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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 28, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________.
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 NUMBER)
7300 COLLEGE BOULEVARD,
SUITE 302, OVERLAND PARK, KANSAS 66210
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (913) 345-9315
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
COMMON STOCK (.001 PAR VALUE) NASDAQ NATIONAL MARKET
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE.
Indicate by check mark whether the Registrant (1) has filed all reports 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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). YES [ ] NO [X]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, as of March 24, 2003 was approximately $14.4 million. As of March
24, 2003, the Registrant had 33,346,626 shares of common stock, par value $0.001
per share (the Common Stock), issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information required to be provided in Part III (Items 10, 11, 12, and 13)
of this Annual Report on Form 10-K is hereby incorporated by reference from the
Company's Definitive 2003 Proxy Statement which will be filed with the
Securities and Exchange Commission within 120 days of the end of the Company's
fiscal year.
THE MANAGEMENT NETWORK GROUP, INC.
FORM 10-K
TABLE OF CONTENTS
PAGE
----
PART I
Item 1. Business.................................................... 3
Item 2. Property.................................................... 19
Item 3. Legal Proceedings........................................... 19
Item 4. Submission of Matters to a Vote of Security Holders......... 19
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 20
Item 6. Selected Consolidated Financial Data........................ 21
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 22
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 32
Item 8. Consolidated Financial Statements........................... 33
PART III
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.................................... 59
Item 10. Directors and Executive Officers of the Registrant.......... 59
Item 11. Executive Compensation...................................... 59
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 59
Item 13. Certain Relationships and Related Transactions.............. 60
Item 14. Controls and Procedures 60
Item 15. Exhibits, Financial Statement Schedules and Reports on
Form 8-K.................................................... 60
SIGNATURES............................................................ 61
PART I
ITEM 1. BUSINESS
GENERAL
Founded in 1990, The Management Network Group, Inc. ("TMNG" or "the Company"), a
Delaware corporation, is a leader in consulting to the communications industry,
providing strategy, management, marketing, operational, and technology
consulting services primarily to communications service providers, technology
companies and financial services firms located principally in North America and
Western Europe. Historically, in addition to North America and Western Europe,
TMNG has provided consulting services to clients in almost all other major
international markets. TMNG believes it is unique in its ability to provide a
comprehensive business solution to the communications industry, including
strategy consulting and business planning, product/service definition and
launch, customer acquisition and retention, business model transformation,
technical support and process modeling for business support systems (BSS) and
operations support systems (OSS). TMNG has consulting experience with almost all
major aspects of managing a global communications company. In addition, TMNG
provides marketing consulting services to clients outside of the communications
industry, primarily in the Eastern Region of the United States (Mid-Atlantic)
and is a Value Added Reseller (VAR) and Integrated Partner of mainly Hewlett-
Packard hardware to both the communications industry as well as other industry
segments in the United States.
From its inception to mid-fiscal year 2000, TMNG was a provider of a
comprehensive range of services to the global communications industry with
significant focus and emphasis on management and operational consulting
services. During fiscal year 2000 the Company identified early leading
indicators of the market downturn in the communications industry (See "Market
Overview" in Item 1. for an additional discussion of market changes) and began
the process of strategically repositioning the Company's service offering to
incorporate greater emphasis on strategy and marketing consulting. The Company
broadened its focus and emphasis to include not only management and operational
consulting but also strategy and marketing to enable the Company to deliver
best-in-class solutions to its communication service provider clients. To
accomplish this transformation, the Company looked to increase the breadth of
its employee work base, hiring consultants of increasingly diverse backgrounds
with various technical competencies, and began an acquisition strategy to
acquire consulting companies whose offerings complemented, expanded and deepened
the offerings historically provided by TMNG. Key acquisitions completed by TMNG
during fiscal 2000 to fiscal 2002 included Cambridge Strategic Management Group,
Inc. (now "TMNG Strategy"), The Weathersby Group, Inc. (now "TMNG Marketing")
and Tri-Com Computer Services, Inc. (now "TMNG Technologies"). These businesses
focused primarily on strategy, new product launch initiatives, customer
acquisition and retention, and technology consulting to the global
communications industry. The Company believes these acquisitions have expanded
key client relationships, have positioned TMNG uniquely in the market to
effectively serve today's needs of large global communication service providers,
and have provided an expansion of key direct distribution channel
elements to TMNG.
As TMNG focuses on communication service providers, it has leveraged and learned
from the providers and built offerings to software and technology companies and
investment banking and private equity firms that
invest in and serve the communications industry. Historically the Company's
services to software and technology firms have included strategy definition,
product offering positioning, application development, assistance in responding
to requests for proposals, and implementing solutions within the service
provider environment. Services to the investment banking and private banking
community have included prospect validation and due diligence. Recently, with
the market downturn (see "Market Overview" in Item 1) TMNG has expanded
partnering relations and its offerings. Partnering has better enabled the
Company to serve large clients in what has become a shrinking marketplace. TMNG
provides its partners with contacts and depth of knowledge and experience in
serving the industry, and the partnerships enable TMNG to provide more
comprehensive offerings and solutions that effectively compete with other global
consultancies. Such partnerships have expanded our relationships with off-shore
development firms located primarily in the Asian market that provide high
quality, low cost solutions to the industry. In addition, the Company recently
introduced its offering of managed services and business process outsourcing
(BPO) to banks who hold investments in the sector and to global outsourcing
organizations to provide domain expertise and business process outsourcing
models to facilitate service level agreements and cost reduction initiatives.
The Company is expanding its service offerings and is providing communications
consulting expertise to new and growing organizations with increasing demand.
The Company invested significantly in wireless expertise in fiscal 2002,
including a strategic partnership with inCode Telecom Group, and construction of
a wireless next generation laboratory located in La Jolla, California. In 2003,
the Company looks to the laboratory to assist in the creation of service
offerings to the wireless marketplace. In 2002, the Company also obtained a
Government Services Authorization (GSA) which enables the Company to provide
consulting services to the Federal government. The Company has recruited
personnel with expertise in building a government consultancy and looks to
develop and launch offerings to the Federal government in fiscal 2003. Finally,
the Company has recruited executives with expertise and relationships serving
the rural local exchange carrier (RLEC) market in 2002 and is building presence
and market share in that industry segment of communications service providers.
The Company continues to capitalize on its industry expertise by refreshing
existing proprietary toolsets and building new toolsets to enable it to provide
strategic, management, marketing, operational, and technology support to
clients. TMNG's toolsets are consulting guidelines, processes and benchmarks
created and updated by TMNG consultants based on their experience over many
consulting engagements. These toolsets assist clients to improve productivity,
gain competitive advantage, reduce time to market and market entry risk, and
increase revenues and profits. TMNG's services are provided by a team comprised
of senior professionals recruited from prestigious university campuses
complemented by teams of consultants from the communications industry averaging
15 years of experience.
The Company maintains a unique technology agnostic and vendor neutral position
to make unbiased evaluations and recommendations that are based on a thorough
knowledge of each solution and each client's situation. Therefore, TMNG is able
to capitalize on extensive experience across complex multi-technology
communications systems environments to provide the most sound and practical
recommendations to clients.
MARKET OVERVIEW
The demand for consulting services increased throughout the 1990's, and this
trend was especially prevalent for consulting services of communications and
e-commerce consulting firms. The key contributor to this was the significant
projected growth of the internet and e-commerce which stimulated capital
investment into new and existing wireline communications providers, enabling
their investment in new network technology and the creation of new broadband
market offerings. Investment was further accelerated through global deregulation
of the communications industry throughout the 1990's. The deregulation of the
communications industry resulted in increased competition by the creation of:
increased demand for fiber and capacity by the new market entrants; a massive
influx of capital to fund carrier entrants and allow existing firms to purchase
aggressively from one another as they expanded; rapid internet growth, spurring
broadband internet access services, digital subscriber line (DSL) internet
access and unbundled local loops that forged the way for wholesale DSL business
models; and technological innovations, allowing new service offerings in the
areas of voice, data, video and content.
Similarly, significant investment was made in the wireless communications
industry which was experiencing tremendous growth as a growing percentage of
voice communications were migrating to
wireless networks and devices. In addition, the personal communications services
(PCS) auctions in the United States and universal mobile telecommunications
system (UMTS) broadband spectrum auctions in Europe resulted in new providers,
additional services, and improved technology. Customer penetration resulted in
both residential and business customers, and services were expanded to include
wireless data offerings primarily in Europe and Asia.
By mid-2000, following the first announcements of disappointing financial
performance by wireline and wireless communication service providers and their
vendors, it became apparent that the rate of investment and adoption was far
exceeding the expected rate of consumption in e-commerce and broadband
offerings. The massive inflow of capital in communications during the 1990's
resulted in an inflated market scenario, where once solid business models were
now ill-equipped to function and adjust to the macroeconomic environment. The
cycle was further perpetuated by the over saturation of new market entrants
where supply far exceeded levels sustainable by the market, creating pressure
for consolidation and funding contraction. As a result, the industry experienced
a significant number of bankruptcies and layoffs in excess of half a million
individuals in the United States alone. Because the communications companies
often purchased services from one another, the bankruptcies led to a vicious
cycle of industry-wide destabilization with each successive bankruptcy
jeopardizing another company's liquidity position.
The industry experienced further instability during 2002 due to government
investigations into the accounting practices of several large communications
providers that revealed the perpetuation of accounting improprieties, including
the material overstatement of revenues and the understatement of expenses. Such
inquiries have resulted in ongoing restatements of previously reported financial
statements, resulting in additional destabilization within the industry, and
eroding investors' confidence.
As the macroeconomic forces discussed above continue to destabilize the
communications industry, outside consulting services for communications have
been negatively impacted, including ours. Communications companies have
continued to reduce their demand for external consultants, seeking instead to
utilize more internal resources, or in some cases delayed capital and operating
expenditures related to the launch of new products and services, particularly
in networks and technology. This has resulted in a continued substantial decline
in our revenue and profits during 2001 and 2002 (See Item 1, "Risk Factors" and
Item 7, "Management's Discussion and Analysis").
Today, the communications industry has reached a point where bankruptcies and
market consolidations have resulted in fewer market participants with less
capitalization. The remaining companies have an opportunity to reposition and
increase their market share, however they will be competing with other
survivors, who are comparable global providers. As the capital markets have not
been accessible, companies have focused on improved capital utilization,
maximization of their return on investment, and the uniqueness of their product
offerings.
As TMNG enters fiscal 2003, we believe the large global communications companies
will continue to cut costs, but will begin to fund select investment
opportunities. During 2002, we began to see the emergence of several large
carriers from bankruptcy reorganizations with solid balance sheets and business
case models that better prepare them to compete in the communications arena.
Wireline and wireless providers will be strategically focused on the following
key initiatives, with priority depending upon present position and state of the
company: Launching new products with focus on enterprise customers and broadband
offerings; cost cutting through outsourcing on non-critical activities; bundling
of product offering; improving the customer experience and minimizing churn; and
maximizing invested network efficiencies. It is also expected that further
market consolidation will occur over the next few years. It is our belief that
the regulatory environment will also continue to play a key factor in the
strategy and operations of communications providers. Most notably, on February
20, 2003, the Federal Communications Commission ("FCC") voted to preserve
competition for local phone service by continuing to require regional bell
operating companies ("RBOCs") to resell to other carriers at wholesale rates,
while deregulating broadband and encouraging new investment, in the backdrop of
strengthening the roles of the states in promoting local competition and
protecting customers. We believe the effect of this ruling will continue to
provide unique opportunities and challenges for the communications companies and
the companies providing service to them.
We expect demand for consulting services over the next decade to be
differentiated compared to the past, with increased outsourced BPO service
opportunities, the increasing presence of offshore technology partners due to
price advantage, and the need for existing management consultancies to provide
solutions to communications industry challenges. As discussed in Item 1.
"Business - General," TMNG has invested significantly to enable the Company to
provide such services.
It has been our experience that because the expertise needed by communications
companies to address the market's needs is typically outside their core
competencies, they must either recruit and employ experts or retain outside
specialists. We believe due to the range of expertise required and the time
associated with hiring and training new personnel, bringing expertise in-house
is often not a viable option. When retaining outside specialists, communications
companies need experts that fully understand the communications industry and can
provide timely and unbiased advice and recommendations. We intend to continue
responding to that need.
BUSINESS STRATEGY
The Company's objective is to establish itself as the consulting company of
choice to communications service providers, technology companies, and financial
services and investment banking firms. The following are key strategies the
Company has adopted to pursue this objective.
- - Develop offerings/solutions and thought leadership
The Company plans to continue expanding its end-to-end solutions offerings, both
by organic expansion and/or through acquisitions. Organic expansion involves
launching new products and services and generating revenues through offerings
jointly developed by the Company and its acquired companies. Organic expansion
will also focus on offerings geared towards increasing clients' efficiencies.
The Company expanded its offerings through the acquisition of TMNG Marketing in
late 2000. TMNG Marketing provides a full spectrum of marketing consulting
services, including product development, churn management and market research,
that takes clients from the point of product definition to customer acquisition
and retention. In 2001, the Company acquired TMNG Technologies. TMNG
Technologies provides end-to-end OSS, data center, systems solutions, data
sourcing, legacy integration and middleware implementation. Additionally, in
March 2002, TMNG acquired TMNG Strategy. This newest acquisition provides a wide
range of business strategy services including 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 Company plans to continue extending its product offerings to the
communications industry. We believe wireline and wireless providers will be
strategically focused on the following key initiatives, with priority depending
upon present position and state of the company: Launching new products with
focus on enterprise customers and broadband offerings; cost cutting through
outsourcing of non-critical activities; bundling of product offerings; improving
the customer experience and minimizing churn; and maximizing invested network
efficiencies.
- - Continue to build the TMNG brand
The Company plans to continue building and communicating the TMNG brand, further
positioning the Company as the consultancy of choice for the global
communications industry. Direct marketing efforts and other marketing
initiatives are underway to continue building awareness of TMNG and
communicating our key strengths, including our uniquely high level of
experienced consultants, our focus on the global communication industry, our
end-to-end solution and our commitment to bringing clients a positive return on
their investment. Each of the acquisitions by the Company are also being
rebranded under the TMNG label.
- - Focused and effective retention and recruitment
TMNG plans to further enhance its business model to accommodate the anticipated
types of consulting services as a result of revolutionary change occurring
within the communications sector. One key element of the business model includes
attracting and retaining high quality, experienced consultants. In the current
economic environment, the Company's two primary challenges in the recruitment of
new consulting personnel are the ability to recruit talented personnel into a
market that is significantly depressed and the ability to execute such
recruitment with an appropriate compensation arrangement.
The Company reinvigorates existing skill sets of its consultants with
proprietary toolsets that provide methodologies they use to augment their
experience and help analyze and solve clients' problems. TMNG utilizes a network
of eRooms to serve as a knowledge base, enabling consultant collaboration on
engagements and providing support information and updates of TMNG current
toolsets and releases of next generation tools. Finally, the Company continues
to manage its flexible and unique employee and independent subject matter expert
model to maximize skill set offerings, while minimizing the effect of unbillable
consultant time.
- - Maintaining a global presence
The Company plans to maintain presence globally to deliver services and solution
capabilities to client companies located around the world. Especially in Western
Europe, we believe the competitive market expertise of TMNG's U.S. consultants
can be a key factor for foreign companies facing the business issues associated
with deregulation and competition.
- - Building a comprehensive wireless offering
TMNG has completed engagements with wireless clients in the U.S., Europe, Latin
America, Asia and the Middle East. Our services have included business and
strategic planning, product development, customer acquisition and retention,
business and operations process design and reengineering, revenue and cost
management and network planning.
TMNG in association with our strategic partner, inCode Telecom Group, has
developed a technology laboratory to enable advances in wireless technology. The
Wireless Technology Lab (WTL), located in La Jolla, California, is a center for
testing and demonstrating advanced wireless equipment and software. It also
serves as a neutral location for application development. The WTL is the first
independent facility to provide a vendor and technology-neutral, real-world
testing ground for next-generation wireless technologies. In 2003, the Company
looks to the laboratory to assist in the creation of service offerings to the
wireless marketplace.
- - Leveraging knowledge and skills to new opportunities
The Company is expanding its service offerings and is providing communications
consulting expertise to new and growing organizations with increasing demand. In
2002, the Company obtained a Government Services Authorization (GSA) which
enables the Company to provide consulting services to the Federal government.
The Company has recruited personnel with expertise in building a government
consultancy and looks to develop and launch offerings to the Federal government
in fiscal 2003. In addition, the Company has recruited executives with expertise
and relationships serving the incumbent local exchange carrier (ILEC) market in
2002 and is building presence and market share in that industry segment of
communications service providers.
SERVICES
TMNG provides a full range of strategic, marketing, operations and technology
consulting services to the communications industry. Services provided include:
- - Strategy and Business Case Development
TMNG provides comprehensive strategic analysis to service providers, equipment
manufacturers and
financial investors in the communications industry. Our approach combines
rigorous qualitative and quantitative analyses with our detailed understanding
of industry trends, technologies, and developments. We provide clients with
specific solutions to their key strategic issues relating to their existing
business as well as new product and service opportunities. TMNG's services
include business case development, data and content strategies, marketing
spending optimization, service and brand diversification, enterprise and small
business strategies, technology commercialization and operational strategies.
- - Product Development and Management
TMNG offers global communications service providers the benefit of its hands-on
experience developing and launching new products and services for some of
today's industry leaders. Our product development approach includes market
assessments, product/service definition, business requirements definition,
project management, testing and release. TMNG also helps communication clients
by evaluating the profitability of existing product and service offerings to
identify opportunities to consolidate, de-emphasize or decommission offerings to
improve clients' overall profitability.
- - Customer Acquisition and Retention
TMNG has developed and implemented acquisition and retention strategies for
clients in the communications industry. TMNG's consultants are skilled in the
areas of target market segmentation, campaign management and sales-process
management. Our strategies take into account the needs and preferences of the
target market and include a mix of marketing communications, partner programs,
e-marketing, direct sales, telemarketing, direct response and loyalty and
retention programs.
