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 April 1, 2006
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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Accelerated Filer [ ] Large Accelerated Filer [ ] Non- Accelerated Filer [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 May 12, 2006 TMNG had outstanding 35,854,985 shares of common stock.
THE MANAGEMENT NETWORK GROUP, INC.
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION:
ITEM 1. Condensed Consolidated Financial Statements (unaudited):
Condensed Consolidated Balance Sheets - April 1, 2006
and December 31, 2005 ..................................... 3
Condensed Consolidated Statements of Operations and
Comprehensive Loss - Thirteen weeks ended April 1, 2006
and April 2, 2005 ........................................... 4
Condensed Consolidated Statements of Cash Flows
- Thirteen weeks ended April 1, 2006 and April 2, 2005 ...... 5
Notes to Condensed Consolidated Financial Statements .......... 6
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ............... 12
ITEM 3. Quantitative and Qualitative Disclosures About
Market Risk ................................................. 15
ITEM 4. Controls and Procedures ...................................... 16
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings ............................................ 16
ITEM 1A. Risk Factors ................................................. 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 Security Holders .......... 16
ITEM 5. Other Information ............................................ 16
ITEM 6. Exhibits ..................................................... 16
Signatures............................................................. 17
Exhibits ............................................................... 18
2
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THE MANAGEMENT NETWORK GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
(unaudited)
April 1, December 31,
2006 2005
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents ................................ $ 15,243 $ 10,951
Short-term investments ................................... 33,200 38,700
Receivables:
Accounts receivable .................................... 4,276 3,886
Accounts receivable - unbilled ......................... 2,861 2,559
--------- ---------
7,137 6,445
Less: Allowance for doubtful accounts .................. (294) (296)
--------- ---------
6,843 6,149
Refundable income taxes ................................. 112 117
Prepaid and other assets ................................ 1,177 1,262
--------- ---------
Total current assets ........................... 56,575 57,179
--------- ---------
Property and equipment, net ............................... 948 900
Goodwill ................................................... 13,365 13,365
Identifiable intangible assets, net ........................ 1,536 1,651
Other assets ............................................... 452 454
--------- ---------
Total Assets ............................................... $ 72,876 $ 73,549
========= =========
CURRENT LIABILITIES:
Trade accounts payable ................................... $ 578 $ 1,025
Accrued payroll, bonuses and related expenses ............ 1,760 1,136
Other accrued liabilities ................................ 1,896 1,893
Unfavorable and capital lease obligations 623 628
--------- ---------
Total current liabilities ...................... 4,857 4,682
Unfavorable and capital lease obligations .................. 2,675 2,819
STOCKHOLDERS' EQUITY
Common Stock: ............................................ 36 36
Voting - $.001 par value, 100,000,000 shares authorized; 35,790,286 and
35,705,520 issued and outstanding on April 1, 2006 and December 31, 2005,
respectively
Preferred stock -- $.001 par value, 10,000,000 shares
authorized, no shares issued or outstanding
Additional paid-in capital ............................... 160,025 159,586
Accumulated deficit ...................................... (94,868) (93,305)
Accumulated other comprehensive income -
Foreign currency translation adjustment ................. 151 147
Unearned compensation .................................... (416)
--------- ---------
Total stockholders' equity ...................... 65,344 66,048
--------- ---------
Total Liabilities and Stockholders' Equity ................. $ 72,876 $ 73,549
========= =========
See notes to condensed consolidated financial statements.
3
THE MANAGEMENT NETWORK GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE LOSS
(In thousands, except per share data)
(unaudited)
For the Thirteen Weeks Ended
------------------------------
April 1, April 2,
2006 2005
-------- ---------
Revenues .................................. $ 7,163 $ 7,067
Cost of services (including equity related
charges of $193 and $35 for the
thirteen weeks ended April 1, 2006
and April 2, 2005, respectively)......... 3,544 3,429
-------- --------
Gross Profit .............................. 3,619 3,638
Operating Expenses:
Selling, general and administrative
(including equity related charges of
$510 and $188 for the thirteen weeks
ended April 1, 2006 and April 2, 2005,
respectively).......................... 5,581 4,335
Real estate restructuring ............... 75
Intangible asset amortization............ 115 160
-------- --------
Total operating expenses .............. 5,696 4,570
-------- --------
Loss from operations ...................... (2,077) (932)
Other Income:
Interest income ......................... 535 324
Other, net .............................. 15
-------- --------
Total other income .................... 535 339
-------- --------
Loss from continuing operations before
income tax provision ..................... (1,542) (593)
Income tax provision ...................... (21) (15)
-------- --------
Net loss .................................. (1,563) (608)
-------- --------
Other comprehensive item -
Foreign currency translation
adjustment ............................ 4 (70)
-------- --------
Comprehensive loss ........................ $ (1,559) $ (678)
======== ========
Loss per common share
Basic and Diluted $ (0.04) $ (0.02)
======== ========
Weighted average shares used in calculation
of net loss per common share
Basic and Diluted ..................... 35,625 34,977
======== ========
See notes to condensed consolidated financial statements.
