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 October 1, 2005
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 by check mark whether the registrant is a shell company (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 November 11, 2005 TMNG had outstanding 35,547,521 shares of common stock.
THE MANAGEMENT NETWORK GROUP, INC.
INDEX
PAGE
PART I. FINANCIAL INFORMATION:
ITEM 1. Consolidated Condensed Financial Statements (unaudited)
Consolidated Condensed Balance Sheets - October 1, 2005
and January 1, 2005 ....................................... 3
Consolidated Condensed Statements of Operations and
Comprehensive Income (Loss) - Thirteen weeks and
Thirty-nine weeks ended October 1, 2005 and
October 2, 2004 ........................................... 4
Consolidated Condensed Statements of Cash Flows
Thirty-nine weeks ended October 1, 2005 and
October 2, 2004............................................ 5
Notes to Consolidated Condensed Financial
Statements ................................................ 6
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 2. Unregistered Sales of Equity Securities and Use of Proceeds..16
ITEM 3. Defaults Upon Senior Securities..............................16
ITEM 4. Submission of Matters to a Vote of Securities Holders........16
ITEM 5. Other Information............................................16
ITEM 6. Exhibits.....................................................17
Signatures ..........................................................17
Certifications ......................................................18
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)
October 1, January 1,
2005 2005
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents ................................ $ 11,974 $ 10,882
Short-term investments ................................... 40,300 41,300
Receivables:
Accounts receivable .................................... 4,833 4,663
Accounts receivable - unbilled ......................... 2,309 1,911
---------- ----------
7,142 6,574
Less: Allowance for doubtful accounts .................. (363) (396)
---------- ----------
6,779 6,178
Prepaid and other assets ................................. 1,079 1,945
---------- ----------
Total current assets ........................... 60,132 60,305
---------- ----------
Property and equipment, net .............................. 974 896
Goodwill ................................................. 13,365 13,365
Identifiable intangible assets, net ...................... 242 487
Loan to officer .......................................... 300 300
---------- ----------
Total Assets ............................................... $ 75,013 $ 75,353
========== ==========
CURRENT LIABILITIES:
Trade accounts payable ................................... $ 457 $ 845
Accrued payroll, bonuses and related expenses ............ 1,826 1,040
Other accrued liabilities ................................ 2,059 2,574
Unfavorable and capital lease obligations ................ 605 725
---------- ----------
Total current liabilities ...................... 4,947 5,184
Unfavorable and capital lease obligations .................. 2,970 3,422
STOCKHOLDERS' EQUITY:
Common Stock: ............................................ 35 35
Voting - $.001 par value, 100,000,000 shares authorized;
35,256,785 and 34,750,562 shares issued and outstanding
on October 1, 2005 and January 1, 2005, respectively
Preferred stock - $.001 par value, 10,000,000 shares
Authorized, no shares issued or outstanding
Additional paid-in capital ............................... 158,670 157,857
Accumulated deficit ...................................... (91,439) (90,885)
Accumulated other comprehensive income -
Foreign currency translation adjustment ................. 186 352
Unearned compensation .................................... (356) (612)
---------- ----------
Total stockholders' equity ...................... 67,096 66,747
---------- ----------
Total Liabilities and Stockholders' Equity ................. $ 75,013 $ 75,353
========== ==========
See notes to consolidated condensed financial statements.
THE MANAGEMENT NETWORK GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share data)
(unaudited)
For the thirteen For the thirty-nine
weeks ended weeks ended
------------------------------ -------------------------------
October 1, October 2, October 1, October 2,
2005 2004 2005 2004
------------- ------------- ------------- -------------
Revenues $ 8,057 $ 6,546 $ 24,141 $ 17,509
Cost of Services:
Direct cost of services .................... 3,846 3,441 11,759 9,093
Equity related charges ..................... 12 51 81 157
-------- -------- -------- --------
Total cost of services ................... 3,858 3,492 11,840 9,250
-------- -------- -------- --------
Gross Profit 4,199 3,054 12,301 8,259
Operating Expenses:
Selling, general and administrative ........ 4,484 3,860 13,293 12,318
Real estate restructuring .................. 75
Intangible asset amortization .............. 42 218 245 774
Equity related charges ..................... 60 261 448 776
-------- -------- -------- --------
Total operating expenses ................. 4,586 4,339 14,061 13,868
-------- -------- -------- --------
Loss from operations ......................... (387) (1,285) (1,760) (5,609)
Other Income:
Interest income ............................ 424 189 1,127 470
Other, net................................. (10) 110 (25)
-------- -------- -------- --------
Total other income ....................... 424 179 1,237 445
-------- -------- -------- --------
Income (loss) from continuing operations
before income tax provision ................ 37 (1,106) (523) (5,164)
Income tax provision ......................... (13) (13) (31) (47)
-------- -------- -------- --------
Income (loss) from continuing operations ..... 24 (1,119) (554) (5,211)
Discontinued operations:
Net loss from discontinued operations
(includes a charge for impairment of
goodwill of $2,163 for thirty-nine weeks
ended October 2, 2004) .................... (2,276)
-------- -------- -------- --------
Net income (loss) ............................ 24 (1,119) (554) (7,487)
Other comprehensive item -
Foreign currency translation adjustment .... 26 (1) (165) (6)
-------- -------- -------- --------
Comprehensive income (loss) .................. $ 50 $ (1,120) $ (719) $ (7,493)
======== ======== ======== ========
Income (loss) from continuing operations
per common share
Basic and diluted .......................... $ 0.00 $ (0.03) $ (0.02) $ (0.15)
======== ======== ======== ========
Net loss from discontinued operations
per common share
Basic and diluted........................... $ (0.07)
======== ======== ======== ========
Net income (loss) per common share
Basic and diluted .......................... $ 0.00 $ (0.03) $ (0.02) $ (0.22)
======== ======== ======== ========
Shares used in calculation of income (loss)
from continuing operations, net loss from
discontinued operations, and net income
(loss) per common share
Basic ...................................... 35,156 34,631 35,079 34,586
======== ======== ======== ========
Diluted .................................... 35,525 34,631 35,079 34,586
======== ======== ======== ========
See notes to consolidated condensed financial statements.
