e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended April 2, 2011
or
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Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Commission file number: 001-34006
THE MANAGEMENT NETWORK GROUP, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE
(State or other jurisdiction of incorporation or organization)
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48-1129619
(I.R.S. Employer Identification No.) |
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7300 COLLEGE BLVD., SUITE 302, OVERLAND PARK, KS
(Address of principal executive offices)
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66210
(Zip Code) |
913-345-9315
Registrant’s telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one):
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| Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o
(Do not check if a smaller reporting company)
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Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of
the latest practicable date.
As of
May 13, 2011, TMNG had outstanding 7,084,895 shares of common stock.
THE MANAGEMENT NETWORK GROUP, INC.
INDEX
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Exhibits |
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Employment Agreement |
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| EX-10.2 |
| EX-31 |
| EX-32 |
2
PART I. FINANCIAL INFORMATION
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CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
THE MANAGEMENT NETWORK GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(unaudited)
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April 2, |
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January 1, |
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2011 |
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2011 |
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ASSETS |
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CURRENT ASSETS: |
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Cash and cash equivalents |
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$ |
5,477 |
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$ |
6,786 |
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Accounts receivables, net |
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18,999 |
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16,531 |
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Prepaid and other current assets |
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1,644 |
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1,173 |
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Total current assets |
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26,120 |
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24,490 |
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NONCURRENT ASSETS: |
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Property and equipment, net |
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2,108 |
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1,983 |
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Goodwill |
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8,152 |
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7,993 |
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Identifiable intangible assets, net |
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284 |
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496 |
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Noncurrent investments |
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5,938 |
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5,926 |
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Other assets |
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202 |
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207 |
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Total Assets |
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$ |
42,804 |
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$ |
41,095 |
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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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$ |
1,392 |
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$ |
995 |
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Current borrowings |
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2,625 |
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Accrued payroll, bonuses and related expenses |
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4,747 |
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5,087 |
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Deferred revenue |
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668 |
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860 |
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Other accrued liabilities |
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1,401 |
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1,453 |
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Total current liabilities |
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10,833 |
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8,395 |
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NONCURRENT LIABILITIES: |
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Deferred income tax liabilities |
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276 |
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246 |
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Unfavorable and other contractual obligations |
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439 |
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450 |
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Other noncurrent liabilities |
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254 |
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287 |
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Total noncurrent liabilities |
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969 |
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983 |
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Total stockholders’ equity |
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31,002 |
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31,717 |
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Total Liabilities and Stockholders’ Equity |
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$ |
42,804 |
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$ |
41,095 |
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See notes to unaudited condensed consolidated financial statements.
3
THE MANAGEMENT NETWORK GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except per share data)
(unaudited)
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Thirteen Weeks Ended |
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April 2, |
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April 3, |
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2011 |
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2010 |
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Revenues |
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$ |
16,923 |
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$ |
17,459 |
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Cost of services |
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10,614 |
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10,857 |
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Gross Profit |
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6,309 |
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6,602 |
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Operating Expenses: |
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Selling, general and administrative |
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7,281 |
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7,068 |
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Intangible asset amortization |
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212 |
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363 |
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Total operating expenses |
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7,493 |
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7,431 |
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Loss from operations |
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(1,184 |
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(829 |
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Other income, net |
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31 |
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83 |
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Loss before income tax provision |
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(1,153 |
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(746 |
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Income tax provision |
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(30 |
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(7 |
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Net loss |
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(1,183 |
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(753 |
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Other comprehensive income (loss): |
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Foreign currency translation adjustment |
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416 |
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(795 |
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Unrealized gain on auction rate securities |
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12 |
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63 |
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Comprehensive loss |
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(755 |
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$ |
(1,485 |
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Net loss per common share |
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Basic and diluted |
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(0.17 |
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$ |
(0.11 |
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Weighted average shares used in calculation of net loss per common share |
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Basic and diluted |
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7,073 |
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7,027 |
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See notes to unaudited condensed consolidated financial statements.
4
THE MANAGEMENT NETWORK GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
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For the Thirteen Weeks Ended |
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April 2, |
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April 3, |
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2011 |
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2010 |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net loss |
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$ |
(1,183 |
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$ |
(753 |
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Adjustments to reconcile net loss to net cash used in operating activities: |
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Depreciation and amortization |
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420 |
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705 |
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Share-based compensation |
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40 |
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113 |
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Other |
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30 |
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40 |
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Realized gains on investments |
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(26 |
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Other changes in operating assets and liabilities: |
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Accounts receivable, net |
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(2,243 |
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(1,319 |
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Prepaid and other assets |
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(454 |
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(181 |
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Trade accounts payable |
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344 |
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371 |
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Deferred revenue |
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(201 |
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(260 |
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Accrued liabilities |
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(438 |
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(1,399 |
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Net cash used in operating activities |
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(3,685 |
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(2,709 |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Acquisition of property and equipment |
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(316 |
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(137 |
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Net cash used in investing activities |
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(316 |
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(137 |
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Borrowings on line of credit |
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2,625 |
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880 |
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Payments made on unfavorable and other contractual obligations |
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(61 |
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(175 |
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Net cash provided by financing activities |
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2,564 |
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705 |
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Effect of exchange rate on cash and cash equivalents |
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128 |
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(255 |
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Net decrease in cash and cash equivalents |
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(1,309 |
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(2.396 |
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Cash and cash equivalents, beginning of period |
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6,786 |
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6,301 |
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Cash and cash equivalents, end of period |
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$ |
5,477 |
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$ |
3,905 |
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Supplemental disclosure of cash flow information: |
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Cash paid during period for interest |
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$ |
6 |
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$ |
9 |
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Cash paid during period for taxes |
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$ |
10 |
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Accrued property and equipment additions |
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$ |
270 |
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$ |
309 |
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See notes to unaudited condensed consolidated financial statements.
5
THE MANAGEMENT NETWORK GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Reporting
The condensed consolidated financial statements and accompanying notes of The Management Network
Group, Inc. and its subsidiaries (“TMNG,” “TMNG Global,” “we,” “us,” “our,” or the “Company”) as of
April 2, 2011, and for the thirteen weeks ended April 2, 2011 and April 3, 2010 are unaudited and
reflect all normal recurring adjustments which are, in the opinion of management, necessary for the
fair presentation of the Company’s 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 Company’s annual report on Form
10-K. Accordingly, reference should be made to the Company’s annual consolidated financial
statements and notes thereto for the fiscal year ended January 1, 2011, included in the 2010 Annual
Report on Form 10-K (“2010 Form 10-K”) for additional disclosures, including a summary of the
Company’s accounting policies. The Condensed Consolidated Balance Sheet as of January 1, 2011 has
been derived from the audited Consolidated Balance Sheet at that date but does not include all of
the information and footnotes required by U.S. GAAP for complete financial statements. The Company
has evaluated subsequent events for recognition or disclosure through the date these unaudited
consolidated financial statements were issued.
The preparation of financial statements in conformity with U.S. GAAP requires management to make
estimates and assumptions that affect the amounts reported in the unaudited condensed consolidated
financial statements and accompanying notes. Actual results could differ from those estimates. In
the opinion of management of the Company, all adjustments consisting of normal recurring
adjustments considered necessary for a fair presentation of the financial statements have been
included. The results of operations for the thirteen weeks ended April 2, 2011 are not necessarily
indicative of the results to be expected for the full year ending December 31, 2011.
Revenue Recognition — The Company recognizes revenue from time and materials consulting contracts
in the period in which its services are performed. The Company recognized $8.0 million and $6.3
million in revenues from time and materials contracts during the thirteen weeks ended April 2, 2011
and April 3, 2010, respectively. In addition to time and materials contracts, the Company’s other
types of contracts may include fixed fee contracts and contingent fee contracts. The Company
recognizes 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
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 605-35,
“Revenue Recognition — Construction-Type and Production-Type Contracts”. For fixed fee contracts
where services are not based on providing deliverables or achieving milestones, the Company
recognizes revenue on a straight-line basis over the period during which such services are expected
to be performed. During the thirteen weeks ended April 2, 2011 and April 3, 2010, the Company
recognized $8.9 million and $11.2 million, respectively, in revenues on these other types of
contracts. In connection with some fixed fee contracts, the Company may receive payments from
customers that exceed revenues recognized related to the contracts up to that point in time. The
Company records 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.
