1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q/A
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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 SEPTEMBER 30, 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 of (I.R.S. Employer Identification No.)
incorporation or organization)
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)
-----------
5215 NORTH O'CONNOR BOULEVARD
SUITE 2500
IRVING, TX 75039-3714
(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 October 30, 1998 the following number of shares of the
registrant's stock were outstanding:
Common Stock 4,868,238
Class B Common Stock 22,989
---------
Total 4,891,227
=========
2
THOMAS GROUP, INC.
PART I - FINANCIAL INFORMATION
PAGE NO.
--------
Item 1 - Financial Statements
Consolidated Balance Sheets, September 30, 1998 and December 31, 1997........................................ 3
Consolidated Statements of Operations for the Three Months and Nine Months Ended
September 30, 1998 and 1997.............................................................................. 4
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1998 and 1997.................. 5
Notes to Consolidated Financial Statements................................................................... 7
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 11
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K........................................................................... 16
2
3
ITEM I - FINANCIAL STATEMENTS
THOMAS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
ASSETS 1998 1997
--------------- ---------------
Current Assets
Cash and cash equivalents ........................................... $ 2,641 $ 11,254
Trade accounts receivable, net of allowances of $450 and $341 ....... 8,290 10,278
Unbilled receivables ................................................ 3,599 2,083
Accounts and notes receivable - affiliates .......................... -- 2,274
Deferred tax asset .................................................. 3,150 745
Other assets ........................................................ 543 800
--------------- ---------------
Total Current Assets ............................................. 18,223 27,434
Property and equipment, net ............................................ 3,825 8,326
Capitalized software development costs, net ............................ -- 888
Deferred tax asset ..................................................... 3,074 400
Other assets ........................................................... 4,523 7,338
=============== ===============
$ 29,645 $ 44,386
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued liabilities ............................ $ 7,346 $ 4,716
Income taxes payable ................................................ 866 1,356
Advance payments .................................................... 162 320
Current maturities of long-term obligation .......................... 322 304
--------------- ---------------
Total Current Liabilities ........................................ 8,696 6,696
Long-Term Obligations .................................................. 2,752 2,982
--------------- ---------------
Total Liabilities ................................................ 11,448 9,678
--------------- ---------------
Commitments and Contingencies
Stockholders' Equity
Common Stock, $.01 par value; 25,000,000 shares authorized;
6,470,501 and 6,282,391 shares issued and outstanding ............ 65 63
Class B Common Stock, $.01 par value; 1,200,000 shares authorized;
22,989 and 176,594 shares issued and outstanding ................. -- 2
Additional paid-in capital .......................................... 22,065 21,597
Retained earnings ................................................... 11,193 17,996
Accumulated other comprehensive income ............................. (402) (531)
Treasury stock, 1,590,018 and 312,391 shares of Common, at cost ..... (14,724) (4,419)
--------------- ---------------
Total Stockholders' Equity ....................................... 18,197 34,708
=============== ===============
$ 29,645 $ 44,386
=============== ===============
See accompanying notes to consolidated financial statements.
