements.
|
|
(5)
|
|
During the fourth quarter of 2006,
the one-month reporting lag in the remaining EMEA entities was
eliminated. The elimination of one month of activity increased
our 2006 consolidated net loss for the year ended
December 31, 2006 by $1.2 million.
|
|
(6)
|
|
Restricted cash amounts at
December 31, 2007, 2006, 2005 and 2004 were
$1.7 million, $3.1 million, $121.2 million and
$21.1 million, respectively. As of December 31, 2003
and June 30, 2003, there was no restricted cash.
|
|
(7)
|
|
During the year ended
December 31, 2007, we recognized an increase of
approximately $119.8 million in liability for unrecognized
tax benefits, which was reflected as an increase to the
January 1, 2007 balance of accumulated deficit as a result
of adopting the provisions of Financial Accounting Standards
Board (FASB) Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, as of
January 1, 2007.
|
29
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
|
The following Managements Discussion and Analysis of
Financial Condition and Results of Operation
(MD&A) should be read in conjunction with the
Consolidated Financial Statements and the Notes to Consolidated
Financial Statements included elsewhere in this Annual Report.
This Annual Report contains forward-looking statements that
involve risks and uncertainties. See Forward-Looking
Statements.
Overview
We want to be recognized as the world leader in management and
technology consulting, admired for our passion and respected for
our ability to solve our clients most important
challenges. We provide strategic consulting applications
services, technology solutions and managed services to
government organizations, Global 2000 companies and
medium-sized businesses in the United States and
internationally. In North America, we provide consulting
services through our Public Services, Commercial Services and
Financial Services industry groups in which we focus significant
industry-specific knowledge and service offerings to our
clients. Outside of North America, we are organized on a
geographic basis, with operations in EMEA, the Asia Pacific
region and Latin America.
Economic and Industry Factors
We believe that our clients spending for consulting
services is partially correlated to, among other factors, the
performance of the domestic and global economy as measured by a
variety of indicators such as gross domestic product, government
policies, mergers and acquisitions activity, corporate earnings,
U.S. Federal and state government budget levels, inflation
and interest rates and client confidence levels, among others.
As economic uncertainties increase, clients interests in
business and technology consulting historically have turned more
to improving existing processes and reducing costs rather than
investing in new innovations. Demand for our services, as
evidenced by new contract bookings, also does not uniformly
follow changes in economic cycles. Consequently, we may
experience rapid decreases in new contract bookings at the onset
of significant economic downturns while the benefits of economic
recovery may take longer to realize. Mindful of this phenomenon
and the potential for increasing economic uncertainty in 2008,
our business plan places significant emphasis on continuing our
cost reduction and consolidation efforts, monitoring our
utilization rates, and making conservative estimates of minimal
to no revenue growth in 2008. In terms of achieving our
performance goals for 2008, we believe that the historic
resiliency of our Public Services business to economic
downturns, as well as the level of new bookings obtained in
2007, will aid us in achieving our business goals. Nonetheless,
most bookings are subject to cancellation on short notice and we
may be unable to rapidly and effectively adjust our cost
structure if we experience significant cancellations or
deferrals of work.
The markets in which we provide services are increasingly
competitive and global in nature. While supply and demand in
certain lines of business and geographies may support price
increases for some of our standard service offerings from time
to time, to maintain and improve our profitability we must
constantly seek to improve and expand our unique service
offerings and deliver our services at increasingly lower cost
levels. Our Public Services industry group, which is our
largest, also must operate within the U.S. Federal, state
and local government markets where unique contracting, budgetary
and regulatory regimes control how contracts are awarded,
modified and terminated. Budgetary constraints or reductions in
government funding may result in the modification or termination
of long-term government contracts, which could dramatically
affect the outlook of that business.
30
Revenue and Income Drivers
We derive substantially all of our revenue from professional
services activities. Our revenue is driven by our ability to
continuously generate new opportunities to serve clients, by the
prices we obtain for our service offerings, and by the size and
utilization of our professional workforce. Our ability to
generate new business is directly influenced by the economic
conditions in the industries and regions we serve, our
anticipation and response to technological change, the type and
level of technology spending by our clients and by our
clients perception of the quality of our work. Our ability
to generate new business is also indirectly and increasingly
influenced by our clients perceptions of our ability to
manage our ongoing issues surrounding our financial position and
SEC reporting capabilities.
Our gross profit consists of revenue less our costs of service.
The primary components of our costs of service include
professional compensation and other direct contract expenses.
Professional compensation consists of payroll costs and related
benefits associated with client service professional staff
(including bonuses, the vesting of various stock awards, tax
equalization for employees on foreign and long-term domestic
assignments and costs associated with reductions in workforce).
Other direct contract expenses include costs directly
attributable to client engagements. These costs include
out-of-pocket costs such as travel and subsistence for client
service professional staff, costs of hardware and software, and
costs of subcontractors. If we are unable to adequately control
or estimate these costs, or properly anticipate the sizes of our
client service and support staff, our profitability will suffer.
Our operating profit reflects our revenue less costs of service
and certain additional items that include, primarily, SG&A
expenses, which include costs related to marketing, information
systems, depreciation and amortization, finance and accounting,
human resources, sales force, and other expenses related to
managing and growing our business. Write-downs in the carrying
value of goodwill and amortization of intangible assets have
also reduced our operating profit.
Our operating cash flow is derived predominantly from gross
operating profit and how we manage our receivables and payables.
Key Performance Indicators
In evaluating our operating performance and financial condition,
we focus on the following key performance indicators: bookings,
revenue growth, gross margin (gross profit as a percentage of
revenue), utilization, days sales outstanding, free cash flow
and attrition.
|
|
|
|
|
Bookings. We believe that information regarding our new
contract bookings provides useful trend information regarding
how the volume of our new business changes over time. Comparing
the amount of new contract bookings and revenue provides us with
an additional measure of the short-term sustainability of
revenue growth. Information regarding our new bookings should
not be compared to, or substituted for, an analysis of our
revenue over time. There are no third-party standards or
requirements governing the calculation of bookings. New contract
bookings are recorded using then existing currency exchange
rates and are not subsequently adjusted for currency
fluctuations. These amounts represent our estimate at contract
signing of the net revenue expected over the term of that
contract and involve estimates and judgments regarding new
contracts as well as renewals, extensions and additions to
existing contracts. Subsequent cancellations, extensions and
other matters may affect the amount of bookings previously
reported; however, we do not revise previously reported
bookings. Bookings do not include potential revenue that could
be earned from a client relationship as a result of future
expansion of service offerings to that client, nor does it
reflect option years under contracts that are subject to client
discretion. We do not record unfunded U.S. Federal contracts as
new contract bookings while appropriation approvals remain
pending, as there can be no assurances that these approvals will
be forthcoming in the near future, if at all. Consequently,
there can be significant differences between the time of
contract signing and new contract booking recognition. Our level
of bookings provides an indication of how our business is
|
31
|
|
|
|
|
performing: a positive variance between bookings and revenue is
indicative of business momentum, a negative variance is
indicative of a business downturn. Nonetheless, we do not
characterize our bookings, or our engagement contracts
associated with new bookings, as backlog because our engagements
generally can be cancelled or terminated on short notice or
without notice.
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Revenue Growth. Unlike bookings, which provide only a
general sense of future expectations, period-over-period
comparisons of revenue provide a meaningful depiction of how
successful we have been in growing our business over time.
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We believe that it is also useful to monitor net revenue, as
well as revenue growth. Net revenue represents the actual amount
paid by our clients for the services we provide, as opposed to
services provided by others and ancillary costs and expenses.
Net revenue is a non-GAAP financial measure. The most directly
comparable financial measure in accordance with generally
accepted accounting principles in the United States of America
(GAAP) is revenue. Net revenue is derived by
reducing the components of revenue that consist of other direct
contract expenses, which are costs that are directly
attributable to client engagements. These costs include items
such as computer hardware and software, travel expenses for
professional personnel and costs associated with subcontractors.
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Gross Margin (gross profit as a percentage of revenue).
Gross margin is a meaningful tool for monitoring our ability
to control our costs of service. Analysis of the various cost
elements, including professional compensation expense, effects
of foreign exchange rate changes and the use of subcontractors,
as a percentage of revenue over time can provide additional
information as to the key challenges we are facing in our
business. The cost of subcontractors is generally more expensive
than the cost of our own workforce and can negatively impact our
gross profit. While the use of subcontractors can help us to win
larger, more complex deals, and also may be mandated by our
clients, we focus on limiting the use of subcontractors whenever
possible in order to minimize our costs. We also utilize certain
adjusted gross margin metrics in connection with the vesting and
settlement of certain employee incentive awards. For a
discussion of these metrics, see Item 11, Executive
Compensation Compensation Discussion and
Analysis.
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We also monitor contribution margin to better review
the profitability of our respective operating segments.
Contribution margin is a non-GAAP financial measure. The most
directly comparable financial measure in accordance with GAAP is
gross margin. Contribution margin is calculated by subtracting,
from net revenue, professional compensation, other costs of
service, SG&A and certain other allocations, and then
dividing by net revenue.
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Utilization. Utilization represents the percentage of
time our consultants are performing work, and is defined as
total hours charged to client engagements or to non-chargeable
client-relationship projects divided by total available hours
for any specific time period, net of holiday and paid vacation
hours.
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Days Sales Outstanding (DSO). DSO is an
operational metric that approximates the amount of earned
revenue that remains unpaid by clients at a given time. DSOs are
derived by dividing the sum of our outstanding accounts
receivable and unbilled revenue, less deferred revenue, by our
average net revenue per day. Average net revenue per
day is determined by dividing total net revenue for the
most recently ended trailing twelve-month period by 365.
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Free Cash Flow. Free cash flow is calculated by
subtracting purchases of property and equipment from cash
provided by operating activities. We believe free cash flow is a
useful measure because it allows better understanding and
assessment of our ability to meet debt service requirements and
the amount of recurring cash generated from operation after
expenditures for fixed assets. Free cash flow does not represent
our residual cash flow available for discretionary expenditures
as it excludes certain mandatory expenditures such as repayment
of maturing debt. We use free cash flow as a measure of
recurring operating cash flow. Free cash flow is a non-GAAP
financial measure. The most directly comparable financial
measure calculated in accordance with GAAP is net cash provided
by operating activities.
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Attrition. Attrition, or voluntary total employee
turnover, is calculated by dividing the number of our employees
who have chosen to leave the Company within a certain period by
the total average number of all employees during that same
period. Our attrition statistic covers all of our employees,
which we believe provides metrics that are more compatible with,
and comparable to, those of our competitors.
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Readers should understand that each of the performance
indicators identified above are utilized by many companies in
our industry and by those who follow our industry. There are no
uniform standards or requirements for computing these
performance indicators, and, consequently, our computations of
these amounts may not be comparable to those of our competitors.
2007
Highlights
We are not pleased with our overall performance in 2007. While
we made great strides in 2007 toward our goals of becoming
timely in the filing of our SEC periodic reports and
significantly reducing our SG&A expenses, we realized a net
loss of $362.7 million, as compared to a net loss of
$213.4 million for 2006. We also exceeded our year-end cash
balance target for 2007, ending the year with cash and cash
equivalents of $468.5 million.
For the fourth quarter of fiscal 2007, we realized a net loss of
$169.0 million, which was significantly above the average
of our net losses incurred in the first three quarters of fiscal
2007. Proactive management actions taken in the fourth quarter
and intended to drive further cost savings in 2008 contributed
significantly to the magnitude of this loss. These fourth
quarter management actions included, among other things, lease
and facilities restructuring costs of $20.6 million and
additional severance costs of $14.4 million. Also
contributing to the fourth-quarter loss was $58.8 million
in contract write-downs and loss accruals, a notable net
year-over-year increase over the fourth quarter of fiscal 2006.
Notwithstanding these fourth-quarter increases, total contract
write-downs and loss accruals for the full fiscal year continued
to show improvement, as compared to contract write-downs and
loss accruals for 2006 and 2005.
Of particular note in 2007 are the following:
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New contract bookings for 2007 were $2,864.9 million, a
decrease from new contract bookings of $3,130.0 million for
2006. Increases in new contract bookings in our EMEA and Asia
Pacific regions were more than offset by significant declines in
new contract bookings in our other operating segments.
Year-over-year decreases in Public Services bookings for 2007 of
slightly more than ten percent were substantially attributable
to the signing of several exceptionally large, multi-year
bookings in our SLED sector in early 2006.
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Our revenue for 2007 was $3,455.6 million, representing an
increase of $11.6 million, or 0.3%, over 2006 revenue of
$3,444.0 million. Revenue increases in Public Services,
EMEA, Latin America and Asia Pacific exceeded revenue declines
in Financial Services and Commercial Services. In analyzing
year-over-year revenue growth for 2007, consideration should
also be given to the effect in fiscal 2006 of two previously
disclosed settlements within the telecommunications industry and
the recognition of certain previously deferred revenue, the net
combined effect of which negatively impacted our revenue in 2006.
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Our gross profit for 2007 was $468.5 million, compared to
$550.5 million for 2006. Gross profit as a percentage of
revenue decreased to 13.6% during 2007 from 16.0% during 2006.
Revenue improvements and significant decreases in other direct
contract expenses were more than offset by increases in
professional compensation expense, with the most significant
portion of these increases attributable to expenses associated
with salaries and benefits and stock-based compensation.
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During 2006 and 2007, we worked with Hawaiian Telcom
Communications, Inc., a telecommunications industry client
(HT), to resolve issues relating to our delivery of
services for the design, build and operation of various
information technology systems. In 2006 and 2005, we
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accrued losses of $28.2 million and $111.7 million,
respectively, under our Contract with HT (the HT
Contract). On February 8, 2007, we entered into a
Settlement Agreement and Transition Agreement with HT. Pursuant
to the Settlement Agreement, we paid $52 million,
$38 million of which was paid by certain of our insurers,
and we waived approximately $29.6 million of invoices and
other amounts otherwise payable by HT to us. Due to the timing
of the Settlement Agreement being reached prior to the filing of
our 2006 financial statements, the amounts paid by the insurers
and the invoices that were waived were reflected in our
financial statements as of December 31, 2006, although the
$38 million payment was made subsequent to
December 31, 2006. In addition, the Transition Agreement
governed our transitioning of the remaining work under the HT
Contract to a successor provider, which has been completed. In
2006 and 2005, we incurred losses of $28.2 million and
$111.7 million, respectively, under the HT Contract.
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On June 18, 2007, we entered into a settlement with a
telecommunications industry client resolving the clients
claims under a client-initiated audit of certain of
our time and expense charges relating to an engagement that
closed in 2003. In connection with the settlement, we will make
six equal annual payments to the client for an aggregate amount
of $24 million, the first payment of which was made on the
signing date in return for a full release of the clients
claim and the opportunity to perform services for this client in
the future.
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On May 22, 2007, we settled certain disputes with KPMG that
had arisen between our companies related to a transition
services agreement executed in 2001. KPMG had asserted that we
were liable to it for approximately $31 million under the
agreement for certain technology service termination costs.
While neither company admitted any liability under these claims,
these claims were mutually released. In addition, we agreed to
amend a number of real estate subleases between KPMG and
BearingPoint, and to consent to the further subletting of
others. The settlement also included cash payments by us to KPMG
of an aggregate of $5 million over a three-year time frame.
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We incurred SG&A expenses of $701.3 million in 2007,
representing a decrease of $46.9 million, or 6.3%, from
SG&A expenses of $748.3 million in 2006. The decrease
was primarily due to reduced costs, including subcontracted
labor, directly related to the closing of our financial
statements, as well as savings from the reduction in the size of
our sales force. Partially offsetting these savings was
increased compensation expense for additional SG&A
personnel, additional recruiting costs incurred, and stock-based
compensation expense related to RSUs and PSUs. During 2007, we
incurred external costs of approximately $83.5 million
related to the preparation of our financial statements, our
auditors review and audit of our financial statements and
the testing of internal controls, compared with approximately
$128.2 million for 2006.
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During 2007, we implemented numerous new controls in our efforts
toward remediating our material weaknesses in internal control
over financial reporting. While some material weaknesses remain
(see Item 9A of this Annual Report), senior management
continues its focus on the full remediation of material
weaknesses and continues our goal of building a strong internal
control environment. We currently expect our remaining material
weaknesses to be fully remediated in 2008.
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In 2007, we realized a net loss of $362.7 million, or a
loss of $1.68 per share, representing an increase of
$149.3 million over a net loss of $213.4 million, or a
loss of $1.01 per share, in 2006. This change in net loss was
primarily attributable to:
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A decrease in gross profit of $82.0 million;
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An increase in interest expense of $24.0 million due to
interest attributable to our 2007 Credit Facility and the
acceleration of debt issuance costs resulting from the
termination of the 2005 Credit Facility; and
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An increase in income tax expense of $39.8 million.
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Contributing to the net loss for 2007 were $60.1 million of
bonus expense (which includes, among other things,
$6.3 million related to 2006 performance bonuses,
$10.6 million related to performance cash
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awards made in 2007 (described below) and $30.3 million
expected to be paid in 2008 for 2007 performance),
$97.1 million of non-cash compensation expense related to
the vesting of stock-based awards, $20.9 million of lease
and facilities restructuring charges, and the previously
mentioned $83.5 million in external costs related to the
preparation of our financial statements, our auditors
review and audit of our financial statements and the testing of
internal controls.
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Effective January 1, 2007, we adopted the provisions of
FASB Interpretation No. (FIN) 48,
Accounting for Uncertainty in Income Taxes
(FIN 48). FIN 48 supersedes Statement of
Financial Accounting Standards (SFAS) No. 5,
Accounting for Contingencies, as it relates to
income tax liabilities and changes the standard of recognition
that a tax contingency is required to meet before being
recognized in the financial statements. Upon adoption of
FIN 48 and after examining our existing tax contingencies
under the standards of FIN 48, we recognized an increase of
approximately $119.8 million in our long-term liability for
unrecognized tax benefits, which was reflected as an increase to
the January 1, 2007 balance of accumulated deficit.
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Final determination of a significant portion of the
Companys tax liabilities that will effectively be settled
remains subject to ongoing examination by various taxing
authorities, including the Internal Revenue Service. We are
actively pursuing strategies to favorably settle or resolve
these liabilities for unrecognized tax benefits. If we are
successful in mitigating these liabilities, in whole or in part,
the majority of the impact will be recorded as an adjustment to
income tax expense in the period of settlement.
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Utilization for 2007 was 77.2%, compared with 76.2% in 2006.
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As of December 31, 2007, our DSOs stood at 77 days,
representing a decrease of 5 days, or 6.1%, from our DSOs
at December 31, 2006.
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Free cash flow for 2007 and 2006 was ($231.5) million and
$8.1 million, respectively. Net cash (used in) provided by
operating activities in 2007 and 2006 was ($194.2) million
and $58.7 million, respectively. Purchases of property and
equipment in 2007 and 2006 were $37.3 million and
$50.6 million, respectively. The decrease in free cash flow
for 2007 was primarily attributable to an increase in net loss,
net of non-cash items, the timing of payment of significant
amounts of our accounts payable and, to a lesser degree,
increases to our combined accounts receivable and unbilled
revenue, despite a decrease in DSOs in 2007.
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In 2007 we adopted a new Standards of Business Conduct based on
best industry practices (to replace our prior Code of Business
Conduct and Ethics) and created a Compliance Committee comprised
of members of our senior management whose focus is to properly
organize and allocate the necessary resources to address
broader, Company-wide compliance efforts.
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In 2007, we hired Rick Martino as our Executive Vice President,
Human Resources. In December 2007, F. Edwin Harbach was
promoted to Chief Executive Officer from President and Chief
Operating Officer.
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During 2007, we spent approximately $25.3 million in
connection with the implementation of our new North American
financial reporting system. We finalized decisions regarding the
design of, and obtained licenses for the components needed to
substantially replace, our existing North American financial
reporting systems. This implementation is ongoing, with a number
of milestones, such as system integration review, system build
review and user test acceptance left to complete. For additional
information regarding the implementation of our North American
financial reporting systems, see Principal
Business Priorities for 2008 and Beyond Drive
Operational Excellence.
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As of December 31, 2007, we had approximately
17,100 full-time employees, including approximately 14,400
consulting professionals, which represented a decrease in
billable headcount of approximately 5.9% from full-time
employees and consulting professionals at December 31, 2006
of 17,500 and 15,300, respectively.
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Our voluntary, annualized attrition rate for 2007 was 24.7%,
compared to 25.6% for 2006. The highly competitive industry in
which we operate and our financial condition continue to make it
particularly critical and challenging for us to attract and
retain experienced personnel.
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In early 2007, we granted approximately 22.4 million PSUs
to our highest-performing managing directors and senior
managers. The PSUs were issued as single, three-year cliff
vesting awards rather than several, smaller, periodic awards,
primarily to promote the longer retention of our employees. As
of December 31, 2007, approximately 18.2 million PSUs
were outstanding. For additional information about the PSUs,
see Principal Business Priorities for 2008 and
Beyond Attract, Develop and Retain a
World-Class Employee Base.
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In early 2007, we granted performance cash awards providing for
the payment of up to $50 million to a group of our managing
directors and other high-performing senior-level employees,
including our executive officers (the Performance Cash
Awards). Generally, 50% of these awards may be earned on
December 31 in each of 2007 and 2008, subject to the achievement
of the same consolidated business unit contribution target
required under the PSUs. If the Performance Cash Awards are not
earned in 2007 and 2008, the awards may still be fully earned if
compounded average annual growth for the three-year period ended
December 31, 2009 is achieved. Amounts earned will be paid
by March 31, 2010 or, if the determination of whether
amounts have been earned cannot be made by March 31, within
30 days of the determination date. We did not meet the
consolidated business unit contribution target for 2007. For
additional information regarding consolidated business unit
contribution, see Item 11, Executive
Compensation Compensation Discussion and
Analysis.
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For 2006 and 2007, our Managing Director Compensation Plan (the
MD Compensation Plan) was not fully activated
because we were not current in the filing of our SEC periodic
reports. Even though the target levels of profitability under
the MD Compensation Plan were not achieved in either year, we
decided to pay performance-based cash bonuses for retention
purposes and because we were able to sustain our underlying
operations and our core business continued to perform, despite
the issues we continue to face with respect to our financial
accounting systems and efforts to become timely in our SEC
periodic reports. In 2007, we paid performance-based cash
bonuses totaling approximately $50 million
($33 million to staff, $17 million to managing
directors), based on 2006 performance. In addition, we have
accrued performance-based cash bonuses totaling approximately
$30 million ($15 million to staff, $15 million to
managing directors), to be paid in 2008.
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In 2007, upon the recommendation of our Chief Executive Officer,
the Compensation Committee of our Board agreed, for 2008, not to
activate the provision of our MD Compensation Plan that provides
for 20% of a managing directors salary to be paid two
fiscal quarters after the compensation has been earned, as
determined by the Companys performance. We expect to
review the plan this year, in order to revisit whether it is
still properly aligned with our current business and employee
retention objectives.
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During 2007, we continued our partnership with Yale University
to create the BearingPoint Leadership Program at Yale School of
Management, an innovative education and training program
focusing on career and leadership development for our employees.
In 2007, approximately 1,500 employees participated in the
Yale program, and we currently estimate approximately 2,000 will
participate in 2008. Participants are taught a curriculum
jointly developed by a faculty composed of both Yale professors
and BearingPoint specialists, including a consulting skills
workshop for experienced professionals and management skills
training for newly hired or promoted managers and managing
directors.
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In April 2007, the U.S. Defense Contract Audit Agency
(DCAA) issued a report on its audit of our financial
capability, which concluded that our financial condition is
acceptable for performing government contracts. The DCAA
examined our financial condition and capability to determine if
we have adequate financial resources to perform government
contracts in the current and near-term (up to one year).
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On February 6, 2007, Standard & Poors
withdrew our senior unsecured rating of B- and our subordinated
debt rating of CCC+ and removed them from CreditWatch.
Separately, on December 7, 2007, Moodys confirmed our
B2 corporate family rating, assigned us a negative rating
outlook and downgraded the ratings of our Series A
Debentures and Series B Debentures to Caa1 from B3.
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In early 2007, we launched a new brand strategy and messaging
platform to more aggressively increase awareness of BearingPoint
as a leading global management and technology company. This
included an internal launch of our branding campaign to our
employees to help improve communication, increase employee
morale and retention, and equip employees with enhanced sales
and marketing materials to be more successful in the
marketplace. In connection with our new brand strategy, we
initiated a fully integrated marketing program featuring our
re-designed Internet site, print and online advertising, events,
sponsorships, thought leadership, public relations and client
references.
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In 2007, we received a number of high-profile awards and
industry recognition, providing independent, third-party
acknowledgement of our significant company achievements and
capabilities. These accolades included:
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Named Worldwide Systems Integrator of the Year by
FileNet.
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Designated 2007 Global Systems Integrator of the
Year by Cognos.
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Won SAP Pinnacle Award for Thought Leadership in Enterprise
Service-Oriented
Architecture.
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Called a leader in Risk Consulting Services by Forrester.
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Listed among leading companies in the InformationWeek 500.
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Named as one of the Top 10 Most Trusted Management
Consulting Firms in China by the China Enterprise
Confederation.
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Effective as of October 22, 2007, our Board approved an
amendment to our existing shareholder rights agreement. As
amended, a shareholders right under the agreement to
acquire additional shares of stock will not trigger unless
(a) a shareholder who is a passive investor
acquires 20% or more of our common stock or (b) a
shareholder who is not a passive investor acquires
15% or more of our common stock. Prior to the amendment, these
rights were triggered upon a shareholder acquiring 15% or more
of our common stock in all instances.
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Principal
Business Priorities for 2008 and Beyond
For 2008, our principal business priorities are to:
(1) leverage opportunities across our global footprint;
(2) attract, develop and retain a world-class employee
base; and (3) strive for operational excellence and
profitability. Managements current and planned initiatives
to achieve these priorities are set forth below.
Leverage Opportunities Across our Global Footprint. We
must strengthen our global delivery model to create greater
opportunities and scale our offerings and solutions that offer
the greatest opportunities for growth and profitability. We
believe that operating globally will help us better serve our
clients needs, provide us with an advantage over regional
competitors and allow us to maintain a diverse portfolio that
can help to sustain our business during economic downturns.
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Leverage our Global Delivery Model. We remain committed
to our global delivery model, and we will continue to deliver
consistent, sustainable solutions to our clients worldwide,
while maintaining world class on-shore and off-shore
capabilities to meet the ever changing needs of our clients.
This includes: optimizing our global operating model and
delivery capabilities; leveraging our strong Public Services
franchise globally; and building market awareness under one
global brand.
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Maintain Focus on Key Clients, Marketing and Offerings.
We will continue to selectively target and focus on clients,
markets and offerings that we believe will offer the greatest
growth, profitability and opportunity. We will strategically
leverage our industry and solution expertise along with our
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business partners and other core channels to market to
effectively deliver our capabilities in these areas.
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Differentiate through our Solutions. We will continue to
target and invest in higher-margin, higher-growth solutions that
are relevant to our clients needs and that we can provide
in a compelling, differentiated manner. In 2008, we will invest
in a profitable portfolio of solutions, continue to target
segments, geographies and accounts where we can grow, lead and
be profitable, and focus upon translating our intellectual
property and industry experience into innovative solutions to
key client needs.
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Attract, Develop and Retain a World-Class Employee
Base. As a professional services company, our employees are
the cornerstone of our success. We must attract, develop and
retain world-class talent. Under the leadership of our new
Executive Vice President, Human Resources, our goal is to build
a world-class human resources function that will help us hire
and retain our employees and provide outstanding training and
career opportunities for our people. Our initiatives for 2008
include:
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Reduce Employee Attrition. We continue in our efforts to
reduce attrition by raising our levels of employee ownership to
align the interests of our employees with those of our
shareholders, providing improved training opportunities, and
seeking to better understand and manage employee career
expectations. We experienced additional improvement in our
voluntary employee attrition rate during the fourth quarter of
2007, in comparison to the third quarter of 2007. We are
optimistic that becoming timely in our financial and SEC
periodic reporting and again being able to focus singularly on
our business strategy will continue to improve our attrition
rates.
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Promote a Pay for Performance Culture. We
believe that providing a pay for performance culture
that is communicated both clearly and consistently to our
employees will enhance their understanding of how to succeed
within our company. In 2008, we will strive to bring more
clarity and consistency to our bonus and equity programs to
effectively provide proper incentives to motivate and reward our
employees for their contributions to the success of our business.
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Increase Employee Share Ownership. During the fourth
quarter of 2007, we became current in the filing of our SEC
periodic reports, and were able to sell shares to our employees
under our ESPP. We expect to continue to provide our employees
with regular opportunities to acquire greater ownership in our
company through the ESPP.
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Enhance Employee Training. We plan to enhance career
development and training at all levels, including the expansion
of our Yale program, which has been highly successful in
training our employees, increasing employee satisfaction and
reducing attrition for those who attend the program.
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Monitor Employee Satisfaction. As part of our efforts to
maintain a culture consistent with our values, we will monitor
employee satisfaction through regular surveys and hold our
leaders accountable for improving the results of these surveys
and for taking appropriate actions to address concerns and
issues raised.
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Enhance our Equity Award Structure. In early 2007, we
granted approximately 22.4 million PSUs to our
highest-performing managing directors and senior managers. The
PSUs were issued as single, three-year cliff vesting awards
rather than several, smaller, periodic awards, primarily to
promote the longer retention of our employees. As of
December 31, 2007, approximately 18.2 million PSUs
were outstanding.
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Due to the complexity and uncertainty involved in determining
the likelihood of vesting of the PSUs, as well as the extended
timeframe for vesting and settlement, we have some concerns that
the PSUs may not significantly incent our employees to remain
with the Company. As long as these PSUs continue to remain
outstanding, our ability to take any other retentive actions by
issuing additional equity to our employees remains limited.
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We believe that providing equity to our employees is a key
element of our incentive compensation, to properly motivate
performance, increase their ownership in our business and align
their interests with those of our shareholders. As a result, in
2008 we are currently re-evaluating the efficacy of the PSUs as
a compensation tool and our ability to consider alternatives to
the PSUs that will have clearer retentive value for our
employees. Regardless of how we address the existing component
of our employees compensation, we currently do not intend
to seek approval from our shareholders for any further increase
to our share capacity under the LTIP prior to 2009.
Drive Operational Excellence. In order to achieve our
business goals, we must take actions that will increase revenue,
manage our costs of service and reduce our infrastructure costs.
In 2008, we will focus on the following:
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Drive Higher Operating Margins. We will strive to achieve
higher operating margins by targeting revenue growth in
strategic markets and through differentiated solutions, managing
our costs of service by monitoring our utilization rates,
broadening our people pyramid and enhancing our mix
of off-shore and on-shore service delivery, and continuing to
achieve infrastructure cost reductions through 2008.
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Generate a Culture of Accountability. We must strive to
drive higher operating margins through operational excellence
and financial discipline. We will monitor the metrics that we
believe are critical to driving profitability and positive cash
flow, and we will hold our employees accountable for their
performance. To further a culture of accountability, each of our
operating segments will be measured according to key performance
indicators of their respective business operations. For
information on these key performance indicators, see
Overview Key Performance
Indicators.
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Replace Our North American Financial Reporting Systems.
We are currently in the process of replacing our North
American financial reporting systems. To date, we are on
schedule and have completed various assessments of our new North
American financial system. In early 2008, we anticipate
completing the steps necessary to start systems integration
testing, such as mock data conversion, increasing involvement by
our operating segments, and the development of various reports,
interfaces and enhancements. Other major milestones to be
completed include: systems integration review, system build
review and user test acceptance.
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Strengthen our Balance Sheet. In 2008, we will continue
to seek improvements in our quarterly DSO balances and to
increase our operational focus on improving operating margins.
We are currently undertaking an extensive review of our current
capital structure and considering our alternatives for
optimizing the debt and equity components of that structure. In
April 2009, holders of our April 2005 Convertible Debentures
will have the right to demand payment of the principal of their
debentures. We believe that achieving our 2008 operational and
financial plans will permit us to honor these obligations by
making payments out of our cash balances. Being able to repay
these debentures with cash generated from our operations would
represent not only a significant de-leveraging of our balance
sheet but also a positive affirmation that our core business
remains solid and capable of operating profitably.
|
|
|
|
Remain Timely in our Financial and SEC Periodic Reporting.
With the filing of this Annual Report, we have become timely
in the filing of our SEC periodic reports for the first time
since 2005. We have not yet, however, demonstrated our ability
to consistently file our SEC periodic reports on a timely basis.
While we believe we have made significant improvements in our
periodic financial closing process, we will not be able to fully
minimize the amount of time required to conduct our periodic
financial closing process until we have remediated the material
weaknesses in our internal control over financial reporting and
fully transitioned to our new North American financial reporting
system. Based on our management teams most recent review,
we currently expect that all steps necessary to remediate our
remaining material weaknesses related to revenue recognition,
accounts payable disclosures and our Asia Pacific financial
statement close and reporting process will be completed during
2008. Full remediation can only be achieved, however, after
appropriate internal
|
39
|
|
|
|
|
assessment, including testing and auditing procedures have been
completed. As a result, the exact date of full remediation of
each material weakness remains subject to change. Until that
time, we will continue to maintain our focus on shortening our
financial closing process and enhancing our controls in order to
remain timely in the filing of our SEC periodic reports.
|
In 2008, we must demonstrate our ability to consistently file
our SEC periodic reports on a timely basis. If we are not timely
in filing our periodic reports on or after October 31,
2008, an event of default could be declared by our lenders under
our senior secured credit facility, which may result in the
lenders declaring our outstanding loans due and payable in whole
or in part, and potentially resulting in a cross-default to one
or more series of our convertible debentures.
Segments
Our reportable segments for 2007 consist of our three North
America Industry Groups (Public Services, Commercial Services
and Financial Services), our three international regions (EMEA,
Asia Pacific and Latin America) and the Corporate/Other category
(which consists primarily of infrastructure costs). Revenue and
gross profit information about our segments are presented below,
starting with each of our industry groups and then with each of
our three international regions (in order of size).
Our chief operating decision maker, the Chief Executive Officer,
evaluates performance and allocates resources among the
segments. Accounting policies of our segments are the same as
those described in Note 2, Summary of Significant
Accounting Policies, of the Notes to Consolidated
Financial Statements. Upon consolidation, all intercompany
accounts and transactions are eliminated. Inter-segment revenue
is not included in the measure of profit or loss for each
reportable segment. Performance of the segments is evaluated on
operating income excluding the costs of infrastructure functions
(such as information systems, finance and accounting, human
resources, legal and marketing) as described in Note 18,
Segment Information, of the Notes to Consolidated
Financial Statements. During 2005, we combined our
Communications, Content and Utilities and Consumer, Industrial
and Technology industry groups to form the Commercial Services
industry group.
Year
Ended December 31, 2007 Compared to Year Ended
December 31, 2006
Revenue. Our revenue for 2007 was $3,455.6 million,
an increase of $11.6 million, or 0.3%, over 2006 revenue of
$3,444.0 million. The following tables present certain
revenue information and performance metrics for each of our
reportable segments during 2007 and 2006. Amounts are in
thousands, except percentages. For additional geographical
revenue information, please see Note 18, Segment
Information, of the Notes to Consolidated Financial
Statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
$ Change
|
|
|
% Change
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public Services
|
|
$
|
1,432,645
|
|
|
$
|
1,339,358
|
|
|
$
|
93,287
|
|
|
|
7.0
|
%
|
Commercial Services
|
|
|
509,789
|
|
|
|
554,806
|
|
|
|
(45,017
|
)
|
|
|
(8.1
|
)%
|
Financial Services
|
|
|
264,198
|
|
|
|
399,331
|
|
|
|
(135,133
|
)
|
|
|
(33.8
|
)%
|
EMEA
|
|
|
791,298
|
|
|
|
703,083
|
|
|
|
88,215
|
|
|
|
12.5
|
%
|
Asia Pacific
|
|
|
362,715
|
|
|
|
360,001
|
|
|
|
2,714
|
|
|
|
0.8
|
%
|
Latin America
|
|
|
90,091
|
|
|
|
82,319
|
|
|
|
7,772
|
|
|
|
9.4
|
%
|
Corporate/Other
|
|
|
4,826
|
|
|
|
5,105
|
|
|
|
(279
|
)
|
|
|
n/m
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,455,562
|
|
|
$
|
3,444,003
|
|
|
$
|
11,559
|
|
|
|
0.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of
|
|
|
Revenue growth
|
|
|
|
|
|
|
currency
|
|
|
(decline), net of
|
|
|
|
|
|
|
fluctuations
|
|
|
currency impact
|
|
|
Total
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Public Services
|
|
|
0.0
|
%
|
|
|
7.0
|
%
|
|
|
7.0
|
%
|
Commercial Services
|
|
|
0.0
|
%
|
|
|
(8.1
|
)%
|
|
|
(8.1
|
)%
|
Financial Services
|
|
|
0.0
|
%
|
|
|
(33.8
|
)%
|
|
|
(33.8
|
)%
|
EMEA
|
|
|
9.4
|
%
|
|
|
3.1
|
%
|
|
|
12.5
|
%
|
Asia Pacific
|
|
|
1.7
|
%
|
|
|
(0.9
|
)%
|
|
|
0.8
|
%
|
Latin America
|
|
|
9.5
|
%
|
|
|
(0.1
|
)%
|
|
|
9.4
|
%
|
Corporate/Other
|
|
|
n/m
|
|
|
|
n/m
|
|
|
|
n/m
|
|
Total
|
|
|
2.3
|
%
|
|
|
(2.0
|
)%
|
|
|
0.3
|
%
|
n/m = not meaningful
|
|
|
|
|
Public Services revenue increased in 2007 due to
significant revenue growth in our Emerging Markets, SLED and
Civilian sectors. Revenue growth within these sectors was
partially derived from expected increases in work on several
large existing multi-year contracts signed in prior years.
Revenue in our Defense sector declined somewhat, due to
congressional decisions regarding ongoing funding by the
U.S. government of the continuing war on terrorism and
combat operations in Iraq and Afghanistan, as well as increased
budgetary pressures on U.S. defense spending. The
non-governmental portion of our Healthcare sector also
experienced revenue declines.
|
|
|
|
Commercial Services revenue decreased in 2007. While we
experienced significant revenue growth in our Energy sector as
client demand for the Companys industry-specific solutions
increased, overall, revenue decreased due to declines in the
Communications and Media, High Technology and Manufacturing
sectors. These declines were due, in part, to decreased business
levels caused by consolidation within the telecommunications
industry and disputes with two significant telecommunications
clients in that sector.
|
|
|
|
Financial Services revenue decreased in 2007 due to
significant revenue declines across all of its industry sectors.
Revenue decreases were attributable to several factors,
including the winding down of the segments largest client
engagement during 2007. The continuing effects of losses of
senior staff in certain of our higher rate business sectors also
attributed to revenue declines in 2007. In addition,
difficulties in securing long-term client commitments and delays
by clients in implementing new initiatives given the recently
reported industry-wide losses related to asset write-downs all
had a negative effect on revenue on a year-over-year basis.
|
|
|
|
EMEA revenue increased in 2007, primarily as a result of
the favorable impact of the strengthening of foreign currencies,
primarily the Euro, against the U.S. dollar, but also due
to significant revenue increases in France, Russia and
Switzerland. Revenue growth in France was due to an expanding
systems implementation practice while revenue growth in Russia
and Switzerland was generally attributable to increased demand
for our consulting services in those markets. These increases
were partially offset by revenue declines in Spain and the
United Kingdom. Revenue in the United Kingdom declined due to
the reduction in the volume of work provided to multi-national
clients in 2007, and the decline in revenue in Spain was
attributable to our strategic decision to reduce our activities
in this country.
|
|
|
|
Asia Pacific revenue increased in 2007, primarily as a
result of the favorable impact of the strengthening of foreign
currencies against the U.S. dollar. Significant revenue
growth was achieved in Japan and to a lesser extent in China.
These increases continue to be offset by lower revenue in
Australia, Korea and New Zealand. Japanese revenue increased due
to continued revenue growth from systems implementation
contracts and projects involving compliance with Japans
Financial Instruments and Exchange Law. This growth began in
2006 and has continued throughout 2007.
|
41
|
|
|
|
|
China revenue increased as a result of significant new contracts
signed with several large multi-national clients in 2007. Lower
revenue in Australia and New Zealand resulted from the winding
down or completion of several significant client engagements and
partially due to deteriorating market conditions.
|
|
|
|
|
|
Latin America revenue increased in 2007, with Brazil and
Mexico contributing equally to the growth in U.S. dollars.
The favorable impact of the strengthening of the Brazilian Real
against the U.S. dollar served to offset local currency
revenue declines in Brazil.
|
|
|
|
Corporate/Other: Our Corporate/Other segment does not
contribute significantly to our revenue.
|
Gross Profit. During 2007, our revenue increased
$11.6 million and total costs of service increased
$93.6 million when compared to 2006, resulting in a
decrease in gross profit of $82.0 million, or 14.9%. Gross
profit as a percentage of revenue decreased to 13.6% for 2007
from 16.0% for 2006. The change in gross profit for 2007
compared to 2006 resulted primarily from the following:
|
|
|
|
|
Professional compensation expense increased as a percentage of
revenue to 53.4% for 2007, compared to 49.8% for 2006. We
experienced a net increase in professional compensation expense
of $129.9 million, or 7.6%, to $1,846.6 million for
2007 over $1,716.6 million for 2006. The increase in
professional compensation was primarily due to merit-based
annual salary increases, increases in stock-based compensation
expense for PSUs, RSUs and, to a lesser extent, cash bonuses.
|
|
|
|
Other direct contract expenses decreased as a percentage of
revenue to 23.7% for 2007 compared to 26.0% for 2006. We
experienced a net decrease in other direct contract expenses of
$77.4 million, or 8.6%, to $819.6 million for 2007
from $897.0 million for 2006. The decrease was driven
primarily by reduced subcontractor expenses as a result of
increased use of our internal resources. In addition, the
decline was driven by higher other direct contract expenses
recorded in the first quarter of 2006 related to the HT Contract.
|
|
|
|
Other costs of service as a percentage of revenue increased to
8.7% for 2007 from 7.3% for 2006. We experienced a net increase
in other costs of service of $49.8 million, or 19.9%, to
$300.0 million for 2007 from $250.2 million for 2006.
The increase was primarily due to an increase in non-billable
employees over the prior year, due in part to the redeployment
of existing employees from client-facing roles to practice
support roles, which resulted in related salaries and expenses
now being reflected in other costs of service rather than
professional compensation expense.
|
|
|
|
In 2007 we recorded, within the Corporate/Other operating
segment, a charge of $20.9 million for lease and facilities
restructuring costs, compared to a $29.6 million charge for
lease and facilities restructuring costs in 2006. These costs
for 2007 related primarily to the fair value of future lease
obligations associated with office space, primarily within the
EMEA and North America regions, which we will no longer be using.
|
42
Gross Profit by Segment. The following tables present
certain gross profit and margin information and performance
metrics for each of our reportable segments for years 2007 and
2006. Amounts are in thousands, except percentages.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
$ Change
|
|
|
% Change
|
|
|
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public Services
|
|
$
|
263,431
|
|
|
$
|
263,841
|
|
|
$
|
(410
|
)
|
|
|
(0.2
|
)%
|
Commercial Services
|
|
|
81,656
|
|
|
|
81,419
|
|
|
|
237
|
|
|
|
0.3
|
%
|
Financial Services
|
|
|
41,627
|
|
|
|
135,187
|
|
|
|
(93,560
|
)
|
|
|
(69.2
|
)%
|
EMEA
|
|
|
153,959
|
|
|
|
129,523
|
|
|
|
24,436
|
|
|
|
18.9
|
%
|
Asia Pacific
|
|
|
81,946
|
|
|
|
80,448
|
|
|
|
1,498
|
|
|
|
1.9
|
%
|
Latin America
|
|
|
(11,240
|
)
|
|
|
9,058
|
|
|
|
(20,298
|
)
|
|
|
n/m
|
|
Corporate/Other
|
|
|
(142,854
|
)
|
|
|
(148,950
|
)
|
|
|
6,096
|
|
|
|
n/m
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
468,525
|
|
|
$
|
550,526
|
|
|
$
|
(82,001
|
)
|
|
|
(14.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Gross Profit as a Percentage of Revenue
|
|
|
|
|
|
|
|
|
Public Services
|
|
|
18.4
|
%
|
|
|
19.7
|
%
|
Commercial Services
|
|
|
16.0
|
%
|
|
|
14.7
|
%
|
Financial Services
|
|
|
15.8
|
%
|
|
|
33.9
|
%
|
EMEA
|
|
|
19.5
|
%
|
|
|
18.4
|
%
|
Asia Pacific
|
|
|
22.6
|
%
|
|
|
22.3
|
%
|
Latin America
|
|
|
(12.5
|
)%
|
|
|
11.0
|
%
|
Corporate/Other
|
|
|
n/m
|
|
|
|
n/m
|
|
Total
|
|
|
13.6
|
%
|
|
|
16.0
|
%
|
n/m = not meaningful
Changes in gross profit by segment were as follows:
|
|
|
|
|
Public Services gross profit remained relatively
unchanged in 2007. Significant year-over-year revenue increases
were offset by a significant increase in professional
compensation expense of $78.1 million, or 13.2%, over 2006,
and additional costs and revenue write-downs of approximately
$15 million were taken on two of our SLED sector contracts.
The increase in professional compensation expense was associated
with the hiring of additional personnel needed to meet the
demand for our services, as well as bonus payments and accruals,
and increases in stock-based compensation expense.
|
|
|
|
Commercial Services gross profit remained relatively
unchanged in 2007, with declines in subcontractor expenses,
professional compensation and reimbursable client expenses being
partially offset by reductions in revenue and contract losses.
In 2006, Commercial Services gross profit was negatively
impacted by losses of approximately $86.2 million
attributable to settlements reached with two telecommunications
clients, as compared to losses of approximately
$16.7 million in 2007, primarily in connection with a
single Communications and Media sector project.
|
|
|
|
Financial Services gross profit significantly decreased
in 2007, primarily due to significantly lower revenue combined
with a decline in higher margin engagements in the total mix of
engagements.
|
43
|
|
|
|
|
Declines in revenue were partially offset by declines in
compensation expense, reimbursable client expenses and
subcontractor expenses. These declines in costs of services were
at a slower pace than the declines in revenue, resulting in
lower gross profits in 2007 as compared to 2006.
|
|
|
|
|
|
EMEA gross profit increased in 2007, primarily due to
overall higher revenue in the EMEA region as well as improved
profitability in Germany, France and Switzerland as a result of
higher utilization and lower costs. This increase was partially
offset by an increase in professional compensation due to a
larger number of additional personnel to meet the demand for our
services and, to a lesser extent, an increase in other costs of
services. The increases in professional compensation and other
costs of services were partially offset by decreases in costs
associated with subcontractors due largely to our effort to
increase the use of internal resources.
|
|
|
|
Asia Pacific gross profit increased in 2007, due to
increased revenue and improvements in profitability and staff
utilization in our Japanese business. In addition, positive
growth in gross profit in the region was realized from decreases
in other direct contract expenses as a result of decreased
subcontractor usage in Japan, which were substantially offset by
higher professional compensation costs as well as increased
contract loss reserves of $12.1 million recorded during
2007 as compared to 2006.
|
|
|
|
Latin America gross profit decreased in 2007, due to
significant increases in compensation expense, other direct
contract expenses and contract
write-offs.
These increases were driven by an increase in employee
compensation recognized as a result of statutory overtime
regulations and other employee benefits in Brazil, and to a
lesser extent by increased subcontractor expenses in Mexico.
|
|
|
|
Corporate/Other consists primarily of rent expense and
other facilities related charges.
|
Amortization of Purchased Intangible Assets. We did not
incur any amortization expense in 2007 as our intangible assets
were fully amortized. Amortization of purchased intangible
assets was $1.5 million in 2006.
Selling, General and Administrative Expenses. Selling,
general and administrative expenses decreased
$46.9 million, or 6.3%, to $701.3 million for 2007
from $748.3 million for 2006. Selling, general and
administrative expenses as a percentage of gross revenue
decreased to 20.3% for 2007 from 21.7% for 2006. The decrease
was primarily due to reduced costs directly related to the
closing of our financial statements, primarily subcontracted
labor, as well as savings from the reduction in the size of our
sales force. Partially offsetting these savings was increased
compensation expense for additional SG&A personnel,
additional recruiting costs incurred and stock-based
compensation expense related to RSUs and PSUs.
Interest Income. Interest income was $12.1 million
and $8.7 million in 2007 and 2006, respectively. Interest
income is earned primarily from cash and cash equivalents,
including money-market investments. The increase in interest
income was due to a higher level of cash invested in money
markets during 2007.
Interest Expense. Interest expense was $61.2 million
and $37.2 million in 2007 and 2006, respectively. Interest
expense is attributable to our debt obligations, consisting of
interest due along with amortization of loan costs and loan
discounts. The increase in interest expense was due to interest
attributable to our 2007 Credit Facility, the acceleration of
debt issuance costs resulting from the termination of the 2005
Credit Facility, and, to a lesser extent, higher interest rates
on our debt obligations.
Insurance Settlement. During 2006, related to the
Settlement Agreement with HT, we recorded $38.0 million for
an insurance settlement. For additional information, see
Note 11, Commitments and Contingencies, of the
Notes to Consolidated Financial Statements.
Other (Expense) Income, net. Other expense, net, was
$8.6 million in 2007, and other income, net, was
$8.7 million in 2006. The balances in each period primarily
consisted of foreign currency exchange gains and losses.
44
Income Tax Expense. We incurred income tax expense of
$72.2 million for the year ended December 31, 2007 and
income tax expense of $32.4 million for the year ended
December 31, 2006. The principle reasons for the
differences between the effective income tax rate on loss from
continuing operations of (24.9)% and (17.9)% for years ended
December 31, 2007 and 2006, respectively, and the
U.S. Federal statutory income tax rate were: nondeductible
meals and entertainment expense of $19.0 million and
$22.0 million; increases to deferred tax asset valuation
allowance of $125.6 million and $76.8 million; state
and local income taxes of $(12.4) million and
$(6.7) million; foreign recapitalization and restructuring
of $17.3 million and $5.4 million; foreign taxes of
$17.4 million and $(3.8) million; income tax reserves
of $12.5 million and $8.4 million; non-deductible
interest of $7.8 million and $10.7 million; foreign
dividend income of $1.0 million and $13.6 million; and
other non-deductible items of $17.4 million and
$10.0 million, respectively.
Net Loss. For 2007, we incurred a net loss of
$362.7 million, or a loss of $1.68 per share. Contributing
to the net loss for 2007 were $60.1 million of bonus
expense (which includes, among other things, $6.3 million
related to 2006 performance bonuses, $10.6 million related
to the Performance Cash Awards and $30.3 million expected
to be paid in 2008 for 2007 performance), $97.1 million of
non-cash compensation expense related to the vesting of
stock-based awards, $20.9 million of lease and facilities
restructuring charges, and the previously mentioned
$83.5 million in external costs related to the preparation
of our financial statements, our auditors review and audit
of our financial statements and the testing of internal
controls. For 2006, we incurred a net loss of
$213.4 million, or a loss of $1.01 per share. Contributing
to the net loss for 2006 were $48.2 million of losses
related to the previously mentioned settlements with
telecommunications clients, $57.4 million of bonus expense,
$53.4 million of non-cash compensation expense related to
the vesting of stock-based awards, $29.6 million of lease
and facilities restructuring charges and the previously
mentioned $33.6 million year-over-year increase in external
costs related to the closing of our financial statements.
Year
Ended December 31, 2006 Compared to Year Ended
December 31, 2005
Revenue. Our revenue for 2006 was $3,444.0 million,
an increase of $55.1 million, or 1.6%, over 2005 revenue of
$3,388.9 million. The following tables present certain
revenue information and performance metrics for each of our
reportable segments during 2006 and 2005. Amounts are in
thousands, except percentages. For additional geographical
revenue information, please see Note 18, Segment
Information, of the Notes to Consolidated Financial
Statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
$ Change
|
|
|
% Change
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public Services
|
|
$
|
1,339,358
|
|
|
$
|
1,293,390
|
|
|
$
|
45,968
|
|
|
|
3.6
|
%
|
Commercial Services
|
|
|
554,806
|
|
|
|
663,797
|
|
|
|
(108,991
|
)
|
|
|
(16.4
|
)%
|
Financial Services
|
|
|
399,331
|
|
|
|
379,592
|
|
|
|
19,739
|
|
|
|
5.2
|
%
|
EMEA
|
|
|
703,083
|
|
|
|
662,020
|
|
|
|
41,063
|
|
|
|
6.2
|
%
|
Asia Pacific
|
|
|
360,001
|
|
|
|
312,190
|
|
|
|
47,811
|
|
|
|
15.3
|
%
|
Latin America
|
|
|
82,319
|
|
|
|
75,664
|
|
|
|
6,655
|
|
|
|
8.8
|
%
|
Corporate/Other
|
|
|
5,105
|
|
|
|
2,247
|
|
|
|
2,858
|
|
|
|
n/m
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,444,003
|
|
|
$
|
3,388,900
|
|
|
$
|
55,103
|
|
|
|
1.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of
|
|
|
Revenue growth
|
|
|
|
|
|
|
currency
|
|
|
(decline), net of
|
|
|
|
|
|
|
fluctuations
|
|
|
currency impact
|
|
|
Total
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Public Services
|
|
|
0.0
|
%
|
|
|
3.6
|
%
|
|
|
3.6
|
%
|
Commercial Services
|
|
|
0.0
|
%
|
|
|
(16.4
|
)%
|
|
|
(16.4
|
)%
|
Financial Services
|
|
|
0.0
|
%
|
|
|
5.2
|
%
|
|
|
5.2
|
%
|
EMEA
|
|
|
0.9
|
%
|
|
|
5.3
|
%
|
|
|
6.2
|
%
|
Asia Pacific
|
|
|
(3.2
|
)%
|
|
|
18.5
|
%
|
|
|
15.3
|
%
|
Latin America
|
|
|
9.3
|
%
|
|
|
(0.5
|
)%
|
|
|
8.8
|
%
|
Corporate/Other
|
|
|
n/m
|
|
|
|
n/m
|
|
|
|
n/m
|
|
Total
|
|
|
0.1
|
%
|
|
|
1.5
|
%
|
|
|
1.6
|
%
|
n/m = not meaningful
|
|
|
|
|
Public Services revenue increased in 2006, with strong
revenue growth in certain sectors, particularly in the SLED and
Emerging Markets sectors. SLED revenue increased due to
significant increases in revenue from a number of our key
clients. Emerging Markets revenue increased primarily from
revenue increases on several large existing multi-year contracts
and also from revenue associated with several new contracts
signed in 2006. Revenue declined in our Civilian business sector
due to reduced information technology spending and an
increasingly competitive environment.
|
|
|
|
Commercial Services revenue decreased in 2006, primarily
due to a $57.5 million year-over-year decrease in revenue
associated with the HT Contract and a reduction of
$20.0 million in revenue related to the resolution of a
billings dispute with another large telecommunications client
regarding an engagement completed in 2003. Reduced customer
demand for our services, particularly in the telecommunications
industry, also affected our revenue. These decreases were
partially offset by the recognition in 2006 of approximately
$22.3 million in previously deferred revenue.
|
|
|
|
Financial Services revenue increased in 2006, primarily
due to revenue growth in our Insurance and Banking sectors,
offset by declines in our Global Markets sector. Insurance
sector revenue increased in response to industry-wide demand for
major technology updates and upgrades to operational systems.
