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BEARINGPOINT 10-Q 2007
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549
FORM 10-Q
For the quarterly period ended June 30, 2007.
OR
Commission File Number 001-31451
BEARINGPOINT, INC.
(Exact name of Registrant as specified in its charter)
(703) 747-3000
(Registrant’s telephone number, including area code) (Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark 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.
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
The number of shares of common stock of the Registrant outstanding as of October 1, 2007 was
202,205,473.
BEARINGPOINT, INC.
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2007 EXPLANATORY NOTE
As a result of significant delays in completing our consolidated financial statements for the
year ended December 31, 2006 (“fiscal 2006”), we were unable to timely file with the Securities and
Exchange Commission (the “SEC”) our Annual Report on Form 10-K for the fiscal year ended December
31, 2006 (the “2006 Form 10-K”), our Quarterly Reports on Form 10-Q for fiscal 2006 (the “2006
Forms 10-Q”) and our Quarterly Reports on Form 10-Q for each of the three months ended March 31,
2007 and June 30, 2007, respectively.
We filed the 2006 Form 10-K on June 28, 2007, the 2006 Forms 10-Q on June 29, 2007 and the
Quarterly Report on Form 10-Q for the three months ended March 31, 2007 on September 7, 2007. Due
to the delay in the filing of this Quarterly Report on Form 10-Q, certain information presented in
this Quarterly Report relates to significant events that have occurred subsequent to the period
generally covered in a Form 10-Q for the three months ended June 30, 2007.
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BEARINGPOINT, INC.
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2007 TABLE OF CONTENTS
3
PART I, ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
BEARINGPOINT, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (in thousands, except share and per share amounts) (unaudited)
The accompanying Notes are an integral part of these Consolidated Condensed Financial Statements.
4
BEARINGPOINT, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS (in thousands, except share and per share amounts) (unaudited)
The accompanying Notes are an integral part of these Consolidated Condensed Financial Statements.
5
BEARINGPOINT, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
The accompanying Notes are an integral part of these Consolidated Condensed Financial Statements.
6
BEARINGPOINT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (in thousands, except share and per share amounts) (unaudited) Note 1. Basis of Presentation
The accompanying unaudited interim Consolidated Condensed Financial Statements of
BearingPoint, Inc. (the “Company”) have been prepared pursuant to the rules and regulations of the
SEC for Quarterly Reports on Form 10-Q. These statements do not include all of the information and
Note disclosures required by accounting principles generally accepted in the United States of
America, and should be read in conjunction with the Company’s Consolidated Financial Statements and
notes thereto for the year ended December 31, 2006, included in the Company’s 2006 Form 10-K filed
with the SEC on June 28, 2007. The accompanying Consolidated Condensed Financial Statements have
been prepared in accordance with accounting principles generally accepted in the United States of
America and reflect adjustments (consisting of normal, recurring adjustments) which are, in the
opinion of management, necessary for a fair presentation of results for these interim periods. The
results of operations for the three and six months ended June 30, 2007 are not necessarily
indicative of the results that may be expected for any other interim period or the entire fiscal
year.
The interim Consolidated Condensed Financial Statements reflect the operations of the Company
and all of its majority-owned subsidiaries. Upon consolidation, all significant intercompany
accounts and transactions are eliminated.
Note 2. Stock-Based Compensation
The Consolidated Condensed Statements of Operations for the three and six months ended June
30, 2007 and 2006 include stock-based compensation expense related to awards of stock options,
restricted stock units (“RSUs”), performance share units (“PSUs”) and issuances under the Company’s
Employee Stock Purchase Plan (“ESPP”), including the Company’s “BE an Owner” program, and
restricted stock awards, as follows:
Because the Company was not current in its SEC periodic filings, it had been unable to issue
freely tradable shares of its common stock pursuant to its various equity programs. With the filing
of this Form 10-Q, the Company will be current in its SEC periodic filings, and its equity programs
will fully resume. As a result, the Company will be able to issue shares of its common stock in
accordance with the terms of its various equity programs and related agreements. For additional
information, see Item 1A, “Risk Factors,” of this Quarterly Report.
7
BEARINGPOINT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (continued) (in thousands, except share and per share amounts) (unaudited) Restricted Stock Units
The following table summarizes RSU activity during the six months ended June 30, 2007:
For RSU awards, the fair value is fixed on the date of grant based on the number of RSUs
granted and the fair value of the Company’s common stock on the date of grant. RSUs granted during
the six months ended June 30, 2007 generally either: (i) cliff vest and settle three years from the
grant date; or (ii) vest and settle four years from the date of grant.
None of the common stock equivalents underlying RSUs are considered to be issued or
outstanding common stock, as issuance is dependant on various vesting and settlement terms.
Performance Share Units
On February 2, 2007, the Compensation Committee of the Company’s Board of Directors approved
the issuance of up to 25 million PSUs to the Company’s managing directors and other high-performing
senior-level employees, including its executive officers, under its 2000 Amended and Restated
Long-term Incentive Plan (“LTIP”). Activity for PSUs granted under the LTIP during the six months
ended June 30, 2007 was as follows:
The PSU awards, each of which initially represents the right to receive at the time of
settlement one share of the Company’s common stock, will vest on December 31, 2009. Generally, for
any PSU award to vest, two performance-based metrics must be achieved for the performance period
beginning on (and including) February 2, 2007 and ending on (and including) December 31, 2009 (the
“Performance Period”):
8
BEARINGPOINT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (continued) (in thousands, except share and per share amounts) (unaudited)
An employee’s continuous employment with the Company (except in cases of death, disability or
retirement, or certain changes of control as defined in the agreements governing the PSU awards) is
also required for vesting of a particular employee’s PSU award. The PSU awards will be settled at
various dates from 2010 through 2016.
The fair value of each PSU award was estimated on the date of grant using the Monte Carlo
lattice pricing model and applying the following assumptions:
Note 3. Notes Payable
Notes payable consist of the following:
In December 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position
No. Emerging Issues Task Force (“EITF”) 00-19-2, “Accounting for Registration Payment Arrangements” (“FSP
00-19-2”). FSP 00-19-2 specifies that the contingent obligation to make future payments or
otherwise transfer consideration under a registration payment arrangement, whether issued as a
separate agreement or included as a provision of a financial instrument or other agreement, should
be separately recognized and measured in accordance with SFAS No. 5, “Accounting for
Contingencies.” FSP 00-19-2 also requires additional disclosure regarding the nature of any
registration payment arrangements, alternative settlement methods, the maximum potential amount of
consideration and the current carrying amount of the liability, if any. FSP 00-19-2 applies
immediately to any registration payment arrangement entered into subsequent to the issuance of FSP
00-19-2. For such arrangements entered into prior to the issuance of FSP 00-19-2, the guidance is
effective for the Company as of January 1, 2007.
9
BEARINGPOINT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (continued) (in thousands, except share and per share amounts) (unaudited) As a result of implementing FSP 00-19-2, the Company recognized a cumulative effect adjustment
of $371 that increased the January 1, 2007 accumulated deficit balance and recognized an
undiscounted liability associated with its estimated remaining obligation to pay additional
interest to the holders of the 5.00% Convertible Senior Debentures due April 15, 2025 (the “April
2005 Convertible Debentures”) and the 0.50% Convertible Senior Debentures due July 2010 (the “July
2005 Convertible Debentures”) as a result of the Company’s noncurrent filer status and related
inability to file a registration statement. As of June 30, 2007, the carrying amount of the
obligation under these registration rights agreements was $175. Should the Company be required to
adjust the total obligation due to changes in its estimate, the charge or gain will be reflected in
other income (expense), net in the Consolidated Statements of Operations.
2007 Credit Facility
On May 18, 2007, the Company entered into a $400,000 senior secured credit facility and on
June 1, 2007, the Company amended and restated the credit facility to increase the aggregate
commitments under the facility from $400,000 to $500,000 (the “2007 Credit Facility”). The 2007
Credit Facility consists of (1) term loans in an aggregate principal amount of $300,000 (the “Term
Loans”) and (2) a letter of credit facility in an aggregate face amount at any time outstanding not
to exceed $200,000 (the “LC Facility”). Interest on the Term Loans under the 2007 Credit Facility
is calculated, at the Company’s option, (1) at a rate equal to 3.5% plus the London Interbank
Offered Rate, or LIBOR, or (2) at a rate equal to 2.5% plus the higher of (a) the federal funds
rate plus 0.5% and (b) UBS AG, Stamford Branch’s prime commercial lending rate. Debt issuance costs
of $18,801, mainly comprised of underwriting, commitment, and legal fees, were capitalized into
other non-current assets and are being amortized to interest expense over the life of the Term
Loans. As of June 30, 2007, the Company had $299,250 in principal outstanding under the Term Loans
and an aggregate of $93,868 outstanding in letters of credit. The Company is charged an annual fee
of 4.0% on the total LC Facility, whether or not utilized, and an additional annual fee of 0.2% on
letters of credit issued.
