<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A No. 1
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [Fee Required] FOR THE YEAR ENDED DECEMBER 31,
1995.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required] FOR THE TRANSITION PERIOD FROM
______ TO ______.
Commission file number 0-22010
THOMAS GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 72-0843540
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5215 NORTH O'CONNOR BOULEVARD, SUITE 2500, IRVING, TEXAS 75039-3714
(Address of principal executive offices) (Zip Code)
(214) 869-3400
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<S> <C>
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, par value $.01 per share NASDAQ-NMS
</TABLE>
Securities registered pursuant to Section 12(g) of the Act: None
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. [X] Yes / No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
As of February 29, 1996, the aggregate market value of the voting stock held by
non-affiliates of the registrant was $35,294,000, based on the NASDAQ-NMS
closing price.
<PAGE> 2
As of February 29, 1996, the following number of shares of the registrant's
stock were outstanding:
Common Stock 5,898,907
Class B Common Stock 152,583
---------
Total 6,051,490
=========
DOCUMENTS INCORPORATED BY REFERENCE.
Portions of the 1995 Annual Report to Stockholders are incorporated by
reference into Part II. Portions of the definitive Proxy Statement for the 1996
Annual Meeting of Stockholders are incorporated by reference into Part III.
2
<PAGE> 3
PART II
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
The Company derives 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.
<TABLE>
<CAPTION>
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Percentage of Revenues
For Year Ended December 31,
Pro Forma
1995 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues 100.0 100.0 100.0
Cost of Sales 63.5 66.5 66.0
- --------------------------------------------------------------------------------
Gross Margin 36.5 33.5 34.0
Selling, General and Administrative 20.8 34.3 15.0
- --------------------------------------------------------------------------------
Operating Income (Loss) 15.7 (0.8) 19.0
Interest Income (Expense) .8 .2 (.1)
Net Gain on Securities Sale .9
- --------------------------------------------------------------------------------
Income before Income Taxes 16.5 .3 18.9
- --------------------------------------------------------------------------------
Net Income 10.0 .1 11.7
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</TABLE>
1995 Compared to 1994
RESULTS OF OPERATIONS--The Company reported net income of $6.8 million, or
$1.08 per share, in 1995, an increase of $6.7 million compared to $.05 million
or $.0l per share, in 1994. Weighted average shares outstanding increased 3%
compared to 1994.
Net income in 1995 improved as a result of improved program
productivity, continued focus on cost control and internal process
improvements. The significant improvement in 1995 net income was also impacted
by the absence of a substantial allowance for bad debts such as the $5.9
million charge recorded in the fourth quarter of 1994. In 1995 the Company
reversed $0.6 million of the reserve for doubtful accounts established in the
fourth quarter of 1994.
REVENUES--Revenues were $67.2 million in 1995, a 28% increase from $52.5
million in 1994. Revenues increased primarily due to improved program
performance and the addition/inclusion of Interlink revenues for the period
August 1 through December 31, 1995 of $3.8 million. (See Note 2 to Consolidated
Financial Statements.) As a percentage of total revenues, fixed fee and
non-incentive based revenues were 74% compared to 71% in 1994. European
revenues were $27.1 million, a 20% increase from $22.7 million in 1994.
The following clients contributed in excess of 10% of consolidated revenues
during one of the prior three years: Siemens A.G. in 1995 and 1994; and Revlon
Consumer Products Corporation, Dover Corporation, and Siemens A.G. in 1993.
(See Note 10 to Consolidated Financial Statements.)
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.
COS was $42.7 million in 1995, a 22% increase compared to $34.9
million in 1994. COS as a percentage of revenues decreased 3 percentage points
from 66.5% in 1994 to 63.5% in 1995.
The Company continued to experience increases in both new and
continuing contract activity. In response to the heightened demand and
increased level of business, particularly in Europe, the Company hired
additional
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Resultants. As a result of the additional Resultants, the addition of Interlink
personnel, the change in the mix of U.S. and European employees, and annual
salary adjustments, the compensation component of COS increased 14% in 1995
compared to 1994. Additionally, the costs related to mid-1994 expansions of the
Dallas and Frankfurt offices are reflected for a full year in 1995. The Company
does not anticipate the need to significantly expand offices in the near term;
however, the Company will continue to hire Resultants as the need to staff new
programs arises. COS also includes $1.8 million of Interlink hardware purchases
which were not present in 1994, and incentive compensation. Incentive
compensation is based on Company financial performance, and was $3.2 million in
1995 compared to $1.1 million in 1994. In accordance with Mr. Thomas'
employment agreement, which provides for no base salary, Mr. Thomas earned $1.9
million in incentive compensation in 1995 and earned no incentive compensation
in 1994.
GROSS MARGIN--Gross margin was $24.6 million, representing 37% of revenues in
1995 compared to $17.6 million and 34% of revenues in 1994. Gross margin
improvements were due to increases in revenues and increased efficiency in the
use of Company resources.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES--Selling, general and
administrative expenses (SG&A) consists of all operating expenses not directly
associated with the generation of revenue. A majority of SG&A expenses were for
corporate personnel (including certain officers), non-program-related travel
and entertainment, corporate facilities costs, and professional and legal
costs.
SG&A was $14.0 million in 1995, a 22% decrease compared to $18.0
million in 1994. Excluding the effects of the $5.9 million charge for doubtful
accounts in 1994, SG&A costs increased at a rate consistent with the growth
rate of revenue. The Company also reversed $0.6 million of the 1994 reserve
established for doubtful accounts. The $3.0 million absolute increase is due to
the fully realized effects of various expansion efforts undertaken in 1994. The
expansion efforts included the addition of corporate staff as well as an
increase in sales and marketing employees. As a result, the compensation
component of SG&A increased significantly from 1994 to 1995. Sales and
marketing efforts have increased non-program-related travel by $0.5 million.
Corporate facilities-related costs such as rent, depreciation and utilities
increased to $2.4 million in 1995 from $1.7 million in 1994.
The Company believes that the step-wise increase of SG&A costs
associated with operating as a public company was fully absorbed in 1994 and
1995. SG&A costs should stabilize as a percentage of revenues.
OTHER--The Company's effective tax rate was 39% in 1995, a decrease from 68% in
1994. The rate in 1994 was unusually high due to low domestic taxable income
and certain non-deductible expenses.
1994 COMPARED TO PRO FORMA 1993
RESULTS OF OPERATIONS--Net income in 1994 was $.05 million or $.0l per share.
Results in 1994 reflect a charge of $5.9 million to establish reserves for
doubtful receivables on completed contracts.
The Company's 1994 results were also adversely affected by low revenue
realization on a few key performance- oriented contracts and by the cost of
staffing and operating a sales organization, new hires and office expansion
necessitated by increased business activity.
REVENUES--Revenues were $52.5 million in 1994, an 18% increase from $44.6
million in 1993. Revenues increased primarily due to additional European
programs resulting from referrals and other new business stemming from customer
satisfaction on existing programs. Fixed fee revenues were $37.3 million in
1994, a 74% increase compared to $21.4 million in 1993. As a percentage of
total revenues, fixed fee revenues were 71% compared to 48% in 1993. Fixed fees
increased on both an absolute and relative basis as a result of growth in the
Company's business, particularly in Europe, where the Company has historically
worked more on a fixed fee basis. European revenues were $22.7 million, an 111%
increase compared to $10.7 million in 1993. Due to low revenue realization on a
number of domestic performance-oriented programs, domestic revenues decreased
12%. (See geographic results in Note 10 of the Consolidated Financial
Statements for additional information.)
COST OF SALES--COS was $34.9 million in 1994, a 19% increase compared to $29.4
million in 1993. During 1994 the level of program activity significantly
increased. In response to the heightened demand, the Company hired additional
Resultants and expanded regional office facilities, including related
administrative personnel.
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For 1994, the Company employed an average of 171 Resultants and, at
year end, 174 Resultants. This compares to an average of 146 Resultants in 1993
and 158 Resultants at year end 1993. Program related travel increased
proportionately with the additional Resultants.