Banking sector revenue increases were attributable to existing
client engagements and the introduction of some new clients into
our traditional client base. Global Markets sector revenue
declined as we increased the proportion of work derived from
lower rate per hour offshore resources in response to client
demand, which affected our revenue.
|
|
|
|
EMEA revenue increased in 2006, primarily due to strong
revenue growth in the United Kingdom, France, Ireland and
Switzerland. Revenue growth in the United Kingdom was driven by
our continued expansion in that region, while France continued
to benefit from an expanding systems integration practice and
additional penetration into the French public sector market in
2006. Ireland and Switzerland revenue growth were generally
attributable to increased demand for consulting services in
local markets. Revenue in Germany declined due to a combination
of the impact of adjustments in billable headcount precipitated
by the restructuring of our German practice, increased pressure
on pricing, and a reduction in the spending levels of German
public sector clients.
|
|
|
|
Asia Pacific revenue increased in 2006, primarily due to
significant revenue growth in Australia and Japan. Australian
revenue increased primarily due to a significant new client
engagement in the telecommunications industry. Japanese revenue
increased due to revenue growth from system implementation
contracts and projects involving compliance with Japans
Financial Instruments and Exchange Law, though a substantial
portion of this revenue growth was derived from the use of
subcontractors. Asia Pacific revenue was negatively affected in
2006 by the weakening of foreign currencies against the
U.S. dollar, primarily the Japanese Yen.
|
46
|
|
|
|
|
Latin America revenue increased in 2006, primarily as a
function of the weakening of the U.S. dollar against local
currencies in Latin America (particularly the Brazilian Real),
along with local currency revenue growth and increasing
engagement hours in Brazil, offset by deteriorating revenue in
Mexico. Revenue in Brazil increased due to the addition of
significant client engagements, while revenue in Mexico declined
as they continue to restructure the business to position itself
for future growth.
|
|
|
|
Corporate/Other: Our Corporate/Other segment does not
contribute significantly to our revenue.
|
Gross Profit. During 2006, our revenue increased
$55.1 million and total costs of service decreased
$137.4 million when compared to 2005, resulting in an
increase in gross profit of $192.5 million, or 53.8%. Gross
profit as a percentage of revenue increased to 16.0% for 2006
from 10.6% for 2005. The change in gross profit for 2006
compared to 2005 resulted primarily from the following:
|
|
|
|
|
Professional compensation expense decreased as a percentage of
revenue to 49.8% for 2006, compared to 52.2% for 2005. We
experienced a net decrease in professional compensation expense
of $53.8 million, or 3.0%, to $1,716.6 million for
2006 from $1,770.4 million for 2005. The decrease in 2006
from 2005 was primarily due to higher professional compensation
expense recorded in 2005 (as compared to 2006) related to
the loss accrual for the HT Contract. Stock compensation expense
for 2006 was $41.0 million, as compared to
$76.3 million for 2005. Cash bonuses earned in 2006 by our
highest-performing employees were $49.0 million, as
compared to $17.8 million earned in 2005.
|
|
|
|
Other direct contract expenses decreased as a percentage of
revenue to 26.0% for 2006 compared to 28.7% for 2005. We
experienced a net decrease in other direct contract expenses of
$75.8 million, or 7.8%, to $897.0 million for 2006
from $972.8 million for 2005. The decrease in 2006 from
2005 was primarily due to other direct contract expenses
recorded in 2005 related to the loss accrual for the HT
Contract. In addition, the decline was driven by reduced
subcontractor expenses as a result of the increased use of
internal resources and a decrease of resales of procured
materials.
|
|
|
|
Other costs of service as a percentage of revenue decreased to
7.3% for 2006 from 7.6% for 2005. We experienced a net decrease
in other costs of service of $7.9 million, or 3.1%, to
$250.2 million for 2006 from $258.1 million for 2005.
The decrease in 2006 from 2005 was primarily attributable to a
reduction in administrative support and related costs for our
operating segments.
|
|
|
|
In 2006 we recorded, within the Corporate/Other operating
segment, a charge of $29.6 million for lease and facilities
restructuring costs, compared to a $29.6 million charge for
lease, facilities and other exit activities in 2005. These costs
for 2006 related primarily to the fair value of future lease
obligations associated with office space, primarily within the
EMEA and North America regions, which we will no longer be using.
|
47
Gross Profit by Segment. The following tables present
certain gross profit and margin information and performance
metrics for each of our reportable segments for years 2006 and
2005. Amounts are in thousands, except percentages.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
$ Change
|
|
|
% Change
|
|
|
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public Services
|
|
$
|
263,841
|
|
|
$
|
238,904
|
|
|
$
|
24,937
|
|
|
|
10.4
|
%
|
Commercial Services
|
|
|
81,419
|
|
|
|
(11,142
|
)
|
|
|
92,561
|
|
|
|
830.7
|
%
|
Financial Services
|
|
|
135,187
|
|
|
|
110,602
|
|
|
|
24,585
|
|
|
|
22.2
|
%
|
EMEA
|
|
|
129,523
|
|
|
|
87,702
|
|
|
|
41,821
|
|
|
|
47.7
|
%
|
Asia Pacific
|
|
|
80,448
|
|
|
|
53,636
|
|
|
|
26,812
|
|
|
|
50.0
|
%
|
Latin America
|
|
|
9,058
|
|
|
|
4,321
|
|
|
|
4,737
|
|
|
|
109.6
|
%
|
Corporate/Other
|
|
|
(148,950
|
)
|
|
|
(126,031
|
)
|
|
|
(22,919
|
)
|
|
|
n/m
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
550,526
|
|
|
$
|
357,992
|
|
|
$
|
192,534
|
|
|
|
53.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Gross Profit as a Percentage of Revenue
|
|
|
|
|
|
|
|
|
Public Services
|
|
|
19.7
|
%
|
|
|
18.5
|
%
|
Commercial Services
|
|
|
14.7
|
%
|
|
|
(1.7
|
)%
|
Financial Services
|
|
|
33.9
|
%
|
|
|
29.1
|
%
|
EMEA
|
|
|
18.4
|
%
|
|
|
13.2
|
%
|
Asia Pacific
|
|
|
22.3
|
%
|
|
|
17.2
|
%
|
Latin America
|
|
|
11.0
|
%
|
|
|
5.7
|
%
|
Corporate/Other
|
|
|
n/m
|
|
|
|
n/m
|
|
Total
|
|
|
16.0
|
%
|
|
|
10.6
|
%
|
n/m = not meaningful
Changes in gross profit by segment were as follows:
|
|
|
|
|
Public Services gross profit increased in 2006 despite a
substantial reduction in gross profits in our SLED practice and
increases in professional compensation expense related to hiring
needs related to demand for our services.
|
|
|
|
Commercial Services gross profit increased in 2006,
despite significantly lower revenue, primarily due to a
$45.5 million year-over-year reduction in losses from the
HT Contract. Other factors contributing to the increase in gross
profit were the cost savings realized from 2005 workforce
realignments and reduced subcontractor expenses as a result of
the increased use of internal resources.
|
|
|
|
Financial Services gross profit increased in 2006, due to
higher revenue combined with a decline in compensation expenses.
The decrease in compensation expenses is primarily due to more
efficient utilization of Company shared staff in this segment
and efficient use of offshore resources.
|
|
|
|
EMEA gross profit increased in 2006, due primarily to
higher revenue and improved profitability in France and Ireland
along with significantly improved profitability in Spain as a
result of higher utilization and lower costs. Slight declines in
compensation expense and other direct contract expenses also
contributed to the increase in gross profit, though compensation
expense for 2006
|
48
|
|
|
|
|
continued to be affected by severance and other costs related to
the internal restructuring of the Companys German practice.
|
|
|
|
|
|
Asia Pacific gross profit increased in 2006, primarily
due to significant improvements in profitability and staff
utilization in the Companys Australian and Chinese
businesses. Due to the high demand for resources in the Japanese
market and limited availability of qualified personnel,
increases in subcontractor expenses served to depress the growth
of gross profit in the Companys Japanese operation.
Significant regional improvements in compensation expense
derived from the 2005 workforce reductions in Japan and China
were substantially offset by additional compensation expenses
associated with the use of the Companys personnel from
outside the region in connection with a significant new
telecommunications industry engagement in Australia.
|
|
|
|
Latin America gross profit increased in 2006, due to
higher revenue offset by an increase in compensation expenses,
driven by higher billable headcount to meet the growth of our
business in the region, predominantly Brazil.
|
|
|
|
Corporate/Other consists primarily of rent expense and
other facilities related charges.
|
Amortization of Purchased Intangible Assets. Amortization
of purchased intangible assets decreased $0.7 million to
$1.5 million in 2006 from $2.3 million for 2005.
Goodwill Impairment Charges. In 2006, there was no
goodwill impairment charge. In 2005, a goodwill impairment loss
of $166.4 million was recognized. For 2005, it was
determined that the carrying amount of our EMEA and Commercial
Services segments goodwill exceeded the implied fair value
of that goodwill by $102.2 million and $64.2 million,
respectively.
Selling, General and Administrative Expenses. Selling,
general and administrative expenses decreased $2.6 million,
or 0.3%, to $748.3 million for 2006 from
$750.9 million for 2005. Selling, general and
administrative expenses as a percentage of gross revenue
decreased to 21.7% for 2006 from 22.2% for 2005. The decrease
was primarily due to costs savings from the reduction in the
size of the Companys sales force and reducing other
business development expenses. Offsetting these decreases were
increases in costs for finance and accounting, primarily for
sub-contracted labor and other costs directly related to the
2005 financial statement close. In addition, the Company
incurred additional SG&A expenses during 2006 related to an
agreement with Yale University, as described above.
Interest Income. Interest income was $8.7 million
and $9.0 million in 2006 and 2005, respectively. Interest
income is earned primarily from cash and cash equivalents,
including money-market investments. The slight decrease in
interest income was due to lower levels of cash available to be
invested in money markets during 2006 as compared to 2005.
Interest Expense. Interest expense was $37.2 million
and $33.4 million in 2006 and 2005, respectively. Interest
expense is attributable to our debt obligations, consisting of
interest due along with amortization of loan costs and loan
discounts. The increase in interest expense was due to higher
average debt balances in 2006 as compared to 2005.
Insurance Settlement. During 2006, related to the
Settlement Agreement with Hawaiian Telcom Communications, Inc.,
we recorded $38.0 million for an insurance settlement. See
Note 11, Commitments and Contingencies, of the
Notes to Consolidated Financial Statements for more information.
Other Income/Expense, net. Other income, net, was
$8.7 million in 2006, and other expense, net, was
$13.6 million in 2005. The balances in each period
primarily consist of realized foreign currency exchange gains
and losses.
Income Tax Expense. We incurred income tax expense of
$32.4 million for the year ended December 31, 2006 and
income tax expense of $122.1 million for the year ended
December 31, 2005. The principal reasons
49
for the difference between the effective income tax rate on loss
from continuing operation of (17.9)% and (20.4)% for years ended
December 31, 2006 and 2005, respectively, and the
U.S. Federal statutory income tax rate are the
nondeductible goodwill impairment charge of $0 million and
$118.5 million; nondeductible meals and entertainment
expense of $22.0 million and $19.6 million; increase
to deferred tax asset valuation allowance of $76.8 million
and $223.0 million; state and local income taxes of
$(6.7) million and $(12.7) million; impact of foreign
recapitalization of $5.4 million and $82.0 million;
foreign taxes of $(3.8) million and $13.7 million;
income tax reserves of $8.4 million and $18.6 million;
non-deductible interest of $10.7 million and
$7.7 million; foreign dividend income of $13.6 million
and $9.3 million and other non-deductible items of
$10.0 million and $3.7 million, respectively.
Net Loss. For 2006, we incurred a net loss of
$213.4 million, or a loss of $1.01 per share. Contributing
to the net loss for 2006 were $48.2 million of losses
related to the previously mentioned settlements with
telecommunication clients, $57.4 million accrued for
bonuses payable to our employees, $53.4 million of
non-cash
compensation expense related to the vesting of stock-based
awards, $29.6 million of lease and facilities restructuring
charges and the previously mentioned $33.6 million
year-over-year increase in external costs related to the closing
of our financial statements. For 2005, we incurred a net loss of
$721.6 million, or a loss of $3.59 per share. Included in
our results for 2005 were a $166.4 million goodwill
impairment charge, $111.7 million of operating losses
related to the HT Contract, $81.8 million of non-cash
compensation expense related to the vesting of Retention RSUs, a
$55.3 million increase in the valuation allowance primarily
against our U.S. deferred tax assets, and
$29.6 million of lease and facilities restructuring charges.
Obligations
and Commitments
As of December 31, 2007, we had the following obligations
and commitments to make future payments under contracts,
contractual obligations and commercial commitments (amounts are
in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by Period
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
More than
|
|
Contractual Obligations
|
|
Total
|
|
|
1 year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
5 years
|
|
|
Long-term debt(1)
|
|
$
|
1,493,597
|
|
|
$
|
56,276
|
|
|
$
|
136,406
|
|
|
$
|
374,515
|
|
|
$
|
926,400
|
|
Operating leases
|
|
|
312,489
|
|
|
|
83,984
|
|
|
|
123,822
|
|
|
|
65,469
|
|
|
|
39,214
|
|
Purchase obligations(2)
|
|
|
100,114
|
|
|
|
44,300
|
|
|
|
38,452
|
|
|
|
10,822
|
|
|
|
6,540
|
|
Obligations under the pension and postretirement medical plans
|
|
|
55,228
|
|
|
|
3,805
|
|
|
|
8,462
|
|
|
|
9,734
|
|
|
|
33,227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total(3)
|
|
$
|
1,961,428
|
|
|
$
|
188,365
|
|
|
$
|
307,142
|
|
|
$
|
460,540
|
|
|
$
|
1,005,381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Long-term debt includes both
principal and interest scheduled payment obligations. Certain of
our long-term debt allow the holders the right to convert the
debentures into shares of our common stock or cash (at the
Companys option) in earlier periods than presented above.
For additional information, see Note 6, Notes
Payable, of the Notes to Consolidated Financial Statements.
|
|
(2)
|
|
Purchase obligations include
material agreements to purchase goods or services, principally
software and telecommunications services, that are enforceable
and legally binding and that specify all significant terms,
including: fixed or minimum quantities to be purchased; fixed,
minimum or variable price provisions; and the approximate timing
of the transaction. Purchase obligations exclude agreements that
are cancelable without penalty. From time to time, our operating
segments, particularly our Public Services segment, enter into
agreements with vendors in the normal course of business that
support existing contracts with our clients (client vendor
agreements). The vast majority of these client vendor
agreements involve subcontracts for services to be provided by
third-party vendors. These agreements may be in the form of
teaming agreements or may be a client requirement, and can span
multiple years, depending on the duration of the underlying
arrangement with our clients. We are liable for payments to
vendors under these client vendor agreements. We are unable to
cancel some of these client vendor agreements unless the related
agreement with our client is terminated
and/or upon
payment of a penalty. However, our clients are generally
obligated by contract to reimburse us, directly or indirectly,
for payments we make to vendors under these agreements. We are
not aware of any payments we have been required to make to
vendors after a related client contract has been terminated. We
currently estimate that the total payments we could be obligated
to make under all client vendor agreements known to us would
|
50
|
|
|
|
|
be approximately $99,000, however,
we are unable to identify which of these agreements might
constitute purchase obligations.
|
|
(3)
|
|
The above table does not reflect
unrecognized tax benefits of $314,961. Due to uncertainty
regarding the completion of tax audits and possible outcomes,
the estimate of obligations related to unrecognized tax benefits
cannot be made. For additional information, see Note 14,
Income Taxes, to the Consolidated Financial
Statements.
|
Liquidity
and Capital Resources
The following table summarizes the cash flow statements for
2007, 2006 and 2005 (amounts are in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 to 2007
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
Net cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
(194,187
|
)
|
|
$
|
58,680
|
|
|
$
|
(113,071
|
)
|
|
$
|
(252,867
|
)
|
Investing activities
|
|
|
(35,942
|
)
|
|
|
67,570
|
|
|
|
(141,043
|
)
|
|
|
(103,512
|
)
|
Financing activities
|
|
|
290,566
|
|
|
|
(7,316
|
)
|
|
|
274,152
|
|
|
|
297,882
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
16,807
|
|
|
|
15,297
|
|
|
|
(9,508
|
)
|
|
|
1,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
$
|
77,244
|
|
|
$
|
134,231
|
|
|
$
|
10,530
|
|
|
$
|
(56,987
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Activities. Net cash used in operating
activities during 2007 increased $252.9 million over 2006.
This increase was primarily attributable to an increase in net
loss, net of non-cash items, the timing of payment of
significant amounts of accounts payable and, to a lesser degree,
increases to our combined accounts receivable and unbilled
revenue despite a decrease in DSOs during 2007.
Net cash provided by operating activities during 2006 increased
$171.8 million over 2005. This increase was primarily
attributable to improved profitability and a decrease in
accounts receivable, as our DSOs decreased to 82 days at
December 31, 2006 from 94 days at December 31,
2005, providing an additional $136.3 million. These items
were partially offset by the cash outflow to support the
professional services and related expenses required under the HT
Contract, and, to a lesser extent, payments made for the
Peregrine settlement of $36.9 million.
Investing Activities. Net cash used in investing
activities during 2007 was $35.9 million, and net cash
provided by investing activities during 2006 was
$67.6 million. Capital expenditures were $37.3 million
and $50.6 million during 2007 and 2006, respectively. In
2007 and 2006, $1.4 million and $118.2 million,
respectively, of restricted cash posted as collateral for
letters of credit and surety bonds was released.
Net cash provided by investing activities during 2006 increased
$208.6 million over 2005. This increase was predominantly
due to the change in the amount of restricted cash posted as
collateral for letters of credit and surety bonds. The
requirement to deposit and maintain cash collateral terminated
as part of the March 31, 2006 amendment to the 2005 Credit
Facility, and such cash collateral was released to us. The
increase was offset by an increase of $9.7 million in
capital expenditures in 2006 over 2005.
Financing Activities. Net cash provided by financing
activities during 2007 was $290.6 million, resulting
primarily from the proceeds received from the Term Loans under
the 2007 Credit Facility with an aggregate principal amount of
$300.0 million. Net cash used in financing activities
during 2006 was $7.3 million, primarily due to repayments
of our Japanese term loans.
In addition, issuances of common stock under the ESPP generated
$12.4 million, $0 and $14.9 million in cash during
2007, 2006 and 2005, respectively. Because we were not current
in our SEC periodic reports in 2006 and 2005, we were unable to
issue freely tradable shares of our common stock and had not
issued shares
51
under the LTIP or ESPP since early 2005. These sources of
financing became available to us again once we became current in
our SEC periodic reports in 2007.
Additional
Cash Flow Information
2007. At December 31, 2007, we had global cash
balances of $468.5 million. Our 2007 Credit Facility
consists of (1) term loans in the aggregate principal
amount of $300 million (of which $297.8 million was
outstanding as of December 31, 2007) and (2) a letter
of credit facility in an aggregate face amount at any time
outstanding not to exceed $200 million (of which
$86.9 million remained available as of December 31,
2007). Borrowings under the 2007 Credit Facility will be used
for general corporate purposes, including the payment of
obligations outstanding under our prior credit facility, and
payment of the fees and expenses of the 2007 Credit Facility.
For additional information regarding the 2007 Credit Facility,
see 2007 Credit Facility.
Our decision to obtain the 2007 Credit Facility was based, in
part, on the fact that our North American cash balances have
been negatively affected in the second quarter of 2007 by, among
other things, cash collection levels not maintaining pace with
the levels achieved in the fourth quarter of 2006 and payments
made in connection with (1) the uninsured portion of the
settlement of the dispute with HT, (2) ongoing costs
relating to the design and implementation of our new North
American financial reporting system, (3) ongoing costs
relating to production and completion of our financial
statements, (4) other additional accrued expenses for 2006
paid in the second quarter of 2007, and (5) our
expectations at the time that operations would not generate cash
before the latter part of 2007.
Outlook. We currently expect that our operations will
begin to provide rather than use cash in the second half of
2008. Based on current internal estimates, we nonetheless
believe that our cash balances, together with cash generated
from operation and borrowings made under our 2007 Credit
Facility, will be sufficient to provide adequate funds for our
anticipated internal growth, operating needs and debt service
obligations. We are currently undertaking a detailed analysis of
our current capital structure with our financial advisors, as
well as alternative strategies intended to further improve our
capital structure, global cash balances and their accessibility,
if current internal estimates for cash uses for 2008 prove
incorrect. These activities include initiating further cost
reduction efforts, seeking improvements in working capital
management, reducing or delaying capital expenditures,
reorganizing our internal corporate structure, refinancing or
seeking additional debt or equity capital and selling assets.
However, our ability to execute on any of these strategies could
be significantly impacted by numerous factors, including changes
in the economic or business environment, financial market
volatility, the performance of our business, and the terms and
conditions in our various bank financing and indenture
agreements.
Based on the foregoing and our current state of knowledge of the
outlook for our business, we currently believe that our existing
cash balances and cash flows expected to be generated from
operation will be adequate to finance our working capital needs
for the next twelve months. However, actual results may differ
from current expectations for many reasons, including losses of
business that could result from our failure to timely file
periodic reports with the SEC, the occurrence of any event of
default that could provide our lenders with a right of
acceleration (e.g., non-payment), possible delisting from the
New York Stock Exchange, further downgrades of our credit
ratings or unexpected demands on our current cash resources
(e.g., to settle lawsuits).
For additional information regarding various risk factors that
could affect our outlook, see Item 1A, Risk
Factors. If cash provided from operation is insufficient
and/or our
ability to access the capital or credit markets is impeded, our
business, operation, results and cash flow could be materially
and adversely affected.
52
Debt
Obligations
The following tables present a summary of the activity in our
debt obligations for 2007 and 2006 (amounts are in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
Borrowings
|
|
|
Repayments
|
|
|
Other(1)
|
|
|
2007
|
|
|
Convertible debentures
|
|
$
|
671,490
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
4,121
|
|
|
$
|
675,611
|
|
Term Loans under the 2007 Credit Facility
|
|
|
|
|
|
|
300,000
|
|
|
|
(2,250
|
)
|
|
|
|
|
|
|
297,750
|
|
Other
|
|
|
360
|
|
|
|
2,853
|
|
|
|
(1,931
|
)
|
|
|
|
|
|
|
1,282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total notes payable
|
|
$
|
671,850
|
|
|
$
|
302,853
|
|
|
$
|
(4,181
|
)
|
|
$
|
4,121
|
|
|
$
|
974,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
Borrowings
|
|
|
Repayments
|
|
|
Other(1)
|
|
|
2006
|
|
|
Convertible debentures
|
|
$
|
668,054
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3,436
|
|
|
$
|
671,490
|
|
Yen-denominated term loan (January 31, 2003)
|
|
|
2,803
|
|
|
|
|
|
|
|
(2,802
|
)
|
|
|
(1
|
)
|
|
|
|
|
Yen-denominated term loan (June 30, 2003)
|
|
|
1,402
|
|
|
|
|
|
|
|
(1,442
|
)
|
|
|
40
|
|
|
|
|
|
Other
|
|
|
2,501
|
|
|
|
|
|
|
|
(2,262
|
)
|
|
|
121
|
|
|
|
360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total notes payable
|
|
$
|
674,760
|
|
|
$
|
|
|
|
$
|
(6,506
|
)
|
|
$
|
3,596
|
|
|
$
|
671,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Other changes in notes payable
consist of amortization of notes payable discount and foreign
currency translation adjustments.
|
At December 31, 2007, we had total outstanding debt of
$974.6 million, compared to total outstanding debt of
$671.9 million at December 31, 2006. The
$302.8 million increase in total outstanding debt was
mainly attributable to the proceeds received from the Term Loans
received under the 2007 Credit Facility (described below).
Debt
Ratings
On February 6, 2007, Standard & Poors
withdrew our senior unsecured rating of B- and our subordinated
debt rating of CCC+ and removed them from CreditWatch.
Separately, on December 7, 2007, Moodys confirmed our
B2 corporate family rating, assigned us a negative rating
outlook and downgraded the ratings of our Series A and B
Debentures to Caa1 from B3.
2007
Credit Facility
On May 18, 2007, we entered into a $400.0 million
senior secured credit facility and on June 1, 2007, we
amended and restated the credit facility to increase the
aggregate commitments under the facility from
$400.0 million to $500.0 million. The 2007 Credit
Facility consists of (1) term loans in an aggregate
principal amount of $300.0 million (the Term
Loans) and (2) a letter of credit facility in an
aggregate face amount at any time outstanding not to exceed
$200.0 million (the LC Facility). The LC
Facility is supported by cash deposits made on our behalf by the
lenders. If the Company fails to repay any disbursement on a
letter of credit and these cash deposits are used to reimburse
the issuing bank, the amount of any cash deposits used for such
purpose will be considered as additional loans to the Company
(the LC Loans and, together with the Term Loans, the
Loans). Interest on the Term Loans under the 2007
Credit Facility is calculated, at the Companys option, at
a rate per annum equal to either (1) 3.5% plus the London
Interbank Offered Rate
53
(LIBOR) or (2) 2.5% plus a base rate equal to
the higher of (a) the federal funds rate plus 0.5% and
(b) UBS AG, Stamford Branchs prime commercial lending
rate. Interest on the LC Loans is similarly calculated at the
Companys option at a rate per annum equal to either
(1) 4.0% plus LIBOR or (2) 4.0% plus a base rate
computed in the same manner as the Term Loans. a rate equal to
3.5% plus the London Interbank Offered Rate, or LIBOR, or
(2) at a rate equal to 2.5% plus the higher of Debt
issuance costs of $18.8 million, mainly comprised of
underwriting, commitment, and legal fees, were capitalized into
other non-current assets and are being amortized to interest
expense over the life of the Loans. As of December 31,
2007, we had $297.8 million outstanding under the Term
Loans and an aggregate of approximately $113.1 million of
letters of credit issued and outstanding. The Company is charged
fees for the LC Facilitys continued availability, which
totals 4.125% per annum on the total amount of cash deposits
made available from time to time by the lenders under the LC
Facility to collateralize their obligation to fund demands made
on letters of credit issued under the LC Facility. We are
separately charged a fronting fee of 0.1875% per annum on the
average daily aggregate outstanding face amount of all letters
of credit issued.
Our obligations under the 2007 Credit Facility are secured by
first priority liens and security interests in substantially all
of our assets and most of our material domestic subsidiaries, as
guarantors of such obligations (including a pledge of 65% of the
stock of certain of our foreign subsidiaries), subject to
certain exceptions.
The 2007 Credit Facility requires us to make prepayments of
outstanding Loans and cash collateralize outstanding letters of
credit in an amount equal to (i) 100% of the net proceeds
received from property or asset sales (subject to exceptions),
(ii) 100% of the net proceeds received from the issuance or
incurrence of additional debt (subject to exceptions),
(iii) 100% of all casualty and condemnation proceeds
(subject to exceptions), (iv) 50% of the net proceeds
received from the issuance of equity (subject to exceptions) and
(v) for each fiscal year ending on or after
December 31, 2008, the difference between (a) 50% of
the Excess Cash Flow (as defined in the 2007 Credit Facility)
and (b) any voluntary prepayment of the Loans or the LC
Facility (subject to exceptions). If the Loans are prepaid or
the LC Facility is reduced prior to May 18, 2008 with other
indebtedness or another letter of credit facility, we may be
required to pay a prepayment premium of 1% of the principal
amount of the Loans so prepaid or LC Facility so reduced if the
cost of such replacement indebtedness of letter of credit
facility is lower than the cost of the 2007 Credit Facility. In
addition, we are required to pay $750,000 in principal plus any
accrued and unpaid interest at the end of each quarter,
commencing on June 29, 2007 and ending on March 31,
2012.
The 2007 Credit Facility contains affirmative and negative
covenants, customary representations, warranties and covenants,
certain of which include exceptions for events that would not
have a material adverse effect on the Companys business,
results of operation, financial condition, assets or liabilities.
|
|
|
|
|
The affirmative covenants include, among other things:
the delivery of unaudited quarterly and audited annual financial
statements, all in accordance with generally accepted accounting
principles; certain monthly operating metrics and budgets;
compliance with applicable laws and regulations (excluding,
prior to October 31, 2008, compliance with certain filing
requirements under the securities laws); maintenance of
existence and insurance; after October 31, 2008, as
requested by the Administrative Agent, reasonable efforts to
maintain credit ratings; and maintenance of books and records
(subject to the material weaknesses previously disclosed in our
Annual Report on
Form 10-K
for the year ended December 31, 2005).
|
|
|
|
The negative covenants, which (subject to exceptions)
restrict certain of our corporate activities, include, among
other things, limitations on: disposition of assets; mergers and
acquisitions; payment of dividends; stock repurchases and
redemptions; incurrence of additional indebtedness; making of
loans and investments; creation of liens; prepayment of other
indebtedness; and engaging in certain transactions with
affiliates.
|
Events of default under the 2007 Credit Facility include, among
other things: defaults based on nonpayment, breach of
representations, warranties and covenants, cross-defaults to
other debt above $10 million, loss of lien on collateral,
invalidity of certain guarantees, certain bankruptcy and
insolvency
54
events, certain ERISA events, judgments against us in an
aggregate amount in excess of $20 million that remain
unpaid, and change of control events. For more information
regarding the interplay of these covenants with the terms
applicable to our convertible debentures, see
Repurchase of Debentures at the Option of the
Holders.
Under the terms of the 2007 Credit Facility, we are not required
to become current in the filing of our SEC periodic reports
until October 31, 2008. Until October 31, 2008, our
failure to provide annual audited or quarterly unaudited
financial statements, to keep our books and records in
accordance with GAAP or to timely file our SEC periodic reports
will not be considered an event of default under the 2007 Credit
Facility.
The 2007 Credit Facility replaced our 2005 Credit Facility,
which was terminated on May 18, 2007. For information about
the 2005 Credit Facility, see Discontinued
2005 Credit Facility.
Repurchase
of Debentures at the Option of the Holders
The holders of our April 2005 Convertible Debentures have the
option to require us to repay all or any portion of such
debentures on certain dates at their face amount (plus accrued
interest for which the record date has not passed). The first
such date is April 15, 2009, and it is possible that we may
be required to fund the repayment of the full $200 million
face amount of these debentures (plus such interest) on that
date. In addition, the holders of our Series A Debentures
and our Series B Debentures have an option to require us to
repurchase all or a portion of these debentures. For additional
information regarding our debentures and the timing for such
option, see Item 1A, Risk Factors Risks
that Relate to Our Liquidity, and Note 6, Notes
Payable, of the Notes to Consolidated Financial Statements.
The 2007 Credit Facility contains a restrictive covenant
(Section 6.10(a)) that limits our ability to make any
voluntary or optional payment or prepayment
on or redemption or acquisition for value of these debentures
(emphasis added). Our contractual obligation to repay these
debentures upon the exercise by a holder of its right to require
us to do so pursuant to the indenture is an affirmative
mandatory obligation, and is not voluntary or optional on our
part. This restrictive covenant therefore does not prohibit us
from honoring our obligation to repay the debentures. By
comparison, the Discontinued 2005 Credit Facility made no such
distinction, flatly stating that we could not make
prepayment on, or redemption or acquisition for value of,
or any prepayment or redemption as a result of any asset sale,
change of control, termination of trading or similar event
of any of our debentures.
If one or more holders require us to repay the debentures and we
have sufficient cash on hand to make payment, nothing in the
credit agreement prohibits us from taking this action. If we do
not have sufficient cash on hand, we would seek to raise any
additional funds we needed by incurring additional indebtedness
as otherwise permitted by the terms of the credit agreement.
Discontinued
2005 Credit Facility
On July 19, 2005, we entered into a $150.0 million
Senior Secured Credit Facility (the 2005 Credit
Facility). Our 2005 Credit Facility, as amended, provided
for up to $150.0 million in revolving credit and advances.
Advances under the revolving credit line were limited by the
available borrowing base, which was based upon a percentage of
eligible accounts receivable and unbilled receivables.
In 2005 and 2006, we entered into five amendments to the 2005
Credit Facility. Among other things, these amendments revised
certain covenants contained in the 2005 Credit Facility,
including the extensions of the filing deadlines for our 2005,
2006 and 2007 SEC periodic reports and an increase in the
amounts of civil litigation payments that we are permitted to
pay and in the aggregate amount of investments and indebtedness
that we are permitted to make and incur with respect to our
foreign subsidiaries. In addition, in 2007 we obtained several
limited waivers that, among other things, waived the delivery
requirement of our SEC periodic reports to the lenders under the
facility.
55
The 2005 Credit Facility was terminated on May 18, 2007. On
that date, all outstanding obligations under the 2005 Credit
Facility were paid or assumed under the 2007 Credit Facility,
and all liens and security interests under the 2005 Credit
Facility were released.
Guarantees
and Indemnification Obligations
In the normal course of business, we have indemnified third
parties and have commitments and guarantees under which we may
be required to make payments in certain circumstances. These
indemnities, commitments and guarantees include: indemnities to
third parties in connection with surety bonds; indemnities to
various lessors in connection with facility leases; indemnities
to customers related to intellectual property and performance of
services subcontracted to other providers; indemnities to
directors and officers under the organizational documents and
agreements with them; and guarantees issued between subsidiaries
on intercompany receivables. The duration of these indemnities,
commitments and guarantees varies, and in certain cases, is
indefinite. Certain of these indemnities, commitments and
guarantees do not provide for any limitation of the maximum
potential future payments we could be obligated to make. We
estimate that the fair value of these agreements was minimal.
Accordingly, no liabilities have been recorded for these
agreements as of December 31, 2007.
We are also required, in the course of business, particularly
with certain of our Public Services clients, largely in the
state and local markets, to obtain surety bonds, letters of
credit or bank guarantees for client engagements. At
December 31, 2007, we had $80.9 million in outstanding
surety bonds and $113.1 million in letters of credit
extended to secure certain of these bonds. The issuers of our
outstanding surety bonds may, at any time, require that we post
collateral (cash or letters of credit) to fully secure these
obligations.
From time to time, we enter into contracts with clients whereby
we have joint and several liability with other participants
and/or third
parties providing related services and products to clients.
Under these arrangements, we and other parties may assume some
responsibility to the client or a third party for the
performance of others under the terms and conditions of the
contract with or for the benefit of the client or in relation to
the performance of certain contractual obligations. In some
arrangements, the extent of our obligations for the performance
of others is not expressly specified. Certain of these
guarantees do not provide for any limitation of the maximum
potential future payments we could be obligated to make. As of
December 31, 2007, we estimate we had assumed an aggregate
potential contract value of approximately $41.4 million to
our clients for the performance of others under arrangements
described in this paragraph. These contracts typically include
recourse provisions that would allow us to recover from the
other parties all but approximately $0.1 million if we are
obligated to make payments to the clients that are the
consequence of a performance default by the other parties. To
date, we have not been required to make any payments under any
of the contracts described in this paragraph. We estimate that
the fair value of these agreements was minimal. Accordingly, no
liabilities have been recorded for these contracts as of
December 31, 2007.
Critical
Accounting Policies and Estimates
The preparation of our Consolidated Financial Statements in
conformity with GAAP requires that management make estimates,
assumptions and judgments that affect the reported amounts of
assets and liabilities and disclosure of contingent liabilities
at the date of the Consolidated Financial Statements and the
reported amounts of revenue and expenses during the reporting
period. Managements estimates, assumptions and judgments
are derived and continually evaluated based on available
information, historical experience and various other assumptions
that are believed to be reasonable under the circumstances.
Because the use of estimates is inherent in GAAP, actual results
could differ from those estimates. The areas that we believe are
our most critical accounting policies include:
|
|
|
|
|
revenue recognition,
|
|
|
|
valuation of accounts receivable,
|
|
|
|
valuation of goodwill,
|
56
|
|
|
|
|
accounting for income taxes,
|
|
|
|
valuation of long-lived assets,
|
|
|
|
accounting for leases,
|
|
|
|
restructuring charges,
|
|
|
|
legal contingencies,
|
|
|
|
retirement benefits,
|
|
|
|
accounting for stock-based compensation,
|
|
|
|
accounting for intercompany loans, and
|
|
|
|
accounting for employee global mobility and tax equalization.
|
A critical accounting policy is one that involves making
difficult, subjective or complex accounting estimates that could
have a material effect on our financial condition and results of
operation. Critical accounting policies require us to make
assumptions about matters that are highly uncertain at the time
of the estimate, and different estimates that we could have
used, or changes in the estimate that are reasonably likely to
occur, may have a material impact on our financial condition or
results of operation.
Revenue
Recognition
We earn revenue from three primary sources: (1) technology
integration services where we design, build and implement new or
enhanced system applications and related processes,
(2) services to provide general business consulting, such
as system selection or assessment, feasibility studies, business
valuations and corporate strategy services, and (3) managed
services in which we manage, staff, maintain, host or otherwise
run solutions and systems provided to our customers. Contracts
for these services have different terms based on the scope,
deliverables and complexity of the engagement, which require
management to make judgments and estimates in recognizing
revenue. Fees for these contracts may be charged based upon
time-and-material,
cost-plus or fixed price.
Technology integration services represent a significant portion
of our business and are generally accounted for under the
percentage-of-completion method in accordance with Statement of
Position (SOP)
81-1,
Accounting for Performance of Construction-Type and
Certain Production-Type Contracts
(SOP 81-1).
A portion of the Companys revenue is derived from
arrangements that include software developed
and/or
provided by the Company. The Company recognizes software license
fees included in these arrangements as revenue in accordance
with
SOP 97-2,
Software Revenue Recognition, as amended by
SOP 98-9
by applying the provisions of
SOP 81-1,
as appropriate. Software license fee revenue is generally
included in the Companys technology integration service
revenue, which is recognized using the percentage-of-completion
method. Under the percentage-of-completion method, management
estimates the percentage-of-completion based upon costs to the
client incurred as a percentage of the total estimated costs to
the client. When total cost estimates exceed revenue, we accrue
for the estimated losses immediately. The use of the
percentage-of-completion method requires significant judgment
relative to estimating total contract revenue and costs,
including assumptions relative to the length of time to complete
the project, the nature and complexity of the work to be
performed, and anticipated changes in estimated salaries and
other costs. Incentives and award payments are included in
estimated revenue using the percentage-of-completion method when
the realization of such amounts is deemed probable upon
achievement of certain defined goals. Estimates of total
contract revenue and costs are continuously monitored during the
term of the contract and are subject to revision as the contract
progresses. When revisions in estimated contract revenue and
costs are determined, such adjustments are recorded in the
period in which they are first identified. Revenue arrangements
entered into with the same client that are accounted for under
SOP 81-1
are accounted for on a combined basis when they: are negotiated
as a package with an overall profit margin objective;
essentially
57
represent an agreement to do a single project; involve
interrelated activities with substantial common costs; and are
performed concurrently or sequentially.
Revenue for general business consulting services is recognized
as work is performed and amounts are earned in accordance with
Staff Accounting Bulletin (SAB) No. 101,
Revenue Recognition in Financial Statements, as
amended by SAB No. 104, Revenue
Recognition (SAB 104). We consider
amounts to be earned once evidence of an arrangement has been
obtained, services are delivered, fees are fixed or determinable
and collectibility is reasonably assured. For contracts with
fees based on
time-and-materials
or cost-plus, we recognize revenue over the period of
performance. Depending on the specific contractual provisions
and nature of the deliverable, revenue may be recognized on a
proportional performance model based on level of effort, as
milestones are achieved or when final deliverables have been
provided. Revenue arrangements entered into with the same client
that are accounted for under SAB 104 are accounted for on a
combined basis when they are entered into at or near the same
time, unless it is clearly evident that the contracts are not
related to one another.
For our managed service arrangements, we typically implement or
build system applications for customers that we then manage or
run for periods that may span several years. Such arrangements
include the delivery of a combination of one or more of our
service offerings and are governed by Emerging Issues Task Force
Issue 00-21,
Accounting for Revenue Arrangements with Multiple
Deliverables. In managed service arrangements in which the
system application implementation or build has standalone value
to the customer, and we have sufficient objective evidence of
fair value for the managed or run services, we bifurcate the
total arrangement into two units of accounting based on the
residual method: (i) the system application implementation,
or build, which is recognized as technology integration services
using the percentage-of-completion method under
SOP 81-1
and (ii) the managed or run services, which are recognized
under SAB 104 ratably over the estimated life of the
customer relationship. In instances where we are unable to
bifurcate a managed service arrangement into separate units of
accounting, the total contract is recognized as one unit of
accounting under SAB 104. In such instances, total fees and
direct and incremental costs related to the system application
implementation or build are deferred and recognized together
with managed or run services upon completion of the system
application implementation or build ratably over the estimated
life of the customer relationship. Certain managed service
arrangements may also include transaction-based services in
addition to the system application implementation or build and
managed services. Fees from transaction-based services are
recognized as earned if we have sufficient objective evidence of
fair value for such transactions; otherwise, transaction fees
are spread ratably over the remaining life of the customer
relationship period when we determine these fees are realizable.
The determination of fair value requires us to use significant
judgment. We determine the fair value of service revenue based
upon our recent pricing for those services when sold separately
and/or
prevailing market rates for similar services.
Revenue on cost-plus-fee contracts is recognized to the extent
of costs incurred plus an estimate of the applicable fees
earned. We consider fixed fees under cost-plus-fee contracts to
be earned in proportion to the allowable costs incurred in
performance of the contract.
Revenue includes reimbursements of travel and out-of-pocket
expenses with equivalent amounts of expense recorded in other
direct contract expenses. In addition, we generally enter into
relationships with subcontractors where we maintain a principal
relationship with the customer. In such instances, subcontractor
costs are included in revenue with offsetting expenses recorded
in other direct contract expenses.
Unbilled revenue consists of recognized recoverable costs and
accrued profits on contracts for which billings had not been
presented to clients as of the balance sheet date. We anticipate
that the collection of these amounts will occur within one year
of the balance sheet date. Billings in excess of revenue
recognized for which payments have been received are recorded as
deferred revenue until the applicable revenue recognition
criteria have been met.
58
Valuation
of Accounts Receivable
We maintain allowances for doubtful accounts for estimated
losses resulting from the inability of our customers to make
required payments. Assessing the collectibility of customer
receivables requires management judgment. We determine our
allowance for doubtful accounts by specifically analyzing
individual accounts receivable, historical bad debts, customer
concentrations, customer credit-worthiness, current economic and
accounts receivable aging trends, and changes in our customer
payment terms. Our valuation reserves are periodically
re-evaluated and adjusted as more information about the ultimate
collectibility of accounts receivable becomes available. Upon
determination that a receivable is uncollectible, the receivable
balance and any associated valuation reserve is written off.
Valuation
of Goodwill
Goodwill is the amount by which the cost of acquired net assets
in a business acquisition exceeds the fair value of net
identifiable assets on the date of purchase. We assess the
impairment of goodwill and identifiable intangible assets on at
least an annual basis on April 1 and whenever events or changes
in circumstances indicate that the carrying value of the asset
may not be recoverable, as prescribed in the
SFAS No. 142, Goodwill and Other Intangible
Assets (SFAS 142).
An impairment review of the carrying amount of goodwill is
conducted if events or changes in circumstances indicate that
goodwill might be impaired. Factors we consider important that
could trigger an impairment review include significant
underperformance relative to historical or projected future
operating results, identification of other impaired assets
within a reporting unit, the more-likely-than-not expectation
that a reporting unit or a significant portion of a reporting
unit will be sold, significant adverse changes in business
climate or regulations, significant changes in senior
management, significant changes in the manner of our use of the
acquired assets or the strategy for our overall business,
significant negative industry or economic trends, a significant
decline in our stock price for a sustained period, or a
significant unforeseen decline in our credit rating. Determining
whether a triggering event has occurred includes significant
judgment from management.
The goodwill impairment test prescribed by SFAS 142
requires us to identify reporting units and to determine
estimates of the fair value of our reporting units as of the
date we test for impairment unless an event occurs or
circumstances change that would more likely than not reduce the
fair value of the reporting unit below its carrying amount. As
of December 31, 2007, our reporting units consisted of our
three North America Industry Groups and our three international
regions. To identify impairment, the fair value of the reporting
unit is first compared to its carrying value. If the reporting
units allocated carrying value exceeds its fair value, we
undertake a second evaluation to assess the required impairment
loss to the extent that the carrying value of the goodwill
exceeds its implied fair value. The fair value of a reporting
unit is the amount for which the unit as a whole could be bought
or sold in a current transaction between willing parties. We
estimate the fair values of our reporting units using a
combination of the discounted cash flow valuation model and
comparable market transaction models. Those models require
estimates of future revenue, profits, capital expenditures and
working capital for each unit as well as comparability with
recent transactions in the industry. We estimate these amounts
by evaluating historical trends, current budgets, operating
plans and industry data. Determining the fair value of reporting
units and goodwill includes significant judgment by management
and different judgments could yield different results.
Accounting
for Income Taxes
Provisions for federal, state and foreign income taxes are
calculated on reported pre-tax earnings based on current tax law
and also include, in the current period, the cumulative effect
of any changes in tax rates from those used previously in
determining deferred tax assets and liabilities. Such provisions
differ from the amounts currently receivable or payable because
certain items of income and expense are recognized in different
time periods for financial reporting purposes than for income
tax purposes. Significant judgment is required in determining
income tax provisions and evaluating tax positions.
59
We establish reserves for income tax when, despite the belief
that our tax positions are fully supportable, there remains
uncertainty in a tax position in our previously filed income tax
returns. For tax positions where it is more likely than not that
a tax benefit will be sustained, we have recorded the largest
amount of tax benefit with a greater than 50% likelihood of
being realized upon settlement with a taxing authority that has
full knowledge of all relevant information. For income tax
positions where it is not more likely than not that a tax
benefit will be sustained, no tax benefit has been recognized in
the Consolidated Financial Statements. For additional
information, see Note 14, Income Taxes, of the
Notes to the Consolidated Financial Statements.
The majority of our deferred tax assets at December 31,
2007 consisted of federal, foreign and state net operating loss
carryforwards that will expire between 2008 and 2027. During
2007, the valuation allowance against federal, state and certain
foreign net operating loss and foreign tax credit carryforwards
increased $60.4 million over the year ended 2006, due to
additional losses.
Since our inception, various foreign, state and local
authorities have audited us in the area of income taxes. Those
audits included examining the timing and amount of deductions,
the allocation of income among various tax jurisdictions and
compliance with foreign, state and local tax laws. In evaluating
the exposure associated with various tax filing positions, we
accrue charges for exposures related to uncertain tax positions.
During 2005, the Internal Revenue Service commenced a federal
income tax examination for the tax periods ended June 30,
2001, June 30, 2003, December 31, 2003,
December 31, 2004 and December 31, 2005. During 2007,
the Internal Revenue Service opened the examination for the tax
period ended June 30, 2002. We are unable to determine the
ultimate outcome of these examinations, but we believe that we
have established appropriate reserves related to apportionment
of income between jurisdictions, the impact of the restatement
items and certain filing positions. We are also under
examination from time to time in foreign, state and local
jurisdictions, including a current German income tax audit for
the periods ended December 31, 2001 and December 31,
2002.
At December 31, 2007, we believe we have appropriately
accrued for exposures related to uncertain tax positions. To the
extent we were to prevail in matters for which accruals have
been established or be required to pay amounts in excess of
reserves, our effective tax rate in a given financial statement
period may be materially impacted.
During 2007, a statute of limitations expired in one of our
foreign taxing jurisdictions. As a result, we recognized a total
decrease of $9.1 million in our tax reserve,
$1.7 million of which was recognized as a reduction to our
income tax expense for the year ended December 31, 2007.
During 2006 and 2005, none of the established reserves expired
based on the statute of limitations with respect to certain tax
examination periods. In addition, an increase to the reserve for
tax exposures of $14.2 million, $13.8 million and
$51.6 million, was recorded as an income tax expense for
additional exposures in 2007, 2006 and 2005, respectively,
including interest and penalties.
The carrying value of our net deferred tax assets assumes that
we will be able to generate sufficient future taxable income in
certain tax jurisdictions to realize the value of these assets.
If we are unable to generate sufficient future taxable income in
these jurisdictions, a valuation allowance is recorded when it
is more likely than not that the value of the deferred tax
assets is not realizable. Management evaluates the realizability
of the deferred tax assets and assesses the need for any
valuation allowance. In 2007, we determined that it was more
likely than not that a significant amount of our deferred tax
assets primarily in the U.S. may not be realized;
therefore, we recorded a valuation allowance against those
deferred assets.
Valuation
of Long-Lived Assets
Long-lived assets primarily include property and equipment and
intangible assets with finite lives (purchased software,
capitalized software, and customer lists). In accordance with
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, we periodically review
long-lived assets for impairment
60
whenever events or changes in business circumstances indicate
that the carrying amount of the assets may not be fully
recoverable or that the useful lives are no longer appropriate.
Each impairment test is based on a comparison of the
undiscounted cash flows expected to result from the use and
eventual disposition of the asset to the carrying amount of the
asset. If an impairment is indicated, the asset is written down
to its estimated fair value based on a discounted cash flow
analysis. Determining the fair value of long-lived assets
includes significant judgment by management, and different
judgments could yield different results.
Accounting
for Leases
We lease office facilities under non-cancelable operating leases
that expire at various dates through 2017, and may include
options that permit renewals for additional periods. Rent
abatements and escalations are considered in the determination
of straight-line rent expense for operating leases. Leasehold
improvements made at the inception of or during the lease are
amortized over the shorter of the asset life or the lease term.
We receive incentives to lease office facilities in certain
areas, which are recorded as a deferred credit and recognized as
a reduction to rent expense on a straight-line basis over the
lease term.
Restructuring
Charges
We periodically record restructuring charges resulting from
restructuring our operation (including consolidation
and/or
relocation of operation), changes in our strategic plan or
management responses to increasing costs or declines in demand.
The determination of restructuring charges requires management
to utilize significant judgment and estimates related to
expenses for employee benefits, such as costs of severance and
termination benefits, and costs for future lease commitments on
excess facilities, net of estimated future sublease income. In
determining the amount of lease and facilities restructuring
charges, we are required to estimate such factors as future
vacancy rates, the time required to sublet excess facilities and
sublease rates. These estimates are reviewed and potentially
revised on a quarterly basis based on available information and
known market conditions. If our assumptions prove to be
inaccurate, we may need to make changes in these estimates that
could impact our financial position and results of operation.
Legal
Contingencies
We are currently involved in various claims and legal
proceedings. We periodically review the status of each
significant matter and assess our potential financial exposure.
If the potential loss from any claim or legal proceeding is
considered probable and the amount can be reasonably estimated,
we accrue a liability for the estimated loss. We use significant
judgment in both the determination of probability and the
determination as to whether an exposure is reasonably estimable.
Due to the uncertainties related to these matters, accruals are
based only on the best information at that time. As additional
information becomes available, we reassess the potential
liability related to our pending claims and litigation and may
revise our estimates. Such revisions in the estimates of
potential liabilities could have a material impact on our
financial position and results of operation. We expense legal
fees as incurred.
Retirement
Benefits
Our pension plans and postretirement benefit plans are accounted
for using actuarial valuations required by
SFAS No. 87, Employers Accounting for
Pensions, SFAS No. 106, Employers
Accounting for Postretirement Benefits Other Than
Pensions, and SFAS 158, Employers
Accounting for Defined Benefit Pension and Other Postretirement
Plans. The pension plans relate to our plans for employees
in Germany and Switzerland. Accounting for retirement plans
requires management to make significant subjective judgments
about a number of actuarial assumptions, including discount
rates, salary growth, long-term return on plan assets,
retirement, turnover, health care cost trend rates and mortality
rates. Depending on the assumptions and estimates used, the
pension and postretirement benefit expense could vary within a
range of outcomes and have a material effect on our financial
position and results of operation. In addition, the assumptions
can materially affect accumulated benefit obligations and future
cash funding. For 2007, the discount rate to
61
determine the benefit obligation for the pension plans was 5.1%.
The discount rate reflects the rate at which the pension
benefits could be effectively settled. The rate is based upon
comparable high quality corporate bond yields with maturities
consistent with expected pension payment periods. A
100 basis point increase in the discount rate would
decrease the 2008 pension expense for the plans by approximately
$1.6 million. A 100 basis point decrease in the
discount rate would increase the 2008 pension expense for the
plans by approximately $1.4 million. The expected long-term
rate of return on assets for 2007 was 4.5%. This rate represents
the average of the long-term rates of return for the defined
benefit plan weighted by the plans assets as of
December 31, 2007. To develop this assumption, we
considered historical asset returns, the current asset
allocation and future expectations of asset returns. The actual
long-term rate of return from July 1, 2003 until
December 31, 2007 was 31.2%. A 100 basis point
increase or decrease in the expected long-term rate of return on
the plans assets would have had an approximately
$0.3 million impact on our 2008 pension expense. As of
December 31, 2007, the pension plan had a $3.6 million
unrecognized actuarial gain that will be expensed over the
average future working lifetime of active participants.
We also offer a postretirement medical plan to the majority of
our full-time U.S. employees and managing directors who
meet specific eligibility requirements. For 2007, the discount
rate to determine the benefit obligation was 6.1%. The discount
rate reflects the rate at which the benefits could be
effectively settled. The rate is based upon comparable high
quality corporate bond yields with maturities consistent with
expected retiree medical payment periods. A 100 basis point
increase or decrease in the discount rate would have
approximately a $3.2 million impact on the 2007 retiree
medical expense for the plan. As of December 31, 2007, the
postretirement medical plan had $0.5 million in
unrecognized actuarial gains that will be expensed over the
average future working lifetime of active participants.
Accounting
for Stock-Based Compensation
We have various stock-based compensation plans under which we
have granted stock options, restricted stock awards and stock
units to certain officers, employees and non-employee directors.
We also have the ESPP, which included our BE an
Owner program, that allows for employees to purchase
Company stock at a discount. We granted both service-based and
performance-based stock units and stock options during 2007. The
fair value is generally fixed on the date of grant based on the
number of stock units or stock options issued and the fair value
of the Companys stock on the date of grant. For the
performance-based stock units and stock options, each quarter we
compare the actual performance results with the performance
conditions to determine the probability of the award fully
vesting. The determination of successful compliance with the
performance conditions requires significant judgment by
management, as differing outcomes may have a significant impact
on current and future stock compensation expense.
We adopted SFAS No. 123(R), Share-Based
Payment (SFAS 123(R)), on January 1,
2006. This standard requires that all share-based payments to
employees be recognized in the statements of operation based on
their fair values. We have used the Black-Scholes model to
determine the fair value of our stock option awards. Under the
fair value recognition provisions of SFAS 123(R),
share-based compensation is measured at the grant date based on
the fair value of the award and is recognized as expense over
the requisite service period. Determining the fair value of
share-based awards at the grant date requires judgment,
including estimating stock price volatility and employee stock
option exercise behaviors. If actual results differ
significantly from these estimates, stock-based compensation
expense and our results of operation could be materially
impacted. As stock-based compensation expense recognized in the
Consolidated Statements of Operation is based on awards that
ultimately are expected to vest, the amount of expense has been
reduced for estimated forfeitures. SFAS 123(R) requires
forfeitures to be estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ
from those estimates. Forfeitures were estimated based on
historical experience. If factors change and we employ different
assumptions in the application of SFAS 123(R), the
compensation expense that we record in future periods may differ
significantly from what we have recorded in the current period.
We adopted the modified prospective transition method permitted
under SFAS 123(R) and consequently have not adjusted
results from prior years. Under the modified prospective
transition method, the 2006
62
compensation cost includes expense relating to the remaining
unvested awards granted prior to December 31, 2005 along
with new grants made during 2006. For grants which vest based on
certain specified performance criteria, the grant date fair
value of the shares is recognized over the requisite period of
performance once achievement of criteria is deemed probable. For
grants that vest through the passage of time, the grant date
fair value of the award is recognized over the vesting period.
We elected the alternative transition method as outlined in FASB
Staff Position (FSP) 123(R)-3, Transition
Election Related to Accounting for the Tax Effects of
Share-Based Payment Awards, to calculate the historical
pool of excess tax benefits available to offset tax shortfalls
in periods following the adoption of SFAS 123(R).
