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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to
Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 28, 2002
-------------------------------------------------
or
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission file number: 000-27617
---------------------------------
THE MANAGEMENT NETWORK GROUP, INC.
----------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 48-1129619
- ------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7300 COLLEGE BLVD., SUITE 302, OVERLAND PARK, KS 66210
------------------------------------------------------
(Address of principal executive offices) (Zip Code)
913-345-9315
------------
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
As of November 5, 2002 TMNG had outstanding 33,347,228 shares of common stock.
THE MANAGEMENT NETWORK GROUP, INC.
INDEX
PAGE
PART I. FINANCIAL INFORMATION:
ITEM 1. Consolidated Condensed Financial Statements:
Consolidated Condensed Balance Sheets - September
28, 2002 (unaudited) and December 29, 2001............... 3
Consolidated Condensed Statements of Income (Loss) and
Comprehensive Income (Loss)(unaudited) - Thirteen Weeks
ended September 28, 2002 and September 29, 2001, and
Thirty-nine Weeks ended September 28, 2002 and September
29, 2001................................................. 4
Consolidated Condensed Statements of Cash Flows
(unaudited) - Thirty-nine Weeks ended September
28, 2002 and September 29, 2001.......................... 5
Notes to Consolidated Condensed Financial
Statements (unaudited)..................................... 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 11
ITEM 3. Quantitative and Qualitative Disclosures about
Market Risk................................................ 22
ITEM 4. Controls and Procedures.................................... 22
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.......................................... 22
ITEM 6. Exhibits and Reports on Form 8-K........................... 22
Signatures........................................................... 22
Certifications....................................................... 23
PAGE 2
PART I. FINANCIAL INFORMATION:
ITEM 1. CONSOLIDATED CONDENSED FINANCIAL STATEMENTS:
THE MANAGEMENT NETWORK GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands, except share data)
(unaudited)
December 29, September 28,
2001 2002
------------ -------------
CURRENT ASSETS:
Cash and cash equivalents $ 86,396 $ 54,923
Receivables:
Accounts receivable 8,518 7,471
Accounts receivable -- unbilled 2,962 3,689
--------- ---------
11,480 11,160
Less: Allowance for doubtful accounts (517) (779)
--------- ---------
10,963 10,381
Refundable and deferred income taxes 365 3,880
Other assets 1,706 1,842
--------- ---------
Total current assets 99,430 71,026
Property and equipment, net 1,686 2,596
Goodwill, net 22,147 60,913
Intangibles, net 1,191 3,667
Deferred tax asset 4,080 5,246
Other assets 508 367
--------- ---------
TOTAL ASSETS $ 129,042 $ 143,815
========= =========
CURRENT LIABILITIES:
Trade accounts payable $ 210 $ 948
Accrued payroll, bonuses and related expenses 1,393 2,441
Other accrued liabilities 3,258 2,839
--------- ---------
Total current liabilities 4,861 6,228
Unfavorable lease liability and other 3,200
Capital lease obligations and other 189 576
STOCKHOLDERS' EQUITY
Common Stock:
Voting -- $.001 par value, 100,000,000 shares authorized; 30,204,919 and
33,297,456 issued and outstanding on December 29, 2001 and
September 28, 2002, respectively 30 33
Additional paid-in capital 141,451 155,537
Accumulated deficit (16,463) (21,739)
Accumulated other comprehensive income -
Foreign currency translation adjustment 17 107
Unearned compensation (1,043) (127)
--------- ---------
Total stockholders' equity 123,992 133,811
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 129,042 $ 143,815
========= =========
See notes to consolidated condensed financial statements.
PAGE 3
THE MANAGEMENT NETWORK GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (LOSS) AND
COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share data)
(unaudited)
For the thirteen For the thirty-nine
weeks ended weeks ended
-------------------------------- --------------------------------
September 29, September 28, September 29, September 28,
2001 2002 2001 2002
------------ ------------ ------------ ------------
REVENUES $ 12,231 $ 8,756 $ 44,256 $ 25,952
COST OF SERVICES:
Direct cost of services 5,774 4,372 22,210 12,311
Equity related charges 631 110 1,752 782
------------ ------------ ------------ ------------
Total cost of services 6,405 4,482 23,962 13,093
------------ ------------ ------------ ------------
GROSS PROFIT 5,826 4,274 20,294 12,859
OPERATING EXPENSES:
Selling, general and administrative 4,023 5,015 12,837 18,483
Equity related charges 211 32 670 312
Goodwill and intangibles amortization 574 461 1,507 1,581
------------ ------------ ------------ ------------
Total operating expenses 4,808 5,508 15,014 20,376
------------ ------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS 1,018 (1,234) 5,280 (7,517)
OTHER INCOME
Interest income 611 243 2,023 766
Other, net (6) (8) (23) (23)
------------ ------------ ------------ ------------
Total other income 605 235 2,000 743
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAX
(PROVISION) BENEFIT AND CUMULATIVE EFFECT
OF A CHANGE IN ACCOUNTING PRINCIPLE 1,623 (999) 7,280 (6,774)
INCOME TAX (PROVISION) BENEFIT (492) 351 (2,385) 2,638
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT
OF A CHANGE IN ACCOUNTING PRINCIPLE 1,131 (648) 4,895 (4,136)
CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE, NET OF TAX
BENEFIT OF $760 (1,140)
------------ ------------ ------------ ------------
NET INCOME (LOSS) 1,131 (648) 4,895 (5,276)
OTHER COMPREHENSIVE INCOME (LOSS) -
Foreign currency translation adjustment 18 108 (30) 90
------------ ------------ ------------ ------------
COMPREHENSIVE INCOME (LOSS) $ 1,149 $ (540) $ 4,865 $ (5,186)
============ ============ ============ ============
INCOME (LOSS) BEFORE CUMULATIVE EFFECT
OF A CHANGE IN ACCOUNTING PRINCIPLE
PER COMMON SHARE
Basic $ 0.04 $ (0.02) $ 0.17 $ (0.13)
============ ============ ============ ============
Diluted $ 0.04 $ (0.02) $ 0.16 $ (0.13)
============ ============ ============ ============
CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE PER COMMON
SHARE
Basic $ $ $ $ (0.03)
============ ============ ============ ============
Diluted $ $ $ $ (0.03)
============ ============ ============ ============
NET INCOME (LOSS) PER COMMON SHARE
Basic $ 0.04 $ (0.02) $ 0.17 $ (0.16)
============ ============ ============ ============
Diluted $ 0.04 $ (0.02) $ 0.16 $ (0.16)
============ ============ ============ ============
SHARES USED IN CALCULATION OF INCOME
(LOSS) BEFORE CUMULATIVE EFFECT OF A
CHANGE IN ACCOUNTING PRINCIPLE AND
NET INCOME (LOSS) PER COMMON SHARE
Basic 29,736,625 33,297,086 29,595,790 32,534,864
============ ============ ============ ============
Diluted 30,756,534 33,297,086 30,565,491 32,534,864
============ ============ ============ ============
See notes to consolidated condensed financial statements.
PAGE 4
THE MANAGEMENT NETWORK GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
For the thirty-nine
weeks ended
-----------------------------
September 29, September 28,
2001 2002
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 4,895 $ (5,276)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Cumulative change in accounting principle 1,140
Depreciation and amortization 1,894 2,309
Equity related charges 2,422 1,094
Income tax benefit realized upon exercise
of stock options 33 22
Deferred income taxes (244) 627
Loss on retirement of assets 141
Changes in operating assets and liabilities,
net of business acquisitions:
Accounts receivable 6,560 2,995
Accounts receivable -- unbilled 3,100 176
Other assets (222) 530
Trade accounts payable (975) 714
Accrued liabilities (3,336) (62)
Accrued (refundable) income taxes 1,121 (3,352)
-------- --------
Net cash provided by operating activities 15,248 1,058
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of business, net of cash acquired (4,046) (32,456)
Acquisition of property and equipment (520) (231)
Loans to officers, net (200) (100)
-------- --------
Net cash used in investing activities (4,766) (32,787)
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of stock options 325 301
Issuance of common stock, net of expenses 107
Payments made on long-term obligations (8) (242)
-------- --------
Net cash provided by financing activities 317 166
Effect of exchange rate on cash and cash equivalents (30) 90
-------- --------
Net increase (decrease) in cash and cash equivalents 10,769 (31,473)
Cash and cash equivalents, beginning of period 70,583 86,396
-------- --------
Cash and cash equivalents, end of period $ 81,352 $ 54,923
======== ========
Supplemental disclosure of cash flow information:
Cash paid during period for taxes $ 1,866 $ 180
======== ========
Cash paid during period for interest $ 6 $ 48
======== ========
Supplemental disclosure of non-cash investing
and financing activities: --
Fair value of assets acquired $ 2,355 $ 53,745
Liabilities incurred or assumed $ (4,452) $ (7,282)
Common stock issued $ 3,000 $ 13,480
See notes to consolidated condensed financial statements.
PAGE 5
THE MANAGEMENT NETWORK GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Reporting
The accompanying consolidated condensed financial statements of The Management
Network Group, Inc. (the "Company") as of September 28, 2002, and for the
thirteen and thirty-nine weeks ended September 28, 2002 and September 29, 2001,
are unaudited and reflect all normal recurring adjustments which are, in the
opinion of management, necessary for the fair presentation of the Company's
consolidated condensed financial position, results of operations, and cash flows
as of these dates and for the periods presented. The consolidated condensed
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial
information. Consequently, these statements do not include all the disclosures
normally required by accounting principles generally accepted in the United
States of America for annual financial statements nor those normally made in the
Company's Annual Report on Form 10-K. Accordingly, reference should be made to
the Company's Annual Report on Form 10-K for additional disclosures, including a
summary of the Company's accounting policies, which have not changed (with the
exception of revenue recognition, see Note 2. "Significant Accounting Policies"
below).
