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 July 3, 2010
or
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o |
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Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Commission file number: 001-34006
THE MANAGEMENT NETWORK GROUP, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE
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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
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Smaller reporting company þ |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
As of August 13, 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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15 |
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25 |
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25 |
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26 |
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26 |
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26 |
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26 |
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26 |
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26 |
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26 |
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27 |
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28 |
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EX-31 |
EX-32 |
Page 2 of 31
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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July 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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$ |
8,432 |
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$ |
6,301 |
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Short-term investments |
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5,444 |
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Receivables: |
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Accounts receivable |
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10,027 |
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11,991 |
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Accounts receivable unbilled |
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4,967 |
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4,174 |
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14,994 |
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16,165 |
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Less: Allowance for doubtful accounts |
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(258 |
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(357 |
) |
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Net receivables |
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14,736 |
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15,808 |
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Prepaid and other current assets |
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1,107 |
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1,206 |
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Total current assets |
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24,275 |
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28,759 |
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NONCURRENT ASSETS: |
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Property and equipment, net |
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1,808 |
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1,955 |
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Goodwill |
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7,911 |
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7,772 |
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Identifiable intangible assets, net |
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1,445 |
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2,516 |
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Noncurrent investments |
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6,853 |
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6,852 |
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Other noncurrent assets |
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348 |
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397 |
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Total Assets |
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$ |
42,640 |
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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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$ |
1,008 |
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$ |
1,118 |
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Current borrowings |
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2,800 |
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Accrued payroll, bonuses and related expenses |
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4,674 |
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5,354 |
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Other accrued liabilities |
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1,880 |
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1,433 |
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Deferred revenue |
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659 |
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1,023 |
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Unfavorable and other contractual obligations |
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417 |
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706 |
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Total current liabilities |
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8,638 |
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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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528 |
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546 |
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Other noncurrent liabilities |
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1,231 |
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1,237 |
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Total noncurrent liabilities |
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1,759 |
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1,783 |
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Commitments and contingencies (Note 10) |
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Total stockholders equity |
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32,243 |
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34,034 |
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Total Liabilities and Stockholders Equity |
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$ |
42,640 |
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$ |
48,251 |
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See notes to unaudited condensed consolidated financial statements.
Page 3 of 31
THE MANAGEMENT NETWORK GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share data)
(unaudited)
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Thirteen Weeks Ended |
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Twenty-six Weeks Ended |
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July 3, |
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July 4, |
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July 3, |
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July 4, |
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2010 |
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2009 |
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2010 |
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2009 |
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Revenues |
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$ |
16,971 |
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$ |
16,825 |
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$ |
34,430 |
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$ |
31,022 |
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Cost of services (includes non-cash share-based
compensation expense of $27 and $80 for the
thirteen weeks ended July 3, 2010 and July 4,
2009, respectively, and $61 and $168 for the
twenty-six weeks ended July 3, 2010 and July 4,
2009, respectively) |
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10,328 |
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9,490 |
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21,185 |
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18,208 |
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Gross Profit |
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6,643 |
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7,335 |
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13,245 |
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12,814 |
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Operating Expenses: |
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Selling, general and administrative (includes
non-cash share-based compensation expense of
$57 and $163 for the thirteen weeks ended July
3, 2010 and July 4, 2009, respectively, and
$136 and $383 for the twenty-six weeks ended
July 3, 2010 and July 4, 2009, respectively) |
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6,807 |
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7,354 |
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13,875 |
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14,762 |
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Intangible asset amortization |
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358 |
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491 |
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721 |
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965 |
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Total operating expenses |
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7,165 |
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7,845 |
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14,596 |
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15,727 |
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Loss from operations |
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(522 |
) |
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(510 |
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(1,351 |
) |
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(2,913 |
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Other income (expense) |
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Interest income |
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44 |
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56 |
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108 |
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138 |
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Interest expense |
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(7 |
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(17 |
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(16 |
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(25 |
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Other income |
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30 |
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83 |
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58 |
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106 |
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Total other income |
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67 |
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122 |
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150 |
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219 |
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Loss before income tax provision |
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(455 |
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(388 |
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(1,201 |
) |
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(2,694 |
) |
Income tax (provision) benefit |
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(42 |
) |
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38 |
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(49 |
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160 |
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Net loss |
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(497 |
) |
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(350 |
) |
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(1,250 |
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(2,534 |
) |
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Other comprehensive income (loss): |
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Foreign currency translation adjustment |
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(22 |
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1,725 |
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(817 |
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2,107 |
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Unrealized gain (loss) on marketable securities |
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(62 |
) |
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291 |
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1 |
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688 |
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Comprehensive income (loss) |
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$ |
(581 |
) |
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$ |
1,666 |
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$ |
(2,066 |
) |
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$ |
261 |
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Loss per common share |
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Basic and diluted |
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$ |
(0.07 |
) |
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$ |
(0.05 |
) |
|
$ |
(0.18 |
) |
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$ |
(0.36 |
) |
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Weighted average shares used in calculation of
net loss per basic and diluted common share |
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7,038 |
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6,958 |
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7,033 |
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6,954 |
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See notes to unaudited condensed consolidated financial statements.
Page 4 of 31
THE MANAGEMENT NETWORK GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
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For the Twenty-six Weeks Ended |
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July 3, |
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July 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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$ |
(1,250 |
) |
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$ |
(2,534 |
) |
Adjustments to reconcile net loss to net cash used in operating activities: |
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Depreciation and amortization |
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1,393 |
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1,656 |
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Share-based compensation |
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197 |
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|
551 |
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Deferred income taxes |
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68 |
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(168 |
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Realized gains on investments |
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(56 |
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(105 |
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Other |
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(22 |
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Other changes in operating assets and liabilities: |
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Accounts receivable |
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1,608 |
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(734 |
) |
Accounts receivable unbilled |
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(939 |
) |
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(440 |
) |
Prepaid and other assets |
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122 |
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|
158 |
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Trade accounts payable |
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(98 |
) |
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8 |
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Deferred revenue |
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(316 |
) |
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|
1,046 |
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Accrued liabilities |
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(365 |
) |
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|
1,057 |
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Net cash provided by operating activities |
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|
342 |
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|
495 |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Proceeds from maturities/sales of short-term investments |
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5,500 |
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Acquisition of businesses |
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(703 |
) |
Acquisition of property and equipment, net |
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(314 |
) |
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(255 |
) |
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Net cash provided by (used in) investing activities |
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5,186 |
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(958 |
) |
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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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Payments on line of credit |
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(3,680 |
) |
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(41 |
) |
Payments made on long-term obligations |
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(352 |
) |
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|
(336 |
) |
Issuance of common stock through employee stock purchase plan |
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23 |
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10 |
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Net cash (used in) provided by financing activities |
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(3,129 |
) |
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|
3,033 |
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Effect of exchange rate on cash and cash equivalents |
|
|
(268 |
) |
|
|
1,011 |
|
|
|
|
|
|
|
|
|
|
|
|
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Net increase in cash and cash equivalents |
|
|
2,131 |
|
|
|
3,581 |
|
Cash and cash equivalents, beginning of period |
|
|
6,301 |
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|
|
5,956 |
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|
|
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Cash and cash equivalents, end of period |
|
$ |
8,432 |
|
|
$ |
9,537 |
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Supplemental disclosure of cash flow information: |
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Cash paid during period for interest |
|
$ |
16 |
|
|
$ |
25 |
|
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Cash paid during period for taxes, net of refunds |
|
$ |
(105 |
) |
|
$ |
135 |
|
|
|
|
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|
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Accrued property and equipment additions |
|
$ |
276 |
|
|
$ |
470 |
|
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|
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Supplemental disclosure of non-cash investing and and financing transactions |
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Acquisition of business: Common Stock |
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$ |
53 |
|
|
$ |
104 |
|
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Acquisition of business: Consideration Payable |
|
$ |
344 |
|
|
$ |
981 |
|
|
|
|
|
|
|
|
See notes to unaudited condensed consolidated financial statements.
