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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 1, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .
COMMISSION FILE NUMBER
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 NUMBER)
7300 COLLEGE BOULEVARD,
SUITE 302, OVERLAND PARK, KANSAS 66210
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (913) 345-9315
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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COMMON STOCK (.001 PAR VALUE) NASDAQ NATIONAL MARKET
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE.
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 [X] NO [ ]
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 Registrant's 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.
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, as of March 6, 2000, was approximately $167.3 million. Shares of
Common Stock held by each executive officer and director and by each person who
owns 5% or more of the outstanding Common Stock have been excluded in that such
persons may under certain circumstances be deemed to be affiliates. This
determination of executive officer or affiliate status is not necessarily a
conclusive determination for other purposes. As of March 6, 2000, the registrant
had 27,431,662 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, and
13) of this Annual Report on Form 10-K is hereby incorporated by reference from
the Company's Definitive 2000 Proxy Statement which will be filed with the
Securities and Exchange Commission within 120 days of the end of the Company's
fiscal year.
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THE MANAGEMENT NETWORK GROUP, INC.
FORM 10-K
TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business.................................................... 3
Item 2. Property.................................................... 11
Item 3. Legal Proceedings........................................... 12
Item 4. Submission of Matters to a Vote of Security Holders......... 12
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 13
Item 6. Selected Consolidated Financial Data........................ 14
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 15
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 20
Item 8. Consolidated Financial Statements........................... 20
PART III
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.................................... 37
Item 10. Directors and Executive Officers of the Registrant.......... 37
Item 11. Executive Compensation...................................... 39
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 39
Item 13. Certain Relationships and Related Transactions.............. 39
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 39
SIGNATURES............................................................ 40
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PART I
ITEM 1. BUSINESS
GENERAL
Founded in 1990, The Management Network Group, Inc. ("TMNG" or the
"Company") provides management consulting services to the global
telecommunications and e-business industries, including communications service
providers, technology companies and financial services firms in the United
States, Canada, Europe and other major international markets. TMNG provides
comprehensive solutions from initial, high-level strategic assessments of
clients' needs through improvements to operations. TMNG has consulting
experience with all major aspects of managing a telecommunications company, from
product launch through order entry, service provisioning and billing. The
Company offers a complete solution that addresses the business, information
technology and operational needs associated with all aspects of our clients'
requirements. TMNG works with telecommunications providers by delivering
business planning, management support, process development and operations and
e-business support, systems requirements, selection and implementation. TMNG
also utilizes knowledge of service providers' needs to help the software and
technology companies that serve the telecommunications industry to define
strategies, develop applications, respond to requests for proposals and
implement their solutions within the service provider environment. Finally, TMNG
facilitates the evaluation of proposed investments in telecommunications
companies and related technology companies by investment banking and private
equity firms by providing prospect evaluation, due diligence and post investment
support services.
The Company capitalizes on industry expertise and proprietary methodologies
to provide strategic, management and operational support to clients. TMNG's
proprietary methodologies are consulting guidelines and processes created and
updated by TMNG consultants based on their experience over many consulting
engagements. These methodologies help clients improve productivity, gain a
competitive advantage, reduce time to market and market entry risk, and increase
revenues and profits. TMNG's services are provided by highly experienced
consultants who average over ten years of industry experience. The Company has
worked with numerous global clients, focusing primarily on North America and
Europe. In 1998, consulting engagements in Europe represented 5.1% of total
revenues; for 1999, revenues from European engagements represented over 22.7% of
total revenues.
The Company maintains a unique technology- and vendor-neutral position to
make unbiased evaluations and recommendations that are based on a thorough
knowledge of each solution and each client's situation. Therefore, TMNG is able
to capitalize on extensive experience across complex multi-technology
telecommunications systems environments (front and back office) to provide the
most sound and practical recommendations to clients.
MARKET OVERVIEW
The demand for consulting services has been increasing in the last decade,
a trend that is expected to continue. The growth of the use of the Internet is
further spurring this demand as companies are seeking to improve their business
practices through internet-based communications solutions. As with other
businesses, telecommunications companies are increasingly turning to external
consulting firms to help them improve their business processes and enter new
markets as rapidly as possible. Factors such as deregulation and privatization,
mergers and acquisitions within the industry, and the pace of technological
change are driving these companies to seek the advice of outside experts to
supplement their own staff to implement their strategies.
The multiple forces affecting the telecommunications industry, including
global deregulation, have led to increased competition and complexity in the
market for all types of communications services. To gain or maintain a
competitive advantage, communications service providers and the technology and
financial firms that focus on the telecommunications industry must understand
the growing complexities and how to best take advantage of the market's
opportunities and challenges, including those driven by the rapid growth of e-
business. With this understanding, these companies must develop sound strategic
plans and implement
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effective solutions that best exploit the market's dynamics. To compete
effectively, companies must fully understand the enterprise-wide implications of
a proposed solution and must implement these solutions swiftly with the most
cost effective technologies, systems and processes.
Because the expertise needed by communications companies to address the
market's needs is typically outside their core competencies, they must either
recruit and employ experts or retain outside specialists. Due to the range of
expertise required and the time associated with hiring and training new
personnel, bringing expertise in-house is often not a viable option. When
retaining outside specialists, communications companies need experts that fully
understand the telecommunications industry and can provide timely and unbiased
advice and recommendations.
BUSINESS STRATEGY
The Company's objective is to establish itself as the telecommunications
consulting company of choice to communications service providers, technology
companies and financial services and investment banking firms. The following are
key strategies the company has adopted to pursue this objective.
- Expand geographic reach to serve clients' global needs. The Company plans
to continue expansion geographically to deliver services and solution
capabilities to client companies located around the world. By offering a
full range of professional services on a global basis, the company can
broaden market awareness about TMNG services and solutions to create new
revenue opportunities. In Europe, the competitive market expertise of
TMNG's U.S. consultants is a key factor for European companies facing the
business issues associated with deregulation and increased competition.
TMNG's expertise in Europe can also play a key role for U.S. companies
expanding their European business.
- Focus on supporting current target market's e-business needs through
TMNG.com business. Because communications service providers represent the
infrastructure of the Internet, the ability of these service providers to
build an infrastructure to meet the demand for increased Internet traffic
will be critical to their businesses. More specifically, the growth of
the Internet has also led to a greater demand for internet-based business
support services and the seamless integration of electronic services with
traditional means of interacting with customers. Through TMNG.com, the
Company combines telecommunications knowledge with developing e-business
expertise to help telecommunications service providers build the
infrastructure, systems, processes and services to address these
opportunities. As communications service providers begin to deploy their
application hosting strategies, TMNG.com will also address their
back-office requirements to support their application-based initiatives.
- Further develop and enhance the expandable business model for continued
growth. TMNG plans to further enhance the expandable business model to
accommodate anticipated need for consulting services generated by
industry growth. The key elements of the business model include
attracting and retaining high quality, experienced consultants and
creating business processes that can be duplicated worldwide. The Company
attracts high quality consultants with a broad range of experience and
knowledge within the telecommunications industry through aggressive
recruitment efforts, including focused external recruiting, in-house
recruiting specialists and consultant referral incentive programs. TMNG
retains consultants through a variety of programs, including a stock
option plan, competitive compensation packages, flexible employment model
and dynamic, challenging assignments at the forefront of the
telecommunications industry. TMNG has implemented a contingent employee
model to enable the Company to hire and retain consultants by providing
them with increased benefits. The model allows the Company to better
manage utilization and to minimize unbilled consultant time. To support
anticipated growth, TMNG creates business processes that can be used
worldwide in any consulting engagement. Toolsets provide TMNG consultants
with methodologies that they use to augment their experience and help
analyze and solve clients' problems. TMNG utilizes a network of eRooms to
serve as a knowledge base, enable consultant collaboration on engagements
and provide support information and updates of TMNG current toolsets and
releases of next generation tools. TMNG intends to leverage Internet
communication capabilities to retain a flexible, "virtual" structure.
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- Extending market leadership position and building the TMNG brand. TMNG
plans to expand the Company's leadership position in the
telecommunications consulting industry and to establish TMNG as the
consulting firm of choice for communications service providers and the
technology and banking companies that serve them. TMNG plans to
capitalize on extensive industry knowledge, strong client base, and
highly qualified and experienced professionals to help clients provide
more value-added services to their customer base. The Company has
aggressive marketing initiatives underway to continue building corporate
brand.
SERVICES
- Service Provider Consulting. The Company provides all types of carriers
and service providers with services ranging from high-level strategy
definition through process improvements to operations to help extend
their worldwide reach. TMNG analyzes market trends and dynamics for
telecommunications service providers and advises them on market evolution
and development. The Company enables service providers to define, refine
and implement strategies through business case development and market
launch planning. In addition, TMNG will analyze acquisition opportunities
to determine if they are complementary to strategies clients are
implementing.
- Product development strategic consulting. TMNG assists technology and
software companies analyze and focus their product and development
strategies and efforts to meet the needs of telecommunications service
providers. TMNG's knowledge of service provider requirements, along with
the Company's toolsets, provides significant benefit to technology
companies as they develop new products and applications.
- Market research and analysis. TMNG assists technology and software
companies analyze market trends and dynamics to improve their ability to
respond to the requirements of changing and evolving markets.
- Responses to requests for proposals. TMNG assists technology, software
and consulting companies in responding to requests for proposals that
they receive from service providers and others. TMNG's expertise enables
the Company to ascertain the most critical elements of a request for
proposal and to help clients prepare responses.
