UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(x) Quarterly report pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended July 2, 2005
or
o 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 incorporation or organization) |
(I.R.S. Employer Identification No.) |
7300 COLLEGE BLVD., SUITE 302, OVERLAND PARK, KS 66210
(Address of principal executive offices) (Zip Code)
913-345-9315
Registrants telephone number, including area code
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 o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Indicate the number of shares outstanding of each of the issuers classes of common stock as of the latest practicable date.
As of August 12, 2005 TMNG had outstanding 35,193,285 shares of common stock.
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THE MANAGEMENT NETWORK GROUP, INC.
INDEX
2
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)
July 2, 2005 |
January 1, 2005 |
|||||||
---|---|---|---|---|---|---|---|---|
CURRENT ASSETS: | ||||||||
Cash and cash equivalents | $ | 11,165 | $ | 10,882 | ||||
Short-term investments | 39,250 | 41,300 | ||||||
Receivables: | ||||||||
Accounts receivable | 6,556 | 4,663 | ||||||
Accounts receivable - unbilled | 2,862 | 1,911 | ||||||
9,418 | 6,574 | |||||||
Less: Allowance for doubtful accounts | (432 | ) | (396 | ) | ||||
8,986 | 6,178 | |||||||
Prepaid and other assets | 1,141 | 1,945 | ||||||
Total current assets | 60,542 | 60,305 | ||||||
Property and equipment, net | 1,017 | 896 | ||||||
Goodwill | 13,365 | 13,365 | ||||||
Identifiable intangible assets, net | 285 | 487 | ||||||
Loan to officer | 300 | 300 | ||||||
Total Assets | $ | 75,509 | $ | 75,353 | ||||
CURRENT LIABILITIES: | ||||||||
Trade accounts payable | $ | 896 | $ | 845 | ||||
Accrued payroll, bonuses and related expenses | 1,833 | 1,040 | ||||||
Other accrued liabilities | 2,320 | 2,574 | ||||||
Unfavorable and capital lease obligations | 611 | 725 | ||||||
Total current liabilities | 5,660 | 5,184 | ||||||
Unfavorable and capital lease obligations | 3,119 | 3,422 | ||||||
STOCKHOLDERS EQUITY | ||||||||
Common Stock: | 35 | 35 | ||||||
Voting - $.001 par value, 100,000,000 shares authorized; | ||||||||
35,145,619 and 34,750,562 shares issued and outstanding on | ||||||||
July 2, 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 | 158,545 | 157,857 | ||||||
Accumulated deficit | (91,463 | ) | (90,885 | ) | ||||
Accumulated other comprehensive income - | ||||||||
Foreign currency translation adjustment | 161 | 352 | ||||||
Unearned compensation | (548 | ) | (612 | ) | ||||
Total stockholders equity | 66,730 | 66,747 | ||||||
Total Liabilities and Stockholders Equity | $ | 75,509 | $ | 75,353 | ||||
See notes to consolidated condensed financial statements.