During 1994, the Company relocated its Frankfurt office and enlarged
its Dallas office, expanded accommodations at the CEO Center and opened a new
office in Zurich, Switzerland. Consequently, facilities-related costs increased
from $2.1 million in 1993 to $3.0 million in 1994.
Incentive compensation in 1994 was $1.1 million compared to $2.8
million in 1993. In accordance with Mr. Thomas' employment agreement, he did
not earn salary or incentive compensation in 1994.
GROSS MARGIN--Gross margin was $17.6 million and 34% of revenue in 1994
compared to $15.1 million and 34% of revenue in 1993. Although certain
components of COS increased significantly in 1994, the increased incentive
compensation paid in 1993 served to keep gross margin percentages stable from
1993 to 1994.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE--SG&A was $18.0 million in 1994, a
170% increase from $6.7 million in 1993. SG&A in 1994 included a charge of
$5.9 million to establish reserves for doubtful receivables on completed
contracts. First, pursuant to the February 15, 1995 settlement of a 1993
lawsuit with Revlon Consumer Products Corporation ("Revlon"), the Company
recorded a charge of $3.2 million in the fourth quarter of 1994, as part of a
confidential settlement agreement. Prior to this settlement, the Company and
its legal counsel were confident that, had the matter proceeded to trial, the
Company would have prevailed. Consequently, the Company made no provision for
reserves prior to the settlement date. Due to the significant amount of time
and resources being consumed by the litigation, the Company concluded the
settlement was in the best interests of the Company.
Second, by mutual agreement, the Company and a client terminated a
significant contract. The client was experiencing liquidity difficulties and a
$1.5 million reserve was established against the outstanding receivable balance
of $2.1 million. Third, in 1993 the Company offered terms on a program which
permitted a client to defer payment until December 31, 1994. The client refused
to pay the outstanding receivable, alleging that a certain performance target
was not met. The Company established a bad debt reserve in the amount of the
entire $0.7 million receivable. Fourth, the Company was involved in a dispute
with a client regarding $0.6 million in fees invoiced prior to 1994. This
matter was resolved in December 1994, resulting in a charge of $0.4 million
against a reserve previously established and a charge of approximately $0.3
million in the fourth quarter of 1994. The balance of the $5.9 million charge,
$0.2 million, was established to provide for the settlement of disputes with
another client.
Excluding the 1994 charge for doubtful receivables, the additional
increase in SG&A was precipitated by increased business activity and the
administrative costs associated with an increased employee base as well as an
initiative to expand the business through focused sales and marketing
strategies. Prior to 1994, the Company did not have a distinct sales and
marketing or human resource organization. Additional administrative departments
such as legal and investor relations were required as a result of the Company's
growth. The addition of these departments increased SG&A labor, benefits and
travel by $2.9 million in 1994.
SG&A also rose by approximately $2.0 million due to the additional
expenses associated with expansion of the Corporate headquarters offices and
due to the increased administrative expenses (such as computer maintenance,
supplies and postage) associated with an increase in the total number of
employees.
OTHER--In 1994, the Company exercised a total of 300,000 warrants to purchase
the common stock of a client. Simultaneously with the exercise of the
warrants, the Company sold the common stock in the open market. The Company
realized a net gain of $0.5 million on the sale of the common stock. At
December 31, 1994, the Company had exercised all warrants.
The Company's effective tax rate was 68% in 1994, an increase from 39%
in 1993, due to the change in the mix of domestic and European profitability
and certain non-deductible expenses.
QUARTERLY RESULTS--The following table sets forth certain unaudited operating
results for each of the four quarters in the two years ended December 31, 1995.
The information has been prepared on the same basis as the audited financial
statements and, in the opinion of the Company, includes all adjustments
(consisting of normal recurring adjustments) necessary for a fair presentation
of the information for the periods presented.
5
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<TABLE>
<CAPTION>
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(in thousands, except per share data) 1995 1994
For the three months ended For the three months ended
Mar. 31, June 30, Sept. 30, Dec. 31, YTD Mar. 31, June 30, Sept. 30, Dec. 31, YTD
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 15,514 $16,320 $16,371 $19,015 $ 67,220 $11,856 $ 13,931 $12,202 $14,471 $52,460
Operating
Income (Loss) 1,965 2,984 2,495 3,135 10,579 1,634 2,268 83 (4,424) (439)
Income (Loss) before
Income Taxes 2,020 3,133 2,615 3,335 11,103 1,675 2,749 121 (4,400) 145
Net Income (Loss) 1,212 1,880 1,590 2,073 6,755 1,005 1,649 68 (2,676) 46
Earnings (Loss)
per share $0.20 $0.30 $0.25 $0.33 $ 1.08 $0.16 $0.27 $0.01 $(.43) $0.01
Weighted average
shares and share
equivalents 6,027 6,265 6,365 6,284 6,258 6,213 6,107 6,024 6,167 6,103
- ------------------------------------------------------------------------------------------------------------------------------------
STOCK PRICE (1)
High $10.50 $11.00 $16.00 $15.87 $15.87 $18.75 $16.25 $13.75 $9.25 $18.75
Low $6.25 $9.50 $10.50 $11.75 $6.25 $15.50 $9.75 $8.75 $5.00 $5.00
Close $10.37 $10.50 $14.50 $13.50 $13.50 $16.12 $11.00 $8.75 $6.25 $6.25
</TABLE>
(1) The stock prices set forth represent the highest and lowest sales prices per
share of the Company's Common Stock as reported by the NASDAQ Stock Market.
The prices reported by the NASDAQ Stock Market reflect inter-dealer prices
without retail mark-up, mark-down or commissions, and may not necessarily
represent actual transactions.
QUARTER ENDED DECEMBER 31, 1995--A description of adjustments material to
fourth quarter results follows.
In the fourth quarter of 1994 a reserve of $1.5 million was established
against a $2.1 million receivable from a client experiencing liquidity
difficulties. According to an agreed repayment plan, the client has been paying
the Company $22,000 per week, and through March 1, 1996, the client had made all
payments. In consideration of the consistent payments received since the agreed
repayment plan, the Company reduced the reserve against the remaining client
receivable by $0.6 million to $0.4 million in the fourth quarter of 1995.
LIQUIDITY AND CAPITAL RESOURCES--Cash and cash equivalents increased by $7.3
million in 1995 compared to a $6.8 million decrease in 1994 and a $9.9 million
increase in 1993. The major components of these changes are discussed below.
CASH FLOWS FROM OPERATING ACTIVITIES--Net cash flows provided by operating
activities increased to $10.5 million from cash flows used in operating
activities of $4.5 million in 1994 and $1.6 million in 1993. Such fluctuations
are a direct result of fluctuations in profitability in these years. Cash flows
provided by operating activities in 1995 and combined with cash provided by
financing activities in 1994 and 1993 were used to fund capital additions and
acquisitions during 1995, 1994 and 1993. Accounts receivable balances more than
30 days past due at year end were $1.4 million, compared to $0.7 million at
December 31, 1994 and $2.0 million at December 31, 1993. Days sales outstanding
has also steadily improved from 100 days at the end of 1993 to 81 days at
December 31, 1994 and 79 days at December 31, 1995.
CASH FLOWS FROM INVESTING ACTIVITIES--Cash used for capital additions and
business acquisitions comprise most of the Company's investing activities. Net
capital expenditures were comprised primarily of CEO Center expansion in 1995,
corporate headquarters and CEO Center expansion as well as the move of the
Frankfurt office and the expansion of the Dallas office in 1994, and CEO Center
expansion in 1993.
In 1995, the Company used $1.5 million cash to acquire Interlink
Technologies, Inc. In 1994, cash provided by investing activities was
positively impacted by a net $2.6 million associated with the previously
mentioned securities sale in which warrants were exercised for stock and the
stock simultaneously sold for cash.
