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1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .
COMMISSION FILE NUMBER
THE MANAGEMENT NETWORK GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 48-1129619
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
7300 COLLEGE BOULEVARD,
SUITE 302, OVERLAND PARK, KANSAS 66210
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (913) 345-9315
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
COMMON STOCK (.001 PAR VALUE) NASDAQ NATIONAL MARKET
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE.
Indicate by check mark whether the Registrant (1) has filed all reports to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, as of March 9, 2001 was approximately $121.5 million. Shares of
Common Stock held by each executive officer and director and by each person who
owns 5% or more of the outstanding Common Stock have been excluded in that such
persons may under certain circumstances be deemed to be affiliates. This
determination of executive officer or affiliate status is not necessarily a
conclusive determination for other purposes. As of March 9, 2001, the registrant
had 29,506,078 shares of common stock, par value $0.001 per share (the "Common
Stock"), issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information required to be provided in Part III (Items 10, 11, 12, and
13) of this Annual Report on Form 10-K is hereby incorporated by reference from
the Company's Definitive 2001 Proxy Statement which will be filed with the
Securities and Exchange Commission within 120 days of the end of the Company's
fiscal year.
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THE MANAGEMENT NETWORK GROUP, INC.
FORM 10-K
TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business.................................................... 3
Item 2. Property.................................................... 14
Item 3. Legal Proceedings........................................... 14
Item 4. Submission of Matters to a Vote of Security Holders......... 15
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 15
Item 6. Selected Consolidated Financial Data........................ 16
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 17
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 22
Item 8. Consolidated Financial Statements........................... 22
PART III
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.................................... 39
Item 10. Directors and Executive Officers of the Registrant.......... 39
Item 11. Executive Compensation...................................... 41
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 42
Item 13. Certain Relationships and Related Transactions.............. 42
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 42
SIGNATURES............................................................ 42
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PART I
ITEM 1. BUSINESS
GENERAL
Founded in 1990, The Management Network Group, Inc. ("TMNG" or the
"Company") provides management consulting services to the global
telecommunications and e-business industries, including communications service
providers, technology companies and financial services firms in the United
States, Canada, Europe, Latin America and other major international markets.
TMNG provides comprehensive business solutions from initial, strategic client
needs assessments through improvements in operations. TMNG has consulting
experience with all major aspects of managing a telecommunications company, from
strategy to product concept and launch through order entry, service
provisioning, billing, customer care and retention. The Company offers a
complete solution that addresses the business, information technology and
operational needs associated with all aspects of our clients' requirements. TMNG
works with telecommunications providers by delivering business planning,
management support, process development and operations and e-business support,
systems requirements, selection and implementation. TMNG also utilizes knowledge
of service providers' needs to help the software and technology companies that
serve the telecommunications industry to define strategies, position product
offerings, develop applications, respond to requests for proposals and implement
their solutions within the service provider environment. Finally, TMNG
facilitates the evaluation of proposed investments in telecommunications
companies and related technology companies by investment banking and private
equity firms by providing prospect validation, due diligence and post investment
support services.
The Company capitalizes on industry expertise and proprietary toolsets to
provide strategic, management and operational support to clients. TMNG's
toolsets are consulting guidelines and processes 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 highly experienced consultants who average over
twelve years of industry experience. The Company has worked with numerous global
clients, focusing primarily on North America, Europe and Latin America.
The Company maintains a unique technology and vendor neutral position to
make unbiased evaluations and recommendations that are based on a thorough
knowledge of each solution and each client's situation. Therefore, TMNG is able
to capitalize on extensive experience across complex multi-technology
telecommunications systems environments (front and back office) to provide the
most sound and practical recommendations to clients.
MARKET OVERVIEW
The demand for consulting services has been increasing in the last decade,
a trend that is expected to continue. The growth of the use of the Internet is
further spurring this demand as companies are seeking to improve their business
practices through internet-based communications solutions. As with other
businesses, telecommunications companies are increasingly turning to external
consulting firms to help them improve their business processes, introduce new
products and services and enter new markets as rapidly as possible. Factors such
as deregulation and privatization, mergers and acquisitions within the industry,
and the pace of technological change are driving these companies to seek the
advice of outside experts to supplement their own staff to implement their
strategies.
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The multiple forces affecting the telecommunications industry, including
global deregulation, have led to increased competition and complexity in the
market for all types of communications services. To gain or maintain a
competitive advantage, communications service providers and the technology and
financial firms that focus on the telecommunications industry must understand
the growing complexities and how to best take advantage of the market's
opportunities and challenges, including those driven by the rapid growth of
e-business. With this understanding, these companies must develop sound
strategic plans and implement effective solutions that best exploit the market's
dynamics. To compete effectively, companies must fully understand the
enterprise-wide implications of a proposed solution and must implement these
solutions swiftly with the most cost effective technologies, systems and
processes.
Because the expertise needed by communications companies to address the
market's needs is typically outside their core competencies, they must either
recruit and employ experts or retain outside specialists. Due to the range of
expertise required and the time associated with hiring and training new
personnel, bringing expertise in-house is often not a viable option. When
retaining outside specialists, communications companies need experts that fully
understand the telecommunications industry and can provide timely and unbiased
advice and recommendations.
BUSINESS STRATEGY
The Company's objective is to establish itself as the telecommunications
consulting company of choice to communications service providers, technology
companies and financial services and investment banking firms. The following are
key strategies the company has adopted to pursue this objective.
- Expand geographic reach to serve clients' global needs. The Company
plans to continue expansion geographically to deliver services and
solution capabilities to client companies located around the world. By
offering a full range of professional services on a global basis, the
company can broaden market awareness about TMNG services and solutions
to create new revenue opportunities. In Europe, the competitive market
expertise of TMNG's U.S. consultants is a key factor for European
companies facing the business issues associated with deregulation and
increased competition. TMNG's expertise in Europe can also play a key
role for U.S. companies expanding their European business.
- Expand distribution channels and product offering. The Company has
expanded its offerings to include OSS (Operating Support System) to
clients, with a customer-focused info-structure, ensuring an
integrated end-to-end OSS solution. The Company's OSS solution
includes an Internet based OSS platform that provides art-order
management, zero-touch provisioning, real-time billing, self-learning
customer-focused networks management, and other next generation OSS
functions. Additionally, in fiscal year 2000 the Company acquired The
Weathersby Group to create a new wholly owned TMNG subsidiary, TWG
Marketing. TWG Marketing provides a full spectrum of marketing
consulting services from strategic planning to product delivery and
customer acquisition. The Company plans to continue extending its
product offerings to the telecommunications industry.
- Focus on supporting current target market's e-business needs through
TMNG.com business. Because communications service providers represent
the infrastructure of the Internet, the ability of these service
providers to build an infrastructure to meet the demand for increased
Internet traffic will be critical to their businesses. More
specifically, the growth of the Internet has also led to a greater
demand for internet-based business support services and the seamless
integration of electronic services with traditional means of
interacting with customers. Through TMNG.com, the Company combines
telecommunications knowledge with developing e-business expertise to
help telecommunications service providers build the infrastructure,
systems, processes and services to address these opportunities. As
communications service providers begin to deploy their application
hosting strategies, TMNG.com will also address their back-office
requirements to support their application-based initiatives.
- Further develop and enhance the expandable business model for
continued growth.
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TMNG plans to further enhance the expandable business model to
accommodate the anticipated need for consulting services generated by
industry growth. The key elements of the business model include
attracting and retaining high quality, experienced consultants and
creating business processes that can be duplicated worldwide. The
Company attracts high quality consultants with a broad range of
experience and knowledge within the telecommunications industry
through aggressive recruitment efforts, including focused external
recruiting, in-house recruiting specialists and consultant referral
incentive programs. TMNG retains consultants through a variety of
programs, including a stock option plan, competitive compensation
packages, flexible employment model and dynamic, challenging
assignments at the forefront of the telecommunications industry. TMNG
has implemented a flexible employee model to enable the Company to
hire and retain consultants and provide them with a robust employee
benefits package. The model allows the Company to better manage
utilization and to minimize unbilled consultant time. To support
anticipated growth, TMNG creates business processes that can be used
worldwide in any consulting engagement. Toolsets provide TMNG
consultants with methodologies that they use to augment their
experience and help analyze and solve clients' problems. TMNG utilizes
a network of eRooms to serve as a knowledge base, enable consultant
collaboration on engagements and provide support information and
updates of TMNG current toolsets and releases of next generation
tools. TMNG intends to leverage Internet communication capabilities to
retain a flexible, "virtual" structure.
- Extending market leadership position and building the TMNG brand. TMNG
plans to expand the Company's leadership position in the
telecommunications consulting industry and to establish TMNG as the
consulting firm of choice for communications service providers and the
technology and banking companies that serve them. TMNG plans to
capitalize on extensive industry knowledge, strong client base, and
highly qualified and experienced professionals to help clients provide
more value-added services to their customer base. The Company has
aggressive marketing initiatives underway to continue building
corporate brand.