3
4
THOMAS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
Revenues ................................... $ 17,439 $ 18,457 $ 49,650 $ 52,468
Cost of Sales ........................ 9,621 10,161 29,422 29,815
----------- ----------- ----------- -----------
Gross Margin ............................... 7,818 8,296 20,228 22,653
Selling, General and Administrative .. 4,668 4,819 23,979 13,571
----------- ----------- ----------- -----------
Operating Income (Loss) .................... 3,150 3,477 (3,751) 9,082
Interest Income (Expense), Net ............. (70) 35 (131) 103
----------- ----------- ----------- -----------
Income (Loss) from Continuing Operations
Before Income Taxes ........................ 3,080 3,512 (3,882) 9,185
Income Taxes (Benefit) ..................... 1,124 1,423 (1,511) 3,691
----------- ----------- ----------- -----------
Income (Loss) from Continuing Operations ... 1,956 2,089 (2,371) 5,494
----------- ----------- ----------- -----------
Discontinued Operations:
Loss from Operations, net of income tax .... -- (788) (1,092) (1,984)
Loss on disposal, net of income tax ........ (435) -- (3,341) --
=========== =========== =========== ===========
Net Income ................................. $ 1,521 $ 1,301 $ (6,804) $ 3,510
=========== =========== =========== ===========
Earnings (Loss) per common share:
Basic:
Income from Continuing Operations .......... $ 0.40 $ 0.34 $ (0.44) $ 0.90
Discontinued Operations:
Loss from Operations ..................... -- (0.13) (0.20) (0.32)
Loss on Disposal ......................... (0.09) -- (0.62) --
=========== =========== =========== ===========
Net Income (Loss) .......................... $ 0.31 $ 0.21 $ (1.26) $ 0.58
=========== =========== =========== ===========
Diluted:
Income from Continuing Operations .......... $ 0.39 $ 0.32 -- $ 0.87
Discontinued Operations:
Loss from Operations ..................... -- (0.12) -- (0.31)
Loss on Disposal ......................... (0.09) -- -- --
=========== =========== =========== ===========
Net Income (Loss) .......................... $ 0.30 $ 0.20 -- $ 0.56
=========== =========== =========== ===========
Weighted average shares:
Basic ...................................... 4,946,380 6,102,643 5,403,607 6,085,812
Diluted .................................... 5,055,283 6,435,390 -- 6,304,487
See accompanying notes to consolidated financial statements.
4
5
THOMAS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1998 1997
----------- -----------
Cash Flows From Operating Activities:
Net income (loss) from continuing operations ............................................. $ (2,371) $ 5,494
Adjustments to reconcile net income (loss) to net cash from operating activities
Depreciation and amortization .................................................. 1,143 1,562
Allowance for doubtful accounts ................................................ 101 --
Provision for expatriate costs ................................................. -- 190
Provision for write-down of assets ............................................. 3,602 --
Other .......................................................................... 219 --
Collection of income tax refund ................................................ -- 1,800
Gain (loss) on disposal of property ............................................ 37 (29)
Deferred taxes ................................................................. (2,491) (839)
Change in operating assets and liabilities
(Increase) decrease in trade accounts receivable .......................... 1,305 (2,700)
(Increase) decrease in unbilled receivables ............................... (1,516) (498)
(Increase) decrease in other assets ....................................... 1,468 (455)
Increase (decrease) in accounts payable and accrued liabilities ........... 1,422 1,709
Increase (decrease) in advance payments ................................... 175 --
Increase (decrease) in income taxes payable ............................... (366) 2,814
----------- -----------
Net Cash Provided By (Used In) Operating Activities .................. 2,728 9,048
Cash Flows From Investing Activities:
Capital expenditures ..................................................................... (781) (2,482)
----------- -----------
Net Cash Used In Investing Activities ................................ (781) (2,482)
Cash Flows From Financing Activities:
Purchase of treasury stock ............................................................... (10,605) (186)
Proceeds from exercise of stock options .................................................. 547 (206)
Other long-term obligations .............................................................. (228) --
Advances - line of credit ................................................................ 32,508 894
Repayment - line of credit ............................................................... (32,508) --
Net repayments from (advances to) affiliates ............................................. 2,274 --
----------- -----------
Net Cash Provided By (Used In) Financing Activities .................. (8,012) (502)
See accompanying notes to consolidated financial statements.
5
6
THOMAS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1998 1997
----------- -----------
Effect of Exchange Rate Changes on Cash ........................ (41) (169)
----------- -----------
Net cash provided by (used in) continuing operations ........... (6,106) 3,614
Discontinued Operations:
Net cash used in operating activities ................ (2,507) (2,175)
Net cash used in investing activities ................ -- (1,183)
Net cash provided by (used in) financing activities .. -- 15
----------- -----------
Net Cash (Used In) Discontinued Operations .. (2,507) (3,343)
Net increase (decrease) in cash and cash equivalents ........... (8,613) 3,556
Cash and Cash Equivalents:
Beginning of period .................................. 11,254 5,711
----------- -----------
End of period ........................................ $ 2,641 $ 9,267
=========== ===========
Supplemental Disclosure of Cash Flow Information
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
1998 1997
--------------- ---------------
Interest paid.................................................. $ 169 $ 110
Income taxes paid.............................................. $ 1,965 $ 1,160
See accompanying notes to consolidated financial statements.
