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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to
Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 2000
------------------------------------------------
or
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission file number:
---------------------------------
THE MANAGEMENT NETWORK GROUP, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 48-1129619
------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7300 COLLEGE BLVD., SUITE 302, OVERLAND PARK, KS 66210
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(Address of principal executive offices) (Zip Code)
913-345-9315
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Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date.
As of November 6, 2000 TMNG had outstanding 28,997,994 shares of common
stock.
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TABLE OF CONTENTS
To jump to a section, double-click on the section name.
10-Q
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PART I........................................................................ 3
ITEM 1........................................................................ 3
Balance sheet................................................................. 3
Income statement.............................................................. 4
Cash flow statement........................................................... 5
ITEM 2........................................................................ 10
PART II....................................................................... 20
Item 1........................................................................ 20
Item 2........................................................................ 21
Item 6........................................................................ 21
EX-27.1
Exhibit....................................................................... 22
</TABLE>
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THE MANAGEMENT NETWORK GROUP, INC.
INDEX
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PAGE
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PART I. FINANCIAL INFORMATION:
ITEM 1. Consolidated Condensed Financial Statements:
Consolidated Condensed Balance Sheets -
September 30, 2000 (unaudited) and January 1, 2000 ........... 3
Consolidated Condensed Statements of Income and
Comprehensive Income (unaudited) - Thirteen weeks ended
September 30, 2000 and October 2, 1999, and Thirty-nine
Weeks Ended September 30, 2000 and October 2, 1999............. 4
Consolidated Condensed Statements of Cash Flows
(unaudited) - Thirty-nine Weeks ended September 30, 2000
and October 2, 1999 ........................................... 5
Notes to Consolidated Condensed Financial Statements
(unaudited).................................................... 7
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ........................... 10
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk ..... 20
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings............................................... 20
ITEM 6. Exhibits and Reports on Form 8-K................................ 21
Signatures..................................................................... 21
</TABLE>
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PART I. FINANCIAL INFORMATION:
ITEM 1. Consolidated Condensed Financial Statements:
THE MANAGEMENT NETWORK GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
(unaudited)
January 1, September 30,
2000 2000
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<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 51,523 $ 63,971
Receivables:
Accounts receivable 8,280 21,645
Accounts receivable -- unbilled 4,863 8,076
--------- ---------
13,143 29,721
Less: Allowance for doubtful accounts (350) (1,117)
--------- ---------
12,793 28,604
Other assets 1,048 2,029
--------- ---------
Total current assets 65,364 94,604
--------- ---------
PROPERTY AND EQUIPMENT, NET 706 1,169
DEFERRED TAX ASSET 1,312 3,792
GOODWILL, NET 0 18,533
OTHER ASSETS 0 48
--------- ---------
Total assets $ 67,382 $ 118,146
========= =========
CURRENT LIABILITIES:
Trade accounts payable $ 888 $ 2,675
Accrued payroll, bonuses and related expenses 1,857 4,605
Other accrued liabilities 1,200 3,509
--------- ---------
Total current liabilities 3,945 10,789
--------- ---------
STOCKHOLDERS' EQUITY
Common Stock:
Voting -- $.001 par value, 100,000,000 shares
authorized; 27,417,370 and 28,962,287 issued
and outstanding on January 1, 2000 and
September 30, 2000, respectively 27 29
Preferred stock - $.001 par value, 10,000,000
Shares authorized; no shares issued or
Outstanding
Additional paid-in capital 104,137 136,957
Accumulated deficit (32,138) (25,147)
Accumulated other comprehensive income -
Foreign currency translation adjustment (2) (34)
Unearned compensation (8,587) (4,448)
--------- ---------
Total stockholders' equity 63,437 107,357
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 67,382 $ 118,146
========= =========
</TABLE>
See notes to consolidated condensed financial statements.
