e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the Fiscal Year Ended
December 29, 2007
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission File Number:
000-27617
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
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(I.R.S. Employer
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incorporation or
organization)
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identification
number)
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7300 COLLEGE BOULEVARD,
SUITE 302, OVERLAND PARK, KANSAS 66210
(Address of principal executive
offices) (Zip Code)
REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE:
(913) 345-9315
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE
ACT:
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Title of Each Class
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Name of Each Exchange on Which Registered
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COMMON STOCK, $.001 PAR VALUE PER SHARE
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The NASDAQ STOCK MARKET, LLC
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE
ACT:
NONE.
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. YES o NO þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. YES o NO þ
Indicate by check mark whether the Registrant (1) has filed
all reports 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 if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of Registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer
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Accelerated
filer o
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Non-accelerated
filer o
(Do not check if a smaller reporting company)
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Smaller reporting
company þ
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). YES o NO þ
The aggregate market value of the voting common stock held by
non-affiliates of the Registrant, as of June 29, 2007 was
approximately $35,500,000. Shares of common stock held by each
executive officer, director and holder of 5% or more of the
outstanding common stock have been excluded for purposes of this
calculation. The treatment of such holders as affiliates for
purposes of this calculation is not intended as a conclusive
determination of affiliate status for other purposes. As of
March 24, 2008, the Registrant had 35,997,918 shares
of common stock, par value $0.001 per share (the Common Stock),
issued and outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
The information required to be provided in Part III
(Items 10, 11, 12, 13 and 14) of this Annual Report on
Form 10-K
is hereby incorporated by reference from our definitive 2008
proxy statement which will be filed with the Securities and
Exchange Commission within 120 days of the end of our
fiscal year ended December 29, 2007.
THE
MANAGEMENT NETWORK GROUP, INC.
FORM 10-K
TABLE OF
CONTENTS
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PART I
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING INFORMATION
With the exception of current and historical information, this
Annual Report on
Form 10-K
contains forward-looking statements as defined in the Private
Securities Litigation Reform Act of 1995. 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
will be, intend, continue,
believe, may, expect,
hope, anticipate, goal,
forecast or other comparable terms.
Forward-looking statements involve risks and uncertainties and
are not guarantees of future performance or results. Our actual
financial condition, results of operations or business may vary
materially from those contemplated by such forward looking
statements. Investors are cautioned not to place undue reliance
on any forward-looking statements. Factors that might affect
actual results, performance, or achievements include, among
other things:
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our ability to successfully integrate recent acquisitions and to
successfully locate new acquisition candidates,
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conditions in the industry sectors that we serve,
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the financial condition and business strategies of our customers
in the converging communications, media and entertainment
industry and the investment banking and private equity firms
investing in that industry,
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overall economic and business conditions,
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the potential continuation or recurrence of recent losses from
operations, negative cash flow and reductions in our cash
reserves,
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our ability to retain the limited number of large clients that
constitute a major portion of our revenues,
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fluctuations in our quarterly operating results,
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our ability to control costs under fixed fee contracts, which
make up a substantial portion of our business,
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our ability to compete in intensively competitive markets,
including our ability to address actions by competitors that
could render our services less competitive, causing revenues and
income to decline,
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our ability to address the challenges of conducting business in
foreign countries, including risks of unfavorable foreign
currency exchange rates or fluctuations and changes in local
laws,
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the demand for our services,
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our level of cash and non-cash expenditures,
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technological advances and competitive factors in the markets in
which we compete,
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possible regulatory action related to our past equity granting
practices and associated accounting,
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the possibility of the cancellation of key client contracts,
which may be cancelled on short notice,
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the ability to successfully launch new product and market
initiatives,
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the ability to retain key management and consulting personnel,
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the possible reclassification of our independent contractors,
who we rely upon heavily, as full-time employees by the taxing
and/or labor
and employment authorities of competent jurisdiction,
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the possibility of professional liability claims,
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the loss of key intellectual property, and
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the possibility that our ability to utilize tax net operating
loss carryforwards to offset future taxable income will be
limited if we are deemed to have an ownership change as defined
by Section 382 of the Internal Revenue Code.
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Other factors that we have not identified in this document could
also have this effect. All forward-looking statements made in
this Annual Report on
Form 10-K
are made as of the date hereof.
When used in this report, the terms TMNG, TMNG
Global, we, us, our or
the Company refer to The Management Network Group,
Inc. and its subsidiaries.
GENERAL
TMNG, a Delaware corporation, founded in 1990, 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 (see Services in Item 1). With the
acquisition of Cartesian Ltd. (Cartesian) in early
2007, we further extended our offerings to include software and
application development (see Note 2, Business
Combinations, in Notes to Consolidated Financial
Statements of this
Form 10-K
). We have consulting experience with almost all major aspects
of managing a global communications company. In addition, we
provide marketing consulting services to clients outside of the
communications industry, primarily in the eastern region of the
United States. We capitalize on our industry expertise by
developing and enhancing new and existing proprietary toolsets
that enable us to provide strategic, management, marketing,
operational, and technology support to our clients. 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.
Our clientele includes a variety of businesses whose products,
services and interests are focused on the evolution of the
communications industry, including wireless and traditional
wireline communications service providers, cable multiple
systems operators (MSOs) as well as technology companies, media
and entertainment companies, and financial services firms that
invest in the communications industry. Our clients are
principally located in the United States, United Kingdom and
Western Europe. We believe we are unique in our ability to
provide a comprehensive business and technology solution to the
communications industry, including strategy consulting and
business planning, organizational development, market research
and analysis, product/service definition and launch, customer
acquisition and retention, program management, technical
support, process modeling and software solutions for business
support systems and operations support systems. The software and
application development capabilities of our Software Solutions
segment are primarily targeted to clients revenue and
service assurance initiatives.
Our services are provided by experienced senior professionals
from the communications industry. As it relates to most key
software and technology decisions, we have provided a unique
technology agnostic and vendor neutral position to make unbiased
evaluations and recommendations that are based on a thorough
knowledge of each solution and each clients situation.
Therefore, we are able to capitalize on extensive experience
across complex multi-technology communications systems
environments to provide what we believe are the most sound and
practical recommendations to our clients.
During the current decade, the Company has transformed from a
provider of primarily management and operational consulting
services to a provider of an integrated suite of product and
service offerings to the communications marketplace. This
transformation has been accomplished through both acquisitions
and recruitment efforts, which have increased the breadth of our
employee work base, diversified our technical competencies,
expanded our core management consulting offerings and positioned
us globally. We believe these actions have expanded key client
relationships, have uniquely positioned us in the market to
effectively
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serve the needs of large global communication service providers,
and provided for expansion of our key direct distribution
channel elements.
In 2006 and 2007 we completed the acquisitions of four
businesses that have expanded both our geographic reach and our
ability to address global opportunities in the marketplace.
These transactions included: the international assets of
Adventis, a global consulting firm which consisted of
consultants in London and Shanghai; the United Kingdom-based
technical consultancy and software provider Cartesian Limited
(Cartesian); RVA Consulting, LLC (RVA),
a domestic, telecom industry-focused operations consulting firm;
and TWG Consulting, Inc (TWG), a domestic management
consulting firm. See Note 2, Business Combinations, in the
Notes to the Consolidated Financial Statements for additional
information regarding acquisitions.
As a result of the Adventis transaction in 2006, our CSMG
strategy consultancy has expanded its international footprint,
with an indigenous presence in the United Kingdom and Asia.
The acquisition of Cartesian in early 2007 dramatically
strengthens TMNGs management consultancy services and
broadens our service offerings. Cartesian brings expertise in
billing management and revenue assurance two
traditional strengths on which we built our
reputation but does so from a technology and network
perspective, an ideal complement to our business process focus.
Building on its technical expertise, Cartesian has developed an
innovative and modular software suite, called
Ascertaintm,
which features advanced revenue assurance and data integrity
tools that when customized and integrated into client
environments support fixed, wireless, internet service provider
(ISP), data and content environments.
Cartesians client list includes Tier 1
companies in the United Kingdom and Europe, and in late 2007
TMNG began early introduction of the product with US-based cable
system operators, opening a potentially significant new market
to this product. In early 2008, we engaged in pilot agreements
of
Ascertaintm
with two large cable MSOs.
The acquisitions of RVA and TWG in 2007 strengthen and enhance
historical strengths of TMNG. In the case of the former, RVA
brings strong, contracted relationships with major
U.S. telecommunication carriers and serves as a close fit
with TMNGs core strength in business process and
operational support systems consulting. TWG Consultings
expertise in organizational development and knowledge management
helps to round out our capabilities and extends our strategy
offerings and serving communications companies whose operations
are migrating to Web-based technology platforms.
We have diversified our client base organically by building a
cable and broadband practice. With the convergence of this
industry around multiple video, data and voice service
offerings, we apply our traditional expertise in complex
business processes such as revenue assurance, billing
management, and mediation, as well as in leading functional
areas like program management offices, across the global
converging communications marketplace. We have developed
solutions to assist content providers, and media companies as
they cope with the operational complexities of launching new
products and services; attempt to streamline their business
systems and processes following merger and acquisition activity;
and address product lifecycle issues in the wake of competitive
pressures. We are also providing program management, business
process, service assurance and leadership teams for cable
MSOs as they launch new digital voice product and service
rollouts, including voice over internet protocol offerings.
We also continue to expand our offerings through indirect
channel partners to enable us to extend the reach of our
capabilities and to target additional and larger customers and
verticals as dynamics in the global communications market evolve
(see Market Overview in Item 1). One such
example is our exclusive marketing agreement with S3 Matching
Technologies (S3). S3 has developed proprietary
Teramatch® software,
unique in its ability to evaluate and cleanse data and proven in
supporting needs in the communications sector. This agreement
provides TMNG with the exclusive right to market and resell S3
services to tier one service providers. In such partnerships, we
combine our capabilities with our partners, providing contacts,
strategic business analysis, business process outsourcing
(BPO) solutions, and depth of knowledge and
experience in serving the industry. The partnerships bring us
technology solutions and systems integration capabilities which
enable our partners and us to provide more comprehensive client
offerings and solutions to effectively compete with other global
consultancies.
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As the industry continues to evolve, TMNG expects to utilize its
long history of engagement experience with clients to continue
modifying its toolsets, develop new methodologies, and
selectively expand its base of employee consultants to support
and extend its thought leadership and capabilities in the
communications industry.
MARKET
OVERVIEW
The future of the global communications industry is beginning to
take shape, based around a convergence of voice, data and video
or content based communications. Market factors including
regulatory decisions, new technologies and industry
consolidation have stimulated new investment in the sector.
These dynamics are bringing new competitors to the market, such
as Yahoo! and Google, challenging existing industry competitors
to explore new business models, and driving consolidation within
sectors such as traditional wireline and wireless
telecommunications. In addition, cable communications companies
that historically offered video services are now positioning
themselves as providers of voice and other data and content
services. Wireline, wireless and cable companies alike are
focused on convergence where any type of content or
application can be delivered seamlessly across fixed or mobile
networks
It has been our experience that because the expertise needed by
communications companies to address the markets needs is
typically outside their core competencies, they must ultimately
either recruit and employ experts or retain outside specialists.
Additionally, the convergence of the communications, media and
technology industries has brought forth many new competitors
from outside the traditional communications industries who we
believe do not possess the experience or skill sets needed to
execute new business plans. We believe due to the range of
expertise required and the time associated with hiring and
training new personnel, bringing expertise in-house is often not
a viable option. We believe customers will continue to need to
contract with consultative firms or outsource some of the
expertise required to adapt to new environments and capitalize
on new technologies now emerging. When retaining outside
specialists, we believe communications companies need experts
that fully understand the communications industry and can
provide timely and unbiased advice and recommendations. TMNG has
positioned its business to respond to that anticipated need.
BUSINESS
STRATEGY
Our objective is to establish ourselves as the consulting
company of choice to the converging communications, media and
entertainment industry, which includes the service providers and
technology companies that serve the industry, media, and
entertainment companies, and the financial services and
investment banking firms that invest in the sector. The
following are key strategies we have adopted to pursue this
objective.
-Acquire
or develop and evolve offerings, solutions and thought
leadership
We plan to continue expanding our end-to-end solutions
offerings, both by organic expansion
and/or
through acquisitions. Expanding our consulting solutions
involves building or buying the capabilities that support change
elements in the adoption of IP and wireless technology and
support of convergence of communications with media and content,
with emphasis on wireless. We plan to continue to extend our
product and service offerings to the communications industry,
and we believe that our recent acquisitions in particular
provide us with new opportunities to bring broader solutions to
both existing and new customers. We believe wireline and
wireless providers will be strategically focused on the
following key initiatives: adding, bundling and converging
service offerings (i.e., wireline, wireless, high-speed data and
video); continued consolidation and post merger integration, and
aggressive reduction of costs; reassessment of core competencies
in order to leverage strengths and minimize weaknesses; and
migration to new technologies next generation
wireless and IP. Our solutions will assist clients in redefining
competitive position, launching new products and services and
generating revenues through integrated offerings. Such offerings
will also be focused on increasing clients efficiencies in
these transformations. We will also evaluate expanding our
offerings to include managed services, possibly with partners
surrounding these initiatives.
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Continue to build the TMNG Global brand
We plan to continue building and communicating the TMNG Global
brand, further positioning ourselves as the consultancy of
choice for the global telecom, media and entertainment
industries. In late 2005, TMNG was rebranded to TMNG Global and
we will be sunsetting the RVA Consulting and TWG Consulting
brands and incorporating them into the TMNG Global brand. In
late 2007 we sunset the Adventis brand and now operate our
strategy group as CSMG. These changes were made to better
represent the end-to-end capabilities we offer through our
strategic consulting, management consulting and managed services
practices, and to provide separation between our strategy and
management consulting practices, providing a level of
independence and neutrality desired by clients.
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Focused and effective recruitment and retention
We believe a key element of our business model that will be
required is the attraction and retention of high quality,
experienced consultants. Our two primary challenges in the
recruitment of new consulting personnel are the ability to
recruit talented personnel with the skill sets necessary to
capitalize on an industry undergoing revolutionary change and
the ability to execute such recruitment with an appropriate
compensation arrangement. The market for skilled consultants
remains very competitive in the current industry environment.
We reinvigorate existing skill sets of our consultants with
proprietary toolsets that provide methodologies they use to
augment their experience and help analyze and solve
clients problems. We utilize a network of databases to
serve as a knowledge base, enabling consultant collaboration on
engagements and providing support information and updates of
TMNG current toolsets and releases of next generation tools.
Finally, we continue to manage our flexible and unique employee
and independent subject matter expert model to maximize skill
set offerings, while minimizing the effect of non-billable
consultant time.
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Enhancing our global presence
We plan to further enhance, our global presence beyond the
United States and United Kingdom in order to deliver services
and solution capabilities to client companies located around the
world. We believe the competitive market expertise of our
U.S. consultants can be a key factor for foreign companies
facing the business issues associated with deregulation and
competition, especially in Western Europe. We believe our recent
acquisitions of Cartesian and the international assets of
Adventis strengthen TMNG Globals presence and capabilities
in key European markets and create potential for expansion in
Asian markets.
SERVICES
We provide a full range of strategic, marketing, operations and
technology consulting services to the communications industry.
Services provided include:
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Strategy and Business Case Development
We provide comprehensive strategic analysis to service
providers, media and entertainment companies, equipment
manufacturers and financial investors in the communications
industry. Our approach combines rigorous qualitative and
quantitative analyses with a detailed understanding of industry
trends, technologies, and developments. We provide clients with
specific solutions to their key strategic issues relating to
their existing business as well as new product and service
opportunities. Our services include business case development,
data and content strategies, marketing spending optimization,
service and brand diversification, enterprise and small business
strategies, technology commercialization and operational
strategies.
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Organization Development
We provide organizational performance improvement through
organization assessment, evaluation and design, process
improvement and facilitation, team development and training. Our
approach involves teaming with a clients key stakeholders
to develop a clear understanding of the expected improvements to
be gained. We assess and evaluate the current situation, develop
consensus around a vision, gain commitment and identify
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key activities for successful implementation. Our approach
develops custom performance solutions specific to a
customers set of needs.
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Knowledge Management
We assist our clients in managing the process of capturing and
cultivating information that exists within their organizations.
We utilize an integrated partnership approach to seamlessly
leverage an organizations human knowledge capital. We
provide a tailored solution to solve problems associated with
knowledge creation and distribution, sharing and leveraging
existing knowledge, tools and processes. Our approach connects
people to information to enable organizations to best leverage
existing assets, define competitive advantage and create
measurable business value.
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Product Development and Management
We offer global communications service providers the benefit of
our hands-on experience developing and launching new products
and services for some of todays industry leaders. Our
product development approach includes market assessments,
product/service definition, business requirements definition,
project management, testing and release. We also help
communications clients by evaluating the profitability of
existing product and service offerings to identify opportunities
to consolidate, de-emphasize or decommission offerings to
improve clients overall profitability.
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Customer Acquisition and Retention
We have developed and implemented acquisition and retention
strategies for clients in the communications industry. We have
consultants skilled in the areas of target market segmentation,
campaign management and sales-process management. Our strategies
take into account the needs and preferences of the target market
and include a mix of marketing communications, partner programs,
e-marketing,
web strategy, direct sales, telemarketing, direct response and
loyalty and retention programs.
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Revenue and Cost Management
We are dedicated to helping clients uncover and recover missed
opportunities at every stage along the revenue life cycle and
reduce the costs associated with managing business functions.
Our approach to revenue and cost management centers around
Cartesians innovative and modular software product suite,
Ascertaintm.
Ascertaintm
is among the industrys most widely deployed revenue
assurance tools in Europe and able to support fixed, wireless,
ISP, data, and content environments. Beginning in 2008, we have
expanded deployment of
Ascertaintm
into the United States.
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Program Management, Business and Operations Process Redesign and
Reengineering
We provide clients with efficient, integrated business and
operational processes, supporting technology systems and
web-centric interfaces across all OSS/BSS applications. We take
clients from the point of customer acquisition to provisioning
all the way through to billing, collections and accounts
receivable management to cash in the bank. We have modified our
traditional toolsets, recruited consultants with relevant
expertise and initiated marketing efforts in the burgeoning
areas of the wireless enterprise and IP transformation. We
believe that as these two market phenomena evolve we are
well-positioned to bring business and technical solutions to
existing clients and prospective clients alike.
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Corporate Investment Services
We provide a wide range of services to investment banking and
private equity firms in connection with investments and mergers
and acquisitions in the communications industry. Services
include evaluation of management teams and business plans,
identification of strengths and weakness of the company, and
analyses of the companys financial models, systems,
products and operational and business processes. Post-investment
support is also provided to help customers in the optimization
of their investment.
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-Technical
Consultancy & Software Development
We provide technical consultancy and software development
specialized for the communications industry. We have vast
experience working with and implementing numerous communications
software products. Our expertise includes defining requirements,
data analysis, selecting and implementing mediation,
provisioning, billing and inter-operator billing products,
interfacing products within a legacy environment, migrating
products, data and customers, and planning, managing and
completing systems and software testing.
We have developed a proprietary suite of software
(Ascertaintm)
that combine to address the revenue assurance and data integrity
needs of communications companies.
Ascertaintm
helps prove rate accuracy, reconcile customer data, analyze and
reconcile event records, prove completeness of processing, and
monitor trends and volumes. The
Ascertaintm
suite forms a fully productized and supported set of solutions
that share a common core framework for reporting, user
interaction, data extraction and job scheduling.
COMPETITION
The market for communications consulting services remains
intensely competitive, highly fragmented and rapidly changing.
We face competition from major business and strategy consulting
firms, large systems integration and major global outsourcing
firms as a result of the outsourcing of business support systems
and operating support systems by communications companies,
offshore development firms from the Asian markets, equipment and
software firms that have added service offerings, and
customers internal resources. Recently, we believe there
has been a significant increase in demand for firms that can
bundle BPO with systems and technical integration. Many of our
competitors are large organizations that provide a broad range
of services to companies in many industries, including the
communications industry. In addition, we compete with boutique
firms that maintain specialized skills
and/or
geographical advantages. Many information technology consulting
firms also maintain significant practice groups devoted to the
communications industry. Many of these competitors have
significantly greater financial, technical and marketing
resources and greater name recognition than us.
