e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended October 3, 2009
or
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o |
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Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Commission file number: 001-34006
THE MANAGEMENT NETWORK GROUP, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE
(State or other jurisdiction of incorporation or organization)
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48-1129619
(I.R.S. Employer Identification No.) |
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7300 COLLEGE BLVD., SUITE 302, OVERLAND PARK, KS
(Address of principal executive offices)
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66210
(Zip Code) |
913-345-9315
Registrants telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer o |
Accelerated filer o |
Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company þ
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
As of
November 13, 2009, TMNG had outstanding 35,141,884 shares of common stock.
THE MANAGEMENT NETWORK GROUP, INC.
INDEX
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PAGE |
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3 |
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4 |
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5 |
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6 |
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16 |
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29 |
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29 |
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29 |
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29 |
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29 |
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29 |
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30 |
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30 |
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30 |
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30 |
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31 |
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Exhibits |
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32 |
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EX-31 |
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EX-32 |
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2
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THE MANAGEMENT NETWORK GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(unaudited)
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October 3, |
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January 3, |
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2009 |
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2009 |
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ASSETS |
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CURRENT ASSETS: |
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Cash and cash equivalents |
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$ |
7,293 |
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$ |
5,956 |
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Short-term investments |
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7,392 |
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Receivables: |
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Accounts receivable |
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10,540 |
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8,247 |
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Accounts receivable unbilled |
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4,603 |
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4,540 |
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15,143 |
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12,787 |
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Less: Allowance for doubtful accounts |
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(356 |
) |
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(379 |
) |
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Net receivables |
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14,787 |
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12,408 |
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Prepaid and other current assets |
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1,190 |
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1,653 |
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Total current assets |
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30,662 |
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20,017 |
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NONCURRENT ASSETS: |
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Property and equipment, net |
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2,042 |
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1,801 |
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Goodwill |
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7,702 |
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6,240 |
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Identifiable intangible assets, net |
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3,145 |
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4,842 |
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Noncurrent investments |
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6,854 |
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13,404 |
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Other noncurrent assets |
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379 |
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410 |
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Total Assets |
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$ |
50,784 |
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$ |
46,714 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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CURRENT LIABILITIES: |
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Trade accounts payable |
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$ |
1,493 |
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$ |
1,138 |
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Current borrowings |
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4,850 |
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Accrued payroll, bonuses and related expenses |
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4,604 |
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4,053 |
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Other accrued liabilities |
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2,297 |
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3,010 |
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Deferred revenue |
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1,083 |
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476 |
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Accrued contingent consideration |
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161 |
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161 |
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Unfavorable and other contractual obligations |
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694 |
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697 |
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Total current liabilities |
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15,182 |
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9,535 |
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NONCURRENT LIABILITIES: |
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Unfavorable and other contractual obligations |
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686 |
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1,062 |
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Noncurrent borrowings |
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1,485 |
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Other noncurrent liabilities |
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1,130 |
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1,006 |
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Total noncurrent liabilities |
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1,816 |
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3,553 |
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Commitments and contingencies (Note 10) |
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Total stockholders equity |
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33,786 |
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33,626 |
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Total Liabilities and Stockholders Equity |
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$ |
50,784 |
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$ |
46,714 |
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See notes to unaudited condensed consolidated financial statements.
3
THE MANAGEMENT NETWORK GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except per share data)
(unaudited)
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Thirteen Weeks Ended |
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Thirty-nine Weeks Ended |
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October 3, |
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September 27, |
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October 3, |
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September 27, |
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2009 |
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2008 |
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2009 |
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2008 |
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Revenues |
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$ |
16,812 |
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$ |
17,528 |
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$ |
47,834 |
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$ |
59,645 |
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Cost of services (includes net non-cash
share-based compensation expense of $53 and $65
for the thirteen weeks ended October 3, 2009 and
September 27, 2008, respectively, and $221 and
$447 for the thirty-nine weeks ended October 3,
2009 and September 27, 2008, respectively) |
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9,947 |
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9,899 |
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28,155 |
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32,385 |
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Gross Profit |
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6,865 |
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7,629 |
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19,679 |
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27,260 |
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Operating Expenses: |
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Selling, general and administrative (includes
net non-cash share-based compensation expense
of $120 and $133 for the thirteen weeks ended
October 3, 2009 and September 27, 2008,
respectively, and $503 and $977 for the
thirty-nine weeks ended October 3, 2009 and
September 27, 2008, respectively) |
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6,736 |
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6,911 |
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21,498 |
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23,873 |
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Goodwill
and intangible asset impairment |
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1,086 |
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10,165 |
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Intangible asset amortization |
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506 |
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885 |
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1,471 |
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3,379 |
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Total operating expenses |
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7,242 |
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8,882 |
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22,969 |
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37,417 |
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Loss from operations |
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(377 |
) |
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(1,253 |
) |
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(3,290 |
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(10,157 |
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Other income (expense) |
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Interest income |
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50 |
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233 |
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188 |
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750 |
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Interest expense |
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(17 |
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(42 |
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Other income |
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45 |
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24 |
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151 |
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24 |
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Total other income |
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78 |
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257 |
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297 |
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774 |
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Loss before income tax provision |
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(299 |
) |
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(996 |
) |
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(2,993 |
) |
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(9,383 |
) |
Income tax provision |
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(228 |
) |
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(202 |
) |
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(68 |
) |
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(444 |
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Net loss |
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(527 |
) |
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(1,198 |
) |
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(3,061 |
) |
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(9,827 |
) |
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Other comprehensive income (loss): |
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Foreign currency translation adjustment |
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(449 |
) |
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(1,792 |
) |
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1,658 |
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(1,833 |
) |
Unrealized gain (loss) on marketable securities |
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31 |
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(384 |
) |
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720 |
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(846 |
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Comprehensive loss |
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$ |
(945 |
) |
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$ |
(3,374 |
) |
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$ |
(683 |
) |
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$ |
(12,506 |
) |
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Loss per common share
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Basic and diluted |
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$ |
(0.02 |
) |
|
$ |
(0.03 |
) |
|
$ |
(0.09 |
) |
|
$ |
(0.28 |
) |
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Weighted average shares used in calculation of
net loss per basic and diluted common share |
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35,074 |
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34,706 |
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34,872 |
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35,700 |
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See notes to unaudited condensed consolidated financial statements.
4
THE MANAGEMENT NETWORK GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
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For the Thirty-nine Weeks Ended |
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October 3, |
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September 27, |
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2009 |
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2008 |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net loss |
|
$ |
(3,061 |
) |
|
$ |
(9,827 |
) |
Adjustments to reconcile net loss to net cash used in operating activities: |
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|
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Goodwill and
intangible asset impairment |
|
|
|
|
|
|
10,165 |
|
Depreciation and amortization |
|
|
2,529 |
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|
|
4,419 |
|
Share-based compensation |
|
|
724 |
|
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|
1,424 |
|
Deferred income taxes |
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|
27 |
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(775 |
) |
Realized gains on investments |
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(122 |
) |
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Bad debt recoveries |
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(150 |
) |
Other changes in operating assets and liabilities: |
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Accounts receivable |
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(1,905 |
) |
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|
1,251 |
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Accounts receivable unbilled |
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|
134 |
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|
2,544 |
|
Prepaid and other assets |
|
|
426 |
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|
|
157 |
|
Trade accounts payable |
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|
275 |
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(584 |
) |
Deferred revenue |
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|
566 |
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|
2 |
|
Accrued liabilities |
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|
493 |
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(1,568 |
) |
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Net cash provided by operating activities |
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|
86 |
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|
7,058 |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Proceeds from maturities/sales of short-term investments |
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2,325 |
|
Acquisition of businesses |
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(1,911 |
) |
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(3,580 |
) |
Acquisition of property and equipment, net |
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|
(459 |
) |
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|
(632 |
) |
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Net cash used in investing activities |
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|
(2,370 |
) |
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|
(1,887 |
) |
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Borrowings on line of credit |
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|
3,400 |
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|
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|
|
Payments on line of credit |
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(35 |
) |
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Payments made on long-term obligations |
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|
(508 |
) |
|
|
(1,257 |
) |
Purchases of common stock |
|
|
|
|
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|
(3,200 |
) |
Proceeds from exercise of stock options |
|
|
|
|
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|
27 |
|
Issuance of common stock through employee stock purchase plan |
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|
10 |
|
|
|
98 |
|
|
|
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|
|
|
|
|
|
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|
|
|
Net cash provided by (used in) financing activities |
|
|
2,867 |
|
|
|
(4,332 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate on cash and cash equivalents |
|
|
754 |
|
|
|
(1,201 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
1,337 |
|
|
|
(362 |
) |
Cash and cash equivalents, beginning of period |
|
|
5,956 |
|
|
|
10,022 |
|
|
|
|
|
|
|
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Cash and cash equivalents, end of period |
|
$ |
7,293 |
|
|
$ |
9,660 |
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
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|
|
Cash paid during period for interest |
|
$ |
42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during period for taxes |
|
$ |
151 |
|
|
$ |
1,249 |
|
|
|
|
|
|
|
|
Accrued property and equipment additions |
|
$ |
387 |
|
|
$ |
245 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Supplemental disclosure of non-cash investing and financing transactions |
|
|
|
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|
|
Acquisition of business: Common Stock |
|
$ |
104 |
|
|
$ |
921 |
|
|
|
|
|
|
|
|
Acquisition of business: Consideration Payable |
|
$ |
981 |
|
|
$ |
1,462 |
|
|
|
|
|
|
|
|
See notes to unaudited condensed consolidated financial statements.
5
THE MANAGEMENT NETWORK GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Reporting
The condensed consolidated financial statements and accompanying notes of The Management Network
Group, Inc. and its subsidiaries (TMNG, TMNG Global, we, us, our, or the Company) as of
October 3, 2009, and for the thirteen and thirty-nine weeks ended October 3, 2009 and September 27,
2008 are unaudited and reflect all normal recurring adjustments which are, in the opinion of
management, necessary for the fair presentation of the Companys condensed consolidated financial
position, results of operations, and cash flows as of these dates and for the periods presented.
The unaudited condensed consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America (U.S. GAAP) and pursuant
to the rules and regulations of the Securities and Exchange Commission (SEC) for interim
financial information. Consequently, these statements do not include all the disclosures normally
required by U.S. GAAP for annual financial statements nor those normally made in the Companys
annual report on Form 10-K. Accordingly, reference should be made to the Companys annual
consolidated financial statements and notes thereto for the fiscal year ended January 3, 2009,
included in the 2008 Annual Report on Form 10-K (2008 Form 10-K) for additional disclosures,
including a summary of the Companys accounting policies. The Condensed Consolidated Balance Sheet
as of January 3, 2009 has been derived from the audited Consolidated Balance Sheet at that date but
does not include all of the information and footnotes required by U.S. GAAP for complete financial
statements. The Company has evaluated subsequent events for recognition or disclosure through
November 17, 2009, which is the date these unaudited consolidated financial statements were issued.
The preparation of financial statements in conformity with U.S. GAAP requires management to make
estimates and assumptions that affect the amounts reported in the unaudited condensed consolidated
financial statements and accompanying notes. Actual results could differ from those estimates. The
results of operations for the thirteen and thirty-nine weeks ended October 3, 2009 are not
necessarily indicative of the results to be expected for the full year ending January 2, 2010.
Fair Value Measurement For cash and cash equivalents, current trade receivables and current
trade payables, the carrying amounts approximate fair value because of the short maturity of these
items.
Research and Development and Capitalized Software Costs During the thirteen and thirty-nine
weeks ended October 3, 2009, software development costs of $144,000 and $390,000, respectively,
were expensed as incurred. During the thirteen and thirty-nine weeks ended September 27, 2008,
software development costs of $219,000 and $615,000, respectively, were expensed as incurred. No
software development costs were capitalized during the thirteen and thirty-nine weeks ended October
3, 2009 and September 27, 2008.
Foreign Currency Transactions and Translation TMNG Europe Ltd. (TMNG Europe), Cartesian Ltd.
(Cartesian) and the international operations of Cambridge Strategic Management Group, Inc.
(CSMG) conduct business primarily denominated in their respective local currency. Assets and
liabilities have been translated to U.S. dollars at the period-end exchange rate. Revenues and
expenses have been translated at exchange rates which approximate the average of the rates
prevailing during each period. Translation adjustments are reported as a separate component of
accumulated other comprehensive income in the consolidated statements of stockholders equity.
Assets and liabilities denominated in other than the functional currency of a subsidiary are
remeasured at rates of exchange on the balance sheet date. Resulting gains and losses on foreign
currency transactions are included in the Companys results of operations. Realized and unrealized
exchange gains included in results of operations were $128,000 during the thirteen weeks ended
October 3, 2009. Realized and unrealized exchange losses included in results of operations were
$447,000 during the thirty-nine weeks ended October 3, 2009. Realized and unrealized exchange gains
included in results of operations were $192,000 and $347,000, respectively, during the thirteen and
thirty-nine weeks ended September 27, 2008. Realized and unrealized exchange gains included in
results of operations are reflected in selling, general and administrative expenses in the
Condensed Consolidated Statement of Operations and Comprehensive Loss (unaudited).
Derivative Financial Instruments As of October 3, 2009, the Company has open foreign currency
forward contracts with a combined notional amount of $0.9 million. These forward contracts provide
an economic hedge of fluctuations in euro denominated accounts receivable against the British
pound, but have not been designated as hedges for accounting purposes. The change in fair value of
these contracts as of October 3, 2009 was not material to the Companys results of operations or
financial position. The Company utilizes valuation models for these forward contracts that rely
exclusively on Level 2 inputs, as defined by the Financial Accounting Standards Board (FASB)
Accounting Standards Codification (ASC) 820, Fair Value Measurement and Disclosures. These
contracts expire on staggered dates between November 30, 2009 and April 30, 2010. During the
thirteen and thirty-nine weeks ended October 3, 2009, the Company recognized losses on these
forward contracts of $53,000 and $29,000, respectively, which are included in selling, general and
administrative expenses in the Condensed Consolidated Statement of Operations and Comprehensive
Loss (unaudited).
6
Net Income (Loss) Per Share The Company has not included the effect of stock options and
nonvested shares in the calculation of diluted loss per share for the thirteen and thirty-nine
weeks ended October 3, 2009 and September 27, 2008 as the Company reported a net loss for these
periods and the effect would have been anti-dilutive.
Recent Accounting Pronouncements In April 2009, the FASB issued ASC 820-10-65-4, Fair Value
Measurement and Disclosures, Transition Related to FASB Staff Position FAS 157-4, Determining Fair
Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased
and Identifying Transactions That Are Not Orderly (ASC 820-10-65-4), which is effective for
interim and annual periods ending after June 15, 2009. ASC 820-10-65-4 provides additional guidance
for determining fair value and requires new disclosures regarding the categories of fair value
instruments, as well as the inputs and valuation techniques utilized to determine fair value and
any changes to the inputs and valuation techniques during the period. The Company adopted this
staff position upon issuance and it had no material impact on its consolidated financial
statements.
