Attached files
file | filename |
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EX-31 - EX-31 - Cartesian, Inc. | c61288exv31.htm |
EX-32 - EX-32 - Cartesian, Inc. | c61288exv32.htm |
EX-10.2 - EX-10.2 - Cartesian, Inc. | c61288exv10w2.htm |
EX-10.1 - EX-10.1 - Cartesian, Inc. | c61288exv10w1.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended October 2, 2010
or
o | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Commission file number: 001-34006
THE MANAGEMENT NETWORK GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE | 48-1129619 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
7300 COLLEGE BLVD., SUITE 302, OVERLAND PARK, KS | 66210 | |
(Address of principal executive offices) | (Zip Code) |
913-345-9315
Registrants telephone number, including area code
Registrants telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes 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 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):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company þ |
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
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date. As of November 12, 2010, TMNG had
outstanding 7,073,330 shares of
common stock.
THE MANAGEMENT NETWORK GROUP, INC. INDEX
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EX-10.1 Lease Agreement |
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EX-10.2 Lease Amendment |
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EX-31 302 Certifications |
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EX-32 906 Certifications |
2
PART I. FINANCIAL INFORMATION
ITEM 1. | CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
THE MANAGEMENT NETWORK GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(unaudited)
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(unaudited)
October 2, | January 2, | |||||||
2010 | 2010 | |||||||
ASSETS |
||||||||
CURRENT ASSETS: |
||||||||
Cash and cash equivalents |
$ | 8,271 | $ | 6,301 | ||||
Short-term investments |
5,444 | |||||||
Receivables: |
||||||||
Accounts receivable |
10,702 | 11,991 | ||||||
Accounts receivable unbilled |
5,381 | 4,174 | ||||||
16,083 | 16,165 | |||||||
Less: Allowance for doubtful accounts |
(261 | ) | (357 | ) | ||||
Net receivables |
15,822 | 15,808 | ||||||
Prepaid and other current assets |
1,215 | 1,206 | ||||||
Total current assets |
25,308 | 28,759 | ||||||
NONCURRENT ASSETS: |
||||||||
Property and equipment, net |
1,906 | 1,955 | ||||||
Goodwill |
8,079 | 7,772 | ||||||
Identifiable intangible assets, net |
976 | 2,516 | ||||||
Noncurrent investments |
5,902 | 6,852 | ||||||
Other noncurrent assets |
211 | 397 | ||||||
Total Assets |
$ | 42,382 | $ | 48,251 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
CURRENT LIABILITIES: |
||||||||
Trade accounts payable |
$ | 1,297 | $ | 1,118 | ||||
Current borrowings |
2,800 | |||||||
Accrued payroll, bonuses and related expenses |
4,742 | 5,354 | ||||||
Other accrued liabilities |
1,792 | 1,433 | ||||||
Deferred revenue |
335 | 1,023 | ||||||
Unfavorable and other contractual obligations |
238 | 706 | ||||||
Total current liabilities |
8,404 | 12,434 | ||||||
NONCURRENT LIABILITIES: |
||||||||
Unfavorable and other contractual obligations |
582 | 546 | ||||||
Other noncurrent liabilities |
1,316 | 1,237 | ||||||
Total noncurrent liabilities |
1,898 | 1,783 | ||||||
Commitments and contingencies (Note 10) |
||||||||
Total stockholders equity |
32,080 | 34,034 | ||||||
Total Liabilities and Stockholders Equity |
$ | 42,382 | $ | 48,251 | ||||
See notes to unaudited condensed consolidated financial statements.
3
THE MANAGEMENT NETWORK GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except per share data)
(unaudited)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except per share data)
(unaudited)
Thirteen Weeks Ended | Thirty-nine Weeks Ended | |||||||||||||||
October 2, | October 3, | October 2, | October 3, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Revenues |
$ | 16,384 | $ | 16,812 | $ | 50,814 | $ | 47,834 | ||||||||
Cost of services (includes non-cash share-based
compensation expense of $19 and $53 for the thirteen
weeks ended October 2, 2010 and October 3, 2009,
respectively, and $80 and $221 for the thirty-nine
weeks ended October 2, 2010 and October 3, 2009,
respectively) |
10,171 | 9,947 | 31,356 | 28,155 | ||||||||||||
Gross Profit |
6,213 | 6,865 | 19,458 | 19,679 | ||||||||||||
Operating Expenses: |
||||||||||||||||
Selling, general and administrative (includes
non-cash share-based compensation expense of $42
and $120 for the thirteen weeks ended October 2,
2010 and October 3, 2009, respectively, and $178
and $503 for the thirty-nine weeks ended October
2, 2010 and October 3, 2009, respectively) |
6,558 | 6,736 | 20,433 | 21,498 | ||||||||||||
Intangible asset amortization |
340 | 506 | 1,061 | 1,471 | ||||||||||||
Total operating expenses |
6,898 | 7,242 | 21,494 | 22,969 | ||||||||||||
Loss from operations |
(685 | ) | (377 | ) | (2,036 | ) | (3,290 | ) | ||||||||
Other income (expense): |
||||||||||||||||
Interest income |
32 | 50 | 140 | 188 | ||||||||||||
Interest expense |
(17 | ) | (16 | ) | (42 | ) | ||||||||||
Other (expense) income |
(32 | ) | 45 | 26 | 151 | |||||||||||
Total other income |
| 78 | 150 | 297 | ||||||||||||
Loss before income tax provision |
(685 | ) | (299 | ) | (1,886 | ) | (2,993 | ) | ||||||||
Income tax provision |
(38 | ) | (228 | ) | (87 | ) | (68 | ) | ||||||||
Net loss |
(723 | ) | (527 | ) | (1,973 | ) | (3,061 | ) | ||||||||
Other comprehensive income (loss): |
||||||||||||||||
Foreign currency translation adjustment |
443 | (449 | ) | (374 | ) | 1,658 | ||||||||||
Unrealized (losses) gains on marketable securities |
(1 | ) | 31 | 720 | ||||||||||||
Realized losses on marketable securities |
50 | 50 | ||||||||||||||
Comprehensive loss |
$ | (231 | ) | $ | (945 | ) | $ | (2,297 | ) | $ | (683 | ) | ||||
Loss per common share: |
||||||||||||||||
Basic and diluted |
$ | (0.10 | ) | $ | (0.08 | ) | $ | (0.28 | ) | $ | (0.44 | ) | ||||
Weighted average shares used in calculation of net
loss per basic and diluted common share |
7,062 | 7,015 | 7,043 | 6,974 | ||||||||||||
See notes to unaudited condensed consolidated financial statements.
4
THE MANAGEMENT NETWORK GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
For the Thirty-nine Weeks Ended | ||||||||
October 2, | October 3, | |||||||
2010 | 2009 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net loss |
$ | (1,973 | ) | $ | (3,061 | ) | ||
Adjustments to reconcile net loss to net cash used in operating
activities: |
||||||||
Depreciation and amortization |
2,076 | 2,529 | ||||||
Share-based compensation |
258 | 724 | ||||||
Deferred income taxes |
98 | 27 | ||||||
Recognized gains on investments |
(6 | ) | (122 | ) | ||||
Other |
(22 | ) | ||||||
Other changes in operating assets and liabilities: |
||||||||
Accounts receivable |
1,097 | (1,905 | ) | |||||
Accounts receivable unbilled |
(1,266 | ) | 134 | |||||
Prepaid and other assets |
163 | 426 | ||||||
Trade accounts payable |
157 | 275 | ||||||
Deferred revenue |
(658 | ) | 566 | |||||
Accrued liabilities |
(434 | ) | 493 | |||||
Net cash (used in) provided by operating activities |
(510 | ) | 86 | |||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Proceeds from sales of investments |
6,450 | |||||||
Acquisition of businesses |
(1,911 | ) | ||||||
Acquisition of property and equipment |
(543 | ) | (459 | ) | ||||
Net cash provided by (used in) investing activities |
5,907 | (2,370 | ) | |||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Borrowings on line of credit |
880 | 3,400 | ||||||
Payments on line of credit |
(3,680 | ) | (35 | ) | ||||
Payments made on long-term obligations |
(531 | ) | (508 | ) | ||||
Issuance of common stock through employee stock purchase plan |
23 | 10 | ||||||
Net cash (used in) provided by financing activities |
(3,308 | ) | 2,867 | |||||
Effect of exchange rate on cash and cash equivalents |
(119 | ) | 754 | |||||
Net increase in cash and cash equivalents |
1,970 | 1,337 | ||||||
Cash and cash equivalents, beginning of period |
6,301 | 5,956 | ||||||
Cash and cash equivalents, end of period |
$ | 8,271 | $ | 7,293 | ||||
Supplemental disclosure of cash flow information: |
||||||||
Cash paid during period for interest |
$ | 16 | $ | 42 | ||||
Cash (refunded) paid during period for income taxes |
$ | (90 | ) | $ | 151 | |||
Accrued property and equipment additions |
$ | 323 | $ | 387 | ||||
Supplemental disclosure of non-cash investing and financing transactions |
||||||||
Acquisition of business: common stock |
$ | 53 | $ | 104 | ||||
Acquisition of business: consideration payable |
$ | 344 | $ | 981 | ||||
See notes to unaudited condensed consolidated financial statements.