2. Significant Accounting Policies
Revenue Recognition - The Company has historically accounted for revenue in
connection with client service engagements under primarily a time and materials
revenue model, where time and materials service revenues and costs are recorded
in the period in which the service is performed. In fiscal 2002, the Company
began entering into large fixed price contracts of various durations, and
expects this trend to continue into the future. The Company generally records
revenue in connection with larger fixed price contracts under a percentage of
completion method when it has the ability to make reasonably dependable
estimates towards project completion. This method of accounting results in the
ratable recognition of revenue and related costs over the client service
engagement. Estimates are prepared to monitor and assess the Company's progress
on the engagement from the initial phase of the project, to completion, and
these estimates are utilized in recognizing revenue and related expense in the
Company's financial statements. If the current estimates of total contract
revenues and contract costs indicate a loss, the Company records a provision for
the entire loss on the contract. Revenues and related costs of smaller fixed
price contracts are generally recognized upon contract completion under the
completed contract method, and generally involve immaterial amounts and are of a
short duration.
Additionally in fiscal year 2002, the Company began entering into gain sharing
contracts, where the Company's revenues are determined on a success-based
revenue model. Revenues generated on such contracts result from financial
success recognized by the client utilizing agreed upon contract measures and
milestones between the two parties. Due to the contingent nature of these
gain-sharing projects, the Company believes the appropriate method of accounting
is to recognize consultant costs as they are incurred on the project and to
defer the revenue recognition until the revenue is realizable and earned.
3. Earnings (Loss) Per Share
The Company calculates and presents earnings (loss) per share using a dual
presentation of basic and diluted earnings (loss) per share. Basic earnings
(loss) per share is computed by dividing net income (loss) by the weighted
average number of common shares outstanding for the period. Diluted earnings per
share reflects the potential dilution of securities by adding common stock
options in the weighted average number of common shares outstanding for a
period, if dilutive. In accordance with the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 128 "Earnings Per Share", the Company has not
included the effect of common stock options for the thirteen and thirty-nine
weeks ended September 28, 2002, as the Company reported a loss from continuing
operations for these respective periods. Had the Company reported net income,
the treasury method of calculating common stock equivalents would have resulted
in approximately 115,000 and 799,000 additional diluted shares for the thirteen
and thirty-nine weeks ended September 28, 2002, respectively.
The reconciliation of weighted average common shares outstanding included in the
computation of basic and diluted net income (loss) per common share for the
periods indicated is as follows (amounts in thousands):
FOR THE THIRTEEN WEEKS ENDED FOR THE THIRTY-NINE WEEKS ENDED
---------------------------- -------------------------------
SEPTEMBER 29, SEPTEMBER 28, SEPTEMBER 29, SEPTEMBER 28,
2001 2002 2001 2002
-------- -------- -------- --------
Weighted average common shares
outstanding for basic earnings
(loss) per share 29,737 33,297 29,596 32,535
Effect of stock options 1,020 969
------ ------ ------ ------
Weighted average shares of common
stock outstanding for diluted
earnings (loss) per share 30,757 33,297 30,565 32,535
====== ====== ====== ======
4. Business Combinations
On March 6, 2002, TMNG announced the purchase of the business and primary assets
of Cambridge Strategic Management Group, Inc. ("CSMG") of Boston, Massachusetts.
CSMG provides high-end advisory services to global communication service and
equipment providers and investment firms that provide capital to the industry.
CSMG's range of business strategy services include analyses of industry and
competitive environments; product and distribution strategies; finance,
including business case development, modeling, cost analysis and benchmarking;
and due diligence and risk assessment.
The acquisition, recorded under the purchase method of accounting, resulted in a
total purchase price of approximately $46.5 million. Consideration consisted of
$33.0 million cash and 2,892,800 shares of TMNG Common Stock valued at
approximately $13.5 million. Share consideration was calculated in accordance
with the Asset Purchase Agreement at a fixed price of $4.66 per share. All
shares are restricted from trading for one year from the closing. An escrow was
established as part of the transaction, consisting of 566,502 shares and $4.0
million of cash (collectively, the "Escrowed Property"). The Escrowed Property
is subject to certain claims as set forth in the Asset Purchase Agreement and is
scheduled to be distributed to the Seller pro rata in four installments over a
24 month period. In accordance with the Escrow Agreement, the Company released
the first pro rata installment to the Seller on September 6, 2002. On the date
of announcement of the acquisition, the closing pricing of TMNG's Common Stock
was $4.56 per share.
The transaction was structured as a taxable transaction for Federal income tax
purposes, and included $5.4 million in cash consideration to the Seller
representing a sharing of tax benefits and costs. The purchase price also
included $5.2 million representing the working capital purchased from CSMG.
The initial purchase price will be subject to refinement based on the
finalization of the balances of the working capital items and income tax sharing
at the date of close, and the finalization of direct acquisition costs incurred
in the transaction. The operating results of CSMG have been included in the
Consolidated Condensed Statements of Income (Loss) and Comprehensive Income
(Loss) from the date of the purchase.
The following table summarizes the estimated fair value of the assets acquired
and liabilities assumed as of the date of acquisition. The allocation of the
purchase price is based on preliminary estimates and is subject to further
refinement, however, adjustments, if any, are not expected to be material. The
preliminary allocation of the purchase price to identifiable intangible assets
was determined by an independent price appraisal.
AT MARCH 6, 2002
(AMOUNTS IN THOUSANDS)
Current assets $ 6,081
Property, plant and equipment 1,548
Employment agreements 3,200
Customer backlog 420
Company tradename 350
Deferred taxes (non-current) 1,501
Goodwill 40,645
-------
Total assets acquired 53,745
Current liabilities 3,333
Noncurrent liabilities 3,949
-------
Total liabilities assumed 7,282
-------
Net assets acquired $46,463
=======
Of the $420,000 assigned to the customer backlog, no residual value has been
identified with this asset. The customer backlog had an estimated useful life of
3 months and was amortized on a straight-line basis. As of September 28, 2002,
customer backlog was fully amortized by TMNG.
Of the $350,000 assigned to the company tradename, no residual value has been
identified with this asset. The company tradename has an estimated useful life
of 24 months and is amortized on a straight-line basis.
Of the $3,200,000 assigned to the employment agreements, no residual value has
been identified with this asset. The employment agreements have a weighted
average useful life of approximately 32 months and are amortized on a
straight-line basis.
As part of the acquisition of CSMG, the Company assumed liabilities of
approximately $889,000 related to capital leases.
The following reflects pro forma combined results of the Company and CSMG as if
the acquisition had occurred as of December 30, 2001 and December 31, 2000. In
management's opinion, this pro forma information does not necessarily reflect
the actual results that would have occurred nor is it necessarily indicative of
future results of operations of the combined entities.
-----------------------------------------------------------------
FOR THE THIRTEEN WEEKS ENDED FOR THE THIRTY-NINE WEEKS ENDED
-----------------------------------------------------------------
(in thousands, except per share amounts) SEPTEMBER 29, SEPTEMBER 28, SEPTEMBER 29, SEPTEMBER 28,
2001 2002 2001 2002
---------- ---------- ---------- ----------
Total revenues $ 16,642 $ 8,756 $ 61,757 $ 28,179
Income (loss) before cumulative effect of
accounting changes $ 236 $ (648) $ 4,730 $ (4,366)
Net income (loss) $ 236 $ (648) $ 4,730 $ (5,506)
Basic income (loss) before cumulative effect
of accounting changes per common share $ 0.01 $ (0.02) $ 0.15 $ (0.13)
Diluted income (loss) before cumulative
effect of accounting changes per common share $ 0.01 $ (0.02) $ 0.14 $ (0.13)
Basic net income (loss) per common share $ 0.01 $ (0.02) $ 0.15 $ (0.17)
Diluted net income (loss) per common share $ 0.01 $ (0.02) $ 0.14 $ (0.17)
Included in the pro forma information for the thirteen and thirty-nine weeks
ended September 29, 2001 is approximately $1.4 million in one-time nonrecurring
severance charges incurred by CSMG. Excluding these charges, pro forma basic and
diluted net income per share would have been $0.04 and $0.03 for the thirteen
weeks ended September 29, 2001, respectively, and $0.18 and $0.16, respectively
for the thirty-nine weeks ended September 29, 2001.
5. Severance
During the thirty-nine weeks ended September 28, 2002, the Company recorded
severance expense of approximately $1.9 million and had paid approximately $1.2
million. These charges are included in selling, general and administrative
expense in the accompanying Consolidated Condensed Statement of Income (Loss)
and Comprehensive Income (Loss).
6. Equity Related Charges
During the thirteen weeks ended September 28, 2002, the Company granted
approximately 361,000 stock options to employees at a weighted average exercise
price of $1.26 and recorded net compensation expense related to all stock
options of $142,000. During the thirty-nine weeks ended September 28, 2002,
approximately 1,805,000 stock options were provided to employees at a weighted
average exercise price of $2.76. Of the 1,805,000 stock options granted during
fiscal year 2002, approximately 1,434,000 stock options remain outstanding as of
September 28, 2002. The Company recorded net compensation expense related to all
stock options of $142,000 and $471,000 for the thirteen and thirty-nine weeks
ended September 28, 2002, respectively. During the thirty-nine weeks ended
September 28, 2002, the Company recorded equity related charges to cost of
services associated with a warrant of $623,000. The warrant was fully amortized
by the Company during the second quarter of 2002.
