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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(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 03, 2004
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: 000-27617
THE MANAGEMENT NETWORK GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 48-1129619
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION 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
------------------- -----------------------------------------
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. []
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). YES [ ] NO [X]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, as of March 26, 2004 was approximately $65.7 million. As of March
26, 2004, the Registrant had 34,565,483 shares of common stock, par value $0.001
per share (the Common Stock), issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information required to be provided in Part III (Items 10, 11, 12, 13 and
14) of this Annual Report on Form 10-K is hereby incorporated by reference from
the Company's Definitive 2004 Proxy Statement which will be filed with the
Securities and Exchange Commission within 120 days of the end of the Company's
fiscal year.
THE MANAGEMENT NETWORK GROUP, INC.
FORM 10-K
TABLE OF CONTENTS
PAGE
----
PART I
Item 1. Business.................................................... 4
Item 2. Property.................................................... 16
Item 3. Legal Proceedings........................................... 16
Item 4. Submission of Matters to a Vote of Security Holders......... 17
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 17
Item 6. Selected Consolidated Financial Data........................ 18
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 19
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 26
Item 8. Consolidated Financial Statements........................... 27
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.................................... 54
Item 9A. Controls and Procedures .................................... 54
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 54
Item 11. Executive Compensation...................................... 54
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 54
Item 13. Certain Relationships and Related Transactions.............. 55
Item 14. Principal Accountant Fees and Services ..................... 55
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on
Form 8-K.................................................... 55
SIGNATURES............................................................ 56
PART I
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
Cautionary statement regarding forward-looking information
With the exception of historical information, this report on Form 10-K contains
forward-looking statements as defined in the Private Securities Litigation
Reform Act of 1995 and identified by such words as "will be," "intend,"
"continue," "believe," "may," "expect," "hope," "anticipate," "goal," "forecast"
or other comparable terms. The Management Network Group, Inc.'s actual financial
condition, results of operations or business may vary materially from those
contemplated by such forward looking statements and involve various risks and
uncertainties, including but not limited to those discussed in Item 1, "Business
- - Risk Factors." Investors are cautioned not to place undue reliance on any
forward-looking statements.
WEBSITE ACCESS TO EXCHANGE ACT REPORTS
The Management Network Group, Inc.'s internet website address is www.tmng.com.
The Management Network Group, Inc. ("TMNG" or "the Company") makes available
free of charge through TMNG's website the Company's annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to
those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Exchange Act as soon as reasonably practicable after the Company electronically
files such material with, or furnishes it to the Securities and Exchange
Commission ("SEC").
ITEM 1. BUSINESS
GENERAL
Founded in 1990, TMNG a Delaware corporation, is a leader in consulting to the
communications industry. The Company has built a fully integrated suite of
consulting offerings including strategy, management, marketing, operational, and
technology consulting services primarily to communications service providers,
technology companies and financial services firms located principally in North
America and Western Europe. Historically, in addition to North America and
Western Europe, TMNG has provided consulting services to clients in almost all
other major international markets. TMNG believes it is unique in its ability to
provide a comprehensive business solution to the communications industry,
including strategy consulting and business planning, product/service definition
and launch, customer acquisition and retention, business model transformation,
technical support and process modeling for business support systems (BSS) and
operations support systems (OSS). TMNG has consulting experience with almost all
major aspects of managing a global communications company. In addition, TMNG
provides marketing consulting services to clients outside of the communications
industry, primarily in the Eastern Region of the United States (Mid-Atlantic).
From its inception to mid-fiscal year 2000, TMNG was a provider of a
comprehensive range of services to the global communications industry with
significant focus and emphasis on management and operational consulting
services. During fiscal year 2000 the Company identified early leading
indicators of the market downturn in the communications industry (See "Market
Overview" in Item 1 for an additional discussion of market changes). The Company
broadened its focus and emphasis to include not only management and operational
consulting but also strategy and marketing to enable the Company to deliver
solutions to its communication service provider clients. To accomplish this
transformation, the Company looked to increase the breadth of its employee work
base, hiring consultants of increasingly diverse backgrounds with various
technical competencies, and began an acquisition strategy to acquire consulting
companies whose offerings complemented, expanded and deepened the offerings
historically provided by TMNG. Key acquisitions completed by TMNG during the
last four years included Cambridge Strategic Management Group, Inc. (now "TMNG
Strategy"), The Weathersby Group, Inc. (now "TMNG Marketing") and Tri-Com
Computer Services, Inc. (now "TMNG Technologies"). These businesses focused
primarily on strategy, new product launch initiatives, customer acquisition and
retention, and technology consulting to the global communications industry. The
Company believes these acquisitions have expanded key client relationships, have
positioned TMNG uniquely in the market to effectively serve today's needs of
large global communication service providers, and have provided an expansion of
key direct distribution channel elements to TMNG. In fiscal year 2003, the
Company better integrated these practices and now brings a fully integrated
suite of offerings to the communications marketplace.
As TMNG primarily focuses on communication service providers, it has learned
during the course of numerous engagements what the service providers' key
business objectives consist of, both near and long term. Subsequently, TMNG
built product offerings targeting software solution and technology companies,
investment banking, and private equity firms which invest in and serve the
communications industry. The Company's services to software and technology firms
have included strategy definition, product offering positioning, application
development, assistance in responding to requests for proposals, and
implementing solutions within the service provider environment. Services to the
investment banking and private banking community have included prospect
validation and due diligence.
Recently, with the market dynamics changing, (see "Market Overview" in Item 1)
TMNG is focusing on the opportunity to expand its offerings through indirect
channel partners. Partnering will better enable the Company to serve large
clients in what has become a shrinking and consolidating marketplace. TMNG
provides its partners with contacts, business analysis, business process
outsourcing (BPO) solutions, and depth of knowledge and experience in serving
the industry. The partnerships bring technology solutions and systems
integration capabilities which enable TMNG to provide a more comprehensive
client offerings and solution to effectively compete with other global
consultancies. Such partnerships are also expanding the Company's relationships
with off-shore development firms located primarily in the Asian market that
provide high quality, low cost solutions to the industry.
The Company is evolving its service offerings to support the next generation of
data and content offerings and is providing communications consulting expertise
to new and growing organizations with increasing demand. The Company continues
to invest significantly in wireless, including a strategic partnership with
inCode Telecom Group, in the construction of a wireless next generation
laboratory located in San Diego, California. In 2003, the Company took a
leadership position in the wireless industry by providing a suite of offerings
to assist wireless carriers with the impact of wireless number portability
(WNP). The Company looks to focus on several data and broadband wireless
initiatives in 2004. The Company is also investing in intellectual capital to
assist major communication service providers in dealing with the voice over
internet protocol (VOIP) and Internet Protocol managed offerings transformation
which TMNG believes will have an impact on the industry. Finally, the Company
has recruited executives with expertise and relationships serving the rural
local exchange carrier (RLEC) market and is building presence and market share
in that industry segment of communications service providers.
The Company intends to continue capitalizing on its industry expertise by
refreshing existing proprietary toolsets and building new toolsets to enable it
to provide strategic, management, marketing, operational, and technology support
to clients. TMNG's toolsets are consulting guidelines, processes and benchmarks
created and updated by TMNG consultants based on their experience over many
consulting engagements. These toolsets assist clients to improve productivity,
gain competitive advantage, reduce time to market and market entry risk, and
increase revenues and profits. TMNG's services are provided by a team comprised
of senior professionals recruited from prestigious university campuses
complemented by teams of consultants from the communications industry averaging
15 years of experience.
The Company maintains a unique technology agnostic and vendor neutral position
to make unbiased evaluations and recommendations that are based on a thorough
knowledge of each solution and each client's situation. Therefore, TMNG is able
to capitalize on extensive experience across complex multi-technology
communications systems environments to provide the most sound and practical
recommendations to clients.
MARKET OVERVIEW
The demand for consulting services increased throughout the 1990's, and this
trend was especially prevalent for consulting services of communications and
e-commerce consulting firms. The key contributor to this was the significant
projected growth of the internet and e-commerce which stimulated capital
investment into new and existing wireline communications providers, enabling
their investment in new network technology and the creation of new broadband
market offerings. Investment was further accelerated through global deregulation
of the communications industry throughout the 1990's. The deregulation of the
communications industry resulted in increased competition by the creation of
increased demand for fiber and capacity by the new market entrants; a massive
influx of capital to fund carrier entrants and allow existing firms to purchase
aggressively from one another as they expanded; rapid internet growth, spurring
broadband internet access services, digital subscriber line (DSL) internet
access and unbundled local loops that forged the way for wholesale DSL business
models; and technological innovations, allowing new service offerings in the
areas of voice, data, video and content.
Similarly, significant investment was made in the wireless communications
industry, which was experiencing tremendous growth as a growing percentage of
voice communications were migrating to wireless networks and devices. In
addition, the personal communications services (PCS) auctions in the United
States and universal mobile telecommunications system (UMTS) broadband spectrum
auctions in Europe resulted in new providers, additional services, and improved
technology. Customer penetration resulted in both residential and business
customers, and services were expanded to include wireless data offerings
primarily in Europe and Asia.
By mid-2000, following the first announcements of disappointing financial
performance by wireline and wireless communication service providers and their
vendors, it became apparent that the rate of investment and adoption was far
exceeding the expected rate of consumption in e-commerce and broadband
offerings. The massive inflow of capital in communications during the 1990's
resulted in an inflated market scenario, where once solid business models were
now ill equipped to function and adjust to the macroeconomic environment. The
cycle was further perpetuated by the over saturation of new market entrants
where supply far exceeded levels sustainable by the market, creating pressure
for consolidation and funding contraction. As a result, the industry experienced
a significant number of bankruptcies and layoffs in excess of half a million
individuals in the United States alone. Because the communications companies
often purchased services from one another, the bankruptcies led to a vicious
cycle of industry-wide destabilization with each successive bankruptcy
jeopardizing another company's liquidity position.
