<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[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, 1996.
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 Identification No.)
incorporation or organization)
5215 NORTH O'CONNOR BOULEVARD, SUITE 2500, IRVING, TEXAS 75039-3714
(Address of principal executive offices) (Zip Code)
(972) 869-3400
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ------------------- -----------------------------------------
Common Stock, par value $.01 per share NASDAQ-NMS
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 (ss.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. |_|
As of February 28, 1996, the aggregate market value of the voting stock held by
non-affiliates of the registrant was $34,811,000, based on the NASDAQ-NMS
closing price.
As of February 28, 1996, the following number of shares of the registrant's
stock were outstanding:
<TABLE>
<S> <C>
Common Stock 5,893,134
Class B Common Stock 186,567
---------
Total 6,079,701
=========
</TABLE>
DOCUMENTS INCORPORATED BY REFERENCE.
Portions of the 1996 Annual Report to Stockholders are incorporated by
reference into Part II.
Portions of the definitive Proxy Statement for the 1997 Annual Meeting of
Stockholders are incorporated by reference into Part III.
<PAGE> 2
PART I
ITEM 1. BUSINESS.
GENERAL
Thomas Group, Inc., a Delaware corporation (the "Company"), is an
implementor of a proven management methodology that enables organizations to
continuously become more competitive, more efficient and to improve financial
performance. The Company's systematic approach to business process design and
operating performance enhancement utilizes its proprietary Total Cycle Time(R)
methodology to deliver Speed Driven Results(SM). The Company's experienced
professionals lead clients in effecting internal change that maximizes
responsiveness. From the Company's United States, Asia/Pacific and European
offices, the Company has successfully completed projects enabling large
corporations in the United States, Asia and Western Europe to outpace global
competition. The Company's Interlink Technologies subsidiary specializes in
paperless warehousing and distribution systems. The Company's Bermac
Communications subsidiary specializes in custom multimedia applications in the
training and sales force automation areas.
The Company's specific methodology, known as Total Cycle Time, focuses
on reducing the time to complete and improve the effectiveness of
revenue-production, product development and administrative processes, resulting
in improvements in financial performance, quality, and response time. The
Company's services are based on time management concepts and are applied to
business processes throughout industry.
Utilizing Total Cycle Time methodology, the Company analyzes a
client's business, works with the client's senior management in a four day
executive workshop to define the potential performance improvement, and works
with the client to implement actions to obtain the improvement. Total Cycle
Time services are designed to enable the Company's clients to achieve
quantifiable results, such as higher growth, improved profitability, greater
productivity, more effective asset utilization and reduced time in developing
and delivering new products to market, thereby making clients more competitive.
Due to the Company's prior success with and confidence in Total Cycle Time
services, the Company generally provides its clients with the option of paying
the Company fixed fees or a combination of fixed fees and performance-oriented
fees based on improvements in mutually determined measurements, such as cycle
time or financial criteria.
CLIENTS
The Company's clients are typically large, well-established companies,
or distinct business units of such companies, in North America, Western Europe,
and the Asia/Pacific region. Within the largest clients, multiple programs have
been performed for different business units, however, the Company has not
historically performed repeat programs for specific client business units for
which the Company has completed a Total Cycle Time program. The Company has
begun to diversify its product offerings in order to increase the potential for
continuous client engagements.
TOTAL CYCLE TIME
The Total Cycle Time methodology developed and employed by the Company
is used to analyze a client's business into components of three basic
processes: the development of new products and services; the production and
delivery of goods and services; and the definition and implementation of
strategies to capitalize on fast response. By defining such processes and
working directly with the top management team in a four day workshop, the
Company is able to analyze and quantify a client's existing performance levels
using measures of time, productivity, asset utilization, cost and quality. In
addition the Company is able to establish operating and financial improvements
the Company believes can be obtained by the client utilizing the Thomas Group
methodology and tools and existing or reduced resources.
Frequently, business and cultural "barriers" restrict or hinder a
client's operating processes. These barriers may consist of excessive
inspections, inappropriate lot/batch sizes, improper measures or a client's
view of its business as departments or functions rather than as integrated
processes. Cultural and business process barriers appear in a wide variety of
manufacturing, project and service businesses, and their removal can have a
significant, positive impact on a
<PAGE> 3
client's business. Because these barriers are ingrained in a client's business
and culture, they may be difficult for a client's management to identify and
address without the assistance of outside, experienced business professionals.
At an early stage of a Total Cycle Time program's implementation, the
Company identifies each of a client's business processes, analyzes the inter
relationship of each process to another, identifies the cultural barriers
restricting a client's performance, and determines the actions required to
remove these barriers. As barriers to improved performance and unnecessary
steps in the business processes are removed, cycle times are reduced and
activities or actions are more rapidly and efficiently completed.
During implementation of a Total Cycle Time program, the Company works
with the client to internalize Total Cycle Time methodologies, with the
objective of sustaining change in the client's culture after Company personnel
complete the bulk of the program. The Company provides its clients a limited
license to use Total Cycle Time methodologies internally.
In response to client demand, the Company has been developing
continuous improvement services, consisting of ongoing assessments and upgrades
to Total Cycle Time methodology. Continuous improvement services are designed
to sustain and improve upon the successes of the original Total Cycle Time
programs, and provide clients with an extended means of assessing, monitoring
and improving their businesses utilizing Total Cycle Time. Continuous
improvement services will also afford the Company the opportunity for
additional revenues in subsequent years. The Company has also developed a major
new product to address the need for rapid strategic implementation capability.
This product is a natural second major step for the client and enhances the
Company's Total Cycle Time program. This new product is being launched in
1997.
SALES AND MARKETING
The Company's services are marketed through its own sales and
marketing organization. As part of its marketing efforts, the Company employs
and uses outside consultants as sales executives whose primary focus is
acquiring new business through specific relationships. Additionally, sales and
marketing efforts include a fully integrated marketing program including
magazine advertising, direct mail pieces and the sponsorship of prestigious
business conferences.
