e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended September 29, 2007
or
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o |
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Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Commission file number: 0-27617
THE MANAGEMENT NETWORK GROUP, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE
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48-1129619 |
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.) |
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7300 COLLEGE BLVD., SUITE 302, OVERLAND PARK, KS
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66210 |
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(Address of principal executive offices)
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(Zip Code) |
913-345-9315
Registrants telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant 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.
Accelerated Filer o Large Accelerated Filer o Non- Accelerated Filer þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock as of the
latest practicable date.
As of November 9, 2007, TMNG had outstanding 36,086,633 shares of common stock.
THE MANAGEMENT NETWORK GROUP, INC.
INDEX
-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)
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September 29, |
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December 30, |
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2007 |
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2006 |
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ASSETS |
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CURRENT ASSETS: |
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Cash and cash equivalents |
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$ |
11,147 |
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$ |
11,133 |
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Short-term investments |
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17,525 |
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27,200 |
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Receivables: |
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Accounts receivable |
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14,671 |
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5,063 |
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Accounts receivable unbilled |
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6,784 |
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3,654 |
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21,455 |
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8,717 |
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Less: Allowance for doubtful accounts |
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(609 |
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(378 |
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20,846 |
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8,339 |
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Prepaid and other current assets |
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2,266 |
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2,257 |
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Total current assets |
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51,784 |
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48,929 |
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Property and equipment, net |
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1,714 |
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846 |
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Goodwill |
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13,365 |
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13,365 |
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Licenses and identifiable intangible assets, net |
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12,696 |
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1,189 |
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Other assets |
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928 |
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967 |
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Total Assets |
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$ |
80,487 |
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$ |
65,296 |
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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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$ |
2,259 |
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$ |
1,446 |
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Accrued payroll, bonuses and related expenses |
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6,378 |
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1,965 |
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Other accrued liabilities |
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2,429 |
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1,986 |
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Income tax liabilities |
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1,461 |
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271 |
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Deferred revenue |
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5,327 |
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33 |
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Accrued contingent consideration |
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1,260 |
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Unfavorable and other contractual obligations |
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1,956 |
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649 |
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Total current liabilities |
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21,070 |
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6,350 |
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NONCURRENT LIABILITIES: |
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Deferred income tax liabilities |
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1,860 |
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Unfavorable and other contractual obligations |
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2,099 |
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2,189 |
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Other noncurrent liabilities |
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516 |
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Total noncurrent liabilities |
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4,475 |
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2,189 |
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Commitments and contingencies (Note 9) |
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Total stockholders equity |
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54,942 |
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56,757 |
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Total Liabilities and Stockholders Equity |
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$ |
80,487 |
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$ |
65,296 |
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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 INCOME (LOSS)
(In thousands, except per share data)
(unaudited)
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Thirteen Weeks Ended |
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Thirty-nine Weeks Ended |
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September 29, |
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September 30, |
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September 29, |
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September 30, |
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2007 |
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2006 |
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2007 |
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2006 |
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Revenues |
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$ |
20,814 |
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$ |
8,691 |
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$ |
51,047 |
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$ |
25,395 |
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Cost of services (includes net non-cash
share-based compensation expense of $191
and $142 for the thirteen weeks ended
September 29, 2007 and September 30,
2006, respectively, and $124 and $513
for the thirty-nine weeks ended
September 29, 2007 and September 30,
2006, respectively) |
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10,514 |
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4,687 |
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27,308 |
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13,129 |
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Gross Profit |
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10,300 |
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4,004 |
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23,739 |
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12,266 |
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Operating Expenses: |
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Selling, general and administrative
(includes net non-cash share-based
compensation expense of $577 and $808
for the thirteen weeks ended September
29, 2007 and September 30, 2006,
respectively, and $588 and $2,159 for
the thirty-nine weeks ended September
29, 2007 and September 30, 2006,
respectively) |
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8,944 |
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7,455 |
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22,778 |
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20,578 |
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Special Committee investigation (a) |
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103 |
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2,451 |
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Intangible asset amortization |
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1,057 |
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215 |
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2,149 |
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566 |
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Legal settlements |
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(62 |
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(31 |
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Total operating expenses |
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10,104 |
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7,608 |
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27,378 |
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21,113 |
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Income (loss) from operations |
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196 |
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(3,604 |
) |
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(3,639 |
) |
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(8,847 |
) |
Other income (loss): |
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Interest income |
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387 |
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528 |
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1,185 |
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1,609 |
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Other, net |
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452 |
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452 |
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(1 |
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Total other income |
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839 |
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528 |
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1,637 |
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1,608 |
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Income (loss) before income tax provision |
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1,035 |
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(3,076 |
) |
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(2,002 |
) |
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(7,239 |
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Income tax provision |
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(531 |
) |
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(5 |
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(815 |
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(39 |
) |
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Net income (loss) |
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504 |
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(3,081 |
) |
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(2,817 |
) |
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(7,278 |
) |
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Other comprehensive item Foreign
currency translation adjustment |
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121 |
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(23 |
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309 |
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27 |
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Comprehensive income (loss) |
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$ |
625 |
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$ |
(3,104 |
) |
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$ |
(2,508 |
) |
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$ |
(7,251 |
) |
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Income (loss) per common share |
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Basic and diluted |
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$ |
0.01 |
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$ |
(0.09 |
) |
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$ |
(0.08 |
) |
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$ |
(0.20 |
) |
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Weighted average shares used in
calculation of net income (loss) per
common share |
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Basic |
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35,808 |
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35,764 |
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35,763 |
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35,713 |
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Diluted |
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36,140 |
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35,764 |
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35,763 |
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35,713 |
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(a) |
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For a summary of the Special Committee investigation, refer to Note 2 of the Consolidated Financial Statements
included in the Annual Report on Form 10-K as filed with the Securities and Exchange Commission on May 14, 2007. |
See notes to unaudited condensed consolidated financial statements.
-4-
THE MANAGEMENT NETWORK GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
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For the Thirty-nine Weeks Ended |
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September 29, |
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September 30, |
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2007 |
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2006 |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net loss |
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$ |
(2,817 |
) |
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$ |
(7,278 |
) |
Adjustments to reconcile net loss to net cash used in operating activities: |
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Depreciation and amortization |
|
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3,059 |
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|
885 |
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Share-based compensation |
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|
712 |
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|
2,672 |
|
Deferred income taxes |
|
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(655 |
) |
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Bad debt expense |
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|
380 |
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|
211 |
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Other changes in operating assets and liabilities: |
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Accounts receivable |
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(2,191 |
) |
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(1,450 |
) |
Accounts receivable unbilled |
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(1,554 |
) |
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(1,360 |
) |
Prepaid and other assets |
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|
665 |
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(970 |
) |
Trade accounts payable |
|
|
191 |
|
|
|
(448 |
) |
Income tax liabilities |
|
|
667 |
|
|
|
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|
Accrued liabilities |
|
|
2,650 |
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|
|
1,010 |
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|
|
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Net cash provided by (used in) operating activities |
|
|
1,107 |
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(6,728 |
) |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Purchases of short-term investments |
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(9,200 |
) |
Proceeds from maturities and sales of short-term investments |
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9,675 |
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|
16,800 |
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Acquisition of businesses, net of cash acquired |
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|
(9,943 |
) |
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|
(1,509 |
) |
Acquisition of property and equipment |
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(300 |
) |
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|
(517 |
) |
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Net cash (used in) provided by investing activities |
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(568 |
) |
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|
5,574 |
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Payments made on long-term obligations |
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(783 |
) |
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|
(444 |
) |
Proceeds from exercise of stock options |
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|
162 |
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|
297 |
|
Repurchase of common stock |
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(241 |
) |
Issuance of common stock through employee stock purchase plan |
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|
36 |
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|
74 |
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Net cash used in financing activities |
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|
(585 |
) |
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|
(314 |
) |
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Effect of exchange rate on cash and cash equivalents |
|
|
60 |
|
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|
27 |
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|
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|
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|
|
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Net increase (decrease) in cash and cash equivalents |
|
|
14 |
|
|
|
(1,441 |
) |
Cash and cash equivalents, beginning of period |
|
|
11,133 |
|
|
|
10,951 |
|
|
|
|
|
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|
|
Cash and cash equivalents, end of period |
|
$ |
11,147 |
|
|
$ |
9,510 |
|
|
|
|
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|
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|
|
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Supplemental disclosure of cash flow information: |
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Cash paid during period for interest |
|
|
|
|
|
$ |
1 |
|
|
|
|
|
|
|
|
|
Cash paid during period for income taxes, net of refunds |
|
$ |
752 |
|
|
$ |
11 |
|
|
|
|
|
|
|
|
Accrued property and equipment additions |
|
$ |
55 |
|
|
$ |
10 |
|
|
|
|
|
|
|
|
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. (TMNG, TMNG Global, we, us, our, or the Company) as of September 29, 2007,
and for the thirteen and thirty-nine weeks ended September 29, 2007 and September 30, 2006 are
unaudited and reflect all normal recurring adjustments which are, in the opinion of management,
necessary for the fair presentation of the Companys condensed consolidated financial position,
results of operations, and cash flows as of these dates and for the periods presented. The
condensed consolidated financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America (US GAAP) and pursuant to the rules
and regulations of the Securities and Exchange Commission for interim financial information.
Consequently, these statements do not include all the disclosures normally required by US GAAP for
annual financial statements nor those normally made in the Companys annual report on Form 10-K.
Accordingly, reference should be made to the Companys annual consolidated financial statements and
notes thereto for the fiscal year ended December 30, 2006, included in the 2006 Annual Report on
Form 10-K (2006 Form 10-K) for additional disclosures, including a summary of the Companys
accounting policies. The Condensed Consolidated Balance Sheet as of December 30, 2006 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.
The preparation of financial statements in conformity with U.S. GAAP requires management to make
estimates and assumptions that affect the amounts reported in the unaudited condensed consolidated
financial statements and accompanying notes. Actual results could differ from those estimates. The
results of operations for the thirteen and thirty-nine weeks ended September 29, 2007 are not
necessarily indicative of the results to be expected for the full year ending December 29, 2007.
Certain amounts in prior years have been reclassified to conform to current period presentation.