THE MANAGEMENT NETWORK GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
For the thirty-nine weeks ended
-------------------------------
October 1, October 2,
2005 2004
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .............................................. $ (554) $ (7,487)
Adjust for loss from discontinued operations
(includes non-cash goodwill impairment
charge of $2,163 in the thirty-nine weeks
ended October 2, 2004).............................. 2,276
---------- ----------
Loss from continuing operations (554) (5,211)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization ...................... 622 1,294
Equity related charges ............................. 529 933
Loss on retirement of assets ....................... 40
Other changes in operating assets and liabilities:
Accounts receivable ........................... (202) (85)
Accounts receivable - unbilled ................ (398) (762)
Prepaid and other assets ...................... 865 (158)
Trade accounts payable ........................ (388) (52)
Accrued liabilities ........................... 107 373
---------- ----------
Net cash provided by (used in) operating
activities from continuing operations..... 581 (3,628)
Net cash used in discontinued operations ... (113)
---------- ----------
Net cash provided by (used in) operating
activities ............................... 581 (3,741)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments ................... (7,350) (400)
Proceeds from maturities and sales of short-term
investments .......................................... 8,350 4,600
Acquisition of property and equipment, net ............ (288) (107)
---------- ----------
Net cash provided by investing activities .. 712 4,093
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments made on long-term obligations ................ (576) (538)
Proceeds from exercise of options ..................... 452 564
Issuance of common stock through employee
stock purchase plan.................................. 88 49
---------- ----------
Net cash provided by (used in)
financing activities ..................... (36) 75
---------- ----------
Effect of exchange rate on cash and cash equivalents .... (165) (6)
---------- ----------
Net increase in cash and cash equivalents ............... 1,092 421
Cash and cash equivalents, beginning of period .......... 10,882 8,825
---------- ----------
Cash and cash equivalents, end of period ................ $ 11,974 9,246
========== ==========
Supplemental disclosure of cash flow information:
Cash paid during period for interest .................... $ 3 $ 26
========== ==========
Cash paid during period for taxes ....................... $ 31 $ 47
========== ==========
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. ("TMNG" or the "Company") as of October 1, 2005, and for the
thirteen and thirty-nine weeks ended October 1, 2005 and October 2, 2004, 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.
Changes in Presentation
Auction rate securities, which prior to the fourth quarter of 2004 were recorded
in cash and cash equivalents due to their liquidity and pricing reset feature,
have been included as short-term investments in the accompanying balance sheets
and sales and maturities of these securities have been reflected as investing
activities in the statements of cash flows.
Stock Based Compensation
During the thirteen weeks ended October 1, 2005, the Company granted 25,000
shares of restricted stock to key management personnel. These grants had a fair
value on the date of grant of $55,000. During the thirteen weeks ended October
1, 2005, and October 2, 2004 the Company recognized compensation expense of
$72,000 and $312,000, respectively, related to the restricted stock grants made
to key management personnel. The compensation cost associated with such grants
is being amortized through charges to operations on a graded vesting schedule
over periods ranging from two to four years.
During the thirteen weeks ended October 1, 2005, the Company granted options to
purchase 112,000 and 100,000 shares of the Company's common stock to employees
and members of the Company's Board of Directors, respectively, at a weighted
average exercise price of $2.28. During the thirteen weeks ended October 2,
2004, the Company granted options to purchase 66,000 shares of the Company's
common stock to employees at a weighted average exercise price of $2.12. At the
date of the grants, the exercise price of the option awards equaled the market
price of the Company's common stock.
During the thirty-nine weeks ended October 1, 2005, the Company granted 200,000
shares of restricted stock to key management personnel. These grants had a fair
value on the date of grant of $447,000. During the thirty-nine weeks ended
October 1, 2005 and October 2, 2004, the Company recognized compensation expense
of $529,000 and $933,000, respectively, related to the issuance of restricted
stock grants made to key management personnel.
During the thirty-nine weeks ended October 1, 2005, the Company granted options
to purchase 397,500 and 300,000 shares of the Company's common stock to
employees and members of the Company's Board of Directors, respectively, at a
weighted average exercise price of $2.26. During the thirty-nine weeks ended
October 2, 2004, the Company granted 239,000 options to purchase the Company's
common stock to employees at a weighted average exercise price of $2.98. At the
dates of grants, the exercise price of the option awards equaled the market
price of the Company's common stock.
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 income for the thirteen weeks ended October 1, 2005 would have
decreased by approximately $0.5 million, the net loss for the thirteen weeks
ended October 2, 2004 would have increased by $0.5 million, and the Company's
net loss for the thirty-nine weeks ended October 1, 2005 and October 2, 2004,
would have increased by approximately $1.2 million and $2.2 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 thirty-nine weeks
ended October 1, 2005, and October 2, 2004 (in thousands, except per share
amounts):
FOR THE THIRTEEN WEEKS ENDED FOR THE THIRTY-NINE WEEKS ENDED
----------------------------- -------------------------------
October 1, October 2, October 1, October 2,
2005 2004 2005 2004
------------ ------------ ----------- -----------
Net income (loss), as reported: $ 24 $ (1,119) $ (554) $ (7,487)
Add: Stock-based employee
compensation expense included in reported
net income (loss), net of related tax effects 72 312 529 933
Deduct: Total stock-based compensation
expense determined under fair value
based method for all awards, net of related
tax effects (539) (785) (1,759) (3,170)
------------ ------------ ----------- -----------
Pro forma net loss $ (443) $ (1,592) $ (1,784) $ (9,724)
============ ============ =========== ===========
Net income (loss) per share
Basic and diluted, as reported $ 0.00 $ (0.03) $ (0.02) $ (0.22)
============ ============ =========== ===========
Basic and diluted, pro forma $ (0.01) $ (0.05) $ (0.05) $ (0.28)
============ ============ =========== ===========
Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS 123(R), "Share-Based Payment". SFAS No.