7. Contingencies
In June 1998, the bankruptcy trustee of a former client, Communications Network
Corporation, sued TMNG for a total of $320,000 in the U.S. Bankruptcy Court in
New York seeking recovery of $160,000 alleging an improper payment of consulting
fees paid to TMNG by the former client during the period from July 1, 1996, when
an involuntary bankruptcy proceeding was initiated against the former client,
through August 6, 1996, when the former client agreed to an order for relief in
the bankruptcy proceeding, and $160,000 in consulting fees paid by the former
client after August 6, 1996.
The bankruptcy trustee has also sued TMNG for at least $1.85 million for breach
of contract, breach of fiduciary duties and negligence. Although assurance
cannot be given as to the ultimate outcome of this proceeding, TMNG believes
that it has meritorious defenses to the claims made by the bankruptcy trustee,
including particularly the claims for breach of contract, breach of fiduciary
duty and negligence, and that the ultimate resolution of this matter will not
materially harm our business.
The Company has and may become involved in various legal and administrative
actions arising in the normal course of business. These could include actions
raised by taxing authorities challenging the employment status of consultants
utilized by the Company. In addition, customer bankruptcies could result in a
claim against the Company on collected balances for professional services near
the bankruptcy filing date. While the resolution of any of such actions, claims,
or the matter described above may have an impact on the financial results for
the period in which it is resolved, the Company believes that the ultimate
disposition of these matters will not have a material adverse effect upon its
consolidated results of operations, cash flows or financial position. A
customer bankruptcy or impairment of a customer's financial condition could
also jeopardize the Company's ability to collect receivables owed by that
customer. In light of current adverse conditions in the telecommunications
industry, the incidents of customer bankruptcies have increased and may
continue to do so.
8. Loans to Officers
During the third quarter of fiscal year 2001, three executive officers of the
Company received stock options at fair market value in lieu of receiving their
cash base compensation, which subsequently resumed in the first quarter of
fiscal year 2002. To assist in meeting the cash flow needs of the officers who
reduced their compensation, the Company provided lines of credit, collateralized
by Company common stock held by
such officers. In June 2002, one of the officers retired from the Company, and
his line of credit was cancelled. The maximum available borrowings under the
loan agreements between the two remaining officers and the Company are
$1,050,000 in total. Borrowings against the line of credit at September 28, 2002
totaled $300,000. In accordance with the loan provisions, the interest rate
charged on the loans is equal to the Applicable Federal Rate (AFR), as announced
by the Internal Revenue Service, for short-term obligations (with annual
compounding) in effect for the month in which the advance is made, until fully
paid.
9. Business Segments
The Company has identified its segments based on the way management organizes
the Company to assess performance and make operating decisions regarding the
allocation of resources.
Based on the criteria of Statement of Financial Accounting Standards ("SFAS")
No. 131, "Disclosure about Segments of an Enterprise and Related Information,"
the Company has two segments, only one of which is separately reportable: The
Management Consulting Services segment, and All Other. Management Consulting
Services includes business strategy and planning, marketing and customer
relationship management, operating system support, revenue assurance, corporate
investment services, networks, and business model transformation. All Other
consists of computer hardware commission and rebates received in connection with
the procurement of hardware for third parties. Management evaluates performance
based upon operating earnings before interest income (expense), foreign currency
transaction gains (losses), extraordinary items, if any, and income tax effects
excluding equity related charges and goodwill and intangibles amortization.
Management also evaluates trade accounts receivable as part of its overall
assessment of the segments' performance. There are no intersegment sales.
Summarized financial information concerning the Company's reportable segments is
shown in the following table (amounts in thousands):
----------------------------------------------------------------
Management All Not Assigned
Consulting Services Other to Segments Total
------------------- ---------- ------------ ---------
For the thirteen weeks ended September 29, 2001:
Net sales to external customers $ 11,910 $ 321 $ 12,231
Income from operations $ 2,122 $ 312 $ (1,416) $ 1,018
Total assets $ 16,514 $ 32 $ 112,557 $ 129,103
For the thirteen weeks ended September 28, 2002:
Net sales to external customers $ 8,724 $ 32 $ 8,756
Income (loss) from operations $ (614) $ (17) $ (603) $ (1,234)
Total assets $ 10,641 $ 3 $ 133,171 $ 143,815
For the thirty-nine weeks ended September 29, 2001:
Net sales to external customers $ 43,935 $ 321 $ 44,256
Income from operations $ 8,897 $ 312 $ (3,929) $ 5,280
Total assets $ 16,514 $ 32 $ 112,557 $ 129,103
For the thirty-nine weeks ended September 28, 2002:
Net sales to external customers $ 25,327 $ 625 $ 25,952
Income (loss) from operations $ (5,137) $ 295 $ (2,675) $ (7,517)
Total assets $ 10,641 $ 3 $ 133,171 $ 143,815
Segment assets include both billed and unbilled trade accounts receivable, net
of allowances, and certain other assets. Assets not assigned to segments include
cash and cash equivalents, property and equipment, goodwill and intangible
assets and deferred tax assets, excluding deferred tax assets recognized on
accounts receivable reserves, which are assigned to their respective segment.
Reconciling information between reportable segments and the Company's totals is
shown in the following table (amounts in thousands):
----------------------------------------------------------------------------------
FOR THE THIRTEEN WEEKS ENDED FOR THE THIRTY-NINE WEEKS ENDED
----------------------------------------------------------------------------------
SEPTEMBER 29, 2001 SEPTEMBER 28, 2002 SEPTEMBER 29, 2001 SEPTEMBER 28, 2002
------------------ ------------------ ------------------ ------------------
Total operating earnings (losses) for
reportable segments $ 2,434 $ (631) $ 9,209 $(4,842)
Equity related charges (842) (142) (2,422) (1,094)
Goodwill and intangibles amortization (574) (461) (1,507) (1,581)
------- ------- ------- -------
Income (loss) from operations $ 1,018 $(1,234) $ 5,280 $(7,517)
======= ======= ======= =======
10. Goodwill and Other Intangibles
Effective for the start of fiscal year 2002, the Company adopted certain
provisions of SFAS No. 142 "Accounting for Goodwill and Intangible Assets". In
accordance with certain provisions of the Statement, goodwill has not been
amortized in fiscal year 2002. This Statement requires
that goodwill be evaluated on an annual basis, or more frequently if necessary.
This Statement also requires a transitional impairment test within six months of
the date of adoption. The Company determines fair value using the present value
method of measurement of future cash flows. The present value method includes
the estimation of a cash flow stream, applying a discount rate. The Company's
best estimate of future cash flows is determined using its internal budgets as
the basis. The discount rate used is commensurate with the risks involved,
including the nature of the business, the time value of money, expectations
about the amount or timing of future cash flows, and factors affecting
liquidity. Upon the adoption of SFAS No. 142, the Company recorded a preliminary
goodwill impairment loss related to the Management Consulting Segment of
approximately $1.9 million and has reflected this amount as a cumulative change
in accounting principle, net of tax benefit, in the Statement of Income (Loss)
and Comprehensive Income (Loss).
Included in intangible assets and other assets on the Company's consolidated
condensed balance sheet as of the end of the third quarter, September 28, 2002,
and as of the latest fiscal year end, December 29, 2001, are the following
intangible assets (amounts in thousands):
December 29, 2001 September 28, 2002
------------------------ ------------------------
Accumulated Accumulated
Cost Amortization Cost Amortization
------- ------------ ------- ------------
Goodwill $24,633 $(2,486) $63,399 $(2,486)
======= ======= ======= =======
Intangibles with
finite lives $ 1,503 $ (131) $ 5,473 $(1,712)
======= ======= ======= =======
Intangible amortization expense for the thirteen and thirty-nine weeks ended
September 28, 2002 was $0.5 million and $1.6 million, respectively. Intangible
amortization expense is estimated to be approximately $2.0 million for fiscal
year 2002. Estimated intangible amortization expense is expected to total $1.8
million in fiscal year 2003, $1.1 million in fiscal year 2004, and $0.3 million
in fiscal year 2005. As the Company's specifically identifiable intangible
assets will be fully amortized as of the end of fiscal year 2005, the Company
does not expect to record amortization expense in connection with intangible
assets in fiscal years 2006 or 2007.
