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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, 1997
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 of (I.R.S. Employer
incorporation or organization) Identification No.)
5215 NORTH O'CONNOR BOULEVARD
SUITE 2500
IRVING, TX 75039-3714
(Address of principal executive offices, including zip code)
(972) 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)
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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 30, 1997 the following number of shares of the
registrant's stock were outstanding:
Common Stock 5,901,739
Class B Common Stock 184,947
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Total 6,086,686
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THOMAS GROUP, INC.
PART I -- FINANCIAL INFORMATION
PAGE NO.
Item 1 -- Financial Statements
Consolidated Balance Sheets, March 31, 1997 and December 31, 1996 . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations for the Three Months Ended March 31, 1997 and 1996 . . . . . . . . 4
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1997 and 1996 . . . . . . . . 5
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Item 2 -- Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . . . . . 8
PART II - OTHER INFORMATION
Item 6 -- Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
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3
THOMAS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
MARCH 31, DECEMBER 31,
ASSETS 1997 1996
--------- ------------
Current Assets
Cash and cash equivalents ........................................ $ 3,763 $ 5,711
Trade accounts receivable, net of allowances of $306 ............. 13,177 10,267
Accounts and notes receivable -- affiliates ...................... 2,151 1,500
Other assets ..................................................... 2,377 3,944
-------- --------
Total Current Assets .......................................... 21,468 21,422
Property and Equipment, net .......................................... 7,200 7,641
Capitalized Software Development Costs, net .......................... 3,363 3,069
Other Assets ......................................................... 7,224 6,758
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$ 39,255 $ 38,890
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued liabilities ......................... $ 3,299 $ 3,901
Income taxes payable ............................................. 1,542 1,420
Advance payments ................................................. 372 396
-------- --------
Total Current Liabilities ..................................... 5,213 5,717
Long-Term Obligations ................................................ 1,721 1,661
-------- --------
Total Liabilities ............................................. 6,934 7,378
-------- --------
Commitments and Contingencies
Stockholders' Equity
Common Stock, $.01 par value; 12,500,000 shares authorized;
6,193,030 and 6,179,117 shares issued ......................... 62 62
Class B Common Stock, $.01 par value; 1,200,000 shares authorized;
184,947 and 185,189 shares issued and outstanding ............. 2 2
Additional paid-in capital ....................................... 20,632 20,143
Retained earnings ................................................ 16,182 15,570
Cumulative translation adjustment ................................ (324) (32)
Treasury stock, 295,991 shares of Common, at cost ................ (4,233) (4,233)
-------- --------
Total Stockholders' Equity .................................... 32,321 31,512
-------- --------
$ 39,255 $ 38,890
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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,
-----------------------
1997 1996
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Revenues ................................................ $ 16,849 $ 19,256
Cost of Sales ....................................... 10,894 12,616
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Gross Margin ............................................ 5,955 6,640
Selling, General and Administrative ................ 4,943 4,026
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Operating Income ........................................ 1,012 2,614
Interest Income, Net ............................... 8 76
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Income Before Income Taxes .............................. 1,020 2,690
Income Taxes ....................................... 408 1,075
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Net Income .............................................. $ 612 $ 1,615
========== ==========
Earnings Per Common and Common Equivalent Share ......... $ 0.10 $ 0.25
Weighted Average Shares and Share Equivalents
Outstanding ............................................ 6,245,676 6,386,251
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,
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1997 1996
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Cash Flows From Operating Activities
Net income ......................................................................... $ 612 $ 1,615
Adjustments to reconcile net income to net cash (used in) provided by operating
activities
Depreciation and amortization ............................................. 843 634
Allowance for doubtful accounts ........................................... -- (95)
Gain on disposal of property .............................................. (35) --
Other ..................................................................... 73 11