The Company develops, installs and supports customer software in addition to the provision of
traditional consulting services. The Company recognizes revenue in connection with its software
sales agreements utilizing the percentage of completion method prescribed by ASC 605-35. These
agreements include software right-to-use licenses (“RTU’s”) and related customization and
implementation services. Due to the long-term nature of the 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 percentage-of-completion-like methodology involves recognizing revenue using the proportion of
services completed, on either a current cumulative cost to total cost or effort to total effort
basis, using a reasonably consistent profit margin over the period. Due to the 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, the
Company revises its cost and revenue estimates, which may result in increases or decreases in
revenues and costs, and such revisions are reflected in income in the period in which the facts
that give rise to that revision become known.
In addition to the professional services related to the customization and implementation of its
software, the Company may also provide post-contract support (“PCS”) services, including technical
support and maintenance services as well as other professional services not essential to the
functionality of the software. For those contracts that include PCS service and professional
services arrangements which are not essential to the functionality of the software solution, the
Company separates the ASC 605-35 software services and PCS services utilizing the
6
multiple-element arrangement model prescribed by ASC 605-25 , “Revenue Recognition —
Multiple-Element Arrangements”. 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. The Company utilizes 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 utilizing PCS renewal terms as evidence of fair value. Revenues from PCS services
are recognized ratably on a straight-line basis over the term of the support and maintenance
agreement.
The Company may also 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, the Company recognizes costs as they are incurred on the project and
defers revenue recognition until the revenue is realizable and earned as agreed to by its clients.
Although these contracts can be very rewarding, the profitability of these contracts is dependent
on the Company’s ability to deliver results for its clients and control the cost of providing these
services. These types of contracts are typically more results-oriented and are subject to greater
risk associated with revenue recognition and overall project profitability than traditional time
and materials contracts. Revenues associated with contingent fee contracts were not material during
the thirteen weeks ended April 2, 2011 and April 3, 2010.
Fair Value Measurement — For cash and cash equivalents, current trade receivables and current
trade payables, the carrying amounts approximate fair value because of the short maturity of these
items.
The Company utilizes the methods of fair value measurement as described in ASC 820 to value its
financial assets and liabilities. As defined in ASC 820, fair value is based on the price that
would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. In order to increase consistency and
comparability in fair value measurements, ASC 820 establishes a fair value hierarchy that
prioritizes observable and unobservable inputs used to measure fair value into three broad levels,
which are described below:
Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement
date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1
inputs.
Level 2: Observable prices that are based on inputs not quoted on active markets, but
corroborated by market data.
Level 3: Unobservable inputs are used when little or no market data is available. The fair
value hierarchy gives the lowest priority to Level 3 inputs.
In determining fair value, the Company utilizes valuation techniques that maximize the use of
observable inputs and minimize the use of unobservable inputs to the extent possible as well as
considers counterparty credit risk in its assessment of fair value.
Research and Development and Capitalized Software Costs — During the thirteen weeks ended April 2,
2011 and April 3, 2010, software development costs of $144,000 and $139,000, respectively, were
expensed as incurred. No software development costs were capitalized during the thirteen weeks
ended April 2, 2011 and April 3, 2010.
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 re-measured at rates of
exchange on the balance sheet date. Resulting gains and losses on foreign currency transactions are
included in the Company’s results of operations. Realized and unrealized exchange gains included in
results of operations were not significant during the thirteen weeks ended April 2, 2011 and April
3, 2010.
Net Loss Per Common Share — The Company has not included the effect of stock options and
non-vested shares in the calculation of diluted loss per common share for the thirteen weeks ended
April 2, 2011 and April 3, 2010 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 element’s
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
product’s essential functionality. Both statements are effective for revenue arrangements entered
into or materially modified in fiscal years beginning on or after June 15, 2010. The adoption of
this guidance did not have a significant effect on our 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
7
guidance concerning item (2) is effective for fiscal years beginning after December 15, 2010. The
adoption of item (2) of this guidance did not have a significant effect on our 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 Company’s 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 Company’s 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 Company’s 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 guidance did not have a significant effect on our financial
statements.
In December 2010, the FASB issued ASU 2010-28, Intangibles—Goodwill and Other: When to Perform
Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts.
The guidance clarifies when to perform step 2 of the goodwill impairment test for reporting units
with zero or negative carrying amounts. This update modifies step 1 of the goodwill impairment test
for reporting units with zero or negative carrying amounts, requiring the entity to assess whether
it is more likely than not that the reporting units’ goodwill is impaired in order to determine if
the entity should perform step 2 of the goodwill impairment test for those reporting unit(s). This
update is effective for fiscal years, and interim periods within those years, beginning after
December 15, 2010. The adoption of this guidance did not have a significant impact on our
consolidated financial statements.
2. Auction Rate Securities
As of April 2, 2011 and January 1, 2011, TMNG held $5.9 million in fair value of auction rate
securities for which the underlying collateral is guaranteed through the Federal Family Education
Loan Program of the U.S. Department of Education. The Company’s auction rate securities portfolio
as of April 2, 2011 consisted of the following:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Fair Value at |
| |
|
|
|
|
|
Unrealized |
|
April 2, 2011 |
| Issuer |
|
Cost Basis |
|
Loss |
|
(Noncurrent) |
| |
|
(In thousands) |
Available-for-Sale Securities |
|
|
|
|
|
|
|
|
|
|
|
|
Education Funding Capital Education Loan Backed Notes |
|
$ |
6,250 |
|
|
$ |
(312 |
) |
|
$ |
5,938 |
|
The Company’s auction rate securities portfolio as of January 1, 2011 consisted of the
following:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Fair Value at |
| |
|
|
|
|
|
Unrealized |
|
January 1, 2011 |
| Issuer |
|
Cost Basis |
|
Loss |
|
(Noncurrent) |
| |
|
(In thousands) |
Available-for-Sale Securities |
|
|
|
|
|
|
|
|
|
|
|
|
Education Funding Capital Education Loan Backed Notes |
|
$ |
6,250 |
|
|
$ |
(324 |
) |
|
$ |
5,926 |
|
On April 27, 2011, the Company liquidated its auction rate securities. See Note 10,
“Subsequent Events’’, for further information.
The auction rate securities the Company holds are generally long-term debt instruments that
historically provided liquidity through a Dutch auction process through which interest rates reset
every 28 to 35 days. Beginning in February 2008, auctions of the Company’s 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 a contractual maturity of approximately 31
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. The Company entered into a settlement with UBS AG
(“UBS”) to provide liquidity for the Company’s 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.
Prior to accepting the UBS settlement offer, the Company recorded all of its auction rate
securities as available-for-sale investments. Upon accepting the UBS settlement, the Company made a
one-time election to transfer its UBS auction rate securities holdings from available-for-
sale securities to trading securities under FASB ASC 320, “Investments-Debt and Equity Securities.”
For auction rate securities classified as trading securities the Company recognized realized
holding gains of $110,000, offset by realized losses on the Company’s ARS Rights of
8
$84,000 during
the thirteen weeks ended April 3, 2010. Realized gains and losses on trading securities have been
recognized in Other income in the Condensed Consolidated Statements of Operations and Comprehensive
Loss. During the second quarter of fiscal year 2010, all of the remaining auction rate securities
held with a UBS affiliate were sold by the Company pursuant to the terms of the ARS Rights.
For auction rate securities classified as available-for-sale, the Company recognized unrealized
holding gains of $12,000 and $63,000, respectively during the thirteen weeks ended April 2, 2011
and April 3, 2010. Unrealized holding gains and losses on securities classified as
available-for-sale are included as a separate component of stockholders’ equity, net of applicable
taxes, and have been recognized in Other comprehensive income (loss) in the Condensed Consolidated
Statements of Operations and Comprehensive Loss.
