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 April 3, 2010
or
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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
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48-1129619 |
(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.) |
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7300 COLLEGE BLVD., SUITE 302, OVERLAND PARK, KS
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66210 |
(Address of principal executive offices)
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(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):
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o
(Do not check if a smaller reporting company)
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Smaller reporting company þ |
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
May 14, 2010, TMNG had outstanding 7,043,303 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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14 |
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24 |
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25 |
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25 |
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25 |
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25 |
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26 |
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27 |
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28 |
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EX-31 |
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EX-32 |
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EX-31 |
EX-32 |
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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April 3, |
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January 2, |
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2010 |
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2010 |
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ASSETS |
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CURRENT ASSETS: |
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Cash and cash equivalents |
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$ |
3,905 |
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$ |
6,301 |
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Short-term investments |
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5,470 |
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5,444 |
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Receivables: |
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Accounts receivable |
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12,454 |
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11,991 |
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Accounts receivable unbilled |
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4,593 |
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4,174 |
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17,047 |
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16,165 |
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Less: Allowance for doubtful accounts |
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(356 |
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(357 |
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Net receivables |
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16,691 |
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15,808 |
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Prepaid and other current assets |
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1,388 |
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1,206 |
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Total current assets |
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27,454 |
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28,759 |
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NONCURRENT ASSETS: |
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Property and equipment, net |
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1,870 |
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1,955 |
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Goodwill |
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7,516 |
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7,772 |
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Identifiable intangible assets, net |
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1,947 |
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2,516 |
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Noncurrent investments |
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6,915 |
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6,852 |
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Other assets |
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371 |
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397 |
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Total Assets |
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$ |
46,073 |
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$ |
48,251 |
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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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$ |
1,492 |
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$ |
1,118 |
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Current borrowings |
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3,680 |
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2,800 |
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Accrued payroll, bonuses and related expenses |
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3,790 |
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5,354 |
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Other accrued liabilities |
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1,423 |
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1,433 |
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Deferred revenue |
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717 |
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1,023 |
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Unfavorable and other contractual obligations |
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592 |
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706 |
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Total current liabilities |
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11,694 |
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12,434 |
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NONCURRENT LIABILITIES: |
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Unfavorable and other contractual obligations |
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495 |
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546 |
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Other noncurrent liabilities |
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1,221 |
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1,237 |
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Total noncurrent liabilities |
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1,716 |
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1,783 |
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Total stockholders equity |
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32,663 |
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34,034 |
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Total Liabilities and Stockholders Equity |
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$ |
46,073 |
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$ |
48,251 |
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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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April 3, |
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April 4, |
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2010 |
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2009 |
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Revenues |
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$ |
17,459 |
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$ |
14,197 |
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Cost of services (includes net non-cash share-based compensation
expense of $34 and $88 for the thirteen weeks ended April 3, 2010 and
April 4, 2009, respectively) |
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10,857 |
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8,718 |
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Gross Profit |
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6,602 |
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5,479 |
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Operating Expenses: |
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Selling, general and administrative (includes net non-cash
share-based compensation expense of $79 and $220 for the thirteen
weeks ended April 3, 2010 and April 4, 2009, respectively) |
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7,068 |
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7,408 |
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Intangible asset amortization |
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363 |
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474 |
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Total operating expenses |
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7,431 |
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7,882 |
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Loss from operations |
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(829 |
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(2,403 |
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Other income (expense): |
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Interest income |
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64 |
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82 |
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Interest expense |
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(9 |
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(9 |
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Other income, net |
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28 |
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24 |
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Total other income |
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83 |
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97 |
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Loss before income tax (provision) benefit |
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(746 |
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(2,306 |
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Income tax (provision) benefit |
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(7 |
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122 |
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Net loss |
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(753 |
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(2,184 |
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Other comprehensive income (loss): |
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Foreign currency translation adjustment |
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(795 |
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382 |
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Unrealized gain on auction rate securities |
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63 |
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397 |
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Comprehensive loss |
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$ |
(1,485 |
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$ |
(1,405 |
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Net loss per common share |
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Basic and diluted |
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$ |
(0.11 |
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$ |
(0.31 |
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Weighted average shares used in calculation of net loss per common share |
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Basic and diluted |
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7,027 |
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6,950 |
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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 Thirteen Weeks Ended |
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April 3, |
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April 4, |
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2010 |
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2009 |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net loss |
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$ |
(753 |
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$ |
(2,184 |
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Adjustments to reconcile net loss to net cash used in
operating activities: |
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Depreciation and amortization |
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705 |
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796 |
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Share-based compensation |
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113 |
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308 |
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Deferred taxes |
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34 |
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(193 |
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Bad debt expense |
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6 |
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Realized gains on investments |
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(26 |
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(23 |
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Other changes in operating assets and liabilities: |
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Accounts receivable |
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(764 |
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(2,625 |
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Accounts receivable unbilled |
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(555 |
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(138 |
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Prepaid and other assets |
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(181 |
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(274 |
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Trade accounts payable |
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371 |
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229 |
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Deferred revenue |
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(260 |
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1,092 |
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Accrued liabilities |
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(1,399 |
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287 |
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Net cash used in operating activities |
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(2,709 |
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(2,725 |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Acquisition of businesses |
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(703 |
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Acquisition of property and equipment, net |
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(137 |
) |
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(46 |
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Net cash used in investing activities |
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(137 |
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(749 |
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Borrowings on line of credit |
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880 |
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3,400 |
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Repayments on line of credit |
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(41 |
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Payments made on unfavorable and other contractual obligations |
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(175 |
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(167 |
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Net cash provided by financing activities |
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705 |
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3,192 |
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Effect of exchange rate on cash and cash equivalents |
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(255 |
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180 |
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Net decrease in cash and cash equivalents |
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(2,396 |
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(102 |
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Cash and cash equivalents, beginning of period |
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6,301 |
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5,956 |
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Cash and cash equivalents, end of period |
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$ |
3,905 |
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$ |
5,854 |
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Supplemental disclosure of cash flow information: |
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Cash paid during period for interest |
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$ |
9 |
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$ |
9 |
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Cash paid during period for taxes |
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$ |
10 |
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Accrued property and equipment additions |
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$ |
309 |
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$ |
466 |
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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
April 3, 2010, and for the thirteen weeks ended April 3, 2010 and April 4, 2009 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 2, 2010, included in the 2009 Annual
Report on Form 10-K (2009 Form 10-K) for additional disclosures, including a summary of the
Companys accounting policies. The Condensed Consolidated Balance Sheet as of January 2, 2010 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 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. In
the opinion of management of the Company, all adjustments consisting of normal recurring
adjustments considered necessary for a fair presentation of the financial statements have been
included. The results of operations for the thirteen weeks ended April 3, 2010 are not necessarily
indicative of the results to be expected for the full year ending January 1, 2011.