- - Revenue and Cost Management
TMNG is dedicated to helping clients uncover and recover missed opportunities at
every stage along the revenue life cycle and reduce the costs associated with
managing business functions. TMNG's approach to revenue and cost management
centers around operational assessment, process improvement, organizational
restructuring, and continuous improvement. Our consultants utilize their
industry expertise and our proprietary TMNG QBC(R) (Quality Business Controls)
toolset to deliver quantifiable benefits to our clients.
- - Business and Operations Process Redesign and Reengineering
TMNG provides clients with efficient, integrated business and operational
processes, supporting technology systems and web-centric interfaces across all
OSS/BSS applications. We take clients from the point of customer acquisition to
provisioning all the way through to billing, collections and accounts-receivable
management--to cash and profits in the bank. TMNG process redesign and
reengineering expertise is put to use not only for our clients, but in our
Wireless Technology Lab where we're working with our partners to develop and
test leading edge wireless applications.
- - Corporate Investment Services
The Company provides a wide range of corporate investment services to
investment/private equity firms in connection with investments and mergers and
acquisitions in the communications industry. Services include evaluation of
management teams and business plans, identification of strengths and weakness of
the company, and analyses of the company's financial models, systems, products
and operational and business processes. Post-investment support is also provided
to help customers in the optimization of their investment. The Company's
Operational Performance Appraisal (OPA(TM)) features an assessment of
communications companies' revenue assurance, network inventory, network
operations, order management and provisioning, disaster recovery planning and
e-commerce operations and products. The appraisal seeks to help companies
optimize asset utilization, including network assets and inventory. In addition,
OPA seeks to maximize revenue and minimize associated costs and determine if the
provider's customers are being served effectively.
COMPETITION
The market for communications consulting services is highly fragmented and
changing rapidly. TMNG faces competition from major business and strategy
consulting firms, large systems integration and major global outsourcing firms,
offshore development firms from the Asian markets, equipment and software firms
that have added service offerings, and customers' internal resources. Recently,
there has been a significant increase in demand for firms that can bundle
business process outsourcing (BPO) with systems and
technical integration. Many of these competitors are large organizations that
provide a broad range of services to companies in many industries, including the
communications industry. Many of these competitors have significantly greater
financial, technical and marketing resources and greater name recognition than
TMNG. TMNG believes it has a competitive advantage due to its single focus on
the communications industry, and the comprehensive offerings it provides to its
customers. TMNG also believes the complementary experience and expertise of its
professionals represents a competitive advantage. TMNG's consulting team is
comprised of senior professionals recruited from prestigious university campuses
complemented by teams of consultants from the communications industry averaging
15 years of experience.
The Company has faced, and expects to continue to face, additional competition
from new entrants into the communications consulting markets. The Company has
also experienced increased price competition, particularly from large Asian
firms providing technical support and outsourcing and other large firms that
have the financial resources to aggressively price engagements that they have a
particular interest in obtaining. Increased competition could result in further
price reductions, fewer client projects, underutilization of consultants,
reduced operating margins, and loss of market share.
With the communications industry experiencing significant economic challenge,
contraction and consolidation, we believe our principal competitive factor is
our continual focus on the communications industry and the ability to develop
and provision solutions that enhance client revenue and asset utilization and
provide return on investment. In a down economic environment, our biggest
competitor is the customer's internal resources. As a result, the most
significant competitive advantage becomes long-lived relationships with key
client executives that have developed over time from consistency in
responsiveness to their needs, quality and reliability of consultants and
deliverables, and an appropriate price/value formula.
EMPLOYEES
TMNG's ability to recruit and retain experienced, highly qualified and highly
motivated personnel has contributed greatly to the Company's historical success
and will be critical in the future. The Company offers a flexible recruiting
model that enhances the ability to attract consultants and to effectively manage
utilization. TMNG's consultants may work as employees, independent subject
matter experts or as contingent employees. Contingent employees receive
company-paid medical insurance, vacation and other employee benefits. Instead of
receiving a regular salary, however, contingent employees will only be paid for
time spent working on consulting projects for customers or working on internal
projects. Generally, TMNG will offer contingent employment to independent
subject matter experts who are frequently subcontracted into consulting
projects, and have a skill set/offering that is in high demand. TMNG's current
base of independent subject matter experts have specialized expertise in
discrete areas of communications, and TMNG typically deploys these resources
only when their unique expertise/offering is required.
As of December 28, 2002, TMNG utilized approximately 227 consultants. Of these,
125 were employee consultants and approximately 102 were working on engagements
for TMNG as independent subject matter experts. In addition to the consultants,
TMNG has an administrative staff of approximately 32 employees in the accounting
and finance, marketing, recruiting, information technology, human resources and
administrative areas.
BUSINESS SEGMENTS
Based on an analysis of the criteria in SFAS No. 131 "Disclosure about Segments
of an Enterprise and Related Information" the Company has concluded it has five
operating segments, of which four are aggregated in one reportable segment, the
Management Consulting Services segment, and the remaining segment in All Other.
Management Consulting Services include business strategy and planning,
product/service definition and launch, customer acquisition and retention,
business model transformation, and technical and process modeling for BSS and
OSS environments. All Other consists of computer hardware commissions and
rebates received in connection with the procurement of hardware for third
parties. The accounting policies for the segments are documented in the summary
of significant accounting policies under Item 8, Footnote 1 "Organization and
Summary of Significant Accounting Policies." Management evaluates segment
performance based upon Income (Loss) from Operations, excluding equity related
charges, goodwill and intangibles amortization, and goodwill impairment.
Management also evaluates trade accounts receivable as part of its overall
assessment of the segments' performance. There are no intersegment sales.
Revenues from external customers, a measurement of profit or loss and total
assets for each segment are disclosed in Item 8, Notes to Consolidated Financial
Statements, Footnote 5 "Major Customers, Business Segments and Significant Group
Concentrations of Credit Risk."
MAJOR CUSTOMERS
As of December 28, 2002, TMNG has provided services to approximately 600
domestic and international customers, primarily communication service providers
and large technology and applications firms ("TMNG Partners") serving the
communications industry. The Company depends on a small number of key customers
for a significant portion of revenues. For fiscal year 2002, revenues from
Verizon Communications, Inc. and AT&T Corporation each accounted for more than
10 percent of revenues, and in the aggregate accounted for more than 29.6% of
revenues. Also during fiscal year 2002, our top ten customers accounted for
approximately 67.0% of total revenue. TMNG generally provides discounted pricing
for large projects on fixed commitments with long-term customers. Because TMNG's
clients typically engage services on a project basis, their needs for services
vary substantially from period to period. TMNG continues to concentrate on large
wireline and wireless global communications companies headquartered principally
in North America and Western Europe and seeks to offer broad and diversified
services to these customers. The Company anticipates that operating results will
continue to depend on volume services to a relatively small number of
communication service providers and technology vendors. The Company anticipates
increased market demand for bundled business process and technical outsourcing
which the Company and its TMNG Partners have formalized agreements to provide.
In addition, the Company provides marketing consulting across multiple business
verticals, primarily on the East Coast of the United States. TMNG Technologies
operates as a value-added reseller of hardware technology to both communications
and non-communications related clientele.
INTELLECTUAL PROPERTY
TMNG's success is dependent, in part, upon proprietary processes and
methodologies, and the Company relies upon a combination of copyright, trade
secret, and trademark law to protect intellectual property. Additionally,
employees and consultants are required to sign non-disclosure agreements to
assist the Company in protecting its intellectual property. The Company has
obtained federal registration for fourteen trademarks and one copyright in the
United States and has filed applications to register six other marks in the
United States. It is possible that third parties may challenge TMNG trademark
applications.
The Company does not have any patent protection for the proprietary
methodologies used by TMNG consultants. TMNG does not currently anticipate
applying for patent protection for these toolsets and methodologies.
SEASONALITY
In the past, the Company has experienced seasonal fluctuations in revenue in the
fourth quarter due primarily to the fewer number of business days because of the
holiday periods occurring in that quarter. The Company may continue to
experience fluctuations in revenue in the fourth quarter and may experience
fluctuations in summer and other vacation periods as the Company expands
internationally.
WEBSITE ACCESS TO EXCHANGE ACT REPORTS
Our Internet website address is www.tmng.com. We make available free of charge
through our website our annual reports on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K, and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as
reasonably practicable after we electronically file such material with, or
furnish it to the SEC.
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 Annual Report on Form 10-K 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
CONTINUES TO EXPERIENCE 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,
DECLINING REVENUES, LOSSES FROM OPERATIONS AND A DECLINE IN OUR STOCK PRICE, AND
COULD CONTINUE TO HARM OUR BUSINESS. IF CONDITIONS IN THE COMMUNICATIONS
INDUSTRY DO NOT IMPROVE IN THE NEAR FUTURE, OUR FINANCIAL POSITION MAY CONTINUE
TO BE DIMINISHED, OUR LIQUIDITY MAY BECOME IMPAIRED AND FUNDING FROM THE CAPITAL
MARKETS MAY NOT BE AVAILABLE
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 fourth 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, results of operations, liquidity and ability to make acquisitions and
raise investment capital.
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 or type 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.
Additionally, fixed and contingent fee contracts entail subjective judgments and
estimates about revenue recognition and are subject to uncertainties and
contingencies. For a more complete discussion of the Company's accounting for
revenue recognition, see "Critical Accounting Policies" included in Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
ANY CONTINUING DECREASE IN CURRENT AND PROJECTED REVENUES MAY RESULT IN
ADDITIONAL ASSET IMPAIRMENTS AND NEGATIVELY IMPACT INCOME FROM OPERATIONS
As part of our business strategy we have made and may continue to make
acquisitions. As a result, goodwill and intangible assets constitute an
increasing amount of the assets reported on our balance sheet. The Financial
Accounting Standards Board (FASB) has issued Statement of Financial Accounting
Standards ("SFAS") No. 142 "Accounting for Goodwill and Intangible Assets." SFAS
No. 142 requires an annual evaluation of goodwill to determine if an impairment
of goodwill has occurred. The evaluation involves calculating enterprise fair
value, which may be based on a number of analyses, including a discounted cash
flow projection of future financial results. Estimated fair values are then
compared to the total recorded
book value to determine if an impairment of goodwill is deemed to have occurred.
If an impairment of goodwill is deemed to have occurred, this would 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
in connection with the initial adoption of the Statement, and subsequently
recorded a charge of approximately $25.2 million in the fourth quarter of 2002
in connection with the annual test required by the Statement. If we are not able
to achieve projected future operating performance and related cash flows, these
intangible assets may become further impaired, and the resulting asset
impairment would be charged to operating income.
WE HAVE GENERATED SIGNIFICANT DEFERRED INCOME TAX ASSETS AND IF WE ARE NOT ABLE
TO GENERATE SUFFICIENT TAXABLE INCOME IN FUTURE PERIODS, WE MAY NOT BE ABLE TO
REALIZE THE INCOME TAX BENEFITS RELATED TO THOSE ASSETS
We have generated substantial deferred tax assets primarily from the accelerated
financial statement write-off of goodwill and the charge to compensation expense
taken related to stock options. For the Company to realize the income tax
benefit of these assets, it must generate sufficient taxable income in future
periods when such deductions are allowed for income tax purposes. If the Company
is unable to generate sufficient taxable income in future periods, these income
tax assets would become impaired and the impairment charged against net 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 may 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
condition.
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 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 strategy and
management consulting firms and major global outsourcing firms like
International Business Machines Corporation (IBM), Electronic Data Systems
Corporation (EDS) and Computer Sciences Corporation (CSC), which have become
more significant competitors recently due to the outsource of certain business
support system (BSS) and operating support system (OSS) operations, and large
technical firms from the Asian markets, like Infosys Technologies, Ltd. that
provide significant cost advantage. 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:
- - Accenture;
- - Booz-Allen & Hamilton;
- - Cap Gemini Ernst & Young;
- - IBM;
- - Infosys Technologies, Ltd.; 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 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.
IF WE ARE NOT ABLE TO EFFECTIVELY RECRUIT AND RETAIN MANAGEMENT AND
CONSULTING PERSONNEL THAT PROVIDE THE COMPANY WITH NEW TALENT SETS ENABLING THE
IMPLEMENTATION OF NEW STRATEGIC OFFERINGS IN A RAPIDLY CHANGING MARKET, THE
COMPANY'S FINANCIAL PERFORMANCE MAY BE NEGATIVELY IMPACTED.
The Company may face two critical challenges in the recruitment of new
management personnel. The first is the ability to recruit talented management
personnel into a market that is significantly depressed, and the second is the
ability to execute such recruitment with an appropriate compensation
arrangement. If we are not able to effectively recruit within the construct of
these two challenges, the financial performance of the Company may be negatively
affected.
We must attract new consultants to implement strategic 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 strategic 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.
IF INTERNATIONAL BUSINESS VOLUMES WOULD INCREASE, WE MAY BE EXPOSED TO A NUMBER
OF BUSINESS AND ECONOMIC RISKS, WHICH COULD RESULT IN INCREASED EXPENSES AND
DECLINING PROFITABILITY
If TMNG's international business volume increases, business and economic risks
it may face include:
- - unfavorable foreign currency exchange;
- - difficulties in staffing and managing foreign operations;
- - seasonal reductions in business activity;
- - 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;
- - the impact of foreign laws, regulations, taxes and trade customs;
- - 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, including the potential impact of
terrorist attack or international
hostilities; and
- - expropriations of assets, including bank accounts, intellectual property and
physical assets by foreign governments.
In addition, 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.
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 any executive officer, 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. This may increasingly be the case
with any further consolidation or contraction in the industry.
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 2003 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 have declined
substantially 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. The recent decline in our
overall market capitalization may also discourage analysts and investors from
following the Company. 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
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. If all such persons acted together, they would have
the ability to control 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. Our officers and directors have a fiduciary
duty to act in the best interest of our shareholders.
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, if available, 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, our stockholders may experience dilution in the voting power or net
book value per share of our stock, 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.
WE MUST DOCUMENT AND MAINTAIN ADEQUATE SYSTEMS AND PROCEDURES TO COMPLY WITH
RECENT LEGAL REFORMS
Recent legal reforms, including the Sarbanes-Oxley Act and related SEC rules,
have created new responsibilities for public company officers and directors. Our
ability to comply with these new laws and regulations will depend on our ability
to document and maintain effective systems and procedures, but we cannot assure
that our systems and procedures will always be adequate for this purpose.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS
For information about foreign and domestic operations, see Item 8, Notes to
Consolidated Financial Statements, Footnote 5 "Major Customers, Business
Customers and Significant Concentrations of Group Credit Risk."
ITEM 2. PROPERTY
The Company's principal executive offices are located in a 4,305 square foot
facility in Overland Park, Kansas. This facility houses the executive, corporate
and administrative offices and is under a lease which expires in August 2005. In
addition to the executive offices, the Company also leases an 8,175 square foot
facility in Bethesda, Maryland for its TMNG Marketing and TMNG Technology
subsidiaries, and a 21,710 square foot facility in Boston, Massachusetts
acquired in the transaction with Cambridge Strategic Management Group, Inc.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in legal proceedings and litigation arising in the
ordinary course of business. In addition, customer bankruptcies could result in
a claim on collected balances for professional services near the bankruptcy
filing date. While resolution of legal proceedings, claims and litigation 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.
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 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 the
Company 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.
In 2002 the Company received demands of approximately $1.2 million by the
bankruptcy trustees of several former clients in connection with collected
balances near the customers' respective bankruptcy filing dates. Although the
Company does not believe it received any preference payments from these former
clients and plans to vigorously defend its position, the Company has established
reserves of $886,000 which it believes are adequate in the event of loss or
settlement on such claims.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 2002.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
TMNG's Common Stock is quoted on the Nasdaq National Market under the symbol
TMNG. The high and low closing price per share for the Common Stock for the
fiscal years ending December 28, 2002 and December 29, 2001 by quarter were as
follows:
High Low
First quarter, fiscal year 2002 $ 7.00 $ 4.51
Second quarter, fiscal year 2002 $ 5.38 $ 1.90
Third quarter, fiscal year 2002 $ 2.12 $ 1.12
Fourth quarter fiscal year 2002 $ 2.08 $ 1.27
High Low
First quarter, fiscal year 2001 $14.19 $ 4.50
Second quarter, fiscal year 2001 $ 7.38 $ 3.10
Third quarter, fiscal year 2001 $ 6.97 $ 4.86
Fourth quarter, fiscal year 2001 $ 7.20 $ 5.65
The above information reflects inter-dealer prices, without retail mark-up,
mark-down or commissions and may not necessarily represent actual transactions.
As of March 24, 2003 the closing price of our Common Stock was $1.25 per share.
At such date, there were approximately 162 holders of record of the Company's
Common Stock.
Holders of Common Stock are entitled to receive ratably such dividends, if any,
as may be declared by the Board of Directors out of funds legally available
therefor. To date, TMNG has not paid any cash dividends on its Common Stock and
does not expect to declare or pay any cash or other dividends in the foreseeable
future.
EQUITY COMPENSATION PLAN INFORMATION
(c)
NUMBER OF SECURITIES
(a) REMAINING AVAILABLE
NUMBER OF (b) FOR FUTURE ISSUANCE
SECURITIES TO BE ISSUED WEIGHTED AVERAGE UNDER EQUITY COMPENSATION
UPON EXERCISE OF EXERCISE PRICE OF PLANS (EXCLUDING SECURITIES
OUTSTANDING OPTIONS OUTSTANDING OPTIONS REFLECTED IN COLUMN (a))
PLANS APPROVED BY SECURITY HOLDERS
- - 1998 Equity Incentive Plan 3,911,795 $ 7.47 1,516,895
PLANS NOT APPROVED BY SECURITY HOLDERS
- - 2000 Supplemental Stock Plan 2,235,763 $ 4.63 1,651,862
For an additional discussion of the Company's equity compensation plans, see
Item 8, Notes to Consolidated Financial Statements, Footnote 9 "Stock Option
Plan and Stock Based Compensation."
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below have been derived from
the Company's consolidated financial statements. The data presented below should
be read in conjunction with Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations, Item 8, Consolidated Financial
Statements and the notes thereto and other financial information appearing
elsewhere in this Annual Report on Form 10-K.
