-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EyXkoSjbVlnn0uNs6vICSyB2QHCq1+00UOouns6nvsl7pVPEqUidJsZZ6JFzpvgf KAQmnaL6DpPLHKig8cDyNg== 0001013816-03-000187.txt : 20030812 0001013816-03-000187.hdr.sgml : 20030812 20030812151615 ACCESSION NUMBER: 0001013816-03-000187 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20030628 FILED AS OF DATE: 20030812 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MANAGEMENT NETWORK GROUP INC CENTRAL INDEX KEY: 0001094814 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MANAGEMENT CONSULTING SERVICES [8742] IRS NUMBER: 481129619 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-27617 FILM NUMBER: 03837415 BUSINESS ADDRESS: STREET 1: 7300 COLLEGE BLVD., STE 302 CITY: OVERLAND PARK STATE: KS ZIP: 66210 BUSINESS PHONE: 9133459315 MAIL ADDRESS: STREET 1: 7300 COLLEGE BLVD., STE 302 CITY: OVERLAND PARK STATE: KS ZIP: 66210 10-Q 1 form10q_62803.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (x) Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 28, 2003 or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission file number: 0-27617 THE MANAGEMENT NETWORK GROUP, INC. (Exact name of registrant as specified in its charter) DELAWARE 48-1129619 - ------------------------------- ------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 7300 COLLEGE BLVD., SUITE 302, OVERLAND PARK, KS 66210 ------------------------------------------------------ (Address of principal executive offices) (Zip Code) 913-345-9315 Registrant's telephone number, including area code Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. As of August 11, 2003 TMNG had outstanding 33,461,752 shares of common stock. THE MANAGEMENT NETWORK GROUP, INC. INDEX PAGE PART I. FINANCIAL INFORMATION: ITEM 1. Consolidated Condensed Financial Statements: Consolidated Condensed Balance Sheets - June 28, 2003 (unaudited) and December 28, 2002 ................ 3 Consolidated Condensed Statements of Operations and Comprehensive Loss (unaudited) - Thirteen Weeks and Twenty-six Weeks Ended June 28, 2003 and June 29, 2002 ............................................. 4 Consolidated Condensed Statements of Cash Flows (unaudited) - Twenty-six Weeks ended June 28, 2003 and June 29, 2002 .................................... 5 Notes to Consolidated Condensed Financial Statements .................................................. 6 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations .........................11 ITEM 3. Quantitative and Qualitative Disclosures about Market Risk .................................................14 ITEM 4. Controls and Procedures .....................................15 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings ...........................................15 ITEM 4. Submission to a Vote of Securities Holders ..................15 ITEM 6. Exhibits and Reports on Form 8-K ............................15 Signatures ..........................................................15 Certifications ......................................................16 PART I. FINANCIAL INFORMATION ITEM 1. CONSOLIDATED CONDENSED FINANCIAL STATEMENTS THE MANAGEMENT NETWORK GROUP, INC. CONSOLIDATED CONDENSED BALANCE SHEETS (In thousands, except share data) (unaudited)
December 28, June 28, 2002 2003 ------------ ------------ CURRENT ASSETS: Cash and cash equivalents ................................ $ 53,786 $ 52,312 Receivables: Accounts receivable .................................... 5,597 2,677 Accounts receivable - unbilled ......................... 4,232 3,687 ------------ ------------ 9,829 6,364 Less: Allowance for doubtful accounts .................. (471) (521) ------------ ------------ 9,358 5,843 Deferred income taxes .................................... 494 580 Refundable income taxes .................................. 4,277 7,064 Prepaid and other assets ................................. 1,723 1,058 ------------ ------------ Total current assets ........................... 69,638 66,857 ------------ ------------ Property and Equipment, net ................................ 2,285 1,897 Goodwill .............................................. 31,308 15,528 Customer relationships, net ................................ 5,092 1,330 Identifiable intangible assets, net ........................ 2,362 1,650 Deferred tax assets ........................................ 14,272 15,994 Other assets ............................................... 502 502 ------------ ------------ Total Assets ............................................... $ 125,459 $ 103,758 ============ ============ CURRENT LIABILITIES: Trade accounts payable ................................... $ 1,170 $ 421 Accrued payroll, bonuses and related expenses ............ 2,105 2,018 Other accrued liabilities ................................ 1,964 1,789 Unfavorable and capital lease obligations ................ 921 897 ------------ ------------ Total current liabilities ...................... 6,160 5,125 Unfavorable and capital lease obligations .................. 3,573 3,167 STOCKHOLDERS' EQUITY Common Stock: ............................................ 33 33 Voting - $.001 par value, 100,000,000 shares authorized; 33,347,228 and 33,397,087 issued and outstanding on December 28, 2002 and June 28, 2003, respectively ...... Additional paid-in capital ............................... 155,509 155,146 Accumulated deficit ...................................... (39,866) (59,835) Accumulated other comprehensive income - Foreign currency translation adjustment ................. 113 122 Unearned compensation .................................... (63) ------------ ------------ Total stockholders' equity ...................... 115,726 95,466 ------------ ------------ Total Liabilities and Stockholders' Equity ................. $ 125,459 $ 103,758 ============ ============
See notes to consolidated condensed financial statements. THE MANAGEMENT NETWORK GROUP, INC. CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (In thousands, except per share data) (unaudited)
For the thirteen For the twenty-six weeks ended weeks ended -------------------------------- ------------------------------- June 29, 2002 June 28, 2003 June 29, 2002 June 28, 2003 ------------- ------------- ------------- ------------- REVENUES $ 9,927 $ 5,020 $ 17,195 $ 12,426 COST OF SERVICES: Direct cost of services .................... 4,264 2,724 7,938 6,406 Equity related charges ..................... 177 (84) 672 (104) -------- -------- -------- -------- Total cost of services ................... 4,441 2,640 8,610 6,302 -------- -------- -------- -------- GROSS PROFIT 5,486 2,380 8,585 6,124 OPERATING EXPENSES: Selling, general and Administrative ............................ 7,768 5,298 13,467 10,408 Goodwill and intangible asset impairment 18,942 18,942 Intangible asset amortization ...... 728 644 1,120 1,359 Equity related charges ..................... 117 (8) 280 3 -------- -------- -------- -------- Total operating expenses ................. 8,613 24,876 14,867 30,712 -------- -------- -------- -------- LOSS FROM OPERATIONS ......................... (3,127) (22,496) (6,282) (24,588) OTHER INCOME: Interest income ............................ 212 161 522 338 Other, net................................. (4) (15) (15) (32) -------- -------- -------- -------- Total other income ....................... 208 146 507 306 -------- -------- -------- -------- LOSS BEFORE INCOME TAX BENEFIT AND CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE ..................... (2,919) (22,350) (5,775) (24,282) INCOME TAX BENEFIT ........................... 1,097 3,613 2,288 4,313 -------- -------- -------- -------- LOSS BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE ............ (1,822) (18,737) (3,487) (19,969) CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, NET OF TAX BENEFIT OF $760 ....... (1,140) -------- -------- -------- -------- NET LOSS ..................................... (1,822) (18,737) (4,627) (19,969) OTHER COMPREHENSIVE INCOME (LOSS) - Foreign currency translation adjustment .... 15 23 (18) 9 -------- -------- -------- -------- COMPREHENSIVE LOSS ........................... $ (1,807) $(18,714) $ (4,645) $(19,960) ======== ======== ======== ======== LOSS BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE PER COMMON SHARE Basic and diluted ................................$ (0.05) $ (0.56) $ (0.11) $ (0.60) ======== ======== ======== ======== CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE PER COMMON SHARE Basic and diluted ......................... $ (0.03) ========= NET LOSS PER COMMON SHARE Basic and diluted ................................$ (0.05) $ (0.56) $ (0.14) $ (0.60) ======== ======== ======== ======== SHARES USED IN CALCULATION OF LOSS BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE AND NET LOSS PER COMMON SHARE Basic and diluted ..................................33,259 33,372 32,152 33,359 ======== ======== ======== ========
