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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 03, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
------------ ------------
COMMISSION FILE NUMBER: 000-27617
THE MANAGEMENT NETWORK GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 48-1129619
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
7300 COLLEGE BOULEVARD,
SUITE 302, OVERLAND PARK, KANSAS 66210
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (913) 345-9315
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
COMMON STOCK (.001 PAR VALUE) NASDAQ NATIONAL MARKET
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE.
Indicate by check mark whether the Registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. []
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). YES [ ] NO [X]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, as of March 26, 2004 was approximately $65.7 million. As of March
26, 2004, the Registrant had 34,565,483 shares of common stock, par value $0.001
per share (the Common Stock), issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information required to be provided in Part III (Items 10, 11, 12, 13 and
14) of this Annual Report on Form 10-K is hereby incorporated by reference from
the Company's Definitive 2004 Proxy Statement which will be filed with the
Securities and Exchange Commission within 120 days of the end of the Company's
fiscal year.
THE MANAGEMENT NETWORK GROUP, INC.
FORM 10-K
TABLE OF CONTENTS
PAGE
----
PART I
Item 1. Business.................................................... 4
Item 2. Property.................................................... 16
Item 3. Legal Proceedings........................................... 16
Item 4. Submission of Matters to a Vote of Security Holders......... 17
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 17
Item 6. Selected Consolidated Financial Data........................ 18
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 19
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 26
Item 8. Consolidated Financial Statements........................... 27
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.................................... 54
Item 9A. Controls and Procedures .................................... 54
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 54
Item 11. Executive Compensation...................................... 54
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 54
Item 13. Certain Relationships and Related Transactions.............. 55
Item 14. Principal Accountant Fees and Services ..................... 55
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on
Form 8-K.................................................... 55
SIGNATURES............................................................ 56
PART I
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
Cautionary statement regarding forward-looking information
With the exception of historical information, this report on Form 10-K contains
forward-looking statements as defined in the Private Securities Litigation
Reform Act of 1995 and identified by such words as "will be," "intend,"
"continue," "believe," "may," "expect," "hope," "anticipate," "goal," "forecast"
or other comparable terms. The Management Network Group, Inc.'s actual financial
condition, results of operations or business may vary materially from those
contemplated by such forward looking statements and involve various risks and
uncertainties, including but not limited to those discussed in Item 1, "Business
- - Risk Factors." Investors are cautioned not to place undue reliance on any
forward-looking statements.
WEBSITE ACCESS TO EXCHANGE ACT REPORTS
The Management Network Group, Inc.'s internet website address is www.tmng.com.
The Management Network Group, Inc. ("TMNG" or "the Company") makes available
free of charge through TMNG's website the Company's annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to
those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Exchange Act as soon as reasonably practicable after the Company electronically
files such material with, or furnishes it to the Securities and Exchange
Commission ("SEC").
ITEM 1. BUSINESS
GENERAL
Founded in 1990, TMNG a Delaware corporation, is a leader in consulting to the
communications industry. The Company has built a fully integrated suite of
consulting offerings including strategy, management, marketing, operational, and
technology consulting services primarily to communications service providers,
technology companies and financial services firms located principally in North
America and Western Europe. Historically, in addition to North America and
Western Europe, TMNG has provided consulting services to clients in almost all
other major international markets. TMNG believes it is unique in its ability to
provide a comprehensive business solution to the communications industry,
including strategy consulting and business planning, product/service definition
and launch, customer acquisition and retention, business model transformation,
technical support and process modeling for business support systems (BSS) and
operations support systems (OSS). TMNG has consulting experience with almost all
major aspects of managing a global communications company. In addition, TMNG
provides marketing consulting services to clients outside of the communications
industry, primarily in the Eastern Region of the United States (Mid-Atlantic).
From its inception to mid-fiscal year 2000, TMNG was a provider of a
comprehensive range of services to the global communications industry with
significant focus and emphasis on management and operational consulting
services. During fiscal year 2000 the Company identified early leading
indicators of the market downturn in the communications industry (See "Market
Overview" in Item 1 for an additional discussion of market changes). The Company
broadened its focus and emphasis to include not only management and operational
consulting but also strategy and marketing to enable the Company to deliver
solutions to its communication service provider clients. To accomplish this
transformation, the Company looked to increase the breadth of its employee work
base, hiring consultants of increasingly diverse backgrounds with various
technical competencies, and began an acquisition strategy to acquire consulting
companies whose offerings complemented, expanded and deepened the offerings
historically provided by TMNG. Key acquisitions completed by TMNG during the
last four years included Cambridge Strategic Management Group, Inc. (now "TMNG
Strategy"), The Weathersby Group, Inc. (now "TMNG Marketing") and Tri-Com
Computer Services, Inc. (now "TMNG Technologies"). These businesses focused
primarily on strategy, new product launch initiatives, customer acquisition and
retention, and technology consulting to the global communications industry. The
Company believes these acquisitions have expanded key client relationships, have
positioned TMNG uniquely in the market to effectively serve today's needs of
large global communication service providers, and have provided an expansion of
key direct distribution channel elements to TMNG. In fiscal year 2003, the
Company better integrated these practices and now brings a fully integrated
suite of offerings to the communications marketplace.
As TMNG primarily focuses on communication service providers, it has learned
during the course of numerous engagements what the service providers' key
business objectives consist of, both near and long term. Subsequently, TMNG
built product offerings targeting software solution and technology companies,
investment banking, and private equity firms which invest in and serve the
communications industry. The Company's services to software and technology firms
have included strategy definition, product offering positioning, application
development, assistance in responding to requests for proposals, and
implementing solutions within the service provider environment. Services to the
investment banking and private banking community have included prospect
validation and due diligence.
Recently, with the market dynamics changing, (see "Market Overview" in Item 1)
TMNG is focusing on the opportunity to expand its offerings through indirect
channel partners. Partnering will better enable the Company to serve large
clients in what has become a shrinking and consolidating marketplace. TMNG
provides its partners with contacts, business analysis, business process
outsourcing (BPO) solutions, and depth of knowledge and experience in serving
the industry. The partnerships bring technology solutions and systems
integration capabilities which enable TMNG to provide a more comprehensive
client offerings and solution to effectively compete with other global
consultancies. Such partnerships are also expanding the Company's relationships
with off-shore development firms located primarily in the Asian market that
provide high quality, low cost solutions to the industry.
The Company is evolving its service offerings to support the next generation of
data and content offerings and is providing communications consulting expertise
to new and growing organizations with increasing demand. The Company continues
to invest significantly in wireless, including a strategic partnership with
inCode Telecom Group, in the construction of a wireless next generation
laboratory located in San Diego, California. In 2003, the Company took a
leadership position in the wireless industry by providing a suite of offerings
to assist wireless carriers with the impact of wireless number portability
(WNP). The Company looks to focus on several data and broadband wireless
initiatives in 2004. The Company is also investing in intellectual capital to
assist major communication service providers in dealing with the voice over
internet protocol (VOIP) and Internet Protocol managed offerings transformation
which TMNG believes will have an impact on the industry. Finally, the Company
has recruited executives with expertise and relationships serving the rural
local exchange carrier (RLEC) market and is building presence and market share
in that industry segment of communications service providers.
The Company intends to continue capitalizing on its industry expertise by
refreshing existing proprietary toolsets and building new toolsets to enable it
to provide strategic, management, marketing, operational, and technology support
to clients. TMNG's toolsets are consulting guidelines, processes and benchmarks
created and updated by TMNG consultants based on their experience over many
consulting engagements. These toolsets assist clients to improve productivity,
gain competitive advantage, reduce time to market and market entry risk, and
increase revenues and profits. TMNG's services are provided by a team comprised
of senior professionals recruited from prestigious university campuses
complemented by teams of consultants from the communications industry averaging
15 years of experience.
The Company maintains a unique technology agnostic and vendor neutral position
to make unbiased evaluations and recommendations that are based on a thorough
knowledge of each solution and each client's situation. Therefore, TMNG is able
to capitalize on extensive experience across complex multi-technology
communications systems environments to provide the most sound and practical
recommendations to clients.
MARKET OVERVIEW
The demand for consulting services increased throughout the 1990's, and this
trend was especially prevalent for consulting services of communications and
e-commerce consulting firms. The key contributor to this was the significant
projected growth of the internet and e-commerce which stimulated capital
investment into new and existing wireline communications providers, enabling
their investment in new network technology and the creation of new broadband
market offerings. Investment was further accelerated through global deregulation
of the communications industry throughout the 1990's. The deregulation of the
communications industry resulted in increased competition by the creation of
increased demand for fiber and capacity by the new market entrants; a massive
influx of capital to fund carrier entrants and allow existing firms to purchase
aggressively from one another as they expanded; rapid internet growth, spurring
broadband internet access services, digital subscriber line (DSL) internet
access and unbundled local loops that forged the way for wholesale DSL business
models; and technological innovations, allowing new service offerings in the
areas of voice, data, video and content.
Similarly, significant investment was made in the wireless communications
industry, which was experiencing tremendous growth as a growing percentage of
voice communications were migrating to wireless networks and devices. In
addition, the personal communications services (PCS) auctions in the United
States and universal mobile telecommunications system (UMTS) broadband spectrum
auctions in Europe resulted in new providers, additional services, and improved
technology. Customer penetration resulted in both residential and business
customers, and services were expanded to include wireless data offerings
primarily in Europe and Asia.
By mid-2000, following the first announcements of disappointing financial
performance by wireline and wireless communication service providers and their
vendors, it became apparent that the rate of investment and adoption was far
exceeding the expected rate of consumption in e-commerce and broadband
offerings. The massive inflow of capital in communications during the 1990's
resulted in an inflated market scenario, where once solid business models were
now ill equipped to function and adjust to the macroeconomic environment. The
cycle was further perpetuated by the over saturation of new market entrants
where supply far exceeded levels sustainable by the market, creating pressure
for consolidation and funding contraction. As a result, the industry experienced
a significant number of bankruptcies and layoffs in excess of half a million
individuals in the United States alone. Because the communications companies
often purchased services from one another, the bankruptcies led to a vicious
cycle of industry-wide destabilization with each successive bankruptcy
jeopardizing another company's liquidity position.
The industry experienced further instability during 2002 due to government
investigations into the accounting practices of several large communications
providers that revealed the perpetuation of accounting improprieties, including
the material overstatement of revenues and the understatement of expenses. Such
inquiries have resulted in ongoing restatements of previously reported financial
statements, resulting in additional destabilization within the industry, and
eroding investors' confidence.
As the macroeconomic forces discussed above continue to destabilize the
communications industry, outside consulting services for communications have
been negatively impacted, including TMNG's. Communications companies have
continued to reduce their demand for external consultants, seeking instead to
utilize more internal resources, or in some cases delayed capital and operating
expenditures related to the launch of new products and services, particularly in
networks and technology. This has resulted in a continued substantial decline in
TMNG's revenue and profits during fiscal years 2001, 2002 and 2003 (See Item 1,
"Business - Risk Factors" and Item 7, "Management's Discussion and Analysis").
Today, the global communications industry is in the midst of what the Company
believes to be revolutionary change.
The Company believes the companies that survived the fallout over the past three
years will either acquire or be acquired and/or need to implement significant
changes to their organizations. The Company believes access to capital markets
will remain limited and, as a result, capital and operating investment and
expense will continue to be closely monitored.
As TMNG enters fiscal 2004, the Company believes the large global communications
companies will be strategically focused on the following key initiatives, with
priority depending upon present position and state of the company: launching new
products with focus on enterprise customers and broadband and content offerings;
cost cutting through outsourcing on non-critical activities; bundling of product
offerings; improving the customer experience and minimizing churn; and
maximizing invested network efficiencies. It is also expected that further
market consolidation will occur over the next few years. It is the Company's
belief that the regulatory environment will also continue to play a key factor
in the strategy and operations of communications providers. Most notably, as it
relates to requirements to offer wholesale pricing on network elements and
taxation surrounding communications over VOIP. Regulatory decisions will further
facilitate the speed of change to next generation networks, as it will provide
input to the business cases. The Company expects demand for consulting services
over the next decade to be differentiated compared to the past, with increased
focus on wireless, and internet based offering, outsourced BPO service
opportunities, the increasing presence of offshore technology partners due to
price advantage, and the need for existing management consultancies to provide
solutions to communications industry challenges. As discussed in Item 1,
"Business - General," TMNG has invested significantly to enable the Company to
provide such services.
It has been the Company's experience that because the expertise needed by
communications companies to address the market's needs is typically outside
their core competencies, they must ultimately either recruit and employ experts
or retain outside specialists. The Company believes due to the range of
expertise required and the time associated with hiring and training new
personnel, bringing expertise in-house is often not a viable option. Although
demand for consulting services has been down for the last three years, the
Company believes customers will need to outsource some of the expertise required
to adapt to new environments and capitalize on new technologies now emerging.
When retaining outside specialists, communications companies need experts that
fully understand the communications industry and can provide timely and unbiased
advice and recommendations. TMNG intends to continue responding to that need.
BUSINESS STRATEGY
The Company's objective is to establish itself as the consulting company of
choice to the communications industry, which includes the service providers and
technology companies that serve the industry, and the financial services and
investment banking firms that invest in the sector. The following are key
strategies the Company has adopted to pursue this objective.
- - Develop and evolve existing offerings/solutions and thought leadership
The Company plans to continue expanding its end-to-end solutions offerings, both
by organic expansion and/or through acquisitions. Organic expansion involves
launching new products and services and generating revenues through integrated
offerings jointly developed by the Company and its acquired companies. Organic
expansion will also focus on offerings geared towards increasing clients'
efficiencies. The Company expanded its offerings through the acquisition of TMNG
Marketing in late 2000. TMNG Marketing provides a full spectrum of marketing
consulting services, including product development, churn management and market
research that takes clients from the point of product definition to customer
acquisition and retention. In 2001, the Company acquired TMNG Technologies. TMNG
Technologies provides end-to-end OSS, data center, systems solutions, data
sourcing, legacy integration and middleware implementation. Additionally, in
March 2002, TMNG acquired TMNG Strategy. This newest acquisition provides a wide
range of business strategy services including analyses of industry and
competitive environments; product and distribution strategies; finance,
including business case development, modeling, cost analysis and benchmarking;
and due diligence and risk assessment.
The Company plans to continue extending its product offerings to the
communications industry. As discussed in "Market Overview" in Item 1 above, the
Company believes wireline and wireless providers will be strategically focused
on the following key initiatives, with priority depending upon present position
and state of the company: launching new products with focus on enterprise
customers and broadband offerings; cost cutting through outsourcing of
non-critical activities; bundling of product offerings; improving the customer
experience and minimizing churn; and investing in next generation networks.
- - Continue to build the TMNG brand
The Company plans to continue building and communicating the TMNG brand, further
positioning the Company as the consultancy of choice for the global
communications industry. Special focus will be placed on brand and eminence
building in the wireless consulting market and in the VOIP arenas. Direct
marketing efforts and other marketing initiatives are underway to continue
building awareness of TMNG and communicating the Company's key strengths,
including the Company's uniquely high level of experienced consultants, focus on
the global telecommunications industry, integrated end-to-end solution and
commitment to bringing clients a positive return on their investment. Each of
the acquisitions by the Company is also being rebranded under the TMNG label.
- - Focused and effective retention and recruitment
TMNG plans to further enhance its business model to accommodate the anticipated
types of consulting services as a result of revolutionary change occurring
within the communications sector. One key element of the business model includes
attracting and retaining high quality, experienced consultants. In the current
economic environment, the Company's two primary challenges in the recruitment of
new consulting
personnel are the ability to recruit talented personnel into a market that is
significantly depressed and the ability to execute such recruitment with an
appropriate compensation arrangement.
The Company reinvigorates existing skill sets of its consultants with
proprietary toolsets that provide methodologies they use to augment their
experience and helps analyze and solve clients' problems. TMNG utilizes a
network of eRooms to serve as a knowledge base, enabling consultant
collaboration on engagements and providing support information and updates of
TMNG current toolsets and releases of next generation tools. Finally, the
Company continues to manage its flexible and unique employee and independent
subject matter expert model to maximize skill set offerings, while minimizing
the effect of unbillable consultant time.
- - Maintaining a global presence
The Company plans to maintain presence globally to deliver services and solution
capabilities to client companies located around the world. Especially in Western
Europe, the Company believes the competitive market expertise of TMNG's U.S.
consultants can be a key factor for foreign companies facing the business issues
associated with deregulation and competition.
- - Building intellectual capital and a comprehensive suite of wireless and VOIP
consultative offerings
TMNG has completed engagements with wireless clients in the U.S., Europe, Latin
America, Asia and the Middle East. The Company's services have included business
and strategic planning, product development, customer acquisition and retention,
business and operations process design and reengineering, revenue and cost
management and network planning. In 2003 the Company built a suite of offerings
to support WNP for the wireless industry.
In association with the Company's strategic partner, inCode Telecom Group, a
technology laboratory has been established to enable advances in wireless
technology. The Wireless Technology Lab (WTL), located in San Diego, California,
is a center for testing and demonstrating advanced wireless equipment and
software. It also serves as a neutral location for application development. The
WTL is the first independent facility to provide a vendor and
technology-neutral, real-world testing ground for next-generation wireless
technologies. In 2004, the Company will look to the laboratory to assist in the
creation of service offerings to the wireless marketplace.
In 2004, the Company's top two strategic focuses will be building a
knowledgebase and developing service offerings supporting wireless communication
service providers and VOIP initiatives.
- - Leveraging knowledge and skills to new opportunities and services
The Company is expanding its service offerings and is providing communications
consulting expertise to new and growing organizations with increasing demand. In
2002, the Company obtained a Government Services Authorization (GSA), which
enables the Company to provide consulting services to the Federal government.
The Company has recruited personnel with expertise in building a government
consultancy and looks to develop and launch offerings to the Federal government.
In addition, the Company has recruited executives with expertise and a
relationship serving the incumbent local exchange carrier (ILEC) market and
plans to build its presence and market share in that industry segment of
communications service providers.
The Company is also expanding its focus on managed service offerings and
partnerships with select global technology, outsourcing and system integration
firms as a complement to the Company's consultancy offerings. The Company
believes this will be a fast growing market segment which should allow the
Company to leverage its intellectual capital while teaming with technology
partners to bring BPO and managed services offerings to select clients. The
Company believes it is uniquely positioned to capitalize on these anticipated
market opportunities, particularly because of its vendor neutrality and
proprietary productivity toolsets.
SERVICES
TMNG provides a full range of strategic, marketing, operations and technology
consulting services to the communications industry. Services provided include:
- - Strategy and Business Case Development
TMNG provides comprehensive strategic analysis to service providers, equipment
manufacturers and financial investors in the communications industry. The
Company's approach combines rigorous qualitative and quantitative analyses with
a detailed understanding of industry trends, technologies, and developments.
TMNG provides clients with specific solutions to their key strategic issues
relating to their existing business as well as new product and service
opportunities. TMNG's services include business case development, data and
content strategies, marketing spending optimization, service and brand
diversification, enterprise and small business strategies, technology
commercialization and operational strategies.
- - Product Development and Management
TMNG offers global communications service providers the benefit of its hands-on
experience developing and launching new products and services for some of
today's industry leaders. TMNG's product development approach includes market
assessments, product/service definition,
business requirements definition, project management, testing and release. TMNG
also helps communication clients by evaluating the profitability of existing
product and service offerings to identify opportunities to consolidate,
de-emphasize or decommission offerings to improve clients' overall
profitability.
- - Customer Acquisition and Retention
TMNG has developed and implemented acquisition and retention strategies for
clients in the communications industry. TMNG's consultants are skilled in the
areas of target market segmentation, campaign management and sales-process
management. TMNG's strategies take into account the needs and preferences of the
target market and include a mix of marketing communications, partner programs,
e-marketing, direct sales, telemarketing, direct response and loyalty and
retention programs.
- - Revenue and Cost Management
TMNG is dedicated to helping clients uncover and recover missed opportunities at
every stage along the revenue life cycle and reduce the costs associated with
managing business functions. TMNG's approach to revenue and cost management
centers around operational assessment, process improvement, organizational
restructuring, and continuous improvement. TMNG's consultants utilize their
industry expertise and the Company's proprietary TMNG QBC (R) (Quality Business
Controls) toolset to deliver quantifiable benefits to clients.
- - Business and Operations Process Redesign and Reengineering
TMNG provides clients with efficient, integrated business and operational
processes, supporting technology systems and web-centric interfaces across all
OSS/BSS applications. TMNG takes clients from the point of customer acquisition
to provisioning all the way through to billing, collections and accounts
receivable management to cash and profits in the bank. TMNG process redesign and
reengineering expertise is put to use not only for the Company's clients, but
also in TMNG's Wireless Technology Lab where the Company is working with its
partners to develop and test leading edge wireless applications.
- - Corporate Investment Services
The Company provides a wide range of corporate investment services to
investment/private equity firms in connection with investments and mergers and
acquisitions in the communications industry. Services include evaluation of
management teams and business plans, identification of strengths and weakness of
the company, and analyses of the company's financial models, systems, products
and operational and business processes. Post-investment support is also provided
to help customers in the optimization of their investment. The Company's
Operational Performance Appraisal (OPA (TM)) features an assessment of
communications companies' revenue assurance, network inventory, network
operations, order management and provisioning, disaster recovery planning and
e-commerce operations and products. The appraisal seeks to help companies
optimize asset utilization, including network assets and inventory. In addition,
OPA(TM) seeks to maximize revenue and minimize associated costs and determine if
the provider's customers are being served effectively.
- - TMNG Resources
TMNG Resources, a business unit of TMNG Marketing, focuses on providing subject
matter experts (SMEs) utilizing a staff augmentation model. As the telecom
industry starts to rebound ever so slowly, the Company believes service
providers may, at least initially, be hesitant to make permanent hiring
decisions and will seek temporary expert staff. The Company believes TMNG
Resources is uniquely positioned to fill the recruiting needs of the Company's
clients.