SERVICES
- Service Provider Consulting. The Company provides all types of
carriers and service providers with services ranging from high-level
strategy definition, product introduction and launch, through process
improvements to operations to help extend their worldwide reach. TMNG
analyzes market trends and dynamics for telecommunications service
providers and advises them on market evolution and development. The
Company enables service providers to define, refine and implement
strategies through business case development and market launch
planning. In addition, TMNG will analyze acquisition opportunities to
determine if they are complementary to strategies clients are
implementing.
- Product development strategic consulting. TMNG assists technology and
software companies analyze and focus their product and development
strategies and efforts to meet the needs of telecommunications service
providers. TMNG's knowledge of service provider requirements, along
with the Company's toolsets, provides significant benefit to
technology companies as they develop new products and applications.
- Market research and analysis. TMNG assists technology and software
companies analyze market trends and dynamics to improve their ability
to respond to the requirements of changing and evolving markets.
- Responses to requests for proposals. TMNG assists technology, software
and consulting companies in responding to requests for proposals that
they receive from service providers and others. TMNG's expertise
enables the Company to ascertain the most critical elements of a
request for proposal and to help clients prepare responses.
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- Implementation support. For global consulting firms that have
engagements which require specialized telecommunications expertise,
TMNG serves as the telecommunications experts. In addition, TMNG
supports software clients by assisting with program management for
software implementation.
- Evaluation. TMNG assists investment banking and financial services
firms with prospect validation and due diligence in connection with
planned investments and other transactions. TMNG's broad knowledge of
the industry and subject matter expertise speed up the evaluation
process. TMNG's prospect validation services include candidate
validation, business plan development, financial modeling and contract
development and negotiation. TMNG's consultants and toolsets also
facilitate rapid development and execution when conducting due
diligence. TMNG's services in this area include business plan
evaluation and validation, financial model analysis, product and
evaluation, benchmarking, organization and business process
validation, systems evaluation, and network plan reviews.
- Post-Investment Support. TMNG provides to its banking and financial
service clients that have made investments in the telecommunications
industry a broad range of post-investment support services, including
project and program management, system selection and implementation,
process development and reengineering, communications services product
development, financial operations management for carrier billing and
operations, call center management, and billing and collections
management.
COMPETITION
The market for telecommunications consulting services is highly fragmented
and changing rapidly. TMNG faces competition from major business consulting
firms, the consulting arms of accounting and other professional services
organizations and customers' internal resources. These competitors are major
consulting firms that provide a broad range of services to companies in many
industries, including the telecommunications industry. Many of these competitors
have significantly greater financial, technical and marketing resources and
greater name recognition than TMNG.
The Company has faced, and expects to continue to face, additional
competition from new entrants into the communications markets. The Company has
also experienced increased price competition, particularly from larger firms
that have the financial resources to aggressively price engagements that they
have a particular interest in obtaining. Increased competition could result in
price reductions, fewer client projects, underutilization of consultants,
reduced operating margins, and loss of market share.
The principal competitive factors in the market include responsiveness to
the needs of customers, quality and reliability of consultants, price, project
management capability and technical expertise. The Company's ability to compete
depends in part on performance, a focused service offering formula, the
price/value formula of TMNG service offerings, responsiveness to customer needs
and the ability to hire, retain, and motivate key personnel.
EMPLOYEES
TMNG's ability to recruit and retain experienced, highly-qualified and
highly-motivated personnel has contributed greatly to the Company's success and
will be critical in the future. The Company offers a flexible recruiting model
that enhances the ability to attract consultants and to effectively manage
utilization. TMNG's consultants may work as employees, independent subject
matter experts or as contingent employees. Contingent employees will, unlike
independent subject matter experts, receive company-paid medical insurance,
vacation and other employee benefits. Instead of receiving a regular salary,
however, contingent employees will only be paid for time spent working on
consulting projects for customers or working on internal projects. Generally,
TMNG will offer contingent employment to independent subject matter experts that
are regularly involved in consulting projects, have a broad range of expertise
and are highly utilized by the Company. TMNG's current independent subject
matter expert base also includes individuals with specialized expertise in
discrete areas, and TMNG typically deploys these individuals only when their
unique expertise is necessary.
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As of December 30, 2000, TMNG utilized approximately 526 consultants. Of
these, 129 were employee consultants and approximately 397 were working on
engagements for TMNG as independent subject matter experts. In addition to the
consultants, TMNG has an administrative staff of approximately 41 employees in
the accounting and finance, marketing, recruiting, information technology, human
resources and administrative areas.
MAJOR CUSTOMERS
As of December 30, 2000 TMNG has provided services to approximately 400
customers. The Company depends on a few key customers for a significant portion
of revenues. For fiscal year 2000, revenues from Williams Communications
accounted for more than ten percent of revenues. In fiscal year 1999, revenues
from Williams Communications Group and diAx each accounted for more than ten
percent of revenues. TMNG generally negotiates discounted pricing for large
projects with long-term customers. Because TMNG's clients typically engage
services on a project basis, their needs for services vary substantially from
period to period. TMNG continues to diversify the Company's customer base and
expand the portion of revenues, however, the Company anticipates that operating
results will continue to depend on volume services to a relatively small number
of communication service providers and technology vendors.
INTELLECTUAL PROPERTY
TMNG's success is dependent, in part, upon proprietary processes and
methodologies, and the Company relies upon a combination of copyright, trade
secret, and trademark law to protect intellectual property. The Company has
obtained federal registration for nine trademarks in the United States and has
filed applications to register five 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 in the future
experience fluctuations in revenue in the fourth quarter as well as summer and
other vacation periods as the Company expands internationally.
RISK FACTORS
The following important factors, among others, could cause actual results
to differ materially from those contained in forward-looking statements made in
this Annual Report on Form 10-K or presented elsewhere by management from time
to time.
WE FOCUS EXCLUSIVELY ON SERVING THE TELECOMMUNICATIONS INDUSTRY AND THEREFORE
CHANGES IN THIS INDUSTRY COULD REDUCE OUR CUSTOMER BASE OR CAUSE CUSTOMERS TO
USE INTERNAL RESOURCES
We derive a significant amount of our revenues from consulting engagements
within the telecommunications industry. Much of our recent growth has arisen
from business opportunities presented by industry trends that include
deregulation, increased competition, technological advances, the growth of
e-business and the convergence of service offerings.
If these trends change, the demand for telecommunications consulting work
will likely decrease. In addition, the telecommunications industry is in a
period of consolidation, which could reduce the client base, eliminate future
opportunities or create conflicts of interest among clients. Additionally,
current and future economic pressures in the industry may cause
telecommunications companies to use internal resources in lieu of outside
consultants. As a result, our customer base and revenues may decline.
WE ARE DEPENDENT ON A LIMITED NUMBER OF LARGE CUSTOMERS FOR A MAJOR PORTION OF
OUR REVENUES, AND THE LOSS OF A MAJOR CUSTOMER COULD REDUCE REVENUES AND HARM
OUR BUSINESS
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A significant portion of our revenues are derived from a relatively limited
number of clients. For example, during fiscal year 2000, Williams Communications
Group accounted for more than ten percent of revenues and revenues from our ten
most significant clients accounted for approximately 68% of revenues. The
services required by any one client may be affected by industry consolidation,
technological developments, economic slowdown or internal budget constraints. As
a result, the volume of work performed for specific clients varies from period
to period, and a major client in one period may not use our services in a
subsequent period.
Our services are often sold under short-term engagements and most clients
can reduce or cancel their contracts with little or no penalty or notice. Our
operating results may suffer if we are unable to rapidly deploy consultants if a
client defers, modifies or cancels a project. Consequently, you should not
predict or anticipate our future revenue based on the number of clients we have
or the number and scope of our existing engagements.
OUR REVENUES AND OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY FROM QUARTER TO
QUARTER, AND FLUCTUATIONS IN OPERATING RESULTS COULD CAUSE OUR STOCK PRICE TO
DECLINE
Our revenue and operating results may vary significantly from
quarter-to-quarter due to a number of factors. In future quarters, our operating
results may be below the expectations of public market analysts or investors,
and the price of our common stock may decline. Factors that could cause
quarterly fluctuations include:
- the beginning and ending of significant contracts during a quarter;
- the size and scope of the assignments;
- consultant turnover, utilization rates and billing rates;
- the loss of key consultants, which could cause clients to end their
relationship with us;
- the ability of clients to terminate engagements without penalty;
- fluctuations in demand for our services resulting from budget cuts,
project delays, cyclical downturns or similar events;
- clients' decisions to divert resources to other projects, which may
limit clients' resources that would otherwise be allocated to projects
we could provide;
- reductions in the prices of services offered by our competitors;
- fluctuations in the telecommunications market and economic conditions;
- seasonality during the summer, vacation and holiday periods; and
- fluctuations in the value of foreign currencies versus the U.S. dollar
Because a significant portion of our 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 our
operating results from quarter-to-quarter and could result in losses. To the
extent the addition of consultant employees is not followed by corresponding
increases in revenues, additional expenses would be incurred that would not be
matched by corresponding revenues. Therefore, profitability would decline and we
could potentially experience losses. In addition, our stock price would likely
decline.