In addition to its traditional marketing and sales efforts, the
Company relies upon references and referrals from existing and former clients,
and the use of lectures and publications including five books authored by Mr.
Thomas (Competitiveness Through Total Cycle Time, Getting Competitive, Time
Warrior, Quality Alone Is Not Enough, and Survival at Nodulex).
CONTRACTUAL ARRANGEMENTS
The Company performs Total Cycle Time services for a client pursuant
to agreements generally having terms of 18 months to three years. A client
agrees to compensate the Company for its services in the form of fixed fees or
a combination of fixed and performance-oriented fees. The Company's fee
structure is based on a client's size, the complexity and geographic deployment
of a client's business, the level of improvement opportunity available to a
client, and certain other factors.
Fixed fees are recognized as revenue when earned, generally on a
straight-line basis over the life of the contract. Performance-oriented fees
are based on agreed-upon objective measures (such as cycle time reduction,
inventory reduction, accounts receivable reduction, profit improvement or other
quantifiable objectives) calculated monthly, and are recognized as revenue when
earned and approved by the client.
PROFESSIONAL STAFF
At December 31, 1996, the Company had a total of 349 employees,
consisting of 192 business professionals who apply Total Cycle Time methodology
and are known as Resultants(SM), 51 computer software development and
implementation professionals, and 106 administrative employees. The Company's
employees are not represented by a labor union nor are they subject to any
collective bargaining agreement. The Company has entered into nondisclosure and
noncompetition or nonsolicitation agreements with Mr. Philip R. Thomas, the
Company's Chairman and Chief Executive Officer, and substantially all of its
employees.
<PAGE> 4
EUROPEAN OPERATIONS
The Company had revenues attributable to European clients of $18.4
million in 1996 (26% of revenues), $27.1 million in 1995 (40% of revenues), and
$22.7 million in 1994 (43% of revenues). The majority of the Company's European
agreements are denominated in European currencies.
CLIENT CONCENTRATION
The Company had revenues exceeding 10% of its total consolidated
revenues from LSG Sky Chefs, Inc., Siemens A.G., and Moore Business Forms, Inc.
in 1996, and Siemens A.G. in 1995 and 1994. The loss, without replacement, of
any of the Company's large clients could have a material adverse effect on the
Company.
COMPETITION
The Company believes that the competitive factors most important to
its business are the unique quality of its Total Cycle Time methodology, the
quality of its professional staff, its willingness to be compensated on a
performance-oriented basis and its referenceable reputation for achieving
targeted results. Traditional consulting firms provide services similar in some
respects to the services provided by the Company, as a part of their overall
practice, but generally do not offer performance-oriented fees.
TRADEMARKS AND SERVICE MARKS
The Company has secured federal registration for the service marks
"Total Cycle Time(R)," "TCT(R)," "5 I's Process(R)" and "Cycles of
Learning(R)." These registrations expire from August 2002 to January 2003. The
Company has filed an application for a federal servicemark registration for
"Resultants," "AIP Management," "AIPs," "Actions-In-Process" and "Speed Driven
Results." The Company considers each of these service marks or trademarks to be
significant to the Company's business.
BUSINESS AND GEOGRAPHIC SEGMENTS
Business and geographic segment information appearing on pages 28 and
29 of the Company's 1996 Annual Report to Stockholders is herein incorporated
by reference.
ITEM 2. PROPERTIES.
The Company's principal executive office is located in Irving, Texas.
The Company also leases space in a building adjacent to its principal executive
offices in Irving, Texas and space for its offices in Princeton, New Jersey;
Troy, Michigan; Maumee, Ohio; Frankfurt, Germany; and Singapore. The Company
currently leases 60 acres of land near Baton Rouge, Louisiana, on which the
Company's conference and training center ("CEO Center") is located. The Company
considers these properties to be adequate for their business purposes.
ITEM 3. LEGAL PROCEEDINGS.
On December 29, 1993, the Company filed suit against Revlon Consumer
Products Corporation ("Revlon"), claiming the Company was entitled to unpaid
incentive (or performance-oriented) fees and expenses totaling approximately
$3,900,000. Other than the inability to invoice Revlon for further fees, the
litigation had little immediate effect on the Company's business. The Company
was able to productively redeploy the personnel assigned to the Revlon program.
Additionally, the Revlon legal proceedings had no discernible impact upon the
Company's other programs or upon the Company's relations with its other
clients. Due to timing differences, however, potential earnings from the Revlon
program were not immediately replaced. This litigation and all related
litigation was settled in early 1995, and the Company has to date received two
of five settlement payments to be received over a five-year period.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
<PAGE> 5
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET FOR REGISTRANT'S COMMON EQUITY
The Company's Common Stock is traded on the over the counter market on
the NASDAQ National Market System under the symbol TGIS. 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 National Market System. The prices
reported in the following table by the NASDAQ National Market System reflect
inter-dealer prices without retail mark-up, mark-down or commissions.
<TABLE>
<CAPTION>
Quarter Ended High Low
------------- ---- ---
<S> <C> <C>
March 31, 1995 $10.50 $ 6.25
June 30, 1995 $11.00 $ 9.50
September 30, 1995 $16.00 $10.50
December 31, 1995 $15.87 $11.75
March 31, 1996 $15.75 $12.00
June 30, 1996 $20.00 $14.13
September 30, 1996 $18.63 $14.00
December 31, 1996 $14.63 $ 7.00
</TABLE>
There is no established public market for the Company's Class B Common
Stock.
HOLDERS OF RECORD
As of February 28, 1997 there were approximately 130 holders of record
of the Company's Common Stock.