In April 2009, the FASB issued ASC 825-10-65, Financial Instruments Transition Related to FSP
FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments (ASC
820-10-65), effective for interim and annual periods ending after June 15, 2009. ASC 820-10-65
requires fair value disclosures of financial instruments on a quarterly basis, as well as new
disclosures regarding the methodology and significant assumptions underlying the fair value
measures and any changes to the methodology and assumptions during the reporting period. The
Company adopted this guidance upon issuance.
In May 2009, the FASB issued ASC 855-10, Subsequent Events (ASC 855-10). ASC 855-10 incorporates
the subsequent events guidance contained in the auditing standards literature into authoritative
accounting literature. It also requires entities to disclose the date through which they have
evaluated subsequent events and whether the date corresponds with the release of their financial
statements. This guidance is effective for all interim and annual periods ending after June 15,
2009. The Company adopted ASC 855-10 upon its issuance. Refer to the subsequent events disclosure
above in this Note 1 Basis of Reporting and the disclosure in Note 11 Subsequent Event.
In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets an
amendment of FASB Statement No. 140 (SFAS 166). SFAS 166 revises SFAS No. 140 and will require
entities to provide more information about sales of securitized financial assets and similar
transactions, particularly if the seller retains some risk with respect to the assets. SFAS 166 is
effective for fiscal years beginning after November 15, 2009. The Company is currently evaluating
the impact that the adoption of SFAS 166 will have on its consolidated financial statements.
In
June 2009, the FASB issued SFAS No. 167, Amendments to
FASB Interpretation No. 46(R), which amends the consolidation
guidance applicable to variable interest entities. The amendments to
the consolidation guidance affect all entities currently within the
scope of
FIN 46(R), as well as qualifying special-purpose entities
that are currently excluded from the scope of FIN 46(R). SFAS 167 is
effective for fiscal years beginning after November 15, 2009. The
Company is currently evaluating the impact that the adoption of SFAS
167 will have on its consolidated financial statements.
In June 2009, the FASB issued ASC 105-10, Generally Accepted Accounting Principles Overall (ASC
105-10) that established FASB Accounting Standards Codification (Codification), as the single
source of authoritative U.S. GAAP for all non-governmental entities. The Codification, which
launched July 1, 2009, changes the referencing and organization of accounting guidance and is
effective for interim and annual periods ending after September 15, 2009. Since it is not intended
to change or alter existing U.S. GAAP, the Codification does not have any impact on the Companys
financial condition or results of operations, but it does change the way GAAP is organized and
presented. The Codification is effective for the Companys third quarter ended October 3, 2009
financial statements and the principal impact on the Companys financial statements is limited to
disclosures as all future references to authoritative accounting literature will be referenced in
accordance with the Codification.
In August 2009, FASB issued Accounting Standards Update (ASU) No. 2009-05 which amends Fair Value
Measurements and Disclosures Overall (ASC Topic 820-10) to provide guidance on the fair value
measurement of liabilities. This update requires clarification for circumstances in which a quoted
price in an active market for the identical liability is not available, in which event a reporting
entity is required to measure fair value using one or more of the following techniques: 1) a
valuation technique that uses either the quoted price of the identical liability when traded as an
asset or quoted prices for a similar liability or similar liabilities when traded as an asset; or
2) another valuation technique that is consistent with the principles in ASC Topic 820 such as the
income and market approach to valuation. The amendments in this update also clarify that when
estimating the fair value of a liability, a reporting entity is not required to include a separate
input or adjustment to other inputs relating to the existence of a restriction that prevents the
transfer of the liability. This update further clarifies that if the fair value of a liability is
determined by reference to a quoted price in an active market for an identical liability, that
price would be considered a Level 1 measurement in the fair value hierarchy. Similarly, if the
identical liability has a quoted price when traded as an asset in an active market, it is also a
Level 1 fair value measurement if no adjustments to the quoted price of the asset are required.
This update is effective for the Companys fiscal year ending January 2, 2010.
In October 2009, the FASB issued ASU No. 2009-13, Revenue Recognition (Topic 605)
Multiple-Deliverable Revenue Arrangements, a consensus of the FASB Emerging Issue Task Force (ASU
2009-13), and Accounting Standards Update No. 2009-14, Software (Topic 985) Certain Revenue
Arrangements That Include Software Elements (ASU 2009-14). ASU 2009-13 requires companies to
allocate revenue in multiple-element arrangements based on an elements estimated selling price if
vendor-specific or other third party evidence of value is not available. ASU 2009-14 modifies the
software revenue recognition guidance to exclude from its scope tangible products that contain both
software and non-software components that function together to deliver a products essential
functionality. Both statements are effective for revenue arrangements entered into or materially
modified in fiscal years
7
beginning on or after June 15, 2010. Early adoption is permitted. The Company is currently
evaluating the impact that the adoption of this guidance will have on its consolidated financial
statements.
2. Auction Rate Securities
As of October 3, 2009, TMNG held $14.2 million in fair value of auction rate securities for which
the underlying collateral is guaranteed through the Federal Family Education Loan Program of the
U.S. Department of Education. The Companys auction rate securities portfolio as of October 3, 2009
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized |
|
|
|
|
|
|
|
|
|
|
Gains |
|
Unrealized |
|
Fair Value at October 3, 2009 |
Issuer |
|
Cost Basis |
|
(Losses) |
|
Losses |
|
Current |
|
Noncurrent |
|
|
|
(In thousands) |
|
Trading Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kentucky Higher Education Loan Revenue |
|
$ |
1,900 |
|
|
$ |
(112 |
) |
|
|
|
|
|
$ |
1,788 |
|
|
|
|
|
Missouri Higher Education Loan Revenue |
|
|
1,800 |
|
|
|
(106 |
) |
|
|
|
|
|
|
1,694 |
|
|
|
|
|
Utah State Board of Regents Revenue Bonds |
|
|
1,400 |
|
|
|
(83 |
) |
|
|
|
|
|
|
1,317 |
|
|
|
|
|
Access Group Inc. Federal Student Loan Asset Backed
Notes |
|
|
2,050 |
|
|
|
(252 |
) |
|
|
|
|
|
|
1,798 |
|
|
|
|
|
Kentucky Higher Education Loan Revenue |
|
|
400 |
|
|
|
(24 |
) |
|
|
|
|
|
|
376 |
|
|
|
|
|
|
|
|
|
|
|
7,550 |
|
|
|
(577 |
) |
|
|
|
|
|
|
6,973 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Education Funding Capital Education Loan Backed Notes |
|
|
6,250 |
|
|
|
|
|
|
$ |
(369 |
) |
|
|
|
|
|
$ |
5,881 |
|
Brazos Student Finance Corporation Student Loan
Asset Backed Notes |
|
|
1,000 |
|
|
|
|
|
|
|
(27 |
) |
|
|
|
|
|
|
973 |
|
|
|
|
|
|
|
7,250 |
|
|
|
|
|
|
|
(396 |
) |
|
|
|
|
|
|
6,854 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ARS Rights |
|
|
|
|
|
|
419 |
|
|
|
|
|
|
|
419 |
|
|
|
|
|
|
|
|
|
|
$ |
14,800 |
|
|
$ |
(158 |
) |
|
$ |
(396 |
) |
|
$ |
7,392 |
|
|
$ |
6,854 |
|
|
|
|
The auction rate securities the Company holds are generally long-term debt instruments that
historically provided liquidity through a Dutch auction process through which interest rates reset
every 28 to 35 days. Beginning in February 2008, auctions of the Companys auction rate securities
portfolio failed to receive sufficient order interest from potential investors to clear
successfully, resulting in failed auctions. The principal associated with failed auctions will not
be accessible until a successful auction occurs, a buyer is found outside of the auction process,
the issuers redeem the securities, the issuers establish a different form of financing to replace
these securities or final payments come due according to contractual maturities ranging from
approximately 22 to 36 years.
During the third quarter of 2008, state and federal regulators reached settlement agreements with
both of the brokers who advised the Company to purchase the auction rate securities currently held
by the Company. The settlement agreements with the regulators were intended to eventually provide
liquidity for holders of auction rate securities. On November 13, 2008, the Company entered into a
settlement with UBS AG (UBS) to provide liquidity for the Companys $7.6 million auction rate
securities portfolio held with a UBS affiliate. Pursuant to the terms of the settlement, UBS issued
to the Company Auction Rate Securities Rights (ARS Rights), allowing the Company to sell to UBS
its auction rate securities held in accounts with UBS and UBS affiliates at par value at any time
during the period beginning June 30, 2010 and ending July 2, 2012. As consideration for the
issuance of the ARS Rights, the Company (1) released UBS from all claims for damages (other than
consequential damages) directly or indirectly relating to UBSs marketing and sale of auction rate
securities, and (2) granted UBS the discretionary right to sell or otherwise dispose of the
Companys auction rate securities, provided that the Company is paid the par value of the auction
rate securities upon any disposition.
While the ARS Rights result in a put option which represents a separate freestanding instrument,
the put option does not meet the definition of a derivative instrument under FASB ASC 815,
Derivatives and Hedging. The Company has elected to measure the ARS Rights at fair value under
FASB ASC 825 to better align changes in fair value of the ARS Rights with those of the underlying
auction rate securities investments.
Prior to accepting the UBS settlement offer, the Company recorded all of its auction rate
securities as available-for-sale investments. Upon accepting the UBS settlement, the Company made a
one-time election to transfer its UBS auction rate securities holdings from available-for-sale
securities to trading securities under FASB ASC 320, Investments-Debt and Equity Securities. For
auction rate securities classified as available-for-sale the Company recognized unrealized holding
gains of $31,000 and $720,000, respectively during the thirteen and thirty-nine weeks ended October
3, 2009 and recognized unrealized holding losses of $384,000 and $846,000 during the thirteen and
thirty-nine weeks ended September 27, 2008. Unrealized holding gains and losses on securities
classified as
8
available-for-sale are included as a separate component of stockholders equity, net of applicable
taxes, and have been recognized in Other comprehensive income (loss) in the Condensed Consolidated
Statements of Operations and Comprehensive Loss (unaudited). For auction rate securities
classified as trading securities the Company recognized realized holding gains of $208,000 and
$606,000, respectively, offset by realized losses on the Companys ARS Rights of $191,000 and
$484,000, respectively, during the thirteen and thirty-nine weeks ended October 3, 2009. Realized
gains and losses on trading securities have been recognized in Other income in the Condensed
Consolidated Statements of Operations and Comprehensive Loss (unaudited). The ARS Rights will
continue to be measured at fair value under FASB ASC 825 until the earlier of the Companys
exercise of the ARS Rights or UBSs purchase of the auction rate securities in connection with the
ARS Rights.
Due to the lack of observable market quotes on the Companys auction rate securities portfolio and
ARS Rights, the Company utilizes valuation models that rely exclusively on Level 3 inputs, as
defined by FASB ASC 820, including those that are based on expected cash flow streams and
collateral values, including assessments of counterparty credit quality, default risk underlying
the security, discount rates and overall capital market liquidity. The valuation of the Companys
auction rate securities portfolio and ARS Rights is subject to uncertainties that are difficult to
predict. Factors that may impact the Companys valuation include changes to credit ratings of the
securities as well as to the underlying assets supporting those securities, rates of default of the
underlying assets, underlying collateral value, discount rates, counterparty risk and ongoing
strength and quality of market credit and liquidity.
Given the Companys intent to exercise its right under the ARS Rights to sell to UBS its auction
rate securities held in accounts with UBS and UBS affiliates at par value on June 30, 2010, the
Company has classified the entire amount of auction rate securities portfolio held with UBS
affiliates, including the fair value of the ARS Rights, as short-term investments in the Condensed
Consolidated Balance Sheet (unaudited) as of October 3, 2009. The remaining auction rate securities
are classified as noncurrent investments in the Condensed Consolidated Balance Sheet (unaudited) as
of October 3, 2009. The entire amount of auction rate securities is reflected as noncurrent assets
on the Companys Condensed Consolidated Balance Sheet as of January 3, 2009.
3. Line of Credit Agreements
As discussed above in Note 2, Auction Rate Securities, on November 13, 2008, the Company entered
into a settlement with UBS to provide liquidity for the Companys $7.6 million auction rate
securities portfolio held with a UBS affiliate. As provided for in the settlement, the Company
entered into a line of credit from UBS and its affiliates for up to 75% of the fair value of its
auction rate securities. The line of credit provides the Company with an uncommitted, demand
revolving line of credit of up to 75% of the fair value, as determined by UBS in its sole
discretion, of the Companys auction rate securities that the Company has pledged as collateral.
The interest that the Company pays on the line of credit will not exceed the interest that the
Company receives on the auction rate securities pledged to UBS as security for the line of credit.
UBS may demand full or partial payment of amounts borrowed on the line of credit, at its sole
option and without cause, at any time. UBS may, at any time, in its discretion, terminate and
cancel the line of credit. If at any time UBS exercises its right of demand, then a UBS affiliate
shall provide, as soon as reasonably possible, alternative financing on substantially the same
terms and conditions as those under the line of credit and UBS agrees that the line of credit shall
remain in full force and effect until such time as such alternative financing has been established.
If alternative financing cannot be established, then a UBS-related entity will purchase the pledged
auction rate securities at par value. If the Company elects to sell any auction rate securities
that are pledged as collateral under the line of credit to a purchaser other than UBS, UBS intends
to exercise its right to demand repayment of the line of credit relating to the auction rate
securities sold by the Company.
Given the Companys intent to liquidate the auction rate securities related to the line of credit
with UBS within one year and the requirement that the Company concurrently repay the amounts
borrowed on the line of credit, the Company has classified this debt as a current liability in the
Condensed Consolidated Balance Sheet (unaudited) as of October 3, 2009. The Company classified the
line of credit as a noncurrent liability in the Condensed Consolidated Balance Sheet as of January
3, 2009. The Company had borrowed $4,850,000 and $1,485,000 under this line of credit as of October
3, 2009 and January 3, 2009, respectively. $3,400,000 was borrowed during the thirty-nine weeks
ended October 3, 2009. No amounts were borrowed during the thirteen weeks ended October 3, 2009
and September 27, 2009, or the thirty-nine weeks ended September 27, 2008. These borrowings were
used to fund short-term liquidity needs. Because amounts borrowed under the line of credit bear
interest at a floating rate and have a remaining maturity of less than one year, the fair value of
this financial instrument approximates its carrying value.
On March 19, 2009, the Company entered into a loan agreement with Citigroup Global Markets, Inc.
