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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 April 1, 2000
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or
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission file number:
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THE MANAGEMENT NETWORK GROUP, INC.
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(Exact name of registrant as specified in its charter)
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DELAWARE 48-1129619
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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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 May 8, 2000 TMNG had outstanding 27,439,996 shares of common stock.
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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 (unaudited)
- April 1, 2000 and January 1, 2000 ..................... 3
Consolidated Condensed Statements of Income
(unaudited) - Thirteen weeks ended
April 1, 2000 and April 3, 1999 ......................... 4
Consolidated Condensed Statements of Cash Flows
(unaudited) - Thirteen weeks ended
April 1, 2000 and April 3, 1999 ......................... 5
Notes to Consolidated Condensed Financial Statements .... 6
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ........... 8
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings ....................................... 14
ITEM 2. Changes in Securities and Use of Proceeds................ 15
ITEM 6. Exhibits and Reports on Form 8-K ........................ 15
Signatures.......................................................... 15
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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)
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(unaudited)
January 1, April 1,
2000 2000
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CURRENT ASSETS:
Cash and cash equivalents $ 51,523 $ 53,458
Receivables:
Accounts receivable 8,280 8,928
Accounts receivable - unbilled 4,863 6,885
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13,143 15,813
Less: Allowance for doubtful accounts (350) (437)
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12,793 15,376
Other assets 1,048 914
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Total current assets 65,364 69,748
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Property and Equipment, net 706 709
Deferred Tax Asset 1,312 2,285
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Total Assets $ 67,382 $ 72,742
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CURRENT LIABILITIES:
Trade accounts payable $ 888 $ 1,586
Accrued payroll, bonuses and related expenses 1,857 1,877
Other accrued liabilities 1,200 561
Income taxes payable 1,296
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Total current liabilities 3,945 5,320
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STOCKHOLDERS' EQUITY
Common Stock: 27 27
Voting - $.001 par value, 100,000,000 shares
authorized; 27,417,370 and 27,431,662 issued and
outstanding on January 1, 2000 and April 1, 2000,
respectively
Additional paid-in capital 104,137 104,896
Accumulated deficit (32,138) (30,460)
Accumulated other comprehensive income -
Foreign currency translation adjustment (2) (18)
Unearned compensation (8,587) (7,023)
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Total stockholders' equity
63,437 67,422
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Total Liabilities and Stockholders' Equity $ 67,382 $ 72,742
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</TABLE>
See notes to consolidated condensed financial statements.
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THE MANAGEMENT NETWORK GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands, except share and per share data)
(unaudited)
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For the Thirteen Weeks Ended
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April 3, April 1,
1999 2000
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Revenues $ 11,433 $ 16,402
Cost of Services:
Direct cost of services 5,937 8,529
Equity related charges 507 1,916
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Total cost of services 6,444 10,445
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Gross Profit 4,989 5,957
Operating Expenses:
Selling, general and
administrative 2,429 3,471
Equity related charges 169 418
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Total operating expenses 2,598 3,889
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Income From Operations 2,391 2,068
Other Income (Expense)
Interest income 849
Interest expense (559) (3)
Other, net 1 (132)
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Total other income (expense) (558) 714
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Income Before Provision for
Income Taxes 1,833 2,782
Provision for Income Taxes 767 1,104
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Net Income 1,066 1,678
Other Comprehensive Income -
Foreign currency translation
Adjustment (11) (16)
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Comprehensive Income $ 1,055 $ 1,662
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Net Income Per Common Share
Basic $ 0.05 $ 0.06
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Diluted $ 0.05 $ 0.06
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Shares Used in Calculation
of Net Income Per Common Share
Basic 22,500 27,425
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Diluted 22,936 28,651
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</TABLE>
See notes to consolidated condensed financial statements.
