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 September 29, 2001
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or
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission file number:
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THE MANAGEMENT NETWORK GROUP, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 48-1129619
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7300 COLLEGE BLVD., SUITE 302, OVERLAND PARK, KS 66210
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(Address of principal executive offices) (Zip Code)
913-345-9315
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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 the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
As of November 5, 2001 TMNG had outstanding 30,161,287 shares of common stock.
THE MANAGEMENT NETWORK GROUP, INC.
INDEX
PAGE
PART I. FINANCIAL INFORMATION:
ITEM 1. Consolidated Condensed Financial Statements:
Consolidated Condensed Balance Sheets - September
29, 2001 (unaudited) and December 30, 2000...... 3
Consolidated Condensed Statements of Income and
Comprehensive Income (unaudited) - Thirteen
Weeks ended September 29, 2001 and September 30,
2000, and Thirty-nine Weeks Ended September 29,
2001 and September 30, 2000..................... 4
Consolidated Condensed Statements of Cash Flows
(unaudited) -- Thirty-nine Weeks ended September
29, 2001 and September 30, 2000................. 5
Notes to Consolidated Condensed Financial
Statements (unaudited)............................ 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............... 8
ITEM 3. Quantitative and Qualitative Disclosures about
Market Risk....................................... 20
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings................................ 20
ITEM 2. Changes in Securities and Use of Proceeds........ 20
ITEM 6. Exhibits and Reports on Form 8-K................. 21
Signatures................................................. 21
Page 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)
December 30, September 29,
2000 2001
------------ -------------
CURRENT ASSETS:
Cash and cash equivalents $ 70,583 $ 81,352
Receivables:
Accounts receivable 17,985 11,875
Accounts receivable -- unbilled 8,023 4,962
--------- ---------
26,008 16,837
Less: Allowance for doubtful accounts (766) (888)
--------- ---------
25,242 15,949
Other assets 1,280 1,850
--------- ---------
Total current assets 97,105 99,151
PROPERTY AND EQUIPMENT, NET 1,298 1,624
GOODWILL AND INTANGIBLES, NET 18,016 23,815
DEFERRED TAXES AND OTHER ASSETS 3,010 4,513
--------- ---------
Total assets $ 119,429 $ 129,103
========= =========
CURRENT LIABILITIES:
Trade accounts payable $ 1,282 $ 1,428
Accrued payroll, bonuses and related expenses 4,722 2,172
Other accrued liabilities 1,953 1,572
Income tax payable 1,375
--------- ---------
Total current liabilities 7,957 6,547
CAPITAL LEASE OBLIGATIONS AND OTHER 218
STOCKHOLDERS' EQUITY
Common Stock:
Voting -- $.001 par value, 100,000,000 shares
authorized; 29,465,808 and 30,114,354 issued
and outstanding on December 30, 2000 and
September 29, 2001, respectively 29 29
Preferred stock - $.001 par value, 10,000,000
shares authorized; no shares issued or
outstanding
Additional paid-in capital 136,917 140,867
Accumulated deficit (22,071) (17,176)
Accumulated other comprehensive income -
Foreign currency translation adjustment 35 5
Unearned compensation (3,438) (1,387)
--------- ---------
Total stockholders' equity 111,472 122,338
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 119,429 $ 129,103
========= =========
See notes to consolidated condensed financial statements.
Page 3
THE MANAGEMENT NETWORK GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands, except per share data)
(unaudited)
For the thirteen For the thirty-nine
weeks ended weeks ended
-------------------------------- --------------------------------
September 30, September 29, September 30, September 29,
2000 2001 2000 2001
------------ ------------ ------------ ------------
REVENUES $ 20,003 $ 12,231 $ 55,870 $ 44,256
COST OF SERVICES:
Direct cost of services 10,300 5,774 28,939 22,210
Equity related charges 1,241 631 5,158 1,752
------------ ------------ ------------ ------------
Total cost of services 11,541 6,405 34,097 23,962
------------ ------------ ------------ ------------
GROSS PROFIT 8,462 5,826 21,773 20,294
OPERATING EXPENSES:
Selling, general and
administrative 4,194 4,023 11,642 12,837
Equity related charges 392 211 1,202 670
Goodwill and intangibles
amortization 150 574 150 1,507
------------ ------------ ------------ ------------
Total operating expenses 4,736 4,808 12,994 15,014
------------ ------------ ------------ ------------
INCOME FROM OPERATIONS 3,726 1,018 8,779 5,280
OTHER INCOME (EXPENSE)
Interest income 1,279 611 2,902 2,023
Other, net 95 (6) (29) (23)
------------ ------------ ------------ ------------
Total other income 1,374 605 2,873 2,000
------------ ------------ ------------ ------------
INCOME BEFORE PROVISION FOR
INCOME TAXES 5,100 1,623 11,652 7,280
PROVISION FOR INCOME TAXES (2,040) (492) (4,661) (2,385)
------------ ------------ ------------ ------------
NET INCOME 3,060 1,131 6,991 4,895
OTHER COMPREHENSIVE INCOME -
Foreign currency translation
adjustment 13 18 (32) (30)
------------ ------------ ------------ ------------
COMPREHENSIVE INCOME $ 3,073 $ 1,149 $ 6,959 $ 4,865
============ ============ ============ ============
NET INCOME PER COMMON SHARE
Basic $ 0.11 $ 0.04 $ 0.25 $ 0.17
============ ============ ============ ============
Diluted $ 0.10 $ 0.04 $ 0.24 $ 0.16
============ ============ ============ ============
SHARES USED IN CALCULATION OF
NET INCOME PER COMMON SHARE
Basic 28,304,775 29,736,625 27,728,082 29,595,790
============ ============ ============ ============
Diluted 29,572,076 30,756,534 28,965,065 30,565,491
============ ============ ============ ============
See notes to consolidated condensed financial statements.
Page 4
THE MANAGEMENT NETWORK GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
For the thirty-nine
weeks ended
--------------------------
September 30, September 29,
2000 2001
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,991 $ 4,895
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 341 1,894
Equity related charges 6,360 2,422
Income tax benefit realized upon
exercise of stock options 1,336 33
Provision for deferred income taxes (2,786) (244)
Changes in operating assets and
liabilities, net of business
acquisitions:
Accounts receivable (9,587) 6,560
Accounts receivable -- unbilled (3,213) 3,100
Other assets (709) (222)
Trade accounts payable 16 (975)
Accrued liabilities 4,553 (3,336)
Income tax payable 1,121
-------- --------
Net cash provided by
operating activities 3,302 15,248
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of business, net of cash
acquired (11,601) (4,046)
Acquisition of property and equipment (485) (520)
Loans to officers (200)
-------- --------
Net cash used in
investing activities (12,086) (4,766)
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of stock options 324 325
Payments made on capital lease obligations (8)
Proceeds from issuance of common
stock, net of expenses 20,940
-------- --------
Net cash provided by financing activities 21,264 317
EFFECT OF EXCHANGE RATE ON CASH AND
CASH EQUIVALENTS (32) (30)
-------- --------
Net increase in cash and cash equivalents 12,448 10,769
Cash and cash equivalents, beginning of period 51,523 70,583
-------- --------
Cash and cash equivalents, end of period $ 63,971 $ 81,352
======== ========
Supplemental disclosure of cash flow information:
Cash paid during period for taxes $ 5,320 $ 1,866
======== ========
Supplemental disclosure of non-cash investing
and financing activities:
Acquisition of business:
Fair value of assets acquired $ 3,667 $ 2,355
Fair value of liabilities incurred or assumed $ (2,275) $ (4,452)
Common stock issued $ 8,000 $ 3,000
See notes to consolidated condensed financial statements.