Page 5 of 31
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
July 3, 2010, and for the thirteen and twenty-six weeks ended July 3, 2010 and July 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. The
results of operations for the thirteen and twenty-six weeks ended July 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 and twenty-six weeks
ended July 3, 2010, software development costs of $184,000 and $323,000, respectively, were
expensed as incurred. During the thirteen and twenty-six weeks ended July 4, 2009, software
development costs of $101,000 and $246,000, respectively, were expensed as incurred. No software
development costs were capitalized during the thirteen and twenty-six weeks ended July 3, 2010 and
July 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 losses included
in results of operations were $41,000 and $36,000, respectively, during the thirteen and twenty-six
weeks ended July 3, 2010. Realized and unrealized exchange losses included in results of operations
were $417,000 and $551,000, respectively, during the thirteen and twenty-six weeks ended July 4,
2009.
Derivative Financial Instruments As of July 3, 2010, the Company had open foreign currency
forward contracts with a combined notional amount of $0.5 million. These forward contracts provide
an economic hedge of fluctuations in euro denominated accounts receivable against the British
pound, but have not been designated as hedges for accounting purposes. The Company utilizes
valuation models for these forward contracts that rely exclusively on Level 2 inputs, as defined by the Financial Accounting Standards
Board (FASB) Accounting Standards Codification (ASC) 820, Fair Value Measurement and
Disclosures. These contracts expire on August 31, 2010 and February 22, 2011. During the thirteen
and twenty-six weeks ended July 3, 2010, the Company recognized gains on these forward contracts of
$11,000. During the thirteen and twenty-six weeks ended July 4, 2009, the Company recognized
losses on these forward contracts of $14,000 and $39,000, respectively. Recognized gains and
losses on forward contracts are included in selling, general and administrative expenses in the
Condensed Consolidated Statement of Operations and Comprehensive Income (Loss) (unaudited).
Page 6 of 31
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 and twenty-six weeks ended July 3,
2010 and July 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 July 2010, the FASB issued ASU 2010-20, Disclosures about the Credit Quality of Financing
Receivables and the Allowance for Credit Losses. The guidance will significantly expand the
disclosures that companies must make about the credit quality of financing receivables and the
allowance for credit losses. The disclosures as of the end of the reporting period are effective
for the Companys interim and annual periods ending on or after December 15, 2010. The disclosures
about activity that occurs during a reporting period are effective for the Companys interim and
annual periods beginning on or after December 15, 2010. The objectives of the enhanced disclosures
are to provide financial statement users with additional information about the nature of credit
risks inherent in the Companys financing receivables, how credit risk is analyzed and assessed
when determining the allowance for credit losses, and the reasons for the change in the allowance
for credit losses. The adoption of this Update requires enhanced disclosures and is not expected to
have a significant effect on the Companys financial statements.
2. Auction Rate Securities
As of July 3, 2010 and January 2, 2010, TMNG held $6.9 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 July 3, 2010, which is included in Noncurrent investments on the
Condensed Consolidated Balance Sheet (unaudited), consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at |
|
|
|
|
|
|
|
Unrealized |
|
|
July 3, 2010 |
|
Issuer |
|
Cost Basis |
|
|
Losses |
|
|
(Noncurrent) |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Available-for-Sale Securities |
|
|
|
|
|
|
|
|
|
|
|
|
Education Funding Capital Education Loan Backed Notes |
|
$ |
6,250 |
|
|
$ |
(347 |
) |
|
$ |
5,903 |
|
Brazos Student Finance Corporation Student Loan Asset Backed Notes |
|
|
1,000 |
|
|
|
(50 |
) |
|
|
950 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
7,250 |
|
|
$ |
(397 |
) |
|
$ |
6,853 |
|
|
|
|
Page 7 of 31
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 |
|
|
|
|
During the thirteen and twenty-six weeks ended July 3, 2010, the Company recognized gains of
$30,000 and $56,000, respectively, on auction rate securities classified as trading securities.
During the thirteen and twenty-six weeks ended July 4, 2009, the Company recognized gains of
$82,000 and $105,000, respectively, on auction rate securities classified as trading securities.
These gains and losses on trading securities have been recognized in Other income in the Condensed
Consolidated Statements of Operations and Comprehensive Income (Loss) (unaudited).
The auction rate securities the Company holds are 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 28 to 32 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. 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
provided 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.
While the ARS Rights resulted in a put option which represents a separate freestanding instrument,
the put option did not meet the definition of a derivative instrument under FASB ASC 815,
Derivatives and Hedging. The Company 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.
Page 8 of 31
During the thirteen weeks ended July 3, 2010, all of the remaining auction rate securities held
with a UBS affiliate were sold by the Company at par value of $5.5 million. Proceeds from the
liquidation were applied first to the $3.7 million outstanding balance of the line of credit from
UBS. The Company received the remaining $1.8 million in proceeds. Upon the liquidation of the
Companys auction rate securities portfolio held with the UBS affiliate, the ARS Rights terminated
unexercised. The ARS Rights were measured at fair value under FASB ASC 825 until UBSs purchase of
the auction rate securities in connection with the ARS Rights.
For auction rate securities classified as available-for-sale, the Company recognized unrealized
holding (losses) gains of ($62,000) and $1,000, respectively during the thirteen and twenty-six
weeks ended July 3, 2010 and recognized unrealized holding gains of $292,000 and $689,000 during
the thirteen and twenty-six weeks ended July 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 Income (Loss) (unaudited).
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 twenty-six weeks ended July 3, 2010 and July 4,
2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the |
|
|
For the |
|
|
|
twenty-six weeks |
|
|
twenty-six weeks |
|
|
|
ended July 3, 2010 |
|
|
ended July 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 Income
(Loss) (unaudited) |
|
|
56 |
|
|
|
105 |
|
Total unrealized gains (losses)
included in Other comprehensive
income (loss) in the Consolidated
Statements of Operations and
Comprehensive Income (Loss)
(unaudited) |
|
|
1 |
|
|
|
689 |
|
Sales |
|
|
(5,500 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value at end of period |
|
$ |
6,853 |
|
|
$ |
14,198 |
|
|
|
|
|
|
|
|
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 July 3, 2010 and
July 4, 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the |
|
|
For the |
|
|
|
thirteen |
|
|
thirteen |
|
|
|
weeks |
|
|
weeks |
|
|
|
ended |
|
|
ended |
|
|
|
July 3, |
|
|
July 4, |
|
|
|
2010 |
|
|
2009 |
|
Fair value at beginning of period |
|
$ |
12,385 |
|
|
$ |
13,824 |
|
Total unrealized and realized gains
(losses) included in Other income in
the Consolidated Statements of
Operations and Comprehensive Income
(Loss) (unaudited) |
|
|
30 |
|
|
|
82 |
|
Total unrealized gains (losses)
included in Other comprehensive
income (loss) in the Consolidated
Statements of Operations and
Comprehensive Income (Loss)
(unaudited) |
|
|
(62 |
) |
|
|
292 |
|
Sales |
|
|
(5,500 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value at end of period |
|
$ |
6,853 |
|
|
$ |
14,198 |
|
|
|
|
|
|
|
|
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 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 as of January 2, 2010. The remaining auction rate securities are classified as noncurrent investments in the
Condensed Consolidated Balance Sheet (unaudited) as of July 3, 2010 and the Condensed Consolidated
Balance Sheet as of January 2, 2010.
