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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2004
or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-22010
THOMAS GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware | 72-0843540 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
5221 North O'Connor Boulevard Suite 500 Irving, TX 75039-3714 (Address of principal executive offices, including zip code) | |
(972) 869-3400 (Registrant's telephone number, including area code) |
NONE
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yesý Noo
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o Noý
As of May 11, 2004 there were 9,655,662 shares of the registrant's common stock outstanding.
Thomas Group, Inc. (the "Company") hereby amends Items 1 and 2 of its quarterly report on Form 10-Q for the three month period ended March 31, 2004 in order to correct a calculation error related to the recording of income tax benefits. The error relates to foreign tax credits, for which an election was made to convert the expiring foreign tax credits to ordinary deductions and carry back the resulting net operating losses to create income tax benefits.
Restatement of the three month period ended March 31, 2004 resulted in a $224,000 decrease in other current assets, a $40,000 decrease in accounts payable and accrued liabilities and a $184,000 increase in accumulated deficit with a corresponding decrease in income tax benefit. Basic income per share decreased $0.01 per share to $0.01 from $0.02 per share. Diluted income per share decreased $0.02 per share to $0.00 from $0.02 per share.
The table below outlines the line item adjustments related to the restatement of the three month period ended March 31, 2004.
| Three Months Ended March 31, 2004 | ||||||
---|---|---|---|---|---|---|---|
| (As Restated) | March 31, 2004 Previously Reported | |||||
Other current assets | $ | 670 | $ | 894 | |||
Accounts payable and accrued liabilities | $ | 2,534 | $ | 2,574 | |||
Accumulated deficit | $ | (2,213 | ) | $ | (2,029 | ) | |
Income tax benefit | $ | (12 | ) | $ | (196 | ) | |
Net income | $ | 50 | $ | 234 | |||
Basic earnings per share | $ | 0.01 | $ | 0.02 | |||
Diluted earnings per share | $ | 0.00 | $ | 0.02 |
Any items in the original filing not expressly changed by the amendment shall be as set forth in the original filing.
2
THOMAS GROUP, INC.
| | Page No. | ||
---|---|---|---|---|
Item 1 - | Financial Statements (unaudited) | 3 | ||
Consolidated Balance Sheets, March 31, 2004 and December 31, 2003 | 4 | |||
Consolidated Statements of Operations for the Three Month Periods Ended March 31, 2004 and 2003 | 5 | |||
Consolidated Statements of Cash Flows for the Three Month Periods Ended March 31, 2004 and 2003 | 6 | |||
Notes to Consolidated Financial Statements | 7 | |||
Item 2 - | Management's Discussion and Analysis of Financial Condition and Results of Operations | 13 | ||
Item 3 - | Quantitative and Qualitative Disclosures About Market Risk | 16 | ||
Item 4 - | Controls and Procedures | 16 | ||
PART II—OTHER INFORMATION | ||||
Item 6 - | Exhibits and Reports on Form 8-K | 17 | ||
Signatures | 18 |
3
THOMAS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
| March 31, 2004 (Restated) | December 31, 2003 | |||||||
---|---|---|---|---|---|---|---|---|---|
ASSETS | |||||||||
Current Assets | |||||||||
Cash and cash equivalents | $ | 911 | $ | 1,924 | |||||
Trade accounts receivable, net of allowances of $45 in 2004 and 2003, respectively | 4,454 | 3,549 | |||||||
Unbilled receivables | 194 | 285 | |||||||
Other assets | 670 | 424 | |||||||
Total Current Assets | 6,229 | 6,182 | |||||||
Property and equipment, net | 992 | 1,101 | |||||||
Other assets | 154 | 157 | |||||||
$ | 7,375 | $ | 7,440 | ||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||
Current Liabilities | |||||||||
Accounts payable and accrued liabilities | $ | 2,534 | $ | 2,332 | |||||
Income taxes payable | 75 | 147 | |||||||
Current portion of long-term debt | 2,500 | 1,200 | |||||||
Current maturities of other long-term obligations | 6 | 6 | |||||||
Total Current Liabilities | 5,115 | 3,685 | |||||||
Indebtedness to related parties | 1,400 | 1,400 | |||||||
Long-term debt | — | 1,600 | |||||||
Other long-term obligations | 67 | 80 | |||||||
Total Liabilities | 6,582 | 6,765 | |||||||
Stockholders' Equity | |||||||||
Common stock, $.01 par value; 25,000,000 shares authorized; 12,209,538 and 12,109,538 shares issued and 9,655,662 and 9,555,662 outstanding in 2004 and 2003, respectively | 122 | 121 | |||||||
Additional paid-in capital | 26,129 | 26,062 | |||||||
Accumulated deficit | (2,213 | ) | (2,263 | ) | |||||
Accumulated other comprehensive loss | (786 | ) | (786 | ) | |||||
Treasury stock, 2,553,876 shares in 2004 and 2003, at cost, respectively | (22,459 | ) | (22,459 | ) | |||||
Total Stockholders' Equity | 793 | 675 | |||||||
$ | 7,375 | $ | 7,440 | ||||||
See accompanying notes to consolidated financial statements.