(Citigroup) to provide liquidity for the Companys $7.3 million auction rate securities portfolio
held with Citigroup. Under the loan agreement, the Company has access to a revolving line of credit
of up to 50% of the par value of the auction rate securities that the Company has pledged as
collateral, or $3.625 million. The current interest rate on the line of credit is the federal funds
rate plus 3.65%. The interest rate may change in future periods based on the change in the spread
over the federal funds rate. The line of credit is not for any specific term or duration and
Citigroup may demand full or partial payment of amounts borrowed on the line of credit, at its sole
option and without cause, at any time. Citigroup may, at any time, in its discretion, terminate the
line of credit with proper notice. No amounts have been borrowed against this line of credit.
9
4. Business Combinations
TWG Consulting, Inc.
On October 5, 2007, the Company acquired all of the outstanding shares of stock of TWG Consulting,
Inc. (TWG), a privately-held management consulting firm. Under the purchase agreement, TMNG
agreed to acquire the entire ownership interest in TWG for a total cash purchase price of $1.7
million, including approximately $1.2 million paid for TWGs working capital. In the event TWG
achieves certain performance targets, total consideration under the purchase agreement could
increase to $3.4 million, including $1.3 million of possible contingent cash consideration and
approximately 0.7 million shares of TMNG common stock valued at $0.4 million based on the share
price as of October 3, 2009. As of October 3, 2009 and January 3, 2009, negative goodwill of
$161,000 is reflected as a current liability based on the anticipated resolution of the contingent
feature. If and when contingent payments are earned, the Company will apply the payments against
these contingent liabilities. TWG is presented as a component of the Management Consulting Services
segment.
The aggregate purchase price of $1.9 million consisted of the following (in thousands):
|
|
|
|
|
Cash paid at closing |
|
$ |
1,660 |
|
Transaction costs |
|
|
59 |
|
Accrued contingent consideration |
|
|
161 |
|
|
|
|
|
|
|
|
|
|
Total purchase price recognized at October 3, 2009 |
|
$ |
1,880 |
|
|
|
|
|
RVA Consulting, LLC
On August 3, 2007, the Company acquired all of the outstanding membership interests of RVA
Consulting, LLC (RVA) pursuant to a Membership Interest Purchase Agreement with the members of
RVA. TMNG assumed all liabilities of RVA, subject to certain indemnities on the part of the selling
members. Certain of the selling members continue to be employed by and participate in the
management of RVA after the closing date pursuant to written employment agreements. RVA is
presented as a component of the Management Consulting Services segment. In addition to cash
consideration paid at closing, the transaction included additional consideration for working
capital true-ups and potential earn-out consideration based upon performance of RVA through June
30, 2010. The aggregate potential purchase price of $11.5 million consists of the following (in
thousands):
|
|
|
|
|
Cash paid at closing |
|
$ |
6,625 |
|
Transaction costs |
|
|
247 |
|
Contingent cash consideration earned |
|
|
2,292 |
|
Contingent cash consideration earned but not yet paid |
|
|
981 |
|
Contingent stock consideration earned (based on June 30, 2008 measurement date) |
|
|
921 |
|
Contingent stock consideration earned but not yet paid (based on June 30, 2009 measurement date) |
|
|
104 |
|
|
|
|
|
|
|
|
|
|
Total purchase price recognized at October 3, 2009 |
|
|
11,170 |
|
|
|
|
|
|
Remaining contingent cash consideration |
|
|
344 |
|
Remaining contingent stock consideration (based on share price as of October 3, 2009) |
|
|
61 |
|
|
|
|
|
|
|
|
|
|
Aggregate potential consideration |
|
$ |
11,575 |
|
|
|
|
|
The
Company has accrued $981,000 in Other accrued liabilities on the Condensed Consolidated Balance
Sheet related to contingent cash consideration which has been earned but not paid as of October 3,
2009. This liability is expected to be paid during the thirteen weeks ended January 2, 2010.
Cartesian Limited
On January 2, 2007, the Company acquired one hundred percent of the outstanding common stock of
Cartesian. Cartesian is presented within the Software Solutions Segment. In addition to cash
consideration paid at closing, the transaction included additional consideration for working
capital true-ups and potential earn-out consideration based upon performance of Cartesian after the
closing date. During the fourth quarter of 2008, in consideration for the selling parties
relinquishing certain management rights, the remaining contingent consideration was deemed earned.
In addition, a payment of $372,000 scheduled to be made in 2010 was accelerated and paid in 2008.
As of
10
January 3, 2009, the remaining cash consideration of $1.9 million was included in other accrued
liabilities on the Condensed Consolidated Balance Sheet.
During the thirteen weeks ended April 4, 2009, the Company paid $0.7 million of the accrued earn-out.
During the thirteen weeks ended October 3, 2009, the remaining earn-out balance of $1.2 million was
paid.
The aggregate purchase price of $15.5
million consisted of the following (in thousands):
|
|
|
|
|
Cash paid at closing |
|
$ |
6,495 |
|
Transaction costs |
|
|
534 |
|
Contingent consideration earned and paid |
|
|
8,462 |
|
|
|
|
|
Aggregate purchase price |
|
$ |
15,491 |
|
|
|
|
|
5. Goodwill and Other Identifiable Intangible Assets
The changes in the carrying amount of goodwill for the thirty-nine weeks ended October 3, 2009 are
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management |
|
|
Software |
|
|
|
|
|
|
Consulting |
|
|
Solutions |
|
|
|
|
|
|
Segment |
|
|
Segment |
|
|
Total |
|
Balance as of January 3, 2009 |
|
$ |
2,465 |
|
|
$ |
3,775 |
|
|
$ |
6,240 |
|
2009 RVA goodwill from contingent consideration earned |
|
|
1,085 |
|
|
|
|
|
|
|
1,085 |
|
Changes in foreign currency exchange rates |
|
|
|
|
|
|
377 |
|
|
|
377 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of October 3, 2009 |
|
$ |
3,550 |
|
|
$ |
4,152 |
|
|
$ |
7,702 |
|
|
|
|
|
|
|
|
|
|
|
Included in intangible assets, net are the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 3, 2009 |
|
|
January 3, 2009 |
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Accumulated |
|
|
|
Cost |
|
|
Amortization |
|
|
Cost |
|
|
Amortization |
|
Customer relationships |
|
$ |
5,310 |
|
|
$ |
(3,154 |
) |
|
$ |
5,136 |
|
|
$ |
(2,072 |
) |
Acquired software |
|
|
2,387 |
|
|
|
(1,641 |
) |
|
|
2,170 |
|
|
|
(1,085 |
) |
Employment agreements |
|
|
1,991 |
|
|
|
(1,748 |
) |
|
|
1,847 |
|
|
|
(1,154 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
9,688 |
|
|
$ |
(6,543 |
) |
|
$ |
9,153 |
|
|
$ |
(4,311 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible amortization expense for the thirteen weeks ended October 3, 2009 and September 27,
2008 was $659,000 and $1,063,000, respectively, including $154,000 and $179,000 reported in cost of
services for the thirteen weeks ended October 3, 2009 and September 27, 2008, respectively.
Intangible amortization expense for the thirty-nine weeks ended October 3, 2009 and September 27,
2008 was $1,905,000 and $3,928,000, respectively, including $434,000 and $549,000 reported in cost
of services for the thirty-nine weeks ended October 3, 2009 and September 27, 2008, respectively.
Future intangible amortization expense is estimated to be as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
|
|
|
|
|
intangible |
|
|
Total estimated |
|
amortization to |
|
|
intangible |
|
be included in |
Future Period |
|
amortization |
|
cost of services |
Remainder of fiscal year 2009
|
|
$ |
647 |
|
|
$ |
149 |
|
Fiscal year 2010
|
|
|
2,002 |
|
|
|
597 |
|
Fiscal year 2011
|
|
|
496 |
|
|
|
|
|
The Company evaluates goodwill for impairment on an annual basis on the last day of the first
fiscal month of the fourth quarter and whenever events or circumstances indicate that these assets
may be impaired. Management determined that there were no events or changes in circumstances during
the thirteen weeks ended October 3, 2009 which indicated that goodwill needed to be tested for
impairment during the period.
During the second quarter of 2008, based on an analysis of the present value of future cash flows
the Company recognized a charge of approximately $9.1 million for the impairment of the carrying
value of goodwill in the Management Consulting Services Segment. The impairment charge was the
result of a reduction in the size and scope of operations which impacted our assessment of future
cash flows of the strategy reporting unit.
11
During the third quarter of 2008, based on an analysis of the present value of future cash flows,
the Company determined that the carrying value of the S3 license agreement and the intangibles
related to the TWG acquisition exceeded their fair market values and recorded an impairment loss
related to the Management Consulting Segment of approximately $1.1 million.
These impairment losses were reflected as a component of Loss from Operations in the Statement of
Operations and Comprehensive Loss. The Company performed its impairment tests for goodwill in
accordance with FASB ASC 350 Intangibles-Goodwill and Other.
6. Share-Based Compensation
The Company issues stock option awards and nonvested share awards under its share-based
compensation plans. The key provisions of the Companys share-based compensation plans are
described in Note 6 to the Companys consolidated financial statements included in the 2008 Form
10-K.
During the thirteen and thirty-nine weeks ended October 3, 2009, the Company recognized no income
tax benefits related to share-based compensation arrangements. During the thirteen and thirty-nine
weeks ended September 27, 2008, the Company recognized income tax benefits of $72,000 and $247,000,
respectively, related to share-based compensation arrangements.
1998 Equity Incentive Plan
Stock Options
A summary of the option activity under the Companys Amended and Restated 1998 Equity Incentive
Plan (the 1998 Plan), as of October 3, 2009 and changes during the thirty-nine weeks then ended
is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
Shares |
|
|
Exercise Price |
|
Outstanding at January 3, 2009 |
|
|
4,288,075 |
|
|
$ |
3.62 |
|
Granted |
|
|
47,500 |
|
|
$ |
0.30 |
|
Forfeited/cancelled |
|
|
(467,164 |
) |
|
$ |
3.89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at October 3, 2009 |
|
|
3,868,411 |
|
|
$ |
3.54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested and expected to vest at October 3, 2009 |
|
|
3,493,687 |
|
|
$ |
3.69 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at October 3, 2009 |
|
|
2,875,432 |
|
|
$ |
4.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value of options granted during
the period |
|
|
|
|
|
$ |
0.17 |
|
Nonvested Shares
A summary of the status of nonvested stock issued under the 1998 Plan as of October 3, 2009 and
changes during the thirty-nine weeks then ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average Grant |
|
|
|
Shares |
|
|
Date Fair Value |
|
Outstanding at January 3, 2009 |
|
|
56,875 |
|
|
$ |
2.23 |
|
Vested |
|
|
(50,625 |
) |
|
$ |
2.24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at October 3, 2009 |
|
|
6,250 |
|
|
$ |
2.19 |
|
|
|
|
|
|
|
|
12
2000 Supplemental Stock Plan
A summary of the option activity under the Companys 2000 Supplemental Stock Plan as of October 3,
2009 and changes during the thirty-nine weeks then ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
Shares |
|
|
Exercise Price |
|
Outstanding at January 3, 2009 |
|
|
1,556,273 |
|
|
$ |
2.34 |
|
Granted |
|
|
26,000 |
|
|
$ |
0.24 |
|
Forfeited/cancelled |
|
|
(174,750 |
) |
|
$ |
1.99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at October 3, 2009 |
|
|
1,407,523 |
|
|
$ |
2.34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested and expected to vest at October 3, 2009 |
|
|
1,205,016 |
|
|
$ |
2.39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at October 3, 2009 |
|
|
786,773 |
|
|
$ |
2.58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value of options granted during
the period |
|
|
|
|
|
$ |
0.14 |
|
7. Business Segments and Major Customers
The Company identifies its segments based on the way management organizes the Company to assess
performance and make operating decisions regarding the allocation of resources. In accordance with
the criteria in FASB ASC 280 Segment Reporting, the Company has concluded it has two reportable
segments: the Management Consulting Services segment and the Software Solutions segment. The
Management Consulting Services segment is comprised of five operating segments (Operations,
Domestic Strategy, International Strategy, RVA and TWG), which are aggregated into one reportable
segment. Management Consulting Services includes consulting services related to strategy and
business planning, market research and analysis, organizational development, knowledge management,
marketing and customer relationship management, program management, billing system support,
operating system support, revenue assurance, and corporate investment services. Software Solutions
is a single reportable operating segment that provides custom developed software, consulting and
technical services. These services range from developing initial business and system requirements,
to software development, software configuration and implementation, and post-contract customer
support.
Management evaluates segment performance based upon income (loss) from operations, excluding
share-based compensation (benefits), depreciation and intangibles amortization. Inter-segment sales
were approximately $0.1 million and $0.9 million in the thirteen and thirty-nine weeks ended
October 3, 2009, respectively. Inter-segment sales were approximately $0.5 million and $2.1 million
in the thirteen and thirty-nine weeks ended September 27, 2008, respectively. In addition, in its
administrative division, entitled Not Allocated to Segments, the Company accounts for
non-operating activity and the costs of providing corporate and other administrative services to
the segments.
13
Summarized financial information concerning the Companys reportable segments is shown in the
following table (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management |
|
|
|
|
|
Not |
|
|
|
|
Consulting |
|
Software |
|
Allocated to |
|
|
|
|
Services |
|
Solutions |
|
Segments |
|
Total |
As of and for the thirty-nine weeks ended October 3, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
36,968 |
|
|
$ |
10,866 |
|
|
|
|
|
|
$ |
47,834 |
|
Income (loss) from operations |
|
|
8,648 |
|
|
|
1,026 |
|
|
$ |
(12,964 |
) |
|
|
(3,290 |
) |
Total assets |
|
$ |
10,220 |
|
|
$ |
4,567 |
|
|
$ |
35,997 |
|
|
$ |
50,784 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the thirteen weeks ended October 3, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
13,229 |
|
|
$ |
3,583 |
|
|
|
|
|
|
$ |
16,812 |
|
Income (loss) from operations |
|
|
3,284 |
|
|
|
196 |
|
|
$ |
(3,857 |
) |
|
|
(377 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the thirty-nine weeks ended September 27, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
43,330 |
|
|
$ |
16,315 |
|
|
|
|
|
|
$ |
59,645 |
|
Income (loss) from operations |
|
|
14,714 |
|
|
|
3,849 |
|
|
$ |
(28,720 |
) |
|
|
(10,157 |
) |
Total assets |
|
$ |
11,035 |
|
|
$ |
4,976 |
|
|
$ |
42,750 |
|
|
$ |
58,761 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the thirteen weeks ended September 27, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
12,246 |
|
|
$ |
5,282 |
|
|
|
|
|
|
$ |
17,528 |
|
Income (loss) from operations |
|
|
3,875 |
|
|
|
1,226 |
|
|
$ |
(6,354 |
) |
|
|
(1,253 |
) |
Segment assets, regularly reviewed by management as part of its overall assessment of the segments
performance, 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,
investments, property and equipment, goodwill and intangible assets and deferred tax assets.
