Black Box Corporation 10-Q/A
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended July 1, 2006
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ________ to ________
Commission File Number: 0-18706
Black Box Corporation
(Exact name of registrant as specified in its charter)
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Delaware
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95-3086563 |
(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.) |
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1000 Park Drive, Lawrence, Pennsylvania
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15055 |
(Address of principal executive offices)
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(Zip Code) |
Registrants telephone number, including area code: 724-746-5500
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. ¨Yes þ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule
12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ Accelerated filer ¨ Non-accelerated filer ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). ¨ Yes þ No
As of August 8, 2006, there were 17,680,303 shares of common stock, par value $.001 (the common
stock), outstanding.
BLACK BOX CORPORATION
INDEX
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EXPLANATORY NOTE
In this Quarterly Report on Form 10-Q/A for the quarter ended July 1, 2006 (Form 10-Q/A), Black
Box Corporation (Black Box or the Company) is restating its Consolidated Balance Sheets as of
July 1, 2006 and March 31, 2006, Consolidated Statements of Income and Consolidated Statements of
Cash Flows for the three (3) month periods ended July 1, 2006 and July 2, 2005 and the related
Notes to the Consolidated Financial Statements. This Form 10-Q/A also includes the amendment of
Managements Discussion and Analysis of Financial Condition and Results of Operations presented
in the Companys Quarterly Report on Form 10-Q for the quarter ended July 1, 2006 (the 1Q07 Form
10-Q) as it relates to the three (3) month periods ended July 1, 2006 and July 2, 2005. All
restated information identified above is collectively referred to as the Restatement. References
herein to Fiscal Year or Fiscal mean the Companys Fiscal Year ended March 31 for the year
referenced.
The Restatement reflects adjustments arising from the determinations of the Audit Committee (the
Audit Committee) of the Companys Board of Directors (the Board), with the assistance of
outside legal counsel, and the Companys management to record additional non-cash charges for
stock-based compensation expense and the related income tax effects, relating to certain stock
option grants during the period from 1992 through September, 2006.
Following the filing of this Form 10-Q/A, the Company will file its amended Quarterly Report on
Form 10-Q/A for the quarter ended September 30, 2006 (the 2Q07 Form 10-Q/A), its Quarterly Report
on Form 10-Q for the quarter ended December 30, 2006 (the 3Q07 Form 10-Q) and its Annual Report
on Form 10-K for the period ended March 31, 2007 (the FY07 Form 10-K). The 2Q07 Form 10-Q/A and
the 3Q07 Form 10-Q will include, respectively, restated financial information for (i) the three (3)
and six (6) month periods ended September 30, 2006 and October 1, 2005 and as of March 31, 2006 and
September 30, 2006 and (ii) the three (3) and nine (9) month periods ended December 30, 2006 and
December 31, 2005 and as of March 31, 2006 and December 30, 2006. In the FY07 Form 10-K, the
Company will restate its Consolidated Balance Sheet at March 31, 2006, its Consolidated Statements
of Income for the years ended March 31, 2006 and 2005, its Consolidated Statements of Changes in
Stockholders Equity for the years ended March 31, 2006, 2005 and as of April 1, 2004, its
Consolidated Statements of Cash Flows for the years ended March 31, 2006 and 2005, its quarterly
financial data as of and for the quarters ended in the fiscal year ended March 31, 2006 and its
Selected Financial Data as of and for the years ended March 31, 2006, 2005, 2004 and 2003.
The Company has not amended and does not intend to amend any of its other previously-filed reports
on Form 10-K or Form 10-Q for the periods affected by the Restatement other than those specifically
stated above. As previously disclosed, the consolidated financial statements and related financial
information contained in such previously filed reports should no longer be relied upon.
Restatement through March 31, 2006
Background
On November 13, 2006, Black Box received a letter of informal inquiry from the Enforcement Division
of the Securities and Exchange Commission (the SEC) relating to the Companys stock option
practices from January 1, 1997 to present. As a result, the Audit Committee, with the assistance
of outside legal counsel, commenced an independent review of the Companys historical stock option
grant practices and related accounting for stock option grants during the period from 1992 to the
present (the Review Period).
On February 1, 2007, the Company announced that, while the review of option grant practices was
continuing, it believed that it would need to record additional non-cash charges for stock-based
compensation expense relating to certain stock option grants and, accordingly, cautioned investors
about relying on its historical financial statements until the Company could determine with
certainty whether a restatement would be required and, if so, the extent of any such restatement
and the periods affected.
On March 19, 2007, although the Audit Committee had not yet completed its review, the Audit
Committee concluded that the exercise price of certain stock option grants differed from the fair
market value of the underlying shares on the appropriate measurement date. At that time, the
Company and the Audit Committee announced that it was currently expected that the Companys
additional non-cash, pre-tax charges for stock-based compensation expense relating to certain stock
option grants would approximate $63 million for the Review Period. In addition, the Company and
the Audit Committee concluded that the Company would need to restate its previously-issued
financial statements contained in reports previously filed by the Company with the SEC.
Accordingly, on March 19, 2007, the Company and the Audit Committee concluded that the Companys
previously-issued financial statements and other historical financial information and related
disclosures for the Review Period, including applicable reports of its current or former
independent registered public accounting firms and related press releases, should not be relied
upon.
On May 25, 2007, the Company was advised by the Enforcement Division of the SEC that a Formal Order
of Private Investigation arising out of the Companys stock option practices had been entered and
on May 29, 2007 the Company received a subpoena that was issued by the SEC.
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On May 31, 2007, the Company announced that, as a result of the ongoing review of stock option
practices, Company management and the Audit Committee expected that the Companys additional
non-cash, pre-tax charges for stock-based compensation expense relating to certain stock option
grants would approximate $70 million for the Review Period.
Findings of the Audit Committee
During the Review Period, the Company granted stock options pursuant to an employee stock option
plan and a director stock option plan to acquire approximately 10.9 million shares of common stock.
Such plans at all relevant times provided for option grants to be approved by a designated
committee of non-employee directors or, in the case of the director stock option plan, by the
Board. Approximately 2,000 stock option grants were awarded during the Review Period with 69
recorded grant dates. No stock options have been granted since September, 2006. The Audit
Committee reviewed all stock options granted during the Review Period, including option grants to
the Companys directors, officers and rank and file employees (including grants to new employees,
grants awarded in connection with Company acquisitions and grants made as individual or group
performance awards). The Audit Committees review of the Companys stock option granting practices
included a comprehensive examination of reasonably available relevant physical and electronic
documents as well as interviews with current and former directors, officers and Company personnel.
The Audit Committees review was initially focused on determining whether the Companys prior stock
option granting practices were in compliance with the plans granting provisions and applicable law
or called into question its accounting for such options. Once it became evident that such issues
and accounting implications existed, the inquiry focused on those matters necessary: to determine
whether any accounting charges were material and whether a restatement of the Companys
previously-issued financial statements would be required; to establish a basis for effecting any
required restatement; to assure that, on as timely a basis as possible, the Company could file any
required curative disclosures with the SEC and assure its continued eligibility for listing on The
NASDAQ Stock Market (NASDAQ); and to provide an informed basis for the Companys response to the
identified issues, including appropriate corrective and remedial actions.
The following information summarizes certain of the findings of the Audit Committee. The findings
identified approximately $71.5 million of unrecorded expense at the time of grant (i.e., the
difference between the fair market value of the common stock on the appropriate measurement date
and the stated exercise price), net of forfeitures, during the Review Period, of which $70.0
million was recorded in the Companys Consolidated Financial Statements through March 31, 2006 and
$1.5 million of unrecorded expense at the time of grant will be included, beginning at April 1,
2006, in the Companys computation of compensation expense in accordance with Statement of
Financial Accounting Standards (SFAS) No. 123 (revised 2004) Share-Based Payment (SFAS
123(R)). The following summarizes the unrecorded expense at the time of grant by time period and
category of recipient:
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$4.2 million for the period from Fiscal 1993 through Fiscal 1997 ($0.2 million for
directors, $2.5 million for officers and $1.5 million for rank and file employees) |
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$45.6 million for the period from Fiscal 1998 through August 2002 ($1.1 million for
directors, $25.7 million for officers and $18.7 million for rank and file employees) |
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$21.8 million for the period from August 2002 to the present ($0.04 million for directors,
$0.6 million for officers and $21.1 million for rank and file employees) |
The Audit Committees additional key findings are summarized below:
Lack of Adequate Documentation: For a majority of grants issued by the Company during the
Review Period, there is either no or inadequate documentation of approval actions that satisfies
the requisites for establishing a measurement date under Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees (APB 25). Of the 69 recorded grant dates, there
are documented approval actions by the Board or the Option or Compensation Committee of the Board
(the Compensation Committee) with respect to particular grants for 12 dates. In the period
December 1992 to May 1996, neither the minutes of the Compensation Committee nor of the Board
reflect any action to approve specific grants. In some instances, evidence of single director (the
chairman of the Compensation Committee) approval actions exists. This absence of non-employee
director level documentation also applies to a majority of grants with a recorded grant date after
1996. In some cases, Compensation Committee minutes contain a reference to reports on the status
of the option pool but do not document any action to approve specific grants.
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Approval documentation for certain grants has internal inconsistencies or conflicts with other
documents thereby rendering this documentation unreliable as a basis for establishing a measurement
date. In some cases, the only existing documentation is the executed option agreement and/or the
entry of the option grant into the option database. Notwithstanding these approval documentation
inadequacies, the Company entered into option agreements with grantees and has honored such grants.
Grant Approvals: During the Review Period, relatively few option grants were approved in
complete compliance with the Companys stock option plans. Available documentation reflects that
the Company approved option grants in a variety of ways. With respect to the employee stock option
plan, grants were approved by the Compensation Committee as contemplated by the plan at various
times, by the full Board in 1998 and 1999, by a single director (the chairman of the Compensation
Committee) on nine recorded grant dates during the period 1994 through 2001 and by the Companys
Chief Executive Officer (CEO) at various times. With respect to the director stock option plan,
grants were generally approved by the designated Board committee and, in a few cases, by the
chairman of the Compensation Committee. In one instance in 2000, there is no conclusive
documentary evidence of the approval of director grants other than the signed director option
agreements.
The delegation of authority by the Compensation Committee to the CEO with respect to grants to rank
and file employees was not fully documented. However, there was an understood and accepted
practice between the CEO and the Compensation Committee whereby the CEO made certain awards to
individual employees. In some instances, this involved the allocation among rank and file
employees of blocks of shares approved by the Compensation Committee; in three (3) such instances,
the number of shares ultimately awarded pursuant to this process exceeded the approved size of the
block, which was contrary to the understanding of the Compensation Committee members. Further,
contrary to the understanding of Committee members, the award and/or documentation of those
individual grants often significantly lagged the approval of the block grant. In August 2005, the
Compensation Committee specifically acknowledged a prior grant of delegated authority to the CEO to
make option grants to rank and file employees and ratified all prior awards by the CEO. In some
cases, documentation of approval action is either inconclusive or missing, and the Company
therefore has been unable to determine what entity or person actually approved specific grants.
Option Pricing: The recorded grant dates for a majority of grants do not match the
applicable measurement dates as determined under APB 25. The grants of options with exercise
prices lower than the fair market values of the stock on the actual measurement dates did not
satisfy the fair market pricing requirement in the Companys plans, as amended in 1998, and were
not consistent with the Companys disclosures in SEC filings stating that the exercise price of
options was equal to the fair market value of the stock on the date of the grant.
The relationship between the stated exercise price of options and the fair market value of the
Companys stock on the date of the identifiable approval actions varied from grant to grant. In
some cases, the exercise price of grants reflected the fair market value of the underlying shares
on the date of any documented approval action. In other cases, the exercise prices reflected the
fair market value of the underlying shares on a date either prior or subsequent to any such
documented approval action and the exercise price was lower than the fair market value on the date
of any such action. In several such cases before August 2002, the use of such grant dates and
lower exercise prices (together with other available evidence) supports a finding that the recorded
grant dates and corresponding exercise prices were selected with the benefit of hindsight. For
certain grants where the mismatch between the recorded grant date and the approval action was only
a matter of days, however, the mismatch appears to have been attributable to inaccurate recording
or administrative delays. In some cases, the apparent approval action did not identify all
grantees; for example, there are cases where a block grant was approved subject to a later
determination of individual grant recipients and grants were recorded with a grant date, and
corresponding exercise price, that matched the date of the apparent approval of the block grant and
the fair market value of the common stock on that date although individual grant recipients may
have been identified some time after approval of the block grant. Finally, in some cases, the
approval action for specific grants is not adequately documented. Where the recorded grant date
did not satisfy the requisites for a measurement date under APB 25, the Company relied on default
methodologies to determine an appropriate measurement date.
Internal Controls: As outlined above, the Companys historical administration of its
options program lacked discipline as it relates to proper adherence to the plan requirements,
corporate recordkeeping and documentation. Since November 2003, however, the Company has properly
administered the stock option program as it relates to awards to directors and officers. During
the investigation, the Company identified control gaps related to grants made throughout the Review
Period. As of March 31, 2007, the Company implemented additional procedures to its process that
are focused on formalized documentation of appropriate approvals and determination of grant terms
to employees.
Procedural and Remedial Actions
The Audit Committee and other relevant Board committees are committed to a continued review and
implementation of procedural
enhancements and remedial actions in light of the foregoing findings. Consistent with its
obligation to act in the best interests of the Company taking into account all relevant facts and
circumstances, the Audit Committee is continuing to assess the appropriateness of a broad range of
possible procedural enhancements and potential remedial measures in light of the findings of its
investigation. While the Audit Committee has not completed its consideration of all such steps,
procedural enhancements may include recommendations regarding improved stock option administration
procedures and controls, training and monitoring compliance with those procedures, corporate
recordkeeping, corporate risk assessment, evaluation of the internal compliance environment and
other remedial steps that
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may be appropriate. The Audit Committee is also expected to address
issues of individual conduct or responsibility, including those of the Board, CEOs and Chief
Financial Officers (CFOs) serving during the Review Period. Potential remedial measures may
include an evaluation of the role of and possible claims or other remedial actions against current
and former Company personnel who may be found to have been responsible for identified problems
during the Review Period. The Audit Committee expects to recommend to the Board and/or its
appropriate committees procedural enhancements and remedial measures that appropriately address the
issues raised by its findings. In advance of action by the Audit Committee, as noted above, the
Company has implemented additional procedures to its process for approving stock option grants that
are focused on formalized documentation of appropriate approvals and determination of grant terms
to employees.
Restatement Methodologies
As of April 1, 2006, the Company adopted SFAS 123(R) using the modified prospective transition
method. Under this transition method, compensation expense is to be recognized for all share-based
compensation awards granted after the date of adoption and for all unvested awards existing on the
date of adoption. Prior to April 1, 2006, the Company accounted for stock-based compensation
awards to directors, officers and rank and file employees using the intrinsic value method in
accordance with APB 25 as allowed under SFAS No. 123 Accounting for Stock-Based Compensation
(SFAS 123). Under the intrinsic value method, no share-based compensation expense related to
stock options was required to be recognized if the exercise price of the stock option was at least
equal to the fair market value of the common stock on the measurement date. APB 25 defines the
measurement date as the first date on which are known both (1) the number of shares that an
individual grant recipient is entitled to receive and (2) the option or purchase price, if any.
In light of the Audit Committees review of the Companys stock option granting practices during
the Review Period and as to those cases in which the Company previously used a recorded grant date
as the measurement date that the Company determined could no longer be relied upon, the Company has
developed and applied the following methodologies to remeasure those stock option grants and record
the relevant charges in accordance with APB 25 by considering the following sources of information:
(i) meeting minutes of the Board and of committees thereof and related materials, (ii) Unanimous
Written Consents of the Board and of committees thereof, (iii) the dates on which stock option
grants were entered into the Companys stock option database (create date), (iv) relevant email
correspondence reflecting stock option grant approval actions, (v) individual stock option
agreements and related materials, (vi) employee and Board offer letters, (vii) documents relating
to acquisitions, (viii) reports on Form 4 filed with the SEC and (ix) guidance of the Office of the
Chief Accountant of the SEC on stock option matters as set forth in its letter dated September 19,
2006.
Grants with Appropriate Committee Approval. With respect to grants of approximately 1.0 million
shares, or approximately 9% of the total grants in the Review Period, the Company has evidence to
support the approval of the grant under the stock option plans by the relevant committee of the
Board, and such evidence includes the number of options each individual was entitled to receive and
the option price. However, the relationship between these documented approval actions and the
originally-recorded grant dates and exercise prices for the options so approved varied during the
Review Period. In some cases, grants were recorded with a grant date and a corresponding exercise
price that matched the date of the approval action or were otherwise consistent with the terms of
the approval actions. In other cases, however, the recorded grant dates and corresponding exercise
prices of the grants reflected the fair market value of the common stock on a date prior to the
committees documented approval actions. The Company has restated the compensation expense for
stock option grants relating to approximately 0.4 million shares of common stock by using the date
of the documented approval action as the measurement date. The total additional non-cash, pre-tax
charge for these grants is approximately $1.8 million, net of forfeitures, amortized over the
appropriate vesting period through March 31, 2006, of which $0.07 million relates to director
options, $1.3 million relates to officer options and $0.4 million relates to rank and file employee
options.
Grants with Other Approvals. With respect to grants of approximately 1.9 million shares, or
approximately 18% of the total grants in the Review Period, the Company has evidence to support the
approval of the grant by the Board, an outside director or the Companys CEO and the identification
of the number of options each individual was entitled to receive together with the option price.
These grants are distinguished from the grants described in the prior paragraph in that the nature
of the approval was not fully consistent with the terms of the relevant stock option plan. As with
the grants discussed in the preceding paragraph, the relationship between these documented approval
actions and the originally-recorded grant dates and exercise prices for the options so
approved varied during the Review Period. In some cases, grants were recorded with a grant date
and a corresponding exercise price that matched the date of the approval action or were otherwise
consistent with the terms of the approval action. In other cases, however, the recorded grant
dates and corresponding exercise prices of the grants reflected the fair market value of the
Companys stock on a date prior to the approval action. The Company has restated the compensation
expense for stock option grants relating to approximately 1.6 million shares of common stock by
using the date of the documented approval action as the measurement date. The total additional
non-cash, pre-tax charge for these grants is approximately $7.6 million, net of forfeitures,
amortized over the appropriate vesting period through March 31, 2006, of which $0.5 million relates
to director options, $2.6 million relates to officer options and $4.5 million relates to rank and
file employee options.
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Grants Lacking Adequate Documentation. With respect to grants of approximately 7.9 million shares
(5.0 million shares to rank and file employees), or 73.0% of the total grants in the Review Period,
the Company has been unable to locate adequate documentation of approval actions that would satisfy
the requisites for a measurement date under APB 25. For these grants, management considered all
available relevant information to form a reasonable conclusion as to the most reasonable
measurement date. For all grants in this category, the Company has established default
methodologies for determining the most appropriate measurement date under APB 25.
With respect to grants entered into the Companys stock option database after September 9, 1999,
when the database began to reflect a create date which is the date on which a grant was entered
into the system, the Company has determined to use the individual create date for each grant as
the APB 25 measurement date, which was in most cases different from the originally-recorded grant
date. The Company believes that this create date is the most appropriate methodology in the
absence of sufficient evidence of approvals for these grants as it represents the earliest point in
time at which the evidence shows that all requisites for the establishment of the measurement date
had been satisfied. Such create dates preceded, often by a significant amount of time, the
execution of stock option agreements, which, generally, were manually signed by the Companys CEO
and manually signed and dated by the grantee. In addition, in almost all cases, a grant entered
into the database, which established the create date, ultimately resulted in the creation of a
stock option agreement reflecting such grant. Accordingly, while execution of the stock option
agreements constituted a clear acknowledgement by the grantee and the Company of the grantees
legal entitlement to the grant the Company believes the create date more accurately reflects the
date of approval than does the signed option agreement. The Company has restated the compensation
expense for stock option grants relating to approximately 4.2 million shares of common stock by
using the create date as the measurement date. The total additional non-cash, pre-tax charge for
these grants is approximately $49.8 million, net of forfeitures, amortized over the appropriate
vesting period through March 31, 2006, of which $0.5 million relates to director options, $17.2
million relates to officer options and $32.2 million relates to rank and file employee options.
The Companys procedures for evaluating the appropriateness of measurement dates fixed with
reference to such create dates included a sensitivity analysis which provided an understanding of
the differences between the additional recorded charge for stock-based compensation expense and the
charges that would result from using other identified alternative methods for determining
measurement dates. The Companys sensitivity analysis included identifying the range of potential
grant dates defined by the recorded grant date and the create date for each grant. The Company
then identified the low and high closing prices of the common stock within that range of potential
grant dates and applied both the low and high closing prices of the common stock to the number of
shares granted for which the create date methodology was utilized to determine the range of
potential adjustments to stock-based compensation expense for these grants, which was $0.09 million
to $73.8 million, net of forfeitures, as compared to the additional non-cash, pre-tax charge for
these grants of approximately $49.8 million, net of forfeitures, included in the Restatement.
For options entered into the Companys option database before September 9, 1999, the Company
determined the measurement date generally by reference to signed option agreements (or the deemed
signature date for certain options as discussed below). The executed option agreements
(hereinafter signed option agreements), manually signed by the Companys CEO and manually signed
and dated by the grantee, constituted an acknowledgement by the grantee and the Company of the
grantees legal entitlement to the grant and, in the absence of authoritative information as to
when all the requisites for the establishment of the measurement date had been satisfied, provides
a measurement date framework based on entitlement. The Company has restated the compensation
expense for stock option grants relating to approximately 1.4 million shares of common stock by
using the signed option agreements as the measurement date. The total additional non-cash, pre-tax
charge for these grants is approximately $6.4 million, net of forfeitures, amortized over the
appropriate vesting period through March 31, 2006, of which $0.3 million relates to director
options, $3.6 million relates to officer options and $2.5 million relates to rank and file employee
options. The Company believes this methodology was the most appropriate in the absence of
sufficient evidence of approvals for these grants as it represents the earliest point in time at
which the evidence shows that all requisites for the establishment of the measurement date had been
satisfied for these grants. The Companys procedures for evaluating the appropriateness of
measurement dates fixed with reference to the dating of signed option agreements included a
sensitivity analysis which provided an understanding of the differences between the additional
recorded charge for stock-based compensation expense and the charges that would result from using
other identified alternative methods for determining measurement dates. The Companys sensitivity
analysis included identifying the range of potential grant dates defined by the recorded grant date
and the date of the grantees signature on the stock option agreement for each grant. The Company
then
identified the low and high closing prices of the common stock within that range of potential grant
dates and applied both the low and high closing prices of the common stock to the number of shares
granted for which the signed option agreements methodology was utilized to determine the range of
potential adjustments to stock-based compensation expense for these grants, which was $0.03 million
to $9.6 million, net of forfeitures, as compared to the additional non-cash, pre-tax charge for
these grants of approximately $6.4 million, net of forfeitures, included in the Restatement.
In those cases where no reliably-dated signed option agreement could be located and where no
post-September 9, 1999 create date exists (stock option grants totaling approximately 0.9 million
shares), the Company used the average period between recorded grant date and date of the signatures
on all other grantee signed option agreements with the same grant date as the measurement date.
For example, if there were four stock option grants with a grant date of January 1, 1996, the
Company had the signed option agreements for three of these stock option grants and the average
number of days between the grant date and the signature dates of these three
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signed option
agreements was 20 days, January 21, 1996 was used as the measurement date for the grant for which
no signed option agreement could be located. The Company has restated the compensation expense for
stock option grants relating to approximately 0.7 million shares of common stock using this
average days to sign agreement method. The total additional non-cash, pre-tax charge for these
grants is approximately $4.4 million, net of forfeitures, amortized over the appropriate vesting
period through March 31, 2006, of which $0.06 million relates to director options, $4.2 million
relates to officer options and $0.2 million relates to rank and file employee options. The Company
believes this methodology was the most appropriate in the absence of sufficient evidence of
approvals for these grants because it gives a reasonable approximation of the measurement date
related to these options in light of the available evidence. The Company conducted a sensitivity
analysis by comparing the Companys current default methodology (i.e., average days to sign
agreement) with another default methodology. For this analysis, the Company identified the range
of potential grant dates defined by the earliest signed option agreement and the latest signed
option agreement. The Company then identified the low and high closing prices of the common stock
over the range of potential grant dates and applied both the low and high closing prices of the
common stock to the number of shares granted to determine the range of potential adjustments to
stock-based compensation expense for these grants, which was $2.6 million to $5.9 million, net of
forfeitures. The Companys analyses indicate that stock-based compensation expense computed using
other identified alternative default methodologies would not materially differ from stock-based
compensation expense computed using the average days to sign agreement methodology. The
Companys procedures for evaluating the appropriateness of measurement dates fixed with reference
to the average days to sign agreements also included a sensitivity analysis which provided an
understanding of the differences between the additional recorded charge for stock-based
compensation expense and the charges that would result from using other identified alternative
methods for determining measurement dates. The Companys sensitivity analysis included identifying
the range of potential grant dates defined by the recorded grant date and the average days to sign
agreement for each grant. The Company then identified the low and high closing prices of the
common stock within that range of potential grant dates and applied both the low and high closing
prices of the common stock to the number of shares granted to determine the range of potential
adjustments to stock-based compensation expense for these grants, which was $0.03 million to $6.1
million, net of forfeitures, as compared to the additional non-cash, pre-tax charge for these
grants of approximately $4.4 million, net of forfeitures, included in the Restatement.
Given the volatility of the common stock during much of the Review Period, the use of methodologies
and measurement dates different from those described above could have resulted in a higher or lower
cumulative compensation expense which would have caused net income or loss to be different from the
amounts reported in the restated consolidated financial statements. The Companys procedures for
evaluating the appropriateness of measurement dates fixed using the default methodologies described
above also included a sensitivity analysis which provided an understanding of the differences
between the additional recorded charge for stock-based compensation expense and the charges that
would result from using other identified alternative methods for determining measurement dates.
The Companys sensitivity analysis included identifying the range of potential grant dates defined
by the recorded grant date and the appropriate measurement date for each grant. The Company then
identified the low and high closing prices of the common stock within that range of potential grant
dates and applied both the low and high closing prices of the common stock to the number of shares
granted to determine the range of potential adjustments to stock-based compensation expense for
these grants, which was $9.3 million to $99.3 million, net of forfeitures, as compared to the
additional non-cash, pre-tax charge for these grants of approximately $70.0 million, net of
forfeitures, included in the Restatement.
