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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(x) Quarterly report pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 28, 2003
or
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission file number: 0-27617
THE MANAGEMENT NETWORK GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 48-1129619
- ------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7300 COLLEGE BLVD., SUITE 302, OVERLAND PARK, KS 66210
------------------------------------------------------
(Address of principal executive offices) (Zip Code)
913-345-9315
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
As of August 11, 2003 TMNG had outstanding 33,461,752 shares of common stock.
THE MANAGEMENT NETWORK GROUP, INC.
INDEX
PAGE
PART I. FINANCIAL INFORMATION:
ITEM 1. Consolidated Condensed Financial Statements:
Consolidated Condensed Balance Sheets - June
28, 2003 (unaudited) and December 28, 2002 ................ 3
Consolidated Condensed Statements of Operations and
Comprehensive Loss (unaudited) - Thirteen Weeks
and Twenty-six Weeks Ended June 28, 2003 and
June 29, 2002 ............................................. 4
Consolidated Condensed Statements of Cash Flows
(unaudited) - Twenty-six Weeks ended June 28,
2003 and June 29, 2002 .................................... 5
Notes to Consolidated Condensed Financial
Statements .................................................. 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .........................11
ITEM 3. Quantitative and Qualitative Disclosures about
Market Risk .................................................14
ITEM 4. Controls and Procedures .....................................15
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings ...........................................15
ITEM 4. Submission to a Vote of Securities Holders ..................15
ITEM 6. Exhibits and Reports on Form 8-K ............................15
Signatures ..........................................................15
Certifications ......................................................16
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
THE MANAGEMENT NETWORK GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands, except share data)
(unaudited)
December 28, June 28,
2002 2003
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents ................................ $ 53,786 $ 52,312
Receivables:
Accounts receivable .................................... 5,597 2,677
Accounts receivable - unbilled ......................... 4,232 3,687
------------ ------------
9,829 6,364
Less: Allowance for doubtful accounts .................. (471) (521)
------------ ------------
9,358 5,843
Deferred income taxes .................................... 494 580
Refundable income taxes .................................. 4,277 7,064
Prepaid and other assets ................................. 1,723 1,058
------------ ------------
Total current assets ........................... 69,638 66,857
------------ ------------
Property and Equipment, net ................................ 2,285 1,897
Goodwill .............................................. 31,308 15,528
Customer relationships, net ................................ 5,092 1,330
Identifiable intangible assets, net ........................ 2,362 1,650
Deferred tax assets ........................................ 14,272 15,994
Other assets ............................................... 502 502
------------ ------------
Total Assets ............................................... $ 125,459 $ 103,758
============ ============
CURRENT LIABILITIES:
Trade accounts payable ................................... $ 1,170 $ 421
Accrued payroll, bonuses and related expenses ............ 2,105 2,018
Other accrued liabilities ................................ 1,964 1,789
Unfavorable and capital lease obligations ................ 921 897
------------ ------------
Total current liabilities ...................... 6,160 5,125
Unfavorable and capital lease obligations .................. 3,573 3,167
STOCKHOLDERS' EQUITY
Common Stock: ............................................ 33 33
Voting - $.001 par value, 100,000,000 shares authorized;
33,347,228 and 33,397,087 issued and outstanding on
December 28, 2002 and June 28, 2003, respectively ......
Additional paid-in capital ............................... 155,509 155,146
Accumulated deficit ...................................... (39,866) (59,835)
Accumulated other comprehensive income -
Foreign currency translation adjustment ................. 113 122
Unearned compensation .................................... (63)
------------ ------------
Total stockholders' equity ...................... 115,726 95,466
------------ ------------
Total Liabilities and Stockholders' Equity ................. $ 125,459 $ 103,758
============ ============
See notes to consolidated condensed financial statements.
THE MANAGEMENT NETWORK GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE LOSS
(In thousands, except per share data)
(unaudited)
For the thirteen For the twenty-six
weeks ended weeks ended
-------------------------------- -------------------------------
June 29, 2002 June 28, 2003 June 29, 2002 June 28, 2003
------------- ------------- ------------- -------------
REVENUES $ 9,927 $ 5,020 $ 17,195 $ 12,426
COST OF SERVICES:
Direct cost of services .................... 4,264 2,724 7,938 6,406
Equity related charges ..................... 177 (84) 672 (104)
-------- -------- -------- --------
Total cost of services ................... 4,441 2,640 8,610 6,302
-------- -------- -------- --------
GROSS PROFIT 5,486 2,380 8,585 6,124
OPERATING EXPENSES:
Selling, general and
Administrative ............................ 7,768 5,298 13,467 10,408
Goodwill and intangible asset impairment 18,942 18,942
Intangible asset amortization ...... 728 644 1,120 1,359
Equity related charges ..................... 117 (8) 280 3
-------- -------- -------- --------
Total operating expenses ................. 8,613 24,876 14,867 30,712
-------- -------- -------- --------
LOSS FROM OPERATIONS ......................... (3,127) (22,496) (6,282) (24,588)
OTHER INCOME:
Interest income ............................ 212 161 522 338
Other, net................................. (4) (15) (15) (32)
-------- -------- -------- --------
Total other income ....................... 208 146 507 306
-------- -------- -------- --------
LOSS BEFORE INCOME TAX BENEFIT
AND CUMULATIVE EFFECT OF A CHANGE
IN ACCOUNTING PRINCIPLE ..................... (2,919) (22,350) (5,775) (24,282)
INCOME TAX BENEFIT ........................... 1,097 3,613 2,288 4,313
-------- -------- -------- --------
LOSS BEFORE CUMULATIVE EFFECT OF
A CHANGE IN ACCOUNTING PRINCIPLE ............ (1,822) (18,737) (3,487) (19,969)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE, NET OF TAX BENEFIT OF $760 ....... (1,140)
-------- -------- -------- --------
NET LOSS ..................................... (1,822) (18,737) (4,627) (19,969)
OTHER COMPREHENSIVE INCOME (LOSS) -
Foreign currency translation adjustment .... 15 23 (18) 9
-------- -------- -------- --------
COMPREHENSIVE LOSS ........................... $ (1,807) $(18,714) $ (4,645) $(19,960)
======== ======== ======== ========
LOSS BEFORE CUMULATIVE EFFECT OF A CHANGE
IN ACCOUNTING PRINCIPLE PER COMMON SHARE
Basic and diluted ................................$ (0.05) $ (0.56) $ (0.11) $ (0.60)
======== ======== ======== ========
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING
PRINCIPLE PER COMMON SHARE
Basic and diluted ......................... $ (0.03)
=========
NET LOSS PER COMMON SHARE
Basic and diluted ................................$ (0.05) $ (0.56) $ (0.14) $ (0.60)
======== ======== ======== ========
SHARES USED IN CALCULATION OF LOSS BEFORE
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING
PRINCIPLE AND NET LOSS PER COMMON SHARE
Basic and diluted ..................................33,259 33,372 32,152 33,359
======== ======== ======== ========
See notes to consolidated condensed financial statements.
