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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 1, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 000-27617
THE MANAGEMENT NETWORK GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 48-1129619
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION 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 July 3, 2004 was approximately $42.8 million. As of April 1,
2005 the Registrant had 34,862,289 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
our definitive 2005 proxy statement which will be filed with the Securities and
Exchange Commission within 120 days of the end of our fiscal year.
THE MANAGEMENT NETWORK GROUP, INC.
FORM 10-K
TABLE OF CONTENTS
PAGE
----
PART I
Item 1. Business.................................................... 3
Item 2. Property.................................................... 15
Item 3. Legal Proceedings........................................... 15
Item 4. Submission of Matters to a Vote of Security Holders......... 16
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 16
Item 6. Selected Consolidated Financial Data........................ 18
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 20
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 27
Item 8. Consolidated Financial Statements........................... 28
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.................................... 54
Item 9A. Controls and Procedures .................................... 54
Item 9B. Other Information .......................................... 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.............. 54
Item 14. Principal Accountant Fees and Services ..................... 54
PART IV
Item 15. Exhibits and Financial Statement Schedules ................. 54
SIGNATURES............................................................ 55
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. Our 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 ACTS REPORTS
Our internet website address is www.tmng.com. We make available free of charge
through our website all of our filings with the Securities and Exchange
Commission ("SEC"), including our annual reports on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed
or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as
reasonably practicable after we electronically file such material with, or
furnish it to the SEC. The charters of our audit, nominating and compensation
committees and our Code of Business Conduct are also available on our website
and in print to any shareholder who requests them.
ITEM 1. BUSINESS
When used in this report, the terms "TMNG," "we," "us," "our" or the "Company"
refer to The Management Network Group, Inc. and its subsidiaries.
GENERAL
TMNG, a Delaware corporation, founded in 1990, is a leader in consulting to the
communications industry. We have 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,
we have provided consulting services to clients in almost all other major
international markets. We believe we are unique in our 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). We have consulting experience with almost all
major aspects of managing a global communications company. In addition, we
provide marketing consulting services to clients outside of the communications
industry, primarily in the Eastern region of the United States (Mid-Atlantic).
From our inception to mid-fiscal year 2000, we have been 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 we identified early leading indicators of the
market downturn in the communications industry (See "Market Overview" in Item 1
for an additional discussion of market conditions). We broadened our focus and
emphasis to include not only management and operational consulting but also
strategy and marketing to enable us to deliver more comprehensive solutions to
our communications service provider clients. To accomplish this transformation,
we looked to increase the breadth of our 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 or expanded the offerings we historically provided. Key
acquisitions completed by us during the last five years included Cambridge
Strategic Management Group, Inc. (now "TMNG Strategy"), The Weathersby Group,
Inc. (now "TMNG Marketing") and Tri-Com Computer Services, Inc. ("TMNG
Technologies"). These acquired businesses focused primarily on strategy, new
product launch initiatives, customer acquisition and retention, and technology
consulting to the global communications industry. We believe these acquisitions
have expanded key client relationships, have uniquely positioned us in the
market to effectively serve today's needs of large global communication service
providers, and provided an expansion of our key direct distribution channel
elements. We have integrated these practices and are now bringing a fully
integrated suite of offerings to the communications marketplace.
As we primarily focus on communications service providers, during the course of
numerous engagements we have learned what the service providers' key business
objectives consist of, both near and long term. In addition, we have built
product offerings targeting software and technology companies, investment
banking and private equity firms, which invest in and serve the communications
industry. Our services to software and technology firms have included strategy
definition, product 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
equity community have included prospect validation, due diligence, and
operational management outsourcing.
Recently, with the market dynamics changing (see "Market Overview" in Item 1) we
have been focusing on the opportunity to expand our offerings through indirect
channel partners. We believe partnering will better enable us to serve large
clients in what has become a shrinking and consolidating marketplace. We provide
our partners with contacts, strategic business analysis, business process
outsourcing (BPO) solutions, and depth of knowledge and experience in serving
the industry. The partnerships bring us technology solutions and systems
integration capabilities which enable our partners and us to provide more
comprehensive client offerings and solutions to effectively compete with other
global consultancies.
Our key strategic initiatives focus on supporting wireless and Internet Protocol
("IP") initiatives in the market place. We have been evolving our service
offerings to support the growth and transformation of communications over the
next generation of technologies, including IP voice, data and content offerings
over both wireline and wireless networks. We have been providing communications
consulting expertise to new and growing organizations. In 2003, we 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). In 2004, we have continued to expand our presence in wireless and in
conjunction with Bear, Stearns & Co., completed an in-depth review of new
broadband wireless technologies from a business and economic perspective. We are
investing in intellectual capital to assist major communications service
providers in dealing with the voice over internet protocol ("VoIP") and IP
managed offerings which we believe are transforming the industry. We have also
established a Mobile Virtual Network Enablement ("MVNE") practice to offer
end-to-end consulting services to the fast growing Mobile Virtual Network
Operator ("MVNO") market. Finally, we have recruited executives with expertise
and relationships serving the rural local exchange carrier (RLEC) market and are
building presence and market share in that industry segment of communications
service providers.
We intend to continue capitalizing on our industry expertise by refreshing
existing proprietary toolsets and building new toolsets to enable us to provide
strategic, management, marketing, operational, and technology support to our
clients. Our toolsets are consulting guidelines, processes and benchmarks
created and updated by our 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. Our services are provided by teams comprised of
senior professionals recruited from prestigious university campuses complemented
by teams of consultants from the communications industry averaging 15 years of
experience.
We maintain 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, we are able to
capitalize on extensive experience across complex multi-technology
communications systems environments to provide the most sound and practical
recommendations to our clients.
MARKET OVERVIEW
The demand for consulting services increased throughout the 1990's. 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 new market
entrants; a massive influx of debt and equity capital to the sector to fund new
and existing carrier entrants; 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.
In parallel to the wireline sector, significant investment was made in wireless
communications. There was tremendous growth occurring as 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. Increased
customer penetration of wireless services occurred in both consumer 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 adverse 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 one-half million individuals in the United States alone. Because
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.
These macroeconomic forces destabilized the communications industry and
depressed the market for outside consulting services, including ours.
Communications companies continued to reduce 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 resulted in a continued
substantial decline in our revenue and profits during fiscal years 2001, 2002
and 2003, although the trend appeared to level off during fiscal year 2004 (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 we believe is
to be revolutionary change. After approximately four years of
retrenching and restructuring, the complements of regulatory decisions and new
technologies have begun to stimulate new investment in the sector. What we
believe the future of the global communications industry will look like is
beginning to take shape. A convergence of voice, data and video or content based
communications is occurring. This is bringing both new competitors to the market
and resulting in the consolidation of existing industry competitors. In
addition, cable communications companies that historically offered video
services are now positioning themselves as providers of voice and other data and
content services.
As we enter fiscal year 2005, we believe 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: bundling of
services (i.e., wireline, wireless, high-speed data and video) to compete with
cable companies; continued aggressive reduction of costs; reassessment of core
competencies in order to leverage strengths and exit weak areas; and migration
to new technologies--next generation wireless and VoIP. It is also expected that
further market consolidation will occur over the next few years.
It is our belief that the regulatory environment will also continue to play a
key factor in the strategy and operations of communications providers as these
decisions impact intercarrier costs and pricing. In 2004, the Federal
Communications Commission ("FCC") and State Public Utility Commissions ("PUC's")
continued to consider the regulatory treatment of IP-enabled services, like
VoIP. While it is difficult to predict future outcomes, it seems apparent from
the various VoIP orders released by the FCC that they are moving towards a
national regulatory regime with limited regulation, rather than state-by-state
regulation. These recent regulatory decisions surrounding intercarrier pricing
of certain network elements played a role in the consolidations of
inter-exchange carrier ("IXC") players like AT&T and MCI as their long-term
ability to compete was impaired. In addition to these developments, several key
legislators wish to "re-open" the Telecommunications Act of 1996 during the 2005
legislative session. The FCC's continued promotion of flexibility in use of
licensed spectrum and easing of spectrum caps has led to consolidation of
wireless carriers and the development of advanced wireless technologies which
now make wireless a viable "substitute" for wireline rather than just a
complement to the bundle.
The convergence of content providers and wireless distribution channels (i.e.,
carriers) has opened new segments of the market through the MVNO model. MVNOs
are mobile operators that do not own their own wireless spectrum or network
infrastructure. Instead, MVNOs contract with existing wireless carriers to
purchase wholesale access to wireless networks. We believe the MVNO model will
move the market for wireless services from a voice-focused market to one focused
on value-added non-voice services extending into media and entertainment. As
MVNOs, companies traditionally known for content, aim to transform the way
consumers view their wireless services. We expect this transformation of the
wireless market to occur rapidly and present numerous challenges to the
traditional carriers and MVNOs alike.
We expect these regulatory, competitive and technological developments will
increase demand for consulting services, with increased focus on wireless and IP
based offerings, outsourced BPO service opportunities, and the need for existing
management consultancies to provide solutions to these new communications
industry challenges. As discussed in Item 1, "Business - General," we have
invested significantly to enable us to provide such services.
It has been our experience that because the expertise needed by communications
companies to address the market's needs is typically outside their core
competencies, they must ultimately either recruit and employ experts or retain
outside specialists. We believe due to the range of expertise required and the
time associated with hiring and training new personnel, bringing expertise
in-house is often not a viable option. Although demand for consulting services
has been down in recent years, we believe 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, we believe
communications companies need experts that fully understand the communications
industry and can provide timely and unbiased advice and recommendations. We
continue to position ourselves to respond to that anticipated need.
BUSINESS STRATEGY
Our objective is to establish ourselves 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 we
have adopted to pursue this objective.
- - Develop and evolve existing offerings/solutions and thought leadership
We plan to continue expanding our end-to-end solutions offerings, both by
organic expansion and/or through acquisitions. Organic expansion involves
assisting clients in further defining competitive position, launching new
products and services and generating revenues through integrated offerings
jointly developed by us and our acquired companies. Organic expansion will also
focus on offerings geared towards increasing clients' efficiencies. We have
expanded our 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. Additionally, in March 2002, we acquired TMNG Strategy. TMNG Strategy
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.
- - Continue to build the TMNG brand
We plan to continue building and communicating the TMNG brand, further
positioning ourselves as the consultancy of choice for the global
communications industry. Special focus will be placed on brand and eminence
building in the wireless consulting and VoIP arenas. Direct marketing efforts
and other marketing initiatives are underway to continue building awareness of
TMNG and communicating our key strengths, including our unique high level of
experienced consultants, our singular focus on the global telecommunications
industry, our integrated end-to-end solution and our commitment to bringing
clients a positive return on their investment.
- - Focused and effective retention and recruitment
We plan to further enhance our business model to accommodate the anticipated
types of consulting services resulting from revolutionary change occurring
within the communications sector. One key element of our business model is the
attraction and retention of high quality, experienced consultants. Our two
primary challenges in the recruitment of new consulting personnel are the
ability to recruit talented personnel with the skill sets necessary to
capitalize on an industry undergoing revolutionary change and the ability to
execute such recruitment with an appropriate compensation arrangement.
We reinvigorate existing skill sets of our consultants with proprietary toolsets
that provide methodologies they use to augment their experience and help analyze
and solve clients' problems. We utilize 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, we continue to manage our 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
We plan to maintain our presence globally to deliver services and solution
capabilities to client companies located around the world. We believe the
competitive market expertise of our U.S. consultants can be a key factor for
foreign companies facing the business issues associated with deregulation and
competition, especially in Western Europe.
- - Building intellectual capital and a comprehensive suite of wireless and VoIP
consultative offerings
We have completed engagements with wireless clients in the U.S., Europe, Latin
America, Asia and the Middle East. Our services have included business and
strategic planning, product development, customer acquisition and retention,
business and operations process design and reengineering, revenue and cost
management and network planning. In 2003 we continued to build a suite of
offerings to support WNP for the wireless industry. During 2004, we co-authored
a study with Bear, Stearns & Co. analyzing the impact of new broadband wireless
technologies on public and private companies in the telecommunications sector.
In 2005, our top two strategic focuses will be continued development of service
offerings supporting wireless communication service providers and the
transformation to IP technologies.
- - Leveraging knowledge and skills through partner channels
We are also focusing on managed service offerings and partnerships with select
global technology, outsourcing and system integration firms as a complement to
our consultancy offerings. We believe this will be a fast growing market segment
which should allow us to leverage our intellectual capital while teaming with
technology partners to bring BPO and managed services offerings to select
clients. We believe we are uniquely positioned to capitalize on these
anticipated market opportunities, particularly because of our vendor neutrality
and proprietary productivity toolsets.
SERVICES
We provide a full range of strategic, marketing, operations and technology
consulting services to the communications industry. Services provided include:
- - Strategy and Business Case Development
We provide comprehensive strategic analysis to service providers, equipment
manufacturers and financial investors in the communications industry. Our
approach combines rigorous qualitative and quantitative analyses with a detailed
understanding of industry trends, technologies, and developments. We provide
clients with specific solutions to their key strategic issues relating to their
existing business as well as new product and service opportunities. Our 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
We offer global communications service providers the benefit of our hands-on
experience developing and launching new products and services for some of
today's industry leaders. Our product development approach includes market
assessments, product/service definition, business requirements definition,
project management, testing and release. We also help communications 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
We have developed and implemented acquisition and retention strategies for
clients in the communications industry. We have consultants skilled in the areas
of target market segmentation, campaign management and sales-process management.
Our strategies take into account the needs and preferences of the target market
and include a mix of marketing communications, partner programs, e-marketing,
direct sales, telemarketing, direct response and loyalty and retention programs.
- - Revenue and Cost Management
We are dedicated to helping clients uncover and recover missed billing
opportunities at every stage along the revenue life cycle and reduce the costs
associated with managing business functions. Our approach to revenue and cost
management centers around operational assessment, process improvement,
organizational restructuring, and continuous improvement. Our consultants
utilize their industry expertise and our proprietary TMNG QBC(R) (Quality
Business Controls) toolset to deliver quantifiable benefits to clients.
- - Business and Operations Process Redesign and Reengineering
We provide clients with efficient, integrated business and operational
processes, supporting technology systems and web-centric interfaces across all
OSS/BSS applications. We take clients from the point of customer acquisition to
provisioning all the way through to billing, accounts receivable management and
cash collections to profits in the bank.
- - Corporate Investment Services
We provide a wide range of services to investment banking and 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 through our Operational
Performance Appraisal (OPA(TM)) tool. 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 OPA(TM) 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 utilizing a staff augmentation model. As the telecom industry
starts to rebound, we believe service providers may, at least initially, be
hesitant to make permanent hiring decisions and will seek temporary expert
staff. We believe TMNG Resources is uniquely positioned to fill the recruiting
needs of our clients.
COMPETITION
The market for communications consulting services is highly fragmented and
changing rapidly. We face 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 us. With the communications industry experiencing
significant economic challenge, contraction and consolidation, we believe our
principal competitive factor is our continual focus on the communications
industry and the ability to develop and deliver solutions that enhance client
revenue and asset utilization and provide return on investment. We also believe
the complementary experience and expertise of our professionals represents a
competitive advantage. In a down economic environment our biggest competitor is
the customer's internal resources. As a result, the most significant competitive
advantage becomes long-lived relationships with key client executives that have
developed over time from consistency in responsiveness to their needs, quality
and reliability of consultants and deliverables, and an appropriate price/value
formula.
We have faced, and expect to continue to face, additional competition from new
entrants into the communications consulting markets. We have 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.
EMPLOYEES
Our ability to recruit and retain experienced, highly qualified and highly
motivated personnel has contributed greatly to our performance and will be
critical in the future. We offer a flexible recruiting model that enhances our
ability to attract consultants and to effectively manage utilization. Our
consultants may work as full time employees or as contingent employees.
Contingent employees receive company-paid medical insurance, vacation and other
employee benefits, but instead of receiving a regular salary, they are only paid
for time spent working on consulting projects for customers or working on
internal projects. Generally, we will offer contingent employment to personnel
who are frequently utilized on consulting projects, and have a skill
set/offering that is in high demand. We also have relationships with many
independent contracting firms to assist in delivery of consulting solutions. Our
current base of independent firms has specialized expertise in discrete areas of
communications, and we typically deploy these firms only when their unique
expertise/offering is required.