4
THE MANAGEMENT NETWORK GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
For the Thirteen Weeks Ended
------------------------------
April 1, April 2,
2006 2005
---------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .............................................. $ (1,563) $ (608)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization ...................... 214 282
Equity related charges ............................. 703 223
Other changes in operating assets and liabilities:
Accounts receivable ........................... (392) 1,066
Accounts receivable - unbilled ................ (302) (2,018)
Refundable income taxes ....................... 5 590
Prepaid and other assets ...................... 87 67
Trade accounts payable ........................ (447) (291)
Accrued liabilities ........................... 625 59
-------- --------
Net cash used in operating activities ...... (1,070) (630)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments ................... (800)
Proceeds from maturities and sales of short-term
investments .......................................... 6,300 2,750
Acquisition of property and equipment ................. (147) (86)
-------- --------
Net cash provided by investing activities .. 5,353 2,664
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments made on long-term obligations ................ (147) (263)
Proceeds from exercise of stock options ............... 152 158
-------- --------
Net cash provided by (used in) financing
activities ............................... 5 (105)
-------- --------
Effect of exchange rate on cash and cash
equivalents ............................................ 4 (70)
-------- --------
Net increase in cash and cash equivalents ............... 4,292 1,859
Cash and cash equivalents, beginning of period .......... 10,951 10,882
-------- --------
Cash and cash equivalents, end of period ................ $ 15,243 $ 12,741
======== ========
Supplemental disclosure of cash flow information:
Cash paid during period for interest .................... $ $ 1
======== ========
Cash paid during period for taxes, net of refunds ....... $ 16 $ 15
======== ========
Non-cash acquisitions of property and equipment
included in accrued liabilities ...................... $ $ 169
======== ========
See notes to condensed consolidated financial statements.
5
THE MANAGEMENT NETWORK GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Reporting
The accompanying condensed consolidated financial statements of The Management
Network Group, Inc. ("TMNG" or the "Company") as of April 1, 2006 and for the
thirteen weeks ended April 1, 2006 and April 2, 2005, are unaudited and reflect
all normal recurring adjustments which are, in the opinion of management,
necessary for the fair presentation of the Company's condensed consolidated
financial position, results of operations, and cash flows as of these dates and
for the periods presented. The condensed consolidated 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 ("US GAAP") 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. The Condensed Consolidated Balance Sheet as
of December 31, 2005 has been derived from the audited Consolidated Balance
Sheet at that date but does not include all of the information and footnotes
required by US GAAP for complete financial statements.
Research and Development Costs - Expenditures relating to development of new
offerings and services are expensed as incurred. Research and development costs
(exclusive of associated sales and marketing related costs) were $180,000 and
$115,000 in the thirteen weeks ended April 1, 2006 and April 2, 2005,
respectively.
2. Share-Based Compensation
In December 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 123R, "Share-Based Payment." SFAS
No. 123R is a revision of SFAS No. 123, "Accounting for Stock-based
Compensation," and supersedes Accounting Principles Board Opinion ("APB") No.
25, "Accounting for Stock Issued to Employees," and its related implementation
guidance. SFAS No. 123R focuses primarily on accounting for transactions in
which an entity obtains employee and non-employee services in exchange for
share-based payment transactions. SFAS No. 123R establishes fair value as the
measurement objective in accounting for share-based payment arrangements and
requires all companies to apply a fair-value-based measurement method in
accounting for generally all share-based payment transactions with employees and
non-employees.
On January 1, 2006, the Company adopted SFAS No. 123R using the modified
prospective transition method. Accordingly, prior period amounts have not been
restated; however, the balance presented as unearned compensation on nonvested
shares (restricted stock) within stockholders' equity has been reclassified to
additional paid-in capital as of January 1, 2006. Additionally, amounts
previously classified as "equity related charges" on the condensed consolidated
statements of operations and comprehensive loss have been reclassified to cost
of services or selling, general and administrative expense, as appropriate. SFAS
No. 123R requires the netting of estimated forfeitures against compensation
expense. The adoption of that policy was immaterial, therefore no cumulative
effect change in accounting has been reported. Compensation expense is based on
the calculated fair value of the awards and is expensed over the service period
(generally the vesting period). Prior to the adoption of SFAS No. 123R, the
Company utilized the intrinsic value methodology in accounting for stock-based
compensation for employees and non-employee directors in accordance with the
provisions of APB No. 25 and related Interpretations.