123(R) revises SFAS 123, Accounting for Stock-Based Compensation, and supersedes
APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related
implementation guidance. SFAS 123(R) will require compensation costs related to
share-based payment transactions to be recognized in the financial statements
(with limited exceptions). The amount of compensation cost will be measured
based on the grant-date fair value of the equity or liability instruments
issued. Compensation cost will be recognized over the period that an employee
provides service in exchange for the award. The Company will adopt SFAS No.
123(R) effective January 1, 2006 and is currently evaluating the financial
statement impact of the adoption of SFAS No. 123(R), although this is expected
to result in increased compensation expense in future periods.
2. EARNINGS (LOSS) PER SHARE
The Company calculates and presents earnings (loss) per share using a dual
presentation of basic and diluted earnings (loss) per share. Basic earnings
(loss) per share is computed by dividing net income (loss) by the weighted
average number of common shares outstanding for the period. Diluted earnings
(loss) per share is computed in the same manner except the weighted average
number of shares is increased for dilutive securities. The following table sets
forth the computation of diluted shares outstanding (amounts in thousands):
FOR THE THIRTEEN WEEKS ENDED FOR THE THIRTY-NINE WEEKS ENDED
----------------------------- -------------------------------
October 1, October 2, October 1, October 2,
2005 2004 2005 2004
------------ ----------- ----------- -----------
Weighted average shares outstanding - basic 35,156 34,631 35,079 34,586
Effect of dilutive securities:
Stock options 369
------------ ------------ ----------- -----------
Weighted average shares outstanding - diluted 35,525 34,631 35,079 34,586
============ ============ =========== ===========
In accordance with the provisions of SFAS No. 128 "Earnings Per Share", the
Company has not included the effect of stock options in the calculation of
diluted loss per share for the thirteen weeks ended October 2, 2004 and
thirty-nine weeks ended October 1, 2005 and October 2, 2004, as the Company
reported a loss from continuing operations for these periods and the effect
would have been anti-dilutive. Had the Company reported net income for the
thirteen weeks ended October 2, 2004, the treasury method of calculating common
stock equivalents would have resulted in approximately 230,000 additional
diluted shares. Had the Company reported net income for the thirty-nine weeks
ended October 1, 2005, and October 2, 2004, the treasury method of calculating
common stock equivalents would have resulted in approximately 394,000 and
754,000 additional diluted shares, respectively.
3. DISCONTINUED OPERATIONS
During the thirteen weeks ended April 3, 2004, management and the Board of
Directors elected to discontinue the hardware segment of the Company. The
Company concluded that this segment of the business did not align well with the
strategic focus of the Company. Charges related to the discontinuation of the
hardware business were $2.3 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.
Net sales and loss from discontinued operations are as follows (amounts in
thousands):
FOR THIRTY-NINE WEEKS ENDED
------------------------------------------------------
October 2,
2004
----------
Revenue $ 13
Goodwill impairment
and severance charge $ (2,213)
Operating loss (63)
----------
Loss from discontinued operations $ (2,276)
==========
4. BUSINESS SEGMENTS
The Company identifies its segments based on the way management organizes the
Company to assess performance and make operating decisions regarding the
allocation of resources. In accordance with the criteria in SFAS No. 131
"Disclosure about Segments of an Enterprise and Related Information," the
Company has concluded it has four operating segments: Operations, Strategy,
Marketing and International; which are aggregated in one reportable segment, the
Management Consulting Services segment. 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 business model transformation.
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 THIRTY-NINE WEEKS ENDED
-----------------------------------------------------------------------------
October 1, 2005 OCTOBER 2, 2004 October 1, 2005 OCTOBER 2, 2004
------------------ ---------------- ------------------ ----------------
United States $ 7,705 $ 5,352 $22,726 $13,930
International:
United Kingdom 248 825 1,019 1,374
Australia 104 65 351 65
Portugal 1,124
The Netherlands 304 39 705
Canada 113
Belize 173
Other 6 25
------- ------- ------- -------
Total $ 8,057 $ 6,546 $24,141 $17,509
======= ======= ======= =======
5. GOODWILL
During the thirty-nine weeks ended October 2, 2004, the Company recorded a $2.2
million goodwill impairment loss related to the discontinuation of the hardware
segment and has reflected this amount in the Statement of Operations and
Comprehensive Loss as a component of discontinued operations. The changes in the
carrying amount of goodwill as of October 1, 2005 are as follows (amounts in
thousands):
Management Consulting Discontinued
Segment Operations Total
--------------------- ------------ -------
Balance as of January 3, 2004 $ 13,365 $ 2,163 $15,528
Impairment loss in year ended January 1, 2005 (2,163) (2,163)
-------- --------- --------
Balance as of January 1, 2005 and October 1, 2005 $ 13,365 $ 0 $13,365
======== ========= ========
6. OTHER IDENTIFIABLE INTANGIBLE ASSETS
Included in the Company's consolidated balance sheet as of October 1, 2005, and
January 1, 2005, are the following identifiable assets (amounts in thousands):
October 1, 2005 January 1, 2005
------------------------ ------------------------
Accumulated Accumulated
Cost Amortization Cost Amortization
------- ------------ ------- ------------
Customer relationships $ 1,908 $(1,666) $ 1,908 $(1,538)
Employment agreements 3,200 (3,200) 3,200 (3,083)
------- ------- ------- -------
Total $ 5,108 $(4,866) $ 5,108 $(4,621)
======= ======= ======= =======
Intangible amortization expense for the thirteen weeks ended October 1, 2005 and
October 2, 2004 was $42,000 and $218,000, respectively. Intangible amortization
expense for the thirty-nine weeks ended October 1, 2005 and October 2, 2004 was
$245,000 and $774,000, respectively. Intangible amortization expense is
estimated to be approximately $43,000 for the remainder of fiscal year 2005,
$171,000 in fiscal year 2006 and $28,000 in fiscal year 2007.