We believe that the principal competitive factors in our market
include: the ability to provide payback on our services to
clients through proven business cases; the ability to provide
innovative solutions; the ability to provide deep and proven
expertise and talent; the ability to provide capability and
expertise in delivering complex projects through teams located
globally; availability of resources; price of solutions;
industry knowledge; understanding of user experience; and
sophisticated project and program management capability.
We believe we have a competitive advantage due to our exclusive
focus on the communications, media and entertainment industry,
and the comprehensive offerings we provide to our customers. We
also believe the complementary experience and expertise of our
professionals represents a competitive advantage. With the
communications industry experiencing consolidation and
convergence with media and entertainment, we believe our
principal competitive factor is our continual focus on the
converging communications industry and the ability to develop
and deliver solutions that enhance client revenue and asset
utilization and provide return on investment. Our biggest
competitor is normally the customers internal resources.
As a result, the most significant competitive advantage becomes
long-term relationships with key client executives that have
developed over time from consistency in responsiveness to their
needs, quality and reliability of consultants and deliverables,
and an appropriate price/value formula.
We have experienced a market trend of increased price
competition, particularly from large Asian firms providing
technical support and outsourcing and other large firms that
have the financial resources to aggressively price engagements
that they have a particular interest in obtaining. This
development has required us to focus on decreasing general and
administrative costs as a percentage of revenues. Although the
recent growth in our business has been positive, the economic
outlook, as always, is subject to change and the recent
challenges of the financial markets driven by the subprime
mortgage crisis impacts the communications and media sector.
Increased competition could result in further price reductions,
fewer client projects, under utilization of consultants, reduced
operating margins, and loss of market share. Any decline in our
revenues will have a significant impact on our financial
results, particularly because a significant portion of our
operating costs are fixed in advance of a particular quarter. In
addition, our future revenues and operating
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results may fluctuate from quarter to quarter based on the
number, size and scope of projects in which we are engaged, the
contractual terms and degree of completion of such projects, any
delays incurred in connection with a project, consultant
utilization rates, the use of estimates to complete ongoing
projects, general economic conditions and other factors.
EMPLOYEES
Our ability to recruit and retain experienced, highly qualified
and highly motivated personnel has contributed greatly to our
performance and will be critical in the future. We offer a
flexible recruiting model that enhances our ability to attract
consultants and to effectively manage utilization. Our
consultants may work as full time or part time employees. We
also have relationships with many independent contracting firms
to assist in delivery of consulting solutions. Our current base
of independent firms has specialized expertise in discrete areas
of communications, and we typically deploy these firms only when
their unique expertise/offering is required.
During fiscal year 2007, we utilized approximately 500
consultants, representing a combination of employee client
service personnel and independent contracting firms. Of these,
273 were employee consultants and approximately 227 were working
on engagements for us primarily through independent
subcontracting firms. In addition to the consultants, we have an
administrative staff of approximately 51 employees in the
accounting and finance, marketing, recruiting, information
technology, human resources, legal and administrative areas. As
of December 29, 2007, we had 296 total employees, of which
288 are full-time.
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 Statement of Financial Accounting Standards
(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 five operating
segments (Operations, Domestic Strategy, International Strategy,
RVA and TWG) which are aggregated into one reportable segment.
Management Consulting Services includes consulting services
related to strategy and business planning, market research and
analysis, organizational development, knowledge management,
marketing and customer relationship management, program
management, billing system support, operating system support,
revenue assurance and corporate investment services. 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.
For a discussion of operating results by segment, please see
Item 7 Managements Discussion and
Analysis of Financial Condition and Results of Operations, and
Note 5, Business Segments, Major Customers and Significant
Group Concentrations of Credit Risk, in the Notes to the
Consolidated Financial Statements.
MAJOR
CUSTOMERS
Since our inception, we have provided services to over a
thousand domestic and international customers, primarily
communication service providers and large technology and
applications firms serving the communications industry and
financial firms that invest in the sector. Beginning in 2006, we
have added to our base of customers with cable, media and
entertainment clients looking to leverage communications
infrastructure to deliver offerings to the market. We depend on
a small number of key customers for a significant portion of
revenues. For fiscal year 2007, revenues from two customers
accounted for 25.2% and 13.0%, respectively of our revenues. No
other single customer accounted for more than 10% of our
revenue. Also during fiscal year 2007, our top ten customers
accounted for approximately 73.2% of total revenue. We generally
provide discounted pricing for large projects on fixed
commitments with long-term customers. Because our clients
typically engage services on a project basis, their needs for
services vary substantially from period to period.
10
We continue to concentrate on large wireline, wireless, and
cable MSOs headquartered principally in North America and
Western Europe, as well as media and entertainment clients. We
seek to offer broad and diversified services to these customers.
We anticipate that operating results will continue to depend on
volume services to a relatively small number of customers.
FOREIGN
MARKETS
As a result of the combination of organic growth, coupled with
our Adventis and Cartesian acquisitions, a substantial portion
of our business is conducted in foreign markets and a
substantial portion of our revenues and costs are derived from
our international business. Our international revenues in the
fiscal year ended December 29, 2007 represented 44.9% of
our total revenues, up from 21.2% in the same period of 2006, as
a result of the strategic acquisitions as well as international
organic growth. Our international operations expose us to a
number of business and economic risks, including unfavorable
foreign currency exchange rates or fluctuations; our ability to
protect our intellectual property; the impact of foreign laws,
regulations and trade customs; U.S. and foreign taxation
issues; potential limits on our ability to repatriate foreign
profits; and general political and economic trends, including
the potential impact of terrorist attacks or international
hostilities. If we are unable to achieve anticipated levels of
revenues from or efficiently manage our international
operations, our overall revenues and profitability may decline.
INTELLECTUAL
PROPERTY
Our success is dependent, in part, upon proprietary processes
and methodologies. We rely upon a combination of copyright,
trade secret, and trademark law to protect our intellectual
property. Additionally, employees and consultants sign
non-disclosure agreements to assist us in protecting our
intellectual property.
We have not applied for patent protection for the proprietary
methodologies used by our consultants. We do not currently
anticipate applying for patent protection for these toolsets and
methodologies.
SEASONALITY
In the past, we have experienced seasonal fluctuations in
revenue in the fourth quarter due primarily to the fewer number
of business days because of the holiday periods occurring in
that quarter. We continue to experience fluctuations in revenue
in the fourth quarter and with our global expansion, may
experience fluctuations in summer months and other holiday
periods.
WEBSITE
ACCESS TO INFORMATION
Our internet website address is www.tmng.com. We make available
free of charge through our website all of our filings with the
Securities and Exchange Commission (SEC), including
our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended (Exchange Act), as soon as
reasonably practicable after we electronically file such
material with, or furnish it to the SEC. The charters of our
audit, nominating and compensation committees and our Code of
Business Conduct are also available on our website and in print
to any shareholder who requests them.
ITEM 1A. RISK
FACTORS
Not applicable.
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ITEM 1B.
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UNRESOLVED
STAFF COMMENTS
|
Not applicable.
11
Our principal executive offices are located in a
6,475 square foot facility in Overland Park, Kansas. This
facility houses the executive, corporate and administrative
offices and is under a lease which expires in August 2010. In
addition to the executive offices, we also lease the following
facilities which are primarily utilized by management and
consulting personnel.
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Lease
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Location
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Sq. Feet
|
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Expiration
|
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McLean, Virginia
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|
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7,575
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|
June 2009
|
Boston, Massachusetts
|
|
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10,344
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January 2011
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Shawnee, Kansas
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1,365
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May 2008
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Somerset, New Jersey
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|
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9,000
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December 2008
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London, England (Gate Street)
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|
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11,825
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November 2015
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London, England (Kingsway House)
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3,210
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June 2009
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Berlin, Germany
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4,174
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June 2009
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Shanghai, China
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1,511
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March 2009
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In the fourth quarter of fiscal year 2004, the Company made the
decision to consolidate office space. In connection with this
decision, a sublease agreement for 11,366 square feet of
unutilized office space in Boston, Massachusetts was entered
into with a third party through the end of the original lease
term in 2011. In addition, 5,941 square feet of the London
Gate Street property is sublet to third parties. The subtenant
lease related to 1,370 square feet of the London Gate
Street property expires in January 2009. The subtenant agreement
related to the remaining space expires in July 2008.
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ITEM 3.
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LEGAL
PROCEEDINGS
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None.
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ITEM 4.
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SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
No matters were submitted to a vote of security holders during
the fourth quarter of 2007.
PART II
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ITEM 5.
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MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Our Common Stock is quoted on the NASDAQ Stock Market under the
symbol TMNG. The high and low price per share for the Common
Stock for the fiscal years ending December 29, 2007 and
December 30, 2006 by quarter were as follows:
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High
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Low
|
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First quarter, fiscal year 2007
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$
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2.15
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|
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$
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1.42
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Second quarter, fiscal year 2007
|
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$
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2.45
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|
|
$
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1.67
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Third quarter, fiscal year 2007
|
|
$
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2.48
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|
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$
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2.00
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Fourth quarter, fiscal year 2007
|
|
$
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2.76
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|
|
$
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2.07
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High
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Low
|
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|
First quarter, fiscal year 2006
|
|
$
|
2.88
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|
|
$
|
2.10
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|
Second quarter, fiscal year 2006
|
|
$
|
2.64
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|
|
$
|
1.92
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|
Third quarter, fiscal year 2006
|
|
$
|
2.25
|
|
|
$
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1.43
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|
Fourth quarter, fiscal year 2006
|
|
$
|
1.70
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|
|
$
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1.27
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The above information reflects inter-dealer prices, without
retail
mark-up,
markdown or commissions and may not necessarily represent actual
transactions.
As of March 24, 2008 the closing price of our Common Stock
was $1.69 per share. At such date, there were approximately 81
holders of record of our Common Stock.
Holders of Common Stock are entitled to receive ratably such
dividends, if any, as may be declared by the Board of Directors
out of funds legally available. To date, we have not paid any
cash dividends on our Common Stock and do not expect to declare
or pay any cash or other dividends in the foreseeable future.
12
STOCK
PERFORMANCE GRAPH
The following graph compares the cumulative total stockholder
return on the Companys Common Stock with the cumulative
total return of the NASDAQ Composite Index (in which TMNG Common
Stock is included), and the Russell 2000 Index (in which TMNG
Common Stock is not included) for the period beginning on
December 28, 2002 and ending on December 29, 2007. The
rules of the SEC provide that the Company may compare its
returns to those of issuers with similar market capitalization
if the Company does not use a published industry or
line-of-business index as a comparison and does not believe it
can reasonably identify a peer group. The Company has compared
its stock price performance with that of the Russell 2000 Index
because it does not believe it can reasonably identify a peer
group and no comparable published industry or line-of-business
index is available. The Russell 2000 Index consists of companies
with market capitalizations similar to that of the Company. The
comparisons in this graph are provided in accordance with SEC
disclosure requirements and are not intended to forecast or be
indicative of the future performance of our common shares.
COMPARISON
OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among The Management Network Group, Inc., The NASDAQ Composite
Index
And The Russell 2000 Index
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Cumulative Total Return
|
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12/28/02
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1/3/04
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1/1/05
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12/31/05
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12/30/06
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12/29/07
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THE MANAGEMENT NETWORK GROUP, INC.
|
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100.00
|
|
|
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194.12
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|
|
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138.24
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140.59
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95.29
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147.06
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NASDAQ COMPOSITE INDEX
|
|
|
100.00
|
|
|
|
149.75
|
|
|
|
164.64
|
|
|
|
168.60
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|
|
|
187.83
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|
|
|
205.22
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RUSSELL 2000 INDEX
|
|
|
100.00
|
|
|
|
147.25
|
|
|
|
174.24
|
|
|
|
182.18
|
|
|
|
215.64
|
|
|
|
212.26
|
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* |
|
$100 invested on 12/28/02 in stock or on 12/31/02 in
index-including reinvestment of dividends. Indexes calculated on
month-end basis. |
The performance graph and related text are being furnished to
and not filed with the SEC, and will not be deemed to be
soliciting material or subject to
Regulation 14A or 14C under the Securities Exchange Act of
1934 or to the liabilities of Section 18 of the Securities
Exchange Act of 1934, and will not be deemed to be incorporated
by reference into any filing under the Securities Act of 1933 or
the Exchange Act, except to the extent we specifically
incorporate such information by reference into such a filing.
13
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ITEM 6.
|
SELECTED
FINANCIAL DATA
|
Not applicable.
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
The following discussion should be read in conjunction with our
Consolidated Financial Statements and Notes thereto included in
this Annual Report on
Form 10-K.
Statements included in this discussion that are not statements
of current or historical information may constitute
forward-looking statements. Forward-looking statements involve
risks and uncertainties and are not guarantees of future
performance or results. Actual results and experience could
differ materially from the anticipated results and other
expectations expressed in our forward-looking statements.
Factors that might affect actual results, performance, or
achievements include, among other things, the factors identified
in the Cautionary Statement Regarding Forward-Looking
Information in Part I of this report. Other factors that we
have not identified in this document could also have this effect.
We report our financial data on a 52/53-week fiscal year for
reporting purposes. Fiscal years 2007 and 2006 had
52 weeks. For further discussion of our fiscal year end see
Item 8, Consolidated Financial Statements,
Note 1 Organization and Summary of Significant
Accounting Policies, contained herein.
OVERVIEW
Included in Item 1, Business is discussion that
includes a general overview of our Business, Market Overview,
Business Strategy, Services and Competition. The purpose of this
executive overview is to complement the qualitative discussion
of the Business from Item 1.
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, organizational development, knowledge management,
marketing, operational, and technology consulting services. With
our 2007 acquisition of Cartesian, we further extended our
offerings to include a suite of 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.
Our international revenues in the fiscal year ended
December 29, 2007 represents 44.9% of our total revenues,
up from 21.2% in the same period of 2006 as a result of
strategic acquisitions as well as international organic growth.
The recent acquisitions of RVA and TWG support our carrier
positioning strategy and add 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 furthers our capabilities to support knowledge
management, leveraging our knowledge surrounding the Web 2.0
movement and its extension to corporate intranets.
Generally our client relationships begin with a short-term
engagement utilizing a few consultants. Our sales strategy
focuses on building long-term relationships with both new and
existing clients to gain additional engagements within existing
accounts and referrals for new clients. Strategic alliances with
other companies are also used to sell services. We anticipate
that we will continue to pursue these marketing strategies in
the future. The volume of work performed for specific clients
may vary from period to period and a major client from one
period may not use our services or the same volume of services
in another period. In addition, clients generally may end their
engagements with little or no penalty or notice. If a client
engagement ends
14
earlier than expected, we must re-deploy professional service
personnel as any resulting non-billable time could harm margins.
Our revenues of $71.9 million for the fiscal year ended
December 29, 2007 increased 111.3% compared with the same
period in 2006. The results for the fiscal year ended
December 29, 2007 include the acquisitions of Cartesian on
January 2, 2007, RVA on August 3, 2007 and TWG on
October 5, 2007 from the respective dates of acquisition.
The details of these acquisitions are outlined in Item 8,
Note 2, Business Combinations, to the
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 second reporting segment, the Software Solutions
segment. The Software Solutions segment includes revenues from
Cartesians widely deployed modular software suite, called
Ascertaintm
, which features 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.
Cost of services consists primarily of compensation for
consultants who are employees and amortization of share-based
compensation for stock options and nonvested stock (restricted
stock), as well as fees paid to independent contractor
organizations and related expense reimbursements. Employee
compensation includes certain non-billable time, training,
vacation time, benefits and payroll taxes. Gross margins are
primarily impacted by the type of consulting services provided;
the size of service contracts and negotiated discounts; changes
in our pricing policies and those of competitors; utilization
rates of consultants and independent subject matter experts; and
employee and independent contractor costs, which tend to be
higher in a competitive labor market.
Gross margins were 46.8% in the fiscal year ended
December 29, 2007 compared with 48.4% 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 2007, a lower level of higher margin strategy
consulting revenue as compared to 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.
Sales and marketing expenses consist primarily of personnel
salaries, bonuses, and related costs for direct client sales
efforts and marketing staff. We primarily use a relationship
sales model in which partners, principals and senior consultants
generate revenues. In addition, sales and marketing expenses
include costs associated with marketing collateral, product
development, trade shows and advertising. General and
administrative expenses consist mainly of costs for accounting,
recruiting and staffing, information technology, personnel,
insurance, rent, and outside professional services incurred in
the normal course of business.
Management has focused on aligning operating costs with
operating segment revenues. As a percentage of revenues, we have
reduced selling, general and administrative costs to
approximately 44.1% in the fiscal year ended December 29,
2007 from 80.7% in the same period of 2006. Selling general and
administrative expense in 2007 includes approximately
$6.3 million of incremental expense associated with the
operations of Cartesian, RVA and TWG. We continue to leverage
integration of our recent acquisitions and evaluate selling,
general and administrative cost reduction opportunities to
improve earnings.
In November 2006, following an initial internal review of our
stock option practices, our Board of Directors appointed a
Special Committee of outside directors (the Special
Committee) to conduct a full investigation of our past
stock option granting practices and related accounting. There
were significant non-recurring operating expenses related to the
Special Committee investigation amounting to approximately
$2.6 million and $0.7 million during 2007 and 2006,
respectively. These costs primarily consisted of professional
services for legal, accounting and tax guidance.
15
Intangible asset amortization increased substantially to
$3.6 million in fiscal year 2007 from $0.7 million in
fiscal year 2006. The increase in amortization expense was due
to the amortization of intangibles recorded in connection with
the Cartesian, RVA and TWG acquisitions.
We substantially reduced our net loss to $2.3 million for
fiscal year 2007 from $12.4 million for fiscal year 2006.
This improvement is primarily attributable to scale through
acquisitions and organic growth, combined with effective cost
management initiatives. Offsetting these improvements was an
increase in costs related to the Special Committee investigation
of $1.8 million and a net increase in intangible asset
amortization/impairment of $0.9 million.
From a cash flow perspective, cash flows provided by operating
activities were $1.4 million during the fiscal year ended
December 29, 2007. Net cash flows used in operating
activities were $8.9 million during the fiscal year ended
December 30, 2006. The improvement in cash flow from
operating activities during the fiscal year ended
December 29, 2007 as compared with the 2006 period
primarily related to improvements in operating results. This
increase in cash flows was achieved notwithstanding cash used to
fund the stock option review. We used $11.0 million in net
cash to fund the acquisitions of Cartesian, RVA and TWG mostly
offset by $10.1 million in proceeds from sales of
short-term investments.
At December 29, 2007, we have working capital in excess of
$32 million and minimal long-term obligations. Our
short-term investments consist of money market funds and
investment-grade auction rate securities (ARS).
Returns on our short-term investments have increased over recent
periods as a result of increasing interest rates.
Due to recent events in the credit markets, the liquidity of ARS
has been called into question. As part of the ongoing credit
market crisis, many ARS from various issuers have failed to
receive sufficient order interest from potential investors to
clear successfully, resulting in failed auctions. As of the
filing of our Annual Report on
Form 10-K,
we hold ARS in the amount of $14.9 million supported by
government guaranteed student loans. Beginning in February 2008,
we began to experience failed auctions for securities in our ARS
portfolio. It is our understanding these failed auctions are
likely to continue over at least the next several months. We do
not believe these failed auctions are indicative of a credit
risk concern due to the fact that the underlying collateral is
fully guaranteed through the Federal Family Education Loan
Program of the U.S. Department of Education. However, these
auction failures do affect the liquidity of these investments.
