Black Box Corporation 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934

For the quarterly period ended December 31, 2005

Commission File No. 0-18706

Black Box Corporation

(Exact name of registrant as specified in its charter)


Delaware		95-3086563
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)

1000 Park Drive
Lawrence, Pennsylvania 15055
(Address of principal executive offices)

724-746-5500
(Registrant’s 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, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).


Yes o		No þ

As of February 7, 2006, there were 17,473,821 shares of common stock ($0.001 par value) outstanding.

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

BLACK BOX CORPORATION

CONSOLIDATED BALANCE SHEETS


In thousands, except par value	December 31,			March 31,
Unaudited	2005			2005

*Assets*
Cash and cash equivalents	$	12,143		$	11,592
Accounts receivable, net of allowance for doubtful accounts of $8,301 and $7,342		125,632			116,865
Lease receivables		465			1,697
Inventories, net		53,448			57,176
Costs and estimated earnings in excess of billings on uncompleted contracts		28,093			25,695
Deferred tax asset		11,084			9,236
Net current assets of discontinued operations		376			549
Other current assets		17,642			14,724

Total current assets		248,883			237,534
Property, plant and equipment, net		36,117			38,268
Goodwill, net		468,871			444,567
Other intangibles, net		55,573			44,157
Lease receivables, net of current portion		0			473
Deferred tax asset		3,979			3,793
Net assets of discontinued operations, net of current portion		153			373
Other assets		4,327			3,725

Total assets	$	817,903		$	772,890

*Liabilities*
Current maturities of long-term debt	$	716		$	692
Current maturities of discounted lease rentals		70			890
Accounts payable		39,487			36,032
Billings in excess of costs and estimated earnings on uncompleted contracts		11,604			8,947
Deferred revenue		21,473			21,456
Accrued liabilities:
Compensation and benefits		12,650			13,073
Restructuring		4,589			6,709
Other liabilities		40,274			33,905
Income taxes		9,013			3,295

Total current liabilities		139,876			124,999
Long-term debt		141,304			147,196
Discounted lease rentals		3			30
Other liabilities		169			75
Restructuring reserve		7,970			9,889
*Stockholders’ Equity*
Preferred stock authorized 5,000, par value $1.00, none issued		—			—
Common stock authorized 100,000, par value $.001, 17,406 and 16,840 shares outstanding		24			24
Additional paid-in capital		355,981			336,290
Retained earnings		458,252			428,632
Treasury stock, at cost, 6,935 shares		(296,811	)		(296,797	)
Accumulated other comprehensive income		11,135			22,552

Total stockholders’ equity		528,581			490,701

Total liabilities and stockholders’ equity	$	817,903		$	772,890

See Notes To Consolidated Financial Statements

BLACK BOX CORPORATION

CONSOLIDATED STATEMENTS OF INCOME


	Three months ended				Nine Months ended
In thousands, except per share amounts	December 31,		January 1,		December 31,		January 1,
Unaudited	2005		2005		2005		2005

Revenues	$	182,135	$	126,896	$	546,467	$	377,846
Cost of sales		108,733		75,878		328,243		222,633


Gross profit		73,402		51,018		218,224		155,213

Selling, general and administrative		50,441		36,762		152,008		107,886
Restructuring charges		0		0		5,290		0
Intangibles amortization		1,349		59		4,235		187


Operating income		21,612		14,197		56,691		47,140

Interest expense, net		2,397		519		6,686		1,436
Other expense, net		114		46		79		93


Income before provision for income taxes		19,101		13,632		49,926		45,611

Provision for income taxes		6,590		4,383		17,224		15,736


Net income	$	12,511	$	9,249	$	32,702	$	29,875


Earnings per common share
Basic	$	0.72	$	0.54	$	1.92	$	1.71
Diluted	$	0.70	$	0.52	$	1.88	$	1.66

Weighted average common shares outstanding
Basic		17,286		17,293		17,050		17,499
Diluted		17,786		17,694		17,362		17,949


Dividends per share	$	0.06	$	0.06	$	0.18	$	0.17

See Notes To Consolidated Financial Statements

BLACK BOX CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS


In thousands	Nine months ended
Unaudited	December 31, 2005			January 1, 2005

*Operating Activities*
Net income	$	32,702		$	29,875
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization		11,013			4,557
Deferred tax (benefit)/provision		(2,083	)		1,775
Tax impact from exercised options		(3,347	)		—
Stock compensation expense		—			680
Changes in operating assets and liabilities (net of acquisitions):
Accounts receivable, net		73			1,153
Inventories, net		5,673			(2,412	)
Other current assets		1,270			888
Proceeds from lease contracts		1,746			—
Accounts payable and accrued liabilities		(8,135	)		(2,111	)

Net cash provided by operating activities		38,912			34,405

*Investing Activities*
Capital expenditures		(3,151	)		(2,579	)
Capital disposals		1,232			730
Acquisition of businesses, net of cash acquired		(40,682	)		—
Prior merger-related payments		(378	)		(498	)

Net cash used in investing activities		(42,979	)		(2,347	)

*Financing Activities*
Repayment of borrowings		(164,698	)		(91,596	)
Proceeds from borrowings		157,280			95,632
Repayments on discounted lease rentals		(847	)		—
Proceeds from the exercise of options		16,344			7,310
Payment of dividends		(3,049	)		(2,809	)
Deferred financing costs		—			(235	)
Purchase of treasury stock		(14	)		(37,585	)

Net cash provided / (used) in financing activities		5,016			(29,283	)

Foreign currency exchange impact on cash		(398	)		(1,134	)


Increase in cash and cash equivalents		551			1,641
Cash and cash equivalents at beginning of year		11,592			9,306

Cash and cash equivalents at end of year	$	12,143		$	10,947

*Supplemental Cash Flow:*
Cash paid for interest	$	5,817		$	1,425
Cash paid for income taxes		13,539			14,022
Non-cash financing activities:
Dividends payable		1,044			1,039
Capital leases		834			—

See Notes To Consolidated Financial Statements

BLACK BOX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollars in thousands, except per share amounts)

Note 1: Basis of Presentation

The unaudited interim consolidated financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United States and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.

Black Box Corporation (the “Company”) believes that these consolidated financial statements reflect all normal, recurring adjustments needed to present fairly the Company’s results for the interim periods presented. The results for interim periods may not be indicative of the results of operations for any other interim period or for the full year.

These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s most recent Form 10-K as filed with the Securities and Exchange Commission (“SEC”) for the fiscal year ended March 31, 2005.

The Company’s fiscal year ends on March 31. The fiscal quarters consist of 13 weeks and end on the Saturday nearest each calendar quarter end. The actual ending dates for the periods presented in these Notes as December 31, 2005 and 2004 were December 31, 2005 and January 1, 2005.

Note 2: Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of the parent company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates in these financial statements include allowances for doubtful accounts receivable, sales returns, net realizable value of inventories, loss contingencies, warranty reserves and intangible assets. Actual results could differ from those estimates. Management believes the estimates made are reasonable.

Stock-Based Compensation

Stock options are granted to certain employees and members of the Company’s Board of Directors at the fair market value of the Company’s stock on the date of the grant. The Company accounts for its stock-based compensation plans under the provisions of Accounting Principles Board Opinion No. 25 “Accounting for Stock Issued to Employees” (“APB No. 25”), as amended, and related guidance. Under this guidance, there are no charges or credits to income with respect to stock options.

The pro forma information below is based on provisions of SFAS No. 123 “Accounting for Stock-Based Compensation” (“SFAS No. 123”) as amended by SFAS No. 148 “Accounting for Stock-Based Compensation — Transition and Disclosure” issued in December 2002 (“SFAS No. 148”). SFAS No. 148 requires that the pro forma information regarding net income and earnings per share are determined as if the Company had accounted for its employee stock options under the fair value method as prescribed by SFAS No. 123.

