10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
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þ |
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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 September 30, 2008.
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 001-31451
BEARINGPOINT, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE
(State or other jurisdiction of
incorporation or organization)
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22-3680505
(IRS Employer
Identification No.) |
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1676 International Drive, McLean, VA
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22102 |
(Address of principal executive offices)
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(Zip Code) |
(703) 747-3000
(Registrants telephone number, including area code)
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, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
The number of shares of common stock of the registrant outstanding as of November 1, 2008 was
220,688,470.
BEARINGPOINT, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2008
TABLE OF CONTENTS
2
PART I, ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
BEARINGPOINT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
(unaudited)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2008 |
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2007 |
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2008 |
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2007 |
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Revenue |
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$ |
800,987 |
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$ |
861,897 |
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$ |
2,517,731 |
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$ |
2,603,495 |
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Costs of service: |
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Professional compensation |
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417,435 |
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440,672 |
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1,285,865 |
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1,386,580 |
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Other direct contract expenses |
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171,574 |
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202,980 |
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522,624 |
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588,429 |
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Lease and facilities restructuring charges (credits) |
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1,381 |
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3,866 |
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(6,298 |
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308 |
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Other costs of service |
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66,119 |
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81,759 |
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208,862 |
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220,967 |
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Total costs of service |
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656,509 |
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729,277 |
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2,011,053 |
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2,196,284 |
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Gross profit |
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144,478 |
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132,620 |
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506,678 |
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407,211 |
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Selling, general and administrative expenses |
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139,915 |
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160,324 |
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423,514 |
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512,275 |
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Operating income (loss) |
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4,563 |
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(27,704 |
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83,164 |
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(105,064 |
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Interest income |
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2,136 |
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3,087 |
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6,619 |
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7,475 |
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Interest expense |
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(15,931 |
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(17,532 |
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(47,886 |
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(44,198 |
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Other expense, net |
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(16,897 |
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(5,377 |
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(13,770 |
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(5,747 |
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(Loss) income before taxes |
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(26,129 |
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(47,526 |
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28,127 |
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(147,534 |
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Income tax expense |
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4,364 |
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20,480 |
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63,349 |
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46,205 |
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Net loss |
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$ |
(30,493 |
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$ |
(68,006 |
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$ |
(35,222 |
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$ |
(193,739 |
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Loss per share basic and diluted: |
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$ |
(0.14 |
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$ |
(0.32 |
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$ |
(0.16 |
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$ |
(0.90 |
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Weighted average shares basic and diluted: |
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224,001,730 |
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215,247,757 |
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222,817,265 |
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214,677,985 |
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The accompanying Notes are an integral part of these Consolidated Financial Statements.
3
BEARINGPOINT, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
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September 30, |
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2008 |
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December 31, |
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(unaudited) |
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2007 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
330,048 |
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$ |
466,815 |
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Restricted cash |
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2,964 |
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1,703 |
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Accounts receivable, net of allowances of $3,418 at
September 30, 2008 and $5,980 at December 31, 2007 |
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293,773 |
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356,178 |
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Unbilled revenue |
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336,873 |
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319,132 |
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Income tax receivable |
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6,759 |
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8,869 |
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Deferred income taxes |
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10,789 |
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11,521 |
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Prepaid expenses |
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46,306 |
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36,500 |
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Other current assets |
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30,165 |
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38,122 |
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Total current assets |
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1,057,677 |
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1,238,840 |
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Property and equipment, net |
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108,154 |
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113,771 |
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Goodwill |
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480,358 |
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494,656 |
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Deferred income taxes, less current portion |
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20,266 |
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25,179 |
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Other assets |
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96,234 |
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108,958 |
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Total assets |
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$ |
1,762,689 |
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$ |
1,981,404 |
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LIABILITIES AND STOCKHOLDERS DEFICIT |
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Current liabilities: |
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Current portion of notes payable |
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$ |
205,195 |
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$ |
3,700 |
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Accounts payable |
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159,660 |
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215,999 |
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Accrued payroll and employee benefits |
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306,403 |
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368,208 |
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Deferred revenue |
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72,563 |
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115,961 |
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Income tax payable |
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38,882 |
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58,304 |
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Current portion of accrued lease and facilities charges |
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14,565 |
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17,618 |
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Deferred income taxes |
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13,344 |
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15,022 |
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Accrued legal settlements |
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14,205 |
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8,716 |
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Other current liabilities |
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87,899 |
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108,364 |
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Total current liabilities |
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912,716 |
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911,892 |
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Notes payable, less current portion |
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772,408 |
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970,943 |
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Accrued employee benefits |
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122,053 |
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118,235 |
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Accrued lease and facilities charges, less current portion |
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28,129 |
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48,066 |
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Deferred income taxes, less current portion |
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10,416 |
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9,581 |
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Income tax reserve |
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246,032 |
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242,308 |
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Other liabilities |
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140,085 |
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149,668 |
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Total liabilities |
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2,231,839 |
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2,450,693 |
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Commitments and contingencies (note 9) |
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Stockholders deficit: |
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Preferred stock, $.01 par value 10,000,000 shares authorized |
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Common stock, $.01 par value 1,000,000,000 shares
authorized, 225,527,781 shares issued and 220,688,470
shares outstanding on September 30, 2008 and 219,890,126
shares issued and 215,156,077 shares outstanding on
December 31, 2007 |
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2,243 |
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2,186 |
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Additional paid-in capital |
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1,477,149 |
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1,438,369 |
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Accumulated deficit |
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(2,215,800 |
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(2,180,578 |
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Accumulated other comprehensive income |
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305,534 |
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308,857 |
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Treasury stock, at cost (4,839,311 shares on September 30,
2008 and 4,734,049 shares on December 31, 2007) |
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(38,276 |
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(38,123 |
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Total stockholders deficit |
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(469,150 |
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(469,289 |
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Total liabilities and stockholders deficit |
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$ |
1,762,689 |
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$ |
1,981,404 |
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The accompanying Notes are an integral part of these Consolidated Financial Statements.
4
BEARINGPOINT,
INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
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Nine Months Ended |
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September 30, |
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2008 |
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2007 |
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Cash flows from operating activities: |
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Net loss |
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$ |
(35,222 |
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$ |
(193,739 |
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Adjustments to reconcile net loss to net cash used in operating activities: |
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Provision for deferred income taxes |
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4,397 |
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3,525 |
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(Benefit) provision for doubtful accounts |
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(933 |
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1,056 |
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Stock-based compensation |
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38,019 |
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76,516 |
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Depreciation and amortization of property and equipment |
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34,894 |
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48,307 |
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Lease and facilities restructuring (credit) charge |
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(6,298 |
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308 |
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Loss on disposal and impairment of assets |
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2,248 |
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5,685 |
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Amortization of debt issuance costs and debt accretion |
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9,301 |
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11,428 |
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Reversal of global tax equalization accruals |
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(29,239 |
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Unrealized foreign exchange losses |
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9,373 |
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9,148 |
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Changes in assets and liabilities: |
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Accounts receivable |
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61,064 |
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21,066 |
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Unbilled revenue |
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(23,262 |
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(67,035 |
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Income tax receivable, prepaid expenses and other current assets |
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(2,179 |
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13,953 |
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Other assets |
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6,875 |
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(20,610 |
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Accounts payable |
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(56,343 |
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(79,544 |
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Income tax payable, accrued legal settlements and other current liabilities |
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(37,431 |
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(63,602 |
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Accrued payroll and employee benefits |
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(27,721 |
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13,424 |
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Deferred revenue |
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(46,678 |
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(19,137 |
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Income tax reserve and other liabilities |
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(1,422 |
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17,300 |
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Net cash used in operating activities |
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(100,557 |
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(221,951 |
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Cash flows from investing activities: |
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Purchases of property and equipment |
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(31,972 |
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(31,834 |
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Increase in restricted cash |
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(1,261 |
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(14 |
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Net cash used in investing activities |
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(33,233 |
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(31,848 |
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Cash flows from financing activities: |
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Proceeds from issuance of common stock |
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1,695 |
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Treasury stock through net share delivery |
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(117 |
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Net proceeds from issuance of notes payable |
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2,141 |
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284,016 |
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Repayments of notes payable |
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(3,514 |
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(1,860 |
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Net cash provided by financing activities |
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205 |
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282,156 |
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Effect of exchange rate changes on cash and cash equivalents |
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(3,182 |
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10,203 |
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Net (decrease) increase in cash and cash equivalents |
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(136,767 |
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38,560 |
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Cash and cash equivalents beginning of period |
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466,815 |
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389,571 |
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Cash and cash equivalents end of period |
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$ |
330,048 |
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$ |
428,131 |
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The accompanying Notes are an integral part of these Consolidated Financial Statements.
5
BEARINGPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(unaudited)
Note 1. Basis of Presentation and Liquidity
Basis of Presentation
The accompanying unaudited interim Consolidated Financial Statements of BearingPoint, Inc.
(the Company) have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission (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 Companys Consolidated
Financial Statements and notes thereto for the year ended December 31, 2007, included in the
Companys Annual Report on Form 10-K for the year ended December 31, 2007 (the 2007 Form 10-K)
filed with the SEC. The accompanying Consolidated 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 nine months ended September 30, 2008 are not necessarily indicative of
the results that may be expected for any other interim period or the entire year. Certain amounts
reported in the prior year have been reclassified to conform to the current period presentation.
The interim Consolidated Financial Statements reflect the operations of the Company and all of
its majority-owned subsidiaries. Upon consolidation, all intercompany accounts and transactions are
eliminated.
Liquidity
The interim Consolidated Condensed Financial Statements of the Company
are prepared on a going concern basis, which assumes that the Company will
continue its operations for the foreseeable future and will realize its assets
and discharge its liabilities in the ordinary course of business.
At September 30, 2008, the Company had $330,048 of cash and cash equivalents,
which represents a decline of $136,767 of cash and cash equivalents since
December 31, 2007. The Company was able to reduce cash used in operations
by $121,394 in the first nine months of fiscal 2008 as compared with the
first nine months of 2007. Historically, the Company has paid certain annual
payment obligations in the first half of the year, such as certain bonuses,
insurance premiums and taxes for our profitable operating entities. While the
Company again made significant payments of these obligations in the first half
of 2008, the Company will also continue to make significant payments for certain
of these obligations throughout the remainder of 2008. Also, during the third
quarter of 2008 certain of the Companys profitable operating entities had higher
income tax payments than in the past which are expected to continue to remain at
a high level in the fourth quarter of 2008. In addition, as described in Note 7,
the holders of the Companys $200,000 5.00% Convertible Senior Subordinated Debentures
due 2025 have the option to require the Company to repay all or any portion of such
debentures as early as April 2009.
In the first nine months of fiscal 2008 the Company has produced year over year
improvements in days sales outstanding (DSOs) for each quarter. While the
Company continues to expect improvement in its DSOs for the remainder of
2008, and expects to make progress toward reversing its historical experience of rising
DSOs in the first six months of 2009, these improvements alone likely will not be
sufficient to generate adequate cash to operate its business and service its debt
obligations throughout 2009. Consequently, the Company has initiated a number of
additional operational and alternative strategies to attempt to maximize the Companys
cash and cash equivalents over the near term. In the fourth quarter of 2008, the Company
will try to accelerate efforts to exit countries and business segments that are not profitable
and reduce the costs associated with those lines of business. If necessary, and in order to
conserve cash, the Company is also contemplating deferring the transition to its new North
American financial system to later in 2009 to help avoid incurring any higher-than-expected
transition costs or risk cash shortfalls that might arise from its inability to timely invoice
and collect for all work performed during the first quarter of 2009. It is also increasingly
likely that the Company will need to execute on one or more alternative strategies, such as a
merger or sale of the Company as a whole, a sale of all or substantially all of the assets of
the Company, the sale by the Company of any of its six principal business units, a restructuring
of all or selected series of the Companys convertible debt or an exchange of existing convertible
debt for equity, to be able to obtain adequate cash to operate its business and service its debt
obligations. However, the Company can give no assurance it can successfully execute any of these
strategies and its ability to do so could be significantly impacted by numerous factors, including
changes in the economic or business environment, financial market volatility, the performance of
the Companys business, and the terms and conditions in the Companys various bank financing and indenture agreements.
6
BEARINGPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share and per share amounts)
(unaudited)
Note 2. Recently Issued Accounting Pronouncements
In December 2007, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 141(R), Business Combinations, which replaces SFAS
No. 141, Business Combinations. This statement establishes principles and requirements for how an
acquirer: recognizes and measures in its financial statements the identifiable assets acquired, the
liabilities assumed and any noncontrolling interest in the acquiree; recognizes and measures the
goodwill acquired in the business combination or a gain from a bargain purchase; and determines
what information to disclose to enable users of the financial statements to evaluate the nature and
financial effects of the business combination. This statement applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. The Company does not expect this will
have a significant impact on its financial statements.
In
May 2008, the FASB issued FASB Staff Position (FSP) Accounting Principles Board Opinion No. 14-1,
Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including
Partial Cash Settlement) (FSP APB 14-1). FSP APB 14-1 requires issuers of convertible debt
instruments that may be settled in cash upon conversion (including partial cash settlement) to
separately account for the liability and equity components in a manner that will reflect the
issuers nonconvertible debt borrowing rate when interest expense is recognized in subsequent
periods. The provisions of FSP APB 14-1 shall be applied retrospectively to all periods presented,
effective for the fiscal year beginning January 1, 2009. The Company is continuing to evaluate the
impact of the provisions of FSP APB 14-1; however, at this time management believes that the
incremental interest expense to be recognized as a result of the adoption will be material.
In
October 2008, the FASB issued FSP SFAS No. 157-3, Determining the Fair Value of a Financial
Asset When the Market for That Asset Is Not Active (FSP 157-3). FSP 157-3 clarifies the
application of SFAS 157 in a market that is not active and provides an example to illustrate key
considerations in determining the fair value of a financial asset when the market for that
financial asset is not active. FSP 157-3 became effective immediately, including prior periods for
which financial statements have not been issued. Therefore, the Company has adopted the provisions
of FSP 157-3 in its financial statements for the three months ended September 30, 2008. The
adoption did not have a material impact on the Companys consolidated financial position, results
of operations, or cash flows.
Note 3. Stock-Based Compensation
The Consolidated Statements of Operations for the three and nine months ended September 30,
2008 and 2007 include stock-based compensation expense related to awards of stock options,
restricted stock units (RSUs), and performance share units (PSUs) as well as issuances under
the Companys Employee Stock Purchase Plan (ESPP), including the Companys BE an Owner program,
and restricted stock awards, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Stock options |
|
$ |
241 |
|
|
$ |
1,877 |
|
|
$ |
834 |
|
|
$ |
6,510 |
|
RSUs |
|
|
1,614 |
|
|
|
4,675 |
|
|
|
9,570 |
|
|
|
15,641 |
|
PSUs |
|
|
14,809 |
|
|
|
21,686 |
|
|
|
26,882 |
|
|
|
50,489 |
|
ESPP and BE an Owner |
|
|
290 |
|
|
|
1,178 |
|
|
|
609 |
|
|
|
3,533 |
|
Restricted stock awards |
|
|
|
|
|
|
|
|
|
|
124 |
|
|
|
343 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
16,954 |
|
|
$ |
29,416 |
|
|
$ |
38,019 |
|
|
$ |
76,516 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the second quarter of 2008, the Company increased its forfeiture rate assumption based
on actual historical forfeitures through June 30, 2008 and expected future forfeitures over the
remainder of the vesting term of the PSU awards. This revised forfeiture rate resulted in an
adjustment of $21,350 to reduce stock compensation expense during the second quarter of 2008. Of
this adjustment, $13,577 was recorded to professional compensation and $7,773 was recorded to
selling, general and administrative expenses.
7
BEARINGPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share and per share amounts)
(unaudited)
Stock Options
During the third quarter of 2008, the Company granted 96,333 options. As of September 30,
2008, there were 26,947,680 options outstanding.
Restricted Stock Units and Performance Share Units
During the third quarter of 2008, 530,176 shares of common stock were issued in settlement of
RSUs. The following table summarizes RSU and PSU activity during the nine months ended September
30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RSUs(1) |
|
|
PSUs(2) |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Grant |
|
|
|
|
|
|
Grant |
|
|
|
|
|
|
|
Date Fair |
|
|
|
|
|
|
Date Fair |
|
|
|
Units |
|
|
Value |
|
|
Units |
|
|
Value |
|
Nonvested at December 31, 2007 |
|
|
6,428,764 |
|
|
$ |
8.14 |
|
|
|
18,104,846 |
|
|
$ |
12.53 |
|
Granted |
|
|
2,064,516 |
|
|
$ |
2.27 |
|
|
|
|
|
|
|
|
|
Vested |
|
|
(2,071,084 |
) |
|
$ |
8.40 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(1,412,877 |
) |
|
$ |
5.81 |
|
|
|
(3,703,004 |
) |
|
$ |
12.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at September 30, 2008 |
|
|
5,009,319 |
|
|
$ |
6.27 |
|
|
|
14,401,842 |
|
|
$ |
12.57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested at September 30, 2008 |
|
|
4,400,479 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2008 |
|
|
9,409,798 |
|
|
|
|
|
|
|
14,401,842 |
|
|
|
|
|
|
|
|
(1) |
|
Approximately 41,883 RSUs (net of forfeitures) and 45,563 RSUs (net of forfeitures) have been
excluded from the December 31, 2007 and September 30, 2008 nonvested balances, respectively,
because they were awarded to recipients in countries where local laws require a cash
settlement. Similarly, approximately 27,537 RSUs (net of forfeitures) and 73,100 RSUs (net of
forfeitures) have been excluded from the September 30, 2008 vested and outstanding balances,
respectively. |
|
(2) |
|
Approximately 54,348 PSUs (net of forfeitures) have been excluded from the December 31, 2007
and September 30, 2008 nonvested balances because they were awarded to recipients in countries
where local laws require a cash settlement. Similarly, approximately 54,348 PSUs (net of
forfeitures) have been excluded from the September 30, 2008 outstanding balance. |
Note 4. Loss per Share
Basic loss per share is computed based on the weighted average number of common shares
outstanding and vested RSUs during the period. Diluted loss per share is computed using the
weighted average number of basic shares outstanding during the period plus the dilutive effect of
other potential common shares.