Reverse Stock Split On January 21, 2010, TMNGs stockholders approved a one-for-five reverse
stock split of the Companys authorized, issued and outstanding common stock. The reverse stock
split was effective on February 7, 2010. Trading of TMNGs common stock on the NASDAQ Global Market
on a split-adjusted basis began at the open of trading on February 8, 2010. The reverse stock split
affected all shares of the Companys common stock, as well as options to purchase the Companys
common stock, that were outstanding immediately prior to the effective date of the reverse stock
split. All references to common shares and per-share data for prior periods have been retroactively
restated to reflect the reverse stock split as if it had occurred at the beginning of the earliest
period presented. The par value of the Companys common stock was changed to $.005 per share from
$.001 per share in connection with the reverse split.
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 weeks ended April 3,
2010 and April 4, 2009, software development costs of $139,000 and $145,000, respectively, were
expensed as incurred. No software development costs were capitalized during the thirteen weeks
ended April 3, 2010 and April 4, 2009.
Foreign Currency Transactions and Translation TMNG Europe Ltd., Cartesian Ltd. (Cartesian) and
the international operations of Cambridge Strategic Management Group, Inc. 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 and
(losses) included in results of operations were $5,000 and ($134,000) during the thirteen weeks
ended April 3, 2010 and April 4, 2009, respectively.
Derivative Financial Instruments As of April 3, 2010, the Company had an open foreign currency
forward contract with a notional amount of $0.3 million. This forward contract provides an economic
hedge of fluctuations in euro denominated accounts receivable against the British pound, but has
not been designated as a hedge for accounting purposes. The change in fair value of this contract
as of April 3, 2010 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. This
contract expired on April 30, 2010. During the thirteen weeks ended April 3, 2010, the Company
recognized no gains or losses on
this forward contract. During the thirteen weeks ended April 4,
2009, the Company recognized losses of $25,000 on forward contracts. Recognized gains and losses
on forward contracts are included in selling, general and administrative expenses in the Condensed
Consolidated Statement of Operations and Comprehensive Loss (unaudited).
6
Net 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 weeks ended April 3, 2010 and April
4, 2009 as the Company reported a net loss for these periods and the effect would have been
anti-dilutive.
Recent Accounting Pronouncements In October 2009, the FASB issued Accounting Standards
Update (ASU) 2009-13, Revenue Recognition (Topic 605) Multiple-Deliverable Revenue
Arrangements, a consensus of the FASB Emerging Issue Task Force (ASU 2009-13), and ASU 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 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.
In January 2010, the FASB issued ASU 2010-06, Fair Value Measures and Disclosures, (ASU
2010-06). ASU 2010-06 amends the Codification to require new or enhanced disclosures about: (1)
transfers in and out of Levels 1, 2 and 3; (2) purchases, sales, issuances and settlements related
to Level 3 measurements; (3) level of disaggregation; and (4) inputs and valuation techniques used
to measure fair value. With the exception of item (2), this guidance was effective for the first
reporting period beginning after December 15, 2009. The Company adopted this guidance, with the
exception of item (2), upon issuance and it did not have an effect on its consolidated financial
statements. The guidance concerning item (2) is effective for fiscal years beginning after
December 15, 2010. The Company is currently evaluating the impact that the adoption of item (2) of
this guidance will have on its consolidated financial statements.
In January 2010, the FASB issued ASU 2010-09, Subsequent Events (Topic 855), (ASU 2010-09). As a
result of ASU 2010-09, SEC registrants will no longer disclose the date through which management
evaluated subsequent events in the financial statements, either in originally issued financial
statements or reissued financial statements. The guidance in ASU 2010-09 is effective
immediately. The Company adopted this guidance upon issuance and it did not have a material effect
on its financial statements.
2. Auction Rate Securities
As of April 3, 2010 and January 2, 2010, TMNG held $12.4 million and $12.3 million, respectively,
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 April 3, 2010 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains |
|
|
Unrealized |
|
|
Fair Value at April 3, 2010 |
|
Issuer |
|
Cost Basis |
|
|
(Losses) |
|
|
Losses |
|
|
Current |
|
|
Noncurrent |
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
Trading Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kentucky Higher Education Loan Revenue Bonds |
|
$ |
1,900 |
|
|
$ |
(80 |
) |
|
|
|
|
|
$ |
1,820 |
|
|
|
|
|
Missouri Higher Education Loan Revenue Bonds |
|
|
1,800 |
|
|
|
(76 |
) |
|
|
|
|
|
|
1,724 |
|
|
|
|
|
Utah State Board of Regents Revenue Bonds |
|
|
1,400 |
|
|
|
(59 |
) |
|
|
|
|
|
|
1,341 |
|
|
|
|
|
Kentucky Higher Education Loan Revenue Bonds |
|
|
400 |
|
|
|
(17 |
) |
|
|
|
|
|
|
383 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,500 |
|
|
|
(232 |
) |
|
|
|
|
|
|
5,268 |
|
|
|
|
|
|
|
|
Available-for-Sale Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Education Funding Capital Education Loan
Backed Notes |
|
|
6,250 |
|
|
|
|
|
|
$ |
(264 |
) |
|
|
|
|
|
$ |
5,986 |
|
Brazos Student Finance Corporation Student
Loan Asset Backed Notes |
|
|
1,000 |
|
|
|
|
|
|
|
(71 |
) |
|
|
|
|
|
|
929 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,250 |
|
|
|
|
|
|
|
(335 |
) |
|
|
|
|
|
|
6,915 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ARS Rights |
|
|
|
|
|
|
202 |
|
|
|
|
|
|
|
202 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
12,750 |
|
|
$ |
(30 |
) |
|
$ |
(335 |
) |
|
$ |
5,470 |
|
|
$ |
6,915 |
|
|
|
|
7
The Companys auction rate securities portfolio as of January 2, 2010 consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains |
|
|
Unrealized |
|
|
Fair Value at January 2, 2010 |
|
Issuer |
|
Cost Basis |
|
|
(Losses) |
|
|
Losses |
|
|
Current |
|
|
Noncurrent |
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
Trading Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kentucky Higher Education Loan Revenue Bonds |
|
$ |
1,900 |
|
|
$ |
(118 |
) |
|
|
|
|
|
$ |
1,782 |
|
|
|
|
|
Missouri Higher Education Loan Revenue Bonds |
|
|
1,800 |
|
|
|
(112 |
) |
|
|
|
|
|
|
1,688 |
|
|
|
|
|
Utah State Board of Regents Revenue Bonds |
|
|
1,400 |
|
|
|
(87 |
) |
|
|
|
|
|
|
1,313 |
|
|
|
|
|
Kentucky Higher Education Loan Revenue Bonds |
|
|
400 |
|
|
|
(25 |
) |
|
|
|
|
|
|
375 |
|
|
|
|
|
|
|
|
|
|
|
5,500 |
|
|
|
(342 |
) |
|
|
|
|
|
|
5,158 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Education Funding Capital Education Loan
Backed Notes |
|
|
6,250 |
|
|
|
|
|
|
$ |
(389 |
) |
|
|
|
|
|
$ |
5,861 |
|
Brazos Student Finance Corporation Student
Loan Asset Backed Notes |
|
|
1,000 |
|
|
|
|
|
|
|
( 9 |
) |
|
|
|
|
|
|
991 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,250 |
|
|
|
|
|
|
|
(398 |
) |
|
|
|
|
|
|
6,852 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ARS Rights |
|
|
|
|
|
|
286 |
|
|
|
|
|
|
|
286 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
12,750 |
|
|
$ |
(56 |
) |
|
$ |
(398 |
) |
|
$ |
5,444 |
|
|
$ |
6,852 |
|
|
|
|
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 21 to 35 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 $63,000 during the thirteen weeks ended April 3, 2010 and recognized unrealized holding
gains of $397,000 during the thirteen weeks ended April 4, 2009. Unrealized holding gains and
losses on securities classified as 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 $110,000 and $169,000, respectively,
offset by realized losses on the Companys ARS Rights of $84,000 and $146,000, respectively, during
the thirteen weeks ended April 3, 2010 and April 4, 2009. Realized gains and losses on trading
securities have been recognized in Other income in the Condensed Consolidated Statements of
Operations and Comprehensive Loss
8
(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.
