UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(x) Quarterly report pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended July 03, 2004
or
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
COMMISSION FILE NUMBER: 0-27617
THE MANAGEMENT NETWORK GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 48-1129619
------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7300 COLLEGE BLVD., SUITE 302, OVERLAND PARK, KS 66210
(Address of principal executive offices) (Zip Code)
913-345-9315
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
As of August 9, 2004 TMNG had outstanding 34,626,541 shares of common stock.
THE MANAGEMENT NETWORK GROUP, INC.
INDEX
PAGE
PART I. FINANCIAL INFORMATION:
ITEM 1. Consolidated Condensed Financial Statements:
Consolidated Condensed Balance Sheets - July
03, 2004 (unaudited) and January 03, 2004 .............. 3
Consolidated Condensed Statements of Operations and
Comprehensive Loss (unaudited) - Thirteen Weeks
and Twenty-six Weeks Ended July 03, 2004 and
June 28, 2003 .......................................... 4
Consolidated Condensed Statements of Cash Flows
(unaudited) - Twenty-six Weeks ended July 03,
2004 and June 28, 2003 ................................. 5
Notes to Consolidated Condensed Financial
Statements ............................................... 7
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ...................... 11
ITEM 3. Quantitative and Qualitative Disclosures about
Market Risk .............................................. 16
ITEM 4. Controls and Procedures .................................. 16
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings ........................................ 16
ITEM 4. Submission of Matters to a Vote of Securities Holders .... 16
ITEM 6. Exhibits and Reports on Form 8-K ......................... 17
Signatures ....................................................... 17
Certifications ................................................... 17
Exhibits ......................................................... 17
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
THE MANAGEMENT NETWORK GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands, except share data)
(unaudited)
January 03, July 03,
2004 2004
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents ................................ $ 52,875 $ 49,466
Receivables:
Accounts receivable .................................... 5,376 5,770
Accounts receivable - unbilled ......................... 2,140 2,269
------------ ------------
7,516 8,039
Less: Allowance for doubtful accounts .................. (652) (200)
------------ ------------
6,864 7,839
Refundable income taxes .................................. 1,557 1,314
Prepaid and other assets ................................. 710 810
------------ ------------
Total current assets ........................... 62,006 59,429
------------ ------------
Property and equipment (net of accumulated depreciation of
$2,722 and $3,071 for fiscal year ended January 3, 2004
and twenty-six weeks ended July 3, 2004) ................ 1,558 1,278
Goodwill .............................................. 15,528 13,365
Customer relationships, net ................................ 541 455
Identifiable intangible assets, net ........................ 937 467
Other assets ............................................... 402 431
------------ ------------
Total Assets ............................................... $ 80,972 $ 75,425
============ ============
CURRENT LIABILITIES:
Trade accounts payable ................................... $ 635 $ 771
Accrued payroll, bonuses and related expenses ............ 1,251 1,507
Other accrued liabilities ................................ 1,816 1,580
Deferred revenue ......................................... 288 186
Unfavorable and capital lease obligations ................ 785 647
------------ ------------
Total current liabilities ...................... 4,775 4,691
Unfavorable and capital lease obligations .................. 2,828 2,526
STOCKHOLDERS' EQUITY
Common Stock: ............................................ 34 35
Voting - $.001 par value, 100,000,000 shares authorized;
34,371,068 and 34,626,541 issued and outstanding on
January 03, 2004 and July 3, 2004, respectively .......
Additional paid-in capital ............................... 157,292 157,704
Accumulated deficit ...................................... (82,190) (88,558)
Accumulated other comprehensive income -
Foreign currency translation adjustment ................. 176 172
Unearned compensation .................................... (1,943) (1,145)
------------ ------------
Total stockholders' equity ...................... 73,369 68,208
------------ ------------
Total Liabilities and Stockholders' Equity ................. $ 80,972 $ 75,425
============ ============
See notes to consolidated condensed financial statements.
THE MANAGEMENT NETWORK GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE LOSS
(In thousands, except per share data)
(unaudited)
For the thirteen For the twenty-six
weeks ended weeks ended
-------------------------------- -------------------------------
June 28, 2003 July 03, 2004 June 28, 2003 July 03, 2004
------------- ------------- ------------- -------------
Revenues $ 4,963 $ 5,184 $ 12,203 $ 10,963
Cost of services:
Direct cost of services .................... 2,724 2,739 6,397 5,652
Equity related charges (benefit) ........... (84) 52 (104) 106
-------- -------- -------- --------
Total cost of services ................... 2,640 2,791 6,293 5,758
-------- -------- -------- --------
Gross Profit 2,323 2,393 5,910 5,205
Operating Expenses:
Selling, general and administrative ........ 5,255 4,179 10,327 8,458
Goodwill and intangible asset impairment 18,942 18,942
Intangible asset amortization .............. 644 218 1,359 556
Equity related charges (benefit) ........... (8) 232 3 515
-------- -------- -------- --------
Total operating expenses ................. 24,833 4,629 30,631 9,529
-------- -------- -------- --------
Loss from operations ......................... (22,510) (2,236) (24,721) (4,324)
Other Income:
Interest income ............................ 161 145 338 281
Other, net.................................. (15) (6) (32) (15)
-------- -------- -------- --------
Total other income ....................... 146 139 306 266
-------- -------- -------- --------
Loss from continuing operations before
income tax (provision) benefit .............. (22,364) (2,097) (24,415) (4,058)
Income tax (provision) benefit ............... 3,619 (20) 4,367 (34)
-------- -------- -------- --------
Loss from continuing operations .............. (18,745) (2,117) (20,048) (4,092)
Discontinued operations:
Net income (loss) from discontinued operations
(net of income tax provision of $6 and $53
for the thirteen weeks and twenty-six weeks
ended June 28, 2003, respectively, and
including charge for impairment of goodwill
of $2,163 for twenty-six weeks ended
July 3, 2004) 8 79 (2,276)
-------- -------- -------- --------
Net loss ..................................... (18,737) (2,117) (19,969) (6,368)
Other comprehensive item -
Foreign currency translation adjustment .... 23 11 9 (5)
-------- -------- -------- --------
Comprehensive loss ........................... $(18,714) $ (2,106) $ (19,960) $ (6,373)
======== ======== ======== ========
Loss from continuing operations
per common share
Basic and diluted .......................... $ (0.56) $ (0.06) $ (0.60) $ (0.12)
======== ======== ======== ========
Loss from discontinued operations
per common share
Basic and diluted ......................... $ (0.06)
======== ======== ======== ========
Loss per common share
Basic and diluted .......................... $ (0.56) $ (0.06) $ (0.60) $ (0.18)
======== ======== ======== ========
Shares used in calculation of loss
From continuing operations, loss from
Discontinued operations, and net loss
per common share
Basic and diluted .......................... 33,372 34,625 33,359 34,564
======== ======== ======== ========
On March 4, 2004, management and the Board of Directors elected to shut down the
hardware segment of the Company. The thirteen weeks and twenty-six weeks ended
June 28, 2003 have been restated to report the income from discontinued
operations, net of tax. For a further discussion see Item 1, "Notes to
Consolidated Condensed Financial Statements," Note 3, "Discontinued Operations."