Other adjustments through March 31, 2006
From 1994 through 1998, the Company did not properly account for stock options for one officer that
were modified after the grant date pursuant to a separation agreement. Some of these modifications
were not identified in the Companys financial reporting processes and were therefore not properly
reflected in its financial statements. As a result, the Company has recorded a non-cash charge for
stock-based compensation of $1.0 million during Fiscal 1999.
Summary
In summary, the Company recorded cumulative non-cash charges for stock-based compensation of $70.9
million through March 31, 2006, offset in part by a cumulative income tax benefit of $27.7 million,
for a total after-tax charge of $43.2 million. These charges had no impact on net sales or cash
and cash equivalents as previously reported in the Companys financial statements; as a result, no
changes to these items are reflected in the Restatement. Non-cash charges for stock-based
compensation expense have been recorded as adjustments to Selling, General, and Administrative
Expenses within the Companys Consolidated Statements of Income.
1Q07 Restatement
In addition to the Restatement noted above through March 31, 2006, the Company has recorded a
non-cash charge for stock-based compensation of $1.6 million for the three (3) month period ended
July 1, 2006, offset in part by an income tax benefit of $0.6 million, or a total after-tax charge
of $1.0 million. This charge was recorded to reflect additional non-cash, stock-based
8
compensation expense recognized under the fair value method (SFAS 123(R)) because the exercise
price for certain stock option grants prior to, but not vested as of March 31, 2006, differed from
the fair market value of the underlying shares on the appropriate measurement date, some of which
occurred during Fiscal 2007.
The table below reflects the impact of the additional non-cash charges for stock-based compensation
expense on the Companys Consolidated Statements of Income, including the cumulative adjustment to
Retained Earnings as of March 31, 2006 and July 1, 2006 on the Companys Consolidated Balance
Sheet. See Note 3 of the Notes to Consolidated Financial Statements for reference to footnote
disclosure that reconciles the previously filed annual financial information to the restated annual
financial information. All dollar amounts are presented in thousands except per share amounts.
Per share amounts may not total due to rounding.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(As |
|
|
|
|
|
|
|
|
|
|
(As |
|
|
|
|
|
|
|
|
|
|
Adjust- |
|
|
|
|
|
|
previously |
|
|
|
|
|
|
(As |
|
|
|
previously |
|
|
Adjust- |
|
|
Income |
|
|
ment, |
|
|
(As |
|
|
reported) |
|
|
|
|
|
|
Restated) |
|
|
|
reported) |
|
|
ment, |
|
|
Tax |
|
|
Net of |
|
|
Restated) |
|
|
Diluted |
|
|
Adjust- |
|
|
Diluted |
|
|
|
Net Income |
|
|
Pre-Tax |
|
|
Benefit |
|
|
Tax |
|
|
Net Income |
|
|
EPS |
|
|
ment |
|
|
EPS |
|
|
|
FY 94 |
|
$ |
13,370 |
|
|
$ |
43 |
|
|
$ |
(19) |
|
|
$ |
24 |
|
|
$ |
13,346 |
|
|
$ |
0.83 |
|
|
$ |
|
|
|
$ |
0.83 |
|
FY 95 |
|
|
14,515 |
|
|
|
461 |
|
|
|
(144) |
|
|
|
317 |
|
|
|
14,198 |
|
|
|
0.89 |
|
|
|
(0.02) |
|
|
|
0.87 |
|
FY 96 |
|
|
18,278 |
|
|
|
406 |
|
|
|
(151) |
|
|
|
255 |
|
|
|
18,023 |
|
|
|
1.10 |
|
|
|
(0.01) |
|
|
|
1.09 |
|
FY 97 |
|
|
24,792 |
|
|
|
1,172 |
|
|
|
(456) |
|
|
|
716 |
|
|
|
24,076 |
|
|
|
1.40 |
|
|
|
(0.04) |
|
|
|
1.36 |
|
FY 98 |
|
|
32,404 |
|
|
|
3,595 |
|
|
|
(1,393) |
|
|
|
2,202 |
|
|
|
30,202 |
|
|
|
1.79 |
|
|
|
(0.12) |
|
|
|
1.67 |
|
FY 99 |
|
|
38,145 |
|
|
|
4,506 |
|
|
|
(1,732) |
|
|
|
2,774 |
|
|
|
35,371 |
|
|
|
2.09 |
|
|
|
(0.15) |
|
|
|
1.94 |
|
FY 00 |
|
|
48,852 |
|
|
|
5,778 |
|
|
|
(2,209) |
|
|
|
3,569 |
|
|
|
45,283 |
|
|
|
2.60 |
|
|
|
(0.19) |
|
|
|
2.41 |
|
FY 01 |
|
|
64,190 |
|
|
|
10,290 |
|
|
|
(3,953) |
|
|
|
6,337 |
|
|
|
57,853 |
|
|
|
3.22 |
|
|
|
(0.32) |
|
|
|
2.90 |
|
FY 02 |
|
|
62,042 |
|
|
|
11,333 |
|
|
|
(4,381) |
|
|
|
6,952 |
|
|
|
55,090 |
|
|
|
2.97 |
|
|
|
(0.33) |
|
|
|
2.64 |
|
FY 03 |
|
|
48,685 |
|
|
|
8,927 |
|
|
|
(2,328) |
|
|
|
6,599 |
|
|
|
42,086 |
|
|
|
2.39 |
|
|
|
(0.32) |
|
|
|
2.07 |
|
FY 04 |
|
|
47,243 |
|
|
|
8,197 |
|
|
|
(4,156) |
|
|
|
4,041 |
|
|
|
43,202 |
|
|
|
2.52 |
|
|
|
(0.22) |
|
|
|
2.30 |
|
FY 05 |
|
|
29,912 |
|
|
|
5,178 |
|
|
|
(2,312) |
|
|
|
2,866 |
|
|
|
27,046 |
|
|
|
1.68 |
|
|
|
(0.16) |
|
|
|
1.52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative 03/31/05 |
|
$ |
442,428 |
|
|
$ |
59,886 |
|
|
$ |
(23,234) |
|
|
$ |
36,652 |
|
|
$ |
405,776 |
|
|
$ |
23.48 |
|
|
$ |
(1.89) |
|
|
$ |
21.59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1Q06 |
|
|
7,394 |
|
|
|
1,120 |
|
|
|
(442) |
|
|
|
678 |
|
|
|
6,716 |
|
|
|
0.43 |
|
|
|
(0.04) |
|
|
|
0.39 |
|
2Q06 |
|
|
12,797 |
|
|
|
1,126 |
|
|
|
(444) |
|
|
|
682 |
|
|
|
12,115 |
|
|
|
0.74 |
|
|
|
(0.04) |
|
|
|
0.70 |
|
3Q06 |
|
|
12,511 |
|
|
|
2,431 |
|
|
|
(959) |
|
|
|
1,472 |
|
|
|
11,039 |
|
|
|
0.70 |
|
|
|
(0.08) |
|
|
|
0.62 |
|
4Q06 |
|
|
4,656 |
|
|
|
6,368 |
|
|
|
(2,612) |
|
|
|
3,756 |
|
|
|
900 |
|
|
|
0.26 |
|
|
|
(0.21) |
|
|
|
0.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FY 06 |
|
$ |
37,358 |
|
|
$ |
11,045 |
|
|
$ |
(4,457) |
|
|
$ |
6,588 |
|
|
$ |
30,770 |
|
|
$ |
2.13 |
|
|
$ |
(0.37) |
|
|
$ |
1.76 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative 03/31/06 |
|
$ |
479,786 |
|
|
$ |
70,931 |
|
|
$ |
(27,691) |
|
|
$ |
43,240 |
|
|
$ |
436,546 |
|
|
$ |
25.61 |
|
|
$ |
(2.26) |
|
|
$ |
23.35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1Q07 |
|
|
7,807 |
|
|
|
1,629 |
|
|
|
(635) |
|
|
|
994 |
|
|
|
6,813 |
|
|
|
0.43 |
|
|
|
(0.06) |
|
|
|
0.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative 07/01/06 |
|
$ |
487,593 |
|
|
$ |
72,560 |
|
|
$ |
(28,326) |
|
|
$ |
44,234 |
|
|
$ |
443,359 |
|
|
$ |
26.04 |
|
|
$ |
(2.32) |
|
|
$ |
23.72 |
|
|
For the convenience of the reader, this Form 10-Q/A sets forth Part I of the 1Q07 Form 10-Q
in its entirety, as amended by, and to reflect, the Restatement. This Form 10-Q/A generally does
not reflect events that have occurred after August 10, 2006, the original filing date of the 1Q07
Form 10-Q, or modify or update the disclosures originally presented in the 1Q07 Form 10-Q except to
reflect the effects of the Restatement, to reflect changes in the Companys evaluation of
disclosure controls and procedures. Accordingly, only the following items of the 1Q07 Form 10-Q
have been amended:
|
|
|
|
|
Part I
|
|
Item 1
|
|
Financial Statements (Unaudited) |
Part I
|
|
Item 2
|
|
Managements Discussion and Analysis of Financial Condition and Results of Operations |
Part I
|
|
Item 4
|
|
Controls and Procedures |
Part II
|
|
Item 6
|
|
Exhibits |
Income Tax Considerations
In the course of the investigation, the Company determined that a number of officers may have
exercised options for which the application of Section 162(m) of the Internal Revenue Code of 1986,
as amended (the Code), may apply. It is possible that these options will be treated as having
been granted at less than fair market value for federal income tax purposes because the Company
incorrectly applied the measurement date as defined in APB 25. If such options are deemed to be
granted at less than fair market value, pursuant to Section 162(m) of the Code (Section 162(m)),
any compensation to officers, including proceeds from options exercised, in any given tax year in excess of $1.0 million will be disallowed as a deduction for tax purposes. The Company estimates that the potential tax effected liability for any such disallowed Section 162(m) deduction would
approximate $3.6 million. The Company may also incur interest and penalties if it were to incur
any such tax liability, which could be material.
9
In addition, the Company is considering the application of Section 409A of the Code (Section
409A) to those options for which it incorrectly applied the measurement date as defined in APB 25.
It is possible that these options will be treated as having been granted at less than fair market
value for federal income tax purposes and thus subject to Section 409A. Accordingly, the Company
may adopt measures to address the application of Section 409A. The Company does not currently know
what impact Section 409A will have, or any such measures, if adopted, would have, on its
results of operations, financial position or cash flows, although such impact could be material.
Expenses Incurred by the Company
The Company has incurred expenses for legal fees and external audit firm fees, in the aggregate
amount of approximately $0.6 million, in the fiscal year ended March 31, 2007, in relation to (i)
the Audit Committees review of the Companys historical stock option practices and related
accounting for stock option grants, (ii) the informal inquiry and formal order of investigation by
the Securities and Exchange Commission regarding its past stock option practices, (iii) the
derivative action relating to the Companys historical stock option practices filed against the
Company as a nominal defendant and certain of the Companys current and former directors and
officers as to whom it may have indemnification obligations and (iv) related matters. Further, the
Company expects to incur significant additional expense related to the foregoing matters in the
fiscal year ending March 31, 2008. It is anticipated that certain of those expenses will be
reimbursed under the Companys directors & officers indemnification insurance.
10
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
BLACK BOX CORPORATION
CONSOLIDATED BALANCE SHEETS (1)
|
|
|
|
|
|
|
|
|
|
|
(As Restated) |
|
|
(As Restated) |
|
In thousands, except par value |
|
July 1, 2006 |
|
|
March 31, 2006 |
|
|
|
(Unaudited) |
|
|
(Unaudited) |
|
|
Assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
14,360 |
|
|
$ |
11,207 |
|
Accounts receivable, net of allowance for doubtful accounts of
$15,884 and $9,517 |
|
|
172,315 |
|
|
|
116,713 |
|
Lease receivables |
|
|
1,071 |
|
|
|
512 |
|
Inventories, net |
|
|
68,243 |
|
|
|
53,926 |
|
Costs and estimated earnings in excess of billings on uncompleted contracts |
|
|
55,400 |
|
|
|
23,803 |
|
Deferred tax asset |
|
|
8,873 |
|
|
|
8,973 |
|
Net current assets of discontinued operations |
|
|
404 |
|
|
|
467 |
|
Other current assets |
|
|
27,187 |
|
|
|
15,523 |
|
|
Total current assets |
|
|
347,853 |
|
|
|
231,124 |
|
Property, plant and equipment, net |
|
|
39,029 |
|
|
|
35,124 |
|
Goodwill, net |
|
|
593,188 |
|
|
|
468,724 |
|
Customer relationships, net |
|
|
54,036 |
|
|
|
24,657 |
|
Other intangibles, net |
|
|
35,471 |
|
|
|
30,783 |
|
Lease receivables, net of current portion |
|
|
987 |
|
|
|
-- |
|
Deferred tax asset |
|
|
19,065 |
|
|
|
19,909 |
|
Other assets |
|
|
3,982 |
|
|
|
5,091 |
|
|
Total assets |
|
$ |
1,093,611 |
|
|
$ |
815,412 |
|
|
Liabilities |
|
|
|
|
|
|
|
|
Current maturities of long-term debt |
|
$ |
704 |
|
|
$ |
1,049 |
|
Current maturities of discounted lease rentals |
|
|
9 |
|
|
|
30 |
|
Accounts payable |
|
|
73,753 |
|
|
|
44,943 |
|
Billings in excess of costs and estimated earnings on uncompleted contracts |
|
|
15,483 |
|
|
|
8,648 |
|
Deferred revenue |
|
|
53,365 |
|
|
|
22,211 |
|
Accrued liabilities: |
|
|
|
|
|
|
|
|
Compensation and benefits |
|
|
25,644 |
|
|
|
13,954 |
|
Restructuring reserve |
|
|
16,090 |
|
|
|
3,292 |
|
Other liabilities |
|
|
52,245 |
|
|
|
27,817 |
|
Income taxes |
|
|
9,887 |
|
|
|
9,511 |
|
|
Total current liabilities |
|
|
247,180 |
|
|
|
131,455 |
|
Long-term debt |
|
|
243,886 |
|
|
|
122,673 |
|
Restructuring reserve |
|
|
14,646 |
|
|
|
7,406 |
|
Other liabilities |
|
|
16,863 |
|
|
|
887 |
|
Stockholders Equity |
|
|
|
|
|
|
|
|
Preferred stock authorized 5,000, par value $1.00, none issued |
|
|
-- |
|
|
|
-- |
|
Common stock authorized 100,000, par value $.001, 17,680 and 17,593 shares
outstanding |
|
|
25 |
|
|
|
25 |
|
Additional paid-in capital |
|
|
424,141 |
|
|
|
418,141 |
|
Retained earnings |
|
|
424,365 |
|
|
|
418,613 |
|
Treasury stock, at cost, 6,935 and 6,935 shares |
|
|
(296,824) |
|
|
|
(296,824) |
|
Accumulated other comprehensive income |
|
|
19,329 |
|
|
|
13,036 |
|
|
Total stockholders equity |
|
|
571,036 |
|
|
|
552,991 |
|
|
Total liabilities and stockholders equity |
|
$ |
1,093,611 |
|
|
$ |
815,412 |
|
|
|
|
|
(1) |
|
See Note 3 of the Notes to Consolidated Financial Statements |
See Notes to Consolidated Financial Statements
11
BLACK BOX CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (1)
|
|
|
|
|
|
|
|
|
|
|
Three months ended (Unaudited) |
|
|
|
(As Restated) |
|
|
(As Restated) |
|
In thousands, except per share amounts |
|
July 1, 2006 |
|
|
July 2, 2005 |
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
|
|
|
|
|
|
Hotline products |
|
$ |
52,225 |
|
|
$ |
53,452 |
|
On-site services |
|
|
178,170 |
|
|
|
125,830 |
|
|
Total |
|
|
230,395 |
|
|
|
179,282 |
|
Cost of sales |
|
|
|
|
|
|
|
|
Hotline products |
|
|
25,461 |
|
|
|
25,874 |
|
On-site services |
|
|
119,090 |
|
|
|
82,468 |
|
|
Total |
|
|
144,551 |
|
|
|
108,342 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
85,844 |
|
|
|
70,940 |
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
|
70,202 |
|
|
|
52,040 |
|
Restructuring and other charges |
|
|
-- |
|
|
|
5,290 |
|
Intangibles amortization |
|
|
1,506 |
|
|
|
1,558 |
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
14,136 |
|
|
|
12,052 |
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
3,640 |
|
|
|
1,959 |
|
Other expense, net |
|
|
115 |
|
|
|
(75) |
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes |
|
|
10,381 |
|
|
|
10,168 |
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
|
3,568 |
|
|
|
3,452 |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
6,813 |
|
|
$ |
6,716 |
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share |
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.39 |
|
|
$ |
0.40 |
|
Diluted |
|
$ |
0.37 |
|
|
$ |
0.39 |
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
|
|
|
|
|
|
Basic |
|
|
17,626 |
|
|
|
16,845 |
|
Diluted |
|
|
18,262 |
|
|
|
17,042 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends per share |
|
$ |
0.06 |
|
|
$ |
0.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
See Note 3 of the Notes to Consolidated Financial Statements |
See Notes to Consolidated Financial Statements
12
BLACK BOX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (1)
|
|
|
|
|
|
|
|
|
|
|
Three months ended (Unaudited) |
|
|
|
(As Restated) |
|
|
(As Restated) |
|
In thousands |
|
July 1, 2006 |
|
|
July 2, 2005 |
|
|
Operating Activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
6,813 |
|
|
$ |
6,716 |
|
Adjustments to reconcile net income to cash provided
by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
3,806 |
|
|
|
3,791 |
|
Deferred tax provision/(benefit) |
|
|
(508) |
|
|
|
(3,091) |
|
Stock compensation expense |
|
|
3,249 |
|
|
|
1,120 |
|
Tax impact from exercised options |
|
|
779 |
|
|
|
187 |
|
Changes in operating assets and liabilities (net of acquisitions): |
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
|
11,218 |
|
|
|
4,785 |
|
Inventories, net |
|
|
(1,066) |
|
|
|
5,032 |
|
Other current assets |
|
|
(2,427) |
|
|
|
(7,371) |
|
Proceeds from lease contracts |
|
|
312 |
|
|
|
735 |
|
Accounts payable and accrued liabilities |
|
|
(9,569) |
|
|
|
(1,101) |
|
|
Net cash provided by operating activities |
|
|
12,607 |
|
|
|
10,803 |
|
|
Investing Activities |
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(1,523) |
|
|
|
(492) |
|
Capital disposals |
|
|
30 |
|
|
|
813 |
|
Acquisition of businesses, net of cash acquired |
|
|
(129,161) |
|
|
|
(13,492) |
|
Prior merger-related (payments)/recoveries |
|
|
(1,350) |
|
|
|
44 |
|
|
Net cash used in investing activities |
|
|
(132,004) |
|
|
|
(13,127) |
|
|
Financing Activities |
|
|
|
|
|
|
|
|
Repayment of borrowings |
|
|
(73,769) |
|
|
|
(53,177) |
|
Proceeds from borrowings |
|
|
194,522 |
|
|
|
56,249 |
|
Repayments on discounted lease rentals |
|
|
(21) |
|
|
|
(423) |
|
Proceeds from the exercise of options |
|
|
3,530 |
|
|
|
136 |
|
Payment of dividends |
|
|
(1,055) |
|
|
|
(1,011) |
|
|
Net cash provided by financing activities |
|
|
123,207 |
|
|
|
1,774 |
|
|
Foreign currency exchange impact on cash |
|
|
(657) |
|
|
|
(34) |
|
|
|
|
|
|
|
|
|
|
|
Increase/(decrease) in cash and cash equivalents |
|
|
3,153 |
|
|
|
(584) |
|
Cash and cash equivalents at beginning of year |
|
|
11,207 |
|
|
|
11,592 |
|
|
Cash and cash equivalents at end of year |
|
$ |
14,360 |
|
|
$ |
11,008 |
|
|
Supplemental Cash Flow: |
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
2,601 |
|
|
$ |
2,140 |
|
Cash paid for income taxes |
|
|
2,685 |
|
|
|
1,240 |
|
Non-cash financing activities: |
|
|
|
|
|
|
|
|
Dividends payable |
|
|
1,061 |
|
|
|
1,011 |
|
Capital leases |
|
|
109 |
|
|
|
390 |
|
|
|
|
|
(1) |
|
See Note 3 of the Notes to Consolidated Financial Statements |
See Notes to Consolidated Financial Statements
13
BLACK BOX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollars in thousands, except per share amounts)
Note 1: Basis of Presentation
The unaudited interim consolidated financial statements included herein have been prepared in
accordance with accounting principles generally accepted in the United States and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by accounting principles generally accepted in the United
States for complete financial statements.
Black Box Corporation (the Company) believes that these consolidated financial statements reflect
all normal, recurring adjustments needed to present fairly the Companys results for the interim
periods presented. The results for interim periods may not be indicative of the results of
operations for any other interim period or for the full year.
As previously disclosed, the financial statements and notes thereto included in the Companys most
recent Annual Report on Form 10-K as filed with the Securities and Exchange Commission (SEC) for
the fiscal year ended March 31, 2006 will need to be restated and, therefore, should not be relied
upon. See Note 3 of the Notes to Consolidated Financial Statements.
The Companys fiscal year ends on March 31. The fiscal quarters consist of 13 weeks and end on the
Saturday nearest each calendar quarter end. The actual ending dates for the periods presented in
these Notes as of June 30, 2006 and 2005 were July 1, 2006 and July 2, 2005, respectively.
References to Fiscal Year or Fiscal mean the Companys fiscal year ended March 31 for the year
referenced.
Note 2: Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the parent company and its
subsidiaries. All significant intercompany accounts and transactions have been eliminated in
consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during
the reporting period. Significant estimates in these financial statements include allowances for
doubtful accounts receivable, sales returns, net realizable value of inventories, loss
contingencies, warranty reserves and intangible assets. Actual results could differ from those
estimates. Management believes the estimates made are reasonable.
Stock-Based Compensation
On April 1, 2006, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123
(revised 2004), Share-Based Payment (SFAS 123(R)) which requires the measurement and
recognition of compensation expense for all share-based payment awards made to employees and
directors based on estimated fair values. SFAS 123(R) supersedes the Companys previous accounting
under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB
25) for periods beginning in Fiscal 2007.
14
SFAS 123(R) requires companies to estimate the fair value of share-based payment awards on the
grant-date using an option-pricing model. The value of the portion of the award that is ultimately
expected to vest is recognized as expense over the requisite service periods in the Companys
Consolidated Statements of Income. Prior to the adoption of SFAS 123(R), the Company accounted for
share-based awards to employees and directors using the intrinsic value method in accordance with
APB 25 as allowed under SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123). Under
the intrinsic value method, no share-based compensation expense related to stock options was
required to be recognized in the Companys Consolidated Financial Statements if the exercise price
of the stock options was equal to or greater than the fair market value of the underlying stock at
the measurement date.
The Company adopted SFAS 123(R) using the modified prospective transition method, which requires
the application of the accounting standard as of April 1, 2006, the first day of the Companys
fiscal year 2007. The Companys Consolidated Financial Statements as of and for the three months
ended June 30, 2006 reflect the impact of SFAS 123(R). In accordance with the modified prospective
transition method, the Companys Consolidated Financial Statements for prior periods have not been
retrospectively adjusted to reflect, and do not include, the impact of SFAS 123(R). See Note 14 of
the Notes to the Consolidated Financial Statements for additional information.
On November 10, 2005, the Financial Accounting Standards Board (the FASB) issued Staff Position
No. SFAS 123(R)-3, Transition Election Related to Accounting for Tax Effects of Share-Based
Payment Awards (SFAS 123(R)-3). The alternative transition method includes simplified methods to
establish the beginning balance of the additional paid-in capital pool (APIC pool) related to the
tax effects of employee share-based compensation, and to determine the subsequent impact on the
APIC pool and Consolidated Statements of Cash Flows of the tax effects of employee share-based
compensation awards that are outstanding upon adoption of SFAS 123(R). The Company is in the
process of evaluating whether to adopt the provisions of SFAS 123(R)-3.
Reclassification
Certain reclassifications have been made to the Consolidated Financial Statements for prior periods
in order to conform to the Fiscal 2007 first quarter (fiscal quarter ending June 30, 2006)
presentation.
Recent Accounting Pronouncements
Accounting for Income Taxes
In July 2006, the FASB issued FASB Interpretation No. (FIN) 48, Accounting for Uncertainty in
Income Taxes (FIN 48). This Interpretation requires that realization of an uncertain income tax
position must be more likely than not (i.e., greater than 50% likelihood of receiving a benefit)
before it can be recognized in the financial statements. Further, FIN 48 prescribes the benefit to
be recorded in the financial statements as the amount most likely to be realized assuming a review
by tax authorities having all relevant information and applying current conventions. The
Interpretation also clarifies the financial statement classification of tax-related penalties and
interest and sets forth new disclosures regarding unrecognized tax benefits.
FIN 48 is effective for the next fiscal year beginning after December 15, 2006. The Company plans
to adopt the Interpretation as of April 1, 2007 as required. The Interpretation is currently being
evaluated by the Company for its full impact and, at this time, the Company believes it has
properly and adequately provided for all income tax positions and therefore expects minimal impact
from adopting the Interpretation.
Accounting Changes and Error Corrections
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections (SFAS 154).
This Statement replaces APB No. 20 Accounting Changes cumulative effect accounting with
accounting treatment based on retroactive restatement of comparative financial statements. It
applies to all voluntary changes in accounting principle and defines retrospective application to
differentiate it from restatements due to incorrect accounting. The provisions of this Statement
are effective for accounting changes and corrections of errors made in fiscal years beginning after
December 15, 2005. The Companys adoption of SFAS 154 had no impact on its financial position,
results of operations or cash flows.
Accounting for Conditional Asset Retirement Obligations
In March 2005, the FASB issued FIN 47, Accounting for Conditional Asset Retirement Obligations
(FIN 47). FIN 47 clarifies the term conditional asset retirement obligation as used in SFAS No.
143, Accounting for Asset Retirement Obligations, which refers to a legal obligation to perform
an asset retirement activity in which the timing and/or method of settlement are conditional on a
future event. Uncertainty about the timing and/or method of settlement of a conditional asset
retirement obligation should be factored into the measurement of the liability when sufficient
information exists. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. There was no impact to the Company upon adoption of FIN 47.
