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Filed Pursuant to Rule 424(b)(4)
Registration No. 333-40864
PROSPECTUS
3,000,000 SHARES
LOGO
COMMON STOCK
$22.875 PER SHARE
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We are selling 1,000,000 shares of common stock and the selling
stockholders named in this prospectus are selling 2,000,000 shares. We will not
receive any proceeds from the sale of shares by the selling stockholders. The
underwriters named in this prospectus may purchase up to 397,500 and 52,500
additional shares of common stock from Behrman Capital II L.P. and Richard P.
Nespola, respectively, to cover over-allotments.
Our common stock is quoted on The Nasdaq National Market under the symbol
"TMNG". The last reported sale price of our common stock on the Nasdaq National
Market on August 1, 2000 was $23.00.
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INVESTING IN OUR COMMON STOCK INVOLVES CERTAIN RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 7.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
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<TABLE>
<CAPTION>
PER SHARE TOTAL
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<S> <C> <C>
Public Offering Price....................................... $22.875 $68,625,000
Underwriting Discount....................................... $ 1.14 $ 3,420,000
Proceeds to The Management Network Group, Inc. (before
expenses)................................................. $21.735 $21,735,000
Proceeds to Selling Stockholders (before expenses).......... $21.735 $43,470,000
</TABLE>
The underwriters are offering the shares subject to various conditions. The
underwriters expect to deliver the shares to purchasers on or about August 7,
2000.
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SALOMON SMITH BARNEY CHASE H&Q
LEHMAN BROTHERS
August 1, 2000
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TABLE OF CONTENTS
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PAGE
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Prospectus Summary.......................................... 3
Risk Factors................................................ 7
Forward-Looking Statements.................................. 15
Use of Proceeds............................................. 15
Price Range of Common Stock................................. 15
Dividend Policy............................................. 15
Trademarks.................................................. 15
Capitalization.............................................. 16
Dilution.................................................... 17
Selected Consolidated Financial Data........................ 18
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 19
Business.................................................... 28
Management.................................................. 42
Certain Transactions........................................ 52
Principal and Selling Stockholders.......................... 54
Description of Capital Stock................................ 56
Shares Eligible For Future Sale............................. 59
Underwriting................................................ 61
Legal Matters............................................... 63
Experts..................................................... 63
Where You Can Find Additional Information................... 63
Index to Financial Statements............................... F-1
</TABLE>
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PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus. This summary may not contain all of the information that you should
consider before investing in the common stock. You should read the entire
prospectus carefully, including "Risk Factors" and our financial statements
before making an investment decision.
THE MANAGEMENT NETWORK GROUP, INC.
We provide management consulting services to the global telecommunications
industry, including communications service providers, technology companies and
financial services firms. We provide a comprehensive range of services,
including strategic, management and operational advice, that enable our clients
to meet the challenges of today's competitive and dynamic telecommunications
environment, including the growing demand for electronic business, known as
e-business, infrastructure. Since our inception in 1990, we have performed
services for approximately 235 clients. Based on revenues, our top two clients
for fiscal 1999 and for the six month period ended July 1, 2000 were Williams
Communications Group and diAx.
Our industry-focused services help our broad range of clients capitalize on
the vast opportunities brought about by a rapidly changing telecommunications
market. Our complete range of solutions include:
- strategic assessments;
- design and evaluation of telecommunications infrastructure;
- operational support and process improvement; and
- system evaluation, selection and implementation advice.
The sophisticated services we provide make extensive use of the proprietary
methodologies we have developed, ensuring the high quality and timeliness of our
services. Our solutions enable our clients to compete more effectively by
aligning their service offerings with their chosen market strategies. In
addition, our solutions allow them to offer their services cost-effectively and
accelerate the introduction of new technologies, while improving overall
customer satisfaction and retention, all of which are critical components of
their profitability.
We provide our services through highly experienced consultants who average
over ten years of industry experience. In 1998 and 1997, our President and Chief
Executive Officer was named by Phone+ magazine, a trade publication, to its
annual list of the most influential people in competitive long distance
telecommunications. In both years he was the highest-ranking non-carrier
executive selected for this list. We believe our clients value the extensive
expertise and industry knowledge our consultants provide, enabling us to develop
relationships with many of our clients, who in many cases rely on our advice and
services to make critical strategic and business decisions.
Our key growth initiatives include:
- combining our telecommunications and e-business expertise to help our
clients successfully develop and deploy the underlying infrastructure to
support the internet and to meet their growing e-business requirements;
- capitalizing on our competitive telecommunications experience to expand
globally to serve our clients' growing global needs as overseas markets
continue to face increasing deregulation and competition;
- further enhancing our long-term client relationships to allow us to
jointly plan future projects and develop large, multi-year contracts;
- building our brand through several marketing initiatives; and
- extending our business model by enhancing our business processes that can
be duplicated worldwide.
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THE OFFERING
Common stock offered by us....... 1,000,000 shares
Common stock offered by the
selling stockholders............. 2,000,000 shares
Common stock outstanding after
this offering.................... 28,496,444 shares
Use of Proceeds.................. To enhance our European initiative, enhance
our toolsets, support TMNG.com and for
general corporate purposes, including
working capital and potential acquisitions.
Nasdaq National Market symbol.... TMNG
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The number of shares of common stock outstanding after this offering is
based on the number of shares outstanding as of July 1, 2000 and does not
include the following:
- 2,528,216 shares of common stock subject to options issued at a weighted
average exercise price of $7.14 per share granted under our 1998 equity
incentive plan; and
- 500,000 shares of our common stock subject to an outstanding warrant
issued to Williams Communications Group at an exercise price of $2.00 per
share.
Please see "Capitalization" for a more complete discussion regarding the
outstanding shares of our common stock and options to purchase our common stock
and other related matters.
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RECENT DEVELOPMENTS
Since our initial public offering on November 23, 1999 through the six
month period ended July 1, 2000, we have experienced the following developments
in our business:
- Clients and Alliances. We have added 42 high quality new clients,
including communication service providers, technology companies, and
investment banking and financial services firms. We have expanded our
alliances with large systems integration and applications development
organizations to expand our distribution channels and provide clients a
complete solution.
- International Operations. During the six month period ended July 1, 2000,
revenues from international operations were 29.1% of our total revenues
with the European market being the focus of such growth and initiative.
Also during the six month period ended July 1, 2000, we increased our
presence in Latin America, anchored by our consulting agreement with
iPlan Networks, a facilities-based telecommunications provider
headquartered in Argentina that combines fiber optics and wireless
technology.
- TMNG.com. TMNG.com generated 28 new engagements with new and existing
clients since introduction in third quarter 1999. TMNG.com assists
companies pursuing e-business opportunities with the construction of the
infrastructure, systems and processes needed to support e-business. For
example, TMNG.com addresses the back-office requirements of Internet and
Application Service Providers (ISP and ASP), two growth strategies common
to many communication service providers.
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CORPORATE INFORMATION
Our principal executive offices are located at 7300 College Boulevard,
Suite 302, Overland Park, Kansas 66210 and our telephone number is (913)
345-9315. Our web site is www.tmng.com and our corporate email address is
"[email protected]." Any reference contained in this prospectus to our web site, or
to any other web site, shall not be deemed to incorporate information from those
sites into this prospectus.
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Unless otherwise noted, all information in this prospectus assumes that the
underwriters will not exercise their option to purchase additional shares of
common stock to cover over-allotments.
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SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The following summary financial information should be read in conjunction
with our consolidated financial statements and their related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in this prospectus. Listed below is our statement of
operations data for fiscal years 1995 through 1999 and for the six months ended
July 3, 1999 and July 1, 2000 and our balance sheet data as of July 1, 2000. The
results for the interim periods are not necessarily indicative of the results
for the full fiscal year or any future period. Interim results reflect all
adjustments, which are in the opinion of management, necessary to a fair
statement of these results.
To calculate the pro forma provision for income taxes and pro forma net
income available to stockholders for fiscal year 1998 and earlier, we have
assumed the pro forma provision for income taxes reflects adjustments to
historical net income as if we had not elected subchapter "S" corporation status
for federal and state income tax purposes.
Beginning with fiscal 1998, we switched to a four week -- four week -- five
week quarterly accounting system in which each quarter is 13 weeks long and ends
on a Saturday. As a result of this change, our fiscal year end changed from
December 31 to the Saturday which is 13 weeks from the end of the third fiscal
quarter. The words "fiscal year" in this prospectus refer to the fiscal year
most closely coinciding with the related calendar year. Our 1998 fiscal year
therefore ended on January 2, 1999. Our 1999 fiscal year ended on January 1,
2000. When we refer to the "six month period for 1999" and to the "six month
period for 2000" in this prospectus, we mean the six month periods ended on July
3, 1999 and July 1, 2000, respectively.
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<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR ------------------
--------------------------------------------------- JULY 3, JULY 1,
1995 1996 1997 1998 1999 1999 2000
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues.............................................. $ 7,299 $17,279 $20,184 $32,103 $50,322 $23,856 $35,866
------- ------- ------- ------- ------- ------- -------
Cost of services:
Direct cost of services............................. 4,303 9,648 11,384 17,411 26,109 12,377 18,638
Equity related charges.............................. 239 2,780 956 3,917
------- ------- ------- ------- ------- ------- -------
Total cost of services........................ 4,303 9,648 11,384 17,650 28,889 13,333 22,555
------- ------- ------- ------- ------- ------- -------
Gross profit.......................................... 2,996 7,631 8,800 14,453 21,433 10,523 13,311
------- ------- ------- ------- ------- ------- -------
Operating expenses:
Selling, general and administrative expenses........ 1,242 2,798 3,280 6,158 9,777 4,886 7,448
Equity related charges.............................. 22 1,998 570 810
------- ------- ------- ------- ------- ------- -------
Total operating expenses...................... 1,242 2,798 3,280 6,180 11,775 5,456 8,258
------- ------- ------- ------- ------- ------- -------
Income from operations................................ 1,754 4,833 5,520 8,273 9,658 5,067 5,053
------- ------- ------- ------- ------- ------- -------
Total other income (expense).......................... 4 (120) (16) (1,948) (1,789) (1,193) 1,499
Income before provision for income taxes and
extraordinary item.................................. 1,758 4,713 5,504 6,325 7,869 3,874 6,552
Provision for income taxes............................ (3,282) (3,208) (1,612) (2,621)
------- ------- ------- ------- ------- ------- -------
Income available to common stockholders before
extraordinary item.................................. 1,758 4,713 5,504 3,043 4,661 2,262 3,931
Extraordinary item.................................... (200)
------- ------- ------- ------- ------- ------- -------
Net income available to common stockholders........... $ 1,758 $ 4,713 $ 5,504 $ 3,043 $ 4,461 $ 2,262 $ 3,931
======= ======= ======= ======= ======= ======= =======
Income before extraordinary item per common share:
Basic............................................... $ 0.08 $ 0.21 $ 0.24 $ 0.14 $ 0.20 $ 0.10 $ 0.14
======= ======= ======= ======= ======= ======= =======
Diluted............................................. $ 0.08 $ 0.21 $ 0.24 $ 0.13 $ 0.20 $ 0.10 $ 0.14
======= ======= ======= ======= ======= ======= =======
Net income per common share:
Basic............................................... $ 0.08 $ 0.21 $ 0.24 $ 0.14 $ 0.19 $ 0.10 $ 0.14
======= ======= ======= ======= ======= ======= =======
Diluted............................................. $ 0.08 $ 0.21 $ 0.24 $ 0.13 $ 0.19 $ 0.10 $ 0.14
======= ======= ======= ======= ======= ======= =======
Weighted average common shares outstanding:
Basic............................................... 22,500 22,500 22,500 22,500 23,056 22,507 27,443
======= ======= ======= ======= ======= ======= =======
Diluted............................................. 22,500 22,500 22,500 22,944 23,807 22,991 28,664
======= ======= ======= ======= ======= ======= =======
Pro forma provision for income taxes(1)............... $ 703 $ 1,885 $ 2,202 $ 2,530
Pro forma net income available to stockholders........ $ 1,055 $ 2,828 $ 3,302 $ 3,795
======= ======= ======= =======
</TABLE>
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<CAPTION>
JULY 1, 2000
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PRO FORMA
ACTUAL AS ADJUSTED(2)
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(IN THOUSANDS)
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CONSOLIDATED BALANCE SHEET DATA:
Net working capital......................................... $68,455 $ 89,486
Total assets................................................ $78,626 $ 99,657
Common stockholders' equity................................. $72,654 $ 93,685
</TABLE>
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(1) Before February 12, 1998, we were a subchapter "S" corporation and,
accordingly, federal and state income taxes were paid at the stockholder
level only. Upon consummation of the February 1998 leveraged
recapitalization, we terminated our subchapter "S" corporation status and,
accordingly, became subject to federal and state income taxes. The pro forma
provision for income taxes and pro forma net income available to
stockholders reflect adjustment to historical net income as if we had not
elected subchapter "S" corporation status for federal and state income tax
purposes.
(2) As adjusted reflects the issuance of 1,000,000 shares of common stock by us
in this offering at the offering price of $22.875 per share and deducting
the underwriting discounts and commissions and estimated offering expenses.
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RISK FACTORS
You should carefully consider the following risk factors and all other
information contained in this prospectus before purchasing our common stock.
Investing in our common stock involves a high degree of risk.
WE FOCUS EXCLUSIVELY ON SERVING THE TELECOMMUNICATIONS INDUSTRY AND THEREFORE
CHANGES IN THIS INDUSTRY COULD REDUCE OUR CUSTOMER BASE OR CAUSE CUSTOMERS TO
USE INTERNAL RESOURCES
We currently derive all of our revenues from consulting engagements within
the telecommunications industry. Much of our recent growth has arisen from
business opportunities presented by industry trends that include:
- deregulation;
- increased competition;
- technological advances;
- the growth of e-business; and
- the convergence of service offerings.
If these trends change, the demand for telecommunications consulting work
will likely decrease. In addition, the telecommunications industry is in a
period of consolidation, which could reduce our client base, eliminate future
opportunities or create conflicts of interest among our clients. Additionally,
current and future economic pressures in the industry may cause
telecommunications companies to use internal resources in lieu of outside
consultants. As a result, our customer base and our revenues may decline.
WE ARE DEPENDENT ON A LIMITED NUMBER OF LARGE CUSTOMERS FOR A MAJOR PORTION OF
OUR REVENUES, AND THE LOSS OF A MAJOR CUSTOMER COULD REDUCE OUR REVENUES AND
HARM OUR BUSINESS
We derive a significant portion of our revenues from a relatively limited
number of clients. For example, during 1999 and the six month period for 2000,
revenues from our ten most significant clients accounted for approximately 85.2%
and 76.6% of our revenues, respectively. In fiscal 1999 and the six month period
for 2000, Williams Communications Group and diAx each 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 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;
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- 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.
WE MUST CONTINUE TO ATTRACT AND RETAIN QUALITY CONSULTANTS, AND OUR INABILITY TO
DO SO WOULD IMPAIR OUR ABILITY TO SERVICE EXISTING ENGAGEMENTS OR UNDERTAKE NEW
ENGAGEMENTS, RESULTING IN A DECLINE IN OUR REVENUES AND INCOME
We must attract a significant number of new consultants to implement our
growth plans. The number of potential consultants that meet our hiring criteria
is relatively small, and we face significant competition for these consultants
from our direct competitors and others in the telecommunications industry.
Competition for these consultants may result in significant increases in our
costs to retain the consultants, which could reduce our margins and our
profitability. In addition, we will need to attract consultants in international
locations, principally Europe, to support our international growth plans. We
have limited experience in recruiting internationally, and we may not be able to
do so. Our inability to recruit new consultants and retain existing consultants
could impair our ability to service existing engagements or undertake new
engagements. If we are unable to attract and retain consultants, our revenues
and our profitability would decline.
THE MARKET IN WHICH WE COMPETE IS INTENSELY COMPETITIVE AND ACTIONS BY
COMPETITORS COULD RENDER OUR SERVICES LESS COMPETITIVE CAUSING OUR REVENUES AND
INCOME TO DECLINE
The market for consulting services to telecommunications companies is
intensely competitive, highly fragmented and subject to rapid change. Our
competitors include general management consulting firms, the consulting
practices of "Big Five" accounting firms, most of which have practice groups
focused on the telecommunications industry and local or regional firms
specializing in telecommunications services. Some of these competitors have also
formed strategic alliances with telecommunications and technology companies
serving the industry. We also compete with internal resources of our clients.
Our competitors include:
- American Management Systems;
- Andersen Consulting;
- Booz-Allen & Hamilton;
- The Boston Consulting Group;
- Cap Gemini;
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- 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
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.
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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 1998 and the six month period for 1999, the
percentage of our revenues comprised of international engagements increased
significantly in fiscal year 1999 and the six month period for 2000,
respectively, and may continue to increase. Some of our international
engagements are denominated in the local currency of our clients. Expenses that
we incur in delivering these services, consisting primarily of consultant
compensation, are typically denominated in U.S. dollars. To the extent that the
value of a currency in which our billings are denominated decreases in relation
to the U.S. dollar or another currency in which our expenses are denominated,
our operating results and financial condition could be harmed. We may hedge our
foreign currency exposure from time to time, but hedging may not be effective.
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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
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.
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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. For additional information regarding this proceeding,
please see "Business -- Legal Proceedings."
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;
- 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.
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<PAGE> 13
In addition, the stock market experiences significant price and volume
fluctuations. These fluctuations particularly affect the market prices of the
securities of many high technology companies. These broad market fluctuations
could harm the market price of our common stock.
WE MAY MAKE ACQUISITIONS, WHICH ENTAIL RISKS THAT COULD HARM OUR FINANCIAL
PERFORMANCE OR STOCK PRICE
As part of our business strategy, we may make acquisitions. Currently, we
do not have any planned or pending acquisitions. Any future acquisition would be
accompanied by the risks commonly encountered in acquisitions. These risks
include:
- the difficulty associated with assimilating the personnel and operations
of acquired companies;
- the potential disruption of our existing business; and
- adverse effects on our financial statements, including one-time
write-offs, ongoing charges for amortization of goodwill and assumption
of liabilities of acquired businesses.
If we make acquisitions and any of these problems materialize, these
acquisitions could negatively affect our operations, profitability and financial
operations.
OUR INABILITY TO PROTECT OUR INTELLECTUAL PROPERTY COULD HARM OUR COMPETITIVE
POSITION AND OUR FINANCIAL PERFORMANCE
Despite our efforts to protect our proprietary rights from unauthorized use
or disclosure, parties, including former employees or consultants of ours, may
attempt to disclose, obtain or use our solutions or technologies. The steps we
have taken may not prevent misappropriation of our solutions or technologies,
particularly in foreign countries where laws or law enforcement practices may
not protect our proprietary rights as fully as in the United States.
Unauthorized disclosure of our proprietary information could make our solutions
and methodologies available to others and harm our competitive position.
Intellectual property claims brought against us, regardless of their merit,
could result in costly litigation and the diversion of our financial resources
and technical and management personnel. Further, if such claims are proven
valid, through litigation or otherwise, we may be required to change our
trademarks and pay financial damages, which could harm our profitability and
financial performance.
PRINCIPAL STOCKHOLDERS, EXECUTIVE OFFICERS AND DIRECTORS WILL RETAIN SUBSTANTIAL
CONTROL OVER US AFTER THE OFFERING AND MAY MAKE DECISIONS THAT ARE NOT IN THE
BEST INTEREST OF OTHER STOCKHOLDERS
Upon completion of this offering, our executive officers, directors and
stockholders owning more than five percent of our outstanding common stock (and
their affiliates) will, in the aggregate, own a majority of our outstanding
common stock. As a result, such persons, acting together, will have the ability
to substantially influence all matters submitted to the stockholders for
approval (including the election and removal of directors and any merger,
consolidation or sale of all or substantially all of our assets) and to control
our management and affairs. Accordingly, concentration of ownership of our
common stock may have the effect of delaying, deferring or 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.
THE SIGNIFICANT NUMBER OF SHARES OF COMMON STOCK THAT WILL BE ELIGIBLE FOR SALE
IN THE NEAR FUTURE MAY HARM THE MARKET PRICE OF OUR COMMON STOCK
Sales of a substantial number of shares of our common stock in the public
market following this offering could harm the market price for our common stock.
This may prevent stockholders from reselling their shares at or above the price
at which they purchased their shares. Upon expiration of 90-day lockup
agreements that the selling stockholders and our executive officers and
directors have entered into with the underwriters or us, 20,036,707 shares of
our common stock will become eligible for immediate sale. For additional detail
regarding shares eligible for sale, please see "Shares Eligible for Future
Sale."
13
<PAGE> 14
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.
INVESTORS IN THIS OFFERING WILL SUFFER IMMEDIATE AND SUBSTANTIAL DILUTION
If you purchase shares of our common stock, you will incur immediate and
substantial dilution of $19.72 in pro forma net tangible book value per share.
If other security holders exercise options or warrants to purchase our common
stock, you will suffer further dilution.
WE MAY SEEK TO RAISE ADDITIONAL FUNDS, AND ADDITIONAL FUNDING MAY BE DILUTIVE TO
STOCKHOLDERS OR IMPOSE OPERATIONAL RESTRICTIONS
Any additional equity financing may be dilutive to our stockholders and
debt financing, if available, may involve restrictive covenants, which may limit
our operating flexibility with respect to certain business matters. If
additional funds are raised through the issuance of equity securities, the
percentage ownership of our stockholders will be reduced. These stockholders may
experience 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.
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<PAGE> 15
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks and
uncertainties, which may include statements about our:
- business strategy;
- financial performance and trends affecting our business; and
- plans, objectives, expectations and intentions contained in this
prospectus that are not historical facts.
When used in this prospectus, the words "expects," "anticipates,"
"intends," "plans," "believes," "seeks," "estimates" and similar expressions are
generally intended to identify forward-looking statements. In addition, this
prospectus includes statistical data that comes from information published by
independent sources, including International Data Corporation (IDC). Because
these forward-looking statements involve risks and uncertainties, actual results
could differ materially from those expressed or implied by these forward-looking
statements for a number of reasons, including those discussed under "Risk
Factors" and elsewhere in this prospectus.
USE OF PROCEEDS
We estimate that we will receive proceeds of $21,031,250 from the sale of
the 1,000,000 shares of common stock we are offering based on an assumed public
offering price of $22.875 per share and after deducting the underwriting
discount and our estimated offering expenses. We will not receive any proceeds
from the sale of the shares offered by the selling stockholders.
We plan to use the proceeds to enhance our European initiative, enhance our
toolsets, support TMNG.com and for general corporate purposes, including working
capital. We may also use some of the proceeds to acquire other complementary
businesses, although we have no current commitments relating to any of these
transactions. Pending these uses, the net proceeds of this offering will be
invested in short-term, investment grade, interest-bearing securities.
PRICE RANGE OF COMMON STOCK
Our common stock is traded on the Nasdaq National Market under the symbol
of TMNG. The following table sets forth, for the period indicated, the low and
high sale prices per share for our common stock as reported by the Nasdaq
National Market.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
Fourth Quarter 1999 (from November 22, 1999)................ $35.13 $17.00
First Quarter 2000.......................................... $41.88 $21.75
Second Quarter 2000......................................... $40.00 $ 9.00
Third Quarter 2000 (through August 1, 2000)................. $40.00 $22.81
</TABLE>
On August 1, 2000, the last reported sale price of our common stock on the
Nasdaq National Market was $23.00 per share. As of July 1, 2000, we had
outstanding 27,496,444 shares of common stock held by approximately 50 holders
of record.
DIVIDEND POLICY
We currently expect to retain our future earnings, if any, for use in the
operation and expansion of our business and do not anticipate paying any cash
dividends in the foreseeable future.
TRADEMARKS
TMNG(R), TMNG.com(TM), TMNG CLEC Planner(TM), TMNG Lexicon(R), TMNG
e-Lexicon(TM), Margin Master(R) and QBC(R) are trademarks of The Management
Network Group, Inc. eRoom(TM) is a trademark of Instinctive Technology, Inc.
Other service marks, trademarks and trade names referred to in this prospectus
are the property of their respective owners.
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<PAGE> 16
CAPITALIZATION
The following table sets forth as of July 1, 2000:
- our actual capitalization; and
- our capitalization as adjusted to reflect the proceeds from the sale of
1,000,000 shares of our common stock offered hereby at the public
offering price of $22.875 per share and after deducting the underwriting
discount and estimated offering expenses.
The actual information below is qualified by, and should be read in
conjunction with, our consolidated financial statements and related notes
appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
JULY 1, 2000
----------------------------
PRO FORMA
ACTUAL AS ADJUSTED
------------ ------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE
DATA)
<S> <C> <C>
Stockholders' equity:
Preferred stock, $0.001 par value; 10,000,000 shares
authorized, none issued and outstanding, Actual and as
adjusted...............................................