3
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THE MANAGEMENT NETWORK GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
For the thirteen For the thirty-nine
weeks ended weeks ended
-------------------------------- --------------------------------
October 2, September 30, October 2, September 30,
1999 2000 1999 2000
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES $ 13,112 $ 20,003 $ 36,968 $ 55,870
COST OF SERVICES:
Direct cost of services 6,801 10,300 19,178 28,939
Equity related charges 822 1,241 1,778 5,158
------------ ------------ ------------ ------------
Total cost of services 7,623 11,541 20,956 34,097
------------ ------------ ------------ ------------
GROSS PROFIT 5,489 8,462 16,012 21,773
OPERATING EXPENSES:
Selling, general and
administrative 2,593 4,344 7,479 11,792
Equity related charges 376 392 946 1,202
------------ ------------ ------------ ------------
Total operating expenses 2,969 4,736 8,425 12,994
------------ ------------ ------------ ------------
INCOME FROM OPERATIONS 2,520 3,726 7,587 8,779
OTHER INCOME (EXPENSE)
Interest income 1 1,279 3 2,906
Interest expense (537) 0 (1,653) (4)
Other, net 17 95 (61) (29)
------------ ------------ ------------ ------------
Total other income
(expense) (519) 1,374 (1,711) 2,873
------------ ------------ ------------ ------------
INCOME BEFORE PROVISION FOR
INCOME TAXES 2,001 5,100 5,876 11,652
PROVISION FOR INCOME TAXES (829) (2,040) (2,437) (4,661)
------------ ------------ ------------ ------------
NET INCOME 1,172 3,060 3,439 6,991
OTHER COMPREHENSIVE INCOME -
Foreign currency translation
Adjustment (4) 13 (2) (32)
------------ ------------ ------------ ------------
COMPREHENSIVE INCOME $ 1,168 $ 3,073 $ 3,437 $ 6,959
============ ============ ============ ============
NET INCOME PER COMMON SHARE
Basic $ 0.05 $ 0.11 $ 0.15 $ 0.25
============ ============ ============ ============
Diluted $ 0.05 $ 0.10 $ 0.15 $ 0.24
============ ============ ============ ============
SHARES USED IN CALCULATION OF
NET INCOME PER COMMON SHARE
Basic 22,566,500 28,304,775 22,526,932 27,728,082
============ ============ ============ ============
Diluted 23,162,418 29,572,076 23,056,018 28,965,065
============ ============ ============ ============
</TABLE>
See notes to consolidated condensed financial statements.
4
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THE MANAGEMENT NETWORK GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
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<CAPTION>
For the thirty-nine
weeks ended
--------------------------
October 2, September 30,
1999 2000
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,439 $ 6,991
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 195 341
Stock option and bonus share
compensation 2,724 6,360
Income tax benefit realized upon
exercise of nonqualified stock
options applied to equity 1,336
Provision for deferred income
taxes (1,270) (2,786)
Changes in operating assets and
liabilities, net of business
acquisitions:
Accounts receivable (1,449) (9,587)
Accounts receivable --
unbilled (1,981) (3,213)
Other assets (486) (709)
Trade accounts payable 114 16
Trade accounts payable --
related party (332)
Accrued liabilities 2,026 4,553
Income tax payable 12
-------- --------
Net cash provided by
operating activities 2,992 3,302
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of business, net of cash
acquired (11,601)
Acquisition of property and
equipment (405) (485)
-------- --------
Net cash used in
investing activities (405) (12,086)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank overdraft 436
Proceeds received from exercise of
nonqualified stock options 324
Net borrowings under revolving
credit facility (1,699)
Payments made on long-term debt (975)
Proceeds from issuance of common
stock, net of expenses 168 20,940
-------- --------
Net cash provided by (used in) financing
activities (2,070) 21,264
-------- --------
EFFECT OF EXCHANGE RATE ON CASH AND
CASH EQUIVALENTS (15) (32)
-------- --------
Net increase in cash and cash
equivalents 502 12,448
Cash and cash equivalents, beginning
</TABLE>
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<TABLE>
<S> <C> <C>
of period 959 51,523
-------- --------
Cash and cash equivalents, end of
period $ 1,461 $ 63,971
======== ========
Supplemental disclosure of cash flow information:
Cash paid during period for
interest $ 1,790 $ 4
======== ========
Cash paid during period for taxes $ 3,695 $ 5,320
======== ========
Supplemental disclosure of non-cash
investing and financing activities:
Acquisition of business:
Fair value of assets acquired $ 3,667
Liabilities incurred or assumed $ (2,275)
Common stock issued $ 8,000
</TABLE>
See notes to consolidated condensed financial statements.
