UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended July 1, 2006
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number: 0-27617
THE MANAGEMENT NETWORK GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 48-1129619
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7300 COLLEGE BLVD., SUITE 302, OVERLAND PARK, KS 66210
(Address of principal executive offices) (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 [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
[ ] Large Accelerated Filer [ ] Accelerated Filer [X] Non-Accelerated Filer
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12-b-2 of the Exchange Act) [ ] Yes [X] No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
As of August 11, 2006 TMNG had outstanding 35,901,917 shares of common stock.
1
THE MANAGEMENT NETWORK GROUP, INC.
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION:
ITEM 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets - July 1, 2006
(unaudited) and December 31, 2005 .................. 3
Condensed Consolidated Statements of Operations and
Comprehensive Loss (unaudited) - Thirteen weeks and
Twenty-six weeks ended July 1, 2006 and July 2,
2005 ............................................... 4
Condensed Consolidated Statements of Cash Flows
(unaudited) - Twenty-six weeks ended July 1, 2006
and July 2, 2005 ................................... 5
Notes to Condensed Consolidated Financial
Statements ......................................... 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................ 13
ITEM 3. Quantitative and Qualitative Disclosures about
Market Risk ........................................ 19
ITEM 4. Controls and Procedures ............................... 19
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings ..................................... 19
ITEM 1A. Risk Factors .......................................... 19
ITEM 2. Unregistered Sales of Equity Securities and Use of
Proceeds ........................................... 19
ITEM 3. Defaults Upon Senior Securities ....................... 19
ITEM 4. Submission of Matters to a Vote of Security Holders ... 20
ITEM 5. Other Information ..................................... 20
ITEM 6. Exhibits .............................................. 20
Signatures ..................................................... 20
Exhibits ....................................................... 21
2
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THE MANAGEMENT NETWORK GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(unaudited)
July 1, December 31,
2006 2005
-------- ------------
CURRENT ASSETS:
Cash and cash equivalents ................................... $ 6,392 $ 10,951
Short-term investments ...................................... 35,750 38,700
Receivables:
Accounts receivable ...................................... 7,324 3,886
Accounts receivable - unbilled ........................... 4,265 2,559
-------- --------
11,589 6,445
Less: Allowance for doubtful accounts .................... (418) (296)
-------- --------
11,171 6,149
Refundable income taxes .................................. 111 117
Prepaid and other assets ................................. 1,389 1,262
-------- --------
Total current assets .................................. 54,813 57,179
-------- --------
Property and equipment, net ................................. 1,108 900
Goodwill .................................................... 14,745 13,365
Licenses and other identifiable intangible assets, net ...... 1,647 1,651
Other assets ................................................ 821 454
-------- --------
Total Assets ................................................... $ 73,134 $ 73,549
======== ========
CURRENT LIABILITIES:
Trade accounts payable ...................................... $ 1,650 $ 1,025
Accrued payroll, bonuses and related expenses ............... 2,712 1,136
Other accrued liabilities ................................... 1,712 1,893
Unfavorable and capital lease obligations ................... 610 628
-------- --------
Total current liabilities ............................. 6,684 4,682
Unfavorable lease .............................................. 2,515 2,819
STOCKHOLDERS' EQUITY
Common Stock: ............................................... 36 36
Voting - $.001 par value, 100,000,000 shares authorized;
35,896,584 and 35,705,520 shares issued and outstanding on
July 1, 2006 and December 31, 2005, respectively
Preferred stock - $.001 par value, 10,000,000 shares
authorized, no shares issued or outstanding
Additional paid-in capital .................................. 161,030 159,586
Accumulated deficit ......................................... (97,328) (93,305)
Accumulated other comprehensive income -
Foreign currency translation adjustment .................. 197 147
Unearned compensation ....................................... (416)
-------- --------
Total stockholders' equity ............................ 63,935 66,048
-------- --------
Total Liabilities and Stockholders' Equity ..................... $ 73,134 $ 73,549
======== ========
See notes to 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)
For the Thirteen For the Twenty-six
Weeks Ended Weeks Ended
--------------------------- ---------------------------
July 1, 2006 July 2, 2005 July 1, 2006 July 2, 2005
------------ ------------ ------------ ------------
Revenues ........................................ $ 9,541 $ 9,017 $16,704 $16,084
Cost of services (including equity related
charges of $134 and $34 for the thirteen
weeks ended July 1, 2006 and July 2, 2005,
respectively, and $327 and $69 for the twenty-
six weeks ended July 1, 2006 and July 2,
2005, respectively) .......................... 4,854 4,553 8,398 7,982
------- ------- ------- -------
Gross profit .................................... 4,687 4,464 8,306 8,102
Operating Expenses:
Selling, general and administrative
(including equity related charges of $711
and $200 for the thirteen weeks ended
July 1, 2006 and July 2, 2005,
respectively, and $1,221 and $388 for the
twenty-six weeks ended July 1, 2006 and
July 2, 2005, respectively) ............... 7,443 4,862 13,024 9,198
Real estate restructuring .................... 75
Intangible asset amortization ................ 236 43 351 202
------- ------- ------- -------
Total operating expenses .................. 7,679 4,905 13,375 9,475
------- ------- ------- -------
Loss from operations ............................ (2,992) (441) (5,069) (1,373)
Other Income:
Interest income .............................. 546 379 1,081 703
Other, net ................................... (1) 95 (1) 110
------- ------- ------- -------
Total other income ........................ 545 474 1,080 813
------- ------- ------- -------
(Loss) income before income tax provision ....... (2,447) 33 (3,989) (560)
Income tax provision ............................ (13) (3) (34) (18)
------- ------- ------- -------
Net (loss) income ............................... (2,460) 30 (4,023) (578)
Other comprehensive item -
Foreign currency translation adjustment ...... 46 (121) 50 (191)
------- ------- ------- -------
Comprehensive loss .............................. $(2,414) $ (91) $(3,973) $ (769)
======= ======= ======= =======
Net (loss) income per common share
Basic ........................................ $ (0.07) $ 0.00 $ (0.11) $ (0.02)
======= ======= ======= =======
Diluted ...................................... $ (0.07) $ 0.00 $ (0.11) $ (0.02)
======= ======= ======= =======
Shares used in calculation of net (loss)
income per common share
Basic ........................................ 35,731 35,104 35,678 35,040
======= ======= ======= =======
Diluted ...................................... 35,731 35,461 35,678 35,040
======= ======= ======= =======
See notes to condensed consolidated financial statements.
4
THE MANAGEMENT NETWORK GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
For the
Twenty-six
Weeks Ended
-----------------
July 1, July 2,
2006 2005
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ............................................... $(4,023) $ (578)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization .................... 555 455
Equity related charges ........................... 1,548 457
Other changes in operating assets and liabilities,
net of business acquisition:
Accounts receivable ........................... (2,313) (1,857)
Accounts receivable - unbilled ................ (1,706) (951)
Prepaid and other assets ...................... (255) 804
Trade accounts payable ........................ (196) 51
Accrued liabilities ........................... 458 371
------- -------
Net cash used in operating activities ...... (5,932) (1,248)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments .................... (5,900) (3,600)
Proceeds from maturities and sales of short-term
investments ......................................... 8,850 5,650
Acquisition of business, net of cash acquired .......... (1,339)
Acquisition of property and equipment .................. (304) (206)
------- -------
Net cash provided by investing activities .. 1,307 1,844
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments made on long-term obligations ................. (296) (418)
Proceeds from exercise of stock options ................ 238 208
Issuance of common stock through employee stock
purchase plan ....................................... 74 88
------- -------
Net cash provided by (used in) financing
activities .............................. 16 (122)
------- -------
Effect of exchange rate on cash and cash equivalents ...... 50 (191)
------- -------
Net increase (decrease) in cash and cash equivalents ...... (4,559) 283
Cash and cash equivalents, beginning of period ............ 10,951 10,882
------- -------
Cash and cash equivalents, end of period .................. $ 6,392 $11,165
======= =======
Supplemental disclosure of cash flow information:
Cash paid during period for interest ...................... $ 1 $ 2
======= =======
Cash paid during period for taxes, net .................... $ 16 $ 18
======= =======
Accrued property and equipment ............................ $ 24
=======
See notes to condensed consolidated financial statements.
5
THE MANAGEMENT NETWORK GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF REPORTING AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying condensed consolidated financial statements of The Management
Network Group, Inc. ("TMNG" or the "Company") as of July 1, 2006, and for the
thirteen and twenty-six weeks ended July 1, 2006 and July 2, 2005, are unaudited
and have been prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial information.
