UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
Current Report
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (date of earliest event reported):
April 23, 2007
THE MANAGEMENT NETWORK GROUP, INC.
(Exact name of company as specified in its charter)
Delaware 0-27617 48-1129619
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(State or other jurisdiction (Commission File Number) (IRS Employer
of incorporation) Identification Number)
7300 College Boulevard, Suite 302, Overland Park, Kansas 66210
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(Address of principal executive offices) (Zip code)
(913) 345-9315
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(Registrant's telephone number, including area code)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (see General Instruction A.2.):
[ ] Written communications pursuant to Rule 425 under the Securities Act (17
CFR 230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17
CFR 240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4(c))
ITEM 4.02 NON-RELIANCE ON PREVIOUSLY ISSUED FINANCIAL STATEMENTS OR A
RELATED AUDIT REPORT OR COMPLETED INTERIM REVIEW
ITEM 8.01 OTHER EVENTS
As we have previously announced, a special committee of our Board of Directors
(the "Board"), together with its independent legal counsel and forensic
accountants, has conducted an investigation of our historical practices
associated with the granting of stock options and restricted stock and our
accounting for those awards.
The Board did not place any limitations on the scope of the special committee's
review. The special committee and its advisors were given complete access to all
electronic and other documents maintained by us and our employees and received
full cooperation from management. The special committee's investigative team
searched more than one million physical and electronic documents, reviewed more
than 270,000 physical and electronic documents, and interviewed more than 20
current and former directors, officers, employees and advisors.
For additional information about this and related matters, see our current
reports on Form 8-K filed on November 13, 2006, November 20, 2006, January 19,
2007, February 15, 2007, February 28, 2007, April 4, 2007 and April 9, 2007.
The special committee has completed its review, and delivered its final report
to our Board on April 23, 2007. We will provide copies of the report to the
Securities and Exchange Commission and all investigation documents required by
the Nasdaq Stock Market.
The special committee and its advisors analyzed the measurement dates for all
856 stock option grants and restricted stock awards made between November 1,
1999, before our initial public offering, and October 2, 2006, the date our
Board suspended option grants pending completion of the investigation (the
"review period").
The special committee determined that 582 of those stock option and restricted
stock grants (representing an aggregate of approximately 8,479,129 shares) had
incorrect measurement dates. The misdated options and restricted stock awards
represented 68% of all options and restricted stock awards made during the
review period.
The special committee's investigation identified a large number of option grants
for which grant dates were intentionally selected in order to obtain favorable
exercise prices. The grant dates for these awards were selected to reflect our
stock price at a date prior to the actual grant date or measurement date. The
vast majority of these options that were retroactively priced were granted to
non-management employees. Approximately 94% of these misdated grants (in number
of grants and number of underlying shares) occurred prior to 2004.
We are restating previously filed financial statements for fiscal years 2004 and
2005, along with the first and second quarters of fiscal year 2006, to record
additional non-cash share-based compensation expense and the related tax effects
in connection with misdated options and restricted stock awards. These non-cash
adjustments, after tax, will amount to approximately $0.2 million, $0.4 million
and $1.3 million in fiscal years 2006, 2005 and 2004, respectively. The
aggregate additional non-cash compensation expense, after tax, attributable to
misdated options and restricted shares awarded prior to 2004 is approximately
$6.9 million and will be recorded as an increase in accumulated deficit as of
January 3, 2004 to reflect the cumulative effect of the error. The restated
financial statements will be included in our Quarterly Report on Form 10-Q for
the quarter ended September 30, 2006, in our Annual
Report on Form 10-K for the fiscal year ended December 30, 2006, and our amended
Quarterly Reports on Form 10-Q/A for the quarters ended April 1, 2006 and July
1, 2006. The September 30, 2006 Form 10-Q and December 30, 2006 Form 10-K are
being filed late because of the investigation and consequent restatement.
Pursuant to SEC guidance, we do not intend to amend any other previously filed
Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q or proxy statements
affected by the restatement; accordingly, such reports and the related reports
of our independent registered public accounting firm and such proxy statements
should not be relied upon.
The special committee found no evidence of intent to defraud, fraudulent
misconduct or intentional filing of misleading financial statements or other
public disclosures. None of the current executive officers or directors who
received stock options that were incorrectly dated (seven grants in total during
the seven year review period) exercised those stock options. The special
committee did not find that incorrect dating of stock options resulted in any
direct financial gain to executive officers or directors. The special committee
did not recommend the termination or resignation of any member of management or
the Board.
All seven misdated dated stock option grants made to current executive officers
or directors (representing an aggregate of 502,612 shares) have been voluntarily
surrendered and cancelled.
Most of the misdated option grants, other than those made to executive officers
and directors, were made by management without prior Board approval under an
apparent or de facto delegation of authority by the Board. Although reports of
stock option grants were provided to the Board from time to time, the recipients
and terms of most of these grants were generally fixed for accounting purposes
before these reports were provided to the Board. The de facto delegation of
granting authority to management may not have complied with the terms of the
equity compensation plans under which those options and restricted stock grants
were awarded.