Page 9 of 31
3. Line of Credit Agreements
As discussed above in Note 2, Auction Rate Securities, in November of 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 provided 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 pledged as collateral. The
interest that the Company paid on the line of credit did not exceed the interest that the Company
received on the auction rate securities pledged to UBS as security for the line of credit.
During the thirteen weeks ended July 3, 2010, the Company liquidated the auction rate securities
with a par value of $5.5 million pledged as collateral for the line of credit with UBS. Proceeds
from the liquidation were applied first to the $3.7 million outstanding balance of the line of
credit. The Company received the remaining $1.8 million in proceeds. Upon liquidation of the
relevant auction rate securities, the line of credit with UBS was terminated. 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. An additional $880,000 was borrowed during the
twenty-six weeks ended July 3, 2010. These borrowings were used to fund short-term liquidity needs.
Because amounts borrowed under the line of credit accrued interest at a floating rate and had a
remaining maturity of less than one year, the fair value of this financial instrument approximated
its carrying value.
On March 19, 2009, the Company entered into a loan agreement with Citigroup Global Markets, Inc.
(Citigroup) to provide liquidity for the Companys $7.3 million auction rate securities portfolio
held with Citigroup. Under the loan agreement, the Company has access to a revolving line of credit
of up to 50% of the par value of the auction rate securities that the Company has pledged as
collateral, or $3.625 million. The current interest rate on the line of credit is the federal funds
rate plus 3.08%. 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
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 cash consideration earned but not yet paid |
|
|
344 |
|
Contingent stock consideration earned (based on June 30, 2008 measurement date) |
|
|
921 |
|
Contingent stock consideration earned (based on June 30, 2009 measurement date) |
|
|
104 |
|
Contingent stock consideration earned but not yet paid (based on June 30, 2010 measurement date) |
|
|
53 |
|
|
|
|
|
|
|
|
|
|
Total purchase price recognized at July 3, 2010 |
|
$ |
11,567 |
|
|
|
|
|
The measurement date for contingent cash and stock consideration was June 30 of each of the
three years subsequent to the transaction. During the thirteen weeks ended July 3, 2010, we
accrued $344,000 in contingent cash consideration earned but not yet paid for the measurement
period ended June 30, 2010. As of July 3, 2010, $344,000 is included in Other accrued liabilities
on the Condensed Consolidated Balance Sheet (unaudited). This liability is expected to be paid
during the thirteen weeks ending January 1, 2011. The final measurement date was June 30, 2010. As
a result, there is no remaining contingent consideration to be earned related to this acquisition
as of July 3, 2010.
Page 10 of 31
5. Goodwill and Other Identifiable Intangible Assets
The changes in the carrying amount of goodwill for the thirteen weeks ended July 3, 2010 are as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North |
|
|
|
|
|
|
|
|
|
America |
|
|
EMEA |
|
|
Total |
|
Balance as of January 2, 2010 |
|
$ |
3,550 |
|
|
$ |
4,222 |
|
|
$ |
7,772 |
|
2010 RVA goodwill from contingent consideration earned |
|
|
397 |
|
|
|
|
|
|
|
397 |
|
Changes in foreign currency exchange rates |
|
|
|
|
|
|
(258 |
) |
|
|
(258 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of July 3, 2010 |
|
$ |
3,947 |
|
|
$ |
3,964 |
|
|
$ |
7,911 |
|
|
|
|
|
|
|
|
|
|
|
Included in intangible assets, net are the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 3, 2010 |
|
|
January 2, 2010 |
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Accumulated |
|
|
|
Cost |
|
|
Amortization |
|
|
Cost |
|
|
Amortization |
|
Customer relationships |
|
$ |
5,223 |
|
|
$ |
(4,074 |
) |
|
$ |
5,342 |
|
|
$ |
(3,511 |
) |
Acquired software |
|
|
2,278 |
|
|
|
(1,994 |
) |
|
|
2,427 |
|
|
|
(1,820 |
) |
Employment agreements |
|
|
1,919 |
|
|
|
(1,907 |
) |
|
|
2,018 |
|
|
|
(1,940 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
9,420 |
|
|
$ |
(7,975 |
) |
|
$ |
9,787 |
|
|
$ |
(7,271 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible amortization expense for the thirteen weeks ended July 3, 2010 and July 4, 2009 was
$498,000 and $637,000, respectively, including $140,000 and $146,000 reported in cost of services
for the thirteen weeks ended July 3, 2010 and July 4, 2009, respectively. Intangible amortization
expense for the twenty-six weeks ended July 3, 2010 and July 4, 2009 was $1,007,000 and $1,246,000,
respectively, including $286,000 and $281,000 reported in cost of services for the twenty-six weeks
ended July 3, 2010 and July 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 |
|
$ |
949 |
|
|
$ |
284 |
|
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 or twenty-six weeks ended July 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 or twenty-six weeks ended
July 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 and twenty-six weeks ended July 3, 2010, the Company recognized no income tax
benefits related to share-based compensation arrangements. The Company recognized income tax
benefits of $34,000 and $73,000, respectively, during the thirteen and twenty-six weeks ended
July 4, 2009 related to share-based compensation arrangements.
Page 11 of 31
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 July 3, 2010 and changes during the twenty-six weeks then ended is
presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Exercise |
|
|
|
Shares |
|
|
Price |
|
Outstanding at January 2, 2010 |
|
|
763,547 |
|
|
$ |
17.57 |
|
Forfeited/cancelled |
|
|
(103,247 |
) |
|
$ |
51.24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at July 3, 2010 |
|
|
660,300 |
|
|
$ |
12.30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested and expected to vest at July 3, 2010 |
|
|
629,438 |
|
|
$ |
12.40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at July 3, 2010 |
|
|
577,177 |
|
|
$ |
12.62 |
|
|
|
|
|
|
|
|
Nonvested Shares
A summary of the status of nonvested stock issued under the 1998 Plan as of July 3, 2010 and
changes during the twenty-six weeks then ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average Grant |
|
|
|
Shares |
|
|
Date Fair Value |
|
Outstanding at January 2, 2010 |
|
|
1,250 |
|
|
$ |
10.95 |
|
Vested |
|
|
(500 |
) |
|
$ |
10.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at July 3, 2010 |
|
|
750 |
|
|
$ |
11.25 |
|
|
|
|
|
|
|
|
2000 Supplemental Stock Plan
A summary of the option activity under the Companys 2000 Supplemental Stock Plan (the
Supplemental Stock Plan) as of July 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 |
|
|
(18,925 |
) |
|
$ |
10.35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at July 3, 2010 |
|
|
255,687 |
|
|
$ |
11.84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested and expected to vest at July 3, 2010 |
|
|
226,895 |
|
|
$ |
12.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at July 3, 2010 |
|
|
173,462 |
|
|
$ |
12.68 |
|
|
|
|
|
|
|
|
The Supplemental Stock Plan expired May 23, 2010. The outstanding awards issued pursuant to
the Supplemental Stock Plan will remain subject to the terms of the Supplemental Stock Plan
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
Page 12 of 31
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. The EMEA segment is a single reportable, operating segment that encompasses our
operational, technology and software consulting operations outside of North America. 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 or twenty-six weeks ended July 3, 2010 or July 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 America |
|
|
EMEA |
|
|
Not Allocated
to Segments |
|
|
Total |
|
As of and for the twenty-six weeks ended July 3, 2010: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
26,442 |
|
|
$ |
7,988 |
|
|
|
|
|
|
$ |
34,430 |
|
Income (loss) from operations |
|
|
7,121 |
|
|
|
1,466 |
|
|
$ |
(9,938 |
) |
|
|
(1,351 |
) |
Total assets |
|
$ |
9,500 |
|
|
$ |
5,493 |
|
|
$ |
27,647 |
|
|
$ |
42,640 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the thirteen weeks ended July 3, 2010: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
13,336 |
|
|
$ |
3,635 |
|
|
|