The principal associated with failed auctions will not be
accessible until a successful auction occurs, a buyer is found
outside of the auction process, the issuers redeem the
securities, the issuers establish a different form of financing
to replace these securities or final payments come due according
to contractual maturities ranging from approximately 22 to
36 years. For each unsuccessful auction, the interest rate
moves to a maximum rate defined for each security. If we
continue to hold our ARS, the entire amount of ARS may be
reclassified from current to non-current assets on our balance
sheet at some point in the future, which would reduce our
working capital and current ratio. Furthermore, based on an
analysis of the fair value of the these securities, we may need
to record an impairment related to these ARS. Although we
currently believe that any decline in the fair market value of
these securities would be temporary, there is a risk that the
decline in value may ultimately be deemed to be
other-than-temporary. Should we determine that the decline in
value of these securities is other-than-temporary, it would
result in a loss being recognized in our consolidated statement
of operations, which could be material. In the event we are able
to successfully liquidate our ARS portfolio we intend to
reinvest these balances into money market or similar
investments. Based on our expected operating cash flows, and our
other sources of cash, we do not currently anticipate the
potential lack of liquidity of these investments will affect our
ability to execute our current business plan. See Critical
Accounting Policies and Item 8, Consolidated
Financial Statements, Note 16, Subsequent
Event for further discussion of our ARS.
16
CRITICAL
ACCOUNTING POLICIES
Our significant accounting policies are summarized in
Note 1 to the consolidated financial statements included in
Item 8 Consolidated Financial Statements of
this report.
While the selection and application of any accounting policy may
involve some level of subjective judgments and estimates, we
believe the following accounting policies are the most critical
to our consolidated financial statements, potentially involve
the most subjective judgments in their selection and
application, and are the most susceptible to uncertainties and
changing conditions:
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Short-term Investments;
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|
Allowance for Doubtful Accounts;
|
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|
Fair Value of Acquired Businesses;
|
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Impairment of Goodwill and Long-lived Intangible Assets;
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|
Revenue Recognition;
|
|
|
|
Share-based Compensation Expense;
|
|
|
|
Accounting for Income Taxes; and
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Research and Development and Capitalized Software Costs.
|
Short-term Investments Short-term
investments, which consist of investment-grade auction rate
securities, are classified as available for sale
under the provisions of Statement of Financial Accounting
Standards (SFAS) No. 115, Accounting for
Certain Investments in Debt and Equity Securities.
Accordingly, the short-term investments are reported at fair
value, with any related unrealized gains and losses included as
a separate component of stockholders equity, net of
applicable taxes, when applicable. Realized gains and losses and
interest and dividends are included in interest income within
the Consolidated Statements of Operations and Comprehensive
Loss. Historically, auction rate securities reset every 28 to
35 days; consequently, interest rate movements generally
did not have a material effect on the fair value of these
investments. At December 29, 2007 and December 30,
2006 there were no unrealized gains or losses on short-term
investments.
Due to recent events in the credit markets, the liquidity of ARS
has been called into question. As part of the ongoing credit
market crisis, many ARS from various issuers have failed to
receive sufficient order interest from potential investors to
clear successfully, resulting in failed auctions. As of
December 29, 2007, we held $17.1 million in ARS.
Subsequent to year end, all of the ARS held in our portfolio
were successfully auctioned. The successful auctions of our
entire ARS portfolio subsequent to our year-end confirm there is
no impairment of these investment balances at December 29,
2007. As of the filing of our Annual Report on
Form 10-K,
we hold ARS in the amount of $14.9 million supported by
government guaranteed student loans. The remaining
$2.2 million balance was converted to cash or money market
investments.
Beginning in February 2008, we began to experience failed
auctions within our remaining ARS portfolio. It is our
understanding these failed auctions are likely to continue at
least over the next several months. We do not believe these
failed auctions are indicative of a credit risk concern due to
the fact that the underlying collateral is fully guaranteed
through the Federal Family Education Loan Program of the
U.S. Department of Education. However, these auction
failures do affect the liquidity of these investments.
We continually monitor the credit quality and liquidity of our
ARS. To the extent we believe we will not be able to collect all
amounts due according to the contractual terms of a security, we
will record an other-than-temporary impairment. At this time, we
are uncertain as to when the liquidity issues related to these
investments will improve. Accordingly, the entire amount of ARS
may be reclassified from current to non-current assets on our
balance sheet at some point in the future. While our ARS
portfolio is asset backed and supported by government
guarantees, if the issuers are unable to successfully close
future auctions and their credit ratings deteriorate, we could
be required to record realized or unrealized losses on these
investments in the future. We will continue to value our ARS
portfolio in future reporting periods using a model that takes
17
into consideration the financial conditions of the ARS issuer,
bond insurers and the value of the collateral bonds. This could
require us to recognize unrealized losses in accordance with
SFAS No. 115.
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 to
60 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 in the amounts of $380,000 and
$263,000 for fiscal years 2007 and 2006, respectively. Our
allowance for doubtful accounts totaled $562,000 and $378,000 at
the end of fiscal years 2007 and 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 was based on uncollected
account experience in prior years and our ongoing evaluation of
the credit status of our customers and the communications
industry in general.
We have attempted to mitigate credit risk by concentrating our
marketing efforts on the largest and most stable companies in
the communications industry and by tightly controlling the
amount of credit provided to customers. If we are unsuccessful
in these efforts, or if our customers file for bankruptcy or
experience financial difficulties, it is possible that the
allowance for doubtful accounts will be insufficient and we will
have a greater bad debt loss than the amount reserved, which
would adversely affect our financial performance and cash flow.
Fair Value of Acquired Businesses TMNG has
acquired seven organizations over the last six years. A
significant component of the value of these acquired businesses
has been allocated to intangible assets. 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 or separable criterion be separately recognized
on the financial statements at their fair value, and provides
guidance on the types of intangible assets subject to
recognition. Determining the fair value for these specifically
identified intangible assets involves significant professional
judgment, estimates and projections related to the valuation to
be applied to intangible assets like customer lists, employment
agreements and trade names. The subjective nature of
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 As of December 29, 2007, we have
$13.4 million in goodwill and $11.6 million in
long-lived intangible assets, net of accumulated amortization.
Goodwill and other long-lived intangible assets arising from our
acquisitions are subjected to periodic review for impairment.
SFAS No. 142 Goodwill and Other Intangible
Assets requires an annual evaluation at the reporting unit
level of the fair value of goodwill and compares the calculated
fair value of the reporting unit to its book value to determine
whether impairment has been deemed to occur. Any impairment
charge would be based on the most recent estimates of the
recoverability of the recorded goodwill. If the remaining book
value assigned to goodwill in an acquisition is higher than the
estimated fair value of the reporting unit, there is a
requirement to write down these assets. The determination of
fair value requires management to make assumptions about future
cash flows and 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, Accounting for
the Impairment or Disposal of Long-lived Assets, 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.
18
During 2007, an assessment of impairment values was completed
and no impairment charge was deemed necessary. In the fourth
quarter of 2006, we recognized a $2.1 million charge for
the impairment of the carrying amount of our Adventis business.
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 our assessment of future cash flows
of the Adventis business.
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 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 services are
expected to be performed. In connection with some fixed fee
contracts, we receive payments from customers that exceed
recognized revenues. We record the excess of receipts from
customers over recognized revenue as deferred revenue. Deferred
revenue is classified as a current liability to the extent it is
expected to be earned within twelve months from the date of the
balance sheet.
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
19
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 fiscal year ended December 29, 2007
and were not material for the fiscal year ended
December 30, 2006.
Share-Based Compensation Expense We grant
stock options and nonvested 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 Payment. 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 fiscal year ended December 29, 2007, we used
a weighted-average expected stock-price volatility of 64%. The
expected term of options granted is based on the simplified
method in accordance with 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 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 December 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 Taxes an 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 December 29, 2007,
cumulative valuation allowances in the amount of
$30.7 million were recorded in connection with the net
deferred income tax assets. As of December 29, 2007, all of
our domestic and foreign net operating losses were fully
reserved. 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
20
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 December 29, 2007, we
have recorded a liability of approximately $524,000 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 our ability to use recorded
deferred income tax asset balances. If we continue to report
domestic operating losses for financial reporting in future
years, no additional tax benefit will be recognized for those
losses, since we will not have accumulated enough positive
evidence to support our ability to utilize net operating loss
carryforwards in the future.
During the fourth quarter of 2007, we performed a review of our
transfer pricing methodology specifically as it relates to
inter-company charges for headquarter support services performed
by our domestic entities on behalf of various foreign
affiliates. We adopted a cost plus fixed margin
transfer pricing methodology. While the application of the new
transfer pricing methodology did not change the Companys
revenue or operating loss on a consolidated basis, it impacted
the allocation of revenue and costs between the Company and its
international subsidiaries, thus impacting the tax liability for
certain international subsidiaries.
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. During the fiscal
year ended December 29, 2007, no software development costs
were capitalized and $868,000 of these costs were expensed as
incurred. During the fiscal year ended December 30, 2006,
no software development costs were incurred.
We also incur 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 fiscal year ended December 30, 2006. No
product development costs were incurred in the fiscal year ended
December 29, 2007.
21
RECENT
ACCOUNTING PRONOUNCEMENTS
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements. This statement defines fair
value, establishes a framework for measuring fair value in
generally accepted accounting principles and expands disclosures
about fair value measurements. SFAS No. 157 is
effective for fiscal years beginning after November 15,
2007 and interim periods within those fiscal years. In February
2008, the FASB issued Staff Position
157-1,
Application of FASB Statement No. 157 to FASB
Statement No. 13 and Other Accounting Pronouncements That
Address Fair Value Measurements for Purposes of Lease
Classification or Measurement under Statement 13,
(FSP 157-1)
which amends SFAS 157 to exclude SFAS No. 13,
Accounting for Leases, and other accounting
pronouncements that address fair value measurements for purposes
of lease classification or measurement under Statement 13, with
the exception of assets acquired and liabilities assumed in a
business combination. In February 2008, the FASB issued Staff
Position
157-2,
Effective Date of FASB Statement No. 157,
(FSP 157-2)
which delays the effective date of SFAS 157 for
nonfinancial assets and nonfinancial liabilities, except for
items that are recognized or disclosed at fair value in the
financial statements on a recurring basis. We are currently
evaluating the impact, if any, that the adoption of
SFAS No. 157,
FSP 157-1,
and
FSP 157-2
will have on our 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
adoption of this statement will have no impact on our
consolidated financial statements as we do not intend to elect
to apply the provisions.
In June 2007, the FASBs EITF issued EITF Issue
No. 06-11
Accounting for Income Tax Benefits of Dividends on
Share-Based Payment Awards. This issue requires that the
tax benefits related to dividend equivalents paid on restricted
stock units, which are expected to vest, be recorded as an
increase to additional paid-in capital.
EITF 06-11
is effective prospectively to the income tax benefits on
dividends declared in fiscal years beginning after
December 15, 2007. The adoption of this issue will have no
impact on our consolidated financial statements.
In December 2007, the SEC issued Staff Accounting
Bulletin No. 110 (SAB No. 110).
SAB No. 110 expresses the staffs view regarding
the use of the simplified method, as discussed in
SAB No. 107, in developing an estimate of the expected
term of plain vanilla share options in accordance
with SFAS No. 123R, Accounting for Shared Base
Payment. At the time SAB No. 107 was issued, the
SEC staff believed that more detailed external information about
employee exercise behavior would, over time, become readily
available to companies. Therefore, the SEC staff did not expect
companies to use the simplified method for share option grants
after December 31, 2007. SAB No. 110 acknowledges
that such detailed information about employee exercise behavior
may not be widely available by December 31, 2007.
Accordingly, SAB No. 110 would allow, under certain
circumstances, the use of the simplified method beyond
December 31, 2007. We have evaluated the impact of
SAB No. 110 and will continue to use the simplified
method for fiscal year 2008.
In December 2007, the FASB issued SFAS No. 141R,
Business Combinations, which replaces FAS 141.
SFAS No. 141R establishes principles and requirements
for how an acquirer in a business combination recognizes and
measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any controlling interest;
recognizes and measures the goodwill acquired in the business
combination or a gain from a bargain purchase; and determines
what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the
business combination. SFAS No. 141R is to be applied
prospectively to business combinations for which the acquisition
date is on or after the beginning of an entitys fiscal
year that begins after December 15, 2008. We will assess
the impact of SFAS No. 141R if and when a future
acquisition occurs.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements an amendment of ARB No. 51.
SFAS No. 160 establishes new accounting and reporting
standards for the noncontrolling interest in a subsidiary and
for the deconsolidation of a subsidiary.
22
Specifically, this statement requires the recognition of a
noncontrolling interest (minority interest) as equity in the
consolidated financial statements and separate from the
parents equity. The amount of net income attributable to
the noncontrolling interest will be included in consolidated net
income on the face of the income statement.
SFAS No. 160 clarifies that changes in a parents
ownership interest in a subsidiary that do not result in
deconsolidation are equity transactions if the parent retains
its controlling financial interest. In addition, this statement
requires that a parent recognize a gain or loss in net income
when a subsidiary is deconsolidated. Such gain or loss will be
measured using the fair value of the noncontrolling equity
investment on the deconsolidation date. SFAS No. 160
also includes expanded disclosure requirements regarding the
interests of the parent and its noncontrolling interest.
SFAS No. 160 is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after
December 15, 2008. Earlier adoption is prohibited. The
adoption of SFAS No. 160 is not expected to have an
impact on our consolidated financial statements.
RESULTS
OF OPERATIONS
FISCAL
2007 COMPARED TO FISCAL 2006
REVENUES
Revenues increased 111.3% to $71.9 million for the fiscal
year 2007 from $34.0 million for the fiscal year 2006. The
increase in revenue is primarily due to the acquisitions of
Cartesian in January 2007, RVA in August 2007 and TWG in October
2007 which contributed $24.2 million, $9.3 million and
$1.0 million, respectively, in revenue during 2007. 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 40.1%
to $47.7 million for 2007 from $34.0 million for the
same period of 2006. The acquisitions of RVA and TWG accounted
for $9.3 million and $1.0 million, respectively, of
this increase. Revenues from the remainder of the segment added
$3.4 million or 10.0% growth, due largely to growth in
services to our global cable and broadband clientele, partially
offset by reduction in revenues from our global strategy
consulting practices.
During the fiscal year ended December 29, 2007, this
segment provided services on 245 customer projects, compared to
217 projects performed in the fiscal year ended
December 30, 2006. Average revenue per project was $195,000
in the fiscal year ended December 29, 2007 compared to
$157,000 in the fiscal year ended December 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 of this
segment of $8.0 in fiscal year 2007 represents a decrease to
16.9% of segment revenues from $7.2 million and 21.2% for
fiscal year 2006. The decrease as a percentage of revenues was
due to an overall increase in the mix of project activity
domestically, driven by the acquisitions of RVA and TWG and a
decrease in strategy engagements internationally during the
period.
Revenues recognized in connection with fixed price and
contingent fee engagements totaled $23.4 million and
$14.4 million, representing 49.0% and 42.4% of total
revenues of the segment, for the fiscal year ended
December 29, 2007 and December 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 fiscal year 2007 as compared
to the fiscal year 2006.
Software Solutions Segment Revenues of
$24.2 million were generated for the fiscal year ended
December 29, 2007. All revenues were generated
internationally. During the fiscal year ended December 29,
2007, this segment provided services on 126 customer projects.
Average software and services revenue per project was
approximately $177,000. In addition, revenues from post-contract
support services were approximately $1.9 million.
23
COST OF
SERVICES
Cost of services increased 118.0% to $38.3 million for
fiscal year 2007 compared to $17.5 million for fiscal year
2006. As a percentage of revenues, our gross profit margin was
46.8% for fiscal year 2007 compared to 48.4% for fiscal year
2006. The decrease in gross profit margin in 2007 compared to
2006 is primarily due a higher mix of larger and longer-term
consulting engagements with discounted pricing in our Management
Consulting Services segment and our new Software Solutions
segment in 2007, combined with a lower mix of higher margin
projects in our strategy consulting practice. Gross margins in
both our management consulting services and software solutions
segments are comparable. The addition of RVA in the second half
of fiscal 2007 provided uplift to our margins. Cost of services
also includes amortization of intangible assets acquired with
Cartesian of $750,000, related to acquired software.
OPERATING
EXPENSES
In total, operating expenses increased by 22.7% to
$37.9 million for fiscal year 2007, from $30.9 million
for fiscal year 2006. Operating expenses included selling,
general and administrative costs (inclusive of share-based
compensation), Special Committee stock option investigation
charges, legal settlements, intangible asset amortization and
impairment of goodwill, intangibles and long-lived assets.
Selling, general and administrative expense increased to
$31.7 million for fiscal year 2007 compared to
$27.4 million for fiscal year 2006. As a percentage of
revenues, our selling, general and administrative expense was
44.1% for fiscal year 2007 compared to 80.7% for fiscal year
2006. During 2007, we had $6.3 million in incremental
expense due to the acquisitions of the Cartesian, RVA and TWG
businesses, offset by expense reductions in the remainder of the
business of $2.0 million, or 7.4%, as compared to fiscal
year 2006. The decrease in selling, general and administrative
expenses, exclusive of Cartesian, RVA and TWG, was primarily due
to a reduction in compensation of $1.6 million, a reduction
in share-based compensation expense of $1.4 million, and
reductions in travel and entertainment expenses of
$0.6 million, partially offset by an increase in
professional fees of $1.2 million. Included in selling
general and administrative expenses for fiscal year 2007 is
$0.9 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.
Operating expenses included Special Committee charges of
approximately $2.6 million and $0.7 million during
2007 and 2006, respectively, related to 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. Operating expenses for 2006
also included a $2.1 million charge for the impairment of
the carrying amount of our Adventis business. 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 our assessment of future cash flows of the
Adventis business.
Intangible asset amortization increased by $2.9 million to
$3.6 million in fiscal year 2007, compared to
$0.7 million in fiscal year 2006. The increase in
amortization expense was due to the amortization of intangibles
recorded in connection with the Cartesian, RVA and TWG
acquisitions.
OTHER
INCOME AND EXPENSES
Interest income was $1.5 million and $2.1 million for
fiscal years 2007 and 2006, respectively, and represented
interest earned on invested balances. Interest income decreased
during fiscal year 2007 as compared to the same 2006 period due
primarily 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 auction rate securities as part of our overall investment
policy. During 2007, we recorded other income in the amount of
$452,000 related to the settlement of foreign withholding tax
disputes.
24
INCOME
TAXES
We recorded income tax provisions of $52,000 for both fiscal
years 2007 and 2006. The income tax provisions for 2007 and 2006
primarily relate to state income taxes. For both fiscal years,
we recorded no income tax benefit related to domestic pre-tax
losses in accordance with the provisions of
SFAS No. 109 which requires an estimation of our
ability to use recorded deferred income tax assets. We have
recorded a valuation allowance against all domestic and certain
international deferred income tax assets generated due to
uncertainty about their ultimate realization due to our history
of net operating losses. If we continue to report domestic,
federal net operating losses for financial reporting, no
additional tax benefit will be recognized for those losses,
since we will not have accumulated enough positive evidence to
support our ability to utilize the net operating loss
carryforwards in the future.
During the fourth quarter of 2007, we completed a transfer
pricing study. While the results of the transfer pricing study
did not change our revenues or operating loss on a consolidated
basis, it impacted the allocation of costs between members of
the consolidated group. As a result, the tax liability for
certain international subsidiaries was reduced.
NET
LOSS
We had a net loss of $2.3 million for fiscal year 2007,
compared to $12.4 million for fiscal year 2006. The
decrease in net loss is primarily attributable to increased
revenues from our accretive acquisitions of Cartesian, RVA and
TWG, combined with continued cost management initiatives and
added leverage to the business model. Offsetting these
improvements in 2007 were increases in intangible amortization
related to acquisitions of $2.9 million and increased
Special Committee investigation expenses of $1.8 million.
In 2006, we recorded an impairment charge of $2.1 million
for Adventis.
LIQUIDITY
AND CAPITAL RESOURCES
Cash flow provided by operating activities was $1.4 million
in fiscal year 2007 compared to cash flow used in operating
activities of $8.9 million for fiscal year 2006. The
significant change in cash flow from operating activities in
2007 as compared to 2006 are due to improvements in operating
results.