Under the modified prospective transition method, compensation cost associated
with stock options and nonvested shares for the thirteen weeks ended April 1,
2006 includes: (a) compensation cost for awards granted prior to, but not yet
vested as of January 1, 2006, based on the grant date fair value estimated in
accordance with the original provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation" and (b) compensation cost for awards granted
subsequent to January 1, 2006, based on the grant date fair value under SFAS No.
123R.
Prior to Adoption of SFAS No. 123R
During the thirteen weeks ended April 2, 2005, the Company recognized
compensation expense of $223,000 related to the nonvested share grants made to
key management personnel in prior periods. In addition, during the thirteen
weeks ended April 2, 2005, the Company granted options to purchase 205,000
shares of the Company's common stock to employees at a weighted average exercise
price of $2.36 per share. At the date of the grants, the exercise price of the
option awards equaled the market price of the Company's common stock.
6
The following table summarizes the pro forma effect of stock-based compensation
on net loss and net loss per share for the thirteen weeks ended April 2, 2005:
THIRTEEN
WEEKS ENDED
APRIL 2, 2005
-------------
Net loss, as reported: $ (608)
Add: stock-based employee compensation
expense included in reported net loss 223
Deduct: Total stock-based compensation
expense determined under fair value based
method for all awards (606)
-----------
Pro forma net loss $ (991)
===========
Loss per share
Basic and diluted, as reported $ (0.02)
===========
Basic and diluted, pro forma $ (0.03)
===========
Subsequent to Adoption of SFAS No. 123R
The Company estimates the fair value of our stock options and stock issued under
the Employee Stock Purchase Plan using the Black-Scholes-Merton option pricing
model. Groups of employees or non-employee directors that have similar
historical and expected exercise behavior are considered separately for
valuation purposes. The table below shows the weighted average of the
assumptions used in estimating the fair value of stock options granted during
the thirteen weeks ended April 1, 2006 and April 2, 2005:
THIRTEEN THIRTEEN
WEEKS ENDED WEEKS ENDED
APRIL 1, 2006 APRIL 2, 2005
---------------- -----------------
Risk-free interest rate........ 4.46% - 4.83% 3.58% - 3.99%
Expected life.................. 6 years 5 years
Expected volatility factor..... 83% 90%
Expected dividend rate......... 0% 0%
The risk-free interest rate is based on the U.S. Treasury yield at the time of
grant for a term equal to the expected life of the stock option; prior to the
adoption of SFAS No. 123R, the expected life is based on historical and expected
exercise behavior; subsequent to the adoption of SFAS No. 123R, the expected
life was determined using the simplified method of estimating the life as
allowed under Staff Accounting Bulletin No. 107, "Share-Based Payment"; and the
expected volatility is based on the historical volatility of our stock price for
a period of time equal to the expected life of the stock option.
Nearly all of the Company's stock based compensation arrangements utilize graded
vesting schedules where a portion of the grant vests annually over a period of
two to four years. The Company has a policy of recognizing compensation expense
for awards with graded vesting over the requisite service period for each
separately vesting portion of the award as if the award was, in-substance,
multiple awards. This policy has the effect of accelerating the recognition of
expense when compared to a straight-line amortization methodology.
As of April 1, 2006, the Company has three share-based compensation plans, which
are described below. The compensation cost that has been charged against income
for those plans under SFAS No. 123R was $703,000 for the thirteen weeks ended
April 1, 2006. As of April 1, 2006, unrecognized compensation cost, net of
estimated forfeitures, related to the unvested portion of all share-based
compensation arrangements was approximately $3.7 million and is expected to be
recognized over a weighted-average period of approximately 1.2 years. The
Company has historically issued and expects to continue to issue new shares to
satisfy stock option exercises, vesting of nonvested shares or purchases of
shares under the Employee Stock Purchase Plan.
1998 EQUITY INCENTIVE PLAN
Stock Options
The Company's 1998 Equity Incentive Plan (the 1998 Plan) is a shareholder
approved plan, which provides for the granting of incentive stock options and
nonqualified stock options to employees, and nonqualified stock options and
nonvested shares to employees, directors and consultants. As of April 1, 2006,
the Company has 3,530,362 shares of the Company's common stock available to
grant as stock options under the 1998 Plan. Incentive stock options are granted
at an exercise price of not less than market value per share of the common stock
on the
7
date of grant as determined by the Board of Directors. Vesting and exercise
provisions are determined by the Board of Directors. As of April 1, 2006, all
options granted under the 1998 Plan were non-qualified stock options. Options
granted under the 1998 Plan generally become exercisable over a three to four
year period beginning on the date of grant. Options granted under the 1998 Plan
have a maximum term of ten years.
