10-K
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the Fiscal Year Ended
January 3, 2009
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission File Number:
000-27617
THE MANAGEMENT NETWORK GROUP,
INC.
(Exact name of registrant as
specified in its charter)
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DELAWARE
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48-1129619
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(State or other jurisdiction
of
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(I.R.S. Employer
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incorporation or
organization)
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identification
number)
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7300 COLLEGE BOULEVARD,
SUITE 302, OVERLAND PARK, KANSAS 66210
(Address of principal executive
offices) (Zip Code)
REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE:
(913) 345-9315
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE
ACT:
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Title of Each Class
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Name of Each Exchange on Which Registered
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COMMON STOCK, $.001 PAR VALUE PER SHARE
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The NASDAQ STOCK MARKET, LLC
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE
ACT:
NONE.
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. YES o NO þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. YES o NO þ
Indicate by check mark whether the Registrant (1) has filed
all reports to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. YES þ NO o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of Registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o
(Do not check if a smaller reporting company)
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Smaller reporting company þ
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). YES o NO þ
The aggregate market value of the voting common stock held by
non-affiliates of the Registrant, as of June 28, 2008 was
approximately $24,500,000. Shares of common stock held by each
executive officer, director and holder of 5% or more of the
outstanding common stock have been excluded for purposes of this
calculation. The treatment of such holders as affiliates for
purposes of this calculation is not intended as a conclusive
determination of affiliate status for other purposes. As of
March 31, 2009, the Registrant had 34,765,124 shares of
common stock, par value $0.001 per share (the Common Stock),
issued and outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
The information required to be provided in Part III
(Items 10, 11, 12, 13 and 14) of this Annual Report on
Form 10-K
is hereby incorporated by reference from our definitive 2009
proxy statement which will be filed with the Securities and
Exchange Commission within 120 days of the end of our
fiscal year ended January 3, 2009.
THE
MANAGEMENT NETWORK GROUP, INC.
FORM 10-K
TABLE OF
CONTENTS
Exhibits
List of Subsidiaries
Consent of Independent Registered Public Accounting Firm
302 Certification of Chief Executive Officer
302 Certification of Chief Financial Officer
Section 906 Certification
2
PART I
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING INFORMATION
With the exception of current and historical information, this
Annual Report on
Form 10-K
contains forward-looking statements as defined in the Private
Securities Litigation Reform Act of 1995. Forward-looking
statements include, but are not limited to, statements of plans
and objectives, statements of future economic performance or
financial projections, statements of assumptions underlying such
statements, and statements of the Companys or
managements intentions, hopes, beliefs, expectations or
predictions of the future. Forward-looking statements can often
be identified by the use of forward-looking terminology, such as
will be, intend, continue,
believe, may, expect,
hope, anticipate, goal,
forecast or other comparable terms.
Forward-looking statements involve risks and uncertainties and
are not guarantees of future performance or results. Our actual
financial condition, results of operations or business may vary
materially from those contemplated by such forward looking
statements. Investors are cautioned not to place undue reliance
on any forward-looking statements. Factors that might affect
actual results, performance, or achievements include, among
other things, the factors described in Risks Related to
Current Economic Conditions in Item 1 below and the
following factors:
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conditions in the industry sectors that we serve, including the
recent worsening of economic conditions in such industry
sectors, resulting in slowing client decisions on proposals and
project opportunities along with scope reduction of existing
projects
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the financial condition and business strategies of our customers
in the converging communications, media and entertainment
industry and the investment banking and private equity firms
investing in that industry,
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overall economic and business conditions given the current
global economic recession, including the recent worsening of
conditions in the credit markets and in general economic
conditions
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the level of demand for our services, including recently
decreasing demand for services
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the potential continuation or recurrence of recent losses from
operations, negative cash flow and reductions in our cash
reserves,
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our ability to retain the limited number of large clients that
constitute a major portion of our revenues,
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fluctuations in our quarterly operating results,
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our ability to reduce our cost structure to align with reduced
demand and to control costs under fixed fee contracts, which
make up a substantial portion of our business,
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our ability to compete in intensively competitive markets,
including our ability to address actions by competitors that
could render our services less competitive, such as the recent
increase in price competition, which may cause our revenues,
gross profits and income to decline,
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our ability to address the challenges of conducting business in
foreign countries, including risks of unfavorable foreign
currency exchange rates or fluctuations and changes in local
laws,
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the possibility of further impairments of goodwill if our
financial performance does not meet or exceed our projections
used to value the assets or if there is a further decline in our
stock price,
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the possibility of further write-downs in the value of our
auction rate securities due to future fluctuations in interest
rates, counter-party credit ratings and liquidity in the
secondary market for these securities,
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our ability to successfully integrate recent acquisitions and to
successfully locate new acquisition candidates,
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our level of cash and non-cash expenditures,
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technological advances and competitive factors in the markets in
which we compete,
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possible regulatory action related to our past equity granting
practices and associated accounting,
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the possibility of the cancellation of key client contracts,
which may be cancelled on short notice,
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the ability to successfully launch new product and market
initiatives,
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the ability to retain key management and consulting personnel,
particularly given the performance of our stock and the impact
of a low stock price on the value of share-based compensation,
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the possible reclassification of our independent contractors,
who we rely upon heavily, as full-time employees by the taxing
and/or labor
and employment authorities of competent jurisdiction,
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the possibility of professional liability claims,
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the loss of key intellectual property,
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our ability to satisfy the continued listing requirements of the
NASDAQ Stock Market (including our failure to satisfy the NASDAQ
Stock Markets $1.00 minimum bid price requirement which
has been temporarily suspended), and
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the possibility that our ability to utilize tax net operating
loss carryforwards to offset future taxable income will be
limited if we are deemed to have an ownership change as defined
by Section 382 of the Internal Revenue Code.
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Other factors that we have not identified in this document could
also have this effect. All forward-looking statements made in
this Annual Report on
Form 10-K
are made as of the date hereof.
When used in this report, the terms TMNG, TMNG
Global, we, us, our or
the Company refer to The Management Network Group,
Inc. and its subsidiaries.
GENERAL
TMNG, a Delaware corporation, founded in 1990, is a leading
provider of professional services to the converging
communications, media and entertainment industries and the
capital formation firms that support them. We offer a fully
integrated suite of offerings including strategy, management,
marketing, operational, and technology consulting services, as
well as software and application development (see
Services in Item 1). We have consulting
experience with almost all major aspects of managing a global
communications company. We capitalize on our industry expertise
by developing and enhancing new and existing software and
proprietary toolsets that enable us to provide strategic,
management, marketing, operational, and technology support to
our clients. Our portfolio of solutions includes licensed
software, proprietary methodologies and toolsets, deep industry
experience, and hands-on operational expertise. These solutions
assist clients in tackling complex business problems.
Our clientele includes a variety of businesses whose products,
services and interests are focused on the evolution of the
communications industry, including wireless and traditional
wireline communications service providers, cable multiple
systems operators (MSOs) as well as technology companies, media
and entertainment companies, and financial services firms that
invest in the communications industry. Our clients are
principally located in the United States, United Kingdom and
Western Europe. We have recently reorganized the firm to align
with our client base geographically. We believe we are unique in
our ability to provide a comprehensive business and technology
solution to the communications industry, including strategy
consulting and business planning, organizational development,
market research and analysis, product/service definition and
launch, customer acquisition and retention, program management,
technical support, process modeling and software solutions for
business support systems and operations support systems. The
software and application development capabilities of our
Software Solutions segment are primarily targeted to
clients revenue and service assurance, and data management
initiatives.
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Our services are provided by experienced senior professionals
from the communications industry. As it relates to most key
software and technology decisions, we have provided a unique
technology agnostic and vendor neutral position to make unbiased
evaluations and recommendations that are based on a thorough
knowledge of each solution and each clients situation.
Therefore, we are able to capitalize on extensive experience
across complex multi-technology communications systems
environments to provide what we believe are the most sound and
practical recommendations to our clients.
During the current decade, the Company has transformed from a
provider of primarily management and operational consulting
services to a provider of an integrated suite of product and
service offerings to the communications marketplace. This
transformation has been accomplished through both acquisitions
and recruitment efforts, which have increased the breadth of
skill sets in our employee work base, diversified our technical
competencies, expanded our core management consulting offerings
and positioned us globally. We believe these actions have
expanded key client relationships, have uniquely positioned us
in the market to effectively serve the needs of large global
communication service providers, and provided for expansion of
our key direct distribution channel elements.
In 2007, we completed the acquisitions of three businesses that
expanded both our geographic reach and our ability to address
global opportunities in the marketplace. These transactions
included: the United Kingdom-based technical consultancy and
software provider Cartesian Limited (Cartesian); RVA
Consulting, LLC (RVA), a domestic, telecom
industry-focused operations consulting firm; and TWG Consulting,
Inc (TWG), a domestic management consulting firm.
See Note 4, Business Combinations, in the Notes
to the Consolidated Financial Statements for additional
information regarding acquisitions.
The acquisition of Cartesian in early 2007 dramatically
strengthened TMNGs management consultancy services and
broadened our service offerings. Cartesian brings expertise in
billing management and revenue assurance two
traditional strengths on which we built our
reputation but does so from a technology and network
perspective, an ideal complement to our business process focus.
Building on its technical expertise, Cartesian has developed an
innovative and modular software suite, called
Ascertaintm,
which features advanced revenue assurance and data integrity
tools that when customized and integrated into client
environments support fixed, wireless, internet service provider
(ISP), data and content environments.
Cartesians client list includes Tier 1
companies in the United Kingdom and Europe, and in 2008, TMNG
began early introduction of the product with US-based carriers
and cable system operators, opening a potentially significant
new market to this product.
The acquisitions of RVA and TWG in 2007 enhanced historical
strengths of TMNG. In the case of the former, RVA has strong,
contracted relationships with major U.S. telecommunication
carriers and serves as a close fit with TMNGs core
strength in business process and operational support systems
consulting. TWG Consultings expertise in organizational
development and knowledge management helped to round out our
capabilities and extended our strategy offerings.
We have diversified our client base organically by building a
cable and broadband practice. With the convergence of this
industry around multiple video, data and voice service
offerings, we apply our traditional expertise in complex
business processes such as revenue assurance, billing
management, and mediation, as well as in leading functional
areas like program management offices, across the global
converging communications marketplace. We have developed
solutions to assist content providers, and media companies as
they cope with the operational complexities of launching new
products and services; attempt to streamline their business
systems and processes following merger and acquisition activity;
and address product lifecycle issues in the wake of competitive
pressures. We are also providing program management, business
process, service assurance and leadership teams for cable
MSOs as they launch new digital voice product and service
rollouts, including voice over internet protocol offerings and
focus on their 4G wireless launch.
As the industry continues to evolve, TMNG expects to utilize its
long history of engagement experience with clients to continue
modifying its toolsets, develop new methodologies, and
selectively expand its base of employee consultants to support
and extend its thought leadership and capabilities in the
communications industry.
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MARKET
OVERVIEW
The global communications industry is evolving around a
convergence of voice, data and video or content based
communications. Market factors including regulatory decisions,
new technologies and industry consolidation have stimulated new
investment in the sector. These dynamics are bringing new
competitors to the market, such as Apple and Google, challenging
existing industry competitors to explore new business models,
and driving consolidation within sectors such as traditional
wireline and wireless telecommunications. In addition, cable
communications companies that historically offered video
services are now positioning themselves as providers of voice
and other data and content services. Wireline, wireless and
cable companies alike are focused on convergence
where any type of content or application can be delivered
seamlessly across fixed or mobile networks.
While communications companies are investing in future growth,
the global economic recession that began in 2008 has limited
liquidity and access to capital, reduced budgets and forward
visibility. Companies across most industries and sectors,
including communications and media, are operating with increased
expense discipline with many reducing their cost structures,
through actions which include lowering total headcount,
decreasing information technology expenses, and reducing
spending on contractors and consultants. Spending decisions,
both operating and capital expenses, are coming under increased
scrutiny with a heightened focus on a demonstrated return on
investment or lower total cost.
It has been our experience that because the expertise needed by
communications companies to address the markets needs is
typically outside their core competencies, they must ultimately
either recruit and employ the necessary experience or retain
outside specialists. Additionally, the convergence of the
communications, media and technology industries has brought
forth many new competitors from outside the traditional
communications industries who we believe do not possess the
experience or skill sets needed to execute new business plans.
We believe due to the range of expertise required and the time
and expense associated with hiring and training new personnel,
bringing expertise in-house is often not a viable option. We
believe customers will continue to need to contract with
consultative firms or outsource some of the expertise required
to adapt to new environments and capitalize on new technologies
now emerging, while maintaining a cost effective structure. When
retaining outside specialists, we believe communications
companies need experts that fully understand the communications
industry and can provide timely and unbiased advice and
recommendations for cost-effective solutions, including revenue
assurance and expense avoidance. TMNG has positioned its
business to respond to these anticipated needs.
BUSINESS
STRATEGY
Our objective is to establish ourselves as the consulting
company of choice to the converging communications, media and
entertainment industry, which includes the service providers and
technology companies that serve the industry and the financial
services and investment banking firms that invest in the sector.
Given the challenges currently presented by the economic
recession, greater emphasis in the near term is focused on our
top client relationships and their most strategic initiatives,
with the goal of expanding market penetration and share with
these clients. Despite shifting our focus to our core clients,
we continue to investigate opportunities with other, non-core
clients that offer a high probability of a return on our
business development investment. The following are key
strategies we have adopted to pursue our objectives.
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Develop and evolve offerings, solutions and thought
leadership
We plan to continue expanding and evolving our end-to-end
solutions. Expanding our consulting solutions involves building
the capabilities that support change elements in the adoption of
IP and wireless technology and support of convergence of
communications with media and content, with emphasis on
wireless. We plan to continue to extend our product and service
offerings to the communications industry, and we believe that
our recent acquisitions in particular provide us with new
opportunities to bring broader solutions to customers. We
believe wireline and wireless providers will be strategically
focused on the following key initiatives: adding, bundling and
converging service offerings (i.e., wireline, wireless,
high-speed data and video); continued consolidation and post
merger integration, and aggressive reduction of costs;
reassessment of core
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competencies in order to leverage strengths and minimize
weaknesses; migration to new technologies next
generation wireless and IP and driving efficiency in their
business models while spending less on information technology in
the near term, given the current economic environment. Our
solutions will assist clients in redefining competitive
position, launching new products and services and generating
revenues through integrated offerings. Such offerings will also
be focused on increasing clients efficiencies in these
transformations. We will also evaluate expanding our offerings
to include managed services, possibly with partners surrounding
these initiatives.
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Continue to build the TMNG Global brand
We plan to continue building and communicating the TMNG Global
brand, further positioning ourselves as the consultancy of
choice for the global telecom, media and entertainment
industries. We have sunset the RVA Consulting and TWG Consulting
brands and incorporated them into the TMNG Global brand. In late
2007, we sunset the Adventis brand and now operate our strategy
group as CSMG. These changes were made to better represent the
end-to-end capabilities we offer through our strategic
consulting, management consulting and managed services
practices, and to provide separation between our strategy and
management consulting practices, providing a level of
independence and neutrality desired by clients.
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Focused and effective recruitment and retention
We believe a key element of our business model that will be
required is the attraction and retention of high quality,
experienced consultants. Our two primary challenges in the
recruitment of new consulting personnel are the ability to
recruit talented personnel with the skill sets necessary to
capitalize on an industry undergoing revolutionary change and
the ability to execute such recruitment with an appropriate
compensation arrangement.
Beginning in fiscal year 2009, we have adopted a more linear,
geographic organizational structure with two distinct groups:
North America and Europe, Middle East and Africa
(EMEA). This move has already generated productivity
benefits for us, as we have been able to more easily shift top
talent between groups as needed and thereby better serve our
clients, adding to our efficiency and utilization.
We reinvigorate existing skill sets of our consultants with
proprietary toolsets that provide methodologies they use to
augment their experience and help analyze and solve
clients problems. We utilize a network of databases to
serve as a knowledge base, enabling consultant collaboration on
engagements and providing support information and updates of
TMNG current toolsets and releases of next generation tools.
Finally, we continue to manage our flexible and unique employee
and independent subject matter expert model to maximize skill
set offerings, while minimizing the effect of non-billable
consultant time.
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Enhancing our global presence
We plan to further enhance our presence beyond the United States
and United Kingdom, with emphasis on the European continent. We
believe the competitive market expertise of our
U.S. consultants can be a key factor for foreign companies
facing the business issues associated with deregulation and
competition, especially in Europe. We believe our acquisition of
Cartesian and our strategy consulting expertise strengthen TMNG
Globals presence and capabilities in key European markets.
SERVICES
We provide a full range of strategic, marketing, operations and
technology consulting services to the communications industry.
Services provided include:
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Strategy and Business Case Development
We provide comprehensive strategic analysis to service
providers, media and entertainment companies, equipment
manufacturers and financial investors in the communications
industry. Our approach combines rigorous qualitative and
quantitative analyses with a detailed understanding of industry
trends, technologies,
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and developments. We provide clients with specific solutions to
their key strategic issues relating to their existing business
as well as new product and service opportunities. Our services
include business case development, data and content strategies,
marketing spending optimization, service and brand
diversification, enterprise and small business strategies,
technology commercialization and operational strategies.
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Organization Development
We provide organizational performance improvement through
organization assessment, evaluation and design, process
improvement and facilitation, team development and training. Our
approach involves teaming with a clients key stakeholders
to develop a clear understanding of the expected improvements to
be gained. We assess and evaluate the current situation, develop
consensus around a vision, gain commitment and identify key
activities for successful implementation. Our approach develops
custom performance solutions specific to a customers set
of needs.
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Knowledge Management
We assist our clients in managing the process of capturing and
cultivating information that exists within their organizations.
We utilize an integrated partnership approach to seamlessly
leverage an organizations human knowledge capital. We
provide a tailored solution to solve problems associated with
knowledge creation and distribution, sharing and leveraging
existing knowledge, tools and processes. Our approach connects
people to information to enable organizations to best leverage
existing assets, define competitive advantage and create
measurable business value.
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Product Development and Management
We offer global communications service providers the benefit of
our hands-on experience developing and launching new products
and services for some of todays industry leaders. Our
product development approach includes market assessments,
product/service definition, business requirements definition,
project management, testing and release. We also help
communications clients by evaluating the profitability of
existing product and service offerings to identify opportunities
to consolidate, de-emphasize or decommission offerings to
improve clients overall profitability.
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Customer Acquisition and Retention
We have developed and implemented acquisition and retention
strategies for clients in the communications industry. We have
consultants skilled in the areas of target market segmentation,
campaign management and sales-process management. Our strategies
take into account the needs and preferences of the target market
and include a mix of marketing communications, partner programs,
e-marketing,
web strategy, direct sales, telemarketing, direct response and
loyalty and retention programs.
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Revenue and Cost Management
We are dedicated to helping clients uncover and recover missed
opportunities at every stage along the revenue life cycle and
reduce the costs associated with managing business functions.
Our approach to revenue and cost management centers around
Cartesians innovative and modular software product suite,
Ascertaintm.
Ascertaintm
is among the industrys most widely deployed revenue
assurance tools in Europe and able to support fixed, wireless,
ISP, data, and content environments. Beginning in 2008, we have
expanded deployment of
Ascertaintm
into the United States. Especially in the current challenging
economic environment, these
self-amortizing
offerings are of increased interest to clients in their efforts
to control expenses.
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Program Management, Business and Operations Process Redesign and
Reengineering
We provide clients with efficient, integrated business and
operational processes, supporting technology systems and
web-centric interfaces across all OSS/BSS applications. We take
clients from the point of customer acquisition to provisioning
all the way through to billing, collections and accounts
receivable management to cash in the bank. We have modified our
traditional toolsets, recruited consultants with relevant
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expertise and initiated marketing efforts in the burgeoning
areas of the wireless enterprise and IP transformation. We
believe that as these two market phenomena evolve we are
well-positioned to bring business and technical solutions to
existing clients and prospective clients alike.
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Corporate Investment Services
We provide a wide range of services to investment banking and
private equity firms in connection with investments and mergers
and acquisitions in the communications industry. Services
include evaluation of management teams and business plans,
identification of strengths and weakness of the company, and
analyses of the companys financial models, systems,
products and operational and business processes. Post-investment
support is also provided to help customers in the optimization
of their investment.
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Technical Consultancy & Software
Development
We provide technical consultancy and software development
specialized for the communications industry. We have vast
experience working with and implementing numerous communications
software products. Our expertise includes defining requirements,
data analysis, selecting and implementing mediation,
provisioning, billing and inter-operator billing products,
interfacing products within a legacy environment, migrating
products, data and customers, and planning, managing and
completing systems and software testing.
We have developed a proprietary suite of software
(Ascertaintm)
that combine to address the revenue assurance and data integrity
needs of communications companies.
Ascertaintm
helps prove rate accuracy, reconcile customer data, analyze and
reconcile event records, prove completeness of processing, and
monitor trends and volumes. The
Ascertaintm
suite forms a fully productized and supported set of solutions
that share a common core framework for reporting, user
interaction, data extraction and job scheduling.
COMPETITION
The market for communications consulting services remains
intensely competitive, highly fragmented and rapidly changing.
We face competition from major business and strategy consulting
firms, large systems integration and major global outsourcing
firms as a result of the outsourcing of business support systems
and operating support systems by communications companies,
offshore development firms from the Asian markets, equipment and
software firms that have added service offerings, and
customers internal resources. We believe there has been a
significant increase in demand for firms that can bundle BPO
with systems and technical integration. Many of our competitors
are large organizations that provide a broad range of services
to companies in many industries, including the communications
industry. In addition, we compete with boutique firms that
maintain specialized skills
and/or
geographical advantages. Many information technology consulting
firms also maintain significant practice groups devoted to the
communications industry. Many of these competitors have
significantly greater financial, technical and marketing
resources and greater name recognition than us.
We believe that the principal competitive factors in our market
include: the ability to provide payback on our services to
clients through proven business cases; the ability to provide
innovative solutions; the ability to provide deep and proven
expertise and talent; the ability to provide capability and
expertise in delivering complex projects through teams located
globally; availability of resources; price of solutions;
industry knowledge; understanding of user experience; and
sophisticated project and program management capability.