6
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THE MANAGEMENT NETWORK GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Reporting
The accompanying consolidated condensed financial statements of The
Management Network Group, Inc. (the "Company") as of September 30, 2000,
and for the thirteen and thirty-nine weeks ended September 30, 2000 and
October 2, 1999, are unaudited and reflect all normal recurring
adjustments which are, in the opinion of management, necessary for the
fair presentation of the Company's consolidated condensed financial
position, results of operations, and cash flows as of these dates and
for the periods presented. The consolidated condensed financial
statements have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial
information. Consequently, these statements do not include all the
disclosures normally required by accounting principles generally
accepted in the United States of America for annual financial statements
nor those normally made in the Company's Annual Report on Form 10-K.
Accordingly, reference should be made to the Company's Annual Report on
Form 10-K for additional disclosures, including a summary of the
Company's accounting policies, which have not changed.
2. Earnings Per Share
The following table sets forth the computation of basic and diluted net
income per share for the periods indicated (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
FOR THE THIRTEEN FOR THE THIRTY-NINE
WEEKS ENDED WEEKS ENDED
-------------------------- ---------------------------
OCTOBER 2, SEPTEMBER 30, OCTOBER 2, SEPTEMBER 30,
1999 2000 1999 2000
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<S> <C> <C> <C> <C>
Numerator
Net income $ 1,172 $ 3,060 $ 3,439 $ 6,991
Denominator
Weighted average common shares 22,567 28,305 22,527 27,728
Weighted average unvested common 1,443 3,006 1,236 2,951
shares
Weighted average unvested common
shares (848) (1,739) (707) (1,714)
Subject to repurchase
Denominator for basic calculation 22,567 28,305 22,527 27,728
Denominator for diluted calculation 23,162 29,572 23,056 28,965
Basic net income per share $ 0.05 $ 0.11 $ 0.15 $ 0.25
Diluted net income per share $ 0.05 $ 0.10 $ 0.15 $ 0.24
</TABLE>
3. Warrant Grant and Stock Based Compensation
During the thirty-nine weeks ended September 30, 2000, the Company
granted approximately 1,182,000 stock options to employees and 38,000
stock options to a non-employee director at a weighted average exercise
price of $22.24, and options for approximately 78,000 shares were
forfeited. During the same period, the Company recorded unearned
compensation of approximately $13,000 and compensation expense related
to all stock options of $3.7 million. During the thirteen weeks ended
September 30, 2000, the Company granted approximately 506,000 stock
options to employees at a weighted average exercise price $20.89.
367,000 of these options were related to the acquisition of The
Weathersby Group, Inc. ("TWG"), discussed in greater detail in footnote
5.
Additionally, 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. During the thirty-nine weeks ended
September 30, 2000, the Company recognized $2.7 million in equity
related charges. During the thirteen weeks ended September 30, 2000, the
Company recognized $713,000 in equity related charges.
4. 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
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bankruptcy trustee for satisfaction of general creditor claims. During
fiscal year 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.
5. On September 5, 2000, the Company completed its acquisition of The
Weathersby Group, Inc. ("TWG"), a Maryland corporation. TWG provides a
full range of marketing telecommunications consulting services to
various U.S. companies. Consulting services offered include product
development and positioning, strategy, CRM and loyalty programs,
communications, and channel management, among other services. The
acquisition, recorded under the purchase method of accounting, included
the purchase of all outstanding shares of TWG, which resulted in a total
purchase price of approximately $19.2 million consisting of $11.2
million cash and $8.0 million in TMNG stock. Additionally, TMNG incurred
direct costs of $885,000 related to the acquisition. A portion of the
purchase price has been preliminarily allocated to assets acquired and
liabilities assumed based on estimated fair value at the date of
acquisition. The excess of the purchase price over the estimated fair
value of the net assets acquired has been recorded as goodwill estimated
to be $18.7 million preliminarily and which is being amortized over ten
years on a straight-line basis. The acquisition also provides for
contingent consideration of up to an additional $9.0 million, consisting
of up to $2.5 million cash consideration and $6.5 million stock
consideration, contingent on TWG achieving certain performance targets
in 2001.
The purchase price allocation for this acquisition is based on
preliminary estimates and is subject to further refinement. The purchase
price is subject to refinement based on the finalization of direct
acquisition costs incurred in the transaction. The operating results of
TWG have been included in the Consolidated Condensed Statements of
Income and Comprehensive Income from the date of acquisition.