A summary of the option activity of the Company's 1998 Plan as of April 1, 2006
and changes during the thirteen weeks then ended is presented below:
WEIGHTED AVERAGE
WEIGHTED AVERAGE REMAINING AGGREGATE
SHARES EXERCISE PRICE CONTRACTUAL TERM INTRINSIC VALUE
------------ ---------------- ----------------- -----------------
Outstanding at December 31, 2005 5,052,405 $ 4.50
Granted 652,000 $ 2.46
Exercised (84,766) $ 1.78
Forfeited/cancelled (92,377) $ 6.11
---------
Outstanding at April 1, 2006 5,527,262 $ 4.28 7.4 years $469,000
=========
Options exercisable at April 1, 2006 2,730,077 $ 6.19 5.5 years $388,000
=========
Weighted average fair value of
options granted during the period $ 1.83
The total intrinsic value of options exercised during the thirteen weeks ended
April 1, 2006 was $68,000. As of April 1, 2006, unrecognized compensation cost,
net of estimated forfeitures, related to the unvested portion of stock options
issued under the 1998 Plan was approximately $2.8 million and is expected to be
recognized over a weighted-average period of approximately 1.2 years.
Nonvested Shares
As of April 1, 2006, the Company has 1,055,000 shares of the Company's common
stock available for grant as nonvested shares under the 1998 Plan for key
management personnel. The shares are subject to restriction based upon a two to
four year vesting schedule. The fair value of nonvested share awards is
determined based on the closing trading price of our common stock on the grant
date.
A summary of the status of nonvested shares granted under the 1998 Plan as of
April 1, 2006 and changes during the thirteen weeks then ended is presented
below:
WEIGHTED AVERAGE
GRANT DATE
SHARES FAIR VALUE
-------- ----------------
Outstanding at December 31, 2005 310,500 $2.31
Vested (43,750) $2.24
--------
Outstanding at April 1, 2006 266,750 $2.32
========
As of April 1, 2006, there was $329,000 of total unrecognized compensation cost
related to nonvested shares granted under the 1998 Plan. The cost is expected to
be recognized over a weighted average period of 1.9 years. The total fair value
of shares vested during the thirteen weeks ended April 1, 2006 was $98,000.
2000 SUPPLEMENTAL STOCK PLAN
As of April 1, 2006, the Company has 2,721,087 shares of the Company's common
stock available to grant as stock options under the 2000 Supplemental Stock Plan
(the 2000 Plan). The 2000 Plan provides the Company's common stock for the
granting of nonqualified stock options to employees and is not subject to
shareholder approval. Vesting and exercise provisions are determined by the
Board of Directors. Options granted under the plan generally become exercisable
over a period of up to four years beginning on the date of grant and have a
maximum term of ten years.
8
A summary of the option activity of the Company's 2000 Plan as of April 1, 2006
and changes during the thirteen weeks then ended is presented below:
WEIGHTED AVERAGE
WEIGHTED AVERAGE REMAINING AGGREGATE
SHARES EXERCISE PRICE CONTRACTUAL TERM INTRINSIC VALUE
------------ ---------------- ----------------- -----------------
Outstanding at December 31, 2005 957,040 $4.63
Granted 132,500 $2.48
Forfeited/cancelled (22,500) $3.50
---------
Outstanding at April 1, 2006 1,067,040 $4.39 6.8 years $26,000
=========
Options exercisable at April 1, 2006 683,891 $5.45 5.5 years $15,000
=========
Weighted average fair value of
options granted during the period $1.82
As of April 1, 2006, unrecognized compensation cost, net of estimated
forfeitures, related to the unvested portion of stock options issued under the
2000 Plan was approximately $420,000 and is expected to be recognized over a
weighted-average period of approximately 1.2 years.
EMPLOYEE STOCK PURCHASE PLAN
Under the Employee Stock Purchase Plan (ESPP), shares of the Company's common
stock may be purchased at six-month intervals at 85% of the lower of the fair
market value on the first day of the enrollment period or on the last day of
each six-month period. Employees may purchase shares through a payroll deduction
program having a value not exceeding 15% of their gross compensation during an
offering period. In the thirteen weeks ended April 1, 2006, we recognized
expense under SFAS No. 123R associated with purchases under the ESPP of $67,000.
3. 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. 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 April 1, 2006 and April 2, 2005, 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
April 1, 2006 and April 2, 2005 the treasury method of calculating common stock
equivalents would have resulted in approximately 374,000 and 475,000 additional
diluted shares, respectively.
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. The company intends to
continue to measure and report its activities using our current segment
structure. However, as the services provided by the Company evolve, management
will continue to evaluate its segment reporting structure.