The industry experienced further instability during 2002 due to government
investigations into the accounting practices of several large communications
providers that revealed the perpetuation of accounting improprieties, including
the material overstatement of revenues and the understatement of expenses. Such
inquiries have resulted in ongoing restatements of previously reported financial
statements, resulting in additional destabilization within the industry, and
eroding investors' confidence.
As the macroeconomic forces discussed above continue to destabilize the
communications industry, outside consulting services for communications have
been negatively impacted, including TMNG's. Communications companies have
continued to reduce their demand for external consultants, seeking instead to
utilize more internal resources, or in some cases delayed capital and operating
expenditures related to the launch of new products and services, particularly in
networks and technology. This has resulted in a continued substantial decline in
TMNG's revenue and profits during fiscal years 2001, 2002 and 2003 (See Item 1,
"Business - Risk Factors" and Item 7, "Management's Discussion and Analysis").
Today, the global communications industry is in the midst of what the Company
believes to be revolutionary change.
The Company believes the companies that survived the fallout over the past three
years will either acquire or be acquired and/or need to implement significant
changes to their organizations. The Company believes access to capital markets
will remain limited and, as a result, capital and operating investment and
expense will continue to be closely monitored.
As TMNG enters fiscal 2004, the Company believes the large global communications
companies will be strategically focused on the following key initiatives, with
priority depending upon present position and state of the company: launching new
products with focus on enterprise customers and broadband and content offerings;
cost cutting through outsourcing on non-critical activities; bundling of product
offerings; improving the customer experience and minimizing churn; and
maximizing invested network efficiencies. It is also expected that further
market consolidation will occur over the next few years. It is the Company's
belief that the regulatory environment will also continue to play a key factor
in the strategy and operations of communications providers. Most notably, as it
relates to requirements to offer wholesale pricing on network elements and
taxation surrounding communications over VOIP. Regulatory decisions will further
facilitate the speed of change to next generation networks, as it will provide
input to the business cases. The Company expects demand for consulting services
over the next decade to be differentiated compared to the past, with increased
focus on wireless, and internet based offering, outsourced BPO service
opportunities, the increasing presence of offshore technology partners due to
price advantage, and the need for existing management consultancies to provide
solutions to communications industry challenges. As discussed in Item 1,
"Business - General," TMNG has invested significantly to enable the Company to
provide such services.
It has been the Company's experience that because the expertise needed by
communications companies to address the market's needs is typically outside
their core competencies, they must ultimately either recruit and employ experts
or retain outside specialists. The Company believes 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. Although
demand for consulting services has been down for the last three years, the
Company believes customers will need to outsource some of the expertise required
to adapt to new environments and capitalize on new technologies now emerging.
When retaining outside specialists, communications companies need experts that
fully understand the communications industry and can provide timely and unbiased
advice and recommendations. TMNG intends to continue responding to that need.
BUSINESS STRATEGY
The Company's objective is to establish itself as the consulting company of
choice to the communications industry, which includes the service providers and
technology companies that serve the industry, and the financial services and
investment banking firms that invest in the sector. The following are key
strategies the Company has adopted to pursue this objective.
- - Develop and evolve existing offerings/solutions and thought leadership
The Company plans to continue expanding its end-to-end solutions offerings, both
by organic expansion and/or through acquisitions. Organic expansion involves
launching new products and services and generating revenues through integrated
offerings jointly developed by the Company and its acquired companies. Organic
expansion will also focus on offerings geared towards increasing clients'
efficiencies. The Company expanded its offerings through the acquisition of TMNG
Marketing in late 2000. TMNG Marketing provides a full spectrum of marketing
consulting services, including product development, churn management and market
research that takes clients from the point of product definition to customer
acquisition and retention. In 2001, the Company acquired TMNG Technologies. TMNG
Technologies provides end-to-end OSS, data center, systems solutions, data
sourcing, legacy integration and middleware implementation. Additionally, in
March 2002, TMNG acquired TMNG Strategy. This newest acquisition provides a wide
range of business strategy services including analyses of industry and
competitive environments; product and distribution strategies; finance,
including business case development, modeling, cost analysis and benchmarking;
and due diligence and risk assessment.
The Company plans to continue extending its product offerings to the
communications industry. As discussed in "Market Overview" in Item 1 above, the
Company believes wireline and wireless providers will be strategically focused
on the following key initiatives, with priority depending upon present position
and state of the company: launching new products with focus on enterprise
customers and broadband offerings; cost cutting through outsourcing of
non-critical activities; bundling of product offerings; improving the customer
experience and minimizing churn; and investing in next generation networks.
- - Continue to build the TMNG brand
The Company plans to continue building and communicating the TMNG brand, further
positioning the Company as the consultancy of choice for the global
communications industry. Special focus will be placed on brand and eminence
building in the wireless consulting market and in the VOIP arenas. Direct
marketing efforts and other marketing initiatives are underway to continue
building awareness of TMNG and communicating the Company's key strengths,
including the Company's uniquely high level of experienced consultants, focus on
the global telecommunications industry, integrated end-to-end solution and
commitment to bringing clients a positive return on their investment. Each of
the acquisitions by the Company is also being rebranded under the TMNG label.
- - Focused and effective retention and recruitment
TMNG plans to further enhance its business model to accommodate the anticipated
types of consulting services as a result of revolutionary change occurring
within the communications sector. One key element of the business model includes
attracting and retaining high quality, experienced consultants. In the current
economic environment, the Company's two primary challenges in the recruitment of
new consulting
personnel are the ability to recruit talented personnel into a market that is
significantly depressed and the ability to execute such recruitment with an
appropriate compensation arrangement.
The Company reinvigorates existing skill sets of its consultants with
proprietary toolsets that provide methodologies they use to augment their
experience and helps analyze and solve clients' problems. TMNG utilizes a
network of eRooms to serve as a knowledge base, enabling consultant
collaboration on engagements and providing support information and updates of
TMNG current toolsets and releases of next generation tools. Finally, the
Company continues to manage its flexible and unique employee and independent
subject matter expert model to maximize skill set offerings, while minimizing
the effect of unbillable consultant time.
- - Maintaining a global presence
The Company plans to maintain presence globally to deliver services and solution
capabilities to client companies located around the world. Especially in Western
Europe, the Company believes the competitive market expertise of TMNG's U.S.
consultants can be a key factor for foreign companies facing the business issues
associated with deregulation and competition.
- - Building intellectual capital and a comprehensive suite of wireless and VOIP
consultative offerings
TMNG has completed engagements with wireless clients in the U.S., Europe, Latin
America, Asia and the Middle East. The Company's services have included business
and strategic planning, product development, customer acquisition and retention,
business and operations process design and reengineering, revenue and cost
management and network planning. In 2003 the Company built a suite of offerings
to support WNP for the wireless industry.
In association with the Company's strategic partner, inCode Telecom Group, a
technology laboratory has been established to enable advances in wireless
technology. The Wireless Technology Lab (WTL), located in San Diego, California,
is a center for testing and demonstrating advanced wireless equipment and
software. It also serves as a neutral location for application development. The
WTL is the first independent facility to provide a vendor and
technology-neutral, real-world testing ground for next-generation wireless
technologies. In 2004, the Company will look to the laboratory to assist in the
creation of service offerings to the wireless marketplace.
In 2004, the Company's top two strategic focuses will be building a
knowledgebase and developing service offerings supporting wireless communication
service providers and VOIP initiatives.
- - Leveraging knowledge and skills to new opportunities and services
The Company is expanding its service offerings and is providing communications
consulting expertise to new and growing organizations with increasing demand. In
2002, the Company obtained a Government Services Authorization (GSA), which
enables the Company to provide consulting services to the Federal government.
The Company has recruited personnel with expertise in building a government
consultancy and looks to develop and launch offerings to the Federal government.
In addition, the Company has recruited executives with expertise and a
relationship serving the incumbent local exchange carrier (ILEC) market and
plans to build its presence and market share in that industry segment of
communications service providers.
The Company is also expanding its focus on managed service offerings and
partnerships with select global technology, outsourcing and system integration
firms as a complement to the Company's consultancy offerings. The Company
believes this will be a fast growing market segment which should allow the
Company to leverage its intellectual capital while teaming with technology
partners to bring BPO and managed services offerings to select clients. The
Company believes it is uniquely positioned to capitalize on these anticipated
market opportunities, particularly because of its vendor neutrality and
proprietary productivity toolsets.
SERVICES
TMNG provides a full range of strategic, marketing, operations and technology
consulting services to the communications industry. Services provided include:
- - Strategy and Business Case Development
TMNG provides comprehensive strategic analysis to service providers, equipment
manufacturers and financial investors in the communications industry. The
Company's approach combines rigorous qualitative and quantitative analyses with
a detailed understanding of industry trends, technologies, and developments.
TMNG provides clients with specific solutions to their key strategic issues
relating to their existing business as well as new product and service
opportunities. TMNG's services include business case development, data and
content strategies, marketing spending optimization, service and brand
diversification, enterprise and small business strategies, technology
commercialization and operational strategies.
- - Product Development and Management
TMNG offers global communications service providers the benefit of its hands-on
experience developing and launching new products and services for some of
today's industry leaders. TMNG's product development approach includes market
assessments, product/service definition,
business requirements definition, project management, testing and release. TMNG
also helps communication clients by evaluating the profitability of existing
product and service offerings to identify opportunities to consolidate,
de-emphasize or decommission offerings to improve clients' overall
profitability.
- - Customer Acquisition and Retention
TMNG has developed and implemented acquisition and retention strategies for
clients in the communications industry. TMNG's consultants are skilled in the
areas of target market segmentation, campaign management and sales-process
management. TMNG's strategies take into account the needs and preferences of the
target market and include a mix of marketing communications, partner programs,
e-marketing, direct sales, telemarketing, direct response and loyalty and
retention programs.
