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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 March 30, 2002
or
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission file number: 0-27617
THE MANAGEMENT NETWORK GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 48-1129619
------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7300 COLLEGE BLVD., SUITE 302, OVERLAND PARK, KS 66210
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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 May 8, 2002 TMNG had outstanding 33,266,456 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 - March 30, 2002
(unaudited) and December 29, 2001 .......................... 3
Consolidated Condensed Statements of Income (Loss) and
Comprehensive Income (Loss) (unaudited) - Thirteen weeks
ended March 30, 2002 and March 31, 2001 .................... 4
Consolidated Condensed Statements of Cash Flows
(unaudited) - Thirteen weeks ended March 30, 2002
and March 31, 2001 ......................................... 5
Notes to Consolidated Condensed Financial Statements
(unaudited) ................................................ 6
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations .............. 10
ITEM 3. Quantitative and Qualitative Disclosures About
Market Risk ................................................ 12
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings ........................................... 12
ITEM 6. Exhibits and Reports on Form 8-K ............................ 12
Signatures............................................................ 12
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 29, March 30,
2001 2002
------------ -----------
CURRENT ASSETS:
Cash and cash equivalents ................................ $ 86,396 $ 57,252
Receivables:
Accounts receivable .................................... 8,518 8,250
Accounts receivable - unbilled ......................... 2,962 3,605
--------- ---------
11,480 11,855
Less: Allowance for doubtful accounts .................. (517) (1,008)
--------- ---------
10,963 10,847
Other assets ............................................. 2,071 3,395
--------- ---------
Total current assets ........................... 99,430 71,494
--------- ---------
Property and Equipment, net ................................ 1,686 2,984
Goodwill, net .............................................. 22,147 62,799
Intangibles, net ........................................... 1,191 4,541
Deferred Tax Asset ......................................... 4,080 5,440
Other assets ............................................... 508 472
--------- ---------
Total Assets ............................................... $ 129,042 $ 147,730
========= =========
CURRENT LIABILITIES:
Trade accounts payable ................................... $ 210 $ 637
Accrued payroll, bonuses and related expenses ............ 1,393 1,522
Other accrued liabilities ................................ 3,258 4,728
--------- ---------
Total current liabilities ...................... 4,861 6,887
Noncurrent liabilities ..................................... 189 4,197
STOCKHOLDERS' EQUITY
Common Stock: ............................................ 30 33
Voting - $.001 par value, 100,000,000 shares
authorized; 30,204,919 and 33,211,652 issued and
outstanding on December 29, 2001 and March 30, 2002,
respectively
Additional paid-in capital ............................... 141,451 155,497
Accumulated deficit ...................................... (16,463) (18,128)
Accumulated other comprehensive income -
Foreign currency translation adjustment ................. 17 (16)
Unearned compensation .................................... (1,043) (740)
--------- ---------
Total stockholders' equity ...................... 123,992 136,646
--------- ---------
Total Liabilities and Stockholders' Equity ................. $ 129,042 $ 147,730
========= =========
See notes to consolidated condensed financial statements.
3
THE MANAGEMENT NETWORK GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (LOSS) AND
COMPREHENSIVE INCOME (LOSS)
(In thousands, except share and per share data)
(unaudited)
For the Thirteen Weeks Ended
------------------------------
March 31, March 30,
2001 2002
--------- ---------
Revenues ............................... $ 18,334 $ 7,268
Cost of Services:
Direct cost of services .............. 9,544 3,674
Equity related charges ............... 413 495
-------- --------
Total cost of services ............. 9,957 4,169
-------- --------
Gross Profit ........................... 8,377 3,099
Operating Expenses:
Selling, general and
administrative .................... 4,844 5,699
Equity related charges ............... 198 163
Goodwill and intangibles
amortization ...................... 466 392
-------- --------
Total operating expenses ........... 5,508 6,254
-------- --------
Income (Loss) From Operations .......... 2,869 (3,155)
Other Income
Interest income ...................... 721 310
Other, net ........................... (15) (11)
-------- --------
Total other income ................. 706 299
-------- --------
Income (Loss) Before Provision for
Income Taxes ......................... 3,575 (2,856)
Income Tax (Provision) Benefit ......... (1,238) 1,191
-------- --------
Net Income (Loss) ...................... 2,337 (1,665)
Other Comprehensive Loss -
Foreign currency translation
adjustment ......................... (45) (33)
-------- --------
Comprehensive Income (Loss) ............ $ 2,292 $ (1,698)
======== ========
Net Income (Loss) Per Common Share
Basic ................................ $ 0.08 $ (0.05)
======== ========
Diluted .............................. $ 0.08 $ (0.05)
======== ========
Shares Used in Calculation
of Net Income (Loss) Per Common
Share
Basic ................................ 29,490 31,032
======== ========
Diluted .............................. 30,276 32,114
======== ========
See notes to consolidated condensed financial statements.