4
THOMAS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
(Unaudited)
| Three Months Ended March 31, | ||||||
---|---|---|---|---|---|---|---|
| 2004 (Restated) | 2003 (Restated) | |||||
Consulting revenue before reimbursements | $ | 7,084 | $ | 7,598 | |||
Reimbursements | 35 | 143 | |||||
Total revenue | 7,119 | 7,741 | |||||
Cost of sales before reimbursable expenses | 3,704 | 4,062 | |||||
Reimbursable expenses | 35 | 143 | |||||
Total cost of sales | 3,739 | 4,205 | |||||
Gross profit | 3,380 | 3,536 | |||||
Selling, general and administrative | 3,252 | 3,413 | |||||
Operating income | 128 | 123 | |||||
Interest expense | (90 | ) | (199 | ) | |||
Income (loss) before income taxes | 38 | (76 | ) | ||||
Income tax benefit | (12 | ) | (13 | ) | |||
Net income (loss) | $ | 50 | $ | (63 | ) | ||
Income (loss) per common share: | |||||||
Basic | $ | .01 | $ | (.01 | ) | ||
Diluted | $ | .00 | $ | (.01 | ) | ||
Weighted average shares: | |||||||
Basic | 9,623,794 | 9,556,139 | |||||
Diluted | 10,570,227 | 9,556,139 |
See accompanying notes to consolidated financial statements.
5
THOMAS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| Three Months Ended March 31, | |||||||
---|---|---|---|---|---|---|---|---|
| 2004 (Restated) | 2003 (Restated) | ||||||
Cash Flows From Operating Activities: | ||||||||
Net income (loss) | $ | 50 | $ | (63 | ) | |||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||
Depreciation | 117 | 230 | ||||||
Amortization | 5 | 4 | ||||||
Amortization of debt discount | — | 37 | ||||||
Bad debts | — | 13 | ||||||
Other | (12 | ) | (2 | ) | ||||
Amortization (cancellation) of stock option grants | 27 | (22 | ) | |||||
Foreign currency loss | — | 11 | ||||||
Change in operating assets and liabilities: | ||||||||
(Increase) decrease in trade accounts receivable | (897 | ) | 307 | |||||
(Increase) decrease in unbilled receivables | 91 | (128 | ) | |||||
Increase in other assets | (248 | ) | (153 | ) | ||||
Increase in accounts payable and accrued liabilities | 194 | 87 | ||||||
Decrease in income taxes payable | (71 | ) | (173 | ) | ||||
Net Cash Provided by (Used In) Operating Activities | (744 | ) | 148 | |||||
Cash Flows from Investing Activities: | ||||||||
Capital expenditures | (7 | ) | (10 | ) | ||||
Net Cash Used In Investing Activities | (7 | ) | (10 | ) | ||||
Cash Flows From Financing Activities: | ||||||||
Net repayments—line of credit | — | (547 | ) | |||||
Proceeds from exercise of stock options | 40 | — | ||||||
Repayments—other debt | (302 | ) | (2 | ) | ||||
Net Cash Used In Financing Activities | (262 | ) | (549 | ) | ||||
Effect of Exchange Rate Changes on Cash | — | (4 | ) | |||||
Net Change In Cash | (1,013 | ) | (415 | ) | ||||
Cash and Cash Equivalents: | ||||||||
Beginning of period | 1,924 | 2,332 | ||||||
End of period | $ | 911 | $ | 1,917 | ||||
See accompanying notes to consolidated financial statements.