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THE MANAGEMENT NETWORK GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
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For the Thirteen Weeks Ended
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April 3, April 1,
1999 2000
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,066 $ 1,678
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 60 53
Stock option and bonus share compensation 676 2,334
Deferred income taxes benefit (190) (973)
Changes in:
Accounts receivable 1,788 (561)
Accounts receivable - unbilled (1,278) (2,022)
Other assets (30) 134
Trade accounts payable 89 698
Trade accounts payable - related party (332)
Accrued liabilities 154 (619)
Income taxes payable 341 1,296
Deferred revenue 20
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Net cash provided by operating
activities 2,364 2,018
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CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (120) (56)
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Net cash used in investing
activities (120) (56)
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CASH FLOWS FROM FINANCING ACTIVITIES:
IPO costs charged to equity (119)
Exercise of options, including related tax
benefits 108
Net borrowings under revolving credit facility (1,421)
Payments made on long-term debt (325)
Issuance of common stock, net of expenses 66
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Net cash used in financing
activities (1,680) (11)
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Effect of exchange rate on cash and cash
equivalents (11) (16)
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Net increase in cash and cash equivalents 553 1,935
Cash and cash equivalents, beginning of period 959 51,523
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Cash and cash equivalents, end of period $ 1,512 $ 53,458
============ ============
Supplemental disclosure of cash flow information:
Cash paid during period for interest $ 783 $ 2
============ ============
Cash paid during period for taxes $ 565 $ 291
============ ============
</TABLE>
See notes to consolidated condensed financial statements.
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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 April 1, 2000, and for
the three months ended April 1, 2000 and April 3, 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 Company calculated earnings per share in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share."
SFAS 128 establishes standards for computing and presenting earnings per
share (EPS) and requires a dual presentation of basic and diluted earnings
per share. Basic earnings per share is computed using the weighted average
number of common shares outstanding. Diluted earnings per share is computed
using the weighted average number of common shares outstanding and the
assumed exercise of stock options and warrants (using the treasury stock
method).
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):
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THREE MONTHS ENDED
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APRIL 3, 1999 APRIL 1, 2000
(UNAUDITED) (UNAUDITED)
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Numerator
Net income $ 1,066 $ 1,678
Denominator
Weighted average common shares 22,500 27,425
Weighted average unvested common shares 1,079 2,782
Weighted average unvested common shares
Subject to repurchase (643) (1,556)
Denominator for basic calculation 22,500 27,425
Denominator for diluted calculation 22,936 28,651
Basic & diluted net income per share $ 0.05 $ 0.06
</TABLE>
3. Warrant Grant and Stock Based Compensation
On October 29, 1999, the Company issued a significant customer a warrant to
purchase 500,000 shares of common stock at an exercise price of $2.00 per
share. As of January 1, 2000 all shares under the warrant were exercisable.
The expected fair value of this warrant was approximately $5.2 million based
on an expected life of 3 years. Additionally on December 10, 1999, the
Company entered into a consulting services agreement with this customer
under which such customer will commit to $22 million of consulting fees over
a three-year period commencing January 1, 2000. Equity related charges to
cost of services associated with the warrants during the first quarter of
fiscal year 2000 totaled $1.0 million, based on the recognition of expense
as the greater of two calculations: 1) Total expense attributable to the
warrants, amortized on a straight-line basis over a period of 36 months, or
2) Total expense attributable to the warrants, amortized on a ratable basis
as a percentage of the significant customer's consulting fees earned by the
Company on a quarterly basis, divided by $22 million.
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During the three months ended April 1, 2000, the Company granted
approximately 462,000 stock options to employees at a weighted average
exercise price of $22.54. During the same period, the Company recorded
unearned compensation of approximately $13,000 and compensation expense
related to all stock options of $1.3 million.
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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 APRIL 1, 2000 COMPARED TO THIRTEEN WEEKS ENDED APRIL 3,
1999
Revenues
Revenues increased 43.9% to $16.4 million for the first quarter of fiscal
year 2000 from $11.4 million for the first quarter of fiscal 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, to a lesser extent,
increased billing rates of our consultants. Additionally, our international
revenue base grew to 32% of our revenues, up from 20% in the first quarter of
1999. First quarter 2000 revenues included services provided to one large
customer, which accounted for 26% of revenues for that period, as compared to
46.7% of revenues for the same customer during the first quarter of 1999.
Costs of Services
Direct costs of services increased to $8.5 million for the first quarter of
fiscal year 2000 from $5.9 million in the first quarter of fiscal 1999. As a
percentage of revenues, our gross margin on services as a percentage of revenue
was comparable with the first quarter of 1999 at 48%.
Non-cash stock based compensation charges were $1.9 million and $507,000
for the first quarter of fiscal year 2000 and 1999, respectively. Of the $1.9
million compensation charges related to fiscal year 2000, $900,000 was recorded
in connection with the issuance of stock options to employees and non-employee
consultants and $1.0 million was recorded in connection with warrants issued
during the fourth quarter of 1999. These charges increased costs of services as
a percentage of revenue by 11.7% in the first quarter of fiscal year 2000.