The changes in the carrying amount of goodwill as of September 28, 2002 are as
follows (amounts in thousands):
Management Consulting All Other
Segment Segment Total
--------------------- --------- --------
Balance as of December 30, 2001 $ 19,156 $ 2,991 $ 22,147
Goodwill acquired during fiscal year 2002 40,666 40,666
Impairment loss (1,900) (1,900)
-------- --------- --------
Balance as of September 28, 2002 $ 57,922 $ 2,991 $ 60,913
======== ========= ========
The following pro forma information reconciles the net income (loss) and
earnings (loss) per share reported for the thirteen and thirty-nine weeks ended
September 28, 2002 to adjusted net income (loss) and earnings (loss) per share
which reflect the adoption of SFAS No. 142 and compares the adjusted information
to the current year results (amounts in thousands, except per share data):
--------------------------------------------------------------------------------
FOR THE THIRTEEN WEEKS ENDED FOR THE THIRTY-NINE WEEKS ENDED
--------------------------------------------------------------------------------
SEPTEMBER 29, 2001 SEPTEMBER 28, 2002 SEPTEMBER 29, 2001 SEPTEMBER 28, 2002
------------------ ------------------ ------------------ ------------------
Reported income (loss) before cumulative
effect of change in accounting
principle $ 1,131 $ (648) $ 4,895 $(4,136)
Cumulative effect of change in accounting
principle (1,140)
------- ------- ------- -------
Reported net income (loss) 1,131 (648) 4,895 (5,276)
Goodwill amortization, net of tax 280 839
------- ------- ------- -------
Net income (loss), as adjusted $ 1,411 $ (648) $ 5,734 $ (5,276)
========= ========= ========= =========
Basic income (loss) per share before
cumulative effect of change in accounting
principle $ 0.04 $ (0.02) $ 0.17 $ (0.13)
Cumulative effect of change in accounting
principle (0.03)
--------- --------- --------- ---------
Reported net income (loss) per share 0.04 (0.02) 0.17 (0.16)
Add back: Goodwill amortization, net of tax 0.01 0.02
--------- --------- --------- ---------
Basic income (loss) per share, as adjusted $ 0.05 $ (0.02) $ 0.19 $ (0.16)
========= ========= ========= =========
Diluted income (loss) per share before
cumulative effect of change in accounting
principle $ 0.04 $ (0.02) $ 0.16 $ (0.13)
Cumulative effect of change in accounting
principle (0.03)
--------- --------- --------- ---------
Reported net income (loss) per share 0.04 (0.02) 0.16 (0.16)
Add back: Goodwill amortization, net of tax 0.01 0.03
--------- --------- --------- ---------
Diluted income (loss) per share, as adjusted $ 0.05 $ (0.02) $ 0.19 $ (0.16)
========= ========= ========= =========
11. Significant Customer Contracts
On December 10, 1999, the Company entered into a consulting services agreement
with a significant customer under which such customer committed to $22 million
of consulting fees over a three-year period commencing January 1, 2000. Due to
financial difficulties experienced by the customer in fiscal year 2001 and
continuing into fiscal year 2002, the agreement was extended in April 2002 for
two additional years beyond the original term of the agreement, in exchange for
an expanded preferred contractor relationship and immediate commitment to a
significant consulting arrangement. As of September 28, 2002, $16.1 million of
consulting fees had been recognized in connection with the agreement from the
commencement date.
In August 2002, the Company entered into a gain sharing consulting services
agreement with a significant customer, under which the Company earns revenue
based upon project success as contractually defined. Due to the contingent
nature of this project, all project costs have been expensed as incurred, due to
the lack of an indication that an economic resource has been created.
Additionally, the Company has not recognized any revenue on the project as of
September 28, 2002, as the revenue is not realizable or earned at this time. As
of September 28, 2002, total project cost recognized in loss from operations on
the Company's Consolidated Condensed Statement of Income (Loss) and
Comprehensive Income (Loss) in connection with the project was approximately
$128,000.
12. Letter of Credit
In March 2002, the Company entered into a $1.0 million standby letter of credit
("LOC") facility with a financial institution in connection with the CSMG
acquisition. The LOC was required as part of the assignment of the leased office
space from CSMG to the Company. The LOC was collateralized by the Company with a
$1.0 million cash deposit to the above financial institution. This amount is
included in "Cash and Cash Equivalents" on the Company's consolidated condensed
balance sheet as of September 28, 2002.
In August 2002, the Company entered into a $0.3 million standby LOC facility
with a financial institution in connection with the procurement of computer
hardware by the Company from a third-party vendor. The hardware represents a
deliverable by the Company in connection with a customer engagement, for which
the customer is contractually required to satisfy. The LOC was required by the
third-party vendor in the event the customer does not satisfy the obligation. As
part of the agreement, the Company holds a collateralized position on the
hardware sold to the customer. The LOC was collateralized by the Company with a
$0.3 million cash deposit to the above financial institution. This amount is
included in "Cash and Cash Equivalents" on the Company's consolidated condensed
balance sheet as of September 28, 2002.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
In addition to historical information, this quarterly report contains
forward-looking statements. Certain risks and uncertainties could cause actual
results to differ materially from those reflected in such forward-looking
statements. Factors that might cause a difference include, but are not limited
to, those discussed in the sections entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business - Risk
Factors" in the Company's Annual Report on Form 10-K for the fiscal year ended
December 29, 2001 and in "Risk Factors" in this quarterly report. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
reflect management's opinions only as of the date of this report. We undertake
no obligation to revise, or publicly release the results of any revision to,
these forward-looking statements. Readers should carefully review the risk
factors described in our annual report and this quarterly report and in other
documents that we file from time to time with the Securities and Exchange
Commission.
The following should be read in connection with Management's Discussion and
Analysis of Financial Condition and Results of Operations and Critical
Accounting Policies as presented in the Company's Annual Report on Form 10-K for
the fiscal year ended December 29, 2001.
OVERVIEW
Revenues typically consist of consulting fees for professional services and
related expense reimbursements. A significant percentage of our consulting
services are contracted on either a time and materials basis not to exceed a
negotiated contract price or a fixed cost basis. Substantially all revenues are
recognized in the period in which the service is performed on a percentage of
completion method, utilizing estimates of project completion under both of these
types of contracts. Larger fixed price contracts have recently begun to
represent a more significant component of our revenue mix.
RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED SEPTEMBER 28, 2002 COMPARED TO THIRTEEN WEEKS ENDED
SEPTEMBER 29, 2001
REVENUES
Revenues decreased 28.4% to $8.8 million for the thirteen weeks ended September
28, 2002 from $12.2 million for the thirteen weeks ended September 29, 2001. The
decrease in revenues was due primarily to a deferral or reduction of management
consulting demand by the communications and technology industry resulting
primarily from macroeconomic events in this sector during 2001 and 2002,
including reductions in capital funding, business failures, and industry
restructurings and reorganizations. Additionally, our international revenue base
decreased to 9.1% of our revenues for the thirteen weeks ended September 28,
2002, from 14.4% for the corresponding period in fiscal year 2001, due primarily
to the additional domestic revenue generated by our recently acquired
subsidiaries, Cambridge Strategic Management Group, Inc. ("CSMG") in March 2002,
and TMNG Technologies, Inc. ("TMNG Technologies") in September 2001, and the
decline in services provided to international customers related to similar
adverse macroeconomic events in those markets. CSMG revenues represented 33.7%
of consolidated revenues for the thirteen weeks ended September 28, 2002.
Non-consulting revenues recognized by TMNG Technologies represented less than 1%
of consolidated revenues for the thirteen weeks ended September 28, 2002, and
related to commissions on hardware sales. For the thirteen weeks ended September
28, 2002, revenues recognized by the Company in connection with fixed price
engagements totaled approximately $1,221,000, and represented approximately
13.9% of consolidated revenues.
COSTS OF SERVICES
Direct costs of services decreased 24.3% to $4.4 million for the thirteen weeks
ended September 28, 2002 compared to $5.8 million for the thirteen weeks ended
September 29, 2001, and was attributable primarily to the decrease in consulting
engagements and corresponding reductions in consulting personnel costs. As a
percentage of revenues, our gross margin based on direct cost of services was
50.1% for the thirteen weeks ended September 28, 2002 compared to 52.8% for the
thirteen weeks ended September 29, 2001. The decrease in gross margin was
primarily attributable to a lower percentage of revenue with our technology
offerings and the corresponding decrease in commission revenue related to the
hardware component, partially offset by higher margins from an increase in
strategy offerings for the thirteen weeks ended September 28, 2002.
Non-cash stock based compensation charges were $110,000 and $631,000 for the
thirteen weeks ended September 28, 2002 and September 29, 2001, respectively.
The primary reasons for the net decrease in non-cash stock based compensation
charges for the thirteen weeks ended September 28, 2002 compared to the same
period in fiscal year 2001 was a net reduction in amortization charges related
to the pre-initial public offering grants of stock options and the reduction in
amortization expense recognized on a warrant in the amount of $430,000. Non-cash
stock based compensation charges are recognized by the Company over a period of
three or four years, based on an accelerated vesting schedule. Substantially all
of the options giving rise to the equity related charges are in their respective
third of fourth year of vesting, and therefore continue to have less impact on
the Company's Statement of Income (Loss) and Comprehensive Income (Loss). The
above warrant was fully amortized during the second quarter of fiscal year 2002.
These net charges increased costs of services as a percentage of revenue by 1.3%
and 5.2% for the thirteen weeks ended September 28, 2002 and the corresponding
period in fiscal year 2001, respectively.
OPERATING EXPENSES
In total, operating expenses increased to $5.5 million for the thirteen weeks
ended September 28, 2002, or 14.6% from $4.8 million for the corresponding
period in fiscal year 2001. The major component of the $0.7 million increase in
operating expenses was an increase in the selling, general and administrative
costs associated with our CSMG and TMNG Technologies acquisitions. As a
percentage of revenues, selling, general and administrative expenses increased
to 57.3% compared to 32.9% for the thirteen weeks ended September 28, 2002 and
September 29, 2001, respectively. This percentage increase was primarily
attributable to the decreased revenues. Selling, general and administrative
expenses decreased by approximately $874,000 for the thirteen weeks ended
September 28, 2002, compared to the thirteen weeks ended June 29, 2002, after
excluding the effect of a one-time charge recorded in the second quarter of
fiscal year 2002 related to severance costs. This decrease in selling, general
and administrative expenses from the second to the third thirteen week period in
2002 was due to the cost-cutting initiatives adopted by the Company's executive
management team. Management continues to examine cost-reduction measures to
enhance the Company's profitability. Amortization expense decreased by $113,000
for the thirteen weeks ended September 28, 2002 compared to the same period in
fiscal year 2001, due primarily to the Company no longer recording amortization
expense on goodwill in accordance with SFAS No. 142 "Accounting for Goodwill and
Intangible Assets," offset by the amortization of specifically identified
intangibles acquired in the CSMG and TMNG Technologies acquisitions.
