1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-22010
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THOMAS GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 72-0843540
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
5215 NORTH O'CONNOR BOULEVARD
SUITE 2500
IRVING, TX 75039-3714
(Address of principal executive offices, including zip code)
(214) 869-3400
(Registrant's telephone number, including area code)
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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. Yes [X] No [ ]
As of April 24, 1996 the following number of shares of the registrant's
stock were outstanding:
Common Stock 5,743,874
Class B Common Stock 161,535
---------
Total 5,905,409
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THOMAS GROUP, INC.
PAGE NO.
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets, March 31, 1996
and December 31, 1995. . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations for the
Three Months Ended March 31, 1996 and 1995. . . . . . . . 4
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1996 and 1995. . . . . . . . 5
Notes to Consolidated Financial Statements. . . . . . . . . 6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . 7
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . 10
2
3
THOMAS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
MARCH 31, DECEMBER 31,
ASSETS 1996 1995
--------- ------------
Current Assets
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,396 $11,273
Trade accounts receivable, net of allowances of $150 and $245, respectively . . . . . . 13,771 14,476
Accounts and notes receivable -- affiliates . . . . . . . . . . . . . . . . . . . . . . 384 --
Other, net of allowances of $382 and $382, respectively . . . . . . . . . . . . . . . . 2,227 2,257
------- -------
Total Current Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,778 28,006
Net Property and Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,268 6,547
Capitalized Software Development Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . 831 832
Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,655 4,772
------- -------
$40,532 $40,157
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . $ 4,589 $ 4,229
Accounts payable- affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 1,027
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,664 2,428
Advance payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 270 294
Current maturities of long-term obligations . . . . . . . . . . . . . . . . . . . . . . 15 27
------- -------
Total Current Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,538 8,005
Long-Term Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,303 1,101
------- -------
Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,841 9,106
------- -------
Commitments and Contingencies
Stockholders' Equity
Common Stock, $.01 par value; 12,500,000 shares authorized;
5,989,505 and 5,983,903 shares issued . . . . . . . . . . . . . . . . . . . . . . . . 60 60
Class B Common Stock, $.01 par value; 1,200,000 shares authorized;
155,633 and 152,133 shares issued and outstanding . . . . . . . . . . . . . . . . . . 2 2
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,213 18,094
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,360 13,745
Cumulative translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . 128 283
Treasury stock, 155,978 and 90,603 shares of Common, at cost . . . . . . . . . . . . . . (2,072) (1,133)
------- -------
Total Stockholders' Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,691 31,051
------- -------
$40,532 $40,157
======= =======
See accompanying notes to consolidated financial statements.
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THOMAS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
---------------------------------
1996 1995
------------ -------------
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $19,256 $15,514
Cost of Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,616 9,663
------------ -------------
Gross Margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,640 5,851
Selling, General and Administrative . . . . . . . . . . . . . . . . . . . 4,026 3,886
------------ -------------
Operating Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,614 1,965
Interest Income, Net . . . . . . . . . . . . . . . . . . . . . . . . . . 76 55
------------ -------------
Income Before Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 2,690 2,020
Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,075 808
------------ -------------
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,615 $ 1,212
============ =============
Earnings Per Common and Common Equivalent Share . . . . . . . . . . . . . . . $0.25 $0.20
Weighted Average Shares and Share Equivalents 6,386,251 6,027,098
See accompanying notes to consolidated financial statements.
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THOMAS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
----------------------
1996 1995
------- -------
Cash Flows From Operating Activities
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,615 $ 1,212
Adjustments to reconcile net income to net cash used in operating activities
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . 634 358
Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . (95) --
Provision for expatriate costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 17
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 11
Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 29
Change in operating assets and liabilities
Decrease trade accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . 671 3,984
Increase other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,070) (42)
Increase accounts payable and accrued liabilities . . . . . . . . . . . . . . . . 573 403
Decrease advance payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . (22) (94)
Increase income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . 168 298
------- -------
Net Cash Provided by Operating Activities . . . . . . . . . . . . . . . . . . 2,485 6,176
------- -------
Cash Flows Used In Investing Activities
Decrease in short-term receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 --
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (885) (285)
Capitalization of software development costs . . . . . . . . . . . . . . . . . . . . . . . . . . (72) --
License purchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (250) --
------- -------
Net Cash Used In Investing Activities . . . . . . . . . . . . . . . . . . . . (1,166) (285)
------- -------
Cash Flows From Financing Activities
Purchase of 65,375 shares of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . (939) --
Net proceeds from exercise of stock options . . . . . . . . . . . . . . . . . . . . . . . . . . 77 286
Repayment of other long-term obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . (19) (32)
Payments and advances to affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,412) (7)
------- -------
Net Cash (Used In) Provided By Financing Activities . . . . . . . . . . . . . (2,293) 247
------- -------
Effect of Exchange Rate Changes on Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 370
------- -------
Net (Decrease) Increase In Cash and Cash Equivalents . . . . . . . . . . . . . . . . . . . . . . . . (877) 6,508
Cash and Cash Equivalents
Beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,273 3,942
------- -------
End of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,396 $10,450
======= =======
See accompanying notes to consolidated financial statements.