Principles of Consolidation The consolidated statements include the accounts of TMNG and its
wholly-owned subsidiaries. On August 3, 2007, the Company acquired all of the outstanding
membership interests of RVA Consulting, LLC (RVA), a New Jersey based consulting firm
specializing in the communications industry. The results of RVA are included in the results of
operations subsequent to the date of acquisition. On January 2, 2007, the Company acquired
one-hundred percent of the outstanding common stock of Cartesian Limited (Cartesian), a United
Kingdom-based software engineering and consulting firm. The results of Cartesian are included in
the results of operations subsequent to the date of acquisition. A wholly-owned subsidiary,
Cambridge Adventis Ltd., was formed in March 2006. On April 3, 2006, Cambridge Adventis Ltd.
acquired the business and primary assets of Adventis Ltd., the international operations of Adventis
Corporation, a global consulting firm specializing in telecom, technology and digital media. The
results of Cambridge Adventis Ltd. are included in the results of operations subsequent to the date
of formation.
Revenue Recognition The Company recognizes revenue from time and materials consulting contracts
in the period in which its services are performed. In addition to time and materials contracts, the
Companys other types of contracts may include time and materials contracts not to exceed contract
price, 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 method prescribed by AICPA Statement of Position
(SOP) No. 81-1, Accounting for Performance of Construction-Type and Certain Production-Type
Contracts. For fixed fee contracts where services are not based on providing deliverables or
achieving milestones, the Company recognizes revenue on a straight-line basis over the period
during which such services are expected to be performed.
As a result of the Cartesian acquisition, the Company now develops, installs and supports customer
software in addition to its traditional consulting services. The Company recognizes revenue in
connection with its software sales agreements utilizing the SOP No. 81-1 percentage of completion
method. These agreements include software right-to-use licenses (RTUs) and related customization
and implementation services. Due to the long-term nature of the software implementation and the
extensive software customization based on customer specific requirements normally experienced by
the Company, both the RTU and implementation services are treated as a single element for revenue
recognition purposes.
The SOP No. 81-1 percentage-of-completion methodology involves recognizing revenue using the
percentage of services completed, on a current cumulative cost to total cost basis, using a
reasonably consistent profit margin over the period. Due to the longer term nature of these
projects, developing the estimates of costs often requires significant judgment. Factors that must
be considered in estimating the progress of work completed and ultimate cost of the projects
include, but are not limited to, the availability of labor and labor productivity, the nature and
complexity of the work to be performed, and the impact of delayed performance. If changes occur in
delivery, productivity or other factors used in developing the estimates of costs or revenues, 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 also provides 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, the Company
separates the SOP No. 81-1 software services and PCS services utilizing the multiple-element
arrangement model prescribed by Emerging Issues Task Force (EITF) No. 00-21, Revenue
-6-
Arrangements with Multiple Deliverables. EITF No. 00-21 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 EITF No. 00-21 to separate the PCS service
elements and allocate total contract consideration to the contract elements based on the relative
fair value of those elements. Revenues from PCS services are recognized ratably on a straight-line
basis over the term of the support and maintenance agreement.
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 Companys 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 and costs associated with contingent fee contracts were $786,000
and $236,000, respectively, for the thirteen and thirty-nine weeks ended September 29, 2007 and
were not material for the thirteen and thirty-nine weeks ended September 30, 2006.
Deferred Revenue In connection with some fixed price contracts, the Company receives payments
from customers that exceed recognized revenues. 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.
Research and Development and Capitalized Software Costs - Software development costs are accounted
for in accordance with Statement of Financial Accounting Standards (SFAS) No. 86, Accounting for
the Costs of Computer Software to Be Sold, Leased, or Otherwise 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, the date technological feasibility is
reached, anticipated future gross revenue, estimated economic life and changes in software and
hardware technologies. The Company capitalizes development costs incurred during the period between
the establishment of technological feasibility and the release of the final product to customers if
such costs are material. During the thirteen and thirty-nine weeks ended September 29, 2007,
$229,000 and $680,000, respectively, of these costs were expensed as incurred. No software
development costs were capitalized during the thirteen and thirty-nine weeks ended September 29,
2007. No software development costs were incurred in the thirteen and thirty-nine weeks ended
September 30, 2006.
The Company also incurs research and development costs associated with development of new offerings
and services. These product development costs are expensed as incurred. Research and development
costs associated with product development were $281,000 in the thirty-nine weeks ended September
30, 2006. No product development costs were incurred in the thirteen weeks ended September 30, 2006
and the thirteen and thirty-nine weeks ended September 29, 2007.
Recent Accounting Pronouncements In September 2006, the Financial Accounting Standards Board
(FASB) issued SFAS No. 157, Fair Value Measurements. This statement defines fair value,
establishes a framework for using fair value to measure assets and liabilities, and expands
disclosures about fair value measurements. The statement applies whenever other statements require
or permit assets or liabilities to be measured at fair value. SFAS No. 157 is effective for fiscal
years beginning after November 15, 2007. The Company is currently evaluating the impact of this
adoption on its consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Liabilities. This statement permits entities to choose to measure many financial instruments and
certain other items at fair value. If the fair value option is elected, unrealized gains and losses
will be recognized in earnings at each subsequent reporting date. SFAS No. 159 is effective for
fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact of
this adoption on its consolidated financial statements.
2. Business Combinations
RVA Consulting, LLC
On August 3, 2007, the Company acquired all of the outstanding membership interests of RVA pursuant
to a Membership Interest Purchase Agreement with the members of RVA. The transaction was valued at
a purchase price of approximately $6.6 million in cash, potential additional consideration of $0.4
million for working capital true-ups and potential earn-out consideration based upon performance of
RVA after the closing date of up to approximately $2.8 million in cash and approximately 1.0
million shares of TMNG common stock valued at $2.4 million based on the share price at the date of
close. The Company incurred approximately $0.2 million in transaction costs related to the
acquisition. In addition, approximately $0.2 million of future purchase consideration is contingent
on the continued employment of one of the selling members and is being expensed over the employees
expected service period of three months. TMNG assumed all liabilities of RVA, subject to certain
indemnities on the part of the selling members. Certain of the selling members continue to be
employed by and participate in the management of RVA after the closing date pursuant to written
employment agreements. RVA will be presented as a component of the Management Consulting Services
segment.
The measurement of the respective assets and liabilities recognized in connection with the
acquisition has been made in accordance with the provisions of SFAS No. 141, Business
Combinations. The fair value of the net assets acquired in the RVA acquisition exceeded the total
consideration paid by the Company, resulting in negative goodwill of $0.9 million. Because the
acquisition involves contingent consideration,
-7-
the Company is required to recognize additional
purchase consideration equal to the lesser of the negative goodwill or the maximum amount of
contingent consideration of $5.2 million. The negative goodwill is included in the total purchase
price and reflected as a current liability based on the anticipated resolution of the contingent
feature. If and when contingent payments are earned, the Company will apply the payments against
these contingent liabilities. Any contingent payments in excess of the initial accrued contingent
consideration will be recorded as goodwill. To the extent contingent payments are not made, the
Company will reduce the basis of certain acquired assets and any remaining negative goodwill will
be charged to the results of operations as an extraordinary gain. None of the earn-out
consideration was earned during the thirteen and thirty-nine weeks ended September 29, 2007.
The aggregate purchase price of $7.7 million consisted of the following (in thousands):
|
|
|
|
|
Cash (including transaction costs) |
|
$ |
6,826 |
|
Accrued contingent consideration |
|
|
878 |
|
|
|
|
|
|
|
|
|
|
Total purchase price |
|
$ |
7,704 |
|
|
|
|
|
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. The preliminary allocation of the purchase price
assigned to identifiable intangible assets was determined with the assistance of an independent
appraisal firm.
At August 3, 2007
(Amounts in Thousands)
|
|
|
|
|
Acquired cash |
|
$ |
5,642 |
|
Other current assets |
|
|
3,191 |
|
Furniture, fixtures and equipment |
|
|
369 |
|
Customer relationships |
|
|
3,400 |
|
Employment agreements |
|
|
400 |
|
Customer backlog |
|
|
2,100 |
|
|
|
|
|
|
|
|
|
|
Total assets acquired |
|
|
15,102 |
|
|
|
|
|
|
|
|
|
|
Deferred revenue |
|
|
4,575 |
|
Other current liabilities assumed |
|
|
2,429 |
|
Noncurrent liabilities assumed |
|
|
394 |
|
|
|
|
|
|
|
|
|
|
Total liabilities assumed |
|
|
7,398 |
|
|
|
|
|
|
|
|
|
|
Net assets acquired |
|
$ |
7,704 |
|
|
|
|
|
The following table summarizes the estimated useful life for the identifiable intangible assets. No
residual values have been identified with these assets and each are amortized on a straight-line
basis. Customer relationships are amortized over a shortened estimated useful life to ensure that
the recognition of the costs better corresponds to their anticipated contribution to cash flows.
|
|
|
|
|
|
|
Estimated |
|
|
useful life |
Identifiable Intangible Asset |
|
(in months) |
Customer relationships |
|
|
48 |
|
Employment agreements |
|
|
36 |
|
Customer backlog |
|
|
12 |
|
The transaction was structured as an asset acquisition for income tax purposes, therefore any
goodwill resulting from contingent consideration and specifically identifiable intangible assets recorded in the transaction will be
deductible for income tax purposes. Net deferred income tax assets recorded in connection with the
preliminary purchase price allocation have been fully reserved with valuation allowances due to
uncertainty about the realization of these benefits.
Cartesian Limited
On January 2, 2007, the Company acquired one-hundred percent of the outstanding common stock of
Cartesian for a total purchase price of approximately $6.5 million, plus up to approximately $9.2
million in potential future earn-out consideration based upon the performance of Cartesian after
the closing date. An additional $0.5 million in transaction costs were capitalized as part of the
purchase price. The selling shareholders continue to be employed by and manage Cartesian after the
closing date pursuant to written employment agreements. Any future
-8-
purchase consideration is not
contingent on the continued employment of the selling shareholders. TMNG assumed all liabilities of
Cartesian, subject to certain tax indemnities on the part of the selling shareholders.
