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| TMNG > SEC Filings for TMNG > Form 10-Q on 19-May-2009 | All Recent SEC Filings |
19-May-2009
Quarterly Report
recession, helping us to expand our global presence. We continue to focus our
efforts on identifying, adapting to and capitalizing on the changing dynamics
prevalent in the converging communications industry, as well as providing our
wireless and IP services within the communications sector.
The convergence of communications with media and entertainment and the
consolidation of large telecommunications carriers have required us to focus our
strategy on building a global presence, continuing to expand our offerings and
strengthening our position within the large carriers and media and entertainment
companies. We have demonstrated recent success on building a global presence and
enhancing our position with our top 10 clients. Over a two year period including
fiscal years 2007 and 2008 our total revenues grew by approximately 118%, driven
primarily by acquisitions and complemented through select organic growth
initiatives. Our international revenues grew to roughly one-third of total
revenue during the thirteen weeks ended April 4, 2009 from 21% in fiscal year
2006.
Our financial results are affected by macroeconomic conditions, credit market
conditions, and the overall level of business confidence. The current global
economic downturn has reduced capital and operating spend and resulted in
significant employee layoffs for our clients in the communications, media and
entertainment sectors. During the first quarter of 2009, our consulting and
software solutions segments continued to feel the impact of the economy, as
measured by lower demand for consultants, deferral of projects and specifically
the reduction in strategy-related project opportunities. We are also seeing
greater pricing pressure and an increased need for enhanced return on investment
for projects or added sharing of risk and reward.
Our revenues are denominated in multiple currencies and have recently been
unfavorably affected by currency rate fluctuations. Beginning in the fourth
quarter of fiscal 2008, the U.S. dollar began to strengthen against many
currencies and this has resulted in unfavorable currency translation to our
consolidated financial statements. During the first quarter of 2009, the impact
of currency rate fluctuations and foreign currency translation were minimal.
However, when compared to the first quarter of 2008, the U.S. dollar has
strengthened considerably against the British pound sterling, resulting in an
unfavorable impact to our consolidated financial statements. During the quarter,
the Company entered into foreign currency forward contracts with a notional
amount of $1.2 million. These forward contracts provide an economic hedge of
fluctuations in euro denominated accounts receivable against the British pound.
We provide such hedges when our contracts are denominated in a currency for
which we do not have a natural hedge through our operating cost structures. In
the future, changes to the U.S dollar valuation against other currencies could
have a significant positive or negative impact on our financial results.
Revenues are driven by the ability of our team to secure new project contracts
and deliver those projects in a way that adds value to our client in terms of
return on investment or assisting clients address a need or implement change.
For the thirteen weeks ended April 4, 2009, revenues declined 34% to
$14.2 million from $21.5 million for the thirteen weeks ended March 29, 2008.
Generally our client relationships begin with a short-term consulting 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. Strategic alliances with
other companies are also used to sell services. We anticipate that we will
continue to pursue these marketing strategies in the future. The volume of work
performed for specific clients may vary from period to period and a major client
from one period may not use our services or the same volume of services in
another period. In addition, clients generally may end their engagements with
little or no penalty or notice. If a client engagement ends earlier than
expected, we must re-deploy professional service personnel as any resulting
non-billable time could harm margins.
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 38.6% in the thirteen weeks ended April 4, 2009 compared with
47.0% in the same period of 2008. The decrease in gross margin in the first
quarter of 2009 as compared to the same period of 2008 is due to a combination
of factors. The most significant items that impact our margins include the mix
of project types, utilization of personnel and pricing decisions. During the
first quarter of 2009, the volume of strategy related projects was down
approximately 30% from the comparable period of 2008. Strategy projects
generally provide us with our highest gross margins. In addition, given the
challenging macroeconomic environment and reduced consulting demand, we have
provided clients reduced pricing for long term project commitment and volume
increases.
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. Selling, general and administrative expenses have been reduced
$1.4 million, a decline of 16%, to $7.4 million during the thirteen weeks ended
April 4, 2009 from $8.8 million for the thirteen weeks ended March 29, 2008.
However, with the decline in revenues selling, general and administrative
expense have increased as a percentage of revenues to 52.2% in the thirteen
weeks ended April 4, 2009 from 41.0% in the thirteen weeks ended March 29, 2008.
During the first quarter of 2009, we continued to reduce selling and
administrative costs to better align our cost structure with revenue levels and
believe additional
benefits will be realized in the second quarter of 2009. We will continue to
evaluate selling, general and administrative expense reduction opportunities to
improve earnings.