The following table shows the effects on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, as amended, to the stock-based awards:


			Three months ended						Nine months ended
			December 31,						December 31,
			2005			2004			2005			2004

Net income		As reported	$	12,511		$	9,249		$	32,702		$	29,875
	Add:	Stock-based employee compensation expense included in reported net income, net of related tax		—			—			—			445
	Deduct:	Stock-based compensation expense determined by the fair value method for all awards, net of related tax		(17,703	)		(2,482	)		(22,925	)		(7,501	)
Net income		Pro forma	$	(5,192	)	$	6,767		$	9,777		$	22,819

Earnings per share:		Basic — as reported	$	0.72		$	0.54		$	1.92		$	1.71
		Basic — pro forma	$	(0.30	)	$	0.39		$	0.57		$	1.30

		Diluted — as reported	$	0.70		$	0.52		$	1.88		$	1.66
		Diluted — pro forma	$	(0.29	)	$	0.38		$	0.56		$	1.27

For options with a vesting period, compensation expense is recognized on a ratable basis over the service period which corresponds to the vesting period. Compensation expense is recognized immediately for options that are granted fully vested on the date of the grant. The incremental fair value of each option grant is estimated on the date of grant using the Black-Scholes options pricing model. The model requires the use of various assumptions. The following assumptions were used in the nine months ended:


	December 31,
	2005			2004

Expected life (in years)		5.6			5.0
Risk free interest rate		4.17	%		3.32	%
Volatility		49	%		55	%
Dividend yield		0.6	%		0.3	%

On October 31, 2005, in response to the issuance of SFAS No. 123(R) (as defined below), the Compensation Committee of the Board of Directors of the Company authorized the acceleration of the vesting of all of the Company’s outstanding out-of-the-money unvested stock options held by current employees, including officers, and directors. Approximately 405,224 options that would otherwise have vested from time to time over the next three years became immediately exercisable. Such stock options had an exercise price greater than $39.77, the approximate fair market value of the Company’s common stock, par value $.001 per share (the “Common Stock”) on October 31, 2005. The accelerated vesting of these options increased the pro-forma compensation expense for the three months ended December 31, 2005 by approximately $3,521, net of tax.

On October 31, 2005, the Company issued options to purchase approximately 984,000 shares of Common Stock which were granted fully vested, the effect of which increased the pro-forma compensation expense for the three months ended December 31, 2005 by approximately $11,962, net of tax.

During the second quarter of Fiscal 2005 (fiscal year ending March 31, 2005), the Company recorded compensation expense, as a result of a modification to a retiring director’s stock option agreements. Based on the guidance under FIN 44, “Accounting for Certain Transactions Involving Stock Compensation,” the Company recorded compensation expense in the amount of $680. The expense was recorded as a component of Selling, General and Administrative expense.

Reclassification

Certain reclassifications have been made to the Consolidated Financial Statements for prior periods in order to conform to the Fiscal 2006 (fiscal year ending March 31, 2006) presentation.

Recent Accounting Pronouncements

Stock-Based Compensation

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement No. 123 (revised 2004) “Share-Based Payment” (“SFAS No. 123(R)”). SFAS No. 123(R) is a revision of SFAS No. 123, supersedes APB No. 25 and amends FASB Statement No. 95 “Statement of Cash Flows.” SFAS No. 123(R) requires that companies recognize all share-based payments to employees and directors, including grants of employee and director stock options, in the financial statements. The recognized cost will be based on the fair value of the equity or liability instruments issued. Pro forma disclosure of this cost will no longer be an alternative under SFAS No. 123(R). SFAS No. 123(R) is effective for public companies at the beginning of the first annual reporting period that begins after June 15, 2005.

As permitted by SFAS No. 123, the Company currently accounts for its stock-based compensation plans under APB No. 25’s intrinsic value method and, as such, generally recognizes no compensation cost for employee stock options. Accordingly, the adoption of SFAS No. 123(R)’s fair value method will have a significant impact on the Company’s results of operations, although it will have no impact on the Company’s overall financial position or cash flows. The impact of adopting SFAS No. 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had the Company adopted SFAS No. 123(R) in prior periods, and assuming that, in the third quarter of Fiscal 2006, the Company would have accelerated the vesting of options and would have granted fully vested options as discussed above, the impact would have approximated the amounts in its pro forma disclosure as described in the disclosure of pro forma net income and earnings per share in Note 2 to Consolidated Financial Statements. Based on SFAS No. 123(R), the Company will transition to the new requirements by using the modified prospective transition method. This transition method requires compensation cost to be recognized for all share-based payments granted after the date of adoption and for all unvested awards existing on the date of adoption.

SFAS No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost be reported as a financing cash flow, rather than as an operating cash flow as required under current standards. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. The Company cannot estimate what those amounts will be in the future because they are dependant on, among other things, when employees or directors exercise stock options.

The Company plans to adopt SFAS No. 123(R) as of the first day of the first quarter of Fiscal 2007, or April 1, 2006, as required.

Foreign Earnings Repatriation

In October 2004, the “American Jobs Creation Act of 2004” was signed into law. The law provides for a special one-time deduction of 85% of certain foreign earnings that are repatriated. The law also includes a tax deduction of up to 9% of the lesser of (a) “qualified production activities income” or (b) taxable income. An issue arose as to whether that deduction should be accounted for as a special deduction or a tax rate reduction under FASB Statement No. 109.

In December 2004, the FASB issued Staff Position No. FAS 109-1 “Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004” (“SFAS No. 109”). The FASB staff believes that the deduction should be accounted for as a special deduction in accordance with SFAS No. 109. The Company is currently assessing the impact of this special deduction.

In December 2004, the FASB issued Staff Position No. FAS 109-2 “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004” (“FAS No. 109-2”). FAS No. 109-2 allows additional time to assess the effect of repatriating international earnings under the law and requires explanatory disclosures from those who need the additional time.

The Company is evaluating the effects of the law and recent regulations on its plan for reinvestment or repatriation of international earnings. The possible amounts of unremitted earnings available for repatriation under the law and the potential range of income tax effects of such repatriation cannot be reasonably estimated as of the time of this filing.

Segments

In February 2005, the FASB issued Emerging Issues Task Force (EITF) No. 04-10, “Determining Whether to Aggregate Segments That Do Not Meet the Quantitative Thresholds” (“EITF No. 04-10”). This statement clarifies the aggregation criteria of operating segments as defined in SFAS No. 131 (as defined below). The effective date of this statement is for fiscal years ending after September 15, 2005. The Company believes that its current segment reporting complies with EITF No. 04-10.

Accounting Changes and Error Corrections

In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154, “Accounting Changes and Error Corrections” (“SFAS No. 154”). This statement replaces Accounting Principles Board Opinion No. 20 “Accounting Changes” cumulative effect accounting with accounting treatment based on retroactive restatement of comparative financials statements. It applies to all voluntary changes in accounting principle and defines “retrospective application” to differentiate it from restatements due to incorrect accounting. The provisions of this statement are effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company’s adoption of SFAS No. 154 had no impact on its financial position, results of operations or cash flows.

Note 3: Inventories

Inventory balances, net of reserves for excess and obsolete inventories:


	December 31, 2005			March 31, 2005

Raw materials	$	1,477		$	1,447
Finished goods		65,507			68,275

Subtotal		66,984			69,722
Excess and obsolete inventory reserves		(13,536	)		(12,546	)

Inventory, net	$	53,448		$	57,176

Note 4: Goodwill and Other Intangible Assets

On April 1, 2001, the Company adopted SFAS No. 142 “Goodwill and Other Intangible Assets.” Under this Statement, goodwill and intangible assets with indefinite useful lives are not amortized. As required by the Statement, the Company performs an impairment test annually, or as often as impairment indicators are present. The Company’s policy is to evaluate its non-amortizable intangible assets for impairment during the third quarter of each fiscal year. The Company performed the most recent test during the third quarter of Fiscal 2006, and concluded that no impairment existed. The Company’s only intangibles, as identified in SFAS No. 141 “Business Combinations” (“SFAS No. 141”), other than goodwill, are its trademarks, non-compete agreements, customer relationships and acquired backlog.

Changes in the carrying amount of goodwill, net of accumulated amortization of $40,328 and $40,424 at December 31, 2005 and March 31, 2005, respectively, by reporting segment are as follows:


	North America			Europe			All Other		Total

Balance as of March 31, 2005	$	371,865		$	70,734		$	1,968	$	444,567
Currency translation		23			(6,405	)		27		(6,355	)
Goodwill on businesses acquired		30,685			—			—		30,685
Actual earnout payments		—			—			41		41
Other		(288	)		221			—		(67	)

Balance as of December 31, 2005	$	402,285		$	64,550		$	2,036	$	468,871

At December 31, 2005, certain merger agreements provided for contingent payments of up to $4,588. If future operating performance goals are met, goodwill will be adjusted for the amount of the contingent payments.

The Company’s amortizable intangible assets are comprised of the appraised fair market values of employee non-compete contracts, backlog and customer relationships obtained through business acquisitions. The Company has the following definite-lived intangibles:


	December 31, 2005						March 31, 2005
	Gross				Net		Gross				Net
	Carrying		Accum.		Carrying		Carrying		Accum.		Carrying
	Amount		Amort.		Amount		Amount		Amort.		Amount

Non-compete agreements	$	4,843	$	1,657	$	3,186	$	2,676	$	1,105	$	1,571
Customer relationships		25,042		709		24,333		11,699		114		11,585
Acquired backlog		3,903		3,588		315		3,930		668		3,262

Total	$	33,788	$	5,954	$	27,834	$	18,305	$	1,887	$	16,418

Intangible asset amortization is computed using the straight-line method based upon the estimated useful lives of the respective assets, which range from one to twenty years.

