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| TMNG > SEC Filings for TMNG > Form 10-Q on 12-Nov-2008 | All Recent SEC Filings |
12-Nov-2008
Quarterly Report
Cost of services consists primarily of compensation for consultants who are
employees and amortization of share-based compensation for stock options and
nonvested stock (restricted stock), as well as fees paid to independent
contractor organizations and related expense reimbursements. Employee
compensation includes certain non-billable time, training, vacation time,
benefits and payroll taxes. Gross margins are primarily impacted by the type of
consulting services provided; the size of service contracts and negotiated
discounts; changes in our pricing policies and those of competitors; utilization
rates of consultants and independent subject matter experts; and employee and
independent contractor costs, which tend to be higher in a competitive labor
market.
Gross margins were 45.7% in the thirty-nine weeks ended September 27, 2008
compared with 46.5% in the same period of 2007. Gross margins were 43.5% for the
thirteen weeks ended September 27, 2008 compared with 49.5% for the same period
of 2007. The decline in gross margin percentage in the 2008 periods as compared
to the same periods of 2007 is primarily due to both a reduction during 2008 in
project revenues on higher margin fixed price projects and the related impact on
consultant utilization as a result of such project reductions. We continue to
evaluate the size of our employee consultant base and reduce the base as
required to align to reduced revenue levels and a more challenging economic
environment.
Sales and marketing expenses consist primarily of personnel salaries, bonuses,
and related costs for direct client sales efforts and marketing staff. We
primarily use a relationship sales model in which partners, principals and
senior consultants generate revenues. In addition, sales and marketing expenses
include costs associated with marketing collateral, product development, trade
shows and advertising. General and administrative expenses consist mainly of
costs for accounting, recruiting and staffing, information technology,
personnel, insurance, rent, and outside professional services incurred in the
normal course of business.
Management has focused on aligning operating costs with operating segment
revenues. As a percentage of revenues, we have reduced selling, general and
administrative expenses to 40.0% in the thirty-nine weeks ended September 27,
2008 from 44.6% in the same period of 2007. Selling general and administrative
expenses in the 2008 period include a net increase of approximately $0.4 million
in share-based compensation expenses due primarily to adjustments to our
forfeiture assumptions in the first quarter of 2007 that resulted in a reduction
in expense in the 2007 period. We continue to leverage integration of our recent
acquisitions and evaluate selling, general and administrative expense reduction
opportunities to improve earnings.
Intangible asset amortization increased substantially to $3.4 million in the
thirty-nine weeks ended September 27, 2008 from $2.1 million in the same period
of 2007. The increase in amortization expense was due to the amortization of
intangibles recorded in connection with the RVA and TWG acquisitions.
We recorded net loss of $9.8 million for the thirty-nine weeks ended
September 27, 2008 compared to a net loss of $2.8 million for the thirty-nine
weeks ended September 29, 2007. The increase in net loss is primarily
attributable to a $9.1 million impairment of goodwill related to our strategy
business and a $1.1 million impairment of intangible assets within our
Management Consulting Services Segment, partially offset by the benefits of
scale as a result of increased revenues combined with effective cost management
initiatives.
Although the year over year growth in our business has been positive, the more
recent economic outlook has added significant challenges to our clients in the
communications and media sector. The result is reduced client spend on capital
and operational initiatives. This reduction in spending, coupled with increased
competition pursuing fewer opportunities could result in further price
reductions, fewer client projects, under utilization of consultants, reduced
operating margins, and loss of market share. Declines in our revenues can have a
significant impact on our financial results. Although we have a very flexible
cost base comprised primarily of employee and related costs, there is a lag in
time required to scale the business appropriately if revenues are reduced. In
addition, our future revenues and operating results may fluctuate from quarter
to quarter based on the number, size and scope of projects in which we are
engaged, the contractual terms and degree of completion of such projects, any
delays incurred in connection with a project, consultant utilization rates, the
use of estimates to complete ongoing projects, general economic conditions and
other factors.