The following reflects unaudited pro forma combined results of the
Company and TWG as if the acquisition had occurred as of January 3,
1999. In management's opinion, this unaudited pro forma information does
not necessarily reflect the actual results that would have occurred nor
is it necessarily indicative of future results of operations of the
combined entities.
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Pro Forma
---------------------------
Nine Months Ended
October 2, September 30,
(in thousands, except per share amounts) 1999 2000
---------- ------------
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Total revenues $ 44,228 $ 65,859
Net income $ 2,832 $ 6,550
Basic earnings per share $ 0.12 $ 0.23
Diluted earnings per share $ 0.12 $ 0.22
</TABLE>
6. New Accounting Pronouncements
In December 1999, the staff of the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 101 entitled "Revenue Recognition."
The bulletin, as amended, is to be adopted, if needed, no later than the
fourth fiscal quarter of fiscal years commencing after December 15,
1999, with retroactive adjustment to the first fiscal quarter of that
fiscal year. The effect, if any, of complying with the accounting
described in this bulletin has not been determined by management.
7. Reclassification
8
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In July, 2000, the Emerging Issues Task Force (the "EITF") reached a
consensus that the reduction of income tax paid as a result of the
deduction triggered by employee exercise of non-qualified stock options
should be classified as an operating cash flow. The Company has adopted
this presentation commencing with the start of its third fiscal quarter
of fiscal year 2000 and has reclassified amounts in the current fiscal
year's prior interim condensed consolidated statements of cash flows.
This reclassification has no effect on Net Income or Shareholders'
Equity as previously reported.
8. On August 2, 2000, TMNG closed a secondary offering of 3 million shares
of common stock, including 1 million shares offered by the Company. The
offering generated gross proceeds of $22.9 million for the Company. Of
the remaining shares, approximately 1.8 million were offered by Behrman
Capital and the balance was offered by certain other selling
shareholders.
9
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ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
In addition to historical information, this quarterly report contains
forward-looking statements. Certain risks and uncertainties could cause actual
results to differ materially from those reflected in such forward-looking
statements. Factors that might cause a difference include, but are not limited
to, those discussed in the section entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Risk Factors."
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's opinions only as of the date of this
report. We undertake no obligation to revise or publicly release the results of
any revision to these forward-looking statements. Readers should carefully
review the risk factors described in this quarterly report and in other
documents that we file from time to time with the Securities and Exchange
Commission.
The following should be read in connection with the Management's Discussion and
Analysis of Financial Condition and Results of Operations as presented in our
Annual Report on Form 10-K.
RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED SEPTEMBER 30, 2000 COMPARED TO THIRTEEN WEEKS ENDED OCTOBER
2, 1999
Revenues
Revenues increased 52.6% to $20.0 million for the thirteen weeks ended
September 30, 2000 from $13.1 million for the thirteen weeks ended October 2,
1999. The increase in revenues was due primarily to an increase in consulting
services performed for our new and existing clients during the period, and
increased billing rates of our consultants. Additionally, revenues increased due
to the purchase of The Weathersby Group, Inc., an acquisition that occurred in
the third quarter of 2000. For the thirteen weeks ended September 30, 2000, our
international revenue base represented 18.8% of our revenues, down from 31.2%
for the thirteen weeks ended October 2, 1999.
In the thirteen weeks ended September 30, 2000 two large customers each
accounted for more than 10% of our revenues and represented an aggregate of
25.9% of total revenue. In the thirteen weeks ended October 2, 1999 two large
customers each accounted for more than 10% of our revenues and represented an
aggregate of 50.0% of total revenue.
Costs of Services
Direct costs of services increased to $10.3 million for the thirteen
weeks ended September 30, 2000 compared to $6.8 million for the thirteen weeks
ended October 2, 1999. As a percentage of revenues, our gross margin on services
was 48.5% for the thirteen weeks ended September 30, 2000 and 48.1% for the
thirteen weeks ended October 2, 1999.