Page 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. (the "Company") as of September 29, 2001,
and for the thirteen and thirty-nine weeks ended September 29, 2001 and
September 30, 2000, are unaudited and reflect all normal recurring
adjustments which are, in the opinion of management, necessary for the
fair presentation of the Company's consolidated condensed financial
position, results of operations, and cash flows as of these dates and
for the periods presented. The consolidated condensed financial
statements have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial
information. Consequently, these statements do not include all the
disclosures normally required by accounting principles generally
accepted in the United States of America for annual financial statements
nor those normally made in the Company's Annual Report on Form 10-K.
Accordingly, reference should be made to the Company's Annual Report on
Form 10-K for additional disclosures, including a summary of the
Company's accounting policies, which have not changed.
2. Earnings Per Share
The following table sets forth the computation of basic and diluted net
income per share for the periods indicated (in thousands, except per
share amounts):
FOR THE THIRTEEN FOR THE THIRTY-NINE
WEEKS ENDED WEEKS ENDED
---------------------------- -----------------------------
SEPTEMBER 30, SEPTEMBER 29, SEPTEMBER 30, SEPTEMBER 29,
2000 2001 2000 2001
------------- ------------- ------------- -------------
Numerator
Net income $ 3,060 $ 1,131 $ 6,991 $ 4,895
Denominator
Weighted average common shares 28,305 29,737 27,728 29,596
Weighted average unvested common shares 3,006 5,188 2,951 4,337
Weighted average unvested common
shares subject to repurchase (1,739) (4,168) (1,714) (3,368)
Denominator for basic calculation 28,305 29,737 27,728 29,596
Denominator for diluted calculation 29,572 30,757 28,965 30,565
Basic net income per share $ 0.11 $ 0.04 $ 0.25 $ 0.17
Diluted net income per share $ 0.10 $ 0.04 $ 0.24 $ 0.16
3. Acquisition
On September 5, 2001, the Company completed its acquisition of Tri-Com
Computer Services, Inc. ("Tri-Com"), a Maryland corporation. Tri-Com
provides a full range of technology and systems solutions to the
telecommunications industry. Consulting services offered include
providing end-to-end OSS, data center, systems solutions, data sourcing,
legacy integration and middleware implementation. In addition, Tri-Com
periodically receives commissions on hardware purchases, whereby
customers utilize Tri-Com as an agent in procuring computer hardware and
equipment. The primary reason for the acquisition was for TMNG to
further expand its offering, enabling the Company's specialists to take
an engagement from strategy, to marketing and operational definition,
and to OSS enablement.
The acquisition, recorded under the business combination method of
accounting, included the purchase of all outstanding shares of Tri-Com,
which resulted in a total purchase price of approximately $4.8 million
for the equity and assumption of liabilities exceeding Tri-Com's net
assets. Consideration consisted of
Page 6
$1.8 million cash and 490,417 shares of TMNG common stock valued at $3.0
million. Share consideration was valued in accordance with the stock
purchase agreement and represents the average of the closing bid and ask
prices of TMNG's common stock, as reported on the NASDAQ National
Market, over the twenty trading days immediately preceding the second
day prior to the Closing Date of September 5, 2001. Additionally, TMNG
incurred direct costs of $158,000 related to the acquisition, and
recorded approximately $221,000 as an increase to purchase price in
connection with the exchange of the Company's stock options for vested
stock appreciation rights held by Tri-Com employees at the time of
acquisition. A portion of the purchase price has been preliminarily
allocated to assets acquired and liabilities assumed based on estimated
fair value at the date of acquisition. The excess of the purchase price
over the estimated fair value of the net assets acquired is allocated
between goodwill and other identifiable intangibles and is estimated to
total $7.3 million preliminarily. Amortization expense was recorded in
connection with the preliminary allocation of basis on the identifiable
intangibles and totaled $100,000 for September 2001.
The purchase price allocation for this acquisition is based on
preliminary estimates and is subject to further refinement. The purchase
price is subject to refinement based on the finalization of direct
acquisition costs incurred in the transaction, and the valuation
allocated to identifiable intangible assets purchased in the
transaction. The operating results of Tri-Com have been included in the
Consolidated Condensed Statements of Income and Comprehensive Income
from the date of acquisition.
The following reflects pro forma combined results of the Company and
Tri-Com as if the acquisition had occurred as of January 2, 2000. In
management's opinion, this pro forma information does not necessarily
reflect the actual results that would have occurred nor is it
necessarily indicative of future results of operations of the combined
entities.
Pro Forma
------------------------------
Nine Months Ended
September 30, September 29,
(in thousands, except per share amounts) 2000 2001
------------- -------------
Total revenues $ 67,455 $ 49,039
Net income $ 6,396 $ 3,973
Diluted earnings per share $ 0.22 $ 0.13
4. Warrant Grant and Stock Based Compensation
During the thirteen weeks ended September 29, 2001, the Company granted
approximately 1,343,000 stock options to employees at a weighted average
exercise price $5.24 and recorded net compensation expense related to
all stock options of $412,000. Of the 1,343,000 options granted, 729,000
were granted to employees of Tri-Com, (see acquisition disclosure in
footnote 3), of which approximately 54,000 options were issued in
exchange for fully vested stock appreciation rights held by Tri-Com
employees. Additionally, equity related charges to cost of services
associated with warrants granted to a significant customer in 1999
totaled $430,000 for the thirteen weeks ended September 29, 2001.
During the thirty-nine weeks ended September 29, 2001, the Company
granted approximately 3,257,000 stock options to employees and 34,000
stock options to a non-employee director at a weighted average exercise
price of $4.97 and recorded net compensation expense related to all
stock options of $1,131,000. Equity related charges to cost of services
associated with warrants totaled $1,291,000.
Page 7
5. Loans to Officers
During the third quarter of fiscal year 2001, three executive officers
of the Company reduced their cash base compensation in lieu of receiving
TMNG non-statutory stock options at fair value. Additionally, to assist
in meeting the cash flow needs of the officers who reduced their
compensation, the Company provided lines of credit, collateralized by
Company common stock held by such officers. Borrowings against the line
of credit at September 29, 2001 totaled $200,000. 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.