See notes to consolidated condensed financial statements. THE MANAGEMENT NETWORK GROUP, INC. CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (In thousands) (unaudited)
For the Twenty-six Weeks Ended ------------------------------- June 29, June 28, 2002 2003 ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss .............................................. $ (4,627) $(19,969) Adjustments to reconcile net loss to net cash provided by operating activities: Cumulative change in accounting principle........... 1,140 Goodwill and intangible asset impairment 18,942 Depreciation and amortization ...................... 1,570 1,814 Equity related charges (benefit) ................... 952 (101) Income tax benefit (charge) recognized upon exercise of stock options ................................ 17 (256) Deferred income taxes .............................. 317 (1,808) Loss on retirement of assets ....................... 140 Other changes in operating assets and liabilities, net of business acquisitions: Accounts receivable ........................... 1,949 2,970 Accounts receivable - unbilled ................ (346) 545 Other assets .................................. 681 606 Refundable income taxes ....................... (2,639) (2,787) Trade accounts payable ........................ 446 (749) Accrued liabilities ........................... 622 (292) Unfavorable lease liability ................... 196 (189) ---------- ---------- Net cash (used in) provided by operating activities ................................ 418 (1,274) ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of business, net of cash acquired ......... (32,332) Acquisition of property and equipment ................. (213) (68) Loans to officers, net ................................ (100) ---------- ---------- Net cash used in investing activities ...... (32,645) (68) ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments made on long-term obligations ................ (151) (212) Proceeds from exercise of options ..................... 276 33 Issuance of common stock, net of expenses ............. 107 38 ---------- ---------- Net cash (used in) provided by financing activities ............................... 232 (141) ---------- ---------- Effect of exchange rate on cash and cash equivalents ............................................ (18) 9 ---------- ---------- Net decrease in cash and cash equivalents ............... (32,013) (1,474) Cash and cash equivalents, beginning of period .......... 86,396 53,786 ---------- ---------- Cash and cash equivalents, end of period ................ $ 54,383 $ 52,312 ========== ========== Supplemental disclosure of cash flow information: Cash paid during period for interest .................... $ 41 $ 32 ========== ========== Cash paid during period for taxes ....................... $ 132 $ 485 ========== ==========
Supplemental disclosure of non-cash investing and financing transactions -- Fair value of assets acquired ....................... $ 53,953 Liabilities incurred or assumed ..................... $ (7,490) Common stock issued ................................. $ 13,480 See notes to consolidated condensed financial statements. THE MANAGEMENT NETWORK GROUP, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 1. Basis of Reporting The accompanying consolidated condensed financial statements of The Management Network Group, Inc. (the "Company") as of June 28, 2003, and for the thirteen and twenty-six weeks ended June 28, 2003 and June 29, 2002, are unaudited and reflect all normal recurring adjustments which are, in the opinion of management, necessary for the fair presentation of the Company's consolidated condensed financial position, results of operations, and cash flows as of these dates and for the periods presented. The consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. Consequently, these statements do not include all the disclosures normally required by accounting principles generally accepted in the United States of America for annual financial statements nor those normally made in the Company's annual report on Form 10-K. Accordingly, reference should be made to the Company's annual report on Form 10-K for additional disclosures, including a summary of the Company's accounting policies. Stock Based Compensation During the thirteen weeks ended June 28, 2003, the Company granted approximately 5,500 stock options to employees and 75,000 stock options to independent members of the Company's Board of Directors at a weighted average exercise price of $1.50. The grants of stock options to independent board members were made in connection with the appointment by the Board of Directors of Frank M. Siskowski and Robert J. Currey to fill vacancies on the Board during 2003. During the second quarter of 2003, the Company recorded a net credit to compensation expense of $92,000, attributable primarily to the forfeiture of unvested stock options by employees, partially offset by the recognition of compensation expense on pre-initial public offering grants of stock options. During the thirteen weeks ended June 29, 2002, the Company granted approximately 1,376,000 stock options to employees at a weighted average price of $2.98 and recorded net compensation expense related to all stock options of $102,000. The Company also recorded equity related charges of $192,000 during the second quarter of 2002 for a previously issued warrant. The warrant was fully amortized by the Company during the second quarter of fiscal 2002. During the twenty-six weeks ended June 28, 2003, the Company granted approximately 515,500 stock options to employees and 75,000 stock options to independent members of the Company's Board of Directors at a weighted average exercise price of $1.43. During the same period, the Company recorded a net credit to compensation expense of $101,000, attributable primarily to the forfeiture of unvested stock options by employees, partially offset by the recognition of compensation expense on pre-initial public offering grants of stock options. During the twenty-six weeks ended June 29, 2002, the Company granted approximately 1,439,000 stock options to employees at a weighted average price of $3.14 and recorded net compensation expense related to all stock options of $329,000. The Company also recorded equity related charges of $623,000 for a previously issued warrant. The warrant was fully amortized by the Company during the second quarter of fiscal 2002. The Company utilizes an intrinsic value methodology in accounting for stock based compensation for employees and certain non-employee directors in accordance with the provisions of Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees" and related Interpretations, and accounts for stock-based compensation for non-employees utilizing a fair value methodology in accordance with Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation" as amended by SFAS No. 148 "Accounting for Stock Based Compensation - Transition and Disclosure." If compensation cost for the Company's APB 25 grants and the employee stock purchase plan had been determined under SFAS No. 123, based upon the fair value at the grant date, consistent with the Black-Scholes option pricing methodology, the Company's net loss for the thirteen weeks ended June 28, 2002 and June 28, 2003, would have increased by approximately $1.0 million and decreased by approximately $1.6 million, respectively, and the Company's net loss for the twenty-six weeks ended June 28, 2002 and June 28, 2003, would have increased by approximately $2.3 million and decreased by approximately $824,000, respectively. For purposes of pro forma disclosures required under the provisions of SFAS No. 123, as amended by SFAS No. 148, the estimated fair value of options is amortized to pro forma expense over the options' vesting period. The following table contains pro forma information for the thirteen and twenty-six weeks ended June 29, 2002, and June 28, 2003 (in thousands, except per share amounts):
FOR THE THIRTEEN WEEKS ENDED FOR THE TWENTY-SIX WEEKS ENDED ---------------------------- ------------------------------ JUNE 29, JUNE 28, JUNE 29, JUNE 28, 2002 2003 2002 2003 ----------- ----------- ---------- --------- Net loss, as reported: $(1,822) $(18,737) $(4,627) $(19,969) Add: Stock-based employee compensation expense (benefit) included in reported net loss, net of related tax effects 61 (92) 197 (97) Deduct): Total stock-based compensation (expense) benefit determined under fair value based method for all awards, net of related (1,107) 1,651 (2,479) 921 tax effects ------------ ------------ ---------- ---------- Pro forma net loss $(2,868) $(17,178) $(6,909) $(19,145) ============ ============ ========== ========== Loss per share Basic and diluted, as reported $ (0.05) $ (0.56) $(0.14) $(0.60) ============ ============ ========== ========== Basic and diluted, pro forma $ (0.08) $ (0.51) $(0.21) $(0.57) ============ ============ ========== ==========