We believe we have a competitive advantage due to our exclusive
focus on the communications, media and entertainment industry,
and the comprehensive offerings we provide to our customers. We
also believe the complementary experience and expertise of our
professionals represents a competitive advantage. With the
communications industry experiencing consolidation and
convergence with media and entertainment, we believe our
principal competitive factor is our continual focus on the
converging communications industry and the ability to develop
and deliver solutions that enhance client revenue and asset
utilization and provide return on investment. Our biggest
challenge is normally the customers internal resources and
budget constraints. As a result, the most significant
competitive advantage becomes long-term relationships with key
client executives
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that have developed over time from consistency in responsiveness
to their needs, quality and reliability of consultants and
deliverables, and an appropriate price/value formula.
We have recently experienced reduced demand in certain offerings
and a market trend of increased price competition, resulting
primarily from current global economic conditions and large
firms with the financial resources to aggressively price
engagements in which they have a particular interest in
obtaining and the ability to provide technical support and
outsourcing. These developments have required us to focus on
decreasing our overall cost structure to align with lower
revenue levels and direct our resources toward our top revenue
generating clients in which we are deeply imbedded.
RISKS
RELATED TO CURRENT ECONOMIC CONDITIONS
The economic outlook, as always, is subject to change and the
recent challenges of the financial markets have expanded into
the broader marketplace and are impacting many sectors,
including communications and media. In particular, current
uncertainty in global economic conditions may cause our clients
to cancel or delay consulting initiatives. Our efforts to
down-size, when necessary, in a manner intended to mirror the
downturn in economic conditions, could encounter delays and be
costly. If the downturn in worldwide economic conditions
continues or conditions worsen, particularly in the United
States or Europe, the financial condition of our clients may be
adversely affected. A continuation of the current downturn could
result in further reduced demand for our services, cause
continued pricing pressure and possible project cancellations or
delays, and possibly create lower revenues and operating margins
resulting from price reduction pressures for our services.
Continued declines in our revenues and gross profits will have a
significant impact on our financial results, particularly
because a significant portion of our operating costs are fixed
in advance of a particular quarter. In addition, our future
revenues and operating results may fluctuate from quarter to
quarter based on the number, size and scope of projects in which
we are engaged, the contractual terms and degree of completion
of such projects, any delays incurred in connection with a
project, consultant utilization rates, the use of estimates to
complete ongoing projects, general economic conditions and other
factors. Any of these events could materially and adversely
impact our business, financial condition and results of
operations. We are unable to predict how long the economic
downturn will last and the magnitude of its effect on our
business and results of operations. If these conditions
continue, or further deteriorate, our business and results of
operations could be materially adversely affected.
EMPLOYEES
Our ability to recruit and retain experienced, highly qualified
and highly motivated personnel has contributed greatly to our
performance and will be critical in the future. We offer a
flexible recruiting model that enhances our ability to attract
consultants and to effectively manage utilization. Our
consultants may work as full time or part time employees. We
also have relationships with many independent contracting firms
to assist in delivery of consulting solutions. Our current base
of independent firms has specialized expertise in discrete areas
of communications, and we typically deploy these firms only when
their unique expertise/offering is required.
During fiscal year 2008, we utilized approximately 463
consultants, representing a combination of employee client
service personnel and independent contracting firms. Of these,
279 were employee consultants and approximately 184 were working
on engagements for us primarily through independent
subcontracting firms. In addition to the consultants, we have an
administrative staff of approximately 58 employees in the
accounting and finance, marketing, recruiting, information
technology, human resources, legal and administrative areas. As
of January 3, 2009, we had 304 total employees, of which
259 were full-time.
BUSINESS
SEGMENTS
The Company identifies its segments based on the way management
organizes the Company to assess performance and make operating
decisions regarding the allocation of resources. In accordance
with the criteria in Statement of Financial Accounting Standards
(SFAS) No. 131 Disclosure about Segments
of an Enterprise and Related Information, the Company has
concluded it has two reportable segments: the
10
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. For a
discussion of operating results by segment, please see
Item 7 Managements Discussion and
Analysis of Financial Condition and Results of Operations, and
Note 7, Business Segments, Major Customers and Significant Group
Concentrations of Credit Risk, in the Notes to the Consolidated
Financial Statements.
MAJOR
CUSTOMERS
Since our inception, we have provided services to over a
thousand domestic and international customers, primarily
communication service providers and large technology and
applications firms serving the communications industry and
financial firms that invest in the sector. As a continuation of
our strategy begun in 2006, we have added to our base of
customers with cable, media and entertainment clients looking to
leverage communications infrastructure to deliver offerings to
the market. We depend on a small number of key customers for a
significant portion of revenues. For fiscal year 2008, two
customers accounted for 28.4% and 14.4%, respectively, of our
revenues. No other single customer accounted for more than 10%
of our revenues. Also during fiscal year 2008, our top ten
customers accounted for approximately 81.4% of total revenues.
We generally provide discounted pricing for large projects on
fixed commitments with long-term customers. Because our clients
typically engage services on a project basis, their needs for
services vary substantially from period to period.
We continue to concentrate on large wireline, wireless, and
cable MSOs headquartered principally in North America and
Western Europe, as well as media and entertainment clients. We
seek to offer broad and diversified services to these customers.
We anticipate that operating results will continue to depend on
volume services to a relatively small number of customers.
FOREIGN
MARKETS
As a result of the combination of organic growth, coupled with
our Adventis and Cartesian acquisitions, a substantial portion
of our business is conducted in foreign markets and a
substantial portion of our revenues and costs are derived from
our international business. Our international revenues in the
fiscal year ended January 3, 2009 represented 37.7% of our
total revenues, down from 44.9% in the same period of 2007,
primarily as a result of changes in foreign currency exchange
rates. Our international operations expose us to a number of
business and economic risks, including unfavorable foreign
currency exchange rates or fluctuations; our ability to protect
our intellectual property; the impact of foreign laws,
regulations and trade customs; U.S. and foreign taxation
issues; potential limits on our ability to repatriate foreign
profits; and general political and economic trends, including
the potential impact of terrorist attacks or international
hostilities. If we are unable to achieve anticipated levels of
revenues from or efficiently manage our international
operations, our overall revenues and profitability may decline.
INTELLECTUAL
PROPERTY
Our success is dependent, in part, upon proprietary processes
and methodologies. We rely upon a combination of copyright,
trade secret, and trademark law to protect our intellectual
property. Additionally, employees and consultants sign
non-disclosure agreements to assist us in protecting our
intellectual property. We have not applied for patent protection
for the proprietary methodologies used by our consultants.
11
SEASONALITY
In the past, we have experienced seasonal fluctuations in
revenue in the fourth quarter due primarily to the fewer number
of business days because of the holiday periods occurring in
that quarter. We continue to experience fluctuations in revenue
in the fourth quarter and with our global expansion, may
experience fluctuations in summer months and other holiday
periods.
WEBSITE
ACCESS TO INFORMATION
Our internet website address is www.tmng.com. We make available
free of charge through our website all of our filings with the
Securities and Exchange Commission (SEC), including
our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended (Exchange Act), as soon as
reasonably practicable after we electronically file such
material with, or furnish it to the SEC. The charters of our
audit, nominating and compensation committees and our Code of
Business Conduct are also available on our website and in print
to any shareholder who requests them.
Not applicable.
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|
ITEM 1B.
|
UNRESOLVED
STAFF COMMENTS
|
Not applicable.
Our principal executive offices are located in a
10,400 square foot facility in Overland Park, Kansas. This
facility houses the executive, corporate and administrative
offices and is under a lease which expires in August 2013. In
addition to the executive offices, we also lease the following
facilities which are primarily utilized by management and
consulting personnel.
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|
|
|
|
|
|
|
|
|
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Lease
|
Location
|
|
Sq. Feet
|
|
|
Expiration
|
|
McLean, Virginia
|
|
|
7,575
|
|
|
June 2009
|
Boston, Massachusetts
|
|
|
21,710
|
|
|
January 2011
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Somerset, New Jersey
|
|
|
2,910
|
|
|
February 2014
|
London, England (Gate Street)
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|
|
11,825
|
|
|
November 2015
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London, England (Kingsway House)
|
|
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3,210
|
|
|
June 2009
|
The Company has a sublease agreement for 11,366 square feet
of the 21,710 square feet of office space in Boston,
Massachusetts with a third party through the end of the original
lease term in 2011. In addition, 3,426 square feet of the
London Gate Street property is sublet to third parties until
November 2012. It is our intent not to renew the lease on the
Kingsway House Property in London. Upon termination, the
management and consulting personnel at this location will be
relocated to the Gate Street property.
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ITEM 3.
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LEGAL
PROCEEDINGS
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None.
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|
ITEM 4.
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SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
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No matters were submitted to a vote of security holders during
the fourth quarter of 2008.
12
PART II
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ITEM 5.
|
MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Our Common Stock is quoted on the NASDAQ Stock Market under the
symbol TMNG. The high and low price per share for the Common
Stock for the fiscal years ending January 3, 2009 and
December 29, 2007 by quarter were as follows:
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|
|
|
|
|
|
|
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|
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High
|
|
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Low
|
|
|
First quarter, fiscal year 2008
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$
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2.75
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|
|
$
|
1.55
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|
Second quarter, fiscal year 2008
|
|
$
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2.08
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|
|
$
|
1.38
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|
Third quarter, fiscal year 2008
|
|
$
|
1.45
|
|
|
$
|
0.95
|
|
Fourth quarter, fiscal year 2008
|
|
$
|
0.99
|
|
|
$
|
0.38
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
First quarter, fiscal year 2007
|
|
$
|
2.15
|
|
|
$
|
1.42
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|
Second quarter, fiscal year 2007
|
|
$
|
2.45
|
|
|
$
|
1.67
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|
Third quarter, fiscal year 2007
|
|
$
|
2.48
|
|
|
$
|
2.00
|
|
Fourth quarter, fiscal year 2007
|
|
$
|
2.76
|
|
|
$
|
2.07
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|
The above information reflects inter-dealer prices, without
retail
mark-up,
markdown or commissions and may not necessarily represent actual
transactions.
As of March 31, 2009 the closing price of our Common Stock
was $0.38 per share. At such date, there were approximately
83 holders of record of our Common Stock.
Holders of Common Stock are entitled to receive ratably such
dividends, if any, as may be declared by the Board of Directors
out of funds legally available. To date, we have not paid any
cash dividends on our Common Stock and do not expect to declare
or pay any cash or other dividends in the foreseeable future.
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ITEM 6.
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SELECTED
FINANCIAL DATA
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Not applicable.
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|
ITEM 7.
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MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
The following discussion should be read in conjunction with our
Consolidated Financial Statements and Notes thereto included in
this Annual Report on
Form 10-K.
Statements included in this discussion that are not statements
of current or historical information may constitute
forward-looking statements. Forward-looking statements 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 (including the recent slowing of client
decisions on proposals and project opportunities along with
scope reduction of existing projects), overall economic and
business conditions (including the recent worsening of
conditions in the credit markets and in general economic
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 identified in the Cautionary
Statement Regarding Forward-Looking Information in Part I
of this report. Other factors that we have
13
not identified in this document could also have this effect. All
forward-looking
statements made in this Annual Report on
Form 10-K
are made as of the date hereof.
We report our financial data on a 52/53-week fiscal year for
reporting purposes. Fiscal year 2008 was a 53-week fiscal year.
Fiscal year 2007 had 52 weeks. For further discussion of
our fiscal year end see Item 8, Consolidated
Financial Statements, Note 1 Organization and
Summary of Significant Accounting Policies, contained
herein.
OVERVIEW
Included in Item 1, Business is discussion that
includes a general overview of our Business, Market Overview,
Business Strategy, Services and Competition. The purpose of this
executive overview is to complement the qualitative discussion
of the Business from Item 1.
TMNG is a leading provider of professional services to the
converging communications, media and entertainment industries
and the capital formation firms that support them. We offer a
fully integrated suite of consulting offerings and licensed
software including strategy, organizational development,
knowledge management, marketing, operational, and technology
consulting services. We have consulting experience with almost
all major aspects of managing a global communications company.
Our portfolio of solutions includes proprietary methodologies
and toolsets, deep industry experience, hands-on operational
expertise and licensed software. These solutions assist clients
in tackling complex business problems.
We expanded our capabilities and client base through our
acquisitions in 2007. The Cartesian acquisition extended our
offerings to include a suite of software applications. The RVA
and TWG acquisitions have supported our carrier positioning
strategy and added 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 also complements 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 8, Note 4, Business
Combinations, to the Consolidated Financial Statements.
These acquisitions combined with our investment in targeting the
cable industry have re-positioned us to better serve
consolidating telecommunications carriers and the converging
global media and entertainment companies. Our efforts are
helping us build what we believe is a more sustainable revenue
model over the long-term, subject to cyclical economic
conditions such as the current recession, helping us to expand
our global presence. We continue to focus our efforts on
identifying, adapting to and capitalizing on the changing
dynamics prevalent in the converging communications industry, as
well as providing our wireless and IP services within the
communications sector.
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, cable MSOs and media
and entertainment companies. We have demonstrated recent success
on building a global presence. Over a two year period including
fiscal years 2007 and 2008 our total revenues grew by
approximately 118%, driven primarily by acquisitions and
complemented through select organic initiatives. Our
international revenues grew to 38% of total revenue during
fiscal 2008 from 21% in fiscal 2006. Beginning in the third
quarter of fiscal 2008, as a result of the global recession, we
began to see carryover financial impact to the communications
sector. The impact to TMNG has been a noted slowing of client
decisions on proposals and project opportunities, reduced
strategy related project opportunities, scope reduction of
existing projects and increased pricing pressure. In addition,
our revenues have been negatively impacted by unfavorable
foreign exchange rate movements.
Generally our client relationships begin with a short-term
engagement utilizing a few consultants. Our sales strategy
focuses on building long-term relationships with both new and
existing clients to gain additional engagements within existing
accounts and referrals for new clients. Strategic alliances with
other companies are also used to sell services. We anticipate
that we will continue to pursue these marketing strategies in
the future. The volume of work performed for specific clients
may vary from period to period and a major client
14
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. As a result of the deterioration in
economic conditions and increasing price competition, we have
directed our resources toward our top revenue generating clients.
Cost of services consists primarily of compensation for
consultants who are employees and amortization of share-based
compensation for stock options, 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 44.6% in the fiscal year ended
January 3, 2009 compared with 46.8% in the fiscal year
ended December 29, 2007. The decline in gross margin
percentage in the 2008 fiscal year as compared to 2007 is
primarily due to both a reduction in project revenues on higher
margin fixed price strategy related projects and the related
impact on consultant utilization as a result of such project
reductions. We continue to evaluate the size of our employee
consultant base and reduce the base as required to align to
reduced revenue levels and a more challenging economic
environment. We also continue to evaluate creative pricing
models, including guaranteed volume commitments for volume
rebates, risk/reward vehicles and increased fixed price
proposals to minimize the impact of increased pricing pressure.
Sales and marketing expenses consist primarily of personnel
salaries, bonuses, and related costs for direct client sales
efforts and marketing staff, including amortization of
share-based compensation for stock options and nonvested stock
(restricted stock). We primarily use a relationship sales model
in which our executive business development teams 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 40.7% in
the fiscal year ended January 3, 2009 from 44.1% in the
fiscal year ended December 29, 2007. We continue to
leverage integration of our recent acquisitions and evaluate
selling, general and administrative expense reduction
opportunities to improve earnings.
Intangible asset amortization was $3.9 million in fiscal
year 2008 compared with $3.6 million in fiscal year 2007.
The increase in amortization expense was due to the amortization
of intangibles recorded in connection with the RVA and TWG
acquisitions.
We recorded a net loss of $14.8 million for the fiscal year
2008 compared to a net loss of $2.3 million for the fiscal
year 2007. The increase in net loss is primarily attributable to
a $14.5 million impairment of goodwill and intangible
assets related to our Management Consulting Services segment,
partially offset by charges of $2.6 million in fiscal year
2007 related to the Special Committee investigation of our past
stock option granting practices and related accounting. In
addition, interest income decreased $0.6 million during
fiscal year 2008 as compared to fiscal year 2007 due primarily
to reductions in invested balances attributable to cash utilized
for acquisitions and reductions in interest rates in fiscal year
2008. We made substantial strides during fiscal year 2008
integrating our 2007 acquisitions and reducing our total
operating cost structure with emphasis on selling, general and
administrative expenses. However, due to the deterioration in
economic conditions, these cost savings were overshadowed by a
decrease in revenue levels of approximately one-third on a
quarterly basis comparing first quarter 2008 revenues of
$21.5 million to fourth quarter 2008 revenues of
$14.4 million, making it very difficult to sustain
profitability.
15
Although the year over year growth in our business has been
positive, the more recent economic outlook has added significant
challenges to our clients in the communications and media
sector. The general result is reduced client spending on capital
and operational initiatives. This reduction in spending, coupled
with increased competition pursuing fewer opportunities, could
result in further price reductions, fewer client projects, under
utilization of consultants, reduced operating margins, and loss
of market share. Declines in our revenues can have a significant
impact on our financial results. Although we have a flexible
cost base comprised primarily of employee and related costs,
there is a lag in time required to scale the business
appropriately if revenues are reduced. In addition, our future
revenues and operating results may fluctuate from quarter to
quarter based on the number, size and scope of projects in which
we are engaged, the contractual terms and degree of completion
of such projects, any delays incurred in connection with a
project, consultant utilization rates, the use of estimates to
complete ongoing projects, general economic conditions and other
factors.
From a cash flow perspective, cash flows provided by operating
activities were $6.3 million during the fiscal year ended
January 3, 2009. Net cash flows provided by operating
activities were $1.4 million during the fiscal year ended
December 29, 2007. The improvement in cash flows from
operating activities during the fiscal year ended
January 3, 2009 as compared with the 2007 period primarily
related to revenue scale and cost and working capital
management, including non-recurring payments made in the 2007
period related to the Special Committee investigation.
At January 3, 2009, we had working capital of approximately
$10.5 million and long-term debt of $1.5 million. Our
non-current investments included $12.5 million
($14.8 million par value) in auction rate securities
guaranteed through the Federal Family Education Loan Program of
the U.S. Department of Education. As discussed in
Note 2, Auction Rate Securities, in Notes to
Consolidated Financial Statements, during 2008, we reached a
settlement agreement on $7.55 million of the auction rate
securities allowing the Company to sell these auction rate
securities held in accounts with UBS AG (UBS) and
UBS affiliates at par value beginning June 30, 2010 and
enabling the Company to borrow up to 75% of the fair value of
the securities at zero net interest cost prior to the sales
date. As discussed in Note 19, Subsequent
Events, in Notes to Consolidated Financial Statements, on
March 19, 2009, the Company entered into a loan agreement
with Citigroup to provide liquidity for the remainder of the
Companys $7.25 million auction rate securities
portfolio held with Citigroup. Under the loan agreement, the
Company has access to a revolving line of credit of up to 50% of
the par value of the auction rate securities that the Company
has pledged as collateral, or $3.625 million. As of
January 3, 2009, we had borrowed $1.5 million against
the line of credit with UBS. Subsequent to year end, we borrowed
an additional $3.4 million against this line of credit. We
have made no borrowings under the line of credit with Citigroup.
CRITICAL
ACCOUNTING POLICIES
Our significant accounting policies are summarized in
Note 1 to the consolidated financial statements included in
Item 8 Consolidated Financial Statements of
this report.
While the selection and application of any accounting policy may
involve some level of subjective judgments and estimates, we
believe the following accounting policies are the most critical
to our consolidated financial statements, potentially involve
the most subjective judgments in their selection and
application, and are the most susceptible to uncertainties and
changing conditions:
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|
|
|
Marketable Securities;
|
|
|
|
Allowance for Doubtful Accounts;
|
|
|
|
Fair Value of Acquired Businesses;
|
|
|
|
Impairment of Goodwill and Long-lived Assets;
|
|
|
|
Revenue Recognition;
|
|
|
|
Share-based Compensation Expense;
|
16
|
|
|
|
|
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 accounted for under the provisions of
SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities
(SFAS No. 115). Management evaluates the
appropriate classification of marketable securities at each
balance sheet date. These investments are reported at fair
value, as measured pursuant to SFAS No. 157,
Fair Value Measurements
(SFAS No. 157). We adopted
SFAS No. 157 for our financial assets as of the
beginning of the 2008 fiscal year. For those
securities considered to be available for sale, any
temporary unrealized gains and losses are included as a separate
component of stockholders equity, net of applicable taxes.
For those securities considered to be trading, any
unrealized gains and losses are included in the Consolidated
Statements of Operations and Comprehensive Loss, net of
applicable taxes. Additionally, realized gains and losses,
changes in value judged to be other-than-temporary, interest and
dividends are also included in the Consolidated Statements of
Operations and Comprehensive Loss, net of applicable taxes.
The auction rate securities we hold are generally long-term debt
instruments that historically provided liquidity through a Dutch
auction process through which interest rates reset every 28 to
35 days. 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. The
entire amount of auction rate securities is reflected as
non-current assets on the Companys balance sheet as of
January 3, 2009.
During the third quarter of 2008, state and federal regulators
reached settlement agreements with both of the brokers who
advised the Company to purchase the auction rate securities
currently held by the Company. The settlement agreements with
the regulators were intended to eventually provide liquidity for
holders of auction rate securities. On November 13, 2008,
the Company entered into a settlement with UBS to provide
liquidity for the Companys $7.6 million auction rate
securities portfolio held with a UBS affiliate. Pursuant to the
terms of the Settlement, UBS issued to the Company Auction Rate
Securities Rights (ARS Rights), allowing the Company
to sell to UBS its auction rate securities held in accounts with
UBS and UBS affiliates at par value at any time during the
period beginning June 30, 2010 and ending July 2,
2012. As consideration for the issuance of the ARS Rights, the
Company (1) released UBS from all claims for damages (other
than consequential damages) directly or indirectly relating to
UBSs marketing and sale of auction rate securities, and
(2) granted UBS the discretionary right to sell or
otherwise dispose of the Companys auction rate securities,
provided that the Company is paid the par value of the auction
rate securities upon any disposition.