The Company’s obligations under the 2007 Credit Facility are secured by first priority liens and security
interests in substantially all of the Company’s assets and most of its material domestic
subsidiaries, as guarantors of such obligations (including a pledge of 65% of the stock of certain
of its foreign subsidiaries), subject to certain exceptions.
The 2007 Credit Facility requires the Company to make prepayments of outstanding Term Loans
and cash collateralize outstanding Letters of Credit in an amount equal to (i) 100% of the net
proceeds received from property or asset sales (subject to exceptions), (ii) 100% of the net
proceeds received from the issuance or incurrence of additional debt (subject to exceptions), (iii)
100% of all casualty and condemnation proceeds (subject to exceptions), (iv) 50% of the net
proceeds received from the issuance of equity (subject to exceptions) and (v) for each fiscal year
ending on or after December 31, 2008 (and, at the Company’s election for the second half of 2007),
the difference between (a) 50% of the Excess Cash Flow (as defined in the 2007 Credit Facility) and
(b) any voluntary prepayment of the Term Loan or the LC Facility (as defined in the 2007 Credit
Facility) (subject to exceptions). If the Term Loan is prepaid or the LC Facility is reduced prior
to May 18, 2008 with other indebtedness or another letter of credit facility, the Company may be
required to pay a prepayment premium of 1% of the principal amount of the Term Loan so prepaid or
LC Facility so reduced if the cost of such replacement indebtedness or letter of credit facility is
lower than the cost of the 2007 Credit Facility. In addition, the Company is required to pay $750
in principal plus any accrued and unpaid interest at the end of each quarter, commencing on June
29, 2007 and ending on March 31, 2012.
The 2007 Credit Facility contains affirmative and negative covenants:
10
BEARINGPOINT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (continued) (in thousands, except share and per share amounts) (unaudited)
The
2007 Credit Facility contains customary representations, warranties
and covenants, certain of which include exceptions for events that
would not have a material adverse effect on the Company’s
business, results of operations, financial condition, assets or
liabilities.
Events of default under the 2007 Credit Facility include, among other things: defaults based
on nonpayment, breach of representations, warranties and covenants, cross-defaults to other debt
above $10,000, loss of lien on collateral, invalidity of certain guarantees, certain bankruptcy and
insolvency events, certain ERISA events, judgments against the Company in an aggregate amount in
excess of $20,000 that remain unpaid, and change of control events.
Under the terms of the 2007 Credit Facility, the Company is not required to become current in
its SEC periodic filings until October 31, 2008. Until October 31, 2008, the Company’s failure to
provide annual audited or quarterly unaudited financial statements, to keep its books and records
in accordance with generally accepted accounting principles in the United States of America
(“GAAP”) or to timely file its SEC periodic reports will not be considered an event of default
under the 2007 Credit Facility.
The 2007 Credit Facility replaced the Company’s 2005 Credit Facility, which was terminated on
May 18, 2007. For information about the 2005 Credit Facility, see below.
Discontinued 2005 Credit Facility
On July 19, 2005, the Company entered into a $150,000 Senior Secured Credit Facility (the
“2005 Credit Facility”). The 2005 Credit Facility, as amended, provided for up to $150,000 in
revolving credit and advances, all of which was available for issuance of letters of credit.
Advances under the revolving credit line were limited by the available borrowing base, which was
based upon a percentage of eligible accounts receivable and unbilled receivables. The 2005 Credit
Facility was terminated on May 18, 2007. On that date, all outstanding obligations under the 2005
Credit Facility were assumed by the 2007 Credit Facility, $2,102 of unamortized debt issuance costs
was written-off to interest expense, and liens and security interests under the 2005 Credit
Facility were released.
Japanese Credit Facility
On September 22, 2006, the Company’s Japanese subsidiary entered into a 500,000
yen-denominated overdraft line of credit with The Bank of Tokyo – Mitsubishi UFJ Ltd. There were no
borrowings at June 30, 2007. On September 28, 2007, the Company’s Japanese subsidiary borrowed
100,000 yen (approximately $865) against the line of credit. Borrowings under the line of credit
accrue interest at Tokyo Interbank Offered Rate (“TIBOR”) plus 0.5%.
Note 4. Earnings (Loss) Per Share
Basic earnings (loss) per share is computed based on the weighted average number of common
shares outstanding during the period. Diluted earnings (loss) per share is computed using the
weighted average number of common shares outstanding during the period plus the dilutive effect of
potential future issues of common stock relating to the Company’s stock option program, unvested
PSUs, unvested RSUs, convertible debt and other potentially dilutive securities. In calculating
diluted earnings (loss) per share, the dilutive effect of stock options is computed using the
average market price for the period in accordance with the treasury stock method. The effect of
convertible securities on the calculation of diluted net loss per share is calculated using the “if
converted” method. During the three months ended June 30, 2007 and 2006, 129,675,122 shares and
131,196,743 shares, respectively, were not included in the computation of diluted EPS because to do so would have been anti-dilutive.
During the six months ended June 30, 2007 and 2006, 130,135,073 and 133,530,784 shares,
respectively, were not included in the computation of diluted EPS because to do so would have been
anti-dilutive.
11
BEARINGPOINT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (continued) (in thousands, except share and per share amounts) (unaudited) Note 5. Comprehensive Income/(Loss)
The components of comprehensive income/(loss) are as follows:
Note 6. Segment Reporting
The Company’s segment information has been prepared in accordance with Statement of Financial
Accounting Standard (“SFAS”) No. 131, “Disclosures about Segments of an Enterprise and Related
Information.” Operating segments are defined as components of an enterprise engaging in business
activities about which separate financial information is available that is evaluated regularly by
the Company’s chief operating decision-maker, the Chief Executive Officer, in deciding how to
allocate resources and assess performance. The Company’s reportable segments consist of its three
North America industry groups (Public Services, Commercial Services and Financial Services), its
three international regions (Europe, the Middle East and Africa (“EMEA”), Asia Pacific and Latin
America) and the Corporate/Other category (which consists primarily of infrastructure costs).
Accounting policies of the segments are the same as those described in Note 2, “Summary of
Significant Accounting Policies,” of the Company’s 2006 Form 10-K. Upon consolidation, all
intercompany accounts and transactions are eliminated. Inter-segment revenue is not included in the
measure of profit or loss. Performance of the segments is evaluated on operating income excluding
the costs of infrastructure and shared service costs (such as facilities, information systems,
finance and accounting, human resources, legal and marketing), which is represented by the
Corporate/Other segment.
12
BEARINGPOINT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (continued) (in thousands, except share and per share amounts) (unaudited)
13
BEARINGPOINT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (continued) (in thousands, except share and per share amounts) (unaudited) Note 7. Goodwill
The changes in the carrying amount of goodwill, at the reporting unit level, for the six
months ended June 30, 2007 were as follows:
In April 2007, the Company completed its required annual impairment test and determined that
the carrying value of goodwill was not impaired.
Note 8. Lease and Facilities Restructuring Activities
During the three and six months ended June 30, 2007, the Company recorded a restructuring
charge of $1,329 and a credit of $3,558, respectively, both in connection with the Company’s
previously announced office space reduction efforts. The restructuring credit for the six months
ended June 30, 2007 represents a net reduction of accruals, primarily attributable to the change in
sublease income assumptions associated with vacated leased facilities.
During the three and six months ended June 30, 2006, the Company recorded restructuring
charges of $2,488 and $5,288, respectively, both in connection with the Company’s previously
announced office space reduction efforts.
Since July 2003, the Company has incurred a total of $128,779 in lease and facilities-related
restructuring charges in connection with its office space reduction effort relating to the
following regions: $25,772 in EMEA, $863 in Asia Pacific and $102,144 in North America. As of June
30, 2007, the Company has a remaining lease and facilities accrual of $54,503, of which $15,095 and
$39,408 have been identified as current and non-current portions, respectively. The remaining lease
and facilities accrual will be paid over the remaining lease terms which expire at various dates
through 2014.