Cash flow used in investing activities was $1.3 million in
fiscal year 2007 compared to cash flow provided by investing
activities of $9.4 million for fiscal year 2006. Investing
activities included $11.0 million for the acquisitions of
Cartesian, RVA and TWG in fiscal year 2007 and $1.5 million
for the acquisition of Adventis in fiscal year 2006. Investing
activities include net proceeds from sales and reinvestments of
investment securities of $10.1 million and
$11.5 million in fiscal years 2007 and 2006, respectively.
Cash used in or provided by investing activities also includes
cash used to acquire office equipment, software and computer
equipment of $0.4 million and $0.6 million in fiscal
years 2007 and 2006, respectively.
Cash flow used in financing activities was $1.2 million and
$0.5 million for fiscal years 2007 and 2006, respectively,
primarily related to payments on long-term obligations,
partially offset by proceeds received from the exercise of
employee stock options and issuance of common stock pursuant to
our employee stock purchase plan. Furthermore, cash used in
financing activities for 2006 included $0.3 million related
to the repurchase of common stock under our stock repurchase
program.
At December 29, 2007, we had approximately
$27.1 million in cash, cash equivalents, and short-term
investments. We believe we have sufficient cash and short-term
investments to meet anticipated cash requirements, including
anticipated capital expenditures, consideration for possible
acquisitions, and any future operating losses that may be
incurred, for at least the next 12 months. Should our cash
and short-term investments prove insufficient we might need to
obtain new debt or equity financing to support our operations or
complete acquisitions. We have established a flexible model that
provides a lower fixed cost structure than most consulting
firms, enabling us to scale operating cost structures more
quickly based on market conditions. Our strong cash position and
absence of long-term debt have enabled us to make acquisitions
and related investments in intellectual property and businesses
we believe are enabling us to capitalize on the current
25
transformation of the industry; however, if demand for our
consulting services is reduced and we experience negative cash
flow, we could experience liquidity challenges at some future
point.
As previously discussed, the liquidity of auction rate
securities has been called into question due to the recent
events in the credit markets. As part of the ongoing credit
market crisis, many ARS from various issuers have failed to
receive sufficient order interest from potential investors to
clear successfully, resulting in failed auctions As of
December 29, 2007, we held $17.1 million in ARS.
Subsequent to year end, all ARS held in our portfolio were
successfully auctioned. As of the filing of our Annual Report on
Form 10-K,
we hold ARS in the amount of $14.9 million supported by
government guaranteed student loans. The remaining
$2.2 million balance was converted to cash or money market
investments. Beginning in February 2008, we began to experience
failed auctions within our remaining ARS portfolio. It is our
understanding these failed auctions are likely to continue at
least over the next several months. We do not currently believe
that these failed auctions are indicative of a credit risk
concern due to the fact that the underlying collateral is fully
guaranteed through the Federal Family Education Loan Program of
the U.S. Department of Education. However, these auction
failures do affect the liquidity of these investments. The
principal associated with failed auctions will not be accessible
until a successful auction occurs, a buyer is found outside of
the auction process, the issuers redeem the securities, the
issuers establish a different form of financing to replace these
securities or final payments come due according to contractual
maturities ranging from approximately 22 to 36 years. For
each unsuccessful auction, the interest rate moves to a maximum
rate defined for each security. In the event we are able to
successfully liquidate our ARS portfolio we intend to reinvest
these balances into money market or similar investments. Based
on our expected operating cash flows, and our other sources of
cash, we do not anticipate the potential lack of liquidity on
these investments will affect our ability to execute our current
business plan. However, we are uncertain as to when the
liquidity issues related to these investments will improve. If
we still continue to hold the ARS for a period of time, we may
need to reclassify such securities to long-term investments. Any
such reclassification would cause our working capital and
current ratio to decrease.
FINANCIAL
COMMITMENTS AND OFF BALANCE SHEET ARRANGEMENTS
On January 2, 2007, we purchased 100% of the outstanding
stock of Cartesian. On August 3, 2007, we acquired all of
the outstanding membership interests of RVA. On October 5,
2007, we acquired all of the outstanding shares of stock of TWG.
In addition to consideration paid at closing for these
acquisitions, we have contingent purchase price obligations of
approximately $5.7 million, $5.2 million and
$2.8 million, respectively, at December 29, 2007
related to future earn-out consideration based upon the
performance of Cartesian, RVA and TWG after the closing dates.
On February 19, 2008, the independent members of our Board
of Directors approved an executive incentive compensation plan
for fiscal year 2008 (the Plan). The Plan
establishes a cash bonus pool (the Pool) for our
chief executive officer, president and chief operating officer,
and chief financial officer if we meet or exceed a non-GAAP
earnings target of $7.0 million for fiscal year 2008. The
calculation of the non-GAAP earnings target excludes non-cash
charges (e.g., share-based compensation expense, depreciation
and amortization, etc.) and may exclude extraordinary one-time
items to the extent determined to be appropriate by the
Compensation Committee. The amount available for payment from
the Pool (Payout Amount) begins at $800,000 if we
achieve the earnings target. If the earnings target is exceeded,
the Payout Amount increases in accordance with a graduated,
ascending scale ranging from 15% to 25% of the earnings in
excess of the target, provided that the Payout Amount will in no
event exceed $3,000,000. The distribution of the Payout Amount,
if any, among our eligible executive management will be
determined by the Compensation Committee
and/or
independent directors at a later date.
TRANSACTIONS
WITH RELATED PARTIES
During fiscal years 2007 and 2006, we incurred legal fees of
$128,000 and $348,000, respectively, for services provided by
Bingham McCutchen, LLP, a law firm in which a member of our
Board of Directors, Andrew Lipman, owns an equity interest.
Payments made in fiscal year 2007 were in connection with our
acquisition of Cartesian and other potential acquisition
matters. Payments made in fiscal year 2006 were in
26
connection with our acquisitions of Adventis and Cartesian. Our
Board of Directors has affirmatively determined that such
payments do not constitute a material relationship between the
director and the Company and concluded the director is
independent as defined by the NASDAQ corporate governance rules.
All payments were made within the limitations set forth by
NASDAQ Rules as to the qualifications of an independent director.
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.
At the time of the transaction, Behrman Capital and its
affiliates (collectively Behrman), owned 35% of
TMNGs outstanding common stock, and also owned 61% of the
outstanding common stock of Adventis Corporation. Grant G.
Behrman and William M. Matthes, both of whom served on our Board
of Directors at that time, were the Co-Managing Partners of
Behrman. Despite owning a majority of Adventis
Corporations common stock, Behrman did not control
Adventis Corporation at the time of this transaction. Adventis
Corporation was under the control of its senior secured
creditors as it underwent a sale of the business. In order to
execute this purchase, TMNG formed a Special Committee of our
Board of Directors to evaluate and approve the acquisition. The
Special Committee consisted of the four independent board
members not part of TMNG management or affiliated with Behrman.
Behrman received none of the proceeds of this transaction.
As of December 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
December 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 December 29, 2007.
|
|
ITEM 7A.
|
QUALITATIVE
AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
|
Not applicable.
27
|
|
ITEM 8.
|
CONSOLIDATED
FINANCIAL STATEMENTS
|
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
The Management Network Group, Inc.
Overland Park, Kansas
We have audited the accompanying consolidated balance sheets of
The Management Network Group, Inc. and subsidiaries (the
Company) as of December 29, 2007 and
December 30, 2006 and the related consolidated statements
of operations and comprehensive loss, stockholders equity
and cash flows for each of the two years in the period ended
December 29, 2007. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on the financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of the
Company as of December 29, 2007 and December 30, 2006,
and the results of their operations and their cash flows for
each of the two years in the period ended December 29,
2007, in conformity with accounting principles generally
accepted in the United States of America.
As discussed in Note 1 to the consolidated financial
statements, respectively, the Company adopted Statement of
Financial Accounting Standards No. 123R, Share-Based
Payment, using the modified prospective method on
January 1, 2006, and Financial Accounting Standards Board
Interpretation No. 48, Accounting for Uncertainty in
Income Taxes an Interpretation of Statement of
Financial Accounting Standard No. 109, Accounting for
Income Taxes, on December 31, 2006.
|
|
|
|
/s/
|
DELOITTE &
TOUCHE LLP
|
KANSAS CITY, MISSOURI
March 28, 2008
28
THE
MANAGEMENT NETWORK GROUP, INC.
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 29,
|
|
|
December 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except share data)
|
|
|
ASSETS
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
10,022
|
|
|
$
|
11,133
|
|
Short-term investments
|
|
|
17,125
|
|
|
|
27,200
|
|
Receivables:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
13,044
|
|
|
|
5,063
|
|
Accounts receivable unbilled
|
|
|
7,804
|
|
|
|
3,654
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,848
|
|
|
|
8,717
|
|
Less: Allowance for doubtful accounts
|
|
|
(562
|
)
|
|
|
(378
|
)
|
|
|
|
|
|
|
|
|
|
Net Receivables
|
|
|
20,286
|
|
|
|
8,339
|
|
Prepaid and other assets
|
|
|
1,763
|
|
|
|
2,257
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
49,196
|
|
|
|
48,929
|
|
|
|
|
|
|
|
|
|
|
NONCURRENT ASSETS:
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
1,784
|
|
|
|
846
|
|
Goodwill
|
|
|
13,365
|
|
|
|
13,365
|
|
Licenses and identifiable intangible assets, net
|
|
|
11,605
|
|
|
|
1,189
|
|
Other assets
|
|
|
616
|
|
|
|
967
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
76,566
|
|
|
$
|
65,296
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
Trade accounts payable
|
|
$
|
1,927
|
|
|
$
|
1,446
|
|
Accrued payroll, bonuses and related expenses
|
|
|
5,038
|
|
|
|
1,965
|
|
Other accrued liabilities
|
|
|
2,466
|
|
|
|
1,986
|
|
Income tax liabilities
|
|
|
861
|
|
|
|
271
|
|
Deferred revenue
|
|
|
3,554
|
|
|
|
33
|
|
Accrued contingent consideration
|
|
|
1,616
|
|
|
|
|
|
Unfavorable and other contractual obligations
|
|
|
1,668
|
|
|
|
649
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
17,130
|
|
|
|
6,350
|
|
|
|
|
|
|
|
|
|
|
NONCURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
Deferred income tax liabilities
|
|
|
1,368
|
|
|
|
|
|
Unfavorable and other contractual obligations
|
|
|
1,716
|
|
|
|
2,189
|
|
Other noncurrent liabilities
|
|
|
524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noncurrent liabilities
|
|
|
3,608
|
|
|
|
2,189
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Notes 8 and 12)
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY:
|
|
|
|
|
|
|
|
|
Common stock:
|
|
|
|
|
|
|
|
|
Voting $.001 par value, 100,000,000 shares
authorized; 36,185,143 and 35,989,081 (including 200,000
treasury shares) shares issued and outstanding on
December 29, 2007, and December 30, 2006, respectively
|
|
|
36
|
|
|
|
36
|
|
Preferred stock $.001 par value,
10,000,000 shares authorized; no shares issued or
outstanding
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
172,798
|
|
|
|
171,117
|
|
Accumulated deficit
|
|
|
(116,881
|
)
|
|
|
(114,321
|
)
|
Treasury stock, at cost
|
|
|
(345
|
)
|
|
|
(345
|
)
|
Accumulated other comprehensive income
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
220
|
|
|
|
270
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
55,828
|
|
|
|
56,757
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity
|
|
$
|
76,566
|
|
|
$
|
65,296
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
29
THE
MANAGEMENT NETWORK GROUP, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
December 29,
|
|
|
December 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except per share data)
|
|
|
Revenues
|
|
$
|
71,875
|
|
|
$
|
34,013
|
|
Cost of services (includes non-cash share-based compensation
expense of $302 and $560 for the 2007 and 2006 fiscal years,
respectively)
|
|
|
38,263
|
|
|
|
17,549
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
33,612
|
|
|
|
16,464
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Selling, general and administrative (includes non-cash
share-based compensation expense of $1,145 and $2,297 for the
2007 and 2006 fiscal years, respectively)
|
|
|
31,723
|
|
|
|
27,443
|
|
Special Committee investigation
|
|
|
2,560
|
|
|
|
720
|
|
Legal settlement
|
|
|
|
|
|
|
(31
|
)
|
Goodwill, intangible and long-lived asset impairment
|
|
|
|
|
|
|
2,074
|
|
Intangible asset amortization
|
|
|
3,612
|
|
|
|
686
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
37,895
|
|
|
|
30,892
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(4,283
|
)
|
|
|
(14,428
|
)
|
Other income (expense):
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
1,546
|
|
|
|
2,111
|
|
Other, net
|
|
|
452
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
1,998
|
|
|
|
2,110
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax provision
|
|
|
(2,285
|
)
|
|
|
(12,318
|
)
|
Income tax provision
|
|
|
(52
|
)
|
|
|
(52
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(2,337
|
)
|
|
|
(12,370
|
)
|
Other comprehensive (loss) income
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
(50
|
)
|
|
|
123
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$
|
(2,387
|
)
|
|
$
|
(12,247
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per common share
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.07
|
)
|
|
$
|
(0.35
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in calculation of net loss per
common share
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
35,868
|
|
|
|
35,699
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
30
THE
MANAGEMENT NETWORK GROUP, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
December 29,
|
|
|
December 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,337
|
)
|
|
$
|
(12,370
|
)
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Goodwill, intangible and long-lived asset impairment
|
|
|
|
|
|
|
2,074
|
|
Depreciation and amortization
|
|
|
4,872
|
|
|
|
1,094
|
|
Share-based compensation
|
|
|
1,447
|
|
|
|
2,857
|
|
Deferred taxes
|
|
|
(882
|
)
|
|
|
|
|
Gain on disposal of assets
|
|
|
(82
|
)
|
|
|
|
|
Bad debt expense
|
|
|
380
|
|
|
|
263
|
|
Other changes in operating assets and liabilities, net of
business acquisitions:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(54
|
)
|
|
|
(354
|
)
|
Accounts receivable unbilled
|
|
|
(2,552
|
)
|
|
|
(1,095
|
)
|
Prepaid and other assets
|
|
|
1,480
|
|
|
|
(1,163
|
)
|
Trade accounts payable
|
|
|
(322
|
)
|
|
|
(495
|
)
|
Income tax liabilities
|
|
|
113
|
|
|
|
|
|
Deferred revenue
|
|
|
(1,299
|
)
|
|
|
32
|
|
Accrued liabilities
|
|
|
671
|
|
|
|
273
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
1,435
|
|
|
|
(8,884
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchases of short-term investments
|
|
|
(9,325
|
)
|
|
|
(15,750
|
)
|
Proceeds from maturities/sales of short-term investments
|
|
|
19,400
|
|
|
|
27,250
|
|
Acquisition of business, net of cash acquired
|
|
|
(11,011
|
)
|
|
|
(1,509
|
)
|
Acquisition of property and equipment, net
|
|
|
(430
|
)
|
|
|
(553
|
)
|
Disposal of assets
|
|
|
82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
(1,284
|
)
|
|
|
9,438
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Issuance of common stock through employee stock purchase plan
|
|
|
71
|
|
|
|
135
|
|
Repurchase of common stock
|
|
|
|
|
|
|
(345
|
)
|
Payments made on unfavorable and other contractual obligations
|
|
|
(1,390
|
)
|
|
|
(594
|
)
|
Exercise of stock options
|
|
|
163
|
|
|
|
309
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(1,156
|
)
|
|
|
(495
|
)
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate on cash and cash equivalents
|
|
|
(106
|
)
|
|
|
123
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(1,111
|
)
|
|
|
182
|
|
Cash and cash equivalents, beginning of period
|
|
|
11,133
|
|
|
|
10,951
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
10,022
|
|
|
$
|
11,133
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid during period for interest
|
|
|
|
|
|
$
|
1
|
|
|
|
|
|
|
|
|
|
|
Cash paid during period for taxes
|
|
$
|
165
|
|
|
$
|
20
|
|
|
|
|
|
|
|
|
|
|
Accrued property and equipment additions
|
|
$
|
125
|
|
|
$
|
11
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
31
THE
MANAGEMENT NETWORK GROUP, INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
$.001 Par
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Voting
|
|
|
Paid-In
|
|
|
Accumulated
|
|
|
Treasury
|
|
|
Comprehensive
|
|
|
Unearned
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Stock
|
|
|
Income
|
|
|
Compensation
|
|
|
Total
|
|
|
|
(In thousands, except share data)
|
|
|
Balance, December 31, 2005
|
|
|
35,705,520
|
|
|
$
|
36
|
|
|
$
|
168,338
|
|
|
$
|
(101,951
|
)
|
|
$
|
|
|
|
$
|
147
|
|
|
$
|
(522
|
)
|
|
$
|
66,048
|
|
Purchases of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(345
|
)
|
|
|
|
|
|
|
|
|
|
|
(345
|
)
|
Reclassification of unearned compensation related to the
adoption of Statement of Financial Accounting Standards
No. 123R (Note 4)
|
|
|
|
|
|
|
|
|
|
|
(522
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
522
|
|
|
|
|
|
Exercise of options
|
|
|
189,198
|
|
|
|
|
|
|
|
309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
309
|
|
Employee stock purchase plan
|
|
|
91,363
|
|
|
|
|
|
|
|
135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
135
|
|
Non-vested stock grants
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
2,857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,857
|
|
Nonvested stock cancellations
|
|
|
(7,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income Foreign currency
translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
123
|
|
|
|
|
|
|
|
123
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,370
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,370
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 30, 2006
|
|
|
35,989,081
|
|
|
|
36
|
|
|
|
171,117
|
|
|
|
(114,321
|
)
|
|
|
(345
|
)
|
|
|
270
|
|
|
|
|
|
|
|
56,757
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of adopting FIN 48 (Note 7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(223
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(223
|
)
|
Exercise of options
|
|
|
95,906
|
|
|
|
|
|
|
|
163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
163
|
|
Employee stock purchase plan
|
|
|
59,146
|
|
|
|
|
|
|
|
71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71
|
|
Non-vested stock grants
|
|
|
111,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
1,447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,447
|
|
Nonvested stock cancellations
|
|
|
(70,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income Foreign currency
translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(50
|
)
|
|
|
|
|
|
|
(50
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,337
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,337
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 29, 2007
|
|
|
36,185,143
|
|
|
$
|
36
|
|
|
$
|
172,798
|
|
|
$
|
(116,881
|
)
|
|
$
|
(345
|
)
|
|
$
|
220
|
|
|
$
|
|
|
|
$
|
55,828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
32
THE
MANAGEMENT NETWORK GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
1.
|
ORGANIZATION
AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Nature of Operations The Management Network
Group, Inc. (TMNG or the Company) was
founded in 1990 as a management consulting firm specializing in
providing consulting services to the converging communications
industry and the financial services firms that support it. A
majority of the Companys revenues are from customers in
the United States, United Kingdom, and Western Europe.
TMNGs corporate offices are located in Overland Park,
Kansas.
Principles of Consolidation The consolidated
statements include the accounts of TMNG and its wholly-owned
subsidiaries. All significant inter-company accounts and
transactions have been eliminated in consolidation.
|
|
|
|
|
Name of Subsidiary/Acquisition
|
|
Date Formed/Acquired
|
|
|
TMNG Europe Ltd. (TMNG Europe)
|
|
|
March 19, 1997
|
|
The Management Network Group Canada Ltd. (TMNG
Canada)
|
|
|
May 14, 1998
|
|
TMNG.com, Inc.
|
|
|
June 1, 1999
|
|
TMNG Marketing, Inc.
|
|
|
September 5, 2000
|
|
TMNG Technologies, Inc.
|
|
|
September 5, 2001
|
|
Cambridge Strategic Management Group, Inc.
|
|
|
March 6, 2002
|
|
Cambridge Adventis Ltd.
|
|
|
March 1, 2006
|
|
Cartesian Ltd. (Cartesian)
|
|
|
January 2, 2007
|
|
RVA Consulting, LLC (RVA)
|
|
|
August 3, 2007
|
|
TWG Consulting, Inc. (TWG)
|
|
|
October 5, 2007
|
|
On January 2, 2007, the Company acquired one-hundred
percent of the outstanding common stock of Cartesian, a United
Kingdom-based software engineering and consulting firm. On
August 3, 2007, the Company acquired all of the outstanding
membership interests of RVA, a New Jersey based consulting firm
specializing in the communications industry. On October 5,
2007, the Company acquired all of the outstanding shares of
stock of TWG, a privately-held management consulting firm. The
results of Cartesian, RVA and TWG are included in the results of
operations subsequent to their respective dates of acquisition.