During fiscal year 2004, we utilized approximately 259 consultants, representing
a combination of employee consultants and independent contracting firms. Of
these, 70 were employee consultants and approximately 189 were working on
engagements for us primarily through independent subcontracting firms. In
addition to the consultants, we have an administrative staff of approximately 27
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 Statement of Financial Accounting
Standards ("SFAS") No. 131 "Disclosure about Segments of an Enterprise and
Related Information" we historically concluded we had five operating segments,
of which four were aggregated in one reportable segment, the Management
Consulting Services segment, and the remaining segment in All Other. Services
provided by the Management Consulting Services segment include business strategy
and planning, marketing and customer relationship management, billing system
support, operating system support, revenue assurance, corporate investment
services, and network management. All Other consisted of computer hardware
commissions and rebates received in connection with the procurement of hardware
for third parties. Effective with the discontinuation of the hardware business
in March 2004, we now have one reportable segment, and therefore summarized
financial information concerning the Management Consulting Services segment is
not included in this report. For summarized financial information regarding the
All Other segment, see Note 4 "Discontinued Operations." There are no
inter-segment sales.
MAJOR CUSTOMERS
We have provided services to approximately 1,000 domestic and international
customers, primarily communication service providers and large technology and
applications firms serving the communications industry and investment banking
and private equity firms that invest in the sector. We depend on a small number
of key customers for a significant portion of revenues. Revenues from two global
carriers each accounted for more than 10% of our revenues, and in the aggregate
accounted for 26.2% of revenues in fiscal year 2004 and 25.3% of revenues in
fiscal year 2003. Also during fiscal year 2004, our top ten customers accounted
for approximately 67.0% of total revenue. We generally provide discounted
pricing for large projects on fixed commitments with long-term customers.
Because our clients typically engage services on a project basis, their needs
for services vary substantially from period to period. We continue to
concentrate on large wireline and wireless global communications companies
headquartered principally in North America and Western Europe and seek to offer
broad and diversified services to these customers. We anticipate that operating
results will continue to depend on volume services to a relatively small number
of communication service providers and technology vendors. We anticipate
increased market demand for bundled business process and technical outsourcing
which we and our partners have formalized agreements to provide.
INTELLECTUAL PROPERTY
Our success is dependent, in part, upon proprietary processes and methodologies.
We rely upon a combination of copyright, trade secret, and trademark law to
protect our intellectual property. Additionally, employees and consultants sign
non-disclosure agreements to assist us in protecting our intellectual property.
We have not applied for patent protection for the proprietary methodologies used
by our consultants. We do not currently anticipate applying for patent
protection for these toolsets and methodologies.
SEASONALITY
In the past, we have 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. We may continue to experience
fluctuations in revenue in the fourth quarter. As we expand internationally,
third quarter revenue may fluctuate as a result of significant vacation periods
taken in the summer months.
RISK FACTORS
Our business, operating results, financial condition and stock price are subject
to numerous risks, uncertainties, and contingencies, many of which are beyond
our control. The following important factors, among others, could cause actual
results to differ materially from those contemplated in forward-looking
statements made in this annual report on Form 10-K or presented elsewhere by
management from time to
time. Investors are urged to consider these risk factors when evaluating an
investment in TMNG.
RISK THAT MAY IMPACT OUR FINANCIAL PERFORMANCE
OUR BUSINESS IS COMPLETELY DEPENDENT ON CONDITIONS IN THE COMMUNICATIONS
INDUSTRY
We focus almost exclusively on customers in the communications industry and
investment banking and private equity firms investing in that industry. We
experienced significant growth in demand for our services throughout the 1990's.
Since 2000, the communications industry has experienced a number of adverse
conditions, including bankruptcies, layoffs, consolidation and contradiction,
declining market values, and in some cases financial scandals. These macro
economic conditions substantially reduced the demand for our services and caused
our revenues to decline, resulting in operating losses, negative cash flow and a
decline in our stock price. If the communications industry does not recover and
demand for our services does not increase in the foreseeable future, we may
continue to incur operating losses and negative cash flow, which may eventually
adversely affect our liquidity.
ADVERSE CONDITIONS IN THE COMMUNICATIONS INDUSTRY MAY HURT OUR BUSINESS
Future client financial difficulties and/or bankruptcies could require us to
write-off receivables that are in excess of bad debt reserves, which would harm
our results of operations in future fiscal periods. Client bankruptcies could
also create an at-risk situation on funds collected for professional services
within 90 days of the bankruptcy filing date. In addition, any continuing
deterioration of conditions in the communications sector could cause companies
to delay new product and new business initiatives and to seek to control
expenses by reducing the use of outside consultants. The communications industry
is in a period of consolidation, which could reduce our client base, eliminate
future opportunities or create conflicts of interest among clients. As a result,
current industry conditions may continue to harm our business, financial
condition, results of operations, liquidity and ability to make acquisitions and
raise investment capital.
WE ARE DEPENDENT ON A LIMITED NUMBER OF LARGE CUSTOMERS FOR A MAJOR PORTION OF
OUR REVENUES, AND THE LOSS OF A MAJOR CUSTOMER COULD SUBSTANTIALLY REDUCE
REVENUES AND HARM OUR BUSINESS AND LIQUIDITY
We derive a substantial portion of our revenues from a relatively limited number
of clients. The services required by any one client may be affected by industry
consolidation or adverse industry conditions, technological developments,
economic slowdown or internal budget constraints. As a result, the volume of
work performed for specific clients varies from period to period, and a major
client in one period may not use our services in a subsequent period.
OUR REVENUES AND OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY FROM QUARTER-TO-
QUARTER, AND FLUCTUATIONS IN OUR OPERATING RESULTS COULD CAUSE OUR STOCK PRICE
TO DECLINE
Our revenue and operating results may vary significantly from quarter-to-quarter
due to a number of factors. In future quarters, our operating results may be
below the expectations of public market analysts or investors, and the price of
our common stock may decline. This is especially true under present economic
conditions impacting the communications industry, a typical result being fewer
opportunities and discounted pricing. Factors that could cause quarterly
fluctuations include:
- - the beginning and ending of significant contracts during a quarter;
- - the size and scope of assignments;
- - the form of customer contracts changing primarily from time and materials
to fixed price or contingent fee, based on project results;
- - consultant turnover, utilization rates and billing rates;
- - the loss of key consultants, which could cause clients to end their
relationships with us;
- - the ability of clients to terminate engagements without penalty;
- - fluctuations in demand for our services resulting from budget cuts, project
delays, industry downturns or similar events;
- - clients' decisions to divert resources to other projects, which may limit
clients' resources that would otherwise be allocated to services we could
provide;
- - reductions in the prices of services offered by our competitors;
- - fluctuations in the communications market and economic conditions;
- - seasonality during the summer, vacation and holiday periods;
- - 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 our non-consultant expenses are relatively
fixed, a variation in the number of client assignments or the timing of the
initiation or the completion of client assignments may cause significant
variations in operating results from quarter-to-quarter and could result in
continuing losses. To the extent the addition of consultant employees is not
followed by corresponding increases in revenues, additional expenses would be
incurred that would not be matched by corresponding revenues. Therefore,
profitability would decline and we could potentially experience further losses
and our stock price would likely decline.
AN INCREASING PERCENTAGE OF OUR BUSINESS IS REPRESENTED BY CONTINGENT FEE OR
FIXED FEE CONTRACTS, WHICH EXPOSE US TO ADDITIONAL RISKS
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 our accounting for revenue recognition, see
"Critical Accounting Policies" included in Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations." Fixed fee contracts
expose us to the risk that our cost of performing the contract may be higher
than expected, reducing or eliminating our profit margin from the contract. In
contingent fee contracts, some or all of our compensation may be dependent on
the achievement of certain benefits or results. If those benefits or results are
not achieved, we could lose money on the contract.
WE HAVE MADE SEVERAL ACQUISITIONS AND MAY CONTINUE TO MAKE ACQUISITIONS, WHICH
ENTAIL RISKS THAT COULD HARM OUR FINANCIAL PERFORMANCE OR STOCK PRICE
As part of our business strategy, we have made and may continue to make
acquisitions. Any future acquisition would be accompanied by the risks commonly
encountered in acquisitions. These risks include:
- - the difficulty associated with assimilating the personnel and operations of
acquired companies;
- - the potential disruption of our existing business;
- - further reductions in our cash reserves;
- - adverse effects on our financial statements, including write-offs if the
business does not perform as expected and assumption of liabilities of
acquired businesses; and
- - paying too much for an acquired company.
If we make acquisitions and any of these problems materialize, these
acquisitions could negatively affect our operations, profitability and financial
condition.
ANY CONTINUING DECREASE IN CURRENT AND PROJECTED REVENUES MAY RESULT IN
ADDITIONAL ASSET IMPAIRMENTS THAT WOULD CONTINUE TO ADVERSELY AFFECT OUR
PROFITABLITY
We have made and may continue to make acquisitions. As a result, goodwill and
intangible assets constitute a significant portion of the assets reported on our
balance sheet. We have, in the past, been required to write down goodwill and
intangible assets on our financial statements as a result of declining revenues
and earnings of the businesses we acquire. We may continue to be required to
take assets impairment charges in the future. Our earnings and profitability
would be adversely affected by any further asset impairments.
The Financial Accounting Standards Board ("FASB") has issued SFAS No. 142
"Accounting for Goodwill and Intangible Assets." SFAS No. 142 requires an annual
evaluation of goodwill to determine if an impairment of goodwill has occurred.
The evaluation involves calculating enterprise fair value, which may be based on
a number of analyses, including a discounted cash flow projection of future
financial results. Estimated fair values are then compared to the total recorded
book value to determine if an impairment of goodwill is deemed to have occurred.
If an impairment of goodwill is deemed to have occurred, this would negatively
affect our consolidated results of operations. We recorded impairment charges of
$27.1 million, $15.8 million, and $2.2 million related to the impairment of
goodwill in 2002, 2003, and 2004, respectively. If we are 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" we are using our 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 our assets
might not be recoverable. During fiscal year 2003, we identified such events,
including significant decreases in revenue from customers whose relationships
were valued in purchase accounting. We performed impairment tests, 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 we are 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.
WE HAVE REDUCED CONSULTANT HEADCOUNT WHICH COULD ADVERSELY AFFECT OUR ABILITY TO
PERFORM CONSULTING ENGAGEMENTS AND OBTAIN NEW BUSINESS
We have undergone a series of cost-cutting measures since 2001 to better align
our operating costs with the reduced demand for communications consulting
services. As part of these cost-costing measures, we have reduced our employee
consultant headcount. Because the talents and skills of those consultants are no
longer available to us, we may lose opportunities to obtain future consulting
engagements or have difficulty performing engagements we do obtain, any of which
could harm our business.
THE MARKET IN WHICH WE COMPETE IS INTENSELY COMPETITIVE - ACTIONS BY COMPETITORS
COULD RENDER OUR SERVICES LESS COMPETITIVE, CAUSING REVENUES AND INCOME TO
DECLINE
The market for consulting services to communications companies is intensely
competitive, highly fragmented and subject to rapid change. Competitors include
strategy and management consulting firms and major global outsourcing firms like
IBM, Electronic Data Systems Corporation (EDS) and Computer Sciences
Corporation, which have become more significant competitors recently due to the
outsourcing of business support systems and operating support systems by
communications companies. We are also subject to competition from large
technical firms from the Asian markets, like Infosys Technologies, Ltd. that can
provide significant cost advantages. Some of these competitors have also formed
strategic alliances with communications and technology companies serving the
industry. We also compete with internal resources of our clients. Although
non-exhaustive, a partial list of our competitors includes:
- - Accenture;
- - Booz-Allen & Hamilton;
- - Cap Gemini;
- - DiamondCluster International, Inc.;
- - IBM;
- - Infosys Technologies, Ltd.; and
- - McKinsey & Company
- - Computer Sciences Corporation
Many information technology-consulting firms also maintain significant practice
groups devoted to the communications industry. Many of these companies have a
national and international presence and may have greater personnel, financial,
technical and marketing resources. We may not be able to compete successfully
with our existing competitors or with any new competitors.
We also believe our ability to compete depends on a number of factors outside of
our control, including:
- - the prices at which others offer competitive services, including aggressive
price competition and discounting on individual engagements which may
become increasingly prevalent in the current industry environment;
- - the ability and willingness of our competitors to finance customers'
projects on favorable terms;
- - the ability of our competitors to undertake more extensive marketing
campaigns than we can;
- - the extent, if any, to which our competitors develop proprietary tools that
improve their ability to compete with us;
- - the ability of our customers to perform the services themselves; and
- - the extent of our competitors' responsiveness to customer needs.
We may not be able to compete effectively on these or other factors. If we are
unable to compete effectively, our market position, and therefore our revenues
and profitability, would decline.
WE MUST CONTINUALLY ENHANCE OUR SERVICES TO MEET THE CHANGING NEEDS OF CUSTOMERS
OR WE MAY LOSE FUTURE BUSINESS TO OUR COMPETITORS
Our future success will depend upon our ability to enhance existing services and
to introduce new services to meet the requirements of customers in a rapidly
developing and evolving market, particularly in the areas of wireless
communications and next generation technologies.
Present or future services may not satisfy the needs of the communications
market. If we are unable to anticipate or respond adequately to customer needs,
we may lose business and our financial performance will suffer.
IF WE ARE NOT ABLE TO EFFECTIVELY RECRUIT AND RETAIN MANAGEMENT AND CONSULTING
PERSONNEL THAT PROVIDE US WITH NEW TALENT SETS ENABLING THE IMPLEMENTATION OF
NEW STRATEGIC OFFERINGS IN A RAPIDLY CHANGING MARKET, OUR FINANCIAL PERFORMANCE
MAY BE NEGATIVELY IMPACTED
Our ability to adapt to changing market conditions will depend on our ability to
recruit and retain talented personnel, which cannot be assured. We may face two
critical challenges in the recruitment of new management personnel. The first is
the ability to recruit talented management personnel with the skill sets
necessary to capitalize on an industry undergoing revolutionary change, and the
second is the ability to execute such recruitment with an appropriate
compensation arrangement. If we are unable to recruit and retain the people we
need to perform our consulting engagements in a rapidly changing environment,
our business may suffer.
We must attract new consultants to implement our strategic plans. The number of
potential consultants that meet our hiring criteria is relatively small, and
there is significant competition for these consultants from direct competitors
and others in the communications industry. Competition for these consultants may
result in significant increases in our costs to attract and retain the
consultants, which could reduce margins and profitability. In addition, we will
need to attract consultants in international locations, principally Europe, to
support our international strategic plans. We have limited experience in
recruiting internationally, and may not be able to do so. Any inability to
recruit new consultants or retain existing consultants could impair our ability
to service existing engagements or undertake new engagements. If we are unable
to attract and retain quality consultants, our revenues and profitability would
decline.
OUR ENGAGEMENTS WITH CLIENTS MAY NOT BE PROFITABLE OR MAY BE TERMINATED BY OUR
CLIENTS ON SHORT NOTICE
Unexpected costs, delays or failure to achieve anticipated cost reductions could
make our contracts unprofitable. We have many types of contracts, including time
and materials contracts, fixed-price contracts and contingent fee contracts.
When making proposals for engagements, we estimate the costs and timing for
completing the projects. These estimates reflect our best judgment regarding our
costs, as well as the efficiencies of our methodologies and professionals as we
plan to deploy them on our projects. Any increased or unexpected costs, delays
or failures to achieve anticipated cost reductions in connection with the
performance of these engagements, including delays by factors outside our
control, could make these contracts less profitable or unprofitable, which would
have an adverse effect on our profit margin.
Under many of our contracts, the payment of some or all of our fees is
conditioned upon our performance. We are increasingly moving away from contracts
that are priced solely on a time and materials basis and toward contracts that
also include incentives related to factors such as benefits produced. During
fiscal year 2004, we estimate that approximately 40.5% of our contracts had some
fixed-price, incentive-based or other pricing terms that conditioned some or all
of our fees on our ability to deliver these defined goals. The trend to include
greater incentives in our contracts may increase the variability in revenues and
margins earned on such contracts.
A majority of our contracts can be terminated by our clients with short notice
and without significant penalty. Our clients typically retain us on a
non-exclusive, engagement-by-engagement basis, rather than under exclusive
long-term contracts. A majority of our consulting engagements are less than 12
months in duration. The advance notice of termination required for contracts of
shorter duration and lower revenues is typically 30 days. Longer-term, larger
and more complex contracts generally require a longer notice period for
termination and may include an early termination charge to be paid to us.
