FWP 1 w77668fwfwp.htm FWP fwp
Issuer Free Writing Prospectus dated November 8, 2010
Filed by Booz Allen Hamilton Holding Corporation
Pursuant to Rule 433 under the Securities Act of 1933
Registration Statement No. 333-167645
 
Booz Allen Hamilton Holding Corporation
 
Free Writing Prospectus
 
This Free Writing Prospectus is being filed to advise you of the availability of a revised preliminary prospectus, dated November 8, 2010 (the “Updated Preliminary Prospectus”) and to provide you with a hyperlink to the current version of the Registration Statement on Form S-1 (File No. 333-167645), which includes the Updated Preliminary Prospectus. The Updated Preliminary Prospectus updates, among other things, our financial results for the six months ended September 30, 2010. This Free Writing Prospectus presents below certain information included in the Updated Preliminary Prospectus under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” regarding our results of operations and cash flows for the six months ended September 30, 2010 under the following captions: “— Results of Operations — Financial and Other Highlights — Six Months Ended September 30, 2010”; “— Results of Operations — Six Months Ended September 30, 2010 Compared to Six Months Ended September 30, 2009”; and “— Liquidity and Capital Resources — Cash Flows.” This Free Writing Prospectus also presents below our consolidated financial statements which includes our unaudited consolidated financial statements as of September 30, 2010 and for the six months ended September 30, 2009 and 2010, and these consolidated financial statements are included in the Updated Preliminary Prospectus. References to “we,” “us,” “our,” our “company,” “fiscal,” “acquisition,” “recapitalization” and certain other defined terms have the meaning given to them in the Updated Preliminary Prospectus. The Updated Preliminary Prospectus forms a part of our Registration Statement on Form S-1 (File No. 333-167645) to which this Free Writing Prospectus relates. You should carefully read the Updated Preliminary Prospectus before deciding to invest in our Class A common stock.
 
To review a filed copy of our current Registration Statement and the Updated Preliminary Prospectus, click the following link on the SEC website at www.sec.gov as follows (or if such address has changed, by reviewing our filings for the relevant date on the SEC website):
 
http://www.sec.gov/Archives/edgar/data/1443646/000095012310102320/w77668a5sv1za.htm


 

 
Results of Operations
 
                 
    The Company  
    Six Months
 
    Ended September 30,  
    2009     2010  
    (Unaudited)
    (Unaudited)  
    (As adjusted)        
    (In thousands)  
 
Revenue
  $ 2,508,716     $ 2,709,143  
Operating costs and expenses:
               
Cost of revenue
    1,304,396       1,375,658  
Billable expenses
    673,292       715,529  
General and administrative expenses
    372,711       418,330  
Depreciation and amortization
    48,028       38,972  
                 
Total operating costs and expenses
    2,398,427       2,548,489  
                 
Operating income
    110,289       160,654  
Interest income
    819       478  
Interest (expense)
    (73,112 )     (85,824 )
Other expense, net
    (762 )     (947 )
Income (loss) from continuing operations before income taxes
    37,234       74,361  
Income tax expense from continuing operations
    17,999       31,375  
                 
Income from continuing operations
    19,235       42,986  
                 
Loss from discontinued operations, net of tax
           
                 
Net income
  $ 19,235     $ 42,986  
                 
 
Financial and Other Highlights — Six Months Ended September 30, 2010
 
Key financial highlights during the six months ended September 30, 2010 include:
 
  •  Revenue increased 8.0% over the six months ended September 30, 2009 driven primarily by the deployment during the six months ended September 30, 2010 of approximately 2,200 net additional consulting staff against funded backlog. Net additional consulting staff reflects newly hired consulting staff net of consulting staff attrition during the twelve months ended September 30, 2010.
 
  •  Operating income as a percentage of revenue increased to 5.9% in the six months ended September 30, 2010 from 4.4% in the six months ended September 30, 2009. The increase in operating margin reflects a reduction in the cost of revenue as a percentage of revenue driven by a decrease in acquisition-related expenses and cost efficiencies across our overhead base primarily related to lower indirect labor costs.
 
  •  Income from continuing operations before taxes increased to $74.4 million for the six months ended September 30, 2010 from $37.2 million for the six months ended September 30, 2009 due to an increase in operating income of $50.4 million, partially offset by a decrease in interest expense.
 
Six Months Ended September 30, 2010 Compared to Six Months Ended September 30, 2009
 
Revenue
 
Revenue increased to $2,709.1 million in the six months ended September 30, 2010 from $2,508.7 million in the six months ended September 30, 2009, or a 8.0% increase. This increase was primarily driven by the deployment during the six months ended September 30, 2010 of approximately 2,200 net additional consulting staff against funded backlog. Consulting staff increased during the period due to ongoing recruiting efforts, resulting in additions to consulting staff in excess of attrition. Additions to funded backlog during the twelve months ended September 30, 2010 totaled $5.9 billion, including $3.3 billion in the six months ended September 30, 2010, as a result of the conversion of unfunded backlog to funded backlog, the award of new contracts and task orders under which funding was appropriated and the exercise and subsequent funding of priced options.


2


 

 
Cost of Revenue
 
Cost of revenue increased to $1,375.7 million in the six months ended September 30, 2010 from $1,304.4 million in the six months ended September 30, 2009, or a 5.5% increase. This increase was primarily due to an increase in salaries and salary-related benefits of $69.7 million and employer retirement plan contributions of $9.3 million. The increase in salaries and salary-related benefits was driven by headcount growth of approximately 2,200 net additional consulting staff in the twelve months ended September 30, 2010 and annual base salary increases. The increase in employer retirement plan contributions was due to an increase in the number of employees who completed one year of service and became eligible to participate in our Employees’ Capital Accumulation Plan. The cost of revenue increase was partially offset by decreases of $8.0 million in incentive compensation and $5.9 million in stock-based compensation expense for Rollover and EIP options for Class A common stock and restricted shares, in each case issued in connection with the acquisition (stock-based compensation expense related to Rollover options and restricted shares issued in connection with the acquisition and the initial grant of EIP options, collectively referred to as acquisition-related compensation expenses). The decrease in incentive compensation was primarily due to a decrease in the number of senior personnel eligible for incentive compensation engaged in day-to-day client management roles, and the decrease in acquisition-related compensation expense was primarily due to a decrease in expense recognition compared to the prior six-month period due to the application of the accounting method for recognizing stock-based compensation, which requires higher expenses initially and declining expenses in subsequent years. The decrease in the number of senior personnel eligible for incentive compensation engaged in day-to-day client management roles and the related increase in the number of senior personnel eligible for incentive compensation engaged in internal management, development and strategic planning discussed under general and administrative expenses reflects an internal realignment of such senior personnel to better address the changing needs of our company primarily as a result of business growth generally. Cost of revenue as a percentage of revenue was 50.8% and 52.0% for the six months ended September 30, 2010 and 2009, respectively.
 
Billable Expenses
 
Billable expenses increased to $715.5 million in the six months ended September 30, 2010 from $673.3 million in the six months ended September 30, 2009, or a 6.3% increase. This increase was primarily due to increased direct subcontractor expenses of $15.5 million and was partially offset by decreases in travel and material expenses of $6.7 million. The increase in direct subcontractor expenses was primarily attributable to increased use of subcontractors due to increased funded backlog. Billable expenses as a percentage of revenue were 26.4% and 26.8% for the six months ended September 30, 2010 and 2009, respectively.
 
General and Administrative Expenses
 
General and administrative expenses increased to $418.3 million in the six months ended September 30, 2010 from $372.7 million in the six months ended September 30, 2009, or a 12.2% increase. This increase was primarily due to increases in salaries and salary-related benefits of $38.9 million and incentive compensation of $14.5 million. The increase in incentive compensation was primarily due to an increase in the number of senior personnel that became eligible for incentive compensation and increased compensation under our annual performance bonus program, as well as an increase in the number of senior personnel eligible for incentive compensation engaged in internal management, development and strategic planning. The increase in general and administrative expenses was also due to increased occupancy expenses of $12.5 million, employer retirement plan contributions of $4.1 million and other expenses associated with increased headcount across our general corporate functions, including finance, accounting, legal, and human resources, to prepare us for operating as a public company and support the increased scale of our business. The increase in general and administrative expenses was partially offset by a decrease of $11.4 million related to travel, recruiting and certain other expenses, $9.2 million in acquisition-related compensation expense and $5.8 million in professional fees. General and administrative expenses as a percentage of revenue were 15.4% and 14.9% for the six months ended September 30, 2010 and 2009, respectively.
 
Depreciation and Amortization
 
Depreciation and amortization decreased to $39.0 million in the six months ended September 30, 2010 from $48.0 million in the six months ended September 30, 2009, or a 18.9% decrease. This decrease was


3


 

primarily due to a decrease of $6.0 million in the amortization of our intangible assets, which includes below market rate leases and contract backlog that were recorded in connection with the acquisition and are amortized based on contractual lease terms and projected future cash flows, respectively, thereby reflecting higher amortization expense initially and declining expense in subsequent periods. Intangible asset amortization expense decreased to $2.4 million per month in the six months ended September 30, 2010 compared to $3.4 million per month in the six months ended September 30, 2009.
 
Interest Income, Interest (Expense) and Other Expense
 
Interest income is primarily related to interest on late client payments, as well as interest earned on our cash balances. Interest income decreased to $478,000 in the six months ended September 30, 2010 from $819,000 in the six months ended September 30, 2009, or a 41.6% decrease, due to declining interest rates in the marketplace.
 
Interest expense increased to $85.8 million in the six months ended September 30, 2010 from $73.1 million in the six months ended September 30, 2009, or a 17.4% increase. This increase was primarily due to debt incurred in connection with the recapitalization transaction in December 2009, at which time we amended and restated our senior credit facilities to add the Tranche C term facility, and the acceleration of debt issuance costs and original issue discount and a prepayment penalty of $2.6 million incurred in connection with the repayment of $85.0 million of indebtedness outstanding under our mezzanine credit facility in August 2010. Interest accrued on our approximately $1,474.9 million of debt as of September 30, 2010 at contractually specified rates ranging from 4.0% to 13.0%, and is generally required to be paid to our syndicate of lenders on a quarterly basis. The increase in interest expense was partially offset by a decrease of $2.2 million in interest expense related to the deferred payment obligation. In December 2009, we repaid $78.0 million of the original deferred payment obligation plus interest accrued on the deferred payment obligation of $22.4 million. Interest continues to be accrued subsequent to December 2009 on the remaining $80.0 million of the deferred payment obligation.
 
Other expense increased to $947,000 in the six months ended September 30, 2010 from $762,000 in the six months ended September 30, 2009, or an 24.3% increase.
 
Income (Loss) from Continuing Operations before Income Taxes
 
Pre-tax income increased to $74.4 million in the six months ended September 30, 2010 compared to $37.2 million in 2009. This increase was primarily due to revenue growth, cost efficiencies across our overhead base, lower indirect cost spending and lower acquisition-related compensation expense.
 
Income Tax Expense
 
Income tax expense increased to $31.4 million in the six months ended September 30, 2010 compared to $18.0 million in the six months ended September 30, 2009. This increase was primarily due to higher pre-tax income in the six months ended September 30, 2010 compared to the six months ended September 30, 2009. The effective tax rate decreased to 42.2% for the six months ended September 30, 2010 compared to 48.3% for the six months ended September 30, 2009, primarily due to a significant increase in pre-tax income, which reduced the impact of certain non-deductible expenses on our effective rate. This effective rate is higher than the statutory rate of 35% primarily due to state taxes and the limitations on the deductibility of meal and entertainment expenses. The tax expense calculated using this effective tax rate does not equate to current cash tax payments since existing NOLs were used to reduce our tax obligations.


4


 

 
Liquidity and Capital Resources
 
Cash Flows
 
                 
    The Company
    Six Months
    Ended September 30,
    2009   2010
    (Unaudited)   (Unaudited)
    (In thousands)
 
Net cash provided by operating activities
  $ 116,755     $ 170,885  
Net cash provided by (used in) investing activities
    16,568       (37,573 )
Net cash (used in) financing activities
    (120,183 )     (74,621 )
                 
Total increase in cash and cash equivalents
  $ 13,140     $ 58,691  
                 
 
Net Cash from Operating Activities
 
Net cash from operations is primarily affected by the overall profitability of our contracts, our ability to invoice and collect from our clients in a timely manner, and our ability to manage our vendor payments. Net cash provided by operations was $170.9 million in the six months ended September 30, 2010, compared to $116.8 million in the six months ended September 30, 2009. The increase in net cash provided by operations in the six months ended September 30, 2010 compared to the six months ended September 30, 2009 was primarily due to net income growth and improved collections of accounts receivable, partially offset by increased cash used for accrued compensation and benefits.
 
Net Cash from Investing Activities
 
Net cash used in investing activities was $37.6 million in the six months ended September 30, 2010, compared to net cash provided by investing activities of $16.6 million in the six months ended September 30, 2009. The increase in net cash used in investing activities in the six months ended September 30, 2010 compared to the six months ended September 30, 2009 was primarily due to an increase in capital expenditures and expenditures for internally developed software.
 
Net Cash from Financing Activities
 
Net cash from financing activities are primarily associated with proceeds from debt and the repayment thereof. Net cash used in financing activities was $74.6 million in the six months ended September 30, 2010, compared to $120.2 million in the six months ended September 30, 2009. The decrease in net cash used in financing activities in the six months ended September 30, 2010 compared to the six months ended September 30, 2009 was primarily due to the repayment of $95.9 million of debt in the six months ended September 30, 2010 compared to dividend payments of $114.9 million in fiscal 2010.


5


 

 
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
         
    Page
 
    F-2  
Part I. Financial Information
       
Item 1. Audited Consolidated Financial Statements
       
    F-3  
    F-4  
    F-5  
    F-6  
    F-8  


F-1


 

 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
The Board of Directors and Shareholders of
Booz Allen Hamilton Holding Corporation
 
We have audited the accompanying consolidated balance sheets of Booz Allen Hamilton Holding Corporation (the Company) as of March 31, 2009 and 2010 and the related consolidated statements of operations, stockholders’ equity and cash flows for the eight-month period ended March 31, 2009 and the year ended March 31, 2010. We have also audited the consolidated statements of operations, stockholders’ equity and cash flows for the year ended March 31, 2008 and the four month period ended July 31, 2008 of Booz Allen Hamilton, Inc. (Predecessor). These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
 
We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Booz Allen Hamilton Holding Corporation at March 31, 2009 and 2010, and the consolidated results of its operations and its cash flows for the eight months ended March 31, 2009 and the year ended March 31, 2010 in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the Predecessor financial statements referred to above present fairly, in all material respects, the consolidated results of operations and cash flows of Booz Allen Hamilton, Inc. for the year ended March 31, 2008 and the four month period ended July 31, 2008 in conformity with U.S. generally accepted accounting principles.
 
As discussed in Note 2 to the financial statements, the Company and the Predecessor changed their method of revenue recognition.
 