Common stock, $0.001 par value; 100,000,000 shares
authorized, shares issued and outstanding, at amount
paid in(1):
Actual: 27,496,444 shares; and As Adjusted: 28,496,444
shares(1)............................................. $ 27 $ 28
Additional paid-in capital................................ 106,540 127,570
Accumulated deficit....................................... (28,207) (28,207)
Accumulated other comprehensive income -- foreign currency
translation
adjustment............................................. (47) (47)
Unearned compensation..................................... (5,659) (5,659)
-------- --------
Total stockholders' equity........................ 72,654 93,685
-------- --------
Total capitalization.............................. $ 72,654 $ 93,685
======== ========
</TABLE>
---------------
(1) The number of shares of common stock outstanding at July 1, 2000 excludes:
2,528,216 shares underlying options issuable upon the exercise of options
outstanding under our 1998 equity incentive plan at a weighted average
exercise price of $7.14 per share, of which 301,320 are exercisable as of
July 1, 2000 and 482,409 shares underlying options available for future
grants. The number of shares of common stock outstanding also excludes
500,000 shares issuable upon the exercise of a warrant issued to Williams
Communications Group in October 1999. The exercise price of this warrant is
$2.00 per share.
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<PAGE> 17
DILUTION
Our net tangible book value as of July 1, 2000 was approximately $68.8
million, or approximately $2.50 per share of common stock. Net tangible book
value per share represents the amount of tangible assets less total liabilities,
divided by the shares of common stock outstanding as of July 1, 2000.
Dilution in net tangible book value per share represents the difference
between the amount per share paid by purchasers of shares of our common stock in
this offering and the pro forma as adjusted net tangible book value per share of
our common stock immediately after the offering. After giving effect to our sale
of 1,000,000 shares of common stock in this offering at the public offering
price of $22.875 per share and after deducting the underwriting discount and
estimated offering expenses, our pro forma as adjusted net tangible book value
as of July 1, 2000, would have been approximately $89.9 million, or $3.15 per
share. This represents an immediate increase in pro forma as adjusted net
tangible book value of $0.65 per share to existing stockholders and an immediate
dilution in pro forma as adjusted net tangible book value of $19.72 per share to
purchasers of common stock in this offering.
<TABLE>
<S> <C> <C>
Public offering price per share............................. $22.875
Net tangible book value per share as of July 1, 2000...... $2.50
Increase per share attributable to new investors.......... $0.65
Pro forma as adjusted net tangible book value per share..... $ 3.15
-------
Dilution per share to new investors......................... $ 19.72
=======
</TABLE>
The foregoing computations exclude 2,528,216 shares of common stock subject
to options issued at a weighted average exercise price of $7.14 per share
granted under our 1998 equity incentive plan. These computations also exclude
500,000 shares of common stock subject to an outstanding warrant issued to
Williams Communications Group at an exercise price of $2.00 per share.
To the extent these options and the warrant are exercised, there would be
additional dilution to investors purchasing shares in this offering.
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<PAGE> 18
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data for the six months ended
July 3, 1999 and July 1, 2000, are derived from our unaudited condensed
consolidated financial statements and each of the notes to those statements
included elsewhere in this prospectus. In the opinion of our management, our
unaudited financial statements have been prepared on the same basis as our
audited financial statements and include all adjustments, consisting of only
normal recurring adjustments, necessary for a fair presentation of our financial
condition and results of operations for such periods. The selected financial
data at December 31, 1995 has been derived from our unaudited financial
statements, which are not included in this prospectus. The selected financial
data at December 31, 1996 and 1997, and for each of fiscal years 1995 and 1996,
have been derived from our audited financial statements and the notes to those
statements which are not included in this prospectus. The selected financial
data at January 2, 1999 and January 1, 2000, and for each of fiscal years 1997,
1998 and 1999 have been derived from our audited financial statements and the
notes to those statements included elsewhere in this prospectus. The selected
financial data should be read in conjunction with, and is qualified in its
entirety by, "Management's Discussion and Analysis of Financial Condition and
Results of Operations," our audited financial statements and the notes to those
statements and the other financial data included elsewhere in this prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR SIX MONTHS ENDED
------------------------------------------------ -------------------
JULY 3, JULY 1,
1995 1996 1997 1998 1999 1999 2000
------- ------- ------- -------- ------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues................................................. $ 7,299 $17,279 $20,184 $ 32,103 $50,322 $ 23,856 $35,866
Cost of services:
Direct cost of services................................ 4,303 9,648 11,384 17,411 26,109 12,377 18,638
Equity related charges................................. 239 2,780 956 3,917
------- ------- ------- -------- ------- -------- -------
Total cost of services........................... 4,303 9,648 11,384 17,650 28,889 13,333 22,555
------- ------- ------- -------- ------- -------- -------
Gross profit............................................. 2,996 7,631 8,800 14,453 21,433 10,523 13,311
Operating expenses:
Selling, general and administrative expenses........... 1,242 2,798 3,280 6,158 9,777 4,886 7,448
Equity related charges................................. 22 1,998 570 810
------- ------- ------- -------- ------- -------- -------
Total operating expenses......................... 1,242 2,798 3,280 6,180 11,775 5,456 8,258
------- ------- ------- -------- ------- -------- -------
Income from operations................................... 1,754 4,833 5,520 8,273 9,658 5,067 5,053
Other income (expense):
Interest income........................................ 6 16 6 18 277 2 1,626
Interest expense....................................... (2) (136) (30) (2,054) (1,998) (1,116) (3)
Other, net............................................. 8 88 (68) (79) (124)
------- ------- ------- -------- ------- -------- -------
Total other income (expense)............................. 4 (120) (16) (1,948) (1,789) (1,193) 1,499
Income before provision for income taxes and
extraordinary item..................................... 1,758 4,713 5,504 6,325 7,869 3,874 6,552
Provision for income taxes............................... (3,282) (3,208) (1,612) (2,621)
------- ------- ------- -------- ------- -------- -------
Income available to common stockholders before
extraordinary item..................................... 1,758 4,713 5,504 3,043 4,661 2,262 3,931
Extraordinary item....................................... (200)
------- ------- ------- -------- ------- -------- -------
Net income available to common stockholders.............. $ 1,758 $ 4,713 $ 5,504 $ 3,043 $ 4,461 $ 2,262 $ 3,931
======= ======= ======= ======== ======= ======== =======
Income before extraordinary item per common share
Basic................................................ $ 0.08 $ 0.21 $ 0.24 $ 0.14 $ 0.20 $ 0.10 $ 0.14
======= ======= ======= ======== ======= ======== =======
Diluted.............................................. $ 0.08 $ 0.21 $ 0.24 $ 0.13 $ 0.20 $ 0.10 $ 0.14
======= ======= ======= ======== ======= ======== =======
Net income per common share
Basic................................................ $ 0.08 $ 0.21 $ 0.24 $ 0.14 $ 0.19 $ 0.10 $ 0.14
======= ======= ======= ======== ======= ======== =======
Diluted.............................................. $ 0.08 $ 0.21 $ 0.24 $ 0.13 $ 0.19 $ 0.10 $ 0.14
======= ======= ======= ======== ======= ======== =======
Weighted average common shares outstanding
Basic................................................ 22,500 22,500 22,500 22,500 23,056 22,507 27,443
======= ======= ======= ======== ======= ======== =======
Diluted.............................................. 22,500 22,500 22,500 22,944 23,807 22,991 28,664
======= ======= ======= ======== ======= ======== =======
Pro forma provision for income taxes(1).................. $ (703) $(1,885) $(2,202) $ (2,530)
======= ======= ======= ========
Pro forma net income..................................... $ 1,055 $ 2,828 $ 3,302 $ 3,795
======= ======= ======= ========
"S" corporation distributions............................ $ 1,450 $ 6,095 $ 2,600 $ 4,664
======= ======= ======= ========
CONSOLIDATED BALANCE SHEET DATA:
Net working capital...................................... $ 2,809 $ 1,744 $ 4,689 $ 6,025 $61,419 $ 5,731 $68,455
Total assets............................................. $ 3,443 $ 4,121 $ 5,483 $ 11,006 $67,382 $ 12,090 $78,626
Total long-term obligations (including current debt)..... $ 26,017 $ 23,350
Total Stockholders' Equity (Deficiency in assets)........ $ 2,809 $ 1,743 $ 4,709 $(18,271) $63,437 $(14,356) $72,654
</TABLE>
---------------
(1) Before February 12, 1998, we were a subchapter "S" corporation and,
accordingly, federal and state income taxes were paid at the stockholder
level only. Upon consummation of the February 1998 leveraged
recapitalization, we terminated our subchapter "S" corporation status and,
accordingly became subject to federal and state income taxes. The pro forma
income statement information reflects adjustments to historical net income
as if we had not elected subchapter "S" corporation status for federal and
state income tax purposes.
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<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following section should be read in conjunction with the Consolidated
Financial Statements and Notes thereto beginning on page F-1 of this prospectus.
In addition to historical information, this discussion and analysis contains
forward-looking statements that involve risks, uncertainties and assumptions
which could cause actual results to differ materially from management's
expectations. Factors that could cause such differences include those discussed
in "Risk Factors."
OVERVIEW
We are a global management consulting firm that specializes in serving the
telecommunications industry. We provide comprehensive services that enable our
clients to meet the challenges of today's competitive and dynamic
telecommunications environment, including the growing demand for Internet
infrastructure and e-business solutions. Our clients include communications
service providers, technology companies and the investment firms that support
the telecommunications industry. We capitalize on our industry expertise and
proprietary methodologies to provide strategic, management and operational
support to our clients.
Beginning with fiscal year 1998, we switched to a four week -- four
week -- five week quarterly accounting system in which each quarter is 13 weeks
and ends on a Saturday. As a result of this change, our fiscal year end changed
from being December 31 to being the Saturday which is 13 weeks from the end of
the third fiscal quarter. Our 1998 fiscal year therefore ended on January 2,
1999. Our 1999 fiscal year ended on January 1, 2000. The words "fiscal year" in
this prospectus refer to the fiscal year most closely coinciding with the
related calendar year. When we refer to the "six month period for 1999" and the
"six month period for 2000" in this prospectus, we mean the six month periods
ending on July 3, 1999 and July 1, 2000, respectively.
Sources of Revenue and Revenue Recognition Policy. Our revenues consist of
consulting fees for professional services and related expense reimbursements.
Substantially all of our consulting services are contracted on a time and
materials basis not to exceed a negotiated contract price. Each quarter we
reevaluate our progress against these contracts to confirm our cost of services
will not exceed the contract price. We recognize substantially all revenues in
the period in which the service is performed. We generally begin a client
relationship with a short-term engagement utilizing a few consultants. Our sales
strategy focuses on building long-term relationships with both new and existing
clients to gain additional engagements within existing accounts and referrals
for new clients. We also use strategic alliances with other companies to sell
our services and anticipate that we will continue to do so in the future.
Because we are a consulting company, we experience fluctuations in revenues
derived from our clients during the course of a project lifecycle. As a result,
the volume of work performed for specific clients varies from period to period
and a major client from one period may not use our services in another period.
In addition, our clients generally may end their engagements with little or no
penalty or notice. If a client engagement ends earlier than we expect, we must
re-deploy professional service personnel as any resulting unbillable time could
harm our margins.
In third quarter 1999, we introduced our TMNG.com services, which are
directed at assisting communications service providers in building the
infrastructure to support e-business. We are recruiting additional consultants
to support this business and designing our proprietary methodologies to focus on
e-business, including our TMNG e-Lexicon. We expect to incur substantial costs
in connection with the development of TMNG.com; we also expect that a
significant portion of our long-term service revenues will be attributable to
our TMNG.com service offerings. Should these revenues fall short of our
expectations for any reason, our margins could be harmed.
Customer concentration. While we have a large number of customers, we also
depend on a few key customers for a significant portion of our revenues. In
fiscal year 1998, 42.5% of our revenues came from Williams Communications Group,
Bell Atlantic and e.spire Communications, with services to each accounting for
more than ten percent of our revenues. In fiscal year 1999 and for the six month
period for
19
<PAGE> 20
2000, 54.1% and 34.5%, respectively, of our revenues came from Williams
Communications Group and diAx, with services to each accounting for more than
ten percent of our revenues. We generally negotiate discounted pricing for large
projects with long-term customers. Because our clients typically engage our
services on a project basis, their needs for our services vary substantially
from period to period. While we are seeking to diversify our customer base and
expand the portion of our revenues which is derived from service through various
channels, we anticipate that our operating results will continue to depend on
volume services to a relatively small number of communication service providers
and technology vendors.
Cost of Services. Cost of services consists primarily of fees paid to
independent contractors and client-related compensation for consultants who are
employees as well as equity related non-cash charges we incur in connection with
the grants of equity securities primarily to consultants. Employee compensation
includes certain unbillable time, training, vacation time, benefits and payroll
taxes. Our annual gross margins have ranged from 41.0% to 45.0% during the
period from 1995 to 1999. For the six month period for 2000, gross margin was
37.1%. Margins are primarily impacted by:
- the type of consulting services provided;
- the size of service contracts and negotiated volume discounts;
- changes in our pricing policies and those of our competitors;
- utilization rates of consultants and independent contractors;
- employee and independent contractor costs associated with a competitive
labor market; and
- non-cash equity related charges.
In addition, gross margins may be impacted by the ratio of consultants to
independent contractors providing client service. To improve our ability to
attract and retain personnel, we offer certain current consultants either
regular full-time employment or contingent employment. Contingent employees are
eligible for stock options and generally receive company-paid medical insurance,
vacation and other employee benefits. However, instead of receiving a regular
salary, contingent employees will be compensated only for time spent serving on
consulting projects for customers or requested assistance on internal projects,
including updating our toolsets. We believe our contingent employment model is
unique and provides our consultants with employee benefits, greater flexibility
for personal time and organizational support while providing us greater
flexibility in managing utilization rates than if we hired these consultants as
full-time employees. In addition, as we increase the full-time employee portion
of our consultant base, it becomes increasingly important for us to manage
utilization rates. If we are unable to manage utilization rates, our gross
margins may be negatively impacted because of the additional fixed costs
associated with full-time employees.
Operating Expenses. Operating expenses include selling, general and
administrative expenses as well as equity related non-cash charges we incur in
connection with the grants of equity securities primarily to partners,
principals and certain senior executives. Sales and marketing expenses consist
primarily of personnel and related costs for our direct client marketing efforts
and marketing staff. We primarily use a relationship sales model in which our
partners, principals and consultants generate revenues. We take these revenue
generating activities into account when determining these individuals' quarterly
bonus compensation, which is generally recorded as sales and marketing expenses.
Other expenditures include costs associated with marketing materials, trade
shows and advertising. To increase market awareness of our company, we intend to
continue to expand our sales and marketing efforts substantially, both
domestically and internationally. We will continue investment in sales and
marketing by adding to our senior executive team to support targeted marketing
programs, promoting recognition of our senior executives through published
articles and trade show presentations, and advertisement of new service
offerings, including a substantial portion for TMNG.com. We expect our sales and
marketing expenses to increase in the future.
General and administrative expenses consist primarily of salaries for
employees engaged primarily in executive and support functions as well as
expenses for corporate infrastructure. With our international expansion, we are
investing in enhancing our technologies and infrastructure to support our
operations both domestically and abroad. We do not expect to invest heavily in
facilities because we plan to link our
20
<PAGE> 21
consultants by electronic communication, enabling our consultants to work
off-site using internet communication capabilities known as our eRooms. We are
also investing heavily in updating our toolsets and developing new ones. A
substantial portion of our recruiting and toolset development expenses will be
incurred in connection with the continued development of our TMNG.com service
line. Our development expenditures are expensed when incurred. We expect our
selling, general and administrative expenses to increase in absolute dollars and
as a percentage of revenues, due in part to the expenses we expect to incur in
connection with the continued development of TMNG.com.
Recapitalization. From our inception through February 12, 1998, the date of
our leveraged recapitalization, our pre-recapitalization stockholders, Richard
P. Nespola, Micky K. Woo, Alan H. Staples and Ralph R. Peck conducted operations
through several loosely affiliated entities. On February 12, 1998, we effected a
leveraged recapitalization with Behrman Capital II, L.P. and affiliated venture
funds in which the Behrman Capital funds acquired shares of common stock for
$20.0 million. At that time, we also borrowed $24.0 million in term loans and
obtained a $5.0 million revolving credit facility from Chase Manhattan Bank and
a syndicate of lenders established by Chase Manhattan Bank (this indebtedness
was repaid with the proceeds of our initial public offering in November 1999).
The proceeds from the investment by Behrman Capital and the term loans were used
principally to fund the redemption of approximately 60% of the common stock
owned by Messrs. Nespola, Woo, Peck and Staples for an aggregate redemption
price of approximately $38.7 million. In connection with the recapitalization,
we made distributions to the stockholders of approximately $4.7 million,
representing accumulated equity in our company and resulting in negative
stockholders' equity of $21.6 million. We accounted for the transaction using
the leveraged recapitalization accounting convention. As a result of the
recapitalization, we incurred non-recurring recapitalization costs totaling
approximately $3.1 million related to offering costs.
Prior to the recapitalization, we compensated Messrs. Woo, Peck and Staples
for oversight and strategic advice principally through management fees paid to
affiliates owned by them, along with fees for independent contractor services
provided to our clients through these affiliated entities. At the time of the
recapitalization, we ceased making payments of management fees and entered into
an employment agreement with each of Messrs. Nespola, Woo, Peck and Staples.
From 1993 through February 12, 1998, we elected to be treated as a
subchapter "S" corporation for tax purposes. During that period, all of our
outstanding common stock was owned by Messrs. Nespola, Woo, Peck and Staples.
Upon consummation of the recapitalization, we terminated our subchapter "S"
corporation election and became obligated to pay federal and state income taxes
as a subchapter "C" corporation.
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<PAGE> 22
RESULTS OF OPERATIONS
The following table sets forth financial data for the fiscal periods
indicated as a percentage of revenues:
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUES
---------------------------------------------
SIX MONTHS ENDED
FISCAL YEAR ENDED ------------------
----------------------- JULY 3, JULY 1,
1997 1998 1999 1999 2000
----- ----- ----- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues........................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of services:
Direct cost of services.......................... 56.4 54.2 51.9 51.9 52.0
Equity related charges........................... 0.7 5.5 4.0 10.9
----- ----- ----- ----- -----
Total cost of services........................ 56.4 54.9 57.4 55.9 62.9
----- ----- ----- ----- -----
Gross margin....................................... 43.6 45.1 42.6 44.1 37.1
Operating expenses:
Selling, general and administrative expenses..... 16.3 19.2 19.4 20.5 20.7
Equity related charges........................... 0.1 4.0 2.4 2.3
----- ----- ----- ----- -----
Total operating expenses...................... 16.3 19.3 23.4 22.9 23.0
----- ----- ----- ----- -----
Income from operations............................. 27.3 25.8 19.2 21.2 14.1
Other income (expense):
Interest income.................................. 0.5 4.5
Interest expense................................. (6.4) (4.0) (4.7)
Other expenses, net.............................. 0.3 (0.3) (0.3)
----- ----- ----- ----- -----
Income before income taxes and extraordinary
item............................................. 27.3 19.7 15.7 16.2 18.3
Provision for income tax........................... (10.2) (6.4) (6.7) (7.3)
----- ----- ----- ----- -----
Income before extraordinary item................... 27.3 9.5 9.3 9.5 11.0
Extraordinary item................................. (0.4)
----- ----- ----- ----- -----
Net income......................................... 27.3% 9.5% 8.9% 9.5% 11.0%
===== ===== ===== ===== =====
</TABLE>
COMPARISON OF SIX MONTHS ENDED JULY 1, 2000 AND JULY 3, 1999
Revenues
Revenues increased 50.3% to $35.9 million for the six month period for 2000
from $23.9 million for the six month period for 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 six month period for 2000, our international
revenue base represented 29.1% of our revenues, up from 24.1% for the six month
period for 1999.
Included in revenue for the six month period for 2000 were services
provided to two large customers, which accounted for 34.4% of revenues in the
six month period for 2000 compared to 57.3% for the six month period for 1999.
Costs of Services
Direct cost of services increased to $18.6 million for the six month period
for 2000 compared to $12.4 million for the six month period for 1999. As a
percentage of revenues, our gross margin on services was 48.0% for the six month
period for 2000 and 48.1% for the six month period for 1999.
Non-cash stock based compensation charges were $3.9 million and $1.0
million for the six month period for 2000 and 1999, respectively. Of the $3.9
million compensation charges related to the six month period for 2000, $1.9
million was recorded in connection with the issuance of stock options to
employees and non-employee consultants and $2.0 million was recorded in
connection with warrants issued during the fourth quarter of fiscal year 1999.
These charges represent 10.9% of revenues for the six month period for 2000
compared to 4.0% of revenues for the six month period for 1999.
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<PAGE> 23
Operating Expenses
Selling, general and administrative expenses increased to $7.4 million for
the six month period for 2000, or 52.4%, from $4.9 million for the six month
period for 1999. As a percentage of revenues, selling, general and
administrative expenses were comparable with the six month period for 2000 and
1999 at 20.7% and 20.5%, respectively. 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.
Non-cash stock based compensation charges of $810,000 and $570,000 for the
six month period for 2000 and for the six month period for 1999, respectively,
were recorded in connection with the issuance of stock options to our senior
management team, administration, and one non-employee director. These charges
represent 2.3% of revenues in the six month period for 2000 compared to 2.4% of
revenues in the six month period for 1999.
Other Income and Expenses
Interest income was $1.6 million for the six month period for 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 six month period for 2000,
compared to $1.1 million for the six month period for 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
$136,000 for the six month period for 2000, compared to a foreign currency loss
of $75,000 for the six month period for 1999. The losses were 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 six month period for 2000 as a
percentage of pretax income was 40.0% compared to 41.6% for the six month period
for 1999.
FISCAL YEAR 1999 COMPARED TO FISCAL YEAR 1998
Revenues
Revenues increased 56.7% to $50.3 million for fiscal year 1999 from $32.1
million for fiscal year 1998. The increase was primarily attributable to a net
increase in consulting services. The increase in consulting services was due
primarily to a significant increase in services provided to a major customer,
which was offset in part by negotiated volume discounts. Fiscal year 1999
revenues included revenues from services provided to one large customer, which
accounted for 39.6% of revenues during that period. International revenue
expanded to 27.7% of revenues in fiscal year 1999 compared to 16.2% for fiscal
year 1998, primarily due to an increase in European business.
Cost of Services
Direct cost of services increased to $26.1 million for fiscal year 1999
from $17.4 million for fiscal year 1998. Direct cost of services as a percent of
revenue decreased from 54.2% for fiscal year 1998 to 51.9% for fiscal year 1999.
Direct gross margins improved because the consultant mix changed to include more
employees in fiscal year 1999 compared to fiscal year 1998. A greater portion of
full-time employees at a relatively constant utilization rate tends to improve
gross margins because of their overall lower fixed salary compared to the higher
variable costs paid to independent contractors. The margin improvement provided
by increasing the full-time employee base was slightly offset by discounted
customer pricing associated with large engagements.
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<PAGE> 24
Non-cash stock based compensation charges of $2.8 million and $239,000 for
fiscal year 1999 and fiscal year 1998, respectively, were recorded in connection
with the issuance of stock options to employees and non-employee consultants.
These charges reduced gross margin by 5.5% in fiscal year 1999 compared to 0.7%
in fiscal year 1998.
Operating Expenses
Selling, general and administrative expenses increased to $9.8 million for
fiscal year 1999 from $6.2 million for fiscal year 1998. Selling, general and
administrative expense as a percentage of revenue increased to 19.4% for fiscal
year 1999 from 19.2% for fiscal year 1998. We incurred an increase in marketing
costs primarily as a result of an increase in sales bonuses associated with
implementation of a revised incentive program for consultants and increased
revenues for fiscal year 1999. We incurred an increase in selling, general and
administrative expense primarily due to the personnel and facility costs
associated with opening a new corporate office in the third quarter of fiscal
year 1998 and increased administrative staffing to manage and support the growth
of the organization. We also hired managing directors to lead the European and
Canadian subsidiaries at the beginning of fiscal year 1999. In addition, we
established reserves of $160,000 for a potential claim brought against us by a
trustee in bankruptcy for a former client.
Non-cash stock based compensation charges of $2.0 million and $22,000 for
fiscal year 1999 and fiscal year 1998, respectively, were recorded in connection
with the issuance of stock options to partners, principals and certain senior
executives and non-employee directors. These charges increased operating
expenses as a percentage of revenue by 4.0% in fiscal year 1999 compared to 0.1%
in fiscal year 1998.
Other Income and Expenses
Interest expense decreased to $2.0 million for fiscal year 1999, compared
to $2.1 million for fiscal year 1998. Interest expense primarily related to
$24.0 million of borrowings under our term loans incurred in connection with the
recapitalization in February 1998 and borrowings on the revolving credit
facility. On November 29, 1999, all outstanding indebtedness was repaid with
$22.3 million of the proceeds from the November 23, 1999 initial public
offering. In conjunction with the early extinguishment of debt, deferred
financing charges of $200,000, net of tax, were written-off and recorded as an
extraordinary loss in the fourth quarter of fiscal year 1999.