Changes in the Company’s accrual for restructuring charges for the six months ended June 30,
2007 were as follows:
14
BEARINGPOINT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (continued) (in thousands, except share and per share amounts) (unaudited) Note 9. Commitments and Contingencies
The Company currently is a party to a number of disputes which involve or may involve
litigation or other legal or regulatory proceedings. Generally, there are three types of legal
proceedings to which the Company has been made a party:
The Company currently maintains insurance in types and amounts customary in its industry,
including coverage for professional liability, general liability and management and director
liability. Based on management’s current assessment and insurance coverages believed to be
available, the Company believes that its financial statements include adequate provision for
estimated losses that are likely to be incurred with regard to all matters of the types described
above.
SEC Reporting Matters
2005 Class Action Suits
In and after April 2005, various separate complaints were filed in the U.S. District Court for
the Eastern District of Virginia alleging that the Company and certain of its current and former
officers and directors violated Section 10(b) of the Exchange Act, Rule 10b-5 promulgated
thereunder and Section 20(a) of the Exchange Act by, among other things, making materially
misleading statements between August 14, 2003 and April 20, 2005 with respect to its financial
results in the Company’s SEC periodic filings and press releases. On January 17, 2006, the court
certified a class, appointed class counsel and appointed a class representative. The plaintiffs
filed an amended complaint on March 10, 2006 and the defendants, including the Company,
subsequently filed a motion to dismiss that complaint, which was fully briefed and heard on May 5,
2006. The Company was awaiting a ruling when, on March 23, 2007, the court stayed the case, pending
the U.S. Supreme Court’s decision in the case of Makor Issues & Rights, Ltd v. Tellabs, argued
before the Supreme Court on March 28, 2007. On June 21, 2007, the Supreme Court issued its opinion
in the Tellabs case, holding that to plead a strong inference of a defendant’s fraudulent intent
under the applicable federal securities laws, a plaintiff must demonstrate that such an inference
is not merely reasonable, but cogent and at least as compelling as any opposing inference of
non-fraudulent intent. The court ordered both parties to submit briefs regarding the impact of
Tellabs upon the defendants’ motion to dismiss. The parties filed their briefs on July 16, 2007,
and oral arguments were held on July 27, 2007. On September 12, 2007, the court dismissed with
prejudice this complaint, granting motions to dismiss filed by the Company and the other named
defendants. In granting the Company’s motion to dismiss, the court ruled that the plaintiff failed
to meet the scienter pleading requirements set forth in the Private Securities Litigation Reform
Act of 1995, as amended. On September 26, 2007, the plaintiffs filed a motion that seeks
a reversal of the court’s order dismissing the case or an amendment to the court’s order that would
allow the plaintiffs to replead. The Company filed its brief on
October 17, 2007 and a hearing on the plaintiffs’ motion is
scheduled for November 16, 2007.
2005 Shareholders’ Derivative Demand
On May 21, 2005, the Company received a letter from counsel representing one of its
shareholders requesting that the Company initiate a lawsuit against its Board of Directors and
certain present and former officers of the Company, alleging breaches of the officers’ and
directors’ duties of care and loyalty to the Company relating to the events disclosed in its report
filed on Form 8-K, dated April 20, 2005. On January 21, 2006, the shareholder filed a derivative
complaint in the Circuit Court of Fairfax County, Virginia, that
15
BEARINGPOINT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (continued) (in thousands, except share and per share amounts) (unaudited) was not served on the Company until March 2006. The shareholder’s complaint alleged that his
demand was not acted upon and alleged the breach of fiduciary duty claims previously stated in his
demand. The complaint also included a non-derivative claim seeking the scheduling of an annual
meeting in 2006. On May 18, 2006, following an extensive audit committee investigation, the
Company’s Board of Directors responded to the shareholder’s demand by declining at that time to
file a suit alleging the claims asserted in the shareholder’s demand. The shareholder did not amend
the complaint to reflect the refusal of his demand. The Company filed demurrers on August 11, 2006,
which effectively sought to dismiss the matter related to the fiduciary duty claims. On November 3,
2006, the court granted the demurrers and dismissed the fiduciary claims, with leave to file
amended claims. As a result of the Company’s annual meeting of stockholders held on December 14,
2006, the claim seeking the scheduling of an annual meeting became moot. On January 3, 2007, the
plaintiff filed an amended derivative complaint re-asserting the previously dismissed derivative
claims and alleging that the Board’s refusal of his demand was not in good faith. The Company’s
renewed motion to dismiss all remaining claims was heard on March 23, 2007 and no ruling has yet
been entered. The Company has a reasonable possibility of loss in this matter, although no estimate
of such loss can be determined at this time. Accordingly, no liability has been recorded.
SEC Investigation
On April 13, 2005, pursuant to the same matter number as its inquiry concerning the Company’s
restatement of certain financial statements issued in 2003, the staff of the SEC’s Division of
Enforcement requested information and documents relating to the Company’s March 18, 2005 Form 8-K.
On September 7, 2005, the Company announced that the staff had issued a formal order of
investigation in this matter. The Company subsequently has received subpoenas from the staff
seeking production of documents and information including certain information and documents related
to an investigation conducted by its Audit Committee. The Company continues to provide information
and documents to the SEC as requested. The investigation is ongoing and the SEC is in the process
of taking the testimony of a number of the Company’s current and former employees, as well as a
former director.
In connection with the investigation by its Audit Committee, the Company became aware of
incidents of possible non-compliance with the Foreign Corrupt Practices Act and its internal
controls in connection with certain of its operations in China and voluntarily reported these
matters to the SEC and U.S. Department of Justice in November 2005. Both the SEC and the Department
of Justice are investigating these matters in connection with the formal investigation described
above. On March 27, 2006, the Company received a subpoena from the SEC regarding information
related to these matters. The Company has a reasonable possibility of loss in this matter, although
no estimate of such loss can be determined at this time. Accordingly, no liability has been
recorded.
Government Contracting Matters
A significant portion of the Company’s business relates to providing services under contracts
with the U.S. Federal government or state and local governments, inclusive of government sponsored
enterprises. These contracts are subject to extensive legal and regulatory requirements and, from
time to time, agencies of the U.S. Federal government or state and local governments investigate
whether the Company’s operations are being conducted in accordance with these requirements and the
terms of the relevant contracts. In the ordinary course of business, various government
investigations are ongoing. U.S. Federal government investigations of the Company, whether relating
to these contracts or conducted for other reasons, could result in administrative, civil or
criminal liabilities, including repayments, fines or penalties being imposed upon the Company, or
could lead to suspension or debarment from future U.S. Federal government contracting. The Company
believes that it has adequately reserved for any losses it may experience from these
investigations. Whether such amounts could have a material effect on the results of operations in a
particular quarter or fiscal year cannot be determined at this time.
Other Matters
Telecommunications Company
A telecommunications industry client initiated an “audit” of certain of the Company’s time and
expense charges, alleging that the Company inappropriately billed the client for days claimed to be
“non-work days,” such as days before and after travel days, travel days, overtime, and other
alleged errors. On June 18, 2007, the Company and the client entered into a settlement resolving
the client’s claims. In connection with the settlement, the Company will make six equal annual
payments to the client in an aggregate amount of $24,000, with the first payment made on the
signing date in return for a full release of the client’s claims. An expense of $20,045
16
BEARINGPOINT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (continued) (in thousands, except share and per share amounts) (unaudited) relating to the present value of these settlement payments was included as a reduction of
revenue in the Consolidated Statement of Operations for the first quarter of 2006, as the financial
statements for 2006 were not yet issued at the settlement date.
Michael Donahue
In March 2005, Mr. Donahue filed suit against the Company in connection with the termination
of his employment in February 2005. Mr. Donahue alleges he is owed $3,000 under the terms and
conditions of a Special Termination Agreement he executed in November 2001, between $1,700 and
$2,400 as compensation for the value of stock options he was required to forfeit as the result of
his discharge, and an additional $200 for an unpaid bonus. Mr. Donahue has also argued that a 25%
penalty pursuant to Pennsylvania law should be added to each of these sums. In May 2005, the
Company removed the matter to Federal Court. On October 5, 2005, Mr. Donahue filed his Complaint in
Federal Court, under seal. In this Complaint, in response to the Company’s motion to compel
arbitration, Mr. Donahue dropped his claims for his stock options and performance bonus, although
he is free to bring those claims again at a later time. On January 31, 2006, Mr. Donahue filed his
Demand for Arbitration, asserting all the claims he originally asserted, including his claims under
the Special Termination Agreement, his claims for his stock options, and his claim for his annual
bonus payment for 2004, in addition to the statutory penalties sought for these unpaid amounts. The
parties have selected arbitrators for the panel, and discovery has commenced. Due to the early
stage of this matter, the nature of the potential claims and differing interpretations of Mr.