7. INCOME TAXES
In the thirteen weeks ended October 1, 2005, the Company generated income from
continuing operations of $37,000, which would result in a statutory tax expense
of $15,000, however, the Company utilized its net operating loss carry-forwards
to offset a portion of this income tax expense, with the remaining expense
related to state income taxes in jurisdictions where net operating loss
carry-forwards were not available. In the thirty-nine weeks ended October 1,
2005 and the thirteen weeks and thirty-nine weeks ended October 2, 2004, the
Company generated income tax benefits of $210,000, $437,000 and $2.1 million,
respectively. The Company recorded full valuation allowances against these
income tax benefits 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 income tax provisions of $13,000 for the thirteen weeks ended
October 1, 2005 and October 2, 2004, and income tax provisions of $31,000 and
$47,000 for the thirty-nine weeks ended October 1, 2005 and October 2, 2004,
respectively, related to state tax expense. As of October 1, 2005, the Company
recorded $26.8 million of valuation allowance in connection with its deferred
tax assets.
As of October 1, 2005, the Company had an income tax receivable balance of
$162,000, net of reserves, related to pending foreign tax returns. Subsequent to
the end of the third quarter of fiscal year 2005, the Company was notified that
the refunds related to these returns were being challenged. Management intends
to fight this matter vigorously and believes it has established adequate
reserves against these receivables.
The Company establishes reserves for potential tax liabilities when, despite the
belief that tax return positions are fully supported, certain positions are
likely to be challenged and not fully sustained. Such tax reserves are analyzed
on a quarterly basis and adjusted based upon changes in facts and circumstances,
such as the progress of federal and state audits, case law and emerging
legislation. The Company establishes the reserves based upon its assessment of
exposure associated with possible future assessments that may result from the
examination of Federal, state, or international tax returns. These tax reserves
did not change materially during the thirteen weeks ended October 1, 2005 and
October 2, 2004. Management believes that it has established adequate reserves
in the event of loss or settlement of any potential tax liabilities.
8. REAL ESTATE RESTRUCTURING
In the fourth quarter of fiscal year 2004, the Company made the decision to
consolidate office space. In connection with this decision, a sublease agreement
for unutilized space was entered into with a third party for the remainder of
the original lease term. In accordance with SFAS No. 146 "Accounting for Costs
Associated with Exit or Disposal Activities," the decision to consolidate office
space resulted in charges of $75,000 related to the buyout of an office
equipment lease in the thirty-nine weeks ended October 1, 2005. The
restructuring charge of $75,000 has been reflected as a component of Loss from
Operations in the Statement of Operations and Comprehensive Loss.
9. LOAN TO OFFICER
As of October 1, 2005, there is one remaining line of credit between the Company
and its Chief Executive Officer, Richard P. Nespola, which originated in fiscal
year 2001. Aggregate borrowings available and outstanding against the line of
credit at October 1, 2005 and January 1, 2005 totaled $300,000. The balance is
due in 2011. In accordance with the loan provisions, the interest rate charged
on the loans is equal to the Applicable Federal Rate (AFR), as announced by the
Internal Revenue Service, for short-term obligations (with annual compounding)
in effect for the month in which the advance is made, until fully paid. All
interest payments have been made in a timely fashion. 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.
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. Although the Company denies these claims
and plans to vigorously defend itself, management has established reserves of
$160,000 as of October 1, 2005 and January 1, 2005, which it believes are
adequate.
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 October 1, 2005 the Company has outstanding demands aggregating
approximately $1.0 million by the bankruptcy trustees of several former clients
in connection with collected balances near the customers' respective bankruptcy
filing dates. Although the Company does not believe it received any preference
payments from these former clients and plans to vigorously defend its position,
the Company has established reserves of $727,000 as of October 1, 2005 and
January 1, 2005, which it believes are adequate.
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. While the resolution of any of such actions, claims, or
the matters described above may have an impact on the financial results for the
period in which they occur, the Company believes that the ultimate disposition
of these matters will not have a material adverse effect upon its consolidated
results of operations, cash flows or financial position.
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 our annual report on Form 10-K for the fiscal year ended January 1,
2005. 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.
EXECUTIVE FINANCIAL OVERVIEW
As discussed in our 2004 annual report on Form 10-K for the fiscal year ended
January 1, 2005 the communications industry experienced a significant economic
recession from 2001 through 2004. We are a consultancy to the industry, and as a
result experienced a significant reduction in consulting business during that
period primarily due to the recession. We experienced significant revenue
declines and/or net losses from 2001 to 2004. During this period we maintained
relatively consistent gross margins through innovative pricing and high
consultant utilization levels.
Beginning in late 2004 and continuing through the third quarter of 2005, we see
significant change in the industry resulting from consolidation, technology
transformation and the convergence of telecommunications, media and
entertainment sectors. During the thirteen and thirty-nine weeks ended October
1, 2005, our revenues increased 23% and 38%, respectively, compared with the
same periods in 2004. Additionally, gross margins improved to 51% during the
thirty-nine weeks ended October 1, 2005 compared with 47% during the same period
of 2004. We believe these improved operating results and margins are reflective
of our efforts to identify, adapt to and capitalize on these change elements,
combined with growth of wireless and Internet protocol (IP) initiatives within
the communications sector.
