<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 18, 1999
REGISTRATION NO. 333-87383
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
THE MANAGEMENT NETWORK GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 5416 48-1129619
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
THE MANAGEMENT NETWORK GROUP, INC.
7300 COLLEGE BOULEVARD, SUITE 302
OVERLAND PARK, KS 66210
(913) 345-9315
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
RICHARD P. NESPOLA
PRESIDENT AND CHIEF EXECUTIVE OFFICER
THE MANAGEMENT NETWORK GROUP, INC.
7300 COLLEGE BOULEVARD, SUITE 302
OVERLAND PARK, KS 66210
(913) 345-9315
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
CHRISTOPHER D. MITCHELL, ESQ.
SANJIV S. DHAWAN, ESQ.
JUDITH E. BROWN, ESQ.
ROSEANN M. ROTANDARO, ESQ.
WILSON SONSINI GOODRICH & ROSATI
PROFESSIONAL CORPORATION
650 PAGE MILL ROAD
PALO ALTO, CA 94304
(650) 493-9300
GAVIN B. GROVER, ESQ.
BRIAN V. CAID, ESQ.
MATTHEW BURNS, ESQ.
MORRISON & FOERSTER LLP
425 MARKET STREET
SAN FRANCISCO, CA 94105
(415) 268-7000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C> <C> <C>
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TITLE OF EACH CLASS AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
OF SECURITIES TO TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION
BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) FEE(3)
- ---------------------------------------------------------------------------------------------------------------------------------
Common stock, $0.001 par value...... 5,307,250 $14.00 $74,301,500 $20,656
- ---------------------------------------------------------------------------------------------------------------------------------
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</TABLE>
(1) Includes 692,250 shares which the underwriters have the option to purchase
to cover over-allotments, if any.
(2) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(o) under the Securities Act of 1933.
(3) Entire amount previously paid pursuant to Rule 457(o).
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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- --------------------------------------------------------------------------------
<PAGE> 2
The information in this prospectus is not complete and may be changed.
We may not sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and we are not
soliciting an offer to buy these securities in any state where the offer
or sale is not permitted.
SUBJECT TO COMPLETION, DATED NOVEMBER 18, 1999
PROSPECTUS
4,615,000 SHARES
LOGO
COMMON STOCK
This is an initial public offering of common stock by The Management
Network Group, Inc. We are selling all of the 4,615,000 shares offered under
this prospectus. We anticipate that the initial public offering price will be
between $12.00 and $14.00.
------------------
Prior to this offering, there has been no public market for our common
stock. We have applied to have our common stock quoted on the Nasdaq National
Market under the symbol TMNG.
------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- --------
<S> <C> <C>
Initial public offering price............................... $ $
Underwriting discounts and commissions...................... $ $
Proceeds to The Management Network Group, Inc., before
expenses.................................................. $ $
</TABLE>
Several of our stockholders have granted the underwriters an option for a
period of 30 days to purchase up to 692,250 additional shares of common stock to
cover over-allotments.
------------------
INVESTING IN THE COMMON STOCK INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 7.
------------------
The Securities and Exchange Commission and state securities regulators have
not approved or disapproved of these securities or determined if this prospectus
is truthful or complete. Any representation to the contrary is a criminal
offense.
HAMBRECHT & QUIST
ROBERTSON STEPHENS
SALOMON SMITH BARNEY
JEFFERIES & COMPANY, INC.
, 1999
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 3
Risk Factors................................................ 7
Forward-Looking Statements.................................. 16
Use of Proceeds............................................. 16
Dividend Policy............................................. 16
Trademarks.................................................. 16
Capitalization.............................................. 17
Dilution.................................................... 18
Unaudited Pro Forma Condensed Consolidated Financial Data... 19
Selected Consolidated Financial Data........................ 24
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 25
Business.................................................... 36
Management.................................................. 51
Certain Transactions........................................ 61
Principal Stockholders...................................... 63
Description of Capital Stock................................ 65
Shares Eligible For Future Sale............................. 68
Underwriting................................................ 70
Legal Matters............................................... 72
Experts..................................................... 72
Where You Can Find Additional Information................... 72
Index to Financial Statements............................... F-1
</TABLE>
---------------------
UNTIL , 1999, ALL DEALERS THAT BUY, SELL OR TRADE OUR COMMON
STOCK, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER
A PROSPECTUS. THIS REQUIREMENT IS IN ADDITION TO THE DEALERS' OBLIGATION TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
2
<PAGE> 4
PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus. This summary may not contain all of the information that you should
consider before investing in the common stock. You should read the entire
prospectus carefully, including "Risk Factors" and our financial statements
before making an investment decision.
THE MANAGEMENT NETWORK GROUP, INC.
We provide management consulting services to the global telecommunications
industry, including communications service providers, technology companies and
financial services firms. We provide a comprehensive range of services,
including strategic, management and operational advice, that enable our clients
to meet the challenges of today's competitive and dynamic telecommunications
environment, including the growing demand for electronic business, known as
e-business, infrastructure. Since our inception in 1990, we have performed
services for over 170 clients. For example, our top two clients for the first
nine months of 1999 were: Williams Communications Group and diAx.
Our industry-focused services help our broad range of clients capitalize on
the vast opportunities brought about by a rapidly changing telecommunications
market. Our complete range of solutions include:
- strategic assessments;
- design and evaluation of telecommunications infrastructure;
- operational support and process improvement; and
- system evaluation, selection and implementation advice.
The sophisticated services we provide make extensive use of the proprietary
methodologies we have developed, ensuring the high quality and timeliness of our
services. Our solutions enable our clients to compete more effectively by
aligning their service offerings with their chosen market strategies. In
addition, our solutions allow them to offer their services cost-effectively and
accelerate the introduction of new technologies, while improving overall
customer satisfaction and retention, all of which are critical components of
their profitability.
We provide our services through highly experienced consultants who average
over ten years of industry experience. In 1998 and 1997, our President and Chief
Executive Officer was named by Phone+ magazine, a trade publication, to its
annual list of the most influential people in competitive long distance
telecommunications. In both years he was the highest-ranking non-carrier
executive selected for this list. We believe our clients value the extensive
expertise and industry knowledge our consultants provide, enabling us to develop
relationships with many of our clients, who in many cases rely on our advice and
services to make critical strategic and business decisions.
Our key growth initiatives include:
- combining our telecommunications and e-business expertise to help our
clients successfully develop and deploy the underlying infrastructure to
support the internet and to meet their growing e-business requirements;
- capitalizing on our competitive telecommunications experience to expand
globally to serve our clients' growing global needs as overseas markets
continue to face increasing deregulation and competition;
- further enhancing our long-term client relationships to allow us to
jointly plan future projects and develop large, multi-year engagements;
- building our brand through several marketing initiatives; and
- extending our business model by enhancing our business processes that can
be duplicated worldwide.
3
<PAGE> 5
THE OFFERING
Common stock offered by us....... 4,615,000 shares
Common stock outstanding after
this offering.................... 27,261,201 shares
Use of Proceeds.................. For repayment of indebtedness and general
corporate purposes, including working
capital and potential acquisitions.
Nasdaq National Market symbol.... TMNG
------------------------
The number of shares of common stock outstanding after this offering is
based on the number of shares outstanding as of October 29, 1999 and does not
include the following:
- 1,862,416 shares of common stock subject to options issued at a weighted
average exercise price of $1.75 per share granted under our 1998 equity
incentive plan; and
- 500,000 shares of our common stock subject to an outstanding warrant
issued to Williams Communications Group at an exercise price of $2.00 per
share.
Please see "Capitalization" for a more complete discussion regarding the
outstanding shares of our common stock and options to purchase our common stock
and other related matters.
------------------------
Our principal executive offices are located at 7300 College Boulevard,
Suite 302, Overland Park, Kansas 66210 and our telephone number is (913)
345-9315. Our web site is www.tmng.com and our corporate email address is
"[email protected]." Any reference contained in this prospectus to our web site, or
to any other web site, shall not be deemed to incorporate information from those
sites into this prospectus.
------------------------
Unless otherwise noted, all information in this prospectus:
- assumes that the underwriters will not exercise their option to purchase
additional shares of common stock to cover over-allotments, if any; and
- gives effect to a 1-for-2 reverse split of our common stock to be
effected prior to the completion of this offering.
4
<PAGE> 6
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
(UNAUDITED)
The following summary financial information should be read in conjunction
with our consolidated financial statements and their related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in this prospectus. Listed below is our statement of
operations data for fiscal years 1995 through 1998 and for the nine months ended
October 3, 1999 and October 2, 1998, and our balance sheet data as of October 3,
1999. The results for the interim periods are not necessarily indicative of the
results for the full fiscal year or any future period. Interim results reflect
all adjustments, which are in the opinion of management, necessary to a fair
statement of these results.
To calculate the "Pro Forma As Adjusted Statement of Operations Data" for
fiscal year 1998 and the nine months ended October 3, 1998 and October 2, 1999,
we have assumed the following occurred as of the first day of fiscal 1998:
- our leveraged recapitalization, which was actually completed in February
1998;
- our conversion of tax status from a subchapter "S" corporation to a
subchapter "C" corporation which occurred at the time of
recapitalization; and
- the sale of 4,615,000 shares of common stock in the offering at an
assumed initial public offering price of $13.00 per share, after
deducting the underwriting discounts and estimated offering expenses, and
the application of the net proceeds of the offering to repay all of our
bank debt.
To calculate the pro forma as adjusted balance sheet data, we have assumed
this offering and the application of the net proceeds from this offering, as
described above, occurred on October 2, 1999.
Beginning with fiscal 1998, we switched to a four week -- four week -- five
week quarterly accounting system in which each quarter is 13 weeks long and ends
on a Saturday. As a result of this change, our fiscal year end changed from
December 31 to the Saturday which is 13 weeks from the end of the third fiscal
quarter. The words "fiscal year" in this prospectus refer to the fiscal year
most closely coinciding with the related calendar year. Our 1998 fiscal year
therefore ended on January 2, 1999. When we refer to the "nine month period for
1998" and to "nine month period for 1999" in this prospectus, we mean nine month
period ended on October 3, 1998 and October 2, 1999, respectively.
5
<PAGE> 7
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ------------------------
---------------------------------------- OCTOBER OCTOBER
1995 1996 1997 1998 3, 1998 2, 1999
------- ------- ------- ------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................................... $ 7,299 $17,279 $20,184 $32,103 $21,471 $36,968
------- ------- ------- ------- ------- -------
Cost of services:..........................................
Direct cost of services................................... 4,303 9,648 11,384 17,411 11,611 19,178
Equity related charges.................................... 239 14 1,778
------- ------- ------- ------- ------- -------
Total cost of services.............................. 4,303 9,648 11,384 17,650 11,625 20,956
------- ------- ------- ------- ------- -------
Gross profit............................................... 2,996 7,631 8,800 14,453 9,846 16,012
------- ------- ------- ------- ------- -------
Operating expenses:
Selling, general and administrative expenses.............. 1,242 2,798 3,280 6,158 4,003 7,479
Equity related charges.................................... 22 1 946
------- ------- ------- ------- ------- -------
Total operating expenses............................ 1,242 2,798 3,280 6,180 4,004 8,425
------- ------- ------- ------- ------- -------
Income from operations..................................... 1,754 4,833 5,520 8,273 5,842 7,587
------- ------- ------- ------- ------- -------
Net income available to common stockholders................ $ 1,758 $ 4,713 $ 5,504 $ 3,043 $ 1,876 $ 3,439
======= ======= ======= ======= ======= =======
Net income per common share
Basic..................................................... $ 0.08 $ 0.21 $ 0.24 $ 0.14 $ 0.08 $ 0.15
======= ======= ======= ======= ======= =======
Diluted................................................... $ 0.08 $ 0.21 $ 0.24 $ 0.13 $ 0.08 $ 0.14
======= ======= ======= ======= ======= =======
Weighted average common shares outstanding:
Basic..................................................... 22,500 22,500 22,500 22,500 22,500 22,532
======= ======= ======= ======= ======= =======
Diluted................................................... 22,500 22,500 22,500 22,944 22,790 23,880
======= ======= ======= ======= ======= =======
Pro forma provision for income taxes(1).................... $ 703 $ 1,885 $ 2,202 $ 2,530 $ 1,780
Pro forma net income available to stockholders............. $ 1,055 $ 2,828 $ 3,302 $ 3,795 $ 2,670
======= ======= ======= ======= =======
PRO FORMA AS ADJUSTED STATEMENT OF OPERATIONS DATA:
Revenues................................................... $32,103 $21,471 36,968
Income from operations..................................... 8,386 5,955 7,587
Net income................................................. 5,095 3,636 4,431
Net income per common share
Basic..................................................... $ 0.19 $ 0.13 $ 0.16
======= ======= =======
Diluted................................................... $ 0.18 $ 0.13 $ 0.16
======= ======= =======
Weighted average common shares outstanding(2)
Basic..................................................... 27,115 27,115 27,147
======= ======= =======
Diluted................................................... 27,559 27,405 28,495
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
OCTOBER 2, 1999
--------------------------
PRO FORMA
ACTUAL AS ADJUSTED(3)
-------- --------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Net working capital......................................... $ 6,953 $41,237
Total assets................................................ $ 16,363 $47,021
Total debt (including current debt)......................... $ 23,343 --
Common stockholders' equity (deficiency in assets).......... $(11,954) $42,718
</TABLE>
- ---------------
(1) Before February 12, 1998, we were 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, we terminated our subchapter "S" corporation status and,
accordingly, became subject to federal and state income taxes. The pro forma
as adjusted statement of operations data reflects adjustments to historical
net income as if we had not elected subchapter "S" corporation status for
federal and state income tax purposes.
(2) Pro forma as adjusted weighted average common shares outstanding assumes
that the following occurred at the beginning of the period indicated:
- our leveraged recapitalization, which actually occurred in February 1998;
and
- the issuance of 4,615,000 shares of common stock issuable in this
offering.
(3) Pro forma as adjusted assumes the issuance of 4,615,000 shares of common
stock issuable in this offering at October 2, 1999.
6
<PAGE> 8
RISK FACTORS
You should carefully consider the following risk factors and all other
information contained in this prospectus before purchasing our common stock.
Investing in our common stock involves a high degree of risk.
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 currently derive all 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 our client base, eliminate future
opportunities or create conflicts of interest among our 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 our 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 OUR REVENUES AND
HARM OUR BUSINESS
We derive a significant portion of our revenues from a relatively limited
number of clients. For example, during 1997 and 1998, revenues from our ten most
significant clients accounted for approximately 78.4% and 76.0% of our revenues,
respectively. In the first nine months of 1999, Williams Communications Group
and diAx accounted for 41.1% and 13.6% of our revenues, respectively. 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 OUR 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 assignments;
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<PAGE> 9
- consultant turnover, utilization rates and billing rates;
- the loss of key consultants, which could cause clients to end their
relationships 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, including Year
2000 remediation work, 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
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, we would incur additional expenses that would not be
matched by corresponding revenues. Therefore, our profitability would decline
and we could potentially experience losses. In addition, our stock price would
likely decline.
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 our
growth plans. The number of potential consultants that meet our hiring criteria
is relatively small, and we face significant competition for these consultants
from our direct competitors and others in the telecommunications industry.
Competition for these consultants may result in significant increases in our
costs to retain the consultants, which could reduce our margins and our
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, our revenues
and our profitability would decline.
THE MARKET IN WHICH WE COMPETE IS INTENSELY COMPETITIVE AND ACTIONS BY
COMPETITORS COULD RENDER OUR SERVICES LESS COMPETITIVE CAUSING OUR REVENUES AND
INCOME TO DECLINE
The market for consulting services to telecommunications companies is
intensely competitive, highly fragmented and subject to rapid change. Our
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;
- Andersen Consulting;
- Booz-Allen & Hamilton;
8
<PAGE> 10
- The Boston Consulting Group;
- Cap Gemini;
- KPMG Peat Marwick; 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 cannot assure you
that we will 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;
- the ability and willingness of our competitors to finance 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 OUR BUSINESS IN RECENT PERIODS, AND IF
WE ARE UNABLE TO MANAGE THIS GROWTH, OUR OPERATIONAL INFRASTRUCTURE MAY NOT BE
ABLE TO SUPPORT OUR GROWTH
We are currently experiencing a period of rapid growth that may strain our
managerial and operational resources. To support our 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 INDEPENDENT CONTRACTORS TO
EMPLOYEES, WE COULD INCUR UNANTICIPATED COSTS WHICH WOULD HARM OUR FINANCIAL
PERFORMANCE
We are planning to offer contingent employee or full-time employee status
to certain of our independent contractors. As we convert independent contractors
to consultant employees, we will incur additional fixed costs for each such
employee that we do not incur when we retain an independent contractor. To
effectively manage these additional fixed costs, we will need to continuously
improve utilization management and minimize unbilled employee time. In addition,
9
<PAGE> 11
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.
IF WE DO NOT CONTINUALLY ENHANCE OUR SERVICES TO MEET THE CHANGING NEEDS OF OUR
CUSTOMERS, WE MAY LOSE FUTURE BUSINESS TO OUR COMPETITORS
We believe that our future success will depend upon our ability to enhance
our existing services and to introduce new services to meet the requirements of
our customers in a rapidly developing and evolving market. Our present or future
services may not satisfy the needs of the telecommunications market. If we are
unable to anticipate or respond adequately to customer needs, we may lose
business and our financial performance will suffer.
OUR PLANS FOR INTERNATIONAL EXPANSION MAY NOT SUCCEED, WHICH WOULD HARM OUR
REVENUES AND PROFITABILITY
Our future revenues depend to a large extent on expansion into
international markets. Our future international operations might not succeed for
a number of reasons, including:
- difficulties in staffing and managing foreign operations;
- seasonal reductions in business activity;
- 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 our business plan
in foreign markets. If we are unable to achieve anticipated levels of revenues
from our international operations, our revenues and profitability would decline.
IF OUR INTERNATIONAL BUSINESS VOLUMES INCREASE, WE WILL BE EXPOSED TO GREATER
FOREIGN CURRENCY EXCHANGE RISKS, WHICH COULD RESULT IN INCREASED EXPENSES AND
DECLINING PROFITABILITY
The percentage of our revenues comprised of international engagements
increased significantly in the first nine months of 1999 and may continue to
increase. Some of our international engagements are denominated in the local
currency of our clients. Expenses that we incur 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 our billings
are denominated decreases in relation to the U.S. dollar or another currency in
which our expenses are denominated, our operating results and financial
condition could be harmed. We may hedge our
10
<PAGE> 12
foreign currency exposure from time to time, but we cannot assure you that any
hedging will be effective.
WE EXPECT THE GROWTH OF OUR TMNG.COM BUSINESS TO DRIVE FUTURE REVENUES AND IF
THIS DOES NOT HAPPEN OUR REVENUES AND PROFITABILITY WOULD DECLINE
A significant part of our future growth is dependent upon our ability to
grow our TMNG.com business which is focused on providing consulting services to
help telecommunications companies build the infrastructure, systems and
processes needed to support e-business. To support this growth, we must develop
a base of consultants with internet-based skills. The personnel and skill sets
required for our TMNG.com services are different from those used in our
traditional lines of business. The personnel that we need to support this
business may not be widely available, and we may encounter unforeseen
difficulties in recruiting needed personnel for the TMNG.com initiative. In
addition, we may be unable to develop methodologies to address the unique needs
of internet-based companies due to our relative lack of experience in this
market. Additionally, the continuously evolving nature of the internet makes it
very difficult to establish e-business expertise. If we fail to adequately
develop our internet and e-business skills, we may not be able to capitalize on
the growth opportunities presented by these sectors, and our competitive
position, revenues and profitability would decline.
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.
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
11
<PAGE> 13
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 CUSTOMERS, OUR SUCCESS WOULD
BE JEOPARDIZED
A substantial majority of our business is derived from repeat customers.
Our future success depends to a significant extent on our ability to develop
long-term relationships with successful telecommunications providers who will
give us new and repeat business. We may be unable to develop new customer
relationships and our new or existing customers may be unsuccessful. Our
inability to build long-term customer relations would result in declines in our
revenues and profitability.
A LARGE NUMBER OF OUR 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 the substantial majority 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 contractors in our benefit plans. In the future, the
IRS and state authorities may challenge the status of consultants as independent
contractors. Independent contractors may also initiate proceedings to seek
reclassification as employees under state law. In either case, if persons
engaged by us as independent contractors 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. As of
October 2, 1999, approximately 115 consultants were working on engagements for
us as independent contractors. In addition, at least another 100 individuals
have worked for us as independent contracts since January 1, 1998. Any challenge
by the IRS or state authorities or individuals resulting in a determination that
a substantial number of such persons are employees could subject 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 our 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 one of our former clients. 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. For additional information regarding this proceeding,
please see "Business -- Legal Proceedings."
THE MARKET PRICE OF OUR COMMON STOCK MAY BE VOLATILE, AND OUR INVESTORS MAY
EXPERIENCE INVESTMENT LOSSES
The market price of our common stock may be volatile. Our stock price could
decline or fluctuate in response to a variety of factors, including:
- variations in our quarterly operating results;
- announcements of technological innovations that render our talent
outdated;
12
<PAGE> 14
- introduction of new services or new pricing policies by us or our
competitors;
- trends in the telecommunications industry;
- acquisitions or strategic alliances by us or others in our industry;
- failure to achieve financial analysts' or other estimates of our results
of operations for any fiscal period;
- changes in estimates of our 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 may make acquisitions. Currently, we
do not have any planned or pending 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 our existing business; and
- adverse effects on our financial statements, including one-time
write-offs, ongoing charges for amortization of goodwill and assumption
of liabilities of acquired businesses.
If we make acquisitions and any of these problems materialize, these
acquisitions could negatively affect our operations, profitability and financial
operations.
OUR INABILITY TO PROTECT OUR INTELLECTUAL PROPERTY COULD HARM OUR COMPETITIVE
POSITION AND OUR FINANCIAL PERFORMANCE
Despite our efforts to protect our proprietary rights from unauthorized use
or disclosure, parties, including former employees or consultants of ours, may
attempt to disclose, obtain or use our solutions or technologies. The steps we
have taken may not prevent misappropriation of our solutions or technologies,
particularly in foreign countries where laws or law enforcement practices may
not protect our proprietary rights as fully as in the United States.
Unauthorized disclosure of our proprietary information could make our solutions
and methodologies available to others and harm our competitive position.
Intellectual property claims brought against us, regardless of their merit,
could result in costly litigation and the diversion of our financial resources
and technical and management personnel. Further, if such claims are proven
valid, through litigation or otherwise, we may be required to change our
trademarks and pay financial damages, which could harm our profitability and
financial performance.
PRINCIPAL STOCKHOLDERS, EXECUTIVE OFFICERS AND DIRECTORS WILL RETAIN SUBSTANTIAL
CONTROL OVER US AFTER THE OFFERING AND MAY MAKE DECISIONS THAT ARE NOT IN THE
BEST INTEREST OF OTHER STOCKHOLDERS
Upon completion of this offering, our executive officers, directors and
stockholders owning more than five percent of our outstanding common stock (and
their affiliates) will, in the aggregate, own approximately 83.2% of our
outstanding common stock. As a result, such persons, acting together, will 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 of our assets) and to control
our management and affairs. Accordingly, concentration of ownership of our
common stock may have the effect of delaying, deferring or
13
<PAGE> 15
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.
THERE HAS BEEN NO PRIOR PUBLIC MARKET FOR OUR COMMON STOCK, AND THE PRICE OF OUR
COMMON STOCK MAY DECLINE
Our common stock has never been sold in a public market. An active trading
market for our common stock may not develop or be sustained upon the completion
of this offering. In addition, the initial offering price may not be indicative
of the prices that will prevail in the public market after the offering, and the
market price of the common stock could fall below the initial public offering
price.
THE SIGNIFICANT NUMBER OF SHARES OF COMMON STOCK THAT WILL BE ELIGIBLE FOR SALE
IN THE NEAR FUTURE MAY HARM THE MARKET PRICE OF OUR COMMON STOCK
Sales of a substantial number of shares of our common stock in the public
market following this offering could harm the market price for our common stock.
This may prevent stockholders from reselling their shares at or above the price
at which they purchased their shares. Upon expiration of 180-day lockup
agreements that our stockholders have entered into with the underwriters or us,
14,745,115 shares of our common stock will become eligible for immediate sale.
This amount represents approximately 54.1% of the shares of our common stock
outstanding upon completion of this offering. For additional detail regarding
shares eligible for sale, please see "Shares Eligible for Future Sale."
WE USED TO BE TAXED UNDER SUBCHAPTER "S" OF THE INTERNAL REVENUE CODE AND CLAIMS
OF TAXING AUTHORITIES RELATED TO OUR 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. This indemnity is secured by escrowed funds in an
escrow that terminates in February 2001. Accordingly, this indemnity may not be
sufficient to cover claims made by the IRS or other taxing authorities, and any
such claims could result in additional costs and harm our financial performance.
INVESTORS IN THIS OFFERING WILL SUFFER IMMEDIATE AND SUBSTANTIAL DILUTION
If you purchase shares of our common stock, you will incur immediate and
substantial dilution of $11.43 in pro forma net tangible book value per share.
If other security holders exercise options or warrants to purchase our common
stock, you will suffer further dilution.
WE MAY SEEK TO RAISE ADDITIONAL FUNDS, AND ADDITIONAL FUNDING MAY BE DILUTIVE TO
STOCKHOLDERS OR IMPOSE OPERATIONAL RESTRICTIONS
Any additional equity financing may be dilutive to 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 our stockholders will be reduced. These stockholders may
experience
14
<PAGE> 16
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.
WE DO NOT ANTICIPATE PAYING DIVIDENDS ON OUR COMMON STOCK IN THE FORESEEABLE
FUTURE
We currently intend to retain all available funds for use in the operation
and expansion of our business and do not anticipate paying any cash dividends in
the foreseeable future. Contractual restrictions currently prohibit us from
paying cash dividends.
ANTI-TAKEOVER PROVISIONS AND OUR RIGHT TO ISSUE PREFERRED STOCK COULD MAKE A
THIRD PARTY ACQUISITION OF US 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
of us, even if a change in control would be beneficial to stockholders. In
addition, our 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 us.
IF OUR INTERNAL SYSTEMS OR THE INTERNAL SYSTEMS OF OUR CUSTOMERS OR SUPPLIERS
ARE NOT YEAR 2000 COMPLIANT, WE COULD EXPERIENCE DISRUPTIONS IN COMMUNICATIONS
SERVICE AND LOST REVENUES
We cannot assure you that our computer systems and software products do not
contain undetected errors or defects associated with Year 2000 data functions,
nor can we assure you that the software components we have acquired from third
parties will be Year 2000 compliant. This failure to be Year 2000 compliant
could result in system failures, delays or miscalculations. Computer systems and
software that have not been developed or enhanced recently may need to be
upgraded or replaced to comply with Year 2000 requirements. If we discover any
Year 2000 errors or defects in our internal systems, we could incur substantial
costs in making repairs. The resulting disruption of our operations could harm
our business.
Furthermore, the Internet operations of many of our customers and suppliers
may be affected by Year 2000 complications. The failure of our customers or
suppliers to ensure that their systems are Year 2000 compliant could harm our
customers and suppliers, resulting in our inability to obtain necessary data
communication and telecommunication capacity. In addition, our customers may
encounter Year 2000 problems which cause them to divert resources from projects
we are or could potentially be engaged in order for them to solve their Year
2000 problems. If diversions of this nature occur, we could experience lost
revenues or cancellation or delay of engagements, which would harm our revenues
and profitability.
15
<PAGE> 17
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks and
uncertainties, which may include statements about our:
- business strategy;
- financial performance and trends affecting our business; and
- plans, objectives, expectations and intentions contained in this
prospectus that are not historical facts.
When used in this prospectus, the words "expects," "anticipates,"
"intends," "plans," "believes," "seeks," "estimates" and similar expressions are
generally intended to identify forward-looking statements. In addition, this
prospectus includes statistical data that comes from information published by
independent sources, including International Data Corporation (IDC). Because
these forward-looking statements involve risks and uncertainties, actual results
could differ materially from those expressed or implied by these forward-looking
statements for a number of reasons, including those discussed under "Risk
Factors" and elsewhere in this prospectus.
USE OF PROCEEDS
We estimate that we will receive proceeds of $54.8 million from the sale of
the 4,615,000 shares of common stock we are offering assuming a public offering
price of $13.00 per share and after deducting the underwriting discount and our
estimated offering expenses.
We intend to use approximately $23.3 million of the proceeds of the
offering for repayment of indebtedness. We plan to use the remainder of the
proceeds for general corporate purposes, including working capital. We may also
use some of the proceeds to acquire other complementary businesses, although we
have no current plans relating to any of these transactions. Pending these uses,
the net proceeds of this offering will be invested in short-term, investment
grade, interest-bearing securities.
The indebtedness to be repaid with the proceeds of this offering consists
of two term loans, with principal balances of $11.0 million and $12.0 million at
October 2, 1999, and any outstanding borrowings under our $5.0 million revolving
credit facility. As of October 2, 1999, total borrowings of $317,000 were
outstanding under our revolving credit facility. The term loans and revolving
credit facility are secured by a pledge of substantially all of our assets. We
pay quarterly interest on the term loan that has an $11.0 million principal
balance at the London Interbank Offered Rate, or LIBOR, plus 2.75%. We pay
quarterly interest on the other term loan at LIBOR plus 3.00%. As of October 2,
1999, LIBOR equaled 5.40% and the interest rates on our term loans were 8.15%
and 8.40%, respectively. As of October 2, 1999, the interest rate on our
revolving credit facility was based on the prime rate plus 1.25%, which equalled
9.50%. Both of the term loans and the revolving credit facility mature on
December 31, 2003. The terms of our indebtedness require us to maintain
specified financial ratios and observe additional restrictive covenants. As of
October 2, 1999, we were in compliance with these ratios and covenants.
DIVIDEND POLICY
We currently expect to retain our future earnings, if any, for use in the
operation and expansion of our business and do not anticipate paying any cash
dividends in the foreseeable future. Covenants in our bank credit agreements
prohibit the payment of cash dividends.
TRADEMARKS
TMNG(R), TMNG.com(TM), TMNG CLEC Planner(TM), TMNG Lexicon(TM), TMNG
e-Lexicon(TM), Margin Master(TM) and QBC(R) are trademarks of The Management
Network Group, Inc. eRoom(TM) is a trademark of Instinctive Technology, Inc.
Other service marks, trademarks and trade names referred to in this prospectus
are the property of their respective owners.
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<PAGE> 18
CAPITALIZATION
The following table sets forth as of October 2, 1999:
- our actual capitalization; and
- our pro forma capitalization as adjusted to reflect the proceeds from the
sale of 4,615,000 shares of our common stock offered hereby at an assumed
initial public offering price of $13.00 per share and after deducting the
underwriting discount and estimated offering expenses and repayment of
debt with the net proceeds of this offering.
The actual information below is qualified by, and should be read in
conjunction with, our consolidated financial statements and related notes
appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
OCTOBER 2, 1999
---------------------------
PRO FORMA
ACTUAL AS ADJUSTED
---------- -------------
(IN THOUSANDS, EXCEPT SHARE
DATA)
<S> <C> <C>
Long-term debt, including current portion................... $ 23,343
Stockholders' equity (deficiency in assets):
Preferred stock, $0.001 par value; 10,000,000 shares
authorized, none issued and outstanding, Actual and Pro
forma as adjusted......................................
Common stock, $0.001 par value; 50,000,000 shares
authorized, shares issued and outstanding, at amount
paid in(1):
Actual: 22,571,201 shares; and Pro Forma As Adjusted:
27,186,201 shares(1).................................. 23 28
Additional paid-in capital................................ 26,426 81,216
Retained earnings (deficit)(2)(3)......................... (33,160) (33,517)
Accumulated other comprehensive income -- foreign currency
translation
adjustment............................................. (10) (10)
Unearned compensation..................................... (5,233) (4,999)
-------- -------
Total stockholders' equity (deficiency in
assets)......................................... (11,954) 42,718
-------- -------
Total capitalization.............................. $ 11,389 $42,718
======== =======
</TABLE>
- -------------------------
(1) The number of shares of common stock outstanding at October 2, 1999
excludes: 1,950,000 shares issuable upon the exercise of options under our
1998 equity incentive plan consisting of: 1,695,250 shares underlying
options outstanding at a weighted average exercise price of $1.68 per share,
of which 286,667 are exercisable as of October 2, 1999; and 254,750 shares
underlying options available for future grants. The number of shares of
common stock outstanding also excludes 500,000 shares issuable upon the
exercise of a warrant issued to Williams Communications Group in October
1999. The exercise price of this warrant is $2.00 per share.
(2) Pro Forma As Adjusted retained earnings (deficit) reflects $217,000 of
charges for deferred financing costs incurred in connection with our
February 1998 leveraged recapitalization, which will be eliminated, net of
tax effect, in connection with the retirement of our long-term debt from the
proceeds of this offering.
(3) Pro Forma As Adjusted retained earnings (deficit) reflects $140,000 of
compensation expense, net of tax effect, related to stock options which vest
immediately following the completion of this offering.
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<PAGE> 19
DILUTION
Our net tangible book value as of October 2, 1999 was approximately ($13.0)
million, or approximately ($.57) per share of common stock. Net tangible book
value per share represents the amount of tangible assets less total liabilities,
divided by the shares of common stock outstanding as of October 2, 1999.
Dilution in net tangible book value per share represents the difference
between the amount per share paid by purchasers of shares of our common stock in
this offering and the pro forma as adjusted net tangible book value per share of
our common stock immediately after the offering. After giving effect to our sale
of 4,615,000 shares of common stock in this offering at an assumed public
offering price of $13.00 per share and after deducting the underwriting discount
and estimated offering expenses, our pro forma as adjusted net tangible book
value as of October 2, 1999 would have been approximately $42.7 million, or
$1.57 per share. This represents an immediate increase in pro forma as adjusted
net tangible book value of $2.14 per share to existing stockholders and an
immediate dilution in pro forma as adjusted net tangible book value of $11.43
per share to purchasers of common stock in this offering.
<TABLE>
<S> <C> <C>
Initial public offering price per share..................... $13.00
Net tangible book value per share as of October 2, 1999..... $(0.57)
Increase per share attributable to new investors.......... 2.14
Pro forma as adjusted net tangible book value per share..... 1.57
------
Dilution per share to new investors......................... $11.43
======
</TABLE>
The following table sets forth the total consideration paid and the average
price per share paid by the existing stockholders and by new investors, before
deducting estimated underwriting discounts and commissions and offering expenses
payable by us at an assumed public offering price of $13.00 per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ---------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders....... 22,571,201 83.0% $17,520,000 22.6% $ 0.78
New investors............... 4,615,000 17.0 59,995,000 77.4 13.00
---------- ----- ----------- ----- ------
Total............. 27,186,201 100.0% $77,515,000 100.0% $ 2.85
========== ===== =========== ===== ======
</TABLE>
The foregoing computations exclude 1,695,250 shares of common stock subject
to options issued at a weighted average exercise price of $1.68 per share
granted under our 1998 equity incentive plan. These computations also exclude
500,000 shares of common stock subject to an outstanding warrant issued to
Williams Communications Group at an exercise price of $2.00 per share.
To the extent these options and the warrant are exercised, there would be
additional dilution to investors purchasing shares in this offering.
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<PAGE> 20
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma condensed consolidated financial data has
been prepared by our management from our consolidated financial statements and
the notes to those statements included elsewhere in this prospectus. We believe
that the accounting treatment used to prepare the pro forma data provides a
reasonable basis on which to present this unaudited pro forma condensed
consolidated financial data. The unaudited pro forma condensed consolidated
statements of operations for fiscal 1998, and the nine months ended October 2,
1999, reflects adjustments as if our leveraged recapitalization (which occurred
in February, 1998) and this offering had occurred on January 1, 1998. The
unaudited pro forma as adjusted condensed consolidated balance sheet as of
October 2, 1999 gives effect to this offering and the use of proceeds as stated
in "Use of Proceeds" as if it had occurred on October 2, 1999.
We are providing the unaudited pro forma condensed consolidated financial
data for informational purposes only. The pro forma condensed financial data
shown below may not necessarily be indicative of either our financial position
or the results of our operations which would have occurred had the
recapitalization and this offering actually occurred on the dates described
above, nor are they necessarily indicative of the results of operations for any
future period. The unaudited pro forma condensed consolidated financial data and
accompanying notes should be read in conjunction with our financial statements
and the notes to those statements included elsewhere in this prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR 1998
----------------------------------------------------------------------
ADJUSTMENTS ADJUSTMENTS
RELATED TO THE PRO RELATED TO THIS PRO FORMA
ACTUAL RECAPITALIZATION FORMA OFFERING AS ADJUSTED
------- ---------------- ------- --------------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS:
Revenues............................................... $32,103 $32,103 $32,103
Cost of services:
Direct cost of services............................ 17,411 17,411 17,411
Equity related charges............................. 239 239 239
------- ------- -------
Total cost of services......................... 17,650 17,650 17,650
------- ------- -------
Gross profit......................................... 14,453 14,453 14,453
Operating expenses:
Selling, general and administrative expenses....... 6,158 $(113)(1) 6,045 6,045
Equity related charges............................. 22 22 22
------- ----- ------- -------
Total operating expenses....................... 6,180 (113) 6,067 6,067
------- ----- ------- -------
Income from operations............................... 8,273 113 8,386 8,386
Other income (expense)............................... 88 88 88
Interest income...................................... 18 18 18
Interest expense..................................... (2,054) (248)(2) (2,302) $2,302(3)
------- ----- ------- ------ -------
Income before provision for income taxes and
extraordinary items................................ 6,325 (135) 6,190 2,302 8,492
Provision for income taxes........................... 3,282 (57)(4) 2,473 924(4) 3,397
(752)(5)
------- ----- ------- ------ -------
Net income available to common stockholders.......... $ 3,043 $ 674 $ 3,717 $1,378 $ 5,095
======= ===== ======= ====== =======
Net income per common share
Basic.............................................. $ 0.14 $ 0.17 $ 0.19
======= ======= =======
Diluted............................................ $ 0.13 $ 0.16 $ 0.18
======= ======= =======
Weighted average common shares outstanding(6)
Basic.............................................. 22,500 22,500 27,115
======= ======= =======
Diluted............................................ 22,944 22,944 27,559
======= ======= =======
</TABLE>
- -------------------------
(see accompanying notes)
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<PAGE> 21
<TABLE>
<CAPTION>
NINE MONTHS ENDED OCTOBER 2, 1999
---------------------------------------------------------------------
ADJUSTMENTS ADJUSTMENTS
RELATED TO RELATED TO THE PRO FORMA
ACTUAL RECAPITALIZATION PRO FORMA OFFERING AS ADJUSTED
------- ---------------- --------- -------------- -----------
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
<S> <C> <C> <C> <C> <C>
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS:
Revenues................................... $36,968 $36,968 $36,968
Cost of services:
Direct cost of services................ 19,178 19,178 19,178
Equity related charges................. 1,778 1,778 1,778
------- ------- -------
Total cost of services............ 20,956 20,956 20,956
------- ------- -------
Gross profit............................. 16,012 16,012 16,012
Operating expenses:
Selling, general and administrative
expenses............................. 7,479 7,479 7,479
Equity related charges................. 946 946 946
------- ------- -------
Total operating expenses.......... 8,425 8,425 8,425
------- ------- -------
Income from operations................... 7,587 7,587 7,587
Other income (expense)................... (61) (61) (61)
Interest income.......................... 3 3 3
Interest expense......................... (1,653) (1,653) $1,653(3) --
------- ------- ------ -------
Income before provision for income
taxes.................................. 5,876 5,876 1,653 7,529
Provision for income taxes............... 2,437 2,437 661(4) 3,098
------- ------- ------ -------
Net income available to common
stockholders........................... $ 3,439 $ 3,439 $ 992 $ 4,431
======= ======= ====== =======
Net income per common share
Basic.................................. $ 0.15 $ 0.15 $ 0.16
======= ======= =======
Diluted................................ $ 0.14 $ 0.14 $ 0.16
======= ======= =======
Weighted average common shares
outstanding(6)
Basic.................................. 22,532 22,532 27,147
======= ======= =======
Diluted................................ 23,880 23,880 28,495
======= ======= =======
</TABLE>
- -------------------------
(see accompanying notes)
20
<PAGE> 22
<TABLE>
<CAPTION>
NINE MONTHS ENDED OCTOBER 3, 1998
----------------------------------------------------------------------
ADJUSTMENTS ADJUSTMENTS
RELATED TO THE PRO RELATED TO THIS PRO FORMA
ACTUAL RECAPITALIZATION FORMA OFFERING AS ADJUSTED
------- ---------------- ------- --------------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS:
Revenues.................................. $21,471 $21,471 $21,471
Cost of services:
Direct cost of services............... 11,611 11,611 11,611
Equity related charges................ 14 14 14
------- ------- -------
Total cost of services........... 11,625 11,625 11,625
------- ------- -------
Gross profit............................ 9,846 9,846 9,846
Operating expenses:
Selling, general and administrative
expenses............................ 4,003 $(113)(1) 3,890 3,890
Equity related charges................ 1 1 1
------- ----- ------- -------
Total operating expenses......... 4,004 (113) 3,891 3,891
------- ----- ------- -------
Income from operations.................. 5,842 113 5,955 5,955
Other income (expense).................. 87 87 87
Interest income......................... 17 17 17
Interest expense........................ (1,494) (248)(2) (1,742) $1,742(3)
------- ----- ------- ------ -------
Income before provision for income taxes
and extraordinary item................ 4,452 (135) 4,317 1,742 6,059
Provision for income taxes.............. 2,576 (54)(4) 1,726 697(4) 2,423
(796)(5)
------- ----- ------- ------ -------
Net income available to common
stockholders.......................... $ 1,876 $ 715 $ 2,591 $1,045 $ 3,636
======= ===== ======= ====== =======
Net income per common share
Basic................................. $ 0.08 $ 0.12 $ 0.13
======= ======= =======
Diluted............................... $ 0.08 $ 0.11 $ 0.13
======= ======= =======
Weighted average common shares
outstanding(6)
Basic................................. 22,500 22,500 27,115
======= ======= =======
Diluted............................... 22,790 22,790 27,405
======= ======= =======
</TABLE>
- -------------------------
(see accompanying notes)
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(1) Represents a reduction in compensation currently payable to our Chief
Executive Officer as required under his employment agreement entered into in
connection with the February 1998 recapitalization, in excess of actual
compensation paid during the period from January 1, 1998 through February
12, 1998.