FISCAL YEAR ENDED
-------------------------------------------------------------------------
January 2, January 1, December 30, December 29, December 28,
1999 2000 2000 2001 2002
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues ............................................ $ 32,103 $ 50,322 $ 77,727 $ 54,832 $ 34,595
Cost of services:
Direct cost of services ........................... 17,411 26,109 40,396 27,347 16,855
Equity related charges ............................ 239 2,780 5,519 2,322 721
-------- -------- -------- -------- --------
Total cost of services .................... 17,650 28,889 45,915 29,669 17,576
-------- -------- -------- -------- --------
Gross profit ........................................ 14,453 21,433 31,812 25,163 17,019
Operating expenses:
Selling, general and administrative expenses ...... 6,158 9,777 16,024 16,767 23,971
Equity related charges ............................ 22 1,998 1,564 843 353
Goodwill and intangibles amortization ............. 621 1,996 2,887
Goodwill impairment 25,165
-------- -------- -------- -------- --------
Total operating expenses .................. 6,180 11,775 18,209 19,606 52,376
-------- -------- -------- -------- --------
Income (loss) from operations ....................... 8,273 9,658 13,603 5,557 (35,357)
Other income (expense):
Interest income ................................... 18 277 3,327 2,433 996
Interest expense .................................. (2,054) (1,998) (14) (63)
Other, net ........................................ 88 (68) (152) (8) 26
-------- -------- -------- -------- --------
Total other income (expense) .............. (1,948) (1,789) 3,175 2,411 959
Income (loss) before income tax provision (benefit),
extraordinary item and cumulative effect of a change
in accounting principle ........................... 6,325 7,869 16,778 7,968 (34,398)
Income tax (provision) benefit ...................... (3,282) (3,208) (6,711) (2,360) 12,135
-------- -------- -------- -------- --------
Income (loss) before extraordinary item and
cumulative effect of a change in accounting principle 3,043 4,661 10,067 5,608 (22,263)
Extraordinary item, net of taxes .................... (200)
Cumulative effect of a change in accounting principle,
net of taxes (1,140)
-------- -------- -------- -------- --------
Net income (loss).................................... $ 3,043 $ 4,461 $ 10,067 $ 5,608 $(23,403)
======== ======== ======== ======== ========
Net income (loss) before extraordinary item and
cumulative effect of a change in accounting principle
per common share
Basic ............................................. $ 0.14 $ 0.20 $ 0.36 $ 0.19 $( 0.68)
======== ======== ======== ======== ========
Diluted ........................................... $ 0.13 $ 0.20 $ 0.34 $ 0.18 $( 0.68)
======== ======== ======== ======== ========
Net income (loss) per common share
Basic ............................................. $ 0.14 $ 0.19 $ 0.36 $ 0.19 $( 0.71)
======== ======== ======== ======== ========
Diluted ........................................... $ 0.13 $ 0.19 $ 0.34 $ 0.18 $( 0.71)
======== ======== ======== ======== ========
Weighted average common shares outstanding
Basic ............................................. 22,500 23,056 28,110 29,736 32,734
======== ======== ======== ======== ========
Diluted ........................................... 22,944 23,807 29,208 30,774 32,734
======== ======== ======== ======== ========
Pro forma provision for income taxes ................ $ (2,530)
========
Pro forma net income ................................ $ 3,795
========
S corporation distributions ......................... $ 4,664
========
FISCAL YEAR ENDED
---------------------------------------------------------------
January 2, January 1, December 30, December 29, December 28,
1999 2000 2000 2001 2002
--------- --------- ----------- ----------- -----------
CONSOLIDATED BALANCE SHEET DATA:
Net working capital ..................... $ 6,025 $ 61,419 $ 89,148 $ 94,569 $ 63,478
Total assets ............................ 11,006 67,382 119,429 129,042 125,459
Total debt (including current debt) ..... 26,017 338 885
Total Stockholders' Equity (deficiency in
assets) ............................... $(18,271) $ 63,437 $111,472 $123,992 $115,726
Before February 12, 1998, the Company was a subchapter S corporation and,
accordingly, Federal and state income taxes were paid at the stockholder level
only. Upon consummation of a leveraged recapitalization in 1998, the Company
terminated its subchapter S corporation status and, accordingly became subject
to Federal and state income taxes. The pro forma income statement information
reflects adjustments to historical net income as if the Company had not elected
subchapter S corporation status for Federal and state income tax purposes.
On November 22, 1999, the Securities and Exchange Commission declared TMNG's
Registration Statement on Form S-1 (File No. 333-87383) effective. On November
23, 1999, TMNG closed its offering of an aggregate of 4,615,000 shares of TMNG
Common Stock at an aggregate offering price of $78.5 million. Net proceeds to
TMNG, after deducting underwriting discounts and commissions of $5.5 million and
offering expenses of $1.6 million, were $71.6 million.
On November 29, 1999 TMNG used $22.3 million of the proceeds from its initial
public offering to repay all indebtedness.
On August 2, 2000, the Securities and Exchange Commission declared TMNG's
Registration Statement on Form S-1 (File No. 333-40864) effective. On August 2,
2000, TMNG closed its offering of an aggregate of 3,000,000 shares of TMNG
Common Stock at an aggregate offering price of $68.6 million. Net proceeds to
TMNG, after deducting underwriting discounts and commissions of $1.1 million and
offering expenses of $728,000 were $20.9 million. Proceeds were used for working
capital, general corporate purposes and as possible consideration for
acquisitions.
On September 5, 2000, the Company completed its acquisition of The Weathersby
Group, Inc. ("TWG"), a Maryland corporation. The acquisition resulted in a total
purchase price of approximately $19.2 million consisting of $11.2 million cash
and $8.0 million in TMNG stock. Additionally, TMNG incurred direct costs of $1.5
million related to the acquisition.
On September 5, 2001, the Company completed its acquisition of Tri-Com, a
Maryland corporation. The acquisition resulted in a total purchase price of
approximately $4.8 million consisting of $1.8 million cash and $3.0 million in
TMNG stock. Additionally, TMNG incurred direct costs of approximately $180,000
related to the acquisition and recorded this amount as an increase to purchase
price. In addition to the above-mentioned costs, TMNG recorded approximately
$216,000 as an increase to purchase price in connection with the exchange of the
Company's stock options for vested stock appreciation rights held by Tri-Com
employees at the time of the acquisition.
On March 6, 2002, the Company completed its acquisition of CSMG, a Delaware
corporation. The acquisition resulted in a total purchase price of approximately
$46.5 million consisting of $33.0 million cash and $13.5 million in TMNG stock.
Additionally, TMNG incurred direct costs of $2.3 million related to the
acquisition and recorded this amount as an increase to purchase price.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Cautionary statement regarding forward-looking information
With the exception of historical information, this report on Form 10-K contains
forward-looking statements as defined in the Private Securities Litigation
Reform Act of 1995 and identified by such words as "will be," "intend,"
"continue," "believe," "may," "expect," "hope," "anticipate," "goal," "forecast"
or other comparable terms. The Company's actual financial condition, results of
operations or business may vary materially from those contemplated by such
forward looking statements and involve various risks and uncertainties,
including but not limited to those discussed in Item 1, "Business - Risk
Factors." Investors are cautioned not to place undue reliance on any
forward-looking statements.
The following discussion should be read in conjunction with the Consolidated
Financial Statements and Notes thereto of the Company included in this Annual
Report on Form 10-K. The forward-looking statements included in this discussion
and elsewhere in this Form 10-K involve risks and uncertainties, including
anticipated financial performance, business prospects, industry trends,
shareholder returns and other matters, which reflect management's best judgment
based on factors currently known. Actual results and experience could differ
materially from the anticipated results and other expectations expressed in the
Company's forward-looking statements as a result of a number of factors,
including but not limited to those discussed in this Item and in Item 1
"Business - Risk Factors."
OVERVIEW
TMNG reports its financial data where each quarter is 13 weeks and ends on a
Saturday. As a result, the fiscal year end is the Saturday which is 13 weeks
from the end of the third fiscal quarter. Fiscal years 2002 and 2001 therefore
ended on December 28, 2002 and December 29, 2001, respectively. The words fiscal
year refer to the fiscal year most closely coinciding with the related calendar
year.
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, a time and
materials basis not to exceed contract price, or a fixed cost basis. Contract
revenues on contracts with a not to exceed contract price or a fixed cost
contract are recorded under the 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.
Generally a client relationship begins with a short-term engagement utilizing a
few consultants. TMNG's sales strategy focuses on building long-term
relationships with both new and existing clients to gain additional engagements
within existing accounts and referrals for new clients. Strategic alliances with
other companies are also used to sell services. TMNG anticipates that the
Company will continue to do so in the future. Because TMNG is a consulting
company, the Company experiences fluctuations in revenues derived from clients
during the course of a project lifecycle. As a result, the volume of work
performed for specific clients varies from period to period and a major client
from one period may not use TMNG services in another period. In addition,
clients generally may end their engagements with little or no penalty or notice.
If a client engagement ends earlier than expected, the Company must re-deploy
professional service personnel as any resulting unbillable time could harm
margins.
Cost of services consists primarily of client-related compensation for
consultants who are employees and amortization of equity related non-cash
charges incurred in connection with pre-initial public offering grants of equity
securities primarily to consultants, as well as fees paid to independent subject
matter expert organizations and related expense reimbursements. Employee
compensation includes certain unbillable time, training, vacation time, benefits
and payroll taxes. Annual gross margins have ranged from 40.9% to 49.2% during
the period from 1998 to 2002. Margins are primarily impacted by the type of
consulting services provided, the size of service contracts and negotiated
volume discounts, changes in TMNG pricing policies and those of competitors,
utilization rates of consultants and independent subject matter experts; and
employee and independent subject matter expert costs associated with a
competitive labor market.
Operating expenses include selling, general and administrative, equity related
charges, goodwill and intangibles amortization, and goodwill impairment. Sales
and marketing expenses consist primarily of personnel salaries, bonuses, and
related costs for direct client sales efforts and marketing staff. The Company
primarily uses a relationship sales model in which partners, principals and
senior consultants generate revenues. In addition, sales and marketing expense
includes costs associated with marketing collateral, product development, trade
shows and advertising. General and administrative expenses consist mainly of
accounting and recruiting personnel costs, insurance, rent, and outside
professional services incurred in the normal course of business. The equity
related charges relate to non-cash amortization charges incurred in connection
principally with pre-initial public offering grants of equity securities
primarily to principals and certain senior executives. Goodwill and intangibles
amortization relates to amortization of identifiable intangible assets and
goodwill amortization recorded prior to the adoption of SFAS No. 142 "Accounting
for Goodwill and Intangible Assets" ("SFAS No. 142"). Goodwill impairment
relates to the write-off of goodwill calculated in accordance with the
provisions of SFAS No. 142.
CRITICAL ACCOUNTING POLICIES
The significant accounting policies of TMNG are summarized in Footnote 1 to the
consolidated financial statements included in Item 8 of this report.
While the selection and application of any accounting policy may involve some
level of subjective judgments and estimates, we believe the following accounting
policies are the most critical to our consolidated financial statements,
potentially involve the most subjective judgments in their selection and
application, and are the most susceptible to uncertainties and changing
conditions:
- - Allowance for Doubtful Accounts
- - Fair Value Accounting of Acquired Businesses
- - Impairment of Goodwill and Other Intangible Assets
- - Revenue Recognition
Allowance for Doubtful Accounts - Substantially all of our receivables are owed
by companies in the communications industry, whose recent adverse conditions are
described in Item 1, "Business." We typically bill customers for our services
after all or a portion of the services have been performed and require customers
to pay immediately. We attempt to control our credit risk by being diligent in
credit approvals, limiting the amount of credit extended to customers and
monitoring our customers' payment record and credit status as work is being
performed for them.
We recorded bad debt expense in the amounts of $1,207,000, $812,000 and
$1,004,000 for fiscal years 2002, 2001 and 2000, respectively, and our allowance
for doubtful accounts totaled $471,000, $517,000 and $766,000 at the end of
fiscal years 2002, 2001 and 2000, respectively. The calculation of these amounts
is based on our judgment about the anticipated default rate on receivables owed
to us as of the end of the reporting period. That judgment was based on our
uncollected account experience in prior years and our ongoing evaluation of the
credit status of our customers and the communications industry in general.
We have endeavored to mitigate our credit risk by concentrating our marketing
efforts on the largest and most stable companies in the communications industry
and by tightly controlling the amount of credit provided to customers. If we are
unsuccessful in these efforts, or if more of our customers file for bankruptcy
or experience financial difficulties, it is possible that our allowance for
doubtful accounts will be insufficient and we will have a greater bad debt loss
than the amount we reserved, which would adversely affect our cash flow and
financial performance.
Fair Value of Acquired Businesses - TMNG has acquired three professional service
organizations over the last three years. A significant component of the value of
these acquired businesses has been allocated to intangible assets. The Financial
Accounting Standards Board ("FASB") issued SFAS No. 141 which requires acquired
businesses to be recorded at fair value by the acquiring entity. SFAS No. 141
also requires that intangible assets that meet the legal or separable criterion
be separately recognized on the financial statements at their fair value, and
provides guidance on the types of intangible assets subject to recognition.
Determining the fair value for these specifically identified intangible assets
involves significant professional judgment, estimates and projections related to
the valuation to be applied to intangible assets like customer lists, employment
agreements and tradenames. Specifically, the FASB issued EITF No. 02-17
"Recognition of Customer Relationship Intangible Assets Acquired in a Business
Combination" in 2002 which provided an expanded definition of how to value
customer relationships and includes not only the current backlog of an acquired
entity, but also the expectations of future revenues resulting from current
customer relationships. In accordance with the provisions of EITF No. 02-17,
management has made estimates and assumptions regarding projected future
revenues resulting from the customer relationships acquired in our acquisitions.
The subjective nature of management's assumptions
adds an increased risk associated with estimates surrounding the projected
performance of the acquired entity. Additionally, as the Company amortizes the
intangible assets over time, the purchase accounting allocation directly impacts
the amortization expense we record on our financial statements.
Impairment of Goodwill and Other Intangible Assets - Goodwill and other
intangible assets arising from our acquisitions, as discussed above, are
subjected to periodic review for impairment. SFAS No. 142 requires an annual
evaluation at the reporting unit level of the fair value of goodwill and
compares the calculated fair value of the reporting unit to its book value to
determine whether an impairment has been deemed to occur. Any impairment charge
would be based on the most recent estimates of the recoverability of the
recorded goodwill and intangibles balances. If the remaining book value assigned
to goodwill and other intangible assets acquired in an acquisition is higher
than the amounts the Company currently would expect to realize based on updated
financial and cash flow projections from the reporting unit, there is a
requirement to write down these assets. The Company has recorded goodwill
impairment charges in 2002 in accordance with the provisions of SFAS No. 142.
For an additional discussion see Item 8, Notes to Consolidated Financial
Statements, Footnote 3 "Goodwill and Other Intangibles."
Revenue Recognition - Historically, most of our consulting practice contracts
have been on a time and material basis, in which customers are billed for time
and materials expended in performing their contracts. We have recognized revenue
from customer contracts in the period in which our services are performed.
As we continue to adapt to changes in the communications consulting industry, we
have elected to enter into more fixed fee contracts in which revenue is based
upon delivery of services or solutions, and contingent fee contracts, in which
revenue is subject to achievement of savings or other agreed upon results,
rather than time spent. Both of these types of contracts are typically more
results-oriented and are subject to greater risk associated with revenue
recognition and overall project profitability than traditional time and
materials contracts. Due to the nature of fixed fee and contingent fee
contracts, the amount and timing of revenue recognized may be subject to
adjustment or deferral, and additional costs and effort as compared to what was
originally planned may need to be expended to fulfill delivery requirements on
such contracts, which could adversely affect our consolidated financial
position, results of operations and liquidity.
RESULTS OF OPERATIONS
FISCAL 2002 COMPARED TO FISCAL 2001
REVENUES
Revenues decreased 36.9% to $34.6 million for fiscal 2002 from $54.8 million for
fiscal 2001. The decrease in revenues was due primarily to a reduction in
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. The industry was also adversely
affected in 2002 by a series of accounting scandals at several prominent
telecommunications companies. Our international revenue base decreased to 7.3%
of our revenues for fiscal 2002, down from 11.7% for fiscal 2001, due to the
additional domestic revenue generated by our recently acquired subsidiaries,
TMNG Strategy and TMNG Technologies, and the decline in services provided to
international customers related to similar adverse macroeconomic events in those
markets. TMNG Strategy revenues represented 32.3% of consolidated revenues
during fiscal 2002. Non-consulting revenues recognized by TMNG Technologies
represented 4.4% of consolidated revenues for fiscal 2002 compared to 1.1% of
consolidated revenues for fiscal 2001, and related primarily to commissions
received on hardware sales. Revenues recognized by the Company in connection
with fixed price engagements totaled $11.9 million, and represented 34.4% of
consolidated revenue during fiscal 2002.
COST OF SERVICES
Direct costs of services decreased 38.4% to $16.9 million for fiscal 2002
compared to $27.3 million for fiscal 2001. The decrease was attributable
primarily to fewer consulting engagements and corresponding reductions in
consulting personnel costs. As a percentage of revenues, our gross margin based
on direct cost of services was 51.3% for fiscal 2002 compared to 50.1% for
fiscal 2001. The increase in gross margin was primarily attributable to higher
margins associated with the increase in strategy offerings provided during
fiscal 2002 compared to the corresponding period in fiscal 2001.
Non-cash stock based compensation charges were $0.7 million and $2.3 million for
fiscal years 2002 and 2001, respectively. The primary reasons for the net
decrease in non-cash stock based compensation charges for fiscal year 2002
compared to fiscal year 2001 were the reduction in amortization expense
recognized on a warrant in the amount of $1.1 million and the net reduction in
amortization charges related to the pre-initial public offering grants of stock
options in the amount of $0.5 million. 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 Operations 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 2.1% and
4.2% for fiscal years 2002 and 2001, respectively.
OPERATING EXPENSES
In total, operating expenses increased to $52.4 million for fiscal year 2002, or
167.1% from $19.6 million for fiscal year 2001. This increase of $32.8 million
can be allocated to primarily three cost categories. First, and largest, is
$26.1 million of additional operating expenses in 2002 associated with the $25.2
million write-down of goodwill and $0.9 million of amortization of other
identified intangibles associated with acquired business units. The write-down
of goodwill was calculated in accordance with the provisions of SFAS No. 142 and
reflected the unanticipated continued decline in the Company's current financial
performance and projections of future operating results.