Revenues earned in the United States and internationally based on the location where the services
are performed are as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Thirteen Weeks |
|
For the Thirty-nine Weeks |
|
|
|
Ended |
|
Ended |
|
|
|
October 3, 2009 |
|
|
September 27, 2008 |
|
October 3, 2009 |
|
|
September 27, 2008 |
|
United States |
|
$ |
12,214 |
|
|
$ |
10,648 |
|
$ |
33,728 |
|
|
$ |
36,416 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United Kingdom |
|
|
4,182 |
|
|
|
6,555 |
|
|
12,538 |
|
|
|
21,898 |
|
Other |
|
|
416 |
|
|
|
325 |
|
|
1,568 |
|
|
|
1,331 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
16,812 |
|
|
$ |
17,528 |
|
$ |
47,834 |
|
|
$ |
59,645 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Major customers in terms of significance to TMNGs revenues (i.e. in excess of 10% of revenues) and
accounts receivable were as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
Accounts Receivable |
|
|
For the thirteen weeks |
|
|
|
|
|
|
|
|
ended |
|
For the thirty-nine weeks ended |
|
|
|
|
|
|
October 3, |
|
September 27, |
|
October 3, |
|
September 27, |
|
As of October 3, |
|
As of September |
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
2009 |
|
27, 2008 |
Customer A |
|
$ |
2,113 |
|
|
$ |
2,084 |
|
|
$ |
5,592 |
|
|
$ |
8,919 |
|
|
$ |
3,708 |
|
|
$ |
2,694 |
|
Customer B |
|
$ |
5,955 |
|
|
$ |
4,261 |
|
|
$ |
16,223 |
|
|
$ |
17,013 |
|
|
$ |
2,494 |
|
|
$ |
2,209 |
|
Customer C |
|
$ |
2,314 |
|
|
$ |
1,723 |
|
|
$ |
6,497 |
|
|
$ |
4,751 |
|
|
$ |
1,290 |
|
|
$ |
928 |
|
Customer D |
|
$ |
1,755 |
|
|
$ |
1,564 |
|
|
$ |
4,919 |
|
|
$ |
4,320 |
|
|
$ |
1,938 |
|
|
$ |
1,402 |
|
14
Revenues earned from major customers by the Companys reportable segments are as follows (amounts
in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
For the thirteen weeks |
|
For the thirteen weeks |
|
|
ended October 3, 2009 |
|
ended September 27, 2008 |
|
|
Management |
|
|
|
|
|
Management |
|
|
|
|
Consulting |
|
Software |
|
Consulting |
|
Software |
|
|
Services |
|
Solutions |
|
Services |
|
Solutions |
Customer A |
|
$ |
906 |
|
|
$ |
1,207 |
|
|
$ |
571 |
|
|
$ |
1,513 |
|
Customer B |
|
$ |
5,955 |
|
|
|
|
|
|
$ |
4,261 |
|
|
|
|
|
Customer C |
|
$ |
2,314 |
|
|
|
|
|
|
$ |
1,723 |
|
|
|
|
|
Customer D |
|
$ |
1,755 |
|
|
|
|
|
|
$ |
1,564 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
For the thirty-nine weeks |
|
For the thirty-nine weeks |
|
|
Ended October 3, 2009 |
|
ended September 27, 2008 |
|
|
Management |
|
|
|
|
|
Management |
|
|
|
|
Consulting |
|
Software |
|
Consulting |
|
Software |
|
|
Services |
|
Solutions |
|
Services |
|
Solutions |
Customer A |
|
$ |
2,514 |
|
|
$ |
3,078 |
|
|
$ |
3,779 |
|
|
$ |
5,140 |
|
Customer B |
|
$ |
16,223 |
|
|
|
|
|
|
$ |
17,013 |
|
|
|
|
|
Customer C |
|
$ |
6,497 |
|
|
|
|
|
|
$ |
4,751 |
|
|
|
|
|
Customer D |
|
$ |
4,919 |
|
|
|
|
|
|
$ |
4,320 |
|
|
|
|
|
Revenues from the Companys ten most significant customers accounted for approximately 87% of
revenues during the thirteen and thirty-nine weeks ended October 3, 2009. Revenues from the
Companys ten most significant customers accounted for approximately 81% of revenues during the
thirteen and thirty-nine weeks ended September 27, 2008.
8. Income Taxes
In the thirteen and thirty-nine weeks ended October 3, 2009, the Company recorded income tax
provisions of $228,000 and $68,000, respectively. In the thirteen and thirty-nine weeks ended
September 27, 2008, the Company recorded income tax provisions of $202,000 and $444,000,
respectively. The tax provision for the thirteen and thirty-nine weeks ended October 3, 2009 is
primarily related to recording a full valuation allowance on deferred tax related to the Companys
United Kingdom operations. The tax provisions in the 2008 periods are primarily related to
international income taxes due to the profitability of the Companys United Kingdom operations.
During both periods, the Company recorded full valuation allowances against income tax benefits
related to domestic operations in accordance with the provisions of FASB ASC 740 Income Taxes,
which requires an estimation of the recoverability of the recorded income tax asset balances. As of
October 3, 2009, the Company has recorded $33.2 million of valuation allowances attributable to its
net deferred tax assets.
The Company analyzes its uncertain tax positions pursuant to the provisions of FASB ASC 740 Income
Taxes. The Company recognizes interest and penalties related to unrecognized tax benefits as a
component of the income tax provision. There was no material activity related to the liability for
uncertain tax positions during the thirteen and thirty-nine weeks ended October 3, 2009 and
September 27, 2008. As of October 3, 2009, the Company has $0.9 million accrued for uncertain
income tax positions. The Company believes there are no positions for which it is reasonably
possible that the total amount of unrecognized tax benefits will significantly increase or decrease
within the next 12 months.
The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction,
and various states and foreign jurisdictions. With few exceptions, the Company is no longer subject
to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years
before 2002. As of October 3, 2009, the Company has no income tax examinations in process.
9. Loans to Officers
As of October 3, 2009, there is one outstanding line of credit between the Company and its Chief
Executive Officer, Richard P. Nespola, which originated in fiscal year 2001. Aggregate borrowings
outstanding against the line of credit at October 3, 2009 and January 3, 2009 totaled $300,000 and
are due in 2011. These amounts are included in other assets in the noncurrent assets section of the
Condensed Consolidated Balance Sheets. In accordance with the loan provisions, the interest rate
charged on the loans is equal to the Applicable Federal Rate (AFR), as announced by the Internal
Revenue Service, for short-term obligations (with annual compounding) in effect for the month in
which the advance is made, until fully paid. Pursuant to the Sarbanes-Oxley Act, no further loan
agreements or draws against the line may be made by the Company to, or arranged by the Company for,
its executive officers. Interest payments on this loan are current as of October 3, 2009.
15
10. Commitments and Contingencies
The Company may become involved in various legal and administrative actions arising in the normal
course of business. These could include actions brought by taxing authorities challenging the
employment status of consultants utilized by the Company. In addition, future customer bankruptcies
could result in additional claims on collected balances for professional services near the
bankruptcy filing date. The resolution of any of such actions, claims, or the matters described
above may have an impact on the financial results for the period in which they occur.
11. Subsequent Events
On October 26, 2009, all of the Access Group Inc. Federal Student Loan Asset Backed Notes held as
part of the Companys auction rate securities portfolio with a UBS affiliate were sold. Pursuant to
the terms of the settlement with UBS, UBS holds discretionary right to sell or otherwise dispose of
the Companys auction rate securities, provided that the Company is entitled to the par value of
the auction rate securities upon any disposition. The par value of the liquidated securities,
$2,050,000, was applied to the line of credit from UBS and its affiliates.
On October 15, 2009, the Company entered into a Sales Agency and Marketing Support Agreement with
Adaption Technologies Ventures, Ltd. (Adaption). Adaption is a provider of telecommunications
provisioning software and related support and implementation services. Under the terms of this
agreement, the Company may (1) provide sales agency services and marketing support services to
Adaption in exchange for sales commission and market-rate fees, respectively; and/or (2) retain
staffing services from Adaption in exchange for market-rate fees. The agreement does not require
that the Company undertake any specific actions or obligations. Under the terms of this agreement,
the Company is provided a three percent (3%) equity interest in Adaption upon the Company achieving a certain
level of sales volume under the Agreement within the first two years it is in effect. In addition, the Company may
acquire an additional seventeen percent (17%) equity interest in Adaption if certain sales
thresholds are reached by the Company, by converting fees earned under the Agreement into ownership
units over a four year period. Because there have been no sales under this agreement and the potential for such sales is prospective and uncertain, the right to
acquire equity interests in Adaption had de minimus value at the inception of the agreement. Roy A. Wilkens, a
member of the Companys Board of Directors, holds a direct material interest in Adaption. In
conjunction with the consideration and execution of the above-described agreement, Mr. Wilkens
discontinued service as a member of the Companys Compensation Committee. Mr. Wilkens remains an
independent director and member of the Companys Audit Committee.
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Statement Regarding Forward-Looking Statements. In addition to historical information,
this quarterly report contains forward-looking statements. Forward-looking statements include, but
are not limited to, statements of plans and objectives, statements of future economic performance
or financial projections, statements of assumptions underlying such statements, and statements of
the Companys or managements intentions, hopes, beliefs, expectations or predictions of the
future. Forward-looking statements can often be identified by the use of forward-looking
terminology, such as believes, expects, may, should, could, intends, plans,
estimates or anticipates, variations thereof or similar expressions. 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,
conditions in the industry sectors that we serve, including the recent slowing of client decisions
on proposals and project opportunities along with scope reduction of existing projects, overall
economic and business conditions, including the recent worsening of conditions in the credit
markets and in general economic conditions, our ability to retain the limited number of large
clients that constitute a major portion of our revenues, technological advances and competitive
factors in the markets in which we compete, and the factors discussed in the sections entitled
Cautionary Statement Regarding Forward-Looking Information and Managements Discussion and
Analysis of Financial Condition and Results of Operations in our annual report on Form 10-K for
the fiscal year ended January 3, 2009. Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect managements opinions only as of the date of this report.
We undertake no obligation to revise, or publicly release the results of any revision to, these
forward-looking statements. Readers should carefully review the cautionary statements contained 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 Managements Discussion and Analysis of Financial
Condition and Results of Operations as presented in our annual report on Form 10-K for the fiscal
year ended January 3, 2009.
OVERVIEW
TMNG is among the leading providers of professional services to the converging communications,
media and entertainment industries and the capital formation firms that support them. We offer a
fully integrated suite of consulting offerings including strategy, organizational development,
knowledge management, marketing, operational, and technology consulting services. We have
consulting experience with almost all major aspects of managing a global communications company.
Our portfolio of solutions includes
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proprietary methodologies and toolsets, deep industry experience, and hands-on operational
expertise and licensed software. These solutions assist clients in tackling complex business
problems.
Our 2007 acquisitions of Cartesian, RVA and TWG combined with our investment in targeting the cable
industry have re-positioned us to better serve consolidating telecommunications carriers and the
converging global media and entertainment companies. Our efforts are helping us build what we
believe is a more sustainable revenue model over the long-term, subject to cyclical economic
conditions such as the current recession, helping us to expand our global presence. We continue to
focus our efforts on identifying, adapting to and capitalizing on the changing dynamics prevalent
in the converging communications industry, as well as providing our wireless and IP services within
the communications sector.
The convergence of communications with media and entertainment and the consolidation of large
telecommunications carriers have required us to focus our strategy on building a global presence,
continuing to expand our offerings and strengthening our position within the large carriers and
media and entertainment companies. We have demonstrated success over the past three years in
building a global presence and enhancing our position with our top 10 clients. Revenues increased
118% from fiscal 2006 to fiscal 2008 and international revenues grew from 21% of total revenue in
fiscal 2006 to 38% in fiscal 2008, driven primarily by acquisitions and complemented through select
organic growth initiatives. Our international revenues were approximately 27% of total revenue
during the thirteen weeks ended October 3, 2009.
Our financial results are affected by macroeconomic conditions, credit market conditions, and the
overall level of business confidence. The current global economic downturn has reduced capital and
operating spending and resulted in significant employee layoffs for our clients in the
communications, media and entertainment sectors. Beginning in the second half of 2008 and
continuing through the third quarter of 2009, our Management Consulting Services and Software
Solutions segments continued to feel the impact of the economy, as measured by lower demand for
consultants, deferral of projects and specifically the reduction in strategy-related project
opportunities. We are also seeing greater pricing pressure and an increased need for enhanced
return on investment for projects or added sharing of risk and reward.
Our revenues are denominated in multiple currencies and have also recently been impacted by
currency rate fluctuations. Beginning in the fourth quarter of fiscal 2008, the U.S. dollar began
to strengthen against many currencies and this has resulted in unfavorable currency translation to
our consolidated financial statements. When comparing the first three quarters of 2009 to the same
period of 2008, the U.S. dollar has strengthened considerably against the British pound sterling,
resulting in an unfavorable impact to our consolidated financial statements. As of October 3, 2009,
the Company has open foreign currency forward contracts with a combined notional amount of $0.9
million. These forward contracts provide an economic hedge of fluctuations in euro denominated
accounts receivable against the British pound. We consider acquiring contracts providing such
hedges when our contracts are denominated in a currency for which we do not have a natural hedge,
such as between the U.S. dollar and British pound sterling, through our operating cost structures.
In the future, changes to the U.S dollar valuation against other currencies could have a
significant positive or negative impact on our financial results.
Revenues are driven by the ability of our team to secure new project contracts and deliver those
projects in a way that adds value to our client in terms of return on investment or assisting
clients address a need or implement change. For the thirty-nine weeks ended October 3, 2009,
revenues declined 20% to $47.8 million from $59.6 million for the thirty-nine weeks ended September
27, 2008. Unfavorable foreign currency translation accounted for approximately $3.9 million or 33%
of the revenue decline. For the thirteen weeks ended October 3, 2009, revenues declined 4% to $16.8
million from $17.5 million for the thirteen weeks ended September 27, 2008. Removing the impact of
unfavorable foreign currency translation, revenues increased $0.2 million, or 1%, in the third
quarter of 2009 as compared to the same period of 2008.
Generally our client relationships begin with a short-term consulting engagement utilizing a few
consultants. Our sales strategy focuses on building long-term relationships with both new and
existing clients to gain additional engagements within existing accounts and referrals for new
clients. Strategic alliances with other companies are also used to sell services. We anticipate
that we will continue to pursue these marketing strategies in the future. The volume of work
performed for specific clients may vary from period to period and a major client from one period
may not use our services or the same volume of services in another period. In addition, clients
generally may end their engagements with little or no penalty or notice. If a client engagement
ends earlier than expected, we must re-deploy professional service personnel as any resulting
non-billable time could harm margins.