Additionally, large client projects involve multiple engagements or stages, and
there is a risk that a client may choose not to retain us for additional stages
of a project or that a client will cancel or delay additional planned
engagements. These terminations, cancellations or delays could result from
factors unrelated to our work product or the project, such as business or
financial conditions of the client, changes in client strategies or the economy
in general. When contracts are terminated, we lose the associated revenues and
we may not be able to eliminate associated costs in a timely manner.
Consequently, our profit margins in subsequent periods may be lower than
expected.
OUR PROFITABLITY WILL SUFFER IF WE ARE NOT ABLE TO MAINTAIN OUR PRICING AND
UTILIZATION RATES AND CONTROL COSTS
Our profitability is largely a function of the rates we are able to obtain for
our services and the utilization rate, or chargeability, of our professionals.
If we do not maintain pricing for our services and an appropriate utilization
rate for our professionals without corresponding cost reductions, our
profitability will suffer. We are under increasing price competition from
competitors, which could adversely affect our profitability.
IF INTERNATIONAL BUSINESS VOLUMES INCREASE, WE MAY BE EXPOSED TO A NUMBER OF
BUSINESS AND ECONOMIC RISKS, WHICH COULD RESULT IN INCREASED EXPENSES AND
DECLINING PROFITABILITY
If our international business volumes increase, we will face a number of
business and economic risks, including:
- - unfavorable fluctuations in foreign currency exchange rates;
- - difficulties in staffing and managing foreign operations;
- - seasonal reductions in business activity;
- - competition from local and foreign-based consulting companies;
- - ability to protect our 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 and trade customs;
- - U.S. and foreign taxation issues;
- - operational issues such as longer customer payment cycles and greater
difficulties in collecting accounts receivable;
- - language and cultural differences;
- - changes in foreign communications markets;
- - increased cost of marketing and servicing international clients;
- - general political and economic trends, including the potential impact of
terrorist attack or international hostilities; and
- - expropriations of assets, including bank accounts, intellectual property
and physical assets by foreign governments.
In addition, we may not be able to successfully execute our business plan in
foreign markets. If we are unable to achieve anticipated levels of revenues from
international operations, overall revenues and profitability may decline.
WE ARE DEPENDENT ON A LIMITED NUMBER OF KEY PERSONNEL, AND THE LOSS OF THESE
INDIVIDUALS COULD HARM OUR COMPETITIVE POSITION AND FINANCIAL PERFORMANCE
Our business consists primarily of the delivery of professional services and,
accordingly, our success depends upon the efforts, abilities, business
generation capabilities and project execution of our executive officers and key
consultants. Our success is also dependent upon the managerial, operational,
marketing, and administrative skills of our executive officers, particularly
Richard Nespola, TMNG'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, which
could harm our financial performance.
IF WE FAIL TO PERFORM EFFECTIVELY ON PROJECT ENGAGEMENTS, OUR REPUTATION, AND
THEREFORE OUR COMPETITIVE POSITION AND FINANCIAL PERFORMANCE, COULD BE HARMED
Many of our engagements come from existing clients or from referrals by existing
clients. Therefore, our growth is dependent on our reputation and on client
satisfaction. The failure to perform services that meet a client's expectations
may damage our reputation and harm our ability to attract new business.
IF WE FAIL TO DEVELOP AND MAINTAIN LONG-TERM RELATIONSHIPS WITH OUR CUSTOMERS,
OUR SUCCESS WOULD BE JEOPARDIZED
A substantial majority of our business is derived from repeat customers. Future
success depends to a significant extent on our ability to develop long-term
relationships with successful communications providers who will give us new and
repeat business. Inability to build long-term customer relationships could
result in declining revenues and profitability. This may increasingly be the
case with any further consolidation or contraction in the industry.
WE CLASSIFY A LARGE NUMBER OF SUBCONTRACTORS AS INDEPENDENT CONTRACTORS FOR TAX
AND EMPLOYMENT LAW PURPOSES. IF THESE FIRMS OR PERSONNEL WERE TO BE RECLASSIFIED
AS EMPLOYEES, WE COULD BE SUBJECT TO BACK TAXES, INTEREST, PENALTIES AND OTHER
LEGAL CLAIMS
We provide a significant percentage of consulting services through independent
contractors and, therefore, do not pay Federal or state employment taxes or
withhold income taxes for such persons. We generally do not include these
independent contractors in our benefit plans. In the future, the IRS or 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 us as
independent contractors are determined to be employees by the IRS or any state
taxation department, we would be required to pay applicable Federal and state
employment taxes and withhold income taxes with respect to such contractors, and
could become liable for amounts required to be paid or withheld in prior periods
along with interest and penalties. In addition, we could be required to include
such contractors in benefit plans retroactively and going forward.
WE COULD BE SUBJECT TO CLAIMS FOR PROFESSIONAL LIABILITY, WHICH COULD HARM OUR
FINANCIAL PERFORMANCE
As a provider of professional services, we face the risk of liability claims. A
liability claim brought against us could harm our business. We may also be
subject to claims by clients for the actions of our consultants and employees
arising from damages to clients' business or otherwise, or clients may demand a
reduction in fees because of dissatisfaction with our services.
In particular, we are currently a defendant in litigation brought by the
bankruptcy trustee of a former client. This litigation seeks to recover at least
$1.85 million for breach of contract, breach of fiduciary duties and negligence,
plus $320,000 in consulting fees paid by the former client. See Item 3, "Legal
Proceedings."
OUR INABILITY TO PROTECT OUR INTELLECTUAL PROPERTY COULD HARM OUR COMPETITIVE
POSITION AND FINANCIAL PERFORMANCE
Despite our efforts to protect proprietary rights from unauthorized use or
disclosure, parties, including former employees or consultants, may attempt to
disclose, obtain or use our solutions or technologies. The steps we have taken
may not prevent misappropriation of our intellectual property, particularly in
foreign countries where laws or law enforcement practices may not protect
proprietary rights as fully as in the United States. Unauthorized disclosure of
our proprietary information could make our solutions and methodologies available
to others and harm our competitive position.
RISK THAT COULD AFFECT OUR STOCK PRICE
THE MARKET PRICE OF OUR COMMON STOCK IS VOLATILE, AND INVESTORS MAY EXPERIENCE
INVESTMENT LOSSES
The market price of our common stock is volatile and has declined significantly
from its initial public offering price. Our stock price could continue to
decline or fluctuate in response to a variety of factors, including:
- - variations in quarterly operating results;
- - announcements of technological innovations that render talent outdated;
- - future trends in the communications industry;
- - acquisitions or strategic alliances by us 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 our
stock trades;
- - changes in estimates of performance or recommendations by financial
analysts;
- - any further reduction in our revenues or continued losses during 2005 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 technology and communications companies. Our stock price
tends to track the stock price of communications companies, which have declined
substantially and may continue to do so. These broad market fluctuations could
continue to harm the market price of our common stock. If the market price of
our common stock continues to decline, we may risk being delisted from the
NASDAQ Stock Market on which our stock trades. The recent decline in our overall
market capitalization may also discourage analysts and investors from
following us. Additionally, due to the limited public float of our common stock,
investors may find their investment illiquid, and suffer losses.
PRINCIPAL STOCKHOLDERS, EXECUTIVE OFFICERS AND DIRECTORS HAVE SUBSTANTIAL
CONTROL OVER OUR VOTING STOCK
Executive officers, directors and stockholders owning more than five percent of
our outstanding common stock (and their affiliates) own a majority of our
outstanding common stock. If all such persons acted together, they would have
the ability to control all matters submitted to the stockholders for approval
(including the election and removal of directors and any merger, consolidation
or sale of all or substantially all of our assets) and to control our management
and affairs. Concentration of ownership of our common stock may have the effect
of delaying, deferring or preventing a change in control, impeding a merger,
consolidation, takeover or other business combination involving us or
discouraging a potential acquirer from making a tender offer or otherwise
attempting to obtain control of us, any of which could be beneficial to our
shareholders.
WE MAY SEEK TO RAISE ADDITIONAL FUNDS, WHICH MAY BE DILUTIVE TO STOCKHOLDERS OR
IMPOSE OPERATIONAL RESTRICTIONS
Although we have not been required to obtain new debt or equity financing to
support our operations or complete acquisitions, we may decide or be required to
raise new capital for these or other purposes in the future. There can be no
assurances any such capital would be available to us on acceptable terms. Debt
financing, if available, may involve restrictive covenants, which may limit our
operating flexibility with respect to certain business matters. Debt financing
would require payments of principal and interest, which could adversely affect
our cash flow and profitability. Any debt financing may be secured by our
tangible and intangible assets, which could expose us to the loss of those
assets if we are unable to meet debt service requirements. If additional funds
are raised through the issuance of equity securities, our stockholders may
experience dilution in the voting power or net book value per share of our
stock, and any additional equity securities may have rights, preferences and
privileges senior to those of the holders of our common stock.
ANTI-TAKEOVER PROVISIONS AND OUR RIGHT TO ISSUE PREFERRED STOCK COULD MAKE A
THIRD PARTY ACQUISITION DIFFICULT
Our certificate of incorporation, bylaws, and anti-takeover provisions of
Delaware law could make it more difficult for a third party to acquire control
of us. In addition, our bylaws provide for a classified board, with board
members serving staggered three-year terms. The Delaware anti-takeover
provisions and the existence of a classified board, in addition to our
relatively small public float, could make it more difficult for a third party to
acquire us, even if such transactions were in the best interest of our
shareholders.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS
For information about foreign and domestic operations, see Item 8, "Consolidated
Financial Statements," Note 5 "Business Segments, Major Customers and
Significant Group Concentrations of Credit Risk."
ITEM 2. PROPERTY
Our principal executive offices are located in 4,305 square feet of space 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, we also lease 7,575 square feet of space in
McLean, Virginia for our TMNG Marketing subsidiary, under a lease which expires
in June 2009, and 10,344 square feet of space in Boston, Massachusetts, under a
lease which expires in 2011. The Boston and McLean locations are primarily
utilized by management and consulting personnel.
In the fourth quarter of fiscal year 2004, we made the decision to consolidate
office space. In connection with this decision, a sublease agreement for 11,366
square feet of unutilized office space in Boston, Massachusetts was entered into
with a third party through the end of the original lease term in 2011. For
additional discussion of this sublease, see Item 8, "Consolidated Financial
Statements," Note 8 "Real Estate Restructuring."
ITEM 3. LEGAL PROCEEDINGS
We are 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 our financial results for the period in which they are resolved, we believe
that the ultimate disposition of these matters will not have a material adverse
effect upon our consolidated results of operations, cash flows or financial
position.
In June 1998, the bankruptcy trustee of a former client, Communications Network
Corporation, sued us 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. Although we deny these claims and plan to
vigorously defend ourselves, we have reserves at January 1, 2005 of $160,000,
which we believe are adequate in the event of loss or settlement on those
claims.
The bankruptcy trustee has also sued us 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, we believe we have
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 we believe that the ultimate resolution of this matter will not
materially harm our business.
In 2002 and 2003, we received demands aggregating approximately $1.2 million by
the bankruptcy trustees of several former clients in connection with collected
balances near the customers' respective bankruptcy filing dates. Although we do
not believe we received any preferential payments from these former clients and
plan to vigorously defend those claims, we have reserves at January 1, 2005 of
$727,000, which we believe are adequate in the event of loss or settlement on
those claims.
On August 25, 2004, we entered into a mediated settlement agreement to settle
pending litigation with a customer. Pursuant to the terms of the settlement
agreement, each party was dismissed from any liability for the claims made
against it and the customer agreed to make a cash settlement payment to us, in
the amount of $2 million to settle all claims and disputes arising under the
consulting services agreement. We have no obligation to render further services
to the customer. At October 11, 2004, we received the $2 million settlement from
the customer and the parties dismissed one another from liability.
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 2004.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock is quoted on the NASDAQ Stock Market under the symbol TMNG. The
high and low closing price per share for the Common Stock for the fiscal years
ending January 1, 2005 and January 3, 2004 by quarter were as follows:
High Low
First quarter, fiscal year 2004 $ 5.50 $ 3.19
Second quarter, fiscal year 2004 $ 3.75 $ 1.77
Third quarter, fiscal year 2004 $ 2.45 $ 1.62
Fourth quarter, fiscal year 2004 $ 2.40 $ 1.92
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
The above information reflects inter-dealer prices, without retail mark-up,
markdown or commissions and may not necessarily represent actual transactions.
As of March 31, 2005 the closing price of our Common Stock was $2.37 per share.
At such date, there were approximately 93 holders of record of our 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. To
date, we have not paid any cash dividends on our Common Stock and do 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 4,455,385 $ 5.16 2,279,419
- - 1998 Equity Incentive Plan - Restricted Stock 658,000 n/a 542,000
PLANS NOT APPROVED BY SECURITY HOLDERS
- - 2000 Supplemental Stock Plan 1,053,564 $ 4.71 2,744,478
For an additional discussion of our equity compensation plans, see Item 8,
"Consolidated Financial Statements," Note 10 "Stock Option Plan and Stock Based
Compensation."
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below have been derived from
our 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
-------------------------------------------------------------------------
December 30, December 29, December 28, January 3, January 1,
2000 2001 2002 2004 2005
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues ............................................ $ 77,727 $ 54,236 $ 33,057 $ 23,245 $ 23,704
Cost of services:
Direct cost of services ........................... 40,396 27,338 16,111 11,927 12,319
Equity related charges (benefits).................. 5,519 2,322 721 (57) 205
-------- -------- -------- -------- --------
Total cost of services .................... 45,915 29,660 16,832 11,870 12,524
-------- -------- -------- -------- --------
Gross profit ........................................ 31,812 24,576 16,225 11,375 11,180
Operating expenses:
Selling, general and administrative................. 16,024 16,727 23,811 19,359 16,037
Legal settlement .................................. (1,294)
Real estate restructuring ......................... 1,545
Goodwill and intangible asset impairment .......... 25,165 19,484
Goodwill and intangibles amortization ............. 621 1,996 2,887 2,343 992
Equity related charges ............................ 1,564 843 353 142 958
-------- -------- -------- -------- --------
Total operating expenses .................. 18,209 19,566 52,216 41,328 18,238
-------- -------- -------- -------- --------
Income (loss) from operations ....................... 13,603 5,010 (35,991) (29,953) (7,058)
Other income (expense):
Interest income ................................... 3,327 2,433 996 624 718
Interest expense .................................. (14) (63) (51) (30)
Other, net ........................................ (152) (8) 26
-------- -------- -------- -------- --------
Total other income (expense) .............. 3,175 2,411 959 573 688
Income (loss) from continuing operations before income
tax (provision) benefit and cumulative effect of a
change in accounting principle .................... 16,778 7,421 (35,032) (29,380) (6,370)
Income tax (provision) benefit ...................... (6,711) (2,141) 12,389 (12,978) (49)
-------- -------- -------- -------- --------
Income (loss) from continuing operations before
cumulative effect of a change in accounting principle 10,067 5,280 (22,643) (42,358) (6,419)
Cumulative effect of a change in accounting principle,
net of taxes (1,140)
-------- -------- -------- -------- --------
Income (loss)from continuing operations.............. 10,067 5,280 (23,783) (42,358) (6,419)
Discontinued operations:
net income (loss) from discontinued operations..... 328 380 34 (2,276)
-------- -------- -------- -------- --------
Net income (loss) ................................... $ 10,067 $ 5,608 $(23,403) $(42,324) (8,695)
======== ======== ======== ======== ========
Income (loss) from continuing operations before
cumulative effect of a change in accounting principle
per common share
Basic ............................................. $ 0.36 $ 0.18 $( 0.69) $( 1.26) $ (0.18)
======== ======== ======== ======== ========
Diluted ........................................... $ 0.34 $ 0.17 $( 0.69) $( 1.26) $ (0.18)
======== ======== ======== ======== ========
Net income (loss) from discontinued operations per
common share
Basic and Diluted ................................. $ 0.01 $ 0.01 $ (0.07)
======== ======== ======== ======== ========
Net income (loss) per common share
Basic ............................................. $ 0.36 $ 0.19 $( 0.71) $( 1.26) $ (0.25)
======== ======== ======== ======== ========
Diluted ........................................... $ 0.34 $ 0.18 $( 0.71) $( 1.26) $ (0.25)
======== ======== ======== ======== ========
Weighted average common shares outstanding
Basic ............................................. 28,110 29,736 32,734 33,545 34,619
======== ======== ======== ======== ========
Diluted ........................................... 29,208 30,774 32,734 33,545 34,619
======== ======== ======== ======== ========
FISCAL YEAR ENDED
---------------------------------------------------------------
December 30, December 29, December 28, January 3, January 1,
2000 2001 2002 2004 2005
---------- ---------- ----------- ----------- -----------
CONSOLIDATED BALANCE SHEET DATA:
Net working capital ..................... $ 89,148 $ 94,569 $ 63,478 $57,231 $55,121
Total assets ............................ $119,429 $129,042 $125,459 $81,582 $75,353
Total debt (including current debt) ..... $ 338 $ 885 $ 493 $ 200
Total stockholders' equity ............. $111,472 $123,992 $115,726 $73,369 $66,747
On August 2, 2000, the SEC declared our Registration Statement on Form S-1 (File
No. 333-40864) effective. On August 2, 2000, we closed our offering of an
aggregate of 3,000,000 shares of our Common Stock at an aggregate offering price
of $68.6 million. Net proceeds to us, after deducting proceeds to shareholders
of $45.9 million, 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, we completed our 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
common stock. Additionally, we incurred direct costs of $1.5 million related to
the acquisition.