In addition, selling, general and administrative expenses increased by
approximately $7.2 million in 2002 compared to 2001. Of this increase, $2.8
million was related to cost reduction initiatives and sizing of the Company, and
$4.2 million was the result of absorbing the selling, general and administrative
costs of TMNG Technology and TMNG Strategy. During the second half of 2002 the
Company implemented a series of cost reductions to properly size selling,
general and administrative costs to revenue generation, and believes these
initiatives will better position the selling, general and administrative cost
structure in future periods. Management continues to examine cost-reduction
measures to enhance the Company's profitability and manage operating expenses to
better align them with the size of the Company.
Non-cash stock based compensation charges of $0.4 million and $0.8 million for
fiscal year 2002 and fiscal year 2001, respectively, were recorded in connection
with stock options granted to our partners, principals and certain senior
executives and non-employee directors. The net $0.4 million 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 accelerated vesting schedule
discussed above in "Cost of Services." These charges increased operating
expenses as a percentage of revenue by 1.0% and 1.5% for fiscal years 2002 and
2001, respectively.
OTHER INCOME AND EXPENSES
Interest income was $1.0 million and $2.4 million for fiscal years 2002 and
2001, respectively, and represented interest earned on invested balances.
Interest income decreased during fiscal year 2002 due to lower invested balances
resulting from a reduction in cash reserves and lower interest rate returns 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
In general, the Company records an income tax provision (benefit) at a blended
Federal and state statutory income tax rate of 40.3%. Income tax provision
(benefit) for fiscal 2002 and 2001 as a percentage of pretax income (loss) was a
benefit of 35.3% in fiscal 2002 and a provision of 29.6% in fiscal 2001. The
primary reason for the variance between the effective and statutory income tax
rates in 2002 relate to a portion of the reported goodwill impairment losses not
deductible for income tax purposes. The primary reason for the variance in 2001
was the earnings reported on short-term investments in Federally tax-exempt
income securities not taxable for Federal income tax purposes.
CUMULATIVE CHANGE IN ACCOUNTING PRINCIPLE
A cumulative change in accounting principle in the amount of $1.9 million was
recorded during fiscal year 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 Operations and Comprehensive
Income (Loss), net of tax benefit, in the amount of $1.1 million.
FISCAL 2001 COMPARED TO FISCAL 2000
REVENUES
Revenues decreased 29.5% to $54.8 million for fiscal year 2001 from $77.7
million for fiscal year 2000. 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, including reductions in capital funding, business
failures, and industry restructurings and reorganizations. Additionally, our
international revenue base decreased to 11.7% of total revenues in fiscal year
2001 compared to 23.4% in fiscal year 2000, primarily due to the additional
domestic revenue generated by our recently acquired subsidiaries, TMNG
Marketing, Inc. and TMNG Technologies, Inc., and the decline in services
provided to international customers related to similar adverse macroeconomic
events in those markets. Non-consulting revenues recognized by TMNG Technologies
represented 1.1% of consolidated revenues for fiscal year 2001, and related to
agency commissions received on hardware sales.
COST OF SERVICES
Direct cost of services decreased 32.3% to $27.3 million for fiscal year 2001
from $40.4 million for fiscal year 2000. As a percentage of revenues, our gross
margin on direct cost of services was 50.1% for fiscal year 2001 compared to
48.0% for fiscal year 2000. The increase in gross margin as a percentage of
revenue was attributable primarily to cost reductions negotiated with most of
our vendors and the settlement of a customer contract commitment.
Non-cash stock based compensation charges were $2.3 million and $5.5 million for
fiscal year 2001 and fiscal year 2000, respectively. Of the $2.3 million
compensation charges related to fiscal year 2001, $1.2 million was recorded in
connection with pre-initial public offering grants of stock options to employees
and non-employee consultants, offset by a $578,000 credit representing a
reversal of previously recorded expense attributable to the forfeiture and
cancellation of unvested stock options during fiscal year 2001, and $1.7 million
was recorded in connection with the warrant issued during the fourth quarter of
1999. The primary reason for the decrease in non-cash stock based compensation
charges for fiscal year 2001 compared to fiscal year 2000 was the reduction in
the amortization of the deferred compensation charges recorded in connection
with pre-initial public offering grants of non-qualified stock options and the
warrant. These net charges increased costs of services as a percentage of
revenue by 4.2% and 7.1% for fiscal year 2001 and fiscal year 2000,
respectively.
OPERATING EXPENSES
In total, operating expenses increased to $19.6 million for fiscal 2001, or 7.7%
from $18.2 million for fiscal year 2000. The major components of this increase
were $1.9 million of goodwill amortization reflecting a full year of
amortization on the acquisition of TMNG Marketing, Inc. recorded in fiscal year
2001, versus $621,000 of goodwill amortization recorded in fiscal year 2000, a
$721,000 decrease in non-cash stock based compensation charges in fiscal year
2001 compared to fiscal year 2000, and a $743,000 increase in selling, general
and administrative expense primarily related to increased personnel costs. As a
percentage of revenues, selling, general and administrative expenses increased
to 30.6% for fiscal year 2001 from 20.6% of revenues for fiscal year 2000. This
percentage increase was primarily attributable to the decrease in revenues in
2001. In the second quarter of fiscal year 2001, management implemented a number
of cost-reduction initiatives in selling, general and administrative areas,
including additional integration of acquisitions to address the economic slow
down within the communications industry. Additionally, late in the third quarter
of fiscal year 2001, three of our executive officers, Richard Nespola, Micky Woo
and Ralph Peck reduced their aggregate base cash compensation by approximately
$450,000 in exchange for grants of non-statutory stock options at fair market
value, contributing to the decrease in selling, general and administrative
expenses. Results of management's cost reduction initiatives gained traction in
the second half of fiscal year 2001, as selling, general and administrative
expenses in that half were essentially the same as selling, general and
administrative expenses reported in the second half of fiscal year 2000.
Non-cash stock based compensation charges of $843,000 and $1.6 million for
fiscal year 2001 and fiscal year 2000, respectively, were recorded in connection
with stock options granted to our partners, principals and certain senior
executives and non-employee directors. These charges increased operating
expenses as a percentage of revenue by 1.5% and 2.0% for fiscal year 2001 and
fiscal year 2000, respectively. The decrease in non-cash stock based
compensation charges for fiscal year 2001 compared to fiscal year 2000 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.
OTHER INCOME AND EXPENSES
Interest income was $2.4 million and $3.3 million for fiscal year 2001 and
fiscal year 2000, respectively, and represented interest earned on invested
balances. Interest income decreased during fiscal year 2001 due primarily to the
Federal Reserve Bank reducing interest rates during the period, which was
partially offset by larger invested cash balances, and the Company's shift to
tax-exempt investments and the lower interest rates associated with these
investments. We invest in short-term, high-grade investment instruments, and
maintain a mix of taxable and tax-exempt instruments as part of our overall
investment policy.
Other, net losses were $8,000 and $152,000 for fiscal year 2001 and fiscal year
2000, respectively. The net loss of $152,000 in fiscal year 2000 related
primarily to foreign currency transaction losses incurred on projects performed
overseas during that year.
INCOME TAXES
Provision for income taxes for fiscal year 2001 as a percentage of pretax income
was 29.6% compared to 40.0% for fiscal year 2000. The decrease in income taxes
as a percentage of revenue 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.
FISCAL 2000 COMPARED TO FISCAL 1999
REVENUES
Revenues increased 54.5% to $77.7 million for fiscal year 2000 from $50.3
million for fiscal year 1999. The increase in revenues was due primarily to an
increase in consulting services performed for our new and existing clients
during the period, and increased billing rates of our consultants. Additionally,
international revenue increased 30.9% to $18.2 million for fiscal year 2000 from
$13.9 million for fiscal year 1999, primarily due to an increase in European
business. Additionally, revenues increased due to the purchase of The Weathersby
Group, Inc., an acquisition that closed on September 5,2000. This acquisition
was
accounted for as a purchase, so TWG's revenues for the period from the closing
through the end of the year are included in TMNG's consolidated revenues.
COST OF SERVICES
Direct costs of services increased to $40.4 million for fiscal year 2000 from
$26.1 million for fiscal year 1999. As a percentage of revenues, our gross
margin on services was 48.0% for fiscal year 2000 compared to 48.1% for fiscal
year 1999.
Non-cash stock based compensation charges were $5.5 million and $2.8 million for
fiscal year 2000 and fiscal year 1999, respectively. These equity charges relate
to stock options and warrants granted in 1999 and previously. Of the $5.5
million compensation charges related to fiscal year 2000, $2.7 million was
recorded in connection with the issuance of stock options to employees and
non-employee consultants and $2.8 million was recorded in connection with the
warrant issued during the fourth quarter of 1999. These charges represented 7.1%
of revenues for fiscal year 2000 compared to 5.5% for fiscal year 1999.
OPERATING EXPENSES
Selling, general and administrative expenses increased to $16.6 million for
fiscal year 2000, or 69.4% from $9.8 million for fiscal year 1999. Selling,
general and administrative expenses increased to 21.4% of revenues for fiscal
year 2000, from 19.4% of revenues for fiscal year 1999. We incurred an increase
in selling, general and administrative expenses primarily due to the personnel
and technology costs associated with the increased administrative staffing
required to manage and support the growth of the organization, as well as the
amortization of goodwill recorded in connection with The Weathersby Group, Inc.
acquisition.
Non-cash stock based compensation charges of $1.6 million and $2.0 million for
fiscal year 2000 and fiscal year 1999, respectively, were recorded primarily in
connection with the issuance of stock options in fiscal year 1999 and previously
to our senior executives, principals, administration and non-employee directors.
These charges represented 2.0% of revenues for fiscal year 2000, compared to
4.0% of revenues for fiscal year 1999.
OTHER INCOME AND EXPENSES
Interest income increased to $3.3 million for the fiscal year 2000, compared to
$277,000 for the fiscal year 1999. Interest income increased primarily due to
the interest received on the net proceeds of the initial public and secondary
offerings. We invest in short-term, high-grade investment instruments.
Interest expense decreased to $0 for fiscal year 2000, compared to $2.0 million
for fiscal year 1999. Interest expense decreased primarily due to the
extinguishment of debt in the fourth quarter of 1999. On November 29, 1999, all
outstanding indebtedness was repaid with $22.3 million of the proceeds from our
November 23, 1999 initial public offering.
Other, net totaled losses of $152,000 and $68,000 for fiscal year 2000 and
fiscal year 1999, respectively, and increased primarily due to foreign currency
transaction losses incurred on overseas projects performed during fiscal year
2000.
INCOME TAXES
Provision for income taxes remained consistent for fiscal year 2000 and fiscal
year 1999 at 40.0% and 40.8%, respectively.
SUMMARY OF QUARTERLY RESULTS OF OPERATIONS -- UNAUDITED
QUARTER ENDED
----------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 29, DECEMBER 29,
2001 2001 2001 2001
-------- ------- ------------- -----------
Revenues ....................................... $ 18,334 $ 13,691 $ 12,231 $ 10,576
======== ======== ======== ========
Gross profit ................................... $ 8,377 $ 6,092 $ 5,826 $ 4,869
======== ======== ======== ========
Net income ..................................... $ 2,337 $ 1,428 $ 1,131 $ 713
======== ======== ======== ========
Basic net income per common share .............. $ .08 $ .05 $ .04 $ .02
======== ======== ======== ========
Diluted net income per common share ............ $ .08 $ .05 $ .04 $ .02
======== ======== ======== ========
QUARTER ENDED
----------------------------------------------------
MARCH 30, JUNE 29, SEPTEMBER 28, DECEMBER 28,
2002 2002 2002 2002
-------- -------- ------------- -----------
Revenues ....................................... $ 7,268 $ 9,927 $ 8,756 $ 8,644
======== ======== ======== ========
Gross profit ................................... $ 3,099 $ 5,486 $ 4,274 $ 4,160
======== ======== ======== ========
Loss before cumulative effect of a change in
accounting principle $ (1,665) $ (1,822) $ (648) $(18,128)
======== ======== ======== ========
Net loss........................................ $ (2,805) $ (1,822) $ (648) $(18,128)
======== ======== ======== ========
Basic and diluted loss before cumulative
effect of a change in accounting principle per
common share $ (.05) $ (.05) $ (.02) $ (.54)
======== ======== ======== ========
Basic and diluted net loss per common share .... $ (.09) $ (.05) $ (.02) $ (.54)
======== ======== ======== ========
For the period ended March 30, 2002, net loss and basic and diluted net loss per
common share differ from the amounts previously reported by the Company on Form
10-Q as filed with the Securities and Exchange Commission on May 13, 2002. The
Company had previously reported a net loss of $1,665 and a basic and diluted net
loss per common share of $0.05 for the thirteen weeks ended March 30, 2002,
compared to the net loss of $2,805 and basic and diluted net loss per common
share of $0.09 as shown above for the same period. The additional loss was
attributable to the Company's completion of the goodwill impairment test
required under SFAS No. 142 "Accounting for Goodwill and Intangible Assets"
during the second quarter of 2002. In accordance with the provisions of SFAS
142, the goodwill impairment loss was reported as a cumulative effect of a
change in accounting principle and retroactively recognized in the first quarter
of fiscal year 2002.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $7,000, $20.9 million and $10.0
million for fiscal years 2002, 2001 and 2000, respectively. Cash provided by
operating activities for fiscal year 2002 was due primarily to the reduction of
accounts receivable balances, reflecting more focused billing and collection
activities, offset by operating losses in fiscal year 2002.
Net cash used in investing activities was $32.8 million, $5.6 million and $12.3
million for fiscal years 2002, 2001 and 2000, respectively. Cash used for
acquisitions was $32.5 million, $4.7 million and $11.6 million in fiscal years
2002, 2001 and 2000, respectively, and relates to the Cambridge Strategic
Management Group, Inc., Tri-Com Computer Services, Inc. and The Weathersby
Group, Inc. acquisitions, respectively. Capital expenditures of $0.3 million,
$0.7 million and $0.7 million, respectively, relate to the capitalization of
leasehold improvements, computer equipment and software by the Company.
Additionally, during fiscal 2002 the Company provided lines of credit to two
executive officers of TMNG, Inc., of which $0.3 million was outstanding as of
December 28, 2002. The maximum available borrowings
under the loan agreements between the two officers and the Company are $1.1
million in total. These lines of credit were provided prior to the passage of
the Sarbanes-Oxley Act (which prohibits any such loans made after July 30, 2002)
and were in consideration of the waiver of salary by those officers in late
2001.
Net cash provided by financing activities was $0.12 million, $0.51 million and
$21.4 million fiscal years 2002, 2001 and 2000, respectively. Cash provided in
fiscal years 2002 and 2001 related to proceeds from the exercise of employee
stock options as well as common stock issued by the Company as part of its
employee stock purchase program. Net proceeds from the Company's secondary
public offering were $20.9 million in fiscal year 2000.
As of December 28, 2002, the Company has the following contractual obligations
and commercial commitments by year (amounts in millions):
Later
Years
Through
2003 2004 2005 2006 2007 2011 Total
---- ---- ---- ---- ---- ------- -----
Capital leases $0.4 $0.3 $0.2 $ 0.9
Operating leases 2.1 1.8 1.6 $1.5 $1.5 $5.4 13.9
---- ---- ---- ---- ---- ---- -----
Total $2.5 $2.1 $1.8 $1.5 $1.6 $5.4 $14.8
==== ==== ==== ==== ==== ==== =====
At December 28, 2002, TMNG had approximately $53.8 million in cash and cash
equivalents. TMNG believes it has sufficient cash to meet anticipated cash
requirements, including anticipated capital expenditures, consideration for
possible acquisitions, and any continuing operating losses, 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. Although the
Company is well-positioned because of its cash reserves to weather continuing
adverse conditions in the communications industry for a period of time, if the
industry and demand for consulting services do not rebound in the foreseeable
future and we begin to experience negative cash flow, we could experience
liquidity challenges.
TRANSACTIONS WITH RELATED PARTIES
During fiscal year 2000, four members of the TMNG board of directors were also
directors of customers with which TMNG did business. The Company earned revenues
from these customers of approximately $16.1 million during fiscal year 2000.
During fiscal year 2001 a member of the TMNG board of directors was also a
director of a customer for which TMNG did business, and the Company also
performed services for one customer in which one member of the TMNG board of
directors owns a partial equity interest. Revenues earned from these customers
during fiscal year 2001 were approximately $2.3 million. During fiscal year
2002, one member of the TMNG board of directors was also director of a customer
with which TMNG did business. Revenues earned from the customer during 2002
totaled approximately $308,000. No receivables were outstanding by the above
customers as of December 29, 2001 and December 28, 2002, respectively.
During fiscal years 2000, 2001 and 2002, TMNG made payments of approximately
$432,000, $70,000 and $190,000 to two legal firms in which two members of the
TMNG board of directors own equity interests. Such payments were for legal
services rendered in connection with the Company's equity offerings and for
other matters arising in the normal course of business. The costs associated
with the equity offerings were classified as a component of additional paid-in
capital, and the costs associated with business matters arising in the normal
course of business were classified as selling, general and administrative in the
consolidated statements of income and comprehensive income.
Mr. Nespola is indebted to the Company in the amount of $300,000 as of the end
of 2002, pursuant to a line of credit extended by the Company. The credit line
bears interest at the Applicable Federal Rate and matures in 2011, at which time
all principal and interest will be due and payable. A total of $600,000 and
$450,000 are available for borrowing under credit lines to Mr. Nespola and Mr.
Woo, respectively. As of the end of 2002, Mr. Woo did not have any borrowings
against his line of credit. The credit lines pre-date the passage of the
Sarbanes-Oxley Act.
ITEM 7A. 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 and significant increases in international
engagements denominated in the local currency of the Company's clients.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS OF
The Management Network Group, Inc.
Overland Park, Kansas
We have audited the accompanying consolidated balance sheets of The Management
Network Group, Inc. and subsidiaries (the "Companies") as of December 28, 2002
and December 29, 2001 and the related consolidated statements of operations and
comprehensive income (loss), stockholders' equity and cash flows for the fiscal
years ended December 28, 2002, December 29, 2001 and December 30, 2000. These
financial statements are the responsibility of the Companies' management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Companies as of December 28,
2002 and December 29, 2001, and the results of their operations and their cash
flows for the fiscal years ended December 28, 2002, December 29, 2001 and
December 30, 2000 in conformity with accounting principles generally accepted in
the United States of America.