The measurement of the respective assets and liabilities recognized in connection with the
acquisition has been made in accordance with the provisions of SFAS No. 141, Business
Combinations. The fair value of the net assets acquired in the Cartesian acquisition exceeded the
total consideration paid by the Company, resulting in negative goodwill of $3.8 million. Because
the acquisition involves contingent consideration, the Company is required to recognize additional
purchase consideration equal to the lesser of the negative goodwill or the maximum amount of
contingent consideration of $9.2 million. The negative goodwill is included in the total purchase
price and reflected as a current liability based on the anticipated resolution of the contingent
feature. If and when contingent payments are earned, the Company will apply the payments against
these contingent liabilities. Any contingent payments in excess of the initial accrued contingent
consideration will be recorded as goodwill. To the extent contingent payments are not made, the
Company will reduce the basis of certain acquired assets and any remaining negative goodwill will
be charged to the results of operations as an extraordinary gain. Earn-out consideration of $1.5
million and $3.5 million was earned and paid during the thirteen and thirty-nine weeks ended
September 29, 2007, respectively. The payment of the earn-out consideration reduced the liability
for accrued contingent consideration. Potential earn-out payments in excess of amounts already
paid total $5.7 million at September 29, 2007.
The aggregate purchase price of $10.9 million consisted of the following (in thousands):
|
|
|
|
|
Cash |
|
$ |
7,030 |
|
Accrued contingent consideration |
|
|
3,824 |
|
|
|
|
|
|
|
|
|
|
Total purchase price |
|
$ |
10,854 |
|
|
|
|
|
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. The preliminary allocation of the purchase price
assigned to identifiable intangible assets was determined with the assistance of an independent
appraisal firm.
At January 2, 2007
(Amounts in Thousands)
|
|
|
|
|
Acquired cash |
|
$ |
1,787 |
|
Other current assets |
|
|
6,192 |
|
Property, plant and equipment |
|
|
533 |
|
Customer relationships |
|
|
2,368 |
|
Acquired software |
|
|
2,961 |
|
Employment agreements |
|
|
1,974 |
|
Customer backlog |
|
|
395 |
|
Tradename |
|
|
395 |
|
|
|
|
|
|
|
|
|
|
Total assets acquired |
|
|
16,605 |
|
|
|
|
|
|
|
|
|
|
Current liabilities assumed |
|
|
3,332 |
|
Deferred income tax liabilities recognized |
|
|
2,419 |
|
|
|
|
|
|
|
|
|
|
Total liabilities assumed and recognized |
|
|
5,751 |
|
|
|
|
|
|
|
|
|
|
Net assets acquired |
|
$ |
10,854 |
|
|
|
|
|
The following table summarizes the estimated useful life for the identifiable intangible assets. No
residual values have been identified with these assets and each are amortized on a straight-line
basis. Customer relationships are amortized over a shortened estimated useful life to ensure that
the recognition of the costs better corresponds to their anticipated contribution to cash flows.
-9-
|
|
|
|
|
|
|
Estimated |
|
|
useful life |
Identifiable Intangible Asset |
|
(in months) |
Customer relationships |
|
|
48 |
|
Acquired software |
|
|
48 |
|
Employment agreements |
|
|
36 |
|
Customer backlog |
|
|
12 |
|
Tradename |
|
|
24 |
|
The
transaction was structured as a stock acquisition, therefore any
goodwill resulting from contingent consideration and specifically
identifiable intangible assets recorded in the transaction will not be deductible for income tax
purposes.
Adventis Limited
On April 3, 2006, TMNG acquired the business and primary assets of Adventis Ltd., the international
operations of Adventis Corporation, a Delaware corporation and the parent of Adventis Ltd., a
global consulting firm specializing in the interrelated sectors of telecom, technology and digital
media. The acquired operations of Adventis Ltd. consisted 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 $1.93 million, with approximately $1.5 million paid in cash at
closing, plus the assumption of approximately $432,000 in net working capital deficiency, which
included $269,000 in professional fees and other costs related directly to the acquisition. During
the fourth quarter of fiscal year 2006, the Company recognized a $2.1 million charge for the
impairment of the carrying amount of Adventis Ltd. The impairment charge was the result of lower
than expected operating results coupled with a reduction in the size and scope of operations which
impacted the Companys assessment of future cash flows of the Adventis business. The impairment
charge reduced the net carrying amount of Adventis intangible assets to zero.
Pro Forma Combined Results
The operating results of Adventis, Cartesian and RVA have been included in the Condensed
Consolidated Statements of Operations and Comprehensive Loss subsequent to the respective dates of
the purchase. The following reflects pro forma combined results of the Company (including Adventis,
Cartesian and RVA) as if the acquisitions had occurred as of January 1, 2006. In managements
opinion, this pro forma information does not necessarily reflect the actual results that would have
occurred had the acquisitions been completed as of January 1, 2006 nor is it necessarily indicative
of future consolidated results of operations of the Company.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited |
|
|
For the Thirteen Weeks Ended |
|
For the Thirty-nine Weeks Ended |
|
|
September
29, 2007 |
|
September
30, 2006 |
|
September 29,
2007 |
|
September 30,
2006 |
Total revenues |
|
$ |
23,553 |
|
|
$ |
17,307 |
|
|
$ |
67,983 |
|
|
$ |
42,400 |
|
Net income (loss) |
|
$ |
1,943 |
|
|
$ |
(505 |
) |
|
$ |
5,229 |
|
|
$ |
(4,611 |
) |
Basic and diluted net income (loss) per common share |
|
$ |
0.05 |
|
|
$ |
(0.01 |
) |
|
$ |
0.15 |
|
|
$ |
(0.13 |
) |
3. 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 two reportable segments beginning in the first quarter of fiscal
2007, the Management Consulting Services segment and the Software Solutions segment. The Management
Consulting Services segment is comprised of four operating segments (Operations, Strategy,
Marketing and International) which are aggregated into one reportable segment. Management
Consulting Services includes consulting services related to business strategy and planning,
marketing and customer relationship management, billing system support, operating system support,
revenue assurance, corporate investment services, and business model transformation. Software
Solutions is a single reportable operating segment that provides custom developed software,
consulting and technical services. These services range from developing initial business and system
requirements, to software development, software configuration and implementation, and post-contract
customer support. The Company began reporting the Software Solutions segment as a result of the
acquisition of Cartesian on January 2, 2007.
Management evaluates segment performance based upon income (loss) from operations, excluding
share-based compensation (benefits), depreciation and intangibles amortization. Inter-segment sales
were approximately $0.3 million and $0.6 million in the thirteen and thirty-nine weeks ended
September 29, 2007, respectively. The Company had one reporting segment during the thirteen and
thirty-nine weeks ended September 30, 2006, the Management Consulting Services segment. In addition, in its administrative
division, entitled Not Allocated to
-10-
Segments, the Company accounts for non-operating activity and
the costs of providing corporate and other administrative services to the segment.
Summarized financial information concerning the Companys reportable segments is shown in the
following table (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management |
|
|
|
|
|
Not |
|
|
|
|
Consulting |
|
Software |
|
Allocated to |
|
|
|
|
Services |
|
Solutions |
|
Segments |
|
Total |
As of and for the thirty-nine weeks ended
September 29, 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
33,354 |
|
|
$ |
17,693 |
|
|
|
|
|
|
$ |
51,047 |
|
Income (loss) from operations |
|
|
11,658 |
|
|
|
5,495 |
|
|
$ |
(20,792 |
) |
|
|
(3,639 |
) |
Total assets |
|
$ |
14,493 |
|
|
$ |
6,353 |
|
|
$ |
59,604 |
|
|
$ |
80,450 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the thirteen weeks ended September 29, 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
14,057 |
|
|
$ |
6,757 |
|
|
|
|
|
|
$ |
20,814 |
|
Income (loss) from operations |
|
|
5,473 |
|
|
|
2,453 |
|
|
$ |
(7,730 |
) |
|
|
196 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the thirty-nine weeks ended
September 30, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
25,395 |
|
|
|
|
|
|
|
|
|
|
$ |
25,395 |
|
Income (loss) from operations |
|
|
7,731 |
|
|
|
|
|
|
$ |
(16,578 |
) |
|
|
(8,847 |
) |
Total assets |
|
$ |
9,752 |
|
|
|
|
|
|
$ |
61,291 |
|
|
$ |
71,043 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the thirteen weeks ended September 30, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
8,691 |
|
|
|
|
|
|
|
|
|
|
$ |
8,691 |
|
Income (loss) from operations |
|
|
1,899 |
|
|
|
|
|
|
$ |
(5,503 |
) |
|
|
(3,604 |
) |
Segment assets, regularly reviewed by management as part of its overall assessment of the segments
performance, include both billed and unbilled trade accounts receivable, net of allowances, and
certain other assets. Assets not assigned to segments include cash and cash equivalents, 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 respective segment.
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 Weeks Ended |
|
|
For the Thirty-nine Weeks Ended |
|
|
|
|
|
|
|
|
|
|
September 29, |
|
|
September 30, |
|
|
September 29, |
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
12,102 |
|
|
$ |
6,331 |
|
|
$ |
27,023 |
|
|
$ |
20,254 |
|
International: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United Kingdom |
|
|
8,300 |
|
|
|
1,185 |
|
|
|
22,139 |
|
|
|
3,137 |
|
Germany |
|
|
25 |
|
|
|
925 |
|
|
|
714 |
|
|
|
1,392 |
|
Japan |
|
|
|
|
|
|
178 |
|
|
|
220 |
|
|
|
430 |
|
Ireland |
|
|
107 |
|
|
|
|
|
|
|
301 |
|
|
|
|
|
Spain |
|
|
186 |
|
|
|
|
|
|
|
207 |
|
|
|
|
|
Other |
|
|
94 |
|
|
|
72 |
|
|
|
443 |
|
|
|
182 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
20,814 |
|
|
$ |
8,691 |
|
|
$ |
51,047 |
|
|
$ |
25,395 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4. Goodwill and Other Identifiable Intangible Assets
There were no changes in the carrying amounts of goodwill during the thirteen weeks and thirty-nine
weeks ended September 29, 2007.
Included in the Companys consolidated balance sheets as of September 29, 2007 (reflecting the
acquisitions of Cartesian on January 2, 2007 and RVA on August 3, 2007) and December 30, 2006, are
the following identifiable intangible assets (amounts in thousands):
-11-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 29, 2007 |
|
|
December 30, 2006 |
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Accumulated |
|
|
|
Cost |
|
|
Amortization |
|
|
Cost |
|
|
Amortization |
|
Acquired software |
|
$ |
3,062 |
|
|
$ |
(574 |
) |
|
|
|
|
|
|
|
|
Customer relationships |
|
|
5,849 |
|
|
|
(601 |
) |
|
$ |
1,908 |
|
|
$ |
(1,879 |
) |
Employment agreements |
|
|
2,441 |
|
|
|
(532 |
) |
|
|
|
|
|
|
|
|
Customer backlog |
|
|
2,508 |
|
|
|
(656 |
) |
|
|
|
|
|
|
|
|
Tradename |
|
|
408 |
|
|
|
(153 |
) |
|
|
|
|
|
|
|
|
S3 license agreement |
|
|
1,500 |
|
|
|
(556 |
) |
|
|
1,500 |
|
|
|
(340 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
15,768 |
|
|
$ |
(3,072 |
) |
|
$ |
3,408 |
|
|
$ |
(2,219 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The customer relationships of $1.9 million as of December 30, 2006 were fully amortized during the
thirteen weeks ended March 31, 2007.