Intangible asset amortization expense was $1,349 and $59 for the three months ended December 31, 2005 and 2004, respectively, and $4,235 and $187 for the nine months ended December 31, 2005 and 2004, respectively. The Company acquired definite-lived intangibles from the completion of six acquisitions during the first nine months of Fiscal 2006 (see Note 11). The estimated definite-lived intangibles recorded of $15,668 were based on a preliminary allocation pending completion of third party valuation, which is expected to be completed during the fourth quarter of Fiscal 2006. The Company recorded amortization expense of $143 during the nine months ended December 31, 2005 for these definite-lived assets.

Excluding the newly acquired definite-lived intangibles, the Company’s estimated amortization expense for fiscal years ending March 31 are as follows:


Years Ending March 31,

2006	$	5,056
2007		870
2008		671
2009		588
2010		588
Thereafter		8,645

	$	16,418

Intangible assets not subject to amortization consist solely of the Company’s trademark portfolio. The net carrying amount was $27,739 at December 31, 2005 and March 31, 2005.

The changes in the carrying amount of goodwill and intangible assets, net of accumulated amortization are as follows:


			Non-
Nine months ended			Competes and			Customer
December 31, 2005	Trademarks		Backlog			Relationships			Goodwill			Total

Balance at beginning of period	$	27,739	$	4,833		$	11,585		$	444,567		$	488,724
Change in net intangible assets during the period related to:
Amortization expense		—		(3,639	)		(596	)		—			(4,235	)
Currency translation		—		(17	)		—			(6,355	)		(6,372	)
Acquisitions (Note 11)		—		2,324			13,344			30,685			46,353
Actual earnout payments		—		—			—			41			41
Other		—		—			—			(67	)		(67	)

Balance at end of period	$	27,739	$	3,501		$	24,333		$	468,871		$	524,444

Note 5: Indebtedness

Long-term debt consisted of the following:


	December 31, 2005			March 31, 2005

Revolving credit agreement	$	140,000		$	146,560
Capital lease obligations		1,768			772
Other		252			556

Total debt		142,020			147,888
Less: current portion		(716	)		( 692	)

Long-term debt	$	141,304		$	147,196

On January 24, 2005, the Company entered into a Second Amended and Restated Credit Facility (together with an amendment dated February 17, 2005, the “Credit Agreement”) with Citizens Bank of Pennsylvania, as agent, and a group of lenders. The Credit Agreement expires on August 31, 2008.

During the three months ended December 31, 2005, the maximum amount and weighted average balance outstanding under the Credit Agreement were $158,635 and $149,737, respectively. As of December 31, 2005, the Company had $3,065 outstanding in letters of credit and $96,935 available under the Credit Agreement. The weighted average interest rate on all outstanding debt was 5.59% and 2.77% for the three months ended December 31, 2005 and 2004, respectively, and 4.86% and 2.31% for the nine months ended December 31, 2005 and 2004, respectively. At December 31, 2005, the Company was in compliance with all required covenants under the Credit Agreement.

The capital lease obligations are primarily for facilities and equipment. The lease agreements have remaining terms ranging from two to five years with interest rates ranging from 7.60% to 9.25%.

Other debt is composed of various bank and third party loans secured by specific pieces of equipment and real property. The loans have remaining terms of one to four years with interest rates ranging from 1.23% to 9.50%.

Note 6: Derivative Instruments and Hedging Activities

The Company enters into derivative instruments to hedge exposure to variability in expected fluctuations in foreign currencies. All of the Company’s derivatives have been designated and qualify as cash flow hedges. There was no hedge ineffectiveness during the three months ended December 31, 2005.

At December 31, 2005, the Company had open contracts in Australian and Canadian dollar, Danish krone, Euro, Japanese yen, Norwegian kroner, Pound sterling, Swedish krona and Swiss franc. These contracts had a notional amount of approximately $38,673 and a fair value of $37,248 and mature within the next fifteen months.

For the three months ended December 31, 2005, the Company recognized in earnings approximately $66 in net losses on matured contracts. As of December 31, 2005, a loss of $272 was included in other comprehensive income (loss) (“OCI”). This loss is expected to be charged to earnings over the life of the maturing contracts as the hedged transactions occur and it is expected that the loss will be offset by currency gains on the items being hedged.

Note 7: Earnings Per Share

The following table details this calculation for the three and nine months ended December 31:


	Three months ended				Nine months ended
	December 31,				December 31,
	2005		2004		2005		2004

Net income, as reported	$	12,511	$	9,249	$	32,702	$	29,875


Weighted average shares outstanding		17,286		17,293		17,050		17,499

Effect of dilutive securities from employee and director stock options		500		401		312		450


Weighted average diluted shares outstanding		17,786		17,694		17,362		17,949


Basic earnings per share	$	0.72	$	0.54	$	1.92	$	1.71
Diluted earnings per share	$	0.70	$	0.52	$	1.88	$	1.66

There is no impact to the weighted average share calculations during any period where the exercise price of a stock option is greater than the average market price during the same period. There were 563,406 and 2,050,707 non-dilutive options outstanding during the three months ended December 31, 2005 and 2004, respectively, and 2,494,091 and 889,942 non-dilutive options outstanding during the nine months ended December 31, 2005 and 2004, respectively, that are not included in the above calculation.

Note 8: Comprehensive Income and Stockholders’ Equity

Comprehensive income for the three and nine months ended December 31, consisted of the following:


	Three months ended					Nine months ended
	December 31,					December 31,
	2005			2004		2005			2004

Net income	$	12,511		$	9,249	$	32,702		$	29,875
Other comprehensive income:
Foreign currency translation adjustment		(2,246	)		9,950		(11,292	)		9,993
Unrealized (losses)/gains on derivatives designated and qualified as cash flow hedges, net of reclassification of unrealized (losses)/gains on expired derivatives		(358	)		523		(125	)		(231	)

Comprehensive income	$	9,907		$	19,722	$	21,285		$	39,637

The components of accumulated other comprehensive income consisted of the following:


	December 31, 2005			March 31, 2005

Foreign currency translation adjustment	$	11,407		$	22,699
Unrealized gains/(losses) on derivatives designated and qualified as cash flow hedges, net of reclassification of unrealized gains/(losses) on expired derivatives		(272	)		(147	)

Total accumulated other comprehensive income	$	11,135		$	22,552

During the nine months ended December 31, 2005, additional paid-in-capital increased $19,691 from the exercise of stock options to purchase 566,682 shares of Common Stock. The increase was comprised of $16,344 from the exercise of options, net of tax and a tax benefit of $3,347.

Note 9: Commitments and Contingencies

Litigation

The Company is, as a normal part of its business operations, a party to legal proceedings. Based on the facts currently available, management believes legal matters are adequately provided for, covered by insurance, without merit or not probable that an unfavorable outcome will result.

Product Warranties

Estimated future warranty costs related to certain products are charged to operations in the period the related revenue is recognized. The product warranty liability reflects the Company’s best estimate of probable liability under those warranties.

There has been no significant or unusual activity during the three months ended December 31, 2005. As of December 31, 2005 and March 31, 2005, the Company has recorded a warranty reserve of $1,855 and $1,895, respectively.

The accrual for product warranties is classified with other accrued expenses in the Consolidated Balance Sheets. The expense for product warranties is classified with cost of sales in the Consolidated Income Statements.

Note 10: Restructuring and Other Charges

During the first quarter of Fiscal 2006 and fourth quarter of Fiscal 2005, the Company recorded restructuring and other charges of $5,290 and $5,059, respectively. The Fiscal 2006 restructuring charge of $5,290 is related to staffing level adjustments and real estate consolidations. The Fiscal 2005 charge was comprised of restructuring expense of $3,019 related to staffing level adjustments and real estate consolidations, as well as other charges of $2,040 related to the resolution of a previously disclosed litigation matter. The restructuring charges are discussed in further detail below.

As announced in Fiscal 2005, the Company initiated a restructuring plan intended to right-size the organization and bring its expense structure in-line with anticipated revenues and changing market demand for its solutions and services. The restructuring charges recorded during the first quarter of Fiscal 2006 and fourth quarter of Fiscal 2005 of $5,290 and $3,019, respectively, relate to staffing level adjustments and real estate consolidations in the Europe and North America segments. With the additional charges incurred during the first quarter of Fiscal 2006, the Company has completed its restructuring plan.