15
Segments
In February 2005, the FASB issued Emerging Issues Task Force (EITF) No. 04-10, Determining
Whether to Aggregate Segments That Do Not Meet the Quantitative Thresholds (EITF 04-10). This
Statement clarifies the aggregation criteria of operating segments as defined in SFAS 131 (as
defined below in Note 15 of the Notes to Consolidated Financial Statements). The effective date of
this Statement is for fiscal years ending after September 15, 2005. The Company believes that its
current segment reporting complies with EITF 04-10.
Stock-Based Compensation
In December 2004, the FASB issued SFAS 123(R). SFAS 123(R) is a revision of SFAS 123, supersedes
APB 25 and amends SFAS No. 95, Statement of Cash Flows. SFAS 123(R) requires that companies
recognize all share-based payments to employees, including grants of employee stock options, in the
financial statements. The recognized cost will be based on the fair value of the equity or
liability instruments issued. Pro forma disclosure of this cost is no longer an alternative under
SFAS 123(R). The Company adopted SFAS 123(R) as of April 1, 2006, the first day of the Companys
Fiscal Year 2007, using the modified prospective transition method. This transition method requires
compensation cost to be recognized for all share-based payments granted after the date of adoption
and for all unvested awards existing on the date of adoption. The Companys Consolidated Financial
Statements as of and for the three months ended June 30, 2006 reflect the impact of SFAS 123(R). In
accordance with the modified prospective transition method, the Companys Consolidated Financial
Statements for prior periods have not been restated to reflect, and do not include, the impact of
SFAS 123(R). However, had the Company adopted SFAS 123(R) in prior periods, the impact would have
approximated the amounts in its disclosure of pro forma net income and earnings per share in Note
14 of the Notes to Consolidated Financial Statements.
The impact on future reporting periods of adopting SFAS 123(R) cannot be predicted at this time
because it will depend on levels of share-based payments granted in the future. SFAS 123(R) also
requires the benefits of tax deductions in excess of recognized compensation cost be reported as a
financing cash flow, rather than as an operating cash flow as required under past standards. This
requirement will reduce net operating cash flows and increase net financing cash flows in future
reporting periods. The Company cannot estimate what those amounts will be in the future because
they are dependant on, among other things, when employees exercise stock options.
Note 3: Restatement of Consolidated Financial Statements
Restatement through March 31, 2006
Background
On November 13, 2006, Black Box received a letter of informal inquiry from the Enforcement Division
of the SEC relating to the Companys stock option practices from January 1, 1997 to present. As a
result, the Audit Committee, with the assistance of outside legal counsel, commenced an independent
review of the Companys historical stock option grant practices and related accounting for stock
option grants during the period from 1992 to the present (the Review Period).
On February 1, 2007, the Company announced that, while the review of option grant practices was
continuing, it believed that it would need to record additional non-cash charges for stock-based
compensation expense relating to certain stock option grants and, accordingly, cautioned investors
about relying on its historical financial statements until the Company could determine with
certainty whether a restatement would be required and, if so, the extent of any such restatement
and the periods affected.
On March 19, 2007, although the Audit Committee had not yet completed its review, the Audit
Committee concluded that the exercise price of certain stock option grants differed from the fair
market value of the underlying shares on the appropriate measurement date. At that time, the
Company and the Audit Committee announced that it was currently expected that the Companys
additional non-cash, pre-tax charges for stock-based compensation expense relating to certain stock
option grants would approximate $63 million for the Review Period. In addition, the Company and
the Audit Committee concluded that the Company would need to restate its previously-issued
financial statements contained in reports previously filed by the Company with the SEC.
Accordingly, on March 19, 2007, the Company and the Audit Committee concluded that the Companys
previously-issued financial statements and other historical financial information and related
disclosures for the Review Period, including applicable reports of its
current or former independent registered public accounting firms and related press releases, should
not be relied upon.
16
On May 25, 2007, the Company was advised by the Enforcement Division of the SEC that a Formal Order
of Private Investigation arising out of the Companys stock option practices had been entered and
on May 29, 2007 the Company received a subpoena that was issued by the SEC.
On May 31, 2007, the Company announced that, as a result of the ongoing review of stock option
practices, Company management and the Audit Committee expected that the Companys additional
non-cash, pre-tax charges for stock-based compensation expense relating to certain stock option
grants would approximate $70 million for the Review Period.
Findings of the Audit Committee
During the Review Period, the Company granted stock options pursuant to an employee stock option
plan and a director stock option plan to acquire approximately 10.9 million shares of common stock,
par value $.001 per share (the common stock). Such plans at all relevant times provided for
option grants to be approved by a designated committee of non-employee directors or, in the case of
the director stock option plan, by the Companys Board of Directors (the Board). Approximately
2,000 stock option grants were awarded during the Review Period with 69 recorded grant dates. No
stock options have been granted since September, 2006. The Audit Committee reviewed all stock
options granted during the Review Period, including option grants to the Companys directors,
officers and rank and file employees (including grants to new employees, grants awarded in
connection with Company acquisitions and grants made as individual or group performance awards).
The Audit Committees review of the Companys stock option granting practices included a
comprehensive examination of reasonably available relevant physical and electronic documents as
well as interviews with current and former directors, officers and Company personnel.
The Audit Committees review was initially focused on determining whether the Companys prior stock
option granting practices were in compliance with the plans granting provisions and applicable law
or called into question its accounting for such options. Once it became evident that such issues
and accounting implications existed, the inquiry focused on those matters necessary: to determine
whether any accounting charges were material and whether a restatement of the Companys
previously-issued financial statements would be required; to establish a basis for effecting any
required restatement; to assure that, on as timely a basis as possible, the Company could file any
required curative disclosures with the SEC and assure its continued eligibility for listing on The
NASDAQ Stock Market; and to provide an informed basis for the Companys response to the identified
issues, including appropriate corrective and remedial actions.
The following information summarizes certain of the findings of the Audit Committee. The findings
identified approximately $71.5 million of unrecorded expense at the time of grant (i.e., the
difference between the fair market value of the common stock on the appropriate measurement date
and the stated exercise price), net of forfeitures, during the Review Period, of which $70.0
million was recorded in the Companys Consolidated Financial Statements through March 31, 2006 and
$1.5 million of unrecorded expense at the time of grant will be included, beginning at April 1,
2006, in the Companys computation of compensation expense in accordance with SFAS 123(R). The
following summarizes the unrecorded expense at the time of grant by time period and category of
recipient:
|
|
|
$4.2 million for the period from Fiscal 1993 through Fiscal 1997 ($0.2 million for
directors, $2.5 million for officers and $1.5 million for rank and file employees) |
|
|
|
|
$45.6 million for the period from Fiscal 1998 through August 2002 ($1.1 million for
directors, $25.7 million for officers and $18.7 million for rank and file employees) |
|
|
|
|
$21.8 million for the period from August 2002 to the present ($0.04 million for directors,
$0.6 million for officers and $21.1 million for rank and file employees) |
The Audit Committees additional key findings are summarized below:
Lack of Adequate Documentation: For a majority of grants issued by the Company during the
Review Period, there is either no or inadequate documentation of approval actions that satisfies
the requisites for establishing a measurement date under APB 25. Of the 69 recorded grant dates,
there are documented approval actions by the Board or the Option or Compensation Committee of the
Board (the Compensation Committee) with respect to particular grants for 12 dates. In the period
December 1992 to May 1996, neither the minutes of the Compensation Committee nor of the Board
reflect any action to approve specific grants. In some instances, evidence of single director (the
chairman of the Compensation Committee) approval actions exists. This absence of non-employee
director level documentation also applies to a majority of grants with a recorded grant date after
1996. In some cases, Compensation Committee minutes contain a reference to reports on the status
of the option pool but do not document any action to approve specific grants. Approval
documentation for certain grants has internal inconsistencies or conflicts with other documents
thereby rendering this documentation unreliable as a basis for establishing a measurement date. In
some cases, the only existing documentation is the executed option agreement and/or the entry of
the option grant into the option database. Notwithstanding these approval documentation
inadequacies, the Company entered into option agreements with grantees and has honored such grants.
17
Grant Approvals: During the Review Period, relatively few option grants were approved in
complete compliance with the Companys stock option plans. Available documentation reflects that
the Company approved option grants in a variety of ways. With respect to the employee stock option
plan, grants were approved by the Compensation Committee as contemplated by the plan at various
times, by the full Board in 1998 and 1999, by a single director (the chairman of the Compensation
Committee) on nine recorded grant dates during the period 1994 through 2001 and by the Companys
Chief Executive Officer (CEO) at various times. With respect to the director stock option plan,
grants were generally approved by the designated Board committee and, in a few cases, by the
chairman of the Compensation Committee. In one instance in 2000, there is no conclusive
documentary evidence of the approval of director grants other than the signed director option
agreements.
The delegation of authority by the Compensation Committee to the CEO with respect to grants to rank
and file employees was not fully documented. However, there was an understood and accepted
practice between the CEO and the Compensation Committee whereby the CEO made certain awards to
individual employees. In some instances, this involved the allocation among rank and file
employees of blocks of shares approved by the Compensation Committee; in three (3) such instances,
the number of shares ultimately awarded pursuant to this process exceeded the approved size of the
block, which was contrary to the understanding of the Compensation Committee members. Further,
contrary to the understanding of Committee members, the award and/or documentation of those
individual grants often significantly lagged the approval of the block grant. In August 2005, the
Compensation Committee specifically acknowledged a prior grant of delegated authority to the CEO to
make option grants to rank and file employees and ratified all prior awards by the CEO. In some
cases, documentation of approval action is either inconclusive or missing, and the Company
therefore has been unable to determine what entity or person actually approved specific grants.
Option Pricing: The recorded grant dates for a majority of grants do not match the
applicable measurement dates as determined under APB 25. The grants of options with exercise
prices lower than the fair market values of the stock on the actual measurement dates did not
satisfy the fair market pricing requirement in the Companys plans, as amended in 1998, and were
not consistent with the Companys disclosures in SEC filings stating that the exercise price of
options was equal to the fair market value of the stock on the date of the grant.
The relationship between the stated exercise price of options and the fair market value of the
Companys stock on the date of the identifiable approval actions varied from grant to grant. In
some cases, the exercise price of grants reflected the fair market value of the underlying shares
on the date of any documented approval action. In other cases, the exercise prices reflected the
fair market value of the underlying shares on a date either prior or subsequent to any such
documented approval action and the exercise price was lower than the fair market value on the date
of any such action. In several such cases before August 2002, the use of such grant dates and
lower exercise prices (together with other available evidence) supports a finding that the recorded
grant dates and corresponding exercise prices were selected with the benefit of hindsight. For
certain grants where the mismatch between the recorded grant date and the approval action was only
a matter of days, however, the mismatch appears to have been attributable to inaccurate recording
or administrative delays. In some cases, the apparent approval action did not identify all
grantees; for example, there are cases where a block grant was approved subject to a later
determination of individual grant recipients and grants were recorded with a grant date, and
corresponding exercise price, that matched the date of the apparent approval of the block grant and
the fair market value of the common stock on that date although individual grant recipients may
have been identified some time after approval of the block grant. Finally, in some cases, the
approval action for specific grants is not adequately documented. Where the recorded grant date
did not satisfy the requisites for a measurement date under APB 25, the Company relied on default
methodologies to determine an appropriate measurement date.
Internal Controls: As outlined above, the Companys historical administration of its
options program lacked discipline as it relates to proper adherence to the plan requirements,
corporate recordkeeping and documentation. Since November 2003, however, the Company has properly
administered the stock option program as it relates to awards to directors and officers. During
the investigation, the Company identified control gaps related to grants made throughout the Review
Period. As of March 31, 2007, the Company implemented additional procedures to its process that
are focused on formalized documentation of appropriate approvals and determination of grant terms
to employees.
Procedural and Remedial Actions
The Audit Committee and other relevant Board committees are committed to a continued review and
implementation of procedural enhancements and remedial actions in light of the foregoing findings.
Consistent with its obligation to act in the best interests of the Company taking into account all
relevant facts and circumstances, the Audit Committee is continuing to assess the appropriateness
of a broad range of possible procedural enhancements and potential remedial measures in light of
the findings of its investigation. While the Audit Committee has not completed its consideration
of all such steps, procedural enhancements may include recommendations regarding improved stock
option administration procedures and controls, training and monitoring compliance with those
procedures, corporate recordkeeping, corporate risk assessment, evaluation of the internal
compliance environment and other remedial steps that
18
may be appropriate. The Audit Committee is
also expected to address issues of individual conduct or responsibility, including those of the
Board, CEOs and Chief Financial Officers (CFOs) serving during the Review Period. Potential
remedial measures may include an evaluation of the role of and possible claims or other remedial
actions against current and former Company personnel who may be found to have been responsible for
identified problems during the Review Period. The Audit Committee expects to recommend to the
Board and/or its appropriate committees procedural enhancements and remedial measures that
appropriately address the issues raised by its findings. In advance of action by the Audit
Committee, as noted above, the Company has implemented additional procedures to its process for
approving stock option grants that are focused on formalized documentation of appropriate approvals
and determination of grant terms to employees.
Restatement Methodologies
As of April 1, 2006, the Company adopted SFAS 123(R) using the modified prospective transition
method. Under this transition method, compensation expense is to be recognized for all share-based
compensation awards granted after the date of adoption and for all unvested awards existing on the
date of adoption. Prior to April 1, 2006, the Company accounted for stock-based compensation
awards to directors, officers and rank and file employees using the intrinsic value method in
accordance with APB 25 as allowed under SFAS 123. Under the intrinsic value method, no share-based
compensation expense related to stock options was required to be recognized if the exercise price
of the stock option was at least equal to the fair market value of the common stock on the
measurement date. APB 25 defines the measurement date as the first date on which are known both
(1) the number of shares that an individual grant recipient is entitled to receive and (2) the
option or purchase price, if any.
In light of the Audit Committees review of the Companys stock option granting practices during
the Review Period and as to those cases in which the Company previously used a recorded grant date
as the measurement date that the Company determined could no longer be relied upon, the Company has
developed and applied the following methodologies to remeasure those stock option grants and record
the relevant charges in accordance with APB 25 by considering the following sources of information:
(i) meeting minutes of the Board and of committees thereof and related materials, (ii) Unanimous
Written Consents of the Board and of committees thereof, (iii) the dates on which stock option
grants were entered into the Companys stock option database (create date), (iv) relevant email
correspondence reflecting stock option grant approval actions, (v) individual stock option
agreements and related materials, (vi) employee and Board offer letters, (vii) documents relating
to acquisitions, (viii) reports on Form 4 filed with the SEC and (ix) guidance of the Office of the
Chief Accountant of the SEC on stock option matters as set forth in its letter dated September 19,
2006.
Grants with Appropriate Committee Approval. With respect to grants of approximately 1.0 million
shares, or approximately 9% of the total grants in the Review Period, the Company has evidence to
support the approval of the grant under the stock option plans by the relevant committee of the
Board, and such evidence includes the number of options each individual was entitled to receive and
the option price. However, the relationship between these documented approval actions and the
originally-recorded grant dates and exercise prices for the options so approved varied during the
Review Period. In some cases, grants were recorded with a grant date and a corresponding exercise
price that matched the date of the approval action or were otherwise consistent with the terms of
the approval actions. In other cases, however, the recorded grant dates and corresponding exercise
prices of the grants reflected the fair market value of the common stock on a date prior to the
committees documented approval actions. The Company has restated the compensation expense for
stock option grants relating to approximately 0.4 million shares of common stock by using the date
of the documented approval action as the measurement date. The total additional non-cash, pre-tax
charge for these grants is approximately $1.8 million, net of forfeitures, amortized over the
appropriate vesting period through March 31, 2006, of which $0.07 million relates to director
options, $1.3 million relates to officer options and $0.4 million relates to rank and file employee
options.
Grants with Other Approvals. With respect to grants of approximately 1.9 million shares, or
approximately 18% of the total grants in the Review Period, the Company has evidence to support the
approval of the grant by the Board, an outside director or the Companys CEO and the identification
of the number of options each individual was entitled to receive together with the option price.
These grants are distinguished from the grants described in the prior paragraph in that the nature
of the approval was not fully consistent with the terms of the relevant stock option plan. As with
the grants discussed in the preceding paragraph, the relationship between these documented approval
actions and the originally-recorded grant dates and exercise prices for the options so
approved varied during the Review Period. In some cases, grants were recorded with a grant date
and a corresponding exercise price that matched the date of the approval action or were otherwise
consistent with the terms of the approval action. In other cases, however, the recorded grant
dates and corresponding exercise prices of the grants reflected the fair market value of the
Companys stock on a date prior to the approval action. The Company has restated the compensation
expense for stock option grants relating to approximately 1.6 million shares of common stock by
using the date of the documented approval action as the measurement date. The total additional
non-cash, pre-tax charge for these grants is approximately $7.6 million, net of forfeitures,
amortized over the appropriate vesting period through March 31, 2006, of which $0.5 million relates
to director options, $2.6 million relates to officer options and $4.5 million relates to rank and
file employee options.
19
Grants Lacking Adequate Documentation. With respect to grants of approximately 7.9 million shares
(5.0 million shares to rank and file employees), or 73.0% of the total grants in the Review Period,
the Company has been unable to locate adequate documentation of approval actions that would satisfy
the requisites for a measurement date under APB 25. For these grants, management considered all
available relevant information to form a reasonable conclusion as to the most reasonable
measurement date. For all grants in this category, the Company has established default
methodologies for determining the most appropriate measurement date under APB 25.
With respect to grants entered into the Companys stock option database after September 9, 1999,
when the database began to reflect a create date which is the date on which a grant was entered
into the system, the Company has determined to use the individual create date for each grant as
the APB 25 measurement date, which was in most cases different from the originally-recorded grant
date. The Company believes that this create date is the most appropriate methodology in the
absence of sufficient evidence of approvals for these grants as it represents the earliest point in
time at which the evidence shows that all requisites for the establishment of the measurement date
had been satisfied. Such create dates preceded, often by a significant amount of time, the
execution of stock option agreements, which, generally, were manually signed by the Companys CEO
and manually signed and dated by the grantee. In addition, in almost all cases, a grant entered
into the database, which established the create date, ultimately resulted in the creation of a
stock option agreement reflecting such grant. Accordingly, while execution of the stock option
agreements constituted a clear acknowledgement by the grantee and the Company of the grantees
legal entitlement to the grant the Company believes the create date more accurately reflects the
date of approval than does the signed option agreement. The Company has restated the compensation
expense for stock option grants relating to approximately 4.2 million shares of common stock by
using the create date as the measurement date. The total additional non-cash, pre-tax charge for
these grants is approximately $49.8 million, net of forfeitures, amortized over the appropriate
vesting period through March 31, 2006, of which $0.5 million relates to director options, $17.2
million relates to officer options and $32.2 million relates to rank and file employee options.
The Companys procedures for evaluating the appropriateness of measurement dates fixed with
reference to such create dates included a sensitivity analysis which provided an understanding of
the differences between the additional recorded charge for stock-based compensation expense and the
charges that would result from using other identified alternative methods for determining
measurement dates. The Companys sensitivity analysis included identifying the range of potential
grant dates defined by the recorded grant date and the create date for each grant. The Company
then identified the low and high closing prices of the common stock within that range of potential
grant dates and applied both the low and high closing prices of the common stock to the number of
shares granted for which the create date methodology was utilized to determine the range of
potential adjustments to stock-based compensation expense for these grants, which was $0.09 million
to $73.8 million, net of forfeitures, as compared to the additional non-cash, pre-tax charge for
these grants of approximately $49.8 million, net of forfeitures, included in the Restatement.
For options entered into the Companys option database before September 9, 1999, the Company
determined the measurement date generally by reference to signed option agreements (or the deemed
signature date for certain options as discussed below). The executed option agreements
(hereinafter signed option agreements), manually signed by the Companys CEO and manually signed
and dated by the grantee, constituted an acknowledgement by the grantee and the Company of the
grantees legal entitlement to the grant and, in the absence of authoritative information as to
when all the requisites for the establishment of the measurement date had been satisfied, provides
a measurement date framework based on entitlement. The Company has restated the compensation
expense for stock option grants relating to approximately 1.4 million shares of common stock by
using the signed option agreements as the measurement date. The total additional non-cash, pre-tax
charge for these grants is approximately $6.4 million, net of forfeitures, amortized over the
appropriate vesting period through March 31, 2006, of which $0.3 million relates to director
options, $3.6 million relates to officer options and $2.5 million relates to rank and file employee
options. The Company believes this methodology was the most appropriate in the absence of
sufficient evidence of approvals for these grants as it represents the earliest point in time at
which the evidence shows that all requisites for the establishment of the measurement date had been
satisfied for these grants. The Companys procedures for evaluating the appropriateness of
measurement dates fixed with reference to the dating of signed option agreements included a
sensitivity analysis which provided an understanding of the differences between the additional
recorded charge for stock-based compensation expense and the charges that would result from using
other identified alternative methods for determining measurement dates. The Companys sensitivity
analysis included identifying the range of potential grant dates defined by the recorded grant date
and the date of the grantees signature on the stock option agreement for each grant. The Company
then
identified the low and high closing prices of the common stock within that range of potential grant
dates and applied both the low and high closing prices of the common stock to the number of shares
granted for which the signed option agreements methodology was utilized to determine the range of
potential adjustments to stock-based compensation expense for these grants, which was $0.03 million
to $9.6 million, net of forfeitures, as compared to the additional non-cash, pre-tax charge for
these grants of approximately $6.4 million, net of forfeitures, included in the Restatement.
In those cases where no reliably-dated signed option agreement could be located and where no
post-September 9, 1999 create date exists (stock option grants totaling approximately 0.9 million
shares), the Company used the average period between recorded grant date and date of the signatures
on all other grantee signed option agreements with the same grant date as the measurement date.
For example, if there were four stock option grants with a grant date of January 1, 1996, the
Company had the signed option agreements for three of these stock option grants and the average
number of days between the grant date and the signature dates of these three signed option
agreements was 20 days, January 21, 1996 was used as the measurement date for the grant for which
no signed option agreement could be located. The Company has
20
restated the compensation expense for
stock option grants relating to approximately
0.7 million shares of common stock using this
average days to sign agreement method. The total additional non-cash, pre-tax charge for these
grants is approximately $4.4 million, net of forfeitures, amortized over the appropriate vesting
period through March 31, 2006, of which $0.06 million relates to director options, $4.2 million
relates to officer options and $0.2 million relates to rank and file employee options. The Company
believes this methodology was the most appropriate in the absence of sufficient evidence of
approvals for these grants because it gives a reasonable approximation of the measurement date
related to these options in light of the available evidence. The Company conducted a sensitivity
analysis by comparing the Companys current default methodology (i.e., average days to sign
agreement) with another default methodology. For this analysis, the Company identified the range
of potential grant dates defined by the earliest signed option agreement and the latest signed
option agreement. The Company then identified the low and high closing prices of the common stock
over the range of potential grant dates and applied both the low and high closing prices of the
common stock to the number of shares granted to determine the range of potential adjustments to
stock-based compensation expense for these grants, which was $2.6 million to $5.9 million, net of
forfeitures. The Companys analyses indicate that stock-based compensation expense computed using
other identified alternative default methodologies would not materially differ from stock-based
compensation expense computed using the average days to sign agreement methodology. The
Companys procedures for evaluating the appropriateness of measurement dates fixed with reference
to the average days to sign agreements also included a sensitivity analysis which provided an
understanding of the differences between the additional recorded charge for stock-based
compensation expense and the charges that would result from using other identified alternative
methods for determining measurement dates. The Companys sensitivity analysis included identifying
the range of potential grant dates defined by the recorded grant date and the average days to sign
agreement for each grant. The Company then identified the low and high closing prices of the
common stock within that range of potential grant dates and applied both the low and high closing
prices of the common stock to the number of shares granted to determine the range of potential
adjustments to stock-based compensation expense for these grants, which was $0.03 million to $6.1
million, net of forfeitures, as compared to the additional non-cash, pre-tax charge for these
grants of approximately $4.4 million, net of forfeitures, included in the Restatement.
Given the volatility of the common stock during much of the Review Period, the use of methodologies
and measurement dates different from those described above could have resulted in a higher or lower
cumulative compensation expense which would have caused net income or loss to be different from the
amounts reported in the restated consolidated financial statements. The Companys procedures for
evaluating the appropriateness of measurement dates fixed using the default methodologies described
above also included a sensitivity analysis which provided an understanding of the differences
between the additional recorded charge for stock-based compensation expense and the charges that
would result from using other identified alternative methods for determining measurement dates.
The Companys sensitivity analysis included identifying the range of potential grant dates defined
by the recorded grant date and the appropriate measurement date for each grant. The Company then
identified the low and high closing prices of the common stock within that range of potential grant
dates and applied both the low and high closing prices of the common stock to the number of shares
granted to determine the range of potential adjustments to stock-based compensation expense for
these grants, which was $9.3 million to $99.3 million, net of forfeitures, as compared to the
additional non-cash, pre-tax charge for these grants of approximately $70.0 million, net of
forfeitures, included in the Restatement.
Other adjustments through March 31, 2006
From 1994 through 1998, the Company did not properly account for stock options for one officer that
were modified after the grant date pursuant to a separation agreement. Some of these modifications
were not identified in the Companys financial reporting processes and were therefore not properly
reflected in its financial statements. As a result, the Company has recorded a non-cash charge for
stock-based compensation of $1.0 million during Fiscal 1999.
Summary
In summary, the Company recorded cumulative non-cash charges for stock-based compensation of $70.9
million through March 31, 2006, offset in part by a cumulative income tax benefit of $27.7 million,
for a total after-tax charge of $43.2 million. These charges had no impact on net sales or cash
and cash equivalents as previously reported in the Companys financial statements; as a result, no
changes to these items are reflected in the Restatement. Non-cash charges for stock-based
compensation expense have been recorded as adjustments to Selling, General, and Administrative
Expenses within the Companys Consolidated Statements of Income.
1Q07 Restatement
In addition to the Restatement noted above through March 31, 2006, the Company has recorded a
non-cash charge for stock-based compensation of $1.6 million for the three (3) month period ended
July 1, 2006, offset in part by an income tax benefit of $0.6 million, or a total after-tax charge
of $1.0 million. This charge was recorded to reflect additional non-cash, stock-based
compensation expense recognized
21
under the fair value method (SFAS 123(R)) because the exercise
price for certain stock option grants prior to, but not vested as of March 31, 2006, differed from
the fair market value of the underlying shares on the appropriate measurement date, some of which
occurred during Fiscal 2007.
The table below reflects the impact of the additional non-cash charges for stock-based compensation
expense on the Companys Consolidated Statements of Income, including the cumulative adjustment to
Retained Earnings as of March 31, 2006 and July 1, 2006 on the Companys Consolidated Balance
Sheet. All dollar amounts are presented in thousands except per share amounts.