Cost of services consists primarily of compensation for consultants who are employees and
amortization of share-based compensation for stock options and nonvested stock (restricted stock),
as well as fees paid to independent contractor organizations and related expense reimbursements.
Employee compensation includes certain non-billable time, training, vacation time, benefits and
payroll taxes. Gross margins are primarily impacted by the type of consulting services provided;
the size of service contracts and negotiated discounts; changes in our pricing policies and those
of competitors; utilization rates of consultants and independent subject matter experts; and
employee and independent contractor costs, which tend to be higher in a competitive labor market.
Gross margins were 41.1% in the thirty-nine weeks ended October 3, 2009 compared with 45.7% in the
same period of 2008. The decrease in gross margin in the thirty-nine weeks ended October 3, 2009 as
compared to the same period of 2008 is due to a combination of factors. The most significant items
that impact our margins include the mix of project types, utilization of personnel and pricing
decisions. During the first thirty-nine weeks of 2009, the volume of strategy related project
revenues was down approximately 38% from the comparable period of 2008. Strategy projects generally
provide us with our highest gross margins. In
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addition, given the challenging macroeconomic environment and reduced consulting demand, we have
provided clients reduced pricing for long term project commitment and volume increases.
Sales and marketing expenses consist primarily of personnel salaries, bonuses, and related costs
for direct client sales efforts and marketing staff. We primarily use a relationship sales model in
which partners, principals and senior consultants generate revenues. In addition, sales and
marketing expenses include costs associated with marketing collateral, product development, trade
shows and advertising. General and administrative expenses consist mainly of costs for accounting,
recruiting and staffing, information technology, personnel, insurance, rent, and outside
professional services incurred in the normal course of business.
Management has focused on aligning operating costs with operating segment revenues. Selling,
general and administrative expenses have been reduced $2.4 million, a decline of 10%, to $21.5
million during the thirty-nine weeks ended October 3, 2009 from $23.9 million for the thirty-nine
weeks ended September 27, 2008. This reduction in selling, general and administrative expenses was
realized despite the fact that foreign currency losses included in selling, general and
administrative expenses were $0.5 million during the thirty-nine weeks ended October 3, 2009
compared to foreign currency gains of $0.3 million during the thirty-nine weeks ended September 27,
2008. With the decline in revenues, our selling, general and administrative expenses have increased
as a percentage of revenues to 44.9% in the thirty-nine weeks ended October 3, 2009 from 40.0% in
the thirty-nine weeks ended September 27, 2008. During the first thirty-nine weeks of 2009, we
continued to reduce selling and administrative costs to better align our cost structure with
revenue levels and we will continue to evaluate selling, general and administrative expense
reduction opportunities to improve earnings.
Intangible asset amortization included in operating expenses decreased to $1.5 million in the
thirty-nine weeks ended October 3, 2009 from $3.4 million in the thirty-nine weeks ended September
27, 2008. The decrease in amortization expense was due to the completion of amortization of some
intangibles recorded in connection with our 2007 acquisitions, exchange rate movements and the
impairment of the S3 license agreement and the intangibles related to the TWG acquisition during
the thirteen weeks ended September 27, 2008.
We recorded net losses of $0.5 million and $3.1 million for the thirteen and thirty-nine weeks
ended October 3, 2009, respectively, compared to net losses of $1.2 million and $9.8 million for
the thirteen and thirty-nine weeks ended September 27, 2008. The decline in the loss for the
thirty-nine weeks ended October 3, 2009 to the comparable period of 2008 is primarily attributable
to a $10.2 million impairment of goodwill related to our strategy business within our Management
Consulting Services Segment in the 2008 period, effective cost management initiatives and a
decrease in intangible amortization, partially offset by a contraction in revenues and the
resulting negative impact on gross margins. We made substantial strides during fiscal year 2008
integrating our 2007 acquisitions and reducing our total operating cost structure with emphasis on
selling, general and administrative expenses. However, due to the deterioration in economic
conditions, these cost savings were overshadowed by the decrease in revenue levels from the
thirty-nine weeks ended September 27, 2008 which impacted our ability to achieve profitability.
The recent economic outlook has added significant challenges to our clients in the communications
media, and entertainment sectors. The general result is reduced client spending on capital and
operational initiatives. This reduction in spending, coupled with increased competition pursuing
fewer opportunities, could result in further price reductions, fewer client projects, under
utilization of consultants, reduced operating margins, and loss of market share. Declines in our
revenues can have a significant impact on our financial results. Although we have a flexible cost
base comprised primarily of employee and related costs, there is a lag in time required to scale
the business appropriately if revenues are reduced. In addition, our future revenues and operating
results may fluctuate from quarter to quarter based on the number, size and scope of projects in
which we are engaged, the contractual terms and degree of completion of such projects, any delays
incurred in connection with a project, consultant utilization rates, general economic conditions
and other factors.
From a cash flow perspective, cash flows provided by operating activities were $0.1 million during
the thirty-nine weeks ended October 3, 2009. Net cash flows provided by operating activities were
$7.1 million during the thirty-nine weeks ended September 27, 2008. The decline in cash flows from
operating activities during the thirty-nine weeks ended October 3, 2009 as compared with the 2008
period primarily related to a decline in operating results coupled with a reduction in cash flows
from net working capital changes.
At October 3, 2009, we have working capital of approximately $15.5 million, which includes $4.9
million in short-term debt. Our short-term and noncurrent investments consist of auction rate
securities. Returns on our cash and investments have decreased over recent periods as a result of
decreasing interest rates and a reduction in invested balances.
Our investments included $14.2 million ($14.8 million par value) in auction rate securities
guaranteed through the Federal Family Education Loan Program of the U.S. Department of Education.
As discussed in Note 2, Auction Rate Securities, in the notes to condensed consolidated financial
statements (unaudited), during 2008, we reached a settlement agreement on $7.55 million of the
auction rate securities allowing us to sell these auction rate securities held in accounts with UBS
AG (UBS) and UBS affiliates at par value beginning June 30, 2010 and enabling us to borrow up to
75% of the fair value of the securities at zero net interest cost prior to the sales date. As of
the end of the third quarter of 2009, we have classified $7.4 million ($7.6 million par value) of
our investments in auction rate securities as current assets based on our intent and expected
ability to liquidate these investments within the next year. As of October 3, 2009, we had borrowed
$4.9 million against the line of credit with UBS. Given our intent to liquidate the collateral
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related to the line of credit with UBS within one year and the requirement that we concurrently
repay the amounts borrowed on the line of credit, we have classified this debt as short-term as of
October 3, 2009.
In addition, during the first quarter of 2009, we entered into a loan agreement with Citigroup to
provide liquidity for the remainder of our $7.25 million auction rate securities portfolio held
with Citigroup. Under the loan agreement, we have access to a revolving line of credit of up to 50%
of the par value of the auction rate securities that we have pledged as collateral, or $3.625
million. We have made no borrowings under the line of credit with Citigroup.
On October 26, 2009, all of the Access Group Inc. Federal Student Loan Asset Backed Notes held as
part of our auction rate securities portfolio with a UBS affiliate were sold. Pursuant to the terms
of the settlement with UBS, UBS holds discretionary right to sell or otherwise dispose of the
Companys auction rate securities, provided that the Company is entitled to the par value of the
auction rate securities upon any disposition. The par value of the liquidated securities,
$2,050,000, was applied to the line of credit from UBS and its affiliates.
CRITICAL ACCOUNTING POLICIES
While the selection and application of any accounting policy may involve some level of subjective
judgments and estimates, we believe the following accounting policies are the most critical to our
condensed consolidated financial statements, potentially involve the most subjective judgments in
their selection and application, and are the most susceptible to uncertainties and changing
conditions:
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Marketable Securities; |
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Allowance for Doubtful Accounts; |
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Fair Value of Acquired Businesses; |
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Impairment of Goodwill and Long-lived Assets; |
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Revenue Recognition; |
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Share-based Compensation Expense; |
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Accounting for Income Taxes; and |
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Research and Development and Capitalized Software Costs. |
Marketable Securities Short-term investments and non-current investments, which consist of
auction rate securities, are accounted for under the provisions of FASB ASC 320, Investments-Debt
and Equity Securities. Management evaluates the appropriate classification of marketable
securities at each balance sheet date. These investments are reported at fair value, as measured
pursuant to FASB ASC 820, Fair Value Measurements and Disclosures. For those securities
considered to be available-for-sale, any temporary unrealized gains and losses are included as a
separate component of stockholders equity, net of applicable taxes. For those securities
considered to be trading, any unrealized gains and losses are included in the Condensed
Consolidated Statements of Operations and Comprehensive Loss (unaudited), net of applicable taxes.
Additionally, realized gains and losses, changes in value judged to be other-than-temporary,
interest and dividends are also included in the Condensed Consolidated Statements of Operations and
Comprehensive Loss (unaudited), net of applicable taxes.
The auction rate securities we hold are generally long-term debt instruments that historically
provided liquidity through a Dutch auction process through which interest rates reset every 28 to
35 days. Beginning in February 2008, auctions of our auction rate securities portfolio failed to
receive sufficient order interest from potential investors to clear successfully, resulting in
failed auctions. The principal associated with failed auctions will not be accessible until a
successful auction occurs, a buyer is found outside of the auction process, the issuers redeem the
securities, the issuers establish a different form of financing to replace these securities or
final payments come due according to contractual maturities ranging from approximately 22 to 36
years.
As of October 3, 2009, $7.4 million ($7.6 million par value) of our investments in auction rate
securities is reflected as current assets and $6.9 million ($7.3 million par value) is reflected as
non-current assets on our Condensed Consolidated Balance Sheet (unaudited). The entire amount of
auction rate securities is reflected as non-current assets on our Condensed Consolidated Balance
Sheet as of January 3, 2009.
During the third quarter of 2008, state and federal regulators reached settlement agreements with
both of the brokers who advised us to purchase the auction rate securities currently held by the
Company. The settlement agreements with the regulators were intended to eventually provide
liquidity for holders of auction rate securities. On November 13, 2008, we entered into a
settlement with UBS to provide liquidity for our $7.6 million auction rate securities portfolio
held with a UBS affiliate. Pursuant to the terms of the Settlement, UBS issued Auction Rate
Securities Rights (ARS Rights) to us, allowing us to sell to UBS our auction rate securities held
in accounts with UBS and UBS affiliates at par value at any time during the period beginning June
30, 2010 and ending July 2, 2012. As consideration for the issuance of the ARS Rights, we (1)
released UBS from all claims for damages (other than
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consequential damages) directly or indirectly relating to UBSs marketing and sale of auction rate
securities, and (2) granted UBS the discretionary right to sell or otherwise dispose of our auction
rate securities, provided that the we are paid the par value of the auction rate securities upon
any disposition.
While the ARS Rights result in a put option which represents a separate freestanding instrument,
the put option does not meet the definition of a derivative instrument under FASB ASC 815,
Derivatives and Hedging. We have elected to measure the ARS Rights at fair value under FASB ASC
825, Financial Instruments, to better align changes in fair value of the ARS Rights with those of
the underlying auction rate securities investments.
Prior to accepting the UBS settlement offer, we recorded all of our auction rate securities as
available-for-sale investments. Upon accepting the UBS settlement, the Company made a one-time
election to transfer its UBS auction rate securities holdings from available-for-sale securities to
trading securities under FASB ASC 320. For auction rate securities classified as
available-for-sale, we recognized unrealized holding gains of $31,000 and $720,000, respectively
during the thirteen and thirty-nine weeks ended October 3, 2009 and recognized unrealized holding
losses of $384,000 and $846,000 during the thirteen and thirty-nine weeks ended September 27, 2008.
For auction rate securities classified as trading securities, we recognized realized holding gains
of $208,000 and $606,000, respectively, offset by realized losses on the Companys ARS Rights of
$191,000 and $484,000, respectively, during the thirteen and thirty-nine weeks ended October 3,
2009. The ARS Rights will continue to be measured at fair value under FASB ASC 825 until the
earlier of our exercise of the ARS Rights or UBSs purchase of the auction rate securities at par
value in connection with the ARS Rights Agreement.
Due to the lack of observable market quotes on our auction rate securities portfolio and ARS
Rights, we utilize valuation models that rely exclusively on Level 3 inputs as defined in FASB ASC
820 including those that are based on expected cash flow streams and collateral values, including
assessments of counterparty credit quality, default risk underlying the security, discount rates
and overall capital market liquidity. The valuation of our auction rate securities portfolio and
ARS Rights is subject to uncertainties that are difficult to predict. Factors that may impact our
valuation include changes to credit ratings of the securities as well as to the underlying assets
supporting those securities, rates of default of the underlying assets, underlying collateral
value, discount rates, counterparty risk and ongoing strength and quality of market credit and
liquidity.
Allowances for Doubtful Accounts Substantially all of our receivables are owed by companies in
the communications industry. We typically bill customers for services after all or a portion of the
services have been performed and require customers to pay within 30 to 60 days. We attempt to
control credit risk by being diligent in credit approvals, limiting the amount of credit extended
to customers and monitoring customers payment records and credit status as work is being performed
for them.
We recorded no bad debt expense for the thirteen and thirty-nine weeks ended October 3, 2009.
During the thirteen and thirty-nine weeks ended September 27, 2008, we recorded bad debt recoveries
of $150,000. Our allowance for doubtful accounts totaled $356,000 and $379,000 as of October 3,
2009 and January 3, 2009, respectively. The calculation of these amounts is based on judgment about
the anticipated default rate on receivables owed to us as of the end of the reporting period. That
judgment is based on uncollected account experience in prior years and our ongoing evaluation of
the credit status of our customers and the communications industry in general.
We have attempted to mitigate credit risk by concentrating our marketing efforts on the largest and
most stable companies in the communications industry and by tightly controlling the amount of
credit provided to customers. If we are unsuccessful in these efforts, or if our customers file for
bankruptcy or experience financial difficulties, it is possible that the allowance for doubtful
accounts will be insufficient and we will have a greater bad debt loss than the amount reserved,
which would adversely affect our financial performance and cash flow.
Fair Value of Acquired Businesses TMNG has acquired seven organizations over the last seven
years. A significant component of the value of these acquired businesses has been allocated to
intangible assets. SFAS No. 141 Business Combinations (SFAS No, 141), which applies to
businesses acquired prior to the adoption of FASB ASC 805 Business Combinations requires acquired
businesses to be recorded at fair value by the acquiring entity. SFAS No. 141 also requires that
intangible assets that meet the legal and separable criterion be separately recognized on the
financial statements at their fair value, and provides guidance on the types of intangible assets
subject to recognition. Determining the fair value for these specifically identified intangible
assets involves significant professional judgment, estimates and projections related to the
valuation to be applied to intangible assets like customer lists, employment agreements and
tradenames. The subjective nature of managements assumptions adds an increased risk associated
with estimates surrounding the projected performance of the acquired entity. Additionally, as we
amortize the intangible assets over time, the purchase accounting allocation directly impacts the
amortization expense we record in our financial statements.