Consequently, these statements do not include all the disclosures normally
required by accounting principles generally accepted in the United States of
America ("US 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 report on Form 10-K for additional disclosures,
including a summary of the Company's accounting policies. The Condensed
Consolidated Balance Sheet as of December 31, 2005 has been derived from the
audited Consolidated Balance Sheet at that date but does not include all of the
information and footnotes required by US GAAP for complete financial statements.
Research and Development Costs - Expenditures relating to development of new
offerings and services are expensed as incurred. Research and development costs
(exclusive of associated sales and marketing related costs) in the thirteen
weeks and twenty-six weeks ended July 1, 2006 and July 2, 2005 were $101,000,
$281,000, $346,000 and $461,000, respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets,
an amendment of APB Opinion No. 29 ("SFAS 153"). SFAS 153 was issued primarily
to improve the comparability of accounting for exchanges of nonmonetary assets
with the International Accounting Standards Board. SFAS 153 requires that
exchanges of nonmonetary assets be measured based on the fair value of the
assets exchanged. APB Opinion No. 29 included some exceptions to measuring
exchanges at fair value. SFAS 153 is effective for nonmonetary asset exchanges
occurring in fiscal periods beginning after June 15, 2005, though early adoption
is encouraged. The adoption of SFAS 153 is not expected to have a material
impact on the Company's consolidated financial statements.
In May 2005, FASB issued SFAS No. 154, Accounting Changes and Error Corrections
("SFAS 154"), which will require entities that voluntarily make a change in
accounting principle to apply that change retrospectively to prior periods'
financial statements, unless this would be impracticable. SFAS 154 supersedes
APB Opinion No. 20, Accounting Changes, which previously required that most
voluntary changes in accounting principle be recognized by including in the
current period's net income the cumulative effect of changing to the new
accounting principle. SFAS 154 also makes a distinction between "retrospective
application" of an accounting principle and the "restatement" of financial
statements to reflect the correction of an error. SFAS 154 applies to accounting
changes and error corrections that are made in fiscal years beginning after
December 15, 2005. The adoption of SFAS 154 is not expected to have a material
impact on the Company's consolidated financial statements.
In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid
Financial Instruments--an amendment of SFAS No. 133 and 140. This statement
simplifies accounting for certain hybrid financial instruments, eliminates the
interim guidance in Statement 133 Implementation Issue No. D1, Application of
Statement 133 to Beneficial Interest in Securitized Financial Assets, and
eliminates a restriction of the passive derivative instruments that a qualifying
special-purpose entity may hold. The statement is effective for fiscal years
beginning after September 15, 2006. The adoption of SFAS 155 is not expected to
have a material impact on the Company's consolidated financial statements.
In March 2006, the Emerging Issues Task Force ("EITF") issued EITF Issue 06-3,
"How Sales Taxes Collected from Customers and Remitted to Governmental
Authorities Should Be Presented in the Income Statement." A consensus was
reached that entities may adopt a policy of presenting sales taxes in the income
statement on either a gross or net basis. If taxes are significant, an entity
should disclose its policy of presenting taxes and the amounts of taxes. The
guidance is effective for periods beginning after December 15, 2006. The
Company presents sales net of sales taxes. This issue will not have an impact
on the Company's consolidated financial statements.
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of
Financial Assets - an amendment of FASB Statement No. 140 ("SFAS 156"). This
statement requires all separately recognized servicing rights to be initially
measured at fair value, if practicable. SFAS 156 is effective January 1, 2007.
The adoption of SFAS 156 is not expected to have a material impact on the
Company's consolidated financial statements.
In July 2006, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes--an
interpretation of FASB Statement No. 109" ("FIN 48"), which clarifies the
accounting for uncertainty in tax positions. This Interpretation requires that
the Company recognize in its financial statements, the impact of a tax position,
if that position is not more likely than not of being sustained on audit, based
on the technical merits of the position. The provisions of FIN 48 will be
effective as of the beginning of the Company's 2007 fiscal year, with the
cumulative effect of the change in accounting principle recorded as an
adjustment to opening retained earnings. The Company is currently evaluating the
impact of adopting FIN 48 on the Consolidated Financial Statements.
6
2. BUSINESS COMBINATIONS
On April 3, 2006, TMNG announced it had signed a definitive agreement to acquire
the business and primary assets of Adventis Limited, the international
operations of Adventis Corporation, a Delaware corporation and the parent of
Adventis Limited, a global consulting firm specializing in the interrelated
sectors of telecom, technology and digital media. The acquisition complements
TMNG's strategic consulting practice, with service offerings including analyses
of industry and competitive environments; product and distribution strategies;
finance, including business case development, modeling, cost analysis and
benchmarking; and due diligence and risk assessment. The acquired international
operations of Adventis Limited consist of 27 consultants located in London,
Berlin, and Shanghai with revenues from clients in Europe and Asia. The
transaction had a purchase price of approximately $1.86 million, with
approximately $1.5 million paid in cash at closing, plus the assumption of
approximately $358,000 in net working capital deficiency, which included
$195,000 in professional fees and other costs related directly to the
acquisition. The acquisition closed on April 3, 2006.
The measurement of the respective assets and liabilities recognized in
connection with the acquisition has been made in accordance with the provisions
of Statement of Financial Accounting Standards ("SFAS") No. 141, Business
Combinations. The following table summarizes the estimated fair value of the
assets acquired and liabilities assumed as of the date of acquisition. The
allocation of the purchase price is based on preliminary estimates and is
subject to further refinement. Adjustments, if any, are not expected to be
material. The preliminary allocation assigned to identifiable intangible assets
was determined with the assistance of an independent appraisal firm.
AT APRIL 3, 2006
(AMOUNTS IN THOUSANDS)
Current assets $1,393
Property, plant and equipment 126
Employment agreements 111
Customer backlog 143
Trade name 93
Goodwill 1,380
------
Total assets acquired 3,246
Current liabilities assumed 1,751
------
Net assets acquired $1,495
======
Of the $111,000 assigned to the employment agreements, no residual value has
been identified with this asset. The employment agreements have a weighted
average useful life of approximately 10.5 months and are amortized on a
straight-line basis.
Of the $143,000 assigned to the customer backlog, no residual value has been
identified with this asset. The customer backlog has an estimated useful life of
6 months and is amortized on a straight-line basis.
Of the $93,000 assigned to the company trade name, no residual value has been
identified with this asset. The company trade name has an estimated useful life
of 60 months and is amortized on a straight-line basis.
The transaction was structured as a taxable transaction to Adventis Corporation,
therefore the goodwill and specifically identifiable intangible assets recorded
in the transaction will be deductible for income tax purposes.
The operating results of Adventis Limited have been included in the Condensed
Consolidated Statements of Operations and Comprehensive Loss from the date of
the purchase. The following reflects pro forma combined results of the Company
and Adventis Limited as if the acquisition had occurred as of the earliest
period presented. In management's opinion, this pro forma information does not
necessarily reflect the actual results that would have occurred nor is it
necessarily indicative of future results of operations of the combined entities.
For the Thirteen For the Twenty-Six
Weeks Ended Weeks Ended
----------------- ------------------
July 1, July 2, July 1, July 2,
(in thousands, except per share amounts) 2006 2005 2006 2005
------- ------- ------- -------
Total revenues $ 9,541 $12,803 $18,286 $22,174
Net loss (income) $(2,539) $ 450 $(4,392) $ (329)
Basic net loss (income) per common share $ (0.07) $ 0.01 $ (0.12) $ (0.01)
Diluted net loss (income) per common share $ (0.07) $ 0.01 $ (0.12) $ (0.01)
Behrman Capital and its affiliates (collectively "Behrman"), an owner of 35% of
TMNG's outstanding common stock, also owns 61% of the outstanding common stock
of Adventis Corporation. Grant G. Behrman and William M. Matthes, who serve on
the Board of Directors, are the Co-Managing Partners of Behrman. Despite owning
a majority of Adventis Corporation's common stock, Behrman did not control
Adventis Corporation at the time of this transaction. Adventis Corporation was
under the control of its senior secured creditors as it underwent a sale of the
business. In order to execute this purchase as an arms-length transaction, TMNG
formed a Special Committee of the Board of Directors to
7
evaluate the acquisition. The Special Committee consisted of the four
independent board members not part of TMNG management or affiliated with
Behrman. Behrman received none of the proceeds of this transaction.
3. SHARE-BASED COMPENSATION
In December 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 123R, "Share-Based Payment." SFAS
No. 123R is a revision of SFAS No. 123, "Accounting for Stock-based
Compensation," and supersedes Accounting Principles Board Opinion ("APB") No.