Non-cash stock based compensation charges were $1.2 million and $822,000
for the thirteen weeks ended September 30, 2000 and the thirteen weeks ended
October 2, 1999, respectively. These equity charges relate to stock options and
warrants granted in 1999 and previously. Of the $1.2 million compensation
charges related to the thirteen weeks ended September 30, 2000, $528,000 was
recorded in connection with the issuance of stock options to employees and
non-employee consultants and $713,000 was recorded in connection with warrants
issued during the fourth quarter of 1999. These charges represented 6.2% of
revenues for the thirteen weeks ended September 30, 2000 compared to 6.3% for
the thirteen weeks ended October 2, 1999.
Operating Expenses
Selling, general and administrative expenses increased to $4.3 million
for the thirteen weeks ended September 30, 2000, or 67.5% from $2.6 million for
the thirteen weeks ended October 2, 1999. Selling, general and administrative
expenses increased
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to 21.7% of revenues for the thirteen weeks ended September 30, 2000 from 19.8%
of revenues for the thirteen weeks ended October 2, 1999. We incurred an
increase in selling, general and administrative expenses primarily due to the
personnel and technology costs associated with the increased administrative
staffing required to manage and support the growth of the organization, as well
as the amortization of goodwill recorded in connection with the Weathersby
Group, Inc. acquisition.
Non-cash stock based compensation charges of $392,000 and $376,000 for
the thirteen weeks ended September 30, 2000 and thirteen weeks ended October 2,
1999, respectively, were recorded in connection with the issuance of stock
options in 1999 and previously to our partners, principals, senior executives
administration and non-employee directors. These charges represented 2.0% of
revenues for the thirteen weeks ended September 30, 2000 compared to 2.9% of
revenues for the thirteen weeks ended October 2, 1999.
Other Income and Expenses
Interest income was $1,279,000 for the thirteen weeks ended September
30, 2000, due primarily to the interest received on the net proceeds of the
initial public and secondary offerings. We invest in short-term, high grade
investment instruments.
Interest expense decreased to $0 for the thirteen weeks ended September
30, 2000, compared to $537,000 for the thirteen weeks ended October 2, 1999.
Interest expense decreased primarily due to the extinguishment of debt in the
fourth quarter of 1999. On November 29, 1999, all outstanding indebtedness was
repaid with proceeds from our November 23, 1999 initial public offering.
Income Taxes
Provision for income taxes for the thirteen weeks ended September 30,
2000 as a percentage of pretax income was 40.0% compared to 41.4% for the
thirteen weeks ended October 2, 1999. The effective tax rate for the thirty-nine
weeks ended September 30, 2000 decreased as a result of an increase in foreign
source income at lower effective rates.
THIRTY-NINE WEEKS ENDED SEPTEMBER 30, 2000 COMPARED TO THIRTY-NINE WEEKS ENDED
OCTOBER 2, 1999
Revenues
Revenues increased 51.1% to $55.9 million for the thirty-nine weeks
ended September 30, 2000 from $37.0 million for the thirty-nine weeks ended
October 2, 1999. The increase in revenues was due primarily to an increase in
consulting services performed for our new and existing clients during the
period, and increased billing rates of our consultants. Additionally, for the
thirty-nine weeks ended September 30, 2000, our international revenue base
represented 25.4% of our revenues, compared to 26.7% for the thirty-nine weeks
ended October 2, 1999.
Included in revenue for the thirty-nine weeks ended September 30, 2000
were services provided to one large customer, which accounted for 20.5% of
revenues for the thirty-nine weeks ended September 30, 2000 compared to 41.1%
for the thirty-nine weeks ended October 2, 1999.
Cost of Services
Direct cost of services increased to $28.9 million for the thirty-nine
weeks ended September 30, 2000 compared to $19.2 million for the thirty-nine
weeks ended October 2, 1999. As a percentage of revenues, our gross margin on
services was 48.2% for the thirty-nine weeks September 30, 2000 and 48.1% for
the thirty-nine weeks ended October 2, 1999.
Non-cash stock based compensation charges were $5.2 million and $1.8
million for the thirty-nine weeks ended September 30, 2000 and October 2, 1999,
respectively. These equity charges relate to stock options and warrants granted
in 1999 and previously. Of the $5.2 million compensation charges related to the
thirty-nine weeks ended
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September 30, 2000, $2.5 million was recorded in connection with the issuance of
stock options to employees and non-employee consultants and $2.7 million was
recorded in connection with warrants issued during the fourth quarter of fiscal
year 1999. These charges represented 9.2% of revenues for the thirty-nine weeks
ended September 30, 2000 compared to 4.8% of revenues for the thirty-nine weeks
ended October 2, 1999.