The following table sets forth the computation of basic and diluted earnings per share
(EPS):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Net loss |
|
$ |
(30,493 |
) |
|
$ |
(68,006 |
) |
|
$ |
(35,222 |
) |
|
$ |
(193,739 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
219,568,666 |
|
|
|
201,761,301 |
|
|
|
217,836,352 |
|
|
|
201,321,963 |
|
Weighted average vested RSUs |
|
|
4,433,064 |
|
|
|
13,486,456 |
|
|
|
4,980,913 |
|
|
|
13,356,022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
224,001,730 |
|
|
|
215,247,757 |
|
|
|
222,817,265 |
|
|
|
214,677,985 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share basic and diluted |
|
$ |
(0.14 |
) |
|
$ |
(0.32 |
) |
|
$ |
(0.16 |
) |
|
$ |
(0.90 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the potential common stock equivalents, on a weighted-average
basis, that were excluded from the computation of diluted EPS, since the effect of including these
equivalents would have been anti-dilutive. The inclusion of any portion
8
BEARINGPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share and per share amounts)
(unaudited)
of these shares in future calculations of diluted EPS depends on several factors, including
whether the Company generates net income, the level of net income generated and the Companys
common stock price.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Employee stock options |
|
|
27,503,164 |
|
|
|
33,064,651 |
|
|
|
28,957,430 |
|
|
|
34,259,109 |
|
ESPP and BE an owner |
|
|
4,244,613 |
|
|
|
6,545,850 |
|
|
|
2,670,556 |
|
|
|
6,545,850 |
|
Unvested restricted stock units |
|
|
5,438,408 |
|
|
|
8,130,456 |
|
|
|
5,846,181 |
|
|
|
8,366,845 |
|
Performance share units(1) |
|
|
38,203,103 |
|
|
|
54,246,351 |
|
|
|
40,663,150 |
|
|
|
42,857,179 |
|
$250,000 2.50% Series A
Convertible Subordinated
Debentures due 2024 |
|
|
23,810,200 |
|
|
|
23,810,200 |
|
|
|
23,810,200 |
|
|
|
23,810,200 |
|
$200,000 2.75% Series B
Convertible Subordinated
Debentures due 2024 |
|
|
19,048,160 |
|
|
|
19,048,160 |
|
|
|
19,048,160 |
|
|
|
19,048,160 |
|
$200,000 5.00% Convertible
Senior Subordinated Debentures
due 2025 |
|
|
30,303,020 |
|
|
|
30,303,020 |
|
|
|
30,303,020 |
|
|
|
30,303,020 |
|
$40,000 0.50% Convertible
Senior Subordinated Debentures
due 2025 |
|
|
5,925,926 |
|
|
|
5,925,926 |
|
|
|
5,925,926 |
|
|
|
5,925,926 |
|
Warrants issued in connection
with the July 2005 Convertible
Debentures |
|
|
3,500,000 |
|
|
|
3,500,000 |
|
|
|
3,500,000 |
|
|
|
3,500,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
157,976,594 |
|
|
|
184,574,614 |
|
|
|
160,724,623 |
|
|
|
174,616,289 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As of the end of the reporting period, the performance conditions described further in Note
13, Stock-Based Compensation, included in the 2007 Form 10-K, have not been met; however,
the above shares represent the maximum settlement of shares under this program. |
Note 5. Comprehensive Loss
The components of comprehensive loss are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Net loss |
|
$ |
(30,493 |
) |
|
$ |
(68,006 |
) |
|
$ |
(35,222 |
) |
|
$ |
(193,739 |
) |
Pension prior service cost, net of tax of $20 and $65 |
|
|
278 |
|
|
|
|
|
|
|
869 |
|
|
|
|
|
Pension net actuarial gain, net of tax of $2 and $6 |
|
|
(6 |
) |
|
|
|
|
|
|
(21 |
) |
|
|
|
|
Foreign currency translation adjustment |
|
|
(33,311 |
) |
|
|
31,070 |
|
|
|
(4,171 |
) |
|
|
41,844 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
$ |
(63,532 |
) |
|
$ |
(36,936 |
) |
|
$ |
(38,545 |
) |
|
$ |
(151,895 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 6. Goodwill
The changes in the carrying amount of goodwill, at the reporting unit level, for the nine
months ended September 30, 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign |
|
|
|
|
|
|
Balance |
|
|
|
|
|
|
Currency |
|
|
Balance |
|
|
|
December 31, |
|
|
|
|
|
|
Translation |
|
|
September 30, |
|
|
|
2007 |
|
|
Reductions |
|
|
Adjustment |
|
|
2008 |
|
Public Services |
|
$ |
23,581 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
23,581 |
|
Financial Services |
|
|
9,210 |
|
|
|
|
|
|
|
|
|
|
|
9,210 |
|
EMEA |
|
|
385,650 |
|
|
|
|
|
|
|
(11,453 |
) |
|
|
374,197 |
|
Asia Pacific |
|
|
75,003 |
|
|
|
(1,003 |
)(1) |
|
|
(1,812 |
) |
|
|
72,188 |
|
Latin America |
|
|
1,010 |
|
|
|
|
|
|
|
(30 |
) |
|
|
980 |
|
Corporate/Other |
|
|
202 |
|
|
|
|
|
|
|
|
|
|
|
202 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
494,656 |
|
|
$ |
(1,003 |
) |
|
$ |
(13,295 |
) |
|
$ |
480,358 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amount represents the write off of a deferred tax liability established in the original
acquisition, whose statute of limitations had expired. |
9
BEARINGPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share and per share amounts)
(unaudited)
In April 2008, the Company completed its required annual impairment test and determined that
the carrying value of goodwill was not impaired. Further, the Company regularly monitors the
carrying value of its goodwill. This monitoring includes an assessment as to whether or not certain
events would, more likely than not, cause the Company to conclude that the carrying value of any of
its reporting units would exceed their fair value. The Company identified and evaluated the effects
of the events which occurred in the third quarter by performing an analysis of the effect of these
events on the fair value of its reporting units. While these events decreased the fair value of the
Companys reporting units, the Company concluded that the fair value of the respective reporting
units exceeded their carrying values. The assumptions used by management in this analysis are
highly sensitive and judgmental. Should actual future results vary significantly from expectations,
impairment of the Companys goodwill could result in future periods.
Note 7. Notes Payable
Notes payable consist of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Current portion: |
|
|
|
|
|
|
|
|
Term Loans under the 2007 Credit Facility |
|
$ |
3,000 |
|
|
$ |
3,000 |
|
$200,000 5.00% Convertible Senior Subordinated Debentures due 2025 |
|
|
200,000 |
|
|
|
|
|
Other Financing Arrangements |
|
|
2,195 |
|
|
|
700 |
|
|
|
|
|
|
|
|
Total current portion |
|
|
205,195 |
|
|
|
3,700 |
|
|
|
|
|
|
|
|
Long-term portion: |
|
|
|
|
|
|
|
|
$250,000 2.50% Series A Convertible Subordinated Debentures due
2024 and $200,000 2.75% Series B Convertible Subordinated
Debentures due 2024 |
|
|
450,000 |
|
|
|
450,000 |
|
$200,000 5.00% Convertible Senior Subordinated Debentures due 2025 |
|
|
|
|
|
|
200,000 |
|
$40,000 0.50% Convertible Senior Subordinated Debentures due 2025
(net of discount of $10,788 and $14,389, respectively) |
|
|
29,212 |
|
|
|
25,611 |
|
Term Loans under the 2007 Credit Facility |
|
|
292,500 |
|
|
|
294,750 |
|
Other |
|
|
696 |
|
|
|
582 |
|
|
|
|
|
|
|
|
Total long-term portion |
|
|
772,408 |
|
|
|
970,943 |
|
|
|
|
|
|
|
|
Total notes payable |
|
$ |
977,603 |
|
|
$ |
974,643 |
|
|
|
|
|
|
|
|
The holders of the Companys $200,000 5.00% Convertible Senior Subordinated Debentures due
2025 (the 5.00% Senior Convertible Debentures) have the right, at their option, to require the
Company to repurchase all or any portion of such debentures on April 15, 2009, 2013, 2015 and 2020.
In each case, the Company may be required to pay a repurchase price in cash equal to 100% of the
principal amount of the 5.00% Senior Convertible Debentures plus any accrued but unpaid interest,
including additional interest, if any, to the repurchase date. As a result of the repurchase
feature that can be exercised in April 2009, the Company has changed the classification of the
outstanding principal and unpaid interest related to the 5.00% Senior Convertible Debentures from
the long-term portion of notes payable to the current portion of notes payable within the
Consolidated Balance Sheet.
Note 8. Lease and Facilities Restructuring Activities
During the three and nine months ended September 30, 2008, the Company recorded a lease
restructuring charge of $1,381 and recognized a benefit of $6,298, respectively, associated with restructuring
activities recognized prior to 2008. The charge was recorded within the Corporate/Other operating
segment and represents a net increase of accruals, primarily as a result of increases to operating
expense assumptions included within the restructuring accrual. The benefit was recorded within the
Corporate/Other operating segment and represents a net reduction of accruals, primarily
attributable to the change in sublease income assumptions associated with vacated leased
facilities. During the three and nine months ended September 30, 2007, the Company recorded
restructuring charges of $3,866 and $308, respectively, within the Corporate/Other operating
segment. These restructuring charges relate to accrual adjustments, primarily attributable to the change in sublease income assumptions
associated with vacated leased facilities.
Since July 2003, the Company has incurred a total of $146,908 in lease and facilities-related
restructuring charges in connection with its office space reduction efforts relating to the
following regions: $21,810 in Europe, the Middle East and Africa (EMEA),
10
BEARINGPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share and per share amounts)
(unaudited)
$863 in Asia Pacific and $124,235 in North America. As of September 30, 2008, the Company had
a remaining lease and facilities accrual of $42,694, of which $14,565 and $28,129 have been
identified as current and non-current portions, respectively. It is anticipated that this remaining
lease and facilities accrual will be paid over the remaining lease terms, which expire at various
dates through 2016.
Changes in the Companys accrual for restructuring charges for the nine months ended September
30, 2008 were as follows:
|
|
|
|
|
|
|
Total |
|
Balance at December 31, 2007 |
|
$ |
65,684 |
|
New charges |
|
|
|
|
Adjustment to the provision |
|
|
(6,298 |
) |
Payments and other utilization |
|
|
(16,730 |
) |
Other(1) |
|
|
38 |
|
|
|
|
|
Balance at September 30, 2008 |
|
$ |
42,694 |
|
|
|
|
|
|
|
|
(1) |
|
Other changes in the restructuring accrual consist primarily of foreign currency translation
adjustments. |
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:
|
|
|
Claims and investigations arising from its inability to timely file periodic reports
under the Securities Exchange Act of 1934, as amended (the Exchange Act), and the
restatement of its financial statements for certain prior periods to correct accounting
errors and departures from generally accepted accounting principles for those years (SEC
Reporting Matters); |
|
|
|
|
Claims and investigations being conducted by agencies or officers of the U.S. Federal
government and arising in connection with its provision of services under contracts with
agencies of the U.S. Federal government (Government Contracting Matters); and |
|
|
|
|
Claims made in the ordinary course of business by clients seeking damages for alleged
breaches of contract or failure of performance, by current or former employees seeking
damages for alleged acts of wrongful termination or discrimination, and by creditors or
other vendors alleging defaults in payment or performance (Other Matters). |
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 Companys SEC filings and press releases. On January 17, 2006, the court certified a
class, appointed class counsel and appointed a class representative. The plaintiffs filed an
amended complaint on March 10, 2006 and the defendants, including the Company, subsequently filed a
motion to dismiss that complaint, which was fully briefed and heard on May 5, 2006. The Company was
awaiting a ruling when, on March 23, 2007, the court stayed the case, pending the U.S. Supreme
Courts decision in the case of Makor Issues & Rights, Ltd v. Tellabs, argued before the Supreme
Court on March 28, 2007. On June 21, 2007, the Supreme Court issued its opinion in the Tellabs
case, holding that to plead a strong inference of a defendants fraudulent intent under the
applicable federal securities laws, a plaintiff must demonstrate that such an inference is not
merely reasonable, but cogent and at least as compelling as any opposing inference of
non-fraudulent intent. The court ordered both parties to submit briefs regarding the impact of
Tellabs upon the defendants motion to dismiss. The parties filed their briefs on July 16, 2007,
and oral arguments were held on July 27, 2007. On September 12, 2007, the court dismissed with
prejudice this complaint, granting motions to dismiss filed by the Company and the other named
defendants. In granting the Companys motion to dismiss, the court ruled that the plaintiff failed
to meet the scienter pleading requirements set forth in the Private
11
BEARINGPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share and per share amounts)
(unaudited)
Securities Litigation Reform Act of 1995, as amended. On September 26, 2007, the plaintiffs
filed a motion that seeks a reversal of the courts order dismissing the case or an amendment to
the courts order that would allow the plaintiffs to replead. The Company filed its brief on
October 17, 2007 and although a hearing on the plaintiffs motion was scheduled for November 16,
2007, the court canceled the hearing as not necessary. On November 19, 2007, the court issued an
order denying the plaintiffs motion to amend or alter the courts September 12, 2007 dismissal of
this matter. The plaintiffs have appealed the matter to the U.S. Court of Appeals for the Fourth
Circuit. It is not possible to predict with certainty whether or not the Company will ultimately be
successful in this matter, and, if not, what the impact might be. Accordingly, no liability has
been recorded.
SEC Investigation
On April 13, 2005, the staff of the SECs Division of Enforcement requested information and
documents relating to the Companys March 18, 2005 Form 8-K. On September 7, 2005, the Company
announced that the staff had issued a formal order of investigation in this matter. The Company
subsequently has received subpoenas from the staff seeking production of documents and information,
including certain information and documents related to an investigation conducted by its Audit
Committee. The Company continues to provide information and documents to the SEC as requested. The
SEC has taken the testimony of a number of the Companys current and former employees, including
one of its former directors, and the investigation is ongoing.
In connection with the investigation by its Audit Committee, the Company became aware of
incidents of possible non-compliance with the Foreign Corrupt Practices Act and its internal
controls in connection with certain of its operations in China and voluntarily reported these
matters to the SEC and U.S. Department of Justice in November 2005. Both the SEC and the Department
of Justice are investigating these matters in connection with the formal investigation described
above. On March 27, 2006, the Company received a subpoena from the SEC regarding information
related to these matters and responded to these requests through the summer of 2006. The Company
has not received any further requests since that time. The Company has a reasonable possibility of
loss in this matter, although no estimate of such loss can be determined at this time. Accordingly,
no liability has been recorded.
Government Contracting Matters
A significant portion of the Companys business relates to providing services under contracts
with the U.S. Federal government or state and local governments, inclusive of government-sponsored
enterprises. These contracts are subject to extensive legal and regulatory requirements and, from
time to time, agencies of the U.S. Federal government or state and local governments investigate
whether the Companys operation is being conducted in accordance with these requirements and the
terms of the relevant contracts. In the ordinary course of business, various government
investigations are ongoing. U.S. Federal government investigations of the Company, whether relating
to these contracts or conducted for other reasons, could result in administrative, civil or
criminal liabilities, including repayments, fines or penalties being imposed upon the Company, or
could lead to suspension or debarment from future U.S. Federal government contracting. It cannot be
determined at this time whether any findings, conclusions, penalties, fines or other amounts
determined to be applicable to the Company in any such investigation could have a material effect
on the Companys results of operation, outlook or business prospects. Accordingly, as of September
30, 2008, the Company had accrued amounts related to these matters, which are not material.
Other Matters
The
Company recently escalated discussions with a client regarding a contract involving the
design and implementation of an information technology system to resolve the scope of work
encompassed by the contract. The Company and the client have agreed to enter into voluntary,
non-binding mediation in hopes of resolving this matter, which mediation is expected to be held
in December 2008. The Companys maximum stated liability under
the contract is $31,800. The
Company believes there is a reasonable possibility of loss if this matter is not resolved, however,
due to the early stage of this matter plus associated fees and costs and the nature of the potential claims, a range of loss cannot
be determined at this time. Accordingly, no liability has been recorded.