THE MANAGEMENT NETWORK GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
For the Twenty-six Weeks Ended
-------------------------------
June 29, June 28,
2002 2003
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .............................................. $ (4,627) $(19,969)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Cumulative change in accounting principle........... 1,140
Goodwill and intangible asset impairment 18,942
Depreciation and amortization ...................... 1,570 1,814
Equity related charges (benefit) ................... 952 (101)
Income tax benefit (charge) recognized upon exercise
of stock options ................................ 17 (256)
Deferred income taxes .............................. 317 (1,808)
Loss on retirement of assets ....................... 140
Other changes in operating assets and
liabilities, net of business acquisitions:
Accounts receivable ........................... 1,949 2,970
Accounts receivable - unbilled ................ (346) 545
Other assets .................................. 681 606
Refundable income taxes ....................... (2,639) (2,787)
Trade accounts payable ........................ 446 (749)
Accrued liabilities ........................... 622 (292)
Unfavorable lease liability ................... 196 (189)
---------- ----------
Net cash (used in) provided by operating
activities ................................ 418 (1,274)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of business, net of cash acquired ......... (32,332)
Acquisition of property and equipment ................. (213) (68)
Loans to officers, net ................................ (100)
---------- ----------
Net cash used in investing activities ...... (32,645) (68)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments made on long-term obligations ................ (151) (212)
Proceeds from exercise of options ..................... 276 33
Issuance of common stock, net of expenses ............. 107 38
---------- ----------
Net cash (used in) provided by financing
activities ............................... 232 (141)
---------- ----------
Effect of exchange rate on cash and cash
equivalents ............................................ (18) 9
---------- ----------
Net decrease in cash and cash equivalents ............... (32,013) (1,474)
Cash and cash equivalents, beginning of period .......... 86,396 53,786
---------- ----------
Cash and cash equivalents, end of period ................ $ 54,383 $ 52,312
========== ==========
Supplemental disclosure of cash flow information:
Cash paid during period for interest .................... $ 41 $ 32
========== ==========
Cash paid during period for taxes ....................... $ 132 $ 485
========== ==========
Supplemental disclosure of non-cash investing and
financing transactions --
Fair value of assets acquired ....................... $ 53,953
Liabilities incurred or assumed ..................... $ (7,490)
Common stock issued ................................. $ 13,480
See notes to consolidated condensed financial statements.
THE MANAGEMENT NETWORK GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Reporting
The accompanying consolidated condensed financial statements of The Management
Network Group, Inc. (the "Company") as of June 28, 2003, and for the thirteen
and twenty-six weeks ended June 28, 2003 and June 29, 2002, are unaudited and
reflect all normal recurring adjustments which are, in the opinion of
management, necessary for the fair presentation of the Company's consolidated
condensed financial position, results of operations, and cash flows as of these
dates and for the periods presented. The consolidated condensed financial
statements have been prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial information.
Consequently, these statements do not include all the disclosures normally
required by accounting principles generally accepted in the United States of
America for annual financial statements nor those normally made in the Company's
annual report on Form 10-K. Accordingly, reference should be made to the
Company's annual report on Form 10-K for additional disclosures, including a
summary of the Company's accounting policies.
Stock Based Compensation
During the thirteen weeks ended June 28, 2003, the Company granted approximately
5,500 stock options to employees and 75,000 stock options to independent members
of the Company's Board of Directors at a weighted average exercise price of
$1.50. The grants of stock options to independent board members were made in
connection with the appointment by the Board of Directors of Frank M. Siskowski
and Robert J. Currey to fill vacancies on the Board during 2003. During the
second quarter of 2003, the Company recorded a net credit to compensation
expense of $92,000, attributable primarily to the forfeiture of unvested stock
options by employees, partially offset by the recognition of compensation
expense on pre-initial public offering grants of stock options. During the
thirteen weeks ended June 29, 2002, the Company granted approximately 1,376,000
stock options to employees at a weighted average price of $2.98 and recorded net
compensation expense related to all stock options of $102,000. The Company also
recorded equity related charges of $192,000 during the second quarter of 2002
for a previously issued warrant. The warrant was fully amortized by the Company
during the second quarter of fiscal 2002.