/s/  Ernst & Young LLP
 
McLean, Virginia
June 18, 2010
(except as to the first paragraph of Note 16,
as to which the date is November 8, 2010)
 


F-2


 

BOOZ ALLEN HAMILTON HOLDING CORPORATION
 
CONSOLIDATED BALANCE SHEETS
 
                         
    March 31,     September 30,
 
    2009     2010     2010  
    (As adjusted)           (Unaudited)  
    (In thousands, except share
 
    and per share data)  
 
ASSETS
       
Current assets:
                       
Cash and cash equivalents
  $ 420,902     $ 307,835     $ 366,526  
Accounts receivable, net of allowance
    925,925       1,018,311       972,542  
Prepaid expenses
    32,696       32,546       41,696  
Other current assets
    53,370       11,476       24,500  
                         
Total current assets
    1,432,893       1,370,168       1,405,264  
Property and equipment, net
    142,543       136,648       150,952  
Accounts receivable
    13,051       17,072       17,991  
Deferred income taxes
    99,378       53,204       48,998  
Intangible assets, net
    309,477       268,880       254,561  
Goodwill
    1,141,615       1,163,129       1,152,238  
Other long-term assets
    43,292       53,122       52,100  
                         
Total assets
  $ 3,182,249     $ 3,062,223     $ 3,082,104  
                         
LIABILITIES AND STOCKHOLDERS’ EQUITY
       
Current liabilities:
                       
Current portion of long-term debt
  $ 15,225     $ 21,850     $ 21,850  
Accounts payable and other accrued expenses
    243,831       354,097       365,495  
Accrued compensation and benefits
    344,409       385,145       361,627  
Deferred revenue
    18,186       9,996       9,367  
Deferred income taxes
    21,934       14,832       14,832  
                         
Total current liabilities
    643,585       785,920       773,171  
Long-term debt, net of current portion
    1,220,502       1,546,782       1,453,081  
Income tax reserve
    99,394       100,178       101,317  
Deferred payment obligation
    108,969       20,028       22,545  
Postretirement obligation
    39,809       50,464       52,974  
Other long-term liabilities
    9,647       49,268       77,717  
                         
Total liabilities
    2,121,906       2,552,640       2,480,805  
Commitments and contingencies (Note 20)
                       
Stockholders’ equity:
                       
Common stock, Class A — $0.01 par value — authorized, 600,000,000 shares; issued and outstanding, 101,316,870 shares at March 31, 2009, 102,922,900 shares at March 31, 2010, and 106,622,350 shares at September 30, 2010
    1,013       1,029       1,066  
Non-voting common stock, Class B — $0.01 par value — authorized, 16,000,000 shares; issued and outstanding, 2,350,200 shares at March 31, 2009, 2,350,200 shares at March 31, 2010, and 3,053,130 shares at September 30, 2010
    24       24       31  
Restricted common stock, Class C — $0.01 par value — authorized, 5,000,000 shares; issued and outstanding, 2,028,270 shares at March 31, 2009, 2,028,270 shares at March 31, 2010, and 2,028,270 shares at September 30, 2010
    20       20       20  
Special voting common stock, Class E — $0.003 par value — authorized, 25,000,000 shares; issued and outstanding, 14,802,880 shares at March 31, 2009, 13,345,880 shares at March 31, 2010, and 12,348,860 shares at September 30, 2010
    44       40       37  
Additional paid-in capital
    1,097,327       525,652       574,177  
(Accumulated deficit) Retained earnings
    (38,783 )     (13,364 )     29,622  
Accumulated other comprehensive income (loss)
    698       (3,818 )     (3,654 )
                         
Total stockholders’ equity
    1,060,343       509,583       601,299  
                         
Total liabilities and stockholders’ equity
  $ 3,182,249     $ 3,062,223     $ 3,082,104  
                         
 
The accompanying notes are an integral part of these Consolidated Financial Statements.

F-3


 

 
BOOZ ALLEN HAMILTON HOLDING CORPORATION
 
CONSOLIDATED STATEMENTS OF OPERATIONS
 
                                                   
    Predecessor       The Company  
    Fiscal Year
    Four Months
      Eight Months
    Fiscal Year
    Six Months
    Six Months
 
    Ended
    Ended
      Ended
    Ended
    Ended
    Ended
 
    March 31,
    July 31,
      March 31,
    March 31,
    September 30,
    September 30,
 
    2008     2008       2009     2010     2009     2010  
    (As adjusted)     (As adjusted)       (As adjusted)           (As adjusted)        
                              (Unaudited)        
                                    (Unaudited)  
    (In thousands, except per share data)              
Revenue
  $ 3,625,055     $ 1,409,943       $ 2,941,275     $ 5,122,633     $ 2,508,716     $ 2,709,143  
Operating costs and expenses:
                                                 
Cost of revenue
    2,028,848       722,986         1,566,763       2,654,143       1,304,396       1,375,658  
Billable expenses
    935,459       401,387         756,933       1,361,229       673,292       715,529  
General and administrative expenses
    474,188       726,929         505,226       811,944       372,711       418,330  
Depreciation and amortization
    33,079       11,930         79,665       95,763       48,028       38,972  
                                                   
Total operating costs and expenses
    3,471,574       1,863,232         2,908,587       4,923,079       2,398,427       2,548,489  
                                                   
Operating income (loss)
    153,481       (453,289 )       32,688       199,554       110,289       160,654  
Interest income
    2,442       734         4,578       1,466       819       478  
Interest expense
    (2,319 )     (1,044 )       (98,068 )     (150,734 )     (73,112 )     (85,824 )
Other expense, net
    (1,931 )     (54 )       (128 )     (1,292 )     (762 )     (947 )
                                                   
Income (loss) from continuing operations before income taxes
    151,673       (453,653 )       (60,930 )     48,994       37,234       74,361  
Income tax expense (benefit) from continuing operations
    62,693       (56,109 )       (22,147 )     23,575       17,999       31,375  
                                                   
Income (loss) from continuing operations
    88,980       (397,544 )       (38,783 )     25,419       19,235       42,986  
Loss from discontinued operations, net of tax
    (71,106 )     (848,371 )                          
                                                   
Net income (loss)
  $ 17,874     $ (1,245,915 )     $ (38,783 )   $ 25,419     $ 19,235     $ 42,986  
                                                   
Earnings (loss) from continuing operations per common share (Note 3):
                                                 
Basic
  $ 50.64     $ (181.28 )     $ (0.37 )   $ 0.24     $ 0.18     $ 0.40  
                                                   
Diluted
  $ 43.33     $ (181.28 )     $ (0.37 )   $ 0.22     $ 0.17     $ 0.35  
                                                   
Earnings (loss) per common share (Note 3):
                                                 
Basic
  $ 10.17     $ (568.13 )     $ (0.37 )   $ 0.24     $ 0.18     $ 0.40  
                                                   
Diluted
  $ 8.70     $ (568.13 )     $ (0.37 )   $ 0.22     $ 0.17     $ 0.35  
                                                   
 
The accompanying notes are an integral part of these Consolidated Financial Statements.


F-4


 

 
BOOZ ALLEN HAMILTON HOLDING CORPORATION
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
                                                   
    Predecessor       The Company  
    Fiscal Year
    Four Months
      Eight Months
    Fiscal Year
    Six Months
    Six Months
 
    Ended
    Ended
      Ended
    Ended
    Ended
    Ended
 
    March 31,
    July 31,
      March 31,
    March 31,
    September 30,
    September 30,
 
    2008     2008       2009     2010     2009     2010  
                              (As adjusted)        
                              (Unaudited)        
                                    (Unaudited)  
    (As adjusted)     (As adjusted)       (As adjusted)                    
    (In thousands)              
                                       
Cash flows from operating activities
                                                 
Net income (loss)
  $ 17,874     $ (1,245,915 )     $ (38,783 )   $ 25,419     $ 19,235     $ 42,986  
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
                                                 
Loss from discontinued operations, net of taxes
    71,106       848,371                            
Depreciation and amortization
    33,079       11,930         79,665       95,763       48,028       38,972  
Amortization of debt issuance costs
                  3,106       5,700       2,439       7,186  
Amortization of original issuance discount on debt
                  1,480       2,505       1,145       2,224  
Excess tax benefit from the exercise of stock options
                        (1,915 )           (15,779 )
Stock-based compensation expense
    35,013       511,653         62,059       71,897       39,601       27,295  
Loss on disposition of property and equipment
                  166                    
Deferred income taxes
    (39,988 )     (54,236 )       (22,147 )     19,837       13,838       27,022  
Changes in assets and liabilities, net of effect of business combination:
                                                 
Accounts receivable, net
    (181,365 )     (19,765 )       (33,675 )     (92,386 )     (25,701 )     45,769  
Income taxes receivable / payable
    (35,934 )     (70,781 )       21,303       (14,429 )     4,117       (3 )
Prepaid expenses
    (6,236 )     (4,717 )       (26,030 )     150       (4,971 )     (9,150 )
Other current assets
    (1,859 )     (327 )       (6,491 )     15,672       17,523       (11,721 )
Other long-term assets
    2,627       280               (3,742 )     (3,666 )     (7,083 )
Accrued compensation and benefits
    (7,913 )     (44,050 )       99,094       33,760       (20,202 )     (25,565 )
Accounts payable and accrued expenses
    72,654       57,054         7,186       110,265       19,130       11,398  
Accrued interest
                  10,604       (10,633 )     7,110       4,146  
Income tax reserve
    73,036       (7,220 )       1,177       2,483       908       680  
Deferred revenue
    2,716       (4,036 )       10,499       (8,190 )     (8,247 )     (629 )
Postretirement obligation
    (4,630 )     21,793         1,849       6,139       1,989       2,674  
Other long-term liabilities
    13,611       (26,582 )       9,647       12,189       4,479       30,463  
                                                   
Net cash provided by (used in) operating activities of continuing operations
    43,791       (26,548 )       180,709       270,484       116,755       170,885  
Net cash provided by (used in) operating activities of discontinued operations
    115,650       (160,368 )                          
                                                   
Net cash provided by (used in) operating activities
    159,441       (186,916 )       180,709       270,484       116,755       170,885  
Cash flows from investing activities
                                                 
Purchases of property and equipment
    (35,179 )     (9,314 )       (36,835 )     (49,271 )     (21,712 )     (38,957 )
Cash paid in merger transaction, net of cash acquired
                  (1,623,683 )                  
Investment in discontinued operations
    (3,348 )     (153,662 )                          
Escrow payments
                        38,280       38,280       1,384  
                                                   
Net cash used in investing activities of continuing operations
    (38,527 )     (162,976 )       (1,660,518 )     (10,991 )     16,568       (37,573 )
Net cash (used in) provided by investing activities of discontinued operations
    (68,516 )     58,323                            
                                                   
Net cash used in investing activities
    (107,043 )     (104,653 )       (1,660,518 )     (10,991 )     16,568       (37,573 )
Cash flows from financing activities
                                                 
Proceeds from issuance of common stock
    18,891               956,500                   1,002  
Cash dividends paid
                        (612,401 )     (114,912 )      
Redemption of common stock and Class B common stock
    (15,543 )     (16,422 )                            
Repayment of debt
    (4,761 )             (251,050 )     (16,100 )     (6,050 )     (95,925 )
Proceeds from debt
          227,534         1,240,300       346,500              
Debt issuance costs
                  (45,039 )     (15,808 )            
Payment of deferred payment obligation
                        (78,000 )            
Excess tax benefits from the exercise of stock options
                        1,915             15,779  
Stock option exercises
                        1,334       779       4,523  
                                                   
Net cash (used in) provided by financing activities of continuing operations
    (1,413 )     211,112         1,900,711       (372,560 )     (120,183 )     (74,621 )
Net cash (used in) provided by financing activities of discontinued operations
    (5,908 )     128,712                            
                                                   
Net cash (used in) provided by financing activities
    (7,321 )     339,824         1,900,711       (372,560 )     (120,183 )     (74,621 )
Net increase (decrease) in cash and cash equivalents of continuing operations
    3,851       21,588         420,902       (113,067 )     13,140       58,691  
Cash and cash equivalents — beginning of period
    3,272       7,123               420,902       420,902       307,835  
                                                   
Cash and cash equivalents — end of period
  $ 7,123     $ 28,711       $ 420,902     $ 307,835     $ 434,042     $ 366,526  
                                                   
Supplemental disclosures of cash flow information
                                                 
Cash paid during the period for:
                                                 
Interest
  $ 1,448     $ 720       $ 82,879     $ 126,744     $ 61,034     $ 69,639  
                                                   
Income taxes
  $ 19,841     $ 42,336       $ 34     $ 5,474     $ 2,069     $ 2,717  
                                                   
 
The accompanying notes are an integral part of these Consolidated Financial Statements.


F-5


 

 
BOOZ ALLEN HAMILTON HOLDING CORPORATION
 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY — PREDECESSOR
 
                                                 
    Predecessor  
                      Retained
    Accumulated
       
          Stock
    Additional
    Earnings
    Other
    Total
 
    Redeemable
    Subscription
    Paid-In
    (Accumulated
    Comprehensive
    Stockholders’
 
    Common Stock     Receivable     Capital     Deficit)     Income (Loss)     Equity  
    (In thousands, except share data)  
 
Balance at March 31, 2007
  $ 242,963     $     $     $ 16,024     $ (15,800 )   $ 243,187  
                                                 
Revenue recognition — cumulative effect of change in accounting principle
                      28,881             28,881  
                                                 
Balance at March 31, 2007 (as adjusted)
    242,963                   44,905       (15,800 )     272,068  
                                                 
Net income (as adjusted)
                      17,874             17,874  
Issuance of redeemable common stock
    42,831                               42,831  
Cash dividends
                      (217 )           (217 )
Redemption of common stock
    (15,543 )                             (15,543 )
Stock compensation expenses
    17,216                               17,216  
Mark to put value for redeemable shares
    178                   (178 )            
Change in accounting principle for the adoption of ASC 740-10
                            (10,081 )     (10,081 )
Decrease in minimum pension liability, net of tax of $10,500
                            15,800       15,800  
Change in accounting principle for the adoption of ASC 715, net of tax of $17,922
                            (26,883 )     (26,883 )
                                                 
Balance at March 31, 2008 (as adjusted)
    287,645                   62,384       (36,964 )     313,065  
                                                 
Net loss (as adjusted)
                      (1,245,915 )           (1,245,915 )
Reclassification of liability for share-based payments for shares held over six months
    5,479                               5,479  
Dividends declared
                      (52 )           (52 )
Redemption of redeemable common stock
    (16,422 )                             (16,422 )
Redemption of common stock marked to redemption value in stock-based compensation
    854,494                               854,494  
Redemption of common stock marked to redemption value in equity
    180,985                   (180,985 )            
Unrealized loss on benefit plan, net of income taxes
                            (846 )     (846 )
Receivable from shareholders for exercise of stock rights of Booz Allen Hamilton Inc. 
          (87,007 )                       (87,007 )
Distribution of Booz & Company, Inc. common stock to shareholders of Booz Allen Hamilton, Inc. 
                      (134,874 )     22,252       (112,622 )
                                                 
Balance at July 31, 2008 (as adjusted)
  $ 1,312,181     $ (87,007 )   $     $ (1,499,442 )   $ (15,558 )   $ (289,826 )
                                                 
 
The accompanying notes are an integral part of these Consolidated Financial Statements.


F-6


 

 
BOOZ ALLEN HAMILTON HOLDING CORPORATION
 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY — THE COMPANY
 
                                                                                                 
    The Company  
                Class B
    Class C
    Class E
          (Accumulated
    Accumulated
       
    Class A
    Non-Voting
    Restricted
    Special Voting
    Additional
    Deficit)
    Other
    Total
 
    Common Stock     Common Stock     Common Stock     Common Stock     Paid-In
    Retained
    Comprehensive
    Stockholders’
 
    Shares     Amount     Shares     Amount     Shares     Amount     Shares     Amount     Capital     Earnings     Income (Loss)     Equity  
    (In thousands, except share data)  
 
Balance at August 1, 2008
        $           $           $           $     $     $     $     $  
                                                                                                 
Exchange of rollover equity
    5,641,870       56       2,350,200       24       2,028,270       20       14,802,880       44       79,725                   79,869  
Issuance of common stock
    95,675,000       957                                           955,543                   956,500  
Net loss
                                                          (38,783 )           (38,783 )
Actuarial gain related to employee benefits, net of taxes
                                                                698       698  
                                                                                                 
Comprehensive loss
                                                                                            (38,085 )
Stock compensation expense
                                                    62,059                   62,059  
                                                                                                 
Balance at March 31, 2009
    101,316,870       1,013       2,350,200       24       2,028,270       20       14,802,880       44       1,097,327       (38,783 )     698       1,060,343  
                                                                                                 
Issuance of common stock
    19,070                                                                    
Stock options exercised
    1,586,960       16                               (1,457,000 )     (4 )     1,322                   1,334  
Recognition of liability related to future stock option exercises (Note 17)
                                                    (34,408 )                 (34,408 )
Net income
                                                          25,419             25,419  
Actuarial loss related to employee benefits, net of taxes
                                                                (4,516 )     (4,516 )
                                                                                                 
Comprehensive income
                                                                                            20,903  
Stock compensation expense
                                                    71,897                     71,897  
Dividends paid (Notes 1 and 17)
                                                    (612,401 )                   (612,401 )
Excess tax benefits from exercise of stock options
                                                    1,915                   1,915  
                                                                                                 
Balance at March 31, 2010
    102,922,900     $ 1,029       2,350,200     $ 24       2,028,270     $ 20       13,345,880     $ 40     $ 525,652     $ (13,364 )   $ (3,818 )   $ 509,583  
                                                                                                 
Issuance of common stock
    89,830                                     702,930       2       1,000                   1,002  
Stock options exercised
    4,312,550       44                               (1,699,950 )     (5 )     11,460                   11,499  
Excess tax benefits from exercise of stock options
                                                    15,779                   15,779  
Share exchange
    (702,930 )     (7 )     702,930       7                                                  
Recognition of liability related to future stock option exercises (Note 17)
                                                    (7,009 )                 (7,009 )
Net income
                                                          42,986             42,986  
Actuarial gain related to employee benefits, net of taxes
                                                                164       164  
                                                                                                 
Comprehensive income
                                                                                            43,150  
Stock compensation expense
                                                    27,295                   27,295  
                                                                                                 
Balance at September 30, 2010 (unaudited)
    106,622,350     $ 1,066       3,053,130     $ 31       2,028,270     $ 20       12,348,860     $ 37     $ 574,177     $ 29,622     $ (3,654 )   $ 601,299  
                                                                                                 
 
The accompanying notes are an integral part of these Consolidated Financial Statements.
 