(2) The interest and amortization expense pro forma adjustment relating to the
recapitalization is as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
----------------------------------
FISCAL 1998 OCTOBER 3, 1998 OCTOBER 2, 1999
----------- --------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest expense relating to the bank term loans using
an assumed interest rate of 7.9% per annum for the
term loan that has $11.4 million outstanding and
8.6% per annum for the other term loan.............. $231 $231 $--
Interest expense relating to the revolving credit
facility using an assumed interest rate of 8.4% per
annum................................................. 5 5 --
Amortization of deferred financing costs relating to
borrowings under the term loans..................... 12 12 --
---- ---- --
$248 $248 $--
==== ==== ==
</TABLE>
21
<PAGE> 23
(3) Represents the elimination of interest and amortization expense due to the
repayment of such debt with the proceeds of this offering as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
----------------------------------
FISCAL 1998 OCTOBER 3, 1998 OCTOBER 2, 1999
----------- --------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C>
Elimination of interest expense relating to repayment
of approximately $23.0 million in term loans........ $2,043 $1,589 $1,481
Elimination of interest expense relating to repayment
of revolving credit facility.......................... 141 64 86
Elimination of deferred financing cost amortization... 118 89 86
------ ------ ------
$2,302 $1,742 $1,653
====== ====== ======
</TABLE>
(4) Represents adjustment for the tax effect of notes (1), (2) and (3), as
applicable, at an effective rate of 40.0%.
(5) We were a subchapter "S" corporation before closing of the February 1998
recapitalization. The pro forma income statement information reflects
adjustments to historical net income as if we had not elected subchapter "S"
corporation status for federal and state income tax purposes and reflects
the income tax effect of the pro forma adjustments related to the February
1998 recapitalization and this offering assuming an effective tax rate of
40.0%.
(6) Pro forma as adjusted weighted average shares outstanding assumes that the
offering occurred at the beginning of the period and the issuance of
4,615,000 shares of common stock issuable in this offering were outstanding
at January 1, 1998.
22
<PAGE> 24
<TABLE>
<CAPTION>
OCTOBER 2, 1999
------------------------------------------
ADJUSTMENTS
RELATED TO THIS PRO FORMA
ACTUAL OFFERING AS ADJUSTED
-------- --------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Unaudited Pro Forma Condensed
Consolidated Balance Sheet Data:
ASSETS
CURRENT ASSETS:
Cash................................................... $ 1,461 $ 54,795(1) $ 32,913
(23,343)(2)
Receivables:
Accounts receivable.................................. 7,624 7,624
Accounts receivable -- unbilled...................... 5,232 5,232
-------- -------- --------
12,856 12,856
Less: allowance for doubtful accounts................ (302) (302)
-------- -------- --------
12,554 12,554
Other assets........................................... 600 (527)(1) 73
-------- -------- --------
Total current assets......................... 14,615 30,925 45,540
DEFERRED FINANCING COSTS, net.......................... 361 (361)(3) --
PROPERTY AND EQUIPMENT, net............................ 721 721
DEFERRED TAX ASSET..................................... 666 94(4) 760
-------- -------- --------
TOTAL ASSETS................................. $ 16,363 $ 30,658 $ 47,021
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY IN
ASSETS)
CURRENT LIABILITIES:
Long-term debt -- current portion.................... $ 2,688 $ (2,688)(2) --
Bank overdraft....................................... 436 $ 436
Trade accounts payable............................... 1,073 1,073
Accrued payroll, bonuses and related expenses........ 2,012 2,012
Accrued interest payable............................. 217 217
Other accrued liabilities............................ 1,076 (527)(1) 549
Income tax payable................................... 127 (144)(3) (17)
Deferred taxes....................................... 33 33
-------- -------- --------
Total current liabilities.................... 7,662 (3,359) 4,303
LONG-TERM DEBT......................................... 20,655 (20,655)(2)
STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS):
Common stock......................................... 23 5(1) 28
Additional paid-in capital........................... 26,426 54,790(1) 81,216
Retained earnings (deficit).......................... (33,160) (217)(3) (33,517)
(140)(4)
Accumulated other comprehensive income --
Foreign currency translation and adjustment....... (10) (10)
Unearned compensation................................ (5,233) 234(4) (4,999)
-------- -------- --------
Total stockholders' equity (deficiency in assets)...... (11,954) 54,672 42,718
-------- -------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIENCY IN ASSETS)..................... $ 16,363 $ 30,658 $ 47,021
======== ======== ========
</TABLE>
Notes to unaudited pro forma condensed consolidated balance sheet.
(1) Represents the issuance of 4,615,000 shares of common stock in connection
with this offering at an assumed initial public offering price of $13.00 per
share, less the underwriting discount and estimated offering expenses.
(2) Represents the application of the net proceeds of this offering to repay the
outstanding balances of the term loans and revolving credit facility.
(3) Represents deferred financing costs associated with the term loans which
will be charged against income upon the completion of this offering, net of
tax effect.
(4) Represents compensation expense related to stock options which vest
immediately following the completion of this offering, net of tax effect.
23
<PAGE> 25
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data for the nine months
ended October 2, 1999, are derived from our unaudited financial statements and
the notes to those statements included elsewhere in this prospectus. In the
opinion of our management, our unaudited financial statements have been prepared
on the same basis as our audited financial statements and include all
adjustments, consisting of only normal recurring adjustments, and adjustments
necessary to record the recapitalization discussed in note 1 to our consolidated
financial statements included elsewhere in this prospectus, necessary for a fair
presentation of our financial condition and results of operations for such
periods. The selected financial data at December 31, 1995 has been derived from
our unaudited financial statements, which are not included in this prospectus.
The selected financial data at December 31, 1996, and for fiscal 1995, have been
derived from our audited financial statements and the notes to those statements
which are not included in this prospectus. The selected financial data at
December 31, 1997 and January 2, 1999 and for each of fiscal years 1996, 1997
and 1998 have been derived from our audited financial statements and the notes
to those statements included elsewhere in this prospectus. The selected
financial data should be read in conjunction with, and is qualified in its
entirety by, "Management's Discussion and Analysis of Financial Condition and
Results of Operations," our audited financial statements and the notes to those
statements and the other financial data included elsewhere in this prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR NINE MONTHS ENDED
-------------------------------------- -----------------------
OCTOBER 3, OCTOBER 2,
1995 1996 1997 1998 1998 1999
------- ------- ------- -------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA(1):
Revenues.................................................... $ 7,299 $17,279 $20,184 $ 32,103 $ 21,471 $ 36,968
Cost of services:
Direct cost of services................................... 4,303 9,648 11,384 17,411 11,611 19,178
Equity related charges.................................... 239 14 1,778
------- ------- ------- -------- -------- --------
Total cost of services.............................. 4,303 9,648 11,384 17,650 11,625 20,956
------- ------- ------- -------- -------- --------
Gross profit................................................ 2,996 7,631 8,800 14,453 9,846 16,012
Operating expenses:
Selling, general and administrative expenses.............. 1,242 2,798 3,280 6,158 4,003 7,479
Equity related charges.................................... 22 1 946
------- ------- ------- -------- -------- --------
Total operating expenses............................ 1,242 2,798 3,280 6,180 4,004 8,425
------- ------- ------- -------- -------- --------
Income from operations...................................... 1,754 4,833 5,520 8,273 5,842 7,587
Other income (expense):
Interest income........................................... 6 16 6 18 17 3
Interest expense.......................................... (2) (136) (30) (2,054) (1,494) (1,653)
Other, net................................................ 8 88 87 (61)
------- ------- ------- -------- -------- --------
Total other income (expense)................................ 4 (120) (16) (1,948) (1,390) (1,711)
Income before provision for income taxes.................... 1,758 4,713 5,504 6,325 4,452 5,876
Provision for income taxes.................................. 3,282 2,576 2,437
------- ------- ------- -------- -------- --------
Net income available to common stockholders................. $ 1,758 $ 4,713 $ 5,504 $ 3,043 $ 1,876 $ 3,439
======= ======= ======= ======== ======== ========
Net income per common share
Basic................................................... $ 0.08 $ 0.21 $ 0.24 $ 0.14 $ 0.08 $ 0.15
======= ======= ======= ======== ======== ========
Diluted................................................. $ 0.08 $ 0.21 $ 0.24 $ 0.13 $ 0.08 $ 0.14
======= ======= ======= ======== ======== ========
Weighted average common shares outstanding
Basic................................................... 22,500 22,500 22,500 22,500 22,500 22,532
Diluted................................................. 22,500 22,500 22,500 22,944 22,790 23,880
Pro forma provision for income taxes(2)..................... $ 703 $ 1,885 $ 2,202 $ 2,530 $ 1,780
======= ======= ======= ======== ========
Pro forma net income........................................ $ 1,055 $ 2,828 $ 3,302 $ 3,795 $ 2,670
======= ======= ======= ======== ========
"S" corporation distributions............................... $ 1,450 $ 6,095 $ 2,600 $ 4,664 $ 4,664
======= ======= ======= ======== ========
CONSOLIDATED BALANCE SHEET DATA(1):
Net working capital......................................... $ 2,809 $ 1,744 $ 4,689 $ 6,025 $ 3,256 $ 6,953
Total assets................................................ 3,443 4,121 5,483 11,006 11,306 16,363
Total debt (including current debt)......................... 26,017 25,919 23,343
Total Stockholders' Equity (Deficiency in assets)........... $ 2,809 $ 1,743 $ 4,709 $(18,271) $(19,592) $(11,954)
</TABLE>
- -------------------------
(1) Selected financial data for 1994 has been omitted because our records from
which the selected data could be created were destroyed in a disaster and
cannot be recreated.
(2) Before February 12, 1998, we were 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, we terminated our 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 we had not elected subchapter "S" corporation status for federal and
state income tax purposes.
24
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following "Management's Discussion and Analysis of Financial Condition
and Results of Operations" should be read in conjunction with our consolidated
financial statements and related notes appearing at the end of this prospectus.
OVERVIEW
We are a global management consulting firm that specializes in serving the
telecommunications industry. We provide comprehensive services that enable our
clients to meet the challenges of today's competitive and dynamic
telecommunications environment, including the growing demand for Internet
infrastructure and e-business solutions. Our clients include communications
service providers, technology companies and the investment firms that support
the telecommunications industry. We capitalize on our industry expertise and
proprietary methodologies to provide strategic, management and operational
support to our clients.
From 1995 through 1998, our revenues grew at a compounded annual growth
rate of 63.8%. Revenue for the nine months ended October 2, 1999 increased by
72.2% over the nine months ended October 3, 1998. The principal factors driving
revenue growth have been increased competition in the telecommunications
industry resulting from deregulation, new technology and convergence of voice
and data services. The combined factors create new opportunities and challenges
for telecommunications companies, resulting in a need for independent expertise
by both incumbent carriers and new market entrants alike.
Beginning with fiscal year 1998, we switched to a four week -- four
week -- five week quarterly accounting system in which each quarter is 13 weeks
and ends on a Saturday. As a result of this change, our fiscal year end changed
from being December 31 to being the Saturday which is 13 weeks from the end of
the third fiscal quarter. Our 1998 fiscal year therefore ended on January 2,
1999. The words "fiscal year" in this prospectus refer to the fiscal year most
closely coinciding with the related calendar year. When we refer to the "nine
month period for 1998" and the "nine month period for 1999" in this prospectus,
we mean the nine month period ending on October 3, 1998 and October 2, 1999,
respectively.
Sources of Revenue and Revenue Recognition Policy. Our revenues consist of
consulting fees for professional services and related expense reimbursements.
Substantially all of our consulting services are contracted on a time and
materials basis not to exceed a negotiated contract price. We recognize
substantially all revenues in the period in which the service is performed. We
generally begin a client relationship with a short-term engagement utilizing a
few consultants. Our sales strategy focuses on building long-term relationships
with both new and existing clients to gain additional engagements within
existing accounts and referrals for new clients. We also use strategic alliances
with other companies to sell our services and anticipate that we will continue
to do so in the future. Because we are a consulting company, we experience
fluctuations in revenues derived from our 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 our
services in another period. In addition, our clients generally may end their
engagements with little or no penalty or notice. If a client engagement ends
earlier than we expect, we must re-deploy professional service personnel as any
resulting unbillable time could harm our margins.
Through fiscal year 1998, most of our engagements were in North America. We
have experienced growth in our international consulting engagements, primarily
in Europe. International revenues during the first nine months of fiscal year
1999 grew to 26.7% of total revenue from 16.4% in the comparable period of the
prior year. We expect that international revenues will continue to represent an
increasing percentage of total revenues. Our knowledge and focus on trends
impacting markets abroad enable us to provide the expert advice needed by
international clients competing in newly deregulated markets and by U.S.
companies seeking to expand their global reach. We
25
<PAGE> 27
continue to expand our geographic presence in key locations based on industry
demand and our clients' needs and opportunities.
We are planning to introduce our TMNG.com services, which will be directed
at assisting communications service providers in building the infrastructure to
support e-business. We are recruiting additional consultants to support this
business and designing our proprietary methodologies to focus on e-business,
including our TMNG e-Lexicon. While we expect to incur substantial costs in
connection with the development of TMNG.com, we also expect that a significant
portion of our long-term service revenues will be attributable to our TMNG.com
service offerings. Should these revenues fall short of our expectations for any
reason, our margins could be harmed.
Customer concentration. While we have a large number of customers, we also
depend on a few key customers for a significant portion of our revenues. In
fiscal year 1998, 42.5% of our revenues came from Williams Communications Group,
Bell Atlantic and e.spire Communications, with services to each accounting for
more than ten percent of our revenues. For the first nine months of fiscal year
1999, 54.7% of our revenues came from Williams Communications Group and diAx
with each accounting for more than ten percent of our revenues. We generally
negotiate discounted pricing for large projects with long-term customers.
Because our clients typically engage our services on a project basis, their
needs for our services vary substantially from period to period. While we are
seeking to diversify our customer base and expand the portion of our revenues
which is derived from service through various channels, we anticipate that our
operating results will continue to depend on volume services to a relatively
small number of communication service providers and technology vendors.
Cost of Services. Cost of services consists primarily of fees paid to
independent contractors and client-related compensation for consultants who are
employees as well as equity related non-cash charges we incur in connection with
the grants of equity securities primarily to consultants. Employee compensation
includes certain unbillable time, training, vacation time, benefits and payroll
taxes. Our annual gross margins have ranged from 41.0% to 45.0% during the
period from 1995 to 1998. Margins are primarily impacted by:
- the type of consulting services provided;
- the size of service contracts and negotiated volume discounts;
- changes in our pricing policies and those of our competitors;
- utilization rates of consultants and independent contractors; and
- employee and independent contractor costs associated with a competitive
labor market.
In addition, gross margins may be impacted by a change we are beginning to
implement in our consultants' status. Currently, the majority of our consulting
engagements are staffed by independent contractors. To improve our ability to
attract and retain personnel, we plan to offer certain current consultants
either regular full-time employment or contingent employment. Contingent
employees are eligible for stock options and generally receive company-paid
medical insurance, vacation and other employee benefits. However, instead of
receiving a regular salary, contingent employees will be compensated only for
time spent serving on consulting projects for customers or requested assistance
on internal projects, including updating our toolsets. We believe our contingent
employment model is unique and provides our consultants with employee benefits,
greater flexibility for personal time and organizational support while providing
us greater flexibility in managing utilization rates than if we hired these
consultants as full-time employees. In addition, as we increase the full-time
employee portion of our consultant base, it becomes increasingly important for
us to manage utilization rates. If we are unable to manage utilization rates,
our gross margins may be negatively impacted because of the additional fixed
costs associated with full-time employees.
26
<PAGE> 28
Operating Expenses. Operating expenses include selling, general and
administrative expenses as well as equity related non-cash charges we incur in
connection with the grants of equity security primarily to partners, principals
and certain senior executives. Sales and marketing expenses consist primarily of
personnel and related costs for our direct client marketing efforts and
marketing staff. We primarily use a relationship sales model in which our
partners, principals and consultants generate revenues. We take these revenue
generating activities into account when determining these individuals' quarterly
bonus compensation, which is generally recorded as sales and marketing expenses.
Other expenditures include costs associated with marketing materials, trade
shows and advertising. To increase market awareness of our company, we intend to
continue to expand our direct and indirect sales efforts substantially, both
domestically and internationally. We will continue investment in sales and
marketing by adding to our senior executive team to support targeted marketing
programs, promoting recognition of our senior executives through published
articles and trade show presentations, and advertisement of new service
offerings, including a substantial portion for TMNG.com. We expect our sales and
marketing expenses to increase in the future.
General and administrative expenses consist primarily of salaries for
employees engaged primarily in executive and support functions as well as
expenses for corporate infrastructure. We plan to maintain our flexibility in
hiring a mix of full time employees, full time contingent employees and
independent subject matter experts to help us manage costs. We do not expect to
invest heavily in facilities because we plan to link our consultants by
electronic communication, enabling our consultants to work off-site using
internet communication capabilities known as our eRooms. We are also investing
heavily in updating our toolsets and developing new ones. A substantial portion
of our recruiting and toolset development expenses will be incurred in
connection with the development of our TMNG.com service line. Our development
expenditures are expensed when incurred. We expect our selling, general and
administrative expenses to increase in absolute dollars and as a percentage of
revenues, due in part to the expenses we expect to incur in connection with the
development of TMNG.com.
Equity related charges. In connection with the grant of certain stock
options to employees during the nine month period ended October 2, 1999 and
fiscal year ended 1998, we recorded unearned compensation of $6.1 million and
$305,000, respectively, representing the difference between the deemed value of
common stock for accounting purposes and the exercise price of these options at
the date of grant. Unearned compensation is presented as a reduction of
stockholders' equity (deficit) and is amortized over the vesting period of the
applicable options. We expensed $1.2 million of unearned compensation during the
nine month period ended October 2, 1999. In addition, $261,000 and $1.1 million
of compensation expense was recorded for stock options granted to independent
contractors and other non-employees during fiscal year ended 1998 and the nine
month period ended October 2, 1999. Compensation expense of $441,000 for
employee stock bonus awards was also recorded during the nine months ended
October 2, 1999. This employee and non-employee compensation expense relates to
stock options awarded to individuals providing consulting service and operating
activities. In connection with the issuance to Williams Communications Group of
a warrant to purchase 500,000 shares of our common stock in October 1999, we
expect to recognize approximately $5.2 million as future equity related charges
in operations. This amount represents the difference between the deemed value of
the common stock, issuable upon exercise of the warrant, and the exercise price
of the warrant at the date of grant.
Recapitalization. From our inception through February 12, 1998, the date of
our leveraged recapitalization, our pre-recapitalization stockholders, Richard
P. Nespola, Micky K. Woo, Alan H. Staples and Ralph R. Peck conducted operations
through several loosely affiliated entities. On February 12, 1998, we effected a
leveraged recapitalization with Behrman Capital II, L.P. and affiliated venture
funds in which the Behrman Capital funds acquired shares of common stock for
$20.0 million. At that time, we also borrowed $24.0 million in term loans and
obtained a $5.0 million revolving credit facility from Chase Manhattan Bank and
a syndicate of lenders established by Chase Manhattan Bank. The proceeds from
the investment by Behrman Capital and the term loans
27
<PAGE> 29
were used principally to fund the redemption of approximately 60% of the common
stock owned by Messrs. Nespola, Woo, Peck and Staples for an aggregate
redemption price of approximately $38.7 million. In connection with the
recapitalization, we made distributions to the stockholders of approximately
$4.7 million, representing accumulated equity in our company and resulting in
negative stockholders' equity of $21.6 million. We accounted for the transaction
using the leveraged recapitalization accounting convention. As a result of the
recapitalization, we incurred non-recurring recapitalization costs totaling
approximately $3.1 million related to offering costs.
Prior to the recapitalization, we compensated Messrs. Woo, Peck and Staples
for oversight and strategic advice principally through management fees paid to
affiliates owned by them, along with fees for independent contractor services
provided to our clients through these affiliated entities. At the time of the
recapitalization, we ceased making payments of management fees and entered into
an employment agreement with each of Messrs. Nespola, Woo, Peck and Staples.
From 1993 through February 12, 1998, we elected to be treated as a
subchapter "S" corporation for tax purposes. During that period, all of our
outstanding common stock was owned by Messrs. Nespola, Woo, Peck and Staples.
Upon consummation of the recapitalization, we terminated our subchapter "S"
corporation election and became obligated to pay federal and state income taxes
as a subchapter "C" corporation. We estimate our effective income tax rate will
be approximately 40% of taxable income in fiscal year 1999.
RESULTS OF OPERATIONS
The following table sets forth financial data for the fiscal years
indicated as a percentage of revenues:
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUES
---------------------------------------------------
NINE MONTHS ENDED
FISCAL YEAR ENDED ------------------------
----------------------- OCTOBER 3, OCTOBER 2,
1996 1997 1998 1998 1999
----- ----- ----- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues..................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of services:
Direct cost of services.................... 55.8 56.4 54.2 54.1 51.9
Equity related charges..................... 0.7 0.0 4.8
----- ----- ----- ----- -----
Total cost of services.................. 55.8 56.4 54.9 54.1 56.7
Gross margin................................. 44.2 43.6 45.1 45.9 43.3
----- ----- ----- ----- -----
Operating expenses:
Selling, general and administrative
expenses................................ 16.2 16.3 19.2 18.7 20.2
Equity related charges..................... 0.1 0.0 2.6
----- ----- ----- ----- -----
Total operating expenses................ 16.2 16.3 19.3 18.7 22.8
Income from operations....................... 28.0 27.3 25.8 27.2 20.5
Other income (expense):
Interest income............................ 0.1 0.1 0.0
Interest expense........................... (0.8) (6.4) (7.0) (4.4)
Other expenses, net........................ 0.3 0.4 (0.2)
----- ----- ----- ----- -----
Income before income taxes................... 27.3 27.3 19.7 20.7 15.9
----- ----- ----- ----- -----
Provisions for income tax.................... 10.2 12.0 6.6
----- ----- ----- ----- -----
Net income................................. 27.3% 27.3% 9.5% 8.7% 9.3%
===== ===== ===== ===== =====
</TABLE>
COMPARISON OF NINE MONTHS ENDED OCTOBER 2, 1999 AND OCTOBER 3, 1998
Revenues. Revenues increased 72.2% to $37.0 million for the nine month
period for 1999 from $21.5 million for the nine month period for 1998. The
increase was primarily attributable to a net
28
<PAGE> 30
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. Revenues for the first
nine months of 1999 included revenues from services provided to one large
customer, which accounted for 41.1% of our revenues during that period. Our
international revenue expanded to 26.7% of revenues in the nine month period for
1999 compared to 16.4% for the nine month period for 1998, primarily due to an
increase in European business.
Cost of Services
Direct Cost of Services. Direct cost of services increased to $19.2 million
for the nine month period for 1999 from $11.6 million for the nine month period
for 1998. Direct cost of services as a percent of revenue decreased from 54.1%
for the nine month period for 1998 to 51.9% for the nine month period for 1999.
Direct gross margins improved because our 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 we pay our independent contractors. The margin improvement
provided by increasing the full-time employee base was slightly offset by
discounted customer pricing associated with large engagements.
Equity Related Charges. We recorded non-cash stock based compensation
charges of $1.8 million and $14,000 in the nine month periods for 1999 and 1998,
respectively, in connection with the issuance of stock options to our employees
and non-employee consultants. These charges reduced gross margin by 4.8% in
1999.
Operating Expenses
Selling, General and Administrative Expense. Selling, general and
administrative expenses increased to $7.5 million for the nine month period for
1999 from $4.0 million for the nine month period for 1998. Selling, general and
administrative expense as a percentage of revenue increased to 20.2% for the
nine month period for 1999 from 18.7% for the nine month period for 1998. We
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
our consultants and increased revenues for the nine month period for 1999. We
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. We also hired
managing directors to lead our European and Canadian subsidiaries at the
beginning of fiscal year 1999. In addition, we established reserves of $160,000
for a potential claim brought against us by a trustee in bankruptcy for a former
client.
Equity Related Charges. We recorded non-cash stock based compensation
charges of $946,000 and $1,000 in the nine month period for 1999 and 1998,
respectively, in connection with the issuance of stock options to our partners,
principals and certain senior executives and non-employee directors. These
charges increased operating expenses as a percentage of revenue by 2.6%.
Interest Expense. Interest expense increased to $1.7 million for the nine
month period for 1999, compared to $1.5 million for the nine month period for
1998. Interest expense primarily relates to $24.0 million of borrowings under
our term loans incurred in connection with our recapitalization in February 1998
and borrowings on our revolving credit facility. The increase in interest
expense was due to nine months of expense incurred for the nine month period for
1999 compared to eight months of expense for the nine month period for 1998.
Other (Income) Expense. Other income for the nine month period for 1998
primarily represents the recovery of $92,000 related to an employee advance
previously reserved.
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Income Taxes. Provision for income taxes for the nine month period for 1999
as a percentage of pretax income was 41.5% compared to 57.9% for the nine month
period for 1998. The 57.9% effective tax rate for the nine month period 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, we did not report tax expense as an "S" corporation.
COMPARISON OF FISCAL YEARS 1998 AND 1997
Revenues. Revenues increased 59.1% to $32.1 million in fiscal year 1998
from $20.2 million in fiscal year 1997. The increase in revenues was due
primarily to the commencement of several major new engagements during 1998.
Higher billing rates, which resulted from a reduction in volume discounts in
fiscal 1998 as compared to fiscal 1997, also contributed to the increase. The
revenues in fiscal year 1997 included revenues from services provided to one
large customer, which accounted for 39.3% of revenues in that year, at a
negotiated volume discount. International revenues in fiscal year 1998 were
16.2% of revenues, primarily from Canada, and in fiscal year 1997 were 0.8% of
revenues.
Cost of Services
Direct Cost of Services. Direct cost of services increased to $17.4 million
in fiscal year 1998 from $11.4 million in fiscal year 1997. As a percentage of
revenues, direct cost of services decreased to 54.2% in fiscal year 1998 from
56.4% in fiscal year 1997. The gross margin improvement resulted primarily from
a reduction in business from our two largest customers in fiscal year 1997 at
negotiated volume discounts. In addition, our gross margins improved because our
consultant mix changed to include more employees in fiscal year 1998 compared to
fiscal year 1997.
Equity Related Charges. We recorded $239,000 non-cash stock based
compensation charges in fiscal year 1998 in connection with the issuance of
stock options to our consultants. These charges reduced gross margin in this
period by 0.7%.
Operating Expenses
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 87.7% to $6.2 million in fiscal year 1998 from
$3.3 million in fiscal year 1997. As a percentage of revenues, selling, general
and administrative expenses increased to 19.2% in fiscal year 1998 from 16.3% in
fiscal year 1997. Employee costs increased in fiscal year 1998 due to the larger
role our principals had in generating sales and the compensation expense
associated with those responsibilities. In addition, expenses increased in
fiscal year 1998 due to infrastructure investment. We opened our new corporate
office in September 1998, and hired five management and administrative employees
late in the year. We installed management information systems in 1998, including
our financial reporting and project costing systems. In fiscal year 1998, we
enhanced our marketing materials, expanded our marketing efforts in Europe and
promoted our brand. We also expanded efforts to enhance our TMNG Lexicon and
TMNG CLEC Planner toolsets in fiscal year 1998.
Interest Expense. Interest expense increased to $2.1 million in fiscal year
1998 from $30,000 in fiscal year 1997. Interest expense in fiscal year 1998
related primarily to two term loans in an aggregate principal amount of $24.0
million entered into in connection with our leveraged recapitalization. In
fiscal year 1997, interest expense related to notes payable to several of our
stockholders.
Other (Income) Expense. Other income in the fiscal year 1998 primarily
represents the recovery of $92,000 related to an employee advance previously
reserved in fiscal year 1997.
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Income Taxes. Provision for income taxes was $3.3 million in fiscal year
1998. The 51.9% effective tax rate in fiscal year 1998 exceeded the statutory
federal income tax rate primarily due to the establishment of net deferred taxes
upon conversion to a subchapter "C" corporation, and state income taxes. These
increases in provision for income taxes were partially reduced by the exclusion
of net income prior to February 12, 1998, representing "S" corporation net
income. Prior to the conversion to a "C" corporation on February 12, 1998, we
did not report tax expense as an "S" corporation.
Net Income. Net income decreased to $3.0 million in fiscal year 1998 from
$5.5 million in fiscal year 1997. In 1997, the Company was a subchapter "S"
corporation and did not report tax expense. Income before provision for income
taxes increased to $6.3 million in fiscal 1998 from $5.5 million in fiscal year
1997.
COMPARISON OF FISCAL YEARS 1997 AND 1996
Revenues. Revenues increased 16.8% to $20.2 million in fiscal year 1997
from $17.3 million in fiscal year 1996, resulting from a net increase in
consulting services offset in part by a volume discount negotiated by a large
customer in fiscal year 1997, which customer represented 39.3% of revenues.
Cost of Services. Cost of services increased to $11.4 million in fiscal
year 1997 from $9.6 million in fiscal year 1996. As a percentage of sales, cost
of services was 56.4% and 55.8% in fiscal years 1997 and 1996, respectively.
Gross margins decreased in fiscal year 1997 compared to fiscal year 1996 due
primarily to negotiated volume discounts provided to one large customer in
fiscal year 1997.
Operating Expenses
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $3.3 million in fiscal year 1997 from $2.8
million in fiscal year 1996. As a percentage of revenues, selling, general and
administrative expenses increased to 16.3% in fiscal year 1997 from 16.2% in
1996. Selling, general and administrative expenses remained relatively constant
as there were no significant changes in operations with the exception of
increased marketing activities.
Interest Expense. Interest expense decreased to $30,000 in fiscal year 1997
from $136,000 in fiscal year 1996. The decrease in interest expense resulted
from the payment of notes payable to stockholders.
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SELECTED UNAUDITED HISTORICAL QUARTERLY FINANCIAL DATA
The following tables set forth certain unaudited consolidated statements of
operations data for the seven quarters ended October 2, 1999, as well as the
percentage of revenues represented by each item. These data have been derived
from unaudited interim consolidated financial statements prepared on the same
basis as the audited consolidated financial statements and, in the opinion of
management, include all adjustments, consisting only of normal recurring
adjustments, considered necessary for a full presentation of such information
when read in conjunction with the consolidated financial statements and notes
appearing elsewhere in this prospectus. Operating results for any quarter are
not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------------------
APRIL 4, JULY 4, OCTOBER 3, JANUARY 2, APRIL 3, JULY 3, OCTOBER 2,
1998 1998 1998 1999 1999 1999 1999
-------- ------- ---------- ---------- -------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues................. $6,154 $6,878 $8,439 $10,632 $11,433 $12,423 $13,112
====== ====== ====== ======= ======= ======= =======
Cost of services:
Direct cost of
services............ 3,413 3,583 4,615 5,800 5,937 6,440 6,801
Equity related
charges............. 14 225 507 449 822
------ ------ ------ ------- ------- ------- -------
Total cost of
services..... 3,413 3,583 4,629 6,025 6,444 6,889 7,623
Gross profit........... 2,741 3,295 3,810 4,607 4,989 5,534 5,489
Operating expenses:
Selling general and
administrative
expenses............ 1,014 1,386 1,603 2,155 2,428 2,458 2,593
Equity related
charges............. 1 21 170 400 376
------ ------ ------ ------- ------- ------- -------
Total operating
expenses..... 1,014 1,386 1,604 2,176 2,598 2,858 2,969
------ ------ ------ ------- ------- ------- -------
Income from operations... $1,727 $1,909 $2,206 $ 2,431 $ 2,391 $ 2,676 $ 2,520
====== ====== ====== ======= ======= ======= =======
Revenues................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of services:
Direct cost of
services............ 55.5 52.1 54.7 54.6 51.9 51.8 51.9
Equity related
charges............. .2 2.1 4.4 3.7 6.3
------ ------ ------ ------- ------- ------- -------
Total cost of
services..... 55.5 52.1 54.9 56.7 56.3 55.5 58.2
------ ------ ------ ------- ------- ------- -------
Gross margins............ 44.5 47.9 45.1 43.3 43.7 44.5 41.8
Operating expenses
Selling, general and
administrative
expenses............ 16.4 20.1 19.0 20.2 21.2 19.8 19.8
Equity related
charges............. .2 1.5 3.2 2.8
------ ------ ------ ------- ------- ------- -------
Total operating
expenses..... 16.4 20.1 19.0 20.4 22.7 23.0 22.6
------ ------ ------ ------- ------- ------- -------
Income from operations... 28.1% 27.8% 26.1% 22.9% 21.0% 21.5% 19.2%
====== ====== ====== ======= ======= ======= =======
</TABLE>
In the past, we have experienced seasonal fluctuations in revenue in the
fourth quarter due primarily to the fewer number of business days because of the
holiday periods occurring in that quarter. We may in the future experience
fluctuations in revenue in the fourth quarter as well as summer and other
vacation periods as we expand internationally.
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LIQUIDITY AND CAPITAL RESOURCES
We have historically funded our business through cash provided by
operations. The principal use of cash subsequent to the leveraged
recapitalization was debt service incurred in connection with the leveraged
recapitalization. Prior to the leveraged recapitalization, the principal use of
cash was to fund distribution of earnings to our stockholders. At October 2,
1999, we had cash of approximately 1.5 million. Although we believe that the net
proceeds of this offering together with cash generated from operations will be
sufficient to meet our anticipated cash requirements, including scheduled debt
repayments and anticipated capital expenditures, for at least the next 12
months, we may in the future require additional funds to meet our cash
requirements and successfully execute on our business model beyond that 12-month
period. We may be required to raise additional funds through sales of equity or
debt securities or seek additional financing from financial institutions. We
cannot assure you that that financing will be available to us on favorable terms
or, if obtained, will be sufficient for our needs.
Cash provided by operating activities for the nine month period for 1999
and 1998 and for the fiscal years ended 1998, 1997 and 1996 was approximately
$3.0 million, $1.6 million, $2.0 million, $4.3 million and $4.3 million,
respectively. Cash provided by operating activities for the nine month period
for 1999 was generated primarily by net income, as adjusted primarily by
increases in deferred tax assets and receivables aggregating $4.7 million,
offset by an increase in accrued liabilities of $2.0 million and stock option
and bonus share compensation of $2.7 million.
Cash provided by operating activities for the nine month period for 1998
was generated by net income and increases in accounts payable, accrued
liabilities, deferred tax liabilities and income taxes payable aggregating $4.3
million, adjusted primarily by increases in accounts receivable of $4.6 million.
Cash provided by operating activities in fiscal year 1998 was generated by net
income and an increase in accounts payable and accrued liabilities of $1.8
million, adjusted primarily by an increase in accounts receivable of $3.9
million. Cash provided by operating activities in fiscal year 1997 was generated
by net income as adjusted by an increase in accounts receivable of $1.4 million.
Cash provided by operating activities in fiscal year 1996 was generated by net
income, adjusted primarily by an increase in accounts receivable of $700,000.
Cash used in investing activities for the nine month period for 1999 and
1998 and for fiscal year 1998 was $400,000, $300,000, and $500,000,
respectively. Cash was used for the purchase of property and equipment, and we
expect to continue to invest in fixtures and equipment in the ordinary course of
business, including expenditures in connection with the purchase of sales and
staff tracking software and the upgrading of computer equipment and networking
infrastructure.
Cash used in financing activities for the nine month period for 1999 and
1998 and for the fiscal years 1998, 1997 and 1996 was $2.1 million, $1.0
million, $800,000, $4.3 million, and $4.3 million, respectively. Cash used in
financing activities for the nine month period for 1999 was due primarily to the
repayment of long-term debt and net repayments of borrowing under the credit
facility aggregating $2.7 million. Cash used in financing activities for the
nine month period for 1998 and fiscal year 1998 was due primarily to the impact
of net borrowings of $25.9 million in connection with the leveraged
recapitalization and net issuance and redemption of common stock of $21.8
million, an increase in deferred financing costs of $600,000, and the payment of
final subchapter "S" corporation distributions of $4.7 million. Cash used in
financing activities in fiscal 1997 and 1996 was due primarily to distributions
to stockholders of $4.0 million and $4.7 million, respectively.
INTEREST RATE AND CURRENCY EXCHANGE RATE RISK
We have variable interest rate exposure under our senior bank debt
agreements, which we mitigate by utilizing derivative financial instruments. We
do not use derivative financial instruments for speculative or trading purposes.
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We entered into an interest rate cap agreement on March 13, 1998, covering
a notional amount of $12.0 million under one of our term loans, to reduce our
exposure to market risks from changes in interest rates. We plan to retire the
outstanding senior bank debt and the interest cap agreement in connection with
this offering. Under the interest rate cap agreement, if during any period the
floating interest rate on our senior bank debt exceeds the cap rate under the
agreement, which is currently 8.187%, our bank will pay us the difference
between the two rates for the period.
We anticipate that revenues from international engagements will increase as
a percentage of our revenues. We may enter into consulting engagements that are
denominated in foreign currencies. To the extent that the value of a currency in
which our billings are denominated decreases in relation to the U.S. dollar or
another currency in which our expenses are denominated, our expenses would
increase and the profitability of the engagement would decline. We may hedge our
foreign currency exposure from time to time but our hedging activities may not
be effective.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants, or
AICPA, issued Statement of Position, or SOP, No. 98-1, Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use. SOP No. 98-1
requires entities to capitalize certain costs related to internal-use software
once certain criteria have been met. We adopted SOP No. 98-1 effective January
3, 1999 and it did not have a significant effect on our financial position or
results of operations.
In April 1998, the AICPA issued SOP No. 98-5, Reporting on the Costs of
Start-Up Activities. SOP No. 98-5 requires that all start-up costs related to
new operations must be expensed as incurred. In addition, all start-up costs
that were capitalized in the past must be written off when SOP No. 98-5 is
adopted. We adopted SOP No. 98-5 effective January 1, 1999 and it did not have a
significant effect on our financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued FAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. FAS No. 133
establishes methods for derivative financial instruments and hedging activities
related to those instruments, as well as other hedging activities, We expect
that the adoption of FAS No. 133 will not have a significant effect on our
financial position or results of operations. FAS No. 137 has deferred the
effective date of FAS 133 to fiscal years beginning after June 15, 2000.
YEAR 2000 READINESS
The "Year 2000" issue is a general term used to describe the various
problems that may result from the improper processing of dates and
date-sensitive calculations by computers and other machinery as the year 2000 is
approached and reached. These problems arise from hardware and software unable
to distinguish dates in the "2000's" from dates in the "1900's" and from other
sources such as the use of special codes and conventions in software that make
use of a date field. We recognize the need to ensure our operations will not be
adversely affected by Year 2000 software failures.
We have reviewed our internal management information and other critical
business systems to identify any Year 2000 problems. All such systems were
vendor supplied with no significant modifications. Consequently, we have
communicated with the external vendors that supply us with material software and
information systems and with significant suppliers to determine their Year 2000
readiness. Based on our vendors' representations, we believe that the
third-party hardware and software we use is Year 2000 compliant although we have
not performed any operational tests on these systems.
To date, we have not incurred any material costs directly associated with
Year 2000 compliance efforts. As discussed above, we do not expect the total
cost of Year 2000 problems to be material to
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<PAGE> 36
our business, financial condition and operating results. During the months prior
to the century change, however we will continue to evaluate any new versions of
software and information systems provided by third parties and any new
infrastructure systems that we may acquire, to determine whether they are Year
2000 compliant. Despite our current assessment, we may not identify and correct
all significant Year 2000 problems on a timely basis. If the representations
made by our various vendors regarding Year 2000 compliance are inaccurate,
additional Year 2000 compliance efforts may involve significant time and expense
and unremediated problems could harm our business. We currently have no
contingency plans to address the risk.
In addition, the software and systems of our clients, third-party service
companies and others outside of our control may not be Year 2000 ready. Our
analysis of their Year 2000 readiness has been limited to reviewing periodic
updates contained in publicly available documents in which these clients,
principally telecommunications service providers, describe the status of their
readiness. Our clients' descriptions generally contain significant cautionary
language regarding ultimate Year 2000 outcomes. If our third-party service
providers, clients and others are not Year 2000 ready, a systemic failure beyond
our control could result, including prolonged internet, telecommunications or
general electrical failure. This type of failure would significantly interfere
with our ability to provide our services to our clients. If a prolonged failure
of this type occurred, our business would be harmed.