Intangible amortization expense for the thirteen weeks ended September 29, 2007 and September 30,
2006 was $1,246,000 and $215,000, respectively, including $189,000 reported in cost of services for
the thirteen weeks ended September 29, 2007. Intangible amortization expense for the thirty-nine
weeks ended September 29, 2007 and September 30, 2006 was $2,707,000 and $566,000, respectively,
including $558,000 reported in cost of services for the thirty-nine weeks ended September 29, 2007.
Future intangible amortization expense is estimated to be approximately as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
|
|
|
|
|
intangible |
|
|
Total estimated |
|
amortization to |
|
|
intangible |
|
be included in |
Future Period |
|
amortization |
|
cost of services |
Remainder of fiscal year 2007 |
|
$ |
1,511 |
|
|
$ |
191 |
|
Fiscal year 2008 |
|
|
4,761 |
|
|
|
765 |
|
Fiscal years 2009 2011 |
|
|
6,424 |
|
|
|
1,531 |
|
5. Share-Based Compensation
The Company issues stock option awards and nonvested share awards under its share-based
compensation plans. The key provisions of the Companys share-based compensation plans are
described in Note 5 of the Companys consolidated financial statements included in the 2006 Form
10-K.
The Company did not recognize any income tax benefit for share-based compensation arrangements for
the thirty-nine weeks ended September 29, 2007 and September 30, 2006. In addition, no costs
related to share-based compensation expense were capitalized during the thirty-nine weeks ended
September 29, 2007 and September 30, 2006. During the first quarter of 2007, the Company revised
its estimate of options that are expected to be forfeited prior to vesting. As a result of this
change in estimate, pre-tax share-based compensation expense was reduced by $968,000.
1998 Equity Incentive Plan
Stock Options
A summary of the option activity under the Companys 1998 Equity Incentive Plan, as amended and
restated (the 1998 Plan), as of September 29, 2007 and changes during the thirty-nine weeks then
ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
Shares |
|
Exercise Price |
Outstanding at December 30, 2006 |
|
|
5,465,594 |
|
|
$ |
3.78 |
|
Granted |
|
|
1,771,500 |
|
|
$ |
2.14 |
|
Exercised |
|
|
(95,906 |
) |
|
$ |
1.69 |
|
Forfeited/cancelled |
|
|
(2,677,372 |
) |
|
$ |
3.16 |
|
|
|
|
|
|
|
|
|
|
Outstanding at September 29, 2007 |
|
|
4,463,816 |
|
|
$ |
3.55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested and expected to vest at September 29, 2007 |
|
|
3,698,382 |
|
|
$ |
3.83 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at September 29, 2007 |
|
|
2,061,518 |
|
|
$ |
5.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value of options granted during the period |
|
|
|
|
|
$ |
1.39 |
|
-12-
Nonvested Shares
A summary of the status of nonvested shares granted under the 1998 Plan as of September 29, 2007
and changes during the thirty-nine weeks then ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
Grant Date |
|
|
Shares |
|
Fair Value |
Outstanding at December 30, 2006 |
|
|
221,750 |
|
|
$ |
2.30 |
|
Granted |
|
|
12,500 |
|
|
$ |
2.29 |
|
Vested |
|
|
(46,250 |
) |
|
$ |
2.23 |
|
Forfeited/Cancelled |
|
|
(70,000 |
) |
|
$ |
2.48 |
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 29, 2007 |
|
|
118,000 |
|
|
$ |
2.23 |
|
|
|
|
|
|
|
|
|
|
2000 Supplemental Stock Plan
A summary of the option activity under the Companys 2000 Supplemental Stock Plan as of September
29, 2007 and changes during the thirty-nine weeks then ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
Shares |
|
Exercise Price |
Outstanding at December 30, 2006 |
|
|
1,121,972 |
|
|
$ |
4.02 |
|
Granted |
|
|
795,000 |
|
|
$ |
2.30 |
|
Forfeited/cancelled |
|
|
(593,570 |
) |
|
$ |
4.90 |
|
|
|
|
|
|
|
|
|
|
Outstanding at September 29 , 2007 |
|
|
1,323,402 |
|
|
$ |
2.59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested and expected to vest at September 29, 2007 |
|
|
1,022,754 |
|
|
$ |
2.69 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at September 29, 2007 |
|
|
347,311 |
|
|
$ |
3.47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value of options granted during the period |
|
|
|
|
|
$ |
1.39 |
|
6. Earnings (Loss) Per Share
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. The
weighted average number of common shares outstanding excludes treasury shares purchased by the
Company. 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 128, Earnings per Share, the Company uses the treasury
stock method for calculating the dilutive effect of employee stock options and nonvested shares.
These instruments will have a dilutive effect under the treasury stock method only when the
respective periods average market value of the underlying Company common stock exceeds the actual
proceeds. In applying the treasury stock method, assumed proceeds include the amount, if any, the
employee must pay upon exercise, the amount of compensation cost for future services that the
Company has not yet recognized, and the amount of tax benefits, if any, that would be credited to
additional paid-in capital assuming exercise of the options and the vesting of nonvested shares.
The Company has not included the effect of stock options in the calculation of diluted loss per
share for the thirty-nine weeks ended September 29, 2007 or for the thirteen and thirty-nine weeks
ended September 30, 2006 as the Company reported a net loss for these periods and the effect would
have been anti-dilutive. During the thirteen weeks ended September 29, 2007, the calculation of
diluted earnings per share excludes the impact of 5,613,390 options under the treasury stock method
because the impact of these stock options would have been anti-dilutive.
7. Income Taxes
In the thirteen and thirty-nine weeks ended September 29, 2007 and September 30, 2006, the Company
recorded income tax provisions of $531,000, $815,000, $5,000 and $39,000, respectively. The tax
provisions in the thirteen and thirty-nine weeks ended September 29, 2007 are primarily related to
international income taxes due to the profitability of the Companys United Kingdom operations. The
tax provisions in the thirteen and thirty-nine weeks ended September 30, 2006 are primarily related
to state income taxes. During both periods, the Company recorded full valuation allowances against
income tax benefits related to domestic operations 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. As of September 29, 2007, the Company has recorded $32.0
million of valuation allowances attributable to its net deferred tax assets.
-13-
The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes, an interpretation of FASB Statement 109, (FIN 48) effective January 1, 2007. FIN
48 prescribes a two-step process to determine the amount of tax benefit to be recognized. First,
the tax position must be evaluated to determine the likelihood that it will be sustained upon
external examination. If the tax position is deemed more-likely-than-not to be sustained, the tax
position is then assessed to determine the amount of benefit to recognize in the financial
statements. The amount of the benefit that may be recognized is the largest amount that has a
greater than 50 percent likelihood of being realized upon ultimate settlement with the taxing
authority. Tax positions that previously failed to meet the more-likely-than-not recognition
threshold should be recognized in the first subsequent financial reporting period in which that
threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not
recognition threshold should be derecognized in the first subsequent financial reporting period in
which that threshold is no longer met.
FIN 48 requires that the cumulative effect of the change in accounting principle be recorded as an
adjustment to opening accumulated deficit. As a result of the implementation of FIN 48, the Company
recognized a cumulative effect adjustment of $223,000 as an increase to beginning accumulated
deficit. In addition, the Company identified approximately $271,000 in liabilities for unrecognized
tax benefits which were previously reserved. The liability for uncertain tax positions was $516,000
as of September 29, 2007 and is included in Other noncurrent liabilities on the condensed
consolidated balance sheet. The adoption of FIN 48 did not have a material effect on the Companys
results of operations, financial condition or cash flows during the thirty-nine weeks ended
September 29, 2007. However, FIN 48 may add volatility to the Companys effective tax rate and,
therefore, the expected income tax expense in future periods.
The Company recognizes interest accrued related to unrecognized tax benefits in interest expense
and penalties as a component of the income tax provision. As of September 29, 2007 and December 31,
2006, the total amount of accrued income tax-related interest and penalties included in the
Condensed Consolidated Balance Sheet was $161,000 and $139,000, respectively. As of September 29,
2007, the Company believes there are no positions for which it is reasonably possible that the
total amount of unrecognized tax benefits will significantly increase or decrease within the next
12 months.
The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction,
and various states and foreign jurisdictions. With few exceptions, the Company is no longer subject
to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years
before 2002. As of September 29, 2007, the Company has one examination in process by the Internal
Revenue Service related to employment and stock option matters.
8. Loans to Officers
As of September 29, 2007, 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 September 29, 2007 and December 30, 2006 totaled $300,000
and are due in 2011. These amounts are included in other assets in the non-current assets section
of the balance sheet. 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 September 29, 2007.
9. Commitments and Contingencies
As of March 31, 2007, 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. One of these demands originated through the
acquisition of Tri-Com in 2001, resulting in a contingent purchase price to the seller. Although
the Company did not believe preferential payments had been received from this former client, the
Company had reserves of $727,000 to cover any liability resulting from the remaining outstanding
claims and the contingent purchase price. In May 2007, the Company reached a settlement agreement
with the bankruptcy trustee whereby the Company agreed to pay $565,000 in exchange for being
released from all potential liability under the demands discussed above. A small gain was
recognized in fiscal year 2006 as a result of this subsequent event. The Company is currently
working to finalize settlement for the contingent purchase price component of the Tri-Com
acquisition.
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 the matters described above will not have a
material adverse effect upon its consolidated results of operations, cash flows or financial
position.
On September 26, 2007, the independent members of the Companys Board of Directors (the Board)
upon the recommendation of the Compensation Committee of the Board approved a senior executive
incentive compensation plan for fiscal year 2007 (the Plan). The Plan establishes a cash bonus
pool (the Pool) for the Companys executive management, including its principal executive
officer, president and chief operating officer, principal financial officer, and other executives,
as recommended by the principal executive officer, if the Company meets or exceeds an earnings
target for fiscal year 2007. The calculation of the earnings target excludes non-cash charges and
benefits and the impact of certain items that are generally not expected to be on-going in nature.
