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 September 27, 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 November 10, 2003 TMNG had outstanding 33,582,401 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 (unaudited)
- September 27, 2003 and December 28, 2002 .................. 3
Consolidated Condensed Statements of Operations and
Comprehensive Loss (unaudited) - Thirteen Weeks
ended September 27, 2003 and September 28, 2002 and
Thirty-nine Weeks ended September 27, 2003 and
September 28, 2002......................................... 4
Consolidated Condensed Statements of Cash Flows
(unaudited) - Thirty-nine Weeks ended September 27,
2003 and September 28, 2002................................ 6
Notes to Consolidated Condensed Financial
Statements .................................................. 8
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .........................13
ITEM 3. Quantitative and Qualitative Disclosures about
Market Risk .................................................18
ITEM 4. Controls and Procedures .....................................18
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings ...........................................18
ITEM 6. Exhibits and Reports on Form 8-K ............................18
Signatures ..........................................................18
Exhibit 31 - Certifications Pursuant to Section 302 of the
Sarbanes-Oxley Act ..................................................19
Exhibit 32 - Certifications Furnished Pursuant to Section 906
of the Sarbanes-Oxley Act ......................................... 21
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, September 27,
2002 2003
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents ................................ $ 53,786 $ 49,411
Receivables:
Accounts receivable .................................... 5,597 3,223
Accounts receivable - unbilled ......................... 4,232 4,014
------------ ------------
9,829 7,237
Less: Allowance for doubtful accounts .................. (471) (523)
------------ ------------
9,358 6,714
Deferred income taxes .................................... 494 599
Refundable income taxes .................................. 4,277 7,036
Prepaid and other assets ................................. 1,723 770
------------ ------------
Total current assets ........................... 69,638 64,530
------------ ------------
Property and equipment, net ................................ 2,285 1,720
Goodwill .............................................. 31,308 15,528
Deferred tax assets ........................................ 14,272 15,610
Customer relationships, net ................................ 5,092 1,206
Identifiable intangible assets, net ........................ 2,362 1,294
Other assets ............................................... 502 402
------------ ------------
Total Assets ............................................... $ 125,459 $100,290
============ ============
CURRENT LIABILITIES:
Trade accounts payable ................................... $ 1,170 $ 590
Accrued payroll, bonuses and related expenses ............ 2,105 1,479
Other accrued liabilities ................................ 1,964 1,709
Unfavorable and capital lease obligations ................ 921 846
------------ ------------
Total current liabilities ...................... 6,160 4,624
Unfavorable and capital lease obligations .................. 3,573 2,995
STOCKHOLDERS' EQUITY
Common Stock: ............................................ 33 34
Voting - $.001 par value, 100,000,000 shares authorized;
33,347,228 and 33,528,293 issued and outstanding on
December 28, 2002 and September 27, 2003, respectively .