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BUSINESS
OVERVIEW
We provide management consulting services to the global telecommunications
industry. Our clients include:
- communications service providers;
- technology companies; and
- financial services firms.
We provide comprehensive services that address imminent client needs and
enable our clients to meet the challenges of today's competitive and dynamic
telecommunications environment. Present challenges include the ever-growing
demand on companies to conduct e-business and facilitate commercial
relationships over the internet. Our highly experienced consultants, who average
over ten years of telecommunications industry experience, enable us to use our
industry expertise and proprietary methodologies to provide strategic,
management and operational support to our clients.
We serve clients in all major regions of the U.S., in key European markets
and in several other international locations.
We are the successor to a telecommunications consulting company founded in
1990 by Richard P. Nespola, our President and Chief Executive Officer. Several
additional shareholders were added in 1993. We then underwent a leveraged
recapitalization transaction in 1998. We were incorporated in Kansas in 1993 and
reincorporated in Delaware in September 1999.
INDUSTRY BACKGROUND
CONSULTING SERVICES
The demand for consulting services has been increasing in the last decade,
a trend that is expected to continue. International Data Corporation, also known
as IDC, projects that worldwide consulting services will increase from $52.4
billion in 1998 to $102.8 billion in 2003, a compound annual growth rate of
14.4%. 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. Forrester Research, Inc., projects that the worldwide
internet professional services will grow from $2.4 billion in 1997 to $32.8
billion in 2002, a compound annual growth rate of 68.7%.
As with other businesses, telecommunications companies are increasingly
turning to external consulting firms to help them improve their business
processes and enter new markets as rapidly as possible. Factors such as
deregulation and privatization, mergers and acquisitions within the industry,
and the pace of technological change are driving these companies to seek the
advice of outside experts and supplement the need for additional professionals
to implement their strategies. IDC projects that communications information
technology consulting services will increase from $3.2 billion in 1998 to $6.9
billion in 2003, a compound annual growth rate of 16.5%.
TELECOMMUNICATIONS
Other market dynamics that are contributing to an increased need for
consulting services in the global telecommunications industry include:
- deregulation, which began in the U.S. with the breakup of AT&T and
continued with the Telecommunications Act of 1996 and is accelerating in
Europe and other international markets;
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<PAGE> 38
- the growth of the internet and e-business, which increases the demand for
telecommunications capacity and places further pressure on incumbent and
emerging communications service providers to make substantial changes in
the way they do business to support this growth;
- convergence among the different types of services being provided by a
single telecommunications company;
- the influx of new entrants and increasing competition due to deregulation
and an increasing demand for telecommunications services; and
- technological advances, which have significantly increased the volume of
traffic that can be carried over telecommunications networks and have
lowered transmission costs.
Deregulation
The U.S. telecommunications market reaps the benefits of deregulation,
which began in 1984 and continued with the federal Telecommunications Act of
1996. Deregulation has brought about the liberalization of the
telecommunications market in the United States. Deregulation created new
opportunities not only for the incumbent communications carriers but also for a
vast array of new market entrants. Deregulation has created substantially
greater competition in the industry, resulting in:
- significantly reduced rates;
- vastly improved and new technologies; and
- even more competition.
More recently, deregulation has accelerated internationally. In 1997, the
World Trade Organization Telecommunications Accord was adopted. This treaty has
contributed to deregulation initiatives in Europe, Asia and Latin America.
Explosion of e-Business
The growth of the internet is a global phenomenon fundamentally changing
the nature of the telecommunications industry. Web user growth, coupled with the
growth of new types of on-line and e-business services has driven the emergence
of new service providers such as internet service providers, on-line
communities, internet telephony providers and others. In addition, traditional
telecommunications carriers have entered the on-line market, providing internet
connections and e-business services to businesses and consumers. The growth of
the internet and e-business raises critical strategic and operational issues
that telecommunications companies will need to address, including:
- complex integration issues associated with merging old and new network
technologies;
- unprecedented demand for capacity, which companies must meet while
simultaneously assuring service quality; and
- operational changes needed to support e-business initiatives in a secure
environment, including seamless web-based customer care, on-line bill
presentment and payment, dynamic product introduction and management.
Convergence and Complexity
In the past, communications service providers typically specialized or
offered a single product or a limited set of products to their customers. Such
specialization required the customer to purchase its entire package of
communications needs from multiple providers. Deregulation has enabled companies
to enter previously closed markets and offer multiple services through one stop
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shopping. Companies now seek to meet all of the customer's communications needs.
In addition, advances in technology accelerated convergence in the services
provided on the underlying communications network. For example, the ability to
transport telephone calls over the internet will enable service providers to
efficiently integrate voice and data services on a single network.
Consolidation among key players has also contributed to convergence as
major companies seek to broaden their service offerings through acquisitions.
Companies must integrate multiple corporate infrastructures, networks,
operations and processes.
Influx of New Entrants
The increased demand for services has led not only to additional offerings
by the established players, but also to new entrants to the market. Industry
sources estimate that there are now over 3,000 new providers of voice and data
telecommunications services in the U.S. We expect this competitive trend to
continue to migrate overseas as global deregulation spreads. New market entrants
seek to gain market share from incumbent service providers, who in turn are
striving to change their business models to adapt to the newer, more competitive
industry environment. As a result, core telecommunications services are becoming
increasingly commoditized, making superior customer service and satisfaction, as
well as efficient and cost effective back office systems, key competitive
elements.
Rapid Technological Advances
The telecommunications industry is characterized by rapid technological
advances. Unprecedented levels of transmission capacity, both in terms of the
size and number of packets of data that can be transmitted, now exist due to the
advent of new technologies for voice and data transmission.
Additionally, improvements in fiber optics and other transmission
technologies have increased the number of calls a single fiber can carry from
8,000 in 1985 to 1.5 million in 1999. These technological advances are enabling
communications providers to harness multiple applications, such as voice, data
and video, on a single network, creating new types and combinations of services
available to a broader range of users.
Industry Challenges
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 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.
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OUR SOLUTION
We provide a comprehensive range of services, including strategy,
management, operational and e-business support to communications service
providers, technology companies and financial services firms in the United
States, Canada, Europe and other major international markets. Our solutions
encompass the following key elements.
- Exclusive focus on the telecommunications and e-business
industries. Since our founding in 1990, we have occupied a unique
position in the consulting arena, with our exclusive focus on the
telecommunications industry and our more recent focus on the e-business
marketplace. Our consultants have significant industry and consulting
experience across critical business disciplines. Our customers rely on
our expertise and reputation, not only to help them keep up with market
growth but to help them deal with the trends as they arise and adapt
their business plans to meet the demands of the future. Our
telecommunications and e-business focus allows us to best fulfill our
clients' needs and continuously refine our services by staying at the
forefront of, and helping to define, industry standards.
- Integrated, complete solution. We use our industry expertise to provide
comprehensive solutions from initial, high-level strategic assessments of
clients' needs through improvements to operations. We have consulting
experience with all major aspects of managing a telecommunications
company, from product launch through order entry, service provisioning
and billing. Our complete solution addresses the business, information
technology and operational needs associated with all aspects of our
clients' requirements. We work with telecommunications providers by
delivering business planning, management support, process development,
operations support, systems requirements, selection and implementation.
We also use our understanding of service providers' needs to help the
software and technology companies that serve the telecommunications
industry to define strategies, develop applications, respond to requests
for proposals and implement their solutions within the service provider
environment. Finally, we facilitate the evaluation of proposed
investments in telecommunications companies and related technology
companies by investment banking and private equity firms by providing
prospect evaluation, due diligence and post investment support services.
- Partnership with clients. We develop long-term relationships with our
clients as we demonstrate our understanding of all aspects of their
business. We work closely with senior management to understand, predict
and address our clients' evolving strategic and operational business
needs. A majority of our current top 20 customers who have been in
business since 1995 have been customers of ours since then. We expect to
develop long-term relationships with our more recent clients by gaining a
deep understanding of their business and providing a broad array of
services.
- Global presence. Our knowledge and focus on the trends impacting markets
abroad enable us to provide the expert advice needed by international
clients competing in newly deregulated markets and by U.S. companies
seeking to expand their global reach. We have worked with clients across
the globe, focusing primarily on North America and Europe. At the end of
1998, consulting engagements in Europe represented 5.1% of our total
revenues; for the nine month period for 1999, revenues from European
engagements represented over 21.6% of our total revenues. We continue to
expand our geographic presence in key locations based on our clients'
needs and opportunities.
- Industry leading consultants. We use seasoned telecommunications
professionals with telecommunications industry expertise. Our senior
officers and principals average more than 15 years of financial,
operational or systems experience in competitive telecommunications
markets. Our consultants average over ten years of telecommunications
industry experience. This extensive experience has positioned our team to
set standards as industry leaders and
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means that all of our project team members bring hands-on expertise and
practical insight to each engagement.
- Proprietary methodologies. Our proprietary methodologies are consulting
guidelines and processes that we have created and which are updated by
our consultants based on their experience over many consulting
engagements. Our consultants use these methodologies to win engagements
and help clients improve productivity, gain a competitive advantage,
reduce time to market and market entry risk, and increase revenues and
profits. The following are our toolsets.
TMNG Lexicon is a comprehensive collection of business and systems
requirements for the competitive telecommunications industry and
covers all key functional operations areas, such as order entry,
billing and customer care.
QBC (Quality Billing Center) is a process model that measures the
entire revenue flow and is designed to help carriers improve cash
flow, reduce call center volumes and diminish customer billing
complaints and challenges.
TMNG CLEC Planner is an economic planning tool designed for
competitive local telephone carriers.
Margin Master is an activity based costing model designed specifically
for competitive carrier cost assignment and management.
C-B-I (Carried to Billed to Invoiced) is designed to allow service
providers to track calls and other billable events from carried to
billed to invoiced.
TMNG e-Lexicon is being developed as a comprehensive collection of
business and systems requirements for telecommunications companies
serving e-business customers and developing their own web-based
capabilities.
- Vendor and technology neutral. Because we focus on management consulting,
we are in 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, we are
able to capitalize on our extensive experience across complex
multi-technological telecommunications and back office systems
environments to provide the most sound and practical recommendations to
our clients. Because of our neutrality, we believe we are trusted for our
unbiased opinions in the telecommunications community, which has allowed
us to play a key role in setting industry standards. For example, the
European Billing Association, a non-profit trade association, endorsed
our Quality Billing Center as the chosen billing and service management
standard for the European carrier community.
OUR STRATEGY
Our objective is to establish ourself as the telecommunications consulting
company of choice to communications service providers, technology companies and
financial services and investment banking firms. The following are the key
strategies we intend to pursue to meet this objective.
- Expand geographic reach to serve our clients' global needs. We plan to
continue to expand geographically to deliver our services and solution
capabilities to client companies located around the world. By offering
our full range of professional services on a global basis, we believe we
can broaden market awareness about our services and solutions to create
new revenue opportunities. In Europe, the competitive market expertise of
our U.S. consultants is a key factor for European companies facing the
business issues associated with deregulation and increased competition.
Our expertise in Europe can also play a key role for U.S. companies
expanding their European business.
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- Focus on supporting our current target market's e-business needs through
our 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, we are combining our telecommunications knowledge with
our developing e-business expertise to help telecommunications service
providers build the infrastructure, systems, processes and services to
address these opportunities arising from the growth of the internet. 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.
- Expand long-term client relationships. We build long-term relationships
with our customers by delivering high quality solutions to help our
clients set their strategies and operate as efficiently as possible in
the rapidly changing telecommunications environment. We believe this
focus improves client satisfaction and results in two major benefits for
us: follow-on engagements with existing, satisfied clients and referrals
for new clients. Expanding our existing client relationships will allow
us to jointly plan future projects and, in particular, develop large,
multi-year engagements. The dynamic nature of the telecommunications
industry generates a continuing need for our services, and clients come
back to us because of our knowledge of their systems and architectures
and their satisfaction with our services.
- Further develop and enhance our expandable business model for continued
growth. We plan to further enhance our expandable business model to
accommodate anticipated need for our services generated by industry
growth. The following are the key elements of our business model.
Attracting and retaining high quality, experienced consultants. We
seek to attract 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. We retain our consultants through a variety of
programs, including our stock option plan, competitive compensation
packages, flexible employment model and dynamic, challenging
assignments at the forefront of the telecommunications industry.
Creating business processes that can be duplicated worldwide. To
support our anticipated growth, we are creating business processes
that we can use worldwide in any consulting engagement. Our toolsets
provide our consultants with methodologies that they use to augment
their experience and help analyze and solve clients' problems. We are
also building a network of eRooms to serve as a knowledge base, enable
consultant collaboration on engagements and provide support
information and updates of our current toolsets and releases of next
generation tools.
Maintaining a flexible organization with minimal physical
structure. We intend to use our internet communication capabilities to
retain our flexible, "virtual" structure as we grow. We are developing
a contingent employee model to enable us to hire and retain
consultants by providing them with increased benefits. We believe the
model allows us to better manage utilization and to minimize unbilled
consultant time. We also do not expect to invest heavily in facilities
and plan to rely on electronic telecommunications to support our
organization.
- Extending our market leadership position and building our brand. We
intend to expand our leadership position in the telecommunications
consulting industry and to establish ourselves as the consulting firm of
choice for communications service providers and the technology and
banking companies that serve them. We intend to capitalize on our
extensive industry
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knowledge, strong client base, and highly qualified and experienced
professionals to help our clients provide more value-added services to
their customer base. We also have several marketing initiatives underway
to continue building our corporate brand.
PROPRIETARY METHODOLOGIES
We have created methodologies which are unique to our company and based on
our consultants' experience. We continually invest in these toolsets by updating
them to keep them at the forefront of the industry. The following are our
methodologies.
- TMNG Lexicon: a comprehensive collection of business requirements for the
competitive telecommunications industry that harnesses the collective
experience, knowledge and lessons learned from top professionals in the
industry. From order entry to billing to customer care, it covers every
functional area typically found in a telecommunications company, and now
contains over 4,000 requirements. On an ongoing basis, the Lexicon is
modified, tested and updated to reflect additional knowledge gained and
changes in the market.
- QBC (Quality Billing Center): a process model that measures the flow of
revenue from beginning to end that is tailored to a carrier's business
systems and process environment. Successfully implemented at
telecommunications companies around the world, the QBC provides key
benefits and measurable results, including improved cash flow, reduced
call center volumes, and diminished customer billing challenges. The
European Billing Association recently endorsed our QBC as the best of
breed in telecommunications process measurement tools.
- TMNG CLEC Planner: an economic planning tool developed exclusively for
competitive local telephone carriers. It is used to:
- make resale versus facility-based decisions;
- determine transition plans;
- make market entry decisions;
- identify profitable target markets;
- develop resource plans that align with revenue forecasts; and
- analyze pricing strategy impacts.
- Margin Master: an activity-based costing tool developed for the
telecommunications industry that helps carriers determine product profit
margins. It supports decisions in a bundled product offering and enables
market segment, region, channel, and product-specific analysis. With
growing pressure on margins and reliance on bundled service offerings,
our Margin Master tool becomes increasingly valuable.
- C-B-I (Carried to Billed to Invoiced): a methodology that assists
carriers with the complex task of reconciling incoming call records,
customer billing, and invoices from their service provider. This
proprietary tool allows us to design systems resellers use to track calls
and other billable events from "carried to billed to invoiced," with the
objective of maximizing revenue by minimizing or eliminating lost
billable events.
- TMNG e-Lexicon: currently under development, it will be the first toolset
in our next generation process architectures. The e-Lexicon will
capitalize on our experience and understanding of the requirements being
driven by the convergence of telephony and the Internet in areas such as
electronic bill presentment and payment and web-based customer service.
This toolset will also capitalize on our extensive knowledge of the
existing telecommunications infrastructure, and combine that knowledge
with our experience,
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understanding, and research of the leading edge business support systems
and operations support systems software solutions to develop the
e-Lexicon.
CUSTOMERS AND SERVICES
We provide services to customers in key market segments of the industry.
Since 1990, we have performed consulting assignments for over 170 companies,
including over 80 telecommunications service providers, over 50 technology
companies, including global consulting firms, and over 20 investment banking and
financial services firms. For the nine months ended October 2, 1999,
telecommunications service providers accounted for 79.0% of our revenues,
technology companies accounted for 20.0% of our revenues and investment banking
and financial services firms accounted for one percent of our revenues. Our
customer concentration and our principal customers have in the past changed, and
may in the future change, based on customer requirements and the timing of
completion of engagements. Accordingly, investors should not assume that
customers in a particular fiscal period will be customers of ours in future
periods. For the nine months ended October 2, 1999, Williams Communications
Group and diAx each accounted for more than 10% of our revenues.
In October 1999, we reached an agreement in principle with Williams
Communications under which Williams Communications will commit to $22 million of
consulting fees over three years. We expect to enter into a definitive
consulting agreement with Williams Communications reflecting these terms prior
to the end of 1999. In addition, in October 1999, we issued Williams
Communications a warrant to purchase 500,000 shares of our common stock at an
exercise price of $2.00 per share. Williams did not pay any separate cash
consideration for this warrant.
COMMUNICATIONS SERVICE PROVIDERS
We provide all types of carriers and service providers with services
ranging from high-level strategy definition through improvements to operations
to help extend their worldwide reach.
Strategic Consulting. We analyze market trends and dynamics for
telecommunications service providers and advise them on market evolution and
development. We also help service providers define, refine and implement
strategies through business case development and market launch planning. In
addition, we analyze acquisition opportunities to determine if they are
complementary to strategies our service provider clients are implementing.
Process Development and Operations Support. We have spearheaded numerous
engagements to design infrastructure, improve processes, and provide operations
support. When telecommunications providers implement new business support
systems and operations support systems, they are seeking to maximize efficiency
and integration in order processing and customer care as well as timeliness and
accuracy in the revenue stream from call processing to billing and payment
processing. Our experience includes revenue assurance and reporting, performance
and cost benchmarking, change management and revenue operations management. We
help clients improve the efficiency, integration, and timeliness of their order
processing, provisioning, billing and customer care systems. Using our unique
process models, QBC and CBI, we improve the timeliness, accuracy and
completeness of carriers' revenue stream management.
Systems Requirements, Selection and Implementation. We have extensive
expertise in the area of systems assessment, requirements definition, vendor
selection, implementation management, testing, and project and program
management. We assist service providers in preparing and managing requests for
proposals for software systems purchases. Our unique, vendor-neutral and
technology-neutral position ensures that the solutions we recommend are based on
what is best for our clients' businesses.
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TECHNOLOGY, SOFTWARE AND CONSULTING COMPANIES
Our extensive first-hand knowledge of incumbent and emerging service
providers' needs provides a solid knowledge base of services for technology and
software companies and positions us as subject matter experts to other
consulting companies.
Product development strategic consulting. We help technology and software
companies analyze and focus their product and development strategies and efforts
to meet the needs of telecommunications service providers. Our knowledge of
service provider requirements, along with our toolsets, provides significant
benefit to technology companies as they develop new products and applications.
In particular, our TMNG Lexicon toolset helps facilitate rapid analysis of
technology companies' products and product plans. We anticipate that our TMNG
e-Lexicon toolset will also be used for this purpose.
Market research and analysis. We help technology and software companies
analyze market trends and dynamics to improve their ability to respond to the
requirements of changing and evolving markets. We also analyze acquisition and
investment opportunities for our clients.
Responses to requests for proposals. We assist technology, software and
consulting companies in responding to requests for proposals that they receive
from service providers and others. Our expertise enables us to ascertain the
most critical elements of a request for proposal and to help our clients prepare
responses that address the service provider's key requirements.
Implementation support. For global consulting firms that have engagements
which require specialized telecommunications expertise, we serve as the
telecommunications experts. In addition, we support our software clients by
assisting with program management for software implementation. These assignments
capitalize on our extensive understanding of both the software solution and the
service provider communities.
INVESTMENT BANKING AND FINANCIAL SERVICES FIRMS
We assist investment banking and financial services firms with prospect
validation and due diligence in connection with planned investments and other
transactions. Our broad knowledge of the industry and subject matter expertise
speed up the evaluation of proposals and potential investment candidates. Our
prospect validation services include candidate validation, business plan
development, financial modeling and contract development and negotiation. Our
consultants and toolsets also facilitate rapid development and execution when
conducting due diligence. Our 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.
REPRESENTATIVE ENGAGEMENTS
The following engagements illustrate some of the services that we are
providing and have provided to several of our current clients.
Communications Service Providers
A Leading Wholesale Carrier. We helped this client develop its business
plan for entry into the voice market. Once the business plan was approved, we
were selected to manage the implementation. We are continuing to serve as the
program management office for this client's market entry. Our responsibilities
include providing consulting services and coordinating deliverables being
provided by other vendors. Key services we provided included:
- authoring the initial business case to examine the viability and impact
of a voice strategy;
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- developing functional and technical requirements for all areas of
customer relationship management, such as:
- order entry;
- provisioning;
- billing;
- customer care;
- collections; and
- other back office systems;
- supporting the development of a network management and deployment
strategy;
- assisting in the development of the product marketing strategy; and
- managing the system testing process.
A Major Global Carrier. We have performed numerous diversified engagements
for this client, ranging from strategy development, competitive cost analyses,
to systems requirements. Recent projects include:
- developing a wholesale strategy and plans. We were asked to help this
client develop a strategy to serve the wholesale market to help the
company further enhance its product offering. We continue to provide
planning assistance to this division; and
- assisting this client with the integration of a recent acquisition of a
large national competitive telephone company including systems and
process review and development of recommendations for improvement. We
have also assisted with developing requirements for an accounts
receivable system, issuing requests for proposals, selecting vendors,
reconciling data from disparate systems and identifying areas for process
improvement.
A European Competitive Service Provider. We are assisting this client in
every facet of systems implementation for all customer life cycle systems
(billing, customer care, order entry and provisioning), including requirements
development, testing, and post-implementation support. This effort addresses the
complete set of this client's products for local, long distance, internet,
wireless and other services. We are also assisting with this client's conversion
to a new software operating system and selecting and implementing vendors for
other business support systems and operations support systems.
Technology Companies
A Worldwide Technology Company. We have assisted this client with a variety
of market initiatives dating back to when this client was in the business
support systems/operations support systems arena. Sample engagements include:
- assisting this client in the development of a proposal for a global
satellite project, focusing on billing functionality;
- providing international advanced intelligent network expertise;
- conducting market assessments for two key initiatives, internet and
prepaid telephone cards. These assessments included a competitive
analysis, a market size analysis and the development of market entry
criteria;
- performing due diligence support for this client's billing vendor
acquisition; and
- managing billing projects with this client and alliance partners in the
competitive local telephone market.
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A Major Global Systems Integration and Software Services Firm. We have
worked with this client on numerous engagements both domestically and
internationally. We have provided this client with telecommunications subject
matter expertise both directly and as a subcontractor in engagements it provided
to its clients. Representative projects include:
- development of a market strategy for this client's competitive local
telephone company practice. We conducted primary and secondary market
research, evaluated this client's software products and capabilities, and
identified initiatives for this client in competitive local telephone
markets;
- completion of an assessment of this client's billing product. After
completing an analysis of this product compared to market requirements,
we served as project manager for the implementation of improvements to
this key strategic product;
- development of functional and technical requirements for next generation
billing and collections system for a Spanish telecommunications company;
and
- development of requirements for and assistance with the launch of the
calling card and debit card system and international switch for a
Malaysian communications service provider. Assisted with all aspects of
the implementation of the international settlements process.
Financial Services Companies
A Leading Merchant Banking Firm. We provided the primary due diligence for
a potential investment in a European data services company. In this capacity, we
completed due diligence reviews of the underlying network and technology systems
proposed for the venture. We also developed the business plan assumptions and
financial analysis, including the cost structure and revenue plans, transfer
costing methodology, and the voice implementation strategy.
MARKETING, SALES AND STRATEGIC ALLIANCES
Our marketing and sales efforts are focused on growing our client
relationships, developing new relationships, and building our brand recognition
in the U.S. and abroad. We market and sell our services through multiple
channels, including our partners, principals, and consultants; long-term client
relationships; relationships with strategic partners; advertising; tradeshows;
web site marketing; and public relations.
Marketing
Our marketing activities are focused on expanding our presence and brand
recognition in the U.S. and abroad, to further our position as the consulting
firm of choice for telecommunications service providers and the technology and
banking firms that serve them.
Our integrated marketing programs include:
- TMNG, TMNG.com and TMNG Europe advertising campaigns;
- ongoing Web site management and enhancement;
- marketing communications;
- industry trade shows and speaking engagements;
- knowledge and toolset packaging;
- ongoing public relations campaign; and
- articles authored by us or our consultants published in trade journals.
Significant marketing efforts are focused on TMNG.com, including a newly
developed TMNG.com advertising campaign. In concert with this advertising
campaign, we reinforce the TMNG.com message and brand with marketing
communications, trade shows, publicity and web site activities. Additionally, a
new TMNG Europe campaign is under development.
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We are an active participant in telecommunications and internet telephony
conferences and trade shows in North America and Europe. We regularly
participate as keynote speakers, panel moderators, workshop leaders, and
exhibitors. Considered an industry authority, we are frequently consulted by the
trade media. In 1998 and 1997, Mr. Nespola, our President and Chief Executive
Officer, was named to Phone+ magazine's annual list of the most influential
people in competitive long distance telecommunications. In each year, he was the
highest ranking non-carrier executive selected for the list.
Sales
We sell our services directly to senior and management-level executives of
communications service providers in the United States, Europe, Canada, Asia,
Australia and South America, primarily through relationship sales. Our officers
and principals sell the majority of our engagements. In addition, our
consultants also sell, and are encouraged to do so with a compensation structure
that provides both financial and equity incentives. In pursuing new business,
our sales team and consultants emphasize our industry reputation, experience,
vendor- and technology-neutral position and time-saving proprietary business
tools.
Our sales strategy centers on building long-term relationships with our
clients, to gain new and follow-on engagements within existing accounts and
referrals for new clients. Expanding our existing client relationships will
allow us to jointly plan future projects and, in particular, develop large,
multi-year engagements.
Strategic Alliances
We have entered into, and intend to continue entering into, strategic
alliances with a select group of technology and related companies. The primary
goals of our strategic alliances are:
- to enhance our overall service offerings;
- to create or identify new revenue opportunities through referrals and the
creation of new service offerings; and
- to increase our credibility and visibility in the marketplace through
collaboration in joint marketing.
We currently have strategic alliances with Emerald Solutions, IBM,
PricewaterhouseCoopers and Tanning Technology Corporation. We do not enter into
exclusive arrangements with technology companies so that we can maintain our
vendor neutrality.
OPERATIONS
We believe that a key factor differentiating us from other consulting firms
is our operational and organizational structure. We have developed an
operational model that enables us to limit our physical facilities and other
overhead requirements and maximize utilization of the consultant base. This
structure enables us to control costs and contributes to our operating margins.
We limit our facilities requirements through the use of use electronic
communication. Although our consultants are geographically dispersed throughout
the United States and in international locations, our only corporate office
facility is our headquarters in the Kansas City area. Our consultants typically
do not require office facilities as they work either from the customer's site or
their homes.
To provide our consultants with additional infrastructure support, we are
creating a series of eRooms which consultants will be able to access through the
internet. We have established an eRoom that includes proposals we have made for
consulting engagements and an eRoom containing repositories of deliverables
generated during consulting engagements. We are also building engagement
specific eRooms to facilitate collaboration among consultants that are in
disparate locations but are working on the same engagement. We have developed a
human resources eRoom
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that provides information regarding compensation and benefits and fulfills the
same function as a bricks and mortar human resources office. We plan to develop
eRooms that provide consultant support for our proprietary methodologies. Our
eRooms are designed to provide our consultants with access to the same types of
information and support they would otherwise need to receive from a corporate
headquarters organization.
To track consultant utilization and project profitability, we have
established a sophisticated management reporting system. This system enables us
to track consultant utilization and productivity as well as costs related to and
profitability of particular projects and engagements.
Our staffing needs are coordinated by our project staffing group, which
uses a database containing information on the availability and subject matter
expertise of our consultants. Through the use of this database, we are able to
effectively match consultant availability and expertise with the needs of
incoming engagements.
Our organization is relatively flat in nature. As a result, we do not have
layers of management and require only a relatively small headquarters staff for
administrative purposes. In addition, our consultants play a key role in selling
new consulting services as well as working on their current engagements.
HUMAN RESOURCES
We believe that our ability to recruit and retain experienced,
highly-qualified and highly-motivated personnel has contributed greatly to our
success to date and will be critical for us in the future. We seek to offer a
positive environment and corporate culture and to offer significant financial
opportunities.
We offer a flexible recruiting model that we believe enhances our ability
to attract consultants and to effectively manage utilization. Our consultants
may work for us as employees, independent contractors or as contingent
employees. Contingent employees will, unlike independent contractors, receive
company-paid medical insurance, vacation and other employee benefits. Instead of
receiving a regular salary, however, contingent employees will only be paid for
time spent working on consulting projects for customers or working on internal
projects. We intend to begin offering contingent employment to a selected
portion of our independent contractor base later this year. Generally, we will
offer contingent employment to independent contractors that are regularly
involved in consulting projects, have a broad range of expertise and are highly
utilized by us. Our current independent contractor base also includes
individuals with specialized expertise in discrete areas, and we typically
deploy these individuals only when their unique expertise is necessary. We
expect that we will continue to retain these individuals as independent
contractors.
As of October 2, 1999, we had approximately 210 consultants available to
work on engagements for us. Of these, 51 were full-time employees and
approximately 115 were working on engagements for us as independent contractors.
The remaining consultants are available to work on engagements as we need them.
In addition to our consultants, we have a headquarters staff of 15, which
includes our Chief Executive Officer, Chief Financial Officer and other
administrative personnel.
We retain our professionals through the use of many initiatives. We
compensate our employees through a combination of regular cash compensation,
performance-based cash incentive compensation and participation in our stock
option and other equity incentive plans and independent contractors through a
competitive daily service rate. Through the use of the three-pronged employment
model option, we offer significant flexibility to suit the varied needs and
skill sets of our consulting base. Further, because we do not require
consultants to work from a central office, consultants are not required to move
to a particular location to join us, which offers geographic flexibility to our
consulting base.
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COMPETITION
The market for telecommunications consulting services is relatively new,
highly fragmented and changing rapidly. We face competition from major business
consulting firms, the consulting arms of accounting and other professional
services organizations and our customers' internal resources. We consider some
of our principal competitors to be:
- American Management Systems;
- Andersen Consulting;
- Booz-Allen & Hamilton;
- The Boston Consulting Group;
- Cap Gemini;
- KPMG Peat Marwick; and
- PricewaterhouseCoopers.
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 we do.
We believe, based on our revenue levels and our market research, that we
are among the largest stand-alone providers of telecommunications management
consulting services.
We have faced, and expect to continue to face, additional competition from
new entrants into our markets. We have 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 our market include responsiveness to
the needs of customers, quality and reliability of consultants, price, project
management capability and technical expertise. We believe that our ability to
compete depends in part on performance, a focused service offering formula, the
price/value formula of our service offerings, responsiveness to customer needs
and our ability to hire, retain, and motivate key personnel.
INTELLECTUAL PROPERTY
Our success is dependent, in part, upon our proprietary processes and
methodologies, and we rely upon a combination of copyright, trade secret, and
trademark law to protect our intellectual property. We have obtained federal
registration for two trademarks in the United States and have filed applications
to register eight other marks in the United States. It is possible that third
parties may challenge our trademark applications.
We do not have any patent protection for the proprietary methodologies used
by our consultants. We currently do not anticipate applying for patent
protection for these toolsets and methodologies.
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We enter into confidentiality agreements with our employees, independent
contractors and clients. We also limit access to and distribution of our
proprietary information. In addition, we have entered into non-competition
agreements with certain of our key employees. We cannot assure you that the
steps we have taken in this regard will be adequate to prevent or deter
misappropriation of our proprietary information or that we will be able to
detect unauthorized use and take appropriate steps to enforce our intellectual
property rights. Misappropriation or unauthorized use of our intellectual
property could harm our business.
FACILITIES
Our principal executive offices are located in a 3,357 square foot facility
in Overland Park, Kansas. This facility houses our executive, corporate and
administrative offices. We occupy these premises under a lease which expires in
July 2003. We anticipate that our current executive office facility will be
sufficient to meet our corporate facilities needs for the foreseeable future.
LEGAL PROCEEDINGS
In June 1998, the bankruptcy trustee of one of our former clients,
Communications Network Corporation, sued us in the U.S. Bankruptcy Court in New
York seeking recovery of $160,000 in improper payment of consulting fees paid by
the former client during the period from July 1, 1996, when an involuntary
bankruptcy proceeding was initiated against the former client, through August 6,
1996, when the former client agreed to an order for relief in the bankruptcy
proceeding, and $160,000 in consulting fees paid by the former client after
August 6, 1996. The bankruptcy trustee has also sued us for at least $1.85
million for breach of contract, breach of fiduciary duties and negligence.
Although we cannot give you any assurance as to the ultimate outcome of this
proceeding, we believe we have meritorious defenses to the claims made by the
bankruptcy trustee, including particularly the claims for breach of contract,
breach of fiduciary duty and negligence, and that the ultimate resolution of
this matter will not materially harm our business.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information regarding our executive
officers and directors as of October 2, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Grant G. Behrman(1)....................... 45 Chairman of the Board
Richard P. Nespola........................ 55 President, Chief Executive Officer and Director
Ralph R. Peck............................. 49 Vice President
Micky K. Woo.............................. 46 Vice President and Director
Donald E. Klumb........................... 37 Vice President and Chief Financial Officer
William M. Matthes(1)..................... 39 Director
Mario M. Rosati(2)........................ 53 Director
Dennis G. Sisco........................... 54 Director
Roy A. Wilkens(1)(2)...................... 56 Director
</TABLE>
- -------------------------
(1) Member of the compensation committee
(2) Member of the audit committee
Grant G. Behrman has served as our Chairman of the Board since February
1998. Mr. Behrman currently serves as Managing Partner of Behrman Capital, a
private equity firm, and was a founding partner of that firm. At Behrman
Capital, he has primary responsibility for investments made in the information
technology and outsourcing areas. Prior to founding Behrman Capital, Mr. Behrman
was a founding member of Morgan Stanley's Venture Capital Group where he worked
from 1981 to 1991, and a consultant with the Boston Consulting Group from 1977
to 1981. Mr. Behrman is a director of Visual Networks, Inc., a
telecommunications equipment manufacturer, and several private companies
including Groundswell, Inc., a web strategy, design and hosting firm. Mr.
Behrman received an M.B.A. with distinction from the Wharton Graduate School of
Business in 1977. Mr. Behrman received his undergraduate degree in Business from
the University of the Witwatersrand (South Africa).
Richard P. Nespola has served as our President and Chief Executive Officer
and founded TMNG in 1990. Prior to founding TMNG, from 1989 to 1990, Mr. Nespola
served as Senior Vice President and Chief Operating Officer of Telesphere
Communications, a communications service provider. From 1986 through 1989, he
held the positions of Vice President of Financial Operations and Senior Vice
President of Strategic Markets and Product Pricing at Sprint. He also served as
the Senior Director of Revenue and Treasury Operations at MCI from 1982 to 1986.
Mr. Nespola is a director of Groundswell, Inc., a web strategy, design and
hosting firm. Mr. Nespola is also a frequent chair of industry forums and noted
conference speaker. Mr. Nespola received his B.A. and his M.B.A. from Long
Island University.
Ralph R. Peck has served as Vice President and has been a partner with TMNG
since August 1991. From 1986 to 1988, Mr. Peck was a Director of Revenue
Management at Sprint and the Senior Manager for both West Coast Financial
Operations Revenue and Treasure Systems Management at MCI from 1984 to 1986. In
these positions, Mr. Peck had responsibility for billing systems, billing center
management, revenue and treasury management, new product development, and
customer database conversions. Mr. Peck received his B.S.B.A. from American
University.
Micky K. Woo has served as our Vice President and as a director, and he has
been a partner with us since December 1991. Prior to joining us, Mr. Woo served
from June 1989 to November 1999 as Vice President of Information Systems and
Revenue Assurance at Telesphere Communications, a communications service
provider from June 1989 to November 1991. From 1987 to 1989, Mr. Woo was the
Director of Revenues Treasury Management at Sprint and from 1983 to 1987 he
served in management at MCI, including Senior Manager of Receivables Management,
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<PAGE> 53
Senior Manager of the East Coast Billing Center, and the Senior Manager of
Revenue Reporting and Analysis. Prior to entering the telecommunications
industry, Mr. Woo was a consultant with Price Waterhouse. Mr. Woo received his
B.A. in Computer Science and an M.A. in accounting from the University of Iowa.
Donald E. Klumb has served as our Vice President and Chief Financial
Officer since July 1999. From June 1998 to July 1999, Mr. Klumb was a partner at
Deloitte & Touche LLP and headed the firm's midwest telecommunications and high
technology practice. From 1992 to 1998, he was a senior manager with Deloitte &
Touche. Mr. Klumb received his B.S. in accounting from the University of
Wisconsin-Milwaukee and is a certified public accountant.
William M. Matthes has served as a director since February 1998. Mr.
Matthes joined Behrman Capital, a private equity firm, in April 1996 and has
served as a Managing Partner of Behrman Capital since January 1999. Prior to
joining Behrman Capital, Mr. Matthes was Chief Operating Officer of Holsted
Marketing, Inc., a direct marketing company from July 1994 to April 1996. From
December 1989 to July 1994, Mr. Matthes was a General Partner at Brentwood
Associates, a private equity firm. Mr. Matthes currently serves on the board of
Starwood Financial Trust and several private companies, including Groundswell,
Inc., a web strategy, design, and hosting firm, where he serves as Chairman of
the Board. Mr. Matthes received his M.B.A. from Harvard Business School in 1986
where he was both a Baker Scholar and a Loeb Rhoades Fellow. Mr. Matthes also
received his A.B. in Economics from Stanford University, where he graduated with
honors and distinction.
Mario M. Rosati has served as a director since June 1999. Mr. Rosati is a
member of the executive committee of Wilson, Sonsini, Goodrich & Rosati, one of
the premier legal firms for high technology companies. He has been with the law
firm since 1971, first as an associate and then as a member since 1975. He is a
member of the board of directors of Aehr Test Systems, a semiconductor equipment
company, Genus, Inc., a semiconductor equipment company Mypoints.com, Inc., an
internet-based direct marketing company, Ross Systems, Inc., a software company,
Sanmina Corporation, an electronics contract manufacturing company, Symyx
Technologies, a combinatorial materials science company, and Vivus, Inc., a
medical device company. Mr. Rosati received his B.A. from the University of
California at Los Angeles and his J.D. from the University of California at
Berkeley, Boalt Hall School of Law.
Dennis G. Sisco has served as a director since February 1998. Since January
1998, Mr. Sisco has been a partner with Behrman Capital. From 1993 to 1997, Mr.
Sisco served as an Executive Vice President of Dun and Bradstreet and as
President of D&B Enterprises a venture capital operation of Dun & Bradstreet.
From 1989 to 1983, Mr. Sisco served as an Executive Vice President of Cognizant
Corporation, a business information services provider. Previously, Mr. Sisco
held several operating positions in technology companies and served as a General
Partner at Oak Investment Partners, a venture capital partnership. Mr. Sisco
specializes in the information technology area and currently serves on the
boards of Aspect Development, Inc., a software product and information services
company. The Gartner Group, Inc., a market research firm, and TSI Software
International, Ltd., an e-business and microwave software products company. Mr.
Sisco graduated with honors from Western Maryland College with a B.A. in
Economics.
Roy A. Wilkens has served as a director since June 1999. In 1985, Mr.
Wilkens founded WilTel, Inc., a wholesale communications carrier, a subsidiary
of The Williams Companies, an oil and gas pipeline company. Mr. Wilkens was the
Chief Executive Officer of WilTel Inc. from 1985 to 1995. In 1995, Wiltel was
acquired by LDDS Communications, a predecessor company to MCI Worldcom, and Mr.
Wilkens remained as Chief Executive Officer of Wiltel until 1997. Prior to 1985,
Mr. Wilkens served as the President of Williams Pipeline Company, a subsidiary
of The Williams Companies. In 1992, President George Bush appointed Mr. Wilkens
to the National Security Telecommunications Advisory Council. He has also served
as chairman of both the Competitive Telecommunications Association and the
National Telecommunications Network. Mr. Wilkens is Chairman of Williams
Communications Group and is a member of the board of directors of
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<PAGE> 54
McLeodUSA Incorporated, a communications services provider, Splitrock Services,
Inc., a competitive local telephone company, and UniDial, Inc., a
telecommunications services provider.
Each officer, except the Chief Executive Officer, serves at the discretion
of the board of directors and holds office until his or her successor is elected
and qualified or until his or her earlier resignation or removal. The Chief
Executive Officer serves under his employment agreement with us. There are no
family relationships among any of our directors, executive officers or key
employees.
OTHER KEY PERSONNEL
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Carol F. Bleecker.................................. 50 Principal
Kimberly J. Cole................................... 41 Principal
Peter D'Agostino................................... 54 General Manager of TMNG.com
Linda L. Gimnich................................... 51 Principal
Jane D. Hufstedler................................. 54 Principal
Edward F. Shanahan................................. 45 Principal
Leslie T. Shaw..................................... 50 Managing Director, TMNG Europe
S. David Craig..................................... 40 Managing Director, TMNG Canada
</TABLE>
Our other key personnel include managers of our subsidiaries and our
principals. Our principals typically have been with us for a significant period
of time and have responsibility for key accounts, sales or other managerial
functions as well as the provision of consulting services.