From a cash flow perspective, cash flows provided by operating activities were
$7.1 million during the thirty-nine weeks ended September 27, 2008. Net cash
flows provided by operating activities were $1.1 million during the thirty-nine
weeks ended September 29, 2007. The improvement in cash flows from operating
activities during the thirty-nine weeks ended September 27, 2008 as compared
with the same 2007 period primarily related to revenue scale and cost and
working capital management, including non-recurring payments of $2.5 million
made in the 2007 period related to the Special Committee investigation of our
past stock option granting practices and related accounting, and positive cash
flow from net working capital changes.
At September 27, 2008, we have working capital of approximately $14 million and
minimal long-term obligations. Additionally, our non-current investments consist
of $14.0 million in auction rate securities guaranteed through the Federal
Family Education Loan Program of the U.S. Department of Education. Due to recent
events in the credit markets, the liquidity of auction rate securities has been
negatively impacted. See Note 2, "Auction Rate Securities," in Notes to
Condensed Consolidated Financial Statements (Unaudited) and "Critical Accounting
Policies" below for further discussion of our auction rate securities.
CRITICAL ACCOUNTING POLICIES
While the selection and application of any accounting policy may involve some
level of subjective judgments and estimates, we believe the following accounting
policies are the most critical to our condensed consolidated financial
statements, potentially involve the most subjective judgments in their selection
and application, and are the most susceptible to uncertainties and changing
conditions:
• Marketable Securities;
• Allowance for Doubtful Accounts;
• Fair Value of Acquired Businesses;
• Impairment of Goodwill and Long-lived Assets;
• Revenue Recognition;
• Share-based Compensation Expense;
• Accounting for Income Taxes; and
• Research and Development and Capitalized Software Costs.
Marketable Securities - Short-term investments and non-current investments,
which consist of auction rate securities, are classified as "available for sale"
under the provisions of Statement of Financial Accounting Standards ("SFAS")
No. 115, "Accounting for Certain Investments in Debt and Equity Securities."
Accordingly, these investments are reported at fair value, as measured pursuant
to SFAS No. 157, "Fair Value Measurements," with any temporary unrealized gains
and losses included as a separate component of stockholders' equity, net of
applicable taxes, when applicable. Realized gains and losses, changes in value
judged to be other-than-temporary, interest and dividends are included in
interest income within the Consolidated Statements of Operations and
Comprehensive (Loss) Income.
The auction rate securities we hold are generally long-term debt instruments
that historically provided liquidity through a Dutch auction process through
which interest rates reset every 28 to 35 days; consequently, interest rate
movements did not materially affect the fair value of these investments. At
December 29, 2007 there were no unrealized gains or losses on short-term
investments. Given the liquidity created by the auctions, auction rate
securities were presented as current assets under short-term investments on our
balance sheet. Beginning in February 2008, auctions of our auction rate
securities portfolio failed to receive sufficient order interest from potential
investors to clear successfully, resulting in failed auction status. The
principal associated with failed auctions will not be accessible until a
successful auction occurs, a buyer is found outside of the auction process, the
issuers redeem the securities, the issuers establish a different form of
financing to replace these securities or final payments come due according to
contractual maturities ranging from approximately 22 to 36 years. For each
unsuccessful auction, the interest rate moves to a maximum rate defined for each
security. In the event we are able to successfully liquidate our auction rate
securities portfolio we intend to reinvest these balances into money market or
similar investments. At this time, we are uncertain as to when the liquidity
issues related to these investments will improve. Accordingly, the entire amount
of auction rate securities is classified as non-current assets on our balance
sheet as of September 27, 2008.
We value our auction rate securities portfolio using a model that takes into
consideration inputs that are based on expected cash flow streams and collateral
values, including assessments of counterparty credit quality, default risk
underlying the security, discount rates and overall capital market liquidity.