25, "Accounting for Stock Issued to Employees," and its related implementation
guidance. SFAS No. 123R focuses primarily on accounting for transactions in
which an entity obtains employee and non-employee services in exchange for
share-based payment transactions. SFAS No. 123R establishes fair value as the
measurement objective in accounting for share-based payment arrangements and
requires all companies to apply a fair-value-based measurement method in
accounting for generally all share-based payment transactions with employees and
non-employees.
On January 1, 2006, the Company adopted SFAS No. 123R using the modified
prospective transition method. Accordingly, prior period amounts have not been
restated; however, the balance presented as unearned compensation on nonvested
shares (restricted stock) within stockholders' equity has been reclassified to
additional paid-in capital as of January 1, 2006. Additionally, amounts
previously classified as "equity related charges" on the condensed consolidated
statements of operations and comprehensive loss have been reclassified to cost
of services or selling, general and administrative expense, as appropriate. SFAS
No. 123R requires the netting of estimated forfeitures against compensation
expense. The adoption of the policy to net forfeitures was immaterial, therefore
no cumulative effect resulted. Compensation expense is based on the calculated
fair value of the awards and is expensed over the service period (generally the
vesting period). Prior to the adoption of SFAS No. 123R, the Company utilized
the intrinsic value methodology in accounting for stock-based compensation for
employees and non-employee directors in accordance with the provisions of APB
No. 25 and related Interpretations.
Under the modified prospective transition method, compensation cost associated
with stock options and nonvested shares for the thirteen weeks ended July 1,
2006 includes: (a) compensation cost for awards granted prior to, but not yet
vested as of January 1, 2006, based on the grant date fair value estimated in
accordance with the original provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation" and (b) compensation cost for awards granted
subsequent to January 1, 2006, based on the grant date fair value under SFAS No.
123R.
PRIOR TO ADOPTION OF SFAS NO. 123R
During the thirteen weeks and twenty-six weeks ended July 2, 2005, the Company
recognized compensation expense of $234,000 and $457,000, respectively, related
to the restricted stock grants made to key management personnel. The
compensation cost associated with such grants is being amortized through charges
to operations on a graded vesting schedule over periods ranging from two to four
years.
During the thirteen weeks ended July 2, 2005, the Company granted options to
purchase 80,500 and 200,000 shares of the Company's common stock to employees
and members of the Company's Board of Directors, respectively, at a weighted
average exercise price of $2.17. At the dates of grants, the exercise price of
the option awards equaled the market price of the Company's common stock.
During the twenty-six weeks ended July 2, 2005, the Company granted options to
purchase 285,500 and 200,000 shares of the Company's common stock to employees
and members of the Company's Board of Directors, respectively, at a weighted
average exercise price of $2.25. At the dates of grants, the exercise price of
the option awards equaled the market price of the Company's common stock.
During the twenty-six weeks ended July 2, 2005, the Company granted 175,000
shares of restricted stock to key management personnel. These grants had a fair
value on the date of grant of $392,000 which equaled the market price of the
Company's common stock.
The following table summarizes the pro forma effect of stock-based compensation
on net loss and net loss per share for the thirteen weeks and twenty-six weeks
ended July 2, 2005 based on the fair-value method under SFAS 123R:
THIRTEEN TWENTY-SIX
WEEKS ENDED WEEKS ENDED
JULY 2, 2005 JULY 2, 2005
------------ ------------
Net income (loss), as reported: $ 30 $ (578)
Add: stock-based employee compensation
expense included in reported net income (loss) 234 457
Deduct: Total stock-based compensation
expense determined under fair value based
method for all awards (614) (1,220)
------ -------
Pro forma net loss $ (350) (1,341)
====== =======
Loss per share
Basic and diluted, as reported $ 0.00 $ (0.02)
====== =======
Basic and diluted, pro forma $(0.01) $ (0.04)
====== =======
8
GRANT DATE FAIR VALUE
The Company estimates the fair value of our stock options and stock issued under
the Employee Stock Purchase Plan using the Black-Scholes-Merton option pricing
model. Groups of employees or non-employee directors that have similar
historical and expected exercise behavior are considered separately for
valuation purposes. The table below shows the weighted average of the
assumptions used in estimating the fair value of stock options granted during
the thirteen weeks and twenty-six weeks ended July 1, 2006 and July 2, 2005:
THIRTEEN THIRTEEN TWENTY-SIX TWENTY-SIX
WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED
JULY 1, 2006 JULY 2, 2005 JULY 1, 2006 JULY 2, 2005
------------ ------------ ------------ ------------
Risk-free interest rate ..... 5.0% 3.9% 4.9% 3.8%
Expected life ............... 6 years 5 years 6 years 5 years
Expected volatility factor .. 83% 85% 83% 88%
Expected dividend rate ...... 0% 0% 0% 0%
The risk-free interest rate is based on the U.S. Treasury yield at the time of
grant for a term equal to the expected life of the stock option; prior to the
adoption of SFAS No. 123R, the expected life is based on historical and expected
exercise behavior; subsequent to the adoption of SFAS No. 123R, the expected
life was determined using the simplified method of estimating the life as
allowed under Staff Accounting Bulletin No. 107; and the expected volatility is
based on the historical volatility of our stock price for a period of time equal
to the expected life of the stock option.
COMPENSATION EXPENSE
Nearly all of the Company's stock based compensation arrangements utilize graded
vesting schedules where a portion of the grant vests annually over a period of
two to four years. The Company has a policy of recognizing compensation expense
for awards with graded vesting over the requisite service period for each
separately vesting portion of the award as if the award was, in-substance,
multiple awards. This policy has the effect of accelerating the recognition of
expense when compared to a straight-line amortization methodology.
As of July 1, 2006, the Company has three share-based compensation plans, which
are described below. The compensation cost that has been charged against income
for those plans under SFAS No. 123R was $845,000 and $1,548,000 for the thirteen
weeks and twenty-six weeks ended July 1, 2006, respectively. As of July 1, 2006,
unrecognized compensation cost, net of estimated forfeitures, related to the
unvested portion of all share-based compensation arrangements was approximately
$3.9 million and is expected to be recognized over a weighted-average period of
approximately 1.2 years. The Company has historically issued and expects to
continue to issue new shares to satisfy stock option exercises, vesting of
nonvested shares or purchases of shares under the Employee Stock Purchase Plan.
1998 EQUITY INCENTIVE PLAN
STOCK OPTIONS
The Company's 1998 Equity Incentive Plan (the 1998 Plan) is a shareholder
approved plan, which provides for the granting of incentive stock options and
nonqualified stock options to employees, and nonqualified stock options and
nonvested shares to employees, directors and consultants. As of July 1, 2006,
the Company has 3,159,097 shares of the Company's common stock available to
grant as stock options under the 1998 Plan. Incentive stock options are granted
at an exercise price of not less than market value per share of the common stock
on the date of grant as determined by the Board of Directors. Vesting and
exercise provisions are determined by the Board of Directors. As of July 1,
2006, all options granted under the 1998 Plan were non-qualified stock options.
Options granted under the 1998 Plan generally become exercisable over a three to
four year period beginning on the date of grant. Options granted under the 1998
Plan have a maximum term of ten years.
A summary of the option activity of the Company's 1998 Plan as of July 1, 2006
and changes during the twenty-six weeks then ended is presented below:
WEIGHTED AVERAGE
WEIGHTED AVERAGE REMAINING AGGREGATE
SHARES EXERCISE PRICE CONTRACTUAL TERM INTRINSIC VALUE
--------- ---------------- ---------------- ---------------
Outstanding at December 31, 2005 5,052,405 $4.50
Granted 1,201,500 $2.32
Exercised (136,365) $1.74
Forfeited/cancelled (270,612) $6.99
---------
Outstanding at July 1, 2006 5,846,928 $4.00 7.4 years $443,543
=========
Options exercisable at July 1, 2006 2,751,995 $5.83 5.4 years $363,835
=========
Weighted average fair value of
options granted during the period $1.72
9
The total intrinsic value of options exercised during the thirteen weeks and
twenty-six weeks ended July 1, 2006 was $35,000 and $103,000, respectively. As
of July 1, 2006, unrecognized compensation cost, net of estimated forfeitures,
related to the unvested portion of stock options issued under the 1998 Plan was
approximately $2.9 million and is expected to be recognized over a
weighted-average period of approximately 1.2 years.