Carol F. Bleecker has served as a Principal since July 1997. Ms. Bleecker
joined us in November 1994 as a senior consultant. In 1989, Ms. Bleecker founded
Acorn Technologies, a telecommunications consulting firm, and served as a Senior
Partner from 1989 to 1994. Ms. Bleecker received her B.A. from Wells College and
her M.P.A. from George Washington University.
Kimberly J. Cole has served as a Principal since 1996. Mr. Cole joined us
in 1991 as a senior consultant working with service providers, global technology
providers and systems integrators on process/organization re-engineering, new
product introduction, system implementation, third party evaluations and
strategic analysis. From 1989 to 1990, Mr. Cole served as a manager at
Telesphere Communications, a communications services provider, and from 1987 to
1989 as a manager at Sprint, a global communications company. Mr. Cole received
his B.B.A. from Western Michigan University and his M.B.A. from the University
of Michigan.
Peter D'Agostino has served as a Principal and Network Practice Leader
since 1998 and General Manager of TMNG.com since July 1999. Mr. D'Agostino began
consulting with us in 1994. Mr. D'Agostino started his 30-year career in
telecommunications at Bell Laboratories and has held various management and
executive positions in the industry, including at AT&T and MCI, where he was
responsible for data and voice network design, management and operation. From
1990 to 1998, Mr. D'Agostino was the senior founding partner in The Computech
Group, a consulting firm. Mr. D'Agostino received his B.S. from Pratt Institute
and his M.S. and Ph.D. degrees in Electrical Engineering from New York
University.
Linda L. Gimnich has served as a Principal since 1996. From 1995 to 1996,
she served as Vice President of Provisioning and Billing for Excel
Communications, a long distance telecommunications company. From 1993 to 1995,
she served as a Principal and senior consultant at TMNG. From 1980 to 1993, she
held executive positions at Sprint, a global communications company, and its
predecessor companies in strategic planning, revenue management, billing,
customer service, information systems and equal access product marketing. Ms.
Gimnich received her B.S. degree from Louisiana State University.
Jane D. Hufstedler has served as a Principal since October 1998. Ms.
Hufstedler joined us in October 1996 as a senior consultant. From 1994 to 1996,
Ms. Hufstedler served as the Vice President
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<PAGE> 55
of operations at Preferred Telecom, a communications services provider. From
1993 to 1994 she served as product director for customer care at Tandem, a
computer manufacturer. Prior to 1993, Ms. Hufstedler held senior management
positions at Southwestern Bell and Sprint and its predecessor companies.
Edward F. Shanahan has served as a Principal since 1992. Mr. Shanahan
joined us in 1991 as a senior consultant. From June 1989 to September 1991, Mr.
Shanahan served as director of external billing at Telesphere Communications, a
communications services provider. From 1987 to 1989, Mr. Shanahan was the
Director of Exchange Carrier Billing at Sprint, a global communications company
and from 1986 to 1987 he served as a Program Manager at MCI. Mr. Shanahan
received his B.S. from University of Massachusetts and his M.B.A. from the
University of Maryland.
Leslie T. Shaw has served as Managing Director of TMNG Europe since
December 1998. Mr. Shaw joined us as a senior consultant in June 1998. From
December 1997 through June 1998, Mr. Shaw worked as an independent consultant.
From 1992 through 1997, Mr. Shaw held various director-level positions with
France Telecom, a French communications services provider, including Vice
President of Global Account Management and Director of Sales and Marketing for
the United Kingdom. Mr. Shaw received his H.N.C. in Telecommunications from
Manchester University (United Kingdom).
S. David Craig has served as Managing Director for TMNG Canada since
February 1999. From November 1994 to February 1999, Mr. Craig served in
management positions, including Vice President of Network Operations, Vice
President of Customer Service, and Vice President of Customer Assistance and
Revenue Management, with AT&T Canada. Mr. Craig received his B.S. in Engineering
from the University of Waterloo (Canada), and his M.B.A. from the Ivey School of
Business at the University of Western Ontario (Canada).
BOARD COMPOSITION
Our bylaws currently authorize seven directors. Our certificate of
incorporation and bylaws provide that our board will be divided into three
classes, Class I, Class II and Class III, with each class serving staggered
three-year terms. The Class I directors, Messrs. Matthes and Woo, will stand for
reelection at the 2000 annual meeting of stockholders. The Class II directors,
Messrs. Rosati, Sisco and Wilkens, will stand for reelection at the 2001 annual
meeting of stockholders. The Class III directors, Messrs. Behrman and Nespola,
will stand for reelection at the 2002 annual meeting of stockholders. Any
additional directorships resulting from an increase in the number of directors
will be distributed among the three classes so that, as nearly as possible, each
class will consist of one-third of the directors. This staggered classification
of the board of directors may have the effect of delaying or preventing changes
in control or management.
COMMITTEES OF THE BOARD OF DIRECTORS
The board of directors has established a compensation committee and an
audit committee. The compensation committee, consisting of Messrs. Behrman,
Matthes and Wilkens, reviews and approves the salaries, bonuses and other
compensation payable to our executive officers and administers and makes
recommendations concerning our employee benefits plans.
The audit committee, consisting of Messrs. Rosati and Wilkens, recommends
the selection of independent public accountants to the board of directors,
reviews the scope and results of the audit and other services provided by our
independent accountants and reviews our accounting practices and systems of
internal accounting controls.
DIRECTOR COMPENSATION
Directors who are also our employees currently receive no additional
compensation for their services as directors of our company. Directors who are
not our employees may occasionally
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<PAGE> 56
receive options under our 1998 equity incentive plan. Messrs. Rosati and Wilkens
each received an option to purchase 37,500 shares of our common stock when they
joined the board of directors in 1999. We have no other director compensation
arrangements, other than reimbursement for travel expenses and other
out-of-pocket costs incurred in connection with directors' attendance at
meetings.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of our compensation committee serves as a member of the board of
directors or compensation committee of any entity that has one or more executive
officers serving as a member of our board of directors or compensation
committee.
EMPLOYMENT AND NONCOMPETITION AGREEMENTS
In connection with our merger and recapitalization in 1998, we entered into
a noncompetition agreement with Behrman Capital and an affiliated fund and
Messrs. Nespola, Peck and Woo. We also entered into employment agreements with
such individuals at that time.
Noncompetition Agreement. Under this agreement, Messrs. Nespola, Peck and
Woo have agreed to restrain from any direct or indirect competition with us and
to further refrain from any solicitation of our employees or interference with
our contractual relations with employees. The noncompetition agreement
terminates as to Mr. Nespola, on February 13, 2005, and as to Messrs. Peck and
Woo, on the earlier of February 12, 2005 on the third anniversary of the date of
termination of their employment with us. Alan Staples, a former stockholder and
employee of ours, is also subject to the provisions of this agreement through
November 2001.
Employment Agreements. We have employment agreements with Messrs. Nespola,
Peck and Woo, which set forth the terms and conditions of their employment with
us. These terms and conditions include:
- compensation in the form of annual salary, bonus and other compensation
awarded at the discretion of the board of directors as a result of
successful acquisitions by the company, the initial public offering of
our stock and other events;
- full time duties;
- benefits, including vacation, fringe benefits and severance benefits;
- a confidentiality provision requiring nondisclosure of our nonpublic
information;
- an assignment provision entitling us to all rights in the products
resulting from services performed under the employment agreements; and
- an arbitration clause selecting the form of arbitration for the
resolution of disputes under the employment agreements.
EXECUTIVE COMPENSATION
The following table contains information, in summary form, concerning the
compensation paid to our chief executive officer and each of our most highly
compensated executive officers whose total salary, bonus and other compensation
exceeded $100,000 during fiscal year 1998. In accordance with the rules of the
SEC, the compensation described in this table does not include perquisites and
other personal benefits received by the executive officers named in the table
below which does not exceed the lessor of $50,000 or ten percent of the total
salary and bonus reported for these officers.
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<PAGE> 57
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION ALL OTHER 1998
NAME AND PRINCIPAL POSITIONS SALARY CASH BENEFIT BONUS COMPENSATION
---------------------------- ------ ------------ ----- --------------
<S> <C> <C> <C> <C>
Richard Nespola, President and
Chief Executive Officer..................... $554,215(1) $41,226 $200,000 $19,656(2)
Micky Woo, Vice President..................... 210,973 41,226 150,000 --
Ralph Peck, Vice President.................... 210,973 41,226 100,000 --
Alan Staples, Partner(3)...................... 179,243 34,919 -- --
</TABLE>
- -------------------------
(1) Mr. Nespola's current annual salary rate is $440,000.
(2) All other 1998 compensation is for the use of an automobile and reflects
100.0% of the lease payments.
(3) Mr. Staples terminated his employment with us in November 1998.
In addition, Mr. Klumb, our Vice President and Chief Financial Officer,
joined us in July 1999 at an annual salary rate of $180,000.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information relating to stock
options awarded to each of the executive officers named in the summary
compensation table during fiscal 1998. All such options were awarded under our
1998 equity incentive plan.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------- POTENTIAL REALIZABLE VALUE AT
NUMBER OF PERCENT OF ASSUMED ANNUAL RATES OF
SECURITIES TOTAL STOCK PRICE APPRECIATION FOR
UNDERLYING OPTIONS EXERCISE OPTION TERM
OPTIONS GRANTED PRICE EXPIRATION ------------------------------
NAME GRANTED IN 1998 PER SHARE DATE 5% 10%
---- ---------- ---------- --------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Richard Nespola........ -- -- -- --
Micky K. Woo........... 50,000 4.54% $1.62 12/31/08 $1.0 million $1.5 million
Ralph R. Peck.......... 50,000 4.54% $1.48 12/31/08 $1.0 million $1.5 million
Alan Staples........... -- -- -- --
</TABLE>
Potential realizable value has been calculated based on an assumed initial
public offering price of $13.00 per share. In 1998, we granted options to
purchase an aggregate of 1,099,750 shares of common stock to our employees,
directors and consultants. Generally, we grant options at an exercise price
equal to the fair market value of the underlying common stock on the date of
grant, as determined by our board of directors, and the options vest over three
or four years from the date of grant. In determining the fair market value of
our common stock, our board of directors considers valuations of comparable
companies, valuation reports and analyses prepared by third parties, and the
lack of liquidity of our securities. Once we become a publicly held company, the
fair market value of our stock will equal its trading market price on the day of
the grant.
In accordance with the rules of the SEC, the above table sets forth the
potential realizable value over the ten-year period from the grant date to the
expiration date, assuming rates of stock appreciation of five percent and ten
percent compounded annually. These amounts do not represent our estimate of
future stock price performance. Actual realizable values, if any, of stock
options will depend on the future performance of our common stock.
On July 26, 1999, we granted Mr. Klumb an option to purchase 250,000 shares
of our common stock. This option was granted under our 1998 equity incentive
plan with an exercise price of $2.00 per share. The potential realizable values
at assumed annual rates of stock price appreciation for the option term at 5%
and 10% are $5.3 million and $8.4 million, respectively.
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<PAGE> 58
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following table set forth information for each of the officers named in
the summary compensation table concerning option exercises for fiscal year 1998,
and exercisable and unexercisable options held at January 2, 1999. The officers
named in the summary compensation table did not exercise any options during
fiscal year 1998.
The "Value of Unexercised In-the-Money Options at January 2, 1999" is based
on a value of $13.00 per share of our common stock, which is the initial public
offering price, less the per share exercise price, multiplied by the number of
shares issued upon exercise of the option. All options were granted under our
1998 equity incentive plan.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED
OPTIONS AT FISCAL YEAR END
---------------------------
NAME EXERCISABLE UNEXERCISABLE
---- ----------- -------------
<S> <C> <C>
Richard Nespola............................................. 0 --
Micky K Woo................................................. 0 50,000
Ralph R. Peck............................................... 0 50,000
Alan Staples................................................ 0 --
</TABLE>
STOCK PLANS
1998 Equity Incentive Plan
The amended and restated 1998 equity incentive plan was adopted and
approved by our board of directors and by our stockholders in September, 1999.
When we amended and restated our 1998 equity incentive plan, we combined both
our 1998 equity incentive plan and our 1998 consultant equity incentive plan.
The 1998 equity incentive plan provides for the grant to employees of incentive
stock options within the meaning of Section 422 of the Internal Revenue Code,
and for the grant to employees, directors and consultants of nonstatutory stock
options and stock purchase rights.
As of October 2, 1999, a total of 1,950,000 shares of common stock were
reserved for issuance pursuant to the 1998 equity incentive plan, of which
options to acquire 1,695,250 shares were issued and outstanding as of that date.
The 1998 equity incentive plan provides for annual increases in the number of
shares available for issuance thereunder, on the first day of each new fiscal
year, effective beginning with fiscal year 2000, equal to the lesser of (a)
1,500,000 shares, (b) five percent of the outstanding shares of common stock on
the first day of the fiscal year, or (c) such lesser amount as the board may
determine.
The board of directors or a committee of the board administers the 1998
equity incentive plan. In the case of options intended to qualify as
"performance-based compensation" within the meaning of Section 162(m) of the
Internal Revenue Code, the committee will consist of two or more "outside
directors" within the meaning of Section 162(m) of the Internal Revenue Code.
The administrator has the power to determine the terms of the options or share
purchase rights granted, including the exercise price, the number of shares
subject to each option or share purchase rights, the exercisability of the
options and the form of consideration payable upon exercise.
Options
We determine the exercise price of nonstatutory stock options granted under
the 1998 equity incentive plan, but with respect to nonstatutory stock options
intended to qualify as "performance-based compensation" within the meaning of
Section 162(m) of the Internal Revenue Code, the exercise price must at least be
equal to the fair market value of the common stock on the date of grant. The
exercise price of all incentive stock options granted under the 1998 equity
incentive plan
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must be at least equal to the fair market value of the common stock on the date
of grant. With respect to any participant who owns stock possessing more than
ten percent of the voting power of all classes of our outstanding capital stock,
the exercise price of any incentive stock option granted must equal at least
110.0% of the fair market value on the grant date and the term of such incentive
stock option must not exceed five years. The term of all other options granted
under the 1998 equity incentive plan may not exceed ten years.
An optionee generally must exercise an option granted under the 1998 equity
incentive plan at the time set forth in the optionee's option agreement after
the end of optionee's status as an employee, director or consultant of ours, or
within 12 months after the optionee's termination by death or disability, or
within a longer time period not exceeding five years, but in no event later than
the expiration of the option's ten year term. If an optionee is terminated by us
or any of our subsidiaries for cause, as defined in the 1998 equity incentive
plan, then any option held by the optionee shall be terminated immediately or
after any period of time as determined by the administrator.
The administrator determines the exercise price of stock purchase rights
granted under the 1998 equity incentive plan. In the case of stock purchase
rights, unless the administrator determines otherwise, the restricted stock
purchase agreement entered into in connection with the exercise of the stock
purchase rights shall grant us a repurchase option that we may exercise upon the
voluntary or involuntary termination of the purchaser's service with us for any
reason, including death or disability. The purchase price for shares we
repurchase pursuant to restricted stock purchase agreements shall be the
original price paid by the purchaser and may be paid by cancellation of any
indebtedness of the purchaser to us. The repurchase option shall lapse at a rate
that the administrator determines.
An optionee generally may not transfer options and stock purchase rights
granted under the 1998 equity incentive plan and only an optionee may exercise
an option and stock purchase rights during his or her lifetime.
The 1998 equity incentive plan provides that upon our dissolution,
liquidation or merger with or into another corporation or a sale of
substantially all of our assets, the successor corporation shall assume or
substitute each option or stock purchase right held by an employee. If the
employee is terminated other than for cause within six months after the
dissolution, liquidation, merger or sale of assets, the vesting of each
outstanding option or stock purchase right will automatically accelerate as to
50% of the unvested shares subject to the option or stock purchase right. All
options or stock purchase rights held by independent contractors and all holders
of options not assumed or substituted by the surviving entity shall be
exercisable for a period of 15 days after the holder receives notice of his or
her rights. The option or stock purchase right will terminate upon the
expiration of the 15 day period.
Unless terminated sooner, the 1998 equity incentive plan will terminate
automatically in 2008. In addition, we have the authority to amend, suspend or
terminate the 1998 equity incentive plan, provided that no such action may
affect any share of common stock previously issued and sold or any option
previously granted under the 1998 equity incentive plan without the optionee's
written consent.
1999 EMPLOYEE STOCK PURCHASE PLAN
The board of directors adopted our 1999 employee stock purchase plan in
September 1999 and stockholders approved the 1999 purchase plan in September
1999.
A total of 200,000 shares of common stock has been reserved for issuance
under the purchase plan. In addition, the 1999 purchase plan provides for annual
increases in the number of shares available for issuance under the 1999 purchase
plan on the first day of each fiscal year, beginning with fiscal year 2000,
equal to the lesser of (a) 200,000 shares of common stock, (b) 0.05% of the
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outstanding shares of common stock on the first day of the fiscal year or (c)
such lesser amount as may be determined by the board.
The board of directors or a committee appointed by the board administers
the 1999 purchase plan. The board of directors or its committee has full and
exclusive authority to interpret the terms of the 1999 purchase plan and
determine eligibility.
Employees are eligible to participate if they are customarily employed by
us or any participating subsidiary for at least 20 hours per week and more than
five months in any calendar year. An employee, however, may not be granted an
option to purchase stock under the 1999 purchase plan if such an employee:
- immediately after grant owns stock possessing five percent or more of the
total combined voting power or value of all classes of the capital stock
of ours; or
- whose rights to purchase stock under all employee stock purchase plans of
ours accrues at a rate which exceeds $25,000 worth of stock for each
calendar year.
The 1999 purchase plan, which is intended to qualify under Section 423 of
the Internal Revenue Code, contains consecutive, overlapping 24 month offering
periods. Each offering period includes four six month purchase periods. The
offering periods generally start on the first trading day on or after January 1
and June 30 of each year, except for the first such offering period which will
commence on the first trading day on or after the effective date of this
offering and will end on the last trading day on or before June 30, 2001.
The 1999 purchase plan permits participants to purchase common stock
through payroll deductions of up to 15% of the participant's "compensation."
Compensation is defined as the participant's base straight time gross earnings
and commissions but excludes payments for:
- overtime;
- shift premium payments;
- incentive compensation;
- incentive payments;
- bonuses; and
- other compensation.
Amounts deducted and accumulated by the participant are used to purchase
shares of common stock at the end of each offering period. The price of stock
purchased under the 1999 purchase plan is 85.0% of the lower of the fair market
value of the common stock at the beginning or end of the offering period. If the
fair market value at the end of a purchase period is less than the fair market
value at the beginning of the offering period, participants will withdraw from
the current offering period following the exercise and will automatically
re-enroll in a new offering period. Participants may end their participation at
any time during an offering period, and they will be paid their payroll
deductions to date. Participation ends automatically upon termination of
employment with us.
A participant may not transfer rights granted under the 1999 purchase plan
other than by will, the laws of descent and distribution or as otherwise
provided under the 1999 purchase plan.
The 1999 purchase plan provides that, if we merge with or into another
corporation or a sale of substantially all of our assets, a successor
corporation may assume or substitute for each outstanding option. If the
successor corporation refuses to assume or substitute for the outstanding
options, the offering period then in progress will be shortened, and a new
exercise date will be set.
The 1999 purchase plan will terminate in 2009. However, the board of
directors has the authority to amend or terminate the 1999 purchase plan, except
that, subject to certain exceptions
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<PAGE> 61
described in the 1999 purchase plan, no such action may adversely affect any
outstanding rights to purchase stock under the 1999 purchase plan.
LIMITATIONS OF LIABILITY AND INDEMNIFICATION MATTERS
Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, except liability for any of the
following:
- any breach of their duty of loyalty to the corporation or its
stockholders;
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
- any transaction from which the director derived an improper personal
benefit.
This limitation of liability does not apply to liabilities arising under
the federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.
Our bylaws provide that we shall indemnify our directors and executive
officers and may indemnify our other officers and employees and other agents to
the fullest extent permitted by law. We believe that indemnification under our
bylaws covers at least negligence and gross negligence on the part of
indemnified parties. Our bylaws also permit us to secure insurance on behalf of
any officer, director, employee or other agent for any liability arising out of
his or her actions in such capacity, regardless of whether the bylaws would
permit indemnification.
We have entered into agreements to indemnify our directors and executive
officers, in addition to indemnification provided for in our bylaws. These
agreements, among other things, indemnify our directors and executive officers
for certain expenses, including any action by us arising out of such person's
services as our director or executive officer, any of our subsidiaries or any
other company or enterprise to which the person provides services at our
request. Such expenses include amounts incurred by any person in an action or a
proceeding such as attorneys' fees, judgments, fines, and settlement amounts.
We believe that these provisions and agreements are necessary to attract
and retain qualified persons as directors and executive officers.
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<PAGE> 62
CERTAIN TRANSACTIONS
RECAPITALIZATION TRANSACTION
On February 12, 1998, we entered into a series of transactions that
resulted in our leveraged recapitalization. Prior to completion of the
recapitalization, we made distributions totaling $4.7 million to our
stockholders and all stockholders' notes receivable were paid off. The
recapitalization included the following transactions (share information set
forth below with respect to the recapitalization gives effect to the 1-for-2
reverse stock split that we will effect prior to the completion of this
offering):
- we converted all authorized non-voting common stock to voting common
stock and we declared a 3,272.73-for-one stock split resulting in total
number of authorized shares of 60,000,000 at the time of the
recapitalization, which is 30,000,000 after the reverse stock split, with
22,500,000 shares issued and outstanding;
- Behrman Capital and an affiliated fund, Strategic Entrepreneur Fund II,
L.P., organized Behrman Capital TMNG, Inc., a new company, and
contributed $20.0 million in exchange for 100% of the new company's
capital stock. The new company was formed as a transitory corporation
solely for the purpose of effecting the recapitalization and has not
carried on any activities to date other than those related to its
formation and the recapitalization;
- Behrman Capital exchanged 100% of its stock in the new company for
13,500,000 newly issued shares of TMNG common stock. The new company was
then merged into TMNG with TMNG being the surviving corporation. At this
time we changed our income tax status to a "C" corporation from an "S"
corporation;
- we entered into a senior bank credit facility that provided $24.0 million
in term loans and a $5.0 million revolving credit facility from Chase
Manhattan Bank and a syndicate of banks established by Chase Manhattan
Bank. We utilized the funds provided by the revolving credit facility and
the proceeds from the merger with the new company to acquire 13,500,000
shares of common stock from existing shareholders (as of December 31,
1997) for aggregate consideration of $38.7 million. These shares were
then retired and returned to the status of authorized but unissued
shares; and
- in connection with the recapitalization, we entered into employment
agreements and a noncompetition agreement with Messrs. Nespola, Peck,
Staples and Woo.
OTHER TRANSACTIONS
Mr. Rosati, one of our directors, is also a member of Wilson Sonsini
Goodrich & Rosati, Professional Corporation, which became our outside corporate
counsel in July 1999.
We have entered into indemnification agreements with each of our directors
and executive officers.
In November 1998, Mr. Staples entered into a separation agreement and
release and a stock purchase agreement with us, Behrman Capital and its
affiliated entities that are stockholders of ours and Messrs. Nespola, Peck and
Woo. Mr. Staples' company, Revenue Systems Management Company, was also a party
to these agreements. Under the separation agreement, Mr. Staples resigned from
his position with us and his employment agreement with us was terminated. He
received his salary and expenses up to the date of termination and his company
received a lump-sum payment of $95,000. Under the stock purchase agreement, our
existing stockholders repurchased all of Mr. Staples shares of our common stock
for an aggregate repurchase price of $2.7 million.
Intertech Management Group, Inc. is a customer of ours. Messrs. Matthes and
Sisco, two of our directors, are also directors of Intertech Management Group,
Inc. In addition, Behrman Capital II,
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<PAGE> 63
L.P. and Strategic Entrepreneur Fund II L.P., venture funds affiliated with
Behrman Capital with whom Messrs. Matthes and Sisco are employed, hold shares of
preferred stock of Intertech that are convertible into approximately 25.0% of
Intertech's outstanding common stock. We provided $329,000 and $2.2 million of
consulting services to Intertech in 1998 and for the nine month period ended
October 2, 1999, respectively.
Mr. Wilkens, a member of our board of directors, became a director and
non-executive Chairman of the Board of Williams Communications Group, Inc. upon
completion of Williams' Communications Group's initial public offering. Williams
Communications Group was our largest customer during fiscal year 1998 and the
nine months ended October 2 1999. We provided $5.4 million and $15.2 million of
consulting services to Williams in 1998 and for the nine months ended October 2,
1999, respectively.
In October 1999, we reached an agreement in principle with Williams
Communications under which Williams Communications will commit to minimum levels
of consulting fees of $22 million over three years. In addition, in October
1999, we issued Williams Communications a warrant to purchase 500,000 shares of
our common stock at an exercise price of $2.00 per share.
During 1996, 1997 and fiscal year 1998, we made payments of approximately
$213,000, $200,000 and $77,000, respectively, to a company owned by Mr. Nespola.
In addition, we made a payment of $100,000 in 1997 to Mr. Nespola. These
payments were for services rendered under consulting agreements between TMNG and
the company owned by Mr. Nespola.
Through January 2, 1999, we subcontracted with five companies owned by
Messrs. Nespola, Peck and Woo. These companies provided consultants (acting as
independent contractors) to render consulting services to our customers.
Beginning January 3, 1999, we contracted directly with these consultants. Total
services received from these companies was approximately $7.8 million, $9.6
million and $14.9 million in 1996, 1997 and fiscal 1998, respectively. At
December 31, 1997 and January 2, 1999, we had accounts receivable balances due
for these services of $565,000 and $332,000, respectively.
POLICY REGARDING TRANSACTIONS WITH AFFILIATES
All future transactions with affiliates, including any loans we make to our
officers, directors, principal stockholders or other affiliates, will be
approved by a majority of our board of directors, including a majority of the
independent and disinterested members or, if required by law, a majority of
disinterested stockholders, and will be on terms no less favorable to us than we
could have obtained from unaffiliated third parties.
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<PAGE> 64
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock as of October 2, 1999 and as adjusted to reflect
the sale of the shares of common stock in this offering by:
- each person or entity known by us to own more than five percent of our
outstanding stock;
- our Chief Executive Officer, each of the executive officers named in the
summary compensation table and each of our directors; and
- all of our directors and executive officers as a group.
Unless otherwise indicated, the address for each beneficial owner is c/o
The Management Network Group, Inc., 7300 College Boulevard, Suite 302, Overland
Park, Kansas 66210.
The beneficial ownership is calculated based on 22,571,201 shares of our
common stock outstanding as of October 2, 1999, and 27,261,201 shares
outstanding immediately following the completion of this offering. Beneficial
ownership is determined in accordance with the rules of the SEC and generally
includes voting and investment power with respect to the securities. Unless
otherwise indicated, and subject to applicable community property laws, to the
best of our knowledge, the persons named in this table have sole voting and
investing power with respect to all of the shares of common stock held by them.
Shares issuable upon the exercise of options that are exercisable or become
exercisable within 60 days of October 2, 1999 are considered outstanding for the
purpose of computing percentage ownership of that person, but are not treated as
outstanding for the purpose of computing any other person's ownership
percentage.
Messrs. Nespola and Peck and Behrman Capital II L.P. and Strategic
Entrepreneur Fund II L.P. have granted the underwriters an option to purchase up
to an aggregate of 692,250 shares of common stock to cover over-allotments, if
any.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
-------------------------------------------
PERCENT BEFORE PERCENT AFTER
BENEFICIAL OWNER NUMBER OFFERING OFFERING
---------------- ---------- -------------- -------------
<S> <C> <C> <C>
Behrman Capital II L.P.(1).............................. 14,673,912 65.0% 53.8%
126 E. 56th Street, 27th Floor
New York, NY 10022
Grant G. Behrman(2)..................................... 14,673,912 65.0 53.8
Behrman Capital
126 E. 56th Street, 27th Floor
New York, NY 10022
William M. Matthes(3)................................... 14,580,985 64.6 53.5
Behrman Capital
Four Embarcadero Center, Suite 3640
San Francisco, CA 94111
Dennis G. Sisco(4)...................................... 14,580,985 64.6 53.5
Behrman Capital
126 E. 56th Street, 27th floor
New York, NY 10022
Richard P. Nespola(5)................................... 4,891,304 21.7 17.9
Micky K. Woo Trust...................................... 1,956,521 8.7 7.2
Ralph R. Peck........................................... 978,261 4.3 3.6
Donald E. Klumb(6)...................................... 37,500 * *
Mario M. Rosati(7)...................................... 37,500 * *
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304
</TABLE>
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<PAGE> 65
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
-------------------------------------------
PERCENT BEFORE PERCENT AFTER
BENEFICIAL OWNER NUMBER OFFERING OFFERING
---------------- ---------- -------------- -------------
<S> <C> <C> <C>
Roy A. Wilkens(7)....................................... 37,500 * *
All directors and executive officers as a group (9
persons)(8)........................................... 22,612,498 99.9 83.2
</TABLE>
- -------------------------
* Less than 1%.
(1) Also includes 92,927 shares held by Strategic Entrepreneur Fund II, L.P., an
affiliate of Behrman Capital.
(2) Represents 14,580,985 shares held by Behrman Capital and 92,927 shares held
by Strategic Entrepreneur Fund. Mr. Behrman is a managing member of Behrman
Brothers LLC, the general partner of Behrman Capital and is a general
partner of Strategic Entrepreneur Fund. Mr. Behrman disclaims beneficial
ownership of the shares held by these entities, except to the extent of his
proportionate partnership interest therein. Mr. Behrman is a member of our
board of directors.
(3) Represents 14,580,985 shares held by Behrman Capital. Mr. Matthes is a
managing member of Behrman Brothers LLC, the general partner of Behrman
Capital. Mr. Matthes disclaims beneficial ownership of the shares held by
Behrman Capital, except to the extent of his proportionate partnership
interest therein. Mr. Matthes is a member of our board of directors.
(4) Represents 14,580,985 shares held by Behrman Capital. Mr. Sisco is a member
of Behrman Brothers LLC, the general partner of Behrman Capital. Mr. Sisco
disclaims beneficial ownership of the shares held by Behrman Capital, except
to the extent of his proportionate partnership interest therein. Mr. Sisco
is a member of our board of directors.
(5) Includes 250,000 shares held by the TMNG 1999 Trust, Faye Nespola, Trustee.
(6) Consists of 37,500 stock options that vest upon the closing of this
offering.
(7) Consists of 37,500 stock options that are exercisable within 60 days of
October 2, 1999. These options, if exercised, will be subject to a right of
repurchase of unvested shares. The shares subject to these options vest in
four equal annual installments, with the first quarter becoming vested on
June 4, 2000.
(8) Includes 112,500 stock options that are exercisable within 60 days of
October 2, 1999 and 250,000 shares held by TMNG 1999 Trust, Faye Nespola,
Trustee. Also includes an aggregate of 14,580,985 shares held by Behrman
Capital and 92,927 shares held by Strategic Entrepreneur Fund.
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<PAGE> 66
DESCRIPTION OF CAPITAL STOCK
GENERAL
Prior to giving effect to the 1 for 2 reverse split of our common stock to
be effected prior to the completion of this offering, we are authorized to issue
up to 100,000,000 shares of common stock, $0.001 par value and 10,000,000 shares
of undesignated preferred stock. From time to time, our board of directors may
establish the rights and preferences of the preferred stock. As of October 2,
1999, after giving effect to the reverse split, 22,571,201 shares of common
stock were issued and outstanding and held by 11 stockholders, and zero shares
of preferred stock were issued and outstanding. The following description of our
capital stock is, by necessity, not complete. We encourage you to refer to our
certificate of incorporation and bylaws, which are included as exhibits to the
registration statement of which this prospectus forms a part, and applicable
provisions of Delaware law for a more complete description.
COMMON STOCK
Each holder of common stock is entitled to one vote for each share held on
all matters to be voted upon by the stockholders and there are no cumulative
voting rights. Subject to preferences that may be applicable to any outstanding
preferred stock, holders of common stock are entitled to receive ratably such
dividends, if any, as may be declared time to time by the board of directors out
of funds legally available for that purpose. See "Dividend Policy." If we
undergo a liquidation, dissolution or winding up, the holders of common stock
are entitled to share in our assets remaining after the payment of liabilities
and the satisfaction of any liquidation preference granted to the holders of any
outstanding shares of preferred stock. Holders of common stock have no
preemptive or conversion rights or other subscription rights. There are no
redemption or sinking fund provisions applicable to the common stock. All
outstanding shares of common stock are, in the opinion of our legal counsel,
Wilson Sonsini Goodrich & Rosati, fully paid and nonassessable. The rights,
preferences and privileges of the holders of common stock are subject to, and
may be adversely affected by the rights of the holders of shares of any series
of preferred stock which we may designate in the future.
PREFERRED STOCK
The board of directors has the authority, without action by the
stockholders, to designate and issue preferred stock in one or more series and
to designate the rights, preferences and privileges of each series, which may be
greater than the rights of the common stock. It is not possible to state the
actual effect of the issuance of any shares of preferred stock upon the rights
of holders of the common stock until the board of directors determines the
specific rights of the holders of this preferred stock. However, the effects
might include, among other things:
- restricting dividends on the common stock;
- diluting the voting power of the common stock;
- impairing the liquidation rights of the common stock; or
- delaying or preventing a change in control of us without further action
by the stockholders.
Upon the closing of this offering, no shares of preferred stock will be
outstanding.
WARRANTS
In October 1999, we issued a warrant to purchase 500,000 shares of common
stock to Williams Communications Group at an exercise price of $2.00 per share.
The warrant has a net exercise provision under which the holder may, in lieu of
payment of the exercise price in cash, surrender the warrant and receive a net
amount of shares based on the fair market value of our common stock at the time
of exercise of the warrant, after deducting the aggregate exercise price. No
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<PAGE> 67
separate cash consideration was paid for this warrant. The warrant is
exercisable beginning in November 1999 and will expire in October 2004.
REGISTRATION RIGHTS OF CERTAIN HOLDERS
After this offering, holders of 22,499,998 shares of common stock and a
warrant to purchase 500,000 shares of our common stock or their transferees are
entitled to certain rights with respect to the registration of such shares under
the Securities Act. These rights are provided under the terms of an agreement
between us and the holders of the registrable securities. Beginning 180 days
following the date of this prospectus, holders of at least 15.0% of the
registrable securities may require on up to two occasions, that we use our best
efforts to register the registrable securities for public resale. We are
obligated to register these shares only if the outstanding registrable
securities have an anticipated public offering price of at least $8.0 million.
Also, holders of 25.0% of the registrable securities may require, no more than
once during any six-month period, that we register their shares for public
resale on Form S-3 or similar short-form registration if the value of the
securities to be registered is at least $2.0 million. Furthermore, if we elect
to register any of its shares of common stock for purposes of effecting any
public offering, the holders of registrable securities are entitled to include
their shares of common stock in the registration, but we may reduce the number
of shares proposed to be registered in view of market conditions. These
registration rights have been waived with respect to this offering. We will bear
all expenses in connection with any registration, other than underwriting
discounts and commissions.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF OUR CHARTER AND BYLAWS
Provisions of Delaware law and our certificate of incorporation and bylaws
could make it more difficult to acquire us by means of a tender offer, proxy
contest or otherwise, or to remove our officers and directors. These provisions,
summarized below, are expected to discourage certain types of coercive takeover
practices and inadequate takeover bids. These provisions are also designed to
encourage persons seeking to acquire control of us to first negotiate with our
board. We believe that the benefits of increased protection of its potential
ability to negotiate with the proponent of an unfriendly or unsolicited proposal
to acquire or restructure us outweighs the disadvantages of discouraging such
proposals because negotiation of such proposals could result in an improvement
of their terms.
Our board of directors is divided into three classes. The directors in each
class will serve for a three-year term, with our stockholders electing one class
each year. This system of electing and removing directors may tend to discourage
a third party from making a tender offer or otherwise attempting to obtain
control of us, because it generally makes it more difficult for stockholders to
replace a majority of the directors.
Our certificate of incorporation provides that stockholders may act only at
duly called annual or special meetings of stockholders, not by written consent.
Our bylaws further provide that special meetings of our stockholders may be
called only by the President, Chief Executive Officer or Chairman of the Board
or a majority of the board of directors.
Our bylaws provide that stockholders seeking to bring business before our
annual meeting of stockholders, or to nominate candidates for election as
directors at our annual meeting of stockholders, must provide timely notice
thereof in writing. The bylaws also specify requirements as to the form and
content of a stockholder's notice. These provisions may preclude stockholders
from bringing matters before our annual meeting of stockholders or from making
nominations for directors at our annual meeting of stockholders.
We are subject to Section 203 of the Delaware General Corporation Law, an
anti-takeover law. In general, Section 203 prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years following the date the person became an
interested stockholder, unless the "business combination" or the transaction in
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<PAGE> 68
which the person became an interested stockholder is approved in a prescribed
manner. Generally, a "business combination" includes a merger, asset or stock
sale, or other transaction resulting in a financial benefit to the interested
stockholder. Generally, an "interested stockholder" is a person who, together
with affiliates and associates, owns or within three years prior to the
determination of interested stockholder status, did own, 15.0% or more of a
corporation's voting stock. The existence of this provision may have an
anti-takeover effect with respect to transactions not approved in advance by the
board of directors, including discouraging attempts that might result in a
premium over the market price for the shares of common stock held by
stockholders.
Our certificate of incorporation and bylaws do not provide for cumulative
voting in the election of directors. The amendment of any of the above
provisions of our certificate of incorporation would require approval by holders
of at least two-thirds of the outstanding common stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is United Missouri
Bank of Kansas City. United Missouri Bank's telephone number for stockholder
inquiries is (800) 884-4225.
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<PAGE> 69
SHARES ELIGIBLE FOR FUTURE SALE
Immediately prior to this offering, there was no public market for our
common stock. Future sales of substantial amounts of common stock in the public
market could adversely affect the market price of the common stock. Upon
completion of this offering, we will have outstanding 27,261,201 shares of
common stock based upon shares outstanding at October 29, 1999, assuming no
exercise of outstanding options after October 29, 1999. All of the shares sold
in this offering will be freely tradable without restriction under the
Securities Act except for any shares purchased by our "affiliates" as that term
is defined in Rule 144 under the Securities Act. The remaining 22,646,201 shares
of common stock outstanding are all "restricted" shares under the Securities
Act.
All restricted shares are subject to lock-up agreements with the
underwriters pursuant to which the holders of the restricted shares have agreed
not to sell, pledge or otherwise dispose of such shares for a period of 180 days
after the date of this prospectus. Hambrecht & Quist LLC may release the shares
subject to the lock-up agreements in whole or in part at any time with or
without notice. However, Hambrecht & Quist LLC has no current plans to do so.
The following table indicates approximately when the 22,646,201 shares of our
common stock that are not being sold in the offering but which will be
outstanding at the time the offering is complete will be eligible for sale into
the public market:
<TABLE>
<CAPTION>
ELIGIBILITY OF RESTRICTED SHARES FOR SALE IN THE PUBLIC MARKET
--------------------------------------------------------------
<S> <C>
At effective date........................................... 0
180 days after effective date............................... 14,745,115
At various times thereafter upon the expiration of
applicable holding periods................................ 7,901,086
</TABLE>
As of October 2, 1999, 1,950,000 shares were reserved for issuance under
our amended and restated 1998 equity incentive plan, of which options to
purchase 1,695,250 shares were then outstanding and options to purchase 286,667
shares were then exercisable. These shares are subject to lock-up agreements. We
intend to file, within 180 days after the date of this prospectus, a
registration statement under the Securities Act to register the 1,950,000 shares
under our 1998 equity incentive plan and the 200,000 shares of common stock
reserved for issuance under our employee stock purchase plan. Upon registration,
all of these shares will be freely tradable when issued, subject to Rule 144
volume limitations applicable to affiliates and lock-up agreements.
In October 1999, we issued a warrant to purchase 500,000 shares of common
stock. The shares issuable upon exercise of this warrant will be eligible for
resale in October 2000 if the warrant is exercised on a cashless basis or one
year from the date of exercise if the warrant is exercised with cash. In each
case, resale of these shares will be subject to Rule 144 volume limitations.
In general, under Rule 144, as currently in effect, a person, or persons
whose shares are aggregated, who has beneficially owned restricted shares for at
least one year, will be entitled to sell in any three-month period a number of
shares that does not exceed the greater of:
- one percent of the then outstanding shares of the common stock, which
will equal approximately 275,000 shares immediately after this offering,
or
- the average weekly trading volume of the common stock during the four
calendar weeks preceding the date on which notice of the sale is filed
with the SEC.
Sales pursuant to Rule 144 are subject to requirements relating to manner
of sale, notice and availability of current public information about us. A
person, or persons whose shares are aggregated, who is not deemed to have been
one of our affiliates at any time during the 90 days immediately preceding the
sale and who has beneficially owned his or her shares for at least two years is
entitled to sell such shares pursuant to Rule 144(k) without regard to the
limitations described above.