6. New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141 "Business
Combinations". The statement is to be adopted for all business
combinations initiated after June 30, 2001. Management has adopted this
pronouncement for the acquisition of Tri-Com as discussed in footnote 3.
In June 2001, the FASB issued Statement of Financial Accounting
Standards No. 142 "Accounting for Goodwill and Intangibles". In
accordance with certain provisions of the statement, goodwill acquired
after June 30, 2001 is not amortized and accordingly, the goodwill
recorded in the Tri-Com acquisition described above has not been
amortized. All provisions of the statement are required to be applied in
the fiscal year beginning after December 15, 2001, to all goodwill and
other intangible assets recognized in an entity's balance sheet at the
beginning of that fiscal year. Management of the Company has not
evaluated the provisions of the Statement, and consequently has not
determined what impact, if any, its application might have on the
Company's financial statements.
7. Contingencies
During 1997, one of the Company's customers entered Chapter 11 of the
bankruptcy code. According to the bankruptcy code, certain payments made
within a specified period of time prior to the date of the bankruptcy
filing and payments made subsequent to the date of the bankruptcy filing
which are not previously authorized, could be declared "preference
payments". Under certain conditions, preference payments could be
required to be remitted to the bankruptcy trustee for satisfaction of
general creditor claims. During fiscal year 1998, the bankruptcy trustee
filed suit against the Company for preferential payments received prior
to and subsequent to the bankruptcy filing, and related damages of
approximately $1.9 million. The total amount of payments received from
this customer during the specified preference period aggregated
approximately $320,000 and which may be declared preference payments. In
the opinion of management, resolution of this legal action will not have
a material adverse effect on the Company's consolidated results of
operations, cash flows or financial position.
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
In addition to historical information, this quarterly report contains
forward-looking statements. Certain risks and uncertainties could cause actual
results to differ materially from those reflected in such forward-looking
statements. Factors that might cause a difference include, but are not limited
to, those discussed in the section entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Risk Factors."
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 this quarterly 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 the Management's Discussion and
Analysis of Financial Condition and Results of Operations as presented in our
Page 8
Annual Report on Form 10-K.
RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED SEPTEMBER 29, 2001 COMPARED TO THIRTEEN WEEKS ENDED
SEPTEMBER 30, 2000
Revenues
Revenues decreased 38.9% to $12.2 million for the thirteen weeks ended
September 29, 2001 from $20.0 million for the thirteen weeks ended September 30,
2000. The decrease in revenues was due primarily to a deferral or reduction of
management consulting demand by the telecommunications and technology industry,
resulting from macroeconomic events impacting this sector, including reductions
in capital funding, business failures and industry restructurings and
reorganizations. Additionally, for the thirteen weeks ended September 29, 2001,
our international revenue base represented 14.4% of our revenues, down from
18.8% for the thirteen weeks ended September 30, 2000, due in part to the
domestic revenue generated by our recently acquired subsidiaries, TMNG
Marketing, Inc. (formerly known as The Weathersby Group, Inc.) and TMNG
Technologies, Inc. (formerly known as Tri-Com Computer Services, Inc.) and the
decline in services provided to international customers. Non-consulting revenues
recognized by TMNG Technologies represented 2.62% of consolidated revenues for
the thirteen weeks ended September 29, 2001 and related to agency commissions
received on hardware sales.
Included in revenue for the thirteen weeks ended September 29, 2001 were
services provided to one large customer, which accounted for more than 10% of
our revenues and represented an aggregate of 20.8% of total revenue. Included in
revenue for the thirteen weeks ended September 30, 2000 were services provided
to two large customers, which each accounted for more than 10% of our revenues
and represented an aggregate of 25.9% of total revenue.
Costs of Services
Direct costs of services decreased 43.9% to $5.8 million for the
thirteen weeks ended September 29, 2001, compared to $10.3 million for the
thirteen weeks ended September 30, 2000. As a percentage of revenues, gross
margin on services was 52.8% for the thirteen weeks ended September 29, 2001 and
48.5% for the thirteen weeks ended September 30, 2000. The increase in gross
margin as a percentage of revenue was attributable primarily due to 10% to 15%
cost reductions negotiated with most of our vendors, commission revenue
associated with hardware sales, and contract price adjustments.
Non-cash stock based compensation charges were $631,000 and $1.2 million
for the thirteen weeks ended September 29, 2001 and the thirteen weeks ended
September 30, 2000, respectively. Of the $631,000 compensation charges related
to the thirteen weeks ended September 29, 2001, $430,000 was recorded in
connection with warrants issued during the fourth quarter of 1999 and $201,000
was recorded in connection with stock options previously granted to employees
and non-employee consultants, partially offset by a credit for reversal of
expense attributable to forfeiture of unvested stock options. The decrease in
non-cash stock based compensation charges for the thirteen weeks ended September
29, 2001 compared to the thirteen weeks ended September 30, 2000 was primarily a
result of the reduction in the amortization of the deferred compensation charges
recorded in connection with pre-initial public offering grants of non-qualified
stock options. These charges represent 5.2% of revenues for the thirteen weeks
ended September 29, 2001 compared to 6.2% of revenues for the thirteen weeks
ended September 30, 2000.
Operating Expenses
In total, operating expenses for the thirteen weeks ended September 29,
2001 increased by 1.5% to $4.8 million compared to $4.7 million for the thirteen
weeks ended September 30, 2000. This increase principally reflects amortization
charges of $574,000 related to goodwill and intangible assets recognized in 2001
arising from the TMNG Marketing, Inc. acquisition in September 2000 and the
Tri-Com acquisition in September 2001, versus amortization charges of $150,000
related to goodwill
Page 9
amortization at September 30, 2000. Selling, general and administrative
expenses decreased to $4.0 million for the thirteen weeks ended September 29,
2001 from $4.2 million for the thirteen weeks ended September 30, 2000. As a
percentage of revenues, selling, general and administrative expenses increased
to 32.9% compared to 21.0% for the thirteen weeks ended September 29, 2001 and
September 30, 2000, respectively. This percentage increase was primarily
attributable to the decrease in revenues in the third quarter of fiscal year
2001. Prior to the third quarter of fiscal year 2001, management implemented a
number of cost-reduction initiatives in selling, general and administrative
areas to address the macroeconomic slow down within the telecommunications
industry. Additionally, late in the third quarter of fiscal year 2001, three of
our executive officers, Richard Nespola, Micky Woo and Ralph Peck reduced their
base cash compensation in exchange for grants of non-statutory stock options,
contributing to the decrease in selling, general and administrative expenses.
Management continues to evaluate cost reduction opportunities to better match
revenues and costs in the revised economic environment.