CASH FLOWS FROM FINANCING ACTIVITIES--Cash flows from financing activities
during 1995 and 1994 resulted from stock option exercises and certain
borrowings and repayments from affiliates. Cash flows from financing activities
in 1993 were primarily the results of the issuance of common stock associated
with the initial public offering and the related debt repayment with such
proceeds.
Aside from capital lease obligations of $0.2 million, the Company has
no outstanding long-term indebtedness. The Company's $6.0 million line of
credit agreement, including $1.0 million for letters of credit, with Comerica
Bank has been extended to February 1998. Loans under this agreement bear
interest at the prime
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rate--a reduction from prime plus 1/4% in the prior agreement. The bank has
also removed the need for any collateral, making the new arrangement unsecured.
The credit agreement provides, among other things, that the Company may pay
dividends of up to 50% of its net income. Management does not anticipate paying
such dividends. During 1995, 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 7,000 shares in 1994, no
shares in 1995, and 24,500 shares through March 8, 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 will begin to make significant foreign and
domestic estimated tax payments in 1996 and the Company has activated its stock
buyback program. Cash provided by operating activities and the Company's credit
facility should be sufficient to meet short and long term operational needs and
expansion plans.
RECENT ACCOUNTING STANDARDS--In March 1995, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 121, "Accounting
for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of
(SFAS No. 121). SFAS No. 121 requires, among other things, impairment loss on
assets to be held and gains or losses from assets that are expected to be
disposed of, be included as a component of income from continuing operations.
The Company will adopt SFAS No. 121 in fiscal 1996 and its implementation is
not expected to have a material effect on the consolidated financial
statements.
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS No. 123). SFAS No. 123 encourages entities to
adopt the fair value method in place of the provisions of Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No. 25),
for all arrangements under which employees receive shares of stock or other
equity instruments of the employer or the employer incurs liabilities to
employees in amounts based on the price of its stock. The Company does not
anticipate adopting the fair value method encouraged by SFAS No. 123 and will
continue to account for such transactions in accordance with APB No. 25.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Consolidated Balance Sheets
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December 31,
(in thousands, except share data)
<TABLE>
<CAPTION>
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1995 1994
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 11,273 $ 3,942
Trade accounts receivable, net of allowances of $245 and $890 14,476 11,583
Accounts and notes receivable--affiliates -- 1,247
Other assets, net of allowance of $382 in 1995 2,257 2,737
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Total Current Assets 28,006 19,509
Net Property and Equipment 6,547 6,217
Capitalized Software Development Costs 832 --
Other Assets, net of allowance of $1,500 in 1994 4,772 1,841
- ------------------------------------------------------------------------------------------------------------
Total Assets $ 40,157 $ 27,567
==================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued liabilities $ 4,229 $ 3,083
Accounts payable--affiliates 1,027 --
Income taxes payable 2,428 --
Advance payments 294 1,076
Current maturities of long-term obligations 27 102
- ------------------------------------------------------------------------------------------------------------
Total Current Liabilities 8,005 4,261
Deferred Taxes Payable -- 92
Long-Term Obligations 1,101 937
- ------------------------------------------------------------------------------------------------------------
Total Liabilities 9,106 5,290
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Commitments and Contingencies
Stockholders' Equity
Common Stock, $.01 par value; 12,500,000 shares authorized,
5,983,903 and 5,802,959 shares issued 60 58
Class B Common Stock, $.01 par value; 1,200,000 shares
authorized, 152,133 and 106,658 shares issued and
outstanding 2 1
Additional paid-in capital 18,094 16,349
Retained earnings 13,745 6,990
Cumulative translation adjustment 283 --
Treasury stock, 90,603 and 89,868 shares, at cost (1,133) (1,121)
- ------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 31,051 22,277
- ------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 40,157 $ 27,567
==================================
</TABLE>
See accompanying notes to consolidated financial statements.
8
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Consolidated Statements of Operations
- --------------------------------------------------------------------------------
Year Ended December 31,
(in thousands, except share data)
<TABLE>
<CAPTION>
Pro Forma
Unaudited
1995 1994 1993 1993
<S> <C> <C> <C> <C>
Revenues $67,220 $52,460 $ 44,586 $44,586
Cost of Sales 42,651 34,901 29,277 29,440
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Gross Margin 24,569 17,559 15,309 15,146
Selling, General and Administrative 13,990 17,998 6,899 6,665
Management Fees and Royalty -- -- 1,459 --
- ------------------------------------------------------------------------------------------------------------
Operating Income (Loss) 10,579 (439) 6,951 8,481
Interest income (expense), including income
of $533, $168 and $125 524 105 (77) (30)
Net gain on securities sale -- 479 -- --
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Income before Income Taxes 11,103 145 6,874 8,451
Income Taxes 4,348 99 2,644 3,254
- ------------------------------------------------------------------------------------------------------------
Net Income $6,755 $46 $4,230 $5,197
=======================================================
Earnings per common and
common equivalent share $1.08 $0.01 $0.81 $1.00
Weighted average shares and share equivalents 6,258,040 6,102,911 5,222,843 5,222,843
</TABLE>
See accompanying notes to consolidated financial statements.
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Consolidated Statements of Stockholders' Equity
- --------------------------------------------------------------------------------
(in thousands, except share data)
<TABLE>
<CAPTION>
Class B Additional
Common Common Paid-In Retained Translation Treasury
Stock Stock Capital Earnings Adjustment Stock Total
<S> <C> <C> <C> <C> <C> <C> <C>
December 31, 1992 $45 $-- $430 $ 3,122 $-- $(5,098) (1,501)
Dividends declared--Class A -- -- -- (408) -- -- (408)
Issuance of 85,342 shares of
Common Stock and 95,124
shares of Class B 1 1 445 -- -- -- 447
Tax benefit of non-qualified
stock option exercises -- -- 309 -- -- -- 309
Sale of 8,100 shares of
Treasury Stock -- -- 14 -- -- 35 49
Redemption of 42,548 shares of
Class B -- -- (319) -- -- -- (319)
Conversion of 937,500
shares of Redeemable
Class A to Common Stock 9 -- 4,991 -- -- (5,000) --
Retirement of 1,187,700
shares of Common Stock
and 937,500 shares
of Redeemable Class A (12) -- (5,051) -- -- 10,063 5,000
Receipt of 82,868 shares
of Common Stock
from Mr. Thomas for Treasury -- -- -- -- -- (1,046) (1,046)
Issuance of 1,372,500 shares
of Common Stock in
initial public offering 14 -- 14,887 -- -- -- 14,901
Net income -- -- -- 4,230 -- -- 4,230
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December 31, 1993 57 1 15,706 6,944 -- (1,046) 21,662
Issuance of 54,716 and 109,104
shares of Common Stock
and of Class B 1 1 599 -- -- -- 601
Tax benefit of non-qualified
stock option exercises -- -- 373 -- -- -- 373
Redemption of 73,472
shares of Class B -- (1) (329) -- -- -- (330)
Purchase of 7,000 shares of
Common Stock for Treasury -- -- -- -- -- (75) (75)
Net income -- -- -- 46 -- -- 46
- -------------------------------------------------------------------------------------------------------------------------
December 31, 1994 58 1 16,349 6,990 -- (1,121) 22,277
Issuance of 180,944 and
223,790 shares of
Common Stock and of Class B 2 3 2,308 -- -- -- 2,313
Tax benefit of non-qualified
stock option exercises -- -- 575 -- -- -- 575
Redemption of 186,755
shares of Class B -- (2) (1,843) -- -- -- (1,845)
Performance guarantee
by Mr. Thomas -- -- 705 -- -- -- 705
Purchase of 735 shares
of Common Stock for Treasury -- -- -- -- -- (12) (12)
Foreign currency translation
adjustment -- -- -- -- 283 -- 283
Net income -- -- -- 6,755 -- -- 6,755
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December 31, 1995 $60 $2 $ 18,094 $ 13,745 $283 $(1,133) $31,051
===================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
10
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Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
Year Ended December 31,
(in thousands)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
1995 1994 1993
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net income $6,755 $46 $4,230
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Depreciation and amortization 2,038 1,229 996
Net gain on securities sale -- (479) --