5
THE MANAGEMENT NETWORK GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Reporting
The condensed consolidated financial statements and accompanying notes of The Management Network
Group, Inc. and its subsidiaries (TMNG, TMNG Global, we, us, our, or the Company) as of
October 2, 2010, and for the thirteen and thirty-nine weeks ended October 2, 2010 and October 3,
2009 are unaudited and reflect all normal recurring adjustments which are, in the opinion of
management, necessary for the fair presentation of the Companys condensed consolidated financial
position, results of operations, and cash flows as of these dates and for the periods presented.
The unaudited condensed consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America (U.S. GAAP) and pursuant
to the rules and regulations of the Securities and Exchange Commission (SEC) for interim
financial information. Consequently, these statements do not include all the disclosures normally
required by U.S. GAAP for annual financial statements nor those normally made in the Companys
annual report on Form 10-K. Accordingly, reference should be made to the Companys annual
consolidated financial statements and notes thereto for the fiscal year ended January 2, 2010,
included in the 2009 Annual Report on Form 10-K (2009 Form 10-K) for additional disclosures,
including a summary of the Companys accounting policies. The Condensed Consolidated Balance Sheet
as of January 2, 2010 has been derived from the audited Consolidated Balance Sheet at that date but
does not include all of the information and footnotes required by U.S. GAAP for complete financial
statements. The Company has evaluated subsequent events for recognition or disclosure through the
date these unaudited consolidated financial statements were issued.
The preparation of financial statements in conformity with U.S. GAAP requires management to make
estimates and assumptions that affect the amounts reported in the unaudited condensed consolidated
financial statements and accompanying notes. Actual results could differ from those estimates. The
results of operations for the thirteen and thirty-nine weeks ended October 2, 2010 are not
necessarily indicative of the results to be expected for the full year ending January 1, 2011.
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.
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.
Research and Development and Capitalized Software Costs During the thirteen and thirty-nine
weeks ended October 2, 2010, software development costs of $116,000 and $439,000, respectively,
were expensed as incurred. During the thirteen and thirty-nine weeks ended October 3, 2009,
software development costs of $144,000 and $390,000, respectively, were expensed as incurred. No
software development costs were capitalized during the thirteen and thirty-nine weeks ended October
2, 2010 and October 3, 2009.
Foreign Currency Transactions and Translation TMNG Europe Ltd., Cartesian Ltd. (Cartesian) and
the international operations of Cambridge Strategic Management Group, Inc. conduct business
primarily denominated in their respective local currency. Assets and liabilities have been
translated to U.S. dollars at the period-end exchange rate. Revenues 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 accumulated other
comprehensive income in the consolidated statements of stockholders equity. Assets and liabilities
denominated in other than the functional currency of a subsidiary are remeasured at rates of
exchange on the balance sheet date. Resulting gains and losses on foreign currency transactions are
included in the Companys results of operations. Exchange losses included in results of operations
were $2,000 and $38,000, respectively, during the thirteen and thirty-nine weeks ended October 2,
2010. Exchange gains and (losses) included in results of operations were $128,000 and ($447,000)
during the thirteen weeks and thirty-nine weeks ended October 3, 2009, respectively.
Derivative Financial Instruments As of October 2, 2010, the Company had an open foreign currency
forward contract with a notional amount of $0.2 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 Company utilizes valuation models for
this forward contract that rely exclusively on Level 2 inputs, as defined by the Financial
Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 820, Fair Value
Measurement and Disclosures. This contract expires on February 22, 2011. During the thirteen and
thirty-nine weeks ended October 2, 2010, the Company recognized (losses) gains on foreign currency
forward contracts of ($2,000) and $9,000, respectively. During the thirteen and thirty-nine weeks
ended October 3, 2009, the Company recognized losses on these forward contracts of $53,000 and
$29,000, respectively, which are included in selling, general and administrative expenses in the
Condensed Consolidated Statement of Operations and Comprehensive Loss (unaudited).
6
Net Loss Per Share The Company has not included the effect of stock options and nonvested
shares in the calculation of diluted loss per share for the thirteen and thirty-nine weeks ended
October 2, 2010 and October 3, 2009 as the Company reported a net loss for these periods and the
effect would have been anti-dilutive.
Recent Accounting Pronouncements In October 2009, the FASB issued Accounting Standards Update
(ASU) 2009-13, Revenue Recognition (Topic 605) Multiple-Deliverable Revenue Arrangements, a
consensus of the FASB Emerging Issue Task Force (ASU 2009-13), and ASU 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
permitted. The Company is currently evaluating the impact that the adoption of this guidance will
have on its consolidated financial statements.
In January 2010, the FASB issued ASU 2010-06, Fair Value Measures and Disclosures, (ASU 2010-06).
ASU 2010-06 amends the Codification to require new or enhanced disclosures about: (1) transfers in
and out of Levels 1, 2 and 3; (2) purchases, sales, issuances and settlements related to Level 3
measurements; (3) level of disaggregation; and (4) inputs and valuation techniques used to measure
fair value. With the exception of item (2), this guidance was effective for the first reporting
period beginning after December 15, 2009. The Company adopted this guidance, with the exception of
item (2), upon issuance and it did not have an effect on its consolidated financial statements. The
guidance concerning item (2) is effective for fiscal years beginning after December 15, 2010. The
Company is currently evaluating the impact that the adoption of item (2) of this guidance will have
on its consolidated financial statements.
In July 2010, the FASB issued ASU 2010-20, Disclosures about the Credit Quality of Financing
Receivables and the Allowance for Credit Losses. The guidance will significantly expand the
disclosures that companies must make about the credit quality of financing receivables and the
allowance for credit losses. The disclosures as of the end of the reporting period are effective
for the Companys interim and annual periods ending on or after December 15, 2010. The disclosures
about activity that occurs during a reporting period are effective for the Companys interim and
annual periods beginning on or after December 15, 2010. The objectives of the enhanced disclosures
are to provide financial statement users with additional information about the nature of credit
risks inherent in the Companys financing receivables, how credit risk is analyzed and assessed
when determining the allowance for credit losses, and the reasons for the change in the allowance
for credit losses. The adoption of this Update requires enhanced disclosures and is not expected to
have a significant effect on the Companys financial statements.
2. Auction Rate Securities
As of October 2, 2010 and January 2, 2010, TMNG held $5.9 million and $12.3 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 October 2, 2010, which is included in Noncurrent
investments on the Condensed Consolidated Balance Sheet (unaudited), consisted of the following:
Fair Value at | ||||||||||||
Cost | Unrealized | October 2, 2010 | ||||||||||
Issuer | Basis | Losses | (Noncurrent) | |||||||||
(In thousands) | ||||||||||||
Available-for-Sale Securities |
||||||||||||
Education Funding Capital Education Loan Backed Notes |
$ | 6,250 | $ | (348 | ) | $ | 5,902 |
7
The Companys auction rate securities portfolio as of January 2, 2010 consisted of the following:
Realized | ||||||||||||||||||||
Gains | Unrealized | Fair Value at January 2, 2010 | ||||||||||||||||||
Issuer | Cost Basis | (Losses) | Losses | Current | Noncurrent | |||||||||||||||
(In thousands) | ||||||||||||||||||||
Trading Securities |
||||||||||||||||||||
Kentucky Higher Education Loan Revenue Bonds |
$ | 1,900 | $ | (118 | ) | $ | 1,782 | |||||||||||||
Missouri Higher Education Loan Revenue Bonds |
1,800 | (112 | ) | 1,688 | ||||||||||||||||
Utah State Board of Regents Revenue Bonds |
1,400 | (87 | ) | 1,313 | ||||||||||||||||
Kentucky Higher Education Loan Revenue Bonds |
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 | |||||||||
The Company recognized no gains or losses on auction rate securities classified as trading
securities during the thirteen weeks ended October 2, 2010, and
recognized gains of $56,000 on
auction rate securities classified as trading securities during the thirty-nine weeks ended October
2, 2010. During the thirteen and thirty-nine weeks ended October 3, 2009, the Company recognized
gains of $17,000 and $122,000, respectively, on auction rate securities classified as trading
securities. These gains and losses on trading securities have been recognized in Other Income in
the Condensed Consolidated Statements of Operations and Comprehensive Loss (unaudited).
The auction rate securities held by the Company are 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 a contractual
maturity of approximately 32
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 rate securities, provided that the Company is paid the par value of the auction
rate securities upon any disposition. As provided for in the settlement, the Company entered into a
line of credit from UBS and its affiliates for up to 75% of the fair value of its auction rate
securities. The line of credit provided 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.
While the ARS Rights resulted in a put option which represents a separate freestanding instrument,
the put option did not meet the definition of a derivative instrument under FASB ASC 815,
Derivatives and Hedging. The Company 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, Investments-Debt and Equity Securities.
8
During the thirteen weeks ended July 3, 2010, all of the remaining auction rate securities held
with a UBS affiliate were sold by the Company at par value of $5.5 million. Proceeds from the
liquidation were applied first to the $3.7 million outstanding balance of the line of credit from
UBS. The Company received the remaining $1.8 million in proceeds. Upon the liquidation of the
Companys auction rate securities portfolio held with the UBS affiliate, the ARS Rights terminated
unexercised. The ARS Rights were measured at fair value under FASB ASC 825 until UBSs purchase of
the auction rate securities in connection with the ARS Rights.
Additionally, during the thirty-nine weeks October 2, 2010, the Company sold its Brazos Student
Finance Corporation Student Loan Asset Backed Notes with a par value of $1.0 million held as part
of its auction rate securities portfolio with Citigroup. These auction rate securities were
classified as available-for-sale. The Company received $950,000 in proceeds from the transaction.