Per share amounts may not total due to rounding.
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(As |
|
|
|
|
|
|
|
|
|
|
(As |
|
|
|
|
|
|
|
|
|
|
Adjust- |
|
|
|
|
|
|
previously |
|
|
|
|
|
|
(As |
|
|
|
previously |
|
|
Adjust- |
|
|
Income |
|
|
ment, |
|
|
(As |
|
|
reported) |
|
|
|
|
|
|
Restated) |
|
|
|
reported) |
|
|
ment, |
|
|
Tax |
|
|
Net of |
|
|
Restated) |
|
|
Diluted |
|
|
Adjust- |
|
|
Diluted |
|
|
|
Net Income |
|
|
Pre-Tax |
|
|
Benefit |
|
|
Tax |
|
|
Net Income |
|
|
EPS |
|
|
ment |
|
|
EPS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FY 94 |
|
$ |
13,370 |
|
|
$ |
43 |
|
|
$ |
(19 |
) |
|
$ |
24 |
|
|
$ |
13,346 |
|
|
$ |
0.83 |
|
|
$ |
|
|
|
$ |
0.83 |
|
FY 95 |
|
|
14,515 |
|
|
|
461 |
|
|
|
(144 |
) |
|
|
317 |
|
|
|
14,198 |
|
|
|
0.89 |
|
|
|
(0.02 |
) |
|
|
0.87 |
|
FY 96 |
|
|
18,278 |
|
|
|
406 |
|
|
|
(151 |
) |
|
|
255 |
|
|
|
18,023 |
|
|
|
1.10 |
|
|
|
(0.01 |
) |
|
|
1.09 |
|
FY 97 |
|
|
24,792 |
|
|
|
1,172 |
|
|
|
(456 |
) |
|
|
716 |
|
|
|
24,076 |
|
|
|
1.40 |
|
|
|
(0.04 |
) |
|
|
1.36 |
|
FY 98 |
|
|
32,404 |
|
|
|
3,595 |
|
|
|
(1,393 |
) |
|
|
2,202 |
|
|
|
30,202 |
|
|
|
1.79 |
|
|
|
(0.12 |
) |
|
|
1.67 |
|
FY 99 |
|
|
38,145 |
|
|
|
4,506 |
|
|
|
(1,732 |
) |
|
|
2,774 |
|
|
|
35,371 |
|
|
|
2.09 |
|
|
|
(0.15 |
) |
|
|
1.94 |
|
FY 00 |
|
|
48,852 |
|
|
|
5,778 |
|
|
|
(2,209 |
) |
|
|
3,569 |
|
|
|
45,283 |
|
|
|
2.60 |
|
|
|
(0.19 |
) |
|
|
2.41 |
|
FY 01 |
|
|
64,190 |
|
|
|
10,290 |
|
|
|
(3,953 |
) |
|
|
6,337 |
|
|
|
57,853 |
|
|
|
3.22 |
|
|
|
(0.32 |
) |
|
|
2.90 |
|
FY 02 |
|
|
62,042 |
|
|
|
11,333 |
|
|
|
(4,381 |
) |
|
|
6,952 |
|
|
|
55,090 |
|
|
|
2.97 |
|
|
|
(0.33 |
) |
|
|
2.64 |
|
FY 03 |
|
|
48,685 |
|
|
|
8,927 |
|
|
|
(2,328 |
) |
|
|
6,599 |
|
|
|
42,086 |
|
|
|
2.39 |
|
|
|
(0.32 |
) |
|
|
2.07 |
|
FY 04 |
|
|
47,243 |
|
|
|
8,197 |
|
|
|
(4,156 |
) |
|
|
4,041 |
|
|
|
43,202 |
|
|
|
2.52 |
|
|
|
(0.22 |
) |
|
|
2.30 |
|
FY 05 |
|
|
29,912 |
|
|
|
5,178 |
|
|
|
(2,312 |
) |
|
|
2,866 |
|
|
|
27,046 |
|
|
|
1.68 |
|
|
|
(0.16 |
) |
|
|
1.52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative 03/31/05 |
|
$ |
442,428 |
|
|
$ |
59,886 |
|
|
$ |
(23,234 |
) |
|
$ |
36,652 |
|
|
$ |
405,776 |
|
|
$ |
23.48 |
|
|
$ |
(1.89 |
) |
|
$ |
21.59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1Q06 |
|
|
7,394 |
|
|
|
1,120 |
|
|
|
(442 |
) |
|
|
678 |
|
|
|
6,716 |
|
|
|
0.43 |
|
|
|
(0.04 |
) |
|
|
0.39 |
|
2Q06 |
|
|
12,797 |
|
|
|
1,126 |
|
|
|
(444 |
) |
|
|
682 |
|
|
|
12,115 |
|
|
|
0.74 |
|
|
|
(0.04 |
) |
|
|
0.70 |
|
3Q06 |
|
|
12,511 |
|
|
|
2,431 |
|
|
|
(959 |
) |
|
|
1,472 |
|
|
|
11,039 |
|
|
|
0.70 |
|
|
|
(0.08 |
) |
|
|
0.62 |
|
4Q06 |
|
|
4,656 |
|
|
|
6,368 |
|
|
|
(2,612 |
) |
|
|
3,756 |
|
|
|
900 |
|
|
|
0.26 |
|
|
|
(0.21 |
) |
|
|
0.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FY 06 |
|
$ |
37,358 |
|
|
$ |
11,045 |
|
|
$ |
(4,457 |
) |
|
$ |
6,588 |
|
|
$ |
30,770 |
|
|
$ |
2.13 |
|
|
$ |
(0.37 |
) |
|
$ |
1.76 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative 03/31/06 |
|
$ |
479,786 |
|
|
$ |
70,931 |
|
|
$ |
(27,691 |
) |
|
$ |
43,240 |
|
|
$ |
436,546 |
|
|
$ |
25.61 |
|
|
$ |
(2.26 |
) |
|
$ |
23.35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1Q07 |
|
|
7,807 |
|
|
|
1,629 |
|
|
|
(635 |
) |
|
|
994 |
|
|
|
6,813 |
|
|
|
0.43 |
|
|
|
(0.06 |
) |
|
|
0.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
07/01/06 |
|
$ |
487,593 |
|
|
$ |
72,560 |
|
|
$ |
(28,326 |
) |
|
$ |
44,234 |
|
|
$ |
443,359 |
|
|
$ |
26.04 |
|
|
$ |
(2.32 |
) |
|
$ |
23.72 |
|
|
Income Tax Considerations
In the course of the investigation, the Company determined that a number of officers may have
exercised options for which the application of Section 162(m) of the Internal Revenue Code of 1986,
as amended (the Code), may apply. It is possible that these options will be treated as having
been granted at less than fair market value for federal income tax purposes because the Company
incorrectly applied the measurement date as defined in APB 25. If such options are deemed to be
granted at less than fair market
value, pursuant to Section 162(m) of the Code (Section 162(m)), any compensation to officers,
including proceeds from options exercised in any given tax year, in excess of $1.0 million will be
disallowed as a deduction for tax purposes. The Company estimates that the potential tax effected
liability for any such disallowed Section 162(m) deduction would approximate $3.6 million. The
Company may also incur interest and penalties if it were to incur any such tax liability, which
could be material.
In addition, the Company is considering the application of Section 409A of the Code (Section
409A) to those options for which it incorrectly applied the measurement date as defined in APB 25.
It is possible that these options will be treated as having been granted at less than fair market
value for federal income tax purposes and thus subject to Section 409A. Accordingly, the Company
may adopt measures to address the application of Section 409A. The Company does not currently know
what impact Section 409A will have, or any such measures, if adopted, would have on its
results of operations, financial position or cash flows, although such impact could be material.
Expenses Incurred by the Company
The Company has incurred expenses for legal fees and external audit firm fees, in the aggregate
amount of approximately $0.6 million, in the fiscal year ended March 31, 2007, in relation to (i)
the Audit Committees review of the Companys historical stock option practices and related
accounting for stock option grants, (ii) the informal inquiry and formal order of investigation by
the Securities and Exchange Commission regarding its past stock option practices, (iii) the
derivative action relating to the Companys historical stock option practices filed against the
Company as a nominal defendant and certain of the Companys current and former directors and
officers as to whom it may have indemnification obligations and
(iv) related matters.
22
Further, the
Company expects to incur significant additional expense related to the foregoing matters in the
fiscal year ending March 31, 2008. It is anticipated that certain of those expenses will be
reimbursed under the Companys directors & officers indemnification insurance.
Restatement Impact on the Consolidated Statements of Income
The following tables reconcile the Companys Consolidated Statements of Income from the previously
reported results to the restated results for the quarters ended July 1, 2006 and July 2, 2005. All
dollar amounts are in thousands, except per share amounts. Per share amounts may not sum due to
rounding.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended July 1, 2006 (Unaudited) |
|
|
|
As |
|
|
|
|
|
|
|
|
|
previously |
|
|
|
|
|
|
|
|
|
reported |
|
|
Adjustment |
|
|
As Restated |
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Hotline products |
|
$ |
52,225 |
|
|
$ |
-- |
|
|
$ |
52,225 |
|
On-Site services |
|
|
178,170 |
|
|
|
-- |
|
|
|
178,170 |
|
|
|
|
|
|
|
|
Total |
|
|
230,395 |
|
|
|
-- |
|
|
|
230,395 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
Hotline products |
|
|
25,461 |
|
|
|
-- |
|
|
|
25,461 |
|
On-Site services |
|
|
119,090 |
|
|
|
-- |
|
|
|
119,090 |
|
|
|
|
|
|
|
|
Total |
|
|
144,551 |
|
|
|
-- |
|
|
|
144,551 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
85,844 |
|
|
|
-- |
|
|
|
85,844 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general & administrative expenses |
|
|
68,573 |
|
|
|
1,629 |
|
|
|
70,202 |
|
Restructuring and other charges |
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Intangibles amortization |
|
|
1,506 |
|
|
|
-- |
|
|
|
1,506 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
15,765 |
|
|
|
(1,629 |
) |
|
|
14,136 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense (income), net |
|
|
3,640 |
|
|
|
-- |
|
|
|
3,640 |
|
Other expenses (income), net |
|
|
115 |
|
|
|
-- |
|
|
|
115 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes |
|
|
12,010 |
|
|
|
(1,629 |
) |
|
|
10,381 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
|
4,203 |
|
|
|
(635 |
) |
|
|
3,568 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
7,807 |
|
|
$ |
(994 |
) |
|
$ |
6,813 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.44 |
|
|
$ |
(0.06 |
) |
|
$ |
0.39 |
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.43 |
|
|
$ |
(0.05 |
) |
|
$ |
0.37 |
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
17,626 |
|
|
|
-- |
|
|
|
17,626 |
|
|
|
|
|
|
|
|
Diluted |
|
|
18,262 |
|
|
|
-- |
|
|
|
18,262 |
|
|
|
|
|
|
|
|
Dividends per share |
|
$ |
0.06 |
|
|
$ |
-- |
|
|
$ |
0.06 |
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended July 2, 2005 (Unaudited) |
|
|
|
As |
|
|
|
|
|
|
|
|
|
previously |
|
|
|
|
|
|
|
|
|
reported |
|
|
Adjustment |
|
|
As Restated |
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Hotline products |
|
$ |
53,452 |
|
|
$ |
-- |
|
|
$ |
53,452 |
|
On-Site services |
|
|
125,830 |
|
|
|
-- |
|
|
|
125,830 |
|
|
|
|
|
|
|
|
Total |
|
|
179,282 |
|
|
|
-- |
|
|
|
179,282 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
Hotline products |
|
|
25,874 |
|
|
|
-- |
|
|
|
25,874 |
|
On-Site services |
|
|
82,468 |
|
|
|
-- |
|
|
|
82,468 |
|
|
|
|
|
|
|
|
Total |
|
|
108,342 |
|
|
|
-- |
|
|
|
108,342 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
70,940 |
|
|
|
-- |
|
|
|
70,940 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general & administrative expenses |
|
|
50,920 |
|
|
|
1,120 |
|
|
|
52,040 |
|
Restructuring and other charges |
|
|
5,290 |
|
|
|
-- |
|
|
|
5,290 |
|
Intangibles amortization |
|
|
1,558 |
|
|
|
-- |
|
|
|
1,558 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
13,172 |
|
|
|
(1,120 |
) |
|
|
12,052 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense (income), net |
|
|
1,959 |
|
|
|
-- |
|
|
|
1,959 |
|
Other expenses (income), net |
|
|
(75 |
) |
|
|
-- |
|
|
|
(75 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes |
|
|
11,288 |
|
|
|
(1,120 |
) |
|
|
10,168 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
|
3,894 |
|
|
|
(442 |
) |
|
|
3,452 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
7,394 |
|
|
$ |
(678 |
) |
|
$ |
6,716 |
|
|
|
|
|
|
|
|
Earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.44 |
|
|
$ |
(0.04 |
) |
|
$ |
0.40 |
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.43 |
|
|
$ |
(0.04 |
) |
|
$ |
0.39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
16,845 |
|
|
|
-- |
|
|
|
16,845 |
|
|
|
|
|
|
|
|
Diluted |
|
|
17,042 |
|
|
|
-- |
|
|
|
17,042 |
|
|
|
|
|
|
|
|
Dividends per share |
|
$ |
0.06 |
|
|
$ |
-- |
|
|
$ |
0.06 |
|
|
24
Restatement Impact on the Consolidated Balance Sheets
The following tables reconcile the Companys Consolidated Balance Sheets from the previously
reported results to the restated results as of July 1, 2006 and March 31, 2006. All dollar amounts
are in thousands.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 1, 2006 (Unaudited) |
|
|
|
As previously |
|
|
|
|
|
|
|
|
|
reported |
|
|
Adjustment |
|
|
As Restated |
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
14,360 |
|
|
$ |
-- |
|
|
$ |
14,360 |
|
Trade accounts receivable, net |
|
|
172,315 |
|
|
|
-- |
|
|
|
172,315 |
|
Lease receivables |
|
|
1,071 |
|
|
|
-- |
|
|
|
1,071 |
|
Inventories, net |
|
|
68,243 |
|
|
|
-- |
|
|
|
68,243 |
|
Costs / estimated earnings in excess of
billings on uncompleted contracts |
|
|
55,400 |
|
|
|
-- |
|
|
|
55,400 |
|
Deferred tax asset |
|
|
8,873 |
|
|
|
-- |
|
|
|
8,873 |
|
Net current assets of discontinued operations |
|
|
404 |
|
|
|
-- |
|
|
|
404 |
|
Other current assets |
|
|
27,187 |
|
|
|
-- |
|
|
|
27,187 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
347,853 |
|
|
|
-- |
|
|
|
347,853 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
|
39,029 |
|
|
|
-- |
|
|
|
39,029 |
|
Goodwill, net |
|
|
593,188 |
|
|
|
-- |
|
|
|
593,188 |
|
Customer relationships, net |
|
|
54,036 |
|
|
|
-- |
|
|
|
54,036 |
|
Other intangibles, net |
|
|
35,471 |
|
|
|
-- |
|
|
|
35,471 |
|
Lease receivables, non-current |
|
|
987 |
|
|
|
-- |
|
|
|
987 |
|
Deferred tax asset |
|
|
3,189 |
|
|
|
15,876 |
|
|
|
19,065 |
|
Other assets |
|
|
3,982 |
|
|
|
-- |
|
|
|
3,982 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,077,735 |
|
|
$ |
15,876 |
|
|
$ |
1,093,611 |
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Current maturities of long-term debt |
|
$ |
704 |
|
|
$ |
-- |
|
|
$ |
704 |
|
Current maturities of discounted lease rentals |
|
|
9 |
|
|
|
-- |
|
|
|
9 |
|
Accounts payable |
|
|
73,753 |
|
|
|
-- |
|
|
|
73,753 |
|
Billings in excess of costs/estimated earnings
on uncompleted contracts |
|
|
15,483 |
|
|
|
-- |
|
|
|
15,483 |
|
Deferred revenue |
|
|
53,365 |
|
|
|
-- |
|
|
|
53,365 |
|
Accrued liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits |
|
|
25,644 |
|
|
|
-- |
|
|
|
25,644 |
|
Restructuring reserve |
|
|
16,090 |
|
|
|
-- |
|
|
|
16,090 |
|
Other liabilities |
|
|
52,245 |
|
|
|
-- |
|
|
|
52,245 |
|
Income taxes |
|
|
6,300 |
|
|
|
3,587 |
|
|
|
9,887 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
243,593 |
|
|
|
3,587 |
|
|
|
247,180 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
243,886 |
|
|
|
-- |
|
|
|
243,886 |
|
Restructuring reserve |
|
|
14,646 |
|
|
|
-- |
|
|
|
14,646 |
|
Other liabilities |
|
|
16,863 |
|
|
|
-- |
|
|
|
16,863 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity |
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock |
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Common stock |
|
|
25 |
|
|
|
-- |
|
|
|
25 |
|
Additional paid-in capital |
|
|
367,618 |
|
|
|
56,523 |
|
|
|
424,141 |
|
Retained earnings |
|
|
468,599 |
|
|
|
(44,234 |
) |
|
|
424,365 |
|
Treasury stock, at cost |
|
|
(296,824 |
) |
|
|
-- |
|
|
|
(296,824 |
) |
Accumulated other comprehensive income |
|
|
19,329 |
|
|
|
-- |
|
|
|
19,329 |
|
|
|
|
|
|
|
|
Total stockholders equity |
|
$ |
558,747 |
|
|
$ |
12,289 |
|
|
$ |
571,036 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
1,077,735 |
|
|
$ |
15,876 |
|
|
$ |
1,093,611 |
|
|
|
|
|
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2006 (Unaudited) |
|
|
|
As previously |
|
|
|
|
|
|
|
|
|
reported |
|
|
Adjustment |
|
|
As Restated |
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
11,207 |
|
|
$ |
-- |
|
|
$ |
11,207 |
|
Trade accounts receivable, net |
|
|
116,713 |
|
|
|
-- |
|
|
|
116,713 |
|
Lease receivables |
|
|
512 |
|
|
|
-- |
|
|
|
512 |
|
Inventories, net |
|
|
53,926 |
|
|
|
-- |
|
|
|
53,926 |
|
Costs / estimated earnings in excess of
billings on uncompleted contracts |
|
|
23,803 |
|
|
|
-- |
|
|
|
23,803 |
|
Deferred tax asset |
|
|
8,973 |
|
|
|
-- |
|
|
|
8,973 |
|
Net current assets of discontinued operations |
|
|
467 |
|
|
|
-- |
|
|
|
467 |
|
Other current assets |
|
|
15,523 |
|
|
|
-- |
|
|
|
15,523 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
231,124 |
|
|
|
-- |
|
|
|
231,124 |
|
Property, plant and equipment, net |
|
|
35,124 |
|
|
|
-- |
|
|
|
35,124 |
|
Goodwill, net |
|
|
468,724 |
|
|
|
-- |
|
|
|
468,724 |
|
Customer relationships, net |
|
|
24,657 |
|
|
|
-- |
|
|
|
24,657 |
|
Other intangibles, net |
|
|
30,783 |
|
|
|
-- |
|
|
|
30,783 |
|
Deferred tax asset |
|
|
4,231 |
|
|
|
15,678 |
|
|
|
19,909 |
|
Other assets |
|
|
5,091 |
|
|
|
-- |
|
|
|
5,091 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
799,734 |
|
|
$ |
15,678 |
|
|
$ |
815,412 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Current maturities of long-term debt |
|
$ |
1,049 |
|
|
$ |
-- |
|
|
$ |
1,049 |
|
Current maturities of discounted lease rentals |
|
|
30 |
|
|
|
-- |
|
|
|
30 |
|
Accounts payable |
|
|
44,943 |
|
|
|
-- |
|
|
|
44,943 |
|
Billings in excess of costs/estimated earnings
on uncompleted contracts |
|
|
8,648 |
|
|
|
-- |
|
|
|
8,648 |
|
Deferred revenue |
|
|
22,211 |
|
|
|
-- |
|
|
|
22,211 |
|
Accrued liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits |
|
|
13,954 |
|
|
|
-- |
|
|
|
13,954 |
|
Restructuring reserve |
|
|
3,292 |
|
|
|
-- |
|
|
|
3,292 |
|
Other liabilities |
|
|
27,817 |
|
|
|
-- |
|
|
|
27,817 |
|
Income taxes |
|
|
5,924 |
|
|
|
3,587 |
|
|
|
9,511 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
127,868 |
|
|
|
3,587 |
|
|
|
131,455 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
122,673 |
|
|
|
-- |
|
|
|
122,673 |
|
Restructuring reserve |
|
|
7,406 |
|
|
|
-- |
|
|
|
7,406 |
|
Other liabilities |
|
|
887 |
|
|
|
-- |
|
|
|
887 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity |
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock |
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Common stock |
|
|
25 |
|
|
|
-- |
|
|
|
25 |
|
Additional paid-in capital |
|
|
362,810 |
|
|
|
55,331 |
|
|
|
418,141 |
|
Retained earnings |
|
|
461,853 |
|
|
|
(43,240) |
|
|
|
418,613 |
|
Treasury stock, at cost |
|
|
(296,824) |
|
|
|
-- |
|
|
|
(296,824) |
|
Accumulated other comprehensive income |
|
|
13,036 |
|
|
|
-- |
|
|
|
13,036 |
|
|
|
|
|
|
|
|
Total stockholders equity |
|
$ |
540,900 |
|
|
$ |
12,091 |
|
|
$ |
552,991 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
799,734 |
|
|
$ |
15,678 |
|
|
$ |
815,412 |
|
|
|
|
|
|
|
|
|
26
Restatement Impact on the Consolidated Statement of Cash Flows
The following tables reconcile the Companys Consolidated Statements of Cash Flows from the
previously reported results to the restated results for the quarters ended July 1, 2006 and July 2,
2005. All dollar amounts are in thousands.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended July 1, 2006 (Unaudited) |
|
|
|
As previously |
|
|
|
|
|
|
|
|
|
reported |
|
|
Adjustment |
|
|
As Restated |
|
|
Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
7,807 |
|
|
$ |
(994) |
|
|
$ |
6,813 |
|
Adjustments to reconcile net income to cash provided by operating
activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
3,806 |
|
|
|
-- |
|
|
|
3,806 |
|
Deferred tax (benefit)/provision |
|
|
1,248 |
|
|
|
(1,756) |
|
|
|
(508) |
|
Stock compensation expense |
|
|
1,620 |
|
|
|
1,629 |
|
|
|
3,249 |
|
Tax impact from exercised options |
|
|
342 |
|
|
|
437 |
|
|
|
779 |
|
Changes in operating assets and liabilities (net of acquisitions): |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
|
11,218 |
|
|
|
-- |
|
|
|
11,218 |
|
Inventories, net |
|
|
(1,066) |
|
|
|
-- |
|
|
|
(1,066) |
|
Other current assets |
|
|
(3,111) |
|
|
|
684 |
|
|
|
(2,427) |
|
Proceeds from lease contracts |
|
|
312 |
|
|
|
-- |
|
|
|
312 |
|
Accounts payable and accrued liabilities |
|
|
(9,569) |
|
|
|
-- |
|
|
|
(9,569) |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
12,607 |
|
|
|
-- |
|
|
|
12,607 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(1,523) |
|
|
|
-- |
|
|
|
(1,523) |
|
Capital disposals |
|
|
30 |
|
|
|
-- |
|
|
|
30 |
|
Acquisition of businesses, net of cash acquired |
|
|
(129,161) |
|
|
|
-- |
|
|
|
(129,161) |
|
Prior merger-related recovery/(payments) |
|
|
(1,350) |
|
|
|
-- |
|
|
|
(1,350) |
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(132,004) |
|
|
|
-- |
|
|
|
(132,004) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of borrowings |
|
|
(73,769) |
|
|
|
-- |
|
|
|
(73,769) |
|
Proceeds from borrowings |
|
|
194,522 |
|
|
|
-- |
|
|
|
194,522 |
|
Repayments on discounted lease rentals |
|
|
(21) |
|
|
|
-- |
|
|
|
(21) |
|
Proceeds from the exercise of options |
|
|
3,530 |
|
|
|
-- |
|
|
|
3,530 |
|
Payment of dividends |
|
|
(1,055) |
|
|
|
-- |
|
|
|
(1,055) |
|
|
|
|
|
|
|
|
Net cash (used) / provided by financing activities |
|
|
123,207 |
|
|
|
-- |
|
|
|
123,207 |
|
Foreign currency exchange impact on cash |
|
|
(657) |
|
|
|
-- |
|
|
|
(657) |
|
|
|
|
|
|
|
|
(Decrease)/increase in cash and cash equivalents |
|
|
3,153 |
|
|
|
-- |
|
|
|
3,153 |
|
Cash and cash equivalents at beginning of year |
|
|
11,207 |
|
|
|
-- |
|
|
|
11,207 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year |
|
$ |
14,360 |
|
|
$ |
-- |
|
|
$ |
14,360 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
2,601 |
|
|
$ |
-- |
|
|
$ |
2,601 |
|
Cash paid for income taxes |
|
|
2,685 |
|
|
|
-- |
|
|
|
2,685 |
|
Non-cash financing activities: |
|
|
|
|
|
|
-- |
|
|
|
|
|
Dividends payable |
|
|
1,061 |
|
|
|
-- |
|
|
|
1,061 |
|
Capital leases |
|
|
109 |
|
|
|
-- |
|
|
|
109 |
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended July 2, 2005 (Unaudited) |
|
|
|
As previously |
|
|
|
|
|
|
|
|
|
reported |
|
|
Adjustment |
|
|
As Restated |
|
|
Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
7,394 |
|
|
$ |
(678) |
|
|
$ |
6,716 |
|
Adjustments to reconcile net income to cash provided by operating
activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
3,791 |
|
|
|
-- |
|
|
|
3,791 |
|
Deferred tax (benefit)/provision |
|
|
(2,493) |
|
|
|
(598) |
|
|
|
(3,091) |
|
Stock compensation expense |
|
|
-- |
|
|
|
1,120 |
|
|
|
1,120 |
|
Tax impact from exercised options |
|
|
(31) |
|
|
|
218 |
|
|
|
187 |
|
Changes in operating assets and liabilities (net of acquisitions): |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
|
4,785 |
|
|
|
-- |
|
|
|
4,785 |
|
Inventories, net |
|
|
5,032 |
|
|
|
-- |
|
|
|
5,032 |
|
Other current assets |
|
|
(7,371) |
|
|
|
-- |
|
|
|
(7,371) |
|
Proceeds from lease contracts |
|
|
735 |
|
|
|
-- |
|
|
|
735 |
|
Accounts payable and accrued liabilities |
|
|
(1,039) |
|
|
|
(62) |
|
|
|
(1,101) |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
10,803 |
|
|
|
-- |
|
|
|
10,803 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(492) |
|
|
|
-- |
|
|
|
(492) |
|
Capital disposals |
|
|
813 |
|
|
|
-- |
|
|
|
813 |
|
Acquisition of businesses, net of cash acquired |
|
|
(13,492) |
|
|
|
-- |
|
|
|
(13,492) |
|
Prior merger-related recovery/(payments) |
|
|
44 |
|
|
|
-- |
|
|
|
44 |
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(13,127) |
|
|
|
-- |
|
|
|
(13,127) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of borrowings |
|
|
(53,177) |
|
|
|
-- |
|
|
|
(53,177) |
|
Proceeds from borrowings |
|
|
56,249 |
|
|
|
-- |
|
|
|
56,249 |
|
Repayments on discounted lease rentals |
|
|
(423) |
|
|
|
-- |
|
|
|
(423) |
|
Proceeds from the exercise of options |
|
|
136 |
|
|
|
-- |
|
|
|
136 |
|
Payment of dividends |
|
|
(1,011) |
|
|
|
-- |
|
|
|
(1,011) |
|
|
|
|
|
|
|
|
Net cash (used) / provided by financing activities |
|
|
1,774 |
|
|
|
-- |
|
|
|
1,774 |
|
Foreign currency exchange impact on cash |
|
|
(34) |
|
|
|
-- |
|
|
|
(34) |
|
|
|
|
|
|
|
|
(Decrease)/increase in cash and cash equivalents |
|
|
(584) |
|
|
|
-- |
|
|
|
(584) |
|
Cash and cash equivalents at beginning of year |
|
|
11,592 |
|
|
|
-- |
|
|
|
11,592 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year |
|
$ |
11,008 |
|
|
$ |
-- |
|
|
$ |
11,008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
2,140 |
|
|
$ |
-- |
|
|
$ |
2,140 |
|
Cash paid for income taxes |
|
|
1,240 |
|
|
|
-- |
|
|
|
1,240 |
|
Non-cash financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Dividends payable |
|
|
1,011 |
|
|
|
-- |
|
|
|
1,011 |
|
Capital leases |
|
|
390 |
|
|
|
-- |
|
|
|
390 |
|
|
Note 4: Inventories
Inventory balances, net of reserves for excess and obsolete inventories:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2006 |
|
|
March 31, 2006 |
|
|
Raw materials |
|
$ |
1,516 |
|
|
$ |
1,426 |
|
Finished goods |
|
|
92,438 |
|
|
|
66,787 |
|
|
Subtotal |
|
|
93,954 |
|
|
|
68,213 |
|
Excess and obsolete inventory reserves |
|
|
(25,711) |
|
|
|
(14,287) |
|
|
Inventory, net |
|
$ |
68,243 |
|
|
$ |
53,926 |
|
|
28
Note 5: Goodwill and Other Intangible Assets
As required by SFAS No. 142 Goodwill and Other Intangible Assets, goodwill and intangible assets
with indefinite useful lives are not amortized. Also, the Company is required to perform an
impairment test annually, or as often as impairment indicators are present. The Companys policy is
to evaluate its non-amortizable intangible assets for impairment during the third quarter of each
fiscal year. The Company performed the most recent test during the third quarter of Fiscal 2006,
and concluded that no impairment existed. The Companys only intangibles, as identified in SFAS No.