6
THOMAS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. (a) Basis of Presentation—The unaudited consolidated financial statements of Thomas Group, Inc. (the "Company") include all adjustments, which include only normal recurring adjustments, which are, in the opinion of management, necessary to present fairly the results of operations of the Company for the interim periods presented. The unaudited financial statements should be read in conjunction with the consolidated financial statements and notes thereto in the Company's Form 10-K for the 2003 fiscal year, filed with the Securities and Exchange Commission. The results of operations for the three month period ended March 31, 2004 are not necessarily indicative of the results of operations for the entire year ending December 31, 2004. Certain amounts from prior periods have been reclassified to conform with the 2004 presentation.
(b) Stock Based Compensation—The Company grants incentive and non-qualified stock options and has reserved 3,550,000 shares of common stock for issuance under its stock option plans. Options to purchase shares of the Company's common stock have been granted to directors, officers and employees. The majority of the options granted become exercisable at the rate of 20% per year, and generally expire ten years after the date of grant.
The Company adopted the disclosure provisions of Statement of Financial Accounting Standards No. 123 (SFAS No. 123), "Accounting for Stock Based Compensation." This statement requires the Company to provide pro forma information regarding net income and net income per share as if compensation cost for the Company's stock options had been determined in accordance with the fair value method. The fair value of these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for 2004 and 2003:
| Three Months Ended March 31, | ||||
---|---|---|---|---|---|
| 2004 | 2003 | |||
Dividend yield | 0 | % | 0 | % | |
Expected volatility | 65 | % | 85 | % | |
Risk free interest rate | 3 | % | 3 | % | |
Expected life (years) | 5 | 5 |
7
Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant date consistent with the provisions of SFAS No. 123, the Company's net income (loss) and income (loss) per share would have been adjusted to the pro forma amounts indicated below:
| Three Months Ended March 31, | |||||||
---|---|---|---|---|---|---|---|---|
| 2004 (Restated) | 2003 (Restated) | ||||||
| In thousands except per share data | |||||||
Net income (loss) as reported | $ | 50 | $ | (63 | ) | |||
Deduct: Stock-based compensation adjusted for stock option cancellations | — | (22 | ) | |||||
Deduct: Total stock-based compensation expense determined under fair value based method for all awards | (59 | ) | (72 | ) | ||||
Adjusted net loss | $ | (9 | ) | $ | (157 | ) | ||
Income (loss) per share | ||||||||
As reported | ||||||||
Basic | $ | .01 | $ | (.01 | ) | |||
Diluted | $ | .00 | $ | (.01 | ) | |||
As adjusted | ||||||||
Basic and diluted | $ | .00 | $ | (.02 | ) |
(c) Prior Period Adjustments—During the second quarter of 2004, the Company discovered a calculation error related to an income tax benefit that had been recorded in the first quarter of 2004. The error relates to foreign tax credits, for which an election was made to convert the expiring foreign tax credits to ordinary deductions and carry back the resulting net operating losses to create income tax benefits.
Restatement of the three month period ended March 31, 2004 resulted in a $224,000 decrease in other current assets, a $40,000 decrease in accounts payable and accrued liabilities and a $184,000 increase in accumulated deficit with a corresponding decrease in income tax benefit. Basic income per share for the three months ended March 31, 2004 decreased $0.01 per share to $0.01 from $0.02 per share, and diluted income per share decreased $0.02 per share to $0.00 from $0.02 per share.
The table below outlines the line item adjustments related to the restatement of the three month period ended March 31, 2004.
| Three Months Ended March 31, 2004 | ||||||
---|---|---|---|---|---|---|---|
| (As Restated) | Previously Reported | |||||
Other current assets | $ | 670 | $ | 894 | |||
Accounts payable and accrued liabilities | $ | 2,534 | $ | 2,574 | |||
Accumulated deficit | $ | (2,213 | ) | $ | (2,029 | ) | |
Income tax benefit | $ | (12 | ) | $ | (196 | ) | |
Net income | $ | 50 | $ | 234 | |||
Basic earnings per share | $ | 0.01 | $ | 0.02 | |||
Diluted earnings per share | $ | 0.00 | $ | 0.02 |
8
During 2001, the Company recognized a loss on a contract related to subleased office space. This office space included leasehold improvements, the carrying value of which exceeded its fair value, and was not recoverable at the time the contract was signed. The sublease loss recorded in 2001 failed to include the impairment of these improvements.
To correct this situation, the Company has restated the financial statements related to the fiscal years ended 2002 and 2001, and for each of the three quarters ended September 30, 2003.
