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, 1998
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)
(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, 1998 the following number of shares of the registrant's
stock were outstanding:
Common Stock 4,707,724
Class B Common Stock 164,174
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Total 4,871,898
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2
THOMAS GROUP, INC.
PART I - FINANCIAL INFORMATION
PAGE NO.
Item 1 - Financial Statements
Consolidated Balance Sheets, March 31, 1998 and December 31, 1997.......................................... 3
Consolidated Statements of Operations for the Three Months Ended March 31, 1998 and 1997................... 4
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1998 and 1997................... 5
Notes to Consolidated Financial Statements................................................................. 6
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 9
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K........................................................................... 12
2
3
ITEM I - FINANCIAL STATEMENTS
THOMAS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
MARCH 31, DECEMBER 31,
ASSETS 1998 1997
-------- --------
Current Assets
Cash and cash equivalents .............................................. $ 2,098 $ 11,254
Trade accounts receivable, net of allowances of $460 and $341 .......... 12,143 10,278
Unbilled receivables ................................................... 1,502 2,083
Accounts and notes receivable - affiliates ............................. -- 2,274
Other assets ........................................................... 1,759 1,545
-------- --------
Total Current Assets ................................................ 17,502 27,434
Property and Equipment, net ............................................... 7,826 8,326
Capitalized Software Development Costs, net ............................... 662 888
Other Assets .............................................................. 8,297 7,738
-------- --------
$ 34,287 $ 44,386
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued liabilities ............................... $ 4,070 $ 4,716
Income taxes payable ................................................... 721 1,356
Advance payments ....................................................... 451 320
Current maturities of long-term obligations ............................ 449 304
-------- --------
Total Current Liabilities ........................................... 5,691 6,696
Long-Term Obligations ..................................................... 4,780 2,982
-------- --------
Total Liabilities ................................................... 10,471 9,678
-------- --------
Commitments and Contingencies
Stockholders' Equity
Common Stock, $.01 par value; 12,500,000 shares authorized;
6,295,444 and 6,282,391 shares issued and outstanding ............... 63 63
Class B Common Stock, $.01 par value; 1,200,000 shares authorized;
164,174 and 176,594 shares issued and outstanding ................... 2 2
Additional paid-in capital ............................................. 21,722 21,597
Retained earnings ...................................................... 17,657 17,996
Accumulated other comprehensive income ................................ (605) (531)
Advances to stockholder for treasury stock purchase .................... (10,604) --
Treasury stock, 312,391 shares of Common, at cost ...................... (4,419) (4,419)
-------- --------
Total Stockholders' Equity .......................................... 23,816 34,708
-------- --------
$ 34,287 $ 44,386
======== ========
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,
----------------------------
1998 1997
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Revenues ............................................ $ 16,729 $ 16,849
Cost of Sales ................................... 11,135 10,894
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Gross Profit ........................................ 5,594 5,955
Selling, General and Administrative ............ 6,186 4,943
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Operating Income..................................... (592) 1,012
Interest Income, Net ........................... 29 8
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Income (loss) before income taxes ................... (563) 1,020
Income Tax expense (benefit) ................... (225) 408
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Net income (loss) ................................... $ (338) $ 612
=========== ===========
Earnings (loss) per common share:
Basic ............................................... $ (0.05) $ 0.10
Diluted ............................................. -- $ 0.10
Weighted average shares:
Basic ............................................... 6,151,540 6,079,267
Diluted ............................................. -- 6,220,488
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,
----------------------
1998 1997
-------- --------
Cash Flows From Operating Activities
Net income (loss) ............................................................................. $ (338) $ 612
Adjustments to reconcile net income (loss) to net cash used in operating activities
Depreciation and amortization ....................................................... 853 843
Allowance for doubtful accounts ..................................................... 119 --
(Gain) loss on disposal of property ................................................. 34 (35)
Other ............................................................................... 73 73
Deferred taxes ...................................................................... (214) (13)
Change in operating assets and liabilities
(Increase) decrease in trade accounts receivable ............................... (2,034) (3,108)
(Increase) decrease in unbilled receivables .................................... 581 --
(Increase) decrease in other assets ............................................ (581) 1,546