The after-tax stock-based compensation expense impact of
adopting SFAS 123(R) for the year ended December 31,
2006 was $25.7 million with a $0.12 per share reduction to
diluted earnings per share. Prior to the adoption of
SFAS 123(R), we used the intrinsic value method of
accounting prescribed by Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to
Employees, and related interpretations, including FIN 44,
Accounting for Certain Transactions Involving Stock
Compensation, for our plans. Under this accounting method,
stock option compensation awards that are granted with an
exercise price at the current fair value of our common stock as
of the date of the award generally did not require compensation
expense to be recognized in the Consolidated Statements of
Operations. Stock-based compensation expense recognized for our
employee stock option plans, restricted stock units and
restricted stock awards was $85.8 million in 2005, net of
tax.
As of December 31, 2007, there was $0.4 million,
$28.4 million and $137.0 million of total unrecognized
compensation cost, net of expected forfeitures, related to
nonvested options, RSUs and PSUs, respectively, granted under
the LTIP. That cost is expected to be recognized over a
weighted-average period of one year, 2.2 years and
2.0 years, respectively.
Accounting
for Intercompany Loans
Intercompany loans are classified between long- and short-term
based on managements intent regarding repayment.
Translation gains and losses on short-term loans are recorded in
other (expense) income, net, in our Consolidated Financial
Statements and similar gains and losses on long-term loans are
recorded as other comprehensive income in our Consolidated
Statements of Changes in Stockholders Equity (Deficit).
Accordingly, changes in managements intent relative to the
expected repayment of these intercompany loans will change the
amount of translation gains and losses included in our
Consolidated Financial Statements.
Accounting
for Employee Global Mobility and Tax Equalization
We have a tax equalization policy designed to ensure that our
employees on domestic long-term and foreign assignments will be
subject to the same level of personal tax, regardless of the tax
jurisdiction in which the employee works. We record for tax
equalization expenses in the period incurred. If the estimated
tax equalization liability, including related interest and
penalties, is determined to be greater or less than amounts due
upon final settlement, the difference is recorded in the current
period.
Recently
Issued Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, Fair
Value Measurements (SFAS 157). SFAS 157
establishes a single authoritative definition of fair value,
sets a framework for measuring fair value and expands on
required disclosures about fair value measurements.
SFAS 157 is effective for fiscal years beginning
January 1, 2008 and will be applied prospectively. In
February 2008, the FASB issued a Staff Position that will
(1) partially defer the effective date of SFAS 157 for
one year for certain nonfinancial assets and nonfinancial
liabilities and (2) remove certain leasing transactions
from the scope of SFAS 157. The adoption of SFAS 157
and its related pronouncements are not expected to have a
material effect on our consolidated financial position, results
of operations or cash flows.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities including an amendment of
FAS 115 (SFAS 159). The new
statement allows entities
63
to choose, at specific election dates, to measure eligible
financial assets and liabilities at fair value that are not
otherwise required to be measured at fair value. If a company
elects the fair value option for an eligible item, changes in
that items fair value in subsequent reporting periods must
be recognized in current earnings. SFAS 159 is effective
for the fiscal year beginning January 1, 2008. We have
elected not to apply the fair value option to any of our
financial instruments.
In December 2007, the FASB issued SFAS No. 141(R),
Business Combinations, which replaces
SFAS No. 141, Business Combinations. This
Statement establishes principles and requirements for how an
acquirer: recognizes and measures in its financial statements
the identifiable assets acquired, the liabilities assumed and
any noncontrolling interest in the acquiree; recognizes and
measures the goodwill acquired in the business combination or a
gain from a bargain purchase; and determines what information to
disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination.
This Statement applies prospectively to business combinations
for which the acquisition date is on or after the beginning of
the first annual reporting period beginning on or after
December 15, 2008. We do not expect this Statement to have
a significant impact on our Consolidated Financial Statements.
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ITEM 7A.
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QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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We are exposed to a number of market risks in the ordinary
course of business. These risks, which include interest rate
risk and foreign currency exchange risk, arise in the normal
course of business rather than from trading activities.
Interest
Rate Risk
Our exposure to potential losses due to changes in interest
rates is minimal as our outstanding debt obligations have fixed
interest rates. The fair value of our debt obligations may
increase or decrease for various reasons, including fluctuations
in the market price of our common stock, fluctuations in market
interest rates and fluctuations in general economic conditions.
The table below presents principal cash flows (net of discounts)
and related weighted average interest rates by scheduled
maturity dates for our debt obligations as of December 31,
2007:
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Expected Maturity Date
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Year ended December 31,
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(In thousands U.S. Dollars, except interest rates)
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2008
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2009
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2010
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2011
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2012
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Thereafter
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Total
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Fair Value
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U.S. Dollar Functional Currency
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Series A Convertible Subordinated Debentures
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$
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250,000
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$
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250,000
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$
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146,875
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Average fixed interest rate
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2.50
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%
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2.50
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%
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U.S. Dollar Functional Currency
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series B Convertible Subordinated Debentures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
200,000
|
|
|
$
|
200,000
|
|
|
$
|
106,000
|
Average fixed interest rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.10
|
%
|
|
|
4.10
|
%
|
|
|
|
U.S. Dollar Functional Currency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series C Convertible Subordinated Debentures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
200,000
|
|
|
$
|
200,000
|
|
|
$
|
167,760
|
Average fixed interest rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.00
|
%
|
|
|
5.00
|
%
|
|
|
|
U.S. Dollar Functional Currency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible Senior Subordinated Debentures(1)
|
|
|
|
|
|
|
|
|
|
$
|
40,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
40,000
|
|
|
$
|
24,346
|
Average fixed interest rate
|
|
|
|
|
|
|
|
|
|
|
0.50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.50
|
%
|
|
|
|
U.S. Dollar Functional Currency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term Loans under the 2007 Credit Facility
|
|
$
|
3,000
|
|
|
$
|
3,000
|
|
|
$
|
3,000
|
|
|
$
|
3,000
|
|
|
$
|
285,750
|
|
|
|
|
|
|
$
|
297,750
|
|
|
$
|
297,750
|
Average fixed interest rate
|
|
|
8.88
|
%
|
|
|
8.88
|
%
|
|
|
8.88
|
%
|
|
|
8.88
|
%
|
|
|
8.88
|
%
|
|
|
|
|
|
|
8.88
|
%
|
|
|
|
U.S. Dollar Functional Currency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
$
|
700
|
|
|
$
|
582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,282
|
|
|
$
|
1,282
|
Average fixed interest rate
|
|
|
8.49
|
%
|
|
|
8.49
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.49
|
%
|
|
|
|
|
|
|
(1)
|
|
The fair value was estimated using
the Black-Scholes model with an expected volatility of 37.29%,
risk-free interest rate of 3.06%, an expected life of
2.5 years, and an expected dividend yield of zero.
|
64
Foreign
Currency Exchange Risk
We operate internationally and are exposed to potentially
adverse movements in foreign currency rate changes. Any foreign
currency transaction, defined as a transaction denominated in a
currency other than the U.S. dollar, will be reported in
U.S. dollars at the applicable exchange rate. Assets and
liabilities are translated into U.S. dollars at exchange
rates in effect at the balance sheet date and income and expense
items are translated at average rates for the period.
We have foreign exchange exposures related primarily to
short-term intercompany loans denominated in
non-U.S. dollars
to certain of our foreign subsidiaries. The potential gain or
loss in the fair value of these intercompany loans that would
result from a hypothetical change of 10% in exchange rates would
have been approximately $3.1 million and $6.9 million
as of December 31, 2007 and 2006, respectively. For
additional information, see Note 2, Summary of
Significant Accounting Policies, of the Notes to
Consolidated Financial Statements.
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
See the index included on
Page F-1,
Index to Consolidated Financial Statements.
|
|
ITEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
As previously reported, on February 5, 2007, the Chairman
of the Audit Committee of the Board (the Audit
Committee) was notified by our independent registered
public accounting firm, PricewaterhouseCoopers LLP
(PwC), that PwC was declining to stand for
re-election and that the
client-auditor
relationship between the Company and PwC would cease upon
PwCs completion of services related to the audit of our
annual financial statements for 2006 and related 2006 quarterly
reviews.
During the Companys years ended December 31, 2005 and
December 31, 2006, and through June 28, 2007, there
were no disagreements between the Company and PwC on any matter
of accounting principle or practice, financial statement
disclosure, or auditing scope or procedure that, if not resolved
to PwCs satisfaction, would have caused it to make
reference to the matter in connection with its report on the
Companys consolidated financial statements for the
relevant year, and there were no reportable events as defined in
Item 304(a)(1)(v) of
Regulation S-K,
except that the Company disclosed that material weaknesses
existed in its internal control over financial reporting for
2006 and 2005. The material weaknesses identified are discussed
in Item 9A of the Companys Annual Reports on
Form 10-K
for the year ended December 31, 2006 and for the year ended
December 31, 2005. The Company has authorized PwC to
respond fully to any inquiries of its successor concerning the
material weaknesses. PwCs audit reports on the
Companys consolidated financial statements for the years
ended December 31, 2006 and December 31, 2005 did not
contain an adverse opinion or disclaimer of opinion, nor were
they qualified or modified as to uncertainty, audit scope or
accounting principles.
On February 9, 2007, the Audit Committee of the Board, as
part of its periodic review and corporate governance practices,
determined to engage Ernst & Young LLP
(Ernst & Young) as the Companys
independent registered public accounting firm commencing with
the audit for the year ending December 31, 2007.
Ernst & Young also has been engaged as the independent
registered public accounting firm for the 401(k) Plan,
commencing with the audit for the 401(k) Plans year ending
December 31, 2007. During the Companys years ended
December 31, 2005 and December 31, 2006, and through
February 9, 2007, neither the Company, nor anyone on its
behalf, consulted with Ernst & Young with respect to
either (i) the application of accounting principles to a
specified transaction, either completed or proposed, or the type
of audit opinion that might be rendered on the Companys
consolidated financial statements for 2006 or 2005, and no
written report or oral advice was provided by Ernst &
Young to the Company that Ernst & Young concluded was
an important factor considered
65
by the Company in reaching a decision as to the accounting,
auditing, or financial reporting issue for 2006 or 2005 or
(ii) any matter that was the subject of either a
disagreement as defined in Item 304(a)(1)(iv) of
Regulation S-K
or a reportable event as described in Item 304(a)(1)(v) of
Regulation S-K.
|
|
ITEM 9A.
|
CONTROLS
AND PROCEDURES
|
Evaluation
of Disclosure Controls and Procedures
As of the end of the period covered by this Annual Report,
management performed, with the participation of our Chief
Executive Officer and our Chief Financial Officer, an evaluation
of the effectiveness of our disclosure controls and procedures
as defined in
Rules 13a-15(e)
and
15d-15(e) of
the Exchange Act. Our disclosure controls and procedures are
designed to ensure that information required to be disclosed in
the reports we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time
periods specified in the SECs rules and forms, and that
such information is accumulated and communicated to our
management, including our Chief Executive Officer and our Chief
Financial Officer, to allow timely decisions regarding required
disclosures. Based on the evaluation performed, with the
participation of our Chief Executive Officer and our Chief
Financial Officer, we concluded that as of December 31,
2007, because of the existence of material weaknesses discussed
below, the Companys disclosure controls and procedures
were not effective.
We believe that because we performed substantial additional
procedures to compensate for the material weaknesses, our
consolidated financial statements included in this Annual Report
are fairly stated in all material respects.
Managements
Report on Internal Control over Financial
Reporting
Management is responsible for establishing and maintaining
adequate internal control over financial reporting, as defined
in
Rules 13a-15(f)
and
15d-15(f)
under the Exchange Act. Internal control over financial
reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements in accordance with GAAP.
Internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
Company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with GAAP, and that receipts and
expenditures of the Company are being made only in accordance
with authorizations of management and directors of the Company;
and (3) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or
disposition of the Companys assets that could have a
material effect on the financial statements. Because of its
inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projection of any
evaluation of effectiveness to future periods is subject to the
risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies
or procedures may deteriorate.
Management has conducted, with the participation of our Chief
Executive Officer and our Chief Financial Officer, an
assessment, including testing of the effectiveness of our
internal control over financial reporting as of
December 31, 2007. Managements assessment of internal
control over financial reporting was conducted using the
criteria in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
A material weakness is a deficiency, or a combination of
deficiencies, in internal control over financial reporting, such
that there is a reasonable possibility that a material
misstatement of the annual or interim financial statements will
not be prevented or detected on a timely basis. In connection
with managements
66
assessment of our internal control over financial reporting, we
identified the following material weaknesses in our internal
control over financial reporting as of December 31, 2007:
|
|
|
|
|
We did not maintain effective controls over the completeness,
accuracy, existence, valuation and disclosure of revenue, costs
of service, accounts receivable, unbilled revenue, deferred
contract costs, and deferred revenue. Specifically, we did not
maintain effective controls, including monitoring by management,
outside of our North American region to provide reasonable
assurance that we had adequately evaluated customer contracts
regarding the proper application of GAAP. Although numerous new
controls over the accounts noted above have been implemented in
our North American region, certain of these controls are not
fully remediated or have not been operating for a sufficient
amount of time to be deemed effective.
|
|
|
|
We did not maintain effective controls over the completeness,
accuracy and timeliness of the recording of accounts payable,
accrued liabilities, other current and non-current liabilities.
Specifically, we did not design effective controls over our
period-end reporting to capture and accrue costs incurred but
not yet invoiced by third party suppliers and contractors. In
addition, we did not maintain adequate controls over the
approval and processing of purchase orders.
|
|
|
|
We did not maintain effective controls over our financial
statement close and reporting process in our Asia Pacific
region. Specifically, we did not maintain effective controls
over the recording of recurring and non-recurring journal
entries, nor did we provide reasonable assurance that accounts
were complete and accurate and agreed to detailed support and
that reconciliations of accounts were properly performed,
reviewed and approved.
|
These material weaknesses affect substantially all of our
financial statement accounts and disclosures and therefore,
until the underlying control deficiencies are remediated, could
result in a material misstatement of our annual or interim
consolidated financial statements. Because of the material
weaknesses described above, management has concluded that we did
not maintain effective internal control over financial reporting
as of December 31, 2007, based on the Internal
Control Integrated Framework issued by COSO.
The effectiveness of our internal control over financial
reporting as of December 31, 2007 has been audited by
Ernst & Young LLP, an independent registered public
accounting firm, as stated in their report which is included
elsewhere in this Item 9A.
Remediation
of Material Weaknesses in Internal Control over Financial
Reporting
We have engaged in, and continue to engage in, substantial
efforts to address the material weaknesses in our internal
control over financial reporting. Certain of these efforts
commenced over a year ago and will continue at least through a
portion of fiscal 2008 and potentially beyond. The Company has
implemented an automated workflow tool designed to aid in the
reporting, tracking, and implementing of remediation activities.
These remediation activities are being developed and deployed
under the direction of our senior executive management. In
addition, these activities are monitored on a weekly basis
against formal documented plans and are reviewed on a monthly
basis through an Internal Controls Steering Committee, which
includes the participation of both the Chief Financial Officer
and Chief Executive Officer.
Management is committed to continuing efforts aimed at fully
achieving an operationally effective control environment in
2008. The remediation efforts noted above are subject to the
Companys internal control assessment, testing and
evaluation processes. While these efforts continue, we will rely
on additional procedures and other measures as needed to assist
us with meeting the objectives otherwise fulfilled by an
effective control environment.
Changes
in Internal Control over Financial Reporting
Senior management implemented significant changes in internal
control over financial reporting. These changes represent
material changes that have materially affected or are reasonably
likely to materially affect,
67
our internal control over financial reporting and they occurred
throughout fiscal 2007, but were not considered to be
sufficiently mature prior to the fourth quarter of 2007, at
which time they were deemed to be sustainable and having
achieved their desired impact. These improvements in our
internal control over financial reporting have enabled us to
significantly strengthen our control environment, the
completeness and accuracy of underlying accounting data, and the
timeliness with which we are able to close our books. The areas
remediated were attained through:
|
|
|
|
|
Ongoing training efforts with regard to the application of GAAP
and mandatory training with respect to the Foreign Corrupt
Practices Act and Standards of Business Conduct;
|
|
|
|
Implementation of numerous formal management financial review
monitoring controls;
|
|
|
|
Implementation of certain controls designed to identify
non-routine and significant transactions; and
|
|
|
|
Strengthening of policies and procedures across the organization.
|
Report
of Ernst & Young LLP, Independent Registered Public
Accounting Firm, on Internal Control over Financial
Reporting
Board of Directors and Stockholders of BearingPoint, Inc.:
We have audited BearingPoint, Inc.s internal control over
financial reporting as of December 31, 2007, based on
criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (the COSO criteria). BearingPoint,
Inc.s management is responsible for maintaining effective
internal control over financial reporting, and for its
assessment of the effectiveness of internal control over
financial reporting included in the accompanying
Managements Report on Internal Control over Financial
Reporting. Our responsibility is to express an opinion on the
companys internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
68
A material weakness is a deficiency, or combination of
deficiencies, in internal control over financial reporting, such
that there is a reasonable possibility that a material
misstatement of the companys annual or interim financial
statements will not be prevented or detected on a timely basis.
The following material weaknesses have been identified and
included in managements assessment:
|
|
|
|
|
the Company did not maintain effective controls over the
completeness, accuracy, existence, valuation and disclosure of
revenue, costs of service, accounts receivable, unbilled
revenue, deferred contract costs, and deferred revenue,
|
|
|
|
the Company did not maintain effective controls over the
completeness, accuracy and timeliness of the recording of
accounts payable, accrued liabilities, other current and
non-current liabilities, and;
|
|
|
|
the Company did not maintain effective controls over the
financial statement close and reporting process in its Asia
Pacific region.
|
These material weaknesses were considered in determining the
nature, timing, and extent of audit tests applied in our audit
of the 2007 consolidated financial statements, and this report
does not affect our report dated February 26, 2008 on those
financial statements.
In our opinion, because of the effect of the material weaknesses
described above on the achievement of the objectives of the
control criteria, BearingPoint, Inc. has not maintained
effective internal control over financial reporting as of
December 31, 2007, based on the COSO criteria.
/s/ Ernst & Young LLP
McLean, Virginia
February 26, 2008
|
|
ITEM 9B.
|
OTHER
INFORMATION
|
None.
69
PART III.
|
|
ITEM 10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
Our Board currently consists of ten directors. Our directors are
divided into three classes serving staggered three-year terms.
Information about our directors as of February 1, 2008 is
provided below. For information about our executive officers,
please see Executive Officers of the Registrant
included in Part I of this Annual Report.
Class I
Directors Whose Terms Expire in 2010
Douglas C. Allred, age 57, has been a member
of the Board since January 2000. Mr. Allred is a private
investor. Mr. Allred retired from his position as Senior
Vice President, Office of the President, of Cisco Systems, Inc.
in 2003. Mr. Allred was Senior Vice President, Customer
Advocacy, Worldwide Consulting and Technical Services, Customer
Services, and Cisco Information Technology of Cisco Systems,
Inc. from 1991 to 2002.
Betsy J. Bernard, age 52, has been a member
of the Board since March 2004. Ms. Bernard is a private
investor. Ms. Bernard was President of AT&T
Corporation from 2002 to 2003. From 2001 to 2002,
Ms. Bernard was President and Chief Executive Officer of
AT&T Consumer. Ms. Bernard is a director of The
Principal Financial Group, a global financial institution, and
Telular Corporation, a provider of fixed cellular solutions and
wireless security systems and monitoring solutions.
Spencer C. Fleischer, age 54, has been a
member of the Board since July 2005. Mr. Fleischer is a
senior managing member and Vice Chairman of Friedman
Fleischer & Lowe GP II, LLC, a company sponsoring and
managing several investment funds that make investments in
private and public companies, and has served in such capacity
since 1998. Mr. Fleischer was appointed to the Board in
accordance with the terms of the securities purchase agreement,
dated July 15, 2005, relating to the July 2005 Convertible
Debentures among the Company and certain affiliates of Friedman
Fleischer & Lowe, LLC. If Mr. Fleischer ceases to
be affiliated with the purchasers or ceases to serve on our
Board, so long as the purchasers collectively hold at least 40%
of the original principal amount of the July 2005 Convertible
Debentures, the purchasers or their designee have the right to
designate a replacement director to the Board.
Class II
Directors Whose Terms Expire in 2008
Wolfgang H. Kemna, age 49, has been a member
of the Board since April 2001. Mr. Kemna is Chief Executive
Officer of Living-e AG, a German-based software provider of
publishing and productivity software and has served in such
capacity since July 2007. From 2004 to 2007, Mr. Kemna was
a managing director of Steeb Anwendungssysteme GmbH, a wholly
owned subsidiary of SAP AG (SAP). Mr. Kemna was
Executive Vice President of Global Initiatives of SAP from 2002
to 2004 and a member of SAPs extended executive board from
2000 to 2004.
Albert L. Lord, age 62, has been a member of
the Board since February 2003. Mr. Lord is a vice chairman
and Chief Executive Officer of SLM Corporation, commonly known
as Sallie Mae, since January 2008. Mr. Lord was
Vice Chairman and Chief Executive Officer of Sallie Mae from
1997 to 2005 and Chairman from 2005 to January 2008.
Eddie R. Munson, age 57, has been a member of
the Board since October 2007. Mr. Munson is a retired
partner with KPMG and has more than 30 years of auditing
experience focusing on the financial services, government and
automotive industries. From 1996 to 2004, Mr. Munson was a
member of KPMGs board of directors, where he was a member
of the pension committee and chair of the committees responsible
for
70
partner rights and board nominations. Most recently,
Mr. Munson was the national partner in charge of
KPMGs University Relations and Campus Recruiting programs.
Mr. Munson is a director of United American Healthcare
Corporation.
J. Terry Strange, age 64, has been a
member of the Board since April 2003. Mr. Strange retired
from KPMG where he served as Vice Chair and Managing Partner of
the U.S. Audit Practice from 1996 to 2002. During this
period, Mr. Strange also served as the Global Managing
Partner of the Audit Practice of KPMG International and was a
member of its International Executive Committee.
Mr. Strange is a director of New Jersey Resources Corp., an
energy services holding company, Group 1 Automotive, Inc., a
holding company operating in the automotive retailing industry,
and Newfield Exploration Company, an independent crude oil and
natural gas exploration and production company.
Class III
Directors Whose Terms Expire in 2009
F. Edwin Harbach, age 54, has been Chief
Executive Officer and a member of the Board since December 2007.
Mr. Harbach also served as the Companys President and
Chief Operating Officer from January 2007 to December 2007. From
1976 until his retirement in 2004, Mr. Harbach held various
positions with and served in leadership roles at Accenture Ltd,
a global management consulting, technology services and
outsourcing company, including chief information officer,
Managing Partner of Japan and Managing Director of Quality and
Client Satisfaction.
Roderick C. McGeary, age 57, has been a
member of the Board since August 1999 and Chairman of the Board
since November 2004. From March 2005 until December 2007,
Mr. McGeary served the Company in a full-time capacity,
focusing on clients, employees and business partners. From 2004
until 2005, Mr. McGeary served as our Chief Executive
Officer. From 2000 to 2002, Mr. McGeary was the Chief
Executive Officer of Brience, Inc., a wireless and broadband
company. Mr. McGeary is a director of Cisco Systems, Inc.,
a worldwide leader in networking for the Internet, and Dionex
Corporation, a manufacturer and marketer of chromatography
systems for chemical analysis. On December 31, 2007,
Mr. McGeary retired as an employee of the Company.
Mr. McGeary will continue serving as Chairman of the Board.
Jill S. Kanin-Lovers, age 55, has been a
member of the Board since May 2007. Ms. Kanin-Lovers served
as Senior Vice President of Human Resources &
Workplace Management at Avon Products, Inc. from 1998 to 2004.
Ms. Kanin-Lovers is a member of the board of directors of
Dot Foods, Inc., one of the nations largest food
redistributors, Heidrick & Struggles, a leading global
search firm, and First Advantage Corporation, a leading provider
of risk mitigation and business solutions.
No family relationships exist between any of the directors or
between any director and any executive officer of the Company.
Presiding
Director of Executive Sessions of Non-Management
Directors
Our non-management directors who are not employees of the
Company meet separately on a regular basis. The Board has
designated Douglas C. Allred as the Presiding Director for all
meetings of the executive sessions of non-management directors.
Audit
Committee
Our Audit Committee is currently composed of
Messrs. Strange (Chair), Kemna, Lord and Munson. The Board
has affirmatively determined that each member of the Audit
Committee has no material relationship with the Company (either
directly or as a partner, stockholder or officer of the Company)
and is independent of the Company and its management under the
listing standards of the NYSE and the applicable regulations of
71
the SEC. The Board has determined that both Messrs. Strange
and Munson qualify as an Audit Committee Financial Expert.
Compensation
Committee Interlocks and Insider Participation
Our Compensation Committee is currently composed of Mses.
Kanin-Lovers (Chair) and Bernard, and Messrs. Allred and
Munson. During 2007, the committee members initially were
Mr. Allred (Chair), Ms. Bernard and Mr. Strange.
Ms. Kanin-Lovers was appointed to the Compensation
Committee on May 10, 2007 and on June 18, 2007,
Mr. Strange stepped down from the committee. On
November 5, 2007, the Board re-aligned its committees, and
on that date, Mr. Munson was appointed to the Compensation
Committee and Ms. Kanin-Lovers replaced Mr. Allred as
Chair of the committee. No member of the Compensation Committee
is a former or current officer or employee of the Company or any
of the Companys subsidiaries. To the Companys
knowledge, there are no other relationships involving members of
the Compensation Committee requiring disclosure in this Annual
Report.
Standards
of Business Conduct
On May 10, 2007, the Board approved the Standards of
Business Conduct, which superseded our prior Code of Business
Conduct and Ethics as of May 31, 2007. The Standards of
Business Conduct was developed as part of our commitment to
enhancing our culture of integrity and our corporate governance
policies. The Standards of Business Conduct reflects changes in
law and regulation, best practices and updates to the
Companys policies. In addition, the Standards of Business
Conduct contains new or enhanced policies
and/or
procedures relating to violations of the Standards of Business
Conduct, conflicts of interest (including those related to the
giving and receiving of gifts and entertainment), financial
disclosures, the importance of maintaining the confidentiality
of Company, client and competitor information, data privacy and
protection, Company property, investor and media relations,
records management, and lobbying/political activities. The
Standards of Business Conduct applies to all of our directors
and employees, including our principal executive officer,
principal financial officer and principal accounting officer.
The Standards of Business Conduct is posted on our website, at
www.bearingpoint.com. We intend to satisfy the disclosure
requirement regarding any amendment to, or waiver of, a
provision of the Standards of Business Conduct for our Chief
Executive Officer, Chief Financial Officer, Corporate Controller
or persons performing similar functions, by posting such
amendment or waiver on our website within the applicable
deadline that may be imposed by government regulation following
the amendment or waiver.
Committee
Charters
Our Corporate Governance Guidelines, Audit Committee Charter,
Compensation Committee Charter and Nominating and Corporate
Governance Committee Charter are posted on the Companys
website, at www.bearingpoint.com. A printed copy of these
documents, as well as the Standards of Business Conduct, is
available free of charge to any person who makes a request to
our Investor Relations team at BearingPoint, Inc., 25
Independence Blvd., 4th Floor, Warren, New Jersey 07059, or
by calling
908-607-2100.
Annual
Certifications
The certifications by our Chief Executive Officer and Chief
Financial Officer regarding the quality of our public
disclosures are filed as Exhibits 31.1 and 31.2,
respectively, to this Annual Report. We have also submitted to
the NYSE a certificate of our Chief Executive Officer certifying
that he is not aware of any violation by the Company of the NYSE
corporate governance listing standards.
72
Annual
Meeting
We currently expect to hold our Annual Meeting of Stockholders
in the fourth quarter of 2008. The Boards Nominating and
Corporate Governance Committee is currently undertaking a review
of our corporate governance structure, assessing the
Boards current composition and determining its future
needs, and considering its recommendations for nominees to the
Board at our next annual meeting of stockholders. We may, as a
result of this review, propose changes to our corporate
governance structure, certain of which may be included in the
agenda at our next annual meeting of stockholders. If the date
of our stockholder meeting is changed by more 30 days from
the anniversary date of our 2007 stockholder meeting, the
deadlines for shareholder proposals, including proposals for
director recommendations and nominations, will change. If any
such change occurs, we will provide these new deadlines, either
in a
Form 10-Q,
Form 8-K
or by other permitted means.
Communications
with Board of Directors
The Board welcomes your questions and comments. If you would
like to communicate directly with our Board, our non-management
directors of the Board as a group or Mr. Allred, as the
Presiding Director, then you may submit your communication to
our General Counsel and Corporate Secretary by writing to them
at the following address:
BearingPoint, Inc.
c/o General
Counsel and Corporate Secretary
8725 W. Higgins Road
Chicago, IL 60631
All communications and concerns will be forwarded to our Board,
our non-management directors as a group or our Presiding
Director, as applicable. We also have established a dedicated
telephone number for communicating concerns or comments
regarding compliance matters to the Company. The phone number is
1-800-206-4081
(or
240-864-0229
for international callers), and is available 24 hours a
day, seven days a week. The Standards of Business Conduct
prohibits any retaliation or other adverse action against any
person for raising a concern. If you wish to raise your concern
in an anonymous manner, you may do so by calling the telephone
number listed above.
Section 16(a)
Beneficial Ownership Reporting Compliance
Under the U.S. Federal securities laws, directors and
executive officers, as well as persons who beneficially own more
than ten percent of our outstanding common stock, must report
their initial ownership of the common stock and any changes in
that ownership to the SEC. The SEC has designated specific due
dates for these reports, and we must identify in this Annual
Report those persons who did not file these reports when due.
Based solely on a review of copies of Forms 3, 4 or 5 filed
by us on behalf of our directors and executive officers or
otherwise provided to us and copies of Schedule 13Gs, we
believe that all of our directors, executive officers and
greater than ten percent stockholders complied with their
applicable filing requirements for 2007.
73
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ITEM 11.
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EXECUTIVE
COMPENSATION
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Compensation
Discussion and Analysis
The Compensation Committee of our Board of Directors (the
Committee) determines the compensation of our
executive officers, including making individual compensation
decisions, and reviewing and monitoring the compensation
programs applicable to our executive officers. This discussion
describes the Committees determination of 2007
compensation for our named executive officers our
Chief Executive Officer, Chief Financial Officer, Chief
Operating Officer and General Counsel and Secretary.
In 2007, there were several changes in our executive management
team. In January 2007, F. Edwin Harbach was appointed as our
Chief Operating Officer, replacing Richard Roberts. As a result,
the Committee did not make any determinations regarding
Mr. Roberts 2007 compensation. Furthermore, in
December 2007, Harry You left the Company, and Mr. Harbach
was promoted the position of Chief Executive Officer. Also in
December 2007, Roderick McGeary retired as an employee of the
Company, terminating his service as an executive officer of the
Company, although he continues in his role as Chairman of the
Board. As a result, the Committee did not make any 2007 bonus
determinations for Mr. You or Mr. McGeary.
Overall
Compensation Philosophy and Objectives
Overall, our compensation philosophy is to enhance corporate
performance and stockholder value by aligning the financial
interests of our executive officers with those of our
stockholders. We strive to implement this philosophy by paying
for performance, based upon both individual performance and
Company performance. Our goal is to design compensation programs
that will:
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attract and retain the best possible talent;
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recognize and reward outstanding individual performance;
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motivate our people to deliver quality service to our clients,
in order to drive client satisfaction and the profitability of
our company, resulting in positive returns for our stockholders;
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provide for cash and long-term incentive compensation at levels
that are competitive with companies within our industry and of
similar size (targeting total compensation to remain at
approximately the 50th percentile); and
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communicate metrics openly and transparently, to influence
employee performance and accountability.
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How
Compensation is Determined
The Committee devotes a substantial portion of its time in
determining the compensation of our executive officers. This
process includes reviewing market data, sharing best practices
gained through prior experience, determining appropriate
milestones to assess Company performance, and discussing
appropriate levels of compensation based upon both individual
and Company performance. In addition, the Committee engages a
compensation consultant for independent guidance and expertise.
For 2007, we engaged Towers Perrin to provide its counsel
related to various executive compensation matters.
As part of the process, the Committee considers peer
benchmarking information, which is used to assess the level of
our executive officer compensation relative to a group of peer
companies, and to compare the mix of total compensation. For
2007, the Committee reviewed market comparisons for all
companies participating in the Towers Perrin U.S. Executive
Compensation Databank within the business services or
information
74
technology industries (the Peer Companies). This
broad industry peer group for 2007 consisted of
33 companies:
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Accenture Ltd
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Cisco Systems, Inc.
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Gartner, Inc.
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ADVO, Inc.
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Convergys Corporation
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The GEO Group, Inc.
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APAC Customer Services, Inc.
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eFunds Corporation
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IKON Office Solutions, Inc.
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ARAMARK Corporation
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Electronic Data Systems Corporation
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IMS Health Incorporated
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Automatic Data Processing, Inc.
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EMC Corporation
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Jackson Hewitt Tax Service Inc.
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H&R Block, Inc.
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Emdeon Corporation
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Pitney Bowes Inc.
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Booz Allen Hamilton Inc.
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Equifax Inc.
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R.R. Donnelly & Sons Company
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CB Richard Ellis Group, Inc.
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Equity Office Properties Trust
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The Reynolds and Reynolds Company
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CDI Corp.
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First Data Corporation
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Robert Half International Inc.
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Ceridian Corporation
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Fiserv, Inc.
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Unisys Corporation
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CheckFree Corporation
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G&K Services, Inc.
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WPP Group plc
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In addition, the Committee reviewed its compensation decisions
against compensation data for 12 direct peer companies, provided
through a survey prepared by Watson Wyatt. These companies were:
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Accenture Ltd
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Hewlett-Packard Company
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Affiliated Computer Services, Inc.
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International Business Machines Corporation
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Computer Sciences Corporation
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Marsh & McLennan Companies, Inc.
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Electronic Data Systems Corporation
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Oracle Corporation
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EMC Corporation
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Sun Microsystems, Inc.
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First Data Corporation
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Unisys Corporation
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The Committee determines executive compensation based upon the
total amount of compensation relative to the Peer Companies,
with the general goal of setting the level of compensation at
approximately the 50th percentile. For 2007, the Committee
focused primarily on the total amount of compensation rather
than the mix of compensation (i.e., cash/noncash or
long-term/short-term), because the mix of our executive
officers compensation has not been comparable to the Peer
Companies. This is primarily due to the state of our business at
the time we hired these individuals, which included issues
related to our North American financial reporting systems,
internal controls and various investigations and related
litigation. We paid signing bonuses and long-term incentive
compensation awards as part of their employment arrangements, to
induce them to join the Company and to offset the compensation
or benefits they would have received if they remained with their
previous employers.
As part of its decision-making process, the Committee meets with
the Chief Executive Officer to discuss the annual performance of
each executive officer (and in the case of the Chief Executive
Officer, the Committee meets with both the Chairman of the Board
and the Presiding Director). The Committee then deliberates and
determines the executive officers compensation, taking
into account managements recommendations, the executive
officers individual performance and Company performance.
The Committee balances its analysis by considering the
Companys performance within our industry, any challenges
or business issues faced or overcome by the Company, as well as
each individuals current contribution and expected future
contribution to Company performance. Furthermore, the Committee
assesses the reasonableness of the compensation package based
upon its review of compensation for the Peer Companies and
guidance provided by its compensation consultant.
Appointment of Ed Harbach as Chief Executive
Officer. In December 2007, Mr. Harbach was
appointed as our Chief Executive Officer, to replace
Mr. You. In determining Mr. Harbachs 2008
compensation as Chief Executive Officer, the Committee reviewed
market information provided by the same databank maintained by
75
Towers Perrin that comprised the Peer Companies, but adjusted
for 2008 participation. The Peer Companies for 2008 were the
following 38 companies:
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Accenture Ltd
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Dendrite International, Inc.
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IKON Office Solutions, Inc.
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ADVO, Inc.
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eBay Inc.
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IMS Health Incorporated
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APAC Customer Services, Inc.
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eFunds Corporation
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Iron Mountain Incorporated
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ARAMARK Corporation
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Electronic Data Systems Corporation
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Kelly Services, Inc.
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Automatic Data Processing, Inc.
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EMC Corporation
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MacDonald, Dettwiler and Associates
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Booz Allen & Hamilton, Inc.
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Equifax Inc.
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Oracle Corporation
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The Brinks Company
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First Data Corporation
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Pitney Bowes Inc.
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CA, Inc.
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Fiserv, Inc.
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Robert Half International Inc.
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Ceridian Corporation
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G&K Services, Inc.
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Symantec Corporation
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CheckFree Corporation
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Gartner, Inc.
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TeleTech Holdings, Inc.
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CitiStreet
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The GEO Group, Inc.
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Unisys Corporation
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Convergys Corporation
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GTECH Holdings Corp
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Viad Corp
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Deluxe Corporation
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H&R Block, Inc.
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In addition, the results of this market data were compared
against compensation data for a select sample of 9 professional
services firms from the 2007 Towers Perrin International
Professional Services Executive Compensation Survey. These
direct peer companies were selected because they were the
companies in Towers Perrins database that management felt
provided comprised the most comparable peer group to the direct
peer list previously used by the Company.
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Accenture Ltd
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Gartner, Inc.
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Booz Allen Hamilton, Inc.
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International Business Machines Corporation
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Capgemini U.S. LLC
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Science Applications International Corporation
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Deloitte Consulting LLP
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Unisys Corporation
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Diamond Management & Technology Consultants, Inc.
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The Committee decided to provide a total compensation package
for Mr. Harbach that would fall approximately at the
50th percentile of compensation reported. When determining
Mr. Harbachs compensation, the Committee considered
the signing bonus and equity awards made to Mr. Harbach
upon joining the Company in 2007. Furthermore,
Mr. Harbachs previously executed employment
arrangements were either terminated or amended, as part of the
Committees desire to provide a compensation package that
reflected market best practices and was more closely aligned
with the standard terms utilized in agreements with our other
managing directors. The Committee believes that while the level
of compensation for its executive officers must remain market
competitive, it is also important to more closely align certain
employment terms and conditions with those applicable to our
managing directors, to provide consistency with respect to our
performance expectations for our most senior level of
executives. For additional information about
Mr. Harbachs new employment arrangements, see
Employment Agreements Employment
Agreement for F. Edwin Harbach, below.
Principal
Components of Executive Officer Compensation
The principal elements of our executive officer compensation
program consist of base salary, annual cash incentive payments
and, at appropriate intervals, long-term incentive compensation
in the form of grants of stock-based awards. We also provide
deferred compensation plans, health and welfare (including
medical), retirement and other perquisites and benefits to our
executive officers that also available to our managing directors.
We have utilized employment agreements and other agreements as
the primary manner for structuring the compensation of our
executive officers. Certain terms and conditions of our
employment agreements with our executive officers reflected our
strong desire, at the time of hire, to induce these individuals
to join our
76
company, given their level of expertise and experience and the
specific issues we faced at that time. While we expect to
continue to use employment agreements and other agreements as a
method of attracting executive talent and to continue providing
competitive compensation for our executive officers, our goal is
to further align the terms of employment with our executive
officers with the standard terms and conditions that apply to
the vast majority of our managing directors, unless specific
situations necessitate other alternatives.
Fixed
Compensation
Base Salaries. Base salaries for our executive
officers are determined by evaluating the responsibilities of
the position, the experience and performance of the individual
and market information comparing such salaries to the
competitive marketplace for executive talent, with emphasis on
our primary competitors in the management and technology
consulting industry. The Committee considers salary adjustments
based upon the recommendation of the Chief Executive Officer
(other than with respect to his salary) and the Committees
evaluation of Company performance and individual performance,
taking into account any additional or new responsibilities
assumed by the individual executive officer in connection with
promotions or organizational changes. Our philosophy is that,
base salary should comprise a smaller percentage of total
compensation for our executive officers, with a greater
percentage tied to Company performance. Because our executive
officers are the primary decision-makers and policy-makers for
our Company, we believe it is appropriate to directly link a
larger percentage of their compensation with Company
performance, to hold them accountable for the decisions that
they make.
Base salary information for our executive officers can be found
in the Summary Compensation Table included in this
Annual Report. The Committee decided to increase the base
salaries of our executive officers by 4% (with the exception of
Mr. Harbach, whose 2007 salary was specified in his
employment agreement), which was the standard salary increase
provided to the Companys managing directors for 2007. The
Committee reviewed the performance of the Company and the
individual executive officers before determining that they, too,
should receive this increase in base salary. The Committee
determined the increase was appropriate, given the tasks
management had performed in the past and the objectives it had
outlined for the future.
As part of its analysis, the Committee assessed each executive
officers proposed base salary for 2007 with relevant
market data provided by Towers Perrin. In all cases except for
Mr. You, proposed 2007 base salaries were between the
50th to 75th percentile of the Peer Companies.
Mr. Yous proposed base salary was significantly below
market, falling within the 25th to 50th percentile of
the Peer Companies. The Committee did not, however, increase
Mr. Yous base salary but decided to make up the
shortfall by increasing Mr. Yous equity-based
compensation. This decision was made not only to better balance
the mix of Mr. Yous cash and non-cash compensation,
but also to strengthen the link between Mr. Yous
compensation and the Companys 2007 performance.
Information about the RSU grants awarded to Mr. You in 2007
can be found in the Grants of Plan-Based Awards
table included in this Annual Report.
In January 2007, Mr. Harbach was appointed as our Chief
Operating Officer. Mr. Harbachs base salary for 2007,
set forth in his employment agreement with the Company, was
$700,000. Mr. Harbachs base salary was considered to
be competitive compared to relevant market, which was between
the 50th to 75th percentile of chief operating officer
compensation for the Peer Companies. The Committee agreed with
managements recommendation that, in light of the business
issues the Company faced at that time, it was appropriate to
offer a salary at a level higher than the 50th percentile,
in order to attract a senior executive with
Mr. Harbachs experience and expertise.
Variable
Compensation
Cash Awards. The Committee makes cash award
determinations each year based upon its pay for
performance philosophy. For 2007, our executive officers
were awarded the annual cash awards set forth in
77
the Bonus column of the Summary Compensation
Table included in this Annual Report. Awards earned for
performance during one year are paid in the following year. For
2007, all of our executive officers were eligible to receive a
maximum cash award equal to 100% of their respective base
salaries, as set forth in their respective employment
agreements. Under these agreements, Mr. Harbach is entitled
to receive a minimum cash award equal to 40% of his base salary
for 2007, provided that he received a meets
expectation performance rating for 2007. Ms. Ethell
and Mr. Lutz are entitled to receive cash awards based on
the achievement of reasonable, pre-established performance goals.
In addition to the milestones set forth in their employment
agreements, the Committee determined that the performance of our
executive officers would be measured, in part, against the
achievement of corporate performance milestones. The
Committees plan required the achievement of two goals:
(1) the Company must be current in its periodic SEC reports
as of December 31, 2007; and (2) for 2007, the Company
must achieve at least 90% of (a) the Companys
2007 gross profit plan of $930 million and
(b) the Companys 2007 earnings before interest and
taxes (EBIT) plan of $(99) million), with
certain adjustments to be made to reflect actual stock
compensation expense. In addition, the corporate portion will be
increased to the extent that actual gross profit and EBIT exceed
this minimum average threshold. The Committee selected gross
profit and EBIT as measures it felt were appropriate for gauging
the overall health of the Company, given its past performance
and expectations for the future. The Company was current in its
periodic SEC reports as of December 31, 2007 but did not
achieve either the gross profit or EBIT plans.
For 2007, after reviewing Mr. Harbachs tenure as
Chief Operating Officer, his short tenure as Chief Executive
Officer in December of 2007 and his employment arrangements, the
Committee determined to award Mr. Harbach a cash bonus
equal to $350,046, or 50% of his 2007 base salary.
Mr. Harbachs employment agreements required that his
cash bonus for 2007 be, at a minimum, 40% of his base salary, if
Mr. Harbach received a minimum meets
expectations performance rating by the Committee. After
reviewing Mr. Harbachs accomplishments as Chief
Operating Officer during 2007 and the expansion of his role and
responsibilities as Chief Executive Officer, the Committee
strongly believed that Mr. Harbachs 2007 performance
had met the minimum meets expectations requirement
and in fact exceeded its expectations. The Committee based its
determination that Mr. Harbachs 2007 operational
efforts were integral to many of the Companys achievements
in 2007, including the reduction of infrastructure costs and the
Company being current in its periodic SEC reports as of
December 31, 2007. The Committee further expressed its
confidence in Mr. Harbachs ability to successfully
implement the Companys business goals and objectives for
2008. As a result, the Committee decided that Mr. Harbach
should receive a cash incentive award at a level greater than
the minimum 40% threshold. At the same time, however, the
Company decided that awarding Mr. Harbach a more
significant cash award bonus was not appropriate, given the
Companys 2007 financial performance. The Committees
determination was also based, in part, on the following
considerations:
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F. Edwin Harbach:
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excellent communication to the
Board regarding Company issues and challenges, and operational
vision and goals;
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development of metrics and
scorecard to monitor Company performance;
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operational improvements related
to the participation of our engagement teams in providing
financial information and updates into the financial closing
process;
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successful transition to new
responsibilities and duties as Chief Executive Officer; and
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evaluations by Board members.
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The Committee then proceeded to evaluate Ms. Ethells
and Mr. Lutzs individual performance. With respect to
both Ms. Ethell and Mr. Lutz, the Committee recognized
their significant and important contributions in the
Companys achievement in 2007 of becoming current in its
SEC periodic reports. The Committee strongly believed that
becoming current in its periodic SEC reporting was essential to
the Companys ability to achieve its future performance
goals, and agreed that its expectations were surpassed with
respect to managements ability to achieve what it
considered to be the Companys most important
78
objective for 2007. As a result, the Committee decided to award
each of Ms. Ethell and Mr. Lutz a cash incentive award
equal to $260,047, or 50% of their respective base salaries in
2007. At the same time, however, the Company decided that
awarding Ms. Ethell and Mr. Lutz a more significant
cash award bonus was not appropriate, given the Companys
2007 financial performance. In addition, the Committee discussed
and based its determinations, in part, on the following:
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Judy Ethell:
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instrumental in Companys
ability to become current in its SEC periodic reports;
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progress achieved with respect to
the remediation of internal control issues and Sarbanes-Oxley
efforts;
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achievement of cost reductions
within finance; and
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feedback provided by peers and
direct reports, gathered through the Companys 360
degree review process.
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Laurent Lutz:
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instrumental in Companys
ability to become current in its SEC periodic reports;
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successful resolution of contract
disputes and litigation;
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negotiation and structuring of the
2007 Credit Facility;
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development and leadership of
legal and compliance functions; and
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quality of analysis and guidance
provided to the Board and its committees.
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Long-Term
Incentive Compensation
While we have maintained parity with our major competitors on
base cash compensation for our executive officers, comparisons
with our Peer Companies indicate that our long-term incentive
equity awards continue to lag behind our competitors.
Performance Share Units. In 2007, we issued
performance share units (PSUs) to certain of our
executive officers to help balance the mix of fixed and variable
compensation of our executive officers. Information about these
grants can be found in the Grants of Plan-Based
Awards table included in this Annual Report. Award amounts
were based upon each executive officers individual
performance and responsibilities and roles within the Company
and by assessing and comparing the executive officers
total compensation, including previously granted incentive
awards and the balance of fixed and variable compensation.
Mr. Harbach did not receive a PSU award since he received a
grant of RSUs earlier in the year as part of his employment
arrangement with the Company, and the Committee determined that
his amount of compensation, and his mix of total compensation,
were appropriate without making additional grants.
The vesting of the PSUs is tied to the achievement of
performance targets of both minimum growth in consolidated
business unit contribution (CBUC) and total
shareholder return. The Committee supported managements
decision to use CBUC as a performance metric as a way of
measuring the core growth of our industry groups, and to use
total shareholder return as a best practice
performance metric important to our stockholders. CBUC is
defined as (i) consolidated net revenue less
(ii) professional compensation, other costs of service and
sales, general and administrative expense (excluding stock
compensation expense, bonus expense, interest expense and
infrastructure expense). While we currently believe that the
minimum CBUC target may be achieved by 2009, there can be no
assurance that our total shareholder return performance (in
comparison to the S&P 500), will permit vesting of the PSUs.
Due to the complexity and uncertainty involved in determining
the likelihood of vesting of the PSUs, as well as the extended
timeframe for vesting and settlement, we have some concerns that
the PSUs may not significantly incent our employees to remain
with the Company. As long as these PSUs continue to remain
outstanding, our ability to take any other retentive actions by
issuing additional equity to our employees remains limited. As a
result, management is re-evaluating the efficacy of the PSUs as
a compensation tool and our ability to consider alternatives to
the PSUs that will have clearer retentive value for our
employees. We expect that our executive officers would be
included in any of these alternatives that may be pursued.
79
Regardless of how we address the existing component of our
employees compensation, we currently do not intend to seek
approval from our shareholders for any further increase to our
share capacity under our Long-Term Incentive Plan (the
LTIP) prior to 2009.
Restricted Stock Units. We granted restricted
stock units (RSUs) for various purposes, including
employment offers for new executive officer candidates. In 2007,
we made the following RSU awards to our Named Executive Officers
(additional information can be found in the Grants of
Plan-Based Awards table included in this Annual Report):
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Mr. Lutz received a grant of RSUs in accordance with his
employment arrangements with the Company, which provided that
once the Company became current in its SEC periodic reports,
Mr. Lutzs long-term incentive award would be paid in
RSUs rather than in cash. At the time of Mr. Lutzs
hire in 2006, we could not issue RSUs due to the existence of a
blackout period under our 401(k) plan pursuant to
Regulation BTR. After we took steps to amend the 401(k)
plan, the blackout period ended as of September 14, 2006.
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Mr. Harbach received a grant of RSUs as part of his
employment arrangement with the Company.
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Mr. You and Mr. McGeary received grants of RSUs as
part of their bonus compensation for our 2006 fiscal year.
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Stock Options. While no executive officers
were issued stock options in 2007, Mr. Harbach did receive
an award of stock options to purchase up to
1,232,600 shares of our common stock (with an exercise
price equal to $2.76 per share) on January 2, 2008, in
connection with his appointment as Chief Executive Officer. The
award vests in four equal increments (25%) on January 2 in each
year of 2009 through 2012.
To date, we have not instituted any equity ownership
requirements for our executive officers. We did not consider any
such policy in 2007, since our equity programs were suspended
for most of the year, as we were not current in our SEC periodic
reports. Now that we are current, we expect to consider an
equity ownership policy for our executive officers and directors
in 2008.
Other
Compensation
Deferred Compensation Plans. We have a
Deferred Compensation Plan and a Managing
Directors Deferred Compensation Plan for our managing
directors and other highly compensated executives. The two plans
are substantially identical and permit a select group of
management and highly compensated employees to accumulate
additional income for retirement and other personal financial
goals by making elective deferrals of compensation to which they
will become entitled to in the future. Our deferred compensation
plans are nonqualified and unfunded, and participants are
unsecured general creditors of the Company as to their accounts.
None of our executive officers have participated in our deferred
compensation plans.
Other Benefits. Our executive officers are
eligible for the same health and welfare programs as our other
employees. Our retirement program for U.S. employees
includes a 401(k) program. We match the individual
employees contribution to the program of 25% of the first
6% of pre-tax eligible compensation contributed to the plan,
and, at our discretion, may make additional discretionary
contributions of up to 25% of the first 6% of pre-tax eligible
compensation contributed to the plan. Employee contributions to
the 401(k) program for our executive officers are limited by
federal law. We do not make up for the impact of these statutory
limitations through any type of nonqualified deferred
compensation or other program.
Perquisites and Other Compensation. Certain of
our executive officers have received perquisites such as
reimbursements of moving expenses and legal fees and
gross-up
payments in connection with the same as set forth in their
respective employment agreements. As part of
Mr. Harbachs employment arrangement as Chief
Executive Officer of the Company, Mr. Harbach will be
reimbursed for his rental of an apartment in New York
80
City during part of 2007 and 2008, which is his primary office
location (Mr. Harbach resides in Florida). The Committee
will review its decision to provide this reimbursement to
Mr. Harbach at each lease renewal date.
Regulatory
Considerations
The Internal Revenue Code contains a provision that limits the
tax deductibility of certain compensation paid to our executive
officers to the extent it is not considered performance-based
compensation under the Internal Revenue Code. We have adopted
policies and practices to facilitate compliance with
Section 162(m) of the Internal Revenue Code. It is intended
that awards granted under the LTIP to such persons will qualify
as performance-based compensation within the meaning of
Section 162(m) and regulations under that section.
In making decisions about executive compensation, we also
consider the impact of other regulatory provisions, including
the provisions of Section 409A of the Internal Revenue Code
regarding non-qualified deferred compensation and the
change-in-control
provisions of Section 280G of the Internal Revenue Code. In
accordance with recent IRS guidance interpreting
Section 409A, the LTIP will be administered in a manner
that is in good faith compliance with Section 409A. The
Board intends that any awards under the LTIP satisfy the
applicable requirements of Section 409A. Generally,
Section 409A is inapplicable to incentive stock options and
restricted stock and also to nonqualified stock options so long
as the exercise price for the nonqualified option may never be
less than the fair market value of the common stock on the date
of grant.
REPORT OF
THE COMPENSATION COMMITTEE
OF THE BOARD OF DIRECTORS ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors has
reviewed and discussed the Compensation Discussion and Analysis
section of this Annual Report on
Form 10-K
with the Companys management and, based on such review and
discussion, recommended to the Board of Directors that the
Compensation Discussion and Analysis be included in this Annual
Report on
Form 10-K.
COMPENSATION COMMITTEE
Jill S. Kanin-Lovers (Chair)*
Douglas C. Allred**
Betsy J. Bernard
Eddie R. Munson***
*Member of the Compensation Committee since May 10, 2007
and Chair beginning November 5, 2007
**Chair of the Compensation Committee until November 5,
2007
***Member of the Compensation Committee since November 5,
2007
81
Summary
of Cash and Certain Other Compensation
The Summary Compensation Table below sets forth information
concerning all compensation for services in all capacities to
the Company for 2006 and 2007 of those persons who were or acted
as the Chief Executive Officer, Chief Financial Officer and the
three other most highly compensated executive officers of the
Company for 2007 (collectively, the named executive
officers).