Restatement of the March 31, 2003 statement of operations resulted in a $22,000 decrease to selling, general and administrative expense and a corresponding decrease to net loss due to the reversal of depreciation expense related to these leasehold improvements. Restatement of the March 31, 2003 balance sheet resulted in a $397,000 increase to accumulated deficit and a correspondeing decrease to property and equipment. The effect of this prior period adjustment is outlined in the table below.
| Three Months Ended March 31, 2003 | ||||||
---|---|---|---|---|---|---|---|
| As Restated | Previously Reported | |||||
| In thousands, except per share data | ||||||
Property and equipment, net. | $ | 1,658 | $ | 2,055 | |||
Accumulated deficit | (3,572 | ) | (3,175 | ) | |||
Total stockholders' equity (deficit) | (87 | ) | 310 | ||||
Total assets | 11,006 | 11,403 | |||||
Selling, general and administrative | 3,413 | 3,435 | |||||
Net loss | (63 | ) | (85 | ) | |||
Loss per common share: Basic and diluted | $ | (.01 | ) | $ | (.01 | ) |
2. Financing Agreement—On February 2, 2004, the Company revised its credit agreement with its senior lender extending the maturity date to February 28, 2005. An initial principal payment of $200,000 was made against the term note on February 28, 2004 and monthly term note payments of $100,000 are required beginning March 31, 2004 and continuing until maturity. These required payments result in a minimum term note reduction in 2004 of $1.4 million. In addition, term note payments equal to 25% of cash flows provided by operating activities on a year-to-date, cumulative basis are payable quarterly. As part of the revision, an amendment fee of $100,000 was added. This fee is to be accrued in five monthly installments of $20,000 each beginning August 1, 2004 and is payable in full on December 31, 2004 unless the Company replaces its senior lender. If the senior lender is replaced prior to December 31, 2004, a pro-rata portion of the amendment fee will be due.
At March 31, 2004 the Company had no borrowings outstanding under the revolving line of credit and $2.5 million outstanding on the term note classified as current liabilities, due to the maturity date of February 28, 2005. At March 31, 2004, the Company was in compliance with all of its debt covenants.
3. Liquidity Plan—As a result of cash generated from operations, the Company reduced its senior debt by $4.5 million in 2003 and another $0.4 million through May 11, 2004. The Company's ability to reduce debt and generate cash from operations is due primarily to cost saving measures including staff reductions, downsizing and subleasing facilities and more aggressive collection policies. However, recent operating results and the uncertainty of future business development and growth strategies give rise to concerns about the Company's ability to generate cash flow from operations sufficient to make scheduled debt payments as they become due and to remain in compliance with its restrictive loan covenants.
The Company's need to raise additional equity or debt financing and its ability to generate cash flow from operations sufficient to make scheduled payments on its debts as they become due will
9
depend on its future performance and in particular, its ability to successfully implement business and growth strategies. In addition, the Company is seeking financing alternatives to replace its current senior lender, as well as continuing the evaluation of the business on a daily basis to enhance its liquidity position. Such evaluation includes appropriate furlough of its unassigned workforce, staff reductions and the downsizing or subleasing of facilities when necessary.
The Company's performance will also be affected by prevailing economic conditions. Many of these factors are beyond the Company's control. The Company currently seeks business opportunities in the European, Asia/Pacific and North American regions and is affected by prevailing economic conditions in these regions. In addition, recent conflicts throughout the world involving the United States military, could potentially have an adverse affect on the Company's liquidity due to the high concentration of United States government contracts, which could result in delays in program operations. If future cash flows and capital resources are insufficient to meet the Company's debt obligations and commitments, the Company may be forced to reduce or delay activities and capital expenditures, obtain additional equity capital or restructure or refinance its debt. In the event the Company is unable to do so, the Company may be left without sufficient liquidity and it may not be able to meet its debt service requirements. In such case, an event of default would occur under the credit facility and could result in all of the Company's indebtedness becoming immediately due and payable. As a result, the Company's senior lender would be able to foreclose on the Company's assets.