At April 2, 2011 the company utilized valuation models that rely on Level 2 inputs, as defined by
FASB ASC 820, including quoted prices for identical securities in non-active markets. Prior to the
thirteen weeks ended April 2, 2011, due to the lack of observable market quotes on the Company’s
auction rate securities portfolio and ARS Rights, the Company utilized 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 change from Level 3 to Level 2 inputs was driven by the increased availability of quoted prices
during the quarter. The valuation of the Company’s auction rate securities portfolio and ARS Rights
is subject to uncertainties that are difficult to predict. Factors that may impact the Company’s
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 Company’s auction
rate securities portfolio and ARS Rights for the thirteen weeks ended April 2, 2011 and April 3,
2010 (in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
For the |
|
|
For the |
|
| |
|
thirteen |
|
|
thirteen |
|
| |
|
weeks ended |
|
|
weeks ended |
|
| |
|
April 2, 2011 |
|
|
April 3, 2010 |
|
Fair value at beginning of period |
|
$ |
5,926 |
|
|
$ |
12,296 |
|
Total unrealized and realized gains
included in Other income in the
Consolidated Statements of Operations
and Comprehensive Loss |
|
|
— |
|
|
|
26 |
|
Total unrealized gains included in
Other comprehensive income (loss) in
the Consolidated Statements of
Operations and Comprehensive Loss |
|
|
12 |
|
|
|
63 |
|
|
|
|
|
|
|
|
Fair value at end of period |
|
$ |
5,938 |
|
|
$ |
12,385 |
|
|
|
|
|
|
|
|
3. Line of Credit Agreements
In November 2008, the Company entered into a settlement with UBS to provide liquidity for the
Company’s auction rate securities portfolio then held with a UBS affiliate. As provided for in the
settlement, the Company entered into a line of credit from UBS. During the second quarter of 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 as of the date of the transaction. 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 borrowings against this line of
credit 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 Company’s auction rate securities portfolio held with
Citigroup. Under the loan agreement, the Company has access to a revolving line of credit of up to
$2.625 million with its auction rate securities pledged as collateral. The current interest rate on
the line of credit is the federal funds rate plus 3.25%. 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. During the
thirteen weeks ended April 2, 2011, the Company borrowed $2.625 million under the line of credit.
With this draw against the line, there is no material balance available to be borrowed. These
borrowings were used to fund short-term liquidity needs. Because amounts borrowed under the line of
credit accrued interest at a floating rate and are callable on demand, the fair value of this
financial instrument approximated its carrying value. Subsequent to the end of the first quarter
of 2011, the Company liquidated the auction rate securities pledged as collateral for this line of
credit. See Note 10, “Subsequent Events’’, for further information.
9
4. Goodwill and Other Identifiable Intangible Assets
The changes in the carrying amount of goodwill for the thirteen weeks ended April 2, 2011 are as
follows (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
North |
|
|
|
|
|
|
|
| |
|
America |
|
|
EMEA |
|
|
Total |
|
Balance as of January 1, 2011 |
|
$ |
3,947 |
|
|
$ |
4,046 |
|
|
$ |
7,993 |
|
Changes in foreign currency exchange rates |
|
|
|
|
|
|
159 |
|
|
|
159 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of April 2, 2011 |
|
$ |
3,947 |
|
|
$ |
4,205 |
|
|
$ |
8,152 |
|
|
|
|
|
|
|
|
|
|
|
Included in intangible assets, net are the following (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
April 2, 2011 |
|
January 1, 2011 |
| |
|
|
|
|
|
Accumulated |
|
|
|
|
|
Accumulated |
| |
|
Cost |
|
Amortization |
|
Cost |
|
Amortization |
Customer relationships |
|
$ |
3,400 |
|
|
$ |
(3,116 |
) |
|
$ |
3,400 |
|
|
$ |
(2,904 |
) |
Intangible amortization expense for the thirteen weeks ended April 2, 2011 and April 3, 2010 was
$212,000 and $509,000, respectively, including $146,000 reported in cost of services for the
thirteen weeks ended April 3, 2010 for acquired software technology that became fully amortized
during fiscal year 2010. The remaining net book value of customer relationships in the amount of
$284,000 will be fully amortized by the end of fiscal year 2011.
The Company evaluates goodwill for impairment on an annual basis on the last day of the first
fiscal month of the fourth quarter and whenever events or circumstances indicate that these assets
may be impaired. The Company performs its impairment testing for goodwill in accordance with FASB
ASC 350, “Intangibles-Goodwill and Other.” Management determined that there were no events or
changes in circumstances during the thirteen weeks ended April 2, 2011 which indicated that
goodwill needed to be tested for impairment during the period.
The Company reviews long-lived assets and certain identifiable intangibles to be held and used for
impairment whenever events or changes in circumstances indicate that the carrying amount of these
assets might not be recoverable in accordance with the provisions of FASB ASC 360, “Property, Plant
and Equipment” and FASB ASC 350, “Intangibles-Goodwill and Other.” Management determined that there
were no events or changes in circumstances during the thirteen weeks ended April 2, 2011 which
indicated that long-lived assets and intangible assets needed to be reviewed for impairment during
the period.
5. Share-Based Compensation
The Company issues stock option awards and non-vested share awards under its share-based
compensation plans. The key provisions of the Company’s share-based compensation plans are
described in Note 6 to the Company’s consolidated financial statements included in the 2010 Form
10-K.
The Company recognized no income tax benefits related to share-based compensation arrangements
during the thirteen weeks ended April 2, 2011 and April 3, 2010.
1998 Equity Incentive Plan
Stock Options
A summary of the option activity under the Company’s Amended and Restated 1998 Equity Incentive
Plan (the “1998 Plan”), as of April 2, 2011 and changes during the thirteen weeks then ended is
presented below:
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Weighted |
|
| |
|
|
|
|
|
Average |
|
| |
|
|
|
|
|
Exercise |
|
| |
|
Shares |
|
|
Price |
|
Outstanding at January 1, 2011 |
|
|
641,093 |
|
|
$ |
11.18 |
|
Forfeited/cancelled |
|
|
(12,247 |
) |
|
$ |
21.73 |
|
|
|
|
|
|
|
|
Outstanding at April 2, 2011 |
|
|
628,846 |
|
|
$ |
10.97 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested and expected to vest at April 2, 2011 |
|
|
611,161 |
|
|
$ |
10.98 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at April 2, 2011 |
|
|
582,964 |
|
|
$ |
11.03 |
|
|
|
|
|
|
|
|
10
Non-vested Shares
There were 375 shares of non-vested stock issued under the 1998 Plan as of April 2, 2011 and
January 1, 2011 with a weighted average grant date fair value of $11.25 per share. No shares of
non-vested stock were issued or vested during the thirteen weeks ended April 2, 2011.
2000 Supplemental Stock Plan
A summary of the option activity under the Company’s 2000 Supplemental Stock Plan (the
“Supplemental Stock Plan”) as of April 2, 2011 and changes during the thirteen weeks then ended is
presented below:
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Weighted |
|
| |
|
|
|
|
|
Average |
|
| |
|
|
|
|
|
Exercise |
|
| |
|
Shares |
|
|
Price |
|
Outstanding at January 1, 2011 |
|
|
247,437 |
|
|
$ |
11.74 |
|
Forfeited/cancelled |
|
|
(17,225 |
) |
|
$ |
10.47 |
|
|
|
|
|
|
|
|
Outstanding at April 2, 2011 |
|
|
230,212 |
|
|
$ |
11.84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested and expected to vest at April 2, 2011 |
|
|
214,217 |
|
|
$ |
11.96 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at April 2, 2011 |
|
|
189,287 |
|
|
$ |
12.22 |
|
|
|
|
|
|
|
|
The Supplemental Stock Plan expired on May 23, 2010. No new awards will be issued pursuant to
the plan. The outstanding awards issued pursuant to the Supplemental Stock Plan remain subject to
the terms of the Supplemental Stock Plan following expiration of the plan.