2. Loss Per Share The Company calculates and presents loss per share using a dual presentation of basic and diluted loss per share. Basic loss per share is computed by dividing net loss by the weighted average number of common shares outstanding for the period. In accordance with the provisions of SFAS No. 128 "Earnings Per Share", the Company has not included the effect of common stock options in the calculation of diluted loss per share for the thirteen and twenty-six weeks ended June 29, 2002 and June 28, 2003, as the Company reported a loss from continuing operations for all periods and the effect would have been antidilutive. The weighted average shares of common stock outstanding for basic and diluted loss per share for the thirteen weeks ended June 29, 2002 and June 28, 2003, were 33,259,000 and 33,372,000, respectively. The weighted average shares of common stock outstanding for basic and diluted loss per share for the twenty-six weeks ended June 29, 2002, and June 28, 2003, were 32,152,000 and 33,359,000, respectively. Had the Company reported net income for the thirteen weeks ended June 29, 2002 and June 28, 2003, the treasury method of calculating common stock equivalents would have resulted in approximately 782,000 and 177,000 additional diluted shares, respectively. Had the Company reported net income for the twenty-six weeks ended June 29, 2002, and June 28, 2003, the treasury method of calculating common stock equivalents would have resulted in approximately 910,000 and 142,000 additional diluted shares, respectively. 3. Business Combinations On March 6, 2002, TMNG purchased the business and primary assets of CSMG, a Delaware corporation, of Boston, Massachusetts. CSMG ("CSMG" or "TMNG Strategy") provides high-end advisory services to global communication service and equipment providers and investment firms that provide capital to the industry. CSMG's range of business strategy services include analyses of industry and competitive environments; product and distribution strategies; finance, including business case development, modeling, cost analysis and benchmarking; and due diligence and risk assessment. The acquisition, recorded under the purchase method of accounting, resulted in a total purchase price of approximately $46.5 million, of which approximately $36.2 million was allocated to goodwill. Consideration consisted of $33.0 million cash and 2,892,800 shares of TMNG Common Stock valued at approximately $13.5 million. Share consideration was calculated in accordance with the Asset Purchase Agreement at a fixed price of $4.66 per share. Additionally, the Company incurred direct costs of approximately $2.3 million related to the acquisition and recorded this amount as an increase to purchase price. The operating results of CSMG have been included in the Consolidated Condensed Statements of Operations and Comprehensive Loss from the date of the purchase. The following reflects pro forma combined results of the Company and CSMG as if the acquisition had occurred as of December 30, 2001. In management's opinion, this pro forma information does not necessarily reflect the actual results that would have occurred nor is it necessarily indicative of future results of operations of the combined entities.
FOR THE THIRTEEN FOR THE TWENTY-SIX WEEKS ENDED WEEKS ENDED (in thousands, except per share amounts) JUNE 29, 2002 JUNE 29,2002 -------------- ----------------- Total revenues $ 9,927 $ 19,422 Loss before cumulative effect of a change in accounting principle $ (1,822) $ (3,718) Net loss $ (1,822) $ (4,858) Basic and diluted loss before cumulative effect of a change in accounting principle per common share $ (0.05) $ (0.11) Basic and diluted loss per common share $ (0.05) $ (0.15)
4. Goodwill The Company adopted the provisions of SFAS No. 142 "Accounting for Goodwill and Intangible Assets" ("SFAS No. 142") in connection with goodwill and other intangible assets acquired in the purchase of The Weathersby Group, Inc., Tri-Com Computer Services, Inc., and Cambridge Strategic Management Group, Inc. In accordance with certain provisions of the Statement, goodwill has not been amortized beginning in fiscal year 2002. Upon the adoption of SFAS No. 142 at the beginning of fiscal year 2002, the Company recorded a goodwill impairment loss related to the Management Consulting Segment of approximately $1.9 million and has reflected this amount as a cumulative change in accounting principle, net of tax benefit, in the Statement of Operations and Comprehensive Loss. During the second quarter of fiscal year 2003, the Company performed an interim test under the provisions of SFAS No. 142 to determine whether an impairment of goodwill had occurred at the reporting unit level. The Company performed the interim test due to the significantly lower operating results of one of the Company's reporting units, compared to the projected financial results that were utilized in determining the reporting unit's fair value in the annual goodwill impairment test performed in 2002. Additionally, during the second quarter of 2003 two executives of companies acquired by TMNG tendered their resignations to the Company, which also had the effect of lowering the financial projections of one of the entities. Based on an analysis of projected future cash flows and utilizing the assistance of an outside valuation firm, the Company determined that the carrying value of goodwill acquired in the CSMG acquisition exceeded its fair market value and recorded an impairment loss related to the Management Consulting Segment of approximately $15.8 million. The goodwill impairment loss related to the interim impairment test has been reflected as a component of Loss from Operations in the Statement of Operations and Comprehensive Loss. The changes in the carrying amount of goodwill as of June 28, 2003 are as follows (amounts in thousands):
Management Consulting All Other Segment Segment Total --------------------- --------- ------- Balance as of December 29, 2001 $ 19,156 $ 2,991 $22,147 Goodwill acquired during fiscal year 2001 36,216 10 36,226 Impairment loss (26,227) (838) (27,065) -------- -------- - ------- Balance as of December 28, 2002 29,145 2,163 31,308 Impairment loss (15,780) (15,780) -------- -------- ------- Balance as of June 28, 2003 $ 13,365 $ 2,163 $15,528 ======== ======== =======
5. Customer Relationships and Other Identifiable Intangible Assets Included in the Company's consolidated balance sheet as of the end of the latest fiscal year, December 28, 2002, and the end of the second quarter, June 28, 2003, are the following identifiable intangible assets (amounts in thousands): December 28, 2002 June 28, 2003 ------------------------ ------------------------ Accumulated Accumulated Cost Amortization Cost Amortization ------- ------------ ------- ------------ Customer relationships $ 6,790 $(1,698) $ 3,627 $(2,297) Employment agreements 3,200 (1,042) 3,200 (1,667) Tradename 350 (146) 350 (233) Covenant not to compete 203 (132) 203 (180) ------- ------- ------- ------- Total $10,543 $(3,018) $ 7,380 $(4,377) ======= ======= ======= ======= In connection with SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" the Company, using its best estimates based on reasonable and supportable assumptions and projections, reviews for impairment long-lived assets and certain identifiable intangibles to be held and used whenever events or changes in circumstances indicate that the carrying amount of its assets might not be recoverable. During the quarter ended June 28, 2003, management identified certain events, including the significant decrease in revenue from customers whose relationships were valued in purchase accounting for the CSMG acquisition. The Company performed an impairment test, and determined that the carrying value of customer relationships exceeded its fair market value and recorded an impairment loss related to the Management Consulting Segment of approximately $3.1 million. Fair value was based on an analysis of projected future cash flows. The impairment loss has been reflected as a component of Loss from Operations in the Statement of Operations and Comprehensive Loss. Intangible amortization expense for the thirteen weeks ended June 29, 2002 and June 28, 2003 was $0.7 million and $0.6 million, respectively. Intangible amortization expense for the twenty-six weeks ended June 29, 2002 and June 28, 2003 was $1.1 million and $1.4 million, respectively. Intangible amortization expense is estimated to be approximately $2.3 million for fiscal year 2003, $1.3 million in fiscal year 2004, $0.5 million in fiscal year 2005, $0.2 million in fiscal year 2006 and $28,000 in fiscal year 2007. 