141 Business Combinations (SFAS 141), other than goodwill, are its trademarks, non-compete
agreements, customer relationships and acquired backlog.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
|
Europe |
|
|
All Other |
|
|
Total |
|
|
Balance as of March 31, 2006 |
|
$ |
400,998 |
|
|
$ |
65,684 |
|
|
$ |
2,042 |
|
|
$ |
468,724 |
|
Currency translation |
|
|
29 |
|
|
|
4,110 |
|
|
|
(30) |
|
|
|
4,109 |
|
Goodwill on businesses acquired |
|
|
120,355 |
|
|
|
-- |
|
|
|
-- |
|
|
|
120,355 |
|
Actual earnout payments |
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Other |
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
Balance as of June 30, 2006 |
|
$ |
521,382 |
|
|
$ |
69,794 |
|
|
$ |
2,012 |
|
|
$ |
593,188 |
|
|
At June 30, 2006, certain merger agreements provided for contingent payments of up to $4,588. If
future operating performance goals are met, goodwill will be adjusted for the amount of the
contingent payments.
The Companys intangible assets are comprised of the appraised fair market values of employee
non-compete contracts, backlog and customer relationships obtained through business acquisitions.
The Company has the following definite-lived intangibles:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2006 |
|
|
March 31, 2006 |
|
|
|
Gross |
|
|
|
|
|
|
Net |
|
|
Gross |
|
|
|
|
|
|
Net |
|
|
|
Carrying |
|
|
Accum. |
|
|
Carrying |
|
|
Carrying |
|
|
Accum. |
|
|
Carrying |
|
|
|
Amount |
|
|
Amort. |
|
|
Amount |
|
|
Amount |
|
|
Amort. |
|
|
Amount |
|
|
Non-compete agreements |
|
$ |
7,209 |
|
|
$ |
2,227 |
|
|
$ |
4,982 |
|
|
$ |
4,894 |
|
|
$ |
1,851 |
|
|
$ |
3,043 |
|
Customer relationships |
|
|
55,689 |
|
|
|
1,653 |
|
|
|
54,036 |
|
|
|
25,654 |
|
|
|
997 |
|
|
|
24,657 |
|
Acquired backlog |
|
|
7,239 |
|
|
|
4,489 |
|
|
|
2,750 |
|
|
|
3,935 |
|
|
|
3,934 |
|
|
|
1 |
|
|
Total |
|
$ |
70,137 |
|
|
$ |
8,369 |
|
|
$ |
61,768 |
|
|
$ |
34,483 |
|
|
$ |
6,782 |
|
|
$ |
27,701 |
|
|
Intangible asset amortization is computed using the straight-line method based upon the estimated
useful lives of the respective assets, which range from one to 20 years.
Intangible asset amortization expense for the three months ended June 30, 2006 and 2005 was $1,506
and $1,558, respectively. The Company acquired definite-lived intangibles from the completion of
two acquisitions during the first quarter of Fiscal 2007 (see Note 10). The estimated
definite-lived intangibles recorded of $32,416 were based on a preliminary allocation pending
completion of third party valuation, which is expected to be completed during the second quarter of
Fiscal 2007. The Company recorded amortization expense of $838 during the three months ended June
30, 2006 for these definite-lived assets.
Excluding the newly acquired definite-lived intangibles, the Companys estimated amortization
expense for fiscal years ending March 31 is as follows:
|
|
|
|
|
Years Ending March 31, |
|
|
2007 |
|
$ |
2,135 |
|
2008 |
|
|
2,097 |
|
2009 |
|
|
1,953 |
|
2010 |
|
|
1,903 |
|
2011 |
|
|
995 |
|
Thereafter |
|
|
18,618 |
|
|
|
|
$ |
27,701 |
|
|
Intangible assets not subject to amortization consist solely of the Companys trademark
portfolio. The net carrying amount was $27,739 at June 30, 2006 and March 31, 2006.
29
The changes in the carrying amount of goodwill and intangible assets, net of accumulated
amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
Competes and |
|
|
Customer |
|
|
|
|
|
|
|
June 30, 2006 |
|
Trademarks |
|
|
Backlog |
|
|
Relationships |
|
|
Goodwill |
|
|
Total |
|
|
Balance at beginning of period |
|
$ |
27,739 |
|
|
$ |
3,044 |
|
|
$ |
24,657 |
|
|
$ |
468,724 |
|
|
$ |
524,164 |
|
Change in net intangible
assets during the period
related to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense |
|
|
-- |
|
|
|
(850) |
|
|
|
(656) |
|
|
|
-- |
|
|
|
(1,506) |
|
Currency translation |
|
|
-- |
|
|
|
56 |
|
|
|
-- |
|
|
|
4,109 |
|
|
|
4,165 |
|
Acquisitions (Note 10) |
|
|
-- |
|
|
|
5,482 |
|
|
|
30,035 |
|
|
|
120,355 |
|
|
|
155,872 |
|
|
Balance at end of period |
|
$ |
27,739 |
|
|
$ |
7,732 |
|
|
$ |
54,036 |
|
|
$ |
593,188 |
|
|
$ |
682,695 |
|
|
Note 6: Indebtedness
Long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2006 |
|
|
March 31, 2006 |
|
|
Revolving credit agreement |
|
$ |
242,565 |
|
|
$ |
121,303 |
|
Capital lease obligations |
|
|
1,826 |
|
|
|
1,891 |
|
Other |
|
|
199 |
|
|
|
528 |
|
|
Total debt |
|
|
244,590 |
|
|
|
123,722 |
|
Less: current portion |
|
|
(704) |
|
|
|
(1,049) |
|
|
Long-term debt |
|
$ |
243,886 |
|
|
$ |
122,673 |
|
|
On March 28, 2006, the Company entered into a Second Amendment to the Second Amended and Restated
Credit Agreement dated January 24, 2005, as amended February 17, 2005 (collectively, the Credit
Agreement) with Citizens Bank of Pennsylvania, as agent, and a group of lenders. The Credit
Agreement expires on March 28, 2011.
During the three months ended June 30, 2006, the Company increased net borrowings under the Credit
Agreement by approximately $121,262, primarily to fund acquisitions (see Note 10). During the three
months ended June 30, 2006, the maximum amount and weighted average balance outstanding under the
Credit Agreement were $266,055 and $221,584, respectively. As of June 30, 2006, the Company had
$3,065 outstanding in letters of credit and $64,370 available under the Credit Agreement. The
weighted average interest rate on all outstanding debt during the three months ended June 30, 2006
and June 30, 2005 was approximately 6.06% and 4.05%, respectively. At June 30, 2006, the Company
was in compliance with all required covenants under the Credit Agreement.
The capital lease obligations are primarily for facilities and equipment. The lease agreements have
remaining terms ranging from less than one year to four years with interest rates ranging from
3.83% to 10.83%.
Other debt is composed of various bank and third party loans secured by specific pieces of
equipment and real property. The loans have remaining terms of less than one year to five years
with interest rates ranging from 0% to 7.1%.
Note 7: Derivative Instruments and Hedging Activities
The Company enters into derivative instruments to hedge exposure to variability in expected
fluctuations in foreign currencies. All of the Companys derivatives have been designated and
qualify as cash flow hedges. There was no hedge ineffectiveness during the three months ended June
30, 2006.
At June 30, 2006, the Company had open contracts in Australian and Canadian dollar, Danish krone,
Euro, Japanese yen, Norwegian kroner, Pound sterling, Swedish krona and Swiss franc. These
contracts had a notional amount of approximately $63,129 and a fair value of $62,777 and mature
within the next thirty-three months.
For the three months ended June 30, 2006, the Company recognized in earnings approximately $186 in
net gains on matured contracts. As of June 30, 2006, a gain of $910 was included in other
comprehensive income (loss) (OCI). This gain is expected to be credited to earnings over the life
of the maturing contracts as the hedged transactions occur and it is expected that the gain will be
offset by currency losses on the items being hedged.
30
Subsequent to June 30, 2006, the Company entered into an interest rate swap agreement with a
notional value of $100,000, the effect of which will be to effectively convert a portion of the
variable interest rate-based debt to a fixed rate portion.
Note 8: Earnings Per Share
The following table details this calculation for the three months ended June 30:
|
|
|
|
|
|
|
|
|
|
|
(As Restated) |
|
|
(As Restated) |
|
|
|
2006 |
|
|
2005 |
|
|
Net income, as reported |
|
$ |
6,813 |
|
|
$ |
6,716 |
|
|
|
Weighted average shares outstanding |
|
|
17,626 |
|
|
|
16,845 |
|
Effect of dilutive securities from employee stock options |
|
|
636 |
|
|
|
197 |
|
|
|
Weighted average diluted shares outstanding |
|
|
18,262 |
|
|
|
17,042 |
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
0.39 |
|
|
$ |
0.40 |
|
Dilutive earnings per share |
|
$ |
0.37 |
|
|
$ |
0.39 |
|
|
There is no impact to the weighted average share calculations during any period where the exercise
price of a stock option is greater than the average market price during the same period. There were
489,573 and 2,867,000 non-dilutive options outstanding during the three months ended June 30, 2006
and 2005, respectively that are not included in the above calculation.
Note 9: Comprehensive Income and Stockholders Equity
Comprehensive income for the three months ended June 30, 2006 and 2005 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
(As Restated) |
|
|
(As Restated) |
|
|
|
2006 |
|
|
2005 |
|
|
Net income |
|
$ |
6,813 |
|
|
$ |
6,716 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
Foreign currency translation adjustment |
|
|
6,525 |
|
|
|
(9,764) |
|
Unrealized gains/(losses) on derivatives
designated and qualified as cash flow
hedges, net of reclassification of
unrealized gains/(losses) on expired
derivatives |
|
|
(232) |
|
|
|
158 |
|
|
Comprehensive income (loss) |
|
$ |
13,106 |
|
|
$ |
(2,890) |
|
|
The components of accumulated other comprehensive income consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2006 |
|
|
March 31, 2006 |
|
|
Foreign currency translation adjustment |
|
$ |
19,561 |
|
|
$ |
12,041 |
|
Unrealized gains/(losses) on derivatives
designated and qualified as cash flow
hedges, net of reclassification of
unrealized gains/(losses) on expired
derivatives |
|
|
(232) |
|
|
|
995 |
|
|
Total accumulated other comprehensive income |
|
$ |
19,329 |
|
|
$ |
13,036 |
|
|
31
Note 10: Acquisitions
During the first quarter of Fiscal 2007, the Company acquired the USA Commercial and Government and
Canadian operations of NextiraOne, LLC (NextiraOne).
The following table summarizes the fair value of the NextiraOne assets acquired and liabilities
assumed at the date of acquisition.
|
|
|
|
|
|
|
At April 30, 2006 |
|
|
Current assets, primarily consisting of accounts receivable and inventories |
|
$ |
87,562 |
|
Property, plant and equipment |
|
|
4,434 |
|
Other non-current assets |
|
|
3,208 |
|
Intangible assets |
|
|
19,743 |
|
Goodwill |
|
|
102,776 |
|
|
Total assets acquired |
|
$ |
217,723 |
|
Current liabilities, primarily consisting of deferred revenue,
restructuring reserve and accrued expenses |
|
|
100,700 |
|
Other non-current liabilities, primarily consisting of restructuring reserve |
|
|
28,250 |
|
|
Net assets acquired |
|
$ |
88,773 |
|
|
The amounts assigned to intangible assets are shown below:
|
|
|
|
|
|
Backlog |
|
$ |
3,300 |
|
Customer relationships and contracts |
|
|
16,443 |
|
|
Total intangible assets |
|
$ |
19,743 |
|
|
The amortization period is estimated to be one year for backlog and 20 years for customer
relationships and contracts.
The Company obtained various contractual obligations in the form of operating leases for facilities
and vehicles as part of the NextiraOne acquisition. The following table summarizes those
obligations as of June 30, 2006, and are in addition to the contractual obligations previously
disclosed in the Companys Annual Report on Form 10-K for the period ending March 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
|
|
|
Less than 1 |
|
|
|
|
|
|
|
|
|
|
More than |
|
|
|
Total |
|
|
year |
|
|
1-3 years |
|
|
3-5 years |
|
|
5 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease obligations |
|
|
41,612 |
|
|
|
15,872 |
|
|
|
21,517 |
|
|
|
4,223 |
|
|
|
- |
|
|
The transaction resulted in $102,776 of goodwill. The Company paid a premium for NextiraOne in
order to further expand its operational footprint in the voice and data technology markets. In
addition, the purchase increased the Companys solutions offerings, providing for a stronger
worldwide technical services partner for its collective clients.
The Company paid a cash total of $97,305 for all outstanding interest in NextiraOne. This amount
included an estimate for the equity book value (total assets less total liabilities, as adjusted by
the parties for certain items) as of the closing date. The actual equity book value adjustment is
expected to be confirmed within the next two quarters, at which time the final purchase price will
be determined. The cash total above has been reflected on the Companys Consolidated Statements of
Cash Flows as an Investing Activity in the first quarter of Fiscal 2007.
As of the first quarter of Fiscal 2007, the Company has included an equity book value adjustment of
$10,535. This amount is included in Other Current Assets of $27,187 on the Companys Consolidated
Balance Sheet as of June 30, 2006 as a receivable from the seller and is considered collectable.
As part of the purchase price paid, $42,143 (the Escrow Amount) was allocated to escrow accounts,
which include a general holdback and specifically set aside funds to satisfy defined items
including: litigation matters, accounts receivable matters and vendor and leasing disputes. These
amounts will be paid from time to time based on the terms set forth in the agreement. The Escrow
Amount has been reflected on the Companys Consolidated Statements of Cash Flows as an Investing
Activity in the first quarter of Fiscal 2007.
After consummation of the acquisition, the Company began to integrate NextiraOne products,
employees and facilities with its own. In connection with these integration actions, the Company
incurred severance costs of $8,694 for the separation of approximately 250 employees. In addition,
the Company incurred integration costs for facility consolidations of $15,767. These costs were
properly
included in the purchase price allocation for NextiraOne, in accordance with the SFAS 141. The
majority of the severance costs will be paid in Fiscal 2007 with certain facility costs extending through
Fiscal 2014.
32
Also, during the first quarter of Fiscal 2007, the Company acquired Nu-Vision Technologies, Inc.
and Nu-Vision Technologies, LLC (collectively referred to as NUVT). In connection with the NUVT
acquisition, the Company has prepared preliminary allocations of goodwill and definite-lived
intangible assets of $20,682 and $12,673, respectively. The definite-lived intangible assets
recorded represent the estimated fair market value of acquired backlog, customer relationships and
non-compete agreements. The Company estimates that the definite-lived intangibles are to be
amortized over a period of one to 20 years.
The allocation of the purchase price of these acquisitions is based upon preliminary estimates of
the fair values of certain assets acquired and liabilities assumed as of the date of the
acquisition. Management, with the assistance of independent valuation specialists, is currently
assessing the fair values of the tangible and intangible assets acquired and liabilities assumed.
This preliminary allocation of the purchase price is dependant upon certain estimates and
assumptions, which are preliminary and may vary from the amounts herein.
The acquisitions contributed on-site services revenues of approximately $60,158 and are included in
the first quarter of Fiscal 2007 results.
The following unaudited pro forma summary presents the Companys results of operations as if the
acquisitions of NextiraOne and NUVT had occurred on April 1, 2005, and does not purport to represent
what the Companys results of operations would have been had the acquisitions occurred on such date
or at the beginning of the period indicated, or to project the Companys results of operations for
any future date or period, or to be a fair reflection of the assets purchased at the date of
acquisition. The pro forma results of operations exclude the impact of nonrecurring or
extraordinary adjustments, together with related income tax effects. These pro forma results of
operations do not include the effects of cost synergies and one-time nonrecurring transactions
associated with the acquisition.
|
|
|
|
|
|
|
|
|
|
For the three months ended June 30, |
|
|
(As Restated) |
|
|
(As Restated) |
|
|
|
2006 |
|
|
2005 |
|
|
Pro forma revenue |
|
$ |
259,903 |
|
|
$ |
304,568 |
|
Pro forma income from operations, net of tax |
|
|
9,614 |
|
|
|
11,437 |
|
Pro forma per share income from operations, net of tax: |
|
|
|
|
|
|
|
|
Basic |
|
|
$ 0.55 |
|
|
|
$ 0.68 |
|
Diluted |
|
|
$ 0.53 |
|
|
|
$ 0.67 |
|
|
During the first quarter of Fiscal 2006, the Company acquired 100% of the issued and outstanding
equity interests of Telecommunication Systems Management, Inc. (TSM), GTC Technology Group, Inc.
and Technology Supply, Inc. (collectively referred to as GTC) and Business Communications, Inc.,
Bainbridge Communication, Inc., BCI of Tampa, LLC and Networx, L.L.C. (collectively referred to as
BCI). These companies primarily provide full-service voice communication solutions and services
in the Florida and Virginia markets. In connection with the acquisitions, the Company has allocated
goodwill and definite-lived intangible assets of $8,369 and $5,846, respectively. The
definite-lived intangible assets recorded represent the fair market value of acquired customer
relationships and non-compete agreements. The definite-lived intangibles are being amortized over a
period of five to 20 years.
During the second quarter of Fiscal 2006, the Company acquired substantially all of the assets and
certain liabilities of Universal Solutions of North America, L.L.C. and related entities
(Universal). Universal primarily provides planning, installation and maintenance services for
voice and data network systems in 14 states. In connection with the acquisition, the Company has
allocated goodwill and definite-lived intangible assets of $8,860 and $8,010, respectively. The
definite-lived intangible assets recorded represent the estimated fair market value of acquired
customer relationships and non-compete agreements. The definite-lived intangibles are being
amortized over a period of four to 20 years.
During the third quarter of Fiscal 2006, the Company purchased 100% of the issued and outstanding
equity interests of Communication is World InterActive Networking, Inc. (C=WIN) and Converged
Solutions Group, LLC (CSG). C=WIN has an active customer base which includes commercial and
various government agency accounts. CSG has an active customer base which includes commercial,
education, health care and various government agency accounts. The C=WIN and CSG acquisitions
primarily provide planning, installation and maintenance services for voice and data network
systems in 15 states. In connection with the acquisitions, the Company has prepared preliminary
allocations of goodwill and definite-lived intangible assets of $10,328 and $5,561, respectively.
The definite-lived intangible assets recorded represent the estimated fair market value of acquired
customer relationships and non-compete agreements. The Company estimates that the definite-lived
intangibles are to be amortized over a period of four to 20 years.
33
The results of operations of TSM, GTC, BCI, Universal, C=WIN and CSG are included in the Companys
Consolidated Statements of
Income beginning on their respective acquisition dates. The acquisitions taken individually did not
have a material impact on the Companys results of operations. The costs of the acquisitions were
funded with borrowings under the Credit Agreement described in Note 6.
The following acquired companies will collectively be referred to as Acquired Companies: TSM,
GTC, BCI, Universal, C=WIN, CSG, NextiraOne and NUVT.
Note 11: Commitments and Contingencies
Litigation
The Company is involved in, or has pending, various legal proceedings, claims, suits and complaints
arising out of the normal course of business.
Based on the facts currently available to the Company, management believes its litigation matters
are adequately provided for, covered by insurance, without merit or not probable that an
unfavorable outcome will result.
Product Warranties
Estimated future warranty costs related to certain products are charged to operations in the period
the related revenue is recognized. The product warranty liability reflects the Companys best
estimate of probable liability under those warranties.
There has been no significant or unusual activity other than the acquisitions discussed in Note 10
during the three months ended June 30, 2006. As of June 30, 2006 and March 31, 2006, the Company
has recorded a warranty reserve of $5,780 and $1,383, respectively.
The accrual for product warranties is classified with other Accrued Liabilities in the Consolidated
Balance Sheets. The expense for product warranties is classified with Cost of Sales in the
Consolidated Income Statements.
Note 12: Pension Plan Costs
NextiraOne, acquired on April 30, 2006, is the sponsor of a non-contributory defined benefit plan
(the CWA Plan) for the Communication Workers of America Local 1109 (CWA 1109). Benefits from
the CWA Plan are based upon years of service and rates negotiated by the Company and CWA 1109.
Pension costs are funded to satisfy minimum requirements prescribed by the Employee Retirement
Income Security Act of 1974.
The following table summarizes the net periodic benefit costs beginning after the acquisition date
through the end of the first quarter of Fiscal 2007:
|
|
|
|
|
|
|
|
|
|
|
May 1, 2006 to |
|
|
|
June 30, 2006 |
|
|
Service cost |
|
|
|
|
|
$ |
71 |
|
Interest cost |
|
|
|
|
|
|
116 |
|
Expected return on plan assets |
|
|
|
|
|
|
(108) |
|
Amortization of prior service cost |
|
|
|
|
|
|
- |
|
Amortization of unrealized gains and losses |
|
|
|
|
|
|
42 |
|
|
Net periodic benefit cost |
|
|
|
|
|
$ |
121 |
|
|
As of April 30, 2006, the projected benefit obligation, accumulated benefit obligation and fair
value of plan assets were $25,400, $25,400 and $18,697, respectively. A liability of $6,703,
representing the unfunded portion of the CWA Plan, is included in the Other Liabilities (long-term)
balance of $16,863 on the Companys Consolidated Balance Sheet as of June 30, 2006.
34
The following are the weighted-average assumptions utilized for this plan:
|
|
|
|
|
|
|
|
|
|
|
April 30, 2006 |
|
|
Discount rate |
|
|
|
|
|
|
5.50% |
|
Rate of compensation increase |
|
|
|
|
|
|
N/A |
|
Expected long-term rate of return |
|
|
|
|
|
|
8.00% |
|
|
Note 13: Restructuring and Other Charges
As announced in Fiscal 2005, the Company initiated a restructuring plan intended to right-size the
organization and bring its expense structure in-line with anticipated revenues and changing market
demand for its solutions and services. The restructuring charges recorded during the first quarter
of Fiscal 2006 and fourth quarter of Fiscal 2005 of $5,290 and $3,019, respectively, relate to
staffing level adjustments and real estate consolidations in the Europe and North America segments.
With the additional charges incurred during the first quarter of Fiscal 2006, the Company has
completed its restructuring plan.
As a result of the first quarter Fiscal 2006 restructuring actions, approximately 90 and 34
employees were involuntarily terminated in its Europe and North America segments, respectively,
resulting in a restructuring charge related to staffing level adjustments of $2,951 and $522 in
Europe and North America, respectively. The Company also recorded a charge of $1,817 in the first
quarter of Fiscal 2006 related to idle facility rent obligations and the write-off of leasehold
improvements related to these facilities resulting in a restructuring charge of $791 and $1,026
related to real estate consolidations in Europe and North America, respectively. The majority of
the costs were paid by the end of Fiscal 2006, with the exception of certain facility costs, which
extend through Fiscal 2012 (fiscal year ending March 31, 2012).