DIVIDENDS
The Company has not paid cash dividends on its Common Stock. The
Company intends to retain future earnings in order to provide funds for use in
the operation and expansion of the business, and, accordingly, does not
anticipate paying cash dividends on its Common Stock in the foreseeable future.
ITEM 6. SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA.
Selected historical and pro forma financial data appearing on page 13
of the Company's 1996 Annual Report to Stockholders is herein incorporated by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Management's discussion and analysis of financial condition and
results of operations appearing on pages 14 through 17 of the Company's 1996
Annual Report to Stockholders is herein incorporated by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements and notes thereto, together with
the report of independent certified public accountants thereon, appearing on
pages 18 through 33 of the Company's 1996 Annual Report to Stockholders, are
herein incorporated by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
Not applicable.
<PAGE> 6
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information relating to the Company's directors and nominees for
election as directors, and the information relating to executive officers of
the Company, is incorporated herein by reference from the Company's Proxy
Statement (herein so called) for its 1997 Annual Meeting of Stockholders. It is
currently anticipated that the Proxy Statement will be publicly available and
mailed to stockholders in April 1997.
ITEM 11. EXECUTIVE COMPENSATION.
The discussion under "Executive Compensation" in the Company's Proxy
Statement for its 1997 Annual Meeting is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The discussion under "Security Ownership of Certain Beneficial Owners
and Management" in the Company's Proxy Statement for its 1997 Annual Meeting is
incorporated herein by reference.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The discussion under "Certain Transactions" in the Company's Proxy
Statement for its 1997 Annual Meeting is incorporated herein by reference.
<PAGE> 7
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this report.
1. Financial Statements
The Consolidated Financial Statements and the Report of
Independent Public Accountants thereon are included on pages 18
through 33 of the Company's 1996 Annual Report to Stockholders
included as Exhibit 13 to this Form 10-K and are incorporated herein
by reference.
2. Financial Statement Schedules
<TABLE>
<CAPTION>
SEQUENTIAL
SCHEDULE DESCRIPTION PAGE NUMBER
<S> <C>
II. Valuation and Qualifying Accounts and Reserves. ____
</TABLE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
3.1 Amended and Restated Certificate of Incorporation
of the Company filed August 13, 1993, with the
State of Delaware Office of the Secretary of State
(filed as Exhibit 3.1 to the Company's Annual
Report on Form 10-K for the year ended December
31, 1994 (the "1994 Form 10-K") and incorporated
herein by reference)..
3.2 Amended and Restated By-Laws (filed as Exhibit 3.5
to the Company's 1993 Form S-1 (File No. 33-64492)
and incorporated herein by reference).
4.1 Specimen Certificate evidencing Common Stock
(filed as Exhibit 4.1 to the Company's 1993 Form
S-1 (File No. 33-64492) and incorporated herein by
reference).
4.2 Form of Warrant Issued by the Company to the
Representative (filed as Exhibit 4.2 to the
Company's 1993 Form S-1 (File No. 33-64492) and
incorporated herein by reference).
10.1 Registration Rights Agreement dated February 23,
1990, among the Company, EDS, Philip R. Thomas,
individually and acting in a representative
capacity (filed as Exhibit 10.7 to the Company's
1993 Form S-1 (File No. 33-64492) and incorporated
herein by reference).
10.2 Agreement dated July 14, 1992, by and among the
Company, Philip R. Thomas and EDS (filed as
Exhibit 10.11 to the Company's 1993 Form S-1 (File
No. 33-64492) and incorporated herein by
reference).
10.3 Amended and Restated Employment Agreement dated
effective January 1, 1994 between the Company and
Philip R. Thomas (filed as Exhibit 10.3 to the
Company's 1994 Form 10-K and incorporated herein
by reference)..
10.4 Amendment No. 1 to Amended and Restated Employment
Agreement between the Company and Philip R.
Thomas, dated effective December 1, 1994 (filed as
Exhibit 10.4 to the Company's 1994 Form 10-K and
incorporated herein by reference)..
</TABLE>
<PAGE> 8
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
10.5 Employment Agreement between the Company and Alex
W. Young (filed as Exhibit 10.13 to the Company's
Annual Report on Form 10-K for the year ended
December 31, 1993 (the "1993 Form 10-K") and
incorporated herein by reference).
10.6 Amendment to Employment Agreement between the
Company and Alex W. Young (filed as Exhibit 10.13
to the Company's 1993 Form 10-K and incorporated
herein by reference).
*10.7 Employment Agreement between the Company and
Leland L. Grubb, Jr.
10.8 Amended and Restated 1988 Stock Option Plan (filed
as Exhibit 10.14 to the Company's 1993 Form S-1
(File No. 33-64492) and incorporated herein by
reference).
10.9 Amended and Restated 1992 Stock Option Plan.
(Filed as Exhibit 10.8 to the Company's Form S-1
(File No. 33-64492) and incorporated herein by
reference
10.10 401(k) Plan (filed as Exhibit 10.16 to the
Company's 1993 Form S-1 (File No. 33-64492) and
incorporated herein by reference).
10.11 Form of Indemnification Agreement (filed as
Exhibit 10.18 to the Company's 1993 Form S-1 (File
No. 33-64492) and incorporated herein by
reference).
*10.12 First Amended and Restated Revolving Credit Loan
Agreement dated December 4, 1996 between Comerica
Bank-Texas and the Company.
10.13 Supplemental Registration Rights Agreement dated
April 5, 1993 among the Company, Allen & Company
Incorporated, EDS and Philip R. Thomas,
individually and acting in a representative
capacity (filed as Exhibit 10.22 to the Company's
1993 Form S-1 (File No. 33-64492) and incorporated
herein by reference).
10.14 Commercial lease dated December 31, 1991 between
Philip R. Thomas and Wayne Heirtzler Thomas, as
owners, and the Company, as lessee (filed as
Exhibit 10.31 to the Company's 1993 Form S-1 (File
No. 33-64492) and incorporated herein by
reference).