Other income for fiscal year 1998 primarily represents the recovery of
$92,000 related to an employee advance previously reserved.
Income Taxes
Provision for income taxes for fiscal year 1999 as a percentage of pretax
income was 40.8% compared to 51.9% for fiscal year 1998. The 51.9% effective tax
rate for fiscal year 1998 exceeded the statutory federal income tax rate
primarily due to the establishment of net deferred taxes upon conversion to a
"C" corporation on February 12, 1998 in connection with the leveraged
recapitalization and state income taxes. These increases in income tax expense
were partially reduced by the exclusion of net income prior to February 12,
1998, representing "S" corporation net income. Prior to the conversion to a "C"
corporation on February 12, 1998, we did not report tax expense as an "S"
corporation.
FISCAL YEAR 1998 COMPARED TO FISCAL YEAR 1997
Revenues
Revenues increased 59.1% to $32.1 million in fiscal year 1998 from $20.2
million in fiscal year 1997. The increase in revenues was due primarily to the
commencement of several major new engagements during fiscal year 1998. Higher
billing rates, which resulted from a reduction in volume discounts in fiscal
year 1998 as compared to fiscal year 1997, also contributed to the increase. The
revenues in fiscal year 1997 included revenues from services provided to one
large customer, which accounted for 39.3% of
24
<PAGE> 25
revenues in that year, at a negotiated volume discount. International revenues
in fiscal year 1998 were 16.2% of revenues, primarily from Canada, and in fiscal
year 1997 were 0.8% of revenues.
Cost of Services
Direct cost of services increased to $17.4 million in fiscal year 1998 from
$11.4 million in fiscal year 1997. As a percentage of revenues, direct cost of
services decreased to 54.2% in fiscal year 1998 from 56.4% in fiscal year 1997.
The gross margin improvement resulted primarily from a reduction in business
from the two largest customers in fiscal year 1997 at negotiated volume
discounts. In addition, gross margins improved because the consultant mix
changed to include more employees in fiscal year 1998 compared to fiscal year
1997.
In fiscal year 1998, $239,000 non-cash stock based compensation charges
were recorded in connection with the issuance of stock options to consultants.
These charges reduced gross margin in this period by 0.7%.
Operating Expenses
Selling, general and administrative expenses increased 87.7% to $6.2
million in fiscal year 1998 from $3.3 million in fiscal year 1997. As a
percentage of revenues, selling, general and administrative expenses increased
to 19.2% in fiscal year 1998 from 16.3% in fiscal year 1997. Employee costs
increased in fiscal year 1998 due to the larger role principals had in
generating sales and the compensation expense associated with those
responsibilities. In addition, expenses increased in fiscal year 1998 due to
infrastructure investment. A new corporate office was opened in September 1998,
and five management and administrative employees were hired late in the year.
Management information systems were installed in fiscal year 1998, including
financial reporting and project costing systems. In fiscal year 1998, marketing
materials were enhanced, marketing efforts in Europe were expanded and the TMNG
brand was promoted. We also expanded efforts to enhance TMNG Lexicon and TMNG
CLEC Planner toolsets in fiscal year 1998.
Other Income and Expenses
Interest expense increased to $2.1 million in fiscal year 1998 from $30,000
in fiscal year 1997. Interest expense in fiscal year 1998 related primarily to
two term loans in an aggregate principal amount of $24.0 million entered into in
connection with the leveraged recapitalization. In fiscal year 1997, interest
expense related to notes payable to several stockholders.
Other income in the fiscal year 1998 primarily represents the recovery of
$92,000 related to an employee advance previously reserved in fiscal year 1997.
Income Taxes
Provision for income taxes was $3.3 million in fiscal year 1998. The 51.9%
effective tax rate in fiscal year 1998 exceeded the statutory federal income tax
rate primarily due to the establishment of net deferred taxes upon conversion to
a subchapter "C" corporation, and state income taxes. These increases in
provision for income taxes were partially reduced by the exclusion of net income
prior to February 12, 1998, representing "S" corporation net income. Prior to
the conversion to a "C" corporation on February 12, 1998, we did not report tax
expense as an "S" corporation.
Net income decreased to $3.0 million in fiscal year 1998 from $5.5 million
in fiscal year 1997. In fiscal year 1997, we were a subchapter "S" corporation
and did not report tax expense. Income before provision for income taxes
increased to $6.3 million in fiscal year 1998 from $5.5 million in fiscal year
1997.
SELECTED UNAUDITED HISTORICAL QUARTERLY FINANCIAL DATA
The following tables set forth certain unaudited consolidated statements of
income data for the ten quarters ended July 1, 2000. These data have been
derived from unaudited interim consolidated financial statements prepared on the
same basis as the audited consolidated financial statements and, in the opinion
of management, include all adjustments, consisting only of normal recurring
adjustments, considered
25
<PAGE> 26
necessary for a full presentation of such information when read in conjunction
with the consolidated financial statements and notes appearing elsewhere in this
prospectus. Results for any quarter are not necessarily indicative of results
for any future period.
SUMMARY OF QUARTERLY RESULTS OF OPERATIONS -- UNAUDITED
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------
APRIL 4, JULY 4, OCTOBER 3, JANUARY 2, APRIL 3,
1998(1) 1998 1998 1999 1999
-------- ------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
Revenues................................ $ 6,154 $ 6,878 $ 8,439 $10,632 $11,433
======= ======= ======= ======= =======
Gross profit............................ $ 2,741 $ 3,295 $ 3,810 $ 4,607 $ 4,989
======= ======= ======= ======= =======
Income before extraordinary item........ $ 39 $ 838 $ 999 $ 1,167 $ 1,067
======= ======= ======= ======= =======
Net income.............................. $ 39 $ 838 $ 999 $ 1,167 $ 1,067
======= ======= ======= ======= =======
Diluted net income before extraordinary
item per common share................. $ 0.002 $ .037 $ .043 $ .050 $ .045
======= ======= ======= ======= =======
Diluted net income per common share..... $ 0.002 $ .037 $ .043 $ .050 $ .045
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
JULY 3, OCTOBER 2, JANUARY 1, APRIL 1, JULY 1,
1999 1999 2000 2000 2000
------- ---------- ---------- -------- -------
<S> <C> <C> <C> <C> <C>
Revenues................................ $12,423 $13,112 $13,354 $16,402 $19,464
======= ======= ======= ======= =======
Gross profit............................ $ 5,534 $ 5,489 $ 5,421 $ 5,957 $ 7,354
======= ======= ======= ======= =======
Income before extraordinary item........ $ 1,195 $ 1,172 $ 1,227 $ 1,678 $ 2,253
======= ======= ======= ======= =======
Net income.............................. $ 1,195 $ 1,172 $ 1,027 $ 1,678 $ 2,253
======= ======= ======= ======= =======
Diluted net income before extraordinary
item per common share................. $ .051 $ .049 $ .050 $ .058 $ .079
======= ======= ======= ======= =======
Diluted net income per common share..... $ .051 $ .049 $ .040 $ .058 $ .079
======= ======= ======= ======= =======
</TABLE>
------------------------
(1) We converted to "C" corporation status for income tax purposes on February
12, 1998, and charged income for $1.1 million of deferred taxes upon
conversion.
In the past, we have experienced seasonal fluctuations in revenue in the
fourth quarter due primarily to the fewer number of business days because of the
holiday periods occurring in that quarter. We may in the future experience
fluctuations in revenue in the fourth quarter as well as summer and other
vacation periods as we expand internationally.
LIQUIDITY AND CAPITAL RESOURCES
On November 23, 1999, we completed our initial public offering and received
net proceeds of approximately $71.5 million from the sale of 4,615,000 shares of
common stock. On November 29, 1999 we used $22.3 million of the proceeds from
our initial public offering to repay all indebtedness.
At July 1, 2000, we had approximately $53.8 million in cash and cash
equivalents. We believe the net proceeds of the initial public offering and of
this offering, in addition to cash generated from operations, will be sufficient
to meet anticipated cash requirements, including anticipated capital
expenditures and consideration for possible acquisitions, for at least the next
12 months. Should our business expand more rapidly than expected, we believe
that bank credit would be available to fund such operating and capital
requirements.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (FAS 133). This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. FAS 133, as
amended by
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<PAGE> 27
FAS 137, is required to be adopted for all fiscal quarters of all fiscal years
beginning after June 15, 2000. We do not expect the adoption to have a material
impact on our financial statements.
In December 1999, the staff of the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 101 entitled "Revenue Recognition."
Further, 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.
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
invested balance during the six month period 2000 was approximately $51.3
million. We make no attempt to hedge this risk.
27
<PAGE> 28
BUSINESS
OVERVIEW
We provide management consulting services to the global telecommunications
industry. Our clients include:
- communications service providers;
- technology companies; and
- financial services firms.
We provide comprehensive services that address imminent client needs and
enable our clients to meet the challenges of today's competitive and dynamic
telecommunications environment. Present challenges include the ever-growing
demand on companies to conduct e-business and facilitate commercial
relationships over the internet. Our highly experienced consultants, who average
over ten years of telecommunications industry experience, enable us to use our
industry expertise and proprietary methodologies to provide strategic,
management and operational support to our clients.
We serve clients in all major regions of the U.S., in key European markets
and in several other international locations.
We are the successor to a telecommunications consulting company founded in
1990 by Richard P. Nespola, our President and Chief Executive Officer. Several
additional shareholders were added in 1993. We then underwent a leveraged
recapitalization transaction in 1998. We were incorporated in Kansas in 1993 and
reincorporated in Delaware in September 1999.
INDUSTRY BACKGROUND
CONSULTING SERVICES
The demand for consulting services has been increasing in the last decade,
a trend that is expected to continue. International Data Corporation, also known
as IDC, projects that worldwide consulting services will increase from $60.1
billion in 1999 to $124.5 billion in 2004, a compound annual growth rate of
15.7%. The growth of the use of the internet is further spurring this demand as
companies are seeking to improve their business practices through internet-based
communications solutions. IDC projects that worldwide internet professional
services will grow from $16.2 billion in 1999 to $99.1 billion in 2004, a
compound annual growth rate of 43.7%.
As with other businesses, telecommunications companies are increasingly
turning to external consulting firms to help them improve their business
processes and enter new markets as rapidly as possible. Factors such as
deregulation and privatization, mergers and acquisitions within the industry,
and the pace of technological change are driving these companies to seek the
advice of outside experts and supplement the need for additional professionals
to implement their strategies. IDC projects that communications information
technology consulting services will increase from $3.2 billion in 1998 to $6.9
billion in 2003, a compound annual growth rate of 16.5%.
TELECOMMUNICATIONS
Other market dynamics that are contributing to an increased need for
consulting services in the global telecommunications industry include:
- deregulation, which began in the U.S. with the breakup of AT&T and
continued with the Telecommunications Act of 1996 and is accelerating in
Europe and other international markets;
- the growth of the internet and e-business, which increases the demand for
telecommunications capacity and places further pressure on incumbent and
emerging communications service providers to make substantial changes in
the way they do business to support this growth;
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<PAGE> 29
- convergence among the different types of services being provided by a
single telecommunications company;
- the influx of new entrants and increasing competition due to deregulation
and an increasing demand for telecommunications services; and
- technological advances, which have significantly increased the volume of
traffic that can be carried over telecommunications networks and have
lowered transmission costs.
Deregulation
The U.S. telecommunications market reaps the benefits of deregulation,
which began in 1984 and continued with the federal Telecommunications Act of
1996. Deregulation has brought about the liberalization of the
telecommunications market in the United States. Deregulation created new
opportunities not only for the incumbent communications carriers but also for a
vast array of new market entrants. Deregulation has created substantially
greater competition in the industry, resulting in:
- significantly reduced rates;
- vastly improved and new technologies; and
- even more competition.
More recently, deregulation has accelerated internationally. In 1997, the
World Trade Organization Telecommunications Accord was adopted. This treaty has
contributed to deregulation initiatives in Europe, Asia and Latin America.
Explosion of e-Business
The growth of the internet is a global phenomenon fundamentally changing
the nature of the telecommunications industry. Web user growth, coupled with the
growth of new types of on-line and e-business services has driven the emergence
of new service providers such as internet service providers, on-line
communities, internet telephony providers and others. In addition, traditional
telecommunications carriers have entered the on-line market, providing internet
connections and e-business services to businesses and consumers. The growth of
the internet and e-business raises critical strategic and operational issues
that telecommunications companies will need to address, including:
- complex integration issues associated with merging old and new network
technologies;
- unprecedented demand for capacity, which companies must meet while
simultaneously assuring service quality; and
- operational changes needed to support e-business initiatives in a secure
environment, including seamless web-based customer care, on-line bill
presentment and payment, dynamic product introduction and management.
Convergence and Complexity
In the past, communications service providers typically specialized or
offered a single product or a limited set of products to their customers. Such
specialization required the customer to purchase its entire package of
communications needs from multiple providers. Deregulation has enabled companies
to enter previously closed markets and offer multiple services through one stop
shopping. Companies now seek to meet all of the customer's communications needs.
In addition, advances in technology accelerated convergence in the services
provided on the underlying communications network. For example, the ability to
transport telephone calls over the internet will enable service providers to
efficiently integrate voice and data services on a single network.
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<PAGE> 30
Consolidation among key players has also contributed to convergence as
major companies seek to broaden their service offerings through acquisitions.
Companies must integrate multiple corporate infrastructures, networks,
operations and processes.
Influx of New Entrants
The increased demand for services has led not only to additional offerings
by the established players, but also to new entrants to the market. Industry
sources estimate that there are now over 3,000 new providers of voice and data
telecommunications services in the U.S. We expect this competitive trend to
continue to migrate overseas as global deregulation spreads. New market entrants
seek to gain market share from incumbent service providers, who in turn are
striving to change their business models to adapt to the newer, more competitive
industry environment. As a result, core telecommunications services are becoming
increasingly commoditized, making superior customer service and satisfaction, as
well as efficient and cost effective back office systems, key competitive
elements.
Rapid Technological Advances
The telecommunications industry is characterized by rapid technological
advances. Unprecedented levels of transmission capacity, both in terms of the
size and number of packets of data that can be transmitted, now exist due to the
advent of new technologies for voice and data transmission.
Additionally, improvements in fiber optics and other transmission
technologies have increased the number of calls a single fiber can carry from
8,000 in 1985 to 1.5 million in 1999. These technological advances are enabling
communications providers to harness multiple applications, such as voice, data
and video, on a single network, creating new types and combinations of services
available to a broader range of users.
Industry Challenges
The multiple forces affecting the telecommunications industry, including
global deregulation, have led to increased competition and complexity in the
market for all types of communications services. To gain or maintain a
competitive advantage, communications service providers and the technology and
financial firms that focus on the telecommunications industry must understand
the growing complexities and how to best take advantage of the market's
opportunities and challenges, including those driven by the rapid growth of
e-business. With this understanding, these companies must develop sound
strategic plans and implement effective solutions that best exploit the market's
dynamics. To compete effectively, companies must fully understand the
enterprise-wide implications of a proposed solution and must implement these
solutions swiftly with the most effective technologies, systems and processes.
Because the expertise needed by communications companies to address the
market's needs is typically outside their core competencies, they must either
recruit and employ experts or retain outside specialists. Due to the range of
expertise required and the time associated with hiring and training new
personnel, bringing expertise in-house is often not a viable option. When
retaining outside specialists, communications companies need experts that fully
understand the telecommunications industry and can provide timely and unbiased
advice and recommendations.
OUR SOLUTION
We provide a comprehensive range of services, including strategy,
management, operational and e-business support to communications service
providers, technology companies and financial services firms in the United
States, Canada, Europe and other major international markets. Our solutions
encompass the following key elements.
- Exclusive focus on the telecommunications and e-business
industries. Since our founding in 1990, we have occupied a unique
position in the consulting arena, with our exclusive focus on the
telecommunications industry and our more recent focus on the e-business
marketplace. Our
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consultants have significant industry and consulting experience across
critical business disciplines. Our customers rely on our expertise and
reputation, not only to help them keep up with market growth but to help
them deal with the trends as they arise and adapt their business plans to
meet the demands of the future. Our telecommunications and e-business
focus allows us to best fulfill our clients' needs and continuously
refine our services by staying at the forefront of, and helping to
define, industry standards.
- Integrated, complete solution. We use our industry expertise to provide
comprehensive solutions from initial, high-level strategic assessments of
clients' needs through improvements to operations. We have consulting
experience with all major aspects of managing a telecommunications
company, from product launch through order entry, service provisioning
and billing. Our complete solution addresses the business, information
technology and operational needs associated with all aspects of our
clients' requirements. We work with telecommunications providers by
delivering business planning, management support, process development,
operations support, systems requirements, selection and implementation.
We work jointly with application development organizations and system
integration firms to provide a comprehensive solution. We also use our
understanding of service providers' needs to help the software and
technology companies that serve the telecommunications industry to define
strategies, develop applications, respond to requests for proposals and
implement their solutions within the service provider environment.
Finally, we facilitate the evaluation of proposed investments in
telecommunications companies and related technology companies by
investment banking and private equity firms by providing prospect
evaluation, due diligence and post investment support services.
- Partnership with clients. We develop long-term relationships with our
clients as we demonstrate our understanding of all aspects of their
business. We work closely with senior management to understand, predict
and address our clients' evolving strategic and operational business
needs. We expect to develop long-term relationships with our more recent
clients by gaining a deep understanding of their business and providing a
broad array of services.
- Global presence. Our knowledge and focus on the trends impacting markets
abroad enable us to provide the expert advice needed by international
clients competing in newly deregulated markets and by U.S. companies
seeking to expand their global reach. We have worked with clients across
the globe, focusing primarily on North America and Europe. In fiscal year
1999, international consulting engagements represented 27.7% of our total
revenues. For the six month period for 2000, revenues from international
engagements represented 29.1% of our total revenues. We continue to
expand our geographic presence in key locations based on our clients'
needs and opportunities.
- Industry leading consultants. We use seasoned telecommunications
professionals with telecommunications industry expertise. Our senior
officers and principals average more than 15 years of financial,
operational or systems experience in competitive telecommunications
markets. Our consultants average over ten years of telecommunications
industry experience. This extensive experience has positioned our team to
set standards as industry leaders and means that all of our project team
members bring hands-on expertise and practical insight to each
engagement.
- Proprietary methodologies. Our proprietary methodologies are consulting
guidelines and processes that we have created and which are updated by
our consultants based on their experience over many consulting
engagements. Our consultants use these methodologies to win engagements
and help clients improve productivity, gain a competitive advantage,
reduce time to market and market entry risk, and increase revenues and
profits. The following are our toolsets:
TMNG Lexicon is a comprehensive collection of business and systems
requirements for the competitive telecommunications industry and
covers all key functional operations areas, such as order entry,
billing and customer care.
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QBC (Quality Billing Center) is a process model that measures the
entire revenue flow and is designed to help carriers improve cash
flow, reduce call center volumes and diminish customer billing
complaints and challenges.
TMNG CLEC Planner is an economic planning tool designed for
competitive local telephone carriers.
Margin Master is an activity based costing model designed specifically
for competitive carrier cost assignment and management.
C-B-I (Carried to Billed to Invoiced) is designed to allow service
providers to track calls and other billable events from carried to
billed to invoiced.
TMNG e-Lexicon is a comprehensive collection of business and systems
requirements for telecommunications companies serving e-business
customers and developing their own web-based capabilities.
- Vendor and technology neutral. Because we focus on management consulting,
we are in a unique technology- and vendor-neutral position to make
unbiased evaluations and recommendations that are based on a thorough
knowledge of each solution and each client's situation. Therefore, we are
able to capitalize on our extensive experience across complex
multi-technological telecommunications and back office systems
environments to provide the most sound and practical recommendations to
our clients. Because of our neutrality, we believe we are trusted for our
unbiased opinions in the telecommunications community, which has allowed
us to play a key role in setting industry standards. For example, the
European Billing Association, a non-profit trade association, endorsed
our Quality Billing Center as the chosen billing and service management
standard for the European carrier community.
OUR STRATEGY
Our objective is to establish ourself as the telecommunications consulting
company of choice to communications service providers, technology companies and
financial services and investment banking firms. The following are the key
strategies we intend to pursue to meet this objective:
- Expand geographic reach to serve our clients' global needs. We plan to
continue to expand geographically to deliver our services and solution
capabilities to client companies located around the world. By offering
our full range of professional services on a global basis, we believe we
can broaden market awareness about our services and solutions to create
new revenue opportunities. In Europe, the competitive market expertise of
our U.S. consultants is a key factor for European companies facing the
business issues associated with deregulation and increased competition.
Our expertise in Europe can also play a key role for U.S. companies
expanding their European business.
- Focus on supporting our current target market's e-business needs through
our TMNG.com business. Because communications service providers represent
the infrastructure of the internet, the ability of these service
providers to build an infrastructure to meet the demand for increased
internet traffic will be critical to their businesses. More specifically,
the growth of the internet has also led to a greater demand for
internet-based business support services and the seamless integration of
electronic services with traditional means of interacting with customers.
Through TMNG.com, we are combining our telecommunications knowledge with
our developing e-business expertise to help telecommunications service
providers build the infrastructure, systems, processes and services to
address these opportunities arising from the growth of the internet. As
communications service providers begin to deploy their application
hosting strategies, TMNG.com will also address their back-office
requirements to support their application-based initiatives.
- Expand long-term client relationships. We build long-term relationships
with our customers by delivering high quality solutions to help our
clients set their strategies and operate as efficiently as possible in
the rapidly changing telecommunications environment. We believe this
focus improves
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client satisfaction and results in two major benefits for us: follow-on
engagements with existing, satisfied clients and referrals for new
clients. Expanding our existing client relationships will allow us to
jointly plan future projects and, in particular, develop large,
multi-year engagements. The dynamic nature of the telecommunications
industry generates a continuing need for our services, and clients come
back to us because of our knowledge of their systems and architectures
and their satisfaction with our services.
- Further develop and enhance our expandable business model for continued
growth. We plan to further enhance our expandable business model to
accommodate anticipated need for our services generated by industry
growth. The following are the key elements of our business model:
Attracting and retaining high quality, experienced consultants. We
seek to attract high quality consultants with a broad range of
experience and knowledge within the telecommunications industry
through aggressive recruitment efforts, including focused external
recruiting, in-house recruiting specialists and consultant referral
incentive programs. We retain our consultants through a variety of
programs, including our stock option plan, competitive compensation
packages, flexible employment model and dynamic, challenging
assignments at the forefront of the telecommunications industry.
Creating business processes that can be duplicated worldwide. To
support our anticipated growth, we are creating business processes
that we can use worldwide in any consulting engagement. Our toolsets
provide our consultants with methodologies that they use to augment
their experience and help analyze and solve clients' problems. We have
built and are building a network of eRooms to serve as a knowledge
base, enable consultant collaboration on engagements and provide
support information and updates of our current toolsets and releases
of next generation tools.
Maintaining a flexible organization with minimal physical
structure. We intend to use our internet communication capabilities to
retain our flexible, "virtual" structure as we grow. Our contingent
employee model enables us to hire and retain consultants by providing
them with increased benefits. We believe the model allows us to better
manage utilization and to minimize unbilled consultant time. We also
do not expect to invest heavily in facilities and plan to rely on
electronic telecommunications to support our organization.
- Extending our market leadership position and building our brand. We
intend to expand our leadership position in the telecommunications
consulting industry and to establish ourselves as the consulting firm of
choice for communications service providers and the technology and
banking companies that serve them. We intend to capitalize on our
extensive industry knowledge, strong client base, and highly qualified
and experienced professionals to help our clients provide more
value-added services to their customer base. We also have several
marketing initiatives underway to continue building our corporate brand.
PROPRIETARY METHODOLOGIES
We have created methodologies which are unique to our company and based on
our consultants' experience. We continually invest in these toolsets by updating
them to keep them at the forefront of the industry. The following are our
methodologies:
- TMNG Lexicon: a comprehensive collection of business requirements for the
competitive telecommunications industry that harnesses the collective
experience, knowledge and lessons learned from top professionals in the
industry. From order entry to billing to customer care, it covers every
functional area typically found in a telecommunications company, and
contains over 4,000 requirements. On an ongoing basis, the Lexicon is
modified, tested and updated to reflect additional knowledge gained and
changes in the market.
- QBC (Quality Billing Center): a process model that measures the flow of
revenue from beginning to end that is tailored to a carrier's business
systems and process environment. Successfully
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implemented at telecommunications companies around the world, the QBC
provides key benefits and measurable results, including improved cash
flow, reduced call center volumes, and diminished customer billing
challenges. The Global Billing Association recently endorsed our QBC as
the best of breed in telecommunications process measurement tools.
- TMNG CLEC Planner: an economic planning tool developed exclusively for
competitive local telephone carriers. It is used to:
- make resale versus facility-based decisions;
- determine transition plans;
- make market entry decisions;
- identify profitable target markets;
- develop resource plans that align with revenue forecasts; and
- analyze pricing strategy impacts.
