e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended March 29, 2008
or
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Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Commission file number: 0-27617
THE MANAGEMENT NETWORK GROUP, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE
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48-1129619 |
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.) |
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7300 COLLEGE BLVD., SUITE 302, OVERLAND PARK, KS
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66210 |
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(Address of principal executive offices)
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(Zip Code) |
913-345-9315
Registrants telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See
definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of
the Exchange Act. (Check one):
Large accelerated filer
o Accelerated filer
o
Non-accelerated filer
o
Smaller reporting company
þ
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
As of
May 9, 2008, TMNG had outstanding 36,069,753 shares of common stock.
THE MANAGEMENT NETWORK GROUP, INC.
INDEX
- 2 -
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THE MANAGEMENT NETWORK GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(unaudited)
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March 29, |
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December 29, |
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2008 |
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2007 |
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ASSETS |
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CURRENT ASSETS: |
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Cash and cash equivalents |
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$ |
13,068 |
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$ |
10,022 |
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Short-term investments |
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17,125 |
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Receivables: |
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Accounts receivable |
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16,120 |
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13,044 |
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Accounts receivable unbilled |
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5,577 |
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7,804 |
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21,697 |
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20,848 |
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Less: Allowance for doubtful accounts |
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(663 |
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(562 |
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Net Receivables |
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21,034 |
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20,286 |
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Prepaid and other current assets |
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1,694 |
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1,763 |
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Total current assets |
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35,796 |
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49,196 |
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NONCURRENT ASSETS: |
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Property and equipment, net |
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1,782 |
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1,784 |
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Goodwill |
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14,163 |
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13,365 |
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Licenses and identifiable intangible assets, net |
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10,168 |
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11,605 |
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Non-current investments |
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14,342 |
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Other assets |
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655 |
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616 |
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Total Assets |
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$ |
76,906 |
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$ |
76,566 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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CURRENT LIABILITIES: |
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Trade accounts payable |
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$ |
1,749 |
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$ |
1,927 |
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Accrued payroll, bonuses and related expenses |
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5,815 |
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5,038 |
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Other accrued liabilities |
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3,818 |
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2,466 |
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Income tax liabilities |
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432 |
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861 |
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Deferred revenue |
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4,007 |
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3,554 |
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Accrued contingent consideration |
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281 |
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1,616 |
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Unfavorable and other contractual obligations |
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1,455 |
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1,668 |
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Total current liabilities |
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17,557 |
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17,130 |
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NONCURRENT LIABILITIES: |
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Deferred income tax liabilities |
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1,017 |
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1,368 |
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Unfavorable and other contractual obligations |
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1,587 |
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1,716 |
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Other noncurrent liabilities |
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532 |
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524 |
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Total noncurrent liabilities |
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3,136 |
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3,608 |
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Commitments and contingencies (Note 10) |
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Total stockholders equity |
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56,213 |
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55,828 |
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Total Liabilities and Stockholders Equity |
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$ |
76,906 |
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$ |
76,566 |
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See notes to unaudited condensed consolidated financial statements.
- 3 -
THE MANAGEMENT NETWORK GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except per share data)
(unaudited)
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Thirteen Weeks Ended |
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March 29, |
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March 31, |
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2008 |
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2007 |
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Revenues |
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$ |
21,541 |
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$ |
15,113 |
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Cost of services [includes net non-cash share-based compensation expense
(credits) of $193 and $(148) for the thirteen weeks ended March 29, 2008 and
March 31, 2007, respectively] |
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11,414 |
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8,319 |
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Gross Profit |
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10,127 |
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6,794 |
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Operating Expenses: |
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Selling, general and administrative [includes net non-cash share-based
compensation expense (credits) of $436 and $(296) for the thirteen weeks
ended March 29, 2008 and March 31, 2007, respectively] |
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8,842 |
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6,780 |
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Special Committee investigation (a) |
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1,559 |
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Intangible asset amortization |
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1,248 |
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540 |
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Total operating expenses |
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10,090 |
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8,879 |
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Income (loss) from operations |
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37 |
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(2,085 |
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Interest income |
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306 |
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417 |
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Income (loss) before income tax provision |
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343 |
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(1,668 |
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Income tax (provision) benefit |
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(82 |
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1 |
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Net income (loss) |
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261 |
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(1,667 |
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Other comprehensive (loss) income: |
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Foreign currency translation adjustment |
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(72 |
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42 |
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Unrealized loss on auction rate securities |
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(458 |
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Comprehensive loss |
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$ |
(269 |
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$ |
(1,625 |
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Net income (loss) per common share |
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Basic and diluted |
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$ |
0.01 |
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$ |
(0.05 |
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Weighted average shares used in calculation of net income (loss)
per common share |
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Basic |
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36,343 |
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35,716 |
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Diluted |
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36,490 |
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35,716 |
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(a) |
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For a summary of the Special Committee investigation, refer to Note 15 of the Consolidated Financial
Statements included in the Annual Report on Form 10-K as filed with the Securities and Exchange Commission on
March 28, 2008. |
See notes to unaudited condensed consolidated financial statements.
- 4 -
THE MANAGEMENT NETWORK GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
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For the Thirteen Weeks Ended |
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March 29, |
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March 31, |
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2008 |
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2007 |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net income (loss) |
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$ |
261 |
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$ |
(1,667 |
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Adjustments to reconcile net loss to net cash used in operating activities: |
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Depreciation and amortization |
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1,592 |
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872 |
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Share-based compensation |
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629 |
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(444 |
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Deferred taxes |
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(313 |
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(187 |
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Bad debt expense |
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151 |
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Other changes in operating assets and liabilities: |
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Accounts receivable |
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(2,964 |
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(2,662 |
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Accounts receivable unbilled |
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2,258 |
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26 |
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Prepaid and other assets |
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(5 |
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814 |
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Trade accounts payable |
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(122 |
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296 |
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Income tax liabilities |
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(416 |
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173 |
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Accrued liabilities |
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1,597 |
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168 |
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Net cash provided by (used in) operating activities |
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2,517 |
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(2,460 |
) |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Proceeds from maturities/sales of short-term investments |
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2,325 |
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1,900 |
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Acquisition of businesses, net of cash acquired |
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(1,151 |
) |
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(5,243 |
) |
Acquisition of property and equipment, net |
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(216 |
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(41 |
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Net cash
provided by (used in) investing activities |
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958 |
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(3,384 |
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Payments made on unfavorable and other contractual obligations |
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(384 |
) |
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(153 |
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Exercise of stock options |
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27 |
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38 |
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Net cash used in financing activities |
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(357 |
) |
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(115 |
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Effect of exchange rate on cash and cash equivalents |
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(72 |
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38 |
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Net increase (decrease) in cash and cash equivalents |
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3,046 |
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(5,921 |
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Cash and cash equivalents, beginning of period |
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10,022 |
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11,133 |
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Cash and cash equivalents, end of period |
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$ |
13,068 |
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$ |
5,212 |
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Supplemental disclosure of cash flow information: |
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Cash paid during period for taxes |
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$ |
804 |
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$ |
5 |
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Accrued property and equipment additions |
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$ |
66 |
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See notes to unaudited condensed consolidated financial statements.
- 5 -
THE MANAGEMENT NETWORK GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Reporting
The condensed consolidated financial statements and accompanying notes of The Management Network
Group, Inc. and its subsidiaries (TMNG, TMNG Global, we, us, our, or the Company) as of
March 29, 2008, and for the thirteen weeks ended March 29, 2008 and March 31, 2007 are unaudited
and reflect all normal recurring adjustments which are, in the opinion of management, necessary for
the fair presentation of the Companys condensed consolidated financial position, results of
operations, and cash flows as of these dates and for the periods presented. The condensed
consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (US GAAP) and pursuant to the rules and
regulations of the Securities and Exchange Commission for interim financial information.
Consequently, these statements do not include all the disclosures normally required by US GAAP for
annual financial statements nor those normally made in the Companys annual report on Form 10-K.
Accordingly, reference should be made to the Companys annual consolidated financial statements and
notes thereto for the fiscal year ended December 29, 2007, included in the 2007 Annual Report on
Form 10-K (2007 Form 10-K) for additional disclosures, including a summary of the Companys
accounting policies. The Condensed Consolidated Balance Sheet as of December 29, 2007 has been
derived from the audited Consolidated Balance Sheet at that date but does not include all of the
information and footnotes required by US GAAP for complete financial statements.
The preparation of financial statements in conformity with U.S. GAAP requires management to make
estimates and assumptions that affect the amounts reported in the unaudited condensed consolidated
financial statements and accompanying notes. Actual results could differ from those estimates. The
results of operations for the thirteen weeks ended March 29, 2008 are not necessarily indicative of
the results to be expected for the full year ending January 3, 2009.
