UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the Fiscal
Year Ended January 2,
2010
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
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Commission File Number:
001-34006
THE MANAGEMENT NETWORK GROUP,
INC.
(Exact name of registrant as
specified in its charter)
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DELAWARE
(State or other jurisdiction
of
incorporation or organization)
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48-1129619
(I.R.S. Employer
identification number)
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7300 COLLEGE BOULEVARD,
SUITE 302, OVERLAND PARK, KANSAS 66210
(Address of principal executive
offices) (Zip Code)
REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE:
(913) 345-9315
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE
ACT:
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Title of Each Class
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Name of Each Exchange on Which Registered
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COMMON STOCK, $.005 PAR VALUE PER SHARE
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The NASDAQ STOCK MARKET, LLC
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE
ACT:
NONE.
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. YES o NO þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. YES o NO þ
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. YES þ NO o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files). YES o NO o
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 Registrants 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. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o
(Do not check if a smaller reporting company)
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Smaller reporting company þ
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). YES o NO þ
The aggregate market value of the voting common stock held by
non-affiliates of the Registrant, as of July 3, 2009 was
approximately $7,600,000. Shares of common stock held by each
executive officer, director and holder of 5% or more of the
outstanding common stock have been excluded for purposes of this
calculation. The treatment of such holders as affiliates for
purposes of this calculation is not intended as a conclusive
determination of affiliate status for other purposes. As of
March 19, 2010, the Registrant had 7,428,310 shares of
common stock, par value $0.005 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 2010
proxy statement which will be filed with the Securities and
Exchange Commission within 120 days of the end of our
fiscal year ended January 2, 2010.
THE
MANAGEMENT NETWORK GROUP, INC.
FORM 10-K
TABLE OF
CONTENTS
Exhibits
List of Subsidiaries
Consent of Independent Registered Public Accounting Firm
302 Certification of Chief Executive Officer
302 Certification of Chief Financial Officer
Section 906 Certification
2
PART I
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING INFORMATION
With the exception of current and historical information, this
Annual Report on
Form 10-K
contains forward-looking statements as defined in the Private
Securities Litigation Reform Act of 1995. Forward-looking
statements include, but are not limited to, statements of plans
and objectives, statements of future economic performance or
financial projections, statements of assumptions underlying such
statements, and statements of the Companys or
managements intentions, hopes, beliefs, expectations or
predictions of the future. Forward-looking statements can often
be identified by the use of forward-looking terminology, such as
will be, intend, continue,
believe, may, expect,
hope, anticipate, goal,
forecast or other comparable terms.
Forward-looking statements involve risks and uncertainties and
are not guarantees of future performance or results. Our actual
financial condition, results of operations or business may vary
materially from those contemplated by such forward looking
statements. Investors are cautioned not to place undue reliance
on any forward-looking statements. Factors that might affect
actual results, performance, or achievements include, among
other things, the factors described in Risks Related to
Current Economic Conditions in Item 1 below and the
following factors:
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conditions in the industry sectors that we serve, including the
economic conditions in such industry sectors, that can result in
slowing client decisions on proposals and project opportunities
along with scope reduction of existing projects;
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the financial condition and business strategies of our customers
in the converging communications, media and entertainment
industry and the investment banking and private equity firms
investing in that industry;
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overall economic and business conditions, including the current
conditions in the real estate and credit markets and general
economic conditions;
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the level of demand for our services;
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the potential continuation or recurrence of recent losses from
operations, negative cash flow and reductions in our cash
reserves;
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our ability to retain the limited number of large clients that
constitute a major portion of our revenues;
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fluctuations in our quarterly operating results;
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our ability to reduce our cost structure to align with reduced
demand and to control costs under fixed fee contracts, which
make up a substantial portion of our business;
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our ability to compete in intensively competitive markets,
including our ability to address actions by competitors that
could render our services less competitive, such as recently
increasing price competition, which may cause our revenues,
gross profits and income to decline;
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our ability to address the challenges of conducting business in
foreign countries, including risks of unfavorable foreign
currency exchange rates or fluctuations and changes in local
laws;
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the possibility of further impairments of goodwill if our
financial performance does not meet or exceed our projections
used to value the assets or if there is a further decline in our
stock price;
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the possibility of further write-downs in the value of our
auction rate securities due to future fluctuations in interest
rates, counter-party credit ratings and liquidity in the
secondary market for these securities;
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our ability to successfully integrate recent acquisitions and to
successfully locate new acquisition candidates;
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our level of cash and non-cash expenditures;
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technological advances and competitive factors in the markets in
which we compete;
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the possibility of the cancellation of key client contracts,
which may be cancelled on short notice;
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the ability to successfully launch new product and market
initiatives;
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the ability to retain key management and consulting personnel,
particularly given the performance of our stock and the impact
of a low stock price on the value of share-based compensation;
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the possible reclassification of our independent contractors as
full-time employees by the taxing
and/or labor
and employment authorities of competent jurisdiction;
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the possibility of professional liability claims;
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the loss of key intellectual property;
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our ability to satisfy the continued listing requirements of the
NASDAQ Stock Market; and
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the possibility that our ability to utilize tax net operating
loss carryforwards to offset future taxable income will be
limited if we are deemed to have an ownership change as defined
by Section 382 of the Internal Revenue Code.
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Other factors that we have not identified in this document could
also have this effect. All forward-looking statements made in
this Annual Report on
Form 10-K
are made as of the date hereof.
When used in this report, unless the context requires otherwise,
the terms TMNG, TMNG Global,
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 leading
provider of professional services to the converging
communications, media and entertainment industries and the
capital formation firms that support them. We offer a fully
integrated suite of offerings including strategy, management,
marketing, operational, and technology consulting services, as
well as software solutions and application development (see
Services in Item 1). We have consulting
experience in virtually every major aspect of managing and
operating a global communications company. Our heritage of
industry knowledge and deep technical and operational expertise
has allowed us to continually enhance the software solutions and
proprietary toolsets that enable our advisory, analytical,
operational, and technical support In this way, our clients can
leverage our expertise to optimize their performance, improve
cash flow and gain sustainable competitive advantage in the
market.
Our clientele includes a variety of businesses whose products,
services and interests are focused on the evolution of the
communications industry, including wireless and traditional
wireline communications service providers, cable multiple
systems operators (MSOs) as well as technology companies, media
and entertainment companies, and financial services firms that
invest in the communications industry. Our clients are
principally located in the United States, United Kingdom and
Western Europe. In the first quarter of fiscal year 2010, we
have reorganized the Company to align geographically with our
client base. We anticipate that we will modify our reportable
segments beginning in the first quarter of fiscal year 2010 as a
result of this internal reorganization. We believe we are unique
in our ability to provide a comprehensive business and
technology solution to the communications industry, including
strategy consulting and business planning, organizational
development, market research and analysis, product/service
definition and launch, customer acquisition and retention,
program management, technical support, process modeling and
software solutions for business support systems and operations
support systems. The software and application development
capabilities of our Software Solutions segment are primarily
targeted to clients revenue and service assurance, and
data management initiatives.
Our services are provided by experienced senior professionals
from the communications industry. As it relates to most key
software and technology decisions, we have provided a unique
technology agnostic and
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vendor neutral position to make unbiased evaluations and
recommendations that are based on a thorough knowledge of each
solution and each clients unique situation. Therefore, we
are able to capitalize on extensive experience across complex
multi-technology communications systems environments to provide
what we believe are the most sound and practical recommendations
to our clients.
We have transformed from being a provider of primarily
management and operational consulting services to a provider of
an integrated suite of product and service offerings to the
communications marketplace. This transformation has been
accomplished through both acquisitions and recruitment efforts,
which have increased the depth and breadth of skill sets in our
employee work base, diversified our technical competencies,
expanded our core management consulting offerings and positioned
us to compete globally. We believe these actions have expanded
key client relationships, have uniquely positioned us in the
market to effectively serve the needs of large global
communication service providers, and provided for expansion of
our key direct distribution channel elements.
In 2007, we completed the acquisitions of three businesses that
expanded both our geographic reach and our ability to address
global opportunities in the marketplace. These transactions
included: the United Kingdom-based technical consultancy and
software provider Cartesian Limited (Cartesian); RVA
Consulting, LLC (RVA), a domestic, telecom
industry-focused operations consulting firm; and TWG Consulting,
Inc (TWG), a domestic management consulting firm.
See Note 4, Business Combinations, in the Notes
to the Consolidated Financial Statements for additional
information regarding acquisitions.
The acquisition of Cartesian in early 2007 dramatically
strengthened TMNGs technology consultancy services and
broadened our service offerings. Cartesian brings expertise in
billing management and revenue assurance two
traditional strengths on which we built our
reputation but does so from a technology and network
perspective, an ideal complement to our business process focus.
Building on its technical expertise, Cartesian has developed an
innovative and modular software suite, called
Ascertain®,
which features advanced revenue assurance and data integrity
tools that when customized and integrated into client
environments support fixed, wireless, internet service provider
(ISP), data and content environments.
Cartesians client list includes Tier 1
companies in the United Kingdom and Europe, and in 2008, TMNG
began early introduction of the product with
U.S.-based
carriers and cable system operators, opening a potentially
significant new market to this product.
The acquisitions of RVA and TWG in 2007 enhanced historical
strengths of TMNG. RVA has strong, contracted relationships with
major U.S. telecommunication carriers and serves as a close
fit with TMNGs core strength in business process and
operational support systems consulting. TWGs expertise in
organizational development and knowledge management helped to
round out our capabilities and extended our strategy offerings.
We have diversified our client base organically by building a
cable and broadband practice. With the convergence of this
industry around multiple video, data and voice service
offerings, we apply our traditional expertise in complex
business processes such as revenue assurance, billing
management, and mediation, as well as in leading functional
areas like program management offices, across the global
converging communications marketplace. We have developed
solutions to assist content providers, and media companies as
they cope with the operational complexities of launching new
products and services; attempt to streamline their business
systems and processes following merger and acquisition activity;
and address product lifecycle issues in the wake of competitive
pressures. We are also providing program management, business
process, service assurance and leadership teams for cable
MSOs as they launch new digital voice product and service
rollouts, including voice over internet protocol offerings and
focus on their 4G wireless launch. In 2009, 41% of revenue was
from cable and broadband clients.
As the industry continues to evolve, TMNG expects to leverage
its long history of engagement experience with clients to
continue modifying its toolsets, develop new methodologies, and
selectively expand its base of employee consultants to support
and extend its thought leadership and capabilities in the
communications industry.
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MARKET
OVERVIEW
The global communications industry is evolving around a
convergence of voice, data and video or content-based
communications. Market factors including regulatory decisions,
new technologies and industry consolidation have stimulated new
investment in the sector. These dynamics are bringing new
competitors to the market, such as Apple and Google, challenging
existing industry competitors to explore new business models,
and driving consolidation within sectors such as traditional
wireline and wireless telecommunications. In addition, cable
communications companies that historically primarily offered
video services are now positioning themselves as providers of
voice and other data and content services. Wireline, wireless
and cable companies alike are focused on convergence
where any type of content or application can be delivered
seamlessly across fixed or mobile networks.
While communications companies are investing in future growth,
the global economic slowdown that began in 2008 has limited
liquidity and access to capital, and reduced budgets and forward
visibility. Companies across most industries and sectors,
including communications and media, are operating with increased
expense discipline with many reducing their cost structures
through actions which include lowering total headcount,
decreasing information technology expenses, and reducing
spending on contractors and consultants. Spending decisions,
both operating and capital expenses, are coming under increased
scrutiny with a heightened focus on a demonstrated return on
investment or lower total cost.
It has been our experience that because the expertise necessary
to address the markets needs is typically outside
communications companies core competencies, they must ultimately
either recruit and employ talent with the necessary experience
or retain outside specialists. Additionally, the convergence of
the communications, media and entertainment industries has
brought forth many new competitors from outside the traditional
communications industries who we believe do not possess the
experience or skill sets needed to execute new business plans.
We believe due to the range of expertise required and the time
and expense associated with hiring and training new personnel,
bringing expertise in-house is often not a viable option. We
believe customers will continue to contract with consultative
firms or outsource some of the expertise required to adapt to
new environments and capitalize on new technologies now
emerging, while maintaining a cost effective structure. 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 for cost-effective solutions, including revenue
assurance and expense avoidance. TMNG has positioned its
business to respond to these anticipated needs.
BUSINESS
STRATEGY
Our objective is to establish ourselves as the consulting
company of choice to the converging communications, media and
entertainment industry, which includes the service providers,
content creators, and technology companies that serve the
industry and the financial services and investment banking firms
that invest in the sector. In the near term greater emphasis is
being focused on our top client relationships and their most
strategic initiatives, with the goal of expanding market
penetration and share with these clients. Despite shifting our
focus to our core clients, we continue to investigate
opportunities with other, non-core clients that offer a high
probability of a return on our business development investment.
The following are key strategies we have adopted to pursue our
objectives.
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Develop and evolve offerings, solutions and thought
leadership
We plan to continue expanding and evolving our
end-to-end
solutions. Expanding our consulting solutions involves building
the capabilities that support change elements in the adoption of
IP and wireless technology and support of convergence of
communications with media and content, with emphasis on
wireless. We plan to continue to extend our product and service
offerings to the communications, media and entertainment
industries. We believe wireline and wireless providers will be
strategically focused on the following key initiatives: adding,
bundling and converging service offerings (i.e., wireline,
wireless, high-speed data and video); reduction of costs;
reassessment of core competencies in order to leverage strengths
and minimize weaknesses; migration to new
technologies next generation wireless and IP and
driving efficiency in their
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business models while spending less on information technology in
the near term, given the current economic environment. Our
solutions will assist clients in redefining their competitive
position, launching new products and services and generating
revenues through integrated offerings. Such offerings will also
be focused on increasing clients efficiencies in these
transformations. We will also evaluate expanding our offerings
to include managed services, possibly with partners surrounding
these initiatives.
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Continue to build the TMNG Global brand
We plan to continue building and communicating the TMNG Global
brand, further positioning ourselves as the consultancy of
choice for the global telecom, media and entertainment
industries. We have sunset the RVA and TWG brands and
incorporated them into the TMNG Global brand. In late 2007, we
sunset the Adventis brand and now operate our strategy group as
CSMG. These changes were made to better represent the
end-to-end
capabilities we offer through our strategic consulting,
management consulting and managed services practices, and to
provide separation between our strategy and management
consulting practices, providing a level of independence and
neutrality desired by clients.
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Focused and effective recruitment and retention
We believe a 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.
Beginning in fiscal year 2009, we have adopted a more linear,
geographic organizational structure with two distinct groups:
(1) North America and (2) United Kingdom/Europe. This
move has already generated productivity benefits for us, as we
have been able to more easily shift top talent between groups as
needed and thereby better serve our clients, adding to our
efficiency and utilization.
We enhance consultants existing skill sets with
proprietary toolsets that provide methodologies they use to
augment their experience and help analyze and solve
clients problems. We utilize a network of databases 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 non-billable
consultant time.
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Enhancing our global presence
We plan to further enhance our presence beyond the United States
and United Kingdom, with emphasis on current top revenue
generating clients on the European continent. 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
Europe. We believe our acquisition of Cartesian and our strategy
consulting expertise strengthen TMNG Globals presence and
capabilities in key European markets.
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Increase penetration within top revenue-generating
clients
In response to the economic downturn, we adjusted our sales
strategy to focus on increasing the number of engagements within
our top revenue-generating clients and minimize new business
related costs. The approach included volume pricing arrangements
and was designed to give us both revenue visibility and add
efficiency to the model so as to ensure optimum utilization of
our consultant base. In fiscal year 2009, 87% of our revenues
came from our ten most significant customers, up from 81% in
fiscal year 2008.
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SERVICES
TMNG Global along with our brands CSMG and Cartesian, provide a
robust portfolio of strategic, management, and technical
consulting, as well as products, services and technical
solutions, to the communications industry worldwide, including:
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Strategy and Business Case Development
We provide comprehensive strategic analysis to service
providers, media and entertainment companies, 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.
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Knowledge Management
We assist our clients in managing the process of capturing and
cultivating information that exists within their organizations.
We utilize an integrated partnership approach to seamlessly
leverage an organizations human knowledge capital. We
provide a tailored solution to solve problems associated with
knowledge creation and distribution, sharing and leveraging
existing knowledge, tools and processes. Our approach connects
people to information to enable organizations to best leverage
existing assets, define competitive advantage and create
measurable business value.
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Revenue and Cost Management
Revenue management is now evolving into a proactive discipline
covering cost reduction and optimization as well as
profitability enhancement. TMNG applies its robust revenue
management methodologies to all phases of the service activation
and revenue processes and approaches revenue assurance from an
end-to-end,
order-to-cash
perspective. Proprietary toolsets, combined with in-depth
operational expertise and a track record of success have proven
to be the winning formula to enable our clients to generate
significant cash flow improvements.
As mentioned, TMNG Global has expanded its suite of revenue
assurance assessment tools to include
Ascertain®,
a flexible, scalable, configurable revenue management and data
integrity toolset that provides timely evaluation of processes,
metrics and control points. A fifth generation platform
developed by the revenue assurance experts at Cartesian,
Ascertain®
is among the industrys most widely deployed revenue
assurance tools in Europe and is able to support fixed,
wireless, ISP, data, and content environments. Beginning in
2008, we expanded deployment of
Ascertain®
into the United States.
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Program Management
We have a track record of success in the management, execution
and delivery of quality consulting services in a
cross-functional program management environment. We provide
independent, impartial, centralized management and governance of
a complex series of inter-related projects using a small group
of experienced and dedicated resources. Our approach enables an
organization to deliver projects faster, with higher quality, at
less cost and within estimates, to meet and
often exceed expectations. Our PMO engagements are
supported by a superb track record, proven tool sets and
methodologies, a focus on what works and a keen
understanding of both the financial imperatives of the business
and the drivers of customer satisfaction.
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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. Our
BSS/OSS approach is holistic,
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assessing each system and process from the point of customer
acquisition to provisioning, billing, collections and accounts
receivable management with a focus on operational efficiency and
optimizing cash flow. We assist companies in taking a proactive
approach to reviewing existing business and operating models. By
properly addressing gaps in their process, they have the
potential to recover millions of dollars annually.
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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 companys financial models, systems,
products and operational and business processes. Post-investment
support is also provided to help customers in the optimization
of their investment.
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Technical Consultancy & Software
Development
We provide technical consultancy and software development
specialized for the communications industry. We have vast
experience working with and implementing numerous communications
software products. Our expertise includes defining requirements,
data analysis, selecting and implementing mediation,
provisioning, billing and inter-operator billing products,
interfacing products within a legacy environment, migrating
products, data and customers, and planning, managing and
completing systems and software testing.
We have developed a proprietary suite of software
(Ascertain®)
to address the revenue assurance and data integrity needs of
communications companies.
Ascertain®
helps prove rate accuracy, reconcile customer data, analyze and
reconcile event records, prove completeness of processing, and
monitor trends and volumes. The
Ascertain®
suite forms a fully productized and supported set of solutions
that share a common core framework for reporting, user
interaction, data extraction and job scheduling.
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Marketing
We provide a breadth of marketing services to support our
clients from strategy, to planning, through execution. Our deep
understanding of the global communications environment and our
creative and rigorous analytic techniques enable us to craft
winning marketing strategies and programs for our clients. We
see individual business issues in the context of overall
industry financial and value relationships, allowing us to
deliver detailed, focused and pragmatic recommendations and
blueprints for sustainable impact and change. We provide program
management and project delivery to support execution across the
broad spectrum of marketing services such as Customer
Segmentation, Customer Experience Assessment, Product
Management, Retail Sales Channel Assessment and Marketing
Communications.
COMPETITION
The market for communications consulting services remains
intensely competitive, highly fragmented and rapidly changing.
We face competition from major business and strategy consulting
firms, large systems integration and major global outsourcing
firms as a result of the outsourcing of business support systems
and operating support systems by communications companies,
offshore development firms from the Asian markets, equipment and
software firms that have added service offerings, boutique
consulting firms and customers internal resources. We
believe there has been a significant increase in demand for
firms that can bundle business process outsourcing, or BPO, with
systems and technical integration. Many of our competitors are
large organizations that provide a broad range of services to
companies in many industries, including the communications
industry. In addition, we compete with boutique firms that
maintain specialized skills
and/or
geographical advantages. Many information technology consulting
firms also maintain significant practice groups devoted to the
communications industry. Many of these competitors have
significantly greater financial, technical and marketing
resources and greater name recognition than us.
We believe that the principal competitive factors in our market
include: the ability to provide payback on our services to
clients through proven business cases; the ability to provide
innovative solutions; the ability to provide deep and proven
expertise and talent; the ability to provide capability and
expertise in delivering
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complex projects through teams located globally; availability of
resources; price of solutions; industry knowledge; understanding
of user experience; and sophisticated project and program
management capability.
We believe we have a competitive advantage due to our exclusive
focus on the communications, media and entertainment industry,
and the comprehensive offerings we provide to our customers. We
also believe the complementary experience and expertise of our
professionals represents a competitive advantage. With the
communications industry experiencing consolidation and
convergence with media and entertainment, we believe our
principal competitive factor is our specialized and continual
focus on the converging communications industry and the ability
to develop and deliver solutions that enhance client revenue and
asset utilization and provide return on investment. Our biggest
challenge is normally the customers internal resources and
budget constraints. As a result, the most significant
competitive advantage becomes long-term 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 recently experienced reduced demand in certain offerings
and a market trend of increased price competition, resulting
primarily from current global economic conditions and large
firms with the financial resources to aggressively price
engagements in which they have a particular interest in
obtaining and the ability to provide technical support and
outsourcing. These developments have required us to focus on
decreasing our overall cost structure to align with lower
revenue levels and direct our resources toward our top revenue
generating clients in which we are deeply imbedded.
RISKS
RELATED TO CURRENT ECONOMIC CONDITIONS
The economic outlook, as always, is subject to change and the
recent challenges of the financial markets have expanded into
the broader marketplace and are impacting many sectors,
including communications and media. In particular, current
uncertainty in global economic conditions may cause our clients
to cancel or delay consulting initiatives. Our efforts to
down-size, when necessary, in a manner intended to mirror the
downturn in economic conditions, could encounter delays and be
costly. If the downturn in worldwide economic conditions
continues or conditions worsen, particularly in the United
States or Europe, the financial condition of our clients may be
adversely affected. A continuation of the current downturn could
add to volatility in foreign exchange rates, result in further
reduced demand for our services, cause continued pricing
pressure and possible project cancellations or delays, and
possibly create lower revenues and operating margins resulting
from price reduction pressures for our services. Continued
declines in our revenues and gross profits will have a
significant impact on our financial results, particularly
because a significant portion of our operating costs are fixed
in advance of a particular quarter. In addition, our future
revenues and operating results may fluctuate from quarter to
quarter based on the number, size and scope of projects in which
we are engaged, the contractual terms and degree of completion
of such projects, any delays incurred in connection with a
project, consultant utilization rates, the use of estimates to
complete ongoing projects, general economic conditions and other
factors. Any of these events could materially and adversely
impact our business, financial condition and results of
operations. We are unable to predict how long the economic
slowdown will last and the magnitude of its effect on our
business and results of operations. If these conditions
continue, or further deteriorate, our business and results of
operations could be materially adversely affected.
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 or part time employees. 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 2009, we utilized approximately 430
consultants, representing a combination of employee client
service personnel and independent contracting firms. Of these,
339 were employee consultants
10
and approximately 91 were working on engagements for us
primarily through independent subcontracting firms. In addition
to the consultants, we have an administrative staff of
approximately 53 employees in the accounting and finance,
marketing, recruiting, information technology, human resources,
legal and administrative areas. As of January 2, 2010, we
had 344 total employees, of which 245 were full-time.