The following is a reconciliation of the beginning and ending balances of the Companys
auction rate securities portfolio and ARS Rights for the thirteen weeks ended April 3, 2010
and April 4, 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the |
|
|
For the |
|
|
|
thirteen weeks |
|
|
thirteen weeks |
|
|
|
ended April 3, 2010 |
|
|
ended April 4, 2009 |
|
Fair value at beginning of period |
|
$ |
12,296 |
|
|
$ |
13,404 |
|
Total unrealized and realized gains
(losses) included in Other income in
the Consolidated Statements of
Operations and Comprehensive Loss |
|
|
26 |
|
|
|
23 |
|
Total unrealized gains (losses)
included in Other comprehensive
income (loss) in the Consolidated
Statements of Operations and
Comprehensive Loss |
|
|
63 |
|
|
|
397 |
|
|
|
|
|
|
|
|
Fair value at end of period |
|
$ |
12,385 |
|
|
$ |
13,824 |
|
|
|
|
|
|
|
|
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 April 3, 2010 and the Condensed Consolidated Balance
Sheet as of January 2, 2010. The remaining auction rate securities are classified as noncurrent
investments in the Condensed Consolidated Balance Sheet (unaudited) as of April 3, 2010 and the
Condensed Consolidated Balance Sheet as of January 2, 2010.
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 the outstanding balance of $3.7 million
as a current liability in the Condensed Consolidated Balance Sheet (unaudited) as of April 3, 2010.
The Company classified the outstanding balance of $2.8 million as a current liability in the
Condensed Consolidated Balance Sheet as of January 2, 2010. $880,000 was borrowed during the thirteen weeks ended April 3, 2010. As of
April 3, 2010, there was no material balance available to be borrowed. 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.
9
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 3.08%. 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.
4. Business Combinations
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 North America 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 $11.6 million consists of the following (in thousands):
|
|
|
|
|
Cash paid at closing |
|
$ |
6,625 |
|
Transaction costs |
|
|
247 |
|
Contingent cash consideration earned |
|
|
3,273 |
|
Contingent stock consideration earned (based on June 30, 2008 measurement date) |
|
|
921 |
|
Contingent stock consideration earned (based on June 30, 2009 measurement date) |
|
|
104 |
|
|
|
|
|
|
|
|
|
|
Total purchase price recognized at April 3, 2010 |
|
|
11,170 |
|
|
|
|
|
|
Remaining contingent cash consideration |
|
|
344 |
|
Remaining contingent stock consideration (based on share price as of April 3, 2010) |
|
|
51 |
|
|
|
|
|
|
|
|
|
|
Aggregate potential consideration |
|
$ |
11,565 |
|
|
|
|
|
The measurement date for contingent cash and stock consideration is June 30 of the three years
subsequent to the transaction. There was no cash earn-out or stock consideration earned or paid
during the thirteen weeks ended April 3, 2010 or April 4, 2009.
5. Goodwill and Other Identifiable Intangible Assets
The changes in the carrying amount of goodwill for the thirteen weeks ended April 3, 2010 are as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North |
|
|
|
|
|
|
|
|
|
America |
|
|
EMEA |
|
|
Total |
|
Balance as of January 2, 2010 |
|
$ |
3,550 |
|
|
$ |
4,222 |
|
|
$ |
7,772 |
|
Changes in foreign currency exchange rates |
|
|
|
|
|
|
(256 |
) |
|
|
(256 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of April 3, 2010 |
|
$ |
3,550 |
|
|
$ |
3,966 |
|
|
$ |
7,516 |
|
|
|
|
|
|
|
|
|
|
|
Included in intangible assets, net are the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 3, 2010 |
|
|
January 2, 2010 |
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Accumulated |
|
|
|
Cost |
|
|
Amortization |
|
|
Cost |
|
|
Amortization |
|
Customer relationships |
|
$ |
5,224 |
|
|
$ |
(3,750 |
) |
|
$ |
5,342 |
|
|
$ |
(3,511 |
) |
Acquired software |
|
|
2,280 |
|
|
|
(1,852 |
) |
|
|
2,427 |
|
|
|
(1,820 |
) |
Employment agreements |
|
|
1,920 |
|
|
|
(1,875 |
) |
|
|
2,018 |
|
|
|
(1,940 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
9,424 |
|
|
$ |
(7,477 |
) |
|
$ |
9,787 |
|
|
$ |
(7,271 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
10
Intangible amortization expense for the thirteen weeks ended April 3, 2010 and April 4, 2009
was $509,000 and $608,000, respectively, including $146,000 and $135,000 reported in cost of
services for the thirteen weeks ended April 3, 2010 and April 4, 2009, 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 2010 |
|
$ |
1,451 |
|
|
$ |
427 |
|
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. The Company performs its impairment testing for goodwill in accordance with FASB
ASC 350, Intangibles-Goodwill and Other. Management determined that there were no events or
changes in circumstances during the thirteen weeks ended April 3, 2010 which indicated that
goodwill needed to be tested for impairment during the period.
The Company reviews long-lived assets and certain identifiable intangibles to be held and used for
impairment whenever events or changes in circumstances indicate that the carrying amount of these
assets might not be recoverable in accordance with the provisions of FASB ASC 360, Property, Plant
and Equipment and FASB ASC 350, Intangibles-Goodwill and Other. Management determined that
there were no events or changes in circumstances during the thirteen weeks ended April 3, 2010
which indicated that long-lived assets and intangible assets needed to be reviewed for impairment
during the period.
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 2009 Form
10-K.