Principles of Consolidation The consolidated statements include the accounts of TMNG
and the following wholly-owned subsidiaries. All significant inter-company accounts and
transactions have been eliminated in consolidation.
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Name of Subsidiary/Acquisition |
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Date Formed/Acquired |
TMNG Europe Ltd.
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March 19, 1997 |
The Management Network Group Canada Ltd.
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May 14, 1998 |
TMNG.com, Inc.
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June 1, 1999 |
TMNG Marketing, Inc.
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September 5, 2000 |
TMNG Technologies, Inc.
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September 5, 2001 |
Cambridge Strategic Management Group, Inc.
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March 6, 2002 |
Cambridge Adventis Ltd.
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March 1, 2006 |
Cartesian Ltd. (Cartesian)
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January 2, 2007 |
RVA Consulting, LLC (RVA)
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August 3, 2007 |
TWG Consulting, Inc. (TWG)
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October 5, 2007 |
Revenue Recognition The Company recognizes revenue from time and materials consulting contracts
in the period in which its services are performed. In addition to time and materials contracts, the
Companys other types of contracts may include time and materials contracts not to exceed contract
price, fixed fee contracts, and contingent fee contracts. The Company recognizes revenues on
milestone or deliverables-based fixed fee contracts and time and materials contracts not to exceed
contract price using the percentage of completion method prescribed by AICPA Statement of Position
(SOP) No. 81-1, Accounting for Performance of Construction-Type and Certain Production-Type
Contracts. For fixed fee contracts where
services are not based on providing deliverables or achieving milestones, the Company recognizes
revenue on a straight-line basis over the period during which such services are expected to be
performed.
As a result of the Cartesian acquisition, the Company now develops, installs and supports customer
software in addition to its traditional consulting services. The Company recognizes revenue in
connection with its software sales agreements utilizing the SOP No. 81-1 percentage of completion
method. These agreements include software right-to-use licenses (RTUs) and related customization
and implementation services. Due to the long-term nature of the software implementation and the
extensive software customization based on customer specific requirements normally experienced by
the Company, both the RTU and implementation services are treated as a single element for revenue
recognition purposes.
The SOP No. 81-1 percentage-of-completion methodology involves recognizing revenue using the
percentage of services completed, on a current cumulative cost to total cost basis, using a
reasonably consistent profit margin over the period. Due to the longer term nature of these
projects, developing the estimates of costs often requires significant judgment. Factors that must
be considered in estimating the progress of work completed and ultimate cost of the projects
include, but are not limited to, the availability of labor and labor productivity, the nature and
complexity of the work to be performed, and the impact of delayed performance. If changes occur in
delivery, productivity or other factors used in developing the estimates of costs or revenues, the
Company revises its cost and revenue estimates, which may result in increases or
- 6 -
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. Revenues from contingent fee contracts were not material for the thirteen
weeks ended March 29, 2008 and March 31, 2007.
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.
Marketable Securities Short-term investments and non-current investments, which
consist of 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 marketable
securities are reported at fair value, with any related unrealized gains and losses
included as a separate component of stockholders equity, net of applicable taxes.
Realized gains and losses, changes in value judged to be other-than-temporary, 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 there were no unrealized gains or
losses on short-term investments. At March 29, 2008 there were temporary, unrealized
losses of $458,000 on the Companys auction rate securities that were reflected within
comprehensive income. The Companys auction rate securities were reclassified as
non-current investments as of March 29, 2008. See Note 2 for further discussion of recent developments with
the Companys auction rate securities portfolio. In addition, the Company held $9.8
million and $6.7 million in money market funds at March 29, 2008 and December 29, 2007,
respectively, that are classified as cash equivalents.
Fair Value Measurement - The Company utilizes the methods of fair value measurement as described in
SFAS No. 157, Fair Value Measurements (SFAS No. 157) to value its financial assets and
liabilities. As defined in SFAS No. 157, fair value is based on the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date. In order to increase consistency and comparability in fair value
measurements, SFAS No. 157 establishes a fair value hierarchy that prioritizes observable and
unobservable inputs used to measure fair value into three broad levels, which are described below:
Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement
date for assets or liabilities. The fair value hierarchy gives the highest priority to Level
1 inputs.
Level 2: Observable prices that are based on inputs not quoted on active markets, but
corroborated by market data.
Level 3: Unobservable inputs are used when little or no market data is available. The fair
value hierarchy gives the lowest priority to Level 3 inputs.
In determining fair value, the Company utilizes valuation techniques that maximize the use of
observable inputs and minimize the use of unobservable inputs to the extent possible as well as
considers counterparty credit risk in its assessment of fair value.
See Note 2 for the impact of adopting SFAS 157.
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 the thirteen
weeks ended March 29, 2008 and March 31, 2007,
- 7 -
respectively, $184,000 and $272,000, of these costs
were expensed as incurred. No software development costs were capitalized during the thirteen
weeks ended March 29, 2008 and March 31, 2007, respectively.
Recent Accounting Pronouncements In September 2006, the Financial Accounting Standards
Board (FASB) issued SFAS No. 157. 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 was effective for the
Company on December 30, 2007. However, 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 to fiscal years beginning after November 15, 2008, and interim
periods within those fiscal years, 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. 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. The Company is currently evaluating
the impact, if any, that the adoption of SFAS No. 157 and FSP 157-2 for our non-financial
assets will have on its consolidated financial statements.
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 (1) recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any controlling interest, (2)
recognizes and measures the goodwill acquired in the business combination or a gain from
a bargain purchase, and (3) 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 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
the Companys consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging
Activities (SFAS 161). SFAS 161 requires enhanced disclosures about an entitys derivative and
hedging activities and thereby improves the transparency of financial reporting. The objective of
the guidance is to provide users of financial statements with an enhanced understanding of how and
why an entity uses derivative instruments; how derivative instruments and related hedged items are
accounted for; and how derivative instruments and related hedged items affect an entitys financial
position, financial performance, and cash flows. SFAS 161 is effective for fiscal years beginning
after November 15, 2008. The Company is currently evaluating the impact, if any, the adoption of
SFAS 161 will have on its consolidated financial statements.
- 8 -
2. Auction Rate Securities
As of March 29, 2008, TMNG held $14.3 million in auction rate securities for which the underlying
collateral is fully guaranteed through the Federal Family Education Loan Program of the U.S.
Department of Education. The Companys auction rate securities portfolio as of March 29, 2008
consisted of the following:
|
|
|
|
|
|
|
Value at March 29, |
|
Issuer |
|
2008 |
|
Education Funding Capital Education Loan Backed Notes |
|
$ |
6,250 |
|
Access Group Inc. Federal Student Loan Asset Backed Notes |
|
|
2,050 |
|
Kentucky Higher Education Loan Revenue Bonds A-4 |
|
|
1,900 |
|
Missouri Higher Education Loan Revenue Bonds |
|
|
1,800 |
|
Utah State Board of Regents Revenue Bonds |
|
|
1,400 |
|
Brazos Student Finance Corporation Student Loan Asset Backed Notes |
|
|
1,000 |
|
Kentucky Higher Education Loan Revenue Bonds A-2 |
|
|
400 |
|
|
|
|
|
Par Value |
|
|
14,800 |
|
Unrealized Loss on Principal |
|
|
(458 |
) |
|
|
|
|
Fair Value |
|
$ |
14,342 |
|
|
|
|
|
The auction rate securities we hold are generally long-term debt instruments that provide
liquidity through a Dutch auction process through which interest rates reset every 28 to
35 days. Given the liquidity created by the auctions historically, auction rate
securities were presented as current assets under short-term investments on the Companys
balance sheet. Beginning in February 2008, auctions of the Companys auction rate
securities portfolio failed to receive sufficient order interest from potential investors
to clear successfully, resulting in failed auctions. The principal associated with failed
auctions will not be accessible until a successful auction occurs, a buyer is found
outside of the auction process, the issuers redeem the securities, the issuers establish
a different form of financing to replace these securities or final payments come due
according to contractual maturities ranging from approximately 22 to 36 years. For each
unsuccessful auction, the interest rate moves to a maximum rate defined for each
security. At this time, the Company is uncertain as to when the liquidity issues related
to these investments will improve. Accordingly, the entire amount of auction rate
securities has been reclassified from current to non-current assets on the Companys
balance sheet as of March 29, 2008.
The Company values its auction rate securities portfolio using a model that takes into
consideration those inputs that are based on expected cash flow streams and collateral values,
including assessments of counterparty credit quality, default risk underlying the security,
discount rates and overall capital market liquidity. Although the auction rate securities
continue to pay interest according to their stated terms, based on its analysis of the fair value
of these securities, the Company recorded an impairment related to these auction rate securities.