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THE MANAGEMENT NETWORK GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE LOSS
(In thousands, except per share data)
(unaudited)
For the Thirteen Weeks Ended |
For the Twenty-six Weeks Ended |
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
July 2, 2005 |
July 3, 2004 |
July 2, 2005 |
July 3, 2004 |
|||||||||||
Revenues | $ | 9,017 | $ | 5,184 | $ | 16,084 | $ | 10,963 | ||||||
Cost of services: | ||||||||||||||
Direct cost of services | 4,519 | 2,739 | 7,913 | 5,652 | ||||||||||
Equity related charges | 34 | 52 | 69 | 106 | ||||||||||
Total cost of services | 4,553 | 2,791 | 7,982 | 5,758 | ||||||||||
Gross Profit | 4,464 | 2,393 | 8,102 | 5,205 | ||||||||||
Operating Expenses: | ||||||||||||||
Selling, general and administrative | 4,662 | 4,179 | 8,810 | 8,458 | ||||||||||
Real estate restructuring | 75 | |||||||||||||
Intangible asset amortization | 43 | 218 | 202 | 556 | ||||||||||
Equity related charges | 200 | 232 | 388 | 515 | ||||||||||
Total operating expenses | 4,905 | 4,629 | 9,475 | 9,529 | ||||||||||
Loss from operations | (441 | ) | (2,236 | ) | (1,373 | ) | (4,324 | ) | ||||||
Other Income: | ||||||||||||||
Interest income | 379 | 145 | 703 | 281 | ||||||||||
Other, net | 95 | (6 | ) | 110 | (15 | ) | ||||||||
Total other income | 474 | 139 | 813 | 266 | ||||||||||
Income (loss) from continuing operations | ||||||||||||||
before income tax provision | 33 | (2,097 | ) | (560 | ) | (4,058 | ) | |||||||
Income tax provision | (3 | ) | (20 | ) | (18 | ) | (34 | ) | ||||||
Income (loss) from continuing operations | 30 | (2,117 | ) | (578 | ) | (4,092 | ) | |||||||
Discontinued operations: | ||||||||||||||
Net loss from discontinued operations | ||||||||||||||
(includes a charge for impairment of | ||||||||||||||
goodwill of $2,163 for the twenty six weeks | ||||||||||||||
ended July 3, 2004) | (2,276 | ) | ||||||||||||
Net income (loss) | 30 | (2,117 | ) | (578 | ) | (6,368 | ) | |||||||
Other comprehensive item - | ||||||||||||||
Foreign currency translation adjustment | (121 | ) | 11 | (191 | ) | (5 | ) | |||||||
Comprehensive loss | $ | (91 | ) | $ | (2,106 | ) | $ | (769 | ) | $ | (6,373 | ) | ||
Income (loss) from continuing operations | ||||||||||||||
per common share | ||||||||||||||
Basic and diluted | $ | 0.00 | $ | (0.06 | ) | $ | (0.02 | ) | $ | (0.12 | ) | |||
Net loss from discontinued operations | ||||||||||||||
per common share | ||||||||||||||
Basic and diluted | $ | (0.06 | ) | |||||||||||
Net income (loss) per common share | ||||||||||||||
Basic and diluted | $ | 0.00 | $ | (0.06 | ) | $ | (0.02 | ) | $ | (0.18 | ) | |||
Shares used in calculation of income (loss) | ||||||||||||||
from continuing operations, net loss from | ||||||||||||||
discontinued operations, and net income | ||||||||||||||
(loss) per common share | ||||||||||||||
Basic | 35,104 | 34,625 | 35,040 | 34,564 | ||||||||||
Diluted | 35,461 | 34,625 | 35,040 | 34,564 | ||||||||||
See notes to consolidated condensed financial statements.