6. Business Segments and Major Customers
The Company identifies its segments based on the way management organizes the Company to assess
performance and make operating decisions regarding the allocation of resources. In accordance with
the criteria in FASB ASC 280 “Segment Reporting,” the Company has concluded it has two reportable
segments: the North America segment and the EMEA segment. The North America segment is comprised of
three operating segments (North America Cable and Broadband, North America Telecom and Strategy),
which are aggregated into one reportable segment based on the similarity of their economic
characteristics. The EMEA segment is a single reportable, operating segment that encompasses the
Company’s operational, technological and software consulting services 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, depreciation and intangibles amortization. There were no inter-segment
sales in either the thirteen weeks ended April 2, 2011 or April 3, 2010. 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 Company’s reportable segments is
shown in the following table (amounts in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Not |
|
|
| |
|
North |
|
|
|
|
|
Allocated |
|
|
| |
|
America |
|
EMEA |
|
to Segments |
|
Total |
As of and for the thirteen weeks ended April 2, 2011: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
13,065 |
|
|
$ |
3,858 |
|
|
|
|
|
|
$ |
16,923 |
|
Income (loss) from operations |
|
|
3,081 |
|
|
|
678 |
|
|
$ |
(4,943 |
) |
|
|
(1,184 |
) |
Total assets |
|
$ |
13,993 |
|
|
$ |
5,006 |
|
|
$ |
23,805 |
|
|
$ |
42,804 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of the fiscal year ended January 1, 2011: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
11,124 |
|
|
$ |
5,406 |
|
|
$ |
24,565 |
|
|
$ |
41,095 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the thirteen weeks ended April 3, 2010: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
13,106 |
|
|
$ |
4,353 |
|
|
|
|
|
|
$ |
17,459 |
|
Income (loss) from operations |
|
|
3,588 |
|
|
|
786 |
|
|
$ |
(5,203 |
) |
|
|
(829 |
) |
Total assets |
|
$ |
10,479 |
|
|
$ |
6,548 |
|
|
$ |
29,026 |
|
|
$ |
46,053 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of the fiscal year ended January 2, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
9,466 |
|
|
$ |
6,342 |
|
|
$ |
32,443 |
|
|
$ |
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
11
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 |
|
| |
|
April 2, 2011 |
|
|
April 3, 2010 |
|
United States |
|
$ |
12,593 |
|
|
$ |
13,013 |
|
International: |
|
|
|
|
|
|
|
|
United Kingdom |
|
|
4,040 |
|
|
|
4,055 |
|
Other |
|
|
290 |
|
|
|
391 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
16,923 |
|
|
$ |
17,459 |
|
|
|
|
|
|
|
|
Major customers in terms of significance to TMNG’s revenues (i.e. in excess of 10% of
revenues) and accounts receivable were as follows (amounts in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Revenues |
| |
|
For the thirteen weeks |
|
For the thirteen weeks |
| |
|
ended April 2, 2011 |
|
ended April 3, 2010 |
| |
|
North |
|
|
|
|
|
North |
|
|
| |
|
America |
|
EMEA |
|
America |
|
EMEA |
Customer A |
|
|
|
|
|
$ |
1,349 |
|
|
|
|
|
|
$ |
1,982 |
|
Customer B |
|
$ |
4,232 |
|
|
|
|
|
|
$ |
5,481 |
|
|
|
|
|
Customer C |
|
$ |
2,814 |
|
|
|
|
|
|
$ |
703 |
|
|
|
|
|
Customer D |
|
$ |
2,414 |
|
|
|
|
|
|
$ |
2,479 |
|
|
|
|
|
Customer E |
|
$ |
1,319 |
|
|
|
|
|
|
$ |
1,801 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
Accounts Receivable |
| |
|
As of April 2, |
|
As of April 3, |
| |
|
2011 |
|
2010 |
Customer A |
|
$ |
1,657 |
|
|
$ |
2,759 |
|
Customer B |
|
$ |
3,303 |
|
|
$ |
4,312 |
|
Customer C |
|
$ |
6,007 |
|
|
|
454 |
|
Customer D |
|
$ |
2,255 |
|
|
$ |
1,653 |
|
Customer E |
|
$ |
787 |
|
|
$ |
1,289 |
|
Revenues from the Company’s ten most significant customers accounted for approximately 86% and 87%
of revenues during the thirteen weeks ended April 2, 2011 and April 3, 2010, respectively.
7. Income Taxes
In the thirteen weeks ended April 2, 2011, the Company recorded an income tax provision of $30,000.
In the thirteen weeks ended April 3, 2010, the Company recorded an income tax provision of $7,000.
The tax provision for the thirteen weeks ended April 2, 2011 is primarily due to deferred taxes
recognized on intangible assets amortized for income tax purposes but not for financial reporting
purposes. The tax provision for the thirteen weeks ended April 3, 2010 is primarily due to interest
recognized on reserves for uncertain tax positions. The Company has reserved all of its domestic
and international net deferred tax assets with a valuation allowance as of April 2, 2011 and
January 1, 2011 in accordance with the provisions of FASB ASC 740, “Income Taxes,” which requires
an estimation of the recoverability of the recorded income tax asset balances. As of April 2, 2011,
the Company has recorded $34.2 million of valuation allowances attributable to its net deferred tax
assets.
The Company analyzes its uncertain tax positions pursuant to the provisions of FASB ASC 740 “Income
Taxes.” The Company recognizes interest and penalties related to unrecognized tax benefits as a
component of the income tax provision. There was no material activity related to the liability for
uncertain tax positions during the thirteen weeks ended April 2, 2011 and April 3, 2010. As of
April 2, 2011, the Company has $199,000 accrued for uncertain income tax positions, including
interest and penalties. As of April 2, 2011, the Company believes that it is reasonably possible
that the liability for uncertain tax positions will decrease by $124,000 within the next 12 months
due to the expiration of the statute of limitations of tax filings in foreign jurisdictions.
12
The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction,
and various states and foreign jurisdictions. With few exceptions, the Company is no longer subject
to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years
before 2003. As of April 2, 2011, the Company has no income tax examinations in process.
8. Loan to Officer
As of April 2, 2011, there is one outstanding line of credit between the Company and its Chief
Executive Officer, Richard P. Nespola, which originated in fiscal year 2001. Aggregate borrowings
outstanding against the line of credit at April 2, 2011 and January 1, 2011 totaled $300,000 and
are due in September 2011. This amount is included in Prepaids and Other Current Assets in the
current assets section of the Condensed Consolidated Balance Sheets as of April 2, 2011 and January
1, 2011. In accordance with the loan provisions, the interest rate charged on the loans is equal to
the Applicable Federal Rate (AFR), as announced by the Internal Revenue Service, for short-term
obligations (with annual compounding) in effect for the month in which the advance is made, until
fully paid. Pursuant to the Sarbanes-Oxley Act, no further loan agreements or draws against the
line may be made by the Company to, or arranged by the Company for its executive officers. Interest
payments on this loan are current as of April 2, 2011.
9. 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.
During fiscal year 2009, the Company entered into an agreement under which it has a commitment to
purchase a minimum of $401,000 in computer software over a three year period. As of April 2, 2011,
the Company has an obligation of $122,000 remaining under this commitment.
During fiscal year 2010, the Company entered into an agreement to purchase telecommunications
equipment in the amount of $99,000. As of April 2, 2011, the Company has an obligation of $88,000
remaining under this commitment.
10. Subsequent Events
On April 27, 2011, the Company sold its Education Funding Capital Education Loan Backed Notes with
a par value of $6.3 million held with Citigroup. The total proceeds from the transaction were $5.9
million. Proceeds from the sale were applied first to the $2.6 million outstanding balance of the
line of credit with Citigroup. The Company received the remaining $3.3 million in proceeds. Upon
the disposition of the underlying collateral, the loan agreement with Citigroup was terminated.
ITEM 2. MANAGEMENT’S 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 Company’s or management’s 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 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, 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
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our
annual report on Form 10-K for the fiscal year ended January 1, 2011. Readers are cautioned not to
place undue reliance on these forward-looking statements, which reflect management’s opinions only
as of the date of this report. We undertake no obligation to revise, or publicly release the
results of any revision to, these forward-looking statements. Readers should carefully review the
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 Management’s 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 1, 2011.
OVERVIEW
TMNG is among the leading providers of professional services to the converging communications,
media and entertainment industries and the capital formation firms that support them. We offer a
fully integrated suite of consulting offerings including strategy, organizational development,
knowledge management, marketing, operational, and technology consulting services. We have
consulting experience with almost all major aspects of managing a global communications company.