- - Revenue and Cost Management
TMNG is dedicated to helping clients uncover and recover missed opportunities at
every stage along the revenue life cycle and reduce the costs associated with
managing business functions. TMNG's approach to revenue and cost management
centers around operational assessment, process improvement, organizational
restructuring, and continuous improvement. TMNG's consultants utilize their
industry expertise and the Company's proprietary TMNG QBC (R) (Quality Business
Controls) toolset to deliver quantifiable benefits to clients.
- - Business and Operations Process Redesign and Reengineering
TMNG provides clients with efficient, integrated business and operational
processes, supporting technology systems and web-centric interfaces across all
OSS/BSS applications. TMNG takes clients from the point of customer acquisition
to provisioning all the way through to billing, collections and accounts
receivable management to cash and profits in the bank. TMNG process redesign and
reengineering expertise is put to use not only for the Company's clients, but
also in TMNG's Wireless Technology Lab where the Company is working with its
partners to develop and test leading edge wireless applications.
- - Corporate Investment Services
The Company provides a wide range of corporate investment services to
investment/private equity firms in connection with investments and mergers and
acquisitions in the communications industry. Services include evaluation of
management teams and business plans, identification of strengths and weakness of
the company, and analyses of the company's financial models, systems, products
and operational and business processes. Post-investment support is also provided
to help customers in the optimization of their investment. The Company's
Operational Performance Appraisal (OPA (TM)) features an assessment of
communications companies' revenue assurance, network inventory, network
operations, order management and provisioning, disaster recovery planning and
e-commerce operations and products. The appraisal seeks to help companies
optimize asset utilization, including network assets and inventory. In addition,
OPA(TM) seeks to maximize revenue and minimize associated costs and determine if
the provider's customers are being served effectively.
- - TMNG Resources
TMNG Resources, a business unit of TMNG Marketing, focuses on providing subject
matter experts (SMEs) utilizing a staff augmentation model. As the telecom
industry starts to rebound ever so slowly, the Company believes service
providers may, at least initially, be hesitant to make permanent hiring
decisions and will seek temporary expert staff. The Company believes TMNG
Resources is uniquely positioned to fill the recruiting needs of the Company's
clients.
COMPETITION
The market for communications consulting services is highly fragmented and
changing rapidly. TMNG faces competition from major business and strategy
consulting firms, large systems integration and major global outsourcing firms,
offshore development firms from the Asian markets, equipment and software firms
that have added service offerings, and customers' internal resources. Recently,
there has been a significant increase in demand for firms that can bundle BPO
with systems and technical integration. Many of these competitors are large
organizations that provide a broad range of services to companies in many
industries, including the communications industry. Many of these competitors
have significantly greater financial, technical and marketing resources and
greater name recognition than TMNG. TMNG believes it has a competitive advantage
due to its single focus on the communications industry, and the comprehensive
offerings it provides to its customers. TMNG also believes the complementary
experience and expertise of its professionals represents a competitive
advantage. TMNG's consulting team is comprised of senior professionals recruited
from prestigious university campuses complemented by teams of consultants from
the communications industry averaging 15 years of experience.
The Company has faced, and expects to continue to face, additional competition
from new entrants into the communications consulting markets. The Company has
also experienced increased price competition, particularly from large Asian
firms providing technical support and outsourcing and other large firms that
have the financial resources to aggressively price engagements that they have a
particular interest in obtaining. Increased competition could result in further
price reductions, fewer client projects, underutilization of consultants,
reduced operating margins, and loss of market share.
With the communications industry experiencing significant economic challenge,
contraction and consolidation, TMNG believes the Company's
principal competitive factor is the Company's continual focus on the
communications industry and the ability to develop and provision solutions that
enhance client revenue and asset utilization and provide return on investment.
In a down economic environment, the Company's biggest competitor is the
customer's internal resources. As a result, the most significant competitive
advantage becomes long-lived relationships with key client executives that have
developed over time from consistency in responsiveness to their needs, quality
and reliability of consultants and deliverables, and an appropriate price/value
formula.
EMPLOYEES
TMNG's ability to recruit and retain experienced, highly qualified and highly
motivated personnel has contributed greatly to the Company's performance 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 full time employees or as contingent
employees. Contingent employees 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 personnel who are frequently utilized on
consulting projects, and have a skill set/offering that is in high demand. TMNG
also has relationships with many independent contracting firms to assist in
delivery of consulting solutions. TMNG's current base of independent firms have
specialized expertise in discrete areas of communications, and TMNG typically
deploys these firms only when their unique expertise/offering is required.
As of January 3, 2004, TMNG has utilized approximately 180 consultants,
representing a combination of employee consultants and independent contracting
firms. Of these, 76 were employee consultants and approximately 104 were working
on engagements for TMNG primarily through independent subcontracting firms. In
addition to the consultants, TMNG has an administrative staff of approximately
25 employees in the accounting and finance, marketing, recruiting, information
technology, human resources and administrative areas.
BUSINESS SEGMENTS
Based on an analysis of the criteria in SFAS No. 131 "Disclosure about Segments
of an Enterprise and Related Information" the Company has concluded it has five
operating segments, of which four are aggregated in one reportable segment, the
Management Consulting Services segment, and the remaining segment in All Other.
Management Consulting Services include business strategy and planning,
product/service definition and launch, customer acquisition and retention,
business model transformation, and technical and process modeling for BSS and
OSS environments. All Other consists of computer hardware commissions and
rebates received in connection with the procurement of hardware for third
parties. The accounting policies for the segments are documented in the summary
of significant accounting policies under Item 8, "Consolidated Financial
Statements," Footnote 1 "Organization and Summary of Significant Accounting
Policies." As discussed in Item 8, "Consolidated Financial Statements," Footnote
14, "Subsequent Event," effective March 4, 2004, Management and the Board of
Directors approved the closing of the hardware segment of the business.
Management evaluates segment performance based upon Income (Loss) from
Operations, excluding equity related charges, goodwill and intangibles
amortization, and goodwill and intangible asset impairment. Management also
evaluates trade accounts receivable as part of its overall assessment of the
segments' performance. There are no intersegment sales. Revenues from external
customers, a measurement of profit or loss and total assets for each segment are
disclosed in Item 8, "Consolidated Financial Statements," Footnote 5 "Major
Customers, Business Segments and Significant Group Concentrations of Credit
Risk."
MAJOR CUSTOMERS
Since inception, TMNG has provided services to approximately 600 domestic and
international customers, primarily communication service providers and large
technology and applications firms ("TMNG Partners") serving the communications
industry. The Company depends on a small number of key customers for a
significant portion of revenues. For fiscal year 2003, revenues from Nextel
Communications, Inc. and AT&T Corporation each accounted for more than 10% of
revenues, and in the aggregate accounted for 25.3% of revenues. Also during
fiscal year 2003, the Company's top ten customers accounted for approximately
66.5% of total revenue. TMNG generally provides discounted pricing for large
projects on fixed commitments 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 concentrate on large
wireline and wireless global communications companies headquartered principally
in North America and Western Europe and seeks to offer broad and diversified
services to these customers. 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. The Company anticipates
increased market demand for bundled business process and technical outsourcing
which the Company and its TMNG Partners have formalized agreements to provide.
In addition, the Company provides marketing consulting across multiple business
verticals, primarily on the East Coast of the United States.
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. Additionally,
employees and consultants are required to sign non-disclosure agreements to
assist the Company in protecting its intellectual property. The Company has
obtained federal registration for seventeen trademarks and has filed
applications to register four 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.
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 continue to
experience fluctuations in revenue in the fourth quarter and may experience
fluctuations in summer months and other vacation periods. As the Company expands
internationally, third quarter revenue may fluctuate as a result of significant
vacation periods taken in the summer months.
RISK FACTORS
RISKS THAT RELATE TO TMNG'S BUSINESS
TMNG's business, operating results, and financial condition are subject to
numerous risks, uncertainties, and contingencies, many of which are beyond the
Company's control. The following important factors, among others, could cause
actual results to differ materially from those contemplated in forward-looking
statements made in this Annual Report on Form 10-K or presented elsewhere by
management from time to time. Investors are urged to consider these risk factors
when evaluating an investment in the Company.
TMNG'S RESULTS OF OPERATIONS ARE MATERIALLY AFFECTED BY ECONOMIC CONDITIONS,
LEVELS OF BUSINESS ACTIVITY AND LEVELS OF CHANGE IN THE INDUSTRIES THE COMPANY
SERVES.
Uncertain global economic and political conditions affect many of the Company's
clients' businesses and many clients continue to reduce or defer expenditures
for consulting services. In addition, TMNG's business tends to lag behind
economic cycles and, consequently, the benefits of any industry recovery to the
Company's business may take longer to realize. The Company continues to
experience pricing pressures, but the primary cause of TMNG's eroding revenues
has been budget constraints and budget reductions on the part of the Company's
service provider clients. Further deterioration of global industry, economic or
political conditions could increase these effects.
TMNG FOCUSES ALMOST EXCLUSIVELY ON SERVING THE COMMUNICATIONS INDUSTRY, WHICH
CONTINUES TO EXPERIENCE DECLINING RESULTS OF OPERATIONS, BANKRUPTCIES, FUTURE
UNCERTAINTIES AND A REDUCTION IN THE AVAILABILITY OF INVESTMENT CAPITAL. ADVERSE
INDUSTRY CONDITIONS HAVE RESULTED IN DECLINING DEMAND FOR THE COMPANY'S
SERVICES, DECLINING REVENUES, LOSSES FROM OPERATIONS AND A DECLINE IN TMNG'S
STOCK PRICE, AND COULD CONTINUE TO HARM THE COMPANY. IF CONDITIONS IN THE
COMMUNICATIONS INDUSTRY DO NOT IMPROVE IN THE NEAR FUTURE, THE COMPANY'S
FINANCIAL POSITION MAY CONTINUE TO BE DIMINISHED, THE COMPANY'S LIQUIDITY MAY
BECOME IMPAIRED AND FUNDING FROM THE CAPITAL MARKETS MAY NOT BE AVAILABLE
The Company derived almost all of its revenues from consulting engagements
within the communications industry. Much of the Company's past growth arose from
business opportunities presented by industry trends that included deregulation,
increased competition, technological advances, the growth of e-business and the
convergence of service offerings.