During the twenty-six weeks ended June 28, 2003, the Company granted
approximately 515,500 stock options to employees and 75,000 stock options to
independent members of the Company's Board of Directors at a weighted average
exercise price of $1.43. During the same period, the Company recorded a net
credit to compensation expense of $101,000, attributable primarily to the
forfeiture of unvested stock options by employees, partially offset by the
recognition of compensation expense on pre-initial public offering grants of
stock options. During the twenty-six weeks ended June 29, 2002, the Company
granted approximately 1,439,000 stock options to employees at a weighted average
price of $3.14 and recorded net compensation expense related to all stock
options of $329,000. The Company also recorded equity related charges of
$623,000 for a previously issued warrant. The warrant was fully amortized by the
Company during the second quarter of fiscal 2002.
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 Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation" as amended by SFAS
No. 148 "Accounting for Stock Based Compensation - Transition and Disclosure."
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,
the Company's net loss for the thirteen weeks ended June 28, 2002 and June 28,
2003, would have increased by approximately $1.0 million and decreased by
approximately $1.6 million, respectively, and the Company's net loss for the
twenty-six weeks ended June 28, 2002 and June 28, 2003, would have increased by
approximately $2.3 million and decreased by approximately $824,000,
respectively.
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 the thirteen and twenty-six weeks ended
June 29, 2002, and June 28, 2003 (in thousands, except per share amounts):
FOR THE THIRTEEN WEEKS ENDED FOR THE TWENTY-SIX WEEKS ENDED
---------------------------- ------------------------------
JUNE 29, JUNE 28, JUNE 29, JUNE 28,
2002 2003 2002 2003
----------- ----------- ---------- ---------
Net loss, as reported: $(1,822) $(18,737) $(4,627) $(19,969)
Add: Stock-based employee
compensation expense (benefit) included in
reported net loss, net of related tax effects 61 (92) 197 (97)
Deduct): Total stock-based compensation
(expense) benefit determined under fair value
based method for all awards, net of related (1,107) 1,651 (2,479) 921
tax effects
------------ ------------ ---------- ----------
Pro forma net loss $(2,868) $(17,178) $(6,909) $(19,145)
============ ============ ========== ==========
Loss per share
Basic and diluted, as reported $ (0.05) $ (0.56) $(0.14) $(0.60)
============ ============ ========== ==========
Basic and diluted, pro forma $ (0.08) $ (0.51) $(0.21) $(0.57)
============ ============ ========== ==========
2. Loss Per Share
The Company calculates and presents loss per share using a dual presentation of
basic and diluted loss per share. Basic loss per share is computed by dividing
net loss by the weighted average number of common shares outstanding for the
period. In accordance with the provisions of SFAS No. 128 "Earnings Per Share",
the Company has not included the effect of common stock options in the
calculation of diluted loss per share for the thirteen and twenty-six weeks
ended June 29, 2002 and June 28, 2003, as the Company reported a loss from
continuing operations for all periods and the effect would have been
antidilutive. The weighted average shares of common stock outstanding for basic
and diluted loss per share for the thirteen weeks ended June 29, 2002 and June
28, 2003, were 33,259,000 and 33,372,000, respectively. The weighted average
shares of common stock outstanding for basic and diluted loss per share for the
twenty-six weeks ended June 29, 2002, and June 28, 2003, were 32,152,000 and
33,359,000, respectively. Had the Company reported net income for the thirteen
weeks ended June 29, 2002 and June 28, 2003, the treasury method of calculating
common stock equivalents would have resulted in approximately 782,000 and
177,000 additional diluted shares, respectively. Had the Company reported net
income for the twenty-six weeks ended June 29, 2002, and June 28, 2003, the
treasury method of calculating common stock equivalents would have resulted in
approximately 910,000 and 142,000 additional diluted shares, respectively.
3. Business Combinations
On March 6, 2002, TMNG purchased the business and primary assets of CSMG, a
Delaware corporation, of Boston, Massachusetts. CSMG ("CSMG" or "TMNG Strategy")
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, of which approximately $36.2 million was allocated
to goodwill. 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. 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.
The operating results of CSMG have been included in the Consolidated Condensed
Statements of Operations and Comprehensive Loss from the date of the purchase.
The following reflects pro forma combined results of the Company and CSMG as if
the acquisition had occurred as of December 30, 2001. In management's opinion,
this pro forma information does not necessarily reflect the actual results that
would have occurred nor is it necessarily indicative of future results of
operations of the combined entities.
FOR THE THIRTEEN FOR THE TWENTY-SIX
WEEKS ENDED WEEKS ENDED
(in thousands, except per share amounts) JUNE 29, 2002 JUNE 29,2002
-------------- -----------------
Total revenues $ 9,927 $ 19,422
Loss before cumulative effect of a change in
accounting principle $ (1,822) $ (3,718)
Net loss $ (1,822) $ (4,858)
Basic and diluted loss before cumulative effect
of a change in accounting principle
per common share $ (0.05) $ (0.11)
Basic and diluted loss per common share $ (0.05) $ (0.15)
4. Goodwill
The Company adopted the provisions of SFAS No. 142 "Accounting for Goodwill and
Intangible Assets" ("SFAS No. 142") in connection with goodwill and other
intangible assets acquired in the purchase of The Weathersby Group, Inc.,
Tri-Com Computer Services, Inc., and Cambridge Strategic Management Group, Inc.
In accordance with certain provisions of the Statement, goodwill has not been
amortized beginning in fiscal year 2002. Upon the adoption of SFAS No. 142 at
the beginning of fiscal year 2002, 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 Loss.