Revenue earned in warrants -- (663) (1,459)
Allowance for doubtful accounts 245 (400) 150
Provision for performance guarantees -- (60) (906)
Provision for expatriate costs (311) (417) (919)
(Gain) Loss on disposal of property -- 167 (14)
Deferred taxes 621 (1,657) 1,140
Change in operating assets and liabilities
(Increase)/Decrease trade accounts receivable (2,143) 533 (4,350)
(Increase)/Decrease other assets (496) (192) (718)
Increase/(Decrease) accounts payable and
accrued liabilities 1,528 922 285
Increase/(Decrease) advance payments (812) (2,392) (283)
Increase/(Decrease) income taxes payable 3,032 (1,104) 244
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Net Cash Provided By (Used In)
Operating Activities 10,457 (4,467) (1,604)
- ------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities
Acquisition of Interlink Technologies (1,500) -- --
Increase in short-term receivable (572) -- --
Capital expenditures (1,714) (3,805) (1,247)
Exercise of warrants to acquire securities -- (2,625) --
Proceeds from securities sale -- 5,226 --
Capitalization of software development costs (83) -- --
Other (230) 130
- ------------------------------------------------------------------------------------------------------------
Net Cash Used In Investing Activities (4,099) (1,204) (1,117)
- ------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities
Net proceeds from initial public offering -- -- 14,901
Dividends paid to EDS -- -- (680)
Purchase of treasury stock (12) (75) (74)
Proceeds from sale of treasury stock -- -- 49
Proceeds from exercise of stock options 495 229 184
Repayment of other long-term obligations (70) (219) (105)
Proceeds from short-term debt -- -- 2,850
Repayment of short-term debt -- -- (4,482)
Repayment from (advances to) affiliates 592 (1,085) (11)
- ------------------------------------------------------------------------------------------------------------
Net Cash Provided By (Used In) Financing Activities 1,005 (1,150) 12,632
Effect of Exchange Rate Changes on Cash (32) -- --
- ------------------------------------------------------------------------------------------------------------
Net Increase /(Decrease) In Cash and Cash Equivalents 7,331 (6,821) 9,911
Cash and Cash Equivalents
Beginning of period 3,942 10,763 852
- ------------------------------------------------------------------------------------------------------------
End of period $ 11,273 $ 3,942 $ 10,763
==================================================
</TABLE>
11
<PAGE> 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) THE COMPANY -- Thomas Group, Inc. (the "Company" or "TGI") was
incorporated under the laws of the State of Delaware in June 1978 and provides
management services designed to improve the competitiveness and profitability
of the Company's clients. The Company's specific methodology, known as Total
Cycle Time, focuses on reducing the time spent on revenue-producing, product
development and administrative processes, resulting in improvements in
financial performance, quality and response time.
(b) BASIS OF PRESENTATION -- The accompanying consolidated financial
statements include the Company and its wholly owned subsidiaries. All
significant intercompany transactions and balances have been eliminated.
Earnings per share is computed by dividing net income by the weighted
average shares and share equivalents outstanding during the year. Fully diluted
earnings per share and share equivalents are not presented because the result
is not materially different.
The presentation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(c) INITIAL PUBLIC OFFERING -- On August 19, 1993, the Company completed
an initial public offering of 1,750,000 shares of its Common Stock at $12.625
per share. Of the 1,750,000 shares, the Company sold 1,200,000 shares, and
selling stockholders sold the balance of 550,000 shares. The Company sold an
additional 172,500 shares in September 1993 when the underwriters exercised
their over-allotment option. Net proceeds to the Company from the sale of
1,372,500 shares of Common Stock were $14.9 million.
At the time of the initial public offering, the Company acquired TC
Operating, Inc. ("TCO") from Mr. Philip R. Thomas ("Mr. Thomas"), Chairman of
the Board, Chief Executive Officer, and a principal stockholder of the Company,
for 712,871 shares of Common Stock. The acquisition was accounted for as a
reorganization of entities under common control in a manner similar to a
pooling of interests. The financial statements have been retroactively adjusted
to reflect the acquisition of TCO, and the shares of Common Stock issued in
connection with the acquisition have been treated as outstanding for all
periods presented.
A number of changes took place on or prior to the closing of the
initial public offering, including (i) termination of the Company's obligation
to make payments to Electronic Data Systems Corporation ("EDS"), either in the
form of interest, dividends or marketing fees, (ii) termination of the
management agreement with Thomas Group Holding Company ("TGHC"), (iii)
commencement of an employment agreement with Mr. Thomas, and (iv) termination
of royalty payments to TCO. Due to these changes, historical results of
operations are not comparable and may not provide the most meaningful
information. Pro forma information has therefore been provided for 1993, and
for consistency the comparison of results of operations for 1993 is based upon
such pro forma information.
STOCK SPLIT -- Immediately preceding the initial public offering, the Board of
Directors and stockholders approved a 3- for-1 split of each outstanding share
of Common Stock, Redeemable Class A Common Stock and Class B Common Stock. All
options for the purchase of Common Stock and Class B Common Stock have been
adjusted for the 3-for-1 stock split. All references in the accompanying
financial statements to the number of shares of Common Stock, Redeemable Class
A Common Stock, Class B Common Stock, stock options, and per share amounts have
been restated to reflect the stock split.
WARRANTS -- The Company sold Warrants to purchase up to 175,000 shares of
Common Stock at a price of $.001 per Warrant to the representatives of the
Underwriters of the initial public offering. The Warrants are
12
<PAGE> 13
exercisable for a period of five years beginning on August 26, 1993 at an
initial per share exercise price of $15.15, which represents 120% of the
initial offering price.
(d) RECLASSIFICATIONS -- Beginning in the third quarter of 1995, the Company
revised its income statement presentation to accommodate the expansion of
business operations effective with an acquisition (See Note 2) and to more
closely align the reporting of results with companies in the services industry.
Previously reported Professional and Support Compensation and General,
Administrative and Other expenses have been replaced by Cost of Sales and
Selling, General and Administrative. Cost of Sales includes all costs
associated directly with the generation of revenue. Selling, General and
Administrative includes all other costs. The financial information for all
periods presented has been reclassified to reflect this revision in
presentation.
Under the previous presentation, Professional and Support Compensation
represented the Company's total personnel expense, excluding employee insurance
costs, and General, Administrative and Other represented all operating expenses
except personnel cost.
Certain balance sheet amounts have been reclassified from the
previously reported financial statements in order to conform with the current
presentation.
(e) PROPERTY AND EQUIPMENT -- Property and equipment are stated at cost
less accumulated depreciation. Depreciation is provided by accelerated methods
over the estimated useful lives of the various assets for financial reporting
purposes as follows:
Furniture and fixtures 5-7 Years
Equipment 3-7 Years
Leasehold improvements 5-19 Years
(f) CAPITALIZED SOFTWARE DEVELOPMENT COSTS -- Capitalization of software
development costs begins upon the establishment of technological feasibility.
Amortization is provided on a straight-line basis over the estimated useful
life of the software product, generally three years.
(g) INTANGIBLES -- The Company amortizes costs in excess of net assets
acquired on a straight-line basis over the estimated benefit period, generally
five years. Patents and licenses are generally amortized on a straight-line
basis over five years.
(h) REVENUES -- The Company derives its revenues from professional service
agreements specifying fixed fees, or fixed fees plus incentives based on
improvements achieved. Incentive (performance-oriented) revenues are based on
agreed-upon formulas relating to improvements in customer-specific measures.
Improvements are measured, and performance- oriented fees are billed, as
earned, at time intervals specified in each contract, generally monthly. Fixed
fees are recognized as revenue when earned, generally on a straight line basis
over the life of the contract, when billed. An allowance for doubtful accounts
is provided when necessary and is determined on a client by client basis.
(i) ADVANCE PAYMENTS -- The Company occasionally receives advance payments
of a portion of its fees. Advance payments are deferred upon receipt and
credited against future revenue earned as specified by the contract.