As discussed in Notes 1 and 3 to the consolidated financial statements, the
Company changed its method of accounting for goodwill and other intangible
assets with the adoption of Statement of Financial Accounting Standards No. 142
"Goodwill and Other Intangible Assets", in 2002.
/s/ DELOITTE & TOUCHE LLP
Kansas City, Missouri
March 10, 2003
THE MANAGEMENT NETWORK GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
DECEMBER 29, DECEMBER 28,
2001 2002
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents .......................................... $ 86,396 $ 53,786
Receivables:
Accounts receivable ............................................. 8,518 5,597
Accounts receivable -- unbilled ................................. 2,962 4,232
--------- ---------
11,480 9,829
Less: Allowance for doubtful accounts ........................... (517) (471)
--------- ---------
10,963 9,358
Refundable income taxes 4,277
Prepaid and other assets ........................................ 2,071 2,217
--------- ---------
Total current assets ....................................... 99,430 69,638
--------- ---------
Property and Equipment, net ......................................... 1,686 2,285
Goodwill............................................................. 22,147 31,308
Customer relationships, net ......................................... 1,191 5,092
Identifiable intangible assets, net 2,362
Deferred tax asset .................................................. 4,080 14,272
Other assets ........................................................ 508 502
--------- ---------
Total Assets ........................................................ $ 129,042 $ 125,459
========= =========
CURRENT LIABILITIES:
Trade accounts payable ............................................. $ 210 $ 1,170
Accrued payroll, bonuses and related expenses ...................... 1,393 2,105
Other accrued liabilities .......................................... 3,258 1,964
Unfavorable and capital lease obligations 921
--------- ---------
Total current liabilities .................................. 4,861 6,160
--------- ---------
Unfavorable and capital lease obligations ........................... 189 3,573
STOCKHOLDERS' EQUITY;
Common stock:
Voting -- $.001 par value, 100,000,000 shares authorized;
30,204,919 shares issued and outstanding on
December 29, 2001, 33,347,228 shares issued and
outstanding on December 28, 2002 ................................ 30 33
Preferred stock -- $.001 par value, 10,000,000 shares
authorized; no shares issued or outstanding
Additional paid-in capital ......................................... 141,451 155,509
Accumulated deficit ................................................ (16,463) (39,866)
Accumulated other comprehensive income --
Foreign currency translation adjustment ........................... 17 113
Unearned compensation .............................................. (1,043) (63)
--------- ---------
Total stockholders' equity ................................. 123,992 115,726
--------- ---------
Total Liabilities and Stockholders' Equity .......................... $ 129,042 $ 125,459
========= =========
See notes to consolidated financial statements.
THE MANAGEMENT NETWORK GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FISCAL YEAR ENDED
------------------------------------------
DECEMBER 30, DECEMBER 29, DECEMBER 28,
2000 2001 2002
----------- ----------- -----------
Revenues................................................. $ 77,727 $ 54,832 $ 34,595
Cost of services:
Direct cost of services................................. 40,396 27,347 16,855
Equity related charges ................................. 5,519 2,322 721
-------- -------- --------
Total cost of services ......................... 45,915 29,669 17,576
-------- -------- --------
Gross profit............................................. 31,812 25,163 17,019
Operating expenses:
Selling, general and administrative..................... 16,024 16,767 23,971
Equity related charges ................................. 1,564 843 353
Goodwill and intangibles amortization .................. 621 1,996 2,887
Goodwill impairment 25,165
-------- -------- --------
Total operating expenses ....................... 18,209 19,606 52,376
-------- -------- --------
Income (loss) from operations ........................... 13,603 5,557 (35,357)
Other income:
Interest income ........................................ 3,327 2,433 996
Interest expense ....................................... (14) (63)
Other, net ............................................. (152) (8) 26
-------- -------- --------
Total other income.............................. 3,175 2,411 959
-------- -------- --------
Income (loss) before income tax (provision) benefit
and cumulative effect of a change in accounting
principle .............................................. 16,778 7,968 (34,398)
Income tax (provision) benefit .......................... (6,711) (2,360) 12,135
-------- -------- --------
Income (loss) before cumulative effect of a change
in accounting principle................................. 10,067 5,608 (22,263)
Cumulative effect of a change in accounting principle -
goodwill impairment, net of tax benefit of $760 (1,140)
-------- -------- --------
Net income (loss) ....................................... 10,067 5,608 (23,403)
Other comprehensive income (loss) --
Foreign currency translation adjustment................. 37 (18) 96
-------- -------- --------
Comprehensive income (loss) ............................. $ 10,104 $ 5,590 $(23,307)
======== ======== ========
Income (loss) before cumulative effect of a change in
accounting principle per common share
Basic .................................................. $ 0.36 $ 0.19 $ (0.68)
======== ======== ========
Diluted ................................................ $ 0.34 $ 0.18 $ (0.68)
======== ======== ========
Cumulative effect of a change in accounting principle
per common share
Basic $ (0.03)
========
Diluted $ (0.03)
========
Net income (loss) per common share
Basic .................................................. $ 0.36 $ 0.19 $ (0.71)
======== ======== ========
Diluted ................................................ $ 0.34 $ 0.18 $ (0.71)
======== ======== ========
Shares used in calculation of income (loss) before
cumulative effect of a change in accounting principle
and net income (loss) per common share
Basic .................................................. 28,110 29,736 32,734
======== ======== ========
Diluted ................................................ 29,208 30,774 32,734
======== ======== ========
See notes to consolidated financial statements.
THE MANAGEMENT NETWORK GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FISCAL YEAR ENDED
-----------------------------------------
DECEMBER 30, DECEMBER 29, DECEMBER 28,
2000 2001 2002
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ........................................ $ 10,067 $ 5,608 $(23,403)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Cumulative change in accounting principle 1,900
Goodwill impairment 25,165
Depreciation and amortization .......................... 910 2,543 3,835
Equity related charges ................................. 7,083 3,165 1,074
Loss on retirement of assets 205
Income tax benefit (increase) realized upon
exercise of stock options ............................. 1,499 (9) 22
Deferred income taxes .................................. (1,847) 111 (8,820)
Other changes in operating assets and liabilities, net
of business acquisitions:
Accounts receivable .................................. (6,279) 9,546 4,561
Accounts receivable -- unbilled ...................... (3,160) 5,100 (367)
Other assets ......................................... (127) (659) 202
Trade accounts payable ............................... (1,377) (1,592) 936
Accrued (refundable) income taxes 2,540 52 (4,583)
Accrued liabilities .................................. 642 (2,969) (720)
-------- -------- --------
Net cash provided by operating activities ......... 9,951 20,896 7
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of business, net of cash acquired ............ (11,555) (4,650) (32,456)
Acquisition of property and equipment, net................ (713) (724) (280)
Loans to officers, net.................................... (200) (100)
-------- -------- --------
Net cash used in investing activities ............. (12,268) (5,574) (32,836)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock, net of expenses ................ 20,875 221 164
Payments made on long-term obligations ................... (48) (342)
Exercise of stock options................................. 475 336 301
-------- -------- --------
Net cash provided by financing activities 21,350 509 123
-------- -------- --------
Effect of exchange rate on cash and cash equivalents ....... 27 (18) 96
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ....... 19,060 15,813 (32,610)
Cash and cash equivalents, beginning of period ............. 51,523 70,583 86,396
-------- -------- --------
Cash and cash equivalents, end of period ................... $ 70,583 $ 86,396 $ 53,786
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during period for interest ..................... $ $ 14 $ 63
======== ======== ========
Cash paid during period for taxes ........................ $ 6,357 $ 2,385 $ 583
======== ======== ========
Supplemental disclosure of non-cash investing and financing
transactions-
Acquisition of business:
Fair value of assets acquired .......................... $ 3,664 $ 3,655 $ 53,840
Liabilities incurred or assumed ........................ $ (2,275) $ (1,652) $ (7,377)
Common stock issued .................................... $ 8,000 $ 3,000 $ 13,480
See notes to consolidated financial statements.
THE MANAGEMENT NETWORK GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
COMMON STOCK
$.001 PAR
VOTING ADDITIONAL RETAINED
--------------------- PAID-IN EARNINGS
SHARES AMOUNT CAPITAL (DEFICIT)
------------ ------ ---------- ---------
Balance, January 1, 2000 27,417,370 $ 27 $ 104,137 $ (32,138)
Issuance of options 144
Exercise of options 276,183 475
Cancellation of options (982)
Execise and amortization of warrant 424,098 1 2,819
Stock compensation (49)
Other comprehensive income -
Foreign currency translation adjustment
Issuance of common stock, net 1,000,000 1 20,874
Tax benefit due to exercise of stock options 1,499
Acquisition of subsidiary 348,157 8,000
Net income 10,067
------------ ------ ---------- ---------
Balance, December 30, 2000 29,465,808 29 136,917 (22,071)
Exercise of options 196,433 336
Cancellation of options (954)
Amortization of warrant cost 1,721
Employee stock purchase plan 52,261 222
Stock compensation (25)
Other comprehensive income -
Foreign currency translation adjustment
Stock options issued in exchange for Tri-Com SAR's 244
Reduction of tax benefit due to exercise of stock options (9)
Acquisition of subsidiary 490,417 1 2,999
Net income 5,608
------------ ------ ---------- ---------
Balance, December 29, 2001 30,204,919 30 141,451 (16,463)
Exercise of options 174,058 301
Cancellation of options (526)
Amortization of warrant cost 623
Employee stock purchase plan 75,451 164
Stock compensation (4)
Other comprehensive income -
Foreign currency translation adjustment
Tax benefit due to exercise of stock options 22
Acquisition of subsidiary 2,892,800 3 13,478
Net loss (23,403)
------------ ------ ---------- ---------
Balance, December 28, 2002 33,347,228 $ 33 $ 155,509 $ (39,866)
============ ====== ========== =========
ACCUMULATED
OTHER
COMPREHENSIVE
INCOME UNEARNED
(LOSSES) COMPENSATION TOTAL
------------- -------------- ---------
Balance, January 1, 2000 $ (2) $ (8,587) $ 63,437
Issuance of options (144) -
Exercise of options 475
Cancellation of options 982 -
Execise and amortization of warrant 2,820
Stock compensation 4,311 4,262
Other comprehensive income -
Foreign currency translation adjustment 37 37
Issuance of common stock, net 20,875
Tax benefit due to exercise of stock options 1,499
Acquisition of subsidiary 8,000
Net income 10,067
------------- -------------- ---------
Balance, December 30, 2000 35 (3,438) 111,472
Exercise of options 336
Cancellation of options 954 -
Amortization of warrant cost 1,721
Employee stock purchase plan 222
Stock compensation 1,469 1,444
Other comprehensive income -
Foreign currency translation adjustment (18) (18)
Stock options issued in exchange for Tri-Com SAR's (28) 216
Reduction of tax benefit due to exercise of stock options (9)
Acquisition of subsidiary 3,000
Net income 5,608
------------- -------------- ---------
Balance, December 29, 2001 17 (1,043) 123,992
Exercise of options 301
Cancellation of options 526 -
Amortization of warrant cost 623
Employee stock purchase plan 164
Stock compensation 454 450
Other comprehensive income -
Foreign currency translation adjustment 96 96
Tax benefit due to exercise of stock options 22
Acquisition of subsidiary 13,481
Net loss (23,403)
------------- -------------- ---------
Balance, December 28, 2002 $ 113 $ (63) $ 115,726
============= ============== =========
See notes to consolidated financial statements.
THE MANAGEMENT NETWORK GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations -- The Management Network Group, Inc. ("TMNG" or the
"Company") was formed on April 1, 1993 as a management consulting firm
specializing in global competitive communications. Primary services include
providing management consulting services to wireless and wireline communications
carriers, and the technology and investment firms that support the
communications industry. A majority of the Company's revenues are to customers
in the United States, however the Company also provides services to customers in
Europe and other foreign countries. The Company's corporate offices are located
in Overland Park, Kansas.
Principles of Consolidation -- The consolidated statements include the accounts
of TMNG and its wholly-owned subsidiaries, The Management Network Group Europe
Ltd. ("TMNG-Europe"), formed on March 19, 1997, based in the United Kingdom; The
Management Network Group Canada Ltd. ("TMNG-Canada"), formed on May 14, 1998,
based in Toronto, Canada; TMNG.com, Inc., formed in June 1999; TMNG Marketing,
Inc. acquired on September 5, 2000; TMNG Technologies, Inc. acquired on
September 5, 2001; and TMNG Strategy, Inc., acquired on March 6, 2002. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Fiscal Year -- The Company has a 52/53 week fiscal year ending on the Saturday
nearest December 31. The fiscal years ended December 28, 2002, December 29, 2001
and December 30, 2000 each had 52 weeks and are referred to herein as fiscal
year 2002, 2001 and 2000, respectively. TMNG-Europe and TMNG-Canada maintain
year-end dates of December 31.
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 to enter into large fixed price contracts and time and material contracts
with guaranteed maximums 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 in proportion to the 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 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.
In fiscal year 2002 the Company also 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 recognizes costs as they are incurred on the project and defers the
revenue recognition until the revenue is realizable and earned.
Cash and Cash Equivalents -- Cash and cash equivalents include cash on hand and
short-term investments with original maturities of three months or less when
purchased.
Fair Value of Financial Instruments -- The fair value of current financial
instruments approximates the carrying value because of the short maturity of
these instruments.
Property and Equipment -- Property and equipment are stated at cost less
accumulated depreciation and amortization. Maintenance and repairs are charged
to expense as incurred. Depreciation is based on the estimated useful lives of
the assets and is computed using the straight-line method, and capital leases
are amortized on a straight-line basis over the life of the lease. Asset lives
range from three to seven years for computers and equipment. Leasehold
improvements are capitalized and amortized over the life of the lease.
Goodwill -- The Company had previously recorded $18,652,000 of goodwill in
connection with the acquisition of The Weathersby Group, Inc. ("TWG") and had
reported the goodwill at cost less accumulated amortization using the
straight-line method over ten years. The Company recorded goodwill amortization
of $1,865,000 and $621,000 in fiscal years 2001 and 2000, respectively.
Additionally, the Company has recorded $6,001,000 of goodwill in connection with
the acquisition of Tri-Com Computer Services, Inc. ("Tri-Com") and $36,206,000
in connection with the acquisition of Cambridge Strategic Management Group, Inc.
("CSMG"). The Company has not recorded goodwill amortization in connection with
the Tri-Com and CSMG acquisitions, and did not recognize goodwill amortization
in connection with TWG during fiscal year 2002, in accordance with the
provisions of SFAS No. 142 "Accounting for Goodwill and Intangible Assets"
("SFAS No. 142").
Goodwill Impairment -- During fiscal year 2002 the Company adopted the
provisions of SFAS No. 142, and recognized a goodwill impairment charge of
approximately $1,140,000, net of tax benefit of $760,000 in connection with its
initial adoption of the Statement. This item was reported net of tax as a
cumulative change in accounting principle. Subsequent to its initial adoption of
the Statement, the Company performed its annual impairment test and recorded a
goodwill charge of approximately $25,165,000. This amount is reflected in the
Company's loss from operations included in the Consolidated Statement of
Operations and Comprehensive Income (Loss). For an additional discussion of the
Company's goodwill impairment, see Footnote 3 "Goodwill and Other Intangibles"
contained herein.
Identifiable Intangibles -- Identifiable intangible assets are stated at cost
less accumulated amortization, and represent customer relationships, employment
agreements and tradenames acquired in the CSMG and Tri-Com acquisitions.
Included in customer relationships, employment agreements and other intangible
assets, and other current assets are the following (amounts in thousands):
December 29, 2001 December 28, 2002
------------------- ---------------------
Accumulated Accumulated
Cost Amortization Cost Amortization
---- ------------ ---- ------------
Customer relationships $ 1,300 $ (109) $ 6,790 $(1,698)
Employment agreements 3,200 (1,042)
Tradename 350 (146)
Covenant not to compete 203 (23) 203 (132)
------- ------- ------- -------
Total $ 1,503 $ (132) $10,543 $(3,018)
======= ======= ======= =======
Amortization is based on estimated useful lives of 3 to 60 months, depending on
the nature of the intangible asset, and is recognized on a straight-line basis.
During fiscal year 2001 and 2002, amortization expense totaled $131,000 and
$2,887,000, respectively.
In connection with SFAS No. 144 "Accounting for the Impairment or Disposal of
Long-lived Assets" the Company, using its best estimates based on reasonable and
supportable assumptions and projections, reviews for impairment of long-lived
assets and certain identifiable intangibles to be held and used whenever events
or changes in circumstances indicate that the carrying amount of its assets
might not be recoverable, and has concluded no financial statement adjustment is
required.
Income Taxes -- The Company recognizes a liability or asset for the deferred tax
consequences of temporary differences between the tax basis of assets or
liabilities and their reported amounts in the financial statements. A valuation
allowance is provided when, in the opinion of management, it is more likely than
not that some portion or all of a deferred tax asset will not be realized.
Use of Estimates -- The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Foreign Currency Transactions and Translation -- TMNG-Europe and TMNG-Canada
both conduct business primarily denominated in their respective local currency.
Assets and liabilities have been translated to U.S. dollars at the period-end
exchange rate. Revenue and expenses have been translated at exchange rates which
approximate the average of the rates prevailing during each period. Translation
adjustments are reported as a separate component of other comprehensive income
in the consolidated statements of stockholders' equity. Realized and unrealized
exchange gains and losses included in results of operations were insignificant
for all periods presented.
Stock-Based Compensation -- The Company utilizes an intrinsic value methodology
in accounting for stock based compensation for employees and certain
non-employee directors in accordance with the provisions of Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees" and related Interpretations, and accounts for stock-based
compensation for non-employees utilizing a fair value methodology in accordance
with SFAS No. 123, "Accounting for Stock-Based Compensation" as amended by SFAS
No. 148 "Accounting for Stock Based Compensation - Transition and Disclosure."