NONVESTED SHARES
As of July 1, 2006, the Company has 1,045,000 shares of the Company's common
stock available for grant as nonvested shares under the 1998 Plan for key
management personnel. The shares are subject to restriction based upon a two to
four year vesting schedule. The fair value of nonvested share awards is
determined based on the closing trading price of our common stock on the grant
date.
A summary of the status of nonvested shares granted under the 1998 Plan as of
July 1, 2006 and changes during the twenty-six weeks then ended is presented
below:
WEIGHTED AVERAGE
GRANT DATE
SHARES FAIR VALUE
------- ----------------
Outstanding at December 31, 2005 310,500 $2.31
Granted 10,000 $2.10
Vested (43,750) $2.24
-------
Outstanding at July 1, 2006 276,750 $2.31
=======
As of July 1, 2006, there was $275,000 of total unrecognized compensation cost
related to nonvested shares granted under the 1998 Plan. The cost is expected to
be recognized over a weighted average period of 1.7 years. The total fair value
of shares vested during the twenty-six weeks ended July 1, 2006 was $98,000.
2000 SUPPLEMENTAL STOCK PLAN
As of July 1, 2006, the Company has 2,535,934 shares of the Company's common
stock available to grant as stock options under the 2000 Supplemental Stock Plan
(the 2000 Plan). The 2000 Plan provides the Company's common stock for the
granting of nonqualified stock options to employees and is not subject to
shareholder approval. Vesting and exercise provisions are determined by the
Board of Directors. Options granted under the plan generally become exercisable
over a period of up to four years beginning on the date of grant and have a
maximum term of ten years.
A summary of the option activity of the Company's 2000 Plan as of July 1, 2006
and changes during the twenty-six weeks then ended is presented below:
WEIGHTED AVERAGE
WEIGHTED AVERAGE REMAINING AGGREGATE
SHARES EXERCISE PRICE CONTRACTUAL TERM INTRINSIC VALUE
--------- ---------------- ---------------- ---------------
Outstanding at December 31, 2005 957,040 $4.63
Granted 415,500 $2.28
Forfeited/cancelled (120,347) $3.27
---------
Outstanding at July 1, 2006 1,252,193 $3.98 7.3 years $30,000
=========
Options exercisable at July 1, 2006 659,190 $5.48 5.3 years $15,000
=========
Weighted average fair value of
options granted during the period $1.68
As of July 1, 2006, unrecognized compensation cost, net of estimated
forfeitures, related to the unvested portion of stock options issued under the
2000 Plan was approximately $686,000 and is expected to be recognized over a
weighted-average period of approximately 1.4 years.
EMPLOYEE STOCK PURCHASE PLAN
Under the Employee Stock Purchase Plan (ESPP), shares of the Company's common
stock may be purchased at six-month intervals at 85% of the lower of the fair
market value on the first day of the enrollment period or on the last day of
each six-month period. Employees may purchase shares through a payroll deduction
program having a value not exceeding 15% of their gross compensation during an
offering period. In the twenty-six weeks ended July 1, 2006 we recognized net
expense of $45,000 in connection with SFAS No. 123R associated with the ESPP.
4. EARNINGS (LOSS) PER SHARE
10
The Company calculates and presents earnings (loss) per share using a dual
presentation of basic and diluted earnings (loss) per share. Basic earnings
(loss) per share is computed by dividing net income (loss) by the weighted
average number of common shares outstanding for the period. Diluted earnings
(loss) per share is computed in the same manner except the weighted average
number of shares is increased for dilutive securities. In accordance with the
provisions of SFAS No. 128 "Earnings Per Share", the Company has not included
the effect of stock options in the calculation of diluted loss per share for the
thirteen weeks ended July 1, 2006 and twenty-six weeks ended July 1, 2006 and
July 2, 2005, as the Company reported a loss from continuing operations for
these periods and the effect would have been anti-dilutive. Had the Company
reported net income for the thirteen weeks and twenty-six weeks ended July 1,
2006 and July 2, 2005 the treasury method of calculating common stock
equivalents would have resulted in approximately 251,000, 296,000 and 407,000
additional diluted shares, respectively. As the Company reported net income for
the thirteen weeks ended July 2, 2005, the treasury method of calculating common
stock equivalents resulted in approximately 357,000 additional diluted shares
for that period.
5. BUSINESS SEGMENTS
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 SFAS No. 131
"Disclosure about Segments of an Enterprise and Related Information," the
Company has concluded it has four operating segments: Operations, Strategy,
Marketing and International; which are aggregated in one reportable segment, the
Management Consulting Services segment. Management Consulting Services includes
business strategy and planning, marketing and customer relationship management,
billing system support, operating system support, revenue assurance, corporate
investment services, and business model transformation. The Company intends to
continue to measure and report its activities using its current segment
structure. However, as the services provided by the Company evolve, management
will continue to evaluate its segment reporting structure.
In accordance with the provisions of SFAS No 131, 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 FOR THE TWENTY-SIX
WEEKS ENDED WEEKS ENDED
--------------------------- ---------------------------
JULY 1, 2006 JULY 2, 2005 JULY 1, 2006 JULY 2, 2005
------------ ------------ ------------ ------------
United States $6,978 $8,413 $13,923 $15,021
International:
United Kingdom 1,735 426 1,953 771
Germany 467 467
Japan 252 252
China 109 109
Australia 178 178
Other 114
------ ------ ------- -------
Total $9,541 $9,017 $16,704 $16,084
====== ====== ======= =======
6. GOODWILL
During the thirteen weeks ended July 1, 2006, the Company recorded $1.4 million
in goodwill related to the acquisition of Adventis Limited on April 3, 2006 as
discussed above in Note 2 "Business Combinations." The change in the carrying
amount of goodwill as of July 1, 2006 is as follows (amounts in thousands):
Management Consulting
Segment
---------------------
Balance as of December 31, 2005 $ 13,365
Acquisition of Adventis Limited 1,380
--------
Balance as of July 1, 2006 $ 14,745
========
7. OTHER IDENTIFIABLE INTANGIBLE ASSETS
Included in the Company's condensed consolidated balance sheets as of July 1,
2006, and December 31, 2005, are the following identifiable intangible assets
(amounts in thousands):
11
July 1, 2006 December 31, 2005
---------------------- ----------------------
Accumulated Accumulated
Cost Amortization Cost Amortization
------- ------------ ------- ------------
Customer relationships $1,908 $(1,794) $1,908 $(1,709)
S3 license agreement 1,500 (193) 1,500 (48)
Employment agreements 111 (45) 3,200 (3,200)
Customer backlog 143 (71)
Trade name 93 (5)
------ ------- ------ -------
Total $3,755 $(2,108) $6,608 $(4,957)
====== ======= ====== =======
As discussed above in Note 2 "Business Combinations", the Company recorded
amounts related to specifically identifiable intangible assets that were
acquired as part of the Adventis Limited purchase transaction. These amounts
include $111,000 assigned to employment agreements; $143,000 assigned to
customer backlog; and $93,000 assigned to trade name.
Intangible amortization expense for the thirteen weeks ended July 1, 2006 and
July 2, 2005 was $236,000 and $43,000, respectively. Intangible amortization
expense for the twenty-six weeks ended July 1, 2006 and July 2, 2005 was
$351,000 and $202,000, respectively. Intangible amortization expense is
estimated to be approximately $368,000 for the remainder of fiscal year 2006,
$349,000 in fiscal year 2007 and $310,000 in fiscal year 2008 through fiscal
year 2010.
8. INCOME TAXES
In the thirteen and twenty-six weeks ended July 1, 2006 and the thirteen and
twenty-six weeks ended July 2, 2005, the Company generated income tax benefits
of $883,000 and $1,507,000, and $198,000 and $906,000, respectively. The Company
recorded full valuation allowances against these income tax benefits in
accordance with provisions of SFAS No. 109 "Accounting for Income Tax", which
requires an estimation of the recoverability of the recorded income tax asset
balances. In addition, the Company reported income tax provision of $13,000 and
$3,000, for the thirteen weeks ended July 1, 2006 and July 2, 2005 and $34,000
and $18,000 for the twenty-six weeks ended July 1, 2006 and July 2, 2005,
respectively, related to state tax expense. As of July 1, 2006, the Company has
recorded $28.8 million of valuation allowances in connection with its net
deferred tax assets.
9. REAL ESTATE RESTRUCTURING
In the fourth quarter of fiscal year 2004, the Company made the decision to
consolidate office space. In connection with this decision, a sublease agreement
for unutilized space was entered into with a third party for the remainder of
the original lease term. In accordance with SFAS No. 146 "Accounting for Costs
Associated with Exit or Disposal Activities," the decision to consolidate office
space resulted in charges of $75,000 related to the buyout of an office
equipment lease in the twenty-six weeks ended July 2, 2005. The restructuring
charge of $75,000 has been reflected as a component of Loss from Operations in
the Statement of Operations and Comprehensive Loss.