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
12
BEARINGPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share and per share amounts)
(unaudited)
guarantees in accordance with FASB Interpretation No. (FIN) 45, Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.
These indemnities, commitments and guarantees include: indemnities to third parties in connection
with surety bonds; indemnities to various lessors in connection with facility leases; indemnities
to customers related to intellectual property and performance of services subcontracted to other
providers; indemnities to directors and officers under the organizational documents and agreements
of the Company; and guarantees issued between subsidiaries on intercompany receivables. The
duration of these indemnities, commitments and guarantees varies, and in certain cases, is
indefinite. Certain of these indemnities, commitments and guarantees do not provide for any
limitation of the maximum potential future payments the Company could be obligated to make. The
Company estimates that the fair value of these agreements was insignificant. Accordingly, no
liabilities have been recorded for these agreements as of September 30, 2008.
Some clients, largely in the state and local markets, require the Company to obtain surety
bonds, letters of credit or bank guarantees for client engagements. As of September 30, 2008, the
Company had $92,565 of outstanding surety bonds and $126,931 of outstanding letters of credit for
which the Company may be required to make future payment. An aggregate of $78,255 of the
outstanding letters of credit are used to secure outstanding surety and performance bonds.
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 Companys obligations
for the performance of others is not expressly specified. Certain of these guarantees do not
provide for any limitation of the maximum potential future payments the Company could be obligated
to make. The Company estimates that as of September 30, 2008, it had assumed an aggregate potential
contract value of approximately $44,594 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, and therefore no liabilities have been recorded for these contracts
as of September 30, 2008.
The Company has a tax equalization policy designed to ensure that its employees on domestic
long-term and foreign short-term assignments will be subject to the same level of personal tax, regardless of
the tax jurisdiction in which the employee works. The Company accrues tax equalization expenses in
the period incurred. If the estimated tax equalization liability, including related interest and
penalties, is determined to be greater or less than amounts due upon final settlement, the
difference is recorded in the current period.
As of September 30, 2008 the Company had approximately $85,429 of accrued liabilities
associated with global tax equalizations. In the second quarter of 2008, the Company
reversed $22,899 of these liabilities as a result of settlements at
amounts less than previously estimated and recorded the resulting benefit to
professional compensation. In the third quarter of 2008, the Company
reversed $6,339 of these liabilities and reduced reserves on employee
receivables, which were also recorded as a benefit to professional
compensation.
13
BEARINGPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share and per share amounts)
(unaudited)
Note 10. Pension and Postretirement Benefits
The components of the Companys net periodic pension cost and postretirement medical cost for
the three and nine months ended September 30, 2008 and 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Components of net periodic pension cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
1,592 |
|
|
$ |
1,589 |
|
|
$ |
4,838 |
|
|
$ |
4,767 |
|
Interest cost |
|
|
1,506 |
|
|
|
1,165 |
|
|
|
4,575 |
|
|
|
3,495 |
|
Expected return on plan assets |
|
|
(338 |
) |
|
|
(243 |
) |
|
|
(1,029 |
) |
|
|
(729 |
) |
Amortization of (gain) loss |
|
|
(5 |
) |
|
|
95 |
|
|
|
(15 |
) |
|
|
285 |
|
Amortization of prior service cost |
|
|
178 |
|
|
|
163 |
|
|
|
575 |
|
|
|
489 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost |
|
$ |
2,933 |
|
|
$ |
2,769 |
|
|
$ |
8,944 |
|
|
$ |
8,307 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of net periodic postretirement medical cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
631 |
|
|
$ |
618 |
|
|
$ |
1,893 |
|
|
$ |
1,854 |
|
Interest cost |
|
|
235 |
|
|
|
217 |
|
|
|
705 |
|
|
|
651 |
|
Amortization of losses |
|
|
|
|
|
|
13 |
|
|
|
|
|
|
|
39 |
|
Amortization of prior service cost |
|
|
119 |
|
|
|
119 |
|
|
|
357 |
|
|
|
357 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic postretirement medical cost |
|
$ |
985 |
|
|
$ |
967 |
|
|
$ |
2,955 |
|
|
$ |
2,901 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 11. Income Taxes
For the three and nine months ended September 30, 2008, the Company recognized (loss) and
income before taxes of ($26,129) and $28,127, respectively, and provided for income taxes of $4,364
and $63,349, respectively, resulting in an effective tax rate of (16.7%) and 225.2%, respectively.
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, other items and non-deductible meals
and entertainment. The mix of income is a significant factor in calculating the effective tax rate
and the largest factor in determining tax expense since certain profitable countries comprise the
majority of the tax expense. The tax provision recorded in the three months ended September 30,
2008 includes the effect of a discrete tax benefit of $11,208, which includes approximately $5,575 related to the release
of valuation allowances recorded on certain foreign deferred tax assets and an adjustment to a tax
refund receivable of approximately $5,633 relating to the filing of amended tax returns in the United States. During the nine months ended September 30,
2008, the Company recorded tax expense of $18,917 related to a foreign legal restructuring. The
restructuring resulted in the loss of certain loss carry-forwards and the realization of capital
gains.
For the three and nine months ended September 30, 2007, the Company recognized (loss) before
taxes of ($47,526) and ($147,534), respectively, and provided for income taxes of $20,480 and
$46,205, respectively, resulting in an effective tax rate of (43.1%) and (31.3%), respectively.
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, other items and non-deductible meals
and entertainment.
The total liability for uncertain tax positions at September 30, 2008 is estimated to be
approximately $246,032. We record interest and penalties related to unrecognized tax benefits in
the provision for income taxes which is consistent with the prior year. Final determination of a
significant portion of the Companys tax liabilities that will be effectively settled remains
subject to ongoing examination by various taxing authorities, including the Internal Revenue
Service. The Company is actively pursuing strategies to favorably settle or resolve these
liabilities for unrecognized tax benefits. If the Company is successful in mitigating these
liabilities, in whole or in part, the impact will be recorded as an adjustment to income tax
expense in the period of settlement. It is reasonably possible that a reduction of approximately
$85,000 of unrecognized tax benefits may occur within 12 months as a result of projected settlement
of global tax issues.
14
BEARINGPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share and per share amounts)
(unaudited)
Note 12. Fair Value Measurements
On January 1, 2008, the Company adopted the provisions of SFAS No. 157, Fair Value
Measurements (SFAS 157), for certain financial assets and financial liabilities that are
measured at fair value on a recurring basis. In February 2008, the Company adopted FSP 157-1,
Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements
That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under
Statement 13, which removed leasing transactions accounted for under Statement No. 13 and related
guidance from the scope of SFAS No. 157. In February 2008, the Company also adopted FSP 157-2,
Partial Deferral of the Effective Date of Statement 157, which deferred the effective date of
SFAS 157 for all nonfinancial assets and nonfinancial liabilities measured at fair value on a
nonrecurring basis to fiscal years beginning after November 15, 2008. SFAS 157 provides a
consistent definition of fair value, with a focus on exit price from the perspective of a market
participant.
The Company holds short-term money market investments, commercial paper, investments in
private equity, and certain other financial instruments which are carried at fair value. The
Company determines fair value based upon quoted prices, when available, or through the use of
alternative approaches when market quotes are not readily accessible or available.
Valuation techniques for fair value are based upon observable and unobservable inputs.
Observable inputs reflect market data obtained from independent sources, while unobservable inputs
reflect the Companys best estimate, considering all relevant information. These valuation
techniques involve some level of management estimation and judgment. The valuation process to
determine fair value also includes making appropriate adjustments to the valuation model outputs to
consider risk factors.
The fair value hierarchy of the Companys inputs used in the determination of fair value for
assets and liabilities during the current period consists of three levels. Level 1 inputs are
comprised of unadjusted, quoted prices in active markets for identical assets or liabilities at the
measurement date. Level 2 inputs include quoted prices for similar instruments in active markets;
quoted prices for identical or similar instruments in markets that are not active; inputs other
than quoted prices that are observable for the asset or liability; and inputs that are derived
principally from or corroborated by observable market data by correlation or other means. Level 3
inputs incorporate the Companys own best estimate of what market participants would use in pricing
the asset or liability at the measurement date where consideration is given to the risk inherent in
the valuation technique and the risk inherent in the inputs to the model. If inputs used to measure
an asset or liability fall within different levels of the hierarchy, the categorization is based on
the lowest level input that is significant to the fair value measurement of the asset or liability.
The Companys assessment of the significance of a particular input to the fair value measurement in
its entirety requires judgment, and considers factors specific to the asset or liability.
The following table presents financial assets and liabilities measured at fair value on a
recurring basis and their related valuation inputs as of September 30, 2008:
Assets and Liabilities Measured at Fair Value on a Recurring Basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using |
|
|
|
|
|
|
|
Quoted Prices in |
|
|
Significant |
|
|
|
|
|
|
|
|
|
|
Active Markets |
|
|
Other |
|
|
Significant |
|
|
|
Total Fair Value |
|
|
for Identical |
|
|
Observable |
|
|
Unobservable |
|
|
|
of Asset or |
|
|
Assets |
|
|
Input |
|
|
Inputs |
|
|
|
Liability |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
Cash and Cash Equivalents |
|
$ |
103,827 |
|
|
$ |
103,827 |
|
|
$ |
|
|
|
$ |
|
|
Other Current Assets(1) |
|
|
5,051 |
|
|
|
5,051 |
|
|
|
|
|
|
|
|
|
Other Assets |
|
|
426 |
|
|
|
111 |
|
|
|
|
|
|
|
315 |
(2) |
|
|
|
|
|
|
Total Assets |
|
$ |
109,304 |
|
|
$ |
108,989 |
|
|
$ |
|
|
|
$ |
315 |
|
|
|
|
|
|
|
Other Current Liabilities(1) |
|
$ |
5,051 |
|
|
$ |
5,051 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities |
|
$ |
5,051 |
|
|
$ |
5,051 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The Company has assets held in a Rabbi Trust deferred compensation plan, which generally
include actively traded mutual funds and money market accounts. |
|
(2) |
|
The Company carries cost-basis investments in privately-held companies. An other than
temporary impairment in value of $34 and a temporary impairment in value of $5 for the three
and nine months ending September 30, 2008 was recorded as part of Other Income in the
Consolidated Statement of Operations. |
15
BEARINGPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share and per share amounts)
(unaudited)
Note 13. Segment Reporting
The Companys segment information has been prepared in accordance with SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information. Operating segments are
defined as components of an enterprise engaging in business activities about which separate
financial information is available that is evaluated regularly by the Companys chief operating
decision-maker, the Chief Executive Officer, in deciding how to allocate resources and assess
performance. The Companys reportable segments consist of its three North America industry groups
(Public Services, Commercial Services and Financial Services), its three international regions
(EMEA, Asia Pacific and Latin America) and the Corporate/Other category (which consists primarily
of infrastructure costs). Accounting policies of the segments are the same as those described in
Note 2, Summary of Significant Accounting Policies, of the Companys 2007 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
Operating |
|
|
|
|
|
Operating |
|
|
|
Revenue |
|
|
Income (Loss) |
|
|
Revenue |
|
|
|
Income (Loss) |
|
Public Services |
|
$ |
354,654 |
|
|
$ |
61,355 |
|
|
$ |
362,893 |
|
|
$ |
64,593 |
|
Commercial Services |
|
|
92,329 |
|
|
|
11,356 |
|
|
|
131,383 |
|
|
|
21,135 |
|
Financial Services |
|
|
48,428 |
|
|
|
7,820 |
|
|
|
66,412 |
|
|
|
8,207 |
|
EMEA |
|
|
199,914 |
|
|
|
38,520 |
|
|
|
184,318 |
|
|
|
24,132 |
|
Asia Pacific |
|
|
76,711 |
|
|
|
18,545 |
|
|
|
94,081 |
|
|
|
20,575 |
|
Latin America |
|
|
28,593 |
|
|
|
5,802 |
|
|
|
22,240 |
|
|
|
(3,338 |
) |
Corporate/Other |
|
|
358 |
|
|
|
(138,835 |
) |
|
|
570 |
|
|
|
(163,008 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
800,987 |
|
|
$ |
4,563 |
|
|
$ |
861,897 |
|
|
$ |
(27,704 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
Operating |
|
|
|
|
|
|
Operating |
|
|
|
Revenue |
|
|
Income (Loss) |
|
|
Revenue |
|
|
Income (Loss) |
|
Public Services |
|
$ |
1,075,929 |
|
|
$ |
223,878 |
|
|
$ |
1,084,080 |
|
|
$ |
197,335 |
|
Commercial Services |
|
|
311,183 |
|
|
|
44,943 |
|
|
|
401,638 |
|
|
|
61,149 |
|
Financial Services |
|
|
144,681 |
|
|
|
20,196 |
|
|
|
209,378 |
|
|
|
18,641 |
|
EMEA |
|
|
647,328 |
|
|
|
121,688 |
|
|
|
570,111 |
|
|
|
92,852 |
|
Asia Pacific |
|
|
252,656 |
|
|
|
56,209 |
|
|
|
267,161 |
|
|
|
51,877 |
|
Latin America |
|
|
85,145 |
|
|
|
13,576 |
|
|
|
67,787 |
|
|
|
(8,614 |
) |
Corporate/Other |
|
|
809 |
|
|
|
(397,326 |
) |
|
|
3,340 |
|
|
|
(518,304 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,517,731 |
|
|
$ |
83,164 |
|
|
$ |
2,603,495 |
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(105,064 |
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16
PART
I, ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following Managements Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) should be read in conjunction with the interim Consolidated Financial
Statements and the Notes to the Consolidated Financial Statements included elsewhere in this
Quarterly Report.
Disclosure Regarding Forward-Looking Statements
Some of the statements in this Quarterly Report constitute forward-looking statements within
the meaning of the United States Private Securities Litigation Reform Act of 1995. These statements
relate to our operations 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 Quarterly 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:
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Our ability to sign new business and recruit and retain employees may be materially and
adversely affected while our Board of Directors evaluates strategic alternatives. |
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If we are unable to timely and properly implement our new North American financial
reporting system, we may be unable to timely file our SEC periodic reports, conclude that
our internal control over financial reporting is effective, or reduce certain selling,
general and administrative (SG&A) expenses as a percentage of revenue as rapidly as we
had previously planned. |
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Our business may be adversely impacted as a result of changes in demand, both globally
and in individual market segments, for our consulting and systems integration services. |
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Our operating results will suffer if we are not able to maintain our billing and
utilization rates or control our costs. |
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We continue to incur SG&A expenses as a percentage of revenue at levels significantly
higher than those of our competitors. |
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The systems integration consulting markets are highly competitive. We may not be able
to compete effectively in these markets if we are unable to continue to manage and reduce
our costs related to these engagements. |
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Contracting with the U.S. Federal government is inherently risky and exposes us to
risks that may materially and adversely affect our business. |
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Our ability to attract, retain and motivate our managing directors and other key
employees is critical to the success of our business. We continue to experience sustained,
higher-than-industry average levels of voluntary turnover among our workforce, which has
impacted our ability to grow our business. |
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Our contracts can be terminated by our clients with short notice, or our clients may
cancel or delay projects. |
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If we are not able to keep up with rapid changes in technology or maintain strong
relationships with software providers, our business could suffer. |
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Loss of our joint marketing relationships could reduce our revenue and growth
prospects. |
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We are not likely to be able to significantly grow our business through mergers and
acquisitions in the near term. |
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There will not be a consistent pattern in our financial results from quarter to
quarter, which may result in increased volatility of our stock price. |
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Our performance may be negatively affected due to financial, regulatory and operational
risks inherent in worldwide operations. |
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We may bear the risk of cost overruns relating to our services, thereby adversely
affecting our performance. |
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We may face legal liabilities and damage to our professional reputation from claims
made against our work. |
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Our services may infringe upon the intellectual property rights of others. |
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We have only a limited ability to protect our intellectual property rights, which are
important to our success. |
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Our $500.0 million Senior Secured Credit Facility dated as of May 2007, as amended and
restated in June 2007 (the 2007 Credit Facility) imposes a number of restrictions on the
way in which we operate our business and may negatively affect our ability to finance
future needs, or do so on favorable terms. |
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Our cash resources might not be sufficient to meet our expected cash needs over time.