|
|
|
$ |
16,971 |
|
Income (loss) from operations |
|
|
3,533 |
|
|
|
680 |
|
|
$ |
(4,735 |
) |
|
|
(522 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the twenty-six weeks ended July 4, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
22,046 |
|
|
$ |
8,976 |
|
|
|
|
|
|
$ |
31,022 |
|
Income (loss) from operations |
|
|
5,361 |
|
|
|
2,139 |
|
|
$ |
(10,413 |
) |
|
|
(2,913 |
) |
Total assets |
|
$ |
8,571 |
|
|
$ |
6,182 |
|
|
$ |
39,197 |
|
|
$ |
53,950 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the thirteen weeks ended July 4, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
12,191 |
|
|
$ |
4,634 |
|
|
|
|
|
|
$ |
16,825 |
|
Income (loss) from operations |
|
|
3,541 |
|
|
|
1,089 |
|
|
$ |
(5,140 |
) |
|
|
(510 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of the fiscal year ended January 2, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
9,704 |
|
|
$ |
6,461 |
|
|
$ |
32,086 |
|
|
$ |
48,251 |
|
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 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 |
|
|
For the Twenty-six Weeks Ended |
|
|
|
July 3, 2010 |
|
|
July 4, 2009 |
|
|
July 3, 2010 |
|
|
July 4, 2009 |
|
United States |
|
$ |
12,701 |
|
|
$ |
11,999 |
|
|
$ |
25,714 |
|
|
$ |
21,514 |
|
|
International: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United Kingdom |
|
|
4,113 |
|
|
|
4,207 |
|
|
|
8,169 |
|
|
|
8,356 |
|
Other |
|
|
157 |
|
|
|
619 |
|
|
|
547 |
|
|
|
1,152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
16,971 |
|
|
$ |
16,825 |
|
|
$ |
34,430 |
|
|
$ |
31,022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 13 of 31
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 twenty-six weeks |
|
|
For the twenty-six weeks |
|
|
|
ended July 3, 2010 |
|
|
ended July 4, 2009 |
|
|
|
North America |
|
|
EMEA |
|
|
North America |
|
|
EMEA |
|
Customer A |
|
|
|
|
|
$ |
3,571 |
|
|
|
|
|
|
$ |
3,479 |
|
Customer B |
|
$ |
10,240 |
|
|
|
|
|
|
$ |
10,268 |
|
|
|
|
|
Customer C |
|
$ |
5,075 |
|
|
|
|
|
|
$ |
4,184 |
|
|
|
|
|
Customer D |
|
$ |
3,484 |
|
|
|
|
|
|
$ |
3,164 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
|
For the thirteen weeks |
|
|
For the thirteen weeks |
|
|
|
ended July 3, 2010 |
|
|
ended July 4, 2009 |
|
|
|
North |
|
|
|
|
|
|
North |
|
|
|
|
|
|
America |
|
|
EMEA |
|
|
America |
|
|
EMEA |
|
Customer A |
|
|
|
|
|
$ |
1,589 |
|
|
|
|
|
|
$ |
1,906 |
|
Customer B |
|
$ |
4,760 |
|
|
|
|
|
|
$ |
5,690 |
|
|
|
|
|
Customer C |
|
$ |
2,596 |
|
|
|
|
|
|
$ |
2,273 |
|
|
|
|
|
Customer D |
|
$ |
1,683 |
|
|
|
|
|
|
$ |
1,710 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts Receivable |
|
|
|
As of July 3, 2010 |
|
|
As of July 4, 2009 |
|
Customer A |
|
$ |
2,483 |
|
|
$ |
2,174 |
|
Customer B |
|
$ |
2,332 |
|
|
$ |
2,339 |
|
Customer C |
|
$ |
1,842 |
|
|
$ |
1,578 |
|
Customer D |
|
$ |
1,164 |
|
|
$ |
1,262 |
|
Revenues from the Companys ten most significant customers accounted for approximately 84% and 86%
of revenues during the thirteen and twenty-six weeks ended July 3, 2010, respectively. Revenues
from the Companys ten most significant customers accounted for approximately 86% of revenues
during the thirteen and twenty-six weeks ended July 4, 2009.
8. Income Taxes
In the thirteen and twenty-six weeks ended July 3, 2010, the Company recorded income tax provisions
of $42,000 and $49,000, respectively. In the thirteen and twenty-six weeks ended July 4, 2009, the
Company recorded income tax benefits of $38,000 and $160,000, respectively. The tax provisions for
the thirteen and twenty-six weeks ended July 3, 2010 are primarily due to deferred taxes recognized
on intangibles amortized for income tax purposes but not for financial reporting purposes and
interest recognized on reserves for uncertain tax positions. The tax benefit for the thirteen and
twenty-six weeks ended July 4, 2009 is primarily related to deferred tax benefit recognized for the
Companys United Kingdom operations. During the thirteen and twenty-six weeks ended
July 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 July 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 and twenty-six weeks ended July 3, 2010 and July 4,
2009. As of July 3, 2010, the Company has $1.0 million accrued for uncertain income tax positions,
including interest and penalties. As of July 3, 2010, the Company believes that it is reasonably
possible that the liability for uncertain tax positions will decrease by $0.8 million within the
next 12 months due to the expiration of the statute of limitations of tax filings in foreign
jurisdictions.
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 July 3, 2010, the Company has no income tax examinations in process.
9. Loan to Officer
As of July 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 July 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
Page 14 of 31
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 July 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
On July 12, 2010, the Company sold its Brazos Student Finance Corporation Student Loan Asset Backed
Notes with a par value of $1.0 million held as part of the Companys auction rate securities
portfolio with Citigroup. The Company received $950,000 in proceeds from the transaction.
During
August 2010, the Company executed a lease agreement for new office space in Boston,
Massachusetts. The lease commences on February 1, 2011 and runs for five years and three months
from the commencement date. Future minimum payments over the term of this lease are $2.0 million.
|
|
|
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,
technology, 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 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 technology, 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, technology, media and entertainment companies. 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, technology, 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 half of 2010 has demonstrated positive
economic indications, the global economic downturn of 2008 and 2009 has resulted in continuing
unemployment levels and reductions in capital and operating expenditures for some of our
significant clients in the communications, technology, 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.
Page 15 of 31
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 twenty-six weeks ended July 3, 2010,
revenues increased 11.0% to $34.4 million from $31.0 million for the twenty-six weeks ended July 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 twenty-six weeks ended July 3, 2010, as compared to 31% for the twenty-six weeks ended
July 4, 2009. 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 38.5% in the twenty-six weeks ended July 3, 2010 compared with 41.3% in the
twenty-six weeks ended July 4, 2009. Sequentially, gross margins demonstrated improvement during
the second quarter of 2010, improving to 39.1% from 37.8% in the first quarter of 2010. The
decrease in gross margin in the first half of 2010 as compared to the same period of 2009 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 beginning in fiscal year 2008
and carrying into fiscal year 2009, 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 $0.9 million to
$13.9 million for the twenty-six weeks ended July 3, 2010 from $14.8 million for the twenty-six
weeks July 4, 2009. As a result, our selling, general and administrative expenses have decreased as
a percentage of revenues to 40.3% in the twenty-six weeks ended July 3, 2010 from 47.6% in the
twenty-six weeks ended July 4, 2009. The reduction in selling, general and administrative expenses
was driven primarily by reductions in compensation costs and professional fees. During the
twenty-six weeks ended July 3, 2010, selling expenses also included $0.6 million in transition and
severance for personnel associated with the reorganization undertaken for 2010. In addition,
selling, general and administrative expenses during the twenty-six weeks ended July 3, 2010
included a reduction of $0.5 million in foreign currency losses as compared to the 2009 period. 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 $0.7 million in the
twenty-six weeks ended July 3, 2010 from $1.0 million in the twenty-six weeks ended July 4,
2009. The decrease in amortization expense was due to the completion of amortization of
some intangibles recorded in connection with our acquisitions of Cartesian Ltd, RVA Consulting LLC
and TWG Consulting, Inc.