BUSINESS
SEGMENTS
We identify our segments based on the way management organizes
the business to assess performance and make operating decisions
regarding the allocation of resources. In accordance with
Accounting Standards Codification
280-10,
Segment Reporting, we have concluded that we have two
reportable segments: the Management Consulting Services segment
and the Software Solutions segment. The Management Consulting
Services segment is comprised of five operating segments
(Operations, Domestic Strategy, International Strategy, RVA and
TWG) which are aggregated into one reportable segment.
Management Consulting Services includes consulting services
related to strategy and business planning, market research and
analysis, organizational development, knowledge management,
marketing and customer relationship management, program
management, billing system support, operating system support,
revenue assurance, and corporate investment services. Software
Solutions is a single reportable operating segment that provides
custom developed software, consulting and technical services.
These services range from developing initial business and system
requirements, to software development, software configuration
and implementation, and post-contract customer support. For a
discussion of operating results by segment, please see
Item 7 Managements Discussion and
Analysis of Financial Condition and Results of Operations, and
Note 7, Business Segments, Major Customers and Significant
Group Concentrations of Credit Risk, in the Notes to the
Consolidated Financial Statements.
MAJOR
CUSTOMERS
Since our inception, we have provided services to over a
thousand domestic and international customers, primarily
communication service providers and large technology and
applications firms serving the communications industry and
financial firms that invest in the sector. We have recently
added to our base of customers with cable, media and
entertainment clients looking to leverage communications
infrastructure to deliver offerings to the market. We depend on
a small number of key customers for a significant portion of
revenues. For fiscal year 2009, four customers accounted for
35%, 14%, 11% and 10%, respectively, of our revenues. No other
single customer accounted for more than 10% of our revenues.
Also during fiscal year 2009, our top ten customers accounted
for approximately 87% of total revenues. 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, wireless, and
cable MSOs headquartered principally in North America, the
United Kingdom and Western Europe, as well as media and
entertainment clients. We 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 customers.
FOREIGN
MARKETS
A substantial portion of our business is conducted in foreign
markets and a substantial portion of our revenues and costs are
derived from our international business. Our international
revenues in the fiscal year ended January 2, 2010
represented 28.9% of our total revenues, down from 37.7% in the
same period of 2008, primarily as a result of changes in foreign
currency exchange rates. Our international operations expose us
to a number of business and economic risks, including
unfavorable foreign currency exchange rates or fluctuations; our
ability to protect our intellectual property; the impact of
foreign laws, regulations and trade customs; U.S. and
foreign taxation issues; potential limits on our ability to
repatriate foreign profits; and general political and economic
trends, including the potential impact of terrorist attacks or
international hostilities. If we are unable to achieve
anticipated levels of revenues from or efficiently manage our
international operations, our overall revenues and profitability
may decline.
11
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.
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 continue to experience fluctuations in revenue
in the fourth quarter and with our global expansion, may
experience fluctuations in summer months and other holiday
periods.
WEBSITE
ACCESS TO INFORMATION
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 Securities Exchange Act of
1934, as amended (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 stockholder who requests them.
Not applicable.
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ITEM 1B.
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UNRESOLVED
STAFF COMMENTS
|
Not applicable.
Our principal executive offices are located in a
10,400 square foot facility in Overland Park, Kansas. This
facility houses the executive, corporate and administrative
offices and is under a lease which expires in August 2013. In
addition to the executive offices, we also lease the following
facilities which are primarily utilized by management and
consulting personnel.
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|
|
|
|
|
|
|
|
|
|
Lease
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Location
|
|
Sq. Feet
|
|
|
Expiration
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|
McLean, Virginia
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|
|
4,881
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|
|
July 2019
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Boston, Massachusetts
|
|
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21,710
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|
|
January 2011
|
Somerset, New Jersey
|
|
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2,910
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|
|
February 2014
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London, England (Gate Street)
|
|
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11,825
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|
|
November 2015
|
We have a sublease agreement for 11,366 square feet of the
21,710 square feet of office space in Boston, Massachusetts
with a third party through the end of the original lease term in
2011. In addition, 2,056 square feet of the London Gate
Street property is sublet to a third party until June 2010 and
1,370 square feet is sublet to a third party until November
2012.
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ITEM 3.
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LEGAL
PROCEEDINGS
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None.
12
PART II
|
|
ITEM 5.
|
MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
|
On January 21, 2010, TMNGs stockholders approved a
one-for-five
reverse stock split of the Companys issued and outstanding
common stock. The reverse stock split was effective on
February 7, 2010. Trading of TMNGs common stock on
the NASDAQ Global Market on a split-adjusted basis began at the
open of trading on February 8, 2010. The reverse stock
split affected all shares of the Companys common stock, as
well as options to purchase the Companys common stock,
that were outstanding immediately prior to the effective date of
the reverse stock split. All references to common shares and
per-share data for prior periods have been retroactively
restated to reflect the reverse stock split as if it had
occurred at the beginning of the earliest period presented. The
par value of the Companys common stock was changed to
$.005 per share from $.001 per share in connection with the
reverse split.
Our Common Stock is quoted on the NASDAQ Stock Market under the
symbol TMNG. The high and low price per share for the Common
Stock for each quarter of the fiscal years ending
January 2, 2010 and January 3, 2009, in all cases, as
adjusted for the
one-for-five
reverse common stock split effected on February 7, 2010:
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|
|
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|
|
|
|
|
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High
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Low
|
|
First quarter, fiscal year 2009
|
|
$
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3.00
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|
|
$
|
0.80
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|
Second quarter, fiscal year 2009
|
|
$
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2.80
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|
|
$
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1.10
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|
Third quarter, fiscal year 2009
|
|
$
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7.25
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|
|
$
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1.05
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|
Fourth quarter, fiscal year 2009
|
|
$
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3.50
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|
|
$
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1.75
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|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
Low
|
|
First quarter, fiscal year 2008
|
|
$
|
13.75
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|
|
$
|
7.75
|
|
Second quarter, fiscal year 2008
|
|
$
|
10.40
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|
|
$
|
6.90
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|
Third quarter, fiscal year 2008
|
|
$
|
7.25
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|
|
$
|
4.75
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|
Fourth quarter, fiscal year 2008
|
|
$
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4.95
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|
|
$
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1.90
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|
The above information reflects inter-dealer prices, without
retail
mark-up,
markdown or commissions and may not necessarily represent actual
transactions.
As of March 19, 2010 the closing price of our Common Stock
was $2.75 per share. At such date, there were approximately 79
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.
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ITEM 6.
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SELECTED
FINANCIAL DATA
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Not applicable.
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ITEM 7.
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MANAGEMENTS
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.
Statements included in this discussion that are not statements
of current or historical information may constitute
forward-looking statements. Forward-looking statements include,
but are not limited to, statements of plans and objectives,
statements of future economic performance or financial
projections, statements of assumptions underlying such
statements, and statements of the Companys or
managements intentions, hopes, beliefs, expectations or
predictions of the future. Forward-looking statements can often
be identified by the use of forward-looking terminology, such as
believes,
13
expects, may, should,
could, intends, plans,
estimates or anticipates, variations
thereof or similar expressions. Certain risks and uncertainties
could cause actual results to differ materially from those
reflected in such forward-looking statements. Factors that might
cause a difference include, but are not limited to, conditions
in the industry sectors that we serve (including the delay of
client decisions on proposals and project opportunities along
with scope reduction of existing projects), overall economic and
business conditions (including the conditions in the credit
markets and general economic conditions), our ability to retain
the limited number of large clients that constitute a major
portion of our revenues, technological advances and competitive
factors in the markets in which we compete, and the factors
identified in the Cautionary Statement Regarding Forward-Looking
Information in Part I of this report. Other factors that we
have not identified in this document could also have this
effect. All forward-looking statements made in this Annual
Report on
Form 10-K
are made as of the date hereof.
We report our financial data on a 52/53-week fiscal year for
reporting purposes. Fiscal year 2009 was a 52-week fiscal year.
Fiscal year 2008 had 53 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.
OVERVIEW
Included in Item 1, Business is discussion that
includes a general overview of our Business, Market Overview,
Business Strategy, Services and Competition. The purpose of this
executive overview is to complement the qualitative discussion
of the Business from Item 1.
TMNG is among the leading providers of professional services to
the converging communications, media and entertainment
industries and the capital formation firms that support them. We
offer a fully integrated suite of consulting offerings including
strategy, organizational development, knowledge management,
marketing, operational, and technology consulting services. We
have consulting experience with almost all major aspects of
managing a global communications company. Our portfolio of
solutions includes proprietary methodologies and toolsets, deep
industry experience, and hands-on operational expertise and
licensed software. These solutions assist clients in tackling
complex business problems.
Our 2007 acquisitions and our investment in targeting the cable
industry have re-positioned us to better serve consolidating
telecommunications carriers and the converging global media and
entertainment companies. The convergence of communications with
media and entertainment and the consolidation of large
telecommunications carriers have required us to focus our
strategy on building a global presence, continuing to expand our
offerings and strengthening our position within the large
carriers and media and entertainment companies. Our efforts are
helping us build what we believe is a more sustainable revenue
model over the long-term, subject to cyclical economic
conditions such as the current economic slowdown, helping us to
expand our global presence. We continue to focus our efforts on
identifying, adapting to and capitalizing on the changing
dynamics prevalent in the converging communications, media and
entertainment industries, as well as providing our wireless and
IP services within the communications sector.
Our financial results are affected by macroeconomic conditions,
credit market conditions, and the overall level of business
confidence. The current global economic downturn has reduced
capital and operating spending and resulted in significant
employee layoffs for our clients in the communications, media
and entertainment sectors. Beginning in the second half of 2008
and through fiscal year 2009, our Management Consulting Services
and Software Solutions segments continued to feel the impact of
the economy, as measured by lower demand for consultants,
deferral of projects and specifically the reduction in
strategy-related project opportunities. We are also seeing
greater pricing pressure and an increased need for enhanced
return on investment for projects or added sharing of risk and
reward.
Our revenues are denominated in multiple currencies and have
also recently been impacted by currency rate fluctuations.
Beginning in the fourth quarter of fiscal year 2008, the
U.S. dollar began to strengthen against many currencies and
this has resulted in unfavorable currency translation to our
consolidated financial statements. When comparing fiscal year
2009 to fiscal year 2008, the U.S. dollar has strengthened
considerably against the British pound sterling, resulting in an
unfavorable impact to our consolidated financial statements.
14
Revenues are driven by the ability of our team to secure new
project contracts and deliver those projects in a way that adds
value to our client in terms of return on investment or
assisting clients address a need or implement change. For fiscal
year 2009, revenues declined 12.3% to $65.0 million from
$74.0 million for fiscal year 2008. Unfavorable foreign
currency translation accounted for approximately
$3.8 million or 42% of the revenue decline.
Generally our client relationships begin with a short-term
consulting 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 pursue these marketing
strategies in the future. The volume of work performed for
specific clients may vary from period to period and a major
client from one period may not use our services or the same
volume of 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
non-billable time could harm margins.
Cost of services consists primarily of compensation for
consultants who are employees and amortization of share-based
compensation for stock options and nonvested stock, amortization
of acquired software intangibles, as well as fees paid to
independent contractor organizations and related expense
reimbursements. Employee compensation includes certain
non-billable time, training, vacation time, benefits and payroll
taxes. Gross margins are primarily impacted by the type of
consulting services provided; the size of service contracts and
negotiated discounts; changes in our pricing policies and those
of competitors; utilization rates of consultants and independent
subject matter experts; and employee and independent contractor
costs, which tend to be higher in a competitive labor market.
Gross margins were 41.4% in fiscal year 2009 compared with 44.6%
in fiscal year 2008. The decrease in gross margin from 2009 to
2008 is due to a combination of factors. The most significant
items that impact our margins include the mix of project types,
utilization of personnel and pricing decisions. During 2009, the
volume of strategy related project revenues was down
approximately 31% from 2008. Strategy projects generally provide
us with our highest gross margins. In addition, given the
challenging macroeconomic environment and reduced consulting
demand, we have provided clients reduced pricing for long term
project commitment and volume increases.
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.
Management has focused on aligning operating costs with
operating segment revenues. Selling, general and administrative
expenses have been reduced $1.6 million, a decline of 5%,
to $28.5 million for fiscal year 2009 from
$30.1 million for fiscal year 2008. This reduction in
selling, general and administrative expenses was realized
despite the fact that foreign currency losses included in
selling, general and administrative expenses were
$0.5 million during fiscal year 2009 compared to foreign
currency gains of $1.0 million during fiscal year 2008.
With the decline in revenues, our selling, general and
administrative expenses have increased as a percentage of
revenues to 43.9% in fiscal year 2009 from 40.7% in fiscal year
2008. During fiscal year 2009, we continued to reduce selling
and administrative costs to better align our cost structure with
revenue levels and we will continue to evaluate selling, general
and administrative expense reduction opportunities to improve
earnings.
Intangible asset amortization included in operating expenses
decreased to $2.0 million in fiscal year 2009 from
$3.9 million in fiscal year 2008. The decrease in
amortization expense was due to the completion of amortization
of some intangibles recorded in connection with our 2007
acquisitions, exchange rate movements and the impairment in
fiscal year 2008 of the S3 license agreement and the intangibles
related to the TWG acquisition.
15
We recorded a net loss of $3.2 million for fiscal year 2009
compared to a net loss of $14.8 million for fiscal year
2008. The decline in the loss for fiscal year 2009 from fiscal
year 2008 is primarily attributable to a $14.5 million
impairment of goodwill and intangible assets in 2008, effective
cost management initiatives and a decrease in intangible
amortization, partially offset by a contraction in revenues
together with lower utilization of our employee consulting
personnel and the resulting negative impact on gross margins. We
made substantial strides during fiscal year 2008 integrating our
2007 acquisitions and reducing our total operating cost
structure with emphasis on selling, general and administrative
expenses. However, due to the deterioration in economic
conditions, these cost savings were overshadowed by the decrease
in revenue levels and gross margins from fiscal year 2008 which
impacted our ability to achieve profitability.
Recent economic conditions have added significant challenges to
our clients in the communications media, and entertainment
sectors. The general result is reduced client spending on
capital and operational initiatives. This reduction in spending,
coupled with increased competition pursuing fewer opportunities,
could result in further price reductions, fewer client projects,
under utilization of consultants, reduced operating margins, and
loss of market share. Declines in our revenues can have a
significant impact on our financial results. Although we have a
flexible cost base comprised primarily of employee and related
costs, there is a lag in time required to scale the business
appropriately if revenues are reduced. In addition, our future
revenues and operating results may fluctuate from quarter to
quarter based on the number, size and scope of projects in which
we are engaged, the contractual terms and degree of completion
of such projects, any delays incurred in connection with a
project, consultant utilization rates, general economic
conditions and other factors.
From a cash flow perspective, cash flows provided by operating
activities were $0.4 million during fiscal year 2009
compared to $6.3 million for fiscal year 2008. The decline
in cash flows from operating activities for fiscal year 2009 as
compared with the 2008 period primarily related to a decline in
operating results due to lower revenue volumes and lower
utilization of our employee consulting personnel.
At January 2, 2010, we had working capital of approximately
$16.3 million, which included $2.8 million in
short-term debt. In addition, working capital includes
$5.4 million in short-term investments that were classified
as long-term as of January 3, 2009. Our short-term and
noncurrent investments consist of auction rate securities.
Returns on our cash and investments have decreased over recent
periods as a result of decreasing interest rates and a reduction
in invested balances.
Our investments included $12.3 million ($12.8 million
par value) in auction rate securities guaranteed through the
Federal Family Education Loan Program of the
U.S. Department of Education. As discussed in Note 2,
Auction Rate Securities, in the notes to
consolidated financial statements, during 2008, we reached a
settlement agreement on $7.55 million of the auction rate
securities allowing us to sell these auction rate securities
held in accounts with UBS AG (UBS) and UBS
affiliates at par value beginning June 30, 2010 and
enabling us to borrow up to 75% of the fair value of the
securities at zero net interest cost prior to the sales date.
On October 26, 2009, all of the Access Group Inc. Federal
Student Loan Asset Backed Notes held as part of our auction rate
securities portfolio with a UBS affiliate were sold. Pursuant to
the terms of the settlement with UBS, UBS holds a discretionary
right to sell or otherwise dispose of our auction rate
securities, provided that we are entitled to the par value of
the auction rate securities upon any disposition. The par value
of the liquidated securities, $2,050,000, was applied to the
line of credit from UBS and its affiliates. As of
January 2, 2010, there was approximately $900,000 available
to be accessed under the UBS line of credit.
As of January 2, 2010, $5.4 million ($5.5 million
par value) of our investments in auction rate securities were
classified as current assets based on our intent and expected
ability to liquidate these investments within the next year. As
of January 2, 2010, we had borrowed $2.8 million
against the line of credit with UBS. Given our intent to
liquidate the collateral related to the line of credit with UBS
within one year and the requirement that we concurrently repay
the amounts borrowed on the line of credit, we have classified
this debt as short-term as of January 2, 2010.
16
In addition, during the first quarter of 2009, we entered into a
loan agreement with Citigroup to provide liquidity for the
remainder of our $7.25 million auction rate securities
portfolio held with Citigroup. Under the loan agreement, we have
access to a revolving line of credit of up to 50% of the par
value of the auction rate securities that we have pledged as
collateral, or $3.625 million. We have made no borrowings
under the line of credit with Citigroup.
CRITICAL
ACCOUNTING
POLICIES
Our significant accounting policies are summarized in
Note 1 of the Notes 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:
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|
|
|
|
Marketable Securities;
|
|
|
|
Impairment of Goodwill and Long-lived Assets;
|
|
|
|
Revenue Recognition;
|
|
|
|
Share-based Compensation Expense;
|
|
|
|
Accounting for Income Taxes; and
|
|
|
|
Research and Development and Capitalized Software Costs.
|
Marketable Securities Short-term investments
and non-current investments, which consist of auction rate
securities, are accounted for under the provisions of FASB ASC
320, Investments-Debt and Equity Securities.
Management evaluates the appropriate classification of
marketable securities at each balance sheet date. These
investments are reported at fair value, as measured pursuant to
FASB ASC 820, Fair Value Measurements and
Disclosures. For those securities considered to be
available-for-sale,
any temporary unrealized gains and losses are included as a
separate component of stockholders equity, net of
applicable taxes. For those securities considered to be
trading, any unrealized gains and losses are
included in the Consolidated Statements of Operations and
Comprehensive Loss, net of applicable taxes. Additionally,
realized gains and losses, changes in value judged to be
other-than-temporary,
interest and dividends are also included in the Consolidated
Statements of Operations and Comprehensive Loss, net of
applicable taxes.
The auction rate securities we hold are generally long-term debt
instruments that historically provided liquidity through a Dutch
auction process through which interest rates reset every 28 to
35 days. Beginning in February 2008, auctions of our
auction rate securities portfolio failed to receive sufficient
order interest from potential investors to clear successfully,
resulting in failed auctions. The principal associated with
failed auctions will not be accessible until a successful
auction occurs, a buyer is found outside of the auction process,
the issuers redeem the securities, the issuers establish a
different form of financing to replace these securities or final
payments come due according to contractual maturities ranging
from approximately 21 to 35 years.
As of January 2, 2010, $5.4 million ($5.5 million
par value) of our investments in auction rate securities were
reflected as current assets and $6.9 million
($7.3 million par value) were reflected as non-current
assets on our Consolidated Balance Sheet. The entire amount of
auction rate securities was reflected as a non-current asset on
our Consolidated Balance Sheet as of January 3, 2009.
During the third quarter of 2008, state and federal regulators
reached settlement agreements with both of the brokers who
advised us to purchase the auction rate securities currently
held. The settlement agreements with the regulators were
intended to eventually provide liquidity for holders of auction
rate securities. On November 13, 2008, we entered into a
settlement with UBS to provide liquidity for our
$7.6 million auction rate securities portfolio held with a
UBS affiliate. Pursuant to the terms of the Settlement, UBS
issued Auction Rate Securities Rights (ARS Rights)
to us, allowing us to sell to UBS our auction rate securities
held in
17
accounts with UBS and UBS affiliates at par value at any time
during the period beginning June 30, 2010 and ending
July 2, 2012. As consideration for the issuance of the ARS
Rights, we (1) released UBS from all claims for damages
(other than consequential damages) directly or indirectly
relating to UBSs marketing and sale of auction rate
securities, and (2) granted UBS the discretionary right to
sell or otherwise dispose of our auction rate securities,
provided that the we are paid the par value of the auction rate
securities upon any disposition.
While the ARS Rights result in a put option which represents a
separate freestanding instrument, the put option does not meet
the definition of a derivative instrument under FASB ASC 815,
Derivatives and Hedging. We have elected to
measure the ARS Rights at fair value under FASB ASC 825,
Financial Instruments, to better align
changes in fair value of the ARS Rights with those of the
underlying auction rate securities investments.
Prior to accepting the UBS settlement offer, we recorded all of
our auction rate securities as
available-for-sale
investments. Upon accepting the UBS settlement, we made a
one-time election to transfer our UBS auction rate securities
holdings from
available-for-sale
securities to trading securities under FASB ASC 320.
During October 2009, all of the Access Group Inc. Federal
Student Loan Asset Backed Notes held as part of our auction rate
securities portfolio with a UBS affiliate were sold at par value
of $2,050,000. The proceeds from this transaction were applied
to the line of credit from UBS and its affiliates.
For auction rate securities classified as
available-for-sale,
we recognized unrealized holding gains of $718,000, respectively
during fiscal year 2009 and recognized unrealized holding losses
of $1,116,000 during fiscal year 2008. For auction rate
securities classified as trading securities, we recognized
realized holding gains of $840,000 offset by realized losses on
our ARS Rights of $616,000 during fiscal 2009. The ARS Rights
will continue to be measured at fair value under FASB ASC 825
until the earlier of our exercise of the ARS Rights or
UBSs purchase of the auction rate securities at par value
in connection with the ARS Rights Agreement.
Due to the lack of observable market quotes on our auction rate
securities portfolio and ARS Rights, we utilize valuation models
that rely exclusively on Level 3 inputs as defined in FASB ASC
820 including those that are based on expected cash flow streams
and collateral values, including assessments of counterparty
credit quality, default risk underlying the security, discount
rates and overall capital market liquidity. The valuation of our
auction rate securities portfolio and ARS Rights is subject to
uncertainties that are difficult to predict. Factors that may
impact our valuation include changes to credit ratings of the
securities as well as to the underlying assets supporting those
securities, rates of default of the underlying assets,
underlying collateral value, discount rates, counterparty risk
and ongoing strength and quality of market credit and liquidity.
Impairment of Goodwill and Long-lived Assets
As of January 2, 2010, we had $7.8 million in goodwill
and $2.5 million in long-lived intangible assets, net of
accumulated amortization. Goodwill and other long-lived
intangible assets arising from our acquisitions are subjected to
periodic review for impairment. FASB ASC 350
Intangibles-Goodwill and Other requires an
evaluation of these indefinite-lived assets annually and
whenever events or circumstances indicate that such assets may
be impaired. The evaluation is conducted at the reporting unit
level and compares the calculated fair value of the reporting
unit to its book value to determine whether impairment has been
deemed to occur. Any impairment charge would be based on the
most recent estimates of the recoverability of the recorded
goodwill. If the remaining book value assigned to goodwill in an
acquisition is higher than the estimated fair value of the
reporting unit, there is a requirement to write down these
assets.