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THOMAS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The unaudited financial statements include all adjustments
which, in the opinion of management, are necessary to present fairly the
results of operations of the Company for the interim periods presented. Such
adjustments are of a normal and recurring nature. The unaudited financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto in the Company's 1995 Annual Report to
Stockholders, together with Management's Discussion and Analysis of Financial
Condition and Results of Operations included in the Company's 1995 Annual
Report to Stockholders. The results of operations for the three month period
ended March 31, 1996 are not necessarily indicative of the results of
operations for the entire year ending December 31, 1996.
2. Earnings Per Share - Earnings per share amounts are based on
the weighted average number of shares and dilutive share equivalents
outstanding during the respective periods. Fully diluted earnings per share
and share equivalents is not presented because the result is not materially
different.
3. Subsequent Events - On April 16, 1996 the Company made a $1.0
million payment to the previous owners of Interlink Technologies for the
successful completion of a significant enhancement to the DC Wizard software
product.
From April 1 through April 24, 1996 the Company purchased 97,508 shares
of its common stock on the open market for $1.4 million. The stock repurchase
plan was approved by the Board of Directors in 1994 and authorized the
repurchase of up to 250,000 shares. The Company repurchased 7,000 shares in
1994, no shares in 1995, and through April 24, 162,883 shares in 1996.
4. Supplemental Disclosure of Cash Flow Information
THREE MONTHS ENDED
MARCH 31,
--------------------
1996 1995
----- -----
Interest paid . . . . . . . . . . . . . . . . . . . 13 7
Income taxes paid . . . . . . . . . . . . . . . . . 759 80
6
7
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company derives its revenues from monthly fixed and incentive (or
performance-oriented) fees for the implementation of Total Cycle Time(R)
programs. Performance-oriented fees are tied to improvements in a variety of
client performance measures typically involving response time, asset
utilization, productivity and profitability.
The following table sets forth the percentages which items in the statement of
operations bear to revenues.
THREE MONTHS ENDED
MARCH 31,
---------------------
1996 1995
------ ------
Revenues . . . . . . . . . . . . . . . . . . . . 100.0% 100.0%
Cost of Sales . . . . . . . . . . . . . . . 65.5% 62.3%
------ ------
Gross Margin . . . . . . . . . . . . . . . . . . 34.5% 37.7%
Selling, General and Administrative . . . . 20.9% 25.0%
------ ------
Operating Income . . . . . . . . . . . . . . . . 13.6% 12.7%
Interest Income, Net . . . . . . . . . . . . .4% .3%
------ ------
Income Before Income Taxes . . . . . . . . . . . 14.0% 13.0%
Income Taxes . . . . . . . . . . . . . . . . 5.6% 5.2%
------ ------
Net Income . . . . . . . . . . . . . . . . . . . 8.4% 7.8%
====== ======
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31, 1995
RESULTS OF OPERATIONS - Net income in the first quarter of 1996 was $1.6
million or $.25 per share, an increase of $0.4 million compared to $1.2 million
or $.20 per share in the first quarter of 1995. Weighted average shares
outstanding increased 6% compared to the first quarter of 1995.
Net income in the first quarter of 1996 improved as a result of continued cost
control and contracting and implementation process improvements which generated
improved program productivity.
REVENUES - Revenues were $19.3 million in the first quarter of 1996, an
increase of $3.8 million or 25% from $15.5 million in the first quarter of
1995. Interlink contributed $2.6 million in first quarter revenue. Revenues
from traditional TCT(R) programs were $16.7 million, an 8% increase from first
quarter 1995. The domestic component of TCT(R) program revenue increased 61%
to $11.0 million as a result of a number of large programs which were not
present in 1995. Additionally, in the first quarter of 1995, the Company had
three domestic programs which were subsequently canceled. International
revenues declined 34% to $5.7 million due to the winding down of several large
programs with a multi-national client which were replaced with programs having
a high incentive content. Traditionally, realization of incentive revenues
occurs several months into the program.
COST OF SALES - Cost of Sales (COS) includes all costs associated directly with
the generation of revenue. Such costs include certain personnel and facilities
costs, program-related travel and entertainment, hardware costs, and incentive
compensation expense.
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8
COS was $12.6 million in the first quarter of 1996, a 30% increase compared to
$9.7 million in the first quarter of 1995. As a result of heightened demand,
increased levels of business and the addition of Interlink personnel, the
Company employed an average of 263 direct personnel, which consists of
ResultantsSM and certain administrative personnel, in the first quarter of 1996
compared to 208 in the first quarter of 1995. This personnel increase resulted
in compensation increases of approximately $1.8 million. Additionally, COS
includes $1 million of Interlink hardware purchases which were not present in
the first quarter of 1995.
These increases were offset slightly by a $0.1 million decrease in incentive
compensation expense from $0.8 million in the first quarter of 1995. Incentive
compensation is based on Company financial performance and certain pre- defined
targets.