6
7
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 and nine
month periods ended September 30, 1998 are not necessarily indicative of the
results of operations for the entire year ending December 31, 1998. Certain
items have been reclassified from previously reported amounts in order to
conform to the current presentation.
2. Discontinued Operations - On May 6, 1998, the Company announced its
plan to dispose of its Information Technologies business segment. The Company
recorded an after tax charge of approximately $2.6 million as the estimated loss
on disposal of the segment, including estimated operating losses during the
phase-out period, in the second quarter of 1998. The sale of the majority of the
assets of Thomas Group Information Technologies closed on August 31, 1998. No
proceeds were received in the transaction. In exchange, the Company was relieved
of the liabilities related to extended service contracts. Terms of the sale
required a revision to the estimated loss on disposal and an additional $0.4
million after tax charge was recorded in the third quarter of 1998.
The net loss from operations of Information Technologies prior to May 6, 1998 is
as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
----------------------- ------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
Revenues ............................. -- 1,037 $ 2,040 $ 4,604
(Loss) before income taxes ........... -- (1,314) $ (1,562) $ (3,171)
Income tax benefit ................... -- 526 470 1,187
(Loss) from discontinued operations .. -- (788) $ (1,092) $ (1,984)
Other required disclosure is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
1998 1997 1998 1997
--------- --------- --------- ---------
Tax benefit from Loss on Disposal ...... $ 255 -- $ 1,302 --
Provision for estimated losses through
estimated disposal date ................ 435 -- $ 2,090 --
3. Restructuring Charges - On May 6, 1998, the Company announced its
plan to realign its corporate structure, including the write-down of certain
facilities and other cost-cutting measures. As a result of these actions, the
Company recorded restructuring charges of $9.7 million in the second quarter of
1998. The restructuring charges include approximately $3.0 million for
personnel reduction costs. Also included in the restructuring charges are the
write-down of leasehold improvements and other costs associated with
underutilized and unnecessary facilities, totaling $ 5.9 million, and
miscellaneous other charges of approximately $0.8 million.
4. Significant Clients - The Company recorded revenue in the amount of
$5.9 million, or 33.9% of total revenues, and $13.2 million, or 26.7% of total
revenues, from one client during the three and nine months ended September 30,
1998, respectively. The Company earned $1.7 million or 11.2% of revenues from
the same client during the three month period ended September 30, 1997. There
was no client from which the Company earned in excess of 10% of its total
revenues in the nine-month period ended September 30, 1997.
7
8
THOMAS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. 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 three and nine months ended
September 30, 1997 have been restated to reflect The following illustrates the
reconciliation of the numerators and denominators of the basic and diluted
earnings per share computations:
Income (Loss) Shares Per Share
THREE MONTHS ENDED: (Numerator) (Denominator) Amount
---------------------------------------------------------
SEPTEMBER 30, 1998
Basic EPS
Income available to common stockholders $ 1,521 4,946,380 $ 0.31
Effect of Dilutive Securities
Common stock options 108,903 $ (0.01)
--------------- ---------------
Diluted EPS
Income available to common stockholders plus
assumed conversions $ 1,521 5,055,283 $ 0.30
=============== =============== ===============
SEPTEMBER 30, 1997
Basic EPS
Income available to common stockholders $ 1,301 6,102,643 $ 0.21
Effect of Dilutive Securities
Common stock options 332,747 $ (0.01)
--------------- ---------------
Diluted EPS
Income available to common stockholders plus
assumed conversions $ 1,301 6,435,390 $ 0.20
=============== =============== ===============
NINE MONTHS ENDED:
SEPTEMBER 30, 1998
Basic EPS
Net Loss $ (6,803) 5,403,607 $ (1.26)
=============== =============== ===============
SEPTEMBER 30, 1997
Basic EPS
Income available to common stockholders $ 3,510 6,085,812 $ 0.58
Effect of Dilutive Securities
Common stock options 218,675 (0.02)
--------------- ---------------
Diluted EPS
Income available to common stockholders plus
assumed conversions $ 3,510 6,304,487 $ 0.56
=============== =============== ===============
Due to the net loss incurred in the nine months ended September 30, 1998,
diluted earnings per share and diluted weighted average shares are not
presented. Including common stock equivalents such as options and warrants would
result in antidilutive adjustments to basic earnings per share and basic
weighted average shares.