Additional paid-in capital ............................... 155,509 154,989
Accumulated deficit ...................................... (39,866) (62,486)
Accumulated other comprehensive income -
Foreign currency translation adjustment ................. 113 134
Unearned compensation .................................... (63)
------------ ------------
Total stockholders' equity ...................... 115,726 92,671
------------ ------------
Total Liabilities and Stockholders' Equity ................. $ 125,459 $100,290
============ ============
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 thirty-nine
weeks ended weeks ended
-------------------------------- -------------------------------
September 28, September 27, September 28, September 27,
2002 2003 2002 2003
------------- ------------- ------------- -------------
REVENUES $ 8,756 $ 4,691 $ 25,952 $ 17,117
COST OF SERVICES:
Direct cost of services .................... 4,372 2,506 12,311 8,912
Equity related charges ..................... 110 (10) 782 (113)
-------- -------- -------- --------
Total cost of services ................... 4,482 2,496 13,093 8,799
-------- -------- -------- --------
GROSS PROFIT 4,274 2,195 12,859 8,318
OPERATING EXPENSES:
Selling, general and
administrative ............................ 4,737 4,254 17,755 14,207
Goodwill and intangible asset impairment.... 18,942
Depreciation and amortization .............. 739 711 2,309 2,525
Equity related charges ..................... 32 7 312 10
-------- -------- -------- --------
Total operating expenses ................. 5,508 4,972 20,376 35,684
-------- -------- -------- --------
LOSS FROM OPERATIONS ......................... (1,234) (2,777) (7,517) (27,366)
OTHER INCOME:
Interest income ............................ 243 136 766 474
Other, net................................. (8) (10) (23) (41)
-------- -------- -------- --------
Total other income ....................... 235 126 743 433
-------- -------- -------- --------
LOSS BEFORE INCOME TAX BENEFIT
AND CUMULATIVE EFFECT OF A CHANGE
IN ACCOUNTING PRINCIPLE ..................... (999) (2,651) (6,774) (26,933)
INCOME TAX BENEFIT ........................... 351 2,638 4,313
-------- -------- -------- --------
LOSS BEFORE CUMULATIVE EFFECT OF
A CHANGE IN ACCOUNTING PRINCIPLE ............ (648) (2,651) (4,136) (22,620)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE, NET OF TAX BENEFIT OF $760 ....... (1,140)
-------- -------- -------- --------
NET LOSS ..................................... (648) (2,651) (5,276) (22,620)
OTHER COMPREHENSIVE INCOME
Foreign currency translation adjustment .... 108 12 90 21
-------- -------- -------- --------
COMPREHENSIVE LOSS ........................... $ (540) $ (2,639) $ (5,186) $(22,599)
======== ======== ======== ========
LOSS BEFORE CUMULATIVE EFFECT OF A CHANGE
IN ACCOUNTING PRINCIPLE PER COMMON SHARE
Basic and diluted ................................$ (0.02) $ (0.08) $ (0.13) $ (0.68)
======== ======== ======== ========
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING
PRINCIPLE PER COMMON SHARE
Basic and diluted ......................... $ (0.03)
========
NET LOSS PER COMMON SHARE
Basic and diluted ................................$ (0.02) $ (0.08) $ (0.16) $ (0.68)
======== ======== ======== ========
SHARES USED IN CALCULATION OF LOSS BEFORE
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING
PRINCIPLE AND NET LOSS PER COMMON SHARE
Basic and diluted ..................................33,297 33,458 32,535 33,392
======== ======== ======== ========
See notes to consolidated condensed financial statements.
THE MANAGEMENT NETWORK GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
For the thirty-nine weeks ended
-------------------------------
September 28, September 27,
2002 2003
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .............................................. $ (5,276) $(22,620)
Adjustments to reconcile net loss to net
cash (used in) provided by operating activities:
Cumulative change in accounting principle........... 1,140
Goodwill and intangible asset impairment 18,942
Depreciation and amortization ...................... 2,309 2,525
Equity related charges (benefit) ................... 1,094 (103)
Income tax benefit (charge) recognized upon exercise
and cancellation of stock options ............... 22 (620)
Deferred income taxes .............................. 627 (1,443)
Loss on retirement of assets ....................... 141
Other changes in operating assets and
liabilities, net of business acquisitions:
Accounts receivable ........................... 2,995 2,426
Accounts receivable - unbilled ................ 176 218
Other assets .................................. 530 969
Refundable income taxes ....................... (3,352) (2,759)
Trade accounts payable ........................ 714 (580)
Accrued liabilities ........................... (103) (881)
Unfavorable lease liability ................... 41 (339)
---------- ----------
Net cash (used in) provided by operating
activities ................................ 1,058 (4,265)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of business, net of cash acquired ......... (32,456)
Acquisition of property and equipment ................. (231) (98)
Loans to officers, net ................................ (100)