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THE MANAGEMENT NETWORK GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
For the Twenty-six Weeks Ended |
||||||||
---|---|---|---|---|---|---|---|---|
July 2, 2005 |
July 3, 2004 |
|||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net loss | $ | (578 | ) | $ | (6,368 | ) | ||
Adjust for loss from discontinued operations | ||||||||
(includes non-cash goodwill impairment | ||||||||
charge of $2,163 in the twenty-six weeks | ||||||||
ended July 3, 2004 | 2,276 | |||||||
Loss from continuing operations | (578 | ) | (4,092 | ) | ||||
Adjustments to reconcile net loss to net | ||||||||
cash provided by operating activities: | ||||||||
Depreciation and amortization | 455 | 911 | ||||||
Equity related charges | 457 | 621 | ||||||
Loss on retirement of assets | 2 | |||||||
Other changes in operating assets and liabilities: | ||||||||
Accounts receivable | (1,857 | ) | (847 | ) | ||||
Accounts receivable - unbilled | (951 | ) | (129 | ) | ||||
Prepaid and other assets | 804 | (129 | ) | |||||
Trade accounts payable | 51 | 137 | ||||||
Accrued liabilities | 371 | 162 | ||||||
Net cash used in operating activities | ||||||||
from continuing operations | (1,248 | ) | (3,364 | ) | ||||
Net cash used in discontinued operations | (113 | ) | ||||||
Net cash used in operating activities | (1,248 | ) | (3,477 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Purchases of short-term investments | (3,600 | ) | ||||||
Proceeds from maturities and sales of short-term | ||||||||
investments | 5,650 | 2,200 | ||||||
Acquisition of property and equipment, net | (206 | ) | (77 | ) | ||||
Net cash provided by investing activities | 1,844 | 2,123 | ||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Payments made on long-term obligations | (418 | ) | (440 | ) | ||||
Proceeds from exercise of options | 208 | 541 | ||||||
Issuance of common stock through employee stock purchase plan | 88 | 49 | ||||||
Net cash provided by (used in) financing | ||||||||
activities | (122 | ) | 150 | |||||
Effect of exchange rate on cash and cash equivalents | (191 | ) | (5 | ) | ||||
Net increase (decrease) in cash and cash equivalents | 283 | (1,209 | ) | |||||
Cash and cash equivalents, beginning of period | 10,882 | 8,825 | ||||||
Cash and cash equivalents, end of period | $ | 11,165 | $ | 7,616 | ||||
Supplemental disclosure of cash flow information: | ||||||||
Cash paid during period for interest | $ | 2 | $ | 15 | ||||
Cash paid during period for taxes | $ | 18 | $ | 34 | ||||
See notes to consolidated condensed financial statements.
5
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 July 2, 2005, and for the thirteen and twenty-six weeks ended July 2, 2005 and July 3, 2004, are unaudited and reflect all normal recurring adjustments which are, in the opinion of management, necessary for the fair presentation of the Companys 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 Companys annual report on Form 10-K. Accordingly, reference should be made to the Companys annual report on Form 10-K for additional disclosures, including a summary of the Companys 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 July 2, 2005, and July 3, 2004 the Company recognized compensation expense of $234,000 and $284,000, respectively, related to the restricted stock grants made to key management personnel during the first quarter of fiscal year 2005 and fourth quarter of fiscal year 2003. 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 July 2, 2005, the Company granted options to purchase 80,500 and 200,000 shares of the Companys common stock to employees and members of the Companys Board of Directors, respectively, at a weighted average exercise price of $2.17. At the date of grant, the exercise price of the option awards equaled the market price of the Companys common stock. During the thirteen weeks ended July 3, 2004, the Company granted options to purchase 98,000 shares of the Companys common stock to employees at a weighted average exercise price of $2.85. At the date of grant, the exercise price of the option awards equaled the market price of the Companys common stock.
During the twenty-six weeks ended July 2, 2005, the Company granted 175,000 shares of restricted stock to key management personnel. These grants had a fair value on the date of grant of $392,000. During the twenty-six weeks ended July 2, 2005 and July 3, 2004, the Company recognized compensation expense of $457,000 and $621,000, respectively, related primarily to the issuance of restricted stock grants made to key management personnel during the first quarter of fiscal year 2005 and fourth quarter of fiscal year 2003.
During the twenty-six weeks ended July 2, 2005, the Company granted options to purchase 285,500 and 200,000 shares of the Companys common stock to employees and members of the Companys Board of Directors, respectively, at a weighted average exercise price of $2.25. During the twenty-six weeks ended July 3, 2004, the Company granted 173,000 options to purchase the Companys common stock to employees at a weighted average exercise price of $3.31. At the dates of grants, the exercise price of the option awards equaled the market price of the Companys 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 Companys 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 Companys ne weeks ended July 2, 2005 would have decreased by approximately $0.4 million, and the net loss for the thirteen weeks ended July 3, 2004 would have increased by $0.9 million, and the Companys net loss for the twenty-six weeks ended July 2, 2005 and July 3, 2004, would have increased by approximately $0.8 million and $1.8 million, respectively.