Fiscal Year The Company reports its operating
results on a 52/53-week fiscal year basis. The fiscal year end
is determined as the Saturday ending nearest December 31.
The fiscal years ended December 29, 2007 and
December 30, 2006 reported 52 weeks of operating
results and consisted of four equal 13-week quarters. The fiscal
years ended December 29, 2007 and December 30, 2006
are referred to herein as fiscal years 2007 and 2006,
respectively. TMNG Europe, TMNG Canada and Cartesian maintain
year-end dates of December 31.
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
33
THE
MANAGEMENT NETWORK GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 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.
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.
Cash and Cash Equivalents Cash and cash
equivalents include cash on hand and short-term investments with
original maturities of three months or less when purchased.
Short-Term Investments Short-term
investments, which consist of investment-grade auction rate
securities, are classified as available for sale
under the provisions of Statement of Financial Accounting
Standards (SFAS) No. 115, Accounting for
Certain Investments in Debt and Equity Securities.
Accordingly, the short-term investments are reported at fair
value, with any related unrealized gains and losses included as
a separate component of stockholders equity, net of
applicable taxes, when applicable. Realized gains and losses
34
THE
MANAGEMENT NETWORK GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and interest and dividends are included in interest income
within the Consolidated Statements of Operations and
Comprehensive Loss. Historically, auction rate securities reset
every 28 to 35 days; consequently, interest rate movements
did not materially affect the fair value of these investments.
At December 29, 2007 and December 30, 2006 there were
no unrealized gains or losses on short-term investments. See
Note 16 for recent developments with the Companys
auction rate securities portfolio.
Fair Value of Financial Instruments The fair
value of current financial instruments approximates the carrying
value because of the short maturity of these instruments.
Property and Equipment Property and equipment
are stated at cost or acquisition date fair value less
accumulated depreciation and amortization. Maintenance and
repairs are charged to expense as incurred. Depreciation is
based on the estimated useful lives of the assets and is
computed using the straight-line method, and capital leases are
amortized on a straight-line basis over the life of the lease.
Asset lives range from three to seven years for computers and
equipment. Leasehold improvements are capitalized and amortized
over the life of the lease or useful life of the asset,
whichever is shorter.
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, 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 2007, $868,000 of these costs
were expensed as incurred. No software development costs were
capitalized during 2007. No software development costs were
incurred during 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 (exclusive of associated sales and marketing
related costs) were $281,000 in fiscal year 2006. No product
development costs were incurred in fiscal year 2007.
Goodwill The Company accounts for goodwill in
accordance with the provisions of SFAS No. 142,
Accounting for Goodwill and Intangible Assets.
Goodwill represents the excess of purchase price over the fair
value of net assets acquired in business combinations accounted
for as purchases. The Company evaluates goodwill for impairment
on an annual basis on the last day of the first fiscal month of
the fourth quarter and whenever events or circumstances indicate
that these assets may be impaired. The Company determines
impairment by comparing the net assets of each reporting unit to
its respective fair value. In the event a reporting units
carrying value exceeds its fair value, an indication exists that
the reporting unit goodwill may be impaired. In this situation,
the Company must determine the implied fair value of goodwill by
assigning the reporting units fair value to each asset and
liability of the reporting unit. The excess of the fair value of
the reporting unit over the amounts assigned to its assets and
liabilities is the implied fair value of goodwill. An impairment
loss is measured by the difference between the goodwill carrying
value and the implied fair value.
Intangible Assets Intangible assets are
stated at cost or acquisition date fair value less accumulated
amortization, and represent customer relationships acquired in
the acquisitions of Cambridge Strategic Management Group
(CSMG), Cartesian, RVA and TWG, and an investment in
an exclusive marketing license with S3 Matching Technologies.
Amortization is based on estimated useful lives of 3 to
62 months, depending on the nature of the intangible asset,
and is recognized on a straight-line basis.
35
THE
MANAGEMENT NETWORK GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In connection with SFAS No. 144, Accounting for
the Impairment or Disposal of Long-lived Assets, the
Company uses its best estimate, based on reasonable and
supportable assumptions and projections, to review certain
long-lived assets and identifiable intangibles for impairment
whenever events or changes in circumstances indicate that the
carrying amount of these assets might not be recoverable.
Income Taxes The Company recognizes a
liability or asset for the deferred tax consequences of
temporary differences between the tax basis of assets or
liabilities and their reported amounts in the financial
statements. A valuation allowance is provided when, in the
opinion of management, it is more likely than not that some
portion or all of a deferred tax asset will not be realized.
The Company adopted the provisions of Financial Accounting
Standards Board (FASB) Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement 109,
(FIN 48) effective January 1, 2007.
FIN 48 clarifies the accounting for uncertainty in income
taxes recognized in an enterprises financial statements in
accordance with SFAS No. 109, Accounting for
Income Taxes. FIN 48 also prescribes a recognition
threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected
to be taken in a tax return. Additionally, FIN 48 provides
guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure and
transition.
FIN 48 requires that the cumulative effect of this 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 for fiscal year 2007. In addition, the Company
identified approximately $271,000 in liabilities for
unrecognized tax benefits which were previously reserved in
Income tax liabilities on the consolidated balance
sheet. The liability for uncertain tax positions was $524,000 as
of December 29, 2007 and is included in Other
noncurrent liabilities on the 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 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 and penalties accrued related to
unrecognized tax benefits as a component of the income tax
provision. As of December 29, 2007 and December 30,
2006, the total amount of accrued income tax-related interest
and penalties included in the Consolidated Balance Sheet was
$169,000 and $139,000, respectively.
Use of Estimates The preparation of financial
statements in conformity with accounting principles generally
accepted in the United States of America requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Foreign Currency Transactions and Translation
TMNG Europe, TMNG Canada, Cartesian and the international
operations of CSMG conduct business primarily denominated in
their respective local currency. Assets and liabilities have
been translated to U.S. dollars at the period-end exchange
rate. Revenue and expenses have been translated at exchange
rates which approximate the average of the rates prevailing
during each period. Translation adjustments are reported as a
separate component of other comprehensive income in the
consolidated statements of stockholders equity. Realized
and unrealized exchange gains and losses included in results of
operations were insignificant for all periods presented.
Share-Based Compensation Effective
January 1, 2006, the Company adopted
SFAS No. 123R, Share-Based Payment, which
revised SFAS No. 123, Accounting for Stock-based
Compensation. SFAS No. 123R requires all share-based
payment transactions with employees, including grants of
employee stock options, to be recognized as compensation expense
over the requisite service period based on their relative fair
values.
36
THE
MANAGEMENT NETWORK GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Prior to the adoption of SFAS No. 123R, share-based
compensation expense related to employee stock options was not
recognized in the statement of operations if the exercise price
was at least equal to the market value of the common stock on
the grant date, in accordance with Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to
Employees. The Company applied the disclosure provisions
of SFAS No. 123 as amended by SFAS No. 148,
Accounting for Stock-Based Compensation
Transition and Disclosure, as if the fair-value-based
method had been applied in measuring compensation expense.
The Company elected to use the Modified Prospective Application
method for implementing SFAS No. 123R. The modified
prospective transition method requires that share-based
compensation expense be recorded for all new and unvested stock
options, nonvested stock, and employee stock purchase plan
shares that are ultimately expected to vest as the requisite
service is rendered beginning on January 1, 2006, the first
day of the Companys fiscal year 2006. Share-based
compensation expense for awards granted prior to adoption of
SFAS No. 123R is based on the grant date fair-value as
determined under the pro forma provisions of
SFAS No. 123. See Note 4 for a full discussion of
the Companys share-based compensation arrangements.
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 No. 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 and
nonvested stock in the calculation of diluted loss per share for
fiscal years 2007 and 2006 as the Company reported a net loss
for these periods and the effect would have been anti-dilutive.
Recent Accounting Pronouncements In September
2006, the FASB issued SFAS No. 157, Fair Value
Measurements. This statement defines fair value,
establishes a framework for measuring fair value in generally
accepted accounting principles and expands disclosures about
fair value measurements. SFAS No. 157 is effective for
fiscal years beginning after November 15, 2007 and interim
periods within those fiscal years. In February 2008, the FASB
issued Staff Position
157-1,
Application of FASB Statement No. 157 to FASB
Statement No. 13 and Other Accounting Pronouncements That
Address Fair Value Measurements for Purposes of Lease
Classification or Measurement under Statement 13,
(FSP 157-1)
which amends SFAS 157 to exclude SFAS No. 13,
Accounting for Leases, and other accounting
pronouncements that address fair value measurements for purposes
of lease classification or measurement under Statement 13, with
the exception of assets acquired and liabilities assumed in a
business combination. In February 2008, the FASB issued Staff
Position
157-2,
Effective Date of FASB Statement No. 157,
(FSP 157-2)
which delays the effective date of SFAS 157 for
nonfinancial assets and nonfinancial liabilities, except for
items that are recognized or disclosed at fair value in the
financial statements on a recurring basis. The Company is
currently evaluating the impact, if any, that the adoption of
SFAS No. 157,
FSP 157-1,
and
FSP 157-2
will have 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
37
THE
MANAGEMENT NETWORK GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
earnings at each subsequent reporting date.
SFAS No. 159 is effective for fiscal years beginning
after November 15, 2007. The adoption of this statement
will have no impact on the Companys consolidated financial
statements as we do not intend to elect to apply the provisions.
In June 2007, the FASBs EITF issued EITF Issue
No. 06-11
Accounting for Income Tax Benefits of Dividends on
Share-Based Payment Awards. This issue requires that the
tax benefits related to dividend equivalents paid on restricted
stock units, which are expected to vest, be recorded as an
increase to additional paid-in capital.
EITF 06-11
is effective prospectively to the income tax benefits on
dividends declared in fiscal years beginning after
December 15, 2007. The adoption of this issue will have no
impact on the Companys consolidated financial statements.
In December 2007, the SEC issued Staff Accounting
Bulletin No. 110 (SAB No. 110).
SAB No. 110 expresses the staffs view regarding
the use of the simplified method, as discussed in
SAB No. 107, in developing an estimate of the expected
term of plain vanilla share options in accordance
with SFAS No. 123R, Accounting for Shared Base
Payment. At the time SAB No. 107 was issued, the
SEC staff believed that more detailed external information about
employee exercise behavior would, over time, become readily
available to companies. Therefore, the SEC staff did not expect
companies to use the simplified method for share option grants
after December 31, 2007. SAB No. 110 acknowledges
that such detailed information about employee exercise behavior
may not be widely available by December 31, 2007.
Accordingly, SAB No. 110 would allow, under certain
circumstances, the use of the simplified method beyond
December 31, 2007. The Company has evaluated the impact of
SAB No. 110 and will continue to use the simplified
method for fiscal year 2008.
In December 2007, the FASB issued SFAS No. 141R,
Business Combinations, which replaces FAS 141.
SFAS No. 141R establishes principles and requirements
for how an acquirer in a business combination recognizes and
measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any controlling interest;
recognizes and measures the goodwill acquired in the business
combination or a gain from a bargain purchase; and determines
what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the
business combination. SFAS No. 141R is to be applied
prospectively to business combinations for which the acquisition
date is on or after the beginning of an entitys fiscal
year that begins after December 15, 2008. The Company will
assess the impact of SFAS No. 141R if and when a future
acquisition occurs.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements an amendment of ARB No. 51.
SFAS No. 160 establishes new accounting and reporting
standards for the noncontrolling interest in a subsidiary and
for the deconsolidation of a subsidiary. Specifically, this
statement requires the recognition of a noncontrolling interest
(minority interest) as equity in the consolidated financial
statements and separate from the parents equity. The
amount of net income attributable to the noncontrolling interest
will be included in consolidated net income on the face of the
income statement. SFAS No. 160 clarifies that changes in a
parents ownership interest in a subsidiary that do not
result in deconsolidation are equity transactions if the parent
retains it controlling financial interest. In addition, this
statement requires that a parent recognize a gain or loss in net
income when a subsidiary is deconsolidated. Such gain or loss
will be measured using the fair value of the noncontrolling
equity investment on the deconsolidation date.
SFAS No. 160 also includes expanded disclosure
requirements regarding the interests of the parent and its
noncontrolling interest. SFAS No. 160 is effective for
fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008. Earlier adoption
is prohibited. The adoption of SFAS No. 160 is not
expected to have an impact on the Companys consolidated
financial statements.
38
THE
MANAGEMENT NETWORK GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
TWG
Consulting, Inc.
On October 5, 2007, the Company acquired all of the
outstanding shares of stock of 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 the entire ownership interest in TWG for
a total cash purchase price of $1.5 million, including
approximately $1.2 million paid for TWGs working
capital. The Company incurred approximately $0.1 million in
transaction costs related to the acquisition. In the event TWG
achieves certain performance targets, total consideration under
the Agreement could increase to $4.3 million, including
$1.3 million of possible contingent cash consideration and
approximately 0.7 million shares of TMNG common stock
valued at $1.5 million based on the share price at the date
of close. TWG 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. The
fair value of the net assets acquired in the TWG acquisition
exceeded the total consideration paid by the Company, resulting
in negative goodwill of $0.3 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 $2.8 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 fiscal year ended
December 29, 2007.
The aggregate purchase price of $1.9 million consisted of
the following (in thousands):
|
|
|
|
|
Cash (including transaction costs)
|
|
$
|
1,599
|
|
Accrued contingent consideration
|
|
|
263
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
1,862
|
|
|
|
|
|
|
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
allocation of the purchase price assigned to identifiable
intangible assets was determined by management using applicable
fair-value techniques.
At
October 5, 2007
(Amounts in Thousands)
|
|
|
|
|
Acquired cash
|
|
$
|
576
|
|
Other current assets
|
|
|
891
|
|
Customer relationships
|
|
|
300
|
|
Employment agreements
|
|
|
300
|
|
Customer backlog
|
|
|
100
|
|
|
|
|
|
|
Total assets acquired
|
|
|
2,167
|
|
Current liabilities assumed
|
|
|
305
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
1,862
|
|
|
|
|
|
|
39
THE
MANAGEMENT NETWORK GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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. As applicable, intangible assets are
amortized over a period that is shorter than the anticipated
useful life to ensure that the recognition of the costs better
corresponds to their anticipated contribution to cash flows.
|
|
|
|
|
|
|
Amortization
|
|
Identifiable Intangible Asset
|
|
period
|
|
|
|
(In months)
|
|
|
Customer relationships
|
|
|
36
|
|
Employment agreements
|
|
|
48-60
|
|
Customer backlog
|
|
|
3
|
|
The transaction was structured as a stock acquisition, therefore
any goodwill and specifically identifiable intangible assets
recorded in the transaction will not be deductible for income
tax purposes.
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
$6.7 million in cash 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
was contingent on the continued employment of one of the selling
members and was expensed over the employees 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. 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 $0.7 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 $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 fiscal year ended
December 29, 2007.
The aggregate purchase price of $7.6 million consisted of
the following (in thousands):
|
|
|
|
|
Cash (including transaction costs)
|
|
$
|
6,872
|
|
Accrued contingent consideration
|
|
|
749
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
7,621
|
|
|
|
|
|
|
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
40
THE
MANAGEMENT NETWORK GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
to further refinement. The allocation of the purchase price
assigned to identifiable intangible assets was determined by
management using applicable fair-value techniques.
At
August 3, 2007
(Amounts in Thousands)
|
|
|
|
|
Acquired cash
|
|
$
|
5,642
|
|
Other current assets
|
|
|
3,121
|
|
Furniture, fixtures and equipment
|
|
|
369
|
|
Customer relationships
|
|
|
3,400
|
|
Employment agreements
|
|
|
400
|
|
Customer backlog
|
|
|
2,100
|
|
|
|
|
|
|
Total assets acquired
|
|
|
15,032
|
|
Deferred revenue
|
|
|
4,575
|
|
Other current liabilities assumed
|
|
|
2,442
|
|
Noncurrent liabilities assumed
|
|
|
394
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
7,411
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
7,621
|
|
|
|
|
|
|
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. As applicable, intangible assets are
amortized over a period that is shorter than the anticipated
useful life to ensure that the recognition of the costs better
corresponds to their anticipated contribution to cash flows.
|
|
|
|
|
|
|
Amortization
|
|
Identifiable Intangible Asset
|
|
period
|
|
|
|
(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 and specifically
identifiable intangible assets recorded in the transaction will
be deductible for income tax purposes.
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 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. 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
41
THE
MANAGEMENT NETWORK GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
$4.0 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 $3.5 million
was earned and paid during fiscal year ended December 29,
2007. 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 December 29, 2007.
The aggregate purchase price of $11.1 million consisted of
the following (in thousands):
|
|
|
|
|
Cash
|
|
$
|
7,030
|
|
Accrued contingent consideration
|
|
|
4,044
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
11,074
|
|
|
|
|
|
|
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 assigned to
identifiable intangible assets was determined by management
using applicable fair-value techniques.
At
January 2, 2007
(Amounts in Thousands)
|
|
|
|
|
Acquired cash
|
|
$
|
1,787
|
|
Other current assets
|
|
|
6,421
|
|
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
|
|
|
16,834
|
|
|
|
|
|
|
Current liabilities assumed
|
|
|
3,332
|
|
Deferred income tax liabilities recognized
|
|
|
2,428
|
|
|
|
|
|
|
Total liabilities assumed and recognized
|
|
|
5,760
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
11,074
|
|
|
|
|
|
|
42
THE
MANAGEMENT NETWORK GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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. As applicable, intangible assets 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.
|
|
|
|
|
|
|
Amortization
|
|
Identifiable Intangible Asset
|
|
period
|
|
|
|
(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 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. (Adventis), 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. Adventis is a strategy consulting
practice, with service offerings including analyses of industry
and competitive environments; product and distribution
strategies; finance, including business case development,
modeling, cost analysis and benchmarking; and due diligence and
risk assessment. The acquired international operations of
Adventis 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 $0.4 million in net working capital
deficiency, which included $0.3 million in professional
fees and other costs related directly to the acquisition.
The measurement of the respective assets and liabilities
recognized in connection with the acquisitions was made in
accordance with the provisions SFAS No. 141. The
following table summarizes the estimated fair value of the
assets acquired and liabilities assumed as of the date of
acquisitions. The allocation assigned to identifiable intangible
assets was determined by management using applicable fair-value
techniques.
|
|
|
|
|
|
|
At April 3,
|
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Current assets
|
|
$
|
1,393
|
|
Property, plant and equipment
|
|
|
126
|
|
Employment agreements
|
|
|
35
|
|
Customer backlog
|
|
|
168
|
|
Trade name
|
|
|
102
|
|
Goodwill
|
|
|
1,496
|
|
|
|
|
|
|
Total assets acquired
|
|
|
3,320
|
|
Current liabilities assumed
|
|
|
1,825
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
1,495
|
|
|
|
|
|
|
43
THE
MANAGEMENT NETWORK GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Following the Companys purchase of the assets of Adventis
Ltd., on July 24, 2006, TMNG acquired certain US-based
assets of Adventis Corporation for $172,000, including
acquisition costs. The purchased assets include all intellectual
property owned or licensed by Adventis Corporation and the
hardware or devices on which it is stored (including all
trademarks, service marks and logos, trades secrets and methods,
client information, rights to the Adventis Corporation Web site,
Board of Advisors rights, and the Adventis Corporation name).