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
--------------------------------------------------------------------
APRIL 1, 2006 APRIL 2, 2005
------------- -------------
United States $ 6,945 $ 6,608
International:
The Netherlands 39
United Kingdom 218
345
Other
75
------- -------
Total $7,163 $ 7,067
======= =======
9
5. Other Identifiable Intangible Assets
Included in the Company's consolidated balance sheets as of April 1, 2006 and
December 31, 2005, are the following identifiable intangible assets (amounts in
thousands):
April 1, 2006 December 31, 2005
------------------------ ------------------------
Accumulated Accumulated
Cost Amortization Cost Amortization
------- ------------ ------- ------------
Customer relationships $ 1,908 $(1,751) $ 1,908 $(1,709)
Employee agreements 3,200 (3,200)
S3 license agreement 1,500 (121) 1,500 (48)
------- ------- ------- -------
Total $ 3,408 $(1,872) $ 6,608 $(4,957)
======= ======= ======= =======
Intangible amortization expense for the thirteen weeks ended April 1, 2006 and
April 2, 2005 was $115,000 and $160,000, respectively. Intangible amortization
expense is estimated to be approximately $346,000 for the remainder of fiscal
year 2006, $319,000 in fiscal year 2007 and $290,000 each in fiscal years 2008
through 2010.
6. Income Taxes
In the thirteen weeks ended April 1, 2006 and April 2, 2005, the Company
generated income tax benefits of $624,000 and $233,000, respectively. The
Company recorded full valuation allowances against these income tax benefits in
accordance with provisions of SFAS No. 109 "Accounting for income tax", which
requires an estimation of the recoverability of the recorded income tax asset
balances. In addition, the Company reported income tax provision of $21,000 and
$15,000 for the thirteen weeks ended April 1, 2006 and April 2, 2005,
respectively, related to state tax expense. As of April 1, 2006, the Company has
recorded $27.8 million of valuation allowances in connection with its net
deferred tax assets.
7. 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 a charge of $75,000 related to the buyout of an office
equipment lease in the thirteen weeks ended April 2, 2005. The restructuring
charge has been reflected as a component of Loss from Operations in the
Statement of Operations and Comprehensive Loss.
8. Loans to Officers
As of April 1, 2006, there is one outstanding line of credit between the Company
and its Chief Executive Officer, Richard P. Nespola, which originated in fiscal
year 2001. Aggregate borrowing outstanding against the line of credit at April
1, 2006 and December 31, 2005 totaled $300,000 and are due in 2011. These
amounts are included in other assets in the non-current assets section of the
balance sheet. In accordance with the loan provisions, the interest rate charged
on the loans is equal to the Applicable Federal Rate (AFR), as announced by the
Internal Revenue Service, for short-term obligations (with annual compounding)
in effect for the month in which the advance is made, until fully paid. Pursuant
to the Sarbanes-Oxley Act, no further loan agreements or draws against the line
may be made by the Company to, or arranged by the Company for its executive
officers. Interest payments on this loan are current as of April 1, 2006.
9. 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 also sued TMNG for at least
$1.85 million for breach of contract, breach of fiduciary duties and negligence.
In March 2006, the Company reached a settlement agreement with the bankruptcy
trustee whereby the Company agreed to pay the trustee $255,000 in exchange for
being released from all potential liability under the suits discussed above.
This settlement was fully reserved for as of December 31, 2005.
Additionally, as of April 1, 2006 the Company had outstanding demands
aggregating approximately $1.0 million by the bankruptcy trustees of several
former clients in connection with collected balances near the customers'
respective bankruptcy filing dates. Although the Company does not believe it
received any preference payments from these former clients and plans to
vigorously defend its position, the Company has established reserves of $727,000
as of April 1, 2006 and December 31, 2005, which it believes are adequate in the
event of loss or settlement on remaining outstanding claims.
10
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.
The Company establishes reserves for potential tax liabilities when, despite the
belief that tax return positions are fully supported, certain positions are
likely to be challenged and not be fully sustained. Such tax reserves are
analyzed on a quarterly basis and adjusted based upon changes in facts and
circumstances, such as the progress of federal and state audits, case law and
emerging legislation. The Company's effective tax rate includes the impact of
such tax reserves and changes to these reserves as considered appropriate by
management. The Company establishes the reserves based upon its assessment of
exposure associated with possible future assessments that may result from the
examination of federal, state, or international tax returns. These tax reserves
were $649,000 at April 1, 2006 and December 31, 2005. Management believes that
it has established adequate reserves in the event of loss or settlement of any
potential tax liabilities.
10. Subsequent Event
On April 3, 2006, we entered into an Asset Purchase Agreement with Adventis
Limited, a United Kingdom company ("Limited") and Adventis Corporation, a
Delaware corporation and the parent of Limited (together with Limited,
"Adventis"), pursuant to which we have purchased all of the assets used in the
operation of Adventis' international consulting business outside North America.