Beginning in early 2009, we will begin to become subject to significant scheduled payments
under our 2007 Credit Facility and the 5.00% Senior Convertible Debentures. |
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The holders of our debentures have the right, at their option, to require us to
purchase some or all of our debentures upon certain dates or upon the occurrence of certain
designated events, which could have a material adverse effect on our liquidity. |
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We may be unable to obtain new surety bonds, letters of credit or bank guarantees in
support of client engagements on acceptable terms. |
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Downgrades of our credit ratings may increase our borrowing costs and materially and
adversely affect our business, financial condition or results of operation. |
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Our leverage may adversely affect our business and financial performance and may
restrict our operating flexibility. |
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In 2004, we identified material weaknesses in our internal control over financial
reporting, the remediation of which continues to place significant demands on our time and
resources. As of December 31, 2007, certain material weaknesses remained. These remaining
material weaknesses continue to cause us to rely on additional procedures and other
measures as needed to assist us with meeting the objectives otherwise fulfilled by an
effective control environment. |
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If the price per share of our common stock remains below $1.00 for an extended period
of time or shares of our common stock are otherwise delisted from the New York Stock
Exchange (the NYSE), there could be a negative effect on our business. If we are delisted
by the NYSE before we are able to be listed on another national stock exchange, payment of
substantially all of our outstanding debentures would be accelerated and, by implication,
an event of default would exist under our 2007 Credit Facility that could require repayment
of all amounts outstanding under that facility. If this were to occur, there would be
material adverse effects on our business, financial condition and results of operations. |
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There are significant limitations on the ability of any person or company to acquire
the Company without the approval of our Board of Directors. |
For a more detailed discussion of these factors, please refer to Item 1A, Risk Factors,
included in our 2007 Form 10-K and in Part II, Item 1A in this Quarterly Report on Form 10-Q and
in the Quarterly Report on Form 10-Q for the Quarterly Period Ended June 30, 2008.
18
Overview
We
strive to be recognized as a world leader in management and technology consulting, admired
for our passion and respected for our ability to solve our clients most important challenges. We
provide strategic consulting applications services, technology solutions and managed services to
government organizations, Global 2000 companies and medium-sized businesses in the United States
and internationally. In North America, we provide consulting services through our Public Services,
Commercial Services and Financial Services industry groups in which we focus significant
industry-specific knowledge and service offerings to our clients. Outside of North America, we are
organized on a geographic basis, with operations in EMEA, the Asia Pacific region and Latin
America.
Economic and Industry Factors
We believe that our clients spending for consulting services is partially correlated to,
among other factors, the performance of the domestic and global economy as measured by a variety of
indicators such as gross domestic product, government policies, mergers and acquisitions activity,
corporate earnings, U.S. Federal and state government budget levels, inflation and interest rates
and client confidence levels.
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, 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 current economic realities have disparate impacts on our
various industry groups and the sectors and geographies in which they operate. Mindful of this
phenomenon and the potential for increasing economic uncertainty in 2008, our business plan for
this year places significant emphasis on continuing our cost reduction and consolidation efforts,
monitoring our utilization rates, and making conservative estimates of no revenue growth, or a
slight revenue decline, in 2008. We believe that the historic resiliency of our Public Services
business to economic downturns, combined with the level of new bookings obtained in 2007, should
aid us in achieving our business goals for 2008. Nonetheless, most bookings are subject to
cancellation on short notice and we may be unable to rapidly and effectively adjust our cost
structure if we experience significant cancellations or deferrals of work.
The markets in which we provide services are increasingly competitive and global in nature.
While supply and demand in certain lines of business and geographies may support price increases
for some of our standard service offerings from time to time, to maintain and improve our
profitability we must constantly seek to improve and expand our unique service offerings and
deliver our services at increasingly lower cost levels. Our Public Services industry group, which
is our largest, also must operate within the U.S. Federal, state and local government markets where
unique contracting, budgetary and regulatory regimes control how contracts are awarded, modified
and terminated. Budgetary constraints or reductions in government funding may result in the
modification or termination of long-term government contracts, which could dramatically affect the
outlook of that business.
Revenue and Income Drivers
We derive substantially all of our revenue from professional services activities. Our revenue
is driven by our ability to continuously generate new opportunities to serve clients, by the prices
we obtain for our service offerings, and by the size and utilization of our professional workforce.
Our ability to generate new business is directly influenced by the economic conditions in the
industries and regions we serve, our anticipation and response to technological change, the type
and level of technology spending by our clients and by our clients perception of the quality of
our work. Our ability to generate new business is also indirectly and increasingly influenced by
our clients perceptions of our ability to manage our ongoing issues surrounding our financial
position.
Our gross profit consists of revenue less our costs of service. The primary components of our
costs of service include professional compensation and other direct contract expenses. Professional
compensation consists of payroll costs and related benefits associated with client service
professional staff (including bonuses, the vesting of various stock awards, tax equalization for
employees on foreign and long-term domestic assignments and costs associated with reductions in
workforce). Other direct contract expenses include costs directly attributable to client
engagements. These costs include out-of-pocket costs such as travel and subsistence for client
service professional staff, costs of hardware and software, and costs of subcontractors. If we are
unable to adequately control or estimate these costs, or properly anticipate the sizes of our
client service and support staff, our profitability will suffer.
Our operating profit reflects our revenue less costs of service and certain additional items
that include, primarily, SG&A expenses, which include costs related to marketing, information
systems, depreciation and amortization, finance and accounting, human resources, sales force, and
other expenses related to managing and growing our business. Write-downs in the carrying value of
goodwill and amortization of intangible assets have also reduced our operating profit.
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Our operating cash flow is derived predominantly from gross operating profit and how we manage
our receivables and payables.
Key Performance Indicators
In evaluating our operating performance and financial condition, we focus on the following key
performance indicators: bookings, revenue growth, gross margin (gross profit as a percentage of
revenue), utilization, days sales outstanding, free cash flow and employee attrition.
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Bookings. We believe that information regarding our new contract bookings provides useful
trend information regarding how the volume of our new business changes over time. Comparing
the amount of new contract bookings and revenue provides us with an additional measure of
the short-term sustainability of revenue growth. Information regarding our new bookings
should not be compared to, or substituted for, an analysis of our revenue over time. There
are no third-party standards or requirements governing the calculation of bookings. New
contract bookings are recorded using then existing currency exchange rates and are not
subsequently adjusted for currency fluctuations. These amounts represent our estimate at
contract signing of the net revenue expected over the term of that contract and involve
estimates and judgments regarding new contracts as well as renewals, extensions and
additions to existing contracts. Subsequent cancellations, extensions and other matters may
affect the amount of bookings previously reported; however, we do not revise previously
reported bookings. Bookings do not include potential revenue that could be earned from a
client relationship as a result of future expansion of service offerings to that client, nor
does it reflect option years under contracts that are subject to client discretion. We do
not record unfunded U.S. Federal contracts as new contract bookings while appropriation
approvals remain pending as there can be no assurances that these approvals will be
forthcoming in the near future, if at all. Consequently, there can be significant
differences between the time of contract signing and new contract booking recognition. Our
level of bookings provides an indication of how our business is performing: a positive
variance between bookings and revenue is indicative of business momentum, a negative
variance is indicative of a business downturn. (Sometimes we refer to the ratio of new
bookings for a period to the difference of revenues less other direct costs and expenses for
the same period as our book to bill ratio.) Nonetheless, we do not characterize our
bookings, or our engagement contracts associated with new bookings, as backlog because our
engagements generally can be cancelled or terminated on short notice or without notice. |
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Revenue Growth. Unlike bookings, which provide only a general sense of future
expectations, period-over-period comparisons of revenue provide a meaningful depiction of
how successful we have been in growing our business over time. |
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We believe that it is also useful to monitor net revenue, as well as revenue growth. Net
revenue represents the actual amount paid by our clients for the services we provide, as
opposed to services provided by others and ancillary costs and expenses. Net revenue is a
non-GAAP financial measure. The most directly comparable financial measure in accordance with
GAAP is revenue. Net revenue is derived by reducing the components of revenue that consist of
other direct contract expenses, which are costs that are directly attributable to client
engagements. These costs include items such as computer hardware and software, travel expenses
for professional personnel and costs associated with subcontractors. |
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Gross Margin (gross profit as a percentage of revenue). Gross margin is a meaningful tool
for monitoring our ability to control our costs of service. Analysis of the various cost
elements, including professional compensation expense, effects of foreign exchange rate
changes and the use of subcontractors, as a percentage of revenue over time can provide
additional information as to the key challenges we are facing in our business. The cost of
subcontractors is generally more expensive than the cost of our own workforce and can
negatively impact our gross profit. While the use of subcontractors can help us to win
larger, more complex deals, and also may be mandated by our clients, we focus on limiting
the use of subcontractors whenever possible in order to minimize our costs. We also utilize
certain adjusted gross margin metrics in connection with the vesting and settlement of
certain employee incentive awards. For a discussion of these metrics, see Item 11,
Executive Compensation Compensation Discussion and Analysis, included in our 2007 Form
10-K. |
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We also monitor contribution margin to better review the profitability of our respective
operating segments. Contribution margin is a non-GAAP financial measure. The most directly
comparable financial measure in accordance with GAAP is gross margin. Contribution margin is
calculated by subtracting, from net revenue, professional compensation, other costs of
service, SG&A and certain other allocations, and then dividing by net revenue. |
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Utilization. Utilization represents the percentage of time our consultants are performing
work, and is defined as total hours charged to client engagements or to non-chargeable
client-relationship projects divided by total available hours for any specific time period,
net of holiday and paid vacation hours. |
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Days Sales Outstanding (DSO). DSO is an operational metric that approximates the amount
of earned revenue that remains unpaid by clients at a given time. DSOs are derived by
dividing the sum of our outstanding accounts receivable and unbilled revenue, less deferred
revenue, by our average net revenue per day. Average net revenue per day is determined by
dividing total net revenue for the most recently ended trailing twelve-month period by 365. |
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Free Cash Flow. Free cash flow is calculated by subtracting purchases of property and
equipment from cash provided by operating activities. We believe free cash flow is a useful
measure because it allows better understanding and assessment of our ability to meet debt
service requirements and the amount of recurring cash generated from operations after
expenditures for fixed assets. Free cash flow does not represent our residual cash flow
available for discretionary expenditures as it excludes certain mandatory expenditures such
as repayment of maturing debt. We use free cash flow as a measure of recurring operating
cash flow. Free cash flow is a non-GAAP financial measure. The most directly comparable
financial measure calculated in accordance with GAAP is net cash provided by operating
activities. |
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Attrition. Attrition, or voluntary total employee turnover, is calculated by dividing the
number of our employees who have chosen to leave the Company within a certain period by the
total average number of all employees during that same period. Our attrition statistic
covers all of our employees, which we believe provides metrics that are more compatible
with, and comparable to, those of our competitors. |
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 Nine Months Ended September 30, 2008 Highlights
A summary of our highlights for the three and nine months ended September 30, 2008 is
presented below.
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New contract bookings for the three months ended September 30, 2008 were $739.4 million,
a decrease of $24.7 million, or 3.2%, from new contract bookings of $764.1 million for the
three months ended September 30, 2007. In North America we set a
new record for quarterly bookings in Public
Services, while continuing to experience significant year-over-year bookings declines in Commercial Services and
Financial Services for the fourth consecutive quarter. Internationally, bookings increased significantly in Latin America and
to a lesser extent in EMEA, with favorable foreign exchange rates responsible for most of
the U.S. dollar-denominated bookings growth in EMEA. Favorable foreign exchange rates also contributed significantly to soften
notable bookings declines in Asia Pacific. New contract bookings for the nine months ended
September 30, 2008 were $2,160.1 million, a decrease of $60.4 million, or 2.7%, from new
contract bookings of $2,220.5 million for the nine months ended September 30, 2007.
Declines in bookings in the nine months ended September 30, 2008 were most significant in
Commercial Services and Financial Services and the combined declines in those segments and in
Asia Pacific more than offset increases in Public Services, EMEA and Latin America. Favorable
foreign exchange rates continued to positively affect U.S. dollar-denominated bookings growth in
our international segments, while bookings stated in local currency in EMEA remained flat and
decreased in Asia Pacific. |
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Our revenue for the three months ended September 30, 2008 was $801.0 million, a decrease
of $60.9 million, or 7.1%, from revenue for the three months ended September 30, 2007 of
$861.9 million. For the three month period, favorable foreign
currency exchange rates were responsible for all of the revenue growth in EMEA and had
positive impacts in Latin America and Asia Pacific. Our revenue for the nine months ended September 30, 2008 was $2,517.7
million, a decrease of $85.8 million, or 3.3%, from revenue for the nine months ended
September 30, 2007 of $2,603.5 million. For the nine month period, favorable foreign
currency exchange rates were responsible for most U.S. dollar-denominated bookings growth in
EMEA and had a positive impact in Latin America and contributed significantly to soften
notable revenue declines in Asia Pacific. |
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Our gross profit for the three months ended September 30, 2008 was $144.5 million, an
increase of $11.9 million, or 8.9%, compared with gross profit for the three months ended
September 30, 2007 of $132.6 million. Gross profit as a percentage of revenue increased to
18.0% during the three months ended September 30, 2008 from 15.4% during the three months
ended September 30, 2007. This increase was primarily the result of a $72.8 million decrease
in total cost of services (primarily attributable to a reduction in stock
compensation expenses related to our PSU program and the reversal of accruals related to global tax equalization, both
of which are discussed below) partially offset by the previously mentioned $60.9 million reduction in
revenue. Our gross profit for the nine months ended September 30, 2008 was $506.7 million,
an increase of $99.5 million, or 24.4%,
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compared with gross profit of $407.2 million for the nine months ended September 30, 2007.
Gross profit as a percentage of revenue increased to 20.1% during the nine months ended
September 30, 2008 from 15.6% during the nine months ended September 30, 2007. This increase
was primarily the result of a $185.2 million decrease in total cost of services (primarily
attributable to reductions in cash compensation expense, as well as the reduction in stock
compensation expense related to our PSU program, and the reversal of
accruals related to global tax equalization, both of which are
discussed below) partially offset by the
previously mentioned $85.8 million reduction in revenue. |
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Global tax equalization refers to our policy of estimating and recording expenses to
ensure that our employees working on domestic long-term and foreign short-term assignments outside of their home tax
jurisdiction will be subject to the same level of personal tax as their home tax
jurisdiction. If the estimated tax equalization liability is determined to be greater or
less than the amount due upon final settlement, the difference is recorded in the current
period. During the second quarter of 2008, we reversed accruals of $22.9 million in connection with our global tax equalization policy, which
resulted in our professional compensation expense being reduced by
this amount. During the third quarter of 2008, we reversed accruals of
$6.3 million of these liabilities and reduced reserves on employee
receivables, which also resulted in our professional compensation
expense being reduced by this amount. |
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Reductions in our stock compensation expense are attributable to a combination of
reductions in the number of awards earned in a period and revised estimates related to future
forfeitures. Accounting for our PSU program requires us to make significant judgments and estimates,
including estimates of the expected forfeitures over the vesting period of the awards.
Forfeitures may occur for various reasons; however, employee terminations and attrition are
the primary causes of forfeitures. During the second quarter of 2008, we revised our
forfeiture rate estimate based on actual historical forfeitures through June 30, 2008 and
expected future forfeitures over the remainder of the vesting term of the PSU awards. This
revised forfeiture rate resulted in an adjustment of approximately $21.4 million to reduce
stock compensation expense during the second quarter of 2008. Of this adjustment, $13.6
million was recorded to professional compensation and $7.8 million was recorded to SG&A
expenses. We continued to use this revised forfeiture rate in the
third quarter of 2008 and such rate
contributed significantly to the $6.9 million reduction in stock compensation expense associated
with PSU awards. PSUs were not awarded ratably or uniformly across our business units. PSUs were
predominantly awarded to our North American business units. Consequently, due to the recent
increases in planned and unplanned attrition in the Financial Services and Commercial
Services business units, as discussed below, the majority of the adjustment, which was
recognized in professional compensation was recorded in these two business units while there
has been little or no impact on our EMEA or Asia Pacific business units. |
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We incurred SG&A expenses of $139.9 million in the third quarter of 2008, representing a
decrease of $20.4 million, or 12.7%, over SG&A expenses of $160.3 million in the third
quarter of 2007. We incurred SG&A expenses of $423.5 million in the nine months ended
September 30, 2008, representing a decrease of $88.8 million, or 17.3%, from SG&A expenses
of $512.3 million in the nine months ended September 30, 2007. The decrease in SG&A expense
for the three and nine months ended September 30, 2008 was primarily due to reduced
subcontracted labor and other costs related to the closing of our financial statements
slightly offset by increases in expenses associated with pursuing various strategic alternatives
involving the potential sale of some or all of the Companys assets. |
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Operating income for the three months ended September 30, 2008 was $4.6 million, an
increase of $32.3 million, or 116.5%, compared with operating loss for the three months
ended September 30, 2007 of $27.7 million. Our operating income for the nine months ended
September 30, 2008 was $83.2 million, an increase of $188.2 million, or 179.2%, compared
with operating loss of $105.1 million for the nine months ended September 30, 2007. The
significant increases in operating income in both the three and nine month periods were
driven by the significant increases in gross profit and significant decreases in SG&A
expenses during those periods.
As previously noted, however, revised accounting estimates and accrual reversals factor
significantly in these gross profit improvements.
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Our income tax expense decreased by $16.1 million and increased by $17.1 million for the
three and nine months ended September 30, 2008, respectively, as compared to the three and
nine months ended September 30, 2007. The decrease in income taxes during the third quarter
of 2008 includes the effect of a discrete tax benefit of $11.2 million, which includes approximately $5.6 million related to the release of valuation allowances recorded on
certain foreign deferred tax assets and an adjustment to a tax refund receivable of approximately $5.6 million relating to the filing of amended tax returns in the United States.