During the thirteen weeks ended April 3, 2010, the Company recognized no income tax benefits
related to share-based compensation arrangements. The Company recognized income tax benefits of
$39,000 during the thirteen weeks ended April 4, 2009 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 April 3, 2010 and changes during the thirteen weeks then ended is
presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Exercise |
|
|
|
Shares |
|
|
Price |
|
Outstanding at January 2, 2010 |
|
|
763,547 |
|
|
$ |
17.57 |
|
Forfeited/cancelled |
|
|
(43,825 |
) |
|
$ |
93.77 |
|
|
|
|
|
|
|
|
Outstanding at April 3, 2010 |
|
|
719,722 |
|
|
$ |
12.93 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested and expected to vest at April 3, 2010 |
|
|
670,167 |
|
|
$ |
13.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at April 3, 2010 |
|
|
587,773 |
|
|
$ |
13.54 |
|
|
|
|
|
|
|
|
Nonvested Shares
There were 1,250 shares of nonvested stock issued under the 1998 Plan as of April 3, 2010 and
January 2, 2010 with a weighted average grant date fair value of $10.95 per share. No shares of
nonvested stock were issued or vested during the thirteen weeks ended April 3, 2010.
11
2000 Supplemental Stock Plan
A summary of the option activity under the Companys 2000 Supplemental Stock Plan (the
Supplemental Stock Plan) as of April 3, 2010 and changes during the thirteen weeks then ended is
presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Exercise |
|
|
|
Shares |
|
|
Price |
|
Outstanding at January 2, 2010 |
|
|
274,612 |
|
|
$ |
11.74 |
|
Forfeited/cancelled |
|
|
(9,375 |
) |
|
$ |
11.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at April 3, 2010 |
|
|
265,237 |
|
|
$ |
11.76 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested and expected to vest at April 3, 2010 |
|
|
231,096 |
|
|
$ |
11.98 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at April 3, 2010 |
|
|
165,637 |
|
|
$ |
12.71 |
|
|
|
|
|
|
|
|
The Supplemental Stock Plan will expire on May 23, 2010, after which time, no new awards will
be issued pursuant to the plan. The outstanding awards issued pursuant to the Supplemental Stock
Plan will remain subject to the terms of the Supplemental Stock following expiration of the plan.
7. Business Segments and Major Customers
In the first quarter of fiscal year 2010, the Company was internally reorganized to align
geographically with its client base. As a result of this internal realignment, the Companys
reportable segments have changed. Corresponding segment information for prior periods has been
restated to conform to the current reportable segment presentation.
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 North America segment and the EMEA segment. The North America segment is comprised of
three operating segments (North America Cable and Broadband, North America Telecom and Strategy),
which are aggregated into one reportable segment based on the similarity of their economic
characteristics. Both reportable segments offer management consulting, custom developed software,
and technical services.
Management evaluates segment performance based upon income (loss) from operations, excluding
share-based compensation (benefits), depreciation and intangibles amortization. There were no
inter-segment sales in either the thirteen weeks ended April 3, 2010 or April 4, 2009. 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 all the segments. Summarized financial information concerning the Companys reportable
segments is shown in the following table (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North |
|
|
|
|
|
|
Not Allocated |
|
|
|
|
|
|
America |
|
|
EMEA |
|
|
to Segments |
|
|
Total |
|
As of and for the thirteen weeks ended April 3, 2010: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
13,106 |
|
|
$ |
4,353 |
|
|
|
|
|
|
$ |
17,459 |
|
Income (loss) from operations |
|
|
3,588 |
|
|
|
786 |
|
|
$ |
(5,203 |
) |
|
|
(829 |
) |
Total assets |
|
$ |
10,479 |
|
|
$ |
6,548 |
|
|
$ |
29,026 |
|
|
$ |
46,053 |
|
|
As of the fiscal year ended January 2, 2010: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
9,704 |
|
|
$ |
6,461 |
|
|
$ |
32,086 |
|
|
$ |
48,251 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the thirteen weeks ended April 4, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
9,854 |
|
|
$ |
4,343 |
|
|
|
|
|
|
$ |
14,197 |
|
Income (loss) from operations |
|
|
1,820 |
|
|
|
1,050 |
|
|
$ |
(5,273 |
) |
|
|
(2,403 |
) |
Total assets |
|
$ |
10,479 |
|
|
$ |
5,227 |
|
|
$ |
34,038 |
|
|
$ |
49,744 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of the
fiscal year ended January 3, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
7,012 |
|
|
$ |
5,794 |
|
|
$ |
33,908 |
|
|
$ |
46,714 |
|
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, current and non-current investments, property and equipment, goodwill and
12
intangible assets and deferred tax assets, excluding deferred tax assets recognized on
accounts receivable reserves, which are assigned to their segments.
In accordance with the provisions of FASB ASC 280-10, revenues earned in the United States and
internationally based on the location where the services are performed are shown in the following
table (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the Thirteen Weeks |
|
|
|
Ended |
|
|
|
April 3, 2010 |
|
|
April 4, 2009 |
|
United States |
|
$ |
13,013 |
|
|
$ |
9,515 |
|
International: |
|
|
|
|
|
|
|
|
United Kingdom |
|
|
4,055 |
|
|
|
4,149 |
|
Other |
|
|
391 |
|
|
|
533 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
17,459 |
|
|
$ |
14,197 |
|
|
|
|
|
|
|
|
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 |
|
|
|
For the thirteen weeks |
|
|
For the thirteen weeks |
|
|
|
ended April 3, 2010 |
|
|
ended April 4, 2009 |
|
|
|
North |
|
|
|
|
|
|
North |
|
|
|
|
|
|
America |
|
|
EMEA |
|
|
America |
|
|
EMEA |
|
Customer A |
|
|
|
|
|
$ |
1,982 |
|
|
|
|
|
|
$ |
1,573 |
|
Customer B |
|
$ |
5,481 |
|
|
|
|
|
|
$ |
4,579 |
|
|
|
|
|
Customer C |
|
$ |
2,479 |
|
|
|
|
|
|
$ |
1,911 |
|
|
|
|
|
Customer D |
|
$ |
1,801 |
|
|
|
|
|
|
$ |
1,455 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts Receivable |
|
|
|
As of April 3, |
|
|
As of April 4, |
|
|
|
2010 |
|
|
2009 |
|
Customer A |
|
$ |
2,759 |
|
|
$ |
1,697 |
|
Customer B |
|
$ |
4,312 |
|
|
$ |
5,730 |
|
Customer C |
|
$ |
1,653 |
|
|
$ |
1,340 |
|
Customer D |
|
$ |
1,289 |
|
|
$ |
1,554 |
|
Revenues from the Companys ten most significant customers accounted for approximately 87% and 86%
of revenues during the thirteen weeks ended April 3, 2010 and April 4, 2009, respectively.