Although the auction rate securities are guaranteed through the Federal Family
Education Loan Program of the U.S. Department of Education and continue to pay
interest according to their stated terms, based on our analysis of the fair
value of these securities, we recorded an impairment related to these auction
rate securities. Auction rate securities with an original par value of
approximately $14.8 million were written-down to an estimated fair value of
$14.0 million as of September 27, 2008. Based on our analysis of
other-than-temporary impairment factors, this write-down resulted in temporary
impairment charges of approximately $0.4 million and $0.8 million reflected as
an unrealized loss within other comprehensive income for the thirteen weeks and
thirty-nine weeks ended September 27, 2008. The increase in the unrealized loss
during the thirteen weeks ended September 27, 2008 is due to a decline in the
coupon rates on the auction rate securities while the market yields on similar
investments increased during the period.
During the thirteen weeks ended September 27, 2008, state and federal regulators
reached settlement agreements with both of the brokers who advised the Company
to purchase the auction rate securities currently held by the Company. The
settlement agreements with the regulators were intended to eventually provide
liquidity for holders of auction rate securities. Subsequent to September 27,
2008, we received a settlement offer from a broker who holds $7.6 million par
value of the Company's auction rate securities. If accepted, the settlement
offer would provide the Company with the ability to require the broker to redeem
the securities for their par value during a two-year period beginning June 30,
2010. In addition to ultimate liquidation of the securities, the settlement
offer provides the Company with the opportunity to obtain no-cost loans prior to
June 30, 2010 up to the par value of its auction rate securities. The Company
has not yet received a settlement offer from the broker holding our remaining
auction rate securities.
We continually monitor the credit quality and liquidity of our auction rate
securities. To the extent we believe we will not be able to collect all amounts
due according to the contractual terms of a security, we will record an
other-than-temporary impairment. This could require us to recognize losses in
our consolidated statement of operations in accordance with SFAS No. 115, which
could be material.
Allowances for Doubtful Accounts - Substantially all of our receivables are owed
by companies in the communications industry. We typically bill customers for
services after all or a portion of the services have been performed and require
customers to pay within 30 to 60 days. We attempt to control credit risk by
being diligent in credit approvals, limiting the amount of credit extended to
customers and monitoring customers' payment records and credit status as work is
being performed for them.
We recorded bad debt recoveries of $150,000 for the thirteen and thirty-nine
weeks ended September 27, 2008 and bad debt expense of $90,000 and $380,000 for
the thirteen and thirty-nine weeks ended September 29, 2007. Our allowance for
doubtful accounts totaled $494,000 and $562,000 as of September 27, 2008 and
December 29, 2007, respectively. The calculation of these amounts is based on
judgment about the anticipated default rate on receivables owed to us as of the
end of the reporting period. That judgment is based on uncollected account
experience in prior years and our ongoing evaluation of the credit status of our
customers and the communications industry in general.
We have attempted to mitigate credit risk by concentrating our marketing efforts
on the largest and most stable companies in the communications industry and by
tightly controlling the amount of credit provided to customers. If we are
unsuccessful in these efforts, or if our customers file for bankruptcy or
experience financial difficulties, it is possible that the allowance for
doubtful accounts will be insufficient and we will have a greater bad debt loss
than the amount reserved, which would adversely affect our financial performance
and cash flow.
Fair Value of Acquired Businesses - TMNG has acquired seven organizations over
the last six years. A significant component of the value of these acquired
businesses has been allocated to intangible assets. Statement of Financial
Accounting Standard ("SFAS") No. 141 "Business Combinations" requires acquired
businesses to be recorded at fair value by the acquiring entity. SFAS No. 141
also requires that intangible assets that meet the legal and separable criterion
be separately recognized on the financial statements at their fair value, and
provides guidance on the types of intangible assets subject to recognition.
Determining the fair value for these specifically identified intangible assets
involves significant professional judgment, estimates and projections related to
the valuation to be applied to intangible assets like customer lists, employment
agreements and tradenames. The subjective nature of management's assumptions
adds an increased risk associated with estimates surrounding the projected
performance of the acquired entity. Additionally, as the Company amortizes the
intangible assets over time, the purchase accounting allocation directly impacts
the amortization expense the Company records on its financial statements.
Impairment of Goodwill and Long-lived Assets - As of September 27, 2008, we have
$8.8 million in goodwill and $6.3 million in long-lived intangible assets, net
of accumulated amortization. Goodwill and other long-lived intangible assets
arising from our acquisitions are subjected to periodic review for impairment.