See notes to consolidated condensed financial statements.
THE MANAGEMENT NETWORK GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
For the Twenty-six Weeks Ended
------------------------------
June 28, July 03,
2003 2004
---------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ..................................... $(19,969) $ (6,368)
Adjust for:
(Income)loss from discontinued operations (79) 2,276
-------- --------
Loss from continuing operations (20,048) (4,092)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Goodwill and intangible assets impairment........... 18,942
Depreciation and amortization ...................... 1,814 911
Equity related charges (benefit) ................... (101) 621
Loss on retirement of assets ....................... 2
Income tax charge recognized upon exercise
of stock options ................................ (256)
Deferred income taxes .............................. (1,808)
Other changes in operating assets and
liabilities:
Accounts receivable ........................... 2,970 (847)
Accounts receivable - unbilled ................ 545 (129)
Refundable income taxes ....................... (2,787) 243
Prepaid and other assets ...................... 606 (129)
Trade accounts payable ........................ (749) 137
Deferred revenue .............................. (100) (102)
Accrued liabilities ........................... (381) 21
-------- --------
Net cash used in continuing operations ..... (1,353) (3,364)
Net cash provided by (used in) discontinued
operations ................................. 79 (113)
-------- --------
Net cash used in operating activities ...... (1,274) (3,477)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment, net ............ (68) (77)
-------- --------
Net cash used in investing
activities ................................ (68) (77)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments made on long-term obligations ................ (212) (440)
Proceeds from exercise of options ..................... 33 541
Issuance of common stock, net of expense............... 38 49
-------- --------
Net cash provided by (used in) financing
activities ............................... (141) 150
-------- --------
Effect of exchange rate on cash and cash
equivalents ............................................ 9 (5)
-------- --------
Net decrease in cash and cash equivalents ............... (1,474) (3,409)
Cash and cash equivalents, beginning of period .......... 53,786 52,875
-------- --------
Cash and cash equivalents, end of period ................ $ 52,312 $ 49,466
======== ========
Supplemental disclosure of cash flow information:
Cash paid during period for interest .................... $ 32 $ 15
======== ========
Cash paid during period for taxes ....................... $ 485 $ 34
======== ========
See notes to consolidated condensed financial statements.
THE MANAGEMENT NETWORK GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF REPORTING
The accompanying consolidated condensed financial statements of The Management
Network Group, Inc. (the "Company") as of July 03, 2004, and for the thirteen
and twenty-six weeks ended July 03, 2004 and June 28, 2003, are unaudited and
reflect all normal recurring adjustments which are, in the opinion of
management, necessary for the fair presentation of the Company's consolidated
condensed financial position, results of operations, and cash flows as of these
dates and for the periods presented. The consolidated condensed financial
statements have been prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial information.
Consequently, these statements do not include all the disclosures normally
required by accounting principles generally accepted in the United States of
America for annual financial statements nor those normally made in the Company's
annual report on Form 10-K. Accordingly, reference should be made to the
Company's annual report on Form 10-K for additional disclosures, including a
summary of the Company's accounting policies.
STOCK BASED COMPENSATION
During the thirteen weeks ended July 03, 2004, the Company recognized $284,000
in compensation expense related primarily to the issuance of restricted stock
grants made to key management personnel. The grants were made in the fourth
quarter of fiscal 2003 and the compensation cost associated with such grants is
being amortized by charges to operations on a graded vesting schedule over a
period of two years from the date of grant. During the thirteen weeks ended July
03, 2004, the Company granted options to purchase 98,000 shares of the Company's
common stock at a weighted average exercise price of $2.85. At the date of
grant, the exercise price of the option awards equaled the market price of the
Company's common stock. During the thirteen weeks ended June 28, 2003, the
Company granted 5,500 stock options to employees and 75,000 stock options to
independent members of the Company's Board of Directors at a weighted average
exercise price of $1.50. The grants of stock options to independent board
members were made in connection with the appointment by the Board of Directors
of Frank M. Siskowski and Robert J. Currey to fill vacancies on the Board during
2003. During the thirteen weeks ended June 28, 2003 the Company recorded a net
credit to compensation expense of $92,000, attributable primarily to the
forfeiture of unvested stock options by employees, partially offset by the
recognition of compensation expense on pre-initial public offering grants of
stock options.
During the twenty-six weeks ended July 03, 2004, the Company granted 173,000
stock options to employees at a weighted average exercise price of $3.31. During
the same period, the Company recognized $621,000 in compensation expense related
primarily to the issuance of restricted stock made to key management personnel.
During the twenty-six weeks ended June 28, 2003, the Company granted 515,500
stock options to employees and 75,000 stock options to independent members of
the Company's Board of Directors at a weighted average exercise price of $1.43.
During the same period, the Company recorded a net credit to compensation
expense of $101,000, attributable primarily to the forfeiture of unvested stock
options by employees, partially offset by the recognition of compensation
expense on pre-initial public offering grants of stock options.
The Company utilizes an intrinsic value methodology in accounting for stock
based compensation for employees and certain non-employee directors in
accordance with the provisions of Accounting Principles Board Opinion ("APB")
No. 25, "Accounting for Stock Issued to Employees" and related Interpretations,
and accounts for stock-based compensation for non-employees utilizing a fair
value methodology in accordance with Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation" as amended by SFAS
No. 148 "Accounting for Stock Based Compensation - Transition and Disclosure."
If compensation cost for the Company's APB 25 grants and the employee stock
purchase plan had been determined under SFAS No. 123, based upon the fair value
at the grant date, consistent with the Black-Scholes option pricing methodology,
the Company's net loss for the thirteen weeks ended June 28, 2003 and July 03,
2004, would have decreased by approximately $1.6 million and increased by $0.9
million, respectively, and the Company's net loss for the twenty-six weeks ended
June 28, 2003 and July 03, 2004, would have decreased by approximately $825,000
and increased by approximately $1.8 million, respectively.
For purposes of pro forma disclosures required under the provisions of SFAS No.