8
9
THOMAS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
6. 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
(foreign currency translation adjustments) except those resulting from
investments by stockholders and distributions to stockholders.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- ------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
Net income $ 1,521 $ 1,301 $ (6,804) $ 3,510
Increase in other comprehensive income 248 14 129 385
--------- --------- --------- ---------
Comprehensive income (loss) $ 1,769 $ 1,315 $ (6,675) $ 3,895
========= ========= ========= =========
Stockholder Rights Plan - On July 9, 1998, the Company announced
the adoption of a Stockholder Rights Plan, intended to protect from unfair or
coercive takeover attempts. The grant of the rights was made to stockholders
of record as of July 20, 1998.
Capital Structure - At the 1998 Annual Stockholders' meeting, the
stockholders voted to increase the number of authorized shares of the
Company's common stock from 12,500,000 to 25,000,000.
7. Deferred Taxes - As a result of the restructuring charges and
losses from discontinued operations recognized in the second quarter, the
Company maintains a $6.2 million deferred tax asset. The $3.1 million current
asset and an additional $3.1 million long-term deferred tax asset are to be
applied against tax liabilities resulting from taxable net income in the
current and future periods, respectively. No deferred tax valuation adjustment
is deemed necessary as a result of management's evaluation of the likelihood
that all of the deferred tax assets will more likely than not be realized in
the future. Approximately $0.6 million of deferred tax benefit was realized in
the third quarter of 1998. The Company has no operating loss carryforwards
prior to 1998. The Company will continue in future periods to evaluate the
realizability of the deferred tax asset and make necessary adjustments through
charges to expense should projected future taxable income be insufficient to
realize the benefit of the deferred tax asset. The following pro forma table
sets forth the results of operations of the Company excluding the results of
discontinued operations and restructuring charges in the second quarter and
other non-recurring charges of $0.8 million in the first quarter of 1998.
NINE MONTHS ENDED FISCAL YEARS ENDED
----------------- -------------------------------------------------
SEPTEMBER 30, 1997 1996 1995
1998
------------- ------------- ------------- -------------
Revenues ......................... $ 49,650 $ 69,620 $ 65,011 $ 63,392
Cost of Sales ................. 29,422 40,302 41,429 39,813
------------- ------------- ------------- -------------
Gross Margin ..................... 20,228 29,318 23,582 23,579
Selling, General and .......... 13,543 18,257 17,753 13,370
Administrative
------------- ------------- ------------- -------------
Operating Income ................. 6,685 11,061 5,829 10,209
Interest Income (Expense), net ... (132) 159 252 524
------------- ------------- ------------- -------------
Income Before Taxes .............. 6,553 11,220 6,081 10,733
Income Taxes ..................... 2,379 4,487 2,433 4,203
============= ============= ============= =============
Net Income ....................... $ 4,174 $ 6,733 $ 3,648 $ 6,530
============= ============= ============= =============
9
10
THOMAS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
8. 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. The Company
utilized the credit line during the first nine months of 1998 for working
capital requirements, but maintained no outstanding balance at September 30,
1998. At November 6, 1998 the balance outstanding was $1.2 million. During the
first three quarters of 1998, the average daily balance outstanding under the
credit line was $3.0 million and total interest paid, at an annual rate of 8.5%,
was $0.2 million.
10
11
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
UNLESS OTHERWISE STATED, THE DISCUSSION THAT FOLLOWS PERTAINS TO CONTINUING
OPERATIONS ONLY.