As a result of this transaction, $50,000 in losses were reclassified from Accumulated Other
Comprehensive Loss in stockholders equity and recognized in Other Income (Expense) in the
Condensed Consolidated Statements of Operations and Comprehensive Loss (unaudited).
For auction rate securities classified as available-for-sale, the Company recognized unrealized
holding losses of $1,000 during the thirteen weeks ended October 2, 2010 and no unrealized holding
gains or losses during the thirty-nine weeks ended October 2, 2010. In addition, during the
thirteen and thirty-nine weeks ended October 2, 2010, the Company reclassified $50,000 in
previously unrealized losses from Accumulated Other Comprehensive Loss to realized losses in Other
Income (Expense) upon the disposition of the related available-for-sale securities as described
above. During the thirteen and thirty-nine weeks ended October 3, 2009, the Company recognized
unrealized holding gains of $31,000 and $720,000, respectively.
Unrealized holding gains and losses on securities classified as available-for-sale are included as
a separate component of stockholders equity, net of applicable taxes, and have been recognized in
Other Comprehensive Income (Loss) in the Condensed Consolidated Statements of Operations and
Comprehensive Loss (unaudited).
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 for the thirty-nine weeks ended October 2, 2010 and
October 3, 2009 (in thousands):
For the | For the | |||||||
thirty-nine | thirty-nine | |||||||
weeks ended | weeks ended | |||||||
October 2, | October 3, | |||||||
2010 | 2009 | |||||||
Fair value at beginning of period |
$ | 12,296 | $ | 13,404 | ||||
Total unrealized and realized gains
included in Other income in the
Consolidated Statements of Operations
and Comprehensive Loss (unaudited) |
6 | 122 | ||||||
Total unrealized gains included in
Other comprehensive income in the
Consolidated Statements of Operations
and Comprehensive Loss (unaudited) |
50 | 720 | ||||||
Sales |
(6,450 | ) | ||||||
Fair value at end of period |
$ | 5,902 | $ | 14,246 | ||||
The following is a reconciliation of the beginning and ending balances of the Companys
auction rate securities portfolio and ARS Rights for the thirteen weeks ended October 2, 2010 and
October 3, 2009 (in thousands):
For the | For the | |||||||
thirteen | thirteen | |||||||
weeks ended | weeks ended | |||||||
October 2, | October 3, | |||||||
2010 | 2009 | |||||||
Fair value at beginning of period |
$ | 6,853 | $ | 14,198 | ||||
Total unrealized and realized
(losses) gains included in Other
income in the Consolidated Statements
of Operations and Comprehensive Loss
(unaudited) |
(50 | ) | 17 | |||||
Total unrealized gains included in
Other comprehensive income (loss) in
the Consolidated Statements of
Operations and Comprehensive Loss
(unaudited) |
49 | 31 | ||||||
Sales |
(950 | ) | ||||||
Fair value at end of period |
$ | 5,902 | $ | 14,246 | ||||
9
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 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 Condensed
Consolidated Balance Sheet as of January 2, 2010. The remaining auction rate securities are
classified as noncurrent investments in the Condensed Consolidated Balance Sheet (unaudited) as of
October 2, 2010 and the Condensed Consolidated Balance Sheet as of January 2, 2010.
3. Line of Credit Agreements
As discussed above in Note 2, Auction Rate Securities, in November of 2008, the Company entered
into a settlement with UBS to provide liquidity for the Companys auction rate securities portfolio
then held with a UBS affiliate. During the thirty-nine weeks ended October 2, 2010, the Company
liquidated the auction rate securities with a par value of $5.5 million pledged as collateral for
the line of credit with UBS. Proceeds from the liquidation were applied first to the $3.7 million
outstanding balance of the line of credit as of the date of the transaction. The Company received
the remaining $1.8 million in proceeds. Upon liquidation of the relevant auction rate securities,
the line of credit with UBS was terminated. The Company classified the outstanding balance of $2.8
million as a current liability in the Condensed Consolidated Balance Sheet as of January 2, 2010.
An additional $880,000 was borrowed during the thirteen weeks ended April 3, 2010. These borrowings
were used to fund short-term liquidity needs. Because amounts borrowed under the line of credit
accrued interest at a floating rate and had a remaining maturity of less than one year, the fair
value of this financial instrument approximated its carrying value.
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 $3.125 million based upon the Companys current holdings of $6.25 million of auction
rate securities. The current interest rate on the line of credit is the federal funds rate plus
3.25%. 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.
4. Business Combinations
RVA Consulting, LLC
On August 3, 2007, the Company acquired all of the outstanding membership interests of RVA
Consulting, LLC (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. RVA is presented as a component of the North America 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 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 cash consideration earned but not yet paid |
344 | |||
Contingent stock consideration earned (based on June 30, 2008 measurement date) |
921 | |||
Contingent stock consideration earned (based on June 30, 2009 measurement date) |
104 | |||
Contingent stock consideration earned but not yet paid (based on June 30, 2010 measurement date) |
53 | |||
Total purchase price recognized at October 2, 2010 |
$ | 11,567 | ||
The measurement date for contingent cash and stock consideration was June 30 of each of the
three years subsequent to the transaction. During the thirty-nine weeks ended October 2, 2010, the
Company accrued $344,000 in contingent cash consideration earned but not yet paid for the
measurement period ended June 30, 2010. As of October 2, 2010, this liability is included in Other
accrued liabilities on the Condensed Consolidated Balance Sheet
(unaudited). This liability was paid during the thirteen weeks ending January 1, 2011. The final measurement date
was June 30, 2010. As a result, there is no remaining contingent consideration to be earned.
10
5. Goodwill and Other Identifiable Intangible Assets
The changes in the carrying amount of goodwill for the thirty-nine weeks ended October 2, 2010 are
as follows (in thousands):
North | ||||||||||||
America | EMEA | Total | ||||||||||
Balance as of January 2, 2010 |
$ | 3,550 | $ | 4,222 | $ | 7,772 | ||||||
2010 RVA goodwill from contingent consideration earned |
397 | 397 | ||||||||||
Changes in foreign currency exchange rates |
(90 | ) | ( 90 | ) | ||||||||
Balance as of October 2, 2010 |
$ | 3,947 | $ | 4,132 | $ | 8,079 | ||||||
Included in intangible assets, net are the following (in thousands):
October 2, 2010 | January 2, 2010 | |||||||||||||||
Accumulated | Accumulated | |||||||||||||||
Cost | Amortization | Cost | Amortization | |||||||||||||
Customer relationships |
$ | 5,300 | $ | (4,473 | ) | $ | 5,342 | $ | (3,511 | ) | ||||||
Acquired software |
2,375 | (2,226 | ) | 2,427 | (1,820 | ) | ||||||||||
Employment agreements |
1,984 | (1,984 | ) | 2,018 | (1,940 | ) | ||||||||||
$ | 9,659 | $ | (8,683 | ) | $ | 9,787 | $ | (7,271 | ) | |||||||
Intangible amortization expense for the thirteen weeks ended October 2, 2010 and October 3,
2009 was $485,000 and $659,000, respectively, including $145,000 and $154,000 reported in cost of
services for the thirteen weeks ended October 2, 2010 and October 3, 2009, respectively. Intangible
amortization expense for the thirty-nine weeks ended October 2, 2010 and October 3, 2009 was
$1,493,000 and $1,905,000, respectively, including $432,000 and $434,000 reported in cost of
services for the thirty-nine weeks ended October 2, 2010 and October 3, 2009, respectively. 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 | ||||||
Remainder of fiscal year 2010 |
$ | 480 | $ | 148 | ||||
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. Management determined that there were no events or
changes in circumstances during the thirteen or thirty-nine weeks ended October 2, 2010 which
indicated that goodwill needed to be tested for impairment during the period.
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. Management determined that there
were no events or changes in circumstances during the thirteen or thirty-nine weeks ended October
2, 2010 which indicated that long-lived assets and intangible assets needed to be reviewed for
impairment during the period.
6. Share-Based Compensation
The Company issues stock option awards and nonvested share awards under its share-based
compensation plans. The key provisions of the Companys share-based compensation plans are
described in Note 6 to the Companys consolidated financial statements included in the 2009 Form
10-K.
During the thirteen and thirty-nine weeks ended October 2, 2010 and October 3, 2009, the Company
recognized no income tax benefits related to share-based compensation arrangements.
1998 Equity Incentive Plan
On May 27, 2010, the stockholders of the Company approved amendments to the Companys Amended and
Restated 1998 Equity Incentive Plan (the 1998 Plan). The amendments to the 1998 Plan include the
following: (1) an increase of 614,338 in the number of shares of common stock available for
issuance under the 1998 Plan to correct a miscalculation in the 2009 amendments to the 1998 Plan;
and (2) a reallocation of 291,321 shares of common stock not subject to outstanding awards under
the Companys 2000 Supplemental Stock Plan (the the Supplemental Stock Plan) from the
Supplemental Stock Plan to the 1998 Plan.