However, beginning in late 2000 and continuing through 2003, many communications
companies, including carriers, equipment manufacturers and other industry
participants have reported declining results of operations and liquidity, and
there have been numerous bankruptcy filings. These events resulted in a
substantial decline in TMNG's revenues and net losses through the fourth quarter
of 2003. The Company's future operating results could continue to be affected by
continuing declines in results of operations and continuing financial
difficulties among communications companies. In addition to continuing decreases
in demand for the Company's services, future client financial difficulties
and/or bankruptcies could require the Company to write-off receivables that are
in excess of bad debt reserves, which would harm the Company's results of
operations in future fiscal periods. Client bankruptcies could also create an
at-risk situation on balances for professional services collected near the
bankruptcy filing date. In addition, the worsening conditions in the
communications sector could cause companies to delay new product and new
business initiatives and to seek to control expenses by reducing use of outside
consultants. Additionally, the communications industry is in a period of
consolidation, which could reduce the Company's client base, eliminate future
opportunities or create conflicts of interest among clients. As a result,
current industry conditions may continue to harm the Company's business,
financial condition, results of operations, liquidity and ability to make
acquisitions and raise investment capital.
TMNG IS DEPENDENT ON A LIMITED NUMBER OF LARGE CUSTOMERS FOR A MAJOR PORTION OF
ITS REVENUES, AND THE LOSS OF A MAJOR CUSTOMER COULD SUBSTANTIALLY REDUCE
REVENUES AND HARM THE COMPANY'S BUSINESS AND LIQUIDITY
TMNG derives a substantial portion of its revenues from a relatively limited
number of clients. The services required by any one client may be affected by
industry consolidation or adverse industry conditions, 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 the Company's services in a subsequent
period.
TMNG's services are often sold under short-term engagements and most clients can
reduce or cancel their contracts with little or no penalty or notice. The
Company's operating results may suffer if it is unable to rapidly re-deploy
consultants if a client defers, modifies or cancels a
project. Consequently, investors should not predict or anticipate the Company's
future revenue based on the number or type of clients TMNG has or the number and
scope of its existing engagements.
THE COMPANY'S REVENUES AND OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY FROM
QUARTER-TO- QUARTER, AND FLUCTUATIONS IN THE COMPANY'S OPERATING RESULTS COULD
CAUSE THE COMPANY'S STOCK PRICE TO DECLINE
TMNG's revenue and operating results may vary significantly from
quarter-to-quarter due to a number of factors. In future quarters, the Company's
operating results may be below the expectations of public market analysts or
investors, and the price of TMNG's common stock may decline. This is especially
true under present economic conditions impacting the communications industry, a
typical result being fewer opportunities and discounted pricing. Factors that
could cause quarterly fluctuations include:
- - the beginning and ending of significant contracts during a quarter;
- - the size and scope of assignments;
- - the form of customer contracts changing primarily from time and materials
to fixed price or contingent fee, based on project results;
- - consultant turnover, utilization rates and billing rates;
- - the loss of key consultants, which could cause clients to end their
relationships with TMNG;
- - the ability of clients to terminate engagements without penalty;
- - fluctuations in demand for the Company's services resulting from budget
cuts, project delays, industry downturns or similar events;
- - clients' decisions to divert resources to other projects, which may limit
clients' resources that would otherwise be allocated to services the
Company could provide;
- - reductions in the prices of services offered by TMNG's competitors;
- - fluctuations in the communications market and economic conditions;
- - seasonality during the summer, vacation and holiday periods;
- - fluctuations in the value of foreign currencies versus the U.S. dollar; and
- - global economic and political conditions and related risks, including acts
of terrorism.
Because a significant portion of the Company's non-consultant 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
continuing 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 the Company could potentially experience further
losses. In addition, the Company's stock price would likely decline.
Additionally, fixed and contingent fee contracts entail subjective judgments and
estimates about revenue recognition and are subject to uncertainties and
contingencies. For a more complete discussion of the Company's accounting for
revenue recognition, see "Critical Accounting Policies" included in Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
TMNG HAS MADE SEVERAL ACQUISITIONS AND MAY CONTINUE TO MAKE ACQUISITIONS, WHICH
ENTAIL RISKS THAT COULD HARM THE COMPANY'S FINANCIAL PERFORMANCE OR STOCK PRICE,
AND MAY BE DILUTIVE TO EXISTING SHAREHOLDERS
As part of the Company's business strategy, TMNG has made and may continue to
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 the Company's existing business;
- - further reductions in the Company's cash reserves;
- - adverse effects on the Company's financial statements, including write-offs
and assumption of liabilities of acquired businesses; and
- - paying too much for an acquired Company.
If TMNG makes acquisitions and any of these problems materialize, these
acquisitions could negatively affect the Company's operations, profitability and
financial condition.
TMNG HAS GENERATED SIGNIFICANT DEFERRED INCOME TAX ASSETS AND IF THE COMPANY IS
NOT ABLE TO GENERATE SUFFICIENT TAXABLE INCOME IN FUTURE PERIODS, THE COMPANY
MAY NOT BE ABLE TO REALIZE THE INCOME TAX BENEFITS RELATED TO THOSE ASSETS
During fiscal year 2003, a valuation allowance in the amount of $24.0 million
was recorded in connection with the Company's deferred tax assets. Management
continues to evaluate the recoverability of the deferred tax assets balances. As
part of its analysis, the impact of sources of future income has not been
included due to the Company's history of cumulative operating losses. In the
event the Company continues to report net operating losses for financial
reporting, no tax benefit would be recognized for those losses.
ANY CONTINUING DECREASE IN CURRENT AND PROJECTED REVENUES MAY RESULT IN
ADDITIONAL ASSET IMPAIRMENTS AND CONTINUE TO ADVERSELY AFFECT THE COMPANY'S
PROFITABLITY
As part of TMNG's business strategy the Company has made and may continue to
make acquisitions. As a result, goodwill and intangible assets constitute an
increasing amount of the assets reported on the Company's balance sheet. The
Company may be required to write down goodwill and intangible assets on the
Company's financial statements as a result of declining revenues and earnings.
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards ("SFAS") No. 142 "Accounting for Goodwill and
Intangible Assets." SFAS No. 142 requires an annual evaluation of goodwill to
determine if an impairment of goodwill has occurred. The evaluation involves
calculating enterprise fair value, which may be based on a number of analyses,
including a discounted cash flow projection of future financial results.
Estimated fair values are then compared to the total recorded book value to
determine if an impairment of goodwill is deemed to have occurred. If an
impairment of goodwill is deemed to have occurred, this would negatively affect
the Company's consolidated results of operations. The Company recorded
impairment charges of $27.1 million and $15.8 million related to the impairment
of goodwill in 2002 and 2003, respectively. If the Company is not able to
achieve projected future operating performance and related cash flows, goodwill
may become further impaired, and the resulting asset impairment would be charged
to operating income.
In connection with SFAS No. 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets" the Company, using its best estimates based on reasonable and
supportable assumptions and projections, reviews for impairment long-lived
assets and certain identifiable intangibles to be held and used whenever events
or changes in circumstances indicate that the carrying amount of its assets
might not be recoverable. During fiscal year 2003, management identified certain
events, including significant decrease in revenue from customers whose
relationships were valued in purchase accounting. The Company performed an
impairment test, and determined that the carrying value of customer
relationships exceeded their fair market value and recorded an impairment loss
of approximately $3.7 million in 2003. If the Company is not able to achieve
projected future operating performance and related cash flows, intangible assets
may become further impaired, and the resulting asset impairment would be charged
to operating income.
THE COMPANY HAS REDUCED CONSULTANT HEADCOUNT DURING THE PAST FISCAL YEAR, AND
THE TERMINATION OF CONSULTANTS COULD RESULT IN A DIMINISHMENT OF CONSULTATIVE
OFFERINGS AVAILABLE TO CUSTOMERS
Beginning in fiscal year 2001 and continuing through fiscal year 2003, the
Company undertook a series of cost-cutting measures, including the reduction in
employee consultant headcount. As the talents and skill sets of these employee
consultants are no longer available to the Company, TMNG could be adversely
affected in its ability to provide various consultative offerings to customers,
potentially resulting in a diminishment of revenue opportunities for the
Company.
THE MARKET IN WHICH TMNG COMPETES IS INTENSELY COMPETITIVE, AND ACTIONS BY
COMPETITORS COULD RENDER THE COMPANY'S SERVICES LESS COMPETITIVE, CAUSING
REVENUES AND INCOME TO DECLINE
The market for consulting services to communications companies is intensely
competitive, highly fragmented and subject to rapid change. Competitors include
strategy and management consulting firms and major global outsourcing firms like
International Business Machines Corporation (IBM), Electronic Data Systems
Corporation (EDS) and Computer Sciences Corporation (CSC), which have become
more significant competitors recently due to the outsource of certain business
support system (BSS) and operating support system (OSS) operations, and large
technical firms from the Asian markets, like Infosys Technologies, Ltd. that
provide significant cost advantage. Some of these competitors have also formed
strategic alliances with communications and technology companies serving the
industry. TMNG also competes with internal resources of its clients. Although
non-exhaustive, a partial list of TMNG's competitors includes:
- - Accenture;
- - Booz-Allen & Hamilton;
- - Cap Gemini Ernst & Young;
- - IBM;
- - Infosys Technologies, Ltd.; and
- - McKinsey & Company.