123, as amended by SFAS No. 148, the estimated fair value of options is
amortized to pro forma expense over the options' vesting period. The following
table contains pro forma information for the thirteen and twenty-six weeks ended
June 28, 2003, and July 03, 2004 (in thousands, except per share amounts):
FOR THE THIRTEEN WEEKS ENDED FOR THE TWENTY-SIX WEEKS ENDED
---------------------------- ------------------------------
JUNE 28, JULY 03, JUNE 28, JULY 03,
2003 2004 2003 2004
----------- ----------- ---------- ---------
Net loss, as reported: $ (18,737) $ (2,117) $ (19,969) $ (6,368)
Add: Stock-based employee
compensation expense (benefit) included in
reported net loss, net of related tax effects (92) 284 (97) 621
Deduct: Total stock-based compensation
(expense) benefit determined under fair value
based method for all awards, net of related
tax effects 1,651 (1,135) 921 (2,385)
------------ ------------ ---------- ----------
Pro forma net loss $ (17,178) $ (2,968) $ (19,145) $ (8,132)
============ ============ ========== ==========
Loss per share
Basic and diluted, as reported $ (0.56) $ (0.06) $ (0.60) $ (0.18)
============ ============ ========== ==========
Basic and diluted, pro forma $ (0.51) $ (0.09) $ (0.57) $ (0.24)
============ ============ ========== ==========
2. LOSS PER SHARE
The Company calculates and presents loss per share using a dual presentation of
basic and diluted loss per share. Basic loss per share is computed by dividing
net loss by the weighted average number of common shares outstanding for the
period. In accordance with the provisions of SFAS No. 128 "Earnings Per Share",
the Company has not included the effect of common stock options in the
calculation of diluted loss per share for the thirteen and twenty-six weeks
ended June 28, 2003 and July 03, 2004, as the Company reported a loss from
continuing operations for all periods and the effect would have been
antidilutive. The weighted average shares of common stock outstanding for basic
and diluted loss per share for the thirteen weeks ended June 28, 2003 and July
03, 2004, were 33,372,000 and 34,625,000, respectively. The weighted average
shares of common stock outstanding for basic and diluted loss per share for the
twenty-six weeks ended June 28, 2003, and July 03, 2004, were 33,359,000 and
34,564,000, respectively. Had the Company reported net income for the thirteen
weeks ended June 28, 2003 and July 03, 2004, the treasury method of calculating
common stock equivalents would have resulted in approximately 177,000 and
1,139,217 additional diluted shares, respectively. Had the Company reported net
income for the twenty-six weeks ended June 28, 2003, and July 03, 2004, the
treasury method of calculating common stock equivalents would have resulted in
approximately 142,000 and 841,064 additional diluted shares, respectively.
3.DISCONTINUED OPERATIONS
During the thirteen weeks ended April 03, 2004, management and the Board of
Directors elected to shutdown the hardware segment of the Company. The Company
concluded that this segment of the business did not align well with the
strategic focus of the Company. Charges related to the shutdown of the hardware
business were $2.2 million and relate primarily to goodwill impairment and
severance charges. These charges are reported as a component of discontinued
operations. The hardware segment's results of operations have been classified as
discontinued operations and prior periods have been restated. For business
segment reporting purposes, the hardware segment was previously recorded as the
"All Other" segment.
Revenue and income (loss) from discontinued operations are as follows (amounts
in thousands):
FOR THE THIRTEEN WEEKS ENDED FOR TWENTY-SIX WEEKS ENDED
---------------------------- -------------------------
JUNE 28, JULY 03, JUNE 28, JULY 03,
2003 2004 2003 2004
--------- -------- ------- --------
Revenue $ 57 $ 223 $ 13
Goodwill impairment
and severance charge $ (2,213)
Operating income (loss) $ 14 $ 132 (63)
Income tax provision 6 53
------- -------- ------- --------
Income (loss) from
discontinued operations $ 8 $ 79 $ (2,276)
======= ======== ======== ========
4. BUSINESS SEGMENTS
In accordance with the criteria in SFAS No. 131 "Disclosure about Segments of an
Enterprise and Related Information," the Company historically concluded it had
five operating segments, of which four were aggregated in one reportable
segment, the Management Consulting Services segment, and the remaining segment
in All Other. Management Consulting Services includes business strategy and
planning, marketing and customer relationship management, billing system
support, operating system support, revenue assurance, corporate investment
services and network management. All Other consisted of computer hardware
commissions and rebates received in connection with the procurement of hardware
for third parties. Effective with the shut down of the All Other segment in
March 2004, the Company has only one reportable segment, and therefore
summarized financial information concerning the Management Consulting segment is
not included. For summarized financial information regarding the All Other
segment, see Note 3 "Discontinued Operations."
In accordance with the provisions of SFAS No 131, revenues earned in the United
States and internationally based on the location where the services are
performed are shown in the following table (amounts in thousands):
FOR THE THIRTEEN WEEKS ENDED FOR THE TWENTY-SIX WEEKS ENDED
------------------------------- --------------------------------
JUNE 28, 2003 JULY 03, 2004 JUNE 28, 2003 JULY 03, 2004
------------- ------------- ------------- -------------
United States $ 4,441 $ 4,164 $11,318 $ 8,578
International:
The Netherlands 303 183 532 401
Canada 101 113 101 113
Belize 118 89 141 173
Portugal 264 1,124
Great Britain 346 549
Other 25 111 25
------- ------- ------- -------
Total $ 4,963 $ 5,184 $12,203 $10,963
======= ======= ======= =======
5. GOODWILL
In accordance with provisions of SFAS 142 "Accounting for Goodwill and
Intangible Assets," goodwill has not been amortized in fiscal years 2003 and
2004. The Statement requires an annual evaluation at the reporting unit level of
the fair value of goodwill and compares the calculated fair value of the
reporting unit to its book value to determine whether impairment has been deemed
to occur. Any impairment charge would be based on the most recent estimates of
the recoverability of the recorded goodwill and intangibles balances. If the
remaining book value assigned to goodwill and other intangible assets acquired
in an acquisition is higher than the amounts the Company currently would expect
to realize based on updated financial and cash flow projections from the
reporting unit, there is a requirement to write down these assets. During the
thirteen weeks ended April 03, 2004, the Company recorded a $2.2 million
goodwill impairment loss related to the shutdown of the hardware segment and has
reflected this amount in the Statement of Operations and Comprehensive Loss as a
component of discontinued operations. During the thirteen weeks ended June 28,
2003, the Company performed an interim test to determine whether an impairment
of goodwill had occurred at the reporting unit level. The Company performed the
interim test due to the significantly lower operating results of one of the
Company's reporting units, compared to the projected financial results that were
utilized in determining the reporting unit's fair value in the annual goodwill
impairment test performed in 2002. Additionally, during the thirteen weeks ended
June 28, 2003 two executives of companies acquired by TMNG tendered their
resignations to the Company, which also had the effect of lowering the financial
projections of one of the entities. Based on an analysis of projected future
cash flows and utilizing the assistance of an outside valuation firm, the
Company determined that the carrying value of goodwill acquired in the CSMG
acquisition exceeded its fair market value and recorded an impairment loss
related to the Management Consulting Segment of approximately $15.8 million. The
goodwill impairment loss has been reflected as a component of Loss from
Operations in the Statement of Operations and Comprehensive Loss. The changes in
the carrying amount of goodwill are as follows (amounts in thousands):
Management Consulting All Other
Segment Segment Total
--------------------- --------- -------
Balance as of December 28, 2002 $ 29,145 $ 2,163 $ 31,308
Impairment loss (15,780) (15,780)
-------- -------- -------
Balance as of January 03, 2004 13,365 2,163 15,528
Impairment loss (2,163) (2,163)
--------- -------- -------
Balance as of July 03, 2004 $ 13,365 $13,365
========= ======== =======
6. CUSTOMER RELATIONSHIPS AND OTHER IDENTIFIABLE INTANGIBLE ASSETS
Included in the Company's consolidated balance sheet as of the end of the latest
fiscal year, January 03, 2004, and the end of the twenty-six weeks ended July
03, 2004, are the following identifiable intangible assets (amounts in
thousands):
January 03, 2004 July 03, 2004
------------------------ ------------------------
Accumulated Accumulated
Cost Amortization Cost Amortization
------- ------------ ------- ------------
Customer relationships $ 3,086 $(2,545) $ 3,086 $(2,631)
Employment agreements 3,200 (2,292) 3,200 (2,733)
Tradename 350 (321) 350 (350)
Covenant not to compete 203 (203) 203 (203)
------- ------- ------- -------
Total $ 6,839 $(5,361) $ 6,839 $(5,917)
======= ======= ======= =======
In connection with SFAS No. 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets" the Company, using its best estimates based on reasonable and
supportable assumptions and projections, reviews for impairment long-lived
assets and certain identifiable intangibles to be held and used whenever events
or changes in circumstances indicate that the carrying amount of its assets
might not be recoverable. During the thirteen weeks ended June 28, 2003,
management identified certain events, including the significant decrease in
revenue from customers whose relationships were valued in purchase accounting
for the CSMG acquisition. The Company performed an impairment test, and
determined that the carrying value of customer relationships exceeded its fair
market value and recorded an impairment loss related to the Management
Consulting Segment of approximately $3.1 million. Fair value was based on an
analysis of projected future cash flows. The impairment loss has been reflected
as a component of Loss from Operations in the Statement of Operations and
Comprehensive Loss.