Auction rate securities with an original par value of approximately $14.8 million were written-down
to an estimated fair value of $14.3 million as of March 29, 2008. Based on an analysis of
other-than-temporary impairment factors, this write-down resulted in a temporary impairment charge
of approximately $0.5 million reflected as an unrealized loss within other comprehensive income for
the thirteen weeks ended March 29, 2008.
Although the Company currently believes that any decline in the fair market value of
these securities is 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 in accordance with SFAS No. 115,
which could be material.
As of March 29, 2008, the Company held $9.8 million in money market funds. The Company utilized
Level 1 directly observable price quotes in active markets to measure fair value. Due to the lack
of observable market quotes on the Companys auction rate securities portfolio, the Company
utilizes
valuation models that rely exclusively on Level 3 inputs including those that are based on expected
cash flow streams and collateral values, including assessments of counterparty credit quality,
default risk underlying the security, discount rates and overall capital market liquidity. The
valuation of the Companys auction rate securities portfolio is subject to uncertainties that are
difficult to predict. Factors that may impact the Companys valuation include changes to credit
ratings of the securities as well as to the underlying assets supporting those securities, rates of
default of the underlying assets, underlying collateral value, discount rates, counterparty risk
and ongoing strength and quality of market credit and liquidity.
3. Business Combinations
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
- 9 -
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 weighted average share price for the twenty days preceding the date
of close. TWG is presented as a component of the Management Consulting Services segment.
The measurement of the respective assets and liabilities recognized in connection with
the acquisition has been made in accordance with the provisions of SFAS No. 141,
Business Combinations. The fair value of the net assets acquired in the 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 as of March 29, 2008.
The aggregate purchase price of $1.9 million consisted of the following (in thousands):
|
|
|
|
|
Cash paid at
closing |
|
$ |
1,540 |
|
Transaction
costs |
|
|
59 |
|
Accrued contingent consideration |
|
|
281 |
|
|
|
|
|
Total purchase price
recognized at March 29, 2008 |
|
$ |
1,880 |
|
|
|
|
|
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. TMNG assumed all liabilities
of RVA, subject to certain indemnities on the part of the selling members. Certain of the selling
members continue to be employed by and participate in the management of RVA after the closing date
pursuant to written employment agreements. RVA is presented as a component of the Management
Consulting Services segment. In addition to cash consideration paid at closing, the transaction
included additional consideration for working capital true-ups and potential earn-out consideration
based upon performance of RVA after the closing date. The aggregate potential purchase price of
$12.8 million consists of the following (in thousands):
|
|
|
|
|
Cash paid at closing |
|
$ |
6,625 |
|
Transaction costs |
|
|
247 |
|
Contingent consideration earned |
|
|
830 |
|
|
|
|
|
Total purchase price recognized at March 29, 2008 |
|
|
7,702 |
|
|
|
|
|
|
|
|
|
|
Remaining contingent cash consideration |
|
|
2,787 |
|
Remaining
contingent stock consideration (based on weighted average share price
for 30 day period preceding close) |
|
|
2,353 |
|
|
|
|
|
Aggregate potential consideration |
|
$ |
12,842 |
|
|
|
|
|
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. Because the acquisition involves contingent consideration, the
Company was initially required to recognize additional purchase consideration equal to the lesser
of the negative goodwill or the maximum amount of contingent consideration. At December 29, 2007,
$0.7 million of negative goodwill was reflected as a current liability based on the anticipated
resolution of the contingent feature. During the thirteen weeks ended March 29, 2008, additional
consideration for working capital true-ups totaling $0.8 million was paid, resulting in the
creation of $0.1 million of goodwill.
Cartesian Limited
On January 2, 2007, the Company acquired one-hundred percent of the outstanding common stock of
Cartesian Limited. Cartesian is presented within the Software Solutions Segment. In addition to
cash consideration paid at closing, the transaction included additional consideration for
- 10 -
working capital true-ups and potential earn-out consideration based upon performance of Cartesian
after the closing date. The aggregate potential purchase price of $16.3 million consists of the
following (in thousands):
|
|
|
|
|
Cash paid at closing |
|
$ |
6,495 |
|
Transaction costs |
|
|
534 |
|
Contingent consideration earned |
|
|
4,835 |
|
|
|
|
|
Total purchase price recognized at March 29, 2008 |
|
|
11,864 |
|
|
|
|
|
|
|
|
|
|
Remaining contingent cash consideration |
|
|
4,482 |
|
|
|
|
|
Aggregate potential consideration |
|
$ |
16,346 |
|
|
|
|
|
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. Because the acquisition involves contingent consideration,
the Company was initially required to recognize additional purchase consideration equal to the
lesser of the negative goodwill or the maximum amount of contingent consideration. At December 29,
2007, $0.6 million of negative goodwill was reflected as a current liability based on the
anticipated resolution of the contingent feature. During the thirteen weeks ended March 29, 2008,
earn-out payments totaling $0.3 million were paid and an additional $1.0 million was earned and
accrued for in Other accrued liabilities on the condensed consolidated balance sheet, resulting
in the creation of $0.7 million of goodwill.
Pro Forma Combined Results
The operating results of Cartesian, RVA, and TWG have been included in the Condensed Consolidated
Statements of Operations and Comprehensive Loss subsequent to the respective dates of the purchase.
The following reflects pro forma combined results of the Company (including Cartesian, RVA, and
TWG) as if the acquisitions had occurred as of January 1, 2007. 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, 2007 nor is it necessarily indicative of future
consolidated results of operations of the Company.
|
|
|
|
|
|
|
For the Thirteen Weeks |
|
|
|
Ended March 31, 2007 |
|
|
|
(Unaudited) |
|
|
|
(In thousands, except per |
|
|
|
share amounts) |
|
Total revenues |
|
$ |
23,168 |
|
Net income |
|
$ |
51 |
|
Basic and diluted net income per common share |
|
$ |
0.00 |
|
4. Business Segments and Major Customers
The Company identifies its segments based on the way management organizes the Company to
assess performance and make operating decisions regarding the allocation of resources. In
accordance with the criteria in 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 $727,000 and $24,000 in the thirteen weeks ended March 29, 2008 and March 31,
2007, respectively. 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 segments.
- 11 -
Summarized financial information concerning the Companys reportable segments is shown in the
following table (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management |
|
|
|
|
|
Not |
|
|
|
|
Consulting |
|
Software |
|
Allocated to |
|
|
|
|
Services |
|
Solutions |
|
Segments |
|
Total |
As of and for the thirteen weeks ended March 29, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
15,975 |
|
|
$ |
5,566 |
|
|
|
|
|
|
$ |
21,541 |
|
Income
(loss) from operations |
|
|
4,784 |
|
|
|
1,790 |
|
|
$ |
(6,537 |
) |
|
|
37 |
|
Total assets |
|
$ |
14,532 |
|
|
$ |
6,502 |
|
|
$ |
55,872 |
|
|
$ |
76,906 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the thirteen weeks ended March 31, 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
9,832 |
|
|
$ |
5,281 |
|
|
|
|
|
|
$ |
15,113 |
|
Income (loss) from operations |
|
|
3,184 |
|
|
|
1,427 |
|
|
$ |
(6,696 |
) |
|
|
(2,085 |
) |
Total assets |
|
$ |
9,844 |
|
|
$ |
6,567 |
|
|
$ |
56,379 |
|
|
$ |
72,790 |
|
Segment assets, regularly reviewed by management as part of its overall assessment of the segments
performance, include both billed and unbilled trade accounts receivable, net of allowances, and
certain other assets. Assets not assigned to segments include cash and cash equivalents, property
and equipment, goodwill and intangible assets and deferred tax assets.
Revenues earned in the United States and internationally based on the location where the services
are performed are as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the Thirteen Weeks Ended |
|
|
|
March 29, |
|
|
March 31, |
|
|
|
2008 |
|
|
2007 |
|
United States |
|
$ |
13,467 |
|
|
$ |
7,595 |
|
International: |
|
|
|
|
|
|
|
|
United Kingdom |
|
|
7,574 |
|
|
|
6,525 |
|
Germany |
|
|
|
|
|
|
516 |
|
Japan |
|
|
|
|
|
|
221 |
|
Ireland |
|
|
286 |
|
|
|
|
|
Other |
|
|
214 |
|
|
|
256 |
|
|
|
|
|
|
|
|
|
Total |
|
$ |
21,541 |
|
|
$ |
15,113 |
|
|
|
|
|
|
|
|
Major customers in terms of significance to TMNGs revenues (i.e. in excess of 10% of revenues) for
the thirteen weeks ended March 29, 2008, and accounts receivable as of March 29, 2008 were as
follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the |
|
|
|
|
thirteen |
|
Accounts |
|
|
weeks ended |
|
Receivable as |
|
|
March 29, |
|
of March 29, |
|
|
2008 |
|
2008 |
Customer A |
|
$ |
6,569 |
|
|
$ |
5,174 |
|
Customer B |
|
$ |
3,694 |
|
|
$ |
5,795 |
|
Revenues from Customers A were reported within the Management Consulting Services segment.