F-7


 

BOOZ ALLEN HAMILTON HOLDING CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
 
1.   OVERVIEW
 
Our Business
 
Booz Allen Hamilton Holding Corporation, including its wholly owned subsidiaries (“Holding” or the “Company”), is an affiliate of The Carlyle Group (“Carlyle”) and was incorporated in Delaware in May 2008. The Company and its subsidiaries provide management and technology consulting services primarily to the U.S. government and its agencies in the defense, intelligence, and civil markets. The Company offers clients functional knowledge spanning strategy and organization, analytics, technology and operations, which it combines with specialized expertise in clients’ mission and domain areas to help solve critical problems. The Company reports operating results and financial data in one operating segment. The Company is headquartered in McLean, Virginia, with approximately 23,300 employees as of March 31, 2010.
 
Spin-off and Merger Transactions
 
On July 31, 2008, pursuant to a merger agreement (the “Merger Agreement”), the then-existing shareholders of Booz Allen Hamilton, Inc. completed the spin-off of the commercial business to the commercial partners. Effective August 1, 2008, Holding acquired the outstanding common stock of Booz Allen Hamilton, Inc., which consisted of the U.S. government consulting business, through the merger of Booz Allen Hamilton, Inc. with a wholly-owned subsidiary of Holding (the “Merger Transaction” or the “Acquisition”). The Company acquired Booz Allen Hamilton, Inc. for total consideration of $1,828.0 million. As discussed in Note 4, the acquisition consideration was allocated to the acquired net assets, identified intangibles of $353.8 million, and goodwill of $1,163.1 million. Prior to the Merger Transaction, Booz Allen Hamilton, Inc. is referred to as the Predecessor for accounting purposes. The Predecessor’s consolidated financial statements have been presented for fiscal 2008 and the four months ended July 31, 2008. The consolidated financial statements of Holding subsequent to the Merger Transaction, which is referred to as the Company, have been presented from August 1, 2008 through March 31, 2009, for fiscal 2010 and for the six months ended September 30, 2009 and 2010. From May through July 2008, Holding had no operations. As a result, the Company is presented as commencing on August 1, 2008.
 
In connection with the Acquisition, the Company issued certain shares of its common stock in exchange for shares of the Predecessor. The Officers’ Rollover Stock Plan (the “Rollover Plan”) was adopted as a mechanism to enable the exchange of a portion of previous equity interests in the Predecessor for equity interests in Holding. Common Stock owned by the Predecessor’s U.S. government consulting partners were exchanged for Class A Common Stock of Holding, while common stock owned by a limited number of the Predecessor’s commercial consulting partners were exchanged for Class B Non-Voting Common Stock of Holding. Fully vested shares of the Predecessor were exchanged for vested shares of the Company, with a fair value of $79.7 million. This amount was included as a component of the total acquisition consideration. The Company also exchanged restricted shares and options for previously issued and outstanding stock rights of the Predecessor held by the Predecessor’s U.S. government consulting partners. The Predecessor’s commercial consulting partners exercised their previously outstanding stock rights and received cash for the underlying shares surrendered. Based on the vesting terms of the Company’s newly issued Class C Restricted Common Stock and the new options granted under the Rollover Plan, the fair value of the issued awards of $147.4 million is being recognized as compensation expense by the Company subsequent to the Acquisition, as discussed further in Note 17.
 
In connection with the Merger Transaction, the Company entered into a senior secured credit agreement (the “Senior Secured Agreement”) and a mezzanine credit agreement (the “Mezzanine Credit Agreement”) for a total amount of $1,240.3 million. The total debt proceeds received by the Company at Closing were net of debt issuance costs of $45.0 million and original issue discount on the debt of $19.7 million. Prior to the Merger Transaction, the Predecessor had an outstanding line of credit of $245.0 million. The Company paid


F-8


 

BOOZ ALLEN HAMILTON HOLDING CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
off the Predecessor’s line of credit with proceeds from the financing. In addition to the debt used to finance the Company’s acquisition of Booz Allen Hamilton, Inc., Carlyle, along with a consortium of other investors, provided $956.5 million in cash in exchange for equity interests in the Company.
 
Recapitalization Transaction and Repricing
 
On December 11, 2009, the Company consummated a recapitalization transaction (the “Recapitalization Transaction”), which included amendments of the Senior Secured Agreement to include a new term loan (“Tranche C”) with $350.0 million of principal, and the Mezzanine Credit Agreement primarily to allow for the recapitalization and payment of a special dividend. This special dividend was declared by the Company’s Board of Directors on December 7, 2009, to be paid to holders of record as of December 8, 2009. Net proceeds from Tranche C of $341.3 million less transaction costs of $13.2 million, along with cash on hand of $321.9 million, were used to fund a partial payment of the Company’s deferred payment obligation (“DPO”) in the amount of $100.4 million, and a dividend payment of $4.642 per share, or $497.5 million, which was paid on all issued and outstanding shares of Holding’s Class A Common Stock, Class B Non-Voting Common Stock, and Class C Restricted Common Stock. As required by the Officers’ Rollover Stock Plan and the Equity Incentive Plan, the exercise price per share of each outstanding option was reduced. Because the reduction in per share value exceeded the exercise price for certain of the options granted under the Officers’ Rollover Stock Plan, the exercise price for those options was reduced to the $0.01 par value of the shares issuable on exercise, and the holders became entitled to receive a cash payment equal to the excess of the reduction in per share value over the reduction in exercise price to the par value. The difference between one cent and the reduced value for shares vested and not yet exercised of approximately $54.4 million will be paid in cash upon exercise of the options. As of March 31, 2010, the Company reported $27.4 million in other long-term liabilities and $7.0 million in accrued compensation and benefits in the consolidated balance sheets for the portion of stock-based compensation recognized as of March 31, 2010, which is reflective of the options vested with an exercise price of one cent. Transaction fees incurred in connection with the Recapitalization Transaction were approximately $22.4 million, of which approximately $15.8 million were deferred financing costs and will be amortized over the lives of the loans. Refer to Note 10 for further discussion of the DPO, Note 11 for further discussion of the amended credit agreements, Note 12 for further discussion of the accounting for deferred financing costs, and Note 17 for further discussion of the December 2009 dividend and associated future cash payments as related to stock options.
 
2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Basis of Presentation
 
The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, and have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). All intercompany balances and transactions are eliminated in consolidation.
 
The operating results of the global commercial business that was spun off by the Predecessor effective July 31, 2008 have been presented as discontinued operations in the Predecessor’s consolidated financial statements and the related notes included in these financial statements. These operations and cash flows are clearly distinguished from the continuing business, the operations have been disposed of, and there was no continuing involvement in the operations after August 1, 2008.
 
The statement of cash flows for the year ended March 31, 2008 reflects the reclassification of certain amounts resulting in an increase of $3.3 million in net cash used in financing activities of continuing operations and a corresponding decrease in net cash used in investing activities of continuing operations.
 
The Company’s fiscal year ends on March 31 and unless otherwise noted, references to fiscal year or fiscal are for fiscal years ended March 31. The accompanying audited financial statements present the


F-9


 

BOOZ ALLEN HAMILTON HOLDING CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
financial position of the Company as of March 31, 2009 and 2010, the Company’s results of operations for the eight months ended March 31, 2009 and fiscal 2010, and the Predecessor’s results of operations for fiscal 2008 and four months ended July 31, 2008.
 
Unaudited Interim Financial Information
 
The accompanying unaudited interim consolidated balance sheet as of September 30, 2010, the consolidated statements of operations and cash flows for the six months ended September 30, 2009 and 2010, and the consolidated statement of stockholders’ equity for the six months ended September 30, 2010 are unaudited. These unaudited interim consolidated financial statements have been prepared in accordance with GAAP. In the opinion of the Company’s management, the unaudited interim consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments necessary for the fair presentation of the Company’s statement of financial position, results of operations, and its cash flows for the six months ended September 30, 2009 and 2010. The results for the six months ended September 30, 2010 are not necessarily indicative of the results to be expected for the year ending March 31, 2011. All references to September 30, 2010 or to the six months ended September 30, 2009 and 2010 in the notes to the consolidated financial statements are unaudited.
 
Use of Estimates
 
The preparation of financial statements in conformity with GAAP 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 revenue and expenses during the reporting periods. Areas of the financial statements where estimates may have the most significant effect include allowance for doubtful accounts, contractual and regulatory reserves, lives of tangible and intangible assets, impairment of long-lived and other assets, realization of deferred tax assets, accrued liabilities, revenue recognition, bonus and other incentive compensation, stock-based compensation, provisions for income taxes, and postretirement obligations. Actual results experienced by the Company may differ materially from management’s estimates.
 
Change in Accounting Principle
 
In fiscal 2010, the Company and the Predecessor changed their methodology of recognizing revenue for all U.S. government contracts to apply the accounting guidance of Financial Accounting Standards Board (“FASB”) Accounting Standards Codificationtm (“ASC” or “the Codification”) Subtopic 605-35, as directed by ASC Topic 912, which permits revenue recognition on a percentage-of-completion basis. Previously, the Company applied this guidance only to contracts related to the construction or development of tangible assets. For contracts not related to those activities, the Company had applied the general revenue recognition guidance of Staff Accounting Bulletin (“SAB”) Topic 13, Revenue Recognition. Upon contract completion, both methods yield the same results, but the Company believes that the application of contract accounting under ASC 605-35 to contracts not related to the construction or development of tangible assets is preferable to the application of contract accounting under SAB Topic 13 based on the fact that the percentage-of-completion model utilized under ASC 605-35 is a recognized accounting model, that better reflects the economics of a U.S. government contract during the contract performance period. The only material financial statement impact of the revenue recognition change was the recognition of award fees over the performance period. The Company concluded that this change is appropriate as the award fees earned by the Company are estimable based on historical information and management’s monitoring of fees earned and is reflective of the economics of such contracts.


F-10


 

BOOZ ALLEN HAMILTON HOLDING CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
All prior periods presented have been retrospectively adjusted to apply the new method of accounting. The cumulative effect of this change represents the difference between the amount of retained earnings at the beginning of the period of change and the amount of retained earnings that would have been reported at the date if the new accounting principle had been applied retroactively for all prior periods. The cumulative effect of the change in accounting principle on periods prior to those presented of $28.9 million has been reflected as an adjustment to the opening balance of retained earnings, net of tax, as of April 1, 2007.


F-11


 

BOOZ ALLEN HAMILTON HOLDING CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The table below presents the impact of the change in this accounting principle on accounts receivable, net, accounts payable and other accrued expenses, revenue, net earnings (loss), and net earnings (loss) per share as if the change had been in place throughout all periods presented (in thousands, except per share data):
 
                                           
    Predecessor       The Company  
    Fiscal Year
    Four Months
      Eight Months
    Fiscal Year
    Six Months
 
    Ended
    Ended
      Ended
    Ended
    Ended
 
    March 31,
    July 31,
      March 31,
    March 31,
    September 30,
 
    2008     2008       2009     2010     2009  
                                           
Impact of change in application of accounting principle applied retrospectively:
                                         
Accounts receivable, net
  $ 842,593     $ 876,280       $ 883,311     $ 980,095     $ 909,412  
Impact of change in revenue recognition
    55,175       41,253         42,614       38,216       42,214  
                                           
Accounts receivable, net, as adjusted
  $ 897,768     $ 917,533       $ 925,925     $ 1,018,311     $ 951,626  
                                           
Accounts payable and other accrued expenses
  $ 187,096     $ 244,024       $ 234,412     $ 344,678     $ 253,619  
Impact of change in revenue recognition
    9,443       8,813         9,419       9,419       9,344  
                                           
Accounts payable and other accrued expenses, as adjusted
  $ 196,539     $ 252,837       $ 243,831     $ 354,097     $ 262,963  
                                           
Revenue
  $ 3,625,951     $ 1,423,865       $ 2,912,610     $ 5,121,895     $ 2,503,980  
Impact of change in revenue recognition
    (896 )     (13,922 )       28,665       738       4,736  
                                           
Revenue, as adjusted
  $ 3,625,055     $ 1,409,943       $ 2,941,275     $ 5,122,633     $ 2,508,716  
                                           
Net earnings (loss) from continuing operations
  $ 90,175     $ (389,497 )     $ (55,770 )   $ 24,681     $ 14,424  
Impact of change in revenue recognition
    (1,195 )     (8,047 )       16,987       738       4,811  
                                           
Net earnings (loss) from continuing operations, as adjusted
  $ 88,980     $ (397,544 )     $ (38,783 )   $ 25,419     $ 19,235  
                                           
Net earnings (loss)
  $ 19,069     $ (1,237,868 )     $ (55,770 )   $ 24,681     $ 14,424  
Impact of change in revenue recognition
    (1,195 )     (8,047 )       16,987       738       4,811  
                                           
Net earnings (loss), as adjusted
  $ 17,874     $ (1,245,915 )     $ (38,783 )   $ 25,419     $ 19,235  
                                           
Net earnings (loss) from continuing operations per share:
                                         
Basic
  $ 51.32     $ (177.61 )     $ 0.53     $ 0.23     $ 0.13  
                                           
Diluted
  $ 43.92     $ (177.61 )     $ 0.53     $ 0.21     $ 0.13  
                                           
Impact of change in revenue recognition per share:
                                         
Basic
  $ (0.68 )   $ (3.67 )     $ 0.16     $ 0.01     $ 0.05  
                                           
Diluted
  $ (0.59 )   $ (3.67 )     $ 0.16     $ 0.01     $ 0.04  
                                           
Net earnings (loss) from continuing operations per share, as adjusted:
                                         
Basic
  $ 50.64     $ (181.28 )     $ 0.37     $ 0.24     $ 0.18  
                                           
Diluted
  $ 43.33     $ (181.28 )     $ 0.37     $ 0.22     $ 0.17  
                                           
Net earnings (loss) per share:
                                         
Basic
  $ 10.85     $ (546.46 )     $ 0.53     $ 0.23     $ 0.13  
                                           
Diluted
  $ 9.29     $ (564.46 )     $ 0.53     $ 0.21     $ 0.13  
                                           
Impact of change in revenue recognition per share:
                                         
Basic
  $ (0.68 )   $ (3.67 )     $ 0.16     $ 0.01     $ 0.05  
                                           
Diluted
  $ (0.59 )   $ (3.67 )     $ 0.16     $ 0.01     $ 0.04  
                                           
Net earnings (loss) per share, as adjusted:
                                         
Basic
  $ 10.17     $ (568.13 )     $ 0.37     $ 0.24     $ 0.18  
                                           
Diluted
  $ 8.70     $ (568.13 )     $ 0.37     $ 0.22     $ 0.17  
                                           


F-12


 

BOOZ ALLEN HAMILTON HOLDING CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Revenue Recognition
 
The majority of the Company’s revenue is derived from services and solutions provided to the U.S. government and its agencies, primarily by the Company’s employees and, to a lesser extent, subcontractors. The Company generates its revenue from the following types of contractual arrangements: cost-plus-fee contracts, time-and-materials contracts, and fixed-price contracts.
 