Non-cash stock based compensation charges of $32,000 and $211,000 were recorded
for the thirteen weeks ended September 28, 2002 and
September 29, 2001, respectively. The $179,000 net decrease in non-cash stock
based compensation charges for fiscal year 2002 compared to fiscal year 2001 was
a result of the reduction in the amortization of the deferred compensation
charges based on the accelerating vesting schedule discussed above in "Cost of
Services". These charges increased operating expenses as a percentage of revenue
by 0.4% and 1.7% for the thirteen weeks ended September 28, 2002 and September
29, 2001, respectively.
OTHER INCOME AND EXPENSES
Interest income was $243,000 and $611,000 for the thirteen weeks ended September
28, 2002 and September 29, 2001, respectively, and represented interest earned
on invested balances. Interest income decreased during the thirteen weeks ended
September 28, 2002 due to lower invested balances resulting from the reduction
in cash reserves and lower interest rates from the third quarter of fiscal year
2001 to the third quarter of fiscal year 2002. We invest in short-term,
high-grade investment instruments as part of our overall investment policy.
INCOME TAXES
Income tax benefit for the thirteen weeks ended September 28, 2002 as a
percentage of pretax loss was 35.1% compared to a provision of 30.3% of pretax
income for the thirteen weeks ended September 29, 2001. The decrease in income
taxes as a percentage of pre-tax income in fiscal year 2001 was due primarily to
the partial shift of investments by TMNG from taxable to tax-exempt securities
that are not taxed at the federal income tax level.
THIRTY-NINE WEEKS ENDED SEPTEMBER 28, 2002 COMPARED TO THIRTY-NINE WEEKS ENDED
SEPTEMBER 29, 2001
REVENUES
Revenues decreased 41.4% to $26.0 million for the thirty-nine weeks ended
September 28, 2002 from $44.3 million for the thirty-nine weeks ended September
29, 2001. The decrease in revenues was due primarily to a deferral or reduction
of management consulting demand by the communications and technology industry
resulting primarily from adverse macroeconomic events in this sector during 2001
and 2002, including reductions in capital funding, business failures, and
industry restructurings and reorganizations. Additionally, our international
revenue base decreased to 7.4% of our revenues for the thirty-nine weeks ended
September 28, 2002, down from 13.9% for the thirty-nine weeks ended September
29, 2001, due primarily to the additional domestic revenue generated by our
recently acquired subsidiaries, CSMG and TMNG Technologies and the decline in
services provided to international customers related to similar adverse
macroeconomic events in those markets. CSMG revenues represented 33.5% of
consolidated revenues for the thirty-nine weeks ended September 28, 2002.
Non-consulting revenues recognized by TMNG Technologies represented 2.4% of
consolidated revenues for the thirty-nine weeks ended September 28, 2002, and
related primarily to commissions received on hardware sales. For the thirty-nine
weeks ended September 28, 2002, revenues recognized by the Company in connection
with fixed price engagements totaled $5.2 million, and represented 20.1% of
consolidated revenue.
COST OF SERVICES
Direct costs of services decreased 44.6% to $12.3 million for the thirty-nine
weeks ended September 28, 2002 compared to $22.2 million for the thirty-nine
weeks ended September 29, 2001, and was attributable primarily to the decrease
in consulting engagements and corresponding reductions in consulting personnel
costs. As a percentage of revenues, our gross margin based on direct cost of
services was 52.6% for the thirty-nine weeks ended September 28, 2002 compared
to 49.8% for the thirty-nine weeks ended September 29, 2001. The increase in
gross margin was primarily attributable to higher margins associated with the
increase in strategy offerings provided during the thirty-nine weeks ended
September 28, 2002 compared to the corresponding period in fiscal year 2001.
Non-cash stock based compensation charges were $782,000 and $1,752,000 for the
thirty-nine weeks ended September 28, 2002 and September 29, 2001, respectively.
The primary reasons for the net decrease in non-cash stock based compensation
charges for the thirty-nine weeks ended September 28, 2002 compared to the same
period in fiscal year 2001 was the net reduction in amortization charges related
to the pre-initial public offering grants of stock options in the amount of
$302,000, and the reduction in amortization expense recognized on the warrant in
the amount of $668,000. Non-cash stock based compensation charges are recognized
by the Company over a period of three or four years, based on an accelerated
vesting schedule. Substantially all of the options giving rise to the equity
related charges are in their respective third of fourth year of vesting, and
therefore continue to have less impact on the Company's Statement of Income
(Loss) and Comprehensive Income (Loss). The above warrant was fully amortized by
the Company during the second quarter of fiscal year 2002. These net charges
increased costs of services as a percentage of revenue by 3.0% and 4.0% for the
thirty-nine weeks September 28, 2002 and September 29, 2001, respectively.
OPERATING EXPENSES
In total, operating expenses increased to $20.4 million for the thirty-nine
weeks ended September 28, 2002, or 35.7% from $15.0 million for the thirty-nine
weeks ended September 29, 2001. The major components of the $5.4 million
increase in operating expenses was a $1.9 million one-time charge related to
severance costs incurred by the Company as part of its overall cost-reduction
initiatives, an $855,000 one-time charge related to the closing of our Lanham
office into our Bethesda location in the first quarter of fiscal year 2002, and
the additional selling, general and administrative costs associated with our
CSMG and TMNG Technologies acquisitions. As a percentage of revenues, selling,
general and administrative expenses increased to 71.2% compared to 29.0% for the
thirty-nine weeks ended September 29, 2001.
This percentage increase was primarily attributable to the decreased revenues.
Beginning in fiscal year 2001 and continuing into fiscal year 2002, management
began implementing a number of cost reduction initiatives including the
reduction of sales and marketing staff, minimization of consultant recruitment,
and a reduction in the Company's accounting staff. Management continues to
examine cost-reduction measures to enhance the Company's profitability.
Amortization expense increased to $1.6 million for the thirty-nine weeks ended
September 28, 2002, or 4.9% from $1.5 million for the thirty-nine weeks ended
September 29, 2001. The net increase in amortization expense was due primarily
to the amortization of specifically identified intangibles acquired in the CSMG
and TMNG Technologies acquisitions, offset by the Company no longer recording
amortization expense on goodwill in accordance with SFAS No. 142 "Accounting for
Goodwill and Intangible Assets."
Non-cash stock based compensation charges of $312,000 and $670,000 for the
thirty-nine weeks ended September 28, 2002 and September 29, 2001, respectively,
were recorded in connection with stock options granted to our partners,
principals and certain senior executives and non-employee directors. The net
$358,000 decrease in non-cash stock based compensation charges for fiscal year
2002 compared to fiscal year 2001 was a result of the reduction in the
amortization of the deferred compensation charges recorded in connection with
pre-initial public offering grants of non-qualified stock options based on the
accelerating vesting schedule discussed above in "Cost of Services". These
charges increased operating expenses as a percentage of revenue by 1.2% and 1.5%
for the thirty-nine weeks ended September 28, 2002 and September 29, 2001,
respectively.
OTHER INCOME AND EXPENSES
Interest income was $766,000 and $2,023,000 for the thirty-nine weeks ended
September 28, 2002 and September 29, 2001, respectively, and represented
interest earned on invested balances. Interest income decreased during the
thirty-nine weeks ended September 28, 2002 due to lower invested balances
resulting from a reduction in cash reserves and lower interest rates from fiscal
year 2001 to fiscal year 2002. We invest in short-term, high-grade investment
instruments as part of our overall investment policy.
INCOME TAXES
Income tax benefit for the thirty-nine weeks ended September 28, 2002 as a
percentage of pretax loss was 38.9% compared to a provision of 32.8% of pretax
income for the thirty-nine weeks ended September 29, 2001. The increase in the
income tax expense (benefit) as a percentage of pre-tax income (loss) was due
primarily to a shift away from short-term investments in federally exempt income
securities.
CUMULATIVE CHANGE IN ACCOUNTING PRINCIPLE
A cumulative change in accounting principle in the amount of $1.9 million was
recorded in the thirty-nine weeks ended September 28, 2002 in connection with
the Company's estimate of goodwill impairment. The impairment was calculated in
accordance with the provisions of SFAS No. 142 "Accounting for Goodwill and
Intangible Assets" and has been reported on the Company's Statement of Income
(Loss) and Comprehensive Income (Loss), net of tax benefit in the amount of $1.1
million.
LIQUIDITY AND CAPITAL RESOURCES
At September 28, 2002, we had approximately $54.9 million in cash and cash
equivalents. We believe the cash on hand will be sufficient to meet anticipated
cash requirements, including anticipated capital expenditures, consideration for
possible acquisitions, and to support operations, if necessary, for at least the
next 12 months. The Company has established a flexible model that provides a
lower fixed cost structure than most consulting firms, enabling TMNG to scale
operating cost structures more quickly based on market conditions.
Net cash provided by operating activities was $1.1 million and $15.2 million for
the thirty-nine weeks ended September 28, 2002 and September 29, 2001,
respectively. The Company generated positive cash flow from its operating
activities during fiscal 2002, primarily due to the reduction in accounts
receivable balances, after giving impact to the CSMG acquisition, reflecting
more focused billing and collection activities, and better management of working
capital.
Net cash used in investing activities was $32.8 million and $4.8 million for the
thirty-nine weeks ended September 28, 2002 and September 29, 2001, respectively.
Cash used for acquisitions was $32.5 million for the thirty-nine weeks ended
September 28, 2002, and related to the CSMG acquisition closed by the Company on
March 6, 2002. Cash used for acquisitions was $4.0 million for the thirty-nine
weeks ended September 29, 2001, and related to the Tri-Com Computer Services,
Inc. acquisition closed by the Company on September 5, 2001. Capital
expenditures of $231,000 and $520,000 for the thirty-nine weeks ended September
28, 2002 and September 29, 2001, respectively, relate to the capitalization of
leasehold improvements, computer equipment and software by the Company.