Deferred taxes ............................................................ (13) --
Change in operating assets and liabilities
(Increase) decrease trade accounts receivable ........................ (3,108) 671
Decrease (increase) other assets ..................................... 1,546 (1,070)
Increase (decrease) accounts payable and accrued liabilities ......... (560) 573
Decrease advance payments ............................................ (24) (22)
Increase income taxes payable ........................................ 231 168
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Net Cash (Used In) Provided by Operating Activities ............. (435) 2,485
-------- --------
Cash Flows Used In Investing Activities
Decrease in short-term receivables ................................................. -- 41
Capital expenditures ............................................................... (141) (885)
Capitalization of software development costs ....................................... (444) (72)
Additional Goodwill - purchase price adjustment .................................... (200) --
License purchase ................................................................... -- (250)
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Net Cash Used In Investing Activities ........................... (785) (1,166)
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Cash Flows From Financing Activities
Purchase of treasury stock ......................................................... -- (939)
Proceeds from exercise of stock options ............................................ 57 77
Other long-term obligations ........................................................ 10 (19)
Advances - line of credit .......................................................... 2,200 --
Repayment - line of credit ......................................................... (2,200) --
Repayment of obligations to affiliate .............................................. -- (1,027)
Net repayments from (advances to) affiliates ....................................... (651) (385)
-------- --------
Net Cash Used In Financing Activities ........................... (584) (2,293)
-------- --------
Effect of Exchange Rate Changes on Cash ................................................. (144) 97
-------- --------
Net (Decrease) Increase In Cash and Cash Equivalents .................................... (1,948) (877)
Cash and Cash Equivalents
Beginning of period ........................................................... 5,711 11,273
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End of period ................................................................. $ 3,763 $ 10,396
======== ========
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 1996 Annual Report to Stockholders, together with
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in the Company's 1996 Annual Report to Stockholders. The
results of operations for the three month period ended March 31, 1997 are not
necessarily indicative of the results of operations for the entire year ending
December 31, 1997.
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 are not presented because the result is not materially different.
3. Summary of Significant Accounting Policies
Recent Accounting Standards - The Financial Accounting Standards Board
recently adopted Statement of Financial Accounting Standards No. 128, Earning
Per Share (SFAS 128). SFAS 128 requires a calculation of book "Basic" and
"Diluted" earnings per share. Basic earnings per share includes no dilution.
The company will adopt SFAS 128 in fiscal 1997. Its implementation in the first
quarter of 1997 would not have had a material effect on the reported earnings
per share.
4. Related Party Transactions
A summary of receivables from affiliates follows:
THREE MONTHS ENDED
MARCH 31,
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1997 1996
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Philip R. Thomas - incentive compensation advances $2,019 --
Other affiliates - long term 200 --
Celerity Partners, LLP 132 --
Effective January 1, 1997, the company modified its agreement with Celerity
Partners, a limited partnership (the "Partnership") an investment partnership
in which Mr. Thomas and Mr. Gerald K. Beckmann (company directors) have
ownership interests in the general partner. The company has terminated the
employee status of the two individuals who, in addition to previously working
for the company, also provided certain services to the Partnership. The company
now makes quarterly advances to the partnership which are earned as the
partnership brings qualified client prospects to a company CEO workshop.
5. Revolving Credit Agreement - The company maintains a $20 million revolving
credit agreement with Comerica bank. This agreement expires in December 2003
and includes a call option in December 2001. Additionally, terms of the
agreement provide for a $1 million per quarter reduction in any outstanding
balances after the first two years. Loans under this agreement bear interest at
the prime rate or other similar interest options. While there were no
outstanding borrowings under this revolving line of credit agreement at March
31, 1997, the company did utilize the credit line during the first quarter of
1997 to meet working capital requirements. The average daily balance
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outstanding under the credit line was $0.3 million and total interest paid, at
an annual rate of 8.25%, was $0.01 million.