Revenue on cost-plus-fee contracts is recognized as services are performed, generally based on the allowable costs incurred during the period plus any recognizable earned fee. The Company considers fixed fees under cost-plus-fee contracts to be earned in proportion to the allowable costs incurred in performance of the contract. For cost-plus-fee contracts that include performance-based fee incentives, which are principally award fee arrangements, the Company recognizes income when such fees are probable and estimable. Estimates of the total fee to be earned are made based on contract provisions, prior experience with similar contracts or clients, and management’s monitoring of the performance on such contracts. Contract costs, including indirect expenses, are subject to audit by the Defense Contract Audit Agency and, accordingly, are subject to possible cost disallowances.
 
Revenue for time-and-materials contracts is recognized as services are performed, generally on the basis of contract allowable labor hours worked multiplied by the contract-defined billing rates, plus allowable direct costs and indirect cost burdens associated with materials used in and other direct expenses incurred in connection with the performance of the contract.
 
Revenue on fixed-price completion contracts is recognized using percentage-of-completion based on actual costs incurred relative to total estimated costs for the contract. These estimated costs are updated during the term of the contract, and may result in revision by the Company of recognized revenue and estimated costs in the period in which they are identified. Profits on fixed-price contracts result from the difference between incurred costs and revenue earned.
 
Contract accounting requires significant judgment relative to assessing risks, estimating contract revenue and costs, and making assumptions for schedule and technical issues. Due to the size and nature of many of the Company’s contracts, developing total revenue and cost at completion requires the use of estimates. Contract costs include direct labor and billable expenses, as well as an allocation of allowable indirect costs. Billable expenses is comprised of subcontracting costs and other “out of pocket” costs that often include, but are not limited to, travel-related costs and telecommunications charges. The Company recognizes revenue and billable expenses from these transactions on a gross basis. Assumptions regarding the length of time to complete the contract also include expected increases in wages and prices for materials. Estimates of total contract revenue and costs are monitored during the term of the contract and are subject to revision as the contract progresses. Anticipated losses on contracts are recognized in the period they are deemed probable and can be reasonably estimated.
 
The Company’s contracts may include the delivery of a combination of one or more of the Company’s service offerings. In these situations, the Company determines whether such arrangements with multiple elements should be treated as separate units of accounting, with revenue allocated to each element of the arrangement based on the fair value of each element.
 
Cash and Cash Equivalents
 
Cash and cash equivalents include cash on hand and highly liquid investments having an original maturity of three months or less. The Company’s investments consist primarily of institutional money market funds and U.S. Treasury securities. The Company’s investments are carried at cost, which approximates fair value. The Company maintains its cash and cash equivalents in bank accounts that, at times, exceed the federally insured limits. The Company has not experienced any losses in such accounts.


F-13


 

BOOZ ALLEN HAMILTON HOLDING CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Valuation of Accounts Receivable
 
The Company maintains allowances for doubtful accounts against certain billed receivables based upon the latest information regarding whether invoices are ultimately collectible. Assessing the collectability of customer receivables requires management judgment. The Company determines its allowance for doubtful accounts by specifically analyzing individual accounts receivable, historical bad debts, customer credit-worthiness, current economic conditions, and accounts receivable aging trends. Valuation reserves are periodically re-evaluated and adjusted as more information about the ultimate collectability of accounts receivable becomes available. Upon determination that a receivable is uncollectible, the receivable balance and any associated reserve are written off.
 
Concentrations of Credit Risk
 
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash equivalents and accounts receivable. The Company’s cash equivalents are generally invested in U.S. government insured money market funds and Treasury bills. The Company believes that credit risk, with respect to accounts receivable, are limited as they are primarily U.S. government receivables.
 
As of March 31, 2009, March 31, 2010, and September 30, 2010, the Company had no derivative financial instruments.
 
Property and Equipment
 
Property and equipment are stated at cost, and the balances are presented net of depreciation. The cost of software purchased or internally developed is capitalized. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. Furniture and equipment is depreciated over five to ten years, computer equipment is depreciated over three years, and software purchased or developed for internal use is depreciated over one to three years. Leasehold improvements are amortized over the shorter of the useful life of the asset or the lease term. Maintenance and repairs are charged to expense as incurred.
 
Goodwill
 
Goodwill is the amount by which the cost of acquired net assets in a business acquisition exceeds the fair value of net identifiable assets on the date of purchase. The Company assesses goodwill for impairment on at least an annual basis on January 1, and whenever impairment indicators are present in events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. The Company defines its reporting unit as its operating segment. The Company considers itself to be a single reporting segment, as discussed in Note 21, and operating unit structure given that the Company is managed and operated as one business. There were no impairment charges for the eight months ended March 31, 2009 or fiscal 2010.
 
Intangible Assets
 
Intangible assets consist of trade name, contract backlog, and favorable lease terms. Trade name is not amortized, but is tested annually for impairment. Contract backlog is amortized over the expected backlog life based on projected future cash flows of approximately nine years. Favorable lease terms are amortized over the remaining contractual terms of approximately five years.
 
Valuation of Long-Lived Assets
 
The Company reviews its long-lived assets, including property and equipment and intangible assets with finite lives, for impairment whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be fully recoverable or that the useful lives are no longer appropriate. If the total of the expected undiscounted future net cash flows expected to result from the use and eventual disposition of the


F-14


 

BOOZ ALLEN HAMILTON HOLDING CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
asset is less than its carrying amount, a loss is recorded for the amount required to reduce the carrying amount to fair value. There were no impairment charges for the eight months ended March 31, 2009, or fiscal 2010.
 
Foreign Currency Transactions
 
Foreign currency gains (losses) are reported as a component of other expense, net in the accompanying consolidated statements of operations. For fiscal 2008, four months ended July 31, 2008, eight months ended March 31, 2009, and fiscal 2010, net exchange (losses) gains were approximately $(529,000), $(53,000) , $49,000, and $(105,000), respectively.
 
Income Taxes
 
Deferred tax assets and liabilities are recorded to recognize the expected future tax benefits or costs of events that have been, or will be, reported in different years for financial statement purposes than for tax purposes. Deferred tax assets and liabilities are computed based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates and laws for the years in which these items are expected to reverse. If management determines that a deferred tax asset is not “more likely than not” to be realized, an offsetting valuation allowance is recorded, reducing income and the deferred tax asset in that period. Management records valuation allowances primarily based on an assessment of historical earnings and future taxable income that incorporates prudent, feasible tax-planning strategies. The Company assesses deferred tax assets on an individual jurisdiction basis. The Company reviews tax laws, regulations, and related guidance on an ongoing basis in order to properly record any uncertain tax liabilities.
 
Comprehensive Income
 
Comprehensive income is the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. Comprehensive income is presented in the consolidated statements of stockholders’ equity. Accumulated other comprehensive income as of March 31, 2009, March 31, 2010 and September 30, 2010, consisted of unrealized gains (losses) on the Company’s defined and postretirement benefit plans.
 
Stock-Based Compensation
 
Share-based payments to employees are recognized in the consolidated statements of operations based on their grant date fair values with the expense being recognized over the requisite service period. The Company uses the Black-Scholes model to determine the fair value of its awards at the time of the grant.
 
Redeemable Common Stock
 
Prior to the Merger Transaction, the Predecessor had Redeemable Common Stock. Shares of Redeemable Common Stock issued upon exercise of rights granted prior to April 1, 2006 were marked to the redemption amount at the end of each reporting period with changes recorded in stock-based compensation expense. For shares of Redeemable Common Stock issued upon exercise of rights granted on or after April 1, 2006, the Redeemable Common Stock was marked to the redemption amount through stock-based compensation expense until such shares had been outstanding for six months. After such time, changes in the redemption amount were recorded as a component of stockholders’ equity.
 
Defined Benefit Plan and Other Postretirement Benefits
 
The Company recognizes the underfunded status of pension and other postretirement benefit plans on the consolidated balance sheets. Gains and losses, prior service costs and credits, and any remaining transition amounts that have not yet been recognized through net periodic benefit cost will be recognized in


F-15


 

BOOZ ALLEN HAMILTON HOLDING CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
accumulated other comprehensive income, net of tax effects, until they are amortized as a component of net periodic cost. The measurement date, the date at which the benefit obligation and plan assets are measured, is the Company’s fiscal year end.
 
Self-Funded Medical Plans
 
The Company maintains self-funded medical insurance. Self-funded plans include a health maintenance organization, preferred provider organization, point of service, qualified point of service, and traditional choice. Further, self-funded plans also include prescription drug benefits. The Company records an incurred but unpaid claim liability in the accrued compensation and benefits line of the consolidated balance sheets for self-funded plans based on an external actuarial valuation.
 
Estimates are calculated as the midpoint of reasonable ranges. Primary data that drives this estimate is based on claims and enrollment data received provided by a third party valuation firm for medical and pharmacy related costs. These reports detail claims paid and incurred through one month prior to the quarter end.
 
Deferred Compensation Plan
 
The Company accounts for its deferred compensation plan on an accrual basis, in accordance with the terms of the underlying contract. To the extent the terms of the contract attribute all or a portion of the expected future benefit to an individual year of the employee’s service, the cost of the benefits are recognized in that year. Therefore, the Company estimates that the cost of any and all future benefits that are expected to be paid as a result of the deferred compensation and expenses the present value of those costs in the year as services are provided.
 
Fair Value Measurements
 
The accounting standard for fair value measurements defines fair value, establishes a market-based framework or hierarchy for measuring fair value, and expands disclosures about fair value measurements. The standard establishes a three-tier value hierarchy, which prioritizes the inputs used in measuring fair value as follows: observable inputs such as quoted prices in active markets (“Level 1”); inputs other than the quoted prices in active markets that are observable either directly or indirectly (“Level 2”); and observable inputs in which there is little or no market data, which requires the Company to develop its own assumptions (“Level 3”).
 
New Accounting Pronouncements
 
During the fiscal year ended March 31, 2010, the Company adopted the following accounting pronouncements, none of which had a material impact on the Company’s present or historical consolidated financial statements:
 
During June 2009, the FASB approved the Codification as the single source of authoritative nongovernmental U.S. generally accepted accounting principles. The Codification reorganizes thousands of pronouncements into roughly 90 accounting topics and displays the topics using a consistent structure. All existing accounting standard documents are superseded, and all other accounting literature not included in the Codification is considered nonauthoritative. The Codification became effective for interim and annual periods ending after September 15, 2009. The Codification did not have a material impact on the Company’s results of operations or financial position.
 
During December 2007, the FASB issued ASC 805, Business Combinations, which the Company adopted effective January 1, 2009. This guidance replaced existing guidance and significantly changed accounting and reporting relative to business combinations in consolidated financial statements, including requirements to


F-16


 

BOOZ ALLEN HAMILTON HOLDING CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
recognize acquisition-related transaction costs and post acquisition restructuring costs in the results of operations as incurred. There was not a material impact to the Company’s consolidated financial statements upon adoption of this standard. Any future business combinations will be presented in accordance with ASC 805, but the nature and magnitude of the specific effects will depend on the nature, terms and size of the acquisitions. Additionally, ASC 805 changes the accounting for uncertain tax positions that are settled subsequent to adoption, but relate to preacquisition tax contingencies that existed prior to the adoption of ASC 805. To the extent that the Company’s established tax contingencies are realized at an amount greater or less than the contingency recorded, this adoption could materially impact the Company’s results of operations.
 
During June 2009, the FASB issued ASC 855, Subsequent Events, which the Company adopted effective June 30, 2009. This guidance establishes general standards of accounting for, and disclosures of, events that occur after the balance sheet date but before the financial statements are issued. During February 2010, the FASB amended the evaluation and disclosure requirements for subsequent events for companies that are not required to file with the U.S. Securities and Exchange Commission. The Company adopted the amended subsequent event requirements effective March 31, 2010. There was no material impact to the Company’s consolidated financial statements upon adoption of the original or amended standard.
 
In October 2009, the FASB issued Accounting Standards Update No. 2009-13, Multiple-Deliverable Revenue Arrangements, which amends ASC 605, Revenue Recognition. The guidance relates to the determination of when the individual deliverables included in a multiple-element arrangement may be treated as separate units of accounting and modifies the manner in which the transaction consideration is allocated across the individual deliverables, thereby affecting the timing of revenue recognition. The guidance also expands the disclosure requirements for revenue arrangements with multiple deliverables. The guidance will be effective beginning on April 1, 2011, and may be applied retrospectively for all periods presented or prospectively to arrangements entered into or materially modified after the adoption date. Early adoption is permitted provided that the guidance is retroactively applied to the beginning of the year of adoption. The Company is currently assessing the potential effect, if any, on its consolidated financial statements.
 
3.   EARNINGS PER SHARE
 
The Company computes basic and diluted per share amounts based on net income (loss) for the periods presented. The Company uses the weighted average number of common shares outstanding during the period to calculate basic earnings (loss) per share. Diluted EPS is computed similar to basic EPS, except the weighted average number of shares outstanding is increased to include the dilutive effect of outstanding common stock options and other stock-based awards.
 
The Company currently has outstanding shares of Class A Common Stock, Class B Non-Voting Common Stock, Class C Restricted Common Stock, and Class E Special Voting Common Stock. Class E shares are not included in the calculation of EPS as these shares represent voting rights only and are not entitled to participate in dividends or other distributions.


F-17


 

BOOZ ALLEN HAMILTON HOLDING CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
A reconciliation of the income (loss) used to compute basic and diluted EPS for the periods presented are as follows (in thousands, except share and per share amounts):
 
                                                   
    Predecessor       The Company  
    Fiscal Year
    Four Months
      Eight Months
    Fiscal Year
    Six Months
    Six Months
 
    Ended
    Ended
      Ended
    Ended
    Ended
    Ended
 
    March 31,
    July 31,
      March 31,
    March 31,
    September 30,
    September 30,
 
    2008     2008       2009     2010     2009     2010  
Earnings (loss) from continuing operations for basic and diluted computations
  $ 88,980     $ (397,544 )     $ (38,783 )   $ 25,419     $ 19,235     $ 42,986  
Earnings (loss) for basic and diluted computations
    17,874       (1,245,915 )       (38,783 )     25,419       19,235       42,986  
Weighted-average Class A Common Stock outstanding
    1,757,000       2,193,000         101,316,870       102,099,180       101,369,787       103,543,008  
Weighted-average Class B Non-Voting Common Stock outstanding
                  2,350,200       2,350,200       2,350,200       2,861,073  
Weighted-average Class C Restricted Common Stock outstanding
                  2,028,270       2,028,270       2,028,270       2,028,270  
                                                   
Total weighted-average common shares outstanding for basic computations
    1,757,000       2,193,000         105,695,340       106,477,650       105,748,257       108,432,351  
Dilutive stock options and restricted stock
    296,338                     9,750,730       7,217,039       13,305,491  
                                                   
Average number of common shares outstanding for diluted computations
    2,053,338       2,193,000         105,695,340       116,228,380       112,965,296       121,737,842  
                                                   
Earnings (loss) from continuing operations per common share
                                                 
Basic
  $ 50.64     $ (181.28 )     $ (0.37 )   $ 0.24     $ 0.18     $ 0.40  
                                                   
Diluted
  $ 43.33     $ (181.28 )     $ (0.37 )   $ 0.22     $ 0.17     $ 0.35  
                                                   
Earnings (loss) per common share
                                                 
Basic
  $ 10.17     $ (568.13 )     $ (0.37 )   $ 0.24     $ 0.18     $ 0.40  
                                                   
Diluted
  $ 8.70     $ (568.13 )     $ (0.37 )   $ 0.22     $ 0.17     $ 0.35  
                                                   
 
4.   BUSINESS COMBINATION
 
The Company acquired the outstanding common stock of Booz Allen Hamilton, Inc. effective August 1, 2008. The purchase price was $1,828.0 million as of March 31, 2010. Pursuant to the Merger Agreement, spin-off, indemnification and working capital escrow accounts in the amounts of $15.0 million, $25.0 million, and $50.0 million, respectively, were established for a period of one year from the date of the closing or until all outstanding claims made against the escrow accounts are resolved, whichever is later. As of March 31, 2010, payments in the aggregate amount of $52.5 million were made out of the escrow accounts, of which $13.0 million has been released to selling shareholders.
 