Increase (decrease) in accounts payable and accrued liabilities ................ (524) (560)
Increase (decrease) in advance payments ........................................ 124 (24)
Increase (decrease) in income taxes payable .................................... (625) 231
-------- --------
Net Cash Used In Operating Activities ..................................... (2,532) (435)
Cash Flows From Investing Activities
Capital expenditures .......................................................................... (69) (141)
Capitalization of software development costs .................................................. -- (444)
Additional Goodwill - purchase price adjustment ............................................... -- (200)
-------- --------
Net Cash Used In Investing Activities ..................................... (69) (785)
Cash Flows From Financing Activities
Advances to stockholder for treasury stock purchase ........................................... (10,604) --
Proceeds from exercise of stock options ....................................................... 50 57
Other long-term obligations ................................................................... 64 10
Advances - line of credit ..................................................................... 8,850 2,200
Repayment - line of credit .................................................................... (7,095) (2,200)
Net repayments from (advances to) affiliates .................................................. 2,274 (651)
-------- --------
Net Cash Used In Financing Activities ..................................... (6,461) (584)
Effect of Exchange Rate Changes on Cash ........................................................... (94) (144)
-------- --------
Net decrease in Cash and Cash Equivalents ......................................................... (9,156) (1,948)
Cash and Cash Equivalents:
Beginning of period ..................................................................... 11,254 5,711
-------- --------
End of period ........................................................................... $ 2,098 $ 3,763
======== ========
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 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 1997 Annual Report to
Stockholders. The results of operations for the three month period ended March
31, 1998 are not necessarily indicative of the results of operations for the
entire year ending December 31, 1998.
2. Earnings Per Share - Basic earnings per share is based on the weighted
average shares outstanding without regard for common stock equivalents such as
options and warrants. Diluted earnings per share includes the effect of common
stock equivalents. Earnings per share for the quarter ended March 31, 1997 have
been restated to reflect the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share". The following illustrates the
reconciliation of the numerators and denominators of the basic and diluted
earnings per share computations:
THREE MONTHS ENDED MARCH 31, 1998
---------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
-----------------------------------------------
BASIC EPS
Income available to common stockholders $ (338,000) 6,151,540 $ (0.05)
============= ============ =========
Due to the net loss incurred in the first quarter of 1998, diluted earnings per
share and diluted weighted average shares are not presented. Exercise of options
and warrants would result in antidilutive adjustments to basic earnings per
share and basic weighted average shares.
THREE MONTHS ENDED MARCH 31, 1997
---------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
------------ --------------- ---------
BASIC EPS
Income available to common stockholders $ 612,000 6,079,267 $ 0.10
========
EFFECT OF DILUTIVE SECURITIES
Common stock options -- 141,221
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DILUTED EPS
Income available to common stockholders
plus assumed conversions $ 612,000 6,220,488 $ 0.10
========= ========= ========
3. Significant Clients - The Company recorded revenue in the amount of $2.9
million, or 17.3% of total revenues, from one client during the three month
period ended March 31, 1998.
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THOMAS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. Summary of Significant Accounting Policies
Recent Accounting Standards - In the first quarter of 1998, the Company
adopted Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income", which establishes standards for reporting and display of
comprehensive income. Comprehensive income includes all changes in equity except
those resulting from investments by owners and distributions to owners.
Comprehensive income, derived from foreign currency translation and including
net income, totaled a comprehensive loss of $0.4 million for the first quarter
of 1998 and comprehensive income of $0.3 million for the first quarter of 1997.
Certain balance sheet items have been reclassified to conform with the current
presentation.
5. Related Party Transactions - In February 1998, the Company agreed to
purchase from the then current chairman and chief executive officer, outstanding
common stock of the Company worth $10.6 million. The number of shares purchased
in the transaction was to be determined based on a discounted average stock
price for the period from January 25, 1998 through April 24, 1998. The value of
these shares is recorded as advances to stockholder for treasury stock purchase
on the consolidated balance sheet as of March 31, 1998. At the close of the
market on April 24, 1998 the number of shares to be purchased was determined to
be 1.3 million shares.
6. 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. At March 31, 1998,
and May 7, 1998, the balances due on the agreement were $1.8 million and $4.9
million, respectively. There was no balance for the comparable period of 1997.
During the first quarter of 1998, the average daily balance outstanding under
the credit line was $0.9 million and total interest paid, at an annual rate of
8.5%, was less than $0.1 million.