Intangible amortization expense for the thirteen weeks ended June 28, 2003 and
July 03, 2004 was $644,000 and $218,000, respectively. Intangible amortization
expense for the twenty-six weeks ended June 28, 2003 and July 03, 2004 was
$1,359,000 and $556,000, respectively. Intangible amortization expense is
estimated to be approximately $1.0 million in fiscal year 2004, $0.3 million in
fiscal year 2005, and $0.2 million in fiscal year 2006.
7. INCOME TAXES
In the thirteen weeks and twenty-six weeks ended July 03, 2004, the Company
generated an income tax benefit of $906,000 and $1.7 million, respectively. The
Company recorded a valuation allowance against this income tax benefit in
accordance with the provisions of SFAS No. 109 "Accounting for Income Taxes"
which requires an estimation of the recoverability of the recorded income tax
asset balances. In addition, the Company reported an income tax provision of
$20,000 and $34,000 for the thirteen weeks ended July 03, 2004 and twenty-six
weeks ended July 03, 2004 related to state income tax expense. For the
comparable period in the thirteen weeks and twenty-six weeks ended June 28,
2003, the Company generated an income tax benefit of $8.8 million and $9.5
million, respectively. The Company recorded a valuation allowance of $5.2
million against this income tax benefit. The majority of the valuation allowance
relates to impairment losses of goodwill and other intangible assets that were
initially recorded in connection with the Company's acquisitions and net
operating losses. As of July 3, 2004 the Company has fully reserved its deferred
income tax assets with a cumulative valuation allowance of $25.7 million.
8. LOANS TO OFFICERS
As of July 03, 2004, there was one outstanding line of credit between the
Company and an officer. The maximum aggregate amount available for borrowing
under that loan agreement is $300,000. An aggregate borrowing against the line
of credit at June 28, 2003 and July 03, 2004 totaled $300,000 for each period
and is due in 2011. These amounts are included in other assets in the
non-current assets section of the balance sheet. In accordance with the loan
provisions, the interest rate charged on the loans is equal to the Applicable
Federal Rate (AFR), as announced by the Internal Revenue Service, for short-term
obligations (with annual compounding) in effect for the month in which the
advance is made, until fully paid. Pursuant to the Sarbanes-Oxley Act, no
further loan agreements or draws against the line may be made by the Company to,
or arranged by the Company for its executive officers
9. SIGNIFICANT CUSTOMER CONTRACTS
On December 10, 1999, the Company entered into a consulting services agreement
with a significant customer under which the customer committed to $22 million of
consulting fees over a three-year period commencing January 1, 2000. During
fiscal year 2002 the agreement was extended for two additional years beyond the
original term of the agreement, in exchange for an expanded preferred contractor
relationship and immediate commitment to a significant consulting arrangement.
The agreement provides for minimum annual usage requirements in connection with
consulting services performed under the agreement, and as of January 3, 2004 a
shortfall in minimum annual usage requirements of consulting services under the
agreement was deemed to have occurred. The shortfall was not remedied by the
customer during the first quarter of 2004, resulting in the customer's default
on the contract.
On March 4, 2004, TMNG filed suit against the customer for breach of the
consulting agreement, seeking damages of approximately $5.7 million against the
customer. The customer responded to the suit on March 26, 2004 with its answer
and two counterclaims, neither of which seeks money damages at this time. The
customer has requested a declaration that TMNG first breached the agreement and
that the customer is therefore not liable for any damages. Additionally, during
the first quarter of fiscal 2004 the customer informed the Company of its
decision to cancel the consulting agreement. The Company does not believe the
counterclaims asserted by the customer to be meritorious, and plans to
vigorously pursue enforcement of the contract and to obtain payment of the
consideration under the contract.
10. CONTINGENCIES
In June 1998, the bankruptcy trustee of a former client, Communications Network
Corporation, sued TMNG for a total of $320,000 in the U.S. Bankruptcy Court in
New York seeking recovery of $160,000 alleging an improper payment of consulting
fees paid by the former client during the period from July 1, 1996, when an
involuntary bankruptcy proceeding was initiated against the former client,
through August 6, 1996, when the former client agreed to an order for relief in
the bankruptcy proceeding, and $160,000 in consulting fees paid by the former
client after August 6, 1996.
The bankruptcy trustee has also sued TMNG for at least $1.85 million for breach
of contract, breach of fiduciary duties and negligence. Although assurance
cannot be given as to the ultimate outcome of this proceeding, TMNG believes the
Company has meritorious defenses to the claims made by the bankruptcy trustee,
including particularly the claims for breach of contract, breach of fiduciary
duty and negligence, and that the ultimate resolution of this matter will not
materially harm the Company's business.
As of July 3, 2004 the Company has outstanding demands aggregating approximately
$1.1 million by the bankruptcy trustees of several former clients in connection
with collected balances near the customers' respective bankruptcy filing dates.
Although the Company does not believe it received any preference payments from
these former clients and plans to vigorously defend its position, the Company
has established reserves of $854,000, which it believes are adequate in the
event of loss or settlement on such claims.
The Company may become involved in various legal and administrative actions
arising in the normal course of business. These could include actions brought by
taxing authorities challenging the employment status of consultants utilized by
the Company. In addition, customer bankruptcies could result in additional
claims on collected balances for professional services near the bankruptcy
filing date. While the resolution of any of such actions, claims, or the matters
described above may have an impact on the financial results for the period in
which it is resolved, the Company believes that the ultimate disposition of
these matters will not have a material adverse effect upon its consolidated
results of operations, cash flows or financial position.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
In addition to historical information, this quarterly report contains
forward-looking statements. Certain risks and uncertainties could cause actual
results to differ materially from those reflected in such forward-looking
statements. Factors that might cause a difference include, but are not limited
to, those discussed in the sections entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business - Risk
Factors" in the Company's annual report on Form 10-K for the fiscal year ended
January 03, 2004. Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's opinions only as of the
date of this report. We undertake no obligation to revise, or publicly release
the results of any revision to, these forward-looking statements. Readers should
carefully review the risk factors described in our annual report and in other
documents that we file from time to time with the Securities and Exchange
Commission.