On September 5, 2001, we completed our 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 our common stock valued at $3.0 million. We 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, we
recorded approximately $216,000 as an increase to purchase price in connection
with the exchange of our stock options for vested stock appreciation rights held
by Tri-Com employees at the time of acquisition.
On March 6, 2002, we completed our 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 common stock.
Additionally, we 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 our Consolidated
Financial Statements and Notes thereto 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 our forward-looking
statements and should be read in conjunction with the disclosures and
information contained in the sections of this report entitled "Disclosures
Regarding Forward Looking Statements" and in Item 1, "Business - Risk Factors."
EXECUTIVE FINANCIAL OVERVIEW
Included in Item 1, "Business", is a discussion that includes a general overview
of our 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 an analysis of the financial impact
on us.
As previously noted, the communications industry has experienced a significant
economic recession from 2001 through 2004. We are a consultancy to the industry,
and as a result experienced a significant reduction in consulting business
primarily due to the recession. We have experienced significant revenue declines
and/or net loss from 2001 to 2004 (see Item 6, "Selected Consolidated Financial
Data"). While our revenues have declined significantly in recent years, we have
maintained relatively consistent gross margins through innovative pricing and
high consultant utilization levels. Additionally, our ability to manage costs
and leverage our flexible staffing model further allowed us to maintain our
gross margins.
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, our operating
expenses include goodwill and intangible impairment losses of $27.1 million and
$19.5 million in fiscal years 2002 and 2003, respectively. In fiscal year 2004,
we recorded a goodwill impairment loss of $2.2 million in connection with the
discontinuation of our hardware business. In fiscal years 2003 and 2004, we also
recorded valuation reserves of $24.0 million and $2.6 million, respectively, in
connection with deferred income tax assets, which were generated primarily by
goodwill impairment and current operating losses.
We have implemented many programs to size the business consistent with our lower
revenue base. Such steps included 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 assisted us in reducing cash used in operations. Selling,
general and administrative costs were $23.8 million, $19.4 million and $16.0
million in fiscal years 2002, 2003 and 2004, respectively, reflective of these
cost cutting initiatives. We have also focused our 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
We report our financial data on a 52/53-week fiscal year for reporting purposes.
Fiscal year 2003 was a 53 week fiscal year. Fiscal years 2002 and 2004 had 52
weeks. For further discussion of our fiscal year end see Item 8, "Consolidated
Financial Statements," Note 1 "Organization and Summary of Significant
Accounting Policies," contained herein.
Revenues typically consist of consulting fees for professional services and
related expense reimbursements. Our consulting services are typically contracted
on a time and materials basis, a time and materials basis not to exceed contract
price, a fixed fee basis, or contingent fee basis. Contract revenues on
contracts with a not to exceed contract price or a fixed price are recorded
under the percentage of completion method, utilizing estimates of project
completion under both of these types of contracts. Larger fixed price contracts
have recently begun to represent a more significant component of our revenue
mix. Contract revenues on contingent fee contracts are deferred until the
revenue is realizable and earned.
Generally a client relationship begins with a short-term engagement utilizing a
few consultants. Our 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. We anticipate that we will continue to
do so in the future. Because we are a consulting company, we experience
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 our
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, we 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 2004. Margins are primarily impacted by
the type of consulting services provided, the size of service contracts and
negotiated volume discounts, changes in our 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, intangible asset amortization, and goodwill and intangible asset
impairments. Operating expenses for fiscal year 2004 also include a litigation
settlement and real estate restructuring charge. Sales and marketing expenses
consist primarily of personnel salaries, bonuses, and related costs for direct
client sales efforts and marketing staff. We primarily use 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 costs for accounting, recruiting and
staffing, information technology, personnel, 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. Impairment
relates to the write down of goodwill calculated in accordance with the
provisions of SFAS No. 142 "Accounting for Goodwill and Intangible Assets" 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.
CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are summarized in Note 1 to the consolidated
financial statements included in Item 8 "Consolidated Financial Statements" of
this report.
While the selection and application of any accounting policy may involve some
level of subjective judgments and estimates, we believe the following accounting
policies are the most critical to our consolidated financial statements,
potentially involve the most subjective judgments in their selection and
application, and are the most susceptible to uncertainties and changing
conditions:
- - Allowance for Doubtful Accounts;
- - Impairment of Goodwill and Long-lived Intangible Assets;
- - Revenue Recognition; and
- - Deferred Income Tax Assets.
Allowances for Doubtful Accounts - Substantially all of our receivables are owed
by companies in the communications industry. We typically bill customers for
services after all or a portion of the services have been performed and require
customers to pay within 30 days. We attempt 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.
We recorded bad debt expense in the amounts of $1,207,000, $575,000 and $399,000
for fiscal years 2002, 2003 and 2004, respectively, and our allowance for
doubtful accounts totaled $471,000, $652,000 and $396,000 at the end of fiscal
years 2002, 2003 and 2004, respectively. The calculation of these amounts is
based on judgment about the anticipated default rate on receivables owed to us
as of the end of the reporting period. That judgment was based on uncollected
account experience in prior years and our ongoing evaluation of the credit
status of our customers and the communications industry in general.
We have attempted to mitigate credit risk by concentrating our marketing efforts
on the largest and most stable companies in the communications industry and by
tightly controlling the amount of credit provided to customers. If we are
unsuccessful in these efforts, or if more of our customers file for bankruptcy
or experience financial difficulties, it is possible that the allowance for
doubtful accounts will be insufficient and we will have a greater bad debt loss
than the amount reserved, which would adversely affect our cash flow and
financial performance.
Impairment of Goodwill and Long-lived Intangible Assets - Goodwill and other
long-lived intangible assets arising from our acquisitions 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 we would currently expect to realize based on updated financial and
cash flow projections from the reporting unit, there is a requirement to write
down these assets.
Effective March 4, 2004, management and the Board of Directors elected to
discontinue our hardware business. We concluded this segment of the business did
not align well with our strategic focus. We incurred goodwill impairment charges
of $2.2 million in the first quarter of fiscal year 2004, related to the
discontinuation of the hardware business, in accordance with the provisions of
SFAS No. 142.
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, we recorded goodwill impairment losses of
$27.1 million and $15.8 million in 2002
and 2003, respectively, in accordance with the provisions of SFAS No. 142. For
an additional discussion see Item 8, "Consolidated Financial Statements," Note 3
"Goodwill and Other Intangible Assets."
In accordance with SFAS No. 144, we use our best estimates based upon 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
our assets might not be recoverable. During fiscal year 2003 we identified
certain events, including a significant decrease in revenue from customers whose
relationships were valued in purchase accounting. We 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 Operations in the
Statement of Operations and Comprehensive Income (Loss).
Revenue Recognition - Historically, most of our consulting practice contracts
have been on a time and materials basis, in which customers are billed for time
and materials expended in performing their engagements. We recognize revenue
from those types of customer contracts in the period in which our services are
performed. In addition to time and materials contracts, our other types of
contracts include time and materials contracts not to exceed contract price,
fixed fee contracts, managed services or outsourcing contracts, and contingent
fee contracts. Managed services or outsourcing contracts typically have longer
terms than consulting contracts (e.g., longer than one year).
We recognize revenues on time and materials contracts not to exceed contract
price and fixed fee contracts using the percentage of completion method.
Percentage of completion accounting involves calculating the percentage of
services provided during the reporting period compared with the total estimated
services to be provided over the duration of the contract. For all contracts,
estimates of total contract revenues and costs are continuously monitored during
the term of the contract, and recorded revenues and costs are subject to
revisions as the contract progresses. Such revisions may result in an increase
or decrease to revenues and income and are reflected in the financial statements
in the periods in which they are first identified.
As we continue to adapt to changes in the communications consulting industry, we
have elected to enter into more fixed fee contracts in which revenue is based
upon delivery of services or solutions, and contingent fee contracts, in which
revenue is subject to achievement of savings or other agreed upon results,
rather than time spent. Both of these types of contracts are typically more
results-oriented and are subject to greater risk associated with revenue
recognition and overall project profitability than traditional time and
materials contracts. Due to the nature of these contingent fee contracts, we
recognize costs as they are incurred on the project and defer revenue
recognition until the revenue is realizable and earned as agreed to by our
clients. Additional costs and effort as compared to what was originally planned
may need to be expended to fulfill delivery requirements on such contracts,
which could adversely affect our consolidated financial position, results of
operations and liquidity.
Deferred Income Tax Assets - We have generated substantial deferred income tax
assets primarily from the accelerated financial statement write-off of goodwill,
the charge to compensation expense taken for stock options and net operating
loss carry forwards. For us to realize the income tax benefit of these assets,
we must generate sufficient taxable income in future periods when such
deductions are allowed for income tax purposes. In assessing whether a valuation
allowance is needed in connection with our deferred income tax assets, we have
evaluated our ability to carry back tax losses to prior years that reported
taxable income, and our ability to generate sufficient taxable income in future
periods to utilize the benefit of the deferred income tax assets. Such
projections of future taxable income require significant subjective judgments
and estimates by us. As of January 1, 2005, cumulative valuation allowances in
the amount of $26.2 million were recorded in connection with the deferred income
tax assets. We continue to evaluate the recoverability of the recorded deferred
income tax asset balances. If we continue to report net operating losses for
financial reporting, no additional tax benefit would be recognized for those
losses, since we may be required to increase our valuation allowance to offset
such amounts.
RESULTS OF OPERATIONS
On March 4, 2004, management and the Board of Directors elected to discontinue
our hardware business. The Consolidated Statements of Operations and
Comprehensive Income (Loss) have been adjusted for fiscal years 2004, 2003, and
2002 to report the income (loss) from discontinued operations, net of tax. For a
further discussion see Item 1, "Notes to Consolidated Condensed Financial
Statements," Note 4, "Discontinued Operations."
FISCAL 2004 COMPARED TO FISCAL 2003
REVENUES
Revenues increased 2.0% to $23.7 million for fiscal year 2004 from $23.2 million
for fiscal year 2003 Included in revenues for fiscal year 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. The increase in revenue in 2004 is attributable to an
increase in engagements in the wireless segment of the telecom industry, along
with a slight increase in the average size of projects. During fiscal year 2004,
we provided services on 197 customer projects, compared to 196 projects
performed in fiscal year 2003. Average revenue per project was $120,000 in
fiscal year 2004 compared to $119,000 in fiscal year 2003. International revenue
base increased to 22.3% of our revenues for fiscal year 2004, from 10.0% for
fiscal year 2003, due primarily to a significant increase in project activity
with select large global wireline and wireless carriers located in Western
Europe and Australia. Revenues recognized in connection with fixed price
engagements totaled $9.6 million and $6.4 million in fiscal year 2004 and 2003,
respectively, representing 40.5% and 27.4% of total revenue in fiscal year 2004
and 2003, respectively.
Effective March 4, 2004, management and the Board of Directors elected to
discontinue our hardware business (previously reported as the separate business
segment "All Other"). Operating results of the hardware business for fiscal
years 2004 and 2003 have been included as a component of discontinued operations
in the Consolidated Statements of Operations and Comprehensive Income (Loss)
contained herein.
COST OF SERVICES
Direct costs of services increased to $12.3 million for fiscal year 2004
compared to $11.9 million for fiscal year 2003. As a percentage of revenues, our
gross margin based on direct cost of services was 48.0% for fiscal year 2004
compared to 48.7% for fiscal year 2003. Included in fiscal year 2003 gross
margin is the $0.7 million of revenue from the take or pay contract discussed
above. Gross margin percentage is attributable to the mix of services, pricing
of our projects and efficiency of delivery.
Non-cash equity related charges were $205,000 for fiscal year 2004. The charges
relate to the award of restricted stock issued to select executives and key
employees during the fourth quarter of fiscal year 2003, which are being
amortized on a graded vesting schedule over a period of two years from the date
of grant. The non-cash equity related benefit of $57,000 for fiscal year 2003,
was primarily related to the cancellation and forfeiture of unvested stock
options by employees.
OPERATING EXPENSES
In total, operating expenses decreased by 55.9% to $18.2 million for fiscal year
2004, from $41.3 million for fiscal year 2003. Operating expenses include
selling, general and administrative costs, legal settlement, real estate
restructuring, equity related charges, goodwill and intangible asset impairment,
and intangible asset amortization. The major components of the decrease are
discussed by category in the following paragraphs.
We recorded a goodwill and intangible asset impairment charge of $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 year
2003 and lower than expected operating results of reporting units during fiscal
year 2003, 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.
The decrease in operating expenses includes $3.3 million related to selling,
general and administrative expense reductions in fiscal year 2004 compared to
fiscal year 2003. Approximately $1.5 million of the reductions were associated
with reductions in personnel levels and improvement in our utilization rates, as
part of our ongoing effort to properly size the business to a lower revenue
base. In fiscal year 2004 we incurred severance charges of $0.1 million compared
to $0.4 million in fiscal year 2003 related to involuntary employee turnover. We
also reduced outside professional service fees by $0.6 million in fiscal year
2004 from fiscal year 2003. Additionally, throughout fiscal year 2004, we
implemented a number of cost reductions within sales and marketing,
communications, insurance, and other administrative costs. We continue to
examine cost-reduction measures to enhance our profitability and manage
operating expenses to better align them with the size of the business.
In fiscal year 2004 we entered into a mediated settlement agreement to settle
pending litigation with a customer regarding the take or pay contract discussed
in "Revenues" above. As part of the settlement, we received a $2 million cash
payment to settle all claims and disputes in the litigation. This payment was
recorded as a $1.3 million reduction of operating expenses and $0.7 million
reduction of existing receivables. Also during fiscal year 2004, we made the
decision to consolidate office space resulting in a charge to earnings of $1.5
million.
Non-cash stock based compensation charges were $1.0 million in fiscal year 2004
compared to $0.1 million for fiscal year 2003. The fiscal year 2004 charges
relate to the award of restricted stock issued to select executives and key
employees during the fourth quarter of fiscal year 2003, which are being
amortized on a graded vesting schedule over a period of two years from the date
of grant.
OTHER INCOME AND EXPENSES
Interest income was $0.7 million and $0.6 million for fiscal years 2004 and
2003, respectively, and represented interest earned on invested cash and cash
equivalent balances and short-term investments. Interest income increased during
fiscal year 2004 due to investing cash reserves at slightly higher interest rate
returns in 2004 compared to 2003. We primarily invest in money market funds and
investment-grade auction rate securities as part of our overall investment
policy.
INCOME TAXES
For fiscal year 2004 we have fully reserved our deferred income tax benefits
generated by our pre-tax losses of $6.4 million from continuing operations. The
fiscal year 2004 income tax provision of $49,000 relates to state income taxes.
In fiscal year 2003, we recorded a valuation allowance in the amount of $24.0
million against deferred income tax assets, offsetting the income tax benefit
from current year operating losses and resulting in a net 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.
FISCAL 2003 COMPARED TO FISCAL 2002
REVENUES
Revenues decreased 29.7% to $23.2 million for fiscal year 2003 from $33.1
million for fiscal year 2002. Included in revenues for fiscal year 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. The decrease in revenues was primarily associated with the
decline in utilization of management consulting services by communication
service providers, which correlated with significant layoffs of management
personnel by such clients, and continuing adverse conditions in the
communication and technology industry. In addition, there was continued deferral
of key management consulting pipeline opportunities, increases in managed
services outsourcing by clients, which partially displaced what were
historically management consulting opportunities for us, and the resignation of
certain key executives during fiscal year 2003, which resulted in the loss of
revenue opportunities for us. During fiscal year 2003, we provided services on
196 customer projects, compared to 239 projects performed in fiscal year 2002.