As a result of the acquisition of NextiraOne, the Company committed to a plan of reorganization of
NextiraOnes operations. In connection with these integration actions, the Company incurred
severance costs of $8,694 for the separation of approximately 250 employees. In addition, the
Company incurred integration costs for facility consolidations of $15,767. These costs were
included in the purchase price allocation for NextiraOne in accordance with SFAS 141. For the three
months ended June 30, 2006, the Company paid $3,470 related to these obligations. The Company
anticipates a majority of the severance costs to be paid by the end of Fiscal 2007, with certain
facility costs extending through Fiscal 2014.
The following table summarizes the restructuring and other charges and the remaining reserves
reflected on the Consolidated Balance Sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
|
|
|
June 30, 2006 |
|
Employee Severance |
|
|
Facility Closures |
|
|
Total |
|
|
Balance at beginning of period |
|
|
|
|
|
$ |
260 |
|
|
|
|
|
|
$ |
10,438 |
|
|
$ |
10,698 |
|
Acquisition adjustments |
|
|
|
|
|
|
8,864 |
|
|
|
|
|
|
|
15,884 |
|
|
|
24,748 |
|
Cash expenditures |
|
|
|
|
|
|
(2,668) |
|
|
|
|
|
|
|
(2,042) |
|
|
|
(4,710) |
|
|
Balance at end of period |
|
|
|
|
|
$ |
6,456 |
|
|
|
|
|
|
$ |
24,280 |
|
|
$ |
30,736 |
|
|
Note 14: Stock-based Compensation
Share-based compensation expense recognized during the current period is based on the value of the
portion of share-based payment awards that is ultimately expected to vest. SFAS 123(R) requires
forfeitures to be estimated at the time of grant in order to estimate the amount of share-based
awards that will ultimately vest. The forfeiture rate is based on historical rates. Share-based
compensation expense recognized in the Companys Consolidated Statements of Income for the first
quarter of Fiscal 2007 includes (i) compensation expense for share-based awards granted prior to,
but not yet vested as of March 31, 2006, based on the grant-date fair value estimated in accordance
with the pro forma provisions of SFAS 123 and (ii) compensation expense for the share-based payment
awards granted subsequent to March 31, 2006 based on the grant-date fair value estimated in
accordance with the provisions of SFAS 123(R). The fair value of each option grant is
estimated on the date of the grant using the Black-Scholes options pricing model. The model
requires the use of various assumptions. The fair value of grants awarded prior to, but not yet
vested as of March 31, 2006 and grants issued during the first quarter of Fiscal 2007 was estimated
on the grant-date with the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
1Q07 |
|
|
1Q06 |
|
|
Expected life (in years) |
|
|
5.7 |
|
|
|
5.1 |
|
Risk free interest rate |
|
|
3.66% |
|
|
|
3.89% |
|
Annual forfeiture rate |
|
|
1.54% |
|
|
|
2.27% |
|
Volatility |
|
|
43.21% |
|
|
|
59.13% |
|
Dividend yield |
|
|
0.60% |
|
|
|
0.70% |
|
|
35
The Company calculates expected volatility based on historical volatility of its common stock. The
dividend yield assumption is based on the Companys historical and projected dividend payouts. The
risk-free interest rate assumption is based upon observed interest rates appropriate for the term
of the Companys employee stock options. The annual forfeiture rate and expected holding period
assumptions were estimated based on historical experience.
As a result of the Restatement through March 31, 2006, the Company has recorded an additional
non-cash charge for stock-based compensation for the three (3) month period ended July 1, 2006.
This charge was recorded to reflect additional non-cash, stock-based
compensation expense recognized under the fair value method (SFAS 123(R)) because the exercise
price for certain stock option grants prior to, but not vested as of March 31, 2006, differed from
the fair market value of the underlying shares on the appropriate measurement date, some of which
occurred during Fiscal 2007. The following table reconciles the Companys stock-based compensation
expense from the previously reported results to the restated results for the quarters ended June
30, 2006 and June 30, 2005. All dollar amounts are in thousands. Stock-based compensation expense
is recorded to Selling, General, and Administrative expense.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-Based Compensation Expense, Pre-Tax |
|
|
(As previously |
|
|
|
|
|
|
|
|
|
reported) |
|
|
Adjustment |
|
|
(As Restated) |
|
|
Three Months 6/30/06 |
|
$ |
1,620 |
|
|
$ |
1,629 |
|
|
$ |
3,249 |
|
Three Months 6/30/05 |
|
|
-- |
|
|
|
1,120 |
|
|
|
1,120 |
|
|
As noted above, the restated stock-based compensation expense for the three months ended June 30,
2006 and June 30, 2005 was $3,249 ($2,112 net of tax), or approximately $0.12 per diluted share and
$1,120 ($728 net of tax), or approximately $0.04 per diluted share respectively.
The following table illustrates the effect on net income and earnings per share for the three
months ended June 30, 2005 as if the Company had applied the fair value recognition provisions of
SFAS 123(R): Per share amounts may not total due to rounding.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2005 |
|
|
As |
|
|
|
|
|
|
|
|
|
previously |
|
|
|
|
|
|
|
|
|
reported |
|
|
Adjustment |
|
|
As Restated |
|
|
Net income (As reported) |
|
$ |
7,394 |
|
|
$ |
(678) |
|
|
$ |
6,716 |
|
Plus: Stock-based
compensation expense
included in reported net
income, net of related tax |
|
|
-- |
|
|
|
1,120 |
|
|
|
1,120 |
|
Less: Stock-based
compensation expense
determined by the fair value
method for all awards, net
of related tax |
|
|
(2,577) |
|
|
|
(2,781) |
|
|
|
(5,358) |
|
|
|
|
|
|
|
|
Net Income (Pro forma) |
|
$ |
4,817 |
|
|
$ |
(2,339 |
) |
|
$ |
2,478 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share |
|
|
|
|
|
|
|
|
|
|
|
|
Basic as reported |
|
$ |
0.44 |
|
|
$ |
(0.04) |
|
|
$ |
0.40 |
|
Basic pro forma |
|
$ |
0.29 |
|
|
$ |
(0.14) |
|
|
$ |
0.15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted as reported |
|
$ |
0.43 |
|
|
$ |
(0.04) |
|
|
$ |
0.39 |
|
Diluted pro forma |
|
$ |
0.28 |
|
|
$ |
(0.13 |
) |
|
$ |
0.15 |
|
|
The Company has two stock option plans, the 1992 Stock Option Plan, as amended (the Employee
Plan), and the 1992 Director Stock Option Plan, as amended (the Director Plan). As of June 30,
2006, the Employee Plan authorized the issuance of options and stock appreciation rights (SARs)
for up to 9,200,000 shares of common stock. The Employee Plan provides that options are to be
granted by a committee appointed by the Board to key employees of the Company; such stock options
generally become exercisable in equal amounts over a three-year period. The Director Plan
authorized the issuance of options and SARs for up to 250,000 shares of common stock as of June 30,
2006. The Director Plan provides that options are to be granted by the Board or a committee
appointed by the Board; such options generally become exercisable in equal amounts over a
three-year period. No SARs have been issued under either plan.
36
The following is a summary of the Companys stock option plans for the three-month period ended
June 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three month period ended June 30, 2006 |
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
|
Shares |
|
|
|
|
|
|
Exercise Price (per share) |
|
|
Outstanding at March 31, 2006 |
|
|
5,055 |
|
|
|
|
|
|
$ |
38.28 |
|
Granted |
|
|
35 |
|
|
|
|
|
|
|
38.84 |
|
Exercised |
|
|
(87) |
|
|
|
|
|
|
|
40.46 |
|
Forfeited or expired |
|
|
(30) |
|
|
|
|
|
|
|
38.56 |
|
|
Outstanding at June 30, 2006 |
|
|
4,973 |
|
|
|
|
|
|
$ |
38.25 |
|
|
Exercisable at June 30, 2006 |
|
|
4,227 |
|
|
|
|
|
|
$ |
38.93 |
|
|
Weighted average fair value
of options granted during
the period using
Black-Scholes option pricing
model |
|
|
|
|
|
|
|
|
|
$ |
17.20 |
|
|
The following table summarizes information about the stock options outstanding at June 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
|
Options Exercisable |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Weighted |
|
|
Average |
|
|
|
|
|
|
Weighted |
|
|
Average |
|
|
|
Shares |
|
|
Remaining |
|
|
Average |
|
|
Intrinsic |
|
|
Shares |
|
|
Average |
|
|
Intrinsic |
|
Range of |
|
Outstanding |
|
|
Contractual |
|
|
Exercise |
|
|
Value |
|
|
Exercisable |
|
|
Exercise |
|
|
Value |
|
Exercise Prices |
|
(000s) |
|
|
Life (Years) |
|
|
Price |
|
|
(000s) |
|
|
(000s) |
|
|
Price |
|
|
(000s) |
|
|
|
|
|
|
$19.95 - $26.60 |
|
|
328 |
|
|
|
1.6 |
|
|
$ |
22.47 |
|
|
$ |
5,269 |
|
|
|
328 |
|
|
$ |
22.47 |
|
|
$ |
5,269 |
|
$26.60 - $33.25 |
|
|
357 |
|
|
|
2.9 |
|
|
|
30.06 |
|
|
|
3,020 |
|
|
|
357 |
|
|
|
30.06 |
|
|
|
3,020 |
|
$33.25 - $39.90 |
|
|
1,983 |
|
|
|
8.9 |
|
|
|
36.97 |
|
|
|
4,281 |
|
|
|
1,237 |
|
|
|
38.52 |
|
|
|
1,200 |
|
$39.90 - $46.55 |
|
|
2,147 |
|
|
|
5.5 |
|
|
|
42.37 |
|
|
|
-- |
|
|
|
2,147 |
|
|
|
42.37 |
|
|
|
-- |
|
$46.55 - $53.20 |
|
|
154 |
|
|
|
3.3 |
|
|
|
49.39 |
|
|
|
-- |
|
|
|
154 |
|
|
|
49.39 |
|
|
|
-- |
|
$53.20 - $59.85 |
|
|
2 |
|
|
|
3.5 |
|
|
|
55.88 |
|
|
|
-- |
|
|
|
2 |
|
|
|
55.88 |
|
|
|
-- |
|
$59.85 - $66.50 |
|
|
2 |
|
|
|
3.5 |
|
|
|
63.22 |
|
|
|
-- |
|
|
|
2 |
|
|
|
63.22 |
|
|
|
-- |
|
|
|
|
|
|
$19.95 - $66.50 |
|
|
4,973 |
|
|
|
6.4 |
|
|
$ |
38.25 |
|
|
$ |
12,570 |
|
|
|
4,227 |
|
|
$ |
38.93 |
|
|
$ |
9,489 |
|
|
|
|
|
|
The
aggregate intrinsic value in the preceding table represents the total
pre-tax intrinsic value,
based on the Companys average stock price on June 30, 2006 of $38.52, which would have been
received by the option holders had all option holders exercised their options as of that date.
As of June 30, 2006, there was approximately $10,468 of total unrecognized pre-tax compensation
expense related to non-vested stock options granted under the plans which is expected to be
recognized over a weighted average period of 3.0 years.
Note 15: Segment Reporting
As required by SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information
(SFAS 131), the Company reports the results of its operating segments on a geographic basis. This
is consistent with how the Company is organized and how the business is managed on a day-to-day
basis. The primary reportable segments are comprised of North America, Europe and All Other.
Consistent with SFAS 131, the Company aggregates similar operating segments into reportable
segments.
The accounting policies of the various segments are the same as those described in the Notes to the
Companys Consolidated Financial Statements for the year ended March 31, 2006 contained in the
Companys Annual Report on Form 10-K. The Company evaluates the performance of each segment based
on operating income. Inter-segment sales and segment interest income or expense and expenditures
for segment assets are not presented to or reviewed by management and, therefore, are not presented
below.
Summary information by reportable segment is as follows:
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30 |
|
|
|
|
|
|
(As Restated) |
|
|
|
|
|
|
(As Restated) |
|
|
|
|
|
|
2006 |
|
|
|
|
|
|
2005 |
|
|
North America |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
|
|
|
$ |
192,572 |
|
|
|
|
|
|
$ |
136,861 |
|
Operating income |
|
|
|
|
|
|
9,397 |
|
|
|
|
|
|
|
10,739 |
|
Depreciation |
|
|
|
|
|
|
2,161 |
|
|
|
|
|
|
|
1,960 |
|
Amortization |
|
|
|
|
|
|
1,457 |
|
|
|
|
|
|
|
1,205 |
|
Segment assets |
|
|
|
|
|
|
1,031,765 |
|
|
|
|
|
|
|
734,522 |
|
|
Europe |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
|
|
|
$ |
29,345 |
|
|
|
|
|
|
$ |
33,750 |
|
Operating income |
|
|
|
|
|
|
3,143 |
|
|
|
|
|
|
|
(367) |
|
Depreciation |
|
|
|
|
|
|
119 |
|
|
|
|
|
|
|
196 |
|
Amortization |
|
|
|
|
|
|
40 |
|
|
|
|
|
|
|
343 |
|
Segment assets |
|
|
|
|
|
|
124,252 |
|
|
|
|
|
|
|
122,606 |
|
|
All Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
|
|
|
$ |
8,478 |
|
|
|
|
|
|
$ |
8,671 |
|
Operating income |
|
|
|
|
|
|
1,596 |
|
|
|
|
|
|
|
1,680 |
|
Depreciation |
|
|
|
|
|
|
20 |
|
|
|
|
|
|
|
77 |
|
Amortization |
|
|
|
|
|
|
9 |
|
|
|
|
|
|
|
10 |
|
Segment assets |
|
|
|
|
|
|
15,636 |
|
|
|
|
|
|
|
14,269 |
|
|
Operating income for the first quarter of Fiscal 2006 for North America and Europe was reduced by
$1,548 and $3,742, respectively, for restructuring charges incurred during the period.
The sum of the segment revenues, operating income, depreciation and amortization equals the
consolidated revenues, operating income, depreciation and amortization. The following reconciles
segment assets to total consolidated assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(As Restated) |
|
|
(As Restated) |
|
|
|
|
|
|
|
June 30, 2006 |
|
|
March 31, 2006 |
|
|
Assets for North America, Europe and
All Other segments |
|
|
|
|
|
$ |
1,171,653 |
|
|
|
|
|
|
$ |
894,557 |
|
Corporate eliminations |
|
|
|
|
|
|
(78,042) |
|
|
|
|
|
|
|
(79,145) |
|
|
Total consolidated assets |
|
|
|
|
|
$ |
1,093,611 |
|
|
|
|
|
|
$ |
815,412 |
|
|
Management is also presented with and reviews revenues by service type. The following information
is presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30 |
|
Revenues |
|
|
|
|
2006 |
|
|
|
|
|
|
2005 |
|
|
Data Services |
|
|
|
|
|
$ |
44,531 |
|
|
|
|
|
|
$ |
52,901 |
|
Voice Services |
|
|
|
|
|
|
133,639 |
|
|
|
|
|
|
|
72,929 |
|
Hotline Services |
|
|
|
|
|
|
52,225 |
|
|
|
|
|
|
|
53,452 |
|
|
Total revenues |
|
|
|
|
|
$ |
230,395 |
|
|
|
|
|
|
$ |
179,282 |
|
|
Note 16: Subsequent Events
Regulatory Matters
As previously disclosed, on November 13, 2006, the Company received a letter of informal inquiry
from the Enforcement Division of the Securities and Exchange Commission (the SEC) relating to the
Companys stock option practices from January 1, 1997 to present. On May 24, 2007, the SEC issued
a formal order of investigation in connection with this matter, and, on May 29, 2007, the Company
received a document subpoena from the SEC acting pursuant to such order. The Company has
cooperated with the SEC in this matter and intends to continue to do so. As previously disclosed,
the Audit Committee, with the assistance of outside legal counsel, is conducting an independent
review of the Companys historical stock option grant practices and related accounting for stock
option grants. See the Explanatory Note preceding Part I, Item 1 of this Form 10-Q/A for more
information regarding this and related matters.
38
On September 20, 2006, the Company received formal notice from the Internal Revenue Service (IRS)
regarding its intent to begin an audit of the Companys tax years 2004 and 2005. In connection
with this normal recurring audit, the IRS has requested certain documentation with respect to stock
options for the Companys 2004 and 2005 tax years. The Company has produced various documents
requested by the IRS and is currently in the process of responding to additional documentation
requests.
At the conclusion of these regulatory matters, the Company could be subject to additional taxes,
fines or penalties which could be material.
Litigation Matters
In November 2006, two stockholder derivative lawsuits were filed against the Company itself, as a
nominal defendant, and several of the Companys current and former officers and directors in the
United States District Court for the Western District of Pennsylvania. The two substantially
identical stockholder derivative complaints allege that the individual defendants improperly
backdated grants of stock options to several officers and directors in violation of the Companys
stockholder-approved stock option plans during the period 1996-2002, improperly recorded and
accounted for backdated stock options in violation of generally accepted accounting principles,
improperly took tax deductions based on backdated stock options in violation of the Internal
Revenue Code of 1986, as amended, produced and disseminated false financial statements and SEC
filings to the Companys stockholders and to the market that improperly recorded and accounted for
the backdated option grants, concealed the alleged improper backdating of stock options and
obtained substantial benefits from sales of Company stock while in the possession of material
inside information. The complaints seek damages on behalf of the Company against certain current
and former officers and directors and allege breach of fiduciary duty, unjust enrichment,
securities law violations and other claims. The two lawsuits have been consolidated into a single
action as In re Black Box Corporation Derivative Litigation, Master File No. 2:06-CV-1531-TMH, and
plaintiffs filed a consolidated amended complaint on January 29, 2007. The parties have stipulated
that responses by the defendants, including the Company, are due on or before August 1, 2007. The
Company may have indemnification obligations arising out of this matter to its current and former
directors and officers named in this litigation. The Company has made a claim for such costs under
an insurance policy.
39
Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations.
The discussion and analysis set forth below in this Item 2 has been amended to reflect the
Restatement as described in the Explanatory Note and in Note 3 of the Notes to Consolidated
Financial Statements. For this reason, the data set forth in this section may not be comparable to
discussions and data in the Companys previously filed Quarterly
Reports on Form 10-Q. All dollar amounts are presented
in thousands unless otherwise noted.
Restatement through March 31, 2006
Background
On November 13, 2006, Black Box received a letter of informal inquiry from the Enforcement Division
of the SEC relating to the Companys stock option practices from January 1, 1997 to present. As a
result, the Audit Committee, with the assistance of outside legal counsel, commenced an independent
review of the Companys historical stock option grant practices and related accounting for stock
option grants during the Review Period.
On February 1, 2007, the Company announced that, while the review of option grant practices was
continuing, it believed that it would need to record additional non-cash charges for stock-based
compensation expense relating to certain stock option grants and, accordingly, cautioned investors
about relying on its historical financial statements until the Company could determine with
certainty whether a restatement would be required and, if so, the extent of any such restatement
and the periods affected.
On March 19, 2007, although the Audit Committee had not yet completed its review, the Audit
Committee concluded that the exercise price of certain stock option grants differed from the fair
market value of the underlying shares on the appropriate measurement date. At that time, the
Company and the Audit Committee announced that it was currently expected that the Companys
additional non-cash, pre-tax charges for stock-based compensation expense relating to certain stock
option grants would approximate $63 million for the Review Period. In addition, the Company and
the Audit Committee concluded that the Company would need to restate its previously-issued
financial statements contained in reports previously filed by the Company with the SEC.
Accordingly, on March 19, 2007, the Company and the Audit Committee concluded that the Companys
previously-issued financial statements and other historical financial information and related
disclosures for the Review Period, including applicable reports of its current or former
independent registered public accounting firms and related press releases, should not be relied
upon.
On May 25, 2007, the Company was advised by the Enforcement Division of the SEC that a Formal Order
of Private Investigation arising out of the Companys stock option practices had been entered and
on May 29, 2007 the Company received a subpoena that was issued by the SEC.
On May 31, 2007, the Company announced that, as a result of the ongoing review of stock option
practices, Company management and the Audit Committee expected that the Companys additional
non-cash, pre-tax charges for stock-based compensation expense relating to certain stock option
grants would approximate $70 million for the Review Period.
Findings of the Audit Committee
During the Review Period, the Company granted stock options pursuant to an employee stock option
plan and a director stock option plan to acquire approximately 10.9 million shares of common stock.
Such plans at all relevant times provided for option grants to be approved by a designated
committee of non-employee directors or, in the case of the director stock option plan, by the
Board. Approximately 2,000 stock option grants were awarded during the Review Period with 69
recorded grant dates. No stock options have been granted since September, 2006. The Audit
Committee reviewed all stock options granted during the Review Period, including option grants to
the Companys directors, officers and rank and file employees (including grants to new employees,
grants awarded in connection with Company acquisitions and grants made as individual or group
performance awards). The Audit Committees review of the Companys stock option granting practices
included a comprehensive examination of reasonably available relevant physical and electronic
documents as well as interviews with current and former directors, officers and Company personnel.
The Audit Committees review was initially focused on determining whether the Companys prior stock
option granting practices were in compliance with the plans granting provisions and applicable law
or called into question its accounting for such options. Once it became evident that such issues
and accounting implications existed, the inquiry focused on those matters necessary: to determine
whether any accounting charges were material and whether a restatement of the Companys
previously-issued financial statements would be required; to establish a basis for effecting any
required restatement; to assure that, on as timely a basis as possible, the Company could file any
required curative disclosures with the SEC and assure its continued
eligibility for listing on NASDAQ; and to provide an informed basis for the Companys response to the identified issues, including
appropriate corrective and remedial actions.
40
The following information summarizes certain of the findings of the Audit Committee. The findings
identified approximately $71.5 million of unrecorded expense at the time of grant (i.e., the
difference between the fair market value of the common stock on the appropriate measurement date
and the stated exercise price), net of forfeitures, during the Review Period, of which $70.0
million was recorded in the Companys Consolidated Financial Statements through March 31, 2006 and
$1.5 million of unrecorded expense at the time of grant will be included, beginning at April 1,
2006, in the Companys computation of compensation expense in accordance with SFAS 123(R). The
following summarizes the unrecorded expense at the time of grant by time period and category of
recipient:
|
|
|
$4.2 million for the period from Fiscal 1993 through Fiscal 1997 ($0.2 million for
directors, $2.5 million for officers and $1.5 million for rank and file employees) |
|
|
|
|
$45.6 million for the period from Fiscal 1998 through August 2002 ($1.1 million for
directors, $25.7 million for officers and $18.7 million for rank and file employees) |
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|
$21.8 million for the period from August 2002 to the present ($0.04 million for directors,
$0.6 million for officers and $21.1 million for rank and file employees) |
The Audit Committees additional key findings are summarized below:
Lack of Adequate Documentation: For a majority of grants issued by the Company during the
Review Period, there is either no or inadequate documentation of approval actions that satisfies
the requisites for establishing a measurement date under APB 25. Of the 69 recorded grant dates,
there are documented approval actions by the Board or the Option or Compensation Committee with
respect to particular grants for 12 dates. In the period December 1992 to May 1996, neither the
minutes of the Compensation Committee nor of the Board reflect any action to approve specific
grants. In some instances, evidence of single director (the chairman of the Compensation
Committee) approval actions exists. This absence of non-employee director level documentation also
applies to a majority of grants with a recorded grant date after 1996. In some cases, Compensation
Committee minutes contain a reference to reports on the status of the option pool but do not
document any action to approve specific grants. Approval documentation for certain grants has
internal inconsistencies or conflicts with other documents thereby rendering this documentation
unreliable as a basis for establishing a measurement date. In some cases, the only existing
documentation is the executed option agreement and/or the entry of the option grant into the option
database. Notwithstanding these approval documentation inadequacies, the Company entered into
option agreements with grantees and has honored such grants.
Grant Approvals: During the Review Period, relatively few option grants were approved in
complete compliance with the Companys stock option plans. Available documentation reflects that
the Company approved option grants in a variety of ways. With respect to the employee stock option
plan, grants were approved by the Compensation Committee as contemplated by the plan at various
times, by the full Board in 1998 and 1999, by a single director (the chairman of the Compensation
Committee) on nine recorded grant dates during the period 1994 through 2001 and by the Companys
CEO at various times. With respect to the director stock option plan, grants were generally
approved by the designated Board committee and, in a few cases, by the chairman of the Compensation
Committee. In one instance in 2000, there is no conclusive documentary evidence of the approval of
director grants other than the signed director option agreements.
The delegation of authority by the Compensation Committee to the CEO with respect to grants to rank
and file employees was not fully documented. However, there was an understood and accepted
practice between the CEO and the Compensation Committee whereby the CEO made certain awards to
individual employees. In some instances, this involved the allocation among rank and file
employees of blocks of shares approved by the Compensation Committee; in three (3) such instances,
the number of shares ultimately awarded pursuant to this process exceeded the approved size of the
block, which was contrary to the understanding of the Compensation Committee members. Further,
contrary to the understanding of Committee members, the award and/or documentation of those
individual grants often significantly lagged the approval of the block grant. In August 2005, the
Compensation Committee specifically acknowledged a prior grant of delegated authority to the CEO to
make option grants to rank and file employees and ratified all prior awards by the CEO. In some
cases, documentation of approval action is either inconclusive or missing, and the Company
therefore has been unable to determine what entity or person actually approved specific grants.
Option Pricing: The recorded grant dates for a majority of grants do not match the
applicable measurement dates as determined under APB 25. The grants of options with exercise
prices lower than the fair market values of the stock on the actual measurement dates did not
satisfy the fair market pricing requirement in the Companys plans, as amended in 1998, and were
not consistent with the Companys disclosures in SEC filings stating that the exercise price of
options was equal to the fair market value of the stock on the date of the grant.
41
The relationship between the stated exercise price of options and the fair market value of the
Companys stock on the date of the identifiable approval actions varied from grant to grant. In
some cases, the exercise price of grants reflected the fair market value of the underlying shares
on the date of any documented approval action. In other cases, the exercise prices reflected the
fair market value of the underlying shares on a date either prior or subsequent to any such
documented approval action and the exercise price was lower than the fair market value on the date
of any such action. In several such cases before August 2002, the use of such grant dates and
lower exercise prices (together with other available evidence) supports a finding that the recorded
grant dates and corresponding exercise prices were selected with the benefit of hindsight. For
certain grants where the mismatch between the recorded grant date and the approval action was only
a matter of days, however, the mismatch appears to have been attributable to inaccurate recording
or administrative delays. In some cases, the apparent approval action did not identify all
grantees; for example, there are cases where a block grant was approved subject to a later
determination of individual grant recipients and grants were recorded with a grant date, and
corresponding exercise price, that matched the date of the apparent approval of the block grant and
the fair market value of the common stock on that date although individual grant recipients may
have been identified some time after approval of the block grant. Finally, in some cases, the
approval action for specific grants is not adequately documented. Where the recorded grant date
did not satisfy the requisites for a measurement date under APB 25, the Company relied on default
methodologies to determine an appropriate measurement date.