The following should be read in connection with Management's Discussion and
Analysis of Financial Condition and Results of Operations as presented in the
Company's annual report on Form 10-K for the fiscal year ended January 03, 2004.
EXECUTIVE FINANCIAL OVERVIEW
As previously discussed in the Company's 2003 annual report on Form 10-K as
filed with the Securities and Exchange Commission on March 31, 2004, the
communications industry has experienced a significant economic downturn that
began in fiscal year 2001 and continues to go through significant changes
resulting from a combination of competitive, regulatory and technology factors,
with growth occurring primarily in wireless and internet protocol (IP) services.
TMNG is a consultancy to the industry, and as a result has experienced a
significant reduction in consulting business since 2001. However, the Company is
migrating the focus of its service offerings to position itself in this new
economic environment.
During fiscal year 2003, as a result of a combination of operating losses, the
resignation of certain key personnel and revised and reduced financial
projections, the Company recorded goodwill and intangible asset impairment
losses of $19.5 million for select reporting units and recorded valuation
reserves of $24.0 million against deferred income tax assets. During the
thirteen weeks ended April 03, 2004, management and the Board of Directors
elected to shutdown the hardware segment of the Company, resulting in a goodwill
impairment charge of $2.2 million. During the twenty-six weeks ended July 03,
2004, the Company also recorded additional valuation reserves of $1.7 million
against deferred income tax assets, which offset income tax benefits generated
on operating losses for the twenty-six week period.
The Company has implemented many programs to size the business with its lower
revenue base. Such steps include staff reductions and other selling, general and
administrative cost cutting measures to maintain appropriate gross margin,
pricing and utilization metrics, which are critical to a management consultancy.
The Company reduced selling, general and administrative expense during the
thirteen weeks ended July 03, 2004 by 20% from the comparable thirteen weeks
ended June 28, 2003. Such cost reductions also enabled the Company to minimize
cash used in operations, however because valuation allowances were provided on
all income tax benefits generated in the twenty-six weeks ended July 03, 2004
cash used in continuing operations was $3.4 million compared with cash used in
operations of $1.4 million in the twenty-six weeks ended June 28, 2003. The
Company also is focusing its marketing efforts on large and sustainable clients
to maintain a portfolio of business that is high credit quality and thus reduce
bad debt risks.
OPERATIONAL OVERVIEW
Revenues typically consist of consulting fees for professional services and
related expense reimbursements. A significant percentage of the Company's
consulting services are contracted on a time and materials basis, a time and
materials basis not to exceed contract price, or a fixed cost basis. Contract
revenues on contracts with a not to exceed contract price or a fixed cost price
are recorded under the percentage of completion method, utilizing estimates of
project completion under both of these types of contracts. Larger fixed price
contracts have recently begun to represent a more significant component of the
Company's revenue mix.
Generally a client relationship begins with a short-term engagement utilizing a
few consultants. TMNG's sales strategy focuses on building long-term
relationships with both new and existing clients to gain additional engagements
within existing accounts and referrals for new clients. Strategic alliances with
other companies are also used to sell services. TMNG anticipates that the
Company will continue to do so in the future. Because TMNG is a consulting
company, the Company experiences fluctuations in revenues derived from clients
during the course of a project lifecycle. As a result, the volume of work
performed for specific clients varies from period to period and a major client
from one period may not use TMNG services in another period. In addition,
clients generally may end their engagements with little or no penalty or notice.
If a client engagement ends earlier than expected, the Company must re-deploy
professional service personnel as any resulting unbillable time could harm
margins.
Cost of services consists primarily of client-related compensation for
consultants who are employees and amortization of equity related non-cash
charges incurred in connection with restricted stock granted to key management
personnel and restricted stock awards primarily to consultants, as well as fees
paid to independent contractor organizations and related expense reimbursements.
Employee compensation includes certain unbillable time, training, vacation time,
benefits and payroll taxes. Margins are primarily impacted by the type of
consulting services provided, the size of service contracts and negotiated
volume discounts, changes in TMNG pricing policies and those of competitors,
utilization rates of consultants and independent subject matter experts; and
employee and independent contractor organization costs associated with a
competitive labor market.
Operating expenses include selling, general and administrative, equity related
charges, and intangible asset amortization. Sales and marketing expenses consist
primarily of personnel salaries, bonuses, and related costs for direct client
sales efforts and marketing staff. The Company primarily uses a relationship
sales model in which partners, principals and senior consultants generate
revenues. In addition, sales and marketing expenses include costs associated
with marketing collateral, product development, trade shows and advertising.
General and administrative expenses consist mainly of accounting and recruiting
personnel costs, insurance, rent, and outside professional services incurred in
the normal course of business. The equity related charges consist of non-cash
amortization charges incurred in connection with restricted stock granted to key
management personnel. Intangible asset amortization relates to amortization of
identifiable intangible assets
CRITICAL ACCOUNTING POLICIES
While the selection and application of any accounting policy may involve some
level of subjective judgments and estimates, the Company believes the following
accounting policies are the most critical to the Company's consolidated
financial statements, potentially involve the most subjective judgments in their
selection and application, and are the most susceptible to uncertainties and
changing conditions:
- Allowance for Doubtful Accounts;
- Fair Value Accounting of Acquired Businesses;
- Impairment of Goodwill and Long-Lived Intangible Assets;
- Revenue Recognition; and
- Deferred Income Tax Assets.
Allowances for Doubtful Accounts - Substantially all of the Company's
receivables are owed by companies in the communications industry. The Company
typically bills customers for services after all or portions of the services
have been performed and requires customers to pay within 30 days. The Company
attempts to control credit risk by being diligent in credit approvals, limiting
the amount of credit extended to customers and monitoring customers' payment
record and credit status as work is being performed for them.
The Company recorded bad debt expense in the amount of $353,000 and $214,000 for
the twenty-six weeks ended June 28, 2003 and July 03, 2004, respectively, and
the Company's allowance for doubtful accounts totaled $652,000 and $200,000 at
the end of January 03, 2004 and July 03, 2004, respectively. The calculation of
these amounts is based on judgment about the anticipated default rate on
receivables owed as of the end of the reporting period. That judgment was based
on uncollected account experience in prior years and the ongoing evaluation of
the credit status of the Company's customers and the communications industry in
general.
The Company has endeavored to mitigate credit risk by concentrating its
marketing efforts on the largest and most stable companies in the communications
industry and by tightly controlling the amount of credit provided to customers.
If the Company is unsuccessful in these efforts, or if more of the Company's
customers file for bankruptcy or experience financial difficulties, it is
possible that the allowance for doubtful accounts will be insufficient and the
Company will have a greater bad debt loss than the amount reserved, which would
adversely affect cash flow and financial performance.
Fair Value of Acquired Businesses - TMNG has acquired three professional service
organizations over the last four years. A significant component of the value of
these acquired businesses has been allocated to intangible assets. The Financial
Accounting Standards Board ("FASB") issued SFAS No. 141 "Accounting for Business
Combinations", which requires acquired businesses to be recorded at fair value
by the acquiring entity. SFAS No. 141 also requires that intangible assets that
meet the legal or separable criterion be separately recognized on the financial
statements at their fair value, and provides guidance on the types of intangible
assets subject to recognition. Determining the fair value for these specifically
identified intangible assets involves significant professional judgment,
estimates and projections related to the valuation to be applied to intangible
assets like customer lists, employment agreements and trade names. The
subjective nature of management's assumptions adds an increased risk associated
with estimates surrounding the projected performance of the acquired entity.