Operating Expenses
Selling, general and administrative expenses increased to $3.5 million in
the first quarter of fiscal year 2000, or 45.8%, from $2.4 million in the first
quarter of fiscal 1999. As a percentage of revenues, selling, general and
administrative expenses were comparable with the first quarter of 1999 at 21.2%.
We incurred an increase in selling, general and administrative expenses
primarily due to the personnel and facility costs associated with the increased
administrative staffing used to manage and support the growth of the
organization.
Non-cash stock based compensation charges of $418,000 and $169,000 for the
first quarter of fiscal year 2000 and first quarter of fiscal year 1999,
respectively, were recorded in connection with the issuance of stock options to
our partners,
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principals and certain senior executives and non-employee directors. These
charges increased operating expenses as a percentage of revenue by 2.5% in the
first quarter of fiscal year 2000.
Other Income and Expenses
Interest income was $849,000 for the first quarter of fiscal year 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 $3,000 for the first quarter of fiscal
year 2000, compared to $559,000 for the first quarter of fiscal year 1999.
Interest expense decreased primarily due to the extinguishment of debt in the
fourth quarter of 1999. On November 29, 1999, all outstanding indebtedness was
repaid with proceeds from our November 23, 1999 initial public offering.
Included in other, net were foreign currency exchange losses of $136,000
for the first quarter of fiscal year 2000, compared to a foreign currency gain
of $7,000 for the first quarter of fiscal year 1999. The change is due primarily
to losses recorded on a project located in Switzerland that was billed in Swiss
francs.
Income Taxes
Provision for income taxes for the first quarter of fiscal year 2000 as
a percentage of pretax income was 39.7% compared to 41.8% for the first quarter
of fiscal year 1999.
Liquidity and Capital Resources
At April 1, 2000, we had approximately $53.5 million in cash and cash
equivalents. We believe the net proceeds of the offering, in addition to cash
generated from operations, will be sufficient to meet anticipated cash
requirements, including anticipated capital expenditures and consideration for
possible acquisition, for at least the next 12 months. Should our business
expand more rapidly than expected, we believe that bank credit would be
available to fund such operating and capital requirements.
Year 2000 Issue
We established a Year 2000 compliance program to address the impact of
the Year 2000 date transition on operations. This program covered internal
information systems and other information technology facilities such as data
communications and building management. Since the millennium date change, we
have not experienced any significant disruption in business due to Year 2000
issues.
Risk Factors
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
OUR CUSTOMERS TO USE INTERNAL RESOURCES
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We derive all of revenues from consulting engagements within the
telecommunications industry. Recent growth has arisen from business
opportunities presented by industry trends that include deregulation, increased
competition, technological advances, the growth of e-business and the
convergence of service offerings.
If these trends change, the demand for telecommunications consulting work
will likely decrease. In addition, the telecommunications industry is in a
period of consolidation, which could reduce our client base, eliminate future
opportunities or create conflicts of interest among clients. Additionally,
current and future economic pressures in the industry may cause
telecommunications companies to use internal resources in lieu of outside
consultants. As a result, our customer base and revenues may decline.
WE ARE DEPENDENT ON A LIMITED NUMBER OF LARGE CUSTOMERS FOR A MAJOR PORTION OF
REVENUES, AND THE LOSS OF A MAJOR CUSTOMER COULD REDUCE REVENUES AND HARM OUR
BUSINESS
A significant portion of our revenue is derived from a relatively limited
number of clients. For example, during the first quarter of fiscal year 2000,
revenues from the ten most significant clients accounted for approximately 76.9%
of revenues. In the first quarter of fiscal year 2000, Williams Communications
Group and diAx each accounted for more than ten percent of revenues. The
services required by any one client may be affected by industry consolidation,
technological developments, economic slowdown or internal budget constraints. As
a result, the volume of work performed for specific clients varies from period
to period, and a major client in one period may not use our services in a
subsequent period.
REVENUES AND OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY FROM QUARTER TO
QUARTER, AND FLUCTUATIONS IN OPERATING RESULTS COULD CAUSE OUR STOCK PRICE TO
DECLINE
Revenue and operating results may vary significantly from
quarter-to-quarter due to a number of factors. In future quarters, operating
results may be below the expectations of public market analysts or investors,
and the price of our common stock may decline.