Donahue’s Special Termination Agreement, the Company is unable to estimate the amount of potential
loss at this time. Accordingly, no liability has been recorded.
Transition Services Provided By KPMG LLP
KPMG LLP contended that the Company owed approximately $26,214 in termination costs and
unrecovered capital for the termination of information technology services provided under the
transition services agreement. However, in accordance with the terms of the agreement, the Company
did not believe that it was liable for termination costs arising upon the expiration of the
agreement. In addition, KPMG LLP contended the Company owed an additional $5,347 in connection with
the expiration of the transition services agreement relating to its share of occupancy related
assets in subleased offices from KPMG LLP.
In May 2007, the Company and KPMG LLP settled its disputes under the transition services
agreement. KPMG LLP released all claims against the Company. In connection with the settlement, the
Company amended certain real estate documents relating to a number of properties that it currently
sublets from KPMG LLP to either allow it to further sublease these properties to third parties, or
to return certain properties the Company no longer utilizes to KPMG LLP, in return for a reduction
of the amount of the Company’s sublease obligations to KPMG LLP for those properties. The Company
also agreed to pay $5,000 over three years to KPMG LLP as part of the settlement. An expense of
$4,585 relating to the present value of these settlement payments was included as an increase of
selling, general and administrative expense in the Consolidated Statement of Operations for the
first quarter of 2006, as the financial statements for 2006 were not yet issued at the settlement
date.
Softline Acquisition Obligation
On May 27, 1999, KPMG LLP (the Company’s former parent) acquired all of the voting common
stock of Softline Consulting & Integrators, Inc. (“Softline”), a systems integration company, and
entered into an agreement with the then shareholders of Softline (the “Softline Sellers”) to
acquire all of the Softline nonvoting common stock for not less than $65,000. In August 2000, the
Company and the Softline Sellers entered into an amendment pursuant to which the Company acquired
the nonvoting common stock of Softline and paid $65,000 to the Softline Sellers. Of the $65,000
purchase price, the parties agreed to hold back $15,000, which accrued interest at 6% per annum
(the “Softline Holdback”), until the final determination of claims by the Company against the
Softline Sellers. The Softline Holdback was payable in shares of the Company’s common stock
(calculated based on the Company’s initial public offering price less the underwriting discount in
such offering); provided, however, that the Softline Sellers could elect to receive cash in lieu of
up to 30% of the shares of the Company common stock otherwise issuable to such Softline Sellers.
The amount of cash to be paid would be calculated based on average closing price for the Company’s
common stock during the 20 trading days immediately preceding the date such notice of election was
provided to the Company.
The Softline Sellers elected to settle the Softline Holdback by a payment of an aggregate of
$2,025 in cash and the issuance of an aggregate of 563,474 shares of the Company’s common stock,
which payment and issuance was made on August 16, 2007.
17
BEARINGPOINT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (continued) (in thousands, except share and per share amounts) (unaudited) Other Commitments
In the normal course of business, the Company has indemnified third parties and has
commitments and guarantees under which it may be required to make payments in certain
circumstances. The Company accounts for these indemnities, commitments and guarantees in accordance
with Financial Interpretation No. (“FIN”) 45, “Guarantor’s Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” These indemnities,
commitments and guarantees include: indemnities to third parties in connection with surety bonds;
indemnities to various lessors in connection with facility leases; indemnities to customers related
to intellectual property and performance of services subcontracted to other providers; and
indemnities to directors and officers under the organizational documents and agreements of the
Company. The duration of these indemnities, commitments and guarantees varies, and in certain
cases, is indefinite. Certain of these indemnities, commitments and guarantees do not provide for
any limitation of the maximum potential future payments the Company could be obligated to make. The
Company estimates that the fair value of these agreements was immaterial. Accordingly, no
liabilities have been recorded for these agreements as of June 30, 2007.
Some clients, largely in the state and local market, require the Company to obtain surety
bonds, letters of credit or bank guarantees for client engagements. As of June 30, 2007, the
Company had $94,114 of outstanding surety bonds and $93,868 of outstanding letters of credit for
which the Company may be required to make future payment. See Note 3, “Notes Payable” for
additional information.
From time to time, the Company enters into contracts with clients whereby it has joint and
several liability with other participants and/or third parties providing related services and
products to clients. Under these arrangements, the Company and other parties may assume some
responsibility to the client or a third party for the performance of others under the terms and
conditions of the contract with or for the benefit of the client or in relation to the performance
of certain contractual obligations. In some arrangements, the extent of the Company’s obligations
for the performance of others is not expressly specified. Certain of these guarantees do not
provide for any limitation of the maximum potential future payments the Company could be obligated
to make. As of June 30, 2007, the Company estimates it had assumed an aggregate potential contract
value of approximately $53,870 to its clients for the performance of others under arrangements
described in this paragraph. These contracts typically provide recourse provisions that would allow
the Company to recover from the other parties all but approximately $105 if the Company is
obligated to make payments to the clients that are the consequence of a performance default by the
other parties. To date, the Company has not been required to make any payments under any of the
contracts described in this paragraph. The Company estimates that the fair value of these
agreements was minimal. Accordingly, no liabilities have been recorded for these contracts as of
June 30, 2007.
18
BEARINGPOINT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (continued) (in thousands, except share and per share amounts) (unaudited) Note 10. Pension and Postretirement Benefits
The components of the Company’s net periodic pension cost and post-retirement medical cost for
the three and six months ended June 30, 2007 and 2006 were as follows:
Note 11. Income Taxes
Effective January 1, 2007, the Company adopted the provisions of FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 supersedes SFAS No. 5, “Accounting
for Contingencies,” as it relates to income tax liabilities and changes the standard of recognition
that a tax contingency is required to meet before being recognized in the financial statements. As
a result of the adoption of FIN 48, the Company recognized an increase of approximately $119,845 in
its liability for unrecognized tax benefits, which was reflected as an increase to the January 1,
2007 balance of accumulated deficit.
Final determination of a significant portion of the Company’s tax liabilities that will
effectively be settled remains subject to ongoing examination by various taxing authorities,
including the Internal Revenue Service. The Company is aggressively pursuing strategies to
favorably settle or resolve these liabilities for unrecognized tax benefits. If the Company is
successful in mitigating these liabilities, in whole or in part, the impact will be recorded as an
adjustment to income tax expense in the period of settlement.
As of January 1, 2007, the Company had $282,822 of unrecognized tax benefits. If recognized,
$220,896 would be recognized as a reduction of income tax expense impacting the effective income
tax rate. At June 30, 2007, the Company had $294,675 of unrecognized tax benefits. If recognized,
$230,188 would be recognized as a reduction of income tax expense impacting the effective income
tax rate.
The Company is subject to U.S. federal income tax as well as income tax of multiple state and
foreign jurisdictions. The Company has concluded substantially all federal income tax matters
through June 30, 2001, excluding an open audit of a $4,848 federal income tax refund claim. The
statute of limitations is open for all remaining years. The Company is currently under audit for
the tax periods ended June 30, 2003, December 31, 2003, 2004 and 2005. The Company has income tax
audits in progress in various state and international jurisdictions in which it operates.
The Company’s policy is to recognize interest and penalties related to income tax matters in
income tax expense. The Company had $52,565 accrued for interest and penalties at adoption of FIN
48 and $59,884 at June 30, 2007. The Company recorded $3,836 and $7,319 in interest and penalties
during the three and six months ended June 30, 2007, respectively.