---------- ----------
Net cash used in investing activities ...... (32,787) (98)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments made on long-term obligations ................ (242) (314)
Proceeds from exercise of stock options ............... 301 243
Issuance of common stock, net of expenses ............. 107 38
---------- ----------
Net cash (used in) provided by financing
activities ............................... 166 (33)
---------- ----------
Effect of exchange rate on cash and cash
equivalents ............................................ 90 21
---------- ----------
Net decrease in cash and cash equivalents ............... (31,473) (4,375)
Cash and cash equivalents, beginning of period .......... 86,396 53,786
---------- ----------
Cash and cash equivalents, end of period ................ $ 54,923 $ 49,411
========== ==========
Supplemental disclosure of cash flow information:
Cash paid during period for interest .................... $ 48 $ 41
========== ==========
Cash paid during period for taxes ....................... $ 180 $ 493
========== ==========
Supplemental disclosure of non-cash investing and
financing transactions --
Fair value of assets acquired ................. $53,745
Liabilities incurred or assumed ............... $ 7,282
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 September 27, 2003, and for the
thirteen and thirty-nine weeks ended September 27, 2003 and September 28, 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 September 27, 2003, the Company granted
approximately 25,000 stock options to employees at a weighted average exercise
price of $1.75 and recorded a net credit to compensation expense related to all
stock options of $3,000. During the thirteen weeks ended September 28, 2002, the
Company granted approximately 361,000 stock options to employees at a weighted
average price of $1.26 and recorded net compensation expense related to all
stock options of $142,000.
During the thirty-nine weeks ended September 27, 2003, the Company granted
approximately 540,500 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 $1.44 and $1.49, respectively, and recorded a net credit to
compensation expense related to all stock options of $103,000. 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 thirty-nine weeks ended
September 27, 2002, the Company granted approximately 1,805,000 stock options to
employees at a weighted average price of $2.76 and recorded net compensation
expense related to all stock options of $471,000. During the same period, 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, utilizing the Black-Scholes option pricing model with
consistent assumptions as used in the Company's annual report on Form 10-K for
fiscal year 2002, the Company's net loss for the thirteen weeks ended September
28, 2002 and September 27, 2003, would have increased by approximately $1.0
million and $0.7 million, respectively, and the Company's net loss for the
thirty-nine weeks ended September 28, 2002 and September 27, 2003, would have
increased by approximately $3.2 million and decreased by approximately $0.1
million, 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 thirty-nine weeks
ended September 28, 2002, and September 27, 2003 (in thousands, except per share
amounts):
FOR THE THIRTEEN WEEKS ENDED FOR THE THIRTY-NINE WEEKS ENDED
---------------------------- -------------------------------
September 28, September 27, September 28, September 27,
2002 2003 2002 2003
------------- ------------- ------------- -------------
Net loss, as reported: $(648) $(2,651) $(5,276) $ (22,620)
Add: Stock-based employee
compensation expense (benefit) included in
reported net loss, net of related tax effects 85 (3) 282 (100)
Deduct: Total stock-based compensation
(expense) benefit determined under fair value
based method for all awards, net of related (1,040) (689) (3,519) 232
tax effects
------------ ------------ ---------- ----------
Pro forma net loss $(1,603) $(3,343) $(8,513) $(22,488)
============ ============ ========== ==========
Loss per share
Basic and diluted, as reported $ (0.02) $ (0.08) $(0.13) $(0.68)
============ ============ ========== ==========
Basic and diluted, pro forma $ (0.05) $ (0.10) $(0.26) $(0.67)
============ ============ ========== ==========
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 thirty-nine weeks
ended September 28, 2002 and September 27, 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 September 28, 2002 and
September 27, 2003, were 33,297,000 and 33,458,000, respectively. The weighted
average shares of common stock outstanding for basic and diluted loss per share
for the thirty-nine weeks ended September 28, 2002, and September 27, 2003, were
32,535,000 and 33,392,000, respectively. Had the Company reported net income for
the thirteen weeks ended September 28, 2002 and September 27, 2003, the treasury
method of calculating common stock equivalents would have resulted in
approximately 115,000 and 307,000 additional diluted shares, respectively. Had
the Company reported net income for the thirty-nine weeks ended September 28,
2002, and September 27, 2003, the treasury method of calculating common stock
equivalents would have resulted in approximately 799,000 and 208,000 additional
diluted shares, respectively.