Because a significant portion of our expenses are relatively fixed, a
variation in the number of client assignments or the timing of the initiation or
the completion of client assignments may cause significant variations in our
operating results from quarter to quarter and could result in losses. To the
extent the addition of consultant employees is not followed by corresponding
increases in revenues, additional expenses would be incurred that would not be
matched by corresponding revenues. Therefore, profitability would decline and we
could potentially experience losses. In addition, our stock price would likely
decline.
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 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 there is significant competition for these consultants
from direct competitors and others in the telecommunications industry.
Competition for these consultants may result in significant increases in costs
to retain the consultants, which could reduce margins and profitability. If we
are unable to attract and retain consultants, revenues and profitability could
decline.
THE MARKET IN WHICH WE COMPETE IS INTENSELY COMPETITIVE AND ACTIONS BY
COMPETITORS COULD RENDER OUR SERVICES LESS COMPETITIVE CAUSING REVENUES AND
INCOME TO DECLINE
The market for consulting services to telecommunications companies is
intensely competitive, highly fragmented and subject to rapid change. Our
competitors include general management consulting firms, the consulting
practices of "Big Five" accounting firms, most of which have practice groups
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focused on the telecommunications industry and local or regional firms
specializing in telecommunications services. Some of these competitors have also
formed strategic alliances with telecommunications and technology companies
serving the industry.
If we are unable to compete effectively, our market position, and therefore
revenues and profitability, would decline.
WE HAVE EXPERIENCED SIGNIFICANT GROWTH IN THE BUSINESS IN RECENT PERIODS, AND IF
WE ARE UNABLE TO MANAGE THIS GROWTH, OUR OPERATIONAL INFRASTRUCTURE MAY NOT BE
ABLE TO SUPPORT GROWTH
We are currently experiencing a period of rapid growth that may strain
managerial and operational resources. To support growth, the organizational
infrastructure must grow accordingly.
If we fail to address these issues, our operational
infrastructure may be insufficient to support the levels of business activity.
In this event, we could experience disruptions in business and declining
revenues or profitability.
IF WE DO NOT EFFECTIVELY MANAGE THE CONVERSION OF OUR INDEPENDENT CONTRACTORS TO
EMPLOYEES, WE COULD INCUR UNANTICIPATED COSTS WHICH WOULD HARM OUR FINANCIAL
PERFORMANCE
As our independent contractors are converted to consultant employees, we
will incur additional fixed costs for each such employee that we do not retain
as an independent contractor. To effectively manage these additional fixed
costs, we will need to continuously improve utilization management and minimize
unbilled employee time. If the Company fails to effectively manage this
transition, we could incur additional costs due to underutilization of full-time
employees as well as other unanticipated costs.
WE MUST CONTINUALLY ENHANCE SERVICES TO MEET THE CHANGING NEEDS OF OUR CUSTOMERS
OR WE MAY LOSE FUTURE BUSINESS TO COMPETITORS
Our future success will depend upon our ability to enhance existing
services and to introduce new services to meet the requirements of our customers
in a rapidly developing and evolving market. Present or future services may not
satisfy the needs of the telecommunications market. If we are unable to
anticipate or respond adequately to our customers' needs, lost business may
result and our financial performance will suffer.
PLANS FOR INTERNATIONAL EXPANSION MAY NOT SUCCEED, WHICH WOULD HARM OUR REVENUES
AND PROFITABILITY
Future revenues depend to a large extent on our expansion into
international markets. International operations might not succeed for a number
of reasons, including difficulty in staffing, competition, and issues relating
to uncertainties of laws and enforcement relating to the protection of
intellectual property; and unexpected changes in trading policies and regulatory
requirements.
Accordingly, we may not be able to successfully execute the business plan
in foreign markets. If we are unable to achieve anticipated levels of revenues
from international operations, our revenues and profitability would decline.
IF INTERNATIONAL BUSINESS VOLUMES INCREASE, WE WILL BE EXPOSED TO GREATER
FOREIGN CURRENCY EXCHANGE RISKS, WHICH COULD RESULT IN INCREASED EXPENSES AND
DECLINING PROFITABILITY
The percentage of revenues comprised of our international engagements
increased in the first quarter of fiscal year 2000 over fiscal year 1999 and may
continue to increase. Some international engagements are denominated in the
local currency of the clients. Expenses incurred in delivering these services,
consisting primarily of consultant compensation, are typically denominated in
U.S. dollars. To the extent that the value of a currency in which billings are
denominated decreases in relation to the U.S. dollar or another currency in
which expenses are denominated, our operating results and financial condition
could be harmed.