4. Earnings Per Share—Basic earnings per share is based on the number of weighted average shares outstanding. Diluted earnings per share includes the effect of dilutive securities such as stock options and warrants. The following table reconciles basic earnings per share to diluted earnings per share under the provisions of Statement of Financial Accounting Standards No. 128, "Earnings Per Share."
| Three Months Ended March 31, | ||||||||
---|---|---|---|---|---|---|---|---|---|
| 2004 (Restated) | 2003 (Restated) | |||||||
| In thousands, except per share data | ||||||||
Numerator: | |||||||||
Net income (loss) | $ | 50 | $ | (63 | ) | ||||
Denominator: | |||||||||
Weighted average shares outstanding: | |||||||||
Basic | 9,624 | 9,556 | |||||||
Effect of dilutive securities: | |||||||||
Common stock options and warrants | 946 | — | |||||||
Diluted | 10,570 | 9,556 | |||||||
Earnings (loss) per share: | |||||||||
Basic | $ | .01 | $ | (.01 | ) | ||||
Diluted | $ | .00 | $ | (.01 | ) |
Stock options and warrants outstanding in 2004 and 2003 that are not included in the diluted earnings per share computation due to the antidilutive effects are approximately 1,499,000 and 2,622,000 respectively. Such options and warrants are excluded due to the Company incurring a net loss for the three months ended March 31, 2003 and due to exercise prices exceeding the average market value of the Company's common stock in 2004.
5. Significant Clients—The Company recorded revenue from CACI International of $3.0 million or 42% of revenue for the three month period ended March 31, 2004. Revenue from the same client totaled $2.6 million and 33% of revenue for the three month period ended March 31, 2003.
10
The Company recorded revenue from the United States Navy of $2.3 million or 33% of revenue for the three month period ended March 31, 2004. Revenue from the same client totaled $2.5 million or 32% of revenue for the three month period ended March 31, 2003.
There were no other clients from whom revenue exceeded 10% of total revenue in the three month periods ended March 31, 2004 and 2003, respectively.
6. Comprehensive Income or Loss—Comprehensive income or loss includes all changes in equity (foreign currency translation), except those resulting from investments by owners and distributions to owners. For the three month period ended March 31, 2004 and 2003, net income (loss) is the only component of comprehensive income.
7. Legal Proceedings—The Company has become subject to various claims and other legal matters, such as collection matters initiated by the Company, in the course of conducting its business. The Company believes that neither such claims and legal matters nor the cost of prosecuting and/or defending such claims and legal matters will have a material adverse effect on the Company's consolidated results of operations, financial condition or cash flows. No material claims are currently pending; however, no assurances can be given that future claims, if any, may not be material.
8. Supplemental Disclosure of Cash Flow Information
| Three Months Ended March 31, | |||||
---|---|---|---|---|---|---|
| 2004 | 2003 | ||||
| In thousands of dollars | |||||
Interest paid | $ | 95 | $ | 205 | ||
Taxes paid | �� | $ | 92 | $ | 183 |
11
9. Segment Data—The Company operates in one industry segment, but conducts its business primarily in three geographic areas: North America, Europe and Asia/Pacific. Information regarding these areas follows:
| Three Month Ended March 31, | ||||||||
---|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | |||||||
| In thousands of dollars | ||||||||
Revenue: | |||||||||
North America | $ | 6,625 | $ | 6,886 | |||||
Europe | — | 70 | |||||||
Asia/Pacific | 494 | 785 | |||||||
Total revenue | $ | 7,119 | $ | 7,741 | |||||
Gross profit (loss): | |||||||||
North America | $ | 3,517 | $ | 3,636 | |||||
Europe | 9 | (117 | ) | ||||||
Asia/Pacific | (146 | ) | 17 | ||||||
Total gross profit | $ | 3,380 | $ | 3,536 | |||||
| March 31, 2004 | December 31, 2003 (Restated) | |||||
---|---|---|---|---|---|---|---|
| In thousands of dollars | ||||||
Long-lived assets: | |||||||
North America | $ | 1,013 | $ | 1,114 | |||
Europe | 30 | 36 | |||||
Asia/Pacific | 13 | 14 | |||||
Corporate | 90 | 94 | |||||
$ | 1,146 | $ | 1,258 | ||||
10. Income Taxes—During the three months ended March 31, 2004, the Company recorded a net income tax benefit of $12,000, comprised of $22,000 of state income tax and the accrual of a $34,000 income tax refund related to foreign tax credit carrybacks. At December 31, 2003, the Company had approximately $2.3 million of unused foreign tax credits, of which $1.5 million were to expire in 2003. The Company determined that carrying back the entire $2.3 million and amending prior year tax returns would result in a refund of approximately $34,000. The Company is in the process of amending these tax returns. The Company recorded no provision for United States federal income tax expense during the three months ended March 31, 2004 due to the projected effect on United States taxable income from the closing of the Company's subsidiary in Singapore planned for 2004.