3. Business Combinations
On March 6, 2002, TMNG purchased the business and primary assets of Cambridge
Strategic Management Group, Inc. ("CSMG" or "TMNG Strategy"), 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, 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 THIRTY-NINE
WEEKS ENDED
(in thousands, except per share amounts) SEPTEMBER 28,2002
------------------
Total revenues $ 28,178
Loss before cumulative effect of a change in
accounting principle $ (4,366)
Net loss $ (5,506)
Basic and diluted loss before cumulative effect
of a change in accounting principle
per common share $ (0.13)
Basic and diluted loss per common share $ (0.17)
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 SFAS No.142, 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.
Management regularly reviews the carrying amount of goodwill at interim dates
and has concluded there are not any factors requiring an interim impairment test
in the third quarter of 2003. The changes in the carrying amount of goodwill as
of September 27, 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 September 27, 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 third quarter, September 27,
2003, are the following identifiable intangible assets (amounts in thousands):
December 28, 2002 September 27, 2003
------------------------ ------------------------
Accumulated Accumulated
Cost Amortization Cost Amortization
------- ------------ ------- ------------
Customer relationships $ 6,790 $(1,698) $ 3,627 $(2,421)
Employment agreements 3,200 (1,042) 3,200 (1,979)
Tradename 350 (146) 350 (277)
Covenant not to compete 203 (132) 203 (203)
------- ------- ------- -------
Total $10,543 $(3,018) $ 7,380 $(4,880)
======= ======= ======= =======
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 thirty-nine weeks ended September 27, 2003,
management identified certain events, including a 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 in the second quarter of 2003.
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 September 28, 2002
and September 27, 2003 was $0.5 million and $0.5 million, respectively.
Intangible amortization expense for the thirty-nine weeks ended September 28,
2002 and September 27, 2003 was $1.6 million and $1.9 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 $16.2
million as of December 28, 2002 and September 27, 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. During the second quarter of
2003 the Company established a valuation allowance of $5.2 million and increased
it to $6.0 million in the third quarter of fiscal year 2003, to reserve the
entire tax benefit generated in the third quarter. In management's opinion, it
is not more likely than not as of September 27, 2003 that sufficient future
taxable income will be generated by the Company to support the deferred tax
assets generated by the impairments and current operating losses, thereby
resulting in the recognition of the valuation allowance. Management continues to
evaluate the recoverability of the recorded deferred tax asset balances. As part
of its analysis, the impact of estimated future income has been included. In the
event the Company continues to report net operating losses for financial
reporting, the provisions of SFAS No. 109 may no longer allow the Company to
include such estimated future income in its valuation allowance analysis, and a
valuation allowance could be required for all or part of the remaining deferred
tax asset balance.
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,
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 September 28, 2002:
Net sales to external customers $ 8,724 $ 32 $ 8,756
Loss from operations $ (614) $ (17) $ (603) $ (1,234)
Total assets $ 10,641 $ 3 $ 133,171 $143,815
For the thirteen weeks ended September 27, 2003:
Net sales to external customers $ 4,691 $ 4,691
Loss from operations $ (2,246) $ (30) $ (501) $ (2,777)
Total assets $ 6,703 $ 11 $ 93,576 $100,290
For the thirty-nine weeks ended September 28, 2002:
Net sales to external customers $ 25,327 $ 625 $ 25,952
Loss from operations $ (5,137) $ 295 $ (2,675) $ (7,517)
Total assets $ 10,641 $ 3 $ 133,171 $143,815
For the thirty-nine weeks ended September 27, 2003:
Net sales to external customers $ 16,894 $ 223 $ 17,117
Loss from operations $(25,739) $ 132 $ (1,759) $(27,366)
Total assets $ 6,703 $ 11 $ 93,576 $100,290
Segment assets are regularly reviewed by management as part of its overall
assessment of the segments' performance, and include both billed and unbilled
trade accounts receivable, net of allowances, and certain other assets. Assets
not assigned to segments include cash and cash equivalents, property and
equipment, goodwill and intangible assets and deferred tax assets, excluding
deferred tax assets recognized on accounts receivable reserves, which are
assigned to their respective segment.