Summary
Compensation Table
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Non-Equity
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|
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|
|
|
|
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Incentive
|
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|
|
|
|
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|
|
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|
|
|
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Stock
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Option
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Plan
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All Other
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|
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Name and
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|
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|
|
Salary
|
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Bonus
|
|
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Awards
|
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Awards
|
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Compensation
|
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Compensation
|
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Total
|
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Principal Position
|
|
Year
|
|
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($)
|
|
|
($)(1)
|
|
|
($)(2)
|
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($)(2)
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|
|
($)
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($)(1)
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|
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($)
|
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F. Edwin Harbach(3)
|
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2007
|
|
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$
|
686,830
|
|
|
$
|
1,350,046
|
|
|
$
|
1,710,473
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
152,364
|
|
|
$
|
3,899,713
|
|
Chief Executive Officer
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Judy A. Ethell(4)
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2007
|
|
|
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520,094
|
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260,047
|
|
|
|
1,500,626
|
|
|
|
379,396
|
|
|
|
|
|
|
|
78,579
|
|
|
|
2,738,742
|
|
Chief Financial Officer
|
|
|
2006
|
|
|
|
500,000
|
|
|
|
500,000
|
|
|
|
690,700
|
|
|
|
1,131,000
|
|
|
|
|
|
|
|
3,797
|
|
|
|
2,825,497
|
|
Laurent C. Lutz(5)
|
|
|
2007
|
|
|
|
520,094
|
|
|
|
635,047
|
|
|
|
1,418,690
|
|
|
|
|
|
|
|
525,000
|
(6)
|
|
|
10,777
|
|
|
|
3,109,608
|
|
General Counsel and Secretary
|
|
|
2006
|
|
|
|
411,059
|
|
|
|
1,311,059
|
|
|
|
|
|
|
|
|
|
|
|
525,000
|
|
|
|
78,431
|
|
|
|
2,325,549
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|
Roderick C. McGeary
|
|
|
2007
|
|
|
|
676,166
|
|
|
|
|
|
|
|
240,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
916,166
|
|
Chairman of the Board
|
|
|
2006
|
|
|
|
662,640
|
|
|
|
50,712
|
|
|
|
250,000
|
|
|
|
263,732
|
|
|
|
|
|
|
|
|
|
|
|
1,227,084
|
|
Richard J. Roberts(7)
|
|
|
2007
|
|
|
|
635,525
|
|
|
|
|
|
|
|
405,283
|
|
|
|
82,450
|
|
|
|
|
|
|
|
1,586
|
|
|
|
1,124,844
|
|
Chairman, Global Public Services and
|
|
|
2006
|
|
|
|
650,000
|
|
|
|
50,700
|
|
|
|
855,400
|
|
|
|
332,160
|
|
|
|
|
|
|
|
3,977
|
|
|
|
1,892,237
|
|
Former Chief Operating Officer
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Harry L. You(8)
|
|
|
2007
|
|
|
|
791,229
|
|
|
|
|
|
|
|
122,346
|
|
|
|
3,056,537
|
|
|
|
|
|
|
|
107,237
|
|
|
|
4,077,349
|
|
Former Chief Executive Officer
|
|
|
2006
|
|
|
|
750,000
|
|
|
|
58,500
|
|
|
|
938,900
|
|
|
|
2,519,300
|
|
|
|
|
|
|
|
331,828
|
|
|
|
4,598,528
|
|
|
|
|
(1)
|
|
Unless otherwise noted,
Bonus amounts consist of performance-based cash
bonuses accrued in the fiscal year for which the bonus has been
earned. We have entered into employment agreements with
Mr. Harbach, Ms. Ethell and Mr. Lutz that set
forth the terms of their compensation. Mr. You also had an
employment agreement that set forth the terms of his
compensation. All Other Compensation does not
include matching contributions to be made by the Company under
the 401(k) Plan for 2007, since these amounts are not finalized
for payment until the following year.
|
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(2)
|
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Amounts reflected in the table as
2007 equity compensation reflect the amount recognized for
financial statement reporting purposes in 2007 in accordance
with SFAS 123(R) for equity award expense. These amounts reflect
the Companys accounting expense for these awards, and do
not correspond to the actual value that may be recognized by the
named executive officers. Whether and to what extent a named
executive officer realizes value will depend on various factors,
including actual operating performance, stock price fluctuations
and the named executive officers continued employment. For
a discussion of the assumptions used by the Company in
calculating these amounts, see Item 7,
Managements Discussion and Analysis of Financial
Condition and Results of Operation Accounting for
Stock-Based Compensation, and Note 13,
Stock-Based Compensation, of the Notes to
Consolidated Financial Statements. For information regarding
2007 Stock Awards and Option Awards, see
Grants of Plan-Based Awards.
|
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(3)
|
|
Mr. Harbachs annual base
salary for 2007 was $700,000. The amount reported as
Mr. Harbachs salary is the amount actually paid in
2007. Mr. Harbachs Bonus amount for 2007
consists of a signing bonus of $1,000,000 and a $350,046 cash
incentive award for his 2007 performance.
Mr. Harbachs All Other Compensation
consists of $98,704 in reimbursements for costs associated with
a furnished apartment in New York City for
Mr. Harbachs use (including a monthly rental payment
of $10,000 beginning on September 15, 2007, certain
expenses incidental to the maintenance, furnishing and upkeep of
the apartment and costs related to Mr. Harbachs
moving expenses) and $53,660 in tax equalization payments with
respect to the reimbursement of certain state taxes paid by
Mr. Harbach resulting from work performed outside his state
of residence. Mr. Harbach served as our President and Chief
Operating Officer until December 3, 2007, when he became
our Chief Executive Officer. In connection with
Mr. Harbachs promotion, Mr. Harbachs
annual salary was increased to $900,214, effective
December 31, 2007, with a target bonus of $900,214. In
February 2008, we agreed to make Mr. Harbachs
new base salary effective as of December 1, 2007, to align
more closely with the date of his promotion. The incremental
salary to be paid to Mr. Harbach will be made in 2008. For
additional information regarding Mr. Harbachs 2008
employment arrangements, see Employment
Agreements Employment for F. Edwin Harbach.
|
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(4)
|
|
Ms. Ethells All
Other Compensation consists of $76,669 in legal fees
reimbursed by the Company and tax equalization payments with
respect to the reimbursement of these legal fees, which amounts
were paid in 2007,
|
82
|
|
|
|
|
incurred in connection with the
previously disclosed replacement of certain equity grants in
2006, and $1,910 in tax equalization payments with respect to
the reimbursement of certain state taxes paid by Ms. Ethell
resulting from work performed outside her state of residence.
|
|
(5)
|
|
Mr. Lutzs
Bonus amount for 2007 consists of a $375,000 cash
retention bonus paid on the first anniversary of the effective
date of his employment agreement and a $260,047 cash incentive
award for his 2007 performance. Mr. Lutzs All
Other Compensation consists of $10,777 in tax equalization
payments with respect to the reimbursement of certain state
taxes paid by Mr. Lutz resulting from work performed
outside his state of residence.
|
|
(6)
|
|
Upon his appointment as General
Counsel of the Company in March 2006, Mr. Lutz was granted
a multi-year award under our LTIP with an aggregate value of
$1.75 million. Grants under the award were to be made in
cash until the earlier of (i) the date an effective
registration statement on
Form S-8
is filed or is on file, and (ii) the date, if any, we cease
to be a reporting company under the Exchange Act. Subsequent to
that event, the award would consist of grants of RSUs having an
aggregate value of $1.75 million, less amounts previously
paid in cash. Mr. Lutz received cash payments (which
reduced the value of the RSUs to be granted) of $525,000 on
July 1, 2006 and June 30, 2007. On October 22,
2007, the Company filed a registration statement on
Form S-8,
which became effective on the same day. As a result, we were
obligated, pursuant to the terms of his employment agreement, to
provide Mr. Lutz with an equity grant having an aggregate value
of $700,000, which was the amount remaining from his initial
award, after taking into account cash payments previously made.
Therefore, we granted Mr. Lutz 146,444 RSUs, which number
was based on the closing price of our common stock on the first
business day after the filing of the registration statement. Of
the 146,444 RSUs, 36,611 RSUs vested and settled on
December 31, 2007 and an additional 36,611 RSUs will vest
on December 31 in each of 2008, 2009 and 2010.
|
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|
|
(7)
|
|
Effective as of January 8,
2007, Mr. Roberts no longer served as our Chief Operating
Officer.
|
|
(8)
|
|
Mr. You served as our Chief
Executive Officer until he left the Company on December 3,
2007. Mr. Yous All Other Compensation
consists of $17,848 in commuting expenses, $8,730 in tax
equalization payments with respect to the reimbursement of
certain state taxes paid by Mr. You resulting from work
performed outside his state of residence, $7,810 for temporary
living accommodations and $72,849 in accrued and unused personal
days paid in connection with his leaving the Company.
|
Grants of
Plan-Based Awards
The following table provides information relating to equity
awards made in 2007 to our named executive officers.
|
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|
|
|
|
|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other
|
|
|
All Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
|
|
|
Option
|
|
|
|
|
|
Grant Date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards:
|
|
|
Awards:
|
|
|
Exercise
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Future Payouts
|
|
|
Number of
|
|
|
Number of
|
|
|
or Base
|
|
|
of Stock
|
|
|
|
|
|
|
|
|
|
Estimated Future Payouts
|
|
|
Under Equity Incentive
|
|
|
Shares of
|
|
|
Securities
|
|
|
Price of
|
|
|
and
|
|
|
|
|
|
|
Compensation
|
|
|
Under Non-Equity Incentive Plan Awards
|
|
|
Plan Awards
|
|
|
Stock
|
|
|
Underlying
|
|
|
Option
|
|
|
Option
|
|
|
|
Grant
|
|
|
Committee
|
|
|
Threshold
|
|
|
Target
|
|
|
Maximum
|
|
|
Threshold
|
|
|
Target
|
|
|
Maximum
|
|
|
or Units
|
|
|
Options
|
|
|
Awards
|
|
|
Awards
|
|
Name
|
|
Date
|
|
|
Approval Date
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
(#)
|
|
|
(#)
|
|
|
(#)
|
|
|
(#)
|
|
|
(#)
|
|
|
($/Sh)
|
|
|
($)(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F. Edwin Harbach(2)
|
|
|
1/8/2007
|
|
|
|
1/8/2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
888,325
|
|
|
|
|
|
|
|
|
|
|
$
|
7,000,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Judy A. Ethell(3)
|
|
|
3/13/2007
|
|
|
|
3/13/2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
306,905
|
|
|
|
767,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,477,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Laurent C. Lutz(4)
|
|
|
3/13/2007
|
|
|
|
3/13/2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
383,632
|
|
|
|
959,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,346,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10/23/2007
|
|
|
|
2/24/2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
146,444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
700,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Roderick C. McGeary(5)
|
|
|
2/12/2007
|
|
|
|
2/12/2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
239,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3/13/2007
|
|
|
|
3/13/2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
255,754
|
|
|
|
639,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,897,693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard J. Roberts(6)
|
|
|
3/13/2007
|
|
|
|
3/13/2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
63,939
|
|
|
|
159,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
724,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Harry L. You(7)
|
|
|
2/12/2007
|
|
|
|
2/12/2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
599,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3/13/2007
|
|
|
|
3/13/2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
959,079
|
|
|
|
2,397,698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,866,365
|
|
|
|
|
(1)
|
|
Amounts reflected in the
Grant Date Fair Value of Stock and Option Awards
column reflect the amount recognized for financial statement
purposes in 2007 in accordance with SFAS 123(R) for equity award
expense. These amounts reflect the Companys accounting
expense for these awards, and do not correspond to the actual
value that may be recognized by the named executive officers.
Whether and to what extent a named executive officer realizes
value will depend on various factors, including actual operating
performance, stock price fluctuations and the named executive
officers continued employment. For a discussion of the
assumptions used by the Company in calculating these amounts,
see Item 7, Managements Discussion and Analysis
of Financial Condition and Results of Operation
Accounting for Stock-Based Compensation, and Note 13,
Stock-Based Compensation, of the Notes to
Consolidated Financial Statements.
|
(2)
|
|
Mr. Harbach was granted
888,235 RSUs on January 8, 2007, of which 222,081 RSUs
vested on January 8, 2008, 222,081 RSUs will vest on
January 8 in each of 2009 and 2010, and 222,082 RSUs will vest
on January 8, 2011, in connection with his appointment as
Chief Operating Officer of the Company. In addition, on
January 2, 2008, Mr. Harbach was granted the following
awards in connection with his promotion to Chief Executive
Officer of the
|
83
|
|
|
|
|
Company: (i) stock options to
purchase up to 1,232,600 shares of our common stock (at an
exercise price of $2.76 per share), 25% of which will vest on
January 2 in each of 2009 through 2012, and (iii) 199,275
RSUs of which 49,818 will vest on January 2, 2009 and
49,819 will vest on January 2 in each of 2010 through 2012.
|
|
(3)
|
|
Ms. Ethell was granted 306,905
PSUs on March 13, 2007. The PSUs will vest on
December 31, 2009 if two performance-based metrics are
achieved. For more information, see Equity
Compensation Programs PSU Program.
|
|
(4)
|
|
Mr. Lutz was granted the
following awards: (i) 383,632 PSUs were granted on
March 13, 2007; and (ii) 146,444 RSUs were granted as
of October 23, 2007 in connection with his employment
agreement, of which 36,611 RSUs vested on December 31,
2007, and 36,611 RSUs will vest on December 31 in each of 2008
through 2010. The PSUs will vest on December 31, 2009 if
two performance-based metrics are achieved. For more information
on the RSU grant, see Footnote 6 to the Summary
Compensation Table, and for more information on the PSU
grant, see Equity Compensation
Programs PSU Program.
|
|
(5)
|
|
Mr. McGeary was granted the
following awards: (i) 29,197 RSUs were granted on
February 12, 2007, of which 7,299 RSUs vested on
February 12, 2008, 7,299 RSUs will vest on February 12 in
each of 2009 and 2010, and 7,300 RSUs will vest on
February 12, 2011; and (ii) 255,754 PSUs were granted
on March 13, 2007. Effective as of December 31, 2007,
the vesting of the RSUs was accelerated and the PSUs were
forfeited in connection with Mr. McGearys retirement
from the Company.
|
|
(6)
|
|
Mr. Roberts was granted 63,939
PSUs on March 13, 2007. The PSUs will vest on
December 31, 2009 if two performance-based metrics are
achieved. For more information, see Equity
Compensation Programs PSU Program.
|
|
(7)
|
|
Mr. You was granted the
following awards: (i) 72,992 RSUs were granted on
February 12, 2007, of which 18,248 RSUs were scheduled to
vest on February 12 in each of 2008, 2009, 2010 and 2011; and
(ii) 959,079 PSUs were granted on March 13, 2007. The
PSUs were scheduled to vest on December 31, 2009 if two
performance-based metrics were achieved. When Mr. You left
the Company, both of these awards were forfeited.
|
84
Outstanding
Equity Awards at Fiscal Year-End (December 31,
2007)
The following table provides information regarding the value of
all unexercised options and unvested restricted stock units
previously awarded to our named executive officers as of
December 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
Stock Awards(1)
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
Equity
|
|
Equity
|
|
|
|
|
|
|
Incentive
|
|
|
|
|
|
|
|
|
|
Incentive Plan
|
|
Incentive Plan
|
|
|
|
|
|
|
Plan
|
|
|
|
|
|
|
|
Market
|
|
Awards:
|
|
Awards:
|
|
|
|
|
|
|
Awards:
|
|
|
|
|
|
|
|
Value of
|
|
Number of
|
|
Market or
|
|
|
Number of
|
|
Number of
|
|
Number of
|
|
|
|
|
|
Number of
|
|
Shares or
|
|
Unearned
|
|
Payout Value of
|
|
|
Securities
|
|
Securities
|
|
Securities
|
|
|
|
|
|
Shares or
|
|
Units of
|
|
Shares, Units
|
|
Unearned
|
|
|
Underlying
|
|
Underlying
|
|
Underlying
|
|
|
|
|
|
Units of
|
|
Stock
|
|
or Other
|
|
Shares, Units or
|
|
|
Unexercised
|
|
Unexercised
|
|
Unexercised
|
|
Option
|
|
Option
|
|
Stock That
|
|
That Have
|
|
Rights That
|
|
Other Rights
|
|
|
Options(#)
|
|
Options(#)
|
|
Unearned
|
|
Exercise
|
|
Expiration
|
|
Have Not
|
|
Not
|
|
Have Not
|
|
That Have Not
|
Name
|
|
Exercisable
|
|
Unexercisable
|
|
Options(#)
|
|
Price($)
|
|
Date
|
|
Vested(#)
|
|
Vested($)
|
|
Vested(#)
|
|
Vested($)
|
|
F. Edwin Harbach(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
888,325
|
(2)
|
|
$
|
2,513,960
|
|
|
|
|
|
|
$
|
|
|
Judy A. Ethell
|
|
|
300,000
|
(3)
|
|
|
|
|
|
|
300,000
|
(3)
|
|
|
8.70
|
|
|
|
9/19/2016
|
|
|
|
|
|
|
|
|
|
|
|
105,400
|
(3)
|
|
|
298,282
|
|
Laurent C. Lutz
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
109,833
|
(4)
|
|
|
310,827
|
|
|
|
|
|
|
|
|
|
Roderick C. McGeary
|
|
|
7,928
|
|
|
|
|
|
|
|
|
|
|
|
55.50
|
|
|
|
6/30/2010
|
|
|
|
|
(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,000
|
|
|
|
|
|
|
|
|
|
|
|
16.38
|
|
|
|
4/24/2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
450,000
|
|
|
|
|
|
|
|
|
|
|
|
9.00
|
|
|
|
11/19/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard J. Roberts
|
|
|
11,982
|
|
|
|
|
|
|
|
|
|
|
|
18.00
|
|
|
|
7/31/2010
|
|
|
|
69,883
|
(6)
|
|
|
197,769
|
|
|
|
|
|
|
|
|
|
|
|
|
53,205
|
|
|
|
|
|
|
|
|
|
|
|
18.00
|
|
|
|
2/8/2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
13.30
|
|
|
|
7/24/2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,611
|
|
|
|
|
|
|
|
|
|
|
|
11.01
|
|
|
|
9/3/2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70,000
|
|
|
|
|
|
|
|
|
|
|
|
10.01
|
|
|
|
9/3/2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
125,000
|
|
|
|
|
|
|
|
|
|
|
|
8.19
|
|
|
|
8/28/2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60,000
|
|
|
|
|
|
|
|
|
|
|
|
9.15
|
|
|
|
10/4/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Harry L. You
|
|
|
1,000,000
|
(7)
|
|
|
|
|
|
|
|
|
|
|
7.55
|
|
|
|
3/18/2015
|
|
|
|
|
(8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Due to the terms of the PSUs and
the fact that no determinations regarding the vesting of PSUs
can be made until December 31, 2009, PSU awards are not
included in this table.
|
|
(2)
|
|
Mr. Harbach received a grant
of 888,325 RSUs on January 8, 2007, of which 222,081 RSUs
vested on January 8, 2008, 222,081 RSUs will vest on
January 8 in 2009 and 2010, and 222,082 RSUs will vest on
January 8, 2011. Mr. Harbach did not receive a grant
of RSUs in 2007, since he received the RSU grant earlier in
the year. In addition, the amounts reflected above do not
include grants made on January 2, 2008 in connection with
Mr. Harbachs promotion to Chief Executive Officer.
For information regarding these grants, see Footnote 1 to
Grants of Plan-Based Awards.
|
|
(3)
|
|
On September 19, 2006,
Ms. Ethell was granted stock options to purchase up to
600,000 shares of our common stock, of which 25% vested
upon grant, 25% vested on July 1, 2007 and, subject to
achievement of certain performance criteria, 25% will vest on
July 1 in each of 2008 and 2009. On September 19, 2006,
Ms. Ethell was also granted: (i) 292,000 RSUs, of
which 204,400 RSUs vested upon grant, 29,200 RSUs vested on
July 1, 2007, and, subject to achievement of certain
performance criteria, 29,200 RSUs will vest on July 1 in each of
2008 and 2009; and (ii) 94,000 RSUs, of which 23,500 RSUs
vested upon grant, 23,500 RSUs vested on July 1, 2007, and,
subject to achievement of certain performance criteria, and
23,500 RSUs will vest on July 1 in each of 2008 and 2009. In
addition, on March 13, 2007, Ms. Ethell was granted
306,905 PSUs, which will vest on December 31, 2009 if two
performance-based metrics are achieved. For more information,
please see Equity Compensation
Programs PSU Program.
|
|
(4)
|
|
On October 23, 2007,
Mr. Lutz was granted 146,444 RSUs, of which 36,611 RSUs
vested on December 31, 2007 and 36,611 will vest on
December 31 in each of 2008 through 2010. In addition, on
March 13, 2007, Mr. Lutz was granted 383,632 PSUs,
which will vest on December 31, 2009 if two
performance-based metrics are achieved. For more information,
see Equity Compensation Programs
PSU Program.
|
|
(5)
|
|
Mr. McGeary was granted the
following awards: (i) Effective as of September 25,
2006, Mr. McGeary was granted 29,411 RSUs, of which 7,352
RSUs vested on January 1, 2007 and 7,353 RSUs will vest on
January 1 in each of 2008 through 2010; and (ii) on
February 12, 2007, Mr. McGeary was granted 29,197
RSUs, of which 7,299 RSUs vested on February 12, 2008,
7,299 RSUs will vest on February 12 in each of 2009 and 2010 and
7,300 RSUs will vest on February 12, 2011. In addition, on
March 13, 2007, Mr. McGeary was granted 255,754 PSUs.
Effective as of December 31, 2007, the vesting of the RSUs
was accelerated, and the PSUs were forfeited, in connection with
Mr. McGearys retirement from the Company.
|
85
|
|
|
(6)
|
|
As of December 31, 2007, all
of Mr. Roberts stock options grants were fully
vested. Effective as of September 25, 2006,
Mr. Roberts was granted 93,177 RSUs, of which
23,294 RSUs vested on January 1 in each of 2007 and 2008,
23,294 RSUs will vest on January 1, 2009 and 23,295 RSUs
will vest on January 1, 2010. On March 13, 2007,
Mr. Roberts was also granted 63,939 PSUs, which will vest
on December 31, 2009 if two performance-based metrics are
achieved. For more information, see Equity
Compensation Programs PSU Program.
|
|
(7)
|
|
Mr. You was granted stock
options to purchase up to 2,000,000 shares of our common
stock, which options vest 25% on March 18 in each of 2006
through 2009. In connection with Mr. You leaving the
Company on December 3, 2007, Mr. Yous vested
stock options will expire on March 3, 2008.
|
|
(8)
|
|
As of December 3, 2007, all
unvested RSUs and PSUs were forfeited in connection with
Mr. You leaving the Company.
|
Option
Exercises and Stock Vested
The following table provides information with respect to
restricted stock units that vested during 2007 with respect to
our named executive officers. No options were exercised in 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
|
Stock Awards
|
|
|
|
Number of Shares
|
|
|
|
|
|
Number of Shares
|
|
|
|
|
|
|
Acquired on
|
|
|
Value Realized
|
|
|
Acquired on
|
|
|
Value Realized
|
|
Name
|
|
Exercise(#)
|
|
|
on Exercise($)
|
|
|
Vesting(#)
|
|
|
on Vesting($)(1)
|
|
|
F. Edwin Harbach
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
Judy A. Ethell
|
|
|
|
|
|
|
|
|
|
|
52,700
|
|
|
|
385,237
|
|
Laurent C. Lutz
|
|
|
|
|
|
|
|
|
|
|
36,611
|
|
|
|
103,609
|
|
Roderick C. McGeary(2)
|
|
|
|
|
|
|
|
|
|
|
58,608
|
|
|
|
202,915
|
|
Richard J. Roberts
|
|
|
|
|
|
|
|
|
|
|
23,294
|
|
|
|
183,324
|
|
Harry L. You
|
|
|
|
|
|
|
|
|
|
|
62,500
|
|
|
|
471,875
|
|
|
|
|
(1)
|
|
Amounts reflect the value of awards
realized by the named executive officer and are computed by
multiplying the number of vested shares by the closing price of
the Companys stock on the date of vesting.
|
|
(2)
|
|
Effective December 31, 2007,
pursuant to the terms of his award agreement, the vesting of all
RSUs granted to Mr. McGeary was accelerated in connection
with his retirement from the Company.
|
Pension
Benefits
Our only retirement plan for our
U.S.-based
employees, including our named executive officers, is the 401(k)
Plan. We do not have a pension plan in which our named executive
officers are eligible to participate.
Nonqualified
Deferred Compensation Plans
We have a Deferred Compensation Plan and a
Managing Directors Deferred Compensation Plan, which
are designed to permit a select group of management and highly
compensated employees who contribute materially to our continued
growth, development and future business success to accumulate
additional income for retirement and other personal financial
goals through plans that enable the participants to make
elective deferrals of compensation to which they will become
entitled to in the future. Our deferred compensation plans are
nonqualified and unfunded, and participants are unsecured
general creditors of the Company as to their accounts. Our
managing directors, including our named executive officers, and
other highly compensated executives selected by the plans
administrative committee are eligible to participate in the
plans. To date, none of our named executive officers has
participated in any of our deferred compensation plans.
86
Employment
Agreements
Managing Director Agreements. We have entered into a
Managing Director Agreement (a Managing Director
Agreement) with each of our approximately 660 managing
directors, including our named executive officers. Pursuant to
the Managing Director Agreement, we provide up to six
months pay for certain terminations of employment by us.
In addition, the Managing Director Agreement contains
non-competition and non-solicitation provisions for a period of
up to two years after such executives termination of
employment or resignation.
With respect to our named executive officers, we entered into
the following employment agreements. Generally, each of these
arrangements provided for participation in all benefit, fringe
and perquisite plans, practices, programs, policies and
arrangements generally provided to senior executives of the
Company at a level commensurate with the executives
position.
Employment Agreement for F. Edwin Harbach. Effective
December 31, 2007, we entered into the following
arrangements with Mr. Harbach, in connection with his
promotion to Chief Executive Officer. In establishing his new
arrangements, as well as terminating or amending the agreements
previously executed with Mr. Harbach when he first joined
the Company, we have endeavored to adjust
Mr. Harbachs compensation to reflect his new position
as Chief Executive Officer and also to more closely align most
of the terms of his employment agreements with current standard
terms utilized in agreements with our other managing directors.
Mr. Harbachs employment agreement provides for the
following:
|
|
|
|
|
Termination of Prior Agreements. Effective as of
December 31, 2007, Mr. Harbachs previous
employment agreement, Managing Director Agreement and Special
Termination Agreement were terminated. Mr. Harbachs
annual base salary and bonus compensation for 2007 can be found
in the Summary Compensation Table above, and
information regarding his equity awards are included under
Outstanding Equity Awards at Fiscal Year-End
(December 31, 2007), in each instance pursuant to his
previous employment agreement.
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Compensation. Mr. Harbachs compensation
for 2008 will be:
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Mr. Harbachs annual base salary for 2008 is $900,214.
In addition, starting in 2008, Mr. Harbach will be eligible
for an annual performance bonus with a target amount of 100% of
his annual base salary for the year for which the performance
bonus is being awarded, based on his ability to achieve all
performance objectives as established for the applicable year by
the Compensation Committee.
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On January 2, 2008, Mr. Harbach received a grant of
199,275 RSUs and a grant of stock options pursuant to the LTIP,
with an exercise price of $2.76 per share, to purchase
1,232,600 shares of common stock of the Company. The RSUs
and the stock options vest in equal 25% increments on each of
the next four anniversary dates of such grant date, provided
that Mr. Harbachs employment has not terminated prior
to such date. Furthermore, all of the RSUs will vest upon the
termination of Mr. Harbachs employment due to his
death, disability or retirement.
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Effective as of December 31, 2007, the terms of
Mr. Harbachs prior RSU grant of 888,325 restricted
stock units awarded to him in January 2007 was amended to
provide that in the event of a Change in Control (as defined in
the LTIP), the RSUs will become 100% vested and nonforfeitable
effective as of the date of such Change in Control, provided
that Mr. Harbachs employment has not terminated prior
to such date. This amendment conforms the vesting of the RSUs
upon a change in control to that contained in all other RSU
awards granted by the Company. Previously, the RSUs would have
vested only upon (i) a Change in Control and
(ii) Mr. Harbachs termination by the Company for
any reason other than for cause within three years following a
Change in Control.
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Living Expenses. Mr. Harbach will be reimbursed
for monthly rental payments for his current apartment lease in
New York City. The Compensation Committee of the Board will
review its decision to provide this reimbursement at each lease
renewal date.
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Indemnification. We agreed to indemnify
Mr. Harbach with respect to his activities on behalf of the
Company to the fullest extent permitted by law and the
Companys Articles of Incorporation.
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Termination Payments. Mr. Harbach is entitled to
certain termination payments under his employment agreement,
which are described below under Potential
Payments upon Termination of Employment or Change in
Control.
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In addition, Mr. Harbach and the Company entered into a new
Managing Director Agreement and Special Termination Agreement,
effective as of December 31, 2007.
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Managing Director Agreement. Mr. Harbachs
Managing Director Agreement is the standard form currently
utilized for all new managing directors of the Company. The
Managing Director Agreement contains noncompetition and
non-solicitation provisions for a period of two years after his
termination or resignation.
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Special Termination Agreement. The term of
Mr. Harbachs Special Termination Agreement is three
years (subject to potential one-year extensions) or, if longer,
two years after a Change in Control. If, after a Change in
Control and during the term of the Special Termination
Agreement, the Company terminates Mr. Harbachs
employment other than for Cause or Disability (as defined in the
Special Termination Agreement) or if he terminates his
employment within 60 days after any decrease of his base
salary by 20% or more after such Change in Control,
Mr. Harbach is entitled to certain benefits, including the
payment of approximately one years compensation (based on
salary plus potential bonus).
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Employment Agreement for Judy A. Ethell. Effective
as of July 1, 2005, we entered into the following
arrangements with Judy A. Ethell, our Chief Financial Officer:
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Compensation. Information regarding
Ms. Ethells annual base salary and bonus compensation
can be found in the Summary Compensation Table
above. Information regarding equity awards issued to
Ms. Ethell pursuant to her employment arrangements are
included under Outstanding Equity Awards at Fiscal
Year-End (December 31, 2007), above.
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Indemnification. We agreed to indemnify
Ms. Ethell with respect to her activities on behalf of the
Company, for any failure of the Company to comply with
Section 409A of the Internal Revenue Code of 1986, as
amended, and for certain other matters.
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Termination Payments. Ms. Ethell is entitled to
certain termination payments under her employment agreement,
which are described below under Potential
Payments upon Termination of Employment or Change in
Control.
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Employment Agreement for Laurent C. Lutz. Effective
as of October 17, 2006, the Board determined that Laurent
C. Lutz, our General Counsel and Secretary, was an executive
officer of the Company. Effective as of February 27, 2006,
we had entered into the following arrangements with
Mr. Lutz:
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Compensation. Information regarding
Mr. Lutzs annual base salary and bonus compensation
can be found in the Summary Compensation Table
above. Information regarding equity awards issued to
Mr. Lutz and non-equity incentive plan compensation awarded
to Mr. Lutz are included under Outstanding Equity
Awards at Fiscal Year-End (December 31, 2007) and
Grants of Plan-Based Awards, above.
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Indemnification. We agreed to indemnify
Mr. Lutz in the event that any activity he undertakes on
behalf of the Company is challenged as being in violation of any
agreement he may have with a prior employer and for certain
other matters. In addition, Mr. Lutz is entitled to receive
a gross-up
for any
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payment to him under any of his agreements that would be subject
to a surtax imposed by Section 409A of the Internal Revenue
Code or for any interest or penalties thereon.
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Termination Payments. Mr. Lutz is entitled to
certain termination payments under his employment agreement,
which are described below under Potential
Payments upon Termination of Employment or Change in
Control.
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Employment Agreement for Harry L. You. Effective as of
December 3, 2007, Mr. You left the Company. Pursuant
to the terms of his employment agreement, Mr. You was paid
for all accrued and unused personal days.
Potential
Payments upon Termination or Change in Control
Severance Payments under Managing Director
Agreements. Under our Managing Director Agreements, we
provide up to six months pay for terminations of
employment by us other than for cause, as defined in
the agreements. In addition, these agreements contain
non-competition and non-solicitation provisions for a period of
up to two years after such executives termination of
employment or resignation.
Severance Payments under Employment
Agreements. Under our employment agreements with
Mr. Harbach, Ms. Ethell and Mr. Lutz, we state
that upon termination of the individuals employment by us
without cause or by the individual for good
reason, (as defined in the agreements), within
30 days after our receipt of a fully executed release, we
will make a severance payment to the individual. These severance
payments are significantly higher than those that we would pay
under our Managing Director Agreements.
Termination Payments under Special Termination
Agreements. We have entered into special termination
agreements (each, a Special Termination Agreement)
with certain key personnel. The purpose of the Special
Termination Agreement is to ensure that these executives are
properly protected in the event of a change in control of the
Company, thereby enhancing our ability to hire and retain them.
The terms of the Special Termination Agreements vary up to a
maximum of three years, which terms automatically renew for
additional one-year terms unless we give notice that the
agreement will not be renewed, or, if later, two years after a
change in control. The protective provisions of the Special
Termination Agreement become operative only upon a change in
control, as defined in the agreement.
All Special Termination Agreements signed on or after
August 1, 2006 specify that if, after a change in control
and during the term of the agreement, we terminate the
executives employment other than for cause (as
defined in the agreements) or the executive terminates his
employment because his salary was reduced by at least 20%, the
executive is entitled to certain benefits. Generally, Special
Termination Agreements signed before August 1, 2006 specify
that if, after a change in control and during the term of the
agreement, we terminate the executives employment other
than for cause or if the executive terminates his
employment for specified reasons (including if his
responsibilities have been materially reduced or adversely
modified or his compensation has been reduced), the executive is
entitled to certain benefits. Under the Special Termination
Agreements, these benefits generally include the payment of
approximately one years compensation, based on salary plus
bonus as specified in the agreement, continued coverage under
our welfare benefit plans (e.g., medical, life insurance and
disability insurance) for up to two years at no cost, and
outplacement counseling.
The Special Termination Agreements that we entered into with
Ms. Ethell and Messrs. Lutz and Roberts differ, in
some respects, from the standard form of Special Termination
Agreement. Mr. Harbachs Special Termination Agreement
was amended, effective December 31, 2007, to conform to the
standard form. For a discussion of potential payments to our
named executive officers, pursuant to their respective Special
Termination Agreements, upon a change in control and other
triggering events, please see the table below.
89
Potential
Payments
Upon Termination of Employment or
Change-in-Control
as of December 31, 2007
The table below sets forth the potential payments that generally
would have been payable to each of our named executive officers
as of December 31, 2007 if:
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the named executive officers employment were terminated by
us without Cause (as defined in such named executive
officers employment agreement) or by the named executive
officer for Good Reason (as defined in such named
executive officers employment agreement); and
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the named executive officers employment (a) were
terminated by us within two years after a Change in Control (as
defined in such named executive officers Special
Termination Agreement) for any reason other than
Cause (as defined in such named executive
officers Special Termination Agreement) or if the
executive became permanently disabled or was unable to work for
a period of 180 consecutive days, (b) (i) were
involuntarily terminated by us (other than for Cause) or
(ii) were terminated by the named executive officer
following a reduction or adverse change in the named executive
officers duties or compensation, in each case within six
months prior to a Change in Control and in anticipation of a
Change in Control or (c) were terminated by the named
executive officer during the term of the Special Termination
Agreement but after a Change in Control if one of the events
specified in such named executive officers Special
Termination Agreement has occurred.
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Termination of
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Change in
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Name
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Employment(1)(2)
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Control(2)(3)
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F. Edwin Harbach
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$
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2,815,886
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(4)
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5,642,648
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(5)
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Judy A. Ethell
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1,298,693
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(6)
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7,457,748
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(7)
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Laurent C. Lutz
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2,031,039
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(8)
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8,095,839
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(9)
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Richard J. Roberts
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317,763
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(10)
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2,006,024
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(11)
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*
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Mr. McGeary retired from the
Company, effective December 31, 2007, and
Mr. Yous departure from the Company was effective on
December 3, 2007.
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(1)
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Amounts set forth in the table for
Mr. Harbach, Ms. Ethell and Mr. Lutz reflect the
severance payments payable under their respective employment
agreements. If Mr. Harbach, Ms. Ethell or
Mr. Lutzs employment is not terminated (i) by us
without Cause (as defined in such named executive
officers employment agreement) or (ii) by the named
executive officer for Good Reason (as defined in
such named executive officers employment agreement), then
such named executive officer may still be eligible to receive
payments representing earned but unpaid salary and bonus
amounts, any unpaid accrued personal days or unreimbursed
business expenses and any other amounts due under the
Companys benefit plans. If Mr. Harbach,
Ms. Ethell or Mr. Lutz does not qualify for payment
under any of the provisions of their respective employment
agreements, they may be eligible to receive severance payments
under their respective Managing Director Agreements if their
employment is terminated other than for Cause (as defined in the
respective Managing Director Agreement) or for no reason. Such
payments would generally consist of all earned and unpaid base
salary plus a payment equal to three months pay at such
named executive officers current base salary. Amounts
payable under the Managing Director Agreements for
Mr. Harbach, Ms. Ethell and Mr. Lutz as of
December 31, 2007 would have been $175,000, $130,000 and
$130,000, respectively. Amounts set forth in the table for
Mr. Roberts reflect the severance payments payable under
his Managing Director Agreement.
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(2)
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The dollar amounts in the table
with respect to RSUs and PSUs that accelerate upon a
termination, Change in Control or other triggering event assume
a $2.83 per share price for our common stock (the closing price
on December 31, 2007).
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(3)
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Amounts set forth in the table for
Mr. Harbach, Ms. Ethell, Mr. Lutz and
Mr. Roberts reflect the termination payments payable
governed under their respective Special Termination Agreements
upon a Change of Control (as defined in such agreements). Even
if Mr. Harbach, Ms. Ethell or Mr. Lutz is not
eligible to receive the payments set forth in the table above
upon a change in control (as defined in the Special Termination
Agreements), all unvested options, RSUs and PSUs held will
immediately vest upon the occurrence of a Change of Control (as
defined under the LTIP) pursuant to such named executive
officers employment agreement. In addition, the Change of
Control provisions under the LTIP generally provide that any
unvested portion of stock option grants, RSUs and PSUs will vest
upon the occurrence of a Change of Control (as defined in the
LTIP). See Change of Control Provisions Under the
LTIP
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90
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below. Furthermore, if such named
executive officer is not eligible to receive the payments and
other benefits specified in his or her Special Termination
Agreement upon a change in control, such named executive officer
may be eligible to receive the payments payable upon termination
of employment under such individuals employment agreement,
as specified in this table and the related footnotes.
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(4)
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Under Mr. Harbachs
employment agreement in effect as of December 31, 2007,
Mr. Harbach would have been entitled to the following:
(i) payment equal to two times the sum of his
(A) annual base salary ($700,000) and (B) bonus
compensation of $350,046, (ii) payment of accrued and
unused personal days ($65,310), (iii) payment of premiums
under the Consolidated Omnibus Budget Reconciliation Act of
1985, as amended for a period of 18 months after
termination ($21,995), and (iv) the vesting of an
additional 222,081 RSUs that would have vested within the first
anniversary of the termination date ($628,489).
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(5)
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Under Mr. Harbachs
Special Termination Agreement in effect as of December 31,
2007, Mr. Harbach would have been entitled to the
following: (i) payment equal to the sum of his
(A) annual base salary in 2007 ($700,000) and
(B) bonus compensation of $350,046, (ii) for a period
of 2 years after his termination, continuation of medical,
dental, life insurance, disability, accidental death and
dismemberment benefits and other welfare benefits, subject to
certain exceptions ($21,897), (iii) pursuant to the terms
of Mr. Harbachs RSU grant, in the event of a Change
in Control, the vesting of all unvested RSUs (an additional
888,325 RSUs valued at $2,513,960), (iv) reimbursement for
outplacement services, (v) payment of any earned but unpaid
salary, bonus or incentive compensation and (vi) an
additional tax
gross-up
payment of $2,056,745, which excludes tax gross-up payments that
may be payable under his Special Termination Agreement to offset
the impact of excise taxes that may be imposed under provisions
of the Internal Revenue Code.
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(6)
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Under Ms. Ethells
employment agreement, Ms. Ethell would have been entitled
to (i) payment equal to the sum of her (A) annual base
salary ($520,000) and (B) target bonus ($520,000),
(ii) payment of accrued and unused personal days ($94,412),
(iii) payment of premiums under the Consolidated Omnibus
Budget Reconciliation Act of 1985, as amended, for a period of
18 months after termination ($15,140), and the vesting of
an additional 150,000 options and 52,700 RSUs that would have
vested within the first anniversary of the termination date
($149,141).
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(7)
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Under Ms. Ethells
Special Termination Agreement, Ms. Ethell would have been
entitled to the following: (i) payment equal to 299% of the
sum of her (A) annual base salary in 2007 ($520,000) and
(B) target bonus for 2007 ($520,000), (ii) for a
period of 2 years after her termination, continuation of
medical, dental, life insurance, disability, accidental death
and dismemberment benefits and other welfare benefits, subject
to certain exceptions ($15,546), (iii) if
Ms. Ethells employment is terminated by us (other
than for Cause) or there is a reduction or adverse change in
Ms. Ethells duties or compensation and
Ms. Ethell terminates her employment within six months
prior to a Change of Control and in anticipation of a Change of
Control, the vesting of all unvested options, RSUs and PSUs (an
additional 300,000 options, 105,400 RSUs and 306,905 PSUs
(assuming the PSUs vest at 100%) valued at $1,166,823),
(iv) reimbursement for outplacement services,
(v) payment of any earned but unpaid salary, bonus or
incentive compensation and (vi) an additional tax
gross-up
payment of $3,165,779, which excludes tax gross-up payments that
may be payable under her Special Termination Agreement to offset
the impact of excise taxes that may be imposed under provisions
of the Internal Revenue Code.
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(8)
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Under Mr. Lutzs
employment agreement, Mr. Lutz would have been entitled to
(i) payment equal to the sum of his (A) annual base
salary ($520,000) (or, in the event of termination by Good
Reason (as defined in his employment agreement), 1 and 1/2 times
annual base salary) and (B) target bonus ($520,000),
(ii) payment of accrued and unused personal days ($64,197),
(iii) payment of premiums under the Consolidated Omnibus
Budget Reconciliation Act of 1985, as amended for a period of
18 months after termination ($21,995), (iv) vesting of
an additional 36,611 RSUs scheduled to vest on the next vesting
date following the termination date ($103,609) and (v) an
additional tax
gross-up
payment of $801,238.
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(9)
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Under Mr. Lutzs Special
Termination Agreement, Mr. Lutz would have been entitled to
the following: (i) payment equal to 299% of the sum of his
(A) annual base salary in 2007 ($520,000) and
(B) target bonus for 2007 ($520,000), (ii) for a
period of 2 years after his termination, continuation of
medical, dental, life insurance, disability, accidental death
and dismemberment benefits and other welfare benefits, subject
to certain exceptions ($20,932), (iii) if
Mr. Lutzs employment is terminated by us (other than
for Cause) or there is a reduction or adverse change in
Mr. Lutzs duties or compensation and Mr. Lutz
terminates his employment within six months prior to a Change of
Control and in anticipation of a Change of Control, the vesting
of all unvested RSUs and PSUs (an additional 109,833 RSUs and
383,632 PSUs (assuming the PSUs vest at 100%) valued at
$1,396,506), (iv) reimbursement for outplacement services,
(v) payment of any earned but unpaid salary, bonus or
incentive compensation and (vi) an additional tax
gross-up
payment of $3,193,801, which excludes tax gross-up payments that
may be payable under his Special Termination Agreement to offset
the impact of excise taxes that may be imposed under provisions
of the Internal Revenue Code. In addition, pursuant to his
employment agreement, Mr. Lutz would have been entitled, as
of December 31, 2007, to the acceleration of the remaining
portion of his unpaid retention bonus ($375,000) upon a Change
in Control (as defined in his Special Termination Agreement).
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(10)
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Under Mr. Roberts
Managing Director Agreement, Mr. Roberts would have been
entitled to payment equal to six months of his base salary
($635,525).
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(11)
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Under Mr. Roberts
Special Termination Agreement, Mr. Roberts would have been
entitled to the following: (i) payment equal to the sum of
his (A) annual base salary in 2007 ($635,525) and
(B) potential bonus or incentive compensation (20% of base
salary or $127,105), (ii) for a period of 2 years
after his termination, continuation of medical, dental, life
insurance, disability, accidental death and dismemberment
benefits and other welfare benefits, subject to certain
exceptions ($18,154), (iii) if Mr. Roberts
employment is terminated by us (other than for Cause) or
(ii) there is a reduction or adverse change in
Mr. Roberts duties or compensation and
Mr. Roberts terminates his employment within six months
prior to a Change of Control and in anticipation of a Change of
Control, the vesting of all unvested RSUs and PSUs (an
additional 69,883 RSUs and 63,939 PSUs (assuming the PSUs vest
at 100%) valued at $378,716), (iv) reimbursement for
outplacement services, (v) payment of any earned but unpaid
salary, bonus or incentive compensation and (vi) an
additional
gross-up
payment of $846,524, which excludes tax gross-up payments that
may be payable under his Special Termination Agreement to offset
the impact of excise taxes that may be imposed under provisions
of the Internal Revenue Code.
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Change of Control Provisions Under the LTIP. In
addition to the provisions in the agreements referred to above,
in the event of certain Changes of Control of the
Company, any non-vested portion of stock option grants and RSUs,
and other awards made under the LTIP will generally vest, and
any contractual transfer restrictions on restricted stock or
other shares issued upon the settlement of RSUs will be released
except under the PSU awards. If such a Change of Control were to
occur, all stock options not yet exercisable, including those of
our named executive officers set forth in the table captioned
Outstanding Equity Awards at Fiscal Year-End
(December 31, 2007) would vest. Upon a Change of
Control, for PSU awards, the growth target in consolidated
business unit contribution will be waived and the acquiring
company may (i) substitute the PSUs for the right to
receive the acquiring companys stock with the same vesting
and settlement schedule, (ii) accelerate and settle in cash
the ratable number of PSUs that would vest through the date of
Change in Control and replace the remaining PSUs with a cash
incentive bonus program that provides for an opportunity to earn
up to the value of the remaining PSUs, or (iii) if neither
of the above options is selected, then the PSUs will vest and
settle and be payable within 10 days of the change of
control.
Managing
Director Compensation Plan
In January 2006, the Compensation Committee of the Board
approved and authorized the development of our MD Compensation
Plan. The MD Compensation Plan was designed to be a
comprehensive cash and equity-based compensation program for the
managing directors of the Company and was intended to replace
the previous cash-based compensation program for such
individuals. Generally, all managing directors, including our
named executive officers, are eligible to participate in the MD
Compensation Plan. The primary goal of the MD Compensation Plan
is to align the compensation of our managing directors with
those of our stockholders, and the plan is designed to offer
transparency into the Companys executive compensation
program, align company performance and individual performance,
provide a fair and objective basis for assessing performance,
link managing director roles and responsibilities to the
Companys business objectives, and enhance the
accountability of the Companys executives. Under the MD
Compensation Plan, a managing directors compensation may
include the following components: (i) RSUs;
(ii) target compensation (which may be cash or equity);
(iii) performance compensation; and (iv) additional
breakthrough awards.
We did not activate the MD Compensation Plan for 2007 because we
were not, at that time, current in the filing of our SEC
periodic reports. We were unable to provide for bonuses under
the MD Compensation Plan since the plan has not yet been fully
activated and the target levels of profitability set forth under
the MD Compensation Plan were not achieved due to our ongoing
issues related to our financial accounting systems and internal
controls and their related impact on our ability to become
current in our SEC periodic reports and deliver shares of common
stock under equity-based awards.
In 2007, upon the recommendation of our Chief Executive Officer,
the Compensation Committee of our Board agreed, for 2008, not to
activate the provision of our MD Compensation Plan that provides
for 20% of a managing directors salary to be paid two
fiscal quarters after the compensation has been earned, as
92
determined by the Companys performance. We expect to
review the plan this year, in order to revisit whether it is
still properly aligned with our current business and employee
retention objectives.
Director
Compensation
Non-employee directors, those who are not employed by us on a
full-time or other basis, receive compensation for their service
on our Board. The goals for non-employee director compensation
are to fairly pay directors for their service, to align
directors interests with the long-term interests of our
stockholders and to have a structure that is transparent. An
employee director receives no additional compensation for their
service on the Board.
In 2007, non-employee director compensation included the
following elements:
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an annual fee of $40,000;
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a meeting fee of $2,000 for attendance in person at any meeting
of the Board or a committee of the Board and $1,000 for
attendance by telephone (members of the Audit Committee are paid
$2,000 for attendance at any Audit Committee meeting, whether
they attended in person or by telephone);
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a grant of stock options to purchase up to 15,000 shares of
common stock upon initial election to the Board; and
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a grant of stock options to purchase up to 5,000 shares of
common stock upon initial election as the Chair of the Audit
Committee.
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Under the 2000 Amended and Restated LTIP, automatic grant of
restricted stock awards ceased as of January 1, 2007. The
Company may, in its discretion, provide discretionary grants.
The Compensation Committee determined to grant 8,000 shares
of restricted shares of common stock for service performed in
2007.
On December 31, 2007, Roderick McGeary, Chairman of the
Board, retired as an employee of the Company. On January 1,
2008, the Compensation Committee of the Board approved an annual
fee of $150,000 payable to Mr. McGeary, as compensation for
his ongoing services as Chairman of the Board. This fee is in
addition to the $40,000 annual fee payable to the Companys
non-employee directors.
In January 2008, the Nominating and Corporate Governance
Committee of the Board performed a review of our non-employee
director compensation policy and determined not to make any
changes to non-employee director compensation for 2008, although
it agreed to consider re-addressing the policy later in the year.
2007 Director
Compensation Table
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Fees Earned
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or Paid
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in Cash
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Stock Awards
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Option Awards
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Total
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Name
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($)(1)
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($)(4)
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($)(5)(6)
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($)
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Douglas C. Allred
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$
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85,000
|
|
|
$
|
15,520
|
|
|
$
|
|
|
|
$
|
100,520
|
|
Betsy J. Bernard
|
|
|
84,000
|
|
|
|
15,520
|
|
|
|
|
|
|
|
99,520
|
|
Spencer C. Fleischer
|
|
|
84,000
|
|
|
|
15,520
|
|
|
|
|
|
|
|
99,520
|
|
Jill S. Kanin-Lovers(2)
|
|
|
71,000
|
|
|
|
15,520
|
|
|
|
30,946
|
|
|
|
117,466
|
|
Wolfgang H. Kemna
|
|
|
85,000
|
|
|
|
15,520
|
|
|
|
|
|
|
|
100,520
|
|
Albert L. Lord
|
|
|
94,000
|
|
|
|
15,520
|
|
|
|
|
|
|
|
109,520
|
|
Eddie R. Munson(3)
|
|
|
51,000
|
|
|
|
15,520
|
|
|
|
6,662
|
|
|
|
73,182
|
|
J. Terry Strange
|
|
|
124,000
|
|
|
|
15,520
|
|
|
|
|
|
|
|
139,520
|
|
93
|
|
|
(1)
|
|
Unless otherwise noted, Fees
Earned or Paid in Cash amounts consist of amounts paid for
Board service rendered in 2007.
|
|
(2)
|
|
Ms. Kanin-Lovers was elected
to the Board on May 10, 2007.
|
|
(3)
|
|
Mr. Munson was elected to the
Board on October 19, 2007.
|
|
(4)
|
|
Reflects the dollar amount
recognized for financial statement reporting purposes in
accordance with SFAS 123(R) with respect to grants of
restricted stock awarded for 2007 service. On January 18,
2008, each director was granted 8,000 shares of restricted
common stock for services rendered in 2007, each with a fair
value of $15,520. In accordance with SFAS 123(R), fair
value is calculated using the closing price of our common stock
on the date of grant.
|
|
(5)
|
|
Reflects the dollar amount
recognized for financial statement reporting purposes, in
accordance with SFAS 123(R) with respect to stock option
awards granted during 2007. In accordance with SFAS 123(R),
fair value was estimated using the Black-Scholes option-pricing
model.
|
|
(6)
|
|
Outstanding equity awards for each
non-employee director is as follows (for a complete description
of the beneficial ownership by our directors, see
Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters):
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
Outstanding
|
|
|
|
Stock Awards at
|
|
|
Option Awards at
|
|
|
|
December 31,
|
|
|
December 31,
|
|
Name
|
|
2007(1)
|
|
|
2007
|
|
|
Douglas C. Allred
|
|
|
36,000
|
|
|
|
15,000
|
|
Betsy J. Bernard
|
|
|
24,000
|
|
|
|
15,000
|
|
Spencer C. Fleischer
|
|
|
16,000
|
|
|
|
15,000
|
|
Jill S. Kanin-Lovers
|
|
|
|
|
|
|
15,000
|
|
Wolfgang H. Kemna
|
|
|
36,000
|
|
|
|
15,000
|
|
Albert L. Lord
|
|
|
32,000
|
|
|
|
15,000
|
|
Eddie R. Munson
|
|
|
|
|
|
|
15,000
|
|
J. Terry Strange
|
|
|
32,000
|
|
|
|
20,000
|
|
|
|
|
(1)
|
|
Does not include 8,000 shares
of restricted stock granted on January 18, 2008 to each
non-employee director as part of that directors equity
compensation for services rendered in 2007.
|
We also reimburse directors for reasonable travel expenses
related to attending a Board, Committee or other Company-related
business meetings, and provide liability insurance for our
directors and officers.
94
|
|
ITEM 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
|
Beneficial
Ownership of More Than Five Percent
The following table sets forth the only persons known by us, as
of February 15, 2008, to be beneficial owners or more than
five percent of our common stock.
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
Percentage of
|
Name and Address of 5% Holders of Common Stock
|
|
Number of Shares
|
|
Shares Outstanding
|
|
Ariel Capital Management, LLC(1)
|
|
|
41,516,556
|
|
|
|
19.3
|
%
|
200 E. Randolph Drive, Suite 2900
|
|
|
|
|
|
|
|
|
Chicago, IL 60601
|
|
|
|
|
|
|
|
|
Glenview Capital Management, LLC(2)
|
|
|
20,599,344
|
|
|
|
9.4
|
|
767 Fifth Avenue, 44th Floor
|
|
|
|
|
|
|
|
|
New York, NY 10153
|
|
|
|
|
|
|
|
|
Whitebox Advisors, LLC(3)
|
|
|
16,990,113
|
|
|
|
7.3
|
|
3033 Excelsior Boulevard
|
|
|
|
|
|
|
|
|
Minneapolis, MN 55416
|
|
|
|
|
|
|
|
|
North Run Capital, LP(4)
|
|
|
16,709,700
|
|
|
|
7.8
|
|
One International Place, Suite 2401
|
|
|
|
|
|
|
|
|
Boston, MA 02110
|
|
|
|
|
|
|
|
|
Franklin Resources, Inc.(5)
|
|
|
13,496,210
|
|
|
|
6.3
|
|
One Franklin Parkway
|
|
|
|
|
|
|
|
|
San Mateo, CA
94403-1906
|
|
|
|
|
|
|
|
|
Noonday Asset Management, LP(6)
|
|
|
11,825,600
|
|
|
|
5.5
|
|
227 West Trade Street, Suite 2140
|
|
|
|
|
|
|
|
|
Charlotte, NC 28202
|
|
|
|
|
|
|
|
|
Tracer Capital Management L.P.(7)
|
|
|
11,685,813
|
|
|
|
5.4
|
|
540 Madison Avenue, 33rd Floor
|
|
|
|
|
|
|
|
|
New York, NY 10022
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Represents shares beneficially held
by Ariel Capital Management, LLC (Ariel), as
reported on a Schedule 13G/A filed on January 10, 2008.
Ariel has sole voting power with respect to
33,042,381 shares and sole dispositive power with respect
to 41,516,556 shares. These shares are beneficially owned
by investment advisory clients of Ariel.
|
|
(2)
|
|
Represents shares beneficially held
by Glenview Capital Management, LLC (Glenview) and
Lawrence M. Robbins, as reported on a Schedule 13G/A filed
on February 14, 2008. Glenview serves as investment manager
to various entities and as such may be deemed to have voting and
dispositive power with respect to 20,599,344 shares, of
which 4,924,244 shares are issuable upon conversion of
certain convertible debentures of the Company. Mr. Robbins
is the Chief Executive Officer of Glenview.
|
|
(3)
|
|
Represents shares beneficially held
by Whitebox Advisors, LLC and its various related entities
(collectively, Whitebox), as reported on a Schedule
13G filed on February 14, 2008. Whitebox serves as
investment manager to various entities and as such may be deemed
to have voting and dispositive power with respect to
16,990,113 shares, of which all shares are issuable upon
the conversion of certain convertible debentures of the Company.
|
|
(4)
|
|
Represents shares beneficially held
by North Run Capital, LP, North Run GP, LP, North Run Advisors,
LLC, Todd B. Hammer and Thomas B. Ellis (North Run),
as reported on a Schedule 13G/A filed on February 14,
2008. North Run has sole voting and dispositive powers with
respect to 16,709,700 shares.
|
|
(5)
|
|
Represents shares beneficially held
by Franklin Resources, Inc., Charles B. Johnson, Rupert H.