The increase in our tax expense for the nine months ended September 30, 2008 is due largely to a
number of our foreign subsidiaries which generated significant levels of taxable income in
these foreign jurisdictions. Historically, we have not fully allocated our corporate-level
expenses to local country operations. Consequently, our tax expense is increasing as
increasing foreign source income is not being reduced by corporate-level expenses being
borne by the Company, which are not being allocated to foreign jurisdictions. Additionally,
included in our tax expense during the second quarter of 2008, we recognized $18.9 million
of expense as a result of the loss of certain loss carry-forwards and the realization of capital gains in connection with
a foreign corporate entity restructuring conducted during this three
month period. |
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During the third quarter of 2008, we realized a net loss of $30.5 million,
or a loss of
$0.14 per share, representing an improvement of $37.5 million over the net loss of $68.0
million, or a loss of $0.32 per share, during the third quarter of 2007. This improvement
was primarily attributable to: |
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an increase in gross profit of $11.9 million; |
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a decrease of $20.4 million in SG&A expenses; |
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a decrease in tax expense of $16.1 million; and |
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partially offset by a $11.5 million increase in other expense primarily related to
unrealized foreign exchange losses on our short term intercompany transactions. |
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During the nine months ended September 30, 2008, we realized a net loss of $35.2 million,
or a loss of $0.16 per share, representing an improvement of $158.5 million over the net
loss of $193.7 million, or a loss of $0.90 per share, during the nine months ended September
30, 2007. This improvement in net loss was primarily attributable to: |
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an increase in gross profit of $99.5 million; and |
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a decrease of $88.8 million in SG&A expenses. |
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These improvements were partially offset by: |
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a net increase in interest expense of $3.7 million (net of interest income
and foreign currency gains/losses); and |
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an increase in income tax expense of $17.1 million, as discussed previously. |
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Our Financial Services business unit ended 2007 overstaffed for the business downturn
that has occurred within the industry in 2008. Our portfolio of business is over-weighted in
those areas of the financial services industry most impacted by recent financial losses and
write-downs. We have a limited number of multi-year outsourcing engagements. Having devoted
significant efforts in the first quarter of 2008 to reducing headcount and stabilizing our
business model, we are now turning to aggressively rebalancing the weighting of our
portfolio and market offerings to provide the greatest opportunity for a return to
profitability. In the first nine months of 2008, the business units gross profit margin
showed significant improvements as compared to the first nine months of 2007; however, these
improvements were primarily the result of adjustments recorded in the second quarter of 2008
for the reversal of accruals for global tax equalization expense and stock based
compensation, as discussed above. We are seeing some signs that our strategy may be
producing improved profitability of our work as evidenced in the third quarter of 2008 as
compared to the third quarter of 2007, and when comparing the third quarter of 2008 to the
second quarter of 2008, after adjusting for the above mentioned expense reversals. Though
significant improvements have been made in the profitability of our Financial Services
business unit, it has not yet reached the level of profitability required to be able to fund
the portion of total SG&A and other overhead expenses attributable to its operations, and we
do not expect to reach this level by the end of 2008. Among our clients, our Financial
Services clients tend to be most sensitive to negative perceptions around our financial
stability and our ability to properly staff our engagements. The negative perceptions have
affected our ability to achieve our goals. |
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Our Commercial Services business unit is continuing to position itself for profitability
through its stated strategy of promoting more focused market offerings to more specifically
targeted clients. While we have made significant progress in implementing this strategy in
the first nine months of 2008, that progress has been obscured as higher than expected
contract fee adjustments have hindered our ability to achieve our goal of significantly
improving our net rates per hour earned for our services. We have also devoted a significant
amount of time to managing both planned and unplanned attrition, as we optimize our service
delivery model and respond to some clients concerns that perceptions regarding our
financial stability and attrition will cause us to be unable to maintain appropriate
staffing of our engagements. In the first nine months of 2008, the business units gross
margin was relatively flat as compared to the first nine months of 2007; however, the gross
profit margin in the first nine months of 2008 was positively impacted by adjustments
recorded for the reversal of accruals for global tax equalization expense and stock based
compensation, as discussed above. While the quantity of our new contract signings continues
to decline, we are seeing some signs that our strategy may be producing improved
profitability as evidenced in our gross profit margin in the third quarter of 2008 compared
to the gross profit margin in the second quarter of 2008, after adjusting for the above
mentioned expense reversals. We believe that our workforce is now more appropriately aligned
with our execution strategy and we are placing increasing emphasis on the utilization of our
lower-cost, global delivery centers, so as to further reduce our cost of services. To
continue to successfully execute on our strategy we must be able to address perceptions
about our financial stability and our clients increasing concerns regarding our ability to
properly staff our projects. |
|
|
|
|
Utilization for the three months ended September 30, 2008 was 79.1%, an increase of 60
basis points from the three months ended September 30, 2007. Utilization for the nine months
ended September 30, 2008 was 78.8%, an increase of 160 basis points over the nine months
ended September 30, 2007. |
23
|
|
|
As of September 30, 2008, our DSOs stood at 78 days, representing a decrease of 11 days,
or 12.4%, from our DSOs at September 30, 2007. Nonetheless, in line with the historical
patterns of our business, DSOs as of September 30, 2008 were higher than DSOs as of December
31, 2007 by 1 day, and lower than DSOs as of June 30, 2008 by 9 days. |
|
|
|
|
Free cash flow for the nine months ended September 30, 2008 and 2007 was ($132.5) million
and ($253.8) million, respectively. Net cash used in
operating activities in the nine months ended September 30, 2008 and 2007 was ($100.6)
million and ($222.0) million, respectively. Purchases of property and equipment in the nine
months ended September 30, 2008 and 2007 were $32.0 million and $31.8 million,
respectively. The change in free cash flow for the nine month period was primarily attributable to
a decrease in net loss for the period, improved collection of outstanding receivables, and lower
bonus and insurance payments, offset by higher tax and severance payments. |
|
|
|
|
Significant uses of cash in operating activities in the first nine months of 2008 were
attributed to the payment of taxes (net of refunds) for certain of our profitable operating
entities of $58.0 million and severance payments related to managed reductions in our
workforce of approximately $11.0 million, partially offset by an unfavorable impact of $3.2
million due to the weakening of foreign currencies against the U.S. dollar. For a more
detailed discussion of our cash and cash equivalents, see Part I, Item 2, Managements
Discussion and Analysis of Financial Condition and Results of Operations Liquidity. |
|
|
|
|
As of September 30, 2008, we had approximately 15,700 full-time employees, including
approximately 13,100 consulting professionals. This represented a decrease in billable
headcount of approximately 9.0% from our headcount as of December 31, 2007. |
|
|
|
|
Our voluntary, annualized attrition rate for the third quarter of 2008 was 25.4%,
compared to 26.6% for the third quarter of 2007. The highly competitive industry in which
we operate and our financial position continues to make it particularly critical and
challenging for us to attract and retain experienced personnel. |
Segments
Our reportable segments for 2008 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 13, Segment Reporting, of the Notes to
Consolidated Financial Statements.
24
Three Months Ended September 30, 2008 Compared to Three Months Ended September 30, 2007
Revenue. Our revenue for the third quarter of 2008 was $801.0 million, a decrease of $60.9
million, or 7.1%, from revenue of $861.9 million for the third quarter of 2007. The following
tables present certain revenue information and performance metrics for each of our reportable
segments for the third quarters of 2008 and 2007. Amounts are in thousands, except percentages.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent |
|
|
Percent |
|
|
|
Three Months Ended |
|
|
|
|
|
|
Increase |
|
|
Increase |
|
|
|
September 30, |
|
|
|
|
|
|
(Decrease) |
|
|
(Decrease) |
|
|
|
2008 |
|
|
2007 |
|
|
US$ Change |
|
|
US$ |
|
|
Local Currency |
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public Services |
|
$ |
354,654 |
|
|
$ |
362,893 |
|
|
$ |
(8,239 |
) |
|
|
(2.3 |
%) |
|
|
(2.3 |
%) |
Commercial Services |
|
|
92,329 |
|
|
|
131,383 |
|
|
|
(39,054 |
) |
|
|
(29.7 |
%) |
|
|
(29.7 |
%) |
Financial Services |
|
|
48,428 |
|
|
|
66,412 |
|
|
|
(17,984 |
) |
|
|
(27.1 |
%) |
|
|
(27.1 |
%) |
EMEA |
|
|
199,914 |
|
|
|
184,318 |
|
|
|
15,596 |
|
|
|
8.5 |
% |
|
|
(0.3 |
%) |
Asia Pacific |
|
|
76,711 |
|
|
|
94,081 |
|
|
|
(17,370 |
) |
|
|
(18.5 |
%) |
|
|
(23.8 |
%) |
Latin America |
|
|
28,593 |
|
|
|
22,240 |
|
|
|
6,353 |
|
|
|
28.6 |
% |
|
|
16.8 |
% |
Corporate/Other |
|
|
358 |
|
|
|
570 |
|
|
|
(212 |
) |
|
|
(37.2 |
%) |
|
|
n/m |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
800,987 |
|
|
$ |
861,897 |
|
|
$ |
(60,910 |
) |
|
|
(7.1 |
%) |
|
|
(9.8 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public Services revenue decreased in the third quarter of 2008 primarily due to revenue
decreases in the Emerging Markets, SLED and Healthcare sectors, offset by increases in the
Civilian and Defense sectors. The decrease in the Emerging Markets sector was due to delays
in funding and a decline in the Middle East region. The decrease in the SLED sector was
primarily driven by reductions in revenue due to performance issues on certain contracts.
The increases in the Civilian and Defense sectors were due primarily to an increased demand
for our services. |
|
|
|
|
Commercial Services revenue decreased significantly in the third quarter of 2008 due to
revenue decreases across all sectors. Revenue decreases were attributable to a combination
of reduced demand for our services and reductions in the effective rates charged for our
services. |
|
|
|
|
Financial Services revenue decreased significantly in the third quarter of 2008 due
primarily to significant decreases in the Banking sector. Revenue decreases were
attributable to lower levels of contract signings since the fourth quarter of 2007, which,
in turn, were due to reduced demand for our services as many clients deferred new
initiatives in the wake of the crisis in the financial markets and became increasingly
sensitive to negative perceptions regarding our financial stability. These revenue declines
were only slightly offset by increased revenue in the Insurance sector driven by additional
efforts on a small number of large client engagements. |
|
|
|
|
EMEA revenue increased in the third quarter of 2008 primarily as a result of the
favorable impact of the strengthening of foreign currencies, specifically the Euro, against
the U.S. dollar, as well as meaningful revenue growth in Germany and France. Partially
offsetting these increases were decreases in the United Kingdom, Spain, and Sweden. The
significant increase in revenues in Germany and France resulted from both increased billing
rates and increased demand for our services. Revenues in Spain continue to decline as a
result of our strategic decision to reduce our activities in this country. The revenues in
the United Kingdom and Sweden declined due to the loss of key personnel in the early part of
2008 in these countries. |
|
|
|
|
Asia Pacific revenue decreased in the third quarter of 2008 due primarily to significant
revenue decreases in Australia and New Zealand, and, to a lesser extent, Japan. The revenue
declines were partially offset by the favorable impact of the strengthening of foreign
currencies against the U.S. dollar, particularly the Japanese yen. Revenue declines in
Australia were primarily related to losses of key employees, including managing directors,
which resulted in a significant reduction in the volume of our Australian business. In
addition, our decision to reduce our presence in New Zealand in late 2007 has resulted in a
significant decline in revenue. In Japan, revenue declines were due, in part, to a lower
volume of work related to projects involving compliance with Japans Financial Instruments
and Exchange Law (J-SOX), which companies were required to comply with as early as April
2008. We have historically utilized a higher number of sub-contractors to supplement our
work on J-SOX engagements, and, as these engagements have declined, we have shifted our
focus to engagements that utilize a higher number of our employees, which has resulted in
overall lower revenue. |
25
|
|
|
Latin America revenue increased in the third quarter of 2008 primarily as a result of
revenue increases in Costa Rica and Brazil, as well as the favorable impact of the
strengthening of the Brazilian Real against the U.S. dollar, partially offset by revenue
declines in Mexico. |
|
|
|
|
Corporate/Other: Our Corporate/Other segment does not contribute significantly to our
revenue. |
Gross Profit. During the third quarter of 2008, although our revenue decreased $60.9 million,
total costs of service decreased $72.8 million when compared to the third quarter of 2007,
resulting in an increase in gross profit of $11.9 million, or 8.9%. Gross profit as a percentage of
revenue increased to 18.0% for the third quarter of 2008 from 15.4% for the third quarter of 2007.
The change in gross profit for the third quarter of 2008 compared to the third quarter of 2007
resulted primarily from the following:
|
|
|
Professional compensation expense as a percentage of revenue increased to 52.1% for the
third quarter of 2008, compared to 51.1% for the third quarter of 2007. We experienced a net
decrease in professional compensation expense of $23.2 million, or 5.3%, to $417.4 million
for the third quarter of 2008 over $440.7 million for the third quarter of 2007. This
decrease in professional compensation expense over the third quarter of 2007 was primarily
due to reductions in stock based compensation expense of $11.4 million primarily attributable to a
higher rate of forfeitures applied to the current period and to a lesser extent, a lower number
of awards earned during the quarter, a reversal of $6.3 million associated
with global tax equalization expense and reductions in salaries due to lower headcount. |
|
|
|
|
Other direct contract expenses decreased as a percentage of revenue to 21.4% for the
third quarter of 2008, compared to 23.6% for the third quarter of 2007. We experienced a
net decrease in other direct contract expenses of $31.4 million, or 15.5%, to $171.6 million
for the third quarter of 2008 from $203.0 million for the third quarter of 2007, primarily
as a result of lower use of subcontractors as we continue to realign our staffing to
increase profitability. |
|
|
|
|
Other costs of service as a percentage of revenue decreased to 8.3% for the third quarter
of 2008 from 9.5% for the third quarter of 2007. We experienced a net decrease in other
costs of service of $15.6 million, or 19.1%, to $66.1 million for the third quarter of 2008
from $81.8 million for the third quarter of 2007, primarily due to declines in recruiting
and occupancy expenses, and an asset impairment charge recorded in the third quarter of
2007. |
|
|
|
|
During the third quarter of 2008 and 2007, we recorded, within the Corporate/Other
operating segment, restructuring charges of $1.4 million and $3.9 million, respectively,
related to lease, facilities and other exit activities. These charges relate primarily to
adjustments to the fair value of future lease obligations associated with office space,
which we will no longer be using within the EMEA and North America regions. The
restructuring charge for the three months ended September 30, 2007 represents a net
reduction of accruals, primarily attributable to the change in sublease income assumptions
associated with certain vacated leased facilities. |
Gross Profit by Segment. The following tables present certain gross profit and margin
information and performance metrics for each of our reportable segments for the third quarters of
2008 and 2007. Amounts are in thousands, except percentages.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent |
|
|
Percent |
|
|
|
Three Months Ended |
|
|
|
|
|
|
Increase |
|
|
Increase |
|
|
|
September 30, |
|
|
|
|
|
|
(Decrease) |
|
|
(Decrease) |
|
|
|
2008 |
|
|
2007 |
|
|
US$ Change |
|
|
US$ |
|
|
Local Currency |
|
Gross Profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public Services |
|
$ |
68,468 |
|
|
$ |
73,283 |
|
|
$ |
(4,815 |
) |
|
|
(6.6 |
%) |
|
|
(6.6 |
%) |
Commercial Services |
|
|
15,148 |
|
|
|
27,235 |
|
|
|
(12,087 |
) |
|
|
(44.4 |
%) |
|
|
(44.4 |
%) |
Financial Services |
|
|
10,502 |
|
|
|
12,873 |
|
|
|
(2,371 |
) |
|
|
(18.4 |
%) |
|
|
(18.4 |
%) |
EMEA |
|
|
45,874 |
|
|
|
31,044 |
|
|
|
14,830 |
|
|
|
47.8 |
% |
|
|
35.3 |
% |
Asia Pacific |
|
|
21,835 |
|
|
|
24,064 |
|
|
|
(2,229 |
) |
|
|
(9.3 |
%) |
|
|
(15.6 |
%) |
Latin America |
|
|
6,166 |
|
|
|
(1,916 |
) |
|
|
8,082 |
|
|
|
421.8 |
% |
|
|
398.2 |
% |
Corporate/Other |
|
|
(23,515 |
) |
|
|
(33,963 |
) |
|
|
10,448 |
|
|
|
30.8 |
% |
|
|
n/m |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
144,478 |
|
|
$ |
132,620 |
|
|
$ |
11,858 |
|
|
|
8.9 |
% |
|
|
5.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
September 30, |
|
|
2008 |
|
2007 |
Gross Profit as a % of revenue |
|
|
|
|
|
|
|
|
Public Services |
|
|
19.3 |
% |
|
|
20.2 |
% |
Commercial Services |
|
|
16.4 |
% |
|
|
20.7 |
% |
Financial Services |
|
|
21.7 |
% |
|
|
19.4 |
% |
EMEA |
|
|
22.9 |
% |
|
|
16.8 |
% |
Asia Pacific |
|
|
28.5 |
% |
|
|
25.6 |
% |
Latin America |
|
|
21.6 |
% |
|
|
(8.6 |
%) |
Corporate/Other |
|
|
n/m |
|
|
|
n/m |
|
Total |
|
|
18.0 |
% |
|
|
15.4 |
% |
Changes in gross profit by segment were as follows:
|
|
|
Public Services gross profit decreased in the third quarter of 2008 due primarily to
decreases in revenue, particularly in our SLED and Emerging Markets sectors, and increases
in professional compensation. The increase in professional compensation is primarily
attributable to costs associated with two loss contracts in our SLED sector. |
|
|
|
|
Commercial Services gross profit decreased in the third quarter of 2008 as significant
revenue declines were only partially offset by significant reductions in professional
compensation. The reduction in professional compensation was primarily due to actions taken
in 2007, and early 2008, to align our staffing levels to business demands. |
|
|
|
|
Financial Services gross profit decreased in the third quarter of 2008 as significant
revenue decreases were mostly offset by significant decreases in professional compensation.