We recorded net losses of $0.5 million and $1.3 million for the thirteen and twenty-six weeks ended
July 3, 2010, respectively, compared to net losses of $0.4 million and $2.5 million for the
thirteen and twenty-six weeks ended July 4, 2009. The decrease in net loss for the twenty-six
weeks ended July 3, 2010 as compared to the twenty-six weeks ended July 4, 2009 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 twenty-six weeks ended July 3, 2010 as compared to the
twenty-six weeks ended July 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.
Page 16 of 31
From a cash flow perspective, cash flows provided by operating activities were $0.3 million during
the twenty-six weeks ended July 3, 2010 and $0.5 million during the twenty-six weeks ended July 4,
2009. During the twenty-six weeks ended July 3, 2010, cash provided by operating activities
consisted almost entirely of positive cash flows from the results of operations (after adding back
non-cash items to our net loss) as compared to the twenty-six weeks ended July 4, 2009, for which
changes in working capital resulted in a $1.1 million addition to cash flows partially offset by
$0.6 million in negative cash flows from the results of operations (after adding back non-cash
items to our net loss).
At July 3, 2010, we had working capital of approximately $15.6 million. Our noncurrent investments
of $6.9 million ($7.3 million par value) consist of auction rate securities held with Citigroup.
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 include 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, during the thirteen weeks ended July 3, 2010, our entire remaining auction rate
securities portfolio held by a UBS affiliate were sold by us at par value of $5.5 million. Upon the
sale of the securities, $3.7 million was applied to the line of credit from UBS and its affiliates.
The line of credit was terminated, the ARS Rights expired unexercised and we received the
remaining sales proceeds of $1.8 million. As a result, working capital as of July 3, 2010 includes
no short-term investments or borrowings.
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.
Shortly after the end of the second quarter of 2010, we sold our Brazos Student Finance Corporation
Student Loan Asset Backed Notes with a par value of $1.0 million held as part of our auction rate
securities portfolio with Citigroup. We received $950,000 in proceeds from the transaction.
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; |
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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 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 Income (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 Income (Loss) (unaudited), net of applicable taxes.
As of July 3, 2010 and January 2, 2010, $6.9 million in auction rate securities ($7.3 million par
value) is reflected as non-current assets on our Condensed Consolidated Balance Sheet (unaudited).
All of these auction rate securities are classified as available-for-sale investments. For auction
rate securities classified as available-for-sale, we recognized unrealized holding (losses) gains
of ($62,000) and $1,000, respectively during the thirteen and twenty-six weeks ended July 3, 2010
and recognized unrealized holding gains of $292,000 and $689,000, respectively during the thirteen
and twenty-six weeks ended July 4, 2009.
As of January 2, 2010, we had $5.4 million ($5.5 million par value) in auction rate securities
reflected as current assets. The auction rate securities classified as short-term investments were
held with a UBS affiliate. During 2008, we reached a settlement agreement related to our auction
rate securities held in accounts with a UBS affiliate. Pursuant to the terms of the settlement with
UBS, UBS held discretionary rights to sell or otherwise dispose of our auction rate securities
(ARS Rights), provided that we were entitled to the par value of the auction rate securities upon
any disposition. Upon accepting the UBS settlement, we made a one-time election to transfer our UBS
auction rate securities holdings from available-for-sale securities to trading securities under
FASB ASC 320. For auction rate securities classified as trading securities,
Page 17 of 31
we recognized realized holding gains of $232,000 and $342,000, respectively, offset by realized
losses on the Companys ARS Rights of $202,000 and $286,000, respectively, during the thirteen and
twenty-six weeks ended July 3, 2010. For auction rate securities classified as trading securities,
we recognized realized holding gains of $229,000 and $398,000, respectively, offset by realized
losses on the Companys ARS Rights of $147,000 and $293,000, respectively, during the thirteen and
twenty-six weeks ended July 4, 2009. The ARS Rights were measured at fair value under FASB ASC 825.
During the thirteen weeks ended July 3, 2010, all of the auction rate securities classified as
available-for-sale were sold at par value of $5.5 million.
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.
Impairment of Goodwill and Long-lived Assets As of July 3, 2010, we had $7.9 million in goodwill
and $1.4 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
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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
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In accordance with FASB ASC 360, Property, Plant and Equipment, we use our best estimates based
upon reasonable and supportable assumptions and projections to review for impairment of
finite-lived assets and finite-lived identifiable intangibles to be held and used whenever events
or changes in circumstances indicate that the carrying amount of our assets might not be
recoverable.
Revenue Recognition We recognize revenues from time and materials consulting contracts in the
period in which our services are performed. We recognized $6.4 million and $6.9 million in revenues
from time and materials contracts during the thirteen weeks ended July 3, 2010 and July 4, 2009,
respectively. We recognized $12.7 million and $13.1 million in revenues from time and materials
contracts during the twenty-six weeks ended July 3, 2010 and July 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 July 3, 2010 and July 4, 2009, we
recognized $10.6 million and $9.9 million in revenues on these other types of contracts. We
recognized $21.7 million and $17.9 million in revenues from these other types of contracts during
the twenty-six weeks ended July 3, 2010 and July 4, 2009, respectively. We recognize revenues on
milestone or deliverables-based fixed fee contracts and time and materials contracts not to exceed
contract price using the percentage of completion-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.
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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
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 and
twenty-six weeks ended July 3, 2010 or July 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 July 3 2010 is 39%.
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 July 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
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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 July 3,
2010, we have recorded a liability of approximately $956,000 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 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 and twenty-six weeks ended July 3, 2010, software development costs of $184,000
and $323,000, respectively, were expensed as incurred. During the thirteen and twenty-six weeks
ended July 4, 2009, software development costs of $101,000 and $246,000, respectively, were
expensed as incurred. No software development costs were capitalized during the thirteen and
twenty-six weeks ended July 3, 2010 and July 4, 2009.
RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED JULY 3, 2010 COMPARED TO THIRTEEN WEEKS ENDED JULY 4, 2009
REVENUES
Revenues increased to $17.0 million for the thirteen weeks ended July 3, 2010 from $16.8 million
for the thirteen weeks ended July 4, 2009. The increase in revenues is primarily due to an increase
in demand for strategic consulting within our North America segment, partially offset by lower
revenues in our EMEA segment due to a decline in demand for technology and software services.
North America Segment North America segment revenues increased 9.4% to $13.3 million for the
thirteen weeks ended July 3, 2010 from $12.2 million for the same period of 2009. During the
thirteen weeks ended July 3, 2010, the North America segment provided services on 79 customer
projects, compared to 77 projects performed in the thirteen weeks ended July 4, 2009. Average
revenue per project was $169,000 in the thirteen weeks ended July 3, 2010, compared to $158,000 in
the thirteen weeks ended July 4, 2009. Revenues recognized in connection with fixed price
engagements totaled $8.2 million and $8.1 million, representing 61.5% and 66.0% of total revenues
of the segment, for the thirteen weeks ended July 3, 2010 and July 4, 2009, respectively.