Johnson, Jr. and Franklin Templeton Investments Corp.
(collectively Franklin Resources), as reported on a
Schedule 13G filed on February 6, 2008. Franklin
Resources has sole voting and dispositive power for up to
13,496,210 shares. These shares are beneficially owned by
one or more open or closed end investment companies or other
managed accounts that are investment management clients of
investment mangers that are direct and indirect subsidiaries of
Franklin Resources, Inc.
|
|
(6)
|
|
Represents shares beneficially held
by the Noonday Funds, the Farallon Funds, and its various
advisors, managing members, management company and general
partner (collectively, Noonday), as reported on a
Schedule 13G/A filed on January 4, 2008. Noonday has voting
and dispositive powers for up to 11,825,600 shares.
|
|
(7)
|
|
Represents shares beneficially held
by Tracer Capital Management L.P. (Tracer), Riley
McCormack and Matt Hastings, as reported on a Schedule 13G
filed on February 14, 2008. Tracer serves as investment
manager to various entities and as such may be deemed to have
voting and dispositive power with respect to
11,685,813 shares. Mr. McCormack and Mr. Hastings
are the sole limited partners of Tracer.
|
95
Security
Ownership of Directors and Executive Officers
The following table sets forth, as of February 15, 2008,
information regarding the beneficial ownership of our common
stock held by (i) each of our directors and named executive
officers and (2) all of our directors and executive
officers as a group. To our knowledge, except as otherwise
indicated, each of the persons or entities listed below has sole
voting and investment power with respect to the shares
beneficially owned by him or her. Beneficial
ownership is determined in accordance with
Rule 13d-3
under the Exchange Act, pursuant to which a person or group of
persons is deemed to have beneficial ownership of
any shares that he or she has the right to acquire within
60 days of February 15, 2008. Any shares that a person
has the right to acquire within 60 days of
February 15, 2008 are deemed to be outstanding for that
person but are not deemed to be outstanding for any other person.
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
Percentage of
|
Name and Address(1)
|
|
Number of Shares
|
|
|
Shares Outstanding
|
|
F. Edwin Harbach(2)
|
|
|
222,081
|
|
|
|
*
|
Judy A. Ethell(3)
|
|
|
682,181
|
|
|
|
*
|
Laurent C. Lutz
|
|
|
22,167
|
|
|
|
*
|
Douglas C. Allred(4)
|
|
|
59,000
|
|
|
|
*
|
Betsy J. Bernard(5)
|
|
|
47,000
|
|
|
|
*
|
Spencer C. Fleischer(6)
|
|
|
39,000
|
|
|
|
*
|
Jill S. Kanin-Lovers
|
|
|
8,000
|
|
|
|
*
|
Wolfgang H. Kemna(7)
|
|
|
59,000
|
|
|
|
*
|
Albert L. Lord(8)
|
|
|
66,600
|
|
|
|
*
|
Roderick C. McGeary(9)
|
|
|
700,760
|
|
|
|
*
|
Eddie R. Munson
|
|
|
8,000
|
|
|
|
*
|
J. Terry Strange(10)
|
|
|
65,000
|
|
|
|
*
|
Richard J. Roberts(11)
|
|
|
670,542
|
|
|
|
*
|
Harry L. You(12)
|
|
|
1,072,500
|
|
|
|
*
|
All executive officers and directors as a group
(12 persons)(13)
|
|
|
1,978,789
|
|
|
|
*
|
|
|
|
*
|
|
Less than 1% of our common stock
outstanding.
|
|
(1)
|
|
The address for all persons listed
is
c/o BearingPoint,
Inc., 1676 International Drive, McLean, Virginia 22102 USA.
|
|
(2)
|
|
Represents 222,081 vested RSUs.
|
|
(3)
|
|
Includes 58,400 vested RSUs, and
300,000 shares of common stock that may be acquired through
the exercise of stock options. Also includes 141,600 shares
of common stock and 30,000 vested RSUs held by Robert R. Glatz,
Ms. Ethells spouse.
|
|
(4)
|
|
Includes 15,000 shares of
common stock that may be acquired through the exercise of stock
options.
|
|
(5)
|
|
Includes 15,000 shares of
common stock that may be acquired through the exercise of stock
options.
|
|
(6)
|
|
Includes 15,000 shares of
common stock that may be acquired through the exercise of stock
options within 60 days of December 31, 2007.
Mr. Fleischer is a senior managing member of Friedman
Fleischer & Lowe GP II, LLC, a Delaware limited
liability company (FFL GP). FFL GP is the general
partner of Friedman Fleischer & Lowe GP II, L.P.,
which is the general partner of each of Friedman
Fleischer & Lowe Capital Partners II, L.P. (FFL
Capital Partners), FFL Parallel Fund II, L.P.
(FFL Parallel Fund) and FFL Executive Partners II,
L.P. (FFL Executive Partners, and together with FFL
Capital Partners and FFL Parallel Fund, the FFL
Funds). The FFL Funds are the owners of record of
$40 million of initial principal amount of
0.50% Convertible Senior Subordinated Debentures due July
2010 and warrants to purchase up to 3.5 million shares of
common stock. Mr. Fleischer disclaims any beneficial
ownership of the securities owned by the FFL Funds, except to
the extent of his pecuniary interest therein, if any.
|
|
(7)
|
|
Includes 15,000 shares of
common stock that may be acquired through the exercise of stock
options.
|
|
(8)
|
|
Includes 15,000 shares of
common stock that may be acquired through the exercise of stock
options.
|
96
|
|
|
(9)
|
|
On December 31, 2007,
Mr. McGeary retired as an employee of the Company.
Mr. McGeary will continue to serve as the Chairman of our
Board. Effective as of his retirement as an employee of the
Company, all unvested RSUs become vested. Includes 51,256 vested
RSUs and 472,928 shares of common stock that may be
acquired through the exercise of stock options.
|
|
(10)
|
|
Includes 20,000 shares of
common stock that may be acquired through the exercise of stock
options.
|
|
(11)
|
|
Effective as of January 8,
2007, Mr. Roberts no longer served as our Chief Operating
Officer, as a result of the appointment of F. Edwin Harbach as
our President and Chief Operating Officer. Includes
4,301 shares held through a family trust, 196,370 vested
RSUs and 381,708 shares of common stock that may be
acquired through the exercise of stock options.
|
|
|
|
(12)
|
|
Includes 62,500 vested RSUs and
1,000,000 shares of common stock that may be acquired
through the exercise of stock options.
|
|
(13)
|
|
Does not include Mr. Roberts
or Mr. You as they were not executive officers nor, in the
case of Mr. You, a director, on December 31, 2007.
|
97
|
|
ITEM 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
Related
Party Transaction Policies
The Audit Committee of our Board has the primary responsibility
for reviewing, approving or ratifying any related party
transactions, which include certain transactions that we may
enter into with our directors or executive officers (or their
immediate family members), or certain shareholders of the
Company. Our legal department assists the Audit Committee in
implementing procedures and processes to obtain information
regarding any such related party transactions, including
information obtained from our directors and officers through
annual questionnaires. The Audit Committee makes all decisions
with respect to whether a transaction meets the criteria of a
related party transaction.
Related
Transactions
|
|
|
Friedman
Fleischer & Lowe, LLC /Spencer C. Fleischer
|
On July 15, 2005, we issued $40,000,000 aggregate principal
amount of our July 2005 Convertible Debentures and common stock
warrants to purchase up to 3,500,000 shares of our common
stock pursuant to a securities purchase agreement, dated
July 15, 2005 (the FF&L Purchase
Agreement), among the Company and certain affiliates of
Friedman Fleischer & Lowe, LLC (the FF&L
Purchasers). In accordance with the terms of the FF&L
Purchase Agreement, Mr. Spencer C. Fleischer was appointed
to our Board as a Class I Director, effective July 15,
2005. Mr. Fleischer is a senior managing member and Vice
Chairman of Friedman Fleischer & Lowe GP II, LLC, the
general partner of Friedman Fleischer & Lowe GP II,
LP, which is the general partner of several investment funds
that make investments in private and public companies in the
United States and Bermuda; he has served in this capacity since
1998. If Mr. Fleischer ceases to be affiliated with the
FF&L Purchasers or ceases to serve on the Board, so long as
the FF&L Purchasers together hold at least 40% of the
original principal amount of the July 2005 Senior Debentures,
the FF&L Purchasers or their designees have the right to
designate a replacement director to our Board. In connection
with the Supplemental Indentures entered into for the
Subordinated Debentures and the April 2005 Convertible
Debentures and the payment of a consent fee to the holders of
the April 2005 Convertible Debentures equal to 1.00% of the
outstanding principal amount of the April 2005 Convertible
Debentures on November 9, 2006 and an additional consent
fee of 0.25% on October 27, 2007, we paid to the holders of
the July 2005 Convertible Debentures an amount equal to 1.00% of
the outstanding principal amount of the July 2005 Convertible
Debentures and an additional 0.25%, respectively.
On October 8, 2007, the Company and Robert R. Glatz,
Executive Vice President, entered into a Separation and Release
of Claims Agreement regarding the terms of his departure from
the Company. Mr. Glatz is the spouse of Judy A. Ethell, our
Chief Financial Officer. Under the terms of the agreement, among
other things: (a) Mr. Glatzs employment with the
Company terminated effective as of October 31, 2007;
(b) the Company paid Mr. Glatz cash severance of
$1 million; and (c) in connection with the grant of
300,000 RSUs made to Mr. Glatz on August 22, 2005, the
vesting of 30,000 RSUs were accelerated on October 31,
2007, and 30,000 unvested RSUs were forfeited. As part of
Mr. Glatzs employment, Mr. Glatz was paid:
(a) $520,988 in salary in 2007 and (b) $300,000 as
bonus for his services in 2006, which was paid in 2007. In
connection with his employment, Mr. Glatz was also provided
with, and participated in, other benefits that are provided to
other executives of the Company.
Director
Independence
The Board has reviewed each directors independence. As a
result of this review, the Board affirmatively determined that
each of Messrs. Allred, Fleischer, Kemna, Lord, Munson and
Strange, and Mses. Bernard and
98
Kanin-Lovers has no material relationship with the Company
(either directly or as a partner, shareholder or officer of an
organization that has a relationship with the Company).
Furthermore, each of these directors is independent of the
Company and its management under the listing standards of the
NYSE currently in effect and, with respect to members of the
Audit Committee, the applicable regulations of the SEC.
Mr. Harbach is an employee of the Company and while
Mr. McGeary resigned as an employee of the Company as of
December 31, 2007, he is not considered an independent director
under the NYSEs listing standards due to his recent
employment with the Company.
In connection with the Boards determination of
Mr. Fleischers independence, the Board re-examined
Mr. Fleischers status as a senior managing member of
one of the Companys convertible debt holders. After
considering all relevant facts and circumstances, the Board
determined Mr. Fleischers relationship was not
material and does not impair the independence of
Mr. Fleischer. Although Mr. Fleischer is invited to
attend committee meetings from time to time, he is not a member
of our Audit Committee, Compensation Committee or Nominating and
Corporate Governance Committee. For more information about
Mr. Fleischers appointment to the Board and his
relationship to one of our convertible debt holders, please see
Friedman Fleischer & Lowe, LLC /Spencer
C. Fleischer.
|
|
ITEM 14.
|
PRINCIPAL
ACCOUNTING FEES AND SERVICES
|
Audit
Committee Pre-Approval Policies
The Audit Committee has adopted policies and procedures for
approving all audit and permissible non-audit services performed
by our independent auditors. Consistent with these policies, all
engagements of the independent auditor to perform any audit
services and non-audit services have been pre-approved by the
Audit Committee. No services provided by our independent auditor
were approved by the Audit Committee pursuant to the de
minimis exception to the pre-approval requirement set
forth in paragraph (c)(7)(i)(C) of
Rule 2-01
of
Regulation S-X.
Independent
Registered Public Accountants Fees
For fiscal years 2007 and 2006, our independent registered
public accountants, Ernst & Young LLP and
PricewaterhouseCoopers LLP, respectively, billed us the fees and
expenses set forth below in connection with services rendered:
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended December 31,
|
|
Type of Fee
|
|
2007
|
|
|
2006
|
|
|
Audit Fees(1)
|
|
$
|
31,595,000
|
|
|
$
|
30,211,000
|
|
Audit-Related Fees(2)
|
|
|
805,000
|
|
|
|
275,000
|
|
Tax Fees(3)
|
|
|
449,000
|
|
|
|
960,000
|
|
All Other Fees(4)
|
|
|
2,187,000
|
|
|
|
15,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
35,036,000
|
|
|
$
|
31,461,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Audit fees include audits of
consolidated financial statements, reviews of unaudited
quarterly financial statements and services that are normally
provided by independent auditors in connection with statutory
and regulatory filings.
|
|
(2)
|
|
Audit-related fees include
assurance and related services provided by our independent
auditors that are reasonably related to the performance of the
audit or review of our consolidated financial statements and are
not included above under Audit Fees. These services
principally include audits of employee benefit plans, accounting
consultations, and other services in connection with regulatory
reporting requirements.
|
|
(3)
|
|
Tax services principally include
consultation in connection with tax compliance, tax
consultations and tax planning.
|
|
(4)
|
|
All other fees include licenses to
technical accounting research software and, for 2007, an EMEA
due diligence review.
|
99
PART IV
|
|
Item 15.
|
EXHIBITS,
FINANCIAL STATEMENT SCHEDULES
|
(a)(1) The financial statements of the Company required in
response to this Item are incorporated by reference from
Item 8 of this Report.
(a)(3) See the exhibits listed below under Item 15(b).
(b) Exhibit Index
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
3
|
.1
|
|
Amended and Restated Certificate of Incorporation, dated as of
February 7, 2001, which is incorporated herein by reference
to Exhibit 3.1 from the Companys
Form 10-Q
for the quarter ended March 31, 2001.
|
|
|
|
|
|
|
3
|
.2
|
|
Amended and Restated Bylaws, amended and restated as of
August 2, 2007, which is incorporated herein by reference
to Exhibit 3.1 from the Companys
Form 8-K
filed with the SEC on August 8, 2007.
|
|
|
|
|
|
|
3
|
.3
|
|
Certificate of Ownership and Merger merging Bones Holding into
the Company, dated October 2, 2002, which is incorporated
herein by reference to Exhibit 3.3 from the Companys
Form 10-Q
for the quarter ended September 30, 2002.
|
|
|
|
|
|
|
4
|
.1
|
|
Rights Agreement, dated as of October 2, 2001, between the
Company and EquiServe Trust Company, N.A., which is
incorporated herein by reference to Exhibit 1.1 from the
Companys Registration Statement on
Form 8-A
dated October 3, 2001.
|
|
|
|
|
|
|
4
|
.2
|
|
Certificate of Designation of Series A Junior Participating
Preferred Stock, which is incorporated herein by reference to
Exhibit A to Exhibit 1.1 from the Companys
Registration Statement on
Form 8-A
dated October 3, 2001.
|
|
|
|
|
|
|
4
|
.3
|
|
Amendment No. 1 to the Rights Agreement between the Company
and EquiServe Trust Company, N.A., which is incorporated
herein by reference to Exhibit 99.1 from the Companys
Form 8-K
filed on September 6, 2002.
|
|
|
|
|
|
|
4
|
.4
|
|
Second Amendment to the Rights Agreement, dated as of
October 27, 2007, between the Company and Computershare
Trust Company, N.A. (formerly EquiServe Trust Company,
N.A.), which is incorporated herein by reference to
Exhibit 4.4 from the Companys
Form 10-Q
for the quarter ended June 30, 2007.
|
|
|
|
|
|
|
10
|
.1
|
|
Amended and Restated Separation Agreement, dated as of
February 13, 2001, among KPMG LLP, KPMG Consulting, LLC and
the Company, which is incorporated herein by reference to
Exhibit 10.1 from the Companys
Form 10-Q
for the quarter ended March 31, 2001.
|
|
|
|
|
|
|
10
|
.2
|
|
Transition Services Agreement, dated as of February 13,
2001, among KPMG LLP, KPMG Consulting, LLC and the Company,
which is incorporated herein by reference to Exhibit 10.3
from the Companys
Form 10-Q
for the quarter ended March 31, 2001.
|
|
|
|
|
|
|
10
|
.3
|
|
Stock Purchase Agreement dated as of December 29, 1999,
among Cisco Systems, Inc., KPMG LLP and the Company, which is
incorporated herein by reference to Exhibit 10.11 from the
Companys
Form S-1.
(Registration
No. 333-36328)
(referred to below as the Companys
Form S-1).
|
|
|
|
|
|
|
10
|
.4
|
|
Investor Rights Agreement dated as of January 31, 2000,
among KPMG LLP, Cisco Systems, Inc. and the Company, which is
incorporated herein by reference to Exhibit 10.12 from the
Companys
Form S-1.
|
100
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
|
|
|
|
|
10
|
.5
|
|
Irrevocable Waiver, dated May 17, 2004, by Cisco Systems,
Inc. with respect to the Investor Rights Agreement, dated
January 31, 2000 and the Stock Purchase Agreement, dated
December 29, 1999, which is incorporated herein by
reference to Exhibit 10.49 of the Companys
Form S-1/A
(Registration
No. 333-100199).
|
|
|
|
|
|
|
10
|
.6
|
|
Credit Agreement dated as of May 18, 2007, as amended and
restated on June 1, 2007, among the Company, BearingPoint,
LLC, the guarantors party thereto, the lenders party thereto,
UBS Securities LLC, Morgan Stanley Senior Funding, Inc., UBS AG,
Stamford Branch and Wells Fargo Foothill, LLC, which is
incorporated herein by reference to Exhibit 10.6 from the
Companys
Form 10-K
for the year ended December 31, 2006.
|
|
|
|
|
|
|
10
|
.7
|
|
Security Agreement dated as of May 18, 2007, among the
Company, BearingPoint, LLC, the guarantors party thereto and UBS
AG, Stamford Branch, as Collateral Agent, which is incorporated
herein by reference to Exhibit 10.7 from the Companys
Form 10-K
for the year ended December 31, 2006.
|
|
|
|
|
|
|
10
|
.8
|
|
Form of Term Note under the Credit Agreement dated as of
May 18, 2007, which is incorporated herein by reference to
Exhibit 10.8 from the Companys
Form 10-K
for the year ended December 31, 2006.
|
|
|
|
|
|
|
10
|
.9
|
|
Form of 2.50% Series A Convertible Subordinated Debentures
due 2024, which is incorporated by reference to
Exhibit 10.66 from the Companys
Form 10-K
for the year ended December 31, 2004.
|
|
|
|
|
|
|
10
|
.10
|
|
Form of 2.75% Series B Convertible Subordinated Debentures
due 2024, which is incorporated by reference to
Exhibit 10.67 from the Companys
Form 10-K
for the year ended December 31, 2004.
|
|
|
|
|
|
|
10
|
.11
|
|
Purchase Agreement, dated as of December 16, 2004, among
the Company and the Initial Purchasers named therein, which is
incorporated by reference to Exhibit 10.68 from the
Companys
Form 10-K
for the year ended December 31, 2004.
|
|
|
|
|
|
|
10
|
.12
|
|
Indenture, dated as of December 22, 2004, by and between
the Company and The Bank of New York, as trustee, which is
incorporated by reference to Exhibit 99.1 from the
Companys
Form 8-K
filed on March 10, 2006.
|
|
|
|
|
|
|
10
|
.13
|
|
First Supplemental Indenture, dated as of November 7, 2006,
between BearingPoint, Inc. and The Bank of New York, as trustee
under the Indenture, dated as of December 22, 2004, which
is incorporated by reference to Exhibit 99.1 from the
Companys
Form 8-K
filed on November 8, 2006.
|
|
|
|
|
|
|
10
|
.14
|
|
Resale Registration Rights Agreement, dated December 22,
2004, between the Company and the Initial Purchasers, which is
incorporated by reference to Exhibit 10.70 from the
Companys
Form 10-K
for the year ended December 31, 2004.
|
|
|
|
|
|
|
10
|
.15
|
|
Form of 5.00% Convertible Senior Subordinated Debentures
due 2025, which is incorporated by reference to
Exhibit 10.71 from the Companys
Form 10-K
for the year ended December 31, 2004.
|
|
|
|
|
|
|
10
|
.16
|
|
Form of Securities Purchase Agreement, dated April 21,
2005, among the Company and the purchasers named therein, which
is incorporated by reference to Exhibit 10.72 from the
Companys
Form 10-K
for the year ended December 31, 2004.
|
|
|
|
|
|
|
10
|
.17
|
|
Indenture, dated as of April 27, 2005, by and between the
Company and the Bank of New York, as trustee, which is
incorporated by reference to Exhibit 99.2 from the
Companys
Form 8-K
filed on March 10, 2006.
|
101
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
|
|
|
|
|
10
|
.18
|
|
First Supplemental Indenture, dated as of November 2, 2006,
between BearingPoint, Inc. and The Bank of New York, as trustee
under the Indenture, dated as of April 27, 2005, which is
incorporated by reference to Exhibit 99.2 from the
Companys
Form 8-K
filed on November 3, 2006.
|
|
|
|
|
|
|
10
|
.19
|
|
Registration Rights Agreement, dated April 27, 2005,
between the Company and the placement agents named therein,
which is incorporated by reference to Exhibit 10.74 from
the Companys
Form 10-K
for the year ended December 31, 2004.
|
|
|
|
|
|
|
10
|
.20
|
|
Securities Purchase Agreement, dated July 15, 2005, among
the Company and certain affiliates of Friedman
Fleischer & Lowe, LLC, which is incorporated by
reference to Exhibit 10.75 from the Companys
Form 10-K
for the year ended December 31, 2004.
|
|
|
|
|
|
|
10
|
.21
|
|
Form of 0.50% Convertible Senior Subordinated Debentures
due July 2010, which is incorporated by reference to
Exhibit 10.76 from the Companys
Form 10-K
for the year ended December 31, 2004.
|
|
|
|
|
|
|
10
|
.22
|
|
Form of Warrant Certificate, dated July 15, 2005, which is
incorporated by reference to Exhibit 10.77 from the
Companys
Form 10-K
for the year ended December 31, 2004.
|
|
|
|
|
|
|
10
|
.23
|
|
Registration Rights Agreement, dated July 15, 2005, between
the Company and certain affiliates of Friedman
Fleischer & Lowe, LLC, which is incorporated by
reference to Exhibit 10.78 from the Companys
Form 10-K
for the year ended December 31, 2004.
|
|
|
|
|
|
|
10
|
.24
|
|
Amended and Restated 2000 Long-Term Incentive Plan, effective as
of February 2, 2007, which is incorporated herein by
reference to Exhibit 10.24 from the Companys
Form 10-K
for the year ended December 31, 2006.
|
|
|
|
|
|
|
10
|
.25
|
|
Employee Stock Purchase Plan, as amended and restated as of
February 1, 2007, which is incorporated herein by reference
to Exhibit 10.25 from the Companys
Form 10-K
for the year ended December 31, 2006.
|
|
|
|
|
|
|
10
|
.26
|
|
Amended and Restated 401(k) Plan dated August 21, 2003,
which is incorporated herein by reference to Exhibit 10.19
from the Companys
Form 10-K
for the year ended June 30, 2003.
|
|
|
|
|
|
|
10
|
.27
|
|
Amendment No. 1 to Amended and Restated 401(k) Plan dated
April 29, 2004, which is incorporated herein by reference
to Exhibit 10.20 from the Companys
Form S-1/A
(Registration
No. 333-100199).
|
|
|
|
|
|
|
10
|
.28
|
|
Amendment No. 2 to Amended and Restated 401(k) Plan dated
June 24, 2005, which is incorporated by reference to
Exhibit 10.24 from the Companys
Form 10-K
for the year ended December 31, 2004.
|
|
|
|
|
|
|
10
|
.29
|
|
Amendment No. 3 to Amended and Restated 401(k) Plan dated
August 22, 2005, which is incorporated by reference to
Exhibit 10.25 from the Companys
Form 10-K
for the year ended December 31, 2004.
|
|
|
|
|
|
|
10
|
.30
|
|
Amendment No. 4 to Amended and Restated 401(k) Plan dated
November 1, 2005, which is incorporated by reference to
Exhibit 10.26 from the Companys
Form 10-K
for the year ended December 31, 2004.
|
|
|
|
|
|
|
10
|
.31
|
|
Amendment No. 5 to Amended and Restated 401(k) Plan,
effective as of September 14, 2006, which is incorporated
herein by reference to Exhibit 10.31 from the
Companys
Form 10-K
for the year ended December 31, 2006.
|
|
|
|
|
|
|
10
|
.32
|
|
Amendment No. 6 to Amended and Restated 401(k) Plan,
effective as of January 1, 2006, which is incorporated
herein by reference to Exhibit 10.32 from the
Companys
Form 10-K
for the year ended December 31, 2006.
|
102
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
|
|
|
|
|
10
|
.33
|
|
Amendment No. 7 to Amended and Restated 401(k) Plan,
effective as of May 1, 2007, which is incorporated herein
by reference to Exhibit 10.33 from the Companys
Form 10-K
for the year ended December 31, 2006.
|
|
|
|
|
|
|
10
|
.34
|
|
Deferred Compensation Plan, as amended and restated as of
August 1, 2003, which is incorporated herein by reference
to Exhibit 10.20 from the Companys
Form 10-K
for the year ended June 30, 2003.
|
|
|
|
|
|
|
10
|
.35
|
|
Amendment to Deferred Compensation Plan effective as of
December 31, 2004, which is incorporated by reference to
Exhibit 10.28 from the Companys
Form 10-K
for the year ended December 31, 2004.
|
|
|
|
|
|
|
10
|
.36
|
|
Amended and Restated BearingPoint, Inc. Managing Directors
Deferred Compensation Plan dated January 1, 2006, which is
incorporated by reference to Exhibit 10.30 from the
Companys
Form 10-K
for the year ended December 31, 2004.
|
|
|
|
|
|
|
10
|
.37
|
|
Form of Member Distribution Agreement for KPMG Consulting
Qualified Employees, which is incorporated herein by reference
to Exhibit 10.6 from the Companys
Form S-1
(including for Richard Roberts).
|
|
|
|
|
|
|
10
|
.38
|
|
Form of Amendment to the Managing Director Agreement, dated as
of January 31, 2005, between the Company and certain
executive officers (including for Richard Roberts), which is
incorporated by reference to Exhibit 10.8 from the
Companys
Form 10-K
for the year ended December 31, 2004.
|
|
|
|
|
|
|
10
|
.39
|
|
Form of Managing Director Agreement (including for Roderick C.
McGeary), which is incorporated herein by reference to
Exhibit 10.39 from the Companys
Form 10-K
for the year ended December 31, 2006.
|
|
|
|
|
|
|
10
|
.40
|
|
Form of Managing Director Agreement, which is incorporated
herein by reference to Exhibit 10.40 from the
Companys
Form 10-K
for the year ended December 31, 2006.
|
|
|
|
|
|
|
10
|
.41
|
|
Form of Special Termination Agreement (including for Richard
Roberts), which is incorporated by reference to
Exhibit 10.93 from the Companys
Form 10-K
for the year ended December 31, 2005.
|
|
|
|
|
|
|
10
|
.42
|
|
Form of Restricted Stock Agreement with certain officers of the
Company pursuant to the 2000 Long-Term Incentive Plan, which is
incorporated herein by reference to Exhibit 10.5 from the
Companys
Form 10-Q
for the quarter ended September 30, 2002.
|
|
|
|
|
|
|
10
|
.43
|
|
Form of Restricted Stock Agreement with non-employee directors
of the Company pursuant to the Amended and Restated Long-Term
Incentive Plan, which is incorporated herein by reference to
Exhibit 10.5 from the Companys
Form 10-Q
for the quarter ended December 31, 2002.
|
|
|
|
|
|
|
10
|
.44
|
|
Form of Restricted Stock Unit agreement under the Companys
2000 Long-Term Incentive Plan for managing directors and
employees, which is incorporated by reference to
Exhibit 10.81 from the Companys
Form 10-K
for the year ended December 31, 2004.
|
|
|
|
|
|
|
10
|
.45
|
|
Form of Performance Share Award Unit Agreement, which is
incorporated by reference to Exhibit 99.1 from the
Companys
Form 8-K
filed with the SEC on February 8, 2007.
|
|
|
|
|
|
|
10
|
.46
|
|
Form of Performance Cash Award Agreement, which is incorporated
by reference to Exhibit 99.2 from the Companys
Form 8-K
filed with the SEC on February 8, 2007.
|
|
|
|
|
|
|
10
|
.47
|
|
Employment Letter, effective as of March 21, 2005, between
the Company and Harry L. You, which is incorporated by reference
to Exhibit 10.86 from the Companys
Form 10-K
for the year ended December 31, 2004.
|
103
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
|
|
|
|
|
10
|
.48
|
|
Managing Director Agreement, dated as of March 21, 2005,
between the Company and Harry L. You, which is incorporated by
reference to Exhibit 10.87 from the Companys
Form 10-K
for the year ended December 31, 2004.
|
|
|
|
|
|
|
10
|
.49
|
|
Restricted Stock Unit Agreement, dated March 21, 2005,
between the Company and Harry L. You, which is incorporated by
reference to Exhibit 10.88 from the Companys
Form 10-K
for the year ended December 31, 2004.
|
|
|
|
|
|
|
10
|
.50
|
|
Special Termination Agreement, dated as of March 21, 2005,
between the Company and Harry L. You, which is incorporated by
reference to Exhibit 10.89 from the Companys
Form 10-K
for the year ended December 31, 2004.
|
|
|
|
|
|
|
10
|
.51
|
|
Stock Option Agreement, between the Company and Harry L. You,
which is incorporated by reference to Exhibit 10.90 from
the Companys
Form 10-K
for the year ended December 31, 2004.
|
|
|
|
|
|
|
10
|
.52
|
|
Form of Restricted Stock Unit Agreement awarded to Harry You and
Roderick C. McGeary, which is incorporated by reference to
Exhibit 99.2 from the Companys
Form 8-K
filed with the SEC on February 13, 2007.
|
|
|
|
|
|
|
10
|
.53
|
|
Employment Letter, effective as of July 1, 2005, between
the Company and Judy A. Ethell, which is incorporated by
reference to Exhibit 10.91 from the Companys
Form 10-K
for the year ended December 31, 2004.
|
|
|
|
|
|
|
10
|
.54
|
|
Managing Director Agreement, dated as of July 1, 2005,
between the Company and Judy A. Ethell, which is incorporated
herein by reference to Exhibit 10.54 from the
Companys
Form 10-K
for the year ended December 31, 2006.
|
|
|
|
|
|
|
10
|
.55
|
|
Special Termination Agreement, dated as of July 1, 2005,
between the Company and Judy A. Ethell, which is incorporated by
reference to Exhibit 10.93 from the Companys
Form 10-K
for the year ended December 31, 2004.
|
|
|
|
|
|
|
10
|
.56
|
|
Letter Agreement dated October 3, 2006, between the Company
and Judy A. Ethell, which is incorporated by reference to
Exhibit 10.95 from the Companys
Form 10-K
for the year ended December 31, 2005.
|
|
|
|
|
|
|
10
|
.57
|
|
Restricted Stock Unit Agreement, dated September 19, 2006,
between the Company and Judy A. Ethell, which is incorporated by
reference to Exhibit 10.96 from the Companys
Form 10-K
for the year ended December 31, 2005.
|
|
|
|
|
|
|
10
|
.58
|
|
Restricted Stock Unit Agreement, dated September 19, 2006,
between the Company and Judy A. Ethell, which is incorporated by
reference to Exhibit 10.97 from the Companys
Form 10-K
for the year ended December 31, 2005.
|
|
|
|
|
|
|
10
|
.59
|
|
Employment Letter, effective as of February 24, 2006,
between the Company and Laurent C. Lutz, which is incorporated
by reference to Exhibit 10.91 from the Companys
Form 10-K
for the year ended December 31, 2005.
|
|
|
|
|
|
|
10
|
.60
|
|
Managing Director Agreement, dated as of February 24, 2006,
between the Company and Laurent C. Lutz, which is incorporated
by reference to Exhibit 10.92 from the Companys
Form 10-K
for the year ended December 31, 2005.
|
|
|
|
|
|
|
10
|
.61
|
|
Special Termination Agreement, dated as of February 24,
2006, between the Company and Laurent C. Lutz, which is
incorporated by reference to Exhibit 10.94 from the
Companys
Form 10-K
for the year ended December 31, 2005.
|
|
|
|
|
|
|
10
|
.62*
|
|
Employment Letter, effective as of December 31, 2007,
between the Company and F. Edwin Harbach.
|
104
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
|
|
|
|
|
10
|
.63*
|
|
Managing Director Agreement, effective as of December 31,
2007, between the Company and F. Edwin Harbach.
|
|
|
|
|
|
|
10
|
.64*
|
|
Special Termination Agreement, dated as of December 31,
2007, between the Company and F. Edwin Harbach.
|
|
|
|
|
|
|
10
|
.65
|
|
Restricted Stock Unit Agreement, dated January 8, 2007,
between the Company and F. Edwin Harbach, which is incorporated
by reference to Exhibit 99.5 from the Companys
Form 8-K
filed with the SEC on January 12, 2007.
|
|
|
|
|
|
|
10
|
.66*
|
|
Amendment No. 1 to the Restricted Stock Unit Agreement with
F. Edwin Harbach dated January 8, 2007, dated as of
December 31, 2007.
|
|
|
|
|
|
|
10
|
.67*
|
|
Restricted Stock Unit Agreement, dated January 7, 2008,
between the Company and F. Edwin Harbach.
|
|
|
|
|
|
|
10
|
.68*
|
|
Stock Option Agreement, dated January 7, 2008, between the
Company and F. Edwin Harbach.
|
|
|
|
|
|
|
14
|
.1
|
|
Standards of Business Conduct, which is incorporated by
reference to Exhibit 14.1 from the Companys
Form 10-K
for the year ended December 31, 2006.
|
|
|
|
|
|
|
16
|
.1
|
|
Letter dated June 28, 2007, from PricewaterhouseCoopers LLP
to the Securities and Exchange Commission, which is incorporated
by reference to Exhibit 16.1 from the Companys
Form 10-K
for the year ended December 31, 2006.
|
|
|
|
|
|
|
21
|
.1*
|
|
List of subsidiaries of the Registrant.
|
|
|
|
|
|
|
23
|
.1*
|
|
Consent of Ernst & Young LLP.
|
|
|
|
|
|
|
23
|
.2*
|
|
Consent of PricewaterhouseCoopers LLP.
|
|
|
|
|
|
|
31
|
.1*
|
|
Certification of Chief Executive Officer pursuant to
Rule 13a-14(a)
or 15d-14(a).
|
|
|
|
|
|
|
31
|
.2*
|
|
Certification of Chief Financial Officer pursuant to
Rule 13a-14(a)
or 15d-14(a).
|
|
|
|
|
|
|
32
|
.1*
|
|
Certification of Chief Executive Officer pursuant to
Section 1350.
|
|
|
|
|
|
|
32
|
.2*
|
|
Certification of Chief Financial Officer pursuant to
Section 1350.
|
105
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf on February 28, 2008 by
the undersigned, thereunto duly authorized.
BEARINGPOINT, INC.
Name: F. Edwin
Harbach
Title: Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below on February 28, 2008 by
the following persons on behalf of the Registrant and in the
capacities indicated.
|
|
|
|
|
Signature
|
|
Title
|
|
/s/ F.
Edwin Harbach
F.
Edwin Harbach
|
|
Director, President and Chief Executive Officer (principal
executive officer)
|
|
|
|
/s/ Judy
A. Ethell
Judy
A. Ethell
|
|
Chief Financial Officer (principal financial and accounting
officer)
|
|
|
|
/s/ Roderick
C. McGeary
Roderick
C. McGeary
|
|
Chairman of the Board of Directors
|
|
|
|
/s/ Douglas
C. Allred
Douglas
C. Allred
|
|
Director
|
|
|
|
/s/ Betsy
J. Bernard
Betsy
J. Bernard
|
|
Director
|
|
|
|
/s/ Spencer
C. Fleischer
Spencer
C. Fleischer
|
|
Director
|
|
|
|
/s/ Jill
S. Kanin-Lovers
Jill
S. Kanin-Lovers
|
|
Director
|
|
|
|
/s/ Wolfgang
H. Kemna
Wolfgang
H. Kemna
|
|
Director
|
|
|
|
/s/ Albert
L. Lord
Albert
L. Lord
|
|
Director
|
|
|
|
/s/ Eddie
R. Munson
Eddie
R. Munson
|
|
Director
|
|
|
|
/s/ J.
Terry Strange
J.
Terry Strange
|
|
Director
|
106
|
|
ITEM 8:
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
BEARINGPOINT,
INC.
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page
|
|
|
|
|
F-2
|
|
|
|
|
|
|
|
|
|
F-3
|
|
|
|
|
|
|
|
|
|
F-4
|
|
|
|
|
|
|
|
|
|
F-5
|
|
|
|
|
|
|
|
|
|
F-6
|
|
|
|
|
|
|
|
|
|
F-8
|
|
|
|
|
|
|
|
|
|
F-9
|
|
F-1
REPORT OF
ERNST & YOUNG LLP,
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders of BearingPoint, Inc.:
We have audited the accompanying consolidated balance sheet of
BearingPoint, Inc. as of December 31, 2007, and the related
statements of operations, changes in stockholders equity
(deficit), and cash flows for the year then ended. These
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the 2007 financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of BearingPoint, Inc. at December 31,
2007, and the consolidated results of its operations and its
cash flows for the year then ended, in conformity with
U.S. generally accepted accounting principles.
As discussed in Note 14 to the consolidated financial
statements, the Company adopted Financial Accounting Standards
Board Interpretation No. 48, Accounting for Uncertainty
in Income Taxes, effective January 1, 2007.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
BearingPoint, Inc.s internal control over financial
reporting as of December 31, 2007, based on criteria
established in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated February 26, 2008
(included in Item 9A) expressed an adverse opinion thereon.
/s/
Ernst & Young LLP
McLean, Virginia
February 26, 2008
F-2
REPORT OF
PRICEWATERHOUSECOOPERS LLP,
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of BearingPoint, Inc.:
In our opinion, the consolidated financial statements listed in
the accompanying index present fairly, in all material respects,
the financial position of BearingPoint, Inc. and its
subsidiaries (the Company) at December 31,
2006, and the results of their operations and their cash flows
for each of the two years in the period ended December 31,
2006 in conformity with accounting principles generally accepted
in the United States of America. These financial statements are
the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these
statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles
used and significant estimates made by management, and
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
As discussed in Note 2 to the consolidated financial
statements, the Company changed the manner in which it accounts
for share-based compensation in 2006 and the manner in which it
accounts for defined benefit pension and other postretirement
plans effective December 31, 2006.
PricewaterhouseCoopers LLP
Boston, Massachusetts
June 27, 2007
F-3
BEARINGPOINT,
INC.
(in
thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
466,815
|
|
|
$
|
389,571
|
|
Restricted cash (note 2)
|
|
|
1,703
|
|
|
|
3,097
|
|
Accounts receivable, net of allowance for doubtful accounts of
$5,980 at December 31, 2007 and $5,927 at December 31,
2006
|
|
|
356,178
|
|
|
|
361,638
|
|
Unbilled revenue
|
|
|
319,132
|
|
|
|
341,357
|
|
Income tax receivable
|
|
|
8,869
|
|
|
|
1,414
|
|
Deferred income taxes
|
|
|
11,521
|
|
|
|
7,621
|
|
Prepaid expenses
|
|
|
36,500
|
|
|
|
33,677
|
|
Other current assets
|
|
|
38,122
|
|
|
|
65,611
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,238,840
|
|
|
|
1,203,986
|
|
Property and equipment, net
|
|
|
113,771
|
|
|
|
146,392
|
|
Goodwill
|
|
|
494,656
|
|
|
|
463,446
|
|
Deferred income taxes, less current portion
|
|
|
25,179
|
|
|
|
41,663
|
|
Other assets
|
|
|
108,958
|
|
|
|
83,753
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,981,404
|
|
|
$
|
1,939,240
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS DEFICIT
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Current portion of notes payable
|
|
$
|
3,700
|
|
|
$
|
360
|
|
Accounts payable
|
|
|
215,999
|
|
|
|
270,321
|
|
Accrued payroll and employee benefits
|
|
|
368,208
|
|
|
|
369,503
|
|
Deferred revenue
|
|
|
115,961
|
|
|
|
131,313
|
|
Income tax payable
|
|
|
58,304
|
|
|
|
33,324
|
|
Current portion of accrued lease and facilities charges
|
|
|
17,618
|
|
|
|
17,126
|
|
Deferred income taxes
|
|
|
15,022
|
|
|
|
20,109
|
|
Accrued legal settlements
|
|
|
8,716
|
|
|
|
59,718
|
|
Other current liabilities
|
|
|
108,364
|
|
|
|
135,837
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
911,892
|
|
|
|
1,037,611
|
|
Notes payable, less current portion
|
|
|
970,943
|
|
|
|
671,490
|
|
Accrued employee benefits
|
|
|
118,235
|
|
|
|
116,087
|
|
Accrued lease and facilities charges, less current portion
|
|
|
48,066
|
|
|
|
49,792
|
|
Deferred income taxes, less current portion
|
|
|
9,581
|
|
|
|
7,984
|
|
Income tax reserve
|
|
|
243,308
|
|
|
|
108,499
|
|
Other liabilities
|
|
|
148,668
|
|
|
|
125,078
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
2,450,693
|
|
|
|
2,116,541
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (notes 9, 10, 11)
|
|
|
|
|
|
|
|
|
Stockholders deficit:
|
|
|
|
|
|
|
|
|
Preferred stock, $.01 par value 10,000,000 shares
authorized
|
|
|
|
|
|
|
|
|
Common stock, $.01 par value 1,000,000,000 shares
authorized, 219,890,126 shares issued and
215,156,077 shares outstanding on December 31, 2007
and 205,406,249 shares issued and 201,593,999 shares
outstanding on December 31, 2006
|
|
|
2,186
|
|
|
|
2,044
|
|
Additional paid-in capital
|
|
|
1,438,369
|
|
|
|
1,315,190
|
|
Accumulated deficit
|
|
|
(2,180,578
|
)
|
|
|
(1,697,639
|
)
|
Notes receivable from stockholders
|
|
|
|
|
|
|
(7,466
|
)
|
Accumulated other comprehensive income
|
|
|
308,857
|
|
|
|
246,297
|
|
Treasury stock, at cost (4,734,049 shares on
December 31, 2007 and 3,812,250 shares on
December 31, 2006)
|
|
|
(38,123
|
)
|
|
|
(35,727
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders deficit
|
|
|
(469,289
|
)
|
|
|
(177,301
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders deficit
|
|
$
|
1,981,404
|
|
|
$
|
1,939,240
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
Consolidated Financial Statements.
F-4
BEARINGPOINT,
INC.
(in
thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Revenue
|
|
$
|
3,455,562
|
|
|
$
|
3,444,003
|
|
|
$
|
3,388,900
|
|
Costs of service:
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional compensation
|
|
|
1,846,571
|
|
|
|
1,716,632
|
|
|
|
1,770,405
|
|
Other direct contract expenses
|
|
|
819,618
|
|
|
|
896,999
|
|
|
|
972,787
|
|
Lease and facilities restructuring charges
|
|
|
20,869
|
|
|
|
29,621
|
|
|
|
29,581
|
|
Other costs of service
|
|
|
299,979
|
|
|
|
250,225
|
|
|
|
258,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs of service
|
|
|
2,987,037
|
|
|
|
2,893,477
|
|
|
|
3,030,908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
468,525
|
|
|
|
550,526
|
|
|
|
357,992
|
|
Amortization of purchased intangible assets
|
|
|
|
|
|
|
1,545
|
|
|
|
2,266
|
|
Goodwill impairment charge
|
|
|
|
|
|
|
|
|
|
|
166,415
|
|
Selling, general and administrative expenses
|
|
|
701,317
|
|
|
|
748,250
|
|
|
|
750,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(232,792
|
)
|
|
|
(199,269
|
)
|
|
|
(561,556
|
)
|
Interest income
|
|
|
12,084
|
|
|
|
8,749
|
|
|
|
9,049
|
|
Interest expense
|
|
|
(61,216
|
)
|
|
|
(37,182
|
)
|
|
|
(33,385
|
)
|
Insurance settlement
|
|
|
|
|
|
|
38,000
|
|
|
|
|
|
Other (expense) income, net
|
|
|
(8,566
|
)
|
|
|
8,659
|
|
|
|
(13,630
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before taxes
|
|
|
(290,490
|
)
|
|
|
(181,043
|
)
|
|
|
(599,522
|
)
|
Income tax expense
|
|
|
72,233
|
|
|
|
32,397
|
|
|
|
122,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(362,723
|
)
|
|
$
|
(213,440
|
)
|
|
$
|
(721,643
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1.68
|
)
|
|
$
|
(1.01
|
)
|
|
$
|
(3.59
|
)
|
Weighted average shares basic and diluted
|
|
|
216,167,179
|
|
|
|
212,154,618
|
|
|
|
201,020,274
|
|
The accompanying notes are an integral part of these
Consolidated Financial Statements.
F-5
BEARINGPOINT,
INC.
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Additional
|
|
|
|
|
|
receivable
|
|
|
other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
|
|
|
paid-in
|
|
|
Accumulated
|
|
|
from
|
|
|
comprehensive
|
|
|
Treasury Stock
|
|
|
Comprehensive
|
|
|
|
|
|
|
issued
|
|
|
Amount
|
|
|
capital
|
|
|
deficit
|
|
|
stockholders
|
|
|
income (loss)
|
|
|
Shares
|
|
|
Amount
|
|
|
Income (loss)
|
|
|
Total
|
|
|
Balance at December 31, 2004
|
|
|
203,133
|
|
|
|
2,022
|
|
|
|
1,143,059
|
|
|
|
(762,556
|
)
|
|
|
(8,055
|
)
|
|
|
285,955
|
|
|
|
(3,812
|
)
|
|
|
(35,727
|
)
|
|
|
|
|
|
|
624,698
|
|
Exercise of stock options under Long-Term Incentive Plan,
including tax benefit of $75
|
|
|
164
|
|
|
|
1
|
|
|
|
1,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,201
|
|
Sale of common stock under Employee Stock Purchase Plan,
including tax benefit of $520
|
|
|
2,053
|
|
|
|
21
|
|
|
|
14,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,290
|
|
Notes receivable from stockholders, including $6 in interest and
forgiveness of loan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
477
|
|
Compensation recognized for stock options, restricted stock
awards and restricted stock units
|
|
|
|
|
|
|
|
|
|
|
82,346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82,346
|
|
Cash paid in lieu of stock issuance related to transactions
involving Andersen Business Consulting
|
|
|
|
|
|
|
|
|
|
|
(4,929
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,929
|
)
|
Compensation recognized for stock awards related to transactions
involving Andersen Business Consulting
|
|
|
|
|
|
|
|
|
|
|
3,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,491
|
|
Beneficial conversion feature relating to the July 2005 Senior
Debentures
|
|
|
|
|
|
|
|
|
|
|
14,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,288
|
|
Fair value of the July 2005 Warrants
|
|
|
|
|
|
|
|
|
|
|
8,073
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,073
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(721,643
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(721,643
|
)
|
|
|
(721,643
|
)
|
Minimum pension liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,321
|
)
|
|
|
|
|
|
|
|
|
|
|
(13,321
|
)
|
|
|
(13,321
|
)
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(54,543
|
)
|
|
|
|
|
|
|
|
|
|
|
(54,543
|
)
|
|
|
(54,543
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(789,507
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
205,350
|
|
|
$
|
2,044
|
|
|
$
|
1,261,797
|
|
|
$
|
(1,484,199
|
)
|
|
$
|
(7,578
|
)
|
|
$
|
218,091
|
|
|
|
(3,812
|
)
|
|
$
|
(35,727
|
)
|
|
|
|
|
|
$
|
(45,572
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes receivable from stockholders, including $3 in interest and
forgiveness of loan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
112
|
|
Restricted stock awards to Board of Directors
|
|
|
56
|
|
|
|
|
|
|
|
460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
460
|
|
Compensation recognized for stock options and restricted stock
units
|
|
|
|
|
|
|
|
|
|
|
52,933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52,933
|
|
SFAS 158 adjustment, net of tax benefit of $3,756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,417
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,417
|
)
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(213,440
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(213,440
|
)
|
|
|
(213,440
|
)
|
Minimum pension liability, net of tax of $2,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,880
|
|
|
|
|
|
|
|
|
|
|
|
8,880
|
|
|
|
8,880
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,743
|
|
|
|
|
|
|
|
|
|
|
|
30,743
|
|
|
|
30,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(173,817
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
205,406
|
|
|
$
|
2,044
|
|
|
$
|
1,315,190
|
|
|
$
|
(1,697,639
|
)
|
|
$
|
(7,466
|
)
|
|
$
|
246,297
|
|
|
|
(3,812
|
)
|
|
$
|
(35,727
|
)
|
|
|
|
|
|
$
|
(177,301
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
Consolidated Financial Statements.
F-6
BEARINGPOINT,
INC.
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
(DEFICIT) (Continued)
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Additional
|
|
|
|
|
|
receivable
|
|
|
other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
|
|
|
paid-in
|
|
|
Accumulated
|
|
|
from
|
|
|
comprehensive
|
|
|
Treasury Stock
|
|
|
Comprehensive
|
|
|
|
|
|
|
issued
|
|
|
Amount
|
|
|
capital
|
|
|
deficit
|
|
|
stockholders
|
|
|
income (loss)
|
|
|
Shares
|
|
|
Amount
|
|
|
Income (loss)
|
|
|
Total
|
|
|
Balance at December 31, 2006
|
|
|
205,406
|
|
|
$
|
2,044
|
|
|
$
|
1,315,190
|
|
|
$
|
(1,697,639
|
)
|
|
$
|
(7,466
|
)
|
|
$
|
246,297
|
|
|
|
(3,812
|
)
|
|
$
|
(35,727
|
)
|
|
|
|
|
|
$
|
(177,301
|
)
|
Compensation recognized for stock options, restricted stock
units, performance share units, Employee Stock Purchase Plan, BE
an Owner and restricted stock awards
|
|
|
|
|
|
|
|
|
|
|
97,062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
97,062
|
|
Sale of common stock under Employee Stock Purchase
Plan BE an Owner
|
|
|
2,546
|
|
|
|
26
|
|
|
|
10,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,148
|
|
Sale of common stock under Employee Stock Purchase Plan
|
|
|
3,104
|
|
|
|
31
|
|
|
|
12,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,374
|
|
Restricted stock awards to Board of Directors
|
|
|
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlement of notes receivable from stockholders
|
|
|
|
|
|
|
(3
|
)
|
|
|
(6,649
|
)
|
|
|
|
|
|
|
7,466
|
|
|
|
|
|
|
|
(297
|
)
|
|
|
(782
|
)
|
|
|
|
|
|
|
32
|
|
Settlement of softline acquisition obligation
|
|
|
563
|
|
|
|
6
|
|
|
|
10,383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,389
|
|
Settlement of restricted stock units
|
|
|
8,223
|
|
|
|
82
|
|
|
|
(82
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(625
|
)
|
|
|
(1,614
|
)
|
|
|
|
|
|
|
(1,614
|
)
|
FSP 00-19-2
adoption
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(371
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(371
|
)
|
FIN 48 adoption
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(119,845
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(119,845
|
)
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(362,723
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(362,723
|
)
|
|
|
(362,723
|
)
|
Prior service cost, net of tax benefit of $1,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,800
|
|
|
|
|
|
|
|
|
|
|
|
1,800
|
|
|
|
1,800
|
|
Net actuarial gain, net of tax of $6,229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,056
|
|
|
|
|
|
|
|
|
|
|
|
13,056
|
|
|
|
13,056
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47,704
|
|
|
|
|
|
|
|
|
|
|
|
47,704
|
|
|
|
47,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(300,163
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
219,890
|
|
|
$
|
2,186
|
|
|
$
|
1,438,369
|
|
|
$
|
(2,180,578
|
)
|
|
$
|
|
|
|
$
|
308,857
|
|
|
|
(4,734
|
)
|
|
$
|
(38,123
|
)
|
|
|
|
|
|
$
|
(469,289
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
Consolidated Financial Statements.
F-7
BEARINGPOINT,
INC.
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(362,723
|
)
|
|
$
|
(213,440
|
)
|
|
$
|
(721,643
|
)
|
Adjustments to reconcile net loss to net cash (used in) provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
4,060
|
|
|
|
(13,406
|
)
|
|
|
49,211
|
|
Provision (benefit) for doubtful accounts
|
|
|
2,465
|
|
|
|
(464
|
)
|
|
|
5,334
|
|
Stock-based compensation
|
|
|
97,062
|
|
|
|
53,393
|
|
|
|
85,837
|
|
Impairment of goodwill
|
|
|
|
|
|
|
|
|
|
|
166,415
|
|
Depreciation and amortization of property and equipment
|
|
|
63,472
|
|
|
|
74,023
|
|
|
|
70,544
|
|
Amortization of purchased intangible assets
|
|
|
|
|
|
|
1,545
|
|
|
|
2,266
|
|
Lease and facilities restructuring charges
|
|
|
20,869
|
|
|
|
29,621
|
|
|
|
29,581
|
|
Loss on disposal and impairment of assets
|
|
|
9,575
|
|
|
|
3,769
|
|
|
|
|
|
Amortization of debt issuance costs and debt accretion
|
|
|
13,955
|
|
|
|
8,936
|
|
|
|
12,396
|
|
Other
|
|
|
11,326
|
|
|
|
(8,549
|
)
|
|
|
11,597
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
17,353
|
|
|
|
84,124
|
|
|
|
(52,196
|
)
|
Unbilled revenue
|
|
|
28,510
|
|
|
|
19,814
|
|
|
|
20,492
|
|
Income tax receivable, prepaid expenses and other current assets
|
|
|
19,742
|
|
|
|
(23,702
|
)
|
|
|
26,318
|
|
Other assets
|
|
|
(14,363
|
)
|
|
|
(5,710
|
)
|
|
|
(10,025
|
)
|
Accounts payable
|
|
|
(58,711
|
)
|
|
|
(26,322
|
)
|
|
|
(3,113
|
)
|
Accrued legal settlements and other current liabilities
|
|
|
(51,421
|
)
|
|
|
(12,715
|
)
|
|
|
61,240
|
|
Accrued payroll and employee benefits
|
|
|
(5,501
|
)
|
|
|
48,099
|
|
|
|
47,018
|
|
Deferred revenue
|
|
|
(18,941
|
)
|
|
|
(38,605
|
)
|
|
|
62,788
|
|
Income tax reserve and other liabilities
|
|
|
29,084
|
|
|
|
78,269
|
|
|
|
22,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
|
(194,187
|
)
|
|
|
58,680
|
|
|
|
(113,071
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(37,335
|
)
|
|
|
(50,581
|
)
|
|
|
(40,849
|
)
|
Decrease (increase) in restricted cash
|
|
|
1,393
|
|
|
|
118,151
|
|
|
|
(100,194
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
(35,942
|
)
|
|
|
67,570
|
|
|
|
(141,043
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock
|
|
|
12,374
|
|
|
|
|
|
|
|
14,896
|
|
Treasury stock through net share delivery
|
|
|
(1,614
|
)
|
|
|
|
|
|
|
|
|
Net proceeds from issuance of notes payable
|
|
|
284,015
|
|
|
|
|
|
|
|
282,156
|
|
Repayments of notes payable
|
|
|
(4,209
|
)
|
|
|
(6,506
|
)
|
|
|
(16,985
|
)
|
Decrease in book overdrafts
|
|
|
|
|
|
|
(810
|
)
|
|
|
(980
|
)
|
Payments made in lieu of stock issuance
|
|
|
|
|
|
|
|
|
|
|
(4,929
|
)
|
Increase in notes receivable from stockholders
|
|
|
|
|
|
|
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
290,566
|
|
|
|
(7,316
|
)
|
|
|
274,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
16,807
|
|
|
|
15,297
|
|
|
|
(9,508
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
77,244
|
|
|
|
134,231
|
|
|
|
10,530
|
|
Cash and cash equivalents beginning of period
|
|
|
389,571
|
|
|
|
255,340
|
|
|
|
244,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents end of period
|
|
$
|
466,815
|
|
|
$
|
389,571
|
|
|
$
|
255,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplementary cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
43,733
|
|
|
$
|
27,582
|
|
|
$
|
17,547
|
|
Taxes paid, net of refunds
|
|
$
|
18,427
|
|
|
$
|
21,333
|
|
|
$
|
(41,741
|
)
|
Supplemental non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlement of notes receivable from stockholders
|
|
$
|
7,466
|
|
|
$
|
|
|
|
$
|
|
|
Settlement of Softline acquisition obligation
|
|
$
|
10,389
|
|
|
$
|
|
|
|
$
|
|
|
Sale of common stock BE an Owner
|
|
$
|
10,148
|
|
|
$
|
|
|
|
$
|
|
|
Beneficial conversion feature related to the July 2005 Debentures
|
|
$
|
|
|
|
$
|
|
|
|
$
|
14,288
|
|
Fair value of July 2005 Warrants
|
|
$
|
|
|
|
$
|
|
|
|
$
|
8,073
|
|
The accompanying notes are an integral part of these
Consolidated Financial Statements.