For purposes of pro forma disclosures required under the provisions of SFAS No. 123, as amended by SFAS No. 148, the estimated fair value of options is amortized to pro forma expense over the options vesting period. The following table contains pro forma information for the thirteen and twenty-six weeks ended July 2, 2005, and July 3, 2004 (in thousands, except per share amounts):
6
FOR THE THIRTEEN WEEKS ENDED |
FOR THE TWENTY-SIX WEEKS ENDED |
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
JULY 2, 2005 |
JULY 3, 2004 |
JULY 2, 2005 |
JULY 03, 2004 |
|||||||||||
Net income (loss), as reported: | $ | 30 | $ | (2,117 | ) | $ | (578 | ) | $ | (6,368 | ) | |||
Add: Stock-based employee | ||||||||||||||
compensation expense included in reported | ||||||||||||||
net income (loss), net of related tax effects | 234 | 284 | 457 | 621 | ||||||||||
Deduct: Total stock-based compensation | ||||||||||||||
expense determined under fair value | ||||||||||||||
based method for all awards, net of related | ||||||||||||||
tax effects | (614 | ) | (1,135 | ) | (1,220 | ) | (2,385 | ) | ||||||
Pro forma net loss | $ | (350 | ) | $ | (2,968 | ) | $ | (1,341 | ) | $ | (8,132 | ) | ||
Net income (loss) per share | ||||||||||||||
Basic and diluted, as reported | $ | 0.00 | $ | (0.06 | ) | $ | (0.02 | ) | $ | (0.18 | ) | |||
Basic and diluted, pro forma | $ | (0.01 | ) | $ | (0.09 | ) | $ | (0.04 | ) | $ | (0.24 | ) | ||
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. On April 14, 2005, SFAS No. 123R was amended to allow companies to adopt the standard at the beginning of the fiscal year that begins after June 15, 2005. The Company is currently evaluating the various transitions provisions under SFAS No. 123(R) and will adopt SFAS No. 123(R) effective January 1, 2006, which 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 TWENTY-SIX WEEKS ENDED |
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
JULY 2, 2005 |
JULY 3, 2004 |
JULY 2, 2005 |
JULY 3, 2004 |
|||||||||||
Weighted average shares outstanding - basic | 35,104 | 34,625 | 35,040 | 34,564 | ||||||||||
Effect of dilutive securities: | ||||||||||||||
Stock options | 357 | |||||||||||||
Weighted average shares outstanding - diluted | 35,461 | 34,625 | 35,040 | 34,564 | ||||||||||
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 July 3, 2004 and twenty-six weeks ended July 2, 2005 and July 3, 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 July 3, 2004, the treasury method of calculating common stock equivalents would have resulted in approximately 1,139,217 additional diluted shares. Had the Company reported net income for the twenty-six weeks ended July 2, 2005, and July 3, 2004, the treasury method of calculating common stock equivalents would have resulted in approximately 406,599 and 841,064 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 segments results of operations have been classified as discontinued operations.