Many information technology-consulting firms also maintain significant practice
groups devoted to the communications industry. Many of these companies have a
national and international presence and may have greater personnel, financial,
technical and marketing resources. TMNG may not be able to compete successfully
with its existing competitors or with any new competitors.
TMNG also believes the Company's ability to compete depends on a number of
factors outside of its control, including:
- - the prices at which others offer competitive services, including aggressive
price competition and discounting on individual engagements which may
become increasingly prevalent due to worsening economic conditions;
- - the ability and willingness of TMNG's competitors to finance customers'
projects on favorable terms;
- - the ability of TMNG's competitors to undertake more extensive marketing
campaigns than TMNG can;
- - the extent, if any, to which TMNG's competitors develop proprietary tools
that improve their ability to compete with TMNG;
- - the ability of TMNG's customers to perform the services themselves; and
- - the extent of TMNG's competitors' responsiveness to customer needs.
TMNG may not be able to compete effectively on these or other factors. If TMNG
is unable to compete effectively, the Company's market position, and therefore
its revenues and profitability, would decline.
TMNG MUST CONTINUALLY ENHANCE ITS SERVICES TO MEET THE CHANGING NEEDS OF
CUSTOMERS OR THE COMPANY MAY LOSE FUTURE BUSINESS TO ITS COMPETITORS
The Company's future success will depend upon its ability to enhance existing
services and to introduce new services to meet the requirements of customers in
a rapidly developing and evolving market, particularly in the areas of wireless
communications and next generation technologies. Present or future services may
not satisfy the needs of the communications market. If the Company is unable to
anticipate or respond adequately to customer needs, lost business may result and
TMNG's financial performance will suffer.
IF TMNG IS NOT ABLE TO EFFECTIVELY RECRUIT AND RETAIN MANAGEMENT AND CONSULTING
PERSONNEL THAT PROVIDE THE COMPANY WITH NEW TALENT SETS ENABLING THE
IMPLEMENTATION OF NEW STRATEGIC OFFERINGS IN A RAPIDLY CHANGING MARKET, THE
COMPANY'S FINANCIAL PERFORMANCE MAY BE NEGATIVELY IMPACTED.
The Company may face two critical challenges in the recruitment of new
management personnel. The first is the ability to recruit talented management
personnel into a market that is significantly depressed, and the second is the
ability to execute such recruitment with an appropriate compensation
arrangement. If TMNG is not able to effectively recruit within the construct of
these two challenges, the financial performance of the Company may be negatively
affected.
The Company must attract new consultants to implement strategic plans. The
number of potential consultants that meet the Company's hiring criteria is
relatively small, and there is significant competition for these consultants
from direct competitors and others in the communications industry. Competition
for these consultants may result in significant increases in the Company's costs
to attract and retain the consultants, which could reduce margins and
profitability. In addition, TMNG will need to attract consultants in
international locations, principally Europe, to support the Company's
international strategic plans. TMNG has limited experience in recruiting
internationally, and may not be able to do so. Any inability to recruit new
consultants or retain existing consultants could impair the Company's ability to
service existing engagements or undertake new engagements. If the Company is
unable to attract and retain quality consultants, revenues and profitability
would decline.
IF INTERNATIONAL BUSINESS VOLUMES WOULD INCREASE, THE COMPANY MAY BE EXPOSED TO
A NUMBER OF BUSINESS AND ECONOMIC RISKS, WHICH COULD RESULT IN INCREASED
EXPENSES AND DECLINING PROFITABILITY
If TMNG's international business volume increases, business and economic risks
it may face include:
- - unfavorable foreign currency exchange;
- - difficulties in staffing and managing foreign operations;
- - seasonal reductions in business activity;
- - competition from local and foreign-based consulting companies;
- - issues relating to uncertainties of laws and enforcement relating to the
protection of intellectual property;
- - unexpected changes in trading policies and regulatory requirements;
- - legal uncertainties inherent in transnational operations such as export and
import regulations, tariffs and other trade barriers;
- - the impact of foreign laws, regulations, taxes and trade customs;
- - taxation issues;
- - operational issues such as longer customer payment cycles and greater
difficulties in collecting accounts receivable;
- - language and cultural differences;
- - changes in foreign communications markets;
- - increased cost of marketing and servicing international clients;
- - general political and economic trends, including the potential impact of
terrorist attack or international hostilities; and
- - expropriations of assets, including bank accounts, intellectual property
and physical assets by foreign governments.
In addition, TMNG may not be able to successfully execute the Company's business
plan in foreign markets. If TMNG is unable to achieve anticipated levels of
revenues from international operations, overall revenues and profitability may
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
TMNG's 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 its executive officers and key
consultants. TMNG's success is also dependent upon the managerial, operational,
marketing, and administrative skills of any executive officer, particularly
Richard Nespola, the Company's Chairman, President and Chief Executive Officer.
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 PERFORM EFFECTIVELY ON PROJECT ENGAGEMENTS, THE COMPANY'S
REPUTATION, AND THEREFORE COMPETITIVE POSITION AND FINANCIAL PERFORMANCE COULD
BE HARMED
Many of the Company's engagements come from existing clients or from referrals
by existing clients. Therefore, the Company's growth is dependent on its
reputation and on client satisfaction. The failure to perform services that meet
a client's expectations may damage the Company's reputation and harm the
Company's ability to attract new business. Damage to the Company's reputation
arising from client dissatisfaction could therefore harm the Company's financial
performance.
IF TMNG FAILS TO DEVELOP LONG-TERM RELATIONSHIPS WITH ITS CUSTOMERS, THE
COMPANY'S SUCCESS WOULD BE JEOPARDIZED
A substantial majority of the Company's business is derived from repeat
customers. Future success depends to a significant extent on the Company's
ability to develop long-term relationships with successful communications
providers who will give new and repeat business. Inability to build long-term
customer relations would result in declines in the Company's revenues and
profitability. This may increasingly be the case with any further consolidation
or contraction in the industry.
THE COMPANY CLASSIFIES A LARGE NUMBER OF SUBCONTRACTORS AS INDEPENDENT
CONTRACTORS FOR TAX AND EMPLOYMENT LAW PURPOSES, AND IF THESE FIRMS OR PERSONNEL
WERE TO BE RECLASSIFIED AS EMPLOYEES, THE COMPANY COULD BE SUBJECT TO BACK
TAXES, INTEREST, PENALTIES AND OTHER LEGAL CLAIMS
TMNG provides a significant percentage of consulting services through
independent contractors and, therefore, does not pay Federal or state employment
taxes or withhold income taxes for such persons. Further, TMNG generally does
not include these independent contractors in its benefit plans. 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, TMNG would be required to
pay applicable Federal and state employment taxes and withhold income taxes with
respect to such contractors, and could become liable for
amounts required to be paid or withheld in prior periods along with interest and
penalties. In addition, the Company could be required on a going-forward basis
to include such contractors in benefit plans retroactively and going forward.
TMNG COULD BE SUBJECT TO CLAIMS FOR PROFESSIONAL LIABILITY, WHICH COULD HARM THE
COMPANY'S FINANCIAL PERFORMANCE
As a provider of professional services, TMNG faces the risk of liability claims.
A liability claim brought against TMNG could harm the Company's business. TMNG
may also be subject to claims by clients for the actions of the Company's
consultants and employees arising from damages to clients' business or
otherwise, or clients may demand a reduction in fees because of dissatisfaction
with the Company's services.
In particular, the Company is currently a defendant in litigation brought by the
bankruptcy trustee of a former client. This litigation seeks to recover at least
$1.85 million for breach of contract, breach of fiduciary duties and negligence.
In addition, this litigation seeks to recover $320,000 in consulting fees paid
by the former client.
THE MARKET PRICE OF TMNG'S COMMON STOCK IS VOLATILE, AND INVESTORS MAY
EXPERIENCE INVESTMENT LOSSES
The market price of TMNG's common stock is volatile and has declined
significantly from its initial public offering price. The Company's stock price
could continue to decline or fluctuate in response to a variety of factors,
including:
- - variations in quarterly operating results;
- - announcements of technological innovations that render talent outdated;
- - future trends in the communications 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;
- - the relatively small public float and relatively low volume at which the
Company's stock trades;
- - changes in estimates of performance or recommendations by financial
analysts;
- - any further reduction in the Company's revenues or profits during 2004 and
future years; and
- - continuing adverse market conditions in the communications industry and the
economy as a whole.
In addition, the stock market itself experiences significant price and volume
fluctuations. These fluctuations particularly affect the market prices of the
securities of many high technology and communications companies. The Company's
stock price tends to track the stock price of communications companies, which
have declined substantially and may continue to do so. These broad market
fluctuations could continue to harm the market price of the Company's common
stock. If the market price of TMNG's common stock continues to decline, the
Company may risk being delisted from the NASDAQ National Stock market on which
it trades. The recent decline in TMNG's overall market capitalization may also
discourage analysts and investors from following the Company. Additionally, due
to the limited float of the Company's common stock, investors may find their
investment illiquid, and suffer losses.
THE COMPANY'S INABILITY TO PROTECT ITS INTELLECTUAL PROPERTY COULD HARM THE
COMPANY'S COMPETITIVE POSITION AND FINANCIAL PERFORMANCE
Despite TMNG's efforts to protect proprietary rights from unauthorized use or
disclosure, parties, including former employees or consultants, may attempt to
disclose, obtain or use the Company's solutions or technologies. The steps the
Company has 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 the Company's proprietary information could make its solutions and
methodologies available to others and harm the Company's competitive position.