THE TELECOMMUNICATIONS INDUSTRY HAS RECENTLY EXPERIENCED DECLINING RESULTS OF
OPERATIONS AND A REDUCTION IN THE AVAILABILITY OF INVESTMENT CAPITAL, AND
INDUSTRY CONDITIONS COULD HARM OUR BUSINESS.
Our future operating results could be affected by declining results of
operations among telecommunications companies as well as client financial
difficulties. Beginning in late 2000 and continuing into 2001, many
telecommunications companies, including carriers, equipment manufacturers and
other industry participants have begun reporting declining results of
operations. For example, during the third quarter, one of our clients declared
bankruptcy. Our accounts receivable reserves are sufficient to cover the
potential exposure with this client.
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However, future client financial difficulties that result in write-offs that are
in excess of our bad debt reserves could harm our results of operations in
future fiscal periods.
In addition, the worsening conditions in the telecommunications sector
could cause companies to delay new product and new business initiatives and to
seek to control expenses by reducing use of outside consultants. As a result,
current industry conditions could harm our business, financial condition and
results of operations.
WE MUST CONTINUE TO ATTRACT AND RETAIN QUALITY CONSULTANTS, AND OUR INABILITY TO
DO SO WOULD IMPAIR OUR ABILITY TO SERVICE EXISTING ENGAGEMENTS OR UNDERTAKE NEW
ENGAGEMENTS, RESULTING IN A DECLINE IN OUR REVENUES AND INCOME.
We must attract a significant number of new consultants to implement growth
plans. The number of potential consultants that meet our hiring criteria is
relatively small, and there is significant competition for these consultants
from direct competitors and others in the telecommunications industry.
Competition for these consultants may result in significant increases in costs
to retain the consultants, which could reduce our margins and profitability. In
addition, we will need to attract consultants in international locations,
principally Europe, to support our international growth plans. We have limited
experience in recruiting internationally, and we may not be able to do so. Our
inability to recruit new consultants and retain existing consultants could
impair our ability to service existing engagements or undertake new engagements.
If we are unable to attract and retain consultants, revenues and profitability
would decline.
THE MARKET IN WHICH WE COMPETE IS INTENSELY COMPETITIVE AND ACTIONS BY OUR
COMPETITORS COULD RENDER OUR SERVICES LESS COMPETITIVE CAUSING REVENUES AND
INCOME TO DECLINE
The market for consulting services to telecommunications companies is
intensely competitive, highly fragmented and subject to rapid change.
Competitors include general management consulting firms, the consulting
practices of "Big Five" accounting firms, most of which have practice groups
focused on the telecommunications industry and local or regional firms
specializing in telecommunications services. Some of these competitors have also
formed strategic alliances with telecommunications and technology companies
serving the industry. We also compete with internal resources of our clients.
Our competitors include:
- American Management Systems;
- Accenture;
- Booz-Allen & Hamilton;
- The Boston Consulting Group;
- Cap Gemini Ernst & Young;
- KPMG; and
- PricewaterhouseCoopers.
Many information technology consulting firms also maintain significant
practice groups devoted to the telecommunications industry. Many of these
companies have a national and international presence and may have greater
personnel, financial, technical and marketing resources. We may not be able to
compete successfully with our existing competitors or with any new competitors.
We also believe our ability to compete depends on a number of factors
outside of our 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 our competitors to finance
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customers' projects on favorable terms;
- the ability of our competitors to undertake more extensive marketing
campaigns than we can;
- the extent, if any, to which our competitors develop proprietary
tools that improve their ability to compete with us;
- the ability of our customers to perform the services themselves; and
- the extent of our competitors' responsiveness to customer needs.
We may not be able to compete effectively on these or other factors. If we
are unable to compete effectively, our market position, and therefore our
revenues and profitability, would decline.
WE HAVE EXPERIENCED SIGNIFICANT GROWTH IN THE BUSINESS IN RECENT PERIODS, AND IF
WE ARE UNABLE TO MANAGE THIS GROWTH, OUR OPERATIONAL INFRASTRUCTURE MAY NOT BE
ABLE TO SUPPORT GROWTH
We are currently experiencing a period of rapid growth that may strain
managerial and operational resources. To support growth, our organizational
infrastructure must grow accordingly.
To manage the expected growth of our operations and personnel, we must:
- improve existing and implement new operational, financial and
management controls, reporting systems and procedures; and
- maintain and expand our financial management information systems.
If we fail to address these issues, our operational infrastructure may be
insufficient to support our levels of business activity. In this event, we could
experience disruptions in our business and declining revenues or profitability.
IF WE DO NOT EFFECTIVELY MANAGE THE CONVERSION OF OUR INDEPENDENT SUBJECT MATTER
EXPERTS TO EMPLOYEES, WE COULD INCUR UNANTICIPATED COSTS WHICH WOULD HARM OUR
FINANCIAL PERFORMANCE
We offer contingent employee or full-time employee status to certain of our
independent subject matter experts. As independent subject matter experts are
converted to consultant employees, we will incur additional fixed costs for each
such employee that we do not incur when retained as an independent subject
matter expert. To effectively manage these additional fixed costs, we will need
to continuously improve utilization management and minimize unbilled employee
time. In addition, this change may cause other disruptions to our business. If
we fail to effectively manage this transition, we could incur additional costs
due to underutilization of full-time employees as well as other unanticipated
costs.
WE MUST CONTINUALLY ENHANCE OUR SERVICES TO MEET THE CHANGING NEEDS OF OUR
CUSTOMERS OR WE MAY LOSE FUTURE BUSINESS TO OUR COMPETITORS
Our future success will depend upon our ability to enhance existing
services and to introduce new services to meet the requirements of our customers
in a rapidly developing and evolving market. Present or future services may not
satisfy the needs of the telecommunications market. If we are unable to
anticipate or respond adequately to our customers' needs, lost business may
result and our financial performance will suffer.
PLANS FOR INTERNATIONAL EXPANSION MAY NOT SUCCEED, WHICH WOULD HARM OUR REVENUES
AND PROFITABILITY
Future revenues depend to a large extent on expansion into international
markets. International operations might not succeed for a number of reasons,
including:
- difficulties in staffing and managing foreign operations;
- seasonal reductions in business activity;
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- fluctuations in currency exchange rates or imposition of currency
exchange controls;
- 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;
- taxation issues;
- operational issues such as longer customer payment cycles and
greater difficulties in collecting accounts receivable;
- language and cultural differences;
- general political and economic trends; and
- expropriations of assets, including bank accounts, intellectual
property and physical assets by foreign governments.
Accordingly, we may not be able to successfully execute the business plan
in foreign markets. If we are unable to achieve anticipated levels of revenues
from international operations, our revenues and profitability would decline.
IF INTERNATIONAL BUSINESS VOLUMES INCREASE, WE WILL BE EXPOSED TO GREATER
FOREIGN CURRENCY EXCHANGE RISKS, WHICH COULD RESULT IN INCREASED EXPENSES AND
DECLINING PROFITABILITY
Revenues derived from our international engagements continued to increase
in fiscal year 2000 and may continue to increase. Some international engagements
are denominated in the local currency of the clients. Expenses incurred in
delivering these services, consisting primarily of consultant compensation, are
typically denominated in U.S. dollars. To the extent that the value of a
currency in which billings are denominated decreases in relation to the U.S.
dollar or another currency in which expenses are denominated, our operating
results and financial condition could be harmed. We may hedge our foreign
currency exposure from time to time, but hedging may not be effective.
OUR TMNG.COM BUSINESS IS DEPENDENT ON CONTINUED GROWTH, USE AND ACCEPTANCE OF
THE INTERNET AND E-BUSINESS
Our success in providing e-business related consulting services depends in
part on widespread acceptance and use of the Internet as a way to conduct
business. The Internet and e-business may not become a viable long-term
commercial marketplace due to potentially inadequate development of the
necessary network infrastructure or delayed development of enabling technologies
and performance improvements. Our business would be harmed if:
- use of the Internet and other online services does not increase or
increases at a slower pace than expected or on-line services do not
become viable marketplaces;
- the infrastructure for the Internet and other online services does
not effectively support future expansion of e-business; or
- concerns over security and privacy inhibit the growth of the
internet.
The failure of the Internet to continue to grow would inhibit the demand for our
TMNG.com consulting services and our revenues and financial performance.
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WE ARE DEPENDENT ON A LIMITED NUMBER OF KEY PERSONNEL, AND THE LOSS OF THESE
INDIVIDUALS COULD HARM OUR COMPETITIVE POSITION AND FINANCIAL PERFORMANCE
Our business consists primarily of the delivery of professional services
and, accordingly, our success depends upon the efforts, abilities, business
generation capabilities and project execution of our executive officers and key
consultants. Our success is also dependent upon the managerial, operational and
administrative skills of our executive officers, particularly Richard Nespola,
our 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 our
financial performance.