10.15 Amendment No. 1 to Commercial Lease between Philip
R. Thomas and Wayne Heirtzler Thomas, as owners,
and the Company, as lessee, dated February 8, 1992
(filed as Exhibit 10.32 to the Company's 1993 Form
S-1 (File No. 33-64492) and incorporated herein by
reference).
10.16 Amendment No. 2 to Commercial Lease between Philip
R. Thomas and Wayne Heirtzler Thomas, as owners,
and the Company, as lessee, dated February 1, 1993
(filed as Exhibit 10.33 to the Company's 1993 Form
S-1 (File No. 33-64492) and incorporated herein by
reference).
10.17 Amendment No. 3 to Commercial Lease between Philip
R. Thomas and Wayne Heirtzler Thomas, as owners,
and the Company, as lessee (filed as Exhibit 10.34
to the Company's 1993 Form S-1 (File No. 33-64492)
and incorporated herein by reference).
</TABLE>
<PAGE> 9
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <S>
10.18 Registration Rights Agreement, dated as of August
18, 1993, between the Company and Philip R. Thomas
(filed as Exhibit 10.37 to the Company's 1993 Form
S-1 (File No. 33-64492) and incorporated herein by
reference).
10.19 Non-Employee Director Retainer Fee Plan (filed as
Exhibit 10.38 to the Company's 1993 Form S-1 (File
No. 33-64492) and incorporated herein by
reference).
10.20 Commercial Lease dated February 8, 1994 between
Philip R. Thomas and Wayne Heirtzler Thomas, as
owners, and the Company, as lessee (filed as
Exhibit 10.41 to the Company's registration
statement on Form S-1 (File No. 33-79418) and
incorporated herein by reference).
* 11 Statement of Computation of Earnings Per Share.
* 13 1996 Annual Report to Stockholders.
* 21 Subsidiaries of the Company.
* 23 Consent of BDO Seidman, LLP.
24 Power of Attorney (set forth on the signature page
of this Form 10-K).
* 27 Financial Data Schedule
</TABLE>
---------------
* Filed herewith.
(b) Reports on Form 8-K.
None
<PAGE> 10
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 to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Irving, State of Texas, on March 28th, 1997.
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.
<PAGE> 11
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
- ------------------------
Philip R. Thomas Director, Chairman of the Board and Chief Executive Officer March 31, 1997
/s/ ALEX W. YOUNG
- ------------------------
Alex W. Young President, Chief Operating Officer and Director March 31, 1997
/s/ LELAND L. GRUBB, JR.
- ------------------------
Leland L. Grubb, Jr. Vice President, Chief Financial Officer and Treasurer March 31, 1997
(Principal Financial and Accounting Officer)
/s/ GERALD K. BECKMANN
- ------------------------
Gerald K. Beckmann Director March 31, 1997
/s/ J. FRED BUCY
- ------------------------
J. Fred Bucy Director March 31, 1997
/s/ HOLLIS L. CASWELL
- ------------------------
Hollis L. Caswell Director March 31, 1997
/s/ JOHN T. CHAIN, JR.
- ------------------------
John T. Chain, Jr. Director March 31, 1997
/s/ JAMES E. DYKES
- ------------------------
James E. Dykes Director March 31, 1997
</TABLE>
<PAGE> 12
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Thomas Group, Inc.
Irving, Texas
The audits referred to in our report dated March 3, 1997 relating to the
consolidated financial statements of Thomas Group, Inc., which is incorporated
in Item 8 of the Form 10-K by reference to the annual report to stockholders
for the year ended December 31, 1996 included the audits of the financial
statement schedule listed under Item 14 of this Form 10-K. This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statement schedule
based upon our audits.
In our opinion, such financial statement schedule presents fairly, in all
material respects, the information set forth therein.
BDO SEIDMAN, LLP
Dallas, Texas
March 3, 1997
<PAGE> 13
THOMAS GROUP, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS
BEGINNING CHARGED BALANCE AT
DESCRIPTION OF YEAR TO EXPENSES DEDUCTIONS END OF YEAR
- --------------------------------------------------------------------- ----------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
December 31, 1994
Allowance for doubtful accounts .............. $ 400 $ 890 $ 400 $ 890
Reserve for performance guarantees ........... $ 60 $ -- $ 60 $ --
Allowance for doubtful accounts, long term ... $ -- $1,500 $ -- $1,500
December 31, 1995
Allowance for doubtful accounts .............. $ 890 $ 245 $ 890 $ 245
Allowance for doubtful accounts, long term ... $1,500 $ -- $1,118 $ 382
December 31, 1996
Allowance for doubtful accounts .............. $ 245 $ 215 $ 154 $ 306
Allowance for doubtful accounts, long term ... $ 382 $ 182 $ -- $ 564
</TABLE>
<PAGE> 14
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.7 Employment Agreement between the Company and
Leland L. Grubb, Jr.
10.12 First Amended and Restated Revolving Credit Loan
Agreement dated December 4, 1996 between Comerica
Bank-Texas and the Company.
11 Statement of Computation of Earnings Per Share.
13 1996 Annual Report to Stockholders.
21 Subsidiaries of the Company.
23 Consent of BDO Seidman, LLP.
24 Power of Attorney (set forth on the signature page
of this Form 10-K).
27 Financial Data Schedule.
<PAGE> 1
EXHIBIT 10.7
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (this "Agreement") is entered into as of
January 2, 1996, to be effective immediately prior to the Effective Time
(defined below), by and between THOMAS GROUP, INC., a Delaware corporation
("TGI") and LELAND L. GRUBB, JR., an individual residing in Bloomfield Hills,
Michigan ("Employee").
RECITALS
1. Employee is the Vice President and the Chief Financial Officer of
TGI and an integral part of its management who participates in the
decision-making process relative to short and long-term planning and policy for
TGI. Employee has served since April, 1995, in this capacity.