For an additional discussion of the Company's stock options see Footnote 9
"Stock Option Plan and Stock Based Compensation." If compensation cost for the
Company's APB 25 grants and the employee stock purchase plan had been determined
under SFAS No. 123, based upon the fair value at the grant date, consistent with
the Black-Scholes option pricing methodology using the assumptions above, the
Company's net income for fiscal years 2000 and 2001 would have decreased by
approximately $4.2 million and $6.9 million, respectively, and its net loss for
2002 would have increased by $3.3 million. For purposes of pro forma disclosures
required under the provisions of SFAS No. 123, as amended by SFAS No. 148, the
estimated fair value of options is amortized to pro forma expense over the
options' vesting period. The following table contains pro forma information for
fiscal years 2000, 2001 and 2002 (in thousands, except per share amounts):
FISCAL FISCAL FISCAL
YEAR YEAR YEAR
2000 2001 2002
-------- -------- --------
Net income (loss), as reported: $ 10,067 $ 5,608 $(23,403)
Deduct: Incremental stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects (4,200) (6,868) (3,263)
-------- -------- --------
Pro forma net income (loss) $ 5,867 $ (1,260) $(26,666)
======== ======== ========
Earnings (loss) per share
Basic, as reported $ 0.36 $ 0.19 $ (0.71)
======== ======== ========
Basic, pro forma $ 0.21 $ (0.04) $ (0.81)
======== ======== ========
Diluted, as reported $ 0.34 $ 0.18 $ (0.71)
======== ======== ========
Diluted, pro forma $ 0.20 $ (0.04) $ (0.81)
======== ======== ========
Warrant Grant -- On October 29, 1999, the Company issued a significant customer
a warrant to purchase 500,000 shares of common stock at an exercise price of
$2.00 per share. The estimated fair value of this
warrant was approximately $5.2 million, all of which has been recognized in the
Company's financial statement as follows: $2.8 million, $1.7 million and $0.7
million in fiscal years 2000, 2001 and 2002, respectively. On November 8, 2000,
the customer exercised the warrant. Additionally on December 10, 1999, the
Company entered into a consulting services agreement with this customer under
which such customer committed to $22 million of consulting fees over a
three-year period commencing January 1, 2000. During fiscal year 2002 the
agreement was extended 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 December 28,
2002, $16.2 million of consulting fees had been recognized in connection with
the agreement. There can be no certainty that the remaining $5.8 million of
consulting services will be purchased, however the agreement does contain a
termination fee in the amount of the lesser of $1.25 million or 25 percent of
unused and committed consulting services.
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 and the warrant in the weighted average number of
common shares outstanding for a period, if dilutive. In accordance with the
provisions of SFAS No. 128 "Earnings Per Share", the Company has not included
the effect of common stock options for fiscal year 2002 as the Company reported
a loss from continuing operations for that period. Had the Company reported net
income in fiscal year 2002, the treasury method of calculating common stock
equivalents would have resulted in approximately 791,000 additional diluted
shares.
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):
FISCAL FISCAL FISCAL
YEAR YEAR YEAR
2000 2001 2002
-------- -------- --------
Net income (loss) for basic and diluted earnings (loss) per
share:
Income (loss) before taxes and cumulative effect of a
change in accounting principle ............................. $ 16,778 $ 7,968 $ (34,398)
Income tax (provision) benefit............................... (6,711) (2,360) 12,135
-------- -------- ---------
Income (loss) before cumulative effect of a change in
accounting principle........................................ 10,067 5,608 ( 22,263)
Cumulative effect of a change in accounting principle........ (1,140)
-------- -------- ---------
Net income (loss) ........................................... $ 10,067 $ 5,608 $ (23,403)
======== ======== =========
Weighted average shares of common stock outstanding:
Weighted average shares of common stock outstanding for
basic earnings (loss) per share........................... 28,110 29,736 32,734
Effect of stock options ..................................... 946 1,038
Effect of warrant .......................................... 152
-------- -------- ---------
Weighted average shares of common stock outstanding for
diluted earnings (loss) per share.......................... 29,208 30,774 32,734
======== ======== =========
Basic earnings (loss) per share:
Income (loss) before cumulative effect of a change in
accounting principle ...................................... $ 0.36 $ 0.19 $ (0.68)
Cumulative effect of a change in accounting principle........ (0.03)
-------- -------- ---------
Net income (loss) ........................................... $ 0.36 $ 0.19 $ (0.71)
======== ======== =========
Diluted earnings (loss) per share:
Income (loss) before cumulative effect of a change in
accounting principle ....................................... $ 0.34 $ 0.18 $ (0.68)
Cumulative effect of a change in accounting principle........ (0.03)
-------- -------- ---------
Net income (loss)............................................ $ 0.34 $ 0.18 $ (0.71)
======== ======== =========
New Accounting Standards -
During 2002 the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS No. 144"), SFAS No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities" ("SFAS No. 146"), and SFAS
No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure"
("SFAS No. 148"). SFAS No. 144, which was adopted at the beginning of fiscal
2002, did not have a material impact on the Company's consolidated financial
statements in fiscal year 2002 (see Footnote 1. Identifiable Intangibles). SFAS
No. 146 will be effective for exit or disposal activities initiated after
December 31, 2002. Adoption of this Statement is not expected to have a material
impact on the Company's consolidated financial statements. Effective December
28, 2002, the Company made the disclosures required under SFAS No. 148 (see
Footnote 9 "Stock Option Plan and Stock Based Compensation").
Also during November 2002, the FASB issued FASB Interpretation No. 45 ("FIN
45"), Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others." FIN 45 requires that
upon issuance of a guarantee, the guarantor must recognize a liability for the
fair value of the obligation it assumes under that guarantee. FIN 45 also
requires additional disclosures by a guarantor in its interim and annual
financial statements about the obligations associated with guarantees issued.
The disclosure requirements are effective for financial statements of interim or
annual periods ending after December 15, 2002. The recognition and measurement
provisions are effective on a prospective basis to guarantees issued or modified
after December 31, 2002. In fiscal 2002 the Company adopted the disclosure
requirements under FIN 45. Complete adoption of this Interpretation in fiscal
2003 is not expected to have a material impact on the Company's financial
statements.
2. BUSINESS COMBINATIONS
On March 6, 2002, TMNG purchased the business and primary assets of CSMG, a
Delaware corporation, 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. Additionally,
the Company incurred direct costs of approximately $2.3 million related to the
acquisition and recorded this amount as an increase to purchase price.
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.
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 operating results of CSMG have been included in the Consolidated Condensed
Statements of Operations and Comprehensive Income (Loss) from the date of the
purchase.
The following table summarizes the final purchase price allocation of the
estimated fair value of the assets acquired and liabilities assumed as of the
date of acquisition. The allocation of the purchase price to identifiable
intangible assets was determined by an independent valuation.
AT MARCH 6, 2002
(AMOUNTS IN THOUSANDS)
Current assets $ 5,621
Property, plant and equipment 1,472
Employment agreements 3,200
Customer relationships 5,490
Company tradename 350
Deferred taxes (non-current) 1,501
Goodwill 36,206
-------
Total assets acquired 53,840
Current liabilities 3,428
Noncurrent liabilities 3,949
-------
Total liabilities assumed 7,377
-------
Net assets acquired $46,463
=======
Of the $5,490,000 assigned to customer relationships, $420,000 was identified as
customer backlog, with the remaining value based on the Company's expectations
of future revenue generated from the acquired customer base. As of December 28,
2002, customer backlog was fully amortized bv TMNG. The Company's estimate of
future revenue generated from the acquired customer base resulted in a customer
relationship value of $5,070,000 and is being amortized on a straight-line basis
over an estimated useful life of 60 months.
CSMG's tradename was valued at $350,000. CSMG's tradename has an estimated
useful life of 24 months and is amortized on a straight-line basis.
CSMG's employment agreements were valued at $3,200,000. 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.
On September 5, 2001, the Company completed its acquisition of Tri-Com, a
Maryland corporation. Tri-Com provides a full range of technology and systems
solutions to the communications industry. Consulting services offered include
providing end-to-end operating support system ("OSS"), data center, systems
solutions, data sourcing, legacy integration and middleware implementation. In
addition, Tri-Com periodically receives commissions on hardware purchases,
whereby customers utilize Tri-Com in procuring computer hardware and equipment.
The primary reason for the acquisition was for TMNG to further expand its
offering, enabling the Company's specialists to take an engagement from
strategy, to marketing
and operational definition, and to OSS enablement.
The acquisition, recorded under the purchase method of accounting, included the
purchase of all outstanding shares of Tri-Com, which resulted in a total
purchase price of approximately $5.2 million for the equity and assumption of
liabilities exceeding Tri-Com's net assets. Consideration consisted of $1.8
million cash and 490,417 shares of TMNG common stock valued at $3.0 million.
TMNG incurred direct costs of approximately $180,000 related to the acquisition
and recorded this amount as an increase to purchase price. In addition to the
above-mentioned costs, TMNG recorded approximately $216,000 as an increase to
purchase price in connection with the exchange of the Company's stock options
for vested stock appreciation rights held by Tri-Com employees at the time of
acquisition. The operating results of Tri-Com have been included in the
Consolidated Condensed Statements of Operations and Comprehensive Income (Loss)
from the date of acquisition.
On September 5, 2000, the Company completed its acquisition of TWG, a Maryland
corporation. TWG provides a full range of marketing consulting services to
various U.S. communications companies. Consulting services offered include
product development and positioning, strategy, customer relationship management
("CRM") and loyalty programs, communications, and channel management, among
other services. The acquisition, recorded under the purchase method of
accounting, included the purchase of all outstanding shares of TWG, which
resulted in a total purchase price of approximately $19.2 million consisting of
$11.2 million cash and $8.0 million in TMNG stock. Additionally, TMNG incurred
direct costs of $1.5 million related to the acquisition. The purchase price has
been allocated to assets acquired and liabilities assumed based on estimated
fair value at the date of acquisition. The excess of the purchase price over the
estimated fair value of the net assets acquired has been recorded as goodwill of
$18.6 million.
The following unaudited pro forma results of operations assumes that the CSMG,
Tri-Com and TWG acquisitions occurred at the beginning of the year preceding
each acquisition. The pro forma results of operations require various
assumptions including an assumption that the same amount of goodwill would have
been recognized had the transactions occurred at the beginning of the year
preceding each acquisition without regard to the then current levels of business
activity of CSMG, Tri-Com and TWG and without regard to any operating
efficiencies or other synergies. Consequently, the pro forma results of
operations are not necessarily indicative of the operating results which would
have occurred if the business combinations had been in effect on the dates
indicated or which may result in the future.
(unaudited)
-----------------------------------------
Fiscal Year Ended
(in thousands, except per share amounts) December 30, December 29, December 28,
2000 2001 2002
------------ ------------ ------------
Total revenues $ 102,553 $ 80,918 $ 36,822
Income (loss) before cumulative effect of
a change in accounting principle $ 9,442 $ 4,484 $ (22,494)
Net income (loss) $ 9,442 $ 4,484 $ (23,634)
Basic income (loss) before cumulative effect
of a change in accounting principle per
common share $ 0.33 $ 0.14 $ (0.68)
Diluted income (loss) before cumulative effect
of a change in accounting principle per
common share $ 0.32 $ 0.13 $ (0.68)
Basic net income (loss) per common share $ 0.33 $ 0.14 $ (0.71)
Diluted net income (loss) per common share $ 0.32 $ 0.13 $ (0.71)
Included in the pro forma information for fiscal year 2001 is approximately $1.4
million on a pre-tax basis in one-time nonrecurring severance charges incurred
by CSMG. Excluding these charges, pro forma basic and diluted net income per
share would have each been $0.16 for fiscal year 2001.
3. GOODWILL AND OTHER INTANGIBLES
Effective for the start of fiscal year 2002, the Company adopted the provisions
of SFAS No. 142 "Accounting for Goodwill and Intangible Assets"("SFAS No. 142").
In accordance with 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 of between 20 to 25% 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 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 Operations and Comprehensive Income (Loss). The
Company also performed its annual impairment test during fiscal year 2002, and
established October 28, 2002 as the annual impairment test date. Based on the
analysis of projected future cash flows and utilizing the assistance of an
outside valuation firm, the Company determined that the carrying value of
goodwill exceeded its fair market value and recorded an impairment loss related
to the Management Consulting Segment of approximately $24.4 million, and an
impairment loss related to the All Other Segment of approximately $0.8 million.
The combined $25.2 million goodwill impairment loss related to the Company's
annual impairment test has been reflected as a component of Income (Loss) from
Operations in the Statement of Operations and Comprehensive Income (Loss).
Goodwill and other intangible assets amortization expense for fiscal years 2001
and 2002 was $2.0 million and $2.9 million, respectively. Intangible
amortization expense is estimated to be approximately $2.8 million for fiscal
year 2003, $2.2 million in fiscal year 2004, $1.3 million in fiscal year 2005,
$1.0 million in fiscal year 2006 and $0.2 million in fiscal year 2007.
The changes in the carrying amount of goodwill as of December 29, 2001 and
December 28, 2002 are as follows (amounts in thousands):
Management Consulting All Other
Segment Segment Total
--------------------- --------- --------
Balance as of December 31, 2000 $ 18,016 $ 18,016
Goodwill acquired during fiscal year 2001 3,005 $ 2,991 5,996
Goodwill amortized during fiscal year 2001 (1,865) (1,865)
-------- --------- --------
Balance as of December 29, 2001 19,156 2,991 22,147
Goodwill acquired during fiscal year 2002 36,216 10 36,226
Impairment loss (26,227) (838) (27,065)
-------- --------- --------
Balance as of December 28, 2002 $ 29,145 $ 2,163 $ 31,308
======== ========= ========
The following information reconciles the net income and earnings per share
reported for fiscal years 2000 and 2001 to adjusted net income and earnings per
share exclusive of the amortization and goodwill and compares the adjusted
information to the current year results (amounts in thousands, except per share
data):
--------------------------------------------------------------------
FISCAL YEAR 2000 FISCAL YEAR 2001 FISCAL YEAR 2002
---------------- ---------------- ----------------
Reported income (loss) before cumulative
effect of change in accounting
principle $ 10,067 $ 5,608 $(22,263)
Cumulative effect of change in accounting
principle (1,140)
-------- -------- --------
Reported net income (loss) 10,067 5,608 (23,403)
Add back: Goodwill amortization, net of tax 373 1,119
-------- -------- --------
Net income (loss), as adjusted $ 10,440 $ 6,727 $(23,403)
======== ======== ========
Basic income (loss) per share before
cumulative effect of change in accounting
principle $ 0.36 $ 0.19 $ (0.68)
Cumulative effect of change in accounting
principle (0.03)
-------- -------- --------
Reported net income (loss) per share 0.36 0.19 (0.71)
Add back: Goodwill amortization, net of tax 0.01 0.04
-------- -------- --------
Basic income (loss) per share, as adjusted $ 0.37 $ 0.23 $ (0.71)
======== ======== ========
Diluted income (loss) per share before
cumulative effect of change in accounting
principle $ 0.35 $ 0.18 $ (0.68)
Cumulative effect of change in accounting
principle (0.03)
-------- -------- --------
Reported net income (loss) per share 0.35 0.18 (0.71)
Add back: Goodwill amortization, net of tax 0.01 0.04
-------- -------- --------
Diluted income (loss) per share, as adjusted $ 0.36 $ 0.22 $ (0.71)
======== ======== ========
4. CAPITAL STRUCTURE
On March 6, 2002, the Company completed its acquisition of CSMG and issued
2,892,800 shares of the Company's voting common stock in connection with the
purchase. The fair market value of the issued stock was approximately $13.5
million.
On September 5, 2001, the Company completed its acquisition of Tri-Com and
issued 490,417 shares of the Company's voting common stock in connection with
the purchase. The fair market value of the issued stock was approximately $3.0
million.
On September 5, 2000, the Company completed its acquisition of TWG and issued
348,157 shares of the Company's voting common stock in connection with the
purchase. The fair market value of the issued stock was approximately $8.0
million.
On August 2, 2000, the Company closed a secondary public offering of 3,000,000
shares of common stock, including 1,000,000 shares offered by the Company. The
net proceeds to the Company from the secondary public offering, after deducting
applicable underwriting discounts and offering expenses, was approximately $20.9
million. Of the remaining shares, approximately 1,800,000 were offered by
Behrman Capital II, LP (Behrman) and the balance was offered by certain other
selling stockholders. The Company did not receive any of the proceeds from the
sales of the shares sold by the existing stockholders.
5. MAJOR CUSTOMERS, BUSINESS SEGMENTS AND SIGNIFICANT GROUP CONCENTRATIONS OF
CREDIT RISK
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 an analysis of the criteria in SFAS No. 131 "Disclosure about Segments
of an Enterprise and Related Information," the Company has concluded it has
five operating segments, of which four are aggregated in one reportable segment,
the Management Consulting Services segment, and the remaining segment in 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 commissions and rebates
received in connection with the procurement of hardware for third parties. The
accounting policies for the segments are the same as those described in the
summary of significant accounting policies. Management evaluates segment
performance based upon Income (Loss) from Operations, excluding equity related
charges, goodwill and intangibles amortization, and goodwill impairment. 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
------------------- ------ ------------ --------
FISCAL YEAR 2000
Net sales to external customers $77,727 $ 77,727
Income from operations $21,307 $ (7,704) $ 13,603
Total assets $25,473 $ 93,956 $119,429
FISCAL YEAR 2001
Net sales to external customers $54,236 $ 596 $ 54,832
Income from operations $10,171 $ 547 $ (5,161) $ 5,557
Total assets $11,111 $ 40 $117,891 $129,042
FISCAL YEAR 2002
Net sales to external customers $33,057 $1,538 $ 34,595
Income (loss) from operations $(6,865) $ 634 $(29,126) $(35,357)
Total assets $ 9,330 $ 171 $115,958 $125,459
Segment assets, regularly reviewed by management as part of its overall
assessment of the segments' performance, 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):
FISCAL FISCAL FISCAL
YEAR YEAR YEAR
2000 2001 2002
------- ------- --------
Total operating earnings (losses) for
reportable segments $21,307 $10,718 $ (6,231)
Equity related charges (7,083) (3,165) (1,074)
Goodwill and intangibles amortization (621) (1,996) (2,887)
Goodwill impairment (25,165)
------- ------- --------
Income (loss) from operations $13,603 $ 5,557 $(35,357)
======= ======= ========
Major customers in terms of significance to TMNG's revenues (i.e. in excess of
10% of revenues) for fiscal years 2000, 2001 and 2002, and accounts receivable
as of December 29, 2001 and December 28, 2002 were as follows (amounts in
thousands):
REVENUES ACCOUNTS RECEIVABLE
------------------------------------ ---------------------------
FISCAL FISCAL FISCAL
YEAR YEAR YEAR DECEMBER 29, DECEMBER 28,
2000 2001 2002 2001 2002
-------- ------ ------ ------------ ------------
Customer A ......... $ 13,929
Customer B ......... $5,850 $ 1,238
Customer C ......... $7,185 $4,392 $ 2,360 $ 2,345
Customer D ......... $6,220 $ 546
Revenues from our ten most significant customers accounted for approximately
68%, 61% and 67% of revenues for fiscal years 2000, 2001 and 2002, respectively.