Intangible asset amortization included in operating expenses decreased to
$0.5 million in the thirteen weeks ended April 4, 2009 from $1.2 million in the
thirteen weeks ended March 29, 2008. The decrease in amortization expense was
due to the completion of amortization of some intangibles recorded in connection
with our 2007 acquisitions and exchange rate movements.
We recorded net loss of $2.2 million for the thirteen weeks ended March 29, 2008
compared to net income of $0.3 million for the thirteen weeks ended March 29,
2008. The decline in income is primarily attributable to a contraction in
revenues and the resulting negative impact on gross margins, partially offset by
effective cost management initiatives and a decrease in intangible amortization.
We made substantial strides during fiscal year 2008 integrating our 2007
acquisitions and reducing our total operating cost structure with emphasis on
selling, general and administrative expenses. However, due to the deterioration
in economic conditions, these cost savings were overshadowed by the decrease in
revenue levels from first quarter 2008 to first quarter 2009, which impacted our
ability to sustain profitability.
Recent economic outlook has added significant challenges to our clients in the
communications media, and entertainment sectors. The general result is reduced
client spending 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 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, general economic conditions and other factors.
From a cash flow perspective, cash flows used in operating activities were
$2.7 million during the thirteen weeks ended April 4, 2009. Net cash flows
provided by operating activities were $2.5 million during the thirteen weeks
ended March 29, 2008. The decline in cash flows from operating activities during
the thirteen weeks ended April 4, 2009 as compared with the 2008 period
primarily related to a decline in operating results coupled with cash flow used
for net working capital changes.
At April 4, 2009, we have working capital of approximately $12.6 million and
$4.8 million in long-term debt. Our noncurrent investments consist of auction
rate securities. Returns on our marketable securities have decreased over recent
periods as a result of decreasing interest rates and a reduction in invested
balances.
Our noncurrent investments included $13.8 million ($14.8 million par value) in
auction rate securities guaranteed through the Federal Family Education Loan
Program of the U.S. Department of Education. As discussed in Note 2, "Auction
Rate Securities," in notes to condensed consolidated financial statements,
during 2008, we reached a settlement agreement on $7.55 million of the auction
rate securities allowing us to sell these auction rate securities held in
accounts with UBS AG ("UBS") and UBS affiliates at par value beginning June 30,
2010 and enabling us to borrow up to 75% of the fair value of the securities at
zero net interest cost prior to the sales date. In addition, during the first
quarter of 2009, we entered into a loan agreement with Citigroup to provide
liquidity for the remainder of our $7.25 million auction rate securities
portfolio held with Citigroup. Under the loan agreement, we have access to a
revolving line of credit of up to 50% of the par value of the auction rate
securities that we have pledged as collateral, or $3.625 million. As of April 4,
2009, we had borrowed $4.8 million against the line of credit with UBS. We have
made no borrowings under the line of credit with Citigroup.
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 accounted for under the provisions of SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS No. 115"). Management
evaluates the appropriate classification of marketable securities at each
balance sheet date. These investments are reported at fair value, as measured
pursuant to SFAS No. 157, "Fair Value Measurements" ("SFAS No. 157"). For those
securities considered to be "available-for-sale," any temporary unrealized gains
and losses are included as a separate component of stockholders' equity, net of
applicable taxes. For those securities considered to be "trading," any
unrealized gains and losses are included in the Condensed Consolidated
Statements of Operations and Comprehensive Loss (unaudited), net of applicable
taxes. Additionally, realized gains and losses, changes in value judged to be
other-than-temporary, interest and dividends are also included in the Condensed
Consolidated Statements of Operations and Comprehensive Loss (unaudited), net of
applicable taxes.
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. 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 auctions. 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. The entire amount of auction rate securities is reflected as non-current
assets on our Condensed Consolidated Balance Sheets as of April 4, 2009 and
January 3, 2009.
During the third quarter of 2008, state and federal regulators reached
settlement agreements with both of the brokers who advised us 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. On November 13, 2008, we entered into a settlement with
UBS to provide liquidity for our $7.6 million auction rate securities portfolio
held with a UBS affiliate. Pursuant to the terms of the Settlement, UBS issued
Auction Rate Securities Rights ("ARS Rights") to us, allowing us to sell to UBS
our auction rate securities held in accounts with UBS and UBS affiliates at par
value at any time during the period beginning June 30, 2010 and ending July 2,
2012. As consideration for the issuance of the ARS Rights, we (1) released UBS
from all claims for damages (other than consequential damages) directly or
indirectly relating to UBS's marketing and sale of auction rate securities, and
(2) granted UBS the discretionary right to sell or otherwise dispose of our
auction rate securities, provided that the we are paid the par value of the
auction rate securities upon any disposition.