F-8
BEARINGPOINT,
INC.
(in
thousands, except share and per share amounts)
1. Description
of the Business
BearingPoint, Inc. (the Company) is one of the
worlds leading providers of management and technology
consulting services to Forbes Global 2000 companies as well
as government organizations. The Companys core services,
which include management consulting, technology solutions, as
well as application services and managed services, are designed
to help its clients generate revenue, increase
cost-effectiveness, manage regulatory compliance, integrate
information and transition to next-generation
technology. The Company had approximately 17,100 employees
at December 31, 2007.
In North America, the Company delivers consulting services
through its Public Services, Commercial Services and Financial
Services industry groups, which provide significant
industry-specific knowledge and service offerings. Outside of
North America, the Company is organized on a geographic basis -
Europe, the Middle East and Africa (EMEA), the Asia
Pacific region and Latin America.
|
|
2.
|
Summary
of Significant Accounting Policies
|
|
|
|
Principles
of Consolidation
|
The Consolidated Financial Statements reflect the operations of
the Company and all of its majority-owned subsidiaries. Upon
consolidation, all intercompany accounts and transactions are
eliminated. Certain of the Companys consolidated foreign
subsidiaries reported their results on a one-month reporting
lag, which allowed additional time to compile results. During
the fourth quarter of 2006, the one-month reporting lag in the
remaining EMEA entities was eliminated, in order for certain
foreign subsidiaries of the Company to report on a basis
consistent with the Companys fiscal reporting period. The
elimination of one month of activity increased the
Companys 2006 consolidated net loss for the year ended
December 31, 2006 by $1,164.
The preparation of Consolidated Financial Statements in
conformity with accounting principles generally accepted in the
United States requires that management make estimates,
assumptions and judgments that affect the reported amounts of
assets and liabilities and disclosure of contingent liabilities
at the date of the Consolidated Financial Statements and the
reported amounts of revenue and expenses during the reporting
period. Managements estimates, assumptions and judgments
are derived and continually evaluated based on available
information, historical experience and various other assumptions
that are believed to be reasonable under the circumstances.
Because the use of estimates is inherent in the financial
reporting process, actual results could differ from those
estimates.
Reclassifications
Certain amounts reported in previous years have been
reclassified to conform to the current period presentation.
Revenue
Recognition
The Company earns revenue from three primary sources:
(1) technology integration services in which it designs,
builds and implements new or enhanced system applications and
related processes, (2) services to provide general business
consulting, such as system selection or assessment, feasibility
studies, business valuations and corporate strategy services,
and (3) managed services in which it manages, staffs,
maintains,
F-9
BEARINGPOINT,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(in
thousands, except share and per share amounts)
hosts or otherwise runs solutions and systems provided to its
customers. Contracts for these services have different terms
based on the scope, deliverables and complexity of the
engagement, which require management to make judgments and
estimates in recognizing revenue. Fees for these contracts may
be charged based upon
time-and-material,
cost-plus or fixed price.
Technology integration services represent a significant portion
of the Companys business and are generally accounted for
under the percentage-of-completion method in accordance with
Statement of Position (SOP)
81-1,
Accounting for Performance of Construction-Type and
Certain Production-Type Contracts
(SOP 81-1).
A portion of the Companys revenue is derived from
arrangements that include software developed
and/or
provided by the Company. The Company recognizes software license
fees included in these arrangements as revenue in accordance
with
SOP 97-2,
Software Revenue Recognition as amended by
SOP 98-9
by applying the provisions of
SOP 81-1,
as appropriate. Software license fee revenue is generally
included in the Companys technology integration service
revenue, which is recognized using the percentage-of-completion
method. Under the percentage-of-completion method, management
estimates the percentage of completion based upon costs to the
client incurred as a percentage of the total estimated costs to
the client. When total cost estimates exceed revenue, the
Company accrues for the estimated losses immediately. The use of
the percentage-of-completion method requires significant
judgment relative to estimating total contract revenue and
costs, including assumptions relative to the length of time to
complete the project, the nature and complexity of the work to
be performed, and anticipated changes in estimated salaries and
other costs. Incentives and award payments are included in
estimated revenue using the percentage-of-completion method when
the realization of such amounts is deemed probable upon
achievement of certain defined goals. Estimates of total
contract revenue and costs are continuously monitored during the
term of the contract and are subject to revision as the contract
progresses. When revisions in estimated contract revenue and
costs are determined, such adjustments are recorded in the
period in which they are first identified. Revenue arrangements
entered into with the same client that are accounted for under
SOP 81-1
are accounted for on a combined basis when they: are negotiated
as a package with an overall profit margin objective;
essentially represent an agreement to do a single project;
involve interrelated activities with substantial common costs;
and are performed concurrently or sequentially.
Revenue for general business consulting services is recognized
as work is performed and amounts are earned in accordance with
Staff Accounting Bulletin (SAB) No. 101,
Revenue Recognition in Financial Statements, as
amended by SAB No. 104, Revenue
Recognition (SAB 104). The Company
considers amounts to be earned once evidence of an arrangement
has been obtained, services are delivered, fees are fixed or
determinable and collectibility is reasonably assured. For
contracts with fees based on
time-and-materials
or cost-plus, the Company recognizes revenue over the period of
performance. Depending on the specific contractual provisions
and nature of the deliverable, revenue may be recognized on a
proportional performance model based on level of effort, as
milestones are achieved or when final deliverables have been
provided. Revenue arrangements entered into with the same client
that are accounted for under SAB 104 are accounted for on a
combined basis when they are entered into at or near the same
time, unless it is clearly evident that the contracts are not
related to one another.
For managed service arrangements, the Company typically
implements or builds system applications for customers that it
then manages or runs for periods that may span several years.
Such arrangements include the delivery of a combination of one
or more of the Companys service offerings and are governed
by Emerging Issues Task Force Issue (EITF)
00-21,
Accounting for Revenue Arrangements with Multiple
Deliverables. In managed service arrangements in which the
system application implementation or build has standalone value
to the customer, and management has sufficient objective
evidence of fair value for the managed or run services, the
Company bifurcates the total arrangement into two units of
accounting based upon the residual method: (i) the system
application implementation or build, which is recognized as
technology integration
F-10
BEARINGPOINT,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(in
thousands, except share and per share amounts)
services using the percentage-of-completion method under
SOP 81-1;
and (ii) the managed or run services, which are recognized
under SAB 104 ratably over the estimated life of the
customer relationship. In instances where the Company is unable
to bifurcate a managed service arrangement into separate units
of accounting, the total contract is recognized as one unit of
accounting under SAB 104. In such instances, total fees and
direct and incremental costs related to the system application
implementation or build are deferred and recognized together
with managed or run services upon completion of the system
application implementation or build ratably over the estimated
life of the customer relationship. Certain managed service
arrangements may also include transaction-based services in
addition to the system application implementation or build and
managed services. Fees from transaction-based services are
recognized as earned if the Company has sufficient objective
evidence of fair value for such transactions; otherwise,
transaction fees are spread ratably over the remaining life of
the customer relationship period when the Company determines
these fees are realizable. The determination of fair value
requires the Company to use significant judgment. Management
determines the fair value of service revenue based upon the
Companys recent pricing for those services when sold
separately
and/or
prevailing market rates for similar services.
Revenue on cost-plus-fee contracts is recognized to the extent
of costs incurred plus an estimate of the applicable fees
earned. The Company considers fixed fees under cost-plus-fee
contracts to be earned in proportion to the allowable costs
incurred in performance of the contract.
Revenue includes reimbursements of travel and out-of-pocket
expenses with equivalent amounts of expense recorded in other
direct contract expenses. In addition, the Company generally
enters into relationships with subcontractors where it maintains
a principal relationship with the customer. In such instances,
subcontractor costs are included in revenue with offsetting
expenses recorded in other direct contract expenses.
Unbilled revenue consists of recognized recoverable costs and
accrued profits on contracts for which billings had not been
presented to clients as of the balance sheet date. Management
anticipates that the collection of these amounts will occur
within one year of the balance sheet date. Billings in excess of
revenue recognized for which payments have been received are
recorded as deferred revenue until the applicable revenue
recognition criteria have been met.
Costs of service include professional compensation and other
direct contract expenses, as well as costs attributable to the
support of client service professional staff, depreciation and
amortization costs related to assets used in revenue-generating
activities, bad debt expense relating to accounts receivable,
and other costs attributable to serving the Companys
client base. Professional compensation consists of payroll costs
and related benefits including stock-based compensation,
bonuses, tax equalization for employees on foreign assignments,
and reductions in workforce associated with client service
professional staff. Other direct contract expenses include costs
directly attributable to client engagements, such as
out-of-pocket costs including travel and subsistence for client
service professional staff, costs of hardware and software and
costs of subcontractors. Lease and facilities restructuring
charges represent the fair value of future lease obligations
(net of estimated sublease income), the unamortized cost of
fixed assets no longer in use and other incurred costs
associated with the Companys office space reduction
efforts. Recurring lease and facilities charges for occupied
offices are included in other costs of service.
F-11
BEARINGPOINT,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(in
thousands, except share and per share amounts)
|
|
|
Selling,
General and Administrative Expenses
|
Selling, general and administrative expenses include expenses
related to marketing, information systems, depreciation and
amortization, finance and accounting, human resources, sales
force and other functions related to managing and growing the
Companys business. Advertising costs are expensed when
advertisements are first placed or run. Advertising expense was
$24,903, $21,304 and $20,681 for the years ended
December 31, 2007, 2006 and 2005, respectively.
|
|
|
Cash,
Cash Equivalents and Restricted Cash
|
Cash and cash equivalents consist of all cash balances, demand
deposits and highly liquid investments with insignificant
interest rate risks and original maturity of three months or
less. The Companys cash equivalents consisted of money
market investments and interest-bearing accounts of $203,507 and
$225,411 at December 31, 2007, respectively, and $148,731
and $41,678 at December 31, 2006, respectively. Book
overdrafts representing outstanding checks in excess of funds on
deposit are classified as short-term borrowings and included in
other current liabilities on the Consolidated Balance Sheets. As
of December 31, 2006, cash and cash equivalents and accrued
payroll and employee benefits included approximately $21,240 of
employee contributions to the Employee Stock Purchase Plan (the
ESPP) held by the Company, which were payable on
demand. As of December 31, 2007, there were no employee
contributions held by the Company because there was not an
offering period at that time (an offering period closed on
October 29, 2007 and the next offering period did not open
until February 1, 2008). As of December 31, 2007 and
2006, the Company classified as restricted cash approximately
$1,703 and $3,097, respectively, of cash collateral posted to
secure reimbursement obligations under letters of credit and
surety bonds.
|
|
|
Concentrations
of Credit Risk and Fair Value of Financial Instruments
|
The amounts reflected in the Consolidated Balance Sheets for
cash and cash equivalents, accounts receivable and accounts
payable approximate their fair value due to their short-term
maturities. At December 31, 2007 and 2006, the fair value
of the Companys notes payable, including the current
portion, was $744,013 and $776,241, respectively, compared to
their respective carrying values of $974,643 and $671,850. The
fair value was primarily estimated based on the quoted market
price or in the case of the July 2005 Convertible Debentures,
based on a Black-Scholes calculation. Financial instruments that
potentially subject the Company to concentrations of credit risk
consist primarily of notes payable, trade receivables, and
unbilled revenue. The Companys cash and cash equivalents
are placed with financial institutions with high credit
standings. The Companys cash equivalents are primarily
invested in money market funds. These money market funds invest
in asset-backed securities that could subject the Company to
valuation risk in the event that these securities experience
significant declines in their fair value. The Companys
customer base consists of large numbers of geographically
diverse customers dispersed across many countries. Concentration
of credit risk with respect to trade accounts receivables is not
significant.
During 2007, 2006 and 2005, the Companys revenue from the
U.S. Federal government, inclusive of government sponsored
enterprises and reported in the Public Services segment, was
$981,604, $983,075 and $978,976, respectively, representing
28.4%, 28.5% and 28.9% of total revenue, respectively. At
December 31, 2007 and 2006, receivables due from the
U.S. Federal government were $101,047 and $64,605,
respectively. Unbilled revenue due from the U.S. Federal
government was $93,445 and $123,791 at December 31, 2007
and 2006, respectively. While most of the Companys
government agency clients have the ability to unilaterally
terminate their contracts, the Companys relationships are
seldom with political appointees, and the Company has not
historically experienced a loss of U.S. Federal government
projects with a change in administration.
F-12
BEARINGPOINT,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(in
thousands, except share and per share amounts)
|
|
|
Valuation
of Accounts Receivable
|
The Company maintains allowances for doubtful accounts for
estimated losses resulting from the inability of its customers
to make required payments. Assessing the collectibility of
customer receivables requires management judgment. The Company
determines its allowance for doubtful accounts by specifically
analyzing individual accounts receivable, historical bad debts,
customer concentrations, customer credit-worthiness, current
economic and accounts receivable aging trends, and changes in
customer payment terms. Valuation reserves are periodically
re-evaluated and adjusted as more information about the ultimate
collectibility of accounts receivable becomes available. Upon
determination that a receivable is uncollectible, the receivable
balance and any associated valuation reserve are written-off.
Property and equipment are recorded at cost, less allowances for
depreciation and amortization. The cost of software purchased or
developed for internal use is capitalized in accordance with
SOP 98-1,
Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use. Depreciation is provided for
all classes of assets for financial statement purposes using the
straight-line method over the estimated useful lives of the
assets. Equipment is depreciated over three to five years,
software purchased or developed for internal use is depreciated
over one to five years, and furniture is depreciated over three
to ten years. Leasehold improvements are amortized over the
shorter of their useful lives or the remaining term of the
respective lease. Maintenance and repairs are charged to expense
as incurred. When assets are sold or retired, the asset cost and
related accumulated depreciation are relieved from the
Consolidated Balance Sheets, and any associated gain or loss is
recognized in income from operation.
Accounting
for Leases
The Company leases its office facilities under non-cancelable
operating leases that expire at various dates through 2017, and
may include options that permit renewals for additional periods.
Rent abatements and escalations are considered in the
determination of straight-line rent expense for operating
leases. The Company receives incentives to lease office
facilities in certain areas. These incentives are recorded as a
deferred credit and recognized as a reduction to rent expense on
a straight-line basis over the lease term.
Asset
Retirement Obligations
The Company leases all of its office facilities under various
operating leases, some of which contain clauses that require the
Company to restore the leased facility to its original state at
the end of the lease term. In accordance with Statement of
Financial Accounting Standards (SFAS) No. 143,
Accounting for Asset Retirement Obligations, these
asset retirement obligations are initially measured at fair
value and recorded as a liability, and a corresponding increase
is recorded to the carrying amount of the leasehold improvement.
At December 31, 2007 and 2006, asset retirement obligations
were $3,802 and $2,636, respectively.
Goodwill
and Other Intangible Assets
Goodwill is the amount by which the cost of acquired net assets
in a business acquisition exceeds the fair value of net
identifiable assets on the date of purchase. The Company
assesses goodwill for impairment on at least an annual basis on
April 1 and whenever events or changes in circumstances indicate
that the carrying value of the asset may not be recoverable.
F-13
BEARINGPOINT,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(in
thousands, except share and per share amounts)
An impairment review of the carrying amount of goodwill is also
conducted if events or changes in circumstances indicate that
goodwill might be impaired. The Company considers the following
to be important factors that could trigger an impairment review:
significant underperformance relative to historical or projected
future operating results; identification of other impaired
assets within a reporting unit; the more-likely-than not
expectation that a reporting unit or a significant portion of a
reporting unit will be sold; significant adverse changes in
business climate or regulations; significant changes in senior
management; significant changes in the manner of use of the
acquired assets or the strategy for the Companys overall
business; significant negative industry or economic trends; a
significant decline in the Companys stock price for a
sustained period or a significant unforeseen decline in the
Companys credit rating. In testing goodwill for
impairment, the Company aggregates its reporting units with
similar economic characteristics as one reporting unit. The
resulting reporting units are consistent with the Companys
reportable segments as identified in Note 18, Segment
Information. To conduct a goodwill impairment test, the
fair value of the reporting unit is first compared to its
carrying value. The aggregate carrying value of all reporting
units equals the Companys stockholders deficit. If
the reporting units allocated carrying value exceeds its
fair value, the Company undertakes a second evaluation to assess
the required impairment loss to the extent that the carrying
value of goodwill exceeds its implied fair value. Management
estimates the fair value of its reporting units using a
combination of the discounted cash flow valuation model and
comparable market transaction models.
Other identifiable intangible assets include finite-lived
purchased intangible assets, which primarily consist of market
rights, order backlog, customer contracts and related customer
relationships and trade names. Finite-lived purchased intangible
assets are amortized using the straight-line method over their
expected period of benefit, which generally ranges from one to
five years.
|
|
|
Valuation
of Long-Lived Assets
|
Long-lived assets primarily include property and equipment and
intangible assets with finite lives (purchased software,
capitalized software, and customer lists). In accordance with
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, the Company periodically
reviews long-lived assets for impairment whenever events or
changes in business circumstances indicate that the carrying
amount of the assets may not be fully recoverable or that the
useful lives are no longer appropriate. Each impairment test is
based on a comparison of the undiscounted cash flows expected to
result from the use and eventual disposition of the asset to the
carrying amount of the asset. If an impairment is indicated, the
asset is written down to its estimated fair value based on a
discounted cash flow analysis. Determining the fair value of
long-lived assets includes significant judgment by management,
and different judgments could yield different results.
Assets and liabilities of consolidated foreign subsidiaries,
whose functional currency is the local currency, are translated
to U.S. dollars at period end exchange rates. Revenue and
expense items are translated to U.S. dollars at the average
rates of exchange prevailing during the period. The adjustment
resulting from translating the financial statements of such
foreign subsidiaries to U.S. dollars is reflected as a
cumulative translation adjustment and reported as a component of
accumulated other comprehensive income in the Consolidated
Statements of Changes in Stockholders Equity (Deficit).
Foreign currency transaction gains and losses related to
short-term intercompany loans are recorded in the Consolidated
Statements of Operations as incurred. Intercompany loans that
are of a long-term nature are accounted for in accordance with
SFAS No. 52,
F-14
BEARINGPOINT,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(in
thousands, except share and per share amounts)
Foreign Currency Translation, whereby foreign
currency transaction gains and losses are reported in the same
manner as translation adjustments. Cash flows of consolidated
foreign subsidiaries, whose functional currency is the local
currency, are translated to U.S. dollars using weighted
average exchange rates for the period.
Foreign currency gains (losses) are reported as a component of
other (expense) income, net in the Consolidated Statements of
Operations. For the years ended December 31, 2007, 2006 and
2005, net foreign currency (losses) gains were $(9,653), $8,855
and $(13,454), respectively.
|
|
|
Accounting
for Income Taxes
|
In accordance with SFAS No. 109, Accounting for
Income Taxes (SFAS 109), the Company
recognizes deferred income taxes based on the expected future
tax consequences of differences between the financial statement
basis and the tax basis of assets and liabilities, calculated
using enacted tax rates in effect for the year in which the
differences are expected to be reflected in the tax return.
The carrying value of the Companys net deferred tax assets
assumes that the Company will be able to generate sufficient
future taxable income in certain tax jurisdictions to realize
the value of these assets. If the Company is unable to generate
sufficient future taxable income in these jurisdictions, a
valuation allowance is recorded when it is more likely than not
that the value of the deferred tax assets is not realizable.
Management evaluates the realizability of the deferred tax
assets and assesses the need for any valuation allowance
adjustment. It is the companys policy to provide for
uncertain tax positions and the related interest and penalties
based upon managements assessment of whether a tax benefit
is more likely than not to be sustained upon examination by tax
authorities. To the extent that the probable tax outcome of
these uncertain tax positions changes, such changes in estimate
will impact the income tax provision in the period in which such
determination is made. At December 31, 2007, the company
believes it has appropriately accounted for any unrecognized tax
benefits. To the extent the company prevails in matters for
which a liability for an unrecognized tax benefit is established
or is required to pay amounts in excess of the liability, the
companys effective tax rate in a given financial statement
period may be affected.
|
|
|
Pension
and Postretirement Benefits
|
The Companys pension expense and obligations are developed
from actuarial valuations required by the provisions of
SFAS No. 87, Employers Accounting for
Pensions(SFAS 87),
SFAS No. 106, Employers Accounting for
Postretirement Benefits Other Than
Pensions(SFAS 106), and
SFAS No. 158, Employers Accounting for
Defined Benefit Pension and Other Postretirement
Plans an amendment of FASB Statements No. 87,
88, 106, and 132(R) (SFAS 158).
SFAS 158 requires recognition of the overfunded or
underfunded status of pension and other postretirement benefit
plans on the balance sheet. Under SFAS 158, gains and
losses, prior service costs and credits and any remaining
transition amounts under SFAS 87 and SFAS 106 that
have not yet been recognized through net periodic benefit cost
will be recognized in accumulated other comprehensive income,
net of tax effects, until they are amortized as a component of
net periodic cost. The measurement date, the date at which the
benefit obligation and plan assets are measured, is now required
to be the same as the companys fiscal year-end. As
required by SFAS 158, the Company adopted the balance sheet
recognition provisions at December 31, 2006. The
measurement date of the benefit obligation and plan assets is
the same as the Companys fiscal year end. In addition,
SFAS 87 required the recognition of an additional minimum
liability (AML) if the market value of plan assets
was less than the accumulated benefit obligation at the end of
the measurement date. The AML was eliminated upon the adoption
of SFAS 158. See Note 16, Employee Benefit
Plans, for additional information.
F-15
BEARINGPOINT,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(in
thousands, except share and per share amounts)
|
|
|
Accounting
for Employee Global Mobility and Tax Equalization
|
The Company has a tax equalization policy designed to ensure
that its employees on domestic long-term and foreign assignments
will be subject to the same level of personal tax, regardless of
the tax jurisdiction in which the employee works. The Company
records tax equalization expenses in the period incurred. If the
estimated tax equalization liability, including related interest
and penalties, is determined to be greater or less than amounts
due upon final settlement, the difference is recorded in the
current period. The Companys liabilities associated with
tax equalization expenses remaining to be paid and interest and
penalties associated with failure to timely file and withhold
payroll and other taxes were $59,287 and $48,768 as of
December 31, 2007, respectively, and $53,941 and $33,680 as
of December 31, 2006, respectively.
On January 1, 2006, the Company adopted the provisions of
SFAS No. 123(R), Share-Based Payment
(SFAS 123(R)), to record compensation expense
for its employee stock options, restricted stock awards, RSUs
and shares purchased by employees under the ESPP. This Statement
is a revision of SFAS No. 123, Accounting for
Stock-Based Compensation (SFAS 123), and
supersedes Accounting Principles Board Opinion (APB)
No. 25, Accounting for Stock Issued to
Employees (APB 25), and its related
implementation guidance. Prior to the adoption of
SFAS 123(R), the Company followed the intrinsic value
method in accordance with APB 25, in accounting for its stock
options and other equity instruments.
SFAS 123(R) requires that all share-based payments to
employees be recognized in the Consolidated Statements of
Operations based on their grant date fair values with the
expense being recognized over the requisite service period. The
Company uses the Black-Scholes model to determine the fair value
of its awards at the time of grant. See Note 13,
Stock-Based Compensation, for additional information.
|
|
|
Derivative
Financial Instruments
|
The Company accounts for derivative instruments and debt
instruments in accordance with the interpretative guidance of
SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities
(SFAS 133),
EITF 00-19,
Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Companys Own
Stock, APB No. 14, Accounting for Convertible
Debt and Debt Issued with Stock Purchase Warrants,
EITF 98-5,
Accounting for Convertible Securities with Beneficial
Conversion Features or Contingently Adjustable Conversion
Ratios
(EITF 98-5),
and
EITF 00-27,
Application of Issue
No. 98-5
to Certain Convertible Instruments
(EITF 00-27),
and associated pronouncements related to the classification and
measurement of warrants and instruments with conversion
features. The Company makes certain assumptions and estimates to
value its derivatives and debt instruments.
The Company is exposed to changes in foreign currency exchange
rates and interest rates that may affect its results of
operations and financial position. The Company manages its
exposure to changes in foreign currency exchange rates and
interest rates through its normal operating and financing
activities. The Company accounts for its derivative instruments
in accordance with SFAS 133, which requires that all
derivative instruments be reported on the balance sheet at fair
value. If the derivative instrument is a hedge, depending on the
nature of the hedge, changes in the fair value of the derivative
instrument are either recognized in net loss or in other
comprehensive income until the hedged item is recognized in net
loss. For derivatives that do not qualify as hedges under
SFAS 133, the change in fair value is recorded in other
(expense) income in the Consolidated Statements of Operations.
F-16
BEARINGPOINT,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(in
thousands, except share and per share amounts)
|
|
|
Accumulated
Other Comprehensive Income
|
Accumulated other comprehensive income consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency
|
|
|
Pension and
|
|
|
|
|
|
|
translation
|
|
|
post-retirement
|
|
|
|
|
|
|
adjustment
|
|
|
benefit
|
|
|
Total
|
|
|
Balance December 31, 2005
|
|
$
|
231,412
|
|
|
$
|
(13,321
|
)
|
|
$
|
218,091
|
|
Change in foreign currency translation
|
|
|
30,743
|
|
|
|
|
|
|
|
30,743
|
|
Change in minimum pension liabilities, net of tax of $2,961
|
|
|
|
|
|
|
8,880
|
|
|
|
8,880
|
|
Adoption of SFAS 158, net of tax benefit of $3,756
|
|
|
|
|
|
|
(11,417
|
)
|
|
|
(11,417
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2006
|
|
|
262,155
|
|
|
|
(15,858
|
)
|
|
|
246,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost, net of tax benefit of $1,270
|
|
|
|
|
|
|
1,800
|
|
|
|
1,800
|
|
Net actuarial gain, net of tax of $6,229
|
|
|
|
|
|
|
13,056
|
|
|
|
13,056
|
|
Change in foreign currency translation
|
|
|
47,704
|
|
|
|
|
|
|
|
47,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2007
|
|
$
|
309,859
|
|
|
$
|
(1,002
|
)
|
|
$
|
308,857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recently
Issued Accounting Pronouncements
|
In September 2006, the FASB issued SFAS No. 157, Fair
Value Measurements (SFAS 157). SFAS 157
establishes a single authoritative definition of fair value,
sets a framework for measuring fair value and expands on
required disclosures about fair value measurements.
SFAS 157 is effective for fiscal years beginning after
January 1, 2008 and will be applied prospectively. In
February 2008, the FASB issued a Staff Position that will
(1) partially defer the effective date of SFAS 157 for
one year for certain nonfinancial assets and nonfinancial
liabilities and (2) remove certain leasing transactions
from the scope of SFAS 157. The adoption of SFAS 157
and its related pronouncements are not expected to have a
material effect on the Companys consolidated financial
position, results of operations or cash flows.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities including an amendment of
FAS 115. This new statement allows entities to
choose, at specific election dates, to measure eligible
financial assets and liabilities at fair value that are not
otherwise required to be measured at fair value. If a company
elects the fair value option for an eligible item, changes in
that items fair value in subsequent reporting periods must
be recognized in current earnings. SFAS 159 is effective
for the fiscal year beginning January 1, 2008. The Company
has elected not to apply the fair value option to any of its
financial instruments.
In December 2007, the FASB issued SFAS No. 141(R),
Business Combinations, which replaces
SFAS No. 141, Business Combinations. This
statement establishes principles and requirements for how an
acquirer: recognizes and measures in its financial statements
the identifiable assets acquired, the liabilities assumed and
any noncontrolling interest in the acquiree; recognizes and
measures the goodwill acquired in the business combination or a
gain from a bargain purchase; and determines what information to
disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination.
This Statement applies prospectively to business combinations
for which the acquisition date is on or after the beginning of
the first annual reporting period beginning on or after
December 15, 2008. The Company does not expect this will
have a significant impact on the financial statements of the
Company.
F-17
BEARINGPOINT,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(in
thousands, except share and per share amounts)
Basic loss per share is computed based on the weighted average
number of common shares outstanding and vested RSUs during the
period. The following table sets forth the computation of basic
EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Common shares outstanding
|
|
|
202,819,718
|
|
|
|
201,243,428
|
|
|
|
201,020,274
|
|
Vested RSUs
|
|
|
13,347,461
|
|
|
|
10,911,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
216,167,179
|
|
|
|
212,154,618
|
|
|
|
201,020,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted loss per share is computed using the weighted average
number of common shares outstanding during the period plus the
dilutive effect of potential future issuances of common stock
relating to the Companys outstanding stock options,
unvested PSUs, unvested RSUs, convertible debt and other
potentially dilutive securities. In calculating diluted loss per
share, the dilutive effect of stock options is computed using
the average market price for the period in accordance with the
treasury stock method. The effect of convertible securities on
the calculation of diluted net loss per share is calculated
using the if converted method.
The following table sets forth the potential common stock
equivalents, on a weighted-average basis, that were excluded
from the computation of diluted EPS. The inclusion of any
portion of such shares in diluted EPS is dependent on several
factors, including whether or not the Company generates net
income, the level of net income generated and the Companys
common stock price.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Employee stock options
|
|
|
33,682,831
|
|
|
|
39,869,914
|
|
|
|
44,920,037
|
|
Employee stock purchase plan
|
|
|
|
|
|
|
4,831,754
|
|
|
|
4,605,505
|
|
Restricted stock units
|
|
|
8,253,253
|
|
|
|
4,333,270
|
|
|
|
4,275,980
|
|
Performance share units(1)
|
|
|
45,039,343
|
|
|
|
|
|
|
|
|
|
Series A Convertible Subordinated Debentures
|
|
|
23,810,200
|
|
|
|
23,810,200
|
|
|
|
23,810,200
|
|
Series B Convertible Subordinated Debentures
|
|
|
19,048,160
|
|
|
|
19,048,160
|
|
|
|
19,048,160
|
|
April 2005 Convertible Senior Subordinated Debentures
|
|
|
30,303,020
|
|
|
|
30,303,020
|
|
|
|
18,939,388
|
|
July 2005 Convertible Senior Subordinated Debentures
|
|
|
5,925,926
|
|
|
|
5,925,926
|
|
|
|
2,716,049
|
|
Warrants issued in connection with the July 2005 Debentures
|
|
|
3,500,000
|
|
|
|
3,500,000
|
|
|
|
1,604,167
|
|
Softline acquisition obligation (Note 9)
|
|
|
|
|
|
|
735,759
|
|
|
|
713,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
169,562,733
|
|
|
|
132,358,003
|
|
|
|
120,632,649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
As of the end of the reporting
period, the performance conditions described further in
Note 13, Stock-Based Compensation, have not
been met; however, the above shares represent the maximum
settlement of shares under this program.
|
F-18
BEARINGPOINT,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(in
thousands, except share and per share amounts)
|
|
4.
|
Property
and Equipment
|
Property and equipment, net, consists of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Property and equipment:
|
|
|
|
|
|
|
|
|
Internal-use software
|
|
$
|
162,727
|
|
|
$
|
161,005
|
|
Equipment
|
|
|
83,491
|
|
|
|
101,026
|
|
Leasehold improvements
|
|
|
65,089
|
|
|
|
72,517
|
|
Furniture
|
|
|
30,111
|
|
|
|
38,063
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment
|
|
|
341,418
|
|
|
|
372,611
|
|
|
|
|
|
|
|
|
|
|
Accumulated depreciation and amortization:
|
|
|
|
|
|
|
|
|
Internal-use software
|
|
|
(110,570
|
)
|
|
|
(96,798
|
)
|
Equipment
|
|
|
(61,695
|
)
|
|
|
(72,809
|
)
|
Leasehold improvements
|
|
|
(39,099
|
)
|
|
|
(37,859
|
)
|
Furniture
|
|
|
(16,283
|
)
|
|
|
(18,753
|
)
|
|
|
|
|
|
|
|
|
|
Total accumulated depreciation and amortization
|
|
|
(227,647
|
)
|
|
|
(226,219
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
113,771
|
|
|
$
|
146,392
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense related to property and
equipment consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Amounts included in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other costs of service
|
|
$
|
40,502
|
|
|
$
|
40,502
|
|
|
$
|
39,205
|
|
Selling, general and administrative expenses
|
|
|
22,970
|
|
|
|
33,521
|
|
|
|
31,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
63,472
|
|
|
$
|
74,023
|
|
|
$
|
70,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.
|
Business
Acquisitions, Goodwill and Other Intangible Assets
|
Goodwill balances at December 31, 2007 and 2006 are
associated with the acquisition of KPMG Consulting AG
(subsequently renamed BearingPoint GmbH) in August 2002 and a
series of acquisitions of Andersen Business Consulting practices
during 2002.
F-19
BEARINGPOINT,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(in
thousands, except share and per share amounts)
The changes in the carrying amount of goodwill, at the reporting
unit level, for the years ended December 31, 2007 and 2006
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
|
Balance
|
|
|
|
|
|
Currency
|
|
|
Balance
|
|
|
|
December 31,
|
|
|
|
|
|
Translation
|
|
|
December 31,
|
|
|
|
2006
|
|
|
Reductions
|
|
|
Adjustment
|
|
|
2007
|
|
|
Public Services
|
|
$
|
23,581
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
23,581
|
|
Financial Services
|
|
|
9,210
|
|
|
|
|
|
|
|
|
|
|
|
9,210
|
|
EMEA
|
|
|
359,133
|
|
|
|
(7,495
|
)(1)
|
|
|
34,012
|
|
|
|
385,650
|
|
Asia Pacific
|
|
|
70,402
|
|
|
|
|
|
|
|
4,601
|
|
|
|
75,003
|
|
Latin America
|
|
|
918
|
|
|
|
|
|
|
|
92
|
|
|
|
1,010
|
|
Corporate/Other
|
|
|
202
|
|
|
|
|
|
|
|
|
|
|
|
202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
463,446
|
|
|
$
|
(7,495
|
)
|
|
$
|
38,705
|
|
|
$
|
494,656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Amount represents the reversal of
uncertain income tax liabilities recorded as part of the
acquisition of a consulting practice in EMEA against goodwill,
as the statute of limitations for the potential tax liability
expired during the first quarter of 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
|
Balance
|
|
|
|
|
|
Currency
|
|
|
Balance
|
|
|
|
December 31,
|
|
|
|
|
|
Translation
|
|
|
December 31,
|
|
|
|
2005
|
|
|
Reductions
|
|
|
Adjustment
|
|
|
2006
|
|
|
Public Services
|
|
$
|
23,581
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
23,581
|
|
Financial Services
|
|
|
9,210
|
|
|
|
|
|
|
|
|
|
|
|
9,210
|
|
EMEA
|
|
|
325,262
|
|
|
|
|
|
|
|
33,871
|
|
|
|
359,133
|
|
Asia Pacific
|
|
|
68,562
|
|
|
|
|
|
|
|
1,840
|
|
|
|
70,402
|
|
Latin America
|
|
|
871
|
|
|
|
|
|
|
|
47
|
|
|
|
918
|
|
Corporate/Other
|
|
|
202
|
|
|
|
|
|
|
|
|
|
|
|
202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
427,688
|
|
|
$
|
|
|
|
$
|
35,758
|
|
|
$
|
463,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company completed its required annual impairment test in
April 2007 and determined that the carrying value of goodwill
was not impaired. Further, the Company regularly monitors the
carrying value of its goodwill. This monitoring includes an
assessment as to whether or not certain events would, more
likely than not, cause the Company to conclude that the carrying
value of any of its reporting units would exceed their fair
value. The Company identified and evaluated the affects of the
events which occurred in the fourth quarter by performing an
analysis of the affect of these events on the fair value of its
reporting units. While these events decreased the fair value of
the Companys reporting units, the Company concluded that
the fair value of the respective reporting units exceeded their
carrying values. The assumptions used by management in this
analysis are highly sensitive and judgmental. Should actual
future results vary significantly from expectations, impairment
of the Companys goodwill could result in future periods.
In the fourth quarter of 2005, the Company determined that a
triggering event had occurred, causing the Company to perform a
goodwill impairment test on all of its reporting units. The
triggering event resulted from a combination of various factors,
including lower than previously expected results in the fourth
quarter ended December 31, 2005 and a change in
managements expectation of future results. As required by
SFAS 142, the Company performed a two-step impairment test
to identify the potential impairments and, if
F-20
BEARINGPOINT,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(in
thousands, except share and per share amounts)
necessary, to measure the amount of the impairments. Under step
one of the impairment test, the Company determined there were
potential impairments in its Commercial Services and EMEA
reporting units. In determining the fair value of its Commercial
Services and EMEA reporting units, the Company revised certain
assumptions relative to each reporting unit, which significantly
decreased their fair value as compared to the fair value
determined during the Companys most recent goodwill
impairment test, which had been performed as of April 20,
2005. For the Commercial Services reporting unit, these
revisions included the negative impact on future periods from
operating losses associated with the Companys contract
with Hawaiian Telcom Communications, Inc. For the EMEA reporting
unit, these revisions included lowering operating margin growth
expectations. In order to quantify the impairment, under step
two of the impairment test, the Company completed a hypothetical
purchase price allocation of the fair value determined in step
one to all of the respective assets and liabilities of its
Commercial Services and EMEA reporting units. As a result,
goodwill impairment losses of $64,188 and $102,227 were
recognized in the Commercial Services and the EMEA reporting
units, respectively, as the carrying amount of each reporting
unit was greater than the revised fair value of that reporting
unit (as determined using the expected present value of future
cash flows), and the carrying amount of each reporting
units goodwill exceeded the implied fair value of that
goodwill. The goodwill impairment loss of $64,188 for the
Commercial Services reporting unit represented a full impairment
of the remaining goodwill in that reporting unit.
On April 20, 2005, the Company determined that a triggering
event had occurred, causing the Company to perform a goodwill
impairment test on all reporting units. The triggering event
resulted from the Companys public announcement of likely
restatements of prior period financial statements along with
significant delays in filing its 2004 annual results and
anticipated delays in filing 2005 quarterly results. The Company
determined this triggering event may have a significant adverse
effect on its business climate and regulatory environment. As
required by SFAS 142, the Company applied a two-step
impairment test to identify the potential impairments and, if
necessary, to measure the amount of the impairments. The Company
performed step one of the impairment test to identify potential
impairments and determined there were no impairments to any
reporting units. As a result, the step two impairment test was
not considered necessary.
Identifiable intangible assets include finite-lived intangible
assets, which primarily consist of market rights, order backlog,
customer contracts and related customer relationships.
Identifiable intangible assets are amortized using the
straight-line method over their expected period of benefit,
which generally ranges from one to five years. Identifiable
intangible assets consist of market rights and backlog, customer
contracts and related customer relationships, both of which were
fully amortized as of December 31, 2006. For the years
ended December 31, 2007, 2006 and 2005, amortization
expense related to identifiable intangible assets was $0, $1,545
and $2,266, respectively.
F-21
BEARINGPOINT,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(in
thousands, except share and per share amounts)
Notes payable consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Current portion(1):
|
|
|
|
|
|
|
|
|
Term Loans under the 2007 Credit Facility
|
|
$
|
3,000
|
|
|
$
|
|
|
Other
|
|
|
700
|
|
|
|
360
|
|
|
|
|
|
|
|
|
|
|
Total current portion
|
|
|
3,700
|
|
|
|
360
|
|
|
|
|
|
|
|
|
|
|
Long-term portion:
|
|
|
|
|
|
|
|
|
Series A and Series B Convertible Debentures
|
|
|
450,000
|
|
|
|
450,000
|
|
April 2005 Convertible Debentures
|
|
|
200,000
|
|
|
|
200,000
|
|
July 2005 Convertible Debentures (net of discount of $14,389 and
$18,510, respectively)
|
|
|
25,611
|
|
|
|
21,490
|
|
Term Loans under the 2007 Credit Facility
|
|
|
294,750
|
|
|
|
|
|
Other
|
|
|
582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term portion
|
|
|
970,943
|
|
|
|
671,490
|
|
|
|
|
|
|
|
|
|
|
Total notes payable
|
|
$
|
974,643
|
|
|
$
|
671,850
|
|
|
|
|
|
|
|
|
|
|
The following is a schedule of annual maturities on notes
payable, net of discounts, as of December 31, 2007 for each
of the next five calendar years and thereafter:
|
|
|
|
|
Year
|
|
Amount(2)
|
|
|
2008
|
|
$
|
3,700
|
|
2009
|
|
|
3,582
|
|
2010
|
|
|
28,611
|
|
2011
|
|
|
3,000
|
|
2012
|
|
|
285,750
|
|
Thereafter
|
|
|
650,000
|
|
|
|
|
|
|
Total
|
|
$
|
974,643
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The weighted average interest rate
on the current portion of notes payable as of December 31,
2007 and 2006 was 8.8% and 5.6%, respectively.
|
|
(2)
|
|
As described below, the holders of
the Subordinated Debentures (as defined below) have the right to
convert the debentures into shares of Company common stock only
upon occurrence of certain triggering events. The April 2005
Convertible Debentures (as defined below) were convertible upon
issuance on April 27, 2005, and the July 2005 Convertible
Debentures (as defined below) were convertible starting on
July 15, 2006. Upon conversion of these debentures, the
Company will have the right to deliver, in lieu of shares of
common stock, cash or a combination of cash and shares of common
stock. In addition, the holders of the April 2005 Convertible
Debentures and Subordinated Debentures have the right, at their
option, to require the Company to repurchase all or some of
their debentures on various dates prior to maturity (see below).
|
F-22
BEARINGPOINT,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(in
thousands, except share and per share amounts)
In December 2006, the FASB issued FASB Staff Position
No. EITF 00-19-2,
Accounting for Registration Payment Arrangements
(FSP 00-19-2).
FSP 00-19-2
specifies that the contingent obligation to make future payments
or otherwise transfer consideration under a registration payment
arrangement, whether issued as a separate agreement or included
as a provision of a financial instrument or other agreement,
should be separately recognized and measured in accordance with
SFAS No. 5, Accounting for Contingencies.
As a result of implementing
FSP 00-19-2,
the Company recognized a cumulative effect adjustment of $371
that increased the January 1, 2007 accumulated deficit
balance and recognized an undiscounted liability associated with
its estimated remaining obligation to pay additional interest to
the holders of the April 2005 Convertible Debentures (as defined
below) and the July 2005 Convertible Debentures (as defined
below) as a result of the Companys noncurrent filer status
and related inability to file a registration statement. The
April 2005 Convertible Debentures and the July 2005
Convertible Debentures became eligible for sale under SEC
Rule 144(k) without registration as of April 28, 2007
and December 3, 2007, respectively; therefore, the Company
was no longer required to file a registration statement.
On May 18, 2007, the Company entered into a $400,000 senior
secured credit facility and on June 1, 2007, the Company
amended and restated the credit facility to increase the
aggregate commitments under the facility from $400,000 to
$500,000 (the 2007 Credit Facility). The 2007 Credit
Facility consists of (1) term loans in an aggregate
principal amount of $300,000 (the Term Loans) and
(2) a letter of credit facility in an aggregate face amount
at any time outstanding not to exceed $200,000 (the LC
Facility). The LC Facility is supported by cash deposits
made on our behalf by the lenders. If the Company fails to repay
any disbursement on a letter of credit and these cash deposits
are used to reimburse the issuing bank, the amount of any cash
deposits used for such purpose will be considered as additional
loans to the Company (the LC Loans and, together
with the Term Loans, the Loans). Interest on the
Term Loans under the 2007 Credit Facility is calculated, at the
Companys option, at a rate per annum equal to either
(1) 3.5% plus the London Interbank Offered Rate
(LIBOR) or (2) 2.5% plus a base rate equal to
the higher of (a) the federal funds rate plus 0.5% and
(b) UBS AG, Stamford Branchs prime commercial lending
rate. Interest on the LC loans is similarly calculated at the
Companys option at a rate per annum equal to either
(1) 4.0% plus LIBOR or (2) 4.0% plus a rate computed
in the same manner as the Term Loans. Debt issuance costs of
$18,801, mainly comprised of underwriting, commitment and legal
fees, were capitalized into other non-current assets and are
being amortized to interest expense over the life of the Loans.
As of December 31, 2007, the Company had $297,750 in
principal outstanding under the Term Loans and an aggregate of
$113,137 of letters of credit issued and outstanding. The
Company is charged fees for the LC Facilitys continued
availability, which totals 4.125% per annum on the total amount
of cash deposits made available from time to time by the lenders
under the LC Facility to collateralize their obligation to fund
demands made on letters of credit issued under the LC Facility.
We are separately charged a fronting fee of 0.1875% per annum on
the average daily aggregate outstanding face amount of all
letters of credit issued.
The Companys obligations under the 2007 Credit Facility
are secured by first priority liens and security interests in
substantially all of the Companys assets and most of its
material domestic subsidiaries, as guarantors of such
obligations (including a pledge of 65% of the stock of certain
of its foreign subsidiaries), subject to certain exceptions.
The 2007 Credit Facility requires the Company to make
prepayments of outstanding Loans and cash collateralize
outstanding letters of credit in an amount equal to
(i) 100% of the net proceeds received from property or
asset sales (subject to exceptions), (ii) 100% of the net
proceeds received from the issuance or
F-23
BEARINGPOINT,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(in
thousands, except share and per share amounts)
incurrence of additional debt (subject to exceptions),
(iii) 100% of all casualty and condemnation proceeds
(subject to exceptions), (iv) 50% of the net proceeds
received from the issuance of equity (subject to exceptions) and
(v) for each fiscal year ending on or after
December 31, 2008 the difference between (a) 50% of
the Excess Cash Flow (as defined in the 2007 Credit Facility)
and (b) any voluntary prepayment of the Loans or the LC
Facility (subject to exceptions). If the Loans are prepaid or
the LC Facility is reduced prior to May 18, 2008 with other
indebtedness or another letter of credit facility, the Company
may be required to pay a prepayment premium of 1% of the
principal amount of the Loans so prepaid or LC Facility so
reduced if the cost of such replacement indebtedness or letter
of credit facility is lower than the cost of the 2007 Credit
Facility. In addition, the Company is required to pay $750 in
principal plus any accrued and unpaid interest at the end of
each quarter, commencing on June 29, 2007 and ending on
March 31, 2012.
The 2007 Credit Facility contains affirmative and negative
covenants, customary representations and warranties, certain of
which include exceptions for events that would not have a
material adverse effect on the Companys business, results
of operation, financial condition, assets or liabilities.
|
|
|
|
|
The affirmative covenants include, among other things:
the delivery of unaudited quarterly and audited annual financial
statements, all in accordance with generally accepted accounting
principles, certain monthly operating metrics and budgets;
compliance with applicable laws and regulations (excluding,
prior to October 31, 2008, compliance with certain filing
requirements under the securities laws); maintenance of
existence and insurance; after October 31, 2008, as
requested by the Administrative Agent, reasonable efforts to
maintain credit ratings; and maintenance of books and records
(subject to the material weaknesses previously disclosed in the
Companys Annual Report on
Form 10-K
for the year ended December 31, 2005).
|
|
|
|
The negative covenants, which (subject to exceptions)
restrict certain of the Companys corporate activities,
include, among other things, limitations on: disposition of
assets; mergers and acquisitions; payment of dividends; stock
repurchases and redemptions; incurrence of additional
indebtedness; making of loans and investments; creation of
liens; prepayment of other indebtedness; and engaging in certain
transactions with affiliates.
|
Events of default under the 2007 Credit Facility include, among
other things: defaults based on nonpayment, breach of
representations, warranties and covenants, cross-defaults to
other debt above $10,000, loss of lien on collateral, invalidity
of certain guarantees, certain bankruptcy and insolvency events,
certain ERISA events, judgments against the Company in an
aggregate amount in excess of $20,000 that remain unpaid, and
change of control events.
Under the terms of the 2007 Credit Facility, the Company is not
required to become current with its SEC periodic reports until
October 31, 2008. Until October 31, 2008, the
Companys failure to provide annual audited or quarterly
unaudited financial statements, to keep its books and records in
accordance with GAAP or to timely file its SEC periodic reports
will not be considered an event of default under the 2007 Credit
Facility.
The 2007 Credit Facility replaced the Companys 2005 Credit
Facility, which was terminated on May 18, 2007. For
information about the 2005 Credit Facility, see below.
Series A
and Series B Convertible Subordinated Debentures
On December 22, 2004, the Company closed on a $400,000
offering of convertible subordinated debentures. The offering
consisted of $225,000 aggregate principal amount of 2.50%
Series A Convertible
F-24
BEARINGPOINT,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(in
thousands, except share and per share amounts)
Subordinated Debentures due December 15, 2024 (the
Series A Debentures) and $175,000 aggregate
principal amount of 2.75% Series B Convertible Subordinated
Debentures due December 15, 2024 (the Series B
Debentures and together with the Series A Debentures,
the Subordinated Debentures). On January 5,
2005, the Company issued an additional $25,000 aggregate
principal amount of its Series A Debentures and an
additional $25,000 aggregate principal amount of its
Series B Debentures upon the exercise in full of an option
granted to the initial purchasers. Interest is payable on the
Subordinated Debentures on June 15 and December 15 of each year,
beginning June 15, 2005. The Subordinated Debentures are
unsecured and are subordinated to the April 2005 and July 2005
indentures and borrowings and future senior debt. Due to the
delay in the completion of the Companys audited financial
statements for the year ended December 31, 2004, the
Company was unable to file a timely registration statement with
the SEC to register for resale its Subordinated Debentures and
the shares of common stock issuable upon conversion of the
Subordinated Debentures. Accordingly, the applicable interest
rate on each series of Subordinated Debentures increased by
0.25% beginning on March 23, 2005 and increased another
0.25% beginning on June 22, 2005. The interest rates on the
Series A Debentures and the Series B Debentures
increased to 3.00% and 3.25%, respectively, until
January 6, 2007.
On January 6, 2007, the Subordinated Debentures and the
shares of common stock issuable upon conversion of the
Subordinated Debentures became transferable by non-affiliates of
the Company without restriction pursuant to the provisions of
Rule 144(k) under the Securities Act. As a result, the
Company is no longer obligated to register the Subordinated
Debentures for resale or pay the additional interest associated
with these registration requirements.
In connection with the Companys previously disclosed
resolution of a dispute with certain holders of the Series B
Debentures (these holders had provided a purported notice of
default based upon the Companys failure to timely file
certain of its periodic reports due in 2005), on
November 2, 2006, the Company entered into the First
Supplemental Indenture (the First Supplemental
Indenture) with The Bank of New York, as trustee, which
amends the indenture governing the Subordinated Debentures. The
First Supplemental Indenture includes: (i) a waiver of the
Companys SEC reporting requirements under the Subordinated
Indentures through October 31, 2008, (ii) adjustment
of the interest rate payable on all Series A Debentures
from 3.00% per annum to 3.10% per annum until December 23,
2011, and (iii) adjustment of the interest rate payable on
all Series B Debentures from 3.25% per annum to 4.10% per
annum until December 23, 2014. In accordance with
EITF 96-19,
Debtors Accounting for a Modification or Exchange of
Debt Instruments
(EITF 96-19),
since the change in the terms of the Subordinated Debentures did
not result in substantially different cash flows, this change in
terms is accounted for as a modification, and therefore
additional interest payments will be expensed over the period
from November 2, 2006 through December 23, 2011 for
the Series A Debentures, and December 23, 2014 for the
Series B Debentures. During the period of November 2,
2006 through December 23, 2011 for the Series A
Debentures and December 23, 2014 for the Series B
Debentures, the new effective interest rates on this debt are
3.60% and 4.50%, respectively. In addition, the Company paid
approximately $1,800 in fees and expenses to third-parties for
work performed in connection with all of the modifications to
the Companys outstanding debentures, which were expensed
as incurred.
The net proceeds from the sale of the Subordinated Debentures
were approximately $435,600, after deducting offering expenses
and the initial purchasers commissions of $11,400 and
other fees and expenses of approximately $3,000. The Company
used approximately $240,590 of the net proceeds from the sale of
the Subordinated Debentures to repay its then outstanding
$220,000 senior notes and approximately $135,000 to repay
amounts outstanding under its then existing revolving credit
facility. The Company also used the proceeds to pay fees and
expenses in connection with entering into the $400,000 Interim
Senior Secured Credit Facility, as defined below.
F-25
BEARINGPOINT,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(in
thousands, except share and per share amounts)
The Subordinated Debentures are initially convertible, under
certain circumstances, into shares of the Companys common
stock at a conversion rate of 95.2408 shares for each $1
principal amount of the Subordinated Debentures, subject to
anti-dilution and adjustments but not to exceed
129.0 shares, equal to an initial conversion price of
approximately $10.50 per share. Holders of the Subordinated
Debentures may exercise the right to convert the Subordinated
Debentures prior to their maturity only under certain
circumstances, including when the Companys stock price
reaches a specified level for a specified period of time, upon
notice of redemption, and upon specified corporate transactions.
Upon conversion of the Subordinated Debentures, the Company will
have the right to deliver, in lieu of shares of common stock,
cash or a combination of cash and shares of common stock. The
Subordinated Debentures will be entitled to an increase in the
conversion rate upon the occurrence of certain change of control
transactions or, in lieu of the increase, at the Companys
election, in certain circumstances, to an adjustment in the
conversion rate and related conversion obligation so that the
Subordinated Debentures are convertible into shares of the
acquiring or surviving company. The Company will also increase
the conversion rate upon occurrence of certain transactions. As
of December 31, 2007, none of the circumstances under which
the Subordinated Debentures are convertible existed.
On December 15, 2011, December 15, 2014 and
December 15, 2019, holders of Series A Debentures, at
their option, have the right to require the Company to
repurchase any outstanding Series A Debentures. On
December 15, 2014 and December 15, 2019, holders of
Series B Debentures, at their option, have the right to
require the Company to repurchase any outstanding Series B
Debentures. In each case, the Company will pay a repurchase
price in cash equal to 100% of the principal amount of the
Subordinated Debentures, plus accrued and unpaid interest,
including liquidated damages, if any, to the repurchase date. In
addition, holders of the Subordinated Debentures may require the
Company to repurchase all or a portion of the Subordinated
Debentures on the occurrence of a designated event, at a
repurchase price equal to 100% of the principal amount of the
Subordinated Debentures, plus any accrued but unpaid interest
and liquidated damages, if any, to, but not including, the
repurchase date. A designated event includes certain change of
control transactions and a termination of trading, occurring if
the Companys common stock is no longer listed for trading
on a U.S. national securities exchange.