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TMNG.COM BUSINESS IS EXPECTED 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 TMNG.com business which is focused on providing consulting services to help
telecommunications companies build the infrastructure, systems and processes
needed to support e-business. A base of consultants with internet-based skills
is needed since the skill sets required for TMNG.com services are different from
those used in our traditional lines of business. The continuously evolving
nature of the internet makes it very difficult to establish e-business
expertise. If we fail to adequately develop internet and e-business skills, we
may not be able to capitalize on the growth opportunities presented by these
sectors, and our revenues and profitability could decline.
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. 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 DEVELOP LONG-TERM RELATIONSHIPS WITH OUR CUSTOMERS, OUR SUCCESS
WOULD BE JEOPARDIZED
A substantial majority of our business is derived from repeat customers.
Future success depends to a significant extent on our ability to develop
long-term relationships with successful telecommunications providers who will
give us new and repeat business. 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 a substantial majority of consulting services through our
independent contractors and, therefore, do not pay federal or state employment
taxes or withhold income taxes for such persons. In the future, the IRS and
state authorities may challenge the status of our 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. 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 business. We may also be
subject to claims by clients for the actions of consultants and employees
arising from damages to clients' business or otherwise.
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In particular, we are currently a defendant in litigation brought by the
bankruptcy trustee of a former client. This litigation seeks to recover $320,000
in consulting fees paid by the former client and also seeks to recover at least
$1.85 million for breach of contract, breach of fiduciary duties and negligence.
THE MARKET PRICE OF OUR COMMON STOCK MAY BE VOLATILE, AND INVESTORS MAY
EXPERIENCE INVESTMENT LOSSES
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 quarterly operating results;
- announcements of technological innovations that render talent outdated;
- trends in the telecommunications industry;
- acquisitions or strategic alliances by us or others in the
industry;
- failure to achieve financial analysts' or other estimates of results of
operations for any fiscal period;
- changes in estimates of performance or recommendations by financial
analysts; and
- market conditions in the telecommunications industry and the economy as a
whole.
In addition, the stock market experiences significant price and volume
fluctuations. These fluctuations particularly affect the market prices of the
securities of many high technology companies. These broad market fluctuations
could harm the market price of our common stock.
WE MAY MAKE ACQUISITIONS, WHICH ENTAIL RISKS THAT COULD HARM OUR FINANCIAL
PERFORMANCE OR STOCK PRICE
As part of our business strategy, we may make acquisitions. Any future
acquisition would be accompanied by the risks commonly encountered in
acquisitions. These risks include:
- the difficulty associated with assimilating the personnel and operations
of acquired companies;
- the potential disruption of existing business; and
- adverse effects on the financial statements, including one-time
write-offs, ongoing charges for amortization of goodwill and assumption
of liabilities of acquired businesses.
If we make acquisitions and any of these problems materialize, these
acquisitions could negatively affect our operations, profitability and financial
operations.
OUR INABILITY TO PROTECT INTELLECTUAL PROPERTY COULD HARM OUR COMPETITIVE
POSITION AND FINANCIAL PERFORMANCE
Despite efforts to protect proprietary rights from unauthorized use or
disclosure, parties, including former employees or consultants, may attempt to
disclose, obtain or use our solutions or technologies. The steps we have taken
may not prevent misappropriation of solutions or technologies, particularly in
foreign countries where laws or law enforcement practices may not protect
proprietary rights as fully as in the United States. Unauthorized disclosure of
proprietary information could make our solutions and methodologies available to
others and harm our competitive position.
OUR PRINCIPAL STOCKHOLDERS, EXECUTIVE OFFICERS AND DIRECTORS WILL RETAIN
SUBSTANTIAL
13
<PAGE> 14
CONTROL OVER US AND MAY MAKE DECISIONS THAT ARE NOT IN THE BEST INTEREST OF OUR
OTHER STOCKHOLDERS
Executive officers, directors and stockholders owning more than five
percent of outstanding common stock (and their affiliates) own approximately
79.5% 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 and affairs. Accordingly, concentration of ownership of our
common stock may have the effect of delaying, deferring or preventing a change
in control, impeding a merger, consolidation, takeover or other business
combination involving us or discouraging a potential acquirer from making a
tender offer or otherwise attempting to obtain control of us, even if such a
transaction would be beneficial to other stockholders.