- Implementation support. For global consulting firms that have engagements
which require specialized telecommunications expertise, TMNG serves as
the telecommunications experts. In addition, TMNG supports software
clients by assisting with program management for software implementation.
These assignments capitalize on TMNG's extensive understanding of both the
software solution and the service provider communities.
- Evaluation. TMNG assists investment banking and financial services firms
with prospect validation and due diligence in connection with planned
investments and other transactions. TMNG's broad knowledge of the
industry and subject matter expertise speed up the evaluation process.
TMNG's prospect validation services include candidate validation,
business plan development, financial modeling and contract development
and negotiation. TMNG's consultants and toolsets also facilitate rapid
development and execution when conducting due diligence. TMNG's services
in this area include business plan evaluation and validation, financial
model analysis, product and evaluation, benchmarking, organization and
business process validation, systems evaluation, and network plan
reviews.
COMPETITION
The market for telecommunications consulting services is highly fragmented
and changing rapidly. TMNG faces competition from major business consulting
firms, the consulting arms of accounting and other professional services
organizations and customers' internal resources. These competitors are major
consulting firms that provide a broad range of services to companies in many
industries, including the telecommunications industry. Many of these competitors
have significantly greater financial, technical and marketing resources and
greater name recognition than TMNG.
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The Company has faced, and expects to continue to face, additional
competition from new entrants into the communications markets. The Company has
also experienced increased price competition, particularly from larger firms
that have the financial resources to aggressively price engagements that they
have a particular interest in obtaining. Increased competition could result in
price reductions, fewer client projects, underutilization of consultants,
reduced operating margins, and loss of market share.
The principal competitive factors in the market include responsiveness to
the needs of customers, quality and reliability of consultants, price, project
management capability and technical expertise. The Company's ability to compete
depends in part on performance, a focused service offering formula, the
price/value formula of TMNG service offerings, responsiveness to customer needs
and the ability to hire, retain, and motivate key personnel.
EMPLOYEES
TMNG's ability to recruit and retain experienced, highly-qualified and
highly-motivated personnel has contributed greatly to the Company's success and
will be critical in the future. The Company offers a flexible recruiting model
that enhances the ability to attract consultants and to effectively manage
utilization. TMNG's consultants may work as employees, independent contractors
or as contingent employees. Contingent employees will, unlike independent
contractors, receive company-paid medical insurance, vacation and other employee
benefits. Instead of receiving a regular salary, however, contingent employees
will only be paid for time spent working on consulting projects for customers or
working on internal projects. Generally, TMNG will offer contingent employment
to independent contractors that are regularly involved in consulting projects,
have a broad range of expertise and are highly utilized by the Company. TMNG's
current independent contractor base also includes individuals with specialized
expertise in discrete areas, and TMNG typically deploys these individuals only
when their unique expertise is necessary.
As of January 1, 2000, TMNG had approximately 275 consultants. Of these, 92
were full-time employees and approximately 90 were working on engagements for
TMNG as independent contractors. The remaining consultants are available to work
on engagements as needed. In addition to the consultants, TMNG has a
headquarters staff of 19, which includes the Chief Executive Officer, Chief
Financial Officer and other administrative personnel.
MAJOR CUSTOMERS
As of January 1, 2000 TMNG has provided services to approximately 200
customers. The Company depends on a few key customers for a significant portion
of revenues. In fiscal year 1998, revenues from Williams Communications Group,
Bell Atlantic and e.spire Communications, each accounted for more than ten
percent of revenues. For fiscal year 1999, revenues from Williams Communications
Group and diAx each accounted for more than ten percent of revenues. TMNG
generally negotiates discounted pricing for large projects with long-term
customers. Because TMNG's clients typically engage services on a project basis,
their needs for services vary substantially from period to period. TMNG
continues to diversify the Company's customer base and expand the portion of
revenues, however, the Company anticipates that operating results will continue
to depend on volume services to a relatively small number of communication
service providers and technology vendors.
INTELLECTUAL PROPERTY
TMNG's success is dependent, in part, upon proprietary processes and
methodologies, and the Company relies upon a combination of copyright, trade
secret, and trademark law to protect intellectual property. The Company has
obtained federal registration for two trademarks in the United States and has
filed applications to register eight other marks in the United States. It is
possible that third parties may challenge TMNG trademark applications.
The Company does not have any patent protection for the proprietary
methodologies used by TMNG consultants. TMNG does not currently anticipate
applying for patent protection for these toolsets and methodologies.
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SEASONALITY
In the past, the Company has 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. The Company may in the future
experience fluctuations in revenue in the fourth quarter as well as summer and
other vacation periods as the Company expands internationally.
RISK FACTORS
The following important factors, among others, could cause actual results
to differ materially from those contained in forward-looking statements made in
this Annual Report on Form 10-K or presented elsewhere by management from time
to time.
TMNG FOCUSES EXCLUSIVELY ON SERVING THE TELECOMMUNICATIONS INDUSTRY AND
THEREFORE CHANGES IN THIS INDUSTRY COULD REDUCE THE CUSTOMER BASE OR CAUSE
CUSTOMERS TO USE INTERNAL RESOURCES
TMNG derives all of revenues from consulting engagements within the
telecommunications industry. Recent growth has arisen from business
opportunities presented by industry trends that include deregulation, increased
competition, technological advances, the growth of e-business and the
convergence of service offerings.
If these trends change, the demand for telecommunications consulting work
will likely decrease. In addition, the telecommunications industry is in a
period of consolidation, which could reduce the client base, eliminate future
opportunities or create conflicts of interest among clients. Additionally,
current and future economic pressures in the industry may cause
telecommunications companies to use internal resources in lieu of outside
consultants. As a result, the customer base and revenues may decline.
TMNG IS DEPENDENT ON A LIMITED NUMBER OF LARGE CUSTOMERS FOR A MAJOR PORTION OF
REVENUES, AND THE LOSS OF A MAJOR CUSTOMER COULD REDUCE REVENUES AND HARM THE
BUSINESS
A significant portion of revenues are derived from a relatively limited
number of clients. For example, during fiscal year 1997 and fiscal year 1998,
revenues from the ten most significant clients accounted for approximately 78.4%
and 76.0% of revenues, respectively. In fiscal year 1999, Williams
Communications Group and diAx each accounted for more than ten percent of
revenues. The services required by any one client may be affected by industry
consolidation, technological developments, economic slowdown or internal budget
constraints. As a result, the volume of work performed for specific clients
varies from period to period, and a major client in one period may not use TMNG
services in a subsequent period.
REVENUES AND OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY FROM QUARTER TO
QUARTER, AND FLUCTUATIONS IN OPERATING RESULTS COULD CAUSE THE STOCK PRICE TO
DECLINE
Revenue and operating results may vary significantly from
quarter-to-quarter due to a number of factors. In future quarters, operating
results may be below the expectations of public market analysts or investors,
and the price of common stock may decline.
Because a significant portion of expenses are relatively fixed, a variation
in the number of client assignments or the timing of the initiation or the
completion of client assignments may cause significant variations in operating
results from quarter to quarter and could result in losses. To the extent the
addition of consultant employees is not followed by corresponding increases in
revenues, additional expenses would be incurred that would not be matched by
corresponding revenues. Therefore, profitability would decline and TMNG could
potentially experience losses. In addition, the stock price would likely
decline.
THE COMPANY MUST CONTINUE TO ATTRACT AND RETAIN QUALITY CONSULTANTS, AND
INABILITY TO DO SO WOULD IMPAIR THE ABILITY TO SERVICE EXISTING ENGAGEMENTS OR
UNDERTAKE NEW ENGAGEMENTS, RESULTING IN A DECLINE IN REVENUES AND INCOME.
TMNG must attract a significant number of new consultants to implement
growth plans. The number of potential consultants that meet the Company's hiring
criteria is relatively small, and there is significant
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competition for these consultants from direct competitors and others in the
telecommunications industry. Competition for these consultants may result in
significant increases in costs to retain the consultants, which could reduce
margins and profitability. If the Company is unable to attract and retain
consultants, revenues and profitability would decline.
THE MARKET IN WHICH TMNG COMPETES IS INTENSELY COMPETITIVE AND ACTIONS BY
COMPETITORS COULD RENDER TMNG SERVICES LESS COMPETITIVE CAUSING REVENUES AND
INCOME TO DECLINE
The market for consulting services to telecommunications companies is
intensely competitive, highly fragmented and subject to rapid change.
Competitors include general management consulting firms, the consulting
practices of "Big Five" accounting firms, most of which have practice groups
focused on the telecommunications industry and local or regional firms
specializing in telecommunications services. Some of these competitors have also
formed strategic alliances with telecommunications and technology companies
serving the industry.
If TMNG is unable to compete effectively, the Company's market position,
and therefore revenues and profitability, would decline.
TMNG HAS EXPERIENCED SIGNIFICANT GROWTH IN THE BUSINESS IN RECENT PERIODS, AND
IF THE COMPANY IS UNABLE TO MANAGE THIS GROWTH, THE OPERATIONAL INFRASTRUCTURE
MAY NOT BE ABLE TO SUPPORT GROWTH
TMNG is currently experiencing a period of rapid growth that may strain
managerial and operational resources. To support growth, the organizational
infrastructure must grow accordingly.
If the Company fails to address these issues, the operational
infrastructure may be insufficient to support the levels of business activity.
In this event, TMNG could experience disruptions in business and declining
revenues or profitability.