Revenues of $1.9 million and $1.8 million for Customer B were reported within the Software
Solutions and Management Consulting Services segments, respectively, during the thirteen
weeks ended March 29, 2008. Revenues from the Companys ten most significant customers
accounted for approximately 82% of revenues during the thirteen weeks ended March 29, 2008.
- 12 -
5. Goodwill and Other Identifiable Intangible Assets
The changes in the carrying amount of goodwill for the thirteen weeks ended March 29, 2008
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management |
|
|
Software |
|
|
|
|
|
|
Consulting |
|
|
Solutions |
|
|
|
|
|
|
Segment |
|
|
Segment |
|
|
Total |
|
Balance as
of December 29, 2007 |
|
$ |
13,365 |
|
|
|
|
|
|
$ |
13,365 |
|
2008 Cartesian Goodwill |
|
|
|
|
|
$ |
717 |
|
|
|
717 |
|
2008 RVA Goodwill |
|
|
81 |
|
|
|
|
|
|
|
81 |
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 29, 2008 |
|
$ |
13,446 |
|
|
$ |
717 |
|
|
$ |
14,163 |
|
|
|
|
|
|
|
|
|
|
|
Included in intangible assets, net are the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 29, 2008 |
|
|
December 29, 2007 |
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Accumulated |
|
|
|
Cost |
|
|
Amortization |
|
|
Cost |
|
|
Amortization |
|
Acquired software |
|
$ |
2,988 |
|
|
$ |
(934 |
) |
|
$ |
2,988 |
|
|
$ |
(747 |
) |
Customer relationships |
|
|
6,090 |
|
|
|
(1,364 |
) |
|
|
6,090 |
|
|
|
(977 |
) |
Employment agreements |
|
|
2,692 |
|
|
|
(952 |
) |
|
|
2,692 |
|
|
|
(736 |
) |
Customer backlog |
|
|
2,200 |
|
|
|
(1,500 |
) |
|
|
2,598 |
|
|
|
(1,373 |
) |
Tradename |
|
|
398 |
|
|
|
(249 |
) |
|
|
398 |
|
|
|
(199 |
) |
S3 license agreement |
|
|
1,500 |
|
|
|
(701 |
) |
|
|
1,500 |
|
|
|
(629 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
15,868 |
|
|
$ |
(5,700 |
) |
|
$ |
16,266 |
|
|
$ |
(4,661 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible amortization expense for the thirteen weeks ended March 29, 2008 and March 31, 2007 was
$1,433,000 and $723,000, respectively, including $185,000 and $183,000 reported in cost of services
for the thirteen weeks ended March 29, 2008 and March 31, 2007, respectively. Future intangible
amortization expense is estimated to be as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
|
|
|
|
|
intangible |
|
|
Total estimated |
|
amortization to |
|
|
intangible |
|
be included in |
Future Period |
|
amortization |
|
cost of services |
Remainder of fiscal year 2008
|
|
$ |
3,437 |
|
|
$ |
560 |
|
Fiscal year 2009
|
|
|
3,450 |
|
|
|
747 |
|
Fiscal years 2010 2012
|
|
|
3,282 |
|
|
|
747 |
|
6. Share-Based Compensation
The Company issues stock option awards and nonvested share awards under its share-based
compensation plans. The key provisions of the Companys share-based compensation plans are
described in Note 4 of the Companys consolidated financial statements included in the 2007 Form
10-K.
The Company did not recognize any income tax benefit for share-based compensation arrangements for
the thirteen weeks ended March 29, 2008 and March 31, 2007. In addition, no costs related to
share-based compensation expense were capitalized during the thirteen weeks ended March 29, 2008
and March 31, 2007. During the first quarter of 2007, the Company revised its estimate of options
that are expected to be forfeited prior to vesting. As a result of this change in estimate, pre-tax
share-based compensation expense was reduced by $968,000.
- 13 -
1998 Equity Incentive Plan
Stock Options
A summary of the option activity under the Companys 1998 Equity Incentive Plan, as amended and
restated (the 1998 Plan), as of March 29, 2008 and changes during the thirteen weeks then ended
is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
Shares |
|
|
Exercise Price |
|
Outstanding at December 29, 2007 |
|
|
4,794,341 |
|
|
$ |
3.47 |
|
Exercised |
|
|
(12,775 |
) |
|
$ |
2.10 |
|
Forfeited/cancelled |
|
|
(112,125 |
) |
|
$ |
2.25 |
|
|
|
|
|
|
|
|
Outstanding at March 29, 2008 |
|
|
4,669,441 |
|
|
$ |
3.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested and expected to vest at March 29, 2008 |
|
|
3,919,809 |
|
|
$ |
3.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at March 29, 2008 |
|
|
2,325,618 |
|
|
$ |
4.79 |
|
|
|
|
|
|
|
|
Nonvested Shares
A summary of the status of nonvested stock granted under the 1998 Plan as of March 29, 2008 and
changes during the thirteen weeks then ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Grant Date |
|
|
|
Shares |
|
|
Fair Value |
|
Outstanding at December 29, 2007 |
|
|
107,500 |
|
|
$ |
2.24 |
|
Vested |
|
|
(43,750 |
) |
|
$ |
2.24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 29, 2008 |
|
|
63,750 |
|
|
$ |
2.23 |
|
|
|
|
|
|
|
|
2000 Supplemental Stock Plan
A summary of the option activity under the Companys 2000 Supplemental Stock Plan as of March 29,
2008 and changes during the thirteen weeks then ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
Shares |
|
|
Exercise Price |
|
Outstanding at December 29, 2007 |
|
|
1,399,736 |
|
|
$ |
2.58 |
|
Granted |
|
|
361,000 |
|
|
$ |
1.89 |
|
Forfeited/cancelled |
|
|
(35,834 |
) |
|
$ |
2.23 |
|
|
|
|
|
|
|
|
Outstanding at March 29 , 2008 |
|
|
1,724,902 |
|
|
$ |
2.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested and expected to vest at March 29, 2008 |
|
|
1,352,724 |
|
|
$ |
2.52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at March 29, 2008 |
|
|
398,812 |
|
|
$ |
3.32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value of options granted during the period |
|
|
|
|
|
$ |
1.12 |
|
7. Earnings (Loss) Per Share
The Company calculates and presents earnings (loss) per share using a dual presentation of basic
and diluted earnings (loss) per share. Basic earnings (loss) per share is computed by dividing net
income (loss) by the weighted average number of common shares outstanding for the period. The
weighted average number of common shares outstanding excludes treasury shares purchased by the
Company. Diluted earnings (loss) per share is computed in the same manner except the weighted
average number of shares is increased for dilutive securities.
In accordance with the provisions of SFAS 128, Earnings per Share, the Company uses the treasury
stock method for calculating the dilutive effect of employee stock options and nonvested shares.
These instruments will have a dilutive effect under the treasury stock method only when the
respective periods average market value of the underlying Company common stock exceeds the actual
proceeds. In applying the treasury stock method, assumed proceeds include the amount, if any, the
employee must pay upon exercise, the amount of compensation cost for future services that the
Company has not yet recognized, and the amount of tax benefits, if any, that would be credited to
additional paid-in capital
- 14 -
assuming exercise of the options and the vesting of nonvested shares. The Company has excluded the
effect of 6,257,067 stock options and 34,972 nonvested shares in the calculation of diluted income
per share for the thirteen weeks ended March 29, 2008 as the effect would have been anti-dilutive.
For the thirteen weeks ended March 31, 2007, the Company has not included the effect of stock
options and nonvested shares in the calculation of diluted loss per share as it reported a net loss
for the period and the effect would have been anti-dilutive.
8. Income Taxes
In the thirteen weeks ended March 29, 2008, the Company recorded an income tax provision of $82,000
An income tax benefit of $1,000 was recorded during the thirteen weeks ended March 31, 2007. The
tax provision in the 2008 period is primarily related to international income taxes due to the
profitability of the Companys United Kingdom operations. The tax benefit in the thirteen weeks
ended March 31, 2007 is primarily related to state income taxes. During both periods, the Company
recorded full valuation allowances against income tax benefits related to domestic operations in
accordance with the provisions of SFAS No. 109 Accounting for Income Taxes, which requires an
estimation of the recoverability of the recorded income tax asset balances. As of March 29, 2008,
the Company has recorded $30.5 million of valuation allowances attributable to its net deferred tax
assets.