11
Stock Options
A summary of the option activity under the 1998 Plan as of October 2, 2010 and changes during the
thirty-nine weeks then ended is presented below:
Weighted | ||||||||
Average | ||||||||
Exercise | ||||||||
Shares | Price | |||||||
Outstanding at January 2, 2010 |
763,547 | $ | 17.57 | |||||
Forfeited/cancelled |
(110,997 | ) | $ | 54.21 | ||||
Outstanding at October 2, 2010 |
652,550 | $ | 11.34 | |||||
Options vested and expected to vest at October 2, 2010 |
623,293 | $ | 11.38 | |||||
Options exercisable at October 2, 2010 |
574,027 | $ | 11.48 | |||||
Nonvested Shares
A summary of the status of nonvested stock issued under the 1998 Plan as of October 2, 2010 and
changes during the thirty-nine weeks then ended is presented below:
Weighted | ||||||||
Average | ||||||||
Grant Date | ||||||||
Shares | Fair Value | |||||||
Outstanding at January 2, 2010 |
1,250 | $ | 10.95 | |||||
Vested |
(875 | ) | $ | 10.82 | ||||
Outstanding at October 2, 2010 |
375 | $ | 11.25 | |||||
2000 Supplemental Stock Plan
A summary of the option activity under the Supplemental Stock Plan as of October 2, 2010 and
changes during the thirty-nine weeks then ended is presented below:
Weighted | ||||||||
Average | ||||||||
Exercise | ||||||||
Shares | Price | |||||||
Outstanding at January 2, 2010 |
274,612 | $ | 11.74 | |||||
Forfeited/cancelled |
(23,425 | ) | $ | 10.88 | ||||
Outstanding at October 2, 2010 |
251,187 | $ | 11.82 | |||||
Options vested and expected to vest at October 2, 2010 |
227,780 | $ | 11.99 | |||||
Options exercisable at October 2, 2010 |
187,962 | $ | 12.40 | |||||
The Supplemental Stock Plan expired May 23, 2010. The outstanding awards issued pursuant to
the Supplemental Stock Plan will remain subject to the terms of the Supplemental Stock Plan
following expiration of the plan.
12
7. Business Segments and Major Customers
In the first quarter of fiscal year 2010, the Company was internally reorganized to align
geographically with its client base. As a result of this internal realignment, the Companys
reportable segments have changed. Corresponding segment information for prior periods has been
restated to conform to the current reportable segment presentation.
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 Segment Reporting, the Company has concluded it has two reportable
segments: the North America segment and the EMEA segment. The North America segment is comprised of
three operating segments (North America Cable and Broadband, North America Telecom and Strategy),
which are aggregated into one reportable segment based on the similarity of their economic
characteristics. The EMEA segment is a single reportable, operating segment that encompasses the
Companys operational, technology and software consulting operations outside of North America. Both
reportable segments offer management consulting, custom developed software, and technical services.
Management evaluates segment performance based upon income (loss) from operations, excluding
share-based compensation (benefits), depreciation and intangibles amortization. There were no
inter-segment sales in either the thirteen or thirty-nine weeks ended October 2, 2010 or October 3,
2009. 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 all the segments. Summarized financial information concerning the
Companys reportable segments is shown in the following table (amounts in thousands):
Not | ||||||||||||||||
North | Allocated | |||||||||||||||
America | EMEA | to Segments | Total | |||||||||||||
As of and for the thirty-nine weeks ended October 2, 2010: |
||||||||||||||||
Revenues |
$ | 38,716 | $ | 12,098 | $ | 50,814 | ||||||||||
Income (loss) from operations |
10,030 | 2,286 | $ | (14,352 | ) | (2,036 | ) | |||||||||
Total assets |
$ | 10,373 | $ | 5,448 | $ | 26,561 | $ | 42,382 | ||||||||
For the thirteen weeks ended October 2, 2010: |
||||||||||||||||
Revenues |
$ | 12,274 | $ | 4,110 | $ | 16,384 | ||||||||||
Income (loss) from operations |
2,909 | 820 | $ | (4,414 | ) | (685 | ) | |||||||||
As of and for the thirty-nine weeks ended October 3, 2009: |
||||||||||||||||
Revenues |
$ | 34,369 | $ | 13,465 | $ | 47,834 | ||||||||||
Income (loss) from operations |
8,631 | 3,036 | $ | (14,957 | ) | (3,290 | ) | |||||||||
Total assets |
$ | 8,294 | $ | 6,077 | $ | 36,413 | $ | 50,784 | ||||||||
For the thirteen weeks ended October 3, 2009: |
||||||||||||||||
Revenues |
$ | 12,323 | $ | 4,489 | $ | 16,812 | ||||||||||
Income (loss) from operations |
3,270 | 897 | $ | (4,544 | ) | (377 | ) | |||||||||
As of the fiscal year ended January 2, 2010 |
||||||||||||||||
Total assets |
$ | 9,704 | $ | 6,461 | $ | 32,086 | $ | 48,251 |
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):
For the Thirty-nine Weeks | ||||||||||||||||
For the Thirteen Weeks Ended | Ended | |||||||||||||||
October 2, | October 3, | October 2, | October 3, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
United States |
$ | 11,943 | $ | 12,214 | $ | 37,657 | $ | 33,728 | ||||||||
International: |
||||||||||||||||
United Kingdom |
4,296 | 4,182 | 12,465 | 12,538 | ||||||||||||
Other |
145 | 416 | 692 | 1,568 | ||||||||||||
Total |
$ | 16,384 | $ | 16,812 | $ | 50,814 | $ | 47,834 | ||||||||
13
Major customers in terms of significance to TMNGs revenues (i.e. in excess of 10% of
revenues) and accounts receivable were as follows (amounts in thousands):
Revenues | ||||||||||||||||
For the thirteen weeks ended | For the thirteen weeks ended | |||||||||||||||
October 2, 2010 | October 3, 2009 | |||||||||||||||
North | North | |||||||||||||||
America | EMEA | America | EMEA | |||||||||||||
Customer A |
$ | 1,829 | $ | 2,113 | ||||||||||||
Customer B |
$ | 3,240 | $ | 5,955 | ||||||||||||
Customer C |
$ | 2,578 | $ | 2,314 | ||||||||||||
Customer D |
$ | 1,543 | $ | 1,755 | ||||||||||||
Customer E |
$ | 2,676 | $ | 430 | ||||||||||||
Revenues | ||||||||||||||||
For the thirty-nine weeks | For the thirty-nine weeks | |||||||||||||||
ended October 2, 2010 | ended October 3, 2009 | |||||||||||||||
North America | EMEA | North America | EMEA | |||||||||||||
Customer A |
$ | 5,388 | $ | 5,592 | ||||||||||||
Customer B |
$ | 13,350 | $ | 16,223 | ||||||||||||
Customer C |
$ | 7,653 | $ | 6,497 | ||||||||||||
Customer D |
$ | 5,027 | $ | 4,919 | ||||||||||||
Customer E |
$ | 4,755 | $ | 998 | ||||||||||||
Accounts Receivable | ||||||||
As of | As of | |||||||
October 2, | October 3, | |||||||
2010 | 2009 | |||||||
Customer A |
$ | 1,583 | $ | 3,708 | ||||
Customer B |
$ | 2,388 | $ | 2,494 | ||||
Customer C |
$ | 2,019 | $ | 1,290 | ||||
Customer D |
$ | 798 | $ | 1,938 | ||||
Customer E |
$ | 2,418 | $ | 412 |
Revenues from the Companys ten most significant customers accounted for approximately 86% and 83%
of revenues during the thirteen and thirty-nine weeks ended October 2, 2010, respectively. Revenues
from the Companys ten most significant customers accounted for approximately 87% of revenues
during the thirteen and thirty-nine weeks ended October 3, 2009.
8. Income Taxes
In the thirteen and thirty-nine weeks ended October 2, 2010, the Company recorded income tax
provisions of $38,000 and $87,000, respectively. In the thirteen and thirty-nine weeks ended
October 3, 2009, the Company recorded income tax provisions of $228,000 and $68,000, respectively.
The tax provisions for the thirteen and thirty-nine weeks ended October 2, 2010 are 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 tax
provision for the thirteen and thirty-nine weeks ended October 3, 2009 is primarily related to
recording a full valuation allowance against deferred tax assets related to the Companys United
Kingdom operations and interest recognized on reserves for uncertain tax positions. During the
thirteen and thirty-nine weeks ended October 2, 2010, the Company recorded full valuation
allowances against income tax benefits related to domestic and international operations in
accordance with the provisions of FASB ASC 740 Income Taxes, which requires an estimation of the
recoverability of the recorded income tax asset balances. As of October 2, 2010, the Company has
recorded $33.6 million of valuation allowances attributable to its net deferred tax assets.
The Company analyzes its uncertain tax positions pursuant to the provisions of FASB ASC 740 Income
Taxes. The Company recognizes interest and penalties related to unrecognized tax benefits as a
component of the income tax provision. There was no material activity related to the liability for
uncertain tax positions during the thirteen and thirty-nine weeks ended October 2, 2010 and October
3, 2009. As of October 2, 2010, the Company has $1.0 million accrued for uncertain income tax
positions, including interest and penalties. As of October 2, 2010, the Company believes that it is
reasonably possible that the liability for uncertain tax positions will decrease by $0.8 million
within the next 12 months due to the expiration of the statute of limitations of tax filings in
foreign jurisdictions. The statute of limitations related to uncertain tax positions of $0.4
million expired on October 31, 2010.
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 October 2, 2010, the Company has no income tax examinations in process.
14
9. Loan to Officer
As of October 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 October 2, 2010 and January 2, 2010 totaled $300,000 and
are due in September 2011. This amount is included in Prepaids and Other Current Assets in the
current assets section of the Condensed Consolidated Balance Sheet (unaudited) as of October 2,
2010. This amount was included in other assets in the noncurrent assets section of the Condensed
Consolidated Balance Sheet as of January 2, 2010. 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 October 2, 2010.
10. 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.