IF THE COMPANY DOES NOT EFFECTIVELY MANAGE THE CONVERSION OF INDEPENDENT
CONTRACTORS TO EMPLOYEES, THE COMPANY COULD INCUR UNANTICIPATED COSTS WHICH
WOULD HARM THE FINANCIAL PERFORMANCE
As independent contractors are converted to consultant employees, TMNG will
incur additional fixed costs for each such employee that the Company does not
incur when retained as an independent contractor. To effectively manage these
additional fixed costs, TMNG will need to continuously improve utilization
management and minimize unbilled employee time. If the Company fails to
effectively manage this transition, the Company could incur additional costs due
to underutilization of full-time employees as well as other unanticipated costs.
TMNG MUST CONTINUALLY ENHANCE SERVICES TO MEET THE CHANGING NEEDS OF CUSTOMERS
OR THE COMPANY MAY LOSE FUTURE BUSINESS TO COMPETITORS
The future success of the Company will depend upon the ability to enhance
existing services and to introduce new services to meet the requirements of
customers in a rapidly developing and evolving market. Present or future
services may not satisfy the needs of the telecommunications market. If the
Company is unable to anticipate or respond adequately to customer needs, lost
business may result and the financial performance will suffer.
PLANS FOR INTERNATIONAL EXPANSION MAY NOT SUCCEED, WHICH WOULD HARM REVENUES AND
PROFITABILITY
Future revenues depend to a large extent on expansion into international
markets. International operations might not succeed for a number of reasons,
including difficulty in staffing, competition, and issues relating to
uncertainties of laws and enforcement relating to the protection of intellectual
property; and unexpected changes in trading policies and regulatory
requirements.
Accordingly, TMNG may not be able to successfully execute the business plan
in foreign markets. If TMNG is unable to achieve anticipated levels of revenues
from international operations, revenues and profitability would decline.
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IF INTERNATIONAL BUSINESS VOLUMES INCREASE, TMNG WILL BE EXPOSED TO GREATER
FOREIGN CURRENCY EXCHANGE RISKS, WHICH COULD RESULT IN INCREASED EXPENSES AND
DECLINING PROFITABILITY
The percentage of revenues comprised of international engagements increased
significantly in fiscal year 1999 and may continue to increase. Some
international engagements are denominated in the local currency of the clients.
Expenses incurred in delivering these services, consisting primarily of
consultant compensation, are typically denominated in U.S. dollars. To the
extent that the value of a currency in which billings are denominated decreases
in relation to the U.S. dollar or another currency in which expenses are
denominated, operating results and financial condition could be harmed.
TMNG.COM BUSINESS IS EXPECTED TO DRIVE FUTURE REVENUES AND IF THIS DOES NOT
HAPPEN REVENUES AND PROFITABILITY WOULD DECLINE
A significant part of future growth is dependent upon the ability to grow
TMNG.com business which is focused on providing consulting services to help
telecommunications companies build the infrastructure, systems and processes
needed to support e-business. A base of consultants with internet-based skills
is needed since the skill sets required for TMNG.com services are different from
those used in the traditional lines of business. The continuously evolving
nature of the internet makes it very difficult to establish e-business
expertise. If TMNG fails to adequately develop internet and e-business skills,
the Company may not be able to capitalize on the growth opportunities presented
by these sectors, and revenues and profitability would decline.
TMNG IS DEPENDENT ON A LIMITED NUMBER OF KEY PERSONNEL, AND THE LOSS OF THESE
INDIVIDUALS COULD HARM THE COMPANY'S COMPETITIVE POSITION AND FINANCIAL
PERFORMANCE
The business consists primarily of the delivery of professional services
and, accordingly, the Company's success depends upon the efforts, abilities,
business generation capabilities and project execution of the executive officers
and key consultants. The loss of any executive officer or key consultant or
group of consultants, or the failure of these individuals to generate business
or otherwise perform at or above historical levels could result in a loss of
customers or revenues, and could therefore harm the Company's financial
performance.
IF TMNG FAILS TO DEVELOP LONG-TERM RELATIONSHIPS WITH CUSTOMERS, THE COMPANY'S
SUCCESS WOULD BE JEOPARDIZED
A substantial majority of business is derived from repeat customers. Future
success depends to a significant extent on the ability to develop long-term
relationships with successful telecommunications providers who will give new and
repeat business. Inability to build long-term customer relations would result in
declines in revenues and profitability.
A LARGE NUMBER OF PERSONNEL ARE CLASSIFIED AS INDEPENDENT CONTRACTORS FOR TAX
AND EMPLOYMENT LAW PURPOSES, AND IF THESE PERSONNEL WERE TO BE RECLASSIFIED AS
EMPLOYEES, TMNG COULD BE SUBJECT TO BACK TAXES, INTEREST, PENALTIES AND OTHER
LEGAL CLAIMS
TMNG provides the substantial majority of consulting services through
independent contractors and, therefore, does not pay federal or state employment
taxes or withhold income taxes for such persons. In the future, the IRS and
state authorities may challenge the status of consultants as independent
contractors. Independent contractors may also initiate proceedings to seek
reclassification as employees under state law. In either case, if persons
engaged by TMNG as independent contractors are determined to be employees by the
IRS or any state taxation department, the Company would be required to pay
applicable federal and state employment taxes and withhold income taxes with
respect to such persons and could become liable for amounts required to be paid
or withheld in prior periods along with penalties. Any challenge by the IRS or
state authorities or individuals resulting in a determination that a substantial
number of such persons are employees could subject the Company to liability for
back taxes, interest and penalties, which would harm profitability.
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TMNG COULD BE SUBJECT TO CLAIMS FOR PROFESSIONAL LIABILITY, WHICH COULD HARM
FINANCIAL PERFORMANCE
As a provider of professional services, TMNG faces the risk of liability
claims. A liability claim brought against the Company could harm business. TMNG
may also be subject to claims by clients for the actions of consultants and
employees arising from damages to clients' business or otherwise.
In particular, TMNG is currently a defendant in litigation brought by the
bankruptcy trustee of a former client. This litigation seeks to recover $320,000
in consulting fees paid by the former client and also seeks to recover at least
$1.85 million for breach of contract, breach of fiduciary duties and negligence.
THE MARKET PRICE OF TMNG COMMON STOCK MAY BE VOLATILE, AND INVESTORS MAY
EXPERIENCE INVESTMENT LOSSES
The market price of TMNG common stock may be volatile. The Company's stock
price could decline or fluctuate in response to a variety of factors, including:
- variations in quarterly operating results;
- announcements of technological innovations that render talent outdated;
- trends in the telecommunications industry;
- acquisitions or strategic alliances by the Company or others in the
industry;
- failure to achieve financial analysts' or other estimates of results of
operations for any fiscal period;
- changes in estimates of performance or recommendations by financial
analysts; and
- market conditions in the telecommunications industry and the economy as a
whole.
In addition, the stock market experiences significant price and volume
fluctuations. These fluctuations particularly affect the market prices of the
securities of many high technology companies. These broad market fluctuations
could harm the market price of TMNG common stock.
TMNG MAY MAKE ACQUISITIONS, WHICH ENTAIL RISKS THAT COULD HARM THE FINANCIAL
PERFORMANCE OR STOCK PRICE
As part of TMNG's business strategy, the Company may make acquisitions. Any
future acquisition would be accompanied by the risks commonly encountered in
acquisitions. These risks include:
- the difficulty associated with assimilating the personnel and operations
of acquired companies;
- the potential disruption of existing business; and
- adverse effects on the financial statements, including one-time
write-offs, ongoing charges for amortization of goodwill and assumption
of liabilities of acquired businesses.
If the Company makes acquisitions and any of these problems materialize,
these acquisitions could negatively affect operations, profitability and
financial operations.
TMNG'S INABILITY TO PROTECT INTELLECTUAL PROPERTY COULD HARM THE COMPANY'S
COMPETITIVE POSITION AND FINANCIAL PERFORMANCE
Despite efforts to protect proprietary rights from unauthorized use or
disclosure, parties, including former employees or consultants, may attempt to
disclose, obtain or use TMNG solutions or technologies. The steps TMNG have
taken may not prevent misappropriation of solutions or technologies,
particularly in foreign countries where laws or law enforcement practices may
not protect proprietary rights as fully as in the United States. Unauthorized
disclosure of proprietary information could make TMNG solutions and
methodologies available to others and harm the Company's competitive position.
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PRINCIPAL STOCKHOLDERS, EXECUTIVE OFFICERS AND DIRECTORS WILL RETAIN SUBSTANTIAL
CONTROL OVER TMNG AND MAY MAKE DECISIONS THAT ARE NOT IN THE BEST INTEREST OF
OTHER STOCKHOLDERS
Executive officers, directors and stockholders owning more than five
percent of outstanding common stock (and their affiliates) own approximately
79.5% of TMNG outstanding common stock. As a result, such persons, acting
together, have the ability to substantially influence all matters submitted to
the stockholders for approval (including the election and removal of directors
and any merger, consolidation or sale of all or substantially all assets) and to
control management and affairs. Accordingly, concentration of ownership of TMNG
common stock may have the effect of delaying, deferring or preventing a change
in control, impeding a merger, consolidation, takeover or other business
combination involving the Company or discouraging a potential acquirer from
making a tender offer or otherwise attempting to obtain control of TMNG, even if
such a transaction would be beneficial to other stockholders.