The reduction in professional compensation was due primarily to the effects of continuing
headcount reductions. |
|
|
|
|
EMEA gross profit increased in the third quarter of 2008 due to higher profitability in
Germany, a decline in other costs of service, as well as the favorable impact of the
strengthening of foreign currencies, specifically the Euro, against the U.S. dollar. The
decline in other costs of service was driven primarily by an asset impairment recorded in
the third quarter of 2007 as well as cost
cutting measures taken in 2008. |
|
|
|
|
Asia Pacific gross profit decreased in the third quarter of 2008 due primarily to a
decline in revenue partially offset by declines in other direct contract expenses and
professional compensation expense. The contractions in our Australian and New Zealand
businesses were the primary contributors to lower professional compensation costs while
reductions in our J-SOX work in Japan contributed to the decline in our other direct
contract expenses. |
|
|
|
|
Latin America gross profit increased in the third quarter of 2008 due primarily to
increases in revenue as well as reductions in professional compensation. |
|
|
|
|
Corporate/Other consists primarily of rent expense and other facilities related charges,
which decreased in the third quarter of 2008 primarily due to lower expense adjustments to
lease and facilities restructuring charges, as discussed above. |
Selling, General and Administrative Expenses. We incurred SG&A expenses of $139.9 million in
the three months ended September 30, 2008, representing a decrease of $20.4 million, or 12.7%, from
SG&A expenses of $160.3 million in the three months ended September 30, 2007. SG&A expenses as a
percentage of revenue decreased to 17.5% in the three months ended September 30, 2008 from 18.6% in
the three months ended September 30, 2007. The decrease was primarily due to declines in the use of
external service providers to assist us in the closing of our financial statements and partially
offset by increases in expenses associated with our pursuit of strategic alternatives as discussed
below.
Interest Income. Interest income was $2.1 million and $3.1 million in the three months ended
September 30, 2008 and 2007, respectively. Interest income is earned primarily from cash and cash
equivalents, including money-market investments. The decrease in interest income was due to
declines in the market rates and lower average cash balances.
27
Interest Expense. Interest expense was $15.9 million and $17.5 million in the three months
ended September 30, 2008 and 2007, respectively. Interest expense is attributable to our debt
obligations, consisting of interest due along with amortization of loan costs and loan discounts.
The decrease in interest expense was due to lower rates incurred on our 2007 Credit Facility which
was entered into in May 2007, as amended and restated in June 2007.
Other Expense, net. Other expense, net was $16.9 million and $5.4 million in the three months
ended September 30, 2008 and 2007, respectively. The increase in other expense was largely driven
by foreign exchange losses recognized primarily on short term intercompany borrowings, which are
denominated in foreign currency. These losses were largely unrealized and driven by fluctuations in
currency exchange rates.
Income Tax Expense. We
incurred income tax expense of $4.4 million and $20.5 million in the three months ended
September 30, 2008 and 2007, respectively. The decrease in income taxes is primarily attributable to a decrease in
valuation allowances related to certain foreign tax assets and additional tax refunds receivable
identified in the quarter.
Net
Loss. For the three months ended September 30, 2008, we realized a net loss of $30.5
million, or a loss of $0.14 per share compared to a net loss of $68.0 million, or a loss of $0.32
per share for the three months ended September 30, 2007.
Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007
Revenue. Our revenue for the nine months ended September 30, 2008 was $2,517.7 million, a
decrease of $85.8 million, or 3.3%, over revenue of $2,603.5 million for the nine months ended
September 30, 2007. The following tables present certain revenue information and performance
metrics for each of our reportable segments for the nine months ended September 30, 2008 and 2007.
Amounts are in thousands, except percentages.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent |
|
|
Percent |
|
|
|
Nine Months Ended |
|
|
|
|
|
|
Increase |
|
|
Increase |
|
|
|
September 30, |
|
|
|
|
|
|
(Decrease) |
|
|
(Decrease) |
|
|
|
2008 |
|
|
2007 |
|
|
US$ Change |
|
|
US$ |
|
|
Local Currency |
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public Services |
|
$ |
1,075,929 |
|
|
$ |
1,084,080 |
|
|
$ |
(8,151 |
) |
|
|
(0.8 |
%) |
|
|
(0.8 |
%) |
Commercial Services |
|
|
311,183 |
|
|
|
401,638 |
|
|
|
(90,455 |
) |
|
|
(22.5 |
%) |
|
|
(22.5 |
%) |
Financial Services |
|
|
144,681 |
|
|
|
209,378 |
|
|
|
(64,697 |
) |
|
|
(30.9 |
%) |
|
|
(30.9 |
%) |
EMEA |
|
|
647,328 |
|
|
|
570,111 |
|
|
|
77,217 |
|
|
|
13.5 |
% |
|
|
0.9 |
% |
Asia Pacific |
|
|
252,656 |
|
|
|
267,161 |
|
|
|
(14,505 |
) |
|
|
(5.4 |
%) |
|
|
(14.4 |
%) |
Latin America |
|
|
85,145 |
|
|
|
67,787 |
|
|
|
17,358 |
|
|
|
25.6 |
% |
|
|
11.4 |
% |
Corporate/Other |
|
|
809 |
|
|
|
3,340 |
|
|
|
(2,531 |
) |
|
|
(75.8 |
%) |
|
|
n/m |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,517,731 |
|
|
$ |
2,603,495 |
|
|
$ |
(85,764 |
) |
|
|
(3.3 |
%) |
|
|
(7.5 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public Services revenue for the nine months ended September 30, 2008 decreased due to
declines in the Healthcare and SLED sectors, offset by increases in the Defense, Civilian
and Emerging Markets sectors. The declines in the Healthcare and SLED sectors were primarily
due to a reduced demand for services combined with reductions in revenue due to performance
issues on certain SLED contracts. Revenue growth in the Civilian sector was due to increased
activity with existing clients as well as increases in billing rates for our services.
Revenue growth in the Emerging Markets sector was due to an increase in services provided to
our clients, primarily through the use of subcontractors. Revenue growth in the Defense
sector was due to increased demand for our services and the recognition of $7.7 million in
revenue during the first quarter of 2008 relating to work performed in earlier periods for
which contract contingencies were resolved in the current period. |
|
|
|
|
Commercial Services revenue decreased significantly during the nine months ended
September 30, 2008 due to declines in all sectors. Revenue decreases were attributable to
reduced demand for our services and reductions in the effective rates charged for our
services. |
|
|
|
|
Financial Services revenue decreased significantly during the nine months ended September
30, 2008 due to revenue decreases in the Banking, Services and Global Markets sectors.
Revenue decreases were attributable, in part, to lower levels of contract signings since the
fourth quarter of 2007. These decreases were due to a combination of factors, including our
devoting |
28
|
|
|
significant efforts during the first quarter of this year to reducing headcount and
stabilizing our business model and reduced demand for our services, as many clients deferred
new initiatives in the wake of the crisis in the financial markets and became increasingly
sensitive to negative perceptions regarding our financial stability. These revenue declines
were only slightly offset by increased revenue in the Insurance sector driven by additional
efforts on a small number of large client engagements. |
|
|
|
|
EMEA revenue increased during the nine months ended September 30, 2008 primarily as a
result of the favorable impact of the strengthening of foreign currencies, specifically the
Euro, against the U.S. dollar. The currency impact further enhanced meaningful revenue
growth in Germany and France, and partially offset the effects of revenue decreases in the
United Kingdom, Spain, Sweden and Norway. The increase in revenues in Germany and France
resulted from both increased billing rates and increased demand for our services. Revenues
in Spain continue to decline as a result of our strategic decision to reduce our activities
in this country. The revenues in the United Kingdom, Sweden and Norway declined due to the
loss of key personnel in the early part of 2008 in these countries. |
|
|
|
|
Asia Pacific revenue decreased during the nine months ended September 30, 2008 primarily
as a result of declines in Australia and New Zealand, and, to a significantly lesser extent,
Japan. The revenue declines were partially offset by the favorable impact of the
strengthening of foreign currencies against the U.S. dollar, particularly the Japanese yen.
In Australia, we experienced significant attrition and lost a number of key employees,
including managing directors in early 2008, which led to a substantial reduction in our
business and lower revenues in the nine months ended September 30, 2008. In addition, our
decision to reduce our presence in New Zealand in late 2007 resulted in significantly less
revenue year to date. A decline in revenue in Japan, due in part to the impact of fewer
projects related to J-SOX, also contributed to the overall decline in revenue. |
|
|
|
|
Latin America revenue increased during the nine months ended September 30, 2008 primarily
as a result of revenue increases in Costa Rica and Brazil, as well as the favorable impact
of the strengthening of the Brazilian Real against the U.S. dollar, partially offset by
revenue declines in Mexico. |
|
|
|
|
Corporate/Other: Our Corporate/Other segment does not contribute significantly to our
revenue. |
Gross Profit. During the nine months ended September 30, 2008, although our revenue decreased
$85.8 million, total costs of service decreased $185.2 million when compared to the nine months
ended September 30, 2007, resulting in a net increase in gross profit of $99.5 million, or 24.4%.
Gross profit as a percentage of revenue increased to 20.1% for the nine months ended September 30,
2008 from 15.6% for the nine months ended September 30, 2007. The change in gross profit for the
nine months ended September 30, 2008 compared to the nine months ended September 30, 2007 resulted
primarily from the following:
|
|
|
Professional compensation expense as a percentage of revenue decreased to 51.1% for the
nine months ended September 30, 2008, compared to 53.3% for the nine months ended September
30, 2007. We experienced a net decrease in professional compensation expense of $100.7
million, or 7.3%, to $1,285.9 million for the nine months ended September 30, 2008 from
$1,386.6 million for the nine months ended September 30, 2007. The decrease in professional
compensation expense over the first nine months of 2007 was primarily due to reductions in
salaries and fringe expenses of $34.7 million and stock based compensation expense of $27.6
million as well as the reversal of accruals associated with global tax equalization expense
of $29.2 million, and declines in bonuses of approximately $17.0 million.
The decline in stock based compensation was primarily driven by the revision of our forfeiture rate applied to
PSUs in the second quarter of 2008. |
|
|
|
|
Other direct contract expenses as a percentage of revenue decreased to 20.8% for the nine
months ended September 30, 2008 compared to 22.6% for the nine months ended September 30,
2007. We experienced a net decrease in other direct contract expenses of $65.8 million, or
11.2%, to $522.6 million for the nine months ended September 30, 2008 from $588.4 million
for the nine months ended September 30, 2007. The decrease was driven primarily by declines
in subcontractor expense and reimbursable travel expenses. |
|
|
|
|
Other costs of service as a percentage of revenue decreased to 8.3% for the nine months
ended September 30, 2008 from 8.5% for the nine months ended September 30, 2007. We
experienced a net decrease in other costs of service of $12.1 million, or 5.5%, to $208.9
million for the nine months ended September 30, 2008 from $221.0 million for the nine months
ended September 30, 2007. The decrease was primarily due to declines in recruiting expenses
and real estate related expenses, offset by increases in costs associated with practice
support. |
|
|
|
|
During the nine months ended September 30, 2008, we recorded, within the Corporate/Other
operating segment, a restructuring credit of $6.3 million related to lease, facilities and
other exit activities, compared with a $0.3 million charge during the nine months ended
September 30, 2007. These credits related primarily to the reduction of the fair value of
future lease obligations |
29
|
|
|
associated with office space that we will no longer be using, primarily within the EMEA and
North America regions. The restructuring charge for the nine months ended September 30, 2007
represents a net increase in lease restructuring accruals, due to changes in sublease income
assumptions associated with vacated leased facilities. |
Gross Profit by Segment. The following tables present certain gross profit and margin
information and performance metrics for each of our reportable segments for the nine months ended
September 30, 2008 and 2007. Amounts are in thousands, except percentages.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent |
|
|
Percent |
|
|
|
Nine Months Ended |
|
|
|
|
|
|
Increase |
|
|
Increase |
|
|
|
September 30, |
|
|
|
|
|
|
(Decrease) |
|
|
(Decrease) |
|
|
|
2008 |
|
|
2007 |
|
|
US$ Change |
|
|
US$ |
|
|
Local Currency |
|
Gross Profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public Services |
|
$ |
248,062 |
|
|
$ |
219,505 |
|
|
$ |
28,557 |
|
|
|
13.0 |
% |
|
|
13.0 |
% |
Commercial Services |
|
|
59,486 |
|
|
|
78,309 |
|
|
|
(18,823 |
) |
|
|
(24.0 |
%) |
|
|
(24.0 |
%) |
Financial Services |
|
|
31,394 |
|
|
|
32,667 |
|
|
|
(1,273 |
) |
|
|
(3.9 |
%) |
|
|
(3.9 |
%) |
EMEA |
|
|
142,390 |
|
|
|
113,191 |
|
|
|
29,199 |
|
|
|
25.8 |
% |
|
|
11.4 |
% |
Asia Pacific |
|
|
66,349 |
|
|
|
61,015 |
|
|
|
5,334 |
|
|
|
8.7 |
% |
|
|
(1.5 |
%) |
Latin America |
|
|
15,923 |
|
|
|
(4,127 |
) |
|
|
20,050 |
|
|
|
485.8 |
% |
|
|
445.2 |
% |
Corporate/Other |
|
|
(56,926 |
) |
|
|
(93,349 |
) |
|
|
36,423 |
|
|
|
39.0 |
% |
|
|
n/m |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
506,678 |
|
|
$ |
407,211 |
|
|
$ |
99,467 |
|
|
|
24.4 |
% |
|
|
18.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
September 30, |
|
|
2008 |
|
2007 |
Gross Profit as a % of revenue |
|
|
|
|
|
|
|
|
Public Services |
|
|
23.1 |
% |
|
|
20.2 |
% |
Commercial Services |
|
|
19.1 |
% |
|
|
19.5 |
% |
Financial Services |
|
|
21.7 |
% |
|
|
15.6 |
% |
EMEA |
|
|
22.0 |
% |
|
|
19.9 |
% |
Asia Pacific |
|
|
26.3 |
% |
|
|
22.8 |
% |
Latin America |
|
|
18.7 |
% |
|
|
(6.1 |
%) |
Corporate/Other |
|
|
n/m |
|
|
|
n/m |
|
Total |
|
|
20.1 |
% |
|
|
15.6 |
% |
Changes in gross profit by segment were as follows:
|
|
|
Public Services gross profit increased in the nine months ended September 30, 2008
primarily due to improved results in the Defense and Civilian sectors. Gross profit
improvements were also attributable to the significant decrease in subcontractor expenses,
reversal of costs associated with global tax equalization, a decrease in stock compensation
expense, and the recognition of $7.7 million in revenue during the first quarter of 2008
relating to work performed in earlier periods for which contract contingencies were resolved in the current period. |
|
|
|
|
Commercial Services gross profit decreased in the nine months ended September 30, 2008.
The impact of significant revenue declines in most sectors was offset in part by significant
reductions in professional compensation, and, to a lesser extent, reductions in other direct
contract expenses. The reduction in professional compensation was due to the effects of
continuing headcount reductions, including reductions among additional internal personnel
allocated to this segment, the second quarter reversal of costs associated with global tax
equalization, and, to a lesser extent, reductions in stock based compensation. |
|
|
|
|
Financial Services gross profit decreased in the nine months ended September 30, 2008 as
the impact of significant revenue decreases were largely offset by significant decreases in
professional compensation, and, to a lesser extent, reductions in other direct contract
expenses. The reduction in professional compensation was due primarily to the effects of
continuing headcount reductions, second quarter 2008 reductions in stock based compensation,
and, to a lesser extent, accrual reversals for costs associated with global tax
equalization. |
|
|
|
|
EMEA gross profit increased in the nine months ended September 30, 2008 due to the
favorable impact of the strengthening of the Euro against the U.S. dollar, as well as
increased profitability, primarily in Germany, as well as a decline in other costs of
services, which were driven primarily by an asset impairment recorded in the third quarter
of 2007. |
30
|
|
|
Asia Pacific gross profit increased in the nine months ended September 30, 2008 due
primarily to the favorable impact of the strengthening of foreign currencies against the
U.S. dollar, particularly the Japanese yen. Significant declines in revenue, particularly in
Australia and New Zealand, were substantially offset by lower professional compensation and
other direct contract expenses. This was due to the lower volume of work in Australia and
New Zealand, lower use of sub-contracted labor in Japan and a reduction in cost accruals
related to loss contracts. |
|
|
|
|
Latin America gross profit increased in the nine months ended September 30, 2008 due to
increases in revenue as well as reductions in professional compensation. |
|
|
|
|
Corporate/Other consists primarily of rent expense and other facilities related charges,
which decreased in the nine months ended September 30, 2008 primarily due to lower
facilities costs as a result of restructuring actions taken in 2007. Additionally we
recorded a larger credit during the nine months ended September 30, 2008 for lease and
facilities restructuring charges discussed above, when compared with the nine months ended
September 30, 2007. |
Selling, General and Administrative Expenses. We incurred SG&A expenses of $423.5 million in
the nine months ended September 30, 2008, a decrease of $88.8 million, or 17.3%, from SG&A expenses
of $512.3 million in the nine months ended September 30, 2007. SG&A expenses as a percentage of
gross revenue decreased to 16.8% in the nine months ended September 30, 2008 from 19.7% in the nine
months ended September 30, 2007. The decrease was primarily due to declines in the use of labor
related to the closing of our financial statements, reductions in stock based compensation expense
as discussed above, and reductions in marketing expenses associated with a single large campaign.