In connection with the Merger Transaction, the Company established a DPO of $158.0 million, of which $78.0 million was set aside to be paid in full to the selling shareholders. As discussed in Note 10, on December 11, 2009, in connection with the Recapitalization Transaction, $100.4 million was paid to the


F-18


 

BOOZ ALLEN HAMILTON HOLDING CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
selling shareholders, of which $78.0 million was the repayment of that portion of the DPO, with approximately $22.4 million representing accrued interest. The DPO also was established for additional consideration for the selling shareholders of up to $80.0 million plus accrued interest, payable by the tenth anniversary of the July 31, 2008 Merger Transaction closing date, and following favorable settlement of any indemnified pre-acquisition contingency claims made against the DPO. As of March 31, 2009 and 2010, $59.6 million and $62.4 million, respectively, may be indemnified under the DPO. As the indemnified claims are settled favorably, any amount remaining after settlement will be reflected as an increase in the DPO. An adjustment to the purchase price equal to the DPO adjustment will be recorded as additional consideration to be paid to the selling shareholders. As of March 31, 2009 and 2010, there were no significant settled claims and, accordingly, no adjustments to purchase price. Refer to note 10 for further discussion of the DPO.
 
As discussed in Note 1, the total purchase price was allocated to net tangible and identifiable intangible assets based on their estimated fair values as of the effective date of the acquisition. In allocating the purchase price, the Company considered, among other factors, its intention for future use of acquired assets, analysis of historical financial performance, and estimates of future performance of contracts. The components of intangible assets associated with the acquisition were contract backlog, favorable lease terms, and trade name, valued at $160.8 million, $2.8 million, and $190.2 million, respectively. Trade name, an indefinite lived intangible, represents the estimated fair value for all trade names and trademarks employed by the Company as of the closing date. Backlog consists of services that the Company is committed to fulfill according to the terms of its contracts and task orders. Favorable lease terms represent the differential between the payment terms of in-place leases and market lease rates. Backlog and favorable lease terms are amortized over nine and five years, respectively.
 
Purchase Price Allocation
 
The following table represents the purchase price allocation which includes the resolution of certain working capital, tax adjustments and purchase negotiation matters during fiscal 2010 (in thousands):
 
         
Current assets
  $ 1,009,589  
Property and equipment
    141,219  
Other noncurrent assets
    40,289  
Current liabilities
    (489,611 )
Notes payable, current and long-term
    (245,000 )
Other long-term liabilities
    (145,417 )
         
Net assets acquired
    311,069  
Definite-lived intangible assets acquired
    163,600  
Indefinite-lived intangible assets acquired
    190,200  
Goodwill
    1,163,129  
         
Total purchase price
  $ 1,827,998  
         
 
The following unaudited pro forma combined condensed statement of income sets forth the consolidated results of operations of the Company as if the above described acquisition had occurred at April 1, 2008. The


F-19


 

BOOZ ALLEN HAMILTON HOLDING CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
unaudited pro forma information does not purport to be indicative of the actual results that would have occurred if the combination had occurred at this earlier date (in thousands, except per share amounts):
 
         
    Fiscal Year Ended
    March 31, 2009
 
Revenue
  $ 4,351,218  
Net loss
    (49,441 )
Loss per common share:
       
Basic
  $ (0.47 )
Diluted
  $ (0.47 )
 
5.   GOODWILL AND OTHER INTANGIBLE ASSETS
 
Goodwill
 
As of March 31, 2009, March 31, 2010, and September 30, 2010, goodwill was $1,141.6 million, $1,163.1 million, and $1,152.2 million, respectively. Goodwill, which is associated with the Merger Transaction, was primarily attributed to the employees of the Company, their presence in the marketplace, and the value paid for by companies that operate in the Company’s industry (see Note 4). The change in the carrying amount of goodwill is attributable to the resolution of certain working capital, tax adjustments and purchase negotiation matters during fiscal 2010 and the six months ended September 30, 2010.
 
The Company performed an annual valuation of indefinite-lived intangible assets including goodwill as of January 1, 2010, noting no impairment. Goodwill was assessed for the Company’s one reporting unit utilizing a two-step methodology. The first step requires the Company to estimate the fair value of its reporting unit and compare it to the carrying value. If the carrying value of a reporting unit were to exceed its fair value, the goodwill of that reporting unit would be potentially impaired, and the Company would proceed to step two of the impairment analysis. In step two of the impairment analysis, the Company would measure and record an impairment loss equal to the excess of the carrying value of the reporting unit’s goodwill over its implied fair value should such a circumstance arise. The outcome of the first step of the Company’s test indicated that there was no potential impairment, and therefore the second step of the test was not required. The trademark was evaluated as an indefinite life intangible asset prior to the testing of goodwill. At January 1, 2010, the fair value of the Company’s goodwill and trademark each exceeded their carrying value. There were no additional events or changes that indicated any impairment as of March 31, 2010.
 
Other Intangible Assets
 
The following tables set forth information for intangible assets (in thousands):
 
                                                                         
    As of March 31, 2009   As of March 31, 2010   As of September 30, 2010
    Gross
      Net
  Gross
      Net
  Gross
      Net
    Carrying
  Accumulated
  Carrying
  Carrying
  Accumulated
  Carrying
  Carrying
  Accumulated
  Carrying
    Value   Amortization   Value   Value   Amortization   Value   Value   Amortization   Value
 
Amortized Intangible Assets
                                                                       
Contract backlog
  $ 160,800     $ 43,613     $ 117,187     $ 160,800     $ 83,405     $ 77,395     $ 160,800     $ 97,363     $ 63,437  
Favorable leases
    2,800       710       2,090       2,800       1,515       1,285       2,800       1,876       924  
                                                                         
Total
  $ 163,600     $ 44,323     $ 119,277     $ 163,600     $ 84,920     $ 78,680     $ 163,600     $ 99,239     $ 64,361  
Unamortized Intangible Assets
                                                                       
Trade name
  $ 190,200     $     $ 190,200     $ 190,200     $     $ 190,200     $ 190,200     $     $ 190,200  
                                                                         
Total
  $ 353,800     $ 44,323     $ 309,477     $ 353,800     $ 84,920     $ 268,880     $ 353,800     $ 99,239     $ 254,561  
                                                                         
 
As a result of the Merger Transaction, amortization expense for the eight months ended March 31, 2009 and fiscal 2010, was $44.3 million and $40.6 million, respectively. Amortization expense for the six months


F-20


 

BOOZ ALLEN HAMILTON HOLDING CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
ended September 30, 2009 and 2010 was $20.3 million and $14.3 million, respectively. There were no intangible assets prior to the Merger Transaction. The following table summarizes the estimated annual amortization expense for future periods indicated below (in thousands):
 
         
For the Fiscal Year Ending March 31,
     
 
2011
  $ 28,645  
2012
    16,364  
2013
    12,549  
2014
    8,450  
2015
    4,225  
Thereafter
    8,447  
         
    $ 78,680  
         
 
The Company reviews its long-lived assets, including property and equipment and intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be fully recoverable. If the total of the expected undiscounted future net cash flows is less than the carrying amount of the asset, a loss is recognized for the difference between the fair value and carrying amount of the asset. There were no impairment charges for the eight months ended March 31, 2009 or fiscal 2010.
 
6.   ACCOUNTS RECEIVABLE
 
Accounts receivable, net consisted of the following (in thousands):
 
                         
    March 31,     September 30,  
    2009     2010     2010  
                (Unaudited)  
 
Accounts receivable — billed
  $ 460,215     $ 437,256     $ 433,144  
Accounts receivable — unbilled
    467,358       583,182       540,388  
Allowance for doubtful accounts
    (1,648 )     (2,127 )     (990 )
                         
Accounts receivable, net, current
    925,925       1,018,311       972,542  
Long-term unbilled receivables related to retainage and holdbacks
    13,051       17,072       17,991  
                         
Total accounts receivable, net
  $ 938,976     $ 1,035,383     $ 990,533  
                         
 
The Company recognized a provision for doubtful accounts of $7.1 million, $1.0 million, $2.1 million, and $1.4 million for fiscal 2008, four months ended July 31, 2008, eight months ended March 31, 2009, and fiscal 2010, respectively. The Company recognized a provision for doubtful accounts of $1.1 million for the six months ended September 30, 2010. Long-term unbilled receivables related to retainage, holdbacks, and long-term rate settlements to be billed at contract closeout are included in non-current assets as accounts receivable in the accompanying consolidated balance sheets.


F-21


 

BOOZ ALLEN HAMILTON HOLDING CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
7.   PROPERTY AND EQUIPMENT
 
The components of property and equipment, net were as follows (in thousands):
 
                 
    March 31,  
    2009     2010  
 
Furniture and equipment
  $ 66,748     $ 82,759  
Computer equipment
    34,077       43,824  
Software
    10,164       20,693  
Leasehold improvements
    66,883       79,501  
                 
Total
    177,872       226,777  
Less accumulated depreciation and amortization
    (35,329 )     (90,129 )
                 
Property and equipment, net
  $ 142,543     $ 136,648  
                 
 
Property and equipment, net, includes $3.1 million and $12.1 million of internally developed software, net of depreciation as of March 31, 2009 and 2010, respectively. Depreciation and amortization expense relating to property and equipment for fiscal 2008, four months ended July 31, 2008, eight months ended March 31, 2009, and fiscal 2010, was $33.1 million, $11.9 million, $35.3 million, and $55.2 million, respectively.
 
8.   ACCOUNTS PAYABLE AND OTHER ACCRUED EXPENSES
 
Accounts payable and other accrued expenses consist of the following (in thousands):
 
                         
    March 31,     September 30,  
    2009     2010     2010  
                (Unaudited)  
 
Vendor payables
  $ 184,394     $ 257,418     $ 243,177  
Accrued expenses
    56,774       93,317       117,772  
Other
    2,663       3,362       4,546  
                         
Total accounts payable and other accrued expenses
  $ 243,831     $ 354,097     $ 365,495  
                         
 
9.   ACCRUED COMPENSATION AND BENEFITS
 
Accrued compensation and benefits consist of the following (in thousands):
 
                         
    March 31,     September 30,  
    2009     2010     2010  
                (Unaudited)  
 
Bonus
  $ 135,566     $ 146,035     $ 67,312  
Retirement
    74,614       89,200       140,566  
Vacation
    104,249       119,912       121,611  
Other
    29,980       29,998       32,138  
                         
Total accrued compensation and benefits
  $ 344,409     $ 385,145     $ 361,627  
                         
 
10.   DEFERRED PAYMENT OBLIGATION
 
In connection with the Merger Transaction, on July 31, 2008 (the “Closing Date”) the Company established a DPO of $158.0 million, payable by 81/2 years after the Closing Date, less any settled claims. Pursuant to the Merger Agreement, $78.0 million of the $158.0 million DPO was required to be paid in full to the selling shareholders. On December 11, 2009, in connection with the Recapitalization Transaction,


F-22


 

BOOZ ALLEN HAMILTON HOLDING CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
$100.4 million was paid to the selling shareholders, of which $78.0 million was the repayment of that portion of the DPO, with approximately $22.4 million representing accrued interest.
 
The remaining $80.0 million is available to indemnify the Company for certain pre-acquisition tax contingencies, related interest and penalties and other matters pursuant to the Merger Agreement. Any amounts remaining after the settlement of claims will be paid out to the selling shareholders. As of March 31, 2009 and 2010, the Company has recorded $99.4 million and $100.2 million, respectively, for pre-acquisition uncertain tax positions, of which approximately $59.6 million and $62.4 million, respectively, may be indemnified under the remaining available DPO. In addition, other tax contingencies not currently recorded on the Company’s consolidated balance sheets may arise and may be indemnified by any remaining DPO. Accordingly, the $109.0 million and $20.0 million DPO balance recorded as of March 31, 2009 and 2010, respectively, includes the residual balance to be paid to the selling shareholders based on consideration of contingent tax claims and accrued interest. Interest is accrued at a rate of 5.0% per six-month period on the total remaining $158.0 million and $80.0 million DPO, net of any settled claims or payments as of March 31, 2009 and 2010, respectively. As of March 31, 2009 and 2010, there have been no significant settled claims or payments from the DPO related to indemnified claims.
 
11.   DEBT
 
Long-term debt, net of discount, consists of the following (in thousands):
 
                         
    March 31,     September 30,  
    2009     2010     2010  
                (Unaudited)  
 
Senior secured credit agreement:
                       
Tranche A
  $ 119,708     $ 110,829     $ 104,828  
Tranche B
    571,260       566,811       564,622  
Tranche C
          345,790       344,331  
                         
      690,968       1,023,430       1,013,781  
Unsecured credit agreement:
                       
Mezzanine Term Loan
    544,759       545,202       461,150  
                         
Total
    1,235,727       1,568,632       1,474,931  
Current portion of long-term debt
    (15,225 )     (21,850 )     (21,850 )
                         
Long-term debt, net of current portion
  $ 1,220,502     $ 1,546,782     $ 1,453,081  
                         
 
The Company maintains a Senior Secured Agreement and a Mezzanine Credit Agreement with a syndicate of lenders. In connection with the Recapitalization Transaction, the Senior Secured Agreement was amended and restated effective December 11, 2009, to add Tranche C term loans in the aggregate principal amount of $350.0 million and provide for an increase to the Company’s revolving credit facility of $145.0 million. The Senior Secured Agreement, as amended, provides for $1,060.0 million in term loans ($125.0 million Tranche A, $585.0 million Tranche B, and $350.0 million Tranche C), and a $245.0 million revolving credit facility. In September 2008, a member of the syndicate of lenders filed for bankruptcy. Therefore, management believes that $21.3 million of the $245.0 million revolving credit facility under the Senior Secured Agreement will not be available to the Company.
 
The Senior Secured Agreement requires scheduled principal payments in equal consecutive quarterly installments of the stated principal amount of Tranche A, which commenced on December 31, 2008, with incremental increases prior to the Tranche A maturity date of July 31, 2014. As of March 31, 2009 and 2010, the quarterly installment amount is 1.25% and 2.5% of the stated principal amount of Tranche A, respectively. The Senior Secured Agreement also requires scheduled principal payments in equal consecutive quarterly


F-23


 

BOOZ ALLEN HAMILTON HOLDING CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
installments of 0.25% of the stated principal amount of Tranche B, which commenced on December 31, 2008, and 0.25% of the stated principal amount of Tranche C, which commenced on March 31, 2010. The remaining balances thereof on Tranche B and Tranche C are payable on their maturity date of July 31, 2015. The revolving credit facility matures on July 31, 2014, at which time any remaining principal balance is due in full.
 
At the Company’s option, the interest rate on loans under the Senior Secured Agreement may be based on the Eurocurrency rate or alternate base rate (“ABR”). Subject to a pricing grid, the applicable interest rate margins on Tranche A are 3.75% with respect to Eurocurrency loans, or 2.75% with respect to ABR loans, as defined in the Senior Secured Agreement. The applicable interest rate margins on Tranche B are 4.5% with respect to Eurocurrency Loans, or 3.5% with respect to ABR loans, as defined in the Senior Secured Agreement. The Tranche B interest rate may not be lower than 7.5% on either a Eurocurrency Loan or an ABR loan. The applicable interest rate margins on Tranche C are 4.0% with respect to Eurocurrency Loans, or 3.0% with respect to ABR loans, as defined in the Senior Secured Agreement. The Tranche C interest rate may not be lower than 6.0% on either a Eurocurrency Loan or an ABR loan.
 
As of March 31, 2009, interest accrued at a rate of 4.2% and 7.5% for Tranches A and B, respectively. Interest payments in the amounts of $4.9 million and $29.5 million were made for Tranches A and B, respectively, during the eight months ended March 31, 2009. As of March 31, 2010, interest accrued at a rate of 4.0%, 7.5%, and 6.0% for Tranches A, B, and C, respectively. Interest payments in the amounts of $4.9 million, $44.1 million, and $5.3 million were made for Tranches A, B, and C, respectively, during fiscal 2010. Interest payments in the amounts of $2.5 million and $22.2 million were made for Tranches A and B, respectively, for the six months ended September 30, 2009. Interest payments in the amounts of $2.3 million, $21.9 million, and $10.8 million were made for Tranches A, B, and C, respectively, during the six months ended September 30, 2010. The applicable interest rate margins on the revolving credit facility are 3.75% with respect to Eurocurrency Loans, or 2.75% with respect to ABR loans, as defined in the Senior Secured Agreement. The revolving credit facility margin and commitment fee are subject to the pricing grid, as defined in the Senior Secured Agreement. As of March 31, 2009, March 31, 2010, and September 30, 2010, no amounts have been drawn on the revolving credit facility.
 