8. Income Taxes
In the thirteen weeks ended April 3, 2010, the Company recorded an income tax provision of $7,000.
In the thirteen weeks ended April 4, 2009, the Company recorded an income tax benefit of $122,000.
The tax provision for the thirteen weeks ended April 3, 2010 is primarily due to interest
recognized on reserves for uncertain tax positions. The tax benefit for the thirteen weeks ended
April 4, 2009 is primarily related to a deferred tax benefit recognized on losses for the period in
the Companys United Kingdom operations. During the thirteen weeks ended April 3, 2010, the Company
recorded full valuation allowances against income tax benefits related to domestic and
international 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 April
3, 2010, 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 weeks ended April 3, 2010 and April 4, 2009. As of
April 3, 2010, the Company has $0.9 million accrued for uncertain income tax positions, including
interest and penalties. As of April 3, 2010, the Company believes that it is reasonably possible
that the liability for uncertain tax positions will decrease by $774,000 within the next 12 months
due to the expiration of the statute of limitations of tax filings in foreign jurisdictions.
13
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 2003. As of April 3, 2010, the Company has no income tax examinations in process.
9. Loans to Officers
As of April 3, 2010, 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 April 3, 2010 and January 2, 2010 totaled $300,000 and
are due in September 2011. This amount is 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 April 3,
2010.
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
Kentucky Higher Education Loan Revenue Bonds with a par value of $0.4 million and Missouri Higher
Education Loan Revenue Bonds with a par value of $1.8 million held as part of the Companys auction
rate securities portfolio with a UBS affiliate were sold on May 5, 2010, and May 10, 2010,
respectively. 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 was applied to the line of credit from UBS and its affiliates.
|
|
|
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 current economic slowdown and the difficult
conditions in the credit markets, 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 2, 2010. 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 2, 2010.
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
14
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 global investments in targeting the cable industry have re-positioned us to better serve
consolidating telecommunications carriers and the converging global media and entertainment
companies. 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. Subject to the
effects of cyclical economic conditions such as the current economic
slowdown, our efforts are helping us build what we believe is
a more sustainable revenue model over the long-term, which will enable 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, media and entertainment industries, as well as
providing our wireless and IP services within the communications sector.
Our financial results are affected by macroeconomic conditions, credit market conditions, and the
overall level of business confidence. Although the first quarter of 2010 has demonstrated positive
economic indications, the global economic downturn of 2008 and 2009 has resulted in significant
employee layoffs and reductions in capital and operating expenditures for some of our significant
clients in the communications, media and entertainment sectors. We are also experiencing greater
pricing pressure and an increased need for enhanced return on investment for projects or added
sharing of risk and reward.
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 to address a need or implement change. For the thirteen weeks ended April 3, 2010, revenues
increased 23.0% to $17.5 million from $14.2 million for the thirteen weeks ended April 4, 2009
driven primarily by increased project demand supported by a stronger macroeconomic environment
relative to fiscal year 2009. Our international revenues were approximately 25% of total revenue
during the thirteen weeks ended April 3, 2010, as compared to the thirteen weeks ended April 4,
2009 where international revenues were approximately 33% of total revenues. Our revenues are
denominated in multiple currencies and are impacted by currency rate fluctuations.
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, amortization of
acquired software intangibles, 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 37.8% in the thirteen weeks ended April 3, 2010 compared with 38.6% in thirteen
weeks ended April 4, 2009. The decrease in gross margin 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 competitive pricing decisions. In 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. Along with an
increase in revenues, selling, general and administrative expenses were reduced by $0.3 million to
$7.1 million for the thirteen weeks ended April 3, 2010 from $7.4 million for the thirteen weeks
ended April 4, 2009. With the increase in revenues and reduction in costs, our selling, general and
administrative expenses decreased as a percentage of revenues to 40.5% in the thirteen weeks ended
April 3, 2010 from 52.2% in the thirteen weeks ended April 4, 2009. Our current quarter selling
expenses included significant transition and severance for personnel associated with the
reorganization undertaken for 2010. This represented approximately 3% of revenues for the quarter
ended April 3, 2010. We will continue to evaluate selling, general and administrative expenses to
maintain an appropriate cost structure relative to revenue levels.
Intangible asset amortization included in operating expenses decreased to $0.4 million in the
thirteen weeks ended April 3, 2010 from $0.5 million in the thirteen weeks ended April 4, 2009. The
decrease in amortization expense was due to the completion of
15
amortization of some intangibles
recorded in connection with our acquisitions of Cartesian Ltd, RVA Consulting LLC and TWG
Consulting, Inc.
We recorded a net loss of $0.8 million for the thirteen weeks ended April 3, 2010, compared to a
net loss of $2.2 million for the thirteen weeks ended April 4, 2009. The decrease in net loss is
primarily attributable to an increase in revenues and gross profit, effective cost management
initiatives and a decrease in intangible amortization, partially offset by an increase in income
taxes. We made significant strides in recent years to reduce our total operating cost structure
with emphasis on selling, general and administrative expenses.
Despite the increase in revenues for the thirteen weeks ended April 3, 2010 as compared to the
thirteen weeks ended April 4, 2009, the rate of change in the communications industry, driving
convergence of media and telecommunications, consolidation of smaller providers and expanded
deployment of wireless capabilities have added both opportunity and uncertainty for our clients.
The general result is overall reduced client spending on many 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.
Cash flows used in operating activities were $2.7 million during the thirteen weeks ended April 3,
2010 and April 4, 2009. During the thirteen weeks ended April 3, 2010 the use of cash in operating
activities consisted almost entirely of changes in working capital balances as compared to the
thirteen weeks ended April 4, 2009, for which changes in working capital consisted of a $1.4
million use of cash with the remainder related to operating losses of the business.
At April 3, 2010, we had working capital of approximately $15.8 million, which included $3.7
million in short-term debt. In addition, working capital includes $5.5 million in short-term
investments. 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 $12.4 million ($12.8 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. In the
fourth quarter of fiscal year 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 a discretionary right to sell or
otherwise dispose of our auction rate securities, provided that we are entitled to the par value of
the auction rate securities upon any disposition. The par value of the liquidated securities, $2.1
million, was applied to the line of credit from UBS and its affiliates. As of April 3, 2010, we had
outstanding borrowings of $3.7 million under the UBS line of credit and there was no material
balance available to be borrowed. Given our intent to liquidate the collateral 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 April 3, 2010.
Kentucky Higher Education Loan Revenue Bonds with a par value of $0.4 million and Missouri Higher
Education Loan Revenue Bonds with a par value of $1.8 million held as part of the Companys auction
rate securities portfolio with a UBS affiliate were sold on May 5, 2010, and May 10, 2010,
respectively. 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 was applied to the line of credit from UBS and its affiliates.
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.
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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Impairment of Goodwill and Long-lived Assets; |
16
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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 21 to 35
years.