While the ARS Rights results in a put option which represents a
separate freestanding instrument, the put option does not meet
the definition of a derivative instrument under
SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities
(SFAS No. 133) because the option
requires physical settlement of the auction rate securities,
there is not a market mechanism that facilitates net settlement,
and the underlying auction rate securities are not considered
readily convertible to cash. The Company has elected to measure
the ARS Rights at fair value under SFAS No. 159,
The Fair Value Option for Financial Assets and
Financial Liabilities Including an amendment of FASB Statement
No. 115 (SAFS No. 159) to better
align changes in fair value of the ARS Rights with those of the
underlying auction rate securities investments.
Prior to accepting the UBS settlement offer, the Company
recorded all of its auction rate securities as
available-for-sale investments. Upon accepting the UBS
settlement, the Company made a one-time election to transfer its
UBS auction rate securities holdings from available-for-sale
securities to trading securities under SFAS No. 115.
Accepting the UBS settlement agreement resulted in the
recognition of an other-than-temporary impairment of
approximately $1.2 million, reported within other income on
the Consolidated Statement of
17
Operations and Comprehensive Loss, due to the Companys
intention not to hold these investments to maturity. Offsetting
the other-than-temporary impairment loss and subsequent realized
losses on these trading securities was a gain of
$0.9 million recognized for the fair value of the ARS
Rights under SFAS No. 159. The ARS Rights will continue to
be measured at fair value under SFAS No. 159 until the
earlier of the Companys exercise of the ARS Rights or
UBSs purchase of the auction rate securities at par value
in connection with the ARS Rights Agreement. We continue to
account for the remaining auction rate securities holdings as
available-for-sale securities under SFAS 115 with any
decline in fair value deemed temporary and reported through
other comprehensive income.
Due to the lack of observable market quotes on the
Companys auction rate securities portfolio and ARS Rights,
the Company utilizes valuation models that rely exclusively on
Level 3 inputs as defined in SFAS No. 157
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 and ARS Rights
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.
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 net bad debt recoveries of $227,000 for the fiscal
year ended January 3, 2009 and bad debt expense of $380,000
for the fiscal year ended December 29, 2007. Our allowance
for doubtful accounts totaled $379,000 and $562,000 as of
January 3, 2009 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 nine years. A
significant component of the value of these acquired businesses
has been allocated to intangible assets. SFAS No. 141
Business Combinations (SFAS No,
141) requires acquired businesses to be recorded at fair
value by the acquiring entity. SFAS No. 141 also
requires that intangible assets that meet the legal 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 January 3, 2009, we have $6.2 million in
goodwill and $4.8 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 evaluation of these infinite-lived assets
18
annually and whenever events or circumstances indicate that such
assets may be impaired. The evaluation is conducted 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.
Fair value of our reporting units is determined using the income
approach. The income approach uses a reporting units
projection of estimated cash flows discounted using a
weighted-average cost of capital analysis that reflects current
market conditions. We also considered the market approach to
valuing our reporting units, however due to the lack of
comparable industry publicly available transaction data, we
concluded a market approach did not adequately reflect our
specific reporting unit operations. While the market approach
was not expressly utilized, we did compare the results of our
overall enterprise valuation to our market capitalization.
Significant management judgments related to the income approach
include:
Anticipated future cash flows and terminal value for each
reporting unit The income approach to
determining fair value relies on the timing and estimates of
future cash flows, including an estimate of terminal value. The
projections use managements estimates of economic and
market conditions over the projected period including growth
rates in revenue and estimates of expected changes in operating
margins. Our projections of future cash flows are subject to
change as actual results are achieved that differ from those
anticipated. Because management frequently updates its
projections, we would expect to identify on a timely basis any
significant differences between actual results and recent
estimates. We are not expecting actual results to vary
significantly from estimates.
Selection of an appropriate discount rate The
income approach requires the selection of an appropriate
discount rate, which is based on a weighted average cost of
capital analysis. The discount rate is affected by changes in
short-term interest rates and long-term yield as well as
variances in the typical capital structure of marketplace
participants. The discount rate is determined based on
assumptions that would be used by marketplace participants, and
for that reason, the capital structure of selected marketplace
participants was used in the weighted average cost of capital
analysis. Given the current volatile economic conditions, it is
possible that the discount rate will fluctuate in the near term.
In accordance with 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
finite-lived assets and finite-lived identifiable intangibles to
be held and used whenever events or changes in circumstances
indicate that the carrying amount of our assets might not be
recoverable.
Given the decline in our market capitalization and the
deterioration in US economic and industry conditions, we
recognized impairment charges totaling $13.4 million for
goodwill in the Management Consulting Services Segment. During
2008, we also recognized a $1.1 million charge for the
impairment of the carrying amount of intangible assets in the
Management Consulting Services Segment. The impairment charge
was related to the evaluation of the value of our S3 license
agreement and intangibles related to our acquisition of TWG. See
Note 5, Goodwill and Other Intangible Assets in
the Notes to Consolidated Financial Statements.
Revenue Recognition We recognize revenue from
time and materials consulting contracts in the period in which
our services are performed. We recognized $33.7 million and
$34.6 million in revenues from time and materials contracts
during fiscal years 2008 and 2007 respectively. In addition to
time and materials contracts, our other types of contracts
include fixed fee contracts, and contingent fee contracts.
During fiscal years 2008 and 2007, we recognized
$40.3 million and $37.3 million of revenues from these
other types of contracts. We recognize revenues on milestone or
deliverables-based fixed fee contracts and time and materials
contracts not to exceed contract price using the percentage of
completion method prescribed by AICPA Statement of Position
(SOP)
No. 81-1,
Accounting for Performance of Construction-Type and
Certain Production-Type Contracts
(SOP No. 81-1).
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
19
contracts, we receive payments from customers that exceed
recognized revenues. We record the excess of receipts from
customers over recognized revenue as deferred revenue. Deferred
revenue is classified as a current liability to the extent it is
expected to be earned within twelve months from the date of the
balance sheet.
As a result of the Cartesian acquisition, we now develop,
install and support customer software in addition to our
traditional consulting services. We recognize revenue in
connection with our software sales agreements utilizing the
percentage of completion method prescribed by SOP
No. 81-1.
These agreements include software right-to-use licenses
(RTUs) and related customization and
implementation services. Due to the long-term nature of the
software implementation and the extensive software customization
based on customer specific requirements normally experienced by
the Company, both the RTU and implementation services are
treated as a single element for revenue recognition purposes.
The
SOP No. 81-1 percentage-of-completion
methodology involves recognizing revenue using the percentage of
services completed, on a current cumulative cost to total cost
basis, using a reasonably consistent profit margin over the
period. Due to the longer term nature of these projects,
developing the estimates of costs often requires significant
judgment. Factors that must be considered in estimating the
progress of work completed and ultimate cost of the projects
include, but are not limited to, the availability of labor and
labor productivity, the nature and complexity of the work to be
performed, and the impact of delayed performance. If changes
occur in delivery, productivity or other factors used in
developing the estimates of costs or revenues, we revise our
cost and revenue estimates, which may result in increases or
decreases in revenues and costs, and such revisions are
reflected in income in the period in which the facts that give
rise to that revision become known.
In addition to the professional services related to the
customization and implementation of its software, the Company
also provides post-contract support (PCS) services,
including technical support and maintenance services. For those
contracts that include PCS service arrangements which are not
essential to the functionality of the software solution, we
separate the
SOP No. 81-1
software services and PCS services utilizing the
multiple-element arrangement model prescribed by Emerging Issues
Task Force (EITF)
No. 00-21,
Revenue Arrangements with Multiple
Deliverables (EITF
No. 00-21).
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 from
contingent fee contracts were $50,000 for fiscal year 2008.
Revenues and costs from contingent fee contracts were $786,000
and $236,000 for fiscal year 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
(SFAS No. 123R). 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 fiscal year ended January 3, 2009, we
used a weighted-average expected stock-price volatility of 60%.
The expected term of options granted is
20
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 January 3, 2009 is 34%.
Accounting for Income Taxes Accounting for
income taxes requires significant estimates and judgments on the
part of management. Such estimates and judgments include, but
are not limited to, the effective tax rate anticipated to apply
to tax differences that are expected to reverse in the future,
the sufficiency of taxable income in future periods to realize
the benefits of net deferred tax assets and net operating losses
currently recorded and the likelihood that tax positions taken
in tax returns will be sustained on audit.
We account for income taxes in accordance with
SFAS No. 109, Accounting for Income Taxes
and Financial Accounting Standards Board (FASB)
Interpretation No. 48, Accounting for Uncertainty in
Income Taxes an interpretation of FASB Statement
No. 109 (FIN 48). As required by
SFAS No. 109, we record deferred tax assets or
liabilities based on differences between financial reporting and
tax bases of assets and liabilities using currently enacted
rates that will be in effect when the differences are expected
to reverse. SFAS No. 109 also requires that deferred
tax assets be reduced by a valuation allowance if it is more
likely than not that some portion or all of the deferred tax
asset will not be realized. As of January 3, 2009,
cumulative valuation allowances in the amount of
$34.5 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 January 3, 2009, we have recorded
a liability of approximately $891,000 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
21
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.
International operations have become a significant part of our
business. As part of the process of preparing our financial
statements, we are required to estimate our income taxes in each
of the jurisdictions in which we operate. We utilize a
cost plus fixed margin transfer pricing methodology
as it relates to inter-company charges for headquarters support
services performed by our domestic entities on behalf of various
foreign affiliates. The judgments and estimates used are subject
to challenge by domestic and foreign taxing authorities. It is
possible that such authorities could challenge those judgments
and estimates and draw conclusions that would cause us to incur
liabilities in excess of those currently recorded. We use an
estimate of our annual effective tax rate at each interim period
based upon the facts and circumstances available at that time,
while the actual annual effective tax rate is calculated at
year-end. Changes in the geographical mix or estimated amount of
annual pre-tax income could impact our overall effective tax
rate.
Research and Development and Capitalized Software
Costs Software development costs are accounted
for in accordance with 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 fiscal years 2008 and 2007, $812,000 and $868,000,
respectively, of these costs were expensed as incurred. No
software development costs were capitalized during either fiscal
year 2008 or 2007.
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. In October 2008, the FASB issued Staff
Position
FAS 157-3,
Determining the Fair Value of a Financial Asset When the
Market for that Asset is not Active,
(FSP 157-3)
to provide guidance for determining the fair value of a
financial asset in an inactive market. We considered FSP
FAS 157-3
in the determination of the fair value of our financial assets
and financial liabilities. We are 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 our consolidated
financial statements.
In December 2007, the FASB issued SFAS No. 141R,
Business Combinations,
(SFAS No. 141R) which replaces
SFAS No. 141, Business Combinations.
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
noncontrolling 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
22
and financial effects of the business combination.
SFAS No. 141R is to be applied prospectively to
business combinations for which the acquisition date is on or
after the beginning of an entitys fiscal year that begins
after December 15, 2008. We will assess the impact of
SFAS No. 141R if and when a future acquisition occurs.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements an amendment of ARB No. 51
(SFAS No. 160). 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 our consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities (SFAS No. 161).
SFAS No. 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 No. 161 is effective for fiscal years beginning
after November 15, 2008. We are currently evaluating the
impact, if any, the adoption of SFAS No. 161 will have
on our consolidated financial statements.
In April 2008, the FASB issued Staff Position
No. FAS 142-3,
Determination of Useful Life of Intangible Assets
(FSP
FAS 142-3).
FSP
FAS 142-3
amends the factors that should be considered in developing
renewal or extension assumptions used to determine the useful
life of a recognized intangible asset under FASB Statement
No. 142, Goodwill and Other Intangible Assets.
FSP
FAS 142-3
also requires expanded disclosures related to the determination
of intangible asset useful lives. This standard applies
prospectively to intangible assets acquired
and/or
recognized on or after January 1, 2009. We do not believe
that the adoption of this standard will have an impact on our
consolidated financial statements.
RESULTS
OF OPERATIONS
FISCAL
2008 COMPARED TO FISCAL 2007
REVENUES
Revenues increased 3.0% to $74.0 million for fiscal year
2008 from $71.9 million for fiscal year 2007. The increase
in revenues is primarily due to the acquisitions of RVA in
August 2007 and TWG in October 2007, which contributed
year-over-year revenue increases of $10.7 million and
$0.8 million, respectively. Organic revenues were down
15.2% in fiscal year 2008 as compared to the same period of
2007, due primarily to negative economic trends, particularly in
the second half of fiscal year 2008, which have led to fewer
strategy project opportunities, protractions and scope
reductions in client projects and unfavorable foreign currency
exchange movements.
Management Consulting Services Segment
Management Consulting Services segment revenues increased
$6.4 million or 13.5%, to $54.1 million for fiscal
year 2008 from $47.7 million for fiscal year 2007.
23
The acquisitions of RVA and TWG accounted for $10.7 million
and $0.8 million, respectively, of this increase. Revenues
from the remainder of the segment decreased $5.1 million or
13.7%.
During the fiscal year ended January 3, 2009, this segment
provided services on 215 customer projects, compared to 245
projects performed in the fiscal year ended December 29,
2007. Average revenue per project was $252,000 in the fiscal
year ended January 3, 2009 compared to $195,000 in the
fiscal year ended December 29, 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 were relatively
flat at $8.0 million for the fiscal year ended
January 3, 2009 from $8.0 million for the fiscal year
ended December 29, 2007, despite unfavorable exchange rate
movements, which negatively impacted fiscal year 2008 results by
$0.3 million when holding exchange rates constant to fiscal
year 2007. International revenues have decreased as a percentage
of total revenues of the segment from 16.9% in the fiscal year
ended December 29, 2007 to 14.8% in the fiscal year ended
January 3, 2009. 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 the
completion of a major international project.
Revenues recognized in connection with fixed price engagements
totaled $32.0 million and $23.4 million, representing
59.2% and 49.0% of total revenues of the segment, for the fiscal
years ended January 3, 2009 and December 29, 2007,
respectively. This increase is primarily due to the increase in
deliverable based projects, primarily related to the RVA
acquisition.
Software Solutions Segment Revenues of
$20.0 million and $24.2 million, respectively, were
generated for the fiscal years ended January 3, 2009 and
December 29, 2007. All revenues were generated
internationally. The decrease in revenues was due to unfavorable
exchange rate movements of approximately $1.2 million when
holding exchange rates constant to fiscal year 2007, together
with the completion of a major international client engagement
in the first half of fiscal year 2008. During the fiscal years
ended January 3, 2009 and December 29, 2007, this
segment provided services on 158 and 126 customer projects,
respectively. Average software and services revenue per project
was approximately $110,000 and $177,000 for the fiscal years
ended January 3, 2009 and December 29, 2007,
respectively. The decrease in revenue per project for fiscal
year 2008 as compared to fiscal year 2007 is primarily due to an
increase in the number of smaller engagements combined with
unfavorable exchange rate movements. In addition, revenues from
post-contract support services were approximately
$2.3 million and $1.9 million for the fiscal years
ended January 3, 2009 and December 29, 2007,
respectively.
COST OF
SERVICES
Costs of services increased 7.3% to $41.0 million for
fiscal year 2008 compared to $38.3 million for fiscal year
2007. Our gross margin was 44.6% for fiscal year 2008, compared
to 46.8% for fiscal year 2007. The decrease in gross margin in
the fiscal year 2008 is primarily due to reduced high margin
strategy projects and reductions in project scope for higher
margin fixed priced projects. In addition, reduced revenue
volumes resulted in temporarily lowering the utilization of
consulting personnel until we were able to properly size the
business. Our Management Consulting Services segment gross
margin was 48.2% for fiscal year 2008, compared to 47.3% for
fiscal year 2007. Our Software Solutions segment gross margin
was 34.6% for fiscal year 2008, compared to 45.7% for fiscal
year 2007. The lower margin was due to reduced revenue volumes
and related lower utilization of personnel. Costs of services in
the Software Solutions segment included amortization of
intangible assets of $698,000 and $750,000, respectively for
fiscal year 2008 and fiscal year 2007, related to acquired
software.
OPERATING
EXPENSES
Operating expenses increased by $10.6 million, or 28.0%, to
$48.5 million for fiscal year 2008, from $37.9 million
for fiscal year 2007. Operating expenses for the 2008 period
included selling, general and administrative expenses (inclusive
of share-based compensation), impairment of goodwill and
intangible asset
24
amortization. For the fiscal year ended January 3, 2009,
operating expenses included $14.5 million of goodwill and
intangible asset impairment. For the fiscal year ended
December 29, 2007, operating expenses included Special
Committee charges of approximately $2.6 million related to
the investigation of our past stock option granting practices
and related accounting, consisting of professional services for
legal, accounting and tax guidance.
Selling, general and administrative expenses decreased to
$30.1 million for the fiscal year ended January 3,
2009, compared to $31.7 million for the fiscal year ended
December 29, 2007. As a percentage of revenues, our
selling, general and administrative expense was 40.7% for the
fiscal year ended January 3, 2009, compared to 44.1% for
the fiscal year ended December 29, 2007. Selling, general
and administrative expenses of acquired businesses were
$4.9 million for fiscal year 2008 compared to
$2.0 million in fiscal 2007, as the RVA and TWG
acquisitions occurred in the second half of fiscal year 2007.
Excluding costs related to these acquisitions, organic selling
general and administrative expenses decreased by
$4.5 million, or 15.0%, as compared to fiscal year 2007.
There were substantial cost reductions throughout fiscal year
2008. To illustrate, selling general and administrative expenses
were $8.8 million and $6.3 million in the first
quarter and fourth quarter of fiscal year 2008, respectively.
The reductions were the result of initiatives supporting
integration of administrative activities, facilities
consolidation, right-sizing efforts, better utilization of our
consulting base and reduction in the utilization of third-party
advisors to the firm. 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 $0.3 million to
$3.9 million for the fiscal year ended January 3,
2009, compared to $3.6 million for the fiscal year ended
December 29, 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 $0.9 million and $1.5 million for
fiscal years 2008 and 2007, respectively, and represented
interest earned on invested balances. Interest income decreased
during fiscal year 2008 as compared to fiscal year 2007 due
primarily to reductions in invested balances attributable to
cash utilized for acquisitions and reductions in interest rates
in fiscal year 2008. We are currently invested in money market
funds and auction rate securities. During 2008, we recorded
other expense of $280,000 related to net realized losses due to
the change in fair value of certain auction rate securities and
the ARS Rights. During 2007, we recorded other income in the
amount of $452,000 related to the settlement of foreign
withholding tax disputes.
INCOME
TAXES
We recorded an income tax benefit of $6,000 and provision of
$52,000 for fiscal years 2008 and 2007, respectively. The income
tax benefit in fiscal year 2008 is primarily related to our
United Kingdom operations. The income tax provision in fiscal
year 2007 is primarily due to state income taxes. For both
fiscal years, 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.
During the fourth quarter of 2007, we completed a transfer
pricing study. While the results of the transfer pricing study
did not change our revenues or operating loss on a consolidated
basis, it impacted the allocation of costs between members of
the consolidated group. As a result, the tax liability for
certain international subsidiaries was reduced.
25
NET
LOSS
We had a net loss of $14.8 million for fiscal year 2008,
compared to a net loss of $2.3 million for fiscal year
2007. This increase in net loss was primarily attributable to
the impairment of goodwill and intangible assets of
$14.5 million in fiscal year 2008, partially offset by
$2.6 million in non-recurring special committee charges in
fiscal year 2007.
LIQUIDITY
AND CAPITAL RESOURCES
Net cash provided by operating activities was $6.3 million
and $1.4 million for fiscal years 2008 and 2007,
respectively. The significant change in cash flows from
operating activities for fiscal year 2008 as compared to fiscal
year 2007 was primarily due almost equally to improvements in
cash generated through operating results coupled with positive
improvement in cash flow from net working capital changes. The
fiscal year 2007 included payments related to the Special
Committee that did not occur in the 2008 period.
Net cash used in investing activities was $4.2 million and
$1.3 million for fiscal year 2008 and fiscal year 2007,
respectively. Investing activities in fiscal year 2008 included
$5.4 million in earn-out payments related to the
acquisitions of RVA and Cartesian. In fiscal year 2007,
investing activities included $11.0 million for the
acquisition of Cartesian, RVA and TWG. Investing activities
include net proceeds from sales of marketable securities of $2.3
and $10.1 million in fiscal years 2008 and 2007,
respectively. The decrease in net proceeds during fiscal year
2008 was the result of the elimination of secondary markets for
auction rate securities. Net cash used in investing activities
also included $1.1 million and $0.4 million in fiscal
years 2008 and 2007, respectively, related to the purchase of
office equipment, software and computer equipment. The increase
in fiscal year 2008 was primarily the result of office
consolidation and required improvements.
Net cash used in financing activities was $3.2 million and
$1.2 million for fiscal years 2008 and 2007, respectively.
During the 2008 period, $3.2 million was utilized to
purchase shares of our common stock. Financing activities in
fiscal year 2008 included $1.5 million in proceeds from
line of credit borrowings. In addition, in both periods cash was
used to make 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 January 3, 2009, we had approximately $6.0 million
in cash and cash equivalents ($3.2 million of which was
denominated in pounds sterling) and $10.5 million in net
working capital. In addition, as discussed below, we have
established lines of credit totaling $8.5 million against
our auction rate securities portfolio, of which we had borrowed
$1.5 million at January 3, 2009. We believe we have
sufficient cash and short-term investments and access to lines
of credit to meet anticipated cash requirements, including
anticipated capital expenditures and earn-out payments for at
least the next 12 months. Furthermore, based on an analysis
of our investments classified as cash equivalents, we do not
believe that we have any material risk related to the liquidity
or valuation of these investments, nor do we believe that we
have any counterparty credit risk related to these investments.
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. Recently, credit and
capital markets have experienced unusual volatility and
disruption, and equity and debt financing have become more
expensive and difficult to obtain. If we need to obtain new debt
or equity financing to support our operations or complete
acquisitions in the future, we may be unable to obtain debt or
equity financing on reasonable terms. We have established a
flexible model that provides a lower fixed cost structure than
most consulting firms, enabling us to scale operating cost
structures more quickly based on market conditions, although
there is a lag in time required to scale the business
appropriately if revenues are reduced. Our strong balance sheet
has enabled us to make acquisitions and related investments in
intellectual property and businesses we believe are enabling us
to capitalize on the current transformation of the industry;
however, if demand for our consulting services is reduced and we
experience negative cash flow, we could experience liquidity
challenges at some point in the future.