Average revenue per project was $119,000 in fiscal year 2003 compared to
$138,000 in fiscal year 2002. International revenue base increased to 10.0% of
our revenues for fiscal year 2003, from 8.0% for fiscal year 2002, due primarily
to our decrease in domestic revenue.
Revenues recognized by us in connection with fixed price engagements totaled
$6.4 million, and represented 27.4% of consolidated revenue during fiscal year
2003.
Effective March 4, 2004, management and the Board of Directors elected to
discontinue our hardware business (previously reported as the separate business
segment "All Other"). Operating results of the hardware business for fiscal year
2003 and 2002 have been included as a component of discontinued operations in
the Consolidated Statements of Operations and Comprehensive Income (Loss)
contained herein.
COST OF SERVICES
Direct costs of services decreased to $11.9 million for fiscal year 2003
compared to $16.1 million for fiscal year 2002. The decrease was primarily
attributable to fewer consulting engagements and corresponding reductions made
in personnel costs. As a percentage of revenues, our gross margin based on
direct cost of services was 48.7% for fiscal year 2003 compared to 51.3% for
fiscal year 2002. However, excluding the $0.7 million revenue in fiscal year
2003 from the take or pay contract discussed above, the gross margin based on
direct cost of services would have been 47.1%. 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 20.9% to $41.3 million for fiscal year
2003, from $52.2 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.
Selling, general and administrative expense decreased $4.4 million in fiscal
year 2003 compared to fiscal year 2002. Of these reductions, $1.3 million was
associated with reductions of personnel required to properly size the business
to lower revenue volumes. Total selling and administrative headcount was 34 at
January 3, 2004, compared to 45 at December 28, 2002, which represents a 24.4%
reduction in our selling and administrative personnel. Additionally, in fiscal
year 2003 we incurred severance charges of $0.4 million compared to $1.9 million
in fiscal year 2002 related to involuntary employee turnover. Throughout fiscal
year 2003, we implemented a number of cost reductions within sales and
marketing, recruitment, accounting, and systems as well as other administrative
cost reductions.
We have recorded 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 year 2003 and lower than expected operating results of
reporting units during fiscal years 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.
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 in fiscal year 2003 related to pre-initial offering grants of stock
options which were fully amortized during fiscal year 2003. Additionally in the
fourth quarter of fiscal year 2003, we granted restricted stock to select
executives. The charge in fiscal year 2003 related to these 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. We primarily invest in money market funds
and investment-grade auction rate securities as part of our overall investment
policy.
INCOME TAXES
In fiscal year 2002, we recorded an income tax provision (benefit) at a blended
Federal and state statutory income tax rate of 40.2%. In fiscal year 2003, we
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 a net income tax provision of $13.0 million.
The valuation allowance was calculated utilizing the guidance of SFAS No. 109
which requires an estimation of the recoverability of the recorded deferred
income tax asset balances. The income tax benefit for fiscal year 2002 as a
percentage of pretax loss was 35.3%. The primary reason for the variance between
the effective and statutory income tax rates in 2002 related to a portion of the
reported goodwill impairment losses not deductible for income tax purposes.
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE
A cumulative effect of a change in accounting principle in the amount of $1.9
million was recorded during fiscal year 2002 in connection with our estimate of
goodwill impairment. The impairment was calculated in accordance with the
provisions of SFAS No. 142 and has been reported on our 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 29, JUNE 28, SEPTEMBER 27, January 3,
2003 2003 2003 2004
-------- -------- -------- --------
Revenues ....................................... $ 7,240 $ 4,963 $ 4,691 $ 6,351
======== ======== ======== ========
Gross profit ................................... $ 3,587 $ 2,323 $ 2,195 $ 3,270
======== ======== ======== ========
Net income (loss) from discontinued operation... $ 71 $ 8 $ (30) $ (15)
======== ======== ======== ========
Net loss........................................ $ (1,231) $(18,737) $ (2,651) $(19,704)
======== ======== ======== ========
Basic and diluted income (loss) from
Discontinued operation per common share .......
======== ======== ======== ========
Basic and diluted net loss per common share .... $ (0.04) $ (0.56) $ (0.08) $ (0.58)
======== ======== ======== ========
QUARTER ENDED
----------------------------------------------------
APRIL 3, JULY 3, OCTOBER 27, January 1,
2004 2004 2004 2005
-------- -------- -------- --------
Revenues ....................................... $ 5,779 $ 5,184 $ 6,546 $ 6,195
======== ======== ======== ========
Gross profit ................................... $ 2,812 $ 2,393 $ 3,054 $ 2,921
======== ======== ======== ========
Net income (loss) from discontinued operation... $ (2,276)
======== ======== ======== ========
Net loss........................................ $ (4,251) $ (2,117) $ (1,119) $ (1,208)
======== ======== ======== ========
Basic and diluted income (loss) from
Discontinued operation per common share ....... $ (0.07)
======== ======== ======== ========
Basic and diluted net loss per common share .... $ (0.13) $ (0.06) $ (0.03) $ (0.03)
======== ======== ======== ========
We report our operating activities on a 52/53-week fiscal year and for the
fourth quarter ended January 1, 2005, our financial results include 13 weeks
compared to the 14 weeks reported for the fourth quarter ended January 3, 2004.
The operating results for fiscal year 2004 report 52 weeks of activity compared
to the 53 weeks of activity reported in fiscal year 2003.
LIQUIDITY AND CAPITAL RESOURCES
In fiscal year 2004, through additional clarifying guidance, we determined that
our investments in auction rate securities are more appropriately
classified as available-for-sale short-term investments rather than cash
equivalents and we have reflected such change retroactively in our financial
statements and in our liquidity discussions. Auction rate securities generally
have long-term stated maturities; however, for the investor, these securities
have certain economic characteristics of short-term investments because of their
rate setting mechanism. The return on these securities is designed to track
short-term interest rates due to a "Dutch" auction process which resets the
coupon rate (or dividend rate). Auction rate securities are designed to be
highly liquid. Unless an auction fails, an investor can, by electing not to bid,
recoup the principal amount of its investment at each auction date. To date we
have experienced no failed auctions.
Net cash used in operating activities was $0.7 million and $0.9 million for
fiscal years 2004 and 2003, respectively, compared to net cash provided by
operating activities of $7,000 in fiscal year 2002. We incurred negative cash
flow from our operating activities for fiscal years 2004 and 2003 primarily due
to operating losses. These losses were substantially offset by effective
management of working capital and operating assets and liabilities, tax refunds
and a favorable legal settlement during fiscal year 2004.
Net cash provided by (used in) investing activities was $2.6 million, ($2.0
million) and ($4.3 million) for fiscal year 2004, 2003, and 2002, respectively.
Net cash provided by (used in) investing activities includes maturities and
sales of auction rate securities of $9.6 million, $7.3 million and $108.3
million in fiscal years 2004, 2003 and 2002, respectively. Net cash provided by
(used in) investing activities includes purchases of auction rate securities of
$6.9 million, $9.2 million and $79.8 million in fiscal year 2004, 2003 and 2002,
respectively. Purchases and sales of auction rate securities in fiscal year 2002
included a complete roll-over of investments from tax exempt securities to
taxable securities. Cash used for acquisitions was $32.5 million in fiscal year
2002, and related to the CSMG acquisition. Capital expenditures of $0.2 million,
$0.1 million, and $0.3 million, relate to the capitalization of leasehold
improvements, computer equipment and software for fiscal years 2004, 2003, and
2002, respectively.
Net cash provided by financing activities was $22,000, $94,000, and $123,000 for
fiscal years 2004, 2003, and 2002, respectively. Net cash provided in fiscal
years 2004, 2003, and 2002 related to proceeds from the exercise of employee
stock options as well as common stock issued by us as part of our employee stock
purchase program, partially offset by payments made on long-term obligations.
FINANCIAL COMMITMENTS
As of January 1, 2005, we have the following contractual obligations and
commercial commitments by year (amounts in millions):
Later
Years
Through
2005 2006 2007 2008 2009 2011 Total
---- ---- ---- ---- ---- ------- -----
Capital leases $0.2 $ 0.2
Operating leases $1.8 $1.7 $1.7 $1.8 $1.7 $1.7 $10.4
---- ---- ---- ---- ---- ---- -----
Total $2.0 $1.7 $1.7 $1.8 $1.7 $1.7 $10.6
==== ==== ==== ==== ==== ==== =====
We have met our cash requirements with a combination of operating revenues and
the use of our cash reserves.
At January 1, 2005, we had approximately $52.2 million in cash, cash equivalents
and auction rate securities. We have almost no long-term debt. We believe we
have 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. We have
established a flexible model that provides a lower fixed cost structure than
most consulting firms, enabling us to scale operating cost structures more
quickly based on market conditions. Although we are well positioned because of
our cash reserves to weather continuing adverse conditions in the communications
industry for a period of time, if the industry and demand for consulting
services do not rebound in the foreseeable future and we continue to experience
negative cash flow, we could experience liquidity challenges.
TRANSACTIONS WITH RELATED PARTIES
During fiscal year 2002, one member of our Board of Directors was also director
of a customer with which we did business. Revenues earned from the customer
during fiscal year 2002 totaled approximately $308,000. No receivables were
outstanding from this customer as of December 28, 2002.
During fiscal year 2002, we made payments of approximately $190,000 to two legal
firms in which two members of our Board of Directors own equity interests. Such
payments were for legal services rendered in connection with our 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
(loss). During fiscal year 2004, we made payments of $55,000 to a legal firm in
which a member of our Board of Directors owns an equity interest. Such payments
were made in connection with matters arising in the normal course of business.
Our Board of Directors has affirmatively determined that such payments do not
constitute a material relationship between the director and the Company and
concluded the director is independent as defined by the NASDAQ corporate
governance rules.
As of January 1, 2005, there is one remaining line of credit between the Company
and our Chief Executive Officer, Richard P. Nespola, which originated in fiscal
year 2001. Aggregate borrowings available and outstanding against the line of
credit at January 3, 2004 and January 1, 2005 totaled $300,000 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not invest excess funds in derivative financial instruments or other
market rate sensitive instruments for the purpose of managing our foreign
currency exchange rate risk. We invest excess funds in short-term investments,
including auction rate securities, the yield of which is exposed to interest
rate market risk. Auction rate securities are classified as available-for-sale
and reported on the balance sheet at fair value, which equals market value, as
the rate on such securities resets generally every 28 to 35 days. Consequently,
interest rate movements do not materially affect the balance sheet valuation of
the fixed income investments. Changes in the overall level of interest rates
affect our interest income generated from investments.
We do 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 our clients.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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 "Company") as of January 1, 2005 and
January 3, 2004 and the related consolidated statements of operations and
comprehensive income (loss), stockholders' equity and cash flows for the fiscal
years ended January 1, 2005, January 3, 2004 and December 28, 2002 (52, 53, and
52 weeks, respectively). These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, 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 Company as of January 1, 2005
and January 3, 2004, and the results of its operations and its cash flows for
the fiscal years ended January 1, 2005, January 3, 2004 and December 28, 2002 in
conformity with accounting principles generally accepted in the United States of
America.
As discussed in Note 3 to the consolidated financial statements, the Company
changed its method of accounting for goodwill and other intangible assets with
the adoption of Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets", in 2002.
/S/ DELOITTE & TOUCHE LLP
KANSAS CITY, MISSOURI
March 31, 2005
THE MANAGEMENT NETWORK GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
January 3, January 1,
2004 2005
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents .......................................... $ 8,825 $ 10,882
Short-term investments ............................................. 44,050 41,300
Receivables:
Accounts receivable ............................................. 5,376 4,663
Accounts receivable -- unbilled ................................. 2,140 1,911
--------- ---------
7,516 6,574
Less: Allowance for doubtful accounts ........................... (652) (396)
--------- ---------
6,864 6,178
Refundable income taxes ........................................ 2,167 769
Prepaid and other assets ........................................ 710 1,176
--------- ---------
Total current assets ....................................... 62,616 60,305
--------- ---------
Property and equipment, net ......................................... 1,558 896
Goodwill............................................................. 15,528 13,365
Identifiable intangible assets, net.................................. 1,478 487
Other assets ........................................................ 402 300
--------- ---------
Total Assets ........................................................ $ 81,582 $ 75,353
========= =========
CURRENT LIABILITIES:
Trade accounts payable ............................................. $ 635 $ 845
Accrued payroll, bonuses and related expenses ...................... 1,251 1,040
Other accrued liabilities .......................................... 2,714 2,574
Unfavorable and capital lease obligations .......................... 785 725
--------- ---------
Total current liabilities .................................. 5,385 5,184
--------- ---------
Unfavorable and capital lease obligations ........................... 2,828 3,422
STOCKHOLDERS' EQUITY;
Common stock:
Voting -- $.001 par value, 100,000,000 shares authorized;
34,371,068 shares issued and outstanding on
January 3, 2004, 34,750,562 shares issued and
outstanding on January 1, 2005 .................................. 34 35
Preferred stock -- $.001 par value, 10,000,000 shares
authorized; no shares issued or outstanding
Additional paid-in capital ......................................... 157,292 157,857
Accumulated deficit................................................. (82,190) (90,885)
Accumulated other comprehensive income --
Foreign currency translation adjustment ........................... 176 352
Unearned compensation .............................................. (1,943) (612)
--------- ---------
Total stockholders' equity ................................. 73,369 66,747
--------- ---------
Total Liabilities and Stockholders' Equity .......................... $ 81,582 $ 75,353
========= =========
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 28, January 3, January 1,
2002 2004 2005
----------- ----------- -----------
Revenues................................................. $ 33,057 $ 23,245 $ 23,704
Cost of services:
Direct cost of services................................. 16,111 11,927 12,319
Equity related charges (benefits)....................... 721 (57) 205
-------- -------- --------
Total cost of services ......................... 16,832 11,870 12,524
-------- -------- --------
Gross profit............................................. 16,225 11,375 11,180
Operating expenses:
Selling, general and administrative..................... 23,811 19,359 16,037
Legal settlement ....................................... (1,294)
Real estate restructuring .............................. 1,545
Goodwill and intangible asset impairment ............... 25,165 19,484
Intangible asset amortization .................. 2,887 2,343 992
Equity related charges ................................. 353 142 958
-------- -------- --------
Total operating expenses ....................... 52,216 41,328 18,238
-------- -------- --------
Loss from operations .................................... (35,991) (29,953) (7,058)
Other income:
Interest income ........................................ 996 624 718
Interest expense ....................................... (63) (51) (30)
Other, net ............................................. 26
-------- -------- --------
Total other income.............................. 959 573 688
-------- -------- --------
Loss from continuing operations before income tax
(provision) benefit and cumulative effect of a
change in accounting principle ......................... (35,032) (29,380) (6,370)
Income tax (provision) benefit .......................... 12,389 (12,978) (49)
-------- -------- --------
Loss from continuing operations before cumulative effect
of a change in accounting principle..................... (22,643) (42,358) (6,419)
Cumulative effect of a change in accounting principle -
goodwill impairment, net of tax benefit ................ (1,140)
-------- -------- --------
Loss from continuing operations ......................... (23,783) (42,358) (6,419)
Discontinued operations:
Net income (loss) from discontinued operations (net of
income tax provision of $254 and $53 for fiscal 2002 and
2003, respectively, and including a charge for impairment
of goodwill of $2,163 in fiscal year 2004).............. 380 34 (2,276)
-------- -------- --------
Net loss ................................................ (23,403) (42,324) (8,695)
Other comprehensive income-
Foreign currency translation adjustment................. 96 63 176
-------- -------- --------
Comprehensive loss ...................................... $(23,307) $(42,261) (8,519)
======== ======== ========
Loss from continuing operations before cumulative effect
of a change in accounting principle per common share
Basic and diluted ...................................... $ (0.69) $ (1.26) $ (0.18)
======== ======== ========
Cumulative effect of a change in accounting principle
per common share
Basic and diluted....................................... $ (0.03)
======== ======== ========
Net income (loss) from discontinued operations per
common share
Basic and Diluted ...................................... $ 0.01 $ (0.07)
======== ======== ========
Net loss per common share
Basic and Diluted....................................... $ (0.71) $ (1.26) $ (0.25)
======== ======== ========
Shares used in calculation of loss from continuing
operations before cumulative effect of a change in
accounting principle, net income (loss) from
discontinued operations, and net loss per common
share
Basic and Diluted ...................................... 32,734 33,545 34,619
======== ======== ========
See notes to consolidated financial statements.