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
Revenues ............................................. 100.0 100.0 100.0 100.0
Cost of Sales .................................. 55.2 55.1 59.3 56.8
--------- --------- --------- ---------
Gross Margin ......................................... 44.8 44.9 40.7 43.2
Selling, General and ........................... 26.7 26.1 27.3 25.9
Administrative
Restructuring costs and non-recurring charges
-- -- 21.0 --
--------- --------- --------- ---------
Operating Income (Loss) .............................. 18.1 18.8 (7.6) 17.3
Interest Income (Expense), Net ....................... (0.4) 0.2 (0.2) 0.2
--------- --------- --------- ---------
Income (Loss) from Continuing Operations Before ...... 17.7 19.0 (7.8) 17.5
Income Taxes
Income Taxes (Benefit) ............................... 6.5 7.7 (3.0) 7.0
--------- --------- --------- ---------
Income (Loss) from Continuing Operations ............. 11.2 11.3 (4.8) 10.5
Discontinued Operations:
Loss from Operations, net of income tax .............. -- (4.3) (2.2) (3.8)
(Loss) on disposal, net of income tax ................ (2.5) -- (6.7) --
--------- --------- --------- ---------
Net Income ........................................... 8.7 7.0 (13.7) 6.7
========= ========= ========= =========
The following table sets forth the Company's revenues by geographic
distribution:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
Business Improvement Programs
United States $ 12,568 $ 13,005 $ 34,265 $ 38,682
Europe 3,972 3,908 12,697 10,556
Asia/Pacific 899 1,544 2,688 3,230
============ ============ ============ ============
Total Revenue $ 17,439 $ 18,457 $ 49,650 $ 52,468
============ ============ ============ ============
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1997
REVENUE - Revenue from continuing operations decreased 5.5% in the third quarter
of 1998 from the third quarter of 1997 primarily due to a lag in the replacement
of contracts.
11
12
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
The overall revenue decrease resulted from a $1.7 million increase in fixed fee
revenue and a $2.7 million decrease in incentive revenue. Fixed fee and
incentive revenue represent 80.3% and 19.7% of revenues, respectively, for the
third quarter of 1998 and 66.4% and 33.6% of revenues, respectively, for the
third quarter of 1997. The Company continues to move toward more fixed fee
contracts.
Asia/Pacific revenue decreased 41.8% due to the economic situation in Asia,
which has also affected the Company's ability to generate new business. Although
Asia/Pacific revenues are diminished, profit margins remain in the range of the
United States and European margins.
GROSS PROFIT - Gross profit was 44.8% of revenues in the third quarter of 1998
compared to 44.9% of revenues in the third quarter of 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE - Selling, general and
administrative expense, as a percentage of total revenue, increased to 26.8% in
the third quarter of 1998 from 26.1% in the third quarter of 1997, but decreased
by $0.2 million on an absolute basis. The increase in percentage is primarily
due to decreased revenue.
OTHER - The Company's effective tax rate was 36.5% in the third quarter of 1998,
as compared to the 40.5% rate in the third quarter of 1997. The decrease is
attributable to certain adjustments made to accommodate the restructuring charge
and discontinued operations discussed in the next section, combined with the
replacement of contracts in European countries with comparatively lower tax
rates.
RESULTS OF OPERATIONS - Net income in the third quarter of 1998 was $2.0
million, or $0.40 per share ($0.41 basic), a decrease of $0.1 million compared
to net income of $2.1 million, or $0.32 per share ($0.34 basic), in the third
quarter of 1997.
DISCONTINUED OPERATIONS - Sale of the Company's Information Technologies
business segment was completed in the third quarter of 1998. Based upon the
terms of the final sales agreement the Company recorded an additional loss on
disposal of $0.4 million net of income tax.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1997
REVENUE - Revenue decreased approximately 5.4% in the first nine months of 1998
as compared to the first nine months of 1997 primarily due to the failure to
replace contract completions and previously announced contract cancellations.
The decrease consisted primarily of a $3.6 million decrease in incentive
revenue, offset partially by a $1.3 million increase in fixed fee revenue. Fixed
fee and incentive revenues represent 79.0% and 21.0%, respectively, of revenue
in the first nine months of 1998 and 73.2% and 26.8% of revenue, respectively,
in the first nine months of 1997. The Company continues to move toward more
fixed fee contracts.