During the second quarter of fiscal year 2003, the Company performed an interim
test under the provisions of SFAS No. 142 to determine whether an impairment of
goodwill had occurred at the reporting unit level. The Company performed the
interim test due to the significantly lower operating results of one of the
Company's reporting units, compared to the projected financial results that were
utilized in determining the reporting unit's fair value in the annual goodwill
impairment test performed in 2002. Additionally, during the second quarter of
2003 two executives of companies acquired by TMNG tendered their resignations to
the Company, which also had the effect of lowering the financial projections of
one of the entities. Based on an analysis of projected future cash flows and
utilizing the assistance of an outside valuation firm, the Company determined
that the carrying value of goodwill acquired in the CSMG acquisition exceeded
its fair market value and recorded an impairment loss related to the Management
Consulting Segment of approximately $15.8 million. The goodwill impairment loss
related to the interim impairment test has been reflected as a component of Loss
from Operations in the Statement of Operations and Comprehensive Loss. The
changes in the carrying amount of goodwill as of June 28, 2003 are as follows
(amounts in thousands):
Management Consulting All Other
Segment Segment Total
--------------------- --------- -------
Balance as of December 29, 2001 $ 19,156 $ 2,991 $22,147
Goodwill acquired during fiscal year 2001 36,216 10 36,226
Impairment loss (26,227) (838) (27,065)
-------- --------
- -------
Balance as of December 28, 2002 29,145 2,163 31,308
Impairment loss (15,780) (15,780)
-------- -------- -------
Balance as of June 28, 2003 $ 13,365 $ 2,163 $15,528
======== ======== =======
5. Customer Relationships and Other Identifiable Intangible Assets
Included in the Company's consolidated balance sheet as of the end of the latest
fiscal year, December 28, 2002, and the end of the second quarter, June 28,
2003, are the following identifiable intangible assets (amounts in thousands):
December 28, 2002 June 28, 2003
------------------------ ------------------------
Accumulated Accumulated
Cost Amortization Cost Amortization
------- ------------ ------- ------------
Customer relationships $ 6,790 $(1,698) $ 3,627 $(2,297)
Employment agreements 3,200 (1,042) 3,200 (1,667)
Tradename 350 (146) 350 (233)
Covenant not to compete 203 (132) 203 (180)
------- ------- ------- -------
Total $10,543 $(3,018) $ 7,380 $(4,377)
======= ======= ======= =======
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 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. During the quarter ended June 28, 2003, management
identified certain events, including the significant decrease in revenue from
customers whose relationships were valued in purchase accounting for the CSMG
acquisition. The Company performed an impairment test, and determined that the
carrying value of customer relationships exceeded its fair market value and
recorded an impairment loss related to the Management Consulting Segment of
approximately $3.1 million. Fair value was based on an analysis of projected
future cash flows. The impairment loss has been reflected as a component of Loss
from Operations in the Statement of Operations and Comprehensive Loss.
Intangible amortization expense for the thirteen weeks ended June 29, 2002 and
June 28, 2003 was $0.7 million and $0.6 million, respectively. Intangible
amortization expense for the twenty-six weeks ended June 29, 2002 and June 28,
2003 was $1.1 million and $1.4 million, respectively. Intangible amortization
expense is estimated to be approximately $2.3 million for fiscal year 2003, $1.3
million in fiscal year 2004, $0.5 million in fiscal year 2005, $0.2 million in
fiscal year 2006 and $28,000 in fiscal year 2007.
6. Income Taxes
The Company has recorded a net deferred tax asset of $14.8 million and $16.6
million as of December 28, 2002 and June 28, 2003, respectively in accordance
with the provisions of SFAS No. 109 "Accounting for Income Taxes". Realization
of the asset is dependent on generating sufficient taxable income in future
periods. Management believes that it is more likely than not that the net
recorded deferred tax asset will be realized. The Company established a
valuation allowance of $5.2 million in the second quarter of fiscal year 2003.
The majority of the valuation allowance relates to impairment losses of goodwill
and other intangible assets that were initially recorded in connection with the
Company's acquisitions. In management's opinion, it is not more likely than not
as of June 28, 2003 that sufficient future taxable income will be generated by
the Company to support the deferred tax assets generated by the impairments,
thereby resulting in the recognition of the valuation allowance.
7. Business Segments
The Company has identified its segments based on the way management organizes
the Company to assess performance and make operating decisions regarding the
allocation of resources.
Based on 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 Loss from Operations, excluding equity related charges
(benefits), goodwill and intangible asset impairment, and intangibles
amortization. There are no inter-segment sales.