COMPETITION
The market for communications consulting services is highly fragmented and
changing rapidly. TMNG faces competition from major business and strategy
consulting firms, large systems integration and major global outsourcing firms,
offshore development firms from the Asian markets, equipment and software firms
that have added service offerings, and customers' internal resources. Recently,
there has been a significant increase in demand for firms that can bundle BPO
with systems and technical integration. Many of these competitors are large
organizations that provide a broad range of services to companies in many
industries, including the communications industry. Many of these competitors
have significantly greater financial, technical and marketing resources and
greater name recognition than TMNG. TMNG believes it has a competitive advantage
due to its single focus on the communications industry, and the comprehensive
offerings it provides to its customers. TMNG also believes the complementary
experience and expertise of its professionals represents a competitive
advantage. TMNG's consulting team is comprised of senior professionals recruited
from prestigious university campuses complemented by teams of consultants from
the communications industry averaging 15 years of experience.
The Company has faced, and expects to continue to face, additional competition
from new entrants into the communications consulting markets. The Company has
also experienced increased price competition, particularly from large Asian
firms providing technical support and outsourcing and other large firms that
have the financial resources to aggressively price engagements that they have a
particular interest in obtaining. Increased competition could result in further
price reductions, fewer client projects, underutilization of consultants,
reduced operating margins, and loss of market share.
With the communications industry experiencing significant economic challenge,
contraction and consolidation, TMNG believes the Company's
principal competitive factor is the Company's continual focus on the
communications industry and the ability to develop and provision solutions that
enhance client revenue and asset utilization and provide return on investment.
In a down economic environment, the Company's biggest competitor is the
customer's internal resources. As a result, the most significant competitive
advantage becomes long-lived relationships with key client executives that have
developed over time from consistency in responsiveness to their needs, quality
and reliability of consultants and deliverables, and an appropriate price/value
formula.
EMPLOYEES
TMNG's ability to recruit and retain experienced, highly qualified and highly
motivated personnel has contributed greatly to the Company's performance and
will be critical in the future. The Company offers a flexible recruiting model
that enhances the ability to attract consultants and to effectively manage
utilization. TMNG's consultants may work as full time employees or as contingent
employees. Contingent employees receive company-paid medical insurance, vacation
and other employee benefits. Instead of receiving a regular salary, however,
contingent employees will only be paid for time spent working on consulting
projects for customers or working on internal projects. Generally, TMNG will
offer contingent employment to personnel who are frequently utilized on
consulting projects, and have a skill set/offering that is in high demand. TMNG
also has relationships with many independent contracting firms to assist in
delivery of consulting solutions. TMNG's current base of independent firms have
specialized expertise in discrete areas of communications, and TMNG typically
deploys these firms only when their unique expertise/offering is required.
As of January 3, 2004, TMNG has utilized approximately 180 consultants,
representing a combination of employee consultants and independent contracting
firms. Of these, 76 were employee consultants and approximately 104 were working
on engagements for TMNG primarily through independent subcontracting firms. In
addition to the consultants, TMNG has an administrative staff of approximately
25 employees in the accounting and finance, marketing, recruiting, information
technology, human resources and administrative areas.
BUSINESS SEGMENTS
Based on an analysis of the criteria in SFAS No. 131 "Disclosure about Segments
of an Enterprise and Related Information" the Company has concluded it has five
operating segments, of which four are aggregated in one reportable segment, the
Management Consulting Services segment, and the remaining segment in All Other.
Management Consulting Services include business strategy and planning,
product/service definition and launch, customer acquisition and retention,
business model transformation, and technical and process modeling for BSS and
OSS environments. All Other consists of computer hardware commissions and
rebates received in connection with the procurement of hardware for third
parties. The accounting policies for the segments are documented in the summary
of significant accounting policies under Item 8, "Consolidated Financial
Statements," Footnote 1 "Organization and Summary of Significant Accounting
Policies." As discussed in Item 8, "Consolidated Financial Statements," Footnote
14, "Subsequent Event," effective March 4, 2004, Management and the Board of
Directors approved the closing of the hardware segment of the business.
Management evaluates segment performance based upon Income (Loss) from
Operations, excluding equity related charges, goodwill and intangibles
amortization, and goodwill and intangible asset impairment. Management also
evaluates trade accounts receivable as part of its overall assessment of the
segments' performance. There are no intersegment sales. Revenues from external
customers, a measurement of profit or loss and total assets for each segment are
disclosed in Item 8, "Consolidated Financial Statements," Footnote 5 "Major
Customers, Business Segments and Significant Group Concentrations of Credit
Risk."
MAJOR CUSTOMERS
Since inception, TMNG has provided services to approximately 600 domestic and
international customers, primarily communication service providers and large
technology and applications firms ("TMNG Partners") serving the communications
industry. The Company depends on a small number of key customers for a
significant portion of revenues. For fiscal year 2003, revenues from Nextel
Communications, Inc. and AT&T Corporation each accounted for more than 10% of
revenues, and in the aggregate accounted for 25.3% of revenues. Also during
fiscal year 2003, the Company's top ten customers accounted for approximately
66.5% of total revenue. TMNG generally provides discounted pricing for large
projects on fixed commitments with long-term customers. Because TMNG's clients
typically engage services on a project basis, their needs for services vary
substantially from period to period. TMNG continues to concentrate on large
wireline and wireless global communications companies headquartered principally
in North America and Western Europe and seeks to offer broad and diversified
services to these customers. The Company anticipates that operating results will
continue to depend on volume services to a relatively small number of
communication service providers and technology vendors. The Company anticipates
increased market demand for bundled business process and technical outsourcing
which the Company and its TMNG Partners have formalized agreements to provide.
In addition, the Company provides marketing consulting across multiple business
verticals, primarily on the East Coast of the United States.
INTELLECTUAL PROPERTY
TMNG's success is dependent, in part, upon proprietary processes and
methodologies, and the Company relies upon a combination of copyright, trade
secret, and trademark law to protect intellectual property. Additionally,
employees and consultants are required to sign non-disclosure agreements to
assist the Company in protecting its intellectual property. The Company has
obtained federal registration for seventeen trademarks and has filed
applications to register four other marks in the United States. It is possible
that third parties may challenge TMNG trademark applications.
The Company does not have any patent protection for the proprietary
methodologies used by TMNG consultants. TMNG does not currently anticipate
applying for patent protection for these toolsets and methodologies.
SEASONALITY
In the past, the Company has experienced seasonal fluctuations in revenue in the
fourth quarter due primarily to the fewer number of business days because of the
holiday periods occurring in that quarter. The Company may continue to
experience fluctuations in revenue in the fourth quarter and may experience
fluctuations in summer months and other vacation periods. As the Company expands
internationally, third quarter revenue may fluctuate as a result of significant
vacation periods taken in the summer months.
RISK FACTORS
RISKS THAT RELATE TO TMNG'S BUSINESS
TMNG's business, operating results, and financial condition are subject to
numerous risks, uncertainties, and contingencies, many of which are beyond the
Company's control. The following important factors, among others, could cause
actual results to differ materially from those contemplated in forward-looking
statements made in this Annual Report on Form 10-K or presented elsewhere by
management from time to time. Investors are urged to consider these risk factors
when evaluating an investment in the Company.
TMNG'S RESULTS OF OPERATIONS ARE MATERIALLY AFFECTED BY ECONOMIC CONDITIONS,
LEVELS OF BUSINESS ACTIVITY AND LEVELS OF CHANGE IN THE INDUSTRIES THE COMPANY
SERVES.
Uncertain global economic and political conditions affect many of the Company's
clients' businesses and many clients continue to reduce or defer expenditures
for consulting services. In addition, TMNG's business tends to lag behind
economic cycles and, consequently, the benefits of any industry recovery to the
Company's business may take longer to realize. The Company continues to
experience pricing pressures, but the primary cause of TMNG's eroding revenues
has been budget constraints and budget reductions on the part of the Company's
service provider clients. Further deterioration of global industry, economic or
political conditions could increase these effects.
TMNG FOCUSES ALMOST EXCLUSIVELY ON SERVING THE COMMUNICATIONS INDUSTRY, WHICH
CONTINUES TO EXPERIENCE DECLINING RESULTS OF OPERATIONS, BANKRUPTCIES, FUTURE
UNCERTAINTIES AND A REDUCTION IN THE AVAILABILITY OF INVESTMENT CAPITAL. ADVERSE
INDUSTRY CONDITIONS HAVE RESULTED IN DECLINING DEMAND FOR THE COMPANY'S
SERVICES, DECLINING REVENUES, LOSSES FROM OPERATIONS AND A DECLINE IN TMNG'S
STOCK PRICE, AND COULD CONTINUE TO HARM THE COMPANY. IF CONDITIONS IN THE
COMMUNICATIONS INDUSTRY DO NOT IMPROVE IN THE NEAR FUTURE, THE COMPANY'S
FINANCIAL POSITION MAY CONTINUE TO BE DIMINISHED, THE COMPANY'S LIQUIDITY MAY
BECOME IMPAIRED AND FUNDING FROM THE CAPITAL MARKETS MAY NOT BE AVAILABLE
The Company derived almost all of its revenues from consulting engagements
within the communications industry. Much of the Company's past growth arose from
business opportunities presented by industry trends that included deregulation,
increased competition, technological advances, the growth of e-business and the
convergence of service offerings.
However, beginning in late 2000 and continuing through 2003, many communications
companies, including carriers, equipment manufacturers and other industry
participants have reported declining results of operations and liquidity, and
there have been numerous bankruptcy filings. These events resulted in a
substantial decline in TMNG's revenues and net losses through the fourth quarter
of 2003. The Company's future operating results could continue to be affected by
continuing declines in results of operations and continuing financial
difficulties among communications companies. In addition to continuing decreases
in demand for the Company's services, future client financial difficulties
and/or bankruptcies could require the Company to write-off receivables that are
in excess of bad debt reserves, which would harm the Company's results of
operations in future fiscal periods. Client bankruptcies could also create an
at-risk situation on balances for professional services collected near the
bankruptcy filing date. In addition, the worsening conditions in the
communications sector could cause companies to delay new product and new
business initiatives and to seek to control expenses by reducing use of outside
consultants. Additionally, the communications industry is in a period of
consolidation, which could reduce the Company's client base, eliminate future
opportunities or create conflicts of interest among clients. As a result,
current industry conditions may continue to harm the Company's business,
financial condition, results of operations, liquidity and ability to make
acquisitions and raise investment capital.
TMNG IS DEPENDENT ON A LIMITED NUMBER OF LARGE CUSTOMERS FOR A MAJOR PORTION OF
ITS REVENUES, AND THE LOSS OF A MAJOR CUSTOMER COULD SUBSTANTIALLY REDUCE
REVENUES AND HARM THE COMPANY'S BUSINESS AND LIQUIDITY
TMNG derives a substantial portion of its revenues from a relatively limited
number of clients. The services required by any one client may be affected by
industry consolidation or adverse industry conditions, technological
developments, economic slowdown or internal budget constraints. As a result, the
volume of work performed for specific clients varies from period to period, and
a major client in one period may not use the Company's services in a subsequent
period.
TMNG's services are often sold under short-term engagements and most clients can
reduce or cancel their contracts with little or no penalty or notice. The
Company's operating results may suffer if it is unable to rapidly re-deploy
consultants if a client defers, modifies or cancels a
project. Consequently, investors should not predict or anticipate the Company's
future revenue based on the number or type of clients TMNG has or the number and
scope of its existing engagements.
THE COMPANY'S REVENUES AND OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY FROM
QUARTER-TO- QUARTER, AND FLUCTUATIONS IN THE COMPANY'S OPERATING RESULTS COULD
CAUSE THE COMPANY'S STOCK PRICE TO DECLINE
TMNG's revenue and operating results may vary significantly from
quarter-to-quarter due to a number of factors. In future quarters, the Company's
operating results may be below the expectations of public market analysts or
investors, and the price of TMNG's common stock may decline. This is especially
true under present economic conditions impacting the communications industry, a
typical result being fewer opportunities and discounted pricing. Factors that
could cause quarterly fluctuations include:
- - the beginning and ending of significant contracts during a quarter;
- - the size and scope of assignments;
- - the form of customer contracts changing primarily from time and materials
to fixed price or contingent fee, based on project results;
- - consultant turnover, utilization rates and billing rates;
- - the loss of key consultants, which could cause clients to end their
relationships with TMNG;
- - the ability of clients to terminate engagements without penalty;
- - fluctuations in demand for the Company's services resulting from budget
cuts, project delays, industry downturns or similar events;
- - clients' decisions to divert resources to other projects, which may limit
clients' resources that would otherwise be allocated to services the
Company could provide;
- - reductions in the prices of services offered by TMNG's competitors;
- - fluctuations in the communications market and economic conditions;
- - seasonality during the summer, vacation and holiday periods;
- - fluctuations in the value of foreign currencies versus the U.S. dollar; and
- - global economic and political conditions and related risks, including acts
of terrorism.
Because a significant portion of the Company's non-consultant expenses are
relatively fixed, a variation in the number of client assignments or the timing
of the initiation or the completion of client assignments may cause significant
variations in operating results from quarter-to-quarter and could result in
continuing losses. To the extent the addition of consultant employees is not
followed by corresponding increases in revenues, additional expenses would be
incurred that would not be matched by corresponding revenues. Therefore,
profitability would decline and the Company could potentially experience further
losses. In addition, the Company's stock price would likely decline.
Additionally, fixed and contingent fee contracts entail subjective judgments and
estimates about revenue recognition and are subject to uncertainties and
contingencies. For a more complete discussion of the Company's accounting for
revenue recognition, see "Critical Accounting Policies" included in Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
TMNG HAS MADE SEVERAL ACQUISITIONS AND MAY CONTINUE TO MAKE ACQUISITIONS, WHICH
ENTAIL RISKS THAT COULD HARM THE COMPANY'S FINANCIAL PERFORMANCE OR STOCK PRICE,
AND MAY BE DILUTIVE TO EXISTING SHAREHOLDERS
As part of the Company's business strategy, TMNG has made and may continue to
make acquisitions. Any future acquisition would be accompanied by the risks
commonly encountered in acquisitions. These risks include:
- - the difficulty associated with assimilating the personnel and operations of
acquired companies;
- - the potential disruption of the Company's existing business;
- - further reductions in the Company's cash reserves;
- - adverse effects on the Company's financial statements, including write-offs
and assumption of liabilities of acquired businesses; and
- - paying too much for an acquired Company.
If TMNG makes acquisitions and any of these problems materialize, these
acquisitions could negatively affect the Company's operations, profitability and
financial condition.
TMNG HAS GENERATED SIGNIFICANT DEFERRED INCOME TAX ASSETS AND IF THE COMPANY IS
NOT ABLE TO GENERATE SUFFICIENT TAXABLE INCOME IN FUTURE PERIODS, THE COMPANY
MAY NOT BE ABLE TO REALIZE THE INCOME TAX BENEFITS RELATED TO THOSE ASSETS
During fiscal year 2003, a valuation allowance in the amount of $24.0 million
was recorded in connection with the Company's deferred tax assets. Management
continues to evaluate the recoverability of the deferred tax assets balances. As
part of its analysis, the impact of sources of future income has not been
included due to the Company's history of cumulative operating losses. In the
event the Company continues to report net operating losses for financial
reporting, no tax benefit would be recognized for those losses.
ANY CONTINUING DECREASE IN CURRENT AND PROJECTED REVENUES MAY RESULT IN
ADDITIONAL ASSET IMPAIRMENTS AND CONTINUE TO ADVERSELY AFFECT THE COMPANY'S
PROFITABLITY
As part of TMNG's business strategy the Company has made and may continue to
make acquisitions. As a result, goodwill and intangible assets constitute an
increasing amount of the assets reported on the Company's balance sheet. The
Company may be required to write down goodwill and intangible assets on the
Company's financial statements as a result of declining revenues and earnings.
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards ("SFAS") No. 142 "Accounting for Goodwill and
Intangible Assets." SFAS No. 142 requires an annual evaluation of goodwill to
determine if an impairment of goodwill has occurred. The evaluation involves
calculating enterprise fair value, which may be based on a number of analyses,
including a discounted cash flow projection of future financial results.
Estimated fair values are then compared to the total recorded book value to
determine if an impairment of goodwill is deemed to have occurred. If an
impairment of goodwill is deemed to have occurred, this would negatively affect
the Company's consolidated results of operations. The Company recorded
impairment charges of $27.1 million and $15.8 million related to the impairment
of goodwill in 2002 and 2003, respectively. If the Company is not able to
achieve projected future operating performance and related cash flows, goodwill
may become further impaired, and the resulting asset impairment would be charged
to operating income.
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 fiscal year 2003, management identified certain
events, including significant decrease in revenue from customers whose
relationships were valued in purchase accounting. The Company performed an
impairment test, and determined that the carrying value of customer
relationships exceeded their fair market value and recorded an impairment loss
of approximately $3.7 million in 2003. If the Company is not able to achieve
projected future operating performance and related cash flows, intangible assets
may become further impaired, and the resulting asset impairment would be charged
to operating income.
THE COMPANY HAS REDUCED CONSULTANT HEADCOUNT DURING THE PAST FISCAL YEAR, AND
THE TERMINATION OF CONSULTANTS COULD RESULT IN A DIMINISHMENT OF CONSULTATIVE
OFFERINGS AVAILABLE TO CUSTOMERS
Beginning in fiscal year 2001 and continuing through fiscal year 2003, the
Company undertook a series of cost-cutting measures, including the reduction in
employee consultant headcount. As the talents and skill sets of these employee
consultants are no longer available to the Company, TMNG could be adversely
affected in its ability to provide various consultative offerings to customers,
potentially resulting in a diminishment of revenue opportunities for the
Company.
THE MARKET IN WHICH TMNG COMPETES IS INTENSELY COMPETITIVE, AND ACTIONS BY
COMPETITORS COULD RENDER THE COMPANY'S SERVICES LESS COMPETITIVE, CAUSING
REVENUES AND INCOME TO DECLINE
The market for consulting services to communications companies is intensely
competitive, highly fragmented and subject to rapid change. Competitors include
strategy and management consulting firms and major global outsourcing firms like
International Business Machines Corporation (IBM), Electronic Data Systems
Corporation (EDS) and Computer Sciences Corporation (CSC), which have become
more significant competitors recently due to the outsource of certain business
support system (BSS) and operating support system (OSS) operations, and large
technical firms from the Asian markets, like Infosys Technologies, Ltd. that
provide significant cost advantage. Some of these competitors have also formed
strategic alliances with communications and technology companies serving the
industry. TMNG also competes with internal resources of its clients. Although
non-exhaustive, a partial list of TMNG's competitors includes:
- - Accenture;
- - Booz-Allen & Hamilton;
- - Cap Gemini Ernst & Young;
- - IBM;
- - Infosys Technologies, Ltd.; and
- - McKinsey & Company.
Many information technology-consulting firms also maintain significant practice
groups devoted to the communications industry. Many of these companies have a
national and international presence and may have greater personnel, financial,
technical and marketing resources. TMNG may not be able to compete successfully
with its existing competitors or with any new competitors.
TMNG also believes the Company's ability to compete depends on a number of
factors outside of its control, including:
- - the prices at which others offer competitive services, including aggressive
price competition and discounting on individual engagements which may
become increasingly prevalent due to worsening economic conditions;
- - the ability and willingness of TMNG's competitors to finance customers'
projects on favorable terms;
- - the ability of TMNG's competitors to undertake more extensive marketing
campaigns than TMNG can;
- - the extent, if any, to which TMNG's competitors develop proprietary tools
that improve their ability to compete with TMNG;
- - the ability of TMNG's customers to perform the services themselves; and
- - the extent of TMNG's competitors' responsiveness to customer needs.
TMNG may not be able to compete effectively on these or other factors. If TMNG
is unable to compete effectively, the Company's market position, and therefore
its revenues and profitability, would decline.
TMNG MUST CONTINUALLY ENHANCE ITS SERVICES TO MEET THE CHANGING NEEDS OF
CUSTOMERS OR THE COMPANY MAY LOSE FUTURE BUSINESS TO ITS COMPETITORS
The Company's future success will depend upon its ability to enhance existing
services and to introduce new services to meet the requirements of customers in
a rapidly developing and evolving market, particularly in the areas of wireless
communications and next generation technologies. Present or future services may
not satisfy the needs of the communications market. If the Company is unable to
anticipate or respond adequately to customer needs, lost business may result and
TMNG's financial performance will suffer.
IF TMNG IS NOT ABLE TO EFFECTIVELY RECRUIT AND RETAIN MANAGEMENT AND CONSULTING
PERSONNEL THAT PROVIDE THE COMPANY WITH NEW TALENT SETS ENABLING THE
IMPLEMENTATION OF NEW STRATEGIC OFFERINGS IN A RAPIDLY CHANGING MARKET, THE
COMPANY'S FINANCIAL PERFORMANCE MAY BE NEGATIVELY IMPACTED.
The Company may face two critical challenges in the recruitment of new
management personnel. The first is the ability to recruit talented management
personnel into a market that is significantly depressed, and the second is the
ability to execute such recruitment with an appropriate compensation
arrangement. If TMNG is not able to effectively recruit within the construct of
these two challenges, the financial performance of the Company may be negatively
affected.
The Company must attract new consultants to implement strategic plans. The
number of potential consultants that meet the Company's hiring criteria is
relatively small, and there is significant competition for these consultants
from direct competitors and others in the communications industry. Competition
for these consultants may result in significant increases in the Company's costs
to attract and retain the consultants, which could reduce margins and
profitability. In addition, TMNG will need to attract consultants in
international locations, principally Europe, to support the Company's
international strategic plans. TMNG has limited experience in recruiting
internationally, and may not be able to do so. Any inability to recruit new
consultants or retain existing consultants could impair the Company's ability to
service existing engagements or undertake new engagements. If the Company is
unable to attract and retain quality consultants, revenues and profitability
would decline.
IF INTERNATIONAL BUSINESS VOLUMES WOULD INCREASE, THE COMPANY MAY BE EXPOSED TO
A NUMBER OF BUSINESS AND ECONOMIC RISKS, WHICH COULD RESULT IN INCREASED
EXPENSES AND DECLINING PROFITABILITY
If TMNG's international business volume increases, business and economic risks
it may face include:
- - unfavorable foreign currency exchange;
- - difficulties in staffing and managing foreign operations;
- - seasonal reductions in business activity;
- - competition from local and foreign-based consulting companies;
- - issues relating to uncertainties of laws and enforcement relating to the
protection of intellectual property;
- - unexpected changes in trading policies and regulatory requirements;
- - legal uncertainties inherent in transnational operations such as export and
import regulations, tariffs and other trade barriers;
- - the impact of foreign laws, regulations, taxes and trade customs;
- - taxation issues;
- - operational issues such as longer customer payment cycles and greater
difficulties in collecting accounts receivable;
- - language and cultural differences;
- - changes in foreign communications markets;
- - increased cost of marketing and servicing international clients;
- - general political and economic trends, including the potential impact of
terrorist attack or international hostilities; and
- - expropriations of assets, including bank accounts, intellectual property
and physical assets by foreign governments.