4
THE MANAGEMENT NETWORK GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
For the Thirteen Weeks Ended
------------------------------
March 31, March 30,
2001 2002
---------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ..................................... $ 2,337 $ (1,665)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization ...................... 582 581
Stock option compensation .......................... 611 658
Income tax benefit realized upon exercise
of stock options ................................. 39 24
Provision for deferred income taxes ................ 13 (106)
Loss on retirement of assets ...................... 140
Other changes in operating assets and
liabilities, net of business acquisitions:
Accounts receivable ........................... 2,511 2,481
Accounts receivable - unbilled ................ 580 260
Other assets .................................. (308) 577
Trade accounts payable ........................ (381) 406
Accrued liabilities ........................... (729) (1,720)
-------- --------
Net cash provided by operating
activities ................................ 5,255 1,636
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of business, net of cash acquired ......... (30,797)
Acquisition of property and equipment ................. (309) (89)
-------- --------
Net cash used in investing
activities ................................ (309) (30,886)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments made on long-term obligations ................ (51)
Exercise of options ................................... 78 190
-------- --------
Net cash provided by financing
activities ............................... 78 139
-------- --------
Effect of exchange rate on cash and cash
equivalents ............................................ (45) (33)
-------- --------
Net increase (decrease) in cash and cash equivalents .... 4,979 (29,144)
Cash and cash equivalents, beginning of period .......... 70,583 86,396
-------- --------
Cash and cash equivalents, end of period ................ $ 75,562 $ 57,252
======== ========
Supplemental disclosure of cash flow information:
Cash paid during period for interest .................... $ $ 11
======== ========
Cash paid during period for taxes ....................... $ 43 $ 33
======== ========
Supplemental disclosure of non-cash investing and
financing transactions --
Fair value of assets acquired ....................... $ 53,764
Liabilities incurred or assumed ..................... $ (7,301)
Common stock issued ................................. $ 13,480
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. (the "Company") as of March 30, 2002, and for the three
months (thirteen weeks) ended March 30, 2002 and March 31, 2001, 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 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 reflects the potential dilution of securities by adding common
stock options in the weighted average number of common shares outstanding for a
period, if dilutive.
The reconciliation of weighted average common shares outstanding included in the
computation of basic and diluted net income (loss) per common share for the
periods indicated is as follows (amounts in thousands):
THIRTEEN WEEKS ENDED
----------------------------------
MARCH 31, 2001 MARCH 30, 2002
(UNAUDITED) (UNAUDITED)
-------------- --------------
Weighted average shares of common
stock outstanding for basic earnings
per share ............................ 29,490 31,032
Effect of stock options ............... 786 1,082
------ ------
Weighted average shares of common
stock outstanding for diluted earnings
per share ............................ 30,276 32,114
====== ======
3. Business Combinations
On March 6, 2002, TMNG announced the purchase of the business and primary assets
of Cambridge Strategic Management Group, Inc. ("CSMG") of Boston, Massachusetts.
CSMG provides high-end advisory services to global communication service and
equipment providers and investment firms that provide capital to the industry.
CSMG's range of business strategy services include analyses of industry and
competitive environments; product and distribution strategies; finance,
including business case development, modeling, cost analysis and benchmarking;
and due diligence and risk assessment.