Impairment of Goodwill and Long-lived Assets As of October 3, 2009, we have $7.7 million in
goodwill and $3.1 million in long-lived intangible assets, net of accumulated amortization.
Goodwill and other long-lived intangible assets arising from our acquisitions are subjected to
periodic review for impairment. FASB ASC 350 Intangibles-Goodwill and Other requires an
evaluation of these indefinite-lived assets annually and whenever events or circumstances indicate
that such assets may be impaired. The evaluation is conducted at the reporting unit level and
compares the calculated fair value of the reporting unit to its book value to determine whether
impairment has been deemed to occur. Any impairment charge would be based on the most recent
estimates of the recoverability of the recorded goodwill. If the remaining book value assigned to
goodwill in an acquisition is higher than the estimated fair value of the reporting unit, there is
a requirement to write down these assets.
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Fair value of our reporting units is determined using the income approach. The income approach uses
a reporting units projection of estimated cash flows discounted using a weighted-average cost of
capital analysis that reflects current market conditions. We also consider the market approach to
valuing our reporting units, however due to the lack of comparable industry publicly available
transaction data, we typically conclude a market approach will not adequately reflect our specific
reporting unit operations. While the market approach is typically not expressly utilized, we do
compare the results of our overall enterprise valuation to our market capitalization. Significant
management judgments related to the income approach include:
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Anticipated future cash flows and terminal value for each reporting unit The income
approach to determining fair value relies on the timing and estimates of future cash flows,
including an estimate of terminal value. The projections use managements estimates of
economic and market conditions over the projected period including growth rates in revenues
and estimates of expected changes in operating margins. Our projections of future cash
flows are subject to change as actual results are achieved that differ from those
anticipated. Because management frequently updates its projections, we would expect to
identify on a timely basis any significant differences between actual results and recent
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Selection of an appropriate discount rate The income approach requires the selection
of an appropriate discount rate, which is based on a weighted average cost of capital
analysis. The discount rate is affected by changes in short-term interest rates and
long-term yield as well as variances in the typical capital structure of marketplace
participants. The discount rate is determined based on assumptions that would be used by
marketplace participants, and for that reason, the capital structure of selected
marketplace participants was used in the weighted average cost of capital analysis. Given
the current volatile economic conditions, it is possible that the discount rate will
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In accordance with FASB ASC 360, Property, Plant and Equipment, we use our best estimates based
upon reasonable and supportable assumptions and projections to review for impairment of
finite-lived assets and finite-lived identifiable intangibles to be held and used whenever events
or changes in circumstances indicate that the carrying amount of our assets might not be
recoverable.
Revenue Recognition We recognize revenues from time and materials consulting contracts in the
period in which our services are performed. We recognized $6.4 million and $8.3 million in revenues
from time and materials contracts during the thirteen weeks ended October 3, 2009 and September 27,
2008, respectively. We recognized $19.4 million and $27.1 million in revenues from time and
materials contracts during the thirty-nine weeks ended October 3, 2009 and September 27, 2008,
respectively. In addition to time and materials contracts, our other types of contracts include
fixed fee contracts, and contingent fee contracts. During the thirteen weeks ended October 3, 2009
and September 27, 2008, we recognized $10.4 million and $9.2 million in revenues on these other
types of contracts. We recognized $28.4 million and $32.5 million in revenues from these other
types of contracts during the thirty-nine weeks ended October 3, 2009 and September 27, 2008,
respectively. We recognize revenues on milestone or deliverables-based fixed fee contracts and time
and materials contracts not to exceed contract price using the percentage of completion method
prescribed by FASB ASC 605-35, Revenue Recognition Construction-Type and Production-Type
Contracts (formerly AICPA Statement of Position (SOP) No. 81-1, Accounting for Performance of
Construction-Type and Certain Production-Type Contracts). For fixed fee contracts where services
are not based on providing deliverables or achieving milestones, we recognize revenues on a
straight-line basis over the period during which such services are expected to be performed. In
connection with some fixed fee contracts, we receive payments from customers that exceed recognized
revenues. We record the excess of receipts from customers over recognized revenue as deferred
revenue. Deferred revenue is classified as a current liability to the extent it is expected to be
earned within twelve months from the date of the balance sheet.
As a result of the Cartesian acquisition, we now develop, install and support customer software in
addition to our traditional consulting services. We recognize revenues in connection with our
software sales agreements utilizing the percentage of completion method prescribed by FASB ASC
605-35. These agreements include software right-to-use licenses (RTUs) and related customization
and implementation services. Due to the long-term nature of software implementation and the
extensive software customization based on normal customer specific requirements, both the RTU and
implementation services are treated as a single element for revenue recognition purposes.
The FASB ASC 605-35 percentage-of-completion methodology involves recognizing revenue using the
percentage of services completed, on a current cumulative cost to total cost basis, using a
reasonably consistent profit margin over the period. Due to the longer term nature of these
projects, developing the estimates of costs often requires significant judgment. Factors that must
be considered in estimating the progress of work completed and ultimate cost of the projects
include, but are not limited to, the availability of labor and labor productivity, the nature and
complexity of the work to be performed, and the impact of delayed performance. If changes occur in
delivery, productivity or other factors used in developing the estimates of costs or revenues, we
revise our cost and revenue estimates, which may result in increases or decreases in revenues and
costs, and such revisions are reflected in income in the period in which the facts that give rise
to that revision become known.
In addition to the professional services related to the customization and implementation of its
software, we also provide post-contract support (PCS) services, including technical support and
maintenance services. For those contracts that include PCS service arrangements which are not
essential to the functionality of the software solution, we separate the FASB ASC 605-35 software
services and PCS services utilizing the multiple-element arrangement model prescribed by FASB ASC
605-25, Revenue Recognition Multiple-Element Arrangements (formerly Emerging Issues Task Force
No. 00-21, Revenue Arrangements with Multiple Deliverables). FASB ASC 605-25 addresses the
accounting treatment for an arrangement to provide the delivery or performance of
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multiple products and/or services where the delivery of a product or system or performance of
services may occur at different points in time or over different periods of time. We utilize FASB
ASC 605-25 to separate the PCS service elements and allocate total contract consideration to the
contract elements based on the relative fair value of those elements. Revenues from PCS services
are recognized ratably on a straight-line basis over the term of the support and maintenance
agreement.
We also may enter into contingent fee contracts, in which revenue is subject to achievement of
savings or other agreed upon results, rather than time spent. Due to the nature of contingent fee
contracts, we recognize costs as they are incurred on the project and defer revenue recognition
until the revenue is realizable and earned as agreed to by our clients. Although these contracts
can be very rewarding, the profitability of these contracts is dependent on our ability to deliver
results for our clients and control the cost of providing these services. These types of contracts
are typically more results-oriented and are subject to greater risk associated with revenue
recognition and overall project profitability than traditional time and materials contracts.
Revenues associated with contingent fee contracts were not material during the thirteen and
thirty-nine weeks ended October 3, 2009. Revenues from contingent fee contracts were $50,000 for
the thirteen and thirty-nine weeks ended September 27, 2008.
Share-based Compensation Expense We grant stock options and non-vested stock to our employees
and also provide employees the right to purchase our stock at a discount pursuant to an employee
stock purchase plan. The benefits provided under these plans are share-based payment awards subject
to the provisions of FASB ASC 718, Compensation-Stock Compensation. Under FASB ASC 718, we are
required to make significant estimates related to determining the value of our share-based
compensation. Our expected stock-price volatility assumption is based on historical volatilities of
the underlying stock which are obtained from public data sources. For stock option grants issued
during the thirty-nine weeks ended October 3, 2009, we used a weighted-average expected stock-price
volatility of 61%. The expected term of options granted is based on the simplified method in
accordance with the SECs Staff Accounting Bulletin (SAB) No. 110 as our historical share option
exercise experience does not provide a reasonable basis for estimation. As such, we used a
weighted-average expected option life assumption of 6.25 years.
If factors change and we develop different assumptions in the application of FASB ASC 718 in future
periods, the compensation expense that we record under FASB ASC 718 may differ significantly from
what we have recorded in the current period. There is a high degree of subjectivity involved when
using option pricing models to estimate share-based compensation under FASB ASC 718. Changes in the
subjective input assumptions can materially affect our estimates of fair values of our share-based
compensation. Certain share-based payment awards, such as employee stock options, may expire
worthless or otherwise result in zero intrinsic value as compared to the fair values originally
estimated on the grant date and reported in our financial statements. Alternatively, values may be
realized from these instruments that are significantly in excess of the fair values originally
estimated on the grant date and reported in our financial statements. Although the fair value of
employee share-based awards is determined in accordance with FASB ASC 718 and SAB No. 110 using an
option pricing model, that value may not be indicative of the fair value observed in a willing
buyer/willing seller market transaction.
In addition, under FASB ASC 718 we are required to net estimated forfeitures against compensation
expense. This requires us to estimate the number of awards that will be forfeited prior to vesting.
If actual forfeitures in future periods are different than our initial estimate, the compensation
expense that we ultimately record under FASB ASC 718 may differ significantly from what was
originally estimated. The weighted average estimated forfeiture rate for unvested options
outstanding as of October 3, 2009 is 37%.
Accounting for Income Taxes Accounting for income taxes requires significant estimates and
judgments on the part of management. Such estimates and judgments include, but are not limited to,
the effective tax rate anticipated to apply to tax differences that are expected to reverse in the
future, the sufficiency of taxable income in future periods to realize the benefits of net deferred
tax assets and net operating losses currently recorded and the likelihood that tax positions taken
in tax returns will be sustained on audit. We account for income taxes in accordance with FASB ASC
740 Income Taxes. As required by FASB ASC 740, we record deferred tax assets or liabilities based
on differences between financial reporting and tax bases of assets and liabilities using currently
enacted rates that will be in effect when the differences are expected to reverse. FASB ASC 740
also requires that deferred tax assets be reduced by a valuation allowance if it is more likely
than not that some portion or all of the deferred tax asset will not be realized. As of October 3,
2009, cumulative valuation allowances in the amount of $33.2 million were recorded in connection
with the net deferred income tax assets. As required by FASB ASC 740, we have performed a
comprehensive review of our portfolio of uncertain tax positions in accordance with recognition
standards established by the guidance. Pursuant to FASB ASC 740, an uncertain tax position
represents our expected treatment of a tax position taken in a filed tax return, or planned to be
taken in a future tax return, that has not been reflected in measuring income tax expense for
financial reporting purposes. As of October 3, 2009, we have recorded a liability of approximately
$940,000 for unrecognized tax benefits.
We have generated substantial deferred income tax assets related to our domestic operations
primarily from the accelerated financial statement write-off of goodwill, the charge to
compensation expense taken for stock options and net operating losses. Within our foreign
operations, mostly domiciled within the United Kingdom, we have generated deferred tax assets
primarily from the charge to compensation expense for stock options. For us to realize the income
tax benefit of these assets in either jurisdiction, we must generate sufficient taxable income in
future periods when such deductions are allowed for income tax purposes. In some cases where
deferred taxes were the result of compensation expense recognized on stock options, our ability to
realize the income tax benefit of these assets is also dependent on our share price increasing to a
point where these options have intrinsic value at least equal to the grant date fair value and are
exercised. In assessing whether a valuation allowance is needed in connection with our deferred
income tax assets, we have evaluated our ability to generate sufficient taxable income in future
periods to utilize the benefit of the deferred income tax
22
assets. We continue to evaluate our ability to use recorded deferred income tax asset balances. If
we continue to report operating losses for financial reporting in future years in either our
domestic or international operations, no additional tax benefit would be recognized for those
losses, since we will not have accumulated enough positive evidence to support our ability to
utilize net operating loss carryforwards in the future.
International operations have become a significant part of our business. As part of the process of
preparing our financial statements, we are required to estimate our income taxes in each of the
jurisdictions in which we operate. We utilize a cost plus fixed margin transfer pricing
methodology as it relates to inter-company charges for headquarters support services performed by
our domestic entities on behalf of various foreign affiliates. The judgments and estimates used are
subject to challenge by domestic and foreign taxing authorities. It is possible that such
authorities could challenge those judgments and estimates and draw conclusions that would cause us
to incur liabilities in excess of those currently recorded. We use an estimate of our annual
effective tax rate at each interim period based upon the facts and circumstances available at that
time, while the actual annual effective tax rate is calculated at year-end. Changes in the
geographical mix or estimated amount of annual pre-tax income could impact our overall effective
tax rate.
Research and Development and Capitalized Software Costs Software development costs are accounted
for in accordance with FASB ASC 985-20, Software Costs of Software to Be Sold, Leased, or
Marketed. Capitalization of software development costs for products to be sold to third parties
begins upon the establishment of technological feasibility and ceases when the product is available
for general release. The establishment of technological feasibility and the ongoing assessment of
recoverability of capitalized software development costs require considerable judgment by
management concerning certain external factors including, but not limited to, technological
feasibility, anticipated future gross revenue, estimated economic life and changes in software and
hardware technologies. We capitalize development costs incurred during the period between the
establishment of technological feasibility and the release of the final product to customers.
During the thirteen and thirty-nine weeks ended October 3, 2009, software development costs of
$144,000 and $390,000, respectively, were expensed as incurred. During the thirteen and thirty-nine
weeks ended September 27, 2008, software development costs of $219,000 and $615,000, respectively,
were expensed as incurred. No software development costs were capitalized during the thirteen and
thirty-nine weeks ended October 3, 2009 and September 27, 2008.
RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED OCTOBER 3, 2009 COMPARED TO THIRTEEN WEEKS ENDED SEPTEMBER 27, 2008
REVENUES
Revenues decreased 4.1% to $16.8 million for the thirteen weeks ended October 3, 2008 from $17.5
million for the thirteen weeks ended September 27, 2008. Despite an adverse economic environment in
both the United States and Europe, revenues would have been slightly positive in the thirteen weeks
ended October 3, 2009 compared to the same period in 2008 if not for unfavorable foreign exchange
movements. Unfavorable foreign currency translation accounted for a decline in revenues of
approximately $0.9 million.
Management Consulting Services Segment Management Consulting Services segment revenues increased
8.0% to $13.2 million for the third quarter of 2009 from $12.2 million for the same period of 2008.
Revenues in our global operational consulting practices increased by $1.9 million, partially offset
by a decrease of $0.9 million in our global strategy consulting practices. Unfavorable exchange
rate movements accounted for a reduction in revenues of $0.3 million.
During the thirteen weeks ended October 3, 2009, this segment provided services on 87 customer
projects, compared to 103 projects performed in the thirteen weeks ended September 27, 2008.