In addition, TMNG may not be able to successfully execute the Company's business
plan in foreign markets. If TMNG is unable to achieve anticipated levels of
revenues from international operations, overall revenues and profitability may
decline.
TMNG IS DEPENDENT ON A LIMITED NUMBER OF KEY PERSONNEL, AND THE LOSS OF THESE
INDIVIDUALS COULD HARM THE COMPANY'S COMPETITIVE POSITION AND FINANCIAL
PERFORMANCE
TMNG's business consists primarily of the delivery of professional services and,
accordingly, the Company's success depends upon the efforts, abilities, business
generation capabilities and project execution of its executive officers and key
consultants. TMNG's success is also dependent upon the managerial, operational,
marketing, and administrative skills of any executive officer, particularly
Richard Nespola, the Company's Chairman, President and Chief Executive Officer.
The loss of any executive officer or key consultant or group of consultants, or
the failure of these individuals to generate business or otherwise perform at or
above historical levels, could result in a loss of customers or revenues, and
could therefore harm the Company's financial performance.
IF TMNG FAILS TO PERFORM EFFECTIVELY ON PROJECT ENGAGEMENTS, THE COMPANY'S
REPUTATION, AND THEREFORE COMPETITIVE POSITION AND FINANCIAL PERFORMANCE COULD
BE HARMED
Many of the Company's engagements come from existing clients or from referrals
by existing clients. Therefore, the Company's growth is dependent on its
reputation and on client satisfaction. The failure to perform services that meet
a client's expectations may damage the Company's reputation and harm the
Company's ability to attract new business. Damage to the Company's reputation
arising from client dissatisfaction could therefore harm the Company's financial
performance.
IF TMNG FAILS TO DEVELOP LONG-TERM RELATIONSHIPS WITH ITS CUSTOMERS, THE
COMPANY'S SUCCESS WOULD BE JEOPARDIZED
A substantial majority of the Company's business is derived from repeat
customers. Future success depends to a significant extent on the Company's
ability to develop long-term relationships with successful communications
providers who will give new and repeat business. Inability to build long-term
customer relations would result in declines in the Company's revenues and
profitability. This may increasingly be the case with any further consolidation
or contraction in the industry.
THE COMPANY CLASSIFIES A LARGE NUMBER OF SUBCONTRACTORS AS INDEPENDENT
CONTRACTORS FOR TAX AND EMPLOYMENT LAW PURPOSES, AND IF THESE FIRMS OR PERSONNEL
WERE TO BE RECLASSIFIED AS EMPLOYEES, THE COMPANY COULD BE SUBJECT TO BACK
TAXES, INTEREST, PENALTIES AND OTHER LEGAL CLAIMS
TMNG provides a significant percentage of consulting services through
independent contractors and, therefore, does not pay Federal or state employment
taxes or withhold income taxes for such persons. Further, TMNG generally does
not include these independent contractors in its benefit plans. In the future,
the IRS and state authorities may challenge the status of consultants as
independent contractors. Independent contractors may also initiate proceedings
to seek reclassification as employees under state law. In either case, if
persons engaged by TMNG as independent contractors are determined to be
employees by the IRS or any state taxation department, TMNG would be required to
pay applicable Federal and state employment taxes and withhold income taxes with
respect to such contractors, and could become liable for
amounts required to be paid or withheld in prior periods along with interest and
penalties. In addition, the Company could be required on a going-forward basis
to include such contractors in benefit plans retroactively and going forward.
TMNG COULD BE SUBJECT TO CLAIMS FOR PROFESSIONAL LIABILITY, WHICH COULD HARM THE
COMPANY'S FINANCIAL PERFORMANCE
As a provider of professional services, TMNG faces the risk of liability claims.
A liability claim brought against TMNG could harm the Company's business. TMNG
may also be subject to claims by clients for the actions of the Company's
consultants and employees arising from damages to clients' business or
otherwise, or clients may demand a reduction in fees because of dissatisfaction
with the Company's services.
In particular, the Company is currently a defendant in litigation brought by the
bankruptcy trustee of a former client. This litigation seeks to recover at least
$1.85 million for breach of contract, breach of fiduciary duties and negligence.
In addition, this litigation seeks to recover $320,000 in consulting fees paid
by the former client.
THE MARKET PRICE OF TMNG'S COMMON STOCK IS VOLATILE, AND INVESTORS MAY
EXPERIENCE INVESTMENT LOSSES
The market price of TMNG's common stock is volatile and has declined
significantly from its initial public offering price. The Company's stock price
could continue to decline or fluctuate in response to a variety of factors,
including:
- - variations in quarterly operating results;
- - announcements of technological innovations that render talent outdated;
- - future trends in the communications industry;
- - acquisitions or strategic alliances by the Company or others in the
industry;
- - failure to achieve financial analysts' or other estimates of results of
operations for any fiscal period;
- - the relatively small public float and relatively low volume at which the
Company's stock trades;
- - changes in estimates of performance or recommendations by financial
analysts;
- - any further reduction in the Company's revenues or profits during 2004 and
future years; and
- - continuing adverse market conditions in the communications industry and the
economy as a whole.
In addition, the stock market itself experiences significant price and volume
fluctuations. These fluctuations particularly affect the market prices of the
securities of many high technology and communications companies. The Company's
stock price tends to track the stock price of communications companies, which
have declined substantially and may continue to do so. These broad market
fluctuations could continue to harm the market price of the Company's common
stock. If the market price of TMNG's common stock continues to decline, the
Company may risk being delisted from the NASDAQ National Stock market on which
it trades. The recent decline in TMNG's overall market capitalization may also
discourage analysts and investors from following the Company. Additionally, due
to the limited float of the Company's common stock, investors may find their
investment illiquid, and suffer losses.
THE COMPANY'S INABILITY TO PROTECT ITS INTELLECTUAL PROPERTY COULD HARM THE
COMPANY'S COMPETITIVE POSITION AND FINANCIAL PERFORMANCE
Despite TMNG's efforts to protect proprietary rights from unauthorized use or
disclosure, parties, including former employees or consultants, may attempt to
disclose, obtain or use the Company's solutions or technologies. The steps the
Company has taken may not prevent misappropriation of solutions or technologies,
particularly in foreign countries where laws or law enforcement practices may
not protect proprietary rights as fully as in the United States. Unauthorized
disclosure of the Company's proprietary information could make its solutions and
methodologies available to others and harm the Company's competitive position.
PRINCIPAL STOCKHOLDERS, EXECUTIVE OFFICERS AND DIRECTORS HAVE SUBSTANTIAL
CONTROL OVER THE COMPANY'S VOTING STOCK
Executive officers, directors and stockholders owning more than five percent of
the Company's outstanding common stock (and their affiliates) own a majority of
the Company's outstanding common stock. If all such persons acted together, they
would have the ability to control all matters submitted to the stockholders for
approval (including the election and removal of directors and any merger,
consolidation or sale of all or substantially all of the Company's assets) and
to control TMNG's management and affairs. Concentration of ownership of TMNG's
common stock may have the effect of delaying, deferring or preventing a change
in control, impeding a merger, consolidation, takeover or other business
combination involving the Company or discouraging a potential acquirer from
making a tender offer or otherwise attempting to
obtain control of the Company. TMNG's officers and directors have a fiduciary
duty to act in the best interest of the Company's shareholders.
THE COMPANY USED TO BE TAXED UNDER SUBCHAPTER "S" OF THE INTERNAL REVENUE CODE,
AND CLAIMS OF TAXING AUTHORITIES RELATED TO PRIOR SUBCHAPTER "S" CORPORATION
STATUS COULD HARM THE COMPANY
From 1993 through 1998, TMNG was taxed as a "pass-through" entity under
subchapter "S" of the Internal Revenue Code. Since February 1998, the Company
has been taxed under subchapter "C" of the Internal Revenue Code, which is
applicable to most corporations and treats the corporation as an entity that is
separate and distinct from its stockholders. If the Company's tax returns for
the years in which TMNG was a subchapter "S" corporation were to be audited by
the Internal Revenue Service or another taxing authority and an adverse
determination was made during the audit, the Company could be obligated to pay
back taxes, interest and penalties. The stockholders of TMNG's predecessor
entity agreed, at the time TMNG acquired its predecessor, to indemnify the
Company against negative tax consequences arising from TMNG's prior "S"
corporation status. However, this indemnity may not be sufficient to cover
claims made by the IRS or other taxing authorities, and any such claims could
result in additional costs and harm the Company's financial performance.
THE COMPANY MAY SEEK TO RAISE ADDITIONAL FUNDS, AND ADDITIONAL FUNDING MAY BE
DILUTIVE TO STOCKHOLDERS OR IMPOSE OPERATIONAL RESTRICTIONS
Any additional equity financing, if available, may be dilutive to the Company's
stockholders and debt financing, if available, may involve restrictive
covenants, which may limit the Company's operating flexibility with respect to
certain business matters. If additional funds are raised through the issuance of
equity securities, the Company's stockholders may experience dilution in the
voting power or net book value per share of the Company's stock, and any
additional equity securities may have rights, preferences and privileges senior
to those of the holders of the Company's common stock.
ANTI-TAKEOVER PROVISIONS AND THE COMPANY'S RIGHT TO ISSUE PREFERRED STOCK COULD
MAKE A THIRD PARTY ACQUISITION DIFFICULT
The Company's certificate of incorporation, bylaws, and anti-takeover provisions
of Delaware law could make it more difficult for a third party to acquire
control, even if a change in control would be beneficial to stockholders. In
addition, the Company's bylaws provide for a classified board, with board
members serving staggered three-year terms. The Delaware anti-takeover
provisions and the existence of a classified board, in addition to the Company's
relatively small public float, could make it more difficult for a third party to
acquire the Company.
THE COMPANY MUST DOCUMENT AND MAINTAIN ADEQUATE SYSTEMS AND PROCEDURES TO COMPLY
WITH RECENT LEGAL REFORMS
Recent legal reforms, including the Sarbanes-Oxley Act and related SEC rules,
have created new responsibilities for public company officers and directors. The
Company's ability to comply with these new laws and regulations will depend on
TMNG's ability to document and maintain effective systems and procedures, but
the Company cannot assure that its systems and procedures will always be
adequate for this purpose.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS
For information about foreign and domestic operations, see Item 8, "Consolidated
Financial Statements," Footnote 5 "Major Customers, Business Customers and
Significant Concentrations of Group Credit Risk."
ITEM 2. PROPERTY
The Company's principal executive offices are located in a 4,305 square foot
facility in Overland Park, Kansas. This facility houses the executive, corporate
and administrative offices and is under a lease, which expires in August 2005.
In addition to the executive offices, the Company also leases an 8,175 square
foot facility in Bethesda, Maryland for its TMNG Marketing and TMNG Technology
subsidiaries, which expires in June 2004, and a 21,710 square foot facility in
Boston, Massachusetts, which expires in 2011. The Company is in the process of
negotiating a new five year lease agreement to relocate its Bethesda, Maryland
office to Tyson's Corner, Virginia for similar square footage. The Company
expects the new lease to be executed during the first quarter of fiscal 2004.
The Bethesda and Boston locations are utilized by primarily management and
consulting personnel.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in legal proceedings and litigation arising in the
ordinary course of business. In addition, customer bankruptcies could result in
a claim on collected balances for professional services near the bankruptcy
filing date. While resolution of legal proceedings, claims and litigation may
have an impact on the financial results for the period in which it is resolved,
the Company believes that the ultimate disposition of these matters will not
have a material adverse effect upon its consolidated results of operations, cash
flows or financial position.
In June 1998, the bankruptcy trustee of a former client, Communications Network
Corporation, sued TMNG for a total of $320,000 in the U.S. Bankruptcy Court in
New York seeking recovery of $160,000 alleging an improper payment of consulting
fees paid by the former client during the period from July 1, 1996, when an
involuntary bankruptcy proceeding was initiated against the former client,
through August 6, 1996, when the former client agreed to an order for relief in
the bankruptcy proceeding, and $160,000 in consulting fees paid by the former
client after August 6, 1996.
The bankruptcy trustee has also sued TMNG for at least $1.85 million for breach
of contract, breach of fiduciary duties and negligence. Although assurance
cannot be given as to the ultimate outcome of this proceeding, TMNG believes the
Company has meritorious defenses to the claims made by the bankruptcy trustee,
including particularly the claims for breach of contract, breach of fiduciary
duty and negligence, and that the ultimate resolution of this matter will not
materially harm the Company's business.
In 2002 and 2003, 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.
During 2003, the Company settled $102,000 of such demands for $62,000. Although
the Company does not believe it received any preference payments from these
former clients and plans to vigorously defend the remaining claims, the Company
has reserves at January 3, 2004 of $854,000 which it believes are adequate in
the event of loss or settlement on remaining outstanding claims.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 2003.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
TMNG's Common Stock is quoted on the Nasdaq National Market under the symbol
TMNG. The high and low closing price per share for the Common Stock for the
fiscal years ending January 03, 2004 and December 28, 2002 by quarter were as
follows:
High Low
First quarter, fiscal year 2003 $ 1.90 $ 1.25
Second quarter, fiscal year 2003 $ 2.02 $ 1.21
Third quarter, fiscal year 2003 $ 2.82 $ 1.74
Fourth quarter, fiscal year 2003 $ 3.53 $ 2.31
High Low
First quarter, fiscal year 2002 $ 7.00 $ 4.51
Second quarter, fiscal year 2002 $ 5.38 $ 1.90
Third quarter, fiscal year 2002 $ 2.12 $ 1.12
Fourth quarter, fiscal year 2002 $ 2.08 $ 1.27
The above information reflects inter-dealer prices, without retail mark-up,
markdown or commissions and may not necessarily represent actual transactions.
As of March 26, 2004 the closing price of the Company's Common Stock was $3.92
per share. At such date, there were approximately 98 holders of record of the
Company's Common Stock.
Holders of Common Stock are entitled to receive ratably such dividends, if any,
as may be declared by the Board of Directors out of funds legally available
therefor. To date, TMNG has not paid any cash dividends on its Common Stock and
does not expect to declare or pay any cash or other dividends in the foreseeable
future.
EQUITY COMPENSATION PLAN INFORMATION
(a) (c)
NUMBER OF NUMBER OF SECURITIES
SECURITIES TO BE ISSUED REMAINING AVAILABLE
UPON EXERCISE OF (b) FOR FUTURE ISSUANCE
OUTSTANDING OPTIONS WEIGHTED AVERAGE UNDER EQUITY COMPENSATION
OR VESTING OF RESTRICTED EXERCISE PRICE OF PLANS (EXCLUDING SECURITIES
STOCK OUTSTANDING OPTIONS REFLECTED IN COLUMN (a))
PLANS APPROVED BY SECURITY HOLDERS
- - 1998 Equity Incentive Plan - Stock Options 4,863,615 $ 5.18 364,187
- - 1998 Equity Incentive Plan - Restricted Stock 720,000 n/a 780,000
PLANS NOT APPROVED BY SECURITY HOLDERS
- - 2000 Supplemental Stock Plan 1,183,285 $ 4.78 2,659,924
For an additional discussion of the Company's equity compensation plans, see
Item 8, "Consolidated Financial Statements," Footnote 9 "Stock Option Plan and
Stock Based Compensation."
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below have been derived from
the Company's consolidated financial statements. The data presented below should
be read in conjunction with Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," Item 8, "Consolidated Financial
Statements" and Notes thereto and other financial information appearing
elsewhere in this Annual Report on Form 10-K.
FISCAL YEAR ENDED
-------------------------------------------------------------------------
January 1, December 30, December 29, December 28, January 03,
2000 2000 2001 2002 2004
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues ............................................ $ 50,322 $ 77,727 $ 54,832 $ 34,595 $ 23,476
Cost of services:
Direct cost of services ........................... 26,109 40,396 27,347 16,855 11,935
Equity related charges ............................ 2,780 5,519 2,322 721 (57)
-------- -------- -------- -------- --------
Total cost of services .................... 28,889 45,915 29,669 17,576 11,878
-------- -------- -------- -------- --------
Gross profit ........................................ 21,433 31,812 25,163 17,019 11,598
Operating expenses:
Selling, general and administrative expenses ...... 9,777 16,024 16,767 23,971 19,494
Equity related charges ............................ 1,998 1,564 843 353 142
Goodwill and intangibles amortization ............. 621 1,996 2,887 2,343
Goodwill and intangible asset impairment .......... 25,165 19,484
-------- -------- -------- -------- --------
Total operating expenses .................. 11,775 18,209 19,606 52,376 41,463
-------- -------- -------- -------- --------
Income (loss) from operations ....................... 9,658 13,603 5,557 (35,357) (29,865)
Other income (expense):
Interest income ................................... 277 3,327 2,433 996 624
Interest expense .................................. (1,998) (14) (63) (51)
Other, net ........................................ (68) (152) (8) 26
-------- -------- -------- -------- --------
Total other income (expense) .............. (1,789) 3,175 2,411 959 573
Income (loss) before income tax provision (benefit),
extraordinary item and cumulative effect of a change
in accounting principle ........................... 7,869 16,778 7,968 (34,398) (29,292)
Income tax (provision) benefit ...................... (3,208) (6,711) (2,360) 12,135 (13,032)
-------- -------- -------- -------- --------
Income (loss) before extraordinary item and
cumulative effect of a change in accounting principle 4,661 10,067 5,608 (22,263) (42,324)
Extraordinary item, net of taxes .................... (200)
Cumulative effect of a change in accounting principle,
net of taxes (1,140)
-------- -------- -------- -------- --------
Net income (loss).................................... $ 4,461 $ 10,067 $ 5,608 $(23,403) $(42,324)
======== ======== ======== ======== ========
Net income (loss) before extraordinary item and
cumulative effect of a change in accounting principle
per common share
Basic ............................................. $ 0.20 $ 0.36 $ 0.19 $( 0.68) $ ( 1.26)
======== ======== ======== ======== ========
Diluted ........................................... $ 0.20 $ 0.34 $ 0.18 $( 0.68) $ ( 1.26)
======== ======== ======== ======== ========
Net income (loss) per common share
Basic ............................................. $ 0.19 $ 0.36 $ 0.19 $( 0.71) $ ( 1.26)
======== ======== ======== ======== ========
Diluted ........................................... $ 0.19 $ 0.34 $ 0.18 $( 0.71) $ ( 1.26)
======== ======== ======== ======== ========
Weighted average common shares outstanding
Basic ............................................. 23,056 28,110 29,736 32,734 33,545
======== ======== ======== ======== ========
Diluted ........................................... 23,807 29,208 30,774 32,734 33,545
======== ======== ======== ======== ========
FISCAL YEAR ENDED
---------------------------------------------------------------
January 1, December 30, December 29, December 28, January 03,
2000 2000 2001 2002 2004
--------- --------- ----------- ----------- -----------
CONSOLIDATED BALANCE SHEET DATA:
Net working capital ..................... $ 61,419 $ 89,148 $ 94,569 $ 63,478 $57,231
Total assets ............................ $ 67,382 $119,429 $129,042 $125,459 $80,972
Total debt (including current debt) ..... $ 338 $ 885 $ 493
Total stockholders' equity ............. $ 63,437 $111,472 $123,992 $115,726 $73,369
On November 22, 1999, the SEC declared TMNG's Registration Statement on Form S-1
(File No. 333-87383) effective. On November 23, 1999, TMNG closed its offering
of an aggregate of 4,615,000 shares of TMNG Common Stock at an aggregate
offering price of $78.5 million. Net proceeds to TMNG, after deducting
underwriting discounts and commissions of $5.5 million and offering expenses of
$1.6 million, were $71.6 million.
On November 29, 1999 TMNG used $22.3 million of the proceeds from its initial
public offering to repay all indebtedness.
On August 2, 2000, the SEC declared TMNG's Registration Statement on Form S-1
(File No. 333-40864) effective. On August 2, 2000, TMNG closed its offering of
an aggregate of 3,000,000 shares of TMNG Common Stock at an aggregate offering
price of $68.6 million. Net proceeds to TMNG, after deducting underwriting
discounts and commissions of $1.1 million and offering expenses of $728,000 were
$20.9 million. Proceeds were used for working capital, general corporate
purposes and as possible consideration for acquisitions.
On September 5, 2000, the Company completed its acquisition of The Weathersby
Group, a Maryland corporation. The acquisition resulted in a total purchase
price of approximately $19.2 million consisting of $11.2 million cash and $8.0
million in TMNG stock. Additionally, TMNG incurred direct costs of $1.5 million
related to the acquisition.
On September 5, 2001, the Company completed its acquisition of Tri-Com, a
Maryland corporation. The acquisition, recorded under the purchase method of
accounting, included the purchase of all outstanding shares of Tri-Com, which
resulted in a total purchase price of approximately $5.2 million for the equity
and assumption of liabilities. Consideration consisted of $1.8 million cash and
490,417 shares of TMNG common stock valued at $3.0 million. TMNG incurred direct
costs of approximately $180,000 related to the acquisition and recorded this
amount as an increase to purchase price. In addition to the above-mentioned
costs, TMNG recorded approximately $216,000 as an increase to purchase price in
connection with the exchange of the Company's stock options for vested stock
appreciation rights held by Tri-Com employees at the time of acquisition.
On March 6, 2002, the Company completed its acquisition of CSMG, a Delaware
corporation. The acquisition resulted in a total purchase price of approximately
$46.5 million consisting of $33.0 million cash and $13.5 million in TMNG stock.
Additionally, TMNG incurred direct costs of $2.3 million related to the
acquisition and recorded this amount as an increase to purchase price.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated
Financial Statements and Notes thereto of the Company included in this Annual
Report on Form 10-K. The forward-looking statements included in this discussion
and elsewhere in this Form 10-K involve risks and uncertainties, including
anticipated financial performance, business prospects, industry trends,
shareholder returns and other matters, which reflect management's best judgment
based on factors currently known. Actual results and experience could differ
materially from the anticipated results and other expectations expressed in the
Company's forward-looking statements and should be read in conjunction with the
disclosures and information contained in the sections of this Annual Report on
Form 10-K entitled "Disclosures Regarding Forward Looking Statements" and in
Item 1, "Business - Risk Factors."