Internal Controls: As outlined above, the Companys historical administration of its
options program lacked discipline as it relates to proper adherence to the plan requirements,
corporate recordkeeping and documentation. Since November 2003, however, the Company has properly
administered the stock option program as it relates to awards to directors and officers. During
the investigation, the Company identified control gaps related to grants made throughout the Review
Period. As of March 31, 2007, the Company implemented additional procedures to its process that
are focused on formalized documentation of appropriate approvals and determination of grant terms
to employees.
Procedural and Remedial Actions
The Audit Committee and other relevant Board committees are committed to a continued review and
implementation of procedural enhancements and remedial actions in light of the foregoing findings.
Consistent with its obligation to act in the best interests of the Company taking into account all
relevant facts and circumstances, the Audit Committee is continuing to assess the appropriateness
of a broad range of possible procedural enhancements and potential remedial measures in light of
the findings of its investigation. While the Audit Committee has not completed its consideration
of all such steps, procedural enhancements may include recommendations regarding improved stock
option administration procedures and controls, training and monitoring compliance with those
procedures, corporate recordkeeping, corporate risk assessment, evaluation of the internal
compliance environment and other remedial steps that may be appropriate. The Audit Committee is
also expected to address issues of individual conduct or responsibility, including those of the
Board, CEOs and CFOs serving during the Review Period. Potential remedial measures may include an
evaluation of the role of and possible claims or other remedial actions against current and former
Company personnel who may be found to have been responsible for identified problems during the
Review Period. The Audit Committee expects to recommend to the Board and/or its appropriate
committees procedural enhancements and remedial measures that appropriately address the issues
raised by its findings. In advance of action by the Audit Committee, as noted above, the Company
has implemented additional procedures to its process for approving stock option grants that are
focused on formalized documentation of appropriate approvals and determination of grant terms to
employees.
Restatement Methodologies
As of April 1, 2006, the Company adopted SFAS 123(R) using the modified prospective transition
method. Under this transition method, compensation expense is to be recognized for all share-based
compensation awards granted after the date of adoption and for all unvested awards existing on the
date of adoption. Prior to April 1, 2006, the Company accounted for stock-based compensation
awards to directors, officers and rank and file employees using the intrinsic value method in
accordance with APB 25 as allowed under SFAS 123. Under the intrinsic value method, no share-based
compensation expense related to stock options was required to be recognized if the exercise price
of the stock option was at least equal to the fair market value of the common stock on the
measurement date. APB 25 defines the measurement date as the first date on which are known both
(1) the number of shares that an individual grant recipient is entitled to receive and (2) the
option or purchase price, if any.
In light of the Audit Committees review of the Companys stock option granting practices during
the Review Period and as to those cases in which the Company previously used a recorded grant date
as the measurement date that the Company determined could no longer be relied upon, the Company has
developed and applied the following methodologies to remeasure those stock option grants and record
the relevant charges in accordance with APB 25 by considering the following sources of information:
(i) meeting minutes of the Board and of committees thereof and related materials, (ii) Unanimous
Written Consents of the Board and of committees thereof, (iii) create date, (iv) relevant email
correspondence reflecting stock option grant approval actions, (v) individual stock option
42
agreements and related materials, (vi) employee and Board offer letters, (vii) documents relating to
acquisitions, (viii) reports on Form 4 filed with the SEC and (ix) guidance of the Office of the
Chief Accountant of the SEC on stock option matters as set forth in its letter dated September 19,
2006.
Grants with Appropriate Committee Approval. With respect to grants of approximately 1.0 million
shares, or approximately 9% of the total grants in the Review Period, the Company has evidence to
support the approval of the grant under the stock option plans by the relevant committee of the
Board, and such evidence includes the number of options each individual was entitled to receive and
the option price. However, the relationship between these documented approval actions and the
originally-recorded grant dates and exercise prices for the options so approved varied during the
Review Period. In some cases, grants were recorded with a grant date and a corresponding exercise
price that matched the date of the approval action or were otherwise consistent with the terms of
the approval actions. In other cases, however, the recorded grant dates and corresponding exercise
prices of the grants reflected the fair market value of the common stock on a date prior to the
committees documented approval actions. The Company has restated the compensation expense for
stock option grants relating to approximately 0.4 million shares of common stock by using the date
of the documented approval action as the measurement date. The total additional non-cash, pre-tax
charge for these grants is approximately $1.8 million, net of forfeitures, amortized over the
appropriate vesting period through March 31, 2006, of which $0.07 million relates to director
options, $1.3 million relates to officer options and $0.4 million relates to rank and file employee
options.
Grants with Other Approvals. With respect to grants of approximately 1.9 million shares, or
approximately 18% of the total grants in the Review Period, the Company has evidence to support the
approval of the grant by the Board, an outside director or the Companys CEO and the identification
of the number of options each individual was entitled to receive together with the option price.
These grants are distinguished from the grants described in the prior paragraph in that the nature
of the approval was not fully consistent with the terms of the relevant stock option plan. As with
the grants discussed in the preceding paragraph, the relationship between these documented approval
actions and the originally-recorded grant dates and exercise prices for the options so approved
varied during the Review Period. In some cases, grants were recorded with a grant date and a
corresponding exercise price that matched the date of the approval action or were otherwise
consistent with the terms of the approval action. In other cases, however, the recorded grant
dates and corresponding exercise prices of the grants reflected the fair market value of the
Companys stock on a date prior to the approval action. The Company has restated the compensation
expense for stock option grants relating to approximately 1.6 million shares of common stock by
using the date of the documented approval action as the measurement date. The total additional
non-cash, pre-tax charge for these grants is approximately $7.6 million, net of forfeitures,
amortized over the appropriate vesting period through March 31, 2006, of which $0.5 million relates
to director options, $2.6 million relates to officer options and $4.5 million relates to rank and
file employee options.
Grants Lacking Adequate Documentation. With respect to grants of approximately 7.9 million shares
(5.0 million shares to rank and file employees), or 73.0% of the total grants in the Review Period,
the Company has been unable to locate adequate documentation of approval actions that would satisfy
the requisites for a measurement date under APB 25. For these grants, management considered all
available relevant information to form a reasonable conclusion as to the most reasonable
measurement date. For all grants in this category, the Company has established default
methodologies for determining the most appropriate measurement date under APB 25.
With respect to grants entered into the Companys stock option database after September 9, 1999,
when the database began to reflect a create date which is the date on which a grant was entered
into the system, the Company has determined to use the individual create date for each grant as
the APB 25 measurement date, which was in most cases different from the originally-recorded grant
date. The Company believes that this create date is the most appropriate methodology in the
absence of sufficient evidence of approvals for these grants as it represents the earliest point in
time at which the evidence shows that all requisites for the establishment of the measurement date
had been satisfied. Such create dates preceded, often by a significant amount of time, the
execution of stock option agreements, which, generally, were manually signed by the Companys CEO
and manually signed and dated by the grantee. In addition, in almost all cases, a grant entered
into the database, which established the create date, ultimately resulted in the creation of a
stock option agreement reflecting such grant. Accordingly, while execution of the stock option
agreements constituted a clear acknowledgement by the grantee and the Company of the grantees
legal entitlement to the grant the Company believes the create date more accurately reflects the
date of approval than does the signed option agreement. The Company has restated the compensation
expense for stock option grants relating to approximately 4.2 million shares of common stock by
using the create date as the measurement date. The total additional non-cash, pre-tax charge for
these grants is approximately $49.8 million, net of forfeitures, amortized over the appropriate
vesting period through March 31, 2006, of which $0.5 million relates to director options, $17.2
million relates to officer options and $32.2 million relates to rank and file employee options.
The Companys procedures for evaluating the appropriateness of measurement dates fixed with
reference to such create dates included a sensitivity analysis which provided an understanding of
the differences between the additional recorded charge for stock-based compensation expense and the
charges that would result from using other identified alternative methods for determining
measurement dates. The Companys sensitivity analysis included identifying the range of potential
grant dates defined by the recorded grant date and the create date for each grant. The Company
then identified the low and high closing prices of the common stock within that range of potential
grant dates and applied both the low and high closing prices of the common stock to the number of
shares granted for which the create date
methodology was utilized to determine the range of potential adjustments to stock-based
compensation expense for these
43
grants, which was $0.09 million to $73.8 million, net of
forfeitures, as compared to the additional non-cash, pre-tax charge for these grants of
approximately $49.8 million, net of forfeitures, included in the Restatement.
For options entered into the Companys option database before September 9, 1999, the Company
determined the measurement date generally by reference to signed option agreements (or the deemed
signature date for certain options as discussed below). The executed option agreements
(hereinafter signed option agreements), manually signed by the Companys CEO and manually signed
and dated by the grantee, constituted an acknowledgement by the grantee and the Company of the
grantees legal entitlement to the grant and, in the absence of authoritative information as to
when all the requisites for the establishment of the measurement date had been satisfied, provides
a measurement date framework based on entitlement. The Company has restated the compensation
expense for stock option grants relating to approximately 1.4 million shares of common stock by
using the signed option agreements as the measurement date. The total additional non-cash, pre-tax
charge for these grants is approximately $6.4 million, net of forfeitures, amortized over the
appropriate vesting period through March 31, 2006, of which $0.3 million relates to director
options, $3.6 million relates to officer options and $2.5 million relates to rank and file employee
options. The Company believes this methodology was the most appropriate in the absence of
sufficient evidence of approvals for these grants as it represents the earliest point in time at
which the evidence shows that all requisites for the establishment of the measurement date had been
satisfied for these grants. The Companys procedures for evaluating the appropriateness of
measurement dates fixed with reference to the dating of signed option agreements included a
sensitivity analysis which provided an understanding of the differences between the additional
recorded charge for stock-based compensation expense and the charges that would result from using
other identified alternative methods for determining measurement dates. The Companys sensitivity
analysis included identifying the range of potential grant dates defined by the recorded grant date
and the date of the grantees signature on the stock option agreement for each grant. The Company
then identified the low and high closing prices of the common stock within that range of potential
grant dates and applied both the low and high closing prices of the common stock to the number of
shares granted for which the signed option agreements methodology was utilized to determine the
range of potential adjustments to stock-based compensation expense for these grants, which was
$0.03 million to $9.6 million, net of forfeitures, as compared to the additional non-cash, pre-tax
charge for these grants of approximately $6.4 million, net of forfeitures, included in the
Restatement.
In those cases where no reliably-dated signed option agreement could be located and where no
post-September 9, 1999 create date exists (stock option grants totaling approximately 0.9 million
shares), the Company used the average period between recorded grant date and date of the signatures
on all other grantee signed option agreements with the same grant date as the measurement date.
For example, if there were four stock option grants with a grant date of January 1, 1996, the
Company had the signed option agreements for three of these stock option grants and the average
number of days between the grant date and the signature dates of these three signed option
agreements was 20 days, January 21, 1996 was used as the measurement date for the grant for which
no signed option agreement could be located. The Company has restated the compensation expense for
stock option grants relating to approximately 0.7 million shares of common stock using this
average days to sign agreement method. The total additional non-cash, pre-tax charge for these
grants is approximately $4.4 million, net of forfeitures, amortized over the appropriate vesting
period through March 31, 2006, of which $0.06 million relates to director options, $4.2 million
relates to officer options and $0.2 million relates to rank and file employee options. The Company
believes this methodology was the most appropriate in the absence of sufficient evidence of
approvals for these grants because it gives a reasonable approximation of the measurement date
related to these options in light of the available evidence. The Company conducted a sensitivity
analysis by comparing the Companys current default methodology (i.e., average days to sign
agreement) with another default methodology. For this analysis, the Company identified the range
of potential grant dates defined by the earliest signed option agreement and the latest signed
option agreement. The Company then identified the low and high closing prices of the common stock
over the range of potential grant dates and applied both the low and high closing prices of the
common stock to the number of shares granted to determine the range of potential adjustments to
stock-based compensation expense for these grants, which was $2.6 million to $5.9 million, net of
forfeitures. The Companys analyses indicate that stock-based compensation expense computed using
other identified alternative default methodologies would not materially differ from stock-based
compensation expense computed using the average days to sign agreement methodology. The
Companys procedures for evaluating the appropriateness of measurement dates fixed with reference
to the average days to sign agreements also included a sensitivity analysis which provided an
understanding of the differences between the additional recorded charge for stock-based
compensation expense and the charges that would result from using other identified alternative
methods for determining measurement dates. The Companys sensitivity analysis included identifying
the range of potential grant dates defined by the recorded grant date and the average days to sign
agreement for each grant. The Company then identified the low and high closing prices of the
common stock within that range of potential grant dates and applied both the low and high closing
prices of the common stock to the number of shares granted to determine the range of potential
adjustments to stock-based compensation expense for these grants, which was $0.03 million to $6.1
million, net of forfeitures, as compared to the additional non-cash, pre-tax charge for these
grants of approximately $4.4 million, net of forfeitures, included in the Restatement.
Given the volatility of the common stock during much of the Review Period, the use of
methodologies and measurement dates different from those described above could have resulted in a
higher or lower cumulative compensation expense which would have caused net income or loss to be
different from the amounts reported in the restated consolidated financial statements. The
Companys procedures for evaluating the appropriateness of measurement dates fixed using the
default methodologies described above also included a
44
sensitivity analysis which provided an understanding of the differences
between the additional recorded charge for stock-based compensation expense and the charges that
would result from using other identified alternative methods for determining measurement dates.
The Companys sensitivity analysis included identifying the range of potential grant dates defined
by the recorded grant date and the appropriate measurement date for each grant. The Company then
identified the low and high closing prices of the common stock within that range of potential grant
dates and applied both the low and high closing prices of the common stock to the number of shares
granted to determine the range of potential adjustments to stock-based compensation expense for
these grants, which was $9.3 million to $99.3 million, net of forfeitures, as compared to the
additional non-cash, pre-tax charge for these grants of approximately $70.0 million, net of
forfeitures, included in the Restatement.
Other adjustments through March 31, 2006
From 1994 through 1998, the Company did not properly account for stock options for one officer that
were modified after the grant date pursuant to a separation agreement. Some of these modifications
were not identified in the Companys financial reporting processes and were therefore not properly
reflected in its financial statements. As a result, the Company has recorded a non-cash charge for
stock-based compensation of $1.0 million during Fiscal 1999.
Summary
In summary, the Company recorded cumulative non-cash charges for stock-based compensation of $70.9
million through March 31, 2006, offset in part by a cumulative income tax benefit of $27.7 million,
for a total after-tax charge of $43.2 million. These charges had no impact on net sales or cash
and cash equivalents as previously reported in the Companys financial statements; as a result, no
changes to these items are reflected in the Restatement. Non-cash charges for stock-based
compensation expense have been recorded as adjustments to Selling, General, and Administrative
Expenses within the Companys Consolidated Statements of Income.
1Q07 Restatement
In addition to the Restatement noted above through March 31, 2006, the Company has recorded a
non-cash charge for stock-based compensation of $1.6 million for the three (3) month period ended
July 1, 2006, offset in part by an income tax benefit of $0.6 million, or a total after-tax charge
of $1.0 million. This charge was recorded to reflect additional non-cash, stock-based
compensation expense recognized under the fair value method (SFAS 123(R)) because the exercise
price for certain stock option grants prior to, but not vested as of March 31, 2006, differed from
the fair market value of the underlying shares on the appropriate measurement date, some of which
occurred during Fiscal 2007.
The table below reflects the impact of the additional non-cash charges for stock-based compensation
expense on the Companys Consolidated Statements of Income, including the cumulative adjustment to
Retained Earnings as of March 31, 2006 and July 1, 2006 on the Companys Consolidated Balance
Sheet. See Note 3 of the Notes to Consolidated Financial Statements for reference to footnote
disclosure that reconciles the previously filed annual financial information to the restated annual
financial information. All dollar amounts are presented in thousands except per share amounts.
Per share amounts may not total due to rounding.
45
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|
|
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(As |
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|
|
|
|
|
|
(As |
|
|
|
|
|
|
|
|
|
|
Adjust- |
|
|
|
|
|
|
previously |
|
|
|
|
|
|
(As |
|
|
|
previously |
|
|
Adjust- |
|
|
Income |
|
|
ment, |
|
|
(As |
|
|
reported) |
|
|
|
|
|
|
Restated) |
|
|
|
reported) |
|
|
ment, |
|
|
Tax |
|
|
Net of |
|
|
Restated) |
|
|
Diluted |
|
|
Adjust- |
|
|
Diluted |
|
|
|
Net Income |
|
|
Pre-Tax |
|
|
Benefit |
|
|
Tax |
|
|
Net Income |
|
|
EPS |
|
|
ment |
|
|
EPS |
|
|
|
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|
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|
|
|
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|
|
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|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
|
|
|
FY 94 |
|
$ |
13,370 |
|
|
$ |
43 |
|
|
$ |
(19 |
) |
|
$ |
24 |
|
|
$ |
13,346 |
|
|
$ |
0.83 |
|
|
$ |
-- |
|
|
$ |
0.83 |
|
FY 95 |
|
|
14,515 |
|
|
|
461 |
|
|
|
(144 |
) |
|
|
317 |
|
|
|
14,198 |
|
|
|
0.89 |
|
|
|
(0.02 |
) |
|
|
0.87 |
|
FY 96 |
|
|
18,278 |
|
|
|
406 |
|
|
|
(151 |
) |
|
|
255 |
|
|
|
18,023 |
|
|
|
1.10 |
|
|
|
(0.01 |
) |
|
|
1.09 |
|
FY 97 |
|
|
24,792 |
|
|
|
1,172 |
|
|
|
(456 |
) |
|
|
716 |
|
|
|
24,076 |
|
|
|
1.40 |
|
|
|
(0.04 |
) |
|
|
1.36 |
|
FY 98 |
|
|
32,404 |
|
|
|
3,595 |
|
|
|
(1,393 |
) |
|
|
2,202 |
|
|
|
30,202 |
|
|
|
1.79 |
|
|
|
(0.12 |
) |
|
|
1.67 |
|
FY 99 |
|
|
38,145 |
|
|
|
4,506 |
|
|
|
(1,732 |
) |
|
|
2,774 |
|
|
|
35,371 |
|
|
|
2.09 |
|
|
|
(0.15 |
) |
|
|
1.94 |
|
FY 00 |
|
|
48,852 |
|
|
|
5,778 |
|
|
|
(2,209 |
) |
|
|
3,569 |
|
|
|
45,283 |
|
|
|
2.60 |
|
|
|
(0.19 |
) |
|
|
2.41 |
|
FY 01 |
|
|
64,190 |
|
|
|
10,290 |
|
|
|
(3,953 |
) |
|
|
6,337 |
|
|
|
57,853 |
|
|
|
3.22 |
|
|
|
(0.32 |
) |
|
|
2.90 |
|
FY 02 |
|
|
62,042 |
|
|
|
11,333 |
|
|
|
(4,381 |
) |
|
|
6,952 |
|
|
|
55,090 |
|
|
|
2.97 |
|
|
|
(0.33 |
) |
|
|
2.64 |
|
FY 03 |
|
|
48,685 |
|
|
|
8,927 |
|
|
|
(2,328 |
) |
|
|
6,599 |
|
|
|
42,086 |
|
|
|
2.39 |
|
|
|
(0.32 |
) |
|
|
2.07 |
|
FY 04 |
|
|
47,243 |
|
|
|
8,197 |
|
|
|
(4,156 |
) |
|
|
4,041 |
|
|
|
43,202 |
|
|
|
2.52 |
|
|
|
(0.22 |
) |
|
|
2.30 |
|
FY 05 |
|
|
29,912 |
|
|
|
5,178 |
|
|
|
(2,312 |
) |
|
|
2,866 |
|
|
|
27,046 |
|
|
|
1.68 |
|
|
|
(0.16 |
) |
|
|
1.52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative 03/31/05 |
|
$ |
442,428 |
|
|
$ |
59,886 |
|
|
$ |
(23,234 |
) |
|
$ |
36,652 |
|
|
$ |
405,776 |
|
|
$ |
23.48 |
|
|
$ |
(1.89 |
) |
|
$ |
21.59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1Q06 |
|
|
7,394 |
|
|
|
1,120 |
|
|
|
(442 |
) |
|
|
678 |
|
|
|
6,716 |
|
|
|
0.43 |
|
|
|
(0.04 |
) |
|
|
0.39 |
|
2Q06 |
|
|
12,797 |
|
|
|
1,126 |
|
|
|
(444 |
) |
|
|
682 |
|
|
|
12,115 |
|
|
|
0.74 |
|
|
|
(0.04 |
) |
|
|
0.70 |
|
3Q06 |
|
|
12,511 |
|
|
|
2,431 |
|
|
|
(959 |
) |
|
|
1,472 |
|
|
|
11,039 |
|
|
|
0.70 |
|
|
|
(0.08 |
) |
|
|
0.62 |
|
4Q06 |
|
|
4,656 |
|
|
|
6,368 |
|
|
|
(2,612 |
) |
|
|
3,756 |
|
|
|
900 |
|
|
|
0.26 |
|
|
|
(0.21 |
) |
|
|
0.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FY 06 |
|
$ |
37,358 |
|
|
$ |
11,045 |
|
|
$ |
(4,457 |
) |
|
$ |
6,588 |
|
|
$ |
30,770 |
|
|
$ |
2.13 |
|
|
$ |
(0.37 |
) |
|
$ |
1.76 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative 03/31/06 |
|
$ |
479,786 |
|
|
$ |
70,931 |
|
|
$ |
(27,691 |
) |
|
$ |
43,240 |
|
|
$ |
436,546 |
|
|
$ |
25.61 |
|
|
$ |
(2.26 |
) |
|
$ |
23.35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1Q07 |
|
|
7,807 |
|
|
|
1,629 |
|
|
|
(635 |
) |
|
|
994 |
|
|
|
6,813 |
|
|
|
0.43 |
|
|
|
(0.06 |
) |
|
|
0.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
07/01/06 |
|
$ |
487,593 |
|
|
$ |
72,560 |
|
|
$ |
(28,326 |
) |
|
$ |
44,234 |
|
|
$ |
443,359 |
|
|
$ |
26.04 |
|
|
$ |
(2.32 |
) |
|
$ |
23.72 |
|
|
Income Tax Considerations
In the course of the investigation, the Company determined that a number of officers may have
exercised options for which the application of Section 162(m) of the Code, may apply. It is
possible that these options will be treated as having been granted at less than fair market value
for federal income tax purposes because the Company incorrectly applied the measurement date as
defined in APB 25. If such options are deemed to be granted at less than fair market value,
pursuant to Section 162(m), any compensation to officers, including proceeds from options exercised
in any given tax year, in excess of $1.0 million will be disallowed as a deduction for tax
purposes. The Company estimates that the potential tax effected liability for any such disallowed
Section 162(m) deduction would approximate $3.6 million. The Company may also incur interest and
penalties if it were to incur any such tax liability, which could be material.
In addition, the Company is considering the application of Section 409A to those options for which
it incorrectly applied the measurement date as defined in APB 25. It is possible that these
options will be treated as having been granted at less than fair market value for federal income
tax purposes and thus subject to Section 409A. Accordingly, the Company may adopt measures to
address the application of Section 409A. The Company does not currently know what impact Section 409A will have, or any such measures, if adopted, would have, on its results of
operations, financial position or cash flows, although such impact could be material.
Expenses Incurred by the Company
The Company has incurred expenses for legal fees and external audit firm fees, in the aggregate
amount of approximately $0.6 million, in the fiscal year ended March 31, 2007, in relation to (i)
the Audit Committees review of the Companys historical stock option practices and related
accounting for stock option grants, (ii) the informal inquiry and formal order of investigation by
the Securities and Exchange Commission regarding its past stock option practices, (iii) the
derivative action relating to the Companys historical stock option practices filed against the
Company as a nominal defendant and certain of the Companys current and former directors and
officers as to whom it may have indemnification obligations and (iv) related matters. Further, the
Company expects to incur significant additional expense related to the foregoing matters in the
fiscal year ending March 31, 2008. It is anticipated that certain of those expenses will be
reimbursed under the Companys directors & officers indemnification insurance.
46
The Company
The Company offers one-source network infrastructure services for: data networks (Data Services),
including structured cabling for wired and wireless systems; voice systems (Voice Services),
including new and upgraded telephony systems; and 24/7/365 hotline technical support (Hotline
Services) for more than 118,000 network infrastructure products that it sells through its catalog,
Internet Web site and on-site services offices.
The Company manages its business based on geographic segments: North America, Europe and All
Other. In addition, certain revenue and gross profit information by service type is also provided
herein for purposes of further analysis. All dollars are presented in thousands unless otherwise
indicated.
As of April 1, 2006, the Company implemented SFAS 123(R) which requires share-based compensation to
be charged to expense. During the first quarter of Fiscal 2007, the Companys reconciling items
include pre-tax charges of $3.2 million for share-based compensation, $1.4 million in acquisition
related expenses and charges of $1.1 million in severance expenses. During the first quarter of
Fiscal 2006 and as previously disclosed, the Company recorded a pre-tax restructuring charge of
$5.3 million and incurred pre-tax non-cash charges of $2.8 million related to acquisitions.
On April 30, 2006, the Company acquired NextiraOne. The acquired operations service commercial and
various government agency clients and represent approximately $270 million to $280 million of
projected annualized Voice Services revenues.
On May 1, 2006, the Company acquired NUVT, a privately-held company, which provides planning,
installation, monitoring and maintenance services for voice and data network systems. NUVT has an
active customer base, which includes commercial, education and various government agency accounts
and is expected to provide annual revenues of approximately $55 million.
During the first quarter of Fiscal 2006 and fourth quarter of Fiscal 2005, the Company recorded
pre-tax restructuring charges of $5.3 million and $5.1 million, respectively, related to staffing
level adjustments and real estate consolidations in Europe and North America. These restructuring
charges completed the Companys previously announced restructuring plans that were initiated during
the fourth quarter of Fiscal 2005.