Average revenue per project was $152,000 in the thirteen weeks ended October 3, 2009, compared to
$119,000 in the thirteen weeks ended September 27, 2008. Our international revenues from this
segment decreased to $1.0 million for the thirteen weeks ended October 3, 2009 from $1.6 million
for the thirteen weeks ended September 27, 2008. International revenues have decreased as a
percentage of total revenues of the segment from 13.1% to 7.7%. In addition to the negative impact
of foreign exchange movements, the decrease in international revenues was due to the completion of
a major international project in 2008.
Revenues recognized in connection with fixed price engagements totaled $8.2 million and $7.0
million, representing 61.7% and 56.9% of total revenues of the segment, for the thirteen weeks
ended October 3, 2009 and September 27, 2008, respectively. This increase is primarily due to a
shift in customer preference to fixed price engagements.
Software Solutions Segment Software Solutions segment revenues decreased by 32.2% to $3.6
million for the thirteen weeks ended October 3, 2009 from $5.3 million for the thirteen weeks ended
September 27, 2008. All revenues were generated internationally. The decrease in revenue for the
thirteen weeks ended October 3, 2009 as compared to the 2008 period is primarily due to unfavorable
exchange rate movements of $0.6 million and a decline in demand for software services. During the
thirteen weeks ended October 3, 2009 and September 27, 2008, this segment provided services on 83
and 77 customer projects, respectively. Average software and services revenue per project was
approximately $35,000 and $58,000, respectively, for the thirteen weeks ended October 3, 2009 and
September 27, 2008. Revenues from post-contract support services were approximately $632,000 and
$580,000 for the thirteen weeks ended October 3, 2009 and September 27, 2008, respectively. During
the thirteen weeks ended October 3, 2009 and September 27, 2008, revenues from software licensing
were $3,000 and $238,000, respectively.
23
COSTS OF SERVICES
Costs of services were flat at $9.9 million for the thirteen weeks ended October 3, 2009 and
September 27, 2008. Our gross margin was 40.8% for the thirteen weeks ended October 3, 2009
compared to 43.5% for the thirteen weeks ended September 27, 2008. Our Management Consulting
Services segment gross margin was 43.3% for the thirteen weeks ended October 3, 2009 compared to
47.2% for the thirteen weeks ended September 27, 2008. The decrease in gross margin in the third
quarter of 2009 as compared to the same period of 2008 in our Management Consulting Services
segment is primarily due to the mix of business shifting from strategy engagements to longer term
and lower margin management consulting projects, resulting in lower utilization of our fixed
employee consulting base. Our Software Solutions segment gross margin was 31.8% for the thirteen
weeks ended October 3, 2009, compared to 35.0% for the thirteen weeks ended September 27, 2008.
Margin reductions in the Software Solutions segment are primarily related to lower revenue volumes
for the quarter and thus lower utilization of personnel and a decrease in the mix of software
license revenues. Costs of services in the Software Solutions segment included amortization of
intangible assets of $154,000 and $179,000, respectively, for the thirteen weeks ended October 3,
2009 and September 27, 2008, related to acquired software. The reduction in intangible amortization
is due to exchange rate movements.
OPERATING EXPENSES
Operating expenses decreased 18.5% to $7.2 million for the thirteen weeks ended October 3, 2009,
from $8.9 million for the thirteen weeks ended September 27, 2008. Excluding the $1.1 million of
goodwill impairment in the thirteen weeks ended September 27, 2008, operating expenses decreased by
7.1% in the thirteen weeks ended October 3, 2009 from the same period of 2008. Operating expenses
for both periods included selling, general and administrative expenses (inclusive of share-based
compensation) and intangible asset amortization.
Selling, general and administrative expenses decreased to $6.7 million for the thirteen weeks ended
October 3, 2009, compared to $6.9 million for the thirteen weeks ended September 27, 2008. As a
percentage of revenues, our selling, general and administrative expense was 40.1% for the thirteen
weeks ended October 3, 2009, compared to 39.4% for the thirteen weeks ended September 27, 2008. The
decrease in selling, general and administrative expenses was primarily due to decreases in
compensation costs through headcount reductions, partially offset by bad debt recoveries of
$150,000 in the 2008 period and the effect of exchange rate movements. For the thirteen weeks ended
October 3, 2009, we recognized gains of $75,000 related to foreign exchange compared to gains of
$192,000 for the same period in 2008. We continue to evaluate alignment of costs to revenues for
each operating segment.
Intangible asset amortization decreased by $379,000 to $506,000 for the thirteen weeks ended
October 3, 2009, compared to $885,000 for the thirteen weeks ended September 27, 2008. The decrease
in amortization expense was primarily due to the completion of amortization of some intangibles
recorded in connection with acquisitions, exchange rate movements and the impairment of the S3
license agreement and the intangibles related to the TWG acquisition during the thirteen weeks
ended September 27, 2008.
OTHER INCOME AND EXPENSES
Interest income was $50,000 and $233,000 for the thirteen weeks ended October 3, 2009 and September
27, 2008, respectively, and represented interest earned on invested balances. Interest income
decreased for the thirteen weeks ended October 3, 2009 as compared to the thirteen weeks ended
September 27, 2008 due primarily to reductions in interest rates and reductions in invested
balances. We primarily invest in money market funds and have holdings in auction rate securities.
For the thirteen weeks ended October 3, 2009, other income includes $208,000 in realized holding
gains for auction rate securities classified as trading securities, offset by realized losses on
our ARS Rights of $191,000. In addition, other income for the thirteen weeks ended October 3, 2009
includes $28,000 related to the settlement of a foreign withholding tax dispute.
INCOME TAXES
During the thirteen weeks ended October 3, 2009, we recorded an income tax provision of $228,000
compared to an income tax provision of $202,000 during the thirteen weeks ended September 27, 2008.
The tax provision for the thirteen weeks ended October 3, 2009 is primarily related to the
establishment of valuation allowances on deferred tax benefits recognized in our United Kingdom
operations. The income tax provision in the 2008 period is primarily due to the profitability of
our United Kingdom operations. For the thirteen weeks ended October 3, 2009 and September 27, 2008,
we recorded no income tax benefit related to our domestic pre-tax losses in accordance with the
provisions of FASB ASC 740, Income Taxes, which requires an estimation of our ability to use
recorded deferred income tax assets. We have recorded a valuation allowance against all domestic
and international deferred income tax assets generated due to uncertainty about their ultimate
realization due to our history of operating losses. If we continue to report net operating losses
for financial reporting in either our domestic or international operations, no additional tax
benefit would be recognized for those losses, since we will not have accumulated enough positive
evidence to support our ability to utilize the net operating loss carryforwards in the future.
24
NET LOSS
We had a net loss of $0.5 million for the thirteen weeks ended October 3, 2009 compared to a net
loss of $1.2 million for the thirteen weeks ended September 27, 2008. The decrease in net loss is
primarily attributable to goodwill impairment charges of $1.1 million in the 2008 period, effective
cost management initiatives and a decrease in intangible amortization, partially offset by a
contraction in revenues, including the negative impact of foreign exchange rates, and the resulting
negative impact on gross margins.
THIRTY-NINE WEEKS ENDED OCTOBER 3, 2009 COMPARED TO THIRTY-NINE WEEKS ENDED SEPTEMBER 27, 2008
REVENUES
Revenues decreased 19.8% to $47.8 million for the thirty-nine weeks ended October 3, 2008 from
$59.6 million for the thirty-nine weeks ended September 27, 2008. The decrease in revenues is
primarily due to a deferral of projects or reduction of demand for consulting and software services
by the communications industry resulting from the adverse economic environment in both the United
States and Europe. In addition, unfavorable foreign currency translation accounted for a decline in
revenues of approximately $3.9 million.
Management Consulting Services Segment Management Consulting Services segment revenues decreased
$6.3 million, or 14.7%, to $37.0 million for the thirty-nine weeks ended 2009 from $43.3 million
for the same period of 2008. Revenues in our global operational consulting practices decreased by
$3.6 million and revenues in our global strategy consulting practices decreased by $2.7 million.
Included in these revenue declines are $1.0 million in unfavorable foreign exchange movements.
During the thirty-nine weeks ended October 3, 2009, this segment provided services on 140 customer
projects, compared to 207 projects performed in the thirty-nine weeks ended September 27, 2008.
Average revenue per project was $264,000 in the thirty-nine weeks ended October 3, 2009 compared to
$209,000 in the thirty-nine weeks ended September 27, 2008. Our international revenues from this
segment decreased to $3.2 million for the thirty-nine weeks ended October 3, 2009 from $6.9 million
for the thirty-nine weeks ended September 27, 2008. International revenues have decreased as a
percentage of total revenues of the segment from 16.0% in the thirty-nine weeks ended September 27,
2008 to 8.8% in the 2009 period. The decrease in international revenues was due to the completion
of a major international project and unfavorable exchange rate movements.
Revenues recognized in connection with fixed price engagements totaled $22.0 million and $26.1
million, representing 59.5% and 60.3% of total revenues of the segment, for the thirty-nine weeks
ended October 3, 2009 and September 27, 2008, respectively.
Software Solutions Segment Revenues of $10.9 million and $16.3 million, respectively, were
generated by the Software Solutions segment for the thirty-nine weeks ended October 3, 2009 and
September 27, 2008. All revenues were generated internationally. The decrease in revenues for the
thirty-nine weeks ended October 3, 2009 as compared to the 2008 period is primarily due to
unfavorable exchange rate movements of $2.9 million and a decline in demand for software services.
During the thirty-nine weeks ended October 3, 2009 and September 27, 2008, this segment provided
services on 164 and 139 customer projects, respectively. Average software and services revenue per
project was approximately $53,000 and $103,000 for the thirty-nine weeks ended October 3, 2009 and
September 27, 2008, respectively. Revenues from post-contract support services were approximately
$1,702,000 and $1,724,000 for the thirty-nine weeks ended October 3, 2009 and September 27, 2008,
respectively. During the thirty-nine weeks ended October 3, 2009 and September 27, 2008, revenues
from software licensing were $431,000 and $238,000, respectively.
COSTS OF SERVICES
Costs of services decreased 13.1% to $28.2 million for the thirty-nine weeks ended October 3, 2009
compared to $32.4 million for the thirty-nine weeks ended September 27, 2008. As a percentage of
revenues, our gross margin was 41.1% for the thirty-nine weeks ended October 3, 2009, compared to
45.7% for the thirty-nine weeks ended September 27, 2008. Our Management Consulting Services
segment gross margin was 43.0% for the thirty-nine weeks ended October 3, 2009 compared to 49.5%
for the thirty-nine weeks ended September 27, 2008. The decrease in gross margin for the
thirty-nine weeks ended October 3, 2009 as compared to the thirty-nine weeks ended September 27,
2008 in our Management Consulting Services segment is primarily due to the mix of business shifting
from strategy engagements to longer term and lower margin management consulting projects along with
revenue levels declining more significantly than costs have been reduced. As a result, we
experienced lower utilization of our fixed employee consulting base. Our Software Solutions segment
gross margin was 34.8% for the thirty-nine weeks ended October 3, 2009, compared to 35.7% for the
thirty-nine weeks ended September 27, 2008. Margin reductions in the Software Solutions segment are
primarily related to lower revenue volumes for the period and thus lower utilization of our
employee consulting personnel. Costs of services in the Software Solutions segment included
amortization of intangible assets of $434,000 and $549,000, respectively for the thirty-nine weeks
ended October 3, 2009 and September 27, 2008 related to acquired software. The reduction in
intangible amortization is due to exchange rate movements.
25
OPERATING EXPENSES
Operating expenses decreased by 38.6% to $23.0 million for the thirty-nine weeks ended October 3,
2009, from $37.4 million for the thirty-nine weeks ended September 27, 2008. Excluding the $10.2
million of goodwill impairment in the thirty-nine weeks ended September 27, 2008, operating
expenses decreased by 15.7% from the same period in 2008. Operating expenses for both periods
included selling, general and administrative expenses (inclusive of share-based compensation) and
intangible asset amortization.
Selling, general and administrative expenses decreased to $21.5 million for the thirty-nine weeks
ended October 3, 2009, compared to $23.9 million for the thirty-nine weeks ended September 27,
2008. As a percentage of revenues, our selling, general and administrative expense was 44.9% for
the thirty-nine weeks ended October 3, 2009, compared to 40.0% for the thirty-nine weeks ended
September 27, 2008. The decrease in selling, general and administrative expenses was primarily due
to decreases in compensation costs through headcount reductions and a reduction in professional
services fees. In addition, for the thirty-nine weeks ended October 3, 2009, selling, general and
administrative expenses include losses related to changes in foreign currency exchange rates of
$0.5 million compared to gains of $0.3 million during the thirty-nine weeks ended September 27,
2008. We continue to evaluate alignment of costs to revenues for each operating segment.
Intangible asset amortization decreased by $1,908,000 to $1,471,000 for the thirty-nine weeks ended
October 3, 2009 compared to $3,379,000 for the thirty-nine weeks ended September 27, 2008. The
decrease in amortization expense was primarily due to the completion of amortization of some
intangibles recorded in connection with acquisitions, exchange rate movements and the impairment of
the S3 license agreement and the intangibles related to the TWG acquisition during the thirteen
weeks ended September 27, 2008.
OTHER INCOME AND EXPENSES
Interest income was $188,000 and $750,000 for the thirty-nine weeks ended October 3, 2009 and
September 27, 2008, respectively, and represented interest earned on invested balances. Interest
income decreased for the thirty-nine weeks ended October 3, 2009 as compared to the thirty-nine
weeks ended September 27, 2008 due primarily to reductions in invested balances and reductions in
interest rates. We primarily invest in money market funds and have holdings in auction rate
securities. For the thirty-nine weeks ended October 3, 2009, other income includes $606,000 in
realized holding gains for auction rate securities classified as trading securities, offset by
realized losses on our ARS Rights of $484,000. In addition, other income for the thirty-nine weeks
ended October 3, 2009 includes $28,000 related to the settlement of a foreign withholding tax
dispute.
INCOME TAXES
In the thirty-nine weeks ended October 3, 2009, we recorded an income tax provision of $68,000
compared to an income tax provision of $444,000 during the thirty-nine weeks ended September 27,
2008. The tax provision for the thirty-nine weeks ended October 3, 2009 is primarily related to the
establishment of valuation allowances on deferred tax benefits recognized in our United Kingdom
operations. The income tax provision in the 2008 period is primarily due to the profitability of
our United Kingdom operations. For the thirty-nine weeks ended October 3, 2009 and September 27,
2008, we recorded no income tax benefit related to our domestic pre-tax losses in accordance with
the provisions of FASB ASC 740 Income Taxes which requires an estimation of our ability to use
recorded deferred income tax assets. We have recorded a valuation allowance against all domestic
and international deferred income tax assets generated due to uncertainty about their ultimate
realization due to our history of operating losses. If we continue to report net operating losses
for financial reporting in either our domestic or international operations, no additional tax
benefit would be recognized for those losses, since we will not have accumulated enough positive
evidence to support our ability to utilize the net operating loss carryforwards in the future.