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Cautionary Statement Regarding Forward-Looking Statements. In addition to historical information,
this quarterly report contains 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, 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 slowing of client decisions on
proposals and project opportunities along with scope reduction of existing projects, overall
economic and business conditions, including the current economic slowdown and the difficult
conditions in the credit markets, 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 discussed in the sections entitled Cautionary
Statement Regarding Forward-Looking Information and Managements Discussion and Analysis of
Financial Condition and Results of Operations in our annual report on Form 10-K for the fiscal
year ended January 2, 2010. Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect managements opinions only as of the date of this report.
We undertake no obligation to revise, or publicly release the results of any revision to, these
forward-looking statements. Readers should carefully review the cautionary statements contained in
our annual report and in other documents that we file from time to time with the Securities and
Exchange Commission.
The following should be read in connection with Managements Discussion and Analysis of Financial
Condition and Results of Operations as presented in our annual report on Form 10-K for the fiscal
year ended January 2, 2010.
OVERVIEW
TMNG is among the leading providers of professional services to the converging communications,
technology, 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 global investments in targeting the cable industry have re-positioned us to better serve
consolidating telecommunications carriers and the converging global technology, 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, technology, media and entertainment companies. Our efforts are helping
us build what we believe is a more sustainable revenue model over the long-term, which will enable
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, technology, 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. Although the first three quarters of 2010 have demonstrated
select positive economic indications, the global economic downturn of 2008 and 2009 has resulted in
the continuance of elevated unemployment levels and reductions in capital and operating
expenditures for some of our significant clients in the communications, technology, media and
entertainment industries. We are also experiencing greater pricing pressure and an increased need
for enhanced return on investment for projects or added sharing of risk and reward.
15
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 to address a need or implement change. For the thirty-nine weeks ended October 2, 2010,
revenues increased 6.2% to $50.8 million from $47.8 million for the thirty-nine weeks ended October
3, 2009 driven primarily by increased project demand for our strategic consultative offerings. Our
international revenues were approximately 26% of total revenue during the thirty-nine weeks ended
October 2, 2010, as compared to 29% for the thirty-nine weeks ended October 3, 2009. Our revenues
are denominated in multiple currencies and are impacted by currency rate fluctuations.
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.
Our gross margin was 38.3% for the thirty-nine weeks ended October 2, 2010 compared with 41.1% for
the thirty-nine weeks ended October 3, 2009. The decrease in gross margin in the thirty-nine weeks
ended October 2, 2010 as compared to the same period of 2009 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 competitive pricing decisions, including volume discount programs. In addition,
during the thirty-nine weeks ended October 2, 2010, we have incurred approximately $0.3 million in
the development and launch of the initial SmartXchange handset recapture project.
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. Along with an
increase in revenues, selling, general and administrative expenses were reduced by $1.1 million to
$20.4 million for the thirty-nine weeks ended October 2, 2010 from $21.5 million for the
thirty-nine weeks ended October 3, 2009. As a result, our selling, general and administrative
expenses decreased as a percentage of revenues to 40.2% in the thirty-nine weeks ended October 2,
2010 from 44.9% in the thirty-nine weeks ended October 3, 2009. The reduction in selling, general
and administrative expenses was driven primarily by reductions in personnel related costs. During
the thirty-nine weeks ended October 2, 2010, selling, general and administrative expenses also
included $0.7 million in transition and severance for personnel associated with the reorganization
undertaken for 2010. In addition, selling, general and administrative expenses during the
thirty-nine weeks ended October 2, 2010 included a reduction of $0.4 million in foreign currency
losses as compared to the 2009 period. We will continue to evaluate selling, general and
administrative expenses to maintain an appropriate cost structure relative to revenue levels.
Intangible asset amortization included in operating expenses decreased to $1.1 million in the
thirty-nine weeks ended October 2, 2010 from $1.5 million in the thirty-nine weeks ended October 3,
2009. The decrease in amortization expense was due to the completion of amortization of some
intangibles recorded in connection with our acquisitions of Cartesian Ltd and RVA Consulting LLC.
We recorded net losses of $0.7 million and $2.0 million for the thirteen and thirty-nine weeks
ended October 2, 2010, respectively, compared to net losses of $0.5 million and $3.1 million for
the thirteen and thirty-nine weeks ended October 3, 2009. The decrease in net loss for the
thirty-nine weeks ended October 2, 2010 as compared to the thirty-nine weeks ended October 3, 2009
is primarily attributable to an increase in revenues and gross profit, effective cost management
initiatives and a decrease in intangible amortization. We made significant strides in recent years
to reduce our total operating cost structure with emphasis on selling, general and administrative
expenses.
Despite the increase in revenues for the thirty-nine weeks ended October 2, 2010 as compared to the
thirty-nine weeks ended October 3, 2009, the rate of change in the communications industry, driving
convergence of media and telecommunications, consolidation of smaller providers and expanded
deployment of wireless capabilities have added both opportunity and uncertainty for our clients.
The general result is overall reduced client spending on many 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.
16
From a cash flow perspective, cash flows used in operating activities were $0.5 million during the
thirty-nine weeks ended October 2, 2010 and cash flows provided by operating activities were $0.1
million during the thirty-nine weeks ended October 3, 2009. During the thirty-nine weeks ended
October 2, 2010, cash used in operating activities included a negative impact of $0.9 million due
to changes in working capital, partially offset by $0.4 million of positive cash flows from the
results of operations (after adding back non-cash items to our net loss).
At October 2, 2010, we had working capital of approximately $16.9 million. In addition, our
noncurrent investments of $5.9 million ($6.3 million par value) consist of auction rate securities
held with Citigroup. 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 include 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, during the thirty-nine weeks ended October 2, 2010, our entire remaining auction rate
securities portfolio held by a UBS affiliate were sold by us at par value of $5.5 million. Upon the
sale of the securities, $3.7 million was applied to the line of credit from UBS and its affiliates.
The line of credit was terminated, the ARS Rights expired unexercised and we received the remaining
sales proceeds of $1.8 million. As a result, working capital as of October 2, 2010 includes no
short-term investments or borrowings.
Additionally, during the thirty-nine weeks October 2, 2010, we sold our Brazos Student Finance
Corporation Student Loan Asset Backed Notes with a par value of $1.0 million held as part of our
auction rate securities portfolio with Citigroup. We received $950,000 in proceeds from the
transaction.
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 $3.125 million
based upon the Companys current holdings of $6.25 million of auction rate securities. We have made
no borrowings under the line of credit with Citigroup.
CRITICAL ACCOUNTING POLICIES
While the selection and application of any accounting policy may involve some level of subjective
judgments and estimates, we believe the following accounting policies are the most critical to our
condensed consolidated financial statements, potentially involve the most subjective judgments in
their selection and application, and are the most susceptible to uncertainties and changing
conditions:
| 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 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 Condensed Consolidated Statements of
Operations and Comprehensive Loss (unaudited), 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 Condensed Consolidated Statements of Operations and Comprehensive Loss
(unaudited), net of applicable taxes.
As of October 2, 2010, $5.9 million in auction rate securities ($6.3 million par value) is
reflected as non-current assets on our Condensed Consolidated Balance Sheet (unaudited). As of
January 2, 2010, $6.9 million in auction rate securities ($7.3 million par value) was reflected as
non-current assets on our Condensed Consolidated Balance Sheet (unaudited). All of these auction
rate securities are classified as available-for-sale investments. For auction rate securities
classified as available-for-sale, we recognized unrealized holding gains of $49,000 and $50,000,
respectively during the thirteen and thirty-nine weeks ended October 2, 2010 and recognized
unrealized holding gains of $31,000 and $720,000, respectively during the thirteen and thirty-nine
weeks ended October 3, 2009.
As of January 2, 2010, we had $5.4 million ($5.5 million par value) in auction rate securities
reflected as current assets. The auction rate securities classified as short-term investments were
held with a UBS affiliate. During 2008, we reached a settlement agreement related to our auction
rate securities held in accounts with a UBS affiliate. Pursuant to the terms of the settlement with
UBS, UBS held discretionary rights
to sell or otherwise dispose of our auction rate securities (ARS Rights), provided that we were
entitled to the par value of the auction rate securities upon any disposition. 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. For auction rate
securities classified as trading
17
securities, we recognized no gains or losses on auction rate securities during the
thirteen weeks ended October 2, 2010 and recognized realized holding gains of $342,000 offset by
realized losses on the Companys ARS Rights of $286,000 during the thirty-nine weeks ended October
2, 2010. For auction rate securities classified as trading securities, we recognized realized
holding gains of $208,000 and $606,000, respectively, offset by realized losses on the Companys
ARS Rights of $191,000 and $484,000, respectively, during the thirteen and thirty-nine weeks ended
October 3, 2009. The ARS Rights were measured at fair value under FASB ASC 825. During the
thirty-nine weeks ended October 2, 2010, all of the auction rate securities classified as
trading were sold at par value of $5.5 million.
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 October 2, 2010, we had $8.1 million in
goodwill and $1.0 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 concluded that a market approach will not adequately reflect our specific
reporting unit operations. While the market approach 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:
| 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. | ||
| 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. |
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.
Revenue Recognition We recognize revenues from time and materials consulting contracts in the
period in which our services are performed. We recognized $7.5 million and $6.4 million in revenues
from time and materials contracts during the thirteen weeks ended October 2, 2010 and October 3,
2009, respectively. We recognized $20.2 million and $19.4 million in revenues from time and
materials contracts during the thirty-nine weeks ended October 2, 2010 and October 3, 2009,
respectively. In addition to time and materials contracts, our other types of contracts include
fixed fee contracts and contingent fee contracts. During the thirteen weeks ended October 2, 2010
and October 3, 2009, we recognized $8.9 million and $10.4 million in revenues on these other types
of contracts. We recognized $30.6 million and $28.4 million in revenues from these other types of
contracts during the thirty-nine weeks ended October 2, 2010 and October 3, 2009, respectively. 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.