As a result of the first quarter Fiscal 2006 restructuring actions, approximately 90 and 34 employees were involuntarily terminated in the Company’s Europe and North America segments, respectively, resulting in a restructuring charge related to staffing level adjustments of $2,951 and $522 in Europe and North America, respectively. The Company also recorded a charge of $1,817 in the first quarter of Fiscal 2006 related to idle facility rent obligations and the write-off of leasehold improvements related to these facilities resulting in a restructuring charge of $791 and $1,026 related to real estate consolidations in Europe and North America, respectively. The Company anticipates a majority of the remaining costs to be paid by the end of Fiscal 2006 with the exception of certain facility costs, which will extend through Fiscal 2012 (fiscal year ending March 31, 2012).

In the fourth quarter Fiscal 2005, approximately 28 employees were involuntarily terminated in the Company’s Europe segment resulting in a restructuring charge of $613. The Company also recorded a charge of $2,406 in the fourth quarter of Fiscal 2005 related to idle facility rent obligations and the write-off of leasehold improvements related to these facilities. $390 and $2,016 of the fourth quarter Fiscal 2005 expense related to real estate consolidations in Europe and North America, respectively.

Also, during the fourth quarter of Fiscal 2005, the Company recorded a charge of $2,040 that was classified with restructuring and other charges on the Consolidated Income Statements. The charge was related to a previously disclosed adverse arbitration award. The charge was comprised of $1,778 awarded to the plaintiff, which included interest, fees and costs, as well as $262 of legal fees incurred by the Company previously capitalized in Goodwill. As of March 31, 2005, the Company accrued the plaintiff’s award of $1,778 within accrued liabilities on the Consolidated Balance Sheet. On May 6, 2005, the Company paid the award of $1,778 in satisfaction of this judgment in full.

Upon completion of the acquisition of Norstan, Inc. (“Norstan”) during the fourth quarter of 2005, Company management committed to a plan of reorganization of Norstan’s operations. In connection with these integration actions, the Company incurred severance costs of $2,887 for the separation of approximately 150 employees. In addition, the Company incurred integration costs for facility consolidations of $11,874. These costs were included in the purchase price allocation for Norstan in accordance with SFAS No. 141. The Company anticipates a majority of the severance costs to be paid by the end of Fiscal 2006, with certain facility costs extending through Fiscal 2012.

As a result of the second quarter Fiscal 2006 acquisition of substantially all of the assets and certain liabilities of Universal Solutions of North America, L.L.C. and related entities (“Universal”), the Company’s management committed to a plan of reorganization of Universal’s operations. In connection with these integration actions, the Company incurred integration costs for facility consolidations of $375. These costs were included in the purchase price allocation for Universal in accordance with SFAS No. 141. Facility costs to be paid are anticipated to extend through Fiscal 2008.

The following table summarizes the restructuring and other charges and the remaining reserves reflected on the Consolidated Balance Sheet:


Nine months ended
December 31, 2005	Employee Severance			Facility Closures			Total

Balance at beginning of period	$	2,789		$	13,809		$	16,598
Restructuring charge		3,473			1,817			5,290
Acquisition restructuring		97			375			472
Asset write-downs		—			(636	)		(636	)
Cash expenditures		(5,401	)		(3,764	)		(9,165	)

Balance at end of period	$	958		$	11,601		$	12,559

Note 11: Acquisitions

During the third quarter of Fiscal 2006, the Company purchased Communication is World InterActive Networking, Inc. (“C=WIN”) and Converged Solutions Group, LLC (“CSG”). C=WIN has an active customer base which includes commercial and various government agency accounts. CSG has an active customer base which includes commercial, education, health care and various government agency accounts. The acquisitions primarily provide planning, installation and maintenance services for voice and data network systems in 15 states.

The acquisitions did not materially impact the Company’s net sales or net income during the three months ended December 31, 2005. In connection with the acquisitions, the Company has prepared preliminary allocations of goodwill and definite-lived intangible assets of $10,253 and $5,548, respectively. The definite-lived intangible assets recorded represent the estimated fair market value of acquired customer relationships and non-compete agreements. The Company estimates that the definite-lived intangibles are to be amortized over a period of four to twenty years.

The allocation of the purchase price of the acquisitions is based upon preliminary estimates of the fair values of certain assets acquired and liabilities assumed as of the date of the acquisition. Management, with the assistance of independent valuation specialists, is currently assessing the fair values of the tangible and intangible assets acquired and liabilities assumed. This preliminary allocation of the purchase price is dependant upon certain estimates and assumptions, which are preliminary and may vary from the amounts herein.

On December 21, 2005, the Company signed a non-binding letter of intent to acquire the USA and Canadian Commercial and USA Government Operations of NextiraOne, LLC. The Company is not subject to any legally binding obligation to consummate the transaction and no such obligation will exist until a definitive purchase agreement is negotiated and signed. The acquisition is further dependent upon the satisfactory completion of the Company’s due diligence investigation, board approval, financing, regulatory approval and other customary closing conditions. There is no assurance that a definitive purchase agreement will be entered into or, if such agreement is entered into, that the foregoing conditions will be met and that the transaction will close.

Note 12: Segment Reporting

As required by SFAS No. 131 “Disclosures about Segments of an Enterprise and Related Information” (“SFAS No. 131”), the Company reports the results of its operating segments on a geographic basis. During the fourth quarter of Fiscal 2003 (fiscal year ended March 31, 2003), the Company changed its primary segments to be on a geographic basis. This is consistent with how the Company is organized and how the

business is managed on a day-to-day basis. The primary reportable segments are comprised of North America, Europe and All Other. Consistent with SFAS No. 131, the Company aggregates similar operating segments into reportable segments.

The accounting policies of the various segments are the same as those described in the Notes to the Company’s Consolidated Financial Statements for the year ended March 31, 2005 contained in the Company’s Annual Report on Form 10-K. The Company evaluates the performance of each segment based on operating income. Inter-segment sales and segment interest income or expense and expenditures for segment assets are not presented to or reviewed by management and, therefore, are not presented below.

Summary information by reportable segment is as follows:


	Three months ended				Nine months ended
	December 31,				December 31,
	2005		2004		2005		2004

North America
Revenues	$	143,173	$	78,642	$	426,788	$	242,966
Operating income		15,740		8,345		44,136		27,090
Depreciation		2,093		1,302		6,110		3,237
Amortization		1,272		14		3,747		56
Segment assets		763,006		556,067		763,006		556,067

Europe
Revenues	$	29,950	$	38,947	$	92,899	$	107,337
Operating income		4,101		4,016		7,161		13,365
Depreciation		155		295		517		934
Amortization		70		39		463		116
Segment assets		122,829		142,293		122,829		142,293

All Other
Revenues	$	9,012	$	9,307	$	26,780	$	27,543
Operating income		1,771		1,836		5,394		6,685
Depreciation		36		61		151		199
Amortization		7		6		25		15
Segment assets		16,258		16,633		16,258		16,633

Operating income for the nine months ended December 31, 2005 for North America and Europe was reduced by $1,548 and $3,742, respectively, for restructuring and other charges incurred during the first quarter.

The sum of the segment revenues, operating income, depreciation and amortization equals the consolidated revenues, operating income, depreciation and amortization. The following reconciles segment assets to total consolidated assets:


	December 31, 2005			March 31, 2005

Assets for North America, Europe and All Other segments	$	902,093		$	856,101
Corporate eliminations		(84,190	)		(83,211	)

Total consolidated assets	$	817,903		$	772,890

Management is also presented with and reviews revenues by service type. The following information is presented:


	Three months ended				Nine months ended
	December 31,				December 31,
	2005		2004		2005		2004

Revenues
Data services	$	47,083	$	53,410	$	152,568	$	152,136
Voice services		82,281		16,219		233,620		53,619
Hotline services		52,771		57,267		160,279		172,091

Total Revenues	$	182,135	$	126,896	$	546,467	$	377,846

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The Company offers one-source network infrastructure services for: data networks (Data Services), including structured cabling for wired and wireless systems; voice systems (Voice Services), including new and upgraded telephony systems; and 24/7/365 hotline technical support (Hotline Services) for more than 118,000 network infrastructure products that it sells through its catalog, Internet Web site and on-site services offices.

The Company manages its business based on geographic segments: North America, Europe and All Other. In addition, certain revenue and gross profit information by service type is also provided herein for purposes of further analysis. During the first quarter of Fiscal 2006, the Company recorded a pre-tax charge for restructuring of approximately $5.3 million. There were no restructuring charges incurred during the second and third quarter of Fiscal 2006 and in the first nine months of Fiscal 2005. In addition, the Company incurred non-cash charges during the first, second and third quarters of Fiscal 2006 of $5.4 million pre-tax in connection with acquisition related expenses from the fourth quarter Fiscal 2005 purchase of Norstan.