10. LOANS TO OFFICERS
As of July 1, 2006, 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 borrowing outstanding against the line of credit at July 1,
2006 and December 31, 2005 totaled $300,000 and is due in 2011. This amount is
included in other assets in the non-current asset section of the balance sheet.
In accordance with the loan provisions, the interest rate charged on the loan 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 July 1, 2006.
11. CONTINGENCIES
In June 1998, the bankruptcy trustee of a former client, Communications Network
Corporation, sued TMNG for a total of $320,000 in the U.S. Bankruptcy Court in
New York seeking recovery of $160,000 alleging an improper payment of consulting
fees paid by the former client during the period from July 1, 1996, when an
involuntary bankruptcy proceeding was initiated against the former client,
through August 6, 1996, when the former client agreed to an order for relief in
the bankruptcy proceeding, and $160,000 in consulting fees paid by the former
client after August 6, 1996. The bankruptcy trustee also sued TMNG for at least
$1.85 million for breach of contract, breach of fiduciary duties and negligence.
In March 2006, the Company reached a settlement agreement with the bankruptcy
trustee whereby the Company agreed to pay the trustee $255,000 in exchange for
being released from all potential liability under the suits discussed above. The
settlement was fully reserved at December 31, 2005. Payment to the bankruptcy
trustee was made in April 2006.
Additionally, as of July 1, 2006 the Company had outstanding demands aggregating
approximately $1.0 million by the bankruptcy trustees of several former clients
in connection with collected balances near the customers' respective bankruptcy
filing dates. Although the Company does not believe it received any preference
payments from these former clients and plans to vigorously defend its position,
the Company has
12
established reserves of $727,000 as of July 1, 2006 and December 31, 2005, which
it believes are adequate in the event of loss or settlement on remaining
outstanding claims.
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. While 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, the Company believes that the ultimate disposition
of these matters will not have a material adverse effect upon its consolidated
results of operations, cash flows or financial position.
The Company establishes reserves for potential tax liabilities when, despite the
belief that tax return positions are fully supported, certain positions are
likely to be challenged and not be fully sustained. Such tax reserves are
analyzed on a quarterly basis and adjusted based upon changes in the facts and
circumstances, such as the progress of federal and state audits, case law and
emerging legislation. The Company's effective tax rate includes the impact of
such tax reserves and changes to these reserves as considered appropriate by
management. The Company establishes the reserves based upon its assessment of
exposure associated with possible future assessments that may result from the
examination of federal, state, or international tax returns. These tax reserves
were $649,000 at July 1, 2006 and December 31, 2005. Management believes that it
has established adequate reserves in the event of loss or settlement of any
potential tax liabilities.
12. SUBSEQUENT EVENT
On July 24, 2006 TMNG acquired certain US-based tangible and intangible assets
of Adventis Corporation. The purchased assets include all intellectual property
owned or licensed by Adventis Corporation and the hardware or devices on which
it is stored (including all trademarks, service marks and logos, trades secrets
and methods, client information, rights to the Adventis Corporation Web site,
Board of Advisors rights, and the Adventis Corporation name). The purchase price
of these assets totaled $150,000. This acquisition follows the Company's April
2006 acquisition of the assets of Adventis Limited as discussed above in Note 2
"Business Combination."
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
In addition to historical information, this quarterly report contains
forward-looking statements. Certain risks and uncertainties could cause actual
results to differ materially from those reflected in such forward-looking
statements. Factors that might cause a difference include, but are not limited
to, those discussed in the sections entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Risk Factors" in
our annual report on Form 10-K for the fiscal year ended December 31, 2005.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's opinions only as of the date of this
report. We undertake no obligation to revise, or publicly release the results of
any revision to, these forward-looking statements. Readers should carefully
review the risk factors described in our annual report and in other documents
that we file from time to time with the Securities and Exchange Commission.
The following should be read in connection with Management's Discussion and
Analysis of Financial Condition and Results of Operations as presented in our
annual report on Form 10-K for the fiscal year ended December 31, 2005.
EXECUTIVE FINANCIAL OVERVIEW
As discussed in our 2005 annual report on Form 10-K for the fiscal year ended
December 31, 2005, the communications industry experienced a significant
economic recession from 2001 through 2004. We are a consultancy to the industry,
and as a result experienced a significant reduction in consulting business
primarily due to the recession. We experienced significant revenue declines
and/or net losses from 2001 to 2004. During this period we maintained relatively
consistent gross margins through innovative pricing and high consultant
utilization levels.
Beginning in late 2004 and continuing through the second quarter of 2006, we
have seen significant changes in the industry resulting from consolidation,
technology transformation and the convergence of the telecommunications, media
and entertainment sectors. Through re-positioning of the Company in 2005 and
2006, we are seeing early signs of benefits from adapting to such change. To
support strategic repositioning of the Company to enable it to better serve the
consolidation of telecommunications carriers and convergence with global media
and entertainment companies, on April 3, 2006, we closed on the acquisition of
the business and primary assets of Adventis Limited. The acquisition better
enables TMNG to compete given changes to the sector and complements TMNG's
strategic consulting practice, with service offerings including analyses of
industry and competitive environments; product and distribution strategies;
finance, including business case development, modeling, cost analysis and
benchmarking; and due diligence and risk assessment. The acquired international
operations of Adventis Limited consist of 27 consultants located in London,
Berlin, and Shanghai with revenues from clients in Europe and Asia. The
transaction was valued at a purchase price of approximately $1.86 million, with
approximately $1.5 million paid in cash at closing, plus the assumption of
approximately $358,000 in net working capital deficiency, which includes
$195,000 in professional fees and other costs related directly to the
acquisition.
During the thirteen and twenty-six weeks ended July 1, 2006 our revenues of $9.5
million and $16.7 million, respectively, increased 5.8% and 3.9%, respectively,
compared with the same periods in 2005. The acquisition of Adventis Limited
contributed $1.8 million to the increase for both periods. Gross margins were
49.7% during the twenty-six weeks ended July 1, 2006 compared with 50.4% during
the same period of 2005. On January 1, 2006, we adopted SFAS No. 123R which
reduced gross margins for the twenty-six weeks ended July 1, 2006 by 2.0%,
offsetting improvements in gross margin due to a shift in the mix of business to
more strategy consulting engagements. Equity related charges
13
as a percentage of revenue for the twenty-six weeks ended July 2, 2005 were
minimal. We continue to focus our efforts on identifying, adapting to and
capitalizing on the change elements present in the converging communications
industry, as well as emphasizing wireless and IP initiatives within the
communications sector and expanding our client base into cable, entertainment
and media.
Selling, general and administrative costs in the thirteen and twenty-six weeks
ended July 1, 2006 increased by $2.6 million and $3.8 million, respectively, as
compared to the same periods of 2005. This increase includes selling, general
and administrative costs of $1.9 million as a result of the Adventis Limited
acquisition. Additionally, the increase reflects additional expense related to
the adoption of SFAS No. 123R of $511,000 and $833,000 in the thirteen and
twenty-six weeks ended July 1, 2006, respectively. We also incurred increased
recruiting and incentive compensation costs associated with growth in our
strategic consulting segment along with additional salaries, travel and
entertainment expenses associated with investments in new clients and
intellectual property. Although these costs have impacted our short-term
profitability we believe they will better enable us to capitalize on the
industry convergence and migration toward wireless and IP platforms and cable,
entertainment and media clients. We are also focusing our marketing efforts on
diversifying within the sector through added cable, entertainment and media
growth markets surrounding large and sustainable clients to maintain a portfolio
of business that is high credit quality, thus reducing bad debt risks.
OPERATIONAL OVERVIEW
Revenues typically consist of consulting fees for professional services and
related expense reimbursements. Our consulting services are typically contracted
on a time and materials basis, a time and materials basis not to exceed contract
price, a fixed fee basis, or contingent fee basis. Revenues on contracts with a
not to exceed contract price or a fixed cost contract are recorded under the
percentage of completion method, utilizing estimates of project completion under
both of these types of contracts. We have recently begun to deliver fixed price
contracts as a more significant component of our revenue mix with the growth of
our strategy consulting practice. Contract revenues on contingent fee contracts
are deferred until the revenue is realizable and earned. We have not performed
services on any contingent fee contracts during 2006.