Reconciling information between reportable segments and the Company's totals is
shown in the following table (amounts in thousands):
------------------------------------------------------------------------------
FOR THE THIRTEEN WEEKS ENDED FOR THE THIRTY-NINE WEEKS ENDED
------------------------------------------------------------------------------
SEPTEMBER 28, 2002 SEPTEMBER 27, 2003 SEPTEMBER 28, 2002 SEPTEMBER 27, 2003
------------------ ------------------ ------------------ ------------------
Total operating losses for
reportable segments $ (631) $ (2,276) $ (4,842) $ (6,665)
Goodwill and intangible asset impairment (18,942)
Equity related charges (142) 3 (1,094) 103
Intangible asset amortization (461) (504) (1,581) (1,862)
-------- -------- -------- --------
Loss from operations $(1,234) $ (2,777) $ (7,517) $( 27,366)
======== ======== ======== ========
Revenues earned in the United States and internationally based on the location
where the services are performed are shown in the following table (amounts in
thousands):
---------------------------------------------------------------------------------
FOR THE THIRTEEN WEEKS ENDED FOR THE THIRTY-NINE WEEKS ENDED
---------------------------------------------------------------------------------
SEPTEMBER 28, 2002 SEPTEMBER 27, 2003 SEPTEMBER 28, 2002 SEPTEMBER 27, 2003
------------------ ------------------ ------------------ ------------------
United States $ 7,890 $4,010 $ 23,951 $15,551
International:
Ireland 182 362 32
The Netherlands 627 237 1,526 769
Canada 6 (6) 6 95
Belize 234 375
Portugal 216 216
Trinidad 60 116
Other (9) (9) 79
------- ------- ------- -------
Total $ 8,756 $ 4,691 $25,952 $ 17,117
======= ======= ======= =======
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 September 27, 2003, $16.3 million of consulting fees had been recognized
in connection with the agreement from the commencement date. Based on the total
contract commitment of $22 million and consulting fees recognized as of
September 27, 2003 in the amount of $16.3 million, a $5.7 million shortfall
exists. There can be no certainty that the remaining $5.7 million of consulting
will be purchased, however the agreement does contain a termination fee in the
amount of the lesser of $1.25 million or 25% of the unused committed consulting
services.
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 CSMG
acquisition. The LOC was required as part of the assignment of leased office
space from CSMG to the Company. The Company collateralized the LOC with a $1.0
million cash deposit to the above financial institution. The LOC provides for
reductions 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 September 27, 2003. An obligation has
not been recorded in connection with the LOC on the Company's consolidated
condensed balance sheet as of September 27, 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 September 27,
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 September 28, 2002 and September 27, 2003 totaled
$300,000 for each period. 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 or
draws against the line 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. As of September
27, 2003 the remaining demands for such collected balances aggregated $1.1
million. 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 $824,000, 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 portions 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 $954,010 and $448,000 for
the thirty-nine weeks ended September 28, 2002 and September 27, 2003,
respectively, and our allowance for doubtful accounts totaled $779,000 and
$523,000 as of September 28, 2002 and September 27,2003, 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 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 and lives of these specifically identified intangible
assets involves significant professional judgment, estimates and projections
related to the valuation to be applied to and period benefited by intangible
assets like customer lists, employment agreements and trade names. 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 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 second
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 carry back 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
September 27, 2003, valuation allowances in the amount of $6.0 million are
recorded in connection with the deferred income tax assets. Management continues
to evaluate the recoverability of the recorded deferred tax asset balances. As
part of its analysis, the impact of estimated future income has been included.