Adventis is a global consulting firm specializing in telecommunications,
technology and digital media. The acquired international operations of Adventis
consist of 27 consultants located in London and Berlin with revenues from
clients in Europe and Asia. The transaction was valued at a purchase price of
approximately $1.65 million, with approximately $1.5 million paid in cash at
closing, plus the assumption of approximately $125,000 in net working capital
deficiency. The acquisition closed on April 3, 2006.
Behrman Capital and its affiliates (collectively "Behrman"), an owner of 35% of
TMNG's outstanding common stock, also owns 61% of the outstanding common stock
of Adventis Corporation. Gant G. Behrman and William M. Matthes, who serve on
the Board of Directors, are the Co-Managing Partners of Behrman. Despite owning
a majority of Adventis Corporation's common stock, Behrman did not control
Adventis at the time of this transaction. Adventis was under the control of its
senior secured creditors as it underwent a sale of the business. In order to
execute this purchase as an arms-length transaction, TMNG formed a Special
Committee of the Board of Directors to evaluate the acquisition. The Special
Committee consisted of the four independent board members not part of TMNG
management or affiliated with Behrman. Behrman received none of the proceeds of
this transaction.
11
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 "Risk Factors" in
our annual report on Form 10-K for the fiscal year ended December 31, 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.
The following should be read in connection with Management's Discussion and
Analysis of Financial Condition and Results of Operations as presented in our
annual report on Form 10-K for the fiscal year ended December 31, 2005.
EXECUTIVE FINANCIAL OVERVIEW
As discussed in our 2005 annual report on Form 10-K for the fiscal year ended
December 31, 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
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 first quarter of 2006, we have
seen significant changes in the industry resulting from consolidation,
technology transformation and the convergence of the telecommunications, media
and entertainment sectors. During the thirteen weeks ended April 1, 2006, our
revenues increased 1.4% compared with the thirteen weeks ended April 2, 2005 and
15% compared to the thirteen weeks ended December 31, 2005. Gross margins were
50.5% in the first quarter of 2006 compared with 51.5% in the first quarter of
2005. On January 1, 2006, we adopted SFAS No. 123R which reduced gross margins
for the quarter by 2.6%, offsetting improvements in gross margin due to a shift
in the mix of business to more strategy consulting engagements. We continue to
focus our efforts on identifying, adapting to and capitalizing on the change
elements present in the converging communications industry, as well as
emphasizing wireless and IP initiatives within the communications sector.
Selling, general and administrative costs in the thirteen weeks ended April 1,
2006 and April 2, 2005 were up 28.7% as compared to the same period of 2005. The
increase reflects the impact of the adoption of SFAS No. 123R of $443,000 in the
thirteen weeks ended April 1, 2006. In addition we incurred increased recruiting
and incentive compensation costs associated with growth in our CSMG business
unit along with additional salaries, travel and entertainment expenses
associated with investment in new clients and intellectual property. Although
these costs have impacted our short-term profitability, we believe they will
better enable us to capitalize on the industry convergence and 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.
It is important to note that subsequent to April 1, 2006, we finalized an asset
purchase agreement with Adventis Limited, a United Kingdom company ("Limited")
and Adventis Corporation, a Delaware corporation and the parent of Limited
(together with Limited, "Adventis"), pursuant to which we have purchased all of
the assets used in the operation of Adventis' international consulting business
outside North America. Adventis is a global consulting firm specializing in
telecommunications, technology and digital media. The acquired international
operations of Adventis consist of 27 consultants located in London and Berlin
with revenues from clients in Europe and Asia. The transaction was valued at a
purchase price of approximately $1.65 million, with approximately $1.5 million
paid in cash at closing, plus the assumption of approximately $125,000 in net
working capital deficiency. The acquisition closed on April 3, 2006.
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. Revenues on contracts with a
not to exceed contract price or a fixed cost contract 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
margins.
12
Cost of services consists primarily of compensation for consultants who are
employees and equity related charges for stock options and nonvested shares
(restricted stock) 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 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. Included in selling, general and administrative
expenses are equity related charges incurred in connection with stock-based
compensation awards.
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 record and credit status as work is
being performed for them.
We recorded no bad debt expense in the thirteen weeks ended April 1, 2006 and
April 2, 2005, as no provision was necessary for 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 $294,000 and $296,000 as of April 1, 2006 and December 31, 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 financial performance
and cash flow.
Impairment of Goodwill and Long-lived Intangible Assets - Goodwill and other
long-lived intangible assets arising from our acquisitions are subjected to
periodic review for impairment. SFAS No. 142 requires an annual evaluation at
the reporting unit level of the fair value of goodwill and compares the
calculated fair value of the reporting unit to its book value to determine
whether an impairment has been deemed to occur. Any impairment charge would be
based on the most recent estimates of the recoverability of the recorded
goodwill. If the remaining book value assigned to goodwill in an acquisition is
higher than the estimated fair value of the reporting unit, there is a
requirement to write down these assets. 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.