6. Income Taxes The Company has recorded a net deferred tax asset of $14.8 million and $16.6 million as of December 28, 2002 and June 28, 2003, respectively in accordance with the provisions of SFAS No. 109 "Accounting for Income Taxes". Realization of the asset is dependent on generating sufficient taxable income in future periods. Management believes that it is more likely than not that the net recorded deferred tax asset will be realized. The Company established a valuation allowance of $5.2 million in the second quarter of fiscal year 2003. The majority of the valuation allowance relates to impairment losses of goodwill and other intangible assets that were initially recorded in connection with the Company's acquisitions. In management's opinion, it is not more likely than not as of June 28, 2003 that sufficient future taxable income will be generated by the Company to support the deferred tax assets generated by the impairments, thereby resulting in the recognition of the valuation allowance. 7. Business Segments The Company has identified its segments based on the way management organizes the Company to assess performance and make operating decisions regarding the allocation of resources. Based on an analysis of the criteria in SFAS No. 131 "Disclosure about Segments of an Enterprise and Related Information," the Company has concluded it has five operating segments, of which four are aggregated in one reportable segment, the Management Consulting Services segment, and the remaining segment in All Other. Management Consulting Services includes business strategy and planning, marketing and customer relationship management, operating system support, revenue assurance, corporate investment services, networks, and business model transformation. All Other consists of computer hardware commissions and rebates received in connection with the procurement of hardware for third parties. The accounting policies for the segments are the same as those described in the summary of significant accounting policies. Management evaluates segment performance based upon Loss from Operations, excluding equity related charges (benefits), goodwill and intangible asset impairment, and intangibles amortization. There are no inter-segment sales. Summarized financial information concerning the Company's reportable segments is shown in the following table (amounts in thousands):
----------------------------------------------------------------------- Management All Not Assigned Consulting Services Other to Segments Total ------------------- --------- ------------- --------- For the thirteen weeks ended June 29, 2002: Net sales to external customers $ 9,528 $ 399 $ 9,927 Loss from operations $ (2,409) $ 304 $ (1,022) $ (3,127) Total assets $ 12,145 $ 132,992 $ 145,407 For the thirteen weeks ended June 28, 2003: Net sales to external customers $ 4,963 $ 57 $ 5,020 Loss from operations $ (3,016) $ 14 $(19,494) $ (22,496) Total assets $ 5,990 $ 11 $ 97,757 $ 103,758 For the twenty-six weeks ended June 29, 2002: Net sales to external customers $ 16,602 $ 593 $ 17,195 Loss from operations $ (4,522) $ 312 $ (2,072) $ (6,282) Total assets $ 12,415 $ 132,992 $ 145,407 For the twenty-six weeks ended June 28, 2003: Net sales to external customers $ 12,203 $ 223 $ 12,426 Loss from operations $ (4,520) $ 132 $ (20,200) $ (24,588) Total assets $ 5,990 $ 11 $ 97,757 $ 103,758
Segment assets, regularly reviewed by management as part of its overall assessment of the segments' performance, include both billed and unbilled trade accounts receivable, net of allowances, and certain other assets. Assets not assigned to segments include cash and cash equivalents, property and equipment, goodwill and intangible assets and deferred tax assets, excluding deferred tax assets recognized on accounts receivable reserves, which are assigned to their respective segment. Reconciling information between reportable segments and the Company's totals is shown in the following table (amounts in thousands):
------------------------------------------------------------------- FOR THE THIRTEEN WEEKS ENDED FOR THE TWENTY-SIX WEEKS ENDED ------------------------------------------------------------------- JUNE 29, 2002 JUNE 28, 2003 JUNE 29, 2002 JUNE 28, 2003 ------------- ------------- ------------- ------------- Total operating losses for reportable segments $(2,105) $ (3,002) $ (4,210) $ (4,388) Goodwill and intangible asset impairment (18,942) (18,942) Equity related charges (294) 92 (952) 101 Intangible asset amortization (728) (644) (1,120) (1,359) -------- -------- -------- -------- Loss from operations $(3,127) $(22,496) $ (6,282) $(24,588) ======== ======== ======== ========
Revenues earned in the United States and internationally based on the location where the services are performed is shown in the following table (amounts in thousands):
------------------------------------------------------------------- FOR THE THIRTEEN WEEKS ENDED FOR THE TWENTY-SIX WEEKS ENDED ------------------------------------------------------------------- JUNE 29, 2002 JUNE 28, 2003 JUNE 29, 2002 JUNE 28, 2003 ------------- ------------- ------------- ------------- United States $ 9,232 $ 4,498 $16,095 $11,541 International: Ireland 160 181 32 The Netherlands 524 303 899 532 Canada 101 101 Belize 118 141 Other 11 20 79 ------- ------- ------- ------- Total $ 9,927 $ 5,020 $17,195 $12,426 ======= ======= ======= =======
8. Significant Customer Contracts On December 10, 1999, the Company entered into a consulting services agreement with a significant customer under which such customer committed to $22 million of consulting fees over a three-year period commencing January 1, 2000. The agreement was extended in April 2002 for two additional years beyond the original term of the agreement, in exchange for an expanded preferred contractor relationship and immediate commitment to a significant consulting arrangement. As of June 28, 2003, $16.6 million of consulting fees had been recognized in connection with the agreement from the commencement date. In August 2002, the Company entered into a gain sharing consulting services agreement with a significant customer, under which the Company earns revenue based upon project success as contractually defined. Due to the contingent nature of this project, all project costs have been expensed as incurred, due to the lack of an indication that an economic resource has been created. Additionally, the Company has not recognized any revenue on the project as of June 28, 2003, as the revenue is not realizable or earned at this time. Total project cost recognized in loss from operations on the Company's Consolidated Condensed Statement of Operations and Comprehensive Loss for the second quarter of fiscal 2003 in connection with the project was approximately $71,000. Total costs recognized on the project during 2003 and from inception total $154,000 and $565,000, respectively. 9. Letter of Credit In March 2002, the Company entered into a $1.0 million standby letter of credit ("LOC") facility with a financial institution in connection with the Cambridge Strategic Management Group, Inc. ("CSMG") acquisition. The LOC was required as part of the assignment of the leased office space from CSMG to the Company. The LOC was collateralized by the Company with a $1.0 million cash deposit to the above financial institution. The LOC provides for reduction dates of the amount deposited with the financial institution during the LOC term as follows (amounts in thousands): Amount Reduction Date Deposited ----------------- --------- 5/15/03 - 5/15/04 $633 5/15/04 - 5/15/05 $380 5/15/05 - 2/28/11 $273 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. This amount is included in "Cash and Cash Equivalents" on the Company's consolidated condensed balance sheet as of June 28, 2003. An obligation has not been recorded in connection with the LOC on the Company's consolidated condensed balance sheet as of June 28, 2003. 