The decreases were partially offset by increases in expenses associated with our pursuit of
strategic alternatives as discussed below.
Interest Income. Interest income was $6.6 million and $7.5 million in the nine months ended
September 30, 2008 and 2007, respectively. Interest income is earned primarily from cash and cash
equivalents, including money-market investments. The decrease in interest income was due to lower
average cash balances in the nine months ended September 30, 2008, as well as declines in market
rates on those investments during the three months ended September 30, 2008.
Interest Expense. Interest expense was $47.9 million and $44.2 million in the nine months
ended September 30, 2008 and 2007, 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 the 2007 Credit Facility which was entered into in May
2007, as amended and restated in June 2007, resulting in a full nine months of interest expense
recognized in the nine months ended September 30, 2008, compared to only six months for the same
period in 2007.
Other Expense, net. Other expense, net was $13.8 million and $5.7 million in the nine months
ended September 30, 2008 and 2007, respectively. The activity in each period primarily consist of
unrealized foreign currency exchange losses on our short term intercompany borrowings denominated
in currencies other than the U.S. dollar.
Income
Tax Expense. We incurred income tax expense of $63.3 million and $46.2 million in the
nine months ended September 30, 2008 and 2007, respectively. The increase in income tax expense is
primarily related to $18.9 million incurred in connection with our foreign corporate entity
restructuring conducted during the second quarter of 2008. Partially offsetting this increase were
decreases in valuation allowances related to certain foreign tax assets and additional tax refunds
receivable identified during the third quarter of 2008.
Net
Loss. For the nine months ended September 30, 2008, we realized a net loss of $35.2
million, or a loss of $0.16 per share compared to a net loss of $193.7 million, or a loss of $0.90
per share for the nine months ended September 30, 2007.
31
Liquidity and Capital Resources
The following table summarizes the cash flow statements for the nine months ended September
30, 2008 and 2007 (amounts are in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
|
|
|
|
|
|
|
|
2007 to 2008 |
|
|
|
2008 |
|
|
2007 |
|
|
Change |
|
Net cash provided by (used in): |
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities |
|
$ |
(100,557 |
) |
|
$ |
(221,951 |
) |
|
$ |
121,394 |
|
Investing activities |
|
|
(33,233 |
) |
|
|
(31,848 |
) |
|
|
(1,385 |
) |
Financing activities |
|
|
205 |
|
|
|
282,156 |
|
|
|
(281,951 |
) |
Effect of exchange rate changes on cash and cash equivalents |
|
|
(3,182 |
) |
|
|
10,203 |
|
|
|
(13,385 |
) |
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents |
|
$ |
(136,767 |
) |
|
$ |
38,560 |
|
|
$ |
(175,327 |
) |
|
|
|
|
|
|
|
|
|
|
Operating Activities. Net cash used in operating activities during the nine months ended
September 30, 2008 declined by $121.4 million as compared to the nine months ended September 30,
2007. This improvement was primarily attributable to an increase in operating income of $188.2
million during the nine months ended September 30, 2008 and lower bonus payments, offset by higher
payments of taxes (net of refunds) for certain of our profitable operating entities and severance
payments.
Investing Activities. Net cash used in investing activities during the nine months ended
September 30, 2008 increased by $1.4 million from the nine months ended September 30, 2007 due
primarily to an increase in restricted cash.
Financing Activities. Net cash provided by financing activities during the nine months ended
September 30, 2008 decreased by $282.0 million from the nine months ended September 30, 2007 due to
the $284.0 million of cash generated from the completion of the 2007 Credit Facility in June of
2007.
During the nine months ended September 30, 2008, foreign exchange rates have shifted,
particularly with the recent strengthening of the U.S. dollar. The net effect of the strengthening
U.S. dollar has negatively affected our cash and cash equivalents year-to-date, as evidenced by the
2007 to 2008 change. Should the U.S. dollar continue to strengthen, we will experience further
reductions in cash and cash equivalents with respect to the cash and cash equivalents generated by
our non-U.S. operations.
Additional Cash Flow Information
At September 30, 2008, we had cash and cash equivalents of $330.0 million compared with cash
and cash equivalents of $428.1 million at September 30, 2007. Our cash and cash equivalents for
2007 were significantly affected by the receipt of $284.0 million in net proceeds from the
completion of our 2007 Credit Facility in June, 2007. We were able to reduce cash used in
operation by $121.4 million in the first nine months of fiscal 2008. Notwithstanding these
operational improvements, as in past years, in 2008, we have used significantly more cash in our
operations in the first half of the year. Historically, we have paid certain annual payment
obligations in the first half of the year, such as certain bonuses, insurance premiums and taxes
for our profitable operating entities. While we again made significant payments of these amounts
in the first half of 2008, it is now likely that we will also continue to make significant payments
of these amounts throughout the remainder of 2008. There are various reasons for the amounts of
these payments continuing at higher than historical averages in the second half of the year. We
paid approximately $22.2 million of accrued bonuses in the third quarter, one quarter later than
when these amounts have traditionally been paid. We also recently made a decision that will result
in paying certain annual insurance premiums on a semi-annual basis. As a result, we now expect to
make additional insurance premium payments in December, 2008. Also, as certain of our profitable
foreign subsidiaries have fully utilized previously existing net operating loss carryforwards, our
cash tax payments have begun to increase in 2008 in these countries and may increase further if
profitability in these countries continues to increase.
32
As evidenced by the following table, we have produced year over year improvements in our DSOs
for each quarter of this fiscal year.
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
First quarter |
|
|
85 |
|
|
|
91 |
|
Second quarter |
|
|
87 |
|
|
|
95 |
|
Third quarter |
|
|
78 |
|
|
|
89 |
|
Fourth quarter |
|
|
N/A |
|
|
|
77 |
|
While significant, the combination of these year to date DSO improvements were offset by
significant payments made in the first nine months of 2008, which resulted in a net decrease in
cash and cash equivalents of $136.8 million for the first nine months of 2008.
We are not likely to achieve our previously forecasted internal estimates for cash sources and
uses for 2008. While we continue to expect significant improvement in our DSOs for the remainder of
2008 and make progress toward reversing our historical experience of rising
DSOs in the first six months of 2009, these improvements alone likely will not be sufficient to generate
adequate cash to operate our business and service our debt obligations throughout 2009. Consequently, we are
initiating a number of additional operational and alternative strategies to attempt to maximize our
cash and cash equivalents over the near term. In the fourth quarter of 2008 we will try to
accelerate efforts to exit countries and business segments that are not profitable and reduce the
costs associated with those lines of business. If necessary and in order to conserve cash, we are
also contemplating deferring the transition to our new North American financial system later in 2009 to help
avoid incurring any higher-than-expected transition costs or risk cash shortfalls that might arise from our inability to timely
invoice and collect for all work performed during the first quarter of 2009. It is increasingly
likely that we will need to execute on one
or more of the alternative strategies, as described below, to be able to obtain adequate cash to
operate our business and service our debt obligations, including up to $200.0 million of our 5.00%
Senior Convertible Debentures that can be put to us for payment on April 15, 2009. However, we can
give no assurance we can successfully execute any of these strategies and our ability to do so
could be significantly impacted by numerous factors, including changes in the economic or business
environment, financial market volatility, the performance of our business, and the terms and
conditions in our various bank financing and indenture agreements.
Update on Analysis of Alternative Strategies
As
previously reported, we continue to conduct a detailed analysis of our current capital structure
with our financial advisors, Greenhill & Co., LLC (Greenhill), to explore ways to improve our
capital structure and liquidity.
In early January 2008, we asked Greenhill to assist us in developing plans and advising us
with respect to reducing or restructuring our outstanding indebtedness through various strategic
and business alternatives for the Company, including a merger or sale of the Company as a whole, a
sale of all or substantially all of the assets of the Company or the sale by the Company of any of
its six principal business units.
The recent and
sudden downturns in global financial and credit markets have created significant additional
challenges to completing one or more sales by causing interested parties to withdraw from the
process, submit offers at prices that do not achieve our financial objectives
and/or place new financing conditions on any transaction. The process continues to generate
additional interest from potential strategic and financial buyers, including several that have
previously expressed interest in the Company or certain of its businesses. Discussions and due
diligence are continuing. We hope these discussions can be completed in the near future and an
agreement reached that would generate net cash proceeds sufficient to significantly reduce our
outstanding indebtedness. At present, we can give no assurance that a sale of all or a portion of
the Companys business can be completed in the near term at or near current market prices or at
all.
33
Given that we have been unable to yet reach agreement regarding a sale of all or a portion of
the Companys business, our Board of Directors recently expanded Greenhills responsibilities and
directed them to explore the feasibility of restructuring all or selected series of our convertible
debt or exchanging existing convertible debt for equity. At present, we have no indication of what,
if any, terms may be acceptable for any refinancing, renegotiation or exchange and we can give no
assurance that any of our existing convertible debt can be restructured or exchanged for equity in
the near term or at all.
Our Board of Directors also recently approved and recommended to our shareholders a proposal
that, if approved at the Companys next Annual Meeting of Stockholders on December 5, 2008, will
amend the Companys Amended and Restated Certificate of Incorporation to effect a reverse stock
split of our common shares at a ratio of between one-for-ten to one-for-fifty at the Board of
Directors discretion prior to January 16, 2009. While the primary purpose of this amendment is
intended to assist in remedying the Companys existing noncompliance with the New York Stock
Exchanges continued listing standard relating to minimum average share price, approval of the
proposal could also provide us with additional flexibility in restructuring our existing
convertible debt. For additional information, see our proxy statement for the 2008 Annual Meeting
of Stockholders, Proposal No. 3 Approval of an Amendment to the Amended and Restated Certificate
of Incorporation to Effect a Reverse Stock Split at a Ratio within the Range of One-for-Ten to
One-for-Fifty at any Time Prior to January 16, 2009 at the Discretion of Our Board Certain Risk
Factors Associated with the Reverse Stock Split.
We remain committed to proactively pursuing all strategic alternatives that could be in the
best interests of our shareholders, clients, creditors and employees.
For additional information regarding various risk factors that could affect our business,
outlook, liquidity, shares of stock or other matters, see Item 1A, Risk Factors.
2007 Credit Facility Prepayments
On May 18, 2007, we entered into a $400.0 million senior secured credit facility and on June
1, 2007, we amended and restated the credit facility to increase the aggregate commitments under
the facility from $400.0 million to $500.0 million. The 2007 Credit Facility consists of: (1) term
loans in an aggregate principal amount of $300.0 million (the Loans) and (2) a letter of credit
facility in an aggregate face amount at any time outstanding not to exceed $200.0 million (the LC
Facility). Our obligations under the 2007 Credit Facility are secured by first priority liens and
security interests in substantially all of our assets and most of our material domestic
subsidiaries, as guarantors of such obligations (including a pledge of 65% of the stock of certain
of our foreign subsidiaries), subject to certain exceptions. For additional information regarding
the 2007 Credit Facility, see Item 7, Managements Discussion and Analysis of Financial Condition
and Results of Operations Liquidity and Capital Resources 2007 Credit Facility, of our 2007
Form 10-K.
The 2007 Credit Facility requires us to make prepayments of outstanding Loans and cash
collateralize outstanding letters of credit in an amount equal to (i) 100% of the net proceeds
received from property or asset sales (subject to exceptions), (ii) 100% of the net proceeds
received from the issuance or incurrence of additional debt (subject to exceptions), (iii) 100% of
all casualty and condemnation proceeds (subject to exceptions), (iv) 50% of the net proceeds
received from the issuance of equity (subject to exceptions) and (v) for each fiscal year ending on
or after December 31, 2008, the difference between (a) 50% of the Excess Cash Flow (as defined in
the 2007 Credit Facility) and (b) any voluntary prepayment of the Loans or the LC Facility (subject
to exceptions).
Repurchase of Debentures at the Option of the Holders
The holders of our 5.00% Senior Convertible Debentures have the option to require us to repay
all or any portion of such debentures on certain dates at their face amount (plus accrued interest
for which the record date has not passed). The first such date is April 15, 2009, and it is
possible that we may be required to fund the repayment of the full $200 million face amount of
these debentures (plus such interest) on that date. As a result of the repurchase feature in April
2009, the Company has reclassified the outstanding principal and unpaid interest related to the
$200.0 million 5.00% Senior Convertible Subordinated Debentures from the long-term portion of notes
payable to the current portion of notes payable within the Consolidated Balance Sheet. In addition,
the holders of our $250.0 million 2.50% Series A Convertible Subordinated Debentures due 2024 and
our $200.0 million 2.75% Series B Convertible Subordinated Debentures due 2024 have an option to
require us to repurchase all or a portion of these debentures beginning on December 15, 2011 and
December 15, 2014, respectively. For additional information regarding our debentures, see Item 1A,
Risk Factors Risks that Relate to Our Liquidity, and Note 6, Notes Payable, of the Notes to
Consolidated Financial Statements of our 2007 Form 10-K.
34
The 2007 Credit Facility contains a restrictive covenant (Section 6.10(a)) that limits our
ability to make any voluntary or optional payment or prepayment on or redemption or acquisition
for value of these debentures (emphasis added). Our contractual obligation to repay these
debentures upon the exercise by a holder of its right to require us to do so pursuant to the
indenture is an affirmative mandatory obligation, and is not voluntary or optional on our part.
This restrictive covenant therefore does not prohibit us from honoring our obligation to repay the
debentures. By comparison, our prior discontinued credit facility made no such distinction, flatly
stating that we could not make prepayment on, or redemption or acquisition for value of, or any
prepayment or redemption as a result of any asset sale, change of control, termination of trading
or similar event of any of our debentures.
If one or more holders require us to repay the debentures and we have sufficient cash on hand
to make payment, we believe nothing in the credit agreement prohibits us from taking this action.
Off Balance Sheet Arrangements
In the normal course of business, we have indemnified third parties and have commitments and
guarantees under which we may be required to make payments in certain circumstances. These
indemnities, commitments and guarantees include: indemnities to third parties in connection with
surety bonds; indemnities to various lessors in connection with facility leases; indemnities to
customers related to intellectual property and performance of services subcontracted to other
providers; and certain indemnities to directors and officers. The duration of these indemnities,
commitments and guarantees varies, and in certain cases, is indefinite. Certain of these
indemnities, commitments and guarantees do not provide for any limitation of the maximum potential
future payments we could be obligated to make. It is not possible to predict the maximum potential
amount of future payments under these indemnification agreements due to the conditional nature of
our obligations and the unique facts of each particular agreement. Historically, we have not made
any payments under these agreements that have been material individually or in the aggregate. As of
September 30, 2008, we were not aware of any obligations under such indemnification agreements that
would require material payments.
From time to time, we enter into contracts with clients whereby we have joint and several
liability with other participants and/or third parties providing related services and products to
clients. Under these arrangements, we and other parties may assume some responsibility to the
client or a third party for the performance of others under the terms and conditions of the
contract with or for the benefit of the client or in relation to the performance of certain
contractual obligations. In some arrangements, the extent of our obligations for the performance of
others is not expressly specified. Certain of these guarantees do not provide for any limitation of
the maximum potential future payments which we could be obligated to make. To date, we have not
been required to make any payments under any of the contracts described in this paragraph.
From time to time we enter into arrangements with suppliers for the purchase of goods or
services, principally software and telecommunications services, that are enforceable and legally
binding and that specify all significant terms, including: fixed or minimum quantities to be
purchased; fixed, minimum or variable price provisions; and the approximate timing of the
transaction. Additionally, from time to time, our operating segments, particularly our Public
Services segment, enter into agreements with vendors in the normal course of business that support
existing contracts with our clients (client vendor agreements). The vast majority of these client
vendor agreements involve subcontracts for services to be provided by third-party vendors. These
agreements may be in the form of teaming agreements or may be a client requirement, and can span
multiple years, depending on the duration of the underlying arrangement with our clients. We are
liable for payments to vendors under these client vendor agreements. We are unable to cancel some
of these client vendor agreements unless the related agreement with our client is terminated and/or
upon payment of a penalty. However, our clients are generally obligated by contract to reimburse
us, directly or indirectly, for payments we make to vendors under these agreements. We are not
aware of any payments we have been required to make to vendors after a related client contract has
been terminated.