Selling, general and administrative costs in the thirteen and thirty-nine weeks
ended October 1, 2005 were up approximately 15% and 8%, respectively, as
compared to the same period of 2004. The increase reflects management's efforts
to invest in intellectual property, including proprietary toolsets and
methodologies to support new wireless and IP consultative and managed services
offerings as well as increases in variable selling expenses to support the
significant increase in revenues. Although these investments have impacted our
short-term profitability, we believe they will better enable us to capitalize on
the industry migration toward wireless and IP platforms. We are also focusing
our marketing efforts on growth markets surrounding large and sustainable
clients to maintain a portfolio of business that is high credit quality, thus
reducing bad debt risks.
Our comprehensive cost containment efforts have provided offset to our
investment initiatives, and have assisted us in generating positive cash from
operations for the thirty-nine weeks ended October 1, 2005, and allowed us to
maintain strong levels of cash and short-term investments. Our short-term
investments primarily consist of money market funds and investment-grade auction
rate securities. Returns on our short-term investments have increased over
recent periods as a result of increasing interest rates.
OPERATIONAL OVERVIEW
Revenues typically consist of consulting fees for professional services and
related expense reimbursements. Our consulting services are typically contracted
on a time and materials basis, a time and materials basis not to exceed contract
price, a fixed fee basis, or contingent fee basis. Contract revenues on
contracts with a not to exceed contract price or a fixed price are recorded
under the percentage of completion method, utilizing estimates of project
completion under both of these types of contracts. Larger fixed price contracts
have recently begun to represent a more significant component of our revenue
mix. Contract revenues on contingent fee contracts are deferred until the
revenue is realizable and earned.
Generally a client relationship begins with a short-term engagement utilizing a
few consultants. Our sales strategy focuses on building long-term relationships
with both new and existing clients to gain additional engagements within
existing accounts and referrals for new clients. Strategic alliances with other
companies are also used to sell services. We anticipate that we will continue to
pursue these marketing strategies in the future. Because we are a consulting
company, we experience fluctuations in revenues derived from clients during the
course of a project lifecycle. As a result, the volume of work performed for
specific clients varies from period to period and a major client from one period
may not use our services 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 unbillable time could harm our
margins.
Cost of services consists primarily of compensation for consultants who are
employees and amortization of equity related non-cash charges incurred in
connection with 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. Gross margins are primarily
impacted by the type of consulting services provided; the size of service
contracts and negotiated volume discounts; changes in our pricing policies and
those of competitors; utilization rates of consultants and independent subject
matter experts; and employee and independent contractor organization costs,
which tend to be higher in a competitive labor market.
Operating expenses include selling, general and administrative, equity related
charges, intangible asset amortization, and real estate restructuring charges.
Sales and marketing expenses consist primarily of personnel salaries, bonuses,
and related costs for direct client sales efforts and marketing
staff. We primarily use a relationship sales model in which partners, principals
and senior consultants generate revenues. In addition, sales and marketing
expenses include costs associated with marketing collateral, product
development, trade shows and advertising. General and administrative expenses
consist mainly of costs for accounting, recruiting and staffing, information
technology, personnel, insurance, rent, and outside professional services
incurred in the normal course of business. The equity related charges consist of
non-cash amortization charges incurred in connection with restricted stock
awards, primarily to principals and certain senior executives.
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 consolidated financial statements,
potentially involve the most subjective judgments in their selection and
application, and are the most susceptible to uncertainties and changing
conditions:
Allowance for Doubtful Accounts;
Impairment of Goodwill and Long-lived Intangible Assets;
Revenue Recognition; and
Deferred Income Tax Assets.
Allowances for Doubtful Accounts--Substantially all of our receivables are owed
by companies in the communications industry. We typically bill customers for
services after all or a portion of the services have been performed and require
customers to pay within 30 days. We attempt to control credit risk by being
diligent in credit approvals, limiting the amount of credit extended to
customers and monitoring customers' payment records and credit status as work is
being performed for them.
We recorded no bad debt expense for the thirteen and thirty-nine week periods
ended October 1, 2005 and recorded bad debt expense of $134,000 and $348,000 for
the thirteen and thirty-nine week periods ended October 2, 2004. During the
thirteen weeks and thirty nine weeks ended October 1, 2005, no provision was
necessary in our allowance for doubtful accounts to maintain a level appropriate
with the anticipated default rate of the underlying accounts receivable
balances. Our allowance for doubtful accounts totaled $363,000 and $396,000 as
of October 1, 2005 and January 1, 2005, respectively. The calculation of these
amounts is based on judgment about the anticipated default rate on receivables
owed to us as of the end of the reporting period. That judgment was based on
uncollected account experience in prior years and our ongoing evaluation of the
credit status of our customers and the communications industry in general.
We have attempted to mitigate credit risk by concentrating our marketing efforts
on the largest and most stable companies in the communications industry and by
tightly controlling the amount of credit provided to customers. If we are
unsuccessful in these efforts, or if our customers file for bankruptcy or
experience financial difficulties, it is possible that the allowance for
doubtful accounts will be insufficient and we will have a greater bad debt loss
than the amount reserved, which would adversely affect our cash flow and
financial performance.