Non-cash stock based compensation charges of $211,000 and $392,000 for
the thirteen weeks ended September 29, 2001 and thirteen weeks ended September
30, 2000, respectively, were recorded in connection with stock options granted
to our partners, principals and certain senior executives and non-employee
directors. These charges increased operating expenses as a percentage of revenue
by 1.7% of revenues for the thirteen weeks ended September 29, 2001 compared to
2.0% of revenues for the thirteen weeks ended September 30, 2000. The decrease
in non-cash stock based compensation charges for the thirteen weeks ended
September 29, 2001 compared to the thirteen weeks ended September 30, 2000 was a
result of the reduction in the amortization of the deferred compensation charges
recorded in connection with pre-initial public offering grants of non-qualified
stock options.
Other Income and Expenses
Interest income was $611,000 and $1,279,000 for the thirteen weeks ended
September 29, 2001 and thirteen weeks ended September 30, 2000, respectively,
and represented interest earned on invested balances. Interest income decreased
for the thirteen weeks ended September 29, 2001 due primarily to the Federal
Reserve Bank reducing interest rates during the quarter, which was partially
offset by larger invested cash balances, and the Company's shift to tax-exempt
investments and the lower interest rates associated with these investments. We
invest in short-term, high-grade investment instruments, and maintain a mix of
taxable and tax-exempt instruments as part of our overall investment policy.
Income Taxes
Provision for income taxes for the third quarter of fiscal year 2001 as
a percentage of pretax income was 30.3% compared to 40.0% for the third quarter
of fiscal year 2000. The decrease in income taxes as a percentage of revenue was
due primarily to the partial shift of investments by TMNG from taxable to
tax-exempt securities that are not taxed at the federal income tax level.
THIRTY-NINE WEEKS ENDED SEPTEMBER 29, 2001 COMPARED TO THIRTY-NINE WEEKS ENDED
SEPTEMBER 30, 2000
Revenues
Revenues decreased 20.8% to $44.3 million for the thirty-nine weeks
ended September 29, 2001 from $55.9 million for the thirty-nine weeks ended
September 30, 2000. The decrease in revenues was due primarily to a deferral or
reduction of management consulting demand by the telecommunications and
technology industry resulting from macroeconomic events in this sector during
2001, including reductions in capital funding, business failures and industry
restructurings and reorganizations. Additionally, for the thirty-nine weeks
ended September 29, 2001, our international revenue base represented 13.9% of
our revenues, down from 25.4% for the thirty-nine weeks ended September 30,
2000, due in part to the domestic revenue generated by our recently acquired
subsidiaries, TMNG Marketing, Inc. and TMNG Technologies, Inc., and the decline
in services provided to international customers. Non-consulting revenues
recognized by TMNG Technologies represented 0.7%
Page 10
of consolidated revenues for the thirty-nine weeks ended September 29, 2001 and
related to agency commissions received on hardware sales.
Included in revenue for the thirty-nine weeks ended September 29, 2001
were services provided to two large customers, which each accounted for more
than 10% of our revenues and represented an aggregate of 22.7% of total revenue.
Included in revenue for the thirty-nine weeks ended September 30, 2000 were
services provided to one large customer, which accounted for more than 10% of
our revenues and represented an aggregate of 20.5% of total revenue.
Cost of Services
Direct cost of services decreased 23.3% to $22.2 million for the
thirty-nine weeks ended September 29, 2001 compared to $28.9 million for the
thirty-nine weeks ended September 30, 2000. As a percentage of revenues, our
gross margin on services was 49.8% for the thirty-nine weeks ended September 29,
2001 and 48.2% for the thirty-nine weeks ended September 30, 2000. The increase
in gross margin as a percentage of revenue was attributable primarily to cost
reductions negotiated with most of our vendors and contract price adjustments.
Non-cash stock based compensation charges were $1.8 million and $5.2
million for the thirty-nine weeks ended September 29, 2001 and September 30,
2000, respectively. Of the $1.8 million compensation charges related to the
thirty-nine weeks ended September 29, 2001, $ 1.3 million was recorded in
connection with warrants issued during the fourth quarter of 1999 and $ 461,000
was recorded in connection with stock options previously granted to employees
and non-employee consultants.
Non-cash stock based compensation charges were offset by a $556,000
credit in the first, second and third quarters of fiscal year 2001 representing
a reversal of previously recorded expense attributable to the forfeiture and
cancellation of unvested stock options in the first and second quarters of
fiscal year 2001. Additionally, the decrease in non-cash stock based
compensation charges for the thirty-nine weeks ended September 29, 2001 compared
to the thirty-nine weeks ended September 30, 2000 was primarily a result of the
reduction in the amortization of the deferred compensation charges recorded in
connection with pre-initial public offering grants of non-qualified stock
options. These net charges increase costs of services as a percentage of revenue
by 4.0% and 9.2% for the thirty-nine weeks ended September 29, 2001 and the
thirty-nine weeks ended September 30, 2000, respectively.
Operating Expenses
In total, operating expenses for the thirty-nine weeks ended September
29, 2001 increased to $15.0 million or 15.5% from $13.0 million for the
thirty-nine weeks ended September 30, 2000. The major components of this
increase are $1.4 million of goodwill amortization recorded at September 29,
2001 related to the acquisition of TMNG Marketing, Inc. versus $150,000 of
goodwill amortization recorded at September 30, 2000, and $1.2 million increase
in selling, general and administrative expense primarily related to increased
personnel costs and investments in technology. As a percentage of revenues,
selling, general and administrative expenses increased to 29.0% compared to
20.8% for the thirty-nine weeks ended September 29, 2001 and September 30, 2000,
respectively. This percentage increase was primarily attributable to the
decrease in revenues in 2001. In the second quarter of fiscal year 2001,
management implemented a number of cost-reduction initiatives in selling,
general and administrative areas to address the economic slow down within the
telecommunications industry. These initiatives gained momentum in the third
quarter of fiscal 2001 and were partially quantified as selling, general and
administrative expenses for the thirteen weeks ended September 29, 2001 were
comparable to selling, general and administrative expenses for the thirteen
weeks ended September 30, 2000. Prior to the third quarter of fiscal year 2001,
the Company reported higher selling, general and administrative costs in the
first and second quarters of fiscal year 2001 as compared to the first and
second quarters of fiscal year 2000. Additionally, late in the third quarter of
fiscal year 2001, three of our executive officers, Richard Nespola, Micky Woo
and Ralph Peck reduced their base cash compensation in exchange for grants of
non-statutory stock options, contributing to the decrease in selling, general
and administrative expenses. Management continues to evaluate cost
Page 11
reduction opportunities to better match revenues and costs in the revised
economic environment.