Operating Expenses
Selling, general and administrative expenses increased to $11.8 million
for the thirty-nine weeks ended September 30, 2000, or 57.7%, from $7.5 million
for the thirty-nine weeks ended October 2, 1999. Selling, general and
administrative expenses, as a percentage of revenues, increased to 21.1% for the
thirty-nine weeks ended September 30, 2000 from 20.2% for the thirty-nine weeks
ended October 2, 1999. We incurred an increase in selling, general and
administrative expenses primarily due to the personnel and technology costs
associated with the increased administrative staffing required to manage and
support the growth of the organization, as well as the amortization of goodwill
recorded in connection the acquisition of The Weathersby Group, Inc.
Non-cash stock based compensation charges of $1.2 million and $946,000
for the thirty-nine weeks ended September 30, 2000 and thirty-nine weeks ended
October 2, 1999, respectively, were recorded in connection with the issuance of
stock options in 1999 and previously to our partners, principals, senior
executives administration and non-employee directors. These charges represented
2.2% of revenues for the thirty-nine weeks ended September 30, 2000 compared to
2.6% of revenues for the thirty-nine weeks ended October 2, 1999.
Other Income and Expenses
Interest income was $2.9 million for the thirty-nine weeks ended
September 30, 2000, due primarily to the interest received on the net proceeds
of the initial public offering. We invest in short-term, high-grade investment
instruments.
Interest expense decreased to $4,000 for the thirty-nine weeks ended
September 30, 2000, compared to $1.7 million for the thirty-nine weeks ended
October 2, 1999. Interest expense decreased primarily due to the extinguishment
of debt in the fourth quarter of 1999. On November 29, 1999, all outstanding
indebtedness was repaid with proceeds from our November 23, 1999 initial public
offering.
Included in other expenses, net were foreign currency exchange losses of
$94,000 for the thirty-nine weeks ended September 30, 2000, compared to a
foreign currency loss of $69,000 for the thirty-nine weeks ended October 2,
1999.
Income Taxes
Provision for income taxes for the thirty-nine weeks ended September 30,
2000 as a percentage of pretax income was 40.0% compared to 41.5% for the
thirty-nine weeks ended October 2, 1999. The effective tax rate for the
thirty-nine weeks ended September 30, 2000 decreased as a result of an increase
in foreign source income at lower effective rates.
Liquidity and Capital Resources
At September 30, 2000, we had approximately $64.0 million in cash and
cash equivalents. We believe cash generated from operations will be sufficient
to meet anticipated cash requirements, including anticipated capital
expenditures and consideration for possible acquisitions, for at least the next
12 months. Should our business expand more rapidly than expected, we believe
that bank credit would be available to fund such operating and capital
requirements.
Risk Factors
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Statements in this section and elsewhere in this quarterly report that
are not purely historical, such as statements regarding our expectations,
beliefs, intentions, plans, and strategies regarding the future, are
forward-looking statements. These statements are only predictions, and they
involve risks, uncertainties, and assumptions that could cause our actual
results to differ materially from the results we express in the forward-looking
statements. This section includes important factors that could cause or
contribute to these differences. We cannot guarantee the results expressed in
any forward-looking statement. We have based all forward-looking statements on
information available to us on the date of this quarterly report, and we have no
obligation to update any forward-looking statement.
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 a significant amount of our revenues from consulting
engagements within the telecommunications industry. Much of our recent growth
has arisen from business opportunities presented by industry trends that
include:
- deregulation;
- increased competition;
- technological advances;
- the growth of e-business; and
- the convergence of service offerings.
If these trends change, the demand for telecommunications consulting
work will likely decrease. In addition, the telecommunications industry is in a
period of consolidation, which could reduce 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 1999 and the nine months ended
September 30, 2000, revenues from our ten most significant clients accounted for
approximately 85.2% and 72.1% of our revenues, respectively. In fiscal 1999 and
the nine months ended September 30, 2000, Williams Communications Group
accounted for more than 10% of our revenues. The services required by any one
client may be affected by industry consolidation, technological developments,
economic slowdown or internal budget constraints. As a result, the volume of
work performed for specific clients varies from period to period, and a major
client in one period may not use our services in a subsequent period.