- Margin Master: an activity-based costing tool developed for the
telecommunications industry that helps carriers determine product profit
margins. It supports decisions in a bundled product offering and enables
market segment, region, channel, and product-specific analysis. With
growing pressure on margins and reliance on bundled service offerings,
our Margin Master tool becomes increasingly valuable.
- C-B-I (Carried to Billed to Invoiced): a methodology that assists
carriers with the complex task of reconciling incoming call records,
customer billing, and invoices from their service provider. This
proprietary tool allows us to design systems resellers use to track calls
and other billable events from "carried to billed to invoiced," with the
objective of maximizing revenue by minimizing or eliminating lost
billable events.
- TMNG e-Lexicon: a comprehensive collection of business requirements
similar to our TMNG Lexicon, capitalizing on our experience and
understanding of the requirements being driven by the convergence of
telephony and the Internet in areas such as electronic bill presentment
and payment and web-based customer service. This toolset will also
capitalize on our extensive knowledge of the existing telecommunications
infrastructure, and combine that knowledge with our experience,
understanding, and research of the leading edge business support systems
and operations support systems software solutions to develop the
e-Lexicon.
CUSTOMERS AND SERVICES
We provide services to customers in key market segments of the industry.
Since 1990, we have performed consulting assignments for approximately 235
companies, including over 126 telecommunications service providers, over 71
technology companies, including global consulting firms, and over 38 investment
banking and financial services firms. For the six month period for 2000,
telecommunications service providers accounted for 81.1% of our revenues,
technology companies accounted for 16.5% of our revenues and investment banking
and financial services firms accounted for 2.4% of our revenues. Our customer
concentration and our principal customers have in the past changed, and may in
the future change, based on customer requirements and the timing of completion
of engagements. Accordingly, investors should not assume that customers in a
particular fiscal period will be customers of ours in future periods. For fiscal
year 1999, Williams Communications Group and diAx each accounted for 39.6% and
14.5% of our revenues, respectively. For the six month period for 2000, Williams
Communications Group and diAx each accounted for 23.6% and 10.9% of our
revenues, respectively.
In October 1999, we reached an agreement in principle with Williams
Communications, and, prior to the end of 1999, we entered into a definitive
consulting agreement with Williams Communications in which Williams committed to
$22 million of consulting fees over three years. In addition, in October 1999,
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we issued Williams Communications a warrant to purchase 500,000 shares of our
common stock at an exercise price of $2.00 per share. Williams did not pay any
separate cash consideration for this warrant.
COMMUNICATIONS SERVICE PROVIDERS
We provide all types of carriers and service providers with services
ranging from high-level strategy definition through improvements to operations
to help extend their worldwide reach.
Strategic Consulting. We analyze market trends and dynamics for
telecommunications service providers and advise them on market evolution and
development. We also help service providers define, refine and implement
strategies through business case development and market launch planning. In
addition, we analyze acquisition opportunities to determine if they are
complementary to strategies our service provider clients are implementing.
Process Development and Operations Support. We have spearheaded numerous
engagements to design infrastructure, improve processes, and provide operations
support. When telecommunications providers implement new business support
systems and operations support systems, they are seeking to maximize efficiency
and integration in order processing and customer care as well as timeliness and
accuracy in the revenue stream from call processing to billing and payment
processing. Our experience includes revenue assurance and reporting, performance
and cost benchmarking, change management and revenue operations management. We
help clients improve the efficiency, integration, and timeliness of their order
processing, provisioning, billing and customer care systems. Using our unique
process models, QBC and CBI, we improve the timeliness, accuracy and
completeness of carriers' revenue stream management.
Systems Requirements, Selection and Implementation. We have extensive
expertise in the area of systems assessment, requirements definition, vendor
selection, implementation management, testing, and project and program
management. We assist service providers in preparing and managing requests for
proposals for software systems purchases. Our unique, vendor-neutral and
technology-neutral position ensures that the solutions we recommend are based on
what is best for our clients' businesses.
TECHNOLOGY, SOFTWARE AND CONSULTING COMPANIES
Our extensive first-hand knowledge of incumbent and emerging service
providers' needs provides a solid knowledge base of services for technology and
software companies and positions us as subject matter experts to other
consulting companies.
Product development strategic consulting. We help technology and software
companies analyze and focus their product and development strategies and efforts
to meet the needs of telecommunications service providers. Our knowledge of
service provider requirements, along with our toolsets, provide significant
benefit to technology companies as they develop new products and applications.
In particular, our TMNG Lexicon toolset helps facilitate rapid analysis of
technology companies' products and product plans. Our TMNG e-Lexicon toolset is
also used for this purpose.
Market research and analysis. We help technology and software companies
analyze market trends and dynamics to improve their ability to respond to the
requirements of changing and evolving markets. We also analyze acquisition and
investment opportunities for our clients.
Responses to requests for proposals. We assist technology, software and
consulting companies in responding to requests for proposals that they receive
from service providers and others. Our expertise enables us to ascertain the
most critical elements of a request for proposal and to help our clients prepare
responses that address the service provider's key requirements.
Implementation support. For global consulting firms that have engagements
which require specialized telecommunications expertise, we serve as the
telecommunications experts. In addition, we support our software clients by
assisting with program management for software implementation. These assignments
capitalize on our extensive understanding of both the software solution and the
service provider communities.
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INVESTMENT BANKING AND FINANCIAL SERVICES FIRMS
We assist investment banking and financial services firms with prospect
validation and due diligence in connection with planned investments and other
transactions. Our broad knowledge of the industry and subject matter expertise
speed up the evaluation of proposals and potential investment candidates. Our
prospect validation services include candidate validation, business plan
development, financial modeling and contract development and negotiation. Our
consultants and toolsets also facilitate rapid development and execution when
conducting due diligence. Our services in this area include business plan
evaluation and validation, financial model analysis, product and evaluation,
benchmarking, organization and business process validation, systems evaluation,
and network plan reviews.
REPRESENTATIVE ENGAGEMENTS
The following engagements illustrate some of the services that we are
providing and have provided to several of our current clients:
Communications Service Providers
A Leading Wholesale Carrier. We helped this client develop its business
plan for entry into the voice market. Once the business plan was approved, we
were selected to manage the implementation. We are continuing to serve as the
program management office for this client's market entry. Our responsibilities
include providing consulting services and coordinating deliverables being
provided by other vendors. Key services we provided included:
- authoring the initial business case to examine the viability and impact
of a voice strategy;
- developing functional and technical requirements for all areas of
customer relationship management, such as:
- order entry;
- provisioning;
- billing;
- customer care;
- collections; and
- other back office systems;
- supporting the development of a network management and deployment
strategy;
- assisting in the development of the product marketing strategy; and
- managing the system testing process.
A Major Global Carrier. We have performed numerous diversified engagements
for this client, ranging from strategy development, competitive cost analyses,
to systems requirements. Recent projects include:
- developing a wholesale strategy and plans. We were asked to help this
client develop a strategy to serve the wholesale market to help the
company further enhance its product offering. We continue to provide
planning assistance to this division; and
- assisting this client with the integration of a recent acquisition of a
large national competitive telephone company including systems and
process review and development of recommendations for improvement. We
have also assisted with developing requirements for an accounts
receivable system, issuing requests for proposals, selecting vendors,
reconciling data from disparate systems and identifying areas for process
improvement.
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A European Competitive Service Provider. We are assisting this client in
every facet of systems implementation for all customer life cycle systems
(billing, customer care, order entry and provisioning), including requirements
development, testing, and post-implementation support. This effort addresses the
complete set of this client's products for local, long distance, internet,
wireless and other services. We are also assisting with this client's conversion
to a new software operating system and selecting and implementing vendors for
other business support systems and operations support systems.
Technology Companies
A Worldwide Technology Company. We have assisted this client with a variety
of market initiatives dating back to when this client was in the business
support systems/operations support systems arena. Sample engagements include:
- assisting this client in the development of a proposal for a global
satellite project, focusing on billing functionality;
- providing international advanced intelligent network expertise;
- conducting market assessments for two key initiatives, internet and
prepaid telephone cards. These assessments included a competitive
analysis, a market size analysis and the development of market entry
criteria;
- performing due diligence support for this client's billing vendor
acquisition; and
- managing billing projects with this client and alliance partners in the
competitive local telephone market.
A Major Global Systems Integration and Software Services Firm. We have
worked with this client on numerous engagements both domestically and
internationally. We have provided this client with telecommunications subject
matter expertise both directly and as a subcontractor in engagements it provided
to its clients. Representative projects include:
- development of a market strategy for this client's competitive local
telephone company practice. We conducted primary and secondary market
research, evaluated this client's software products and capabilities, and
identified initiatives for this client in competitive local telephone
markets;
- completion of an assessment of this client's billing product. After
completing an analysis of this product compared to market requirements,
we served as project manager for the implementation of improvements to
this key strategic product;
- development of functional and technical requirements for next generation
billing and collections system for a Spanish telecommunications company;
and
- development of requirements for and assistance with the launch of the
calling card and debit card system and international switch for a
Malaysian communications service provider. Assisted with all aspects of
the implementation of the international settlements process.
Financial Services Companies
A Leading Merchant Banking Firm. We provided the primary due diligence for
a potential investment in a European data services company. In this capacity, we
completed due diligence reviews of the underlying network and technology systems
proposed for the venture. We also developed the business plan assumptions and
financial analysis, including the cost structure and revenue plans, transfer
costing methodology, and the voice implementation strategy.
MARKETING, SALES AND STRATEGIC ALLIANCES
Our marketing and sales efforts are focused on growing our client
relationships, developing new relationships, and building our brand recognition
in the U.S. and abroad. We market and sell our services through multiple
channels, including our partners, principals, and consultants; long-term client
relation-
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ships; relationships with strategic partners; advertising; tradeshows; web site
marketing; and public relations.
Marketing
Our marketing activities are focused on expanding our presence and brand
recognition in the U.S. and abroad, to further our position as the consulting
firm of choice for telecommunications service providers and the technology and
banking firms that serve them.
Our integrated marketing programs include:
- TMNG, TMNG.com and TMNG Europe advertising campaigns;
- ongoing Web site management and enhancement;
- marketing communications;
- industry trade shows and speaking engagements;
- knowledge and toolset packaging;
- ongoing public relations campaign; and
- articles authored by us or our consultants published in trade journals.
Significant marketing efforts are focused on co-branded ad campaigns, with
TMNG and TMNG.com. A new campaign was launched in January 2000, and a new
campaign, tied into the existing one, is currently under development. A new
campaign for TMNG Europe was also launched in 2000.
We are an active participant in telecommunications and internet telephony
conferences and trade shows in North America and Europe. We regularly
participate as keynote speakers, panel moderators, workshop leaders, and
exhibitors. Considered an industry authority, we are frequently consulted by the
trade media. In 1998 and 1997, Mr. Nespola, our President and Chief Executive
Officer, was named to Phone+ magazine's annual list of the most influential
people in competitive long distance telecommunications. In each year, he was the
highest ranking non-carrier executive selected for the list.
Sales
We sell our services directly to senior and management-level executives of
communications service providers in the United States, Europe, Canada, Asia,
Australia and South America, primarily through relationship sales. Our officers
and principals sell the majority of our engagements. In addition, our
consultants also sell, and are encouraged to do so with a compensation structure
that provides both financial and equity incentives. In pursuing new business,
our sales team and consultants emphasize our industry reputation, experience,
vendor- and technology-neutral position and time-saving proprietary business
tools.
Our sales strategy centers on building long-term relationships with our
clients, to gain new and follow-on engagements within existing accounts and
referrals for new clients. Expanding our existing client relationships will
allow us to jointly plan future projects and, in particular, develop large,
multi-year engagements.
Strategic Alliances
We have entered into, and intend to continue entering into, strategic
alliances with a select group of technology and related companies. The primary
goals of our strategic alliances are:
- to enhance our overall service offerings, including joint proposals;
- to create or identify new revenue opportunities through referrals and the
creation of new service offerings; and
- to increase our credibility and visibility in the marketplace through
collaboration in joint marketing.
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We currently have strategic alliances with Emerald Solutions, IBM,
PricewaterhouseCoopers and Tanning Technology Corporation. We do not enter into
exclusive arrangements with technology companies so that we can maintain our
vendor neutrality.
OPERATIONS
We believe that a key factor differentiating us from other consulting firms
is our operational and organizational structure. We have developed an
operational model that enables us to limit our physical facilities and other
overhead requirements and maximize utilization of the consultant base. This
structure enables us to control costs and contributes to our operating margins.
We limit our facilities requirements through the use of electronic
communication. Although our consultants are geographically dispersed throughout
the United States and in international locations, our only corporate office
facility is our headquarters in the Kansas City area. Our consultants typically
do not require that we establish office facilities as they work either from the
customer's site or their homes.
To provide our consultants with additional infrastructure support, we have
created and are creating a series of eRooms which consultants will be able to
access through the internet. We have established an eRoom that includes
proposals we have made for consulting engagements and an eRoom containing
repositories of deliverables generated during consulting engagements. We also
build engagement specific eRooms to facilitate collaboration among consultants
that are in disparate locations but are working on the same engagement. We have
developed a human resources eRoom that provides information regarding
compensation and benefits and fulfills the same function as a bricks and mortar
human resources office. We have developed eRooms that provide consultant support
for our proprietary methodologies. Our eRooms are designed to provide our
consultants with access to the same types of information and support they would
otherwise need to receive from a corporate headquarters organization.
To track consultant utilization and project profitability, we have
established a sophisticated management reporting system. This system enables us
to track consultant utilization and productivity as well as costs related to and
profitability of particular projects and engagements.
Our staffing needs are coordinated by our project staffing group, which
uses a database containing information on the availability and subject matter
expertise of our consultants. Through the use of this database, we are able to
effectively match consultant availability and expertise with the needs of
incoming engagements.
Our organization is relatively flat in nature. As a result, we do not have
layers of management and require only a relatively small headquarters staff for
administrative purposes. In addition, our consultants play a key role in selling
new consulting services as well as working on their current engagements.
HUMAN RESOURCES
We believe that our ability to recruit and retain experienced,
highly-qualified and highly-motivated personnel has contributed greatly to our
success to date and will be critical for us in the future. We seek to offer a
positive environment and corporate culture and to offer significant financial
opportunities.
We offer a flexible recruiting model that we believe enhances our ability
to attract consultants and to effectively manage utilization. Our consultants
may work for us as employees, independent contractors or as contingent
employees. Contingent employees unlike independent contractors, receive
company-paid medical insurance, vacation and other employee benefits. Instead of
receiving a regular salary, however, contingent employees are only paid for time
spent working on consulting projects for customers or working on internal
projects. We offer contingent employment to a selected portion of our
independent contractor base. Generally, we offer contingent employment to
independent contractors that are regularly involved in consulting projects, have
a broad range of expertise and are highly utilized by us. Our current
independent contractor base also includes individuals with specialized expertise
in discrete areas, and we typically deploy these individuals only when their
unique expertise is necessary. We expect that we will continue to retain these
individuals as independent contractors.
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As of July 1, 2000, we were utilizing 80 full-time employees, 23 full-time
contingent employees, and approximately 149 independent contractors. As of July
1, 2000 we had approximately 350 consultants available to work. In addition to
our consultants, we have a headquarters staff of 27, which includes
administrative personnel.
We retain our professionals through the use of many initiatives. We
compensate our employees through a combination of regular cash compensation,
performance-based cash incentive compensation and participation in our stock
option and other equity incentive plans and independent contractors through a
competitive daily service rate. Through the use of the three-pronged employment
model option, we offer significant flexibility to suit the varied needs and
skill sets of our consulting base. Further, because we do not require
consultants to work from a central office, consultants are not required to move
to a particular location to join us, which offers geographic flexibility to our
consulting base.
COMPETITION
The market for telecommunications consulting services is relatively new,
highly fragmented and changing rapidly. We face competition from major business
consulting firms, the consulting arms of accounting and other professional
services organizations and our customers' internal resources. We consider some
of our principal competitors to be:
- American Management Systems;
- Andersen Consulting;
- Booz-Allen & Hamilton;
- The Boston Consulting Group;
- Cap Gemini;
- KPMG Peat Marwick; and
- PricewaterhouseCoopers.
These competitors are major consulting firms that provide a broad range of
services to companies in many industries, including the telecommunications
industry. Many of these competitors have significantly greater financial,
technical and marketing resources and greater name recognition than we do.
We believe, based on our revenue levels and our market research, that we
are among the largest stand-alone providers of telecommunications management
consulting services.
We have faced, and expect to continue to face, additional competition from
new entrants into our markets. We have also experienced increased price
competition, particularly from larger firms that have the financial resources to
aggressively price engagements that they have a particular interest in
obtaining. Increased competition could result in:
- price reductions;
- fewer client projects;
- under utilization of consultants;
- reduced operating margins; and
- loss of market share.
The principal competitive factors in our market include responsiveness to
the needs of customers, quality and reliability of consultants, price, project
management capability and technical expertise. We believe that our ability to
compete depends in part on performance, a focused service offering formula, the
price/value formula of our service offerings, responsiveness to customer needs
and our ability to hire, retain, and motivate key personnel.
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INTELLECTUAL PROPERTY
Our success is dependent, in part, upon our proprietary processes and
methodologies, and we rely upon a combination of copyright, trade secret, and
trademark law to protect our intellectual property. We have obtained federal
registration for 4 trademarks in the United States and have filed applications
to register 10 other marks in the United States. It is possible that third
parties may challenge our trademark applications.
We do not have any patent protection for the proprietary methodologies used
by our consultants. We currently do not anticipate applying for patent
protection for these toolsets and methodologies.
We enter into confidentiality agreements with our employees, independent
contractors and clients. We also limit access to and distribution of our
proprietary information. In addition, we have entered into non-competition
agreements with certain of our key employees. We cannot assure you that the
steps we have taken in this regard will be adequate to prevent or deter
misappropriation of our proprietary information or that we will be able to
detect unauthorized use and take appropriate steps to enforce our intellectual
property rights. Misappropriation or unauthorized use of our intellectual
property could harm our business.
FACILITIES
Our principal executive offices are located in a 4,305 square foot facility
in Overland Park, Kansas. This facility houses our executive, corporate and
administrative offices. We occupy these premises under a lease which expires in
2005. We anticipate that our current executive office facility will be
sufficient to meet our corporate facilities needs for the foreseeable future.
LEGAL PROCEEDINGS
In June 1998, the bankruptcy trustee of one of our former clients,
Communications Network Corporation, sued us in the U.S. Bankruptcy Court in New
York seeking recovery of $160,000 in improper payment of consulting fees paid by
the former client during the period from July 1, 1996, when an involuntary
bankruptcy proceeding was initiated against the former client, through August 6,
1996, when the former client agreed to an order for relief in the bankruptcy
proceeding, and $160,000 in consulting fees paid by the former client after
August 6, 1996. The bankruptcy trustee has also sued us for at least $1.85
million for breach of contract, breach of fiduciary duties and negligence.
Although we cannot give you any assurance as to the ultimate outcome of this
proceeding, we believe we have meritorious defenses to the claims made by the
bankruptcy trustee, including particularly the claims for breach of contract,
breach of fiduciary duty and negligence, and that the ultimate resolution of
this matter will not materially harm our business.
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<PAGE> 42
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information regarding our executive
officers and directors as of July 1, 2000:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Grant G. Behrman(1).......................... 46 Chairman of the Board
Richard P. Nespola........................... 55 President, Chief Executive Officer and Director
Ralph R. Peck................................ 50 Vice President
Micky K. Woo................................. 47 Vice President and Director
Donald E. Klumb.............................. 37 Vice President and Chief Financial Officer
Andrew D. Lipman(2).......................... 49 Director
William M. Matthes(1)........................ 40 Director
Mario M. Rosati(2)........................... 54 Director
Roy A. Wilkens(1)(2)......................... 57 Director
</TABLE>
---------------
(1) Member of the compensation committee
(2) Member of the audit committee
Grant G. Behrman has served as our Chairman of the Board since February
1998. Mr. Behrman currently serves as Managing Partner of Behrman Capital, a
private equity firm, and was a founding partner of that firm. At Behrman
Capital, he has primary responsibility for investments made in the information
technology and outsourcing areas. Prior to founding Behrman Capital, Mr. Behrman
was a founding member of Morgan Stanley's Venture Capital Group where he worked
from 1981 to 1991, and a consultant with the Boston Consulting Group from 1977
to 1981. Mr. Behrman is a director of Visual Networks, Inc., a
telecommunications equipment manufacturer, and several private companies
including Groundswell, Inc., a web strategy, design and hosting firm. Mr.
Behrman received an M.B.A. with distinction from the Wharton Graduate School of
Business in 1977. Mr. Behrman received his undergraduate degree in Business from
the University of the Witwatersrand (South Africa).
Richard P. Nespola has served as our President and Chief Executive Officer
and founded TMNG in 1990. Prior to founding TMNG, from 1989 to 1990, Mr. Nespola
served as Senior Vice President and Chief Operating Officer of Telesphere
Communications, a communications service provider. From 1986 through 1989, he
held the positions of Vice President of Financial Operations and Senior Vice
President of Strategic Markets and Product Pricing at Sprint. He also served as
the Senior Director of Revenue and Treasury Operations at MCI from 1982 to 1986.
Mr. Nespola is a director of Groundswell, Inc., a web strategy, design and
hosting firm. Mr. Nespola is also a frequent chair of industry forums and noted
conference speaker. Mr. Nespola received his B.A. and his M.B.A. from Long
Island University.
Ralph R. Peck has served as Vice President and has been a partner with TMNG
since August 1991. From 1986 to 1988, Mr. Peck was a Director of Revenue
Management at Sprint and the Senior Manager for both West Coast Financial
Operations Revenue and Treasury Systems Management at MCI from 1984 to 1986. In
these positions, Mr. Peck had responsibility for billing systems, billing center
management, revenue and treasury management, new product development, and
customer database conversions. Mr. Peck received his B.S. and B.A. from American
University.
Micky K. Woo has served as our Vice President and as a director, and he has
been a partner with us since December 1991. Prior to joining us, Mr. Woo served
from June 1989 to November 1991 as Vice President of Information Systems and
Revenue Assurance at Telesphere Communications, a communications service
provider. From 1987 to 1989, Mr. Woo was the Director of Revenue and Treasury
Management at Sprint and from 1983 to 1987 he served in management at MCI,
including Senior Manager of Receivables Management, Senior Manager of the East
Coast Billing Center, and the Senior Manager of Revenue Reporting and Analysis.
Prior to entering the telecommunications industry, Mr. Woo
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<PAGE> 43
was a consultant with Price Waterhouse. Mr. Woo received his B.A. in Computer
Science and an M.A. in accounting from the University of Iowa.
Donald E. Klumb has served as our Vice President and Chief Financial
Officer since July 1999. From June 1998 to July 1999, Mr. Klumb was a partner at
Deloitte & Touche LLP and headed the firm's midwest telecommunications and high
technology practice. From 1992 to 1998, he was a senior manager with Deloitte &
Touche. Mr. Klumb received his B.S. in accounting from the University of
Wisconsin-Milwaukee and is a certified public accountant.
Andrew D. Lipman joined our board of directors in May, 2000. Mr. Lipman is
the senior partner of the Telecommunications Group and the Vice Chairman of the
law firm of Swidler Berlin Shereff Friedman LLP. For more than ten years, while
maintaining his partnership at Swidler Berlin Shereff Friedman LLP, Mr. Lipman
also served as Senior Vice President, Legal and Regulatory Affairs for MFS
Communications. Before joining Swidler Berlin Shereff Friedman LLP, Mr. Lipman
was a partner with Pepper, Hamilton & Scheetz where he represented
telecommunications equipment manufacturers and other telecommunications
companies in regulatory, judicial, and legislative matters. Prior to joining
Pepper, he participated in the legal honors program at the U.S. Department of
Transportation and served in the Office of the Secretary of Transportation. Mr.
Lipman also serves as General Counsel to the International Teleconferencing
Association and as Legislative/Regulatory Counsel to the International Satellite
Users Association. Mr. Lipman is a graduate of the University of Rochester and
the Stanford Law School.
William M. Matthes has served as a director since February 1998. Mr.
Matthes joined Behrman Capital, a private equity firm, in April 1996 and has
served as a Managing Partner of Behrman Capital since January 1999. Prior to
joining Behrman Capital, Mr. Matthes was Chief Operating Officer of Holsted
Marketing, Inc., a direct marketing company from July 1994 to April 1996. From
December 1989 to July 1994, Mr. Matthes was a General Partner at Brentwood
Associates, a private equity firm. Mr. Matthes currently serves on the board of
Starwood Financial Trust and several private companies, including Groundswell,
Inc., a web strategy, design, and hosting firm, where he serves as Chairman of
the Board. Mr. Matthes received his M.B.A. from Harvard Business School in 1986
where he was both a Baker Scholar and a Loeb Rhoades Fellow. Mr. Matthes also
received his A.B. in Economics from Stanford University, where he graduated with
honors and distinction.