Our portfolio of solutions includes proprietary methodologies and
13
toolsets, deep industry
experience, and hands-on operational expertise and licensed software. These solutions assist
clients in tackling complex business problems.
Our global investments in targeting the cable industry have re-positioned us to better serve
consolidating telecommunications carriers and the converging global media and entertainment
companies. The convergence of communications with media and entertainment, the pace of
technological change in the sector, and the consolidation of large telecommunications carriers have
required us to focus our strategy on building a global presence, continuing to expand our offerings
with software products and strengthening our position within the large carriers and media and
entertainment companies. Subject to the effects of cyclical economic conditions our efforts are
helping us build what we believe is a more sustainable revenue model over the long-term, which will
enable us to expand our global presence. We continue to focus our efforts on identifying, adapting
to and capitalizing on the changing dynamics prevalent in the converging communications, media and
entertainment industries, as well as providing our wireless and IP services within the
communications sector.
Our financial results are affected by macroeconomic conditions, credit market conditions, and the
overall level of business confidence. Although the first quarter of 2011 has demonstrated positive
economic indications, the economic slowdown of recent years continued to impact our customer base
and has resulted in significant employee layoffs and reductions in capital and operating
expenditures for some of our significant clients in the communications, media and entertainment
sectors. We are also experiencing greater pricing pressure and an increased need for enhanced
return on investment for projects or added sharing of risk and reward.
Revenues are driven by the ability of our team to secure new project contracts and deliver those
projects in a way that adds value to our client in terms of return on investment or assisting
clients to address a need or implement change. For the thirteen weeks ended April 2, 2011, revenues
decreased 3% to $16.9 million from $17.5 million for the thirteen weeks ended April 3, 2010 driven
primarily by reduced project demand for our strategic consulting and EMEA offerings. Our
international revenues were approximately 26% of total revenue during the thirteen weeks ended
April 2, 2011, as compared to 25% of total revenues for the thirteen weeks ended April 3, 2010. 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 as well as
fees paid to independent contractor organizations and related expense reimbursements. Employee
compensation includes certain non-billable time, training, vacation time, benefits and payroll
taxes. Gross margins are primarily impacted by the type of consulting services provided; the size
of service contracts and
negotiated discounts; changes in our pricing policies and those of competitors; utilization rates
of consultants and independent subject matter experts; and employee and independent contractor
costs, which tend to be higher in a competitive labor market.
Gross margins were 37.3% in the thirteen weeks ended April 2, 2011 compared with 37.8% in thirteen
weeks ended April 3, 2010. The decrease in gross margin is due to a combination of factors. The
most significant items that impact our margins include the mix of project types, utilization of
personnel and competitive pricing decisions. In addition, given the challenging macroeconomic
environment and reduced consulting demand, we have provided clients reduced pricing for long term
project commitment and volume increases.
Sales and marketing expenses consist primarily of personnel salaries, bonuses, and related costs
for direct client sales efforts and marketing staff. We primarily use a relationship sales model in
which partners, principals and senior consultants generate revenues. In addition, sales and
marketing expenses include costs associated with marketing collateral, product development, trade
shows and advertising. General and administrative expenses consist mainly of costs for accounting,
recruiting and staffing, information technology, personnel, insurance, rent and outside
professional services incurred in the normal course of business.
Management has focused on aligning operating costs with operating segment revenues. Selling,
general and administrative expenses increased by $0.2 million to $7.3 million for the thirteen
weeks ended April 2, 2011 from $7.1 million for the thirteen weeks ended April 3, 2010. As a result
of the decrease in revenues and increase in costs, our selling, general and administrative expenses
increased as a percentage of revenues to 43.0% in the thirteen weeks ended April 2, 2011 from 40.5%
in the thirteen weeks ended April 3, 2010. Selling expenses during the thirteen weeks ended April
3, 2010 included significant transition and severance costs for personnel associated with the
reorganization undertaken in 2010, representing approximately 3% of revenues for the quarter. More
than offsetting the reduction in transition and severance costs in the 2011 period were increases
in personnel related expenses. 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 $0.2 million in the
thirteen weeks ended April 2, 2011 from $0.4 million in the thirteen weeks ended April 3, 2010. The
decrease in amortization expense was due to the completion of amortization of some
intangibles recorded in connection with our acquisitions of Cartesian Ltd and RVA Consulting LLC.
We recorded a net loss of $1.2 million for the thirteen weeks ended April 2, 2011, compared to a
net loss of $0.8 million for the thirteen weeks ended April 3, 2010. The increase in net loss is
primarily attributable to a decrease in revenues and gross profit. We have made
14
significant strides
in recent years to reduce our total operating cost structure with emphasis on selling, general and
administrative expenses but certain costs cannot be adjusted as quickly when revenues decline.
The rate of change in the communications industry, driving convergence of media and
telecommunications, consolidation of smaller providers and expanded deployment of wireless
capabilities have added both opportunity and uncertainty for our clients. The general result is
overall reduced client spending on many capital and operational initiatives. This reduction in
spending, coupled with increased competition pursuing fewer opportunities, could result in further
price reductions, fewer client projects, under-utilization of consultants, reduced operating
margins and loss of market share. Declines in our revenues can have a significant impact on our
financial results. Although we have a flexible cost base comprised primarily of employee and
related costs, there is a lag in time required to scale the business appropriately if revenues are
reduced. In addition, our future revenues and operating results may fluctuate from quarter to
quarter based on the number, size and scope of projects in which we are engaged, the contractual
terms and degree of completion of such projects, any delays incurred in connection with a project,
consultant utilization rates, general economic conditions and other factors.
Cash flows used in operating activities were $3.7 million and $2.7 million during the thirteen
weeks ended April 2, 2011 and April 3, 2010, respectively. During the thirteen weeks ended April 2,
2011 the increase in cash flows used in operations was primarily due to losses of $0.7 million
after non-cash add backs plus increases in net working capital other than cash of $3.0 million.
During the thirteen weeks ended April 3, 2010, use of cash was primarily due to changes in net
working capital.
At April 2, 2011, we had working capital of approximately $15.3 million, which included $2.6
million in short-term debt. Our non-current investments of $5.9 million ($6.3 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.
During 2009, we entered into a loan agreement with Citigroup to provide liquidity for the remainder
of our $6.25 million auction rate securities portfolio held with Citigroup. Under the loan
agreement, we have access to a revolving line of credit of up to $2.6 million with our auction rate
securities pledged as collateral. On February 23, 2011, we borrowed $2.6 million under the
Citigroup line of credit. With this draw against the line, there was no material balance available
to be borrowed.
On April 27, 2011, we sold all of our Education Funding Capital Education Loan Backed Notes held
with Citigroup. The total proceeds from the transaction were $5.9 million. Proceeds from the sale
were applied first to the $2.6 million outstanding balance of the line of credit with Citigroup.
The Company received the remaining $3.3 million in proceeds. Upon the disposition of the
underlying collateral, the loan agreement with Citigroup was terminated.
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:
| |
• |
|
Marketable Securities; |
| |
| |
• |
|
Impairment of Goodwill and Long-lived Assets; |
| |
| |
• |
|
Revenue Recognition; |
| |
| |
• |
|
Accounting for Income Taxes; and |
| |
| |
• |
|
Research and Development and Capitalized Software Costs. |
Marketable Securities — Non-current investments, which consist of auction rate securities, are
accounted for under the provisions of FASB ASC 320, “Investments-Debt and Equity Securities.”
Management evaluates the appropriate classification of marketable securities at each balance sheet
date. These investments are reported at fair value, as measured pursuant to FASB ASC 820, “Fair
Value Measurements and Disclosures.” For those securities considered to be “available-for-sale,”
any temporary unrealized gains and losses are included as a separate component of stockholders’
equity, net of applicable taxes. For those securities considered to be “trading,” any unrealized
gains and losses are included in the Condensed Consolidated Statements of Operations and
Comprehensive Loss, net of applicable taxes. Additionally, realized gains and losses, changes in
value judged to be other-than-temporary, interest and dividends are also included in the Condensed
Consolidated Statements of Operations and Comprehensive Loss, net of applicable taxes.