EMEA Segment EMEA segment revenues decreased by 21.6% to $3.6 million for the thirteen weeks
ended July 3, 2010 from $4.6 million for the thirteen weeks ended July 4, 2009. All revenues were
generated internationally. During the thirteen weeks ended July 3, 2010 and July 4, 2009, this
segment provided services on 92 and 99 customer projects, respectively. Average revenue per project
was approximately $33,000 and $40,000, respectively, for the thirteen weeks ended July 3, 2010 and
July 4, 2009. The decrease in revenue per project for the thirteen weeks ended July 3, 2010 as
compared to the 2009 period is primarily due to a decline in demand for technology and software
services. Revenues from post-contract software related support services were approximately $631,000
and $556,000 for the thirteen weeks ended July 3, 2010 and July 4, 2009, respectively. There were
no revenues from software licensing during the thirteen weeks ended July 3, 2010. Revenues from
software licensing during the thirteen weeks ended July 4, 2009 were $117,000.
Page 20 of 31
COSTS OF SERVICES
Costs of services increased 8.8% to $10.3 million for the thirteen weeks ended July 3, 2010 from
$9.5 million for the thirteen weeks ended July 4, 2009. Our gross margin was 39.1% for the thirteen
weeks ended July 3, 2010 compared to 43.6% for the thirteen weeks ended July 4, 2009. Cost of
services during the thirteen weeks ended July 3, 2010 were $7.9 million and $2.4 million,
respectively, in our North America and EMEA segments. Cost of services during the thirteen weeks
ended July 4, 2009 were $6.7 million and $2.8 million, respectively, in our North America and EMEA
segments. Our North America segment gross margin was 40.8% for the thirteen weeks ended July 3,
2010 compared to 45.0% for the thirteen weeks ended July 4, 2009. The decrease in gross margin in
the second 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 and the completion of
a large management consulting project in 2009, partially offset by an increase in strategy
engagements resulting in higher utilization of our fixed employee consulting base. Our EMEA segment
gross margin was 33.1% for the thirteen weeks ended July 3, 2010, compared to 39.9% for the
thirteen weeks ended July 4, 2009. Margin reductions in the EMEA segment are primarily related to
lower revenue volumes driven by a reduction in demand for software services. Costs of services in
the EMEA segment included amortization of intangible assets of $140,000 and $146,000, respectively,
for the thirteen weeks ended July 3, 2010 and July 4, 2009, related to acquired software. The
reduction in intangible amortization is due to exchange rate movements.
OPERATING EXPENSES
Operating expenses decreased 8.7% to $7.2 million for the thirteen weeks ended July 3, 2010, from
$7.8 million for the thirteen weeks ended July 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 $6.8 million for the thirteen weeks ended
July 3, 2010, compared to $7.4 million for the thirteen weeks ended July 4, 2009. As a percentage
of revenues, our selling, general and administrative expenses were 40.1% for the thirteen weeks
ended July 3, 2010, compared to 43.7% for the thirteen weeks ended July 4, 2009. The decrease in
selling, general and administrative expenses was primarily due to decreases in compensation costs
through headcount reductions and the effect of exchange rate movements. For the thirteen weeks
ended July 3, 2010, we recognized losses of $41,000 related to foreign exchange compared to losses
of $417,000 for the thirteen weeks ended July 4, 2009.
Intangible asset amortization decreased by $133,000 to $358,000 for the thirteen weeks ended July
3, 2010, compared to $491,000 for the thirteen weeks ended July 4, 2009. The decrease in
amortization expense was primarily due to the completion of amortization of various intangibles
recorded in connection with acquisitions.
OTHER INCOME AND EXPENSES
Interest income was $44,000 and $56,000 for the thirteen weeks ended July 3, 2010 and July 4, 2009,
respectively, and represented interest earned on invested balances. Interest income decreased for
the thirteen weeks ended July 3, 2010 as compared to the thirteen weeks ended July 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
July 3, 2010, other income includes $232,000 in realized holding gains for auction rate securities
classified as trading securities, offset by realized losses on our ARS Rights of $202,000. For the
thirteen weeks ended July 4, 2009, other income includes $229,000 in realized holding gains for
auction rate securities classified as trading securities, offset by realized losses on our ARS
Rights of $147,000.
INCOME TAXES
During the thirteen weeks ended July 3, 2010, we recorded an income tax provision of $42,000
compared to an income tax benefit of $38,000 during the thirteen weeks ended July 4, 2009. The tax
provision for the thirteen weeks ended July 3, 2010 is primarily due to deferred taxes recognized
on intangibles amortized for income tax purposes but not for financial reporting purposes and
interest recognized on reserves for uncertain tax positions. The tax benefit for the thirteen weeks
ended July 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 July 3, 2010 and July 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 July 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.
Page 21 of 31
NET LOSS
We had a net loss of $0.5 million for the thirteen weeks ended July 3, 2010 compared to a net loss
of $0.4 million for the thirteen weeks ended July 4, 2009. The slight increase in net loss is due
to higher of cost of services on flat sales and a provision for income taxes in the 2010 period,
partially offset by reductions in selling, general and administrative costs.
TWENTY-SIX WEEKS ENDED JULY 3, 2010 COMPARED TO TWENTY-SIX WEEKS ENDED JULY 4, 2009
REVENUES
Revenues increased 11% to $34.4 million for the twenty-six weeks ended July 3, 2010 from $31.0
million for the twenty-six weeks ended July 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 19.9% to $26.4 million for the
twenty-six weeks ended July 3, 2010 from $22.0 million for the same period of 2009. During the
twenty-six weeks ended July 3, 2010, the North America segment provided services on 117 customer
projects, compared to 98 projects performed in the twenty-six weeks ended July 4, 2009. Average
revenue per project was $226,000 in the twenty-six weeks ended July 3, 2010, compared to $225,000
in the twenty-six weeks ended July 4, 2009. Revenues recognized in connection with fixed price
engagements totaled $16.9 million and $13.8 million, representing 63.8% and 62.7% of total revenues
of the segment, for the twenty-six weeks ended July 3, 2010 and July 4, 2009, respectively. This
increase is primarily due to a continued shift in customer preference for fixed price engagements
and an increase in strategic consulting.
EMEA Segment EMEA segment revenues decreased by 11% to $8.0 million for the twenty-six weeks
ended July 3, 2010 from $9.0 million for the twenty-six weeks ended July 4, 2009. All revenues were
generated internationally. During the twenty-six weeks ended July 3, 2010 and July 4, 2009, this
segment provided services on 135 and 129 customer projects, respectively. Average revenue per
project was approximately $50,000 and $58,000, respectively, for the twenty-six weeks ended July 3,
2010 and July 4, 2009. The decrease in revenue per project for the twenty-six weeks ended July 3,
2010 as compared to the 2009 period is primarily due to a decline in demand for technology and
software services. Revenues from post-contract software related support services were approximately
$1,277,000 and $1,071,000 for the twenty-six weeks ended July 3, 2010 and July 4, 2009,
respectively. There were no revenues from software licensing during the twenty-six weeks ended
July 3, 2010. Revenues from software licensing during the twenty-six weeks ended July 4, 2009 were
$429,000.
COSTS OF SERVICES
Costs of services increased 16.3% to $21.2 million for the twenty-six weeks ended July 3, 2010
compared to $18.2 million for the twenty-six weeks ended July 4, 2009. As a percentage of revenues,
our gross margin was 38.5% for the twenty-six weeks ended July 3, 2010, compared to 41.3% for the
twenty-six weeks ended July 4, 2009. Cost of services during the twenty-six weeks ended July 3,
2010 were $15.7 million and $5.5 million, respectively, in our North America and EMEA segments.