Revenue Recognition--We recognize revenue from time and material 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 a material
increase or decrease in revenues and income and are reflected in the financial
statements in the periods in which they are first identified.
13
We also may enter into contingent fee contracts, in which revenue is subject to
achievement of savings or other agreed upon results, rather than time spent. Due
to the nature of contingent fee contracts, we recognize costs as they are
incurred on the project and defer revenue recognition until the revenue is
realizable and earned as agreed to by our clients. Although these contracts can
be very rewarding, the profitability of these contracts is dependent on our
ability to deliver results for our clients and control the cost of providing
these services. 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. We did not enter into or deliver on any contingent fee
contracts for the thirteen weeks ended April 1, 2006.
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 carryforwards. 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 April 1, 2006, cumulative
valuation allowances in the amount of $27.8 million were recorded in connection
with the net 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 in future years,
no additional tax benefit would 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 APRIL 1, 2006 COMPARED TO THIRTEEN WEEKS ENDED APRIL 2,
2005
On January 1, 2006, the Company adopted SFAS No. 123R using the modified
prospective transition method. SFAS No. 123R requires the Company to recognize
compensation expense for all share-based awards made to employees and
non-employee directors. Compensation expense is based on the calculated fair
value of the awards as measured at the grant date using the Black-Scholes-Merton
option pricing model and is expensed ratably over the service period of the
awards (generally the vesting period). For periods prior to the adoption of SFAS
No. 123R, the Company utilized the intrinsic value methodology in accounting for
stock-based compensation for employees and non-employee directors in accordance
with the provisions of Accounting Principles Board (APB) No. 25, "Accounting for
Stock Issued to Employees," and related Interpretations.
REVENUES
Revenues increased 1.4% to $7.2 million for the thirteen weeks ended April 1,
2006 from $7.1 million for the thirteen weeks ended April 2, 2005. The increase
in revenue is attributable to greater than 100 percent growth in our CSMG
business unit, largely offset by the unexpected pullback of a major client
project due to the client's business restructuring which negatively impacted
revenues by approximately $1 million. During the thirteen weeks ended April 1,
2006, the Company provided services on 83 customer projects, compared to 123
projects performed in the thirteen weeks ended April 2, 2005. Average revenue
per project was $86,000 in the thirteen weeks ended April 1, 2006 compared to
$57,000 in the thirteen weeks ended April 2, 2005. The increase in average
revenue per project was primarily attributable to a shift in the mix of business
to larger higher rate strategy-related projects in the thirteen weeks ended
April 1, 2006. Our international revenue base decreased to 3.0% of revenues for
the thirteen weeks ended April 1, 2006, from 6.5% for the thirteen weeks ended
April 2, 2005, due primarily to the completion of multiple large projects in
Western Europe in the latter part of fiscal year 2005, combined with an increase
in our domestic project and revenue base.
Revenues recognized in connection with fixed price and contingent fee
engagements totaled $3.4 million and $3.2 million, representing 46.9% and 45.2%
of total revenue, for the thirteen weeks ended April 1, 2006 and April 2, 2005,
respectively, . This increase is due to the mix of our business shifting to more
strategy and management consulting engagements which are more likely to be
structured as fixed price or contingent fee engagements.
COSTS OF SERVICES
Costs of services increased 3.4% for the thirteen weeks ended April 1, 2006,
compared to the thirteen weeks ended April 2, 2005. As a percentage of revenue,
our gross margin was 50.5% for the thirteen weeks ended April 1, 2006, compared
to 51.5% for the thirteen weeks ended April 2, 2005. The decrease in gross
margin was primarily attributable to the adoption of SFAS No. 123R effective
January 1, 2006 which resulted in a reduction of gross margins of 2.6%,
offsetting improvements in gross margin obtained by a shift in the mix of
services to more strategy and management consulting engagements in relation to
resourcing engagements.
OPERATING EXPENSES
In total, operating expenses increased by 24.6% to $5.7 million for the thirteen
weeks ended April 1, 2006, from $4.6 million for the thirteen weeks ended April
2, 2005. Operating expenses include selling, general and administrative costs
(inclusive of equity related charges), real estate restructuring charges and
intangible asset amortization.
14
Selling, general and administrative expense increased to $5.6 million or 28.7%
in the thirteen weeks ended April 1, 2006, compared to the thirteen weeks ended
April 1, 2005. The increase is partially related to equity related charges of
$510,000 in the thirteen weeks ended April 1, 2006 compared to $188,000 for the
thirteen weeks ended April 2, 2005. The increase in equity related charges is
attributable to the adoption of SFAS No. 123R and incentive compensation
effective January 1, 2006. In addition we incurred increased recruiting and
incentive compensation costs associated with growth in our CSMG business unit
along with additional salaries, travel and entertainment expenses associated
with investment in new clients and intellectual property.