THE MANAGEMENT NETWORK GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FISCAL YEAR ENDED
-----------------------------------------
DECEMBER 28, January 3, January 1,
2002 2004 2005
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................. $ (23,403) $ (42,324) $ (8,695)
Adjust for
(Income) loss from discontinued operations (includes
non-cash goodwill impairment charge of $2,163 in fiscal
year 2004) (380) (34) 2,276
-------- -------- --------
Loss from continuing operations (23,783) (42,358) (6,419)
Adjustments to reconcile net 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
Real estate restructuring charge ....................... 1,545
Depreciation and amortization .......................... 3,835 3,197 1,672
Equity related charges ................................. 1,074 85 1,163
Deferred income taxes .................................. (8,820) 14,066
Bad debt expense ...................................... 1,207 575 399
Loss on retirement of assets ........................... 205 39
Income tax benefit realized upon exercise/
forfeiture of stock options ........................... 22 45
Other changes in operating assets and liabilities, net
of business acquisitions:
Accounts receivable .................................. 3,354 (173) 61
Accounts receivable -- unbilled ...................... (367) 2,092 229
Accrued (refundable) income taxes .................... (4,583) 2,720 1,437
Prepaid and other assets ............................. 202 1,113 (364)
Trade accounts payable ............................... 936 (535) 211
Accrued liabilities .................................. (720) (1,286) (563)
-------- -------- --------
Net cash used in operating activities from
continuing operations ............................. (373) (975) (590)
-------- -------- --------
Net cash provided by (used in) operating activities 7 (941) (703)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments........................ (79,775) (9,150) (6,850)
Proceeds from maturities and sales of short-term investment 108,300 7,300 9,600
Acquisition of business, net of cash acquired ............. (32,456)
Acquisition of property and equipment, net................. (280) (127) (188)
Loans to officers, net..................................... (100)
-------- -------- --------
Net cash provided by (used in) investing activities. (4,311) (1,977) 2,562
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock ................ ................. 164 70 131
Payments made on long-term obligations .................... (342) (392) (710)
Exercise of stock options.................................. 301 416 601
-------- -------- --------
Net cash provided by financing activities 123 94 22
-------- -------- --------
Effect of exchange rate on cash and cash equivalents ........ 96 63 176
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ........ (4,085) (2,761) 2,057
Cash and cash equivalents, beginning of period .............. 15,671 11,586 8,825
-------- -------- --------
Cash and cash equivalents, end of period .................... $ 11,586 $ 8,825 $ 10,882
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during period for interest ...................... $ 63 $ 51 $ 30
======== ======== ========
Cash paid during period for taxes ......................... $ 583 $ 493 $ 49
======== ======== ========
Supplemental disclosure of non-cash investing and financing
transactions-
Acquisition of business:
Fair value of assets acquired ........................... $ 53,840
Liabilities incurred or assumed ......................... $ (7,377)
Common stock issued ..................................... $ 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
--------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT
------------ ------ ---------- ---------
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 grants 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 benefit due to exercise/forfeiture
of stock options (655)
Net loss (42,324)
------------ ------ ---------- ---------
Balance, January 3, 2004 34,371,068 34 157,292 (82,190)
Exercise of options 338,165 1 601
Restricted stock cancellation (77,000) (212)
Employee stock purchase plan 98,529 131
Stock compensation
Restricted stock grant 15,000 30
Stock bonus 4,800 15
Other comprehensive income -
Foreign currency translation adjustment
Net loss (8,695)
------------ ------ ---------- ---------
Balance, January 1, 2005 34,750,562 $ 35 $ 157,857 $ (90,885)
============ ====== ========== =========
ACCUMULATED
OTHER
COMPREHENSIVE UNEARNED
INCOME COMPENSATION TOTAL
------------- -------------- ---------
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 grants (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)
Net loss (42,324)
------------- -------------- ---------
Balance, January 3, 2004 176 (1,943) 73,369
Exercise of options 602
Restricted stock grant cancellation 212
Employee stock purchase plan 131
Stock compensation 1,149 1,149
Restricted stock grant (30)
Stock bonus 15
Other comprehensive income -
Foreign currency translation adjustment 176 176
Net loss (8,695)
------------- -------------- ---------
Balance, January 1, 2005 $ 352 $ (612) $ 66,747
============= ============== =========
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 founded in 1990 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 from customers in the United States,
however the Company also provides services to customers in Europe and other
foreign countries. TMNG'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. The fiscal year ended January 1, 2005 reported 52 weeks of
operating results and consisted of four equal 13 week quarters. The fiscal year
ended January 3, 2004 reported 53 weeks of operating results and consisted of
three 13 week quarters and one 14 week quarter compared to the fiscal year ended
December 28, 2002, which reported 52 weeks of operating results and consisted of
4 equal 13 week quarters. The fiscal years ended January 1, 2005, January 3,
2004 and December 28, 2002 are referred to herein as fiscal year 2004, 2003 and
2002, respectively. TMNG Europe and TMNG Canada maintain year-end dates of
December 31.
Revenue Recognition - The Company accounts for revenue and costs in connection
with client service engagements under a time and materials contract in the
period in which the service is performed. The Company generally records revenue
in connection with fixed price contracts under a percentage of completion method
when it is possible 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 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. The Company had no such loss contracts as of January 3, 2004 and
January 1, 2005. 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.
On a more limited basis, the Company also enters into gain-sharing contracts,
where the Company's revenue is 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.
Changes in Presentation - TMNG's Consolidated Statements of Operations and
Comprehensive Income (Loss) for the years ended January 3, 2004 and December 28,
2002 reflect the reclassification of discontinued operations during fiscal year
2004 (see Note 4 "Discontinued Operations"). In addition, through additional
clarifying guidance, the Company determined that its investments in auction rate
securities are more appropriately classified as available-for-sale short-term
investments rather than cash equivalents. Auction rate securities generally have
long-term stated maturities; however, for the investor, these securities have
certain economic characteristics of short-term investments because of their rate
setting mechanism. The return on these securities is designed to track
short-term interest rates due to a "Dutch" auction process which resets the
coupon rate (or dividend rate). Auction rate securities are designed to be
highly liquid. Unless an auction fails, an investor can, by electing not to bid,
recoup the principal amount of its investment at each auction date. To date, the
Company has experienced no failed auctions.
Auction rate securities of $44.1 million at January 3, 2004, which were
previously recorded in cash and cash equivalents due to their liquidity and
pricing reset feature, have been included as short-term investments in the
accompanying balance sheet and purchases, sales and maturities of these
securities have been reflected as investing activities in the statements of cash
flows. The reclassification of prior period balances had no impact on net loss,
cash flow used in operations or debt covenants.
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.
Short-Term Investments - Short-term investments, which consist of
investment-grade auction rate securities, are classified as "available-for-sale"
under the provisions of SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." Accordingly, the short-term investments are
reported at fair value, with any related unrealized gains and losses included as
a separate component of stockholders' equity, net of applicable taxes, when
applicable. Realized gains and losses and interest and dividends are included in
interest income within the Consolidated Statements of Operations and
Comprehensive Income (Loss). Auction rate securities generally reset every 28 to
35 days; consequently, interest rate movements do not materially affect the fair
value of these investments. At January 3, 2004 and January 1, 2005
there were no unrealized gains or losses on short-term investments. The
contractual maturity for all auction rate securities at January 1, 2005 exceeded
10 years.
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 accounts for goodwill in accordance with the provisions
of Statement of Financial Accounting Standards ("SFAS") No. 142 "Accounting for
Goodwill and Intangible Assets." Goodwill represents the excess of purchase
price over the fair value of net assets acquired in business combinations
accounted for as purchases. The Company evaluates goodwill for impairment on an
annual basis and whenever events or circumstances indicate that these assets may
be impaired. The Company determines impairment by comparing the net assets of
each reporting unit to its respective fair value. In the event a reporting
unit's carrying value exceeds its fair value, an indication exists that the
reporting unit goodwill may be impaired. In this situation, the Company must
determine the implied fair value of goodwill by assigning the reporting unit's
fair value to each asset and liability of the reporting unit. The excess of the
fair value of the reporting unit over the amounts assigned to its assets and
liabilities is the implied fair value of goodwill. An impairment loss is
measured by the difference between the goodwill carrying value and the implied
fair value
Identifiable Intangibles - Identifiable intangible assets are stated at cost
less accumulated amortization, and represent customer relationships, employment
agreements and trade names acquired in the acquisition of Cambridge Strategic
Management Group ("CSMG"). 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 uses its best estimate, based on reasonable and
supportable assumptions and projections, to review certain long-lived assets and
identifiable intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amount of these 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 Note
10 "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, the
Company's net loss for fiscal year 2002, 2003 and 2004 would have would have
increased by $3.3 million, $1.1 million and $2.8 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 2002, 2003 and 2004 (in
thousands, except per share amounts):
FISCAL FISCAL FISCAL
YEAR YEAR YEAR
2002 2003 2004
-------- -------- --------
Net loss, as reported: $(23,403) $(42,324) $ (8,695)
Add: Stock-based employee compensation
expense included in reported net loss,
net of related tax effects 273 85 1,163
Deduct: Total stock-based compensation
expense determined under fair value
based method for all awards, net of related (3,536) (1,213) (3,988)
tax effects
-------- -------- --------
Pro forma net loss $(26,666) $(43,452) $(11,520)
======== ======== ========
Loss per share
Basic and diluted, as reported $ (0.71) $ (1.26) $ (0.25)
======== ======== ========
Basic and diluted, pro forma $ (0.81) $ (1.30) $ (0.33)
======== ======== ========
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 had been recognized in the Company's financial statements
by December 28, 2002. Expense recognized in connection with the warrant was $0.7
million for fiscal year 2002.
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 years 2002, 2003 and 2004 as the Company reported a
loss from continuing operations for those periods. Had the Company reported net
income in fiscal years 2002, 2003 and 2004, the treasury stock method of
calculating common stock equivalents would have resulted in approximately
791,000, 772,000 and 822,000 additional dilutive shares, respectively.
New Accounting Standards - In December 2004, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No.
123(R), "Share-Based Payment," replacing SFAS No. 123 and superseding Accounting
Principles Board (APB) Opinion No. 25. SFAS No. 123(R) requires public companies
to recognize compensation expense for the cost of awards of equity compensation
effective for periods beginning after June 15, 2005. This compensation cost will
be measured as the fair value of the award estimated using an option-pricing
model on the grant date. The Company is currently evaluating the various
transition provisions under SFAS No. 123(R) and will adopt SFAS No. 123(R)
effective July 1, 2005, which is expected to result in increased compensation
expense in future periods.
2. BUSINESS COMBINATIONS
On March 6, 2002, TMNG purchased the business and primary assets of CSMG, a
Delaware corporation, of Boston, Massachusetts (now "TMNG Strategy"). TMNG
Strategy provides high-end advisory services to global communication service and
equipment providers and investment firms that provide capital to the industry.
TMNG Strategy'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 was subject to certain claims as set forth in the Asset
Purchase Agreement and was 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 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.
AS OF 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. The Company's estimate of future
revenue generated from the acquired customer base resulted in a customer
relationship value of $5,070,000 to be 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 was amortized on a straight-line basis. As of
January 1, 2005, CSMG's tradename was fully amortized.
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.
The following unaudited pro forma result of operations assumes that the CSMG
acquisition occurred at the beginning of fiscal year 2002. The pro forma results
of operations require various assumptions including an assumption that the same
amount of goodwill would have been recognized had the transaction occurred at
the beginning of fiscal year 2002 without regard to the then current levels of
business activity of CSMG 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 combination 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 28,
2002
---------
Total revenues $ 36,822
Loss before cumulative effect of a change in
accounting principle $ (22,494)
Net loss $ (23,634)
Loss from continuing operations before
cumulative effect of a change in accounting
principle per common share:
Basic and diluted $ (0.68)
Net loss per common share:
Basic and diluted $ (0.71)
3. GOODWILL AND OTHER INTANGIBLE ASSETS
Upon the adoption of SFAS No. 142 in fiscal year 2002, the Company recorded a
goodwill impairment loss related to the Management Consulting Segment of
approximately $1.9 million and has reflected this amount as a cumulative change
in accounting principle, net of tax benefit, in the Statement of Operations and
Comprehensive 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 an impairment loss related to the Management Consulting Segment of
approximately $24.4 million, and an impairment loss related to the All Other
Segment of approximately $0.8 million.
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 the CSMG reporting unit, compared to
the projected financial results that were utilized in determining the reporting
unit's fair value in the previous annual goodwill impairment test. Additionally,
during the second quarter of 2003 an executive of CSMG tendered his resignation
to the Company, which also had the effect of lowering the financial projections
of CSMG. 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 in the second quarter of
fiscal year 2003. 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 were higher than their respective
carrying values. The goodwill impairment loss related to fiscal year 2003 has
been reflected as a component of Loss from Operations in the Statement of
Operations and Comprehensive Income (Loss) for that year. In the first quarter
of fiscal year 2004 the Company recorded a $2.2 million goodwill impairment loss
related to the discontinuation of the hardware segment and has reflected this
amount in the Statement of Operations and Comprehensive Income (Loss) as a
component of discontinued operations. The changes in the carrying amount of
goodwill as of January 3, 2004 and January 1, 2005 are as follows (amounts in
thousands):
Management Consulting All Other
Segment Segment Total
--------------------- --------- --------
Balance as of December 28, 2002 $ 29,145 $ 2,163 $ 31,308
Impairment Loss (15,780) (15,780)
-------- --------- --------
Balance as of January 3, 2004 13,365 2,163 15,528
Impairment loss on discontinued operations (2,163) (2,163)
-------- --------- --------
Balance as of January 1, 2005 $ 13,365 $ 13,365
======== ========= ========
Included in identifiable intangible assets, net are the following (amounts in
thousands):
January 3, 2004 January 1, 2005
------------------- ---------------------
Accumulated Accumulated
Cost Amortization Cost Amortization
---- ------------ ------- ------------
Customer relationships $ 3,086 $(2,545) $ 1,908 $(1,538)
Employment agreements 3,200 (2,292) 3,200 (3,083)
Tradename 350 (321)
Covenant not to compete 203 (203)
------- ------- ------- -------
Total $ 6,839 $(5,361) $ 5,108 $(4,621)
======= ======= ======= =======
During fiscal year 2003, in accordance with the provisions of SFAS No. 144 and
as a result of the factors discussed above, 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. The
impairment losses have been reflected as a component of Loss from Operations in
the Statement of Operations and Comprehensive Income (Loss) for fiscal year
2003. During fiscal year 2004, components of the customer relationships assets
became fully amortized and the associated costs and accumulated amortization
were eliminated.
Intangible assets amortization expense for fiscal years 2002, 2003 and 2004 was
$2.9 million, $2.3 million and $1.0 million, respectively. Intangible
amortization expense is estimated to be approximately $0.3 million in fiscal
year 2005 and $0.2 million in fiscal year 2006.
4. DISCONTINUED OPERATIONS
On March 4, 2004, management and the Board of Directors elected to discontinue
the hardware segment of the Company. The Company concluded that this segment of
the business did not align well with the strategic focus of the Company. Charges
related to the discontinuation of the hardware business were $2.2 million in
fiscal year 2004 and relate primarily to goodwill impairment and severance
charges. These charges are reported as a component of discontinued operations.
The hardware segment's results of operations have been classified as
discontinued operations and prior periods have been restated. For business
segment reporting purposes, the hardware segment was previously recorded as the
"All Other" segment.
Revenue and income (loss) from discontinued operations are as follows (amounts
in thousands):
Fiscal Fiscal Fiscal
Year Year Year
2002 2003 2004
-------- -------- --------
Revenue $ 1,538 $ 231 $ 13
Goodwill impairment
and severance charge $ (2,213)
Operating income (loss) $ 634 $ 87 (63)
Income tax provision 254 53
-------- -------- --------
Income (loss) from
discontinued operations $ 380 $ 34 $ (2,276)
======== ======== ========
5. BUSINESS SEGMENTS, MAJOR CUSTOMERS AND SIGNIFICANT GROUP CONCENTRATIONS OF
CREDIT RISK
The Company identifies its segments based on the way management organizes the
Company to assess performance and make operating decisions regarding the
allocation of resources.