18
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 method prescribed by 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 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
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 the thirteen and
thirty-nine weeks ended October 2, 2010 or October 3, 2009.
Share-based Compensation Expense We grant stock options and non-vested 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. 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.
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 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 October 2, 2010 is 39%.
Accounting for 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 October 2,
2010, cumulative valuation allowances in the amount of $33.6 million were recorded in connection
with the net deferred income tax assets. As required by FASB ASC 740, we have
19
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 October 2, 2010, we have recorded a liability of
approximately $1.0 million for unrecognized tax benefits. The statute of limitations related to
uncertain tax positions of $0.4 million expired on October 31, 2010.
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. Within our foreign operations, mostly domiciled within the United Kingdom, we have
generated deferred tax assets primarily from the charge to compensation expense for stock options
and operating losses. For us to realize the income tax benefit of these assets in either
jurisdiction, 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 international operating losses for financial
reporting in future years in either our domestic or international operations, 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 carry-forwards 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.
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 the thirteen and thirty-nine weeks ended October 2, 2010, software development costs of
$116,000 and $439,000, respectively, were expensed as incurred. During the thirteen and thirty-nine
weeks ended October 3, 2009, software development costs of $144,000 and $390,000, respectively,
were expensed as incurred. No software development costs were capitalized during the thirteen and
thirty-nine weeks ended October 2, 2010 and October 3, 2009.
RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED OCTOBER 2, 2010 COMPARED TO THIRTEEN WEEKS ENDED OCTOBER 3, 2009
REVENUES
Revenues decreased 2.5% to $16.4 million for the thirteen weeks ended October 2, 2010 from $16.8
million for the thirteen weeks ended October 3, 2009. The decrease in revenues is primarily due to
lower revenues in our EMEA segment due to a decline in demand for technology and software services
and a negative impact of $0.2 million as a result of exchange rate movements.
North America Segment North America segment revenues were $12.3 million for the thirteen weeks
ended October 2, 2010 and October 3, 2009. During the thirteen weeks ended October 2, 2010, the
North America segment provided services on 91 customer projects, compared to 75 projects performed
in the thirteen weeks ended October 3, 2009. Average revenue per project was $135,000 in the
thirteen weeks ended October 2, 2010, compared to $176,000 in the thirteen weeks ended October 3,
2009. Revenues recognized in connection with fixed price engagements totaled $6.2 million and $8.2
million, representing 50.5% and 61.6% of total revenues of the segment, for the thirteen weeks
ended October 2, 2010 and October 3, 2009, respectively.
EMEA Segment EMEA segment revenues decreased by 8.4% to $4.1 million for the thirteen weeks
ended October 2, 2010 from $4.5 million for the thirteen weeks ended October 3, 2009. All revenues
were generated internationally. During the thirteen weeks ended October 2, 2010 and October 3,
2009, this segment provided services on 62 and 95 customer projects, respectively. Average revenue
per project was approximately $55,000 and $40,000 for the thirteen weeks ended October 2, 2010 and
October 3, 2009, respectively. The decrease in the number of
customer projects and increase in revenue per project for the thirteen weeks ended
October 2, 2010 as compared to the 2009 period is primarily due to the commencement of several
large projects during the 2010 period as a result of our clients
increased concentration on key business issues. Revenues from post-contract software related support
services were approximately $673,000 and $632,000 for the thirteen weeks ended October 2, 2010 and
October 3, 2009, respectively. There were no revenues from software
20
licensing during the thirteen weeks ended October 2, 2010. Revenues from software licensing during
the thirteen weeks ended October 3, 2009 were $3,000.
COSTS OF SERVICES
Costs of services increased 2.3% to $10.2 million for the thirteen weeks ended October 2, 2010 from
$9.9 million for the thirteen weeks ended October 3, 2009. Our gross margin was 37.9% for the
thirteen weeks ended October 2, 2010 compared to 40.8% for the thirteen weeks ended October 3,
2009. Cost of services during the thirteen weeks ended October 2, 2010 were $7.6 million and $2.6
million, respectively, in our North America and EMEA segments. Cost of services during the thirteen
weeks ended October 3, 2009 were $6.9 million and $3.0 million, respectively, in our North America
and EMEA segments. Our North America segment gross margin was 38.1% for the thirteen weeks ended
October 2, 2010 compared to 43.5% for the thirteen weeks ended October 3, 2009. The decrease in
gross margin in the third quarter of 2010 as compared to the same period of 2009 in our North
America segment is primarily due to the completion of a large management consulting project in
2009, partially offset by an increase in strategy engagements resulting in higher utilization of
our fixed employee consulting base. Our EMEA segment gross margin was 34.7% for the thirteen weeks
ended October 2, 2010, compared to 33.6% for the thirteen weeks ended October 3, 2009. The increase
in gross margin in the EMEA segment is primarily related to reductions in delivery costs partially
offset by lower revenue volumes driven by a reduction in demand for software services. Costs of
services in the EMEA segment included amortization of intangible assets of $145,000 and $154,000,
respectively, for the thirteen weeks ended October 2, 2010 and October 3, 2009, related to acquired
software. The reduction in intangible amortization is due to exchange rate movements.
OPERATING EXPENSES
Operating expenses were $6.9 million and $7.2 million for the thirteen weeks ended October 2, 2010
and October 3, 2009, respectively. Operating expenses for both periods included selling, general
and administrative expenses (inclusive of share-based compensation) and intangible asset
amortization.
Selling, general and administrative expenses decreased to $6.6 million for the thirteen weeks ended
October 2, 2010, compared to $6.7 million for the thirteen weeks ended October 3, 2009. As a
percentage of revenues, our selling, general and administrative expenses were 40.0% for the
thirteen weeks ended October 2, 2010, compared to 40.1% for the thirteen weeks ended October 3,
2009.
Intangible asset amortization decreased by $166,000 to $340,000 for the thirteen weeks ended
October 2, 2010, compared to $506,000 for the thirteen weeks ended October 3, 2009. The decrease in
amortization expense was primarily due to the completion of amortization of various intangibles
recorded in connection with acquisitions.
OTHER INCOME AND EXPENSES
Interest income was $32,000 and $50,000 for the thirteen weeks ended October 2, 2010 and October 3,
2009, respectively, and represented interest earned on invested balances. Interest income decreased
for the thirteen weeks ended October 2, 2010 as compared to the thirteen weeks ended October 3,
2009, due primarily to reductions in interest rates and reductions in invested balances. We
primarily invest in money market funds and have holdings in auction rate securities. For the
thirteen weeks ended October 2, 2010, other income includes $50,000 in realized holding losses for
auction rate securities classified as available for sale that were sold during the period. For the
thirteen weeks ended October 3, 2009, other income includes $208,000 in realized holding gains for
auction rate securities classified as trading securities, offset by realized losses on our ARS
Rights of $191,000. In addition, other income for the thirteen weeks ended October 3, 2009 includes
$28,000 related to the settlement of a foreign withholding tax dispute.
INCOME TAXES
During the thirteen weeks ended October 2, 2010 and October 3, 2009, respectively, we recorded
income tax provisions of $38,000 and $228,000. The tax provision for the thirteen weeks ended
October 2, 2010 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 tax provision for the thirteen weeks ended October 3, 2009 is
primarily related to recording a full valuation allowance against deferred tax assets related to
our United Kingdom operations. For the thirteen weeks ended October 2, 2010 and October 3, 2009, we
recorded no income tax benefit related to our domestic and international pre-tax losses in
accordance with the provisions of FASB ASC 740, Income Taxes, which requires an estimation of our
ability to use recorded deferred income tax assets. We currently have recorded a valuation
allowance against all domestic and international deferred income tax assets generated due to
uncertainty about their ultimate realization due to our history of operating losses. If we continue
to report net operating losses for financial reporting in either our domestic or international
operations, 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 $0.7 million for the thirteen weeks ended October 2, 2010 compared to a net
loss of $0.5 million for the thirteen weeks ended October 3, 2009. The increase in net loss is due
to higher cost of services on slightly lower sales.
21
THIRTY-NINE WEEKS ENDED OCTOBER 2, 2010 COMPARED TO THIRTY-NINE WEEKS ENDED OCTOBER 3, 2009
REVENUES
Revenues increased 6.2% to $50.8 million for the thirty-nine weeks ended October 2, 2010 from $47.8
million for the thirty-nine weeks ended October 3, 2009. The increase in revenues is primarily due
to an increase in demand for strategic consulting within our North America segment, partially
offset by a decrease in revenues in our EMEA segment.
North America Segment North America segment revenues increased 12.7% to $38.7 million for the
thirty-nine weeks ended October 2, 2010 from $34.4 million for the same period of 2009. During the
thirty-nine weeks ended October 2, 2010, the North America segment provided services on 144
customer projects, compared to 125 projects performed in the thirty-nine weeks ended October 3,
2009. Average revenue per project was $269,000 in the thirty-nine weeks ended October 2, 2010,
compared to $275,000 in the thirty-nine weeks ended October 3, 2009. Revenues recognized in
connection with fixed price engagements totaled $23.1 million and $22.0 million, representing 59.6%
and 64.0% of total revenues of the segment, for the thirty-nine weeks ended October 2, 2010 and
October 3, 2009, respectively. This increase in revenues from fixed price engagements is primarily
due to an increase in strategic consulting.