Non-cash stock based compensation charges of $670,000 and $1.2 million
for the thirty-nine weeks ended September 29, 2001 and thirty-nine weeks ended
September 30, 2000, respectively, were recorded in connection with stock options
granted to our partners, principals and certain senior executives and
non-employee directors. These charges increased operating expenses as a
percentage of revenue by 1.5% and 2.2% for the thirty-nine weeks ended September
29, 2001 and the thirty-nine weeks ended September 30, 2000, respectively. The
decrease in non-cash stock based compensation charges for the thirty-nine weeks
ended September 29, 2001 compared to the thirty-nine weeks ended September 30,
2000 was a result of the reduction in the amortization of the deferred
compensation charges recorded in connection with pre-initial public offering
grants of non-qualified stock options.
Other Income and Expenses
Interest income was $2.0 million and $2.9 million for the thirty-nine
weeks ended September 29, 2001 and September 30, 2000, respectively, and
represented interest earned on invested balances. Interest income decreased
during the thirty-nine weeks ended September 29, 2001 due primarily to the
Federal Reserve Bank reducing interest rates during the period, which was
partially offset by larger invested cash balances, and the Company's shift to
tax-exempt investments and the lower interest rates associated with these
investments. We invest in short-term, high-grade investment instruments, and
maintain a mix of taxable and tax-exempt instruments as part of our overall
investment policy.
Income Taxes
Provision for income taxes for the thirty-nine weeks ended September 29,
2001 as a percentage of pretax income was 32.8% compared to 40.0% for the
thirty-nine weeks ended September 30, 2000. The decrease in income taxes as a
percentage of revenue was due primarily to the partial shift of investments by
TMNG from taxable to tax-exempt securities that are not taxed at the federal
income tax level.
Liquidity and Capital Resources
At September 29, 2001, we had approximately $81.4 million in cash and
cash equivalents. We believe the cash on hand, in addition to cash generated
from operations, will be sufficient to meet anticipated cash requirements,
including anticipated capital expenditures and consideration for possible
acquisitions, for at least the next 12 months. Should our business expand more
rapidly than expected, we believe that bank credit would be available to fund
such operating and capital requirements.
Net cash provided by operating activities was $15.2 million for the
thirty-nine weeks ended September 29, 2001 compared to $3.3 million for the
thirty-nine weeks ended September 30, 2000. Net cash provided by operating
activities increased primarily due to the reduction in accounts receivable
reflecting more focused billing and collection activities in 2001 compared to
2000.
Net cash used in investing activities was $4.8 million for the
thirty-nine weeks ended September 29, 2001 compared to $12.1 million for the
thirty-nine weeks ended September 30, 2000. Of the $4.8 million in fiscal year
2001, $4.0 million relates to the purchase of TMNG Technologies, Inc., $520,000
relates to capital expenditures by the Company for leasehold improvements,
computer equipment and software, and $200,000 relates to loans from the Company
to three officers of TMNG. Of the $12.1 million in fiscal year 2000, $11.6
million relates to the purchase of TMNG Marketing, Inc. and $485,000 relates to
capital expenditures by the Company for leasehold improvements, computer
equipment and software.
Net cash provided by financing activities was $317,000 for the
thirty-nine weeks ended September 29, 2001, of which $325,000 related to the
exercise of non-qualified stock options and $8,000 related to payments made on
capital lease obligations. Net cash provided by financing activities was $21.3
million for the thirty-nine weeks ended September 30, 2000 and related primarily
to proceeds received from the Company's secondary stock offering.
Page 12
Risk Factors
Statements in this section and elsewhere in this quarterly report that
are not purely historical, such as statements regarding our expectations,
beliefs, intentions, plans, and strategies regarding the future, are
forward-looking statements. These statements are only predictions, and they
involve risks, uncertainties, and assumptions that could cause our actual
results to differ materially from the results we express in the forward-looking
statements. This section includes important factors that could cause or
contribute to these differences. We cannot guarantee the results expressed in
any forward-looking statement. We have based all forward-looking statements on
information available to us on the date of this quarterly report, and we have no
obligation to update any forward-looking statement.
HISTORICALLY WE HAVE FOCUSED EXCLUSIVELY ON SERVING THE TELECOMMUNICATIONS
INDUSTRY, WHICH HAS RECENTLY EXPERIENCED DECLINING RESULTS OF OPERATIONS AND A
REDUCTION IN THE AVAILABILITY OF INVESTMENT CAPITAL, AND INDUSTRY CONDITIONS
COULD HARM OUR BUSINESS
Historically we derived a significant amount of our revenues from
consulting engagements within the telecommunications industry. Much of our past
growth arose from business opportunities presented by industry trends that
included deregulation, increased competition, technological advances, the growth
of e-business and the convergence of service offerings.
However, beginning in late 2000 and continuing into 2001, many
telecommunications companies, including carriers, equipment manufacturers and
other industry participants have begun reporting declining results of operations
and there have been several bankruptcy filings. This poor financial performance
in the telecommunications sector has continued through the third quarter of
2001, and may continue for the foreseeable future. Our future operating results
could be affected by declining results of operations among telecommunications
companies as well as client financial difficulties. Future client financial
difficulties that result in write-offs that are in excess of our bad debt
reserves could harm our results of operations in future fiscal periods. In
addition, the worsening conditions in the telecommunications sector could cause
companies to delay new product and new business initiatives and to seek to
control expenses by reducing use of outside consultants. Additionally, the
telecommunications industry is in a period of consolidation, which could reduce
our client base, eliminate future opportunities or create conflicts of interest
among clients. As a result, current industry conditions could harm our business,
financial condition and results of operations.
WE ARE DEPENDENT ON A LIMITED NUMBER OF LARGE CUSTOMERS FOR A MAJOR PORTION OF
OUR REVENUES, AND THE LOSS OF A MAJOR CUSTOMER COULD REDUCE REVENUES AND HARM
OUR BUSINESS
We derive a significant portion of our revenues from a relatively
limited number of clients. For example, for the thirty-nine weeks ended
September 29, 2001, revenues from our ten most significant clients accounted for
approximately 62.0% of revenues. The services required by any one client may be
affected by industry consolidation, technological developments, economic
slowdown or internal budget constraints. As a result, the volume of work
performed for specific clients varies from period to period, and a major client
in one period may not use our services in a subsequent period.
Our services are often sold under short-term engagements and most
clients can reduce or cancel their contracts with little or no penalty or
notice. Our operating results may suffer if we are unable to rapidly deploy
consultants if a client defers, modifies or cancels a project. Consequently, you
should not predict or anticipate our future revenue based on the number of
clients we have or the number and scope of our existing engagements.