Our services are often sold under short-term engagements and most
clients can reduce or cancel their contracts with little or no penalty or
notice. Our operating results may suffer if we are unable to rapidly deploy
consultants if a client defers, modifies or cancels a project. Consequently, you
should not predict or anticipate our future revenue based on the number of
clients we have or the number and scope of our existing engagements.
OUR REVENUES AND OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY FROM QUARTER TO
QUARTER, AND FLUCTUATIONS IN 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
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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;
- 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, 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.
THE TELECOMMUNICATIONS INDUSTRY HAS RECENTLY EXPERIENCED A REDUCTION IN THE
AVAILABILITY OF INVESTMENT CAPITAL
Our future operating results could be affected by client financial
difficulties. For example, during the third quarter, one of our clients declared
bankruptcy. Our accounts receivable reserves are sufficient to cover the
potential exposure with this client. However, future client financial
difficulties that result in writeoffs that are in excess of our bad debt
reserves could harm our results of operations in future fiscal periods.
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:
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- American Management Systems;
- Andersen Consulting;
- Booz-Allen & Hamilton;
- 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 may not be able to
compete successfully with our existing competitors or with any new competitors.
We also believe our ability to compete depends on a number of factors
outside of our control, including:
- the prices at which others offer competitive services, including
aggressive price competition and discounting on individual
engagements;
- 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
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We offer contingent employee or full-time employee status to certain of
our independent contractors. As we convert independent contractors to consultant
employees, we 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 need to continuously improve utilization management
and minimize unbilled employee time. In addition, this change may cause other
disruptions to our business. If we fail to effectively manage this transition,
we could incur additional costs due to underutilization of full-time employees
as well as other unanticipated costs.
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
Compared to fiscal year 1999, the percentage of our revenues comprised
of international engagements decreased from 27.7% to 25.4% for the thirty-nine
weeks
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ended September 30. 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 foreign currency exposure
from time to time, but hedging may not 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 continue
to 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
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Many of our engagements come from existing clients or from referrals by
existing clients. Therefore, our growth is dependent on our reputation and on
client satisfaction. The failure to perform services that meet a client's
expectations may damage our reputation and harm our ability to attract new
business. Damage to our reputation arising from client dissatisfaction could
therefore harm our financial performance.
IF WE FAIL TO DEVELOP LONG-TERM RELATIONSHIPS WITH 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 approximately half of our consulting services through
independent contractors and, therefore, do not pay federal or state employment
taxes or withhold income taxes for such persons. Further, we generally do not
include these independent 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. Any
challenge by the IRS or state authorities or individuals resulting in a
determination that a substantial number of persons we have classified as
independent contractors are actually employees could subject us to liability for
back taxes, interest and penalties, which would harm our profitability.
WE COULD BE SUBJECT TO CLAIMS FOR PROFESSIONAL LIABILITY, WHICH COULD HARM OUR
FINANCIAL PERFORMANCE
As a provider of professional services, we face the risk of liability
claims. A liability claim brought against us could harm our business. We may
also be subject to claims by 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.
THE MARKET PRICE OF OUR COMMON STOCK IS VOLATILE, AND OUR INVESTORS MAY
EXPERIENCE INVESTMENT LOSSES
The market price of our common stock is volatile. Our stock price could
decline or fluctuate in response to a variety of factors, including:
- variations in our quarterly operating results;
- announcements of technological innovations that render our talent
outdated;
- introduction of new services or new pricing policies by us or our
competitors;
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- 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 AND MAY MAKE DECISIONS THAT ARE NOT IN THE BEST INTEREST OF
OTHER STOCKHOLDERS
Executive officers, directors and stockholders owning more than five
percent of outstanding common stock (and their affiliates) own approximately
69.1% of our outstanding common stock. As a result, such persons, acting
together, have the ability to substantially influence all matters submitted to
the stockholders for approval (including the election and removal of directors
and any merger, consolidation or sale of all or substantially all assets) and to
control management
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<PAGE> 21
and affairs. Accordingly, concentration of ownership of our common stock may
have the effect of delaying, deferring or preventing a change in control,
impeding a merger, consolidation, takeover or other business combination
involving us or discouraging a potential acquirer from making a tender offer or
otherwise attempting to obtain control of us, even if such a transaction would
be beneficial to other stockholders.