EXECUTIVE FINANCIAL OVERVIEW
Included in Item 1, "Business", is discussion that includes general overview of
the Company's Business, Market Overview, Business Strategy, Competition and Risk
Factors. The purpose of this executive overview is to complement the qualitative
discussion of the Business from Item 1, with the financial impact on the
Company. As previously noted, the communications industry has experienced a
significant economic recession from 2001 through 2003. TMNG is a consultancy to
the industry, and as a result experienced a significant reduction in consulting
business primarily due to the recession. The Company experienced significant
revenue declines and net loss from 2001 to 2003 (see Item 6, "Selected
Consolidated Financial Data").
As a result of a combination of significantly lower operating results of
reporting units during fiscal years 2002 and 2003, the resignation of certain
key personnel and revised and reduced financial projections, the Company
recorded goodwill and intangible impairment losses of $27.1 million and $19.5
million in fiscal 2002 and 2003, respectively. In fiscal 2003, the Company also
recorded valuation reserves of $24.0 million in connection with the deferred tax
assets, which were generated primarily by goodwill impairment and current
operating losses.
During the fourth quarter of fiscal year 2003, the Company recorded a
preliminary charge of $13.4 million related to increasing the valuation reserve
in connection with its deferred tax assets. On February 12, 2004 the Company
released its fourth quarter and annual financial results which reflected such
charge. As management prepared its Form 10-K and continued to refine the
estimates utilized in the analysis and critically evaluated all availalbe
evidence in the context of SFAS No. 109 "Accounting for Income Taxes" ("SFAS No.
109"), management concluded it was appropriate to increase the valuation reserve
by approximately $4.6 million. The Company has a cumulative three year history
of operating losses. In accordance with the provisions of SFAS No. 109, such
history presents objectively verifiable negative evidence regarding the
recoverabiilty of deferred tax asset balances. Similar objectively verifiable
evidence would be required, such as signed contracts supporting 2004 projected
revenue to support the asset. TMNG is a managment consulting firm and as backlog
and signed contracts do not normally exceed six months, management deemed it
appropriate to fully reserve all deferred tax assets as of January 3, 2004.
The Company has implemented many programs to size the business with its lower
revenue base. Such steps include staff reductions and other selling, general and
administrative cost cutting measures to maintain appropriate pricing and
utilization metrics which are critical to a management consultancy. Such cost
reductions also enabled the Company to minimize cash used in operations. In
fiscal 2003, cash used in
operations was $900,000, compared with cash provided from operations in fiscal
2002 and 2001 accumulating to $20.9 million. However, cash used in operation in
2003 was significantly less than it would have been had such cost-cutting
measures not been adopted. The Company also focused its marketing efforts on
large and sustainable clients to maintain a portfolio of business that is high
credit quality and thus reduce bad debt risks.
OPERATIONAL OVERVIEW
TMNG reports its financial data on a 52/53-week fiscal year for reporting
purposes. Fiscal year 2003 was a 53 week fiscal year. For further discussion of
the Company's fiscal year end see Item 8, "Consolidated Financial Statements,"
Footnote 1 "Organization and Summary of Significant Accounting Policies,"
contained herein.
Revenues typically consist of consulting fees for professional services and
related expense reimbursements. A significant percentage of the Company's
consulting services are contracted on a time and materials basis, a time and
materials basis not to exceed contract price, or a fixed cost basis. Contract
revenues on contracts with a not to exceed contract price or a fixed cost
contract are recorded under the percentage of completion method, utilizing
estimates of project completion under both of these types of contracts. Larger
fixed price contracts have recently begun to represent a more significant
component of the Company's revenue mix.
Generally a client relationship begins with a short-term engagement utilizing a
few consultants. TMNG's sales strategy focuses on building long-term
relationships with both new and existing clients to gain additional engagements
within existing accounts and referrals for new clients. Strategic alliances with
other companies are also used to sell services. TMNG anticipates that the
Company will continue to do so in the future. Because TMNG is a consulting
company, the Company experiences fluctuations in revenues derived from clients
during the course of a project lifecycle. As a result, the volume of work
performed for specific clients varies from period to period and a major client
from one period may not use TMNG services in another period. In addition,
clients generally may end their engagements with little or no penalty or notice.
If a client engagement ends earlier than expected, the Company must re-deploy
professional service personnel as any resulting unbillable time could harm
margins.
Cost of services consists primarily of client-related compensation for
consultants who are employees and amortization of equity related non-cash
charges incurred in connection with pre-initial public offering grants of equity
securities and restricted stock awards primarily to consultants, as well as fees
paid to independent contractor organizations and related expense reimbursements.
Employee compensation includes certain unbillable time, training, vacation time,
benefits and payroll taxes. Annual gross margins have ranged from 40.9% to
49.40% during the period from 1999 to 2003. Margins are primarily impacted by
the type of consulting services provided, the size of service contracts and
negotiated volume discounts, changes in TMNG pricing policies and those of
competitors, utilization rates of consultants and independent SME's; and
employee and independent contractor organization costs associated with a
competitive labor market.
Operating expenses include selling, general and administrative, equity related
charges, goodwill and intangibles amortization, and intangible asset impairment.
Sales and marketing expenses consist primarily of personnel salaries, bonuses,
and related costs for direct client sales efforts and marketing staff. The
Company primarily uses a relationship sales model in which partners, principals
and senior consultants generate revenues. In addition, sales and marketing
expenses include costs associated with marketing collateral, product
development, trade shows and advertising. General and administrative expenses
consist mainly of accounting and recruiting personnel costs, insurance, rent,
and outside professional services incurred in the normal course of business. The
equity related charges consist of non-cash amortization charges incurred in
connection with pre-initial public offering grants of equity securities and
restricted stock awards, primarily to principals and certain senior executives.
Goodwill and intangibles amortization relates to amortization of identifiable
intangible assets and goodwill amortization recorded prior to the adoption of
SFAS No. 142 "Accounting for Goodwill and Intangible Assets." Impairment relates
to the write down of goodwill calculated in accordance with the provisions of
SFAS No. 142 and write down of other intangibles calculated in accordance with
the provisions of SFAS No. 144"Accounting for the Impairment on Disposal of Long
Lived Assets." Such impairments occur when the carrying amount of a long-lived
asset (asset group) is not recoverable and exceeds its fair value. That
assessment is based on the carrying amount of the asset (asset group) at the
date it is tested for recoverability, whether in use or under development. An
impairment loss shall be measured as the amount by which the carrying amount of
a long-lived asset (asset group) exceeds its fair value.
CRITICAL ACCOUNTING POLICIES
The significant accounting policies of TMNG are summarized in Footnote 1 to the
consolidated financial statements included in Item 8 of this report.
While the selection and application of any accounting policy may involve some
level of subjective judgments and estimates, the Company believe the following
accounting policies are the most critical to the Company's 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 Long-lived Intangible Assets;
- - Revenue Recognition; and
- - Deferred Income Tax Assets.
Allowances for Doubtful Accounts - Substantially all of the Company's
receivables are owed by companies in the communications industry, whose recent
adverse conditions are described in Item 1, "Business." The Company typically
bills customers for services after all or a portion of the services have been
performed and require customers to pay within 30 days. The Company attempts to
control credit risk by being diligent in credit approvals, limiting the amount
of credit extended to customers and monitoring customers' payment record and
credit status as work is being performed for them.
The Company recorded bad debt expense in the amounts of $575,000, $1,207,000 and
$812,000 for fiscal years 2003, 2002 and 2001, respectively, and the Company's
allowance for doubtful accounts totaled $652,000, $471,000 and $517,000 at the
end of fiscal years 2003, 2002 and 2001, respectively. The calculation of these
amounts is based on TMNG's judgment about the anticipated default rate on
receivables owed to the Company as of the end of the reporting period. That
judgment was based on the Company's uncollected account experience in prior
years and its ongoing evaluation of the credit status of customers and the
communications industry in general.
The Company has endeavored to mitigate credit risk by concentrating its
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 TMNG is unsuccessful in these efforts, or if more of the Company's customers
file for bankruptcy or experience financial difficulties, it is possible that
the allowance for doubtful accounts will be insufficient and the Company will
have a greater bad debt loss than the amount reserved, which would adversely
affect the Company's cash flow and financial performance.
Fair Value Accounting of Acquired Businesses - TMNG has acquired three
professional service organizations over the last four 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 "Accounting for Business Combinations", 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 TMNG's
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 the Company records on its financial statements.
Impairment of Goodwill and Long-lived Intangible Assets - Goodwill and other
long-lived intangible assets arising from the Company's 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 significantly lower operating results of reporting units during
fiscal years 2002 and 2003, the resignation of key personnel, and revised and
reduced financial projections, the Company recorded a goodwill impairment loss
in 2002 and 2003 in the amount of $27.1 million and $15.8 million, respectively,
in accordance with the provisions of SFAS No. 142. For an additional discussion
see Item 8, "Consolidated Financial Statements," and Footnote 3 "Goodwill and
Other Intangibles." In accordance with FASB Statement No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets," the Company, using its best
estimates based upon 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 fiscal year 2003
management identified certain events, including a significant decrease in
revenue from customers whose relationships were valued in purchase accounting.
The Company performed an impairment test, and determined that the carrying value
of customer relationships exceeded its fair market value and recorded an
aggregate impairment loss of $3.7 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 Operation in the Statement of Operations and
Comprehensive Income (Loss).
Revenue Recognition - Historically, most of the Company's 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. The Company
recognized revenue from customer contracts in the period in which services were
performed. TMNG has many types of contracts, including time and materials
contracts, time and materials with cap, fixed fee contracts, and managed
services or outsourcing contracts. The Company recognizes revenues on time and
material with cap and fixed fee contracts using the percentage of completion
method. Percentage of completion accounting involves calculating the percentage
of service provided during the reporting period compared with the total
estimated services to be provided over the duration of the contract. Estimates
of total contract revenues and costs are continuously monitored during the term
of the contract, and recorded revenues and costs are subject to revision as the
contract progress. Such revisions may result in increase or decrease to revenues
and income and are reflected in the
financial statements in the periods in which they are first identified.
Managed services or outsourcing contracts typically have longer contract terms
than consulting contracts. The typical length of the Company's outsourcing
contracts is two to five years. The Company continuously reviews and reassesses
estimates of contract profitability for these types of engagements. If the
Company's estimate indicates a loss will occur, a loss accrual is recorded in
the consolidated financial statements in the period first identified.
Circumstances that could potentially result in contract losses over the life of
the contract include decreases in volumes of transaction or other inputs/outputs
on which the Company is paid, failure to deliver agreed benefits, variances from
planned internal/external costs to deliver the Company's service, and other
factors affecting revenues and costs.
As TMNG continues to adapt to changes in the communications consulting industry,
the Company has 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 the Company's consolidated
financial position, results of operations and liquidity.
Deferred Income Tax Assets - The Company has generated substantial deferred
income tax assets primarily from the accelerated financial statement write-off
of goodwill, the charge to compensation expense taken related to stock options
and net operating loss carry forwards. For the Company to realize the income tax
benefit of these assets, it must generate sufficient 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 taxable income, and the ability of the
Company to generate sufficient income in future periods to utilize the benefit
of the deferred income tax assets. Such projections of future income require
significant subjective judgments and estimates by the Company. As of January 03,
2004, valuation allowances in the amount of $24.0 million are recorded in
connection with the deferred income tax assets. As part of its analysis, the
impact of future income has not been included. The Company did not utilize
projections of estimated future income, as the provisions of SFAS No. 109
"Accounting for Income Taxes" precludes such estimates when a cumulative history
of operating losses exists. In the event the Company continues to report net
operating losses for financial reporting, no tax benefit would be recognized for
those losses.
RESULTS OF OPERATIONS
FISCAL 2003 COMPARED TO FISCAL 2002
REVENUES
Revenues decreased 32.1% to $23.5 million for fiscal 2003 from $34.6 million for
fiscal 2002. The decrease in revenues was primarily associated with the decline
in utilization of management consulting services by communication service
providers, which correlates with significant layoffs of management personnel by
such clients, and continuing adverse conditions in the communication and
technology 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 TMNG, and the resignation of certain key
executives of the Company during fiscal year 2003. During fiscal 2003, the
Company provided services on 203 customer projects, compared to 239 projects
performed in fiscal 2002. Average revenue per project was $116,000 in fiscal
2003 compared to $145,000 in fiscal 2002. International revenue base increased
to 9.9% of the Company's revenues for fiscal 2003, from 7.3% for fiscal 2002,
due primarily to the Company's decrease in domestic revenue. The Company's
Management Consulting Services segment contains a portfolio of operations,
marketing and strategy consulting. A decline in revenues occurred in fiscal year
2003 compared to fiscal year 2002 in each of these consulting offerings.
Non-consulting revenues recognized represented 1.0% of consolidated revenues for
fiscal 2003 compared to 4.4% of consolidated revenues for fiscal 2002, and
related primarily to commissions received on hardware sales. Effective March 4,
2004, management and the Board of Directors elected to shut down all hardware
business (for a further discussion see Item 8, "Consolidated Financial
Statements," Footnote 14 "Subsequent Event" contained herein). Revenues
recognized by the Company in connection with fixed price engagements totaled
$6.4 million, and represented 27.4% of consolidated revenue during fiscal 2003.
Included in revenues for fiscal 2003 was $0.7 million related to a customer take
or pay contract, representing the shortfall in consulting services utilized by a
customer in connection with annual minimum usage requirements during fiscal
2003.
COST OF SERVICES
Direct costs of services decreased 29.2% to $11.9 million for fiscal 2003
compared to $16.9 million for fiscal 2002. The decrease was attributable
primarily to fewer consulting engagements and corresponding reductions made in
consulting personnel costs. As a percentage of revenues, the Company's gross
margin based on direct cost of services was 49.2% for fiscal 2003 compared to
51.3% for fiscal 2002. The decrease in gross margin was primarily attributable
to the impact of lower utilization of full time personnel.
Non-cash stock based compensation charges or benefits related to pre-initial
offering grants of stock options were fully amortized during fiscal year 2003.
OPERATING EXPENSES
In total, operating expenses decreased by 20.8% to $41.5 million for fiscal year
2003, from $52.4 million for fiscal year 2002. Operating expenses include
selling, general and administrative costs, equity related charges, intangible
amortization and goodwill and intangible asset impairment charges. The major
components of the decrease are discussed by category in the following
paragraphs.
The Company had a goodwill and intangible impairment charge of $25.2 million in
fiscal year 2002 and $19.5 million in fiscal year 2003. The goodwill impairment
charge is attributable to a combination of the resignation of key executive
personnel during fiscal 2003 and lower than expected operating results of
reporting units during fiscal 2003 and 2002, both of which adversely affected
future projections of operating results utilized in the impairment analysis. The
write down of goodwill and customer relationships was calculated in accordance
with the provisions of SFAS No. 142 and SFAS No. 144, respectively.
In addition, $4.5 million of the decrease in operating expenses relates to
selling, general and administrative expense reductions in fiscal year 2003
compared to fiscal year 2002. $1.3 million of the reductions were associated
with reductions of personnel required to properly size the business to lower
revenue volumes. Total selling and administrative headcount decreased from 45 at
December 28, 2002 to 34 at January 03, 2004, representing a 24.4% reduction in
the Company's selling and administrative personnel. Additionally, in fiscal year
2002 the Company incurred severance charges of $1.9 million compared to $0.4
million in fiscal year 2003 related to involuntary employee turnover.
Additionally, throughout fiscal year 2003, management has implemented a number
of cost reductions within sales and marketing, recruitment, accounting, and
systems as well as other administrative cost reductions. Management continues to
examine cost-reduction measures to enhance the Company's profitability and
manage operating expenses to better align them with the size of the Company.
Non-cash stock based compensation charges were $0.1 million in fiscal year 2003
compared to $0.4 million for fiscal year 2002. Non-cash stock based compensation
charges or benefits related to pre-initial offering grants of stock options were
fully amortized during fiscal year 2003. In the fourth quarter of fiscal year
2003, the Company granted restricted stock to select executives. The charge in
fiscal 2003 related to the restricted stock grants was $0.1 million.
OTHER INCOME AND EXPENSES
Interest income was $0.6 million and $1.0 million for fiscal years 2003 and
2002, respectively, and represented interest earned on invested balances.
Interest income decreased during 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. The Company invests in short-term,
high-grade investment instruments as part of its overall investment policy.
INCOME TAXES
In general, the Company records an income tax provision (benefit) at a blended
Federal and state statutory income tax rate of 40.2%. In fiscal 2003, the
Company recorded a valuation allowance in the amount of $24.0 million against
the deferred income tax assets, offsetting the income tax benefit from current
year operating losses and resulting in an income tax provision of $13.0 million.
The valuation allowance was calculated utilizing the guidance of SFAS No. 109
"Accounting for Income Taxes" which requires an estimation of the recoverability
of the recorded deferred income tax asset balances. The income tax benefit for
fiscal 2002 as a percentage of pretax income (loss) was a benefit of 35.3%. The
primary reason for the variance between the effective and statutory income tax
rates in 2002 relate to a portion of the reported goodwill impairment losses not
deductible for income tax purposes.
FISCAL 2002 COMPARED TO FISCAL 2001
REVENUES
Revenues decreased 36.9% to $34.6 million for fiscal 2002 from $54.8 million for
fiscal 2001. The decrease in revenues was due primarily to a reduction in
management consulting demand by the communications and technology industry
resulting primarily from adverse macroeconomic events in this sector during 2001
and 2002, including reductions in capital funding, business failures, and
industry restructurings and reorganizations. The industry was also adversely
affected in 2002 by a series of accounting scandals at several prominent
telecommunications companies. Our international revenue base decreased to 7.3%
of the Company's revenues for fiscal 2002, down from 11.7% for fiscal 2001, due
to the additional domestic revenue generated by the Company's recently acquired
subsidiaries, TMNG Strategy and TMNG Technologies, and the decline in services
provided to international customers related to similar adverse macroeconomic
events in those markets. TMNG Strategy revenues represented 32.3% of
consolidated revenues during fiscal 2002. Non-consulting revenues recognized by
TMNG Technologies represented 4.4% of consolidated revenues for fiscal 2002
compared to 1.1% of consolidated revenues for fiscal 2001, and related primarily
to commissions received on hardware sales. Revenues recognized by the Company in
connection with fixed price engagements totaled $11.9 million, and represented
34.4% of consolidated revenue during fiscal 2002.
COST OF SERVICES
Direct costs of services decreased 38.4% to $16.9 million for fiscal 2002
compared to $27.3 million for fiscal 2001. The decrease was attributable
primarily to fewer consulting engagements and corresponding reductions in
consulting personnel costs. As a percentage of
revenues, the Company's gross margin based on direct cost of services was 51.3%
for fiscal 2002 compared to 50.1% for fiscal 2001. The increase in gross margin
was primarily attributable to higher margins associated with the increase in
strategy offerings provided during fiscal 2002 compared to the corresponding
period in fiscal 2001.
Non-cash stock based compensation charges were $0.7 million and $2.3 million for
fiscal years 2002 and 2001, respectively. The primary reasons for the net
decrease in non-cash stock based compensation charges for fiscal year 2002
compared to fiscal year 2001 were the reduction in amortization expense
recognized on a warrant in the amount of $1.1 million and the net reduction in
amortization charges related to the pre-initial public offering grants of stock
options in the amount of $0.5 million. Non-cash stock based compensation charges
are recognized by the Company over a period of three or four years, based on an
accelerated vesting schedule. Substantially all of the options giving rise to
the equity related charges are in their respective third of fourth year of
vesting, and therefore continue to have less impact on the Company's Statement
of Operations and Comprehensive Income (Loss). The above warrant was fully
amortized by the Company during the second quarter of fiscal year 2002. These
net charges increased costs of services as a percentage of revenue by 2.1% and
4.2% for fiscal years 2002 and 2001, respectively.
OPERATING EXPENSES
In total, operating expenses increased to $52.4 million for fiscal year 2002, or
167.1% from $19.6 million for fiscal year 2001. This increase of $32.8 million
can be allocated to primarily three cost categories. First, and largest, is
$26.1 million of additional operating expenses in 2002 associated with the $25.2
million write-down of goodwill and $0.9 million of amortization of other
identified intangibles associated with acquired business units. The write-down
of goodwill was calculated in accordance with the provisions of SFAS No. 142 and
reflected the unanticipated continued decline in the Company's current financial
performance and projections of future operating results.
In addition, selling, general and administrative expenses increased by
approximately $7.2 million in 2002 compared to 2001. Of this increase, $2.8
million was related to cost reduction initiatives and sizing of the Company, and
$4.2 million was the result of absorbing the selling, general and administrative
costs of TMNG Technology and TMNG Strategy. During the second half of 2002 the
Company implemented a series of cost reductions to properly size selling,
general and administrative costs to revenue generation, and believes these
initiatives will better position the selling, general and administrative cost
structure in future periods. Management continues to examine cost-reduction
measures to enhance the Company's profitability and manage operating expenses to
better align them with the size of the Company.
Non-cash stock based compensation charges of $0.4 million and $0.8 million for
fiscal year 2002 and fiscal year 2001, respectively, were recorded in connection
with stock options granted to the Company's partners, principals and certain
senior executives and non-employee directors. The net $0.4 million decrease in
non-cash stock based compensation charges for fiscal year 2002 compared to
fiscal year 2001 was a result of the reduction in the amortization of the
deferred compensation charges recorded in connection with pre-initial public
offering grants of non-qualified stock options based on the accelerated vesting
schedule discussed above in "Cost of Services." These charges increased
operating expenses as a percentage of revenue by 1.0% and 1.5% for fiscal years
2002 and 2001, respectively.
OTHER INCOME AND EXPENSES
Interest income was $1.0 million and $2.4 million for fiscal years 2002 and
2001, respectively, and represented interest earned on invested balances.
Interest income decreased during fiscal year 2002 due to lower invested balances
resulting from a reduction in cash reserves and lower interest rate returns from
fiscal year 2001 to fiscal year 2002. TMNG invests in short-term, high-grade
investment instruments as part of its overall investment policy.