In accordance with the criteria in SFAS No. 131 "Disclosure about Segments of an
Enterprise and Related Information," the Company historically concluded it had
five operating segments, of which four were aggregated in one reportable
segment, the Management Consulting Services segment, and the remaining segment
in All Other. Services provided by the Management Consulting Services include
business strategy and planning, marketing and customer relationship management,
billing system support, operating system support, revenue assurance, corporate
investment services, and network management. All Other consisted of computer
hardware commissions and rebates received in connection with the procurement of
hardware for third parties. Effective with the discontinuation of the hardware
business in March 2004, the
Company has only one reportable segment, and therefore summarized financial
information concerning the Management Consulting Services segment is not
included. For summarized financial information regarding the All Other segment,
see Note 4 "Discontinued Operations."
Major customers in terms of significance to TMNG's revenues (i.e. in excess of
10% of revenues) for fiscal years 2002, 2003 and 2004, and accounts receivable
as of January 3, 2004 and January 1, 2005 were as follows (amounts in
thousands):
REVENUES ACCOUNTS RECEIVABLE
------------------------------------ ---------------------------
FISCAL FISCAL FISCAL
YEAR YEAR YEAR January 3, January 1,
2002 2003 2004 2004 2005
-------- ------ ------ ------------ ------------
Customer A ......... $5,850
Customer B ......... $4,392 $ 3,238 $2,894 $1,743 $ 438
Customer C ......... $ 2,692 $3,305 $1,177 $ 906
Revenues from the Company's ten most significant customers accounted for
approximately 70%, 67% and 67% of revenues for fiscal years 2002, 2003 and 2004,
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 are as follows (amounts in thousands):
FISCAL FISCAL FISCAL
YEAR YEAR YEAR
2002 2003 2004
------- -------- --------
Beginning balance $ 517 $ 471 652
Bad debt expense 1,207 575 399
Account write-offs (1,253) (394) (655)
------- -------- --------
Ending balance $ 471 $ 652 $ 396
======= ======== ========
Revenues earned in the United States and internationally based on the location
where the services are performed are as follows (amounts in thousands):
LOSS FROM CONTINUING OPERATIONS BEFORE
INCOME TAX (PROVISION) BENEFIT AND
CUMMULATIVE EFFECT OF A CHANGE IN
REVENUE ACCOUNTING PRINCIPLE
------------------------------------ ------------------------------------
FY FY FY FY FY FY
2002 2003 2004 2002 2003 2004
-------- -------- -------- -------- -------- --------
United States ........ $ 30,397 $ 20,915 $ 18,427 $(32,387) $(26,473) $ (4,952)
International:
The Netherlands .... 1,990 964 891 (1,979) (1,203) (239)
Ireland ............ 496 32 (493) (39)
Canada ............. 11 95 245 (11) (119) (66)
Belize ............. 704 173 (879) (46)
Portugal .......... 451 1,124 (562) (302)
Great Britain ...... 2,296 (617)
Australia .......... 386 (104)
Other .............. 163 84 162 (162) (105) (44)
-------- -------- -------- -------- -------- --------
Total ...... $ 33,057 $ 23,245 $ 23,704 $(35,032) $(29,380) $ (6,370)
======== ======== ======== ======== ======== ========
No significant long-lived assets are deployed outside the United States.
6. PROPERTY AND EQUIPMENT
JANUARY 3, January 1,
2004 2005
------------ ------------
(000'S)
Furniture and fixtures.............................. $ 908 $ 823
Software and computer equipment..................... 2,661 2,777
Leasehold improvements.............................. 711 479
------ ------
4,280 4,079
Less: Accumulated depreciation and amortization..... 2,722 3,183
------ ------
$1,558 $ 896
====== ======
Depreciation and amortization expense on property and equipment was
approximately $948,000, $854,000 and $680,000 for fiscal years 2002, 2003 and
2004, respectively.
7. INCOME TAXES
For fiscal years 2002, 2003 and 2004, the income tax provision (benefit),
exclusive of the tax associated with discontinued operations and the cumulative
effect of the change in accounting principle consists of the following (amounts
in thousands):
FISCAL FISCAL FISCAL
YEAR YEAR YEAR
2002 2003 2004
-------- -------- --------
Federal
Current ............................ $(2,817) $ ( 992)
Deferred tax (benefit) expense ..... (7,717) (8,698) $ (1,992)
Change in valuation allowance....... 20,999 1,992
-------- -------- --------
(10,534) 11,309 0
State
Current ............................ (849) $ 49
Deferred tax (benefit) expense ..... (1,103) (1,244) (700)
Change in valuation allowance....... 3,000 700
-------- -------- --------
(1,952) 1,756 49
Foreign
Current ............................ 97 (87)
Deferred tax (benefit) expense ..... 99
Change in valuation allowance....... (99)
-------- -------- --------
97 (87) 0
-------- -------- --------
Total ................................ $(12,389) $ 12,978 $ (49)
======== ======== ========
The Company has fully reserved its deferred tax assets with a valuation
allowance as of January 3, 2004 and January 1, 2005, 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.
In the fourth quarter of fiscal year 2003, the Company reassessed all
significant estimates and judgments made in connection with its SFAS No. 109
analysis. In performing the updated analysis of the realizability of its
deferred tax assets, the Company considered continuing market uncertainties and
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 and fully reserved for all deferred
tax assets.
The following is a reconciliation between the provision (benefit) for income
taxes and the amounts computed based on loss from continuing operations at the
statutory federal income tax rate (amounts in thousands):
FISCAL YEAR FISCAL YEAR FISCAL YEAR
2002 2003 2004
----------------- ----------------- -----------------
AMOUNT % AMOUNT % AMOUNT %
-------- ---- -------- ---- -------- ----
Computed expected federal income
tax benefit .......................... $(12,261) (35.0) $(10,282) (35.0) $ (2,229) (35.0)
State income tax expense, net of
federal benefit ...................... (1,611) (4.6) (1,252) (4.3) (298) (4.7)
Goodwill impairment.................... 1,536 4.4 217 0.7
Other ................................. (53) (0.2) 316 1.1 (17) (0.2)
Valuation allowance ................... 23,979 82.0 2,593 40.7
-------- ---- -------- ---- -------- ----
Total ....................... $(12,389) (35.4) $ 12,978 44.5 $ 49 0.8
======== ==== ======== ==== ======== ====
Items giving rise to the provision for deferred income taxes (benefit) are as
follows (amounts in thousands):
FISCAL FISCAL FISCAL
YEAR YEAR YEAR
2002 2003 2004
-------- -------- --------
Goodwill ....................................... $ (7,988) $ (4,961) $ 1,402
Bad debt reserve ............................... 13 (97) 100
Stock option compensation expense .............. 5 45 (196)
Intangible assets .............................. (655) (1,831) (156)
Valuation allowance ............................ 23,999 2,593
Net operating loss carryforward ................ (3,212) (3,318)
Unfavorable lease liability..................... 151 166 (359)
Other .......................................... (346) 2 (66)
-------- -------- --------
Total ................................ $ (8,820) $ 14,111 $ 0
======== ======== ========
The significant components of deferred income tax assets and the related balance
sheet classifications, as of December 28, 2002, January 3, 2004 and January 1,
2005 are as follows (amounts in thousands):
DECEMBER 28, JANUARY 3, JANUARY 1,
2002 2004 2005
------------ ----------- -----------
Current deferred tax assets:
Accounts receivable ....................... $ 143 $ 240 $ 140
Accrued expenses .......................... 351 296 147
Unfavorable lease liability................ 212
Valuation allowance........................ (536) (499)
---------- --------- ---------
Current deferred tax asset ........ $ 494 $ 0 $ 0
========== ========= =========
Non-current deferred tax assets:
Goodwill .................................. $ 8,320 $ 13,281 $ 11,879
Stock option compensation expense ......... 2,893 2,193 2,335
Unfavorable lease liability........... .... 1,180 1,017 1,329
Net operating loss carryover .............. 732 3,944 7,308
Intangible assets.......................... 709 2,540 2,696
Reserves .................................. 419 415 365
Other ..................................... 19 73 173
Valuation allowance ....................... (23,463) (26,085)
---------- --------- ---------
Non-current deferred tax asset .... $ 14,272 $ 0 $ 0
========== ========= =========
The net operating loss carryover as of January 1, 2005 is scheduled to expire as
follows (amounts in thousands):
Amount Year
$ 1,830 2016
5,602 2023
10,576 2024
------
Total $18,008
======
The Company establishes reserves for potential tax liabilities when, despite the
belief that tax return positions are fully supported, certain positions are
likely to be challenged and not be fully sustained. Such tax reserves are
analyzed on a quarterly basis and adjusted based upon changes in facts and
circumstances, such as the progress of federal and state audits, case law and
emerging legislation. The Company's effective tax rate includes the impact of
such tax reserves and changes to these reserves as considered appropriate by
management. The Company establishes the reserves based upon its assessment of
exposure associated with possible future assessments that may result from the
examination of federal, state, or international tax returns. These tax reserves
did not change materially during fiscal year 2004, 2003 or 2002. Management
believes that it has established adequate reserves in the event of loss or
settlement of any potential tax liabilities.
8. REAL ESTATE RESTRUCTURING
In the fourth quarter of fiscal year 2004, the Company made the decision to
consolidate office space. In connection with this decision, a sublease agreement
for unutilized space was entered into with a third party for the remainder of
the original lease term. Due to current market conditions, the terms of the
sublease require payments by the sublessee which are less than the payments the
Company must make to the original lessor. In accordance with SFAS No. 146
"Accounting for Costs Associated with Exit or Disposal Activities" the Company
recognized a charge of $1.3 million for the present value of the total remaining
lease payments less amounts to be received under the sublease. The decision to
consolidate space also resulted in charges of $163,000 relating to impairment of
fixed assets/leasehold improvements and $122,000 for brokerage commissions in
connection with the sublease. The restructuring charge of $1.5 million has been
reflected as a component of Loss from Operations in the Statement of Operations
and Comprehensive Income (Loss).
9. 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 as of
January 1, 2005 (amounts in thousands):
CAPITALIZED
FISCAL YEAR LEASES
--------------------------------------- -----------
2005 $ 191
2006 20
---------
Total minimum lease payments $ 211
Less amount representing interest (11)
---------
Present value of minimum capitalized
lease payments 200
Current portion (184)
---------
Long-term capitalized lease obligations $ 16
=========
Following is a summary of future minimum payments under operating leases that
have initial or remaining noncancellable lease terms in excess of one year at
January 1, 2005 (amounts in thousands):
OPERATING
FISCAL YEAR LEASES
--------------------------------------- -----------
2005 $ 1,770
2006 1,745
2007 1,751
2008 1,753
2009 1,662
Thereafter 1,698
---------
Total minimum lease payments 10,379
Future minimum rentals to be received
under noncancellable subleases (1,704)
---------
Minimum lease payments net of amounts
to be received under subleases $ 8,675
=========
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 and continuing lease commitments associated with the
consolidation of office space. As of January 3, 2004 and January 1, 2005, the
unamortized balance of these unfavorable lease liabilities was $3.0 million and
$3.9 million, respectively.
Assets recorded under capital leases are included in property and equipment as
follows (amounts in thousands):
January 3, January 1,
2004 2005
---------- ----------
Furniture and fixtures $ 220 $ 156
Software and computer equipment 505 505
---------- ----------
725 661
Less: Accumulated depreciation (395) (534)
---------- ----------
$ 330 $ 127
========== ==========
Total rental expense was approximately $2,084,000, $1,911,000 and $1,852,000 for
fiscal years 2002, 2003 and 2004, respectively.
10. STOCK OPTION PLAN AND STOCK BASED COMPENSATION
The Company has 9,294,000 shares of the Company's common stock authorized for
issuance under the Company's 1998 Equity Incentive Plan (the 1998 Plan). The
1998 Plan, a shareholder approved plan, provides the Company's common stock for
the granting of incentive stock options and nonqualified stock options to
employees, and nonqualified stock options 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 1, 2005, 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 28, 2002,
January 3, 2004 and January 1, 2005 and changes during the years ending on those
dates is presented below:
EXERCISE PRICE EQUALS FAIR MARKET VALUE AT GRANT DATE:
DECEMBER 28, January 3, JANUARY 1,
2002 2004 2005
------------------------------- ---------------------------- ------------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
---------- ---------------- ---------- ---------------- ---------- ----------------
Outstanding at beginning of year 3,075,228 $ 9.95 3,143,459 $ 8.72 4,233,696 $5.57
Granted 592,100 $ 2.05 1,967,500 $ 2.07 405,500 $2.38
Exercised (100,377) $ 1.52 (116,221) $ 1.43 (258,831) $1.57
Forfeited/cancelled (423,492) $ 10.09 (761,042) $ 10.17 (478,169) $5.27
--------- --------- ---------
Outstanding at end of year 3,143,459 $ 8.72 4,233,696 $ 5.57 3,902,196 $5.54
========= ========= =========
Options exercisable at year-end 1,612,091 $ 9.41 1,661,916 $ 9.15 2,331,710 $7.66
========= ========= =========
Weighted average fair value of
options granted during the year $ 1.65 $ 1.60 $1.76
The following table summarizes information about market value stock options
outstanding as of January 1, 2005:
WEIGHTED AVERAGE
NUMBER WEIGHTED REMAINING NUMBER WEIGHTED
RANGE OF OUTSTANDING AT AVERAGE CONTRACTUAL EXERCISABLE AT AVERAGE
EXERCISE PRICES JANUARY 1, 2005 EXERCISE PRICE LIFE JANUARY 1, 2005 EXERCISE PRICE
- ---------------- ----------------- -------------- ---------------- ----------------- --------------
$ 0.00 to $ 2.00 1,119,435 $ 1.58 7.85 550,846 $ 1.51
$ 2.01 to $ 3.00 1,208,832 $ 2.31 8.84 420,488 $ 2.31
$ 3.01 to $ 4.00 288,279 $ 3.85 6.92 209,226 $ 3.94
$ 4.01 to $ 5.00 465,000 $ 4.76 6.68 388,250 $ 4.81
$ 5.01 to $10.00 270,000 $ 6.73 6.37 213,625 $ 6.77
$10.01 to $20.00 163,250 $14.44 5.61 161,875 $14.46
$20.01 to $35.00 387,400 $24.72 5.25 387,400 $24.72
--------- ------ --------- ------
TOTAL 3,902,196 $ 5.54 2,331,710 $ 7.66
========= ====== ========= ======
EXERCISE PRICE LESS THAN FAIR MARKET VALUE AT GRANT DATE:
DECEMBER 28, JANUARY 3, JANUARY 1,
2002 2004 2005
----------------------------- ------------------------------ --------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
-------- ---------------- --------- ---------------- -------- ----------------
Outstanding at beginning of year 897,758 $ 2.32 768,336 $ 2.38 629,919 $2.51
Granted 50,000 $ 2.31
Exercised (54,088) $ 1.85 (84,667) $ 1.90 (34,167) $1.94
Forfeited/cancelled (75,334) $ 2.00 (103,750) $ 2.00 (42,563) $3.90
--------- --------- -------
Outstanding at end of year 768,336 $ 2.38 629,919 $ 2.51 553,189 $2.44
========= ========= =======
Options exercisable at year-end 606,084 $ 2.32 579,919 $ 2.52 519,855 $2.45
========= ========= =======
Weighted average fair value of
options granted during the year $ 2.69
The following table summarizes information about below market value stock
options outstanding at January 1, 2005:
WEIGHTED AVERAGE
NUMBER WEIGHTED REMAINING NUMBER WEIGHTED
RANGE OF OUTSTANDING AT AVERAGE CONTRACTUAL EXERCISABLE AT AVERAGE
EXERCISE PRICES JANUARY 1, 2005 EXERCISE PRICE LIFE JANUARY 1, 2005 EXERCISE PRICE
--------------- ---------------- -------------- ---------------- --------------- --------------
$ 0.00 to $ 2.00 423,189 $1.88 4.43 423,189 $1.88
$ 2.01 to $ 3.00 50,000 $2.31 8.96 16,666 $2.31
$ 3.01 to $ 4.00 50,000 $4.00 4.87 50,000 $4.00
$ 5.01 to $10.00 30,000 $8.00 4.81 30,000 $8.00
--------- ------ --------- ------
TOTAL 553,189 $2.44 519,855 $2.45
========= ====== ========= ======
During fiscal year 2003 the Board of Directors of TMNG authorized for issuance
1,200,000 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 28, JANUARY 3, JANUARY 1,
2002 2004 2005
------------------------------- ---------------------------- ------------------------------
SHARES SHARES SHARES
------------------------------- ---------------------------- ------------------------------
Outstanding at beginning of year 720,000
Granted 720,000 15,000
Forfeited/cancelled (77,000)
--------- --------- ---------
Outstanding at end of year 720,000 658,000
========= ========= =========
Weighted average fair value of
Shares granted during the year $ 2.87 $2.01
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 28, 2002,
January 3, 2004 and January 1, 2005, and changes during the years ending on
those dates is presented below:
EXERCISE PRICE EQUALS FAIR MARKET VALUE AT GRANT DATE:
DECEMBER 28, JANUARY 3, JANUARY 1,
2002 2004 2005
---------------------------- ---------------------------- -----------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
---------- ---------------- ----------- ---------------- ----------- ----------------
Outstanding at beginning of year 2 165,114 $ 6.39 2,212,226 $ 4.62 1,175,160 $4.78
Granted 1,316,750 $ 2.97 10,000 $ 1.77 117,500 $2.54
Exercised (12,375) $ 4.00 (44,416) $ 1.85 (45,167) $3.04
Forfeited/cancelled (1,257,263) $ 5.95 (1,002,650) $ 4.53 (193,929) $4.23
--------- --------- ---------
Outstanding at end of year 2,212,226 $ 4.62 1,175,160 $ 4.78 1,053,564 $4.71
========= ========= =========
Options exercisable at year-end 458,433 $ 6.29 527,545 $ 5.62 635,630 $5.60
========= ========= =========
Weighted average fair value of
options granted during the year $ 2.39 $ 1.37 $2.38
The following table summarizes information about stock options outstanding at
January 1, 2005:
WEIGHTED AVERAGE
NUMBER WEIGHTED REMAINING NUMBER WEIGHTED
RANGE OF OUTSTANDING AT AVERAGE CONTRACTUAL EXERCISABLE AT AVERAGE
EXERCISE PRICES JANUARY 1, 2005 EXERCISE PRICE LIFE JANUARY 1, 2005 EXERCISE PRICE
- ---------------- ----------------- -------------- ---------------- ----------------- --------------
$ 0.00 to $ 2.00 74,750 $ 1.85 8.35 17,749 $ 1.77
$ 2.01 to $ 3.00 64,500 $ 2.29 9.64
$ 3.01 to $ 4.00 660,314 $ 3.66 6.74 413,711 $ 3.77
$ 4.01 to $ 5.00 15,500 $ 4.89 7.32 9,000 $ 4.85
$ 5.01 to $10.00 185,000 $ 5.85 6.81 141,670 $ 5.83
$10.01 to $20.00 3,500 $13.68 5.82 3,500 $13.68
$20.01 to $35.00 50,000 $21.00 5.67 50,000 $21.00
--------- ------ --------- ------
TOTAL 1,053,564 $ 4.71 635,630 $ 5.60
========= ====== ========= ======
EXERCISE PRICE LESS THAN FAIR MARKET VALUE AT GRANT DATE:
DECEMBER 28, JANUARY 3, JANUARY 1,
2002 2004 2005
-------------------------- -------------------------- -------------------------
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 8,125 $5.50
Granted
Exercised
Forfeited/cancelled (29,663) $ 5.50 (15,412) $ 5.50 (8,125) $5.50
------ ------ -------
Outstanding at end of year 23,537 $ 5.50 8,125 $ 5.50
====== ====== =======
Options exercisable at year-end 5,884 $ 5.50 8,125 $ 5.50
====== ====== =======
At January 1, 2005, the Company had a total of 5,508,949 outstanding options to
acquire shares with a weighted average exercise price of $5.07 and a weighted
average remaining contractual life of 7.14 years. Of these options 3,487,195
were exercisable at January 1, 2005 with a weighted average exercise price of
$6.51.