2. TGI has determined that it would be in the best interests of TGI
and its stockholders to assure continuity in the management of TGI's operations
by entering into an employment agreement to retain the services of Employee.
3. TGI wishes to assure itself of the continued services of
Employee for the period hereinafter provided, and Employee is willing to be
employed by TGI for said period, upon the terms and conditions set forth in this
Agreement.
4. Employee is currently an at will employee of TGI, and both TGI
and Employee desire that Employee be under contract to TGI.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and the obligations
undertaken by the parties pursuant hereto and other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, TGI
and Employee agree as follows:
1. Definitions. The defined terms used in this Agreement shall have
the meanings ascribed to them in this Section 1.
1.1 Affiliate. "Affiliate" shall mean any corporation over which
Employee or TGI, as the case may be, can exercise effective management and
control.
1.2 Board of Directors. "Board" or the "Board of Directors" shall
mean the Board of Directors of TGI or any committee of the Board empowered to
act or make decisions or determinations with respect to this Agreement.
<PAGE> 2
1.3 Cause. "Cause" shall mean that, as determined in good faith by
the Board of Directors, Employee has engaged in any act of gross misconduct
which is materially injurious to TGI or its business.
1.4 Change in Control. "Change in Control" shall mean:
(a) the acquisition by any individual, entity or group (within
the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of
1934, as amended (the "Exchange Act")) (a "Person" which, for purposes of this
definition, excludes Employee or any of his Affiliates) of beneficial ownership
(within the meaning of Rule 13d-3 promulgated under the Exchange Act) of shares
of common stock or other securities of TGI resulting in the beneficial
ownership by such individual, entity or group of 40% or more of either (1) the
then-outstanding shares of common stock of TGI (the "Outstanding TGI Common
Stock") or (2) the combined voting power of the then-outstanding voting
securities of TGI entitled to vote generally in the election of directors (the
"Outstanding TGI Voting Securities"); or
(b) if individual who, as of the date hereof, constitute the
Board (the "Incumbent Board) cease for any reason to constitute more than fifty
percent of the members of the Board; provided, however, that any individual
becoming a director subsequent to the date hereof whose election, or nomination
for election by TGI's stockholders, was approved by a vote of at least
two-thirds of the directors then constituting the Incumbent Board shall be
considered as though such individual were a member of the Incumbent Board, but
excluding, for this purpose, any such individual whose initial assumption of
office occurs as a result of either an actual or threatened election contest
subject to Rule 14a-11 of Regulation 14A promulgated under the Exchange Act or
other actual or threatened solicitation of proxies or consents by or on behalf
of a Person other than the Board; or
(c) approval by the stockholders of TGI of a reorganization,
merger or consolidation unless following such reorganization, merger or
consolidation (1) more than 40% of, respectively, the then-outstanding shares
of common stock of the corporation resulting from such reorganization, merger
or consolidation (the "Outstanding Survivor Common Stock"), and the combined
voting power of the then-outstanding voting securities of such corporation
entitled to vote generally in the election of directors (the "Outstanding
Survivor Voting Securities"), is then beneficially owned, directly or
indirectly, by all or substantially all of the individuals and entities who
were the beneficial owners, respectively, of the Outstanding TGI Common Stock
and Outstanding TGI Voting Securities immediately prior to such reorganization,
merger or consolidation in substantially the same proportions as their
ownership immediately prior to such reorganization, merger or consolidation, of
the Outstanding TGI Common Stock and Outstanding TGI Voting Securities, as the
case may be (for purposes of determining whether such percentage test is
satisfied, there shall be excluded from the number of shares of Outstanding
Survivor Common Stock and Outstanding Survivor Voting Securities owned by TGI's
stockholders, but not from the total number of shares of Outstanding Survivor
Common Stock and Outstanding Survivor Voting Securities, any shares or voting
securities received by any such stockholder in respect of any consideration
other than shares or voting securities of TGI), (2) no Person (excluding TGI,
any
-2-
<PAGE> 3
employee benefit plan (or related trust) of TGI, any qualified employee benefit
plan of such Surviving Corporation and any Person beneficially owning,
immediately prior to such reorganization, merger or consolidation, directly or
indirectly, 40% or more of the Outstanding TGI Common Stock or Outstanding TGI
Voting Securities, as the case may be) beneficially owns, directly or
indirectly, 40% or more of, respectively, the shares of Outstanding Survivor
Common Stock or the Outstanding Survivor Voting Securities and (3) more than
50% of the members of the board of directors of the Surviving Corporation were
members of the Incumbent Board at the time of the execution of the initial
agreement providing for such reorganization, merger or consolidation; or
(d) (1) approval by the stockholders of TGI of a complete
liquidation or dissolution of TGI or (2) the first to occur of (i) the sale or
other disposition (in one transaction or a series of related transactions) of
all or substantially all of the assets of TGI, or (ii) the approval by the
stockholders of TGI of any such sale or disposition, other than, in each case,
any such sale or disposition to a corporation, with respect to which
immediately thereafter (x) more than 40% of, respectively, the shares of
Outstanding Survivor Common Stock and the Outstanding Survivor Voting
Securities is then beneficially owned, directly or indirectly, by all or
substantially all of the individuals and entities who were the beneficial
owners, respectively, of the Outstanding TGI Common Stock and Outstanding TGI
Voting Securities immediately prior to such sale or other disposition in
substantially the same proportion as their ownership, immediately prior to such
sale or other disposition, of the Outstanding TGI Common Stock and Outstanding
TGI Voting Securities, as the case may be (for purposes of determining whether
such percentage test is satisfied, there shall be excluded from the number of
shares of Outstanding Survivor Common Stock and Outstanding Survivor Voting
Securities owned by TGI's stockholders, but not from the total number of shares
of Outstanding Survivor Common Stock and Outstanding Survivor Voting Securities
of the surviving corporation, any shares or voting securities received by any
such stockholder in respect of any consideration other than shares or voting
securities of TGI), (y) no Person (excluding TGI and any employee benefit plan
(or related trust) of TGI, any qualified employee benefit plan of such
transferee corporation and any Person beneficially owning, immediately prior to
such sale or other disposition, directly or indirectly, 40% or more of the
Outstanding TGI Common Stock or Outstanding TGI Voting Securities, as the case
may be) beneficially owns, directly or indirectly, 40% or more of,
respectively, the shares of Outstanding Survivor Common Stock and the
Outstanding Survivor Voting Securities and (z) more than 50% of the members of
the board of directors of the surviving corporation were members of the
Incumbent Board at the time of the execution of the initial agreement or action
of the board providing for such sale or other disposition of assets of TGI.