The Company analyzes its uncertain tax positions pursuant to the provisions of FASB Interpretation
No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement 109,
(FIN 48). The Company recognizes interest and penalties related to unrecognized tax benefits as a
component of the income tax provision. There was no material activity related to the liability for
uncertain tax positions during the thirteen weeks ended March 29, 2008. As of March 29, 2008, 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 March 29, 2008, the Company has one examination in process by the Internal
Revenue Service related to employment and stock option matters.
9. Loans to Officers
As of March 29, 2008, 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 March 29, 2008 and December 29, 2007 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 March 29, 2008.
10. Commitments and Contingencies
The Company may become involved in various legal and administrative actions arising in the normal
course of business. These could include actions brought by taxing authorities challenging the
employment status of consultants utilized by the Company. In addition, future customer bankruptcies
could result in additional claims on collected balances for professional services near the
bankruptcy filing date. The resolution of any of such actions, claims, or the matters described
above may have an impact on the financial results for the period in which they occur.
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. As of March 29, 2008, the Company is obligated to make remaining payments of
$900,000. The off-market portion of these payments was recorded through purchase accounting in
connection with the Companys acquisition of RVA. As of March 29, 2008, the unamortized balance of
the obligation was $0.7 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 a non-GAAP earnings
target (as defined) of $7.0 million for fiscal year 2008. The calculation of the non-GAAP EBITDA
target excludes non-cash charges (e.g., share-based compensation expense, etc.) and may exclude
extraordinary one-time items to the extent determined to be appropriate by the Compensation
Committee. The amount available for payment from the Pool (Payout Amount) begins at $800,000 if
the Company achieves the non-GAAP EBITDA target. If the target is exceeded, the Payout Amount
increases in accordance with a graduated, ascending scale ranging from 15% to 25% of the non-GAAP
EBITDA 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.
- 15 -
11. 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) was
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). In certain circumstances, the Rights may be redeemed by the Company. If the Rights
are not earlier redeemed, the Rights Plan will terminate on March 27, 2018.
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 historically
experienced substantial net operating losses (See Note 8, 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.
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Statement Regarding Forward-Looking Statements. In addition to historical information,
this quarterly report contains forward-looking statements. Forward-looking statements include, but
are not limited to, statements of plans and objectives, statements of future economic performance
or financial projections, statements of assumptions underlying such statements, and statements of
the Companys or managements intentions, hopes, beliefs, expectations or predictions of the
future. Forward-looking statements can often be identified by the use of forward-looking
terminology, such as believes, expects, may, should, could, intends, plans,
estimates or anticipates, variations thereof or similar expressions. Certain risks and
uncertainties could cause actual results to differ materially from those reflected in such
forward-looking statements. Factors that might cause a difference include, but are not limited to,
our ability to successfully integrate recent acquisitions and to successfully locate new
acquisition candidates, conditions in the industry sectors that we serve, overall economic and
business conditions, our ability to retain the limited number of large clients that constitute a
major portion of our revenues, technological advances and competitive factors in the markets in
which we compete, and the factors discussed in the sections entitled Cautionary Statement
Regarding Forward-Looking Information and Managements Discussion and Analysis of Financial
Condition and Results of Operations in our annual report on Form 10-K for the fiscal year ended
December 29, 2007. Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect managements opinions only as of the date of this report. We undertake no
obligation to revise, or publicly release the results of any revision to, these forward-looking
statements. Readers should carefully review the cautionary statements contained in our annual
report and in other documents that we file from time to time with the Securities and Exchange
Commission.
The following should be read in connection with Managements Discussion and Analysis of Financial
Condition and Results of Operations as presented in our annual report on Form 10-K for the fiscal
year ended December 29, 2007.
OVERVIEW
TMNG is a leading provider of professional services to the converging communications, media and
entertainment industries and the capital formation firms that support them. We offer a fully
integrated suite of consulting offerings including strategy, 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 total revenues grew by 42.5% for the
thirteen weeks ended March 29, 2008 from the same period in 2007. International revenues represent
37.5% of our total revenue, down from 49.7% in the 2007 period as a result of strategic domestic
acquisitions in the second half of fiscal 2007. 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
also 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. The details of these acquisitions are
outlined in Item 1, Note 3, Business Combinations, to the unaudited condensed consolidated
financial statements. These acquisitions combined with our investment in targeting the cable
industry have re-positioned the Company to better serve consolidating telecommunications carriers
and the converging global media and entertainment companies. Our acquisitions, organic growth and
recruitment efforts are helping us build what we believe is a more sustainable revenue model and
expanding
- 16 -
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.
Generally our client relationships begin with a short-term consulting engagement utilizing a few
consultants. Our sales strategy focuses on building long-term relationships with both new and
existing clients to gain additional engagements within existing accounts and referrals for new
clients. Strategic alliances with other companies are also used to sell services. We anticipate
that we will continue to pursue these marketing strategies in the future. The volume of work
performed for specific clients may vary from period to period and a major client from one period
may not use our services or the same volume of services in another period. In addition, clients
generally may end their engagements with little or no penalty or notice. If a client engagement
ends earlier than expected, we must re-deploy professional service personnel as any resulting
non-billable time could harm margins.
Cost of services consists primarily of compensation for consultants who are employees and
amortization of share-based compensation for stock options and nonvested stock (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 47.0% in the thirteen weeks ended March 29, 2008 compared with 45.0% in the same
period of 2007. The increase in gross margin in the first quarter of 2008 as compared to the same
period of 2007 is primarily due to the acquisition of RVA, which has a large base of higher margin
projects. 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 expenses to approximately 41.0% in
the thirteen weeks ended March 29, 2008 from 44.9% in the same period of 2007. Selling general and
administrative expenses in the first quarter of 2008 include approximately $1.2 million of
incremental expense associated with the operations of RVA and TWG. In addition, the first quarter
of 2008 includes $0.4 million in share-based compensation expenses compared with a credit of $0.3
million in the first quarter of 2007 due to adjustments in our forfeiture assumptions. We continue
to leverage integration of our recent acquisitions and evaluate selling, general and administrative
expense reduction opportunities to improve earnings.
Intangible
asset amortization included in operating expenses increased substantially to $1.2 million in the thirteen weeks ended
March 29, 2008 from $0.5 million in the thirteen weeks ended March 31, 2007. The increase in
amortization expense was due to the amortization of intangibles recorded in connection with the RVA
and TWG acquisitions.
We recorded net income of $0.3 million for the thirteen weeks ended March 29, 2008 compared to a
net loss of $1.7 million for the thirteen weeks ended March 31, 2007. This improvement is primarily
attributable to scale through acquisitions and organic growth, combined with effective cost
management initiatives.
From a cash flow perspective, cash flows provided by operating activities were $2.5 million during
the thirteen weeks ended March 29, 2008. Net cash flows used in operating activities were
$2.5 million during the thirteen weeks ended March 31, 2007. The improvement in cash flows from
operating activities during the thirteen weeks ended March 29, 2008 as compared with the 2007
period primarily related to improvements in operating results, including non-recurring payments
made in the 2007 period related to the Special Committee investigation of our past stock option
granting practices and related accounting, and positive cash flow from net working capital changes.
At March 29, 2008, we have working capital in excess of $18 million and minimal long-term
obligations. Our non-current investments consist of auction rate securities. Returns on our
marketable securities have decreased over recent periods as a result of reductions in invested
balances due to acquisitions and decreasing interest rates.
Due to recent events in the credit markets, the liquidity of auction rate securities has been
negatively impacted. As of March 29, 2008, we hold auction rate securities with a face amount of
$14.8 million supported by government guaranteed student loans. Beginning in February 2008,
auctions of the Companys auction rate securities portfolio failed to receive sufficient order
interest from potential investors to clear successfully, resulting in failed auctions. The
principal associated with failed auctions will not be accessible until a successful auction occurs,
a buyer is found outside of the auction process, the issuers redeem the securities, the issuers
establish a different form of financing to replace these securities or final payments come due
according to contractual maturities ranging from approximately 22 to 36 years. For each
unsuccessful auction, the interest rate moves to a maximum rate defined for each security. At this
time, we are uncertain as to when the liquidity issues related to these investments will improve.
Accordingly, the entire amount of auction rate securities has been reclassified from current to
non-current assets on our balance sheet as of March 29, 2008.
- 17 -
Although the auction rate securities are fully guaranteed through the Federal Family Education Loan
Program of the U.S. Department of Education and continue to pay interest according to their stated
terms, based on our analysis of the fair value of these securities, we recorded an impairment
related to these auction rate securities. Auction rate securities with an original par value of
approximately $14.8 million were written-down to an estimated fair value of $14.3 million as of
March 29, 2008. Based on our analysis of other-than-temporary impairment factors, this write-down
resulted in a temporary impairment charge of approximately $0.5 million reflected as an unrealized
loss within other comprehensive income for the thirteen weeks ended March 29, 2008.