As of April 3, 2010 and January 2, 2010, $5.5 million and $5.4 million, respectively, of our
investments in auction rate securities are reflected as current assets on our Condensed
Consolidated Balance Sheet (unaudited). The par value of our auction rate securities classified as
current assets was $5.5 million as of April 3, 2010 and January 2, 2010. As of April 3, 2010 and
January 2, 2010,$6.9 million ($7.3 million par value) is reflected as non-current assets on our
Condensed Consolidated Balance Sheet (unaudited).
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 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.
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 $63,000 and $397,000, respectively,
during the thirteen weeks ended April 3, 2010 and April 4, 2009, respectively. For auction rate
securities classified as trading securities, we recognized realized holding gains of $110,000 and
$169,000, offset by realized losses on the Companys ARS Rights of $84,000 and $146,000,
respectively, during the thirteen weeks ended April 3, 2010 and April 4, 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.
17
Impairment of Goodwill and Long-lived Assets As of April 3, 2010, we had $7.5 million in
goodwill and $1.9 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.
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 concluded that 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 estimates. |
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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 fluctuate in the near term. |
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 $6.3 million and $6.2 million in revenues
from time and materials contracts during the thirteen weeks ended April 3, 2010 and April 4, 2009,
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 April 3, 2010 and
April 4, 2009, we recognized $11.1 million and $8.0 million in revenues on these other types of
contracts. 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-like method
described 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.
We also 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-like 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
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
18
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 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 weeks ended
April 3, 2010 or April 4, 2009.
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. 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.
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 April 3, 2010 is 38%.
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 April 3,
2010, 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 April 3, 2010, we have recorded a liability of approximately
$948,000 for unrecognized tax benefits.
We have generated substantial deferred income tax assets related to our domestic operations, and to
a lesser extent our international 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 and operating losses.
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 assets. We continue to evaluate our
ability to use recorded
19
deferred income tax asset balances. If we continue to report domestic or
international 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 carry-forwards 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 weeks ended April 3, 2010 and April 4, 2009, software development costs of
$139,000 and $145,000, respectively, were expensed as incurred. No software development costs were
capitalized during the thirteen weeks ended April 3, 2010 or April 4, 2009.
RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED APRIL 3, 2010 COMPARED TO THIRTEEN WEEKS ENDED APRIL 4, 2009
REVENUES
Revenues increased 23.0% to $17.5 million for the thirteen weeks ended April 3, 2010 from $14.2
million for the thirteen weeks ended April 4, 2009. The increase in revenues is primarily due to an
increase in demand for operational and strategic consulting within our North America segment
North America Segment North America segment revenues increased 33.0% to $13.1 million for the
thirteen weeks ended April 3, 2010 from $9.9 million for the same period of 2009. During the
thirteen weeks ended April 3, 2010, the North America segment provided services on 77 customer
projects, compared to 70 projects performed in the thirteen weeks ended April 4, 2009. Average
revenue per project was $170,000 in the thirteen weeks ended April 3, 2010, compared to $141,000 in
the thirteen weeks ended April 4, 2009. Revenues recognized in connection with fixed price
engagements totaled $8.7 million and $5.8 million, representing 66.1% and 58.6% of total revenues
of the segment, for the thirteen weeks ended April 3, 2010 and April 4, 2009, respectively. This
increase is primarily due to a continued shift in type of project to and customer preference for
fixed price engagements.
EMEA Segment EMEA segment revenues increased by 0.2% to $4.4 million for the thirteen weeks
ended April 3, 2010 from $4.3 million for the thirteen weeks ended April 4, 2009. All revenues were
generated internationally. During the thirteen weeks ended April 3, 2010 and April 4, 2009, this
segment provided services on 81 and 83 customer projects, respectively. Average revenue per project
was approximately $46,000 and $42,000, respectively, for the thirteen weeks ended April 3, 2010 and
April 4, 2009. Revenues from post-contract software related support services were approximately
$646,000 and $515,000 for the thirteen weeks ended April 3, 2010 and April 4, 2009, respectively.
There were no revenues from software licensing during the thirteen weeks ended April 3, 2010.
Revenues from software licensing during the thirteen weeks ended April 4, 2009 were $311,000.
COSTS OF SERVICES
Costs of services increased 24.5% to $10.9 million for the thirteen weeks ended April 3, 2010 from
$8.7 million for the thirteen weeks ended April 4, 2009. Our gross margin was 37.8% for the
thirteen weeks ended April 3, 2010 compared to 38.6% for the thirteen weeks ended April 4, 2009.
Our North America segment gross margin was 40.1% for the thirteen weeks ended April 3, 2010
compared to 40.4% for the thirteen weeks ended April 4, 2009. The decrease in gross margin in the
first quarter of 2010 as compared to the same period of 2009 in our North America segment is
primarily due to longer term and lower margin management consulting projects, partially offset by
an increase in strategy engagements resulting in higher utilization of our fixed employee
consulting base. Our EMEA segment gross margin was 30.8% for the thirteen weeks ended April 3,
2010, compared to 34.5% for the thirteen weeks ended April 4, 2009. Margin reductions in the EMEA
segment are primarily related to flat revenue volumes for the quarter combined with slightly
increased delivery costs experienced on select fixed price projects and a decrease in the mix of
software license revenues.
Costs of services in the EMEA segment included amortization of intangible assets of $146,000 and
$135,000, respectively, for the thirteen weeks ended April 3, 2010 and April 4, 2009, related to
acquired software.
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OPERATING EXPENSES
Operating expenses decreased 5.7% to $7.4 million for the thirteen weeks ended April 3, 2010, from
$7.9 million for the thirteen weeks ended April 4, 2009. 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 $7.1 million for the thirteen weeks ended
April 3, 2010, compared to $7.4 million for the thirteen weeks ended April 4, 2009. As a percentage
of revenues, our selling, general and administrative expenses were 40.5% for the thirteen weeks
ended April 3, 2010, compared to 52.2% for the thirteen weeks ended April 4, 2009. 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 and the effect of
exchange rate movements. The thirteen weeks ended April 3, 2010 included severance and transition
costs of approximately $0.5 million associated with the reorganization of our EMEA operations. For
the thirteen weeks ended April 3, 2010, we recognized immaterial gains related to foreign exchange
compared to losses of $134,000 for the thirteen weeks ended April 4, 2009.
Intangible asset amortization decreased by $111,000 to $363,000 for the thirteen weeks ended April
3, 2010, compared to $474,000 for the thirteen weeks ended April 4, 2009. The decrease in
amortization expense was primarily due to the completion of amortization of some intangibles
recorded in connection with acquisitions.
OTHER INCOME AND EXPENSES
Interest income was $64,000 and $82,000 for the thirteen weeks ended April 3, 2010 and April 4,
2009, respectively, and represented interest earned on invested balances. Interest income decreased
for the thirteen weeks ended April 3, 2010 as compared to the thirteen weeks ended April 4, 2009
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 April 3, 2010, other income includes $110,000 in realized holding gains for auction rate
securities classified as trading securities, offset by realized losses on our ARS Rights of
$84,000. For the thirteen weeks ended April 4, 2009, other income includes $169,000 in realized
holding gains for auction rate securities classified as trading securities, offset by realized
losses on our ARS Rights of $146,000.