Substantially all of TMNG's receivables are obligations of companies in the
communications industry. The Company generally does not require collateral or
other security on its accounts receivable. The credit risk on these accounts is
controlled through credit approvals, limits and monitoring procedures. The
Company records bad debt expense based on judgment about the anticipated default
rate on receivables owed to TMNG at the end of the reporting period. That
judgment is based on the Company's uncollected account experience in prior years
and the ongoing evaluation of the credit status of TMNG's customers and the
communications industry in general. The changes in the Company's allowance for
doubtful accounts is as follows (amounts in thousands):
FISCAL FISCAL FISCAL
YEAR YEAR YEAR
2000 2001 2002
------- -------- --------
Beginning balance $ 350 $ 766 $ 517
Bad debt expense 1,004 812 1,207
Account write-offs (588) (1,061) (1,253)
------- -------- --------
Ending balance $ 766 $ 517 $ 471
======= ======== ========
Revenues earned in the United States and internationally based on the location
where the services are performed for fiscal year 2000, fiscal year 2001 and
fiscal year 2002 are as follows (amounts in thousands):
FISCAL YEAR 2000 FISCAL YEAR 2001 FISCAL YEAR 2002
------------------------- ---------------------- ----------------------
LOSS BEFORE
INCOME TAX
BENEFIT AND
CUMULATIVE
INCOME INCOME EFFECT OF A
BEFORE BEFORE CHANGE IN
INCOME INCOME ACCOUNTING
REVENUES TAXES REVENUES TAXES REVENUES PRINCIPLE
-------- -------- -------- -------- -------- -----------
United States ........ $ 59,519 $ 12,847 $ 48,402 $ 7,034 $ 31,935 $ (31,753)
International:
United Kingdom ..... 7,585 1,638 5,546 806
Canada ............. 2,078 448 295 43 11 (11)
Ireland ............ 965 208 141 20 496 (493)
Switzerland ........ 5,034 1,087 56 8
Argentina .......... 2,064 446
The Netherlands 1,990 (1,979)
Other .............. 482 104 392 57 163 (162)
-------- -------- -------- -------- -------- -----------
Total ...... $ 77,727 $ 16,778 $ 54,832 $ 7,968 $ 34,595 $ (34,398)
======== ======== ======== ======== ======== ===========
No significant long-lived assets are deployed outside the United States.
6. PROPERTY AND EQUIPMENT
DECEMBER 29, DECEMBER 28,
2001 2002
------------ ------------
(000'S)
Furniture and fixtures................................. $ 564 $ 896
Software and computer equipment........................ 1,889 2,552
Leasehold improvements................................. 241 711
------ ------
2,694 4,159
Less: Accumulated depreciation and amortization........ 1,008 1,874
------ ------
$1,686 $2,285
====== ======
Depreciation and amortization expense on property and equipment was
approximately $289,000, $530,000 and $948,000 for fiscal years 2000, 2001 and
2002, respectively.
During fiscal year 2002, the Company recorded a loss of approximately $205,000
in connection with the retirement of office furniture, computer equipment and
furniture and fixtures. The Company did not receive any proceeds from the asset
retirements.
7. INCOME TAXES
For fiscal years 2000, 2001 and 2002, the income tax provision (benefit),
exclusive of the tax associated with the cumulative effect of the change in
accounting principle consists of the following (amounts in thousands):
FISCAL FISCAL FISCAL
YEAR YEAR YEAR
2000 2001 2002
-------- -------- --------
Federal
Current ............................ $ 5,270 $ 1,267 $ (2,595)
Deferred tax benefit ............... (1,507) (12) (7,717)
-------- -------- --------
3,763 1,255 (10,312)
State
Current ............................ 1,523 486 (817)
Deferred tax benefit ............... (215) (2) (1,103)
-------- -------- --------
1,308 484 (1,920)
Foreign
Current ............................ 1,765 496 97
Deferred tax (benefit) expense ..... (125) 125
-------- -------- --------
1,640 621 97
-------- -------- --------
Total ................................ $ 6,711 $ 2,360 $(12,135)
======== ======== ========
The following is a reconciliation between the provision (benefit) for income
taxes and the amounts computed at the statutory federal income tax rate (amounts
in thousands):
FISCAL YEAR FISCAL YEAR FISCAL YEAR
2000 2001 2002
----------------- ----------------- -----------------
AMOUNT % AMOUNT % AMOUNT %
-------- ---- -------- ---- -------- ----
Computed expected federal income
tax expense .......................... $ 5,872 35.0 $ 2,789 35.0 $(12,039) (35.0)
State income tax expense, net of
federal benefit ...................... 839 5.0 316 4.0 (1,579) (4.6)
Tax-exempt investment income .......... (690) (8.7)
Goodwill impairment 1,536 4.5
Other ................................. (55) (0.7) (53) (0.2)
-------- ---- -------- ---- -------- ----
Total ....................... $ 6,711 40.0 $ 2,360 29.6 $(12,135) (35.3)
======== ==== ======== ==== ======== ====
Items giving rise to the provision for deferred income taxes (benefit) are as
follows (amounts in thousands):
FISCAL FISCAL FISCAL
YEAR YEAR YEAR
2000 2001 2002
-------- -------- --------
Goodwill ....................................... $ (83) $ (249) $ (7,988)
Bad debt reserve ............................... (158) 441 13
Stock option compensation expense .............. (1,168) (133) 5
Change from cash to accrual tax basis accounting (274) (274)
Intangible assets (655)
Valuation allowance ............................ (125)
Other .......................................... (39) 326 (195)
-------- -------- --------
Total ................................ $ (1,847) $ 111 $ (8,820)
======== ======== ========
The significant components of deferred income tax assets and the related balance
sheet classifications, as of December 29, 2001 and December 28, 2002 are as
follows (amounts in thousands):
DECEMBER 29, DECEMBER 28,
2001 2002
------------ ------------
Current deferred tax assets:
Accounts receivable ............................. $ 156 $ 143
Accrued expenses ................................ 209 351
---------- ---------
Current deferred tax asset .............. $ 365 $ 494
========== =========
Non-current deferred tax assets:
Stock option compensation expense ............... $ 2,898 $ 2,893
Goodwill ........................................ 332 8,320
Reserves ........................................ 104 419
Subsidiary net operating loss carryover ......... 730 732
Intangible assets 709
Unfavorable lease liability 1,180
Other ........................................... 16 19
---------- ---------
Non-current deferred tax asset .......... $ 4,080 $ 14,272
========== =========
On March 6, 2002, the Company acquired Cambridge Strategic Management Group,
Inc. and recorded a deferred tax asset of approximately $1,501,000 in connection
with unfavorable leases assumed in the acquisition.
8. LEASE COMMITMENTS
The Company leases office facilities, computer equipment, office furniture, and
an automobile under various operating and capital leases expiring at various
dates through May 2011.
Following is a summary of future minimum payments under capitalized leases and
operating leases that have initial or remaining noncancellable lease terms in
excess of one year at December 28, 2002 (amounts in thousands):
CAPITALIZED OPERATING
FISCAL YEAR LEASES LEASES
- --------------------------------------- ----------- ---------
2003 $ 348 $ 2,121
2004 311 1,758
2005 191 1,591
2006 20 1,540
2007 1,568
Later years through 2011 5,357
--------- ---------
Total minimum lease payments $ 870 $ 13,935
Less amount representing interest (71) =========
---------
Present value of minimum capitalized
lease payments 799
Current portion (306)
----------
Long-term capitalized lease obligations $ 493
==========
Assets recorded under capital leases are included in property and equipment as
follows (amounts in thousands):
DECEMBER 29, DECEMBER 28,
2001 2002
------------ ------------
Furniture and fixtures $ 100 $ 220
Software and computer equipment 29 505
--------- ---------
129 725
Less: Accumulated depreciation (6) (183)
--------- ---------
$ 123 $ 542
========= =========
Total rental expense was approximately $253,000, $553,000 and $2,084,000 for
fiscal years 2000, 2001 and 2002, respectively.
9. STOCK OPTION PLAN AND STOCK BASED COMPENSATION
The Company has 6,294,000 shares of the Company's common stock authorized for
issuance under the Company's 1998 Equity Incentive Plan (the 1998 Plan). The
1998 Plan, a shareholder approved plan, provides the Company's common stock for
the granting of incentive stock options and nonqualified stock options to
employees, and nonqualified stock options to employees, directors and
consultants. Incentive stock options are granted at an exercise price of not
less than fair value per share of the common stock on the date of grant as
determined by the board of directors. Vesting and exercise provisions are
determined by the board of directors. As of December 28, 2002, all options
granted under the 1998 Plan were non-qualified stock options. Options granted
under the 1998 Plan generally become exercisable over a three to four year
period beginning on the date of grant. Options granted under the 1998 Plan have
a maximum term of ten years.
A summary of the status of the Company's 1998 Plan as of December 30, 2000,
December 29, 2001 and December 28, 2002, and changes during the years ending on
those dates is presented below:
EXERCISE PRICE EQUALS FAIR MARKET VALUE AT GRANT DATE:
DECEMBER 30, DECEMBER 29, DECEMBER 28,
2000 2001 2002
------------------------------- ---------------------------- ------------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
Outstanding at beginning of year 746,081 $ 1.90 1,717,434 $ 14.32 3,075,228 $ 9.95
Granted 1,173,500 20.23 1,577,212 5.09 592,100 2.05
Exercised (156,146) 1.48 (116,917) 1.48 (100,377) 1.52
Forfeited/cancelled (46,001) 7.33 (102,501) 17.88 (423,492) 10.09
--------- --------- ---------
Outstanding at end of year 1,717,434 $ 14.32 3,075,228 $ 9.95 3,143,459 $ 8.72
========= ========= =========
Options exercisable at year-end 493,340 $ 10.03 841,454 $ 11.32 1,612,091 $ 9.41
========= ========= =========
Weighted average fair value of
options granted during the year $ 15.18 $ 4.16 $ 1.65
The following table summarizes information about stock options outstanding as of
December 28, 2002:
WEIGHTED AVERAGE
NUMBER WEIGHTED REMAINING NUMBER WEIGHTED
RANGE OF OUTSTANDING AT AVERAGE CONTRACTUAL EXERCISABLE AT AVERAGE
EXERCISE PRICES DECEMBER 28, 2002 EXERCISE PRICE LIFE DECEMBER 28, 2002 EXERCISE PRICE
- ---------------- ----------------- -------------- ---------------- ----------------- --------------
$ 0.00 to $ 2.00 768,322 $ 1.42 7.88 445,822 $ 1.60
2.01 to 6.00 1,217,737 4.37 8.51 559,244 4.50
6.01 to 20.00 485,000 10.21 8.01 188,125 10.90
20.01 to 35.00 672,400 23.84 7.33 418,900 23.60
--------- ------ --------- ------
TOTAL 3,143,459 $ 8.72 1,612,091 $ 9.41
========= ====== ========= ======
EXERCISE PRICE LESS THAN FAIR MARKET VALUE AT GRANT DATE:
DECEMBER 30, DECEMBER 29, DECEMBER 28,
2000 2001 2002
----------------------------- ------------------------------ --------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
Outstanding at beginning of year 1,284,625 $ 2.23 1,074,504 $ 2.26 897,758 $ 2.32
Granted 2,500 20.00
Exercised (120,037) 2.03 (86,734) 1.88 (54,088) 1.85
Forfeited/cancelled (92,584) 2.64 (90,012) 2.00 (75,334) 2.00
--------- --------- -------
Outstanding at end of year 1,074,504 $ 2.26 897,758 $ 2.32 768,336 $ 2.38
========= ========= =======
Options exercisable at year-end 247,673 $ 2.21 428,625 $ 2.30 606,084 $ 2.32
========= ========= =======
Weighted average fair value of
options granted during the year $ 17.42
The following table summarizes information about stock options outstanding at
December 28, 2002:
WEIGHTED AVERAGE
NUMBER WEIGHTED REMAINING NUMBER WEIGHTED
RANGE OF OUTSTANDING AT AVERAGE CONTRACTUAL EXERCISABLE AT AVERAGE
EXERCISE PRICES DECEMBER 28, 2002 EXERCISE PRICE LIFE DECEMBER 28, 2002 EXERCISE PRICE
--------------- ----------------- -------------- ---------------- ----------------- --------------
$ 0.00 to $ 1.75 135,834 $ 1.52 6.01 135,834 $ 1.52
1.76 to 2.00 545,002 2.00 6.65 405,250 2.00
2.01 to 20.00 87,500 6.11 6.86 65,000 5.98
------- ------ ------- ------
768,336 $ 2.38 606,084 $ 2.32
======= ====== ======= ======
The Company has 3,900,000 shares of the Company's common stock authorized for
issuance under the 2000 Supplemental Stock Plan (the 2000 Plan). The plan
provides the Company's common stock for the granting of nonqualified stock
options to employees and is not subject to shareholder approval. Vesting and
exercise provisions are determined by the board of directors. Options granted
under the plan become exercisable over a period of up to four years beginning on
the date of grant and have a maximum term of ten years.
A summary of the status of the Company's 2000 Plan as of December 30, 2000,
December 29, 2001 and December 28, 2002, and changes during the years ending on
those dates is presented below:
EXERCISE PRICE EQUALS FAIR MARKET VALUE AT GRANT DATE:
DECEMBER 30, DECEMBER 29, DECEMBER 28,
2000 2001 2002
---------------------------- ---------------------------- -----------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
Outstanding at beginning of year 295,000 $ 18.70 2,165,114 $ 6.39
Granted 295,000 $ 18.70 2,109,642 5.03 1,316,750 2.97
Exercised (12,375) 4.00
Forfeited/cancelled (239,528) 9.54 (1,257,263) 5.95
------- --------- ----------
Outstanding at end of year 295,000 $ 18.70 2,165,114 $ 6.39 2,212,226 $ 4.62
======= ========= ==========
Options exercisable at year-end 55,500 $ 19.05 458,433 $ 6.29
======= ========= ==========
Weighted average fair value of
options granted during the year $ 14.04 $ 4.11 $ 2.39
The following table summarizes information about stock options outstanding at
December 28, 2002:
WEIGHTED AVERAGE
NUMBER WEIGHTED REMAINING NUMBER WEIGHTED
RANGE OF OUTSTANDING AT AVERAGE CONTRACTUAL EXERCISABLE AT AVERAGE
EXERCISE PRICES DECEMBER 28, 2002 EXERCISE PRICE LIFE DECEMBER 28, 2002 EXERCISE PRICE
- ---------------- ----------------- -------------- ---------------- ----------------- --------------
$ 0.00 to $ 3.50 835,750 $ 2.82 9.40
3.51 to 5.00 660,388 4.02 8.28 167,692 4.02
5.01 to 7.00 631,588 5.67 8.77 248,741 5.62
7.01 to 21.00 84,500 19.34 7.73 42,000 19.40
--------- ------ ------- ------
TOTAL 2,212,226 $ 4.62 458,433 $ 6.29
========= ====== ======= ======
EXERCISE PRICE LESS THAN FAIR MARKET VALUE AT GRANT DATE:
DECEMBER 30, DECEMBER 29, DECEMBER 28,
2000 2001 2002
-------------------------- -------------------------- -------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
Outstanding at beginning of year 53,200 $ 5.50
Granted 53,200 $ 5.50
Exercised
Forfeited/cancelled (29,663) 5.50
------ -------
Outstanding at end of year 53,200 $ 5.50 23,537 $ 5.50
====== =======
Options exercisable at year-end 5,884 $ 5.50
====== =======
Weighted average fair value of
options granted during the year $ 4.61
The following table summarizes information about stock options outstanding at
December 28, 2002:
WEIGHTED AVERAGE
NUMBER WEIGHTED REMAINING NUMBER WEIGHTED
OUTSTANDING AT AVERAGE CONTRACTUAL EXERCISABLE AT AVERAGE
EXERCISE PRICE DECEMBER 28, 2002 EXERCISE PRICE LIFE DECEMBER 28, 2002 EXERCISE PRICE
- -------------- ----------------- -------------- ----------------- ----------------- --------------
$ 5.50 23,537 $ 5.50 8.72 5,884 $ 5.50
------ ------ ----- ------
23,537 $ 5.50 5,884 $ 5.50
====== ====== ===== ======
At December 28, 2002, the Company had outstanding a total of 6,147,600 options
to acquire shares with a weighted average exercise price of $6.44 and a weighted
average remaining contractual life of 8.13 years. Of these options, 2,682,500
were exercisable at December 28, 2002 with a weighted average exercise price of
$7.27.
The Company follows APB No. 25 to account for the employee stock purchase plan
and for employee and certain non-employee directors' stock options. In
connection with APB 25 grants made in fiscal years 2000 and 2001, the Company
recorded unearned compensation of approximately $144,000 and $29,000,
respectively, representing the difference between the exercise price and the
fair value of the common stock on the dates such stock options were granted.
Such amounts are being amortized by charges to operations on a graded vesting
method over the corresponding vesting period of each respective option,
generally three to four years. All option grants in 2002 were issued with the
exercise price of the option equal to the market price of the Company's stock as
of the grant date, and therefore the Company did not recognize any additional
unearned compensation in 2002.
The Company recognizes compensation cost over the vesting periods. These options
have resulted in equity related charges to operations of
approximately $4.3 million, $1.4 million and $0.5 million for fiscal years 2000,
2001 and 2002, respectively. These expenses have been allocated among various
expense categories.