PRINCIPAL STOCKHOLDERS, EXECUTIVE OFFICERS AND DIRECTORS HAVE SUBSTANTIAL
CONTROL OVER THE COMPANY'S VOTING STOCK
Executive officers, directors and stockholders owning more than five percent of
the Company's outstanding common stock (and their affiliates) own a majority of
the Company's outstanding common stock. If all such persons acted together, they
would have the ability to control 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 of the Company's assets) and
to control TMNG's management and affairs. Concentration of ownership of TMNG's
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 the Company. TMNG's officers and directors have a fiduciary
duty to act in the best interest of the Company's shareholders.
THE COMPANY 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 the Company's 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 TMNG's predecessor
entity agreed, at the time TMNG acquired its predecessor, to indemnify the
Company against negative tax consequences arising from TMNG's prior "S"
corporation status. However, 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 Company's 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, if available, may be dilutive to the Company's
stockholders and debt financing, if available, may involve restrictive
covenants, which may limit the Company's operating flexibility with respect to
certain business matters. If additional funds are raised through the issuance of
equity securities, the Company's stockholders may experience dilution in the
voting power or net book value per share of the Company's stock, and any
additional equity securities may have rights, preferences and privileges senior
to those of the holders of the Company's common stock.
ANTI-TAKEOVER PROVISIONS AND THE COMPANY'S RIGHT TO ISSUE PREFERRED STOCK COULD
MAKE A THIRD PARTY ACQUISITION DIFFICULT
The Company's certificate of incorporation, 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 Company's 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, in addition to the Company's
relatively small public float, could make it more difficult for a third party to
acquire the Company.
THE COMPANY MUST DOCUMENT AND MAINTAIN ADEQUATE SYSTEMS AND PROCEDURES TO COMPLY
WITH RECENT LEGAL REFORMS
Recent legal reforms, including the Sarbanes-Oxley Act and related SEC rules,
have created new responsibilities for public company officers and directors. The
Company's ability to comply with these new laws and regulations will depend on
TMNG's ability to document and maintain effective systems and procedures, but
the Company cannot assure that its systems and procedures will always be
adequate for this purpose.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS
For information about foreign and domestic operations, see Item 8, "Consolidated
Financial Statements," Footnote 5 "Major Customers, Business Customers and
Significant Concentrations of Group Credit Risk."
ITEM 2. PROPERTY
The Company's principal executive offices are located in a 4,305 square foot
facility in Overland Park, Kansas. This facility houses the executive, corporate
and administrative offices and is under a lease, which expires in August 2005.
In addition to the executive offices, the Company also leases an 8,175 square
foot facility in Bethesda, Maryland for its TMNG Marketing and TMNG Technology
subsidiaries, which expires in June 2004, and a 21,710 square foot facility in
Boston, Massachusetts, which expires in 2011. The Company is in the process of
negotiating a new five year lease agreement to relocate its Bethesda, Maryland
office to Tyson's Corner, Virginia for similar square footage. The Company
expects the new lease to be executed during the first quarter of fiscal 2004.
The Bethesda and Boston locations are utilized by primarily management and
consulting personnel.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in legal proceedings and litigation arising in the
ordinary course of business. In addition, customer bankruptcies could result in
a claim on collected balances for professional services near the bankruptcy
filing date. While resolution of legal proceedings, claims and litigation may
have an impact on the financial results for the period in which it is resolved,
the Company believes that the ultimate disposition of these matters will not
have a material adverse effect upon its consolidated results of operations, cash
flows or financial position.
In June 1998, the bankruptcy trustee of a former client, Communications Network
Corporation, sued TMNG for a total of $320,000 in the U.S. Bankruptcy Court in
New York seeking recovery of $160,000 alleging an improper payment of consulting
fees paid by the former client during the period from July 1, 1996, when an
involuntary bankruptcy proceeding was initiated against the former client,
through August 6, 1996, when the former client agreed to an order for relief in
the bankruptcy proceeding, and $160,000 in consulting fees paid by the former
client after August 6, 1996.
The bankruptcy trustee has also sued TMNG for at least $1.85 million for breach
of contract, breach of fiduciary duties and negligence. Although assurance
cannot be given as to the ultimate outcome of this proceeding, TMNG believes the
Company has meritorious defenses to the claims made by the bankruptcy trustee,
including particularly the claims for breach of contract, breach of fiduciary
duty and negligence, and that the ultimate resolution of this matter will not
materially harm the Company's business.
In 2002 and 2003, the Company received demands aggregating approximately $1.2
million by the bankruptcy trustees of several former clients in connection with
collected balances near the customers' respective bankruptcy filing dates.
During 2003, the Company settled $102,000 of such demands for $62,000. Although
the Company does not believe it received any preference payments from these
former clients and plans to vigorously defend the remaining claims, the Company
has reserves at January 3, 2004 of $854,000 which it believes are adequate in
the event of loss or settlement on remaining outstanding claims.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 2003.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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 years ending January 03, 2004 and December 28, 2002 by quarter were as
follows:
High Low
First quarter, fiscal year 2003 $ 1.90 $ 1.25
Second quarter, fiscal year 2003 $ 2.02 $ 1.21
Third quarter, fiscal year 2003 $ 2.82 $ 1.74
Fourth quarter, fiscal year 2003 $ 3.53 $ 2.31
High Low
First quarter, fiscal year 2002 $ 7.00 $ 4.51
Second quarter, fiscal year 2002 $ 5.38 $ 1.90
Third quarter, fiscal year 2002 $ 2.12 $ 1.12
Fourth quarter, fiscal year 2002 $ 2.08 $ 1.27
The above information reflects inter-dealer prices, without retail mark-up,
markdown or commissions and may not necessarily represent actual transactions.
As of March 26, 2004 the closing price of the Company's Common Stock was $3.92
per share. At such date, there were approximately 98 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. 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.
EQUITY COMPENSATION PLAN INFORMATION
(a) (c)
NUMBER OF NUMBER OF SECURITIES
SECURITIES TO BE ISSUED REMAINING AVAILABLE
UPON EXERCISE OF (b) FOR FUTURE ISSUANCE
OUTSTANDING OPTIONS WEIGHTED AVERAGE UNDER EQUITY COMPENSATION
OR VESTING OF RESTRICTED EXERCISE PRICE OF PLANS (EXCLUDING SECURITIES
STOCK OUTSTANDING OPTIONS REFLECTED IN COLUMN (a))
PLANS APPROVED BY SECURITY HOLDERS
- - 1998 Equity Incentive Plan - Stock Options 4,863,615 $ 5.18 364,187
- - 1998 Equity Incentive Plan - Restricted Stock 720,000 n/a 780,000
PLANS NOT APPROVED BY SECURITY HOLDERS
- - 2000 Supplemental Stock Plan 1,183,285 $ 4.78 2,659,924
For an additional discussion of the Company's equity compensation plans, see
Item 8, "Consolidated Financial Statements," Footnote 9 "Stock Option Plan and
Stock Based Compensation."
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below have 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 Notes thereto and other financial information appearing
elsewhere in this Annual Report on Form 10-K.
FISCAL YEAR ENDED
-------------------------------------------------------------------------
January 1, December 30, December 29, December 28, January 03,
2000 2000 2001 2002 2004
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues ............................................ $ 50,322 $ 77,727 $ 54,832 $ 34,595 $ 23,476
Cost of services:
Direct cost of services ........................... 26,109 40,396 27,347 16,855 11,935
Equity related charges ............................ 2,780 5,519 2,322 721 (57)
-------- -------- -------- -------- --------
Total cost of services .................... 28,889 45,915 29,669 17,576 11,878
-------- -------- -------- -------- --------
Gross profit ........................................ 21,433 31,812 25,163 17,019 11,598
Operating expenses:
Selling, general and administrative expenses ...... 9,777 16,024 16,767 23,971 19,494
Equity related charges ............................ 1,998 1,564 843 353 142
Goodwill and intangibles amortization ............. 621 1,996 2,887 2,343
Goodwill and intangible asset impairment .......... 25,165 19,484
-------- -------- -------- -------- --------
Total operating expenses .................. 11,775 18,209 19,606 52,376 41,463
-------- -------- -------- -------- --------
Income (loss) from operations ....................... 9,658 13,603 5,557 (35,357) (29,865)
Other income (expense):
Interest income ................................... 277 3,327 2,433 996 624
Interest expense .................................. (1,998) (14) (63) (51)
Other, net ........................................ (68) (152) (8) 26
-------- -------- -------- -------- --------
Total other income (expense) .............. (1,789) 3,175 2,411 959 573
Income (loss) before income tax provision (benefit),
extraordinary item and cumulative effect of a change
in accounting principle ........................... 7,869 16,778 7,968 (34,398) (29,292)
Income tax (provision) benefit ...................... (3,208) (6,711) (2,360) 12,135 (13,032)
-------- -------- -------- -------- --------
Income (loss) before extraordinary item and
cumulative effect of a change in accounting principle 4,661 10,067 5,608 (22,263) (42,324)
Extraordinary item, net of taxes .................... (200)
Cumulative effect of a change in accounting principle,
net of taxes (1,140)
-------- -------- -------- -------- --------
Net income (loss).................................... $ 4,461 $ 10,067 $ 5,608 $(23,403) $(42,324)
======== ======== ======== ======== ========
Net income (loss) before extraordinary item and
cumulative effect of a change in accounting principle
per common share
Basic ............................................. $ 0.20 $ 0.36 $ 0.19 $( 0.68) $ ( 1.26)
======== ======== ======== ======== ========
Diluted ........................................... $ 0.20 $ 0.34 $ 0.18 $( 0.68) $ ( 1.26)
======== ======== ======== ======== ========
Net income (loss) per common share
Basic ............................................. $ 0.19 $ 0.36 $ 0.19 $( 0.71) $ ( 1.26)
======== ======== ======== ======== ========
Diluted ........................................... $ 0.19 $ 0.34 $ 0.18 $( 0.71) $ ( 1.26)
======== ======== ======== ======== ========
Weighted average common shares outstanding
Basic ............................................. 23,056 28,110 29,736 32,734 33,545
======== ======== ======== ======== ========
Diluted ........................................... 23,807 29,208 30,774 32,734 33,545
======== ======== ======== ======== ========
FISCAL YEAR ENDED
---------------------------------------------------------------
January 1, December 30, December 29, December 28, January 03,
2000 2000 2001 2002 2004
--------- --------- ----------- ----------- -----------
CONSOLIDATED BALANCE SHEET DATA:
Net working capital ..................... $ 61,419 $ 89,148 $ 94,569 $ 63,478 $57,231
Total assets ............................ $ 67,382 $119,429 $129,042 $125,459 $80,972
Total debt (including current debt) ..... $ 338 $ 885 $ 493
Total stockholders' equity ............. $ 63,437 $111,472 $123,992 $115,726 $73,369
On November 22, 1999, the SEC 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
$1.6 million, were $71.6 million.