6. Segment Data - Information regarding the company's two business segments
follows:
BUSINESS
IMPROVEMENT SOFTWARE
SERVICES SOLUTIONS CORPORATE TOTAL
---------------------------------------------------
THREE MONTHS ENDED MARCH 31, 1997
Sales to unaffiliated clients $ 15,421 $ 1,428 $ 16,849
Operating income (loss) $ 4,989 ($ 1,105) ($ 2,872) $ 1,012
THREE MONTHS ENDED MARCH 31, 1996
Sales to unaffiliated clients $ 16,689 $ 2,567 $ 19,256
Operating income (loss) $ 5,414 $ 198 ($ 2,998) $ 2,614
7. Software Development Costs - Due to declining sales at the company's
software subsidiaries in the first quarter of 1997, in April 1997 the company
began an evaluation of alternatives for one of the subsidiaries software
products. This evaluation has led the company, beginning in the second quarter
of 1997, to revise the amortization period on this product from 36 to 21
months, which reflects the company's estimate of the remaining economic life of
the product. This adjustment to the amortization was the result of a strategic
decision to focus the subsidiaries' efforts on the alternatives to this
product. The company intends to continue to market, provide technical support
and customization, and develop minor enhancements to the existing product.
8. Supplemental Disclosure of Cash Flow Information
THREE MONTHS ENDED
MARCH 31,
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1997 1996
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Interest paid ......... $ 21 $ 13
Income tax refund ..... 1,800 --
Income taxes paid ..... 302 759
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Thomas Group derives the majority of its revenues from monthly fixed and
incentive (performance-oriented) fees for the implementation of Total Cycle
Time and other business improvement 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 company also provides, on a fixed fee basis, software solutions for certain
business processes.
The following table sets forth the percentages which items in the statement of
operations bear to revenues.
THREE MONTHS ENDED
MARCH 31,
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1997 1996
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Revenues ............................... 100.0% 100.0%
Cost of Sales ..................... 64.7% 65.5%
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Gross Margin ........................... 35.3% 34.5%
Selling, General and
Administrative ................... 29.3% 20.9%
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Operating Income ....................... 6.0% 13.6%
Interest Income, Net .............. -- .4%
----- -----
Income Before Income Taxes ............. 6.0% 14.0%
Income Taxes ...................... 2.4% 5.6%
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Net Income ............................. 3.6% 8.4%
===== =====
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996
RESULTS OF OPERATIONS - Net income in the first quarter of 1997 was $0.6
million or $.10 per share, a decrease of $1.0 million compared to $1.6 million
or $.25 per share in the first quarter of 1996. Weighted average shares and
share equivalents increased 2% compared to the first quarter of 1996.
REVENUES - Revenues were $16.8 million in the first quarter of 1997, a decrease
of $2.5 million or 13% from $19.3 million in the first quarter of 1996. The
software segment contributed $1.4 million in first quarter revenue compared to
a $2.6 million contribution in the first quarter of 1996. Revenues from
traditional TCT(R) programs were $15.4 million, an 8% decrease from first
quarter 1996. The domestic component of TCT(R) program revenue increased 6% to
$11.7 million and international revenues declined 42% to $3.2 million.
International revenues declined due to significant contract completions in 1996
which are still in the process of being replaced. The company's sales process
was enhanced in 1996 and resulted in the signing of four new domestic, one new
Asia/Pacific and three new European contracts in the first quarter of 1997.
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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COS was $10.9 million in the first quarter of 1997, a 13% decrease compared to
$12.6 million in the first quarter of 1996. The company employed an average of
11 more direct personnel in the first quarter of 1997 than in the first quarter
of 1996. Direct personnel consists of Resultants(SM) and certain administrative
personnel. This personnel increase resulted in compensation increases of
approximately $0.4 million offset by a $0.7 million decrease in incentive
compensation expense from $0.7 million in the first quarter of 1996. Incentive
compensation is based on company financial performance and certain pre-defined
targets.
Additional reductions in COS resulted from a company-wide focus on cost
control. Customer related non-billable travel for the first quarter of 1997 was
$0.4 million less than the related cost in the first quarter of 1996 and fewer
computer hardware sales through our software subsidiaries in the first quarter
of 1997 reduced the cost of such hardware by $0.6 million.