Summarized financial information concerning the Company's reportable segments is
shown in the following table (amounts in thousands):
-----------------------------------------------------------------------
Management All Not Assigned
Consulting Services Other to Segments Total
------------------- --------- ------------- ---------
For the thirteen weeks ended June 29, 2002:
Net sales to external customers $ 9,528 $ 399 $ 9,927
Loss from operations $ (2,409) $ 304 $ (1,022) $ (3,127)
Total assets $ 12,145 $ 132,992 $ 145,407
For the thirteen weeks ended June 28, 2003:
Net sales to external customers $ 4,963 $ 57 $ 5,020
Loss from operations $ (3,016) $ 14 $(19,494) $ (22,496)
Total assets $ 5,990 $ 11 $ 97,757 $ 103,758
For the twenty-six weeks ended June 29, 2002:
Net sales to external customers $ 16,602 $ 593 $ 17,195
Loss from operations $ (4,522) $ 312 $ (2,072) $ (6,282)
Total assets $ 12,415 $ 132,992 $ 145,407
For the twenty-six weeks ended June 28, 2003:
Net sales to external customers $ 12,203 $ 223 $ 12,426
Loss from operations $ (4,520) $ 132 $ (20,200) $ (24,588)
Total assets $ 5,990 $ 11 $ 97,757 $ 103,758
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):
-------------------------------------------------------------------
FOR THE THIRTEEN WEEKS ENDED FOR THE TWENTY-SIX WEEKS ENDED
-------------------------------------------------------------------
JUNE 29, 2002 JUNE 28, 2003 JUNE 29, 2002 JUNE 28, 2003
------------- ------------- ------------- -------------
Total operating losses for
reportable segments $(2,105) $ (3,002) $ (4,210) $ (4,388)
Goodwill and intangible asset impairment (18,942) (18,942)
Equity related charges (294) 92 (952) 101
Intangible asset amortization (728) (644) (1,120) (1,359)
-------- -------- -------- --------
Loss from operations $(3,127) $(22,496) $ (6,282) $(24,588)
======== ======== ======== ========
Revenues earned in the United States and internationally based on the location
where the services are performed is shown in the following table (amounts in
thousands):
-------------------------------------------------------------------
FOR THE THIRTEEN WEEKS ENDED FOR THE TWENTY-SIX WEEKS ENDED
-------------------------------------------------------------------
JUNE 29, 2002 JUNE 28, 2003 JUNE 29, 2002 JUNE 28, 2003
------------- ------------- ------------- -------------
United States $ 9,232 $ 4,498 $16,095 $11,541
International:
Ireland 160 181 32
The Netherlands 524 303 899 532
Canada 101 101
Belize 118 141
Other 11 20 79
------- ------- ------- -------
Total $ 9,927 $ 5,020 $17,195 $12,426
======= ======= ======= =======
8. Significant Customer Contracts
On December 10, 1999, the Company entered into a consulting services agreement
with a significant customer under which such customer committed to $22 million
of consulting fees over a three-year period commencing January 1, 2000. The
agreement was extended in April 2002 for two additional years beyond the
original term of the agreement, in exchange for an expanded preferred contractor
relationship and immediate commitment to a significant consulting arrangement.
As of June 28, 2003, $16.6 million of consulting fees had been recognized in
connection with the agreement from the commencement date.
In August 2002, the Company entered into a gain sharing consulting services
agreement with a significant customer, under which the Company earns revenue
based upon project success as contractually defined. Due to the contingent
nature of this project, all project costs have been expensed as incurred, due to
the lack of an indication that an economic resource has been created.
Additionally, the Company has not recognized any revenue on the project as of
June 28, 2003, as the revenue is not realizable or earned at this time. Total
project cost recognized in loss from operations on the Company's Consolidated
Condensed Statement of Operations and Comprehensive Loss for the second quarter
of fiscal 2003 in connection with the project was approximately $71,000. Total
costs recognized on the project during 2003 and from inception total $154,000
and $565,000, respectively.
9. 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 Cambridge
Strategic Management Group, Inc. ("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):
Amount
Reduction Date Deposited
----------------- ---------
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 June 28, 2003. An obligation has not
been recorded in connection with the LOC on the Company's consolidated condensed
balance sheet as of June 28, 2003.
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. In the second
quarter of fiscal year 2003 the Board of Directors cancelled one of the
remaining officer's line of credit. At the time of the cancellation the officer
did not have any outstanding indebtedness to the Company. As of June 28, 2003,
there was one remaining line of credit between the Company and an officer. The
maximum aggregate amount available for borrowing under that remaining loan
agreement was reduced from $600,000 to $300,000. Aggregate borrowings against
the lines of credit at June 29, 2002 and June 28, 2003 totaled $300,000 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. Pursuant to the Sarbanes-Oxley Act, no further loan agreements may
be made by the Company to or arranged by the Company for its executive officers.
11. 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 aggregating 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 brought 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
In addition to historical information, this quarterly report contains
forward-looking statements. Certain risks and uncertainties could cause actual
results to differ materially from those reflected in such forward-looking
statements. Factors that might cause a difference include, but are not limited
to, those discussed in the sections entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business - Risk
Factors" in the Company's annual report on Form 10-K for the fiscal year ended
December 28, 2002. Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's opinions only as of the
date of this report. We undertake no obligation to revise, or publicly release
the results of any revision to, these forward-looking statements. Readers should
carefully review the risk factors described in our annual report and in other
documents that we file from time to time with the Securities and Exchange
Commission.
The following should be read in connection with Management's Discussion and
Analysis of Financial Condition and Results of Operations as presented in the
Company's annual report on Form 10-K for the fiscal year ended December 28,
2002.
CRITICAL ACCOUNTING POLICIES
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
- - Deferred Income Tax Assets
Allowance for Doubtful Accounts - Substantially all of our receivables are owed
by companies in the communications industry. 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 total bad debt expense in the amount of $784,000 and $353,000 for
the twenty-six weeks ended June 29, 2002 and June 28, 2003, respectively, and
our allowance for doubtful accounts totaled $751,000 and $521,000 at the end of
the second quarter of fiscal years 2002 and 2003, 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. Due to a combination of the
significantly lower operating results of TMNG Strategy during the quarter, the
resignation of the president of TMNG Strategy, and the revised and reduced
financial projections of TMNG Strategy, along with the significant decrease in
revenue from customers whose relationships were valued in purchase accounting
for the CSMG acquisition, the Company recorded a goodwill impairment loss and
intangible asset impairment loss in the second quarter of fiscal 2003 in the
amount of $15.8 million and $3.1 million, respectively. The impairment losses
have been reflected as a component of Loss from Operations in the Statement of
Operations and Comprehensive Loss.
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 those types of 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.