INCOME TAXES
During the thirteen weeks ended April 3, 2010, we recorded an income tax provision of $7,000
compared to an income tax benefit of $122,000 during the thirteen weeks ended April 4, 2009. The
tax provision for the thirteen weeks ended April 3, 2010 is primarily due to interest recognized on
reserves for uncertain tax positions. The tax benefit for the thirteen weeks ended April 4, 2009 is
primarily related to a deferred tax benefit recognized on losses for the period in our United
Kingdom operations. For the thirteen weeks ended April 3, 2010 and April 4, 2009, 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. In addition, for the thirteen weeks ended April 3, 2010, we recorded no income
tax benefit related to our international pre-tax losses. We currently 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 $0.8 million for the thirteen weeks ended April 3, 2010 compared to a net loss
of $2.2 million for the thirteen weeks ended April 4, 2009. The decrease in net loss is primarily
attributable to an increase in revenues and gross profit, effective cost management initiatives and
a decrease in intangible amortization, partially offset by an increase in income taxes.
STATEMENT REGARDING NON-GAAP FINANCIAL MEASUREMENT
In addition to net loss and net loss per share on a GAAP basis, TMNG Globals management uses a
non-GAAP financial measure, Non-GAAP adjusted net income or loss, in its evaluation of our
performance, particularly when comparing performance to the prior years period and on a sequential
basis. This non-GAAP measure contains certain non-GAAP adjustments which are described in the
following schedule entitled Reconciliation of GAAP Net Loss to Non-GAAP Adjusted Net Income
(Loss). In making these non-GAAP adjustments, we take into account certain non-cash expenses and
benefits, including tax effects as applicable, and the impact of certain items that are generally
not expected to be on-going in nature or that are unrelated to our core operations. Management
believes the exclusion of these items provides a useful basis for evaluating underlying business
performance, but should not be considered in isolation and is not in accordance with, or a
substitute for, evaluating our performance utilizing GAAP financial
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information. We believe that providing such adjusted results allows investors and other users of
our financial statements to better understand TMNG Globals comparative operating performance for
the periods presented. TMNG Globals non-GAAP measure may differ from similar measures by other
companies, even if similar terms are used to identify such measures. Although TMNG Globals
management believes the non-GAAP financial measure is useful in evaluating the performance of its
business, TMNG Global acknowledges that items excluded from such measure have a material impact on
our net loss and net loss per share calculated in accordance with GAAP. Therefore, management uses
non-GAAP measures in conjunction with GAAP results. Investors and other users of our financial
information should also consider the above factors when evaluating TMNG Globals results. All per
share amounts have been adjusted to reflect the 1-for-5 reverse stock split of the Companys common
stock effective February 7, 2010.
RECONCILIATION OF GAAP NET LOSS TO NON-GAAP ADJUSTED NET INCOME (LOSS)
(unaudited)
(in thousands, except per share data)
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Thirteen Weeks |
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Thirteen Weeks |
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|
Ended |
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Ended |
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April 3, |
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April 4, |
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2010 |
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2009 |
|
Reconciliation of GAAP net loss to non-GAAP adjusted net income (loss): |
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GAAP net loss |
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$ |
(753 |
) |
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$ |
(2,184 |
) |
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|
|
|
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|
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|
|
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Realized gain on auction rate securities |
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(26 |
) |
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(23 |
) |
Depreciation and amortization |
|
|
705 |
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|
|
796 |
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Non-cash share based compensation expense |
|
|
113 |
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|
|
308 |
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Tax effect of applicable non-GAAP adjustments |
|
|
34 |
|
|
|
(158 |
) |
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|
|
|
|
|
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Adjustments to GAAP net loss |
|
|
826 |
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|
|
923 |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP adjusted net income (loss) |
|
$ |
73 |
|
|
$ |
(1,261 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of GAAP net loss per diluted common share to non-GAAP
adjusted net income (loss) per diluted common share: |
|
|
|
|
|
|
|
|
GAAP net loss per diluted common share |
|
$ |
(0.11 |
) |
|
$ |
(0.31 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized gain on auction rate securities |
|
|
0.00 |
|
|
|
0.00 |
|
Depreciation and amortization |
|
|
0.10 |
|
|
|
0.11 |
|
Non-cash share based compensation expense |
|
|
0.02 |
|
|
|
0.04 |
|
Tax effect of applicable non-GAAP adjustments |
|
|
0.00 |
|
|
|
(0.02 |
) |
|
|
|
|
|
|
|
Adjustments to GAAP net loss per diluted common share |
|
|
0.12 |
|
|
|
0.13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP adjusted net income (loss) per diluted common share |
|
$ |
0.01 |
|
|
$ |
(0.18 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in calculation of diluted net loss per common share |
|
|
7,027 |
|
|
|
6,950 |
|
|
|
|
|
|
|
|
LIQUIDITY AND CAPITAL RESOURCES
Net cash flows used in operating activities were $2.7 million during the thirteen weeks ended April
3, 2010 and April 4, 2009. During the thirteen weeks ended April 3, 2010 the use of cash was
primarily due to changes in net working capital. During the thirteen weeks ended April 4, 2009,
$1.4 million of the use in cash was due to changes in net working capital with the remainder due to
operating losses.
Net cash used in investing activities was $0.1 million and $0.7 million for the thirteen weeks
ended April 3, 2010 and April 4, 2009, respectively. Investing activities for the thirteen weeks
ended April 4, 2009 included $0.7 million in earn-out payments related to the acquisition of
Cartesian Ltd. Net cash used in investing activities also included $0.1 million for the thirteen
weeks ended April 3, 2010 and April 4, 2009 related to the purchase of office equipment, software
and computer equipment.
Net cash provided by financing activities was $0.7 million and $3.2 million for the thirteen weeks
ended April 3, 2010 and April 4, 2009, respectively. Financing activities included $0.9 million and
$3.4 million, respectively, in proceeds from line of credit
22
borrowings during the thirteen weeks
ended April 3, 2010 and April 4, 2009. In addition, in both periods cash was used to make payments
on unfavorable contract obligations.