The United States component of revenue decreased 11.4%, primarily as a result of
contract cancellations. European revenue increased 20.2% due to the addition of
a significant contract. Asia/Pacific revenue decreased 16.8% for the comparable
period due to economic conditions in the region, which have affected the
Company's ability to generate new business. Although Asia/Pacific revenues are
diminished, profit margins remain in the range of the United States and European
margins.
GROSS PROFIT - Gross profit was 40.7% of revenues in the first nine months of
1998 compared to 43.2% of revenues in the first nine months of 1997. This
decrease was primarily the result of reduced revenue and the associated fixed
component of cost of sales.
12
13
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - In the nine months ended
September 30, 1998, selling, general and administrative expenses include
restructuring costs.
Selling, general and administrative expense, excluding the restructuring charge,
as a percentage of total revenue increased to 27.3% in the first nine months of
1998 from 25.9% in the first nine months of 1997. Restructuring costs of $9.7
million recorded in the second quarter of 1998 included approximately $3.0
million in personnel reduction costs and $6.7 million for the write-down of
leasehold improvements and other costs associated with underutilized and
unnecessary facilities.
OTHER - The Company's effective tax rate was 38.9% in the first nine months of
1998, as compared to the 40.2% rate in the first nine months of 1997. The
decrease is attributable to certain adjustments made to accommodate the
restructuring charge and discontinued operations, combined with the replacement
of contracts in European countries with comparatively lower tax rates.
RESULTS OF OPERATIONS - The net loss in the first nine months of 1998 was $2.4
million, or $0.44 per share, a decrease of $7.9 million compared to net income
of $5.5 million, or $0.87 per share ($0.90 basic), in the first nine months of
1997.
DISCONTINUED OPERATIONS - Loss from discontinued operations prior to the
measurement date of May 6, 1998 decreased to $1.1 million as compared to $2.0
million for the nine month period of the prior year, primarily due to the
inclusion of only four months of operations for 1998. The loss on disposal of
discontinued operations totaled $3.3 million.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased by $8.6 million in the first nine months of
1998 compared to a $3.6 million increase in the first nine months of 1997. The
major components of these changes are discussed below:
CASH FLOWS FROM OPERATING ACTIVITIES - Operating activities provided cash of
$2.7 million in the first nine months of 1998 compared to $9.0 million in the
first nine months of 1997. Accounts receivable balances more than 30 days past
due were $3.7 million at September 30, 1998, compared to $2.6 million at
December 31, 1997 and $3.1 million at September 30, 1997. Days sales outstanding
increased from 41 days at December 31, 1997 to 49 days at September 30, 1998.
CASH FLOWS FROM INVESTING ACTIVITIES - Cash flows used in investing activities
totaled $0.8 million in the first nine months of 1998 and were allocable to the
purchase of computers and network computing equipment.
CASH FLOWS FROM FINANCING ACTIVITIES - Cash flows used in financing activities
in the first nine months of 1998 were primarily for the purchase of outstanding
stock of the Company from the former chief executive officer of the Company,
discussed in the following paragraph.
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 $8.3 million in cash and satisfaction
of a $2.3 million debt to the Company. At the close of the market on April 24,
1998, the end of the ninety day valuation period, the number of shares to be
purchased was determined to be approximately 1.3 million shares.
The Company maintains a $20 million revolving credit agreement with Comerica
Bank. This agreement expires in
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14
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
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. The Company
utilized the credit line during the first nine months of 1998 for working
capital requirements, but maintained no outstanding balance at September 30,
1998. At November 6, 1998 the balance outstanding was $1.2 million. During the
first three quarters of 1998, the average daily balance outstanding under the
credit line was $3.0 million and total interest paid, at an annual rate of 8.5%,
was $0.2 million.
CASH FLOWS FROM DISCONTINUED OPERATIONS - Cash used in discontinued operations
in the first nine months of 1998 totaled $2.5 million as compared to $3.3
million in the first nine months of 1997.