The Company may redeem some or all of the Series A
Debentures beginning on December 23, 2011 and, beginning on
December 23, 2014, may redeem the Series B Debentures,
in each case at a redemption price in cash equal to 100% of the
principal amount of the Subordinated Debentures plus accrued and
unpaid interest and liquidated damages, if any, on the
Subordinated Debentures to, but not including, the redemption
date.
Upon a continuing event of default, the trustee or the holders
of at least 25% in aggregate principal amount of the
Subordinated Debentures may declare the applicable series of
Debentures immediately due and payable, which could lead to
cross-defaults and possible acceleration of unpaid principal and
accrued interest of the April 2005 Convertible Debentures, July
2005 Convertible Debentures (defined below) and the 2007 Credit
Facility.
|
|
|
April
2005 Convertible Senior Subordinated Debentures
|
On April 27, 2005, the Company issued $200,000 aggregate
principal amount of its 5.00% Convertible Senior
Subordinated Debentures due April 15, 2025 (the April
2005 Convertible Debentures). Interest is payable on the
April 2005 Convertible Debentures on April 15 and October 15 of
each year, beginning October 15, 2005. The April 2005
Convertible Debentures are unsecured and are subordinated to the
F-26
BEARINGPOINT,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(in
thousands, except share and per share amounts)
Companys existing and future senior debt. The April 2005
Convertible Debentures are senior to the Subordinated
Debentures. Since the Company failed to file a registration
statement with the SEC to register for resale of its April 2005
Convertible Debentures and the shares of common stock issuable
upon conversion of the April 2005 Convertible Debentures by
December 31, 2005, the interest rate on the April 2005
Convertible Debentures increased by 0.25% to 5.25% beginning on
January 1, 2006 and continued until April 28, 2007, at
which time the interest rate was reduced to the original 5.00%
rate, as more fully described below. On November 9, 2006,
the Company paid to certain consenting holders of April 2005
Convertible Debentures, who provided their consents prior to the
expiration of the consent solicitation, a consent fee equal to
1.00% of the outstanding principal amount of the April 2005
Convertible Debentures. The supplemental indenture includes a
waiver of the Companys SEC reporting requirements through
October 31, 2007, and provides for further extension
through October 31, 2008 upon the Companys payment of
an additional fee of 0.25% of the principal amount of the
debentures. On October 29, 2007, the Company paid the
additional fee to the consenting holders of the April 2005
Convertible Debentures, and as a result, the Companys SEC
reporting requirements under the indenture have been waived
through October 31, 2008. In accordance with
EITF 96-19,
since the change in the terms of the April 2005 Convertible
Debentures did not result in substantially different cash flows,
the change in terms was accounted for as a modification, and as
a result, the consent fees of 0.25% will be recognized over
future periods. As of December 31, 2007, the unamortized
consent fees of $364 will be recognized through 2008.
On April 28, 2007, the April 2005 Convertible Debentures
and the shares of common stock issuable upon conversion of the
April 2005 Convertible Debentures became transferable by
non-affiliates of the Company without restriction pursuant to
the provisions of Rule 144(k) under the Securities Act. As
a result, the Company is no longer obligated to register the
April 2005 Convertible Debentures for resale or to pay any
additional interest on the April 2005 Convertible Debentures in
connection therewith.
The net proceeds from the sale of the April 2005 Convertible
Debentures, after deducting offering expenses and the placement
agents commissions and other fees and expenses, were
approximately $192,800. The Company used the net proceeds from
the offering to replace the working capital that was at the time
used to cash collateralize letters of credit under the 2004
Interim Credit Facility (see below).
The April 2005 Convertible Debentures are initially convertible
into shares of the Companys common stock at a conversion
rate of 151.5151 shares for each $1 principal amount of the
April 2005 Convertible Debentures, subject to anti-dilution and
adjustments, equal to an initial conversion price of $6.60 per
share at any time prior to the stated maturity. Upon conversion
of the April 2005 Convertible Debentures, the Company will have
the right to deliver, in lieu of shares of common stock, cash or
a combination of cash and shares of common stock. The April 2005
Convertible Debentures will be entitled to an increase in the
conversion rate upon the occurrence of certain change of control
transactions or, in lieu of the increase, at the Companys
election, in certain circumstances, to an adjustment in the
conversion rate and related conversion obligation so that the
April 2005 Convertible Debentures are convertible into shares of
the acquiring or surviving company.
The holders of the April 2005 Convertible Debentures have the
right, at their option, to require the Company to repurchase all
or some of their debentures on April 15, 2009, 2013, 2015
and 2020. In each case, the Company will pay a repurchase price
in cash equal to 100% of the principal amount of the April 2005
Convertible Debentures, plus any accrued but unpaid interest,
including additional interest, if any, to the repurchase date.
In addition, holders of the April 2005 Convertible Debentures
may require the Company to repurchase all or a portion of the
April 2005 Convertible Debentures on the occurrence of a
designated event, at a repurchase price equal to 100% of the
principal amount of the April 2005 Convertible Debentures, plus
F-27
BEARINGPOINT,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(in
thousands, except share and per share amounts)
any accrued but unpaid interest and additional interest, if any,
to, but not including, the repurchase date. A designated event
includes certain change of control transactions and a
termination of trading, occurring if the Companys common
stock is no longer listed for trading on a U.S. national
securities exchange.
The April 2005 Convertible Debentures will be redeemable at the
Companys option on or after April 15, 2009 at a
redemption price in cash equal to 100% of the principal amount
of the April 2005 Convertible Debentures plus accrued and unpaid
interest and additional interest, if any, on the April 2005
Convertible Debentures to, but not including, the redemption
date.
Upon a continuing event of default, the trustee or the holders
of at least 25% in aggregate principal amount of the April 2005
Convertible Debentures may declare the debentures immediately
due and payable, which could lead to cross-defaults and possible
acceleration of unpaid principal and accrued interest of the
Subordinated Debentures, July 2005 Convertible Debentures
(defined below) and the 2007 Credit Facility.
|
|
|
July 2005
Convertible Senior Subordinated Debentures
|
On July 15, 2005, the Company issued $40,000 aggregate
principal amount of its 0.50% Convertible Senior
Subordinated Debentures due July 2010 (the July 2005
Convertible Debentures) and common stock warrants (the
July 2005 Warrants) to purchase up to
3,500,000 shares of the Companys common stock. The
July 2005 Convertible Debentures bear interest at a rate of
0.50% per year and will mature on July 15, 2010. Interest
is payable on the July 2005 Convertible Debentures on January 15
and July 15 of each year, beginning January 15, 2006. The
July 2005 Convertible Debentures are senior to the Subordinated
Debentures. Since the Company failed to file a registration
statement with the SEC to register for resale the shares of
common stock issuable upon conversion of the July 2005
Convertible Debentures and exercise of the July 2005 Warrants by
December 31, 2005, the interest rate on the July 2005
Convertible Debentures increased by 0.25% to 0.75% beginning on
January 1, 2006 and continued until December 3, 2007,
at which time the interest rate was reduced to the original
0.50% rate, as more fully described below. Pursuant to the
original purchase agreement entered into by the Company and the
holders of the July 2005 Convertible Debentures, on
November 9, 2006, the Company entered into an agreement
with the holders of the July 2005 Debentures, pursuant to which
the Company paid a consent fee equal to 1.00% of the outstanding
principal amount of the July 2005 Debentures, in accordance with
the terms of the purchase agreement governing the issuance of
the July 2005 Debentures. On October 29, 2007, in
connection with the payment of the additional fee to the
consenting holders of the April 2005 Convertible Debentures, the
Company paid an additional fee equal to 0.25% of the outstanding
principal amount of the July 2005 Convertible Debentures, in
accordance with the terms of the purchase agreement governing
the issuance of the July 2005 Convertible Debentures. As of
December 31, 2007, the unamortized consent fees of $83 will
be recognized through 2008. In accordance with
EITF 96-19,
since the change in the terms of the July 2005 Convertible
Senior Debentures did not result in substantially different cash
flows, this change in terms is accounted for as a modification,
and therefore the consent fees will be recognized over future
periods.
On December 3, 2007, upon the filing of the Companys
Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2007, the shares of
common stock issuable upon conversion of the July 2005
Convertible Debentures and exercise of the July 2005 Warrants
became transferable by the holders of these debentures without
restriction pursuant to the provisions of Rule 144(k) under
the Securities Act. As a result, the Company is no longer
obligated to register the July 2005 Convertible Debentures for
resale or to pay any additional interest on the July 2005
Convertible Debentures.
F-28
BEARINGPOINT,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(in
thousands, except share and per share amounts)
The net proceeds from the sale of the July 2005 Convertible
Debentures and July 2005 Warrants, after deducting offering
expenses and other fees and expenses, were approximately
$38,900. The Company used the net proceeds from the offering for
general corporate purposes, including the funding of strategic
acquisitions to build capabilities in certain areas.
In accordance with the terms of the purchase agreement, the
holders of the July 2005 Convertible Debentures appointed a
designated director to the Companys Board of Directors
effective July 15, 2005. If the designated director ceases
to be affiliated with the holders of the July 2005 Convertible
Debentures or ceases to serve on the Companys Board of
Directors, so long as the holders together hold at least 40% of
the original principal amount of the July 2005 Convertible
Debentures, the holders or their designees have the right to
designate a replacement director to the Companys Board of
Directors.
The July 2005 Convertible Debentures are initially convertible
on or after July 15, 2006 into shares of the Companys
common stock at a conversion price of $6.75 per share, subject
to anti-dilution and other adjustments. Upon conversion of the
July 2005 Convertible Debentures, the Company will have the
right to deliver, in lieu of shares of common stock, cash or a
combination of both. The July 2005 Convertible Debentures will
be entitled, in certain change of control transactions, to an
adjustment in the conversion obligation so that the July 2005
Convertible Debentures are convertible into shares of stock,
other securities or other property or assets receivable upon the
occurrence of such transaction by a holder of shares of the
Companys common stock in such transaction.
The holders of the July 2005 Convertible Debentures may require
the Company to repurchase all or a portion of the July 2005
Convertible Debentures on the occurrence of a designated event,
at a repurchase price equal to 100% of the principal amount of
the July 2005 Convertible Debentures, plus any accrued but
unpaid interest and additional interest, if any, to, but not
including, the repurchase date. The list of designated events
includes certain change of control transactions and a
termination of trading occurring if the Companys common
stock is no longer listed for trading on a U.S. national
securities exchange.
The July 2005 Warrants may be exercised on or after
July 15, 2006 and have a five-year term. The initial number
of shares issuable upon exercise of the July 2005 Warrants is
3,500,000 shares of common stock, and the initial exercise
price per share of common stock is $8.00. The number of shares
and exercise price are subject to certain customary
anti-dilution protections and other customary terms. These terms
include, in certain change of control transactions, an
adjustment in the conversion obligation so that the July 2005
Warrants, upon exercise, will entitle the July 2005 Warrant
holders to receive shares of stock, other securities or other
property or assets receivable upon the occurrence of such
transaction by a holder of shares of the Companys common
stock in such transaction.
Upon a continuing event of default, the holders of at least 25%
in aggregate principal amount of the July 2005 Convertible
Debentures may declare the July 2005 Convertible Debentures
immediately due and payable, which could lead to cross-defaults
and possible acceleration of unpaid principal and accrued
interest of the Subordinated Debentures, April 2005 Convertible
Debentures and the 2007 Credit Facility.
In accordance with the provisions of
EITF 98-5
and
EITF 00-27,
the Company allocated the proceeds received from the July 2005
Convertible Debentures to the elements of the debt instrument
based on their relative fair values. The Company allocated fair
value to the July 2005 Warrants and conversion option utilizing
the Black-Scholes option pricing model, which was consistent
with the Companys historical
F-29
BEARINGPOINT,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(in
thousands, except share and per share amounts)
valuation methods. The following assumptions and estimates were
used in the Black-Scholes model: volatility of 48.5%; an average
risk-free interest rate of 3.98%; dividend yield of 0%; and an
expected life of 5 years. The fair value of debt component
of the July 2005 Debentures was based on the net present value
of the underlying cash flows discounted at a rate derived from
the Companys then publicly traded debt, which was 11.4%.
Once the relative fair values were established, the Company
allocated the proceeds to each component of the contract.
Because the conversion price was lower than the then current
fair market value of the Companys common stock, the
Company determined that a beneficial conversion feature
(BCF) existed which required separate accounting.
The accounting conversion value of the BCF calculated was
$14,288 and the fair value allocated to the July 2005 Warrants
was $8,073. The fair value allocated to the warrants and the
accounting conversion value of the BCF amounting to $22,361 were
recorded as credits to additional paid-in capital. In addition,
$1,000 paid to the holders in connection with this transaction
was recorded as a reduction of the net proceeds. The offsetting
$23,361 was treated as a discount to the $40,000 principal
amount of the July 2005 Convertible Debentures. Using the
effective interest method with an imputed interest rate of
17.9%, the discount will be accreted as interest expense over
the term of the debt contract to bring the value of the debt to
its face amount at the time the principal payment is due in July
2010. As of December 31, 2007, 2006 and 2005 the Company
has amortized $8,972, $4,851 and $1,415, respectively, of the
discount as interest expense.
|
|
|
Discontinued
Credit Facilities
|
On July 19, 2005, the Company entered into a $150,000
Senior Secured Credit Facility (the 2005 Credit
Facility). The 2005 Credit Facility, as amended, provided
for up to $150,000 in revolving credit and advances, all of
which was available for issuance of letters of credit. Advances
under the revolving credit line were limited by the available
borrowing base, which was based upon a percentage of eligible
accounts receivable and unbilled receivables. The 2005 Credit
Facility was terminated on May 18, 2007. On that date, all
outstanding obligations under the 2005 Credit Facility were
assumed by the 2007 Credit Facility and liens and security
interests were released.
In addition, prior to the March 30, 2006 amendment, the
Company was required to cash collateralize 105% of its
borrowings, including any outstanding letters of credit, under
the 2005 Credit Facility and any accrued and unpaid interest and
fees thereon. As of December 31, 2006, the Company had no
borrowings under the 2005 Credit Facility but had letters of
credit outstanding of approximately $89,300. The Company was
charged an annual rate of 2.75% for the credit spread and other
fees for its outstanding letters of credit. The Company
fulfilled its obligation to cash collateralize using cash on
hand. The requirement to deposit and maintain cash collateral
terminated as part of the March 30, 2006 amendment to the
2005 Credit Facility, and such cash collateral was released to
the Company.
F-30
BEARINGPOINT,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(in
thousands, except share and per share amounts)
|
|
7.
|
Accrued
Payroll and Employee Benefits
|
Accrued payroll and employee benefits consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Accrued compensated absences
|
|
$
|
100,210
|
|
|
$
|
97,123
|
|
Payroll related taxes
|
|
|
45,671
|
|
|
|
55,270
|
|
Employee mobility and tax equalization
|
|
|
108,056
|
|
|
|
87,621
|
|
Accrued bonus
|
|
|
37,393
|
|
|
|
52,501
|
|
Other
|
|
|
76,878
|
|
|
|
76,988
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
368,208
|
|
|
$
|
369,503
|
|
|
|
|
|
|
|
|
|
|
|
|
8.
|
Other
Current Liabilities
|
Other current liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Softline acquisition obligation (see Note 9)
|
|
$
|
|
|
|
$
|
16,564
|
|
Accrual for loss contracts
|
|
|
23,006
|
|
|
|
24,828
|
|
Sales, use and value added taxes payable
|
|
|
37,694
|
|
|
|
31,632
|
|
Other
|
|
|
47,664
|
|
|
|
62,813
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
108,364
|
|
|
$
|
135,837
|
|
|
|
|
|
|
|
|
|
|
|
|
9.
|
Softline
Acquisition Obligation
|
On May 27, 1999, KPMG LLP (the Companys former
parent) acquired all of the voting common stock of Softline
Consulting & Integrators, Inc. (Softline),
a systems integration company, and entered into an agreement
with the then shareholders of Softline (the Softline
Sellers) to acquire all of the Softline nonvoting common
stock for not less than $65,000. In August 2000, the Company and
the Softline Sellers entered into an amendment pursuant to which
the Company acquired the nonvoting common stock of Softline and
paid $65,000 to the Softline Sellers. Of the $65,000 purchase
price, the parties agreed to hold back $15,000, which accrued
interest at 6% per annum (the Softline Holdback),
until the final determination of claims by the Company against
the Softline Sellers. The Softline Holdback was payable in
shares of the Companys common stock (calculated based on
the Companys initial public offering price less the
underwriting discount in such offering); provided, however, that
the Softline Sellers could elect to receive cash in lieu of up
to 30% of the shares of the Company common stock otherwise
issuable to such Softline Sellers. The 30% portion of the
liability that, at the election of the counterparties, can be
settled in either cash or in shares of the Companys common
stock represents a derivative feature. Accordingly, the 30%
portion of the liability was marked to market each reporting
period based on the changes in the intrinsic value of the
underlying equity shares. Any change in the value of the
underlying shares was recorded as a component of interest
expense, amounting to $863, $430 and $354 for the years ended
December 31, 2007, 2006 and 2005, respectively.
F-31
BEARINGPOINT,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(in
thousands, except share and per share amounts)
The Softline Sellers elected to settle the Softline Holdback by
a payment of an aggregate of $2,025 in cash and the issuance of
an aggregate of 563,474 shares of the Companys common
stock, which payment and issuance was made on August 16,
2007. The Company recorded the non-cash component of this
settlement amounting to $10,389 within the statement of
stockholders equity.
|
|
10.
|
Collaboration
Agreement
|
In August 1997, KPMG LLP entered into a collaboration agreement
with Microsoft Corporation. Under this agreement, the Company
developed a broad portfolio of services and solutions to enable
the rapid deployment of Microsoft products. Microsoft paid the
Company $15,000. The agreement requires the Company to train a
specified number of consultants to be proficient in Microsoft
products, and to participate in joint marketing efforts with
Microsoft. Revenue of $5,000 was recognized as training and
other costs associated with the agreement were incurred. Revenue
was not recognized for the remaining $10,000 due to a minimum
royalty liability of $10,000 associated with the agreement. The
agreement requires the Company to pay Microsoft royalties on
certain net revenue for business relating to Microsoft products.
The royalty period ends on the earlier of the date on which the
Company makes the minimum aggregate royalty payment of $10,000
or June 30, 2006. Since the aggregate payments on
June 30, 2006 were less than $10,000, the Company was
obligated to make final payment for the difference, of which
$4,689 was paid in July 2006 and the remaining $4,689 was paid
in June 2007. No royalty payments were made during the year
ended December 31, 2005.
|
|
11.
|
Commitments
and Contingencies
|
The Company currently is a party to a number of disputes which
involve or may involve litigation or other legal or regulatory
proceedings. Generally, there are three types of legal
proceedings to which the Company has been made a party:
|
|
|
|
|
Claims and investigations arising from its inability to timely
file periodic reports under the Exchange Act (the Exchange
Act) and the restatement of its financial statements for
certain prior periods to correct accounting errors and
departures from generally accepted accounting principles for
those years (SEC Reporting Matters);
|
|
|
|
Claims and investigations being conducted by agencies or
officers of the U.S. Federal government and arising in
connection with its provision of services under contracts with
agencies of the U.S. Federal government (Government
Contracting Matters); and
|
|
|
|
Claims made in the ordinary course of business by clients
seeking damages for alleged breaches of contract or failure of
performance, by current or former employees seeking damages for
alleged acts of wrongful termination or discrimination, and by
creditors or other vendors alleging defaults in payment or
performance (Other Matters).
|
The Company currently maintains insurance in types and amounts
customary in its industry, including coverage for professional
liability, general liability and management and director
liability. Based on managements current assessment and
insurance coverages believed to be available, the Company
believes that its financial statements include adequate
provision for estimated losses that are likely to be incurred
with regard to all matters of the types described above.
F-32
BEARINGPOINT,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(in
thousands, except share and per share amounts)
SEC
Reporting Matters
In and after April 2005, various separate complaints were filed
in the U.S. District Court for the Eastern District of
Virginia alleging that the Company and certain of its current
and former officers and directors violated Section 10(b) of
the Exchange Act,
Rule 10b-5
promulgated thereunder and Section 20(a) of the Exchange
Act by, among other things, making materially misleading
statements between August 14, 2003 and April 20, 2005
with respect to its financial results in the Companys SEC
filings and press releases. On January 17, 2006, the court
certified a class, appointed class counsel and appointed a class
representative. The plaintiffs filed an amended complaint on
March 10, 2006 and the defendants, including the Company,
subsequently filed a motion to dismiss that complaint, which was
fully briefed and heard on May 5, 2006. The Company was
awaiting a ruling when, on March 23, 2007, the court stayed
the case, pending the U.S. Supreme Courts decision in
the case of Makor Issues & Rights, Ltd v.
Tellabs, argued before the Supreme Court on March 28,
2007. On June 21, 2007, the Supreme Court issued its
opinion in the Tellabs case, holding that to plead a
strong inference of a defendants fraudulent intent under
the applicable federal securities laws, a plaintiff must
demonstrate that such an inference is not merely reasonable, but
cogent and at least as compelling as any opposing inference of
non-fraudulent intent. The court ordered both parties to submit
briefs regarding the impact of Tellabs upon the
defendants motion to dismiss. The parties filed their
briefs on July 16, 2007, and oral arguments were held on
July 27, 2007. On September 12, 2007, the court
dismissed with prejudice this complaint, granting motions to
dismiss filed by the Company and the other named defendants. In
granting the Companys motion to dismiss, the court ruled
that the plaintiff failed to meet the scienter pleading
requirements set forth in the Private Securities Litigation
Reform Act of 1995, as amended. On September 26, 2007, the
plaintiffs filed a motion that seeks a reversal of the
courts order dismissing the case or an amendment to the
courts order that would allow the plaintiffs to replead.
The Company filed its brief on October 17, 2007 and
although a hearing on the plaintiffs motion was scheduled
for November 16, 2007, the court canceled the hearing as
not necessary. On November 19, 2007, the court issued an
order denying the plaintiffs motion to amend or alter the
courts September 12, 2007 dismissal of this matter.
The plaintiffs have appealed the matter to the U.S. Court
of Appeals for the Fourth Circuit.
|
|
|
2005 Shareholders
Derivative Demand
|
On May 21, 2005, the Company received a letter from counsel
representing one of its shareholders requesting that the Company
initiate a lawsuit against its Board of Directors and certain
present and former officers of the Company, alleging breaches of
the officers and directors duties of care and
loyalty to the Company relating to the events disclosed in its
report filed on
Form 8-K,
dated April 20, 2005. On January 21, 2006, the
shareholder filed a derivative complaint in the Circuit Court of
Fairfax County, Virginia, that was not served on the Company
until March 2006. The shareholders complaint alleged that
his demand was not acted upon and alleged the breach of
fiduciary duty claims previously stated in his demand. The
complaint also included a non-derivative claim seeking the
scheduling of an annual meeting in 2006. On May 18, 2006,
following an extensive audit committee investigation, the
Companys Board of Directors responded to the
shareholders demand by declining at that time to file a
suit alleging the claims asserted in the shareholders
demand. The shareholder did not amend the complaint to reflect
the refusal of his demand. The Company filed demurrers on
August 11, 2006, which effectively sought to dismiss the
matter related to the fiduciary duty claims. On November 3,
2006, the court granted the demurrers and dismissed the
fiduciary claims, with leave to file amended claims. As a result
of the Companys annual meeting of stockholders held on
December 14, 2006, the claim seeking the scheduling of an
annual meeting became moot. On January 3, 2007, the
plaintiff filed an amended derivative complaint re-asserting the
previously dismissed derivative
F-33
BEARINGPOINT,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(in
thousands, except share and per share amounts)
claims and alleging that the Boards refusal of his demand
was not in good faith. The Companys renewed motion to
dismiss all remaining claims was heard on March 23, 2007.
On February 20, 2008, the court granted the Companys
motion to dismiss and dismissed the claims with prejudice. The
Company has a reasonable possibility of loss in this matter,
although no estimate of such loss can be determined at this
time. Accordingly, no liability has been recorded.
On April 13, 2005, pursuant to the same matter number as
its inquiry concerning the Companys restatement of certain
financial statements issued in 2003, the staff of the SECs
Division of Enforcement requested information and documents
relating to the Companys March 18, 2005
Form 8-K.
On September 7, 2005, the Company announced that the staff
had issued a formal order of investigation in this matter. The
Company subsequently has received subpoenas from the staff
seeking production of documents and information, including
certain information and documents related to an investigation
conducted by its Audit Committee. The Company continues to
provide information and documents to the SEC as requested. The
investigation is ongoing and the SEC is in the process of taking
the testimony of a number of its current and former employees,
including one of its former directors.
In connection with the investigation by its Audit Committee, the
Company became aware of incidents of possible non-compliance
with the Foreign Corrupt Practices Act and its internal controls
in connection with certain of its operations in China and
voluntarily reported these matters to the SEC and
U.S. Department of Justice in November 2005. Both the SEC
and the Department of Justice are investigating these matters in
connection with the formal investigation described above. On
March 27, 2006, the Company received a subpoena from the
SEC regarding information related to these matters and has
responded to these requests through the summer of 2006. We have
not received any further requests since that time. The Company
has a reasonable possibility of loss in this matter, although no
estimate of such loss can be determined at this time.
Accordingly, no liability has been recorded.
Government
Contracting Matters
A significant portion of the Companys business relates to
providing services under contracts with the U.S. Federal
government or state and local governments, inclusive of
government-sponsored enterprises. During the year ended
December 31, 2007, 36.7% of the Companys revenue was
earned from contracts with the U.S. Government or state and
local governments. These contracts are subject to extensive
legal and regulatory requirements and, from time to time,
agencies of the U.S. Federal government or state and local
governments investigate whether the Companys operation is
being conducted in accordance with these requirements and the
terms of the relevant contracts. In the ordinary course of
business, various government investigations are ongoing.
U.S. Federal government investigations of the Company,
whether relating to these contracts or conducted for other
reasons, could result in administrative, civil or criminal
liabilities, including repayments, fines or penalties being
imposed upon the Company, or could lead to suspension or
debarment from future U.S. Federal government contracting.
It cannot be determined at this time whether any findings,
conclusions, penalties, fines or other amounts determined to be
applicable to the Company in any such investigation could have a
material effect on the Companys results of operation,
outlook or business prospects.
F-34
BEARINGPOINT,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(in
thousands, except share and per share amounts)
Other
Matters
|
|
|
Hawaiian
Telcom Communications, Inc.
|
The Company had a significant contract (the HT
Contract) with Hawaiian Telcom Communications, Inc., a
telecommunications industry client, under which the Company was
engaged to design, build and operate various information
technology systems for the client. The Company incurred losses
of approximately $28,191 and $111,690 under this contract in
2006 and 2005, respectively. The HT Contract experienced delays
in its build and deployment phases and contractual milestones
were missed. The client alleged that the Company was responsible
to compensate it for certain costs and other damages incurred as
a result of these delays and other alleged failures. The Company
believed the clients nonperformance of its
responsibilities under the HT Contract caused delays in the
project and impacted its ability to perform, thereby causing it
to incur significant damages. On February 8, 2007, the
Company entered into a Settlement Agreement, and Transition
Agreement with the client. Pursuant to the Settlement Agreement,
the Company paid $52,000, $38,000 of which was paid by certain
of its insurers. In addition, the Company waived approximately
$29,600 of invoices and other amounts otherwise payable by the
client to the Company. The Transition Agreement governed its
transitioning of the remaining work under the HT Contract to a
successor provider, which has been completed and accepted by the
client.
|
|
|
Telecommunications
Company
|
A telecommunications industry client initiated an
audit of certain of the Companys time and
expense charges, alleging that the Company inappropriately
billed the client for days claimed to be non-work
days, such as days before and after travel days, travel
days, overtime, and other alleged errors. A preliminary audit by
the Company of the time and expense records for the project did
not reveal the improprieties as alleged. On June 18, 2007,
the Company and the client entered into a settlement resolving
the clients claims. In connection with the settlement, the
Company will make six equal annual payments to the client in an
aggregate amount of $24,000, with the first payment made on the
signing date in return for a full release of the clients
claims.
|
|
|
Transition
Services Provided By KPMG LLP
|
In May 2007, the Company and KPMG LLP settled its disputes under
the transition services agreement and KPMG released all claims
against the Company. KPMG had contended that the Company owed
approximately $26,214 in termination costs and unrecovered
capital for the termination of information technology services
provided under the transition services agreement (see
Note 15, Transactions with KPMG LLP). However,
the Company, in accordance with the terms of the agreement, did
not believe that it was liable for termination costs arising
upon the expiration of the agreement. In addition, KPMG
contended the Company owed an additional $5,347 in connection
with the expiration of the transition services agreement related
the Companys share of occupancy related assets in
subleased offices from KPMG.
In connection with the settlement, the Company amended certain
real estate documents relating to a number of properties that it
currently sublets from KPMG to either allow KPMG to further
sublease these properties to third parties, or to return certain
properties that the Company no longer utilizes to KPMG, in
return for a reduction of the amount of the Companys
sublease obligations to KPMG for those properties. The Company
also agreed to pay $5,000 over three years to KPMG as part of
the settlement. The present value of expenses was recorded
within the Consolidated Statement of Operations for 2006, within
Selling, general and administrative expenses, as the financial
statements for 2006 were not yet issued at the settlement date.
F-35
BEARINGPOINT,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(in
thousands, except share and per share amounts)
Operating
Leases
The Company leases all of its office facilities under various
operating leases, some of which contain escalation clauses. In
addition, the Company leases certain of its office facilities
under subleases with KPMG LLP. Subleases with KPMG LLP are for
periods that coincide with the KPMG LLP lease periods, which run
through 2014. The rental cost is based on square footage
utilized by the Company.
The following is a schedule of future minimum rental payments
required under operating leases that have initial or remaining
non-cancelable lease terms in excess of one year as of
December 31, 2007. Total minimum rental payments are
inclusive of payments related to leases for facilities the
Company has restructured and are net of future minimum sublease
income of $23,410.
|
|
|
|
|
Year ending December 31:
|
|
|
|
|
2008
|
|
$
|
83,984
|
|
2009
|
|
|
72,138
|
|
2010
|
|
|
51,684
|
|
2011
|
|
|
36,999
|
|
2012
|
|
|
28,470
|
|
Thereafter
|
|
|
39,214
|
|
|
|
|
|
|
Total minimum payments required
|
|
$
|
312,489
|
|
|
|
|
|
|
Total rental expense for all operating leases, net of sublease
income, was $69,443, $61,490 and $64,734 for the years ended
December 31, 2007, 2006 and 2005, respectively. Sublease
income was $6,927, $7,642 and $5,320 for the years ended
December 31, 2007, 2006 and 2005, respectively.
Other
Commitments
In the normal course of business, the Company has indemnified
third parties and has commitments and guarantees under which it
may be required to make payments in certain circumstances. The
Company accounts for these indemnities, commitments and
guarantees in accordance with FIN 45,
Guarantors Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of
Others. These indemnities, commitments and guarantees
include: indemnities to third parties in connection with surety
bonds; indemnities to various lessors in connection with
facility leases; indemnities to customers related to
intellectual property and performance of services subcontracted
to other providers; indemnities to directors and officers under
the organizational documents and agreements of the Company; and
guarantees issued between subsidiaries on intercompany
receivables. The duration of these indemnities, commitments and
guarantees varies, and in certain cases, is indefinite. Certain
of these indemnities, commitments and guarantees do not provide
for any limitation of the maximum potential future payments the
Company could be obligated to make. The Company estimates that
the fair value of these agreements was insignificant.
Accordingly, no liabilities have been recorded for these
agreements as of December 31, 2007.
Some clients, largely in the state and local market, require the
Company to obtain surety bonds, letters of credit or bank
guarantees for client engagements. As of December 31, 2007,
the Company had approximately $80,879 of outstanding surety
bonds and $113,137 of outstanding letters of credit for which
the Company may be required to make future payment.
From time to time, the Company enters into contracts with
clients whereby it has joint and several liability with other
participants
and/or third
parties providing related services and products to clients.
Under
F-36
BEARINGPOINT,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(in
thousands, except share and per share amounts)
these arrangements, the Company and other parties may assume
some responsibility to the client or a third party for the
performance of others under the terms and conditions of the
contract with or for the benefit of the client or in relation to
the performance of certain contractual obligations. In some
arrangements, the extent of the Companys obligations for
the performance of others is not expressly specified. Certain of
these guarantees do not provide for any limitation of the
maximum potential future payments the Company could be obligated
to make. As of December 31, 2007, the Company estimates it
had assumed an aggregate potential contract value of
approximately $41,403 to its clients for the performance of
others under arrangements described in this paragraph. These
contracts typically provide recourse provisions that would allow
the Company to recover from the other parties all but
approximately $113 if the Company is obligated to make payments
to the clients that are the consequence of a performance default
by the other parties. To date, the Company has not been required
to make any payments under any of the contracts described in
this paragraph. The Company estimates that the fair value of
these agreements was minimal. Accordingly, no liabilities have
been recorded for these contracts as of December 31, 2007.
|
|
|
Notes
Receivable from Stockholders
|
On February 16, 2000, the Company issued stock awards
aggregating 297,317 shares to certain employees as part of
the separation of KPMG LLPs consulting businesses. In
connection with these awards, the Company also provided loans of
$7,433 to the grantees for personal income taxes attributed to
the awards. The loans are secured by the shares of common stock
issued to the employees and, prior to August 7, 2003, bore
interest at 6.2% per annum with respect to $5,845 of the
principal amount and at 4.63% per annum with respect to $1,588
of the principal amount. Principal and accrued interest on the
loans are due no later than August 9, 2008. In December
2007, in accordance with the terms of these loans, the Company
and such employees reached a settlement and agreed that in lieu
of payment under the loans, such employees returned an aggregate
of 297,317 shares of common stock in full satisfaction of
such loans. The fair value of the respective shares on the
settlement date was recorded as treasury stock and the offset to
alleviate the liability was recorded to additional paid in
capital and common stock.
As noted above, during 2007, the Company recorded
297,317 shares as treasury stock in connection with the
settlement of shareholder notes receivable. The fair value of
these shares on the date of settlement was $782. Also during
2007, 624,482 shares of the Companys common stock
were acquired by the Company to satisfy individual tax
withholdings in connection with RSU settlements (see
Note 13). The fair value of these shares on the date of
settlement was $1,614, which was recorded to treasury stock. The
Company did not repurchase any shares of its common stock in the
open market during the years ended December 31, 2007, 2006
or 2005.
The Company has 10,000,000 authorized shares of $0.01 par
value preferred stock. An aggregate of 1,000,000 shares of
preferred stock have been designated as Series A Junior
Participating Preferred Stock for issuance in connection with
the Companys shareholder rights plan. As of
December 31, 2007, none of the Companys preferred
stock was issued or outstanding.
F-37
BEARINGPOINT,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(in
thousands, except share and per share amounts)
On August 29, 2001, the Board of Directors of the Company
adopted a shareholder rights plan. Under the plan, a dividend of
one preferred share purchase right (a Right) was
declared for each share of common stock of the Company that was
outstanding on October 2, 2001. Each Right entitles the
holder to purchase from the Company one one-thousandth of a
share of a new series of Series A Junior Participating
Preferred Stock at a purchase price of $90, subject to
adjustment.
Effective as of October 22, 2007, the Board of Directors of
the Company approved an amendment to the shareholder rights
plan, dated as of October 2, 2001 and as amended by the
First Amendment dated as of August 19, 2002. As amended, a
shareholders right to purchase additional shares of the
Companys common stock under the rights agreement is not
triggered unless either (a) a shareholder who is a
passive investor acquires 20% or more of outstanding
common stock or (b) a shareholder who is not a
passive investor acquires 15% or more of outstanding
common stock. Prior to the amendment, these rights were
triggered upon a shareholder acquiring 15% or more of
outstanding common stock in all instances.
Pursuant to the plan, as amended by the Second Amendment,
generally, the Rights will trade automatically with the common
stock and will not become exercisable until a person or group
has become an acquiring person by (a) either
acquiring (i) 15% or more of outstanding common stock, or
(ii) if the person or group declares itself as a passive
investor, 20% or more of outstanding common stock, or
(b) until a person or group commences a tender offer that
will result in such person or group either (i) owning 15%
or more of outstanding common stock or (ii) if the person
or group declares itself as a passive investor, 20% or more of
outstanding common stock.
Upon an announcement that any person or group has become an
acquiring person, each Right will entitle all rightholders
(other than the acquiring person) to purchase, for the exercise
price of $90, a number of shares of the Companys common
stock having a market value equal to twice the exercise price.
Rightholders would also be entitled to purchase common stock of
the acquiring person having a value of twice the exercise price
if, after a person had become an acquiring person, the Company
were to enter into certain mergers or other transactions. If any
person becomes an acquiring person, the Board of Directors may,
at its option and subject to certain limitations, exchange one
share of common stock for each Right.
For purposes of the plan, a passive investor is a
person who (a) has either a Schedule 13G or
Schedule 13D, which states that such person has no intent
to seek control of the Company, on file with the SEC or
(b) acquires shares of common stock pursuant to trading
activities undertaken in the ordinary course of such
persons business and not with the purpose, nor the effect,
of exercising the power to direct or cause the direction of
management or policies or otherwise changing or influencing the
control of the Company.
The Rights have certain anti-takeover effects, in that they
would cause substantial dilution to a person or group that
attempts to acquire a significant interest in the Company on
terms not approved by the Board of Directors. In the event that
the Board of Directors determines a transaction to be in the
best interests of the Company and its stockholders, the Board of
Directors may redeem the Rights for $0.01 per share at any time
prior to a person or group becoming an acquiring person. The
Rights will expire on October 2, 2011.
F-38
BEARINGPOINT,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(in
thousands, except share and per share amounts)
|
|
13.
|
Stock-Based
Compensation
|
On January 31, 2000, the Company adopted the 2000 Long-Term
Incentive Plan (LTIP) pursuant to which the Company
is authorized to grant stock options and other awards to its
employees and directors.
On December 14, 2006, the plan was amended for certain
changes and clarifications. These changes included a
25,000,000 share increase in the number of shares
authorized for equity awards made under the plan; the
elimination of an evergreen formula used to
determine the number of shares available under the plan by
reference to a certain percentage of the Companys total
shares outstanding; revisions that allow awards made to the most
senior executives under the plan to qualify as performance-based
compensation under Section 162(m) of the Internal Revenue
Code (the Code); and revisions to comply with
Section 409A of the Code that will minimize the risk of
excise taxes being levied on plan participants in connection
with changes to the vesting, settlement, or delivery of shares
under the awards.
As of December 31, 2007, the LTIP had
92,179,333 shares of common stock that were authorized for
grants or awards in the form of stock options, restricted stock
awards, RSUs or PSUs (collectively stock units).
Stock options are granted with an exercise price equal to the
common stocks fair market value at the date of grant.
Generally, stock options granted have
10-year
contractual terms and vest over three to four years from the
date of grant. Stock-based awards may be issued under the LTIP
for consideration as determined by the Compensation Committee of
the Board of Directors. As of December 31, 2007, the
Company had stock options, restricted stock awards, RSUs and
PSUs outstanding.
The Company adopted the modified prospective transition method
permitted under SFAS 123(R) and consequently has not
adjusted results from prior years. Under the modified
prospective transition method, compensation costs associated
with awards for the year ended December 31, 2006 now
include the expense relating to the remaining unvested awards
granted prior to December 31, 2005 and the expense relating
to any awards issued subsequent to December 31, 2005. For
grants which vest based on certain specified performance
criteria, the grant date fair value of the shares is recognized
over the requisite period of performance once achievement of
criteria is deemed probable. For grants that vest through the
passage of time, the grant date fair value of the award is
recognized over the vesting period. The amount of stock-based
compensation recognized during the period is based on the value
of the portion of the award that is ultimately expected to vest.
SFAS 123(R) requires forfeitures to be estimated at the
time of grant and revised, if necessary, in subsequent periods
if actual forfeitures differ from those estimates. The pre-tax
effect of the change in accounting associated with the adoption
of SFAS 123(R) in 2006 was $26,653 and the application of a
forfeiture rate to compensation expense recognized in prior
years was not considered significant for disclosure. The
Consolidated Statements of Operations for the years ended
December 31, 2007, 2006 and 2005 include stock-based
compensation expense related to awards of stock options, RSUs,
PSUs, and
F-39
BEARINGPOINT,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(in
thousands, except share and per share amounts)
issuances under the Companys ESPP, including the
Companys BE an Owner program, and restricted stock awards,
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Stock options
|
|
$
|
7,473
|
|
|
$
|
21,097
|
|
|
$
|
546
|
|
RSUs
|
|
|
18,920
|
|
|
|
26,280
|
|
|
|
81,800
|
|
PSUs
|
|
|
66,590
|
|
|
|
|
|
|
|
|
|
ESPP and BE an Owner
|
|
|
3,736
|
|
|
|
5,556
|
|
|
|
|
|
Restricted stock awards
|
|
|
343
|
|
|
|
460
|
|
|
|
3,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
97,062
|
|
|
$
|
53,393
|
|
|
$
|
85,837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-40
BEARINGPOINT,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(in
thousands, except share and per share amounts)
The tax benefit related thereto for 2007, 2006 and 2005 was
approximately $3,080, $1,658 and $8,941, respectively.
The Company elected the alternative transition method as
outlined in FASB Staff Position 123(R)-3, Transition
Election Related to Accounting for the Tax Effects of
Share-Based Payment Awards, to calculate the pool of
excess tax benefits available to absorb tax deficiencies
recognized subsequent to the adoption of SFAS 123(R). As
the Company was in a net operating loss carryforward position,
there was no windfall tax benefit in 2006 and therefore, no
impact thereof.
The after-tax stock-based compensation impact of adopting
SFAS 123(R) for the year ended December 31, 2006 was
$25,709 and a $0.12 per share reduction to earnings per share.
Prior to the adoption of SFAS 123(R), the Company used the
intrinsic value method of accounting prescribed by APB 25 and
related interpretations, including FIN 44, Accounting
for Certain Transactions Involving Stock Compensation, for
its plans. Under this accounting method, stock option awards
that are granted with the exercise price at the current fair
value of the Companys common stock as of the date of the
award generally did not require compensation expense to be
recognized in the Consolidated Statements of Operations.
The following table illustrates the proforma effect on net loss
and loss per share had the Company applied the fair value
recognition provisions of SFAS 123 for the Companys
stock-based compensation plans for the period shown:
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31, 2005
|
|
|
Net loss
|
|
$
|
(721,643
|
)
|
Add back:
|
|
|
|
|
Total stock-based compensation expense recorded under intrinsic
value method for all stock awards, net of tax effects
|
|
|
85,837
|
|
Deduct:
|
|
|
|
|
Total stock-based compensation expense recorded under fair value
method for all stock awards, net of tax effects
|
|
|
(173,134
|
)
|
|
|
|
|
|
Pro forma net loss
|
|
$
|
(808,940
|
)
|
|
|
|
|
|
Loss per share:
|
|
|
|
|
Basic and diluted as reported
|
|
$
|
(3.59
|
)
|
Basic and diluted pro forma
|
|
$
|
(4.02
|
)
|
Certain of the Companys stock-based compensation awards
continue to vest and do not accelerate vesting upon retirement
or at the attainment of retirement eligibility; therefore, the
requisite service period subsequent to attaining such
eligibility is considered non-substantive. With the adoption of
SFAS 123(R), the Company recognizes compensation expense
related to stock-based awards granted on or after
January 1, 2006 over the shorter of the requisite service
period or the period to attainment of retirement eligibility.
Certain awards granted to retirement-eligible employees prior to
January 1, 2006 have not been accelerated and will continue
to be amortized over their original vesting periods, until
employment with the Company has terminated, at which point the
compensation expense associated with any remaining unvested
awards will be recognized. Had the Company adopted the
retirement eligibility provisions of SFAS 123(R) prior to
January 1, 2006, the
F-41
BEARINGPOINT,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(in
thousands, except share and per share amounts)
cumulative impact of the change in accounting would have been a
reduction to expense of $2,222 and $2,716 in 2006 and 2005 (pro
forma), respectively.
The fair value of each option award was estimated on the date of
grant using the Black-Scholes option pricing model. Beginning in
2005, the Company determined the expected volatility of the
options based on a blended average of the Companys
historical volatility and the volatility from its peer group,
due to the limited trading experience of the Company and its
current filing status. For 2007 and 2006 awards, the expected
life was approximated by averaging the vesting term and the
contractual term in accordance with the simplified
method described in SAB No. 107,
Share-Based Payment. The risk-free interest rate is
the yield currently available on U.S. Treasury zero-coupon
issues with a remaining term approximating the expected life
used as the input to the Black-Scholes model. The relevant data
used to determine the value of the stock option grants, in the
respective years, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Price
|
|
|
Risk-Free
|
|
|
|
|
|
Expected
|
|
|
|
Expected
|
|
|
Interest
|
|
|
Expected
|
|
|
Dividend
|
|
|
|
Volatility
|
|
|
Rate
|
|
|
Life
|
|
|
Yield
|
|
|
Year ended December 31, 2007
|
|
|
41.85
|
%
|
|
|
4.41
|
%
|
|
|
5.5
|
|
|
|
|
|
Year ended December 31, 2006
|
|
|
50.80
|
%
|
|
|
4.69
|
%
|
|
|
6
|
|
|
|
|
|
Year ended December 31, 2005
|
|
|
51.08
|
%
|
|
|
4.10
|
%
|
|
|
6
|
|
|
|
|
|
The grant date fair value of the Companys common stock
purchased or expected to be purchased under the ESPP was
estimated for the years ended December 31, 2007, 2006 and
2005 using the Black-Scholes option pricing model with an
expected volatility ranging between 30% to 70%, risk-free
interest rates ranging from 1.29% to 3.29%, an expected life
ranging from 6 to 24 months, and an expected dividend yield
of zero. For the years ended December 31, 2007, 2006 and
2005, the weighted average grant date fair value of shares
purchased under the ESPP was $6.66, $0, and $3.21, respectively.
On April 20, 2005, pursuant to Regulation Blackout
Trading Restriction, the Company announced there would be a
blackout period under the Companys 401(k) Plan with
respect to purchases of Company stock. Effective as of
September 14, 2006, the Company notified its directors,
executive officers and employees, that it had amended the 401(k)
Plan to permanently prohibit participant purchases and Company
contributions of Company stock under the 401(k) Plan. As a
result of this action, the blackout period under the 401(k) Plan
ended effective as of September 14, 2006.
On April 20, 2005, the Company sent notices to its
directors and executive officers notifying them that in
connection with the determination that investors should not rely
upon certain previously-issued financial statements, and until
the Company is current in the filing its SEC periodic reports,
the registration statements on
Form S-8
covering the issuances of the Companys common stock under
its LTIP and ESPP will not be available. ESPP participants would
not be permitted to purchase the Companys common stock
normally offered pursuant to the ESPP, and stock-based awards
under the LTIP would not be settled, as the Company could not
provide valid registration of shares delivered for resale. These
restrictions were lifted on October 23, 2007, when the
Company became current in the filing of its SEC periodic reports
and the registration statements on
Form S-8
became available.
F-42
BEARINGPOINT,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(in
thousands, except share and per share amounts)
The following table details the weighted-average remaining
contractual life of options outstanding at December 31,
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
of Options
|
|
|
Price
|
|
|
Life (Years)
|
|
|
Value
|
|
|
Outstanding at December 31, 2006
|
|
|
36,037,278
|
|
|
$
|
11.10
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
30,000
|
|
|
$
|
5.93
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(5,397,609
|
)
|
|
$
|
10.96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
|
30,669,669
|
|
|
$
|
11.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest at December 31, 2007
|
|
|
30,624,891
|
|
|
$
|
11.12
|
|
|
|
5.0
|
|
|
$
|
|
|
Exercisable at December 31, 2007
|
|
|
30,041,149
|
|
|
$
|
11.17
|
|
|
|
4.9
|
|
|
$
|
|
|
The weighted-average grant-date fair value of options granted
during the years 2007, 2006 and 2005 was $2.68, $4.70 and $4.57,
respectively. The total fair value of options vested was
$13,970, $28,596 and $87,519, respectively. No stock options
were exercised in 2007 and 2006. The aggregate intrinsic value
for stock options exercised during 2005 was $185 and the cash
received in association with these exercises was $1,127.
As of December 31, 2007, there was $368 of total
unrecognized compensation cost, net of expected forfeitures,
related to nonvested options. That cost is expected to be
recognized over a weighted-average period of one year.
During 2005, 2,000,000 stock options were granted with a
measurement date market price that was above the grant date
exercise price. As a result, the Company recognized expense of
$466 for the year ended December 31, 2005.
On December 13, 2005, the Company accelerated the vesting
of certain unvested and out-of-the-money stock
options with exercise prices equal to or greater than $9.57 per
share previously awarded to its employees (excluding executive
officers and directors) under the LTIP. The acceleration of
vesting was effective for stock options outstanding as of
December 13, 2005. Options to purchase approximately
2,900,000 shares of common stock, or approximately 21% of
the Companys outstanding unvested options, were subject to
the acceleration. The weighted average exercise price of the
options subject to the acceleration was $10.39, and the exercise
price of these options ranged from $9.58 to $21.17 per share,
with approximately 93.7% and 99.9% of such options scheduled to
vest in 2006 and 2007, respectively. The purpose of the
acceleration was to enable the Company to avoid recognizing
compensation expense associated with these options in future
periods in its Consolidated Statements of Operations, upon
adoption of SFAS 123(R). The Company believes that because
the accelerated options had exercise prices in excess of the
current market value of the Companys common stock, the
options had limited economic value and were not achieving their
original objective of incentive compensation and employee
retention.
F-43
BEARINGPOINT,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(in
thousands, except share and per share amounts)
On March 25, 2005, the Compensation Committee of the
Companys Board of Directors approved the issuance of up to
an aggregate of $165,000 in RSUs under the LTIP to the
Companys current managing directors (MDs) and a limited
number of key employees, and delegated to the Companys
officers the authority to grant these awards. The following
table summarizes the RSU activity in 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Number
|
|
|
Grant Date
|
|
|
|
of RSUs
|
|
|
Fair Value
|
|
|
Nonvested at December 31, 2006(1)
|
|
|
8,864,065
|
|
|
$
|
8.42
|
|
Granted
|
|
|
1,942,893
|
|
|
|
7.36
|
|
Vested
|
|
|
(2,431,254
|
)
|
|
|
8.34
|
|
Forfeited
|
|
|
(1,944,372
|
)
|
|
|
8.39
|
|
|
|
|
|
|
|
|
|
|
Nonvested at December 31, 2007(1)
|
|
|
6,431,332
|
|
|
$
|
8.14
|
|
|
|
|
|
|
|
|
|
|
Vested at December 31, 2007(1)
|
|
|
5,733,620
|
|
|
|
|
|
Outstanding at December 31, 2007(1)
|
|
|
12,164,952
|
|
|
|
|
|
|
|
|
(1)
|
|
Approximately 73,581 RSUs (net of
forfeitures) and 39,315 RSUs (net of forfeitures) have been
excluded from the December 31, 2006 and 2007 nonvested
balances, respectively, because they were awarded to recipients
in countries where local laws require a cash settlement.
Similarly, approximately 37,271 RSUs (net of forfeitures) and
76,586 RSUs (net of forfeitures) have been excluded from the
December 31, 2007 vested and outstanding balances,
respectively. Cash in the amount of $123 was used to settle
these RSUs in 2007.
|
In 2007, 8,223,021 shares of common stock were used to
settle RSUs. As of December 31, 2007, 11,297,233 RSUs and
112,111 RSUs were vested or expected to vest and exercisable,
respectively, with an aggregate intrinsic value of $31,971 and
$317, respectively. The weighted-average grant-date fair value
of RSUs granted during the years 2006 and 2005 was $8.48 and
$7.61, respectively. As of December 31, 2007, there was
$28,428 of total unrecognized compensation cost, net of expected
forfeitures, related to nonvested RSUs. That cost is expected to
be recognized over a weighted-average period of 2.2 years.
The total fair value of RSUs that vested, net of forfeitures,
during the years 2007, 2006 and 2005 was approximately $20,436,
$46,657 and $41,276, respectively. For RSU awards, the fair
value is fixed on the date of grant based on the number of RSUs
granted and the fair value of the Companys common stock on
the date of grant. RSUs granted during 2007 generally either:
(i) cliff vest and settle three years from the grant date;
or (ii) vest and settle over four years from the date of
grant.
Certain RSU awards have performance vesting criteria, for which
the Company has determined achievement to be probable. None of
the common stock equivalents underlying these RSUs are
considered to be issued or outstanding common stock, as issuance
is dependent on various vesting and settlement terms as noted
above.
On February 2, 2007, the Compensation Committee of the
Companys Board of Directors approved the issuance of up to
25,000,000 PSUs to the Companys managing directors and
other high-performing senior-
F-44
BEARINGPOINT,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(in
thousands, except share and per share amounts)
level employees, including its executive officers, under its
2000 Amended and Restated LTIP. Activity for PSUs granted under
the LTIP during 2007 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Number
|
|
|
Grant Date
|
|
|
|
of PSUs
|
|
|
Fair Value
|
|
|
Nonvested and outstanding at December 31, 2006
|
|
|
|
|
|
$
|
|
|
Granted
|
|
|
22,381,132
|
|
|
|
12.46
|
|
Forfeited
|
|
|
(4,253,907
|
)
|
|
|
12.16
|
|
|
|
|
|
|
|
|
|
|
Nonvested and outstanding at December 31, 2007(1)
|
|
|
18,127,225
|
|
|
$
|
12.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Excludes approximately 31,969 PSUs
awarded to recipients in China where local laws require a cash
settlement.
|
The PSU awards, each of which initially represents the right to
receive at the time of settlement one share of the
Companys common stock, will vest on December 31,
2009. Generally, for any PSU award to vest, two
performance-based metrics must be achieved for the performance
period beginning on (and including) February 2, 2007 and
ending on (and including) December 31, 2009 (the
Performance Period):
(i) the Company must first achieve a compounded average
annual growth target in consolidated business unit
contribution; and
(ii) total shareholder return (TSR) for shares
of the Companys common stock must be at least equal to the
25th percentile of TSR of the Standard &
Poors 500 (the S&P 500) in order for any
portion of the award to vest. Depending on the Companys
TSR performance relative to those companies that comprise the
S&P 500, the PSU awards will vest on December 31, 2009
at percentages varying from 0% to 250% of the number of PSU
awards originally awarded.
An employees continuous employment with the Company
(except in cases of death, disability or retirement, or certain
changes of control as defined in the agreements governing the
PSU awards) is also required for vesting of a particular
employees PSU award. The PSU awards will be settled at
various dates from 2010 to 2016.
The fair value of each PSU award was estimated on the date of
grant using the Monte Carlo lattice-pricing model and applying
the following assumptions:
|
|
|
|
|
a performance period of February 2, 2007 to
December 31, 2009;
|
|
|
|
a grant date closing stock price equal to the closing price of a
share of the Companys common stock as reported on the New
York Stock Exchange;
|
|
|
|
a risk free rate using a term structure over the performance
period; and
|
|
|
|
a volatility assumption using a term structure over the
performance period incorporating an average blended rate of the
Companys historical volatility and implied volatility from
the Companys peer group within the S&P 500.
|
F-45
BEARINGPOINT,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(in
thousands, except share and per share amounts)
As of December 31, 2007, 15,548,487 PSUs were vested or
expected to vest with an aggregate intrinsic value of $33,118.