Impairment of Goodwill and Long-lived Intangible Assets--Goodwill and other
long-lived intangible assets arising from our acquisitions are subjected to
periodic review for impairment. SFAS No. 142 requires an annual evaluation at
the reporting unit level of the fair value of goodwill and compares the
calculated fair value of the reporting unit to its book value to determine
whether 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 estimated fair value of the reporting unit, there is a requirement to write
down these assets. The determination of fair value requires management to make
assumptions about future cash flows and discounted rates. These assumptions
require significant judgment and estimations about future events and are thus
subject to significant uncertainty. If actual cash flows turn out to be less
than projected, we may be required to take further write-downs, which could
increase the variability and volatility of our future results.
Effective March 4, 2004, management and the Board of Directors elected to
discontinue our hardware business. We concluded this segment of the business did
not align well with our strategic focus. We incurred goodwill impairment charges
of $2.2 million in the first quarter of fiscal year 2004, related to the
discontinuation of the hardware business, in accordance with the provisions of
SFAS No. 142.
Revenue Recognition--We recognize revenue from time and materials based
contracts in the period in which our services are performed. In addition to time
and materials contracts, our other types of contracts include time and materials
contracts not to exceed contract price, fixed fee contracts, and contingent fee
contracts.
We recognize revenues on time and materials contracts not to exceed contract
price and fixed fee contracts using the percentage of completion method.
Percentage of completion accounting involves calculating the percentage of
services provided during the reporting period compared with the total estimated
services to be provided over the duration of the contract. For all contracts,
estimates of total contract revenues and costs are continuously monitored during
the term of the contract, and recorded revenues and costs are subject to
revisions as the contract progresses. Such revisions may result in material
increases or decreases in revenues and income and are reflected in the financial
statements in the periods in which they are first identified.
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.
As we continue to adapt to changes in the communications consulting industry, we
periodically 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.
Deferred Income Tax Assets--We have generated substantial deferred income tax
assets primarily from the accelerated financial statement write-off of goodwill,
the charge to compensation expense taken for stock options and net operating
loss carry forwards. For us to realize the income tax benefit of these assets,
we must generate sufficient taxable income in future periods when such
deductions are allowed for income tax purposes. In 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 will be exercised. In
assessing whether a valuation allowance is needed in connection with our
deferred income tax assets, we have evaluated our ability to carry back tax
losses to prior years that reported taxable income, and our ability to generate
sufficient taxable income in future periods to utilize the benefit of the
deferred income tax assets. Such projections of future taxable income require
significant subjective judgments and estimates by us. As of October 1, 2005,
cumulative valuation allowances in the amount of $26.8 million were recorded in
connection with the deferred income tax assets. We continue to evaluate the
recoverability of the recorded deferred income tax asset balances. If we
continue to report net operating losses for financial reporting for the entirety
of 2005 or in future years, no additional income tax benefit may be recognized
for those losses, since we would be required to increase our valuation allowance
to offset such amounts.
RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED OCTOBER 1, 2005 COMPARED TO THIRTEEN WEEKS ENDED OCTOBER 2,
2004
REVENUES
Revenues increased 23.1% to $8.1 million for the thirteen weeks ended October 1,
2005 from $6.5 million for the thirteen weeks ended October 2, 2004. The
increase in revenue is primarily attributable to increased penetration of
consulting services to our top 5 client relationships, with emphasis in growth
areas of wireless and IP. During the thirteen weeks ended October 1, 2005 and
October 2, 2004, we provided services on a comparable number of customer
projects, however, revenue per project was $86,000 in the thirteen weeks ended
October 1, 2005, compared to $67,000 in the thirteen weeks ended October 2,
2004. The increase in average revenue per project was primarily attributable to
a small number of large engagements in the mix in the thirteen weeks ended
October 2, 2005. Our international revenue base decreased to 4.4% of our
revenues in the thirteen weeks ended October 1, 2005, from 18.2% in the thirteen
weeks ended October 2, 2004, due primarily to the completion of multiple large
projects in Western Europe at the end of fiscal year 2004, combined with an
increase in our domestic project and revenue base.
Revenues recognized in connection with fixed price and contingent fee
engagements totaled $1.5 million and $2.4 million for the thirteen weeks ended
October 1, 2005 and October 2, 2004, respectively, representing 18.3% and 37.2%
of total revenue, respectively. The mix of contract engagement types will vary
by quarter, depending on the type of engagement.
COSTS OF SERVICES
Direct costs of services increased to $3.8 million for the thirteen weeks ended
October 1, 2005, compared to $3.4 million for the thirteen weeks ended October
2, 2004. As a percentage of revenues, our gross margin based on direct cost of
service was 52.3% for the thirteen weeks ended October 1, 2005, compared to
47.4% for the thirteen weeks ended October 2, 2004. The increase in gross margin
was primarily attributable to a shift in the mix of services to more strategy
and management consulting engagements which typically yield higher margins than
staffing engagements, coupled with higher revenue leading to better utilization
levels.
Non-cash stock based compensation charges were $12,000 for the thirteen weeks
ended October 1, 2005, compared to $51,000 for the thirteen weeks ended October
2, 2004. Non-cash stock based compensation charges primarily relate to the
Company's granting of restricted stock to select executives and key consultants
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.
OPERATING EXPENSES
In total, operating expenses increased to $4.6 million for the thirteen weeks
ended October 1, 2005, or 5.7% from $4.3 million for the thirteen weeks ended
October 2, 2004. Operating expenses include selling, general and administrative
costs, equity related charges, and intangible asset amortization. Selling,
general and administrative expense for the thirteen weeks ended October 1, 2005
was $4.5 million compared to $3.9 million for the thirteen weeks ended October
2, 2004. The increase is primarily related to increased investment in our
initiative to develop our Mobile Virtual Network Enablement (MVNE) offerings and
toolsets for IP transformation.
Intangible asset amortization was $42,000 and $218,000 for the thirteen weeks
ended October 1, 2005 and October 2, 2004, respectively. The $176,000 decrease
in amortization expense was due to certain intangible assets becoming fully
amortized during fiscal year 2004 and first quarter 2005.