WE USED TO BE TAXED UNDER SUBCHAPTER "S" OF THE INTERNAL REVENUE CODE AND CLAIMS
OF TAXING AUTHORITIES RELATED TO PRIOR SUBCHAPTER "S" CORPORATION STATUS COULD
HARM US
From 1993 through 1998, we were taxed as a "pass-through" entity under
subchapter "S" of the Internal Revenue Code. Since February 1998, we have been
taxed under subchapter "C" of the Internal Revenue Code, which is applicable to
most corporations and treats the corporation as an entity that is separate and
distinct from its stockholders. If 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 the predecessor entity agreed, at the time of the acquisition,
to indemnify us against negative tax consequences arising from the prior "S"
corporation status. This indemnity is secured by escrowed funds in an escrow
that terminates in February 2001. Accordingly, this indemnity may not be
sufficient to cover claims made by the IRS or other taxing authorities, and any
such claims could result in additional costs and harm the financial performance.
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 DIFFICULT
Our certificate of incorporation and bylaws and anti-takeover provisions of
Delaware law could make it more difficult for a third party to acquire control,
even if a change in control would be beneficial to our stockholders. In
addition, the bylaws provide for a classified board, with board members serving
staggered three-year terms. The Delaware anti-takeover provisions and the
existence of a classified board could make it more difficult for a third party
to acquire us.
Item 1. Legal Proceedings
The Company is involved in legal proceedings and litigation arising in the
ordinary course of business. The Company believes the outcome of all current
proceedings, claims and litigation will not have a material adverse effect on
the Company's financial position, results of operations, or cash flows when
resolved in a future period.
14
<PAGE> 15
In June 1998, the bankruptcy trustee of a former client, Communications
Network Corporation, sued TMNG in the U.S. Bankruptcy Court in New York seeking
recovery of $160,000 in the allegedly improper payment of consulting fees paid
by the former client during the period from July 1, 1996, when an involuntary
bankruptcy proceeding was initiated against the former client, through August 6,
1996, when the former client agreed to an order for relief in the bankruptcy
proceeding, and $160,000 in consulting fees paid by the former client after
August 6, 1996. The bankruptcy trustee has also sued TMNG for at least $1.85
million for breach of contract, breach of fiduciary duties and negligence.
Although assurance cannot be given as to the ultimate outcome of this
proceeding, TMNG believes the Company has meritorious defenses to the claims
made by the bankruptcy trustee, including particularly the claims for breach of
contract, breach of fiduciary duty and negligence, and that the ultimate
resolution of this matter will not have a material effect on the business.
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. The remainder of the proceeds will be used for working capital,
general corporate purposes and as possible consideration for acquisitions.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
TMNG did not file any Reports on Form 8-K during the quarter ended
April 1, 2000.
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 May 15, 2000
- ------------------------------- Officer
Richard P. Nespola (Principal executive officer)
/s/ DONALD E. KLUMB Chief Financial Officer and Treasurer May 15, 2000
- ------------------------------- (Principal financial officer
Donald E. Klumb and principal accounting
officer)
</TABLE>
15
<PAGE> 16
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-01-2000
<PERIOD-START> JAN-02-2000
<PERIOD-END> APR-01-2000
<CASH> 53,458
<SECURITIES> 0
<RECEIVABLES> 15,813
<ALLOWANCES> 437
<INVENTORY> 0
<CURRENT-ASSETS> 69,748
<PP&E> 953
<DEPRECIATION> 244
<TOTAL-ASSETS> 72,742
<CURRENT-LIABILITIES> 5,320
<BONDS> 0
0
0
<COMMON> 27
<OTHER-SE> 67,395
<TOTAL-LIABILITY-AND-EQUITY> 72,742
<SALES> 0
<TOTAL-REVENUES> 16,402
<CGS> 0
<TOTAL-COSTS> 10,445
<OTHER-EXPENSES> 132
<LOSS-PROVISION> 111
<INTEREST-EXPENSE> 3
<INCOME-PRETAX> 2,782
<INCOME-TAX> 1,104
<INCOME-CONTINUING> 2,068
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,678
<EPS-BASIC> 0.06
<EPS-DILUTED> 0.06
</TABLE>