7
Net sales and loss from discontinued operations are as follows (amounts in thousands):
FOR TWENTY-SIX WEEKS ENDED |
|||||||||
---|---|---|---|---|---|---|---|---|---|
JULY 3, 2004 |
|||||||||
Revenue | $ | 13 | |||||||
Goodwill impairment | |||||||||
and severance charge | $ | (2,213 | ) | ||||||
Operating income (loss) | $ | (63 | ) | ||||||
Income tax provision | |||||||||
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 TWENTY-SIX WEEKS ENDED | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
JULY 2, 2005 |
JULY 3, 2004 |
JULY 2, 2005 |
JULY 3, 2004 |
|||||||||||
United States | $ | 8,413 | $ | 4,164 | $ | 15,021 | $ | 8,578 | ||||||
International: | ||||||||||||||
United Kingdom | 426 | 346 | 771 | 549 | ||||||||||
Australia | 178 | 178 | ||||||||||||
The Netherlands | 183 | 39 | 401 | |||||||||||
Canada | 113 | 113 | ||||||||||||
Portugal | 264 | 1,124 | ||||||||||||
Other | 114 | 75 | 198 | |||||||||||
Total | $ | 9,017 | $ | 5,184 | $ | 16,084 | $ | 10,963 | ||||||
5. |
Goodwill |
During the twenty-six weeks ended July 3, 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 July 2, 2005 are as follows (amounts in thousands):
Management Consulting Segment |
Discontinued Operations |
Total |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Balance as of January 3, 2004 | $ | 13,365 | $ | 2,163 | $ | 15,528 | ||||||
Impairment loss | (2,163 | ) | (2,163 | ) | ||||||||
Balance as of January 1, 2005 | 13,365 | $ | 0 | 13,365 | ||||||||
Impairment loss | ||||||||||||
Balance as of July 2, 2005 | $ | 13,365 | $ | 13,365 | ||||||||
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6. Other Identifiable Intangible Assets
Included in the Companys consolidated balance sheet as of July 2, 2005, and January 1, 2005, are the following identifiable assets
(amounts in thousands):
July 2, 2005 |
January 1, 2005 |
||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Cost |
Accumulated Amortization |
Cost |
Accumulated Amortization | ||||||||||||||
Customer relationships | $ | 1,908 | $ | (1,623 | ) | $ | 1,908 | $ | (1,538 | ) | |||||||
Employment agreements | 3,200 | (3,200 | ) | 3,200 | (3,083 | ) | |||||||||||
Total | $ | 5,108 | $ | (4,823 | ) | $ | 5,108 | $ | (4,621 | ) | |||||||
Intangible amortization expense for the thirteen weeks ended July 2, 2005 and July 3, 2004 was $43,000 and $218,000, respectively. Intangible amortization expense for the twenty-six weeks ended July 2, 2005 and July 3, 2004 was $202,000 and $556,000, respectively. Intangible amortization expense is estimated to be approximately $86,000 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 July 2, 2005, the Company generated income tax expense of $35,000. The Company utilized its net operating loss carryforwards to offset $32,000 of this income tax expense, with the remaining expense related to state income taxes. In the thirteen weeks and twenty-six weeks ended July 2, 2005 and the twenty-six weeks ended July 3, 2004, the Company generated income tax benefits of $198,000, $906,000 and $1.7 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 $20,000 for the thirteen weeks ended July 3, 2004, and income tax provisions of $18,000 and $34,000 for the twenty-six weeks ended July 2, 2005 and July 3, 2004, respectively, related to state tax expense. As of July 2, 2005, the Company recorded $26.9 million of valuation allowance in connection with its deferred tax assets.
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 July 2, 2005 and July 3, 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 twenty-six weeks ended July 2, 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 July 2, 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 July 2, 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
9
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 July 2, 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 Companys business.
As of July 2, 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 July 2, 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.
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ITEM 2. MANAGEMENTS 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 Managements 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 managements opinions only as of the date of this report. We undertake no obligation to revise, or publicly release the results of any revision to, these forward-looking statements. Readers should carefully review the risk factors described in our annual report in other documents that we file from time to time with the Securities and Exchange Commission.
The following should be read in connection with Managements Discussion and Analysis of Financial Condition and Results of Operations as presented in our annual report on Form 10-K for the fiscal year ended January 1, 2005.
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 second quarter of 2005, we are seeing what we believe is the beginning of a recovery in the industry, coupled with a transformation, convergence and consolidation of the telecommunication, media and entertainment sectors. During the thirteen and twenty-six weeks ended July 2, 2005, our revenues increased 74% and 47%, respectively, compared with the same periods in 2004. Additionally, gross margins improved to 50% during the twenty-six weeks ended July 2, 2005 compared with 47% during the same period of 2004. We believe these improved operating results 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 twenty-six weeks ended July 2, 2005 were up approximately 12% and 5%, respectively, as compared to the same period of 2004. The increase reflects managements efforts to invest in intellectual property, including proprietary toolsets and methodologies to support new wireless and IP consultative and managed services offerings. 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 internet protocol 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 minimizing cash used in operations 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.