DEFERRED TAXES - As a result of the restructuring charges and losses from
discontinued operations recognized in the second quarter, the Company maintains
a $6.2 million deferred tax asset. The $3.1 million current asset and an
additional $3.1 million long-term deferred tax asset are to be applied against
tax liabilities resulting from taxable net income in the current and future
periods, respectively. No deferred tax valuation adjustment is deemed necessary
as a result of management's evaluation of the likelihood that all of the
deferred tax assets will more likely than not be realized in the future.
Approximately $0.6 million of deferred tax benefit was realized in the third
quarter of 1998. The Company has no operating loss carryforwards prior to 1998.
The Company will continue in future periods to evaluate the realizability of the
deferred tax asset and make necessary adjustments through charges to expense
should projected future taxable income be insufficient to realize the benefit of
the deferred tax asset. The following pro forma table sets forth the results of
operations of the Company excluding the results of discontinued operations and
restructuring charges in the second quarter and other non-recurring charges of
$0.8 million in the first quarter of 1998.
NINE MONTHS ENDED FISCAL YEARS ENDED
----------------- -------------------------------------------
SEPTEMBER 30, 1997 1996 1995
1998
----------- ----------- ----------- -----------
Revenues ......................... $ 49,650 $ 69,620 $ 65,011 $ 63,392
Cost of Sales ................. 29,422 40,302 41,429 39,813
----------- ----------- ----------- -----------
Gross Margin ..................... 20,228 29,318 23,582 23,579
Selling, General and .......... 13,543 18,257 17,753 13,370
Administrative
----------- ----------- ----------- -----------
Operating Income ................. 6,685 11,061 5,829 10,209
Interest Income (Expense), net ... (132) 159 252 524
----------- ----------- ----------- -----------
Income Before Taxes .............. 6,553 11,220 6,081 10,733
Income Taxes ..................... 2,379 4,487 2,433 4,203
=========== =========== =========== ===========
Net Income ....................... $ 4,174 $ 6,733 $ 3,648 $ 6,530
=========== =========== =========== ===========
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.
YEAR 2000 ISSUES - The Company's internal business information systems are
primarily comprised of commercial application software products offered for
license by Microsoft Corporation and other recognized providers. Because these
providers products are widely distributed commercially developed applications,
the Company anticipates these applications have been or will be brought into
compliance by the manufacturers. At the time of this filing, the Company has
purchased and is in process of implementing new accounting and financial
reporting software. The reasons for such purchase include the assurance of Year
2000 compliance. The Company anticipates this new software to be fully
operational January 1, 1999.
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15
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
The Company does not anticipate any Year 2000 compliance issues to arise related
to its primary internal business information systems. Thomas Group is not aware
of any further material operational issues or costs associated with preparing
internal systems for the Year 2000. However, the Company utilizes other third
party network equipment, telecommunication products, and other third party
software products that may or may not be Year 2000 compliant. Although the
Company is currently taking steps to address the impact, if any, of the Year
2000 issue surrounding such third party products, failure of any critical
technology to operate properly in the Year 2000 may have an adverse impact on
business operations or require the Company to incur unanticipated expenses to
remedy any problems.
OUTLOOK - The Company is in the process of completing its 1999 Business Plan.
Management expects annual revenues to exceed those recorded in any previous year
since the Company's inception. However, the Company has learned of one contract
cancellation as of December 31, 1998 (three months prior to the contractual
conclusion of the agreement) which will diminish first quarter 1999 projected
revenues by approximately $0.8 million if the contract cannot be replaced.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT -
Statements in this report that are not strictly historical are "forward looking"
statements which should be considered as subject to the many uncertainties that
exist in the Company's operations and business environment. These uncertainties,
which include economic and business conditions that may impact clients and the
Company's performance-oriented fees, timing of contracts and revenue
recognition, competitive and cost factors, and the like, are set forth in the
Thomas Group, Inc. Form 10-K for the 1997 fiscal year.
15
16
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
March 1, 1999 /s/ J. Thomas Williams
--------------- ----------------------
Date J. Thomas Williams
Chief Executive Officer
March 1, 1999 /s/ Leland L. Grubb, Jr.
--------------- ------------------------
Date Leland L. Grubb, Jr.
Vice President, Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
17
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
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27 Financial Data Schedule