Recently Issued Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations, which replaces
SFAS No. 141, Business Combinations. This Statement establishes principles and requirements for
how an acquirer: recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed and any noncontrolling interest in the acquiree; recognizes and
measures the goodwill acquired in the business combination or a gain from a bargain purchase; and
determines what information to disclose to enable users of the financial statements to evaluate the
nature and financial effects of the business combination. This Statement applies prospectively to
business combinations for which the acquisition date is on or after the beginning of the first
annual reporting period beginning on or after December 15, 2008. We do not expect this Statement to
have a significant impact on our Consolidated Financial Statements.
35
In May 2008, the FASB issued FASB Staff Position (FSP) Accounting Principles Board Opinion No. 14-1,
Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including
Partial Cash Settlement) (FSP APB 14-1). FSP APB 14-1 requires issuers of convertible debt
instruments that may be settled in cash upon conversion (including partial cash settlement) to
separately account for the liability and equity components in a manner that will reflect the
issuers nonconvertible debt borrowing rate when interest expense is recognized in subsequent
periods. The provisions of FSP APB 14-1 shall be applied retrospectively to all periods presented,
effective for the fiscal year beginning January 1, 2009. We are continuing to evaluate the impact
of the provisions of FSP APB 14-1; however, at this time management believes that the incremental
interest expense to be recognized as a result of the adoption will be material.
In October 2008, the FASB issued FSP SFAS No. 157-3, Determining the Fair Value of a Financial
Asset When the Market for That Asset Is Not Active (FSP 157-3). FSP 157-3 clarifies the
application of SFAS 157 in a market that is not active and provides an example to illustrate key
considerations in determining the fair value of a financial asset when the market for that
financial asset is not active. FSP 157-3 became effective immediately, including prior periods for
which financial statements have not been issued. Therefore, we have adopted the provisions of FSP
157-3 in our financial statements for the three months ended September 30, 2008. The adoption did
not have a material impact on our consolidated financial position, results of operations, or cash
flows.
PART I, ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of September 30, 2008, there have been no material changes to our market risk exposure
disclosed in our 2007 Form 10-K. For a discussion of our market risk associated with our market
sensitive financial instruments as of December 31, 2007, see Quantitative and Qualitative
Disclosures About Market Risk in Part II, Item 7A, of our 2007 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 SECs rules and forms,
and that such information is accumulated and communicated to our management, including our Chief
Executive Officer and our Chief Financial Officer, to allow timely decisions regarding required
disclosures. Based on the evaluation and the identification as of September 30, 2008, 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, 2007, the Companys disclosure controls
and procedures were not effective.
Because of the material weaknesses identified in our evaluation of internal control over
financial reporting as of December 31, 2007, which have not been remediated as of September 30,
2008, we performed additional substantive procedures so that our consolidated financial statements
as of and for the three and nine month periods ended September 30, 2008, are fairly stated in all
material respects in accordance with 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 errors 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. Management continues to engage in
substantial efforts to remediate the material weaknesses in our internal control over financial
reporting.
36
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:
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Claims and investigations arising from our continuing inability to timely file periodic
reports under the Exchange Act, and the restatement of our financial statements for certain
prior periods to correct accounting errors and departures from generally accepted accounting
principles for those years; |
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Claims and investigations being conducted by agencies or officers of the U.S. Federal
government and arising in connection with our provision of services under contracts with
agencies of the U.S. Federal government; and |
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Claims made in the ordinary course of business by clients seeking damages for alleged
breaches of contract or failure of performance, by current or former employees seeking
damages for alleged acts of wrongful termination or discrimination, and by creditors or
other vendors alleging defaults in payment or performance. |
For a description of these items, see our 2007 Form 10-K and subsequent periodic reports filed
with the SEC.
ITEM 1A. RISK FACTORS
For a discussion of the risk factors associated with our business, see below and the Risk
Factors in Part I, Item 1A of our 2007 Form 10-K and in Part II, Item 1A of our Quarterly Report
on Form 10-Q for the Quarterly Period Ended June 30, 2008.
Risks that Relate to Our Liquidity
Our cash resources might not be sufficient to meet our expected cash needs over time. Beginning in
early 2009, we will begin to become subject to significant required payments under our 5.00% Senior
Convertible Debentures and our 2007 Credit Facility. We are increasingly concerned that our cash
balances, together with cash generated from operating activities and borrowings previously made
under our 2007 Credit Facility, may not be sufficient to provide adequate funds for our anticipated
internal growth, operating needs and debt service obligations during 2009.
We have experienced recurring net losses. We have generated positive cash flows from operating
activities in only six quarters since the beginning of 2005. Historically, we have often failed,
sometimes significantly, to achieve managements periodic operating budgets and cash forecasts and
we are not likely to achieve our previously forecasted internal estimates for cash sources and uses
for 2008. Our ability to make scheduled payments or prepayments on our debt and other financial
obligations will depend on our future financial and operating performance. Our financial and
operating performance is subject to prevailing economic and industry conditions and to financial,
business and other factors, some of which are beyond our control. There can be no assurance that
our business will generate sufficient cash flows from operations or that any additional borrowings
will be available to us to enable us to pay our indebtedness or to fund our other liquidity needs.
While we
continue to expect significant improvements in our DSOs for the remainder of 2008 and
to make progress toward reversing our historical experience of rising DSOs in the
first six months of 2009, these improvements alone likely will not be sufficient to generate adequate cash
to operate our business and service our debt obligations. Consequently, we are subject to
increasing pressure to reduce or delay capital expenditures, including possibly delaying in the transition to
our new North American financial system to later in 2009 to help avoid incurring any higher-than-expected transition
costs or risk cash shortfalls that might arise from our inability to timely invoice and collect for all work performed during the
first quarter of 2009, dispose of assets or operations, exit countries and business segments that
are not profitable, seek additional capital or restructure or refinance our indebtedness. In
addition, we cannot assure you that we would be able to take any of these actions, that these
actions would be successful and permit us to meet our scheduled debt service obligations or that
these actions would be permitted under the terms of our existing debt agreements, including the
2007 Credit Facility. For example, we may need to refinance all or a portion of our indebtedness on or before maturity. There can be no assurance that we will be able
to refinance any of our indebtedness on commercially reasonable terms or at all. The 2007
Credit Facility restricts, among other things, our ability
37
to dispose of assets, incur additional indebtedness or issue equity securities unless all net
cash proceeds from such activities (half of such net cash proceeds, in the case of the issuance of
equity securities) are used to prepay outstanding term loans and/or collateralize outstanding
letters of credit under the 2007 Credit Facility. We may not be able to consummate all or any of
these types of transactions or to obtain the net cash proceeds realized from them until amounts due
under the 2007 Credit Facility are paid in full.
Under the most extreme circumstances, we may need to consider various forms of debt exchanges
on a negotiated basis with our various classes of senior and junior subordinated debentures or
prepackaged sales of our assets, either of which may be required to occur under court supervision.
We cannot provide assurance that any debt restructuring, exchange or refinancing will be possible.
If we cannot consistently generate sufficient positive cash flows or generate significant
additional funds through one or more of the various strategic and debt restructuring alternatives
describe above then we will not be able to fund our internal growth, provide for our operating
needs and service our indebtedness. Consequently, our business, financial condition and results of
operations would be materially and adversely affected.
Risks That Relate To Our Common Stock
If the Company does not comply with the NYSEs continued listing standards, we may be delisted by
the NYSE. If we are delisted by the NYSE before we are able to be listed on another national stock
exchange, payment of substantially all of our outstanding debentures would be accelerated and, by
implication, an event of default would exist under our 2007 Credit Facility that could require
repayment of all amounts outstanding under that facility. If this were to occur, there would be
material adverse effects on our business, financial condition and results of operations.
On the dates listed below, we received notices from the NYSE that we are below compliance with
the following NYSE continued listing standards:
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on July 16, 2008, the minimum average share price (relating to the fact that the average
closing share price of our common stock over a 30-day consecutive trading period was less
than $1.00); and |
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on October 28, 2008, the minimum average market capitalization (relating to the fact that
the average market capitalization of the Company over a 30-day consecutive trading period
was less than $100 million). |
The notices set forth timeframes in which each deficiency must be cured in order to remain listed
on the NYSE. The Companys common stock continues to be listed on the NYSE, subject to ongoing
reassessment.
To regain compliance with the NYSEs continued listing standard relating: (a) to minimum
average price, we must have both a $1.00 share price at January 16, 2009 and have maintained a
$1.00 average share price over the preceding 30 trading days, or, if the price deficiency is cured
by the reverse stock split that we have asked our stockholders to approve at the upcoming 2008
Annual Meeting of Stockholders, if the price promptly exceeds $1.00 per share and the price remains
above $1.00 for at least the following 30 trading days, and (b) to minimum average market
capitalization, the Company must submit a plan by December 12, 2008 demonstrating how it intends to comply with this
continued listing standard within 18 months of receipt of the notice.
The
Company continues to communicate with the NYSE regarding its efforts to achieve
compliance with the NYSE's continued listing standards. Given that the Company has, to date,
been unable to reach agreement regarding a sale of all or a portion of the Company's business,
the Companys Board of Directors recently directed our financial advisors to approach holders of
our various series of subordinated, convertible debt to explore the feasibility of restructuring all
or selected series of our convertible debt or exchanging existing convertible debt for equity. At
present, we have no indication of what, if any, terms may be acceptable for any such
restructuring and we can give no assurance that any of our existing convertible debt can be
restructured or exchanged for equity in the near term or at all. However, the Company believes
that some sale, restructuring of indebtedness or combination of the two is likely to be a necessary
condition to achieving near-term compliance with the NYSEs continued listing standard relating
to minimum average market capitalization and the Company has previously communicated this
position to the NYSE.
Although we intend to take actions to bring our share price and market capitalization up to
compliant levels within the specified time frames, we cannot be assured that the plans will be
achieved within the specified time frames, if at all. Furthermore, regardless of the Companys
continued efforts to regain compliance with the NYSEs continued listing standards, the NYSE
reserves the right to suspend trading in the Companys common stock if it decides the trading price
of the Companys common stock has become abnormally low. If the NYSE were to take such an action
against the Company, the Company would have the right to a review of this determination by a
Committee of the Board of Directors of NYSE Regulation. Any application to delist the Companys
common stock would be pending the completion of applicable procedures, including any appeal by the
Company of the NYSE Regulation staffs decision.
If our shares are delisted from the NYSE and we are unable to list our common stock on another
national securities exchange prior to such delisting, the holders of substantially all of our
debentures have a put right to require us to repurchase our debentures at a price in cash equal
to the principal amount of the debentures plus accrued and unpaid interest, if any. If such a put
right were to exist
38
in the hands of the holders of our debentures, there would separately exist an event of
default under our 2007 Credit Facility that could result in the acceleration of the payment of all
amounts outstanding under that facility. For a further discussion of the terms of the various
indentures covering our debentures, as well as those of our 2007 Credit Facility, see our 2007 Form
10-K Item 7, Managements Discussion and Analysis of Financial Condition and Results of
Operation.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
The following table provides information relating to our purchase of shares of common stock of
the Company from July 1, 2008 through September 30, 2008:
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Approximate |
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Dollar Value of |
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Total Number of |
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Shares that May |
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Shares Purchased |
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Yet Be Purchased |
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as Part of |
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Under Publicly |
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Publicly |
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Announced Plans |
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Total Number of |
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Average Price |
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Announced Plans |
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or Programs |
Period |
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Shares Purchased |
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per Share |
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or Programs(1) |
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($ in millions)(1) |
July 1, 2008 July 31, 2008
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32,637 |
(2) |
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$ .79
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$ |
64.3 |
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(1) |
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In July 2001, our Board authorized us to repurchase up to $100.0 million of our common stock.
Any shares so repurchased are held as treasury shares. During the quarter ended September 30,
2008, there were no open market purchases by the Company of our common stock. |
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In July 2008, as permitted under the LTIP, we acquired an aggregate of 32,637 shares of our
common stock for an aggregate price of $25,783 in connection with share withholding for
payroll tax obligations due from employees and former employees for the issuance of shares of
common stock upon settlement of RSUs. |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
Appointment/Departure of Principal Officer
Effective as of November 11,
2008, the Company has appointed Kenneth A. Hiltz, a managing director of AlixPartners, LLP (AlixPartners),
an internationally known business and financial advisory firm, as our new Chief Financial Officer. The Company has
previously retained AlixPartners to assist the Company in developing its 2009 plan, participate in its upcoming
discussions to restructure its indebtedness and lead a number of key cash management initiatives. Mr. Hiltz
has been appointed as the Companys Chief Financial Officer pursuant to an Agreement for Interim Management
Services between the Company and AlixPartners, a copy of which is filed as Exhibit 10.3 to this Quarterly
Report on Form 10-Q. For Mr. Hiltzs services, the Company will pay AlixPartners a fee based on an hourly
rate for time worked by Mr. Hiltz and will also pay or reimburse AlixPartners for reasonable out-of-pocket
expenses. Since Mr. Hiltz will not be an employee of the Company, Mr. Hiltz will not receive any compensation
directly from the Company and will not participate in the Companys employee benefit plans.
Mr. Hiltz, 56,
will be our Chief Financial Officer commencing on November 11, 2008. From 2006 to 2008, he served as chief
financial officer of Dana Holding Corporation, a supplier of automotive products. From 2003 to 2004, he served as
chief financial officer at Foster Wheeler Ltd., a global provider of engineering services and products, and from
2001 to 2003, chief restructuring officer and chief financial officer of Hayes Lemmerz International, Inc., a global
supplier of automotive and commercial components. Mr. Hiltz has been a Managing Director of AlixPartners since 1993.
In connection with the
appointment of Mr. Hiltz as our Chief Financial Officer, Eddie R. Munson will cease to serve as our Chief Financial
Officer on an interim basis, effective as of November 11, 2008. Mr. Munson will continue to serve as a director
of the Company and resume his duties as a member of the Audit Committee of the Board of Directors.
39
ITEM 6. EXHIBITS
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Exhibit |
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No. |
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Description |
3.1
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Amended and Restated Certificate of Incorporation, dated as of February 7, 2001,
which is incorporated herein by reference to Exhibit 3.1 from the Companys Form
10-Q for the quarter ending March 31, 2001. |
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3.2
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Amended and Restated Bylaws, amended and restated as of August 2, 2007, which is
incorporated herein by reference to Exhibit 3.1 from the Companys Form 8-K
filed with the SEC on August 8, 2007. |
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3.3
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Certificate of Ownership and Merger merging Bones Holding into the Company,
dated October 2, 2002, which is incorporated herein by reference to Exhibit 3.3
from the Companys Form 10-Q for the quarter ended September 30, 2002. |
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4.1
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Rights Agreement, dated as of October 2, 2001, between the Company and
Computershare Trust Company, N.A. (formerly EquiServe Trust Company, N.A.),
which is incorporated herein by reference to Exhibit 1.1 from the Companys
Registration Statement on Form 8-A dated October 3, 2001. |
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4.2
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Certificate of Designation of Series A Junior Participating Preferred Stock,
which is incorporated herein by reference to Exhibit 1.2 from the Companys
Registration Statement on Form 8-A dated October 3, 2001. |
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4.3
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First Amendment to the Rights Agreement between the Company and Computershare
Trust Company, N.A. (formerly EquiServe Trust Company, N.A.), which is
incorporated herein by reference to Exhibit 99.1 from the Companys Form 8-K
filed with the SEC on September 6, 2002. |
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4.4
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Second Amendment to the Rights Agreement, dated as of October 27, 2007, between
the Company and Computershare Trust Company, N.A. (formerly EquiServe Trust
Company, N.A.), which is incorporated herein by reference to Exhibit 4.4 from
the Companys Form 10-Q for the quarter ended June 30, 2007. |
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10.1
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Employment Letter dated July 1, 2008, effective as of June 4, 2008, between the
Company and Eddie R. Munson, which is incorporated herein by reference to
Exhibit 10.5 from the Companys Quarterly Report on Form 10-Q for the Quarterly
Period Ended June 30, 2008. |
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10.2
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Managing Director Agreement dated July 1, 2008, effective as of June 4, 2008,
between the Company and Eddie R. Munson, which is incorporated herein by
reference to Exhibit 10.6 from the Companys Quarterly Report on Form 10-Q for
the Quarterly Period Ended June 30, 2008. |
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10.3* |
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Agreement for Interim Management Services dated November 10, 2008, between the Company and AlixPartners, LLP. |
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31.1*
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Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a). |
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31.2*
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Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a). |
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32.1*
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Certification of Chief Executive Officer pursuant to Section 1350. |
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32.2*
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Certification of Chief Financial Officer pursuant to Section 1350. |
40
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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BearingPoint, Inc.
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DATE: November 10, 2008 |
By: |
/s/ Eddie R. Munson
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Eddie R. Munson |
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Chief Financial Officer |
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41