Additionally, as the Company amortizes the intangible assets over time, the
purchase accounting allocation directly impacts the amortization expense we
record on our financial statements.
Impairment of Goodwill and Long-lived Intangible Assets - Goodwill and other
long-lived intangible assets arising from the Company's acquisitions, as
discussed above, are subjected to periodic review for impairment. SFAS No. 142
"Accounting for Goodwill and Intangible Assets" requires an annual evaluation at
the reporting unit level of the fair value of goodwill and compares the
calculated fair value of the reporting unit to its book value to determine
whether an impairment has been deemed to occur. Any impairment charge would be
based on the most recent estimates of the recoverability of the recorded
goodwill and intangibles balances. If the remaining book value assigned to
goodwill and other intangible assets acquired in an acquisition is higher than
the amounts the Company currently would expect to realize based on updated
financial and cash flow projections from the reporting unit, there is a
requirement to write down these assets. Effective March 4, 2004, management and
the Board of Directors elected to shut down the Company's hardware business. The
Company concluded that this segment of the business did not align well with the
strategic focus of the Company. The Company incurred goodwill impairment charges
of $2.2 million in the first quarter of fiscal year 2004, related to the
shutdown of the hardware business in accordance with the provisions of SFAS No.
142. In the thirteen weeks ended June 28, 2003, the Company recorded a goodwill
impairment loss and intangible asset impairment loss in the amount of $15.8
million and $3.1 million, respectively. The impairment losses have been
reflected as a component of Loss from Operations in the Statement of Operations
and Comprehensive Loss.
Revenue Recognition - Historically, most of TMNG's consulting practice contracts
have been on a time and material basis, in which customers are billed for time
and materials expended in performing their contracts. The Company has recognized
revenue from those types of customer contracts in the period in which our
services are performed. TMNG has many types of contracts, including time and
materials contracts, time and materials with cap, fixed fee contracts, and
managed services or outsourcing contracts. Managed services or outsourcing
contracts typically have longer contract terms than consulting contracts. The
typical length of the Company's outsourcing contracts is two to five years.
The Company recognizes revenues on time and material with cap and fixed fee
contracts using the percentage of completion method. Percentage of completion
accounting involves calculating the percentage of service provided during the
reporting period compared with the total estimated services to be provided over
the duration of the contract. For all contracts, estimates of total contract
revenues and costs are continuously monitored during the term of the contract,
and recorded revenues and costs are subject to revisions as the contract
progresses. Such revisions may result in increase or decrease to revenues and
income and are reflected in the financial statements in the periods in which
they are first identified.
As TMNG continues to adapt to changes in the communications consulting industry,
the Company has elected to enter into more fixed fee contracts in which revenue
is based upon delivery of services or solutions, and contingent fee contracts,
in which revenue is subject to achievement of savings or other agreed upon
results, rather than time spent. Both of these types of contracts are typically
more results-oriented and are subject to greater risk associated with revenue
recognition and overall project profitability than traditional time and
materials contracts. Due to the nature of fixed fee and contingent fee
contracts, the amount and timing of revenue recognized may be subject to
adjustment or deferral, and additional costs and effort as compared to what was
originally planned may need to be expended to fulfill delivery requirements on
such contracts, which could adversely affect our consolidated financial
position, results of operations and liquidity.
Deferred Income Tax Assets - The Company has generated substantial deferred
income tax assets primarily from the accelerated financial statement write-off
of goodwill, the charge to compensation expense taken related to stock options
and net operating loss carry forwards. For the Company to realize the income tax
benefit of these assets, it must generate sufficient taxable income in future
periods when such deductions are allowed for income tax purposes. In assessing
whether a valuation allowance is needed in connection with the Company's
deferred income tax assets, management has evaluated the ability of the Company
to carry back tax losses to prior years that reported taxable income, and the
ability of the Company to generate sufficient taxable income in future periods
to utilize the benefit of the deferred income tax assets. Such projections of
future taxable income require significant subjective judgments and estimates by
the Company. As of July 03, 2004, cumulative valuation allowances in the amount
of $25.7 million were recorded in connection with the deferred income tax
assets. Management continues to evaluate the recoverability of the recorded
deferred income tax asset balances. In the event the Company continues to report
net operating losses for financial reporting, no tax benefit would be recognized
for those losses.
RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED JULY 03, 2004 COMPARED TO THIRTEEN WEEKS ENDED JUNE 28,
2003
REVENUES
Revenues increased 4.5% to $5.2 million for the thirteen weeks ended July 03,
2004 from $5.0 million for the thirteen weeks ended June 28, 2003. During the
thirteen weeks ended July 03, 2004, the Company provided services on 88 customer
projects, compared to 63 projects performed in the thirteen weeks ended June 28,
2003. Average revenue per project was $59,000 in the thirteen weeks ended July
03, 2004 compared to $79,000 in the thirteen weeks ended June 28, 2003. Our
international revenue base increased to 19.7% of our revenues in the thirteen
weeks ended July 03, 2004, from 10.4% in the thirteen weeks ended June 28, 2003,
due primarily to a significant increase in project activity with large global
carriers primarily in Western Europe, both wireline and wireless. Revenues
recognized by the Company in connection with fixed price engagements totaled
$0.9 million and $1.1 million for the thirteen weeks ended July 03, 2004 and
June 28, 2003, respectively, representing 22.1% of total revenue during the
thirteen weeks ended July 03, 2004, and 16.6% of total revenue during the
thirteen weeks ended July 28, 2003. Effective March 4, 2004, management and the
Board of Directors elected to shutdown all hardware business (previously
reported as the separate business segment "All Other"). Operating results of the
hardware segment for the thirteen weeks and twenty-six weeks ended June 28,
2003, and July 03, 2004, have been included as a component of discontinued
operations in the Consolidated Condensed Statements of Operations and
Comprehensive Loss contained herein.
COSTS OF SERVICES
Direct costs of services remained constant at $2.7 million for the thirteen
weeks ended July 03, 2004 and June 28, 2003. As a percentage of revenues, our
gross margin based on direct cost of service was 47.2% for the thirteen weeks
ended July 03, 2004, compared to 45.1% for the thirteen weeks ended June 28,
2003. The increase in gross margin was primarily attributable to the impact of
higher margin on our consulting engagements.
Non-cash stock based compensation charges were $52,000 for the thirteen weeks
ended July 03, 2004, compared to benefits of $84,000 for the thirteen weeks
ended June 28, 2003. Non-cash stock based compensation charges in the thirteen
weeks ended July 03, 2004, relate to the Company's granting of restricted stock
to select executives and key employees during the fourth quarter of fiscal year
2003, which are being amortized on a graded vesting schedule over a period of
two years from the date of grant. The non-cash stock based compensation benefits
for the thirteen weeks ended June 28, 2003, was primarily attributable to the
cancellation and forfeiture of unvested stock options by employees.