Mario M. Rosati has served as a director since June 1999. Mr. Rosati is a
member of the executive committee of Wilson, Sonsini, Goodrich & Rosati, one of
the premier legal firms for high technology companies. He has been with the law
firm since 1971, first as an associate and then as a member since 1975. He is a
member of the board of directors of Aehr Test Systems, a semiconductor equipment
company, Genus, Inc., a semiconductor equipment company, Mypoints.com, Inc., an
internet-based direct marketing company, Ross Systems, Inc., a software company,
Sanmina Corporation, an electronics contract manufacturing company, Symyx
Technologies, a combinatorial materials science company, and Vivus, Inc., a
medical device company. Mr. Rosati received his B.A. from the University of
California at Los Angeles and his J.D. from the University of California at
Berkeley, Boalt Hall School of Law.
Roy A. Wilkens has served as a director since June 1999. In 1985, Mr.
Wilkens founded WilTel, Inc., a wholesale communications carrier, a subsidiary
of The Williams Companies, an oil and gas pipeline company. Mr. Wilkens was the
Chief Executive Officer of WilTel Inc. from 1985 to 1995. In 1995, Wiltel was
acquired by LDDS Communications, a predecessor company to MCI Worldcom, and Mr.
Wilkens remained as Chief Executive Officer of Wiltel until 1997. Prior to 1985,
Mr. Wilkens served as the President of Williams Pipeline Company, a subsidiary
of The Williams Companies. In 1992, President George Bush appointed Mr. Wilkens
to the National Security Telecommunications Advisory Council. He has also served
as chairman of both the Competitive Telecommunications Association and the
National Telecommunications Network. Mr. Wilkens is Chairman of Williams
Communications Group and is a member of the board of directors of McLeodUSA
Incorporated, a communications services provider, Splitrock Services, Inc., a
competitive local telephone company, and UniDial, Inc., a telecommunications
services provider.
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<PAGE> 44
Each officer, except the Chief Executive Officer, serves at the discretion
of the board of directors and holds office until his or her successor is elected
and qualified or until his or her earlier resignation or removal. The Chief
Executive Officer serves under his employment agreement with us. There are no
family relationships among any of our directors, executive officers or key
employees.
OTHER KEY PERSONNEL
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Carol F. Bleecker.................................. 50 Principal
Kimberly J. Cole................................... 41 Principal
Peter D'Agostino................................... 54 General Manager of TMNG.com
Linda L. Gimnich................................... 51 Principal
Jane D. Hufstedler................................. 54 Principal
Edward F. Shanahan................................. 45 Principal
Leslie T. Shaw..................................... 50 Managing Director, TMNG Europe
S. David Craig..................................... 40 Managing Director, Global Operations
Ronald J. Angner................................... 56 Principal
</TABLE>
Our other key personnel include managers of our subsidiaries and our
principals. Our principals typically have been with us for a significant period
of time and have responsibility for key accounts, sales or other managerial
functions as well as the provision of consulting services.
Carol F. Bleecker has served as a Principal since July 1997. Ms. Bleecker
joined us in November 1994 as a senior consultant. In 1989, Ms. Bleecker founded
Acorn Technologies, a telecommunications consulting firm, and served as a Senior
Partner from 1989 to 1994. Ms. Bleecker received her B.A. from Wells College and
her M.P.A. from George Washington University.
Kimberly J. Cole has served as a Principal since 1996. Mr. Cole joined us
in 1991 as a senior consultant working with service providers, global technology
providers and systems integrators on process/organization re-engineering, new
product introduction, system implementation, third party evaluations and
strategic analysis. From 1989 to 1990, Mr. Cole served as a manager at
Telesphere Communications, a communications services provider, and from 1987 to
1989 as a manager at Sprint, a global communications company. Mr. Cole received
his B.B.A. from Western Michigan University and his M.B.A. from the University
of Michigan.
Peter D'Agostino has served as a Principal and Network Practice Leader
since 1998 and General Manager of TMNG.com since July 1999. Mr. D'Agostino began
consulting with us in 1994. Mr. D'Agostino started his 30-year career in
telecommunications at Bell Laboratories and has held various management and
executive positions in the industry, including at AT&T and MCI, where he was
responsible for data and voice network design, management and operation. From
1990 to 1998, Mr. D'Agostino was the senior founding partner in The Computech
Group, a consulting firm. Mr. D'Agostino received his B.S. from Pratt Institute
and his M.S. and Ph.D. degrees in Electrical Engineering from New York
University.
Linda L. Gimnich has served as a Principal since 1996. From 1995 to 1996,
she served as Vice President of Provisioning and Billing for Excel
Communications, a long distance telecommunications company. From 1993 to 1995,
she served as a Principal and senior consultant at TMNG. From 1980 to 1993, she
held executive positions at Sprint, a global communications company, and its
predecessor companies in strategic planning, revenue management, billing,
customer service, information systems and equal access product marketing. Ms.
Gimnich received her B.S. degree from Louisiana State University.
Jane D. Hufstedler has served as a Principal since October 1998. Ms.
Hufstedler joined us in October 1996 as a senior consultant. From 1994 to 1996,
Ms. Hufstedler served as the Vice President of operations at Preferred Telecom,
a communications services provider. From 1993 to 1994 she served as product
director for customer care at Tandem, a computer manufacturer. Prior to 1993,
Ms. Hufstedler held senior management positions at Southwestern Bell and Sprint
and its predecessor companies.
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<PAGE> 45
Edward F. Shanahan has served as a Principal since 1992. Mr. Shanahan
joined us in 1991 as a senior consultant. From June 1989 to September 1991, Mr.
Shanahan served as director of external billing at Telesphere Communications, a
communications services provider. From 1987 to 1989, Mr. Shanahan was the
Director of Exchange Carrier Billing at Sprint, a global communications company
and from 1986 to 1987 he served as a Program Manager at MCI. Mr. Shanahan
received his B.S. from University of Massachusetts and his M.B.A. from the
University of Maryland.
Leslie T. Shaw has served as Managing Director of TMNG Europe since
December 1998. Mr. Shaw joined us as a senior consultant in June 1998. From
December 1997 through June 1998, Mr. Shaw worked as an independent consultant.
From 1992 through 1997, Mr. Shaw held various director-level positions with
France Telecom, a French communications services provider, including Vice
President of Global Account Management and Director of Sales and Marketing for
the United Kingdom. Mr. Shaw received his H.N.C. in Telecommunications from
Manchester University (United Kingdom).
S. David Craig has served as Managing Director for TMNG Canada since
February 1999 and as Managing Director for TMNG Global Operations since May,
2000. From November 1994 to February 1999, Mr. Craig served in management
positions, including Vice President of Network Operations, Vice President of
Customer Service, and Vice President of Customer Assistance and Revenue
Management, with AT&T Canada. Mr. Craig received his B.S. in Engineering from
the University of Waterloo (Canada), and his M.B.A. from the Ivey School of
Business at the University of Western Ontario (Canada).
Ronald J. Angner has served as a Principal since January, 2000. Prior to
joining TMNG, Mr. Angner was Vice President of telephony and Managing Director
of international operations at CSG Systems. In his 30 years in the
telecommunications industry with CSG, US Telecom, Lucent and AT&T, Mr. Angner
has managed all aspects of a telecommunications firm, including strategy
development and implementation, strategic marketing, network planning and
operations, product specification, design and delivery, and billing and customer
care. Mr. Angner received his PhD in Computer Science as well as an MSEE from
Columbia University. He also holds a BSEE from Drexel University.
BOARD COMPOSITION
Our bylaws currently authorize seven directors. Our certificate of
incorporation and bylaws provide that our board will be divided into three
classes, Class I, Class II and Class III, with each class serving staggered
three-year terms. The Class I directors, Messrs. Matthes and Woo, were elected
at the 2000 annual meeting of stockholders. The Class II directors, Messrs.
Rosati, Lipman and Wilkens, will stand for reelection at the 2001 annual meeting
of stockholders. The Class III directors, Messrs. Behrman and Nespola, will
stand for reelection at the 2002 annual meeting of stockholders. Any additional
directorships resulting from an increase in the number of directors will be
distributed among the three classes so that, as nearly as possible, each class
will consist of one-third of the directors. This staggered classification of the
board of directors may have the effect of delaying or preventing changes in
control or management.
COMMITTEES OF THE BOARD OF DIRECTORS
The board of directors has established a compensation committee and an
audit committee. The compensation committee, consisting of Messrs. Behrman,
Matthes and Wilkens, reviews and approves the salaries, bonuses and other
compensation payable to our executive officers and administers and makes
recommendations concerning our employee benefits plans.
The audit committee, consisting of Messrs. Rosati, Lipman and Wilkens,
recommends the selection of independent public accountants to the board of
directors, reviews the scope and results of the audit and other services
provided by our independent accountants and reviews our accounting practices and
systems of internal accounting controls.
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<PAGE> 46
DIRECTOR COMPENSATION
Directors who are also our employees currently receive no additional
compensation for their services as directors of our company. Directors who are
not our employees may occasionally receive options under our 1998 equity
incentive plan. In 1999, Messrs. Rosati and Wilkens each received an option to
purchase 37,500 shares of our common stock when they joined the board of
directors. In 2000, Mr. Lipman received an option to purchase 37,500 shares of
our common stock when he joined the board of directors. We have no other
director compensation arrangements, other than reimbursement for travel expenses
and other out-of-pocket costs incurred in connection with directors' attendance
at meetings.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of our compensation committee serves as a member of the board of
directors or compensation committee of any entity that has one or more executive
officers serving as a member of our board of directors or compensation
committee.
EMPLOYMENT AND NONCOMPETITION AGREEMENTS
We entered into a noncompetition agreement with Behrman Capital and an
affiliated fund and Messrs. Nespola, Peck, Woo and Klumb. We also entered into
employment agreements with such individuals.
Noncompetition Agreement. Under this agreement, Messrs. Nespola, Peck, Woo
and Klumb have agreed to restrain from any direct or indirect competition with
us and to further refrain from any solicitation of our employees or interference
with our contractual relations with employees. The noncompetition agreement
terminates as to Mr. Nespola, on February 13, 2005, as to Messrs. Peck and Woo,
on the earlier of February 12, 2005 or on the third anniversary of the date of
termination of their employment with us and as to Mr. Klumb on the first
anniversary of the date of termination of his employment with us. Alan Staples,
a former stockholder and employee of ours, is also subject to the provisions of
this agreement through November 2001.
Employment Agreements. We have employment agreements with Messrs. Nespola,
Peck, Woo and Klumb, which set forth the terms and conditions of their
employment with us. These terms and conditions include:
- compensation in the form of annual salary, bonus and other compensation
awarded at the discretion of the board of directors as a result of
successful acquisitions by the company, and other events;
- full time duties;
- benefits, including vacation, fringe benefits and severance benefits;
- a confidentiality provision requiring nondisclosure of our nonpublic
information;
- an assignment provision entitling us to all rights in the products
resulting from services performed under the employment agreements; and
- an arbitration clause selecting the form of arbitration for the
resolution of disputes under the employment agreements.
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<PAGE> 47
EXECUTIVE COMPENSATION
The following table contains information, in summary form, concerning the
compensation paid to our chief executive officer and each of our most highly
compensated executive officers whose total salary, bonus and other compensation
exceeded $100,000 during fiscal year 1999. In accordance with the rules of the
SEC, the compensation described in this table does not include perquisites and
other personal benefits received by the executive officers named in the table
below which does not exceed the lesser of $50,000 or ten percent of the total
salary and bonus reported for these officers.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL SECURITIES
COMPENSATION UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) OPTIONS(#) COMPENSATION($)
--------------------------- ---- ------------ ------------ ---------------
<S> <C> <C> <C> <C>
Richard P. Nespola(1)..................... 1999 $440,000 $329,656
Chief Executive Officer and President 1998 $554,215 $260,882
Micky K. Woo(1)........................... 1999 $275,000 $260,000
Vice President 1998 $210,973 50,000 $191,226
Ralph R. Peck(1).......................... 1999 $268,750 $135,000
Vice President 1998 $210,973 50,000 $141,226
Donald E. Klumb(1)(2)..................... 1999 $ 76,300 250,000 $ 17,400
Vice President and Chief Financial
Officer
</TABLE>
---------------
(1) All other compensation stated is for bonus, cash benefits and the use of an
automobile, including 100.0% of the lease payments.
(2) Mr. Klumb joined TMNG in July 1999. His 1999 annual salary rate and bonus
were $180,000 and $40,000, respectively.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information relating to stock
options awarded to each of the executive officers named in the summary
compensation table during fiscal 1999. All such options were awarded under our
1998 equity incentive plan.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------------------------
NUMBER OF PERCENT OF
SECURITIES TOTAL
UNDERLYING OPTIONS EXERCISE FAIR VALUE
OPTIONS GRANTED PRICE PER SHARE ON EXPIRATION
NAME GRANTED IN 1999 PER SHARE GRANT DATE(1) DATE
---- ---------- ---------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Donald E. Klumb...... 250,000 21.28% $2.00 $8.90 July 26, 2009
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUAL RATES OF
STOCK PRICE APPRECIATION FOR
OPTION TERM
------------------------------------------
NAME 0% 5% 10%
---- ------------ ------------ ------------
<S> <C> <C> <C>
Donald E. Klumb...... $1.7 million $2.8 million $4.5 million
</TABLE>
---------------
(1) Fair value at the date of grant as determined by the Board of Directors.
In accordance with the rules of the SEC, the above table sets forth the
potential realizable value over the ten-year period from the grant date to the
expiration date, assuming rates of stock appreciation of five percent and ten
percent compounded annually. These amounts do not represent our estimate of
future stock price performance. Actual realizable values, if any, of stock
options will depend on the future performance of our common stock.
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<PAGE> 48
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information for each of the officers named
in the summary compensation table concerning option exercises for fiscal year
1999, and exercisable and unexercisable options held at January 1, 2000. The
officers named in the summary compensation table did not exercise any options
during fiscal year 1999.
The "Value of Unexercised In-the-Money Options at January 1, 2000" is based
on a value of $32.63 per share of our common stock, which is the closing price
of our common stock on the Nasdaq National Market on December 31, 1999, less the
per share exercise price, multiplied by the number of shares issued upon
exercise of the option. All options were granted under our 1998 equity incentive
plan.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT JANUARY 1, 2000 JANUARY 1, 2000
--------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Micky K. Woo.......................... 16,667 33,333 $0.5 million $1.0 million
Ralph R. Peck......................... 16,667 33,333 $0.5 million $1.0 million
Donald E. Klumb....................... 37,500 212,500 $1.1 million $6.5 million
</TABLE>
STOCK PLANS
1998 Equity Incentive Plan
The amended and restated 1998 equity incentive plan was adopted and
approved by our board of directors and by our stockholders in September, 1999.
When we amended and restated our 1998 equity incentive plan, we combined both
our 1998 equity incentive plan and our 1998 consultant equity incentive plan.
The 1998 equity incentive plan provides for the grant to employees of incentive
stock options within the meaning of Section 422 of the Internal Revenue Code,
and for the grant to employees, directors and consultants of nonstatutory stock
options and stock purchase rights.
As of July 1, 2000, a total of 3,320,868 shares of common stock were
reserved for issuance pursuant to the 1998 equity incentive plan, of which
options to acquire 2,528,216 shares were issued and outstanding as of that date.
The 1998 equity incentive plan provides for annual increases in the number of
shares available for issuance thereunder, on the first day of each new fiscal
year, effective beginning with fiscal year 2000, equal to the lesser of (a)
1,500,000 shares, (b) five percent of the outstanding shares of common stock on
the first day of the fiscal year, or (c) such lesser amount as the board may
determine.
The board of directors or a committee of the board administers the 1998
equity incentive plan. In the case of options intended to qualify as
"performance-based compensation" within the meaning of Section 162(m) of the
Internal Revenue Code, the committee will consist of two or more "outside
directors" within the meaning of Section 162(m) of the Internal Revenue Code.
The administrator has the power to determine the terms of the options or share
purchase rights granted, including the exercise price, the number of shares
subject to each option or share purchase rights, the exercisability of the
options and the form of consideration payable upon exercise.
Options
We determine the exercise price of nonstatutory stock options granted under
the 1998 equity incentive plan, but with respect to nonstatutory stock options
intended to qualify as "performance-based compensation" within the meaning of
Section 162(m) of the Internal Revenue Code, the exercise price must at least be
equal to the fair market value of the common stock on the date of grant. The
exercise price of all incentive stock options granted under the 1998 equity
incentive plan must be at least equal to the fair market value of the common
stock on the date of grant. With respect to any participant who owns stock
possessing more than ten percent of the voting power of all classes of our
outstanding capital stock, the exercise price of any incentive stock option
granted must equal at least 110.0% of the fair market value
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<PAGE> 49
on the grant date and the term of such incentive stock option must not exceed
five years. The term of all other options granted under the 1998 equity
incentive plan may not exceed ten years.
An optionee generally must exercise an option granted under the 1998 equity
incentive plan at the time set forth in the optionee's option agreement after
the end of optionee's status as an employee, director or consultant of ours, or
within 12 months after the optionee's termination by death or disability, or
within a longer time period not exceeding five years, but in no event later than
the expiration of the option's ten year term. If an optionee is terminated by us
or any of our subsidiaries for cause, as defined in the 1998 equity incentive
plan, then any option held by the optionee shall be terminated immediately or
after any period of time as determined by the administrator.
The administrator determines the exercise price of stock purchase rights
granted under the 1998 equity incentive plan. In the case of stock purchase
rights, unless the administrator determines otherwise, the restricted stock
purchase agreement entered into in connection with the exercise of the stock
purchase rights shall grant us a repurchase option that we may exercise upon the
voluntary or involuntary termination of the purchaser's service with us for any
reason, including death or disability. The purchase price for shares we
repurchase pursuant to restricted stock purchase agreements shall be the
original price paid by the purchaser and may be paid by cancellation of any
indebtedness of the purchaser to us. The repurchase option shall lapse at a rate
that the administrator determines.
An optionee generally may not transfer options and stock purchase rights
granted under the 1998 equity incentive plan and only an optionee may exercise
an option and stock purchase rights during his or her lifetime.
The 1998 equity incentive plan provides that upon our dissolution,
liquidation or merger with or into another corporation or a sale of
substantially all of our assets, the successor corporation shall assume or
substitute each option or stock purchase right held by an employee. If the
employee is terminated other than for cause within six months after the
dissolution, liquidation, merger or sale of assets, the vesting of each
outstanding option or stock purchase right will automatically accelerate as to
50% of the unvested shares subject to the option or stock purchase right. All
options or stock purchase rights held by independent contractors and all holders
of options not assumed or substituted by the surviving entity shall be
exercisable for a period of 15 days after the holder receives notice of his or
her rights. The option or stock purchase right will terminate upon the
expiration of the 15 day period.
Unless terminated sooner, the 1998 equity incentive plan will terminate
automatically in 2008. In addition, we have the authority to amend, suspend or
terminate the 1998 equity incentive plan, provided that no such action may
affect any share of common stock previously issued and sold or any option
previously granted under the 1998 equity incentive plan without the optionee's
written consent.
1999 EMPLOYEE STOCK PURCHASE PLAN
The board of directors adopted our 1999 employee stock purchase plan (the
"1999 purchase plan") in September 1999 and stockholders approved the 1999
purchase plan in September 1999.
A total of 200,000 shares of common stock has been reserved for issuance
under the purchase plan. In addition, the 1999 purchase plan provides for annual
increases in the number of shares available for issuance under the 1999 purchase
plan on the first day of each fiscal year, beginning with fiscal year 2000,
equal to the lesser of (a) 200,000 shares of common stock, (b) 0.05% of the
outstanding shares of common stock on the first day of the fiscal year or (c)
such lesser amount as may be determined by the board.
The board of directors or a committee appointed by the board administers
the 1999 purchase plan. The board of directors or its committee has full and
exclusive authority to interpret the terms of the 1999 purchase plan and
determine eligibility.
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<PAGE> 50
Employees are eligible to participate if they are customarily employed by
us or any participating subsidiary for at least 20 hours per week and more than
five months in any calendar year. An employee, however, may not be granted an
option to purchase stock under the 1999 purchase plan if such an employee:
- immediately after grant owns stock possessing five percent or more of the
total combined voting power or value of all classes of the capital stock
of ours; or
- whose rights to purchase stock under all employee stock purchase plans of
ours accrues at a rate which exceeds $25,000 worth of stock for each
calendar year.
The 1999 purchase plan, which is intended to qualify under Section 423 of
the Internal Revenue Code, contains consecutive, overlapping 24 month offering
periods. Each offering period includes four six month purchase periods. The
offering periods generally start on the first trading day on or after January 1
and June 30 of each year.
The 1999 purchase plan permits participants to purchase common stock
through payroll deductions of up to 15% of the participant's "compensation."
Compensation is defined as the participant's base straight time gross earnings
and commissions but excludes payments for:
- overtime;
- shift premium payments;
- incentive compensation;
- incentive payments;
- bonuses; and
- other compensation.
Amounts deducted and accumulated by the participant are used to purchase
shares of common stock at the end of each offering period. The price of stock
purchased under the 1999 purchase plan is 85.0% of the lower of the fair market
value of the common stock at the beginning or end of the offering period. If the
fair market value at the end of a purchase period is less than the fair market
value at the beginning of the offering period, participants will withdraw from
the current offering period following the exercise and will automatically
re-enroll in a new offering period. Participants may end their participation at
any time during an offering period, and they will be paid their payroll
deductions to date. Participation ends automatically upon termination of
employment with us.
A participant may not transfer rights granted under the 1999 purchase plan
other than by will, the laws of descent and distribution or as otherwise
provided under the 1999 purchase plan.
The 1999 purchase plan provides that, if we merge with or into another
corporation or a sale of substantially all of our assets, a successor
corporation may assume or substitute for each outstanding option. If the
successor corporation refuses to assume or substitute for the outstanding
options, the offering period then in progress will be shortened, and a new
exercise date will be set.
The 1999 purchase plan will terminate in 2009. However, the board of
directors has the authority to amend or terminate the 1999 purchase plan, except
that, subject to certain exceptions described in the 1999 purchase plan, no such
action may adversely affect any outstanding rights to purchase stock under the
1999 purchase plan.
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<PAGE> 51
LIMITATIONS OF LIABILITY AND INDEMNIFICATION MATTERS
Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, except liability for any of the
following:
- any breach of their duty of loyalty to the corporation or its
stockholders;
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
- any transaction from which the director derived an improper personal
benefit.
This limitation of liability does not apply to liabilities arising under
the federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.
Our bylaws provide that we shall indemnify our directors and executive
officers and may indemnify our other officers and employees and other agents to
the fullest extent permitted by law. We believe that indemnification under our
bylaws covers at least negligence and gross negligence on the part of
indemnified parties. Our bylaws also permit us to secure insurance on behalf of
any officer, director, employee or other agent for any liability arising out of
his or her actions in such capacity, regardless of whether the bylaws would
permit indemnification.
We have entered into agreements to indemnify our directors and executive
officers, in addition to indemnification provided for in our bylaws. These
agreements, among other things, indemnify our directors and executive officers
for certain expenses, including any action by us arising out of such person's
services as our director or executive officer, any of our subsidiaries or any
other company or enterprise to which the person provides services at our
request. Such expenses include amounts incurred by any person in an action or a
proceeding such as attorneys' fees, judgments, fines, and settlement amounts.
We believe that these provisions and agreements are necessary to attract
and retain qualified persons as directors and executive officers.
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<PAGE> 52
CERTAIN TRANSACTIONS
RECAPITALIZATION TRANSACTION
On February 12, 1998, we entered into a series of transactions that
resulted in our leveraged recapitalization. Prior to completion of the
recapitalization, we made distributions totaling $4.7 million to our
stockholders and all stockholders' notes receivable were paid off. The
recapitalization included the following transactions (share information set
forth below with respect to the recapitalization gives effect to the 1-for-2
reverse stock split that we effected in November 1999):
- we converted all authorized non-voting common stock to voting common
stock and we declared a 3,272.73-for-one stock split resulting in total
number of authorized shares of 60,000,000 at the time of the
recapitalization, which is 30,000,000 after the reverse stock split, with
22,500,000 shares issued and outstanding;
- Behrman Capital and an affiliated fund, Strategic Entrepreneur Fund II,
L.P., organized Behrman Capital TMNG, Inc., a new company, and
contributed $20.0 million in exchange for 100% of the new company's
capital stock. The new company was formed as a transitory corporation
solely for the purpose of effecting the recapitalization and has not
carried on any activities to date other than those related to its
formation and the recapitalization;
- Behrman Capital exchanged 100% of its stock in the new company for
13,500,000 newly issued shares of TMNG common stock. The new company was
then merged into TMNG with TMNG being the surviving corporation. At this
time we changed our income tax status to a "C" corporation from an "S"
corporation;
- we entered into a senior bank credit facility that provided $24.0 million
in term loans and a $5.0 million revolving credit facility from Chase
Manhattan Bank and a syndicate of banks established by Chase Manhattan
Bank. We utilized the funds provided by the revolving credit facility and
the proceeds from the merger with the new company to acquire 13,500,000
shares of common stock from existing shareholders (as of December 31,
1997) for aggregate consideration of $38.7 million. These shares were
then retired and returned to the status of authorized but unissued
shares; and
- in connection with the recapitalization, we entered into employment
agreements and a noncompetition agreement with Messrs. Nespola, Peck,
Staples and Woo.