During fiscal year 2000, the Company initiated an employee stock purchase plan
for all eligible employees. Under the plan, shares of the Company's common stock
may be purchased at six-month intervals at 85% of the lower of the fair market
value on the first day of the enrollment period or on the last day of each
six-month period. Employees may purchase shares through a payroll deduction
program having a value not exceeding 15% of their gross compensation during an
offering period. During fiscal years 2001 and 2002, 52,261 and 75,451 shares
were purchased under the plan. At December 28, 2002, 116,000 shares were
reserved for future issuance. The employee stock purchase plan is classified as
a non-compensatory plan under APB 25.
The Company accounts for its stock option awards to independent subject matter
experts and other non-employees in accordance with the fair value measurement
provision of SFAS No. 123, Accounting for Stock Based Compensation. Under SFAS
No. 123, stock options are valued at grant date using the Black-Scholes option
pricing model, and this expense is recognized ratably over the vesting period.
Consequently, the expense of these options is recognized in the current and
future reporting periods based on the fair value at the end of each period. The
fair value of each option grant during fiscal years 2000, 2001 and 2002 was
estimated on the date of grant using the Black-Scholes option pricing model with
the following assumptions:
FISCAL YEAR 2000 FISCAL YEAR 2001 FISCAL YEAR 2002
---------------- ----------------- ---------------------
Expected volatility factor..... 95% 114% 111%
Risk-free interest rate........ 4.86% - 6.69% 1.98% - 4.22% 1.34% - 5.00%
Expected life of options....... 5 years 5 years 5 years
Expected life of stock issued
under employee stock purchase
plan.......................... 0.5 - 2.0 years 0.5 - 2.0 years 0.5 years - 2.0 years
Expected dividend rate......... 0% 0% 0%
10. 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 aggregate borrowings under the loan agreements between the two
remaining officers and the Company are $1,050,000. Borrowings against the lines
of credit at December 29, 2001 and December 28, 2002 totaled $200,000 and
$300,000, respectively. 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.
11. 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. The LOC provides
for reduction dates of the amount deposited with the financial institution
during the LOC term as follows (amounts in thousands):
Reduction Date Amount
- ----------------- -------
3/6/02 - 5/15/02 $ 1,013
5/15/02 - 5/15/03 886
5/15/03 - 5/15/04 633
5/15/04 - 5/15/05 380
5/15/05 - 2/28/11 273
The Company would be required to perform under the agreement in the event it was
to default on balances due and owing the landlord on the leased office space.
This amount is included in "Cash and Cash Equivalents" on the Company's
consolidated condensed balance sheet as of December 28, 2002. An obligation has
not been recorded in connection with the LOC on the Company's consolidated
condensed balance sheet as of December 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, 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.
The customer is contractually required to satisfy the obligation with the vendor
by the end of January 2003. 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 December 28, 2002. An
obligation has not been recorded in connection with the LOC on the Company's
consolidated condensed balance sheet as of December 28, 2002.
12. RELATED PARTY TRANSACTIONS
During fiscal year 2000, four members of the TMNG board of directors were also
directors of customers with which TMNG did business. The Company earned revenues
from these customers of approximately $16.1 million during fiscal year 2000.
During fiscal year 2001 a member of the TMNG board of directors was also a
director of a customer for which TMNG did business, and the Company also
performed services for one customer in which one member of the TMNG board of
directors owns an equity interest. Revenues earned from these customers during
fiscal year 2001 were approximately $2.3 million. During fiscal year 2002, one
member of the TMNG board of directors was also director of a customer with which
TMNG did business. Revenues earned from the customer during 2002 totaled
approximately $308,000. No receivables were outstanding by the above customers
as of December 29, 2001 and December 28, 2002, respectively.
During fiscal years 2000, 2001 and 2002, TMNG made payments of approximately
$432,000, $70,000 and $190,000 to two legal firms of which two members of the
TMNG board of directors own a partial equity interests. Such payments were for
legal services rendered in connection with the Company's equity offerings and
for other matters arising in the normal course of business. The costs associated
with the equity offerings were classified as a component of additional paid-in
capital, and the costs associated with business matters arising in the normal
course of business were classified as selling, general and administrative in the
consolidated statements of operations and comprehensive income.
13. 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 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 the Company 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.
In 2002 the Company received demands of approximately $1.2 million by the
bankruptcy trustees of several former clients in connection with collected
balances near the customers' respective bankruptcy filing dates. Although the
Company does not believe it received any preference payments from these former
clients and plans to vigorously defend its position, the Company has established
reserves of $886,000 which it believes are adequate in the event of loss or
settlement on such claims.
The Company 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 additional
claims on collected balances for professional services near the bankruptcy
filing date. While the resolution of any of such actions, claims, or the matters
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.
14. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
In management's opinion, the interim financial data below reflect all
adjustments necessary to fairly state the results of the interim period
presented. Adjustments are of a normal recurring nature necessary for a fair
presentation of the information for the periods presented. Results of any one or
more quarters are not necessarily indicative of annual results or continuing
trends.
(AMOUNTS IN THOUSANDS)
2002 QUARTERS ENDED
--------------------------------------------------------
March 30, June 29, September 28, December 28,
-------- -------- ------------- ------------
Revenues ................................... $ 7,268 $ 9,927 $ 8,756 $ 8,644
Cost of Services:
Direct cost of services................... 3,674 4,264 4,372 4,545
Equity related charges.................... 495 177 110 (61)
-------- -------- -------- --------
Total cost of services............ 4,169 4,441 4,482 4,484
-------- -------- -------- --------
Gross Profit ............................... 3,099 5,486 4,274 4,160
Operating Expenses:
Selling, general and administrative....... 5,510 7,507 4,737 5,269
Depreciation and amortization............. 581 989 739 1,526
Equity related charges.................... 163 117 32 41
Goodwill impairment 25,165
-------- -------- -------- --------
Total operating expenses.......... 6,254 8,613 5,508 32,001
-------- -------- -------- --------
Loss From Operations........................ (3,155) (3,127) (1,234) (27,841)
Other Income:
Interest income........................... 310 212 243 231
Other, net................................ (11) (4) (8) (14)
-------- -------- -------- --------
Total other income................ 299 208 235 217
-------- -------- -------- --------
Loss Before Income Tax Benefit
And Cumulative Effect of a Change
in Accounting Principle (2,856) (2,919) (999) (27,624)
Income Tax Benefit ....... 1,191 1,097 351 9,496
-------- -------- -------- --------
Loss Before Cumulative Effect of a
Change in Accounting Principle (1,665) (1,822) (648) (18,128)
Cumulative Effect of Change in Accounting
Principle, Net of Tax Benefit of $760 (1,140)
-------- -------- -------- --------
Net Loss (2,805) (1,822) (648) (18,128)
Other Comprehensive Income (Loss)
Foreign currency translation adjustment... (33) 15 108 6
-------- -------- -------- --------
Comprehensive Loss ................ $ (2,838) $ (1,807) $ (540) $(18,122)
======== ======== ======== ========
Loss Before Cumulative Effect of
a Change in Accounting Principle Per
Common Share
Basic $ (0.05) $ (0.05) $ (0.02) $ (0.54)
======== ======== ======== ========
Diluted $ (0.05) $ (0.05) $ (0.02) $ (0.54)
======== ======== ======== ========
Cumulative Effect of a Change in Accounting
Principle Per Common Share
Basic $ (0.04)
========
Diluted $ (0.04)
========
Net Loss Per Common Share
Basic..................................... $ (0.09) $ (0.05) $ (0.02) $ (0.54)
======== ======== ======== ========
Diluted................................... $ (0.09) $ (0.05) $ (0.02) $ (0.54)
======== ======== ======== ========
Shares Used in Calculation of Net Loss Per
Common Share
Basic..................................... 31,032 33,259 33,297 33,329
======== ======== ======== ========
Diluted................................... 31,032 33,259 33,297 33,329
======== ======== ======== ========
For the period ending March 30, 2002, net loss and basic and diluted net loss
per common share differ from the amounts previously reported by the Company on
Form 10-Q as filed with the Securities and Exchange Commission on May 13, 2002.
The Company had previously reported a net loss of $1,665 and a basic and diluted
net loss per common share of $0.05 for the thirteen weeks ended March 30, 2002,
compared to the net loss of $2,805 and basic and diluted net loss per common
share of $0.09 as shown above for the same period. The additional loss was
attributable to the Company's completion of the goodwill impairment test
required under SFAS No. 142 "Accounting for Goodwill and Intangible Assets"
during the second quarter of 2002. In accordance with the adoption provisions of
SFAS 142, the goodwill impairment loss was reported as a cumulative effect of a
change in accounting principle and retroactively recognized in the first quarter
of fiscal year 2002.
(AMOUNTS IN THOUSANDS)
2001 QUARTERS ENDED
--------------------------------------------------------
March 31, June 30, September 29, December 29,
-------- -------- ------------- ------------
Revenues ................................... $ 18,334 $ 13,691 $ 12,231 $ 10,576
Cost of Services:
Direct cost of services .................. 9,544 6,892 5,774 5,137
Equity related charges ................... 413 707 631 570
-------- -------- -------- --------
Total cost of services ........... 9,957 7,599 6,405 5,707
-------- -------- -------- --------
Gross Profit ............................... 8,377 6,092 5,826 4,869
Operating Expenses:
Selling, general and administrative ...... 5,310 3,837 4,023 3,770
Depreciation and amortization ............ 600 574 649
Equity related charges ................... 198 261 211 173
-------- -------- -------- --------
Total operating expenses ......... 5,508 4,698 4,808 4,592
-------- -------- -------- --------
Income From Operations ..................... 2,869 1,394 1,018 277
Other Income:
Interest income .......................... 721 692 611 410
Other, net ............................... (15) (3) (6) 2
-------- -------- -------- --------
Total other income ............... 706 689 605 412
-------- -------- -------- --------
Income Before Provision for Income Taxes ... 3,575 2,083 1,623 689
Provision for Income (Taxes) Benefit ....... (1,238) (655) (492) 24
-------- -------- -------- --------
Net Income ................................. 2,337 1,428 1,131 713
Other Comprehensive Income (Loss)
Foreign currency translation adjustment .. (45) (3) 18 12
-------- -------- -------- --------
Comprehensive Income ....................... $ 2,292 $ 1,425 $ 1,149 $ 725
======== ======== ======== ========
Net Income Per Common Share
Basic .................................... $ 0.08 $ 0.05 $ 0.04 $ 0.02
======== ======== ======== ========
Diluted .................................. $ 0.08 $ 0.05 $ 0.04 $ 0.02
======== ======== ======== ========
Shares Used in Calculation of Net Income Per
Common Share
Basic .................................... 29,490 29,560 29,737 30,161
======== ======== ======== ========
Diluted .................................. 30,276 30,491 30,756 31,396
======== ======== ======== ========
With the acquisition of Tri-Com in September 2001, the Company determined it had
four operating segments, of which three are aggregated in one reportable
segment, the Management Consulting Services segment, and the remaining segment
in All Other. See Note 5 for segment information for fiscal years 2002, 2001 and
2000. The fiscal year 2001 quarterly results of operations have not been
restated to disclose segment information. Revenues from external customers and
operating income for the Management Consulting Services segment in the quarter
ended December 29, 2001 were approximately $10.3 million and $1.4 million,
respectively.
PART III
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company's definitive Proxy Statement for its Annual Meeting of Shareholders
to be held in June 2003 (the "Proxy Statement") contains, under the captions
"Election of Directors," "Officers" and "Section 16(a) Beneficial Ownership
Reporting Compliance" the information required by Item 10 of this Form 10-K,
which information is incorporated herein by this reference.
ITEM 11. EXECUTIVE COMPENSATION
The Proxy Statement contains under the captions "Election of Directors,"
"Executive Compensation," "Compensation Committee Report" and "Company
Performance" the information required by Item 11 of this Form 10-K, which
information is incorporated herein by this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The Proxy Statement contains under the caption "Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder Matters" and "Equity
Compensation Plan Information" the information required by Item 12 of this Form
10-K, which information is incorporated herein by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Proxy Statement contains under the caption "Certain Relationships and
Transactions with Related Persons" the information required by Item 13 of this
Form 10-K, which information is incorporated herein by this reference.
ITEM 14. 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 annual 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 IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual Report on Form
10-K:
(1) The response to this portion of Item 15 is set forth in Item 8 of Part II
hereof.
Schedules for which provision is made in the applicable accounting regulations
of the Securities and Exchange Commission are not required under the related
instructions or are inapplicable and therefore have been omitted.
(3) Exhibits
See accompanying Index to Exhibits. The Company will furnish to any stockholder,
upon written request, any exhibit listed in the accompanying Index to Exhibits
upon payment by such stockholder of the Company's reasonable expenses in
furnishing any such exhibit.
(b) Reports on Form 8-K
The Company filed a Form 8-K on December 2, 2002 with the Securities and
Exchange Commission announcing the elevation of President, CEO and Director,
Richard P. Nespola, to the post of the Chairman of the Board of Directors.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report on Form 10-K to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Overland Park, State of Kansas, on the 28th day of March 2003.
THE MANAGEMENT NETWORK GROUP, INC.
By: /s/ RICHARD P. NESPOLA
------------------------------------
Richard P. Nespola
Chairman of the Board,
President and Chief
Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Richard P. Nespola as his
attorney-in-fact, each with full power of substitution, for him or her in any
and all capacities, to sign any and all amendments to this Report on Form 10-K,
and to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming our signatures as they may be signed by our said attorney to any and
all amendments to said Report.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
on Form 10-K has been signed by the following persons in the capacities and on
the dates indicated:
SIGNATURE TITLE DATE
--------- ----- ----
/s/ RICHARD P. NESPOLA Chairman of the Board, March 28, 2003
- ------------------------------- President and Chief
Richard P. Nespola Executive Officer
(Principal executive
officer)
/s/ DONALD E. KLUMB Chief Financial Officer and March 28, 2003
- ------------------------------- Treasurer (Principal
Donald E. Klumb financial officer and
principal accounting
officer)
/s/ MICKY K. WOO Director March 28, 2003
- -------------------------------
Micky K. Woo
/s/ GRANT G. BEHRMAN Director March 28, 2003
- -------------------------------
Grant G. Behrman
/s/ WILLIAM M. MATTHES Director March 28, 2003
- -------------------------------
William M. Matthes
/s/ STEPHEN B. BRODEUR Director March 28, 2003
- -------------------------------
Stephen B. Brodeur
/s/ ANDREW LIPMAN Director March 28, 2003
- -------------------------------
Andrew Lipman
/s/ ROY A. WILKENS Director March 28, 2003
- -------------------------------
Roy A. Wilkens
/s/ FRANK SISKOWSKI Director March 28, 2003
- -------------------------------
Frank Siskowski
CERTIFICATIONS
I, Richard P. Nespola, Chairman of the Board, President and Chief Executive
Officer of The Management Network Group, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of The Management Network
Group, Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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 annual report (the "Evaluation Date"); and
c) presented in this annual 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 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
annual report whether 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: March 28, 2003
By: /s/ Richard P. Nespola
Chairman of the Board, 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 annual report on Form 10-K of The Management Network
Group, Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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 annual report (the "Evaluation Date"); and
c) presented in this annual 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 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
annual report whether 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: March 28, 2003
By: /s/ Donald E. Klumb
Chief Financial Officer and Treasurer
In connection with this annual report on Form 10-K of The Management Network
Group, Inc., I, Richard P. Nespola, Chairman of the Board, President and Chief
Executive Officer of the registrant certify that:
1. this annual 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 annual 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 year.
Date: March 28, 2003
By: /s/ Richard P. Nespola
Chairman of the Board, President
and Chief Executive Officer
In connection with this annual report on Form 10-K of The Management Network
Group, Inc., I, Donald E. Klumb, Chief Financial Officer and Treasurer of the
registrant certify that:
1. this annual 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 annual 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 year.
Date: March 28, 2003
By: /s/ Donald E. Klumb
Chief Financial Officer and Treasurer
INDEX TO EXHIBITS
The following is a list of exhibits filed as part of this report.
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
INDEX TO EXHIBITS
3.1* Certificate of Incorporation of the registrant
3.2 Amendment to the Bylaws of the registrant
4.1* Specimen Common Stock Certificate
4.2* Warrant dated October 29, 1999 issued to Williams
Communications Group
10.1* Registration Rights Agreement dated January 7, 1998 among
the registrant and certain investors
10.2* Form of Indemnification Agreement between the registrant and
each of its Directors and Officers
10.3* 1998 Equity Incentive Plan and form of agreements thereunder
10.4* 1999 Employee Stock Purchase Plan and form of agreements
thereunder
10.5* Consulting Services Agreement between the registrant and
Williams Communications Group, Inc. dated November 5, 1997
10.6* Credit Agreement, including revolving credit notes and term notes,
dated February 12, 1998 among the registrant and certain guarantors,
lenders and agents
10.7* Lease between Lighton Plaza L.L.C. and the registrant dated April 23,
1998
10.8* Noncompetition Agreement between the registrant and certain parties
dated February 12, 1998.
10.9* Employment Agreement between the registrant and Richard Nespola dated
February 12, 1998.
10.10* Employment Agreement between the registrant and Micky Woo dated
February 12, 1998.
10.11* Employment Agreement between the registrant and Ralph Peck dated
February 12, 1998.
10.12* Employment Agreement between the registrant and Donald Klumb dated
September 9, 1999
10.13* Amended Lease Agreement between Lighton Plaza L.L.C. and the
registrant dated December 21, 2000
10.14* Lease between The American Occupational Therapy Association, Inc. and
The Weathersby Group, Inc. dated January 18, 1999
10.15* Amended Lease Agreement between The American Occupational Therapy
Association, Inc. and TWG Marketing, Inc. dated December 5, 2000
10.16* 2000 Supplemental Stock Plan and form of agreements thereunder
10.17* Lease between HANSON PALMER II ASSOCIATES LIMITED PARTNERSHIP and Tri-
Com Computer Services, Inc. dated January 20, 1998
10.18* Amended Lease Agreement between Hanson Palmer II Associated Limited
Partnership and Tri-Com Computer Services, Inc. dated April 15, 1999
21.1 List of subsidiaries of TMNG, Inc.
23.1 Consent of Deloitte & Touche LLP
24.1 Power of attorney (see page 61)
* Previously filed