The amount available for payment from the Pool (Payout Amount) begins at $812,500 if the Company
achieves the earnings target. If the earnings target is exceeded, the Payout Amount increases in
-14-
accordance with a graduated descending scale ranging from 12.5% to 7.5% of the earnings in excess
of the target, provided that the Payout Amount is not to exceed $2,000,000. The distribution of the
Payout Amount, if any, among the Companys eligible executive management will be determined by the
Compensation Committee of the Board and/or independent directors at a later date. During the
thirteen weeks ended September 29, 2007, the Company made the determination that it was probable
the minimum earnings threshold under the Plan would be met and accrued $600,000 related this senior
executive incentive compensation plan.
10. Subsequent Event
On October 5, 2007, the Company acquired all of the outstanding shares of stock of TWG Consulting,
Inc. (TWG), a privately-held management consulting firm. Prior to the acquisition, TMNG did not
have any material relationship with TWG. Under the purchase agreement, TMNG agreed to acquire TWG
for a total cash purchase price of $1.7 million, including approximately $1.3 million paid for
TWGs working capital. In the event TWG achieves certain performance targets, total consideration
under the agreement could increase to $4.6 million, including possible contingent consideration of
$1.3 million in cash and approximately 0.7 million shares of TMNG common stock valued at $1.6
million based on the share price at the date of close.
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Statement Regarding Forward-Looking Statements. In addition to historical information,
this quarterly report contains forward-looking statements. Forward-looking statements include, but
are not limited to, statements of plans and objectives, statements of future economic performance
or financial projections, statements of assumptions underlying such statements, and statements of
the Companys or managements intentions, hopes, beliefs, expectations or predictions of the
future. Forward-looking statements can often be identified by the use of forward-looking
terminology, such as believes, expects, may, should, could, intends, plans,
estimates or anticipates, variations thereof or similar expressions. Certain risks and
uncertainties could cause actual results to differ materially from those reflected in such
forward-looking statements. Factors that might cause a difference include, but are not limited to,
those discussed in the sections entitled Managements 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 30, 2006 and in subsequent quarterly repots on Form 10-Q. Readers are
cautioned not to place undue reliance on these forward-looking statements, which reflect
managements opinions only as of the date of this report. We undertake no obligation to revise, or
publicly release the results of any revision to, these forward-looking statements. Readers should
carefully review the 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 Managements Discussion and Analysis of Financial
Condition and Results of Operations as presented in our annual report on Form 10-K for the fiscal
year ended December 30, 2006.
EXECUTIVE FINANCIAL OVERVIEW
TMNG is a leading provider 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, management, marketing, operational,
and technology consulting services. With our 2007 acquisition of Cartesian, we further extended our
offerings to include software applications. We have consulting experience with almost all major
aspects of managing a global communications company. Our portfolio of solutions includes
proprietary methodologies and toolsets, deep industry experience, and hands-on operational
expertise. These solutions assist clients in tackling complex business problems.
The convergence of communications with media and entertainment and the consolidation of large
telecommunications carriers have required us to focus our strategy on building a global presence,
continuing to expand our offerings and strengthening our position within the large carriers and
media and entertainment companies. We have demonstrated recent success on building a global
presence through both organic growth and acquisitions. Organically, our revenues have grown 12.8%
for the thirty-nine weeks ended September 29, 2007 compared to the same period in 2006. Our
international revenues in the thirty-nine weeks ended September 29, 2007 represents 47.1% of our
total revenue, up from 20.2% in the same period of 2006 as a result of strategic acquisitions as
well as organic growth. The recent announcements of our acquisitions of RVA and TWG,
supports our carrier positioning strategy and adds several new practices to our portfolio. RVA
provides telecom systems integration and transformational consulting for leading, Tier-one U.S.
carriers. RVA has historically been very successful in building relationships with key carriers as
the industry has consolidated in recent years. RVA will also complement the technical capabilities
that Cartesian has brought to TMNG. TWGs strength lies in organizational design and development
and further capabilities to support our Web 2.0 initiative and extension to corporate intranets.
Our revenues of $20.8 million and $51.0 million for the thirteen and thirty-nine weeks ended
September 29, 2007, respectively, increased 139.5% and 101.0%, respectively, compared with the same
periods in 2006. The results for the thirteen and thirty-nine weeks ended June 30, 2007 include the
acquisitions of Adventis on April 3, 2006, Cartesian on January 2, 2007 and RVA on August 3, 2007,
from the respective dates of acquisition. The details of these acquisitions are outlined in Item 1,
Note 2, Business Combinations, to the condensed consolidated financial statements. These
acquisitions combined with our investment in targeting the cable industry have re-positioned the
Company to better serve consolidating telecommunications carriers and the converging global media
and entertainment companies. With the acquisition of Cartesian, we have added a reporting segment,
the Software Solutions segment, to our Management Consulting Services segment. The Software
Solutions segment includes revenues from Cartesians widely deployed modular software suite, called
Ascertain TM , which features
-15-
advanced revenue assurance and data integrity tools that
support fixed, wireless, ISP, data and content environments. Our acquisitions, organic growth and
recruitment efforts are helping us build what we believe is a more sustainable revenue model and
expanding our global presence. We continue to focus our efforts on identifying, adapting to and
capitalizing on the changing dynamics prevalent in the converging communications industry, as well
as providing our wireless and IP services within the communications sector.
Gross margins were 46.5% in the thirty-nine weeks ended September 29, 2007 compared with 48.3% in
the same period of 2006. The decrease in gross margins reflects a combination of factors, including
a higher mix of larger and longer-term projects with discounted pricing from Management Consulting
Services, combined with new revenue from our Software Solutions segment in the first three quarters
of 2007, a lower level of higher margin strategy consulting revenue as compared to the first three
quarters of 2006 and amortization of intangible assets acquired with Cartesian, partially offset by
lower share-based compensation expense. Our Software Solutions segment gross margins are expected
to be comparable to our Management Consulting segment gross margins over time.
Management has focused on aligning operating costs with operating segment revenues. As a percentage
of revenues we have reduced selling, general and administrative costs to approximately 43.0% in the
thirteen weeks ended September 29, 2007 from 85.8% in the same period of 2006. Selling general and
administrative expense in the first three quarters of 2007 include approximately $5.4 million of
incremental expense associated with the operations of Adventis, Cartesian and RVA. We continue to
leverage integration of our recent acquisitions and evaluate selling, general and administrative
cost reduction opportunities to drive earnings. There were significant non-recurring operating
expenses related to the Special Committee investigation of our past stock option granting practices
and related accounting amounting to approximately $2.5 million in the thirty-nine weeks ended
September 29, 2007.
From a cash flow perspective, cash flows provided by operating activities were $1.1 million during
the thirty-nine weeks ended September 29, 2007. Net cash flows used in operating activities were
$6.7 million during the thirty-nine weeks ended September 29, 2006. The improvement in cash flow
from operating activities during the thirty-nine weeks ended September 29, 2007 as compared with
the 2006 period primarily related to improvements in operating results and positive cash flow from
net working capital changes. This increase in cash flows was achieved notwithstanding cash used to
fund the stock option review of $2.5 million. We used $9.9 million in net cash to fund the
acquisitions of Cartesian and RVA, mostly offset by $9.7 million in proceeds from sales of
short-term investments.
OPERATIONAL OVERVIEW
The Company has two reporting segments, the Management Consulting Services segment and the Software
Solutions segment. Revenues in the Management Consulting Services segment typically consist of
management consulting fees for professional services and related expense reimbursements. Revenues
in the Software Solutions segment typically consist of management consulting fees for professional,
technical and integration services, fees for software licensing, support and maintenance and
related expense reimbursements.
Our Management Consulting Services segment provides consulting services that cover almost all major
aspects of managing a global communications company, including strategy, management, marketing,
operational, and technology consulting services. In addition, we provide marketing consulting
services to clients outside of the communications industry. Professional services within this
segment 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 from time and materials
contracts are recognized in the period in which our services are performed. Revenues on contracts
with a not to exceed contract price or a fixed cost contract which are milestone or
deliverables-based are recorded under the percentage of completion method utilizing estimates of
project completion. 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. Contract revenues on contingent fee
contracts are deferred until the revenue is realizable and earned. Revenues and costs associated
with contingent fee contracts were $786,000 and $236,000, respectively, for the thirteen and
thirty-nine weeks ended September 29, 2007 and were not material for the thirteen and thirty-nine
weeks ended September 30, 2006.
Our Software Solutions typically involve custom developed software for clients, leveraging the
supply of licensed modules from our Ascertain TM software suite. Management consulting and
technical services are an integrated component of software solutions, ranging from developing
initial business and systems requirements, to software development, software configuration and
implementation, and post contract customer support. Revenues for Software Solutions contracts are
typically structured as fixed fee contracts or with a not to exceed contract price and are recorded
under the percentage of completion method, utilizing estimates of project completion. On a limited
basis, software contracts are structured with a contingent fee component. Revenues and costs
associated with contingent fee contracts were not material during the thirteen and thirty-nine
weeks ended September 29, 2007.
Generally a client relationship begins with a short-term consulting engagement utilizing the
services of a few consultants or piloting a software solution. 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 type and 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 earnings.
Cost of services primarily consists of compensation for consultants who are employees, amortization
of share-based compensation for stock options and nonvested stock, amortization of certain
intangible assets, as well as fees paid to independent subject matter expert organizations
-16-
and
related expense reimbursements. Employee compensation includes certain non-billable time, training,
vacation time, benefits and payroll taxes. Gross profit margins are primarily impacted by the type
of consulting and support services provided; the size of service contracts and negotiated
discounts; license fees; changes in our pricing policies and those of competitors; utilization
rates of consultants and independent subject matter experts; and employee and independent subject
matter expert costs, which tend to be higher in a competitive labor market.
Operating expenses include selling, general and administrative expenses and intangible asset
amortization. In addition, during the thirteen and thirty-nine weeks ended September 29, 2007
operating expenses included expenses related to the Special Committee investigation of our past
stock option granting practices and related accounting. Sales and marketing expenses are included
in selling, general and administrative expense and 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 vice presidents, 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 share-based compensation charges
incurred in connection with equity awards to certain employees and our board of directors.