Generally a client relationship begins with a short-term 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 unbillable time could
harm margins.
Cost of services consists primarily of compensation for consultants who are
employees and amortization of equity related charges for stock options and
non-vested shares (restricted stock), as well as fees paid to independent
contractor organizations and related expense reimbursements. Employee
compensation includes certain unbillable 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
volume 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.
Operating expenses include selling, general and administrative, equity related
charges, intangible asset amortization, and real estate restructuring charges.
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. Included in selling, general and administrative
expenses are equity related charges incurred in connection with stock-based
compensation awards.
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 consolidated financial statements,
potentially involve the most subjective judgments in their selection and
application, and are the most susceptible to uncertainties and changing
conditions:
- Allowance for Doubtful Accounts;
- Fair Value of Acquired Businesses;
- Impairment of Goodwill and Long-lived Intangible Assets;
- Revenue Recognition;
- Stock-Based Compensation Expense; and
- Deferred Income Tax Assets.
Allowances for Doubtful Accounts -- Substantially all of our receivables are
owed by companies in the communications industry. We typically bill customers
for services after all or a portion of the services have been performed and
require customers to pay within 30 days. We attempt to control credit risk by
being diligent in credit approvals, limiting the amount of credit extended to
customers and monitoring customers' payment records and credit status as work is
being performed for them.
14
We recorded bad debt expense of $126,000 and $127,000 for the thirteen and
twenty-six week periods ended July 1, 2006, respectively, and recorded bad debt
expense of $72,000 and $62,000 for the thirteen and twenty-six week periods
ended July 2, 2005, respectively. Our allowance for doubtful accounts totaled
$418,000 and $296,000 as of July 1, 2006 and December 31, 2005, respectively.
The calculation of these amounts is based on judgment about the anticipated
default rate on receivables owed to us as of the end of the reporting period.
That judgment was based on uncollected account experience in prior years and our
ongoing evaluation of the credit status of our customers and the communications
industry in general.
We have attempted to mitigate credit risk by concentrating our marketing efforts
on the largest and most stable companies in the communications industry and by
tightly controlling the amount of credit provided to customers. If we are
unsuccessful in these efforts, or if our customers file for bankruptcy or
experience financial difficulties, it is possible that the allowance for
doubtful accounts will be insufficient and we will have a greater bad debt loss
than the amount reserved, which would adversely affect our financial performance
and cash flow.
Fair Value of Acquired Businesses - TMNG has acquired four professional service
organizations over the last six years. A significant component of the value of
these acquired businesses has been allocated to intangible assets. Statement of
Financial Accounting Standards No. 141 "Business Combinations" ("SFAS No. 141")
requires acquired businesses to be recorded at fair value by the acquiring
entity. SFAS No. 141 also requires that intangible assets that meet the legal or
separable criterion be separately recognized on the financial statements at
their fair value, and provides guidance on the types of intangible assets
subject to recognition. Determining the fair value for these specifically
identified intangible assets involves significant professional judgment,
estimates and projections related to the valuation to be applied to intangible
assets like customer lists, employment agreements and trade names. The
subjective nature of management's assumptions adds an increased risk associated
with estimates surrounding the projected performance of the acquired entity.
Additionally, as the Company amortizes the intangible assets over time, the
purchase accounting allocation directly impacts the amortization expense the
Company records on its financial statements.
Impairment of Goodwill and Long-lived Intangible Assets - Goodwill and other
long-lived intangible assets arising from our acquisitions are subjected to
periodic review for impairment. SFAS No. 142 "Goodwill and Other Intangible
Assets" requires an annual evaluation at the reporting unit level of the fair
value of goodwill 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. The
determination of fair value requires management to make assumptions about future
cash flows and discounted rates. These assumptions require significant judgment
and estimations about future events and are thus subject to significant
uncertainty. If actual cash flows turn out to be less than projected, we may be
required to take further write-downs, which could increase the variability and
volatility of our future results.
Revenue Recognition - We recognize revenue from time and material contracts in
the period in which our services are performed. In addition to time and
materials contracts, our other types of contracts include time and materials
contracts not to exceed contract price, fixed fee contracts, and contingent fee
contracts.
We recognize revenues on time and materials contracts not to exceed contract
price and fixed fee contracts using the percentage of completion method.
Percentage of completion accounting involves calculating the percentage of
services provided during the reporting period compared with the total estimated
services to be provided over the duration of the contract. For all contracts,
estimates of total contract revenues and costs are continuously monitored during
the term of the contract, and recorded revenues and costs are subject to
revisions as the contract progresses. Such revisions may result in a material
increase or decrease in revenues and income and are reflected in the financial
statements in the periods in which they are first identified.
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. Both of 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. We did not enter into or deliver on any contingent fee
contracts for the thirteen and twenty-six weeks ended July 1, 2006.
Stock-Based Compensation Expense - We grant stock options and non-vested stock
to our employees and also provide employees the right to purchase our stock
pursuant to an employee stock purchase plan. The benefits provided under these
plans are share-based payment awards subject to the provisions of SFAS No. 123R
"Share-Based Payment." Under SFAS No. 123R, we are required to make significant
estimates related to determining the value of our stock-based compensation. Our
expected stock-price volatility assumption is based on historical volatilities
of the underlying stock which is obtained from public data sources. For stock
option grants issued during the thirteen and twenty-six weeks ended July 1,
2006, we used a weighted-average expected stock-price volatility of 83% and 75%,
respectively. The expected term of options granted is based on the simplified
method in accordance with the SEC's Staff Accounting Bulletin No. 107 ("SAB
107") as our historical share option exercise experience does not provide a
reasonable basis for estimation. As such, we used a weighted-average expected
option life assumption of 6 years.
If factors change and we develop different assumptions in the application of
SFAS 123R in future periods, the compensation expense that we record under SFAS
123R may differ significantly from what we have recorded in the current period.
There is a high degree of subjectivity
15
involved when using option pricing models to estimate stock-based compensation
under SFAS 123R. Changes in the subjective input assumptions can materially
affect our estimates of fair values of our stock-based compensation. Certain
share-based payment awards, such as employee stock options, may expire worthless
or otherwise result in zero intrinsic value as compared to the fair values
originally estimated on the grant date and reported in our financial statements.
Alternatively, values may be realized from these instruments that are
significantly in excess of the fair values originally estimated on the grant
date and reported in our financial statements. Although the fair value of
employee share-based awards is determined in accordance with SFAS 123R and SAB
107 using an option pricing model, that value may not be indicative of the fair
value observed in a willing buyer/willing seller market transaction.
Deferred Income Tax Assets - We have generated substantial deferred income tax
assets primarily from the accelerated financial statement write-off of goodwill,
the charge to compensation expense taken for stock options and net operating
loss carry-forwards. For us to realize the income tax benefit of these assets,
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 will be exercised. In
assessing whether a valuation allowance is needed in connection with our
deferred income tax assets, we have evaluated our ability to carry back tax
losses to prior years that reported taxable income, and our ability to generate
sufficient taxable income in future periods to utilize the benefit of the
deferred income tax assets. Such projections of future taxable income require
significant subjective judgments and estimates by us. As of July 1, 2006,
cumulative valuation allowances in the amount of $28.8 million were recorded in
connection with the net deferred income tax assets. We continue to evaluate the
recoverability of the recorded deferred income tax asset balances. If we
continue to report net operating losses for financial reporting in future years,
no additional tax benefit would be recognized for those losses, since we would
be required to increase our valuation allowance to offset such amounts.
RESULTS OF OPERATIONS
As discussed above in Critical Accounting Policies, on January 1, 2006, the
Company adopted SFAS 123R using the modified prospective transition method. SFAS
No. 123R requires the Company to recognize compensation expense for all
share-based awards made to employees and non-employee directors. Compensation
expense is based on the calculated fair value of the awards as measured at the
grant date using the Black-Scholes-Merton option pricing model and is expensed
ratably over the service period of the awards (generally the vesting period).
For periods prior to the adoption of SFAS No. 123R, the Company utilized the
intrinsic value methodology in accounting for stock-based compensation for
employees and non-employee directors in accordance with the provisions of
Accounting Principles Board (APB) No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations.