The Mezzanine Credit Agreement provides for a $550.0 million term loan (the “Mezzanine Term Loan”). The Mezzanine Term Loan does not require scheduled principal payment installments, but reaches maturity on July 31, 2016, at which time the remaining principal balance is due in full. Optional prepayment of the Mezzanine Term Loan requires a prepayment fee equal to 3.0% of the principal amount prepaid if paid on or after the second anniversary but before the third anniversary of the original July 31, 2008 closing date, 2.0% if paid on or after the third anniversary but before the fourth anniversary of the closing date, and a mandatory 1.0% if paid on or after the fourth anniversary of the closing date. The Company records the mandatory 1% payment as additional interest expense over the life of the Mezzanine Term Loan on the consolidated statements of operations. Prepayments made before the second anniversary of closing date are subject to additional premiums and penalties based on the present value of the debt and remaining interest payments at the time of such prepayment. The applicable fixed interest rate on the Mezzanine Term Loan is 13.0%, with the option that, in lieu of interest payment in cash, up to 2.0% of that amount would be added to the then outstanding aggregate principal balance. The Company made interest payments in the amount of $48.3 million and $72.5 million during the eight months ended 2009, and fiscal 2010, respectively. The Company made interest payments in the amount of $36.3 million and $34.5 million during the six months ended September 30, 2009 and 2010, respectively.
 
The total outstanding debt balance is recorded in the accompanying consolidated balance sheets, net of unamortized discount of $18.2 million and $19.2 million as of March 31, 2009 and 2010, respectively.
 
On August 2, 2010, the Company made an optional prepayment of the Mezzanine Term Loan of $85.0 million. In accordance with the prepayment terms of the Mezzanine Term Loan, a prepayment penalty


F-24


 

BOOZ ALLEN HAMILTON HOLDING CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
of $2.6 million was incurred and reflected in interest expense in the accompanying consolidated statement of operations for the six months ended September 30, 2010.
 
The following tables summarizes required future debt principal repayments (in thousands):
 
                                                         
    Payments Due By March 31,  
    Total     2011     2012     2013     2014     2015     Thereafter  
 
Tranche A
    112,500     $ 12,500     $ 15,625     $ 21,875     $ 62,500     $     $  
Tranche B
    576,225       5,850       5,850       5,850       5,850       5,850       546,975  
Tranche C
    349,125       3,500       3,500       3,500       3,500       3,500       331,625  
Mezzanine Term Loan
    550,000                                     550,000  
                                                         
Total
  $ 1,587,850     $ 21,850     $ 24,975     $ 31,225     $ 71,850     $ 9,350     $ 1,428,600  
                                                         
 
At March 31, 2009 and 2010, the Company was contingently liable under open standby letters of credit and bank guarantees issued by the Company’s banks in favor of third parties. These letters of credit and bank guarantees primarily relate to leases and support of insurance obligations that total $1.4 million. These instruments reduce the Company’s available borrowings under the revolving credit facility.
 
The loans under the Senior Secured Agreement are secured by substantially all of the Company’s assets. The Senior Secured Agreement requires the maintenance of certain financial and non-financial covenants. The Mezzanine Term Loan is unsecured, and the Mezzanine Credit Agreement requires the maintenance of certain financial and non-financial covenants. As of March 31, 2009, March 31, 2010, and September 30, 2010, the Company was in compliance with all of its covenants.
 
12.   DEFERRED FINANCING COSTS
 
Costs incurred in connection with securing the loans under the Senior Secured Agreement as well as the Mezzanine Credit Agreement in 2008 were $45.0 million, which is recorded as other long-term assets and will be amortized over the life of the loan. Costs incurred in connection with the Recapitalization Transaction, including amending the Senior Secured Agreement and Mezzanine Credit Agreement, were approximately $18.9 million. Of this amount, approximately $15.8 million was recorded as other long-term assets in the consolidated balance sheets and will be amortized and reflected in interest expense in the consolidated statements of operations over the lives of the loans. Amortization of these costs will be accelerated to the extent that any prepayment is made on the term loans. The remaining amount of approximately $3.1 million was recorded as general and administrative expense in the consolidated statement of operations for fiscal 2010.
 
At March 31, 2009 and 2010, the unamortized debt issuance costs of $41.9 million and $52.0 million, respectively, were reflected as other long-term assets in the consolidated balance sheets. During the eight months ended March 31, 2009 and fiscal 2010, $3.1 million and $5.7 million of costs, respectively, were amortized and reflected in interest expense in the consolidated statements of operations.
 
In connection with the prepayment under the Mezzanine Credit Agreement, the Company wrote off $3.4 million of deferred financing costs, which is reflected as a component of interest expense in the accompanying consolidated statement of operations for the six months ended September 30, 2010. The Company has recorded $39.8 million and $45.2 million of deferred financing costs as of September 30, 2009 and 2010, respectively.


F-25


 

BOOZ ALLEN HAMILTON HOLDING CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
13.   INCOME TAXES
 
The components of income tax expense (benefit) were as follows (in thousands):
 
                                                   
                  The Company  
    Fiscal Year
    Four Months
      Eight Months
    Fiscal Year
    Six Months
    Six Months
 
    Ended
    Ended
      Ended
    Ended
    Ended
    Ended
 
    March 31,
    July 31,
      March 31,
    March 31,
    September 30,
    September 30,
 
    2008     2008       2009     2010     2009     2010  
                              (Unaudited)     (Unaudited)  
Current:
                                                 
U.S. Federal
  $ 93,374     $ (1,414 )     $     $ 2,664     $ 2,250     $ 3,524  
State and local
    9,307       (459 )             1,074       1,911       829  
                                                   
Total current
    102,681       (1,873 )             3,738       4,161       4,353  
                                                   
Deferred:
                                                 
U.S. Federal
    (37,566 )     (44,996 )       (16,133 )     18,004       12,154       24,165  
State and local
    (2,422 )     (9,240 )       (6,014 )     1,833       1,684       2,857  
                                                   
Total deferred
    (39,988 )     (54,236 )       (22,147 )     19,837       13,838       27,022  
                                                   
Total
  $ 62,693     $ (56,109 )     $ (22,147 )   $ 23,575     $ 17,999     $ 31,375  
                                                   
 
A reconciliation between income tax computed at the U.S. federal statutory income tax rate to income tax expense (benefit) from continuing operations follows (in thousands):
 
                                   
    Predecessor       The Company  
    Fiscal Year
    Four Months
      Eight Months
    Fiscal Year
 
    Ended
    Ended
      Ended
    Ended
 
    March 31,
    July 31,
      March 31,
    March 31,
 
    2008     2008       2009     2010  
Income tax expense (benefit) computed at U.S. statutory rate (35)%
  $ 53,086     $ (158,779 )     $ (21,326 )   $ 17,148  
Increases (reductions) in taxes due to:
                                 
State income taxes, net of the federal tax benefit
    8,541       (6,889 )       (2,651 )     2,913  
Meals and entertainment
    738               1,321       2,552  
Nondeductible stock-based compensation
          97,048                
Other
    328       12,511         509       962  
                                   
Income tax expense (benefit) from continuing operations
  $ 62,693     $ (56,109 )     $ (22,147 )   $ 23,575  
                                   


F-26


 

BOOZ ALLEN HAMILTON HOLDING CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Significant components of the Company’s net deferred income tax asset were as follows (in thousands):
 
                 
    March 31,  
    2009     2010  
 
Deferred income tax assets:
               
Accrued expenses
  $ 21,677     $ 36,655  
Stock-based compensation
    26,148       47,461  
Pension and postretirement insurance
    15,503       844  
Property and equipment
    11,087       28,728  
Net operating loss carryforwards
    243,430       141,472  
Capital loss carryforward
    10,056       42,379  
AMT
          3,091  
Other
    640       8,960  
                 
Total gross deferred income taxes
    328,541       309,590  
Less valuation allowance
    (10,056 )     (42,379 )
                 
Total net deferred income tax assets
    318,485       267,211  
                 
Deferred income tax liabilities:
               
Unbilled receivables
    116,687       122,733  
Intangible assets
    122,845       106,106  
Other
    1,509        
                 
Total deferred tax liabilities
    241,041       228,839  
                 
Net deferred income tax asset
  $ 77,444     $ 38,372  
                 
 
Deferred tax balances reflect the impact of temporary differences between the carrying amount of assets and liabilities and their tax basis and are stated at the tax rates expected to be in effect when taxes are actually paid or recovered. A valuation allowance is provided against deferred tax assets when it is more likely than not that some or all of the deferred tax asset will not be realized. In determining if our deferred tax assets are realizable, we consider the Company’s history of generating taxable earnings, forecasted future taxable income, as well as any tax planning strategies. The Company recorded a valuation allowance of $10.1 million and $42.4 million as of March 31, 2009 and 2010, respectively, against deferred tax assets associated with the capital loss carryforward. For all other deferred tax assets, the Company believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize these deferred tax assets.
 
At March 31, 2009 and 2010, the Company has approximately $608.2 million and $367.6 million, respectively, of net operating loss (“NOL”) carryforwards, which will begin to expire in 2028. Section 382 of the Internal Revenue Code limits the use of a corporation’s NOLs and certain other tax benefits following a change in ownership of the corporation. As discussed in Notes 1 and 4, Holding acquired the Predecessor in a nontaxable merger effective August 1, 2008. The transaction resulted in an ownership change, which subjects the NOL generated at July 31, 2008 to the limitation under Section 382.
 
The Patient Protection and Affordable Care Act and subsequent modifications made in the Health Care and Education Reconciliation Act of 2010 were signed into law in March 2010. Under the new legislation, companies will no longer be able to claim an income tax deduction related to the costs of prescription drug benefits provided to retirees and reimbursed under the Medicare Part D retiree drug subsidy. Although this tax change does not take effect until 2013, the Company is required to recognize the impact to the deferred taxes in the period in which the law is enacted. The impact to the Company is immaterial.


F-27


 

BOOZ ALLEN HAMILTON HOLDING CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Uncertain Tax Positions
 
As of March 31, 2009 and 2010, the Company has recorded $99.4 million and $100.2 million, respectively, for pre-acquisition uncertain tax positions, of which approximately $59.6 million and $62.4 million, respectively, may be indemnified under the remaining available DPO. Refer to Note 10 for further explanation.
 
A reconciliation of the beginning and ending amount of total unrecognized tax benefits is as follows (in thousands):
 
                 
    March 31,  
    2009     2010  
 
Uncertain tax positions:
               
Beginning of year
  $ 86,690     $ 87,867  
Increases related to prior-year tax positions
    1,077        
Increases related to current-year tax positions
    100        
Settlements
          (1,885 )
                 
End of year
  $ 87,867     $ 85,982  
                 
 
Included in the balance of unrecognized tax benefits at March 31, 2009 and 2010 are potential tax benefits of $87.9 million and $86.0 million, respectively, that, if recognized, would affect the effective tax rate.
 
The Company recognizes accrued interest and penalties related to unrecognized tax benefits in the income tax provision. Included in the total unrecognized tax benefit are accrued penalties and interest of $11.5 million and $14.2 million at March 31, 2009 and 2010, respectively.
 
The Company and its subsidiaries file a U.S. consolidated income tax return and file in various state and foreign jurisdictions. The Internal Revenue Service (“IRS”) is completing its examination of the Predecessor’s income tax returns, as assumed by the Company, for 2004, 2005, and 2006. As of March 31, 2010, the IRS has proposed certain significant adjustments to the Company’s claim on research credits. Management is currently appealing the proposed adjustments and does not anticipate that the adjustments will result in a material change to its financial position. Additionally, due to statute of limitations expirations and audit settlements, it is reasonably possible that approximately $18.5 million of currently remaining unrecognized tax positions, each of which are individually insignificant, may be effectively settled by March 31, 2011.
 
14.   EMPLOYEE BENEFIT PLANS
 
Defined Contribution Plan
 
The Company sponsors the Employees’ Capital Accumulation Plan (“ECAP”), which is a qualified defined contribution plan that covers eligible U.S. and international employees. ECAP provides for distributions, subject to certain vesting provisions, to participants by reason of retirement, death, disability, or termination of employment. Total expense under ECAP for fiscal 2008, four months ended July 31, 2008, eight months ended March 31, 2009, and fiscal 2010, was $150.2 million, $53.3 million, $116.8 million, and $210.3 million, respectively, and the Company-paid contributions were $147.9 million, $32.9 million, $127.3 million, and $196.3 million, respectively. Total expense under ECAP for the six months ended September 30, 2009 and 2010 was $100.3 million and $113.6 million, respectively, and the Company-paid contributions were $49.6 million and $62.2 million, respectively.


F-28


 

BOOZ ALLEN HAMILTON HOLDING CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Defined Benefit Plan and Other Postretirement Benefit Plans
 
The Company maintains and administers a defined benefit retirement plan and a postretirement medical plan for current, retired, and resigned officers.
 
The Company established a non-qualified defined benefit plan for all Officers in May 1995 (the “Retired Officers’ Bonus Plan”), which pays a lump-sum amount of $10,000 per year of service as an Officer, provided the Officer meets retirement vesting requirements. The Company also provides a fixed annual allowance after retirement to cover financial counseling and other expenses. The Retired Officers’ Bonus Plan is not salary related, but rather is based primarily on years of service.
 
In addition, the Company provides postretirement healthcare benefits to former or active Officers under a medical indemnity insurance plan, with premiums paid by the Company. This plan is referred to as the Officer Medical Plan.
 
The Company recognizes an asset or liability for a defined benefit plan’s overfunded or underfunded status, measures a defined benefit plan’s assets and its obligations that determine its funded status as of the end of the employer’s fiscal year, and recognizes as a component of other comprehensive income the changes in a defined benefit plan’s funded status that are not recognized as components of net periodic benefit cost.
 
The components of net postretirement medical expense for the Officer Medical Plan were as follows (in thousands):
 
                                                   
    Predecessor     The Company
    Fiscal Year
  Four Months
    Eight Months
  Fiscal Year
  Six Months
  Six Months
    Ended
  Ended
    Ended
  Ended
  Ended
  Ended
    March 31,
  July 31,
    March 31,
  March 31,
  September 30,
  September 30,
    2008   2008     2009   2010   2009   2010
                      (Unaudited)   (Unaudited)
Service cost
  $ 1,894     $ 755       $ 2,325     $ 2,682     $ 1,341     $ 1,682  
Interest cost
    1,568       666         1,395       2,269       1,135       1,284  
                                                   
Total postretirement medical expense
  $ 3,462     $ 1,421       $ 3,720     $ 4,951     $ 2,476     $ 2,966  
                                                   
 
The weighted-average assumptions used to determine the year-end benefit obligations are as follows:
 
                                 
    Predecessor
    Officer Medical Plan   Retired Officers’ Bonus Plan
    Fiscal Year
  Four Months
  Fiscal Year
  Four Months
    Ending
  Ending
  Ending
  Ending
    March 31,
  July 31,
  March 31,
  July 31,
    2008   2008   2008   2008
 
Discount rate
    6.25 %     6.50 %     6.25 %     6.50 %
Rate of increase in future compensation
    N/A       N/A       N/A       N/A  
 
                                         
    The Company
    Officer Medical Plan       Retired Officers’ Bonus Plan
    March 31,       March 31,
    2009   2010       2009   2010
 
Discount rate
    6.50 %     5.75 %             6.50 %     5.75 %
Rate of increase in future compensation
    N/A       N/A               N/A       N/A  


F-29


 

BOOZ ALLEN HAMILTON HOLDING CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Assumed healthcare cost trend rates for the Officer Medical Plan at March 31, 2008, 2009, and 2010, are as follows:
 
                         
Pre-65 initial rate
  2008   2009   2010
 
Healthcare cost trend rate assumed for next year
    11.0 %     7.5 %     8.0 %
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)
    5.0 %     5.0 %     5.0 %
Year that the rate reaches the ultimate trend rate
    2013       2015       2017  
 
Assumed healthcare cost trend rates have a significant effect on the amounts reported for the healthcare plans. A one-percentage-point change in assumed healthcare cost trend rates calculated as of March 31, 2010 would have the following effects (in thousands):
 
                 
    1% Increase   1% Decrease
 
Effect on total of service and interest cost
  $ 828     $ (676 )
Effect on postretirement benefit obligation
  $ 6,357     $ (5,271 )
 
Total pension expense, consisting of service and interest, associated with the Retired Officers’ Bonus Plan was $900,000, $300,000, $800,000, and $800,000 for fiscal 2008, four months ended July 31, 2008, eight months ended March 31, 2009, and fiscal 2010, respectively. Benefits paid associated with the Retired Officers’ Bonus Plan were $400,000, $400,000, $600,000, and $300,000 for fiscal 2008, four months ended July 31, 2008, eight months ended March 31, 2009, and fiscal 2010, respectively. The end-of-period benefit obligation of $4.2 million and $5.0 million as of March 31, 2009 and 2010, respectively, is included in postretirement obligation in the accompanying consolidated balance sheets.
 