For the three and six months ended June 30, 2007, the Company recognized loss before taxes of
$45,802 and $100,008, respectively, and provided for income taxes of $18,225 and $25,725,
respectively, resulting in an effective tax rate of (39.8%) and
19
BEARINGPOINT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (continued) (in thousands, except share and per share amounts) (unaudited) (25.7%), respectively. For the
three months ended June 30, 2007, the effective tax rate varied from the U.S. Federal statutory tax
rate, primarily as a result of a change in valuation allowance, the mix of income attributable to
foreign versus domestic jurisdictions, non-deductible meals and entertainment, changes in income
tax reserves, other items, and state and local taxes. For the six months ended June 30, 2007, the
effective tax rate varied from the U.S. Federal statutory tax rate, primarily as a result of a
change in valuation allowance, changes in income tax reserves, the mix of income attributable to
foreign versus domestic jurisdictions, state and local taxes, non-deductible meals and
entertainment and other items.
For the three and six months ended June 30, 2006, the Company recognized income before taxes
of $9,311 and loss before taxes of $49,980, respectively, and provided for income taxes of $12,164
and $25,586, respectively, resulting in an effective tax rate of 130.6% and (51.2%), respectively.
For the three months ended June 30, 2006, the effective tax rate varied from the U.S. Federal
statutory tax rate, primarily as a result of a change in valuation allowance, the mix of income
attributable to foreign versus domestic jurisdictions, non-deductible meals and entertainment,
changes in income tax reserves, other items, and state and local taxes. For the six months ended
June 30, 2006, the effective tax rate varied from the U.S. Federal statutory tax rate, primarily as
a result of a change in valuation allowance, changes in income tax reserves, the mix of income
attributable to foreign versus domestic jurisdictions, state and local taxes, non-deductible meals
and entertainment and other items.
Note 12. Recently Issued Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157,
“Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for
measuring fair value in accordance with generally accepted accounting principles, and expands
disclosures about fair value measurements. The provisions of SFAS 157 are effective for the fiscal
year beginning January 1, 2008. The Company is currently evaluating the impact of the provisions of
SFAS 157.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and
Financial Liabilities – including an amendment of SFAS 115” (“SFAS 159”). SFAS 159 allows entities
to choose, at specific election dates, to measure eligible financial assets and liabilities at fair
value that are not otherwise required to be measured at fair value. If a company elects the fair
value option for an eligible item, changes in that item’s fair value in subsequent reporting
periods must be recognized in current earnings. SFAS 159 is effective for the fiscal year beginning
January 1, 2008. The Company is currently evaluating the impact of the provisions of SFAS
159.
20
PART I, ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following Management’s Discussion and Analysis of Financial Condition and Results of
Operations (“MD&A”) should be read in conjunction with the interim Consolidated Condensed Financial
Statements and the Notes to the Consolidated Condensed Financial Statements included elsewhere in
this Quarterly Report on Form 10-Q.
Disclosure Regarding Forward-Looking Statements
Some of the statements in this Quarterly Report on Form 10-Q constitute “forward-looking
statements” within the meaning of the United States Private Securities Litigation Reform Act of
1995. These statements relate to our operations that are based on our current expectations,
estimates and projections. Words such as “may,” “will,” “could,” “would,” “should,” “anticipate,”
“predict,” “potential,” “continue,” “expects,” “intends,” “plans,” “projects,” “believes,”
“estimates,” “goals,” “in our view” and similar expressions are used to identify these
forward-looking statements. The forward-looking statements contained in this Annual Report include
statements about our internal control over financial reporting, our results of operations and our
financial condition. Forward-looking statements are only predictions and as such are not guarantees
of future performance and involve risks, uncertainties and assumptions that are difficult to
predict. Forward-looking statements are based upon assumptions as to future events or our future
financial performance that may not prove to be accurate. Actual outcomes and results may differ
materially from what is expressed or forecast in these forward-looking statements. The reasons for
these differences include changes that occur in our continually changing business environment, and
the following factors:
21
For a more detailed discussion of these factors, please refer to Item 1A, “Risk Factors,”
included in our 2006 Form 10-K.
EXPLANATORY NOTE
As a result of significant delays in completing our consolidated financial statements for
fiscal 2006, we were unable to timely file with the SEC our 2006 Form 10-K, our 2006 Forms 10-Q and
our Quarterly Reports on Form 10-Q for each of the three months ended March 31, 2007 and June 30,
2007, respectively.
We filed the 2006 Form 10-K on June 28, 2007, the 2006 Forms 10-Q on June 29, 2007 and the
Quarterly Report on Form 10-Q for the three months ended March 31, 2007 on September 7, 2007. Due
to the delay in the filing of this Quarterly Report, certain information presented in this
Quarterly Report relates to significant events that have occurred subsequent to the period
generally covered in a Form 10-Q for the three months ended June 30, 2007.
22
Overview
We provide strategic consulting applications services, technology solutions and managed
services to government organizations, Global 2000 companies and medium-sized businesses in the
United States and internationally. In North America, we provide consulting services through our
Public Services, Commercial Services and Financial Services industry groups in which we focus
significant industry-specific knowledge and service offerings to our clients. Outside of North
America, we are organized on a geographic basis, with operations in EMEA, the Asia Pacific region
and Latin America.
We have started the transition of our business to a more integrated, global delivery model. In
2007, we created a Global Account Management Program and a Global Solutions Council represented by
all of our industry groups that will focus on identifying opportunities for globalized solutions
suites. Our Global Development Centers continue to grow, both in terms of personnel and the
percentage of work they provide to our industry groups.
Economic and Industry Factors
We believe that our clients’ spending for consulting services is partially correlated to,
among other factors, the performance of the domestic and global economy as measured by a variety of
indicators such as gross domestic product, government policies, mergers and acquisitions activity,
corporate earnings, U.S. Federal and state government budget levels, inflation and interest rates
and client confidence levels, among others. As economic uncertainties increase, clients’ interests
in business and technology consulting historically have turned more to improving existing processes
and reducing costs rather than investing in new innovations. Demand for our services, as evidenced
by new contract bookings, also does not uniformly follow changes in economic cycles. Consequently,
we may experience rapid decreases in new contract bookings at the onset of significant economic
downturns while the benefits of economic recovery may take longer to realize.
The markets in which we provide services are increasingly competitive and global in nature.
While supply and demand in certain lines of business and geographies may support price increases
for some of our standard service offerings from time to time, to maintain and improve our
profitability we must constantly seek to improve and expand our unique service offerings and
deliver our services at increasingly lower cost levels. Our Public Services industry group, which
is our largest, also must operate within the U.S. Federal, state and local government markets where
unique contracting, budgetary and regulatory regimes control how contracts are awarded, modified
and terminated. Budgetary constraints or reductions in government funding may result in the
modification or termination of long-term government contracts, which could dramatically affect the
outlook of that business.
Revenue and Income Drivers
We derive substantially all of our revenue from professional services activities. Our revenue
is driven by our ability to continuously generate new opportunities to serve clients, by the prices
we obtain for our service offerings, and by the size and utilization of our professional workforce.
Our ability to generate new business is directly influenced by the economic conditions in the
industries and regions we serve, our anticipation and response to technological change, the type
and level of technology spending by our clients and by our clients’ perception of the quality of
our work. Our ability to generate new business is also indirectly influenced by our clients’
perceptions of our ability to manage our ongoing issues surrounding our financial position and SEC
reporting capabilities.
Our gross profit consists of revenue less our costs of service. The primary components of our
costs of service include professional compensation and other direct contract expenses. Professional
compensation consists of payroll costs and related benefits associated with client service
professional staff (including the vesting of various stock awards, tax equalization for employees
on foreign and long-term domestic assignments, bonuses and costs associated with reductions in
workforce). Other direct contract expenses include costs directly attributable to client
engagements. These costs include out-of-pocket costs such as travel and subsistence for client
service professional staff, costs of hardware and software, and costs of subcontractors. If we are
unable to adequately control or estimate these costs, or properly anticipate the sizes of our
client service and support staff, our profitability will suffer.
Our operating profit reflects our revenue less costs of service and certain additional items
that include, primarily, SG&A expenses, which include costs related to marketing, information
systems, depreciation and amortization, finance and accounting, human resources, sales force, and
other expenses related to managing and growing our business. Write-downs in the carrying value of
goodwill and amortization of intangible assets have also historically reduced our operating profit.
Our operating cash flow is derived predominantly from gross operating profit and how we manage
our receivables and payables.
23
Key Performance Indicators
In evaluating our operating performance and financial condition, we focus on the following key
performance indicators: bookings, revenue growth, gross margin (gross profit as a percentage of
revenue), utilization, days sales outstanding, free cash flow and attrition.