Deferred Income Tax Assets - The Company has 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. In assessing whether a valuation allowance is needed in
connection with the Company's deferred income tax assets, management has
evaluated the ability of the Company to carryback tax losses to prior years that
reported positive taxable income, and the ability of the Company to generate
sufficient taxable income in future periods to utilize the benefit of the
deferred income tax assets. Such projections of future taxable income require
significant subjective judgments and estimates by the Company. As of June 28,
2003, valuation allowances in the amount of $5.2 million were established in
connection with the deferred income tax assets. In future periods, if the
Company does not believe it will be able to recognize the benefits of the
deferred income tax assets, additional impairments of the deferred income tax
assets will be recorded, resulting in additional charges to net income.
RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED JUNE 28, 2003 COMPARED TO THIRTEEN WEEKS ENDED JUNE 29,
2002
REVENUES
Revenues decreased 49.4% to $5.0 million for the second quarter of fiscal year
2003 from $9.9 million for the second quarter of fiscal year 2002. The decrease
in revenues was due primarily to the deferral of key management consulting
pipeline opportunities, along with an increase in outsourcing by clients which
partially displaces what was historically management consulting opportunities,
the resignation of certain key executives during the second quarter, and the
continued reduction of management consulting demand by the communications and
technology industry. Our international revenue base increased to 10.4% of our
revenues in the second quarter of fiscal year 2003, from 7.0% in the second
quarter of 2002, due primarily to the decrease in domestic revenue TMNG Strategy
revenues for the second quarter of 2003 represented 28.3% of consolidated
revenues, compared to 42.8% of consolidated revenues for the second quarter of
fiscal year 2002. Non-consulting revenues recognized by TMNG Technologies
represented 1.1% and4.0 of consolidated revenues for the second quarters of
fiscal year 2003 and 2002, respectively, and related to commissions received on
hardware sales.
COSTS OF SERVICES
Costs of services decreased 40.6% to $2.6 million for the second quarter of
fiscal year 2003 from $4.4 million for the second quarter of fiscal year 2002.
As a percentage of revenues, our gross margin was 47.4% for the second quarter
of fiscal year 2003, compared to 55.3% for the second quarter of fiscal year
2002. The decrease in gross margin was primarily attributable to the impact of
lower utilization of consulting personnel at TMNG Strategy, which represents a
relatively fixed cost to cost of services.
Non-cash stock based compensation benefits were $84,000 for the second quarter
of fiscal year 2003, compared to charges of $177,000 for the second quarter of
fiscal year 2002. The primary reasons for the net decrease in non-cash stock
based compensation charges for the second quarter of fiscal year 2003 compared
to the same period in fiscal year 2002 were the reduction in amortization
charges of a warrant in the amount of $192,000 and the net reduction in
amortization charges related to the pre-initial public offering grants of stock
options. Non-cash stock based compensation charges are recognized by the Company
over a period of three to four years, based on an accelerated vesting schedule.
Substantially all of the options giving rise to the equity related charges are
in their respective fourth and final year of vesting, and therefore continue to
have less impact on the Company's Statement of Operations and Comprehensive
Loss. These net benefits decreased costs of services as a percentage of revenue
by 1.7% for the second quarter of fiscal year 2003. Non-cash stock based
compensation charges increased costs of services as a percentage of revenue by
1.8% for the second quarter of fiscal year 2002.
OPERATING EXPENSES
In total, operating expenses increased to $24.9 million for the second quarter
of fiscal year 2003, or 188.8% from $8.6 million for the second quarter of
fiscal year 2002. The major component of the $16.3 million increase in operating
expenses was a $18.9 million charge related to goodwill and intangible asset
impairment related to the financial deterioration of one of our acquired
entities, offset by a $2.5 million decrease in selling, general and
administrative expenses related to cost reduction measures initiated by
management during fiscal year 2002 and 2003, including the consolidation of
fixed costs associated with our TMNG Strategy and TMNG Technologies
acquisitions, and a reduction of sales, marketing and administrative headcount.
As a percentage of revenues, selling, general and administrative expenses
increased to 105.5% compared to 78.3% for the second quarter of fiscal year 2003
and 2002, respectively, and was primarily a function of the Company's decreased
revenues.
In addition, non-cash stock based compensation benefits of $8,000 compared to
charges of $117,000 were recorded for the second quarter of fiscal years 2003
and 2002, respectively, in connection with stock options granted to our
partners, principals and certain senior executives and non-employee directors.
These charges had a nominal effect on operating expenses as a percentage of
revenue for the second quarter of fiscal year 2003 and fiscal year 2002. The
$125,000 decrease in non-cash stock based compensation charges for the second
quarter of fiscal year 2003 compared to the second quarter of fiscal year 2002
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."
OTHER INCOME AND EXPENSES
Interest income was $161,000 and $212,000 for the second quarter of fiscal years
2003 and 2002, respectively, and represented interest earned on invested
balances. Interest income decreased during the second quarter of fiscal year
2003 due to lower invested balances resulting from a reduction in cash reserves
and lower interest rate returns from fiscal year 2002 to fiscal year 2003. 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 benefit at a blended Federal and
state statutory income tax rate of 40.2%. Income tax benefit for the second
quarter of fiscal 2003 and 2002 as a percentage of pretax loss was 16.2% and
37.6%, respectively. The primary reason for the variance between the effective
and statutory income tax rates in 2003 relates to the establishment of a
valuation allowance in the amount of $5.2 million during the second quarter of
fiscal year 2003. The primary reason for the variance in 2002 was the earnings
reported on short-term investments in Federally tax-exempt income securities not
taxable for Federal income tax purposes.