10. Loans to Officers During the third quarter of fiscal year 2001, three executive officers of the Company received stock options at fair market value in lieu of receiving their cash base compensation, which subsequently resumed in the first quarter of fiscal year 2002. To assist in meeting the cash flow needs of the officers who reduced their compensation, the Company provided lines of credit, collateralized by Company common stock held by such officers. In June 2002, one of the officers retired from the Company, and his line of credit was cancelled. In the second quarter of fiscal year 2003 the Board of Directors cancelled one of the remaining officer's line of credit. At the time of the cancellation the officer did not have any outstanding indebtedness to the Company. As of June 28, 2003, there was one remaining line of credit between the Company and an officer. The maximum aggregate amount available for borrowing under that remaining loan agreement was reduced from $600,000 to $300,000. Aggregate borrowings against the lines of credit at June 29, 2002 and June 28, 2003 totaled $300,000 and $300,000, respectively. 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 may be made by the Company to or arranged by the Company for its executive officers. 11. Contingencies In June 1998, the bankruptcy trustee of a former client, Communications Network Corporation, sued TMNG for a total of $320,000 in the U.S. Bankruptcy Court in New York seeking recovery of $160,000 alleging an improper payment of consulting fees paid by the former client during the period from July 1, 1996, when an involuntary bankruptcy proceeding was initiated against the former client, through August 6, 1996, when the former client agreed to an order for relief in the bankruptcy proceeding, and $160,000 in consulting fees paid by the former client after August 6, 1996. The bankruptcy trustee has also sued TMNG for at least $1.85 million for breach of contract, breach of fiduciary duties and negligence. Although assurance cannot be given as to the ultimate outcome of this proceeding, TMNG believes the Company has meritorious defenses to the claims made by the bankruptcy trustee, including particularly the claims for breach of contract, breach of fiduciary duty and negligence, and that the ultimate resolution of this matter will not materially harm our business. In 2002 the Company received demands aggregating approximately $1.2 million by the bankruptcy trustees of several former clients in connection with collected balances near the customers' respective bankruptcy filing dates. Although the Company does not believe it received any preference payments from these former clients and plans to vigorously defend its position, the Company has established reserves of $886,000 which it believes are adequate in the event of loss or settlement on such claims. The Company may become involved in various legal and administrative actions arising in the normal course of business. These could include actions brought by taxing authorities challenging the employment status of consultants utilized by the Company. In addition, customer bankruptcies could result in additional claims on collected balances for professional services near the bankruptcy filing date. While the resolution of any of such actions, claims, or the matters described above may have an impact on the financial results for the period in which it is resolved, the Company believes that the ultimate disposition of these matters will not have a material adverse effect upon its consolidated results of operations, cash flows or financial position. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In addition to historical information, this quarterly report contains forward-looking statements. Certain risks and uncertainties could cause actual results to differ materially from those reflected in such forward-looking statements. Factors that might cause a difference include, but are not limited to, those discussed in the sections entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business - Risk Factors" in the Company's annual report on Form 10-K for the fiscal year ended December 28, 2002. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's opinions only as of the date of this report. We undertake no obligation to revise, or publicly release the results of any revision to, these forward-looking statements. Readers should carefully review the risk factors described in our annual report and in other documents that we file from time to time with the Securities and Exchange Commission. The following should be read in connection with Management's Discussion and Analysis of Financial Condition and Results of Operations as presented in the Company's annual report on Form 10-K for the fiscal year ended December 28, 2002. CRITICAL ACCOUNTING POLICIES While the selection and application of any accounting policy may involve some level of subjective judgments and estimates, we believe the following accounting policies are the most critical to our consolidated financial statements, potentially involve the most subjective judgments in their selection and application, and are the most susceptible to uncertainties and changing conditions: - - Allowance for Doubtful Accounts - - Fair Value Accounting of Acquired Businesses - - Impairment of Goodwill and Other Intangible Assets - - Revenue Recognition - - Deferred Income Tax Assets Allowance for Doubtful Accounts - Substantially all of our receivables are owed by companies in the communications industry. We typically bill customers for our services after all or a portion of the services have been performed and require customers to pay immediately. We attempt to control our credit risk by being diligent in credit approvals, limiting the amount of credit extended to customers and monitoring our customers' payment record and credit status as work is being performed for them. We recorded total bad debt expense in the amount of $784,000 and $353,000 for the twenty-six weeks ended June 29, 2002 and June 28, 2003, respectively, and our allowance for doubtful accounts totaled $751,000 and $521,000 at the end of the second quarter of fiscal years 2002 and 2003, respectively. The calculation of these amounts is based on our judgment about the anticipated default rate on receivables owed to us as of the end of the reporting period. That judgment was based on our 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 endeavored to mitigate our 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 more of our customers file for bankruptcy or experience financial difficulties, it is possible that our allowance for doubtful accounts will be insufficient and we will have a greater bad debt loss than the amount we reserved, which would adversely affect our cash flow and financial performance. Fair Value of Acquired Businesses - TMNG has acquired three professional service organizations over the last three years. A significant component of the value of these acquired businesses has been allocated to intangible assets. The Financial Accounting Standards Board ("FASB") issued SFAS No. 141 which requires acquired businesses to be recorded at fair value by the acquiring entity. SFAS No. 141 also requires that intangible assets that meet the legal or separable criterion be separately recognized on the financial statements at their fair value, and provides guidance on the types of intangible assets subject to recognition. Determining the fair value for these specifically identified intangible assets involves significant professional judgment, estimates and projections related to the valuation to be applied to intangible assets like customer lists, employment agreements and tradenames. Specifically, the FASB issued EITF No. 02-17 "Recognition of Customer Relationship Intangible Assets Acquired in a Business Combination" in 2002 which provided an expanded definition of how to value customer relationships and includes not only the current backlog of an acquired entity, but also the expectations of future revenues resulting from current customer relationships. In accordance with the provisions of EITF No. 02-17, management has made estimates and assumptions regarding projected future revenues resulting from the customer relationships acquired in our acquisitions. The subjective nature of management's assumptions adds an increased risk associated with estimates surrounding the projected performance of the acquired entity. Additionally, as the Company amortizes the intangible assets over time, the purchase accounting allocation directly impacts the amortization expense we record on our financial statements. Impairment of Goodwill and Other Intangible Assets - Goodwill and other intangible assets arising from our acquisitions, as discussed above, are subjected to periodic review for impairment. SFAS No. 142 requires an annual evaluation at the reporting unit level of the fair value of goodwill and compares the calculated fair value of the reporting unit to its book value to determine whether an impairment has been deemed to occur. Any impairment charge would be based on the most recent estimates of the recoverability of the recorded goodwill and intangibles balances. If the remaining book value assigned