24
Readers should understand that each of the performance indicators identified above are utilized by
many companies in our industry and by those who follow our industry. There are no uniform standards
or requirements for computing these performance indicators, and, consequently, our computations of
these amounts may not be comparable to those of our competitors.
Three and Six Months Ended June 30, 2007 Highlights
A summary of our financial highlights for the three and six months ended June 30, 2007 is
presented below. To the extent currently available we have also included certain operational
metrics for the three and nine months ended September 30, 2007.
25
The change in net loss was partially offset by a decrease in SG&A expenses of $1.7 million in
the second quarter of 2007.
The change in net loss was partially offset by a decrease in SG&A expenses of $13.3 million in
the six months ended June 30, 2007.
26
Principal Business Priorities and Strategies for 2007 and Beyond
In early 2007 our Board of Directors determined our principal business priorities to be to:
(1) enhance shareholder value, (2) become timely in our financial and SEC periodic reporting, (3)
replace our North American financial reporting systems, (4) reduce employee attrition, (5) increase
client awareness, confidence and satisfaction, and (6) strengthen our balance sheet. For
information on management’s current and planned initiatives to achieve the priorities established
by our Board of Directors, please refer to our 2006 Form 10-K.
We provide the following as updates on our progress and challenges with respect to certain of
these priorities:
While we continue to make strides in improving our internal operations, our business strategy
must represent our path forward and our primary focus for enhancing shareholder value. Four themes
encompass our strategic vision:
27
28
Segments
Our reportable segments for 2007 consist of our three North America industry groups (Public
Services, Commercial Services, and Financial Services), our three international regions (EMEA, Asia
Pacific and Latin America) and the Corporate/Other category (which consists primarily of
infrastructure costs). Revenue and gross profit information about our segments are presented below,
starting with each of our industry groups and then with each of our three international regions (in
order of size).
Our chief operating decision maker, the Chief Executive Officer, evaluates performance and
allocates resources among the segments. Upon consolidation, all intercompany accounts and
transactions are eliminated. Inter-segment revenue is not included in the measure of profit or loss
for each reportable segment. Performance of the segments is evaluated on operating income excluding
the costs of infrastructure functions (such as information systems, finance and accounting, human
resources, legal and marketing) as described in Note 6, “Segment Reporting,” of the Notes to
Consolidated Condensed Financial Statements.
Three Months ended June 30, 2007 Compared to Three Months ended June 30, 2006
Revenue. Our revenue for the second quarter of 2007 was $875.3 million, a decrease of $17.3
million, or 1.9%, from revenue of $892.7 million for the second quarter of 2006. The following
tables present certain revenue information and performance metrics for each of our reportable
segments for the second quarters of 2007 and 2006. Amounts are in thousands, except percentages.
29
30
Gross Profit. During the second quarter of 2007, our revenue decreased $17.3 million and total
costs of service increased $31.7 million when compared to the second quarter of 2006, resulting in
a decrease in gross profit of $49.0 million, or 25.6%. Gross profit as a percentage of revenue
decreased to 16.3% for the second quarter of 2007 from 21.5% for the second quarter of 2006. The
change in gross profit for the second quarter of 2007 compared to the second quarter of 2006
resulted primarily from the following:
Gross Profit by Segment. The following tables present certain gross profit and margin
information and performance metrics for each of our reportable segments for the second quarters of
2007 and 2006. Amounts are in thousands, except percentages.
31
Changes in gross profit by segment were as follows:
32
Amortization of Purchased Intangible Assets. Amortization of purchased intangible assets was
$0.5 million in the second quarter of 2006. There was no amortization expense in the second quarter
of 2007 as our intangible assets were fully amortized.
Selling, General and Administrative Expenses. We incurred SG&A expenses of $174.7 million for
the three months ended June 30, 2007, representing a decrease of $1.7 million, or 1.0%, from SG&A
expenses of $176.4 million for the three months ended June 30, 2006. SG&A expenses as a percentage
of gross revenue increased to 20.0% in the three months ended June 30, 2007 from 19.8% for the
three months ended June 30, 2006. The increase was primarily due to increased compensation expense
for additional SG&A personnel, stock-based compensation expense for PSUs and RSUs, and accrued
bonuses. Partially offsetting these increases were reduced sub-contracted labor and other costs
directly related to the closing of our financial statements, as well as savings from the reduction
in the size of our sales force.
Interest Income. Interest income was $2.6 million and $2.3 million in the three months ended
June 30, 2007 and 2006, respectively. Interest income is earned primarily from cash and cash
equivalents, including money-market investments. The increase in interest income was due to a
higher level of cash available to be invested in money-markets during the second quarter of 2007 as
compared to the second quarter of 2006.
Interest Expense. Interest expense was $15.8 million and $9.0 million in the three months
ended June 30, 2007 and 2006, respectively. Interest expense is attributable to our debt
obligations, consisting of interest due along with amortization of loan costs and loan discounts.
The increase in interest expense was due to interest attributable to
our 2007 Credit Facility and, to a
lesser extent, the acceleration of debt issuance costs resulting from the termination of the 2005
Credit Facility.
Other (Expense) Income, net. Other expense, net was $0.5 million in the three months ended
June 30, 2007, compared to other income, net of $1.3 million in the three months ended June 30,
2006. The balances in each period primarily consisted of realized foreign currency exchange losses
and gains.
Income Tax Expense. We incurred income tax expense of $18.2 million and $12.2 million for the
three months ended June 30, 2007 and 2006, respectively. The principal reasons for the difference
between the effective income tax rate on earnings/loss from continuing operations of (39.8%) and
130.6% for the three months ended June 30, 2007 and 2006, respectively, were: a change in valuation
allowance, changes in income tax reserves, the mix of income attributable to foreign versus
domestic jurisdictions, state and local taxes, other items and non-deductible meals and
entertainment.
Net Loss. For the three months ended June 30, 2007, we incurred a net loss of $64.0 million,
or a loss of $0.30 per share. For the three months ended June 30, 2006, we incurred a net loss of
$2.9 million, or a loss of $0.01 per share. Contributing to the net loss for the three months ended
June 30, 2007 were bonuses accrued for our employees, stock-based compensation expense and lease
and facilities restructuring charges.
Six Months ended June 30, 2007 Compared to Six Months ended June 30, 2006
Revenue. Our revenue for the six months ended June 30, 2007 was $1,741.6 million, an increase
of $15.2 million, or 0.9%, over revenue of $1,726.4 million for the six months ended June 30, 2006.
The following tables present certain revenue information and performance metrics for each of our
reportable segments for the six months ended June 30, 2007 and 2006. Amounts are in thousands,
except percentages.
33
34
Gross Profit. During the six months ended June 30, 2007, our revenue increased $15.2 million
and total costs of service increased $30.6 million when compared to the six months ended June 30,
2006, resulting in a decrease in gross profit of $15.4 million, or 5.3%. Gross profit as a
percentage of revenue decreased to 15.8% for the six months ended June 30, 2007 from 16.8% for the
six months ended June 30, 2006. The change in gross profit for the six months ended June 30, 2007
compared to the six months ended June 30, 2006 resulted primarily from the following:
Gross Profit by Segment. The following tables present certain gross profit and margin
information and performance metrics for each of our reportable segments for the six months ended
June 30, 2007 and 2006. Amounts are in thousands, except percentages.
35
Changes in gross profit by segment were as follows:
36
Amortization of Purchased Intangible Assets. Amortization of purchased intangible assets was
$1.0 million in the six months ended June 30, 2006. There was no amortization expense in the six
months ended June 30, 2007 as our intangible assets were fully amortized.
Selling, General and Administrative Expenses. We incurred SG&A expenses of $352.0 million for
the six months ended June 30, 2007, representing a decrease of $13.3 million, or 3.7%, from SG&A
expenses of $365.3 million for the six months ended June 30, 2006. SG&A expenses as a percentage of
gross revenue decreased to 20.2% in the six months ended June 30, 2007 from 21.2% for the six
months ended June 30, 2006. The decrease was primarily due to reduced sub-contracted labor and
other costs directly related to the closing of our financial statements, as well as savings from
the reduction in the size of our sales force. Partially offsetting these savings were increased
compensation expense for additional SG&A personnel, stock-based compensation expense for PSUs and
RSUs, and accrued bonuses.
Interest Income. Interest income was $4.4 million and $4.6 million in the six months ended
June 30, 2007 and 2006, respectively. Interest income is earned primarily from cash and cash
equivalents, including money-market investments. The decrease in interest income was due to a lower
level of cash available to be invested in money markets during the six months ended June 30, 2007,
as compared to the six months ended June 30, 2006.