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RULE 701
In general, under Rule 701, a TMNG employee, director, officer or
consultant who purchases shares from us in connection with a compensatory stock
or option plan or other written agreement before the effective date of the
offering is entitled to resell these shares 90 days after the effective date of
this offering in reliance on Rule 144, without having to comply with certain
restrictions, including the holding period, contained in Rule 144.
The SEC has indicated that Rule 701 will apply to typical stock options
granted by an issuer before it becomes subject to the reporting requirements of
the Securities Exchange Act of 1934, along with the shares acquired upon
exercise of these options (including exercises after the date of this
prospectus). Securities issued in reliance on Rule 701 are restricted securities
and, subject to the contractual restrictions described above, beginning 90 days
after the date of this prospectus, may be sold by persons other than affiliates
subject only to the manner of sale provisions of Rule 144 and by affiliates
under Rule 144 without compliance with its one year minimum holding period
requirement.
LOCK-UP AGREEMENTS
All of our officers and directors and holders of our common stock and
options to purchase common stock have agreed pursuant to "lock-up" agreements
that they will not offer, sell, contract to sell, pledge, grant any option to
sell, or otherwise dispose of, directly or indirectly, any shares of common
stock or securities convertible or exchangeable for common stock, or warrants or
other rights to purchase common stock for a period of 180 days after the date of
this prospectus without the prior written consent of Hambrecht & Quist LLC. We
have also entered into an agreement with Hambrecht & Quist LLC that we will not
offer, sell or otherwise dispose of our common stock until 180 days offer the
effective date of this offering.
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<PAGE> 71
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement, the
underwriters named below, acting through their representatives, Hambrecht &
Quist LLC, BancBoston Robertson Stephens Inc., Salomon Smith Barney Inc. and
Jefferies & Company Inc., have severally agreed to purchase from us the
following respective number of shares of our common stock:
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES
---- ----------------
<S> <C>
Hambrecht & Quist LLC.......................................
BancBoston Robertson Stephens Inc...........................
Salomon Smith Barney Inc....................................
Jefferies & Company Inc.....................................
--------
Total.............................................
========
</TABLE>
The underwriting agreement provides that the obligations of the
underwriters are subject to the conditions precedent, including the absence of
any material adverse change in our business and the receipt of certificates,
opinions and letters from us, our counsel and independent auditors. The nature
of the underwriters' obligation requires that they purchase all shares of common
stock offered if any shares are purchased.
The underwriters propose to offer the shares of common stock directly to
the public at the initial public offering price set forth on the cover page of
this prospectus and to certain dealers at such price less a concession not in
excess of $ per share. The underwriters may allow and such dealers may
reallow a concession not in excess of $ per share to certain other
dealers. After the initial public offering of the shares, the offering price and
other selling terms may be changed by the underwriters. We have been advised by
the representatives that the underwriters do not intend to confirm discretionary
sales in excess of seven percent of the shares of common stock offered by this
prospectus.
Messrs. Nespola and Peck and Behrman Capital, II L.P. and Strategic
Entreprenuer Fund II, L.P. have granted to the underwriters an option,
exercisable no later than 30 days after the date of the effective date of this
offering to purchase up to 692,250 additional shares of common stock at the
public offering price, less the underwriting discount, set forth on the cover
page of this prospectus. To the extent that the underwriters exercise this
option, each underwriter will have a firm commitment to purchase approximately
the same percentage thereof which the number of shares of common stock to be
purchased by it shown in the above table bears to the total number of shares of
common stock offered in this offering. The stockholders will be obligated to
sell shares to the underwriters to the extent the option is exercised. The
underwriters may exercise the option only to cover over-allotments made in
connection with the sale of common stock offered in this prospectus.
The following table shows the per share and total underwriting discounts
and commissions we will pay to the underwriters. These amounts are shown
assuming both no exercise and full exercise of the underwriters' over-allotment
option to purchase additional shares.
UNDERWRITING DISCOUNTS AND COMMISSION PAYABLE BY US
AND OUR STOCKHOLDERS
<TABLE>
<CAPTION>
WITHOUT WITH
OVER-ALLOTMENT OVER-ALLOTMENT
EXERCISE EXERCISE
-------------- --------------
<S> <C> <C>
Per Share................................................... $ $
Total....................................................... $ $
</TABLE>
We estimate that the total expenses of this offering, excluding
underwriting discounts and commissions, will be approximately $1.0 million.
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At our request, the underwriters will reserve up to 323,000 shares of
common stock to be issued by us and offered for sale, at the initial public
offering price, to directors, officers, employees, business associates and other
persons related to us. The number of shares of common stock available for sale
to the general public will be reduced to the extent that such individuals
purchase all or a portion of these reserved shares. Any reserved shares which
are not purchased will be offered by the underwriters to the general public.
The underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
The offering of the shares is made for delivery when, as and if accepted by
the underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
TMNG and the stockholders who have granted the underwriters an
over-allotment option have agreed to indemnify the underwriters against
liabilities connected to this offering, including liabilities under the
Securities Act, and to contribute to payments the underwriters may be required
to make in respect thereof.
Each of our executive officers, directors, stockholders and optionholders
has agreed that they will not, without the prior written consent of Hambrecht &
Quist LLC, offer to sell, contract to sell or otherwise sell, dispose of, loan,
pledge or grant any rights with respect to any shares of common stock, any
options or warrants to purchase any shares of common stock or any securities
convertible into or exchangeable for shares of common stock owned by them as of
the date of this prospectus or thereafter acquired directly by such holders or
with respect to which they have or hereafter acquire the power of disposition,
until the date 180 days following the date of this prospectus.
In addition, we have agreed that we will not, without the prior written
consent of Hambrecht & Quist LLC, offer, sell or otherwise dispose of any shares
of common stock, options or warrants to acquire shares of common stock or
securities exchangeable for or convertible into shares of common stock until the
date 180 days following the date of this prospectus, except that we may issues
shares upon the exercise of options granted prior to the date hereof, and may
grant additional options under our stock option plans, provided that without the
prior written consent of Hambrecht & Quist LLC the additional options shall not
be exercisable during such period.
Prior to this offering, there has been no public market for our shares. The
initial public offering price has been negotiated among or company and the
underwriters. Among the factors to be considered in determining the initial
public offering price of the shares, in addition to prevailing market
conditions, will be our historical performance, estimates of our business
potential and earnings, prospects, an assessment of management and the
consideration of the above factors in relation to market valuation of companies
in related businesses.
We have applied to have our common stock quoted on the Nasdaq National
Market under the symbol TMNG.
Netroadshow Inc., a division of Yahoo!, was utilized in connection with
this offering. Netroadshow is a provider of electronic roadshow presentations
that take the place of institutional one on one meetings. Netroadshow is not
involved in the distribution of the shares of common stock in this offering.
The representatives may over-allot or effect transactions which stabilize,
maintain or otherwise affect the market price of the common stock at levels
above those which might otherwise prevail in the open market, including by
entering stabilizing bids, effecting syndicate covering transactions or imposing
penalty bids. A stabilizing bid means the placing of any bid or effecting of any
purchase, for the purpose of pegging, fixing or maintaining the price of the
common stock. A syndicate
71
<PAGE> 73
covering transaction means the placing of any bid on behalf of the underwriting
syndicate or the effecting of any purchase to reduce a short position created in
connection with the offering. A penalty bid means an arrangement that permits
the underwriters to reclaim a selling concession from a syndicate member in
connection with the offering when shares of common stock sold by the syndicate
member are purchased in syndicate covering transactions. These activities by the
underwriters may stabilize, maintain or otherwise affect the market price of the
common stock. As a result, the price of the common stock may be higher than the
price that otherwise might exist in the open market. Such transactions may be
effected on the Nasdaq National Market, in the over-the-counter market, or
otherwise. Stabilizing, if commenced, may be discontinued at any time.
A prospectus in electronic format is being made available on a web site
maintained by Hambrecht & Quist LLC. In addition, some broker-dealers may choose
to make the prospectus in electronic format available on web sites maintained by
them.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us
by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California. Certain legal matters in connection with this offering will be
passed upon for the underwriters by Morrison & Foerster LLP, San Francisco,
California. As of October 2, 1999, a certain investment partnership and members
of Wilson Sonsini Goodrich & Rosati, Professional Corporation, beneficially
owned an aggregate of 37,500 shares of our common stock. Mario M. Rosati, one of
our directors, and Christopher D. Mitchell, our secretary, are members of Wilson
Sonsini Goodrich & Rosati.
EXPERTS
The financial statements as of December 31, 1997, and January 2, 1999 and
for each of the three fiscal years in the period ended January 2, 1999 included
in this prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing herein (which report expresses an
unqualified opinion and includes an explanatory paragraph referring to the
Company's retroactive change in its method of accounting for stock based
compensation to non-employees) and have been so included in reliance upon the
report of such firm given upon their authority as experts in accounting and
auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC in Washington, D.C. a Registration Statement on
Form S-1 under the Securities Act with respect to the common stock offered in
this prospectus. This prospectus, filed as part of the registration statement,
does not contain all of the information set forth in the registration statement
and its exhibits and schedules, portions of which have been omitted as permitted
by the rules and regulations of the SEC. For further information about us and
the common stock, we refer you to the registration statement and to its exhibits
and schedules. Statements in this prospectus about the contents of any contract,
agreement or other document are not necessarily complete and, in each instance,
we refer you to the copy of such contract, agreement or document filed as an
exhibit to the registration statement, and each such statement being qualified
in all respects by reference to the document to which it refers. Anyone may
inspect the registration statement and its exhibits and schedules without charge
at the public reference facilities the SEC maintains at 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the regional offices of the SEC located at 7 World
Trade Center, Suite 1300, New York, New York 10048 and 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Please call the SEC at 1-800-SEC-0330 for
further information about the public reference rooms. You may obtain copies of
all or any part of these materials from the SEC upon payment to the SEC of
prescribed fees. You may also inspect
72
<PAGE> 74
these reports and other information without charge at a web site maintained by
the SEC. The address of this site is http://www.sec.gov.
Upon completion of this offering we will become subject to the
informational requirements of the Exchange Act and, in accordance therewith,
file reports, proxy statements and other information with the SEC. You will be
able to inspect and copy these reports, proxy statements and other information
at the public reference facilities maintained by the SEC and at the SEC's
regional offices at the addresses noted above. You also will be able to obtain
copies of this material from the Public Reference Section of the SEC as
described above, or inspect them without charge at the SEC's web site. We have
applied to have our common stock quoted on the Nasdaq National Market. Upon
completion of this offering, you will be able to inspect reports, proxy and
information statements and other information concerning us at the National
Association of Securities Dealers, Inc. at 1735 K Street, N.W., Washington, D.C.
2006.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO
BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE
PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF
THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS
PROSPECTUS OR OF ANY SALE OF THE COMMON STOCK.
73
<PAGE> 75
THE MANAGEMENT NETWORK GROUP, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Income and Comprehensive
Income.................................................... F-4
Consolidated Statements of Stockholders' Equity (Deficiency
in Assets)................................................ F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 76
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
The Management Network Group, Inc.
Overland Park, Kansas
We have audited the accompanying consolidated balance sheets of The
Management Network Group, Inc. and subsidiaries (the "Company") as of January 2,
1999 and December 31, 1997 and the related consolidated statements of income and
comprehensive income, stockholders' equity (deficiency in assets) and cash flows
for the years ended January 2, 1999, December 31, 1997 and 1996. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of January 2,
1999 and December 31, 1997, and the results of their operations and their cash
flows for the years ended January 2, 1999, December 31, 1997 and 1996 in
conformity with generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, the
Company retroactively changed its method of accounting for stock based
compensation to non-employees.
DELOITTE & TOUCHE LLP
Kansas City, Missouri
September 17, 1999 (except with
respect to matters discussed
in Note 13, as to which the
date is November 8, 1999)
F-2
<PAGE> 77
THE MANAGEMENT NETWORK GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, JANUARY 2, OCTOBER 2,
1997 1999 1999
------------ ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash........................................................ $ 222 $ 959 $ 1,461
Receivables:
Accounts receivable..................................... 4,206 5,993 7,624
Accounts receivable -- unbilled......................... 1,103 3,251 5,232
------ -------- --------
5,309 9,244 12,856
Less: Allowance for doubtful accounts................... (68) (120) (302)
------ -------- --------
5,241 9,124 12,554
Other assets.............................................. 51 600
------ -------- --------
Total current assets............................... 5,463 10,134 14,615
------ -------- --------
DEFERRED FINANCING COSTS, net............................... 447 361
PROPERTY AND EQUIPMENT, net................................. 425 721
DEFERRED TAX ASSET.......................................... 666
ADVANCES TO RELATED PARTY................................... 201
Less: Allowance for uncollectible advances.............. (181)
------ -------- --------
20 1,748
------ -------- --------
TOTAL ASSETS....................................... $5,483 $ 11,006 $ 16,363
====== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS)
CURRENT LIABILITIES:
Long-term debt -- current portion......................... $ 1,300 $ 2,688
Bank overdraft............................................ 436
Trade accounts payable.................................... $ 134 959 1,073
Trade accounts payable -- related party................... 565 332
Accrued payroll, bonuses and related expenses............. 664 2,012
Accrued interest payable.................................. 440 217
Other accrued liabilities................................. 75 176 1,076
Income taxes payable...................................... 52 127
Deferred taxes............................................ 186 33
------ -------- --------
Total current liabilities.......................... 774 4,109 7,662
LONG-TERM DEBT.............................................. 24,717 20,655
DEFERRED TAXES.............................................. 451
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS)
Common stock:
Voting -- $.0006 par value, 7,500,000 shares authorized;
4,500,000 shares issued and outstanding in 1997; no par,
30,000,000 shares authorized; 22,500,000 shares issued
and outstanding in 1998; $.001 par value, 50,000,000
shares authorized; 22,571,201 shares issued and
outstanding on October 2, 1999.......................... 3 18,631 23
Non-voting -- no par, 22,500,000 shares authorized;
18,000,000 shares issued and outstanding in 1997........ 11
Preferred stock -- $.001 par value, 10,000,000 shares
authorized; no shares issued or outstanding...............
Additional paid-in capital.................................. 399 26,426
Retained earnings (deficit)................................. 4,468 (36,599) (33,160)
Accumulated other comprehensive income --
Foreign currency translation adjustment................... (1) 2 (10)
Unearned compensation....................................... (305) (5,233)
Less: stockholders' notes receivable........................ (171)
------ -------- --------
Total stockholders' equity (deficiency in assets)........... 4,709 (18,271) (11,954)
------ -------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY IN
ASSETS)................................................... $5,483 $ 11,006 $ 16,363
====== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 78
THE MANAGEMENT NETWORK GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
---------------------------------------- -------------------------
DECEMBER 31, DECEMBER 31, JANUARY 2, OCTOBER 3, OCTOBER 2,
1996 1997 1999 1998 1999
------------ ------------ ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES.................................... $17,279 $20,184 $32,103 $21,471 $36,968
COST OF SERVICES:
Direct cost of services................... 9,648 11,384 17,411 11,611 19,178
Equity related charges.................... 239 14 1,778
------- ------- ------- ------- -------
Total cost of services............. 9,648 11,384 17,650 11,625 20,956
------- ------- ------- ------- -------
GROSS PROFIT................................ 7,631 8,800 14,453 9,846 16,012
OPERATING EXPENSES:
Selling, general and administrative....... 2,798 3,280 6,158 4,003 7,479
Equity related charges.................... 22 1 946
------- ------- ------- ------- -------
Total operating expenses........... 2,798 3,280 6,180 4,004 8,425
------- ------- ------- ------- -------
INCOME FROM OPERATIONS...................... 4,833 5,520 8,273 5,842 7,587
OTHER INCOME (EXPENSE):
Interest income........................... 16 6 18 17 3
Interest expense.......................... (136) (30) (2,054) (1,494) (1,653)
Other, net................................ 8 88 87 (61)
------- ------- ------- ------- -------
Total other expense................ (120) (16) (1,948) (1,390) (1,711)
------- ------- ------- ------- -------
INCOME BEFORE PROVISION FOR INCOME TAXES.... 4,713 5,504 6,325 4,452 5,876
PROVISION FOR INCOME TAXES.................. 3,282 2,576 2,437
------- ------- ------- ------- -------
NET INCOME.................................. 4,713 5,504 3,043 1,876 3,439
OTHER COMPREHENSIVE INCOME --
Foreign currency translation adjustment... (1) 3 (2) (12)
------- ------- ------- ------- -------
COMPREHENSIVE INCOME........................ $ 4,713 $ 5,503 $ 3,046 $ 1,874 $ 3,427
======= ======= ======= ======= =======
NET INCOME PER COMMON SHARE
Basic..................................... $ 0.21 $ 0.24 $ 0.14 $ 0.08 $ 0.15
======= ======= ======= ======= =======
Diluted................................... $ 0.21 $ 0.24 $ 0.13 $ 0.08 $ 0.14
======= ======= ======= ======= =======
SHARES USED IN CALCULATION OF NET INCOME AND
PRO FORMA NET INCOME PER COMMON SHARE
Basic..................................... 22,500 22,500 22,500 22,500 22,532
======= ======= ======= ======= =======
Diluted................................... 22,500 22,500 22,944 22,790 23,880
======= ======= ======= ======= =======
PRO FORMA INFORMATION (UNAUDITED)
Pro forma provision for income taxes...... $ 1,885 $ 2,202 $ 2,530 $ 1,780
======= ======= ======= =======
Pro forma net income...................... $ 2,828 $ 3,302 $ 3,795 $ 2,670
======= ======= ======= =======
PRO FORMA NET INCOME PER COMMON SHARE
(UNAUDITED)
Basic..................................... $ 0.13 $ 0.15 $ 0.17 $ 0.12
======= ======= ======= =======
Diluted................................... $ 0.13 $ 0.15 $ 0.17 $ 0.12
======= ======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 79
THE MANAGEMENT NETWORK GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS)
(IN THOUSANDS, EXCEPT SHARE DATA)
(INFORMATION FOR THE NINE MONTHS ENDED OCTOBER 2, 1999 IS UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK
$.0006 PAR 1996 AND
1997; NO PAR
COMMENCING COMMON STOCK
FEBRUARY 12, 1998, $.0006 PAR 1996 AND
$.001 PAR 1997; NO PAR
COMMENCING COMMENCING
AUGUST 27, 1999 FEBRUARY 12, 1998 ACCUMULATED
VOTING NON-VOTING ADDITIONAL RETAINED OTHER
--------------------- -------------------- PAID-IN EARNINGS COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) INCOME (LOSSES)
----------- ------- ----------- ------ ---------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996......... 4,500,000 $ 3 18,000,000 $ 11 $ 124 $ 2,946
Treasury stock sales............. 275
Distributions................... (6,095)
Repayments on stockholders'
notes receivable..............
Net income...................... 4,713
----------- ------- ----------- ---- ------- -------- ----
BALANCE, DECEMBER 31, 1996....... 4,500,000 3 18,000,000 11 399 1,564
Distributions................... (2,600)
Other comprehensive
income -- Foreign currency
translation adjustment........ $ (1)
Repayments on stockholders'
notes receivable..............
Net income...................... 5,504
----------- ------- ----------- ---- ------- -------- ----
BALANCE, DECEMBER 31, 1997....... 4,500,000 3 18,000,000 11 399 4,468 (1)
Distributions................... (4,664)
Other comprehensive
income -- Foreign currency
translation adjustment........ 3
Repayments on stockholders'
notes receivable..............
Conversion of non-voting stock
to voting stock............... 18,000,000 11 (18,000,000) (11)
Issuance of common stock, net of
offering costs of $3,061...... 13,500,000 16,939
Repurchase and cancellation of
treasury stock................ (13,500,000) (38,733)
Constructive distribution
assumed to be reinvested...... 713 (713)
Adjustment to reflect change in
par value..................... 18,051 (18,051)
Issuance of options............. 305
Stock compensation.............. 261
Net income...................... 3,043
----------- ------- ----------- ---- ------- -------- ----
BALANCE, JANUARY 2, 1999......... 22,500,000 18,631 (36,599) 2
Issuance of options
(UNAUDITED)..................... 6,133
Stock compensation (UNAUDITED)... 1,077
Other comprehensive
income -- Foreign currency
translation adjustment
(UNAUDITED)..................... (12)
Issuance of common stock
(UNAUDITED)..................... 71,201 608
Adjustment to reflect change in
par value (UNAUDITED)........... (18,608) 18,608
Net income (UNAUDITED)........... 3,439
----------- ------- ----------- ---- ------- -------- ----
BALANCE, OCTOBER 2, 1999
(UNAUDITED)..................... 22,571,201 $ 23 $26,426 $(33,160) $(10)
=========== ======= =========== ==== ======= ======== ====
<CAPTION>
NON-VOTING
COMMON STOCK
HELD IN
STOCKHOLDERS' TREASURY
UNEARNED NOTES ---------------
COMPENSATION RECEIVABLE SHARES AMOUNT TOTAL
------------ ------------- ------ ------ --------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996......... 4,500 $(275) $ 2,809
Treasury stock sales............. $(500) (4,500) 275 50
Distributions................... (6,095)
Repayments on stockholders'
notes receivable.............. 267 267
Net income...................... 4,713
------- ----- ------ ----- --------
BALANCE, DECEMBER 31, 1996....... (233) 1,744
Distributions................... (2,600)
Other comprehensive
income -- Foreign currency
translation adjustment........ (1)
Repayments on stockholders'
notes receivable.............. 62 62
Net income...................... 5,504
------- ----- ------ ----- --------
BALANCE, DECEMBER 31, 1997....... (171) 4,709
Distributions................... (4,664)
Other comprehensive
income -- Foreign currency
translation adjustment........ 3
Repayments on stockholders'
notes receivable.............. 171 171
Conversion of non-voting stock
to voting stock...............
Issuance of common stock, net of
offering costs of $3,061...... 16,939
Repurchase and cancellation of
treasury stock................ (38,733)
Constructive distribution
assumed to be reinvested......
Adjustment to reflect change in
par value.....................
Issuance of options............. (305)
Stock compensation.............. 261
Net income...................... 3,043
------- ----- ------ ----- --------
BALANCE, JANUARY 2, 1999......... (305) (18,271)
Issuance of options
(UNAUDITED)..................... (6,133)
Stock compensation (UNAUDITED)... 1,205 2,282
Other comprehensive
income -- Foreign currency
translation adjustment
(UNAUDITED)..................... (12)
Issuance of common stock
(UNAUDITED)..................... 608
Adjustment to reflect change in
par value (UNAUDITED)...........
Net income (UNAUDITED)........... 3,439
------- ----- ------ ----- --------
BALANCE, OCTOBER 2, 1999
(UNAUDITED)..................... $(5,233) $(11,954)
======= ===== ====== ===== ========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 80
THE MANAGEMENT NETWORK GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
---------------------------------------- -------------------------
DECEMBER 31, DECEMBER 31, JANUARY 2, OCTOBER 3, OCTOBER 2,
1996 1997 1999 1998 1999
------------ ------------ ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income..................................... $ 4,713 $ 5,504 $ 3,043 $ 1,876 $ 3,439
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization.............. 136 82 195
Stock option and bonus share
compensation............................. 261 2,724
Provision for deferred income taxes........ 637 791 (1,270)
Provision for uncollectible advances to
related party............................ 181 (181) (89)
Changes in:
Accounts receivable...................... 152 (1,727) (1,735) (5,676) (1,449)
Accounts receivable -- unbilled.......... (828) 374 (2,148) 1,068 (1,981)
Income tax payable....................... 1,797 12
Other current assets..................... (51) (4) (486)
Related party receivables................ (26) (175) 201 75 --
Trade accounts payable................... (14) 129 825 1,340 114
Trade accounts payable -- related
party................................. (41) 291 (233) (565) (332)
Accrued liabilities...................... 48 26 1,257 954 2,026
Payables to related parties.............. 300 (300) -- --
------- ------- -------- -------- ---------
Net cash provided by operating
activities.......................... 4,304 4,303 2,012 1,649 2,992
------- ------- -------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES --
Acquisition of property and equipment........ (455) (253) (405)
------- ------- -------- -------- ---------
Net cash used in investing
activities.......................... (455) (253) (405)
------- ------- -------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to shareholders................ (4,695) (4,000) (4,664) (4,664) --
Bank overdraft............................... 436
Proceeds from long-term debt................. 24,000 24,000
Net borrowings under revolving credit
facility................................... 2,017 1,919 (1,699)
Deferred financing costs..................... (553) (553)
Issuance of common stock, net of expenses.... 16,939 16,939 168
Payments received on stockholders' note
receivable................................. 267 62 171 171
Payments made on long-term debt.............. (975)
Payments made on notes payable -- related
party...................................... (300) (350)
Issuance of notes payable -- related party... 350
Sale of treasury stock....................... 50
Purchase of treasury stock................... (38,733) (38,733)
------- ------- -------- -------- ---------
Net cash used in financing
activities.......................... (4,328) (4,288) (823) (921) (2,070)
------- ------- -------- -------- ---------
EFFECT OF EXCHANGE RATE ON CASH................ (1) 3 (2) (15)
------- ------- -------- -------- ---------
NET INCREASE (DECREASE) IN CASH................ (24) 14 737 473 502
CASH, Beginning of period...................... 232 208 222 222 959
------- ------- -------- -------- ---------
CASH, End of period............................ $ 208 $ 222 $ 959 $ 695 $ 1,461
======= ======= ======== ======== =========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid during period for interest......... $ 88 $ 79 $ 1,517 $ 1,417 $ 1,790
======= ======= ======== ======== =========
Cash paid during period for taxes............ $ $ $ 2,581 $ 43 $ 3,695
======= ======= ======== ======== =========
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING TRANSACTIONS --
Sale of treasury stock in exchange for
stockholders' note receivable.............. $ 500 $ $ $ $
======= ======= ======== ======== =========
Reinvested constructive distribution
resulting from conversion to subchapter C
corporation................................ $ $ $ 713 $ 713 $
======= ======= ======== ======== =========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 81
THE MANAGEMENT NETWORK GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE NINE MONTHS ENDED OCTOBER 3, 1998 AND OCTOBER 2, 1999 IS
UNAUDITED)
1. ORGANIZATION
NATURE OF OPERATIONS -- The Management Network Group, Inc. ("TMNG" or the
"Company") was formed on April 1, 1993 as a management consulting firm
specializing in global competitive telecommunications. Primary services include
serving wireless and wireline communications carriers in all industry segments,
and the technology and investment firms that support the telecommunications
industry. A majority of the Company's revenues are to customers in the United
States, however the Company also provides services to customers in the United
Kingdom, Canada, Australia and other foreign countries. The Company's business
is international in scope with corporate offices in Kansas City.
RECAPITALIZATION -- On February 12, 1998, TMNG entered into a series of
transactions that resulted in a leveraged recapitalization (the
"recapitalization") of the Company. Prior to the recapitalization, the Company
made distributions totaling approximately $4.7 million to its stockholders and
all stockholders' notes receivable were paid off. The recapitalization included
the following transactions:
- All authorized non-voting common stock was converted to voting common
stock and the Company declared a 3,272.73-for-one stock split resulting
in total authorized shares of 30 million with 22.5 million issued and
outstanding. In connection with this stock split, the Company changed its
par common stock to no par common stock. All historical share data has
been retroactively restated for the effect of the stock split.
- Behrman Capital II, LP ("Behrman") organized Behrman Capital TMNG, Inc.
("NEWCO") with contributed capital of $20.0 million and Behrman owning
100% of NEWCO capital stock. NEWCO was formed as a transitory corporation
solely for the purpose of effecting the recapitalization and has not
carried on any activities to date other than those incident to its
formation and the recapitalization.
- Behrman exchanged 100% of its NEWCO stock for 13.5 million newly issued
shares of TMNG common stock. NEWCO was then merged with and into TMNG
with TMNG as the surviving corporation, at which time TMNG changed its
income tax status to a subchapter "C" corporation from an subchapter "S"
corporation. Offering costs of approximately $3.1 million were charged
against additional paid-in capital at the time of the merger.
- TMNG entered into a senior bank credit facility that provided $24.0
million in term loans and a $5.0 million revolving credit facility from a
syndicate of banks. TMNG utilized the funds provided by the credit
facility and the proceeds from the merger with NEWCO to acquire 13.5
million shares of common stock from existing stockholders (as of December
31, 1997) for an aggregate cost of approximately $38.7 million. Such
treasury shares were then retired. The costs to enter into the credit
facility of approximately $500,000, were capitalized.
The Company accounted for this series of transactions as a financial
restructuring/ recapitalization requiring continuation of the historical cost
basis.
PRINCIPLES OF CONSOLIDATION -- The consolidated statements include the
accounts of TMNG and its wholly-owned subsidiaries, The Management Network Group
Europe Ltd. ("TMNG-Europe"), formed on March 19, 1997, based in the United
Kingdom, The Management Network Group Canada Ltd. ("TMNG-Canada"), formed on May
14, 1998, based in Toronto, Canada and TMNG.com, Inc., formed in June 1999. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
F-7
<PAGE> 82
THE MANAGEMENT NETWORK GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED OCTOBER 3, 1998 AND OCTOBER 2, 1999 IS
UNAUDITED)
FISCAL YEAR -- Effective January 1, 1998, the Company adopted a 52/53 week
fiscal year, changing the year end date from December 31, to the Saturday
nearest December 31. The fiscal year ended January 2, 1999 had 52 weeks and is
referred to herein as fiscal year 1998. All references herein for fiscal years
1997 and 1996 represent the years ended December 31, 1997 and December 31, 1996,
respectively. TMNG-Europe and TMNG-Canada maintain year end dates of December
31.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONTRACTS -- The Company enters into both time and materials and fixed
price contracts with its customers. A substantial majority of TMNG's contracts
are based upon time and materials with a not to exceed total contract price.
Under a time and materials contract the customer pays a negotiated daily rate
for all services performed plus expenses incurred. Under a fixed price contract
the customer pays a predetermined fixed price for all services performed
regardless of the professional time required. Fixed price contracts generally
involve immaterial amounts and are of short duration.
Prior to January 3, 1999 TMNG subcontracted with several companies (five of
which were related parties to TMNG through certain common ownership or are owned
by employees of TMNG) to provide consultants acting as independent contractors
to render the services required under the customer contracts. These subcontracts
were on a time and materials basis, contained confidentiality/noncompete
provisions and could be terminated by either party on 30 days prior notice.
REVENUE RECOGNITION -- Time and materials service revenues and related time
and materials service costs are recorded in the period in which the service is
performed. Fixed price service contract revenues and related costs are
recognized upon contract completion under the completed contract method.
CASH -- Cash includes cash on hand and cash in bank and is stated at cost,
which approximates market.
PROPERTY AND EQUIPMENT -- Property and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation is based on the
estimated useful lives of the assets and is computed using the straight-line
method. Asset lives range from three to seven years for computers and equipment.
Leasehold improvements are capitalized and amortized over the life of the lease.
Maintenance and repairs are charged to expense as incurred. The cost and
accumulated depreciation applicable to assets retired are removed from the
accounts and the gain or loss on disposition is recognized in income.
INTANGIBLE ASSETS -- Deferred financing costs are capitalized and amortized
over the term of the related credit facility using the straight-line method
which approximates the effective interest rate method. Accumulated amortization
was approximately $106,000 at January 2, 1999.
LONG-LIVED ASSETS -- The Company, using its best estimates based on
reasonable and supportable assumptions and projections, reviews for impairment
long-lived assets and certain identifiable intangibles to be held and used
whenever events or changes in circumstances indicate that the carrying amount of
its assets might not be recoverable when compared to an estimate of future
undiscounted net cash flows expected to result from the use of these assets.
Management has concluded no financial statement adjustment is currently
required.
F-8
<PAGE> 83
THE MANAGEMENT NETWORK GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED OCTOBER 3, 1998 AND OCTOBER 2, 1999 IS
UNAUDITED)
ADVERTISING COSTS -- Advertising costs are expensed as incurred.
Advertising expense charged to operations totaled approximately $57,000,
$115,000, and $101,000 for 1996, 1997, fiscal year 1998, respectively.
INCOME TAXES -- As described in Note 1, the Company converted to a
subchapter "C" corporation for income tax reporting purposes effective February
12, 1998. Deferred tax liabilities of approximately $1.1 million were recorded
on February 12, 1998, in conjunction with the conversion, for the cumulative
temporary differences (see Note 7). The Company recognizes a liability or asset
for the deferred tax consequences of temporary differences between the tax basis
of assets or liabilities and their reported amounts in the financial statements.
A valuation allowance is provided when, in the opinion of management, it is more
likely than not that some portion or all of a deferred tax asset will not be
realized.
Prior to February 12, 1998, the Company elected to be treated as a
subchapter "S" corporation under the Internal Revenue Code and thus was treated
substantially as a partnership for income tax purposes. Accordingly, until the
time of conversion to a subchapter "C" corporation, the individual stockholders
were responsible for their proportionate share of the corporate taxable income
or loss for federal and state income tax reporting purposes.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
FOREIGN CURRENCY TRANSACTIONS AND TRANSLATION -- The 1997 and fiscal year
1998 consolidated financial statements include TMNG -- Europe (located in the
United Kingdom). The fiscal year 1998 consolidated financial statements also
include TMNG -- Canada. Both entities conduct business primarily denominated in
their respective local currency. Assets and liabilities have been translated to
U.S. dollars at the period-end exchange rate. Income and expenses have been
translated at exchange rates which approximate the average of the rates
prevailing during each period. Translation adjustments are reported as a
separate component of other comprehensive income in the consolidated statements
of stockholders' equity. Realized and unrealized exchange gains and losses
included in results of operations were insignificant for all periods presented.
STOCK-BASED COMPENSATION -- The Company accounts for stock based
compensation for employees in accordance with the provisions of Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees" and related Interpretations and for stock-based compensation for
non-employees in accordance with Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation."
In connection with the planned registration of the Company's common stock
with the Securities and Exchange Commission, the Company has retroactively
adopted a new method of accounting for stock based compensation issued to
certain non-employees. The Company has recognized compensation expense based on
the fair market value of the options in accordance with EITF 96-18. Previously,
the Company accounted for such options under the provisions of APB No. 25, and
accordingly, did not recognize any expense. The accompanying 1998 consolidated
financial statements have been restated for this accounting change.
NET INCOME PER SHARE -- Basic net income per share is computed by dividing
net income by the weighted average number of common shares outstanding for the
period. Diluted earnings per share reflects the potential dilution of securities
by adding other common stock equivalents, including
F-9
<PAGE> 84
THE MANAGEMENT NETWORK GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED OCTOBER 3, 1998 AND OCTOBER 2, 1999 IS
UNAUDITED)
stock options, in the weighted average number of common shares outstanding for a
period, if dilutive.
DERIVATIVE FINANCIAL INSTRUMENTS -- The Company enters into interest rate
caps to manage exposure to interest rate volatility. The Company does not enter
into derivative financial instruments for speculative or trading purposes. The
costs of interest rate cap agreements are included in interest expense ratably
over the lives of the agreements. Payments to be received as a result of the cap
agreements are recorded as a reduction of interest expense.
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS -- The Company recently adopted
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information." SFAS No. 131 establishes standards for reporting information about
operating segments, products and services, geographic areas and major customers.
NEW ACCOUNTING STANDARDS -- The FASB recently issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 was
amended by SFAS no. 137 which requires adoption of the SFAS requirements for
fiscal years beginning after June 15, 2000. This standard establishes accounting
and reporting requirements for derivative financial instruments and hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. In the opinion of management, the effect of adoption
of this standard will not have a material impact to operating results of the
Company.
PRO FORMA INFORMATION -- Pro forma information included in the consolidated
statements of income and comprehensive income is unaudited and included to
reflect the pro forma effect of providing income taxes on previously untaxed
subchapter "S" net income. This effect is calculated as follows:
Pro forma income tax expense -- assumed 40% effective tax rate.
Pro forma basic and diluted common shares -- include the effect of
common share issuance and stock option exercise in accordance with SFAS
No. 128, "Earnings per Share."
FAIR VALUE OF FINANCIAL INSTRUMENTS -- The fair values of asset and
liability financial instruments approximate the carrying values.
RECLASSIFICATIONS -- Certain prior period financial statement balances have
been reclassified to conform to the current period presentation.
3. MAJOR CUSTOMERS AND SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
Major customers in terms of significance to TMNG's revenues (i.e. in excess
of 10% of revenues) for the years ended December 31, 1996 and 1997 and fiscal
year 1998 and accounts receivable as of December 31, 1997 and January 2, 1999
are as follows (amounts in thousands):
<TABLE>
<CAPTION>
AMOUNT OF REVENUES ACCOUNTS RECEIVABLE
------------------------------- --------------------------
FISCAL YEAR DECEMBER 31, JANUARY 2,
1996 1997 1998 1997 1999
------ ------ ----------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Customer A................... $1,700 $7,928 $1,504
Customer B................... 2,639 2,524 113
Customer C................... 3,839
Customer D................... $4,138 $1,121
Customer E................... 4,093 2,354
Customer F................... 5,412 1,440
</TABLE>
F-10
<PAGE> 85
THE MANAGEMENT NETWORK GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED OCTOBER 3, 1998 AND OCTOBER 2, 1999 IS
UNAUDITED)
All of TMNG's receivables are obligations of companies in the
telecommunications industry. The Company generally does not require collateral
or other security on their accounts receivable. The credit risk on these
accounts is controlled through credit approvals, limits and monitoring
procedures.
A non-executive member of the TMNG board of directors also serves as a
non-executive director of Customer F.
Service revenues earned outside the United States for the years ended
December 31, 1996 and 1997 were not significant. Revenues earned in the United
States and internationally based on domiciles of project owner for fiscal year
1998 are as follows: (amounts in thousands):
<TABLE>
<CAPTION>
INCOME
BEFORE
AMOUNT OF INCOME
REVENUES TAXES
----------- -----------
FISCAL YEAR FISCAL YEAR
1998 1998
----------- -----------
<S> <C> <C>
United States............................................... $26,914 $5,336
International:
Switzerland............................................... 758 150
Canada.................................................... 3,541 697
Other..................................................... 890 142
------- ------
Total............................................. $32,103 $6,325
======= ======
</TABLE>
No long-lived assets are deployed outside the United States.
TMNG currently operates in one segment, consulting to the
telecommunications industry, based on the way management makes decisions,
allocates resources and assesses performance.
4. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
JANUARY 2,
1999
----------
(000'S)
<S> <C>
Furniture and fixtures...................................... $ 69
Software and computer equipment............................. 256
Leasehold improvements...................................... 130
----
455
Less: accumulated depreciation and amortization............. 30
----
$425
====
</TABLE>
Depreciation expense was approximately $30,000 for fiscal year 1998.
5. LONG-TERM DEBT
<TABLE>
<CAPTION>
JANUARY 2,
1999
----------
(000'S)
<S> <C>
Term loans.................................................. $24,000
Revolving credit facility................................... 2,017
-------
26,017
Less long-term debt -- current portion...................... 1,300
-------
$24,717
=======
</TABLE>
F-11
<PAGE> 86
THE MANAGEMENT NETWORK GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED OCTOBER 3, 1998 AND OCTOBER 2, 1999 IS
UNAUDITED)
As of January 2, 1999, the Company had a $29.0 million secured credit
facility, as amended, with substantially all assets of the Company pledged as
collateral. The $29.0 million credit facility, which expires through December
2003, includes two $12.0 million term loans and a $5.0 million revolving credit
facility. Borrowings against the revolving credit facility are limited to 85% of
eligible accounts receivable as defined in the credit facility agreement.
Interest is payable quarterly as follows:
<TABLE>
<CAPTION>
INTEREST MARGIN
RATE BASE RANGE
--------- -------------
<S> <C> <C>
Term loan A (7.94% at January 2, 1999)..................... LIBOR 2.00% - 2.75%
Term loan B (8.19% at January 2, 1999)..................... LIBOR 2.50% - 3.00%
Revolving credit facility.................................. LIBOR 2.00% - 2.75%
</TABLE>
The weighted average interest rate for the revolving line of credit was
9.59% in fiscal year 1998.
The terms of the secured credit facility require the Company to maintain
certain financial ratios and observe additional restrictive covenants the most
restrictive of which preclude the payment of dividends and limit capital
expenditures. It is management's belief that the Company was in compliance with
all covenants as of January 2, 1999.
The fair value of long-term debt approximates the carrying value as of
January 2, 1999.
As of January 2, 1999, the future minimum principal payments on debt are as
follows (amounts in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR
-----------
<S> <C>
1999........................................................ $ 1,300
2000........................................................ 3,150
2001........................................................ 3,650
2002........................................................ 3,900
2003........................................................ 14,017
-------
$26,017
=======
</TABLE>
6. DERIVATIVE FINANCIAL INSTRUMENTS
As a requirement of the secured credit facility agreement, in March 1998
the Company purchased an interest rate cap agreement from a bank counterparty
with decreasing notional amounts in conjunction with specified debt principal
payments. The interest rate cap agreement was entered into to partially offset
the variable rate characteristics of $12.0 million in term loans. The notional
amount was $12.0 million as of January 2, 1999. The cap agreement was effective
March 13, 1998 and terminates on March 30, 2001. The agreement caps the floating
interest rate exposure on outstanding debt up to the notional amount of the
agreement at 8.1875%.
The Company believes its exposure to potential loss due to counterparty
nonperformance is minimized primarily due to the relatively strong credit
ratings of the bank counterparty and due to the size and diversity of the
counterparty bank. The interest rate agreement is subject to market risk to the
extent that market rates for similar instruments decrease and the Company
terminates the hedge prior to maturity.