As previously discussed, the liquidity of auction rate
securities has been negatively impacted by recent events in the
credit markets. As of January 3, 2009, we hold auction rate
securities in the face amount of $14.8 million, with an
estimated fair value of $12.5 million, collateralized by
government guaranteed student loans. Beginning in February 2008,
auctions of the Companys auction rate securities portfolio
failed to receive
26
sufficient order interest from potential investors to clear
successfully, resulting in failed auction status. Except as
noted below, 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 is classified as non-current assets
on our balance sheet as of January 3, 2009.
During the third quarter of 2008, state and federal regulators
reached settlement agreements with both of the brokers who
advised the Company to purchase the auction rate securities
currently held by the Company. The settlement agreements with
the regulators were intended to eventually provide liquidity for
holders of auction rate securities. On November 13, 2008,
the Company entered into a settlement with UBS to provide
liquidity for the Companys $7.6 million auction rate
securities portfolio held with a UBS affiliate. Pursuant to the
terms of the Settlement, UBS issued to the Company ARS Rights,
allowing the Company to sell to UBS its auction rate securities
held in accounts with UBS and UBS affiliates at par value at any
time during the period beginning June 30, 2010 and ending
July 2, 2012. As consideration for the issuance of the ARS
Rights, the Company (1) released UBS from all claims for
damages (other than consequential damages) directly or
indirectly relating to UBSs marketing and sale of auction
rate securities, and (2) granted UBS the discretionary
right to sell or otherwise dispose of the Companys auction
rate securities, provided that the Company is paid the par value
of the auction rate securities upon any disposition. At
January 3, 2008, the ARS Rights had an estimated fair value
of $0.9 million.
Pursuant to the settlement, the Company entered into a line of
credit from UBS or its affiliates for up to 75% of the market
value of its auction rate securities. The line of credit
provides the Company with an uncommitted, demand revolving line
of credit of up to 75% of the market value, as determined by UBS
in its sole discretion, of the Companys auction rate
securities that the Company has pledged as collateral. The
interest that the Company pays on the line of credit will not
exceed the interest that the Company receives on the auction
rate securities pledged to UBS as security for the line of
credit. UBS may demand full or partial payment of amounts
borrowed on the line of credit, at its sole option and without
cause, at any time. UBS may, at any time, in its discretion,
terminate and cancel the line of credit. If at any time UBS
exercises its right of demand, then a UBS affiliate shall
provide, as soon as reasonably possible, alternative financing
on substantially the same terms and conditions as those under
the line of credit and UBS agrees that the line of credit shall
remain in full force and effect until such time as such
alternative financing has been established. If alternative
financing cannot be established, then a UBS-related entity will
purchase the pledged auction rate securities at par value. If
the Company elects to sell any auction rate securities that are
pledged as collateral under the line of credit to a purchaser
other than UBS, UBS intends to exercise its right to demand
repayment of the line of credit relating to the auction rate
securities sold by the Company. On November 18, 2008, the
Company borrowed $1.5 million under the line of credit.
On March 19, 2009, the Company entered into a loan
agreement with Citigroup Global Markets, Inc.
(Citigroup) to provide liquidity for the
Companys $7.3 million auction rate securities
portfolio held with Citigroup. Under the loan agreement, the
Company has access to a revolving line of credit of up to 50% of
the par value of the auction rate securities that the Company
has pledged as collateral, or $3.625 million. The interest
rate at the inception of the line of credit that the Company
would pay on amounts borrowed is the federal funds rate plus
3.65%. The interest rate may change in future periods based on
the change in the spread over the federal funds rate. Citigroup
may demand full or partial payment of amounts borrowed on the
line of credit, at its sole option and without cause, at any
time. Citigroup may, at any time, in its discretion, terminate
the line of credit with proper notice. No amounts have been
borrowed against this line of credit.
As we are able to liquidate any of 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-temporary impairment. This could require us to
recognize losses in our consolidated statement of operations in
accordance with SFAS No. 115, which could be material.
27
FINANCIAL
COMMITMENTS AND OFF BALANCE SHEET ARRANGEMENTS
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 to date for
these acquisitions, we have potential contingent purchase price
obligations for RVA and TWG of $1.5 million and
$1.6 million, respectively, at January 3, 2009. See
Note 4, Business Combinations, in the Notes to
the Consolidated Financial Statements.
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
established a cash bonus pool (the Pool) for our
chief executive officer, president and chief operating officer,
and chief financial officer which provided for bonuses if we met
or exceeded a non-GAAP EBITDA target (as defined in the
Plan) of $7.0 million for fiscal year 2008. The calculation
of the non-GAAP EBITDA target excluded non-cash charges
(e.g., share-based compensation expense, etc.) and possible
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) began at
$800,000 if we achieved the Non-GAAP EBITDA target. If the
target was exceeded, the Payout Amount increased 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 would in no event exceed $3 million.
Although the 2008 non-GAAP EBITDA target of $7.0 million
was not met, upon the recommendation of the Compensation
Committee, the independent members of the Board of Directors
exercised their discretion and awarded executive incentive
compensation to the Companys chief executive officer,
president and chief operating officer, and chief financial
officer in the aggregate amount of $350,000. The Compensation
Committee and the independent members of the Board of Directors
approved the discretionary payment based upon their
determination that the Company had substantially achieved the
threshold level in the 2008 Plan through the efforts of
management in a uniquely challenging economic environment as
disclosed in our
Form 8-K
of February 27, 2009. As of January 3, 2009, $350,000
was accrued for this item.
TRANSACTIONS
WITH RELATED PARTIES
During fiscal year 2008, we incurred legal fees of $26,000, 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 during the 2008 period were in
connection with income tax and potential acquisition related
matters. During fiscal year 2007, we incurred legal fees of
$128,000, for services provided by Bingham McCutchen, LLP.
Payments made during the 2007 period 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 January 3, 2009, 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
January 3, 2009 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 January 3, 2009.
|
|
ITEM 7A.
|
QUALITATIVE
AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
|
Not applicable.
28
|
|
ITEM 8.
|
CONSOLIDATED
FINANCIAL STATEMENTS
|
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
The Management Network Group, Inc.
Overland Park, Kansas
We have audited the accompanying consolidated balance sheets of
The Management Network Group, Inc. and subsidiaries (the
Company) as of January 3, 2009 and
December 29, 2007, and the related consolidated statements
of operations and comprehensive loss, stockholders equity
and cash flows for the 53-week period ended January 3, 2009
and the 52-week period ended December 29, 2007. These
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of the
Company as of January 3, 2009 and December 29, 2007,
and the results of its operations and its cash flows for the
53-week period ended January 3, 2009 and the 52-week period
ended December 29, 2007, in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial
statements, the Company adopted Financial Accounting Standards
Board Interpretation No. 48, Accounting for Uncertainty in
Income Taxes an interpretation of Statement of
Financial Accounting Standards No. 109, Accounting for
Income Taxes on December 31, 2006, and Statement of
Financial Accounting Standards No. 159, The Fair Value
Option for Financial Assets and Financial
Liabilities including an amendment of FASB Statement
No. 115 on December 30, 2007.
|
|
|
|
/s/
|
DELOITTE &
TOUCHE LLP
|
KANSAS CITY, MISSOURI
April 3, 2009
29
THE
MANAGEMENT NETWORK GROUP, INC.
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
January 3,
|
|
|
December 29,
|
|
|
|
2009
|
|
|
2007
|
|
|
|
(In thousands, except share data)
|
|
|
ASSETS
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
5,956
|
|
|
$
|
10,022
|
|
Short-term investments
|
|
|
|
|
|
|
17,125
|
|
Receivables:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
8,247
|
|
|
|
13,044
|
|
Accounts receivable unbilled
|
|
|
4,540
|
|
|
|
7,804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,787
|
|
|
|
20,848
|
|
Less: Allowance for doubtful accounts
|
|
|
(379
|
)
|
|
|
(562
|
)
|
|
|
|
|
|
|
|
|
|
Net receivables
|
|
|
12,408
|
|
|
|
20,286
|
|
Prepaid and other current assets
|
|
|
1,653
|
|
|
|
1,763
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
20,017
|
|
|
|
49,196
|
|
|
|
|
|
|
|
|
|
|
NONCURRENT ASSETS:
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
1,801
|
|
|
|
1,784
|
|
Goodwill
|
|
|
6,240
|
|
|
|
13,365
|
|
Licenses and identifiable intangible assets, net
|
|
|
4,842
|
|
|
|
11,605
|
|
Non-current investments
|
|
|
13,404
|
|
|
|
|
|
Other assets
|
|
|
410
|
|
|
|
616
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
46,714
|
|
|
$
|
76,566
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
Trade accounts payable
|
|
$
|
1,138
|
|
|
$
|
1,927
|
|
Accrued payroll, bonuses and related expenses
|
|
|
4,053
|
|
|
|
5,038
|
|
Other accrued liabilities
|
|
|
2,907
|
|
|
|
2,466
|
|
Income tax liabilities
|
|
|
103
|
|
|
|
861
|
|
Deferred revenue
|
|
|
476
|
|
|
|
3,554
|
|
Accrued contingent consideration
|
|
|
161
|
|
|
|
1,616
|
|
Unfavorable and other contractual obligations
|
|
|
697
|
|
|
|
1,668
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
9,535
|
|
|
|
17,130
|
|
|
|
|
|
|
|
|
|
|
NONCURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
Deferred income tax liabilities
|
|
|
115
|
|
|
|
1,368
|
|
Unfavorable and other contractual obligations
|
|
|
1,062
|
|
|
|
1,716
|
|
Noncurrent borrowings
|
|
|
1,485
|
|
|
|
|
|
Other noncurrent liabilities
|
|
|
891
|
|
|
|
524
|
|
|
|
|
|
|
|
|
|
|
Total noncurrent liabilities
|
|
|
3,553
|
|
|
|
3,608
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 14)
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY:
|
|
|
|
|
|
|
|
|
Common stock:
|
|
|
|
|
|
|
|
|
Voting $.001 par value, 100,000,000 shares
authorized; 36,965,124 (including 2,200,000 treasury shares) and
36,185,143 (including 200,000 treasury shares) shares issued as
of January 3, 2009 and December 29, 2007,
respectively; 34,765,124 and 35,985,143 shares outstanding
as of January 3, 2009 and December 29, 2007,
respectively
|
|
|
37
|
|
|
|
36
|
|
Preferred stock $.001 par value,
10,000,000 shares authorized; no shares issued or
outstanding
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
175,691
|
|
|
|
172,798
|
|
Accumulated deficit
|
|
|
(131,706
|
)
|
|
|
(116,881
|
)
|
Treasury stock, at cost
|
|
|
(3,545
|
)
|
|
|
(345
|
)
|
Accumulated other comprehensive income
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
(5,735
|
)
|
|
|
220
|
|
Loss on investments
|
|
|
(1,116
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
33,626
|
|
|
|
55,828
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity
|
|
$
|
46,714
|
|
|
$
|
76,566
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
30
THE
MANAGEMENT NETWORK GROUP, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
|
|
|
|
|
|
|
|
|
|
|
Fifty-Three
|
|
|
Fifty-Two
|
|
|
|
Weeks Ended
|
|
|
Weeks Ended
|
|
|
|
January 3,
|
|
|
December 29,
|
|
|
|
2009
|
|
|
2007
|
|
|
|
(In thousands, except per share data)
|
|
|
Revenues
|
|
$
|
74,042
|
|
|
$
|
71,875
|
|
Cost of services (includes net non-cash share-based compensation
expense of $545 and $302 for the 2008 and 2007 fiscal years,
respectively)
|
|
|
41,055
|
|
|
|
38,263
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
32,987
|
|
|
|
33,612
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
Selling, general and administrative (includes net non-cash
share-based compensation expense of $1,272 and $1,145 for the
2008 and 2007, respectively)
|
|
|
30,124
|
|
|
|
31,723
|
|
Special Committee investigation
|
|
|
|
|
|
|
2,560
|
|
Intangible asset amortization
|
|
|
3,916
|
|
|
|
3,612
|
|
Goodwill and intangible asset impairment
|
|
|
14,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
48,491
|
|
|
|
37,895
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(15,504
|
)
|
|
|
(4,283
|
)
|
Interest income
|
|
|
922
|
|
|
|
1,546
|
|
Other (expense) income, net
|
|
|
(249
|
)
|
|
|
452
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
673
|
|
|
|
1,998
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(14,831
|
)
|
|
|
(2,285
|
)
|
Income tax benefit (provision)
|
|
|
6
|
|
|
|
(52
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(14,825
|
)
|
|
|
(2,337
|
)
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
(5,955
|
)
|
|
|
(50
|
)
|
Unrealized loss on marketable securities
|
|
|
(1,116
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$
|
(21,896
|
)
|
|
$
|
(2,387
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per common share
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.42
|
)
|
|
$
|
(0.07
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in calculation of net loss per
share:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
35,445
|
|
|
|
35,868
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
35,445
|
|
|
|
35,868
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
31
THE
MANAGEMENT NETWORK GROUP, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
January 3,
|
|
|
December 29,
|
|
|
|
2009
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(14,825
|
)
|
|
$
|
(2,337
|
)
|
Adjustments to reconcile net loss to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
Goodwill and intangible asset impairment
|
|
|
14,451
|
|
|
|
|
|
Depreciation and amortization
|
|
|
5,386
|
|
|
|
4,872
|
|
Share-based compensation
|
|
|
1,817
|
|
|
|
1,447
|
|
Deferred taxes
|
|
|
(1,077
|
)
|
|
|
(882
|
)
|
Gain on disposal of assets
|
|
|
|
|
|
|
(82
|
)
|
Bad debt (recoveries) expense
|
|
|
(227
|
)
|
|
|
380
|
|
Realized loss on investments
|
|
|
280
|
|
|
|
|
|
Other changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
3,389
|
|
|
|
(54
|
)
|
Accounts receivable unbilled
|
|
|
2,423
|
|
|
|
(2,552
|
)
|
Prepaid and other assets
|
|
|
76
|
|
|
|
1,480
|
|
Trade accounts payable
|
|
|
(572
|
)
|
|
|
(322
|
)
|
Income tax liabilities
|
|
|
(216
|
)
|
|
|
113
|
|
Deferred revenue
|
|
|
(2,962
|
)
|
|
|
(1,299
|
)
|
Accrued liabilities
|
|
|
(1,653
|
)
|
|
|
671
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
6,290
|
|
|
|
1,435
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchases of short-term investments
|
|
|
|
|
|
|
(9,325
|
)
|
Proceeds from maturities/sales of marketable securities
|
|
|
2,325
|
|
|
|
19,400
|
|
Acquisition of businesses, net of cash acquired
|
|
|
(5,426
|
)
|
|
|
(11,011
|
)
|
Acquisition of property and equipment
|
|
|
(1,059
|
)
|
|
|
(430
|
)
|
Disposal of assets
|
|
|
|
|
|
|
82
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(4,160
|
)
|
|
|
(1,284
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Payments made on unfavorable and other contractual obligations
|
|
|
(1,656
|
)
|
|
|
(1,390
|
)
|
Purchases of common stock
|
|
|
(3,200
|
)
|
|
|
|
|
Borrowings on line of credit
|
|
|
1,485
|
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
26
|
|
|
|
163
|
|
Issuance of common stock through employee stock purchase plan
|
|
|
129
|
|
|
|
71
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(3,216
|
)
|
|
|
(1,156
|
)
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate on cash and cash equivalents
|
|
|
(2,980
|
)
|
|
|
(106
|
)
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(4,066
|
)
|
|
|
(1,111
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
10,022
|
|
|
|
11,133
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
5,956
|
|
|
$
|
10,022
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid during period for taxes, net of refunds
|
|
$
|
1,249
|
|
|
$
|
165
|
|
|
|
|
|
|
|
|
|
|
Accrued property and equipment additions
|
|
$
|
17
|
|
|
$
|
125
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash investing and financing
transactions
|
|
|
|
|
|
|
|
|
Acquisition of business: Common stock
|
|
$
|
922
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of business: Contingent consideration earned
|
|
$
|
1,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
32
THE
MANAGEMENT NETWORK GROUP, INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
$.001 Par
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Voting
|
|
|
Paid-In
|
|
|
Accumulated
|
|
|
Treasury
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Stock
|
|
|
Income
|
|
|
Total
|
|
|
|
(In thousands, except share data)
|
|
|
Balance, December 30, 2006
|
|
|
35,989,081
|
|
|
$
|
36
|
|
|
$
|
171,117
|
|
|
$
|
(114,321
|
)
|
|
$
|
(345
|
)
|
|
$
|
270
|
|
|
$
|
56,757
|
|
Cumulative effect of adopting FIN 48 (Note 7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(223
|
)
|
|
|
|
|
|
|
|
|
|
|
(223
|
)
|
Exercise of options
|
|
|
95,906
|
|
|
|
|
|
|
|
163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
163
|
|
Employee stock purchase plan
|
|
|
59,146
|
|
|
|
|
|
|
|
71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71
|
|
Non-vested stock grants
|
|
|
111,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-base compensation
|
|
|
|
|
|
|
|
|
|
|
1,447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,447
|
|
Nonvested stock cancellations
|
|
|
(70,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income Foreign currency
translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(50
|
)
|
|
|
(50
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,337
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,337
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 29, 2007
|
|
|
36,185,143
|
|
|
|
36
|
|
|
|
172,798
|
|
|
|
(116,881
|
)
|
|
|
(345
|
)
|
|
|
220
|
|
|
|
55,828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share repurchases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,200
|
)
|
|
|
|
|
|
|
(3,200
|
)
|
Exercise of options
|
|
|
12,775
|
|
|
|
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
|
|
Employee stock purchase plan
|
|
|
112,732
|
|
|
|
|
|
|
|
129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
129
|
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
1,817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,817
|
|
Common stock issued for acquisitions
|
|
|
654,474
|
|
|
|
1
|
|
|
|
921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
922
|
|
Other comprehensive income Foreign currency
translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,955
|
)
|
|
|
(5,955
|
)
|
Other comprehensive income Loss on investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,116
|
)
|
|
|
(1,116
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,825
|
)
|
|
|
|
|
|
|
|
|
|
|
(14,825
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 3, 2009
|
|
|
36,965,124
|
|
|
$
|
37
|
|
|
$
|
175,691
|
|
|
$
|
(131,706
|
)
|
|
$
|
(3,545
|
)
|
|
$
|
(6,851
|
)
|
|
$
|
33,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
33
THE
MANAGEMENT NETWORK GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
1.
|
ORGANIZATION
AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Nature of Operations The Management Network
Group, Inc. (TMNG or the Company) was
founded in 1990 as a management consulting firm specializing in
providing consulting services to the converging communications
industry and the financial services firms that support it. A
majority of the Companys revenues are from customers in
the United States, United Kingdom, and Western Europe.
TMNGs corporate offices are located in Overland Park,
Kansas.
Principles of Consolidation The consolidated
statements include the accounts of TMNG and its wholly-owned
subsidiaries. All significant inter-company accounts and
transactions have been eliminated in consolidation.
|
|
|
|
|
Name of Subsidiary/Acquisition
|
|
Date Formed/Acquired
|
|
|
TMNG Europe Ltd. (TMNG Europe)
|
|
|
March 19, 1997
|
|
The Management Network Group Canada Ltd. (TMNG
Canada)
|
|
|
May 14, 1998
|
|
TMNG.com, Inc.
|
|
|
June 1, 1999
|
|
TMNG Marketing, Inc.
|
|
|
September 5, 2000
|
|
TMNG Technologies, Inc.
|
|
|
September 5, 2001
|
|
Cambridge Strategic Management Group, Inc.
|
|
|
March 6, 2002
|
|
Cambridge Adventis Ltd.
|
|
|
March 1, 2006
|
|
Cartesian Ltd. (Cartesian)
|
|
|
January 2, 2007
|
|
RVA Consulting, LLC (RVA)
|
|
|
August 3, 2007
|
|
TWG Consulting, Inc. (TWG)
|
|
|
October 5, 2007
|
|
On January 2, 2007, the Company acquired one-hundred
percent of the outstanding common stock of Cartesian, a United
Kingdom-based software engineering and consulting firm. On
August 3, 2007, the Company acquired all of the outstanding
membership interests of RVA, a New Jersey based consulting firm
specializing in the communications industry. On October 5,
2007, the Company acquired all of the outstanding shares of
stock of TWG, a privately-held management consulting firm. The
results of Cartesian, RVA and TWG are included in the results of
operations subsequent to their respective dates of acquisition.
Fiscal Year The Company reports its operating
results on a 52/53-week fiscal year basis. The fiscal year end
is determined as the Saturday ending nearest December 31.
The fiscal year ended January 3, 2009 is a 53-week fiscal
year and was comprised of three 13-week quarters with the fourth
quarter comprised of 14 weeks. The fiscal year ended
December 29, 2007 reported 52 weeks of operating
results and consisted of four equal 13-week quarters. The fiscal
years ended January 3, 2009 and December 29, 2007 are
referred to herein as fiscal years 2008 and 2007, respectively.
TMNG Canada and Cartesian maintain year-end dates of
December 31.
Revenue Recognition The Company recognizes
revenue from time and materials consulting contracts in the
period in which its services are performed. In addition to time
and materials contracts, the Companys other types of
contracts may include 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
34
THE
MANAGEMENT NETWORK GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
its software sales agreements utilizing the SOP No.
81-1 percentage
of completion method. These agreements include software
right-to-use
licenses (RTUs) and related customization and
implementation services. Due to the long-term nature of the
software implementation and the extensive software customization
based on customer specific requirements normally experienced by
the Company, both the RTU and implementation services are
treated as a single element for revenue recognition purposes.