INCOME TAXES
In general, the Company records an income tax provision (benefit) at a blended
Federal and state statutory income tax rate of 40.2%. Income tax provision
(benefit) for fiscal 2002 and 2001 as a percentage of pretax income (loss) was a
benefit of 35.3% in fiscal 2002 and a provision of 29.6% in fiscal 2001. The
primary reason for the variance between the effective and statutory income tax
rates in 2002 relate to a portion of the reported goodwill impairment losses not
deductible for income tax purposes. The primary reason for the variance in 2001
was the earnings reported on short-term investments in Federally tax-exempt
income securities not taxable for Federal income tax purposes.
CUMULATIVE CHANGE IN ACCOUNTING PRINCIPLE
A cumulative change in accounting principle in the amount of $1.9 million was
recorded during fiscal year 2002 in connection with the Company's estimate of
goodwill impairment. The impairment was calculated in accordance with the
provisions of SFAS No. 142 and has been reported on the Company's Statement of
Operations and Comprehensive Income (Loss), net of tax benefit, in the amount of
$1.1 million.
SUMMARY OF QUARTERLY RESULTS OF OPERATIONS -- UNAUDITED
(In thousands, except per share data)
QUARTER ENDED
----------------------------------------------------
MARCH 30, JUNE 29, SEPTEMBER 28, DECEMBER 28,
2002 2002 2002 2002
-------- -------- -------- --------
Revenues ....................................... $ 7,268 $ 9,927 $ 8,756 $ 8,644
======== ======== ======== ========
Gross profit ................................... $ 3,099 $ 5,486 $ 4,274 $ 4,160
======== ======== ======== ========
Loss before cumulative effect of a change in
accounting principle .......................... $ (1,665) $ (1,822) $ (648) $(18,128)
======== ======== ======== ========
Net loss........................................ $ (2,805) $ (1,822) $ (648) $(18,128)
======== ======== ======== ========
Basic and diluted loss before cumulative
effect of a change in accounting principle per
common share .................................. $ (0.05) $ (0.05) $ (0.02) $ (0.54)
======== ======== ======== ========
Basic and diluted net loss per common share .... $ (0.09) $ (0.05) $ (0.02) $ (0.54)
======== ======== ======== ========
QUARTER ENDED
----------------------------------------------------
MARCH 29, JUNE 28, SEPTEMBER 27, January 03,
2003 2003 2003 2004
-------- -------- -------- --------
Revenues ....................................... $ 7,406 $ 5,020 $ 4,691 $ 6,359
======== ======== ======== ========
Gross profit ................................... $ 3,744 $ 2,380 $ 2,194 $ 3,280
======== ======== ======== ========
Net loss........................................ $ (1,231) $(18,737) $ (2,653) $(19,703)
======== ======== ======== ========
Basic and diluted net loss per common share .... $ (0.04) $ (0.56) $ (0.08) $ (0.58)
======== ======== ======== ========
The Company reports its operating activities on a 52/53-week fiscal year and for
the fourth quarter ended January 3, 2004, the Company's financial results
include fourteen weeks compared to the thirteen weeks reported for the fourth
quarter ended December 28, 2002. The operating results for the fiscal year 2003
report fifty-three weeks of activity compared to the fifty-two weeks of activity
reported in fiscal year 2002.
See Footnote 7 "Income Tax" for discussion of fourth quarter deferred tax
charge.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $0.9 million for fiscal year 2003,
compared to net cash provided by operating activities of $7,000 and $20.9
million for fiscal years 2002 and 2001, respectively. The Company incurred
negative cash flow from its operating activities for fiscal year 2003 primarily
due to operating losses. However, these were substantially offset by effective
management of working capital and operating assets and liabilities during the
year.
Net cash used in investing activities was $0.1 million, $32.8 million, and $5.6
million for fiscal years 2003, 2002, and 2001, respectively. Cash used for
acquisitions was $32.5 million and $4.7 million in fiscal years 2002 and 2001,
respectively, and relates to the Cambridge Strategic Management Group, Inc. and
Tri-Com Computer Services, Inc. acquisitions, respectively. Capital expenditures
of $0.1 million, $0.3 million, and $0.7 million, respectively, relate to the
capitalization of leasehold improvements, computer equipment and software by the
Company for fiscal years 2003, 2002, and 2001.
Net cash provided by financing activities was $.09 million, $0.12 million, and
$0.51 million for fiscal years 2003, 2002, and 2001, respectively. Net cash
provided in fiscal years 2003, 2002, and 2001 related to proceeds from the
exercise of employee stock options as well as common stock issued by the Company
as part of its employee stock purchase program, partially offset by payments
made on long-term obligations.
As of January 03, 2004, the Company has the following contractual obligations
and commercial commitments by year (amounts in millions):
Later
Years
Through
2004 2005 2006 2007 2008 2011 Total
---- ---- ---- ---- ---- ------- -----
Capital leases $0.3 $0.2 $ 0.5
Operating leases 1.8 1.6 $1.5 $1.6 $1.6 $3.7 11.8
---- ---- ---- ---- ---- ---- -----
Total $2.1 $1.8 $1.5 $1.6 $1.6 $3.7 $12.3
==== ==== ==== ==== ==== ==== =====
The Company has met its cash requirements with a combination of operating
revenues and the use of the Company's cash reserves.
At January 03, 2004, TMNG had approximately $52.9 million in cash and cash
equivalents. TMNG believes it has sufficient cash to meet anticipated cash
requirements, including anticipated capital expenditures, consideration for
possible acquisitions, and any continuing operating losses, for at least the
next 12 months. The Company has established a flexible model that provides a
lower fixed cost structure than most consulting firms, enabling TMNG to scale
operating cost structures more quickly based on market conditions. Although the
Company is well positioned because of its cash reserves to weather continuing
adverse conditions in the communications industry for a period of time, if the
industry and demand for consulting services do not rebound in the foreseeable
future and the Company continues to experience negative cash flow, the Company
could experience liquidity challenges.
TRANSACTIONS WITH RELATED PARTIES
During fiscal year 2001 a member of the TMNG board of directors was also a
director of a customer for which TMNG did business, and the Company also
performed services for one customer in which one member of the TMNG board of
directors owns a partial equity interest. Revenues earned from these customers
during fiscal year 2001 were approximately $2.3 million. During fiscal year
2002, one member of the TMNG board of directors was also director of a customer
with which TMNG did business. Revenues earned from the customer during 2002
totaled approximately $308,000. No receivables were outstanding by the above
customers as of December 29, 2001 and December 28, 2002, respectively.
During fiscal years 2001 and 2002, TMNG made payments of approximately $70,000
and $190,000 to two legal firms in which two members of the TMNG board of
directors own equity interests. Such payments were for legal services rendered
in connection with the Company's equity offerings and for other matters arising
in the normal course of business. The costs associated with the equity offerings
were classified as a component of additional paid-in capital, and the costs
associated with business matters arising in the normal course of business were
classified as selling, general and administrative in the consolidated statements
of income and comprehensive income.
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 January 03,
2004, 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 during 2003. Aggregate
borrowings against the lines of credit at December 28, 2002 and January 03, 2004
totaled $300,000 for each period and are due in 2011. 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
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not invest excess funds in derivative financial instruments or
other market rate sensitive instruments for the purpose of managing its foreign
currency exchange rate risk. The Company invests excess funds in short-term
investments, the yield of which is exposed to interest rate market risk.
The Company does not have material exposure to market related risks. Foreign
currency exchange rate risk may become material given U.S. dollar to foreign
currency exchange rate changes and significant increases in international
engagements denominated in the local currency of the Company's clients.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS OF
The Management Network Group, Inc.
Overland Park, Kansas
We have audited the accompanying consolidated balance sheets of The Management
Network Group, Inc. and subsidiaries (the "Companies") as of January 03, 2004
and December 28, 2002 and the related consolidated statements of operations and
comprehensive income (loss), stockholders' equity and cash flows for the fiscal
years ended January 03, 2004, December 28, 2002 and December 29, 2001 (53, 52,
and 52 weeks, respectively). These financial statements are the responsibility
of the Companies' management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Companies as of January 03,
2004 and December 28, 2002, and the results of their operations and their cash
flows for the fiscal years ended January 03, 2004, December 28, 2002 and
December 29, 2001 in conformity with accounting principles generally accepted in
the United States of America.
As discussed in Notes 1 and 3 to the consolidated financial statements, the
Companies changed their method of accounting for goodwill and other intangible
assets with the adoption of Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets", in 2002.
/S/ DELOITTE & TOUCHE LLP
KANSAS CITY, MISSOURI
March 29, 2004
THE MANAGEMENT NETWORK GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
DECEMBER 28, January 03,
2002 2004
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents .......................................... $ 53,786 $ 52,875
Receivables:
Accounts receivable ............................................. 5,597 5,376
Accounts receivable -- unbilled ................................. 4,232 2,140
--------- ---------
9,829 7,516
Less: Allowance for doubtful accounts ........................... (471) (652)
--------- ---------
9,358 6,864
Refundable income taxes ........................................ 4,277 1,557
Prepaid and other assets ........................................ 2,217 710
--------- ---------
Total current assets ....................................... 69,638 62,006
--------- ---------
Property and Equipment, net ......................................... 2,285 1,558
Goodwill............................................................. 31,308 15,528
Customer relationships, net ......................................... 5,092 541
Identifiable intangible assets, net.................................. 2,362 937
Deferred tax asset .................................................. 14,272
Other assets ........................................................ 502 402
--------- ---------
Total Assets ........................................................ $ 125,459 $ 80,972
========= =========
CURRENT LIABILITIES:
Trade accounts payable ............................................. $ 1,170 $ 635
Accrued payroll, bonuses and related expenses ...................... 2,105 1,251
Other accrued liabilities .......................................... 1,964 2,104
Unfavorable and capital lease obligations .......................... 921 785
--------- ---------
Total current liabilities .................................. 6,160 4,775
--------- ---------
Unfavorable and capital lease obligations ........................... 3,573 2,828
STOCKHOLDERS' EQUITY;
Common stock:
Voting -- $.001 par value, 100,000,000 shares authorized;
33,347,228 shares issued and outstanding on
December 28, 2002, 34,371,068 shares issued and
outstanding on January 03, 2004 ................................ 33 34
Preferred stock -- $.001 par value, 10,000,000 shares
authorized; no shares issued or outstanding
Additional paid-in capital ......................................... 155,509 157,292
Accumulated deficit................................................. (39,866) (82,190)
Accumulated other comprehensive income --
Foreign currency translation adjustment ........................... 113 176
Unearned compensation .............................................. (63) (1,943)
--------- ---------
Total stockholders' equity ................................. 115,726 73,369
--------- ---------
Total Liabilities and Stockholders' Equity .......................... $ 125,459 $ 80,972
========= =========
See notes to consolidated financial statements.
THE MANAGEMENT NETWORK GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FISCAL YEAR ENDED
------------------------------------------
DECEMBER 29, DECEMBER 28, January 03,
2001 2002 2004
----------- ----------- -----------
Revenues................................................. $ 54,832 $ 34,595 $ 23,476
Cost of services:
Direct cost of services................................. 27,347 16,855 11,935
Equity related charges ................................. 2,322 721 (57)
-------- -------- --------
Total cost of services ......................... 29,669 17,576 11,878
-------- -------- --------
Gross profit............................................. 25,163 17,019 11,598
Operating expenses:
Selling, general and administrative..................... 16,767 23,971 19,494
Equity related charges ................................. 843 353 142
Goodwill and intangibles amortization .................. 1,996 2,887 2,343
Goodwill and intangible asset impairment ............... 25,165 19,484
-------- -------- --------
Total operating expenses ....................... 19,606 52,376 41,463
-------- -------- --------
Income (loss) from operations ........................... 5,557 (35,357) (29,865)
Other income:
Interest income ........................................ 2,433 996 624
Interest expense ....................................... (14) (63) (51)
Other, net ............................................. (8) 26
-------- -------- --------
Total other income.............................. 2,411 959 573
-------- -------- --------
Income (loss) before income tax (provision) benefit
and cumulative effect of a change in accounting
principle .............................................. 7,968 (34,398) (29,292)
Income tax (provision) benefit .......................... (2,360) 12,135 (13,032)
-------- -------- --------
Income (loss) before cumulative effect of a change
in accounting principle................................. 5,608 (22,263) (42,324)
Cumulative effect of a change in accounting principle -
goodwill impairment, net of tax benefit ................ (1,140)
-------- -------- --------
Net income (loss) ....................................... 5,608 (23,403) (42,324)
Other comprehensive income (loss) --
Foreign currency translation adjustment................. (18) 96 63
-------- -------- --------
Comprehensive income (loss) ............................. $ 5,590 $(23,307) $(42,261)
======== ======== ========
Income (loss) before cumulative effect of a change in
accounting principle per common share
Basic .................................................. $ 0.19 $ (0.68) $ (1.26)
======== ======== ========
Diluted ................................................ $ 0.18 $ (0.68) $ (1.26)
======== ======== ========
Cumulative effect of a change in accounting principle
per common share
Basic .................................................. $ (0.03)
========
Diluted ................................................ $ (0.03)
========
Net income (loss) per common share
Basic .................................................. $ 0.19 $ (0.71) $ (1.26)
======== ======== ========
Diluted ................................................ $ 0.18 $ (0.71) $ (1.26)
======== ======== ========
Shares used in calculation of income (loss) before
cumulative effect of a change in accounting principle
and net income (loss) per common share
Basic .................................................. 29,736 32,734 33,545
======== ======== ========
Diluted ................................................ 30,774 32,734 33,545
======== ======== ========
See notes to consolidated financial statements.
THE MANAGEMENT NETWORK GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FISCAL YEAR ENDED
-----------------------------------------
DECEMBER 29, DECEMBER 28, January 03,
2001 2002 2004
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ........................................ $ 5,608 $ (23,403) $ (42,324)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Cumulative change in accounting principle .............. 1,900
Goodwill and intangible asset impairment ............... 25,165 19,484
Depreciation and amortization .......................... 2,543 3,835 3,197
Equity related charges ................................. 3,165 1,074 85
Loss on retirement of assets ........................... 205
Income tax benefit (increase) realized upon
exercise/forfeiture of stock options ................. (9) 22 45
Deferred income taxes .................................. 111 (8,820) 14,066
Other changes in operating assets and liabilities, net
of business acquisitions:
Accounts receivable .................................. 9,546 4,561 402
Accounts receivable -- unbilled ...................... 5,100 (367) 2,092
Other assets ......................................... (659) 202 1,113
Trade accounts payable ............................... (1,592) 936 (535)
Accrued (refundable) income taxes..................... 52 (4,583) 2,720
Accrued liabilities .................................. (2,969) (720) (1,286)
-------- -------- --------
Net cash provided by (used in) operating activities 20,896 7 (941)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of business, net of cash acquired ............ (4,650) (32,456)
Acquisition of property and equipment, net................ (724) (280) (127)
Loans to officers, net.................................... (200) (100)
-------- -------- --------
Net cash used in investing activities ............. (5,574) (32,836) (127)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock ................ ................ 221 164 70
Payments made on long-term obligations ................... (48) (342) (392)
Exercise of stock options................................. 336 301 416
-------- -------- --------
Net cash provided by financing activities 509 123 94
-------- -------- --------
Effect of exchange rate on cash and cash equivalents ....... (18) 96 63
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ....... 15,813 (32,610) (911)
Cash and cash equivalents, beginning of period ............. 70,583 86,396 53,786
-------- -------- --------
Cash and cash equivalents, end of period ................... $ 86,396 $ 53,786 $ 52,875
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during period for interest ..................... $ 14 $ 63 $ 51
======== ======== ========
Cash paid during period for taxes ........................ $ 2,385 $ 583 $ 493
======== ======== ========
Supplemental disclosure of non-cash investing and financing
transactions-
Acquisition of business:
Fair value of assets acquired .......................... $ 3,655 $ 53,840
Liabilities incurred or assumed ........................ $ (1,652) $ (7,377)
Common stock issued .................................... $ 3,000 $ 13,480
See notes to consolidated financial statements.
THE MANAGEMENT NETWORK GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
COMMON STOCK
$.001 PAR
VOTING ADDITIONAL RETAINED
--------------------- PAID-IN EARNINGS
SHARES AMOUNT CAPITAL (DEFICIT)
------------ ------ ---------- ---------
Balance, December 30, 2000 29,465,808 $ 29 $ 136,917 $ (22,071)
Exercise of options 196,433 336
Cancellation of options (954)
Amortization of warrant cost 1,721
Employee stock purchase plan 52,261 222
Stock compensation (25)
Other comprehensive income -
Foreign currency translation adjustment
Stock options issued in exchange for Tri-Com SAR's 244
Reduction of tax benefit due to exercise of stock options (9)
Acquisition of subsidiary 490,417 1 2,999
Net income 5,608
------------ ------ ---------- ---------
Balance, December 29, 2001 30,204,919 30 141,451 (16,463)
Exercise of options 174,058 301
Cancellation of options (526)
Amortization of warrant cost 623
Employee stock purchase plan 75,451 164
Stock compensation (4)
Other comprehensive income -
Foreign currency translation adjustment
Tax benefit due to exercise of stock options 22
Acquisition of subsidiary 2,892,800 3 13,478
Net loss (23,403)
------------ ------ ---------- ---------
Balance, December 28, 2002 33,347,228 33 155,509 (39,866)
Option grant 189
Exercise of options 245,304 416
Cancellation of options (294)
Stock surrender (8,702) (12)
Employee stock purchase plan 67,238 70
Stock
compensation
Restricted stock grant 720,000 1 2,069
Other comprehensive income -
Foreign currency translation adjustment
Reduction of tax benefits due to exercise/forfeiture
of stock options (655)
Net loss (42,324)
------------ ------ ---------- ---------
Balance, January 03, 2004 34,371,068 $ 34 $ 157,292 $ (82,190)
============ ====== ========== =========
ACCUMULATED
OTHER
COMPREHENSIVE
INCOME UNEARNED
(LOSSES) COMPENSATION TOTAL
------------- -------------- ---------
Balance, December 30, 2000 $ 35 $ (3,438) $ 111,472
Exercise of options 336
Cancellation of options 954 -
Amortization of warrant cost 1,721
Employee stock purchase plan 222
Stock compensation 1,469 1,444
Other comprehensive income -
Foreign currency translation adjustment (18) (18)
Stock options issued in exchange for Tri-Com SAR's (28) 216
Reduction of tax benefit due to exercise of stock options (9)
Acquisition of subsidiary 3,000
Net income 5,608
------------- -------------- ---------
Balance, December 29, 2001 17 (1,043) 123,992
Exercise of options 301
Cancellation of options 526 -
Amortization of warrant cost 623
Employee stock purchase plan 164
Stock compensation 454 450
Other comprehensive income -
Foreign currency translation adjustment 96 96
Tax benefit due to exercise of stock options 22
Acquisition of subsidiary 13,481
Net loss (23,403)
------------- -------------- ---------
Balance, December 28, 2002 113 (63) 115,726
Option grant (189)
Exercise of options 416
Cancellation of options 294 -
Stock surrender (12)
Employee stock purchase plan 70
Stock compensation 85 85
Restricted stock grant
(2,070)
Other comprehensive income -
Foreign currency translation adjustment 63 63
Reduction of tax benefit due to exercise/forfeiture
(655)
of stock options
Net loss (42,324)
------------- -------------- ---------
Balance, January 03, 2004 $ 176 $ (1,943) $ 73,369
============= ============== =========
See notes to consolidated financial statements.
THE MANAGEMENT NETWORK GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations -- The Management Network Group, Inc. ("TMNG" or the
"Company") was formed on April 1, 1993 as a management consulting firm
specializing in global competitive communications. Primary services include
providing management consulting services to wireless and wireline communications
carriers, and the technology and investment firms that support the
communications industry. A majority of the Company's revenues are to customers
in the United States, however the Company also provides services to customers in
Europe and other foreign countries. The Company's corporate offices are located
in Overland Park, Kansas.
Principles of Consolidation -- The consolidated statements include the accounts
of TMNG and its wholly-owned subsidiaries, The Management Network Group Europe
Ltd. ("TMNG-Europe"), formed on March 19, 1997, based in the United Kingdom; The
Management Network Group Canada Ltd. ("TMNG-Canada"), formed on May 14, 1998,
based in Toronto, Canada; TMNG.com, Inc., formed in June 1999; TMNG Marketing,
Inc., acquired on September 5, 2000; TMNG Technologies, Inc., acquired on
September 5, 2001; and TMNG Strategy, Inc., acquired on March 6, 2002. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Fiscal Year -- The Company reports its operating results on a 52/53-week fiscal
year basis. The fiscal year end is determined as the Saturday ending nearest
December 31. Fiscal year ended January 3, 2004 reported fifty three weeks of
operating results and consisted of three 13 weeks quarters and one 14 week
quarter. The fiscal years ended December 28, 2002 and December 29, 2001 each
reported 52 weeks of operating results and consisted of 4 equal quarters of 13
weeks each. The fiscal years ended January 3, 2004, December 28, 2002 and
December 29, 2001 are referred to herein as fiscal year 2003, 2002 and 2001,
respectively. TMNG Europe and TMNG Canada maintain year-end dates of December
31.
Revenue Recognition -- The Company has historically accounted for revenue in
connection with client service engagements under primarily a time and materials
revenue model, where time and materials service revenues and costs are recorded
in the period in which the service is performed. Beginning in fiscal 2002 and
continuing through fiscal year 2003 the Company has entered into large fixed
price contracts and time and material contracts with guaranteed maximums of
various durations, and expects this trend to continue into the future. The
Company generally records revenue in connection with larger fixed price
contracts under a percentage of completion method when it has the ability to
make reasonably dependable estimates towards project completion. This method of
accounting results in the ratable recognition of revenue in proportion to the
related costs over the client service engagement. Estimates are prepared to
monitor and assess the Company's progress on the engagement from the initial
phase of the project to completion, and these estimates are utilized in
recognizing revenue in the Company's financial statements. If the current
estimates of total contract revenues and contract costs indicate a loss, the
Company records a provision for the entire loss on the contract. Revenues and
related costs of smaller fixed price contracts are generally recognized upon
contract completion under the completed contract method, and generally involve
immaterial amounts and are of a short duration.