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. 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 Company performed its annual impairment test for
Adventis goodwill in accordance with SFAS No. 142,
Accounting for Goodwill and Intangible Assets. Based
on an analysis of projected future cash flows and utilizing the
assistance of an independent valuation firm, the Company
determined that the carrying value of goodwill acquired in the
Adventis acquisition exceeded its fair market value and recorded
an impairment loss of $1.5 million to write-off the
balance. In conjunction with the SFAS No. 142 annual
impairment test, the Company evaluated other intangible assets
for potential impairment in accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets. In accordance with the provisions of
SFAS No. 144, the Company determined the carrying
value of the Adventis trade name exceeded its fair market value
and recorded an impairment loss equal to its remaining book
value of $252,000. Additionally, the Company determined the
carrying value of the Adventis property and equipment exceeded
its fair market value and recorded an impairment loss equal to
its remaining book value of $329,000 (see Note 6).
No residual value was assigned to the employment agreements or
customer backlog. Both intangible assets had a weighted average
useful life of 6 months and were amortized on a
straight-line basis. As of September 30, 2006, amounts
assigned to employment agreements and customer backlog were
fully amortized.
The transaction was structured as a taxable transaction to
Adventis Corporation, therefore the goodwill and specifically
identifiable intangible assets recorded in the transaction will
be deductible for income tax purposes.
Behrman Capital and its affiliates (collectively
Behrman), an owner of 35% of TMNGs outstanding
common stock at the time of the transaction, also owned 61% of
the outstanding common stock of Adventis Corporation. Grant G.
Behrman and William M. Matthes, who served on the Companys
Board of Directors at the time of the transaction, were the
Co-Managing Partners of Behrman. Despite owning a majority of
Adventis Corporations common stock, Behrman did not
control Adventis Corporation at the time of this transaction.
Adventis Corporation was under the control of its senior secured
creditors as it underwent a sale of the business. In order to
execute this purchase, TMNG formed a Special Committee of the
Companys Board of Directors to evaluate and approve the
acquisition. The Special Committee consisted of the four
independent board members not part of TMNG management or
affiliated with Behrman. Behrman received none of the proceeds
of this transaction.
Pro
Forma Combined Results
The operating results of Adventis, Cartesian, RVA and TWG have
been included in the Consolidated Statements of Operations and
Comprehensive Loss from their respective dates of purchase. The
following reflects pro forma combined results of the Company and
each of the acquired businesses 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 results of operations of the combined
entities.
44
THE
MANAGEMENT NETWORK GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
December 29,
|
|
|
December 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Total revenues
|
|
$
|
91,935
|
|
|
$
|
67,730
|
|
Net income (loss)
|
|
$
|
5,401
|
|
|
$
|
(10,484
|
)
|
Basic and diluted net loss per common share
|
|
$
|
0.15
|
|
|
$
|
(0.29
|
)
|
|
|
3.
|
GOODWILL
AND OTHER INTANGIBLE ASSETS
|
The changes in the carrying amount of goodwill as of
December 30, 2006 are as follows (in thousands):
|
|
|
|
|
|
|
Management
|
|
|
|
Consulting
|
|
|
|
Segment
|
|
|
Balance as of December 31, 2005
|
|
$
|
13,365
|
|
2006 Adventis Goodwill (See Note 2)
|
|
|
1,496
|
|
2006 impairment loss on Adventis Goodwill (See Note 2)
|
|
|
(1,496
|
)
|
|
|
|
|
|
Balance as of December 30, 2006
|
|
$
|
13,365
|
|
|
|
|
|
|
There were no changes in the carrying amount of goodwill for the
fiscal year ended December 29, 2007.
Included in intangible assets, net are the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 29, 2007
|
|
|
December 30, 2006
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Accumulated
|
|
|
|
Cost
|
|
|
Amortization
|
|
|
Cost
|
|
|
Amortization
|
|
|
Customer relationships
|
|
$
|
6,090
|
|
|
$
|
(977
|
)
|
|
$
|
1,908
|
|
|
$
|
(1,879
|
)
|
Acquired software
|
|
|
2,988
|
|
|
|
(747
|
)
|
|
|
|
|
|
|
|
|
Employment agreements
|
|
|
2,692
|
|
|
|
(736
|
)
|
|
|
|
|
|
|
|
|
Customer backlog
|
|
|
2.598
|
|
|
|
(1,373
|
)
|
|
|
|
|
|
|
|
|
Tradename
|
|
|
398
|
|
|
|
(199
|
)
|
|
|
|
|
|
|
|
|
S3 license agreement
|
|
|
1,500
|
|
|
|
(629
|
)
|
|
|
1,500
|
|
|
|
(340
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
16,266
|
|
|
$
|
(4,661
|
)
|
|
$
|
3,408
|
|
|
$
|
(2,219
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The customer relationships of $1.9 million as of
December 30, 2006 were fully amortized during 2007.
Intangible amortization expense for the fiscal year ended
December 29, 2007 and December 30, 2006 was $4,362,000
and $686,000, respectively, including $750,000 reported in cost
of services for the fiscal year ended December 29, 2007.
Future intangible amortization expense is estimated to be as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
Intangible
|
|
|
|
Total Estimated
|
|
|
Amortization to
|
|
|
|
Intangible
|
|
|
be Included in
|
|
Future Period
|
|
Amortization
|
|
|
Cost of Services
|
|
|
Fiscal year 2008
|
|
$
|
4,874
|
|
|
$
|
747
|
|
Fiscal years 2009 2012
|
|
|
6,731
|
|
|
|
1,494
|
|
45
THE
MANAGEMENT NETWORK GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
4.
|
SHARE-BASED
COMPENSATION
|
In December 2004, the FASB issued SFAS No. 123R,
Share-Based Payment. SFAS No. 123R is a
revision of SFAS No. 123, Accounting for
Stock-based Compensation, and supersedes Accounting
Principles Board Opinion (APB) No. 25,
Accounting for Stock Issued to Employees, and its
related implementation guidance. SFAS No. 123R focuses
primarily on accounting for transactions in which an entity
obtains employee and non-employee services in exchange for
share-based payment transactions.
SFAS No. 123R establishes fair value as the
measurement objective in accounting for share-based payment
arrangements and requires all companies to apply a
fair-value-based measurement method in accounting for generally
all share-based payment transactions with employees and
non-employees.
On January 1, 2006, the Company adopted
SFAS No. 123R using the modified prospective
transition method. Accordingly, prior period amounts were not
restated for the adoption of SFAS No. 123R; however,
the balance presented as unearned compensation on non-vested
shares (restricted stock) and prior stock options granted with
intrinsic value within stockholders equity has been
reclassified to additional paid-in capital as of January 1,
2006. The adoption of the policy to net estimated forfeitures
was immaterial, therefore no cumulative effect resulted. The
Company elected to adopt the alternative transition method to
account for the tax effects of share-based payment awards as
provided in FASB Staff Position FAS 123(R)-3:
Transition Election Related to Accounting for the Tax
Effects of Share-Based Payment Awards. Compensation
expense is based on the calculated fair value of the awards and
is expensed over the service period (generally the vesting
period). Prior to the adoption of SFAS No. 123R, the
Company utilized the intrinsic value methodology in accounting
for share-based compensation for employees and non-employee
directors in accordance with the provisions of APB No. 25 and
related Interpretations.
Under the modified prospective transition method, compensation
cost associated with stock options and nonvested stock for
fiscal year 2006 includes: (a) compensation cost for awards
granted prior to, but not yet vested as of January 1, 2006,
based on the grant date fair value estimated in accordance with
the original provisions of SFAS No. 123,
Accounting for Stock-Based Compensation and
(b) compensation cost for awards granted subsequent to
January 1, 2006, based on the grant date fair value under
SFAS No. 123R.
The Company estimates the fair value of its stock options and
stock issued under the Employee Stock Purchase Plan using the
Black-Scholes-Merton option pricing model. Groups of employees
or non-employee directors that have similar historical and
expected exercise behavior are considered separately for
valuation purposes. The table below shows the weighted average
of the assumptions used in estimating the fair value of stock
options granted during fiscal years 2007, 2006 and 2005:
|
|
|
|
|
|
|
Fiscal Year
|
|
Fiscal Year
|
|
|
2007
|
|
2006
|
|
Risk-free interest rate
|
|
4.7%
|
|
4.8%
|
Expected life
|
|
6.2 years
|
|
6.2 years
|
Expected volatility factor
|
|
64%
|
|
82%
|
Expected dividend rate
|
|
0%
|
|
0%
|
The risk-free interest rate is based on the U.S. Treasury
yield at the time of grant for a term equal to the expected life
of the stock option; the expected life was determined using the
simplified method of estimating the life as allowed under
SAB No. 107; and the expected volatility is based on
the historical volatility of the Companys stock price for
a period of time equal to the expected life of the stock option.
Nearly all of the Companys share-based compensation
arrangements utilize graded vesting schedules where a portion of
the grant vests annually over a period of two to four years. The
Company has a policy of recognizing compensation expense for
awards with graded vesting over the requisite service period for
each
46
THE
MANAGEMENT NETWORK GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
separately vesting portion of the award as if the award was,
in-substance, multiple awards. This policy has the effect of
accelerating the recognition of expense when compared to a
straight-line amortization methodology.
As of December 29, 2007, the Company has three share-based
compensation plans, which are described below. The compensation
cost that has been charged against income for those plans under
SFAS No. 123R was $1.2 million and $2.9 million
during 2007 and 2006, respectively. No income tax benefit
related to share-based payment arrangements pursuant to these
plans was realized in 2007. In addition, no compensation costs
related to these arrangements were capitalized in either year.
As of December 29, 2007, unrecognized compensation cost,
net of estimated forfeitures, related to the unvested portion of
all share-based compensation arrangements was approximately
$2.9 million and is expected to be recognized over a
weighted-average period of approximately 21 months. The
Company has historically issued and expects to continue to issue
new shares to satisfy stock option exercises, vesting of
nonvested stock or purchases of shares under the Employee Stock
Purchase Plan.
1998
EQUITY INCENTIVE PLAN
Stock
Options
The Companys 1998 Equity Incentive Plan, as amended and
restated, (the 1998 Plan) is a shareholder approved
plan, which provides for the granting of incentive stock options
and nonqualified stock options to employees, and nonqualified
stock options and nonvested stock to employees, directors and
consultants. The 1998 Plan will expire in September 2009. As of
December 29, 2007, the Company has 4,143,278 shares of
the Companys common stock available for issuance upon
exercise of outstanding options under the 1998 Plan. Incentive
stock options are granted at an exercise price of not less than
market value per share of the common stock on the date of grant
as determined by the Board of Directors. Vesting and exercise
provisions are determined by the Board of Directors. Between
1999 and 2006, however, the vesting and exercise provisions of
most stock option grants, other than those made to executive
officers and directors, were determined by management under an
apparent or de facto delegation of such authority by the
Board of Directors. Although the 1998 Plan does not expressly
authorize such delegation, the Board of Directors has determined
that these will be recognized as valid option grants.
As of December 29, 2007, all options granted under the 1998
Plan were non-qualified stock options. Options granted under the
1998 Plan generally become exercisable over a three to four year
period beginning on the date of grant. Options granted under the
1998 Plan have a maximum term of ten years.
47
THE
MANAGEMENT NETWORK GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of the option activity of the Companys 1998 Plan
as of December 29, 2007 and changes during the year then
ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Price
|
|
|
Term
|
|
|
Value
|
|
|
Outstanding at December 30, 2006
|
|
|
5,465,594
|
|
|
$
|
3.78
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
2,206,275
|
|
|
$
|
2.19
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(95,906
|
)
|
|
$
|
1.69
|
|
|
|
|
|
|
|
|
|
Forfeited/cancelled
|
|
|
(2,781,622
|
)
|
|
$
|
3.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 29, 2007
|
|
|
4,794,341
|
|
|
$
|
3.47
|
|
|
|
7.3 years
|
|
|
$
|
1,507,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested and expected to be vested at December 29,
2007
|
|
|
3,961,643
|
|
|
$
|
3.73
|
|
|
|
7.0 years
|
|
|
$
|
1,285,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at December 29, 2007
|
|
|
2,055,522
|
|
|
$
|
5.14
|
|
|
|
4.9 years
|
|
|
$
|
727,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value of options granted during the period
|
|
|
|
|
|
$
|
1.40
|
|
|
|
|
|
|
|
|
|
The weighted average grant date fair value of options granted
during 2006 was $1.63. The total intrinsic value of options
exercised was $36,000 and $123,000 during 2007 and 2006,
respectively. As of December 29, 2007, unrecognized
compensation cost, net of estimated forfeitures, related to the
unvested portion of stock options issued under the 1998 Plan was
approximately $2.0 million and is expected to be recognized
over a weighted-average period of approximately 20 months.
Nonvested
Stock
As of December 29, 2007, the Company had
1,034,500 shares of the Companys common stock
available for grant as nonvested stock under the 1998 Plan. The
shares are subject to restriction based upon a two to four year
vesting schedule. The fair value of nonvested share awards is
determined based on the closing trading price of the
Companys common stock on the grant date.
A summary of the status of nonvested stock granted under the
1998 Plan as of December 29, 2007 and changes during the
year 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
|
|
|
(56,750
|
)
|
|
$
|
2.22
|
|
Forfeited/cancelled
|
|
|
(70,000
|
)
|
|
$
|
2.48
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 29, 2007
|
|
|
107,500
|
|
|
$
|
2.24
|
|
|
|
|
|
|
|
|
|
|
The weighted average grant date fair value of nonvested stock
granted during 2006 was $2.10. As of December 29, 2007,
there was $49,000 of total unrecognized compensation cost
related to nonvested stock granted under the 1998 Plan. The cost
is expected to be recognized over a weighted average period of
17 months. The total fair value of shares vested was
$95,000 and $197,000 during 2007 and 2006, respectively.
48
THE
MANAGEMENT NETWORK GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In addition to the 12,500 of nonvested stock granted during 2007
under the 1998 Plan, the Company also issued 98,510 shares
of nonvested stock as part of the acquisition of RVA. The
vesting of these nonvested shares was contingent on the
continued employment of one of the selling members.
Approximately $0.2 million was expensed over the
employees service period of three months.
2000
SUPPLEMENTAL STOCK PLAN
As of December 29, 2007, the Company has
2,383,058 shares of the Companys common stock
available for issuance upon exercise of outstanding options
under the 2000 Supplemental Stock Plan (the 2000
Plan). The 2000 Plan provides the Companys common
stock for the granting of nonqualified stock options to
employees and is not subject to shareholder approval. Vesting
and exercise provisions are determined by the Board of
Directors. Options granted under the plan generally become
exercisable over a period of up to four years beginning on the
date of grant and have a maximum term of ten years.
A summary of the option activity of the Companys 2000 Plan
as of December 29, 2007 and changes during the year then
ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Price
|
|
|
Term
|
|
|
Value
|
|
|
Outstanding at December 30, 2006
|
|
|
1,121,972
|
|
|
$
|
4.02
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
878,500
|
|
|
$
|
2.31
|
|
|
|
|
|
|
|
|
|
Forfeited/cancelled
|
|
|
(600,736
|
)
|
|
$
|
4.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 29, 2007
|
|
|
1,399,736
|
|
|
$
|
2.58
|
|
|
|
8.3 years
|
|
|
$
|
263,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested and expected to be vested at December 29,
2007
|
|
|
1,084,290
|
|
|
$
|
2.67
|
|
|
|
8.0 years
|
|
|
$
|
192,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at December 29, 2007
|
|
|
354,646
|
|
|
$
|
3.44
|
|
|
|
5.1 years
|
|
|
$
|
45,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value of options granted during the period
|
|
|
|
|
|
$
|
1.45
|
|
|
|
|
|
|
|
|
|
The weighted average fair value of options granted during 2006
was $1.61. There were no options exercised during 2007. The
total intrinsic value of options exercised during 2006 was
$1,000. As of December 29, 2007, unrecognized compensation
cost, net of estimated forfeitures, related to the unvested
portion of stock options issued under the 2000 Plan was
approximately $882,000 and is expected to be recognized over a
weighted-average period of approximately 23 months.
EMPLOYEE
STOCK PURCHASE PLAN
Under the Employee Stock Purchase Plan (ESPP), shares of the
Companys common stock may be purchased at six-month
intervals at 85% of the lower of the fair market value on the
first day of the enrollment period or on the last day of each
six-month period over the subsequent two years. Employees may
purchase shares through a payroll deduction program having a
value not exceeding 15% of their gross compensation during an
offering period. During 2007, the Company recognized net expense
of $50,000 in connection with SFAS No. 123R associated with
the ESPP.
49
THE
MANAGEMENT NETWORK GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
5.
|
BUSINESS
SEGMENTS, MAJOR CUSTOMERS AND SIGNIFICANT GROUP CONCENTRATIONS
OF CREDIT RISK
|
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 five
operating segments (Operations, Domestic Strategy, International
Strategy, RVA and TWG) which are aggregated into one reportable
segment. Management Consulting Services includes consulting
services related to strategy and business planning, market
research and analysis, organizational development, knowledge
management, marketing and customer relationship management,
program management, billing system support, operating system
support, revenue assurance, and corporate investment services.
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 $0.9 million during
2007. The Company had one reporting segment during 2006, the
Management Consulting Services segment. In addition, in its
administrative division, entitled Not Allocated to
Segments, the Company accounts for non-operating activity
and the costs of providing corporate and other administrative
services to the segment.
Summarized financial information concerning the Companys
reportable segments is shown in the following table (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management
|
|
|
|
|
|
Not
|
|
|
|
|
|
|
Consulting
|
|
|
Software
|
|
|
Allocated to
|
|
|
|
|
|
|
Services
|
|
|
Solutions
|
|
|
Segments
|
|
|
Total
|
|
|
As of and for the fiscal year ended December 29, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
47,656
|
|
|
$
|
24,219
|
|
|
|
|
|
|
$
|
71,875
|
|
Income (loss) from operations
|
|
|
17,089
|
|
|
|
7,646
|
|
|
$
|
(29,018
|
)
|
|
|
(4,283
|
)
|
Interest income
|
|
|
|
|
|
|
|
|
|
|
1,546
|
|
|
|
1,546
|
|
Income (loss) before income tax provision
|
|
|
17,089
|
|
|
|
7,646
|
|
|
|
(27,020
|
)
|
|
|
(2,285
|
)
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
4,872
|
|
|
|
4,872
|
|
Total assets
|
|
$
|
13,372
|
|
|
$
|
6,914
|
|
|
$
|
56,280
|
|
|
$
|
76,566
|
|
As of and for the fiscal year ended December 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
34,013
|
|
|
|
|
|
|
|
|
|
|
$
|
34,013
|
|
Income (loss) from operations
|
|
|
10,224
|
|
|
|
|
|
|
$
|
(24,652
|
)
|
|
|
(14,428
|
)
|
Interest Income
|
|
|
|
|
|
|
|
|
|
|
2,111
|
|
|
|
2,111
|
|
Income (loss) before income tax provision
|
|
|
10,224
|
|
|
|
|
|
|
|
(22,542
|
)
|
|
|
(12,318
|
)
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
1,094
|
|
|
|
1,094
|
|
Total assets
|
|
$
|
8,339
|
|
|
|
|
|
|
$
|
56,957
|
|
|
$
|
65,296
|
|
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
50
THE
MANAGEMENT NETWORK GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
assets. Assets not assigned to segments include cash and cash
equivalents, property and equipment, goodwill and intangible
assets and deferred tax assets.