The following table has been included to provide the allocation of the first, second and third quarters of Fiscal 2006 actual acquisition related expenses, the estimated allocation of such expenses in the fourth quarter of Fiscal 2006 (4Q06) and the estimated total expenses for Fiscal 2007 to Fiscal 2025, directly related to the acquisition of Norstan:

Dollars in Thousands


P&L Impact:	1Q06		2Q06		3Q06		4Q06		FY06 Total		FY07 to FY25

Gross Profit	$	1,543	$	—	$	—	$	—	$	1,543	$	—
SG&A		169		155		126		40		490		—
Intangibles amortization		1,119		1,119		1,119		464		3,821		11,028

Total	$	2,831	$	1,274	$	1,245	$	504	$	5,854	$	11,028

During April 2005, the Company completed the acquisitions of Telecommunication Systems Management, Inc. (“TSM”), GTC Technology Group, Inc. and Technology Supply, Inc. (collectively referred to as “GTC”) and Business Communications, Inc., Bainbridge Communications, Inc., BCI of Tampa, LLC and Networx, L.L.C. (collectively referred to as “BCI”). These companies primarily provide full-service voice communication solutions and services in the Florida and Virginia markets. The acquisitions increase the

Company’s operational footprint in these marketplaces, provide an opportunity to expand into large complex and multi-site customer solutions services and provide additional technical expertise and product offerings in the voice market. The results of operations for these acquisitions are included in the Company’s financial statements from the completion date of the acquisition. The revenues for these acquisitions are included in North America and Voice Services revenues.

During August 2005, the Company completed the acquisition of substantially all of the assets and certain liabilities of Universal. Universal primarily provides planning, installation and maintenance services for voice and data network systems in 14 states. The acquisition increases the Company’s operational footprint in these marketplaces, provides an opportunity to expand into large complex and multi-site customer solutions services and provide additional technical expertise and product offerings in the voice market. The results of operations for this acquisition are included in the Company’s financial statements from the completion date of the acquisition. The revenues for this acquisition are included in North America and Voice Services revenues.

During December 2005, the Company completed the acquisitions of C=WIN and CSG. These companies primarily provide voice communication solutions and services in 15 states. The acquisitions increase the Company’s operational footprint in these marketplaces, provide an opportunity to expand into large complex and multi-site customer solutions services and provide additional technical expertise and product offerings in the voice market. The results of operations for these acquisitions are included in the Company’s financial statements from the completion date of the acquisition. The revenues for these acquisitions are included in North America and Voice Services revenues.

Dollars in Thousands, unless Otherwise Indicated

The tables below should be read in conjunction with the following discussion.


	Three months ended December 31,										Nine months ended December 31,
	2005					2004					2005					2004
	(3Q06)			(3Q05)							(3Q06YTD)			(3Q05YTD)
				% of					% of					% of					% of
				total					total					total					total
		$		revenues			$		revenues			$		revenues			$		revenues
By Geography
Revenues:
North America	$	143,173			79%	$	78,642			62%	$	426,788			78%	$	242,966			64%
Europe		29,950			16%		38,947			31%		92,899			17%		107,337			29%
All Other		9,012			5%		9,307			7%		26,780			5%		27,543			7%

Total	$	182,135			100%	$	126,896			100%	$	546,467			100%	$	377,846			100%


Operating Income:
North America	$	15,740				$	8,345				$	44,136				$	27,090
% of North America revenues		11.0	%				10.6	%				10.3	%				11.1	%
Europe	$	4,101				$	4,016				$	7,161				$	13,365
% of Europe revenues		13.7	%				10.3	%				7.7	%				12.5	%
All Other	$	1,771				$	1,836				$	5,394				$	6,685
% of All Other revenues		19.7	%				19.7	%				20.1	%				24.3	%

Total	$	21,612				$	14,197				$	56,691				$	47,140
% of Total revenues		11.9	%				11.2	%				10.4	%				12.5	%


Restructuring charges and acquisition related expenses:
North America	$	1,245				$	—				$	6,898				$	—
Europe		—					—					3,742					—
All Other		—					—					—					—

Total	$	1,245				$	—				$	10,640				$	—
% of Total revenues		0.7	%				—	%				1.9	%				—	%

Information on revenues and gross profit for Data Services, Voice Services and Hotline Services is presented below:


	Three months ended December 31,										Nine months ended December 31,
	2005					2004					2005					2004
	(3Q06)			(3Q05)							(3Q06YTD)			(3Q05YTD)
				% of					% of					% of					% of
				total					total					total					total
		$		revenues			$		revenues			$		revenues			$		revenues
By Service Type
Revenues:
Data Services	$	47,083			26%	$	53,410			42%	$	152,568			28%	$	152,136			40%
Voice Services		82,281			45%		16,219			13%		233,620			43%		53,619			14%
Hotline Services		52,771			29%		57,267			45%		160,279			29%		172,091			46%

Total	$	182,135			100%	$	126,896			100%	$	546,467			100%	$	377,846			100%


Gross Profit:
Data Services	$	14,794				$	16,149				$	45,800				$	46,011
% of Data Services revenues		31.4	%				30.2	%				30.0	%				30.2	%
Voice Services	$	32,145				$	5,469				$	91,156				$	18,607
% of Voice Services revenues		39.1	%				33.7	%				39.0	%				34.7	%
Hotline Services	$	26,463				$	29,400				$	81,268				$	90,595
% of Hotline Services revenues		50.1	%				51.3	%				50.7	%				52.6	%

Total	$	73,402				$	51,018				$	218,224				$	155,213
% of Total revenues		40.3	%				40.2	%				39.9	%				41.1	%

Third Quarter Fiscal 2006 (3Q06) Compared to Third Quarter Fiscal 2005 (3Q05):

Total Revenues

Total revenues for 3Q06 were $182,135, an increase of 44% compared to 3Q05 total revenues of $126,896. The increase was primarily due to the incremental revenue from the acquisition of Norstan in the fourth quarter of Fiscal 2005 and the acquisitions of TSM, GTC, BCI, Universal, C=WIN and CSG during the first nine months of Fiscal 2006, which added $60,371 of revenues to 3Q06 results. Excluding the effects of the acquisitions and the negative impact of exchange rates of $2,949 relative to the U.S. dollar, revenues would have decreased $2,183, a decrease of 2% from 3Q05.

Revenues by Geography

North America Revenues

Revenues in North America were $143,173 for 3Q06, an increase of 82% compared to $78,642 for 3Q05. The increase was primarily due to the incremental revenue from the acquisition of Norstan in the fourth quarter of Fiscal 2005 and the acquisitions of TSM, GTC, BCI, Universal, C=WIN and CSG in the first nine months of Fiscal 2006, which added $60,371 of revenues to 3Q06 results. Excluding the effects of the acquisitions and the positive impact of exchange rates of $42 relative to the U.S. dollar, revenues would have increased 5%. The overall increase is due to increased demand in Data Services and Voice Services and success in the Company’s DVH (Data, Voice and Hotline) Services cross-selling initiatives.

Europe Revenues

Revenues in Europe were $29,950 for 3Q06, a decrease of 23% compared to $38,947 for 3Q05. The overall decrease was generally due to weak economic conditions that affected client demand and $2,613 of negative impact of exchange rates relative to the U.S. dollar. If exchange rates relative to the U.S. dollar had remained unchanged from 3Q05, Europe revenues would have decreased a total of $6,384 to $32,563, a decrease of 16%.

All Other Revenues

Revenues for All Other were $9,012 for 3Q06, a decrease of 3% compared to $9,307 for 3Q05. If exchange rates relative to the U.S. dollar had remained unchanged from 3Q05, All Other revenues would have increased $378 to $9,390, an increase of 1%.

Revenue by Service Type

Data Services

Revenues from Data Services were $47,803 for 3Q06, a decrease of 10% compared to $53,410 for 3Q05. The Company believes the overall decrease in Data Services revenue was due to decreased demand in the European market and $908 of negative impact of exchange rates relative to the U.S. dollar for its international Data Services. If exchange rates relative to the U.S. dollar had remained unchanged from 3Q05, Data Services revenues would have decreased a total of $4,699, a decrease of 9%.

Voice Services

Revenues from Voice Services were $82,281 for 3Q06, an increase of 407% compared to $16,219 for 3Q05. The increase was primarily due to the incremental revenue from the acquisition of Norstan in the fourth quarter of Fiscal 2005 and the acquisitions of TSM, GTC, BCI, Universal, C=WIN and CSG in the first nine months of Fiscal 2006, which added $60,371 of revenues to 3Q06 results. Excluding the effects of the acquisitions, Voice Services revenues increased 35% over 3Q05. The Company believes the overall increase in Voice Services revenues was due to increased demand for these services and success in cross-selling initiatives with the Company’s other service lines. There was no exchange rate impact on Voice Service revenues as all of the Company’s Voice Services revenues are denominated in U.S. dollars.