F-12
<PAGE> 87
THE MANAGEMENT NETWORK GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED OCTOBER 3, 1998 AND OCTOBER 2, 1999 IS
UNAUDITED)
7. INCOME TAXES
For the fiscal year 1998, the income tax provision consists of the
following (amounts in thousands):
<TABLE>
<S> <C>
Federal
Current..................................................... $2,090
Deferred tax benefit...................................... (391)
------
1,699
State
Current................................................... 491
Deferred tax benefit...................................... (40)
------
451
Foreign..................................................... 64
------
2,214
Deferred recorded on conversion to subchapter "C"
corporation............................................... 1,068
------
Total..................................................... $3,282
======
</TABLE>
The following is a reconciliation between the provision for income taxes
and the amounts computed at the statutory federal income tax rate (amounts in
thousands):
<TABLE>
<CAPTION>
AMOUNT %
------ ----
<S> <C> <C>
Computed expected federal income tax expense................ $2,214 35.0
State income tax expense, net of federal benefit............ 285 4.5
Conversion to subchapter "C" corporation.................... 1,068 16.9
Subchapter "S" corporation earnings (January 1, 1998 to
February 11, 1998)........................................ (318) (5.0)
Other....................................................... 33 0.5
------ ----
Total..................................................... $3,282 51.9
====== ====
</TABLE>
Items giving rise to the provision for deferred income taxes (benefit)
excluding the deferred tax expense recorded on conversion to subchapter "C"
corporation (amounts in thousands):
<TABLE>
<S> <C>
Bad debt reserve............................................ $ (20)
Stock option compensation expense........................... (104)
Change from cash to accrual tax basis accounting............ (270)
Other....................................................... (37)
-----
Total............................................. $(431)
=====
</TABLE>
F-13
<PAGE> 88
THE MANAGEMENT NETWORK GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED OCTOBER 3, 1998 AND OCTOBER 2, 1999 IS
UNAUDITED)
The significant components of deferred income tax assets and liabilities
and the related balance sheet classifications, as of January 2, 1999 are as
follows (amounts in thousands):
<TABLE>
<S> <C>
Current deferred tax assets (liabilities):
Bad debt reserve.......................................... $ 46
Prepaid expenses.......................................... (19)
Accrued expenses.......................................... 57
Change from cash to accrual tax basis
accounting -- current portion.......................... (270)
-----
Net current deferred tax liability................ $(186)
=====
Non-current deferred tax assets (liabilities):
Change from cash to accrual tax basis accounting.......... $(540)
TMNG -- Europe -- cumulative net operating losses......... 134
Stock option compensation expense......................... 104
Other..................................................... (15)
-----
(317)
Valuation allowance....................................... (134)
-----
Net non-current deferred tax liability............ $(451)
=====
</TABLE>
A valuation allowance has been established for the Company's deferred
income tax asset related to the future benefit of net operating losses related
to TMNG -- Europe, as management cannot assess the likelihood that the future
tax benefit will be realized. An allowance of $134,000 has been recorded as of
January 2, 1999.
The Company has foreign net operating loss carryforwards totaling
approximately $447,000 at January 2, 1999. The utilization of such net operating
loss carryforwards is restricted to the earnings of specific foreign
subsidiaries.
8. OPERATING LEASES
The Company leases office facilities and certain automobiles under
non-cancelable operating leases expiring at various dates through August 2003.
Total rental expense was approximately $17,000, $27,000 and $40,000 for 1996,
1997 and fiscal 1998, respectively. As of January 2, 1999, the future minimum
payments under operating leases are as follows (amounts in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR
-----------
<S> <C>
1999........................................................ $ 76
2000........................................................ 59
2001........................................................ 53
2002........................................................ 54
2003........................................................ 38
----
$280
====
</TABLE>
9. STOCK OPTION PLAN
In 1998, 1,950,000 shares of the Company's Common Stock were authorized for
issuance under the Company's 1998 Equity Incentive Plan and 1998 Consultant
Equity Incentive Plan (the "Plans"). The Plans provide the Company's Common
Stock for the granting of incentive stock options and nonqualified stock options
to employees, and nonqualified stock options to employees, directors and
consultants. Incentive stock options are granted at an exercise price of not
less than
F-14
<PAGE> 89
THE MANAGEMENT NETWORK GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED OCTOBER 3, 1998 AND OCTOBER 2, 1999 IS
UNAUDITED)
fair value per share of the common stock on the date of grant as determined by
the board of directors. Vesting and exercise provisions are determined by the
board of directors. Options granted under the Plans generally become exercisable
over a three to four year period beginning on the date of grant. Options granted
under the Plans have a maximum term of ten years. Subsequent to January 2, 1999,
the Company combined both plans into the 1998 Equity Incentive Plan.
<TABLE>
<CAPTION>
WEIGHTED
WEIGHTED WEIGHTED AVERAGE
NUMBER AVERAGE AVERAGE FAIR REMAINING
OF EXERCISE VALUE AT DATE CONTRACTUAL
SHARES PRICE OF GRANT LIFE (YEARS)
------- -------- ------------- ------------
<S> <C> <C> <C> <C>
Exercise price equals fair market value:
Granted during the year............................ 889,750 $1.48 $1.48 9.50
Outstanding at January 2, 1999................... 889,750 $1.48 $1.48 9.50
Exercisable at January 2, 1999................... -- $ -- $ -- --
Exercise price less than fair market value:
Granted during the year.......................... 210,000 $1.52 $3.50 9.99
Outstanding at January 2, 1999................... 210,000 $1.52 $3.50 9.99
Exercisable at January 2, 1999................... -- $ -- $ -- --
</TABLE>
The Company applies APB Opinion No. 25 ("APB 25") and related
interpretations in accounting for its stock option grants to employees and
certain non-employees. Options granted prior to December 8, 1998 were issued at
fair value. Options granted subsequent to December 7, 1998 were issued at less
than fair value. In connection with APB 25 grants issued in fiscal year 1998,
the Company recorded unearned compensation of $305,000 representing the
difference between the exercise price and the fair value of the common stock on
the dates such stock options were granted. Such amount is being amortized by
charges to operations on a graded vesting method over the corresponding vesting
period of each respective option, generally three years. Compensation expense
for fiscal year 1998 was insignificant due to the short period the grants with
unearned compensation were outstanding.
The Company accounts for its stock option awards to independent contractors
and other non-employees in accordance with the fair value measurement provision
of SFAS No. 123. Consequently, the cost of these options are recognized in the
current and future reporting periods based on the fair value at the end of each
period. The fair value of each option grant during fiscal year 1998 was
estimated on the date of grant using the Black-Scholes option pricing model with
the following assumptions:
<TABLE>
<S> <C>
Expected volatility factor.................................. 55%
Risk-free interest rate..................................... 4.24% - 5.65%
Expected life............................................... 5 years
Expected dividend rate...................................... 0%
</TABLE>
The Company recognizes compensation cost over the vesting periods. These options
have resulted in equity related charges to operations of approximately $261,000
for fiscal year 1998. These expenses have been allocated among various expense
categories.
If compensation cost for the Company's APB 25 grants had been determined
based upon the fair value at the grant date, consistent with the Black-Scholes
option pricing methodology using the
F-15
<PAGE> 90
THE MANAGEMENT NETWORK GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED OCTOBER 3, 1998 AND OCTOBER 2, 1999 IS
UNAUDITED)
assumptions above, the Company's net income for fiscal year 1998 would have
decreased by approximately $66,000.
For purposes of pro forma disclosures, the estimated fair value of options
is amortized to pro forma expense over the options' vesting period. Pro forma
information for fiscal year 1998 (in thousands, except per share amounts):
<TABLE>
<S> <C>
Net Income:
As reported................................................. $3,043
======
Pro forma................................................. $2,977
======
Basic and diluted net income per share:
Basic..................................................... $ 0.14
======
Diluted................................................... $ 0.13
======
Basic and diluted pro forma net income per share:
Basic..................................................... $ 0.13
======
Diluted................................................... $ 0.13
======
</TABLE>
10. RELATED PARTY TRANSACTIONS
Two members of the TMNG board of directors are also directors of a customer
with which TMNG does business. During fiscal year 1998 the Company earned
revenues from this customer of approximately $330,000. Receivables from this
customer at January 2, 1999 were approximately $275,000. Additionally, venture
funds affiliated with TMNG's majority shareholder hold shares of preferred stock
of this customer that are convertible into approximately 25% of the customer's
outstanding common stock.
Through January 2, 1999 TMNG subcontracted with five companies owned by
certain stockholders and employees of TMNG. These companies provided consultants
(acting as independent contractors) to TMNG to render consulting services to
TMNG customers. Effective January 3, 1999, TMNG contracts directly with
consultants. Total services received from these companies was approximately $7.8
million, $9.6 million and $14.9 million in 1996, 1997 and fiscal 1998,
respectively, and are included in cost of services in the statements of income
representing the fair value of the services provided. Included in accounts
payable at December 31, 1997 and January 2, 1999 are balances due for such
services of approximately $565,000 and $332,000, respectively.
During 1996, 4,500,000 shares of treasury stock (non-voting) were purchased
by shareholders of the Company for cash of $50,000 and notes receivable of
$500,000. Such notes matured beginning January 1998 through April 1998 with
interest rates ranging from 5.2% to 7.0%. The outstanding balance on the notes
receivable at December 31, 1996 and 1997 are presented within stockholders'
equity as they represent receivables due from the sale of common stock. Included
in interest income is approximately $16,000, $6,000 and $7,000 in 1996, 1997 and
fiscal year 1998, respectively, related to these notes. As described in Note 1,
the notes were retired on February 12, 1998.
On February 10, 1996, the Company issued options to acquire 2.25 million
shares of non-voting common stock at an exercise price of $0.12 per share
(estimated fair value at date of grant). The options were to be exercised prior
to June 30, 1997. The options were exercised on June 29, 1996, and are included
in the aforementioned sale of treasury stock.
During 1996, 1997 and fiscal year 1998 TMNG made payments of approximately
$213,000, $200,000 and $77,000 respectively, to a company owned by a significant
stockholder of TMNG. In
F-16
<PAGE> 91
THE MANAGEMENT NETWORK GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED OCTOBER 3, 1998 AND OCTOBER 2, 1999 IS
UNAUDITED)
addition, TMNG made a payment of $100,000 in 1997 to a stockholder. Such
payments were for services rendered under consulting agreements between TMNG and
the respective affiliated company and/or shareholder. These expenses were
classified as selling, general and administrative in the accompanying statements
of income and comprehensive income.
During 1996 and 1997 TMNG incurred interest expense on notes and
distributions payable of approximately, $136,000 and $30,000, respectively, for
certain related parties. The interest rate applied was 7.0%.
11. CONTINGENCIES
During 1997, one of the Company's customers entered Chapter 11 of the
bankruptcy code. According to the bankruptcy code, certain payments made within
a specified period of time prior to the date of the bankruptcy filing and
payments made subsequent to the date of the bankruptcy filing which are not
previously authorized, could be declared "preference payments". Under certain
conditions, preference payments could be required to be remitted to the
bankruptcy trustee for satisfaction of general creditor claims. During 1998, the
bankruptcy trustee filed suit against the Company for preferential payments
received prior to and subsequent to the bankruptcy filing, and related damages
of approximately $1.9 million. The total amount of payments received from this
customer during the specified preference period aggregated approximately
$320,000 and which may be declared preference payments. In the opinion of
management, resolution of this legal action will not have a material adverse
effect on the Company's consolidated results of operations, cash flows or
financial position.
During 1997, the Company discovered that its TMNG-Europe general manager
and director had drawn Company funds without authorization. The director
resigned from TMNG-Europe during the year ended December 31, 1997 and claimed
that he was owed unpaid remuneration and reimbursable expenses. During 1998, the
Company received approximately $92,000 from the former director in settlement of
the claim.
The Company may become involved in various legal and administrative actions
arising in the normal course of business. These could include actions raised by
taxing authorities challenging the employment status of consultants utilized by
the Company. While the resolution of any of such actions or the matter described
above may have an impact on the financial results for the period in which it is
resolved, the Company believes that the ultimate disposition of these matters
will not have a material adverse effect upon its consolidated results of
operations, cash flows or financial position.
12. SUBSEQUENT EVENTS
On August 27, 1999, the board of directors approved, subject to stockholder
approval, the amendment of the Company's Certificate of Incorporation, which
included, among other things, reincorporation of the Company in the State of
Delaware and a change in the par values and total number common stock and
preferred stock of which the Company is authorized to issue. The total number of
shares of common stock which the Company has authority to issue is 50 million
with par value of $0.001 per share. The total number of shares of preferred
stock which the Company has authority to issue is 10 million with par value of
$0.001 per share.
On September 7, 1999, the Board of Directors authorized the Company to
proceed with an initial public offering of its common stock.
F-17
<PAGE> 92
THE MANAGEMENT NETWORK GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED OCTOBER 3, 1998 AND OCTOBER 2, 1999 IS
UNAUDITED)
13. REVERSE STOCK SPLIT AND WARRANT GRANT
Effective November 8, 1999 the Company amended its Certificate of
Incorporation to give effect for a 1-for-2 reverse stock split for all
authorized shares of voting and non-voting common stock. All share and per share
data has been retroactively adjusted to reflect this reverse split.
On October 29, 1999, the Company issued a significant customer a warrant to
purchase 500,000 shares of common stock at an exercise price of $2.00 per share.
The expected fair value of this warrant is approximately $5.2 million assuming
its expected life is 3 years and will be recognized as future equity related
charges in operations. Additionally on October 29, 1999, the Company reached an
agreement in principle with this customer under which such customer will commit
to $22 million of consulting fees over a three year period.
14. INTERIM FINANCIAL STATEMENTS (UNAUDITED)
Basis of presentation:
The unaudited interim condensed consolidated financial statements reflect
all adjustments which are, in the opinion of management, necessary to a fair
statement of the results of operations for the nine month periods ended October
3, 1998 and October 2, 1999. All such adjustments are of normal, recurring
nature. The interim results of operations shown are not necessarily indicative
of results that may be expected for the entire fiscal year.
The unaudited interim consolidated financial statements should be read in
conjunction with the 1998 audited consolidated financial statements.
Stock based compensation:
During the nine month period ended October 2, 1999, the Company granted
approximately 620,500 stock options to employees and non-employee consultants at
a weighted average exercise price of $2.00 per share and cancelled 25,000 stock
options previously issued to employees and consultants. During the same period
the Company recorded unearned compensation of $6.1 million. Compensation expense
related to all stock options was $2.3 million during the period. The balance of
outstanding options at October 2, 1999 was 1,695,250.
During the nine months ended October 2, 1999, the Company issued 71,000
shares of common stock representing bonus compensation to certain employees. The
Company calculated compensation expense related to these shares at the fair
value of the shares at the date of issuance. Accordingly, compensation expense
of $441,000 was charged to operations.
Deferred stock issuance costs:
During the nine months ended October 2, 1999, the Company deferred costs of
approximately $527,000 incurred in connection with an initial public offering of
its common stock. This amount is included in Other assets at October 2, 1999 and
includes specific incremental costs directly attributable to the actual
offering. This amount will be charged against the gross proceeds of the offering
at closing.
Share and per share amounts:
All share and per share amounts included in the unaudited interim
consolidated financial statements have been presented giving effect to a planned
1-for-2 reverse stock split.
F-18
<PAGE> 93
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
4,615,000 SHARES
LOGO
COMMON STOCK
---------------------
PROSPECTUS
---------------------
HAMBRECHT & QUIST
ROBERTSON STEPHENS
SALOMON SMITH BARNEY
JEFFERIES & COMPANY, INC
---------------------
, 1999
---------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 94
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all fees and expenses payable by us in
connection with the registration of our common stock. All of the amounts shown
are estimates except for the SEC registration fee, NASD filing fee and the
Nasdaq National Market listing fees.
<TABLE>
<CAPTION>
AMOUNT TO BE
PAID
------------
<S> <C>
SEC Registration Fee........................................ $ 20,656
NASD Filing Fee............................................. 7,900
Nasdaq National Market Listing Fee.......................... 40,000
Printing and Engraving Expenses............................. 250,000
Legal Fees and Expenses..................................... 350,000
Accounting Fees and Expense................................. 250,000
Transfer Agent and Registrar Fees and Expenses.............. 5,000
Miscellaneous Expenses...................................... 76,444
----------
Total............................................. 1,000,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law allows for the
indemnification of officers, directors and any corporate agents in terms
sufficiently broad to indemnify such persons under certain circumstances for
liabilities (including reimbursement for expenses incurred) arising under the
Securities Act. Our certificate of incorporation and our bylaws provide for
indemnification of our directors, officers, employees and other agents to the
extent and under the circumstances permitted by the Delaware General Corporation
Law. We have also entered into agreements with our directors and executive
officers that require us among other things to indemnify them against certain
liabilities that may arise by reason of their status or service as directors and
executive officers to the fullest extent permitted by Delaware law. We have also
purchased directors and officers liability insurance, which provides coverage
against certain liabilities including liabilities under the Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
(a) Within the past three years, we have issued and sold the following
unregistered securities:
(1) In February, 1998, we issued and sold an aggregate of 13,500,000
shares of common stock to our officers and directors and to certain other
individuals for an aggregate purchase price of $19,980,000.
(2) We issued and sold an aggregate of 71,201 shares of common stock
to certain individuals in 1999 as of October 2, 1999.
(3) Since our inception, we have granted options to purchase 1,720,250
shares of common stock to directors, employees and consultants under our
1998 Equity Incentive Plan at exercise prices ranging from $1.48 to $2.00
per share. As of October 2, 1999, options to purchase 1,695,250 shares
remain outstanding.
The sales and issuances of securities in the transactions described above
were deemed to be exempt from registration under the Securities Act in reliance
upon Section 4(2) of the Securities Act, Regulation D promulgated thereunder, or
Rule 701 promulgated under Section 3(b) of the Securities Act, as transactions
by an issuer not involving any public offering or transactions
II-1
<PAGE> 95
pursuant to compensatory benefit plans and contracts relating to compensation as
provided under Rule 701. The recipients of securities in each transaction
represented their intentions to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof and
appropriate legends were affixed to the securities issued in such transactions.
All recipients had adequate access to information about us through their
relationship with us.
(b) There were no underwritten offerings employed in connection with any of
the transactions set forth in Item 15(a).
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
1.1 Form of Underwriting Agreement
2.1** Agreement and Plan of Merger by and among the registrant and
certain parties dated January 7, 1998
3.1** Certificate of Incorporation of the registrant
3.2** Bylaws of the registrant
4.1 Specimen Common Stock Certificate
4.2 Warrant dated October 29, 1999 issued to Williams
Communications Group
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation
10.1** Registration Rights Agreement dated January 7, 1998 among
the registrant and certain investors
10.2** Form of Indemnification Agreement between the registrant and
each of its Directors and Officers
10.3** 1998 Equity Incentive Plan and form of agreements thereunder
10.4** 1999 Employee Stock Purchase Plan and form of agreements
thereunder
10.5** Consulting Services Agreement between the registrant and
Williams Communications Group, Inc. dated November 5, 1997
10.6** Credit Agreement, including revolving credit notes and term
notes, dated February 12, 1998 among the registrant and
certain guarantors, lenders and agents
10.7** Lease between Lighton Plaza L.L.C. and the registrant dated
April 23, 1998
10.8** Noncompetition Agreement between the registrant and certain
parties dated February 12, 1998.
10.9** Employment Agreement between the registrant and Richard
Nespola dated February 12 , 1998.
10.10** Employment Agreement between the registrant and Micky Woo
dated February 12, 1998.
10.11** Employment Agreement between the registrant and Ralph Peck
dated February 12, 1998.
10.12** Employment Agreement between the registrant and Donald Klumb
dated September 9, 1999
21.1** List of subsidiaries
23.1 Consent of Deloitte & Touche LLP
23.2** Consent of Wilson Sonsini Goodrich & Rosati (included in
exhibit 5.1)
24.1** Power of attorney (see page II-4)
27.1** Financial data schedule
</TABLE>
- ---------------
** Denotes exhibit has been previously filed.
(b) Financial Statement Schedules: None.
ITEM 17. UNDERTAKINGS
Indemnification by us for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of TMNG, we have
been advised that in the opinion of
II-2
<PAGE> 96
the Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. If
that a claim for indemnification against such liabilities (other than the
payment by TMNG of expenses incurred or paid by a director, officer or
controlling person of TMNG in the successful defense of any action, suit or
proceeding) is asserted by a director, officer or controlling person in
connection with the securities being registered, we will, unless in the opinion
of our counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
TMNG is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
We hereby undertake that:
(a) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of a
registration statement in reliance upon Rule 430A and contained in the form
of prospectus filed by TMNG pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of the registration
statement as of the time it was declared effective.
(b) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 97
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
TMNG has duly caused this Amendment to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Overland Park, State of Kansas, on the 18th day of November, 1999.
THE MANAGEMENT NETWORK GROUP, INC.
By: /s/ RICHARD P. NESPOLA
------------------------------------
Richard P. Nespola,
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment to the Registration Statement on Form S-1 has been signed by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ RICHARD P. NESPOLA President, Chief Executive Officer November 18, 1999
- ----------------------------------- and Director (Principal executive
Richard P. Nespola officer)
/s/ DONALD E. KLUMB Chief Financial Officer and November 18, 1999
- ----------------------------------- Treasurer (Principal financial
Donald E. Klumb officer and principal accounting
officer)
/s/ MICKY K. WOO* Vice President and Director November 18, 1999
- -----------------------------------
Micky K. Woo
/s/ RALPH R. PECK* Vice President November 18, 1999
- -----------------------------------
Ralph R. Peck
/s/ GRANT G. BEHRMAN* Director November 18, 1999
- -----------------------------------
Grant G. Behrman
/s/ WILLIAM M. MATTHES* Director November 18, 1999
- -----------------------------------
William M. Matthes
/s/ DENNIS G. SISCO* Director November 18, 1999
- -----------------------------------
Dennis G. Sisco
/s/ ROY A. WILKENS Director November 18, 1999
- -----------------------------------
Roy A. Wilkens
/s/ MARIO M. ROSATI* Director November 18, 1999
- -----------------------------------
Mario M. Rosati
*By: /s/ DONALD E. KLUMB
- -----------------------------------
Donald E. Klumb
Attorney-in-Fact
</TABLE>
II-4
<PAGE> 98
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
1.1 Form of Underwriting Agreement
2.1** Agreement and Plan of Merger by and among the registrant and
certain parties dated January 7, 1998
3.1** Certificate of Incorporation of the registrant
3.2** Bylaws of the registrant
4.1 Specimen Common Stock Certificate
4.2 Warrant dated October 29, 1999 issued to Williams
Communications Group
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation
10.1** Registration Rights Agreement dated January 7, 1998 among
the registrant and certain investors
10.2** Form of Indemnification Agreement between the registrant and
each of its Directors and Officers
10.3** 1998 Equity Incentive Plan and form of agreements thereunder
10.4** 1999 Employee Stock Purchase Plan and form of agreements
thereunder
10.5** Consulting Services Agreement between the registrant and
Williams Communications Group, Inc. dated November 5, 1997
10.6** Credit Agreement, including revolving credit notes and term
notes, dated February 12, 1998 among the registrant and
certain guarantors, lenders and agents
10.7** Lease between Lighton Plaza L.L.C. and the registrant dated
April 23, 1998
10.8** Noncompetition Agreement between the registrant and certain
parties dated February 12, 1998.
10.9** Employment Agreement between the registrant and Richard
Nespola dated February 12, 1998.
10.10** Employment Agreement between the registrant and Micky Woo
dated February 12, 1998.
10.11** Employment Agreement between the registrant and Ralph Peck
dated February 12, 1998.
10.12** Employment Agreement between the registrant and Donald Klumb
dated September 9, 1999
21.1** List of subsidiaries of TMNG, Inc.
23.1 Consent of Deloitte & Touche LLP
23.2** Consent of Wilson Sonsini Goodrich & Rosati (included in
exhibit 5.1)
24.1** Power of attorney (see page II-4)
27.1** Financial data schedule
</TABLE>
- ---------------
** Denotes exhibit has been previously filed.
<PAGE> 1
Form of
THE MANAGEMENT NETWORK GROUP, INC.
_________ SHARES(1)
COMMON STOCK
UNDERWRITING AGREEMENT
November __, 1999
HAMBRECHT & QUIST LLC
BANCBOSTON ROBERTSON STEPHENS INC.
SALOMON SMITH BARNEY INC
JEFFERIES & COMPANY INC.
c/o Hambrecht & Quist LLC
One Bush Street
San Francisco, CA 94104
Ladies and Gentlemen:
The Management Network Group, Inc., a Delaware corporation (herein
called the COMPANY), proposes to issue and sell ______ shares of its authorized
but unissued Common Stock, $0.001 par value per share (herein called the COMMON
STOCK) (said ______ shares of Common Stock being herein called the UNDERWRITTEN
STOCK). Behrman Capital II L.P., Strategic Entrepreneur Fund II, L.P., Richard
P. Nespola and Ralph R. Peck, each a stockholder of the Company (herein called
the STOCKHOLDERS), propose to grant to the Underwriters (as hereinafter defined)
an option to purchase up to ______ additional shares of Common Stock (herein
called the OPTION STOCK and with the Underwritten Stock herein collectively
called the STOCK). The Common Stock is more fully described in the Registration
Statement and the Prospectus hereinafter mentioned.
The Company hereby confirms the agreements made with respect to the
purchase of the Stock by the several underwriters, for whom you are acting,
named in Schedule I hereto (herein collectively called the UNDERWRITERS, which
term shall also include any underwriter purchasing Stock pursuant to Section
3(b) hereof). You represent and warrant that you have been authorized by each of
the other Underwriters to enter into this Agreement on its behalf and to act for
it in the manner herein provided.
1. REGISTRATION STATEMENT. The Company has filed with the Securities and
Exchange Commission (herein called the COMMISSION) a registration statement on
Form S-1 (No. 333-87383), including the related preliminary prospectus, for the
registration under the
- --------
(1) Plus an option to purchase from the Stockholders up to ______ additional
shares to cover over-allotments.
<PAGE> 2
Securities Act of 1933, as amended (herein called the SECURITIES ACT) of the
Stock. Copies of such registration statement and of each amendment thereto, if
any, including the related preliminary prospectus (meeting the requirements of
Rule 430A of the rules and regulations of the Commission (herein called the
RULES AND REGULATIONS)) heretofore filed by the Company with the Commission have
been delivered to you.
The term Registration Statement as used in this agreement shall mean
such registration statement, including all exhibits and financial statements,
all information omitted therefrom in reliance upon Rule 430A and contained in
the Prospectus referred to below, in the form in which it became effective, and
any registration statement filed pursuant to Rule 462(b) of the Rules and
Regulations with respect to the Stock (herein called a RULE 462(b) REGISTRATION
STATEMENT), and, in the event of any amendment thereto after the effective date
of such registration statement (herein called the EFFECTIVE DATE), shall also
mean (from and after the effectiveness of such amendment) such registration
statement as so amended (including any Rule 462(b) registration statement). The
term Prospectus as used in this Agreement shall mean the prospectus relating to
the Stock first filed with the Commission pursuant to Rule 424(b) and Rule 430A
(or if no such filing is required, as included in the Registration Statement)
and, in the event of any supplement or amendment to such prospectus after the
Effective Date, shall also mean (from and after the filing with the Commission
of such supplement or the effectiveness of such amendment) such prospectus as so
supplemented or amended. The term Preliminary Prospectus as used in this
Agreement shall mean each preliminary prospectus included in such registration
statement prior to the time it becomes effective.
The Registration Statement has been declared effective under the
Securities Act, and no post-effective amendment to the Registration Statement
has been filed as of the date of this Agreement. The Company has caused to be
delivered to you copies of each Preliminary Prospectus and has consented to the
use of such copies for the purposes permitted by the Securities Act.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE STOCKHOLDERS.
(a) The Company hereby represents and warrants as follows:
(i) Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation, has full
corporate power and authority to own or lease its properties and conduct
its business as described in the Registration Statement and the
Prospectus and as being conducted, and is duly qualified as a foreign
corporation and in good standing in all jurisdictions in which the
character of the property owned or leased or the nature of the business
transacted by it makes qualification necessary except where the failure
to be so qualified would not have a material adverse effect on the
business, properties, earnings, financial condition or results of
operations of the Company and its subsidiaries, taken as a whole (herein
called a MATERIAL ADVERSE EFFECT).
(ii) Since the respective dates as of which information is given
in the Registration Statement and the Prospectus, there has not occurred
any Materially Adverse Effect or any development involving a prospective
Material Adverse Effect, whether or not arising from transactions in the
ordinary course of business, and there has
2
<PAGE> 3
not been any material transaction entered into or any material
transaction that is probable of being entered into by the Company or any
of its subsidiaries, other than transactions in the ordinary course of
business and as set forth in the Registration Statement and the
Prospectus. Neither the Company nor any of its subsidiaries has material
contingent obligations which are not disclosed or provided for in the
Company's financial statements that are included in the Registration
Statement
(iii) The Registration Statement and the Prospectus comply, and
on the Closing Date (as hereinafter defined) and any later date on which
Option Stock is to be purchased (herein called an OPTION CLOSING DATE),
the Prospectus will comply, in all material respects, with the
provisions of the Securities Act and the Securities Exchange Act of
1934, as amended (herein called the EXCHANGE ACT), and the Rules and
Regulations; on the Effective Date, the Registration Statement did not,
and on each of the Closing Date and the Option Closing Date, will not
contain any untrue statement of a material fact and did not omit to
state any material fact required to be stated therein or necessary in
order to make the statements therein not misleading; and, on the
Effective Date the Prospectus did not, and on each of the Closing Date
and the Option Closing Date, will not contain any untrue statement of a
material fact or omit to state any material fact necessary in order to
make the statements therein, in the light of the circumstances under
which they were made, not misleading; provided, however, that none of
the representations and warranties in this subparagraph (iii) shall
apply to statements in, or omissions from, the Registration Statement or
the Prospectus made in reliance upon and in conformity with information
herein or otherwise furnished in writing to the Company by or on behalf
of the Underwriters for use in the Registration Statement or the
Prospectus.
(iv) All of the outstanding shares of capital stock of the
Company have been duly authorized and validly issued and are fully paid
and non-assessable; the Stock to be issued and sold by the Company has
been duly authorized and, when issued and delivered to the Underwriters
against payment therefore as provided by this Agreement, will be validly
issued, fully paid and non-assessable; and no preemptive, co-sale,
registration right, right of first refusal or other similar rights of
stockholders exist with respect to any of the Stock or the issue and
sale thereof, except as set forth in the Registration Statement. No
further approval or authority of the stockholders or the Board of
Directors of the Company will be required for the issuance and sale of
the Stock as contemplated herein. Neither the filing of the Registration
Statement nor the offering or sale of the Stock as contemplated by this
Agreement gives rise to any rights, other than those which have been
waived or satisfied, for or relating to the registration of any shares
of capital stock.
(v) There are no outstanding subscriptions, rights, warrants,
options, calls, convertible securities, commitments of sale or liens
granted or issued by the Company or any of its subsidiaries relating to
or entitling any person to purchase or otherwise to acquire any
securities of, or other ownership interest in, the Company or any of its
subsidiaries, except as otherwise disclosed in the Registration
Statement.
3
<PAGE> 4
(vi) The information set forth under the caption
"Capitalization" in the Prospectus is true and correct in all material
respects. The authorized capital stock of the Company, and of each of
the Company's subsidiaries, conforms as to legal matters to the
description thereof contained in the Prospectus. The form of
certificates for the Stock conforms to the legal requirements of the
state of Delaware.
(vii) The Commission has not issued an order preventing or
suspending the use of any Prospectus relating to the proposed offering
of the Stock, nor, to the best knowledge of the Company, instituted
proceedings for that purpose.
(viii) Neither the Company nor any of its subsidiaries is, nor
with the giving of notice or lapse of time or both will be, in violation
of or in default under its certificate of incorporation or bylaws or
under any agreement, lease, contract, indenture or other instrument or
obligation to which it is a party or by which it, or any of its
properties, is bound and which default would have a Material Adverse
Effect. The execution and delivery of this Agreement and the
consummation of the transactions herein contemplated and the fulfillment
of the terms hereof will not conflict with or result in a breach of any
of the terms or provisions of, or constitute a default under, any
indenture, mortgage, deed of trust or other agreement or instrument to
which the Company or any of its subsidiaries is a party, or of the
respective certificate of incorporation or bylaws of the Company or the
subsidiary, which conflict, breach or default could have a Material
Adverse Effect.
(ix) Each approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or other
governmental body necessary in connection with the execution and
delivery by the Company and the Stockholders of this Agreement and the
consummation of the transactions herein contemplated has been obtained
or made and is in full force and effect. The execution, delivery and
performance of this Agreement by the Company and the Stockholders, the
compliance by the Company and the Stockholders with all the provisions
hereof and the consummation of the transactions contemplated hereby will
not (i) require any other consent, approval, authorization or other
order of, or qualification with, any court or governmental body or
agency (except such as may be required under the securities or Blue Sky
laws of the various states), (ii) violate or conflict with any
applicable law or any rule, regulation, judgment, order, injunction or
decree of any court or any governmental body or agency having
jurisdiction over the Stockholders or the Company or any of its
subsidiaries or their respective property, or (iii) result in the
suspension, termination or revocation of any Authorization (as defined
below) of the Company or any of its subsidiaries or any other impairment
of the rights of the holder of any such Authorization.
(x) The Company and each of its subsidiaries has good and
marketable title to all of its respective properties and assets
reflected in the financial statements (or as described in the
Registration Statement) filed with the Commission as part of the
Registration Statement, free and clear of any lien, mortgage, pledge,
charge or encumbrance of any kind except those reflected in such
financial statements (or as described in the Registration Statement).
All leases to which the Company or any of its
4
<PAGE> 5
subsidiaries is a party are valid and binding obligations of the Company
or the subsidiary, as the case may be, and no default by the Company or
such subsidiary has occurred or is continuing thereunder which could
reasonably be expected to result in a Material Adverse Effect, and the
Company and each of its subsidiaries, as the case may be, enjoys
peaceful and undisturbed possession under all such leases to which it is
a party as lessee.
(xi) Except as disclosed in the Registration Statement, there is
no action, suit, claim or proceeding pending, or, to the knowledge of
the Company, threatened against the Company, any of its subsidiaries or
any of their respective officers or properties, before any court or
administrative agency or otherwise, which if determined adversely to the
Company could reasonably be expected to result in any Material Adverse
Effect or prevent the consummation of the transactions contemplated
hereby; and there are no agreements, contracts, leases or documents of
the Company or any of its subsidiaries of a character required to be
described or referred to in the Registration Statement or Prospectus or
to be filed as an exhibit to the Registration Statement by the
Securities Act or the Rules and Regulations which have not been
accurately described in all material respects or referred to in the
Registration Statement or Prospectus or filed as exhibits to the
Registration Statement. The contracts so described in the Registration
Statement and Prospectus are in full force and effect on the date
hereof, and neither the Company nor, to the best of the Company's
knowledge, any other party, is in breach of or default under any of such
contracts where such breach or default would have a Material Adverse
Effect.
(xii) The Company and each of its subsidiaries has timely filed
all federal, state, local and foreign income tax returns which have been
required to be filed and have paid all taxes indicted by said returns
and all assessments received by them or any of them to the extent that
such taxes have become due and are not being contested in good faith
except where the failure to file such returns and pay such taxes would
not have a Material Adverse Effect. All tax liabilities (including those
being contested in good faith) for the periods covered by the financial
statements of the Company that are included in the Registration
Statement have been adequately provided for in such financial
statements.
(xiii) The Company and its subsidiaries are operating
substantially in compliance with all statutes, laws, regulations,
ordinances or court decrees applicable to their respective businesses
and operations. Neither the Company nor any of its subsidiaries has
violated any provisions of the Foreign Corrupt Practices Act or the
rules and regulations promulgated thereunder, or any foreign, federal,
state or local law or regulation relating to the protection of human
health and safety, the environment or hazardous or toxic substances or
wastes, pollutants or contaminants (herein called ENVIRONMENTAL LAWS),
or relating to discrimination in the hiring, promotion or pay of, or to
the wages and hours of, employees. No labor disturbance by the employees
of the Company exists nor, to the best of the Company's knowledge, is
imminent, and the Company is not aware of any existing or imminent labor
disturbance by the employees of any of its principal suppliers, value
added resellers, authorized dealers or distributors that might be
expected to result in a Material Adverse Effect. No collective
bargaining
5
<PAGE> 6
agreement exists with any of the Company's employees and, to the best of
the Company's knowledge, no such agreement is imminent.
(xiv) Each of the Company and its subsidiaries has such permits,
licenses, consents, exemptions, franchises, authorizations and other
approvals (each herein called an AUTHORIZATION) of, and has made all
filings with and notices to, all governmental or regulatory authorities
and self-regulatory organizations and all courts and other tribunals,
including, without limitation, under any applicable Environmental Laws,
as are necessary to own, lease, license and operate its respective
properties and to conduct its business and as contemplated by the
Prospectus. Each such Authorization is valid and in full force and
effect and each of the Company and its subsidiaries is in compliance
with all the terms and conditions thereof and with the rules and
regulations of the authorities and governing bodies having jurisdiction
with respect thereto; and no event has occurred (including, without
limitation, the receipt of any notice from any authority or governing
body) which allows or, after notice or lapse of time or both, would
allow, revocation, suspension or termination of any such Authorization
or results or, after notice or lapse of time or both, would result in
any other impairment of the rights of the holder of any such
Authorization; and such Authorizations contain no restrictions that are
burdensome to the Company or any of its subsidiaries.
(xv) There are no costs or liabilities associated with
Environmental Laws (including, without limitation, any capital or
operating expenditures required for clean-up, closure of properties or
compliance with Environmental Laws or any Authorization, any related
constraints on operating activities and any potential liabilities to
third parties) which would, singly or in the aggregate, have a Material
Adverse Effect.
(xvi) The Company and its subsidiaries own or possess adequate
rights to use all inventions, designs, computer programs, computer code,
communications protocols, security devices, trade secrets, know-how,
trademarks, service marks, trade names, copyright works or other
information (herein collectively called INTELLECTUAL PROPERTY) which are
necessary to conduct their respective businesses as described in the
Registration Statement and the Prospectus; neither the Company nor any
of its subsidiaries has received any notice of, and has no knowledge of,
any infringement of or conflict with any rights of the Company or any of
its subsidiaries, as the case may be, by others with respect to any
Intellectual Property which, singly or in the aggregate, if the subject
of an unfavorable decision, ruling or finding, would have a Material
Adverse Effect; neither the Company nor any of its subsidiaries has
received any notice of, and have no knowledge of, any infringement of or
conflict with any rights of others with respect to any Intellectual
Property which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would have a Material Adverse
Effect; to the Company's best knowledge, none of the Intellectual
Property licensed to or by the Company or any of its subsidiaries are
unenforceable or invalid; and the Company is not aware of the granting
of any patent rights to third parties or the filing of any patent
applications by third parties or any other rights of third parties to
any Intellectual Property owned by the Company or any of its
subsidiaries.
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(xvii) There are no legal or governmental proceedings pending
relating to patent rights, trade secrets, trademarks, service marks or
other proprietary information or materials of the Company or any of its
subsidiaries, and no such proceedings are threatened or, to the best of
the Company's knowledge, contemplated by governmental authorities or
others.
(xviii) There are no contracts or other documents, relating to
governmental regulation affecting the Company or any of its
subsidiaries, or the Company's or any such subsidiary's patents, trade
secrets, trademarks, service marks or other proprietary information or
materials, of a character required to be filed as an exhibit to the
Registration Statement or required to be described in the Registration
Statement or the Prospectus that are not filed or described as required.
(xix) Neither the Company nor any of its subsidiaries is
infringing or otherwise violating any patents, trade secrets,
trademarks, service marks or other proprietary information or materials,
of others, and there are no infringements by others of any of the
Company's or any of its subsidiaries' patents, trade secrets,
trademarks, service marks or other proprietary information or materials
which could affect materially the use thereof by the Company or any of
its subsidiaries.
(xx) The Company and its subsidiaries hold all material
licenses, certificates and permits from governmental authorities
necessary to conduct the business now being or proposed to be conducted
by the Company or its subsidiaries, as the case may be, as contemplated
by the Prospectus.
(xxi) This Agreement has been duly authorized, executed and
delivered by the Company and is a valid and binding obligation of the
Company.
(xxii) Deloitte & Touche LLP are independent public accountants
with respect to the Company and its subsidiaries as required by the
Securities Act and the Rules and Regulations.
(xxiii) The consolidated financial statements included in the
Registration Statement and the Prospectus (and any amendment or
supplement thereto), together with related schedules and notes, present
fairly the consolidated financial position, results of operations, cash
flows and changes in financial position of the Company and its
subsidiaries on the basis stated therein at the respective dates or for
the respective periods to which they apply; such statements and related
schedules and notes have been prepared in accordance with generally
accepted accounting principles consistently applied throughout the
periods involved, and all adjustments necessary for a fair presentation
of results for such periods have been made; the supporting schedules, if
any, included in the Registration Statement present fairly in accordance
with generally accepted accounting principles the information required
to be stated therein; and the other financial and statistical
information and data set forth in the Registration Statement and the
Prospectus (and any amendment or supplement thereto) are, in all
material respects, accurately presented and prepared on a basis
consistent with such financial statements and the books and records of
the Company.
