Thomas Group Announces Conclusion and Reports Results of Voluntary Investigation of Stock Option Granting Practices
April 06 2007 - 3:47PM
Business Wire
Thomas Group, Inc. (NasdaqGM:TGIS), a leading operations and
process improvement firm, announced today it has concluded the
voluntary investigation into its stock option granting practices.
The results of the investigation and related restatement of certain
of the Company�s historical financial statements were included in
the Company�s Annual Report on Form 10-K for the year ended
December 31, 2006, which was filed with the Securities and Exchange
Commission on April 6, 2007 (�Form 10-K�). Investors are encouraged
to review the details of the investigation and the restatement in
the Form 10-K. This press release summarizes those matters. The
Company�s Board of Directors, with concurrence and oversight by its
Audit Committee, previously initiated a review of the Company�s
historical stock option practices and related accounting in
connection with the Company�s assessment of its historical
capitalization documentation and not in response to any specific
concerns from within the Company about option practices or any
inquiry from the Securities and Exchange Commission or any other
regulatory agency. The Company�s Board of Directors received a
report on the results of the investigation on March 30, 2007 from
the Company�s outside counsel and specially retained forensic
accountants. At that time, the Board also received recommendations
for proposed remedial measures, which did not include any remedial
measures pertaining to the Company�s directors or senior management
team. The investigation team determined that from the Company�s
initial public offering in August 1993 to the date of its last
option grant in January 2003, its historical stock option granting
process has generally reflected a lack of either Board or
Compensation Committee authorization for specific option grants,
although a few instances exist where the Board or Compensation
Committee took appropriate granting action under Delaware law and
the Company�s option plans. Instead, the investigation team
determined that, from August 1993 to January 2003, the Company ran
a CEO-centric option granting process with additional participation
by the President from time to time and with minimal oversight by
either the Board or Compensation Committee. The investigation team
also determined that the Company�s CEOs and/or Presidents through
January 2003 thought that they had the apparent authority to grant
options. Based on the historical process deficiencies, the Company
has concluded that it will be required to adjust the accounting
measurement dates for certain of its stock option grants in
accordance with the earliest evidence that the recipient of the
grant as well as the number of shares subject to such award were
set with finality. The investigation team also identified some
evidence that could be construed as manipulative for certain option
grants and option exercises. Notwithstanding the foregoing, the
investigation team concluded that the totality of the information
obtained and reviewed does not indicate that (i) stock option
grants were intentionally back-dated on a widespread basis in order
to obtain more favorable pricing for directors, officers or
employees or (ii) option exercises were intentionally manipulated
on a widespread basis. The investigation team also concluded that
the Company�s internal control over financial reporting and its
legal processes in connection with stock option grants and
exercises have been ineffective. After consideration of the report,
the Board affirmed its confidence in the Company�s senior
management team and their continued ability to sign certifications
with respect to the Company�s periodic SEC reports and its
financial statements. The Company has self reported the internal
investigation and the restatement to the Securities and Exchange
Commission and intends to cooperate with any informational or other
requests from the SEC. In connection with the investigation, the
Company�s Board of Directors, with the approval of the Company�s
Audit Committee, has determined that the cumulative non-cash
stock-based compensation expense adjustment described below was
material and that the Company�s consolidated financial statements
for each of the first three quarters of fiscal the year ended
December�31, 2006, each of the quarters in the fiscal year ended
December�31, 2005 and the fiscal years ended December�31, 2005 and
2004 as well as the selected consolidated financial data for the
fiscal years ended December�31, 2003 and 2002 should be restated to
record additional stock-based compensation expense resulting from
stock options granted during 1993 to 2003 that were incorrectly
accounted for under GAAP, and related income tax effects. The
Company�s consolidated financial statements included in previously
filed periodic reports with the SEC for such periods have not been
amended. Instead, the consolidated financial statements and
selected financial data included in the Form 10-K have been
restated in order to reflect the referenced adjustments. The
Company has determined that the cumulative, pre-tax, stock-based
compensation expense resulting from revised measurement dates of
stock option grants was approximately $2.2�million during the
period from the Company�s initial public offering in 1993 through
December�31, 2006. These amounts include approximately $2.1 million
in non-cash stock based compensation charges and $0.1 million in
