[THE MANAGEMENT NETWORK GROUP, INC. LETTERHEAD]
CONFIDENTIAL TREATMENT REQUESTED
VIA EDGAR
August 28, 2007
Mr. Kevin Woody
Accounting Branch Chief
Room 4561
Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549
Re: The Management Network Group, Inc.
Form 10-K for the fiscal year ended December 30, 2006
File No. 000-27617
Dear Mr. Woody:
The Management Network Group, Inc. ("TMNG" or the "Company") is pleased to
provide the following responses to your comment letter dated August 14, 2007 to
Donald E. Klumb, Vice President and Chief Financial Officer of TMNG, with
respect to the above-referenced report.
In connection with this response, TMNG acknowledges that:
o The Company is responsible for the adequacy and accuracy of the
disclosure in its filing;
o Staff comments or changes to disclosure in response to staff comments
do not foreclose the Commission from taking any action with respect to
a filing; and
o The Company may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under the federal
securities laws of the United States.
For your convenience, each response to your comments is preceded by the
comment to which it relates.
Form 10-K for the year ended December 30, 2006
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Item 8. Financial Statements and Supplementary Data
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20. Subsequent Event, page 75
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1. We noted in your Form 8-K dated January 2, 2007, that you determined,
"Based upon our analysis of Cartesian and the transaction, we have
determined that the transaction did not constitute a business combination
involving a significant subsidiary as contemplated by SEC rules." Please
provide us with your tests used to determine whether the acquisition of
Cartesian on January 2, 2007, was considered a significant subsidiary under
Rule 1-02 and Rule 3-05 of Regulation S-X.
RESPONSE:
We acquired Cartesian on January 2, 2007 for a total purchase price(1) of
$15.7 million, of which $6.5 million was not subject to contingency and
$9.2 million was structured as future contingent consideration dependent on
the business meeting certain benchmarks. We performed a detailed
quantitative and qualitative analysis in making the determination that the
transaction did not constitute a business combination involving a
significant subsidiary under Rules 1-02(x) and 3-05 of Regulation S-X. Our
calculation of the significance of Cartesian under the three tests
prescribed by Rule 1-02 and Rule 3-05 of Regulation S-X is provided below.
In performing the tests, we examined the financial statements of TMNG for
the fiscal year ended December 31, 2005 (i.e. the registrant's most recent
annual financial statements filed at or prior to the date of the
acquisition, pursuant to Rule 3-05(b)(3)) and the financial statements of
Cartesian for the fiscal year ended August 31, 2006 (i.e. the acquiree's
most recent annual financial statements, pursuant to Rule 3-05(b)(3)).
- --------
(1) The amount of contingent consideration disclosed in our Form 10-Q's filed
during 2007 for the Cartesian acquisition increased from that shown in the Form
10-K for the fiscal year ended December 30, 2006 primarily due to a
reclassification from non-contingent consideration to contingent consideration.
ASSET TEST
GBP $
------------ ------------
Cartesian Total Assets(2)
Total Assets on August 31, 2006 [***] [***]
============ ============
TMNG Total Assets
Total Assets on December 31, 2005 73,549,000
============
Cartesian Total Assets as % of TMNG Total Assets [***]%
Cartesian total assets are less than 20% of TMNG's total assets,
therefore the Cartesian subsidiary is not significant based on the
Asset Test.
EARNINGS TEST
GBP $
------------ ------------
Cartesian Earnings(3)
Income from continuing operations before income
taxes for the fiscal year ended August 31, 2006 [***] [***]
============ ============
TMNG Loss
Loss from continuing operations before income
taxes for the fiscal year ended December 31, 2005 (2,736,000)
Cartesian Earnings as % of TMNG Loss [***]%
Cartesian income from continuing operations before income taxes is
less than 20% of the absolute value of TMNG's loss from continuing
operations before income taxes, therefore the Cartesian subsidiary is
not significant based on the Earnings Test.
- --------
(2) Conversion from GBP to USD was based on the exchange rate for August 31,
2006.
(3) Conversion from GBP to USD was based on the average exchange rate for the
twelve months ended August 31, 2006.
INVESTMENT TEST
GBP $
------------ ------------
Non-Contingent Investment in Cartesian 3,291,000 6,495,442
------------ ------------
Contingent Investment in Cartesian(4)
Earn-out tied to Year 1 Operating Results(5) [***] [***]
Earn-out equal to 35% of EBITDA (greater
than remote)(6) [***] [***]
------------ ------------
[***] [***]
------------ ------------
Expected Purchase Price [***] [***]
============ ============
TMNG Total Assets
Total Assets at December 31, 2005 73,549,000
============
Expected Purchase Price as % of TMNG Total Assets [***]%
Reconciliation of Total Contingent Consideration
Greater than Remote Likelihood of Payout [***] [***]
Remote Likelihood of Payout [***} [***]
------------ ------------
Total Possible Contingent Consideration(7) [***] [***]
============ ============
Our investment in Cartesian is less than 20% of TMNG's total assets,
therefore the Cartesian subsidiary is not significant based on the
Investment Test.
For purposes of determining the amount of contingent consideration
included in the Investment Test calculation, we followed the guidance
of the SEC's Staff Training Manual (Topic Two, I.D.1.a) which states
the investment test should "...include contingent consideration as
part of the total investment in the acquiree unless the likelihood of
its payment is remote."
We determined that the likelihood of payment of GBP [***] (or $[***]
million) of the contingent consideration was remote based upon our
review, in connection with
- --------
(4) Conversion from GBP to USD was based on the exchange rate for January 2,
2007.
(5) Contingency is based on various Year 1 operating results (e.g., working
capital, revenue, EBITDA). Likelihood of payout is considered greater than
remote based on projections for year 1.
(6) Sellers are able to increase purchase price by 35% of EBITDA generated by
Cartesian over a four year period. The amount included in the Investment
Test represents the amount whose likelihood is considered greater than
remote.
(7) As disclosed in our Quarterly Reports on Form 10-Q for the first and second
quarters of FY 2007.
the acquisition, of Cartesian's business and historical financial
performance and the risks associated with Cartesian's business.
Exhibit 31.1 and Exhibit 31.2
- -----------------------------
2. We noted that you have made certain modifications to the exact form of the
required certifications including: the addition of the title when
identifying the certifying individual at the beginning of the
certification; the replacement of the word "report" with "Annual Report" in
paragraphs 2 and 3; and alteration of the language from "most recent fiscal
quarter (the registrant's fourth fiscal quarter in the case of an annual
report)" as prescribed in paragraph 4(c) to "fourth fiscal quarter" in your
certification. Please discontinue the use of modifications in future
filings as certifications required under Exchange Act Rules 13a-14(a) and
15d-14(a) must be in the exact form set forth in Item 601(b)(31) of
Regulation S-K.
RESPONSE:
In future filings, TMNG will conform the certifications filed pursuant to
Exchange Act Rules 13a-14(a) and 15d-14(a) to the form specified in Item
601(b)(31) of Regulation S-K.
We appreciate the opportunity to provide this response. If you have any
questions or would like to discuss these responses, please call me at
913.345.9315.
Very truly yours,
/s/ Donald E. Klumb
Donald E. Klumb
Vice President and Chief Financial Officer
cc: Thurston Cromwell, Esq.