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<PAGE> 8
(xxiv) The statements in the Prospectus under the heading
"Certain Transactions" set forth all existing agreements, arrangements,
understandings or transactions, or proposed agreements, arrangements,
understandings or transactions, between or among the Company, on the one
hand, and any officer, director or stockholder of the Company, or with
any partner, affiliate or associate of any of the foregoing persons or
entities, on the other hand, required to be set forth or described
thereunder.
(xxv) The Company and its subsidiaries carry, or are covered by,
insurance with insurers of nationally recognized reputability in such
amounts and covering such risks as the Company believes is customary for
companies engaged in similar industries.
(xxvi) The Stock has been approved for listing on the Nasdaq
National Stock Market.
(xxvii) There are no issues related to the Company's
preparedness for the Year 2000 that (i) are of a character required to
be described or referred to in the Registration Statement or Prospectus
by the Securities Act or the Rules and Regulations which have not been
accurately described in the Registration Statement or Prospectus or (ii)
might reasonably be expected to result in any Material Adverse Effect.
All internal computer systems and each Constituent Component (as defined
below) of those systems and all computer-related products and each
Constituent Component of those products of the Company fully comply with
the Year 2000 Qualification Requirements. "Year 2000 Qualification
Requirements" means that the internal computer systems and each
Constituent Component of those systems and all computer-related products
and each Constituent Component of those products of the Company (i) have
been reviewed to confirm that they store, process (including sorting and
performing mathematical operations, calculations and computations),
input and output data containing date and information correctly
regardless of whether the date contains dates and times before, on or
after January 1, 2000, (ii) have been designated to ensure date and time
entry recognition, calculations that accommodate same century and
multi-century formulas and date values, leap year recognition and
calculations, and date data interface values that reflect the century,
(iii) accurately manage and manipulate data involving dates and times,
including single century formulas and multi-century formulas, and will
not cause an abnormal ending scenario within the application or generate
incorrect values or invalid results involving such dates, (iv)
accurately process any date rollover and (v) accept and respond to
two-digit year date input in a manner that resolves any ambiguities as
to the century. "Constituent Component" means all software (including
operating systems, programs, packages and utilities), firmware,
hardware, networking components, and peripherals provided as part of the
configuration.
(xxviii) Neither the Company nor any of its subsidiaries has at
any time since its inception (i) made any unlawful contribution to any
candidate for foreign office or failed to disclose fully any
contribution in violation of law, or (ii) made any payment to any U.S.
federal or state governmental officer or official, or other person
charged with similar public or quasi-public duties, other than payments
required or permitted by the laws of the United States or any
jurisdiction thereof.
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(xxix) The Company and its subsidiaries are in compliance in all
material respects with all currently applicable provisions of the
Employee Retirement Income Security Act of 1974, as amended, including
the regulations and published interpretations thereunder (herein called
ERISA); no "reportable event" (as defined in ERISA) has occurred with
respect to any "pension plan" (as defined in ERISA) for which the
Company or any of its subsidiaries would have any liability; neither the
Company nor any of its subsidiaries has incurred and do not expect to
incur liability under (i) Title IV of ERISA with respect to termination
of, or withdrawal from, any "pension plan" or (ii) Sections 412 or 4971
of the Internal Revenue Code of 1986, as amended, including the
regulations and published interpretation thereunder (herein called the
CODE); and each "pension plan" for which the Company or any of its
subsidiaries would have any liability that is intended to be qualified
under Section 401(a) of the Code is so qualified in all material
respects and nothing has occurred, whether by action or by failure to
act, that would cause the loss of such qualification.
(xxx) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurances that (i)
transactions are executed in accordance with management's general or
specific authorization; (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain accountability for
assets; (iii) access to assets is permitted only in accordance with
management's general or specific authorization; and (iv) the recorded
accountability for assets is compared with existing assets at reasonable
intervals and appropriate action is taken with respect to any
differences.
(xxxi) The Company has not distributed and will not distribute
prior to the later of (i) the Closing Date, or any date on which Option
Stock is to be purchased, as the case may be, and (ii) completion of the
distribution of the Stock, any offering material in connection with the
offering and sale of the Stock other than any Preliminary Prospectuses,
the Prospectus, the Registration Statement and other materials, if any,
permitted by the Securities Act.
(xxxii) The Company is not and, after giving effect to the
offering and sale of the Stock and the application of the proceeds
thereof as described in the Prospectus, will not be, an "investment
company" or a company "controlled" by and "investment company" as such
term is defined in the Investment Company Act of 1940, as amended, and
the rules and regulations of the Commission thereunder.
(xxxiii) There are no contracts, agreements or understandings
between the Company and any person granting such person the right to
require the Company to file a registration statement under the
Securities Act with respect to any securities of the Company or to
require the Company to include such securities with the Stock registered
pursuant to the Registration Statement or in any securities being
registered pursuant to any other registration statement filed by the
Company under the Securities Act.
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<PAGE> 10
(xxxiv) Each certificate signed by any officer of the Company
and delivered to the Underwriters or counsel for the Underwriters shall
be deemed to be a representation and warranty by the Company to the
Underwriters as to the matters covered thereby.
(b) Each of the Stockholders, severally and not jointly, hereby
represents and warrants as follows:
(i) Such Stockholder has not distributed and will not distribute
prior to the later of (i) any date on which Option Stock is to be
purchased, and (ii) completion of the distribution of the Stock, any
offering material in connection with the offering and sale of the Stock
other than any Preliminary Prospectuses, the Prospectus, the
Registration Statement and other materials, if any, permitted by the
Securities Act.
(ii) Each certificate signed by such Stockholder or any officer
of such Stockholder and delivered to the Underwriters or counsel for the
Underwriters shall be deemed to be a representation and warranty by the
Stockholder to the Underwriters as to the matters covered thereby.
(iii) Such Stockholder has reviewed the Registration Statement
and Prospectus and on the Effective Date, the Registration Statement did
not, and on each of the Closing Date and the Option Closing Date, will
not contain any untrue statement of a material fact and did not omit to
state any material fact required to be stated therein or necessary in
order to make the statements therein not misleading; and, on the
Effective Date the Prospectus did not, and on each of the Closing Date
and the Option Closing Date, will not contain any untrue statement of a
material fact or omit to state any material fact necessary in order to
make the statements therein, in the light of the circumstances under
which they were made, not misleading; provided, however, that none of
the representations and warranties in this subparagraph (iii) shall
apply to statements in, or omissions from, the Registration Statement or
the Prospectus made in reliance upon and in conformity with information
herein or otherwise furnished in writing to the Company by or on behalf
of the Underwriters for use in the Registration Statement or the
Prospectus.
(iv) This Agreement has been duly authorized, executed and
delivered by the Stockholder and is a valid and binding obligation of
the Stockholder.
(v) Such Stockholder has good and marketable title to all the
shares of Option Stock to be sold by such Stockholder hereunder, free
and clear of all liens, encumbrances, equities, security interests and
claims whatsoever, with full right and authority to deliver the same
hereunder, and that upon delivery of and payment for such shares of the
Option Stock hereunder, the several Underwriters will receive good and
marketable title thereto, free and clear of all liens, encumbrances,
equities, security interests and claims whatsoever.
(vi) To the best of such Stockholder's knowledge, the
representations and warranties of the Company set forth in Section 2(a)
above are true and correct.
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<PAGE> 11
3. PURCHASE OF THE STOCK BY THE UNDERWRITERS.
(a) On the basis of the representations and warranties and subject to
the terms and conditions herein set forth, the Company agrees to issue and sell
________ shares of the Underwritten Stock to the several Underwriters and each
of the Underwriters agrees to purchase from the Company the respective aggregate
number of shares of Underwritten Stock set forth opposite its name in Schedule
I. The price at which such shares of Underwritten Stock shall be sold by the
Company and purchased by the several Underwriters shall be $___ per share. In
making this Agreement, each Underwriter is contracting severally and not
jointly; except as provided in paragraphs (b) and (c) of this Section 3, the
agreement of each Underwriter is to purchase only the respective number of
shares of the Underwritten Stock specified in Schedule I.
(b) If for any reason one or more of the Underwriters shall fail or
refuse (otherwise than for a reason sufficient to justify the termination of
this Agreement under the provisions of Section 8 or 9 hereof) to purchase and
pay for the number of shares of the Stock agreed to be purchased by such
Underwriter or Underwriters, the Company shall immediately give notice thereof
to you, and the non-defaulting Underwriters shall have the right within 24 hours
after the receipt by you of such notice to purchase, or procure one or more
other Underwriters to purchase, in such proportions as may be agreed upon
between you and such purchasing Underwriter or Underwriters and upon the terms
herein set forth, all or any part of the shares of the Stock which such
defaulting Underwriter or Underwriters agreed to purchase. If the non-defaulting
Underwriters fail so to make such arrangements with respect to all such shares
and portion, the number of shares of the Stock which each non-defaulting
Underwriter is otherwise obligated to purchase under this Agreement shall be
automatically increased on a pro rata basis to absorb the remaining shares and
portion which the defaulting Underwriter or Underwriters agreed to purchase;
provided, however, that the non-defaulting Underwriters shall not be obligated
to purchase the shares and portion which the defaulting Underwriter or
Underwriters agreed to purchase if the aggregate number of such shares of the
Stock exceeds 10% of the total number of shares of the Stock which all
Underwriters agreed to purchase hereunder. If the total number of shares of the
Stock which the defaulting Underwriter or Underwriters agreed to purchase shall
not be purchased or absorbed in accordance with the two preceding sentences, the
Company shall have the right, within 24 hours next succeeding the 24-hour period
above referred to, to make arrangements with other underwriters or purchasers
satisfactory to you for purchase of such shares and portion on the terms herein
set forth. In any such case, either you or the Company shall have the right to
postpone the Closing Date determined as provided in Section 5 hereof for not
more than seven business days after the date originally fixed as the Closing
Date pursuant to said Section 5 in order that any necessary changes in the
Registration Statement, the Prospectus or any other documents or arrangements
may be made. If neither the non-defaulting Underwriters nor the Company shall
make arrangements within the 24-hour periods stated above for the purchase of
all the shares of the Stock which the defaulting Underwriter or Underwriters
agreed to purchase hereunder, this Agreement shall be terminated without further
act or deed and without any liability on the part of the Company to any
non-defaulting Underwriter and without any liability on the part of any
non-defaulting Underwriter to the Company. Nothing in this paragraph (b), and no
action taken hereunder, shall relieve any defaulting Underwriter from liability
in respect of any default of such Underwriter under this Agreement.
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(c) On the basis of the representations, warranties and covenants herein
contained, and subject to the terms and conditions herein set forth, the
Stockholders grant an option to the several Underwriters to purchase, severally
and not jointly, up to ______ shares in the aggregate of the Option Stock from
the Stockholders at the same price per share as the Underwriters shall pay for
the Underwritten Stock. Said option may be exercised only to cover
over-allotments in the sale of the Underwritten Stock by the Underwriters and
may be exercised in whole or in part at any time (but not more than once) on or
before the thirtieth day after the date of this Agreement upon written or
telegraphic notice by you to the Company setting forth the aggregate number of
shares of the Option Stock as to which the several Underwriters are exercising
the option. Delivery of certificates for the shares of Option Stock, and payment
therefor, shall be made as provided in Section 5 hereof. The number of shares of
the Option Stock to be purchased by each Underwriter shall be the same
percentage of the total number of shares of the Option Stock to be purchased by
the several Underwriters as such Underwriter is purchasing of the Underwritten
Stock, as adjusted by you in such manner as you deem advisable to avoid
fractional shares.
4. OFFERING BY UNDERWRITERS.
(a) The terms of the initial public offering by the Underwriters of the
Stock to be purchased by them shall be as set forth in the Prospectus. The
Underwriters may from time to time change the public offering price after the
closing of the initial public offering and increase or decrease the concessions
and discounts to dealers as they may determine.
(b) The information set forth under "Underwriting" in the Registration
Statement, any Preliminary Prospectus and the Prospectus relating to the Stock
filed by the Company (insofar as such information relates to the Underwriters)
constitutes the only information furnished by the Underwriters to the Company
for inclusion in the Registration Statement, any Preliminary Prospectus and the
Prospectus, and you on behalf of the respective Underwriters represent and
warrant to the Company that the statements made therein are correct.
5. DELIVERY OF AND PAYMENT FOR THE STOCK.
(a) Delivery of certificates for the shares of the Underwritten Stock
and the Option Stock (if the option granted by Section 3(c) hereof shall have
been exercised not later than 7:00 A.M., San Francisco time, on the date two
business days preceding the Closing Date), and payment therefor, shall be made
at the office of ______________, at 7:00 a.m., San Francisco time, on the
fourth(2) business day after the date of this Agreement, or at such time on such
other day, not later than seven full business days after such fourth business
day, as shall be agreed upon in writing by the Company and you. The date and
hour of such delivery and payment (which may be postponed as provided in Section
3(b) hereof) are herein called the Closing Date.
(b) If the option granted by Section 3(c) hereof shall be exercised
after 7:00 a.m., San Francisco time, on the date two business days preceding the
Closing Date, delivery of certificates for the shares of Option Stock, and
payment therefor, shall be made at the office of
- ----------------
(2) This assumes that the transaction will be priced after the close of market
and that T+4 will apply to the transaction. If the pricing took place before
or during market hours (which will generally not be the case), the closing
would be three business days after pricing.
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_______________, at 7:00 a.m., San Francisco time, on the third business day
after the exercise of such option.
(c) Payment for the Stock purchased from the Company shall be made to
the Company or its order by one or more certified or official bank check or
checks in same day funds. Such payment shall be made upon delivery of
certificates for the Stock to you for the respective accounts of the several
Underwriters against receipt therefor signed by you. Certificates for the Stock
to be delivered to you shall be registered in such name or names and shall be in
such denominations as you may request at least one business day before the
Closing Date, in the case of Underwritten Stock, and at least one business day
prior to the purchase thereof, in the case of the Option Stock. Such
certificates will be made available to the Underwriters for inspection, checking
and packaging at the offices of __________________ on the business day prior to
the Closing Date or, in the case of the Option Stock, by 3:00 p.m., New York
time, on the business day preceding the date of purchase.
It is understood that you, individually and not on behalf of the
Underwriters, may (but shall not be obligated to) make payment to the Company
for shares to be purchased by any Underwriter whose check shall not have been
received by you on the Closing Date or any later date on which Option Stock is
purchased for the account of such Underwriter. Any such payment by you shall not
relieve such Underwriter from any of its obligations hereunder.
6. FURTHER AGREEMENTS OF THE COMPANY. The Company covenants and agrees
as follows:
(a) The Company will (i) prepare and timely file with the Commission
under Rule 424(b) a Prospectus containing information previously omitted at the
time of effectiveness of the Registration Statement in reliance on Rule 430A and
(ii) not file any amendment to the Registration Statement or supplement to the
Prospectus of which you shall not previously have been advised and furnished
with a copy or to which you shall have reasonably objected in writing or which
is not in compliance with the Securities Act or the Rules and Regulations.
(b) The Company will promptly notify each Underwriter in the event of
(i) the request by the Commission for amendment of the Registration Statement or
for supplement to the Prospectus or for any additional information, (ii) the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement, (iii) the institution or notice of intended institution
of any action or proceeding for that purpose, (iv) the receipt by the Company of
any notification with respect to the suspension of the qualification of the
Stock for sale in any jurisdiction, or (v) the receipt by it of notice of the
initiation or threatening of any proceeding for such purpose. The Company will
make every reasonable effort to prevent the issuance of such a stop order and,
if such an order shall at any time be issued, to obtain the withdrawal thereof
at the earliest possible moment.
(c) The Company will (i) on or before the Closing Date, deliver to you a
signed copy of the Registration Statement as originally filed and of each
amendment thereto filed prior to the time the Registration Statement becomes
effective and, promptly upon the filing thereof, a signed copy of each
post-effective amendment, if any, to the Registration Statement (together with,
in each case, all exhibits thereto unless previously furnished to you) and will
also deliver to you, for distribution to the Underwriters, a sufficient number
of additional conformed copies of
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<PAGE> 14
each of the foregoing (but without exhibits) so that one copy of each may be
distributed to each Underwriter, (ii) as promptly as possible deliver to you and
send to the several Underwriters, at such office or offices as you may
designate, as many copies of the Prospectus as you may reasonably request, and
(iii) thereafter from time to time during the period in which a prospectus is
required by law to be delivered by an Underwriter or dealer, likewise send to
the Underwriters as many additional copies of the Prospectus and as many copies
of any supplement to the Prospectus and of any amended prospectus, filed by the
Company with the Commission, as you may reasonably request for the purposes
contemplated by the Securities Act.
(d) If at any time during the period in which a prospectus is required
by law to be delivered by an Underwriter or dealer any event relating to or
affecting the Company, or of which the Company shall be advised in writing by
you, shall occur as a result of which it is necessary, in the opinion of counsel
for the Company or of counsel for the Underwriters, to supplement or amend the
Prospectus in order to make the Prospectus not misleading in the light of the
circumstances existing at the time it is delivered to a purchaser of the Stock,
the Company will forthwith prepare and file with the Commission a supplement to
the Prospectus or an amended prospectus so that the Prospectus as so
supplemented or amended will not contain any untrue statement of a material fact
or omit to state any material fact necessary in order to make the statements
therein, in the light of the circumstances existing at the time such Prospectus
is delivered to such purchaser, not misleading. If, after the initial public
offering of the Stock by the Underwriters and during such period, the
Underwriters shall propose to vary the terms of offering thereof by reason of
changes in general market conditions or otherwise, you will advise the Company
in writing of the proposed variation, and, if in the opinion either of counsel
for the Company or of counsel for the Underwriters such proposed variation
requires that the Prospectus be supplemented or amended, the Company will
forthwith prepare and file with the Commission a supplement to the Prospectus or
an amended prospectus setting forth such variation. The Company authorizes the
Underwriters and all dealers to whom any of the Stock may be sold by the several
Underwriters to use the Prospectus, as from time to time amended or
supplemented, in connection with the sale of the Stock in accordance with the
applicable provisions of the Securities Act and the Rules and Regulations for
such period.
(e) Prior to the filing thereof with the Commission, the Company will
submit to you, for your information, a copy of any post-effective amendment to
the Registration Statement and any supplement to the Prospectus or any amended
prospectus proposed to be filed.
(f) The Company will cooperate, when and as requested by you, in the
qualification of the Stock for offer and sale under the securities or blue sky
laws of such jurisdictions as you may designate and, during the period in which
a prospectus is required by law to be delivered by an Underwriter or dealer, in
keeping such qualifications in good standing under said securities or blue sky
laws; provided, however, that the Company shall not be obligated to file any
general consent to service of process or to qualify as a foreign corporation in
any jurisdiction in which it is not so qualified. The Company will, from time to
time, prepare and file such statements, reports, and other documents as are or
may be required to continue such qualifications in effect for so long a period
as you may reasonably request for distribution of the Stock.
(g) During a period of five years commencing with the date hereof, the
Company will furnish to you, and to each Underwriter who may so request in
writing, copies of all periodic
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<PAGE> 15
and special reports furnished to stockholders of the Company and of all
information, documents and reports filed with the Commission.
(h) Not later than the 45th day following the end of the fiscal quarter
first occurring after the first anniversary of the Effective Date, the Company
will make generally available to its security holders an earnings statement in
accordance with Section 11(a) of the Securities Act and Rule 158 thereunder.
(i) The Company agrees to pay all costs and expenses incident to the
performance of its obligations under this Agreement, including all costs and
expenses incident to (i) the preparation, printing and filing with the
Commission and the National Association of Securities Dealers, Inc. (herein
after called the NASD) of the Registration Statement, any Preliminary Prospectus
and the Prospectus, (ii) the furnishing to the Underwriters of copies of any
Preliminary Prospectus and of the several documents required by paragraph (c) of
this Section 6 to be so furnished, (iii) the printing of this Agreement and
related documents delivered to the Underwriters, (iv) the preparation, printing
and filing of all supplements and amendments to the Prospectus referred to in
paragraph (d) of this Section 6, (v) the furnishing to you and the Underwriters
of the reports and information referred to in paragraph (g) of this Section 6
and (vi) the printing and issuance of stock certificates, including the transfer
agent's fees.
(j) The Company agrees to reimburse you, for the account of the several
Underwriters, for blue sky fees and related disbursements (including counsel
fees and disbursements and cost of printing memoranda for the Underwriters) paid
by or for the account of the Underwriters or their counsel in qualifying the
Stock under state securities or blue sky laws and in the review of the offering
by the NASD.
(k) The Company hereby agrees that, without the prior written consent of
Hambrecht & Quist LLC on behalf of the Underwriters, the Company will not, for a
period of 180 days following the commencement of the public offering of the
Stock by the Underwriters, directly or indirectly, (i) sell, offer, contract to
sell, make any short sale, pledge, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase or otherwise transfer or dispose of any shares of capital stock of the
Company or any securities convertible into or exchangeable or exercisable for or
any rights to purchase or acquire capital stock of the Company or (ii) enter
into any swap or other agreement that transfers, in whole or in part, any of the
economic consequences or ownership of capital stock of the Company, whether any
such transaction described in clause (i) or (ii) above is to be settled by
delivery of capital stock of the Company or such other securities, in cash or
otherwise. The foregoing sentence shall not apply to the Stock to be sold to the
Underwriters pursuant to this Agreement.
(l) The Company agrees to use its best efforts to cause all directors,
officers, optionholders and beneficial holders of more than 5% of the
outstanding capital stock of the Company to agree that, without the prior
written consent of Hambrecht & Quist LLC on behalf of the Underwriters, such
person or entity will not, for a period of 180 days following the commencement
of the public offering of the Stock by the Underwriters, directly or indirectly,
(i) sell, offer, contract to sell, make any short sale, pledge, sell any option
or contract to purchase, purchase any option or contract to sell, grant any
option, right or warrant to purchase or
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<PAGE> 16
otherwise transfer or dispose of any shares of capital stock of the Company or
any securities convertible into or exchangeable or exercisable for or any rights
to purchase or acquire capital stock of the Company or (ii) enter into any swap
or other agreement that transfers, in whole or in part, any of the economic
consequences or ownership of capital stock of the Company, whether any such
transaction described in clause (i) or (ii) above is to be settled by delivery
of capital stock of the Company or such other securities, in cash or otherwise.
(m) If at any time during the 25-day period after the Registration
Statement becomes effective any rumor, publication or event relating to or
affecting the Company shall occur as a result of which in your opinion the
market price for the Stock has been or is likely to be materially affected
(regardless of whether such rumor, publication or event necessitates a
supplement to or amendment of the Prospectus), the Company will, after written
notice from you advising the Company to the effect set forth above, forthwith
prepare, consult with you concerning the substance of, and disseminate a press
release or other public statement, reasonably satisfactory to you, responding to
or commenting on such rumor, publication or event.
(n) The Company is familiar with the Investment Company Act and has in
the past conducted its affairs, and will in the future conduct its affairs, in
such a manner to ensure that the Company was not and will not be an "investment
company" or a company "controlled" by an "investment company" within the meaning
of the Investment Company Act and the rules and regulations thereunder.
(o) The Company will comply with the Securities Act and the Rules and
Regulations, and the Securities Exchange Act of 1934 (herein called the Exchange
Act) and the Rules and Regulations, so as to permit the completion of the
distribution of the Stock as contemplated in this Agreement and the Prospectus.
(p) The Company shall apply the net proceeds of its sale of the Stock as
set forth in the Prospectus under the heading "Use of Proceeds."
(q) The Company will not take, directly or indirectly, any action
designed to cause or result in, or that has constituted or might reasonably be
expected to constitute, the stabilization or manipulation of the price of the
Common Stock of the Company.
(r) The Company will maintain a transfer agent and, if necessary under
the jurisdiction of incorporation of the Company, a registrar (which may be the
same entity as the transfer agent) for its Common Stock.
(s) On or before the Closing Date, the Company will obtain, and it
agrees to maintain, a directors and officers liability insurance policy, in
an amount not being less than $__________, naming you as an additional insured.
7. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company and the Stockholders agree to indemnify and hold
harmless each Underwriter and each person (including each partner or officer
thereof) who controls any Underwriter within the meaning of Section 15 of the
Securities Act from and against any and all losses, claims, damages or
liabilities, joint or several, to which such indemnified parties or any of them
may become subject under the Securities Act, the Exchange Act, or the common law
or otherwise, and the Company agrees to reimburse each such Underwriter and
controlling person for any legal or other expenses (including, except as
otherwise hereinafter provided, reasonable
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fees and disbursements of counsel) incurred by the respective indemnified
parties in connection with defending against any such losses, claims, damages or
liabilities or in connection with any investigation or inquiry of, or other
proceeding which may be brought against, the respective indemnified parties, in
each case arising out of or based upon (i) any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
(including the Prospectus as part thereof and any Rule 462(b) registration
statement) or any post-effective amendment thereto (including any Rule 462(b)
registration statement), or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, or (ii) any untrue statement or alleged untrue statement
of a material fact contained in any Preliminary Prospectus or the Prospectus (as
amended or as supplemented if the Company shall have filed with the Commission
any amendment thereof or supplement thereto) or the omission or alleged omission
to state therein a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; provided, however, that (1) the indemnity agreements of the Company
and the Stockholders contained in this paragraph (a) shall not apply to any such
losses, claims, damages, liabilities or expenses if such statement or omission
was made in reliance upon and in conformity with information furnished as herein
stated or otherwise furnished in writing to the Company by or on behalf of any
Underwriter for use in any Preliminary Prospectus or the Registration Statement
or the Prospectus or any such amendment thereof or supplement thereto and (2)
the indemnity agreement contained in this paragraph (a) with respect to any
Preliminary Prospectus shall not inure to the benefit of any Underwriter from
whom the person asserting any such losses, claims, damages, liabilities or
expenses purchased the Stock which is the subject thereof (or to the benefit of
any person controlling such Underwriter) if at or prior to the written
confirmation of the sale of such Stock a copy of the Prospectus (or the
Prospectus as amended or supplemented) was not sent or delivered to such person
and the untrue statement or omission of a material fact contained in such
Preliminary Prospectus was corrected in the Prospectus (or the Prospectus as
amended or supplemented) unless the failure is the result of noncompliance by
the Company with paragraph (c) of Section 6 hereof. The indemnity agreements of
the Company and the Stockholders contained in this paragraph (a) and the
representations and warranties of the Company and the Stockholders contained in
Section 2 hereof shall remain operative and in full force and effect regardless
of any investigation made by or on behalf of any indemnified party and shall
survive the delivery of and payment for the Stock. Notwithstanding the
foregoing, the liability of a Stockholder for indemnification under this
Section 7 shall not exceed the amount of the aggregate net proceeds received by
such Stockholder upon the sale of the Option Stock by such Stockholder to the
Underwriters.
(b) Each Underwriter severally agrees to indemnify and hold harmless the
Company, each of its officers who signs the Registration Statement on his own
behalf or pursuant to a power of attorney, each of its directors, each other
Underwriter and each person (including each partner or officer thereof) who
controls the Company or any such other Underwriter within the meaning of Section
15 of the Securities Act, from and against any and all losses, claims, damages
or liabilities, joint or several, to which such indemnified parties or any of
them may become subject under the Securities Act, the Exchange Act, or the
common law or otherwise and to reimburse each of them for any legal or other
expenses (including, except as otherwise hereinafter provided, reasonable fees
and disbursements of counsel) incurred by the respective indemnified parties in
connection with defending against any such losses, claims, damages or
liabilities or in connection with any investigation or inquiry of, or other
proceeding which may
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<PAGE> 18
be brought against, the respective indemnified parties, in each case arising out
of or based upon (i) any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement (including the Prospectus
as part thereof and any Rule 462(b) registration statement) or any
post-effective amendment thereto (including any Rule 462(b) registration
statement) or the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading or (ii) any untrue statement or alleged untrue statement of a
material fact contained in the Prospectus (as amended or as supplemented if the
Company shall have filed with the Commission any amendment thereof or supplement
thereto) or the omission or alleged omission to state therein a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading, if such statement or
omission was made in reliance upon and in conformity with information furnished
as herein stated or otherwise furnished in writing to the Company by such
indemnifying Underwriter expressly for use in the Registration Statement or the
Prospectus or any such amendment thereof or supplement thereto. The indemnity
agreement of each Underwriter contained in this paragraph (b) shall remain
operative and in full force and effect regardless of any investigation made by
or on behalf of any indemnified party and shall survive the delivery of and
payment for the Stock.
(c) Each party indemnified under the provision of paragraphs (a) and (b)
of this Section 7 agrees that, upon the service of a summons or other initial
legal process upon it in any action or suit instituted against it or upon its
receipt of written notification of the commencement of any investigation or
inquiry of, or proceeding against, it in respect of which indemnity may be
sought on account of any indemnity agreement contained in such paragraphs, it
will promptly give written notice (herein called the NOTICE) of such service or
notification to the party or parties from whom indemnification may be sought
hereunder. No indemnification provided for in such paragraphs shall be available
to any party who shall fail so to give the Notice if the party to whom such
Notice was not given was unaware of the action, suit, investigation, inquiry or
proceeding to which the Notice would have related and was prejudiced by the
failure to give the Notice, but the omission so to notify such indemnifying
party or parties of any such service or notification shall not relieve such
indemnifying party or parties from any liability which it or they may have to
the indemnified party for contribution or otherwise than on account of such
indemnity agreement. Any indemnifying party shall be entitled at its own expense
to participate in the defense of any action, suit or proceeding against, or
investigation or inquiry of, an indemnified party. Any indemnifying party shall
be entitled, if it so elects within a reasonable time after receipt of the
Notice by giving written notice (herein called the NOTICE OF DEFENSE) to the
indemnified party, to assume (alone or in conjunction with any other
indemnifying party or parties) the entire defense of such action, suit,
investigation, inquiry or proceeding, in which event such defense shall be
conducted, at the expense of the indemnifying party or parties, by counsel
chosen by such indemnifying party or parties and reasonably satisfactory to the
indemnified party or parties; provided, however, that (i) if the indemnified
party or parties reasonably determine that there may be a conflict between the
positions of the indemnifying party or parties and of the indemnified party or
parties in conducting the defense of such action, suit, investigation, inquiry
or proceeding or that there may be legal defenses available to such indemnified
party or parties different from or in addition to those available to the
indemnifying party or parties, then counsel for the indemnified party or parties
shall be entitled to conduct the defense to the extent reasonably determined by
such counsel to be
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<PAGE> 19
necessary to protect the interests of the indemnified party or parties and (ii)
in any event, the indemnified party or parties shall be entitled to have counsel
chosen by such indemnified party or parties participate in, but not conduct, the
defense. If, within a reasonable time after receipt of the Notice, an
indemnifying party gives a Notice of Defense and the counsel chosen by the
indemnifying party or parties is reasonably satisfactory to the indemnified
party or parties, the indemnifying party or parties will not be liable under
paragraphs (a) through (c) of this Section 7 for any legal or other expenses
subsequently incurred by the indemnified party or parties in connection with the
defense of the action, suit, investigation, inquiry or proceeding, except that
(A) the indemnifying party or parties shall bear the legal and other expenses
incurred in connection with the conduct of the defense as referred to in clause
(i) of the proviso to the preceding sentence and (B) the indemnifying party or
parties shall bear such other expenses as it or they have authorized to be
incurred by the indemnified party or parties. If, within a reasonable time after
receipt of the Notice, no Notice of Defense has been given, the indemnifying
party or parties shall be responsible for any legal or other expenses incurred
by the indemnified party or parties in connection with the defense of the
action, suit, investigation, inquiry or proceeding.
(d) If the indemnification provided for in this Section 7 is unavailable
or insufficient to hold harmless an indemnified party under paragraph (a) or (b)
of this Section 7, then each indemnifying party, in lieu of indemnifying such
indemnified party, shall contribute to the amount paid or payable by such
indemnified party as a result of the losses, claims, damages or liabilities
referred to in paragraph (a) or (b) of this Section 7 (i) in such proportion as
is appropriate to reflect the relative benefits received by each indemnifying
party from the offering of the Stock or (ii) if the allocation provided by
clause (i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of each indemnifying party in connection with
the statements or omissions that resulted in such losses, claims, damages or
liabilities, or actions in respect thereof, as well as any other relevant
equitable considerations. The relative benefits received by the Company and the
Underwriters shall be deemed to be in the same respective proportions as the
total net proceeds from the offering of the Stock received by the Company and
the total underwriting discount received by the Underwriters, as set forth in
the table on the cover page of the Prospectus, bear to the aggregate public
offering price of the Stock. Relative fault shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact relates to
information supplied by each indemnifying party and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such untrue statement or omission.
The parties agree that it would not be just and equitable if
contributions pursuant to this paragraph (d) were to be determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take into account
the equitable considerations referred to in the first sentence of this paragraph
(d). The amount paid by an indemnified party as a result of the losses, claims,
damages or liabilities, or actions in respect thereof, referred to in the first
sentence of this paragraph (d) shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigation, preparing to defend or defending against any action or claim
which is the subject of this paragraph (d). Notwithstanding the provisions of
this paragraph (d), no Underwriter shall be required to contribute any amount in
excess of the underwriting discount applicable to the Stock purchased by such
Underwriter. No person guilty of fraudulent
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<PAGE> 20
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations in this paragraph
(d) to contribute are several in proportion to their respective underwriting
obligations and not joint.
Each party entitled to contribution agrees that upon the service of a
summons or other initial legal process upon it in any action instituted against
it in respect of which contribution may be sought, it will promptly give written
notice of such service to the party or parties from whom contribution may be
sought, but the omission so to notify such party or parties of any such service
shall not relieve the party from whom contribution may be sought from any
obligation it may have hereunder or otherwise (except as specifically provided
in paragraph (c) of this Section 7).
(e) The Company will not, without the prior written consent of each
Underwriter, settle or compromise or consent to the entry of any judgment in any
pending or threatened claim, action, suit or proceeding in respect of which
indemnification may be sought hereunder (whether or not such Underwriter or any
person who controls such Underwriter within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act is a party to such claim,
action, suit or proceeding) unless such settlement, compromise or consent
includes an unconditional release of such Underwriter and each such controlling
person from all liability arising out of such claim, action, suit or proceeding.
8. TERMINATION. This Agreement may be terminated by you at any time
prior to the Closing Date by giving written notice to the Company if after the
date of this Agreement trading in the Common Stock shall have been suspended, or
if there shall have occurred (i) the engagement in hostilities or an escalation
of major hostilities by the United States or the declaration of war or a
national emergency by the United States on or after the date hereof, (ii) any
outbreak of hostilities or other national or international calamity or crisis or
change in economic or political conditions if the effect of such outbreak,
calamity, crisis or change in economic or political conditions in the financial
markets of the United States would, in the Underwriters' reasonable judgment,
make the offering or delivery of the Stock impracticable, (iii) suspension of
trading in securities generally or a material adverse decline in value of
securities generally on the New York Stock Exchange, the American Stock
Exchange, The Nasdaq Stock Market, or limitations on prices (other than
limitations on hours or numbers of days of trading) for securities on either
such exchange or system, (iv) the enactment, publication, decree or other
promulgation of any federal or state statute, regulation, rule or order of, or
commencement of any proceeding or investigation by, any court, legislative body,
agency or other governmental authority which in the Underwriters' reasonable
opinion materially and adversely affects or will materially or adversely affect
the business or operations of the Company, (v) declaration of a banking
moratorium by either federal or New York State authorities or (vi) the taking of
any action by any federal, state or local government or agency in respect of its
monetary or fiscal affairs which in the Underwriters' reasonable opinion has a
material adverse effect on the securities markets in the United States. If this
Agreement shall be terminated pursuant to this Section 8, there shall be no
liability of the Company to the Underwriters and no liability of the
Underwriters to the Company; provided, however, that in the event of any such
termination the Company agrees to indemnify and hold harmless the Underwriters
from all costs or expenses incident to the performance of the obligations of the
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<PAGE> 21
Company under this Agreement, including all costs and expenses referred to in
paragraphs (i) and (j) of Section 6 hereof.
9. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the
several Underwriters to purchase and pay for the Stock shall be subject to the
performance by the Company of all its obligations to be performed hereunder at
or prior to the Closing Date or any later date on which Option Stock is to be
purchased, as the case may be, and to the following further conditions:
(a) The Registration Statement shall have become effective; and no stop
order suspending the effectiveness thereof shall have been issued and no
proceedings therefor shall be pending or threatened by the Commission.
(b) The legality and sufficiency of the sale of the Stock hereunder and
the validity and form of the certificates representing the Stock, all corporate
proceedings and other legal matters incident to the foregoing, and the form of
the Registration Statement and of the Prospectus (except as to the financial
statements contained therein), shall have been approved at or prior to the
Closing Date by Morrison & Foerster LLP , counsel for the Underwriters.
(c) You shall have received from Wilson Sonsini Goodrich & Rosati,
Professional Corporation, counsel for the Company, an opinion, addressed to the
Underwriters and dated the Closing Date, covering the matters set forth in Annex
A hereto, and if Option Stock is purchased at any date after the Closing Date,
an additional opinion from such counsel, addressed to the Underwriters and dated
the Option Closing Date, confirming that the statements expressed as of the
Closing Date in such opinion remain valid as of such later date.
(d) You shall be satisfied that (i) as of the Effective Date, the
statements made in the Registration Statement and the Prospectus were true and
correct and neither the Registration Statement nor the Prospectus omitted to
state any material fact required to be stated therein or necessary in order to
make the statements therein, respectively, not misleading, (ii) since the
Effective Date, no event has occurred which should have been set forth in a
supplement or amendment to the Prospectus which has not been set forth in such a
supplement or amendment, (iii) since the respective dates as of which
information is given in the Registration Statement in the form in which it
originally became effective and the Prospectus contained therein, there has not
been any Material Adverse Effect or any development involving a prospective
Material Adverse Effect, whether or not arising from transactions in the
ordinary course of business, and, since such dates, except in the ordinary
course of business, neither the Company nor any of its subsidiaries has entered
into any material transaction not referred to in the Registration Statement in
the form in which it originally became effective and the Prospectus contained
therein, (iv) neither the Company nor any of its subsidiaries has any material
contingent obligations which are not disclosed in the Registration Statement and
the Prospectus, (v) there are not any pending or known threatened legal
proceedings to which the Company or any of its subsidiaries is a party or of
which property of the Company or any of its subsidiaries is the subject which
are material and which are not disclosed in the Registration Statement and the
Prospectus, (vi) there are not any franchises, contracts, leases or other
documents which are required to be filed as exhibits to the Registration
Statement which have not been filed as required, (vii) the representations and
warranties of the Company and the Stockholders herein
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<PAGE> 22
are true and correct in all material respects as of the Closing Date or any
later date on which Option Stock is to be purchased, as the case may be, and
(viii) there has not been any material change in the market for securities in
general or in political, financial or economic conditions from those reasonably
foreseeable as to render it impracticable in your reasonable judgment to make a
public offering of the Stock, or a material adverse change in market levels for
securities in general (or those of companies in particular) or financial or
economic conditions which render it inadvisable to proceed.
(e) You shall have received on the Closing Date and the Option Closing
Date, a certificate, dated the Closing Date or the Option Closing Date, as the
case may be, and signed by the President and the Chief Financial Officer of the
Company, stating that the respective signers of said certificate have carefully
examined the Registration Statement in the form in which it originally became
effective and the Prospectus contained therein and any supplements or amendments
thereto, and that the statements included in clauses (i) through (viii) of
paragraph (d) of this Section 9 are true and correct.
(f) You shall have received from Deloitte & Touche LLP a letter or
letters, addressed to the Underwriters and dated the Closing Date and the Option
Closing Date, as the case may be, confirming that they are independent public
accountants with respect to the Company within the meaning of the Securities Act
and the Rules and Regulations and based upon the procedures described in their
letter delivered to you concurrently with the execution of this Agreement
(herein called the ORIGINAL LETTER), but carried out to a date not more than
three business days prior to the Closing Date or such later date on which Option
Stock is purchased (i) confirming, to the extent true, that the statements and
conclusions set forth in the Original Letter are accurate as of the Closing Date
or the Option Closing Date, as the case may be, and (ii) setting forth any
revisions and additions to the statements and conclusions set forth in the
Original Letter which are necessary to reflect any changes in the facts
described in the Original Letter since the date of the Original Letter or to
reflect the availability of more recent financial statements, data or
information. The letters shall not disclose any change, or any development
involving a prospective change, in or affecting the business or properties of
the Company or any of its subsidiaries which, in your sole judgment, makes it
impractical or inadvisable to proceed with the public offering of the Stock or
the purchase of the Option Stock as contemplated by the Prospectus.
The Original Letter shall be in form and substance satisfactory to the
Underwriters and shall (i) set forth their opinion with respect to their audit
of the consolidated balance sheets of the Company as of January 2, 1999 and
December 31, 1997, and related consolidated statements of income and
comprehensive income, stockholders' equity (deficiency in assets), and cash
flows for the years ended January 2, 1999, December 31, 1997 and 1996, (ii)
state that Deloitte & Touche LLP has performed the procedures set out in
Statement on Auditing Standards No. 71 (herein called SAS 71) as described in
SAS 71 on the unaudited condensed interim consolidated financial statements for
the nine month period ended October 2, 1999, (herein called the Interim
Financial Statements), (iii) state that in the course of such review, nothing
came to their attention that leads them to believe that any material
modifications need to be made to any of the Interim Financial Statements in
order for them to be in compliance with generally accepted accounting principles
consistently applied across the periods presented, and (iv) address other
matters agreed upon by Deloitte & Touche LLP and you.