(j) DEFERRED COMPENSATION -- In 1994, the Company established a
non-qualified deferred compensation program. Participation is limited to
officers and key employees. The plan is funded by the participants who select
investment vehicles from the same pool provided in the Company's 401(k) Plan.
Assets of the plan were $0.7 million and accrued liabilities were $0.7 million
at December 31, 1995.
(k) INCOME TAXES -- Deferred income taxes are provided for temporary
differences between the financial statement and income tax basis of assets and
liabilities in accordance with Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes", which the Company adopted retroactively to
the beginning of 1992. Provisions are made for estimated United States and
foreign income taxes, less available tax credits and
13
<PAGE> 14
deductions, which may be incurred on the remittance of the Company's share of
foreign subsidiaries' undistributed earnings.
(l) CASH AND CASH EQUIVALENTS -- Cash equivalents consist of highly liquid
investments with maturities of three months or less. At December 31, 1995, the
Company had approximately $6.1 million invested in tax-exempt funds and
certificates of deposit.
(m) CONCENTRATION OF CREDIT RISK -- The Company provides its services
primarily to a diverse group of large, well- established companies and does not
require collateral on receivable balances.
(n) FOREIGN CURRENCY TRANSLATION -- Beginning in 1995, all balance sheet
accounts of foreign subsidiaries are translated at the current exchange rate as
of the end of the accounting period. The resulting translation adjustment is
recorded as a separate component of stockholders' equity. Prior to 1995, these
translation gains and losses were included in income and were not significant.
Income statement items are translated at average currency exchange rates.
(o) RECENT ACCOUNTING STANDARDS -- In March 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 121,
"Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of" (SFAS No. 121). SFAS No. 121 requires, among other things, that
impairment loss on assets to be held, and gains or losses from assets that are
expected to be disposed of, be included as a component of income from
continuing operations. The Company will adopt SFAS No. 121 in fiscal 1996, and
its implementation is not expected to have a material effect on the
consolidated financial statements.
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS No. 123). SFAS No. 123 encourages entities to
adopt the fair value method in place of the provisions of Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No. 25),
for all arrangements under which employees receive shares of stock or other
equity instruments of the employer or the employer incurs liabilities to
employees in amounts based on the price of its stock. The Company does not
anticipate adopting the fair value method encouraged by SFAS No. 123 and will
continue to account for such transactions in accordance with APB No. 25.
2 -- ACQUISITION
In August 1995, the Company acquired substantially all of the assets
of Interlink Technologies, Inc. ("Interlink"), a provider of paperless
warehouse and distribution systems, for approximately $1.5 million in cash. The
acquisition was funded with cash from operations and accounted for under the
purchase method of accounting. Interlink's results of operations have been
included in the Company's consolidated financial statements beginning August 1,
1995.
The Company's consolidated results of operations for the years ended
December 31, on an unaudited pro forma basis, assuming the acquisition of
Interlink had occurred as of January 1, 1994, are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(in thousands) 1995 1994
<S> <C> <C>
Revenues $ 71,119 $ 57,036
Net Income (Loss) 6,422 (84)
Earnings (Loss) per common
and common equivalent share $ 1.03 $ (.01)
</TABLE>
In connection with the acquisition, the Company entered into a
software development and consulting services agreement (the "Services
Agreement") with the former principals of Interlink. The Services Agreement
provides for the completion of information technology development projects
currently in process, as well as ongoing services by the former principals. The
Company is obligated for future payments under the Services Agreement based
upon (i) completion of software currently under development, (ii) the provision
of consulting and
14
<PAGE> 15
other ongoing services, and (iii) the achievement of certain financial
milestones. Contingent future payments are not expected to be material to the
Company's results of operations or financial position.
3 -- OTHER ASSETS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
(in thousands) December 31,
1995 1994
<S> <C> <C>
Investment in joint venture $ 100 $ 162
Prepaid expenses 1,389 571
Cash surrender value of key-man life insurance 554 316
Deferred compensation plan assets 690 370
Receivable from employees for computers 208 262
Deferred tax benefit 554 1,116
Foreign tax receivable 495 --
Other intangibles, net 446 --
Income tax receivable -- 193
Investment in Texas Stadium Suite 578 --
Notes receivable 519 --
Long-term receivables 1,184 1,274
Other 312 314
- ------------------------------------------------------------------------------------------------------------
7,029 4,578
Less current portion (2,257) (2,737)
- ------------------------------------------------------------------------------------------------------------
$ 4,772 $ 1,841
=================================================
</TABLE>
On December 31, 1995, the Company purchased a leasehold interest in a
Texas Stadium suite for $0.6 million. (See also Note 11 to the Consolidated
Financial Statements.) Amortization of the purchase price is provided on a
straight-line basis over the remaining term of the lease, which expires on
December 31, 2008.
The Company had one program that provided for payment in stock
warrants in lieu of cash. The warrants entitled the Company to acquire the
client's common stock for $8.75 a share. During 1993 and the first quarter of
1994, the Company earned and was paid a total of 300,000 warrants. Upon receipt
of such warrants the Company recognized revenue equal to the value of the
warrants as computed under the Black-Scholes pricing model of $1.5 million and
$0.7 million in 1994 and 1993, respectively. The valuation approximated the
most objectively determinable fair value of the services provided by the
Company.
In 1994, the Company exercised all 300,000 warrants and purchased
300,000 shares of the client's common stock at $8.75 per share. Immediately
thereafter, the Company sold the common stock in the open market and received
net cash proceeds of $2.6 million. A net gain of $0.5 million was recognized on
the sale of the common stock. At December 31, 1994, the Company had disposed of
all warrants and common stock.
15
<PAGE> 16
4 -- PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
(in thousands) December 31,
1995 1994
<S> <C> <C>
Equipment $ 4,104 $ 2,921
Furniture and fixtures 2,255 1,954
Leasehold improvements 4,115 3,432
Equipment under capital leases 395 395
Construction in process 1,065 1,094
Automobiles 176 166
- ------------------------------------------------------------------------------------------------------------
12,110 9,962
Less accumulated depreciation and
amortization, including $372 and $350
respectively, relating to capital leases (5,563) (3,745)
- ------------------------------------------------------------------------------------------------------------
$ 6,547 $ 6,217
=================================================
</TABLE>
5 -- LONG-TERM OBLIGATIONS
<TABLE>
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
(in thousands) December 31,
1995 1994
Capital lease obligations $ 69 $ 134
Deferred compensation plan 690 370
Other 369 535
- ------------------------------------------------------------------------------------------------------------
1,128 1,039
Less current portion (27) (102)
- ------------------------------------------------------------------------------------------------------------
$1,101 $ 937
==============================================
</TABLE>
Minimum lease payments required under capital leases and non-
cancelable operating leases subsequent to December 31, 1995, are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
(in thousands) Capital Operating
Leases Leases
<S> <C> <C>
1996 $70 $2,991
1997 -- 2,619
1998 -- 2,407
1999 -- 1,269
2000 -- 1,098
Thereafter 1,678
- ------------------------------------------------------------------------------------------------------------
70 12,062
Less amount representing interest (1) --
- ------------------------------------------------------------------------------------------------------------
$69 $12,062
===========================================
</TABLE>
The Company leases office space, vehicles and various types of office
equipment. Rent expense related to operating leases totaled $1.8 million for
1995, $2.7 million for 1994 (which includes a $0.3 million charge for lease
abandonment), and $1.6 million for 1993.