Currently, the Company records no net deferred tax assets due to the fact that the Company believes the recovery of its net deferred tax assets is uncertain. The Company's net deferred tax assets have been offset by a valuation allowance. The net deferred tax assets are still available to the Company and could be used in the future. Utilization of net operating loss carryforwards in the future may be limited if changes in the Company's stock ownership create a change in control as provided in Section 382 of the Internal Revenue Code of 1986, as amended.
12
ITEM 2—MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The Company derives the majority of its revenue from monthly fixed and incentive fees for the implementation of its Process Value Management ("PVM") approach. Incentive fees are tied to improvements in a variety of client performance measures typically involving response time, asset utilization and productivity. Due to the Company's use of incentive fee contracts, variations in revenue levels may cause fluctuations in quarterly results. Factors such as a client's commitment to a PVM program, general economic and industry conditions, and other issues could affect a client's business performance, thereby affecting the Company's incentive fee revenue and quarterly earnings. Quarterly revenue and earnings of the Company may also be impacted by the size and timing of starts and completions of individual contracts.
In addition to its North America operations, the Company has operations and contracts in its Europe and Asia/Pacific regions. The majority of transactions in these regions are denominated using the United States dollar. However, some of the Company's transactions are in the local currency of the country; therefore, the Company is exposed to currency fluctuation risk. See Item 3 "Quantitative and Qualitative Disclosure About Market Risk".
The following table sets forth the percentages which items in the statement of operations bear to revenue:
| Three Months Ended March 31, | ||||
---|---|---|---|---|---|
| 2004 (Restated) | 2003 (Restated) | |||
Revenue | 100.0 | 100.0 | |||
Cost of sales | 52.5 | 54.3 | |||
Gross profit | 47.5 | 45.7 | |||
Selling, general and administrative | 45.7 | 44.1 | |||
Operating income | 1.8 | 1.6 | |||
Interest expense | (1.3 | ) | (2.6 | ) | |
Income (loss) before income taxes | 0.5 | (1.0 | ) | ||
Income tax benefit | (0.2 | ) | (0.2 | ) | |
Net income (loss) | 0.7 | % | (0.8 | )% | |
Three Month Period Ended March 31, 2004 Compared to Three Month Period Ended March 31, 2003
Revenue—Revenue decreased $0.6 million or 8% to $7.1 million from $7.7 million in the first quarter of 2004 compared to the first quarter of 2003.
Fixed fee revenue was $7.0 million, or 98% of revenue in the first quarter of 2004, compared to $7.6 million, or 98% of revenue in the first quarter of 2003. Incentive revenue was $0.1 million, or 2% of revenue in the first quarter of 2004. The first quarter of 2003 contained no incentive revenue. Reimbursements were $35,000 or 2% of revenue in the first quarter of 2004, compared to $143,000, or 2% of revenue in the first quarter of 2003.
North America region revenue decreased $0.3 million, or 4% to $6.6 million in 2004 from $6.9 million in 2003. Revenue from commercial clients decreased $0.9 million, or 69%, to $0.4 million in the first quarter of 2004, compared to $1.3 million in the first quarter of 2003. Revenue from United
13
States government contracts increased $0.6 million, or 11%, to $6.2 million in the first quarter of 2004, compared to $5.6 million in the first quarter of 2003.
Asia/Pacific region revenue decreased $0.3 million, or 38% to $0.5 million in 2004 from $0.8 million in 2003. The decrease in revenue reflects revenue from completed contracts in 2003 surpassing revenue from new contracts in 2004.
Due to the current adverse economic climate in Europe, the Company recorded no revenue in its Europe region during the first quarter of 2004, compared to $70,000 in the first quarter of 2003. The Company pursues revenue opportunities in Europe from its office in Switzerland.
Gross Profit—Gross profit was 47% of revenue, or $3.4 million in 2004, compared to 46% or $3.5 million in 2003. The increase in gross profit in 2004 is attributable to the conclusion of certain commercial programs that required payments to third parties for their assistance on the programs. This revenue was partially replaced in 2004 with commercial contracts that did not require such payments. In addition, increases in United States government contracts contributed to improved gross margins.
Selling, General and Administrative Expenses—Selling, general and administrative expenses decreased $0.2 million to $3.2 million in 2004 from $3.4 million in 2003. Renegotiation of contracts with service providers resulted in a $0.1 million decrease in travel and telecommunication costs. Office and equipment rental costs decreased $0.1 million as certain offices were subleased or eliminated and equipment leases were terminated. Also, depreciation and amortization decreased $0.1 million. These decreases were offset by increases in incentive compensation related to the appreciation of SAR's and sales commissions totaling $0.1 million.