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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:
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Allowance for Doubtful Accounts; |
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Impairment of Goodwill and Long-lived Intangible Assets; |
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Revenue Recognition; and |
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Deferred Income Tax Assets. |
Allowances for Doubtful AccountsSubstantially 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 bad debt expense in the amount of $72,000 and $62,000 for the thirteen and twenty-six week periods ended July 2, 2005 and recorded bad debt expense of $106,000 and $214,000 for the thirteen and twenty-six week periods ended July 3, 2004. Our allowance for doubtful accounts totaled $432,000 and $396,000 as of July 2, 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 AssetsGoodwill 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 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 uncertainity. If actual cash flows turn out to be less than projected, we may require to take further write-downs, which could increase the variability and volatility of our future events.
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 RecognitionHistorically, most of our consulting practice contracts have been on a time and materials basis, in which customers are billed for time and materials expended in performing their engagements. We recognize revenue from those types of customer 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 an increase or decrease in revenues and income and are reflected in the financial statements in the periods in which
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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 continued to adapt to changes in the communications consulting industry, we entered 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 AssetsWe 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 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 July 2, 2005, cumulative valuation allowances in the amount of $26.9 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 annual 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.
RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED JULY 2, 2005 COMPARED TO THIRTEEN WEEKS ENDED
JULY 3, 2004
REVENUES
Revenues increased 73.9% to $9.0 million for the thirteen weeks ended July 2, 2005 from $5.2 million for the thirteen weeks ended July 3, 2004. The increase in revenue is attributable to two elements: the increase in the size and concentration of our top 5 client relationships along with an increase in the number of consulting projects delivered, and general improvements in economics within the telecommunications industry. During the thirteen weeks ended July 2, 2005, we provided services on 107 customer projects, compared to 88 projects performed in the thirteen weeks ended July 3, 2004. Average revenue per project was $84,000 in the thirteen weeks ended July 2, 2005, compared to $59,000 in the thirteen weeks ended July 3, 2004. The increase in average revenue per project was primarily attributable to a small number of large engagements in the mix, that were undertaken in the thirteen weeks ended July 2, 2005. Our international revenue base decreased to 6.7% of our revenues in the thirteen weeks ended July 2, 2005, from 19.7% in the thirteen weeks ended July 3, 2004, due primarily to the end 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 $2.4 million and $0.9 million for the thirteen weeks ended July 2, 2005 and July 3, 2004, respectively, representing 26.7% and 16.6% of total revenue, respectively. The increase was due to the mix of our business shifting to more strategy and management consulting opportunities which are more likely to be structured as fixed price or contingent fee engagements.
COSTS OF SERVICES
Direct costs of services increased to $4.5 million for the thirteen weeks ended July 2, 2005, compared to $2.7 million for the thirteen weeks ended July 3, 2004. As a percentage of revenues, our gross margin based on direct cost of service was 49.9% for the thirteen weeks ended July 2, 2005, compared to 47.2% for the thirteen weeks ended July 3, 2004. The increase in gross margin was primarily attributable to a shift in the mix of services to more strategy and management consulting opportunities which typically yield higher margins than staffing engagements.
Non-cash stock based compensation charges were $34,000 for the thirteen weeks ended July 2, 2005, compared to $52,000 for the thirteen weeks ended July 3, 2004. Non-cash stock based compensation charges primarily relate to the Companys 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 $4.9 million for the thirteen weeks ended July 2, 2005, or 6.0% from $4.6 million for the thirteen weeks ended July 3, 2004. Operating expenses include selling, general and administrative costs, real estate restructuring, equity related charges, and intangible asset amortization. Selling, general and administrative expense for the thirteen weeks ended July 2, 2005 were $4.7 million compared to $4.2 million for the thirteen weeks ended July 3, 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 $43,000 and $218,000 for the thirteen weeks ended July 2, 2005 and July 3, 2004, respectively. The $175,000 decrease in amortization expense was due to certain intangible assets becoming fully amortized during fiscal year 2004 and first quarter 2005.