TMNG USED TO BE TAXED UNDER SUBCHAPTER "S" OF THE INTERNAL REVENUE CODE AND
CLAIMS OF TAXING AUTHORITIES RELATED TO PRIOR SUBCHAPTER "S" CORPORATION STATUS
COULD HARM THE COMPANY
From 1993 through 1998, TMNG was taxed as a "pass-through" entity under
subchapter "S" of the Internal Revenue Code. Since February 1998, the Company
has been taxed under subchapter "C" of the Internal Revenue Code, which is
applicable to most corporations and treats the corporation as an entity that is
separate and distinct from its stockholders. If tax returns for the years in
which TMNG was a subchapter "S" corporation were to be audited by the Internal
Revenue Service or another taxing authority and an adverse determination was
made during the audit, the Company could be obligated to pay back taxes,
interest and penalties. The stockholders of the predecessor entity agreed, at
the time of the acquisition, to indemnify TMNG against negative tax consequences
arising from the prior "S" corporation status. This indemnity is secured by
escrowed funds in an escrow that terminates in February 2001. Accordingly, this
indemnity may not be sufficient to cover claims made by the IRS or other taxing
authorities, and any such claims could result in additional costs and harm the
financial performance.
THE COMPANY MAY SEEK TO RAISE ADDITIONAL FUNDS, AND ADDITIONAL FUNDING MAY BE
DILUTIVE TO STOCKHOLDERS OR IMPOSE OPERATIONAL RESTRICTIONS
Any additional equity financing may be dilutive to stockholders and debt
financing, if available, may involve restrictive covenants, which may limit the
operating flexibility with respect to certain business matters. If additional
funds are raised through the issuance of equity securities, the percentage
ownership of stockholders will be reduced. These stockholders may experience
additional dilution in net book value per share and any additional equity
securities may have rights, preferences and privileges senior to those of the
holders of TMNG common stock.
ANTI-TAKEOVER PROVISIONS AND TMNG'S RIGHT TO ISSUE PREFERRED STOCK COULD MAKE A
THIRD PARTY ACQUISITION DIFFICULT
TMNG's certificate of incorporation and bylaws and anti-takeover provisions
of Delaware law could make it more difficult for a third party to acquire
control, even if a change in control would be beneficial to stockholders. In
addition, the bylaws provide for a classified board, with board members serving
staggered three-year terms. The Delaware anti-takeover provisions and the
existence of a classified board could make it more difficult for a third party
to acquire the Company.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS
For information about foreign and domestic operations, see Note 3 of Notes
to Consolidated Financial Statements.
ITEM 2. PROPERTY
The Company's principal executive offices are located in a 3,357 square
foot facility in Overland Park, Kansas. This facility houses the executive,
corporate and administrative offices and is under a lease which
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expires in July 2003. TMNG is currently in the process of expanding this
facility and believe that the facility, once expanded will be sufficient to meet
corporate facilities needs for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in legal proceedings and litigation arising in the
ordinary course of business. The Company believes the outcome of all current
proceedings, claims and litigation will not have a material adverse effect on
the Company's financial position or results of operations when resolved in a
future period.
In June 1998, the bankruptcy trustee of a former client, Communications
Network Corporation, sued TMNG in the U.S. Bankruptcy Court in New York seeking
recovery of $160,000 in 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 the business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of TMNG was held on October 15, 1999.
The following is a brief description of each matter voted upon at the meeting
and the number of votes cast for, against or withheld, as well the number of
abstentions as to each matter.
(a) TMNG stockholders elected the following persons as directors of TMNG.
For all persons, 45.3 million shares were voted in favor and no votes
were withheld.
Grant G. Behrman
Richard P. Nespola
William M. Matthes
Mario M. Rosati
Dennis G. Sisco
Roy A. Wilkens
Micky K. Woo
(b) TMNG stockholders approved an amendment to the Company's Certificate of
Incorporation to effect a 1-for-2 reverse stock split of the
outstanding common stock. There were 45.3 million votes in favor of,
and 0 votes cast against the proposal.
(c) TMNG stockholders approved the adoption of the Company's 1999 Employee
Stock Purchase Plan and the initial reservation of 200,000 shares of
common stock for issuance under this plan. There were 45.3 million
votes in favor of and 0 votes cast against the proposal.
(d) TMNG stockholders approved various amendments to the 1998 Equity
Incentive Plan, including amendments to increase the number of shares
reserved for issuance thereunder and to restate the plan to combine it
with the 1998 consultant equity incentive plan. There were 45.3 million
votes in favor of and 0 votes cast against the proposal.
(e) TMNG stockholders ratified the appointment of Deloitte & Touche LLP as
independent auditors of TMNG for the fiscal year ending December 31,
1999. There were 45.3 million votes in favor of and 0 votes cast
against the proposal.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On October 29, 1999, the Company issued a warrant to purchase 500,000
shares of Common Stock at an exercise price of $2.00 per share. The exercise
period is between November 29, 1999 and October 29, 2004.
Effective November 8, 1999 the Company amended its Certificate of
Incorporation to give effect for a 1-for-2 reverse stock split for all issued
and outstanding shares of voting and non-voting Common Stock. All issued and
outstanding share and per share data has been retroactively adjusted to reflect
this reverse split.
On November 22, 1999, the Securities and Exchange Commission declared
TMNG's Registration Statement on Form S-1 (File No. 333-87383) effective. On
November 23, 1999, TMNG closed its offering of an aggregate of 4,615,000 shares
of TMNG Common Stock at an aggregate offering price of $78.5 million. The
managing underwriters for the offering were Hambrecht & Quist, Robertson
Stephens, Salomon Smith Barney and Jefferies & Company, Inc. Net proceeds to
TMNG, after deducting underwriting discounts and commissions of $5.5 million and
offering expenses of $1.5 were $71.5 million. On November 29, 1999 TMNG used
$22.3 million of the proceeds from its initial public offering to repay all
indebtedness. The remainder of the proceeds will be used for working capital,
general corporate purposes and as possible consideration for acquisitions.
During 1999, 231,169 unregistered shares of the TMNG's Common Stock were
issued upon exercise of stock options granted under TMNG's 1998 Equity Incentive
Plan. For the total number exercised, 131,169, 75,000 and 25,000 were exercised
at the price per share of $1.48, $2.00 and $4.00, respectively. Additionally,
during 1999 71,201 shares of unregistered Common Stock were issued to certain
employees under TMNG's quarterly bonus program.
TMNG's Common Stock is quoted on the Nasdaq National Market under the
symbol "TMNG". The high and low closing price per share for the Common Stock for
the fiscal year ending January 1, 2000 for the fourth quarter was $33.75 and
$26.31, respectively. As of March 6, 2000, the closing price of Common Stock was
$29.75 per share. At such date, there were approximately 1944 holders of record
of the Company's 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
therefor, subject to any preferential dividend rights of outstanding Preferred
Stock. To date, TMNG has not paid any cash dividends on its Common Stock and
does not expect to declare or pay any cash or other dividends in the foreseeable
future.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below has been derived
from the Company's consolidated financial statements. The data presented below
should be read in conjunction with Item 7. -- Management's Discussion and
Analysis of Financial Condition and Results of Operations, Item 8. --
Consolidated Financial Statements and the notes thereto and other financial
information appearing elsewhere in this Annual Report on Form 10-K.
FISCAL YEAR
-----------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues......................................... $ 7,299 $17,279 $20,184 $32,103 $50,322
Cost of services:
Direct cost of services........................ 4,303 9,648 11,384 17,411 26,109
Equity related charges......................... 239 2,780
------- ------- ------- ------- -------
Total cost of services................. 4,303 9,648 11,384 17,650 28,889
------- ------- ------- ------- -------
Gross profit..................................... 2,996 7,631 8,800 14,453 21,433
Operating expenses:
Selling, general and administrative expenses... 1,242 2,798 3,280 6,158 9,777
Equity related charges......................... 22 1,998
------- ------- ------- ------- -------
Total operating expenses............... 1,242 2,798 3,280 6,180 11,775
------- ------- ------- ------- -------
Income from operations........................... 1,754 4,833 5,520 8,273 9,658
Other income (expense):
Interest income................................ 6 16 6 18 277
Interest expense............................... (2) (136) (30) (2,054) (1,998)
Other, net..................................... 8 88 (68)
------- ------- ------- ------- -------
Total other income (expense)........... 4 (120) (16) (1,948) (1,789)
Income before provision for income taxes and
extraordinary item............................. 1,758 4,713 5,504 6,325 7,869
Provision for income taxes....................... 3,282 3,208
------- ------- ------- ------- -------
Income before extraordinary item................. $ 1,758 $ 4,713 $ 5,504 $ 3,043 $ 4,661
Extraordinary item............................... (200)
------- ------- ------- ------- -------
Net income....................................... $ 1,758 $ 4,713 $ 5,504 $ 3,043 $ 4,461
------- ------- ------- ------- -------
Net income before extraordinary item per common
share
Basic.......................................... $ 0.08 $ 0.21 $ 0.24 $ 0.14 $ 0.20
======= ======= ======= ======= =======
Diluted........................................ $ 0.08 $ 0.21 $ 0.24 $ 0.13 $ 0.20
======= ======= ======= ======= =======
Net income per common share
Basic.......................................... $ 0.08 $ 0.21 $ 0.24 $ 0.14 $ 0.19
======= ======= ======= ======= =======
Diluted........................................ $ 0.08 $ 0.21 $ 0.24 $ 0.13 $ 0.19
======= ======= ======= ======= =======
Weighted average common shares outstanding
Basic.......................................... 22,500 22,500 22,500 22,500 23,056
======= ======= ======= ======= =======
Diluted........................................ 22,500 22,500 22,500 22,944 23,807
======= ======= ======= ======= =======
Pro forma provision for income taxes............. $ 703 $ 1,885 $ 2,202 $ 2,530
======= ======= ======= =======
Pro forma net income............................. $ 1,055 $ 2,828 $ 3,302 $ 3,795
======= ======= ======= =======
"S" corporation distributions.................... $ 1,450 $ 6,095 $ 2,600 $ 4,664
======= ======= ======= =======
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FISCAL YEAR ENDED
---------------------------------------------
1995 1996 1997 1998 1999
------ ------ ------ -------- -------
CONSOLIDATED BALANCE SHEET DATA:
Net working capital................................ $2,809 $1,744 $4,689 $ 6,025 $61,419
Total assets....................................... 3,443 4,121 5,483 11,006 67,382
Total debt (including current debt)................ 26,017
Total Stockholders' Equity (deficiency in
assets).......................................... $2,809 $1,743 $4,709 $(18,271) $63,437
Before February 12, 1998, the Company was a subchapter "S" corporation and,
accordingly, federal and state income taxes were paid at the stockholder level
only. Upon consummation of the February 1998 leveraged recapitalization, the
Company terminated its subchapter "S" corporation status and, accordingly became
subject to federal and state income taxes. The pro forma income statement
information reflects adjustments to historical net income as if the Company had
not elected subchapter "S" corporation status for federal and state income tax
purposes.