The acquisition, recorded under the purchase method of accounting, resulted in a
total purchase price of approximately $46.5 million. Consideration consisted of
$33.0 million cash and 2,892,800 shares of TMNG Common Stock valued at $13.5
million. Share consideration was calculated in accordance with the Asset
Purchase Agreement at a fixed price of $4.66 per share. All shares are
restricted from trading for one year from the closing. An escrow was established
as part of the transaction, consisting of 566,502 shares and $4.0 million of
cash (collectively, "the Escrowed Property"). The Escrowed Property is subject
to certain claims as set forth in the Asset Purchase Agreement and is scheduled
to be distributed to the Seller pro rata in four installments over a 24 month
period. On the date of announcement of the acquisition, the closing pricing of
TMNG's Common Stock was $4.56 per share.
The transaction was structured as a taxable transaction for Federal income tax
purposes, and included $5.4 million in cash consideration to the Seller
representing a sharing of tax benefits and costs. The purchase price also
included $5.2 million representing the working capital purchased from CSMG.
The initial purchase price will be subject to refinement based on the
finalization of the balances of the working capital items and income tax
6
sharing at the date of close, and the finalization of direct acquisition costs
incurred in the transaction. The operating results of CSMG have been included in
the Consolidated Condensed Statements of Income (Loss) and Comprehensive Income
(Loss) from the date of the purchase.
The following table summarizes the estimated fair value of the assets acquired
and liabilities assumed as of the date of acquisition. The allocation of the
purchase price is based on preliminary estimates and is subject to further
refinement, however, adjustments, if any, are not expected to be material. The
preliminary allocation allocated to identifiable intangible assets was
determined by an independent appraisal.
AT MARCH 6, 2002
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
Current assets $ 6,066
Property, plant and equipment 1,537
Employment agreements 3,200
Customer backlog 458
Company tradename 350
Deferred taxes (non-current) 1,501
Goodwill 40,652
-------
Total assets acquired 53,764
Current liabilities 3,317
Long-term obligations 3,984
-------
Total liabilities assumed 7,301
-------
Net assets acquired $46,463
=======
Of the $458,000 assigned to the customer backlog, no residual value has been
identified with this asset. The customer backlog has an estimated useful life of
3 months and is amortized on a straight-line basis.
Of the $350,000 assigned to the company tradename, no residual value has been
identified with this asset. The company tradename has an estimated useful life
of 24 months and is amortized on a straight-line basis.
Of the $3,200,000 assigned to the employment agreements, no residual value has
been identified with this asset. The employment agreements have a weighted
average useful life of approximately 32 months and are amortized on a
straight-line basis.
As part of the acquisition of CSMG, the Company assumed liabilities of
approximately $899,000 related to capital leases.
The following reflects pro forma combined results of the Company and CSMG as if
the acquisition had occurred as of December 30, 2001 and December 31, 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.
(unaudited)
-----------------------------------
Thirteen Weeks Ended
(in thousands, except per share amounts) March 31, March 30,
2001 2002
---------- ----------
Total revenues $ 25,907 $ 9,495
Net income (loss) $ 3,145 $ (1,896)
Basic net income (loss) per common share $ 0.10 $ (0.06)
Diluted net income (loss) per common share $ 0.09 $ (0.06)
4. Equity Related Charges
During the thirteen weeks ended March 30, 2002, the Company granted
approximately 64,000 stock options to employees at a weighted average exercise
price of $6.53. During the same period, the Company recorded net compensation
expense related to all stock options of $227,000.
7
Equity related charges to cost of services associated with the previously issued
warrant during the first quarter of fiscal year 2002 totaled $431,000.
5. Contingencies
In June 1998, the bankruptcy trustee of a former client, Communications Network
Corporation, sued TMNG for a total of $320,000 in the U.S. Bankruptcy Court in
New York seeking recovery of $160,000 alleging an improper payment of consulting
fees paid by the former client during the period from July 1, 1996, when an
involuntary bankruptcy proceeding was initiated against the former client,
through August 6, 1996, when the former client agreed to an order for relief in
the bankruptcy proceeding, and $160,000 in consulting fees paid by the former
client after August 6, 1996.