THIRTEEN WEEKS ENDED JULY 1, 2006 COMPARED TO THIRTEEN WEEKS ENDED JULY 2, 2005
REVENUES
Revenues increased 5.8% to $9.5 million for the thirteen weeks ended July 1,
2006 from $9.0 million for the thirteen weeks ended July 2, 2005. The increase
in revenue is attributable to two elements: a significant increase of $3.0
million in the Company's strategy consulting practice, which includes revenue
generated by the newly acquired Adventis Limited of $1.8 million; largely offset
by a decrease in management consulting revenue of $2.1 million primarily due to
the cancellation of a long-running major client project in the first quarter of
2006. During the thirteen weeks ended July 1, 2006, we provided services on 105
customer projects, compared to 107 projects performed in the thirteen weeks
ended July 2, 2005. Average revenue per project was $91,000 in the thirteen
weeks ended July 1, 2006, compared to $84,000 in the thirteen weeks ended July
2, 2005. The increase in average revenue per project was primarily attributable
to a shift in the mix of business to more consultative versus resources and
staffing projects in the thirteen weeks ended July 1, 2006. Our international
revenue base substantially increased to 26.9% of revenues in the thirteen weeks
ended July 1, 2006, from 6.7% in the thirteen weeks ended July 2, 2005, due
largely to the acquisition of Adventis Limited, which primarily performs
services in the United Kingdom, Germany, and China.
Revenues recognized in connection with fixed price engagements totaled $4.0
million and $2.4 million representing 42.3% and 26.7% of total revenue, for the
thirteen weeks ended July 1, 2006 and July 2, 2005, respectively. The increase
was due to the mix of our business shifting to more strategy projects, which are
more likely to be structured as fixed price engagements.
COSTS OF SERVICES
Costs of services increased to $4.9 million for the thirteen weeks ended July 1,
2006, compared to $4.6 million for the thirteen weeks ended July 2, 2005. As a
percentage of revenue, our gross margin was 49.1% for the thirteen weeks ended
July 1, 2006, compared to 49.5% for the thirteen weeks ended July 2, 2005. The
decrease in gross margin percentage was primarily attributable to the adoption
of SFAS No. 123R effective January 1, 2006 which resulted in a reduction of
gross margin percentage of 1.0% for the thirteen weeks ended July 1, 2006,
compared to the thirteen weeks ended July 2, 2005. The incremental charges
associated with SFAS No. 123R were offset by improvements in gross margin due to
shift in the mix of services to more strategy engagements in relation to
management consulting and resourcing engagements.
OPERATING EXPENSES
In total, operating expenses increased 56.6% to $7.7 million for the thirteen
weeks ended July 1, 2006, from $4.9 million for the thirteen weeks ended July 2,
2005. Operating expenses include selling, general and administrative costs
(inclusive of equity related charges), and intangible asset amortization.
16
Selling, general and administrative expense increased 53.1% to $7.4 million in
the thirteen weeks ended July 1, 2006, compared to $4.9 million the thirteen
weeks ended July 2, 2005. The increase primarily consists of an additional $1.9
million in selling, general and administrative expenses, relating to the
Adventis Limited acquisition, and a $0.5 million increase in equity related
charges. The increase in equity related charges is attributable to the adoption
of SFAS No. 123R effective January 1, 2006. In addition we incurred increased
recruiting and incentive compensation costs associated with growth in our
strategy operating segment along with additional salaries, travel and
entertainment expenses associated with investment in new clients and
intellectual property, which were largely offset by continued involuntary
headcount reductions in consultant personnel as we focus on the portfolio of our
offerings.
Intangible asset amortization was $236,000 and $43,000 for the thirteen weeks
ended July 1, 2006 and July 2, 2005, respectively. The $193,000 increase in
amortization expense was due to the amortization of intangibles recorded in
connection with the Adventis Limited acquisition as well as amortization of a
marketing license agreement with S3 Matching Technologies, Inc. entered into
during the fourth quarter of fiscal year 2005.
OTHER INCOME AND EXPENSES
Interest income was $546,000 and $379,000 for the thirteen weeks ended July 1,
2006 and July 2, 2005, respectively, and represented interest earned on invested
balances. Interest income increased for the thirteen weeks ended July 1, 2006 as
compared to the thirteen weeks ended July 2, 2005 due primarily to increases in
interest rates from 2005 to 2006, which was partially offset by lower invested
cash balances. We primarily invest in money market funds and investment-grade
auction rate securities as part of our overall investment policy.
INCOME TAXES
In the thirteen weeks ended July 1, 2006 and July 2, 2005, we recorded no income
tax benefit related to our pre-tax losses in accordance with the provisions of
SFAS No. 109 "Accounting for Income Taxes" which requires an estimation of the
recoverability of the recorded income tax asset balances. We continue to
evaluate the recoverability of our recorded deferred income tax asset balances.
If we continue to report net operating losses for financial reporting, no
additional tax benefit would be recognized for those losses, since we would be
required to increase our valuation allowance to offset such amounts. We reported
an income tax provision of $13,000 and $3,000 for the thirteen weeks ended July
1, 2006 and July 2, 2005, respectively, related to state tax expense.
NET INCOME (LOSS)
We had a net loss of $2.5 million for the thirteen weeks ended July 1, 2006,
compared to net income of $30,000 for the thirteen weeks ended July 2, 2005. The
loss is primarily attributable to an increase in selling, general and
administrative expenses resulting from the Adventis Limited acquisition in the
amount of $1.9 million and the impact of the adoption of SFAS No. 123R of $0.8
million.
TWENTY-SIX WEEKS ENDED JULY 1, 2006 COMPARED TO TWENTY-SIX WEEKS ENDED JULY 2,
2005
REVENUES
Revenues increased 3.9% to $16.7 million for the twenty-six weeks ended July 1,
2006, from $16.1 million for the twenty-six weeks ended July 2, 2005. The
increase in revenue is attributable to three elements: a significant increase of
$4.7 million in the Company's strategy consulting practice, which includes
revenues of Adventis Limited of $1.8 million; largely offset by a decrease in
management consulting revenue of $3.6 million primarily due to the cancellation
of a major long-running client project in the first quarter of 2006, as well as
a reduction in revenues generated by our staffing practice during fiscal year
2006. During the twenty-six weeks ended July 1, 2006, we provided services on
143 customer projects, compared to 166 projects performed in the twenty-six
weeks ended July 2, 2005. Average revenue per project was $117,000 in the
twenty-six weeks ended July 1, 2006 compared to $97,000 in the twenty-six weeks
ended July 2, 2005. The increase in average revenue per project was primarily
attributable to a shift in the mix of business to more consultative versus
resources and staffing projects in the twenty-six weeks ended July 1, 2006. Our
international revenue base substantially increased to 16.6% of revenues for the
twenty-six weeks ended July 1, 2006, from 6.6% in the twenty-six weeks ended
July 2, 2005, due largely to the acquisition of Adventis Limited, which
primarily performs services in the United Kingdom, Germany, and China.
Revenues recognized in connection with fixed price engagements totaled $7.4
million and $5.0 million representing 44.3% and 31.2% of total revenue, for the
twenty-six weeks ended July 1, 2006 and July 2, 2005, respectively. The increase
was due to the mix of our business shifting to more strategy opportunities,
which are more likely to be structured as fixed fee or contingent fee
engagements.
COST OF SERVICES
Direct costs of services increased to $8.4 million for the twenty-six weeks
ended July 1, 2006 compared to $8.0 million for the twenty-six weeks ended July
2, 2005. As a percentage of revenue, our gross margin was 49.7% for the
twenty-six weeks ended July 1, 2006, compared to 50.4% for the twenty-six weeks
ended July 2, 2005. The decrease in gross margin percentage was primarily
attributable to the adoption of SFAS No. 123R effective January 1, 2006 which
resulted in a reduction of gross margin percentage of 2.0% for the twenty-six
weeks ended July 1, 2006, compared to a reduction in the amount of 0.4% for the
twenty-six weeks ended July 2, 2005. The incremental charges associated with
SFAS No. 123R were offset by improvements in gross margin due to shift in the
mix of services to more strategy engagements in relation
17
to management consulting and resourcing engagements.
OPERATING EXPENSES
In total, operating expenses increased 41.2% to $13.4 million for the twenty-six
weeks ended July 1, 2006, from $9.5 million for the twenty-six weeks ended July
2, 2005. Operating expenses include selling, general and administrative costs
(inclusive of equity related charges), and intangible asset amortization.
Selling, general and administrative expense increased 41.6% to $13.0 million in
the twenty-six weeks ended July 1, 2006, compared to $9.2 million the twenty-six
weeks ended July 2, 2005. The increase primarily consists of an additional $1.9
million in selling, general and administrative expenses, relating to the
Adventis Limited acquisition, and an $0.8 million increase in equity related
charges. The increase in equity related charges is attributable to the adoption
of SFAS No. 123R effective January 1, 2006. In addition we incurred $1.1 million
in compensation and recruiting costs as we added senior executives in support of
our expanded strategy and cable practices.