OPERATING EXPENSES
In total, operating expenses decreased to $4.6 million for the thirteen weeks
ended July 03, 2004, or 81.4% from $24.8 million for the thirteen weeks ended
June 28, 2003. Operating expenses include selling, general and administrative
costs, equity related charges, goodwill and intangible asset impairment, and
intangible asset amortization. The major component of the $20.2 million decrease
in operating expenses was an $18.9 million charge in the thirteen weeks ended
June 28, 2003 for goodwill and intangible asset impairment related to one of our
acquired entities. Selling, general and administrative expenses for the thirteen
weeks ended July 03, 2004 were $4.2 million compared to $5.3 million for the
thirteen weeks ended June 28, 2003. The primary decrease was attributable to
management's efforts to re-size the business to the lower revenue volumes.
Management continues to examine cost-reduction measures to enhance the Company's
profitability and manage operating expense to better align them with the size of
the Company.
Intangible asset amortization was $0.2 million and $0.6 million for the thirteen
weeks ended July 03, 2004 and June 28, 2003, respectively. The decrease in
amortization expense was due to intangible asset impairments recorded in fiscal
year 2003 that had the effect of lowering the recorded intangible asset balance
subject to amortization in fiscal year 2004. Such impairments totaled $3.7
million in fiscal year 2003.
Non-cash stock based compensation charges were $232,000 in the thirteen weeks
ended July 03, 2004. The $232,000 non-cash stock based compensation charges for
the thirteen weeks ended July 03, 2004 relate to the Company's granting of
restricted stock to select executives and key employees during the fourth
quarter of fiscal year 2003, which are being amortized on a graded vesting
schedule over a period of two years from the date of grant.
OTHER INCOME AND EXPENSES
Interest income was $145,000 and $161,000 for the thirteen weeks ended July 03,
2004 and June 28, 2003, respectively, and represented interest earned on
invested balances. Interest income decreased during the thirteen weeks ended
July 03, 2004 due to lower invested balances resulting from a reduction in cash
reserves and lower interest rate returns from fiscal year 2003 to fiscal year
2004. The Company invests in short-term, high-grade investment instruments as
part of our overall investment policy.
INCOME TAXES
In the thirteen weeks ended July 03, 2004, the Company fully reserved its income
tax benefit generated by its pre-tax losses of $2.1 million in accordance with
the provisions of SFAS No. 109 "Accounting for Income Taxes" which requires an
estimation of the recoverability of the recorded income tax asset balances. The
Company also reported an income tax provision of $20,000 for the thirteen weeks
ended July 03, 2004 related to state income tax expense. In the thirteen weeks
ended June 28, 2003, the Company recognized a net income tax benefit of $3.6
million, net of a valuation allowance of $5.2 million. The majority of the
valuation allowance relates to impairment losses of goodwill and other
intangible assets that were initially recorded in connection with the Company's
acquisitions.
TWENTY-SIX WEEKS ENDED JULY 03, 2004 COMPARED TO TWENTY-SIX WEEKS ENDED JUNE 28,
2003
REVENUES
Revenues decreased 10.2% to $11.0 million for the twenty-six weeks ended July
03, 2004, from $12.2 million for the twenty-six weeks ended June 28, 2003. The
decrease in revenues was primarily associated with the decline in utilization of
management consulting services by many communication service providers. In
addition, there has been continued deferral of key management consulting
pipeline opportunities and an increase in managed services outsourcing by
clients, which partially displaces what were historically management consulting
opportunities for TMNG. During the twenty-six weeks ended July 03, 2004, the
Company provided services on 110 customer projects, compared to 111 projects
performed in the twenty-six weeks ended June 28, 2003. Average revenue per
project was $100,000 during the twenty-six weeks ended July 03, 2004 compared to
$110,000 in the twenty-six weeks ended June 28, 2003. International revenue base
increased to 21.8% of the Company's revenues for the twenty-six weeks ended July
03, 2004, from 7.3% for the twenty-six weeks ended June 28, 2003, due primarily
to a significant increase in project activity with large global carriers
primarily in Western Europe, both wireline and wireless. Revenues recognized by
the Company in connection with fixed price engagements totaled $3.9 million and
$2.8 million for the twenty-six weeks ended July 03, 2004 and June 28, 2003,
respectively, representing 36% of total revenue during the twenty-six weeks
ended July 03, 2004 and 23% of twenty-six weeks ended June 28, 2003 total
revenue. Effective March 4, 2004, management and the Board of Directors elected
to shutdown all hardware business (previously reported as the separate business
segment "All Other"). Operating results of the hardware segment for the
twenty-six weeks ended July 03, 2004 and June 28, 2003 have been included as a
component of discontinued operations in the Consolidated Condensed Statements of
Operations and Comprehensive Loss contained herein.
COST OF SERVICES
Direct costs of services decreased 11.6% to $5.7 million for the twenty-six
weeks ended July 03, 2004 compared to $6.4 million for the twenty-six weeks
ended June 28, 2003, consistent with lower revenue generation on project
activity. As a percentage of revenues, our gross margin was 48.4% based upon
direct cost of services for the twenty-six weeks ended July 03, 2004, compared
to 47.6% for the twenty-six weeks ended June 28, 2003. The increase in gross
margin was primarily attributable to the impact of higher margin on our
consulting engagements.
Non-cash stock based compensation charges were $106,000 for the twenty-six weeks
ended July 03, 2004, compared to benefits of $104,000 for the twenty-six weeks
ended June 28, 2003. Non-cash stock based compensation charges for the
twenty-six weeks ended July 03, 2004 relate to the Company's granting of
restricted stock to select executives and key employees during the fourth
quarter of fiscal year 2003, which are being amortized on a graded vesting
schedule over a period of two years from the date of grant. The non-cash stock
based compensation benefits for the twenty-six weeks ended June 28, 2003, were
primarily attributable to the cancellation and forfeiture of unvested stock
options by employees.
OPERATING EXPENSES
In total, operating expenses decreased to $9.5 million for the twenty-six weeks
ended July 03, 2004, or 68.9% from $30.6 million for the twenty-six weeks ended
June 28, 2003. Operating expenses include selling, general and administrative
costs, equity related charges, goodwill and intangible asset impairment, and
intangible asset amortization. The major component of the $21.1 million decrease
in operating expenses was an $18.9 million charge in the twenty-six weeks ended
June 28, 2003 for goodwill and intangible asset impairment related to one of our
acquired entities. Selling, general and administrative expenses for the
twenty-six weeks ended July 03, 2004 were $8.5 million compared to $10.3 million
for the twenty-six weeks ended June 28, 2003. The primary decrease in selling,
general and administrative expense was attributable to management's efforts to
re-size the business to the lower revenue volumes. Management continues to
examine cost-reduction measures to enhance the Company's profitability and
manage operating expense to better align them with the size of the Company.
Intangible asset amortization was $0.6 million and $1.4 million for the
twenty-six weeks ended July 03, 2004 and June 28, 2003, respectively. The
decrease in amortization expense was due to intangible asset impairments
recorded in fiscal year 2003 that had the effect of lowering the recorded
intangible asset balance subject to amortization in fiscal year 2004. Such
impairments totaled $3.7 million in fiscal year 2003.