7. Segment Data - Information regarding the Company's two business segments
follows:
BUSINESS
IMPROVEMENT INFORMATION
SERVICES TECHNOLOGIES CORPORATE TOTAL
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THREE MONTHS ENDED MARCH 31, 1998
Sales to unaffiliated clients $ 15,646 $ 1,083 $ 16,729
Operating income (loss) $ 4,039 $ (1,237) $ (3,394) $ (592)
THREE MONTHS ENDED MARCH 31, 1997
Sales to unaffiliated clients $ 15,448 $ 1,401 $ 16,849
Operating income (loss) $ 4,989 $ (1,105) $ (2,872) $ 1,012
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THOMAS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
8. Supplemental Disclosure of Cash Flow Information
THREE MONTHS ENDED
MARCH 31,
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1998 1997
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Interest paid .......................... 42 $ 21
Income tax refund ...................... -- 1,800
Income taxes paid ...................... 950 302
9. Subsequent Events - In May 1998, management announced the retirement of
the Chairman and Chief Executive Officer, Philip R. Thomas, election of the new
Chief Executive Officer, J. Thomas Williams, and election of General John
T. Chain, Jr. as Chairman of the Board of Directors. Thereafter, management
announced a realignment of its corporate structure to refocus efforts on its
core business. The pretax financial statement impact of the realignment, to be
recorded in the second quarter of 1998, will include disposition of the Thomas
Group Information Technologies segment estimated at approximately $4.0 million,
write down of facilities deemed unnecessary as a result of the realignment of
approximately $6.0 million, personnel reduction costs of approximately $3.0
million, and other provisions of approximately $1.0 million.
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Thomas Group, Inc. (the "Company") derives the majority of its revenues from
monthly fixed and incentive (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,
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1998 1997
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Revenues ......................................... 100.0% 100.0%
Cost of Sales ............................... 66.6% 64.7%
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Gross Profit ..................................... 33.4% 35.3%
Selling, General and Administrative ......... 36.9% 29.3%
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Operating Income ................................. (3.5%) 6.0%
Interest Income, Net ........................ .2% --
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Income Before Income Taxes ....................... (3.3%) 6.0%
Income Taxes ................................ (1.3%) 2.4%
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Net income (loss) ................................ (2.0%) 3.6%
========== ==========
The following table sets forth the Company's revenues by geographic and industry
segment:
THREE MONTHS ENDED
MARCH 31,
-------------------
1998 1997
------- -------
Business Improvement Programs
United States $10,655 $11,673
Europe 4,113 3,229
Asia/Pacific 878 546
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Total Business Improvement Programs 15,646 15,448
Software Solutions 1,083 1,401
------- -------
Total Revenue $16,729 $16,849
======= =======
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
REVENUE - Revenue decreased less than 1.0% in the first quarter of 1998 over the
first quarter of 1997. Business Improvement Program revenue increased 1.0% over
the first quarter of 1997. This increase consisted of a $0.6 million (3.0%)
increase in fixed fee revenue and a $0.4 million (2.4%) decrease in incentive
revenue. Fixed fee and incentive revenues represent 77.9% and 22.1%,
respectively, of Business Improvement Program revenue in the first quarter of
1998 and 75.0% and 25.0%, respectively, of Business Improvement Program revenue
in the first quarter of 1997.
The United States component of Business Improvement Program revenue decreased
8.7%, primarily as a result of cancellations of two contracts in the fourth
quarter of 1997. European Business Improvement Program revenue increased 27.4%
due to the addition of a significant contract in Sweden. Asia/Pacific revenue
increased 60.8% for the comparable quarters as a result of new business being
added to the geographical segment in the third quarter of
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
1997. Due to economic conditions in the region, management does not anticipate
first quarter comparable growth in the Asia/Pacific region to be representative
of that which will be attained in subsequent quarters.
Revenue from Information Technologies decreased 22.7% in the first quarter of
1998 as compared to the first quarter of 1997 primarily as a result of decreased
interactive business and decreased closing of software license contracts.
GROSS PROFIT - Gross profit was 33.4% of revenues in the first quarter of 1998
compared to 35.3% of revenues in the first quarter of 1997. Business Improvement
Program gross profit was 37.8% of revenues in the first quarter of 1998 versus
40.0% of revenues in the first quarter of 1997. This decrease was primarily the
result of the hiring of additional Resultants(SM) in 1997 to keep up with
growth, combined with contract cancellations which reduced short term revenues.