cash-based taxes, penalties and interest. Conversely, the Company
has recorded $0.1 million in tax benefits related to stock
compensation charges. Previously reported total revenues were not
impacted by the restatement. The adjustments made in the
restatement relate to options covering approximately 1.9 million
shares. The Company has recorded amounts as follows: Fiscal Year
Ended December 31, Stock-based Compensation Expense(1) Income Tax,
Penalty and Interest(1) Income tax expense (benefit) (2) Decrease
in EPS 2006� $5,532� $100,613� ($34,367) $0.00� 2005� $48,567� -�
($18,456) $0.00� 2004� $53,722� -� ($20,414) $0.00� 2003� $71,281�
-� ($27,087) $0.00� 2002� $49,293� -� ($10,657) $0.01� Pre-2002�
$1,891,021� -� --� --� Total $2,119,416� $100,613� ($110,981)
$0.01� (1) Recorded as a $2.2 million expense with an offsetting
$2.1 million increase to additional paid-in capital. Net decrease
in equity is $0.1 million due to cash-based taxes, penalties and
interest. (2) Recorded as a decrease to tax expense and an increase
to deferred tax asset or decrease to income tax payable. Net
increase in equity is $0.1 million. In connection with the
restatement, the Company assessed the impact of the findings of the
internal investigation into its historical stock option grant
practices and other tax matters on its reported income tax benefits
and deductions, including income tax deductions previously taken
for cash and stock-based executive compensation under the
provisions of Internal Revenue Code Section�162(m), which provides
for a $1 million tax deduction cap on compensation awarded to
certain top executives that is not considered performance-based.
The Company determined that no adjustments were required to its
(i)�income tax expense previously reported in its Consolidated
Statements of Income; (ii) tax benefits on stock option exercises
previously reported in its Consolidated Statements of Cash Flows
and Consolidated Statement of Changes in Stockholders� Equity or
(iii) deferred tax assets previously reported in its Consolidated
Balance Sheets. However, the Company has determined that Section
162(m) may apply to option exercises in 2006 for 180,649 shares
held by James T. Taylor, our CEO, which, when combined with other
applicable employee remuneration, will be limited to a tax
deduction of $1 million in 2006. We estimate the non-deductible
amount for 2006 to be approximately $654,000, which will result in
increased taxes of approximately $241,000. The Company has also
recorded $101,230 of income tax benefit in its Consolidated
Statements of Income for the year ended December 31, 2006 and in
its Consolidated Balance Sheets at December 31, 2006 to recognize
deferred income tax assets on stock-based compensation relating to
unexercised stock options. This amount is not included in the
tables above because it is a fourth quarter 2006 estimate, and not
part of the restatement. Section�409A of the Internal Revenue Code
provides that option holders with options granted with a
below-market exercise price, to the extent the options were not
vested as of December�31, 2004, may be subject to adverse Federal
income tax consequences. Holders of these options will likely be
required to recognize taxable income at the date of vesting for
those options vesting after December�31, 2004, rather than upon
exercise, on the difference between the amount of the fair market
value of our common stock on the date of vesting and the exercise
price, plus an additional 20�percent penalty tax and interest on
any income tax to be paid. To the extent this process is available
to affected employees, the Company has decided to follow the IRS
Settlement Offer issued in February 2007 to pay penalty and
interest, estimated at approximately $46,000, to the IRS on behalf
of the employees and potentially gross-up employees for tax costs.
The IRS offer only applies to option exercises by rank and file
employees in 2006. Thomas Group, Inc. (NasdaqGM: TGIS) is an
international, publicly traded professional services firm
specializing in operational improvements. Thomas Group's unique
brand of process improvement and performance management services
enable businesses to enhance operations, improve productivity and
quality, reduce costs, generate cash and drive higher
profitability. Known as The Results Company(SM), Thomas Group
creates and implements customized improvement strategies for
sustained performance improvements in all facets of the business
enterprise. Thomas Group has offices in Dallas, Detroit, and Hong
Kong. For additional information on Thomas Group, Inc., please go
to www.thomasgroup.com. Safe Harbor Statement under the Private
Securities Litigation Reform Act: Statements in this release that
are not strictly historical are �forward-looking� statements, which
should be considered as subject to the many uncertainties that
exist in the Company�s operations and business environment. These
uncertainties, which include economic and business conditions that
may impact clients and the Company�s performance-oriented fees,
timing of contracts and revenue recognition, competitive and cost
factors, and the like, are set forth in the Company�s filings from
time to time with the Securities and Exchange Commission, including
the Company�s Form 10-K for the year ended December 31, 2006.
Except as required by law, the Company expressly disclaims any
intent or obligation to update any forward-looking statements.
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