Cost of services during the twenty-six weeks ended July 4, 2009 were $12.6 million and $5.6
million, respectively, in our North America and EMEA segments. Our North America segment gross
margin was 40.5% for the twenty-six weeks ended July 3, 2010 compared to 43.0% for the twenty-six
weeks ended July 4, 2009. The decrease in gross margin in the first half 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 and the completion of a large management consulting project,
partially offset by an increase in strategy engagements resulting in higher utilization of our
fixed employee consulting base. Our EMEA segment gross margin was 31.8% for the twenty-six weeks
ended July 3, 2010, compared to 37.3% for the twenty-six weeks ended July 4, 2009. Margin
reductions in the EMEA segment are primarily related to lower revenue volumes driven by a reduction
in demand for technology and software services. Costs of services in the EMEA segment included
amortization of intangible assets of $286,000 and $281,000, respectively, for the twenty-six weeks
ended July 3, 2010 and July 4, 2009, related to acquired software. The reduction in intangible
amortization is due to exchange rate movements.
OPERATING EXPENSES
Operating expenses decreased by 7.2% to $14.6 million for the twenty-six weeks ended July 4, 2009,
from $15.7 million for the twenty-six weeks ended June 28, 2008. Operating expenses for both
periods included selling, general and administrative expenses (inclusive of share-based
compensation) and intangible asset amortization.
Selling, general and administrative expenses decreased to $13.9 million for the twenty-six weeks
ended July 3, 2010, compared to $14.8 million for the twenty-six weeks ended July 4, 2009. As a
percentage of revenues, our selling, general and administrative expense was 40.3% for the
twenty-six weeks ended July 3, 2010, compared to 47.6% for the twenty-six weeks ended July 4, 2009.
The decrease in selling, general and administrative expenses was primarily due to reductions in
compensation costs of $0.7 million and professional fees of $0.2 million, partially offset by an
increase of $0.5 million in severance costs for personnel associated with the reorganization
undertaken in the first half of 2010. In addition, selling, general and administrative expenses
during the twenty-six weeks ended July 3, 2010 included a reduction of $0.5 million in foreign
currency losses as compared to the 2009 period. We continue to evaluate alignment of costs to
revenues for each operating segment.
Intangible
asset amortization decreased from $965,000 for the twenty-six weeks
ended July 4, 2009 to $721,000 for the twenty-six weeks ended
July 3, 2010. The decrease in amortization expense was primarily due to the completion of
amortization of various intangibles recorded in connection with acquisitions.
Page 22 of 31
OTHER INCOME AND EXPENSES
Interest income was $108,000 and $138,000 for the twenty-six weeks ended July 3, 2010 and July 4,
2009, respectively, and represented interest earned on invested balances. Interest income decreased
for the twenty-six weeks ended July 3, 2010 as compared to the twenty-six weeks ended July 4, 2009
due primarily to reductions in invested balances and reductions in interest rates. We primarily
invest in money market funds and have holdings in auction rate securities. For the twenty-six weeks
ended July 3, 2010, other income includes $342,000 in realized holding gains for auction rate
securities classified as trading securities, offset by realized losses on our ARS Rights of
$286,000. For the twenty-six weeks ended July 4, 2009, other income includes $398,000 in realized
holding gains for auction rate securities classified as trading securities, offset by realized
losses on our ARS Rights of $293,000.
INCOME TAXES
In the twenty-six weeks ended July 3, 2010, the Company recorded income tax provisions of $49,000
compared to an income tax benefit of $160,000 during the twenty-six weeks ended July 4, 2009. The
tax provision for the twenty-six weeks ended July 3, 2010 is primarily due to deferred taxes
recognized on intangibles amortized for income tax purposes but not for financial reporting
purposes and interest recognized on reserves for uncertain tax positions. The tax benefit for the
twenty-six weeks ended July 4, 2009 is primarily related to deferred tax benefit recognized on
losses for the period in our United Kingdom operations. For the twenty-six weeks ended July 3,
2010 and July 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 twenty-six weeks ended
July 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 net loss of $1.3 million for the twenty-six weeks ended July 3, 2010 compared to a net loss
of $2.5 million for the twenty-six weeks ended July 4, 2009. This decrease in net loss is primarily
attributable to an increase in revenues and gross profit, effective cost management initiatives
that resulted in reduced operating expenses, 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 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.
Page 23 of 31
THE MANAGEMENT NETWORK GROUP, INC.
RECONCILIATION OF GAAP NET LOSS TO NON-GAAP ADJUSTED NET INCOME (LOSS)
(unaudited)
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended |
|
|
Twenty-six Weeks Ended |
|
|
|
July 3, |
|
|
July 4, |
|
|
July 3, |
|
|
July 4, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Reconciliation of GAAP net loss to non-GAAP adjusted
net income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP net loss |
|
$ |
(497 |
) |
|
$ |
(350 |
) |
|
$ |
(1,250 |
) |
|
$ |
(2,534 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized gain on auction rate securities |
|
|
(30 |
) |
|
|
(82 |
) |
|
|
(56 |
) |
|
|
(105 |
) |
Depreciation and amortization |
|
|
688 |
|
|
|
860 |
|
|
|
1,393 |
|
|
|
1,656 |
|
Non-cash share based compensation expense |
|
|
84 |
|
|
|
243 |
|
|
|
197 |
|
|
|
551 |
|
Tax effect of applicable non-GAAP adjustments |
|
|
34 |
|
|
|
(62 |
) |
|
|
68 |
|
|
|
(220 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to GAAP net loss |
|
|
776 |
|
|
|
959 |
|
|
|
1,602 |
|
|
|
1,882 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP adjusted net income (loss) |
|
$ |
279 |
|
|
$ |
609 |
|
|
$ |
352 |
|
|
$ |
(652 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
$ |
(0.07 |
) |
|
$ |
(0.05 |
) |
|
$ |
(0.18 |
) |
|
$ |
(0.36 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized gain on auction rate securities |
|
|
(0.00 |
) |
|
|
(0.01 |
) |
|
|
(0.01 |
) |
|
|
(0.02 |
) |
Depreciation and amortization |
|
|
0.10 |
|
|
|
0.12 |
|
|
|
0.20 |
|
|
|
0.24 |
|
Non-cash share based compensation expense |
|
|
0.01 |
|
|
|
0.04 |
|
|
|
0.03 |
|
|
|
0.08 |
|
Tax effect of applicable non-GAAP adjustments |
|
|
0.00 |
|
|
|
(0.01 |
) |
|
|
0.01 |
|
|
|
(0.03 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to GAAP net loss per diluted common share |
|
|
0.11 |
|
|
|
0.14 |
|
|
|
0.23 |
|
|
|
0.27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP adjusted net income (loss) per diluted common share |
|
$ |
0.04 |
|
|
$ |
0.09 |
|
|
$ |
0.05 |
|
|
$ |
(0.09 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in calculation of diluted net
income (loss) per common share |
|
|
7,038 |
|
|
|
6,958 |
|
|
|
7,033 |
|
|
|
6,954 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $0.3 million and $0.5 million, respectively, for the
twenty-six weeks ended July 3, 2010 and July 4, 2009. During the twenty-six weeks ended July 3,
2010, cash provided by operating activities consisted almost entirely of positive cash flows from
the results of operations (after adding back non-cash items to our net loss) as compared to the
twenty-six weeks ended July 4, 2009, for which changes in working capital resulted in a $1.1
million addition to cash flows partially offset by $0.6 million in negative cash flows from the
results of operations (after adding back non-cash items to our net loss).
Net cash provided by investing activities was $5.2 million the twenty-six weeks ended July 3, 2010.
Net cash used in investing activities was $1.0 million for the twenty-six weeks ended July 4, 2009.