TWENTY-SIX WEEKS ENDED JUNE 28, 2003 COMPARED TO TWENTY-SIX WEEKS ENDED JUNE 29,
2002
REVENUES
Revenues decreased 27.7% to $12.4 million for the twenty-six weeks ended June
28, 2003, from $17.2 million for the twenty-six weeks ended June 29, 2002. . The
decrease in revenues was due primarily to the deferral of key management
consulting pipeline opportunities, along with an increase in outsourcing by
clients which partially displaces what was historically management consulting
opportunities, the resignation of certain key executives during the second
quarter, and the continued reduction of management consulting demand by the
communications and technology industry. Our international revenue base increased
to 7.1% of our revenues for the twenty-six weeks ended June 28, 2003, up from
6.4% for the twenty-six weeks ended June 29, 2002, due primarily to our decrease
in domestic revenue TMNG Strategy revenues represented 34.6% of consolidated
revenues for the twenty-six weeks ended June 28, 2003, compared to 33.4% of
consolidated revenues for the twenty-six weeks ended June 29, 2002.
Non-consulting revenues recognized by TMNG Technologies represented 1.8% of
consolidated revenues for the twenty-six weeks ended June 28, 2003, compared to
3.4% of consolidated revenues for the twenty-six weeks ended June 29, 2002, and
related to commissions received on hardware sales.
COST OF SERVICES
Costs of services decreased 26.8% to $6.3 million for the twenty-six weeks ended
June 28, 2003 compared to $8.6 million for the twenty-six weeks ended June 29,
2002, and was attributable primarily to the decrease in consulting engagements
and corresponding reductions in consulting personnel costs. As a percentage of
revenues, our gross margin was 49.3% for the twenty-six weeks ended June 28,
2003, compared to 49.9% for the twenty-six weeks ended June 29, 2002. The
decrease in gross margin was primarily attributable to the impact of lower
utilization of consulting personnel at TMNG Strategy, which represents a fixed
cost to cost of services.
Non-cash stock based compensation benefits of $104,000 compared to charges of
$672,000 were recorded for the twenty-six weeks ended June 28, 2003 and June 29,
2002, respectively. The primary reasons for the net decrease in non-cash stock
based compensation charges for the second quarter of 2003 compared to the same
period for 2002 was the reduction in amortization charges of a warrant of
$623,000 as the warrant was fully amortized in the second quarter of 2002, and
the net reduction in amortization charges related to pre-initial public offering
grants of stock options. These net benefits decreased costs of services as a
percentage of revenue by 0.8% and the net charges increased costs of services as
a percentage of revenue by 3.9% for the twenty-six weeks ended June 28, 2003 and
June 29, 2002, respectively.
OPERATING EXPENSES
In total, operating expenses increased to $30.7 million for the twenty-six weeks
ended June 28, 2003, or 106.6% from $14.9 million for the twenty-six weeks ended
June 29, 2002. The major components of this $15.8 million increase in operating
expenses relate to an $18.9 million charge related to goodwill and intangible
asset impairment was attributable to the financial deterioration of one of our
acquired entities, offset by a $3.1 million decrease in selling, general and
administrative expenses related to cost reduction measures initiated by
management during fiscal year 2002 and 2003, including the consolidation of
fixed costs associated with our TMNG Strategy and TMNG Technologies
acquisitions, and a reduction of sales, marketing and administrative headcount.
As a percentage of revenues, selling, general and administrative expenses
increased to 83.8% compared to 78.3% for the twenty-six weeks ended June 28,
2003 and June 29, 2002, respectively. This percentage increase was primarily
attributable to the decreased revenues. Beginning in fiscal year 2001 and
continuing into fiscal year 2003, management began implementing a number of cost
reduction initiatives including the reduction of sales and marketing staff,
minimization of consultant recruitment, and a reduction in the Company's
accounting staff. Management believes these initiatives will provide for better
management of general and administrative costs in the future.
Non-cash stock based compensation charges of $3,000 and $280,000 for the
twenty-six weeks ended June 28, 2003 and June 29, 2002, 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 less than 0.1% and
1.6% for the twenty-six weeks ended June 28, 2003 and June 29, 2002,
respectively. The $277,000 decrease in non-cash stock based compensation charges
for the twenty-six weeks ended June 28, 2003 compared to June 29, 2002 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 $338,000 and $522,000 for the twenty-six weeks ended June
28, 2003 and June 29, 2002, respectively, and represented interest earned on
invested balances. Interest income decreased during the twenty-six weeks ended
June 28, 2003 due to lower invested balances and lower interest rates from
fiscal year 2002 to fiscal year 2003. We invest in short-term, high-grade
investment instruments as part of our overall investment policy.
INCOME TAXES
Income tax benefit for the twenty-six weeks ended June 28, 2003 as a percentage
of pretax loss was 17.8 % compared to 39.6% for the twenty-six weeks ended June
29, 2002. The decrease in the income tax benefit as a percentage of pre-tax loss
was due primarily to the Company recognizing a valuation allowance in the amount
of $5.2 million during the second quarter of fiscal 2003.
CUMULATIVE CHANGE IN ACCOUNTING PRINCIPLE
A cumulative change in accounting principle in the amount of $1.9 million was
recorded in the twenty-six weeks ended June 29, 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 Loss and
Comprehensive Loss, net of tax benefit in the amount of $1.1 million.
LIQUIDITY AND CAPITAL RESOURCES
At June 28, 2003, we had approximately $52.3 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 and continuing
negative cash flow, for at least the next 12 months. The Company has established
a flexible model that provides a lower fixed cost structure which enables 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 continue to experience negative cash flow, we could
experience liquidity challenges.
Net cash used in operating activities was $1.3 million for the twenty-six weeks
ended June 28, 2003, compared to net cash provided by operating activities of
$418,000 for the same period in fiscal year 2002 The Company generated negative
cash flow from its operating activities for the twenty-six weeks ended June 28,
2003 primarily due to operating losses, partially offset by a reduction in
accounts receivable balances reflecting more focused billing and collection
activities.