EMEA Segment EMEA segment revenues decreased by 10.2% to $12.1 million for the thirty-nine weeks
ended October 2, 2010 from $13.5 million for the thirty-nine weeks ended October 3, 2009. All
revenues were generated internationally. The decrease in revenue for the thirty-nine weeks ended
October 2, 2010 as compared to the 2009 period is primarily due to a decline in demand for
technology and software services. During the thirty-nine weeks ended October 2, 2010 and October 3,
2009, this segment provided services on 134 and 179 customer projects, respectively. Average
revenue per project was approximately $76,000 and $64,000, respectively, for the thirty-nine weeks
ended October 2, 2010 and October 3, 2009. The decrease in the number of
customer projects and increase in revenue per project for the thirty-nine
weeks ended October 2, 2010 as compared to the 2009 period is primarily due to the commencement of
several large projects during the 2010 period as a result of our clients
increased concentration on key business issues. Revenues from post-contract software related support
services were approximately $1,950,000 and $1,702,000 for the thirty-nine weeks ended October 2,
2010 and October 3, 2009, respectively. There were no revenues from software licensing during the
thirty-nine weeks ended October 2, 2010. Revenues from software licensing during the thirty-nine
weeks ended October 3, 2009 were $431,000.
COSTS OF SERVICES
Costs of services increased 11.4% to $31.4 million for the thirty-nine weeks ended October 2, 2010
compared to $28.2 million for the thirty-nine weeks ended October 3, 2009. As a percentage of
revenues, our gross margin was 38.3% for the thirty-nine weeks ended October 2, 2010, compared to
41.1% for the thirty-nine weeks ended October 3, 2009. Cost of services during the thirty-nine
weeks ended October 2, 2010 were $23.3 million and $8.1 million, respectively, in our North America
and EMEA segments. Cost of services during the thirty-nine weeks ended October 3, 2009 were $19.6
million and $8.6 million, respectively, in our North America and EMEA segments. Our North America
segment gross margin was 39.7% for the thirty-nine weeks ended October 2, 2010 compared to 43.1%
for the thirty-nine weeks ended October 3, 2009. The decrease in gross margin in the first half of
2010 as compared to the same period of 2009 in our North America segment is primarily due to longer
term and lower margin management consulting projects and the completion of a large management
consulting project in 2009, partially offset by an increase in strategy engagements resulting in
higher utilization of our fixed employee consulting base. Our EMEA segment gross margin was 32.8%
for the thirty-nine weeks ended October 2, 2010, compared to 36.0% for the thirty-nine weeks ended
October 3, 2009. Margin reductions in the EMEA segment are primarily related to lower revenue
volumes driven by a reduction in demand for technology and software services. Costs of services in
the EMEA segment included amortization of intangible assets of $432,000 and $434,000, respectively,
for the thirty-nine weeks ended October 2, 2010 and October 3, 2009, related to acquired software.
The reduction in intangible amortization is due to exchange rate movements.
OPERATING EXPENSES
Operating expenses decreased by 6.4% to $21.5 million for the thirty-nine weeks ended October 2,
2010, from $23.0 million for the thirty-nine weeks ended October 3, 2009. Operating expenses for
both periods included selling, general and administrative expenses (inclusive of share-based
compensation) and intangible asset amortization.
Selling, general and administrative expenses decreased to $20.4 million for the thirty-nine weeks
ended October 2, 2010, compared to $21.5 million for the thirty-nine weeks ended October 3, 2009.
As a percentage of revenues, our selling, general and administrative expense was 40.2% for the
thirty-nine weeks ended October 2, 2010, compared to 44.9% for the thirty-nine weeks ended October
3, 2009. The decrease in selling, general and administrative expenses was primarily due to
reductions in personnel related costs of $1.1 million and professional fees of $0.1 million,
partially offset by an increase of $0.5 million in severance costs. The severance costs in the
2010 period relate to transition and severance for personnel associated with the reorganization
undertaken for 2010. In addition, selling, general and administrative expenses during the
thirty-nine weeks ended October 2, 2010 included a reduction of $0.4 million in foreign currency
losses as compared to the 2009 period. We continue to evaluate alignment of costs to revenues for
each operating segment.
Intangible asset amortization decreased from $1,471,000 for the thirty-nine weeks ended October 3,
2009 to $1,061,000 for the thirty-nine weeks ended October 2, 2010. The decrease in amortization
expense was primarily due to the completion of amortization of various intangibles recorded in
connection with acquisitions.
22
OTHER INCOME AND EXPENSES
Interest income was $140,000 and $188,000 for the thirty-nine weeks ended October 2, 2010 and
October 3, 2009, respectively, and represented interest earned on invested balances. Interest
income decreased for the thirty-nine weeks ended October 2, 2010 as compared to the thirty-nine
weeks ended October 3, 2009 due primarily to reductions in invested balances and reductions in
interest rates. We primarily invest in money market funds and have holdings in auction rate
securities. For the thirty-nine weeks ended October 2, 2010, other income includes $342,000 in
realized holding gains for auction rate securities classified as trading securities, offset by
realized losses on our ARS Rights of $286,000. In addition, Other Income for the thirty-nine weeks
ended October 2, 2010 includes $50,000 in realized holding losses for auction rate securities
classified as available for sale that were sold during the period. For the thirty-nine weeks ended
October 3, 2009, other income includes $606,000 in realized holding gains for auction rate
securities classified as trading securities, offset by realized losses on our ARS Rights of
$484,000. In addition, other income for the thirty-nine weeks ended October 3, 2009 includes
$28,000 related to the settlement of a foreign withholding tax dispute.
INCOME TAXES
In the thirty-nine weeks ended October 2, 2010 and October 3, 2009, we recorded income tax
provisions of $87,000 and $68,000, respectively. The tax provision for the thirty-nine weeks ended
October 2, 2010 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 tax provision for the thirty-nine weeks ended October 3, 2009 is
primarily related to recording a full valuation allowance against deferred tax assets related to
our United Kingdom operations and interest recognized on reserves for uncertain tax positions. For
the thirty-nine weeks ended October 2, 2010 and October 3, 2009, we recorded no income tax benefit
related to our domestic and international pre-tax losses in accordance with the provisions of FASB
ASC 740, Income Taxes, which requires an estimation of our ability to use recorded deferred
income tax assets. We currently have recorded a valuation allowance against all domestic and
international deferred income tax assets generated due to uncertainty about their ultimate
realization due to our history of operating losses. If we continue to report net operating losses
for financial reporting in either our domestic or international operations, 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 net loss of $2.0 million for the thirty-nine weeks ended October 2, 2010 compared to a net
loss of $3.1 million for the thirty-nine weeks ended October 3, 2009. This decrease in net loss is
primarily attributable to effective cost management initiatives that resulted in reduced operating
expenses and a decrease in intangible amortization, partially offset by a reduction in gross
profit.
STATEMENT REGARDING NON-GAAP FINANCIAL MEASUREMENT
In addition to net loss and net loss per share on a GAAP basis, our 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 (Loss). 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 TMNGs comparative operating performance for the periods presented. TMNGs
non-GAAP measure may differ from similar measures by other companies, even if similar terms are
used to identify such measures. Although TMNGs management believes the non-GAAP financial measure
is useful in evaluating the performance of its business, TMNG 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
TMNGs results. All per share amounts have been adjusted to reflect the 1-for-5 reverse stock split
of the Companys common stock effective February 7, 2010.
23
THE MANAGEMENT NETWORK GROUP, INC.
RECONCILIATION OF GAAP NET LOSS TO NON-GAAP ADJUSTED NET INCOME (LOSS)
(unaudited)
(in thousands, except per share data)
RECONCILIATION OF GAAP NET LOSS TO NON-GAAP ADJUSTED NET INCOME (LOSS)
(unaudited)
(in thousands, except per share data)
Thirteen Weeks Ended | Thirty-nine Weeks Ended | |||||||||||||||
October 2, | October 3, | October 2, | October 3, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Reconciliation of GAAP net loss to non-GAAP adjusted
net income (loss): |
||||||||||||||||
GAAP net loss |
$ | (723 | ) | $ | (527 | ) | $ | (1,973 | ) | $ | (3,061 | ) | ||||
Realized loss (gain) on auction rate securities |
50 | (17 | ) | (6 | ) | (122 | ) | |||||||||
Depreciation and amortization |
683 | 873 | 2,076 | 2,529 | ||||||||||||
Non-cash share based compensation expense |
61 | 173 | 258 | 724 | ||||||||||||
Tax effect of applicable non-GAAP adjustments |
30 | 20 | 98 | (200 | ) | |||||||||||
Adjustments to GAAP net loss |
824 | 1,049 | 2,426 | 2,931 | ||||||||||||
Non-GAAP adjusted net income (loss) |
$ | 101 | $ | 522 | $ | 453 | $ | (130 | ) | |||||||
Reconciliation of GAAP net loss per diluted common share to
non-GAAP adjusted net income (loss) per diluted common
share: |
||||||||||||||||
GAAP net loss per diluted common share |
$ | (0.10 | ) | $ | (0.08 | ) | $ | (0.28 | ) | $ | (0.44 | ) | ||||
Realized loss (gain) on auction rate securities |
0.00 | (0.00 | ) | (0.00 | ) | (0.02 | ) | |||||||||
Depreciation and amortization |
0.10 | 0.12 | 0.29 | 0.36 | ||||||||||||
Non-cash share based compensation expense |
0.01 | 0.03 | 0.04 | 0.11 | ||||||||||||
Tax effect of applicable non-GAAP adjustments |
0.00 | 0.00 | 0.01 | (0.03 | ) | |||||||||||
Adjustments to GAAP net loss per diluted common share |
0.11 | 0.15 | 0.34 | 0.42 | ||||||||||||
Non-GAAP adjusted net income (loss) per diluted common share |
$ | 0.01 | $ | 0.07 | $ | 0.06 | $ | (0.02 | ) | |||||||
Weighted average shares used in calculation of diluted net
income (loss) per common share |
7,062 | 7,015 | 7,043 | 6,974 | ||||||||||||
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $0.5 million the thirty-nine weeks ended October 2, 2010.