In the event the Company continues to report net operating losses for financial
reporting, the provisions of SFAS No. 109 may no longer allow the Company to
include such estimated future income in its valuation allowance analysis, and a
valuation allowance could be required for the remaining deferred tax asset
balance. Any such valuation allowance would result in additional charges to net
income.
RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED SEPTEMBER 27, 2003 COMPARED TO THIRTEEN WEEKS ENDED
SEPTEMBER 28, 2002
REVENUES
Revenues decreased 46.4% to $4.7 million for the third quarter of fiscal year
2003 from $8.8 million for the third quarter of fiscal year 2002. The decrease
in revenues was primarily associated with the reduction of purchases of
management consulting services by the communications services providers, which
correlates with significant layoffs of management personnel by such clients and
continuing adverse conditions in the industry. In addition there has been
continued deferral of key management consulting pipeline opportunities, an
increase in managed services outsourcing by clients which partially displaces
what were historically management consulting opportunities for us, and the
resignation of certain key executives of the Company during fiscal 2003.
International volume has been consistent in comparison to the third quarter of
fiscal year 2002, however our international revenue base increased to 14.5% of
our revenues in the third quarter of fiscal year 2003, from 9.1% in the third
quarter of 2002 due primarily to the decrease in domestic revenue. Our
Management Consulting Services segment contains a portfolio of operations,
marketing and strategy consulting. These offerings have been aggregated into the
Management Consulting segment based on the aggregation criteria of SFAS No. 131
"Disclosures about Segments of an Enterprise and Related Information." The
operations and strategy consulting offerings both experienced a decline in
revenues for the thirteen weeks ended September 27, 2003 compared to September
28, 2002, as operations consulting revenues were $2.5 million compared to $4.9
million and strategy consulting revenues were $1.1 million compared to $3.0
million for the above periods. Marketing consulting revenues increased for the
third quarter of fiscal year 2003 compared to the third quarter of fiscal year
2002, with revenues totaling $1.1 million and $0.8 million, respectively.
COSTS OF SERVICES
Cost of services decreased 44.3% to $2.5 million for the third quarter of fiscal
year 2003 from $4.5 million for the third quarter of fiscal year 2002 as a
result of decreased sales. As a percentage of revenues, our gross margin was
46.8% for the third quarter of fiscal year 2003, compared to 48.8% for the third
quarter of fiscal year 2002. The decrease in gross margin was primarily
attributable to the impact of lower utilization of full-time consulting
personnel.
Non-cash stock based compensation charges or benefits related to pre-initial
offering grants of stock options are almost completely amortized and as a result
current and future charges and benefits will be minimal with respect to these
grants
OPERATING EXPENSES
In total, operating expenses decreased to $5.0 million for the third quarter of
fiscal year 2003, or 9.7% from $5.5 million for the third quarter of fiscal year
2002. The decrease in operating expenses was primarily attributable to a
reduction in selling general and administrative expenses of $0.5 million for the
thirteen weeks ended September 27, 2003. The major component of the $0.5 million
decrease was a decline of $0.3 million related to a reduction in headcount to
resize the Company in relation to decreasing revenues. As a percentage of
revenues, selling, general and administrative expenses increased to 90.7%
compared to 54.1% for the third quarter of fiscal year 2003 and 2002,
respectively, and was primarily a function of the Company's decreased revenues.
Management continues to examine cost - reduction measures to improve the
company's profitability.
Non-cash stock based compensation charges or benefits related to pre-initial
offering grants of stock options are almost completely amortized and as a result
current and future charges and benefits will be minimal with respect to these
grants.
OTHER INCOME
Interest income was $136,000 and $243,000 for the third quarter of fiscal years
2003 and 2002, respectively, and represented interest earned on invested
balances. Interest income decreased during the third quarter of fiscal year 2003
due primarily lower interest rates, combined with lower invested balances from
fiscal year 2002 to fiscal year 2003 as working capital was used to fund
operations. 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 third
quarter of fiscal year 2003 and 2002 as a percentage of pretax loss was 0.0% and
35.1%, respectively. The primary reason for the variance between the effective
and statutory income tax rates in the third quarter of 2003 relates to the
establishment of a valuation allowance in the amount of $0.8 million. For an
additional discussion on the valuation allowance refer to Note 6. "Income Taxes"
included in the Notes to Consolidated Condensed Financial Statements included
herein. The primary reason for the variance in 2002 was due to expenses that
were recorded for financial reporting purposes but not for income tax purposes,
thereby reducing the income tax benefits.