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Non-cash stock based compensation charges were $200,000 in the thirteen weeks ended July 2, 2005 compared to $232,000 for the thirteen weeks ended July 3, 2004. The charges relate to the award of restricted stock to select executives and key employees during the fourth quarter of fiscal year 2003 and first quarter of fiscal year 2005, 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.
OTHER INCOME AND EXPENSES
Interest income was $379,000 and $145,000 for the thirteen weeks ended July 2, 2005 and July 3, 2004, respectively, and represented interest earned on invested balances. Interest income increased for the thirteen weeks ended July 2, 2005 as compared to the thirteen weeks ended July 3, 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. Other income increased due to investment gains recognized in the thirteen weeks ended July 2, 2005.
INCOME TAXES
In the thirteen weeks ended July 2, 2005 and July 3, 2004, we recorded provision for income taxes of $3,000 and $20,000, respectively. For the thirteen weeks ended July 2, 2005, the effective tax rate differs 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 July 3, 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.
TWENTY-SIX WEEKS ENDED JULY 2, 2005 COMPARED TO TWENTY-SIX WEEKS ENDED JULY 3, 2004
Effective March 4, 2004, management and the Board of Directors elected to discontinue our hardware business (previously reported as the separate business segment All Other). Operating results of the hardware segment for the thirteen weeks ended April 3, 2004, have been included as a component of discontinued operations in the Consolidated Condensed Statements of Operations and Comprehensive Loss contained herein.
REVENUES
Revenues increased 46.7% to $16.1 million for the twenty-six weeks ended July 2, 2005, from $11.0 million for the twenty-six weeks ended July 3, 2004. The increase in revenue is attributable to the increase in the concentration of our top 5 client relationships along with an increase in the number of consulting projects delivered, coupled with general improvements in economics within the telecommunications industry. During the twenty-six weeks ended July 2, 2005, we provided services on 166 customer projects, compared to 110 projects performed in the twenty-six weeks ended July 3, 2004. Average revenue per project was $97,000 in the twenty-six weeks ended July 2, 2005 compared to $100,000 in the twenty-six weeks ended July 3, 2004. International revenue base decreased to 6.6% of revenues for the twenty-six weeks ended July 2, 2005, from 21.8% for the twenty-six weeks ended July 3, 2004, due primarily to the end 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 $5.0 million and $3.9 million for the twenty-six weeks ended July 2, 2005 and July 3, 2004, respectively, representing 31.2% and 36.0% of total revenue, respectively. The increased volume was due to the mix of our business shifting to more strategy and management consulting opportunities which are more likely to be structured as fixed fee or contingent fee engagements.
COST OF SERVICES
Direct costs of services increased to $7.9 million for the twenty-six weeks ended July 2, 2005 compared to $5.7 million for the twenty-six weeks ended July 3, 2004. As a percentage of revenues, our gross margin based on direct cost of services was 50.8% for the twenty-six weeks ended July 2, 2005, compared to 48.4% for the twenty-six weeks ended July 3, 2004. The increase in gross margin was primarily attributable to a shift in the mix of services to more strategy and management consulting opportunities which typically yield higher margins than staffing engagements .
Non-cash stock based compensation charges were $69,000 for the twenty-six weeks ended July 2, 2005, compared to $106,000 for the twenty-six weeks ended July 3, 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.
OPERATING EXPENSES
In total, operating expenses remained consistent at $9.5 million for the twenty-six weeks ended July 2, 2005, and July 3, 2004, respectively. Operating expenses include selling, general and administrative costs, equity related charges, real estate restructuring, and intangible asset amortization. Selling, general and administrative expenses for the twenty-six weeks ended July 2, 2005 were $8.9 million compared to $8.5 million for the twenty-six weeks ended July 3, 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.