The
SOP No. 81-1 percentage-of-completion
methodology involves recognizing revenue using the percentage of
services completed, on a current cumulative cost to total cost
basis, using a reasonably consistent profit margin over the
period. Due to the longer term nature of these projects,
developing the estimates of costs often requires significant
judgment. Factors that must be considered in estimating the
progress of work completed and ultimate cost of the projects
include, but are not limited to, the availability of labor and
labor productivity, the nature and complexity of the work to be
performed, and the impact of delayed performance. If changes
occur in delivery, productivity or other factors used in
developing the estimates of costs or revenues, the Company
revises its cost and revenue estimates, which may result in
increases or decreases in revenues and costs, and such revisions
are reflected in income in the period in which the facts that
give rise to that revision become known.
In addition to the professional services related to the
customization and implementation of its software, the Company
also provides post-contract support (PCS) services,
including technical support and maintenance services. For those
contracts that include PCS service arrangements which are not
essential to the functionality of the software solution, the
Company separates the
SOP No. 81-1
software services and PCS services utilizing the
multiple-element arrangement model prescribed by Emerging Issues
Task Force (EITF) No.
00-21,
Revenue Arrangements with Multiple Deliverables.
EITF
No. 00-21
addresses the accounting treatment for an arrangement to provide
the delivery or performance of multiple products
and/or
services where the delivery of a product or system or
performance of services may occur at different points in time or
over different periods of time. The Company utilizes EITF
No. 00-21
to separate the PCS service elements and allocate total contract
consideration to the contract elements based on the relative
fair value of those elements. Revenues from PCS services are
recognized ratably on a straight-line basis over the term of the
support and maintenance agreement.
The Company may also enter into contingent fee contracts, in
which revenue is subject to achievement of savings or other
agreed upon results, rather than time spent. Due to the nature
of contingent fee contracts, the Company recognizes costs as
they are incurred on the project and defers revenue recognition
until the revenue is realizable and earned as agreed to by its
clients. Although these contracts can be very rewarding, the
profitability of these contracts is dependent on the
Companys ability to deliver results for its clients and
control the cost of providing these services. These types of
contracts are typically more results-oriented and are subject to
greater risk associated with revenue recognition and overall
project profitability than traditional time and materials
contracts. Revenues from contingent fee contracts were $50,000
for fiscal year 2008. Revenues and costs from contingent fee
contracts were $786,000 and $236,000 for fiscal year 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.
Cash and Cash Equivalents Cash and cash
equivalents include cash on hand and short-term investments with
original maturities of three months or less when purchased.
Marketable Securities Short-term investments
and non-current investments, which consist of auction rate
securities and related put option, are accounted for under the
provisions of Statement of Financial Accounting Standards
(SFAS) No. 115, Accounting for Certain
Investments in Debt and Equity Securities. Management
evaluates the appropriate classification of marketable
securities at each balance sheet date. These
35
THE
MANAGEMENT NETWORK GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
investments are reported at fair value, as measured pursuant to
SFAS No. 157, Fair Value
Measurements (SFAS No. 157). The
Company adopted SFAS No. 157 for its financial assets as of
the beginning of the 2008 fiscal year. In addition, the Company
accounts for applicable financial instruments under the
provisions of SFAS No. 159, The Fair Value
Option for Financial Assets and Financial Liabilities Including
an amendment of FASB Statement No. 115
(SFAS No. 159). For those securities
considered to be available for sale, any temporary
unrealized gains and losses are included as a separate component
of stockholders equity, net of applicable taxes. For those
securities considered to be trading, any unrealized
gains and losses are included in the Consolidated Statements of
Operations and Comprehensive Loss, net of applicable taxes.
Additionally, realized gains and losses, changes in value judged
to be
other-than-temporary,
interest and dividends are also included in the Consolidated
Statements of Operations and Comprehensive Loss, net of
applicable taxes. See Note 2 for further discussion of the
Companys auction rate securities portfolio.
Fair Value Measurement The Company utilizes
the methods of fair value measurement as described in
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.
Property and Equipment Property and equipment
are stated at cost or acquisition date fair value less
accumulated depreciation and amortization. Maintenance and
repairs are charged to expense as incurred. Depreciation is
based on the estimated useful lives of the assets and is
computed using the straight-line method, and capital leases, if
any, are amortized on a straight-line basis over the life of the
lease. Asset lives range from three to seven years for furniture
and fixtures, software and computer equipment. Leasehold
improvements are capitalized and amortized over the life of the
lease or useful life of the asset, whichever is shorter.
Research and Development and Capitalized Software
Costs Software development costs are accounted
for in accordance with SFAS No. 86,
Accounting for the Costs of Computer Software to Be
Sold, Leased, or Otherwise Marketed. Capitalization of
software development costs for products to be sold to third
parties begins upon the establishment of technological
feasibility and ceases when the product is available for general
release. The establishment of technological feasibility and the
ongoing assessment of recoverability of capitalized software
development costs require considerable judgment by management
concerning certain external factors including, but not limited
to, the date technological feasibility is reached, anticipated
future gross revenue, estimated economic life and changes in
software and hardware technologies. The Company capitalizes
development costs incurred during the period between the
establishment of technological feasibility and the release of
the final product to customers if such costs are material.
During fiscal years 2008 and 2007, $812,000 and $868,000,
respectively of these costs were expensed as incurred. No
software development costs were capitalized during either fiscal
year 2008 or 2007.
36
THE
MANAGEMENT NETWORK GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Goodwill The Company accounts for goodwill in
accordance with the provisions of SFAS No. 142,
Accounting for Goodwill and Intangible
Assets. Goodwill represents the excess of purchase
price over the fair value of net assets acquired in business
combinations accounted for as purchases. The Company evaluates
goodwill for impairment on an annual basis on the last day of
the first fiscal month of the fourth quarter and whenever events
or circumstances indicate that these assets may be impaired. The
annual impairment test for fiscal year 2008 was performed as of
October 25, 2008. The Company determines impairment by
comparing the net assets of each reporting unit to its
respective fair value. In the event a reporting units
carrying value exceeds its fair value, an indication exists that
the reporting unit goodwill may be impaired. In this situation,
the Company must determine the implied fair value of goodwill by
assigning the reporting units fair value to each asset and
liability of the reporting unit. The excess of the fair value of
the reporting unit over the amounts assigned to its assets and
liabilities is the implied fair value of goodwill. An impairment
loss is measured by the difference between the goodwill carrying
value and the implied fair value.
Fair value of the Companys reporting units is determined
using the income approach. The income approach uses a reporting
units projection of estimated cash flows discounted using
a weighted-average cost of capital analysis that reflects
current market conditions. The Company also considered the
market approach to valuing its reporting units, however due to
the lack of comparable industry publicly available transaction
data, we concluded a market approach did not adequately reflect
our specific reporting unit operations. While the market
approach was not expressly utilized, we did compare the results
of our overall enterprise valuation to our market
capitalization. Significant management judgments related to the
income approach include:
Anticipated future cash flows and terminal value for each
reporting unit The income approach to
determining fair value relies on the timing and estimates of
future cash flows, including an estimate of terminal value. The
projections use managements estimates of economic and
market conditions over the projected period including growth
rates in revenue and estimates of expected changes in operating
margins. Projections of future cash flows are subject to change
as actual results are achieved that differ from those
anticipated. Because the Company frequently updates its
projections, it would expect to identify on a timely basis any
significant differences between actual results and recent
estimates. The Company is not expecting actual results to vary
significantly from estimates.
Selection of an appropriate discount rate The
income approach requires the selection of an appropriate
discount rate, which is based on a weighted average cost of
capital analysis. The discount rate is affected by changes in
short-term interest rates and long-term yield as well as
variances in the typical capital structure of marketplace
participants. The discount rate is determined based on
assumptions that would be used by marketplace participants, and
for that reason, the capital structure of selected marketplace
participants was used in the weighted average cost of capital
analysis. Given the current volatile economic conditions, it is
possible that the discount rate will fluctuate in the near term.
Intangible Assets Intangible assets are
stated at cost or acquisition date fair value less accumulated
amortization, and represent customer relationships, software,
employment agreements, customer backlog and tradenames acquired
in the acquisitions of Cartesian, RVA and TWG, and an investment
in an exclusive marketing license with S3 Matching Technologies.
Amortization is based on estimated useful lives of 3 to
62 months, depending on the nature of the intangible asset,
and is recognized on a straight-line basis.
In connection with SFAS No. 144, Accounting
for the Impairment or Disposal of Long-lived Assets,
the Company uses its best estimate, based on reasonable and
supportable assumptions and projections, to review certain
long-lived assets and identifiable intangibles for impairment
whenever events or changes in circumstances indicate that the
carrying amount of these assets might not be recoverable.
Income Taxes The Company recognizes a
liability or asset for the deferred tax consequences of
temporary differences between the tax basis of assets or
liabilities and their reported amounts in the financial
37
THE
MANAGEMENT NETWORK GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
statements. A valuation allowance is provided when, in the
opinion of management, it is more likely than not that some
portion or all of a deferred tax asset will not be realized.
The Company adopted the provisions of Financial Accounting
Standards Board (FASB) Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement 109,
(FIN 48) effective January 1, 2007.
FIN 48 clarifies the accounting for uncertainty in income
taxes recognized in an enterprises financial statements in
accordance with SFAS No. 109, Accounting for
Income Taxes. FIN 48 also prescribes a
recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return.
Additionally, FIN 48 provides guidance on derecognition,
classification, interest and penalties, accounting in interim
periods, disclosure and transition.
FIN 48 required that the cumulative effect of this change
in accounting principle be recorded as an adjustment to opening
accumulated deficit in the year of adoption. As a result of the
implementation of FIN 48, the Company recognized a
cumulative effect adjustment of $223,000 as an increase to
beginning accumulated deficit for fiscal year 2007. In addition,
the Company identified approximately $271,000 in liabilities for
unrecognized tax benefits which were previously reserved in
Income tax liabilities on the consolidated balance
sheet. The liability for uncertain tax positions was $891,000
and $524,000 as of January 3, 2009 and December 27,
2007, respectively, and is included in Other noncurrent
liabilities on the consolidated balance sheet. The
adoption of FIN 48 did not have a material effect on the
Companys results of operations, financial condition or
cash flows during 2007. However, FIN 48 may add volatility
to the Companys effective tax rate and, therefore, the
expected income tax expense in future periods. The Company
recognizes interest and penalties accrued related to
unrecognized tax benefits as a component of the income tax
provision. As of January 3, 2009 and December 29,
2007, the total amount of accrued income tax-related interest
and penalties included in the Consolidated Balance Sheet was
$201,000 and $169,000, respectively.
Use of Estimates The preparation of financial
statements in conformity with accounting principles generally
accepted in the United States of America requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Foreign Currency Transactions and Translation
TMNG Europe, TMNG Canada, Cartesian and the international
operations of CSMG conduct business primarily denominated in
their respective local currency. Assets and liabilities have
been translated to U.S. dollars at the period-end exchange
rate. Revenue and expenses have been translated at exchange
rates which approximate the average of the rates prevailing
during each period. Translation adjustments are reported as a
separate component of other comprehensive income in the
consolidated statements of stockholders equity. Realized
and unrealized exchange gains included in results of operations
were $1,008,000 and $45,000 during fiscal year 2008 and 2007,
respectively.
Share-Based Compensation The Company accounts
for stock based compensation using the provisions of
SFAS No. 123R, Share-Based Payment,
(SFAS No. 123R) and the SECs Staff
Accounting Bulletin No. 110 (SAB 110)
which require the measurement and recognition of compensation
expense for all share-based payment awards based on estimated
fair values. The Company values its stock options using the
Black-Scholes model to determine fair value. See Note 6,
Share-Based Compensation.
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.
38
THE
MANAGEMENT NETWORK GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In accordance with the provisions of SFAS No. 128,
Earnings per Share, the Company uses the
treasury stock method for calculating the dilutive effect of
employee stock options and nonvested shares. These instruments
will have a dilutive effect under the treasury stock method only
when the respective periods average market value of the
underlying Company common stock exceeds the actual proceeds. In
applying the treasury stock method, assumed proceeds include the
amount, if any, the employee must pay upon exercise, the amount
of compensation cost for future services that the Company has
not yet recognized, and the amount of tax benefits, if any, that
would be credited to additional paid-in capital assuming
exercise of the options and the vesting of nonvested shares. The
Company has not included the effect of stock options and
nonvested stock in the calculation of diluted loss per share for
fiscal years 2008 and 2007 as the Company reported a net loss
for these periods and the effect would have been anti-dilutive.
Recent Accounting Pronouncements In September
2006, the 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. In October 2008, the FASB issued Staff
Position
FAS 157-3,
Determining the Fair Value of a Financial Asset When the
Market for that Asset is not Active,
(FSP 157-3)
to provide guidance for determining the fair value of a
financial asset in an inactive market. The Company considered
FSP
FAS 157-3
in the determination of the fair value of its financial assets
and financial liabilities. The Company is currently evaluating
the impact, if any, that the adoption of SFAS No. 157
and
FSP 157-2
for its non-financial assets will have on its consolidated
financial statements.
In December 2007, the FASB issued SFAS No. 141R,
Business Combinations, (SFAS No.
141R) which replaces SFAS No. 141,
Business Combinations. 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 noncontrolling 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). 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
39
THE
MANAGEMENT NETWORK GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 No. 161).
SFAS No. 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 No. 161 is effective for fiscal years beginning
after November 15, 2008. The Company is currently
evaluating the impact, if any, the adoption of
SFAS No. 161 will have on its consolidated financial
statements.
In April 2008, the FASB issued Staff Position
No. FAS 142-3,
Determination of Useful Life of Intangible Assets
(FSP
FAS 142-3).
FSP
FAS 142-3
amends the factors that should be considered in developing
renewal or extension assumptions used to determine the useful
life of a recognized intangible asset under FASB Statement
No. 142, Goodwill and Other Intangible Assets.
FSP
FAS 142-3
also requires expanded disclosures related to the determination
of intangible asset useful lives. This standard applies
prospectively to intangible assets acquired
and/or
recognized on or after January 1, 2009. The Company does
not believe that the adoption of this standard will have an
impact on its consolidated financial statements.
40
THE
MANAGEMENT NETWORK GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
2.
|
AUCTION
RATE SECURITIES
|
As of January 3, 2009, TMNG held auction rate securities
for which the underlying collateral is guaranteed through the
Federal Family Education Loan Program of the
U.S. Department of Education. The Companys auction
rate securities portfolio as of January 3, 2009 consisted
of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized
|
|
|
|
|
|
Fair Value at
|
|
|
|
|
|
|
Gains
|
|
|
Unrealized
|
|
|
January 3,
|
|
Issuer
|
|
Cost Basis
|
|
|
(Losses)
|
|
|
Losses
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Trading Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kentucky Higher Education Loan Revenue Bonds
A-4
|
|
$
|
1,900
|
|
|
$
|
(303
|
)
|
|
|
|
|
|
$
|
1,597
|
|
Missouri Higher Education Loan Revenue Bonds
|
|
|
1,800
|
|
|
|
(287
|
)
|
|
|
|
|
|
|
1,513
|
|
Utah State Board of Regents Revenue Bonds
|
|
|
1,400
|
|
|
|
(232
|
)
|
|
|
|
|
|
|
1,168
|
|
Access Group Inc. Federal Student Loan Asset Backed Notes
|
|
|
2,050
|
|
|
|
(216
|
)
|
|
|
|
|
|
|
1,834
|
|
Kentucky Higher Education Loan Revenue Bonds
A-2
|
|
|
400
|
|
|
|
(145
|
)
|
|
|
|
|
|
|
255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,550
|
|
|
|
(1,183
|
)
|
|
|
|
|
|
|
6,367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for Sale Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Education Funding Capital Education Loan Backed Notes
|
|
|
6,250
|
|
|
|
|
|
|
$
|
(1,015
|
)
|
|
|
5,235
|
|
Brazos Student Finance Corporation Student Loan Asset Backed
Notes
|
|
|
1,000
|
|
|
|
|
|
|
|
(101
|
)
|
|
|
899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,250
|
|
|
|
|
|
|
|
(1,116
|
)
|
|
|
6,134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ARS Rights
|
|
|
|
|
|
|
903
|
|
|
|
|
|
|
|
903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,800
|
|
|
$
|
(280
|
)
|
|
$
|
(1,116
|
)
|
|
$
|
13,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The auction rate securities the Company holds are generally
long-term debt instruments that historically provided liquidity
through a Dutch auction process through which interest rates
reset every 28 to 35 days. 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. The entire amount of auction rate securities is
reflected as non-current assets on the Companys balance
sheet as of January 3, 2009.
During the third quarter of 2008, state and federal regulators
reached settlement agreements with both of the brokers who
advised the Company to purchase the auction rate securities
currently held by the Company. The settlement agreements with
the regulators were intended to eventually provide liquidity for
holders of auction rate securities. On November 13, 2008,
the Company entered into a settlement with UBS AG
(UBS) to provide liquidity for the Companys
$7.6 million auction rate securities portfolio held with a
UBS affiliate. Pursuant to the terms of the Settlement, UBS
issued to the Company Auction Rate Securities Rights (ARS
Rights), allowing the Company to sell to UBS its auction
rate securities held in accounts with UBS and UBS affiliates at
par value at any time during the period beginning June 30,
2010 and ending July 2, 2012. As consideration for the
issuance of the ARS Rights, the Company (1) released UBS
from all claims for damages (other than consequential damages)
directly or indirectly relating to UBSs marketing and sale
of auction rate
41
THE
MANAGEMENT NETWORK GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
securities, and (2) granted UBS the discretionary right to
sell or otherwise dispose of the Companys auction rate
securities, provided that the Company is paid the par value of
the auction rate securities upon any disposition.
While the ARS Rights result in a put option which represents a
separate freestanding instrument, the put option does not meet
the definition of a derivative instrument under SFAS
No. 133, Accounting for Derivative Instruments and
Hedging Activities
(SFAS No. 133) because the option
requires physical settlement of the auction rate securities,
there is not a market mechanism that facilitates net settlement,
and the underlying auction rate securities are not considered
readily convertible to cash. The Company has elected to measure
the ARS Rights at fair value under SFAS No. 159 to
better align changes in fair value of the ARS Rights with those
of the underlying auction rate securities investments.
Prior to accepting the UBS settlement offer, the Company
recorded all of its auction rate securities as
available-for-sale
investments. Upon accepting the UBS settlement, the Company made
a one-time election to transfer its UBS auction rate securities
holdings from
available-for-sale
securities to trading securities under SFAS No. 115.
Accepting the UBS settlement agreement resulted in the
recognition of an
other-than-temporary
impairment of approximately $1.2 million due to the
Companys intention not to hold these investments to
maturity. Offsetting the
other-than-temporary
impairment loss and subsequent realized losses on these trading
securities was a gain of $0.9 million recognized for the
fair value of the ARS Rights under SFAS No. 159. The
ARS Rights will continue to be measured at fair value under
SFAS No. 159 until the earlier of the Companys
exercise of the ARS Rights or UBSs purchase of the auction
rate securities in connection with the ARS Rights.
Due to the lack of observable market quotes on the
Companys auction rate securities portfolio and ARS Rights,
the Company utilizes valuation models that rely exclusively on
Level 3 inputs, as defined by SFAS No. 157,
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 and ARS Rights
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.
As discussed above in Note 2, Auction Rate
Securities, on November 13, 2008, the Company entered
into a settlement with UBS to provide liquidity for the
Companys $7.6 million auction rate securities
portfolio held with a UBS affiliate. As provided for in the
Settlement, the Company entered into a line of credit from UBS
or its affiliates for up to 75% of the market value of its
auction rate securities. The line of credit provides the Company
with an uncommitted, demand revolving line of credit of up to
75% of the fair value, as determined by UBS in its sole
discretion, of the Companys auction rate securities that
the Company has pledged as collateral. The interest that the
Company pays on the line of credit will not exceed the interest
that the Company receives on the auction rate securities pledged
to UBS as security for the line of credit. UBS may demand full
or partial payment of amounts borrowed on the line of credit, at
its sole option and without cause, at any time. UBS may, at any
time, in its discretion, terminate and cancel the line of
credit. If at any time UBS exercises its right of demand, then a
UBS affiliate shall provide, as soon as reasonably possible,
alternative financing on substantially the same terms and
conditions as those under the line of credit and UBS agrees that
the line of credit shall remain in full force and effect until
such time as such alternative financing has been established. If
alternative financing cannot be established, then a UBS-related
entity will purchase the pledged auction rate securities at par
value. If the Company elects to sell any auction rate securities
that are pledged as collateral under the line of credit to a
purchaser other than UBS, UBS intends to exercise its right
42
THE
MANAGEMENT NETWORK GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
to demand repayment of the line of credit relating to the
auction rate securities sold by the Company. The Company has
classified the line of credit as a noncurrent liability in the
Consolidated Balance Sheet.
On November 18, 2008, the Company borrowed approximately
$1.5 million under the Credit Line Agreement to fund
short-term liquidity needs. Available borrowings as of
January 3, 2009 under this line of credit were
$3.4 million.
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 $1.7 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 $3.3 million, including
$1.3 million of possible contingent cash consideration and
approximately 0.7 million shares of TMNG common stock
valued at $0.3 million based on the share price as of
January 3, 2009. 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. 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 $1.6 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. The negative goodwill was reduced during
the fiscal year 2008, by additional consideration of
$0.1 million for working capital
true-ups. 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. None of
the earn-out consideration was earned during the fiscal year
ended January 3, 2009.
The aggregate purchase price of $1.9 million consisted of
the following (in thousands):
|
|
|
|
|
Cash
|
|
$
|
1,660
|
|
Transaction costs
|
|
|
59
|
|
Accrued contingent consideration
|
|
|
161
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
1,880
|
|
|
|
|
|
|
43
THE
MANAGEMENT NETWORK GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the estimated fair value of the
assets acquired and liabilities assumed as of the date of
acquisition. The allocation of the purchase price assigned to
identifiable intangible assets was determined by management
using applicable fair-value techniques.
At
October 5, 2007
(Amounts in Thousands)
|
|
|
|
|
Acquired cash
|
|
$
|
576
|
|
Other current assets
|
|
|
891
|
|
Customer relationships
|
|
|
300
|
|
Employment agreements
|
|
|
300
|
|
Customer backlog
|
|
|
100
|
|
|
|
|
|
|
Total assets acquired
|
|
|
2,167
|
|
Other current liabilities assumed
|
|
|
305
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
1,862
|
|
|
|
|
|
|
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
through June 30, 2010.