Accumulated other comprehensive income as of March 31, 2009, includes unrecognized net actuarial gain of $1.1 million, net of taxes, and net actuarial loss of $400,000, net of taxes, that have not yet been recognized in net periodic pension cost for the Retired Officers’ Bonus Plan and the Officer Medical Plan, respectively. Accumulated other comprehensive income as of March 31, 2010, includes unrecognized net actuarial loss of $3.8 million, net of taxes, that have not yet been recognized in net periodic pension cost for the Retired Officers’ Bonus Plan and the Officer Medical Plan. A primary driver for the net actuarial loss of $3.8 million in fiscal 2010 was the change in the actuarial discount rate from 6.50% to 5.75%.


F-30


 

BOOZ ALLEN HAMILTON HOLDING CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The changes in the benefit obligation, plan assets and funded status of the Officer Medical Plan were as follows (in thousands):
 
                                   
    Predecessor     The Company
    Fiscal Year
  Four Months
    Eight Months
  Fiscal Year
    Ended
  Ended
    Ended
  Ended
    March 31,
  July 31,
    March 31,
  March 31,
    2008   2008     2009   2010
Benefit obligation, beginning of the year
  $ 26,624     $ 32,605       $ 32,157     $ 35,577  
Service cost
    1,894       755         2,325       2,682  
Interest cost
    1,569       666         1,395       2,270  
Actuarial (gain) loss
    3,609       (1,518 )       797       6,673  
Benefits paid
    (1,091 )     (351 )       (1,097 )     (1,747 )
                                   
Benefit obligation, end of the year
  $ 32,605     $ 32,157       $ 35,577     $ 45,455  
                                   
Changes in plan assets
                                 
Fair value of plan assets, beginning of the year
  $     $       $     $  
Actual return on plan assets
                         
Employer contributions
    1,091       351         1,097       1,747  
Benefits paid
    (1,091 )     (351 )       (1,097 )     (1,747 )
                                   
Fair value of plan assets, end of the year
  $     $       $     $ —   
                                   
 
As of March 31, 2009 and 2010, the unfunded status of the Officer Medical Plan was $35.6 million and $45.5 million, respectively. As of September 30, 2010, the unfunded status of the Officer Medical Plan was $47.6 million. There were no employer contributions or benefits paid during the six months ended September 30, 2010.
 
The postretirement benefit liability for the Officer Medical Plan is included in postretirement obligation in the accompanying consolidated balance sheets.
 
Funded Status for Defined Benefit Plans
 
Generally, annual contributions are made at such times and in amounts as required by law and may, from time to time, exceed minimum funding requirements. The Retired Officers’ Bonus Plan is an unfunded plan and contributions are made as benefits are paid, for all periods presented. As of March 31, 2009 and 2010, there were no plan assets for the Retired Officers’ Bonus Plan and therefore, the accumulated liability of $4.2 million and $5.0 million, respectively, is unfunded. The liability will be distributed in a lump-sum payment as each Officer retires.
 
The expected future medical benefits to be paid are as follows (in thousands):
 
         
    Officer
    Medical Plan
For the Fiscal Year Ending March 31,
  Benefits
 
2012
  $ 1,641  
2013
    1,870  
2014
    2,143  
2015
    2,398  
2016
    2,758  
2017-2021
    19,623  


F-31


 

BOOZ ALLEN HAMILTON HOLDING CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The Company’s Officer Medical Plan provides prescription drug benefits to its plan participants. Under the Medicare Prescription Drug, Improvement and Modernization Act of 2003, the U.S. government makes subsidy payments to eligible employers to offset a portion of the cost incurred for prescription drug benefits provided to the employer’s Medicare-eligible retired plan participants. The Company’s expected future subsidy receipts are not material.
 
15.   OTHER LONG-TERM LIABILITIES
 
Other long-term liabilities consist of the following (in thousands):
 
                 
    March 31,
    2009   2010
 
Deferred rent
  $ 4,790     $ 10,255  
Deferred compensation
    4,770       11,289  
Stock-based compensation
          27,432  
Other
    87       292  
                 
Total other long-term liabilities
  $ 9,647     $ 49,268  
                 
 
Deferred rent liabilities result from recording rent expense on a straight-line basis over the life of the respective lease and recording incentives for tenant improvements. The increase of $5.5 million as of March 31, 2010 as compared to March 31, 2009 was primarily for accrual of deferred rent on existing leases.
 
In fiscal 2010, the Company recorded a stock-based compensation liability of $34.4 million, including $7.0 million expected to be paid within one year, related to the reduction in stock option exercise price associated with the December 2009 dividend. Options vested and not yet exercised that would have had an exercise price below zero as a result of the dividend were reduced to one cent, with the remaining reduction to be paid in cash upon exercise of the options. Refer to Note 17 for further discussion of the December 2009 dividend.
 
The Company maintains a deferred compensation plan, the EPP, established in January 2009, for the benefit of certain employees. The EPP allows eligible participants to defer all or a portion of their annual performance bonus, reduced by amounts withheld for the payment of taxes or other deductions required by law. The Company makes no contributions to the EPP, but maintains participant accounts for deferred amounts and interest earned. The amounts deferred into the EPP will earn interest at a rate of return indexed to the results of the Company’s growth as defined by the EPP. In each subsequent year, interest will be compounded on the total deferred balance. Employees must leave the money in the EPP until 2014. The deferred balance generally will be paid within 180 days of the final determination of the interest to be accrued for 2014, upon retirement, or termination. As of March 31, 2009 and 2010, the Company’s liability associated with the EPP was $4.8 million and $11.3 million, respectively. Accrued amounts related to the EPP are included in other long-term liabilities on the accompanying consolidated balance sheets.
 
16.   STOCKHOLDERS’ EQUITY
 
Stock Split
 
On September 21, 2010, the Company’s board of directors approved an amended and restated certificate of incorporation that was filed on November 8, 2010, thereby effecting a ten-for-one stock split of all the outstanding shares of Class A Common Stock, Class B Non-Voting Common Stock, Class C Restricted Common Stock, and Class E Special Voting Common Stock. Par value for Class A Common Stock, Class B Non-Voting Common Stock, and Class C Restricted Common Stock will remain at $0.01 par value per share. Par value for Class E Special Voting Stock will split ten-for-one to become $0.003 per share. All issued and


F-32


 

BOOZ ALLEN HAMILTON HOLDING CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
outstanding common stock and stock options and per share amounts of the Company contained in the financial statements have been retroactively adjusted to reflect this stock split for all periods presented.
 
Common Stock
 
As of March 31, 2009, March 31, 2010, and September 30, 2010, the Company has 600,000,000 shares of authorized Class A Common Stock, par value $0.01 per share, 16,000,000 shares of authorized Class B Non-Voting Common Stock, par value $0.01, 5,000,000 shares of authorized Class C Restricted Common Stock, par value $0.01, 600,000 shares of authorized Class D Merger Rolling Common Stock, par value $0.01, 25,000,000 shares of authorized Class E Special Voting Common Stock, par value $0.003, and 600,000 shares of authorized Class F Non-Voting Restricted Common Stock, par value $0.01 per share. The total number of shares of capital common stock the Company has the authority to issue is 647,200,000.
 
The Common Stock shares outstanding are as follows:
 
                         
    March 31,   September 30,
    2009   2010   2010
 
Class A Common Stock
    101,316,870       102,922,900       106,622,350  
Class B Non-Voting Common Stock
    2,350,200       2,350,200       3,053,130  
Class C Restricted Common Stock
    2,028,270       2,028,270       2,028,270  
Class E Special Voting Common Stock
    14,802,880       13,345,880       12,348,860  
                         
Total shares outstanding
    120,498,220       120,647,250       124,052,610  
                         
 
Holders of Class A Common Stock, Class C Restricted Common Stock, Class D Merger Rolling Common Stock, and Class E Special Voting Common Stock are entitled to one vote for each share as a holder. The holders of the Voting Common Stock shall vote together as a single class. The holders of Class B Non-Voting Common Stock and Class F Non-Voting Restricted Common Stock have no voting rights. During the six months ended September 30, 2010, 702,930 shares of Class A Common Stock held by an officer were exchanged for the equivalent number of shares of Class B Non-Voting Common Stock, and 702,930 shares of Class E Special Voting Common Stock were issued to a family trust of the same officer for an aggregate consideration of $2,109.
 
Class C Restricted Common Stock is restricted in that a holder’s shares vest as set forth in the Officers’ Rollover Stock Plan. Refer to Note 17 for further discussion of the Officers’ Rollover Stock Plan.
 
Class E Special Voting Common Stock represents the voting rights that accompany the New Options program. The New Options program has a fixed vesting and exercise schedule to comply with IRS section 409(a). Upon exercise, the option will convert to Class A Common Stock, and the corresponding Class E Special Voting Common Stock will be repurchased by the Company and retired. Refer to Note 17 for further discussion of the New Options program.
 
Each share of Common Stock, except for Class E Special Voting Common Stock, is entitled to participate equally, when and if declared by the Board of Directors from time to time, such dividends and other distributions in cash, stock, or property from the Company’s assets or funds become legally available for such purposes subject to any dividend preferences that may be attributable to preferred stock that may be authorized.
 
In May 2009, 19,070 shares of Class A Common Stock, with certain restrictions, were granted to certain unaffiliated Board members. These shares were restricted based on the unaffiliated Board members’ continued service to the Company, and vested in equal installments on May 7, 2009, September 30, 2009, and March 31, 2010. As of March 31, 2010, these shares were fully vested. Such shares and related equity balances are included in the Company’s Class A Common Stock. In April 2010, 11,730 shares of Class A Common Stock,


F-33


 

BOOZ ALLEN HAMILTON HOLDING CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
with certain restrictions, were granted to certain unaffiliated Board members. These shares were restricted based on the unaffiliated Board members’ continued service to the Company and will vest in equal installments on September 30, 2010, and March 31, 2011. As of September 30, 2010, half of these shares have vested. Such shares and related equity balances are included in the Company’s Class A Common Stock. Refer to Note 17 for further discussion of Class A Restricted Common Stock.
 
Preferred Stock
 
The Company is authorized to issue 54,000,000 shares of Preferred Stock, $0.01 par value per share, the terms and conditions of which are determined by the Board of Directors upon issuance. The rights, preferences and privileges of holders of common stock are subject to, and may be adversely affected by, the rights of holders of any shares of preferred stock that the Company may designate and issue in the future. At March 31, 2009 and March 31, 2010, there were no shares of preferred stock outstanding.
 
Predecessor Redeemable Common Stock
 
Prior to the Merger Transaction, the Predecessor’s authorized capital stock as of March 31 and July 31, 2008, consisted of 5,000 shares of Common Stock, 5,000 shares of Class A Non-Voting Common Stock, 4,000 shares of Class B Common Stock, and 1,000 shares of Class B Non-Voting Common Stock. Each share of Common Stock and each share of the Class B Common Stock was entitled to one vote. Pursuant to the terms of the Predecessor’s stock rights plan, shares of Common Stock and shares of Class A Non-Voting Common Stock were redeemable at the book value per share at the option of the holder.
 
17.   STOCK-BASED COMPENSATION
 
Officers’ Rollover Stock Plan
 
The Officers’ Rollover Stock Plan (the “Rollover Plan”) was adopted as a mechanism to enable the exchange by the Officers of the Company’s U.S. government consulting business who were required to exchange (and those commercial officers who elected to exchange subject to an aggregate limit) a portion of their previous equity interests in the Predecessor for equity interests in the Company. Among the equity interests that were eligible for exchange were common stock and stock rights, both vested and unvested.
 
The stock rights that were unvested, but would have vested in 2008, were exchanged for 2,028,270 shares of new Class C Restricted Common Stock (“Class C Restricted Stock”) issued by the Company at an estimated fair value of $10.00 at August 1, 2008. The aggregate grant date fair value of the Class C Restricted Stock issued of $20.3 million is being recorded as expense over the vesting period. Total compensation expense recorded in conjunction with this Class C Restricted Stock for the eight months ended March 31, 2009, and fiscal 2010, was $7.9 million and $7.1 million, respectively. Total compensation expense recorded in conjunction with this Class C Restricted Stock for the six months ended September 30, 2009, and 2010, was $4.1 million and $2.2 million, respectively. As of March 31, 2010 and September 30, 2010, unrecognized compensation cost related to the non-vested Class C Restricted Stock was $5.3 million and $3.1 million, respectively, and is expected to be recognized over 3.25 and 2.75 years, respectively. For fiscal 2010 and the six months ended September 30, 2010, 494,490 and 988,980 shares of Class C Restricted Stock vested, respectively. At March 31, 2009, March 31, 2010, and September 30, 2010, 3,971,730 shares of Class C Restricted Stock were authorized but unissued under the Plan. Notwithstanding the foregoing, Class C Restricted Stock was intended to be issued only in connection with the exchange process described above.
 
In addition to the conversion of the stock rights that would have vested in 2008 to Class C Restricted Stock, new options (“New Options”) were issued in exchange for old stock rights held by the Predecessor’s U.S. government consulting partners that were issued under the stock rights plan that existed for the Predecessor’s Officers prior to the closing of the Merger Transaction. The New Options were granted based on


F-34


 

BOOZ ALLEN HAMILTON HOLDING CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
the retirement eligibility of the Officer. For the purposes of the New Options, there are two categories of Officers — retirement eligible and non-retirement eligible. New Options granted to retirement eligible Officers vest in equal annual installments on June 30, 2009, 2010, and 2011.
 
The following table summarizes the exercise schedule for Officers who were deemed retirement eligible. Exercise schedules are based on original vesting dates applicable to the stock rights surrendered:
 
                                                 
    Percentage of New Options to be Exercised
    As of June 30,
    2009   2010   2011   2012   2013   2014
 
Retirement Eligible
                                               
Original vesting date of June 30, 2009
    60 %     20 %     20 %                  
Original vesting date of June 30, 2010
          50 %     20 %     20 %     10 %      
Original vesting date of June 30, 2011
                20 %     20 %     30 %     30 %
 
Those individuals who were considered retirement eligible also were given the opportunity to make a one-time election to be treated as non-retirement eligible. The determination of retirement eligibility was made as of a fixed period of time and cannot be changed at a future date.
 
New Options granted to Officers who were categorized as non-retirement eligible will vest 50% on June 30, 2011, and 25% on June 30, 2012 and 2013.
 
The following table summarizes the exercise schedule for Officers who were deemed non-retirement eligible. Exercise schedules are based on original vesting dates applicable to the stock rights surrendered:
 
                                         
    Percentage of New Options to be Exercised
    As of June 30,
    2011   2012   2013   2014   2015
 
Non-Retirement Eligible
                                       
Original vesting date of June 30, 2011
    20 %     20 %     20 %     20 %     20 %
Original vesting date of June 30, 2012
          25 %     25 %     25 %     25 %
Original vesting date of June 30, 2013
                33 %     33 %     34 %
 
If a holder’s employment with the Company were to terminate without cause, by reason of disability, or Company approved termination, these shares will continue to vest as if the holder continued to be employed as a retirement eligible or non-retirement eligible employee, as the case may be. In the event that a holder’s employment is terminated due to death, any unvested New Options shall immediately vest in full. In the event of a holder’s termination of employment due to death, disability, or a Company approved termination, the Company may, in its sole discretion, convert all or a portion of unexercised New Options into the right to receive upon vesting and exercise, in lieu of Company Common Stock, a cash payment pursuant to a prescribed formula. The aggregate grant date fair value of the New Options issued of $127.1 million is being recorded as compensation expense over the vesting period. Total compensation expense recorded in conjunction with the New Options for the eight months ended March 31, 2009 and fiscal 2010, was $42.7 million and $42.2 million, respectively. Total compensation expense recorded in conjunction with the New Options for the six months ended September 30, 2009 and 2010, was $22.6 million and $14.8 million, respectively. As of March 31, 2010 and September 30, 2010, unrecognized compensation cost related to the non-vested New Options was $42.0 million and $27.3 million, which is expected to be recognized over 3.25 and 2.75 years, respectively.
 