to goodwill and other intangible assets acquired in an acquisition is higher than the amounts the Company currently would expect to realize based on updated financial and cash flow projections from the reporting unit, there is a requirement to write down these assets. Due to a combination of the significantly lower operating results of TMNG Strategy during the quarter, the resignation of the president of TMNG Strategy, and the revised and reduced financial projections of TMNG Strategy, along with the significant decrease in revenue from customers whose relationships were valued in purchase accounting for the CSMG acquisition, the Company recorded a goodwill impairment loss and intangible asset impairment loss in the second quarter of fiscal 2003 in the amount of $15.8 million and $3.1 million, respectively. The impairment losses have been reflected as a component of Loss from Operations in the Statement of Operations and Comprehensive Loss. Revenue Recognition - Historically, most of our consulting practice contracts have been on a time and material basis, in which customers are billed for time and materials expended in performing their contracts. We have recognized revenue from those types of customer contracts in the period in which our services are performed. As we continue to adapt to changes in the communications consulting industry, we have elected to enter into more fixed fee contracts in which revenue is based upon delivery of services or solutions, and contingent fee contracts, in which revenue is subject to achievement of savings or other agreed upon results, rather than time spent. Both of these types of contracts are typically more results-oriented and are subject to greater risk associated with revenue recognition and overall project profitability than traditional time and materials contracts. Due to the nature of fixed fee and contingent fee contracts, the amount and timing of revenue recognized may be subject to adjustment or deferral, and additional costs and effort as compared to what was originally planned may need to be expended to fulfill delivery requirements on such contracts, which could adversely affect our consolidated financial position, results of operations and liquidity. Deferred Income Tax Assets - The Company has generated substantial deferred tax assets primarily from the accelerated financial statement write-off of goodwill and the charge to compensation expense taken related to stock options. For the Company to realize the income tax benefit of these assets, it must generate sufficient taxable income in future periods when such deductions are allowed for income tax purposes. In assessing whether a valuation allowance is needed in connection with the Company's deferred income tax assets, management has evaluated the ability of the Company to carryback tax losses to prior years that reported positive taxable income, and the ability of the Company to generate sufficient taxable income in future periods to utilize the benefit of the deferred income tax assets. Such projections of future taxable income require significant subjective judgments and estimates by the Company. As of June 28, 2003, valuation allowances in the amount of $5.2 million were established in connection with the deferred income tax assets. In future periods, if the Company does not believe it will be able to recognize the benefits of the deferred income tax assets, additional impairments of the deferred income tax assets will be recorded, resulting in additional charges to net income. RESULTS OF OPERATIONS THIRTEEN WEEKS ENDED JUNE 28, 2003 COMPARED TO THIRTEEN WEEKS ENDED JUNE 29, 2002 REVENUES Revenues decreased 49.4% to $5.0 million for the second quarter of fiscal year 2003 from $9.9 million for the second quarter of fiscal year 2002. The decrease in revenues was due primarily to the deferral of key management consulting pipeline opportunities, along with an increase in outsourcing by clients which partially displaces what was historically management consulting opportunities, the resignation of certain key executives during the second quarter, and the continued reduction of management consulting demand by the communications and technology industry. Our international revenue base increased to 10.4% of our revenues in the second quarter of fiscal year 2003, from 7.0% in the second quarter of 2002, due primarily to the decrease in domestic revenue TMNG Strategy revenues for the second quarter of 2003 represented 28.3% of consolidated revenues, compared to 42.8% of consolidated revenues for the second quarter of fiscal year 2002. Non-consulting revenues recognized by TMNG Technologies represented 1.1% and4.0 of consolidated revenues for the second quarters of fiscal year 2003 and 2002, respectively, and related to commissions received on hardware sales. COSTS OF SERVICES Costs of services decreased 40.6% to $2.6 million for the second quarter of fiscal year 2003 from $4.4 million for the second quarter of fiscal year 2002. As a percentage of revenues, our gross margin was 47.4% for the second quarter of fiscal year 2003, compared to 55.3% for the second quarter of fiscal year 2002. The decrease in gross margin was primarily attributable to the impact of lower utilization of consulting personnel at TMNG Strategy, which represents a relatively fixed cost to cost of services. Non-cash stock based compensation benefits were $84,000 for the second quarter of fiscal year 2003, compared to charges of $177,000 for the second quarter of fiscal year 2002. The primary reasons for the net decrease in non-cash stock based compensation charges for the second quarter of fiscal year 2003 compared to the same period in fiscal year 2002 were the reduction in amortization charges of a warrant in the amount of $192,000 and the net reduction in amortization charges related to the pre-initial public offering grants of stock options. Non-cash stock based compensation charges are recognized by the Company over a period of three to four years, based on an accelerated vesting schedule. Substantially all of the options giving rise to the equity related charges are in their respective fourth and final year of vesting, and therefore continue to have less impact on the Company's Statement of Operations and Comprehensive Loss. These net benefits decreased costs of services as a percentage of revenue by 1.7% for the second quarter of fiscal year 2003. Non-cash stock based compensation charges increased costs of services as a percentage of revenue by 1.8% for the second quarter of fiscal year 2002. OPERATING EXPENSES In total, operating expenses increased to $24.9 million for the second quarter of fiscal year 2003, or 188.8% from $8.6 million for the second quarter of fiscal year 2002. The major component of the $16.3 million increase in operating expenses was a $18.9 million charge related to goodwill and intangible asset impairment related to the financial deterioration of one of our acquired entities, offset by a $2.5 million decrease in selling, general and administrative expenses related to cost reduction measures initiated by management during fiscal year 2002 and 2003, including the consolidation of fixed costs associated with our TMNG Strategy and TMNG Technologies acquisitions, and a reduction of sales, marketing and administrative headcount. As a percentage of revenues, selling, general and administrative expenses increased to 105.5% compared to 78.3% for the second quarter of fiscal year 2003 and 2002, respectively, and was primarily a function of the Company's decreased revenues. In addition, non-cash stock based compensation benefits of $8,000 compared to charges of $117,000 were recorded for the second quarter of fiscal years 2003 and 2002, respectively, in connection with stock options granted to our partners, principals and certain senior executives and non-employee directors. These charges had a nominal effect on operating expenses as a percentage of revenue for the second quarter of fiscal year 2003 and fiscal year 2002. The $125,000 decrease in non-cash stock based compensation charges for the second quarter of fiscal year 2003 compared to the second quarter of fiscal year 2002 was a result of the reduction in the amortization of the deferred compensation charges recorded in connection with pre-initial public offering grants of non-qualified stock options based on the accelerated vesting schedule discussed above in "Cost of Services." OTHER INCOME AND EXPENSES Interest income was $161,000 and $212,000 for the second quarter of fiscal years 2003 and 2002, respectively, and represented interest earned on invested balances. Interest income decreased during the second quarter of fiscal year 2003 due to lower invested balances resulting from a reduction in cash