On November 22, 1999, the Securities and Exchange Commission declared
TMNG's Registration Statement on Form S-1 (File No. 333-87383) effective. On
November 23, 1999, TMNG closed its offering of an aggregate of 4,615,000 shares
of TMNG Common Stock at an aggregate offering price of $78.5 million. Net
proceeds to TMNG, after deducting underwriting discounts and commissions of $5.5
million and offering expenses of $1.5 were $71.5 million.
On November 29, 1999 TMNG used $22.3 million of the proceeds from its
initial public offering to repay all indebtedness.
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements contained herein may be deemed to be forward-looking
statements as defined in the Safe Harbor Provisions of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements involve known and
unknown risks and uncertainties, which may cause the Company's actual results in
future periods or plans for future periods to differ materially from what is
currently anticipated. Those risks include, among others, general competitive
factors, the Company's ability to successful complete and integrate its
acquisitions and to implement operational improvements in its acquired
businesses, the seasonality and episodic nature of the Company's business and
other risks and uncertainties detailed from time to time in the Company's
filings with the Securities and Exchange Commission. Other factors and
assumptions not identified above were also involved in the derivation of these
forward-looking statements, and the failure of such other assumptions to be
realized, as well as other factors, may also cause actual results to differ
materially from those projected. The Company assumes no obligation to update
these forward-looking statements to reflect actual results, changes in
assumptions or changes in other factors affecting such forward-looking
statements.
The following information should be read in connection with the information
contained in the Consolidated Financial Statements and notes thereto appearing
elsewhere in this Annual Report on Form 10-K. This Annual Report on Form 10-K
contains forward-looking statements that involve risks and uncertainties. The
Company's actual results may differ materially from the results discussed in the
forward-looking statements (See Item 1. Business).
OVERVIEW
Beginning with fiscal year 1998, TMNG switched to a four week -- four
week -- five week quarterly accounting system in which each quarter is 13 weeks
and ends on a Saturday. As a result of this change, the fiscal year end changed
from being December 31 to being the Saturday which is 13 weeks from the end of
the third fiscal quarter. Fiscal years 1999 and 1998 therefore ended on January
1, 2000 and January 2, 1999, respectively. The words "fiscal year" refer to the
fiscal year most closely coinciding with the related calendar year.
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Revenues consist of consulting fees for professional services and related
expense reimbursements. Substantially all consulting services are contracted on
a time and materials basis not to exceed a negotiated contract price.
Substantially all revenues are recognized in the period in which the service is
performed. Generally a client relationship begins with a short-term engagement
utilizing a few consultants. TMNG's 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. TMNG anticipates that the
Company will continue to do so in the future. Because TMNG is a consulting
company, the Company experiences fluctuations in revenues derived from clients
during the course of a project lifecycle. As a result, the volume of work
performed for specific clients varies from period to period and a major client
from one period may not use TMNG 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, the Company must re-deploy
professional service personnel as any resulting unbillable time could harm
margins.
Cost of services consists primarily of fees paid to independent contractors
and client-related compensation for consultants who are employees as well as
equity related non-cash charges incurred in connection with the grants of equity
securities primarily to consultants. Employee compensation includes certain
unbillable time, training, vacation time, benefits and payroll taxes. Annual
gross margins have ranged from 41.0% to 45.0% during the period from 1995 to
1999. Margins are primarily impacted by the type of consulting services
provided, the size of service contracts and negotiated volume discounts, changes
in TMNG pricing policies and those of competitors, utilization rates of
consultants and independent contractors; and employee and independent contractor
costs associated with a competitive labor market.
Operating expenses include selling, general and administrative expenses as
well as equity related non-cash charges incurred in connection with the grants
of equity securities primarily to partners, principals and certain senior
executives. Sales and marketing expenses consist primarily of personnel and
related costs for direct client marketing efforts and marketing staff. The
Company primarily uses a relationship sales model in which partners, principals
and consultants generate revenues. TMNG takes these revenue generating
activities into account when determining these individuals' quarterly bonus
compensation, which is generally recorded as sales and marketing expense. Other
expenditures include costs associated with marketing materials, trade shows and
advertising. To increase market awareness of the Company, TMNG intends to
continue to expand the direct and indirect sales efforts substantially, both
domestically and internationally.
RESULTS OF OPERATIONS
FISCAL 1999 COMPARED TO FISCAL 1998
Revenues
Revenues increased 56.7% to $50.3 million for fiscal year 1999 from $32.1
million for fiscal year 1998. The increase was primarily attributable to a net
increase in consulting services. The increase in consulting services was due
primarily to a significant increase in services provided to a major customer,
which was offset in part by negotiated volume discounts. Fiscal year 1999
revenues included revenues from services provided to one large customer, which
accounted for 39.6% of revenues during that period. International revenue
expanded to 27.7% of revenues in fiscal year 1999 compared to 16.2% for fiscal
year 1998, primarily due to an increase in European business.
Cost of Services
Direct cost of services increased to $26.1 million for fiscal year 1999
from $17.4 million for fiscal year 1998. Direct cost of services as a percent of
revenue decreased from 54.2% for fiscal year 1998 to 51.9% for fiscal year 1999.
Direct gross margins improved because the consultant mix changed to include more
employees in fiscal year 1999 compared to fiscal year 1998. A greater portion of
full-time employees at a relatively constant utilization rate tends to improve
gross margins because of their overall lower fixed salary compared to the higher
variable costs paid to independent contractors. The margin improvement provided
by
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increasing the full-time employee base was slightly offset by discounted
customer pricing associated with large engagements.
Non-cash stock based compensation charges of $2.8 million and $239,000 for
fiscal year 1999 and fiscal year 1998, respectively, were recorded in connection
with the issuance of stock options to employees and non-employee consultants.
These charges reduced gross margin by 5.5% in fiscal year 1999.
Operating Expenses
Selling, general and administrative expenses increased to $9.8 million for
fiscal year 1999 from $6.2 million for fiscal year 1998. Selling, general and
administrative expense as a percentage of revenue increased to 19.4% for fiscal
year 1999 from 19.2% for fiscal year 1998. The Company incurred an increase in
marketing costs primarily as a result of an increase in sales bonuses associated
with implementation of a revised incentive program for consultants and increased
revenues for fiscal year 1999. TMNG incurred an increase in selling, general and
administrative expense primarily due to the personnel and facility costs
associated with opening a new corporate office in the third quarter of fiscal
year 1998 and increased administrative staffing to manage and support the growth
of the organization. TMNG also hired managing directors to lead the European and
Canadian subsidiaries at the beginning of fiscal year 1999. In addition, the
Company established reserves of $160,000 for a potential claim brought against
TMNG by a trustee in bankruptcy for a former client.
Non-cash stock based compensation charges of $2.0 million and $22,000 for
fiscal year 1999 and fiscal year 1998, respectively, were recorded in connection
with the issuance of stock options to partners, principals and certain senior
executives and non-employee directors. These charges increased operating
expenses as a percentage of revenue by 4.0% in fiscal year 1999.
Other Income and Expenses
Interest expense decreased to $2.0 million for fiscal year 1999, compared
to $2.1 million for fiscal year 1998. Interest expense primarily related to
$24.0 million of borrowings under our term loans incurred in connection with the
recapitalization in February 1998 and borrowings on the revolving credit
facility. On November 29, 1999, all outstanding indebtedness was repaid with
$22.3 million of the proceeds from the November 23, 1999 initial public
offering. In conjunction with the early extinguishment of debt, deferred
financing charges of $200,000, net of tax, were written-off and recorded as an
extraordinary loss in the fourth quarter of fiscal year 1999.
Income Taxes
Other income for fiscal year 1998 primarily represents the recovery of
$92,000 related to an employee advance previously reserved.