IF WE FAIL TO PERFORM EFFECTIVELY ON PROJECT ENGAGEMENTS, OUR REPUTATION, AND
THEREFORE OUR COMPETITIVE POSITION AND FINANCIAL PERFORMANCE COULD BE HARMED
Many of our engagements come from existing clients or from referrals by
existing clients. Therefore, our growth is dependent on our reputation and on
client satisfaction. The failure to perform services that meet a client's
expectations may damage our reputation and harm our ability to attract new
business. Damage to our reputation arising from client dissatisfaction could
therefore harm our financial performance.
IF WE FAIL TO DEVELOP LONG-TERM RELATIONSHIPS WITH OUR CUSTOMERS, OUR SUCCESS
WOULD BE JEOPARDIZED
A substantial majority of our business is derived from repeat customers.
Future success depends to a significant extent on our ability to develop
long-term relationships with successful telecommunications providers who will
give new and repeat business. Inability to build long-term customer relations
would result in declines in our revenues and profitability.
A LARGE NUMBER OF PERSONNEL ARE CLASSIFIED AS INDEPENDENT CONTRACTORS FOR TAX
AND EMPLOYMENT LAW PURPOSES, AND IF THESE PERSONNEL WERE TO BE RECLASSIFIED AS
EMPLOYEES, WE COULD BE SUBJECT TO BACK TAXES, INTEREST, PENALTIES AND OTHER
LEGAL CLAIMS
We provide approximately half of our consulting services through
independent contractors and, therefore, do not pay federal or state employment
taxes or withhold income taxes for such persons. Further, we generally do not
include these independent subject matter experts in our benefit plans. In the
future, the IRS and state authorities may challenge the status of consultants as
independent contractors. Independent subject matter experts may also initiate
proceedings to seek reclassification as employees under state law. In either
case, if persons engaged by us as independent subject matter experts are
determined to be employees by the IRS or any state taxation department, we would
be required to pay applicable federal and state employment taxes and withhold
income taxes with respect to such persons and could become liable for amounts
required to be paid or withheld in prior periods along with penalties. In
addition, we could be required to include such persons in our benefit plans
retroactively and going forward. Any challenge by the IRS or state authorities
or individuals resulting in a determination that a substantial number of persons
we have classified as independent subject matter experts are actually employees
could subject us to liability for back taxes, interest and penalties, which
would harm our profitability.
WE COULD BE SUBJECT TO CLAIMS FOR PROFESSIONAL LIABILITY, WHICH COULD HARM OUR
FINANCIAL PERFORMANCE
As a provider of professional services, we face the risk of liability
claims. A liability claim brought against us could harm our business. We may
also be subject to claims by clients for the actions of our consultants and
employees arising from damages to clients' business or otherwise.
In particular, we are currently a defendant in litigation brought by the
bankruptcy trustee of a former client. This litigation seeks to recover $320,000
in consulting fees paid by the former client and also seeks to recover at least
$1.85 million for breach of contract, breach of fiduciary duties and negligence.
THE MARKET PRICE OF OUR COMMON STOCK MAY BE VOLATILE, AND INVESTORS MAY
EXPERIENCE INVESTMENT LOSSES
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The market price of our common stock is volatile. Our stock price could
decline or fluctuate in response to a variety of factors, including:
- variations in quarterly operating results;
- announcements of technological innovations that render talent outdated;
- trends in the telecommunications industry;
- acquisitions or strategic alliances by the Company or others in the
industry;
- failure to achieve financial analysts' or other estimates of results of
operations for any fiscal period;
- changes in estimates of performance or recommendations by financial
analysts; and
- market conditions in the telecommunications industry and the economy as a
whole.
In addition, the stock market experiences significant price and volume
fluctuations. These fluctuations particularly affect the market prices of the
securities of many high technology companies. These broad market fluctuations
could harm the market price of our common stock.
WE MAY MAKE ACQUISITIONS, WHICH ENTAIL RISKS THAT COULD HARM OUR FINANCIAL
PERFORMANCE OR STOCK PRICE
As part of our business strategy, we have made and will likely 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 existing business; and
- adverse effects on the financial statements, including one-time
write-offs, ongoing charges for amortization of goodwill and assumption
of liabilities of acquired businesses.
If the we make acquisitions and any of these problems materialize, these
acquisitions could negatively affect our operations, profitability and financial
operations.
OUR INABILITY TO PROTECT INTELLECTUAL PROPERTY COULD HARM OUR COMPETITIVE
POSITION AND FINANCIAL PERFORMANCE
Despite our efforts to protect proprietary rights from unauthorized use or
disclosure, parties, including former employees or consultants, may attempt to
disclose, obtain or use our solutions or technologies. The steps we have taken
may not prevent misappropriation of solutions or technologies, particularly in
foreign countries where laws or law enforcement practices may not protect
proprietary rights as fully as in the United States. Unauthorized disclosure of
proprietary information could make our solutions and methodologies available to
others and harm the our competitive position.
PRINCIPAL STOCKHOLDERS, EXECUTIVE OFFICERS AND DIRECTORS WILL RETAIN SUBSTANTIAL
CONTROL OVER US AND MAY MAKE DECISIONS THAT ARE NOT IN THE BEST INTEREST OF OUR
OTHER STOCKHOLDERS
Executive officers, directors and stockholders owning more than five
percent of outstanding common stock (and their affiliates) own over a majority
of our outstanding common stock. As a result, such persons, acting together,
have the ability to substantially influence all matters submitted to the
stockholders for approval (including the election and removal of directors and
any merger, consolidation or sale of all or substantially all assets) and to
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control management and affairs. Accordingly, concentration of ownership of our
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 us or discouraging a potential acquirer from making a
tender offer or otherwise attempting to obtain control of us, even if such a
transaction would be beneficial to other stockholders.
WE 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 US
From 1993 through 1998, we were taxed as a "pass-through" entity under
subchapter "S" of the Internal Revenue Code. Since February 1998, we have 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 our tax returns for the years in which we
were 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, we could be obligated to pay back taxes, interest and penalties. The
stockholders of our predecessor entity agreed, at the time we acquired our
predecessor, to indemnify us against negative tax consequences arising from our
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 our financial performance.
WE MAY SEEK TO RAISE ADDITIONAL FUNDS, AND ADDITIONAL FUNDING MAY BE DILUTIVE TO
OUR STOCKHOLDERS OR IMPOSE OPERATIONAL RESTRICTIONS
Any additional equity financing may be dilutive to our stockholders and
debt financing, if available, may involve restrictive covenants, which may limit
our operating flexibility with respect to certain business matters. If
additional funds are raised through the issuance of equity securities, the
percentage ownership of stockholders will be reduced. These stockholders may
experience additional dilution in net book value per share and any additional
equity securities may have rights, preferences and privileges senior to those of
the holders of our common stock.
ANTI-TAKEOVER PROVISIONS AND OUR RIGHT TO ISSUE PREFERRED STOCK COULD MAKE A
THIRD PARTY ACQUISITION DIFFICULT
Our certificate of incorporation and bylaws and anti-takeover provisions of
Delaware law could make it more difficult for a third party to acquire control,
even if a change in control would be beneficial to stockholders. In addition,
the bylaws provide for a classified board, with board members serving staggered
three-year terms. The Delaware anti-takeover provisions and the existence of a
classified board could make it more difficult for a third party to acquire the
Company.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS
For information about foreign and domestic operations, see Note 3 of Notes
to Consolidated Financial Statements.
ITEM 2. PROPERTY
The Company's principal executive offices are located in a 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. The Company also leases a 8,175 square foot facility in Bethesda,
Maryland for its TWG Marketing subsidiary.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in legal proceedings and litigation arising in the
ordinary course of business. The Company believes the outcome of all current
proceedings, claims and litigation will not have a material adverse effect on
the Company's financial position or results of operations when resolved in a
future period.
In June 1998, the bankruptcy trustee of a former client, Communications
Network Corporation, sued TMNG in the U.S. Bankruptcy Court in New York seeking
recovery of $160,000 in improper payment of consulting fees paid by the former
client during the period from July 1, 1996, when an involuntary bankruptcy
proceeding was initiated against the former client, through August 6, 1996, when
the former client agreed to an order for relief in the bankruptcy proceeding,
and $160,000 in consulting fees paid by the former client after August 6, 1996.