Information Technologies gross margin was a negative 30.2% of revenues in the
first quarter of 1998 and a negative 15.8% of revenues in the first quarter of
1997. This decrease is due primarily to fewer license fee and hardware sales in
the first quarter of 1998 as compared to the first quarter of 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Selling, general and
administrative expenses consist of all operating expenses not directly
associated with the generation of revenue. A majority of selling, general, and
administrative expenses are for corporate personnel (including corporate
officers), non-program-related travel and entertainment, corporate facilities
costs, and professional and legal costs.
Selling, general and administrative expense as a percentage of total revenue
increased to 36.9% in the first quarter of 1998 from 29.3% in the first quarter
of 1997, a $1.2 million quarter to quarter increase. This increase was primarily
the result of $0.8 million in costs associated with the departure of three
senior level managers in the first quarter of 1998. Additionally, the Company
invested $0.2 million in the research and development of new products and
increased information technology expenditures by $0.2 million.
OTHER - The Company's effective tax rate was 40% in the first quarter of 1998,
equal to the 40% rate in the first quarter of 1997.
RESULTS OF OPERATIONS - Net loss in the first quarter of 1998 was $0.3 million,
or $0.05 per share, a decrease of $1.0 million compared to net income of $0.6
million, or $0.10 per share, in the first quarter of 1997.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased by $9.2 million in the first quarter of 1998
compared to a $1.9 million decrease in the first quarter of 1997. The major
components of these changes are discussed below:
CASH FLOWS FROM OPERATING ACTIVITIES - Operating activities used cash of $2.5
million in the first quarter of 1998 compared to using cash of $0.4 million in
the first quarter of 1997. Accounts receivable balances more than 30 days past
due were $1.8 million at March 31, 1998, compared to $1.4 million at December
31, 1997 and $0.8 million at March 31, 1997. Days sales outstanding deteriorated
slightly from 41 days at December 31, 1997 to 49 days at March 31, 1998.
CASH FLOWS FROM FINANCING ACTIVITIES - Cash flows used in financing activities
in the first quarter of 1998 were primarily for the purchase of outstanding
stock of the Company from the chief executive officer of the Company.
In February 1998, the Company entered into a stock purchase agreement with Mr.
Philip R. Thomas, former Chairman and Chief Executive Officer to repurchase
shares of common stock of the Company for $8.2 million in cash and
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
satisfaction of a $2.3 million debt to the Company. The value of these shares is
recorded as advances to stockholder for treasury stock purchase on the
consolidated balance sheet as of March 31, 1998. At the close of the market on
April 24, 1998 the number of shares to be purchased was determined to be 1.3
million shares.
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. At March 31, 1998, and May 7, 1998, the balances due on the agreement
were $1.8 million and $4.9 million, respectively. There was no balance for the
comparable period of 1997. During the first quarter of 1998, the average daily
balance outstanding under the credit line was $0.9 million and total interest
paid, at an annual rate of 8.5%, was less than $0.1 million.
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.
SUBSEQUENT EVENTS - In May 1998, management announced the retirement of the
Chairman and Chief Executive Officer, Philip R. Thomas, election of the new
Chief Executive Officer, J. Thomas Williams, and election of General John T.
Chain, Jr. as Chairman of the Board of Directors. Thereafter, management
announced a realignment of its corporate structure to refocus efforts on its
core business. The pretax financial statement impact of the realignment, to be
recorded in the second quarter of 1998, will include disposition of the Thomas
Group Information Technologies segment estimated at approximately $4.0 million,
write down of facilities deemed unnecessary as a result of the realignment of
approximately $6.0 million, personnel provisions of approximately $3.0 million,
and other provisions of approximately $1.0 million.
11
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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
Reports on Form 8-K for the Quarter Ending March 31, 1998 - 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.
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Registrant
May 20, 1998 /s/ J. Thomas Williams
- ------------ ----------------------
Date J. Thomas Williams
Chief Executive Officer
May 20, 1998 /s/ Leland L. Grubb, Jr.
- ------------ ------------------------
Date Leland L. Grubb, Jr.
Vice President, Chief Financial Officer and
Treasurer (Principal Financial and Accounting Officer)
12
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INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
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27 Financial Data Schedule