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 year 2003, the Company recorded
unearned compensation of approximately $58,000, 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
and 2004 were issued with the exercise price of the option equal to the market
price of the Company's stock as of the grant date.
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 years 2003 and 2004 the Company recorded unearned compensation of
approximately $2,070,000 and $30,150, respectively, 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 $0.5 million, $0.1 million, and $1.2 million for fiscal years
2002, 2003 and 2004, 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 2002, 2003 and 2004, 75,451, 67,238, and
98,529 shares were purchased under the plan, respectively. At January 1, 2005,
5,558,897 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 2002, 2003 and 2004 was estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions:
FISCAL YEAR 2002 FISCAL YEAR 2003 FISCAL YEAR 2004
---------------- ----------------- ---------------------
Expected volatility factor..... 111% 104% 91%
Risk-free interest rate........ 1.34% - 5.00% 1.037% - 3.435% 3.00% - 4.10%
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 - 2.0 years
Expected dividend rate......... 0% 0% 0%
11. LOANS TO OFFICERS
As of January 1, 2005, there is one remaining line of credit between the Company
and its Chief Executive Officer, Richard P. Nespola, which originated in fiscal
year 2001. Aggregate borrowings available and outstanding against the line of
credit at January 3, 2004 and January 1, 2005 totaled $300,000 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.
12. LETTER OF CREDIT
In March 2002, the Company entered into a $1.0 million standby letter of credit
("LOC") facility with a financial institution in connection with the CSMG
acquisition. The LOC was required as part of the assignment of the leased office
space from CSMG to the Company. The Company originally collateralized the LOC
with a $1.0 million cash deposit. The LOC provides for reductions of the amount
deposited with the financial institution during the LOC term as follows (amounts
in thousands):
LOC
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.
The collateral deposited for this LOC is included in "Cash and Cash Equivalents"
on the Company's consolidated condensed balance sheet as of January 3, 2004 and
January 1, 2005. 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
January 1, 2005.
13. RELATED PARTY TRANSACTIONS
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 this customer as of January 3, 2004 and January 1, 2005. Such
relationship did not exist with the Company during fiscal years 2003 and 2004.
During fiscal year 2002, TMNG made payments of approximately $190,000 to two
legal firms in which two members of the 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 operations and comprehensive
income (loss). During fiscal year 2004, we made payments of $55,000 to a legal
firm in which a member of the Board of Directors owns an equity interest. Such
payments were made in connection with matters arising in the normal course of
business and were within the limitations set forth by NASDAQ rules.
14. SIGNIFICANT CUSTOMER CONTRACT SETTLEMENT
On December 10, 1999, the Company entered into a consulting services agreement
with a significant customer under which the 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.
The agreement provided 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. The shortfall was not remedied by the
customer during the first quarter of 2004, resulting in the customer's default
on the contract.
On March 4, 2004, the Company filed suit against the customer for breach of the
consulting agreement, seeking damages of approximately $5.7 million against the
customer. The customer responded to the suit on March 26, 2004 with its answer
and two counterclaims, neither of which sought money damages. The customer
requested a declaration that the Company first breached the agreement and that
the customer was therefore not liable for any damages. Additionally, during the
first quarter of fiscal year 2004 the customer informed the Company of its
decision to cancel the consulting agreement.
On August 25, 2004 the Company entered into a mediated settlement agreement to
settle the pending litigation with the customer. Pursuant to
the terms of the settlement agreement, each party was dismissed from any
liability for the claims made against it and the customer agreed to make a cash
settlement payment to the Company in the amount of $2 million to settle all
claims and disputes arising under the consulting services agreement. The Company
has no obligation to render further services to the customer. At October 11,
2004, the Company received the $2 million settlement from the customer and the
parties dismissed one another from liability. This payment was recorded in the
fourth quarter of fiscal year 2004 as a $1.3 million reduction of operating
expenses, in the consolidated statement of operations and comprehensive income
(loss) and $0.7 million reduction of existing receivables.
15. 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. Although the Company denies these claims and plans
to vigorously defend itself, management has established reserves of $160,000 as
of January 3, 2004 and January 1, 2005, which management believes are adequate
in the event of loss or settlement on those claims.
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.
As of January 1, 2005 the Company had outstanding demands aggregating
approximately $1.0 million by the bankruptcy trustees of several former clients
in connection with collected balances near the customers' respective bankruptcy
filing dates. Although the Company does not believe it received any preference
payments from these former clients and plans to vigorously defend its position,
the Company has established reserves of $727,000, which it believes are adequate
in the event of loss or settlement on remaining outstanding claims.
The Company may become involved in various legal and administrative actions
arising in the normal course of business. These could include actions brought by
taxing authorities challenging the employment status of consultants utilized by
the Company. In addition, customer bankruptcies could result in additional
claims on collected balances for professional services near the bankruptcy
filing date. While the resolution of any of such actions, claims, or the matters
described above may have an impact on the financial results for the period in
which they occur, 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.
17. 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)
2004 QUARTERS ENDED
--------------------------------------------------------
April 3, July 3, October 2, January 1,
-------- -------- ---------- ----------
Revenues ................................... $ 5,779 $ 5,184 $ 6,546 $ 6,195
Cost of Services:
Direct cost of services................... 2,913 2,739 3,441 3,226
Equity related charges.................... 54 52 51 48
-------- -------- -------- --------
Total cost of services............ 2,967 2,791 3,492 3,274
-------- -------- -------- --------
Gross Profit ............................... 2,812 2,393 3,054 2,921
Operating Expenses:
Selling, general and administrative....... 4,278 4,179 3,860 3,720
Legal settlement.......................... (1,294)
Real estate restructuring................. 1,545
Goodwill and intangible asset impairment.
Intangible asset amortization ............ 339 218 218 217
Equity related charges.................... 283 232 261 182
-------- -------- -------- --------
Total operating expenses.......... 4,900 4,629 4,339 4,370
-------- -------- -------- --------
Loss from operations........................ (2,088) (2,236) (1,285) (1,449)
Other Income:
Interest income........................... 136 145 189 248
Other, net................................ (9) (6) (10) (5)
-------- -------- -------- --------
Total other income................ 127 139 179 243
-------- -------- -------- --------
Loss from continuing operations before
income tax (provision) benefit ........... (1,961) (2,097) (1,106) (1,206)
Income tax (provision) benefit ............. (14) (20) (13) (2)
-------- -------- -------- --------
Loss from continuing operations ........... (1,975) (2,117) (1,119) (1,208)
Discontinued operations:
Net income (loss) from discontinued operations
including charge for impairment of goodwill
of $2,163 for the first quarter ended
April 3, 2004) (2,276)
-------- -------- -------- --------
Net loss ................................... (4,251) (2,117) (1,119) (1,208)
Other comprehensive item -
Foreign currency translation adjustment... (15) 11 (1) 181
-------- -------- -------- --------
Comprehensive Loss ......................... $ (4,266) $ (2,106) $ (1,120) $ (1,027)
======== ======== ======== ========
Loss from continuing operations
per common share
Basic and Diluted ........................ $ (0.06) $ (0.06) $ (0.03) $ (0.03)
======== ======== ======== ========
Loss from discontinued operations
per common share
Basic and Diluted......................... $ (0.07)
======== ======== ======== ========
Loss per common share
per common share
Basic and diluted $ (0.13) $ (0.06) $ (0.03) $ (0.03)
======== ======== ======== ========
Basic and diluted weighted average shares
outstanding.............................. 34,503 34,625 34,631 34,716
======== ======== ======== ========
(AMOUNTS IN THOUSANDS)
2003 QUARTERS ENDED
--------------------------------------------------------
March 29, June 28, September 27, January 3,
-------- -------- ------------- ------------
Revenues .................................... $ 7,240 $ 4,963 $ 4,691 $ 6,351
Cost of Services:
Direct cost of services.................... 3,673 2,724 2,506 3,024
Equity related charges..................... (20) (84) (10) 57
-------- -------- -------- --------
Total cost of services............. 3,653 2,640 2,496 3,081
-------- -------- -------- --------
Gross Profit ................................ 3,587 2,323 2,195 3,270
Operating Expenses:
Selling, general and administrative........ 5,071 5,255 4,432 4,601
Goodwill and intangible asset impairment... 18,942 542
Intangible asset amortization ............. 715 644 504 480
Equity related charges..................... 11 (8) 7 132
-------- -------- -------- --------
Total operating expenses........... 5,797 24,833 4,943 5,755
-------- -------- -------- --------
Loss from operations......................... (2,210) (22,510) (2,748) (2,485)
Other Income:
Interest income............................ 177 161 136 150
Other, net................................. (17) (15) (9) (10)
-------- -------- -------- --------
Total other income................. 160 146 127 140
-------- -------- -------- --------
Loss from continuing operations before income
tax (provision) benefit..................... (2,050) (22,364) (2,621) (2,345)
Income tax (provision) benefit .............. 748 3,619 (17,345)
-------- -------- -------- --------
Loss from continuing operations.............. (1,302) (18,745) (2,621) (19,690)
Discontinued operations:
Net income (loss) from discontinued operations
(net of income tax provision of $53 for fiscal
year 2003)................................ 71 8 (30) (15)
-------- -------- -------- --------
Net Loss..................................... (1,231) (18,737) (2,651) (19,705)
Other comprehensive item -
Foreign currency translation adjustment.... (14) 23 12 42
-------- -------- -------- --------
Comprehensive Loss .......................... $ (1,245) $ (18,714) $ (2,639) $ (19,663)
======== ======== ======== ========
Loss from continuing operations
per common share
Basic and Diluted.......................... $ (0.04) $ (0.56) $ (0.08) $ (0.58)
======== ======== ======== ========
Net income (loss) from discontinued
operations per common share
Basic and Diluted..........................
======== ======== ======== ========
Loss per common share
Basic and 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 1, 2005, the Company's financial results
include 13 weeks compared to the 14 weeks reported for the fourth quarter ended
January 3, 2004. The operating results for fiscal year 2004 report 52 weeks of
activity compared to the 53 weeks of activity reported in fiscal year 2003.
See Note 14 "Significant Customer Contract" for discussion of fourth quarter
2004 legal settlement.
See Note 8 "Real Estate Restructuring" for discussion of fourth quarter 2004
real estate restructuring charge.
See Note 7 "Income Taxes" for discussion of fourth quarter 2003 deferred tax
charge.
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 upon that review and evaluation, the CEO and CFO have
concluded that the Company's 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 accordingly, the Company implemented no corrective
measures.
ITEM 9B. OTHER INFORMATION
None
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 on June 9, 2005 (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" and
"Executive Compensation" and 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 captions "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 Registered Public Accounting Firm" the information required by Item
14 of this Form 10-K which information is incorporated herein by this reference.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(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.
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 1st day of April, 2005.
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, APRIL 1, 2005
- ------------------------------- PRESIDENT AND CHIEF
RICHARD P. NESPOLA EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE
OFFICER)
/S/ DONALD E. KLUMB CHIEF FINANCIAL OFFICER AND APRIL 1, 2005
- ------------------------------- TREASURER (PRINCIPAL
DONALD E. KLUMB FINANCIAL OFFICER AND
PRINCIPAL ACCOUNTING
OFFICER)
/S/ MICKY K. WOO DIRECTOR APRIL 1, 2005
- -------------------------------
MICKY K. WOO
/S/ GRANT G. BEHRMAN DIRECTOR APRIL 1, 2005
- -------------------------------
GRANT G. BEHRMAN
/S/ WILLIAM M. MATTHES DIRECTOR APRIL 1, 2005
- -------------------------------
WILLIAM M. MATTHES
/S/ ROBERT J. CURREY DIRECTOR APRIL 1, 2005
- -------------------------------
ROBERT J. CURREY
/S/ ANDREW LIPMAN DIRECTOR APRIL 1, 2005
- -------------------------------
ANDREW LIPMAN
/S/ ROY A. WILKENS DIRECTOR APRIL 1, 2005
- -------------------------------
ROY A. WILKENS
/S/ FRANK SISKOWSKI DIRECTOR APRIL 1, 2005
- -------------------------------
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
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
10.12* 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
10.16* 2000 Supplemental Stock Plan and form of agreements thereunder
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
10.21 Sublease between Best Doctors and the registrant dated December 30,
2004
21.1 List of subsidiaries of TMNG, Inc.
23.1 Consent of Independent Registered Public Accounting Firm.
24.1 Power of attorney (see page 55)
31.1 Certification 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