reserves and lower interest rate returns from fiscal year 2002 to fiscal year 2003. We invest in short-term, high-grade investment instruments as part of our overall investment policy. INCOME TAXES In general, the Company records an income tax benefit at a blended Federal and state statutory income tax rate of 40.2%. Income tax benefit for the second quarter of fiscal 2003 and 2002 as a percentage of pretax loss was 16.2% and 37.6%, respectively. The primary reason for the variance between the effective and statutory income tax rates in 2003 relates to the establishment of a valuation allowance in the amount of $5.2 million during the second quarter of fiscal year 2003. The primary reason for the variance in 2002 was the earnings reported on short-term investments in Federally tax-exempt income securities not taxable for Federal income tax purposes. TWENTY-SIX WEEKS ENDED JUNE 28, 2003 COMPARED TO TWENTY-SIX WEEKS ENDED JUNE 29, 2002 REVENUES Revenues decreased 27.7% to $12.4 million for the twenty-six weeks ended June 28, 2003, from $17.2 million for the twenty-six weeks ended June 29, 2002. . The decrease in revenues was due primarily to the deferral of key management consulting pipeline opportunities, along with an increase in outsourcing by clients which partially displaces what was historically management consulting opportunities, the resignation of certain key executives during the second quarter, and the continued reduction of management consulting demand by the communications and technology industry. Our international revenue base increased to 7.1% of our revenues for the twenty-six weeks ended June 28, 2003, up from 6.4% for the twenty-six weeks ended June 29, 2002, due primarily to our decrease in domestic revenue TMNG Strategy revenues represented 34.6% of consolidated revenues for the twenty-six weeks ended June 28, 2003, compared to 33.4% of consolidated revenues for the twenty-six weeks ended June 29, 2002. Non-consulting revenues recognized by TMNG Technologies represented 1.8% of consolidated revenues for the twenty-six weeks ended June 28, 2003, compared to 3.4% of consolidated revenues for the twenty-six weeks ended June 29, 2002, and related to commissions received on hardware sales. COST OF SERVICES Costs of services decreased 26.8% to $6.3 million for the twenty-six weeks ended June 28, 2003 compared to $8.6 million for the twenty-six weeks ended June 29, 2002, and was attributable primarily to the decrease in consulting engagements and corresponding reductions in consulting personnel costs. As a percentage of revenues, our gross margin was 49.3% for the twenty-six weeks ended June 28, 2003, compared to 49.9% for the twenty-six weeks ended June 29, 2002. The decrease in gross margin was primarily attributable to the impact of lower utilization of consulting personnel at TMNG Strategy, which represents a fixed cost to cost of services. Non-cash stock based compensation benefits of $104,000 compared to charges of $672,000 were recorded for the twenty-six weeks ended June 28, 2003 and June 29, 2002, respectively. The primary reasons for the net decrease in non-cash stock based compensation charges for the second quarter of 2003 compared to the same period for 2002 was the reduction in amortization charges of a warrant of $623,000 as the warrant was fully amortized in the second quarter of 2002, and the net reduction in amortization charges related to pre-initial public offering grants of stock options. These net benefits decreased costs of services as a percentage of revenue by 0.8% and the net charges increased costs of services as a percentage of revenue by 3.9% for the twenty-six weeks ended June 28, 2003 and June 29, 2002, respectively. OPERATING EXPENSES In total, operating expenses increased to $30.7 million for the twenty-six weeks ended June 28, 2003, or 106.6% from $14.9 million for the twenty-six weeks ended June 29, 2002. The major components of this $15.8 million increase in operating expenses relate to an $18.9 million charge related to goodwill and intangible asset impairment was attributable to the financial deterioration of one of our acquired entities, offset by a $3.1 million decrease in selling, general and administrative expenses related to cost reduction measures initiated by management during fiscal year 2002 and 2003, including the consolidation of fixed costs associated with our TMNG Strategy and TMNG Technologies acquisitions, and a reduction of sales, marketing and administrative headcount. As a percentage of revenues, selling, general and administrative expenses increased to 83.8% compared to 78.3% for the twenty-six weeks ended June 28, 2003 and June 29, 2002, respectively. This percentage increase was primarily attributable to the decreased revenues. Beginning in fiscal year 2001 and continuing into fiscal year 2003, management began implementing a number of cost reduction initiatives including the reduction of sales and marketing staff, minimization of consultant recruitment, and a reduction in the Company's accounting staff. Management believes these initiatives will provide for better management of general and administrative costs in the future. Non-cash stock based compensation charges of $3,000 and $280,000 for the twenty-six weeks ended June 28, 2003 and June 29, 2002, respectively, were recorded in connection with stock options granted to our partners, principals and certain senior executives and non-employee directors. These charges increased operating expenses as a percentage of revenue by less than 0.1% and 1.6% for the twenty-six weeks ended June 28, 2003 and June 29, 2002, respectively. The $277,000 decrease in non-cash stock based compensation charges for the twenty-six weeks ended June 28, 2003 compared to June 29, 2002 was a result of the reduction in the amortization of the deferred compensation charges recorded in connection with pre-initial public offering grants of non-qualified stock options. OTHER INCOME AND EXPENSES Interest income was $338,000 and $522,000 for the twenty-six weeks ended June 28, 2003 and June 29, 2002, respectively, and represented interest earned on invested balances. Interest income decreased during the twenty-six weeks ended June 28, 2003 due to lower invested balances and lower interest rates from fiscal year 2002 to fiscal year 2003. We invest in short-term, high-grade investment instruments as part of our overall investment policy. INCOME TAXES Income tax benefit for the twenty-six weeks ended June 28, 2003 as a percentage of pretax loss was 17.8 % compared to 39.6% for the twenty-six weeks ended June 29, 2002. The decrease in the income tax benefit as a percentage of pre-tax loss was due primarily to the Company recognizing a valuation allowance in the amount of $5.2 million during the second quarter of fiscal 2003. CUMULATIVE CHANGE IN ACCOUNTING PRINCIPLE A cumulative change in accounting principle in the amount of $1.9 million was recorded in the twenty-six weeks ended June 29, 2002 in connection with the Company's estimate of goodwill impairment. The impairment was calculated in accordance with the provisions of SFAS No. 142 "Accounting for Goodwill and Intangible Assets" and has been reported on the Company's Statement of Loss and Comprehensive Loss, net of tax benefit in the amount of $1.1 million. LIQUIDITY AND CAPITAL RESOURCES At June 28, 2003, we had approximately $52.3 million in cash and cash equivalents. TMNG believes it has sufficient cash to meet anticipated cash requirements, including anticipated capital expenditures, consideration for possible acquisitions, and any continuing operating losses and continuing negative cash flow, for at least the next 12 months. The Company has established a flexible model that provides a lower fixed cost structure which enables TMNG to scale operating cost structures more quickly based on market conditions. Although the Company is well positioned because of its cash reserves to weather continuing adverse conditions in the communications industry for a period of time, if the industry and demand for consulting services do not rebound in the foreseeable future and we continue to experience negative cash flow, we could experience liquidity challenges. Net cash used in operating activities was $1.3 million for the twenty-six weeks ended June 28, 2003, compared to net cash provided by operating activities of $418,000 for the same period in fiscal year 2002 The Company generated negative cash flow from its operating activities for the twenty-six weeks ended June 28, 2003 primarily due to operating losses, partially offset by a reduction in accounts receivable balances reflecting more focused billing and collection activities. Net cash used in investing activities was $68,000 and $32.6 million for the twenty-six weeks ended June 28, 2003 and June 29, 2002,, respectively. Cash used in investing activities in 2003 related to the capitalization of software and computer equipment by the Company. Cash used in investing activities in 2002 related primarily to the March 6, 2002, acquisition of Cambridge Strategic Management Group, Inc. The purchase price of the acquisition, net of cash acquired, was $32.3 million. Net cash used in financing activities was $141,000 for the twenty-six weeks ended June 28, 2003, and related to payments made by the Company on the current portion of its capital lease obligations and outstanding debt, partially offset by proceeds received from the exercise of employee stock options and purchase of stock under the Company's employee stock purchase plan. Net cash provided by financing activities was $232,000 for the twenty-six week period ended June 29, 2002, and related to proceeds from the exercise of employee stock options and purchase of stock under the Company's employee stock purchase plan, partially offset by payments made by the Company on the current portion of its capital lease obligations and current portion of outstanding debt. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company does not invest excess funds in derivative financial instruments or other market rate sensitive instruments for the purpose of managing its foreign currency exchange rate risk. The Company invests excess funds in short-term investments, the yield of which is exposed to interest rate market risk. The Company does not have material exposure to market related risks. Foreign currency exchange rate risk may become material given U.S. dollar to foreign currency exchange rate changes and significant increases in international engagements denominated in the local currency of the Company's clients. ITEM 4. CONTROLS AND PROCEDURES A review and evaluation was performed by the Company's management, including the Company's Chief Executive Officer (the "CEO") and Chief Financial Officer (the "CFO"), of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this quarterly report, as required by Rules 13a-15(b) and 15d-15(b). Based on that review and evaluation, the CEO and CFO have concluded that the Company's disclosure controls and procedures, as designed and implemented, were effective. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS TMNG has not been subject to any material new litigation or claims against the Company since March 28, 2003, the filing date of TMNG's 2002 Form 10-K filing. For a summary of litigation in which TMNG is currently involved, refer to TMNG's 10-K, as filed with the Securities and Exchange Commission on March 28, 2003. ITEM 4. SUBMISSION TO A VOTE OF SECURITY HOLDERS TMNG HELD AN ANNUAL MEETING OF STOCKHOLDERS ON JUNE 11, 2003. 1. The stockholders approved the election of two directors. The votes cast for each nominee were as follows: FOR ABSTAIN William M. Matthes 27,380,003 4,682,296 Micky K. Woo 30,061,254 2,001,045 2. The stockholders ratified the appointment of Deloitte & Touche LLP as independent auditor for the Company for the 2003 fiscal year by a vote of 31,075,599 shares in favor of the appointment; 432,400 shares against the appointment and 554,300 shares abstaining. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit 31. Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Exhibit 32. Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K The Company filed a Form 8-K on August 5, 2003 with the Securities and Exchange Commission in connection with its earnings release dated August 4, 2003. The Company also filed a Form 8-K on May 6, 2003 with the Securities and Exchange Commission in connection with its earnings release dated April 29, 2003. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SIGNATURE TITLE DATE --------- ----- ---- /s/ RICHARD P. NESPOLA Chairman, President and Chief August 12, 2003 - ------------------------------ Executive Officer Richard P. Nespola /s/ DONALD E. KLUMB Chief Financial Officer and August 12, 2003 - ----------------------------- Treasurer Donald E. Klumb (Principal financial officer and principal accounting officer) Exhibit 31. Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 CERTIFICATIONS I, Richard P. Nespola, Chairman, President and Chief Executive Officer of The Management Network Group, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of The Management Network Group, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 12, 2003 By: /s/ Richard P. Nespola --------------------------------------- Chairman, President and Chief Executive Officer I, Donald E. Klumb, Chief Financial Officer and Treasurer of The Management Network Group, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of The Management Network Group, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 12, 2003 By: /s/ Donald E. Klumb --------------------------------------- Chief Financial Officer and Treasurer EXHIBIT 32. Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with this quarterly report on Form 10-Q of The Management Network Group, Inc., I, Richard P. Nespola, Chairman, President and Chief Executive Officer of the registrant certify that: 1. this quarterly report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. the information contained in this quarterly report fairly presents, in all material respects, the financial condition and results of operations of the registrant for and as of the end of such quarter. Date: August 12, 2003 By: /s/ Richard P. Nespola --------------------------------------- Chairman, President and Chief Executive Officer In connection with this quarterly report on Form 10-Q of The Management Network Group, Inc., I, Donald E. Klumb, Chief Financial Officer and Treasurer of the registrant certify that: 1. this quarterly report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. the information contained in this quarterly report fairly presents, in all material respects, the financial condition and results of operations of the registrant for and as of the end of such quarter. Date: August 12, 2003 By: /s/ Donald E. Klumb --------------------------------------- Chief Financial Officer and Treasurer A signed original of the written statement required by Section 906 has been provided to The Management Network Group, Inc. and will be retained by The Management Network Group, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. EX-31 3 form10q_62803-exh31.txt EXH. 31 Exhibit 31 Exhibit 31. Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 CERTIFICATIONS I, Richard P. Nespola, Chairman, President and Chief Executive Officer of The Management Network Group, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of The Management Network Group, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 12, 2003 By: /s/ Richard P. Nespola --------------------------------------- Chairman, President and Chief Executive Officer I, Donald E. Klumb, Chief Financial Officer and Treasurer of The Management Network Group, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of The Management Network Group, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 12, 2003 By: /s/ Donald E. Klumb --------------------------------------- Chief Financial Officer and Treasurer EX-32 4 form10q_62803-exh32.txt EXH. 32 Exhibit 32 EXHIBIT 32. Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with this quarterly report on Form 10-Q of The Management Network Group, Inc., I, Richard P. Nespola, Chairman, President and Chief Executive Officer of the registrant certify that: 1. this quarterly report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. the information contained in this quarterly report fairly presents, in all material respects, the financial condition and results of operations of the registrant for and as of the end of such quarter. Date: August 12, 2003 By: /s/ Richard P. Nespola --------------------------------------- Chairman, President and Chief Executive Officer In connection with this quarterly report on Form 10-Q of The Management Network Group, Inc., I, Donald E. Klumb, Chief Financial Officer and Treasurer of the registrant certify that: 1. this quarterly report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. the information contained in this quarterly report fairly presents, in all material respects, the financial condition and results of operations of the registrant for and as of the end of such quarter. Date: August 12, 2003 By: /s/ Donald E. Klumb --------------------------------------- Chief Financial Officer and Treasurer A signed original of the written statement required by Section 906 has been provided to The Management Network Group, Inc. and will be retained by The Management Network Group, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----