Net cash provided by operating activities was $0.1 million for the thirty-nine weeks ended October
3, 2009. During the thirty-nine weeks ended October 2, 2010, cash used in operating activities
included a negative impact of $0.9 million due to changes in working capital, partially offset by
$0.4 million of positive cash flows from the results of operations (after adding back non-cash
items to our net loss). For the thirty-nine weeks ended October 3, 2009, cash provided by operating
activities was primarily due to the results of operations (after adding back non-cash items to our
net loss).
Net cash provided by investing activities was $5.9 million the thirty-nine weeks ended October 2,
2010. Net cash used in investing activities was $2.4 million for the thirty-nine weeks ended
October 3, 2009. Investing activities include proceeds from sales of short-term and noncurrent
investments of $6.5 million in the thirty-nine weeks ended October 2, 2010. Investing activities
for the thirty-nine weeks ended October 3, 2009 included $1.9 million in earn-out payments related
to the acquisition of Cartesian. Investing activities also included $0.5 million for both the
thirty-nine weeks ended October 2, 2010 and October 3, 2009 related to the purchase of office
equipment, software and computer equipment.
Net cash used in financing activities was $3.3 million for the thirty-nine weeks ended October 2,
2010. Net cash provided by financing activities was $2.9 million for the thirty-nine weeks ended
October 3, 2009. Financing activities in the thirty-nine weeks ended October 2, 2010 included $3.7
million in repayments on a line of credit and $0.9 million in proceeds from line of credit
borrowings. Financing activities
24
in the 2009 period included $3.4 million in proceeds from line of credit borrowings. In addition,
in both periods payments of $0.5 million were made on long-term obligations.
At October 2, 2010, we had approximately $8.3 million in cash and cash equivalents ($4.1 million of
which is denominated in pounds sterling) and $16.9 million in net working capital. In addition, as
discussed below, we have established lines of credit totaling $3.1 million against our remaining
auction rate securities portfolio, of which we have no borrowings as of October 2, 2010. We believe
we have sufficient cash and access to credit to meet anticipated cash requirements, including
anticipated capital expenditures, earn-out payments, and any future operating losses that may be
incurred, for at least the next 12 months. Should our cash and available lines of credit prove
insufficient we may need to obtain new debt or equity financing to support our operations or
complete acquisitions. Credit and capital markets have continued to experience unusual volatility
and disruption, and equity and debt financing have generally 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 or 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. If demand for our consulting services declines or we experience negative
cash flow, we could experience liquidity challenges at some point in the future.
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 $3.125 million
based upon our current holdings of $6.25 million of auction rate securities. The interest rate as
of October 2, 2010 that we would pay on amounts borrowed is the federal funds rate plus 3.25%. 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.
As of January 2, 2010, we held auction rate securities with a UBS affiliate with a fair value of
$5.4 million ($5.5 million par value). As of January 2, 2010, we had borrowed $2.8 million under
the line of credit. Because we intended to exercise our right under the ARS Rights to sell to UBS
our auction rate securities held in accounts with UBS and a UBS affiliate on June 30, 2010, we
classified these auction rate securities as current assets and the line of credit with UBS as a
current liability in the Consolidated Balance Sheet as of January 2, 2010. During the thirty-nine
weeks ended October 2, 2010, we borrowed an additional $880,000 on the line of credit, making the
outstanding balance $3.68 million.
During the thirty-nine weeks ended October 2, 2010, our entire auction rate securities portfolio
held by a UBS affiliate was sold by us at par value of $5.5 million. Upon the sale of the
securities, $3.7 million was applied to the line of credit from UBS. The line of credit was
terminated, the ARS Rights expired unexercised and we received the remaining sales proceeds of $1.8
million.
In addition, during the thirty-nine weeks ended October 2, 2010, we sold the Brazos Student Finance
Corporation Student Loan Asset Backed Notes with a par value of $1.0 million held as part of the
Companys auction rate securities portfolio with Citigroup. We received $950,000 in proceeds from
the transaction. As a result of this transaction, $50,000 in losses were reclassified from
Accumulated Other Comprehensive Loss in stockholders equity and recognized in Other Income
(Expense) in the Condensed Consolidated Statements of Operations and Comprehensive Loss
(unaudited).
As of October 2, 2010, we held auction rate securities with Citigroup in the face amount of $6.3
million collateralized by government guaranteed student loans. The estimated fair value of the
auction rate securities is $5.9 million as of October 2, 2010.
As we are able to liquidate any of our remaining auction rate securities portfolio we intend to
reinvest in money market or similar investments any amounts not used to repay any amounts borrowed
under the remaining line 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 (unaudited) in accordance with FASB ASC 320, which could be
material.
FINANCIAL COMMITMENTS
During fiscal year 2007, we acquired all of the outstanding membership interests of RVA. In
addition to consideration paid at closing for this acquisition, we accrued $344,000 during the
thirteen weeks ended July 3, 2010 for consideration earned by RVA and payable during the fourth
quarter 2010. See Note 4, Business Combinations, in the Notes to the Condensed Consolidated
Financial Statements (unaudited).
During the thirty-nine weeks ended October 3, 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 October 2, 2010, we have an obligation of $189,000 remaining under this commitment.
During August 2010, we executed a lease agreement for new office space in Boston, Massachusetts.
The lease commences on February 1, 2011 and runs for five years and three months from the
commencement date. Future minimum payments over the term of this lease are $2.0 million.
25
During September 2010, we executed a lease amendment for our office space in London, United
Kingdom. The amendment extends the lease through November 2015 and adjusts the payments due under
the lease. Future minimum payments as of October 2, 2010 over the remaining term of this lease are
$3.0 million.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures and Changes in Internal Control Over Financial Reporting
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 (the Exchange Act)) 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 the design and operation of
our disclosure controls and procedures as of the end of the period
covered by this
quarterly report. Based upon this evaluation, the Companys CEO and CFO have concluded that the
Companys disclosure controls and procedures were effective as of October 2, 2010.
There were no changes in our internal control over financial reporting during the fiscal quarter
ended October 2, 2010, that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We have not been subject to any material new litigation since the filing on April 1, 2010 of our
Annual Report on Form 10-K for the year ended January 2, 2010.
ITEM 1A. RISK FACTORS
Not applicable
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. REMOVED AND RESERVED
ITEM 5. OTHER INFORMATION
(a) Information Required to be Disclosed in a Report on Form 8-K, but not Reported
On August 16, 2010, we executed a Lease Agreement with Two Financial Center, LLC for new office space in Boston, Massachusetts. The lease commences on February 1, 2011 and runs for five years and three months from the commencement date. Future minimum payments over the term of this lease are $2.0 million. A copy of the Lease Agreement is filed as Exhibit 10.1 to this Form 10-Q. |
On September 30, 2010, we executed a lease amendment in the form of a Deed of Variation with EPO (Norman) Limited and EPO (Norman 2) Limited for our office space in London, United Kingdom. The amendment extends the lease through November 2015 and adjusts the payments due under the lease. Future minimum payments as of October 2, 2010 over the remaining term of this lease are $3.0 million. A copy of the Deed of Variation is filed as Exhibit 10.2 to this Form 10-Q. |
26
ITEM 6. EXHIBITS
(a) Exhibits
Exhibit 10.1 | Lease Agreement between Two Financial Center, LLC and the Company, dated August 16, 2010, is attached to this Form 10-Q as Exhibit 10.1. | |
Exhibit 10.2 | Deed of Variation of the lease between EPO (Norman) Limited, EPO (Norman 2) Limited and the Company, dated September 30, 2010, is attached to this Form 10-Q as Exhibit 10.2. | |
Exhibit 31. | Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
Exhibit 32. | Certifications furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
The Management Network Group, Inc. | ||||
(Registrant) | ||||
Date: November 16, 2010 | By | /s/ Richard P. Nespola | ||
(Signature) | ||||
Richard P. Nespola Chairman and Chief Executive Officer (Principal executive officer) |
||||
Date: November 16, 2010 | By | /s/ Donald E. Klumb | ||
(Signature) | ||||
Donald E. Klumb Chief Financial Officer and Treasurer (Principal financial officer and principal accounting officer) |
28
EXHIBIT INDEX
Exhibit No. | Description of Exhibit | |
Exhibit 10.1
|
Lease Agreement between Two Financial Center, LLC and the Company, dated August 16, 2010, is attached to this Form 10-Q as Exhibit 10.1. | |
Exhibit 10.2
|
Deed of Variation of the lease between EPO (Norman) Limited, EPO (Norman 2) Limited and the Company, dated September 30, 2010, is attached to this Form 10-Q as Exhibit 10.2. | |
Exhibit 31.
|
Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
Exhibit 32.
|
Certifications furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
29