47
The tables below should be read in conjunction with the following discussion. The additional
non-cash charges for stock-based compensation expense was recorded in Selling, General and
Administrative expense which is included in the Companys measure of Operating Income. See Note 3
of the Notes to Consolidated Financial Statement.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
|
(As Restated) |
|
(As Restated) |
|
|
2006 |
|
2005 |
|
|
(1Q07) |
|
(1Q06) |
|
|
|
|
|
|
% of total |
|
|
|
|
|
|
% of total |
|
|
$
|
|
|
revenues |
|
|
$ |
|
|
revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By Geography |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
192,572 |
|
|
|
84 |
% |
|
$ |
136,861 |
|
|
|
76 |
% |
Europe |
|
|
29,345 |
|
|
|
13 |
% |
|
|
33,750 |
|
|
|
19 |
% |
All Other |
|
|
8,478 |
|
|
|
3 |
% |
|
|
8,671 |
|
|
|
5 |
% |
|
|
|
Total |
|
$ |
230,395 |
|
|
|
100 |
% |
|
$ |
179,282 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
9,397 |
|
|
|
|
|
|
$ |
10,739 |
|
|
|
|
|
% of North America revenues |
|
|
4.9 |
% |
|
|
|
|
|
|
7.8 |
% |
|
|
|
|
Europe |
|
|
3,143 |
|
|
|
|
|
|
|
(367 |
) |
|
|
|
|
% of Europe revenues |
|
|
10.7 |
% |
|
|
|
|
|
|
(1.1 |
)% |
|
|
|
|
All Other |
|
|
1,596 |
|
|
|
|
|
|
|
1,680 |
|
|
|
|
|
% of All Other revenues |
|
|
18.8 |
% |
|
|
|
|
|
|
19.4 |
% |
|
|
|
|
|
|
|
Total |
|
$ |
14,136 |
|
|
|
|
|
|
$ |
12,052 |
|
|
|
|
|
% of Total revenues |
|
|
6.1 |
% |
|
|
|
|
|
|
6.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges and
other reconciling items: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
5,797 |
|
|
|
|
|
|
$ |
5,499 |
|
|
|
|
|
Europe |
|
|
-- |
|
|
|
|
|
|
|
3,742 |
|
|
|
|
|
All Other |
|
|
-- |
|
|
|
|
|
|
|
-- |
|
|
|
|
|
|
|
|
Total |
|
$ |
5,797 |
|
|
|
|
|
|
$ |
9,241 |
|
|
|
|
|
% of Total revenues |
|
|
2.5 |
% |
|
|
|
|
|
|
5.2 |
% |
|
|
|
|
|
48
Information on revenues and gross profit for Data Services, Voice Services and Hotline Services is
presented below. The additional non-cash charges for stock-based compensation expense were recorded
in Selling, General and Administrative expense which is not included in the Companys measure of
Gross Profit and therefore does not impact the following table or the corresponding discussions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
|
2006 |
|
2005 |
|
|
(1Q07) |
|
(1Q06) |
|
|
|
|
|
|
% of total |
|
|
|
|
|
% of total |
|
|
$ |
|
|
revenues |
|
|
$ |
|
|
revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By Service Type |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Data Services (1) |
|
$ |
44,531 |
|
|
|
19% |
|
|
$ |
52,901 |
|
|
|
30% |
|
Voice Services (1) |
|
|
133,639 |
|
|
|
58% |
|
|
|
72,929 |
|
|
|
40% |
|
Hotline Services |
|
|
52,225 |
|
|
|
23% |
|
|
|
53,452 |
|
|
|
30% |
|
|
|
|
Total |
|
$ |
230,395 |
|
|
|
100% |
|
|
$ |
179,282 |
|
|
|
100% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Data Services |
|
$ |
13,317 |
|
|
|
|
|
|
$ |
15,524 |
|
|
|
|
|
% of Data Services revenues |
|
|
29.9% |
|
|
|
|
|
|
|
29.3% |
|
|
|
|
|
Voice Services |
|
|
45,763 |
|
|
|
|
|
|
|
27,838 |
|
|
|
|
|
% of Voice Services revenues |
|
|
34.2% |
|
|
|
|
|
|
|
38.2% |
|
|
|
|
|
Hotline Services |
|
|
26,764 |
|
|
|
|
|
|
|
27,578 |
|
|
|
|
|
% of Hotline Services revenues |
|
|
51.2% |
|
|
|
|
|
|
|
51.6% |
|
|
|
|
|
|
|
|
Total |
|
$ |
85,844 |
|
|
|
|
|
|
$ |
70,940 |
|
|
|
|
|
% of Total revenues |
|
|
37.3% |
|
|
|
|
|
|
|
39.6% |
|
|
|
|
|
|
|
|
|
(1) |
|
Data Services and Voice Services may also be collectively referred to as On-Site
Services |
First Quarter Fiscal 2007 (1Q07) Compared to First Quarter Fiscal 2006 (1Q06)
Total Revenues
Total revenues for 1Q07 were $230,395, an increase of 29% compared to 1Q06 total revenues of
$179,282. The increase was primarily due to the incremental revenue from the Acquired Companies,
which added $76,099 and $7,437 of revenues to the 1Q07 and 1Q06 results, respectively. Excluding
the effects of these acquisitions and the positive impact of exchange rates of $273 relative to the
U.S. dollar, revenues would have decreased 10% from $171,845 to $154,023 between periods.
Revenues by Geography
North America Revenues
Revenues in North America were $192,572 for 1Q07, an increase of 41% compared to 1Q06 revenues of
$136,861. The increase was primarily due to the incremental revenue from the Acquired Companies,
which added $76,099 and $7,437 of revenues to the 1Q07 and 1Q06 results, respectively. Excluding
the effects of these acquisitions, revenues would have decreased 10% from $129,424 to $116,473
between periods. The Company believes the overall decrease is due to the completion of several
nonrecurring projects, offset in part by success in the Companys DVH (Data, Voice and Hotline)
Services cross-selling initiatives.
Europe Revenues
Revenues in Europe were $29,345 for 1Q07, a decrease of 13% compared to 1Q06 revenues of $33,750.
The Company believes the overall decline in Europe revenues was due to weak general economic
conditions that affected client demand.
49
All Other Revenues
Revenues for All Other were $8,478 for 1Q07, a decrease of 2% compared to $8,671 for 1Q06. If
exchange rates relative to the U.S. dollar had remained unchanged from 1Q06, All Other revenues
would have increased by $151 for an increase of less than 1%.
Revenue by Service Type
Data Services
Revenues from Data Services were $44,531 for 1Q07, a decrease of 16% compared to $52,901 for 1Q06.
The Company believes the overall decrease in Data Services revenue was due to the completion of
several nonrecurring projects and weak general economic conditions in its European market.
Voice Services
Revenues from Voice Services were $133,639 for 1Q07, an increase of 83% compared to $72,929 for
1Q06. The increase was primarily due to the incremental revenue from the Acquired Companies, which
added $76,099 and $7,437 of revenues to the 1Q07 and 1Q06 results, respectively. Excluding the
effects of these acquisitions, revenues would have decreased 12% from $65,492 to $57,540 between
periods. The Company believes that this overall decrease in Voice Services revenue is primarily due
to planned post-merger client attrition from its Norstan acquisition completed in 4Q05.
Hotline Services
Revenues from Hotline Services were $52,225 for 1Q07, a decrease of 2% compared to $53,452 for
1Q06. The Company believes the overall decline in Hotline Services revenues was driven by weak
economic conditions in the European market, offset in part by success in the Companys DVH (Data,
Voice and Hotline) Services cross-selling initiatives.
Gross Profit
Gross profit dollars for 1Q07 increased to $85,844 from $70,940 for 1Q06. The increase in gross
profit dollars over the prior year was due to the increase in revenues related to the Acquired
Companies. Gross profit as a percent of revenues for 1Q07 decreased to 37.3% of revenues from 39.6%
of revenues for 1Q06. The decrease in gross profit percentage was due primarily to the impact of
lower gross profit in its Voice Services segment driven by the acquisition of NextiraOne.
Gross profit dollars for Data Services were $13,317, or 29.9% of revenues, for 1Q07 compared to
$15,524, or 29.3% of revenues, for 1Q06. Gross profit dollars for Voice Services were $45,763, or
34.2% of revenues, for 1Q07 compared to $27,838, or 38.2% of revenues, for 1Q06. Gross profit
dollars for Hotline Services were $26,764, or 51.2% of revenues, for 1Q07 compared to $27,578, or
51.6% of revenues, for 1Q06.
SG&A Expenses
Selling, general and administrative (SG&A) expenses for 1Q07 were $70,202, an increase of $18,162
over SG&A expenses of $52,040 for 1Q06. The increase in SG&A expense dollars over the prior year
was due primarily to the Acquired Companies. SG&A expenses as a percent of revenue for 1Q07 were
30.5% of revenues comparable to 29.0% of revenues for 1Q06. The increase in SG&A expense as a
percent of revenue was due primarily to an increase in non-cash
stock-based compensation expense of
$2,120 and $1,115 in severance expenses incurred in 1Q07.
Restructuring Charges
The Company did not record any restructuring charges during the first quarter of Fiscal 2007. In
the first quarter of Fiscal 2006, the Company recorded a restructuring charge of $5,290. This
charge was comprised of $3,473 for staffing level adjustments and $1,817 for real estate
consolidations in Europe and North America. Of this charge, $3,742 and $1,548 related to Europe and
North America, respectively. See Notes to Consolidated Financial Statements for further details
related to the restructuring charges.
Intangibles Amortization
Intangibles amortization for 1Q07 decreased to $1,506 from $1,558 for 1Q06. The decrease was
primarily attributable to the
completion of specific amortization expense related to the purchase of Norstan, which ended in
4Q06, offset in part by the estimated amortization expense of $1,234 related to the intangible
assets acquired through the purchase of the Acquired Companies. The Company expects to finalize the
valuations of these intangibles for the Acquired Companies in 2Q07.
See Notes to Consolidated Financial Statements for further details related to the acquisitions.
50
Operating Income
Operating income for 1Q07 was $14,136, or 6.1% of revenues, compared to $12,052, or 6.7% of
revenues, for 1Q06.
Interest Expense, Net
Net interest expense for 1Q07 increased to $3,640 from $1,959 for 1Q06 due to an increase in the
weighted average outstanding debt of approximately $221,584 for 1Q07 compared to approximately
$166,796 for 1Q06. The increase in debt relates primarily to the acquisitions of NextiraOne and
NUVT during the first quarter of Fiscal 2007. In addition, the weighted average interest rate
outstanding for 1Q07 was 6.06%, an increase of 2.01% compared to the 1Q06 rate of 4.05%.
Provision for Income Taxes
The tax provision for 1Q07 was $3,568, an effective tax rate of 34.4%. This compares to the tax
provision for 1Q06 of $3,452, an effective tax rate of 33.9%. The tax rate for 1Q07 was higher than
1Q06 due to changes in the overall mix of taxable income among worldwide offices.
Net Income
Net income for 1Q07 was $6,813, or 3.0% of revenues, compared to $6,716, or 3.7% of revenues, for
1Q06.
Liquidity and Capital Resources
Cash Flows from Operating Activities
Net cash provided by operating activities during 1Q07 was $12,607. Significant factors contributing
to a source of cash were: net income of $6,813 and decrease in accounts receivable of $11,579.
Significant factors contributing to a use of cash were: increase in net inventory of $1,066 and
increase in estimated earnings in excess of billings on uncompleted contracts of $7,674. Non-cash
items included amortization and depreciation expense and stock compensation expense of $3,806 and
$3,249, respectively. Changes in the above accounts are based on average Fiscal 2007 exchange
rates.
Net cash provided by operating activities during 1Q06 was $10,803. Significant factors contributing
to a source of cash were: net income of $6,716 and decrease in accounts receivable of $4,701.
Significant factors contributing to a use of cash were: increase in net inventory of $5,163 and
increase in estimated earnings in excess of billings on uncompleted contracts of $4,119. Non-cash
items included amortization and depreciation expense and stock compensation expense of $3,791 and
$1,120, respectively. Changes in the above accounts are based on average Fiscal 2006 exchange
rates.
As of the end of 1Q07 and 1Q06, the Company had cash and cash equivalents of $14,360 and $11,008,
respectively, and working capital of $100,673 and $103,363, respectively. The Companys current
ratio was 1.41 and 1.78 as of the end of 1Q07 and 1Q06, respectively.
The Company believes that its cash provided by operating activities and availability under its
credit facility will be sufficient to fund the Companys working capital requirements, capital
expenditures, dividend program, potential stock repurchases, potential future acquisitions or
strategic investments and other cash needs for the next 12 months.
Investing Activities
Net cash used by investing activities during 1Q07 and 1Q06 was $132,004 and $13,127, respectively.
The Companys primary use of cash during 1Q07 was related to the acquisition of businesses.
During 1Q07, gross capital expenditures were $1,523, while capital disposals were $30.
During 1Q07, the Company paid $129,161 to acquire NextiraOne and NUVT, net of cash acquired in the
transaction. During 1Q06, the Company paid $13,492 to acquire TSM, GTC and BCI, net of cash
acquired in the transaction. The cash impact of prior merger-related payments made during 1Q07 was
$1,350. The cash impact of prior merger-related recoveries made during 1Q06 was $44. See Note 10 of
the Notes to Consolidated Financial Statements for additional detail on acquisitions made during
1Q07.
51
Financing Activities
Net cash provided by/(used in) financing activities during 1Q07 and 1Q06 was $123,207 and $1,774,
respectively. Cash provided by financing activities in 1Q07 and 1Q06 resulted primarily from the
$120,753 and $3,072 net increase in debt obligations and $3,530 and $136 cash received from the
exercise of stock options, partially offset by cash used of $1,055 and $1,011 for payment of
dividends, respectively. The increase in debt obligations was due to the funding of the 1Q07
acquisitions.
Total Debt
Borrowings under the Credit Agreement are permitted up to a maximum amount of $310,000, which
includes up to $15,000 of swing-line loans and $25,000 of letters of credit. The Credit Agreement
may be increased by the Company up to an additional $90,000 with the approval of the lenders and
may be unilaterally and permanently reduced by the Company to not less than the then outstanding
amount of all borrowings. Interest on outstanding indebtedness under the Credit Agreement accrues,
at the Companys option, at a rate based on either: (a) the greater of (i) the prime rate per annum
of the agent then in effect and (ii) 0.50% plus the rate per annum announced by the Federal Reserve
Bank of New York as being the weighted average of the rates on overnight Federal funds transactions
arranged by Federal funds brokers on the previous trading day or (b) a rate per annum equal to the
LIBOR rate plus 0.75% to 1.25% (determined by a leverage ratio based on the Companys EBITDA). The
Credit Agreement expires on March 28, 2011.
The Companys total debt at the end of 1Q07 of $244,590 was comprised of $242,565 under the Credit
Agreement, $1,826 of obligations under capital leases and $199 of various other third-party,
non-employee loans. The weighted average interest rate on all indebtedness of the Company during
1Q07 and 1Q06 was approximately 6.06% and 4.05%, respectively. In addition, as of the end of 1Q07,
the Company had $3,065 of letters of credit outstanding and $64,370 available under the Credit
Agreement.
The Credit Agreement includes financial covenants requiring a minimum net worth, leverage and fixed
charge coverage ratio. At the end of 1Q07, the Company was in compliance with all required
covenants under the Credit Agreement.
Dividends
During 1Q07, the Board declared a cash dividend of $0.06 per share on all outstanding shares of
common stock. The dividend totaled $1,061 and was paid on July 14, 2006 to stockholders of record
at the close of business on June 30, 2006. While the Company expects to continue to declare
dividends for the foreseeable future, there can be no assurance as to the timing or amount of such
dividends.
Repurchase of Common Stock
There were no repurchases of common stock during 1Q07. Since inception of the repurchase program in
April 1999 through June 30, 2006, the Company has repurchased in aggregate approximately 6,900,000
shares of common stock for approximately $297,000. Funding for the stock repurchases came primarily
from existing cash flow from operations. Additional repurchases of stock may occur from time to
time depending upon factors such as the Companys cash flows and general market conditions. While
the Company expects to continue to repurchase shares of common stock for the foreseeable future,
there can be no assurance as to the timing or amount of such repurchases.
Foreign Currency Exchange Impact
The Company has operations, clients and suppliers worldwide, thereby exposing the Companys
financial results to foreign currency fluctuations. In an effort to reduce this risk, the Company
generally sells and purchases inventory based on prices denominated in U.S. dollars. Intercompany
sales to subsidiaries are generally denominated in the subsidiaries local currency, although
intercompany sales to the Companys subsidiaries in Brazil, Chile, Mexico and Singapore are
denominated in U.S. dollars.
The Company has entered and will continue in the future, on a selective basis, to enter into
foreign currency forward contracts to reduce the foreign currency exposure related to certain
intercompany transactions, primarily trade receivables and loans. All of the
contracts have been designated and qualify as cash flow hedges. The effective portion of any
changes in the fair value of the derivative instruments is recorded in OCI until the hedged
forecasted transaction occurs or the recognized currency transaction affects earnings. Once the
forecasted transaction occurs or the recognized currency transaction affects earnings, the
effective portion of any related gains or losses on the cash flow hedge is reclassified from OCI to
earnings. In the event the hedged forecasted transaction does not occur, or it becomes probable
that it will not occur, the ineffective portion of any gain or loss on the related cash flow hedge
would be reclassified from OCI to earnings at that time.
At of the end of 1Q07, the open foreign exchange contracts were in Euro, Pound sterling, Canadian
dollar, Swiss franc, Japanese yen,
52
Swedish krona, Danish krone, Norwegian kroner and Australian
dollar. The open contracts have contract rates of 0.7668 to 0.8262 Euro, 0.5312 to 0.5812 Pound
sterling, 1.1141 to 1.1751 Canadian dollar, 1.1813 to 1.2899 Swiss franc, 105.47 to 110.10 Japanese
yen, 7.0283 to 7.9878 Swedish krona, 5.7065 to 6.3120 Danish krone, 6.0294 to 6.8216 Norwegian
kroner and 1.2950 to 1.3689 Australian dollar, all per U.S. dollar.
The total open contracts, with a notional amount of approximately $63,129, have a fair value of
$62,777 and will expire within 33 months.
Critical Accounting Policies
The Companys critical accounting policies are described in the Notes to the Companys Consolidated
Financial Statements for the year ended March 31, 2006 contained in the Companys Annual Report on
Form 10-K. There have been no significant changes to these policies during the subsequent quarter.
New Accounting Pronouncements
See Notes to Consolidated Financial Statements.
Inflation
The overall effects of inflation on the Company have been nominal. Although long-term inflation
rates are difficult to predict, the Company continues to strive to minimize the effects of
inflation through improved productivity and cost reduction programs as well as price adjustments
within the constraints of market competition.
Cautionary Forward Looking Statements
When included in this Quarterly Report on Form 10-Q/A or in documents incorporated herein by
reference, the words expects, intends, anticipates, believes, estimates and analogous
expressions are intended to identify forward-looking statements. Such statements are inherently
subject to a variety of risks and uncertainties that could cause actual results to differ
materially from those projected. Such risks and uncertainties include, among others, the timing and
final outcome of the ongoing review of the Companys stock option practices, including the related
SEC investigation, shareholder derivative lawsuit, NASDAQ process
regarding listing of the common stock and tax matters, and the impact of any actions that may be required or taken
as a result of such review, SEC investigation, shareholder derivative
lawsuit, NASDAQ
process or tax matters, levels of business activity and operating expenses, expenses relating to corporate
compliance requirements, cash flows, global economic and business conditions, successful
integration of acquisitions, including the NextiraOne business, the timing and costs of
restructuring programs, successful marketing of DVH (Data, Voice and Hotline) Services, successful
implementation of our M&A program, including identifying appropriate targets, consummating
transactions and successfully integrating the businesses, competition, changes in foreign,
political and economic conditions, fluctuating foreign currencies compared to the U.S. dollar,
rapid changes in technologies, client preferences, the ability of the Company to identify, acquire
and operate additional technical services companies and various other matters, many of which are
beyond the Companys control. These forward-looking statements are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995 and speak only as of the date of
this Quarterly Report on Form 10-Q/A. The Company expressly disclaims any obligation or undertaking
to release publicly any updates or any changes in the Companys expectations with regard thereto or
any change in events, conditions or circumstances on which any statement is based.
53
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company is exposed to market risks in the ordinary course of business that include
interest rates and foreign currency exchange rates. Market risk is measured as the potential
negative impact on earnings, cash flows or fair values resulting from a hypothetical change in
interest rates or foreign currency exchange rates over the next year.
Interest Rate Risk
The Companys primary interest rate risk relates to its long-term debt obligations. At June 30,
2006, the Company had total long-term obligations, including the current portion of those
obligations, of $244,590. Of that amount, $2,025 was in fixed rate obligations and $242,565 was in
variable rate obligations. For the amounts in variable rate debt at June 30, 2006, an instantaneous
100 basis point increase in the interest rate would reduce the Companys expected net income in the
subsequent quarter by $394 assuming the Company employed no intervention strategies. Subsequent to
June 30, 2006, the Company entered into an interest rate swap agreement with a notional value of
$100,000, the effect of which will be to effectively convert a portion of the variable rate
interest based debt to a fixed rate portion.
Foreign Exchange Rate Risk
The Company has operations, clients and suppliers worldwide, thereby exposing the Companys
financial results to foreign currency fluctuations. In an effort to reduce this risk, the Company
generally sells and purchases inventory based on prices denominated in U.S. dollars. Intercompany
sales to subsidiaries are generally denominated in the subsidiaries local currency. To mitigate
this risk, the Company has entered and will continue in the future, on a selective basis, to enter
into foreign currency forward contracts to reduce the foreign currency exposure related to certain
intercompany transactions. At June 30, 2006, the Company had total open contracts valued at
approximately $63,129 with a fair value of approximately $62,777.
The Company does not hold or issue any other financial derivative instruments nor does it engage in
speculative trading of financial derivatives.
54
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
As disclosed in the Explanatory Note and in Note 3 of the Notes to Consolidated Financial
Statements in this Form 10-Q/A, and as previously disclosed, the Audit Committee, with the
assistance of outside legal counsel, commenced an independent review of the Companys historical
stock option grant practices and related accounting for stock option grants for the Review Period.
On March 19, 2007, the Audit Committee concluded that the exercise price of certain stock option
grants differed from the fair market value of the underlying shares on the appropriate measurement
date. At that time, the Company and the Audit Committee announced that it was currently expected
that the Companys additional non-cash, pre-tax charges for stock-based compensation expense
relating to certain stock option grants would approximate $63 million (subsequently adjusted as set
forth elsewhere in this Form 10-Q/A) for the Review Period. In addition, the Company and the Audit
Committee concluded that the Company would need to restate its previously-issued financial
statements contained in reports previously filed by the Company with the SEC. Accordingly, on
March 19, 2007, the Company and the Audit Committee concluded that the Companys previously-issued
financial statements and other historical financial information and related disclosures for the
Review Period, including applicable reports of its current or former independent registered public
accounting firms and related press releases, should not be relied upon.
In connection with the preparation of this Form 10-Q/A, an evaluation was performed, under the
supervision and with the participation of Company management, including the CEO and the CFO, of the
effectiveness of the design and operation of the Companys disclosure controls and procedures (as
defined in Rule 13a-15(e)) under the Securities Exchange Act of 1934, as amended (the Exchange
Act), as of July 1, 2006. Based on that evaluation and the foregoing, management, including the
CEO and the CFO, has concluded that, as of July 1, 2006, the Company had a material weakness in
internal control over financial reporting with respect to the Companys stock option grant
practices and related accounting for stock option grants and that, as a result of this material
weakness in internal control over financial reporting, its disclosure controls and procedures were
not effective as of July 1, 2006.
There are inherent limitations to the effectiveness of any system of disclosure controls and
procedures, including cost limitations, judgments used in decision making, assumptions regarding
the likelihood of future events, soundness of internal controls, fraud, the possibility of human
error and the circumvention or overriding of the controls and procedures. Accordingly, even
effective disclosure controls and procedures can provide only reasonable, and not absolute,
assurance of achieving their control objectives.
Changes in Internal Control Over Financial Reporting
In the first fiscal quarter ended July 1, 2006, there had been no change in the Companys internal
control over financial reporting that has materially affected, or is reasonably likely to
materially affect, the Companys internal control over financial reporting.
As of the date of filing of this Form 10-Q/A, Management has made significant revisions to the
Companys internal control structure surrounding the Companys stock option grant practices,
including the formalization of documentation with respect to appropriate approvals for stock option
grants and additional levels of review with respect to stock option grant terms, which Management
believes should facilitate the prevention and/or detection of material errors in future periods.
Also, as of the date of filing of this Form 10-Q/A, the Audit Committee has completed its review of
the Companys stock option grant practices and continues to analyze the facts discovered in its
review in order to make additional recommendations for appropriate remedial actions regarding the
Companys stock option grant practices and related accounting for stock option grants. It is
anticipated that the Company will adopt and implement any such additional recommendations. Pending
the Audit Committees consideration of and the Companys implementation of these recommendations,
the Company has not made and does not intend to make any stock option grants. The Company also
took action to suspend the exercise of outstanding stock options. It is anticipated that the
Company will permit stock option exercises following the filing of this Form 10-Q/A, the 2Q07 Form
10-Q/A, the 3Q07 Form 10-Q and the FY07 Form 10-K.
The scope of Managements assessment of the effectiveness of internal controls over financial
reporting includes all of the Companys material businesses except for NextiraOne, a material business acquired on April 30, 2006. The NextiraOne portion of the
business will be included in the current year assessment to be completed as of March 31, 2007.
55
PART II OTHER INFORMATION
Item 6. Exhibits.
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Exhibit |
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Number |
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Description |
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31.1
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|
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities and
Exchange Act of 1934, as amended, and Section 302 of the
Sarbanes-Oxley Act of 2002(1) |
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31.2
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Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities and
Exchange Act of 1934, as amended, and Section 302 of the Sarbanes-Oxley Act of 2002(1) |
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32.1
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Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Rule
13a-14(b) of the Securities and Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(1) |
56
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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BLACK BOX CORPORATION
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Dated: July 23, 2007 |
By: |
/s/ Michael McAndrew
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Michael McAndrew, Vice President, |
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Chief Financial Officer, Treasurer, Secretary
and Principal Accounting Officer |
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57
EXHIBIT INDEX
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Exhibit |
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Number |
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Description |
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31.1
|
|
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Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities and
Exchange Act of 1934, as amended, and Section 302 of the Sarbanes-Oxley Act of 2002
(1) |
|
|
|
|
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31.2
|
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Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities and
Exchange Act of 1934, as amended, and Section 302 of the Sarbanes-Oxley Act of 2002
(1) |
|
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|
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32.1
|
|
|
|
Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Rule
13a-14(b) of the Securities and Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
(1) |
58