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<PAGE> 23
(g) You shall have received from Deloitte & Touche LLP a letter stating
that their review of the Company's system of internal accounting controls, to
the extent they deemed necessary in establishing the scope of their audit of the
Company's consolidated financial statements as of January 2, 1999, did not
disclose any weakness in internal controls that they considered to be material
weaknesses.
(h) You shall have been furnished evidence in usual written or
telegraphic form from the appropriate authorities of the several jurisdictions,
or other evidence satisfactory to you, of the qualification referred to in
paragraph (f) of Section 6 hereof.
(i) Prior to the Closing Date, the Stock to be issued and sold by the
Company shall have been duly authorized for listing by the Nasdaq National
Market upon official notice of issuance.
(j) On or prior to the Closing Date, you shall have received from all
directors, officers, optionholders and beneficial holders of more than 5% of the
outstanding capital stock of the Company agreements, in form reasonably
satisfactory to Hambrecht & Quist LLC, stating that without the prior written
consent of Hambrecht & Quist LLC on behalf of the Underwriters, such person or
entity will not, for a period of 180 days following the commencement of the
public offering of the Stock by the Underwriters, directly or indirectly, (i)
sell, offer, contract to sell, make any short sale, pledge, sell any option or
contract to purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer or dispose of any shares of
capital stock of the Company or any securities convertible into or exchangeable
or exercisable for or any rights to purchase or acquire capital stock of the
Company or (ii) enter into any swap or other agreement that transfers, in whole
or in part, any of the economic consequences or ownership of capital stock of
the Company, whether any such transaction described in clause (i) or (ii) above
is to be settled by delivery of capital stock of the Company or such other
securities, in cash or otherwise.
(k) On or prior to the Closing Date, you shall have received a copy of
the Company's directors and officers liability insurance policy, in an amount
not being less than $______, naming you as an additional insured.
All the agreements, opinions, certificates and letters mentioned above
or elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if Morrison & Foerster LLP, counsel for the Underwriters,
shall be satisfied that they comply in form and scope.
In case any of the conditions specified in this Section 9 shall not be
fulfilled, this Agreement may be terminated by you by giving notice to the
Company. Any such termination shall be without liability of the Company to the
Underwriters and without liability of the Underwriters to the Company; provided,
however, that (i) in the event of such termination, the Company agrees to
indemnify and hold harmless the Underwriters from all costs or expenses incident
to the performance of the obligations of the Company under this Agreement,
including all costs and expenses referred to in paragraphs (i) and (j) of
Section 6 hereof, and (ii) if this Agreement is terminated by you because of any
refusal, inability or failure on the part of the Company to perform any
agreement herein, to fulfill any of the conditions herein, or to comply with any
provision hereof other than by reason of a default by any of the Underwriters,
the Company will reimburse the Underwriters severally upon demand for all
out-of-pocket expenses (including reasonable fees and disbursements of counsel)
that shall have been incurred by them in connection with the transactions
contemplated hereby.
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<PAGE> 24
10. CONDITIONS OF THE OBLIGATION OF THE COMPANY. The obligation of the
Company to deliver the Stock shall be subject to the conditions that (a) the
Registration Statement shall have become effective and (b) no stop order
suspending the effectiveness thereof shall be in effect and no proceedings
therefor shall be pending or threatened by the Commission.
In case either of the conditions specified in this Section 10 shall not
be fulfilled, this Agreement may be terminated by the Company by giving notice
to you. Any such termination shall be without liability of the Company to the
Underwriters and without liability of the Underwriters to the Company; provided,
however, that in the event of any such termination the Company agrees to
indemnify and hold harmless the Underwriters from all costs or expenses incident
to the performance of the obligations of the Company under this Agreement,
including all costs and expenses referred to in paragraphs (i) and (j) of
Section 6 hereof.
11. REIMBURSEMENT OF CERTAIN EXPENSES. In addition to its other
obligations under Section 7 of this Agreement, the Company hereby agrees to
reimburse on a quarterly basis the Underwriters for all reasonable legal and
other expenses incurred in connection with investigating or defending any claim,
action, investigation, inquiry or other proceeding arising out of or based upon
any statement or omission, or any alleged statement or omission, described in
paragraph (a) of Section 7 of this Agreement, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the obligations
under this Section 11 and the possibility that such payments might later be held
to be improper; provided, however, that (i) to the extent any such payment is
ultimately held to be improper, the persons receiving such payments shall
promptly refund them and (ii) such persons shall provide to the Company, upon
request, reasonable assurances of their ability to effect any refund, when and
if due.
12. PERSONS ENTITLED TO BENEFIT OF AGREEMENT. This Agreement shall inure
to the benefit of the Company and the several Underwriters and, with respect to
the provisions of Section 7 hereof, the several parties (in addition to the
Company and the several Underwriters) indemnified under the provisions of said
Section 7, and their respective representatives, successors and assigns. Nothing
in this Agreement is intended or shall be construed to give to any other person,
firm or corporation any legal or equitable remedy or claim under or in respect
of this Agreement or any provision herein contained. The term "successors and
assigns" as herein used shall not include any purchaser, as such purchaser, of
any of the Stock from any of the several Underwriters.
13. NOTICES. Except as otherwise provided herein, all communications
hereunder shall be in writing or by telegraph and, if to the Underwriters, shall
be mailed, telegraphed or delivered to Hambrecht & Quist LLC, One Bush Street,
San Francisco, California 94104, with a copy to Morrison & Foerster LLP, 370
Seventeenth Street, Denver, Colorado 80202, Attention: Brian V. Caid, Esq.; and
if to the Company, shall be mailed, telegraphed or delivered to it at its
office, 7300 College Boulevard, Suite 302, Overland Park, Kansas, Attention:
_____________. All notices given by telegraph shall be promptly confirmed by
letter.
14. MISCELLANEOUS. The reimbursement, indemnification and contribution
agreements contained in this Agreement and the representations, warranties and
covenants in this Agreement shall remain in full force and effect regardless of
(a) any termination of this Agreement, (b) any investigation made by or on
behalf of any Underwriter or controlling person
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<PAGE> 25
thereof, or by or on behalf of the Company or their respective directors or
officers, and (c) delivery and payment for the Stock under this Agreement;
provided, however, that if this Agreement is terminated prior to the Closing
Date, the provisions of paragraphs (k) and (l) of Section 6 hereof shall be of
no further force or effect.
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
This Agreement shall be governed by, and construed in accordance with,
the internal laws of the State of California.
Please sign and return to the Company the enclosed duplicates of this
letter, whereupon this letter will become a binding agreement between the
Company and the several Underwriters in accordance with its terms.
Very truly yours,
THE MANAGEMENT NETWORK GROUP, INC.
By:
-------------------------------
Richard P. Nespola
President and Chief Executive Officer
THE STOCKHOLDERS:
Behrman Capital II L.P.
By:
-------------------------------
[NAME]
General Partner
Strategic Entrepreneur Fund II, L.P.
By:
-------------------------------
[NAME]
General Partner
25
<PAGE> 26
----------------------------------
Richard P. Nespola
------------------------------------
Ralph R. Peck
The foregoing Agreement is hereby confirmed
and accepted as of the date first above written.
HAMBRECHT & QUIST LLC
BANCBOSTON ROBERTSON STEPHENS INC.
SALOMON SMITH BARNEY INC
JEFFERIES & COMPANY INC.
By Hambrecht & Quist LLC
By:
-------------------------------
Managing Director
Acting on behalf of the several Underwriters,
including themselves, named in Schedule I hereto.
26
<PAGE> 27
SCHEDULE I
UNDERWRITERS
<TABLE>
<CAPTION>
SHARES
NUMBER OF TO BE
UNDERWRITERS PURCHASED
------------ ---------
<S> <C>
Hambrecht & Quist LLC .....................................
BancBoston Robertson Stephens Inc. ........................
Salomon Smith Barney Inc. .................................
Jefferies & Company Inc. ..................................
--------
Total ............................................... ______
========
</TABLE>
27
<PAGE> 28
ANNEX A
MATTERS TO BE COVERED IN THE OPINION
OF
WILSON SONSINI GOODRICH & ROSATI, PROFESSIONAL CORPORATION
COUNSEL FOR THE COMPANY
(i) Each of the Company and its subsidiaries has been duly incorporated
and is validly existing as a corporation in good standing under the laws
of the jurisdiction of its incorporation, is duly qualified as a foreign
corporation and in good standing in each jurisdiction in which its
ownership or leasing of property requires such qualification, and has
full corporate power and authority to own or lease its properties and
conduct its business as described in the Registration Statement; all the
issued and outstanding capital stock of each of the subsidiaries of the
Company has been duly authorized and validly issued and is fully paid
and nonassessable, and is owned by the Company free and clear of all
liens, claims, encumbrances and security interests, and no options,
warrants or other rights to purchase, agreements or other obligations to
issue or other rights to convert any obligations into shares of capital
stock or ownership interests in such subsidiaries are outstanding;
(ii) the authorized capital stock of the Company consists of 10,000,000
shares of Preferred Stock, $.001 par value per share, none of which is
issued and outstanding, and 100,000,000 shares of Common Stock, $.001
par value per share, of which there are outstanding _______ shares
(including the Underwritten Stock), proper corporate proceedings have
been taken validly to authorize such authorized capital stock; all of
the outstanding shares of such capital stock (including the Underwritten
Stock) have been duly and validly issued and are fully paid and
nonassessable; any Option Stock purchased after the Closing Date, when
issued and delivered to and paid for by the Underwriters as provided in
the Underwriting Agreement, will have been duly and validly issued and
be fully paid and nonassessable; and no preemptive rights of, or rights
of refusal in favor of, stockholders exist with respect to the Stock, or
the issue and sale thereof, by operation of law or pursuant to the
Certificate of Incorporation or Bylaws of the Company, and there are no
contractual preemptive rights, rights of first refusal or rights of
co-sale which exist with respect to the Option Stock being sold by the
Stockholders or the issue and sale of the Underwritten Stock;
(iii) the Registration Statement has become effective under the
Securities Act; any required filing of the Prospectus pursuant to Rule
424(b) has been made in the manner and within the time period required
by Rule 424(b); and, to the best of such counsel's knowledge, no stop
order suspending the effectiveness of the Registration Statement or
suspending or preventing the use of the Prospectus is in effect and no
proceedings for that purpose have been instituted or are pending or
contemplated by the Commission;
28
<PAGE> 29
(iv) the Registration Statement, the Prospectus and each amendment to
the Registration Statement, as of their respective effective or issue
dates (except as to the financial statements and schedules and other
financial data contained therein, as to which such counsel need express
no opinion), comply as to form in all material respects with the
requirements of the Securities Act and with the rules and regulations of
the Commission thereunder;
(v) the information required to be set forth in the Registration
Statement in answer to Items 9, 10 (insofar as it relates to such
counsel), 11(a), 11(b), 11(c) and 15 of Form S-1, has been reviewed by
such counsel and is correct in all material respects; the description of
the Company's stock option plans and the options granted and which may
be granted thereunder and the options granted otherwise than under such
plans set forth in the Prospectus accurately and fairly presents in all
material respects the information required to be shown with respect to
said plans and options to the extent required by the Securities Act and
the rules and regulations of the Commission thereunder; and to the best
of such counsel's knowledge, there are no statutes or regulations, and
no legal or governmental actions, suits or proceedings pending or
threatened against the Company that are required to be described in the
Prospectus that are not described as required;
(vi) all descriptions in the Prospectus of contracts and other documents
to which the Company or it subsidiaries are a party are accurate in all
material respects; to such counsel's knowledge, there are no franchises,
contracts, leases, loan agreements, notes, documents or legal
proceedings, pending or threatened, required to be described or referred
to in the Registration Statement or the Prospectus or to be filed as
exhibits to the Registration Statement, which are not described and
filed as required; and no default exists in the due performance or
observance of any material obligation, agreement, covenant or condition
contained in any contract, lease, loan agreement, note or other document
filed as an exhibit to the Registration Statement;
(vii) the Underwriting Agreement has been duly authorized, executed and
delivered by the Company;
(viii) the issue and sale by the Company of the shares of Stock sold by
the Company as contemplated by the Underwriting Agreement will not
conflict with, or result in a breach of, the Certificate of
Incorporation or Bylaws of the Company or any of its subsidiaries or any
agreement or instrument known to such counsel to which the Company or
any of its subsidiaries is a party, or any applicable law or regulation,
or so far as is known to such counsel, any order, writ, injunction or
decree, of any jurisdiction, court or governmental instrumentality;
(ix) to such counsel's knowledge and information, there is not pending,
and the Company has not received any notice of any threatened, action,
suit, proceeding, inquiry or investigation, to which the Company or any
of its subsidiaries is a party, or to which the property of the Company
or any of its subsidiaries is subject, before or brought by any court or
governmental agency or body, which might
29
<PAGE> 30
reasonably be expected to result in any Material Adverse Change, or
which might reasonably be expected to materially and adversely affect
the properties or assets of the Company or the consummation of the
Underwriting Agreement or the performance by the Company of its
obligations under the Underwriting Agreement; and all pending legal or
governmental proceedings to which the Company or any of its subsidiaries
is a party or that affect any of their respective properties that are
not described in the Prospectus, including ordinary routine litigation
incidental to the business, could not reasonably be expected to result
in a Material Adverse Change;
(x) all holders of securities of the Company having rights to the
registration of shares of Common Stock, or other securities, because of
the filing of the Registration Statement by the Company have waived such
rights or such rights have expired by reason of lapse of time following
notification of the Company's intent to file the Registration Statement;
(xi) good and marketable title to the shares of Option Stock sold by the
Stockholders under the Underwriting Agreement, free and clear of all
liens, encumbrances, equities, security interests and claims, has been
transferred to the Underwriters who have severally purchased such shares
of Option Stock under the Underwriting Agreement, assuming for the
purpose of this opinion that the Underwriters purchased the same in good
faith without notice of any adverse claims; [the opinion in this clause
(xi) will be provided at any closing at which Option Stock is purchased]
(xii) no consent, approval, authorization or order of any court or
governmental agency or body is required by the Company for the
consummation of the transactions contemplated in the Underwriting
Agreement, except such as have been obtained under the Securities Act
and such as may be required under state securities or blue sky laws in
connection with the purchase and distribution of the Stock by the
Underwriters;
(xiii) the Stock sold by the Stockholders and the Stock issued and sold
by the Company will have been duly authorized for listing on the Nasdaq
National Market upon official notice of issuance;
(xiv) the Company is not an "investment company" or an entity
"controlled" by an "investment company," as such terms are defined in
the Investment Company Act of 1940, as amended;
(xv) to such counsel's knowledge, neither the Company nor its
subsidiaries are in violation of their charters or bylaws.
In addition, such counsel shall also state that such counsel has
no reason to believe that the Registration Statement (except as to the
financial statements and schedules and other financial and statistical
data contained or incorporated by reference therein, as to which such
counsel need not express any opinion or belief) at the Effective Date
contained any untrue statement of a material fact or omitted
30
<PAGE> 31
to state a material fact required to be stated therein or necessary to
make the statements therein not misleading, or that the Prospectus
(except as to the financial statements and schedules and other financial
and statistical data contained or incorporated by reference therein, as
to which such counsel need not express any opinion or belief) as of its
date or at the Closing Date (or any later date on which Option Stock is
purchased), contained or contains any untrue statement of a material
fact or omitted or omits to state a material fact necessary in order to
make the statements therein, in light of the circumstances under which
they were made, not misleading;
31
<PAGE> 1
EXHIBIT 4.1
[THE MANAGEMENT NETWORK GROUP, INC. LOGO]
COMMON STOCK COMMON STOCK
NUMBER SHARES
TMNG-
INCORPORATED UNDER THE LAWS CUSIP 561693 10 2
OF THE STATE OF DELAWARE
SEE REVERSE FOR CERTAIN DEFINITIONS
THE MANAGEMENT NETWORK GROUP, INC.
THIS CERTIFIES THAT
IS THE OWNER OF
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK, PAR VALUE ONE TENTH OF
ONE CENT
($.001) PER SHARE OF
THE MANAGEMENT NETWORK GROUP, INC.
transferable on the books of the Corporation by the owner hereof in person or by
duly authorized attorney upon surrender of this certificate properly endorsed.
This certificate is not valid unless countersigned by the Transfer Agent
and registered by the Registrar.
WITNESS the facsimile seal of the corporation and the facsimile signatures
of its duly authorized officers.
[SEAL]
Dated:
[Signature Illegible] [Signature Illegible]
SECRETARY PRESIDENT AND CHIEF EXECUTIVE OFFICER
COUNTERSIGNED AND REGISTERED:
UMB BANK, N.A.
(KANSAS CITY, MISSOURI)
TRANSFER AGENT
AND REGISTRAR
AUTHORIZED OFFICER
CFC NORTHERN BANK NOTE COMPANY
Please Proof Prepared On Above Date P.O. Box 608
Phone approval LaGrange, Illinois 60525
necessitates Proof Approved: 708/482-3900
returning a signed Fax 708/482/3332
copy, the final By:______________________
approved proof for Date_____________________
our records.
<PAGE> 2
257776QX 102 TUESDAY NOVEMBER 9, 1999
THE MANAGEMENT NETWORK GROUP, INC.
THE CORPORATION WILL FURNISH WITHOUT CHARGES TO EACH STOCKHOLDER WHO SO
REQUESTS, THE POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING,
OPTIONAL OR OTHER SPECIAL RIGHTS OF EACH CLASS OF STOCK OR SERIES THEREOF OF
THE CORPORATION, AND THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH
PREFERENCES AND/OR RIGHTS. SUCH REQUEST MAY BE MADE TO THE CORPORATION OR THE
TRANSFER AGENT.
The following abbreviations, when used in the inscription on the face of this
certificate, shall be continued as through they were written out.
TEN COM - as tenants in common UNIF GIFT MIN ACT. _______Custodian _________
TEN ENT - as tenants by the (Cust) (Minor)
entireties
JT TEN - as joint tenants with under Uniform Gifts to Minors
right of survivorship and
not as tenants in common Act _____________________________
(State)
For Value received_________________________hereby sell, assign and transfer into
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- ---------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------Shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint _____________________________________Attorney
to transfer the said stock on the books of the within-named Corporation with
full power of substitution in the premises.
Dated____________ X_________________________________________________
X_________________________________________________
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE
FACE OF THE CERTIFICATE, IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT, OR ANY CHANGE
WHATEVER.
SIGNATURE(S) GUARANTEED:
By______________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY
AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKHOLDERS, SAVINGS AND LOAN
ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE
GUARANTEE MEDALLLION PROGRAM, PURSUANT
TO S.E.C., RULE 17AD-15.
CFC NORTHERN BANK NOTE COMPANY, L.L.C.
--------------------------------------------------------------------------
Phone approval Proof Prepared On Above Date P.O. Box 608
necessitates Proof Approved: LaGrange, Illinois 60525
returning a signed 708/482-3900
copy of the final By____________________________ Fax 708/482-3332
approved proof for
our records. Date__________________________
--------------------------------------------------------------------------
<PAGE> 1
- --------------------------------------------------------------------------------
NEITHER THIS WARRANT NOR THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE
HEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE
LAWS OF ANY STATE. NO SALE, TRANSFER OR OTHER DISPOSITION OF THIS WARRANT OR
SAID SHARES MAY BE EFFECTED WITHOUT (i) AN EFFECTIVE REGISTRATION STATEMENT
RELATED THERETO OR (ii) AN OPINION OF COUNSEL FOR THE HOLDER, REASONABLY
SATISFACTORY TO THE COMPANY, THAT SUCH REGISTRATION IS NOT REQUIRED.
- --------------------------------------------------------------------------------
SHARES ISSUABLE UPON EXERCISE: 1,000,000 GRANT DATE: OCTOBER __, 1999
WARRANT NO. ____
WARRANT TO PURCHASE COMMON STOCK
OF
THE MANAGEMENT NETWORK GROUP, INC.
THIS CERTIFIES THAT, for good and valuable consideration,
receipt of which is hereby acknowledged, Williams Communications, Inc.
("Holder"), or its registered assigns, is entitled to subscribe for and purchase
1,000,000 shares of common stock, par value $.0001 per share (the "Shares") of
THE MANAGEMENT NETWORK GROUP, INC., a Delaware corporation (the "Company"), at a
price per share of $1.00, as adjusted from time to time pursuant to the terms
specified herein ("Warrant Price"), subject to the provisions and upon the
terms, conditions and adjustments hereinafter set forth.
THE HOLDER ACKNOWLEDGES THAT THE COMPANY IS CONTEMPLATING A 1-FOR-2
REVERSE SPLIT OF ITS COMMON STOCK TO BE EFFECTED ON OR AROUND THE PARTIES
EXECUTION OF THIS WARRANT. HOLDER FURTHER ACKNOWLEDGES AND AGREES THAT
SUBSEQUENT TO THIS REVERSE SPLIT, REGARDLESS OF WHETHER SUCH REVERSE SPLIT IS
EFFECTED PRIOR TO HOLDER'S ACCEPTANCE HEREOF, THIS WARRANT WILL ENTITLE HOLDER
TO SUBSCRIBE FOR AND PURCHASE 500,000 SHARES AT A WARRANT PRICE OF $2.00 PER
SHARE, SUBJECT TO THE PROVISIONS AND UPON THE TERMS, CONDITIONS AND ADJUSTMENTS
HEREINAFTER SET FORTH.
1. EXERCISE OF WARRANT.
1.1 EXERCISE PERIOD. Holder may exercise this Warrant, in
whole or in part, at any time and from time to time (i) on or after November
____, 1999 [30 days after the Grant Date], and (ii) before the fifth anniversary
date of the Grant Date.
1.2 METHOD OF EXERCISE. Holder may exercise this Warrant by
delivering a duly executed Notice of Exercise in substantially the form attached
as Appendix 1 to the principal office of the Company. Holder shall also deliver
to the Company a check for the aggregate Warrant Price for the Shares being
purchased.
<PAGE> 2
1.3 NET EXERCISE. In lieu of exercising this Warrant pursuant
to Section 1.2 above, the Holder may elect to receive, without the payment by
the Holder of any additional consideration, Shares equal to the value of this
Warrant (or the portion thereof being canceled) by surrender of this Warrant at
the principal office of the Company together with notice of such election, in
which event the Company shall issue to the Holder hereof a number of Shares
computed using the following formula:
X = Y*(A-B) / A
Where: X = The number of Shares to be issued to the Holder
pursuant to this net exercise.
Y = The number of Shares in respect of which the net
issue election is made.
A = The fair market value (as determined below) of one
Share.
B = The Warrant Price (as adjusted to the date of
delivery of the Holder notice of election).
No fractional shares arising out of the above formula for determining the number
of shares issuable in such exchange shall be issued, and the Company shall in
lieu thereof make payment to Holder of cash in the amount of such fraction
multiplied by the fair market value of a one Share on the date of the exchange.
Any tax liability related to such transaction shall be paid by Holder. For the
purposes of this Section 1.3, the "fair market value" of any number of Shares
shall be calculated on the basis of (a) if the Company's common stock is then
traded on a securities exchange, the average of the closing prices of the common
stock on such exchange over the 5-day period ending three (3) days prior to the
date of exercise, (b) if the common stock is then actively traded
over-the-counter, the average of the closing bid or sale prices (whichever is
applicable) of the common stock over the 5-day period ending three (3) days
prior to the date of exercise, and (c) if there is no active public market for
the common stock, the fair market value thereof as determined in good faith upon
agreement by the parties, but if they cannot so agree, then by an independent
appraiser to be mutually agreed upon by the parties. The parties shall share
equally all costs associated with an appraisal for Holder's first net issuance
election requiring an independent appraiser. In the event any net exercise
elections thereafter require an independent appraiser, all costs associated
therewith shall be paid solely by the Holder
1.4 DELIVERY OF CERTIFICATE AND NEW WARRANT. Promptly after
Holder exercises this Warrant, the Company shall deliver to Holder certificates
for the Shares acquired and, if this Warrant has not been fully exercised and
has not expired, a new Warrant representing the Shares not so acquired.
2. STOCK FULLY PAID; RESERVATION OF SHARES. All Shares that may
be issued upon the exercise of the rights represented by this Warrant will, upon
issuance, be validly issued, fully paid and nonassessable, and free from all
taxes, liens and charges with respect to the
2
<PAGE> 3
issue thereof. During the period within which the rights represented by the
Warrant may be exercised, the Company will at all times have authorized and
reserved for the purpose of issuance upon exercise of the purchase rights
evidenced by this Warrant, a sufficient number of Shares to provide for the
exercise of the rights represented by this Warrant.
3. ADJUSTMENT TO THE SHARES AND WARRANT PRICE. The number of
Shares purchasable upon the exercise of this Warrant and the Warrant Price are
subject to adjustment from time to time as provided in this Section 3.
3.1 SUBDIVISION OR COMBINATION OF SHARES. If the Company shall
at any time subdivide its outstanding Shares into a greater number of Shares
(including a stock split effected as a stock dividend) or combine its
outstanding Shares into a lesser number of Shares, the number of Shares issuable
upon exercise of this Warrant shall be adjusted to such number as is obtained by
multiplying the number of Shares issuable upon exercise of this Warrant
immediately prior to such subdivision or combination by a fraction, the
numerator of which is the aggregate number of Shares outstanding immediately
after giving effect to such subdivision or combination and the denominator of
which is the aggregate number of Shares outstanding immediately prior to such
subdivision or combination, and the Warrant Price shall be correspondingly
adjusted to such amount as shall, when multiplied by the number of Shares
issuable upon full exercise of this Warrant (as increased or decreased to
reflect such subdivision or combination of outstanding Shares, as the case may
be), equal the product of the Warrant Price in effect immediately prior to such
subdivision or combination multiplied by the number of Shares issuable upon
exercise of this Warrant immediately prior to such subdivision or combination.
3.2 EFFECT OF SALE, MERGER OR CONSOLIDATION. If any capital
reorganization or reclassification of the capital stock of the Company, or
consolidation or merger of the Company with another corporation, or sale of all
or substantially all of the Company's assets to another corporation shall be
effected after the date hereof in such a way that holders of Shares shall be
entitled to receive stock, securities or assets with respect to or in exchange
for their Shares, then, as a pre-condition of such reorganization,
reclassification, consolidation, merger or sale, lawful and adequate provisions
shall be made whereby the Holder shall thereafter have the right to purchase and
receive, upon the basis and the terms and conditions specified in this Warrant
and in lieu of the Shares immediately theretofore purchasable and receivable
upon the exercise of this Warrant, such shares of stock, securities or assets as
may be issued or payable with respect to or in exchange for a number of
outstanding Shares equal to the number of Shares immediately theretofore
purchasable and receivable upon the exercise of this Warrant, and in any such
case appropriate provisions shall be made with respect to the rights and
interests of the Holder so that the provisions of this Warrant (including,
without limitation, provisions for adjustments of the Warrant Price and of the
number of Shares issuable upon the exercise of this Warrant) shall thereafter be
applicable, as nearly as may be possible, in relation to any shares of stock,
securities or assets thereafter deliverable upon the exercise of this Warrant.
The Company shall not effect any such consolidation, merger or sale unless prior
to or simultaneously with the consummation thereof the successor corporation (if
other than the Company) resulting from such consolidation or merger or the
corporation purchasing such assets shall assume, by written instrument executed
and delivered to the Holder at its last address
3
<PAGE> 4
appearing on the books of the Company, the obligation to deliver to the Holder
such shares of stock, securities or assets as, in accordance with the foregoing
sentence, the Holder may be entitled to purchase.
3.3 NO IMPAIRMENT. The Company will not, by amendment of its
Articles of Incorporation or through any reorganization, recapitalization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms to be observed or performed hereunder by the
Company, but will at all times in good faith assist in the carrying out of all
the provisions of this Section 3 and in the taking of all such action as may be
necessary or appropriate in order to protect the rights of Holder against
impairment.
4. NOTICE OF ADJUSTMENTS. Whenever the number of Shares subject
to this Warrant and the Warrant Price shall be adjusted pursuant to the
provisions hereof, (a) the Company shall promptly notify Holder of such
adjustment, and (b) the Company shall within sixty (60) days of such adjustment
deliver a certificate to the registered Holder hereof setting forth, in
reasonable detail, the event requiring the adjustment, the amount of the
adjustment, the method by which such adjustment was calculated, and the number
of Shares and Warrant Price after giving effect to such adjustment. For purposes
of this Section 4, the Company's public filings with the Securities and Exchange
Commission shall be deemed proper notice under clause (a) above.
5. FRACTIONAL SHARES. No fractional shares will be issued in
connection with any exercise hereunder, but in lieu of such fractional shares
the Company shall make a cash payment therefor upon the basis of the Warrant
Price then in effect.
6. COMPLIANCE WITH SECURITIES ACTS. Holder, by acceptance hereof,
agrees that this Warrant and the Shares to be issued upon exercise hereof are
being acquired for investment and that Holder will not offer, sell or otherwise
dispose of this Warrant or any Shares to be issued upon exercise hereof except
as permitted herein and under circumstances which will not result in a violation
of the Securities Act of 1933, as amended (the "Act"), or the securities laws of
any state. The Company may issue stop-transfer instructions to its transfer
agent in connection with the foregoing restriction. This Warrant and all Shares
issued upon exercise of this Warrant (unless registered under the Act) shall be
stamped or imprinted with a legend in substantially the following form:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, OR THE LAWS OF ANY STATE. NO SALE OR DISPOSITION MAY BE
EFFECTED WITHOUT (i) AN EFFECTIVE REGISTRATION STATEMENT RELATED
THERETO OR (ii) AN OPINION OF COUNSEL FOR THE HOLDER, REASONABLY
SATISFACTORY TO THE COMPANY, THAT SUCH REGISTRATION IS NOT REQUIRED.
4
<PAGE> 5
7. RESTRICTIONS ON TRANSFER OF WARRANT. This Warrant and the
Holder's rights hereunder may not be transferred, assigned or subjected to a
pledge or security interest, except that the Holder may transfer this Warrant,
in whole, to an entity controlled by or under common control with the Holder by
surrender of this Warrant with a properly executed Assignment (in the form of
Appendix 2) at the principal office of the Company. An entity controlled by or
under common control with Holder shall be determined in accordance with Internal
Revenue Code Section 1563 except that 51% shall be substituted for the 80%
requirement thereunder. If the Company determines that the proposed assignment
is permitted pursuant to the provisions hereof, the Company shall register the
assignment of this Warrant in accordance with the information contained in the
executed Assignment and shall, without charge, execute and deliver a new Warrant
in the name of the assignee named in such Assignment and this Warrant shall
promptly be canceled. Conditions to the transfer of this Warrant shall be that
(i) Holder deliver to the Company an opinion of counsel (which may be in-house
counsel to the Holder), reasonably satisfactory in form and substance to the
Company's counsel, to the effect that the proposed transfer will not be in
violation of the Act or of any applicable state law, and (ii) the proposed
transferee deliver to the Company its written agreement to accept and be bound
by all of the terms and conditions of this Warrant.
8. ACCESS TO INFORMATION. The Holder acknowledges that it has had
access to all material information concerning the Company which it has
requested. The Holder also acknowledges that it has had the opportunity to, and
has to its satisfaction, questioned the officers of the Company with respect to
such Holder's investment hereunder.
9. REPRESENTATIONS AND WARRANTIES OF HOLDER. The Holder
represents and warrants to the Company that it understands that the Warrant and
the Shares are speculative investments, that it is aware of the Company's
business affairs and financial condition, and that it has acquired sufficient
information about the Company to reach an informed and knowledgeable decision to
acquire the Warrant. The Holder is acquiring the Warrant and any Shares issued
upon exercise thereof for investment for its own account only and not with a
view to, or for resale in connection with, any "distribution" thereof within the
meaning of the Act or applicable state securities laws. The Holder further
represents that it understands that the Warrant and Shares have not been
registered under the Act or applicable state securities laws by reason of
specific exemptions therefrom, which exemptions depend upon, among other things,
the bona fide nature of Holder's investment intent as expressed herein. The
Holder represents that the Warrant and any Shares purchased upon exercise
thereof must be held indefinitely unless such securities are subsequently
registered under the Act and all applicable state securities laws, or an
exemption from such registration is available.
5
<PAGE> 6
10. REGISTRATION RIGHTS.
10.1 DEMAND REGISTRATION. If the Company shall receive from
the Holder a written request that the Company effect a registration with respect
to any of the Shares held by the Holder, the Company shall as soon as
practicable, but in any event within ninety (90) days after receipt of the
Holder's request, use its best efforts to register (including, without
limitation, the execution of an undertaking to file post-effective amendments
and any other governmental requirements) all Shares which the Holder requests to
be registered; provided, that the Company shall not be obligated to file a
registration statement pursuant to this Section 10.1:
(1) if the number of Shares requested to be registered
shall be less than 51% of the Shares held by the Holder; or
(2) until twelve (12) months after the effective date
of the Company's initial registered offering of Shares to the general
public; or
(3) after the Company has effected one such
registration pursuant to this Section 10.1 with respect to the full
number of shares requested by Holder, and such registration has been
declared or ordered effective.
10.2 UNDERWRITING. In the event Holder intends to offer for
sale the Shares pursuant to Section 10.1, such offering shall be firmly
underwritten by an underwriter approved by the Company in its sole discretion.
The Holder shall negotiate and enter into an underwriting agreement in customary
form with the Company and the underwriter selected.
10.3 DELAYS AND SUSPENSIONS. Notwithstanding the foregoing,
the Company may delay filing a registration statement, and may withhold efforts
to cause the registration statement to become effective, if the Board of
Directors of the Company determines in good faith that such registration might
(i) interfere with or affect the negotiation or completion of any transaction
that is being contemplated by the Company (whether or not a final decision has
been made to undertake such transaction) at the time the right to delay is
exercised, or (ii) involve initial or continuing disclosure obligations that
might not be in the best interest of the Company's stockholders. If, after a
registration statement becomes effective, the Company advises the Holder that
the Company considers it appropriate for the registration statement to be
amended, the Holder shall suspend any further sales of its registered Shares
until the Company advises them that the registration statement has been so
amended.
10.4 PIGGYBACK REGISTRATION.
(1) If at any time or from time to time, the Company
shall determine to register any of its common stock, for its own
account or the account of any of its shareholders, other than a
registration relating solely to employee benefit plans, or a
registration relating solely to a Securities and Exchange Commission
Rule 145 transaction, the Company will:
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<PAGE> 7
(i) give Holder written notice thereof as soon as
practicable prior to filing the registration
statement; and
(ii) include in such registration and in any
underwriting involved therein, all the Shares
specified in a written request, made within 15
days after receipt of such written notice from
the Company, by Holder, except as set forth in
subsection (b) below.
(2) If the registration is for a registered public
offering involving an underwriting, the Company shall so advise the
Holder as part of the written notice given pursuant to subsection
(a)(i), above. Holder shall (together with the Company) enter into an
underwriting agreement in customary form with the underwriter or
underwriters selected for such underwriting by the Company.
Notwithstanding any other provision of this Section 10.4(b), if the
managing underwriter determines that marketing factors require a
limitation of the number of shares to be underwritten, the managing
underwriter may limit the number of Shares to be included in the
registration and underwriting. The Company shall so advise the Holder,
and the number of Shares that may be included in the registration and
underwriting shall be reduced to an amount acceptable to the
underwriter. If Holder disapproves of the terms of any such
underwriting, it may elect to withdraw such Shares from registration.
11. LIMITATION OF RIGHTS. This Warrant does not confer upon the
record Holder hereof any voting rights or other rights as a stockholder of the
Company, either at law or equity. The rights of the Holder are limited to those
expressed herein and the Holder by acceptance hereof, consents to and agrees to
be bound by and to comply with all the provisions of this Warrant.
12. "MARKET STAND-OFF" AGREEMENT. Holder hereby agrees that,
during the period of duration specified by the Company and an underwriter of
common stock or other securities of the Company, following the effective date of
a registration statement of the Company filed under the Act, it shall not, to
the extent requested by the Company and such underwriter, directly or indirectly
sell, offer to sell, contract to sell (including, without limitation, any short
sale), grant any option to purchase or otherwise transfer or dispose of (other
than to donees who agree to be similarly bound) any common stock of the Company
held by it at any time during such period except common stock included in such
registration statement; provided, however, that such market stand-off time
period shall not exceed 180 days. In order to enforce this covenant, the Company
may impose stop-transfer instructions with respect to the Shares of Holder until
the end of such period.
13. REPLACEMENT OF WARRANTS. On receipt of certification of the
Holder reasonably satisfactory to the Company of the loss, theft, destruction or
mutilation of this Warrant and, in the case of loss, theft or destruction, on
delivery of an indemnity agreement reasonably satisfactory in form and amount to
the Company or, in the case of mutilation, on surrender and
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<PAGE> 8
cancellation of this Warrant, the Company at its expense shall execute and
deliver, in lieu of this Warrant, a new warrant of like tenor.
14. MODIFICATION AND WAIVER. This Warrant and any provision hereof
may be changed, waived, discharged or terminated only by an instrument in
writing signed by the party against which enforcement of the same is sought.
15. NOTICES. All notices and other communications from the Company
to the Holder, or vice versa, shall be deemed delivered and effective when given
personally or mailed by first-class registered or certified mail, postage
prepaid, at such address as may have been furnished to the Company or the
Holder, as the case may be, in writing by the Company or such Holder from time
to time.
16. GOVERNING LAW. This warrant shall be construed and enforced in
accordance with, and the rights of the parties shall be governed by, the laws of
the state of Delaware.
THE MANAGEMENT NETWORK GROUP, INC.
By:
---------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
Address:
----------------------------------
----------------------------------
Date:
----------------------
AGREED AND ACCEPTED:
WILLIAMS COMMUNICATIONS, INC.
By:
---------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
Address:
----------------------------------
Date:
---------------------------------- -----------------------
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APPENDIX 1
NOTICE OF EXERCISE
1. The undersigned hereby elects to purchase shares of the Common Stock
of The Management Network Group, Inc. pursuant to the terms of the attached
Warrant, and tenders herewith payment of the purchase price of such shares in
full.
2. Please issue a certificate or certificates representing said shares
in the name of the undersigned or in such other name as is specified below:
- --------------------------------
(Name)
- --------------------------------
- --------------------------------
(Address)
3. The undersigned represents that it is acquiring the shares solely
for its own account and not as a nominee for any other party and not with a view
toward the resale or distribution thereof except in compliance with applicable
securities laws.
-----------------------------------
(Signature)
- -----------------------------
(Date)
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<PAGE> 10
APPENDIX 2
ASSIGNMENT
To be executed by the registered holder to effect a permitted transfer
of the attached Warrant. Capitalized terms have the same meanings ascribed to
them in the Warrant.
FOR VALUE RECEIVED
("Assignor")
hereby sells, assigns and transfers unto
("Assignee")
(Name)
(Address)
the right to purchase shares of Common Stock of The Management Network Group,
Inc. evidenced by the attached Warrant, together with all right, title and
interest therein, and does irrevocably constitute and appoint
________________________________________ attorney to transfer the said right on
the books of said corporation with full power of substitution in the premises.
In satisfaction of a condition to the effectiveness of this assignment,
Assignor hereby certifies that Assignee is an entity controlled by or under
common control with Assignor.
Date: Assignor:
-------------------- -------------------------------
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
10
<PAGE> 1
EXHIBIT 5.1
[WILSON SONSINI GOODRICH & ROSATI LETTERHEAD]
November 17, 1999
The Management Network Group, Inc.
7300 College Boulevard, Suite 302
Overland Park, KS 66210
Re: Registration Statement on Form S-1
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1 filed by you with
the Securities and Exchange Commission (the "Commission") on September
20, 1999 (as such may be further amended or supplemented, the "Registration
Statement"), in connection with the registration under the Securities Act of
1933, as amended (the "Act"), of up to 5,307,250 shares of your Common Stock
(the "Shares"). The Shares, which include up to 692,250 shares of Common Stock
issuable pursuant to an over-allotment option granted to the underwriters (the
"Underwriters"), are to be sold to the Underwriters as described in such
Registration Statement for sale to the public. As your counsel in connection
with this transaction, we have examined the proceedings proposed to be taken by
you in connection with the issuance and sale of the Shares.
Based on the foregoing, it is our opinion that the Shares, when issued and
sold in the manner described in the Registration Statement, will be legally and
validly issued, fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement, and further consent to the use of our name wherever appearing in the
Registration Statement, including the prospectus constituting a part thereof,
which has been approved by us, as such may be further amended or supplemented,
or incorporated by reference in any Registration Statement relating to the
prospectus filed pursuant to Rule 462(b) of the Act.
Very truly yours,
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
/s/ WILSON SONSINI GOODRICH & ROSATI
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 3 to Registration Statement No.
333-87383 of The Management Network Group, Inc. on Form S-1 of our report dated
September 17, 1999 (except with respect to matters discussed in Note 13 as to
which the date is November 8, 1999) (which report expresses an unqualified
opinion and includes an explanatory paragraph referring to the Company's
retroactive change in its method of accounting for stock based compensation to
non-employees), appearing in the Prospectus, which is part of this Registration
Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
DELOITTE & TOUCHE LLP
Kansas City, Missouri
November 15, 1999