Although we currently believe that any decline in the fair market value of these securities is
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 auction
rate securities 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 Note 2, Auction Rate Securities, in Notes to Condensed Consolidated Financial Statements
(Unaudited) for further discussion of our auction rate securities.
CRITICAL ACCOUNTING POLICIES
While the selection and application of any accounting policy may involve some level of subjective
judgments and estimates, we believe the following accounting policies are the most critical to our
condensed consolidated financial statements, potentially involve the most subjective judgments in
their selection and application, and are the most susceptible to uncertainties and changing
conditions:
|
|
|
Marketable Securities; |
|
|
|
|
Allowance for Doubtful Accounts; |
|
|
|
|
Fair Value of Acquired Businesses; |
|
|
|
|
Impairment of Goodwill and Long-lived Assets; |
|
|
|
|
Revenue Recognition; |
|
|
|
|
Share-based Compensation Expense; |
|
|
|
|
Accounting for Income Taxes; and |
|
|
|
|
Research and Development and Capitalized Software Costs. |
Marketable Securities Short-term investments and non-current investments, which consist of
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, these investments are reported at
fair value, as measured pursuant to SFAS No. 157, Fair Value Measurements, with any
temporary unrealized gains and losses included as a separate component of stockholders
equity, net of applicable taxes, when applicable. Realized gains and losses, changes in
value judged to be other-than-temporary, interest and dividends are included in interest
income within the Consolidated Statements of Operations and Comprehensive Loss.
The auction rate securities we hold are generally long-term debt instruments that provide
liquidity through a Dutch auction process through which interest rates reset every 28 to
35 days; consequently, interest rate movements did not materially affect the fair value of
these investments. At March 31, 2007 there were no unrealized gains or losses on short-term
investments. Given the liquidity created by the auctions, auction rate securities were
presented as current assets under short-term investments on our balance sheet. Beginning in
February 2008, auctions of our auction rate securities portfolio failed to receive
sufficient order interest from potential investors to clear successfully, resulting in
failed auction status. 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 auction rate securities portfolio we intend to reinvest these balances into
money market or similar investments. At this time, we are uncertain as to when the liquidity
issues related to these investments will improve. Accordingly, the entire amount of auction
rate securities has been reclassified from current to non-current assets on our balance
sheet as of March 29, 2008.
We value our auction rate securities portfolio using a model that takes into consideration inputs
that are based on expected cash flow streams and collateral values, including assessments of
counterparty credit quality, default risk underlying the security, discount rates and overall
capital market liquidity. Although the auction rate securities are fully guaranteed through the
Federal Family Education Loan Program of the U.S. Department of Education and continue to pay
interest according to their stated terms, based on our analysis of the fair value of these
securities, we recorded an impairment related to these auction rate securities. Auction rate
securities with an original par value of
- 18 -
approximately $14.8 million were written-down to an estimated fair value of $14.3 million as of
March 29, 2008. Based on our analysis of other-than-temporary impairment factors, this write-down
resulted in a temporary impairment charge of approximately $0.5 million reflected as an unrealized
loss within other comprehensive income for the thirteen weeks ended March 29, 2008.
We continually monitor the credit quality and liquidity of our auction rate securities. To
the extent we believe we will not be able to collect all amounts due according to the
contractual terms of a security, we will record an other-than-temporary impairment. This
could require us to recognize further unrealized losses in accordance with SFAS No. 115,
which could be material.
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 no bad debt expense for the thirteen weeks ended March 29, 2008 and $151,000 for the
thirteen weeks ended March 31, 2007. Our allowance for doubtful accounts totaled $663,000 and
$562,000 as of March 29, 2008 and December 29, 2007, respectively. The calculation of these amounts
is based on judgment about the anticipated default rate on receivables owed to us as of the end of
the reporting period. That judgment is based on uncollected account experience in prior years and
our ongoing evaluation of the credit status of our customers and the communications industry in
general.
We have attempted to mitigate credit risk by concentrating our marketing efforts on the largest and
most stable companies in the communications industry and by tightly controlling the amount of
credit provided to customers. If we are unsuccessful in these efforts, or if our customers file for
bankruptcy or experience financial difficulties, it is possible that the allowance for doubtful
accounts will be insufficient and we will have a greater bad debt loss than the amount reserved,
which would adversely affect our financial performance and cash flow.
Fair Value of Acquired Businesses TMNG has acquired seven organizations over the last six years.
A significant component of the value of these acquired businesses has been allocated to intangible
assets. Statement of Financial Accounting Standard (SFAS) No. 141 Business Combinations
requires acquired businesses to be recorded at fair value by the acquiring entity. SFAS No. 141
also requires that intangible assets that meet the legal and separable criterion be separately
recognized on the financial statements at their fair value, and provides guidance on the types of
intangible assets subject to recognition. Determining the fair value for these specifically
identified intangible assets involves significant professional judgment, estimates and projections
related to the valuation to be applied to intangible assets like customer lists, employment
agreements and tradenames. The subjective nature of managements assumptions adds an increased risk
associated with estimates surrounding the projected performance of the acquired entity.
Additionally, as the Company amortizes the intangible assets over time, the purchase accounting
allocation directly impacts the amortization expense the Company records on its financial
statements.
Impairment of Goodwill and Long-lived Assets As of March 29, 2008, we have $14.2 million in
goodwill and $10.2 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.
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 such services are
expected to be performed. In connection with some fixed fee contracts, we receive payments from
customers that exceed recognized revenues. We record the excess of receipts from customers over
recognized revenue as deferred revenue. Deferred revenue is classified as a current liability to
the extent it is expected to be earned within twelve months from the date of the balance sheet.
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
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to the long-term nature of the software implementation and the extensive software customization
based on customer specific requirements normally experienced by the Company, both the RTU and
implementation services are treated as a single element for revenue recognition purposes.
The SOP No. 81-1 percentage-of-completion methodology involves recognizing revenue using the
percentage of services completed, on a current cumulative cost to total cost basis, using a
reasonably consistent profit margin over the period. Due to the longer term nature of these
projects, developing the estimates of costs often requires significant judgment. Factors that must
be considered in estimating the progress of work completed and ultimate cost of the projects
include, but are not limited to, the availability of labor and labor productivity, the nature and
complexity of the work to be performed, and the impact of delayed performance. If changes occur in
delivery, productivity or other factors used in developing the estimates of costs or revenues, we
revise our cost and revenue estimates, which may result in increases or decreases in revenues and
costs, and such revisions are reflected in income in the period in which the facts that give rise
to that revision become known.
In addition to the professional services related to the customization and implementation of its
software, the Company also provides post-contract support (PCS) services, including technical
support and maintenance services. For those contracts that include PCS service arrangements which
are not essential to the functionality of the software solution, we separate the SOP No. 81-1
software services and PCS services utilizing the multiple-element arrangement model prescribed by
Emerging Issues Task Force (EITF) No. 00-21, Revenue Arrangements with Multiple Deliverables.
EITF No. 00-21 addresses the accounting treatment for an arrangement to provide the delivery or
performance of multiple products and/or services where the delivery of a product or system or
performance of services may occur at different points in time or over different periods of time.
The Company utilizes EITF No. 00-21 to separate the PCS service elements and allocate total
contract consideration to the contract elements based on the relative fair value of those elements.
Revenues from PCS services are recognized ratably on a straight-line basis over the term of the
support and maintenance agreement.
We also may enter into contingent fee contracts, in which revenue is subject to achievement of
savings or other agreed upon results, rather than time spent. Due to the nature of contingent fee
contracts, we recognize costs as they are incurred on the project and defer revenue recognition
until the revenue is realizable and earned as agreed to by our clients. Although these contracts
can be very rewarding, the profitability of these contracts is dependent on our ability to deliver
results for our clients and control the cost of providing these services. These types of contracts
are typically more results-oriented and are subject to greater risk associated with revenue
recognition and overall project profitability than traditional time and materials contracts.
Revenues associated with contingent fee contracts were not material during the thirteen weeks ended
March 29, 2008 and March 31, 2007.
Share-based Compensation Expense - We grant stock options and non-vested stock to our employees and
also provide employees the right to purchase our stock at a discount pursuant to an employee stock
purchase plan. The benefits provided under these plans are share-based payment awards subject to
the provisions of SFAS No. 123R, Share-based Payments. Under SFAS No. 123R, we are required to
make significant estimates related to determining the value of our share-based compensation. Our
expected stock-price volatility assumption is based on historical volatilities of the underlying
stock which are obtained from public data sources. For stock option grants issued during the
thirteen weeks ended March 29, 2008, we used a weighted-average expected stock-price volatility of
61%. The expected term of options granted is based on the simplified method in accordance with the
SECs Staff Accounting Bulletin (SAB) No. 110 as our historical share option exercise experience
does not provide a reasonable basis for estimation. As such, we used a weighted-average expected
option life assumption of 6.25 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. 110 using an option pricing model, that value may not be indicative of the fair
value observed in a willing buyer/willing seller market transaction.