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The bankruptcy trustee has also sued TMNG for at least $1.85 million for breach
of contract, breach of fiduciary duties and negligence. Although assurance
cannot be given as to the ultimate outcome of this proceeding, TMNG believes the
Company has meritorious defenses to the claims made by the bankruptcy trustee,
including particularly the claims for breach of contract, breach of fiduciary
duty and negligence, and that the ultimate resolution of this matter will not
materially harm the business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 2000.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On November 22, 1999, the Securities and Exchange Commission declared
TMNG's Registration Statement on Form S-1 (File No. 333-87383) for its initial
public offering effective. On November 23, 1999, TMNG closed its offering of an
aggregate of 4,615,000 shares of TMNG Common Stock at an aggregate offering
price of $78.5 million. The managing underwriters for the offering were JP
Morgan H & Q (formerly known as Hambrecht & Quist), Robertson Stephens, Salomon
Smith Barney and Jefferies & Company, Inc. Net proceeds to TMNG, after deducting
underwriting discounts and commissions of $5.5 million and offering expenses of
$1.6 million, were $71.4 million. On November 29, 1999 TMNG used $22.3 million
of the proceeds from its initial public offering to repay all indebtedness. The
remainder of the proceeds will be used for working capital, general corporate
purposes and as possible consideration for acquisitions.
On September 5, 2000 the Company acquired The Weathersby Group, Inc., and
issued 348,157 shares of TMNG's unregistered Common stock to the sole
shareholder of The Weathersby Group, Inc. The share calculation was made in
accordance with Section 3.2.1 of the purchase agreement dated August 30, 2000,
in which the shareholder was to received $8,000,000 in share consideration at a
purchase price as determined to be the average of the closing bid and ask prices
for TMNG's common stock as reported on the NASDAQ National Market, over the 10
trading days immediately preceding the second day prior to the closing date.
This amount was calculated as $22.98 per share.
TMNG's Common Stock is quoted on the Nasdaq National Market under the
symbol "TMNG". The high and low closing price per share for the Common Stock for
the fiscal year ending December 30, 2000 by quarter was as follows:
High Low
First quarter, fiscal year 2000 $40.38 $22.00
Second quarter, fiscal year 2000 $39.50 $12.00
Third quarter, fiscal year 2000 $38.00 $19.44
Fourth quarter, fiscal year 2000 $21.00 $ 7.00
Fourth quarter, fiscal year 1999
(November 23, 1999 to January 1, 2000) $33.75 $26.31
As TMNG's Common Stock is traded on the Nasdaq National Market, the above
information concerning over-the-counter market quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions.
As of March 9, 2001, the closing price of Common Stock was $11.312 per share. At
such date, there were approximately 165 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
therefore, subject to any preferential dividend rights of outstanding Preferred
Stock. To date, TMNG has not paid any cash dividends on its Common Stock and
does not expect to declare or pay any cash or other dividends in the foreseeable
future.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below has been derived
from the Company's consolidated financial statements. The data presented below
should be read in conjunction with Item 7. -- Management's Discussion and
Analysis of Financial Condition and Results of Operations, Item 8. --
Consolidated Financial Statements and the notes thereto and other financial
information appearing elsewhere in this Annual Report on Form 10-K.
FISCAL YEAR ENDED
-----------------------------------------------------------------
December 31, December 31, January 2, January 1, December 30,
1996 1997 1999 2000 2000
------------ ------------ ---------- ---------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues ........................................ $ 17,279 $ 20,184 $ 32,103 $ 50,322 $ 77,727
Cost of services:
Direct cost of services ....................... 9,648 11,384 17,411 26,109 40,396
Equity related charges ........................ 239 2,780 5,519
-------- -------- -------- -------- --------
Total cost of services ................ 9,648 11,384 17,650 28,889 45,915
-------- -------- -------- -------- --------
Gross profit .................................... 7,631 8,800 14,453 21,433 31,812
Operating expenses:
Selling, general and administrative expenses .. 2.798 3,280 6,158 9,777 16,645
Equity related charges ........................ 22 1,998 1,564
-------- -------- -------- -------- --------
Total operating expenses .............. 2,798 3,280 6,180 11,775 18,209
-------- -------- -------- -------- --------
Income from operations .......................... 4,833 5,520 8,273 9,658 13,603
Other income (expense):
Interest income ............................... 16 6 18 277 3,327
Interest expense .............................. (136) (30) (2,054) (1,998)
Other, net .................................... 8 88 (68) (152)
-------- -------- -------- -------- --------
Total other income (expense) .......... (120) (16) (1,948) (1,789) 3,175
Income before provision for income taxes and
extraordinary item ............................ 4,713 5,504 6,325 7,869 16,778
Provision for income taxes ...................... (3,282) (3,208) (6,711)
-------- -------- -------- -------- --------
Income before extraordinary item ................ 4,713 5,504 3,043 4,661 10,067
Extraordinary item .............................. (200)
-------- -------- -------- -------- --------
Net income ...................................... $ 4,713 $ 5,504 $ 3,043 $ 4,461 $ 10,067
======== ======== ======== ======== ========
Net income before extraordinary item per common
share
Basic ......................................... $ 0.21 $ 0.24 $ 0.14 $ 0.20 $ 0.36
======== ======== ======== ======== ========
Diluted ....................................... $ 0.21 $ 0.24 $ 0.13 $ 0.20 $ 0.34
======== ======== ======== ======== ========
Net income per common share
Basic ......................................... $ 0.21 $ 0.24 $ 0.14 $ 0.19 $ 0.36
======== ======== ======== ======== ========
Diluted ....................................... $ 0.21 $ 0.24 $ 0.13 $ 0.19 $ 0.34
======== ======== ======== ======== ========
Weighted average common shares outstanding
Basic ......................................... 22,500 22,500 22,500 23,056 28,110
======== ======== ======== ======== ========
Diluted ....................................... 22,500 22,500 22,944 23,807 29,208
======== ======== ======== ======== ========
Pro forma provision for income taxes ............ $ (1,885) $ (2,202) $ (2,530)
======== ======== ========
Pro forma net income ............................ $ 2,828 $ 3,302 $ 3,795
======== ======== ========
"S" corporation distributions ................... $ 6,095 $ 2,600 $ 4,664
======== ======== ========
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FISCAL YEAR ENDED
---------------------------------------------------------------------
December 31, December 31, January 2, January 1, December 30,
1996 1997 1999 2000 2000
------------ ------------ ---------- ---------- ------------
CONSOLIDATED BALANCE SHEET DATA:
Net working capital ........................... $ 1,744 $ 4,689 $ 6,025 $ 61,419 $ 89,148
Total assets .................................. 4,121 5,483 11,006 67,382 119,429
Total debt (including current debt) ........... 26,017
Total Stockholders' Equity (deficiency in
assets) ..................................... $ 1,743 $ 4,709 $(18,271) $ 63,437 $111,472
Before February 12, 1998, the Company was a subchapter "S" corporation and,
accordingly, federal and state income taxes were paid at the stockholder level
only. Upon consummation of the February 1998 leveraged recapitalization, the
Company terminated its subchapter "S" corporation status and, accordingly became
subject to federal and state income taxes. The pro forma income statement
information reflects adjustments to historical net income as if the Company had
not elected subchapter "S" corporation status for federal and state income tax
purposes.
On November 22, 1999, the Securities and Exchange Commission declared
TMNG's Registration Statement on Form S-1 (File No. 333-87383) effective. On
November 23, 1999, TMNG closed its offering of an aggregate of 4,615,000 shares
of TMNG Common Stock at an aggregate offering price of $78.5 million. Net
proceeds to TMNG, after deducting underwriting discounts and commissions of $5.5
million and offering expenses of $1.6 million, were $71.4 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 Securities and Exchange Commission 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 $21.0 million. Proceeds will be 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, Inc. ("TWG"), 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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements contained herein may be deemed to be forward-looking
statements as defined in the Safe Harbor Provisions of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements involve known and
unknown risks and uncertainties, which may cause the Company's actual results in
future periods or plans for future periods to differ materially from what is
currently anticipated. Those risks include, among others, general competitive
factors, the Company's ability to successful complete and integrate its
acquisitions and to implement operational improvements in its acquired
businesses, the seasonality and episodic nature of the Company's business and
other risks and uncertainties detailed from time to time in the Company's
filings with the Securities and Exchange Commission. Other factors and
assumptions not identified above were also involved in the derivation of these
forward-looking statements, and the failure of such other assumptions to be
realized, as well as other factors, may also cause actual results to differ
materially from those projected. The Company assumes no obligation to update
these forward-looking statements to reflect actual results, changes in
assumptions or changes in other factors affecting such forward-looking
statements.
The following information should be read in connection with the information
contained in the Consolidated Financial Statements and notes thereto appearing
elsewhere in this Annual Report on Form 10-K. This Annual Report on Form 10-K
contains forward-looking statements that involve risks and uncertainties. The
Company's actual results may differ materially from the results discussed in the
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forward-looking statements (See Item 1. Business).
OVERVIEW
TMNG reports it financial data where each quarter is 13 weeks and ends on a
Saturday. As a result, the fiscal year end is the Saturday which is 13 weeks
from the end of the third fiscal quarter. Fiscal years 2000 and 1999 therefore
ended on December 30, 2000 and January 1, 2000, respectively. The words "fiscal
year" refer to the fiscal year most closely coinciding with the related calendar
year.
Revenues consist of consulting fees for professional services and related
expense reimbursements. Substantially all consulting services are contracted on
a time and materials basis not to exceed a negotiated contract price.