On November 29, 1999 TMNG used $22.3 million of the proceeds from its initial
public offering to repay all indebtedness.
On August 2, 2000, the SEC declared TMNG's Registration Statement on Form S-1
(File No. 333-40864) effective. On August 2, 2000, TMNG closed its offering of
an aggregate of 3,000,000 shares of TMNG Common Stock at an aggregate offering
price of $68.6 million. Net proceeds to TMNG, after deducting underwriting
discounts and commissions of $1.1 million and offering expenses of $728,000 were
$20.9 million. Proceeds were used for working capital, general corporate
purposes and as possible consideration for acquisitions.
On September 5, 2000, the Company completed its acquisition of The Weathersby
Group, a Maryland corporation. The acquisition resulted in a total purchase
price of approximately $19.2 million consisting of $11.2 million cash and $8.0
million in TMNG stock. Additionally, TMNG incurred direct costs of $1.5 million
related to the acquisition.
On September 5, 2001, the Company completed its acquisition of Tri-Com, a
Maryland corporation. The acquisition, recorded under the purchase method of
accounting, included the purchase of all outstanding shares of Tri-Com, which
resulted in a total purchase price of approximately $5.2 million for the equity
and assumption of liabilities. Consideration consisted of $1.8 million cash and
490,417 shares of TMNG common stock valued at $3.0 million. TMNG incurred direct
costs of approximately $180,000 related to the acquisition and recorded this
amount as an increase to purchase price. In addition to the above-mentioned
costs, TMNG recorded approximately $216,000 as an increase to purchase price in
connection with the exchange of the Company's stock options for vested stock
appreciation rights held by Tri-Com employees at the time of acquisition.
On March 6, 2002, the Company completed its acquisition of CSMG, a Delaware
corporation. The acquisition resulted in a total purchase price of approximately
$46.5 million consisting of $33.0 million cash and $13.5 million in TMNG stock.
Additionally, TMNG incurred direct costs of $2.3 million related to the
acquisition and recorded this amount as an increase to purchase price.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated
Financial Statements and Notes thereto of the Company included in this Annual
Report on Form 10-K. The forward-looking statements included in this discussion
and elsewhere in this Form 10-K involve risks and uncertainties, including
anticipated financial performance, business prospects, industry trends,
shareholder returns and other matters, which reflect management's best judgment
based on factors currently known. Actual results and experience could differ
materially from the anticipated results and other expectations expressed in the
Company's forward-looking statements and should be read in conjunction with the
disclosures and information contained in the sections of this Annual Report on
Form 10-K entitled "Disclosures Regarding Forward Looking Statements" and in
Item 1, "Business - Risk Factors."
EXECUTIVE FINANCIAL OVERVIEW
Included in Item 1, "Business", is discussion that includes general overview of
the Company's Business, Market Overview, Business Strategy, Competition and Risk
Factors. The purpose of this executive overview is to complement the qualitative
discussion of the Business from Item 1, with the financial impact on the
Company. As previously noted, the communications industry has experienced a
significant economic recession from 2001 through 2003. TMNG is a consultancy to
the industry, and as a result experienced a significant reduction in consulting
business primarily due to the recession. The Company experienced significant
revenue declines and net loss from 2001 to 2003 (see Item 6, "Selected
Consolidated Financial Data").
As a result of a combination of significantly lower operating results of
reporting units during fiscal years 2002 and 2003, the resignation of certain
key personnel and revised and reduced financial projections, the Company
recorded goodwill and intangible impairment losses of $27.1 million and $19.5
million in fiscal 2002 and 2003, respectively. In fiscal 2003, the Company also
recorded valuation reserves of $24.0 million in connection with the deferred tax
assets, which were generated primarily by goodwill impairment and current
operating losses.
During the fourth quarter of fiscal year 2003, the Company recorded a
preliminary charge of $13.4 million related to increasing the valuation reserve
in connection with its deferred tax assets. On February 12, 2004 the Company
released its fourth quarter and annual financial results which reflected such
charge. As management prepared its Form 10-K and continued to refine the
estimates utilized in the analysis and critically evaluated all availalbe
evidence in the context of SFAS No. 109 "Accounting for Income Taxes" ("SFAS No.
109"), management concluded it was appropriate to increase the valuation reserve
by approximately $4.6 million. The Company has a cumulative three year history
of operating losses. In accordance with the provisions of SFAS No. 109, such
history presents objectively verifiable negative evidence regarding the
recoverabiilty of deferred tax asset balances. Similar objectively verifiable
evidence would be required, such as signed contracts supporting 2004 projected
revenue to support the asset. TMNG is a managment consulting firm and as backlog
and signed contracts do not normally exceed six months, management deemed it
appropriate to fully reserve all deferred tax assets as of January 3, 2004.
The Company has implemented many programs to size the business with its lower
revenue base. Such steps include staff reductions and other selling, general and
administrative cost cutting measures to maintain appropriate pricing and
utilization metrics which are critical to a management consultancy. Such cost
reductions also enabled the Company to minimize cash used in operations. In
fiscal 2003, cash used in
operations was $900,000, compared with cash provided from operations in fiscal
2002 and 2001 accumulating to $20.9 million. However, cash used in operation in
2003 was significantly less than it would have been had such cost-cutting
measures not been adopted. The Company also focused its marketing efforts on
large and sustainable clients to maintain a portfolio of business that is high
credit quality and thus reduce bad debt risks.
OPERATIONAL OVERVIEW
TMNG reports its financial data on a 52/53-week fiscal year for reporting
purposes. Fiscal year 2003 was a 53 week fiscal year. For further discussion of
the Company's fiscal year end see Item 8, "Consolidated Financial Statements,"
Footnote 1 "Organization and Summary of Significant Accounting Policies,"
contained herein.
Revenues typically consist of consulting fees for professional services and
related expense reimbursements. A significant percentage of the Company's
consulting services are contracted on a time and materials basis, a time and
materials basis not to exceed contract price, or a fixed cost basis. Contract
revenues on contracts with a not to exceed contract price or a fixed cost
contract are recorded under the percentage of completion method, utilizing
estimates of project completion under both of these types of contracts. Larger
fixed price contracts have recently begun to represent a more significant
component of the Company's revenue mix.
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 client-related compensation for
consultants who are employees and amortization of equity related non-cash
charges incurred in connection with pre-initial public offering grants of equity
securities and restricted stock awards primarily to consultants, as well as fees
paid to independent contractor organizations and related expense reimbursements.
Employee compensation includes certain unbillable time, training, vacation time,
benefits and payroll taxes. Annual gross margins have ranged from 40.9% to
49.40% during the period from 1999 to 2003. 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 SME's; and
employee and independent contractor organization costs associated with a
competitive labor market.
Operating expenses include selling, general and administrative, equity related
charges, goodwill and intangibles amortization, and intangible asset impairment.
Sales and marketing expenses consist primarily of personnel salaries, bonuses,
and related costs for direct client sales efforts and marketing staff. The
Company primarily uses a relationship sales model in which partners, principals
and senior consultants generate revenues. In addition, sales and marketing
expenses include costs associated with marketing collateral, product
development, trade shows and advertising. General and administrative expenses
consist mainly of accounting and recruiting personnel costs, insurance, rent,
and outside professional services incurred in the normal course of business. The
equity related charges consist of non-cash amortization charges incurred in
connection with pre-initial public offering grants of equity securities and
restricted stock awards, primarily to principals and certain senior executives.
Goodwill and intangibles amortization relates to amortization of identifiable
intangible assets and goodwill amortization recorded prior to the adoption of
SFAS No. 142 "Accounting for Goodwill and Intangible Assets." Impairment relates
to the write down of goodwill calculated in accordance with the provisions of
SFAS No. 142 and write down of other intangibles calculated in accordance with
the provisions of SFAS No. 144"Accounting for the Impairment on Disposal of Long
Lived Assets." Such impairments occur when the carrying amount of a long-lived
asset (asset group) is not recoverable and exceeds its fair value. That
assessment is based on the carrying amount of the asset (asset group) at the
date it is tested for recoverability, whether in use or under development. An
impairment loss shall be measured as the amount by which the carrying amount of
a long-lived asset (asset group) exceeds its fair value.
CRITICAL ACCOUNTING POLICIES
The significant accounting policies of TMNG are summarized in Footnote 1 to the
consolidated financial statements included in Item 8 of this report.
While the selection and application of any accounting policy may involve some
level of subjective judgments and estimates, the Company believe the following
accounting policies are the most critical to the Company's consolidated
financial statements, potentially involve the most subjective judgments in their
selection and application, and are the most susceptible to uncertainties and
changing conditions:
- - Allowance for Doubtful Accounts;
- - Fair Value Accounting of Acquired Businesses;
- - Impairment of Goodwill and Long-lived Intangible Assets;
- - Revenue Recognition; and
- - Deferred Income Tax Assets.