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:
|
|
|
Allowance for Doubtful Accounts; |
|
|
|
|
Fair Value of Acquired Businesses; |
|
|
|
|
Impairment of Goodwill and Long-lived Intangible Assets; |
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Revenue Recognition; |
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Share-based Compensation Expense; |
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Accounting for Income Taxes; and |
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Research and Development and Capitalized Software Costs. |
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.
We recorded bad debt expense of $90,000 and $380,000 for the thirteen and thirty-nine weeks ended
September 29, 2007, respectively, and $84,000 and $211,000, respectively, for the thirteen and
thirty-nine weeks ended September 30, 2006. Our allowance for doubtful accounts totaled $609,000
and $378,000 as of September 29, 2007 and December 30, 2006, respectively. The calculation of these
amounts is based on judgment about the anticipated default rate on receivables owed to us as of the
end of the reporting period. That judgment is based on uncollected account experience in prior
years and our ongoing evaluation of the credit status of our customers and the communications
industry in general.
We have attempted to mitigate credit risk by concentrating our marketing efforts on the largest and
most stable companies in the communications industry and by tightly controlling the amount of
credit provided to customers. If we are unsuccessful in these efforts, or if our customers file for
bankruptcy or experience financial difficulties, it is possible that the allowance for doubtful
accounts will be insufficient and we will have a greater bad debt loss than the amount reserved,
which would adversely affect our financial performance and cash flow.
Fair Value of Acquired Businesses TMNG has acquired seven organizations over the last six years.
A significant component of the value of these acquired businesses has been allocated to intangible
assets. Statement of Financial Accounting Standard (SFAS) No. 141 Business Combinations
requires acquired businesses to be recorded at fair value by the acquiring entity. SFAS No. 141
also requires that intangible assets that meet the legal and separable criterion be separately
recognized on the financial statements at their fair value, and provides guidance on the types of
intangible assets subject to recognition. Determining the fair value for these specifically
identified intangible assets involves significant professional judgment, estimates and projections
related to the valuation to be applied to intangible assets like customer lists,
employment agreements and tradenames. The subjective nature of managements assumptions adds an
increased risk associated with estimates surrounding the projected performance of the acquired
entity. Additionally, as 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
-17-
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 discount 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.
In accordance with SFAS No. 144, we use our best estimates based upon reasonable and supportable
assumptions and projections, to review for impairment of long-lived assets and certain 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 revenue from time and materials consulting contracts in the
period in which our services are performed. In addition to time and materials contracts, our other
types of contracts may include time and materials contracts not to exceed contract price, fixed fee
contracts, and contingent fee 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 method prescribed by AICPA Statement of Position (SOP) No. 81-1,
Accounting for Performance of Construction-Type and Certain Production-Type Contracts. For fixed
fee contracts where services are not based on providing deliverables or achieving milestones, the
Company recognizes revenue on a straight-line basis over the period during which such services are
expected to be performed.
As a result of the Cartesian acquisition, we now develop, install and support customer software in
addition to our traditional consulting services. We recognize revenue in connection with our
software sales agreements utilizing the percentage of completion method prescribed by SOP No. 81-1.
These agreements include software right-to-use licenses (RTUs) and related customization and
implementation services. Due to the long-term nature of the software implementation and the
extensive software customization based on customer specific requirements normally experienced by
the Company, both the RTU and implementation services are treated as a single element for revenue
recognition purposes.
The SOP No. 81-1 percentage-of-completion methodology involves recognizing revenue using the
percentage of services completed, on a current cumulative cost to total cost basis, using a
reasonably consistent profit margin over the period. Due to the longer term nature of these
projects, developing the estimates of costs often requires significant judgment. Factors that must
be considered in estimating the progress of work completed and ultimate cost of the projects
include, but are not limited to, the availability of labor and labor productivity, the nature and
complexity of the work to be performed, and the impact of delayed performance. If changes occur in
delivery, productivity or other factors used in developing the estimates of costs or revenues, we
revise our cost and revenue estimates, which may result in increases or decreases in revenues and
costs, and such revisions are reflected in income in the period in which the facts that give rise
to that revision become known.
In addition to the professional services related to the customization and implementation of its
software, the Company also provides 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 SOP No. 81-1
software services and PCS services utilizing the multiple-element arrangement model prescribed by
Emerging Issues Task Force (EITF) No. 00-21, Revenue Arrangements with Multiple Deliverables.
EITF No. 00-21 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 EITF No. 00-21 to separate the PCS service elements and allocate total
contract consideration to the contract elements based on the relative fair value of those elements.
Revenues from PCS services are recognized ratably on a straight-line basis over the term of the
support and maintenance agreement.
We also may enter into contingent fee contracts, in which revenue is subject to achievement of
savings or other agreed upon results, rather than time spent. Due to the nature of contingent fee
contracts, we recognize costs as they are incurred on the project and defer revenue recognition
until the revenue is realizable and earned as agreed to by our clients. Although these contracts
can be very rewarding, the profitability of these contracts is dependent on our ability to deliver
results for our clients and control the cost of providing these services. These types of contracts
are typically more results-oriented and are subject to greater risk associated with revenue
recognition and overall project profitability than traditional time and materials contracts.
Revenues and costs associated with contingent fee contracts were $786,000 and $236,000,
respectively, for the thirteen and thirty-nine weeks ended September 29, 2007 and not material for
the thirteen and thirty-nine weeks ended September 30, 2006.
Share-based Compensation Expense - We grant stock options and non-vested stock to our employees and
also provide employees the right to purchase our stock at a discount pursuant to an employee stock
purchase plan. The benefits provided under these plans are share-based payment awards subject to
the provisions of SFAS No. 123R, Share-based Payments. Under SFAS No. 123R, we are required to
make significant estimates related to determining the value of our share-based compensation. Our
expected stock-price volatility assumption is based on
historical volatilities of the underlying stock which are obtained from public data sources. For
stock option grants issued during the thirteen and thirty-nine weeks ended September 29, 2007, we
used a weighted-average expected stock-price volatility of 62% and 64%, respectively. The expected
term of options granted is based on the simplified method in accordance with the SECs Staff
Accounting Bulletin (SAB) No. 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 No. 123R in
future periods, the compensation expense that we record under SFAS No. 123R may differ
significantly from what we have recorded in the current period. There is a high degree of
subjectivity involved when using option pricing models to estimate share-based compensation under
SFAS No. 123R. Changes in the
18
subjective input assumptions can materially affect our estimates of
fair values of our share-based compensation. Certain share-based payment awards, such as employee
stock options, may expire worthless or otherwise result in zero intrinsic value as compared to the
fair values originally estimated on the grant date and reported in our financial statements.
Alternatively, values may be realized from these instruments that are significantly in excess of
the fair values originally estimated on the grant date and reported in our financial statements.
Although the fair value of employee share-based awards is determined in accordance with SFAS No.
123R and SAB No. 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.
In addition, under SFAS No. 123R we are required to net estimated forfeitures against compensation
expense. This requires us to estimate the number of awards that will be forfeited prior to vesting.
If actual forfeitures in future periods are different than our initial estimate, the compensation
expense that we ultimately record under SFAS No. 123R may differ significantly from what was
originally estimated. The estimated forfeiture rate for unvested options outstanding as of
September 29, 2007 is 30%.
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 SFAS No. 109, Accounting for Income Taxes and
Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainty in
Income Taxesan interpretation of FASB Statement No. 109 (FIN 48). As required by SFAS No. 109,
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. SFAS No. 109 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 September 29, 2007, cumulative valuation allowances in the amount
of $32.0 million were recorded in connection with the net deferred income tax assets. As required
by FIN 48, we have performed a comprehensive review of our portfolio of uncertain tax positions in
accordance with recognition standards established by the Interpretation. Pursuant to FIN 48, an
uncertain tax position represents the Companys 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 September 29, 2007, we have
recorded a liability of approximately $516,000 for unrecognized tax benefits.
We have generated substantial deferred income tax assets related to our domestic operations
primarily from the accelerated financial statement write-off of goodwill, the charge to
compensation expense taken for stock options and net operating losses. 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 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 the recoverability of the
recorded deferred income tax asset balances. If we continue to report domestic 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.
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. 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 SFAS No. 86, Accounting for the Costs of Computer Software to Be Sold,
Leased, or Otherwise 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 if such costs are material. During the thirteen and thirty-nine weeks ended September
29, 2007, no software development
costs were capitalized and $229,000 and $680,000, respectively, of these costs were expensed as
incurred. No software development costs were incurred in the thirteen and thirty-nine weeks ended
September 30, 2006.
The Company also incurs research and development costs associated with development of new offerings
and services. These product development costs are expensed as incurred. Research and development
costs associated with product development were $281,000 in the thirteen and thirty-nine weeks ended
September 30, 2006. No product development costs were incurred in the thirteen and thirty-nine
weeks ended September 29, 2007.
-19-
RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED SEPTEMBER 29, 2007 COMPARED TO THIRTEEN WEEKS ENDED SEPTEMBER 30, 2006
REVENUES
Revenues increased 139.5% to $20.8 million for the thirteen weeks ended September 29, 2007 from
$8.7 million for the thirteen weeks ended September 30, 2006. The increase in revenue is primarily
due to the acquisitions of Cartesian in January 2007 and RVA in August 2007, which contributed $6.8
million and $3.7 million, respectively, in revenue during the third quarter of 2007. Organic
revenue was up 18.8% in the third quarter of 2007 as compared to the same period of 2006, due
largely to $0.8 million of contractual commissions primarily related to the sale of a managed
services client, as well as growth of our cable practice. As discussed in the Executive Financial
Overview, with the acquisition of Cartesian we have added a reporting segment, the Software
Solutions segment, in addition to our traditional Management Consulting Services segment.
Management
Consulting Services Segment Management Consulting Services segment revenues increased
61.7% to $14.0 million for the third quarter of 2007 from $8.7 million for the same period of 2006.
The acquisition of RVA accounted for $3.7 million of the increase and organic revenues added $1.6
million or 18.8% growth to this segment. During the thirteen weeks ended September 29, 2007, this
segment provided services on 108 customer projects, compared to 100 projects performed in the
thirteen weeks ended September 30, 2006. Average revenue per project was $130,000 in the thirteen
weeks ended September 29, 2007 compared to $87,000 in the thirteen weeks ended September 30, 2006.