Intangible asset amortization was $115,000 and $160,000 for the thirteen weeks
ended April 1, 2006 and April 2, 2005, respectively. The decrease in
amortization expense was due to certain intangible assets becoming fully
amortized in early first quarter 2005.
OTHER INCOME AND EXPENSES
Interest income was $535,000 and $324,000 for the thirteen weeks ended April 1,
2006 and April 2, 2005, respectively, and represented interest earned on
invested balances. Interest income increased for the thirteen weeks ended April
1, 2006 as compared to the thirteen weeks ended April 2, 2005 due to increases
in interest rates from 2005 to 2006. 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 April 1, 2006 and April 2, 2005 we recorded no
income tax benefit related to our pre-tax losses 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. We
continue to evaluate the recoverability of our recorded deferred income tax
asset balances. If we continue to report net operating losses for financial
reporting, no additional tax benefit would be recognized for those losses, since
we would be required to increase our valuation allowance to offset such amounts.
We reported an income tax provision of $21,000 and $15,000 for the thirteen
weeks ended April 1, 2006 and April 2, 2005, respectively, related to state tax
expense.
NET LOSS
Net loss increased 157% to $1.6 million for the thirteen weeks ended April 1,
2006, from $608,000 for the thirteen weeks ended April 2, 2005. The increase was
primarily attributable to the impact of the adoption of SFAS No. 123R as well as
increased selling, general and administrative expenses due to the strategic
addition of consultants to support growth in our CSMG business unit.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $1.1 million and $0.6 million for the
thirteen weeks ended April 1, 2006 and April 2, 2005, respectively. Cash used in
operating activities for the thirteen weeks ended April 1, 2006 and April 2,
2005 primarily related to operating losses.
Net cash provided by investing activities was $5.4 million and $2.7 million for
the thirteen weeks ended April 1, 2006 and April 2, 2005, respectively. This
includes net proceeds from sales and reinvestments of auction rate securities of
$5.5 million and $2.8 million in the thirteen weeks ended April 1, 2006 and
April 2, 2005, respectively. Cash used in investing activities also includes
$147,000 and $86,000 for the thirteen weeks ended April 1, 2006 and April 2,
2005, respectively, related to spending on capitalized office equipment,
software and computer equipment.
Net cash provided by financing activities was $5,000 in the thirteen weeks ended
April 1, 2006, and related to proceeds received from the exercise of employee
stock options, partially offset by payments made on long-term obligations. Net
cash used in financing activities was $105,000 in the thirteen weeks ended April
2, 2005, and related to payments made by the Company on the current portion of
capital lease obligations, partially offset by proceeds received from the
exercise of stock options.
At April 1, 2006, we had approximately $48.4 million in cash, cash equivalents,
and short-term investments. We believe we have sufficient cash and short-term
investments 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. Should our cash
and short-term investments prove insufficient we might need to obtain new debt
or equity financing to support our operations or complete acquisitions. 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 and absence of
long-term debt have 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 our 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 rate risk. We invest excess funds in short-term investments,
including auction rate securities, the yield of which is exposed to interest
rate market risk. Auction rate securities are classified as available-for-sale
and reported on the balance sheet at fair value,
15
which equals market value, as the rate on such securities resets generally every
28 to 35 days. Consequently, interest rate movements do not materially affect
the balance sheet valuation of 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 and significant increases 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 controls or in other
factors that could significantly affect our internal controls subsequent to the
date of their evaluation. There were no significant material weaknesses
identified in the course of such review and evaluation and, 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 March 30, 2006. 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 March 30, 2006 and Note 9 of the
Condensed Consolidated Financial Statements included elsewhere in this report.
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 also sued us for at least
$1.85 million for breach of contract, breach of fiduciary duties and negligence.
In March 2006, we reached a settlement agreement with the bankruptcy trustee
whereby we agreed to pay the trustee $255,000 in exchange for being released
from all potential liability under the suits discussed above.
ITEM 1A. RISK FACTORS
There has been no material change in the Risk Factors previously disclosed in
our annual report on Form 10-K for the year ended December 31, 2005 filed with
the Securities and Exchange Commission on March 30, 2006.
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 10.1 Asset Purchase Agreement between the registrant and Adventis
Limited and Adventis Corporation*
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
* Portions of this document have been redacted pursuant to a Request for
Confidential Treatment filed with the Securities and Exchange Commission
pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.
Redacted portions are indicated with the notation [***].
16
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 May 15, 2006
------------------------------- Executive Officer
Richard P. Nespola (Principal executive officer)