Fair value of our reporting units is determined using the income
approach. The income approach uses a reporting units
projection of estimated cash flows discounted using a
weighted-average cost of capital analysis that reflects current
market conditions. We also consider the market approach to
valuing our reporting units, however due to the lack of
comparable industry publicly available transaction data, we
typically conclude a market approach will not adequately reflect
our specific reporting unit operations. While the market
approach
18
is typically not expressly utilized, we do compare the results
of our overall enterprise valuation to our market
capitalization. Significant management judgments related to the
income approach include:
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Anticipated future cash flows and terminal value for each
reporting unit The income approach to
determining fair value relies on the timing and estimates of
future cash flows, including an estimate of terminal value. The
projections use managements estimates of economic and
market conditions over the projected period including growth
rates in revenues and estimates of expected changes in operating
margins. Our projections of future cash flows are subject to
change as actual results are achieved that differ from those
anticipated. Because management frequently updates its
projections, we would expect to identify on a timely basis any
significant differences between actual results and recent
estimates.
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Selection of an appropriate discount rate The
income approach requires the selection of an appropriate
discount rate, which is based on a weighted average cost of
capital analysis. The discount rate is affected by changes in
short-term interest rates and long-term yield as well as
variances in the typical capital structure of marketplace
participants. The discount rate is determined based on
assumptions that would be used by marketplace participants, and
for that reason, the capital structure of selected marketplace
participants was used in the weighted average cost of capital
analysis. Given the current volatile economic conditions, it is
possible that the discount rate will fluctuate in the near term.
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In accordance with FASB ASC 360, Property, Plant and
Equipment, we use our best estimates based upon
reasonable and supportable assumptions and projections to review
for impairment of finite-lived assets and finite-lived
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.
At the time of the year end goodwill impairment test,
January 2, 2010, fair values of our RVA and Software
Solutions reporting units exceeded their book value by 24% and
28%, respectively. We consider these fair values to be
substantially higher than book value and therefore goodwill was
considered not to be impaired. Given the decline in our market
capitalization and the deterioration in U.S. economic and
industry conditions during the fiscal year ended January 3,
2009, we recognized impairment charges totaling
$13.4 million for goodwill in the Management Consulting
Services Segment in fiscal year 2008. During 2008, we also
recognized a $1.1 million charge for the impairment of the
carrying amount of intangible assets in the Management
Consulting Services Segment. The impairment charge was related
to the evaluation of the value of our S3 license agreement and
intangibles related to our acquisition of TWG. See Note 5,
Goodwill and Other Intangible Assets in the Notes to
Consolidated Financial Statements.
Revenue Recognition We recognize revenues
from time and materials consulting contracts in the period in
which our services are performed. We recognized
$25.1 million and $33.7 million in revenues from time
and materials contracts during fiscal years 2009 and 2008,
respectively. In addition to time and materials contracts, our
other types of contracts include fixed fee contracts, and
contingent fee contracts. During the fiscal years 2009 and 2008,
we recognized $39.9 million and $40.4 million,
respectively, in revenues on these other types of contracts. We
recognize revenues on milestone or deliverables-based fixed fee
contracts and time and materials contracts not to exceed
contract price using the percentage of completion-like method
described by FASB ASC
605-35,
Revenue Recognition Construction-Type and
Production-Type Contracts (formerly AICPA Statement of
Position (SOP)
No. 81-1,
Accounting for Performance of Construction-Type and
Certain Production-Type Contracts). For fixed fee
contracts where services are not based on providing deliverables
or achieving milestones, we recognize revenues on a
straight-line basis over the period during which such services
are expected to be performed. In connection with some fixed fee
contracts, we receive payments from customers that exceed
recognized revenues. We record the excess of receipts from
customers over recognized revenue as deferred revenue. Deferred
revenue is classified as a current liability to the extent it is
expected to be earned within twelve months from the date of the
balance sheet.
We also develop, install and support customer software in
addition to our traditional consulting services. We recognize
revenues in connection with our software sales agreements
utilizing the percentage of completion-like method described in
FASB ASC
605-35.
These agreements include software
right-to-use
licenses (RTUs) and related customization and
implementation services. Due to the long-term nature of software
implementation and the extensive software customization based on
normal customer specific
19
requirements, both the RTU and implementation services are
treated as a single element for revenue recognition purposes.
The FASB ASC
605-35 percentage-of-completion-like
methodology involves recognizing revenue using the percentage of
services completed, on a current cumulative cost to total cost
basis, using a reasonably consistent profit margin over the
period. Due to the longer term nature of these projects,
developing the estimates of costs often requires significant
judgment. Factors that must be considered in estimating the
progress of work completed and ultimate cost of the projects
include, but are not limited to, the availability of labor and
labor productivity, the nature and complexity of the work to be
performed, and the impact of delayed performance. If changes
occur in delivery, productivity or other factors used in
developing the estimates of costs or revenues, we revise our
cost and revenue estimates, which may result in increases or
decreases in revenues and costs, and such revisions are
reflected in income in the period in which the facts that give
rise to that revision become known.
In addition to the professional services related to the
customization and implementation of its software, we also
provide post-contract support (PCS) services,
including technical support and maintenance services. For those
contracts that include PCS service arrangements which are not
essential to the functionality of the software solution, we
separate the FASB ASC
605-35
software services and PCS services utilizing the
multiple-element arrangement model prescribed by FASB ASC
605-25,
Revenue Recognition Multiple-Element
Arrangements (formerly Emerging Issues Task Force
No. 00-21,
Revenue Arrangements with Multiple
Deliverables). FASB ASC
605-25
addresses the accounting treatment for an arrangement to provide
the delivery or performance of multiple products
and/or
services where the delivery of a product or system or
performance of services may occur at different points in time or
over different periods of time. We utilize FASB ASC
605-25 to
separate the PCS service elements and allocate total contract
consideration to the contract elements based on the relative
fair value of those elements. Revenues from PCS services are
recognized ratably on a straight-line basis over the term of the
support and maintenance agreement.
We also may enter into contingent fee contracts, in which
revenue is subject to achievement of savings or other agreed
upon results, rather than time spent. Due to the nature of
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.
Although these contracts can be very rewarding, the
profitability of these contracts is dependent on our ability to
deliver results for our clients and control the cost of
providing these services. 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. Revenues associated
with contingent fee contracts were not material during fiscal
years 2009 and 2008.
Share-based Compensation Expense We grant
stock options and nonvested stock to our employees and also
provide employees the right to purchase our stock at a discount
pursuant to an employee stock purchase plan. The benefits
provided under these plans are share-based payment awards
subject to the provisions of FASB ASC 718,
Compensation-Stock Compensation. Under FASB
ASC 718, we are required to make significant estimates related
to determining the value of our share-based compensation. Our
expected stock-price volatility assumption is based on
historical volatilities of the underlying stock which are
obtained from public data sources. For stock option grants
issued during fiscal year 2009, we used a weighted-average
expected stock-price volatility of 61%. The expected term of
options granted is based on the simplified method in accordance
with the SECs Staff Accounting Bulletin (SAB)
No. 110 as our historical share option exercise experience
does not provide a reasonable basis for estimation. As such, we
used a weighted-average expected option life assumption of
6.25 years.
If factors change and we develop different assumptions in the
application of FASB ASC 718 in future periods, the compensation
expense that we record under FASB ASC 718 may differ
significantly from what we have recorded in the current period.
There is a high degree of subjectivity involved when using
option pricing models to estimate share-based compensation under
FASB ASC 718. Changes in the subjective input assumptions can
materially affect our estimates of fair values of our
share-based compensation. Certain share-based payment awards,
such as employee stock options, may expire worthless or
otherwise result in zero intrinsic value as compared to the fair
values originally estimated on the grant date and reported in
our
20
financial statements. Alternatively, values may be realized from
these instruments that are significantly in excess of the fair
values originally estimated on the grant date and reported in
our financial statements. Although the fair value of employee
share-based awards is determined in accordance with FASB ASC 718
and SAB No. 110 using an option pricing model, that
value may not be indicative of the fair value observed in a
willing buyer/willing seller market transaction.
In addition, under FASB ASC 718 we are required to net estimated
forfeitures against compensation expense. This requires us to
estimate the number of awards that will be forfeited prior to
vesting. If actual forfeitures in future periods are different
than our initial estimate, the compensation expense that we
ultimately record under FASB ASC 718 may differ
significantly from what was originally estimated. The weighted
average estimated forfeiture rate for unvested options
outstanding as of January 2, 2010 is 38%.
Income Taxes Accounting for income taxes
requires significant estimates and judgments on the part of
management. Such estimates and judgments include, but are not
limited to, the effective tax rate anticipated to apply to tax
differences that are expected to reverse in the future, the
sufficiency of taxable income in future periods to realize the
benefits of net deferred tax assets and net operating losses
currently recorded and the likelihood that tax positions taken
in tax returns will be sustained on audit. We account for income
taxes in accordance with FASB ASC 740 Income Taxes.
As required by FASB ASC 740, we record deferred tax assets or
liabilities based on differences between financial reporting and
tax bases of assets and liabilities using currently enacted
rates that will be in effect when the differences are expected
to reverse. FASB ASC 740 also requires that deferred tax assets
be reduced by a valuation allowance if it is more likely than
not that some portion or all of the deferred tax asset will not
be realized. As of January 2, 2010, cumulative valuation
allowances in the amount of $33.5 million were recorded in
connection with the net deferred income tax assets. As required
by FASB ASC 740, we have performed a comprehensive review of our
portfolio of uncertain tax positions in accordance with
recognition standards established by the guidance. Pursuant to
FASB ASC 740, an uncertain tax position represents our expected
treatment of a tax position taken in a filed tax return, or
planned to be taken in a future tax return, that has not been
reflected in measuring income tax expense for financial
reporting purposes. As of January 2, 2010, we have recorded
a liability of approximately $963,000 for unrecognized tax
benefits.
We have generated substantial deferred income tax assets related
to our domestic operations, and to a lesser extent our
international operations, primarily from the accelerated
financial statement write-off of goodwill, the charge to
compensation expense taken for stock options and net operating
losses. 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 some cases where deferred taxes were the result of
compensation expense recognized on stock options, our ability to
realize the income tax benefit of these assets is also dependent
on our share price increasing to a point where these options
have intrinsic value at least equal to the grant date fair value
and are exercised. In assessing whether a valuation allowance is
needed in connection with our deferred income tax assets, we
have evaluated our ability to generate sufficient taxable income
in future periods to utilize the benefit of the deferred income
tax assets. We continue to evaluate our ability to use recorded
deferred income tax asset balances. If we continue to report
domestic or foreign operating losses for financial reporting in
future years, no additional tax benefit would be recognized for
those losses, since we will not have accumulated enough positive
evidence to support our ability to utilize net operating loss
carryforwards in the future.
International operations have become a significant part of our
business. As part of the process of preparing our financial
statements, we are required to estimate our income taxes in each
of the jurisdictions in which we operate. We utilize a
cost plus fixed margin transfer pricing methodology
as it relates to inter-company charges for headquarters support
services performed by our domestic entities on behalf of various
foreign affiliates. The judgments and estimates used are subject
to challenge by domestic and foreign taxing authorities. It is
possible that such authorities could challenge those judgments
and estimates and draw conclusions that would cause us to incur
liabilities in excess of those currently recorded. We use an
estimate of our annual effective tax rate at each interim period
based upon the facts and circumstances available at that time,
while the actual annual effective tax rate is calculated at
year-end. Changes in the geographical mix or estimated amount of
annual pre-tax income could impact our overall effective tax
rate.
21
Research and Development and Capitalized Software
Costs Software development costs are accounted
for in accordance with FASB ASC
985-20,
Software Costs of Software to Be Sold,
Leased, or Marketed. Capitalization of software
development costs for products to be sold to third parties
begins upon the establishment of technological feasibility and
ceases when the product is available for general release. The
establishment of technological feasibility and the ongoing
assessment of recoverability of capitalized software development
costs require considerable judgment by management concerning
certain external factors including, but not limited to,
technological feasibility, anticipated future gross revenue,
estimated economic life and changes in software and hardware
technologies. We capitalize development costs incurred during
the period between the establishment of technological
feasibility and the release of the final product to customers.
During fiscal years 2009 and 2008, $536,000 and $812,000,
respectively, of these costs were expensed as incurred. No
software development costs were capitalized during either fiscal
year 2009 or 2008.
RECENT
ACCOUNTING PRONOUNCEMENTS
In May 2009, the FASB issued ASC
855-10,
Subsequent Events (ASC
855-10).
ASC 855-10
incorporates the subsequent events guidance contained in the
auditing standards literature into authoritative accounting
literature. It also requires entities to disclose the date
through which they have evaluated subsequent events and whether
the date corresponds with the release of their financial
statements. This guidance is effective for all interim and
annual periods ending after June 15, 2009. We adopted ASC
855-10 upon
its issuance.
In June 2009, the FASB issued ASC
105-10,
Generally Accepted Accounting Principles Overall
(ASC
105-10)
that established FASB Accounting Standards Codification
(Codification), as the single source of
authoritative U.S. GAAP for all non-governmental entities.
The Codification, which launched July 1, 2009, changes the
referencing and organization of accounting guidance and is
effective for interim and annual periods ending after
September 15, 2009. Since it is not intended to change or
alter existing U.S. GAAP, the Codification does not have
any impact on our financial condition or results of operations,
but it does change the way GAAP is organized and presented. The
Codification is effective for our financial statements for the
fiscal year ended January 2, 2010 and the principal impact
on our financial statements is limited to disclosures as all
future references to authoritative accounting literature will be
referenced in accordance with the Codification.
In August 2009, FASB issued Accounting Standards Update
(ASU)
No. 2009-05
which amends Fair Value Measurements and Disclosures
Overall (ASC Topic
820-10) to
provide guidance on the fair value measurement of liabilities.
This update requires clarification for circumstances in which a
quoted price in an active market for the identical liability is
not available, in which event a reporting entity is required to
measure fair value using one or more of the following
techniques: 1) a valuation technique that uses either the
quoted price of the identical liability when traded as an asset
or quoted prices for a similar liability or similar liabilities
when traded as an asset; or 2) another valuation technique
that is consistent with the principles in ASC Topic 820 such as
the income and market approach to valuation. The amendments in
this update also clarify that when estimating the fair value of
a liability, a reporting entity is not required to include a
separate input or adjustment to other inputs relating to the
existence of a restriction that prevents the transfer of the
liability. This update further clarifies that if the fair value
of a liability is determined by reference to a quoted price in
an active market for an identical liability, that price would be
considered a Level 1 measurement in the fair value
hierarchy. Similarly, if the identical liability has a quoted
price when traded as an asset in an active market, it is also a
Level 1 fair value measurement if no adjustments to the
quoted price of the asset are required. We adopted ASC Topic
820-10
effective for our fiscal year ending January 2, 2010 and it
had no material impact on our consolidated financial statements.
In October 2009, the FASB issued ASU
No. 2009-13,
Revenue Recognition (Topic 605)
Multiple-Deliverable Revenue Arrangements, a consensus of the
FASB Emerging Issue Task Force (ASU
2009-13),
and Accounting Standards Update
No. 2009-14,
Software (Topic 985) Certain Revenue Arrangements
That Include Software Elements (ASU
2009-14).
ASU 2009-13
requires companies to allocate revenue in multiple-element
arrangements based on an elements estimated selling price
if vendor-specific or other third party evidence of value is not
available. ASU
2009-14
modifies the software revenue recognition guidance to exclude
from its scope tangible products that contain both software and
non-software components that function
22
together to deliver a products essential functionality.
Both statements are effective for revenue arrangements entered
into or materially modified in fiscal years beginning on or
after June 15, 2010. Early adoption is permitted. We are
currently evaluating the impact that the adoption of this
guidance will have on its consolidated financial statements.
RESULTS
OF OPERATIONS
FISCAL
2009 COMPARED TO FISCAL 2008
REVENUES
Revenues decreased $9.0 million, or 12.3%, to
$65.0 million for fiscal year 2009 from $74.0 million
for fiscal year 2008. The decrease in revenues is primarily due
to delays of projects or reduction of demand for consulting and
software services by the communications industry resulting from
the adverse economic environment in both the United States and
Europe. In addition, unfavorable foreign currency translation
accounted for approximately $3.8 million of the decline in
revenues.
Management Consulting Services Segment
Management Consulting Services segment revenues decreased
$3.5 million or 6.5%, to $50.6 million for fiscal year
2009 from $54.1 million for fiscal year 2008. Revenues in
our global operational consulting practices decreased by
$0.8 million and revenues in our global strategy consulting
practices decreased by $2.7 million. Included in these
revenue declines are $1.0 million in unfavorable foreign
exchange movements.
During fiscal year 2009, this segment provided services on 178
customer projects, compared to 215 projects performed in fiscal
year 2008. Average revenue per project was $284,000 in the
fiscal year ended January 2, 2010 compared to $252,000 in
the fiscal year ended January 3, 2009. Our international
revenues from this segment decreased to $4.4 million for
fiscal year 2009 from $8.0 million for fiscal year 2008.
International revenues have decreased as a percentage of total
revenues of the segment from 14.8% in fiscal year 2008 to 8.7%
in the 2009 period. The decrease in international revenues was
due to the completion of a major international project and
unfavorable exchange rate movements.
Revenues recognized in connection with fixed price engagements
totaled $30.7 million and $32.0 million, representing
60.8% and 59.2% of total revenues of the segment, for the fiscal
years ended January 2, 2010 and January 3, 2009,
respectively.
Software Solutions Segment Revenues of
$14.4 million and $20.0 million were generated for
fiscal years 2009 and 2008, respectively. All revenues were
generated internationally. The decrease in revenues for fiscal
year 2009 as compared to the 2008 period is primarily due to
unfavorable exchange rate movements of $2.9 million and the
wind down of a large client project. During fiscal year 2009 and
2008, this segment provided services on 204 and 158 customer
projects, respectively. Average software and services revenue
per project was approximately $56,000 and $110,000 for fiscal
years 2009 and 2008, respectively. The decrease in revenue per
project for fiscal year 2009 as compared to fiscal year 2008 is
primarily due to an increase in the number of smaller
engagements combined with unfavorable exchange rate movements.
Revenues from post-contract support services were approximately
$2.4 million and $2.3 million for fiscal years 2009
and 2008, respectively. During fiscal years 2009 and 2008,
revenues from software licensing were $528,000 and $235,000,
respectively.
COST OF
SERVICES
Costs of services decreased 7.4% to $38.0 million for
fiscal year 2009 compared to $41.0 million for fiscal year
2008. Our gross margin was 41.4% for fiscal year 2009, compared
to 44.6% for fiscal year 2008. Our Management Consulting
Services segment gross margin was 44.0% for fiscal year 2009
compared to 48.2% for fiscal year 2008. The decrease in gross
margin in our Management Consulting Services segment is
primarily due to the mix of business shifting from strategy
engagements to longer term and lower margin management
consulting projects along with revenue levels declining more
significantly than costs have been
23
reduced. As a result, we experienced lower utilization of our
fixed employee consulting base. Our Software Solutions segment
gross margin was 32.3% for the fiscal year ended January 2,
2010, compared to 34.6% for the fiscal year ended
January 3, 2009. Margin reductions in the Software
Solutions segment are primarily related to lower revenue volumes
for the period and thus lower utilization of our employee
consulting personnel. Costs of services in the Software
Solutions segment included amortization of intangible assets of
$587,000 and $698,000 for fiscal year 2009 and fiscal year 2008,
respectively, related to acquired software. The reduction in
intangible amortization is due to exchange rate movements.
OPERATING
EXPENSES
Operating expenses decreased by $18.0 million, or 37.2%, to
$30.5 million for fiscal year 2009, from $48.5 million
for fiscal year 2008. Operating expenses for both periods
included selling, general and administrative expenses (inclusive
of share-based compensation) and intangible asset amortization.
For fiscal year 2008, operating expenses included
$14.5 million of goodwill and intangible asset impairment.
Excluding the impairment charges in the 2008 period, operating
expenses in fiscal year 2009 decreased by 10.5% from the same
period in 2008.
Selling, general and administrative expenses decreased to
$28.5 million for fiscal year 2009, compared to
$30.1 million for fiscal year 2008. As a percentage of
revenues, our selling, general and administrative expense was
43.9% for the fiscal year ended January 2, 2010, compared
to 40.7% for the fiscal year ended January 3, 2009. The
decrease in selling, general and administrative expenses was
primarily due to decreases in compensation costs through
headcount reductions and a reduction in professional services
fees due to effective cost management. In addition, selling,
general and administrative expenses for fiscal year 2009 include
losses related to changes in foreign currency exchange rates of
$0.5 million compared to gains of $1.0 million during
fiscal year 2008.
Intangible asset amortization decreased by $1.9 million to
$2.0 million for fiscal year 2009, compared to
$3.9 million for fiscal year 2008. The decrease in
amortization expense was primarily due to the completion of
amortization of some intangibles recorded in connection with
acquisitions, exchange rate movements and the impairment of the
S3 license agreement and the intangibles related to the TWG
acquisition during fiscal year 2008.
OTHER
INCOME AND EXPENSES
Interest income was $0.3 million and $0.9 million for
fiscal years 2009 and 2008, respectively, and represented
interest earned on invested balances. Interest income decreased
during fiscal year 2009 as compared to fiscal year 2008 due
primarily to reductions in invested balances attributable to
cash utilized for acquisitions and reductions in interest rates.
We primarily invest in money market funds and have holdings in
auction rate securities. For fiscal year 2009, other income
includes $841,000 in realized holding gains for auction rate
securities classified as trading securities, offset by realized
losses on our ARS Rights of $617,000. During fiscal year 2008,
we recorded other expense of $280,000 related to net realized
losses due to the change in fair value of certain auction rate
securities and the ARS Rights. In addition, other income for
fiscal year 2009 includes $109,000 related to the settlement of
a foreign income tax dispute.
INCOME
TAXES
We recorded an income tax provision of $226,000 and benefit of
$6,000 for fiscal years 2009 and 2008, respectively. The income
tax provision in fiscal year 2009 is primarily due to deferred
taxes recognized on intangibles amortized for income tax
purposes but not for financial reporting purposes and interest
recognized on reserves for uncertain tax positions. The income
tax benefit in fiscal year 2008 is primarily related to our
United Kingdom operations. For both fiscal years, we recorded no
income tax benefit related to our domestic pre-tax losses in
accordance with the provisions of ASC 740, Income
Taxes which requires an estimation of our ability to use
recorded deferred income tax assets. We have recorded a
valuation allowance against all domestic and international
deferred income tax assets generated due to uncertainty about
their ultimate
24
realization due to our history of operating losses. If we
continue to report domestic net operating losses for financial
reporting, no additional tax benefit would be recognized for
those losses, since we will not have accumulated enough positive
evidence to support our ability to utilize the net operating
loss carryforwards in the future.
NET
LOSS
We had a net loss of $3.2 million for fiscal year 2009,
compared to a net loss of $14.8 million for fiscal year
2008. Excluding the impact of goodwill and intangible asset
impairment charges of $14.5 million in fiscal year 2008,
the increase in net loss is attributable to a contraction in
revenues, including the negative impact of foreign exchange
rates, and the resulting negative impact on gross margins.