The aggregate potential purchase price of $11.6 million
consists of the following (in thousands):
|
|
|
|
|
Cash paid at closing
|
|
$
|
6,625
|
|
Transaction costs
|
|
|
247
|
|
Contingent cash consideration earned
|
|
|
2,292
|
|
Contingent stock consideration earned (based on share price as
of June 30, 2008)
|
|
|
921
|
|
|
|
|
|
|
Total purchase price recognized at January 3, 2009
|
|
|
10,085
|
|
|
|
|
|
|
Remaining contingent cash consideration
|
|
|
1,325
|
|
Remaining contingent stock consideration (based on share price
as of January 3, 2009)
|
|
|
183
|
|
|
|
|
|
|
Aggregate potential consideration
|
|
$
|
11,593
|
|
|
|
|
|
|
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 consideration. During
the fiscal year ended January 3, 2009 additional
44
THE
MANAGEMENT NETWORK GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
consideration for working capital
true-ups
totaling $0.8 million was paid. The first measurement date
for contingent cash and stock consideration was June 30,
2008. Cash earn-out consideration in the amount of
$1.5 million and stock consideration in the amount of
654,474 shares of common stock, with a value of
$0.9 million as of June 30, 2008, was earned and paid
during fiscal year 2008. The working capital
true-ups and
contingent cash and stock consideration earned resulted in the
creation of $2.5 million of goodwill.
The following table summarizes the estimated fair value of the
assets acquired and liabilities assumed as of the date of
acquisition. The allocation of the purchase price assigned to
identifiable intangible assets was determined by management
using applicable fair-value techniques.
At
August 3, 2007
(Amounts in Thousands)
|
|
|
|
|
Acquired cash
|
|
$
|
5,642
|
|
Other current assets
|
|
|
3,121
|
|
Furniture, fixtures and equipment
|
|
|
369
|
|
Customer relationships
|
|
|
3,400
|
|
Employment agreements
|
|
|
400
|
|
Customer backlog
|
|
|
2,100
|
|
|
|
|
|
|
Total assets acquired
|
|
|
15,032
|
|
Deferred revenue
|
|
|
4,575
|
|
Other current liabilities assumed
|
|
|
2,442
|
|
Noncurrent liabilities assumed
|
|
|
394
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
7,411
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
7,621
|
|
|
|
|
|
|
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 working capital
true-ups and
potential earn-out consideration based upon performance of
Cartesian after the closing date. During the fourth quarter of
2008, in consideration for the selling parties relinquishing
certain management rights, the remaining contingent
consideration was deemed earned. In addition, a payment of
$372,000 scheduled to be made in 2010 was accelerated and paid
in 2008. The remaining cash consideration of $1.9 million
is included in other accrued liabilities on the Consolidated
Balance Sheet as of January 3, 2009 and will be paid during
fiscal year 2009. The aggregate purchase price of
$15.4 million consisted of the following (in thousands):
|
|
|
|
|
Cash paid at closing
|
|
$
|
6,495
|
|
Transaction costs
|
|
|
534
|
|
Contingent consideration earned and paid
|
|
|
6,529
|
|
|
|
|
|
|
Total purchase price recognized at January 3, 2009
|
|
|
13,558
|
|
|
|
|
|
|
Contingent cash consideration earned but not yet paid
|
|
|
1,860
|
|
|
|
|
|
|
Aggregate consideration
|
|
$
|
15,418
|
|
|
|
|
|
|
45
THE
MANAGEMENT NETWORK GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 fiscal year ended January 3,
2009, earn-out payments totaling $3.0 million were paid and
$1.9 million accrued resulting in the creation of
$4.3 million of goodwill.
The following table summarizes the estimated fair value of the
assets acquired and liabilities assumed as of the date of
acquisition. The allocation of the purchase price assigned to
identifiable intangible assets was determined by management
using applicable fair-value techniques.
At
January 2, 2007
(Amounts in Thousands)
|
|
|
|
|
Acquired cash
|
|
$
|
1,787
|
|
Other current assets
|
|
|
6,421
|
|
Property, plant and equipment
|
|
|
533
|
|
Customer relationships
|
|
|
2,368
|
|
Acquired software
|
|
|
2,961
|
|
Employment agreements
|
|
|
1,974
|
|
Customer backlog
|
|
|
395
|
|
Tradename
|
|
|
395
|
|
|
|
|
|
|
Total assets acquired
|
|
|
16,834
|
|
|
|
|
|
|
Current liabilities assumed
|
|
|
3,332
|
|
Deferred income tax liabilities recognized
|
|
|
2,428
|
|
|
|
|
|
|
Total liabilities assumed and recognized
|
|
|
5,760
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
11,074
|
|
|
|
|
|
|
Pro
Forma Combined Results
The operating results of Cartesian, RVA, and TWG have been
included in the 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 RVA and TWG) as if the acquisitions had
occurred as of December 31, 2006. In managements
opinion, this pro forma information does not necessarily reflect
the actual results that would have occurred had the acquisitions
been completed as of December 31, 2006 nor is it
necessarily indicative of future consolidated results of
operations of the Company.
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
December 29, 2007
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands, except per share
|
|
|
|
amounts)
|
|
|
Total revenues
|
|
$
|
91,935
|
|
Net income
|
|
$
|
5,401
|
|
Basic and diluted net income per common share
|
|
$
|
0.15
|
|
46
THE
MANAGEMENT NETWORK GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
5.
|
GOODWILL
AND OTHER INTANGIBLE ASSETS
|
The changes in the carrying amount of goodwill as of
January 3, 2009 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management
|
|
|
|
|
|
|
|
|
|
Consulting
|
|
|
Software
|
|
|
|
|
|
|
Services
|
|
|
Solutions
|
|
|
|
|
|
|
Segment
|
|
|
Segment
|
|
|
Total
|
|
|
Balance as of December 29, 2007
|
|
$
|
13,365
|
|
|
|
|
|
|
$
|
13,365
|
|
2008 Cartesian goodwill from earn-out payments, including
changes in foreign currency exchange rates
|
|
|
|
|
|
$
|
3,775
|
|
|
|
3,775
|
|
2008 RVA goodwill from earn-out payments
|
|
|
2,465
|
|
|
|
|
|
|
|
2,465
|
|
2008 impairment loss
|
|
|
(13,365
|
)
|
|
|
|
|
|
|
(13,365
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 3, 2009
|
|
$
|
2,465
|
|
|
$
|
3,775
|
|
|
$
|
6,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no changes in the carrying amount of goodwill for the
fiscal year ended December 29, 2007.
Licenses and identifiable intangible assets, net are comprised
of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 3, 2009
|
|
|
December 29, 2007
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Accumulated
|
|
|
|
Cost
|
|
|
Amortization
|
|
|
Cost
|
|
|
Amortization
|
|
|
Customer relationships
|
|
$
|
5,136
|
|
|
$
|
(2,072
|
)
|
|
$
|
6,090
|
|
|
$
|
(977
|
)
|
Acquired software
|
|
|
2,170
|
|
|
|
(1,085
|
)
|
|
|
2,988
|
|
|
|
(747
|
)
|
Employment agreements
|
|
|
1,847
|
|
|
|
(1,154
|
)
|
|
|
2,692
|
|
|
|
(736
|
)
|
Customer backlog
|
|
|
2,100
|
|
|
|
(2,100
|
)
|
|
|
2,598
|
|
|
|
(1,373
|
)
|
Tradename
|
|
|
289
|
|
|
|
(289
|
)
|
|
|
398
|
|
|
|
(199
|
)
|
S3 license agreement
|
|
|
|
|
|
|
|
|
|
|
1,500
|
|
|
|
(629
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
11,542
|
|
|
$
|
(6,700
|
)
|
|
$
|
16,266
|
|
|
$
|
(4,661
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible amortization expense for the fiscal years ended
January 3, 2009 and December 29, 2007 was $4,614,000
and $4,362,000, respectively, including $698,000 and $750,000
reported in cost of services for the fiscal years 2008 and 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
|
|
Fiscal year 2009
|
|
$
|
2,442
|
|
|
$
|
543
|
|
Fiscal years 2010 2012
|
|
|
2,400
|
|
|
|
542
|
|
The Company evaluates goodwill for impairment on an annual basis
on the last day of the first fiscal month of the fourth quarter
and whenever events or circumstances indicate that these assets
may be impaired. Based on an analysis of the present value of
future cash flows the Company recognized a charge of
approximately $13.4 million for the impairment of the
carrying value of goodwill in the Management Consulting Services
Segment. The impairment charge was the result of a reduction in
the size and scope of operations which impacted the
Companys assessment of future cash flows. This goodwill
impairment loss has been reflected as a component of Loss from
Operations in the Statement of Operations and Comprehensive
Loss. The Company performed its impairment test for goodwill in
accordance with SFAS No. 142, Accounting for
Goodwill and Intangible Assets.
47
THE
MANAGEMENT NETWORK GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company reviews long-lived assets and certain identifiable
intangibles to be held and used for impairment whenever events
or changes in circumstances indicate that the carrying amount of
these assets might not be recoverable in accordance with the
provisions of SFAS No. 144. Based on an analysis of
the present value of future cash flows, the Company determined
that the carrying value of the S3 license agreement and the
intangibles related to the TWG acquisition exceeded their fair
market values and recorded an impairment loss related to the
Management Consulting Segment of approximately
$1.1 million. This impairment loss has been reflected as a
component of Loss from Operations in the Consolidated Statement
of Operations and Comprehensive Loss.
|
|
6.
|
SHARE-BASED
COMPENSATION
|
The Company estimates the fair value of its stock options and
stock issued under the Employee Stock Purchase Plan using the
Black-Scholes-Merton option pricing model. Groups of employees
or non-employee directors that have similar historical and
expected exercise behavior are considered separately for
valuation purposes. The table below shows the weighted average
of the assumptions used in estimating the fair value of stock
options granted during fiscal years 2008 and 2007:
|
|
|
|
|
|
|
Fiscal Year
|
|
Fiscal Year
|
|
|
2008
|
|
2007
|
|
Risk-free interest rate
|
|
2.8%
|
|
4.7%
|
Expected life
|
|
6.2 years
|
|
6.2 years
|
Expected volatility factor
|
|
60%
|
|
64%
|
Expected dividend rate
|
|
0%
|
|
0%
|
The risk-free interest rate is based on the U.S. Treasury
yield at the time of grant for a term equal to the expected life
of the stock option; the expected life was determined using the
simplified method of estimating the life as allowed under
SAB No. 110; and the expected volatility is based on
the historical volatility of the Companys stock price for
a period of time equal to the expected life of the stock option.
Nearly all of the Companys share-based compensation
arrangements utilize graded vesting schedules where a portion of
the grant vests annually over a period of two to four years. The
Company has a policy of recognizing compensation expense for
awards with graded vesting over the requisite service period for
each separately vesting portion of the award as if the award
was, in-substance, multiple awards. This policy has the effect
of accelerating the recognition of expense when compared to a
straight-line amortization methodology.
As of January 3, 2009, the Company has three share-based
compensation plans, which are described below. The compensation
cost that has been charged against income for those plans under
SFAS No. 123R was $1.8 million and
$1.4 million during 2008 and 2007, respectively. The
Company recognized income tax benefit, net of valuation
allowances, for share-based compensation arrangements of
$326,000 and $246,000 for 2008 and 2007, respectively. In
addition, no compensation costs related to these arrangements
were capitalized in either year. As of January 3, 2009,
unrecognized compensation cost, net of estimated forfeitures,
related to the unvested portion of all share-based compensation
arrangements was approximately $1.3 million and is expected
to be recognized over a weighted-average period of approximately
17 months. The Company has historically issued and expects
to continue to issue new shares to satisfy stock option
exercises, vesting of nonvested stock or purchases of shares
under the Employee Stock Purchase Plan.
1998
EQUITY INCENTIVE PLAN
The Companys 1998 Equity Incentive Plan, as amended and
restated, (the 1998 Plan) is a shareholder approved
plan, which provides for the granting of incentive stock options
and nonqualified stock options to employees, and nonqualified
stock options and nonvested stock to employees, directors and
consultants. The 1998 Plan is scheduled to expire in September
2009. As of January 3, 2009, the Company has
7,921,270 shares
48
THE
MANAGEMENT NETWORK GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
of the Companys common stock available for issuance upon
exercise of outstanding options or as nonvested stock under the
1998 Plan.
Stock
Options
Incentive stock options are granted at an exercise price of not
less than market value per share of the common stock on the date
of grant as determined by the Board of Directors. Vesting and
exercise provisions are determined by the Board of Directors.
Between 1999 and 2006, however, the vesting and exercise
provisions of most stock option grants, other than those made to
executive officers and directors, were determined by management
under an apparent or de facto delegation of such
authority by the Board of Directors. Although the 1998 Plan does
not expressly authorize such delegation, the Board of Directors
has determined that these will be recognized as valid option
grants.
As of January 3, 2009, all options granted under the 1998
Plan were non-qualified stock options. Options granted under the
1998 Plan generally become exercisable over a three to four year
period beginning on the date of grant. Options granted under the
1998 Plan have a maximum term of ten years.
A summary of the option activity of the Companys 1998 Plan
as of January 3, 2009 and changes during the year then
ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Price
|
|
|
Term
|
|
|
Value
|
|
|
Outstanding at December 29, 2007
|
|
|
4,794,341
|
|
|
$
|
3.47
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
16,000
|
|
|
$
|
1.05
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(12,775
|
)
|
|
$
|
2.10
|
|
|
|
|
|
|
|
|
|
Forfeited/cancelled
|
|
|
(509,491
|
)
|
|
$
|
2.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 3, 2009
|
|
|
4,288,075
|
|
|
$
|
3.62
|
|
|
|
6.3 years
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested and expected to be vested at January 3, 2009
|
|
|
3,727,806
|
|
|
$
|
3.83
|
|
|
|
6.0 years
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at January 3, 2009
|
|
|
2,782,391
|
|
|
$
|
4.37
|
|
|
|
5.3 years
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average grant date fair value of options granted
was $0.59 and $1.40 during fiscal years 2008 and 2007,
respectively. The total intrinsic value of options exercised was
$3,000 and $36,000 during fiscal years 2008 and 2007,
respectively. As of January 3, 2009, unrecognized
compensation cost, net of estimated forfeitures, related to the
unvested portion of stock options issued under the 1998 Plan was
approximately $0.7 million and is expected to be recognized
over a weighted-average period of approximately 16 months.
Nonvested
Stock
Nonvested stock under the 1998 Plan are subject to restriction
based upon a two to four year vesting schedule. The fair value
of nonvested share awards is determined based on the closing
trading price of the Companys common stock on the award
date.
49
THE
MANAGEMENT NETWORK GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of the status of nonvested stock issued under the 1998
Plan as of January 3, 2009 and changes during the year then
ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Outstanding at December 29, 2007
|
|
|
107,500
|
|
|
$
|
2.24
|
|
Vested
|
|
|
(50,625
|
)
|
|
$
|
2.24
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 3, 2009
|
|
|
56,875
|
|
|
$
|
2.23
|
|
|
|
|
|
|
|
|
|
|
There were no shares of nonvested stock issued during 2008. As
of January 3, 2009, there was $8,000 of total unrecognized
compensation cost related to nonvested stock granted under the
1998 Plan. The cost is expected to be recognized over a weighted
average period of 17 months. The total fair value of shares
vested was $78,300 and $95,000 during 2008 and 2007,
respectively.
2000
SUPPLEMENTAL STOCK PLAN
As of January 3, 2009, the Company has
2,226,521 shares of the Companys common stock
available for issuance upon exercise of outstanding options
under the 2000 Supplemental Stock Plan (the 2000
Plan). The 2000 Plan provides the Companys common
stock for the granting of nonqualified stock options to
employees and is not subject to shareholder approval. Vesting
and exercise provisions are determined by the Board of
Directors. Options granted under the plan generally become
exercisable over a period of up to four years beginning on the
date of grant and have a maximum term of ten years.
A summary of the option activity of the Companys 2000 Plan
as of January 3, 2009 and changes during the year then
ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Price
|
|
|
Term
|
|
|
Value
|
|
|
Outstanding at December 29, 2007
|
|
|
1,399,736
|
|
|
$
|
2.58
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
469,000
|
|
|
$
|
1.72
|
|
|
|
|
|
|
|
|
|
Forfeited/cancelled
|
|
|
(312,463
|
)
|
|
$
|
2.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 29, 2007
|
|
|
1,556,273
|
|
|
$
|
2.34
|
|
|
|
7.8 years
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested and expected to be vested at December 29,
2007
|
|
|
1,271,493
|
|
|
$
|
2.40
|
|
|
|
7.5 years
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at December 29, 2007
|
|
|
573,270
|
|
|
$
|
2.83
|
|
|
|
5.9 years
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average fair value of options granted was $1.01 and
$1.45 during fiscal years 2008 and 2007, respectively . There
were no options exercised during fiscal year 2008 or 2007. As of
January 3, 2009, unrecognized compensation cost, net of
estimated forfeitures, related to the unvested portion of stock
options issued under the 2000 Plan was approximately
$0.6 million and is expected to be recognized over a
weighted-average period of approximately 18 months.
EMPLOYEE
STOCK PURCHASE PLAN
Under the Employee Stock Purchase Plan (ESPP), shares of the
Companys common stock may be purchased at six-month
intervals at 85% of the lower of the fair market value on the
first day of the enrollment
50
THE
MANAGEMENT NETWORK GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
period or on the last day of each six-month period over the
subsequent two years. Employees may purchase shares through a
payroll deduction program having a value not exceeding 15% of
their gross compensation during an offering period. During 2008
and 2007, the Company recognized net expense of $62,000 and
$50,000, respectively, in connection with
SFAS No. 123R associated with the ESPP.
|
|
7.
|
BUSINESS
SEGMENTS, MAJOR CUSTOMERS AND SIGNIFICANT GROUP CONCENTRATIONS
OF CREDIT RISK
|
The Company identifies its segments based on the way management
organizes the Company to assess performance and make operating
decisions regarding the allocation of resources. In accordance
with the criteria in SFAS No. 131 Disclosure
about Segments of an Enterprise and Related Information,
the Company has concluded it has two reportable segments
beginning in the first quarter of fiscal 2007; the Management
Consulting Services segment and the Software Solutions segment.
The Management Consulting Services segment is comprised of five
operating segments (Operations, Domestic Strategy, International
Strategy, RVA and TWG) which are aggregated into one reportable
segment. Management Consulting Services includes consulting
services related to strategy and business planning, market
research and analysis, organizational development, knowledge
management, marketing and customer relationship management,
program management, billing system support, operating system
support, revenue assurance, and corporate investment services.
Software Solutions is a single reportable operating segment that
provides custom developed software, consulting and technical
services. These services range from developing initial business
and system requirements, to software development, software
configuration and implementation, and post-contract customer
support.
Management evaluates segment performance based upon income
(loss) from operations, excluding share-based compensation
(benefits), depreciation and intangibles amortization.
Inter-segment revenues were approximately $2.4 million in
fiscal year 2008. Inter-segment revenues were approximately
$0.9 million in fiscal year 2007. 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.
51
THE
MANAGEMENT NETWORK GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Summarized financial information concerning the Companys
reportable segments is shown in the following table (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management
|
|
|
|
|
|
Not
|
|
|
|
|
|
|
Consulting
|
|
|
Software
|
|
|
Allocated to
|
|
|
|
|
|
|
Services
|
|
|
Solutions
|
|
|
Segments
|
|
|
Total
|
|
|
As of and for the fiscal year ended January 3, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
54,086
|
|
|
$
|
19,956
|
|
|
|
|
|
|
$
|
74,042
|
|
Income (loss) from operations
|
|
|
17,292
|
|
|
|
4,347
|
|
|
$
|
(37,143
|
)
|
|
|
(15,504
|
)
|
Interest income
|
|
|
|
|
|
|
|
|
|
|
922
|
|
|
|
922
|
|
Income (loss) before income tax provision
|
|
|
17,292
|
|
|
|
4,347
|
|
|
|
(36,470
|
)
|
|
|
(14,831
|
)
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
5,385
|
|
|
|
5,385
|
|
Total assets
|
|
$
|
8,728
|
|
|
$
|
4,078
|
|
|
$
|
33,908
|
|
|
$
|
46,714
|
|
As of and for the fiscal year ended December 29, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
47,656
|
|
|
$
|
24,219
|
|
|
|
|
|
|
$
|
71,875
|
|
Income (loss) from operations
|
|
|
17,089
|
|
|
|
7,646
|
|
|
$
|
(29,018
|
)
|
|
|
(4,283
|
)
|
Interest Income
|
|
|
|
|
|
|
|
|
|
|
1,546
|
|
|
|
1,546
|
|
Income (loss) before income tax provision
|
|
|
17,089
|
|
|
|
7,646
|
|
|
|
(27,020
|
)
|
|
|
(2,285
|
)
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
4,872
|
|
|
|
4,872
|
|
Total assets
|
|
$
|
13,372
|
|
|
$
|
6,914
|
|
|
$
|
56,280
|
|
|
$
|
76,566
|
|
Segment assets, regularly reviewed by management as part of its
overall assessment of the segments performance, include
both billed and unbilled trade accounts receivable, net of
allowances, and certain other assets. Assets not assigned to
segments include cash and cash equivalents, property and
equipment, goodwill and intangible assets and deferred tax
assets, excluding deferred tax assets recognized on accounts
receivable reserves, which are assigned to there segments.