Interest Expense. Interest expense was $26.7 million and $17.9 million in the six months ended
June 30, 2007 and 2006, respectively. Interest expense is attributable to our debt obligations,
consisting of interest due along with amortization of loan costs and loan discounts. The increase
in interest expense was due to interest attributable to our 2007 Credit Facility, the acceleration of debt issuance costs
resulting from the termination of the 2005 Credit Facility, and, to a
lesser extent, higher interest rates on our debt obligations.
Insurance Settlement. During the six months ended June 30, 2006, we recorded $38.0 million for
an insurance settlement in connection with our settlement with HT. For more information, see Note
11, “Commitments and Contingencies,” of the Company’s 2006 Form 10-K.
Other (Expense) Income, net. Other expense, net was $0.4 million in the six months ended June
30, 2007 compared to other income, net of $1.7 million in the six months ended June 30, 2006. The
balances in each period primarily consist of realized foreign currency exchange losses.
Income Tax Expense. We incurred income tax expense of $25.7 million and $25.6 million for the
six months ended June 30, 2007 and 2006, respectively. The principal reasons for the difference
between the effective income tax rates on loss from continuing operations of (25.7%) and (51.2%)
for the six months ended June 30, 2007 and 2006, respectively, were: a change in valuation
allowance, changes in income tax reserves, the mix of income attributable to foreign versus
domestic jurisdictions, state and local taxes, other items and non-deductible meals and
entertainment.
Net Loss. For the six months ended June 30, 2007, we incurred a net loss of $125.7 million, or
a loss of $0.59 per share. Contributing to the net loss for the six months ended June 30, 2007 were
bonuses accrued for our employees and stock-based compensation expense partially offset by a credit
for lease and facilities restructuring activities.
For the six months ended June 30, 2006, we incurred a net loss of $75.6 million, or a loss of
$0.36 per share. Included in our results for the six months ended June 30, 2006 were losses related
to previously mentioned settlements with telecommunication clients, bonuses accrued for our
employees, stock-based compensation expense and lease and facilities restructuring charges.
37
Liquidity and Capital Resources
The following table summarizes the cash flow statements for the six months ended June 30, 2007
and 2006 (amounts are in thousands):
Operating Activities. Net cash used in operating activities during the six months ended June
30, 2007 increased $196.1 million over the six months ended June 30, 2006. This increase was
primarily attributable to significant reductions in our accounts payable, a decline in operating
profitability, and significant increases to our accounts receivable.
Investing Activities. Net cash used in investing activities during the six months ended June
30, 2007 was $23.5 million and net cash provided by investing activities during the six months
ended June 30, 2006 was $68.7 million. Capital expenditures were $22.6 million and $22.2 million
during the six months ended June 30, 2007 and 2006, respectively. In the six months ended June 30,
2006, $90.9 million of restricted cash posted as collateral for letters of credit and surety bonds
was released.
Financing Activities. Net cash provided by financing activities for the six months ended June
30, 2007 was $280.1 million, resulting primarily from the proceeds received from the Term Loans
under the 2007 Credit Facility with an aggregate principal amount of $300.0 million. Net cash used
in financing activities for the six months ended June 30, 2006 was $5.9 million, mainly due to
repayments of our Japanese term loans.
Additional Cash Flow Information
At
September 30, 2007, we had global cash balances of approximately
$430 million. Our decision to obtain the 2007 Credit Facility was based, in part, on the fact that the North
American cash balances have been negatively affected in the second quarter of 2007 by, among other
things, cash collection levels not maintaining pace with the levels achieved in the fourth quarter
of 2006 and payments made in connection with (1) the uninsured portion of the settlement of the
dispute with HT, (2) ongoing costs relating to the design and implementation of the new North
American financial reporting systems, (3) ongoing costs relating to production and completion of
our financial statements, (4) other additional accrued expenses for 2006 paid in the second quarter
of 2007, and (5) our expectations at the time that operations
would not generate cash before the latter
part of 2007.
We currently expect that our operations will provide a source of cash through the remainder of
2007. At June 30, 2007, our DSOs stood at 95 days. To generate significant amounts of cash from
operations in the latter part of 2007, we must again exceed our cash collections for the
fourth quarter of fiscal 2006 when our DSOs stood at 82 days.
Based on the foregoing and our current state of knowledge of the outlook for our business, we
currently believe that our existing cash balances and cash flows expected to be generated from operations will be adequate to finance our working capital needs for the next twelve months. However, actual results may differ from current expectations for many reasons, including
losses of business that could result from our continuing failure to timely file periodic reports
with the SEC, the occurrence of any event of default that could provide our lenders with a right of
acceleration (e.g., non-payment), possible delisting from the New York Stock Exchange, further
downgrades of our credit ratings or unexpected demands on our current cash resources (e.g., to
settle lawsuits).
Our management may seek alternative strategies, intended to further improve our cash balances
and their accessibility, if current internal estimates for cash uses for 2007 prove incorrect.
These activities include: initiating further cost reduction efforts, seeking improvements in
working capital management, reducing or delaying capital expenditures, seeking additional debt or
equity capital and selling assets. For additional information regarding various risk factors that
could affect our outlook, see Item 1A, “Risk Factors.” If cash provided from operations is
insufficient and/or our ability to access the capital markets is impeded, our business, operations,
results and cash flow could be materially and adversely affected.
38
Recently Issued Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS
157 defines fair value, establishes a framework for measuring fair value in accordance with
generally accepted accounting principles, and expands disclosures about fair value measurements.
The provisions of SFAS 157 are effective beginning January 1, 2008. We are currently evaluating the
impact of the provisions of SFAS 157.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets
and Financial Liabilities – including an amendment of SFAS 115,” (“SFAS 159”). SFAS 159 allows
entities to choose, at specific election dates, to measure eligible financial assets and
liabilities at fair value that are not otherwise required to be measured at fair value. If a
company elects the fair value option for an eligible item, changes in that item’s fair value in
subsequent reporting periods must be recognized in current earnings. SFAS 159 is effective
beginning January 1, 2008. We are currently evaluating the impact of the provisions of SFAS 159.
PART I, ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes as of June 30, 2007 to our market risk exposure disclosed
in our 2006 Form 10-K. For a discussion of our market risk associated with the Company’s market
sensitive financial instruments as of December 31, 2006, see “Quantitative and Qualitative
Disclosures About Market Risk” in Part II, Item 7A, of our 2006 Form 10-K.
PART I, ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report, management performed, with the
participation of our Chief Executive Officer and our Chief Financial Officer, an evaluation of the
effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e)
of the Exchange Act. Our disclosure controls and procedures are designed to ensure that information
required to be disclosed in the reports we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the SEC’s rules and forms,
and that such information is accumulated and communicated to our management, including our Chief
Executive Officer and our Chief Financial Officer, to allow timely decisions regarding required
disclosures. Based on the evaluation and the identification as of June 30, 2007, of the material
weaknesses in internal control over financial reporting, as previously disclosed in our Annual
Report on Form 10-K for the year ended December 31, 2006, the Company’s disclosure controls and
procedures were not effective.
Because of the material weaknesses identified in our evaluation of internal control over
financial reporting for the three and six month periods ended June 30, 2007, we performed
additional substantive procedures, similar to those previously disclosed in Form 10-K for the year
ended December 31, 2006, so that our consolidated condensed financial statements as of and for the
three and six month periods ended June 30, 2007, are fairly stated in all material respects in
accordance with generally accepted accounting principles in the United States of America (“GAAP”).
Our management, including the Chief Executive Officer and Chief Financial Officer, does not
expect that our disclosure controls and procedures or our internal control over financial reporting
will prevent all error and all fraud. A control system, no matter how well designed and operated,
can provide only reasonable, not absolute, assurance that the objectives of the control system are
met. Because of the inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if any, within the
Company have been detected.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during the most
recently completed fiscal quarter that have materially affected or are reasonably likely to
materially affect, our internal control over financial reporting.
39
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Overview
We currently are a party to a number of disputes that involve or may involve litigation or
other legal or regulatory proceedings. Generally, there are three types of legal proceedings to
which we have been made a party:
We currently maintain insurance in types and amounts customary in our industry, including
coverage for professional liability, general liability and management and director liability. Based
on management’s current assessment and insurance coverages believed to be available, we believe
that the Company’s financial statements include adequate provision for estimated losses that are
likely to be incurred with regard to all matters of the types described above.