Intangible asset amortization was $351,000 and $202,000 for the twenty-six weeks
ended July 1, 2006 and July 2, 2005, respectively. The $149,000 increase in
amortization expense was due to the amortization of intangibles recorded in
connection with the Adventis Limited acquisition as well as amortization of a
marketing license agreement with S3 Matching Technologies, Inc. entered into
during the fourth quarter of fiscal year 2005.
OTHER INCOME AND EXPENSES
Interest income was $1,081,000 and $703,000 for the twenty-six weeks ended July
1, 2006 and July 2, 2005, respectively, and represented interest earned on
invested balances. Interest income increased for the twenty-six weeks ended July
1, 2006 as compared to the twenty-six weeks ended July 2, 2005 due primarily to
increases in interest rates from 2005 to 2006, which was partially offset by
lower invested cash balances. We primarily invest in money market funds and
investment-grade auction rate securities as part of our overall investment
policy.
INCOME TAXES
In the twenty-six weeks ended July 1, 2006 and July 2, 2005, we recorded no
income tax benefit related to our pre-tax losses in accordance with the
provisions of SFAS No. 109 "Accounting for Income Taxes" which requires an
estimation of the recoverability of the recorded income tax asset balances. We
continue to evaluate the recoverability of our recorded deferred income tax
asset balances. If we continue to report net operating losses for financial
reporting, no additional tax benefit would be recognized for those losses, since
we would be required to increase our valuation allowance to offset such amounts.
We reported an income tax provision of $34,000 and $18,000 for the twenty-six
weeks ended July 1, 2006 and July 2, 2005, respectively, related to state tax
expense.
NET LOSS
We had a net loss of $4.0 million for the twenty-six weeks ended July 1, 2006,
compared to a net loss of $0.6 million for the twenty-six weeks ended July 2,
2005. The loss is primarily attributable to a significant increase in selling,
general and administrative expenses resulting from the Adventis Limited
acquisition in the amount of $1.9 million and the impact of the adoption of SFAS
No. 123R in the amount of $1.5 million.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $5.9 million and $1.2 million for the
twenty-six weeks ended July 1, 2006 and July 2, 2005, respectively. Of the $5.9
million used in operating activities during fiscal year 2006, $1.9 million
relates to our operating losses excluding non-cash items and $4.0 million
relates to net increases in working capital. Operating losses from Adventis
Limited generated $0.9 million of the operating losses in the first half of
2006. Increases in working capital during the twenty-six weeks ended July 1,
2006 relate significantly to the operational logistics of integrating billing
operations for Adventis Limited and receiving VAT registration numbers. We were
required to apply for VAT registration numbers for our newly acquired entity and
were precluded from billing customers in the United Kingdom and Germany until
the registration numbers were received, which had the impact of delaying client
invoicing and related collections. VAT registration numbers for our United
Kingdom and Germany operations are now in place. Cash used in operating
activities for the twenty-six weeks ended July 2, 2005 related primarily to
operating losses and funding of working capital requirement for the business.
Net cash provided by investing activities was $1.3 million and $1.8 million for
the twenty weeks ended July 1, 2006 and July 2, 2005, respectively. This
includes net proceeds from sales and reinvestments of auction rate securities of
$3.0 million and $2.1 million in the twenty -six weeks ended July 1, 2006 and
July 2, 2005, respectively. Net cash provided by investing activities was
partially offset by our acquisition of Adventis Limited in the amount of $1.3
million during the second quarter of 2006. Additionally cash used in investing
activities was $286,000 and $206,000 for the twenty-six weeks ended July 1, 2006
and July 2, 2005, respectively, related to the capitalization of office
equipment, software and computer equipment.
Net cash provided by financing activities was $16,000 in the twenty-six weeks
ended July 1, 2006, and related to proceeds received from the exercise of
employee stock options and purchases under the Company's Employee Stock Purchase
Plan, partially offset by payments made on long-term obligations. Net cash used
in financing activities was $122,000 in the twenty-six weeks ended July 2, 2005,
and related to payments made by the Company on the current portion of its
capital lease obligations, partially offset by proceeds received from the
exercise of stock
18
options and purchases under the Company's Employee Stock Purchase Plan.
At July 1, 2006, we had approximately $42.1 million in cash, cash equivalents,
and short-term investments. We believe we have sufficient cash and short-term
investments to meet anticipated cash requirements, including anticipated capital
expenditures, consideration for possible acquisitions, and any future operating
losses that may be incurred, for at least the next 12 months. Should our cash
and short-term investments prove insufficient we might need to obtain new debt
or equity financing to support our operations or complete acquisitions. 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. Our strong cash position and absence of
long-term debt have enabled us to weather adverse conditions in the
telecommunications industry and to make investments in intellectual property we
believe are enabling us to capitalize on the current recovery and transformation
of the industry; however, if the industry and demand for our consulting services
do not continue to rebound and we continue to experience negative cash flow, we
could experience liquidity challenges at some future point.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not invest excess funds in derivative financial instruments or other
market rate sensitive instruments for the purpose of managing our foreign
currency exchange or interest rate risk. We invest excess funds in short-term
investments, including auction rate securities, the yield of which is exposed to
interest rate market risk. Auction rate securities are classified as
available-for-sale and reported on the balance sheet at cost, which approximates
market value, as the rate on such securities resets generally every 28 to 35
days. Consequently, interest rate movements do not materially affect the balance
sheet valuation of fixed income investments. Changes in the overall level of
interest rates do affect our interest income generated from investments.
We do not have material exposure to market related risks. Foreign currency
exchange rate risk may become material given U.S. dollar to foreign currency
exchange rate changes as well as significant increases in international
engagements denominated in the local currency of our clients due to Adventis
Limited acquisition.
ITEM 4. CONTROLS AND PROCEDURES
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
on that review and evaluation, the CEO and CFO have concluded that our current
disclosure controls and procedures, as designed and implemented, were effective.
There were no significant changes in our internal control over financial
reporting during the thirteen week period ended July 1, 2006 that materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting. There were no significant material weaknesses
identified in the course of such review and evaluation and, therefore, we took
no corrective measures.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We have not been subject to any material new litigation or claims since the time
of our 10-K filing, on March 30, 2006. For a summary of litigation in which we
are currently involved, refer to our annual report on Form 10-K, as filed with
the Securities and Exchange Commission on March 30, 2006 and Note 9 of the
Condensed Consolidated Financial Statements included elsewhere in this report.
In June 1998, the bankruptcy trustee of a former client, Communications Network
Corporation, sued TMNG for a total of $320,000 in the U.S. Bankruptcy Court in
New York seeking recovery of $160,000 alleging an improper payment of consulting
fees paid by the former client during the period from July 1, 1996, when an
involuntary bankruptcy proceeding was initiated against the former client,
through August 6, 1996, when the former client agreed to an order for relief in
the bankruptcy proceeding, and $160,000 in consulting fees paid by the former
client after August 6, 1996. The bankruptcy trustee also sued us for at least
$1.85 million for breach of contract, breach of fiduciary duties and negligence.
In March 2006, we reached a settlement agreement with the bankruptcy trustee
whereby we agreed to pay the trustee $255,000 in exchange for being released
from all potential liability under the suits discussed above. Payment to the
bankruptcy trustee was made in April 2006.
ITEM 1A. RISK FACTORS
There has been no material change in the Risk Factors previously disclosed in
our annual report on Form 10-K for the year ended December 31, 2005 filed with
the Securities and Exchange Commission on March 30, 2006.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
TMNG HELD AN ANNUAL MEETING OF STOCKHOLDERS ON JUNE 22, 2006.
1. The stockholders approved the election of the three directors nominated by
our nominating committee. The votes cast for and withheld from each nominee were
as follows:
FOR WITHHELD
---------- ---------
William M. Matthes 29,488,792 4,553,180
Micky K. Woo 32,631,903 1,410,069
Robert J. Currey 33,467,158 574,814
2. The stockholders ratified the appointment of Deloitte & Touche LLP as
independent registered public accounting firm for the Company for the 2006
fiscal year by a vote of 32,470,796 shares in favor of the appointment;
1,460,865 shares against the appointment and 110,311 shares abstaining.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
(a) Exhibits
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
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ RICHARD P. NESPOLA Chairman, President and Chief August 15, 2006
------------------------------ Executive Officer
Richard P. Nespola
/s/ DONALD E. KLUMB Chief Financial Officer and August 15, 2006
------------------------------ Treasurer
Donald E. Klumb (Principal financial officer
and principal accounting
officer)
20