THIRTY-NINE WEEKS ENDED SEPTEMBER 27, 2003 COMPARED TO THIRTY-NINE WEEKS ENDED
SEPTEMBER 28, 2002
REVENUES
Revenues decreased 34.0% to $17.1 million for the thirty-nine weeks ended
September 27, 2003, from $26.0 million for the thirty-nine weeks ended September
28, 2002. The decrease in revenues was primarily associated with the reduction
of purchases of management consulting services by the communications service
providers, which correlates with significant layoffs of management personnel by
such clients and continuing adverse conditions in the industry. In addition
there has been continued deferral of key management consulting pipeline
opportunities, an increase in managed services outsourcing by clients which
partially displaces what were historically management consulting opportunities
for us and the resignation of certain key executives of the Company during
fiscal year 2003. International volume has been consistent in comparison to the
thirty-nine weeks ended September 28, 2002, however, our international revenue
base increased to 9.2% of our revenues for the thirty-nine weeks ended September
27, 2003, up from 7.4% for the thirty-nine weeks ended September 28, 2002 due
primarily to our decrease in domestic revenue. The operations and strategy
consulting offerings both experienced a decline in revenues for the thirty-nine
weeks ended September 27, 2003 compared to September 28, 2002, as operations
consulting revenues were $8.0 million compared to $13.6 million and
strategy-consulting revenues were $5.5 million compared to $8.7 million for the
above periods. Marketing consulting revenues increased for the thirty-nine weeks
ended September 27, 2003 compared to the thirty-nine weeks ended September 28,
2002, with revenues totaling $3.4 million and $3.0 million, respectively.
COST OF SERVICES
Costs of services decreased 32.8% to $8.8 million for the thirty-nine weeks
ended September 27, 2003 compared to $13.1 million for the thirty-nine weeks
ended September 28, 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 48.6% for the
thirty-nine weeks ended September 28, 2003, compared to 49.5% for the
thirty-nine weeks ended September 28, 2002. The decrease in gross margin was
primarily attributable to the impact of lower utilization of full time
personnel.
Non-cash stock based compensation benefits of $113,000 and charges of $782,000
were recorded for the thirty-nine weeks ended September 27, 2003 and September
28, 2002, respectively. The primary reasons for the net decrease in non-cash
stock based compensation charges for the third 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 third 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 0.7% and the net charges increased costs of services as
a percentage of revenue by 3.0% for the thirty-nine weeks ended September 27,
2003 and September 28, 2002, respectively. Non-cash stock based compensation
charges or benefits related to pre-initial offering grants of stock options are
almost completely amortized and as a result current and future charges and
benefits will be minimal with respect to these grants.
OPERATING EXPENSES
In total, operating expenses increased to $35.7 million for the thirty-nine
weeks ended September 27, 2003, or 175.1% from $20.4 million for the thirty-nine
weeks ended September 28, 2002. The major components of this $15.3 million
increase relate to an $18.9 million goodwill and intangible asset impairment
charge attributable to the lowered discounted cash flow projection of one of our
acquired entities, partially offset by a $3.5 million reduction in selling,
general and administrative expenses. The major components of the $3.5 million
reduction in selling, general and administrative expense relate primarily to a
$1.6 million reduction in severance charges incurred in fiscal 2002 and a $0.8
million decrease in payroll due to a reduction in our headcount. As a percentage
of revenues, selling, general and administrative expenses increased to 83.0%
compared to 68.4% for the thirty-nine weeks ended September 27, 2003 and
September 28, 2002, respectively. This percentage increase was primarily
attributable to the decreased revenues. Throughout fiscal year 2003, management
has implemented a number of cost reduction initiatives including the reduction
of sales and marketing staff, minimization of consultant recruitment, reduction
in the Company's accounting staff as well as other administrative cost
reduction.