Substantially all revenues are recognized in the period in which the service is
performed. Generally a client relationship begins with a short-term engagement
utilizing a few consultants. TMNG's sales strategy focuses on building long-term
relationships with both new and existing clients to gain additional engagements
within existing accounts and referrals for new clients. Strategic alliances with
other companies are also used to sell services. TMNG anticipates that the
Company will continue to do so in the future. Because TMNG is a consulting
company, the Company experiences fluctuations in revenues derived from clients
during the course of a project lifecycle. As a result, the volume of work
performed for specific clients varies from period to period and a major client
from one period may not use TMNG services in another period. In addition,
clients generally may end their engagements with little or no penalty or notice.
If a client engagement ends earlier than expected, the Company must re-deploy
professional service personnel as any resulting unbillable time could harm
margins.
Cost of services consists primarily of client-related compensation for
consultants who are employees and equity related non-cash charges incurred in
connection with the grants of equity securities primarily to consultants, as
well as fees paid to independent subject matter experts. Employee compensation
includes certain unbillable time, training, vacation time, benefits and payroll
taxes. Annual gross margins have ranged from 40.9% to 45.0% during the period
from 1996 to 2000. 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 subject matter experts; and
employee and independent subject matter expert costs associated with a
competitive labor market.
Operating expenses include selling, general and administrative expenses as
well as equity related non-cash charges incurred in connection with the grants
of equity securities primarily to principals and certain senior executives.
Sales and marketing expenses consist primarily of personnel and related costs
for direct client marketing efforts and marketing staff. The Company primarily
uses a relationship sales model in which partners, principals and senior
consultants generate revenues. TMNG takes these revenue generating activities
into account when determining these individuals' quarterly bonus compensation,
which is generally recorded as sales and marketing expense. Other operating
expenditures include costs associated with marketing materials, trade shows and
advertising. To increase market awareness of the Company, TMNG intends to
continue to expand the direct and indirect marketing and advertising efforts
substantially, both domestically and internationally. General and administrative
expenses consist mainly of accounting, recruiting, and professional services
incurred in the normal course of business.
RESULTS OF OPERATIONS
FISCAL 2000 COMPARED TO FISCAL 1999
Revenues
Revenues increased 54.5% to $77.7 million for fiscal year 2000 from $50.3
million for fiscal year 1999. The increase in revenues was due primarily to an
increase in consulting services performed for our new and existing clients
during the period, and increased billing rates of our consultants. Additionally,
international revenue increased 30.9% to $18.2 million for fiscal year 2000 from
$13.9 million for fiscal year 1999, primarily due to an increase in European
business. Additionally, revenues increased due to the purchase of The Weathersby
Group, Inc., an acquisition that closed on September 5, 2000. This acquisition
was accounted for as a purchase, so TWG's revenues for the period from the
closing through the end of the year are included in TMNG's consolidated
revenues.
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Cost of Services
Direct costs of services increased to $40.4 million for fiscal year 2000
from $26.1 million for fiscal year 1999. As a percentage of revenues, our gross
margin on services was 48.0% for fiscal year 2000 compared to 48.1% for fiscal
year 1999.
Non-cash stock based compensation charges were $5.5 million and $2.8
million for fiscal year 2000 and fiscal year 1999, respectively. These equity
charges relate to stock options and warrants granted in 1999 and previously. Of
the $5.5 million compensation charges related to fiscal year 2000, $2.7 million
was recorded in connection with the issuance of stock options to employees and
non-employee consultants and $2.8 million was recorded in connection with
warrants issued during the fourth quarter of 1999. These charges represented
7.1% of revenues for fiscal year 2000 compared to 5.5% for fiscal year 1999.
Operating Expenses
Selling, general and administrative expenses increased to $16.6 million for
fiscal year 2000, or 69.4% from $9.8 million for fiscal year 1999. Selling,
general and administrative expenses increased to 21.4% of revenues for fiscal
year 2000, from 19.4% of revenues for fiscal year 1999. We incurred an increase
in selling, general and administrative expenses primarily due to the personnel
and technology costs associated with the increased administrative staffing
required to manage and support the growth of the organization, as well as the
amortization of goodwill recorded in connection with The Weathersby Group, Inc.
acquisition.
Non-cash stock based compensation charges of $1.6 million and $2.0 million
for fiscal year 2000 and fiscal year 1999, respectively, were recorded primarily
in connection with the issuance of stock options in fiscal year 1999 and
previously to our senior executives, principals, administration and non-employee
directors. These charges represented 2.0% of revenues for fiscal year 2000,
compared to 4.0% of revenues for fiscal year 1999.
Other Income and Expenses
Interest income increased to $3.3 million for the fiscal year 2000,
compared to $277,000 for the fiscal year 1999. Interest income increased
primarily due to the interest received on the net proceeds of the initial public
and secondary offerings. We invest in short-term, high-grade investment
instruments.
Interest expense decreased to $0 for fiscal year 2000, compared to $2.0
million for fiscal year 1999. Interest expense decreased primarily due to the
extinguishment of debt in the fourth quarter of 1999. On November 29, 1999, all
outstanding indebtedness was repaid with $22.3 million of the proceeds from our
November 23, 1999 initial public offering.
Other, net totaled losses of $152,000 and $68,000 for fiscal year 2000 and
fiscal year 1999, respectively, and increased primarily due to losses incurred
on projects performed during fiscal year 2000 in foreign locations resulting in
foreign currency transaction losses.
Income Taxes
Provision for income taxes remained consistent for fiscal year 2000 and
fiscal year 1999 at 40.0% and 40.8%, respectively.
FISCAL 1999 COMPARED TO FISCAL 1998
Revenues
Revenues increased 56.7% to $50.3 million for fiscal year 1999 from $32.1
million for fiscal year 1998. The increase was primarily attributable to a net
increase in consulting services. The increase in consulting services was due
primarily to a significant increase in services provided to a major customer,
which was offset in part by negotiated volume discounts. Fiscal year 1999
revenues included revenues from services provided to one large customer, which
accounted for 39.6% of revenues during that period. International revenue
expanded to 27.7% of revenues in fiscal year 1999 compared to 16.2% for fiscal
year 1998, primarily due to an increase in European business.
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Cost of Services
Direct cost of services increased to $26.1 million for fiscal year 1999
from $17.4 million for fiscal year 1998. Direct cost of services as a percent of
revenue decreased from 54.2% for fiscal year 1998 to 51.9% for fiscal year 1999.
Direct gross margins improved because the consultant mix changed to include more
employees in fiscal year 1999 compared to fiscal year 1998. A greater portion of
full-time employees at a relatively constant utilization rate tends to improve
gross margins because of their overall lower fixed salary compared to the higher
variable costs paid to independent subject matter experts. The margin
improvement provided by increasing the full-time employee base was slightly
offset by discounted customer pricing associated with large engagements.
Non-cash stock based compensation charges of $2.8 million and $239,000 for
fiscal year 1999 and fiscal year 1998, respectively, were recorded in connection
with the issuance of stock options to employees and non-employee consultants.
These charges reduced gross margin by 5.5% in fiscal year 1999.
Operating Expenses
Selling, general and administrative expenses increased to $9.8 million for
fiscal year 1999 from $6.2 million for fiscal year 1998. Selling, general and
administrative expense as a percentage of revenue increased to 19.4% for fiscal
year 1999 from 19.2% for fiscal year 1998. The Company incurred an increase in
marketing costs primarily as a result of an increase in sales bonuses associated
with implementation of a revised incentive program for consultants and increased
revenues for fiscal year 1999. TMNG incurred an increase in selling, general and
administrative expense primarily due to the personnel and facility costs
associated with opening a new corporate office in the third quarter of fiscal
year 1998 and increased administrative staffing to manage and support the growth
of the organization. TMNG also hired managing directors to lead the European and
Canadian subsidiaries at the beginning of fiscal year 1999. In addition, the
Company established reserves of $160,000 for a potential claim brought against
TMNG by a trustee in bankruptcy for a former client.
Non-cash stock based compensation charges of $2.0 million and $22,000 for
fiscal year 1999 and fiscal year 1998, respectively, were recorded in connection
with the issuance of stock options to partners, principals and certain senior
executives and non-employee directors. These charges increased operating
expenses as a percentage of revenue by 4.0% in fiscal year 1999.
Other Income and Expenses
Interest expense decreased to $2.0 million for fiscal year 1999, compared
to $2.1 million for fiscal year 1998. Interest expense primarily related to
$24.0 million of borrowings under our term loans incurred in connection with the
recapitalization in February 1998 and borrowings on the revolving credit
facility. On November 29, 1999, all outstanding indebtedness was repaid with
$22.3 million of the proceeds from the November 23, 1999 initial public
offering. In conjunction with the early extinguishment of debt, deferred
financing charges of $200,000, net of tax, were written-off and recorded as an
extraordinary loss in the fourth quarter of fiscal year 1999.