NET LOSS
We had a net loss of $3.1 million for the thirty-nine weeks ended October 3, 2009 compared to a net
loss of $9.8 million for the thirty-nine weeks ended September 27, 2008. This decrease in net loss
is primarily attributable to goodwill impairment charges of $10.2 million in the 2008 period,
effective cost management initiatives and a decrease in intangible amortization, partially offset
by a contraction in revenues, including the negative impact of foreign exchange rates, and the
resulting negative impact on gross margins.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $0.1 million for the thirty-nine weeks ended October
3, 2009. Net cash provided by operating activities was $7.1 million for the thirty-nine weeks ended
September 27, 2008. The reduction in cash flows from operating activities for the thirty-nine weeks
ended October 3, 2009 as compared to the same period in 2008 was due to declines in operating
results and a reduction in cash flows from net working capital changes.
Net cash used in investing activities was $2.4 million and $1.9 million for the thirty-nine weeks
ended October 3, 2009 and September 27, 2008, respectively. Investing activities for the
thirty-nine weeks ended October 3, 2009 included $1.9 million in earn-out payments
26
related to the acquisition of Cartesian. Investing activities in fiscal year 2008 included $0.8
million and $2.6 million in earn-out payments related to the acquisitions of RVA and Cartesian,
respectively. Investing activities in fiscal year 2008 also included $0.1 million in payments for
TWG working capital true-ups. Investing activities include proceeds from sales of short-term
investments of $2.3 million in the thirty-nine weeks ended September 27, 2008. Net cash used in
investing activities also included $0.5 million and $0.6 million for the thirty-nine weeks ended
October 3, 2009 and September 27, 2008, respectively, related to the purchase of office equipment,
software and computer equipment.
Net cash provided by financing activities was $2.9 million for the thirty-nine weeks ended October
3, 2009. Net cash used in financing activities was $4.3 million for the thirty-nine weeks ended
September 27, 2008. Financing activities in the 2009 period included $3.4 million in proceeds from
line of credit borrowings. During the 2008 period, $3.2 million was utilized to purchase shares of
our common stock. In addition, in both periods cash was used to make payments on long-term
obligations. The 2008 period included payments on unfavorable contract obligations assumed as part
of the RVA acquisition.
At October 3, 2009, we had approximately $7.3 million in cash and cash equivalents ($2.9 million of
which is denominated in pounds sterling) and $15.5 million in net working capital. In addition, as
discussed below, we have established lines of credit totaling $8.5 million against our auction rate
securities portfolio, of which we have borrowed $4.9 million as of October 3, 2009. We believe we
have sufficient cash and access to credit to meet anticipated cash requirements, including
anticipated capital expenditures, earn-out payments, and any future operating losses that may be
incurred, for at least the next 12 months. Should our cash and available lines of credit prove
insufficient we may need to obtain new debt or equity financing to support our operations or
complete acquisitions. Recently, credit and capital markets have experienced unusual volatility and
disruption, and equity and debt financing have become more expensive and difficult to obtain. If we
need to obtain new debt or equity financing to support our operations or complete acquisitions in
the future, we may be unable to obtain debt or equity financing or reasonable terms. We have
established a flexible model that provides a lower fixed cost structure than most consulting firms,
enabling us to scale operating cost structures more quickly based on market conditions, although
there is a lag in time required to scale the business appropriately if revenues are reduced. If
demand for our consulting services continues to decline or we continue to experience negative cash
flow, we could experience liquidity challenges at some point in the future.
As previously discussed, the liquidity of auction rate securities has been negatively impacted by
recent events in the credit markets. As of October 3, 2009, we hold auction rate securities in the
face amount of $14.8 million collateralized by government guaranteed student loans. The estimated
fair value of the auction rate securities and related ARS Rights is $14.2 million as of October 3,
2009. Beginning in February 2008, auctions of our auction rate securities portfolio failed to
receive sufficient order interest from potential investors to clear successfully, resulting in
failed auction status. The principal associated with failed auctions will not be accessible until a
successful auction occurs, a buyer is found outside of the auction process, the issuers redeem the
securities, the issuers establish a different form of financing to replace these securities or
final payments come due according to contractual maturities ranging from approximately 22 to 36
years.
During the third quarter of 2008, state and federal regulators reached settlement agreements with
both of the brokers who advised us to purchase the auction rate securities we currently hold. The
settlement agreements with the regulators were intended to eventually provide liquidity for holders
of auction rate securities. On November 13, 2008, we entered into a settlement with UBS to provide
liquidity for our $7.6 million auction rate securities portfolio held with a UBS affiliate.
Pursuant to the terms of the settlement, UBS issued ARS Rights to us, allowing us to sell to UBS
our auction rate securities held in accounts with UBS and UBS affiliates at par value at any time
during the period beginning June 30, 2010 and ending July 2, 2012. As consideration for the
issuance of the ARS Rights, we (1) released UBS from all claims for damages (other than
consequential damages) directly or indirectly relating to UBSs marketing and sale of auction rate
securities, and (2) granted UBS the discretionary right to sell or otherwise dispose of our auction
rate securities, provided that we are paid the par value of the auction rate securities upon any
disposition. At October 3, 2009, the ARS Rights had an estimated
fair value of $0.4 million.
Pursuant to the settlement, we entered into a line of credit from UBS or its affiliates for up to
75% of the market value of its auction rate securities. The line of credit provides us with an
uncommitted, demand revolving line of credit of up to 75% of the market value, as determined by UBS
in its sole discretion, of our auction rate securities that are pledged as collateral. The interest
that we pay on the line of credit will not exceed the interest that we receive on the auction rate
securities pledged to UBS as security for the line of credit. UBS may demand full or partial
payment of amounts borrowed on the line of credit, at its sole option and without cause, at any
time. UBS may, at any time, in its discretion, terminate and cancel the line of credit. If at any
time UBS exercises its right of demand, then a UBS affiliate shall provide, as soon as reasonably
possible, alternative financing on substantially the same terms and conditions as those under the
line of credit and UBS agrees that the line of credit shall remain in full force and effect until
such time as such alternative financing has been established. If alternative financing cannot be
established, then a UBS-related entity will purchase the pledged auction rate securities at par
value. If we elect to sell any auction rate securities that are pledged as collateral under the
line of credit to a purchaser other than UBS, UBS intends to exercise its right to demand repayment
of the line of credit relating to the auction rate securities sold by us. As of October 3, 2009, we
had borrowed $4.9 million under the line of credit.
On March 19, 2009, we entered into a loan agreement with Citigroup Global Markets, Inc.
(Citigroup) to provide liquidity for our $7.3 million auction rate securities portfolio held with
Citigroup. Under the loan agreement, we have access to a revolving line of credit of up to 50% of
the par value of the auction rate securities that we have pledged as collateral, or $3.625 million.
The interest rate as of October 3, 2009 that we would pay on amounts borrowed is the federal funds
rate plus 3.65%. The interest rate may change in
27
future periods based on the change in the spread over the federal funds rate. The line of credit is
not for any specific term or duration and Citigroup may demand full or partial payment of amounts
borrowed on the line of credit, at its sole option and without cause, at any time. Citigroup may,
at any time, in its discretion, terminate the line of credit with proper notice. No amounts have
been borrowed against this line of credit.
Given our intent and expected ability to exercise our right under the ARS Rights to sell to UBS our
auction rate securities held in accounts with UBS and UBS affiliates at par value on June 30, 2010,
we have classified the entire amount of auction rate securities portfolio held with UBS and UBS
affiliates, including the fair value of the ARS Rights, as short-term investments in the Condensed
Consolidated Balance Sheet (unaudited) as of October 3, 2009. The remaining auction rate securities
held in accounts with Citigroup are classified as noncurrent investments in the Condensed
Consolidated Balance Sheet (unaudited) as of October 3, 2009.
Because we intend to exercise our right under the ARS Rights to sell to UBS our auction rate
securities held in accounts with UBS and UBS affiliated on June 30, 2010, we have classified the
line of credit with UBS as a current liability in the Condensed Consolidated Balance Sheet as of
October 3, 2009. We had borrowed $4.9 million under this line of credit as of October 3, 2009.
These borrowings were used to fund short-term liquidity needs.
As we are able to liquidate any of our auction rate securities portfolio we intend to reinvest in
money market or similar investments any amounts not used to repay amounts borrowed under the lines
of credit. We continually monitor the credit quality and liquidity of our auction rate securities.
To the extent we believe we will not be able to collect all amounts due according to the
contractual terms of a security, we will record an other-than-temporary impairment. This could
require us to recognize losses in our Condensed Consolidated Statement of Operations and
Comprehensive Loss (unaudited) in accordance with FASB ASC 320, which could be material.
On October 26, 2009, all of the Access Group Inc. Federal Student Loan Asset Backed Notes held as
part of our auction rate securities portfolio with a UBS affiliate were sold. Pursuant to the terms
of the settlement with UBS, UBS holds discretionary right to sell or otherwise dispose of the
Companys auction rate securities, provided that the Company is entitled to the par value of the
auction rate securities upon any disposition. The par value of the liquidated securities,
$2,050,000, was applied to the line of credit from UBS and its affiliates.
FINANCIAL COMMITMENTS
During fiscal year 2007, we acquired all of the outstanding membership interests of RVA and
acquired all of the outstanding shares of stock of TWG. In addition to consideration paid at
closing for these acquisitions, we have potential contingent purchase price obligations of
approximately $0.4 million and $1.7 million, respectively, at October 3, 2009 related to future
earn-out consideration based upon the performance of RVA and TWG after the closing dates.
Additionally, we have accrued $981,000 for consideration earned by RVA and payable during the
fourth quarter of 2009.
During the thirteen weeks ended April 4, 2009, we entered into an agreement under which we have a
commitment to purchase a minimum of $401,000 in computer software over a three year period. As of
October 3, 2009, we have an obligation of $323,000 remaining under this commitment.
TRANSACTIONS WITH RELATED PARTIES
During the thirteen and thirty-nine weeks ended October 3, 2009, we incurred legal fees of $2,000
and $9,000, respectively, for services provided by Bingham McCutchen, LLP, a law firm in which a
member of our Board of Directors, Andrew Lipman, owns an equity interest. Fees incurred in the 2009
period were in connection with earn-out payments related to our acquisition of Cartesian and
general legal matters related to our consulting offerings. During the thirteen and thirty-nine
weeks ended September 27, 2008, we incurred legal fees of $6,000 and $31,000, respectively, for
services provided by Bingham McCutchen, LLP. Fees incurred in the 2008 period were in connection
with income tax and potential acquisition related matters. Our Board of Directors has affirmatively
determined that such payments do not constitute a material relationship between the director and
the Company and concluded the director is independent as defined by the NASDAQ corporate governance
rules. All payments were made within the limitations set forth by NASDAQ Rules as to the
qualifications of an independent director.
As of October 3, 2009, there is one outstanding line of credit between the Company and its Chief
Executive Officer, Richard P. Nespola, which originated in fiscal year 2001. Aggregate borrowings
outstanding against the line of credit at October 3, 2009 totaled $300,000 and are due in 2011.
These amounts are included in other assets in the non-current assets section of the Condensed
Consolidated Balance Sheet (unaudited). In accordance with the loan provisions, the interest rate
charged on the loans is equal to the Applicable Federal Rate (AFR), as announced by the Internal
Revenue Service, for short-term obligations (with annual compounding) in effect for the month in
which the advance is made, until fully paid. Pursuant to the Sarbanes-Oxley Act, no further loan
agreements or draws against the line may be made by the Company to, or arranged by the Company for
its executive officers. Interest payments on this loan are current as of October 3, 2009.
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On October 15, 2009, the Company entered into a Sales Agency and Marketing Support Agreement with
Adaption Technologies Ventures, Ltd. (Adaption). Adaption is a provider of telecommunications
provisioning software and related support and implementation services. Under the terms of this
agreement, the Company may (1) provide sales agency services and marketing support services to
Adaption in exchange for sales commission and market-rate fees, respectively; and/or (2) retain
staffing services from Adaption in exchange for market-rate fees. The agreement does not require
that the Company undertake any specific actions or obligations. Under the terms of this agreement,
the Company is provided a three percent (3%) equity interest in Adaption upon the Company achieving a certain
level of sales volume under the Agreement within the first two years it is in effect. In addition, the Company may
acquire an additional seventeen percent (17%) equity interest in Adaption if certain sales
thresholds are reached by the Company, by converting fees earned under the Agreement into ownership
units over a four year period. Because there have been no sales under this agreement and the potential for such sales is prospective and uncertain, the right to
acquire equity interests in Adaption had de minimus value at the inception of the agreement. Roy A. Wilkens, a
member of the Companys Board of Directors, holds a direct material interest in Adaption. In
conjunction with the consideration and execution of the above-described agreement, Mr. Wilkens
discontinued service as a member of the Companys Compensation Committee. Mr. Wilkens remains an
independent director and member of the Companys Audit Committee.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
Not applicable.
ITEM 4T. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures and Changes in Internal Control Over Financial
Reporting
The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934 (the Exchange Act)) that are designed to
ensure that information required to be disclosed by the Company in reports that it files or submits
under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods
specified in SEC rules and forms; and (ii) accumulated and communicated to the Companys
management, including its principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding required disclosure. We have established a
Disclosure Committee, consisting of certain members of management, to assist in this evaluation.
The Disclosure Committee meets on a regular quarterly basis, and as needed.
A review and evaluation was performed by our management, including our Chief Executive Officer (the
CEO) and Chief Financial Officer (the CFO), of the effectiveness of the design and operation of
our disclosure controls and procedures as of the end of the period covered by this quarterly
report. Based upon this evaluation, the Companys CEO and CFO have concluded that the Companys
disclosure controls and procedures were effective as of October 3, 2009.
There was no change in internal control over financial reporting during the fiscal quarter ended
October 3, 2009, that has materially affected or is reasonably likely to materially affect our
internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We have not been subject to any material new litigation since the filing on April 3, 2009 of our
Annual Report on Form 10-K for the year ended January 3, 2009.
ITEM 1A. RISK FACTORS
Not applicable
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
29
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
(a) Exhibits
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Exhibit 31. |
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Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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Exhibit 32. |
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Certifications furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
30
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.
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The Management Network Group, Inc.
(Registrant)
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Date: November 17, 2009 |
By |
/s/ Richard P. Nespola
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(Signature) |
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Richard P. Nespola
Chairman and Chief Executive Officer
(Principal executive officer) |
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Date: November 17, 2009 |
By |
/s/ Donald E. Klumb
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(Signature) |
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Donald E. Klumb
Chief Financial Officer and Treasurer
(Principal financial officer and principal
accounting officer) |
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31
EXHIBIT INDEX
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Exhibit No. |
|
Description of Exhibit |
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|
Exhibit 31. |
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Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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|
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Exhibit 32. |
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Certifications furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
32