GROSS MARGIN - Gross margin was $6.0 million, representing 35.3% of revenues in
the first quarter of 1997, compared to $6.6 million and 34.5% of revenues in
the first quarter of 1996. While lower revenues resulted in absolute gross
margin decreasing in comparable quarters, gross margin as a percentage of
revenues increased as a result of the company's focus on cost control.
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 $4.9 million in the first quarter of 1997, a 23% increase compared to
$4.0 million in the first quarter of 1996. SG&A expenses increased as a result
of growth initiatives undertaken in mid-1996. Sales and marketing personnel
increased in the second half of 1996, resulting in an increase in SG&A
compensation of $0.5 million.
OTHER - The Company's effective tax rate was 40% in the first quarter of 1997,
equal to the 40% rate in the first quarter of 1996.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased by $1.9 million in the first quarter of
1997 compared to a $0.9 million decrease in the first quarter of 1996. The
major components of these changes are discussed below:
CASH FLOWS FROM OPERATING ACTIVITIES - Operating activities yielded negative
cash flows of $0.3 million in the first quarter of 1997 compared to positive
cash flows of $2.5 million in the first quarter of 1996. Accounts receivable
balances more than 30 days past due were $0.8 million at March 31, 1997,
compared to $1.1 million at December 31, 1996 and $1.4 million at March 31,
1996. Days sales outstanding deteriorated from 53 days at December 31, 1996 to
71 days at March 31, 1997.
CASH FLOWS FROM INVESTING ACTIVITIES - The use of cash for capital additions
and capitalized software development costs comprise the company's first quarter
1997 investing activities. Capital expenditures related primarily to computer
hardware upgrades in the first quarter of 1997 and CEO Center expansion in the
first quarter of 1996. In February 1997 the company purchased the software code
for a significant enhancement to a Bermac software product offering. The
company anticipates 1997 capital expenditures will not exceed $2 million and
will be primarily related to computer system upgrades and office
infrastructure.
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CASH FLOWS FROM FINANCING ACTIVITIES - Cash flows used in financing activities
in the first quarter of 1997 were for the advancement of compensation to
affiliates, offset partially by the receipt of proceeds from employee exercises
of stock options.
The Company has no outstanding long-term indebtedness at March 31, 1997. The
company has a $20 million revolving credit facility with Comerica Bank. This
facility expires in December 2003 and includes a call option in December 2001.
Additionally, the terms provide for a $1 million per quarter reduction in any
outstanding balances after the first two years. Loans under this agreement bear
interest at the prime rate or other options. During the first quarter of 1997
the company made draws and repaid in full $2.2 million used by the company for
working capital purposes.
In 1994 the Board of Directors approved a stock repurchase plan for up to
250,000 shares. The company purchased 233,600 shares under this plan through
December 31, 1996. The remaining 16,400 shares are available to the company to
purchase in the open market under this program.
FINANCIAL CONDITION - The company believes that its financial condition remains
strong and that it has the financial resources necessary to meet its needs.
Cash provided by operating activities and the company's credit facility should
be sufficient to meet short and long-term operational needs.
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THOMAS GROUP, INC.
PART II -- OTHER INFORMATION
SEQUENTIAL
PAGE NO.
Item 6 -- Exhibits and Reports on Form 8-K
(a) Exhibits
11 -- Statement Regarding Computation of Earnings Per
Share 12
21 -- Subsidiaries of Registrant (filed as Exhibit 21 to
the Company's 1996 Form 10-K and incorporated herein
by reference) --
27 -- Financial Data Schedule
(b) Reports on Form 8-K for the Quarter Ending March 31, 1997 - 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 14, 1997 /s/ Philip R. Thomas
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Date Philip R. Thomas
Chairman and Chief Executive Officer
May 14, 1997 /s/Leland L. Grubb, Jr.
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Date Leland L. Grubb, Jr.
Vice President, Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
11 Statement Regarding Computation of Earnings Per Share
27 Financial Data Schedule