Liquidity and Capital Resources
Cash and cash equivalents decreased by $1.0 million in the first three months of 2004 compared to a $0.4 million decrease in the first three months of 2003. The major components of these changes are discussed below:
Cash Flows from Operating Activities—Operating activities used cash of $0.7 million during the first three months of 2004 compared to providing cash of $0.1 million in 2003. The increase in cash used by operating activities is primarily due to an increase in trade accounts receivable. Payment from a significant client arrived in early April as opposed to late March, of 2004, as called for under the contract with the client. This lag in collection time created a cash usage during the three month period ended March 31, 2004.
Cash Flows from Investing Activities—Cash flows used in investing activities totaled $7,000 during the first three months of 2004, primarily for upgrades to office equipment. Cash flows used in investing activities for the first three months of 2003 totaled $10,000 for upgrades to computer software.
Cash Flows from Financing Activities—Cash flows used in financing activities were approximately $0.3 million during the first three months of 2004, primarily due to $0.3 million of term note payments made to the Company's senior lender. Cash flows used in financing activities were $0.5 million during the first three months of 2003, due to net repayments on the Company's revolving credit facility.
The Company currently has a stock repurchase plan, which allows the Company to repurchase up to 750,000 shares of the Company's common stock. The Company has approximately 408,000 shares available to purchase under this plan. The Company has purchased no treasury shares since October of 2001.
4. Liquidity Plan—As a result of cash generated from operations, the Company reduced its senior debt by $4.5 million in 2003 and another $0.4 million through May 11, 2004. The Company's ability to reduce debt and generate cash from operations is due primarily to cost saving measures including staff reductions, downsizing and subleasing facilities and more aggressive collection policies.
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However, recent operating results and the uncertainty of future business development and growth strategies give rise to concerns about the Company's ability to generate cash flow from operations sufficient to make scheduled debt payments as they become due and to remain in compliance with its restrictive loan covenants.
The Company's need to raise additional equity or debt financing and its ability to generate cash flow from operations sufficient to make scheduled payments on its debts as they become due will depend on its future performance and in particular, its ability to successfully implement business and growth strategies. In addition, the Company is seeking financing alternatives to replace its current senior lender, as well as continuing the evaluation of the business on a daily basis to enhance its liquidity position. Such evaluation includes appropriate furlough of its unassigned workforce, staff reductions and the downsizing or subleasing of facilities when necessary.
The Company's performance will also be affected by prevailing economic conditions. Many of these factors are beyond the Company's control. The Company currently seeks business opportunities in the European, Asia/Pacific and North American regions and is affected by prevailing economic conditions in these regions. In addition, recent conflicts throughout the world involving the United States military, could potentially have an adverse affect on the Company's liquidity due to the high concentration of United States government contracts, which could result in delays in program operations. If future cash flows and capital resources are insufficient to meet the Company's debt obligations and commitments, the Company may be forced to reduce or delay activities and capital expenditures, obtain additional equity capital or restructure or refinance its debt. In the event the Company is unable to do so, the Company may be left without sufficient liquidity and it may not be able to meet its debt service requirements. In such case, an event of default would occur under the credit facility and could result in all of the Company's indebtedness becoming immediately due and payable. As a result, the Company's senior lender would be able to foreclose on the Company's assets.
Inflation
Although the operations of the Company are influenced by general economic conditions, the Company does not believe inflation had a material effect on the results of operations during the three month periods ended March 31, 2004 or 2003, respectively. However, there can be no assurance the Company's business will not be affected by inflation in the future.
"Safe Harbor" Statement Under The Private Securities Litigation Reform Act:
With the exception of historical information, the matters discussed in this report are "forward looking statements" as that term is defined in Section 21E of the Securities Exchange Act of 1934.
The Company has identified several important factors, which could cause actual results to differ materially from those predicted, including, by way of example:
- •
- The competitive nature of the management consulting industry in light of new entrants into the industry and the difficulty of differentiating the services offered to potential clients;
- •
- The time required by prospective clients to fully understand the value and complexity of a typical PVM program may result in an extended lead time to close new business;
- •
- Performance-oriented fees are earned upon the achievement of improvements in a client's business;
- •
- The client's commitment to a PVM program and general economic/industry conditions could impact a client's business performance and consequently the Company's ability to forecast the timing and ultimate realization of performance-oriented fees;
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- •
- The ability of the Company to productively re-deploy personnel during program transition periods; and
- •
- The ability of the Company to create alliances and make acquisitions that are accretive to earnings.