As of April 2, 2011 and January 1, 2011, $5.9 million ($6.3 million par value) is reflected as a
non current asset on our Condensed Consolidated Balance Sheet and classified as available-for-sale
investments. These auction rate securities are held with Citigroup. On April 27, 2011, all of the
remaining auction rate securities were sold by the Company.
At April 2, 2011 we utilized valuation models that rely on Level 2 inputs, as defined by FASB ASC
820, including quoted prices for identical securities in non-active markets. Prior to the thirteen
weeks ended April 2, 2011, due to the lack of observable market quotes on our auction rate
securities portfolio, we utilized 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 change from Level 3 to Level 2 inputs was
driven by the increased availability of quoted prices during the quarter. The valuation of our
auction rate securities portfolio is subject to uncertainties that
15
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 April 2, 2011, we had $8.2 million in
goodwill and $0.3 million in long-lived intangible assets, net of accumulated amortization.
Goodwill arising from our acquisitions is 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 unit’s 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:
| |
• |
|
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 management’s estimates of economic and
market conditions over the projected period including
growth rates in revenues and estimates of expected changes
in operating margins. Our projections of future cash flows
are subject to change as actual results are achieved that
differ from those anticipated. Because management
frequently updates its projections, we would expect to
identify on a timely basis any significant differences
between actual results and recent estimates. |
| |
| |
• |
|
Selection of an appropriate discount rate — The income
approach requires the selection of an appropriate discount
rate, which is based on a weighted average cost of capital
analysis. The discount rate is affected by changes in
short-term interest rates and long-term yield as well as
variances in the typical capital structure of marketplace
participants. The discount rate is determined based on
assumptions that would be used by marketplace participants,
and for that reason, the capital structure of selected
marketplace participants was used in the weighted average
cost of capital analysis. Given the current volatile
economic conditions, it is possible that the discount rate
will fluctuate in the near term. |
In accordance with FASB ASC 360, “Property, Plant and Equipment,” we use our best estimates based
upon reasonable and supportable assumptions and projections to review for impairment of
finite-lived assets and finite-lived identifiable intangibles to be held and used whenever events
or changes in circumstances indicate that the carrying amount of our assets might not be
recoverable.
Revenue Recognition — We recognize revenues from time and materials consulting contracts in the
period in which our services are performed. We recognized $8.0 million and $6.3 million in revenues
from time and materials contracts during the thirteen weeks ended April 2, 2011 and April 3, 2010,
respectively. In addition to time and materials contracts, our other types of contracts include
fixed fee contracts and contingent fee contracts. During the thirteen weeks ended April 2, 2011 and
April 3, 2010, we recognized $8.9 million and $11.2 million in revenues on these other types of
contracts. We recognize revenues on milestone or deliverables-based fixed fee contracts and time
and materials contracts not to exceed contract price using the percentage of completion-like method
described by FASB ASC 605-35, “Revenue Recognition — Construction-Type and Production-Type
Contracts” For fixed fee contracts where services are not based on providing deliverables or
achieving milestones, we recognize revenues on a straight-line basis over the period during which
such services are expected to be performed. In connection with some fixed fee contracts, we receive
payments from customers that exceed recognized revenues. We record the excess of receipts from
customers over recognized revenue as deferred revenue. Deferred revenue is classified as a current
liability to the extent it is expected to be earned within twelve months from the date of the
balance sheet.
We also develop, install and support customer software in addition to our traditional consulting
services. We recognize revenues in connection with our software sales agreements utilizing the
percentage of completion method prescribed by FASB ASC 605-35. These agreements include software
right-to-use licenses (“RTU’s”) 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.
16
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 ” 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 utilizing PCS renewal terms as evidence of fair value.
Revenues from PCS services are recognized ratably on a straight-line basis over the term of the
support and maintenance agreement.
We also may enter into contingent fee contracts, in which revenue is subject to achievement of
savings or other agreed upon results, rather than time spent. Due to the nature of contingent fee
contracts, we recognize costs as they are incurred on the project and defer revenue recognition
until the revenue is realizable and earned as agreed to by our clients. Although these contracts
can be very rewarding, the profitability of these contracts is dependent on our ability to deliver
results for our clients and control the cost of providing these services. These types of contracts
are typically more results-oriented and are subject to greater risk associated with revenue
recognition and overall project profitability than traditional time and materials contracts.
Revenues associated with contingent fee contracts were not material during the thirteen weeks ended
April 2, 2011 or April 3, 2010.
Accounting for Income Taxes — Accounting for income taxes requires significant estimates and
judgments on the part of management. Such estimates and judgments include, but are not limited to,
the effective tax rate anticipated to apply to tax differences that are expected to reverse in the
future, the sufficiency of taxable income in future periods to realize the benefits of net deferred
tax assets and net operating losses currently recorded and the likelihood that tax positions taken
in tax returns will be sustained on audit. We account for income taxes in accordance with FASB ASC
740 “Income Taxes.” As required by FASB ASC 740, we record deferred tax assets or liabilities based
on differences between financial reporting and tax bases of assets and liabilities using currently
enacted rates that will be in effect when the differences are expected to reverse. FASB ASC 740
also requires that deferred tax assets be reduced by a valuation allowance if it is more likely
than not that some portion or all of the deferred tax asset will not be realized. As of April 2,
2011, cumulative valuation allowances in the amount of $34.2 million were recorded in connection
with the net deferred income tax assets. As required by FASB ASC 740, we have performed a
comprehensive review of our portfolio of uncertain tax positions in accordance with recognition
standards established by the guidance. Pursuant to FASB ASC 740, an uncertain tax position
represents our expected treatment of a tax position taken in a filed tax return, or planned to be
taken in a future tax return, that has not been reflected in measuring income tax expense for
financial reporting purposes. As of April 2, 2011, we have recorded a liability of approximately
$199,000 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
17
weeks ended April 2, 2011 and April 3, 2010, software development costs of
$144,000 and $139,000, respectively, were expensed as incurred. No software development costs were
capitalized during the thirteen weeks ended April 2, 2011 or April 3, 2010.
RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED APRIL 2, 2011 COMPARED TO THIRTEEN WEEKS ENDED APRIL 3, 2010
REVENUES
Revenues decreased 3.1% to $16.9 million for the thirteen weeks ended April 2, 2011 from $17.5
million for the thirteen weeks ended April 3, 2010. The decrease in revenues is primarily due to a
decrease in demand for strategic consulting within our North America segment and demand for
consulting and software services in our EMEA segment.
North America Segment — North America segment revenues were flat at $13.1 million for the thirteen
weeks ended April 2, 2011 and April 3, 2010. During the thirteen weeks ended April 2, 2011, the
North America segment provided services on 88 customer projects, compared to 77 projects performed
in the thirteen weeks ended April 3, 2010. Average revenue per project was $148,000 in the thirteen
weeks ended April 2, 2011, compared to $170,000 in the thirteen weeks ended April 3, 2010. Revenues
recognized in connection with fixed price engagements totaled $6.8 million and $8.7 million,
representing 52.3% and 66.1% of total revenues of the segment, for the thirteen weeks ended April
2, 2011 and April 3, 2010, respectively. Revenues from software licensing during the thirteen weeks
ended April 2, 2011 were $0.2 million. There were no revenues from software licensing during the
thirteen weeks ended April 3, 2010, respectively.
EMEA Segment — EMEA segment revenues decreased by 11.4% to $3.9 million for the thirteen weeks
ended April 2, 2011 from $4.4 million for the thirteen weeks ended April 3, 2010. All revenues were
generated internationally. During the thirteen weeks ended April 2, 2011 and April 3, 2010, this
segment provided services on 70 and 81 customer projects, respectively. Average revenue per project
was approximately $45,000 and $46,000, respectively, for the thirteen weeks ended April 2, 2011 and
April 3, 2010. Revenues from post-contract software related support services were approximately
$708,000 and $646,000 for the thirteen weeks ended April 2, 2011 and April 3, 2010, respectively.
There were no revenues from software licensing during the thirteen weeks ended April 2, 2011 and
April 3, 2010.