The bankruptcy trustee has also sued TMNG for at least $1.85 million for breach
of contract, breach of fiduciary duties and negligence. Although assurance
cannot be given as to the ultimate outcome of this proceeding, TMNG believes the
Company has meritorious defenses to the claims made by the bankruptcy trustee,
including particularly the claims for breach of contract, breach of fiduciary
duty and negligence, and that the ultimate resolution of this matter will not
materially harm our business.
The Company has and may become involved in various legal and administrative
actions arising in the normal course of business. These could include actions
raised by taxing authorities challenging the employment status of consultants
utilized by the Company. In addition, customer bankruptcies could result in a
claim on collected balances for professional services near the bankruptcy filing
date. While the resolution of any of such actions, claims, or the matter
described above may have an impact on the financial results for the period in
which it is resolved, the Company believes that the ultimate disposition of
these matters will not have a material adverse effect upon its consolidated
results of operations, cash flows or financial position.
6. Loans to Officers
During the third quarter of fiscal year 2001, three executive officers of the
Company received stock options at fair market value in lieu of receiving their
cash base compensation. 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. The
maximum available borrowings under the loan agreements between the three
officers and the Company are $1,300,000 in total. Borrowings against the line of
credit at March 30, 2002 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.
7. Business Segments
The Company has identified its segments based on the way management organizes
the Company to assess performance and make operating decisions regarding the
allocation of resources.
Based on the criteria of Statement of Financial Accounting Standards ("SFAS")
No. 131, "Disclosure about Segments of an Enterprise and Related Information,"
the Company has two segments, only one of which is separately reportable: The
Management Consulting Services segment, and All Other. Management Consulting
Services includes business strategy and planning, marketing and customer
relationship management, operating system support, revenue assurance, corporate
investment services, networks, and business model transformation. All Other
consists of computer hardware commission and rebates received in connection with
the procurement of hardware for third parties. Management evaluates performance
based upon operating earnings before interest income (expense), foreign currency
transaction gains (losses), extraordinary items, if any, and income taxes
excluding equity related charges and goodwill and intangibles amortization.
Management also evaluates trade accounts receivable as part of its overall
assessment of the segments' performance. There are no intersegment sales.
Summarized financial information concerning the Company's reportable segments is
shown in the following table (amounts in thousands):
(unaudited)
-----------------------------------------------------------------------
Management All Not Assigned
Consulting Services Other to Segments Total
------------------- --------- ------------- ---------
For the thirteen weeks ended March 31, 2001:
Net sales to external customers $ 18,334 $ 18,334
Income from operations $ 3,946 $ (1,077) $ 2,869
Total assets $ 22,383 $ 98,956 $ 121,339
For the thirteen weeks ended March 30, 2002:
Net sales to external customers $ 7,074 $ 194 $ 7,268
Income (loss) from operations $ (2,113) $ 8 $ (1,050) $ (3,155)
Total assets $ 11,406 $ 136,324 $ 147,730
8
Segment assets include both billed and unbilled trade accounts receivable, net
of allowances, and certain other assets. Assets not assigned to segments include
cash and cash equivalents, property and equipment, goodwill and intangible
assets and deferred tax assets.
Reconciling information between reportable segments and the Company's totals is
shown in the following table (amounts in thousands):
THIRTEEN WEEKS ENDED
--------------------------------------
March 31, 2001 March 30, 2002
(unaudited) (unaudited)
-------------- --------------
Operating earnings(losses)
Total operating earnings (losses) for
reportable segments $ 3,946 $(2,105)
Equity related charges 611 658
Goodwill and intangibles amortization 466 392
------- -------
Income (loss) from operations $ 2,869 $(3,155)
======= =======
8. Goodwill and Other Intangibles
Effective for fiscal year 2002, the Company adopted certain provisions of SFAS
No. 142 "Accounting for Goodwill and Intangible Assets". In accordance with
certain provisions of the Statement, goodwill has not been amortized in fiscal
year 2002. This Statement requires that goodwill be evaluated on an annual
basis, or more frequently if necessary. This Statement also requires a
transitional impairment test within six months of the date of adoption.
Management has not completed the transitional impairment test as of March 30,
2002.