In fiscal year 2002 and continuing into fiscal year 2003 the Company also
entered into gain sharing contracts, where the Company's revenues are determined
on a success-based revenue model. Revenues generated on such contracts result
from financial success recognized by the client utilizing agreed upon contract
measures and milestones between the two parties. Due to the contingent nature of
these gain-sharing projects, the Company recognizes costs as they are incurred
on the project and defers the revenue recognition until the revenue is
realizable and earned.
Cash and Cash Equivalents -- Cash and cash equivalents include cash on hand and
short-term investments with original maturities of three months or less when
purchased.
Fair Value of Financial Instruments -- The fair value of current financial
instruments approximates the carrying value because of the short maturity of
these instruments.
Property and Equipment -- Property and equipment are stated at cost less
accumulated depreciation and amortization. Maintenance and repairs are charged
to expense as incurred. Depreciation is based on the estimated useful lives of
the assets and is computed using the straight-line method, and capital leases
are amortized on a straight-line basis over the life of the lease. Asset lives
range from three to seven years for computers and equipment. Leasehold
improvements are capitalized and amortized over the life of the lease.
Goodwill -- The Company had previously recorded $18,652,000 of goodwill in
connection with the acquisition of The Weathersby Group, Inc. ("TWG") and had
reported the goodwill at cost less accumulated amortization using the
straight-line method over ten years. In fiscal year 2001 the Company recorded
goodwill amortization expense of $1,865,000 in connection with the TWG
acquisition. Additionally, the Company has recorded $6,001,000 of goodwill in
connection with the acquisition of Tri-Com Computer Services, Inc. ("Tri-Com")
and $36,206,000 in connection with the acquisition of Cambridge Strategic
Management Group, Inc. ("CSMG"). The Company has not recorded goodwill
amortization during fiscal year 2002 or 2003, in accordance with the provisions
of Statement of Financial Accounting Standards ("SFAS") No. 142 "Accounting for
Goodwill and Intangible Assets." See Footnote 3 "Goodwill and Other Intangible
Assets" for an additional discussion of the Company's goodwill
Goodwill Impairment -- During fiscal year 2002 the Company adopted the provision
of SFAS No. 142, and recognized a goodwill impairment charge of approximately
$1,140,000, net of tax benefit of $760,000 in connection with its initial
adoption of the Statement. This item was reported net of tax as a cumulative
change in accounting principle. Subsequent to its initial adoption of the
Statement, the Company recognized goodwill impairment charges of $25,165,000 and
$15,780,000 in fiscal years 2002 and 2003, respectively. These amounts are
reflected in the Company's loss from operations included in the Consolidated
Statement of Operations and Comprehensive Income (Loss). For an additional
discussion of the Company's goodwill impairment, see Footnote 3 "Goodwill and
Other Intangible Assets" contained herein.
Identifiable Intangibles -- Identifiable intangible assets are stated at cost
less accumulated amortization, and represent customer relationships, employment
agreements and trade names acquired in the CSMG and Tri-Com acquisitions.
Amortization is based on estimated useful lives of 3 to 60 months, depending on
the nature of the intangible asset, and is recognized on a straight-line basis.
In connection with SFAS No. 144 "Accounting for the Impairment or Disposal of
Long-lived Assets" the Company, using its best estimates based on reasonable and
supportable assumptions and projections, reviews for impairment of long-lived
assets and certain identifiable intangibles to be held and used whenever events
or changes in circumstances indicate that the carrying amount of its assets
might not be recoverable.
Income Taxes -- The Company recognizes a liability or asset for the deferred tax
consequences of temporary differences between the tax basis of assets or
liabilities and their reported amounts in the financial statements. A valuation
allowance is provided when, in the opinion of management, it is more likely than
not that some portion or all of a deferred tax asset will not be realized.
Use of Estimates -- The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Foreign Currency Transactions and Translation -- TMNG-Europe and TMNG-Canada
both conduct business primarily denominated in their respective local currency.
Assets and liabilities have been translated to U.S. dollars at the period-end
exchange rate. Revenue and expenses have been translated at exchange rates which
approximate the average of the rates prevailing during each period. Translation
adjustments are reported as a separate component of other comprehensive income
in the consolidated statements of stockholders' equity. Realized and unrealized
exchange gains and losses included in results of operations were insignificant
for all periods presented.
Stock-Based Compensation -- The Company utilizes an intrinsic value methodology
in accounting for stock based compensation for employees and certain
non-employee directors in accordance with the provisions of Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees" and related Interpretations, and accounts for stock-based
compensation for non-employees utilizing a fair value methodology in accordance
with SFAS No. 123, "Accounting for Stock-Based Compensation" as amended by SFAS
No. 148 "Accounting for Stock Based Compensation - Transition and Disclosure."
For an additional discussion of the Company's stock-based compensation see
Footnote 9 "Stock Option Plan and Stock Based Compensation." If compensation
cost for the Company's APB No. 25 grants, restricted stock 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 pricing
methodology using the assumptions above, the Company's net income for fiscal
year 2001, would have decreased by approximately $6.9 million, and its net loss
for fiscal years 2002 and 2003 would have increased by $3.3 million and $1.1
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 and restricted stock are amortized to pro forma expense over the
vesting period. The following table contains pro forma information for fiscal
years 2001, 2002 and 2003 (in thousands, except per share amounts):
FISCAL FISCAL FISCAL
YEAR YEAR YEAR
2001 2002 2003
-------- -------- --------
Net income (loss), as reported: $ 5,608 $(23,403) $(42,324)
Add: Stock-based employee compensation
expense (benefit)included in reported
net income (loss), net of related tax effects 882 273 85
Deduct: Total stock-based compensation
(expense) benefit determined under fair value
based method for all awards, net of related (7,750) (3,536) (1,213)
tax effects
-------- -------- --------
Pro forma net loss $ (1,260) $(26,666) $(43,452)
======== ======== ========
Loss) per share
Basic, as reported $ 0.19 $ (0.71) $ (1.26)
======== ======== ========
Diluted, as reported $ 0.18 $ (0.71) $ (1.26)
======== ======== ========
Basic and Diluted, pro forma $ (0.04) $ (0.81) $ (1.30)
======== ======== ========
Warrant Grant -- On October 29, 1999, the Company issued a significant customer
a warrant to purchase 500,000 shares of common stock at an exercise price of
$2.00 per share. The estimated fair value of this warrant was approximately $5.2
million, all of which has been recognized in the Company's financial statements
by December 28, 2002. Expense recognized in connection with the warrant was $1.7
million and $0.7 million for fiscal years 2001 and 2002 respectively. The
warrant was fully amortized as of the end of fiscal year 2002. On November 8,
2000, the customer exercised the warrant. Additionally on December 10, 1999, the
Company entered into a consulting services agreement with this customer under
which such customer committed to $22 million of consulting fees over a
three-year period commencing January 1, 2000. During fiscal year 2002 the
agreement was extended for two additional years beyond the original term of the
agreement, in exchange for an expanded preferred contractor relationship and
immediate commitment to a significant consulting arrangement. As of January 3,
2004, $16.3 million of cumulative consulting fees had been recognized in
connection with the agreement. The agreement provides for minimum annual usage
requirements in connection with consulting services performed under the
agreement, and as of January 3, 2004 a shortfall in minimum annual usage
requirements of consulting services under the agreement was deemed to have
occurred. As a result of such shortfall, the Company recognized an additional
$706,000 in revenues reflecting this shortfall, which the customer is obligated
to pay under the terms of the agreement. There can be no certainty that the
remaining $5.0 million of consulting services will be purchased, however the
agreement does contain a termination fee in the amount of 25 percent of the
unused and committed consulting services. In February 2004 after failure by the
customer to cure a default in payment in connection with the contract, the
Company filed suit against the customer for breach of contract. The Company
cannot be assured that it will prevail in the referenced litigations, but
believes its claims are meritorious.
Earnings (Loss) Per Share -- The Company calculates and presents earnings (loss)
per share using a dual presentation of basic and diluted earnings (loss) per
share. Basic earnings (loss) per share is computed by dividing net income (loss)
by the weighted average number of common shares outstanding for the period.
Diluted earnings per share reflects the potential dilution of securities by
adding common stock options in the weighted average number of common shares
outstanding for a period, if dilutive. In accordance with the provisions of SFAS
No. 128 "Earnings Per Share", the Company has not included the effect of common
stock options for fiscal year 2002 and 2003 as the Company reported a loss from
continuing operations for those periods. Had the Company reported net income in
fiscal year 2002 and 2003, the treasury method of calculating common stock
equivalents would have resulted in approximately 791,000 and 772,000 additional
diluted shares, respectively.
The reconciliation of weighted average common shares outstanding included in the
computation of basic and diluted net income (loss) per common share for the
periods indicated is as follows (amounts in thousands, except per share
amounts):
FISCAL FISCAL FISCAL
YEAR YEAR YEAR
2001 2002 2003
-------- -------- --------
Net income (loss) for basic and diluted earnings (loss) per
share:
Income (loss) before taxes and cumulative effect of a
change in accounting principle ............................. $ 7,968 $ (34,398) $ (29,292)
Income tax (provision) benefit............................... (2,360) 12,135 (13,032)
-------- -------- ---------
Income (loss) before cumulative effect of a change in
accounting principle........................................ 5,608 (22,263) (42,324)
Cumulative effect of a change in accounting principle........ (1,140)
-------- -------- ---------
Net income (loss) ........................................... $ 5,608 $(23,403) $ (42,324)
======== ======== =========
Weighted average shares of common stock outstanding:
Weighted average shares of common stock outstanding for
basic earnings (loss) per share........................... 29,736 32,734 33,545
Effect of stock options ..................................... 1,038
-------- -------- ---------
Weighted average shares of common stock outstanding for
diluted earnings (loss) per share.......................... 30,774 32,734 33,545
======== ======== =========
Basic earnings (loss) per share:
Income (loss) before cumulative effect of a change in
accounting principle ...................................... $ 0.19 $ (0.68) $ (1.26)
Cumulative effect of a change in accounting principle........ (0.03)
-------- -------- ---------
Net income (loss) ........................................... $ 0.19 $ (0.71) $ (1.26)
======== ======== =========
Diluted earnings (loss) per share:
Income (loss) before cumulative effect of a change in
accounting principle ....................................... $ 0.18 $ (0.68) $ (1.26)
Cumulative effect of a change in accounting principle........ (0.03)
-------- -------- ---------
Net income (loss)............................................ $ 0.18 $ (0.71) $ (1.26)
======== ======== =========
New Accounting Standards -- SFAS No. 150 "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" establishes
standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. It requires
that an issuer classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances). Many of those instruments were
previously classified as equity. This statement is effective for financial
instruments entered into or modified after May 31, 2003, and was adopted by the
Company during fiscal year 2003. The Company does not have any financial
instruments that are within the scope of SFAS No. 150, and therefore the
adoption of this statement had no material effect on the Company's financial
position, results of operations and cash flows.
FASB Financial Interpretation No. 46 ("FIN 46") clarifies Accounting Research
Bulletin No. 51, "Consolidated Financial Statements." If certain conditions are
met, this interpretation requires the primary beneficiary to consolidate certain
variable interest entities in which equity investors lack the characteristics of
a controlling financial interest or do not have sufficient equity investment at
risk to permit the variable interest entity to finance its activities without
additional subordinated financial support from other parties. This
interpretation is effective immediately for variable interest entities created
or obtained after January 31, 2003. For variable interest entities acquired
before February 1, 2003, the interpretation is effective for the first fiscal
year or interim period beginning after June 15, 2003. The Company currently does
not have any variable interest entities that would be subject to this
interpretation.
In December 2003, the FASB issued a revision to FIN 46 which addresses new
effective dates and certain implementation issues. Among these issues is the
addition of a scope exception for certain entities that meet the definition of a
business, provided certain criteria are met.
2. BUSINESS COMBINATIONS
On March 6, 2002, TMNG purchased the business and primary assets of CSMG, a
Delaware corporation, of Boston, Massachusetts. CSMG provides high-end advisory
services to global communication service and equipment providers and investment
firms that provide capital to the industry. CSMG's range of business strategy
services include analyses of industry and competitive environments; product and
distribution strategies; finance, including business case development, modeling,
cost analysis and benchmarking; and due diligence and risk assessment.
The acquisition, recorded under the purchase method of accounting, resulted in a
total purchase price of approximately $46.5 million. Consideration consisted of
$33.0 million cash and 2,892,800 shares of TMNG Common Stock valued at
approximately $13.5 million. Share consideration was calculated in accordance
with the Asset Purchase Agreement at a fixed price of $4.66 per share.
Additionally, the Company incurred direct costs of approximately $2.3 million
related to the acquisition and recorded this amount as an increase to purchase
price.
An escrow was established as part of the transaction, consisting of 566,502
shares and $4.0 million of cash (collectively, the "Escrowed Property"). The
Escrowed Property is subject to certain claims as set forth in the Asset
Purchase Agreement and is scheduled to be distributed to the Seller pro rata in
four installments over a 24-month period. In accordance with the Escrow
Agreement, the Company made the first three pro rata installment payments to the
Seller, with the final payment scheduled to be released in the first quarter of
fiscal year 2004.
The transaction was structured as a taxable transaction for Federal income tax
purposes, and included $5.4 million in cash consideration to the Seller
representing a sharing of tax benefits and costs. The purchase price also
included $5.2 million representing the working capital purchased from CSMG.
The operating results of CSMG have been included in the Consolidated Condensed
Statements of Operations and Comprehensive Income (Loss) from the date of the
purchase.
The following table summarizes the final purchase price allocation of the
estimated fair value of the assets acquired and liabilities assumed as of the
date of acquisition. The allocation of the purchase price to identifiable
intangible assets was determined by an independent valuation.
AT MARCH 6, 2002
(AMOUNTS IN THOUSANDS)
Current assets $ 5,621
Property, plant and equipment 1,472
Employment agreements 3,200
Customer relationships 5,490
Company tradename 350
Deferred taxes (non-current) 1,501
Goodwill 36,206
-------
Total assets acquired 53,840
Current liabilities 3,428
Noncurrent liabilities 3,949
-------
Total liabilities assumed 7,377
-------
Net assets acquired $46,463
=======
Of the $5,490,000 assigned to customer relationships, $420,000 was identified as
customer backlog, with the remaining value based on the Company's expectations
of future revenue generated from the acquired customer base. As of December 28,
2002, customer backlog was fully amortized bv TMNG. The Company's estimate of
future revenue generated from the acquired customer base resulted in a customer
relationship value of $5,070,000 and is being amortized on a straight-line basis
over an estimated useful life of 60 months.
CSMG's tradename was valued at $350,000. CSMG's tradename has an estimated
useful life of 24 months and is amortized on a straight-line basis.
CSMG's employment agreements were valued at $3,200,000. The employment
agreements have a weighted average useful life of approximately 32 months and
are amortized on a straight-line basis.
As part of the acquisition of CSMG, the Company assumed liabilities of
approximately $889,000 related to capital leases.
On September 5, 2001, the Company completed its acquisition of Tri-Com, a
Maryland corporation. Tri-Com provides a full range of technology and systems
solutions to the communications industry. Consulting services offered include
providing end-to-end operating support system ("OSS"), data center, systems
solutions, data sourcing, legacy integration and middleware implementation. In
addition, Tri-Com periodically receives commissions on hardware purchases,
whereby customers utilize Tri-Com in procuring computer hardware and equipment.
The primary reason for the acquisition was for TMNG to further expand its
offering, enabling the Company's specialists to take an engagement from
strategy, to marketing and operational definition, and to OSS enablement.
The acquisition, recorded under the purchase method of accounting, included the
purchase of all outstanding shares of Tri-Com, which resulted in a total
purchase price of approximately $5.2 million for the equity and assumption of
liabilities exceeding Tri-Com's net assets. Consideration consisted of $1.8
million cash and 490,417 shares of TMNG common stock valued at $3.0 million.
TMNG incurred direct costs of approximately $180,000 related to the acquisition
and recorded this amount as an increase to purchase price. In addition to the
above-mentioned costs, TMNG recorded approximately $216,000 as an increase to
purchase price in connection with the exchange of the Company's stock options
for vested stock appreciation rights held by Tri-Com employees at the time of
acquisition. The operating results of Tri-Com have been included in the
Consolidated Condensed Statements of Operations and Comprehensive Income (Loss)
from the date of acquisition.
The following unaudited pro forma result of operations assumes that the CSMG and
Tri-Com acquisitions occurred at the beginning of the year preceding each
acquisition. The pro forma results of operations require various assumptions
including an assumption that the same amount of goodwill would have been
recognized had the transactions occurred at the beginning of the year preceding
each acquisition without regard to the then current levels of business activity
of CSMG and Tri-Com and without regard to any operating efficiencies or other
synergies. Consequently, the pro forma results of operations are not necessarily
indicative of the operating results, which would have occurred if the business
combinations had been in effect on the dates indicated or which may result in
the future.
(unaudited)
---------------------------
Fiscal Year Ended
(in thousands, except per share amounts) December 29, December 28,
2001 2002
--------- ---------
Total revenues $ 80,918 $ 36,822
Income (loss) before cumulative effect of
a change in accounting principle $ 4,484 $ (22,494)
Net income (loss) $ 4,484 $ (23,634)
Basic income (loss) before cumulative effect
of a change in accounting principle per
common share $ 0.14 $ (0.68)
Diluted income (loss) before cumulative effect
of a change in accounting principle per
common share $ 0.13 $ (0.68)
Basic net income (loss) per common share $ 0.14 $ (0.71)
Diluted net income (loss) per common share $ 0.13 $ (0.71)
Included in the pro forma information for fiscal year 2001 is approximately $1.4
million on a pre-tax basis in one-time nonrecurring severance
charges incurred by CSMG. Excluding these charges, pro forma basic and diluted
net income per share would have each been $0.16 for fiscal year 2001.
3. GOODWILL AND OTHER INTANGIBLE ASSETS
Effective for the start of fiscal year 2002, the Company adopted the provisions
of SFAS No. 142. In accordance with provisions of the Statement, goodwill has
not been amortized in fiscal years 2002 and 2003. The Statement requires that
goodwill be evaluated on an annual basis, or more frequently if necessary. The
Company determines fair value using the present value method of measurement of
future cash flows. The present value method includes the estimation of a cash
flow stream, applying a discount rate. The Company's best estimate of future
cash flows is determined using its internal budgets as the basis. The discount
rate of between 20% to 25% is commensurate with the risks involved, including
the nature of the business, the time value of money, expectations about the
amount or timing of future cash flows, and factors affecting liquidity. Upon the
adoption of SFAS No. 142, the Company recorded a goodwill impairment loss
related to the Management Consulting Segment of approximately $1.9 million and
has reflected this amount as a cumulative change in accounting principle, net of
tax benefit, in the Statement of Operations and Comprehensive Income (Loss).
Subsequent to the initial transition test, the Company performed its annual
impairment test during fiscal year 2002, and established the last day of the
first fiscal month in the fourth quarter as the annual impairment test date.
Based on the analysis of projected future cash flows and utilizing the
assistance of an outside valuation firm, the Company determined in connection
with the annual impairment test performed in fiscal year 2002 that the carrying
value of goodwill exceeded its fair market value and recorded impairment loss
related to the Management Consulting Segment of approximately $24.4 million, and
an impairment loss related to All Other Segment of approximately $0.8 million.
During the second quarter of fiscal year 2003, the Company performed an interim
test to determine whether an impairment of goodwill had occurred at the
reporting unit level. The Company performed the interim test due to
significantly lower operating results of CSMG, 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 an executive of a Company acquired by TMNG
tendered his resignation to the Company, which also had the effect of lowering
the financial projections for the entity. 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 the fair market value and recorded an impairment loss
related to the Management Consulting Segment of approximately $15.8 million. The
Company subsequently performed its annual impairment test in October 2003 and
concluded there was no additional goodwill impairment as the calculated fair
values of its reporting units was higher than their respective carrying values.
The goodwill impairment losses related to both the annual impairment test in
fiscal year 2002 and the interim impairment test in fiscal year 2003 have been
reflected as a component of Loss from Operation in the Statement of Operation
and Comprehensive Income (Loss) in each respective year.
The changes in the carrying amount of goodwill as of December 28, 2002 and
January 03, 2004 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 2002 36,216 10 36,226
Impairment Loss (26,227) (838) (27,065)
-------- --------- --------
Balance as of December 28, 2002 29,145 2,163 31,308
Impairment loss (15,780) (15,780)
-------- --------- --------
Balance as of January 03, 2004 $ 13,365 $ 2,163 $ 15,528
======== ========= ========
Goodwill amortization expense for fiscal year 2001 was $1.9 million. The
following information reconciles the net income (loss) and earnings (loss) per
share reported for fiscal years 2001, 2002 and 2003 to adjusted net income
(loss) and earnings (loss) per share exclusive of goodwill amortization and
compares the adjusted information to the current year results (amounts in
thousands, except per share data):
--------------------------------------------------------------------
FISCAL YEAR 2001 FISCAL YEAR 2002 FISCAL YEAR 2003
---------------- ---------------- ----------------
Reported income (loss) before cumulative
effect of change in accounting
principle $ 5,608 $(22,263) $(42,324)
Cumulative effect of change in accounting
principle (1,140)
-------- -------- --------
Reported net income (loss) 5,608 (23,403) (42,324)
Add back: Goodwill amortization, net of tax 1,119
-------- -------- --------
Net income (loss), as adjusted $ 6,727 $(23,403) $(42,324)
======== ======== ========
Basic income (loss) per share before
cumulative effect of change in accounting
principle $ 0.19 $ (0.68) $ (1.26)
Cumulative effect of change in accounting
principle (0.03)
-------- -------- --------
Reported net income (loss) per share 0.19 (0.71) (1.26)
Add back: Goodwill amortization, net of tax 0.04
-------- -------- --------
Basic income (loss) per share, as adjusted $ 0.23 $ (0.71) $ (1.26)
======== ======== ========
Diluted income (loss) per share before
cumulative effect of change in accounting
principle $ 0.18 $ (0.68) $ (1.26)
Cumulative effect of change in accounting
principle (0.03)
-------- -------- --------
Reported net income (loss) per share 0.18 (0.71) (1.26)
Add back: Goodwill amortization, net of tax 0.04
-------- -------- --------
Diluted income (loss) per share, as adjusted $ 0.22 $ (0.71) $ (1.26)
======== ======== ========
Included in customer relationships, employment agreements and other intangible
assets, and other current assets are the following (amounts in thousands):
December 28, 2002 January 03, 2004
------------------- ---------------------
Accumulated Accumulated
Cost Amortization Cost Amortization
---- ------------ ---- ------------
Customer relationships $ 6,790 $(1,698) $ 3,086 $(2,545)
Employment agreements 3,200 (1,042) 3,200 (2,292)
Tradename 350 (146) 350 (321)
Covenant not to compete 203 (132) 203 (203)
------- ------- ------- -------
Total $10,543 $(3,018) $ 6,839 $(5,361)
======= ======= ======= =======
During fiscal year 2003, in accordance with the provisions of SFAS No. 144 the
Company determined that the carrying value of customer relationships exceeded
its fair market value and recorded an impairment loss related to the Management
Consulting Segment and All Other Segment of approximately $3.4 million and $0.3
million, respectively. These impairment losses have been reflected as a
component of Loss from Operation in the Statement of Operations and
Comprehensive Income (Loss).