ITEM 3—QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company invests cash balances in excess of operating requirements in short-term securities, generally with maturities of 90 days or less. The Company's credit agreement provides for borrowings, which bear interest of prime plus 2% on a $3.0 million revolving line of credit and prime plus 4% on a $2.5 million term note. In addition, the Company has subordinated debt financing of $1.4 million, which bears interest of prime plus 6%. Since January 1, 1993, the prime rate has fluctuated between 9.5% and 4.0%. Based on the volatility of the prime rate in recent years, a five percentage point increase in interest rates would have resulted in $28,000 of additional interest expense in the first three months of 2004. The Company had no borrowings or repayments on its revolving credit facility during the first three months of 2004, and no outstanding borrowings at March 31, 2004. Through May 11, 2004, the Company had no additional borrowings or repayments related to its revolving credit facility, and on May 11, 2004, the Company had no outstanding borrowings on the revolving credit facility. The term loan portion of the credit facility had an outstanding balance of $2.8 million at the beginning of 2004. Subsequent principal reductions of $0.4 million resulted in the current balance on May 11, 2004 of $2.4 million.
Due to the Company's foreign operations in Europe and Asia, the Company is exposed to transaction adjustments with respect to foreign currency. The Company uses the United States dollar as its functional currency.
Under United States dollar functional currency, the financial statements of foreign subsidiaries are remeasured from the recording currency to the United States dollar. The resulting remeasurement adjustment is recorded as foreign exchange gain or loss in the statement of operations. The Company incurred foreign exchange losses of $93 for the three month period ended March 31, 2004 and foreign exchange losses of $11,000 for the three month period ended March 31, 2003. At March 31, 2004, the effect of a 10% increase in foreign exchange rates would have resulted in a $16,000 foreign currency exchange loss on the Company's non-United States denominated assets and a $11,000 foreign exchange gain on the Company's non-United States denominated liabilities. As such, the net effect of a 10% increase in the Company's foreign exchange rates, at March 31, 2004, would have been a $5,000 foreign currency exchange loss. The Company believes that transacting business in countries with traditionally stable currencies mitigates the effect of any near-term foreign currency transaction adjustments on the Company's financial position, results of operations and cash flows.
The Company has not engaged in foreign currency hedging transactions nor does the Company have any derivative financial instruments. However, going forward, the Company will assess the need to enter into hedging transactions to limit its risk due to fluctuations in exchange rates.
ITEM 4—CONTROLS AND PROCEDURES
Based on the evaluation of the Company's disclosure controls and procedures as of the end of the period covered by this quarterly report, James T. Taylor, the President and Chief Executive Officer, has concluded that, in his judgment, the Company's disclosure controls and procedures are designed to ensure that material information relating to the Company, including the Company's subsidiaries, is accumulated and communicated to the Company's management, including its principal executive and financial officers of the Company or its subsidiaries, to allow timely decisions regarding required disclosure. Management necessarily applied its judgment in assessing the costs and benefits of such controls and procedures, which, by their nature, can provide only reasonable assurance regarding management's control objectives. The design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.
There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
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THOMAS GROUP, INC.
Item 6—Exhibits and Reports on Form 8-K
- (a)
- Exhibits
- 31.1
- Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
- 32.1
- Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
- (b)
- Reports on Form 8-K for the Quarter ending March 31, 2004:
Date of Filing | Subject | |
---|---|---|
January 2, 2004 | Press release announcing the resignation of John R. Hamann, CEO. | |
January 12, 2004 | Press release announcing the appointment of James T. Taylor as President and CEO. | |
March 15, 2004 | Press Release announcing financial results for the three months and fiscal year ended December 31, 2003 (such press release is not incorporated by reference herein or deemed "filed" within the meaning of Section 18 of the Securities Act of 1933, as amended.) |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Thomas Group, Inc.
Registrant
August 6, 2004 Date | /s/ James T. Taylor James T. Taylor Chief Executive Officer, President and Chief Financial Officer |
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EXPLANATORY NOTE
THOMAS GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except share data) (Unaudited)
THOMAS GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
THOMAS GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
- ITEM 2—MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 3—QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
ITEM 4—CONTROLS AND PROCEDURES
PART II—OTHER INFORMATION
Item 6—Exhibits and Reports on Form 8-K