OTHER TRANSACTIONS
Mr. Rosati, one of our directors, is also a member of Wilson Sonsini
Goodrich & Rosati, Professional Corporation, which became our outside corporate
counsel in July 1999.
We have entered into indemnification agreements with each of our directors
and executive officers.
In November 1998, Mr. Staples entered into a separation agreement and
release and a stock purchase agreement with us, Behrman Capital and its
affiliated entities that are stockholders of ours and Messrs. Nespola, Peck and
Woo. Mr. Staples' company, Revenue Systems Management Company, was also a party
to these agreements. Under the separation agreement, Mr. Staples resigned from
his position with us and his employment agreement with us was terminated. He
received his salary and expenses up to the date of termination and his company
received a lump-sum payment of $95,000. Under the stock purchase agreement, our
existing stockholders repurchased all of Mr. Staples shares of our common stock
for an aggregate repurchase price of $2.7 million.
Intertech Management Group, Inc. is a customer of ours. Mr. Matthes, one of
our directors, and Mr. Sisco, one of our former directors, are also directors of
Intertech Management Group, Inc. In addition, Behrman Capital II, L.P. and
Strategic Entrepreneur Fund II L.P., venture funds affiliated with Behrman
Capital with whom Messrs. Matthes and Sisco are employed, hold shares of
preferred stock of Intertech that are convertible into approximately 30.0% of
Intertech's outstanding common stock. We
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<PAGE> 53
provided $2.6 million and $356,000 of consulting services to Intertech in 1999
and for the six month period for 2000, respectively.
Mr. Wilkens, a member of our board of directors, became a director and
non-executive Chairman of the Board of Williams Communications Group, Inc. upon
completion of Williams' Communications Group's initial public offering. Williams
Communications Group was our largest customer during fiscal year 1999 and the
six month period for 2000. We provided $19.9 million and $8.4 million of
consulting services to Williams in 1999 and for the six month period for 2000,
respectively.
In October 1999, we reached an agreement in principle with Williams
Communications and, prior to the end of 1999, we entered into a definitive
consulting agreement with Williams Communications in which Williams committed to
$22 million of consulting fees over three years. In addition, in October 1999,
we issued Williams Communications a warrant to purchase 500,000 shares of our
common stock at an exercise price of $2.00 per share.
During fiscal year 1999, we made payments of approximately $105,000 to a
company owned by Mr. Nespola. In addition, we made a payment of $100,000 in 1997
to Mr. Nespola. These payments were for services rendered under consulting
agreements between TMNG and the company owned by Mr. Nespola.
Through January 2, 1999, we subcontracted with five companies owned by
Messrs. Nespola, Peck and Woo. These companies provided consultants (acting as
independent contractors) to render consulting services to our customers.
Beginning January 3, 1999, we contracted directly with these consultants. Total
services received from these companies was approximately $7.8 million, $9.6
million and $14.9 million in 1996, 1997 and fiscal 1998, respectively. At
December 31, 1997 and January 2, 1999, we had accounts receivable balances due
for these services of $565,000 and $332,000, respectively.
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. The stockholders of our predecessor entity
agreed, at the time we acquired our predecessor, to indemnify us against
negative tax consequences arising from our prior "S" corporation status. This
indemnity was secured by escrowed funds in an escrow that was supposed to
terminate in February 2001. However, we terminated the escrow arrangement as of
February 2000, and released all escrowed funds to the stockholders of our
predecessor entity.
POLICY REGARDING TRANSACTIONS WITH AFFILIATES
All future transactions with affiliates, including any loans we make to our
officers, directors, principal stockholders or other affiliates, will be
approved by a majority of our board of directors, including a majority of the
independent and disinterested members or, if required by law, a majority of
disinterested stockholders, and will be on terms no less favorable to us than we
could have obtained from unaffiliated third parties.
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<PAGE> 54
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock as of July 18, 2000 and as adjusted to reflect the
sale of the shares of common stock in this offering by:
- each person or entity known by us to own more than five percent of our
outstanding stock;
- our Chief Executive Officer, each of the executive officers named in the
summary compensation table and each of our directors;
- all of our directors and executive officers as a group; and
- the selling stockholders.
Unless otherwise indicated, the address for each beneficial owner is c/o
The Management Network Group, Inc., 7300 College Boulevard, Suite 302, Overland
Park, Kansas 66210.
The beneficial ownership is calculated based on 27,501,138 shares of our
common stock outstanding as of July 18, 2000, and 28,501,138 shares outstanding
immediately following the completion of this offering. Beneficial ownership is
determined in accordance with the rules of the SEC and generally includes voting
and investment power with respect to the securities. Unless otherwise indicated,
and subject to applicable community property laws, to the best of our knowledge,
the persons named in this table have sole voting and investing power with
respect to all of the shares of common stock held by them. Shares issuable upon
the exercise of options that are exercisable or become exercisable within 60
days of July 18, 2000 are considered outstanding for the purpose of computing
percentage ownership of that person, but are not treated as outstanding for the
purpose of computing any other person's ownership percentage.
Behrman Capital II L.P. and Richard P. Nespola have granted the
underwriters an option to purchase up to an aggregate of 397,500 and 52,500
shares of common stock, respectively, to cover over-allotments, if any.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY
SHARES BENEFICIALLY OWNED AFTER
OWNED OFFERING
PRIOR TO OFFERING ------------
-------------------- SHARES SOLD TOTAL
BENEFICIAL OWNER NUMBER PERCENT IN OFFERING NUMBER PERCENT
---------------- ---------- ------- ----------- ------------ -------
<S> <C> <C> <C> <C> <C>
Behrman Capital II L.P.(1)................ 14,223,949 51.7% 1,756,667 12,467,282 43.7%
126 E. 56th Street, 27th Floor
New York, NY 10022
Grant G. Behrman(2)....................... 14,223,949 51.7% 1,756,667 12,467,282 43.7%
Behrman Capital
126 E. 56th Street, 27th Floor
New York, NY 10022
William M. Matthes(3)..................... 14,223,949 51.7% 1,756,667 12,467,282 43.7%
Behrman Capital
Four Embarcadero Center, Suite 3640
San Francisco, CA 94111
Richard P. Nespola(4)..................... 4,626,640 16.8% 200,000 4,426,640 15.5%
Micky K. Woo Trust(5)..................... 2,039,788 7.4% 2,039,788 7.2%
Ralph R. Peck............................. 980,705 3.6% 26,667 954,038 3.3%
Donald E. Klumb(6)........................ 90,625 * 16,667 73,958 *
Mario M. Rosati(7)........................ 37,500 * 37,500 *
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304
</TABLE>
54
<PAGE> 55
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY
SHARES BENEFICIALLY OWNED AFTER
OWNED OFFERING
PRIOR TO OFFERING ------------
-------------------- SHARES SOLD TOTAL
BENEFICIAL OWNER NUMBER PERCENT IN OFFERING NUMBER PERCENT
---------------- ---------- ------- ----------- ------------ -------
<S> <C> <C> <C> <C> <C>
Roy A. Wilkens............................ 37,500 * 37,500 *
All directors and executive officers as a
group (9 persons)....................... 22,036,707 80.1% 2,000,000 20,036,707 70.3%
</TABLE>
---------------
* Less than 1%.
(1) Also includes 92,524 shares held by Strategic Entrepreneur Fund II, L.P., an
affiliate of Behrman Capital.
(2) Represents 14,131,425 shares held by Behrman Capital and 92,524 shares held
by Strategic Entrepreneur Fund. Mr. Behrman is a managing member of Behrman
Brothers LLC, the general partner of Behrman Capital and is a general
partner of Strategic Entrepreneur Fund. Mr. Behrman disclaims beneficial
ownership of the shares held by these entities, except to the extent of his
proportionate partnership interest therein. Mr. Behrman is a member of our
board of directors.
(3) Represents 14,131,425 shares held by Behrman Capital and 92,524 shares held
by Strategic Entrepeneur Fund. Mr. Matthes is a managing member of Behrman
Brothers LLC, the general partner of Behrman Capital and is a general
partner of Strategic Entrepeneur Fund. Mr. Matthes disclaims beneficial
ownership of the shares held by these entities, except to the extent of his
proportionate partnership interest therein. Mr. Matthes is a member of our
board of directors.
(4) Includes 250,000 shares held by the TMNG 1999 Trust, Faye Nespola, Trustee.
Shares sold in this offering include 150,000 of these shares.
(5) Includes 37,000 shares held by the Woo 1999 Charitable Remainder Unitrust.
(6) Includes 37,500 shares related to vested options and 53,125 shares related
to options which will vest prior to September 17, 2000.
(7) Consists of shares that are subject to a right of repurchase with respect to
unvested shares. The shares subject to these options vest in four equal
annual installments, with the first quarter becoming vested on June 4, 2000.
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<PAGE> 56
DESCRIPTION OF CAPITAL STOCK
GENERAL
We are authorized to issue up to 100,000,000 shares of common stock, $0.001
par value and 10,000,000 shares of undesignated preferred stock. From time to
time, our board of directors may establish the rights and preferences of the
preferred stock. As of July 1, 2000, 27,496,444 shares of common stock were
issued and outstanding and held by 50 stockholders of record, and zero shares of
preferred stock were issued and outstanding. The following description of our
capital stock is, by necessity, not complete. We encourage you to refer to our
certificate of incorporation and bylaws, which are included as exhibits to the
registration statement of which this prospectus forms a part, and applicable
provisions of Delaware law for a more complete description.
COMMON STOCK
Each holder of common stock is entitled to one vote for each share held on
all matters to be voted upon by the stockholders and there are no cumulative
voting rights. Subject to preferences that may be applicable to any outstanding
preferred stock, holders of common stock are entitled to receive ratably such
dividends, if any, as may be declared time to time by the board of directors out
of funds legally available for that purpose. See "Dividend Policy." If we
undergo a liquidation, dissolution or winding up, the holders of common stock
are entitled to share in our assets remaining after the payment of liabilities
and the satisfaction of any liquidation preference granted to the holders of any
outstanding shares of preferred stock. Holders of common stock have no
preemptive or conversion rights or other subscription rights. There are no
redemption or sinking fund provisions applicable to the common stock. All
outstanding shares of common stock are, in the opinion of our legal counsel,
Wilson Sonsini Goodrich & Rosati, fully paid and nonassessable. The rights,
preferences and privileges of the holders of common stock are subject to, and
may be adversely affected by the rights of the holders of shares of any series
of preferred stock which we may designate in the future.
PREFERRED STOCK
The board of directors has the authority, without action by the
stockholders, to designate and issue preferred stock in one or more series and
to designate the rights, preferences and privileges of each series, which may be
greater than the rights of the common stock. It is not possible to state the
actual effect of the issuance of any shares of preferred stock upon the rights
of holders of the common stock until the board of directors determines the
specific rights of the holders of this preferred stock. However, the effects
might include, among other things:
- restricting dividends on the common stock;
- diluting the voting power of the common stock;
- impairing the liquidation rights of the common stock; or
- delaying or preventing a change in control of us without further action
by the stockholders.
There are no shares of preferred stock outstanding.
WARRANTS
In October 1999, we issued a warrant to purchase 500,000 shares of common
stock to Williams Communications Group at an exercise price of $2.00 per share.
The warrant has a net exercise provision under which the holder may, in lieu of
payment of the exercise price in cash, surrender the warrant and receive a net
amount of shares based on the fair market value of our common stock at the time
of exercise of the warrant, after deducting the aggregate exercise price. No
separate cash consideration was paid for this warrant. The warrant will expire
in October 2004.
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<PAGE> 57
REGISTRATION RIGHTS OF CERTAIN HOLDERS
After this offering, holders of 18,933,710 shares of common stock and a
warrant to purchase 500,000 shares of our common stock or their transferees are
entitled to certain rights with respect to the registration of such shares under
the Securities Act. These rights are provided under the terms of an agreement
between us and the holders of the registrable securities. Holders of at least
15.0% of the registrable securities may require on up to two occasions, that we
use our best efforts to register the registrable securities for public resale.
We are obligated to register these shares only if the outstanding registrable
securities have an anticipated public offering price of at least $8.0 million.
Also, holders of 25.0% of the registrable securities may require, no more than
once during any six-month period, that we register their shares for public
resale on Form S-3 or similar short-form registration if the value of the
securities to be registered is at least $2.0 million. Furthermore, if we elect
to register any of its shares of common stock for purposes of effecting any
public offering, the holders of registrable securities are entitled to include
their shares of common stock in the registration, but we may reduce the number
of shares proposed to be registered in view of market conditions. These
registration rights have been waived with respect to this offering. We will bear
all expenses in connection with any registration, other than underwriting
discounts and commissions.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF OUR CHARTER AND BYLAWS
Provisions of Delaware law and our certificate of incorporation and bylaws
could make it more difficult to acquire us by means of a tender offer, proxy
contest or otherwise, or to remove our officers and directors. These provisions,
summarized below, are expected to discourage certain types of coercive takeover
practices and inadequate takeover bids. These provisions are also designed to
encourage persons seeking to acquire control of us to first negotiate with our
board. We believe that the benefits of increased protection of its potential
ability to negotiate with the proponent of an unfriendly or unsolicited proposal
to acquire or restructure us outweighs the disadvantages of discouraging such
proposals because negotiation of such proposals could result in an improvement
of their terms.
Our board of directors is divided into three classes. The directors in each
class will serve for a three-year term, with our stockholders electing one class
each year. This system of electing and removing directors may tend to discourage
a third party from making a tender offer or otherwise attempting to obtain
control of us, because it generally makes it more difficult for stockholders to
replace a majority of the directors.
Our certificate of incorporation provides that stockholders may act only at
duly called annual or special meetings of stockholders, not by written consent.
Our bylaws further provide that special meetings of our stockholders may be
called only by the President, Chief Executive Officer or Chairman of the Board
or a majority of the board of directors.
Our bylaws provide that stockholders seeking to bring business before our
annual meeting of stockholders, or to nominate candidates for election as
directors at our annual meeting of stockholders, must provide timely notice
thereof in writing. The bylaws also specify requirements as to the form and
content of a stockholder's notice. These provisions may preclude stockholders
from bringing matters before our annual meeting of stockholders or from making
nominations for directors at our annual meeting of stockholders.
We are subject to Section 203 of the Delaware General Corporation Law, an
anti-takeover law. In general, Section 203 prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years following the date the person became an
interested stockholder, unless the "business combination" or the transaction in
which the person became an interested stockholder is approved in a prescribed
manner. Generally, a "business combination" includes a merger, asset or stock
sale, or other transaction resulting in a financial benefit to the interested
stockholder. Generally, an "interested stockholder" is a person who, together
with affiliates and associates, owns or within three years prior to the
determination of interested stockholder status, did own, 15.0% or more of a
corporation's voting stock. The existence of this provision may have an anti-
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<PAGE> 58
takeover effect with respect to transactions not approved in advance by the
board of directors, including discouraging attempts that might result in a
premium over the market price for the shares of common stock held by
stockholders.
Our certificate of incorporation and bylaws do not provide for cumulative
voting in the election of directors. The amendment of any of the above
provisions of our certificate of incorporation would require approval by holders
of at least two-thirds of the outstanding common stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is United Missouri
Bank of Kansas City. United Missouri Bank's telephone number for stockholder
inquiries is (800) 884-4225.
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<PAGE> 59
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of common stock, including shares
issued upon exercise of outstanding options and warrants, in the public market
following this offering could adversely affect market prices prevailing from
time to time and could impair our ability to raise capital through sale of our
equity securities.
Upon completion of this offering, we will have outstanding 28,496,444
shares of common stock, assuming the sale of the 1,000,000 shares of common
stock offered by us hereby, no exercise of the underwriters' over-allotment
option and no exercise of outstanding options after July 1, 2000. Of these
shares, the following shares are freely tradeable without restriction under the
Securities Act, except for any shares purchased by our "affiliates" as defined
in Rule 144 under the Securities Act:
- The 3,000,000 shares sold by us in this offering; and
- The 5,307,250 shares sold in our initial public offering in November
1999.
Of the remaining 22,189,194 shares of common stock, 20,036,707 are held by
the selling stockholders and by our executive officers, directors and entities
affiliated with them. These shares are subject to lockup agreements with the
underwriters providing that the stockholder will not offer to sell, contract to
sell or otherwise sell, dispose of, loan, pledge or grant any rights to, any
shares of common stock owned as of the date of this prospectus for a period of
90 days after the date of this prospectus without the prior written consent of
Salomon Smith Barney Inc. All of these shares will be eligible for sale in the
public market upon expiration of the 90-day lockup agreement, except that such
shares will be subject to volume limitations under Rule 144. All of the
remaining shares not held by selling stockholders or by our executive officers,
directors and affiliated entities are currently eligible for immediate sale,
subject to volume limitations under Rule 144. In some cases, these shares are
subject to repurchase rights of TMNG. Salomon Smith Barney Inc. may, in its sole
discretion and at any time without notice, release all or any portion of the
shares subject to the 90-day lockup agreements entered into in connection with
this offering.
In general, under Rule 144, as currently in effect, a person who has
beneficially owned restricted shares for at least one year, including the
holding period of any prior owner and except an affiliate, would be entitled to
sell within any three-month period a number of shares that does not exceed the
greater of:
- 1% of the number of shares of common stock then outstanding, which will
equal approximately 285,000 shares immediately after this offering; or
- the average weekly trading volume of the common stock during the four
calendar weeks preceding the filing of a Form 144.
Sales under Rule 144 are also subject to certain manner of sale provisions
and notice requirements and to the availability of current public information
about TMNG. Under Rule 144(k), a person who is not deemed to have been an
affiliate of TMNG at any time during the three months preceding a sale, and who
has beneficially owned the shares proposed to be sold for at least two years
including the holding period of any prior owner except an affiliate, is entitled
to sell those shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
On May 18, 2000 we filed a registration statement on Form S-8 registering
shares of common stock subject to outstanding options or reserved for future
issuance under our employee benefit plans. As of July 1, 2000, options to
purchase a total of 2,528,216 shares were outstanding and 482,409 were reserved
for future issuance under our stock plans. Common stock issued upon exercise of
outstanding vested options or issued pursuant to our employee stock purchase
plan, other than common stock issued to our affiliates, is eligible for
immediate resale in the open market.
Also, holders of restricted shares are entitled to registration rights on
these shares for sale in the public market. See "Description of Capital
Stock -- Registration Rights." Registration of these shares
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<PAGE> 60
under the Securities Act would result in their becoming freely tradable without
restriction under the Securities Act immediately upon the effectiveness of the
registration.
LOCK-UP AGREEMENTS
The selling stockholders, our executive officers and directors have agreed
pursuant to "lock-up" agreements that they will not offer, sell, contract to
sell, pledge, grant any option to sell, or otherwise dispose of, directly or
indirectly, any shares of common stock or securities convertible or exchangeable
for common stock, or warrants or other rights to purchase common stock for a
period of 90 days after the date of this prospectus without the prior written
consent of Salomon Smith Barney Inc. We have also entered into an agreement with
Salomon Smith Barney Inc. that we will not offer, sell or otherwise dispose of
our common stock until 90 days offer the effective date of this offering.
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<PAGE> 61
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement dated the
date hereof, the underwriters named below, acting through their representatives,
Salomon Smith Barney Inc., Chase Securities Inc. and Lehman Brothers Inc., have
severally agreed to purchase, and we and the selling stockholders have agreed to
sell to the underwriters, the following respective number of shares of our
common stock:
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES
---- ----------------
<S> <C>
Salomon Smith Barney Inc.................................... 1,125,000
Chase Securities Inc........................................ 1,125,000
Lehman Brothers Inc......................................... 750,000
Total............................................. 3,000,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the
underwriters are subject to the conditions precedent, including the absence of
any material adverse change in our business and the receipt of certificates,
opinions and letters from us, our counsel and independent auditors. The nature
of the underwriters' obligation requires that they purchase all shares of common
stock offered, other than those covered by the over-allotment option described
below, if any shares are purchased.
The underwriters propose to offer the shares of common stock directly to
the public at the public offering price set forth on the cover page of this
prospectus and to certain dealers at the public offering price less a concession
not in excess of $.68 per share. The underwriters may allow and such dealers may
reallow a concession not in excess of $.10 per share to other dealers. If all of
the shares are not sold at the initial offering price, the underwriters may
change the public offering price and the other selling terms.
Behrman Capital II L.P. and Richard P. Nespola have each granted to the
underwriters an option, exercisable no later than 30 days after the date of the
effective date of this offering to purchase up to 397,500 and 52,500 additional
shares of common stock, respectively, at the public offering price, less the
underwriting discount, set forth on the cover page of this prospectus. To the
extent that the underwriters exercise this option, each underwriter will have a
firm commitment to purchase approximately the same percentage thereof which the
number of shares of common stock to be purchased by it shown in the above table
bears to the total number of shares of common stock offered in this offering.
Behrman Capital and Mr. Nespola will be obligated to sell shares to the
underwriters to the extent the option is exercised. The underwriters may
exercise the option only to cover over-allotments made in connection with the
sale of common stock offered in this prospectus.
The following table shows the per share and total underwriting discounts
and commissions we and the selling stockholders will pay to the underwriters in
connection with this offering. These amounts are shown assuming both no exercise
and full exercise of the underwriters' over-allotment option to purchase
additional shares of our common stock.
UNDERWRITING DISCOUNTS AND COMMISSIONS PAYABLE BY US
AND THE SELLING STOCKHOLDERS
<TABLE>
<CAPTION>
WITHOUT WITH
OVER-ALLOTMENT OVER-ALLOTMENT
EXERCISE EXERCISE
-------------- --------------
<S> <C> <C>
Per Share................................................... $ 1.14 $ 1.14
Total....................................................... $3,420,000 $3,933,000
</TABLE>
We estimate that the total expenses of this offering, excluding
underwriting discounts and commissions, will be approximately $700,000.
The underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
61
<PAGE> 62
The offering of the shares is made for delivery when, as and if accepted by
the underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
We and the selling stockholders have agreed to indemnify the underwriters
against liabilities connected to this offering, including liabilities under the
Securities Act, and to contribute to payments the underwriters may be required
to make in respect thereof.
Each of the selling stockholders, executive officers and directors has
agreed that they will not, without the prior written consent of Salomon Smith
Barney Inc., offer to sell, contract to sell or otherwise sell, dispose of,
loan, pledge or grant any rights with respect to any shares of our common stock,
any options or warrants to purchase any shares of our common stock or any
securities convertible into or exchangeable for shares of common stock owned by
them as of the date of this prospectus or thereafter acquired directly by such
holders or with respect to which they have or hereafter acquire the power of
disposition, until the date 90 days following the date of this prospectus.
In addition, we have agreed that we will not, without the prior written
consent of Salomon Smith Barney Inc., offer, sell or otherwise dispose of any
shares of common stock, options or warrants to acquire shares of common stock or
securities exchangeable for or convertible into shares of common stock until the
date 90 days following the date of this prospectus, except that we may issues
shares upon the exercise of options granted prior to the date hereof, and may
grant additional options under our stock option plans, provided that without the
prior written consent of Salomon Smith Barney Inc. the additional options shall
not be exercisable during such period.
In connection with the offering, Salomon Smith Barney Inc., on behalf of
the underwriters, may purchase and sell shares of common stock in the open
market. These transactions may include:
- over-allotment, which involves syndicate sales of our common stock in
excess of the number of shares to be purchased by the underwriters in the
offering, which creates a syndicate short position;
- syndicate covering transactions, which involve purchases of our common
stock in the open market after the distribution has been completed to
cover syndicate short positions; and
- stabilizing transactions, which consist of bids or purchases of our
common stock made for the purpose of preventing or retarding a decline in
the market price of our common stock while the offering is in progress.
The underwriter also may impose a penalty bid. Penalty bids permit the
underwriters to reclaim a selling concession from a syndicate member when
Salomon Smith Barney Inc., in covering syndicate short positions or making
stabilizing purchases, repurchases shares originally sold by that syndicate
member.
Any of these activities may cause the price of our common stock to be
higher than the price that otherwise would exist in the open market in the
absence of these transactions. These transactions may be effected on the Nasdaq
National Market or in the over-the-counter market, or otherwise and, if
commenced, may be discontinued at any time.
In addition, in connection with this offering, some of the underwriters may
engage in passive market making transactions in the common stock on the Nasdaq
National Market, prior to the pricing and completion of the offering. Passive
market making consists of displaying bids on the Nasdaq National Market no
higher than the bid prices of independent market makers and making purchases at
prices no higher than those independent bids and effected in response to order
flow. Net purchases by a passive market maker on each day are limited to a
specified percentage of the passive market maker's average daily trading volume
in the common stock during a specified period and must be discontinued when that
limit is reached. Passive market making may cause the price of the common stock
to be higher than the price that otherwise would exist in the open market in the
absence of such transactions. If the underwriters commence passive market
making, they may discontinue at any time.