Non-cash stock based compensation charges were $60,000 in the thirteen weeks
ended October 1, 2005 compared to $261,000 for the thirteen weeks ended October
2, 2004. The charges relate to the award of restricted stock to select
executives and key employees, which are being amortized on a graded vesting
schedule over a period of two years from the date of grant for the fiscal year
2003 grants and four years from the date of grant for the fiscal year 2005
grants. The decrease in equity-related charges is the result of reversals of
previously recognized compensation expense related to
forfeitures of restricted stock.
OTHER INCOME
Interest income was $424,000 and $189,000 for the thirteen weeks ended October
1, 2005 and October 2, 2004, respectively, and represented interest earned on
invested balances. Interest income increased for the thirteen weeks ended
October 1, 2005 as compared to the thirteen weeks ended October 2, 2004 due
primarily to increases in interest rates from 2004 to 2005. We primarily invest
in money market funds and investment-grade auction rate securities as part of
our overall investment policy.
INCOME TAXES
In the thirteen weeks ended October 1, 2005 and October 2, 2004, we recorded
provision for state income taxes of $13,000. For the thirteen weeks ended
October 1, 2005, the effective tax rate differed from the federal statutory rate
primarily due to our use of net operating loss carry-forwards to offset income
tax expense. For the thirteen weeks ended October 2, 2004, the effective tax
rate differed from the federal statutory rate primarily due to valuation
allowances recorded on tax benefits as a result of uncertainties about their
recoverability.
THIRTY-NINE WEEKS ENDED OCTOBER 1, 2005 COMPARED TO THIRTY-NINE WEEKS ENDED
OCTOBER 2, 2005
REVENUES
Revenues increased 37.9% to $24.1 million for the thirty-nine weeks ended
October 1, 2005, from $17.5 million for the thirty-nine weeks ended October 2,
2004. The increase in revenue is primarily attributable to increased penetration
of consulting services to our top 5 client relationships, with emphasis in
growth areas of wireless and IP. During the thirty-nine weeks ended October 1,
2005, we provided services on 197 customer projects, compared to 153 projects
performed in the thirty-nine weeks ended October 2, 2004. Average revenue per
project was $123,000 in the thirty-nine weeks ended October 1, 2005 compared to
$114,000 in the thirty-nine weeks ended October 23, 2004. International revenue
base decreased to 5.9% of revenues for the thirty-nine weeks ended October 1,
2005, from 20.4% for the thirty-nine weeks ended October 2, 2004, due primarily
to the completion of multiple large projects in Western Europe at the end of
fiscal year 2004, combined with an increase in our domestic project and revenue
base.
Revenues recognized by the Company in connection with fixed price and contingent
fee engagements totaled $6.5 million and $4.5 million for the thirty-nine weeks
ended October 1, 2005 and October 2, 2004, respectively, representing 26.9% and
25.6% of total revenue, respectively.
COST OF SERVICES
Direct costs of services increased to $11.8 million for the thirty-nine weeks
ended October 1, 2005 compared to $9.1 million for the thirty-nine weeks ended
October 2, 2004. As a percentage of revenues, our gross margin based on direct
cost of services was 51.3% for the thirty-nine weeks ended October 1, 2005,
compared to 48.1% for the thirty-nine weeks ended October 2, 2004. The increase
in gross margin was primarily attributable to a shift in the mix of services to
more strategy and management consulting engagements which typically yield higher
margins than staffing engagements.
Non-cash stock based compensation charges were $81,000 for the thirty-nine weeks
ended October 1, 2005, compared to $157,000 for the thirty-nine weeks ended
October 2, 2004. Non-cash stock based compensation charges primarily relate to
our granting of restricted stock to select executives and key consultants 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 decrease
in equity-related charges is the result of reversals of previously recognized
compensation expense related to forfeitures of restricted stock.
OPERATING EXPENSES
In total, operating expenses increased to $14.1 million for the thirty-nine
weeks ended October 1, 2005, or 1.4% from $13.9 million for the thirty-nine
weeks ended October 2, 2004. Operating expenses include selling, general and
administrative costs, real estate restructuring, equity related charges, and
intangible asset amortization. Selling, general and administrative expenses for
the thirty-nine weeks ended October 1, 2005 were $13.3 million compared to $12.3
million for the thirty-nine weeks ended October 2, 2004. The increase is
primarily related to increased investment in our initiative to develop our MVNE
offerings and toolsets for IP transformation, as well as increases in selling
expenses due to significant increase in revenues.
Intangible asset amortization was $245,000 and $774,000 for the thirty-nine
weeks ended October 1, 2005 and October 2, 2004, respectively. The decrease in
amortization expense was due to certain intangible assets becoming fully
amortized during fiscal year 2004 and first quarter 2005.
Non-cash stock based compensation charges were $448,000 in the thirty-nine weeks
ended October 1, 2005 compared to $776,000 for the thirty-nine weeks ended
October 2, 2004. The charges relate to the award of restricted stock to select
executives and key employees, which are being amortized on a graded vesting
schedule over a period of two years from the date of grant for the fiscal year
2003 grants and four years from the date of grant for the fiscal year 2005
grants. The decrease in equity-related charges is the result of reversals of
previously recognized compensation expense related to forfeitures of restricted
stock.
OTHER INCOME
Interest income was $1,127,000 and $470,000 for the thirty-nine weeks ended
October 1, 2005 and October 2, 2004, respectively, and represented interest
earned on invested balances. Interest income increased for the thirty-nine weeks
ended October 1, 2005 due primarily to increases in interest rates from 2004 to
2005. We primarily invest in money market funds and investment-grade auction
rate securities as part of our overall investment policy. Other income increased
due to investment gains recognized in the thirty-nine weeks ended October 1,
2005.