COSTS OF SERVICES
Costs of services decreased 2.2% to $10.6 million for the thirteen weeks ended April 2, 2011 from
$10.9 million for the thirteen weeks ended April 3, 2010. Our gross margin was 37.3% for the
thirteen weeks ended April 2, 2011 compared to 37.8% for the thirteen weeks ended April 3, 2010.
Our North America segment gross margin was 37.6% for the thirteen weeks ended April 2, 2011
compared to 40.1% for the thirteen weeks ended April 3, 2010. The decrease in gross margin in the
first quarter of 2011 as compared to the same period of 2010 in our North America segment is
primarily due to a decrease in strategy engagements resulting in lower utilization of our fixed
employee consulting base. Our EMEA segment gross margin was 36.2% for the thirteen weeks ended April 2, 2011, compared to
30.8% for the thirteen weeks ended April 3, 2010. Margin increases in the EMEA segment are
primarily related to adjustments to our cost structure to better align with revenue levels. Costs
of services in the EMEA segment included amortization of intangible assets of $146,000 for the
thirteen weeks ended April 3, 2010 related to acquired software. There was no amortization of
intangible assets included in cost of services during the thirteen weeks ended April 2, 2011.
OPERATING EXPENSES
Operating expenses increased 0.8% to $7.5 million for the thirteen weeks ended April 2, 2011, from
$7.4 million for the thirteen weeks ended April 3, 2010. 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 increased to $7.3 million for the thirteen weeks ended
April 2, 2011, compared to $7.1 million for the thirteen weeks ended April 3, 2010. As a percentage
of revenues, our selling, general and administrative expenses were 43.0% for the thirteen weeks
ended April 2, 2011, compared to 40.5% for the thirteen weeks ended April 3, 2010. Selling expenses
during the thirteen weeks ended April 3, 2010 included significant transition and severance costs
for personnel associated with the reorganization undertaken in 2010, representing approximately 3%
of revenues for the quarter. More than offsetting the reduction in transition and severance costs
in the 2011 period were increases in personnel related expenses.
Intangible asset amortization decreased by $151,000 to $212,000 for the thirteen weeks ended April
2, 2011, compared to $363,000 for the thirteen weeks ended April 3, 2010. The decrease in
amortization expense was primarily due to the completion of amortization of some intangibles
recorded in connection with acquisitions.
18
OTHER INCOME AND EXPENSES
Interest income was $37,000 and $64,000 for the thirteen weeks ended April 2, 2011 and April 3,
2010, respectively, and represented interest earned on invested balances. Interest income decreased
for the thirteen weeks ended April 2, 2011 as compared to the thirteen weeks ended April 3, 2010
due primarily to reductions in invested balances. We primarily invest in money market funds and
have holdings in auction rate securities. For the thirteen weeks ended April 3, 2010, other income
includes $110,000 in realized holding gains for auction rate securities classified as trading
securities, offset by realized losses on our ARS Rights of $84,000.
INCOME TAXES
During the thirteen weeks ended April 2, 2011, we recorded an income tax provision of $30,000
compared to an income tax provision of $7,000 during the thirteen weeks ended April 3, 2010. The
tax provision for the thirteen weeks ended April 2, 2011 is primarily due to deferred taxes
recognized on intangibles amortized for income tax purposes but not for financial reporting
purposes. The tax provision for the thirteen weeks ended April 3, 2010 is primarily due to interest
recognized on reserves for uncertain tax positions. For the thirteen weeks ended April 2, 2011 and
April 3, 2010, we recorded no income tax benefit related to our domestic and international pre-tax
losses in accordance with the provisions of FASB ASC 740, “Income Taxes”, which requires an
estimation of our ability to use recorded deferred income tax assets. We 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 carry-forwards in the future.
NET LOSS
We had a net loss of $1.2 million for the thirteen weeks ended April 2, 2011 compared to a net loss
of $0.8 million for the thirteen weeks ended April 3, 2010. The increase in net loss is primarily
attributable to a decrease in revenues and gross profit.
STATEMENT REGARDING NON-GAAP FINANCIAL MEASUREMENT
In addition to net loss and net loss per share on a GAAP basis, our 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 year’s 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 our comparative operating performance for the periods presented.
Our non-GAAP measure may differ from similar measures by other companies, even if similar terms are
used to identify such measures. Although management believes the non-GAAP financial measure is
useful in evaluating the performance of its business, we acknowledge 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 our
results.
19
RECONCILIATION OF GAAP NET LOSS TO NON-GAAP ADJUSTED NET (LOSS) INCOME
(unaudited)
(in thousands, except per share data)
| |
|
|
|
|
|
|
|
|
| |
|
Thirteen |
|
|
Thirteen |
|
| |
|
Weeks |
|
|
Weeks |
|
| |
|
Ended |
|
|
Ended |
|
| |
|
April 2, |
|
|
April 3, |
|
| |
|
2011 |
|
|
2010 |
|
Reconciliation of GAAP net loss to non-GAAP adjusted net (loss) income: |
|
|
|
|
|
|
|
|
GAAP net loss |
|
$ |
(1,183 |
) |
|
$ |
(753 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized gain on auction rate securities |
|
|
— |
|
|
|
(26 |
) |
Depreciation and amortization |
|
|
420 |
|
|
|
705 |
|
Non-cash share based compensation expense |
|
|
40 |
|
|
|
113 |
|
Tax effect of applicable non-GAAP adjustments |
|
|
30 |
|
|
|
34 |
|
|
|
|
|
|
|
|
Adjustments to GAAP net loss |
|
|
490 |
|
|
|
826 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP adjusted net (loss) income |
|
$ |
(693 |
) |
|
$ |
73 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
$ |
(0.17 |
) |
|
$ |
(0.11 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized gain on auction rate securities |
|
|
— |
|
|
|
0.00 |
|
Depreciation and amortization |
|
|
0.06 |
|
|
|
0.10 |
|
Non-cash share based compensation expense |
|
|
0.01 |
|
|
|
0.02 |
|
Tax effect of applicable non-GAAP adjustments |
|
|
0.00 |
|
|
|
0.00 |
|
|
|
|
|
|
|
|
Adjustments to GAAP net loss per diluted common share |
|
|
0.07 |
|
|
|
0.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP adjusted net (loss) income per diluted common share |
|
$ |
(0.10 |
) |
|
$ |
0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in calculation of diluted net loss per common share |
|
|
7,073 |
|
|
|
7,027 |
|
|
|
|
|
|
|
|
LIQUIDITY AND CAPITAL RESOURCES
Net cash flows used in operating activities were $3.7 million during the thirteen weeks ended April
2, 2011 and $2.7 million during the thirteen weeks ended April 3, 2010. During the thirteen weeks
ended April 2, 2011, the increase in cash flows used in operating activities was primarily due to
losses of $0.7 million after non-cash add backs plus increases in net working capital other than
cash of $3.0 million. During the thirteen weeks ended April 3, 2010, use of cash was primarily due
to changes in net working capital.
Net cash used in investing activities was $0.3 million and $0.1 million for the thirteen weeks
ended April 2, 2011 and April 3, 2010, respectively. Investing activities for the thirteen weeks
ended April 2, 2011 and April 3, 2010 related to the purchase of office equipment, software and
computer equipment.
Net cash provided by financing activities was $2.6 million and $0.7 million for the thirteen weeks
ended April 2, 2011 and April 3, 2010, respectively. Financing activities included $2.6 million and
$0.9 million, respectively, in proceeds from line of credit borrowings during the thirteen weeks
ended April 2, 2011 and April 3, 2010. In addition, in both periods cash was used to make payments
on long term obligations.
At April 2, 2011, we had approximately $5.5 million in cash and cash equivalents ($3.6 million of
which was denominated in pounds sterling) and $15.3 million in net working capital. We believe we
have sufficient cash after consideration of the sale of our auction rate securities on April 27,
2011 to meet anticipated cash requirements, including anticipated capital expenditures for at least
the next 12 months. Should our cash and short-term investments prove insufficient we may need to
obtain new debt or equity financing to support our operations or complete acquisitions. In recent
years, credit and capital markets have experienced unusual volatility and disruption. If we need to
obtain new debt or equity financing to support our operations or complete acquisitions in the
future, we may be unable to obtain debt or equity
financing on reasonable terms. We have established a flexible model that provides a lower fixed
cost structure than most consulting firms, enabling us to scale operating cost structures more
quickly based on market conditions, although there is a lag in time required to scale the
20
business
appropriately if revenues are reduced. Our strong balance sheet has enabled us to make acquisitions
and related investments in intellectual property and businesses we believe are enabling us to
capitalize on the current transformation of the industry; however, if demand for our consulting
services is reduced and we experience negative cash flow, we could experience liquidity challenges
at some point in the future.