62
<PAGE> 63
A prospectus in electronic format is being made available on a web site
maintained by Salomon Smith Barney Inc. In addition, some broker-dealers may
choose to make the prospectus in electronic format available on web sites
maintained by them.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us
by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California. Certain legal matters in connection with this offering will be
passed upon for the underwriters by Morrison & Foerster LLP, San Francisco,
California. As of July 1, 2000, a certain investment partnership and members of
Wilson Sonsini Goodrich & Rosati, Professional Corporation, beneficially owned
an aggregate of 37,500 shares of our common stock. Mario M. Rosati, one of our
directors, and Christopher D. Mitchell, our secretary, are members of Wilson
Sonsini Goodrich & Rosati.
EXPERTS
The financial statements as of January 2, 1999 and January 1, 2000 and for
each of the three fiscal years in the period ended January 1, 2000 included in
this prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing herein and are included in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC in Washington, D.C. a Registration Statement on
Form S-1 under the Securities Act with respect to the common stock offered in
this prospectus. This prospectus, filed as part of the registration statement,
does not contain all of the information set forth in the registration statement
and its exhibits and schedules, portions of which have been omitted as permitted
by the rules and regulations of the SEC. For further information about us and
the common stock, we refer you to the registration statement and to its exhibits
and schedules. Statements in this prospectus about the contents of any contract,
agreement or other document are not necessarily complete and, in each instance,
we refer you to the copy of such contract, agreement or document filed as an
exhibit to the registration statement, and each such statement being qualified
in all respects by reference to the document to which it refers. Anyone may
inspect the registration statement and its exhibits and schedules without charge
at the public reference facilities the SEC maintains at 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the regional offices of the SEC located at 7 World
Trade Center, Suite 1300, New York, New York 10048 and 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Please call the SEC at 1-800-SEC-0330 for
further information about the public reference rooms. You may obtain copies of
all or any part of these materials from the SEC upon payment to the SEC of
prescribed fees. You may also inspect these reports and other information
without charge at a web site maintained by the SEC. The address of this site is
http://www.sec.gov.
We are subject to the informational requirements of the Exchange Act and,
in accordance therewith, file reports, proxy statements and other information
with the SEC. You will be able to inspect and copy these reports, proxy
statements and other information at the public reference facilities maintained
by the SEC and at the SEC's regional offices at the addresses noted above. You
also will be able to obtain copies of this material from the Public Reference
Section of the SEC as described above, or inspect them without charge at the
SEC's web site. Our common stock is quoted on the Nasdaq National Market. You
are able to inspect reports, proxy and information statements and other
information concerning us at the National Association of Securities Dealers,
Inc. at 1735 K Street, N.W., Washington, D.C. 2006.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO
BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE
PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF
THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS
PROSPECTUS OR OF ANY SALE OF THE COMMON STOCK.
63
<PAGE> 64
THE MANAGEMENT NETWORK GROUP, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Income and Comprehensive
Income.................................................... F-4
Consolidated Statements of Stockholders' Equity (Deficiency
in Assets)................................................ F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 65
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
The Management Network Group, Inc.
Overland Park, Kansas
We have audited the accompanying consolidated balance sheets of The
Management Network Group, Inc. and subsidiaries (the "Company") as of January 1,
2000 and January 2, 1999 and the related consolidated statements of income and
comprehensive income, stockholders' equity (deficiency in assets) and cash flows
for the fiscal years ended January 1, 2000, January 2, 1999 and December 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of January 1,
2000 and January 2, 1999, and the results of their operations and their cash
flows for the fiscal years ended January 1, 2000, January 2, 1999 and December
31, 1997 in conformity with accounting principles generally accepted in the
United States of America.
/s/ DELOITTE & TOUCHE LLP
Kansas City, Missouri
February 15, 2000
F-2
<PAGE> 66
THE MANAGEMENT NETWORK GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
JANUARY 2, JANUARY 1, JULY 1,
1999 2000 2000
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 959 $ 51,523 $ 53,809
Receivables:
Accounts receivable..................................... 5,993 8,280 12,523
Accounts receivable -- unbilled......................... 3,251 4,863 7,539
-------- -------- --------
9,244 13,143 20,062
Less: Allowance for doubtful accounts................... (120) (350) (625)
-------- -------- --------
9,124 12,793 19,437
Other assets.............................................. 51 1,048 1,265
-------- -------- --------
Total current assets............................... 10,134 65,364 74,511
-------- -------- --------
DEFERRED FINANCING COSTS, NET............................... 447
PROPERTY AND EQUIPMENT, NET................................. 425 706 784
DEFERRED TAX ASSET.......................................... 1,312 3,331
-------- -------- --------
Total assets....................................... $ 11,006 $ 67,382 $ 78,626
======== ======== ========
CURRENT LIABILITIES:
Long-term debt -- current portion......................... $ 1,300
Trade accounts payable.................................... 959 $ 888 $ 1,157
Trade accounts payable -- related party................... 332
Accrued payroll, bonuses and related expenses............. 664 1,857 3,497
Accrued interest payable.................................. 440
Other accrued liabilities................................. 176 1,200 1,184
Income taxes payable...................................... 52 134
Deferred taxes............................................ 186
-------- -------- --------
Total current liabilities.......................... 4,109 3,945 5,972
-------- -------- --------
LONG-TERM DEBT.............................................. 24,717
DEFERRED TAXES.............................................. 451
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS)
Common stock:
Voting -- no par, 30,000,000 shares authorized;
22,500,000 shares issued and outstanding in 1998; $.001
par value, 100,000,000 shares authorized; 27,417,370
shares issued and outstanding on January 1, 2000;
27,496,444 shares issued and outstanding on July 1,
2000................................................... 18,631 27 27
Preferred stock -- $.001 par value, 10,000,000 shares
authorized; no shares issued or outstanding.............
Additional paid-in capital................................ 104,137 106,540
Accumulated deficit....................................... (36,599) (32,138) (28,207)
Accumulated other comprehensive income --
Foreign currency translation adjustment................. 2 (2) (47)
Unearned compensation..................................... (305) (8,587) (5,659)
-------- -------- --------
Total stockholders' equity (deficiency in
assets).......................................... (18,271) 63,437 72,654
-------- -------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY IN
ASSETS)................................................... $ 11,006 $ 67,382 $ 78,626
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 67
THE MANAGEMENT NETWORK GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
-------------------------------------- -------------------------
DECEMBER 31, JANUARY 2, JANUARY 1, JULY 3, JULY 1,
1997 1999 2000 1999 2000
------------ ---------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES.................................................. $20,184 $32,103 $50,322 $23,856 $35,866
COST OF SERVICES:
Direct cost of services................................. 11,384 17,411 26,109 12,377 18,638
Equity related charges.................................. 239 2,780 956 3,917
------- ------- ------- ------- -------
Total cost of services........................... 11,384 17,650 28,889 13,333 22,555
------- ------- ------- ------- -------
GROSS PROFIT.............................................. 8,800 14,453 21,433 10,523 13,311
OPERATING EXPENSES:
Selling, general and administrative..................... 3,280 6,158 9,777 4,886 7,448
Equity related charges.................................. 22 1,998 570 810
------- ------- ------- ------- -------
Total operating expenses......................... 3,280 6,180 11,775 5,456 8,258
------- ------- ------- ------- -------
INCOME FROM OPERATIONS.................................... 5,520 8,273 9,658 5,067 5,053
OTHER INCOME (EXPENSE):
Interest income......................................... 6 18 277 2 1,626
Interest expense........................................ (30) (2,054) (1,998) (1,116) (3)
Other, net.............................................. 8 88 (68) (79) (124)
------- ------- ------- ------- -------
Total other income (expense)..................... (16) (1,948) (1,789) (1,193) 1,499
------- ------- ------- ------- -------
INCOME BEFORE PROVISION FOR INCOME TAXES AND EXTRAORDINARY
ITEM.................................................... 5,504 6,325 7,869 3,874 6,552
PROVISION FOR INCOME TAXES................................ (3,282) (3,208) (1,612) (2,621)
------- ------- ------- ------- -------
INCOME BEFORE EXTRAORDINARY ITEM.......................... 5,504 3,043 4,661 2,262 3,931
EXTRAORDINARY ITEM --
Loss on debt extinguishment, net of tax benefit of
$133.................................................. (200)
------- ------- ------- ------- -------
NET INCOME................................................ 5,504 3,043 4,461 2,262 3,931
OTHER COMPREHENSIVE INCOME --
Foreign Currency Translation Adjustment................. (1) 3 (4) (6) (45)
------- ------- ------- ------- -------
COMPREHENSIVE INCOME...................................... $ 5,503 $ 3,046 $ 4,457 $ 2,256 $ 3,886
======= ======= ======= ======= =======
INCOME BEFORE EXTRAORDINARY ITEM PER COMMON SHARE
Basic................................................... $ .24 $ .14 $ .20 $ .10 $ .14
======= ======= ======= ======= =======
Diluted................................................. $ .24 $ .13 $ .20 $ .10 $ .14
======= ======= ======= ======= =======
NET INCOME PER COMMON SHARE
Basic................................................... $ .24 $ .14 $ .19 $ .10 $ .14
======= ======= ======= ======= =======
Diluted................................................. $ .24 $ .13 $ .19 $ .10 $ .14
======= ======= ======= ======= =======
SHARES USED IN CALCULATION OF INCOME BEFORE EXTRAORDINARY
ITEM AND NET INCOME PER COMMON SHARE
Basic................................................... 22,500 22,500 23,056 22,507 27,443
======= ======= ======= ======= =======
Diluted................................................. 22,500 22,944 23,807 22,991 28,664
======= ======= ======= ======= =======
PRO FORMA INFORMATION (UNAUDITED)
Pro forma provision for income taxes.................... $ 2,202 $ 2,530
======= =======
Pro forma net income.................................... $ 3,302 $ 3,795
======= =======
PRO FORMA NET INCOME PER COMMON SHARE (UNAUDITED)
Basic................................................... $ 0.15 $ 0.17
======= =======
Diluted................................................. $ 0.15 $ 0.17
======= =======
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 68
THE MANAGEMENT NETWORK GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS)
(IN THOUSANDS, EXCEPT SHARE DATA)
(INFORMATION FOR THE SIX MONTHS ENDED JULY 1, 2000 IS UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK
$.0006 PAR 1997;
NO PAR COMMENCING COMMON STOCK
FEBRUARY 12, 1998, $.0006 PAR 1997;
$.001 PAR COMMENCING NO PAR COMMENCING
AUGUST 27, 1999 FEBRUARY 12, 1998 ACCUMULATED
VOTING NON-VOTING ADDITIONAL RETAINED OTHER
---------------------- -------------------- PAID-IN EARNINGS COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) INCOME (LOSSES)
----------- -------- ----------- ------ ---------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1997........... 4,500,000 $ 3 18,000,000 $ 11 $ 399 $ 1,564 $
Distributions...................... (2,600)
Other comprehensive
income -- Foreign currency
translation adjustment............ (1)
Repayments on stockholders' notes
receivable........................
Net income......................... 5,504
----------- -------- ----------- ---- -------- -------- ----
BALANCE, DECEMBER 31, 1997......... 4,500,000 3 18,000,000 11 399 4,468 (1)
Distributions...................... (4,664)
Other comprehensive
income -- Foreign currency
translation adjustment............ 3
Repayments on stockholders' notes
receivable........................
Conversion of non-voting stock to
voting stock...................... 18,000,000 11 (18,000,000) (11)
Issuance of common stock, net of
offering costs of $3,061.......... 13,500,000 16,939
Repurchase and cancellation of
treasury stock.................... (13,500,000) (38,733)
Constructive distribution assumed
to be reinvested.................. 713 (713)
Adjustment to reflect change in par
value............................. 18,051 (18,051)
Issuance of options................ 305
Stock compensation................. 261
Net income......................... 3,043
----------- -------- ----------- ---- -------- -------- ----
BALANCE, JANUARY 2, 1999........... 22,500,000 18,631 (36,599) 2
Issuance of options................ 11,203
Exercise of options................ 231,169 444
Stock compensation................. 1,416
Other comprehensive
income -- Foreign currency
translation adjustment............ (4)
Issuance of common stock, net...... 4,686,201 4 72,054
Tax benefit due to exercise of
stock options..................... 412
Adjustment to reflect change in par
value............................. (18,608) 18,608
Net income......................... 4,461
----------- -------- ----------- ---- -------- -------- ----
BALANCE, JANUARY 1, 2000........... 27,417,370 27 104,137 (32,138) (2)
Issuance of options (UNAUDITED).... 13
Stock compensation (UNAUDITED)..... 128
Exercise of options (UNAUDITED).... 79,074 118
Other comprehensive
income -- Foreign currency
translation adjustment
(UNAUDITED)....................... (45)
Warrant grant amortization
(UNAUDITED)....................... 1,956
Forfeited options (UNAUDITED)...... (298)
Tax benefit due to exercise of
stock options (UNAUDITED)......... 614
Offering costs (UNAUDITED)......... (128)
Net income (UNAUDITED)............. 3,931
----------- -------- ----------- ---- -------- -------- ----
BALANCE, JULY 1, 2000
(UNAUDITED)....................... 27,496,444 $ 27 $ $106,540 $(28,207) $(47)
=========== ======== =========== ==== ======== ======== ====
<CAPTION>
STOCKHOLDERS'
UNEARNED NOTES
COMPENSATION RECEIVABLE TOTAL
------------ ------------- --------
<S> <C> <C> <C>
BALANCE, JANUARY 1, 1997........... $ $(233) $ 1,744
Distributions...................... (2,600)
Other comprehensive
income -- Foreign currency
translation adjustment............ (1)
Repayments on stockholders' notes
receivable........................ 62 62
Net income......................... 5,504
-------- ----- --------
BALANCE, DECEMBER 31, 1997......... (171) 4,709
Distributions...................... (4,664)
Other comprehensive
income -- Foreign currency
translation adjustment............ 3
Repayments on stockholders' notes
receivable........................ 171 171
Conversion of non-voting stock to
voting stock......................
Issuance of common stock, net of
offering costs of $3,061.......... 16,939
Repurchase and cancellation of
treasury stock.................... (38,733)
Constructive distribution assumed
to be reinvested..................
Adjustment to reflect change in par
value.............................
Issuance of options................ (305)
Stock compensation................. 261
Net income......................... 3,043
-------- ----- --------
BALANCE, JANUARY 2, 1999........... (305) (18,271)
Issuance of options................ (11,203)
Exercise of options................ 444
Stock compensation................. 2,921 4,337
Other comprehensive
income -- Foreign currency
translation adjustment............ (4)
Issuance of common stock, net...... 72,058
Tax benefit due to exercise of
stock options..................... 412
Adjustment to reflect change in par
value.............................
Net income......................... 4,461
-------- ----- --------
BALANCE, JANUARY 1, 2000........... (8,587) 63,437
Issuance of options (UNAUDITED).... (13)
Stock compensation (UNAUDITED)..... 2,704 2,832
Exercise of options (UNAUDITED).... 118
Other comprehensive
income -- Foreign currency
translation adjustment
(UNAUDITED)....................... (45)
Warrant grant amortization
(UNAUDITED)....................... 1,956
Forfeited options (UNAUDITED)...... 237 (61)
Tax benefit due to exercise of
stock options (UNAUDITED)......... 614
Offering costs (UNAUDITED)......... (128)
Net income (UNAUDITED)............. 3,931
-------- ----- --------
BALANCE, JULY 1, 2000
(UNAUDITED)....................... $ (5,659) $ $ 72,654
======== ===== ========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 69
THE MANAGEMENT NETWORK GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
-------------------------------------- -------------------------
DECEMBER 31, JANUARY 2, JANUARY 1, JULY 3, JULY 1,
1997 1999 2000 1999 2000
------------ ---------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................................... $ 5,504 $ 3,043 $ 4,461 $ 2,262 $ 3,931
Add-back: Extraordinary item....................... 200
------- -------- -------- ------- -------
Income before extraordinary item................... 5,504 3,043 4,661 2,262 3,931
Adjustments to reconcile income before
extraordinary item to net cash provided by
operating activities:
Depreciation and amortization.................... 136 275 124 115
Stock option and bonus share compensation........ 261 4,778 1,526 4,727
Provision for deferred income taxes (deferred tax
benefit........................................ 637 (1,952) (629) (2,019)
Provision for uncollectible advances to related
party.......................................... 181 (181)
Loss on disposition of assets.................... 2
Changes in:
Accounts receivable............................ (1,727) (1,735) (2,057) 1,608 (3,968)
Accounts receivable -- unbilled................ 374 (2,148) (1,612) (1,766) (2,676)
Prepaid tax assets............................. (775)
Other assets................................... (51) (995) (11) (217)
Related party receivables...................... (175) 201
Trade accounts payable......................... 129 825 (71) (171) 269
Trade accounts payable -- related party........ 291 (233) (332) (332)
Accrued liabilities............................ 26 1,257 1,909 620 1,624
Income tax payable............................. (52) 134
Payables to related parties.................... (300)
------- -------- -------- ------- -------
Net cash provided by operating activities... 4,303 2,012 4,554 2,456 1,920
------- -------- -------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment.............. (455) (443) (186) (193)
------- -------- -------- ------- -------
Net cash used in investing activities....... (455) (443) (186) (193)
------- -------- -------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to shareholders...................... (4,000) (4,664)
Bank overdraft..................................... 244
Proceeds from long-term debt....................... 24,000
Net borrowings under revolving credit facility..... 2,017 (2,017) (2,017)
Deferred financing costs........................... (553)
Issuance of common stock, net of expenses.......... 16,939 71,618 133
IPO costs charged to equity........................ (128)
Payments received on stockholders' note
receivable....................................... 62 171
Payments made on long-term debt.................... (24,000) (650)
Payments made on notes payable -- related party.... (350)
Exercise of options including related tax
benefits......................................... 856 732
Purchase of treasury stock......................... (38,733)
------- -------- -------- ------- -------
Net cash provided by (used in) financing
activities................................ (4,288) (823) 46,457 (2,290) 604
------- -------- -------- ------- -------
EFFECT OF EXCHANGE RATE ON CASH AND CASH
EQUIVALENTS........................................ (1) 3 (4) (6) (45)
------- -------- -------- ------- -------
Net increase (decrease) in cash equivalents.......... 14 737 50,564 (26) 2,286
Cash and cash equivalents, beginning of period....... 208 222 959 959 51,523
------- -------- -------- ------- -------
Cash and cash equivalents, end of period............. $ 222 $ 959 $ 51,523 $ 933 $53,809
------- -------- -------- ------- -------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during period for interest............... $ 79 $ 1,517 2,324 $ 1,421 $ 3
------- -------- -------- ------- -------
Cash paid during period for taxes.................. $ $ 2,581 5,140 $ 2,969 $ 3,329
======= ======== ======== ======= =======
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING TRANSACTIONS:
Reinvested constructive distribution resulting from
conversion to subchapter C corporation........... $ $ 713 $ $
======= ======== ======== ======= =======
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 70
THE MANAGEMENT NETWORK GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE SIX MONTHS ENDED JULY 3, 1999 AND JULY 1, 2000 IS
UNAUDITED)
1. ORGANIZATION
Nature of Operations -- The Management Network Group, Inc. ("TMNG" or the
"Company") was formed on April 1, 1993 as a management consulting firm
specializing in global competitive telecommunications. Primary services include
serving wireless and wireline communications carriers in all industry segments,
and the technology and investment firms that support the telecommunications
industry. A majority of the Company's revenues are to customers in the United
States, however the Company also provides services to customers in the United
Kingdom, Canada and other foreign countries. The Company's business is
international in scope with corporate offices in Kansas City.
Recapitalization -- On February 12, 1998, TMNG entered into a series of
transactions that resulted in a leveraged recapitalization (the
"recapitalization") of the Company. Prior to the recapitalization, the Company
made distributions totaling approximately $4.7 million to its stockholders and
all stockholders' notes receivable were paid off. The recapitalization included
the following transactions:
- All authorized non-voting common stock was converted to voting common
stock and the Company declared a 3,272.73-for-one stock split resulting
in total authorized shares of 30 million with 22.5 million issued and
outstanding. In connection with this stock split, the Company changed its
par common stock to no par common stock. All historical share data has
been retroactively restated for the effect of the stock split.
- Behrman Capital II, LP ("Behrman") organized Behrman Capital TMNG, Inc.
("NEWCO") with contributed capital of $20.0 million and Behrman owning
100% of NEWCO capital stock. NEWCO was formed as a transitory corporation
solely for the purpose of effecting the recapitalization and has not
carried on any activities to date other than those incident to its
formation and the recapitalization.
- Behrman exchanged 100% of its NEWCO stock for 13.5 million newly issued
shares of TMNG common stock. NEWCO was then merged with and into TMNG
with TMNG as the surviving corporation, at which time TMNG changed its
income tax status to a subchapter "C" corporation from an subchapter "S"
corporation. Offering costs of approximately $3.1 million were charged
against additional paid-in capital at the time of the merger.
- TMNG entered into a senior bank credit facility that provided $24.0
million in term loans and a $5.0 million revolving credit facility from a
syndicate of banks. TMNG utilized the funds provided by the credit
facility and the proceeds from the merger with NEWCO to acquire 13.5
million shares of common stock from existing stockholders (as of December
31, 1997) for an aggregate cost of approximately $38.7 million. Such
treasury shares were then retired. The costs to enter into the credit
facility of approximately $500,000, were capitalized.
The Company accounted for this series of transactions as a financial
restructuring/recapitalization requiring continuation of the historical cost
basis.
Reincorporation -- During fiscal year 1999, the board of directors approved
the amendment of the Company's Certificate of Incorporation, which included,
among other things, reincorporation of the Company in the State of Delaware and
a change in the par values and total number of shares of common stock and
preferred stock of which the Company is authorized to issue.
Public Offering -- On November 22, 1999, the Company completed an initial
public offering of 5,307,250 shares of Common Stock at an initial offering price
of $17.00 per share. Of the 5,307,250 shares of Common Stock offered, 4,615,000
shares were issued and sold by the Company and 692,250 shares were sold by
existing stockholders. Prior to the initial public offering, there was no public
market for the Company's capital stock.
F-7
<PAGE> 71
THE MANAGEMENT NETWORK GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JULY 3, 1999 AND JULY 1, 2000 IS
UNAUDITED)
The Company did not receive any of the proceeds from the sales of the
shares sold by the existing stockholders. The net proceeds to the Company from
the initial public offering, after deducting applicable underwriting discounts
and offering expenses, was approximately $71.5 million. Approximately $22.3
million of the net proceeds to the Company was used to repay outstanding debt.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation -- The consolidated statements include the
accounts of TMNG and its wholly-owned subsidiaries, The Management Network Group
Europe Ltd. ("TMNG-Europe"), formed on March 19, 1997, based in the United
Kingdom, The Management Network Group Canada Ltd. ("TMNG-Canada"), formed on May
14, 1998, based in Toronto, Canada and TMNG.com, Inc., formed in June 1999. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Fiscal Year -- Effective January 1, 1998, the Company adopted a 52/53 week
fiscal year, changing the year-end date from December 31, to the Saturday
nearest December 31. The fiscal years ended January 1, 2000 and January 2, 1999
each had 52 weeks and are referred to herein as fiscal year 1999 and 1998,
respectively. All references herein for 1997 represent the year ended December
31, 1997. TMNG-Europe and TMNG-Canada maintain year-end dates of December 31.
Contracts -- The Company enters into both time and materials and fixed
price contracts with its customers. A substantial majority of TMNG's contracts
are based upon time and materials with a not to exceed total contract price.
Under a time and materials contract the customer pays a negotiated daily rate
for all services performed plus expenses incurred. Under a fixed price contract
the customer pays a predetermined fixed price for all services performed
regardless of the professional time required. Fixed price contracts generally
involve immaterial amounts and are of short duration.
Prior to January 3, 1999 TMNG subcontracted with several companies (five of
which were related parties to TMNG through certain common ownership or are owned
by employees of TMNG) to provide consultants acting as independent contractors
to render the services required under the customer contracts. These subcontracts
were on a time and materials basis, contained confidentiality/noncompete
provisions and could be terminated by either party on 30 days prior notice.
Revenue Recognition -- Time and materials service revenues and related time
and materials service costs are recorded in the period in which the service is
performed. Fixed price service contract revenues and related costs are
recognized upon contract completion under the completed contract method.
Cash and Cash Equivalents -- Cash and cash equivalents include cash on hand
and short-term investments with original maturities of three months or less when
purchased.
Property and Equipment -- Property and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation is based on the
estimated useful lives of the assets and is computed using the straight-line
method. Asset lives range from three to seven years for computers and equipment.
Leasehold improvements are capitalized and amortized over the life of the lease.