In addition, under 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 March
29, 2008 is 31%.
Accounting for Income Taxes - Accounting for income taxes requires significant estimates and
judgments on the part of management. Such estimates and judgments include, but are not limited to,
the effective tax rate anticipated to apply to tax differences that are expected to reverse in the
future, the sufficiency of taxable income in future periods to realize the benefits of net deferred
tax assets and net operating losses currently recorded and the likelihood that tax positions taken
in tax returns will be sustained on audit.
We account for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes and
Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainty in
Income Taxesan interpretation of FASB Statement No. 109 (FIN 48). As required by SFAS No. 109,
we record deferred tax assets or liabilities based on differences between financial reporting and
tax bases of assets
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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 March 29, 2008, cumulative valuation allowances in the amount of $30.5 million
were recorded in connection with the net deferred income tax assets. As required by FIN 48, we have
performed a comprehensive review of our portfolio of uncertain tax positions in accordance with
recognition standards established by the Interpretation. Pursuant to FIN 48, an uncertain tax
position represents the Companys expected treatment of a tax position taken in a filed tax return,
or planned to be taken in a future tax return, that has not been reflected in measuring income tax
expense for financial reporting purposes. As of March 29, 2008, we have recorded a liability of
approximately $532,000 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 would 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 thirteen weeks ended March 29, 2008, no software development costs were
capitalized and $184,000 of these costs were expensed as incurred. During the thirteen weeks ended
March 31, 2007, no software development costs were capitalized and $272,000 of these costs were
expensed as incurred.
RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED MARCH 29, 2008 COMPARED TO THIRTEEN WEEKS ENDED MARCH 31, 2007
REVENUES
Revenues increased 42.5% to $21.5 million for the thirteen weeks ended March 29, 2008 from $15.1
million for the thirteen weeks ended March 31, 2007. The increase in revenues is primarily due to
the acquisitions of RVA in August 2007 and TWG in October 2007, which contributed $6.6 million and
$0.7 million, respectively, in revenues during the first quarter of 2008. Organic revenues were
down 6.0% in the first quarter of 2008 as compared to the same period of 2007, due primarily to
reductions in organic revenues within our management consulting services segment discussed below.
Management Consulting Services Segment - Management Consulting Services segment revenues increased
62.5% to $16.0 million for the first quarter of 2008 from $9.8 million for the same period of 2007.
The acquisitions of RVA and TWG accounted for $6.6 million and $0.7 million, respectively, of this
increase. Revenues from the remainder of the segment decreased $1.1 million due largely to
reductions in revenues from our global strategy consulting practices.
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During the thirteen weeks ended March 29, 2008, this segment provided services on 120 customer
projects, compared to 99 projects performed in the thirteen weeks ended March 31, 2007. Average
revenue per project was $133,000 in the thirteen weeks ended March 29, 2008 compared to $99,000 in
the thirteen weeks ended March 31, 2007. 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 revenues from this segment increased to $2.5 million for the thirteen weeks ended
March 29, 2008 from $2.2 million for the thirteen weeks ended March 31, 2007. However,
international revenues have decreased as a percentage of total revenues of the segment from 22.7%
to 15.7%. 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 engagements totaled $9.5 million and
$4.2 million, representing 59.9% and 43.1% of total revenues of the segment, for the thirteen weeks
ended March 29, 2008 and March 31, 2007, respectively. This increase is primarily due to the
acquisitions of RVA and TWG.
Software Solutions Segment - Revenues of $5.6 million and $5.3 million, respectively were generated
for the thirteen weeks ended March 29, 2008 and March 31, 2007. All revenues were generated
internationally. During the thirteen weeks ended March 29, 2008 and March 31, 2007, this segment
provided services on 84 and 53 customer projects, respectively. Average software and services
revenue per project was approximately $60,000 and $92,000, respectively, for the thirteen weeks
ended March 29, 2008 and March 31, 2007. The decrease in
revenue per project for the thirteen weeks ended March 29, 2008
as compared to the 2007 period is primarily due to an increase in the
number of smaller engagements combined with the completion of a
number of larger projects during fiscal year 2007. In addition, revenues from post-contract support services
were approximately $551,000 and $428,000 for the thirteen weeks ended March 29, 2008 and March 31,
2007, respectively.
COSTS OF SERVICES
Costs of services increased 37.2% to $11.4 million for the thirteen weeks ended March 29, 2008
compared to $8.3 million for the thirteen weeks ended March 31, 2007. As a percentage of revenues,
our gross margin was 47.0% for the thirteen weeks ended March 29, 2008, compared to 45.0% for the
thirteen weeks ended March 31, 2007. The increase in gross margin in the first quarter of 2008 as
compared to the same period of 2007 is primarily due the acquisition of RVA, which has a large base
of higher margin projects, partially offset by fewer projects in our strategy consulting practice
which generally have higher gross margins. Gross margins in both our management consulting
services segment and software solutions segment were comparable. Costs of services also included
amortization of intangible assets of $185,000 and $183,000, respectively for the thirteen weeks
ended March 29, 2008 and March 31, 2007, related to acquired software.
OPERATING EXPENSES
Operating expenses increased by 13.6% to $10.1 million for the thirteen weeks ended March 29, 2008,
from $8.9 million for the thirteen weeks ended March 31, 2007. Operating expenses for the 2008
period included selling, general and administrative expenses (inclusive of share-based
compensation) and intangible asset amortization. For the thirteen weeks ended March 31, 2007,
operating expenses also included Special Committee charges of approximately $1.6 million 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.
Selling, general and administrative expenses increased to $8.8 million for the thirteen weeks ended
March 29, 2008, compared to $6.8 million for the thirteen weeks ended March 31, 2007. As a
percentage of revenues, our selling, general and administrative expense was 41.0% for the thirteen
weeks ended March 29, 2008, compared to 44.9% for the thirteen weeks ended March 31, 2007. For the
thirteen weeks ended March 29, 2008, expenses in the organic business increased $0.8 million, or
12.5%, as compared to the same period in 2007. In addition, the acquired RVA and TWG businesses
added $1.2 million in incremental expense. The increase in selling, general and administrative
expenses, exclusive of RVA and TWG, was primarily due to an increase in share-based compensation
expense of $0.7 million, resulting from credits recognized in the thirteen weeks ended March 31,
2007 associated with an adjustment to our forfeiture assumption in that period. Also included in
selling, general and administrative expenses for the thirteen weeks ended March 29, 2008 is $0.2
million related to a senior executive incentive compensation plan approved by our Board of
Directors. We continue to evaluate cost reductions through the integration of our acquisitions and
alignment of costs to revenues for each operating segment.
Intangible asset amortization increased by $708,000 to $1,248,000 for the thirteen weeks ended
March 29, 2008, compared to $540,000 for the thirteen weeks ended March 31, 2007. The increase in
amortization expense was due to the amortization of intangibles recorded in connection with the RVA
and TWG acquisitions.
OTHER INCOME AND EXPENSES
Interest income was $306,000 and $417,000 for the thirteen weeks ended March 29, 2008 and March 31,
2007, respectively, and represented interest earned on invested balances. Interest income decreased
for the thirteen weeks ended March 29, 2008 as compared to the thirteen weeks ended March 31, 2007
due primarily to reductions in invested balances attributable to cash utilized for acquisitions and
reductions in interest rates. We primarily invest in money market funds and have holdings in
auction rate securities.
- 22 -
INCOME TAXES
In the thirteen weeks ended March 29, 2008, we recorded an income tax provision of $82,000 compared
to an income tax benefit of $1,000 during the thirteen weeks ended March 31, 2007. The income tax
provision in the first quarter of 2008 is primarily due to the profitability of our United Kingdom
operations. The income tax benefit in the first quarter of 2007 is primarily due to state income
taxes. For the thirteen weeks ended March 29, 2008 and March 31, 2007, we recorded no income tax
benefit related to our domestic pre-tax losses in accordance with the provisions of SFAS No. 109
Accounting for Income Taxes which requires an estimation of 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 operating losses. If we continue to report domestic net
operating losses for financial reporting, no additional tax benefit would be recognized for those
losses, since we will not have accumulated enough positive evidence to support our ability to
utilize the net operating loss carryforwards in the future.