Provision for income taxes for fiscal year 1999 as a percentage of pretax
income was 40.8% compared to 51.9% for fiscal year 1998. The 51.9% effective tax
rate for fiscal year 1998 exceeded the statutory federal income tax rate
primarily due to the establishment of net deferred taxes upon conversion to a
"C" corporation on February 12, 1998 in connection with the leveraged
recapitalization and state income taxes. These increases in income tax expense
were partially reduced by the exclusion of net income prior to February 12,
1998, representing "S" corporation net income. Prior to the conversion to a "C"
corporation on February 12, 1998, TMNG did not report tax expense as an "S"
corporation.
FISCAL 1998 COMPARED TO FISCAL 1997
Revenues
Revenues increased 59.1% to $32.1 million in fiscal year 1998 from $20.2
million in fiscal year 1997. The increase in revenues was due primarily to the
commencement of several major new engagements during fiscal year 1998. Higher
billing rates, which resulted from a reduction in volume discounts in fiscal
year 1998 as compared to fiscal year 1997, also contributed to the increase. The
revenues in fiscal year 1997 included
17
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revenues from services provided to one large customer, which accounted for 39.3%
of revenues in that year, at a negotiated volume discount. International
revenues in fiscal year 1998 were 16.2% of revenues, primarily from Canada, and
in fiscal year 1997 were 0.8% of revenues.
Cost of Services
Direct cost of services increased to $17.4 million in fiscal year 1998 from
$11.4 million in fiscal year 1997. As a percentage of revenues, direct cost of
services decreased to 54.2% in fiscal year 1998 from 56.4% in fiscal year 1997.
The gross margin improvement resulted primarily from a reduction in business
from the two largest customers in fiscal year 1997 at negotiated volume
discounts. In addition, gross margins improved because the consultant mix
changed to include more employees in fiscal year 1998 compared to fiscal year
1997.
In fiscal year 1998, $239,000 non-cash stock based compensation charges
were recorded in connection with the issuance of stock options to consultants.
These charges reduced gross margin in this period by 0.7%.
Operating Expenses
Selling, general and administrative expenses increased 87.7% to $6.2
million in fiscal year 1998 from $3.3 million in fiscal year 1997. As a
percentage of revenues, selling, general and administrative expenses increased
to 19.2% in fiscal year 1998 from 16.3% in fiscal year 1997. Employee costs
increased in fiscal year 1998 due to the larger role principals had in
generating sales and the compensation expense associated with those
responsibilities. In addition, expenses increased in fiscal year 1998 due to
infrastructure investment. A new corporate office was opened in September 1998,
and five management and administrative employees were hired late in the year.
Management information systems were installed in fiscal year 1998, including
financial reporting and project costing systems. In fiscal year 1998, marketing
materials were enhanced, marketing efforts in Europe were expanded and the TMNG
brand was promoted. TMNG also expanded efforts to enhance TMNG Lexicon and TMNG
CLEC Planner toolsets in fiscal year 1998.
Other Income and Expenses
Interest expense increased to $2.1 million in fiscal year 1998 from $30,000
in fiscal year 1997. Interest expense in fiscal year 1998 related primarily to
two term loans in an aggregate principal amount of $24.0 million entered into in
connection with the leveraged recapitalization. In fiscal year 1997, interest
expense related to notes payable to several stockholders.
Other income in the fiscal year 1998 primarily represents the recovery of
$92,000 related to an employee advance previously reserved in fiscal year 1997.
Income Taxes
Provision for income taxes was $3.3 million in fiscal year 1998. The 51.9%
effective tax rate in fiscal year 1998 exceeded the statutory federal income tax
rate primarily due to the establishment of net deferred taxes upon conversion to
a subchapter "C" corporation, and state income taxes. These increases in
provision for income taxes were partially reduced by the exclusion of net income
prior to February 12, 1998, representing "S" corporation net income. Prior to
the conversion to a "C" corporation on February 12, 1998, TMNG did not report
tax expense as an "S" corporation.
Net income decreased to $3.0 million in fiscal year 1998 from $5.5 million
in fiscal year 1997. In fiscal year 1997, TMNG was a subchapter "S" corporation
and did not report tax expense. Income before provision for income taxes
increased to $6.3 million in fiscal year 1998 from $5.5 million in fiscal year
1997.
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SUMMARY OF QUARTERLY RESULTS OF OPERATIONS -- UNAUDITED
QUARTER ENDED
-----------------------------------------------
APRIL 4, JULY 4, OCTOBER 3, JANUARY 2,
1998 1998 1998 1999
-------- ------- ---------- ----------
Revenues.......................................... $ 6,154 $ 6,878 $ 8,439 $10,632
======= ======= ======= =======
Gross profit...................................... $ 2,741 $ 3,295 $ 3,810 $ 4,607
======= ======= ======= =======
Net income........................................ $ 39 $ 838 $ 999 $ 1,167
======= ======= ======= =======
Diluted net income per common share............... $ .002 $ .037 $ .043 $ .050
======= ======= ======= =======
APRIL 3, JULY 3, OCTOBER 2, JANUARY 1,
1999 1999 1999 2000
-------- ------- ---------- ----------
Revenues.......................................... $11,433 $12,423 $13,112 $13,354
======= ======= ======= =======
Gross profit...................................... $ 4,989 $ 5,534 $ 5,489 $ 5,421
======= ======= ======= =======
Net income before extraordinary item.............. $ 1,067 $ 1,195 $ 1,172 $ 1,227
======= ======= ======= =======
Net income........................................ $ 1,067 $ 1,195 $ 1,172 $ 1,027
======= ======= ======= =======
Diluted net income before extraordinary item per
common share.................................... $ .045 $ .051 $ .049 $ .050
======= ======= ======= =======
Diluted net income per common share............... $ .045 $ .051 $ .049 $ .040
======= ======= ======= =======
LIQUIDITY AND CAPITAL RESOURCES
On November 23, 1999, TMNG completed its initial public offering and
received net proceeds of approximately $72.1 million from the sale of 4,615,000
shares of common stock. On November 29, 1999 TMNG used $22.3 million of the
proceeds from its initial public offering to repay all indebtedness. The
remainder of the proceeds will be used for working capital, general corporate
purposes and possibly as consideration for acquisitions.
At January 1,2000, TMNG had approximately $51.5 million in cash and cash
equivalents. TMNG believes the net proceeds of the offering, in addition to cash
generated from operations, will be sufficient to meet anticipated cash
requirements, including anticipated capital expenditures and consideration for
possible acquisition, for at least the next 12 months. Should the Company's
business expand more rapidly than expected, the Company believes that bank
credit would be available to fund such operating and capital requirements.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (FAS 133). This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. We do not
expect the adoption to have a material impact on its financial statements.
YEAR 2000 ISSUE
The Company established a Year 2000 compliance program to address the
impact of the Year 2000 date transition on operations. This program covered
internal information systems and other information technology facilities such as
data communications and building management.
The Company has completed its evaluation of all systems and applications
for Year 2000 compliance prior to the end of 1999. Since the century date
change, TMNG has not experienced any significant disruption in business due to
Year 2000 issues.
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20
ITEM 7A. 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 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 8. CONSOLIDATED FINANCIAL STATEMENTS
20
21
INDEPENDENT AUDITORS' REPORT
To the Board of Directors 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 1,
2000 and January 2, 1999 and the related consolidated statements of income and
comprehensive income, stockholders' equity (deficiency in assets) and cash flows
for the fiscal years ended January 1, 2000, January 2, 1999 and December 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes 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 1,
2000 and January 2, 1999, and the results of their operations and their cash
flows for the fiscal years ended January 1, 2000, January 2, 1999 and December
31, 1997 in conformity with accounting principles generally accepted in the
United States of America.
/s/ DELOITTE & TOUCHE LLP
Kansas City, Missouri
February 15, 2000
21
22
THE MANAGEMENT NETWORK GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
JANUARY 2, JANUARY 1,
1999 2000
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents................................. $ 959 $ 51,523
Receivables:
Accounts receivable.................................... 5,993 8,280
Accounts receivable -- unbilled........................ 3,251 4,863
-------- --------
9,244 13,143
Less: Allowance for doubtful accounts.................. (120) (350)
-------- --------
9,124 12,793
Other assets........................................... 51 1,048
-------- --------
Total current assets.............................. 10,134 65,364
-------- --------
Deferred Financing Costs, net............................... 447
Property and Equipment, net................................. 425 706
Deferred Tax Asset.......................................... 1,312
-------- --------
Total Assets...................................... $ 11,006 $ 67,382
======== ========
CURRENT LIABILITIES:
Long-term debt -- current portion......................... $ 1,300
Trade accounts payable.................................... 959 $ 888
Trade accounts payable -- related party................... 332
Accrued payroll, bonuses and related expenses............. 664 1,857
Accrued interest payable.................................. 440
Other accrued liabilities................................. 176 1,200
Income taxes payable...................................... 52
Deferred taxes............................................ 186
-------- --------
Total current liabilities......................... 4,109 3,945
-------- --------
Long-Term Debt.............................................. 24,717
Deferred Taxes.............................................. 451
Commitments and Contingencies
STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS)
Common stock:
Voting -- No par, 30,000,000 shares authorized;
22,500,000 shares issued and outstanding in 1998;
$.001 par value, 100,000,000 shares authorized;
27,417,370 shares issued and outstanding on January 1,
2000.................................................. 18,631 27
Preferred stock -- $.001 par value, 10,000,000 shares
authorized; no shares issued or outstanding............