SFAS No. 142 "Goodwill and Other Intangible Assets" requires an evaluation of
these assets annually and whenever events or circumstances indicate that such
assets may be impaired. The evaluation is conducted at the reporting unit level
of the fair value of goodwill and compares the calculated fair value of the
reporting unit to its book value to determine whether impairment has been deemed
to occur. Any impairment charge would be based on the most recent estimates of
the recoverability of the recorded goodwill. If the remaining book value
assigned to goodwill in an acquisition is higher than the estimated fair value
of the reporting unit, there is a requirement to write down these assets. The
determination of fair value requires management to make assumptions about future
cash flows and discount rates. These assumptions require significant judgment
and estimations about future events and are thus subject to significant
uncertainty. If actual cash flows turn out to be less than projected, we may be
required to take further write-downs, which could increase the variability and
volatility of our future results.
In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," we use our best estimates based upon reasonable and
supportable assumptions and projections to review for impairment of long-lived
assets and certain identifiable intangibles to be held and used whenever events
or changes in circumstances indicate that the carrying amount of our assets
might not be recoverable.
During the second quarter of 2008, we recognized a $9.1 million charge for the
impairment of the carrying amount of goodwill in the Management Consulting
Services Segment. The impairment charge was the result of a reduction in the
size and scope of operations which impacted our assessment of future cash flows
of the strategy business. During the third quarter of 2008, we recognized a $1.1
million charge for the impairment of the carrying amount of intangible assets in
the Management Consulting Services Segment. The impairment charge was related to
the evaluation of the value of our S3 license agreement and intangibles related
to our acquisition of TWG. See Note 5, "Goodwill and Other Identifiable
Intangible Assets" in the Notes to Condensed Consolidated Financial Statements
(Unaudited).
Revenue Recognition - We recognize revenue from time and materials consulting
contracts in the period in which our services are performed. In addition to time
and materials contracts, our other types of contracts include time and materials
contracts not to exceed contract price, fixed fee contracts, and contingent fee
contracts. We recognize revenues on milestone or deliverables-based fixed fee
contracts and time and materials contracts not to exceed contract price using
the percentage of completion method prescribed by AICPA Statement of Position
("SOP") No. 81-1, "Accounting for Performance of Construction-Type and Certain
Production-Type Contracts." For fixed fee contracts where services are not based
on providing deliverables or achieving milestones, the Company recognizes
revenue on a straight-line basis over the period during which such services are
expected to be performed. In connection with some fixed fee contracts, we
receive payments from
customers that exceed recognized revenues. We record the excess of receipts from
customers over recognized revenue as deferred revenue. Deferred revenue is
classified as a current liability to the extent it is expected to be earned
within twelve months from the date of the balance sheet.
As a result of the Cartesian acquisition, we now develop, install and support
customer software in addition to our traditional consulting services. We
recognize revenue in connection with our software sales agreements utilizing the
percentage of completion method prescribed by SOP No. 81-1. These agreements
include software right-to-use licenses ("RTU's") and related customization and
implementation services. Due to the long-term nature of the software
implementation and the extensive software customization based on customer
specific requirements normally experienced by the Company, both the RTU and
implementation services are treated as a single element for revenue recognition
purposes.
The SOP No. 81-1 percentage-of-completion methodology involves recognizing
revenue using the percentage of services completed, on a current cumulative cost
to total cost basis, using a reasonably consistent profit margin over the
period. Due to the longer term nature of these projects, developing the
estimates of costs often requires significant judgment. Factors that must be
considered in estimating the progress of work completed and ultimate cost of the
projects include, but are not limited to, the availability of labor and labor
productivity, the nature and complexity of the work to be performed, and the
impact of delayed performance. If changes occur in delivery, productivity or
other factors used in developing the estimates of costs or revenues, we revise
our cost and revenue estimates, which may result in increases or decreases in
revenues and costs, and such revisions are reflected in income in the period in
which the facts that give rise to that revision become known.
In addition to the professional services related to the customization and
implementation of its software, the Company also provides post-contract support
. . .
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