Income Taxes
Provision for income taxes for fiscal year 1999 as a percentage of pretax
income was 40.8% compared to 51.9% for fiscal year 1998. The 51.9% effective tax
rate for fiscal year 1998 exceeded the statutory federal income tax rate
primarily due to the establishment of net deferred taxes upon conversion to a
"C" corporation on February 12, 1998 in connection with the leveraged
recapitalization and state income taxes. These increases in income tax expense
were partially reduced by the exclusion of net income prior to February 12,
1998, representing "S" corporation net income. Prior to the conversion to a "C"
corporation on February 12, 1998, TMNG did not report tax expense as an "S"
corporation.
-20-
21
SUMMARY OF QUARTERLY RESULTS OF OPERATIONS -- UNAUDITED
QUARTER ENDED
---------------------------------------------------
APRIL 3, JULY 3, OCTOBER 2, JANUARY 1,
1999 1999 1999 2000
-------- -------- ---------- ----------
Revenues ....................................... $ 11,433 $ 12,423 $ 13,112 $ 13,354
======== ======== ======== ========
Gross profit ................................... $ 4,989 $ 5,534 $ 5,489 $ 5,421
======== ======== ======== ========
Net income before extraordinary item ........... $ 1,067 $ 1,195 $ 1,172 $ 1,227
======== ======== ======== ========
Net income ..................................... $ 1,067 $ 1,195 $ 1,172 $ 1,027
======== ======== ======== ========
Diluted net income before extraordinary item per
common share ................................. $ .045 $ .051 $ .049 $ .050
======== ======== ======== ========
Diluted net income per common share ............ $ .045 $ .051 $ .049 $ .040
======== ======== ======== ========
QUARTER ENDED
-----------------------------------------------------
APRIL 1, JULY 1, SEPTEMBER 30, DECEMBER 30,
2000 2000 2000 2000
-------- -------- ------------- ------------
Revenues ....................................... $ 16,402 $ 19,464 $ 20,003 $ 21,858
======== ======== ======== ========
Gross profit ................................... $ 5,957 $ 7,354 $ 8,462 $ 10,039
======== ======== ======== ========
Net income ..................................... $ 1,678 $ 2,253 $ 3,060 $ 3,076
======== ======== ======== ========
Basic net income per common share .............. $ .061 $ .082 $ .108 $ .105
======== ======== ======== ========
Diluted net income per common share ............ $ .059 $ .079 $ .104 $ .102
======== ======== ======== ========
LIQUIDITY AND CAPITAL RESOURCES
On August 2, 2000, TMNG completed its secondary public offering and
received net proceeds of approximately $21.0 million from the sale of 1,000,000
shares of common stock. The proceeds will be used for working capital, general
corporate purposes and possibly as consideration for acquisitions.
Net cash provided by operating activities was $10.0 million, $5.0 million
and $2.0 million for fiscal year 2000, fiscal year 1999 and fiscal year 1998,
respectively. The Company's accompanying consolidated statements of cash flows
identify major differences between net income and net cash provided by operating
activities for each of those years. For additional information relating to the
operations of the Company, see Results of Operations.
Net cash used in investing activities was $12.3 million, $443,000 and
$455,000 for fiscal year 2000, fiscal year 1999 and fiscal year 1998,
respectively. Cash used for acquisitions was $11.6 million in fiscal year 2000,
all of which relates to the TWG acquisition. Capital expenditures of $713,000,
$443,000 and $455,000 for fiscal years 2000, 1999 and 1998, respectively, relate
to the capitalization of leasehold improvements, computer equipment and software
by the Company.
Net cash provided by financing activities was $21.4 million and $46.0
million for fiscal years 2000 and 1999, respectively. Net cash used in financing
activities was $823,000 in fiscal year 1998. Net proceeds from the Company's
secondary public offering was $20.9 million in fiscal year 2000. Net proceeds
from the Company's initial public offering was $71.5 million in fiscal year
1999. Approximately $22.3 million of the proceeds from the initial public
offering was used to repay outstanding debt. Cash used in fiscal year 1998
related primarily to the leveraged recapitalization of the Company.
At December 30, 2000, TMNG had approximately $70.6 million in cash and cash
equivalents. TMNG believes the net proceeds of the initial public offering in
1999 and secondary public offering, in addition to cash generated from
operations, will be sufficient to meet anticipated cash requirements, including
anticipated capital expenditures and consideration for possible acquisitions,
for at least the next 12 months.
-21-
22
Should the Company's capital requirements increase more rapidly than expected,
the Company believes that bank credit would be available to fund such operating
and capital requirements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not invest excess funds in derivative financial
instruments or other market rate sensitive instruments for the purpose of
managing its foreign currency exchange rate risk.
The Company does not have material exposure to market related risks.
Foreign currency exchange rate risk may become material given U.S. dollar to
foreign currency exchange rate changes and significant increases in
international engagements denominated in the local currency of the Company's
clients.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
The Management Network Group, Inc.
Overland Park, Kansas
We have audited the accompanying consolidated balance sheets of The
Management Network Group, Inc. and subsidiaries as of December 30, 2000 and
January 1, 2000 and the related consolidated statements of income and
comprehensive income, stockholders' equity and cash flows for the fiscal years
ended December 30, 2000, January 1, 2000 and January 2, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the companies as of December
30, 2000 and January 1, 2000, and the results of their operations and their cash
flows for the fiscal years ended December 30, 2000, January 1, 2000 and January
2, 1999 in conformity with accounting principles generally accepted in the
United States of America.
/s/ DELOITTE & TOUCHE LLP
Kansas City, Missouri
February 15, 2001
-22-
23
THE MANAGEMENT NETWORK GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
JANUARY 1, DECEMBER 30,
2000 2000
---------- ------------
CURRENT ASSETS:
Cash and cash equivalents .................................. $ 51,523 $ 70,583
Receivables:
Accounts receivable ..................................... 8,280 17,985
Accounts receivable -- unbilled ......................... 4,863 8,023
--------- ---------
13,143 26,008
Less: Allowance for doubtful accounts ................... (350) (766)
--------- ---------
12,793 25,242
Other assets ............................................ 1,048 1,280
--------- ---------
Total current assets ............................... 65,364 97,105
--------- ---------
Property and Equipment, net .................................. 706 1,298
Goodwill, net ................................................ 18,016
Deferred Tax Asset ........................................... 1,312 3,010
--------- ---------
Total Assets ....................................... $ 67,382 $ 119,429
========= =========
CURRENT LIABILITIES:
Trade accounts payable ..................................... $ 888 $ 1,282
Accrued payroll, bonuses and related expenses .............. 1,857 4,722
Other accrued liabilities .................................. 1,200 1,953
--------- ---------
Total current liabilities .......................... 3,945 7,957
--------- ---------
STOCKHOLDERS' EQUITY Common stock:
Voting -- $.001 par value, 100,000,000 shares authorized;
27,417,370 shares issued and outstanding on January 1,
2000, 29,465,808 shares issued and outstanding on
December 30, 2000 ...................................... 27 29
Preferred stock -- $.001 par value, 10,000,000 shares
authorized; no shares issued or outstanding .............
Additional paid-in capital ................................. 104,137 136,917
Accumulated deficit ........................................ (32,138) (22,071)
Accumulated other comprehensive income --
Foreign currency translation adjustment ................... (2) 35
Unearned compensation ...................................... (8,587) (3,438)
--------- ---------
Total stockholders' equity ......................... 63,437 111,472
--------- ---------
Total Liabilities and Stockholders' Equity ................... $ 67,382 $ 119,429
========= =========
See notes to consolidated financial statements.
-23-
24
THE MANAGEMENT NETWORK GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED
-----------------------------------------
JANUARY 2, JANUARY 1, DECEMBER 30,
1999 2000 2000
---------- ---------- ------------
Revenues ................................................. $ 32,103 $ 50,322 $ 77,727
Cost of Services:
Direct cost of services ................................ 17,411 26,109 40,396
Equity related charges ................................. 239 2,780 5,519
-------- -------- --------
Total cost of services ......................... 17,650 28,889 45,915
-------- -------- --------
Gross Profit ............................................. 14,453 21,433 31,812
Operating Expenses:
Selling, general and administrative .................... 6,158 9,777 16,645
Equity related charges ................................. 22 1,998 1,564
-------- -------- --------
Total operating expenses ....................... 6,180 11,775 18,209
-------- -------- --------
Income From Operations ................................... 8,273 9,658 13,603
Other Income (Expense):
Interest income ........................................ 18 277 3,327
Interest expense ....................................... (2,054) (1,998)
Other, net ............................................. 88 (68) (152)
-------- -------- --------
Total other income (expense) ................... (1,948) (1,789) 3,175
-------- -------- --------
Income Before Provision for Income Taxes and Extraordinary
Item ................................................... 6,325 7,869 16,778
Provision for Income Taxes ............................... (3,282) (3,208) (6,711)
-------- -------- --------
Income Before Extraordinary Item ......................... 3,043 4,661 10,067
Extraordinary Item .......................................