Additional paid-in capital................................ 104,137
Accumulated deficit....................................... (36,599) (32,138)
Accumulated other comprehensive income --
Foreign currency translation adjustment................... 2 (2)
Unearned compensation..................................... (305) (8,587)
-------- --------
Total stockholders' equity (deficiency in
assets)......................................... (18,271) 63,437
-------- --------
Total Liabilities and Stockholders' Equity (Deficiency in
Assets)................................................... $ 11,006 $ 67,382
======== ========
See notes to consolidated financial statements.
22
23
THE MANAGEMENT NETWORK GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED
--------------------------------------
DECEMBER 31, JANUARY 2, JANUARY 1,
1997 1999 2000
------------ ---------- ----------
Revenues.................................................... $20,184 $32,103 $50,322
Cost of Services:
Direct cost of services................................... 11,384 17,411 26,109
Equity related charges.................................... 239 2,780
------- ------- -------
Total cost of services............................ 11,384 17,650 28,889
------- ------- -------
Gross Profit................................................ 8,800 14,453 21,433
Operating Expenses:
Selling, general and administrative....................... 3,280 6,158 9,777
Equity related charges.................................... 22 1,998
------- ------- -------
Total operating expenses.......................... 3,280 6,180 11,775
------- ------- -------
Income From Operations...................................... 5,520 8,273 9,658
Other Income (Expense):
Interest income........................................... 6 18 277
Interest expense.......................................... (30) (2,054) (1,998)
Other, net................................................ 8 88 (68)
------- ------- -------
Total other expense............................... (16) (1,948) (1,789)
------- ------- -------
Income Before Provision for Income Taxes and Extraordinary
Item...................................................... 5,504 6,325 7,869
Provision for Income Taxes.................................. (3,282) (3,208)
------- ------- -------
Income Before Extraordinary Item............................ 5,504 3,043 4,661
Extraordinary Item.......................................... (200)
------- ------- -------
Loss on debt extinguishment, net of tax benefit of $133
Net Income.................................................. 5,504 3,043 4,461
Other Comprehensive Income --
Foreign currency translation adjustment................... (1) 3 (4)
------- ------- -------
Comprehensive Income........................................ $ 5,503 $ 3,046 $ 4,457
------- ------- -------
Income Before Extraordinary Item Per Common Share
Basic..................................................... $ 0.24 $ 0.14 $ 0.20
======= ======= =======
Diluted................................................... $ 0.24 $ 0.13 $ 0.20
======= ======= =======
Net Income Per Common Share
Basic..................................................... $ 0.19
=======
Diluted................................................... $ 0.19
=======
Shares Used in Calculation of Income Before Extraordinary
Item and Net Income Per Common Share
Basic..................................................... 22,500 22,500 23,056
======= ======= =======
Diluted................................................... 22,500 22,944 23,807
======= ======= =======
Pro Forma Information (Unaudited)
Pro forma provision for income taxes...................... $ 2,202 $ 2,530
======= =======
Pro forma net income...................................... $ 3,302 $ 3,795
Pro Forma Net Income Per Common Share (Unaudited)
Basic..................................................... $ 0.15 $ 0.17
======= =======
Diluted................................................... $ 0.15 $ 0.17
======= =======
See notes to consolidated financial statements.
23
24
THE MANAGEMENT NETWORK GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS)
(IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK
$.0406 PAR 1997;
NO PAR COMMENCING COMMON STOCK
FEBRUARY 12, 1998 $.0006 PAR
$.001 PAR 1997; NO PAR
COMMENCING COMMENCING
AUGUST 27, 1999 FEBRUARY 12, 1998 ACCUMULATED
VOTING NON-VOTING ADDITIONAL RETAINED OTHER
---------------------- -------------------- PAID-IN EARNINGS COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) INCOME (LOSSES)
----------- -------- ----------- ------ ---------- --------- ---------------
Balance, January 1, 1997.......... 4,500,000 $ 3 18,000,000 $ 11 $ 399 $ 1,564 $
Distributions..................... (2,600)
Other comprehensive income --
Foreign currency translation
adjustment...................... (1)
Repayments on stockholders' notes
receivable......................
Net income........................ 5,504
----------- -------- ----------- ---- -------- -------- ---
Balance, December 31, 1997........ 4,500,000 3 18,000,000 11 399 4,468 (1)
Distributions..................... (4,664)
Other comprehensive income --
Foreign currency translation
adjustment...................... 3
Repayments on stockholders' notes
receivable......................
Conversion of non-voting stock to
voting stock.................... 18,000,000 11 (18,000,000) (11)
Issuance of common stock, net of
offering costs of $3,061........ 13,500,000 16,939
Repurchase and cancellation of
treasury stock.................. (13,500,000) (38,733)
Constructive distribution assumed
to be reinvested................ 713 (713)
Adjustment to reflect change in
par value....................... 18,051 (18,051)
Issuance of options............... 305
Stock compensation................ 261
Net income........................ 3,043
----------- -------- ----------- ---- -------- -------- ---
Balance, January 2, 1999.......... 22,500,000 18,631 (36,599) 2
Issuance of options............... 11,203
Exercise of options............... 231,169 444
Stock compensation................ 1,416
Other comprehensive income --
Foreign currency translation
adjustment...................... (4)
Issuance of common stock, net..... 4,686,201 4 72,054
Tax benefit due to exercise of
stock options................... 412
Adjustment to reflect change in
par value....................... (18,608) 18,608
Net income........................ 4,461
----------- -------- ----------- ---- -------- -------- ---
Balance, January 1, 2000.......... 27,417,370 $ 27 $ $104,137 $(32,138) $(2)
=========== ======== =========== ==== ======== ======== ===
STOCKHOLDERS'
UNEARNED NOTES
COMPENSATION RECEIVABLE TOTAL
------------ ------------- --------
Balance, January 1, 1997.......... $ $(233) $ 1,744
Distributions..................... (2,600)
Other comprehensive income --
Foreign currency translation
adjustment...................... (1)
Repayments on stockholders' notes
receivable...................... 62 62
Net income........................ 5,504
-------- ----- --------
Balance, December 31, 1997........ (171) 4,709
Distributions..................... (4,664)
Other comprehensive income --
Foreign currency translation
adjustment...................... 3
Repayments on stockholders' notes
receivable...................... 171 171
Conversion of non-voting stock to
voting stock....................
Issuance of common stock, net of
offering costs of $3,061........ 16,939
Repurchase and cancellation of
treasury stock.................. (38,733)
Constructive distribution assumed
to be reinvested................
Adjustment to reflect change in
par value.......................
Issuance of options............... (305)
Stock compensation................ 261
Net income........................ 3,043
-------- ----- --------
Balance, January 2, 1999.......... (305) (18,271)
Issuance of options............... (11,203)
Exercise of options............... 444
Stock compensation................ 2,921 4,337
Other comprehensive income --
Foreign currency translation
adjustment...................... (4)
Issuance of common stock, net..... 72,058
Tax benefit due to exercise of
stock options................... 412
Adjustment to reflect change in
par value.......................
Net income........................ 4,461
-------- ----- --------
Balance, January 1, 2000.......... $ (8,587) $ $ 63,437
======== ===== ========
See notes to consolidated financial statements.
24
25
THE MANAGEMENT NETWORK GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED
----------------------------------------
DECEMBER 31, JANUARY 2, JANUARY 1,
1997 1999 2000
------------ ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 5,504 $ 3,043 $ 4,461
Add-back: Extraordinary item.............................. 200
------- -------- --------
Income before extraordinary item.......................... 5,504 3,043 4,661
Adjustments to reconcile income before extraordinary item
to net cash provided by operating activities:
Depreciation and amortization........................... 136 275
Stock option and bonus share compensation............... 261 4,778
Provision for deferred income taxes (deferred tax
benefit).............................................. 637 (1,952)
Provision for uncollectible advances to related party... 181 (181)
Loss on disposition of assets........................... 2
Changes in:
Accounts receivable................................... (1,727) (1,735) (2,057)
Accounts receivable -- unbilled....................... 374 (2,148) (1,612)
Income tax payable.................................... (52)
Other assets.......................................... (51) (995)
Related party receivables............................. (175) 201
Trade accounts payable................................ 129 825 (71)
Trade accounts payable -- related party............... 291 (233) (332)
Accrued liabilities................................... 26 1,257 1,909
Payables to related parties........................... (300)
------- -------- --------
Net cash provided by operating activities.......... 4,303 2,012 4,554
------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment..................... (455) (443)
------- -------- --------
Net cash used in investing activities.............. (455) (443)
------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to shareholders............................. (4,000) (4,664)
Proceeds from long-term debt.............................. 24,000
Net borrowings under revolving credit facility............ 2,017 (2,017)
Deferred financing costs.................................. (553)
Issuance of common stock, net of expenses................. 16,939 71,618
Payments received on stockholders' note receivable........ 62 171
Payments made on long-term debt........................... (24,000)
Payments made on notes payable -- related party........... (350)
Exercise of options including related tax benefits........ 856
Purchase of treasury stock................................ (38,733)
------- -------- --------
Net cash used in financing activities.............. (4,288) (823) 46,457
------- -------- --------
Effect of exchange rate on cash and cash equivalents........ (1) 3 (4)
------- -------- --------
Net increase in cash and cash equivalents................... 14 737 50,564
Cash and cash equivalents, beginning of period.............. 208 222 959
------- -------- --------
Cash and cash equivalents, end of period.................... $ 222 $ 959 $ 51,523
------- -------- --------
Supplemental disclosure of cash flow information:
Cash paid during period for interest...................... $ 79 $ 1,517 $ 2,324
------- -------- --------
Cash paid during period for taxes......................... $ $ 2,581 $ 5,140
======= ======== ========
Supplemental disclosure of non-cash investing and financing
transactions:
Reinvested constructive distribution resulting from
conversion to subchapter C corporation.................. $ $ 713 $
======= ======== ========
See notes to consolidated financial statements.