In accordance with the provisions of SFAS No 131, revenues
earned in the United States and internationally based on the
location where the services are performed are shown in the
following table (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
Loss Before Income Tax Provision
|
|
|
|
FY
|
|
|
FY
|
|
|
FY
|
|
|
FY
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
United States
|
|
$
|
46,096
|
|
|
$
|
39,610
|
|
|
$
|
(9,233
|
)
|
|
$
|
(1,259
|
)
|
International:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United Kingdom
|
|
|
26,163
|
|
|
|
29,835
|
|
|
|
(5,241
|
)
|
|
|
(948
|
)
|
Germany
|
|
|
|
|
|
|
745
|
|
|
|
|
|
|
|
(24
|
)
|
Ireland
|
|
|
849
|
|
|
|
515
|
|
|
|
(170
|
)
|
|
|
(16
|
)
|
Other
|
|
|
934
|
|
|
|
1,170
|
|
|
|
(187
|
)
|
|
|
(38
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
74,042
|
|
|
$
|
71,875
|
|
|
$
|
(14,831
|
)
|
|
$
|
(2,285
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52
THE
MANAGEMENT NETWORK GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Major customers in terms of significance to TMNGs revenues
(i.e. in excess of 10% of revenues) for fiscal years 2008 and
2007, and accounts receivable as of January 3, 2009 and
December 29, 2007 were as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
Fiscal
|
|
Fiscal
|
|
Accounts Receivable
|
|
|
Year
|
|
Year
|
|
January 3,
|
|
December 29,
|
|
|
2008
|
|
2007
|
|
2009
|
|
2007
|
|
Customer A
|
|
$
|
10,697
|
|
|
$
|
18,102
|
|
|
$
|
2,545
|
|
|
$
|
1,448
|
|
Customer B
|
|
$
|
21,032
|
|
|
$
|
9,333
|
|
|
$
|
2,343
|
|
|
$
|
2,829
|
|
During fiscal year 2008, revenues of $6.3 million and
$4.4 million for Customer A were reported within the
Software Solutions and Management Consulting Services segments,
respectively. Revenues of $12.5 million and
$5.6 million for Customer A were reported within the
Software Solutions and Management Consulting Services segments,
respectively, in fiscal year 2007. Revenues from Customer B were
reported within the Management Consulting Services segment in
both fiscal years 2008 and 2007. Revenues from the
Companys ten most significant customers accounted for
approximately 81% and 73% of revenues for fiscal years 2008 and
2007, respectively.
Substantially all of TMNGs receivables are obligations of
companies in the communications, media and entertainment
industries. The Company generally does not require collateral or
other security on its accounts receivable. The credit risk on
these accounts is controlled through credit approvals, limits
and monitoring procedures. The Company records bad debt expense
based on judgment about the anticipated default rate on
receivables owed to TMNG at the end of the reporting period.
That judgment is based on the Companys uncollected account
experience in prior years and the ongoing evaluation of the
credit status of TMNGs customers and the communications
industry in general.
|
|
8.
|
PROPERTY
AND EQUIPMENT
|
|
|
|
|
|
|
|
|
|
|
|
January 3,
|
|
|
December 29,
|
|
|
|
2009
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Furniture and fixtures
|
|
$
|
1,400
|
|
|
$
|
1,081
|
|
Software and computer equipment
|
|
|
2,992
|
|
|
|
3,028
|
|
Leasehold improvements
|
|
|
1,124
|
|
|
|
1,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,516
|
|
|
|
5,309
|
|
Less: Accumulated depreciation and amortization
|
|
|
3,715
|
|
|
|
3,525
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,801
|
|
|
$
|
1,784
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense on property and equipment
was $772,000 and $510,000 for fiscal years 2008 and 2007,
respectively.
53
THE
MANAGEMENT NETWORK GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
For fiscal years 2008 and 2007, the income tax (provision)
benefit consists of the following (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
Fiscal
|
|
|
Fiscal
|
|
|
|
Year
|
|
|
Year
|
|
|
|
2008
|
|
|
2007
|
|
|
Federal
|
|
|
|
|
|
|
|
|
Current tax (expense) benefit
|
|
$
|
(32
|
)
|
|
$
|
(23
|
)
|
Deferred tax (expense) benefit
|
|
|
2,868
|
|
|
|
(1,704
|
)
|
Change in valuation allowance
|
|
|
(2,868
|
)
|
|
|
1,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32
|
)
|
|
|
(23
|
)
|
State
|
|
|
|
|
|
|
|
|
Current tax (expense) benefit
|
|
|
|
|
|
|
(80
|
)
|
Deferred tax (expense) benefit
|
|
|
1,144
|
|
|
|
(343
|
)
|
Change in valuation allowance
|
|
|
(1,144
|
)
|
|
|
343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(80
|
)
|
Foreign
|
|
|
|
|
|
|
|
|
Current tax (expense) benefit
|
|
|
(1,039
|
)
|
|
|
(831
|
)
|
Deferred tax (expense) benefit
|
|
|
841
|
|
|
|
1,199
|
|
Change in valuation allowance
|
|
|
236
|
|
|
|
(317
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
38
|
|
|
|
51
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6
|
|
|
$
|
(52
|
)
|
|
|
|
|
|
|
|
|
|
The Company has reserved all of its domestic net deferred tax
assets and $1.0 million of its foreign deferred tax assets
with a valuation allowance as of January 3, 2009, in
accordance with the provisions of SFAS No. 109
Accounting for Income Taxes. Realization of the
deferred tax asset is dependent on generating sufficient income
in future periods. In evaluating the ability to use its deferred
tax assets, the Company considers all positive and negative
evidence including the Companys past operating results,
the existence of cumulative losses in the most recent fiscal
year and the Companys forecast of future income. In
determining future income, the Company is responsible for
assumptions utilized including the amount of state, federal and
international operating income, the reversal of temporary
differences and the implementation of feasible and prudent tax
planning strategies. These assumptions require significant
judgment about the forecasts of future income and are consistent
with the plans and estimates the Company is using to manage the
underlying business.
54
THE
MANAGEMENT NETWORK GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following is reconciliation between the provision for income
taxes and the amounts computed based on loss before income taxes
at the statutory federal income tax rate (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2008
|
|
|
Fiscal Year 2007
|
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Computed expected federal income tax benefit
|
|
$
|
5,191
|
|
|
|
35.0
|
|
|
$
|
800
|
|
|
|
35.0
|
|
State income tax benefit (expense), net of federal benefit
|
|
|
744
|
|
|
|
5.0
|
|
|
|
(275
|
)
|
|
|
(12.0
|
)
|
Forfeited vested stock options
|
|
|
299
|
|
|
|
2.0
|
|
|
|
(1,222
|
)
|
|
|
(53.5
|
)
|
Adjustment to estimated tax loss carryforward
|
|
|
(552
|
)
|
|
|
(3.7
|
)
|
|
|
(875
|
)
|
|
|
(38.3
|
)
|
Other
|
|
|
(162
|
)
|
|
|
(1.1
|
)
|
|
|
(210
|
)
|
|
|
(9.2
|
)
|
Foreign tax credit carryforward
|
|
|
(1,738
|
)
|
|
|
(11.7
|
)
|
|
|
|
|
|
|
|
|
Change in valuation allowance
|
|
|
(3,776
|
)
|
|
|
(25.5
|
)
|
|
|
1,730
|
|
|
|
75.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6
|
|
|
|
0.0
|
|
|
$
|
(52
|
)
|
|
|
(2.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Items giving rise to the provision for deferred income tax
(provision) benefit are as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
Fiscal
|
|
|
Fiscal
|
|
|
|
Year
|
|
|
Year
|
|
|
|
2008
|
|
|
2007
|
|
|
Goodwill
|
|
$
|
3,964
|
|
|
$
|
(1,409
|
)
|
Bad debt reserve
|
|
|
(48
|
)
|
|
|
86
|
|
Share-based compensation expense
|
|
|
1,019
|
|
|
|
(1,617
|
)
|
Intangible assets
|
|
|
1,734
|
|
|
|
1,164
|
|
Valuation allowance
|
|
|
(3,776
|
)
|
|
|
1,730
|
|
Net operating loss carryforward
|
|
|
(51
|
)
|
|
|
1,624
|
|
Unfavorable liabilities
|
|
|
(634
|
)
|
|
|
(587
|
)
|
Cash to accrual conversion
|
|
|
59
|
|
|
|
59
|
|
Undistributed foreign earnings
|
|
|
(1,185
|
)
|
|
|
|
|
Foreign tax credit carryforward
|
|
|
317
|
|
|
|
|
|
Accrued contingent consideration
|
|
|
(353
|
)
|
|
|
|
|
Other
|
|
|
31
|
|
|
|
(168
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,077
|
|
|
$
|
882
|
|
|
|
|
|
|
|
|
|
|
55
THE
MANAGEMENT NETWORK GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The significant components of deferred income tax assets and the
related balance sheet classifications, as of January 3,
2009 and December 29, 2007 are as follows (amounts in
thousands):
|
|
|
|
|
|
|
|
|
|
|
January 3,
|
|
|
December 29,
|
|
|
|
2009
|
|
|
2007
|
|
|
Current deferred tax assets (liabilities):
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
143
|
|
|
$
|
201
|
|
Accrued expenses
|
|
|
195
|
|
|
|
260
|
|
Unfavorable liabilities
|
|
|
274
|
|
|
|
634
|
|
Cash to accrual conversion
|
|
|
(59
|
)
|
|
|
|
|
Valuation allowance
|
|
|
(496
|
)
|
|
|
(866
|
)
|
Other
|
|
|
57
|
|
|
|
(59
|
)
|
|
|
|
|
|
|
|
|
|
Current deferred tax asset
|
|
$
|
114
|
|
|
$
|
170
|
|
|
|
|
|
|
|
|
|
|
Non-current deferred tax assets (liabilities):
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
11,677
|
|
|
$
|
7,713
|
|
Share-based compensation expense
|
|
|
2,822
|
|
|
|
1,960
|
|
Unfavorable lease liability
|
|
|
311
|
|
|
|
585
|
|
Net operating loss carryforward
|
|
|
17,514
|
|
|
|
17,968
|
|
Intangible assets
|
|
|
1,864
|
|
|
|
(300
|
)
|
Accrued contingent consideration
|
|
|
|
|
|
|
353
|
|
Cash to accrual conversion
|
|
|
(59
|
)
|
|
|
(117
|
)
|
Reserves
|
|
|
|
|
|
|
40
|
|
Auction rate securities
|
|
|
561
|
|
|
|
|
|
Other
|
|
|
87
|
|
|
|
278
|
|
Undistributed foreign earnings
|
|
|
(1,185
|
)
|
|
|
|
|
Foreign tax credit carryforward
|
|
|
317
|
|
|
|
|
|
Valuation allowance
|
|
|
(34,024
|
)
|
|
|
(29,848
|
)
|
|
|
|
|
|
|
|
|
|
Non-current deferred tax liabilities
|
|
$
|
(115
|
)
|
|
$
|
(1,368
|
)
|
|
|
|
|
|
|
|
|
|
The federal net operating loss carryforward as of
January 3, 2009 is scheduled to expire as follows (amounts
in thousands):
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Year
|
|
|
|
|
$
|
2,177
|
|
|
|
2016
|
|
|
|
|
5,602
|
|
|
|
2023
|
|
|
|
|
9,094
|
|
|
|
2024
|
|
|
|
|
7,432
|
|
|
|
2025
|
|
|
|
|
9,854
|
|
|
|
2026
|
|
|
|
|
5,152
|
|
|
|
2027
|
|
|
|
|
957
|
|
|
|
2028
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
40,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The foreign net operating loss carryforward as of
January 3, 2009 is $2.3 million and has no expiration
date. During 2008, the Company concluded $7.0 million of
foreign earnings are no longer permanently reinvested. This
determination resulted in the recognition of $0.9 million
of deferred tax liabilities, net of foreign tax credits, which
are fully offset by a reduction in valuation allowance. The
Company has not provided tax on the remaining undistributed
earnings of foreign subsidiaries, because it is the
Companys intention to reinvest these earnings indefinitely.
56
THE
MANAGEMENT NETWORK GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of January 3, 2009, there are no unrecognized net
operating loss carryforwards available to the Company related to
excess tax benefits from the settlement of share-based awards.
The Company adopted the provisions of FASB Interpretation
No. 48, Accounting for Uncertainty in Income Taxes,
an interpretation of FASB Statement 109,
(FIN 48) effective January 1, 2007.
FIN 48 prescribes a two-step process to determine the
amount of tax benefit to be recognized. First, the tax position
must be evaluated to determine the likelihood that it will be
sustained upon external examination. If the tax position is
deemed more-likely-than-not to be sustained, the tax
position is then assessed to determine the amount of benefit to
recognize in the financial statements. The amount of the benefit
that may be recognized is the largest amount that has a greater
than 50 percent likelihood of being realized upon ultimate
settlement with the taxing authority. Tax positions that
previously failed to meet the more-likely-than-not recognition
threshold should be recognized in the first subsequent financial
reporting period in which that threshold is met. Previously
recognized tax positions that no longer meet the
more-likely-than-not recognition threshold should be
derecognized in the first subsequent financial reporting period
in which that threshold is no longer met.
FIN 48 requires that the cumulative effect of the change in
accounting principle be recorded as an adjustment to opening
accumulated deficit. As a result of the implementation of
FIN 48, the Company recognized a cumulative effect
adjustment of $223,000 as an increase to beginning accumulated
deficit. In addition, the Company identified approximately
$271,000 in liabilities for unrecognized tax benefits which were
previously reserved. During 2008, the liability for uncertain
tax positions increased to $891,000. The liability increased by
$335,000 related to tax positions taken during the current
period and $32,000 for interest. The liability for uncertain tax
positions, including penalties and interest, was $524,000 as of
December 29, 2007 and is included in Other noncurrent
liabilities on the consolidated balance sheet. There were
no increases or decreases in uncertain tax positions during
2007. All of the unrecognized tax benefit balance, if
recognized, would impact the effective tax rate. The adoption of
FIN 48 did not have a material effect on the Companys
results of operations, financial condition or cash flows during
2007. However, FIN 48 may add volatility to the
Companys effective tax rate and, therefore, the expected
income tax expense in future periods.
The Company recognizes interest and penalties accrued related to
unrecognized tax benefits as a component of the income tax
provision. During 2007, the Companys income tax expense
included $30,000 of income tax-related interest and penalties.
As of January 3, 2009 and December 29, 2007, the total
amount of accrued income tax-related interest and penalties
included in the Consolidated Balance Sheet was $201,000 and
$169,000, respectively. As of January 3, 2009, 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.
A reconciliation of the beginning and ending balances of the
total amounts of gross unrecognized tax benefits is as follows
(amounts in thousands):
|
|
|
|
|
Gross unrecognized tax benefits at December 29, 2007
|
|
$
|
524
|
|
Gross increases in tax positions for current year
|
|
|
335
|
|
Interest and penalties
|
|
|
32
|
|
|
|
|
|
|
Gross unrecognized tax benefits at January 3, 2009
|
|
$
|
891
|
|
|
|
|
|
|
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
January 3, 2009, the Company has no tax examinations in
process.
57
THE
MANAGEMENT NETWORK GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company leases office facilities, computer equipment, office
furniture, and an automobile under various operating leases
expiring at various dates through November 2012.
Following is a summary of future minimum payments under
operating leases that have initial or remaining non-cancellable
lease terms at January 3, 2009 (amounts in thousands):
|
|
|
|
|
|
|
Operating
|
|
Fiscal Year
|
|
Leases
|
|
|
2009
|
|
$
|
2,798
|
|
2010
|
|
|
2,656
|
|
2011
|
|
|
1,141
|
|
2012
|
|
|
1,249
|
|
2013 and thereafter
|
|
|
255
|
|
|
|
|
|
|
Total minimum lease payments
|
|
|
8,099
|
|
Future minimum rentals to be received under non-cancellable
subleases
|
|
|
(1,347
|
)
|
|
|
|
|
|
Minimum lease payments net of amounts to be received under
subleases
|
|
$
|
6,752
|
|
|
|
|
|
|
Minimum operating lease payments include the off-market portion
of lease payments recorded through purchase accounting in
connection with the Companys acquisition of CSMG and
continuing lease commitments associated with the consolidation
of office space. The unamortized balance of the unfavorable
lease liabilities and their balance sheet classification as of
January 3, 2009 and December 29, 2007, are as follows:
|
|
|
|
|
|
|
|
|
|
|
January 3,
|
|
|
December 29,
|
|
|
|
2009
|
|
|
2007
|
|
|
Current unfavorable lease obligations
|
|
$
|
681
|
|
|
$
|
709
|
|
Non-current unfavorable lease obligations
|
|
|
773
|
|
|
|
1,475
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,454
|
|
|
$
|
2,184
|
|
|
|
|
|
|
|
|
|
|
Total rental expense was approximately $2,016,000 and $2,445,000
for fiscal years 2008 and 2007, respectively, and was recorded
in selling, general and administrative expenses.
As of January 3, 2009, 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
January 3, 2009 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 January 3, 2009.
In March 2002, the Company entered into a $1.0 million
standby letter of credit (LOC) facility with a
financial institution in connection with an acquisition. The LOC
was required as part of the assignment of the leased office
space from the seller to the Company. The Company originally
collateralized the LOC with a
58
THE
MANAGEMENT NETWORK GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
$1.0 million cash deposit with reductions in this amount
based on passage of time. As of January 3, 2009 and for the
remainder of the term of the LOC, the required collateral amount
is $273,000. The collateral deposited for this LOC is included
in Cash and Cash Equivalents on the Companys
consolidated balance sheet as of January 3, 2009 and
December 29, 2007. The Company would be required to perform
under the agreement in the event it was to default on balances
due and owing the landlord on the leased office space. An
obligation has not been recorded in connection with the LOC on
the Companys consolidated balance sheet as of
January 3, 2009 and December 29, 2007.
|
|
13.
|
RELATED
PARTY TRANSACTIONS
|
During fiscal years 2008 and 2007, the Company incurred legal
fees of $26,000 and $128,000, respectively, for services
provided by Bingham McCutchen, LLP, a law firm in which a member
of the Board of Directors, Andrew Lipman, owns an equity
interest. Payments made during the 2008 period were in
connection with income tax and potential acquisition related
matters. Payments made in fiscal year 2007 were in connection
with the Companys acquisition of Cartesian and other
potential acquisition matters. All payments were within the
limitations set forth by NASDAQ Rules as to the qualifications
as an independent director.
|
|
14.
|
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.
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
established a cash bonus pool (the Pool) for the
Companys chief executive officer, president and chief
operating officer, and chief financial officer which provided
for bonuses if the Company met or exceeded a
non-GAAP EBITDA target (as defined in the Plan) of
$7.0 million for fiscal year 2008. The calculation of the
non-GAAP EBITDA target excluded non-cash charges (e.g.,
share-based compensation expense, etc.) and possible
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) began at
$800,000 if the Company achieved the Non-GAAP EBITDA
target. If the target was exceeded, the Payout Amount increased
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 would in no event exceed $3 million.
Although the 2008 non-GAAP EBITDA target of $7.0 million
was not met, upon the recommendation of the Compensation
Committee, the independent members of the Board of Directors
exercised their discretion and awarded executive incentive
compensation to the Companys chief executive officer,
president and chief operating officer, and chief financial
officer in the aggregate amount of $350,000. The Compensation
Committee and the independent members of the Board of Directors
approved the discretionary payment based upon their
determination that the Company had substantially achieved the
threshold level in the 2008 Plan through the efforts of
management in a uniquely challenging economic environment as
disclosed in our
Form 8-K
of February 27, 2009. As of January 3, 2009, $350,000
was accrued for this item.
59
THE
MANAGEMENT NETWORK GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
15.
|
SHARE
REPURCHASE PROGRAM
|
On June 6, 2008, the Companys Board of Directors
authorized management to enter into stock purchase agreements
with certain stockholders of the Company. On June 11 and 12,
2008, pursuant to these agreements the Company repurchased
2,000,000 shares of its common stock from these
stockholders at a price of $1.60 per share. In connection with
the transactions, the Company entered into standstill agreements
with each of the selling stockholders pursuant to which the
stockholders agreed for a period of two years not to, among
other things, acquire any voting securities of the Company, form
or join in a group with other stockholders, effect or encourage
a tender offer or business combination involving the Company or
any of its subsidiaries, or take other actions seeking to
control or influence the management, Board of Directors or
policies of the Company. This repurchase of shares was not
conducted under the share repurchase program described below.
On September 5, 2006, the Companys Board of Directors
approved a share repurchase program authorizing the purchase of
up to 2,000,000 shares of TMNG common stock. Under the
plan, the Company was authorized to repurchase stock from time
to time in the open market or through privately negotiated
transactions through September 1, 2008, in accordance with
SEC rules. In October 2006, the Companys Board of
Directors suspended share repurchase activity under the share
repurchase program. The suspension remained in effect until the
expiration of the program.
All repurchased shares have been classified as treasury stock
within the stockholders equity section of the Consolidated
Balance Sheet.
|
|
|
|
|
|
|
Treasury Shares
|
|
|
Balance as of December 29, 2007
|
|
|
200,000
|
|
Purchases of treasury stock
|
|
|
2,000,000
|
|
|
|
|
|
|
Balance as of January 3, 2009
|
|
|
2,200,000
|
|
|
|
|
|
|
|
|
16.
|
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 9, 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.
|
|
17.
|
EMPLOYEE
BENEFIT PLAN
|
The Company offers defined contribution plans to eligible
employees. Such employees may contribute a percentage of their
annual compensation in accordance with the plans guidelines. The
plans provide for
60
THE
MANAGEMENT NETWORK GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Company contributions that are subject to maximum limitations as
defined by the plans. Company contributions to its defined
contribution plans totaled $1,093,000 and $1,343,000 in the
years ended January 3, 2009 and December 29, 2007,
respectively.
|
|
18.
|
SPECIAL
COMMITTEE INVESTIGATION
|
In November 2006, following an initial internal review of its
stock option practices, the Companys Board of Directors
appointed a Special Committee of outside directors (the
Special Committee) to conduct a full investigation
of the Companys past stock option granting practices and
related accounting. As a result of the investigation, it was
determined that incorrect measurement dates were used for
financial accounting purposes for certain stock option and
nonvested stock awards in prior years. The Special Committee
recommended remedial measures to address the issues related to
stock options and general corporate governance, oversaw the
adoption of these measures and dissolved in July 2007. Operating
expenses included costs of approximately $2.6 million
during year 2007 related to the Special Committee investigation.
These costs primarily consisted of professional services for
legal, accounting and tax guidance.
Citigroup
Auction Rate Securities Loan
On March 19, 2009, the Company entered into a loan
agreement with Citigroup Global Markets, Inc.