Non-cash stock based compensation charges of $10,000 and $312,000 for the
thirty-nine weeks ended September 27, 2003 and September 28, 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 1.8% for the thirty-nine weeks ended September 27, 2003 and September
28, 2002, respectively. The $302,000 decrease in non-cash stock based
compensation charges for the thirty-nine weeks ended September 27, 2003 compared
to September 28, 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 for the recognition of expense associated with the options. The
accelerated vesting schedule recognizes the most expense upfront in years one
and two, with the expense declining in years three and four of vesting.
Substantially all of the options are in their fourth year of vesting as of
September 27, 2003 . Non-stock cash based compensation charges or benefits
related to pre-initial offering grants of stock options are almost completely
amortized and as a result current and future charges and benefits will be
minimal with respect to these grants.
OTHER INCOME
Interest income was $474,000 and $766,000 for the thirty-nine weeks ended
September 27, 2003 and September 28, 2002, respectively, and represented
interest earned on invested balances. Interest income decreased during the
thirty-nine weeks ended September 27, 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 thirty-nine weeks ended September 27, 2003 as a
percentage of pretax loss was 16.0 % compared to 38.9% for the thirty-nine weeks
ended September 28, 2002. The decrease in the income tax benefit during the
thirty-nine weeks ended 2003 as a percentage of pre-tax loss was due primarily
to the Company recognizing a valuation allowance in the amount of $6.0 million
in 2003. For an additional discussion on the valuation allowance refer to Note
6. "Income Taxes" included in the Notes to Consolidated Condensed Financial
Statements included herein.
CUMULATIVE CHANGE IN ACCOUNTING PRINCIPLE
A cumulative change in accounting principle in the amount of $1.9 million was
recorded in the thirty-nine weeks ended September 28, 2002 in connection with
the Company's estimate of goodwill impairment. The impairment was calculated in
accordance with the provisions of SFAS No. 142 "Accounting for Goodwill and
Intangible Assets" and has been reported on the Company's Statement of Loss and
Comprehensive Loss, net of tax benefit in the amount of $1.1 million.
LIQUIDITY AND CAPITAL RESOURCES
At September 27, 2003, we had approximately $49.4 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 $4.3 million for the thirty-nine weeks
ended September 27, 2003, compared to net cash provided by operating activities
of $1.1 million for the same period in fiscal year 2002. The Company generated
negative cash flow from its operating activities for the thirty-nine weeks ended
September 27, 2003 primarily due to operating losses and the use of working
capital (excluding accounts receivable) to fund operations, partially offset by
a reduction in accounts receivable balances reflecting more focused billing and
collection activities.
Net cash used in investing activities was $98,000 and $32.8 million for the
thirty-nine weeks ended September 27, 2003 and September 28, 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 $32.5 million.
Net cash used in financing activities was $33,000 for the thirty-nine weeks
ended September 27, 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 $166,000 for the thirty-nine week period
ended September 28, 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 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 Furnished 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 October 31, 2003 with the Securities and
Exchange Commission in connection with its earnings release dated October 30,
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 NOVEMBER 12, 2003
- ----------------------------- EXECUTIVE OFFICER
RICHARD P. NESPOLA
/S/ DONALD E. KLUMB CHIEF FINANCIAL OFFICER AND NOVEMBER 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 officer 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; and
5. The registrant's other certifying officer 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: November 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 officer 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; and
5. The registrant's other certifying officer 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: November 12, 2003
BY: /S/ DONALD E. KLUMB
---------------------------------------
CHIEF FINANCIAL OFFICER AND TREASURER
EXHIBIT 32. Certifications Furnished 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: November 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: November 12, 2003
BY: /S/ DONALD E. KLUMB
---------------------------------------
CHIEF FINANCIAL OFFICER AND TREASURER