1.5 Code. "Code" shall mean the Internal Revenue Code of 1986, as
amended.
1.6 Common Stock. "Common Stock" shall mean the common stock of TGI,
par value $.01 per share, that will be outstanding immediately following the
Effective Time.
- 3 -
<PAGE> 4
1.7 Disability. "Disability" shall mean the inability of Employee to
perform his material managerial duties and responsibilities as contemplated
under Section 3 during the Term of Employment, as determined in accordance with
Section 6.1(e).
1.8 Effective Time. "Effective Time" shall mean the date the Form
S-1 Registration Statement relating to the initial public offering of Common
Stock pursuant to the Securities Act of 1933, as amended, is declared effective
by the Securities and Exchange Commission.
1.9 Good Reason. "Good Reason" shall mean Employee's decision to
terminate his employment under this Agreement if: (i) a significant diminution
occurs in the nature or scope of the authorities, powers, functions,
responsibilities or duties of Employee as the Vice President and Chief
Financial Officer described in Section 3, or the assignment to Employee of
functions, responsibilities or duties materially inconsistent with his position
as Vice President and Chief Financial Officer; provided, however, if Employee
agrees in writing to any such change in the nature or scope of his authorities,
powers, functions, responsibilities or duties, Good Reason shall not be deemed
to exist; or (ii) without limiting the generality or effect of the foregoing,
TGI or any successor thereto commits any material breach of this Agreement.
1.10 Term of Employment. "Term of Employment" shall mean the period
of time commencing on the effective date of this Agreement and continuing until
the fifth anniversary date of this Agreement; provided, however, that Employee
and TGI can agree, in writing, to extend the Term of Employment for an
additional five years, unless terminated earlier pursuant to the terms hereof.
2. Termination of Prior Agreements. TGI and Employee hereby
acknowledge and agree that, upon the occurrence of the Effective Time, this
Agreement supersedes any prior agreements.
3. Employment. TGI employs Employee and Employee accepts
employment by TGI as Vice President and Chief Financial Officer of TGI for the
Term of Employment on the terms and conditions and for the compensation
hereinafter set forth. Subject to the authority of the Board of Directors,
Employee shall be responsible for financial management of the business and
affairs of TGI in the ordinary course of its business with all such powers with
respect to such financial management and control as may be reasonably incident
to such responsibilities as its Vice President and Chief Financial Officer,
with all of the rights, powers and decision-making discretion appertaining
thereto. Employee shall devote his full time and effort to the discharge of
his duties as TGI's Vice President and Chief Financial Officer.
4. Compensation and Benefits During the Term of Employment.
4.1 Base Compensation. Employee shall receive base
compensation in the amount determined by the Compensation Committee of the
Board of Directors ("Base Compensation"). The amount of Employee's Base
Compensation shall initially be $300,000.00 annually and shall be reviewed and
adjusted as appropriate at least annually by the Compensation Committee. Base
Compensation shall be paid in equal monthly installments by TGI to Employee.
- 4 -
<PAGE> 5
4.2 Incentive Compensation Arrangement.
(a) In further consideration of Employee's
performance of services under Section 3 hereof, TGI agrees to compensate
Employee under the incentive compensation arrangement ("Incentive
Compensation") set forth in Section 4.2(b). Except as specifically provided
herein, the computation of annual bonus will be based upon the audited
financial results of TGI.
(b) (1) General. Employee's Incentive
Compensation is initially based upon 16.5% (the "Entitled Percent") of the
dollar value derived from a formula sharing ratio of TGI's revenues. The
sharing ratio is based upon TGI's percentage increase in cumulative income
before tax and incentive compensation ("IBTIC") for the current fiscal year
compared to TGI's cumulative IBTIC for the prior fiscal year, and upon certain
targeted levels of TGI's IBTIC. For purposes of determining IBTIC, Incentive
Compensation includes CEO Incentive Compensation as well as any Incentive
Compensation paid under a plan which includes TGI officers (as designated by
TGI's Board of Directors) only. The Compensation and Stock Option Committee of
the Company's Board of Directors may review the percent stated above from time
to time and make appropriate changes..
(2) Incentive Compensation Calculation.
The formula for determining incentive compensation is as follows: Incentive
Compensation equals the product of TGI revenues for the applicable fiscal year
multiplied by the income growth sharing ratio expressed as a percentage
("IGSR") for the fiscal year, the result multiplied by the Entitled Percent.
The ISGR is determined with reference to the following table:
INCOME GROWTH SHARING RATIO
<TABLE>
<CAPTION>
Income Before Tax and
Incentive Compensation Less
as a % of Revenues than 5%* 5%-9.99%* 10%-14.99%* 15%-24.99%* Over 25%*
------------------ -------- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
0 - 8.99% 0 0 0 .2% .3%
9.00% - 14.99% .3% .4% .5% .6% .7%
15.00% - 19.25% .5% .6% .8% 1.0% 1.2%
Over 19.25% .8% 1.0% 1.3% 1.6% 1.8%
</TABLE>
*IBTIC Growth Rate
ISGR is determined by first determining the IBTIC as a percent of revenue for
the current fiscal year and then entering the table along that line until the
appropriate IBTIC Growth Rate is reached; the ISGR is shown at that
intersection in the table.