Non-cash stock based compensation charges were $515,000 in the twenty-six weeks
ended July 03, 2004. The $515,000 non-cash stock based compensation charges for
the twenty-six weeks ended July 03, 2004 relate to the Company's granting of
restricted stock to select executives and key employees during the fourth
quarter of fiscal year 2003, which are being amortized on a graded vesting
schedule over a period of two years from the date of grant.
OTHER INCOME AND EXPENSES
Interest income was $281,000 and $338,000 for the twenty-six weeks ended July
03, 2004 and June 28, 2003, respectively, and represented interest earned on
invested balances. Interest income decreased during the twenty-six weeks ended
July 03, 2004 due to lower invested balances and lower interest rates from
fiscal year 2003 to fiscal year 2004. The Company invests in short-term,
high-grade investment instruments as part of our overall investment policy.
INCOME TAXES
For the twenty-six weeks ended July 03, 2004 the Company fully reserved its
deferred income tax asset and benefits generated by its pre-tax losses of $6.4
million from continuing and discontinued operations in accordance with the
provisions of SFAS No. 109 "Accounting for Income Taxes" which requires an
estimation of the recoverability of the recorded income tax asset balances. The
Company also reported an income tax provision of $34,000 for the twenty-six
weeks ended July 03, 2004 related to state income tax expense. In the twenty-six
weeks ended June 28, 2003, the Company recognized a net income tax benefit of
$4.4 million from continuing operations.
DISCONTINUED OPERATIONS
On March 4, 2004, management and the Board of Directors elected to shut down the
Company's hardware business. The Company concluded that this segment of the
business does not align well with the strategic focus of the Company. Charges
related to the shutdown of the hardware business were $2.2 million and relate
primarily to goodwill impairment and severance charges. In addition losses
generated in the twenty-six weeks ended July 03, 2004 from operations by the
discontinued segment were $63,000. These charges are reported within
discontinued operations. The prior period has been restated to separately report
the income generated by the discontinued segment, on a net of tax basis, of
$8,000 and $79,000 for the thirteen and twenty-six weeks ended June 28, 2003.
For business segment reporting purposes, the hardware segment was previously
recorded as the "All Other" segment.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in continuing operating activities was $3.4 million for the
twenty-six weeks ended July 03, 2004, compared to net cash used in operating
activities of $1.4 million for the twenty-six weeks ended June 28, 2003. The
Company incurred negative cash flow from its operating activities for the
twenty-six weeks ended July 03, 2004 and June 28, 2003 primarily due to
operating losses.
Net cash used in investing activities was $77,000 and $68,000 for the twenty-six
weeks ended July 03, 2004 and June 28, 2003, respectively. Cash used in
investing activities in 2004 and 2003 related to capitalization of office
equipment, software and computer equipment by the Company.
Net cash provided by financing activities was $150,000 in the twenty-six weeks
ended July 03, 2004, and related to proceeds received from the exercise of
employee stock options, partially offset by payments made by the Company on the
current portion of its capital lease obligations and outstanding debt. Net cash
used in financing activities was $141,000 in the twenty-six weeks ended June 28,
2003, and related to payments made by the Company on the current portion of its
capital lease obligations and outstanding debt, partially offset by proceeds
received from the exercise of employee stock options.
As of July 03, 2004, the Company has the following contractual obligations and
commercial commitments by year (amounts in millions):
Later
Years
Through
2004 2005 2006 2007 2008 2011 Total
---- ---- ---- ---- ---- ---- -----
Capital leases $0.1 $0.2 $ 0.3
Operating leases $0.9 $1.8 $1.7 $1.8 $1.8 $3.7 $11.7
---- ---- ---- ---- ---- ---- -----
Total $1.0 $2.0 $1.7 $1.8 $1.8 $3.7 $12.0
---- ---- ---- ---- ---- ---- -----
At July 03, 2004, TMNG had approximately $49.5 million in cash and cash
equivalents. TMNG believes it has sufficient cash to meet anticipated cash
requirements, including anticipated capital expenditures, consideration for
possible acquisitions, and any continuing operating losses, for at least the
next 12 months. The Company has established a flexible model that provides a
lower fixed cost structure than most consulting firms, enabling TMNG to scale
operating cost structures more quickly based on market conditions. Although the
Company is well positioned because of its cash reserves to weather continuing
adverse conditions in the communications industry for a period of time, if the
industry and demand for consulting services do not rebound in the foreseeable
future and we continue to experience negative cash flow, we could experience
liquidity challenges.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not invest excess funds in derivative financial instruments or
other market rate sensitive instruments for the purpose of managing its foreign
currency exchange rate risk. The Company invests excess funds in short-term
investments, the yield of which is exposed to interest rate market risk.
Although the Company does not presently have material exposure to market related
risks, if the Company transacts increased levels of business with international
customers, foreign currency exchange risk may become material given U.S. dollar
to foreign currency exchange rate changes for projects denominated in the local
currency of foreign clients.
ITEM 4. CONTROLS AND PROCEDURES
A review and evaluation was performed by the Company's management, including the
Company's Chief Executive Officer (the "CEO") and Chief Financial Officer (the
"CFO"), of the effectiveness of the design and operation of the Company's
disclosure controls and procedures as of the end of the period covered by this
quarterly report. Based upon that review and evaluation, the CEO and CFO have
concluded that the Company's disclosure controls and procedures, as designed and
implemented, were effective. There have been no significant changes in the
Company's internal controls or in other factors that could significantly affect
the Company's internal controls subsequent to the date of their evaluation.
There was no significant material weakness identified in the course of such
review and evaluation and, therefore, the Company had no corrective measures.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
TMNG has not been subject to any material new litigation or claims against the
Company since the time of TMNG's 10-K filing, March 31, 2004. For a summary of
litigation in which TMNG is currently involved, refer to TMNG's 10-K, as filed
with the Securities and Exchange Commission on March 31, 2004 and Notes 9 and 10
of the Condensed Consolidated Financial Statements included elsewhere in this
report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS -
TMNG HELD AN ANNUAL MEETING OF STOCKHOLDERS ON JUNE 3, 2004.
1. The stockholders approved the election of three directors. The votes cast for
each nominee were as follows:
FOR ABSTAIN
Roy A. Wilkens 29,860,188 1,977,965
Andrew D. Lipman 30,144,913 1,693,240
Frank M. Siskowski 30,235,372 1,602,781
2. The stockholders ratified the appointment of Deloitte & Touche LLP as
independent auditor for the Company for the 2004 fiscal year by a vote of
31,485,448 shares in favor of the appointment; 300,192 shares against the
appointment and 52,513 shares abstaining.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 31. Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
Exhibit 32. Certifications Furnished Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
The Company filed a Form 8-K on August 6, 2004 with the Securities and Exchange
Commission in connection with its earnings release dated August 5, 2004.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SIGNATURE TITLE DATE
--------- ----- ----
/S/ RICHARD P. NESPOLA CHAIRMAN, PRESIDENT AND CHIEF AUGUST 16, 2004
--------------------------- EXECUTIVE OFFICER
RICHARD P. NESPOLA
/S/ DONALD E. KLUMB CHIEF FINANCIAL OFFICER AND AUGUST 16, 2004
-------------------------- TREASURER
DONALD E. KLUMB (PRINCIPAL FINANCIAL OFFICER
AND PRINCIPAL ACCOUNTING
OFFICER)