Included in intangible assets and other assets on the Company's consolidated
balance sheet as of the end of the first quarter, March 30, 2002, and as of the
latest fiscal year end, December 29, 2001, are the following intangible assets
(amounts in thousands):
March 30, 2002
December 29, 2001 (unaudited)
------------------------ ------------------------
Accumulated Accumulated
Cost Amortization Cost Amortization
------- ------------ ------- ------------
Goodwill $24,633 $(2,486) $65,285 $(2,486)
======= ======= ======= =======
Intangibles with
finite lives $ 1,503 $ (131) $ 5,511 $ (523)
======= ======= ======= =======
Intangible amortization expense for the thirteen weeks ended March 30, 2002 was
$392,000 and is estimated to be approximately $2.1 million for fiscal year 2002.
Estimated intangible amortization expense for each of the subsequent three years
beginning in 2003 is expected to range from approximately $1.8 million to
$252,000.
The following pro forma information reconciles the net income and earnings per
share reported for the thirteen weeks ended March 31, 2001 to adjusted net
income and earnings per share which reflect the adoption of SFAS No. 142 and
compares the adjusted information to the current year results (amounts in
thousands, except per share data):
March 31, March 30,
2001 2002
(unaudited) (unaudited)
----------- -----------
Net income, (loss) as reported $ 2,337 $(1,665)
Goodwill amortization, net of tax 280 --
------- -------
Net income (loss), as adjusted $ 2,617 $(1,665)
======= =======
Basic earnings (loss) per share,
as reported $ 0.08 $ (0.05)
Goodwill amortization 0.01 --
------- -------
Basic earnings (loss) per
share, as adjusted $ 0.09 $ (0.05)
======= =======
Diluted earnings (loss)
per share, as reported $ 0.08 $ (0.05)
Goodwill amortization 0.01 --
------- -------
Diluted earnings (loss)
per share, as adjusted $ 0.09 $ (0.05)
======= =======
9. Significant Customer Contract
On December 10, 1999, the Company entered into a consulting services agreement
with a significant customer under which such customer committed to $22 million
of consulting fees over a three-year period commencing January 1, 2000. Due to
financial difficulties experienced by the customer in fiscal year 2001 and
continuing into fiscal year 2002, the agreement was extended in April 2002 for
two additional years beyond the original term of the agreement, in exchange for
an expanded preferred contractor relationship and immediate commitment to a
significant consulting arrangement. As of March 30, 2002, $14.9 million of
consulting fees had been recognized in connection with the agreement from the
commencement date.
10. Letter of Credit
In March 2002, the Company entered into a $1.0 million standby letter of credit
("LOC") facility with a financial institution in connection with the CSMG
acquisition. The LOC was required as part of the assignment of the leased office
space from CSMG to the Company. The LOC was collateralized by the Company with a
$1.0 million cash deposit to the above financial institution. This amount is
included in "Cash and Cash Equivalents" on the Company's consolidated balance
sheet as of March 30, 2002.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
In addition to historical information, this quarterly report contains
forward-looking statements. Certain risks and uncertainties could cause actual
results to differ materially from those reflected in such forward-looking
statements. Factors that might cause a difference include, but are not limited
to, those discussed in the sections entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business - Risk
Factors" in the Company's Annual Report on Form 10-K for the fiscal year ended
December 29, 2001. Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's opinions only as of the
date of this report. We undertake no obligation to revise, or publicly release
the results of any revision to, these forward-looking statements. Readers should
carefully review the risk factors described in our annual report and in other
documents that we file from time to time with the Securities and Exchange
Commission.
The following should be read in connection with Management's Discussion and
Analysis of Financial Condition and Results of Operations and Critical
Accounting Policies as presented in the Company's Annual Report on Form 10-K for
the fiscal year ended December 29, 2001.
RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED MARCH 30, 2002 COMPARED TO THIRTEEN WEEKS ENDED MARCH 31,
2001
REVENUES
Revenues decreased 60.4% to $7.3 million for the first quarter of fiscal year
2002 from $18.3 million for the first quarter of fiscal 2001. The decrease in
revenues was due primarily to a deferral or reduction of management consulting
demand by the communications and technology industry resulting primarily from
adverse macroeconomic events in this sector during 2001 and 2002, including
reductions in capital funding, business failures, and industry restructurings
and reorganizations. Additionally, our international revenue base decreased to
6% of our revenues in the first quarter of fiscal 2002, from 17% in the first
quarter of 2001, due primarily to the domestic revenue generated by our recently
acquired subsidiaries, Cambridge Strategic Management Group, Inc. ("CSMG") and
TMNG Technologies, Inc. and the decline in services provided to international
customers related to similar adverse macroeconomic events in those markets. CSMG
revenues for the period following the close of the acquisition to the end of the
first quarter represented 20.4% of consolidated revenues for the first quarter
of fiscal 2002. Non-consulting revenues recognized by TMNG Technologies
represented 1.8% of consolidated revenues for the first quarter of fiscal 2002,
and related to commissions received on hardware sales.
COSTS OF SERVICES
Direct costs of services decreased 61.5% to $3.7 million for the first quarter
of fiscal year 2002 from $9.5 million in the first quarter of fiscal
10
2001, and was attributable primarily to the decrease in consulting engagements
and corresponding reductions in consulting personnel. As a percentage of
revenues, our gross margin based on direct cost of services was 49.4% for the
first quarter of fiscal year 2002, compared to 47.9% for the first quarter of
fiscal year 2001. The increase in gross margin was primarily attributable to
higher margins associated with strategy offerings provided by CSMG during the
quarter, offsetting lower utilization of other consulting personnel and thus
correspondingly lower margins, which resulted from lower consulting contract
activity.
Non-cash stock based compensation charges were $495,000 and $413,000 for the
first quarter of fiscal year 2002 and 2001, respectively. Of the $495,000
compensation charges related to fiscal year 2002, $120,000 was recorded in
connection with pre-initial public offering grants of stock options to employees
and non-employee consultants, offset by a $56,000 credit representing a reversal
of previously recorded expense attributable to the forfeiture and cancellation
of unvested stock options during the first quarter of fiscal year 2002, and
$431,000 was recorded in connection with the warrant issued during the fourth
quarter of 1999. The primary reason for the net increase in non-cash stock based
compensation charges for the first quarter of fiscal year 2002 compared to the
same period in fiscal year 2001 was that non-cash stock based compensation
charges were offset by a $468,000 credit in the first quarter of fiscal year
2001, representing a reversal of previously recorded expense attributable to the
forfeiture and cancellation of unvested stock options in the first quarter of
fiscal year 2001. These net charges increased costs of services as a percentage
of revenue by 6.8% and 2.3% for the first quarter of fiscal year 2002 and fiscal
year 2001, respectively. The increase in non-cash stock based compensation
charges as a percentage of revenues was due to the decrease in revenues in the
first quarter of fiscal year 2002.
OPERATING EXPENSES
In total, operating expenses increased to $6.3 million for the first quarter of
fiscal year 2002, or 13.5% from $5.5 million for the first quarter of fiscal
year 2001. The major component of this $746,000 net increase in operating
expenses was an $855,000 increase in selling, general and administrative
expenses related to the closing of our Lanham office into our Bethesda location
in the first quarter of fiscal year 2002, an increase in our allowance for
doubtful accounts as a percentage of revenue, and the additional rent and fixed
costs associated with our CSMG and TMNG Technologies acquisitions. As a
percentage of revenues, selling, general and administrative expenses increased
to 78.4% compared to 26.4% for the first quarter of fiscal year 2002 and 2001,
respectively. This percentage increase was primarily attributable to the
decreased revenues. Amortization expense decreased by $74,000 in the first
quarter of fiscal year 2002 compared to the first quarter of fiscal year 2001,
due primarily to the Company no longer recording amortization expense on
goodwill in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 142 "Accounting for Goodwill and Intangible Assets," offset by an increase
in the amortization of specifically identified intangibles acquired in the CSMG
and TMNG Technologies, Inc. acquisitions.
Non-cash stock based compensation charges of $163,000 and $198,000 for the first
quarter of fiscal years 2002 and 2001, 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 2.2% and 1.1% for the first quarter of
fiscal year 2002 and fiscal year 2001, respectively. The $35,000 decrease in
non-cash stock based compensation charges for fiscal year 2002 compared to
fiscal year 2001 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 $310,000 and $721,000 for the first quarter of fiscal years
2002 and 2001, respectively, and represented interest earned on invested
balances. Interest income decreased during the first quarter of fiscal year 2002
due primarily to the Federal Reserve Bank reducing interest rates from the first
quarter of fiscal year 2001 to the first quarter of fiscal year 2002. 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.