Additionally, during fiscal 2002 the Company increased its loans to officers by
$100,000, resulting in an aggregate borrowing of $300,000 by officers as of
September 28, 2002. The maximum available borrowings under the loan agreements
between the two officers and the Company are $1,050,000 in total.
Net cash provided by financing activities was $166,000 and $317,000 for the
thirty-nine weeks ended September 28, 2002 and September 29, 2001, respectively.
Cash provided by financing activities in fiscal 2002 related to proceeds from
the exercise of stock options and the purchase of stock under the Company's
employee stock purchase plan, partially offset from payments made by the Company
on the current portion of its capital lease obligations and current portion of
outstanding debt. Net cash provided by financing activities in fiscal 2001
related to proceeds from the exercise of stock options, partially offset from
payments made by the Company on the current portion of its capital lease
obligations.
RISK FACTORS
Our business, operating results, and financial condition are subject to numerous
risks, uncertainties, and contingencies, many of which are beyond our control.
The following important factors, among others, could cause actual results to
differ materially from those contemplated in forward-looking statements made in
this quarterly report on Form 10-Q or presented elsewhere by management from
time to time. Investors are urged to consider these risk factors when evaluating
an investment in the Company.
WE FOCUS ALMOST EXCLUSIVELY ON SERVING THE COMMUNICATIONS INDUSTRY, WHICH HAS
RECENTLY EXPERIENCED DECLINING RESULTS OF OPERATIONS, BANKRUPTCIES, FUTURE
UNCERTAINTIES AND A REDUCTION IN THE AVAILABILITY OF INVESTMENT CAPITAL. ADVERSE
INDUSTRY CONDITIONS HAVE RESULTED IN DECLINING DEMAND FOR OUR SERVICES AND COULD
CONTINUE TO HARM OUR BUSINESS
We have derived almost all of our revenues from consulting engagements within
the communications industry. Much of our past growth arose from business
opportunities presented by industry trends that included deregulation, increased
competition, technological advances, the growth of e-business and the
convergence of service offerings.
However, beginning in late 2000 and continuing throughout 2001 and into 2002,
many communications companies, including carriers, equipment manufacturers and
other industry participants have reported declining results of operations and
liquidity, and there have been numerous bankruptcy filings. These events
resulted in a substantial decline in our revenues and the incurrence of net
losses through the third quarter of 2002. Our future operating results could
continue to be affected by continuing declines in results of operations and
continuing financial difficulties among communications companies. In addition to
continuing decreases in demand for our services, future client financial
difficulties and/or bankruptcies could require us to write-off receivables that
are in excess of our bad debt reserves, which would harm our results of
operations in future fiscal periods. Client bankruptcies could also create an
at-risk situation on balances for professional services collected near the
bankruptcy filing date. In addition, the worsening conditions in the
communications sector could cause companies to delay new product and new
business initiatives and to seek to control expenses by reducing use of outside
consultants. Additionally, the communications industry is in a period of
consolidation, which could reduce our client base, eliminate future
opportunities or create conflicts of interest among clients. As a result,
current industry conditions may continue to harm our business, financial
condition and results of operations.
WE ARE DEPENDENT ON A LIMITED NUMBER OF LARGE CUSTOMERS FOR A MAJOR PORTION OF
OUR REVENUES, AND THE LOSS OF A MAJOR CUSTOMER COULD SUBSTANTIALLY REDUCE
REVENUES AND HARM OUR BUSINESS AND LIQUIDITY
We derive a substantial portion of our revenues from a relatively limited number
of clients. The services required by any one client may be affected by industry
consolidation or adverse industry conditions, technological developments,
economic slowdown or internal budget constraints. As a result, the volume of
work performed for specific clients varies from period to period, and a major
client in one period may not use our services in a subsequent period.
Our services are often sold under short-term engagements and most clients can
reduce or cancel their contracts with little or no penalty or notice. Our
operating results may suffer if we are unable to rapidly re-deploy consultants
if a client defers, modifies or cancels a project. Consequently, you should not
predict or anticipate our future revenue based on the number of clients we have
or the number and scope of our existing engagements.
OUR REVENUES AND OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY FROM QUARTER-TO-
QUARTER, AND FLUCTUATIONS IN OUR OPERATING RESULTS COULD CAUSE OUR STOCK PRICE
TO DECLINE
Our revenue and operating results may vary significantly from quarter-to-quarter
due to a number of factors. In future quarters, our operating results may be
below the expectations of public market analysts or investors, and the price of
our common stock may decline. This is especially true under present economic
conditions impacting the communications industry, a typical result being fewer
opportunities and discounted pricing. Factors that could cause quarterly
fluctuations include:
- - the beginning and ending of significant contracts during a quarter;
- - the size and scope of assignments;
- - the form of customer contracts changing primarily from time and materials to
fixed price or contingent fee, based on project results;
- - consultant turnover, utilization rates and billing rates;
- - the loss of key consultants, which could cause clients to end their
relationships with us;
- - the ability of clients to terminate engagements without penalty;
- - fluctuations in demand for our services resulting from budget cuts, project
delays, industry downturns or similar events;
- - clients' decisions to divert resources to other projects, which may limit
clients' resources that would otherwise be allocated to services we could
provide;
- - reductions in the prices of services offered by our competitors;
- - fluctuations in the communications market and economic conditions;
- - seasonality during the summer, vacation and holiday periods; and
- - fluctuations in the value of foreign currencies versus the U.S. dollar.
Because a significant portion of our non-consultant expenses are relatively
fixed, a variation in the number of client assignments or the timing of the
initiation or the completion of client assignments may cause significant
variations in operating results from quarter-to-quarter and could result in
continuing losses. To the extent the addition of consultant employees is not
followed by corresponding increases in revenues, additional expenses would be
incurred that would not be matched by corresponding revenues. Therefore,
profitability would decline and we could potentially experience further losses.
In addition, our stock price would likely decline.
ANY CONTINUING DECREASE IN CURRENT AND PROJECTED REVENUES MAY RESULT IN ASSET
IMPAIRMENTS AND WRITE-OFFS TO THE COMPANY
An increasing amount of the assets on our balance sheet derive their value from
projections made by the Company of revenues and cash flows. These assets are
primarily intangible assets and goodwill. If we are not able to maintain certain
levels of revenues and cash flows, these assets may be impaired, and the
resulting asset impairment would be charged to operating income.
WE HAVE MADE SEVERAL ACQUISITIONS AND MAY CONTINUE TO MAKE ACQUISITIONS, WHICH
ENTAIL RISKS THAT COULD HARM OUR FINANCIAL PERFORMANCE OR STOCK PRICE, AND MAY
BE DILUTIVE TO EXISTING SHAREHOLDERS
As part of our business strategy, we have made and will likely continue to make
acquisitions. Any future acquisition would be accompanied by the risks commonly
encountered in acquisitions. These risks include:
- - the difficulty associated with assimilating the personnel and operations of
acquired companies;
- - the potential disruption of our existing business;
- - further reductions in our cash reserves;
- - adverse effects on our financial statements, including one-time write-offs and
assumption of liabilities of acquired businesses; and
- - paying too much for an acquired company.
If we make acquisitions and any of these problems materialize, these
acquisitions could negatively affect our operations, profitability and financial
operations.
In addition, the Financial Accounting Standards Board (FASB) has issued
Statement of Financial Accounting Standards ("SFAS") No. 142 "Accounting for
Goodwill and Intangibles". The impact of SFAS 142 will require an annual
evaluation of goodwill to determine if an impairment of goodwill has occurred.
The Company will annually assess the impact of the Statement. If an impairment
of goodwill is deemed to have occurred, this could negatively affect our
consolidated results of operations. The Company recorded a charge of $1.9
million related to an impairment of goodwill in the first quarter of 2002 and is
currently assessing what impact, if any, these accounting standards might have
on the Company's consolidated financial statements for future periods.
IF CURRENT MARKET CONDITIONS WITHIN THE COMMUNICATIONS INDUSTRY CONTINUE, OUR
FINANCIAL POSITION MAY CONTINUE TO BE DIMINISHED AND OUR LIQUIDITY COULD BECOME
IMPAIRED, AND FUNDING FROM THE CAPITAL MARKETS MAY NOT BE AVAILABLE.
The contraction of the communications industry negatively impacted the Company's
revenues and profitability in 2001 and 2002. The Company believes it currently
has sufficient cash resources to support operations; however, if existing funds
are utilized in operations and acquisitions, it may be difficult to raise
additional capital.
WE MUST CONTINUE TO ATTRACT AND RETAIN QUALITY CONSULTANTS, AND OUR INABILITY TO
DO SO WOULD IMPAIR OUR ABILITY TO SERVICE EXISTING ENGAGEMENTS OR UNDERTAKE NEW
ENGAGEMENTS, RESULTING IN A DECLINE IN OUR REVENUES AND INCOME
We must attract a significant number of new consultants to implement growth
plans. The number of potential consultants that meet our hiring criteria is
relatively small, and there is significant competition for these consultants
from direct competitors and others in the communications industry. Competition
for these consultants may result in significant increases in our costs to
attract and retain the consultants, which could reduce our margins and
profitability. In addition, we will need to attract consultants in international
locations, principally Europe, to support
our international growth plans. We have limited experience in recruiting
internationally, and we may not be able to do so. Any inability to recruit new
consultants or retain existing consultants could impair our ability to service
existing engagements or undertake new engagements. If we are unable to attract
and retain quality consultants, revenues and profitability would decline.