Allowances for Doubtful Accounts - Substantially all of the Company's
receivables are owed by companies in the communications industry, whose recent
adverse conditions are described in Item 1, "Business." The Company typically
bills customers for services after all or a portion of the services have been
performed and require customers to pay within 30 days. The Company attempts to
control credit risk by being diligent in credit approvals, limiting the amount
of credit extended to customers and monitoring customers' payment record and
credit status as work is being performed for them.
The Company recorded bad debt expense in the amounts of $575,000, $1,207,000 and
$812,000 for fiscal years 2003, 2002 and 2001, respectively, and the Company's
allowance for doubtful accounts totaled $652,000, $471,000 and $517,000 at the
end of fiscal years 2003, 2002 and 2001, respectively. The calculation of these
amounts is based on TMNG's judgment about the anticipated default rate on
receivables owed to the Company as of the end of the reporting period. That
judgment was based on the Company's uncollected account experience in prior
years and its ongoing evaluation of the credit status of customers and the
communications industry in general.
The Company has endeavored to mitigate credit risk by concentrating its
marketing efforts on the largest and most stable companies in the communications
industry and by tightly controlling the amount of credit provided to customers.
If TMNG is unsuccessful in these efforts, or if more of the Company's customers
file for bankruptcy or experience financial difficulties, it is possible that
the allowance for doubtful accounts will be insufficient and the Company will
have a greater bad debt loss than the amount reserved, which would adversely
affect the Company's cash flow and financial performance.
Fair Value Accounting of Acquired Businesses - TMNG has acquired three
professional service organizations over the last four years. A significant
component of the value of these acquired businesses has been allocated to
intangible assets. The Financial Accounting Standards Board ("FASB") issued SFAS
No. 141 "Accounting for Business Combinations", which requires acquired
businesses to be recorded at fair value by the acquiring entity. SFAS No. 141
also requires that intangible assets that meet the legal or separable criterion
be separately recognized on the financial statements at their fair value, and
provides guidance on the types of intangible assets subject to recognition.
Determining the fair value for these specifically identified intangible assets
involves significant professional judgment, estimates and projections related to
the valuation to be applied to intangible assets like customer lists, employment
agreements and tradenames. Specifically, the FASB issued EITF No. 02-17
"Recognition of Customer Relationship Intangible Assets Acquired in a Business
Combination" in 2002 which provided an expanded definition of how to value
customer relationships and includes not only the current backlog of an acquired
entity, but also the expectations of future revenues resulting from current
customer relationships. In accordance with the provisions of EITF No. 02-17,
management has made estimates and assumptions regarding projected future
revenues resulting from the customer relationships acquired in TMNG's
acquisitions. The subjective nature of management's assumptions adds an
increased risk associated with estimates surrounding the projected performance
of the acquired entity. Additionally, as the Company amortizes the intangible
assets over time, the purchase accounting allocation directly impacts the
amortization expense the Company records on its financial statements.
Impairment of Goodwill and Long-lived Intangible Assets - Goodwill and other
long-lived intangible assets arising from the Company's acquisitions, as
discussed above, are subjected to periodic review for impairment. SFAS No. 142
requires an annual evaluation at the reporting unit level of the fair value of
goodwill and compares the calculated fair value of the reporting unit to its
book value to determine whether an impairment has been deemed to occur. Any
impairment charge would be based on the most recent estimates of the
recoverability of the recorded goodwill and intangibles balances. If the
remaining book value assigned to goodwill and other intangible assets acquired
in an acquisition is higher than the amounts the Company currently would expect
to realize based on updated financial and cash flow projections from the
reporting unit, there is a requirement to write down these assets. Due to a
combination of significantly lower operating results of reporting units during
fiscal years 2002 and 2003, the resignation of key personnel, and revised and
reduced financial projections, the Company recorded a goodwill impairment loss
in 2002 and 2003 in the amount of $27.1 million and $15.8 million, respectively,
in accordance with the provisions of SFAS No. 142. For an additional discussion
see Item 8, "Consolidated Financial Statements," and Footnote 3 "Goodwill and
Other Intangibles." In accordance with FASB Statement No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets," the Company, using its best
estimates based upon reasonable and supportable assumptions and projections,
reviews for impairment long-lived assets and certain identifiable intangibles to
be held and used whenever events or changes in circumstances indicate that the
carrying amount of its assets might not be recoverable. During fiscal year 2003
management identified certain events, including a significant decrease in
revenue from customers whose relationships were valued in purchase accounting.
The Company performed an impairment test, and determined that the carrying value
of customer relationships exceeded its fair market value and recorded an
aggregate impairment loss of $3.7 million. Fair value was based on an analysis
of projected future cash flows. The impairment loss has been reflected as a
component of Loss from Operation in the Statement of Operations and
Comprehensive Income (Loss).
Revenue Recognition - Historically, most of the Company's consulting practice
contracts have been on a time and material basis, in which customers are billed
for time and materials expended in performing their contracts. The Company
recognized revenue from customer contracts in the period in which services were
performed. TMNG has many types of contracts, including time and materials
contracts, time and materials with cap, fixed fee contracts, and managed
services or outsourcing contracts. The Company recognizes revenues on time and
material with cap and fixed fee contracts using the percentage of completion
method. Percentage of completion accounting involves calculating the percentage
of service provided during the reporting period compared with the total
estimated services to be provided over the duration of the contract. Estimates
of total contract revenues and costs are continuously monitored during the term
of the contract, and recorded revenues and costs are subject to revision as the
contract progress. Such revisions may result in increase or decrease to revenues
and income and are reflected in the
financial statements in the periods in which they are first identified.
Managed services or outsourcing contracts typically have longer contract terms
than consulting contracts. The typical length of the Company's outsourcing
contracts is two to five years. The Company continuously reviews and reassesses
estimates of contract profitability for these types of engagements. If the
Company's estimate indicates a loss will occur, a loss accrual is recorded in
the consolidated financial statements in the period first identified.
Circumstances that could potentially result in contract losses over the life of
the contract include decreases in volumes of transaction or other inputs/outputs
on which the Company is paid, failure to deliver agreed benefits, variances from
planned internal/external costs to deliver the Company's service, and other
factors affecting revenues and costs.
As TMNG continues to adapt to changes in the communications consulting industry,
the Company has elected to enter into more fixed fee contracts in which revenue
is based upon delivery of services or solutions, and contingent fee contracts,
in which revenue is subject to achievement of savings or other agreed upon
results, rather than time spent. Both of these types of contracts are typically
more results-oriented and are subject to greater risk associated with revenue
recognition and overall project profitability than traditional time and
materials contracts. Due to the nature of fixed fee and contingent fee
contracts, the amount and timing of revenue recognized may be subject to
adjustment or deferral, and additional costs and effort as compared to what was
originally planned may need to be expended to fulfill delivery requirements on
such contracts, which could adversely affect the Company's consolidated
financial position, results of operations and liquidity.
Deferred Income Tax Assets - The Company has generated substantial deferred
income tax assets primarily from the accelerated financial statement write-off
of goodwill, the charge to compensation expense taken related to stock options
and net operating loss carry forwards. For the Company to realize the income tax
benefit of these assets, it must generate sufficient income in future periods
when such deductions are allowed for income tax purposes. In assessing whether a
valuation allowance is needed in connection with the Company's deferred income
tax assets, management has evaluated the ability of the Company to carry back
tax losses to prior years that reported taxable income, and the ability of the
Company to generate sufficient income in future periods to utilize the benefit
of the deferred income tax assets. Such projections of future income require
significant subjective judgments and estimates by the Company. As of January 03,
2004, valuation allowances in the amount of $24.0 million are recorded in
connection with the deferred income tax assets. As part of its analysis, the
impact of future income has not been included. The Company did not utilize
projections of estimated future income, as the provisions of SFAS No. 109
"Accounting for Income Taxes" precludes such estimates when a cumulative history
of operating losses exists. In the event the Company continues to report net
operating losses for financial reporting, no tax benefit would be recognized for
those losses.
RESULTS OF OPERATIONS
FISCAL 2003 COMPARED TO FISCAL 2002
REVENUES
Revenues decreased 32.1% to $23.5 million for fiscal 2003 from $34.6 million for
fiscal 2002. The decrease in revenues was primarily associated with the decline
in utilization of management consulting services by communication service
providers, which correlates with significant layoffs of management personnel by
such clients, and continuing adverse conditions in the communication and
technology industry. In addition, there has been continued deferral of key
management consulting pipeline opportunities, an increase in managed services
outsourcing by clients, which partially displaces what were historically
management consulting opportunities for TMNG, and the resignation of certain key
executives of the Company during fiscal year 2003. During fiscal 2003, the
Company provided services on 203 customer projects, compared to 239 projects
performed in fiscal 2002. Average revenue per project was $116,000 in fiscal
2003 compared to $145,000 in fiscal 2002. International revenue base increased
to 9.9% of the Company's revenues for fiscal 2003, from 7.3% for fiscal 2002,
due primarily to the Company's decrease in domestic revenue. The Company's
Management Consulting Services segment contains a portfolio of operations,
marketing and strategy consulting. A decline in revenues occurred in fiscal year
2003 compared to fiscal year 2002 in each of these consulting offerings.
Non-consulting revenues recognized represented 1.0% of consolidated revenues for
fiscal 2003 compared to 4.4% of consolidated revenues for fiscal 2002, and
related primarily to commissions received on hardware sales. Effective March 4,
2004, management and the Board of Directors elected to shut down all hardware
business (for a further discussion see Item 8, "Consolidated Financial
Statements," Footnote 14 "Subsequent Event" contained herein). Revenues
recognized by the Company in connection with fixed price engagements totaled
$6.4 million, and represented 27.4% of consolidated revenue during fiscal 2003.
Included in revenues for fiscal 2003 was $0.7 million related to a customer take
or pay contract, representing the shortfall in consulting services utilized by a
customer in connection with annual minimum usage requirements during fiscal
2003.
COST OF SERVICES