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Intangible asset amortization was $202,000 and $556,000 for the twenty-six weeks ended July 2, 2005 and July 3, 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 $388,000 in the twenty-six weeks ended July 2, 2005 compared to $515,000 for the twenty-six weeks ended July 3, 2004. The charges relate to the award of restricted stock to select executives and key employees during the fourth quarter of fiscal year 2003 and first quarter of fiscal year 2005, 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.
OTHER INCOME AND EXPENSES
Interest income was $703,000 and $281,000 for the twenty-six weeks ended July 2, 2005 and July 3, 2004, respectively, and represented interest earned on invested balances. Interest income increased for the twenty-six weeks ended July 2, 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 thirteen weeks ended July 2, 2005.
INCOME TAXES
In the twenty-six weeks ended July 2, 2005 and July 3, 2004, we recorded provision for income taxes of $18,000 and $34,000 respectively. The effective tax rate for these periods differs 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 twenty-six weeks ended July 3, 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 twenty-six weeks ended July 3, 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 used in operating activities was $1.2 million and $3.5 million for the twenty-six weeks ended July 2, 2005 and July 3, 2004, respectively. We incurred negative cash flow from operating activities for the twenty-six weeks ended July 2, 2005 due primarily to changes in working capital associated with increases in accounts receivable. Negative cash flow from operating activities for the twenty-six weeks ended July 3, 2004 was primarily due to operating losses.
Net cash provided by investing activities was $1.8 million and $2.1 million for the twenty-six weeks ended July 2, 2005 and July 3, 2004, respectively. This includes net proceeds from sales and reinvestments of auction rate securities of $2.1 million and $2.2 million in the twenty-six weeks ended July 2, 2005 and July 3, 2004, respectively. Cash provided by investing activities also includes the acquisition of office equipment, software and computer equipment of $206,000 and $77,000 for the twenty-six weeks ended July 2, 2005 and July 3, 2004, respectively.
Net cash used in financing activities was $122,000 in the twenty-six weeks ended July 2, 2005, and related to payments made on the current portion of our 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 $150,000 in the twenty-six weeks ended July 3, 2004 and related to proceeds received from the exercise of stock options and purchases under our Employee Stock Purchase Plan, partially offset by payments made on the current portion of our capital lease obligations.
At July 2, 2005, we had approximately $50.4 million in cash and cash equivalents and short-term investments. At July 2, 2005 we had capital lease obligations of $40,000. We believe we have sufficient cash to meet anticipated cash requirements, including anticipated capital expenditures, consideration for possible acquisitions, and any continuing 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 will enable 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.
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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 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 over financial reporting or in other factors that could significantly affect our internal controls 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 TO A VOTE OF SECURITY HOLDERS
TMNG HELD AN ANNUAL MEETING OF STOCKHOLDERS ON JUNE 9, 2005.
1. The stockholders approved the election of the two directors nominated by our nominating committee. The vote cast for each nominee were as follows:
FOR | ABSTAIN | ||||||||||
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Grant G. Behrman | 28,362,349 | 3,887,777 | |||||||||
Rich Nespola | 31,102,311 | 1,147,815 |
2. The stockholders ratified the appointment of Deloitte & Touche LLP as independent auditor for the Company for the 2005 fiscal year by a vote of 32,078,583 shares in favor of the appointment; 171,243 shares against the appointment and 300 shares abstaining.
ITEM 5. Other Information
None
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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 |
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/s/ RICHARD P. NESPOLA
Richard P. Nespola |
Chairman, President and Chief
Executive Officer |
August 16, 2005 |
/s/ DONALD E. KLUMB
Donald E. Klumb |
Chief Financial Officer and Treasurer
(Principal financial officer and principal accounting officer) |
August 16, 2005 |
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