The increase in average revenue per project is primarily attributable to an increase in the number
of large projects due to the acquisition of RVA. Our international revenue base of this segment
decreased to 13.9% of revenues for the thirteen weeks ended September 29, 2007, from 27.2% for the
thirteen weeks ended September 30, 2006, due primarily and an overall increase in the mix of
project activity domestically, driven by the acquisition of RVA and a decrease in strategy
engagements internationally during the period.
Revenues recognized in connection with fixed price and contingent fee engagements totaled $7.3
million and $3.6 million, representing 52.1% and 41.5% of total revenues of the segment, for the
thirteen weeks ended September 29, 2007 and September 30, 2006, respectively. This increase is
primarily due to the acquisition of RVA, partially offset by the mix of our organic business
shifting to more time and material projects in the third quarter of 2007 as compared to the same
period of 2006.
Software
Services Segment The Software Services Segment began operations in the first quarter of
2007. Revenues of $6.8 million were generated for the thirteen weeks ended September 29, 2007. All
revenues were generated internationally. During the thirteen weeks ended September 29, 2007, this
segment provided services on 72 customer projects. Average software and services revenue per
project was approximately $88,000. In addition, revenues from post-contract support services were
approximately $448,000.
COSTS OF SERVICES
As a percentage of revenues, our gross margin was 49.5% for the thirteen weeks ended September 29,
2007, compared to 46.1% for the thirteen weeks ended September 30, 2006. The increase in gross
margin in the third quarter of 2007 as compared to the same period of 2006 is primarily due to the
acquisition of RVA, which has a large base of higher margin projects. Our Software Solutions
segment gross margins were 50.8% in the third quarter of 2007, which included an allocation of
intangible asset amortization of $189,000.
OPERATING EXPENSES
Operating expenses increased to $10.1 million for the thirteen weeks ended September 29, 2007, from
$7.6 million for the thirteen weeks ended September 30, 2006. Operating expenses for the period
included selling, general and administrative costs (inclusive of share-based compensation), Special
Committee stock option investigation charges, and intangible asset amortization. For the thirteen
weeks ended September 29, 2007, operating expenses included Special Committee charges of
approximately $103,000 related the investigation of our past stock option granting practices and
related accounting. These costs primarily consisted of professional services for legal, accounting
and tax guidance.
Selling, general and administrative expense increased to $8.9 million in the thirteen weeks ended
September 29, 2007, compared to $7.5 million for the thirteen weeks ended September 30, 2006. As a
percentage of revenues, our selling, general and administrative expense was 43.0% for the thirteen
weeks ended September 29, 2007, compared to 85.8% for the thirteen weeks ended September 30, 2006.
For the thirteen weeks ended September 29, 2007, we had expense reductions in the organic business
of $0.4 million, or 5.9%, as compared to the same period in 2006, partially offset by $1.9 million
in incremental expense due to the acquired Cartesian and RVA businesses. Included in the organic
business expense reduction is share-based compensation expense of $0.6 million in the thirteen
weeks ended September 29, 2007, compared to expense of $0.8 million in the thirteen weeks ended
September 30, 2006. Included in selling general and administrative expenses for the thirteen weeks
ended September 29, 2007 is $0.6 million related to a senior executive incentive compensation plan
approved by our Board of Directors. We continue to evaluate cost reductions through the integration
of our acquisitions and alignment of costs to revenues for each operating segment.
-20-
Intangible asset amortization was $1,057,000 and $215,000 for the thirteen weeks ended September
29, 2007 and September 30, 2006, respectively. The increase in amortization expense was due to the
addition of identifiable intangible assets as part of the Cartesian and RVA acquisitions.
OTHER INCOME AND EXPENSES
Interest income was $387,000 and $528,000 for the thirteen weeks ended September 29, 2007 and
September 30, 2006, respectively, and represented interest earned on invested balances. Interest
income decreased for the thirteen weeks ended September 29, 2007 as compared to the thirteen weeks
ended September 30, 2006 due to reductions in invested balances attributable to cash utilized for
acquisitions and operating losses in fiscal years 2006 and 2007. We primarily invest in money
market funds and investment-grade auction rate securities as part of our overall investment policy.
During the thirteen weeks ended September 29, 2007, we recorded other income in the amount of
$452,000 related to the settlement of foreign withholding tax disputes.
INCOME TAXES
In the thirteen weeks ended September 29, 2007 and September 30, 2006, we recorded an income tax
provision of $531,000 and $5,000, respectively. The income tax provision in the third quarter of
2007 is primarily due to the profitability of our United Kingdom operations. The income tax
provision in the third quarter of 2006 is primarily due to state income taxes. For the thirteen
weeks ended September 29, 2007 and September 30, 2006, we recorded no income tax benefit related to
our domestic 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 net deferred income tax asset
balances and record valuation allowances against assets generated due to domestic losses. If we
continue to report domestic, federal 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.
NET INCOME
We had net income of $0.5 million for the thirteen weeks ended September 29, 2007 compared to net
loss of $3.1 million for the thirteen weeks ended September 30, 2006. Net income was primarily
attributable to improvements in revenues and operating results through continued cost management
and the accretive acquisitions of Cartesian and RVA.
THIRTY-NINE WEEKS ENDED SEPTEMBER 29, 2007 COMPARED TO THIRTY-NINE WEEKS ENDED SEPTEMBER 30, 2006
REVENUES
Revenues increased 101.0% to $51.0 million for the thirty-nine weeks ended September 29, 2007 from
$25.4 million for the thirty-nine weeks ended September 30, 2006. The increase in revenues is due
primarily to acquisitions. The thirty-nine weeks ended September 29, 2007 included $22.4 million in
incremental revenue related to our acquired Adventis, Cartesian and RVA businesses. Organic
revenues increased 12.8% in the thirty-nine weeks ended September 29, 2007 as compared to the same
period of 2006, due largely to $0.8 million of contractual commissions primarily related to the
sale of a managed services client, as well as growth of our cable practice. As discussed in the
Executive Financial Overview, with the acquisition of Cartesian we have added a reporting segment,
the Software Solutions segment, in addition to our traditional Management Consulting Services
segment.
Management Consulting Services Segment - Management Consulting Services segment revenues increased
$7.9 million, or 31.3% to $33.3 million, for the thirty-nine weeks ended September 29, 2007 as
compared to the same period of 2006. This increase is primarily due to expansion globally, the
acquisition of RVA and significant growth in projects sold to cable clients. During the thirty-nine
weeks ended September 29, 2007, this segment provided services on 202 customer projects, compared
to 178 projects performed in the thirty-nine weeks ended September 30, 2006. Average revenue per
project was $165,000 in the thirty-nine weeks ended September 29, 2007 compared to $143,000 in the
thirty-nine weeks ended September 30, 2006. The increase in average revenue per project is
primarily attributable to an increase in the number of large projects due to the acquisition of
RVA. Our international revenue base of this segment decreased slightly to 19.0% of revenues for
the thirty-nine weeks ended September 29, 2007, from 20.2% for the thirty-nine weeks ended
September 30, 2006, due primarily to the acquisition of RVA, which operates solely in the United
States, partially offset by large projects in Western Europe.
Revenues recognized in connection with fixed price and contingent fee engagements totaled $15.3
million and $11.3 million, representing 45.9% and 44.5% of total revenues of the segment, for the
thirty-nine weeks ended September 29, 2007 and September 30, 2006, respectively. This increase is
primarily due to the acquisition of RVA, partially offset by the mix of our organic business
shifting to more time and material projects in the 2007 period as compared to the same period of
2006.
Software Services Segment - The Software Services Segment began operations in the first quarter of
2007. Revenues of $17.7 million were generated for the thirty-nine weeks ended September 29, 2007.
All revenues were generated internationally. During the thirty-nine weeks ended September 29, 2007,
this segment provided services on 110 customer projects. Average software and services revenue per
project was approximately $149,000. In addition, revenues from post-contract support services were
approximately $1,341,000.
-21-
COSTS OF SERVICES
As a percentage of revenues, our gross margin was 46.5% for the thirty-nine weeks ended September
29, 2007, compared to 48.3% for the thirty-nine weeks ended September 30, 2006. The decrease in
gross margin in the thirty-nine weeks ended September 29, 2007 as compared to the same period of
2006 was attributable to a combination of factors, including a higher mix of larger and longer-term
projects with discounted pricing from the Management Consulting Services segment, revenues from our
new Software Solutions segment in the third quarter of 2007, a lower mix of higher margin strategy
consulting revenue and amortization of intangible assets acquired with Cartesian, offset by the
acquisition of RVA. Our Software Solutions segment gross margins were 46.0% in the thirty-nine
weeks ended September 29, 2007, which include an allocation of intangible asset amortization of
$558,000. Offsetting lower fee margins were reductions in share-based compensation of $0.4 million
related to revisions in assumed forfeiture rates during 2007.
OPERATING EXPENSES
Operating expenses increased to $27.4 million for the thirty-nine weeks ended September 29, 2007,
from $21.1 million for the thirty-nine weeks ended September 30, 2006. Operating expenses included
selling, general and administrative costs (inclusive of share-based compensation), Special
Committee stock option investigation charges, and intangible asset amortization. For the
thirty-nine weeks ended September 29, 2007, operating expenses included Special Committee charges
of approximately $2.5 million related the investigation of our past stock option granting practices
and related accounting. These costs primarily consisted of professional services for legal,
accounting and tax guidance and the cost of the special committees outside counsel and forensic
accountants.
Selling, general and administrative expense increased to $22.8 million in the thirty-nine weeks
ended September 29, 2007, compared to $20.6 million for the thirty-nine weeks ended September 30,
2006. As a percentage of revenue, our selling, general and administrative expense was 44.6% for the
thirty-nine weeks ended September 29, 2007, compared to 81.0% for the thirty-nine weeks ended
September 30, 2006. For the thirty-nine weeks ended September 29, 2007, we had expense reductions
in the organic business of $3.2 million, or 15.4%, as compared to the same period in 2006, offset
by $5.4 million in incremental expense due to the acquired Adventis, Cartesian and RVA businesses.
Organic business expense reduction included a $1.6 million reduction in share-based compensation in
the thirty-nine weeks ended September 29, 2007 compared to the same period in 2006. Included in
selling general and administrative expenses for the thirty-nine weeks ended September 29, 2007 is
$0.6 million related to a senior executive incentive compensation plan approved by our Board of
Directors. We continue to evaluate cost reductions through the integration of our acquisitions and
alignment of costs to revenues for each operating segment.