INCOME TAXES
In the thirty-nine weeks ended October 1, 2005 and October 2, 2004, we recorded
provision for state income taxes of $31,000 and $47,000, respectively. The
effective tax rate for these periods differed from the federal statutory rate
primarily due to valuation allowances recorded on tax benefits as a result of
uncertainties about their recoverability.
DISCONTINUED OPERATIONS
In the thirty-nine weeks ended October 2, 2004, charges related to the
discontinuation of the hardware business were $2.2 million for goodwill
impairment and severance charges. In addition, operating losses of the
discontinued operations were $63,000 for the thirty-nine weeks ended October 2,
2004. These amounts are reported within discontinued operations in the Statement
of Operations and Comprehensive Loss.
LIQUIDITY AND CAPITAL RESOURCES
In fiscal year 2004, through additional clarifying guidance, we determined that
our investments in auction rate securities are more appropriately classified as
available-for-sale short-term investments rather than cash equivalents and we
have reflected such change retroactively in our financial statements and in our
liquidity discussions. Auction rate securities generally have long-term stated
maturities; however, for the investor, these securities have certain economic
characteristics of short-term investments because of their rate setting
mechanism. The return on these securities is designed to track short-term
interest rates due to a "Dutch" auction process which resets the coupon rate (or
dividend rate). Auction rate securities are designed to be highly liquid. Unless
an auction fails, an investor can, by electing not to bid, recoup the principal
amount of its investment at each auction date. To date we have experienced no
failed auctions.
Net cash provided by operating activities was $0.6 million for the thirty-nine
weeks ended October 1, 2005, compared to net cash used in operating activities
of $3.7 million for the thirty-nine weeks ended October 2, 2004. We generated
positive cash flow from our operating activities for the thirty-nine weeks ended
October 1, 2005 after offsetting net losses by non-cash operating expenses
consisting of depreciation, amortization, and equity related charges. Negative
cash flow from operating activities for the thirty-nine weeks ended October 2,
2004 was primarily due to operating losses.
Net cash provided by investing activities was $0.7 million and $4.1 million for
the thirty-nine weeks ended October 1, 2005 and October 2, 2004, respectively.
This includes net proceeds from sales and reinvestments of auction rate
securities of $1.0 million and $4.2 million in the thirty-nine weeks ended
October 1, 2005 and October 2, 2004, respectively. Cash provided by investing
activities also includes the acquisition of office equipment, software and
computer equipment of $288,000 and $107,000 for the thirty-nine weeks ended
October 1, 2005 and October 2, 2004, respectively.
Net cash used in financing activities was $36,000 in the thirty-nine weeks ended
October 1, 2005 and related to payments made on unfavorable and capital lease
obligations, partially offset by proceeds received from exercise of stock
options and purchases under our employee stock purchase plan. Net cash provided
by financing activities was $75,000 in the thirty-nine weeks ended October 2,
2004 and proceeds from the exercise of stock options and purchases under our
employee stock purchase plan were slightly in excess of payments made on
unfavorable and capital lease obligations.
At October 1, 2005, we had approximately $52.3 million in cash and cash
equivalents and short-term investments. We believe we have sufficient cash to
meet anticipated cash requirements, including anticipated capital expenditures,
consideration for possible acquisitions, and any future operating losses that
may be incurred, for at least the next 12 months. We have established a flexible
model that provides a lower fixed cost structure than most consulting firms,
enabling us to scale operating cost structures more quickly based on market
conditions. Our strong cash position has enabled us to weather adverse
conditions in the telecommunications industry and to make investments in
intellectual property we believe are enabling us to capitalize on the current
recovery and transformation of the industry; however, if the industry and demand
for consulting services do not continue to rebound and we continue to experience
negative cash flow, we could experience liquidity challenges at some future
point.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not invest excess funds in derivative financial instruments or other
market rate sensitive instruments for the purpose of managing our foreign
currency exchange or interest rate risk. We invest excess funds in short-term
investments, including auction rate securities, the yield of which is exposed to
interest rate market risk. Auction rate securities are classified as
available-for-sale and reported on the balance sheet at cost, which approximates
market value, as the rate on such securities resets generally every 28 to 35
days. Consequently, interest rate movements do not materially affect the balance
sheet valuation of fixed income investments. Changes in the overall level of
interest rates do affect our interest income generated from investments.
We do not have material exposure to market related risks. Foreign currency
exchange rate risk may become material given U.S. dollar to foreign currency
exchange rate changes in international engagements denominated in the local
currency of our clients.
ITEM 4. CONTROLS AND PROCEDURES
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
on that review and evaluation, the CEO and CFO have concluded that our current
disclosure controls and procedures, as designed and implemented, were effective.
There have been no significant changes in our internal control over financial
reporting or in other factors that could significantly affect our internal
control over financial reporting subsequent to the date of their evaluation.
There were no significant material weaknesses identified in the course of such
review and evaluation and, therefore, we took no corrective measures.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We have not been subject to any material new litigation or claims since the time
of our 10-K filing, on April 1, 2005. For a summary of litigation in which we
are currently involved, refer to our annual report on Form 10-K, as filed with
the Securities and Exchange Commission on April 1, 2005 and Note 10 to the
Condensed Consolidated financial statements included elsewhere in this report.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
(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
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 NOVEMBER 15, 2005
------------------------------ EXECUTIVE OFFICER
RICHARD P. NESPOLA
/s/ Donald E. Klumb CHIEF FINANCIAL OFFICER AND NOVEMBER 15, 2005
----------------------------- TREASURER
DONALD E. KLUMB (PRINCIPAL FINANCIAL OFFICER
AND PRINCIPAL ACCOUNTING
OFFICER)