- 5 -
<PAGE> 6
For purposes of this table, IBTIC Growth Rate for each applicable fiscal year
is derived from the following formula:
IBTIC[Current Fiscal Year]
-------------------------- minus 1 x 100
IBTIC[Prior Fiscal Year]
In the event that either the IBTIC Growth Rate or the IBTIC, as
computed above, is zero or negative for a particular fiscal year, it shall be
treated as zero for purposes of the foregoing computation for such year.
(3) If Incentive Compensation, as
calculated in accordance with Section 4.2(b) hereof, exceeds 55 percent of Base
Compensation in a fiscal year, the excess of Incentive Compensation, as
calculated, over 55 percent of Base Compensation will not be paid to Employee
but will be used to calculate the award of a stock option to Employee. The
number of shares to be awarded under such option is determined using the
following formula:
Excess Incentive Compensation
N = -----------------------------
P
Where:
N = Number of shares subject to such option
P = Market price of the Company's stock on the date of award
Excess Incentive Compensation = Excess of Incentive Compensation as calculated
minus 55 percent of base compensation in a fiscal year.
Options granted hereunder shall be granted pursuant to the
Corporation's 1992 Stock Option Plan and shall be subject to all limitations of
such plan, including the aggregate number of options which may be granted.
Options granted pursuant to this Section 4.2(b)(3) shall contain an option
price equal to the market price (average of the day's high and low prices) on
the date of award, shall be fully vested, and shall expire 10 years following
date of grant. This stock option award shall not preclude the Board of
Directors from granting additional options to Employee as it deems appropriate.
Options granted pursuant to this Agreement shall be administered by the
Compensation and Stock Option Committee of TGI's Board of Directors.
(4) Partial Fiscal Years. The
computations set forth in Section 4.2(b)(2) above shall be adjusted to take
into account eligibility for partial fiscal years by computing them based upon
the entire fiscal year and multiplying these results by the ratio of the number
of days of such partial fiscal year to the number of days in the complete
fiscal year.
(5) (i) Payments. TGI shall pay the
Incentive Compensation to Employee on or before the fifteen (15) days after
the completion of the audit of TGI's financial statements by TGI's certified
public accountants.
(ii) Eligibility Under Other
Plans. Employee's eligibility for bonuses or incentive compensation payments
under plans in effect prior to effectiveness of this
- 6 -
<PAGE> 7
Agreement shall terminate upon the effectiveness of this Agreement except that,
if the Effective Time is after the 16th day of any calendar month, any bonuses
or incentive payments earned under prior plans for the full calendar month will
be paid to Employee.
4.3 Travel Costs. TGI shall reimburse Employee for all
travel costs incurred by Employee in connection with TGI's business, together
with all other business expenses of Employee in performing his duties
hereunder, consistent with TGI's past practices.
4.4 Automobile Expenses. TGI shall provide automobile
transportation to employee for Employee's use in connection with TGI's
business, consistent with TGI's past practices.
4.5 Pension and Insurance Benefit Plan Participation; No
Bonus Plan Participation. Employee shall be entitled to participate in TGI's
401(k) plan and profit sharing plan, subject to the terms and conditions of
such plans. TGI also shall provide medical, disability and life insurance
coverage to Employee on the terms and conditions of each of the plans TGI
maintains with respect thereto. In addition, TGI shall continue to pay
premiums on all insurance policies on Employee's life which name either TGI or
TGI's creditors as beneficiary. Employee shall not be entitled to participate
in any of TGI's bonus plans as in effect at the Effective Time or in any other
bonus arrangement instituted from time to time by TGI, unless approved in
advance in writing by the Board.
5. Term of the Agreement. The term of this Agreement, unless
terminated sooner pursuant to Section 5, shall be for the Term of Employment.
6. Termination; Disability; Death, Change in Control.
6.1 Basis. Employee's employment under this Agreement
may be terminated as described in this Section 6.1. In the event that
Employee's employment is terminated in accordance with this Section 6.1,
Employee shall be entitled to receive the benefits described in Section 6.2
that correspond with the manner of such termination.
(a) Termination Without Cause. TGI may terminate
Employee's employment hereunder without Cause, as determined in the good faith
judgment of the Board of Directors, by written notice to Employee to that
effect. Unless otherwise specified in the notice, such termination shall be
effective immediately.
(b) Termination With Cause. TGI may terminate
the employment of Employee hereunder for Cause by written notice to Employee to
that effect. Unless otherwise specified in the notice, such termination shall
be effective immediately.
(c) Good Reason. Upon the occurrence of an event
described in Section 1.10 hereof, Employee may terminate his employment
hereunder for Good Reason within 30 days thereafter upon written notice to TGI
to that effect. If the effect of the occurrence of the event described in
Section 1.10 may be cured, TGI shall have the opportunity to cure any such
effect for a
- 7 -
<PAGE> 8
period of 30 days following receipt of Employee's termination notice. If TGI
fails to cure any such effect, Employee's termination for Good Reason shall
become effective 360 days after the date of Employee's termination notice. If
Employee does not give such notice to TGI, this Agreement will remain in
effect; provided, however, that the failure of Employee to terminate this
Agreement for Good Reason shall not be deemed a waiver of Employee's right to
terminate his employment for Good Reason upon the occurrence of a subsequent
event described in Section 1.10 hereof in accordance with the terms of this
subsection. Notwithstanding the foregoing, the right of Employee to terminate
his employment for Good Reason under this Section 6.1(c) shall not limit TGI's
ability to terminate Employee for Cause under Section 6.1(b) hereof if Cause is
determined to exist prior to the time Employee delivers his written notice of
termination for Good Reason to TGI.