Intangible asset amortization was $2,149,000 and $566,000 for the thirty-nine weeks ended September
29, 2007 and September 30, 2006, respectively. The increase in amortization expense was due to the
addition of certain intangible assets as part of the Cartesian and RVA acquisitions.
OTHER INCOME AND EXPENSES
Interest income was $1,185,000 and $1,609,000 for the thirty-nine weeks ended September 29, 2007
and September 30, 2006, respectively, and represented interest earned on invested balances.
Interest income decreased for the thirty-nine weeks ended September 29, 2007 as compared to the
thirty-nine weeks ended September 30, 2006 due to reductions in invested balances attributable to
cash utilized for acquisitions and operating losses in fiscal years 2006 and 2007. We primarily
invest in money market funds and investment-grade auction rate securities as part of our overall
investment policy. During the thirty-nine weeks ended September 29, 2007, we recorded other income
in the amount of $452,000 related to the settlement of foreign withholding tax disputes.
INCOME TAXES
In the thirty-nine weeks ended September 29, 2007 and September 30, 2006, we recorded an income tax
provision of $815,000 and $39,000, respectively, related primarily to international income taxes
due to the profitability of our United Kingdom operations. For the thirty-nine weeks ended
September 29, 2007 and September 30, 2006, we recorded no income tax benefit related to our
domestic 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 net deferred income tax asset
balances and record valuation allowances against assets generated due to domestic losses. If we
continue to report domestic, federal 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.
NET LOSS
Net loss decreased 61.3% to $2.8 million for the thirty-nine weeks ended September 29, 2007 from
$7.3 million for the thirty-nine weeks ended September 30, 2006. The decrease was primarily
attributable to improvements in operating results and reductions in share-based compensation
expense of $2.0 million, partially offset by $2.5 million of costs related to the Special Committee
investigation of our past stock option practices and an increase in amortization expense due to the
addition of certain intangible assets as part of the Cartesian and RVA acquisitions.
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LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $1.1 million for the thirty-nine weeks ended
September 29, 2007. Net cash used in operating activities was $6.7 million for the thirty-nine
weeks ended September 29, 2006. The improvement in cash flow from operating activities during the
thirty-nine weeks ended September 29, 2007 as compared with the 2006 period primarily related to
improvements in organic operating results, accretive acquisitions and positive cash flow from net
working capital changes, offset by the use of cash for the Special Committee investigation of $2.5
million.
Net cash used in investing activities was $0.6 million for the thirty-nine weeks ended September
29, 2007. Net cash provided by investing activities was $5.6 million for the thirty-nine weeks
ended September 30, 2006. Cash used in investing activities during the thirty-nine weeks ended
September 29, 2007 included $9.9 million for the acquisitions of Cartesian and RVA. In the
thirty-nine weeks ended September 30, 2006 cash provided by investing included the use of $1.5
million for the acquisition of Adventis. Investing activities include proceeds from sales and
reinvestments of short-term investments of $9.7 million and $7.6 million in the thirty-nine weeks
ended September 29, 2007 and September 30, 2006, respectively. Cash used in investing activities
also included $0.3 million and $0.5 million for the thirty-nine weeks ended September 29, 2007 and
September 30, 2006, respectively, related to the purchase of office equipment, software and
computer equipment.
Net cash used in financing activities was $585,000 for the thirty-nine weeks ended September 29,
2007, primarily related to payments on long-term obligations, partially offset by proceeds received
from the exercise of employee stock options and issuance of shares pursuant to the employee stock
purchase plan. Net cash used in financing activities was $314,000 for the thirty-nine weeks ended
September 30, 2006, and was the result of payments made on long-term obligations and repurchases of
common stock under our stock repurchase program, partially offset by the exercise of employee stock
options and issuance of shares pursuant to the employee stock purchase plan.
At September 29, 2007, we had approximately $28.7 million in cash, cash equivalents, and short-term
investments and $30.7 million in net working capital. We used $9.9 million to fund the
acquisitions of Cartesian and RVA during the thirty-nine weeks ended September 29, 2007. 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 or our investments in Cartesian and RVA do not
perform as expected and we continue to experience negative cash flow, we could experience liquidity
challenges at some future point.
FINANCIAL COMMITMENTS
For discussion of our contractual obligations, see the discussions of future commitments under
Managements Discussion and Analysis of Financial Condition and Results of Operations, Item 7 in
our Form 10-K for the fiscal year ended December 30, 2006 and Item 2 in our Form 10-Q for the
quarterly period ended June 30, 2007. With the exception of the obligations previously discussed in
our Form 10-Q for the quarterly period ended June 30, 2007 and the items noted below, there have
been no significant changes with respect to our contractual obligations since December 30, 2006.
On September 26, 2007, the independent members of our Board of Directors (the Board) upon the
recommendation of the Compensation Committee of the Board approved a senior executive incentive
compensation plan for fiscal year 2007 (the Plan). The Plan establishes a cash bonus pool (the
Pool) for our executive management, including our principal executive officer, president and
chief operating officer, principal financial officer, and other executives, as recommended by the
principal executive officer, if we meet or exceed an earnings target for fiscal year 2007. The
calculation of the earnings target excludes non-cash charges and benefits and the impact of certain
items that are generally not expected to be on-going in nature. The amount available for payment
from the Pool (Payout Amount) begins at $812,500 if we achieve the earnings target. If the
earnings target is exceeded, the Payout Amount increases in accordance with a graduated descending
scale ranging from 12.5% to 7.5% of the earnings in excess of the target, provided that the Payout
Amount is not to exceed $2,000,000. The distribution of the Payout Amount, if any, among our
eligible executive management will be determined by the Compensation Committee of the Board and/or
independent directors at a later date. During the thirteen weeks ended September 29, 2007, we made
the determination that it was probable the minimum earnings threshold under the Plan would be met.
As a result, we expect to make minimum payments in the amount of $812,500 related to this senior
executive incentive compensation plan.
On October 5, 2007, the Company entered into a Stock Purchase Agreement (the Agreement) with
Marilyn Breitenstein (Seller) and TWG Consulting, Inc. (TWG) to acquire from Seller all of the
outstanding shares of stock of TWG, a privately-held management consulting firm. Under the
Agreement, TMNG agreed to acquire the entire ownership interest in TWG for a total cash purchase
price of $1.7 million, including approximately $1.3 million paid for TWGs working capital. In the
event TWG achieves certain performance targets, total consideration under the Agreement could
increase to $4.6 million, including possible contingent
consideration of $1.3 million in cash and
approximately 0.7 million shares of TMNG common stock valued at
$1.6 million based on the share price at the date of close.
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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 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 fair value, 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. Given the increase in our foreign
operations, foreign currency exchange rate risk has become more significant. Our foreign currency
exposure is primarily concentrated in the United Kingdom and Continental Europe. We believe the
countries in which we transact business and own assets are politically stable. We face currency
translation exposures related to translating the results of our worldwide operations into U.S.
dollars because of exchange rate fluctuations during the reporting period. We also face
transactional currency exposures relating to transactions denominated in currencies other than the
functional currency of the unit conducting the transactions. We monitor our foreign currency
positions based on our business strategy and foreign exchange markets and adjust foreign currency
holdings to maximize economic returns.
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) that are designed to ensure that information
required to be disclosed by the Company in reports that it files or submits under the Exchange Act
is (i) recorded, processed, summarized and reported within the time periods specified in SEC rules
and forms; and (ii) accumulated and communicated to the Companys management, including its
principal executive officer and principal financial officer, as appropriate to allow timely
decisions regarding required disclosure. We have established a Disclosure Committee, consisting of
certain members of management, to assist in this evaluation. The Disclosure Committee meets on a
regular quarterly basis, and as needed.
A review and evaluation was performed by our management, including our Chief Executive Officer (the
CEO) and Chief Financial Officer (the CFO), of the effectiveness of the design and operation of
our disclosure controls and procedures as of the end of the period covered by this quarterly
report. Based upon this evaluation, the Companys CEO and CFO have concluded that the Companys
disclosure controls and procedures were effective as of September 29, 2007.
There was no change in internal control over financial reporting during the fiscal quarter ended
September 29, 2007, that has materially affected or is reasonably likely to materially affect our
internal control over financial reporting.
ITEM 4T. CONTROLS AND PROCEDURES
Not applicable.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We have not been subject to any material new litigation since filing on May 14, 2007 of our Annual
Report on Form 10-K for the year ended December 30, 2006. For a summary of litigation in which we
are currently involved, refer to our Annual Report on Form 10-K for the year ended December 30,
2006, as filed with the Securities and Exchange Commission on May 14, 2007 and Note 9 of the
Condensed Consolidated Financial Statements included elsewhere in this report.
As previously disclosed, we provided a copy of the Special Committee report on our historical stock
option practices to the Securities and Exchange Commission.
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ITEM 1A. RISK FACTORS
For a full listing of TMNGs Risk Factors, please refer to our Annual Report on Form 10-K for the
year ended December 30, 2006 as filed with the Securities and Exchange Commission on May 14, 2007.
There has been no material change in the Risk Factors previously disclosed in our Annual Report on
Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
(a) Exhibits
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Exhibit 2.1
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Stock Purchase Agreement dated October 5, 2007 among the Company and Marilyn
Breitenstein and TWG Consulting, Inc. |
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Exhibit 10.1
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Transition Services Agreement among RVA Consulting, LLC, a subsidiary of the
Company, and Publicis Selling Solutions, Inc. |
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Exhibit 31.
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Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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Exhibit 32.
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Certifications furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
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The Management Network Group, Inc. |
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(Registrant) |
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Date November 13, 2007 |
By |
/s/ Richard P. Nespola
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(Signature) |
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Richard P. Nespola
Chairman and Chief Executive Officer
(Principal executive officer) |
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Date November 13, 2007 |
By |
/s/ Donald E. Klumb
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(Signature) |
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Donald E. Klumb
Chief Financial Officer and Treasurer
(Principal financial officer and
principal accounting officer) |
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EXHIBIT INDEX
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Exhibit No. |
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Description of Exhibit |
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Exhibit 2.1
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Stock Purchase Agreement dated October 5, 2007 among the Company and Marilyn
Breitenstein and TWG Consulting, Inc. |
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Exhibit 10.1
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Transition Services Agreement among RVA Consulting, LLC, a subsidiary of the
Company, and Publicis Selling Solutions, Inc. |
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Exhibit 31.
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Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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Exhibit 32.
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Certifications furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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