16
<PAGE> 17
6 -- ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
(in thousands) December 31,
1995 1994
<S> <C> <C>
Accounts payable $1,693 $1,001
Accrued payroll and bonuses 643 313
Accrued employee benefits 597 156
Other accrued liabilities 1,145 1,151
Accrued expatriate costs 151 462
- ------------------------------------------------------------------------------------------------------------
$4,229 $3,083
==============================================
</TABLE>
7 -- INCOME TAXES
Federal, state and foreign income taxes consist of the following:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
(in thousands) Year Ended December 31,
1995 1994 1993
<S> <C> <C> <C>
Current tax expense
Federal 1,861 $685 $770
State 219 81 199
Foreign 1,647 990 535
- ------------------------------------------------------------------------------------------------------------
3,727 1,756 1,504
- ------------------------------------------------------------------------------------------------------------
Deferred tax expense (benefit)
Federal 567 (1,483) 1,120
State 54 (174) 20
- ------------------------------------------------------------------------------------------------------------
621 (1,657) 1,140
- ------------------------------------------------------------------------------------------------------------
$4,348 $99 $2,644
==============================================
</TABLE>
The following reconciles income tax expense at the federal statutory rate to
the actual tax expense:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
(in thousands) Year Ended December 31,
1995 1994 1993
<S> <C> <C> <C>
Income taxes at statutory rate $3,775 $50 $2,337
Effect on taxes resulting from:
State taxes 273 (93) 219
Foreign taxes 264 39 535
Foreign tax credit -- -- (434)
Other (primarily
permanent differences) 36 103 (13)
- ------------------------------------------------------------------------------------------------------------
$4,348 $99 $2,644
==============================================
</TABLE>
Significant components of the Company's net deferred tax assets
(liabilities) for federal and state income taxes are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
(in thousands) December 31,
1995 1994
<S> <C> <C>
Fixed assets $195 $186
Allowance for doubtful accounts 212 838
Computer software 41 --
Research and development (87) --
Investment in affiliates (27) (50)
Accrued expenses 97 --
Other, net 123 50
- ------------------------------------------------------------------------------------------------------------
$554 $1,024
============================================
</TABLE>
17
<PAGE> 18
Management believes that current and future levels of taxable income will be
sufficient to realize the benefits of the deferred tax assets.
The domestic and foreign source components of income (loss) before taxes are as
follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
(in thousands) Year Ended December 31,
1995 1994 1993
<S> <C> <C> <C>
Domestic sources $6,726 $(2,021) $5,483
Foreign sources 4,377 2,166 1,391
</TABLE>
8 -- EMPLOYEE BENEFIT PLANS
The Company sponsors a 401(k) retirement plan. The Company, at its
discretion, matches a portion of the participants' contribution. Participants
are vested in the Company's matching contribution after five years of full-time
service and may join the plan January 1 and July 1. Matching contribution
expense for the Company was $0.3 million, $0, and $0.3 million for 1995, 1994
and 1993, respectively.
The Company has an incentive compensation plan covering all full-time
employees who are not officers. All Company officers were covered under this
same plan through August 1993. In 1993, the Company established a separate
incentive compensation program for all officers and entered into employment
agreements containing certain incentive compensation formulas with Mr. Thomas
and Mr. Alex W. Young, President and Chief Operating Officer. Mr. Thomas'
employment agreement has been amended and now provides that, except for certain
Company-provided benefits, all of his compensation will be incentive-based. The
aggregate incentive compensation paid under these plans was $3.2 million, $1.1
million, and $2.6 million in 1995, 1994 and 1993, respectively. In accordance
with Mr. Thomas' employment agreement, he did not earn incentive compensation
in 1994. Consequently, Mr. Thomas executed a promissory note in the amount of
$1.1 million due September 5, 1995 for advances made to him. The note carried
an interest rate equal to the interest rate the Company would pay on its
primary borrowing facility. This loan was repaid in full on September 5, 1995.
For tax planning purposes, the Company prepaid estimated fourth
quarter 1993 incentive compensation of $0.4 million to the officers. Management
subsequently concluded that fourth quarter performance did not warrant payment
of incentive compensation. This prepayment was in part recouped against
incentive compensation earned by the officers in 1994.
The Company self-insures its medical costs associated with injury and
hospitalization to its employees and their dependents up to a limit of $50,000
per person per plan year. Insurance is purchased for claims in excess of the
self-insurance limits. The Company had an accrual for outstanding claims of
approximately $0.3 million to cover any loss incurred, including those not yet
reported, through December 31, 1995.
9 -- LITIGATION
On December 29, 1993, the Company filed suit against Revlon Consumer
Products Corporation claiming the Company was entitled to incentive (or
performance-oriented) fees totaling approximately $3.9 million. This litigation
and all related litigation was settled, resulting in a charge to earnings of
$3.2 million in the fourth quarter of 1994 and a receivable of $0.7 million,
reflecting the present value of payments to be received over a five-year period
beginning July 15, 1995. The first payment of $0.2 million was received in July
1995.
18
<PAGE> 19
10 -- SEGMENT DATA AND SALES TO MAJOR CUSTOMERS
The Company operates in one dominant industry segment, management
services; however, with the acquisition of Interlink, the Company's operations
were expanded to include software development and information technology
services. The software development and information technology services segment
results were not significant to the Company in 1995.
The Company conducts its business primarily in two geographic areas,
North America and Europe. Information regarding these two areas follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
(in thousands) North America Europe Total
<S> <C> <C> <C>
Year Ended December 31, 1995
Sales to Unaffiliated Clients $ 40,125 $ 27,095 $ 67,220
% of Total Sales 60% 40% 100%
Geographic Segment Profit $ 5,724 $ 4,855 $ 10,579
Interest income (expense) 524
- ------------------------------------------------------------------------------------------------------------
Income before Income Taxes $ 11,103
==========
Identifiable Assets $ 20,399 $ 5,782 $ 26,181
Corporate Assets 13,976
- ------------------------------------------------------------------------------------------------------------
Total Assets $ 40,157
==========
Year Ended December 31, 1994
Sales to Unaffiliated Clients $ 29,792 $ 22,668 $ 52,460
% of Total Sales 57% 43% 100%
Geographic Segment Profit $ (5,252)(1) $ 5,292 $ 40
Interest income (expense) 105
- ------------------------------------------------------------------------------------------------------------
Income before Income Taxes $ 145
==========
Identifiable Assets $ 10,213 $ 5,223 $ 15,436
Corporate Assets 12,131
- ------------------------------------------------------------------------------------------------------------
Total Assets $ 27,567
==========
Year Ended December 31, 1993
Sales to Unaffiliated Clients $ 33,848 $ 10,738 $ 44,586
% of Total Sales 76% 24% 100%
Geographic Segment Profit $ 5,642 $ 1,309 $ 6,951
Interest income (expense) (77)
- ------------------------------------------------------------------------------------------------------------
Income before Income Taxes $ 6,874
==========
Identifiable Assets $ 13,923 $ 2,663 $ 16,586
Corporate Assets 14,368
- ------------------------------------------------------------------------------------------------------------
Total Assets $ 30,954
==========
</TABLE>
(1) Includes charge of $5.9 million for allowance for doubtful accounts and net
gain on securities sale of $0.5 million.
19
<PAGE> 20
The following table indicates those clients whose revenues were in excess of
10% of consolidated revenues for the three years ended December 31, 1995.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
(in thousands) North America % of Total Europe % of Total
<S> <C> <C> <C> <C>
Year Ended December 31, 1995
Client 1 $5,846 9% $6,250 9%
Year Ended December 31, 1994
Client 1 $6,989 13% $11,264 22%
Year Ended December 31, 1993
Client 1 $5,036 11%
Client 2 4,486 10%
Client 3 1,427 3% $6,342 14%
</TABLE>
11 -- RELATED PARTY TRANSACTIONS
PHILIP R. THOMAS-PRINCIPAL STOCKHOLDER -- On September 5, 1995, Mr. Thomas
repaid a $1.1 million promissory note, together with accrued interest of $.05
million. The loan was repaid with $0.9 million in cash and 29,000 shares of
Class B Common Stock owned by Mr. Thomas. The Class B Common Stock was valued
at $10.15 per share (70% of the fair market value of the Company's Common Stock
on the date of repayment). In accordance with his employment agreement, Mr.
Thomas executed this note because he earned no incentive compensation in 1994
and had been advanced $1.1 million against 1994 incentive compensation.