Revenues earned in the United States and internationally based
on the location where the services are performed are as follows
(amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
Loss Before Income Tax Provision
|
|
|
|
FY
|
|
|
FY
|
|
|
FY
|
|
|
FY
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
United States
|
|
$
|
39,610
|
|
|
$
|
26,815
|
|
|
$
|
(1,259
|
)
|
|
$
|
(9,711
|
)
|
International:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United Kingdom
|
|
|
29,835
|
|
|
|
4,631
|
|
|
|
(948
|
)
|
|
|
(1,677
|
)
|
Germany
|
|
|
745
|
|
|
|
1,686
|
|
|
|
(24
|
)
|
|
|
(611
|
)
|
Ireland
|
|
|
515
|
|
|
|
|
|
|
|
(16
|
)
|
|
|
|
|
Spain
|
|
|
325
|
|
|
|
|
|
|
|
(10
|
)
|
|
|
|
|
Japan
|
|
|
220
|
|
|
|
668
|
|
|
|
(7
|
)
|
|
|
(242
|
)
|
Monaco
|
|
|
207
|
|
|
|
|
|
|
|
(7
|
)
|
|
|
|
|
Other
|
|
|
418
|
|
|
|
213
|
|
|
|
(14
|
)
|
|
|
(77
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
71,875
|
|
|
$
|
34,013
|
|
|
$
|
(2,285
|
)
|
|
$
|
(12,318
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Major customers in terms of significance to TMNGs revenues
(i.e. in excess of 10% of revenues) for fiscal years 2007 and
2006, and accounts receivable as of December 29, 2007 and
December 30, 2006 were as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
Accounts Receivable
|
|
|
|
Fiscal
|
|
|
Fiscal
|
|
|
|
|
|
|
|
|
|
Year
|
|
|
Year
|
|
|
December 29,
|
|
|
December 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Customer A
|
|
$
|
18,102
|
|
|
|
|
|
|
$
|
1,448
|
|
|
|
|
|
Customer B
|
|
$
|
9,333
|
|
|
$
|
387
|
|
|
$
|
2,829
|
|
|
$
|
3
|
|
Customer C
|
|
$
|
4,210
|
|
|
$
|
5,200
|
|
|
$
|
1,527
|
|
|
$
|
513
|
|
Revenues of $12.5M and $5.6M for Customer A were reported within
the Software Solutions and Management Consulting Services
segments, respectively, in fiscal year 2007. Revenues from
Customers B and C were reported within the Management Consulting
Services segment in both fiscal years 2007 and 2006. Revenues
from the Companys ten most significant customers accounted
for approximately 73% and 62% of revenues for fiscal years 2007
and 2006, respectively.
Substantially all of TMNGs receivables are obligations of
companies in the communications, media and entertainment
industries. The Company generally does not require collateral or
other security on its accounts receivable. The credit risk on
these accounts is controlled through credit approvals, limits
and monitoring procedures. The Company records bad debt expense
based on judgment about the anticipated default rate on
receivables owed to TMNG at the end of the reporting period.
That judgment is based on the Companys uncollected account
experience in prior years and the ongoing evaluation of the
credit status of TMNGs customers and the communications
industry in general.
51
THE
MANAGEMENT NETWORK GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
6.
|
PROPERTY
AND EQUIPMENT
|
|
|
|
|
|
|
|
|
|
|
|
December 29,
|
|
|
December 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Furniture and fixtures
|
|
$
|
1,081
|
|
|
$
|
714
|
|
Software and computer equipment
|
|
|
3,028
|
|
|
|
2,321
|
|
Leasehold improvements
|
|
|
1,200
|
|
|
|
823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,309
|
|
|
|
3,858
|
|
Less: Accumulated depreciation and amortization
|
|
|
3,525
|
|
|
|
3,012
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,784
|
|
|
$
|
846
|
|
|
|
|
|
|
|
|
|
|
During the fourth quarter of fiscal year 2006, in conjunction
with the SFAS No. 142 annual impairment test, the
Company evaluated long-lived assets for potential impairment in
accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. In accordance
with the provisions of SFAS No. 144, the Company
determined the carrying value of the Adventis property and
equipment exceeded its fair market value and recorded an
impairment loss equal to its remaining book value of $329,000.
Depreciation and amortization expense on property and equipment
was $510,000 and $408,000 for fiscal years 2007 and 2006,
respectively.
For fiscal years 2007 and 2006, the income tax (provision)
benefit consists of the following (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
Fiscal
|
|
|
Fiscal
|
|
|
|
Year
|
|
|
Year
|
|
|
|
2007
|
|
|
2006
|
|
|
Federal
|
|
|
|
|
|
|
|
|
Current tax (expense) benefit
|
|
$
|
(23
|
)
|
|
$
|
|
|
Deferred tax (expense) benefit
|
|
|
(1,704
|
)
|
|
|
1,896
|
|
Change in valuation allowance
|
|
|
1,704
|
|
|
|
(1,896
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(23
|
)
|
|
|
|
|
State
|
|
|
|
|
|
|
|
|
Current tax (expense) benefit
|
|
|
(80
|
)
|
|
|
(45
|
)
|
Deferred tax (expense) benefit
|
|
|
(343
|
)
|
|
|
472
|
|
Change in valuation allowance
|
|
|
343
|
|
|
|
(472
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(80
|
)
|
|
|
(45
|
)
|
Foreign
|
|
|
|
|
|
|
|
|
Current tax (expense) benefit
|
|
|
(831
|
)
|
|
|
(7
|
)
|
Deferred tax (expense) benefit
|
|
|
1,199
|
|
|
|
1,307
|
|
Change in valuation allowance
|
|
|
(317
|
)
|
|
|
(1,307
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
51
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(52
|
)
|
|
$
|
(52
|
)
|
|
|
|
|
|
|
|
|
|
The Company has reserved all of its domestic net deferred tax
assets and $1.7 million of its foreign deferred tax assets
with a valuation allowance as of December 29, 2007, in
accordance with the provisions of
52
THE
MANAGEMENT NETWORK GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
SFAS No. 109 Accounting for Income Taxes.
Realization of the deferred tax asset is dependent on generating
sufficient income in future periods. In evaluating the ability
to use its deferred tax assets, the Company considers all
positive and negative evidence including the Companys past
operating results, the existence of cumulative losses in the
most recent fiscal year and the Companys forecast of
future income. In determining future income, the Company is
responsible for assumptions utilized including the amount of
state, federal and international operating income, the reversal
of temporary differences and the implementation of feasible and
prudent tax planning strategies. These assumptions require
significant judgment about the forecasts of future income and
are consistent with the plans and estimates the Company is using
to manage the underlying business.
The following is reconciliation between the provision for income
taxes and the amounts computed based on loss from continuing
operations at the statutory federal income tax rate (amounts in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2007
|
|
|
Fiscal Year 2006
|
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Computed expected federal income tax benefit
|
|
$
|
800
|
|
|
|
35.0
|
|
|
$
|
4,311
|
|
|
|
35.0
|
|
State income tax expense, net of federal benefit
|
|
|
(275
|
)
|
|
|
(12.0
|
)
|
|
|
278
|
|
|
|
2.3
|
|
Forfeited vested stock options
|
|
|
(1,222
|
)
|
|
|
(53.5
|
)
|
|
|
|
|
|
|
|
|
Adjustment to estimated tax loss carryforward
|
|
|
(875
|
)
|
|
|
(38.3
|
)
|
|
|
(544
|
)
|
|
|
(4.4
|
)
|
Other
|
|
|
(210
|
)
|
|
|
(9.2
|
)
|
|
|
(422
|
)
|
|
|
(3.4
|
)
|
Change in valuation allowance
|
|
|
1,730
|
|
|
|
75.7
|
|
|
|
(3,675
|
)
|
|
|
(29.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(52
|
)
|
|
|
(2.3
|
)
|
|
$
|
(52
|
)
|
|
|
(0.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Items giving rise to the provision for deferred income tax
(provision) benefit are as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
Fiscal
|
|
|
Fiscal
|
|
|
|
Year
|
|
|
Year
|
|
|
|
2007
|
|
|
2006
|
|
|
Goodwill
|
|
$
|
(1,409
|
)
|
|
$
|
(1,409
|
)
|
Bad debt reserve
|
|
|
86
|
|
|
|
(3
|
)
|
Share-based compensation expense
|
|
|
(1,617
|
)
|
|
|
(272
|
)
|
Intangible assets
|
|
|
1,164
|
|
|
|
(243
|
)
|
Valuation allowance
|
|
|
1,730
|
|
|
|
(3,675
|
)
|
Net operating loss carryforward
|
|
|
1,624
|
|
|
|
5,960
|
|
Unfavorable liabilities
|
|
|
(587
|
)
|
|
|
(239
|
)
|
Cash to accrual conversion
|
|
|
59
|
|
|
|
|
|
Other
|
|
|
(168
|
)
|
|
|
(119
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
882
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
53
THE
MANAGEMENT NETWORK GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The significant components of deferred income tax assets and the
related balance sheet classifications, as of December 29,
2007 and December 30, 2006 are as follows (amounts in
thousands):
|
|
|
|
|
|
|
|
|
|
|
December 29,
|
|
|
December 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
Current deferred tax assets (liabilities):
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
201
|
|
|
$
|
115
|
|
Accrued expenses
|
|
|
260
|
|
|
|
366
|
|
Unfavorable liabilities
|
|
|
634
|
|
|
|
250
|
|
Cash to accrual conversion
|
|
|
(59
|
)
|
|
|
|
|
Valuation allowance
|
|
|
(866
|
)
|
|
|
(731
|
)
|
|
|
|
|
|
|
|
|
|
Current deferred tax asset
|
|
$
|
170
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Non-current deferred tax assets (liabilities):
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
7,713
|
|
|
$
|
9,121
|
|
Share-based compensation expense
|
|
|
1960
|
|
|
|
3,287
|
|
Unfavorable lease liability
|
|
|
585
|
|
|
|
846
|
|
Net operating loss carryforward
|
|
|
17,968
|
|
|
|
16,261
|
|
Intangible assets
|
|
|
(300
|
)
|
|
|
2,341
|
|
Accrued contingent consideration
|
|
|
353
|
|
|
|
|
|
Cash to accrual conversion
|
|
|
(117
|
)
|
|
|
|
|
Reserves
|
|
|
40
|
|
|
|
33
|
|
Other
|
|
|
278
|
|
|
|
266
|
|
Valuation allowance
|
|
|
(29,848
|
)
|
|
|
(32,155
|
)
|
|
|
|
|
|
|
|
|
|
Non-current deferred tax liabilities
|
|
$
|
(1,368
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
The federal net operating loss carryforward as of
December 29, 2007 is scheduled to expire as follows
(amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Year
|
|
|
|
|
$
|
2,177
|
|
|
|
2016
|
|
|
|
|
5,602
|
|
|
|
2023
|
|
|
|
|
9,094
|
|
|
|
2024
|
|
|
|
|
7,432
|
|
|
|
2025
|
|
|
|
|
9,854
|
|
|
|
2026
|
|
|
|
|
6,129
|
|
|
|
2027
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
40,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The foreign net operating loss carryforward as of
December 29, 2007 is $5.6 million and has no
expiration date.
As of December 29, 2007, there are no unrecognized net
operating loss carryforwards available to the Company related to
excess tax benefits from the settlement of share-based awards.
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
54
THE
MANAGEMENT NETWORK GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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,
including penalties and interest, was $524,000 as of
December 29, 2007 and is included in Other noncurrent
liabilities on the consolidated balance sheet. There were
no increases or decreases in uncertain tax positions during
2007. All of the unrecognized tax benefit balance, if
recognized, would impact the effective tax rate. The adoption of
FIN 48 did not have a material effect on the Companys
results of operations, financial condition or cash flows during
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 and penalties accrued related to
unrecognized tax benefits as a component of the income tax
provision. During 2007, the Companys income tax expense
included $30,000 of income tax-related interest and penalties.
As of December 29, 2007 and December 30, 2006, the
total amount of accrued income tax-related interest and
penalties included in the Consolidated Balance Sheet was
$169,000 and $139,000, respectively. As of December 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
December 29, 2007, the Company has one examination in
process by the Internal Revenue Service related to employment
and stock option matters.
The Company leases office facilities, computer equipment, office
furniture, and two automobiles under various operating leases
expiring at various dates through November 2012.
Following is a summary of future minimum payments under
operating leases that have initial or remaining non-cancellable
lease terms at December 29, 2007 (amounts in thousands):
|
|
|
|
|
|
|
Operating
|
|
Fiscal Year
|
|
Leases
|
|
|
2008
|
|
$
|
3,178
|
|
2009
|
|
|
2,854
|
|
2010
|
|
|
2,573
|
|
2011
|
|
|
1,028
|
|
2012
|
|
|
1,269
|
|
|
|
|
|
|
Total minimum lease payments
|
|
|
10,902
|
|
Future minimum rentals to be received under non-cancellable
subleases
|
|
|
(1,130
|
)
|
|
|
|
|
|
Minimum lease payments net of amounts to be received under
subleases
|
|
$
|
9,772
|
|
|
|
|
|
|
55
THE
MANAGEMENT NETWORK GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Minimum operating lease payments include the off-market portion
of lease payments recorded through purchase accounting in
connection with the Companys acquisition of CSMG and
continuing lease commitments associated with the consolidation
of office space. The unamortized balance of the unfavorable
lease liabilities and their balance sheet classification as of
December 29, 2007 and December 30, 2006, are as
follows:
|
|
|
|
|
|
|
|
|
|
|
December 29,
|
|
|
December 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
Current unfavorable lease obligations
|
|
$
|
709
|
|
|
$
|
625
|
|
Non-current unfavorable lease obligations
|
|
|
1,475
|
|
|
|
2,105
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,184
|
|
|
$
|
2,730
|
|
|
|
|
|
|
|
|
|
|
Total rental expense was approximately $2,445,000 and $1,410,000
for fiscal years 2007 and 2006, respectively, and was recorded
in selling, general and administrative expenses.
As of December 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
December 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 December 29, 2007.
In March 2002, the Company entered into a $1.0 million
standby letter of credit (LOC) facility with a
financial institution in connection with an acquisition. The LOC
was required as part of the assignment of the leased office
space from the seller to the Company. The Company originally
collateralized the LOC with a $1.0 million cash deposit
with reductions in this amount based on passage of time. As of
December 29, 2007 and for the remainder of the term of the
LOC, the required collateral amount is $273,000. The collateral
deposited for this LOC is included in Cash and Cash
Equivalents on the Companys consolidated balance
sheet as of December 29, 2007 and December 30, 2006.
The Company would be required to perform under the agreement in
the event it was to default on balances due and owing the
landlord on the leased office space. An obligation has not been
recorded in connection with the LOC on the Companys
consolidated balance sheet as of December 29, 2007 and
December 30, 2006.
|
|
11.
|
RELATED
PARTY TRANSACTIONS
|
During fiscal years 2007 and 2006, the Company incurred legal
fees of $128,000 and $348,000, respectively, for services
provided by Bingham McCutchen, LLP, a law firm in which a member
of the Board of Directors, Andrew Lipman, owns an equity
interest. Payments made in fiscal year 2007 were in connection
with the Companys acquisition of Cartesian and other
potential acquisition matters. Payments made in fiscal year 2006
were in connection with the Companys acquisitions of
Adventis and Cartesian. All payments were within the limitations
set forth by NASDAQ Rules as to the qualifications as an
independent director.
56
THE
MANAGEMENT NETWORK GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
12.
|
COMMITMENTS
AND CONTINGENCIES
|
As of December 30, 2006 the Company had outstanding demands
aggregating approximately $1.0 million by the bankruptcy
trustee of a former client in connection with collected balances
near the customers bankruptcy filing date. One of these
demands originated through the acquisition of Tri-Com in 2001,
resulting in a contingent purchase price to the seller. 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. 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. 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.
Upon the acquisition of RVA, the Company assumed a contractual
liability pursuant to a services agreement originally entered
into by RVA. Under this agreement, the Company has the right to
use office space and to receive certain information technology
and human resource services through December 2008. The Company
is obligated to make remaining payments of $1.2 million.
The off-market portion of these payments was recorded through
purchase accounting in connection with the Companys
acquisition of RVA. As of December 29, 2007, the
unamortized balance of the obligation was $0.9 million and
is included as a current liability in Unfavorable and
other contractual obligations.
On February 19, 2008, the independent members of the
Companys Board of Directors approved an executive
incentive compensation plan for fiscal year 2008 (the
Plan). The Plan establishes a cash bonus pool (the
Pool) for the Companys chief executive
officer, president and chief operating officer, and chief
financial officer if the Company meets or exceeds an non-GAAP
earnings target of $7.0 million for fiscal year 2008. The
calculation of the non-GAAP earnings target excludes non-cash
charges (e.g., share-based compensation expense, depreciation
and amortization, etc.) and may exclude extraordinary one-time
items to the extent determined to be appropriate by the
Compensation Committee. The amount available for payment from
the Pool (Payout Amount) begins at $800,000 if the
Company achieves the earnings target. If the earnings target is
exceeded, the Payout Amount increases in accordance with a
graduated, ascending scale ranging from 15% to 25% of the
earnings in excess of the target, provided that the Payout
Amount will in no event exceed $3,000,000. The distribution of
the Payout Amount, if any, among the Companys eligible
executive management will be determined by the Companys
Compensation Committee
and/or
independent directors at a later date.
|
|
13.
|
SHARE
REPURCHASE PROGRAM
|
On September 5, 2006, the Companys Board of Directors
approved a share repurchase program authorizing the purchase of
up to 2,000,000 shares of TMNG common stock. Under the
plan, the Company is authorized to repurchase stock from time to
time in the open market or through privately negotiated
transactions through September 1, 2008, in accordance with
SEC rules. During 2006, the Company repurchased
200,000 shares of its common stock at an average purchase
price of $1.72 for an aggregate cost of $345,000. In October
2006, the Companys Board of Directors froze repurchase
activity until further notice. Consequently, there were no share
repurchases pursuant to the program during 2007. As of
December 29, 2007, the Company had 1,800,000 shares
remaining under the repurchase program. The repurchased shares
have been classified as treasury stock within the
stockholders equity section of the Consolidated Balance
Sheet.
57
THE
MANAGEMENT NETWORK GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
14.
|
EMPLOYEE
BENEFIT PLAN
|
The Company offers defined contribution plans to eligible
employees. Such employees may contribute a percentage of their
annual compensation in accordance with the plans guidelines. The
plans provide for Company contributions that are subject to
maximum limitations as defined by the plans. Company
contributions to its defined contribution plans totaled
$1,343,000 and $148,000 in the years ended December 29,
2007 and December 30, 2006, respectively.
|
|
15.
|
SPECIAL
COMMITTEE INVESTIGATION
|
In November 2006, following an initial internal review of its
stock option practices, the Companys Board of Directors
appointed a Special Committee of outside directors (the
Special Committee) to conduct a full investigation
of the Companys past stock option granting practices and
related accounting. As a result of the investigation, it was
determined that incorrect measurement dates were used for
financial accounting purposes for certain stock option and
nonvested stock awards in prior years. The Special Committee
recommended remedial measures to address the issues related to
stock options and general corporate governance, oversaw the
adoption of these measures and dissolved in July 2007. Operating
expenses included costs of approximately $2.6 million and
$0.7 million during fiscal years 2007 and 2006,
respectively, related to the Special Committee investigation.
These costs primarily consisted of professional services for
legal, accounting and tax guidance.
Auction
Rate Securities
Due to recent events in the credit markets, the liquidity of
auction rate securities (ARS) has been called into
question. In recent weeks as part of the ongoing credit market
crisis, many ARS from various issuers have failed to receive
sufficient order interest from potential investors to clear
successfully, resulting in failed auction status. As of
December 29, 2007, TMNG held $17.1 million in ARS,
consisting of the following (amounts in thousands):
|
|
|
|
|
|
|
Balance at
|
|
Issuer
|
|
December 29, 2007
|
|
|
Vermont Student Assistance Corporation Education Loan Revenue
Bonds
|
|
$
|
6,800
|
|
Iowa Student Loan Liquidity Corporation Bonds
|
|
|
2,400
|
|
Iowa Student Loan Revenue Bonds
|
|
|
2,100
|
|
Missouri Higher Education Loan Revenue Bonds
|
|
|
1,800
|
|
Pennsylvania Higher Education Loan Revenue Bonds
|
|
|
1,400
|
|
Brazos Student Finance Corporation Student Loan Asset Backed
Notes
|
|
|
1,000
|
|
College Loan Corporation Student Loan Asset Backed Notes
|
|
|
725
|
|
Indiana Education Loan Revenue Bonds
|
|
|
500
|
|
Kentucky Higher Education Loan Revenue Bonds
|
|
|
400
|
|
|
|
|
|
|
|
|
$
|
17,125
|
|
|
|
|
|
|
Subsequent to year end, all ARS held in the Companys
portfolio were successfully auctioned. The successful auctions
of our entire ARS portfolio subsequent to our year-end confirm
there is no impairment of these investment balances at
December 29, 2007. As of March 28, 2008, the Company
holds ARS in the amount of $14.9 million supported by
government guaranteed student loans. The remaining balance of
$2.2 million has been converted to cash or money market
investments.