The following describes legal proceedings as to which material developments have occurred in
the period covered by this report, which matters have been previously disclosed in our 2006 Form
10-K.
SEC Reporting Matters
2005 Class Action Suits. In and after April 2005, various separate complaints were filed in
the U.S. District Court for the Eastern District of Virginia, alleging that the Company and certain
of its current and former officers and directors violated Section 10(b) of the Exchange Act, Rule
10b-5 promulgated thereunder and Section 20(a) of the Exchange Act by, among other things, making
materially misleading statements between August 14, 2003 and April 20, 2005 with respect to our
financial results in our SEC filings and press releases. On January 17, 2006, the court certified a
class, appointed class counsel and appointed a class representative. The plaintiffs filed an
amended complaint on March 10, 2006 and the defendants, including the Company, subsequently filed a
motion to dismiss that complaint, which was fully briefed and heard on May 5, 2006. We were
awaiting a ruling when, on March 23, 2007, the court stayed the case, pending the U.S. Supreme
Court’s decision in the case of Makor Issues & Rights, Ltd v. Tellabs, argued before the Supreme
Court on March 28, 2007. On June 21, 2007, the Supreme Court issued its opinion in the Tellabs
case, holding that to plead a strong inference of a defendant’s fraudulent intent under the
applicable federal securities laws, a plaintiff must demonstrate that such an inference is not
merely reasonable, but cogent and at least as compelling as any opposing inference of
non-fraudulent intent. On September 12, 2007, the court dismissed with prejudice this complaint,
granting motions to dismiss filed by the Company and the other named defendants. In granting the
Company’s motion to dismiss, the court ruled that the plaintiff failed to meet the scienter
pleading requirements set forth in the Private Securities Litigation Reform Act of 1995, as
amended. On September 26, 2007, the plaintiffs filed a motion that seeks a reversal of
the court’s order dismissing the case or an amendment to the court’s order that would allow the
plaintiffs to replead. The Company filed its brief on October 17, 2007 and a hearing on the plaintiffs’ motion is scheduled for November 16, 2007.
In addition to the matters described above and in Item 3, “Legal Proceedings” of the 2006 Form
10-K, we are involved in a number of other judicial and arbitration proceedings concerning matters
arising in the ordinary course of our business, which we do not expect that any of these matters,
individually or in the aggregate, will have a material impact on our results of operations or
financial condition.
40
ITEM 1A. RISK FACTORS
There have been no material changes to the Risk Factors included in our 2006 Form 10-K, except
as described below and previously reported in our Quarterly Report on Form 10-Q for the three
months ended March 31, 2007 filed on September 7, 2007.
We will not file our quarterly report on Form 10-Q for the third quarter of 2007 on time and
we may be unable to file our annual report on Form 10-K for fiscal 2007 on time. Our continuing
failure to timely file certain periodic reports with the SEC poses significant risks to our
business, each of which could materially and adversely affect our financial condition and results
of operations.
The process, training and systems issues related to financial accounting for our North
American operations and the material weaknesses in our internal control over financial reporting
continue to materially affect our financial condition and results of operations. So long as we are
unable to resolve these issues and remediate these material weaknesses, we will be in jeopardy of
being unable to timely file our periodic reports with the SEC as they come due, and it is likely
that our financial condition and results of operations will continue to be materially and adversely
affected. Furthermore, the longer the period of time before we become timely in our periodic
filings with the SEC and/or the number of subsequent failures to timely file any future periodic
reports with the SEC could increase the likelihood or frequency of occurrence and severity of the
impact of any of the risks described in Item 1A, “Risk Factors” of the 2006 Form 10-K.
The price of our common stock may decline due to the number of shares that may be available
for sale in the future.
Having again become current in our SEC periodic reporting, we must begin to again sell shares
under our ESPP and deliver shares in settlement of previously vested RSUs.
Our ability to counter the market impact of share sales by our employees is limited. Our 2007
Credit Facility significantly restricts our ability to repurchase our shares, whether in the open
market or from our employees in consideration of the payment of withholding taxes payable by them
on the delivery of shares in settlement of RSUs. We cannot defer delivery of shares previously
scheduled for settlement pursuant to RSUs beyond December 31, 2007 without risk of increasing the
taxes that could be paid by recipients of those shares in the United States.
Under the terms of the RSUs, we have limited rights to defer settlement and the right to
designate when recipients of shares under the RSUs may sell those shares. We intend to exercise
those rights. However, the delivery of shares in settlement of these RSUs is generally a taxable
event to our employees and we will not limit sales of these shares in such a way as to preclude
recipients from being able to generate the funds from sales necessary to cover their withholding
tax liabilities. Subject to these concerns and constraints, we are currently planning to deliver
shares under our ESPP shortly after the filing of this Quarterly Report. We intend to begin
settling vested RSUs after the filing with the SEC of our quarterly report for the third fiscal
quarter of 2007. It is our objective to release for sale, after each filing of a periodic report
with the SEC, shares our employees are entitled to in amounts that are less than the current
weighted average weekly trading volume of our shares. While we hope that this proposed delivery
schedule will facilitate the orderly sale of shares by our employees into the markets, the timing
and amounts of sales by our employees will remain within their control.
For additional risk factors, see Item 1A, “Risk Factors,” to the 2006 Form 10-K and the
Quarterly Report on Form 10-Q for the quarter ended March 31, 2007.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
41
ITEM 5. OTHER INFORMATION
Election of Director
On October 17, 2007, the Board appointed, effective immediately, Eddie R.
Munson to serve as a Class II Director until the 2008 annual meeting of stockholders and
the election and qualification of his successor. Mr. Munson also was appointed as a
member of the Audit Committee of the Board. Upon his election to the Board, Mr.
Munson was granted stock options to purchase 15,000 shares of the Company’s common
stock, pursuant to the LTIP. The exercise price for such options is $4.71, and the options
will fully vest on the first anniversary date of the grant.
Judy A. Ethell/Robert Glatz
On October 8, 2007, the Company and Robert R. Glatz, Executive Vice President, entered into a
Separation and Release of Claims Agreement regarding the terms of his departure from the Company.
Mr. Glatz is the spouse of Judy A. Ethell, our Chief Financial Officer. Under the terms of the
agreement, among other things: (a) Mr. Glatz’s employment with the Company will terminate,
effective as of October 31, 2007; (b) the Company will pay Mr. Glatz cash severance of $1 million;
and (c) in connection with the grant of 300,000 RSUs made to Mr. Glatz on August 22, 2005, the
vesting of 30,000 RSUs will accelerate on October 31, 2007, and 30,000 unvested RSUs will be
forfeited. The Separation and Release of Claims Agreement is filed as Exhibit 99.1 to this report.
Amendment to Rights Agreement
Effective
as of October 22, 2007, our Board of Directors approved an amendment to our
shareholder Rights Agreement (the “Rights Agreement”), dated as of October 2, 2001 and as amended
by the First Amendment dated as of August 19, 2002. As amended, a shareholder’s right to purchase
additional shares of our stock under the rights agreement is not triggered unless either (a) a
shareholder who is a “passive investor” acquires 20% or more of our common stock or (b) a
shareholder who is not a “passive investor” acquires 15% or more of our common stock. Prior to the
amendment, these rights were triggered upon a shareholder acquiring 15% or more of our common stock
in all instances.
Pursuant to the Rights Agreement, as amended by the Second Amendment, generally, the Rights
will not become exercisable until a person or group has become an “acquiring person” by (a) either
acquiring (i) 15% or more of our outstanding common stock, or (ii) if the person or group declares
itself as a passive investor, 20% or more of our outstanding common stock, or (b) until a person or
group commences a tender offer that will result in such person or group either (i) owning 15% or
more of our common stock or (ii) if the person or group declares itself as a passive investor, 20%
or more of our outstanding common stock outstanding common stock.
For purposes of the Rights Agreement, a “passive investor” is a person who (a) has either a
Schedule 13G or Schedule 13D, which states that such person has no intent to seek control of the
Company, on file with the SEC or (b) acquires shares of common stock pursuant to trading activities
undertaken in the ordinary course of such person’s business and not with the purpose, nor the
effect, of exercising the power to direct or cause the direction of our management or policies or
otherwise changing or influencing the control of the Company.
42
ITEM 6. EXHIBITS
43
SIGNATURES
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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