Hotline Services

Revenues from Hotline Services were $52,771 for 3Q06, a decrease of 8% compared to $57,267 for 3Q05. The Company believes the overall decline in Hotline Services revenues was due to decreased demand for these services and $2,041 of negative impact of exchange rates relative to the U.S. dollar for its international Hotline Services. If exchange rates relative to the U.S. dollar had remained unchanged from 3Q05, Hotline Services revenues would have decreased a total of $2,455, a decrease of 4%.

Gross Profit

Gross profit dollars for 3Q06 increased to $73,402 from $51,018 for 3Q05. The increase in gross profit dollars over the prior year was due to the increase in revenues. Gross profit as a percent of revenues for 3Q06 of 40.3% of revenues was comparable to 40.2% of revenues for 3Q05.

Gross profit dollars for Data Services were $14,794, or 31.4% of revenues, for 3Q06 compared to $16,149, or 30.2% of revenues, for 3Q05. Gross profit dollars for Voice Services were $32,145, or 39.1% of revenues, for 3Q06 compared to $5,469, or 33.7% of revenues, for 3Q05. Gross profit dollars for Hotline Services were $26,463, or 50.1% of revenues, for 3Q06 compared to $29,400, or 51.3% of revenues, for 3Q05.

SG&A Expenses

Selling, general and administrative (“SG&A”) expenses for 3Q06 were $50,441, an increase of $13,679 over SG&A expenses of $36,762 for 3Q05. SG&A expenses as a percent of revenue for 3Q06 were 27.7% of revenues comparable to 29.0% of revenues for 3Q05. The dollar increase is due to the fourth quarter Fiscal 2005 acquisition of Norstan and the acquisitions of TSM, GTC, BCI, Universal, C=WIN and CSG in the first nine months of Fiscal 2006.

Intangibles Amortization

Intangibles amortization for 3Q06 increased to $1,349 from $59 for 3Q05. The increase was primarily attributable to the addition of $15,971 of intangible assets acquired through the Norstan acquisition during the fourth quarter of Fiscal 2005. The Company recorded an additional $1,119 of amortization expense in 3Q06 due to these intangibles. For Fiscal 2006, the Company expects to incur in total $3,821 of additional amortization expense relative to these acquired intangibles and approximately $600 annually thereafter until Fiscal 2025. In 3Q06, the Company recorded $103 of amortization expense related to definite-lived intangibles in the acquisitions of TSM, GTC and BCI. As of 3Q06, the Company has not recorded amortization expense relative to definite-lived intangibles acquired through the 2Q06 acquisition of Universal and 3Q06 acquisitions of C=WIN and CSG. The Company expects to finalize the valuation of these intangibles by 4Q06. See Note 11 to the Notes to Consolidated Financial Statements for further details related to these acquisitions.

Operating Income

Operating income for 3Q06 was $21,612, or 11.9% of revenues, compared to $14,197, or 11.2% of revenues, for 3Q05. The impact of the Norstan acquisition related expenses on operating income were $1,245, or 1% of revenues.

Interest Expense, Net

Net interest expense for 3Q06 increased to $2,397 from $519 for 3Q05 due to an increase in the weighted average outstanding debt of approximately $149,737 for 3Q06 compared to approximately $52,727 for 3Q05. The increase in debt relates primarily to the fourth quarter Fiscal 2005 acquisition of Norstan and the acquisitions of TSM, GTC, BCI, Universal, C=WIN and CSG in the first nine months of Fiscal 2006. In addition, the weighted average interest rate outstanding for 3Q06 was 5.59%, an increase of 2.82% compared to the 3Q05 rate of 2.77%.

Provision for Income Taxes

The tax provision for 3Q06 was $6,590, an effective tax rate of 34.5%. This compares to the tax provision for 3Q05 of $4,383, an effective tax rate of 32.2%. The tax rate for 3Q06 was higher than 3Q05 due to the Company’s reassessment of the annual effective rate in 3Q05 to reflect the effect of implementing various international tax planning strategies.

The annual effective tax rate is lower than the U.S. statutory rate of 35.0% primarily due to foreign income taxes at rates lower than 35.0%. The Company anticipates that its deferred tax asset is realizable in the foreseeable future.

Net Income

Net income for 3Q06 was $12,511, or 6.9% of revenues, compared to $9,249, or 7.3% of revenues, for 3Q05. The increase in net income dollars is primarily due to the increase in revenues and gross profit, offset in part by increased interest expense and the impact of acquisition related expenses described above.

Nine Months Fiscal 2006 (3Q06YTD) Compared to Nine Months Fiscal 2005 (3Q05YTD):

Total Revenues

Total revenues for 3Q06YTD were $546,467, an increase of 45% compared to 3Q05YTD total revenues of $377,846. The increase was primarily due to the incremental revenue from the acquisition of Norstan in the fourth quarter of Fiscal 2005 and the acquisitions of TSM, GTC, BCI, Universal, C=WIN and CSG in the first nine months of Fiscal 2006, which added $168,873 of revenues to 3Q06YTD results. Excluding the effects of the acquisitions and $1,622 of negative impact of exchange rates relative to the U.S. dollar, revenues would have been comparable to 3Q05YTD.

Revenues by Geography

North America Revenues

Revenues in North America were $426,788 for 3Q06YTD, an increase of 76% compared to $242,966 for 3Q05YTD. The increase was primarily due to the incremental revenue from the acquisition of Norstan in the fourth quarter of Fiscal 2005 and the acquisitions of TSM, GTC, BCI, Universal, C=WIN and CSG in the first nine months of Fiscal 2006, which added $168,873 of revenues to 3Q06YTD results. Excluding the effects of the acquisitions and the positive impact of exchange rates of $211 relative to the U.S. dollar, revenues would have increased 6%. The overall increase is due to increased demand in Data Services and Voice Services and success in the Company’s DVH (Data, Voice and Hotline) Services cross-selling initiatives.

Europe Revenues

Revenues in Europe were $92,889 for 3Q06YTD, a decrease of 13% compared to $107,337 for 3Q05YTD. The overall decrease was generally due to weak economic conditions that affected client demand and $1,703 of negative impact of exchange rates relative to the U.S. dollar. If exchange rates relative to the U.S. dollar had remained unchanged from 3Q05YTD, Europe revenues would have decreased a total of $12,745 to $94,592, a decrease of 12%.

All Other Revenues

Revenues for All Other were $26,780 for 3Q06YTD, a decrease of 3% compared to $27,543 for 3Q05YTD. If exchange rates relative to the U.S. dollar had remained unchanged from 3Q05TYD, All Other revenues would have decreased a total of $633 to $26,910, a decrease of 2%.

Revenues by Service Type

Data Services

Revenues from Data Services were $152,568 for 3Q06YTD, no change compared to $152,136 for 3Q05YTD. If exchange rates relative to the U.S. dollar had remained unchanged from 3Q05YTD, Data Services revenues would have increased a total of $1,077, an increase of 1%.

Voice Services

Revenues from Voice Services were $233,620 for 3Q06YTD, an increase of 336% compared to $53,619 for 3Q05YTD. The increase was primarily due to the incremental revenue from the acquisition of Norstan in the fourth quarter of Fiscal 2005 and the acquisitions of TSM, GTC, BCI, Universal, C=WIN and CSG in the first nine months of Fiscal 2006, which added $168,873 of revenues to 3Q06YTD results. Excluding the effects of the acquisitions, Voice Services revenues increased 21% over 3Q05YTD. The Company believes the overall increase in Voice Services revenues was due to increased demand for these services and success in cross-selling initiatives with the Company’s other service lines. There was no exchange rate impact on Voice Service revenues as all of the Company’s Voice Services revenues are denominated in U.S. dollars.

Hotline Services

Revenues from Hotline Services were $160,279 for 3Q06YTD, a decrease of 7% compared to $172,091 for 3Q05YTD. The Company believes the overall decline in Hotline Services revenues was due to decreased demand for these services and $977 negative impact of exchange rates relative to the U.S. dollar for its international Hotline Services. If exchange rates relative to the U.S. dollar had remained unchanged from 3Q05YTD, Hotline Services revenues would have decreased a total of $10,835, a decrease of 6%.

Gross Profit

Gross profit dollars for 3Q06YTD increased to $218,224 from $155,213 for 3Q05YTD. The increase in gross profit dollars over prior year was due to the increase in revenues. Gross profit as a percent of revenues for 3Q06YTD of 39.9% was comparable to 41.1% of revenues for 3Q05YTD. The decrease in gross profit percentage was due to service mix.