The special committee made the following additional key findings:
o There was a widespread misconception among personnel responsible for
making, processing and approving grants that our stock option
practices were proper.
o There was widespread unawareness of the accounting consequences of our
stock option practices.
o Our internal controls and procedures were inadequate to ensure the
accurate reporting of expense related to stock option grants and
nonvested stock awards.
o There was inadequate communication between the Board, management,
accounting personnel, and non-accounting personnel in the options
granting and reporting process.
o There was inadequate training of both accounting and non-accounting
personnel.
o Non-accounting staff were not provided sufficient guidance with
respect to the proper accounting consequences of option pricing.
o Accounting staff placed undue reliance on the information recorded by
our non-accounting staff in our third-party stock plan management and
reporting information system.
The special committee also found that our financial statements and financial
statement footnotes have inaccurately reported stock option compensation expense
since 1999, that our proxy statement disclosures about stock options have been
inaccurate, and that our corporate governance polices and procedures have been
inadequate.
Based upon the special committee's findings and its own evaluation, management
has concluded that our disclosure controls and procedures were not effective to
provide reasonable assurance that information required to be disclosed in
reports filed under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), was recorded, processed, summarized and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosures. This
was due to material weakness in our internal control over financial reporting,
which included a failure to maintain effective controls over the determination
of the accounting measurement dates for stock options and restricted stock
awards and the additional control deficiencies described above. This weakness
led to the planned restatement of our historical financial statements discussed
above. In light of this conclusion, we are adopting new and enhanced processes
and procedures to ensure the future integrity of our control process and the
reliability of our financial reporting.
The special committee made a series of recommendations to the Board for
improvements in our equity compensation process, corporate governance practices,
disclosure controls and procedures, and our financial reporting. On April 23,
2007, our Board adopted all of the recommendations of the special committee and
directed management to implement those recommendations that require action on
the part of management. The Board actions included the following:
o The Board authorized the special committee to follow-up its
investigation and review the implementation by the Board and
management of the special committee's recommendations with a view to
eventually transitioning ongoing monitoring of such matters to the
standing committees of the Board.
o The Board accepted the voluntary surrender of the seven misdated
option grants made to current executive officers and directors
referred to above.
o The Board directed that until appropriate procedures have been
approved by the Board and implemented, all stock option and restricted
stock awards should be granted solely by the full Board until such
time as the Board determines that it is appropriate for the
Compensation Committee to assume that role.
o The Board determined that the primary duty and responsibility of
Donald E. Klumb as our Chief Financial Officer is to manage the
financial affairs of the Company and that he shall have very limited
assignments and responsibilities outside of this role. The Board
directed management to prepare a job description for the Chief
Financial Officer and submit it for review and approval by the Board
and Audit Committee by May 15, 2007.
The Board further directed that Mr. Klumb's performance as Chief
Financial Officer be reassessed by our CEO, the Audit Committee and
the Board by September 30, 2007.
o The Board directed management to prepare and submit to the Board a
report on the staffing needs and requirements of our finance and
accounting, legal and human resources departments.
o The Board directed that until further notice management must report to
the special committee on a monthly basis on its progress in
implementing the actions recommended by the special committee and
adopted by the Board. The Board indicated its desire to eventually
have the standing committees of the Board assume oversight
responsibilities from the special committee.
Management has also adopted the following measures:
o We have hired a national consulting firm to assist us with the
planning and implementation of our internal control over financial
reporting pursuant to Section 404 of the Sarbanes-Oxley Act and to
help ensure that we have an adequate internal controls and procedures
for financial reporting.
o We have hired additional accounting personnel to assist us with our
accounting and financial reporting function. Training for accounting
and non-accounting personnel will be enhanced. Management and the
Board will assess the need for additional personnel and/or training on
an ongoing basis.
o We have hired an in-house General Counsel to coordinate our legal
affairs and Exchange Act compliance.
We are conducting a comprehensive review of our compensation, governance and
financial reporting policies and practices and will be adopting additional
measures to improve the quality and integrity of our corporate governance,
internal controls and financial reporting. We are committed to high standards of
accountability, transparency, financial integrity and effective governance and
are dedicated to improving our performance in all of these areas.
Cautionary note regarding forward-looking statements
This report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Forward-looking statements
involve risks and uncertainties. In particular, any statements contained in this
report regarding the special committee's investigation, the planned restatement
of the Company's financial statements, the potential impact of such restatement,
the identification of accounting errors or corrections, and/or recommendations
of the special committee or measures adopted by management and the Board are
subject to known and unknown risks, uncertainties and contingencies. Factors
that might affect actual results, performance or achievements include, among
other things, the matters discussed in this report, the restatement of the
Company's financial statements, legal, accounting and regulatory developments
relating to our stock option grants and accounting for those grants, potential
claims or liability that may arise as a result of these matters, that the
anticipated accounting adjustments could have negative tax implications for the
Company, the potential for delisting of our common stock on the Nasdaq Stock
Market, the effectiveness of remedial measures adopted by management and our
Board, and other actions that may be taken as a result of the special committee
investigation. In addition to the matters described in this report, risks and
uncertainties are described from time to time in our filings with the Securities
and Exchange Commission. You should not place undue reliance on any
forward-looking statements, which speak only as of the date on which they are
made. We undertake no responsibility to update any of these forward-looking
statements to reflect events or circumstances occurring after the date of this
report.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
THE MANAGEMENT NETWORK GROUP, INC.
Date: April 27, 2007 By: /s/ Donald E. Klumb
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Donald E. Klumb
Vice President and Chief Financial
Officer