As of December 31, 2007, there was $137,016 of total
unrecognized compensation cost, net of expected forfeitures,
related to nonvested PSUs. That cost is expected to be
recognized over a weighted-average period of 2.0 years.
Under the LTIP, the Company has the discretion to grant
restricted stock to certain of its officers and employees. In
connection with various Andersen Business Consulting
acquisitions, the Company committed to the issuance of
approximately 3,000,000 shares of common stock (net of
forfeitures) to former partners of those practices as a
retentive measure. The stock awards have no purchase price and
were issued as to one-third of the shares on the first three
anniversaries of the acquisition of the relevant consulting
practice, so long as the recipient remained employed by the
Company. Compensation expense was recorded ratably over the
three-year service period beginning in July 2002. In July 2005,
the Company settled the third and final settlement of the stock
award by paying the recipients $4,929 in cash. This payment was
recorded as a reduction to additional paid-in capital. As of
December 31, 2005, 2,100,998 shares of common stock
had been issued.
The Company has granted restricted stock to non-employee members
of the Board of Directors as annual grants under the LTIP, in
connection with their annual service to the Company. The awards
are fully vested upon grant, but are subject to transfer
restrictions defined in the LTIP until the recipient is no
longer a member of the Board of Directors. Under the 2000
Amended and Restated LTIP, automatic grants ceased as of
January 1, 2007. The Company may, in its discretion,
provide discretionary grants. In May 2007, the Board of
Directors approved grants of an aggregate of 48,000 shares
of restricted stock to its non-employee directors. The purpose
of these grants was to provide additional compensation to
non-employee directors for their service on the Board of
Directors during 2005. During the year ended December 31,
2006, the Company granted 56,000 shares of restricted stock
to non-employee directors. Since the Company did not hold its
2005 annual meeting of stockholders, no restricted stock awards
were made to the Board of Directors in 2005.
|
|
|
Employee
Stock Purchase Plan
|
The Companys ESPP was adopted on October 12, 2000 and
allows eligible employees to purchase shares of the
Companys common stock at a discount, up to a maximum of
$25 at fair value, through accumulated payroll deductions of 1%
to 15% of their compensation. Under the ESPP, shares of the
Companys common stock were purchased at 85% of the lesser
of the fair market value at the beginning of the
24-month
offering period (the Look-Back Purchase Price), and
the fair market value at the end of each six-month purchase
period ending on July 31 and January 31, respectively. In
2005, the Board of Directors amended the ESPP to remove the
24-month
look-back purchase price for all future offering periods under
the ESPP. Future offering periods will be
6-months in
length and the purchase price for the Companys common
stock will be calculated at a 15% discount from the closing
price on the last day of each
6-month
offering period. The purchase price of the Companys common
stock for the purchase period in effect at the time of such
amendment was grandfathered from this change (i.e., the purchase
price was the lower of the look-back purchase price and the fair
market value at the end of the purchase period) (the
Grandfathered Offering Period). On April 18,
2007, the Board of Directors amended the ESPP to eliminate the
look-back purchase price for the Grandfathered Offering Period.
As amended, the purchase price for the Grandfathered Offering
Period was 85% of the fair
F-46
BEARINGPOINT,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(in
thousands, except share and per share amounts)
market value of the Companys common stock at the end of
the Grandfathered Offering Period. During the years ended
December 31, 2007, 2006 and 2005, employees purchased a
total of 3,103,858, 0 and 2,053,154 shares for $12,374, $0
and $13,769, respectively. As of December 31, 2007, no
shares of common stock remained available for issuance and no
employee contributions were held by the Company because there
was not an open offering period at that time (the Grandfathered
Offering Period closed on October 29, 2007 and the next
offering period opened on February 1, 2008).
In June 2005, the Company announced that certain employees below
the managing director level were eligible to participate in its
BE an Owner Program. Under this program, as amended, employees
were intended to receive a stock grant equivalent to 3% of their
annual salaries as of October 3, 2005 under the ESPP. In
January 2006, the Company made a cash payment to each eligible
employee in an amount equal to 1.5% of that employees
annual salary as of October 3, 2005 (which payment was
approximately $18,456 in the aggregate). In October 2007, the
Company made, when it became current in the filing of its SEC
periodic reports, a special contribution of approximately
$10,269 representing the remaining 1.5% of eligible
employees annual salary as of October 3, 2005 into
his or her ESPP account, all of which (with the exception of
$121 settled in cash, as required by local country law) was used
to purchase 2,545,523 shares of the Companys common
stock at a 15% discount. The 15% discount offered to employees
under these plans represents a cost to the Company that must be
recognized in the Consolidated Statements of Operations in
accordance with SFAS 123(R).
The Company reported a loss before taxes of $290,490, including
net foreign income of $141,096, for the year ended
December 31, 2007. The Company reported a loss before taxes
of $181,043, including net foreign income of $13,495, for the
year ended December 31, 2006. The Company reported a loss
before taxes of $599,522, including net foreign losses of
$173,046, for the year ended December 31, 2005.
The components of income tax expense (benefit) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
10,972
|
|
|
$
|
4,855
|
|
|
$
|
7,437
|
|
State and local
|
|
|
1,100
|
|
|
|
1,199
|
|
|
|
1,400
|
|
Foreign
|
|
|
49,304
|
|
|
|
27,648
|
|
|
|
58,335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
61,376
|
|
|
|
33,702
|
|
|
|
67,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
|
|
|
|
|
|
|
|
40,242
|
|
State and local
|
|
|
|
|
|
|
|
|
|
|
15,045
|
|
Foreign
|
|
|
10,857
|
|
|
|
(1,305
|
)
|
|
|
(338
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
|
10,857
|
|
|
|
(1,305
|
)
|
|
|
54,949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
72,233
|
|
|
$
|
32,397
|
|
|
$
|
122,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-47
BEARINGPOINT,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(in
thousands, except share and per share amounts)
The following table presents the principal reasons for the
difference between the effective income tax rate on income from
continuing operation and the U.S. Federal statutory income
tax rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
U.S. federal statutory income tax rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
Nondeductible goodwill impairment
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
(6.9
|
)%
|
Change in valuation allowance
|
|
|
(42.4
|
)%
|
|
|
(40.2
|
)%
|
|
|
(37.2
|
)%
|
Foreign taxes
|
|
|
(6.0
|
)%
|
|
|
2.1
|
%
|
|
|
(2.3
|
)%
|
Nondeductible meals and entertainment expense
|
|
|
(2.3
|
)%
|
|
|
(4.3
|
)%
|
|
|
(1.1
|
)%
|
State taxes, net of federal benefit
|
|
|
4.3
|
%
|
|
|
3.7
|
%
|
|
|
2.1
|
%
|
Foreign recapitalization and restructuring
|
|
|
(5.9
|
)%
|
|
|
(3.0
|
)%
|
|
|
(5.5
|
)%
|
Income tax reserve
|
|
|
(4.3
|
)%
|
|
|
(4.6
|
)%
|
|
|
(3.1
|
)%
|
Non-deductible interest
|
|
|
(0.9
|
)%
|
|
|
(2.1
|
)%
|
|
|
(0.5
|
)%
|
Foreign dividends
|
|
|
(0.1
|
)%
|
|
|
(2.6
|
)%
|
|
|
(0.5
|
)%
|
Other, net
|
|
|
(2.3
|
)%
|
|
|
(1.9
|
)%
|
|
|
(0.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
(24.9
|
)%
|
|
|
(17.9
|
)%
|
|
|
(20.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The temporary differences that give rise to a significant
portion of deferred income tax assets and liabilities are as
follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Deferred income tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
287,646
|
|
|
$
|
263,531
|
|
Accrued compensation
|
|
|
39,624
|
|
|
|
33,329
|
|
Reserve for claims
|
|
|
3,344
|
|
|
|
23,323
|
|
Equity-based compensation
|
|
|
58,805
|
|
|
|
39,126
|
|
Accrued liabilities
|
|
|
32,299
|
|
|
|
23,931
|
|
Other
|
|
|
73,472
|
|
|
|
69,945
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred income taxes
|
|
|
495,190
|
|
|
|
453,185
|
|
Less valuation allowance
|
|
|
(468,563
|
)
|
|
|
(408,149
|
)
|
|
|
|
|
|
|
|
|
|
Total net deferred income tax assets
|
|
|
26,627
|
|
|
|
45,036
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax liabilities:
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
5,937
|
|
|
|
13,416
|
|
Other
|
|
|
|
|
|
|
245
|
|
Revenue recognition
|
|
|
5,334
|
|
|
|
|
|
Foreign currency translation
|
|
|
3,259
|
|
|
|
10,184
|
|
|
|
|
|
|
|
|
|
|
Total deferred income tax liabilities
|
|
|
14,530
|
|
|
|
23,845
|
|
|
|
|
|
|
|
|
|
|
Net deferred income tax asset
|
|
$
|
12,097
|
|
|
$
|
21,191
|
|
|
|
|
|
|
|
|
|
|
F-48
BEARINGPOINT,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(in
thousands, except share and per share amounts)
These deferred tax assets and liabilities are presented on the
Consolidated Balance Sheets as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Current deferred tax assets
|
|
$
|
11,521
|
|
|
$
|
7,621
|
|
Non-current deferred tax assets
|
|
|
25,179
|
|
|
|
41,663
|
|
Current deferred tax liabilities
|
|
|
(15,022
|
)
|
|
|
(20,109
|
)
|
Non-current deferred tax liabilities
|
|
|
(9,581
|
)
|
|
|
(7,984
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12,097
|
|
|
$
|
21,191
|
|
|
|
|
|
|
|
|
|
|
The Company had U.S. net operating loss carryforwards at
December 31, 2007 of approximately $564,294, which expire
at various dates beginning in 2010 through 2027. The utilization
of these net operating loss carryforwards is subject to
limitations. The Company believes that it is more likely than
not that these net operating loss carryforwards will not be
utilized. The Company also had foreign net operating loss
carryforwards at December 31, 2007 of approximately
$235,030, which expire at various dates between 2008 and 2027
and $253,890 that carryforward indefinitely as provided by the
applicable foreign law. A valuation allowance has been recorded
due to the uncertainty of the recognition of certain deferred
tax assets, primarily the net operating loss carryforwards of
U.S., state, and certain foreign subsidiaries. The net changes
in the valuation allowance for the years ended December 31,
2007, 2006 and 2005 were $60,414, $69,357, and $224,017,
respectively.
A valuation allowance is provided to offset any deferred tax
assets if, based upon the available evidence, it is more likely
than not that some or all of the deferred tax assets will not be
realized. The Companys valuation allowance of $468,563 and
$408,149 as of December 31, 2007 and 2006, respectively, on
its deferred tax asset primarily relates to the uncertainty
surrounding the realization of U.S., state and certain foreign
net operating loss carryforwards and foreign tax credit
carryforwards. Of these amounts, $2,100 related to amounts
recorded in purchase accounting which, if realized, would reduce
goodwill in the future.
Section 382 of the Internal Revenue Code limits the use of
a corporations net operating losses and certain other tax
benefits following a change in ownership of the corporation.
Section 382 rules governing when a change in ownership
occurs are complex and subject to interpretation; however, a
change in ownership generally occurs when there has been a
cumulative change in the stock ownership of the corporation held
by 5% stockholders of more than 50 percentage points over
an applicable three-year period.
To the extent the Company has not experienced a change in
ownership, subsequent changes in the stock ownership of the
Company could result in a change in ownership that would trigger
the limitations of Section 382. If the Company were to
experience a change in ownership under Section 382, the
Company may be limited in its ability to fully utilize its net
operating loss tax assets to offset future taxable income.
The Company has not provided for U.S. income taxes on the
unremitted earnings of certain foreign subsidiaries as these
earnings are considered to be permanently reinvested. These
earnings amounted to approximately $449,285, $300,315 and
$226,030 for the years ended December 31, 2007, 2006 and
2005, respectively. It is not practicable to compute the
estimated deferred tax liability on these earnings.
Effective January 1, 2007, the Company adopted the
provisions of FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes (FIN 48).
FIN 48 supersedes SFAS No. 5, Accounting
for
F-49
BEARINGPOINT,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(in
thousands, except share and per share amounts)
Contingencies, as it relates to income tax liabilities and
changes the standard of recognition that a tax contingency is
required to meet before being recognized in the financial
statements. As a result of the adoption of FIN 48, the
Company recognized an increase of approximately $119,845 in its
liability for unrecognized tax benefits, which was reflected as
an increase to the January 1, 2007 balance of accumulated
deficit. A reconciliation of the total amounts of unrecognized
tax benefits at the beginning and end of the period is as
follows:
|
|
|
|
|
Balance at January 1, 2007
|
|
$
|
282,822
|
|
Increase as a result of tax positions taken during the current
period
|
|
|
30,446
|
|
Increase as a result of tax positions taken during a prior period
|
|
|
26,296
|
|
Decrease as a result of tax positions taken during a prior period
|
|
|
(14,475
|
)
|
Lapse of applicable statute of limitations
|
|
|
(9,160
|
)
|
Settlements
|
|
|
(968
|
)
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
314,961
|
|
|
|
|
|
|
If recognized, $220,896 and $243,308 would be recognized as a
reduction of income tax expense impacting the effective income
tax rate as of January 1, 2007 and December 31, 2007,
respectively.
As of December 31, 2007 and 2006, the Company had income
tax reserves accrued in the financial statements in the amounts
of $243,308 and $108,499, respectively. This resulted in an
increase to the reserve for tax exposures of $134,809 and
$18,969 in 2007 and 2006, respectively. The components of the
tax reserve increase in 2007 were $119,845 charged to
accumulated deficit from the adoption of FIN 48, $12,491
charged to income tax expense and $2,473 charged to other
accounts. The components of the tax reserve increase in 2006
were $13,795 charged to income tax expense and $5,174 charged to
other accounts.
Final determination of a significant portion of the
Companys tax liabilities that will be effectively settled
remains subject to ongoing examination by various taxing
authorities, including the Internal Revenue Service. The Company
is actively pursuing strategies to favorably settle or resolve
these liabilities for unrecognized tax benefits. If the Company
is successful in mitigating these liabilities, in whole or in
part, the impact will be recorded as an adjustment to income tax
expense in the period of settlement.
It is reasonably possible that changes to the Companys
global unrecognized tax benefits could be significant, however
due to the uncertainty regarding the timing of completion of
audits and possible outcomes, a current estimate of the range of
increases or decreases that may occur within the next twelve
months cannot be made.
The Company is subject to U.S. federal income tax as well
as income tax of multiple state and foreign jurisdictions.
Germany and Japan are the Companys most significant
foreign taxing jurisdictions. The Company has concluded
substantially all U.S. federal income tax matters through
June 30, 2001, excluding an open audit of a $4,900 federal
income tax refund claim. The statute of limitations is open for
all remaining years. The Company has concluded all German
federal income tax matters through December 31, 2000. The
statute of limitations is open for all subsequent income tax
periods. The Company is currently under audit in Germany for the
tax periods ended December 31, 2001 and December 31,
2002. The Company has completed Japanese income tax matters on
all open periods through December 31, 2006.
During 2005, the Internal Revenue Service commenced a federal
income tax examination for the tax
F-50
BEARINGPOINT,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(in
thousands, except share and per share amounts)
periods ended June 30, 2001, June 30, 2003,
December 31, 2003, December 31, 2004 and
December 31, 2005. During 2007, the Internal Revenue
Service opened the examination for the tax period ended
June 30, 2002. It is not known at this time whether there
will be any adjustments to the refund claims already filed or to
taxes paid in any other years as a result of the examination by
the Internal Revenue Service. The Company believes that it has
adequate reserves for any items that may result in an adjustment
as a result of the Internal Revenue Services income tax
examination and the examinations in our foreign jurisdictions.
The Companys policy is to recognize interest and penalties
related to income tax matters in income tax expense. The Company
had $52,565 accrued for interest and penalties at adoption of
FIN 48 and $64,991 at December 31, 2007. The Company
recorded $12,426 in interest and penalties during the year ended
December 31, 2007.
On August 14, 2007, the German Business Tax Reform 2008 was
signed and the legislative process was finalized on
August 17, 2007 with the official publication of the law.
This new legislation changes the German Federal Corporate Tax
Rate. The Company has analyzed the impact of these changes on
its deferred tax assets and liabilities as of the enactment
date. During the year ended December 31, 2007, the Company
recorded a net increase to income tax expense of $3,100 to
reflect the impact of the tax rate change.
In 2006, the Company filed a federal income tax refund claim
related to the tax year ended December 31, 2005 in the
amount of $6,300 regarding a net operating loss carryback. The
Company received the federal income tax refund before
December 31, 2006. In 2005, the Company filed federal
refund claims related to December 31, 2004 and prior years
in the amount of $20,400 regarding net operating loss
carrybacks, foreign tax credit carrybacks and corrections of
previous amounts reported and other miscellaneous items. In
December 2005, the Company received from the Internal Revenue
Service tentative refunds amounting to $15,500 related to the
December 31, 2004 net operating loss carryback. The
remaining refund claims are under review by the Internal Revenue
Service. These refunds are subject to review by the
U.S. Congress Joint Committee on Taxation.
|
|
15.
|
Transactions
with KPMG LLP
|
Effective January 31, 2000, the Company and KPMG LLP
entered into an outsourcing agreement whereby the Company
received and was charged for services performed by KPMG LLP,
which was amended and restated effective July 1, 2000 to
eliminate the service related costs that were not required. On
February 13, 2001, the Company and KPMG LLP entered into a
transition services agreement whereby the Company received and
was charged for infrastructure services on substantially the
same basis as the amended and restated outsourcing agreement.
The allocation of costs to the Company for such services was
based on actual costs incurred by KPMG LLP and were allocated
among KPMG LLPs assurance and tax businesses and the
Company primarily on the basis of full-time equivalent personnel
and actual usage (specific identification). With regard to
facilities costs, the Company and KPMG LLP have entered into
arrangements pursuant to which the Company subleases from KPMG
LLP office space that was formally allocated to the Company
under the outsourcing agreement. The terms of the arrangements
are substantially equivalent to those under the original
outsourcing agreement, and extend over the remaining period
covered by the lease agreement between KPMG LLP and the lessor.
Effective October 1, 2002, the Company and KPMG LLP entered
into an outsourcing services agreement under which KPMG LLP
provides the Company certain services relating to office space.
These services covered by the outsourcing services agreement had
previously been provided under the transition services
F-51
BEARINGPOINT,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(in
thousands, except share and per share amounts)
agreement. The services were provided for three years at a cost
that is less than the cost for comparable services under the
transition services agreement.
The transition services agreement and outsourcing services
agreement expired on February 13, 2005 and October 1,
2005, respectively. The Company continues to sublease office
space from KPMG LLP after the expiration of the transition
services agreement under operating lease agreements. In
connection with the expiration of the transition services
agreement, the Company also agreed to settle a separate
arrangement under which it pays KPMG LLP for the use of
occupancy-related assets in the office facilities subleased by
the Company from KPMG LLP. As such, during July 2005, the
Company paid KPMG LLP $17,356 for its share of the cost of the
occupancy-related assets that related to office locations that
it subleased from KPMG LLP. Approximately $9,660 of the total
$17,356 paid to KPMG LLP related to office locations that were
previously abandoned in connection with the Companys
office space reduction effort. Accordingly, the Company has
reserved for this amount as part of its lease and facilities
restructuring charges recorded during the year ended
December 31, 2005. The Company classified the remaining
$7,696 paid to KPMG LLP as a prepaid service cost, which are
amortized over the remaining term of its respective sublease
agreements with KPMG LLP. As of December 31, 2007, the
remaining amount to be expensed was $1,219. For a discussion
regarding the settlement with KPMG LLP, see Note 11,
Commitments and Contingencies.
Total expenses allocated to the Company under the transition
services agreement and outsourcing services agreement with
regard to occupancy costs and other infrastructure services are
as follows:
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
Occupancy costs
|
|
$
|
2,760
|
|
Other infrastructure service costs
|
|
|
3,236
|
|
|
|
|
|
|
Total
|
|
$
|
5,996
|
|
|
|
|
|
|
Amounts included in:
|
|
|
|
|
Other costs of service
|
|
$
|
2,760
|
|
Selling, general and administrative expenses
|
|
|
3,236
|
|
|
|
|
|
|
|
|
$
|
5,996
|
|
|
|
|
|
|
There were no expenses allocated to the Company relating to the
transition services agreement or outsourcing services agreement
during the year ended December 31, 2007 and 2006 as KPMG
LLP was not considered a related party during the respective
periods.
|
|
16.
|
Employee
Benefit Plans
|
The Company sponsors a qualified 401(k) defined contribution
plan (the 401(k) Plan) covering substantially all of
its employees. Participants are permitted (subject to a maximum
permissible contribution under the Internal Revenue Code for
calendar year 2007 of $16) to contribute up to 50% of their
pre-tax earnings to the 401(k) Plan. Employees who make salary
reduction contributions during the plan year and who are
employed on the last day of the 401(k) Plan year receive a
Company matching contribution of 25% of the
F-52
BEARINGPOINT,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(in
thousands, except share and per share amounts)
first 6% of pre-tax eligible compensation contributed to the
401(k) Plan, and, at the discretion of the Company, may receive
an additional discretionary contribution of up to 25% of the
first 6% of pre-tax eligible compensation contributed to the
plan. Matching contributions are calculated once a year on the
last day of the plan year. Effective May 1, 2006, the
plans year end was changed to December 31 from
April 30. In addition, the plan does not restrict the
ability of employees to dispose of any of the Companys
common stock that are held in their retirement funds (see
Note 13, Stock-Based Compensation). For the
years ended December 31, 2006 and 2005, Company-matching
contributions made, net of forfeitures, were $7,464 and $7,311,
respectively. For the year ended December 31, 2007, the
Company has accrued, net of forfeitures, $7,422 for
Company-matching contributions to the 401(k) Plan.
|
|
|
Pension
and Postretirement Benefits
|
The Company has both funded and unfunded noncontributory defined
benefit pension plans that provide benefits based on years of
service and salary. Pension coverage, which is often governed by
local statutory requirements, is provided under the various
plans.
The Company also offers a postretirement medical plan to the
majority of its full-time U.S. employees and managing
directors who meet specific eligibility requirements.
For the years ended December 31, 2007, 2006 and 2005, the
pension benefit plans and the postretirement medical plan had a
measurement date of December 31.
F-53
BEARINGPOINT,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(in
thousands, except share and per share amounts)
The following schedules provide information concerning the
pension and postretirement medical plans held by the Company:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plans
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Components of net periodic pension cost
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
|
6,613
|
|
|
|
7,166
|
|
|
$
|
6,362
|
|
Interest cost
|
|
|
4,863
|
|
|
|
4,429
|
|
|
|
4,167
|
|
Expected return on plan assets
|
|
|
(998
|
)
|
|
|
(1,075
|
)
|
|
|
(1,172
|
)
|
Amortization of loss
|
|
|
675
|
|
|
|
1,026
|
|
|
|
16
|
|
Amortization of prior service cost
|
|
|
396
|
|
|
|
635
|
|
|
|
774
|
|
Curtailment
|
|
|
|
|
|
|
120
|
|
|
|
(833
|
)
|
Settlement
|
|
|
|
|
|
|
(365
|
)
|
|
|
(232
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost
|
|
$
|
11,549
|
|
|
$
|
11,936
|
|
|
$
|
9,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement Medical Plan
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Components of postretirement medical cost
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
2,471
|
|
|
$
|
1,922
|
|
|
$
|
1,257
|
|
Interest cost
|
|
|
866
|
|
|
|
735
|
|
|
|
572
|
|
Amortization of losses
|
|
|
51
|
|
|
|
156
|
|
|
|
73
|
|
Amortization of prior service cost
|
|
|
478
|
|
|
|
478
|
|
|
|
478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic postretirement medical cost
|
|
$
|
3,866
|
|
|
$
|
3,291
|
|
|
$
|
2,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-54
BEARINGPOINT,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(in
thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement
|
|
|
|
|
|
|
Medical
|
|
|
|
Pension Plans
|
|
|
Plan
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Change in projected benefit obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
119,159
|
|
|
$
|
112,542
|
|
|
$
|
15,073
|
|
|
$
|
13,204
|
|
Service cost
|
|
|
6,612
|
|
|
|
7,166
|
|
|
|
2,471
|
|
|
|
1,922
|
|
Interest cost
|
|
|
4,863
|
|
|
|
4,428
|
|
|
|
866
|
|
|
|
736
|
|
Plan participants contributions
|
|
|
678
|
|
|
|
637
|
|
|
|
196
|
|
|
|
188
|
|
Curtailment(1)
|
|
|
|
|
|
|
(69
|
)
|
|
|
|
|
|
|
|
|
Benefits paid
|
|
|
(2,412
|
)
|
|
|
(1,609
|
)
|
|
|
(270
|
)
|
|
|
(151
|
)
|
Administrative expense
|
|
|
(138
|
)
|
|
|
(128
|
)
|
|
|
|
|
|
|
|
|
Actuarial (gain) loss
|
|
|
(16,854
|
)
|
|
|
(8,372
|
)
|
|
|
(2,907
|
)
|
|
|
(826
|
)
|
Settlement(1)
|
|
|
|
|
|
|
(6,986
|
)
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes
|
|
|
12,113
|
|
|
|
11,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation at end of year
|
|
$
|
124,021
|
|
|
$
|
119,159
|
|
|
$
|
15,429
|
|
|
$
|
15,073
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
22,235
|
|
|
$
|
24,332
|
|
|
$
|
|
|
|
$
|
|
|
Actual return on plan assets
|
|
|
260
|
|
|
|
664
|
|
|
|
|
|
|
|
|
|
Employer contributions
|
|
|
3,874
|
|
|
|
3,440
|
|
|
|
74
|
|
|
|
(37
|
)
|
Employee contributions
|
|
|
678
|
|
|
|
637
|
|
|
|
196
|
|
|
|
188
|
|
Benefits paid
|
|
|
(2,412
|
)
|
|
|
(1,609
|
)
|
|
|
(270
|
)
|
|
|
(151
|
)
|
Administrative expense
|
|
|
(138
|
)
|
|
|
(128
|
)
|
|
|
|
|
|
|
|
|
Settlement(1)
|
|
|
|
|
|
|
(6,986
|
)
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes
|
|
|
1,848
|
|
|
|
1,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
$
|
26,345
|
|
|
$
|
22,235
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of funded status
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status
|
|
$
|
(97,676
|
)
|
|
$
|
(96,924
|
)
|
|
$
|
(15,429
|
)
|
|
$
|
(15,073
|
)
|
Unrecognized loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized prior service cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(97,676
|
)
|
|
$
|
(96,924
|
)
|
|
$
|
(15,429
|
)
|
|
$
|
(15,073
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in Accumulated Other Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost
|
|
$
|
3,574
|
|
|
$
|
4,896
|
|
|
$
|
1,548
|
|
|
$
|
2,026
|
|
Net (gain) loss
|
|
|
(3,589
|
)
|
|
|
6,510
|
|
|
|
(531
|
)
|
|
|
2,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accumulated other comprehensive (income) loss
|
|
$
|
(15
|
)
|
|
$
|
11,406
|
|
|
$
|
1,017
|
|
|
$
|
4,452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent assets
|
|
$
|
2,460
|
|
|
$
|
231
|
|
|
$
|
|
|
|
$
|
|
|
Current liabilities
|
|
|
(2,172
|
)
|
|
|
(1,821
|
)
|
|
|
(189
|
)
|
|
|
(229
|
)
|
Noncurrent liabilities
|
|
|
(97,964
|
)
|
|
|
(95,334
|
)
|
|
|
(15,240
|
)
|
|
|
(14,844
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(97,676
|
)
|
|
$
|
(96,924
|
)
|
|
$
|
(15,429
|
)
|
|
$
|
(15,073
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated benefit obligation
|
|
$
|
110,065
|
|
|
$
|
105,894
|
|
|
$
|
15,429
|
|
|
$
|
15,073
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The settlement and curtailment
related to a decrease in participants in the Switzerland Plan
due to a reduction in workforce.
|
F-55
BEARINGPOINT,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(in
thousands, except share and per share amounts)
As of December 31, 2007, the Switzerland pension plan had a
fair value of assets in excess of the projected benefit
obligation of $2,460. The German pension plan had a projected
benefit obligation in excess of the fair value of assets of
$94,685. During the year, the Company reclassified $639 from
accumulated other comprehensive income to expense for its German
pension and $529 for its postretirement medical plan.
Effective July 23, 2007, the Company amended its defined
benefit pension plans in Germany to no longer accept new
participants.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
|
|
|
|
|
|
|
Plans
|
|
|
Postretirement Medical Plan
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Weighted-average assumptions used to determine benefit
obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
5.1
|
%
|
|
|
4.2
|
%
|
|
|
6.1
|
%
|
|
|
5.8
|
%
|
Rate of compensation increase
|
|
|
3.0
|
%
|
|
|
3.0
|
%
|
|
|
|
|
|
|
|
|
Weighted-average assumptions used to determine net periodic
benefit cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
4.2
|
%
|
|
|
4.0
|
%
|
|
|
5.8
|
%
|
|
|
5.8
|
%
|
Expected long-term return on plan assets
|
|
|
4.5
|
%
|
|
|
4.5
|
%
|
|
|
|
|
|
|
|
|
Rate of compensation increase
|
|
|
3.0
|
%
|
|
|
3.0
|
%
|
|
|
|
|
|
|
|
|
The Companys target allocation is 31% equities, 13% real
estate and 56% bonds. This target allocation is used in
conjunction with historical returns on these asset categories,
current market conditions and future expectations in order to
determine an appropriate expected long-term return on plan
assets. The investment strategy with respect to the pension
assets is to achieve a long-term rate of return to satisfy
current and future plan liabilities while minimizing risks. The
weighted average asset allocations are as follows:
|
|
|
|
|
|
|
|
|
|
|
Pension Plan
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Asset category
|
|
|
|
|
|
|
|
|
Bonds
|
|
|
51.0
|
%
|
|
|
49.0
|
%
|
Equities
|
|
|
31.0
|
|
|
|
30.0
|
|
Real estate
|
|
|
13.0
|
|
|
|
14.0
|
|
Other
|
|
|
5.0
|
|
|
|
7.0
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
F-56
BEARINGPOINT,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(in
thousands, except share and per share amounts)
The benefit payments are expected to be paid from the pension
and postretirement medical plans in the following years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement
|
|
|
|
Pension Plans
|
|
|
Medical Plan
|
|
|
2008
|
|
$
|
3,616
|
|
|
$
|
189
|
|
2009
|
|
|
3,805
|
|
|
|
266
|
|
2010
|
|
|
4,022
|
|
|
|
369
|
|
2011
|
|
|
4,237
|
|
|
|
462
|
|
2012
|
|
|
4,462
|
|
|
|
573
|
|
Years
2013-2017
|
|
|
26,913
|
|
|
|
6,314
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
47,055
|
|
|
$
|
8,173
|
|
|
|
|
|
|
|
|
|
|
The assumed health care cost trends for the postretirement
medical plan are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Health care cost trend rate assumed for next year
|
|
|
9.0
|
%
|
|
|
9.0
|
%
|
Rate to which the cost trend rate is assumed to decline (the
ultimate trend rate)
|
|
|
5.0
|
%
|
|
|
5.0
|
%
|
Year that the rate reaches the ultimate trend rate
|
|
|
2016
|
|
|
|
2015
|
|
Assumed health care cost trend rates have a significant effect
on the amounts reported for the health care plans. A
one-percentage-point change in assumed health care cost trend
rates would have the following effects:
|
|
|
|
|
|
|
|
|
|
|
1%-Point
|
|
|
1%-Point
|
|
|
|
Increase
|
|
|
Decrease
|
|
|
Effect on total service and interest cost
|
|
$
|
652
|
|
|
$
|
(535
|
)
|
Effect on Postretirement Benefit Obligation
|
|
$
|
2,529
|
|
|
$
|
(2,108
|
)
|
The Company expects to contribute $3,805 to its pension plans
and postretirement medical plan in the year ending
December 31, 2008. The Company has other employee benefit
pension plans outside the U.S. that are not included in the
tables above for which the liability was $5,988 and $5,702 as of
December 31, 2007 and 2006, respectively.
Effective December 31, 2006, the Company adopted the
provisions of SFAS 158. SFAS 158 requires the
recognition of the funded status of the pension plans and
non-pension postretirement benefit plans as an asset or a
liability in the Consolidated Balance Sheets. The funded status
is measured as the difference between the projected benefit
obligation and the fair value of plan assets.
F-57
BEARINGPOINT,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(in
thousands, except share and per share amounts)
The following table presents the incremental effects on the
Companys Consolidated Balance Sheet at December 31,
2006 as a result of adopting this recognition requirement from
SFAS 158:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
Prior to SFAS 158
|
|
|
SFAS 158
|
|
|
Post SFAS 158
|
|
|
|
Adjustments
|
|
|
Adjustments
|
|
|
Adjustments
|
|
|
Other assets
|
|
$
|
89,049
|
|
|
$
|
(5,296
|
)
|
|
$
|
83,753
|
|
Deferred income taxes
|
|
|
37,907
|
|
|
|
3,756
|
|
|
|
41,663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
1,940,780
|
|
|
|
(1,540
|
)
|
|
|
1,939,240
|
|
Accrued payroll and employee benefits
|
|
|
342,665
|
|
|
|
2,050
|
|
|
|
344,715
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
1,035,561
|
|
|
|
2,050
|
|
|
|
1,037,611
|
|
Accrued employee benefits
|
|
|
108,260
|
|
|
|
7,827
|
|
|
|
116,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
2,106,664
|
|
|
|
9,877
|
|
|
|
2,116,541
|
|
Accumulated other comprehensive income
|
|
|
257,714
|
|
|
|
(11,417
|
)
|
|
|
246,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders deficit
|
|
$
|
1,940,780
|
|
|
$
|
(1,540
|
)
|
|
$
|
1,939,240
|
|
The Company expects that $1,153 of unrecognized prior service
cost and $(17) of unrecognized net actuarial loss will be
reclassified from accumulated other comprehensive loss and will
be recognized as a component of net periodic benefit cost in
2008. The Company does not expect to receive any refunds from
the Switzerland pension plan in 2008 as the respective pension
plan does not allow any refunds to be made to the Company.
|
|
|
Deferred
Compensation Plan
|
The Company maintains a deferred compensation plan in the form
of a Rabbi Trust. In accordance with
EITF 97-14,
Accounting for Deferred Compensation Arrangements Where
Amounts Earned Are Held in a Rabbi Trust and Invested, the
assets of this trust are consolidated within the Companys
financial statements. Under this plan, certain members of
management and other highly compensated employees may elect to
defer receipt of a portion of their annual compensation, subject
to maximum and minimum percentage limitations. The amount of
compensation deferred under the plan is credited to each
participants deferral account and a deferred compensation
liability established by the Company. An amount equaling each
participants compensation deferral is transferred into a
grantor trust and invested in various debt and equity
securities. The assets of the grantor trust are held by the
Company and accounted for under SFAS No. 115,
Accounting for Certain Investments and Equity
Securities, and are recorded as other current assets
within the Consolidated Balance Sheets.
Deferred compensation plan investments are classified as trading
securities and consist primarily of investments in mutual funds,
money market funds and equity securities. In addition, as of
December 31, 2007, the Rabbi Trust invested in
179 shares of the Companys common stock. The values
of these investments are based on published market quotes at the
end of the period. Adjustments to the fair value of these
investments are recorded in the Consolidated Statements of
Operations. Gross realized and unrealized gains and losses from
trading securities have not been material. These investments are
specifically designated as available to the Company solely for
the purpose of paying benefits under the Companys deferred
compensation plan. However, in the event the Company became
insolvent, the investments would be available to all unsecured
general creditors.
F-58
BEARINGPOINT,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(in
thousands, except share and per share amounts)
The deferred compensation liability relates to obligations due
to participants under the plan. The deferred compensation
liability balance represents accumulated participant deferrals,
and earnings thereon, since the inception of the plan, net of
withdrawals. The deferred compensation liability is recorded
within other long term liabilities on the Consolidated Balance
Sheets. The Companys liability under the plan is an
unsecured general obligation of the Company. At
December 31, 2007 and 2006, $6,766 and $7,352,
respectively, had been deferred under the plan.
|
|
17.
|
Lease and
Facilities Restructuring and Severance Activities
|
Through the normal course of operations, the Company
periodically adjusts the size of its workforce to better match
the needs of the business. In 2007, 2006 and 2005, the Company
terminated approximately 8.0%, 4.8% and 4.8% of its average
annual workforce, respectively, resulting in severance costs of
$24,227, $18,937 and $35,981, respectively. The Company
maintains ongoing benefit plans covering employee terminations,
as defined by SFAS No. 112 Employers
Accounting for Postemployment Benefits, and accounts for
severance costs related to these activities when management with
the requisite authority approves employee termination and it is
probable that no significant changes to planned terminations
will occur between approval and execution. Benefits provided in
excess of the Companys ongoing benefit plans are accounted
for when terminations are communicated to the affected employees.
|
|
|
Lease and
Facilities Restructuring Activities
|
In connection with the Companys office space reduction
efforts, the Company recognized a $15,814 restructuring charge
during the year ended December 31, 2007 related to lease
and facility exit activities. The $15,814 charge, recorded
within the Corporate/Other operating segment, included $10,095
related to the fair value of future lease obligations (net of
estimated sublease income), and $5,719 representing unamortized
cost of fixed assets associated with the exited facilities.
Additionally, the Company recorded charges and adjustments of
$5,055 associated with restructuring activities recognized prior
to 2007. Since July 2003, the Company has incurred a total of
$153,206 in lease and facilities-related restructuring charges
in connection with its office space reduction effort relating to
the following regions: $29,290 in EMEA, $863 in Asia Pacific and
$123,053 in North America. As of December 31, 2007, the
Company had a remaining lease and facilities accrual of $17,618
and $48,066, identified as current and non-current portions,
respectively. The remaining lease and facilities accrual will be
paid over the remaining lease terms which expire in 2016.
During the year ended December 31, 2006, the Company
recognized a $29,621 restructuring charge related to lease,
facility and other exit activities. The $29,621 charge, recorded
within the Corporate/Other operating segment, included $27,552
related to the fair value of future lease obligations (net of
estimated sublease income) and $2,069 in other costs associated
with exiting facilities.
During the year ended December 31, 2005, the Company
recognized a $29,581 restructuring charge related to lease,
facility and other exit activities. The $29,581 charge, recorded
within the Corporate/Other
F-59
BEARINGPOINT,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(in
thousands, except share and per share amounts)
operating segment, included $24,837 related to the fair value of
future lease obligations (net of estimated sublease income) and
$4,744 in other costs associated with exiting facilities.
The following table summarizes the restructuring activities for
the years ended December 31, 2007, 2006 and 2005:
|
|
|
|
|
|
|
Total
|
|
|
Balance at December 31, 2004
|
|
$
|
50,342
|
|
Charges to operations
|
|
|
29,581
|
|
Payments
|
|
|
(28,315
|
)
|
Other (1)
|
|
|
(1,011
|
)
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
50,597
|
|
Charges to operations
|
|
|
29,621
|
|
Payments
|
|
|
(14,142
|
)
|
Other (1)
|
|
|
842
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
66,918
|
|
Charges to operations
|
|
|
20,869
|
|
Payments
|
|
|
(23,774
|
)
|
Other (1)
|
|
|
1,671
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
65,684
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Other changes in restructuring
accrual consist primarily of foreign currency translation
adjustments.
|
The expected utilization of the remaining lease and facilities
accrual is as follows:
|
|
|
|
|
|
Year Ending December 31:
|
|
|
|
|
2008
|
|
$
|
17,618
|
|
2009
|
|
|
13,525
|
|
2010
|
|
|
9,942
|
|
2011
|
|
|
9,850
|
|
2012
|
|
|
8,237
|
|
Thereafter
|
|
|
6,512
|
|
|
|
|
|
|
Total
|
|
$
|
65,684
|
|
|
|
|
|
|
The Companys segment information has been prepared in
accordance with SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information.
Operating segments are defined as components of an enterprise
engaging in business activities about which separate financial
information is available that is evaluated regularly by the
Companys chief operating decision-maker, the Chief
Executive Officer, in deciding how to allocate resources and
assess performance. The Companys reportable segments
consist of its three North American industry groups (Public
Services, Commercial Services and Financial Services), its three
F-60
BEARINGPOINT,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(in
thousands, except share and per share amounts)
international regions (EMEA, Asia Pacific and Latin America) and
the Corporate/Other category (which consists primarily of
infrastructure costs). Accounting policies of the segments are
the same as those described in Note 2, Summary of
Significant Accounting Policies. Upon consolidation all
intercompany accounts and transactions are eliminated.
Inter-segment revenue is not included in the measure of profit
or loss. Performance of the segments is evaluated on operating
income excluding the costs of infrastructure and shared service
costs (such as facilities, information systems, finance and
accounting, human resources, legal and marketing), which is
represented by the Corporate/Other segment. Beginning in 2005,
the Company combined its Communications, Content and Utilities
and Consumer, Industrial and Technology industry groups to form
the Commercial Services industry group.
Financial data presented by reportable segments is provided
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007
|
|
|
|
Public
|
|
|
Commercial
|
|
|
Financial
|
|
|
|
|
|
|
|
|
Latin
|
|
|
Corporate/
|
|
|
|
|
|
|
Services
|
|
|
Services
|
|
|
Services
|
|
|
EMEA
|
|
|
Asia Pacific
|
|
|
America
|
|
|
Other(1)
|
|
|
Total
|
|
|
Revenue
|
|
$
|
1,432,645
|
|
|
$
|
509,789
|
|
|
$
|
264,198
|
|
|
$
|
791,298
|
|
|
$
|
362,715
|
|
|
$
|
90,091
|
|
|
$
|
4,826
|
|
|
$
|
3,455,562
|
|
Operating income (loss)
|
|
|
230,007
|
|
|
|
58,705
|
|
|
|
22,896
|
|
|
|
124,675
|
|
|
|
69,243
|
|
|
|
(17,059
|
)
|
|
|
(721,259
|
)
|
|
|
(232,792
|
)
|
Depreciation and amortization
|
|
|
8,648
|
|
|
|
696
|
|
|
|
557
|
|
|
|
11,855
|
|
|
|
875
|
|
|
|
450
|
|
|
|
40,391
|
|
|
|
63,472
|
|
Interest expense(2)
|
|
|
25,025
|
|
|
|
5,638
|
|
|
|
3,412
|
|
|
|
7,586
|
|
|
|
5,476
|
|
|
|
2,074
|
|
|
|
12,005
|
|
|
|
61,216
|
|
Total assets(3)
|
|
|
396,542
|
|
|
|
95,003
|
|
|
|
48,026
|
|
|
|
594,675
|
|
|
|
130,109
|
|
|
|
25,159
|
|
|
|
691,890
|
|
|
|
1,981,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006
|
|
|
|
Public
|
|
|
Commercial
|
|
|
Financial
|
|
|
|
|
|
|
|
|
Latin
|
|
|
Corporate/
|
|
|
|
|
|
|
Services
|
|
|
Services
|
|
|
Services
|
|
|
EMEA
|
|
|
Asia Pacific
|
|
|
America
|
|
|
Other(1)
|
|
|
Total
|
|
|
Revenue
|
|
$
|
1,339,358
|
|
|
$
|
554,806
|
|
|
$
|
399,331
|
|
|
$
|
703,083
|
|
|
$
|
360,001
|
|
|
$
|
82,319
|
|
|
$
|
5,105
|
|
|
$
|
3,444,003
|
|
Operating income (loss)
|
|
|
234,309
|
|
|
|
57,229
|
|
|
|
111,192
|
|
|
|
96,180
|
|
|
|
68,205
|
|
|
|
4,465
|
|
|
|
(770,849
|
)
|
|
|
(199,269
|
)
|
Depreciation and amortization
|
|
|
10,080
|
|
|
|
1,089
|
|
|
|
852
|
|
|
|
10,573
|
|
|
|
2,795
|
|
|
|
712
|
|
|
|
49,467
|
|
|
|
75,568
|
|
Interest expense(2)
|
|
|
25,915
|
|
|
|
6,382
|
|
|
|
4,715
|
|
|
|
3,637
|
|
|
|
9,717
|
|
|
|
2,836
|
|
|
|
(16,020
|
)
|
|
|
37,182
|
|
Total assets(3)
|
|
|
418,999
|
|
|
|
113,948
|
|
|
|
63,342
|
|
|
|
573,489
|
|
|
|
124,068
|
|
|
|
24,714
|
|
|
|
620,680
|
|
|
|
1,939,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2005
|
|
|
|
Public
|
|
|
Commercial
|
|
|
Financial
|
|
|
|
|
|
|
|
|
Latin
|
|
|
Corporate/
|
|
|
|
|
|
|
Services
|
|
|
Services(4)
|
|
|
Services
|
|
|
EMEA (5)
|
|
|
Asia Pacific
|
|
|
America
|
|
|
Other (1)
|
|
|
Total
|
|
|
Revenue
|
|
$
|
1,293,390
|
|
|
$
|
663,797
|
|
|
$
|
379,592
|
|
|
$
|
662,020
|
|
|
$
|
312,190
|
|
|
$
|
75,664
|
|
|
$
|
2,247
|
|
|
$
|
3,388,900
|
|
Operating income (loss)
|
|
|
195,204
|
|
|
|
(117,376
|
)
|
|
|
84,926
|
|
|
|
(47,917
|
)
|
|
|
39,098
|
|
|
|
(213
|
)
|
|
|
(715,278
|
)
|
|
|
(561,556
|
)
|
Depreciation and amortization
|
|
|
11,042
|
|
|
|
879
|
|
|
|
1,027
|
|
|
|
6,856
|
|
|
|
4,328
|
|
|
|
732
|
|
|
|
47,946
|
|
|
|
72,810
|
|
Interest expense(2)
|
|
|
27,443
|
|
|
|
9,430
|
|
|
|
5,610
|
|
|
|
1,208
|
|
|
|
8,107
|
|
|
|
2,807
|
|
|
|
(21,220
|
)
|
|
|
33,385
|
|
Total assets(3)
|
|
|
469,205
|
|
|
|
166,331
|
|
|
|
94,781
|
|
|
|
515,606
|
|
|
|
127,757
|
|
|
|
16,674
|
|
|
|
582,072
|
|
|
|
1,972,426
|
|
|
|
|
(1)
|
|
Corporate/Other operating loss is
principally due to infrastructure and shared services costs,
such as facilities, information systems, finance and accounting,
human resources, legal and marketing.
|
(2)
|
|
Interest expense is allocated to
the industry segments based on accounts receivable and unbilled
revenue.
|
(3)
|
|
Industry segment assets include
accounts receivable, unbilled revenue, certain software and
property and equipment directly attributed to the industry
segment, purchased intangible assets and goodwill. All other
assets are not allocated to industry segments and are classified
as corporate assets.
|
(4)
|
|
Commercial Services includes a
$64,188 goodwill impairment charge for the year ended
December 31, 2005.
|
(5)
|
|
EMEA includes a $102,227 goodwill
impairment change for the year ended December 31, 2005.
|
F-61
BEARINGPOINT,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(in
thousands, except share and per share amounts)
Financial data segmented by geographic area is provided below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
Property and
|
|
|
|
|
|
Property and
|
|
|
|
|
|
Property and
|
|
|
|
|
|
|
Equipment,
|
|
|
|
|
|
Equipment,
|
|
|
|
|
|
Equipment,
|
|
|
|
Revenue (2)
|
|
|
Net (3)
|
|
|
Revenue (2)
|
|
|
Net (3)
|
|
|
Revenue (2)
|
|
|
Net (3)
|
|
|
North America(1)
|
|
$
|
2,206,632
|
|
|
$
|
88,176
|
|
|
$
|
2,293,495
|
|
|
$
|
112,262
|
|
|
$
|
2,336,779
|
|
|
$
|
129,545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EMEA
|
|
|
791,298
|
|
|
|
17,660
|
|
|
|
703,083
|
|
|
|
26,930
|
|
|
|
662,020
|
|
|
|
31,228
|
|
Asia Pacific
|
|
|
362,715
|
|
|
|
4,738
|
|
|
|
360,001
|
|
|
|
4,886
|
|
|
|
312,190
|
|
|
|
6,832
|
|
Latin America(4)
|
|
|
90,091
|
|
|
|
3,197
|
|
|
|
82,319
|
|
|
|
2,314
|
|
|
|
75,664
|
|
|
|
2,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Outside of North America
|
|
|
1,244,104
|
|
|
|
25,595
|
|
|
|
1,145,403
|
|
|
|
34,130
|
|
|
|
1,049,874
|
|
|
|
40,588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate/Other
|
|
|
4,826
|
|
|
|
|
|
|
|
5,105
|
|
|
|
|
|
|
|
2,247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,455,562
|
|
|
$
|
113,771
|
|
|
$
|
3,444,003
|
|
|
$
|
146,392
|
|
|
$
|
3,388,900
|
|
|
$
|
170,133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The North America region includes
the Public Services, Commercial Services and Financial Services
segments. The North America region is comprised of operations in
the United States and Canada. The Company reports financial
information for these two countries as one region. The
Companys operations in Canada do not contribute materially
to the North America region.
|
(2)
|
|
Revenue by geographic region is
reported based on where client services are supervised.
|
(3)
|
|
Property and equipment, net of
depreciation, related to the geographic region in which the
assets reside.
|
(4)
|
|
The Latin America region includes
Mexico.
|
F-62
BEARINGPOINT,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(in
thousands, except share and per share amounts)
|
|
19.
|
Results
by Quarter (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly Periods during the Year Ended
|
|
|
|
December 31, 2007
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
Revenue
|
|
$
|
852,067
|
|
|
$
|
861,897
|
|
|
$
|
875,346
|
|
|
$
|
866,252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of service:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of service
|
|
|
770,192
|
|
|
|
725,411
|
|
|
|
731,486
|
|
|
|
739,079
|
|
Lease and facilities restructuring charge
|
|
|
20,561
|
|
|
|
3,866
|
|
|
|
1,329
|
|
|
|
(4,887
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs of service
|
|
|
790,753
|
|
|
|
729,277
|
|
|
|
732,815
|
|
|
|
734,192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
61,314
|
(1)
|
|
|
132,620
|
|
|
|
142,531
|
|
|
|
132,060
|
|
Selling, general and administrative expenses
|
|
|
189,042
|
|
|
|
160,324
|
|
|
|
174,707
|
|
|
|
177,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(127,728
|
)
|
|
|
(27,704
|
)
|
|
|
(32,176
|
)
|
|
|
(45,184
|
)
|
Interest/other expense, net
|
|
|
(15,228
|
)
|
|
|
(19,822
|
)
|
|
|
(13,626
|
)
|
|
|
(9,022
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before taxes
|
|
|
(142,956
|
)
|
|
|
(47,526
|
)
|
|
|
(45,802
|
)
|
|
|
(54,206
|
)
|
Income tax expense
|
|
|
26,028
|
(2)
|
|
|
20,480
|
|
|
|
18,225
|
|
|
|
7,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(168,984
|
)
|
|
$
|
(68,006
|
)
|
|
$
|
(64,027
|
)
|
|
$
|
(61,706
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share basic and diluted
|
|
$
|
(0.77
|
)
|
|
$
|
(0.32
|
)
|
|
$
|
(0.30
|
)
|
|
$
|
(0.29
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly Periods during the Year Ended
|
|
|
|
December 31, 2006
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
Revenue
|
|
$
|
874,331
|
|
|
$
|
843,248
|
|
|
$
|
892,680
|
|
|
$
|
833,744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of service:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of service
|
|
|
749,437
|
|
|
|
683,318
|
|
|
|
698,631
|
|
|
|
732,470
|
|
Lease and facilities restructuring charge
|
|
|
23,372
|
|
|
|
961
|
|
|
|
2,488
|
|
|
|
2,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs of service
|
|
|
772,809
|
|
|
|
684,279
|
|
|
|
701,119
|
|
|
|
735,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
101,522
|
|
|
|
158,969
|
|
|
|
191,561
|
|
|
|
98,474
|
|
Amortization of purchased intangible assets
|
|
|
|
|
|
|
515
|
|
|
|
515
|
|
|
|
515
|
|
Selling, general and administrative expenses
|
|
|
209,630
|
|
|
|
173,323
|
|
|
|
176,384
|
|
|
|
188,913
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(108,108
|
)
|
|
|
(14,869
|
)
|
|
|
14,662
|
|
|
|
(90,954
|
)
|
Insurance settlement, net of legal fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,000
|
|
Interest/other expense, net
|
|
|
(2,180
|
)
|
|
|
(5,906
|
)
|
|
|
(5,351
|
)
|
|
|
(6,337
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before taxes
|
|
|
(110,288
|
)
|
|
|
(20,775
|
)
|
|
|
9,311
|
|
|
|
(59,291
|
)
|
Income tax (benefit) expense
|
|
|
(2,047
|
)
|
|
|
8,858
|
|
|
|
12,164
|
|
|
|
13,422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(108,241
|
)
|
|
$
|
(29,633
|
)
|
|
$
|
(2,853
|
)
|
|
$
|
(72,713
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share basic and diluted
|
|
$
|
(0.51
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.34
|
)
|
|
|
|
|
|
|
(1)
|
|
During the fourth quarter of 2007,
the Company recorded $58,800 in loss reserves and revenue write
downs in addition to $20,561 in lease and facilities
restructuring charges which significantly impacted gross profit.
|
|
(2)
|
|
During the fourth quarter of 2007,
the Company recorded a valuation allowance against previously
recognized deferred tax assets of $11,867.
|
F-63
BEARINGPOINT,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(in
thousands, except share and per share amounts)
|
|
20.
|
Supplemental
Financial Information
|
The following tables present a summary of additions and
deductions related to the allowances for doubtful accounts
receivable and allowances for income tax valuation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Charge to
|
|
|
|
|
|
Balance at
|
|
|
|
Beginning
|
|
|
Costs and
|
|
|
Deductions-
|
|
|
End
|
|
Allowance for Doubtful Accounts
|
|
of Period
|
|
|
Expenses (1)
|
|
|
Write Offs
|
|
|
of Period
|
|
|
Year Ended December 31, 2007
|
|
$
|
5,927
|
|
|
$
|
2,465
|
|
|
$
|
(2,412
|
)
|
|
$
|
5,980
|
|
Year Ended December 31, 2006
|
|
|
9,326
|
|
|
|
(464
|
)
|
|
|
(2,935
|
)
|
|
|
5,927
|
|
Year Ended December 31, 2005
|
|
|
11,296
|
|
|
|
5,334
|
|
|
|
(7,304
|
)
|
|
|
9,326
|
|
|
|
|
(1)
|
|
Expense reflected in other costs of
service in the Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Charged to
|
|
|
Charged
|
|
|
Credited to
|
|
|
Balance at
|
|
|
|
|
|
|
Beginning
|
|
|
Income Tax
|
|
|
to Other
|
|
|
Income Tax
|
|
|
End of
|
|
|
|
|
Income Tax Valuation Allowance
|
|
of Period
|
|
|
Provision
|
|
|
Accounts (2)
|
|
|
Provision
|
|
|
Period
|
|
|
|
|
|
Year Ended December 31, 2007
|
|
$
|
408,149
|
|
|
$
|
125,590
|
|
|
$
|
(65,176
|
)
|
|
$
|
|
|
|
$
|
468,563
|
|
|
|
|
|
Year Ended December 31, 2006
|
|
|
338,792
|
|
|
|
76,775
|
|
|
|
(7,418
|
)
|
|
|
|
|
|
|
408,149
|
|
|
|
|
|
Year Ended December 31, 2005
|
|
|
114,775
|
|
|
|
223,031
|
|
|
|
986
|
|
|
|
|
|
|
|
338,792
|
|
|
|
|
|
|
|
|
(2)
|
|
Other accounts include deferred tax
accounts, currency translation adjustments and amounts related
to the adoption of FIN 48.
|
F-64