Gross profit dollars for Data Services for 3Q06YTD was $45,800, or 30.0% of revenues, compared to $46,011, or 30.2% of revenues, for 3Q05YTD. Gross profit dollars for Voice Services for 3Q06YTD was $91,156, or 39.0% of revenues, compared to $18,607, or 34.7% of revenues, for 3Q05YTD. Gross profit dollars for Hotline Services for 3Q06YTD was $81,268, or 50.7% of revenues, compared to $90,595, or 52.6% of revenues, for 3Q05YTD.

SG&A Expenses

SG&A expenses for 3Q06YTD were $152,008, an increase of $44,122 over SG&A expenses of $107,886 for 3Q05YTD. SG&A expenses as a percent of revenues for 3Q06YTD were 27.8% of revenues compared to 28.6% of revenues for 3Q05YTD. The dollar increase is due to the fourth quarter Fiscal 2005 acquisition of Norstan and the acquisitions of TSM, GTC, BCI, Universal, C=WIN and CSG in the first nine months of Fiscal 2006 and $5,290 of restructuring and other charges during the first quarter of Fiscal 2006.

Intangibles Amortization

Intangibles amortization for 3Q06YTD increased to $4,235 from $187 for 3Q05YTD. The increase was primarily attributable to the addition of $15,971 of intangible assets acquired through the Norstan acquisition during the fourth quarter of Fiscal 2005. The Company recorded an additional $3,357 of amortization expense in 3Q06YTD due to these intangibles. For Fiscal 2006, the Company expects to incur in total $3,821 of additional amortization expense relative to these acquired intangibles and approximately $600 annually thereafter until Fiscal 2025. In 3Q06YTD, the Company recorded $143 of amortization expense related to definite-lived intangibles in the acquisitions of TSM, GTC and BCI. As of 3Q06, the Company has not recorded amortization expense relative to definite-lived intangibles acquired through the 2Q06 acquisition of Universal and 3Q06 acquisitions of C=WIN and CSG. The Company expects to finalize the valuation of these intangibles by 4Q06. See Note 4 to the Notes to Consolidated Financial Statements for further details related to these acquisitions.

Operating Income

Operating income for 3Q06YTD was $56,691, or 10.4% of revenues, compared to $47,140, or 12.5% of revenues, for 3Q05YTD. The impact of restructuring charges and acquisition related expenses on operating income for 3Q06YTD was $10,640, or 1.9% of revenues.

Net Interest Expense

Net interest expense for 3Q06YTD increased to $6,686 from $1,436 for 3Q05YTD due to an increase in the weighted average outstanding debt of approximately $159,476 for 3Q06YTD compared to approximately $50,968 for 3Q05YTD. The increase in debt relates primarily to the fourth quarter Fiscal 2005 acquisition of Norstan and the acquisitions of TSM, GTC, BCI, Universal, C=WIN and CSG in the first nine months of Fiscal 2006. In addition, the weighted average interest rate outstanding for 3Q06YTD was 4.86%, an increase of 2.55% compared to the 3Q05YTD rate of 2.31%.

Provision for Income Taxes

The tax provision for 3Q06YTD was $17,224, an effective tax rate of 34.5%. This compares to the tax provision for 3Q05YTD of $15,736, an effective tax rate of 34.5%.

Net Income

Net income for 3Q06YTD was $32,702, or 6.0% of revenues, and is comparable to net income of $29,875, or 7.9% of revenues, for 3Q05YTD. The increase in net income dollars is primarily due to increases in revenue and gross profit offset in part by the 1Q06 restructuring charge, increased interest expense and the impact of acquisition related expenses.

Liquidity and Capital Resources

Operating Activities

As of the end of 3Q06 and 3Q05, the Company had working capital of $109,007 and $120,356, respectively. The Company’s current ratio was 1.78 and 2.88 as of the end of 3Q06 and 3Q05, respectively. The decrease in the current ratio is primarily driven by liabilities assumed as part of the acquisitions completed during the fourth quarter of Fiscal 2005 and the first nine months of Fiscal 2006.

Net cash provided by operating activities during 3Q06YTD and 3Q05YTD was $38,912 and $34,405, respectively. The Company’s major source of cash from operations was net income and the net change in accounts receivable. The Company’s primary use of cash from operations was the net change in accounts payable and accrued liabilities.

The Company anticipates that approximately $1,200 to $1,500 will be incurred during Fiscal 2006 for the ongoing monitoring and testing requirements of Section 404 of the Sarbanes-Oxley Act of 2002. As of the end of 3Q06, the Company has incurred approximately $831 related to these requirements.

The Company believes that its cash provided by operating activities and availability under its credit facility will be sufficient to fund the Company’s working capital requirements, capital expenditures, dividend program, potential stock repurchases, potential future acquisitions or strategic investments and other cash needs for the next 12 months.

Investing Activities

Net cash used in investing activities during 3Q06YTD and 3Q05YTD was $42,979 and $2,347, respectively. The Company’s primary use of cash during 3Q06YTD was related to the acquisition of businesses.

During 3Q06YTD, gross capital expenditures were $3,151, while capital disposals were $1,232. Gross capital expenditures for Fiscal 2006 are projected to be $4,000 to $6,000 and will be spent primarily on information systems, general equipment and facility improvements.

During 3Q06YTD, the Company paid $40,682 to acquire TSM, GTC, BCI, Universal, C=WIN and CSG, net of cash acquired in the transactions. The cash impact of prior merger-related payments made during 3Q06YTD was $378. See Note 11 of the Notes to Consolidated Financial Statements for additional detail on acquisitions made during the first nine months of Fiscal 2006.

Financing Activities

Net cash provided by financing activities during 3Q06YTD was $5,016 compared to the net cash used in 3Q05YTD of $29,283. Cash provided by financing activities for 3Q06YTD resulted primarily from $16,344 cash received from the exercise of stock options, partially offset by cash used of $3,049 for payment of dividends and $7,418 for net repayment of debt.

Total Debt

Borrowings under the Credit Agreement are permitted up to a maximum amount of $240,000, which includes up to $15,000 of swingline loans and $25,000 of letters of credit. The Credit Agreement may be increased by the Company up to an additional $60,000 with the approval of the lenders and may be unilaterally and permanently reduced by the Company to not less than the then outstanding amount of all borrowings. Interest on outstanding indebtedness under the Credit Agreement accrues, at the Company’s option, at a rate based on either: (a) the greater of (i) the prime rate per annum of the agent then in effect and (ii) 0.50% plus the rate per annum announced by the Federal Reserve Bank of New York as being the weighted average of the rates on overnight Federal funds transactions arranged by Federal funds brokers on the previous trading day or (b) a rate per annum equal to the LIBOR rate plus 0.75% to 1.50% (determined by a leverage ratio based on the Company’s EBITDA). The majority of the Company’s borrowings were under the LIBOR option. The Credit Agreement expires on August 31, 2008.

The Company’s total debt at the end of 3Q06 of $142,020 was comprised of $140,000 under the Credit Agreement, $1,768 of obligations under capital leases and $252 of various other third-party, non-employee loans. The weighted average interest rate on all indebtedness of the Company during 3Q06 and 3Q05 was approximately 5.59% and 2.31%, respectively. In addition, as of the end of 3Q06, the Company had $3,065 of letters of credit outstanding and $96,935 available under the Credit Agreement.

The Credit Agreement includes financial covenants requiring a minimum net worth, leverage and fixed charge coverage ratio. At the end of 3Q06, the Company was in compliance with all required covenants under the Credit Agreement.

Dividends

During 3Q06, the Company’s Board of Directors declared a cash dividend of $0.06 per share on all outstanding shares of the Company’s Common Stock. The dividend totaled $1,044 and was paid on January 13, 2006 to stockholders of record at the close of business on December 31, 2005. The dividend declared during 4Q06 of $0.06 per share will be paid on April 14, 2006 to stockholders of record on March 31, 2006. While the Company expects to continue to declare dividends for the foreseeable future, there can be no assurance as to the timing or amount of such dividends.

Repurchase of Common Stock

During 3Q06, the Company repurchased approximately 117 shares for $5. Since inception of the repurchase program in April 1999 through December 31, 2005, the Company has repurchased in aggregate approximately 6,935,000 shares of Common Stock for approximately $297,000. Funding for the stock repurchases came primarily from existing cash flow from operations. Additional repurchases of stock may occur from time to time depending upon factors such as the Company’s cash flows and general market conditions. While the Company expects to continue to repurchase shares of the Common Stock for the foreseeable future, there can be no assurance as to the timing or amount of such repurchases.