STATEMENT
REGARDING NON-GAAP FINANCIAL MEASUREMENT
In addition to net loss and net loss per share on a GAAP basis,
TMNG Globals management uses a non-GAAP financial measure,
Non-GAAP adjusted net income or loss, in its
evaluation of our performance, particularly when comparing
performance to the prior years period and on a sequential
basis. This non-GAAP measure contains certain non-GAAP
adjustments which are described in the following schedule
entitled Reconciliation of GAAP Net Loss to
Non-GAAP Adjusted Net Income. In making these
non-GAAP adjustments, we take into account certain non-cash
expenses and benefits, including tax effects as applicable, and
the impact of certain items that are generally not expected to
be on-going in nature or that are unrelated to our core
operations. Management believes the exclusion of these items
provides a useful basis for evaluating underlying business
performance, but should not be considered in isolation and is
not in accordance with, or a substitute for, evaluating our
performance utilizing GAAP financial information. We believe
that providing such adjusted results allows investors and other
users of our financial statements to better understand TMNG
Globals comparative operating performance for the periods
presented. TMNG Globals non-GAAP measure may differ from
similar measures by other companies, even if similar terms are
used to identify such measures. Although TMNG Globals
management believes the non-GAAP financial measure is useful in
evaluating the performance of its business, TMNG Global
acknowledges that items excluded from such measure have a
material impact on our net loss and net loss per share
calculated in accordance with GAAP. Therefore, management uses
non-GAAP measures in conjunction with GAAP results. Investors
and other users of our financial information should also
consider the above factors when evaluating TMNG Globals
results.
25
RECONCILIATION
OF GAAP NET LOSS TO NON-GAAP ADJUSTED NET INCOME
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
Fifty-Two
|
|
|
Fifty-Three
|
|
|
|
Weeks Ended
|
|
|
Weeks Ended
|
|
|
|
January 2,
|
|
|
January 3,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands, except per share data)
|
|
|
Reconciliation of GAAP net loss to non-GAAP adjusted net
income:
|
|
|
|
|
|
|
|
|
GAAP net loss
|
|
$
|
(3,242
|
)
|
|
$
|
(14,825
|
)
|
|
|
|
|
|
|
|
|
|
Goodwill, intangible and long-lived asset impairment
|
|
|
|
|
|
|
14,451
|
|
Realized (gain) loss on auction rate securities
|
|
|
(224
|
)
|
|
|
280
|
|
Depreciation and amortization
|
|
|
3,379
|
|
|
|
5,385
|
|
Non-cash share based compensation expense
|
|
|
858
|
|
|
|
1,817
|
|
Tax effect of applicable non-GAAP adjustments
|
|
|
(82
|
)
|
|
|
(965
|
)
|
|
|
|
|
|
|
|
|
|
Adjustments to GAAP net loss
|
|
|
3,931
|
|
|
|
20,968
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP adjusted net income
|
|
$
|
689
|
|
|
$
|
6,143
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of GAAP net loss per diluted common share to
non-GAAP adjusted net income per diluted common share:
|
|
|
|
|
|
|
|
|
GAAP net loss per diluted common share
|
|
$
|
(0.46
|
)
|
|
$
|
(2.09
|
)
|
|
|
|
|
|
|
|
|
|
Goodwill, intangible and long-lived asset impairment
|
|
|
|
|
|
|
2.04
|
|
Realized (gain) loss on auction rate securities
|
|
|
(0.03
|
)
|
|
|
0.04
|
|
Depreciation and amortization
|
|
|
0.48
|
|
|
|
0.76
|
|
Non-cash share based compensation expense
|
|
|
0.12
|
|
|
|
0.26
|
|
Tax effect of applicable non-GAAP adjustments
|
|
|
(0.01
|
)
|
|
|
(0.14
|
)
|
|
|
|
|
|
|
|
|
|
Adjustments to GAAP net loss per diluted common share
|
|
|
0.56
|
|
|
|
2.96
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP adjusted net income per diluted common share
|
|
$
|
0.10
|
|
|
$
|
0.87
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in calculation of diluted net loss
per common share
|
|
|
6,986
|
|
|
|
7,089
|
|
|
|
|
|
|
|
|
|
|
LIQUIDITY
AND CAPITAL RESOURCES
Net cash provided by operating activities was $0.4 million
and $6.3 million for fiscal years 2009 and 2008,
respectively. The significant change in cash flows from
operating activities for fiscal year 2009 as compared to fiscal
year 2008 was primarily due to declines in operating results due
a decrease in revenues and resulting lower gross margins.
Net cash used in investing activities was $1.6 million and
$4.2 million for fiscal year 2009 and fiscal year 2008,
respectively. Investing activities in fiscal year 2009 included
$1.9 million, $1.0 million and $0.2 million in
earn-out payments related to the acquisitions of Cartesian, RVA
and TWG, respectively. Investing activities in fiscal year 2008
included $3.0 million and $2.3 million in earn-out
payments related to the acquisitions of Cartesian and RVA,
respectively. Investing activities in fiscal year 2008 also
included $0.1 million in payments for TWG working capital
true-ups.
Investing activities include proceeds from sales of short-term
investments of $2.1 million and $2.3 million,
respectively, for fiscal years 2009 and 2008. Net cash used in
investing activities also included $0.6 million and
$1.1 million in fiscal years 2009 and 2008, respectively,
related to the purchase of office equipment, software and
computer equipment.
Net cash provided by financing activities was $0.7 million
for fiscal year 2009. Net cash used in financing activities was
$3.2 million for fiscal year 2008. Financing activities in
the 2009 period included
26
$3.4 million in proceeds from line of credit borrowings and
$2.1 million in repayments on lines of credit. Financing
activities in fiscal year 2008 included $1.5 million in
proceeds from line of credit borrowings. During the 2008 period,
$3.2 million was utilized to purchase shares of our common
stock. In addition, in both periods cash was used to make
payments on long-term obligations, including unfavorable
contract obligations assumed as part of the RVA acquisition in
the 2008 period, partially offset by proceeds received from the
exercise of employee stock options.
At January 2, 2010, we had approximately $6.3 million
in cash and cash equivalents ($3.9 million of which was
denominated in pounds sterling) and $16.3 million in net
working capital. In addition, as discussed below, we have
established lines of credit totaling $7.3 million as of
January 2, 2010 against our auction rate securities
portfolio, of which we had borrowed $2.8 million at
January 2, 2010. We believe we have sufficient cash and
short-term investments and access to lines of credit to meet
anticipated cash requirements, including anticipated capital
expenditures and earn-out payments for at least the next
12 months. Furthermore, based on an analysis of our
investments classified as cash equivalents, we do not believe
that we have any material risk related to the liquidity or
valuation of these investments, nor do we believe that we have
any counterparty credit risk related to these investments.
Should our cash and short-term investments prove insufficient we
may need to obtain new debt or equity financing to support our
operations or complete acquisitions. Recently, credit and
capital markets have experienced unusual volatility and
disruption, and equity and debt financing have become more
expensive and difficult to obtain. If we need to obtain new debt
or equity financing to support our operations or complete
acquisitions in the future, we may be unable to obtain debt or
equity financing on reasonable terms. 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
there is a lag in time required to scale the business
appropriately if revenues are reduced. Our strong balance sheet
has enabled us to make acquisitions and related investments in
intellectual property and businesses we believe are enabling us
to capitalize on the current transformation of the industry;
however, if demand for our consulting services is reduced and we
experience negative cash flow, we could experience liquidity
challenges at some point in the future.
As previously discussed, the liquidity of auction rate
securities has been negatively impacted by events in the credit
markets since 2008. As of January 2, 2010, we held auction
rate securities in the face amount of $12.8 million
collateralized by government guaranteed student loans. The
estimated fair value of the auction rate securities and related
ARS Rights was $12.3 million as of January 2, 2010.
Beginning in February 2008, auctions of our auction rate
securities portfolio failed to receive sufficient order interest
from potential investors to clear successfully, resulting in
failed auction status. The principal associated with failed
auctions will not be accessible until a successful auction
occurs, a buyer is found outside of the auction process, the
issuers redeem the securities, the issuers establish a different
form of financing to replace these securities or final payments
come due according to contractual maturities ranging from
approximately 21 to 35 years.
During the third quarter of 2008, state and federal regulators
reached settlement agreements with both of the brokers who
advised us to purchase the auction rate securities we currently
hold. The settlement agreements with the regulators were
intended to eventually provide liquidity for holders of auction
rate securities. On November 13, 2008, we entered into a
settlement with UBS to provide liquidity for our
$7.6 million auction rate securities portfolio held with a
UBS affiliate. Pursuant to the terms of the settlement, UBS
issued ARS Rights to us, allowing us to sell to UBS our auction
rate securities held in accounts with UBS and UBS affiliates at
par value at any time during the period beginning June 30,
2010 and ending July 2, 2012. As consideration for the
issuance of the ARS Rights, we (1) released UBS from all
claims for damages (other than consequential damages) directly
or indirectly relating to UBSs marketing and sale of
auction rate securities, and (2) granted UBS the
discretionary right to sell or otherwise dispose of our auction
rate securities, provided that we are paid the par value of the
auction rate securities upon any disposition. At January 2,
2010 the ARS Rights had an estimated fair value of
$0.3 million.
Pursuant to the settlement, we entered into a line of credit
with UBS and its affiliates for up to 75% of the market value of
our auction rate securities. The line of credit provides us with
an uncommitted, demand revolving line of credit of up to 75% of
the market value, as determined by UBS in its sole discretion,
of our auction rate securities that are pledged as collateral.
The interest that we pay on the line of credit will not
27
exceed the interest that we receive on the auction rate
securities pledged to UBS as security for the line of credit.
UBS may demand full or partial payment of amounts borrowed on
the line of credit, at its sole option and without cause, at any
time. UBS may, at any time, in its discretion, terminate and
cancel the line of credit. If at any time UBS exercises its
right of demand, then a UBS affiliate shall provide, as soon as
reasonably possible, alternative financing on substantially the
same terms and conditions as those under the line of credit and
UBS agrees that the line of credit shall remain in full force
and effect until such time as such alternative financing has
been established. If alternative financing cannot be
established, then a UBS-related entity will purchase the pledged
auction rate securities at par value. If we elect to sell any
auction rate securities that are pledged as collateral under the
line of credit to a purchaser other than UBS, UBS intends to
exercise its right to demand repayment of the line of credit
relating to the auction rate securities sold by us.
In October 2009, all of the Access Group Inc. Federal Student
Loan Asset Backed Notes held as part of our auction rate
securities portfolio with a UBS affiliate were sold. Pursuant to
the terms of the settlement with UBS, UBS holds a discretionary
right to sell or otherwise dispose of our auction rate
securities, provided that we are entitled to the par value of
the auction rate securities upon any disposition. The par value
of the liquidated securities, $2,050,000, was applied to the
line of credit from UBS and its affiliates. As of
January 2, 2010, we had outstanding borrowings of
$2.8 million under the line of credit. These borrowings
were used to fund short-term liquidity needs. As of
January 2, 2010, there was approximately $900,000 available
to be accessed under this line of credit.
On March 19, 2009, we entered into a loan agreement with
Citigroup Global Markets, Inc. (Citigroup) to
provide liquidity for our $7.3 million auction rate
securities portfolio held with Citigroup. Under the loan
agreement, we have access to a revolving line of credit of up to
50% of the par value of the auction rate securities that we have
pledged as collateral, or $3.625 million. The interest rate
as of January 2, 2010 that we would pay on amounts borrowed
is the federal funds rate plus 3.08%. The interest rate may
change in future periods based on the change in the spread over
the federal funds rate. The line of credit is not for any
specific term or duration and Citigroup may demand full or
partial payment of amounts borrowed on the line of credit, at
its sole option and without cause, at any time. Citigroup may,
at any time, in its discretion, terminate the line of credit
with proper notice. No amounts have been borrowed against this
line of credit.
Given our intent and expected ability to exercise our right
under the ARS Rights to sell to UBS our auction rate securities
held in accounts with UBS and UBS affiliates at par value on
June 30, 2010, we have classified the entire amount of
auction rate securities portfolio held with UBS and UBS
affiliates, including the fair value of the ARS Rights, as
short-term investments in the Consolidated Balance Sheet as of
January 2, 2010. The remaining auction rate securities held
in accounts with Citigroup are classified as noncurrent
investments in the Consolidated Balance Sheet as of
January 2, 2010. We have classified the borrowings from UBS
as a current liability in the Consolidated Balance Sheet as of
January 2, 2010.
As we are able to liquidate any of our auction rate securities
portfolio we intend to reinvest in money market or similar
investments any amounts not used to repay amounts borrowed under
the lines of credit. We continually monitor the credit quality
and liquidity of our auction rate securities. To the extent we
believe we will not be able to collect all amounts due according
to the contractual terms of a security, we will record an
other-than-temporary
impairment. This could require us to recognize losses in our
Condensed Consolidated Statement of Operations and Comprehensive
Loss in accordance with FASB ASC 320, which could be material.
On March 1, 2010, we borrowed an additional $880,000 under
the UBS line of credit. With this draw against the line, total
borrowings were $3,680,000 on this line of credit and there was
no material balance available to be borrowed.
FINANCIAL
COMMITMENTS AND OFF BALANCE SHEET ARRANGEMENTS
During fiscal year 2007, we acquired all of the outstanding
membership interests of RVA. In addition to consideration paid
to date for these acquisitions, we have potential contingent
purchase price obligations of $0.4 million at
January 2, 2010. See Note 4, Business
Combinations, in the Notes to the Consolidated Financial
Statements.
28
During fiscal year 2009, we entered into an agreement under
which we have a commitment to purchase a minimum of $401,000 in
computer software over a three year period. As of
January 2, 2010, we have an obligation of $290,000
remaining under this commitment.
TRANSACTIONS
WITH RELATED PARTIES
During fiscal years 2009 and 2008, we incurred legal fees of
$16,000 and $26,000, respectively, for services provided by
Bingham McCutchen, LLP, a law firm in which a member of our
Board of Directors, Andrew Lipman, owns an equity interest.
Payments made during both periods were in connection with income
tax and potential acquisition related matters. Our Board of
Directors has affirmatively determined that such payments do not
constitute a material relationship between us and the director
and concluded the director is independent as defined by the
NASDAQ corporate governance rules. All payments were made within
the limitations set forth by NASDAQ Rules as to the
qualifications of an independent director.
As of January 2, 2010, there is one outstanding line of
credit between us and our Chief Executive Officer, Richard P.
Nespola, which originated in fiscal year 2001. Aggregate
borrowings outstanding against the line of credit at
January 2, 2010 and January 3, 2009 totaled $300,000
and are due in September 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 us to, or arranged by
us for our executive officers. Interest payments on this loan
are current as of January 2, 2010.
|
|
ITEM 7A.
|
QUALITATIVE
AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
|
Not applicable.
29
|
|
ITEM 8.
|
CONSOLIDATED
FINANCIAL STATEMENTS
|
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders 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 2, 2010 and
January 3, 2009, and the related consolidated statements of
operations and comprehensive loss, stockholders equity,
and cash flows for the 52-week period ended January 2, 2010
and the 53-week period ended January 3, 2009. These
financial statements are the responsibility of the
Companys 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 Companys 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 2, 2010 and January 3, 2009 and
the results of its operations and its cash flows for the 52-week
period ended January 2, 2010 and the 53-week period ended
January 3, 2009, in conformity with accounting principles
generally accepted in the United States of America.
|
|
|
|
/s/
|
DELOITTE &
TOUCHE LLP
|
Kansas City, Missouri
April 1, 2010
30
THE
MANAGEMENT NETWORK GROUP, INC.
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
January 2,
|
|
|
January 3,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands, except share data)
|
|
|
ASSETS
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
6,301
|
|
|
$
|
5,956
|
|
Short-term investments
|
|
|
5,444
|
|
|
|
|
|
Receivables:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
11,991
|
|
|
|
8,247
|
|
Accounts receivable unbilled
|
|
|
4,174
|
|
|
|
4,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,165
|
|
|
|
12,787
|
|
Less: Allowance for doubtful accounts
|
|
|
(357
|
)
|
|
|
(379
|
)
|
|
|
|
|
|
|
|
|
|
Net receivables
|
|
|
15,808
|
|
|
|
12,408
|
|
Prepaid and other current assets
|
|
|
1,206
|
|
|
|
1,653
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
28,759
|
|
|
|
20,017
|
|
|
|
|
|
|
|
|
|
|
NONCURRENT ASSETS:
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
1,955
|
|
|
|
1,801
|
|
Goodwill
|
|
|
7,772
|
|
|
|
6,240
|
|
Identifiable intangible assets, net
|
|
|
2,516
|
|
|
|
4,842
|
|
Non-current investments
|
|
|
6,852
|
|
|
|
13,404
|
|
Other assets
|
|
|
397
|
|
|
|
410
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
48,251
|
|
|
$
|
46,714
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
Trade accounts payable
|
|
$
|
1,118
|
|
|
$
|
1,138
|
|
Current borrowings
|
|
|
2,800
|
|
|
|
|
|
Accrued payroll, bonuses and related expenses
|
|
|
5,354
|
|
|
|
4,053
|
|
Other accrued liabilities
|
|
|
1,433
|
|
|
|
3,010
|
|
Deferred revenue
|
|
|
1,023
|
|
|
|
476
|
|
Accrued contingent consideration
|
|
|
|
|
|
|
161
|
|
Unfavorable and other contractual obligations
|
|
|
706
|
|
|
|
697
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
12,434
|
|
|
|
9,535
|
|
|
|
|
|
|
|
|
|
|
NONCURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
Unfavorable and other contractual obligations
|
|
|
546
|
|
|
|
1,062
|
|
Noncurrent borrowings
|
|
|
|
|
|
|
1,485
|
|
Other noncurrent liabilities
|
|
|
1,237
|
|
|
|
1,006
|
|
|
|
|
|
|
|
|
|
|
Total noncurrent liabilities
|
|
|
1,783
|
|
|
|
3,553
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 14)
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY:
|
|
|
|
|
|
|
|
|
Common stock:
|
|
|
|
|
|
|
|
|
Voting $.005 par value, 20,000,000 shares
authorized; 7,468,310 (including 440,000 treasury shares) and
7,393,025 (including 440,000 treasury shares) shares issued as
of January 2, 2010 and January 3, 2009, respectively;
7,028,310 and 6,953,025 shares outstanding as of
January 2, 2010 and January 3, 2009, respectively
|
|
|
37
|
|
|
|
37
|
|
Preferred stock $.001 par value,
10,000,000 shares authorized; no shares issued or
outstanding
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
176,680
|
|
|
|
175,691
|
|
Accumulated deficit
|
|
|
(134,948
|
)
|
|
|
(131,706
|
)
|
Treasury stock, at cost
|
|
|
(3,545
|
)
|
|
|
(3,545
|
)
|
Accumulated other comprehensive income
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
(3,792
|
)
|
|
|
(5,735
|
)
|
Loss on investments
|
|
|
(398
|
)
|
|
|
(1,116
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
34,034
|
|
|
|
33,626
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity
|
|
$
|
48,251
|
|
|
$
|
46,714
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
31
THE
MANAGEMENT NETWORK GROUP, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
|
|
|
|
|
|
|
|
|
|
|
Fifty-Two
|
|
|
Fifty-Three
|
|
|
|
Weeks Ended
|
|
|
Weeks Ended
|
|
|
|
January 2,
|
|
|
January 3,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands, except per share data)
|
|
|
Revenues
|
|
$
|
64,953
|
|
|
$
|
74,042
|
|
Cost of services (includes net non-cash share-based compensation
expense of $260 and $545 for the 2009 and 2008 fiscal years,
respectively)
|
|
|
38,036
|
|
|
|
41,055
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
26,917
|
|
|
|
32,987
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
Selling, general and administrative (includes net non-cash
share-based compensation expense of $598 and $1,272 for the 2009
and 2008 fiscal years, respectively)
|
|
|
28,497
|
|
|
|
30,124
|
|
Intangible asset amortization
|
|
|
1,975
|
|
|
|
3,916
|
|
Goodwill, intangible and long-lived asset impairment
|
|
|
|
|
|
|
14,451
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
30,472
|
|
|
|
48,491
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(3,555
|
)
|
|
|
(15,504
|
)
|
Interest income
|
|
|
259
|
|
|
|
922
|
|
Interest expense
|
|
|
(55
|
)
|
|
|
|
|
Other income (expense), net
|
|
|
335
|
|
|
|
(249
|
)
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
539
|
|
|
|
673
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(3,016
|
)
|
|
|
(14,831
|
)
|
Income tax (provision) benefit
|
|
|
(226
|
)
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(3,242
|
)
|
|
|
(14,825
|
)
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
1,943
|
|
|
|
(5,955
|
)
|
Unrealized gain (loss) on marketable securities
|
|
|
718
|
|
|
|
(1,116
|
)
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$
|
(581
|
)
|
|
$
|
(21,896
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per common share
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.46
|
)
|
|
$
|
(2.09
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in calculation of net loss per
share:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
6,986
|
|
|
|
7,089
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
6,986
|
|
|
|
7,089
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
32
THE
MANAGEMENT NETWORK GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
January 2,
|
|
|
January 3,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,242
|
)
|
|
$
|
(14,825
|
)
|
Adjustments to reconcile net loss to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
Goodwill and intangible asset impairment
|
|
|
|
|
|
|
14,451
|
|
Depreciation and amortization
|
|
|
3,379
|
|
|
|
5,386
|
|
Share-based compensation
|
|
|
858
|
|
|
|
1,817
|
|
Deferred taxes
|
|
|
145
|
|
|
|
(1,077
|
)
|
Bad debt recoveries
|
|
|
|
|
|
|
(227
|
)
|
Realized (gain) loss on investments
|
|
|
(224
|
)
|
|
|
280
|
|
Other changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(3,291
|
)
|
|
|
3,389
|
|
Accounts receivable unbilled
|
|
|
601
|
|
|
|
2,423
|
|
Prepaid and other assets
|
|
|
398
|
|
|
|
76
|
|
Trade accounts payable
|
|
|
(74
|
)
|
|
|
(572
|
)
|
Income tax liabilities
|
|
|
(73
|
)
|
|
|
(216
|
)
|
Deferred revenue
|
|
|
494
|
|
|
|
(2,962
|
)
|
Accrued liabilities
|
|
|
1,448
|
|
|
|
(1,653
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
419
|
|
|
|
6,290
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds from maturities/sales of marketable securities
|
|
|
2,050
|
|
|
|
2,325
|
|
Acquisition of businesses, net of cash acquired
|
|
|
(3,054
|
)
|
|
|
(5,426
|
)
|
Acquisition of property and equipment
|
|
|
(618
|
)
|
|
|
(1,059
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(1,622
|
)
|
|
|
(4,160
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Borrowings on line of credit
|
|
|
3,400
|
|
|
|
1,485
|
|
Payments on line of credit
|
|
|
(2,085
|
)
|
|
|
|
|
Payments made on unfavorable and other contractual obligations
|
|
|
(681
|
)
|
|
|
(1,656
|
)
|
Purchases of common stock
|
|
|
|
|
|
|
(3,200
|
)
|
Proceeds from exercise of stock options
|
|
|
|
|
|
|
26
|
|
Issuance of common stock through employee stock purchase plan
|
|
|
27
|
|
|
|
129
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
661
|
|
|
|
(3,216
|
)
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate on cash and cash equivalents
|
|
|
887
|
|
|
|
(2,980
|
)
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
345
|
|
|
|
(4,066
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
5,956
|
|
|
|
10,022
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
6,301
|
|
|
$
|
5,956
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid during period for interest
|
|
$
|
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during period for taxes, net of refunds
|
|
$
|
156
|
|
|
$
|
1,249
|
|
|
|
|
|
|
|
|
|
|
Accrued property and equipment additions
|
|
$
|
325
|
|
|
$
|
17
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash investing and financing
transactions
|
|
|
|
|
|
|
|
|
Acquisition of business: Common stock
|
|
$
|
104
|
|
|
$
|
922
|
|
|
|
|
|
|
|
|
|
|
Acquisition of business: Contingent consideration earned
|
|
|
|
|
|
$
|
1,860
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
33
THE
MANAGEMENT NETWORK GROUP, INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
$.005 Par
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Voting
|
|
|
Paid-In
|
|
|
Accumulated
|
|
|
Treasury
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Stock
|
|
|
Income
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
Balance, December 29, 2007
|
|
|
7,237,029
|
|
|
$
|
36
|
|
|
$
|
172,798
|
|
|
$
|
(116,881
|
)
|
|
$
|
(345
|
)
|
|
$
|
220
|
|
|
$
|
55,828
|
|
Share repurchases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,200
|
)
|
|
|
|
|
|
|
(3,200
|
)
|
Exercise of options
|
|
|
2,555
|
|
|
|
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
|
|
Employee stock purchase plan
|
|
|
22,546
|
|
|
|
|
|
|
|
129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
129
|
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
1,817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,817
|
|
Common stock issued for acquisitions
|
|
|
130,895
|
|
|
|
1
|
|
|
|
921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
922
|
|
Other comprehensive income Foreign currency
translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,955
|
)
|
|
|
(5,955
|
)
|
Other comprehensive income Loss on investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,116
|
)
|
|
|
(1,116
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,825
|
)
|
|
|
|
|
|
|
|
|
|
|
(14,825
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 3, 2009
|
|
|
7,393,025
|
|
|
|
37
|
|
|
|
175,691
|
|
|
|
(131,706
|
)
|
|
|
(3,545
|
)
|
|
|
(6,851
|
)
|
|
|
33,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock purchase plan
|
|
|
19,027
|
|
|
|
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
|
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
858
|
|
Common stock issued for acquisitions
|
|
|
56,325
|
|
|
|
|
|
|
|
104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
104
|
|
Other comprehensive income Foreign currency
translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,943
|
|
|
|
1,943
|
|
Other comprehensive income Loss on investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
718
|
|
|
|
718
|
|
One-for-five
reverse stock split
|
|
|
(67
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,242
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,242
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 2, 2010
|
|
|
7,468,310
|
|
|
$
|
37
|
|
|
$
|
176,680
|
|
|
$
|
(134,948
|
)
|
|
$
|
(3,545
|
)
|
|
$
|
(4,190
|
)
|
|
$
|
34,034
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
34
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
providing consulting services to the converging communications
industry and the financial services firms that support it. A
majority of the Companys revenues are from customers in
the United States, United Kingdom, and Western Europe.