The Company has entered into a 25-year lease agreement with Mr. Thomas
for 60 acres of land on which the CEO Center is situated. The Company has a
separate agreement with Mr. Thomas to lease guest accommodations situated on
Mr. Thomas' personal property adjacent to the CEO Center. The lease provides
for monthly payments of $12,960 through November 30, 2016. The rental rate was
determined by evaluating average occupancy rates and costs of comparable guest
facilities in the area. On December 31, 1995, the Company prepaid its lease
for guest accommodations at the CEO Center through November 2016. The $0.9
million prepayment accepted by Mr. Thomas represents a discount of $0.6 million
(computed on a net present value basis) from the lease payments to which Mr.
Thomas was entitled. The prepayment is included in Other Assets, and is being
amortized on a straight-line basis over the term of the lease.
On December 31, 1995, the Company agreed to purchase Mr. Thomas'
leasehold interest in a Texas Stadium luxury suite for $0.6 million. The
purchase price was established by an independent third party that facilitates
similar transactions.
In 1993, Mr. Thomas agreed to pay $0.7 million to a client of the
Company in the event that (i) a performance target was not met by the client at
the end of 1994 and (ii) the client was current on all outstanding balances due
the Company at the end of 1994. The performance target was not met; however,
Mr. Thomas did not pay the client because the client had an outstanding balance
with the Company of $0.7 million. The Company recorded a reserve against this
client receivable at December 31, 1994. The substance of Mr. Thomas' personal
guarantee to the client was to ensure that the Company would receive payment of
amounts due from the client. Late in 1995 when it became apparent that
collection of amounts due from the client was unlikely, Mr. Thomas executed a
promissory note to the Company in the amount of $0.7 million, due in April
1996. On December 31, 1995, Mr. Thomas prepaid this note, with accrued
interest. The prepayment was recorded as a contribution to paid in capital. Mr.
Thomas paid this note with the proceeds of the Company's prepayment of its
lease for guest accommodations at the CEO Center.
In the period December 1994 through February 1995, the Company issued
duplicate stock certificates to Mr. Thomas in an aggregate amount of 1,130,000
shares. The duplicate certificates were issued in anticipation of an equal
number of shares being returned by Mr. Thomas' personal lenders for
cancellation. Certificates totaling
20
<PAGE> 21
1,130,000 shares were returned and cancelled. The duplicate stock certificate
issuance and subsequent cancellations had no economic effect upon the Company
or Mr. Thomas' share ownership.
In 1993, the Company entered into an agreement with Integrated
Multimedia Solutions, Inc. ("IMS"), an affiliated entity, for the development
of customized learning systems used in the application of Total Cycle Time
methodology. Under this agreement, the Company paid IMS $0.4 million during
1993, of which $0.1 million was capitalized. In 1994, BERMAC Communications,
Inc. ("BERMAC"), a computer software company, acquired IMS interest in this
agreement and is currently pursuing completion of the project. In BERMAC's
opinion, the IMS development platform had become technologically outdated and
was not suitable for further expansion of the software. Based on this opinion,
the capitalized $0.1 million was expensed in 1994. BERMAC is also currently
developing a proprietary database of best practices for the Company in
delivering Total Cycle Time programs. Under the initial eight month term of the
agreement, the Company paid BERMAC approximately $0.6 million which was
capitalized as software under development to be used internally by the Company.
The database was substantially complete at the end of 1994, but is being
upgraded to take advantage of the latest groupware and internet technologies.
The Company paid and expensed $0.1 million of fees to BERMAC in 1995 for
network support. Final on-site testing at client locations is scheduled for the
second quarter of 1996.
Pursuant to an agreement dated February 14, 1994 among BERMAC, TGHC (a
company wholly owned by Mr. Thomas), Mr. Thomas, and other parties, Mr. Thomas
granted to BERMAC a license to use proprietary computer-based training
software, and agreed, through TGHC, to assist BERMAC in arranging private and
public financing. TGHC also agreed to facilitate a strategic alliance between
BERMAC and the Company. As part of the agreement, BERMAC agreed to reserve 15%
of its common stock for issuance to Mr. Thomas or his designee. The factual
circumstances under which Mr. Thomas could earn equity ownership in BERMAC, as
contemplated by such agreement, have not come to pass within the time frame
stipulated and consequently Mr. Thomas has neither earned nor has an
opportunity to earn equity ownership in BERMAC.
During 1994 the Company engaged Integrated Security Systems, Inc.
("ISSI"), to supply security equipment at various Company offices. Payments to
ISSI for such equipment and services totaled $0.4 million in 1994. Mr. Thomas
is the beneficial owner of 21.4% of ISSI's common stock. Effective February 16,
1994, ISSI entered into a five-year agreement with TGHC to provide the services
of Gerald K. Beckmann, Director of TGI, as Chairman of the Board of ISSI for
$0.1 million annually. Mr. Beckmann now serves as the elected Chairman of ISSI;
consequently, the agreement with TGHC was terminated effective May 1995.
As an additional marketing initiative, the Company employs two sales
executives whose primary focus is acquiring new business through relationships
in the investment banking community. The two sales executives have an ownership
interest in Celerity Partners, a limited partnership (the "Partnership") which
invests in companies whose competitiveness within a particular industry may be
significantly improved. In addition, the general partner of the Partnership has
been organized as a limited liability company, in which Mr. Thomas, Mr.
Beckmann, and Mr. Jim Dykes (directors of the Company) own 40%, 15% and 1%
equity interests, respectively. Mr. Beckmann also serves on the board of
directors of the general partner. The Company's board of directors has
precluded Mr. Thomas from becoming involved in contract negotiations or the
contract approval process of any potential client in which the Partnership
holds or is negotiating an ownership interest. The Company incurred costs of
approximately $0.4 million in 1994 and $0.5 million in 1995 supporting this
marketing initiative.
OTHER AFFILIATES -- In 1994, TGI advanced Mr. Beckmann $0.1 million. Mr.
Beckmann executed promissory notes due November 30, 1995. The notes carried an
interest rate equal to the rate the Company would pay on its primary borrowing
facility. The notes were repaid, with interest, on December 31, 1995.
21
<PAGE> 22
A summary of current receivables from affiliates follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
(in thousands) December 31,
1995 1994
<S> <C> <C>
Philip R. Thomas
Prepaid incentive compensation $ -- $1,094
Other Affiliates 153
- ------------------------------------------------------------------------------------------------------------
$ -- $1,247
===============================================
</TABLE>
A summary of transactions with affiliates follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
(in thousands) Year Ended December 31,
1995 1994 1993
<S> <C> <C> <C>
Philip R. Thomas:
Real estate and other rentals paid to
Mr. Thomas $301 $332 $184
Payments to ISSI for security systems 94 350 --
Payments to BERMAC for custom
computer software 139 592 --
Payments to IMS for custom computer software -- -- 427
Management fee and royalties paid to
TGHC or TCO -- -- 1,459
Other Affiliates:
Loans to Gerald K. Beckmann -- 102 --
</TABLE>
ELECTRONIC DATA SYSTEMS CORPORATION ("EDS")--In February 1990, the Company sold
EDS 937,500 shares of the Company's Redeemable Class A Common Stock for $5
million in cash and simultaneously purchased 937,500 shares of Common Stock
from existing stockholders for $5 million.
The Company also received a $2.5 million loan from EDS which became
due and payable on August 19, 1993 and was retired with initial public offering
proceeds. Prior to repayment of the EDS loan, the Company was required to
dedicate, on a quarterly basis, 3% of net sales and 25% of net income for
payment to EDS.
The Company also entered into a Management Service Agreement with EDS
which expired at the end of 1994 and which, in summary, compensated EDS for
consulting services associated with information technology and the
identification of marketing opportunities.