OUR REVENUES AND OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY FROM QUARTER TO
QUARTER, AND FLUCTUATIONS IN OUR OPERATING RESULTS COULD CAUSE OUR STOCK PRICE
TO DECLINE
Our revenue and operating results may vary significantly from
quarter-to-
Page 13
quarter due to a number of factors. In future quarters, our operating results
may be below the expectations of public market analysts or investors, and the
price of our common stock may decline. Factors that could cause quarterly
fluctuations include:
- the beginning and ending of significant contracts during a quarter;
- the size and scope of assignments;
- consultant turnover, utilization rates and billing rates;
- the loss of key consultants, which could cause clients to end their
relationships with us;
- the ability of clients to terminate engagements without penalty;
- fluctuations in demand for our services resulting from budget cuts,
project delays, cyclical downturns or similar events;
- clients' decisions to divert resources to other projects, which may
limit clients' resources that would otherwise be allocated to
projects we could provide;
- reductions in the prices of services offered by our competitors;
- fluctuations in the telecommunications market and economic
conditions;
- seasonality during the summer, vacation and holiday periods; and
- fluctuations in the value of foreign currencies versus the U.S.
dollar.
Because a significant portion of our expenses are relatively fixed, a
variation in the number of client assignments or the timing of the initiation or
the completion of client assignments may cause significant variations in
operating results from quarter-to-quarter and could result in losses. To the
extent the addition of consultant employees is not followed by corresponding
increases in revenues, additional expenses would be incurred that would not be
matched by corresponding revenues. Therefore, profitability would decline and we
could potentially experience losses. In addition, our stock price would likely
decline.
WE MUST CONTINUE TO ATTRACT AND RETAIN QUALITY CONSULTANTS, AND OUR INABILITY TO
DO SO WOULD IMPAIR OUR ABILITY TO SERVICE EXISTING ENGAGEMENTS OR UNDERTAKE NEW
ENGAGEMENTS, RESULTING IN A DECLINE IN OUR REVENUES AND INCOME
We must attract a significant number of new consultants to implement
growth plans. The number of potential consultants that meet our hiring criteria
is relatively small, and there is significant competition for these consultants
from direct competitors and others in the telecommunications industry.
Competition for these consultants may result in significant increases in our
costs to retain the consultants, which could reduce our margins and
profitability. In addition, we will need to attract consultants in international
locations, principally Europe, to support our international growth plans. We
have limited experience in recruiting internationally, and we may not be able to
do so. Our inability to recruit new consultants and retain existing consultants
could impair our ability to service existing engagements or undertake new
engagements. If we are unable to attract and retain consultants, revenues and
profitability would decline.
THE MARKET IN WHICH WE COMPETE IS INTENSELY COMPETITIVE AND ACTIONS BY
COMPETITORS COULD RENDER OUR SERVICES LESS COMPETITIVE CAUSING REVENUES AND
INCOME TO DECLINE
The market for consulting services to telecommunications companies is
intensely competitive, highly fragmented and subject to rapid change.
Competitors include general management consulting firms, the consulting
practices of "Big Five" accounting firms, most of which have practice groups
focused on the telecommunications industry and local or regional firms
specializing in
Page 14
telecommunications services. Some of these competitors have also formed
strategic alliances with telecommunications and technology companies serving the
industry. We also compete with internal resources of our clients. Our
competitors include:
- American Management Systems;
- Accenture;
- Booz-Allen & Hamilton;
- The Boston Consulting Group;
- Cap Gemini Ernst & Young;
- KPMG; and
- PricewaterhouseCoopers.
Many information technology consulting firms also maintain significant
practice groups devoted to the telecommunications industry. Many of these
companies have a national and international presence and may have greater
personnel, financial, technical and marketing resources. We may not be able to
compete successfully with our existing competitors or with any new competitors.
We also believe our ability to compete depends on a number of factors
outside of our control, including:
- the prices at which others offer competitive services, including
aggressive price competition and discounting on individual
engagements which may become increasingly prevalent due to worsening
economic conditions;
- the ability and willingness of our competitors to finance customers'
projects on favorable terms;
- the ability of our competitors to undertake more extensive marketing
campaigns than we can;
- the extent, if any, to which our competitors develop proprietary
tools that improve their ability to compete with us;
- the ability of our customers to perform the services themselves; and
- the extent of our competitors' responsiveness to customer needs.
We may not be able to compete effectively on these or other factors. If
we are unable to compete effectively, our market position, and therefore our
revenues and profitability, would decline.
Page 15
IF WE DO NOT EFFECTIVELY MANAGE THE CONVERSION OF INDEPENDENT SUBJECT MATTER
EXPERTS TO EMPLOYEES, WE COULD INCUR UNANTICIPATED COSTS WHICH WOULD HARM OUR
FINANCIAL PERFORMANCE
We offer contingent employee or full-time employee status to certain of
our independent subject matter experts. As independent subject matter experts
are converted to consultant employees, we incur additional fixed costs for each
such employee that we do not incur when retained as an independent subject
matter expert. To effectively manage these additional fixed costs, we will need
to continuously improve utilization management and minimize unbilled employee
time. In addition, this change may cause other disruptions to our business. If
we fail to effectively manage this transition, we could incur additional costs
due to underutilization of full-time employees as well as other unanticipated
costs.
WE MUST CONTINUALLY ENHANCE OUR SERVICES TO MEET THE CHANGING NEEDS OF OUR
CUSTOMERS OR WE MAY LOSE FUTURE BUSINESS TO OUR COMPETITORS
Our future success will depend upon our ability to enhance existing
services and to introduce new services to meet the requirements of our customers
in a rapidly developing and evolving market. Present or future services may not
satisfy the needs of the telecommunications market. If we are unable to
anticipate or respond adequately to customer needs, lost business may result and
our financial performance will suffer.
PLANS FOR INTERNATIONAL EXPANSION MAY NOT SUCCEED, WHICH WOULD HARM OUR REVENUES
AND PROFITABILITY
Future revenues depend to a large extent on expansion into international
markets. International operations might not succeed for a number of reasons,
including:
- difficulties in staffing and managing foreign operations;
- seasonal reductions in business activity;
- fluctuations in currency exchange rates or imposition of currency
exchange controls;
- competition from local and foreign-based consulting companies;
- issues relating to uncertainties of laws and enforcement relating to
the protection of intellectual property;
- unexpected changes in trading policies and regulatory requirements;
- legal uncertainties inherent in transnational operations such as
export and import regulations, tariffs and other trade barriers;
- taxation issues;
- operational issues such as longer customer payment cycles and
greater difficulties in collecting accounts receivable;
- language and cultural differences;
- general political and economic trends; and
- expropriations of assets, including bank accounts, intellectual
property and physical assets by foreign governments.
Accordingly, we may not be able to successfully execute the business
plan in foreign markets. If we are unable to achieve anticipated levels of
revenues from international operations, our revenues and profitability would
decline.