While the ARS Rights results in a put option which represents a separate
freestanding instrument, the put option does not meet the definition of a
derivative instrument under SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). We have elected to measure the ARS
Rights at fair value under SFAS No. 159, "The Fair Value Option for Financial
Assets and Financial Liabilities Including an amendment of FASB Statement
No. 115 " ("SAFS No. 159") to better align changes in fair value of the ARS
Rights with those of the underlying auction rate securities investments.
Prior to accepting the UBS settlement offer, we recorded all of our auction rate
securities as available-for-sale investments. Upon accepting the UBS settlement,
the Company made a one-time election to transfer its UBS auction rate securities
holdings from available-for-sale securities to trading securities under SFAS
No. 115. For auction rate securities classified as available-for-sale we
recognized unrealized holding gains of $397,000 million during the thirteen
weeks ended April 4, 2009 and recognized unrealized holding losses of
$458,000 million during the thirteen weeks ended March 29, 2008. For auction
rate securities classified as trading securities we recognized unrealized
holding gains of $169,000 million offset by realized losses on the Company's ARS
Rights of $146,000 million during the thirteen weeks ended April 4, 2009. The
ARS Rights will continue to be measured at fair value under SFAS No. 159 until
the earlier of our exercise of the ARS Rights or UBS's purchase of the auction
rate securities at par value in connection with the ARS Rights Agreement.
Due to the lack of observable market quotes on our auction rate securities
portfolio and ARS Rights, we utilize valuation models that rely exclusively on
Level 3 inputs as defined in SFAS No. 157 including those 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. The valuation of our auction rate
securities portfolio and ARS Rights is subject to uncertainties that are
difficult to predict. Factors that may impact our valuation include changes to
credit ratings of the securities as well as to the underlying assets supporting
those securities, rates of default of the underlying assets, underlying
collateral value, discount rates, counterparty risk and ongoing strength and
quality of market credit and liquidity.
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 no bad debt expense for the thirteen weeks ended April 4, 2009 and
March 29, 2008. Our allowance for doubtful accounts totaled $380,000 and
$379,000 as of April 4, 2009 and January 3, 2009, 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 seven years. A significant component of the value of these acquired
businesses has been allocated to intangible assets. SFAS No. 141 "Business
Combinations" ("SFAS No, 141"), which applies to businesses acquired prior to
the adoption of SFAS No. 141R. 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 we amortize the intangible assets over time,
the purchase accounting allocation directly impacts the amortization expense we
record in our financial statements.
Impairment of Goodwill and Long-lived Assets - As of April 4, 2009, we have
$6.3 million in goodwill and $4.3 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 infinite-lived assets annually and whenever events or circumstances
indicate that such assets may be impaired. The evaluation is conducted at the
reporting unit level 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.
Fair value of our reporting units is determined using the income approach. The
income approach uses a reporting unit's projection of estimated cash flows
discounted using a weighted-average cost of capital analysis that reflects
current market conditions. We also considered the market approach to valuing our
reporting units, however due to the lack of comparable industry publicly
available transaction data, we concluded a market approach did not adequately
reflect our specific reporting unit operations. While the market approach was
not expressly utilized, we did compare the results of our overall enterprise
valuation to our market capitalization. Significant management judgments related
to the income approach include:
Anticipated future cash flows and terminal value for each reporting unit - The
income approach to determining fair value relies on the timing and estimates of
future cash flows, including an estimate of terminal value. The projections use
management's estimates of economic and market conditions over the projected
period including growth rates in revenues and estimates of expected changes in
operating margins. Our projections of future cash flows are subject to change as
actual results are achieved that differ from those anticipated. Because
management frequently updates its projections, we would expect to identify on a
timely basis any significant differences between actual results and recent
estimates.
Selection of an appropriate discount rate - The income approach requires the
selection of an appropriate discount rate, which is based on a weighted average
cost of capital analysis. The discount rate is affected by changes in short-term
interest rates and long-term yield as well as variances in the typical capital
structure of marketplace participants. The discount rate is determined based on
assumptions that would be used by marketplace participants, and for that reason,
the capital structure of selected marketplace participants was used in the
weighted average cost of capital analysis. Given the current volatile economic
conditions, it is possible that the discount rate will fluctuate in the near
term.
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
. . .
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