NET INCOME (LOSS)
We had net income of $0.3 million for the thirteen weeks ended March 29, 2008 compared to a net
loss of $1.7 million for the thirteen weeks ended March 31, 2007. This improvement was primarily
attributable to revenue growth, including the accretive acquisitions of Cartesian and RVA, and
improved operating leverage obtained through scale and continued cost management, partially offset
by an increase in share-based compensation expense of $1.1 million resulting from the adjustment
for forfeitures during the 2007 period. In addition, the 2007 period included $1.6 million in
Special Committee charges which did not recur in the thirteen weeks ended March 29, 2008.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $2.5 million for the thirteen weeks ended March 29,
2008. Net cash used in operating activities was $2.5 million for the thirteen weeks ended March
31, 2007. The significant change in cash flows from operating activities for the thirteen weeks
ended March 29, 2008 as compared to the same period in 2007 was due to improvements in operating
results, including payments made in the 2007 period related to the Special Committee, and positive
cash flows from net working capital changes.
Net cash provided by investing activities was $1.0 million for the thirteen weeks ended March 29,
2008 and net cash used in investing activities was $3.4 million for the thirteen weeks ended March
31, 2007. Investing activities in fiscal year 2008 included $0.8 million and $0.3 million in
earn-out payments related to the acquisitions of RVA and Cartesian, respectively, and fiscal year
2007 included $5.2 million for the acquisition of Cartesian. Investing activities include proceeds
from sales of short-term investments of $2.3 million and $1.9 million in the thirteen weeks ended
March 29, 2008 and March 31, 2007, respectively. Net cash used in investing activities also
included $216,000 and $41,000 for the thirteen weeks ended March 29, 2008 and March 31, 2007,
respectively, related to the purchase of office equipment, software and computer equipment.
Net cash used in financing activities was $357,000 and $115,000 for the thirteen weeks ended March
29, 2008 and March 31, 2007, respectively, primarily related to payments on long-term obligations,
including unfavorable contract obligations assumed as part of the RVA acquisition, partially offset
by proceeds received from the exercise of employee stock options.
At March 29, 2008, we had approximately $13.1 million in cash and cash equivalents and $18.2
million in net working capital. We believe we have sufficient cash and short-term investments to
meet anticipated cash requirements, including anticipated capital expenditures, consideration for
possible acquisitions and earn-out payments, 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
may 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 balance sheet has enabled us to make acquisitions and related investments in
intellectual property and businesses we believe are enabling us to capitalize on the current
transformation of the industry; however, if demand for our consulting services is reduced and we
experience negative cash flow, we could experience liquidity challenges at some future point.
As previously discussed, the liquidity of auction rate securities has been negatively impacted by
recent events in the credit markets. As of March 29, 2008, we hold auction rate securities in the
face amount of $14.8 million, with an estimated fair value of $14.3 million, supported by
government guaranteed student loans. Beginning in February 2008, auctions of the Companys auction
rate securities portfolio failed to receive sufficient order interest from potential investors to
clear successfully, resulting in failed auction status. 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. At this time, we are uncertain as to when
the liquidity issues related to these investments will improve. Accordingly, the entire amount of
auction rate securities has been reclassified from current to non-current assets on our balance
sheet as of March 29, 2008. This reclassification has caused our working capital and current ratio
to decrease.
In the event we are able to successfully liquidate our auction rate securities portfolio we
intend to reinvest these balances into money market or similar investments. We continually
monitor the credit quality and liquidity of our auction rate securities. To the extent we
believe we will not be able to collect all amounts due according to the contractual terms of
a security, we will record an other-than-
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temporary impairment. 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 our consolidated statement of operations in accordance with SFAS No. 115, which could be material. 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.
FINANCIAL COMMITMENTS
During fiscal year 2007, we purchased 100% of the outstanding stock of Cartesian, acquired all of
the outstanding membership interests of RVA and acquired all of the outstanding shares of stock of
TWG. In addition to consideration paid at closing for these acquisitions, we have potential
contingent purchase price obligations of approximately $4.5 million, $5.1 million and $2.8 million,
respectively, at March 29, 2008 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 EBITDA target (as defined) of $7.0 million for
fiscal year 2008. The calculation of the non-GAAP EBITDA target excludes non-cash charges (e.g.,
share-based compensation expense, etc.) and may exclude extraordinary one-time items to the extent
determined to be appropriate by the Compensation Committee. The amount available for payment from
the Pool (Payout Amount) begins at $800,000 if we achieve the Non-GAAP EBITDA target. If the
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 the
thirteen weeks ended March 29, 2008 and March 31, 2007, we
incurred legal fees of $18,000
and $73,000, 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 the
thirteen weeks ended March 29, 2008 were in connection with
income tax and other legal matters. Payments made in
the thirteen weeks ended March 31, 2007 were in connection with our acquisition of Cartesian and
other potential acquisition matters. Our Board of Directors has affirmatively determined that such
payments do not constitute a material relationship between the director and the Company and
concluded the director is independent as defined by the NASDAQ corporate governance rules. All
payments were made within the limitations set forth by NASDAQ Rules as to the qualifications of an
independent director.
As of March 29, 2008, 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 March 29, 2008 and March 31, 2007 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 March 29, 2008.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
Not applicable.
ITEM 4T. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures and Changes in Internal Control Over Financial
Reporting
The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934 (the Exchange Act)) that are designed to
ensure that information required to be disclosed by the Company in reports that it files or submits
under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods
specified in SEC rules and forms; and (ii) accumulated and communicated to the Companys
management, including its principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding required disclosure. We have established a
Disclosure Committee, consisting of certain members of management, to assist in this evaluation.
The Disclosure Committee meets on a regular quarterly basis, and as needed.
A review and evaluation was performed by our management, including our Chief Executive Officer (the
CEO) and Chief Financial Officer (the CFO), of the effectiveness of the design and operation of
our disclosure controls and procedures as of the end of the period covered by this quarterly
report. Based upon this evaluation, the Companys CEO and CFO have concluded that the Companys
disclosure controls and procedures were effective as of March 29, 2008.
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There was no change in internal control over financial reporting during the fiscal quarter ended
March 29, 2008, that has materially affected or is reasonably likely to materially affect our
internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We have not been subject to any material new litigation since filing on March 28, 2008 of our
Annual Report on Form 10-K for the year ended December 29, 2007.
ITEM 1A. RISK FACTORS
Not applicable
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
(a) Exhibits
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Exhibit 3.1
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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, are incorporated
herein by reference as Exhibit 3.1. |
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Exhibit 4.1
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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 filed with the Securities and Exchange Commission on March 27,
2008, is incorporated herein by reference as Exhibit 4.1. |
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Exhibit 4.2
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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 filed with the Securities
and Exchange Commission on March 27, 2008, is incorporated herein by reference as
Exhibit 4.2. |
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Exhibit 10.1
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Employment Agreement dated April 8, 2008 between The Management Network Group,
Inc. and Donald E. Klumb, filed as Exhibit 10.1 to the Companys Current Report on
Form 8-K filed with the Securities and Exchange Commission on April 11, 2008, is
incorporated herein by reference as Exhibit 10.1. |
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Exhibit 10.2
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The Management Network Group, Inc. 2008 Executive Incentive Compensation Plan,
filed as Exhibit 10.1 to the Companys Current Report on Form 8-K filed with the
Securities and Exchange Commission on February 25, 2008, is incorporated herein by
reference as Exhibit 10.2. |
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Exhibit 31.
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Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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Exhibit 32.
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Certifications furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
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The Management Network Group, Inc. |
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(Registrant)
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Date
May 13, 2008
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By
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/s/ Richard P. Nespola |
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(Signature)
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Richard P. Nespola |
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Chairman and Chief Executive Officer |
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(Principal executive officer) |
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Date
May 13, 2008
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By
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/s/ Donald E. Klumb |
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(Signature)
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Donald E. Klumb |
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Chief Financial Officer and Treasurer |
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(Principal financial officer and principal |
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accounting officer) |
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EXHIBIT INDEX
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Exhibit No. |
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Description of Exhibit |
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Exhibit 3.1
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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, are incorporated
herein by reference as Exhibit 3.1. |
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Exhibit 4.1
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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 filed with the Securities and Exchange Commission on March 27,
2008, is incorporated herein by reference as Exhibit 4.1. |
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Exhibit 4.2
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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 filed with the Securities
and Exchange Commission on March 27, 2008, is incorporated herein by reference as
Exhibit 4.2. |
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Exhibit 10.1
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Employment Agreement dated April 8, 2008 between The Management Network Group,
Inc. and Donald E. Klumb, filed as Exhibit 10.1 to the Companys Current Report on
Form 8-K filed with the Securities and Exchange Commission on April 11, 2008, is
incorporated herein by reference as Exhibit 10.1. |
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Exhibit 10.2
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The Management Network Group, Inc. 2008 Executive Incentive Compensation Plan,
filed as Exhibit 10.1 to the Companys Current Report on Form 8-K filed with the
Securities and Exchange Commission on February 25, 2008, is incorporated herein by
reference as Exhibit 10.2. |
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Exhibit 31.
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Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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Exhibit 32.
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Certifications furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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