Investing activities include proceeds from sales of short-term investments of $5.5
million in the twenty-six weeks ended July 3, 2010. Investing activities for the twenty-six weeks
ended July 4, 2009 included $0.7 million in earn-out payments related to the acquisition of
Cartesian. Net cash used in investing activities also included $314,000 and $255,000 for the
twenty-six weeks ended July 3, 2010 and July 4, 2009, respectively, related to the purchase of
office equipment, software and computer equipment.
Net cash used in financing activities was $3.1 million for the twenty-six weeks ended July 3, 2010.
Net cash provided by financing activities was $3.0 million for the twenty-six weeks ended July 4,
2009. Financing activities in the twenty-six weeks ended July 3, 2010 included $3.7 million in
repayments on a line of credit and $0.9 million in proceeds from line of credit borrowings.
Financing activities in the 2009 period included $3.4 million in proceeds from line of credit
borrowings. In addition, in both periods cash was used to make payments on long-term obligations.
At July 3, 2010, we had approximately $8.4 million in cash and cash equivalents ($2.2 million of
which is denominated in pounds sterling) and $15.6 million in net working capital. In addition, as
discussed below, we have established lines of credit totaling $3.6 million against our remaining
auction rate securities portfolio, of which we have no borrowings as of July 3, 2010. We believe we
have sufficient cash and access to credit to meet anticipated cash requirements, including
anticipated capital expenditures, earn-out payments, and any future operating losses that may be
incurred, for at least the next 12 months. Should our cash and available lines of credit prove
insufficient we may need to obtain new debt or equity financing to support our operations or
complete acquisitions. Credit and capital markets have continued to experience unusual volatility
and disruption, and equity and debt financing have generally become more expensive and difficult to
obtain. If we need to obtain new debt or equity financing to support our operations or complete
acquisitions in the future, we may be unable to obtain debt or equity financing or reasonable
terms. We have established a flexible model that provides a lower fixed cost structure than most
consulting firms, enabling us to scale operating cost structures more quickly based on market
conditions, although there is a lag in time required to scale the
Page 24 of 31
business appropriately if
revenues are reduced. If demand for our consulting services declines or we experience negative cash
flow, we could experience liquidity challenges at some point in the future.
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 July 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.
As of January 2, 2010, we held auction rate securities with a UBS affiliate with a fair value of
$5.4 million ($5.5 million par value). As of January 2, 2010, we had borrowed $2.8 million under
the line of credit. Because we intended to exercise our right under the ARS Rights to sell to UBS
our auction rate securities held in accounts with UBS and a UBS affiliate on June 30, 2010, we
classified these auction rate securities as current assets and the line of credit with UBS as a
current liability in the Consolidated Balance Sheet as of January 2, 2010. During the twenty-six
weeks ended July 3, 2010, we borrowed an additional $880,000 on the line of credit, making the
outstanding balance $3.68 million.
During the twenty-six weeks ended July 3, 2010, our entire auction rate securities portfolio held
by a UBS affiliate was sold by us at par value of $5.5 million. Upon the sale of the securities,
$3.7 million was applied to the line of credit from UBS. The line of credit was terminated, the
ARS Rights expired unexercised and we received the remaining sales proceeds of $1.8 million.
As of
July 3, 2010, we held auction rate securities with Citigroup in the face amount of $7.3
million collateralized by government guaranteed student loans. The estimated fair value of the
auction rate securities is $6.9 million as of July 3, 2010. Brazos Student Finance Corporation
Student Loan Asset Backed Notes with a par value of $1.0 million held as part of the Companys
auction rate securities portfolio with Citigroup were sold on July 12, 2010. The Company received
$950,000 in proceeds from the transaction.
As we are able to liquidate any of our remaining auction rate securities portfolio we intend to
reinvest in money market or similar investments any amounts not used to repay any amounts borrowed
under the remaining line 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 Income (Loss) (unaudited) 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 accrued $344,000 for
consideration earned by RVA and payable during the fourth quarter 2010. See Note 4, Business
Combinations, in the Notes to the Condensed Consolidated Financial Statements (unaudited).
During the twenty-six weeks ended July 4, 2009, we entered into an agreement under which we have a
commitment to purchase a minimum of $401,000 in computer software over a three year period. As of
July 3, 2010, we have an obligation of $223,000 remaining under this commitment.
During
August 2010, we executed a lease agreement for new office space in Boston, Massachusetts.
The lease commences on February 1, 2011 and runs for five years and three months from the
commencement date. Future minimum payments over the term of this lease are $2.0 million.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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
Page 25 of 31
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 July 3, 2010.
There were no changes in our internal control over financial reporting during the fiscal quarter
ended July 3, 2010, that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We have not been subject to any material new litigation since the filing on April 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
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
(a) Exhibits
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Exhibit 3.1
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Amended and Restated Certificate of Designations of Series A Junior Participating
Preferred Stock, as filed with the Secretary of State of Delaware on July 19, 2010
(incorporated by reference to Exhibit 3.1 to the Companys Current Report on Form
8-K dated July 19, 2010 filed with the Securities and Exchange Commission). |
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Exhibit 4.1
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Amended and Restated Rights Agreement, dated as of July 19, 2010, by and between
the Company and Computershare Trust Company, N.A., which includes as Exhibit A,
the Amended and Restated Certificate of Designations of Series A Junior
Participating Preferred Stock, as Exhibit B, the Form of Rights Certificate, and
as Exhibit C, the Summary of Rights to Purchase Preferred Stock (incorporated by
reference to Exhibit 4.1 to the Companys Current Report on Form 8-K dated July
19, 2010, filed with the Securities and Exchange Commission). |
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Exhibit 10.1
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The Management Network Group, Inc. Amended and Restated 1998 Equity Incentive
Plan, as amended, (incorporated by reference from Appendix A to the Companys
Definitive Proxy Statement filed with the SEC on April 21, 2010). |
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Exhibit 31.
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Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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Exhibit 32.
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Certifications furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
Page 26 of 31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
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The Management Network Group, Inc. |
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(Registrant)
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Date: August 17, 2010 |
By |
/s/ Richard P. Nespola
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(Signature) |
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Richard P. Nespola
Chairman and Chief Executive Officer
(Principal executive officer) |
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Date: August 17, 2010 |
By |
/s/ Donald E. Klumb
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(Signature) |
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Donald E. Klumb
Chief Financial Officer and Treasurer
(Principal financial officer and principal
accounting officer) |
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Page 27 of 31
EXHIBIT INDEX
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Exhibit No. |
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Description of Exhibit |
Exhibit 3.1
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Amended and Restated Certificate of Designations of Series A Junior Participating
Preferred Stock, as filed with the Secretary of State of Delaware on July 19, 2010
(incorporated by reference to Exhibit 3.1 to the Companys Current Report on Form
8-K dated July 19, 2010 filed with the Securities and Exchange Commission). |
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Exhibit 4.1
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Amended and Restated Rights Agreement, dated as of July 19, 2010, by and between
the Company and Computershare Trust Company, N.A., which includes as Exhibit A,
the Amended and Restated Certificate of Designations of Series A Junior
Participating Preferred Stock, as Exhibit B, the Form of Rights Certificate, and
as Exhibit C, the Summary of Rights to Purchase Preferred Stock (incorporated by
reference to Exhibit 4.1 to the Companys Current Report on Form 8-K dated July
19, 2010, filed with the Securities and Exchange Commission). |
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Exhibit 10.1
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The Management Network Group, Inc. Amended and Restated 1998 Equity Incentive
Plan, as amended, (incorporated by reference from Appendix A to the Companys
Definitive Proxy Statement filed with the SEC on April 21, 2010). |
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Exhibit 31.
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Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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Exhibit 32.
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Certifications furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
Page 28 of 31