TMNGs corporate offices are located in Overland Park,
Kansas.
Principles of Consolidation The consolidated
financial statements include the accounts of TMNG and its
wholly-owned subsidiaries. All significant inter-company
accounts and transactions have been eliminated in consolidation.
|
|
|
|
|
Name of Subsidiary/Acquisition
|
|
Date Formed/Acquired
|
|
|
TMNG Europe Ltd. (TMNG Europe)
|
|
|
March 19, 1997
|
|
The Management Network Group Canada Ltd. (TMNG
Canada)
|
|
|
May 14, 1998
|
|
TMNG.com, Inc.
|
|
|
June 18, 1999
|
|
TMNG Marketing, LLC (TMNG Marketing, Inc. merged into TMNG
Marketing, LLC on January 2, 2010).
|
|
|
September 5, 2000
|
|
TMNG Technologies, Inc.
|
|
|
August 27, 2001
|
|
Cambridge Strategic Management Group, Inc. (CSMG)
|
|
|
March 6, 2002
|
|
Cambridge Adventis Ltd.
|
|
|
March 17, 2006
|
|
Cartesian Ltd. (Cartesian)
|
|
|
January 2, 2007
|
|
RVA Consulting, LLC (RVA)
|
|
|
August 3, 2007
|
|
TWG Consulting, Inc. (TWG)
|
|
|
October 5, 2007
|
|
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 2, 2010 includes
52 weeks of operating results and consists of four equal
13-week quarters. The fiscal year ended January 3, 2009 was
a 53-week fiscal year and was comprised of three 13-week
quarters with the fourth quarter comprised of 14 weeks. The
fiscal years ended January 2, 2010 and January 3, 2009
are referred to herein as fiscal years 2009 and 2008,
respectively.
Reverse Stock Split On January 21, 2010,
TMNGs stockholders approved a
one-for-five
reverse stock split of the Companys authorized, issued and
outstanding common stock. The reverse stock split was effective
on February 7, 2010. Trading of TMNGs common stock on
the NASDAQ Global Market on a split-adjusted basis began at the
open of trading on February 8, 2010. The reverse stock
split affected all shares of the Companys common stock, as
well as options to purchase the Companys common stock,
that were outstanding immediately prior to the effective date of
the reverse stock split. All references to common shares and
per-share data for prior periods have been retroactively
restated to reflect the reverse stock split as if it had
occurred at the beginning of the earliest period presented. The
par value of the Companys common stock was changed to
$.005 per share from $.001 per share in connection with the
reverse split.
Subsequent Events The Company has evaluated
subsequent events for recognition or disclosure through the date
these consolidated financial statements were issued.
Revenue Recognition The Company recognizes
revenue from time and materials consulting contracts in the
period in which its services are performed. The Company
recognized $25.1 million and $33.6 million in revenues
from time and materials contracts during fiscal years 2009 and
2008, respectively. In addition to time and materials contracts,
the Companys other types of contracts may include fixed
fee contracts and contingent fee contracts. During fiscal years
2009 and 2008, the Company recognized $39.9 million and
$40.4 million, respectively, in revenues on these other
types of contracts. The Company recognizes revenues on milestone
or
35
THE
MANAGEMENT NETWORK GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
deliverables-based fixed fee contracts and time and materials
contracts not to exceed contract price using the percentage of
completion-like method described by Financial Accounting
Standards Board (FASB) Accounting Standards
Codification (ASC)
605-35,
Revenue Recognition Construction-Type and
Production-Type Contracts (formerly AICPA Statement of
Position (SOP)
No. 81-1,
Accounting for Performance of Construction-Type and
Certain Production-Type Contracts). For fixed fee
contracts where services are not based on providing deliverables
or achieving milestones, the Company recognizes revenue on a
straight-line basis over the period during which such services
are expected to be performed. In connection with some fixed fee
contracts, the Company may receive payments from customers that
exceed revenues recognized related to the contracts up to that
point in time. The Company records the excess of receipts from
customers over recognized revenue as deferred revenue. Deferred
revenue is classified as a current liability to the extent it is
expected to be earned within twelve months from the date of the
balance sheet.
The Company develops, installs and supports customer software in
addition to the provision of traditional consulting services.
The Company recognizes revenue in connection with its software
sales agreements utilizing the percentage of completion method
prescribed by ASC
605-35.
These agreements include software
right-to-use
licenses (RTUs) and related customization and
implementation services. Due to the long-term nature of the
software implementation and the extensive software customization
based on normal customer specific requirements, both the RTU and
implementation services are treated as a single element for
revenue recognition purposes.
The
percentage-of-completion-like
methodology involves recognizing revenue using the percentage of
services completed, on a current cumulative cost to total cost
basis, using a reasonably consistent profit margin over the
period. Due to the longer term nature of these projects,
developing the estimates of costs often requires significant
judgment. Factors that must be considered in estimating the
progress of work completed and ultimate cost of the projects
include, but are not limited to, the availability of labor and
labor productivity, the nature and complexity of the work to be
performed, and the impact of delayed performance. If changes
occur in delivery, productivity or other factors used in
developing the estimates of costs or revenues, the Company
revises its cost and revenue estimates, which may result in
increases or decreases in revenues and costs, and such revisions
are reflected in income in the period in which the facts that
give rise to that revision become known.
In addition to the professional services related to the
customization and implementation of its software, the Company
also provides post-contract support (PCS) services,
including technical support and maintenance services. For those
contracts that include PCS service arrangements which are not
essential to the functionality of the software solution, the
Company separates the ASC
605-35
software services and PCS services utilizing the
multiple-element arrangement model prescribed by ASC
605-25 ,
Revenue Recognition Multiple-Element
Arrangements (formerly Emerging Issues Task Force
(EITF)
No. 00-21,
Revenue Arrangements with Multiple Deliverables).
ASC 605-25
addresses the accounting treatment for an arrangement to provide
the delivery or performance of multiple products
and/or
services where the delivery of a product or system or
performance of services may occur at different points in time or
over different periods of time. The Company utilizes ASC
605-25 to
separate the PCS service elements and allocate total contract
consideration to the contract elements based on the relative
fair value of those elements. Revenues from PCS services are
recognized ratably on a straight-line basis over the term of the
support and maintenance agreement.
The Company may also enter into contingent fee contracts, in
which revenue is subject to achievement of savings or other
agreed upon results, rather than time spent. Due to the nature
of contingent fee contracts, the Company recognizes costs as
they are incurred on the project and defers revenue recognition
until the revenue is realizable and earned as agreed to by its
clients. Although these contracts can be very rewarding, the
profitability of these contracts is dependent on the
Companys ability to deliver results for its clients and
control the cost of providing these services. These types of
contracts are typically more results-oriented and
36
THE
MANAGEMENT NETWORK GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
are subject to greater risk associated with revenue recognition
and overall project profitability than traditional time and
materials contracts. Revenues associated with contingent fee
contracts were not material during fiscal years 2009 and 2008.
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.
Marketable Securities Short-term investments
and non-current investments, which consist of auction rate
securities and related put option, are accounted for under the
provisions of FASB ASC 320, Investments
Debt and Equity Securities. Management evaluates the
appropriate classification of marketable securities at each
balance sheet date. These investments are reported at fair
value, as measured pursuant to FASB ASC 820, Fair Value
Measurements and Disclosures. For those securities
considered to be available for sale, any temporary
unrealized gains and losses are included as a separate component
of stockholders equity, net of applicable taxes. For those
securities considered to be trading, any unrealized
gains and losses are included in the Consolidated Statements of
Operations and Comprehensive Loss, net of applicable taxes.
Additionally, realized gains and losses, changes in value judged
to be
other-than-temporary,
interest and dividends are also included in the Consolidated
Statements of Operations and Comprehensive Loss, net of
applicable taxes. See Note 2 for further discussion of the
Companys auction rate securities portfolio.
Fair Value Measurement For cash and cash
equivalents, current trade receivables and current trade
payables, the carrying amounts approximate fair value because of
the short maturity of these items
The Company utilizes the methods of fair value measurement as
described in ASC 820 to value its financial assets and
liabilities. As defined in ASC 820, fair value is based on the
price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market
participants at the measurement date. In order to increase
consistency and comparability in fair value measurements, ASC
820 establishes a fair value hierarchy that prioritizes
observable and unobservable inputs used to measure fair value
into three broad levels, which are described below:
Level 1: Quoted prices (unadjusted) in
active markets that are accessible at the measurement date for
assets or liabilities. The fair value hierarchy gives the
highest priority to Level 1 inputs.
Level 2: Observable prices that are based
on inputs not quoted on active markets, but corroborated by
market data.
Level 3: Unobservable inputs are used
when little or no market data is available. The fair value
hierarchy gives the lowest priority to Level 3 inputs.
In determining fair value, the Company utilizes valuation
techniques that maximize the use of observable inputs and
minimize the use of unobservable inputs to the extent possible
as well as considers counterparty credit risk in its assessment
of fair value.
Property and Equipment Property and equipment
are stated at cost or acquisition date fair value 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, if
any, are amortized on a straight-line basis over the life of the
lease. Asset lives range from three to seven years for furniture
and fixtures, software and computer equipment. Leasehold
improvements are capitalized and amortized over the life of the
lease or useful life of the asset, whichever is shorter.
Research and Development and Capitalized Software
Costs Software development costs are accounted
for in accordance with FASB ASC
985-20,
Software Costs of Software to Be Sold,
Leased, or Marketed. Capitalization of software
development costs for products to be sold to third parties
begins upon the establishment of technological feasibility and
ceases when the product is available for general release. The
37
THE
MANAGEMENT NETWORK GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
establishment of technological feasibility and the ongoing
assessment of recoverability of capitalized software development
costs require considerable judgment by management concerning
certain external factors including, but not limited to, the date
technological feasibility is reached, anticipated future gross
revenue, estimated economic life and changes in software and
hardware technologies. The Company capitalizes development costs
incurred during the period between the establishment of
technological feasibility and the release of the final product
to customers if such costs are material. During fiscal years
2009 and 2008, $536,000 and $812,000, respectively of these
costs were expensed as incurred. No software development costs
were capitalized during either fiscal year 2009 or 2008.
Goodwill The Company accounts for goodwill in
accordance with the provisions of ASC 350,
Intangibles-Goodwill and Other. 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 on the last day of the first fiscal month of the
fourth fiscal quarter and whenever events or circumstances
indicate that these assets may be impaired. The annual
impairment test for fiscal year 2009 was performed as of
October 31, 2009. The Company determines impairment by
comparing the net assets of each reporting unit to its
respective fair value. In the event a reporting units
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 units 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.
Fair value of the Companys reporting units is determined
using the income approach. The income approach uses a reporting
units projection of estimated cash flows discounted using
a weighted-average cost of capital analysis that reflects
current market conditions. The Company also considered the
market approach to valuing its reporting units, however due to
the lack of comparable industry publicly available transaction
data, it typically concludes a market approach did not
adequately reflect its specific reporting unit operations. While
the market approach is typically not expressly utilized, the
Company did compare the results of its overall enterprise
valuation to its market capitalization. Significant management
judgments related to the income approach include:
Anticipated future cash flows and terminal value for each
reporting unit The income approach to
determining fair value relies on the timing and estimates of
future cash flows, including an estimate of terminal value. The
projections use managements estimates of economic and
market conditions over the projected period including growth
rates in revenues and estimates of expected changes in operating
margins. Projections of future cash flows are subject to change
as actual results are achieved that differ from those
anticipated. Because management frequently updates its
projections, it would expect to identify on a timely basis any
significant differences between actual results and recent
estimates. The Company is not expecting actual results to vary
significantly from estimates.
Selection of an appropriate discount rate The
income approach requires the selection of an appropriate
discount rate, which is based on a weighted average cost of
capital analysis. The discount rate is affected by changes in
short-term interest rates and long-term yield as well as
variances in the typical capital structure of marketplace
participants. The discount rate is determined based on
assumptions that would be used by marketplace participants, and
for that reason, the capital structure of selected marketplace
participants was used in the weighted average cost of capital
analysis. Given the current volatile economic conditions, it is
possible that the discount rate will fluctuate in the near term.
Intangible Assets Intangible assets are
stated at cost or acquisition date fair value less accumulated
amortization, and represent customer relationships, software,
employment agreements, customer backlog and tradenames acquired
in the acquisitions of Cartesian, RVA and TWG. Amortization of
remaining intangible
38
THE
MANAGEMENT NETWORK GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
assets is based on estimated useful lives of 12 to
48 months, depending on the nature of the intangible asset,
and is recognized on a straight-line basis.
In accordance with FASB ASC 360, Property, Plant and
Equipment, the Company uses its best estimates based
upon reasonable and supportable assumptions and projections to
review for impairment of finite-lived assets and finite-lived
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.
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. The
Company recognizes the financial statement effect of a tax
position when, based on the technical merits of the uncertain
tax position, it is more likely than not to be sustained on a
review by taxing authorities. These estimates are based on
judgments made with currently available information. The Company
reviews these estimates and make changes to recorded amounts of
uncertain tax positions as facts and circumstances warrant.
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, TMNG Canada, Cartesian and the international
operations of CSMG conduct business primarily denominated in
their respective local currency. Assets and liabilities have
been translated to U.S. dollars at the period-end exchange
rates. 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 losses included in results of operations
were $520,000 during fiscal year 2009. In fiscal year 2008,
realized and unrealized exchange gains included in results of
operations were $1,008,000.
Derivative Financial Instruments As of
January 2, 2010, the Company had an open foreign currency
forward contract with a notional amount of $0.3 million.
This forward contract provides an economic hedge of fluctuations
in euro denominated accounts receivable against the British
pound, but has not been designated as a hedge for accounting
purposes. The change in fair value of this contract as of
January 2, 2010 was not material to the Companys
results of operations or financial position. The Company
utilizes valuation models for this forward contract that rely
exclusively on Level 2 inputs, as defined by FASB ASC 820.
This contract expires on April 30, 2010. During fiscal year
2009, the Company recognized immaterial losses on forward
contracts, which were included in selling, general and
administrative expenses in the Consolidated Statement of
Operations and Comprehensive Loss.
Share-Based Compensation The Company accounts
for stock based compensation using the provisions of ASC 718,
Compensation-Stock Compensation and the
SECs Staff Accounting Bulletin No. 110
(SAB No. 110) which require the
measurement and recognition of compensation expense for all
share-based payment awards based on estimated fair values. The
Company values its stock options using the Black-Scholes model
to determine fair value. See Note 6, Share-Based
Compensation.
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. The weighted average number of common shares outstanding
excludes treasury shares purchased by the Company. Diluted
39
THE
MANAGEMENT NETWORK GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
earnings (loss) per share is computed in the same manner except
the weighted average number of shares is increased for dilutive
securities.
In accordance with the provisions of ASC 260, Earnings per
Share, the Company uses the treasury stock method for
calculating the dilutive effect of employee stock options and
nonvested shares. These instruments will have a dilutive effect
under the treasury stock method only when the respective
periods average market value of the underlying Company
common stock exceeds the actual proceeds. In applying the
treasury stock method, assumed proceeds include the amount, if
any, the employee must pay upon exercise, the amount of
compensation cost for future services that the Company has not
yet recognized, and the amount of tax benefits, if any, that
would be credited to additional paid-in capital assuming
exercise of the options and the vesting of nonvested shares. The
Company has not included the effect of stock options and
nonvested stock in the calculation of diluted loss per share for
fiscal years 2009 and 2008 as the Company reported a net loss
for these periods and the effect would have been anti-dilutive.
Recent Accounting Pronouncements In June
2009, the FASB issued ASC
105-10,
Generally Accepted Accounting Principles Overall
(ASC
105-10)
that established FASB Accounting Standards Codification
(Codification), as the single source of
authoritative U.S. GAAP for all non-governmental entities.
The Codification, which launched July 1, 2009, changes the
referencing and organization of accounting guidance and is
effective for interim and annual periods ending after
September 15, 2009. Since it is not intended to change or
alter existing U.S. GAAP, the Codification does not have
any impact on the Companys financial condition or results
of operations, but it does change the way GAAP is organized and
presented. The Codification is effective for the Companys
financial statements for the fiscal year ended January 2,
2010 and the principal impact on the Companys financial
statements is limited to disclosures as all future references to
authoritative accounting literature will be referenced in
accordance with the Codification.
In August 2009, FASB issued Accounting Standards Update
(ASU)
No. 2009-05
which amends Fair Value Measurements and Disclosures
Overall (ASC Topic
820-10) to
provide guidance on the fair value measurement of liabilities.
This update requires clarification for circumstances in which a
quoted price in an active market for the identical liability is
not available, in which event a reporting entity is required to
measure fair value using one or more of the following
techniques: 1) a valuation technique that uses either the
quoted price of the identical liability when traded as an asset
or quoted prices for a similar liability or similar liabilities
when traded as an asset; or 2) another valuation technique
that is consistent with the principles in ASC Topic 820 such as
the income and market approach to valuation. The amendments in
this update also clarify that when estimating the fair value of
a liability, a reporting entity is not required to include a
separate input or adjustment to other inputs relating to the
existence of a restriction that prevents the transfer of the
liability. This update further clarifies that if the fair value
of a liability is determined by reference to a quoted price in
an active market for an identical liability, that price would be
considered a Level 1 measurement in the fair value
hierarchy. Similarly, if the identical liability has a quoted
price when traded as an asset in an active market, it is also a
Level 1 fair value measurement if no adjustments to the
quoted price of the asset are required. The Company adopted ASC
Topic 820-10
effective for its fiscal year ending January 2, 2010 and
the ASU had no material impact on its consolidated financial
statements.
In October 2009, the FASB issued ASU
No. 2009-13,
Revenue Recognition (Topic 605)
Multiple-Deliverable Revenue Arrangements, a
consensus of the FASB Emerging Issue Task Force (ASU
2009-13),
and Accounting Standards Update
No. 2009-14,
Software (Topic 985) Certain Revenue Arrangements
That Include Software Elements (ASU
2009-14).
ASU 2009-13
requires companies to allocate revenue in multiple-element
arrangements based on an elements estimated selling price
if vendor-specific or other third party evidence of value is not
available. ASU
2009-14
modifies the software revenue recognition guidance to exclude
from its scope tangible products that contain both software and
non-software components that function together to deliver a
products essential functionality. Both statements are
effective for revenue arrangements entered into or materially
modified in fiscal years beginning on or after June 15,
2010. Early adoption is
40
THE
MANAGEMENT NETWORK GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
permitted. The Company is currently evaluating the impact that
the adoption of this guidance will have on its consolidated
financial statements.
|
|
2.
|
AUCTION
RATE SECURITIES
|
As of January 2, 2010 and January 3, 2009, TMNG held
$12.3 million and $13.4 million, respectively, in fair
value of auction rate securities for which the underlying
collateral is guaranteed through the Federal Family Education
Loan Program of the U.S. Department of Education. The
Companys auction rate securities portfolio as of
January 2, 2010 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at
|
|
|
|
|
|
|
Realized
|
|
|
|
|
|
January 2,
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Unrealized
|
|
|
2010
|
|
Issuer
|
|
Basis
|
|
|
(Losses)
|
|
|
Losses
|
|
|
Current
|
|
|
Noncurrent
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Trading Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kentucky Higher Education Loan Revenue
|
|
$
|
1,900
|
|
|
$
|
(118
|
)
|
|
|
|
|
|
$
|
1,782
|
|
|
|
|
|
Missouri Higher Education Loan Revenue
|
|
|
1,800
|
|
|
|
(112
|
)
|
|
|
|
|
|
|
1,688
|
|
|
|
|
|
Utah State Board of Regents Revenue Bonds
|
|
|
1,400
|
|
|
|
(87
|
)
|
|
|
|
|
|
|
1,313
|
|
|
|
|
|
Kentucky Higher Education Loan Revenue
|
|
|
400
|
|
|
|
(25
|
)
|
|
|
|
|
|
|
375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,500
|
|
|
|
(342
|
)
|
|
|
|
|
|
|
5,158
|
|
|
|
|
|
Available-for-Sale
Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Education Funding Capital Education Loan Backed Notes
|
|
|
6,250
|
|
|
|
|
|
|
$
|
(389
|
)
|
|
|
|
|
|
$
|
5,861
|
|
Brazos Student Finance Corporation Student Loan Asset Backed
Notes
|
|
|
1,000
|
|
|
|
|
|
|
|
(9
|
)
|
|
|
|
|
|
|
991
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,250
|
|
|
|
|
|
|
|
(398
|
)
|
|
|
|
|
|
|
6,852
|
|
ARS Rights
|
|
|
|
|
|
|
286
|
|
|
|
|
|
|
|
286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12,750
|
|
|
$
|
(56
|
)
|
|
$
|
(398
|
)
|
|
$
|
5,444
|
|
|
$
|
6,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41
THE
MANAGEMENT NETWORK GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Companys auction rate securities portfolio as of
January 3, 2009 consisted of the following:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at
|
|
|
|
|
|
|
Realized
|
|
|
|
|
|
January 3,
|
|
|
|
|
|
|
Gains
|
|
|
Unrealized
|
|
|
2009
|
|
Issuer
|
|
Cost Basis
|
|
|
(Losses)
|
|
|
Losses
|
|
|
Noncurrent
|
|
|
|
(In thousands)
|
|
|
Trading Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kentucky Higher Education Loan Revenue
|
|
$
|
1,900
|
|
|
$
|
(303
|
)
|
|
|
|
|
|
$
|
1,597
|
|
Missouri Higher Education Loan Revenue
|
|
|
1,800
|
|
|
|
(287
|
)
|
|
|
|
|
|
|
1,513
|
|
Utah State Board of Regents Revenue Bonds
|
|
|
1,400
|
|
|
|
(232
|
)
|
|
|
|
|
|
|
1,168
|
|
Access Group Inc. Federal Student Loan
|
|
|
2,050
|
|
|
|
(216
|
)
|
|
|
|
|
|
|
1,834
|
|
Asset Backed Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kentucky Higher Education Loan Revenue
|
|
|
400
|
|
|
|
(145
|
)
|
|
|
|
|
|
|
255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,550
|
|
|
|
(1,183
|
)
|
|
|
|
|
|
|
6,367
|
|
Available-for-Sale
Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Education Funding Capital Education Loan Backed Notes
|
|
|
6,250
|
|
|
|
|
|
|
$
|
(1,015
|
)
|
|
|
5,235
|
|
Brazos Student Finance Corporation Student Loan Asset Backed
Notes
|
|
|
1,000
|
|
|
|
|
|
|
|
(101
|
)
|
|
|
899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,250
|
|
|
|
|
|
|
|
(1,116
|
)
|
|
|
6,134
|
|
ARS Rights
|
|
|
|
|
|
|
903
|
|
|
|
|
|
|
|
903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,800
|
|
|
$
|
(280
|
)
|
|
$
|
(1,116
|
)
|
|
$
|
13,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During fiscal year 2009 the Company recognized gains of $224,000
and during fiscal year 2008 the Company recognized losses of
$280,000 related to auction rate securities classified as
trading securities. These gains and losses are recorded in other
income (expense), net in the consolidated statements of
operations and comprehensive loss.