FINANCIAL COMMITMENTS
During fiscal year 2009, we entered into an agreement under which we have a commitment to purchase
a minimum of $401,000 in computer software over a three year period. As of April 2, 2011, we have
an obligation of $122,000 remaining under this commitment.
During fiscal year 2010, we entered into an agreement to purchase telecommunications equipment in
the amount of $99,000. As of April 2, 2011, we have an obligation of $88,000 remaining under this
commitment.
On March 10, 2011, the independent members of our Board of Directors approved an executive
incentive compensation plan for fiscal year 2011 (the “Plan”). The Plan establishes a cash bonus
pool (the “Pool”) for our principal executive officer, president and chief operating officer, and
principal financial officer if we meet or exceed a non-GAAP EBITDA target (as defined) of
$2,750,000 for fiscal year 2011. The calculation of the Non-GAAP EBITDA target excludes non-cash
charges (e.g., share-based compensation expense, etc.) and may exclude extraordinary one-time items
to the extent determined to be appropriate by the Compensation Committee. Non-GAAP EBITDA differs
from non-GAAP net income due to the exclusion of our income tax provision and Other income, net.
The amount available for payment from the Pool (“Payout Amount”) shall be a specified lump sum
amount at certain thresholds of 2011 Non-GAAP EBITDA (as reduced by the Payout Amount) per the
following schedule:
| |
|
|
|
|
|
|
|
|
| Non-GAAP EBITDA |
|
|
|
|
|
|
| (Post Bonus) Exceeds |
|
|
|
Payout Amount |
| $ |
2,750,000 |
|
|
|
|
$ |
450,000 |
|
| $ |
3,025,000 |
|
|
|
|
$ |
575,000 |
|
| $ |
3,330,000 |
|
|
|
|
$ |
700,000 |
|
| $ |
3,630,000 |
|
|
|
|
$ |
770,000 |
|
| $ |
3,970,000 |
|
|
|
|
$ |
830,000 |
|
| $ |
4,310,000 |
|
|
|
|
$ |
890,000 |
|
In no event will the Payout Amount exceed $890,000. The distribution of the Payout Amount, if any,
among our eligible executive management will be determined by our Compensation Committee and/or
independent directors at a later date. The Plan is filed as Exhibit 10.1 to the Current Report on
Form 8-K filed with the Securities and Exchange Commission on March 16, 2011.
TRANSACTIONS WITH RELATED PARTIES
During the thirteen weeks ended April 2, 2011 and April 3, 2010, we incurred immaterial legal fees
for services provided by Bingham McCutchen, LLP, a law firm in which a member of our Board of
Directors, Andrew Lipman, owns an equity interest. Our Board of Directors has affirmatively
determined that such payments do not constitute a material relationship between the director and
the Company and concluded the director is independent as defined by the NASDAQ corporate governance
rules. All payments were made within the limitations set forth by NASDAQ Rules as to the
qualifications of an independent director.
As of April 2, 2011, there is one outstanding line of credit between the Company and its Chief
Executive Officer, Richard P. Nespola, which originated in fiscal year 2001. Aggregate borrowings
outstanding against the line of credit at April 2, 2011 totaled $300,000 and are due in September
2011. This amount is included in Prepaids and Other Current Assets in the current assets section of
the Condensed Consolidated Balance Sheets as of April 2, 2011 and January 1, 2011. In accordance
with the loan provisions, the interest rate charged on the loans is equal to the Applicable Federal
Rate (AFR), as announced by the Internal Revenue Service, for short-term obligations (with annual
compounding) in effect for the month in which the advance is made, until fully paid. Pursuant to
the Sarbanes-Oxley Act, no further loan agreements or draws against the line may be made by the
Company to, or arranged by the Company for its executive officers. Interest payments on this loan
are current as of April 2, 2011.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
21
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 Company’s
management, including its principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding required disclosure. We have established a
Disclosure Committee, consisting of certain members of management, to assist in this evaluation.
The Disclosure Committee meets on a regular quarterly basis, and as needed.
A review and evaluation was performed by our management, including our Chief Executive Officer (the
“CEO”) and Chief Financial Officer (the “CFO”), of the effectiveness of the design and operation of
our disclosure controls and procedures as of the end of the period covered by this quarterly
report. Based upon this evaluation, the Company’s CEO and CFO have concluded that the Company’s
disclosure controls and procedures were effective as of April 2, 2011.
There was no change in internal control over financial reporting during the fiscal quarter ended
April 2, 2011, that has materially affected or is reasonably likely to materially affect our
internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We have not been subject to any material new litigation since the filing on March 31, 2011 of our
Annual Report on Form 10-K for the year ended January 1, 2011.
ITEM 1A. RISK FACTORS
Not applicable
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. REMOVED AND RESERVED
None
ITEM 5. OTHER INFORMATION
None
22
ITEM 6. EXHIBITS
(a) Exhibits
| |
|
|
|
Exhibit 3.1
|
|
Amendments to the Bylaws, filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K
filed with the Securities and
Exchange Commission on March 16, 2011, are incorporated herein by reference as Exhibit 3.1. |
|
|
|
Exhibit 3.2
|
|
Amended and Restated Bylaws, filed as Exhibit 3.2 to the Company’s Current Report on Form
8-K filed with the Securities and Exchange Commission on March 16, 2011, are incorporated
herein by reference as Exhibit 3.2. |
|
|
|
Exhibit 10.1
|
|
The Management Network Group, Inc. 2011 Executive Incentive Compensation Plan, filed as
Exhibit 10.1 to the Company’s
Current Report on Form 8-K filed with the Securities and Exchange Commission on March 16,
2011, is incorporated herein by reference as Exhibit 10.1. |
|
|
|
Exhibit 10.2
|
|
Employment Agreement between Cambridge Strategic Management Group, Inc. and Susan Simmons
dated October 20, 2006. |
|
|
|
Exhibit 31.
|
|
Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
Exhibit 32.
|
|
Certifications furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
| |
|
|
|
|
| |
The Management Network Group, Inc.
(Registrant)
|
|
| Date: May 17, 2011 |
By |
/s/ Richard P. Nespola
|
|
| |
|
(Signature) |
|
| |
|
Richard P. Nespola
Chairman and Chief Executive Officer
(Principal executive officer) |
|
| |
| |
|
|
| Date: May 17, 2011 |
By |
/s/ Donald E. Klumb
|
|
| |
|
(Signature) |
|
| |
|
Donald E. Klumb
Chief Financial Officer and Treasurer
(Principal financial officer and
principal accounting officer) |
|
24
EXHIBIT INDEX
| |
|
|
| Exhibit No. |
|
Description of Exhibit |
|
|
|
Exhibit 3.1
|
|
Amendments to the Bylaws, filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K
filed with the Securities and
Exchange Commission on March 16, 2011, are incorporated herein by reference as Exhibit 3.1. |
|
|
|
Exhibit 3.2
|
|
Amended and Restated Bylaws, filed as Exhibit 3.2 to the Company’s Current Report on Form
8-K filed with the Securities and Exchange Commission on March 16, 2011, are incorporated
herein by reference as Exhibit 3.2. |
|
|
|
Exhibit 10.1
|
|
The Management Network Group, Inc. 2011 Executive Incentive Compensation Plan, filed as
Exhibit 10.1 to the Company’s
Current Report on Form 8-K filed with the Securities and Exchange Commission on March 16,
2011, is incorporated herein by reference as Exhibit 10.1. |
|
|
|
Exhibit 10.2
|
|
Employment Agreement between Cambridge Strategic Management Group, Inc. and Susan Simmons
dated October 20, 2006. |
|
|
|
Exhibit 31.
|
|
Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
Exhibit 32.
|
|
Certifications furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
25