Page 16
IF INTERNATIONAL BUSINESS VOLUMES INCREASE, WE WILL BE EXPOSED TO GREATER
FOREIGN CURRENCY EXCHANGE RISKS, WHICH COULD RESULT IN INCREASED EXPENSES AND
DECLINING PROFITABILITY
Revenues derived from our international engagements continue to
represent a significant number of our engagements. Some international
engagements are denominated in the local currency of the clients. Expenses
incurred in delivering these services, consisting primarily of consultant
compensation, are typically denominated in U.S. dollars. To the extent that the
value of a currency in which billings are denominated decreases in relation to
the U.S. dollar or another currency in which expenses are denominated, our
operating results and financial condition could be harmed. We may hedge our
foreign currency exposure from time to time, but hedging may not be effective.
OUR TMNG.COM BUSINESS IS DEPENDENT ON CONTINUED GROWTH, USE AND ACCEPTANCE OF
THE INTERNET AND E-BUSINESS
Our success in providing e-business related consulting services depends
in part on widespread acceptance and use of the Internet as a way to conduct
business. The Internet and e-business may not become a viable long-term
commercial marketplace due to potentially inadequate development of the
necessary network infrastructure or delayed development of enabling technologies
and performance improvements. Our business would be harmed if:
- use of the Internet and other online services does not increase or
increases at a slower pace than expected or on-line services do not
become viable marketplaces;
- the infrastructure for the Internet and other online services does
not effectively support future expansion of e-business; or
- concerns over security and privacy inhibit the growth of the
Internet.
The failure of the Internet to continue to grow would inhibit the demand for our
TMNG.com consulting services and our revenues and financial performance.
WE ARE DEPENDENT ON A LIMITED NUMBER OF KEY PERSONNEL, AND THE LOSS OF THESE
INDIVIDUALS COULD HARM OUR COMPETITIVE POSITION AND FINANCIAL PERFORMANCE
Our business consists primarily of the delivery of professional services
and, accordingly, our success depends upon the efforts, abilities, business
generation capabilities and project execution of our executive officers and key
consultants. Our success is also dependent upon the managerial, operational and
administrative skills of our executive officers, particularly Richard Nespola,
our President and Chief Executive Officer. The loss of any executive officer or
key consultant or group of consultants, or the failure of these individuals to
generate business or otherwise perform at or above historical levels could
result in a loss of customers or revenues, and could therefore harm our
financial performance.
IF WE FAIL TO PERFORM EFFECTIVELY ON PROJECT ENGAGEMENTS, OUR REPUTATION, AND
THEREFORE OUR COMPETITIVE POSITION AND FINANCIAL PERFORMANCE COULD BE HARMED
Many of our engagements come from existing clients or from referrals by
existing clients. Therefore, our growth is dependent on our reputation and on
client satisfaction. The failure to perform services that meet a client's
expectations may damage our reputation and harm our ability to attract new
business. Damage to our reputation arising from client dissatisfaction could
therefore harm our financial performance.
IF WE FAIL TO DEVELOP LONG-TERM RELATIONSHIPS WITH OUR CUSTOMERS, OUR SUCCESS
WOULD BE JEOPARDIZED
A substantial majority of our business is derived from repeat customers.
Future success depends to a significant extent on our ability to develop
long-term relationships with successful telecommunications providers who will
give new and
Page 17
repeat business. Inability to build long-term customer relations would result in
declines in our revenues and profitability.
A LARGE NUMBER OF PERSONNEL ARE CLASSIFIED AS INDEPENDENT CONTRACTORS FOR TAX
AND EMPLOYMENT LAW PURPOSES, AND IF THESE PERSONNEL WERE TO BE RECLASSIFIED AS
EMPLOYEES, WE COULD BE SUBJECT TO BACK TAXES, INTEREST, PENALTIES AND OTHER
LEGAL CLAIMS
We provide approximately half of our consulting services through
independent contractors and, therefore, do not pay federal or state employment
taxes or withhold income taxes for such persons. Further, we generally do not
include these independent contractors in our benefit plans. In the future, the
IRS and state authorities may challenge the status of consultants as independent
contractors. Independent subject matter experts may also initiate proceedings to
seek reclassification as employees under state law. In either case, if persons
engaged by us as independent subject matter experts are determined to be
employees by the IRS or any state taxation department, we would be required to
pay applicable federal and state employment taxes and withhold income taxes with
respect to such persons and could become liable for amounts required to be paid
or withheld in prior periods along with penalties. In addition, we could be
required to include such persons in our benefit plans retroactively and going
forward. Any challenge by the IRS or state authorities or individuals resulting
in a determination that a substantial number of persons we have classified as
independent subject matter experts are actually employees could subject us to
liability for back taxes, interest and penalties, which would harm our
profitability.
WE COULD BE SUBJECT TO CLAIMS FOR PROFESSIONAL LIABILITY, WHICH COULD HARM OUR
FINANCIAL PERFORMANCE
As a provider of professional services, we face the risk of liability
claims. A liability claim brought against us could harm our business. We may
also be subject to claims by clients for the actions of our consultants and
employees arising from damages to clients' business or otherwise.
In particular, we are currently a defendant in litigation brought by the
bankruptcy trustee of a former client. This litigation seeks to recover $320,000
in consulting fees paid by the former client and also seeks to recover at least
$1.85 million for breach of contract, breach of fiduciary duties and negligence.
THE MARKET PRICE OF OUR COMMON STOCK IS VOLATILE, AND INVESTORS MAY EXPERIENCE
INVESTMENT LOSSES
The market price of our common stock is volatile. Our stock price could
decline or fluctuate in response to a variety of factors, including:
- variations in quarterly operating results;
- announcements of technological innovations that render talent
outdated;
- trends in the telecommunications industry;
- acquisitions or strategic alliances by the Company or others in the
industry;
- failure to achieve financial analysts' or other estimates of results
of operations for any fiscal period;
- changes in estimates of performance or recommendations by financial
analysts; and
- market conditions in the telecommunications industry and the economy
as a whole.
In addition, the stock market experiences significant price and volume
fluctuations. These fluctuations particularly affect the market prices of the
Page 18
securities of many high technology companies. These broad market fluctuations
could harm the market price of our common stock.
WE MAY MAKE ACQUISITIONS, WHICH ENTAIL RISKS THAT COULD HARM OUR FINANCIAL
PERFORMANCE OR STOCK PRICE
As part of our business strategy, we have made and will likely continue
to make acquisitions. Any future acquisition would be accompanied by the risks
commonly encountered in acquisitions. These risks include:
- the difficulty associated with assimilating the personnel and
operations of acquired companies;
- the potential disruption of our existing business; and
- adverse effects on the financial statements, including one-time
write-offs and assumption of liabilities of acquired businesses.
If we make acquisitions and any of these problems materialize, these
acquisitions could negatively affect our operations, profitability and financial
operations.