The auction rate securities the Company holds are generally
long-term debt instruments that historically provided liquidity
through a Dutch auction process through which interest rates
reset every 28 to 35 days. Beginning in February 2008,
auctions of the Companys auction rate securities portfolio
failed to receive sufficient order interest from potential
investors to clear successfully, resulting in failed auctions.
The principal associated with failed auctions will not be
accessible until a successful auction occurs, a buyer is found
outside of the auction process, the issuers redeem the
securities, the issuers establish a different form of financing
to replace these securities or final payments come due according
to contractual maturities ranging from approximately 22 to
36 years.
During the third quarter of 2008, state and federal regulators
reached settlement agreements with both of the brokers who
advised the Company to purchase the auction rate securities
currently held by the Company. The settlement agreements with
the regulators were intended to eventually provide liquidity for
holders of auction rate securities. On November 13, 2008,
the Company entered into a settlement with UBS AG
(UBS) to provide liquidity for the Companys
$7.6 million auction rate securities portfolio held with a
UBS affiliate. Pursuant to the terms of the Settlement, UBS
issued to the Company Auction Rate Securities Rights (ARS
Rights), allowing the Company to sell to UBS its auction
rate securities held in accounts with UBS and UBS affiliates at
par value at any time during the period beginning June 30,
2010 and ending July 2, 2012. As consideration for the
issuance of the ARS Rights, the Company (1) released UBS
from all claims for damages (other than consequential damages)
directly or indirectly relating to UBSs marketing and sale
of auction rate securities, and (2) granted UBS the
discretionary right to sell or otherwise dispose of the
Companys auction
42
THE
MANAGEMENT NETWORK GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
rate securities, provided that the Company is paid the par value
of the auction rate securities upon any disposition.
While the ARS Rights result in a put option which represents a
separate freestanding instrument, the put option does not meet
the definition of a derivative instrument under FASB ASC 815,
Derivatives and Hedging. The Company has
elected to measure the ARS Rights at fair value under FASB ASC
825 to better align changes in fair value of the ARS Rights with
those of the underlying auction rate securities investments.
Prior to accepting the UBS settlement offer, the Company
recorded all of its auction rate securities as
available-for-sale
investments. Upon accepting the UBS settlement, the Company made
a one-time election to transfer its UBS auction rate securities
holdings from
available-for-sale
securities to trading securities under FASB ASC 320.
During October 2009, all of the Access Group Inc. Federal
Student Loan Asset Backed Notes held as part of the
Companys auction rate securities portfolio with a UBS
affiliate were sold at par value of $2,050,000. The proceeds
from this transaction were applied to the line of credit from
UBS and its affiliates.
For auction rate securities classified as
available-for-sale
the Company recognized unrealized holding gains of $718,000
during fiscal year 2009 and recognized unrealized holding losses
of $1,116,000 during fiscal year 2008. For auction rate
securities classified as trading securities the Company
recognized realized holding gains of $841,000 offset by realized
losses on the Companys ARS Rights of $617,000 during
fiscal year 2009. Realized gains and losses on trading
securities have been recognized in Other income in the
Consolidated Statements of Operations and Comprehensive Loss.
The ARS Rights will continue to be measured at fair value under
FASB ASC 825 until the earlier of the Companys exercise of
the ARS Rights or UBSs purchase of the auction rate
securities in connection with the ARS Rights.
Due to the lack of observable market quotes on the
Companys auction rate securities portfolio and ARS Rights,
the Company utilizes valuation models that rely exclusively on
Level 3 inputs, as defined by FASB ASC 820, including those
that are based on expected cash flow streams and collateral
values, including assessments of counterparty credit quality,
default risk underlying the security, discount rates and overall
capital market liquidity. The valuation of the Companys
auction rate securities portfolio and ARS Rights is subject to
uncertainties that are difficult to predict. Factors that may
impact the Companys valuation include changes to credit
ratings of the securities as well as to the underlying assets
supporting those securities, rates of default of the underlying
assets, underlying collateral value, discount rates,
counterparty risk and ongoing strength and quality of market
credit and liquidity.
The following is a reconciliation of the beginning and ending
balances of the Companys auction rate securities portfolio
and ARS Rights as of January 2, 2010 and January 3,
2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal
|
|
|
For the Fiscal
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
January 2,
|
|
|
January 3,
|
|
|
|
2010
|
|
|
2009
|
|
|
Fair value at beginning of period
|
|
$
|
13,404
|
|
|
$
|
17,125
|
|
Total unrealized and realized gains (losses) included in Other
income in the Consolidated Statements of Operations and
Comprehensive Loss
|
|
|
224
|
|
|
|
(280
|
)
|
Total unrealized gains (losses) included in Other comprehensive
income (loss) in the Consolidated Statements of Operations and
Comprehensive Loss
|
|
|
718
|
|
|
|
(1,116
|
)
|
Sales
|
|
|
(2,050
|
)
|
|
|
(2,325
|
)
|
|
|
|
|
|
|
|
|
|
Fair value at end of period
|
|
$
|
12,296
|
|
|
$
|
13,404
|
|
|
|
|
|
|
|
|
|
|
43
THE
MANAGEMENT NETWORK GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Given the Companys intent to exercise its right under the
ARS Rights to sell to UBS its auction rate securities held in
accounts with UBS and UBS affiliates at par value on
June 30, 2010, the Company has classified the entire amount
of auction rate securities portfolio held with UBS affiliates,
including the fair value of the ARS Rights, as short-term
investments in the Consolidated Balance Sheet as of
January 2, 2010. The remaining auction rate securities are
classified as noncurrent investments in the Consolidated Balance
Sheet as of January 2, 2010. The entire amount of auction
rate securities is reflected as noncurrent assets on the
Companys Consolidated Balance Sheet as of January 3,
2009.
|
|
3.
|
LINE OF
CREDIT AGREEMENTS
|
As discussed above in Note 2, Auction Rate
Securities, on November 13, 2008, the Company entered
into a settlement with UBS to provide liquidity for the
Companys $7.6 million auction rate securities
portfolio held with a UBS affiliate. As provided for in the
Settlement, the Company entered into a line of credit with UBS
and its affiliates for up to 75% of the market value of its
auction rate securities. The line of credit provides the Company
with an uncommitted, demand revolving line of credit of up to
75% of the fair value, as determined by UBS in its sole
discretion, of the Companys auction rate securities that
the Company has pledged as collateral. The interest that the
Company pays on the line of credit will not exceed the interest
that the Company receives on the auction rate securities pledged
to UBS as security for the line of credit. UBS may demand full
or partial payment of amounts borrowed on the line of credit, at
its sole option and without cause, at any time. UBS may, at any
time, in its discretion, terminate and cancel the line of
credit. If at any time UBS exercises its right of demand, then a
UBS affiliate shall provide, as soon as reasonably possible,
alternative financing on substantially the same terms and
conditions as those under the line of credit and UBS agrees that
the line of credit shall remain in full force and effect until
such time as such alternative financing has been established. If
alternative financing cannot be established, then a UBS-related
entity will purchase the pledged auction rate securities at par
value. If the Company elects to sell any auction rate securities
that are pledged as collateral under the line of credit to a
purchaser other than UBS, UBS intends to exercise its right to
demand repayment of the line of credit relating to the auction
rate securities sold by the Company.
Given the Companys intent to liquidate the auction rate
securities related to the line of credit with UBS within one
year and the requirement that the Company concurrently repay the
amounts borrowed on the line of credit, the Company has
classified the outstanding balance of $2.8 million as a
current liability in the Consolidated Balance Sheet as of
January 2, 2010. The Company classified the outstanding
balance of $1.5 million under the line of credit as a
noncurrent liability in the Consolidated Balance Sheet as of
January 3, 2009. These borrowings were used to fund
short-term liquidity needs. Because amounts borrowed under the
line of credit bear interest at a floating rate and have a
remaining maturity of less than one year, the fair value of this
financial instrument approximates its carrying value.
During October 2009, all of the Access Group Inc. Federal
Student Loan Asset Backed Notes held as part of the
Companys auction rate securities portfolio with a UBS
affiliate were sold at par value of $2,050,000. The proceeds
from this transaction were applied to the line of credit from
UBS and its affiliates. As of January 2, 2010, there was
approximately $900,000 available to be accessed under this line
of credit.
On March 19, 2009, the Company entered into a loan
agreement with Citigroup Global Markets, Inc.
(Citigroup) to provide liquidity for the
Companys $7.3 million auction rate securities
portfolio held with Citigroup. Under the loan agreement, the
Company has access to a revolving line of credit of up to 50% of
the par value of the auction rate securities that the Company
has pledged as collateral, or $3.625 million. The current
interest rate on the line of credit is the federal funds rate
plus 3.08%. The interest rate may change in future periods based
on the change in the spread over the federal funds rate. The
line of credit is not for any specific term or duration and
Citigroup may demand full or partial payment of amounts borrowed
on the line of credit, at its sole option and without cause, at
any time. Citigroup may, at any time, in its discretion,
terminate the line of credit with proper notice. No amounts have
been borrowed against this line of credit.
44
THE
MANAGEMENT NETWORK GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
TWG
Consulting, Inc.
On October 5, 2007, the Company acquired all of the
outstanding shares of stock of TWG, a privately-held management
consulting firm. Under the purchase agreement, TMNG agreed to
acquire the entire ownership interest in TWG for a total cash
purchase price of $1.7 million, including approximately
$1.2 million paid for TWGs working capital. During
the fourth quarter of fiscal year 2009, the Company and the
seller settled the contingent feature of the purchase agreement
by the payment of $161,000 to the seller. The Company has no
further obligations related to the acquisition of TWG. TWG is
presented as a component of the Management Consulting Services
segment.
RVA
Consulting, LLC
On August 3, 2007, the Company acquired all of the
outstanding membership interests of RVA pursuant to a Membership
Interest Purchase Agreement with the members of RVA. TMNG
assumed all liabilities of RVA, subject to certain indemnities
on the part of the selling members. Certain of the selling
members continue to be employed by and participate in the
management of RVA after the closing date pursuant to written
employment agreements. RVA is presented as a component of the
Management Consulting Services segment. In addition to cash
consideration paid at closing, the transaction included
additional consideration for working capital
true-ups and
potential earn-out consideration based upon performance of RVA
through June 30, 2010. The aggregate potential purchase
price of $11.6 million consists of the following (in
thousands):
|
|
|
|
|
Cash paid at closing
|
|
$
|
6,625
|
|
Transaction costs
|
|
|
247
|
|
Contingent cash consideration earned
|
|
|
3,273
|
|
Contingent stock consideration earned (based on June 30,
2008 measurement date)
|
|
|
921
|
|
Contingent stock consideration earned (based on June 30,
2009 measurement date)
|
|
|
104
|
|
|
|
|
|
|
Total purchase price recognized at January 2, 2010
|
|
|
11,170
|
|
Remaining contingent cash consideration
|
|
|
344
|
|
Remaining contingent stock consideration (based on share price
as of January 3, 2010)
|
|
|
42
|
|
|
|
|
|
|
Aggregate potential consideration
|
|
$
|
11,556
|
|
|
|
|
|
|
The measurement date for contingent cash and stock consideration
is June 30 of the three years subsequent to the transaction.
Cash earn-out consideration in the amount of $1.0 million
and stock consideration in the amount of 56,325 shares of
common stock, with a value of $0.1 million as of
June 30, 2009, was earned and paid during fiscal year 2009.
Cash earn-out consideration in the amount of $1.5 million
and stock consideration in the amount of 130,895 shares of
common stock, with a value of $0.9 million as of
June 30, 2008, was earned and paid during fiscal year 2008.
Cartesian
Limited
On January 2, 2007, the Company acquired one-hundred
percent of the outstanding common stock of Cartesian Limited.
Cartesian is presented within the Software Solutions Segment. In
addition to cash consideration paid at closing, the transaction
included additional consideration for working capital
true-ups and
potential earn-out consideration based upon performance of
Cartesian after the closing date. During the fourth quarter of
2008, in consideration for the selling parties relinquishing
certain management rights, the remaining contingent
consideration was deemed earned. In addition, a payment of
$372,000 scheduled to be made in 2010 was accelerated and paid
in 2008. During fiscal year 2009, the remaining earn-out balance
of $1.9 million was paid. As of January 3, 2009, the
remaining cash consideration of $1.9 million was included
45
THE
MANAGEMENT NETWORK GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
in other accrued liabilities on the Consolidated Balance Sheets.
The aggregate purchase price of $15.5 million consisted of
the following (in thousands):
|
|
|
|
|
Cash paid at closing
|
|
$
|
6,495
|
|
Transaction costs
|
|
|
534
|
|
Contingent consideration earned and paid
|
|
|
8,462
|
|
|
|
|
|
|
Aggregate purchase price
|
|
$
|
15,491
|
|
|
|
|
|
|
|
|
5.
|
GOODWILL
AND OTHER INTANGIBLE ASSETS
|
The changes in the carrying amount of goodwill as of
January 2, 2010 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management
|
|
|
|
|
|
|
|
|
|
Consulting
|
|
|
Software
|
|
|
|
|
|
|
Services
|
|
|
Solutions
|
|
|
|
|
|
|
Segment
|
|
|
Segment
|
|
|
Total
|
|
|
Balance as of December 29, 2007
|
|
$
|
13,365
|
|
|
|
|
|
|
$
|
13,365
|
|
2008 Cartesian goodwill from earn-out payments, including
changes in foreign currency exchange rates
|
|
|
|
|
|
$
|
3,775
|
|
|
|
3,775
|
|
2008 RVA goodwill from earn-out payments
|
|
|
2,465
|
|
|
|
|
|
|
|
2,465
|
|
2008 impairment loss
|
|
|
(13,365
|
)
|
|
|
|
|
|
|
(13,365
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 3, 2009
|
|
|
2,465
|
|
|
|
3,775
|
|
|
|
6,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 RVA goodwill from earn-out payments
|
|
|
1,085
|
|
|
|
|
|
|
|
1,085
|
|
Changes in foreign currency exchange rates
|
|
|
|
|
|
|
447
|
|
|
|
447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 2, 2010
|
|
$
|
3,550
|
|
|
$
|
4,222
|
|
|
$
|
7,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company had gross goodwill and accumulated goodwill
impairment losses as of the beginning and end of fiscal years
2009 and 2010 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
As of
|
|
|
|
January 2,
|
|
|
January 3,
|
|
|
December 29,
|
|
|
|
2010
|
|
|
2009
|
|
|
2007
|
|
|
Gross balance of goodwill
|
|
$
|
67,641
|
|
|
$
|
66,109
|
|
|
$
|
59,869
|
|
Accumulated goodwill impairment losses
|
|
|
(59,869
|
)
|
|
|
(59,869
|
)
|
|
|
(46,504
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net balance of goodwill
|
|
$
|
7,772
|
|
|
$
|
6,240
|
|
|
$
|
13,365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licenses and identifiable intangible assets, net are comprised
of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 2, 2010
|
|
|
January 3, 2009
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Accumulated
|
|
|
|
Cost
|
|
|
Amortization
|
|
|
Cost
|
|
|
Amortization
|
|
|
Customer relationships
|
|
$
|
5,342
|
|
|
$
|
(3,511
|
)
|
|
$
|
5,136
|
|
|
$
|
(2,072
|
)
|
Acquired software
|
|
|
2,427
|
|
|
|
(1,820
|
)
|
|
|
2,170
|
|
|
|
(1,085
|
)
|
Employment agreements
|
|
|
2,018
|
|
|
|
(1,940
|
)
|
|
|
1,847
|
|
|
|
(1,154
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,787
|
|
|
$
|
(7,271
|
)
|
|
$
|
9,153
|
|
|
$
|
(4,311
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible amortization expense for the fiscal years ended
January 2, 2010 and January 3, 2009 was $2,563,000 and
$4,614,000, respectively, including $587,000 and $698,000
reported in cost of services for the fiscal years 2009 and 2008,
respectively.
46
THE
MANAGEMENT NETWORK GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Future intangible amortization expense is estimated to be as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
Intangible
|
|
|
Total Estimated
|
|
Amortization to
|
|
|
Intangible
|
|
be Included in
|
Future Period
|
|
Amortization
|
|
Cost of Services
|
|
Fiscal year 2010
|
|
$
|
2,020
|
|
|
$
|
607
|
|
Fiscal year 2011
|
|
|
496
|
|
|
|
|
|
The Company evaluates goodwill for impairment on an annual basis
on the last day of the first fiscal month of the fourth quarter
and whenever events or circumstances indicate that these assets
may be impaired. The Company performs its impairment testing for
goodwill in accordance with FASB ASC 350
Intangibles-Goodwill and Other. Based on an analysis
of the present value of future cash flows, management determined
that there was no impairment of goodwill during fiscal year
2009. During fiscal year 2008, based on an analysis of the
present value of future cash flows, the Company recognized a
charge of approximately $13.4 million for the impairment of
the carrying value of goodwill in the Management Consulting
Services Segment. The impairment charge was the result of a
reduction in the size and scope of operations which impacted the
Companys assessment of future cash flows. This goodwill
impairment loss has been reflected as a component of Loss from
Operations in the Statement of Operations and Comprehensive Loss.
The Company reviews long-lived assets and certain identifiable
intangibles to be held and used for impairment whenever events
or changes in circumstances indicate that the carrying amount of
these assets might not be recoverable in accordance with the
provisions of FASB ASC 360, Property, Plant and
Equipment and FASB ASC 350,
Intangibles-Goodwill and Other. Based on an
analysis of the present value of future cash flows, management
determined that there was no impairment of long-lived or
intangible assets during fiscal year 2009. During fiscal year
2008, based on an analysis of the present value of future cash
flows, the Company determined that the carrying value of the S3
license agreement and the intangibles related to the TWG
acquisition exceeded their fair market values and recorded an
impairment loss related to the Management Consulting Segment of
approximately $1.1 million. This impairment loss has been
reflected as a component of Loss from Operations in the
Consolidated Statement of Operations and Comprehensive Loss.
|
|
6.
|
SHARE-BASED
COMPENSATION
|
The Company estimates the fair value of its stock options and
stock issued under the Employee Stock Purchase Plan using the
Black-Scholes-Merton option pricing model. Groups of employees
or non-employee directors that have similar historical and
expected exercise behavior are considered separately for
valuation purposes. The table below shows the weighted average
of the assumptions used in estimating the fair value of stock
options granted during fiscal years 2009 and 2008:
|
|
|
|
|
|
|
Fiscal Year
|
|
Fiscal Year
|
|
|
2009
|
|
2008
|
|
Risk-free interest rate
|
|
2.1%
|
|
2.8%
|
Expected life
|
|
6.3 years
|
|
6.3 years
|
Expected volatility factor
|
|
61%
|
|
60%
|
Expected dividend rate
|
|
0%
|
|
0%
|
The risk-free interest rate is based on the U.S. Treasury
yield at the time of grant for a term equal to the expected life
of the stock option; the expected life was determined using the
simplified method of estimating the life as allowed under SAB
No. 110; and the expected volatility is based on the
historical volatility of the Companys stock price for a
period of time equal to the expected life of the stock option.
Nearly all of the Companys share-based compensation
arrangements utilize graded vesting schedules where a portion of
the grant vests annually over a period of two to four years. The
Company has a policy of
47
THE
MANAGEMENT NETWORK GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
recognizing compensation expense for awards with graded vesting
over the requisite service period for each separately vesting
portion of the award as if the award was, in-substance, multiple
awards. This policy has the effect of accelerating the
recognition of expense when compared to a straight-line
amortization methodology.
As of January 2, 2010, the Company has three share-based
compensation plans, which are described below. The compensation
cost that has been charged against operations for those plans
under FASB ASC 718 was $0.9 million and $1.8 million
during 2009 and 2008, respectively. The Company recognized no
income tax benefit for share-based compensation arrangements for
fiscal year 2009. The Company recognized an income tax benefit,
net of valuation allowances, for share-based compensation
arrangements of $326,000 for fiscal year 2008. In addition, no
compensation costs related to these arrangements were
capitalized in either year. As of January 2, 2010,
unrecognized compensation cost, net of estimated forfeitures,
related to the unvested portion of all share-based compensation
arrangements was approximately $0.4 million and is expected
to be recognized over a weighted-average period of approximately
15 months. The Company has historically issued and expects
to continue to issue new shares to satisfy stock option
exercises, vesting of nonvested stock or purchases of shares
under the Employee Stock Purchase Plan.
1998
EQUITY INCENTIVE PLAN
The Companys 1998 Equity Incentive Plan, as amended and
restated, (the 1998 Plan) is a stockholder approved
plan, which provides for the granting of incentive stock options
and nonqualified stock options to employees, and nonqualified
stock options, nonvested stock, and restricted stock units to
employees, directors and consultants. The 1998 Plan is scheduled
to expire in June 2014. As of January 2, 2010, the Company
has 784,287 shares of the Companys common stock
available for issuance upon exercise of outstanding options or
for future awards under the 1998 Plan.
Stock
Options
Incentive stock options are granted at an exercise price of not
less than market 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 2, 2010, 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 option activity of the Companys 1998 Plan
as of January 2, 2010 and changes during the year then
ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Price
|
|
|
Term
|
|
|
Value
|
|
|
Outstanding at January 3, 2009
|
|
|
857,622
|
|
|
$
|
18.08
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
9,500
|
|
|
$
|
1.48
|
|
|
|
|
|
|
|
|
|
Forfeited/cancelled
|
|
|
(103,575
|
)
|
|
$
|
20.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 2, 2010
|
|
|
763,547
|
|
|
$
|
17.57
|
|
|
|
5.7 years
|
|
|
$
|
6,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested and expected to be vested at January 2, 2010
|
|
|
688,692
|
|
|
$
|
18.29
|
|
|
|
5.4 years
|
|
|
$
|
5,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at January 2, 2010
|
|
|
605,848
|
|
|
$
|
19.41
|
|
|
|
5.3 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48
THE
MANAGEMENT NETWORK GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The weighted average grant date fair value of options granted
was $0.86 per share and $2.95 per share during fiscal years 2009
and 2008, respectively. The total intrinsic value of options
exercised was $3,000 during fiscal year 2008. As of
January 2, 2010, unrecognized compensation cost, net of
estimated forfeitures, related to the unvested portion of stock
options issued under the 1998 Plan was approximately
$0.2 million and is expected to be recognized over a
weighted-average period of approximately 14 months.