Intangible assets amortization expense for fiscal years 2001, 2002 and 2003 was
$0.1 million, $2.9 million and $2.3 million, respectively. Intangible
amortization expense is estimated to be approximately $1.0 million for fiscal
year 2004, $0.3 million in fiscal year 2005 and $0.2 million in fiscal year
2006.
4. CAPITAL STRUCTURE
On March 6, 2002, the Company completed its acquisition of CSMG and issued
2,892,800 shares of the Company's voting common stock in connection with the
purchase. The fair market value of the issued stock was approximately $13.5
million.
On September 5, 2001, the Company completed its acquisition of Tri-Com and
issued 490,417 shares of the Company's voting common stock in connection with
the purchase. The fair market value of the issued stock was approximately $3.0
million.
5. MAJOR CUSTOMERS, BUSINESS SEGMENTS AND SIGNIFICANT GROUP CONCENTRATIONS OF
CREDIT RISK
The Company has identified its segments based on the way management organizes
the Company to assess performance and make operating decisions regarding the
allocation of resources.
Based on an analysis of the criteria in SFAS No. 131 "Disclosure about Segments
of an Enterprise and Related Information," the Company has
concluded it has five operating segments, of which four are aggregated in one
reportable segment, the Management Consulting Services segment, and the
remaining segment in All Other. Management Consulting Services includes business
strategy and planning, marketing and customer relationship management, operating
system support, revenue assurance, corporate investment services, networks, and
business model transformation. All Other consists of computer hardware
commissions and rebates received in connection with the procurement of hardware
for third parties. The accounting policies for the segments are the same as
those described in the summary of significant accounting policies. Management
evaluates segment performance based upon Income (Loss) from Operations,
excluding equity related charges, goodwill and intangible asset amortization,
and goodwill and intangible asset impairment. 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
------------------- ------ ------------ --------
FISCAL YEAR 2001
Net sales to external customers $54,236 $ 596 $ 54,832
Income(loss)from operations $10,171 $ 547 $ (5,161) $ 5,557
Total assets $11,111 $ 40 $117,891 $129,042
FISCAL YEAR 2002
Net sales to external customers $33,057 $1,538 $ 34,595
Income (loss) from operations $(6,865) $ 634 $(29,126) $(35,357)
Total assets $ 9,330 $ 171 $115,958 $125,459
FISCAL YEAR 2003
Net sales to external customers $23,245 $ 231 $ 23,476
Income (loss) from operations $(8,040) $ 87 $(21,912) $(29,865)
Total assets $ 6,864 $ 74,108 $ 80,972
As discussed in Note 14 "Subsequent Event", the Company has discontinued the
operations of its All Other segment subsequent to year end.
Segment assets, regularly reviewed by management as part of its overall
assessment of the segments' performance, include both billed and unbilled trade
accounts receivable, net of allowances, and certain other assets. Assets not
assigned to segments include cash and cash equivalents, property and equipment,
goodwill and intangible assets and deferred tax assets, excluding deferred tax
assets recognized on accounts receivable reserves, which are assigned to their
respective segment.
Reconciling information between reportable segments and the Company's totals is
shown in the following table (amounts in thousands):
FISCAL FISCAL FISCAL
YEAR YEAR YEAR
2001 2002 2003
------- ------- --------
Total operating earnings (losses) for
reportable segments $10,718 $ (6,231) $ (7,953)
Equity related charges (3,165) (1,074) (85)
Goodwill and intangibles amortization (1,996) (2,887) (2,343)
Goodwill and intangible asset impairment (25,165) (19,484)
------- ------- --------
Income (loss) from operations $ 5,557 $(35,357) $(29,865)
======= ======= ========
Major customers in terms of significance to TMNG's revenues (i.e. in excess of
10% of revenues) for fiscal years 2001, 2002 and 2003, and accounts receivable
as of December 28, 2002 and January 03, 2004 were as follows (amounts in
thousands):
REVENUES ACCOUNTS RECEIVABLE
------------------------------------ ---------------------------
FISCAL FISCAL FISCAL
YEAR YEAR YEAR DECEMBER 28, January 03,
2001 2002 2003 2002 2004
-------- ------ ------ ------------ ------------
Customer A ......... $7,185 $4,392 $3,238 $2,345 $1,743
Customer B ......... $6,220
Customer C ......... $5,850 $1,238
Customer D ......... $2,692 $1,177
Revenues from the Company's ten most significant customers accounted for
approximately 61%, 67% and 67% of revenues for fiscal years 2001, 2002 and 2003,
respectively.
Substantially all of TMNG's receivables are obligations of companies in the
communications industry. The Company generally does not require collateral or
other security on its accounts receivable. The credit risk on these accounts is
controlled through credit approvals, limits and monitoring procedures. The
Company records bad debt expense based on judgment about the anticipated default
rate on receivables owed to TMNG at the end of the reporting period. That
judgment is based on the Company's uncollected account experience in prior years
and the ongoing evaluation of the credit status of TMNG's customers and the
communications industry in general. The changes in the Company's allowance for
doubtful accounts is as follows (amounts in thousands):
FISCAL FISCAL FISCAL
YEAR YEAR YEAR
2001 2002 2003
------- -------- --------
Beginning balance $ 766 $ 517 $ 471
Bad debt expense 812 1,207 575
Account write-offs (1,061) (1,253) (394)
------- -------- --------
Ending balance $ 517 $ 471 $ 652
======= ======== ========
Revenues earned in the United States and internationally based on the location
where the services are performed are as follows (amounts in thousands):
FISCAL YEAR 2001 FISCAL YEAR 2002 FISCAL YEAR 2003
------------------------- ---------------------- ----------------------
LOSS BEFORE
INCOME TAX
BENEFIT AND
CUMULATIVE
INCOME EFFECT OF A LOSS
BEFORE CHANGE IN BEFORE
INCOME ACCOUNTING INCOME
REVENUES TAXES REVENUES PRINICIPLE REVENUES TAXES
-------- -------- -------- -------- -------- --------
United States ........ $ 48,402 $ 7,034 $ 31,935 $(31,753) $ 21,146 $ (26,385)
International:
United Kingdom ..... 5,546 806
Canada ............. 295 43 11 (11) 95 (119)
Ireland ............ 141 20 496 (493) 32 (39)
Switzerland ........ 56 8
The Netherlands .... 1,990 (1,979) 964 (1,203)
Portugal .......... 451 (562)
Belize ............. 704 (879)
Other .............. 392 57 163 (162) 84 (105)
-------- -------- -------- -------- -------- -----------
Total ...... $ 54,832 $ 7,968 $ 34,595 $(34,398) $ 23,476 $ (29,292)
======== ======== ======== ======== ======== ===========
No significant long-lived assets are deployed outside the United States.
6. PROPERTY AND EQUIPMENT
DECEMBER 28, JANUARY 03,
2002 2004
------------ ------------
(000'S)
Furniture and fixtures................................. $ 896 $ 908
Software and computer equipment........................ 2,552 2,661
Leasehold improvements................................. 711 711
------ ------
4,159 4,280
Less: Accumulated depreciation and amortization........ 1,874 2,722
------ ------
$2,285 $1,558
====== ======
Depreciation and amortization expense on property and equipment was
approximately $530,000, $948,000 and $854,000 for fiscal years 2001, 2002 and
2003, respectively.
During fiscal year 2002, the Company recorded a loss of approximately $205,000
in connection with the retirement of office furniture, computer equipment and
furniture and fixtures. The Company did not receive any proceeds from the asset
retirements.
7. INCOME TAXES
For fiscal years 2001, 2002 and 2003, the income tax provision (benefit),
exclusive of the tax associated with the cumulative effect of the change in
accounting principle consists of the following (amounts in thousands):
FISCAL FISCAL FISCAL
YEAR YEAR YEAR
2001 2002 2003
-------- -------- --------
Federal
Current ............................ $ 1,267 $ (2,595) $ (992)
Deferred tax (benefit) expense ..... (12) (7,717) 12,347
-------- -------- --------
1,255 (10,312) 11,355
State
Current ............................ 486 (817)
Deferred tax (benefit) expense ..... (2) (1,103) 1,764
-------- -------- --------
484 (1,920) 1,764
Foreign
Current ............................ 496 97 (87)
Deferred tax (benefit) expense ..... 125
-------- -------- --------
621 97 (87)
-------- -------- --------
Total ................................ $ 2,360 $(12,135) $ 13,032
======== ======== ========
The Company has fully reserved its deferred tax assets with a valuation
allowance as of January 3, 2004, in accordance with the provisions of SFAS No.
109 "Accounting for Income Taxes." Realization of the deferred tax asset is
dependent on generating sufficient income in future periods. In evaluating the
ability to recover its deferred tax assets, the Company considers all positive
and negative evidence including the Company's past operating results, the
existence of cumulative losses in the most recent fiscal year and the Company's
forecast of future income. In determining future income, the Company is
responsible for assumptions utilized including the amount of state, federal and
international operating income, the reversal of temporary differences and the
implementation of feasible and prudent tax planning strategies. These
assumptions require significant judgment about the forecasts of future income
and are consistent with the plans and estimates the Company is using to manage
the underlying business.
The Company has reassessed all significant estimates and judgments made in its
financial statements, considering all information current available. The Company
determined that the underlying assumptions related to judgments made in
connection with its previous SFAS No. 109 analysis had changed. In performing
the updated analysis of the realizability of its deferred tax assets, the
Company considered continuing market uncertanties including the impact of the
loss in the fourth quarter on the remaining planning periods underlying the SFAS
No. 109 analysis. In light of this new information and after considering all
available evidence, both positive and negative, the Company concluded that an
increase to the valuation allowance for deferred tax assets was required.
Accordingly, based upon the Company's best estimate, the Company recorded a
non-cash charge in the fourth quarter of fiscal year 2003 of $18.0 million to
increase the valuation allowance.
The following is a reconciliation between the provision (benefit) for income
taxes and the amounts computed at the statutory federal income tax rate (amounts
in thousands):
FISCAL YEAR FISCAL YEAR FISCAL YEAR
2001 2002 2003
----------------- ----------------- -----------------
AMOUNT % AMOUNT % AMOUNT %
-------- ---- -------- ---- -------- ----
Computed expected federal income
tax expense .......................... $ 2,789 35.0 $(12,039) (35.0) $(10,252) (35.0)
State income tax expense, net of
federal benefit ...................... 316 4.0 (1,579) (4.6) (1,248) (4.3)
Tax-exempt investment income .......... (690) (8.7)
Goodwill impairment.................... 1,536 4.5 217 0.7
Other ................................. (55) (0.7) (53) (0.2) 316 1.1
Valuation allowance ................... 23,999 82.0
-------- ---- -------- ---- -------- ----
Total ....................... $ 2,360 29.6 $(12,135) (35.3) $ 13,032 44.5
======== ==== ======== ==== ======== ====
Items giving rise to the provision for deferred income taxes (benefit) are as
follows (amounts in thousands):
FISCAL FISCAL FISCAL
YEAR YEAR YEAR
2001 2002 2003
-------- -------- --------
Goodwill ....................................... $ (249) $ (7,988) $ (4,961)
Bad debt reserve ............................... 441 13 (97)
Stock option compensation expense .............. (133) 5 45
Change from cash to accrual tax basis accounting (274)
Intangible assets .............................. (655) (1,831)
Valuation allowance ............................ 23,999
Net operating loss carryforward ................ (3,212)
Other .......................................... 326 (195) 168
-------- -------- --------
Total ................................ $ 111 $ (8,820) $ 14,111
======== ======== ========
The significant components of deferred income tax assets and the related balance
sheet classifications, as of December 28, 2002 and January 3, 2004 are as
follows (amounts in thousands):
DECEMBER 28, JANUARY 03,
2002 2004
------------ -----------
Current deferred tax assets:
Accounts receivable ............................. $ 143 $ 240
Accrued expenses ................................ 351 296
Valuation allowance.............................. (536)
---------- ---------
Current deferred tax asset .............. $ 494 $ 0
========== =========
Non-current deferred tax assets:
Goodwill ........................................ $ 8,320 $ 13,281
Stock option compensation expense ............... 2,893 2,193
Unfavorable lease liability...................... 1,180 1,017
Net operating loss carryover .................... 732 3,944
Intangible assets................................ 709 2,540
Reserves ........................................ 419 415
Other ........................................... 19 73
Valuation allowance ............................. (23,463)
---------- ---------
Non-current deferred tax asset .......... $ 14,272 $ 0
========== =========
The net operating loss carryover as of January 3, 2004 is scheduled to expire as
follows (amounts in thousands):
Amount Year
$1,831 2016
8,030 2023
------
Total $9,861
======
On March 6, 2002, the Company acquired Cambridge Strategic Management Group,
Inc. and recorded a deferred tax asset of approximately $1,501,000 in connection
with unfavorable leases assumed in the acquisition.
8. LEASE COMMITMENTS
The Company leases office facilities, computer equipment, office furniture, and
an automobile under various operating and capital leases expiring at various
dates through May 2011.
Following is a summary of future minimum payments under capitalized leases and
operating leases that have initial or remaining noncancellable lease terms in
excess of one year at January 03, 2004 (amounts in thousands):
CAPITALIZED OPERATING
FISCAL YEAR LEASES LEASES
- --------------------------------------- ----------- ---------
2004 $ 311 $ 1,758
2005 191 1,591
2006 20 1,540
2007 1,568
2008 1,568
Later years through 2011 3,789
--------- ---------
Total minimum lease payments $ 522 $ 11,814
Less amount representing interest (29)
---------
Present value of minimum capitalized
lease payments 493
Current portion (289)
----------
Long-term capitalized lease obligations $ 204
==========
Operating lease minimum payments include the off-market portion of lease
payments recorded through purchase accounting in connection with the Company's
acquisition of CSMG. As of January 3, 2004, the unamortized balance of the
unfavorable lease was $3.0 million.
Assets recorded under capital leases are included in property and equipment as
follows (amounts in thousands):
DECEMBER 28, JANUARY 03,
2002 2004
------------ ------------
Furniture and fixtures $ 220 $ 220
Software and computer equipment 505 505
--------- ---------
725 725
Less: Accumulated depreciation (183) (395)
--------- ---------
$ 542 $ 330
========= =========
Total rental expense was approximately $553,000, $2,084,000 and $1,911,000 for
fiscal years 2001, 2002 and 2003, respectively.
9. STOCK OPTION PLAN AND STOCK BASED COMPENSATION
The Company has 7,794,000 shares of the Company's common stock authorized for
issuance under the Company's 1998 Equity Incentive Plan (the 1998 Plan). The
1998 Plan, a shareholder approved plan, provides the Company's common stock for
the granting of incentive stock options and nonqualified stock options to
employees, and nonqualified stock options and restricted shares to employees,
directors and consultants. Incentive stock options are granted at an exercise
price of not less than fair value per share of the common stock on the date of
grant as determined by the board of directors. Vesting and exercise provisions
are determined by the board of directors. As of January 03, 2004, all options
granted under the 1998 Plan were non-qualified stock options. Options granted
under the 1998 Plan generally become exercisable over a three to four year
period beginning on the date of grant. Options granted under the 1998 Plan have
a maximum term of ten years.
A summary of the status of the Company's 1998 Plan as of December 29, 2001,
December 28, 2002 and January 03, 2004, and changes during the years ending on
those dates is presented below:
EXERCISE PRICE EQUALS FAIR MARKET VALUE AT GRANT DATE:
DECEMBER 29, DECEMBER 28, JANUARY 03,
2001 2002 2004
------------------------------- ---------------------------- ------------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
Outstanding at beginning of year 1,717,434 $ 14.32 3,075,228 $ 9.95 3,143,459 $ 8.72
Granted 1,577,212 $ 5.09 592,100 $ 2.05 1,967,500 $ 2.07
Exercised (116,917) $ 1.48 (100,377) $ 1.52 (116,221) $ 1.43
Forfeited/cancelled (102,501) $ 17.88 (423,492) $ 10.09 (761,042) $ 10.17
--------- --------- ---------
Outstanding at end of year 3,075,228 $ 9.95 3,143,459 $ 8.72 4,233,696 $ 5.57
========= ========= =========
Options exercisable at year-end 841,454 $ 11.32 1,612,091 $ 9.41 1,661,916 $ 9.15
========= ========= =========
Weighted average fair value of
options granted during the year $ 4.16 $ 1.65 $ 1.60
The following table summarizes information about stock options outstanding as of
January 03, 2004:
WEIGHTED AVERAGE
NUMBER WEIGHTED REMAINING NUMBER WEIGHTED
RANGE OF OUTSTANDING AT AVERAGE CONTRACTUAL EXERCISABLE AT AVERAGE
EXERCISE PRICES JANUARY 03, 2004 EXERCISE PRICE LIFE JANUARY 03, 2004 EXERCISE PRICE
- ---------------- ----------------- -------------- ---------------- ----------------- --------------
$ 0.00 to $ 2.00 1,213,434 $ 1.45 8.17 418,427 $ 1.56
$ 2.01 to $ 6.00 2,174,612 $ 3.19 8.90 616,089 $ 4.50
$ 6.01 to $ 20.00 407,000 $10.10 7.02 257,375 $10.68
$20.01 to $ 35.00 438,650 $24.53 6.24 370,025 $24.39
--------- ------ --------- ------
TOTAL 4,233,696 $ 5.57 1,661,916 $ 9.15
========= ====== ========= ======
EXERCISE PRICE LESS THAN FAIR MARKET VALUE AT GRANT DATE:
DECEMBER 29, DECEMBER 28, JANUARY 03,
2001 2002 2004
----------------------------- ------------------------------ --------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
Outstanding at beginning of year 1,074,504 $ 2.26 897,758 $ 2.32 768,336 $ 2.38
Granted 50,000 $ 2.31
Exercised (86,734) $ 1.88 (54,088) $ 1.85 (84,667) $ 1.90
Forfeited/cancelled (90,012) $ 2.00 (75,334) $ 2.00 (103,750) $ 2.00
--------- --------- -------
Outstanding at end of year 897,758 $ 2.32 768,336 $ 2.38 629,919 $ 2.51
========= ========= =======
Options exercisable at year-end 428,625 $ 2.30 606,084 $ 2.32 579,919 $ 2.52
========= ========= =======
Weighted average fair value of
options granted during the year $ 2.69
The following table summarizes information about stock options outstanding at
January 03, 2004:
WEIGHTED AVERAGE
NUMBER WEIGHTED REMAINING NUMBER WEIGHTED
RANGE OF OUTSTANDING AT AVERAGE CONTRACTUAL EXERCISABLE AT AVERAGE
EXERCISE PRICES JANUARY 03, 2004 EXERCISE PRICE LIFE JANUARY 03, 2004 EXERCISE PRICE
--------------- ---------------- -------------- ---------------- ----------------- --------------
$ 0.00 to $ 1.75 119,167 $ 1.53 4.99 119,167 $ 1.53
$ 1.76 to $ 2.00 373,252 $ 2.00 5.59 373,252 $ 2.00
$ 2.01 to $ 20.00 137,500 $ 4.73 7.34 87,500 $ 6.11
------- ------ ------- ------
629,919 $ 2.51 579,919 $ 2.52
======= ====== ======= ======
During fiscal year 2003 the board of directors of TMNG authorized for issuance
1,500,000 shares of the Company's common stock under the 1998 Plan for key
management personnel. The shares are subject to restriction based upon a two
year vesting schedule where 30% of the shares vest on the first anniversary of
the grant date and the remaining 70% of the shares vest on the second
anniversary.
A summary of the status of the restricted shares granted under the 1998 Plan and
changes during fiscal year 2003 is presented below.
RESTRICTED STOCK:
DECEMBER 29, DECEMBER 28, JANUARY 03,
2001 2002 2004
------------------------------- ---------------------------- ------------------------------
SHARES SHARES SHARES
Outstanding at beginning of year
Granted 720,000
Forfeited/cancelled
--------- --------- ---------
Outstanding at end of year 720,000
========= ========= =========
Weighted average fair value of
Shares granted during the year $ 2.87
The Company has 3,900,000 shares of the Company's common stock authorized for
issuance under the 2000 Supplemental Stock Plan (the 2000 Plan). The plan
provides the Company's common stock for the granting of nonqualified stock
options to employees and is not subject to shareholder approval. Vesting and
exercise provisions are determined by the board of directors. Options granted
under the plan become exercisable over a period of up to four years beginning on
the date of grant and have a maximum term of ten years.