Foreign Currency Exchange Impact

The Company has entered and will continue in the future, on a selective basis, to enter into foreign currency forward contracts to reduce the foreign currency exposure related to certain intercompany transactions, primarily trade receivables and loans. All of the contracts have been designated and qualify as cash flow hedges. The effective portion of any changes in the fair value of the derivative instruments is recorded in OCI until the hedged forecasted transaction occurs or the recognized currency transaction affects earnings. Once the forecasted transaction occurs or the recognized currency transaction affects earnings, the effective portion of any related gains or losses on the cash flow hedge is reclassified from OCI to earnings. In the event the hedged forecasted transaction does not occur, or it becomes probable that it will not occur, the ineffective portion of any gain or loss on the related cash flow hedge would be reclassified from OCI to earnings at that time.

At of the end of 3Q06, the open foreign exchange contracts were in Euro, Pound sterling, Canadian dollar, Swiss franc, Japanese yen, Swedish krona, Danish krone, Norwegian kroner and Australian dollar. The open contracts have contract rates of 0.7850 to 0.8527 Euro, 0.5365 to 0.5821 Pound sterling, 1.1751 to 1.1794 Canadian dollar, 1.2149 to 1.3114 Swiss franc, 119.12 to 119.59 Japanese yen, 7.7377 to 8.0770 Swedish krona, 5.9275 to 6.3749 Danish krone, 6.2087 to 6.8638 Norwegian kroner and 1.3077 to 1.3691 Australian dollar, all per U.S. dollar.

The total open contracts, with a notional amount of approximately $38,673, have a fair value of $37,248 and will expire within fifteen months.

Critical Accounting Policies

The Company’s critical accounting policies are described in the Notes to the Company’s Consolidated Financial Statements for the year ended March 31, 2005 contained in the Company’s Annual Report on Form 10-K. There have been no significant changes to these policies during the subsequent quarters.

New Accounting Pronouncements

See Notes to Consolidated Financial Statements.

Inflation

The overall effects of inflation on the Company have been nominal. Although long-term inflation rates are difficult to predict, the Company continues to strive to minimize the effects of inflation through improved productivity and cost reduction programs as well as price adjustments within the constraints of market competition.

Forward Looking Statements

When included in this Quarterly Report on Form 10-Q or in documents incorporated herein by reference, the words “expects,” “intends,” “anticipates,” “believes,” “estimates” and analogous expressions are intended to identify forward-looking statements. Such statements are inherently subject to a variety of risks and uncertainties that could cause actual results to differ materially from those projected. Such risks and uncertainties include, among others, general economic and business conditions, competition, changes in foreign, political and economic conditions, fluctuating foreign currencies compared to the U.S. dollar, rapid changes in technologies, client preferences, the ability of the Company to identify, acquire and operate additional technical service companies and various other matters, many of which are beyond the Company’s control. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and speak only as of the date of this Quarterly Report on Form 10-Q. The Company expressly disclaims any obligation or undertaking to release publicly any updates or any changes in the Company’s expectations with regard thereto or any change in events, conditions or circumstances on which any statement is based.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

The Company is exposed to market risks in the ordinary course of business that include interest rates and foreign currency exchange rates. Market risk is measured as the potential negative impact on earnings, cash flows or fair values resulting from a hypothetical change in interest rates or foreign currency exchange rates over the next year.

Interest Rate Risk

The Company’s primary interest rate risk relates to its long-term debt obligations. At December 31, 2005, the Company had total long-term obligations, including the current portion of those obligations, of $142,020. Of that amount, $2,020 was in fixed rate obligations and $140,000 was in variable rate obligations. For the amounts in variable rate debt at December 31, 2005, an instantaneous 100 basis point increase in the interest rate would reduce the Company’s expected net income in the subsequent quarter by $245, assuming the Company employed no intervention strategies. The Company has no interest rate hedging agreements.

Foreign Exchange Rate Risk

The Company has operations, clients and suppliers worldwide, thereby exposing the Company’s financial results to foreign currency fluctuations. In an effort to reduce this risk, the Company generally sells and purchases inventory based on prices denominated in U.S. dollars. Intercompany sales to subsidiaries are generally denominated in the subsidiaries’ local currency. To mitigate this risk, the Company has entered and will continue in the future, on a selective basis, to enter into foreign currency forward contracts to reduce the foreign currency exposure related to certain intercompany transactions. At December 31, 2005, the Company had total open contracts valued at approximately $38,673 with a fair value of approximately $37,248.

The Company does not hold or issue any other financial derivative instruments nor does it engage in speculative trading of financial derivatives.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

In connection with the preparation of this Quarterly Report on Form 10-Q as of December 31, 2005, an evaluation was performed, under the supervision and with the participation of Company management, including the Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Act”)). Based on that evaluation, management, including the CEO and CFO, has concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, the Company’s disclosure controls and procedures were effective in all material respects at the reasonable assurance level to ensure that information required to be disclosed in reports that the Company files or submits under the Act is recorded, processed, summarized and timely reported in accordance with the rules and forms of the SEC.

The scope of management’s assessment of the effectiveness of internal control over financial reporting includes all of the Company’s material businesses except for Norstan, a material business acquired on January 25, 2005 representing approximately 18% and 21% of total assets as of December 31, 2005 and March 31, 2005, respectively. The Norstan portion of the business will be included in the current year assessment to be completed as of March 31, 2006.

There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including cost limitations, judgments used in decision making, assumptions regarding the likelihood of future events, soundness of internal controls, fraud, the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can provide only reasonable, and not absolute, assurance of achieving their control objectives.

Changes in Internal Control Over Financial Reporting

In the third fiscal quarter ended December 31, 2005, there had been no change in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II — OTHER INFORMATION

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.



							(d) Maximum Number
					(c) Total Number of		(or Approximate
					Shares (or Units)		Dollar Value) of
					Purchased as Part		Shares (or Units)
	(a) Total Number of		(b) Average Price		of Publicly		that May Yet Be
	Shares (or Units)		Paid per Share		Announced Plans or		Purchased Under the
Period	Purchased		(or Unit)		Programs		Plans or Programs⁽¹⁾

October 2 to October 30, 2005		—	$	—		—		564,970

October 31, to November 27, 2005		117		45.44		117		564,853

November 28, to December 31, 2005		—		—		—		564,853

Total		117	$	45.44		117		564,853	⁽²⁾


⁽¹⁾		As of October 1, 2005, 564,970 shares were available for repurchase under repurchase programs approved by the Board of Directors and announced on November 20, 2003 and August 12, 2004.

⁽²⁾		The repurchase programs have no expiration date and no programs were terminated prior to the full repurchase of the authorized amount.

Additional repurchases of stock may occur from time to time depending upon factors such as the Company’s cash flows and general market conditions. While the Company expects to continue to repurchase shares of the Common Stock for the foreseeable future, there can be no assurance as to the timing or amount of such repurchases.


		Page
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited).

Consolidated Balance Sheets — December 31, 2005 and March 31, 2005.		3

Consolidated Statements of Income — Three and Nine months ended December 31, 2005 and January 1, 2005.		4

Consolidated Statements of Cash Flows — Nine months ended December 31, 2005 and January 1, 2005.		5

Notes to Consolidated Financial Statements.		6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.		17

Item 3. Quantitative and Qualitative Disclosures about Market Risk.		29

Item 4. Controls and Procedures.		29

PART II. OTHER INFORMATION

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.		30

Item 6. Exhibits.		31

SIGNATURE		32

EXHIBIT INDEX		33
EX-21.1
EX-31.1
EX-31.2
EX-32.1


Exhibit
Number		Description

21.1		Subsidiaries of Registrant ⁽¹⁾

31.1		Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities and Exchange Act of 1934, as amended, and Section 302 of the Sarbanes-Oxley Act of 2002 ⁽¹⁾

31.2		Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities and Exchange Act of 1934, as amended, and Section 302 of the Sarbanes-Oxley Act of 2002 ⁽¹⁾

32.1		Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) of the Securities and Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 ⁽¹⁾


	BLACK BOX CORPORATION
Dated: February 9, 2006
	By:	/s/ Michael McAndrew
		Michael McAndrew, Vice President,
		Chief Financial Officer, Treasurer, Secretary, and Principal Accounting Officer


Exhibit
Number		Description

21.1		Subsidiaries of Registrant ⁽¹⁾

31.1		Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities and Exchange Act of 1934, as amended, and Section 302 of the Sarbanes-Oxley Act of 2002 ⁽¹⁾

31.2		Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities and Exchange Act of 1934, as amended, and Section 302 of the Sarbanes-Oxley Act of 2002 ⁽¹⁾

32.1		Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) of the Securities and Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 ⁽¹⁾

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⁽¹⁾		Filed herewith.


⁽¹⁾		Filed herewith.