Nonvested
Stock
Nonvested stock under the 1998 Plan are subject to restriction
based upon a two to four year vesting schedule. The fair value
of nonvested share awards is determined based on the closing
trading price of the Companys common stock on the award
date.
A summary of the status of nonvested stock issued under the 1998
Plan as of January 2, 2010 and changes during the year then
ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Outstanding at January 3, 2009
|
|
|
11,375
|
|
|
$
|
11.17
|
|
Vested
|
|
|
(10,125
|
)
|
|
$
|
11.19
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 2, 2010
|
|
|
1,250
|
|
|
$
|
10.95
|
|
|
|
|
|
|
|
|
|
|
There were no shares of nonvested stock issued during 2009. As
of January 2 2010, there was no material unrecognized
compensation cost related to nonvested stock granted under the
1998 Plan. The total fair value of shares vested was $126,000
and $78,300 during 2009 and 2008, respectively.
2000
SUPPLEMENTAL STOCK PLAN
As of January 2, 2010, the Company has 556,558 shares
of the Companys common stock available for issuance upon
exercise of outstanding options under the 2000 Supplemental
Stock Plan (the 2000 Plan). The 2000 Plan provides
the Companys common stock for the granting of nonqualified
stock options to employees and is not subject to stockholder
approval. Vesting and exercise provisions are determined by the
Board of Directors. Options granted under the plan generally
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 option activity of the Companys 2000 Plan
as of January 2, 2010 and changes during the year then
ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Price
|
|
|
Term
|
|
|
Value
|
|
|
Outstanding at January 3, 2009
|
|
|
311,262
|
|
|
$
|
11.69
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
5,200
|
|
|
$
|
1.20
|
|
|
|
|
|
|
|
|
|
Forfeited/cancelled
|
|
|
(41,850
|
)
|
|
$
|
10.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 2, 2010
|
|
|
274,612
|
|
|
$
|
11.74
|
|
|
|
6.7 years
|
|
|
$
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested and expected to be vested at January 2, 2010
|
|
|
237,028
|
|
|
$
|
11.98
|
|
|
|
6.6 years
|
|
|
$
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at January 2, 2010
|
|
|
160,662
|
|
|
$
|
12.90
|
|
|
|
5.9 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49
THE
MANAGEMENT NETWORK GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The weighted average fair value of options granted was $0.70 per
share and $5.05 per share during fiscal years 2009 and 2008,
respectively. There were no options exercised during fiscal year
2009 or 2008. As of January 2, 2010, unrecognized
compensation cost, net of estimated forfeitures, related to the
unvested portion of stock options issued under the 2000 Plan was
approximately $0.2 million and is expected to be recognized
over a weighted-average period of approximately 16 months.
EMPLOYEE
STOCK PURCHASE PLAN
Under the Employee Stock Purchase Plan (ESPP), shares of the
Companys 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 over the subsequent two years. Employees may
purchase shares through a payroll deduction program having a
value not exceeding 15% of their gross compensation during an
offering period. During 2009 and 2008, the Company recognized
net expense of $34,000 and $62,000, respectively, in connection
with FASB ASC 718 associated with the ESPP.
|
|
7.
|
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 FASB ASC
280-10,
Segment Reporting, the Company has concluded it has
two reportable segments, the Management Consulting Services
segment and the Software Solutions segment. The Management
Consulting Services segment is comprised of five operating
segments (Operations, Domestic Strategy, International Strategy,
RVA and TWG) which are aggregated into one reportable segment.
Management Consulting Services includes consulting services
related to strategy and business planning, market research and
analysis, organizational development, knowledge management,
marketing and customer relationship management, program
management, billing system support, operating system support,
revenue assurance, and corporate investment services. Software
Solutions is a single reportable operating segment that provides
custom developed software, consulting and technical services.
These services range from developing initial business and system
requirements, to software development, software configuration
and implementation, and post-contract customer support.
Management evaluates segment performance based upon income
(loss) from operations, excluding share-based compensation
(benefits), depreciation and intangibles amortization.
Inter-segment revenues were approximately $0.9 million in
fiscal year 2009. Inter-segment revenues were approximately
$2.4 million in fiscal year 2008. In addition, in its
administrative division, entitled Not Allocated to
Segments, the Company accounts for non-operating activity
and the costs of providing corporate and other administrative
services to the segments.
50
THE
MANAGEMENT NETWORK GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Summarized financial information concerning the Companys
reportable segments is shown in the following table (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management
|
|
|
|
Not
|
|
|
|
|
Consulting
|
|
Software
|
|
Allocated to
|
|
|
|
|
Services
|
|
Solutions
|
|
Segments
|
|
Total
|
|
As of and for the fiscal year ended January 2, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
50,584
|
|
|
$
|
14,369
|
|
|
|
|
|
|
$
|
64,953
|
|
Income (loss) from operations
|
|
|
12,464
|
|
|
|
934
|
|
|
$
|
(16,953
|
)
|
|
|
(3,555
|
)
|
Interest income
|
|
|
|
|
|
|
|
|
|
|
259
|
|
|
|
259
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
(55
|
)
|
|
|
(55
|
)
|
Income (loss) before income tax provision
|
|
|
12,464
|
|
|
|
934
|
|
|
|
(16,414
|
)
|
|
|
(3,016
|
)
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
3,379
|
|
|
|
3,379
|
|
Total assets
|
|
$
|
11,515
|
|
|
$
|
4,650
|
|
|
$
|
32,086
|
|
|
$
|
48,251
|
|
As of and for the fiscal year ended January 3, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
54,086
|
|
|
$
|
19,956
|
|
|
|
|
|
|
$
|
74,042
|
|
Income (loss) from operations
|
|
|
17,292
|
|
|
|
4,347
|
|
|
$
|
(37,143
|
)
|
|
|
(15,504
|
)
|
Interest Income
|
|
|
|
|
|
|
|
|
|
|
922
|
|
|
|
922
|
|
Income (loss) before income tax provision
|
|
|
17,292
|
|
|
|
4,347
|
|
|
|
(36,470
|
)
|
|
|
(14,831
|
)
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
5,385
|
|
|
|
5,385
|
|
Total assets
|
|
$
|
8,728
|
|
|
$
|
4,078
|
|
|
$
|
33,908
|
|
|
$
|
46,714
|
|
Segment assets, regularly reviewed by management as part of its
overall assessment of the segments performance, include
both billed and unbilled trade accounts receivable, net of
allowances, and certain other assets. Assets not assigned to
segments include cash and cash equivalents, current and
non-current investments, property and equipment, goodwill and
intangible assets and deferred tax assets, excluding deferred
tax assets recognized on accounts receivable reserves, which are
assigned to their segments.
In accordance with the provisions of FASB ASC
280-10,
revenues earned in the United States and internationally based
on the location where the services are performed are shown in
the following table (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
Loss Before Income Tax Provision
|
|
|
|
Fiscal Year
|
|
|
Fiscal Year
|
|
|
Fiscal Year
|
|
|
Fiscal Year
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
United States
|
|
$
|
46,206
|
|
|
$
|
46,096
|
|
|
$
|
(2,145
|
)
|
|
$
|
(9,233
|
)
|
International:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United Kingdom
|
|
|
16,727
|
|
|
|
26,163
|
|
|
|
(777
|
)
|
|
|
(5,241
|
)
|
Other
|
|
|
2,020
|
|
|
|
1,783
|
|
|
|
(94
|
)
|
|
|
(357
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
64,953
|
|
|
$
|
74,042
|
|
|
$
|
(3,016
|
)
|
|
$
|
(14,831
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51
THE
MANAGEMENT NETWORK GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Major customers in terms of significance to TMNGs revenues
(i.e. in excess of 10% of revenues) for fiscal years 2009 and
2008 and accounts receivable as of January 2, 2010 and
January 3, 2009 were as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
Fiscal Year 2009
|
|
Fiscal Year 2008
|
|
|
Management
|
|
|
|
Management
|
|
|
|
|
Consulting
|
|
Software
|
|
Consulting
|
|
Software
|
|
|
Services
|
|
Solutions
|
|
Services
|
|
Solutions
|
|
Customer A
|
|
$
|
3,451
|
|
|
$
|
3,967
|
|
|
$
|
4,413
|
|
|
$
|
6,284
|
|
Customer B
|
|
$
|
22,789
|
|
|
|
|
|
|
$
|
21,032
|
|
|
|
|
|
Customer C
|
|
$
|
8,935
|
|
|
|
|
|
|
$
|
6,564
|
|
|
|
|
|
Customer D
|
|
$
|
6,612
|
|
|
|
|
|
|
$
|
5,731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts Receivable
|
|
|
January 2,
|
|
January 3,
|
|
|
2010
|
|
2009
|
|
Customer A
|
|
$
|
3,244
|
|
|
$
|
2,545
|
|
Customer B
|
|
$
|
4,333
|
|
|
$
|
2,343
|
|
Customer C
|
|
$
|
1,290
|
|
|
$
|
1,215
|
|
Customer D
|
|
$
|
1,640
|
|
|
$
|
1,482
|
|
Revenues from the Companys ten most significant customers
accounted for approximately 87% and 81% of revenues for fiscal
years 2009 and 2008, respectively.
Substantially all of TMNGs receivables are obligations of
companies in the communications, media and entertainment
industries. 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 Companys uncollected account
experience in prior years and the ongoing evaluation of the
credit status of TMNGs customers and the communications
industry in general.
|
|
8.
|
PROPERTY
AND EQUIPMENT
|
|
|
|
|
|
|
|
|
|
|
|
January 2,
|
|
|
January 3,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Furniture and fixtures
|
|
$
|
1,450
|
|
|
$
|
1,400
|
|
Software and computer equipment
|
|
|
3,784
|
|
|
|
2,992
|
|
Leasehold improvements
|
|
|
1,199
|
|
|
|
1,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,433
|
|
|
|
5,516
|
|
Less: Accumulated depreciation and amortization
|
|
|
4,478
|
|
|
|
3,715
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,955
|
|
|
$
|
1,801
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense on property and equipment
was $816,000 and $772,000 for fiscal years 2009 and 2008,
respectively.
52
THE
MANAGEMENT NETWORK GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
For fiscal years 2009 and 2008, the income tax (provision)
benefit consists of the following (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
Fiscal
|
|
|
Fiscal
|
|
|
|
Year
|
|
|
Year
|
|
|
|
2009
|
|
|
2008
|
|
|
Federal
|
|
|
|
|
|
|
|
|
Current tax (expense) benefit
|
|
$
|
(32
|
)
|
|
$
|
(32
|
)
|
Deferred tax (expense) benefit, net
|
|
|
(103
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(135
|
)
|
|
|
(32
|
)
|
State
|
|
|
|
|
|
|
|
|
Current tax (expense) benefit
|
|
|
(34
|
)
|
|
|
|
|
Deferred tax (expense) benefit, net
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(49
|
)
|
|
|
|
|
Foreign
|
|
|
|
|
|
|
|
|
Current tax (expense) benefit
|
|
|
(15
|
)
|
|
|
(1,039
|
)
|
Deferred tax (expense) benefit, net
|
|
|
(27
|
)
|
|
|
1,077
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(42
|
)
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(226
|
)
|
|
$
|
6
|
|
|
|
|
|
|
|
|
|
|
The Company has reserved all of its domestic and foreign net
deferred tax assets with a valuation allowance as of
January 2, 2010, in accordance with the provisions of FASB
ASC 740 Income Taxes. Realization of the deferred
tax asset is dependent on generating sufficient income in future
periods. In evaluating the ability to use its deferred tax
assets, the Company considers all positive and negative evidence
including the Companys past operating results, the
existence of cumulative losses in the most recent fiscal year
and the Companys forecast of future income. In determining
future income, the Company is responsible for assumptions
utilized including the amount of state, federal and
international operating income, the reversal of temporary
differences and the implementation of feasible and prudent tax
planning strategies. These assumptions require significant
judgment about the forecasts of future income and are consistent
with the plans and estimates the Company is using to manage the
underlying business.
The following is reconciliation between the provision for income
taxes and the amounts computed based on loss before income taxes
at the statutory federal income tax rate (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2009
|
|
|
Fiscal Year 2008
|
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Computed expected federal income tax benefit
|
|
$
|
1,056
|
|
|
|
35.0
|
|
|
$
|
5,191
|
|
|
|
35.0
|
|
State income tax (expense) benefit, net of federal benefit
|
|
|
(44
|
)
|
|
|
(1.4
|
)
|
|
|
744
|
|
|
|
5.0
|
|
Rate differential on foreign operations
|
|
|
(243
|
)
|
|
|
(8.1
|
)
|
|
|
(58
|
)
|
|
|
(0.4
|
)
|
Forfeited vested stock options
|
|
|
(883
|
)
|
|
|
(29.3
|
)
|
|
|
299
|
|
|
|
2.0
|
|
Adjustment to estimated tax loss carryforward
|
|
|
(985
|
)
|
|
|
(32.7
|
)
|
|
|
(552
|
)
|
|
|
(3.7
|
)
|
Other
|
|
|
(52
|
)
|
|
|
(1.7
|
)
|
|
|
(104
|
)
|
|
|
(0.7
|
)
|
Foreign tax credit carryforward
|
|
|
56
|
|
|
|
1.8
|
|
|
|
(1,738
|
)
|
|
|
(11.7
|
)
|
Change in valuation allowance
|
|
|
869
|
|
|
|
28.9
|
|
|
|
(3,776
|
)
|
|
|
(25.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(226
|
)
|
|
|
(7.5
|
)
|
|
$
|
6
|
|
|
|
0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53
THE
MANAGEMENT NETWORK GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Items giving rise to the provision for deferred income tax
(provision) benefit are as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
Fiscal
|
|
|
Fiscal
|
|
|
|
Year
|
|
|
Year
|
|
|
|
2009
|
|
|
2008
|
|
|
Goodwill and intangible assets
|
|
$
|
(1,931
|
)
|
|
$
|
5,698
|
|
Share-based compensation expense
|
|
|
(761
|
)
|
|
|
1,019
|
|
Valuation allowance
|
|
|
869
|
|
|
|
(3,776
|
)
|
Net operating loss carryforward
|
|
|
(275
|
)
|
|
|
(51
|
)
|
Undistributed foreign earnings
|
|
|
1,185
|
|
|
|
(1,185
|
)
|
Foreign tax credit carryforward
|
|
|
750
|
|
|
|
317
|
|
Accrued contingent consideration
|
|
|
|
|
|
|
(353
|
)
|
Other
|
|
|
18
|
|
|
|
(592
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(145
|
)
|
|
$
|
1,077
|
|
|
|
|
|
|
|
|
|
|
The significant components of deferred income tax assets and the
related balance sheet classifications, as of January 2,
2010 and January 3, 2009 are as follows (amounts in
thousands):
|
|
|
|
|
|
|
|
|
|
|
January 2,
|
|
|
January 3,
|
|
|
|
2010
|
|
|
2009
|
|
|
Current deferred tax assets (liabilities):
|
|
|
|
|
|
|
|
|
Unfavorable liabilities
|
|
$
|
286
|
|
|
$
|
274
|
|
Other
|
|
|
132
|
|
|
|
336
|
|
Valuation allowance
|
|
|
(418
|
)
|
|
|
(496
|
)
|
|
|
|
|
|
|
|
|
|
Current deferred tax asset
|
|
$
|
0
|
|
|
$
|
114
|
|
|
|
|
|
|
|
|
|
|
Non-current deferred tax assets (liabilities):
|
|
|
|
|
|
|
|
|
Goodwill and intangible assets
|
|
$
|
11,541
|
|
|
$
|
13,541
|
|
Share-based compensation expense
|
|
|
2,126
|
|
|
|
2,822
|
|
Net operating loss carryforward
|
|
|
17,343
|
|
|
|
17,514
|
|
Auction rate securities
|
|
|
182
|
|
|
|
561
|
|
Other
|
|
|
678
|
|
|
|
339
|
|
Undistributed foreign earnings
|
|
|
|
|
|
|
(1,185
|
)
|
Foreign tax credit carryforward
|
|
|
1,067
|
|
|
|
317
|
|
Valuation allowance
|
|
|
(33,055
|
)
|
|
|
(34,024
|
)
|
|
|
|
|
|
|
|
|
|
Non-current deferred tax liabilities
|
|
$
|
(118
|
)
|
|
$
|
(115
|
)
|
|
|
|
|
|
|
|
|
|
54
THE
MANAGEMENT NETWORK GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The federal net operating loss carryforward as of
January 2, 2010 is scheduled to expire as follows (amounts
in thousands):
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Year
|
|
|
|
|
$
|
2,177
|
|
|
|
2016
|
|
|
|
|
5,602
|
|
|
|
2023
|
|
|
|
|
9,094
|
|
|
|
2024
|
|
|
|
|
7,432
|
|
|
|
2025
|
|
|
|
|
9,854
|
|
|
|
2026
|
|
|
|
|
5,152
|
|
|
|
2027
|
|
|
|
|
1,637
|
|
|
|
2028
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
40,948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The foreign net operating loss carryforward as of
January 2, 2010 is $3.5 million and has no expiration
date. As of January 2, 2010, the Company has provided tax
on $5.8 million of foreign earnings that were no longer
permanently reinvested, net of foreign tax credits of
$1.1 million. The expiration of these foreign tax credits
is $317,000 and $750,000 in fiscal years 2018 and 2019,
respectively. The tax on foreign earnings, net of foreign tax
credits, was fully offset by a reduction in valuation allowance.
The Company has not provided tax on the remaining undistributed
earnings of foreign subsidiaries, because it is the
Companys intention to reinvest these earnings
indefinitely. The determination of the amount of unrecognized
deferred tax liabilities related to investments in foreign
subsidiaries that is essentially permanent in nature is not
practicable.
The Company analyzes its uncertain tax positions pursuant to the
provisions of FASB ASC 740 Income Taxes. ASC 740
prescribes a two-step process to determine the amount of tax
benefit to be recognized. First, the tax position must be
evaluated to determine the likelihood that it will be sustained
upon external examination. If the tax position is deemed
more-likely-than-not to be sustained, the tax
position is then assessed to determine the amount of benefit to
recognize in the financial statements. The amount of the benefit
that may be recognized is the largest amount that has a greater
than 50 percent likelihood of being realized upon ultimate
settlement with the taxing authority. Tax positions that
previously failed to meet the more-likely-than-not recognition
threshold should be recognized in the first subsequent financial
reporting period in which that threshold is met. Previously
recognized tax positions that no longer meet the
more-likely-than-not recognition threshold should be
derecognized in the first subsequent financial reporting period
in which that threshold is no longer met.
The Company recognizes accrued interest and penalties related to
unrecognized tax benefits as a component of the income tax
provision. As of January 2, 2010 and January 3, 2009,
the total amount of accrued income tax-related interest and
penalties included in the Consolidated Balance Sheet was
$233,000 and $201,000, respectively. As of January 2, 2010,
the Company believes that it is reasonably possible that the
liability for uncertain tax positions will decrease by $774,000
within the next 12 months due to the expiration of the
statute of limitations of tax filings in foreign jurisdictions.
A reconciliation of the beginning and ending balances of the
total amounts of gross unrecognized tax benefits (excluding
penalties and interest) is as follows:
|
|
|
|
|
|
|
|
|
|
|
January 2,
|
|
|
January 3,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Gross unrecognized tax benefits at beginning of year
|
|
$
|
690
|
|
|
$
|
355
|
|
Gross increases in tax positions for current year
|
|
|
40
|
|
|
|
335
|
|
|
|
|
|
|
|
|
|
|
Gross unrecognized tax benefits at end of year
|
|
$
|
730
|
|
|
$
|
690
|
|
|
|
|
|
|
|
|
|
|
As of January 2, 2010 and January 3, 2009, the Company
reported total unrecognized tax benefits (including penalties
and interest) of $963,000 and $891,000, respectively. If these
amounts were to be recognized, the entire amount would impact
the effective tax rate.
55
THE
MANAGEMENT NETWORK GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company or one of its subsidiaries files income tax returns
in the U.S. federal jurisdiction, and various states and
foreign jurisdictions. With few exceptions, the Company is no
longer subject to U.S. federal, state and local, or
non-U.S. income
tax examinations by tax authorities for years before 2003. As of
January 2, 2010, the Company has no income tax examinations
in process.
The Company leases office facilities, computer equipment, office
furniture, and an automobile under various operating leases
expiring at various dates through July 2019.
Following is a summary of future minimum payments under
operating leases that have initial or remaining non-cancellable
lease terms at January 2, 2010 (amounts in thousands):
|
|
|
|
|
|
|
Operating
|
|
Fiscal Year
|
|
Leases
|
|
|
2010
|
|
$
|
2,884
|
|
2011
|
|
|
1,368
|
|
2012
|
|
|
1,503
|
|
2013
|
|
|
391
|
|
2014 and thereafter
|
|
|
912
|
|
|
|
|
|
|
Total minimum lease payments
|
|
|
7,058
|
|
Future minimum rentals to be received under non-cancellable
subleases
|
|
|
(628
|
)
|
|
|
|
|
|
Minimum lease payments net of amounts to be received under
subleases
|
|
$
|
6,430
|
|
|
|
|
|
|
Minimum operating lease payments include the off-market portion
of lease payments recorded through purchase accounting in
connection with the Companys acquisition of CSMG and
continuing lease commitments associated with the consolidation
of office space. The unamortized balance of the unfavorable
lease liabilities and their balance sheet classification as of
January 2, 2010 and January 3, 2009, are as follows:
|
|
|
|
|
|
|
|
|
|
|
January 2,
|
|
|
January 3,
|
|
|
|
2010
|
|
|
2009
|
|
|
Current unfavorable lease obligations
|
|
$
|
706
|
|
|
$
|
681
|
|
Non-current unfavorable lease obligations
|
|
|
61
|
|
|
|
773
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
767
|
|
|
$
|
1,454
|
|
|
|
|
|
|
|
|
|
|
Total rental expense, net of subtenant rents received, was
approximately $1,910,000 and $2,016,000 for fiscal years 2009
and 2008, respectively, and was recorded in selling, general and
administrative expenses. The Company recorded $560,000 and
$788,000, respectively, in rental income from subtenants during
fiscal years 2009 and 2008. Rents received from subtenants are
recorded as an offset to rental expense.
As of January 2, 2010, there is one outstanding line of
credit between the Company and its Chief Executive Officer,
Richard P. Nespola, which originated in fiscal year 2001.
Aggregate borrowings outstanding against the line of credit at
January 2, 2010 and January 3, 2009 totaled $300,000
and are due in September 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. Interest
payments on this loan are current as of January 2, 2010.