WE HAVE REDUCED CONSULTANT HEADCOUNT DURING THE PAST FISCAL YEAR, AND THE
TERMINATION OF CONSULTANTS COULD RESULT IN A DIMINISHMENT OF CONSULTATIVE
OFFERINGS AVAILABLE TO THE CUSTOMERS
Beginning in fiscal year 2001 and continuing into fiscal year 2002, the Company
began an initiative of cost-cutting measures, including the reduction in
employee consultant headcount. As the talents and skillsets of these employee
consultants are no longer available to the Company, TMNG could be adversely
affected in its ability to provide various consultative offerings to customers,
potentially resulting in a diminishment of revenue opportunities for the
Company.
THE MARKET IN WHICH WE COMPETE IS INTENSELY COMPETITIVE, AND ACTIONS BY
COMPETITORS COULD RENDER OUR SERVICES LESS COMPETITIVE, CAUSING REVENUES AND
INCOME TO DECLINE
The market for consulting services to communications companies is intensely
competitive, highly fragmented and subject to rapid change. Competitors include
general management consulting firms, the consulting practices of "Big Four"
accounting firms, most of which have practice groups focused on the
communications industry, and local or regional firms specializing in
communications services. In addition, major global outsourcing firms like
International Business Machines Corporation (IBM), Electronic Data Systems
Corporation (EDS) and Computer Sciences Corporation (CSC) have become more
significant competitors recently due to the outsource of certain business
support system (BSS) and operating support system (OSS) operations to them. Some
of these competitors have also formed strategic alliances with communications
and technology companies serving the industry. We also compete with internal
resources of our clients. Although non-exhaustive, a partial list of our
competitors includes:
- - American Management Systems;
- - Accenture;
- - Booz-Allen & Hamilton;
- - The Boston Consulting Group;
- - Cap Gemini Ernst & Young;
- - Bearing Point (formerly KPMG); and
- - McKinsey & Company.
Many information technology-consulting firms also maintain significant practice
groups devoted to the communications industry. Many of these companies have a
national and international presence and may have greater personnel, financial,
technical and marketing resources. We may not be able to compete successfully
with our existing competitors or with any new competitors.
We also believe our ability to compete depends on a number of factors outside of
our control, including:
- - the prices at which others offer competitive services, including aggressive
price competition and discounting on individual engagements which may become
increasingly prevalent due to worsening economic conditions;
- - the ability and willingness of our competitors to finance customers' projects
on favorable terms;
- - the ability of our competitors to undertake more extensive marketing campaigns
than we can;
- - the extent, if any, to which our competitors develop proprietary tools that
improve their ability to compete with us;
- - the ability of our customers to perform the services themselves; and
- - the extent of our competitors' responsiveness to customer needs.
We may not be able to compete effectively on these or other factors. If we are
unable to compete effectively, our market position, and therefore our revenues
and profitability, would decline.
WE EXPERIENCED RAPID ORGANIC GROWTH IN OUR BUSINESS PRIOR TO 2001 AND 2002, AND
HAVE ACQUIRED SEVERAL COMPANIES IN RECENT FISCAL YEARS. IF OUR BUSINESS GROWS IN
THE FUTURE AND OUR OPERATING RESULTS
IMPROVE, OUR OPERATIONAL INFRASTRUCTURE MAY NOT BE ABLE TO SUPPORT GROWTH AND
INTEGRATION
If industry conditions improve and we experience a period of rapid growth in the
future, managerial and operational resources may be strained. Additionally, the
consolidation of corporate and administrative functions in connection with
acquisition integration may also strain leadership and resources. To support any
future growth, our organizational infrastructure must grow accordingly.
To manage any future growth of our operations and personnel, we must:
- - improve existing and implement new operational, financial and management
controls, reporting systems and procedures;
- - maintain and expand our financial management information systems; and
- - effectively integrate operational, financial and management controls, report
systems and procedures.
If we fail to address these issues, our operational infrastructure may be
insufficient to support our levels of business activity. In this event, we could
experience disruptions in our business and declining revenues or profitability.
IF WE DO NOT EFFECTIVELY MANAGE THE CONVERSION OF INDEPENDENT SUBJECT MATTER
EXPERTS TO EMPLOYEES, WE COULD INCUR UNANTICIPATED COSTS WHICH WOULD HARM OUR
FINANCIAL PERFORMANCE
We offer contingent employee or full-time employee status to certain of our
independent subject matter experts. As independent subject matter experts are
converted to consultant employees, we incur additional fixed costs for each such
employee that we do not incur when retained as an independent subject matter
expert. To effectively manage these additional fixed costs, we will need to
continuously improve utilization management and minimize unbilled employee time.
In addition, this change may cause other disruptions to our business. If we fail
to effectively manage this transition, we could incur additional costs due to
underutilization of full-time employees as well as other unanticipated costs.
WE MUST CONTINUALLY ENHANCE OUR SERVICES TO MEET THE CHANGING NEEDS OF OUR
CUSTOMERS OR WE MAY LOSE FUTURE BUSINESS TO OUR COMPETITORS
Our future success will depend upon our ability to enhance existing services and
to introduce new services to meet the requirements of our customers in a rapidly
developing and evolving market, particularly in the areas of wireless
communications and next generation technologies. Present or future services may
not satisfy the needs of the communications market. If we are unable to
anticipate or respond adequately to customer needs, lost business may result and
our financial performance will suffer.
PLANS FOR INTERNATIONAL EXPANSION MAY NOT SUCCEED, WHICH WOULD HARM OUR REVENUES
AND PROFITABILITY
Future revenues depend to a large extent on expansion into international
markets. International operations might not succeed for a number of reasons,
including:
- - difficulties in staffing and managing foreign operations;
- - seasonal reductions in business activity;
- - fluctuations in currency exchange rates or imposition of currency exchange
controls;
- - competition from local and foreign-based consulting companies;
- - issues relating to uncertainties of laws and enforcement relating to the
protection of intellectual property;
- - unexpected changes in trading policies and regulatory requirements;
- - legal uncertainties inherent in transnational operations such as export and
import regulations, tariffs and other trade barriers;
- - taxation issues;
- - operational issues such as longer customer payment cycles and greater
difficulties in collecting accounts receivable;
- - language and cultural differences;
- - changes in foreign communications markets;
- - increased cost of marketing and servicing international clients;
- - general political and economic trends; and
- - expropriations of assets, including bank accounts, intellectual property and
physical assets by foreign governments.
Accordingly, we may not be able to successfully execute our business plan in
foreign markets. If we are unable to achieve anticipated levels of revenues from
international operations, our overall revenues and profitability may decline.
IF INTERNATIONAL BUSINESS VOLUMES INCREASE, WE MAY BE EXPOSED TO GREATER FOREIGN
CURRENCY EXCHANGE RISKS, WHICH COULD RESULT IN INCREASED EXPENSES AND DECLINING
PROFITABILITY
Although revenues derived from our international engagements declined in 2002,
they continue to represent a significant number of our engagements. Some
international engagements are denominated in the local currency of the clients.
Expenses incurred in delivering these services, consisting primarily of
consultant compensation, are typically denominated in U.S. dollars. To the
extent that the value of a currency in which billings are denominated decreases
in relation to the U.S. dollar or another currency in which expenses are
denominated, our operating results and financial condition could be harmed. We
may hedge our foreign currency exposure from time to time, but hedging may not
be effective.
WE ARE DEPENDENT ON A LIMITED NUMBER OF KEY PERSONNEL, AND THE LOSS OF THESE
INDIVIDUALS COULD HARM OUR COMPETITIVE POSITION AND FINANCIAL PERFORMANCE
Our business consists primarily of the delivery of professional services and,
accordingly, our success depends upon the efforts, abilities, business
generation capabilities and project execution of our executive officers and key
consultants. Our success is also dependent upon the managerial, operational,
marketing, and administrative skills of our executive officers, particularly
Richard Nespola, our President and Chief Executive Officer. The loss of any
executive officer or key consultant or group of consultants, or the failure of
these individuals to generate business or otherwise perform at or above
historical levels, could result in a loss of customers or revenues, and could
therefore harm our financial performance.
IF WE FAIL TO PERFORM EFFECTIVELY ON PROJECT ENGAGEMENTS, OUR REPUTATION, AND
THEREFORE OUR COMPETITIVE POSITION AND FINANCIAL PERFORMANCE COULD BE HARMED
Many of our engagements come from existing clients or from referrals by existing
clients. Therefore, our growth is dependent on our reputation and on client
satisfaction. The failure to perform services that meet a client's expectations
may damage our reputation and harm our ability to attract new business. Damage
to our reputation arising from client dissatisfaction could therefore harm our
financial performance.
IF WE FAIL TO DEVELOP LONG-TERM RELATIONSHIPS WITH OUR CUSTOMERS, OUR SUCCESS
WOULD BE JEOPARDIZED
A substantial majority of our business is derived from repeat customers. Future
success depends to a significant extent on our ability to develop long-term
relationships with successful communications providers who will give new and
repeat business. Inability to build long-term customer relations would result in
declines in our revenues and profitability.
A LARGE NUMBER OF PERSONNEL ARE CLASSIFIED AS INDEPENDENT CONTRACTORS FOR TAX
AND EMPLOYMENT LAW PURPOSES, AND IF THESE PERSONNEL WERE TO BE RECLASSIFIED AS
EMPLOYEES, WE COULD BE SUBJECT TO BACK TAXES, INTEREST, PENALTIES AND OTHER
LEGAL CLAIMS
We provide a significant percentage of our consulting services through
independent contractors and, therefore, do not pay federal or state employment
taxes or withhold income taxes for such persons. Further, we generally do not
include these independent contractors in our benefit plans. In the future, the
IRS and state authorities may challenge the status of consultants as independent
contractors. Independent subject matter experts may also initiate proceedings to
seek reclassification as employees under state law. In either case, if persons
engaged by us as independent subject matter experts are determined to be
employees by the IRS or any state taxation department, we would be required to
pay applicable federal and state employment taxes and withhold income taxes with
respect to such persons, and could become liable for amounts required to be paid
or withheld in prior periods along with interest and penalties. In addition, we
could be required on a going-forward basis, to include such persons in our
benefit plans retroactively and going forward.