OUR INABILITY TO PROTECT OUR INTELLECTUAL PROPERTY COULD HARM OUR COMPETITIVE
POSITION AND OUR FINANCIAL PERFORMANCE
Despite our efforts to protect proprietary rights from unauthorized use
or disclosure, parties, including former employees or consultants, may attempt
to disclose, obtain or use our solutions or technologies. The steps we have
taken may not prevent misappropriation of solutions or technologies,
particularly in foreign countries where laws or law enforcement practices may
not protect proprietary rights as fully as in the United States. Unauthorized
disclosure of our proprietary information could make our solutions and
methodologies available to others and harm our competitive position.
PRINCIPAL STOCKHOLDERS, EXECUTIVE OFFICERS AND DIRECTORS WILL RETAIN SUBSTANTIAL
CONTROL OVER US AND MAY MAKE DECISIONS THAT ARE NOT IN THE BEST INTEREST OF OUR
OTHER STOCKHOLDERS
Executive officers, directors and stockholders owning more than five
percent of outstanding common stock (and their affiliates) own over a majority
of our outstanding common stock. As a result, such persons, acting together,
have the ability to substantially influence all matters submitted to the
stockholders for approval (including the election and removal of directors and
any merger, consolidation or sale of all or substantially all assets) and to
control management and affairs. Accordingly, concentration of ownership of our
common stock may have the effect of delaying, deferring or preventing a change
in control, impeding a merger, consolidation, takeover or other business
combination involving us or discouraging a potential acquirer from making a
tender offer or otherwise attempting to obtain control of us, even if such a
transaction would be beneficial to other stockholders.
WE USED TO BE TAXED UNDER SUBCHAPTER "S" OF THE INTERNAL REVENUE CODE AND CLAIMS
OF TAXING AUTHORITIES RELATED TO PRIOR SUBCHAPTER "S" CORPORATION STATUS COULD
HARM US
From 1993 through 1998, we were taxed as a "pass-through" entity under
subchapter "S" of the Internal Revenue Code. Since February 1998, we have been
taxed under subchapter "C" of the Internal Revenue Code, which is applicable to
most corporations and treats the corporation as an entity that is separate and
distinct from its stockholders. If our tax returns for the years in which we
were a subchapter "S" corporation were to be audited by the Internal Revenue
Service or another taxing authority and an adverse determination was made during
the audit, we could be obligated to pay back taxes, interest and penalties. The
stockholders of our predecessor entity agreed, at the time we acquired our
predecessor, to indemnify us against negative tax consequences arising from our
prior "S" corporation status. However, this indemnity may not be sufficient to
cover claims made by the IRS or other taxing authorities, and any such claims
could result in additional costs and harm our financial performance.
Page 19
WE MAY SEEK TO RAISE ADDITIONAL FUNDS, AND ADDITIONAL FUNDING MAY BE DILUTIVE TO
STOCKHOLDERS OR IMPOSE OPERATIONAL RESTRICTIONS
Any additional equity financing may be dilutive to our stockholders and
debt financing, if available, may involve restrictive covenants, which may limit
our operating flexibility with respect to certain business matters. If
additional funds are raised through the issuance of equity securities, the
percentage ownership of stockholders will be reduced. These stockholders may
experience additional dilution in net book value per share and any additional
equity securities may have rights, preferences and privileges senior to those of
the holders of our common stock.
ANTI-TAKEOVER PROVISIONS AND OUR RIGHT TO ISSUE PREFERRED STOCK COULD MAKE A
THIRD PARTY ACQUISITION DIFFICULT
Our certificate of incorporation and bylaws and anti-takeover provisions
of Delaware law could make it more difficult for a third party to acquire
control, even if a change in control would be beneficial to stockholders. In
addition, our bylaws provide for a classified board, with board members serving
staggered three-year terms. The Delaware anti-takeover provisions and the
existence of a classified board could make it more difficult for a third party
to acquire us.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We anticipate that revenues from international engagements will continue
to represent a significant percentage of our revenues. We may enter into
consulting engagements that are denominated in foreign currencies. To the extent
that the value of a currency in which our billings are denominated decreases in
relation to the U.S. dollar or another currency in which our expenses are
denominated, our expenses would increase and the profitability of the engagement
would decline. We may hedge our foreign currency exposure from time to time but
our hedging activities may not be effective.
We invest idle cash balances in highly liquid short-term investments,
the earnings of which are subject to interest rate fluctuations. The average
invested balance during the thirty-nine weeks ended September 29, 2001 was
approximately $76.0 million. We make no attempt to hedge this risk.
Part 2. Other Information
Item 1. Legal Proceedings
TMNG has not been subject to any new litigation or claims against the
Company since the time of TMNG's last 10-K filing, dated March 29, 2001. For a
summary of litigation TMNG is currently involved, refer to TMNG's 10-K, as filed
with the Securities and Exchange Commission on March 29, 2001.
Item 2. Changes in Securities and Use of Proceeds
On November 22, 1999, the Securities and Exchange Commission declared
TMNG's Registration Statement on Form S-1 (File No. 333-87383) effective. On
November 23, 1999, TMNG closed its offering of an aggregate of 4,615,000 shares
of TMNG Common Stock at an aggregate offering price of $78.5 million. The
managing underwriters for the offering were Hambrecht & Quist, Robertson
Stephen, Salomon Smith Barney and Jefferies & Company, Inc. Net proceeds to
TMNG, after deducting underwriting discounts and commissions of $5.5 million and
offering expenses of $1.6 were $71.4 million. On November 29, 1999 TMNG used
$22.3 million of the proceeds from its initial public offering to repay all
indebtedness.
On August 2, 2000, the Securities and Exchange Commission declared
TMNG's Registration Statement on Form S-1 (File No. 333-40864) effective. On
August 2, 2000, TMNG closed its offering of an aggregate of 3,000,000 shares of
TMNG Common Stock at an aggregate offering price of $68.6 million. Net proceeds
to TMNG, after deducting underwriting discounts and commissions of $1.1 million
and offering expenses of $728,000 were $21.0 million. Proceeds will be used for
working capital, general corporate purposes and as possible consideration for
acquisitions.
Page 20
In addition to the previously discussed repayment of debt, we have
expended approximately $15.6 million to acquire The Weathersby Group, Inc. and
Tri-Com Computer Services, Inc. The remainder of the net proceeds generated by
our stock offerings is currently invested in short-term, high-grade debt
investments. These funds will be used to support TMNG's European initiative,
working capital, general corporate purposes and as possible consideration for
acquisitions. The use of proceeds described herein does not represent a material
change from that described in earlier filings.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
TMNG did not file any Reports on Form 8-K during the quarter ended
September 29, 2001.
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 President, Chief Executive November 13, 2001
---------------------- Officer and Director
Richard P. Nespola (Principal executive officer)
/s/ DONALD E. KLUMB Chief Financial Officer and November 13, 2001
---------------------- Treasurer
Donald E. Klumb (Principal financial officer
and principal accounting
officer)
*By: /s/ DONALD E. KLUMB
-----------------------
Donald E. Klumb
Attorney-in-Fact
Page 21