Maintenance and repairs are charged to expense as incurred. The cost and
accumulated depreciation applicable to assets retired are removed from the
accounts and the gain or loss on disposition is recognized in income.
Intangible Assets -- Deferred financing costs were capitalized and
amortized over the term of the related credit facility using the straight-line
method which approximates the effective interest rate method. Unamortized
deferred financing costs were charged to operations as an extraordinary item
upon repayment of the Company's long-term debt in November 1999.
F-8
<PAGE> 72
THE MANAGEMENT NETWORK GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JULY 3, 1999 AND JULY 1, 2000 IS
UNAUDITED)
Long-Lived Assets -- The Company, using its best estimates based on
reasonable and supportable assumptions and projections, reviews for impairment
long-lived assets and certain identifiable intangibles to be held and used
whenever events or changes in circumstances indicate that the carrying amount of
its assets might not be recoverable when compared to an estimate of future
undiscounted net cash flows expected to result from the use of these assets.
Management has concluded no financial statement adjustment is currently
required.
Income Taxes -- The Company recognizes a liability or asset for the
deferred tax consequences of temporary differences between the tax basis of
assets or liabilities and their reported amounts in the financial statements. A
valuation allowance is provided when, in the opinion of management, it is more
likely than not that some portion or all of a deferred tax asset will not be
realized.
As described in Note 1, the Company converted to a subchapter "C"
corporation for income tax reporting purposes effective February 12, 1998.
Deferred tax liabilities of approximately $1.1 million were recorded on February
12, 1998, in conjunction with the conversion, for the cumulative temporary
differences (see Note 6). Prior to February 12, 1998, the Company elected to be
treated as a subchapter "S" corporation under the Internal Revenue Code and thus
was treated substantially as a partnership for income tax purposes. Accordingly,
until the time of conversion to a subchapter "C" corporation, the individual
stockholders were responsible for their proportionate share of the corporate
taxable income or loss for federal and state income tax reporting purposes.
Use of Estimates -- The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Foreign Currency Transactions and Translation -- The 1997, fiscal year 1998
and fiscal year 1999 consolidated financial statements include TMNG -- Europe
(located in the United Kingdom). The fiscal year 1998 and fiscal year 1999
consolidated financial statements also include TMNG -- Canada. Both entities
conduct business primarily denominated in their respective local currency.
Assets and liabilities have been translated to U.S. dollars at the period-end
exchange rate. Income and expenses have been translated at exchange rates which
approximate the average of the rates prevailing during each period. Translation
adjustments are reported as a separate component of other comprehensive income
in the consolidated statements of stockholders' equity. Realized and unrealized
exchange gains and losses included in results of operations were insignificant
for all periods presented.
Stock-Based Compensation -- The Company accounts for stock based
compensation for employees in accordance with the provisions of Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees" and related Interpretations and for stock-based compensation for non-
employees in accordance with Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation."
Reverse Stock Split -- Effective November 8, 1999 the Company amended its
Certificate of Incorporation to give effect for a 1-for-2 reverse stock split
for all issued and outstanding shares of voting and non-voting common stock. All
issued and outstanding share and per share data has been retroactively adjusted
to reflect this reverse split.
Warrant Grant -- 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 are
exercisable. The expected fair value of this warrant is approximately $5.2
million based on an expected life of 3 years and will be recognized as future
equity related charges in
F-9
<PAGE> 73
THE MANAGEMENT NETWORK GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JULY 3, 1999 AND JULY 1, 2000 IS
UNAUDITED)
operations. 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.
Net Income Per Share -- Basic net income per share was computed by dividing
net income by the weighted average number of common shares outstanding for the
period. Diluted net income per share reflects the potential dilution of
securities by adding other common stock equivalents, including stock options, in
the weighted average number of common shares outstanding for a period, if
dilutive.
The reconciliation of the net income and weighted average common shares
outstanding included in the computation of basic and diluted net income per
common share for 1997, fiscal year 1998 and fiscal year 1999 is as follows
(amounts in thousands except per share data). There were no dilutive securities
outstanding in 1997.
<TABLE>
<CAPTION>
FISCAL FISCAL
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Net income for basic and diluted earnings per share:
Income before taxes and extraordinary item................ $ 5,504 $ 6,325 $ 7,869
Income tax provision...................................... (3,282) (3,208)
------- ------- -------
Adjusted net income before extraordinary item............. 5,504 3,043 4,661
Extraordinary item........................................ (200)
------- ------- -------
Net income................................................ $ 5,504 $ 3,043 $ 4,461
======= ======= =======
Weighted average shares of common stock outstanding:
Weighted average shares of common stock outstanding for
basic earnings per share............................... 22,500 22,500 23,056
Effect of stock options................................... 444 659
Effect of warrants........................................ 92
------- ------- -------
Weighted average shares of common stock outstanding for
diluted earnings per share............................. 22,500 22,944 23,807
======= ======= =======
Basic earnings per share:
Net income before extraordinary item...................... $ 0.24 $ 0.14 $ 0.20
Extraordinary item........................................ (0.01)
------- ------- -------
Net income................................................ $ 0.24 $ 0.14 $ 0.19
======= ======= =======
Diluted earnings per share:
Net income before extraordinary item...................... $ 0.24 $ 0.13 $ 0.20
Extraordinary item........................................ (0.01)
------- ------- -------
Net income................................................ $ 0.24 $ 0.13 $ 0.19
======= ======= =======
</TABLE>
New Accounting Standards -- The FASB recently issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 was
amended by SFAS no. 137 which requires adoption of the SFAS requirements for
fiscal years beginning after June 30, 2000. This standard establishes accounting
and reporting requirements for derivative financial instruments and hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. In the opinion of management, the effect of adoption
of this standard will not have a material impact to operating results of the
Company.
F-10
<PAGE> 74
THE MANAGEMENT NETWORK GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JULY 3, 1999 AND JULY 1, 2000 IS
UNAUDITED)
Pro Forma Information -- Pro forma information included in the consolidated
statements of income and comprehensive income is unaudited and included to
reflect the pro forma effect of providing income taxes on previously untaxed
subchapter "S" net income. This effect is calculated as follows:
Pro forma income tax expense -- assumed 40% effective tax rate.
Pro forma basic and diluted common shares -- include the effect of
common share issuance and stock option exercise in accordance with SFAS
No. 128, "Earnings per Share."
Fair Value of Financial Instruments -- The fair values of asset and
liability financial instruments approximate the carrying values.
3. MAJOR CUSTOMERS AND SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
Major customers in terms of significance to TMNG's revenues (i.e. in excess
of 10% of revenues) for the year ended December 31, 1997 and fiscal years 1998
and 1999, and accounts receivable as of January 2, 1999 and January 1, 2000 are
as follows (amounts in thousands):
<TABLE>
<CAPTION>
REVENUES ACCOUNTS RECEIVABLE
------------------------------------ ------------------------
FISCAL YEAR FISCAL YEAR JANUARY 2, JANUARY 1,
1997 1998 1999 1999 2000
------ ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Customer A.................... $7,928
Customer B.................... 2,524
Customer C.................... $4,138 $1,121
Customer D.................... 4,093 2,354
Customer E.................... 5,412 $19,925 1,440 $4,598
Customer F.................... 7,322 1,550
</TABLE>
All of TMNG's receivables are obligations of companies in the
telecommunications industry. The Company generally does not require collateral
or other security on their accounts receivable. The credit risk on these
accounts is controlled through credit approvals, limits and monitoring
procedures.
A non-executive member of the TMNG board of directors also serves as a
non-executive director of Customer E.
Revenue earned outside the United States for the year ended December 31,
1997 was not significant. Revenues earned in the United States and
internationally based on domiciles of project owner for fiscal year 1998 and
fiscal year 1999 are as follows: (amounts in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR 1998 FISCAL YEAR 1999
------------------------- ----------------------------
INCOME BEFORE
INCOME TAXES AND
INCOME BEFORE EXTRAORDINARY
REVENUES INCOME TAXES REVENUES ITEM
-------- ------------- -------- ----------------
<S> <C> <C> <C> <C>
United States..................... $26,914 $5,336 $36,375 $5,688
International:
Switzerland..................... 758 150 7,322 1,145
Canada.......................... 3,541 697 2,211 346
Ireland......................... 1,826 286
United Kingdom.................. 448 88 1,567 245
Other........................... 442 54 1,021 159
------- ------ ------- ------
Total................... $32,103 $6,325 $50,322 $7,869
======= ====== ======= ======
</TABLE>
No significant long-lived assets are deployed outside the United States.
F-11
<PAGE> 75
THE MANAGEMENT NETWORK GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JULY 3, 1999 AND JULY 1, 2000 IS
UNAUDITED)
TMNG currently operates in one segment, consulting to the
telecommunications industry, based on the way management makes decisions,
allocates resources and assesses performance.
4. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
JANUARY 2, JANUARY 1,
1999 2000
---------- ----------
(000'S)
<S> <C> <C>
Furniture and fixtures................................. $ 69 $224
Software and computer equipment........................ 256 514
Leasehold improvements................................. 130 159
---- ----
455 897
Less: accumulated depreciation and amortization........ 30 191
---- ----
$425 $706
==== ====
</TABLE>
Depreciation and amortization expense was approximately $30,000 and
$161,000 for fiscal year 1998 and fiscal year 1999, respectively.
5. LONG-TERM DEBT
<TABLE>
<CAPTION>
JANUARY 2,
1999
----------
(000'S)
<S> <C>
Term loans.................................................. $24,000
Revolving credit facility................................... 2,017
-------
26,017
Less long-term debt -- current portion...................... 1,300
-------
$24,717
=======
</TABLE>
As of January 2, 1999, the Company had a $29.0 million secured credit
facility, as amended, with substantially all assets of the Company pledged as
collateral. During November 1999, the Company paid off all outstanding debt
amounts and terminated a related interest rate cap agreement.
The weighted average interest rate for the revolving line of credit was
9.59% and 9.03% in fiscal years 1998 and 1999, respectively.
F-12
<PAGE> 76
THE MANAGEMENT NETWORK GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JULY 3, 1999 AND JULY 1, 2000 IS
UNAUDITED)
6. INCOME TAXES
For the fiscal year 1998 and fiscal year 1999, the income tax provision
consists of the following (amounts in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR
1998 1999
----------- -----------
<S> <C> <C>
Federal
Current............................................. $2,090 $ 3,602
Deferred tax benefit................................ (391) (1,708)
------ -------
1,699 1,894
State
Current............................................. 491 990
Deferred tax benefit................................ (40) (244)
------ -------
451 746
Foreign............................................... 64 568
------ -------
2,214 3,208
Deferred recorded on conversion to subchapter "C"
Corporation......................................... 1,068
------ -------
Total............................................ $3,282 $ 3,208
====== =======
</TABLE>
The following is a reconciliation between the provision for income taxes
and the amounts computed at the statutory federal income tax rate (amounts in
thousands):
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR
1998 1999
-------------- --------------
AMOUNT % AMOUNT %
------ ---- ------ ----
<S> <C> <C> <C> <C>
Computed expected federal income tax expense........ $2,214 35.0 $2,754 35.0
State income tax expense, net of federal benefit.... 285 4.5 437 5.6
Conversion to subchapter "C" corporation............ 1,068 16.9
Subchapter "S" corporation earnings (January 1, 1998
to February 11, 1998)............................. (318) (5.0)
Other............................................... 33 0.5 17 0.2
------ ---- ------ ----
Total..................................... $3,282 51.9 $3,208 40.8
====== ==== ====== ====
</TABLE>
Items giving rise to the provision for deferred income taxes (benefit)
excluding the deferred tax expense recorded on conversion to subchapter "C"
corporation (amounts in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR
1998 1999
----------- -----------
<S> <C> <C>
Bad debt reserve............................................ $ (20) $ (94)
Stock option compensation expense........................... (104) (1,492)
Change from cash to accrual tax basis accounting............ (270) (262)
Other....................................................... (37) (104)
----- -------
Total............................................. $(431) $(1,952)
===== =======
</TABLE>
F-13
<PAGE> 77
THE MANAGEMENT NETWORK GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JULY 3, 1999 AND JULY 1, 2000 IS
UNAUDITED)
The significant components of deferred income tax assets and liabilities
and the related balance sheet classifications, as of January 2, 1999 and January
1, 2000 are as follows (amounts in thousands):
<TABLE>
<CAPTION>
JANUARY 2, JANUARY 1,
1999 2000
---------- ----------
<S> <C> <C>
Current deferred tax assets (liabilities):
Bad debt reserve.......................................... $ 46 $ 140
Prepaid expenses.......................................... (19)
Accrued expenses.......................................... 57 137
Change from cash to accrual tax basis
accounting -- current portion.......................... (270) (274)
----- ------
Net current deferred tax asset (liability)........ $(186) $ 3
===== ======
Non-current deferred tax assets (liabilities):
Change from cash to accrual tax basis accounting.......... $(540) $ (274)
TMNG -- Europe -- cumulative net operating losses......... 134 125
Stock option compensation expense......................... 104 1,596
Other..................................................... (15) (10)
----- ------
(317) 1,437
Valuation allowance....................................... (134) (125)
----- ------
Net non-current deferred tax asset (liability).... $(451) $1,312
===== ======
</TABLE>
The Company has foreign net operating loss carryforwards totaling
approximately $447,000 and $417,000 as of January 2, 1999 and January 1, 2000,
respectively. The utilization of such net operating loss carryforwards is
restricted to the earnings of specific foreign subsidiaries. A valuation
allowance has been established for the Company's deferred income tax asset
related to the future benefit of net operating losses related to TMNG -- Europe,
as management cannot assess the likelihood that the future tax benefit will be
realized in that tax jurisdiction. An allowance of $134,000 and $125,000 has
been recorded as of January 2, 1999 and January 1, 2000, respectively.
7. OPERATING LEASES
The Company leases office facilities and an automobile under non-cancelable
operating leases expiring at various dates through May 2004. Total rental
expense was approximately $27,000, $40,000 and $110,000 for 1997, fiscal year
1998 and fiscal year 1999, respectively. As of January 1, 2000, the future
minimum payments under operating leases are as follows (amounts in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR
-----------
<S> <C>
2000........................................................ $ 87
2001........................................................ 82
2002........................................................ 83
2003........................................................ 58
2004........................................................ 2
----
$312
====
</TABLE>
8. STOCK OPTION PLAN AND STOCK BASED COMPENSATION
The Company has 1,950,000 shares of the Company's Common Stock authorized
for issuance under the Company's 1998 Equity Incentive Plan (the "Plan"). The
Plan is the result of the combination of two plans during fiscal 1999. The Plan
provides the Company's Common Stock for the granting of incentive
F-14
<PAGE> 78
THE MANAGEMENT NETWORK GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JULY 3, 1999 AND JULY 1, 2000 IS
UNAUDITED)
stock options and nonqualified stock options to employees, and nonqualified
stock options to employees, directors and consultants. Incentive stock options
are granted at an exercise price of not less than fair value per share of the
common stock on the date of grant as determined by the board of directors.
Vesting and exercise provisions are determined by the board of directors.
Options granted under the Plan generally become exercisable over a three to four
year period beginning on the date of grant. Options granted under the Plan have
a maximum term of ten years.
FISCAL YEAR 1998 OPTIONS GRANTED
<TABLE>
<CAPTION>
WEIGHTED
WEIGHTED WEIGHTED AVERAGE
NUMBER AVERAGE AVERAGE FAIR REMAINING
OF EXERCISE VALUE AT DATE CONTRACTUAL
SHARES PRICE OF GRANT LIFE (YEARS)
------- -------- ------------- ------------
<S> <C> <C> <C> <C>
Exercise price equals fair market value:
Granted during fiscal year 1998........... 889,750 $1.48 $1.48 --
Outstanding at January 2, 1999............ 889,750 $1.48 $1.48 --
Exercisable at January 2, 1999............ -- $ -- $ -- --
Outstanding at January 1, 2000............ 736,081 $1.48 $1.48 8.50
Options forfeited during fiscal year
1999................................... 22,500 $1.48 $1.48 --
Exercisable at January 1, 2000............ 189,581 $1.48 $1.48 --
Exercised during fiscal year 1999......... 131,169 $1.48 $1.48 --
Exercise price less than fair market value:
Granted during fiscal year 1998........... 210,000 $1.52 $3.50 --
Outstanding at January 2, 1999............ 210,000 $1.52 $3.50 --
Exercisable at January 2, 1999............ -- $ -- $ -- --
Outstanding at January 1, 2000............ 210,000 $1.52 $3.50 9.00
Exercisable at January 1, 2000............ 70,000 $1.52 $3.50 --
</TABLE>
FISCAL YEAR 1999 OPTIONS GRANTED
<TABLE>
<CAPTION>
WEIGHTED
WEIGHTED WEIGHTED AVERAGE
NUMBER AVERAGE AVERAGE FAIR REMAINING
OF EXERCISE VALUE AT DATE CONTRACTUAL
SHARES PRICE OF GRANT LIFE (YEARS)
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
Exercise price less than fair market value:
Granted during fiscal year 1999.......... 1,174,625 $2.38 $10.62 --
Outstanding at January 1, 2000........... 1,074,625 $2.37 $10.71 9.69
Exercisable at January 1, 2000........... 37,500 $2.00 $ 8.90 --
Exercised during fiscal year 1999........ 100,000 $2.50 $ 9.68 --
</TABLE>
The Company applies APB Opinion No. 25 ("APB 25") and related
interpretations in accounting for its stock option grants to employees and
non-employee directors. Options granted prior to December 8, 1998 were issued at
fair value. Options granted subsequent to December 7, 1998 were issued at less
than fair value. In connection with APB 25 grants issued in fiscal year 1998 and
fiscal year 1999, the Company recorded unearned compensation of approximately
$305,000 and $11.2 million, respectively, representing the difference between
the exercise price and the fair value of the common stock on the dates such
stock options were granted. Such amount is being amortized by charges to
operations on a graded vesting method over the corresponding vesting period of
each respective option, generally three to four years. Compensation expense for
fiscal year 1998 was insignificant due to the short period the grants with
unearned compensation were outstanding.
F-15
<PAGE> 79
THE MANAGEMENT NETWORK GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JULY 3, 1999 AND JULY 1, 2000 IS
UNAUDITED)
The Company accounts for its stock option awards to independent contractors
and other non-employees in accordance with the fair value measurement provision
of SFAS No. 123. Consequently, the cost of these options are recognized in the
current and future reporting periods based on the fair value at the end of each
period. The fair value of each option grant during fiscal year 1998 and fiscal
year 1999 was estimated on the date of grant using the Black-Scholes option
pricing model with the following assumptions:
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR
1998 1999
------------ ------------
<S> <C> <C>
Expected volatility factor............................... 55% 60%
Risk-free interest rate.................................. 4.24% - 5.65% 4.56% - 5.60%
Expected life............................................ 5 years 5 years
Expected dividend rate................................... 0% 0%
</TABLE>
The Company recognizes compensation cost over the vesting periods. These
options have resulted in equity related charges to operations of approximately
$261,000 and $4.3 million for fiscal year 1998 and fiscal year 1999,
respectively. These expenses have been allocated among various expense
categories.
If compensation cost for the Company's APB 25 grants had been determined
based upon the fair value at the grant date, consistent with the Black-Scholes
option pricing methodology using the assumptions above, the Company's net income
for fiscal year 1998 and fiscal year 1999 would have decreased by approximately
$66,000 and $280,000, respectively.
For purposes of pro forma disclosures, the estimated fair value of options
is amortized to pro forma expense over the options' vesting period. Pro forma
information for fiscal year 1998 and fiscal year 1999 (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR
1998 1999
----------- -----------
<S> <C> <C>
Net Income before extraordinary item:
As reported............................................... $3,043 $4,661
====== ======
Pro forma................................................. $2,977 $4,381
====== ======
Basic and diluted net income before extraordinary item per
share:
Basic..................................................... $ 0.14 $ 0.20
====== ======
Diluted................................................... $ 0.13 $ 0.20
====== ======
Basic and diluted pro forma net income before extraordinary
item per share:
Basic..................................................... $ 0.13 $ 0.19
====== ======
Diluted................................................... $ 0.13 $ 0.18
====== ======
</TABLE>
During fiscal year 1999, the Company issued 71,201 shares of common stock
representing bonus compensation to certain employees. The Company calculated
expense related to these shares at the fair value of the shares at the date of
issuance. Accordingly, compensation expense of $441,000 was charged to
operations.
9. RELATED PARTY TRANSACTIONS
Two members of the TMNG board of directors are also directors of a customer
with which TMNG does business. During fiscal year 1998 and fiscal year 1999, the
Company earned revenues from this
F-16
<PAGE> 80
THE MANAGEMENT NETWORK GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JULY 3, 1999 AND JULY 1, 2000 IS
UNAUDITED)
customer of approximately $330,000 and $2.6 million, respectively. Receivables
from this customer at January 2, 1999 and January 1, 2000 were approximately
$275,000 and $396,000, respectively. Additionally, venture funds affiliated with
TMNG's majority shareholder hold shares of preferred stock of this customer that
are convertible into approximately 25% of the customer's outstanding common
stock.
Prior to January 3, 1999 TMNG subcontracted with five companies owned by
certain stockholders and employees of TMNG. These companies provided consultants
(acting as independent contractors) to TMNG to render consulting services to
TMNG customers. Total services received from these companies was approximately
$9.6 million and $14.9 million in 1997 and fiscal 1998, respectively, and are
included in cost of services in the statements of income representing the fair
value of the services provided. Included in accounts payable at January 2, 1999
are balances due for such services of approximately $332,000.
During 1997, fiscal year 1998 and fiscal year 1999, TMNG made payments of
approximately $200,000, $77,000 and $105,000, respectively, to a company owned
by a significant stockholder of TMNG. In addition, TMNG made a payment of
$100,000 in 1997 to a stockholder. Such payments were for services rendered
under consulting agreements between TMNG and the respective affiliated company
and/or shareholder. These expenses were classified as selling, general and
administrative in the accompanying statements of income and comprehensive
income.
During 1997 TMNG incurred interest expense on notes and distributions
payable of approximately $30,000 for certain related parties. The interest rate
applied was 7.0%.
10. CONTINGENCIES
During 1997, one of the Company's customers entered Chapter 11 of the
bankruptcy code. According to the bankruptcy code, certain payments made within
a specified period of time prior to the date of the bankruptcy filing and
payments made subsequent to the date of the bankruptcy filing which are not
previously authorized, could be declared "preference payments". Under certain
conditions, preference payments could be required to be remitted to the
bankruptcy trustee for satisfaction of general creditor claims. During 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.
During 1997, the Company discovered that its TMNG-Europe general manager
and director had drawn Company funds without authorization. The director
resigned from TMNG-Europe during the year ended December 31, 1997 and claimed
that he was owed unpaid remuneration and reimbursable expenses. During 1998, the
Company received approximately $92,000 from the former director in settlement of
the claim.
The Company may become involved in various legal and administrative actions
arising in the normal course of business. These could include actions raised by
taxing authorities challenging the employment status of consultants utilized by
the Company. While the resolution of any of such actions or the matter described
above may have an impact on the financial results for the period in which it is
resolved, the Company believes that the ultimate disposition of these matters
will not have a material adverse effect upon its consolidated results of
operations, cash flows or financial position.
F-17
<PAGE> 81
THE MANAGEMENT NETWORK GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JULY 3, 1999 AND JULY 1, 2000 IS
UNAUDITED)
11. INTERIM FINANCIAL STATEMENTS (UNAUDITED)
Basis of presentation -- The consolidated condensed financial statements of
the Company as of July 1, 2000, and for the six months ended July 1, 2000 and
July 3, 1999, are unaudited and reflect all 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. All such adjustments are of
normal, recurring nature. The interim results of operations shown are not
necessarily indicative of results that may be expected for the entire fiscal
year.
Net income 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>
SIX MONTHS ENDED
----------------------------
JULY 3, 1999 JULY 1, 2000
------------ ------------
<S> <C> <C>
Numerator
Net income................................................ $ 2,262 $ 3,931
Denominator
Weighted average common shares............................ 22,507 27,443
Weighted average unvested and vested common shares........ 1,096 2,858
Weighted average unvested and vested common shares
Subject to repurchase.................................. (612) (1,637)
Denominator for basic calculation........................... 22,507 27,443
Denominator for diluted calculation......................... 22,991 28,664
Basic and diluted net income per share...................... $ .10 $ .14
</TABLE>
Warrant grant and Stock Based Compensation -- Equity related charges to
cost of services associated with the warrant charges during the first six months
of fiscal year 2000 totaled $2.0 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.
During the six months ended July 1, 2000, the Company granted approximately
594,000 stock options to employees and approximately 38,000 stock options to a
non-employee director at a weighted average exercise price of $22.62, and
options for approximately 45,000 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 $2.7 million.
In accordance with the provisions of the 1998 Equity Incentive Plan, an
annual increase of 1,370,868 additional authorized shares became available for
award under the Plan as of January 2, 2000.
New Accounting Standards -- 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.
F-18
<PAGE> 82
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COMMON STOCK
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