GROSS MARGIN - Gross margin was $6.6 million representing 34.5% of revenues in
the first quarter of 1996 compared to $5.9 million and 37.7% of revenues in the
first quarter of 1995. Gross margin declined as a result of a number of
factors. First, the Company has added 30 ResultantsSM to its workforce in the
first quarter of 1996. ResultantSM hirings occur slightly in advance of
programs starts so they can be extensively trained in the TCT(R) methodology.
This creates an increase in compensation costs, but no corresponding increase
in program revenue until the ResultantSM is assigned to a program. This
depresses margin during hiring periods. Over the comparable period in 1995,
ResultantSM headcount remained flat. Second, margins on Interlink's operations
are traditionally less than those realized on TCT(R) programs. The Company did
not have sales from Interlink's operations in the first quarter of 1995.
Third, the sharp decline in European revenues coupled with the higher cost of
European ResultantsSM further depressed overall Company margins.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Selling, general and
administrative expenses (SG&A) consist of all operating expenses not directly
associated with the generation of revenue. A majority of SG&A expenses are for
corporate personnel (including certain officers), non-program-related travel
and entertainment, corporate facilities costs, and professional and legal
costs.
SG&A was $4.0 million in the first quarter of 1996, a 3% increase compared to
$3.9 million in the first quarter of 1995. Excluding the addition of Interlink
costs, SG&A decreased by $0.3 million. This decrease was due primarily to
reductions in all general and administrative areas as the Company continues to
focus on increasing administrative efficiency.
OTHER - The Company's effective tax rate was 40% in the first quarter of 1996,
equal to the 40% rate in the first quarter of 1995.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased by $0.9 million in the first quarter of
1996 compared to a $6.5 million increase in the first quarter of 1995. The
major components of these changes are discussed below:
CASH FLOWS FROM OPERATING ACTIVITIES - Net cash flows from operating activities
was $2.9 million. Cash flows from operating activities in the first quarter of
1996 were used to fund capital additions during the period. Accounts
receivable balances more than 30 days past due at March 31, 1996 were $1.4
million, unchanged from December 31, 1995. Days sales outstanding has also
improved from 79 days at December 31, 1995 to 65 days at March 31, 1996.
CASH FLOWS FROM INVESTING ACTIVITIES - Cash used for capital additions comprise
most of the Company's investing activities. Capital expenditures related
primarily to the CEO Center expansion in the first quarter of 1996.
Additionally, the Company acquired a license in certain technologies and
methodologies which will be implemented into the Company's current and future
programs.
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9
CASH FLOWS FROM FINANCING ACTIVITIES - Cash flows used in financing activities
in the first quarter of 1996 were for the purchase of treasury shares, the
settlement of 1995 amounts due to affiliates and certain 1996 advances to
affiliates.
The Company has no outstanding long-term indebtedness. The Company has a $6.0
million line of credit agreement with Comerica Bank expiring February 1998.
Loans under this agreement bear interest at the prime rate and are unsecured.
During the first quarter of 1996, the Company did not incur any borrowings
under this line of credit.
In 1994 the Board of Directors approved a stock repurchase plan for up to
250,000 shares. The Company may purchase stock in the open market in the
future under this program. The Company purchased 65,375 shares in the first
quarter of 1996 and 97,508 additional shares from April 1 through April 24,
1996 under this plan.
FINANCIAL CONDITION - The Company believes that its financial condition remains
strong and that it has the financial resources necessary to meet its needs.
The Company does, however, believe its excess cash balance will gradually
decline over the next few months as expansion of the business will require
capital resources. Additionally, the Company has and will continue to make
significant foreign and domestic estimated tax payments in 1996 compared to
those made in 1995 and may continue to purchase stock under its stock buyback
program. Cash provided by operating activities and the Company's credit
facility should be sufficient to meet operational needs and expansion plans
during 1996.
9
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THOMAS GROUP, INC.
PART II -- OTHER INFORMATION
Item 6 -- Exhibits and Reports on Form 8-K
(a) Exhibits
11 -- Statement Regarding Computation of Earnings Per Share
21 -- Subsidiaries of Registrant (filed as Exhibit 21 to the
Company's 1995 Form 10-K and incorporated herein by
reference)
27 -- Financial Data Schedule
(b) Reports on Form 8-K for the Quarter Ending March 31, 1996 - None
SIGNATURES
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
May 6, 1996 /s/ Philip R. Thomas
------------- --------------------
Date Philip R. Thomas
Chairman and Chief Executive Officer
May 6, 1996 /s/ Leland L. Grubb, Jr.
------------- -----------------------
Date Leland L. Grubb, Jr.
Vice President, Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
10
11
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
11 -- Statement Regarding Computation of Earnings Per Share
21 -- Subsidiaries of Registrant (filed as Exhibit 21 to the
Company's 1995 Form 10-K and incorporated herein by
reference)
27 -- Financial Data Schedule