56
THE
MANAGEMENT NETWORK GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In March 2002, the Company entered into a $1.0 million
standby letter of credit (LOC) facility with a
financial institution in connection with an acquisition. The LOC
was required as part of the assignment of the leased office
space from the seller to the Company. The Company originally
collateralized the LOC with a $1.0 million cash deposit
with reductions in this amount based on passage of time. As of
January 2, 2010 and for the remainder of the term of the
LOC, the required collateral amount is $273,000. The collateral
deposited for this LOC is included in Cash and Cash
Equivalents on the Companys consolidated balance
sheet as of January 2, 2010 and January 3, 2009. 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. An obligation has not been recorded
in connection with the LOC on the Companys consolidated
balance sheet as of January 2, 2010 and January 3,
2009.
|
|
13.
|
RELATED
PARTY TRANSACTIONS
|
During fiscal years 2009 and 2008, the Company incurred legal
fees of $16,000 and $26,000, respectively, for services provided
by Bingham McCutchen, LLP, a law firm in which a member of the
Board of Directors, Andrew Lipman, owns an equity interest.
Payments made during both periods were in connection with income
tax and potential acquisition related matters. All payments were
within the limitations set forth by NASDAQ Rules as to the
qualifications as an independent director.
|
|
14.
|
COMMITMENTS
AND CONTINGENCIES
|
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, future customer bankruptcies could result
in additional claims on collected balances for professional
services near the bankruptcy filing date. 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.
During fiscal year 2009, the Company entered into an agreement
under which it has a commitment to purchase a minimum of
$401,000 in computer software over a three year period. As of
January 2, 2010, the Company has an obligation of $290,000
remaining under this commitment.
|
|
15.
|
SHARE
REPURCHASE PROGRAM
|
On June 6, 2008, the Companys Board of Directors
authorized management to enter into stock purchase agreements
with certain stockholders of the Company. On June 11 and 12,
2008, pursuant to these agreements the Company repurchased
2,000,000 shares (400,000 shares post-reverse stock
split) of its common stock from these stockholders at a price of
$1.60 per share ($8.00 per share post-reverse stock split). In
connection with the transactions, the Company entered into
standstill agreements with each of the selling stockholders
pursuant to which the stockholders agreed for a period of two
years not to, among other things, acquire any voting securities
of the Company, form or join in a group with other stockholders,
effect or encourage a tender offer or business combination
involving the Company or any of its subsidiaries, or take other
actions seeking to control or influence the management, Board of
Directors or policies of the Company. This repurchase of shares
was not conducted under the share repurchase program described
below.
On September 5, 2006, the Companys Board of Directors
approved a share repurchase program authorizing the purchase of
up to 2,000,000 shares of TMNG common stock
(400,000 shares post-reverse stock split). Under the plan,
the Company was authorized to repurchase stock from time to time
in the open market or through privately negotiated transactions
through September 1, 2008, in accordance with SEC rules.
57
THE
MANAGEMENT NETWORK GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In October 2006, the Companys Board of Directors suspended
share repurchase activity under the share repurchase program.
The suspension remained in effect until the expiration of the
program.
All repurchased shares have been classified as treasury stock
within the stockholders equity section of the Consolidated
Balance Sheet.
|
|
|
|
|
|
|
Treasury Shares
|
|
|
Balance as of December 29, 2007
|
|
|
40,000
|
|
Purchases of treasury stock
|
|
|
400,000
|
|
|
|
|
|
|
Balance as of January 3, 2009 and January 2, 2010
|
|
|
440,000
|
|
|
|
|
|
|
|
|
16.
|
EMPLOYEE
BENEFIT PLAN
|
The Company offers defined contribution plans to eligible
employees. Such employees may contribute a percentage of their
annual compensation in accordance with the plans guidelines. The
plans provide for Company contributions that are subject to
maximum limitations as defined by the plans. Company
contributions to its defined contribution plans totaled $922,000
and $1,093,000 in the years ended January 2, 2010 and
January 3, 2009, respectively.
Borrowing
on UBS Line of Credit
On March 1, 2010, the Company borrowed an additional
$880,000 under the UBS line of credit. With this draw against
the line, total borrowings were $3,680,000 on this line of
credit and there was no material balance available to be
borrowed.
58
ITEM 9. CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
|
|
ITEM 9A(T).
|
CONTROLS
AND PROCEDURES
|
Evaluation
of Disclosure Controls and Procedure
The Company maintains disclosure controls and procedures (as
defined in Rules
13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934) that are
designed to ensure that information required to be disclosed by
the Company in reports that it files or submits under the
Exchange Act is (i) recorded, processed, summarized and
reported within the time periods specified in SEC rules and
forms; and (ii) accumulated and communicated to the
Companys management, including its principal executive
officer and principal financial officer, as appropriate to allow
timely decisions regarding required disclosure. We have
established a Disclosure Committee, consisting of certain
members of management, to assist in this evaluation. The
Disclosure Committee meets on a regular quarterly basis, and as
needed.
A review and evaluation was performed by our management,
including our Chief Executive Officer (the CEO) and
Chief Financial Officer (the CFO), of the
effectiveness of our disclosure controls and procedures as of
the end of the period covered by this report. Based upon this
evaluation, the Companys CEO and CFO have concluded that
the Companys disclosure controls and procedures were
effective as of January 2, 2010.
Managements
Report on Internal Control over Financial
Reporting
The management of the Company is responsible for establishing
and maintaining adequate internal control over financial
reporting for the Company. With the participation of our Chief
Executive Officer and Chief Financial Officer, our management
conducted an evaluation of the effectiveness of our internal
control over financial reporting based on the framework and
criteria established in Internal Control
Integrated Framework, issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on
this evaluation, our management has concluded that our internal
control over financial reporting was effective as of
January 2, 2010.
This annual report does not include an attestation report of the
Companys registered public accounting firm regarding
internal control over financial reporting. Our internal control
over financial reporting was not subject to attestation by the
Companys registered public accounting firm pursuant to
temporary rules of the SEC that permit the Company to provide
only managements report in this annual report.
Changes
in Internal Control over Financial Reporting
There were no significant changes in our internal control over
financial reporting during the fourth fiscal quarter ended
January 2, 2010 that materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.
|
|
ITEM 9B.
|
OTHER
INFORMATION
|
None
59
PART III
|
|
ITEM 10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
The Companys definitive Proxy Statement for its 2010
Annual Meeting of Stockholders (the Proxy Statement)
contains, under the captions Election of Directors,
Executive 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, Election of Directors
Non-Employee Director Compensation, Director
Compensation and Executive Compensation, 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
certain of the information required by Item 12 of this
Form 10-K,
which information is incorporated herein by this reference.
EQUITY
COMPENSATION PLAN INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c)
|
|
|
|
(a)
|
|
|
|
|
|
Number of Securities
|
|
|
|
Number of
|
|
|
(b)
|
|
|
Remaining Available
|
|
|
|
Securities to be Issued
|
|
|
Weighted Average
|
|
|
for Future Issuance
|
|
|
|
Upon Exercise of
|
|
|
Exercise Price of
|
|
|
Under Equity Compensation
|
|
|
|
Outstanding Options,
|
|
|
Outstanding Options,
|
|
|
Plans (Excluding Securities
|
|
|
|
Warrants and Rights
|
|
|
Warrants and Rights
|
|
|
Reflected in Column (a))(1)
|
|
|
PLANS APPROVED BY SECURITY HOLDERS(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
1998 Equity Incentive Plan
|
|
|
763,547
|
|
|
$
|
17.57
|
|
|
|
18,240
|
|
PLANS NOT APPROVED BY SECURITY HOLDERS
|
|
|
|
|
|
|
|
|
|
|
|
|
2000 Supplemental Stock Plan
|
|
|
274,612
|
|
|
$
|
11.74
|
|
|
|
281,946
|
|
|
|
|
(1) |
|
The amounts in the table do not include up to 71,911 shares
that may be purchased under the 1999 Employee Stock Purchase
Plan or 1,250 shares subject to outstanding unvested
restricted stock awards. |
For an additional discussion of our equity compensation plans,
see Item 8, Consolidated Financial Statements,
Note 6, Share-Based Compensation.
|
|
ITEM 13.
|
CERTAIN
RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
|
The Proxy Statement contains under the captions Certain
Relationships and Related Transactions and Election
of Directors 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.
60
PART IV
|
|
ITEM 15.
|
EXHIBITS,
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. Pursuant
to the rules and regulations of the Securities and Exchange
Commission, the Company has filed or incorporated by reference
the documents referenced in the accompanying Index to Exhibits
as exhibits to this Annual Report on
Form 10-K.
The documents include agreements to which the Company is a party
or has a beneficial interest. The agreements have been filed to
provide investors with information regarding their respective
terms. The agreements are not intended to provide any other
factual information about the Company or its business or
operations. In particular, the assertions embodied in any
representations, warranties and covenants contained in the
agreements may be subject to qualifications with respect to
knowledge and materiality different from those applicable to
investors and may be qualified by information in confidential
disclosure schedules not included with the exhibits. These
disclosure schedules may contain information that modifies,
qualifies and creates exceptions to the representations,
warranties and covenants set forth in the agreements. Moreover,
certain representations, warranties and covenants in the
agreements may have been used for the purpose of allocating risk
between the parties, rather than establishing matters as facts.
In addition, information concerning the subject matter of the
representations, warranties and covenants may have changed after
the date of the respective agreement, which subsequent
information may or may not be fully reflected in the
Companys public disclosures. Accordingly, investors should
not rely on the representations, warranties and covenants in the
agreements as characterizations of the actual state of facts
about the Company or its business or operations on the date
hereof. 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 Companys
reasonable expenses in furnishing any such exhibit.
61
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.
THE MANAGEMENT NETWORK GROUP, INC.
|
|
|
|
By:
|
/s/ RICHARD
P. NESPOLA
|
RICHARD P. NESPOLA
CHAIRMAN OF THE BOARD AND CHIEF
EXECUTIVE OFFICER
Date: April 1, 2010
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, 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 on behalf of the
Registrant in the capacities and on the dates indicated:
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ RICHARD
P. NESPOLA
Richard
P. Nespola
|
|
Chairman of the Board and Chief Executive Officer (Principal
executive officer)
|
|
April 1, 2010
|
|
|
|
|
|
/s/ DONALD
E. KLUMB
Donald
E. Klumb
|
|
Chief Financial Officer and Treasurer (Principal financial
officer and principal accounting officer)
|
|
April 1, 2010
|
|
|
|
|
|
/s/ MICKY
K. WOO
Micky
K. Woo
|
|
Director
|
|
April 1, 2010
|
|
|
|
|
|
/s/ ANDREW
LIPMAN
Andrew
Lipman
|
|
Director
|
|
April 1, 2010
|
|
|
|
|
|
/s/ ROBERT
J. CURREY
Robert
J. Currey
|
|
Director
|
|
April 1, 2010
|
|
|
|
|
|
/s/ ROY
A. WILKENS
Roy
A. Wilkens
|
|
Director
|
|
April 1, 2010
|
|
|
|
|
|
/s/ FRANK
SISKOWSKI
Frank
Siskowski
|
|
Director
|
|
April 1, 2010
|
62
INDEX TO
EXHIBITS
The following is a list of exhibits filed as part of this report.
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Document
|
|
|
3
|
.1
|
|
Amended and Restated Certificate of Incorporation, filed as
Exhibit 3.1 to the Companys
Form 8-K
filed with the Securities and Exchange Commission on
February 5, 2010, is incorporated herein by reference as
Exhibit 3.1.
|
|
3
|
.2
|
|
Certificate of Designations of Series A Junior
Participating Preferred Stock, as filed with the Secretary of
State of Delaware on March 27, 2008, filed as
Exhibit 3.1 to the Companys Current Report on
Form 8-K
dated March 27, 2008 filed with the Securities and Exchange
Commission, is incorporated herein by reference as
Exhibit 3.2.
|
|
3
|
.3
|
|
Amended and Restated By-laws, filed as Exhibit 3.2 to the
Companys
Form 8-K
filed with the Securities and Exchange Commission on
April 20, 2009, is incorporated herein by reference as
Exhibit 3.3.
|
|
4
|
.1
|
|
Specimen Common Stock Certificate, filed as Exhibit 4.1 to
the Registration Statement on
Form S-1
originally filed September 20, 1999 (Registration
No. 333-87383),
as amended (the 1999
S-1
Registration Statement), is incorporated herein by
reference as Exhibit 4.1.
|
|
4
|
.2
|
|
Registration Rights Agreement, dated February 12, 1998,
among the Company and certain holders of the Companys
common stock (the Registration Rights Agreement),
filed as Exhibit 10.1 to the 1999
S-1
Registration Statement, is incorporated herein by reference as
Exhibit 4.2.
|
|
4
|
.3
|
|
Rights Agreement, dated as of March 27, 2008, by and
between the Company and Computershare Trust Company N.A.,
filed as Exhibit 4.1 to the Companys Current Report
on
Form 8-K
dated March 27, 2008 filed with the Securities and Exchange
Commission, is incorporated herein by reference as
Exhibit 4.3.
|
|
4
|
.4
|
|
Form of Rights Certificate, filed as Exhibit B to the
Rights Agreement filed as Exhibit 4.1 to the Companys
Current Report on
Form 8-K
dated March 27, 2008, filed with the Securities and
Exchange Commission, is incorporated herein by reference as
Exhibit 4.4.
|
|
10
|
.1
|
|
Registration Rights Agreement. (See Exhibit 4.2).
|
|
10
|
.2
|
|
Form of Indemnification Agreement between the Company and each
of its Directors and Officers, filed as Exhibit 10.2 to the
1999 S-1
Registration Statement, is incorporated herein by reference as
Exhibit 10.2.(1)
|
|
10
|
.3
|
|
Amended and Restated 1998 Equity Incentive Plan, as amended and
restated on June 8, 2009, filed as Appendix B to the
definitive proxy statement of the Company filed with the
Securities and Exchange Commission on May 4, 2009, and the
Form of Agreements thereunder, filed in Exhibit 10.3 to the
1999 S-1
Registration Statement, are incorporated herein by reference as
Exhibit 10.3.(1)
|
|
10
|
.4
|
|
1999 Employee Stock Purchase Plan filed as Appendix A to
the definitive proxy statement of the Company filed with the
Securities and Exchange Commission on May 4, 2009,and the
Form of Agreements thereunder, filed in Exhibit 10.4 to the
1999 S-1
Registration Statement, are incorporated herein by reference as
Exhibit 10.4.(1)
|
|
10
|
.5
|
|
2000 Supplemental Stock Plan and Form of Agreements thereunder,
filed as Exhibit 10.16 to the Companys
Form 10-K
for the fiscal year ended December 30, 2000, is
incorporated herein by reference as Exhibit 10.5.(1)
|
|
10
|
.6
|
|
Employment Agreement between the Company and Richard Nespola,
dated January 5, 2004, filed as Exhibit 10.19 to the
Companys
Form 10-K
for the fiscal year ended January 3, 2004, is incorporated
herein by reference as Exhibit 10.6.(1)
|
|
10
|
.7
|
|
Sublease between Best Doctors, Inc. and Cambridge Strategic
Management Group Inc. (formerly TMNG Strategy, Inc.), dated
December 30, 2004, filed as Exhibit 10.21 to the
Companys
Form 10-K
for the fiscal year ended January 1, 2005, is incorporated
herein by reference as Exhibit 10.7.
|
|
10
|
.8
|
|
Asset Purchase Agreement, dated April 2, 2006, among
Wilbass Limited, Adventis Limited, and Adventis Corporation,
filed as Exhibit 10 to the Companys
Form 10-Q
for the quarter ended April 1, 2006, is incorporated herein
by reference as Exhibit 10.8.**
|
63
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Document
|
|
|
10
|
.9
|
|
Share Purchase Agreement, dated December 22, 2006, between
the Company and Janos Sivo, Alan Strong, William Hill and James
Baker, regarding the acquisition of the outstanding common stock
of Cartesian Limited, filed as Exhibit 10.1 to the
Companys
Form 10-Q
for the quarter ended September 30, 2006, is incorporated
herein by reference as Exhibit 10.9.
|
|
10
|
.10
|
|
Third Amended Lease Agreement between NewTower
Trust Company Multi-Employer Property Trust and the
Company, dated August 30, 2005, filed as Exhibit 10.10
to the Companys
Form 10-K
for the fiscal year ended December 30, 2006, is
incorporated herein by reference as Exhibit 10.10.
|
|
10
|
.11
|
|
Third Additional Space Commencement Date Agreement between
NewTower Trust Company Multi-Employer Property Trust and
the Company, dated February 28, 2006, filed as
Exhibit 10.11 to the Companys
Form 10-K
for the fiscal year ended December 30, 2006, is
incorporated herein by reference as Exhibit 10.11.
|
|
10
|
.12
|
|
Membership Interest Purchase Agreement, dated July 30,
2007, between the Company and RVA Consulting, LLC, RVA Holdings,
LLC, Mark Markowitz, Dawn Saitta, and Dale Reynolds, regarding
the acquisition of all outstanding membership interests in RVA
Consulting, LLC, filed as Exhibit 10.1 to the
Companys
Form 10-Q
for the quarter ended June 30, 2007, is incorporated herein
by reference as Exhibit 10.12.**
|
|
10
|
.13
|
|
Stock Purchase Agreement, dated October 5, 2007, between
the Company and TWG Consulting, Inc. and Marilyn Breitenstein,
regarding the acquisition of the outstanding common stock of TWG
Consulting, Inc., filed as Exhibit 2.1 to the
Companys
Form 10-Q
for the quarter ended September 29, 2007, is incorporated
herein by reference as Exhibit 10.13.
|
|
10
|
.14
|
|
Transition Services Agreement among RVA Consulting, LLC, a
subsidiary of the Company, and Publicis Selling Solutions, Inc,
filed as Exhibit 10.1 to the Companys
Form 10-Q
for the quarter ended September 29, 2007, is incorporated
herein by reference as Exhibit 10.14.
|
|
10
|
.15
|
|
Lease Agreement between Cartesian Limited and Sun Life Assurance
Company of Canada (U.K.) Limited, dated November 23, 2000,
filed as Exhibit 10.1 to the Companys
Form 10-Q
for the quarter ended March 31, 2007, is incorporated
herein by reference as Exhibit 10.15.
|
|
10
|
.16
|
|
Fourth Amendment to Lease between NewTower Trust Company
Multi-Employer Property Trust and the Company, dated
July 10, 2007, filed as Exhibit 10.16 to the
Companys
Form 10-K
for the fiscal year ended December 27, 2007, is
incorporated herein by reference as Exhibit 10.16.
|
|
10
|
.17
|
|
Employment Agreement dated April 8, 2008 between The
Management Network Group, Inc. and Donald E. Klumb, filed as
Exhibit 10.1 to the Companys Current Report on
Form 8-K
filed with the Securities and Exchange Commission on
April 11, 2008, is incorporated herein by reference as
Exhibit 10.17.(1)
|
|
10
|
.18
|
|
The Management Network Group, Inc. 2008 Executive Incentive
Compensation Plan, filed as Exhibit 10.1 to the
Companys Current Report on
Form 8-K
filed with the Securities and Exchange Commission on
February 25, 2008, is incorporated herein by reference as
Exhibit 10.18.(1)
|
|
10
|
.19
|
|
Fifth Amendment to Lease between NewTower Trust Company
Multi-Employer Property Trust and the Company, dated
May 19, 2008, filed as Exhibit 10.1 to the
Companys
Form 10-Q
for the quarter ended June 28, 2008, is incorporated herein
by reference as Exhibit 10.19.
|
|
10
|
.20
|
|
Stock Purchase Agreement by and among the Company, Potomac
Capital International Ltd., Potomac Capital Partners LP,
Pleiades Investment Partners-R LP, Potomac Capital Management
LLC, Potomac Capital Management, Inc. and Paul J. Solit dated
June 11, 2008 filed as Exhibit 10.1 to the
Companys
Form 8-K
filed with the Securities and Exchange Commission on
June 12, 2008, is incorporated herein by reference as
Exhibit 10.20.
|
|
10
|
.21
|
|
Stock Purchase Agreement by and among Riley Investment Partners
Master Fund, L.P., Riley Investment Management, LLC., and Bryant
R. Riley dated June 12, 2008 filed as Exhibit 10.2 to
the Companys
Form 8-K
dated June 12, 2008, filed with the Securities and Exchange
Commission, 2008, is incorporated herein by reference as
Exhibit 10.21.
|
64
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Document
|
|
|
10
|
.22
|
|
Standstill Agreement by and among the Company, Potomac Capital
International Ltd., Potomac Capital Partners LP, Pleiades
Investment Partners-R LP, Potomac Capital Management LLC,
Potomac Capital Management, Inc. and Paul J. Solit dated
June 11, 2008 filed as Exhibit 10.3 to the
Companys
Form 8-K
dated June 12, 2008, filed with the Securities and Exchange
Commission, is incorporated herein by reference as
Exhibit 10.22.
|
|
10
|
.23
|
|
Standstill Agreement by and among Riley Investment Partners
Master Fund, L.P., Riley Investment Management, LLC., and Bryant
R. Riley dated June 12, 2008 filed as Exhibit 10.4 to
the Companys
Form 8-K
dated June 12, 2008, filed with the Securities and Exchange
Commission, 2008, is incorporated herein by reference as
Exhibit 10.23.
|
|
10
|
.24
|
|
Offering Letter Relating to the Auction Rate Securities
Settlement with The Management Network Group, Inc. dated as of
October 8, 2008, issued by UBS Financial Services Inc.;
Acceptance Form filed as Exhibit 99.1 to the Companys
Form 8-K
dated November 19, 2008, filed with the Securities and
Exchange Commission, is incorporated herein by reference as
Exhibit 10.24.
|
|
10
|
.25
|
|
Credit Line Account Application and Agreement for Organizations
and Businesses dated as of November 13, 2008, between The
Management Network Group, Inc. and UBS Bank USA filed as
Exhibit 99.2 to the Companys
Form 8-K
dated November 19, 2008, filed with the Securities and
Exchange Commission, is incorporated herein by reference as
Exhibit 10.25.
|
|
10
|
.26
|
|
Addendum to Credit Line Account Application and Agreement dated
as of November 13, 2008, between The Management Network
Group, Inc. and UBS Bank USA filed as Exhibit 99.3 to the
Companys
Form 8-K
dated November 19, 2008, filed with the Securities and
Exchange Commission, is incorporated herein by reference as
Exhibit 10.26.
|
|
10
|
.27
|
|
Important Notice on Interest Rates and Payments dated as of
November 13, 2008, between The Management Network Group,
Inc. and UBS Bank USA filed as Exhibit 99.4 to the
Companys
Form 8-K
dated November 19, 2008, filed with the Securities and
Exchange Commission, is incorporated herein by reference as
Exhibit 10.27.
|
|
21
|
.1
|
|
List of subsidiaries of the Company, prepared pursuant to
Item 601(b)(21) of
Regulation S-K
is attached to this
Form 10-K
as Exhibit 21.1.
|
|
23
|
.1
|
|
Consent of independent registered public accounting firm is
attached to this
Form 10-K
as Exhibit 23.1.
|
|
24
|
.1
|
|
Power of attorney (see signature page).
|
|
31
|
.1
|
|
Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 is attached
to this
Form 10-K
as Exhibit 31.1.
|
|
31
|
.2
|
|
Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 is attached
to this
Form 10-K
as Exhibit 31.2.
|
|
32
|
.1
|
|
Certifications furnished pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 are attached to this
Form 10-K
as Exhibit 32.1.
|
|
|
|
(1) |
|
Management contracts and compensatory plans and arrangements
required to be filed as Exhibits pursuant to Item 15 of
this report. |
|
|
|
** |
|
Portions of this document have been redacted pursuant to a
Request for Confidential Treatment filed with the Securities and
Exchange Commission pursuant to
Rule 24b-2
under the Securities Exchange Act of 1934, as amended. Redacted
portions are indicated with the notation [***]. |
65