Amounts paid to EDS are summarized as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
(in thousands) Year Ended December 31,
1994 1993
<S> <C> <C>
Interest on loan $ -- $ 47
Principal repayments -- 1,332
Dividends declared on Redeemable
Class A Common Stock -- 408
Marketing fee -- 100
Management services 60 65
- ------------------------------------------------------------------------------------------------------------
$ 60 $ 1,952
===============================================
</TABLE>
12 -- SELLING, GENERAL AND ADMINISTRATIVE
Included in SG&A expenses in 1994 is a charge of $5.9 million to
establish reserves for doubtful receivables on completed contracts. First,
pursuant to the February 15, 1995 settlement of a 1993 lawsuit with
22
<PAGE> 23
Revlon Consumer Products Corporation ("Revlon"), the Company recorded a charge
of $3.2 million in the fourth quarter of 1994, as part of a confidential
settlement agreement. Prior to this settlement, the Company and its legal
counsel were confident that, had the matter proceeded to trial, the Company
would have prevailed. Consequently, the Company made no provision for reserves
prior to the settlement date. Due to the significant amount of time and
resources being consumed by the litigation, the Company concluded the
settlement was in the best interests of the Company.
Second, by mutual agreement the Company and a client terminated a
contract. The client was experiencing liquidity difficulties and a $1.5 million
reserve was established against the outstanding receivable balance of $2.1
million. This client has remained current on their agreed-upon payment play to
the Company and the reserve was adjusted to $0.4 million in the fourth quarter
of 1995.
Third, in 1993 the Company offered terms on a program which permitted
a client to defer payment until December 31, 1994. The client refused to pay
the outstanding receivable, alleging that a certain performance target was not
met. The Company established a bad debt reserve in the amount of the entire
$0.7 million receivable.
Fourth, the Company was involved in a dispute with a client regarding
$0.6 million in fees invoiced prior to 1994. This matter was resolved in
December 1994, resulting in a charge of $0.4 million against a reserve
previously established and a charge of approximately $0.3 million in the fourth
quarter of 1994. The remaining $0.2 million reserve was recorded in the fourth
quarter of 1994 to provide for the settlement of disputes with two other
clients.
13 -- FINANCING AGREEMENT
At December 31, 1995, the Company maintained a $6 million revolving
credit agreement, including $1 million for letters of credit, with a bank. This
agreement was to expire in January, 1996, and following a short-term extension
has been further extended to February 1998. The credit agreement provides,
among other things, that the Company may pay dividends of up to 50% of its net
income. Interest on any base rate borrowing is payable at prime. The agreement
is not collateralized. The Company did not borrow funds under the revolving
line of credit agreements at any time during 1995. During 1995 and 1994 the
Company paid no interest and paid a commitment fee of $23,000 and $20,000,
respectively.
14 -- COMMON STOCK AND STOCK OPTIONS
Shares of Common Stock and Class B Common Stock are identical, except
that holders of Class B Common Stock have no voting rights. EDS was the holder
of Redeemable Class A Common Stock prior to its conversion to Common Stock and
retirement in connection with the initial public offering.
The Company grants incentive and non-qualified stock options and has
reserved 2,425,000 shares of Common Stock and 675,000 shares of Class B Common
Stock for issuance. Options to purchase shares of the Company's Common Stock
and Class B Common Stock have been granted to directors, officers and
employees. The majority of the options granted become exercisable at the rate
of 20% per year, and generally expire ten years after the date of grant.
Of the 949,597 Common Stock options outstanding at December 31, 1995,
423,919 contain a provision whereby the option can be exercised by using shares
of Class B Common Stock previously acquired through the exercise of Class B
stock options and held for more than six months, to pay all or a portion of the
option holder's exercise price. The tender of Class B Common Stock to pay for
all or a portion of the exercise of Common Stock options is credited against
the exercise price at the then fair market value of Class B Common Stock. The
fair market value of Class B Stock is 70% of the then quoted closing price on
the NASDAQ for the Company's Common Stock.
23
<PAGE> 24
On December 1, 1994, the Company repriced certain outstanding common
stock options to $6.75, the fair market value of the Company's common stock on
that date. The table on the following page reflects the effect of the
repricing.
Information regarding exercisable options is as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
December 31,
1995 1994
<S> <C> <C>
Common Stock options
Exercisable 661,879 703,374
Average option price $ 10.17 $ 11.25
Class B Common Stock options
Exercisable 200,397 401,775
Average option price $ 4.47 $ 2.77
</TABLE>
Transactions relating to stock options are as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
Common Options
shares Exercise Price Class B Options shares Exercise Price
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1992 824,400 $0.40 - $12.625 664,020 $0.00 - $5.44
Granted 172,450 $0.00 - $18.75 -- --
Exercised (84,874) $0.00 - $14.25 (95,124) $0.00 - $5.44
Terminated (32,030) $0.40 - $14.25 (20,580) $1.33 - $5.33
--------- --------
December 31, 1993 879,946 $0.00 - $18.75 548,316 $0.00 - $5.44
Granted 604,424 $0.00 - $17.50 -- --
Exercised (48,000) $0.00 - $14.25 (109,104) $0.00 - $5.44
Terminated (431,684) $0.00 - $18.75 (1,620) $1.33 - $5.33
--------- --------
December 31, 1994 1,004,686 $0.00 - $12.625 437,592 $0.00 - $5.44
Granted 180,000 $0.00 - $15.50 -- --
Exercised (170,251) $0.00 - $13.00 (223,790) $0.00 - $5.44
Terminated (64,838) $0.00 - $16.75 (10,600) $0.00 - $5.33
--------- --------
December 31, 1995 949,597 $0.00 - $15.50 203,202 $0.00 - $5.44
========= ========
</TABLE>
24
<PAGE> 25
15 -- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
(in thousands, except share data) For the Year Ended December 31,
1995 1994 1993
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest paid $8 $62 $230
Income taxes paid 1,920 2,255 1,300
Transfer of 82,868 shares of Common Stock by
Mr. Thomas in repayment of outstanding notes,
accounts receivable and management fee buy-down -- -- 1,046
Receipt of Class B Common Stock in payment of
exercise price of Common Stock options 1,845 330 245
Conversion of 937,500 shares of
Redeemable Class A Common Stock
to Common Stock -- -- 5,000
Acquisition of Texas Stadium Suite
in exchange for note payable to Mr. Thomas 578 -- --
Prepayment of lease for CEO Center facilities
in exchange for a note payable to Mr. Thomas 876 -- --
Repayment of loan by Mr. Thomas via
offset with TGI prepayment of facilities lease 705 -- --
</TABLE>
25
<PAGE> 26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Form 10-K/A No. 1 to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Irving, State of Texas, on September 30, 1996.
THOMAS GROUP, INC.
By: /s/ PHILIP R. THOMAS
-----------------------------
Philip R. Thomas
Chairman of the Board and
Chief Executive Officer
POWER OF ATTORNEY
Each individual whose signature appears below constitutes and appoints
Philip R. Thomas and Alex W. Young, and each of them, such person's true and
lawful attorneys-in-fact and agents with full power of substitution and
resubstitution, for such person and in such person's name, place, and stead, in
any and all capacities, to sign any and all amendments to this Form 10-K and to
file the same with all exhibits thereto, and all documents in connection
therewith, with the Securities and Exchange Commission, granting unto such
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as such person
might or could do in person, hereby ratifying and confirming all that such
attorneys-in-fact and agents or any of them, or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
26
<PAGE> 27
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this Form 10-K has been signed by the following persons
on behalf of the Registrant in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<S> <C> <C>
/s/ PHILIP R. THOMAS Director, Chairman of the Board and Chief September 30, 1996
------------------------ Executive Officer
Philip R. Thomas
/s/ ALEX W. YOUNG President, Chief Operating Officer and Director September 30, 1996
------------------------
Alex W. Young
/s/ LELAND L. GRUBB, JR. Vice President, Chief Financial Officer and September 30, 1996
------------------------ Treasurer (Principal Financial and Accounting
Leland L. Grubb, Jr. Officer)
/s/ GERALD K. BECKMANN Director September 30, 1996
------------------------
Gerald K. Beckmann
/s/ JAMES P. BUCHANAN Director
------------------------ September 30, 1996
James P. Buchanan
/s/ J. FRED BUCY Director September 30, 1996
------------------------
J. Fred Bucy
</TABLE>
27