WE USED TO BE TAXED UNDER SUBCHAPTER "S" OF THE INTERNAL REVENUE CODE AND CLAIMS
OF TAXING AUTHORITIES RELATED TO 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. However, this indemnity may not be sufficient to
cover claims made by the IRS or other taxing authorities, and any such claims
could result in additional costs and harm our financial performance.
WE MAY SEEK TO RAISE ADDITIONAL FUNDS, AND ADDITIONAL FUNDING MAY BE DILUTIVE TO
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 additional dilution in net book value per share and any additional
equity securities may have rights, preferences and privileges senior to those of
the holders of our common stock.
ANTI-TAKEOVER PROVISIONS AND OUR RIGHT TO ISSUE PREFERRED STOCK COULD MAKE A
THIRD PARTY ACQUISITION 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
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.
We invest idle cash balances in highly liquid short-term investments,
the earnings of which are subject to interest rate fluctuations. The average
cash balance during the nine months ended September 30, 2000 was approximately
$64.0 million. We make no attempt to hedge this risk.
Part 2. Other Information
Item 1. Legal Proceedings
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<PAGE> 22
TMNG has not been subject to any new litigation or claims against the
Company since the time of TMNG's last 10-Q filing, dated May 15, 2000. For a
summary of litigation TMNG is currently involved, refer to TMNG's 10-Q, as filed
with the Securities and Exchange Commission on August 1, 2000.
Item 2. Changes in Securities and Use of Proceeds
On November 22, 1999, the Securities and Exchange Commission declared
TMNG's Registration Statement on Form S-1 (File No. 333-87383) effective. On
November 23, 1999, TMNG closed its offering of an aggregate of 4,615,000 shares
of TMNG Common Stock at an aggregate offering price of $78.5 million. The
managing underwriters for the offering were Hambrecht & Quist, Robertson
Stephen, Salomon Smith Barney and Jefferies & Company, Inc. Net proceeds to
TMNG, after deducting underwriting discounts and commissions of $5.5 million and
offering expenses of $1.5 were $71.5 million. On November 29, 1999 TMNG used
$22.3 million of the proceeds from its initial public offering to repay all
indebtedness.
On August 1, 2000, TMNG's Registration Statement on Form S-1 (File No.
333-40864) was declared effective by the Securities and Exchange Commission. On
August 2, TMNG closed its secondary offering of 3,000,000 common shares at an
offering price of $22.875 per share. Of the shares sold, approximately 1.8
million were offered by Behrman Capital, 1 million were offered by TMNG, and the
remainder was offered by certain other selling shareholders. The managing
underwriters for the offering were Salomon Smith Barney, Chase H&Q, and Lehman
Brothers. Net proceeds generated by the offering, after deducting underwriting
discounts and commissions of $1,143,750 and offering expenses of $662,912, were
$21,068,338.
In addition to the previously discussed repayment of debt, we have
expended approximately $11.2 million to acquire The Weathersby Group, Inc. The
remainder of the net proceeds generated by our stock offerings is currently
invested in short-term, high-grade debt investments. These funds will be used to
support TMNG's European initiative, working capital, general corporate purposes
and as possible consideration for acquisitions. The use of proceeds described
herein does not represent a material change from that described in earlier
filings.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
On September 14, 2000, TMNG filed Form 8-K with the Securities and
Exchange Commission (File No. 000-27617) to report the purchase of The
Weathersby Group, Inc (TWG). On November 13, 2000 an amendment to this
filing was submitted to the Securities and Exchange Commission. The
amendment included pro forma consolidated statements of income and
comprehensive income for the year ended January 1, 2000 and for the six
months ended July 1, 2000 as well as a pro forma consolidated balance
sheet dated July 1, 2000. Additionally, the amendment reported TWG's
1999 financial statements, footnotes, and independent auditors' report.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ RICHARD P. NESPOLA President, Chief Executive November 14, 2000
---------------------- Officer and Director
Richard P. Nespola (Principal executive officer)
/s/ DONALD E. KLUMB Chief Financial Officer and November 14, 2000
---------------------- Treasurer
Donald E. Klumb (Principal financial officer
and principal accounting
officer)
</TABLE>
*By: /s/ DONALD E. KLUMB
-----------------------
Donald E. Klumb
Attorney-in-Fact
21