Other, net represents a loss of $11,000 and $15,000 for the first quarter of
fiscal years 2002 and 2001, respectively. The charge in the first quarter of
fiscal year 2002 represented interest expense associated with our long-term
obligations. The Company did not report interest expense in the first quarter of
fiscal year 2001 as the above long-term obligations were assumed in the Tri-Com
Computer Services, Inc. acquisition completed by the Company in the third
quarter of fiscal year 2001. The loss in the first quarter of fiscal year 2001
was due primarily to the write-down of an investment classified as a trading
security in accordance with SFAS No. 115 "Accounting for Certain Investments in
Debt and Equity Securities."
INCOME TAXES
Income tax benefit for the first quarter of fiscal year 2002 as a percentage of
pretax loss was 41.7% compared to a provision of 34.6% of pretax income for the
first quarter of fiscal year 2001. The increase in the income tax expense
(benefit) as a percentage of pre-tax income (loss) was due primarily to the
federal tax treatment of federally exempt income on short-term investments in
fiscal years 2002 and 2001.
LIQUIDITY AND CAPITAL RESOURCES
At March 30, 2002, we had approximately $57.3 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. The Company has established a flexible model
that provides a lower
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fixed cost structure than most consulting firms, enabling TMNG to scale
operating cost structures more quickly based on market conditions.
Net cash provided by operating activities was $1.6 million and $5.3 million for
the first quarter of fiscal year 2002 and fiscal year 2001, respectively. The
Company generated positive cash flow from its operating activities in the first
quarter of fiscal 2002, primarily due to the reduction in accounts receivable
balances, after giving impact to the CSMG acquisition, reflecting more focused
billing and collection activities.
Net cash used in investing activities was $30.9 million and $309,000 for the
first quarter of fiscal year 2002 and fiscal year 2001, respectively. Cash used
for acquisitions in the first quarter of fiscal year 2002 was $30.8 million, and
related to the CSMG acquisition closed by the Company on March 6, 2002. Capital
expenditures of $89,000 and $309,000 for the first quarter of fiscal years 2002
and 2001, respectively, relate to the capitalization of leasehold improvements,
computer equipment and software by the Company.
Net cash provided by financing activities was $139,000 in the first quarter of
fiscal year 2002, and related to proceeds from the exercise of employee stock
options, partially offset from payments made by the Company on the current
portion of its capital lease obligations and current portion of outstanding
debt. Net cash provided by financing activities was $78,000 in the first quarter
of fiscal year 2001, and related to proceeds from the exercise of employee stock
options.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not invest excess funds in derivative financial instruments or
other market rate sensitive instruments for the purpose of managing its foreign
currency exchange rate risk. The Company invests excess funds in short-term
investments, the yield of which is exposed to interest rate market risk.
The Company does 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 the Company's clients.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
TMNG has not been subject to any material new litigation or claims against the
Company since the time of TMNG's 10-K filing, dated March 29, 2002. For a
summary of litigation in which TMNG is currently involved, refer to TMNG's 10-K,
as filed with the Securities and Exchange Commission on March 29, 2002.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
The Company filed a Form 8-K on March 21, 2002 with the Securities and Exchange
Commission disclosing the acquisition of Cambridge Strategic Management Group,
Inc. On May 10, 2002 an amendment to this filing was submitted to the Securities
and Exchange Commission. The amendment included pro forma consolidated
statements of income and comprehensive income for the year ended December 29,
2001 as well as a pro forma consolidated balance sheet dated December 29, 2001.
Additionally, the amendment reported CSMG's 2001 financial statements,
footnotes, and independent auditors' report.
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 May 13, 2002
------------------------------- Officer
Richard P. Nespola (Principal executive officer)
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/s/ DONALD E. KLUMB Chief Financial Officer and May 13, 2002
------------------------------- Treasurer
Donald E. Klumb (Principal financial officer
and principal accounting
officer)
13