(Citigroup) to provide liquidity for the
Companys $7.3 million auction rate securities
portfolio held with Citigroup. Under the loan agreement, the
Company has access to a revolving line of credit of up to 50% of
the par value of the auction rate securities that the Company
has pledged as collateral, or $3.625 million. The interest
rate at the inception of the line of credit that the Company
would pay on amounts borrowed is the federal funds rate plus
3.65%. The interest rate may change in future periods based on
the change in the spread over the federal funds rate. Citigroup
may demand full or partial payment of amounts borrowed on the
line of credit, at its sole option and without cause, at any
time. Citigroup may, at any time, in its discretion, terminate
the line of credit with proper notice. The Company has made no
borrowings under this line of credit.
61
|
|
ITEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
None.
|
|
ITEM 9A.
|
CONTROLS
AND PROCEDURES
|
Not applicable.
|
|
ITEM 9A(T).
|
CONTROLS
AND PROCEDURES
|
Evaluation
of Disclosure Controls and Procedure
The Company maintains disclosure controls and procedures (as
defined in
Rules 13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934) that are
designed to ensure that information required to be disclosed by
the Company in reports that it files or submits under the
Exchange Act is (i) recorded, processed, summarized and
reported within the time periods specified in SEC rules and
forms; and (ii) accumulated and communicated to the
Companys management, including its principal executive
officer and principal financial officer, as appropriate to allow
timely decisions regarding required disclosure. We have
established a Disclosure Committee, consisting of certain
members of management, to assist in this evaluation. The
Disclosure Committee meets on a regular quarterly basis, and as
needed.
A review and evaluation was performed by our management,
including our Chief Executive Officer (the CEO) and
Chief Financial Officer (the CFO), of the
effectiveness of our disclosure controls and procedures as of
the end of the period covered by this report. Based upon this
evaluation, the Companys CEO and CFO have concluded that
the Companys disclosure controls and procedures were
effective as of January 3, 2009.
Managements
Report on Internal Control over Financial
Reporting
The management of the Company is responsible for establishing
and maintaining adequate internal control over financial
reporting for the Company. With the participation of our Chief
Executive Officer and Chief Financial Officer, our management
conducted an evaluation of the effectiveness of our internal
control over financial reporting based on the framework and
criteria established in Internal Control
Integrated Framework, issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this
evaluation, our management has concluded that our internal
control over financial reporting was effective as of
January 3, 2009.
For the evaluation conducted as of December 29, 2007,
management excluded from its assessment of internal controls
over financial reporting its acquisitions of Cartesian on
January 2, 2007, RVA on August 3, 2007, and TWG on
October 5, 2007. Cartesian, RVA, and TWG represented 35.0%,
13.0%, and 1.4% of the Companys consolidated total
revenues, respectively, for the year ended December 29,
2007, and 25.2%, 21.7%, and 2.9% of the Companys
consolidated total assets, respectively, as of December 29,
2007. Each of these three subsidiaries were included in the
assessment as of January 3, 2009.
This annual report does not include an attestation report of the
Companys registered public accounting firm regarding
internal control over financial reporting. Our internal control
over financial reporting was not subject to attestation by the
Companys registered public accounting firm pursuant to
temporary rules of the SEC that permit the Company to provide
only managements report in this annual report.
Changes
in Internal Control over Financial Reporting
There were no significant changes in our internal control over
financial reporting during the fourth fiscal quarter ended
January 3, 2009 that materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.
|
|
ITEM 9B.
|
OTHER
INFORMATION
|
None
62
PART III
|
|
ITEM 10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
The Companys definitive Proxy Statement for its 2009
Annual Meeting of Stockholders (the Proxy Statement)
contains, under the captions Election of Directors,
Executive Officers and Section 16(a)
Beneficial Ownership Reporting Compliance the information
required by Item 10 of this
Form 10-K,
which information is incorporated herein by this reference.
|
|
ITEM 11.
|
EXECUTIVE
COMPENSATION
|
The Proxy Statement contains under the captions Election
of Directors, Election of Directors
Non-Employee Director Compensation, Director
Compensation and Executive Compensation, the
information required by Item 11 of this
Form 10-K,
which information is incorporated herein by this reference.
|
|
ITEM 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
|
The Proxy Statement contains under the captions Security
Ownership of Certain Beneficial Owners and Management
certain of the information required by Item 12 of this
Form 10-K,
which information is incorporated herein by this reference.
EQUITY
COMPENSATION PLAN INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
|
|
|
|
(c)
|
|
|
|
Number of
|
|
|
|
|
|
Number of Securities
|
|
|
|
Securities to be Issued
|
|
|
|
|
|
Remaining Available
|
|
|
|
Upon Exercise of
|
|
|
(b)
|
|
|
for Future Issuance
|
|
|
|
Outstanding Options
|
|
|
Weighted Average
|
|
|
Under Equity Compensation
|
|
|
|
or Vesting of Nonvested
|
|
|
Exercise Price of
|
|
|
Plans (Excluding Securities
|
|
|
|
Stock
|
|
|
Outstanding Options
|
|
|
Reflected in Column (a))(1)
|
|
|
PLANS APPROVED BY SECURITY HOLDERS(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
1998 Equity Incentive Plan
|
|
|
4,344,950
|
|
|
$
|
3.62
|
|
|
|
7,921,270
|
|
PLANS NOT APPROVED BY SECURITY HOLDERS
|
|
|
|
|
|
|
|
|
|
|
|
|
2000 Supplemental Stock Plan
|
|
|
1,556,273
|
|
|
$
|
2.34
|
|
|
|
1,226,521
|
|
|
|
|
(1) |
|
The amounts in the table do not include up to 54,691 shares
that may be purchased under the 1999 Employee Stock Purchase
Plan. |
The 1998 Incentive Plan includes a provision that automatically
increases the number of securities available for issuance under
the plan. The annual increase is determined on the first day of
the Companys fiscal year and is equal to the lesser of
(i) 1,500,000 shares, (ii) 5% of the outstanding
shares on such date or (iii) a lesser amount determined by
the Companys Board of Directors. The Shares may be
authorized, but unissued, or reacquired Common Stock.
For an additional discussion of our equity compensation plans,
see Item 8, Consolidated Financial Statements,
Note 6, Share-Based Compensation.
|
|
ITEM 13.
|
CERTAIN
RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
|
The Proxy Statement contains under the captions Certain
Relationships and Related Transactions and Election
of Directors the information required by Item 13 of
this
Form 10-K,
which information is incorporated herein by this reference.
63
|
|
ITEM 14.
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
|
The Proxy Statement contains under the caption
Ratification of Appointment of Independent Registered
Public Accounting Firm the information required by
Item 14 of this
Form 10-K,
which information is incorporated herein by this reference.
PART IV
ITEM 15. EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this
Annual Report on
Form 10-K:
(1) The response to this portion of Item 15 is set
forth in Item 8 of Part II hereof.
(2) Schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission
are not required under the related instructions or are
inapplicable and therefore have been omitted.
(3) Exhibits. See accompanying Index to Exhibits. Pursuant
to the rules and regulations of the Securities and Exchange
Commission, the Company has filed or incorporated by reference
the documents referenced in the accompanying Index to Exhibits
as exhibits to this Annual Report on
Form 10-K.
The documents include agreements to which the Company is a party
or has a beneficial interest. The agreements have been filed to
provide investors with information regarding their respective
terms. The agreements are not intended to provide any other
factual information about the Company or its business or
operations. In particular, the assertions embodied in any
representations, warranties and covenants contained in the
agreements may be subject to qualifications with respect to
knowledge and materiality different from those applicable to
investors and may be qualified by information in confidential
disclosure schedules not included with the exhibits. These
disclosure schedules may contain information that modifies,
qualifies and creates exceptions to the representations,
warranties and covenants set forth in the agreements. Moreover,
certain representations, warranties and covenants in the
agreements may have been used for the purpose of allocating risk
between the parties, rather than establishing matters as facts.
In addition, information concerning the subject matter of the
representations, warranties and covenants may have changed after
the date of the respective agreement, which subsequent
information may or may not be fully reflected in the
Companys public disclosures. Accordingly, investors should
not rely on the representations, warranties and covenants in the
agreements as characterizations of the actual state of facts
about the Company or its business or operations on the date
hereof. The Company will furnish to any stockholder, upon
written request, any exhibit listed in the accompanying Index to
Exhibits upon payment by such stockholder of the Companys
reasonable expenses in furnishing any such exhibit.
64
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this Report on Form
10-K to be
signed on its behalf by the undersigned, thereunto duly
authorized.
THE MANAGEMENT NETWORK GROUP, INC.
|
|
|
|
By:
|
/s/ RICHARD
P. NESPOLA
|
RICHARD P. NESPOLA
CHAIRMAN OF THE BOARD AND CHIEF
EXECUTIVE OFFICER
Date: April 3, 2009
POWER OF
ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose
signature appears below hereby constitutes and appoints Richard
P. Nespola as his attorney-in-fact, with full power of
substitution, for him or her in any and all capacities, to sign
any and all amendments to this Report on Form
10-K, and to
file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming our signatures as
they may be signed by our said attorney to any and all
amendments to said Report.
Pursuant to the requirements of the Securities Exchange Act of
1934, this Report on
Form 10-K
has been signed by the following persons on behalf of the
Registrant in the capacities and on the dates indicated:
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ RICHARD
P. NESPOLA
Richard
P. Nespola
|
|
Chairman of the Board and Chief Executive Officer (Principal
executive officer)
|
|
April 3, 2009
|
|
|
|
|
|
/s/ DONALD
E. KLUMB
Donald
E. Klumb
|
|
Chief Financial Officer and Treasurer (Principal financial
officer and principal accounting officer)
|
|
April 3, 2009
|
|
|
|
|
|
/s/ MICKY
K. WOO
Micky
K. Woo
|
|
Director
|
|
April 3, 2009
|
|
|
|
|
|
/s/ ANDREW
LIPMAN
Andrew
Lipman
|
|
Director
|
|
April 3, 2009
|
|
|
|
|
|
/s/ ROBERT
J. CURREY
Robert
J. Currey
|
|
Director
|
|
April 3, 2009
|
|
|
|
|
|
/s/ ROY
A. WILKENS
Roy
A. Wilkens
|
|
Director
|
|
April 3, 2009
|
|
|
|
|
|
/s/ FRANK
SISKOWSKI
Frank
Siskowski
|
|
Director
|
|
April 3, 2009
|
65
INDEX TO
EXHIBITS
The following is a list of exhibits filed as part of this report.
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Document
|
|
|
3
|
.1
|
|
Certificate of Incorporation, filed as Exhibit 3.1 to the
Companys Registration Statement on
Form S-1
originally filed September 20, 1999 (Registration No.
333-87383), as amended (the 1999 S-1 Registration
Statement), is incorporated herein by reference as Exhibit
3.1.
|
|
3
|
.2
|
|
Certificate of Designations of Series A Junior Participating
Preferred Stock, as filed with the Secretary of State of
Delaware on March 27, 2008, filed as Exhibit 3.1 to the
Companys Current Report on Form 8-K dated March 27, 2008
filed with the Securities and Exchange Commission, is
incorporated herein by reference as Exhibit 3.2.
|
|
3
|
.3
|
|
Amended and Restated By-laws, filed as Exhibit 3.2 to the
Companys Form 8-K filed with the Securities and Exchange
Commission on February 13, 2008, is incorporated herein by
reference as Exhibit 3.3.
|
|
4
|
.1
|
|
Specimen Common Stock Certificate, filed as Exhibit 4.1 to the
1999 S-1 Registration Statement, is incorporated herein by
reference as Exhibit 4.1.
|
|
4
|
.2
|
|
Registration Rights Agreement, dated February 12, 1998, among
the Company and certain holders of the Companys common
stock (the Registration Rights Agreement), filed as
Exhibit 10.1 to the 1999 S-1 Registration Statement, is
incorporated herein by reference as Exhibit 4.2.
|
|
4
|
.3
|
|
Rights Agreement, dated as of March 27, 2008, by and between the
Company and Computershare Trust Company N.A., filed as Exhibit
4.1 to the Companys Current Report on Form 8-K dated March
27, 2008 filed with the Securities and Exchange Commission, is
incorporated herein by reference as Exhibit 4.3.
|
|
4
|
.4
|
|
Form of Rights Certificate, filed as Exhibit B to the Rights
Agreement filed as Exhibit 4.1 to the Companys Current
Report on Form 8-K dated March 27, 2008, filed with the
Securities and Exchange Commission, is incorporated herein by
reference as Exhibit 4.4.
|
|
10
|
.1
|
|
Registration Rights Agreement. (See Exhibit 4.2).
|
|
10
|
.2
|
|
Form of Indemnification Agreement between the Company and each
of its Directors and Officers, filed as Exhibit 10.2 to the 1999
S-1 Registration Statement, is incorporated herein by reference
as Exhibit 10.2.(1)
|
|
10
|
.3
|
|
1998 Equity Incentive Plan, as amended and restated on September
7, 1999, and the Form of Agreements thereunder, filed as
Exhibit 10.3 to the 1999 S-1 Registration Statement, is
incorporated herein by reference as Exhibit 10.3.(1)
|
|
10
|
.4
|
|
1999 Employee Stock Purchase Plan and Form of Agreements
thereunder, filed as Exhibit 10.4 to the 1999 S-1 Registration
Statement, is incorporated herein by reference as Exhibit
10.4.(1)
|
|
10
|
.5
|
|
2000 Supplemental Stock Plan and Form of Agreements thereunder,
filed as Exhibit 10.16 to the Companys Form 10-K for the
fiscal year ended December 30, 2000, is incorporated herein by
reference as Exhibit 10.5.(1)
|
|
10
|
.6
|
|
Employment Agreement between the Company and Richard Nespola,
dated January 5, 2004, filed as Exhibit 10.19 to the
Companys Form 10-K for the fiscal year ended January
3, 2004, is incorporated herein by reference as Exhibit 10.6.(1)
|
|
10
|
.7
|
|
Sublease between Best Doctors, Inc. and Cambridge Strategic
Management Group Inc. (formerly TMNG Strategy, Inc.), dated
December 30, 2004, filed as Exhibit 10.21 to the Companys
Form 10-K
for the fiscal year ended January 1, 2005, is incorporated
herein by reference as Exhibit 10.7.
|
|
10
|
.8
|
|
Asset Purchase Agreement, dated April 2, 2006, among Wilbass
Limited, Adventis Limited, and Adventis Corporation, filed as
Exhibit 10 to the Companys Form 10-Q for the quarter ended
April 1, 2006, is incorporated herein by reference as Exhibit
10.8.**
|
|
10
|
.9
|
|
Share Purchase Agreement, dated December 22, 2006, between the
Company and Janos Sivo, Alan Strong, William Hill and James
Baker, regarding the acquisition of the outstanding common stock
of Cartesian Limited, filed as Exhibit 10.1 to the
Companys Form 10-Q for the quarter ended September 30,
2006, is incorporated herein by reference as Exhibit 10.9.
|
66
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Document
|
|
|
10
|
.10
|
|
Third Amended Lease Agreement between NewTower Trust Company
Multi-Employer Property Trust and the Company, dated August 30,
2005, filed as Exhibit 10.10 to the Companys Form 10-K for
the fiscal year ended December 30, 2006, is incorporated herein
by reference as Exhibit 10.10.
|
|
10
|
.11
|
|
Third Additional Space Commencement Date Agreement between
NewTower Trust Company Multi-Employer Property Trust and the
Company, dated February 28, 2006, filed as Exhibit 10.11 to the
Companys Form 10-K for the fiscal year ended December 30,
2006, is incorporated herein by reference as Exhibit 10.11.
|
|
10
|
.12
|
|
Membership Interest Purchase Agreement, dated July 30, 2007,
between the Company and RVA Consulting, LLC, RVA Holdings, LLC,
Mark Markowitz, Dawn Saitta, and Dale Reynolds, regarding the
acquisition of all outstanding membership interests in RVA
Consulting, LLC, filed as Exhibit 10.1 to the Companys
Form 10-Q for the quarter ended June 30, 2007, is incorporated
herein by reference as Exhibit 10.12.**
|
|
10
|
.13
|
|
Stock Purchase Agreement, dated October 5, 2007, between the
Company and TWG Consulting, Inc. and Marilyn Breitenstein,
regarding the acquisition of the outstanding common stock of TWG
Consulting, Inc., filed as Exhibit 2.1 to the Companys
Form 10-Q for the quarter ended September 29, 2007, is
incorporated herein by reference as Exhibit 10.13.
|
|
10
|
.14
|
|
Transition Services Agreement among RVA Consulting, LLC, a
subsidiary of the Company, and Publicis Selling Solutions, Inc,
filed as Exhibit 10.1 to the Companys Form 10-Q for the
quarter ended September 29, 2007, is incorporated herein by
reference as Exhibit 10.14.
|
|
10
|
.15
|
|
Lease Agreement between Cartesian Limited and Sun Life Assurance
Company of Canada (U.K.) Limited, dated November 23, 2000, filed
as Exhibit 10.1 to the Companys Form 10-Q for the quarter
ended March 31, 2007, is incorporated herein by reference
as Exhibit 10.15.
|
|
10
|
.16
|
|
Fourth Amendment to Lease between NewTower Trust Company
Multi-Employer Property Trust and the Company, dated July 10,
2007, filed as Exhibit 10.16 to the Companys Form 10-K for
the fiscal year ended December 27, 2007, is incorporated herein
by reference as Exhibit 10.16.
|
|
10
|
.17
|
|
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 10.17.(1)
|
|
10
|
.18
|
|
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 10.18.(1)
|
|
10
|
.19
|
|
Fifth Amendment to Lease between NewTower Trust Company
Multi-Employer Property Trust and the Company, dated May 19,
2008, filed as Exhibit 10.1 to the Companys Form 10-Q for
the quarter ended June 28, 2008, is incorporated herein by
reference as Exhibit 10.19.
|
|
10
|
.20
|
|
Stock Purchase Agreement by and among the Company, Potomac
Capital International Ltd., Potomac Capital Partners LP,
Pleiades Investment Partners-R LP, Potomac Capital Management
LLC, Potomac Capital Management, Inc. and Paul J. Solit dated
June 11, 2008 filed as Exhibit 10.1 to the Companys Form
8-K filed with the Securities and Exchange Commission on June
12, 2008, is incorporated herein by reference as Exhibit 10.20.
|
|
10
|
.21
|
|
Stock Purchase Agreement by and among Riley Investment Partners
Master Fund, L.P., Riley Investment Management, LLC., and Bryant
R. Riley dated June 12, 2008 filed as Exhibit 10.2 to the
Companys Form 8-K dated June 12, 2008, filed with the
Securities and Exchange Commission, 2008, is incorporated herein
by reference as Exhibit 10.21.
|
|
10
|
.22
|
|
Standstill Agreement by and among the Company, Potomac Capital
International Ltd., Potomac Capital Partners LP, Pleiades
Investment Partners-R LP, Potomac Capital Management LLC,
Potomac Capital Management, Inc. and Paul J. Solit dated June
11, 2008 filed as Exhibit 10.3 to the Companys Form 8-K
dated June 12, 2008, filed with the Securities and Exchange
Commission, is incorporated herein by reference as Exhibit
10.22.
|
67
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Document
|
|
|
10
|
.23
|
|
Standstill Agreement by and among Riley Investment Partners
Master Fund, L.P., Riley Investment Management, LLC., and Bryant
R. Riley dated June 12, 2008 filed as Exhibit 10.4 to the
Companys Form 8-K dated June 12, 2008, filed with the
Securities and Exchange Commission, 2008, is incorporated herein
by reference as Exhibit 10.23.
|
|
10
|
.24
|
|
Offering Letter Relating to the Auction Rate Securities
Settlement with The Management Network Group, Inc. dated as of
October 8, 2008, issued by UBS Financial Services Inc.;
Acceptance Form filed as Exhibit 99.1 to the Companys Form
8-K dated November 19, 2008, filed with the Securities and
Exchange Commission, is incorporated herein by reference as
Exhibit 10.24.
|
|
10
|
.25
|
|
Credit Line Account Application and Agreement for Organizations
and Businesses dated as of November 13, 2008, between The
Management Network Group, Inc. and UBS Bank USA filed as Exhibit
99.2 to the Companys Form 8-K dated November 19, 2008,
filed with the Securities and Exchange Commission, is
incorporated herein by reference as Exhibit 10.25.
|
|
10
|
.26
|
|
Addendum to Credit Line Account Application and Agreement dated
as of November 13, 2008, between The Management Network Group,
Inc. and UBS Bank USA filed as Exhibit 99.3 to the
Companys Form 8-K dated November 19, 2008, filed with the
Securities and Exchange Commission, is incorporated herein by
reference as Exhibit 10.26.
|
|
10
|
.27
|
|
Important Notice on Interest Rates and Payments dated as of
November 13, 2008, between The Management Network Group, Inc.
and UBS Bank USA filed as Exhibit 99.4 to the Companys
Form 8-K
dated November 19, 2008, filed with the Securities and Exchange
Commission, is incorporated herein by reference as Exhibit 10.27.
|
|
21
|
.1
|
|
List of subsidiaries of the Company, prepared pursuant to Item
601(b)(21) of Regulation S-K is attached to this Form 10-K as
Exhibit 21.1.
|
|
23
|
.1
|
|
Consent of independent registered public accounting firm is
attached to this Form 10-K as Exhibit 23.1.
|
|
24
|
.1
|
|
Power of attorney (see signature page)
|
|
31
|
.1
|
|
Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 is attached to this Form 10-K
as Exhibit 31.1.
|
|
31
|
.2
|
|
Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 is attached to this Form 10-K
as Exhibit 31.2.
|
|
32
|
.1
|
|
Certifications furnished pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 are attached to this Form 10-K as
Exhibit 32.1.
|
|
|
|
(1) |
|
Management contracts and compensatory plans and arrangements
required to be filed as Exhibits pursuant to Item 15 of
this report. |
|
|
|
** |
|
Portions of this document have been redacted pursuant to a
Request for Confidential Treatment filed with the Securities and
Exchange Commission pursuant to
Rule 24b-2
under the Securities Exchange Act of 1934, as amended. Redacted
portions are indicated with the notation [***]. |
68