A summary of the status of the Company's 2000 Plan as of December 29, 2001,
December 28, 2002 and January 03, 2004, and changes during the years ending on
those dates is presented below:
EXERCISE PRICE EQUALS FAIR MARKET VALUE AT GRANT DATE:
DECEMBER 29, DECEMBER 28, JANUARY 03,
2001 2002 2004
---------------------------- ---------------------------- -----------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
Outstanding at beginning of year 295,000 $ 18.70 2 165,114 $ 6.39 2,212,226 $ 4.62
Granted 2,109,642 $ 5.03 1,316,750 $ 2.97 10,000 $ 1.77
Exercised (12,375) $ 4.00 (44,416) $ 1.85
Forfeited/cancelled (239,528) $ 9.54 (1,257,263) $ 5.95 (1,002,650) $ 4.53
--------- --------- ----------
Outstanding at end of year 2,165,114 $ 6.39 2,212,226 $ 4.62 1,175,160 $ 4.78
========= ========= ==========
Options exercisable at year-end 55,500 $ 19.05 458,433 $ 6.29 527,545 $ 5.62
========= ========= ==========
Weighted average fair value of
options granted during the year $ 4.11 $ 2.39 $ 1.37
The following table summarizes information about stock options outstanding at
January 03, 2004:
WEIGHTED AVERAGE
NUMBER WEIGHTED REMAINING NUMBER WEIGHTED
RANGE OF OUTSTANDING AT AVERAGE CONTRACTUAL EXERCISABLE AT AVERAGE
EXERCISE PRICES JANUARY 03, 2004 EXERCISE PRICE LIFE JANUARY 03, 2004 EXERCISE PRICE
- ---------------- ----------------- -------------- ---------------- ----------------- --------------
$ 0.00 to $ 3.50 388,875 $ 2.91 8.38 88,352 $ 3.07
$ 3.51 to $ 5.00 480,910 $ 4.02 7.27 243,858 $ 4.02
$ 5.01 to $ 7.00 251,875 $ 5.77 7.79 155,210 $ 5.72
$ 7.01 to $ 21.00 53,500 $ 20.52 6.68 40,125 $ 20.52
--------- ------ ------- ------
TOTAL 1,175,160 $ 4.78 527,545 $ 5.62
========= ====== ======= ======
EXERCISE PRICE LESS THAN FAIR MARKET VALUE AT GRANT DATE:
DECEMBER 29, DECEMBER 28, JANUARY 03,
2001 2002 2004
-------------------------- -------------------------- -------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
Outstanding at beginning of year 53,200 $ 5.50 23,537 $ 5.50
Granted 53,200 $ 5.50
Exercised
Forfeited/cancelled (29,663) $ 5.50 (15,412) $ 5.50
------ ------ -------
Outstanding at end of year 53,200 $ 5.50 23,537 $ 5.50 8,125 $ 5.50
====== ====== =======
Options exercisable at year-end 5,884 $ 5.50 8,125 $ 5.50
====== ====== =======
Weighted average fair value of
options granted during the year $ 4.61
The following table summarizes information about stock options outstanding at
January 03, 2004:
WEIGHTED AVERAGE
NUMBER WEIGHTED REMAINING NUMBER WEIGHTED
OUTSTANDING AT AVERAGE CONTRACTUAL EXERCISABLE AT AVERAGE
EXERCISE PRICE JANUARY 03, 2004 EXERCISE PRICE LIFE JANUARY 03, 2004 EXERCISE PRICE
- -------------- ----------------- -------------- ----------------- ----------------- --------------
$5.50 8,125 $ 5.50 7.71 8,125 $ 5.50
------ ------ ----- ------
8,125 $ 5.50 8,125 $ 5.50
====== ====== ===== ======
At January 03, 2004, the Company had outstanding a total of 6,046,900 options to
acquire shares with a weighted average exercise price of $5.09 and a weighted
average remaining contractual life of 7.89 years. Of these options, 2,777,500
were exercisable at January 03, 2004 with a weighted average exercise price of
$7.08.
The Company follows APB No. 25 to account for the employee stock purchase plan
and for employee and certain non-employee directors' stock options. In
connection with APB No. 25 grants made in fiscal years 2001 and 2003, the
Company recorded unearned compensation of approximately $29,000 and $58,000,
respectively, for representing the difference between the exercise price and the
fair value of the common stock on the dates such stock options were granted.
Such amounts are being amortized by charges to operations on a graded vesting
method over the corresponding vesting period of each respective option,
generally three to four years. All option grants in 2002 were issued with the
exercise price of the option equal to the market price of the Company's stock as
of the grant date, and therefore the Company did not recognize any additional
unearned compensation in 2002.
The Company also follows APB No. 25 to account for restricted stock grants made
to key management personnel. In connection with restricted stock granted during
fiscal year 2003 the Company recorded unearned compensation of approximately
$2,070,000 representing the fair value of the common stock on the date such
restricted stock grants were made. The compensation cost associated with
restricted stock is being amortized by charges to operations on a graded vesting
schedule over a period of two years from the date of grant.
The Company recognizes compensation cost over the vesting periods. These options
and restricted shares have resulted in equity related charges to operations of
approximately $1.4 million, $0.5 million and $0.1 million for fiscal years 2001,
2002 and 2003, respectively. These expenses have been allocated among various
expense categories.
During fiscal year 2000, the Company initiated an employee stock purchase plan
for all eligible employees. Under the plan, shares of the Company's common stock
may be purchased at six-month intervals at 85% of the lower of the fair market
value on the first day of the enrollment period or on the last day of each
six-month period. Employees may purchase shares through a payroll deduction
program having a value not exceeding 15% of their gross compensation during an
offering period. During fiscal years 2001, 2002 and 2003, 52,261, 75,451, and
67,238 shares were purchased under the plan, respectively. At January 03, 2004,
65,000 shares were reserved for future issuance. The employee stock purchase
plan is classified as a non-compensatory plan under APB No. 25.
The Company accounts for its stock option awards to independent subject matter
experts and other non-employees in accordance with the fair value measurement
provision of SFAS No. 123. Under SFAS No. 123, stock options are valued at grant
date using the Black-Scholes option pricing model, and this expense is
recognized ratably over the vesting period. Consequently, the expense of these
options is recognized in the current and future reporting periods based on the
fair value at the end of each period. The fair value of each option grant during
fiscal years 2001, 2002 and 2003 was estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions:
FISCAL YEAR 2001 FISCAL YEAR 2002 FISCAL YEAR 2003
---------------- ----------------- ---------------------
Expected volatility factor..... 114% 111% 104%
Risk-free interest rate........ 1.98% - 4.22% 1.34% - 5.00% 1.037% - 3.435%
Expected life of options....... 5 years 5 years 5 years
Expected life of stock issued
under employee stock purchase
plan.......................... 0.5 - 2.0 years 0.5 - 2.0 years 0.5 years - 2.0 years
Expected dividend rate......... 0% 0% 0%
10. LOANS TO OFFICERS
During the third quarter of fiscal year 2001, three executive officers of the
Company received stock options at fair market value in lieu of receiving their
cash base compensation, which subsequently resumed in the first quarter of
fiscal year 2002. To assist in meeting the cash flow needs of the officers who
reduced their compensation, the Company provided lines of credit, collateralized
by Company common stock held by such officers. In June 2002, one of the officers
retired from the Company, and his line of credit was cancelled. 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 January 03,
2004, 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 during 2003. Aggregate
borrowings against the lines of credit at December 28, 2002 and January 03, 2004
totaled $300,000 for each period and are due in 2011. These amounts are included
in other assets in the non-current assets section of the balance sheet. 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. LETTER OF CREDIT
In March 2002, the Company entered into a $1.0 million standby letter of credit
("LOC") facility with a financial institution in connection with the CSMG
acquisition. The LOC was required as part of the assignment of the leased office
space from CSMG to the Company. The Company collateralized the LOC with a $1.0
million cash deposit to the above financial institution. The LOC provides for
reductions dates of the amount deposited with the financial institution during
the LOC term as follows (amounts in thousands):
Reduction Date Amount
----------------- -------
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 January 3, 2004 and December 28,
2002. An obligation has not been recorded in connection with the LOC on the
Company's consolidated condensed balance sheet as of January 3, 2004 and
December 28, 2002.
12. RELATED PARTY TRANSACTIONS
During fiscal year 2001 a member of the TMNG board of directors was also a
director of a customer for which TMNG did business, and the Company also
performed services for one customer in which one member of the TMNG board of
directors owns an equity interest. Revenues earned from these customers during
fiscal year 2001 were approximately $2.3 million. During fiscal year 2002, one
member of the TMNG board of directors was also director of a customer with which
TMNG did business. Revenues earned from the customer during 2002 totaled
approximately $308,000. No receivables were outstanding from the above customers
as of December 28, 2002 and January 3, 2004. Such relationships did not exist
with the Company during fiscal year 2003.
During fiscal years 2001 and 2002, TMNG made payments of approximately $70,000
and $190,000 to two legal firms of which two members of the TMNG board of
directors own partial equity interest. Such payments were for legal services
rendered in connection with the Company's equity offerings and for other matters
arising in the normal course of business. The costs associated with the equity
offerings were classified as a component of additional paid-in capital, and the
costs associated with business matters arising in the normal course of business
were classified as selling, general and administrative in the consolidated
statements of operations and comprehensive income. The Company did not make such
payments in fiscal year 2003.
13. CONTINGENCIES
In June 1998, the bankruptcy trustee of a former client, Communications Network
Corporation, sued TMNG for a total of $320,000 in the U.S. Bankruptcy Court in
New York seeking recovery of $160,000 alleging an improper payment of consulting
fees paid by the former client during the period from July 1, 1996, when an
involuntary bankruptcy proceeding was initiated against the former client,
through August 6, 1996, when the former client agreed to an order for relief in
the bankruptcy proceeding, and $160,000 in consulting fees paid by the former
client after August 6, 1996.
The bankruptcy trustee also has 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 the Company's 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 January
03, 2004 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 $854,000, 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 such actions, claims, or the matters
described above may have an impact on the financial results for the period in
which it is resolved, the Company believes that the ultimate disposition of
these matters will not have a material adverse effect upon its consolidated
results of operations, cash flows or financial position.
14. SUBSEQUENT EVENT
On March 4, 2004, management and the Board of Directors elected to shut down the
Company's hardware business. The Company concluded that this segment of the
business does not align well with the strategic focus of the Company. Charges
related to the shutdown of the hardware business are expected to range between
$2.2 million and $2.5 million and relate primarily to goodwill impairment and
severance charges. These charges will be reported as a discontinued operation
and prior periods will be restated and recorded in the Company's Statement of
Operations for the first quarter of fiscal 2004. For business segment reporting
purposes (see Footnote 5), the hardware business was classified as "All Other."
15. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
In management's opinion, the interim financial data below reflect all
adjustments necessary to fairly state the results of the interim periods
presented. Adjustments are of a normal recurring nature necessary for a fair
presentation of the information for the periods presented. Results of any one or
more quarters are not necessarily indicative of annual results or continuing
trends.
(AMOUNTS IN THOUSANDS)
2003 QUARTERS ENDED
--------------------------------------------------------
March 29, June 28, September 27, January 03,
-------- -------- ------------- ------------
Revenues ................................... $ 7,406 $ 5,020 $ 4,691 $ 6,359
Cost of Services:
Direct cost of services................... 3,682 2,724 2,506 3,023
Equity related charges.................... (20) (84) (9) 56
-------- -------- -------- --------
Total cost of services............ 3,662 2,640 2,497 3,079
-------- -------- -------- --------
Gross Profit ............................... 3,744 2,380 2,194 3,280
Operating Expenses:
Selling, general and administrative....... 4,880 5,073 4,255 4,432
Depreciation and amortization............. 945 869 711 672
Equity related charges.................... 11 (8) 7 132
Goodwill impairment 18,942 542
-------- -------- -------- --------
Total operating expenses.......... 5,836 24,876 4,973 5,778
-------- -------- -------- --------
Loss From Operations........................ (2,092) (22,496) (2,779) (2,498)
Other Income:
Interest income........................... 177 161 136 150
Other, net................................ (17) (15) (10) (9)
-------- -------- -------- --------
Total other income................ 160 146 126 141
-------- -------- -------- --------
Loss Before Income Tax Benefit (1,932) (22,350) (2,653) (2,357)
Income tax (provision) benefit 701 3,613 (17,346)
-------- -------- -------- --------
Net Loss (1,231) (18,737) (2,653) (19,703)
Foreign currency translation adjustment... (14) 23 12 42
-------- -------- -------- --------
Comprehensive Loss ................ $ (1,245) $ (18,714) $ (2,641) $ (19,661)
======== ======== ======== ========
Net Loss Per Common Share
Basic..................................... $ (0.04) $ (0.56) $ (0.08) $ (0.58)
======== ======== ======== ========
Diluted................................... $ (0.04) $ (0.56) $ (0.08) $ (0.58)
======== ======== ======== ========
Shares Used in Calculation of Net Loss Per
Common Share
Basic .................................... 33,347 33,372 33,458 33,972
======== ======== ======== ========
Diluted .................................. 33,347 33,372 33,458 33,972
======== ======== ======== ========
For the fourth quarter ended January 3, 2004, the Company's financial results
include fourteen weeks compared to the thirteen weeks reported for the fourth
quarter ended December 28, 2002. The operating results for fiscal year 2003
report fifty-three weeks of activity compared to the fifty-two weeks of activity
reported in fiscal year 2002.
See Footnote 7 "Income Tax" for discussion of fourth quarter deferred tax
charge.
(AMOUNTS IN THOUSANDS)
2002 QUARTERS ENDED
--------------------------------------------------------
March 30, June 29, September 28, December 28,
-------- -------- ------------- ------------
Revenues ................................... $ 7,268 $ 9,927 $ 8,756 $ 8,644
Cost of Services:
Direct cost of services .................. 3,674 4,264 4,372 4,545
Equity related charges ................... 495 177 110 (61)
-------- -------- -------- --------
Total cost of services ........... 4,169 4,441 4,482 4,484
-------- -------- -------- --------
Gross Profit ............................... 3,099 5,486 4,274 4,160
Operating Expenses:
Selling, general and administrative ...... 5,510 7,507 4,737 5,269
Depreciation and amortization ............ 581 989 739 1,526
Equity related charges ................... 163 117 32 41
Goodwill Impairment ...................... 25,165
-------- -------- -------- --------
Total operating expenses ......... 6,254 8,613 5,508 32,001
-------- -------- -------- --------
Loss From Operations ..................... (3,155) (3,127) (1,234) (27,841)
Other Income:
Interest income .......................... 310 212 243 231
Other, net ............................... (11) (4) (8) (14)
-------- -------- -------- --------
Total other income ............... 299 208 235 217
-------- -------- -------- --------
Loss Before Income Tax Benefit
And Cumulative Effect of a change
in Accounting Principle ................... (2,856) (2,919) (999) (27,624)
Income Tax Benefit ......................... 1,191 1,097 351 9,496
-------- -------- -------- --------
Loss Before Cumulative Effect of a
Change in Accounting Principle ............ (1,665) (1,822) (648) (18,128)
Cumulative Effect of Change in Accounting
Principle, Net of Tax Benefit of $760 ...... (1,140)
-------- -------- -------- --------
Net Loss ................................. (2,805) (1,822) (648) (18,128)
Other Comprehensive Income (Loss)
Foreign currency translation adjustment .. (33) 15 108 6
-------- -------- -------- --------
Comprehensive Loss ....................... $ (2,838) $ (1,807) $ (540) $(18,122)
======== ======== ======== ========
Loss Before Cumulative Effect of
A Change in Accounting Principle Per
Common Share
Basic .................................... $ (0.05) $ (0.05) $ (0.02) $ (0.54)
======== ======== ======== ========
Diluted .................................. $ (0.05) $ (0.05) $ (0.02) $ (0.54)
======== ======== ======== ========
Cumulative Effect of a Change in Accounting
Principle Per Common Share
Basic .................................... $ (0.04)
========
Diluted .................................. $ (0.04)
========
Net Loss Per Common Share
Basic .................................... $ (0.09) $ (0.05) $ (0.02) $ (0.54)
======== ======== ======== ========
Diluted .................................. $ (0.09) $ (0.05) $ (0.02) $ (0.54)
======== ======== ======== ========
Shares Used in Calculation of Net Loss Per
Common Share
Basic .................................... 31,032 33,259 33,297 33,329
======== ======== ======== ========
Diluted .................................. 31,032 33,259 33,297 33,329
======== ======== ======== ========
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
A review and evaluation was performed by the Company's management, including the
Company's Chief Executive Officer (the "CEO") and Chief Financial Officer (the
"CFO"), of the effectiveness of the design and operation of the Company's
disclosure controls and procedures as of the end of the period covered by this
annual report. Based on that review and evaluation, the CEO and CFO have
concluded that the Company's current disclosure controls and procedures, as
designed and implemented, were effective. There have been no significant changes
in the Company's internal controls or in other factors that could significantly
affect the Company's internal controls subsequent to the date of their
evaluation. There were no significant material weaknesses identified in the
course of such review and evaluation and, therefore, no corrective measures were
taken by the Company.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company's definitive Proxy Statement for its Annual Meeting of Shareholders
to be held in June 2004 (the "Proxy Statement") contains, under the captions
"Election of Directors," "Officers" and "Section 16(a) Beneficial Ownership
Reporting Compliance" the information required by Item 10 of this Form 10-K,
which information is incorporated herein by this reference.
ITEM 11. EXECUTIVE COMPENSATION
The Proxy Statement contains under the captions "Election of Directors,"
"Executive Compensation," "Compensation Committee Report" and "Company
Performance" the information required by Item 11 of this Form 10-K, which
information is incorporated herein by this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The Proxy Statement contains under the caption "Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder Matters" and "Equity
Compensation Plan Information" the information required by Item 12 of this Form
10-K, which information is incorporated herein by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Proxy Statement contains under the caption "Certain Relationships and
Transactions with Related Persons" the information required by Item 13 of this
Form 10-K, which information is incorporated herein by this reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The Proxy Statement contains under the caption "Ratification of Appointment of
Independent Auditors" the information required by Item 14 of this Form 10-K
which information is incorporated herein by this reference.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual Report on Form
10-K:
(1) The response to this portion of Item 15 is set forth in Item 8 of Part II
hereof.
(2) Schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
(3) Exhibits
See accompanying Index to Exhibits. The Company will furnish to any stockholder,
upon written request, any exhibit listed in the accompanying Index to Exhibits
upon payment by such stockholder of the Company's reasonable expenses in
furnishing any such exhibit.
(b) Reports on Form 8-K
The Company filed a Form 8-K on February 13, 2004 with the Securities and
Exchange Commission in connection with its earnings release dated February 12,
2004.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report on Form 10-K to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Overland Park, State of Kansas, on the 31st day of March 2004.
THE MANAGEMENT NETWORK GROUP, INC.
BY: /S/ RICHARD P. NESPOLA
------------------------------------
RICHARD P. NESPOLA
CHAIRMAN OF THE BOARD,
PRESIDENT AND CHIEF
EXECUTIVE OFFICER
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Richard P. Nespola as his
attorney-in-fact, each with full power of substitution, for him or her in any
and all capacities, to sign any and all amendments to this Report on Form 10-K,
and to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming our signatures as they may be signed by our said attorney to any and
all amendments to said Report.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
on Form 10-K has been signed by the following persons in the capacities and on
the dates indicated:
SIGNATURE TITLE DATE
--------- ----- ----
/s/ RICHARD P. NESPOLA Chairman of the Board, March 31, 2004
- ------------------------------- President and Chief
Richard P. Nespola Executive Officer
(Principal executive
officer)
/s/ DONALD E. KLUMB Chief Financial Officer and March 31, 2004
- ------------------------------- Treasurer (Principal
Donald E. Klumb financial officer and
principal accounting
officer)
/s/ MICKY K. WOO Director March 31, 2004
- -------------------------------
Micky K. Woo
/s/ GRANT G. BEHRMAN Director March 31, 2004
- -------------------------------
Grant G. Behrman
/s/ WILLIAM M. MATTHES Director March 31, 2004
- -------------------------------
William M. Matthes
/s/ Robert J. Currey Director March 31, 2004
- -------------------------------
Robert J. Currey
/s/ ANDREW LIPMAN Director March 31, 2004
- -------------------------------
Andrew Lipman
/s/ ROY A. WILKENS Director March 31, 2004
- -------------------------------
Roy A. Wilkens
/s/ FRANK SISKOWSKI Director March 31, 2004
- -------------------------------
Frank Siskowski
INDEX TO EXHIBITS
The following is a list of exhibits filed as part of this report.
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
3.1* Certificate of Incorporation of the registrant
4.1* Specimen Common Stock Certificate
4.2* Warrant dated October 29, 1999 issued to Williams
Communications Group
10.1* Registration Rights Agreement dated January 7, 1998 among
the registrant and certain investors
10.2* Form of Indemnification Agreement between the registrant and
each of its Directors and Officers
10.3* 1998 Equity Incentive Plan and form of agreements thereunder
10.4* 1999 Employee Stock Purchase Plan and form of agreements
thereunder
10.5* Consulting Services Agreement between the registrant and
Williams Communications Group, Inc. dated November 5, 1997
10.6* Credit Agreement, including revolving credit notes and term notes,
dated February 12, 1998 among the registrant and certain guarantors,
lenders and agents
10.7* Lease between Lighton Plaza L.L.C. and the registrant dated April 23,
1998
10.8* Noncompetition Agreement between the registrant and certain parties
dated February 12, 1998.
10.9* Employment Agreement between the registrant and Richard Nespola dated
February 12, 1998.
10.10* Employment Agreement between the registrant and Micky Woo dated
February 12, 1998.
10.11* Employment Agreement between the registrant and Ralph Peck dated
February 12, 1998.
10.12* Employment Agreement between the registrant and Donald Klumb dated
September 9, 1999
10.13* Amended Lease Agreement between Lighton Plaza L.L.C. and the
registrant dated December 21, 2000
10.14* Lease between The American Occupational Therapy Association, Inc. and
The Weathersby Group, Inc. dated January 18, 1999
10.15* Amended Lease Agreement between The American Occupational Therapy
Association, Inc. and TWG Marketing, Inc. dated December 5, 2000
10.16* 2000 Supplemental Stock Plan and form of agreements thereunder
10.17* Lease between HANSON PALMER II ASSOCIATES LIMITED PARTNERSHIP and
Tri-Com Computer Services, Inc. dated January 20, 1998
10.18* Amended Lease Agreement between Hanson Palmer II Associated Limited
Partnership and Tri-Com Computer Services, Inc. dated April 15, 1999
10.19 Employment Agreement between the registrant and Richard Nespola dated
January 5, 2004
10.20 Employment Agreement between the registrant and Donald Klumb dated
December 19, 2003
21.1 List of subsidiaries of TMNG, Inc.
23.1 Consent of Deloitte & Touche LLP
24.1 Power of attorney (see page 53)
31.1 Certifications of Chief Executive Officer pursuant to Section 302 of
the Sarbanes - Oxley Act
31.2 Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes - Oxley Act
32.1 Certifications furnished pursuant to Section 906 of the Sarbanes
- Oxley Act
* Previously filed