Net cash used in investing activities was $68,000 and $32.6 million for the
twenty-six weeks ended June 28, 2003 and June 29, 2002,, respectively. Cash used
in investing activities in 2003 related to the capitalization of software and
computer equipment by the Company. Cash used in investing activities in 2002
related primarily to the March 6, 2002, acquisition of Cambridge Strategic
Management Group, Inc. The purchase price of the acquisition, net of cash
acquired, was $32.3 million.
Net cash used in financing activities was $141,000 for the twenty-six weeks
ended June 28, 2003, and related to payments made by the Company on the current
portion of its capital lease obligations and outstanding debt, partially offset
by proceeds received from the exercise of employee stock options and purchase of
stock under the Company's employee stock purchase plan. Net cash provided by
financing activities was $232,000 for the twenty-six week period ended June 29,
2002, and related to proceeds from the exercise of employee stock options and
purchase of stock under the Company's employee stock purchase plan, partially
offset by payments made by the Company on the current portion of its capital
lease obligations and current portion of outstanding debt.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not invest excess funds in derivative financial instruments or
other market rate sensitive instruments for the purpose of managing its foreign
currency exchange rate risk. The Company invests excess funds in short-term
investments, the yield of which is exposed to interest rate market risk.
The Company does not have material exposure to market related risks. Foreign
currency exchange rate risk may become material given U.S. dollar to foreign
currency exchange rate changes and significant increases in international
engagements denominated in the local currency of the Company's clients.
ITEM 4. CONTROLS AND PROCEDURES
A review and evaluation was performed by the Company's management, including the
Company's Chief Executive Officer (the "CEO") and Chief Financial Officer (the
"CFO"), of the effectiveness of the design and operation of the Company's
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e))
as of the end of the period covered by this quarterly report, as required by
Rules 13a-15(b) and 15d-15(b). Based on that review and evaluation, the CEO and
CFO have concluded that the Company's disclosure controls and procedures, as
designed and implemented, were effective.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
TMNG has not been subject to any material new litigation or claims against the
Company since March 28, 2003, the filing date of TMNG's 2002 Form 10-K filing.
For a summary of litigation in which TMNG is currently involved, refer to TMNG's
10-K, as filed with the Securities and Exchange Commission on March 28, 2003.
ITEM 4. SUBMISSION TO A VOTE OF SECURITY HOLDERS
TMNG HELD AN ANNUAL MEETING OF STOCKHOLDERS ON JUNE 11, 2003.
1. The stockholders approved the election of two directors. The votes cast for
each nominee were as follows:
FOR ABSTAIN
William M. Matthes 27,380,003 4,682,296
Micky K. Woo 30,061,254 2,001,045
2. The stockholders ratified the appointment of Deloitte & Touche LLP as
independent auditor for the Company for the 2003 fiscal year by a vote of
31,075,599 shares in favor of the appointment; 432,400 shares against the
appointment and 554,300 shares abstaining.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 31. Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
Exhibit 32. Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(b) Reports on Form 8-K
The Company filed a Form 8-K on August 5, 2003 with the Securities and Exchange
Commission in connection with its earnings release dated August 4, 2003. The
Company also filed a Form 8-K on May 6, 2003 with the Securities and Exchange
Commission in connection with its earnings release dated April 29, 2003.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ RICHARD P. NESPOLA Chairman, President and Chief August 12, 2003
- ------------------------------ Executive Officer
Richard P. Nespola
/s/ DONALD E. KLUMB Chief Financial Officer and August 12, 2003
- ----------------------------- Treasurer
Donald E. Klumb (Principal financial officer
and principal accounting
officer)
Exhibit 31. Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
CERTIFICATIONS
I, Richard P. Nespola, Chairman, President and Chief Executive Officer of The
Management Network Group, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Management Network
Group, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 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-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, 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 report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal control over
financial reporting that occurred during the registrant's most recent fiscal
quarter that has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: August 12, 2003
By: /s/ Richard P. Nespola
---------------------------------------
Chairman, President and Chief Executive
Officer
I, Donald E. Klumb, Chief Financial Officer and Treasurer of The Management
Network Group, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Management Network
Group, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 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-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, 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 report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal control over
financial reporting that occurred during the registrant's most recent fiscal
quarter that has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: August 12, 2003
By: /s/ Donald E. Klumb
---------------------------------------
Chief Financial Officer and Treasurer
EXHIBIT 32. Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
In connection with this quarterly report on Form 10-Q of The Management Network
Group, Inc., I, Richard P. Nespola, Chairman, President and Chief Executive
Officer of the registrant certify that:
1. this quarterly report fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
2. the information contained in this quarterly report fairly presents, in all
material respects, the financial condition and results of operations of the
registrant for and as of the end of such quarter.
Date: August 12, 2003
By: /s/ Richard P. Nespola
---------------------------------------
Chairman, President and Chief Executive
Officer
In connection with this quarterly report on Form 10-Q of The Management Network
Group, Inc., I, Donald E. Klumb, Chief Financial Officer and Treasurer of the
registrant certify that:
1. this quarterly report fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
2. the information contained in this quarterly report fairly presents, in all
material respects, the financial condition and results of operations of the
registrant for and as of the end of such quarter.
Date: August 12, 2003
By: /s/ Donald E. Klumb
---------------------------------------
Chief Financial Officer and Treasurer
A signed original of the written statement required by Section 906 has been
provided to The Management Network Group, Inc. and will be retained by The
Management Network Group, Inc. and furnished to the Securities and Exchange
Commission or its staff upon request.