Equity Incentive Plan
 
The Equity Incentive Plan (“EIP”) was created in connection with the transaction for employees, directors, and consultants of Holding and its subsidiaries. The Company created a pool of options (the “EIP


F-35


 

BOOZ ALLEN HAMILTON HOLDING CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Options”) to draw upon for future grants that would be governed by the EIP. All options under the EIP are exercisable, upon vesting, for shares of common stock of Holding. The first grant of options under the EIP occurred on November 19, 2008, which was for the grant of 11,900,000 non-qualified EIP Options. The estimated fair value of the common stock at the time of the first option grant was $10. A second grant of 1,420,000 non-qualified EIP Options occurred on May 7, 2009. The estimated fair value of the common stock at the time of the second option grant was $11.81. Grants of 470,000 and 140,000 non-qualified EIP Options were issued on January 27, 2010, and February 15, 2010, respectively. The estimated fair value of the common stock at the time of the third and fourth option grants was $11.49. A new grant of 1,700,000 non-qualified EIP options occurred on April 28, 2010.
 
Stock options are granted at the discretion of the Board of Directors or its Compensation Committee and expire ten years from the date of the grant. Options generally vest over a five-year period based upon required service and performance conditions. The Company calculates the pool of additional paid-in capital associated with excess tax benefits using the “simplified method.”
 
The aggregate grant date fair value of the EIP Options issued during the eight months ended March 31, 2009, fiscal 2010, and the six months ended September 30, 2010 was $51.5 million, $10.6 million, and $10.1 million, respectively, and is being recorded as expense over the vesting period. Total compensation expense recorded in conjunction with all options outstanding under the EIP for the eight months ended March 31, 2009, and fiscal 2010, was $11.5 million and $22.4 million, respectively. Total compensation expense recorded in conjunction with all options outstanding under the EIP for the six months ended September 30, 2009 and 2010, was $12.8 million and $10.2 million, respectively. Future compensation cost related to the non-vested stock options not yet recognized in the consolidated statements of operations was $28.1 million, and is expected to be recognized over 4.75 years. As of March 31, 2010 and September 30, 2010, there were 7,633,600 and 5,843,720 options, respectively, available for future grant under the EIP.
 
Grants of Class A Restricted Common Stock
 
On May 7, 2009, the Compensation Committee of the Board of Directors granted Class A Common Stock with certain restrictions (“Class A Restricted Stock”) to certain unaffiliated Board members for their continued service to the Company. A total of 19,070 shares of Class A Restricted Stock were issued on May 7, 2009. These shares will vest in equal installments on May 7, 2009, September 30, 2009, and March 31, 2010, and were issued with an aggregate grant date fair value of $225,000. Total compensation expense recorded in conjunction with this grant of Class A Restricted Stock for fiscal 2010 was $225,000. For fiscal 2010, 19,070 shares of Class A Restricted Stock vested. There were no additional shares authorized to be issued under the May 2009 Compensation Committee grant.
 
Predecessor Stock Plan
 
Prior to the Merger Transaction, the Predecessor’s Officer Stock Rights Plan enabled officers to purchase shares of Class A Common Stock. The Board of Directors had sole discretion to establish the book value applicable to shares of common stock to be purchased by officers upon the exercise of their stock rights. Rights were granted in connection with the Class B Common Stock to purchase shares of Class A Common Stock, and vested one-tenth each year based on nine years of continuous service, with the first tenth vesting immediately. The exercise price for the first tenth was equal to the book value of the Predecessor’s Class A Common Stock on the grant date, and for the remaining rights the exercise price was equal to 50% of the book value on the grant date. Rights not exercised upon vesting were forfeited. Rights also accelerated upon retirement, in which case the exercise price was equal to 100% of the grant date book value.
 
Effective July 30, 2008, the Predecessor modified the Officers’ Stock Rights Plan to provide for accelerated vesting of stock rights in anticipation of a change in control of the Predecessor. All unvested stock rights were accelerated and vested with the exception of rights that would be exchanged for equity instruments


F-36


 

BOOZ ALLEN HAMILTON HOLDING CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
in Holding after the Merger Transaction. Any stock rights that were due to vest in June 2008 were exercised at a price of 50% of the grant date book value and converted to Class A Common Stock on July 30, 2008. The remaining stock rights that were accelerated and vested were subsequently exercised at 100% of the grant date book value and converted to Class A Common Stock on July 30, 2008.
 
The Predecessor accounted for the rights granted under the Officers’ Stock Rights Plan as liability awards, which are marked to intrinsic value for the life of the award, using an accelerated method, through stock compensation expense.
 
Stock compensation expense of $193.5 million related to the acceleration of stock rights, and $318.2 million related to the mark-up of redeemable common shares, was recorded during the four months ended July 31, 2008.
 
Methodology
 
The Company uses the Black-Scholes option-pricing model to determine the estimated fair value for stock-based awards. The fair value of the Company stock on the date of the New Option grant was determined based on the fair value of the Merger Transaction involving Booz Allen Hamilton, Inc. and the Company that occurred on July 31, 2008. For all subsequent grants of options, the fair value of the Company’s stock was determined by an independent valuation specialist.
 
As the Company has no plans to issue regular dividends, a dividend yield of zero was used in the Black-Scholes model. Expected volatility was calculated as of each grant date based on reported data for a peer group of publicly traded companies for which historical information was available. The Company will continue to use peer group volatility information until historical volatility of the Company can be regularly measured against an open market to measure expected volatility for future option grants. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve rates with the remaining term equal to the expected life assumed at the date of grant. Due to the lack of historical exercise data, the average expected life was estimated based on internal qualitative and quantitative factors. Forfeitures were estimated based on the Company’s historical analysis of Officer attrition levels.
 
The weighted average assumptions used in the Black-Scholes option-pricing model for stock option awards were as follows:
 
                         
    The Company
    Eight Months Ended March 31, 2009
    Rollover Stock Plan
  Rollover Stock Plan
   
    New Options
  New Options
  Equity Incentive
    (Retirement)   (Non-Retirement)   Plan
 
Dividend yield
    0.0 %     0.0 %     0.0 %
Expected volatility
    33.6 %     36.0 %     40.0 %
Risk-free interest rate
    2.76 %     3.26 %     2.50 %
Expected life (in years)
    2.98       5.29       7.02  
 
                         
    Fiscal Year Ended March 31, 2010
    Rollover Stock Plan
  Rollover Stock Plan
   
    New Options
  New Options
  Equity Incentive
    (Retirement)   (Non-Retirement)   Plan
 
Dividend yield
    0.0 %     0.0 %     0.0 %
Expected volatility
    33.6 %     36.0 %     40.0 %
Risk-free interest rate
    2.76 %     3.26 %     2.56 %
Expected life (in years)
    2.98       5.29       7.03  
 


F-37


 

BOOZ ALLEN HAMILTON HOLDING CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
                         
    Six Months Ended September 30, 2010  
    Rollover Stock Plan
    Rollover Stock Plan
       
    New Options
    New Options
    Equity Incentive
 
    (Retirement)     (Non-Retirement)     Plan  
 
                         
Dividend yield
    0.0 %     0.0 %     0.0 %
Expected volatility
    33.6 %     36.0 %     40.1 %
Risk-free interest rate
    2.76 %     3.26 %     2.63 %
Expected life (in years)
    2.98       5.29       7.02  
 
The weighted-average grant-date fair values of retirement eligible New Options, non-retirement eligible New Options and EIP Options were $8.54, $8.63, and $4.85, respectively.
 
December 2009 Dividend and July 2009 Dividend
 
On December 7, 2009, the Company’s Board of Directors approved a dividend of $4.642 per share paid to holders of record as of December 8, 2009 of Class A Common Stock, Class B Non-Voting Common Stock, and Class C Restricted Common Stock. This dividend totaled $497.5 million. As required by the Rollover Plan and the EIP, and in accordance with applicable tax laws and regulatory guidance, the exercise price per share of each outstanding New Option and EIP Option was reduced in an amount equal to the value of the dividend. The Company evaluated the reduction of the exercise price associated with the dividend issuance. Both the Rollover and EIP plans contained mandatory antidilution provisions requiring modification of the options in the event of an equity restructuring, such as the dividends declared in July and December 2009. In addition, the structure of the modifications, as a reduction in the exercise price of options, did not result in an increase to the fair value of the awards. As a result of these factors, the Company did not record incremental compensation expense associated with the modifications of the options as a result of the July and December 2009 dividends. Options vested and not yet exercised that would have had an exercise price below zero as a result of the dividend were reduced to one cent. The difference between one cent and the reduced value for shares vested and not yet exercised of approximately $54.4 million will be paid in cash upon exercise of the options subject to the continued vesting of the options. As of March 31, 2010 and September 30, 2010, the Company reported $27.4 million and $25.4 million, respectively, in other long-term liabilities and $7.0 million and $9.0 million, respectively, in accrued compensation and benefits in the consolidated balance sheets based on the proportion of the potential payment of $54.4 million which is represented by vested options for which stock based compensation expense has been recorded.
 
On July 27, 2009, the Company’s Board of Directors approved a dividend of $1.087 per share paid to holders of record as of July 29, 2009 of the Company’s Class A Common Stock, Class B Non-Voting Common Stock, and Class C Restricted Common Stock. This dividend totaled $114.9 million. In accordance with the Officers’ Rollover Stock Plan, the exercise price per share of each outstanding option, including New Options and EIP options, was reduced in compliance with applicable tax laws and regulatory guidance. Additionally, the Company evaluated the reduction of the exercise price associated with the dividend issuance. As a result, the Company did not record any additional incremental compensation expense associated with the dividend and corresponding decrease in the exercise and fair value of all outstanding options.

F-38


 

BOOZ ALLEN HAMILTON HOLDING CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The following table summarizes stock-based compensation for stock options (in thousands):
 
                                                   
    Predecessor     The Company
    Fiscal Year
  Four Months
    Eight Months
  Fiscal Year
  Six Months
  Six Months
    Ended
  Ended
    Ended
  Ended
  Ended
  Ended
    March 31,
  July 31,
    March 31,
  March 31,
  September 30,
  September 30,
    2008   2008     2009   2010   2009   2010
Included in cost of revenue:
                                                 
Compensation and other costs
  $ 35,013     $       $ 20,479     $ 23,652     $ 13,068     $ 7,884  
                                                   
Total included in cost of revenue
    35,013               20,479       23,652       13,068       7,884  
Included in general and administrative expenses:
                                                 
Compensation and other costs
          511,653         41,580       48,245       26,533       19,411  
                                                   
Total included in general and administrative expenses
          511,653         41,580       48,245       26,533       19,411  
                                                   
Total
  $ 35,013     $ 511,653       $ 62,059     $ 71,897     $ 39,601     $ 27,295  
                                                   


F-39


 

BOOZ ALLEN HAMILTON HOLDING CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The following table summarizes stock option activity for the periods presented:
 
                 
          Weighted
 
          Average
 
    Number of
    Exercise
 
    Options     Price  
 
Officers’ Rollover Stock Plan New Options
               
Retirement Eligible:
               
Granted at August 1, 2008
    7,285,420     $ 1.62  
Forfeited
           
Expired
           
Exercised
           
                 
Options outstanding at March 31, 2009
    7,285,420     $ 0.01 *
Granted
           
Forfeited
           
Expired
           
Exercised
    1,457,080       0.01 *
                 
Options outstanding at March 31, 2010
    5,828,340          
Granted
           
Forfeited
           
Expired
           
Exercised
    1,699,930       0.01 *
                 
Options outstanding at September 30, 2010
    4,128,410          
                 
Non-Retirement Eligible:
               
Granted at August 1, 2008
    7,517,500     $ 1.68  
Forfeited
           
Expired
           
Exercised
           
                 
Options outstanding at March 31, 2009
    7,517,500       0.01 *
Granted
           
Forfeited
           
Expired
           
Exercised
           
                 
Options outstanding at March 31, 2010
    7,517,500          
Granted
           
Forfeited
           
Expired
           
Exercised
           
                 
Options outstanding at September 30, 2010
    7,517,500          
                 


F-40


 

BOOZ ALLEN HAMILTON HOLDING CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
                 
          Weighted
 
          Average
 
    Number of
    Exercise
 
    Options     Price  
 
Equity Incentive Plan Options
               
Granted at November 19, 2008
    11,900,000     $ 10.00  
Forfeited
           
Expired
           
Exercised
           
                 
Options outstanding at March 31, 2009
    11,900,000     $ 4.27 *
Granted
    2,030,000       7.70 *
Forfeited
    735,070       4.38  
Expired
           
Exercised
    129,960       4.27 *
                 
Options outstanding at March 31, 2010
    13,064,970          
Granted
    1,750,000     $ 12.92  
Forfeited
    84,020       4.27  
Expired
           
Exercised
    2,612,720       4.40  
                 
Options outstanding at September 30, 2010
    12,118,230          
                 
 
 
Reflects adjustment for $1.087 dividend issued July 27, 2009, and $4.642 dividend issued December 11, 2009.

F-41


 

BOOZ ALLEN HAMILTON HOLDING CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
 
The following table summarizes unvested stock options for the periods presented:
 
                         
                Aggregate
 
          Weighted
    Intrinsic
 
    Number of
    Average
    Value on
 
    Options     Fair Value     Grant Date  
                (In thousands)  
 
Officers’ Stock Rights Plan — Predecessor
                       
Unvested at March 31, 2008
    903     $ 125.42     $ 56,627  
Granted
                 
Vested
    679       126.11       42,814  
Forfeited
                 
                         
Unvested at July 31, 2008
    224 **                
                         
Officers’ Rollover Stock Plan New Options
                       
Retirement Eligible:
                       
Granted at August 1, 2008
    7,285,420     $ 10.00     $ 61,032  
Vested
                 
Forfeited
                 
                         
Unvested at March 31, 2009
    7,285,420                  
Granted
                 
Vested
    2,428,470       4.27 *     10,370 *
Forfeited
                 
                         
Unvested at March 31, 2010
    4,856,950                  
Granted
                 
Vested
    2,428,470       4.27       10,370  
Forfeited
                 
                         
Unvested at September 30, 2010
    2,428,480                  
                         
Non-Retirement Eligible:
                       
Granted at August 1, 2008
    7,517,500     $ 10.00     $ 62,553  
Vested
                 
Forfeited
                 
                         
Unvested at March 31, 2009
    7,517,500                  
Granted
                 
Vested
                 
Forfeited
                 
                         
Unvested at March 31, 2010
    7,517,500                  
Granted
                 
Vested
                 
Forfeited
                 
                         
Unvested at September 30, 2010
    7,517,500                  
                         


F-42


 

BOOZ ALLEN HAMILTON HOLDING CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
                         
                Aggregate
 
          Weighted
    Intrinsic
 
    Number of
    Average
    Value on
 
    Options     Fair Value     Grant Date  
                (In thousands)  
 
Equity Incentive Plan Options
                       
Unvested at August 1, 2008
    11,900,000     $ 10.00     $  
Granted
                 
Vested
                 
Forfeited
                 
                         
Unvested at March 31, 2009
    11,900,000                  
Granted
    2,030,000     $ 7.70 *   $  
Vested
    2,368,890       4.27 *      
Forfeited
    735,070       4.38        
                         
Unvested at March 31, 2010
    10,826,040                  
Granted
    1,750,000     $ 12.92     $  
Vested
    2,642,170       4.54        
Forfeited
    84,020       4.27        
                         
Unvested at September 30, 2010
    9,849,850