At April 3, 2010, we had approximately $3.9 million in cash and cash equivalents ($2.1 million of
which was denominated in pounds sterling) and $15.8 million in net working capital. In addition, as
discussed below, we have established lines of credit totaling $7.3 million as of April 3, 2010
against our auction rate securities portfolio, of which we had borrowed $3.7 million at April 3,
2010. We believe we have sufficient cash and short-term investments and access to lines of credit
to meet anticipated cash requirements, including anticipated capital expenditures and earn-out
payments for at least the next 12 months. Furthermore, based on an analysis of our investments
classified as cash equivalents, we do not believe that we have any material risk related to the
liquidity or valuation of these investments, nor do we believe that we have any counterparty credit
risk related to these investments. Should our cash and short-term investments 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 on 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. Our strong balance sheet has
enabled us to make acquisitions and related investments in intellectual property and businesses we
believe are enabling us to capitalize on the current transformation of the industry; however, if
demand for our consulting services is reduced and we 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
events in the credit markets since 2008. As of April 3, 2010, we held auction rate securities in
the face amount of $12.8 million collateralized by government guaranteed student loans. The
estimated fair value of the auction rate securities and related ARS Rights was $12.4 million as of
April 3, 2010. 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 21 to 35
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 April 3, 2010 the ARS Rights had an estimated fair value of $0.2 million.
Pursuant to the settlement, we entered into a line of credit with UBS and its affiliates for up to
75% of the market value of our 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 April 3, 2010, we
had outstanding borrowings of $3.7 million under the line of credit and there was no material
balance available to be borrowed. These borrowings were used to fund short-term liquidity needs.
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 April 3, 2010 that we would pay on amounts borrowed is the federal funds
rate plus 3.08%. 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.
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
23
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 April 3, 2010. The remaining auction rate securities
held in accounts with Citigroup are
classified as noncurrent investments in the Condensed Consolidated Balance Sheet (unaudited) as of
April 3, 2010. We have classified the borrowings from UBS as a current liability in the Condensed
Consolidated Balance Sheet (unaudited) as of April 3, 2010.
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 in accordance with FASB ASC 320, which could be material.
FINANCIAL COMMITMENTS
During fiscal year 2007, we acquired all of the outstanding membership interests of RVA. In
addition to consideration paid at closing for this acquisition, we have potential contingent
purchase price obligations of approximately $0.4 million at April 3, 2010 related to future
earn-out consideration based upon the performance of RVA after the closing date.
During fiscal year 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 April 3, 2010, we have
an obligation of $256,000 remaining under this commitment.
On March 31, 2010, the independent members of our Board of Directors approved an executive
incentive compensation plan for fiscal year 2010 (the Plan). The Plan establishes a cash bonus
pool (the Pool) for our principal executive officer, president and chief operating officer, and
principal financial officer if we meet or exceed a non-GAAP EBITDA target (as defined) of
$2,750,000 for fiscal year 2010. The calculation of the Non-GAAP EBITDA target excludes non-cash
charges (e.g., share-based compensation expense, etc.) and may exclude extraordinary one-time items
to the extent determined to be appropriate by the Compensation Committee. The amount available for
payment from the Pool (Payout Amount) shall be a specified lump sum amount at certain thresholds
of 2010 Non-GAAP EBITDA (as reduced by the Payout Amount) per the following schedule:
|
|
|
|
|
Non-GAAP EBITDA |
|
|
(Post Bonus) Exceeds |
|
Payout Amount |
$2,750,000 |
|
$ |
450,000 |
|
$3,025,000 |
|
$ |
575,000 |
|
$3,300,000 |
|
$ |
700,000 |
|
$3,630,000 |
|
$ |
770,000 |
|
$3,970,000 |
|
$ |
830,000 |
|
$4,310,000 |
|
$ |
890,000 |
|
In no event will the Payout Amount exceed $890,000. The distribution of the Payout Amount, if any,
among the Companys eligible executive management will be determined by the Companys Compensation
Committee and/or independent directors at a later date.
TRANSACTIONS WITH RELATED PARTIES
During the thirteen weeks ended April 3, 2010 and April 4, 2009, we incurred legal fees of $4,000
and $6,000, 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
thirteen weeks ended April 3, 2010 were in connection with income tax and other legal matters. Fees
incurred in the thirteen weeks ended April 4, 2009 were in connection with earn-out payments
related to our acquisition of Cartesian. 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 April 3, 2010, 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 April 3, 2010 totaled $300,000 and are due in September
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 April 3, 2010.
|
|
|
ITEM 3. |
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Not applicable.
24
|
|
|
ITEM 4. |
|
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 April 3, 2010.
There was no change in internal control over financial reporting during the fiscal quarter ended
April 3, 2010, that has materially affected or is reasonably likely to materially affect our
internal control over financial reporting.
|
|
|
ITEM 4T. |
|
CONTROLS AND PROCEDURES |
Not applicable.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We have not been subject to any material new litigation since the filing on April 1, 2010 of our
Annual Report on Form 10-K for the year ended January 2, 2010.
ITEM 1A. RISK FACTORS
Not applicable
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. REMOVED AND RESERVED
None
ITEM 5. OTHER INFORMATION
None
25
ITEM 6. EXHIBITS
(a) Exhibits
|
|
|
Exhibit 3.1
|
|
Amended and Restated Certificate of Incorporation, as amended, filed as Exhibit
3.1 to the Companys Current Report on Form 8-K filed with the Securities and
Exchange Commission on February 5, 2010, is incorporated herein by reference as
Exhibit 3.1. |
|
|
|
Exhibit 10.1
|
|
The Management Network Group, Inc. 2010 Executive Incentive Compensation Plan,
filed as Exhibit 10.1 to the Companys Current Report on Form 8-K filed with the
Securities and Exchange Commission on April 6, 2010, is incorporated herein by
reference as Exhibit 10.1. |
|
|
|
Exhibit 31.
|
|
Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
Exhibit 32.
|
|
Certifications furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
26
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.
|
|
|
|
|
|
|
The Management Network Group, Inc.
(Registrant)
|
|
Date: May 18, 2010 |
By |
/s/ Richard P. Nespola
|
|
|
|
(Signature) |
|
|
|
Richard P. Nespola
Chairman and Chief Executive Officer
(Principal executive officer) |
|
|
|
|
|
|
|
Date: May 18, 2010 |
By |
/s/ Donald E. Klumb
|
|
|
|
(Signature) |
|
|
|
Donald E. Klumb
Chief Financial Officer and Treasurer
(Principal financial officer and principal
accounting officer) |
|
27
EXHIBIT INDEX
|
|
|
Exhibit No. |
|
Description of Exhibit |
Exhibit 3.1
|
|
Amended and Restated Certificate of Incorporation, as amended, filed as Exhibit
3.1 to the Companys Current Report on Form 8-K filed with the Securities and
Exchange Commission on February 5, 2010, is incorporated herein by reference as
Exhibit 3.1. |
|
|
|
Exhibit 10.1
|
|
The Management Network Group, Inc. 2010 Executive Incentive Compensation Plan,
filed as Exhibit 10.1 to the Companys Current Report on Form 8-K filed with the
Securities and Exchange Commission on April 6, 2010, is incorporated herein by
reference as Exhibit 10.1. |
|
|
|
Exhibit 31.
|
|
Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
Exhibit 32.
|
|
Certifications furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
28