58
THE
MANAGEMENT NETWORK GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Beginning in February 2008, the Company began to experience
failed auctions within its remaining ARS portfolio. It is the
Companys understanding these failed auctions are likely to
continue at least over the next several months. The Company does
not currently believe these failed auctions are indicative of a
credit risk concern due to the fact that the underlying
collateral is fully guaranteed through the Federal Family
Education Loan Program of the U.S. Department of Education.
However, these auction failures do affect the liquidity of these
investments. The principal associated with failed auctions will
not be accessible until a successful auction occurs, a buyer is
found outside of the auction process, the issuers redeem the
securities, the issuers establish a different form of financing
to replace these securities or final payments come due according
to contractual maturities ranging from approximately 22 to
36 years. For each unsuccessful auction, the interest rate
moves to a maximum rate defined for each security. In the event
the Company is able to successfully liquidate our ARS portfolio
it intends to reinvest these balances into money market or
similar investments.
While the Companys ARS portfolio is asset backed and
supported by government guarantees, if the issuers are unable to
successfully close future auctions and their credit ratings
deteriorate, it could be required to record realized or
unrealized losses on these investments in the future. At this
time, the Company is uncertain as to when the liquidity issues
related to these investments will improve. Accordingly, the
entire amount of ARS may be reclassified from current to
non-current assets on the Companys balance sheet at some
point in the future. The Company will continue to value its ARS
portfolio in future reporting periods using a model that takes
into consideration the financial conditions of the ARS issuer,
bond insurers and the value of the collateral bonds. Based on
its analysis of the fair value of these securities, the Company
may need to record an impairment related to these ARS. Although
the Company currently believes that any decline in the fair
market value of these securities would be temporary, there is a
risk that the decline in value may ultimately be deemed to be
other-than-temporary. Should it be determined that the decline
in value of these securities is other-than-temporary, it would
result in a loss being recognized in the Companys
consolidated statement of operations, which could be material,
in accordance with SFAS No. 115.
Stockholder
Rights Plan
Effective March 27, 2008, the Companys Board of
Directors adopted a stockholder rights plan, pursuant to which a
dividend consisting of one preferred stock purchase right (a
Right) will be distributed for each share of Company
common stock held as of the close of business on April 7,
2008. The description and terms of the Rights are set forth in a
Rights Agreement, dated as of March 27, 2008, between the
Company and Computershare Trust Company, N.A., as Rights
Agent (the Rights Plan).
The Company adopted the Rights Plan in an effort to protect
against the triggering of limitations on the Companys
ability to utilize net operating loss carryforwards to offset
future taxable income of the Company and to ensure, to the
extent possible, that all stockholders receive fair and equal
treatment in the event of a proposed takeover of the Company.
The Company has experienced substantial net operating losses.
See Note 7, Income Taxes. If the Company
experiences an ownership change as defined in
Section 382 of the Internal Revenue Code, the
Companys ability to use the net operating losses could be
substantially diminished. An ownership change is
generally a more than 50 percentage point increase in stock
ownership, during a moving
3-year
testing period, by stockholders owning or deemed to own 5% or
more of the Companys outstanding shares.
The Rights Plan is intended to deter any person or group and
certain related parties from acquiring beneficial ownership of
5% or more of the Companys outstanding common stock
without the approval of the Companys Board of Directors,
and to limit the beneficial ownership of additional shares of
common stock by existing beneficial owners of 5% or more of the
outstanding common stock. The Rights Plan permits certain
transferees of existing beneficial owners of 5% of more of the
outstanding common stock (other than officers of the Company) to
exceed the 5% limit under certain circumstances as described in
the Rights Plan.
59
THE
MANAGEMENT NETWORK GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Each Right, to the extent it becomes exercisable, would
initially entitle the registered holder to purchase one
one-thousandth of a share of Series A Junior Participating
Preferred Stock at a purchase price of $8.00, subject to
adjustment. The Rights do not become exercisable until the
occurrence of certain events specified in the Rights Plan. In
the event that any person or group exceeds the beneficial
ownership limits and becomes an Acquiring Person,
each Right not owned by the Acquiring Person and certain related
parties would entitle the holder of the Right to purchase, at
the purchase price, common stock of the Company having a market
value equal to twice the purchase price. In addition, at any
time after such event, and prior to the acquisition by any
person or group of 50% or more of the outstanding common stock
of the Company, the Board of Directors may, at its option,
require each outstanding Right (other than Rights held by the
Acquiring Person and related parties) to be exchanged for one
share of Company common stock. Also, if a person or group
becomes an Acquiring Person and the Company is acquired in a
merger or other business combination or sells more than 50% of
its assets or earning power, each Right (other than Rights held
by the Acquiring Person and related parties) will entitle
holders to purchase, by payment of the purchase price, common
stock of the acquiring company with a value of twice the
purchase price.
In certain circumstances, the Rights may be redeemed by the
Company at an initial redemption price of $0.001 per Right. If
the Rights are not earlier redeemed, the Rights Plan will
terminate on March 27, 2018.
60
|
|
ITEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
None.
|
|
ITEM 9A.
|
CONTROLS
AND PROCEDURES
|
Not applicable.
|
|
ITEM 9A(T).
|
CONTROLS
AND PROCEDURES
|
Evaluation
of Disclosure Controls and Procedure
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 our disclosure controls and procedures as of
the end of the period covered by this report. Based upon this
evaluation, the Companys CEO and CFO have concluded that
the Companys disclosure controls and procedures were
effective as of December 29, 2007.
Managements
Report on Internal Control over Financial
Reporting
The management of the Company is responsible for establishing
and maintaining adequate internal control over financial
reporting for the Company. With the participation of our Chief
Executive Officer and Chief Financial Officer, our management
conducted an evaluation of the effectiveness of our internal
control over financial reporting based on the framework and
criteria established in Internal Control
Integrated Framework, issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this
evaluation, our management has concluded that our internal
control over financial reporting was effective as of
December 29, 2007.
Management has excluded from its assessment of internal control
over financial reporting at December 29, 2007 its
acquisitions of Cartesian on January 2, 2007, RVA on
August 3, 2007, and TWG on October 5, 2007. Cartesian,
RVA, and TWG represent 35.0%, 13.0%, and 1.4% of the
Companys consolidated total revenues, respectively, for
the year ended December 29, 2007, and 25.2%, 21.7%, and
2.9% of the Companys consolidated total assets,
respectively, as of December 29, 2007.
This annual report does not include an attestation report of the
Companys registered public accounting firm regarding
internal control over financial reporting. Our internal control
over financial reporting was not subject to attestation by the
Companys registered public accounting firm pursuant to
temporary rules of the SEC that permit the Company to provide
only managements report in this annual report.
Changes
in Internal Control over Financial Reporting
There were no significant changes in our internal control over
financial reporting during the fourth fiscal quarter ended
December 29, 2007 that materially affected, or are
reasonably likely to materially affect, our internal control
over financial reporting.
|
|
ITEM 9B.
|
OTHER
INFORMATION
|
None
61
PART III
|
|
ITEM 10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
The Companys definitive Proxy Statement for its 2008
Annual Meeting of Shareholders (the Proxy Statement)
contains, under the captions Election of Directors,
Executive Officers and Section 16(a)
Beneficial Ownership Reporting Compliance the information
required by Item 10 of this
Form 10-K,
which information is incorporated herein by this reference.
|
|
ITEM 11.
|
EXECUTIVE
COMPENSATION
|
The Proxy Statement contains under the captions Election
of Directors, Election of Directors
Non-Employee Director Compensation, Director
Compensation and Executive Compensation, the
information required by Item 11 of this
Form 10-K,
which information is incorporated herein by this reference.
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ITEM 12.
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
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The Proxy Statement contains under the captions Security
Ownership of Certain Beneficial Owners and Management
certain of the information required by Item 12 of this
Form 10-K,
which information is incorporated herein by this reference.
EQUITY
COMPENSATION PLAN INFORMATION
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(a)
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(c)
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Number of
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Number of Securities
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Securities to be Issued
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Remaining Available
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Upon Exercise of
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(b)
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for Future Issuance
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Outstanding Options
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Weighted Average
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Under Equity Compensation
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or Vesting of Nonvested
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Exercise Price of
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Plans (Excluding Securities
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Stock
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Outstanding Options
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Reflected in Column (a))(1)
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PLANS APPROVED BY SECURITY HOLDERS(1)
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1998 Equity Incentive Plan Stock Options
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4,794,341
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$
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3.47
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4,143,278
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1998 Equity Incentive Plan Nonvested
Stock
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107,500
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n/a
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1,034,500
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PLANS NOT APPROVED BY SECURITY HOLDERS
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2000 Supplemental Stock Plan
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1,399,736
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$
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2.58
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2,383,058
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(1) |
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The amounts in the table do not include up to
167,423 shares that may be purchased under the 1999
Employee Stock Purchase Plan. |
For an additional discussion of our equity compensation plans,
see Item 8, Consolidated Financial Statements,
Note 4, Share-Based Compensation.
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ITEM 13.
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CERTAIN
RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
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The Proxy Statement contains under the captions Certain
Relationships and Related Transactions and Election
of Directors the information required by Item 13 of
this
Form 10-K,
which information is incorporated herein by this reference.
62
|
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ITEM 14.
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PRINCIPAL
ACCOUNTANT FEES AND SERVICES
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The Proxy Statement contains under the caption
Ratification of Appointment of Independent Registered
Public Accounting Firm the information required by
Item 14 of this
Form 10-K,
which information is incorporated herein by this reference.
PART IV
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ITEM 15.
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EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES
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(a) The following documents are filed as part of this
Annual Report on
Form 10-K:
(1) The response to this portion of Item 15 is set
forth in Item 8 of Part II hereof.
(2) Schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission
are not required under the related instructions or are
inapplicable and therefore have been omitted.
(3) Exhibits. See accompanying Index to Exhibits. The
Company will furnish to any stockholder, upon written request,
any exhibit listed in the accompanying Index to Exhibits upon
payment by such stockholder of the Companys reasonable
expenses in furnishing any such exhibit.
63
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this Report on
Form 10-K
to be signed on its behalf by the undersigned, thereunto duly
authorized.
THE MANAGEMENT NETWORK GROUP, INC.
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By:
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/s/ RICHARD
P. NESPOLA
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RICHARD P. NESPOLA
CHAIRMAN OF THE BOARD AND CHIEF
EXECUTIVE OFFICER
Date: March 28, 2008
POWER OF
ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose
signature appears below hereby constitutes and appoints Richard
P. Nespola as his attorney-in-fact, with full power of
substitution, for him or her in any and all capacities, to sign
any and all amendments to this Report on
Form 10-K,
and to file the same, with exhibits thereto and other documents
in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming our signatures as
they may be signed by our said attorney to any and all
amendments to said Report.
Pursuant to the requirements of the Securities Exchange Act of
1934, this Report on
Form 10-K
has been signed by the following persons on behalf of the
Registrant in the capacities and on the dates indicated:
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Signature
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Title
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|
Date
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/s/ RICHARD
P. NESPOLA
Richard
P. Nespola
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Chairman of the Board and Chief Executive Officer (Principal
executive officer)
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March 28, 2008
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/s/ DONALD
E. KLUMB
Donald
E. Klumb
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Chief Financial Officer and Treasurer (Principal financial
officer and principal accounting officer)
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March 28, 2008
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/s/ MICKY
K. WOO
Micky
K. Woo
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Director
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March 28, 2008
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/s/ ANDREW
LIPMAN
Andrew
Lipman
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Director
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March 28, 2008
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/s/ ROBERT
J. CURREY
Robert
J. Currey
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Director
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March 28, 2008
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/s/ ROY
A. WILKENS
Roy
A. Wilkens
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Director
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March 28, 2008
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/s/ FRANK
SISKOWSKI
Frank
Siskowski
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Director
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March 28, 2008
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64
INDEX TO
EXHIBITS
The following is a list of exhibits filed as part of this report.
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Exhibit
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Number
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|
Description of Document
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|
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3
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.1
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Certificate of Incorporation, filed as Exhibit 3.1 to the
Companys Registration Statement on
Form S-1
originally filed September 20, 1999 (Registration
No. 333-87383),
as amended (the 1999
S-1
Registration Statement), is incorporated herein by
reference as Exhibit 3.1.
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3
|
.2
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|
Certificate of Designations of Series A Junior
Participating Preferred Stock, as filed with the Secretary of
State of Delaware on March 27, 2008, filed as
Exhibit 3.1 to the Companys Current Report on
Form 8-K
dated March 27, 2008 filed with the Securities and Exchange
Commission, is incorporated herein by reference as
Exhibit 3.2.
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3
|
.3
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|
Amended and Restated By-laws, filed as Exhibit 3.2 to the
Companys
Form 8-K
filed with the Securities and Exchange Commission on
February 13, 2008, is incorporated herein by reference as
Exhibit 3.3.
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|
4
|
.1
|
|
Specimen Common Stock Certificate, filed as Exhibit 4.1 to
the 1999 S-1
Registration Statement, is incorporated herein by reference as
Exhibit 4.1.
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4
|
.2
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|
Registration Rights Agreement, dated February 12, 1998,
among the Company and certain holders of the Companys
common stock (the Registration Rights Agreement),
filed as Exhibit 10.1 to the 1999
S-1
Registration Statement, is incorporated herein by reference as
Exhibit 4.2.
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4
|
.3
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Rights Agreement, dated as of March 27, 2008, by and
between the Company and Computershare Trust Company N.A.,
filed as Exhibit 4.1 to the Companys Current Report
on
Form 8-K
dated March 27, 2008 filed with the Securities and Exchange
Commission, is incorporated herein by reference as
Exhibit 4.3.
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4
|
.4
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|
Form of Rights Certificate, filed as Exhibit B to the
Rights Agreement filed as Exhibit 4.1 to the Companys
Current Report on
Form 8-K
dated March 27, 2008, filed with the Securities and
Exchange Commission, is incorporated herein by reference as
Exhibit 4.4.
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10
|
.1
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Registration Rights Agreement. (See Exhibit 4.2).
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10
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.2
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Form of Indemnification Agreement between the Company and each
of its Directors and Officers, filed as Exhibit 10.2 to the
1999 S-1
Registration Statement, is incorporated herein by reference as
Exhibit 10.2.(1)
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10
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.3
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1998 Equity Incentive Plan, as amended and restated on
September 7, 1999, and the Form of Agreements thereunder,
filed as Exhibit 10.3 to the 1999
S-1
Registration Statement, is incorporated herein by reference as
Exhibit 10.3.(1)
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10
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.4
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1999 Employee Stock Purchase Plan and Form of Agreements
thereunder, filed as Exhibit 10.4 to the 1999
S-1
Registration Statement, is incorporated herein by reference as
Exhibit 10.4.(1)
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10
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.5
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|
2000 Supplemental Stock Plan and Form of Agreements thereunder,
filed as Exhibit 10.16 to the Companys
Form 10-K
for the fiscal year ended December 30, 2000, is
incorporated herein by reference as Exhibit 10.5.(1)
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10
|
.6
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|
Employment Agreement between the Company and Richard Nespola,
dated January 5, 2004, filed as Exhibit 10.19 to the
Companys
Form 10-K
for the fiscal year ended January 3, 2004, is incorporated
herein by reference as Exhibit 10.6.(1)
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10
|
.7
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Sublease between Best Doctors, Inc. and Cambridge Strategic
Management Group Inc. (formerly TMNG Strategy, Inc.), dated
December 30, 2004, filed as Exhibit 10.21 to the
Companys
Form 10-K
for the fiscal year ended January 1, 2005, is incorporated
herein by reference as Exhibit 10.7.
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10
|
.8
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Asset Purchase Agreement, dated April 2, 2006, among
Wilbass Limited, Adventis Limited, and Adventis Corporation,
filed as Exhibit 10 to the Companys
Form 10-Q
for the quarter ended April 1, 2006, is incorporated herein
by reference as Exhibit 10.8.**
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10
|
.9
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|
Share Purchase Agreement, dated December 22, 2006, between
the Company and Janos Sivo, Alan Strong, William Hill and James
Baker, regarding the acquisition of the outstanding common stock
of Cartesian Limited, filed as Exhibit 10.1 to the
Companys
Form 10-Q
for the quarter ended September 30, 2006, is incorporated
herein by reference as Exhibit 10.9.
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65
|
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|
|
|
Exhibit
|
|
|
Number
|
|
Description of Document
|
|
|
10
|
.10
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Third Amended Lease Agreement between NewTower
Trust Company Multi-Employer Property Trust and the
Company, dated August 30, 2005, filed as Exhibit 10.10
to the Companys
Form 10-K
for the fiscal year ended December 30, 2006, is
incorporated herein by reference as Exhibit 10.10.
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10
|
.11
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Third Additional Space Commencement Date Agreement between
NewTower Trust Company Multi-Employer Property Trust and
the Company, dated February 28, 2006, filed as
Exhibit 10.11 to the Companys
Form 10-K
for the fiscal year ended December 30, 2006, is
incorporated herein by reference as Exhibit 10.11.
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10
|
.12
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|
Membership Interest Purchase Agreement, dated July 30,
2007, between the Company and RVA Consulting, LLC, RVA Holdings,
LLC, Mark Markowitz, Dawn Saitta, and Dale Reynolds, regarding
the acquisition of all outstanding membership interests in RVA
Consulting, LLC, filed as Exhibit 10.1 to the
Companys
Form 10-Q
for the quarter ended June 30, 2007, is incorporated herein
by reference as Exhibit 10.12.**
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|
10
|
.13
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|
Stock Purchase Agreement, dated October 5, 2007, between
the Company and TWG Consulting, Inc. and Marilyn Breitenstein,
regarding the acquisition of the outstanding common stock of TWG
Consulting, Inc., filed as Exhibit 2.1 to the
Companys
Form 10-Q
for the quarter ended September 29, 2007, is incorporated
herein by reference as Exhibit 10.13.
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|
10
|
.14
|
|
Transitions Services Agreement among RVA Consulting, LLC, a
subsidiary of the Company, and Publicis Selling Solutions, Inc,
filed as Exhibit 10.1 to the Companys
Form 10-Q
for the quarter ended September 29, 2007, is incorporated
herein by reference as Exhibit 10.14.
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|
10
|
.15
|
|
Lease Agreement between Cartesian Limited and Sun Life Assurance
Company of Canada (U.K.) Limited, dated November 23, 2000,
filed as Exhibit 10.1 to the Companys
Form 10-Q
for the quarter ended March 31, 2007, is incorporated
herein by reference as Exhibit 10.15.
|
|
10
|
.16
|
|
Fourth Amendment to Lease between NewTower Trust Company
Multi-Employer Property Trust and the Company, dated
July 10, 2007, is attached to this
Form 10-K
as Exhibit 10.16.
|
|
21
|
.1
|
|
List of subsidiaries of the Company, prepared pursuant to
Item 601(b)(21) of
Regulation S-K
is attached to this
Form 10-K
as Exhibit 21.1.
|
|
23
|
.1
|
|
Consent of independent registered public accounting firm is
attached to this
Form 10-K
as Exhibit 23.1.
|
|
24
|
.1
|
|
Power of attorney (see signature page)
|
|
31
|
.1
|
|
Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 is attached
to this
Form 10-K
as Exhibit 31.1.
|
|
31
|
.2
|
|
Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 is attached
to this
Form 10-K
as Exhibit 31.2.
|
|
32
|
.1
|
|
Certifications furnished pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 are attached to this
Form 10-K
as Exhibit 32.1.
|
|
|
|
(1) |
|
Management contracts and compensatory plans and arrangements
required to be filed as Exhibits pursuant to Item 15 of
this report. |
|
|
|
** |
|
Portions of this document have been redacted pursuant to a
Request for Confidential Treatment filed with the Securities and
Exchange Commission pursuant to
Rule 24b-2
under the Securities Exchange Act of 1934, as amended. Redacted
portions are indicated with the notation [***]. |
66