Loss on debt extinguishment, net of tax benefit of $133 (200)
-------- -------- --------
Net Income ............................................... 3,043 4,461 10,067
Other Comprehensive Income --
Foreign currency translation adjustment ................ 3 (4) 37
-------- -------- --------
Comprehensive Income ..................................... $ 3,046 $ 4,457 $ 10,104
-------- -------- --------
Income Before Extraordinary Item Per Common Share
Basic .................................................. $ 0.14 $ 0.20 $ 0.36
======== ======== ========
Diluted ................................................ $ 0.13 $ 0.20 $ 0.34
======== ======== ========
Net Income Per Common Share
Basic .................................................. $ 0.14 $ 0.19 $ 0.36
======== ======== ========
Diluted ................................................ $ 0.13 $ 0.19 $ 0.34
======== ======== ========
Shares Used in Calculation of Income Before Extraordinary
Item and Net Income Per Common Share
Basic .................................................. 22,500 23,056 28,110
======== ======== ========
Diluted ................................................ 22,944 23,807 29,208
======== ======== ========
Pro Forma Information (Unaudited)
Pro forma provision for income taxes ................... $ 2,530
========
Pro forma net income ................................... $ 3,795
========
Pro Forma Net Income Per Common Share (Unaudited)
Basic .................................................. $ 0.17
========
Diluted ................................................ $ 0.17
========
See notes to consolidated financial statements.
-24-
25
THE MANAGEMENT NETWORK GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED
-----------------------------------------
JANUARY 2, JANUARY 1, DECEMBER 30,
1999 2000 2000
---------- ---------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................... $ 3,043 $ 4,461 $ 10,067
Add-back: Extraordinary item ............................. 200
-------- -------- --------
Income before extraordinary item ......................... 3,043 4,661 10,067
Adjustments to reconcile income before extraordinary item
to net cash provided by operating activities:
Depreciation and amortization .......................... 136 275 910
Stock option and bonus share compensation .............. 261 4,778 7,083
Income tax benefit realized upon exercise of stock
options ............................................... 412 1,499
Provision for deferred income taxes .................... 637 (1,952) (1,847)
Provision for uncollectible advances to related party .. (181)
Loss on disposition of assets .......................... 2
Other changes in operating assets and liabilities, net
of business acquisitions:
Accounts receivable .................................. (1,735) (2,057) (6,279)
Accounts receivable -- unbilled ...................... (2,148) (1,612) (3,160)
Other assets ......................................... (51) (995) (127)
Related party receivables ............................ 201
Trade accounts payable ............................... 825 (71) (1,377)
Trade accounts payable -- related party .............. (233) (332)
Accrued liabilities .................................. 1,257 1,857 3,182
-------- -------- --------
Net cash provided by operating activities ......... 2,012 4,966 9,951
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of business, net of cash acquired ............ (11,555)
Acquisition of property and equipment .................... (455) (443) (713)
-------- -------- --------
Net cash used in investing activities ............. (455) (443) (12,268)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to shareholders ............................ (4,664)
Proceeds from long-term debt ............................. 24,000
Net borrowings under revolving credit facility ........... 2,017 (2,017)
Deferred financing costs ................................. (553)
Issuance of common stock, net of expenses ................ 16,939 71,618 20,875
Payments received on stockholders' note receivable ....... 171
Payments made on long-term debt .......................... (24,000)
Exercise of options ...................................... 444 475
Purchase of treasury stock ............................... (38,733)
-------- -------- --------
Net cash (used in) provided by financing activities (823) 46,045 21,350
-------- -------- --------
Effect of exchange rate on cash and cash equivalents ....... 3 (4) 27
-------- -------- --------
Net increase in cash and cash equivalents .................. 737 50,564 19,060
Cash and cash equivalents, beginning of period ............. 222 959 51,523
-------- -------- --------
Cash and cash equivalents, end of period ................... $ 959 $ 51,523 $ 70,583
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during period for interest ..................... $ 1,517 $ 2,324 $
======== ======== ========
Cash paid during period for taxes ........................ $ 2,581 $ 5,140 $ 6,357
======== ======== ========
Supplemental disclosure of non-cash investing and financing
transactions:
Reinvested constructive distribution resulting from
conversion to subchapter C corporation ................. $ 713 $ $
======== ======== ========
Acquisition of business:
Fair value of assets acquired .......................... $ 3,664
Liabilities incurred or assumed ........................ $ (2,275)
Common stock issued .................................... $ 8,000
See notes to consolidated financial statements.
-25-
26
THE MANAGEMENT NETWORK GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
COMMON STOCK
$.0406 PAR 1997;
NO PAR COMMENCING COMMON STOCK
FEBRUARY 12, 1998 $.0006 PAR
$.001 PAR 1997; NO PAR
COMMENCING COMMENCING
AUGUST 27, 1999 FEBRUARY 12, 1998
VOTING NON-VOTING ADDITIONAL
--------------------------- --------------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
----------- ----------- ----------- ----------- -----------
Balance, January 1, 1998 4,500,000 $ 3 18,000,000 $ 11 $ 399
Distributions
Other comprehensive income --
Foreign currency translation adjustment
Repayment on stockholder's notes receivable
Conversion of non-voting stock to voting stock 18,000,000 11 (18,000,000) (11)
Issuance of common stock, net 13,500,000 16,939
Repurchase and cancellation of treasury stock (13,500,000)
Constructive distribution assumed to be reinvested 713
Adjustment to reflect change in par value 18,051 (18,051)
Issuance of options 305
Stock compensation 261
Net income
----------- ----------- ----------- ----------- -----------
Balance, January 2, 1999 22,500,000 18,631 -- -- --
Issuance of options 11,203
Exercise of options 231,169 444
Stock compensation 1,416
Other comprehensive income --
Foreign currency translation adjustment
Issuance of common stock, net 4,686,201 4 72,054
Tax benefit due to exercise of stock options 412
Adjustment to reflect change in par value (18,608) 18,608
Net income
----------- ----------- ----------- ----------- -----------
Balance, January 1, 2000 27,417,370 27 -- -- 104,137
Issuance of options 144
Exercise of options 276,183 475
Cancellation of options (982)
Exercise of warrants 424,098 1 2,819
Stock compensation (49)
Other comprehensive income --
Foreign currency translation adjustment
Issuance of common stock, net 1,000,000 1 20,874
Tax benefit due to exercise of stock options 1,499
Acquisition of subsidiary 348,157 8,000
Net income
----------- ----------- ----------- ----------- -----------
Balance, December 30, 2000 29,465,808 $ 29 -- $ -- $ 136,917
=========== =========== =========== =========== ===========
ACCUMULATED
OTHER
RETAINED COMPREHENSIVE STOCKHOLDERS'
EARNINGS INCOME UNEARNED NOTES
(DEFICIT) (LOSSES) COMPENSATION RECEIVABLE TOTAL
----------- ------------- ------------ ------------- -----------
Balance, January 1, 1998 $ 4,468 $ (1) -- $ (171) $ 4,709
Distributions (4,664) (4,664)
Other comprehensive income --
Foreign currency translation adjustment 3 3
Repayment on stockholder's notes receivable 171 171
Conversion of non-voting stock to voting stock
Issuance of common stock, net 16,939
Repurchase and cancellation of treasury stock (38,733) (38,733)
Constructive distribution assumed to be reinvested (713)
Adjustment to reflect change in par value
Issuance of options $ (305)
Stock compensation 261
Net income 3,043 3,043
----------- ----------- ----------- ----------- -----------
Balance, January 2, 1999 (36,599) 2 (305) -- (18,271)
Issuance of options (11,203)
Exercise of options 444
Stock compensation 2,921 4,337
Other comprehensive income --
Foreign currency translation adjustment (4) (4)
Issuance of common stock, net 72,058
Tax benefit due to exercise of stock options 412
Adjustment to reflect change in par value
Net income 4,461 4,461
----------- ----------- ----------- ----------- -----------
Balance, January 1, 2000 (32,138) (2) (8,587) -- 63,437
Issuance of options (144)
Exercise of options 475
Cancellation of options 982
Exercise of warrants 2,820
Stock compensation 4,311 4,262
Other comprehensive income --
Foreign currency translation adjustment 37 37
Issuance of common stock, net 20,875
Tax benefit due to exercise of stock options 1,499
Acquisition of subsidiary 8,000
Net income 10,067 10,067
----------- ----------- ----------- ----------- -----------
Balance, December 30, 2000 $ (22,071) $ 35 $ (3,438) $ -- $ 111,472
=========== =========== =========== =========== ===========
See notes to consolidated financial statements
27
THE MANAGEMENT NETWORK GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations -- The Management Network Group, Inc. ("TMNG" or the
"Company") was formed on April 1, 1993 as a management consulting firm
specializing in global competitive telecommunications. Primary services include
serving wireless and wireline communications carriers in all industry segments,
and the technology and investment firms that support the telecommunications
industry. A majority of the Company's revenues are to customers in the United
States, however the Company also provides services to customers in Europe,
specifically the United Kingdom, and other