25
26
THE MANAGEMENT NETWORK GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Nature of Operations -- The Management Network Group, Inc. ("TMNG" or the
"Company") was formed on April 1, 1993 as a management consulting firm
specializing in global competitive telecommunications. Primary services include
serving wireless and wireline communications carriers in all industry segments,
and the technology and investment firms that support the telecommunications
industry. A majority of the Company's revenues are to customers in the United
States, however the Company also provides services to customers in the United
Kingdom, Canada and other foreign countries. The Company's business is
international in scope with corporate offices in Kansas City.
Recapitalization -- On February 12, 1998, TMNG entered into a series of
transactions that resulted in a leveraged recapitalization (the
"recapitalization") of the Company. Prior to the recapitalization, the Company
made distributions totaling approximately $4.7 million to its stockholders and
all stockholders' notes receivable were paid off. The recapitalization included
the following transactions:
- All authorized non-voting common stock was converted to voting common
stock and the Company declared a 3,272.73-for-one stock split resulting
in total authorized shares of 30 million with 22.5 million issued and
outstanding. In connection with this stock split, the Company changed its
par common stock to no par common stock. All historical share data has
been retroactively restated for the effect of the stock split.
- Behrman Capital II, LP ("Behrman") organized Behrman Capital TMNG, Inc.
("NEWCO") with contributed capital of $20.0 million and Behrman owning
100% of NEWCO capital stock. NEWCO was formed as a transitory corporation
solely for the purpose of effecting the recapitalization and has not
carried on any activities to date other than those incident to its
formation and the recapitalization.
- Behrman exchanged 100% of its NEWCO stock for 13.5 million newly issued
shares of TMNG common stock. NEWCO was then merged with and into TMNG
with TMNG as the surviving corporation, at which time TMNG changed its
income tax status to a subchapter "C" corporation from an subchapter "S"
corporation. Offering costs of approximately $3.1 million were charged
against additional paid-in capital at the time of the merger.
- TMNG entered into a senior bank credit facility that provided $24.0
million in term loans and a $5.0 million revolving credit facility from a
syndicate of banks. TMNG utilized the funds provided by the credit
facility and the proceeds from the merger with NEWCO to acquire 13.5
million shares of common stock from existing stockholders (as of December
31, 1997) for an aggregate cost of approximately $38.7 million. Such
treasury shares were then retired. The costs to enter into the credit
facility of approximately $500,000, were capitalized.
The Company accounted for this series of transactions as a financial
restructuring/recapitalization requiring continuation of the historical cost
basis.
Reincorporation -- During fiscal year 1999, the board of directors approved
the amendment of the Company's Certificate of Incorporation, which included,
among other things, reincorporation of the Company in the State of Delaware and
a change in the par values and total number of shares of common stock and
preferred stock of which the Company is authorized to issue.
Public Offering -- On November 22, 1999, the Company completed an initial
public offering of 5,307,250 shares of Common Stock at an initial offering price
of $17.00 per share. Of the 5,307,250 shares of Common Stock offered, 4,615,000
shares were issued and sold by the Company and 692,250 shares were sold by
existing stockholders. Prior to the initial public offering, there was no public
market for the Company's capital stock.
26
27
THE MANAGEMENT NETWORK GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company did not receive any of the proceeds from the sales of the
shares sold by the existing stockholders. The net proceeds to the Company from
the initial public offering, after deducting applicable underwriting discounts
and offering expenses, was approximately $71.5 million. Approximately $22.3
million of the net proceeds to the Company was used to repay outstanding debt.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation -- The consolidated statements include the
accounts of TMNG and its wholly-owned subsidiaries, The Management Network Group
Europe Ltd. ("TMNG-Europe"), formed on March 19, 1997, based in the United
Kingdom, The Management Network Group Canada Ltd. ("TMNG-Canada"), formed on May
14, 1998, based in Toronto, Canada and TMNG.com, Inc., formed in June 1999. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Fiscal Year -- Effective January 1, 1998, the Company adopted a 52/53 week
fiscal year, changing the year-end date from December 31, to the Saturday
nearest December 31. The fiscal years ended January 1, 2000 and January 2, 1999
each had 52 weeks and are referred to herein as fiscal year 1999 and 1998,
respectively. All references herein for 1997 represent the year ended December
31, 1997. TMNG-Europe and TMNG-Canada maintain year-end dates of December 31.
Contracts -- The Company enters into both time and materials and fixed
price contracts with its customers. A substantial majority of TMNG's contracts
are based upon time and materials with a not to exceed total contract price.
Under a time and materials contract the customer pays a negotiated daily rate
for all services performed plus expenses incurred. Under a fixed price contract
the customer pays a predetermined fixed price for all services performed
regardless of the professional time required. Fixed price contracts generally
involve immaterial amounts and are of short duration.
Prior to January 3, 1999 TMNG subcontracted with several companies (five of
which were related parties to TMNG through certain common ownership or are owned
by employees of TMNG) to provide consultants acting as independent contractors
to render the services required under the customer contracts. These subcontracts
were on a time and materials basis, contained confidentiality/noncompete
provisions and could be terminated by either party on 30 days prior notice.
Revenue Recognition -- Time and materials service revenues and related time
and materials service costs are recorded in the period in which the service is
performed. Fixed price service contract revenues and related costs are
recognized upon contract completion under the completed contract method.
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.
Property and Equipment -- Property and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation is based on the
estimated useful lives of the assets and is computed using the straight-line
method. Asset lives range from three to seven years for computers and equipment.
Leasehold improvements are capitalized and amortized over the life of the lease.
Maintenance and repairs are charged to expense as incurred. The cost and
accumulated depreciation applicable to assets retired are removed from the
accounts and the gain or loss on disposition is recognized in income.
Intangible Assets -- Deferred financing costs were capitalized and
amortized over the term of the related credit facility using the straight-line
method which approximates the effective interest rate method. Unamortized
deferred financing costs were charged to operations as an extraordinary item
upon repayment of the Company's long-term debt in November 1999.
27
28
THE MANAGEMENT NETWORK GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 when compared to an estimate of future
undiscounted net cash flows expected to result from the use of these assets.
Management has concluded no financial statement adjustment is currently
required.
Income Taxes -- The Company recognizes a liability or asset for the
deferred tax consequences of temporary differences between the tax basis of
assets or liabilities and their reported amounts in the financial statements. A
valuation allowance is provided when, in the opinion of management, it is more
likely than not that some portion or all of a deferred tax asset will not be
realized.
As described in Note 1, the Company converted to a subchapter "C"
corporation for income tax reporting purposes effective February 12, 1998.
Deferred tax liabilities of approximately $1.1 million were recorded on February
12, 1998, in conjunction with the conversion, for the cumulative temporary
differences (see Note 6). Prior to February 12, 1998, the Company elected to be
treated as a subchapter "S" corporation under the Internal Revenue Code and thus
was treated substantially as a partnership for income tax purposes. Accordingly,
until the time of conversion to a subchapter "C" corporation, the individual
stockholders were responsible for their proportionate share of the corporate
taxable income or loss for federal and state income tax reporting purposes.
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 -- The 1997, fiscal year 1998
and fiscal year 1999 consolidated financial statements include TMNG -- Europe
(located in the United Kingdom). The fiscal year 1998 and fiscal year 1999
consolidated financial statements also include TMNG -- Canada. Both entities
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. Income and expenses have been translated at exchange rates which
approximate the average of the rates prevailing during each period. Translation
adjustments are reported as a separate component of other comprehensive income
in the consolidated statements of stockholders' equity. Realized and unrealized
exchange gains and losses included in results of operations were insignificant
for all periods presented.
Stock-Based Compensation -- The Company accounts for stock based
compensation for employees in accordance with the provisions of Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees" and related Interpretations and for stock-based compensation for
non-employees in accordance with Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation."
Reverse Stock Split -- Effective November 8, 1999 the Company amended its
Certificate of Incorporation to give effect for a 1-for-2 reverse stock split
for all issued and outstanding shares of voting and non-voting common stock. All
issued and outstanding share and per share data has been retroactively adjusted
to reflect this reverse split.
Warrant Grant -- On October 29, 1999, the Company issued a significant
customer a warrant to purchase 500,000 shares of common stock at an exercise
price of $2.00 per share. As of January 1, 2000 all shares under the warrant are
exercisable. The expected fair value of this warrant is approximately $5.2
million based on an expected life of 3 years and will be recognized as future
equity related charges in operations. Additionally on December 10, 1999, the
Company entered into a consulting services agreement with this
28
29
THE MANAGEMENT NETWORK GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
customer under which such customer will commit to $22 million of consulting fees
over a three-year period commencing January 1, 2000.
Net Income Per Share -- Basic net income per share was computed by dividing
net income by the weighted average number of common shares outstanding for the
period. Diluted net income per share reflects the potential dilution of
securities by adding other common stock equivalents, including stock options, in
the weighted average number of common shares outstanding for a period, if
dilutive.
The reconciliation of the net income and weighted average common shares
outstanding included in the computation of basic and diluted net income per
common share for 1997, fiscal year 1998 and fiscal year 1999 is as follows
(amounts in thousands except per share data). There were no dilutive securities
outstanding in 1997.
FISCAL FISCAL
1997 1998 1999