WE COULD BE SUBJECT TO CLAIMS FOR PROFESSIONAL LIABILITY, WHICH COULD HARM OUR
FINANCIAL PERFORMANCE
As a provider of professional services, we face the risk of liability claims. A
liability claim brought against us could harm our business. We may also be
subject to claims by clients for the actions of our consultants and employees
arising from damages to clients' business or otherwise, or clients may demand a
reduction in fees because of dissatisfaction with our services.
In particular, we are currently a defendant in litigation brought by the
bankruptcy trustee of a former client. This litigation seeks to recover at least
$1.85 million for breach of contract, breach of fiduciary duties and negligence.
In addition, this litigation seeks to recover $320,000 in
consulting fees paid by the former client.
THE MARKET PRICE OF OUR COMMON STOCK IS VOLATILE, AND INVESTORS MAY EXPERIENCE
INVESTMENT LOSSES
The market price of our common stock is volatile and has declined significantly
from its initial public offering price. Our stock price could continue to
decline or fluctuate in response to a variety of factors, including:
- - variations in quarterly operating results;
- - announcements of technological innovations that render talent outdated;
- - future trends in the communications industry;
- - acquisitions or strategic alliances by the Company or others in the industry;
- - failure to achieve financial analysts' or other estimates of results of
operations for any fiscal period;
- - changes in estimates of performance or recommendations by financial analysts;
- - any further reduction in our revenues or profits during 2002 and future years;
and
- - continuing adverse market conditions in the communications industry and the
economy as a whole.
In addition, the stock market itself experiences significant price and volume
fluctuations. These fluctuations particularly affect the market prices of the
securities of many high technology and communications companies. Our stock price
tends to track the stock price of communications companies, which declined
substantially in 2001 and 2002 and may continue to do so. These broad market
fluctuations could continue to harm the market price of our common stock. If the
market price of our common stock continues to decline, the Company may risk
being delisted from the NASDAQ National Stock market on which it trades.
Additionally, due to the limited float of the Company's common stock, investors
may find their investment illiquid, and suffer losses.
OUR INABILITY TO PROTECT OUR INTELLECTUAL PROPERTY COULD HARM OUR COMPETITIVE
POSITION AND OUR FINANCIAL PERFORMANCE
Despite our efforts to protect proprietary rights from unauthorized use or
disclosure, parties, including former employees or consultants, may attempt to
disclose, obtain or use our solutions or technologies. The steps we have taken
may not prevent misappropriation of solutions or technologies, particularly in
foreign countries where laws or law enforcement practices may not protect
proprietary rights as fully as in the United States. Unauthorized disclosure of
our proprietary information could make our solutions and methodologies available
to others and harm our competitive position.
PRINCIPAL STOCKHOLDERS, EXECUTIVE OFFICERS AND DIRECTORS HAVE SUBSTANTIAL
CONTROL OVER OUR VOTING STOCK AND MAY MAKE DECISIONS THAT ARE NOT IN THE BEST
INTEREST OF OUR OTHER STOCKHOLDERS
Executive officers, directors and stockholders owning more than five percent of
our outstanding common stock (and their affiliates) own a majority of our
outstanding common stock. As a result, such persons, acting together, have the
ability to substantially influence all matters submitted to the stockholders for
approval (including the election and removal of directors and any merger,
consolidation or sale of all or substantially all of our assets) and to control
our management and affairs. Concentration of ownership of our common stock may
have the effect of delaying, deferring or preventing a change in control,
impeding a merger, consolidation, takeover or other business combination
involving us or discouraging a potential acquirer from making a tender offer or
otherwise attempting to obtain control of us, even if such a transaction would
be beneficial to our other stockholders.
WE USED TO BE TAXED UNDER SUBCHAPTER "S" OF THE INTERNAL REVENUE CODE, AND
CLAIMS OF TAXING AUTHORITIES RELATED TO PRIOR SUBCHAPTER "S" CORPORATION STATUS
COULD HARM US
From 1993 through 1998, we were taxed as a "pass-through" entity under
subchapter "S" of the Internal Revenue Code. Since February 1998, we have been
taxed under subchapter "C" of the Internal Revenue Code, which is applicable to
most corporations and treats the corporation as an entity that is separate and
distinct from its stockholders. If our tax returns for the years in which we
were a subchapter "S" corporation were to be audited by the Internal Revenue
Service or another taxing authority and an adverse determination was made during
the audit, we could be obligated to pay back taxes, interest and penalties. The
stockholders of our predecessor entity agreed, at the time we acquired our
predecessor, to indemnify us against negative tax consequences arising from our
prior "S" corporation status. However, this indemnity may not be sufficient to
cover claims made by the IRS or other taxing authorities, and any such claims
could result in additional costs and harm our financial performance.
WE MAY SEEK TO RAISE ADDITIONAL FUNDS, AND ADDITIONAL FUNDING MAY BE DILUTIVE TO
STOCKHOLDERS OR IMPOSE OPERATIONAL RESTRICTIONS
Any additional equity financing may be dilutive to our stockholders and debt
financing, if available, may involve restrictive covenants, which may limit our
operating flexibility with respect to certain business matters. If additional
funds are raised through the issuance of equity securities, the percentage
ownership of stockholders will be reduced. Our stockholders may also experience
additional dilution in net book value per share and any additional equity
securities may have rights, preferences and privileges senior to those of the
holders of our common stock.
ANTI-TAKEOVER PROVISIONS AND OUR RIGHT TO ISSUE PREFERRED STOCK COULD MAKE A
THIRD PARTY ACQUISITION DIFFICULT
Our certificate of incorporation, bylaws, and anti-takeover provisions of
Delaware law could make it more difficult for a third party to acquire control,
even if a change in control would be beneficial to stockholders. In addition,
our bylaws provide for a classified board, with board members serving staggered
three-year terms. The Delaware anti-takeover provisions and the existence of a
classified board could make it more difficult for a third party to acquire us.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not invest excess funds in derivative financial instruments or
other market rate sensitive instruments for the purpose of managing its foreign
currency exchange rate risk. The Company invests excess funds in short-term
investments, the yield of which is exposed to interest rate market risk.
The Company does not have material exposure to market related risks. Foreign
currency exchange rate risk may become material given U.S. dollar to foreign
currency exchange rate changes. This would be especially true if we experience
any significant increases in international engagements denominated in the local
currency of the Company's clients.
ITEM 4. CONTROLS AND PROCEDURES
A review and evaluation was performed by the Company's management, including the
Company's Chief Executive Officer (the "CEO") and Chief Financial Officer (the
"CFO"), of the effectiveness of the design and operation of the Company's
disclosure controls and procedures as of a date within 90 days prior to the
filing of this quarterly report. Based on that review and evaluation, the CEO
and CFO have concluded that the Company's current disclosure controls and
procedures, as designed and implemented, were effective. There have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect the Company's internal controls subsequent to the
date of their evaluation. There were no significant material weaknesses
identified in the course of such review and evaluation and, therefore, no
corrective measures were taken by the Company.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
TMNG has not been subject to any material new litigation or claims against the
Company since the time of TMNG's 10-K filing, dated March 29, 2002. For a
summary of litigation in which TMNG is currently involved, refer to TMNG's 10-K,
as filed with the Securities and Exchange Commission on March 29, 2002.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) Reports on Form 8-K
TMNG did not file any Reports on Form 8-K during the quarter ended September 28,
2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ RICHARD P. NESPOLA President, Chief Executive November 12, 2002
---------------------- Officer and Director
Richard P. Nespola (Principal executive officer)
/s/ DONALD E. KLUMB Chief Financial Officer and November 12, 2002
---------------------- Treasurer
Donald E. Klumb (Principal financial officer
and principal accounting
officer)
CERTIFICATIONS
I, Richard P. Nespola, President and Chief Executive Officer of The Management
Network Group, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Management
Network Group, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of the registrant's board of directors (or
persons performing the equivalent function):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 12, 2002
By: /s/ Richard P. Nespola
---------------------------------------
President and Chief Executive Officer
I, Donald E. Klumb, Chief Financial Officer and Treasurer of The Management
Network Group, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Management
Network Group, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of the registrant's board of directors (or
persons performing the equivalent function):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 12, 2002
By: /s/ Donald E. Klumb
---------------------------------------
Chief Financial Officer and Treasurer
In connection with this quarterly report on Form 10-Q of The Management Network
Group, Inc., I, Richard P. Nespola, President and Chief Executive Officer of the
registrant certify that:
1. this quarterly report fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. the information contained in this quarterly report fairly presents,
in all material respects, the financial condition and results of operations of
the registrant for and as of the end of such quarter.
Date: November 12, 2002
By: /s/ Richard P. Nespola
-----------------------------------------
President and Chief Executive Officer
In connection with this quarterly report on Form 10-Q of The Management Network
Group, Inc., I, Donald E. Klumb, Chief Financial Officer and Treasurer of the
registrant certify that:
1. this quarterly report fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. the information contained in this quarterly report fairly presents,
in all material respects, the financial condition and results of operations of
the registrant for and as of the end of such quarter.
Date: November 12, 2002
By: /s/ Donald E. Klumb
-----------------------------------------
Chief Financial Officer and Treasurer