(d) Without Good Reason. Employee may
voluntarily terminate his employment hereunder without Good Reason upon 360
days written notice to TGI to that effect.
(e) Disability. Employee or TGI may terminate
Employee's employment by reason of Disability upon written notice to the other
party to that effect. If the parties hereto are unable to agree as to the
existence of Disability or as to the date of commencement of Disability, each
of Employee and TGI shall select a physician licensed to practice medicine in
the United States and the determination as to any such question shall be made
by such physicians; provided, however, that if such two physicians are unable
to agree, they shall mutually select a third physician licensed to practice
medicine in the United States and the determination as to any such question
shall be made by a majority of such physicians. Any determination made by
physicians in accordance with the provisions of the immediately foregoing
sentence shall be final and binding on the parties hereto. Employee agrees to
submit to any and all reasonable medical examinations or procedures and to
execute and deliver any and all consents to release of medical information and
records or otherwise as shall be reasonably required by any of the physicians
selected in accordance with this Section 6.1(e). Unless otherwise specified in
the notice, such termination shall be effective immediately.
(f) Death. This Employment Agreement shall
automatically terminate as of the date of Employee's death during the Term of
Employment.
(g) Change in Control. If a Change in Control
occurs during the Term of Employment, TGI shall promptly give written notice to
Employee thereof. Following a Change in Control, Employee shall be required to
continue his employment hereunder for 90 days after the date of such Change in
Control, unless his employment is terminated sooner by TGI as set forth in
Section 6.1(h). In the event that Employee decides to resign or otherwise
voluntarily terminate his employment following the occurrence of a Change in
Control, Employee may do so by giving written notice to TGI to that effect on
or before 180 days after the occurrence of the Change in Control, which notice
shall be effective on the later to occur of (i) 180 days after the occurrence
of the Change in Control or (ii) 90 days after the date of such notice. If
Employee does not give such notice to TGI, this Agreement will remain in
effect; provided, however, that the failure of Employee to terminate this
Agreement following the occurrence of a Change in Control shall not be deemed a
waiver of Employee's right to terminate his employment upon a subsequent
occurrence of a Change in Control in accordance with the terms of this
subsection.
- 8 -
<PAGE> 9
(h) Notwithstanding that Employee has given
notice of termination pursuant to subsections (c), (d) or (g) of this Section
6.1, TGI may, in its sole discretion, thereafter require Employee to terminate
his employment prior to the expiration of the applicable notice period.
6.2 Benefits Upon Termination. Employee shall receive
the benefits described in the subsection below that corresponds with the manner
of termination of Employee's employment under Section 6.1.
(a) Without Cause. In the event TGI terminates
Employee's employment hereunder without Cause during the Term of Employment,
Employee shall be entitled to the payments and benefits set forth on Exhibit I.
(b) With Cause. In the event Employee's
employment is terminated with Cause, no further payments or benefits shall be
paid or provided by TGI to Employee hereunder except for reimbursement for
expenses incurred prior to the date of termination, the payment of any vested
pension benefits or vested portions of bonuses described in Section 4.7 hereof,
or the payment of Incentive Compensation that has become due and payable to
Employee on or before the date of such termination under Section 4.2 hereof.
In addition, Employee shall be entitled to exercise any vested but unexercised
stock options for a period of 90 days following the effective date of the
termination of Employee for Cause, and if any such options remain unexercised
upon the expiration of such 90-day period, they shall be determined forfeited
by Employee and have no further force and effect.
(c) Good Reason. In the event Employee
terminates his employment for Good Reason during the Term of Employment,
Employee shall be entitled to the payments and benefits set forth on Exhibit I.
(d) Without Good Reason. In the event Employee
terminates his employment without Good Reason pursuant to Section 6.1(d)
hereof, Employee shall be entitled to the benefits or payments provided for in
Section 6.2(b) hereof.
(e) Disability. In the event that Employee's
employment is terminated by reason of Disability, Employee shall be entitled to
the payments and benefits set forth on Exhibit I.
(f) Death. In the event Employee's employment is
terminated by reason of his death, TGI shall not be required to make any
payments or provide any benefits hereunder, except for (a) reimbursement for
expenses incurred prior to such termination date, (b) payment of Incentive
Compensation through such termination date as provided in Section 4.2, (c) the
use by TGI of its best efforts to remove any guaranties by Employee of
indebtedness of TGI, and
- 9 -
<PAGE> 10
(d) payment of premiums to continue the medical and dental insurance coverage
on Employee's spouse as in effect at and as of the date of Employee's death for
the remainder of spouse's life, if available; provided, however, that nothing
contained herein shall limit or diminish any rights of Employee's estate or any
other person to payments under any life insurance policy maintained by TGI for
the benefit of Employee or his beneficiaries or any health, disability, pension
or other benefit plan provided pursuant to Section 4.7, in each case in
accordance with the terms thereof. If Employee's employment is terminated by
reason of his death, the benefits provided under this Section 6.2(f) shall be
paid to the beneficiary or beneficiaries designated in writing by Employee and
delivered during Employee's lifetime to an officer of TGI; however, if no such
beneficiary designation is made by Employee during his lifetime, the benefits
hereunder shall be paid to his estate. In addition, Employee's estate shall be
entitled to exercise any vested but unexercised stock options for a period of
180 days following the date of Employee's death, and if any such options remain
unexercised upon the expiration of such 180-day period, they shall be
determined forfeited by Employee's estate and have no further force and effect.
(g) Change in Control. In the event Employee
terminates his employment as provided in Section 6.1(g) following the
occurrence of a Change in Control, Employee shall be entitled to the payments
and benefits provided in Exhibit I.
7. Non-Competition, Non-Solicitation, and Confidentiality
Covenants.
7.1 Non-competition Covenant.
(a) In consideration for the execution of this
Agreement by TGI and the payments for services to be rendered by Employee
hereunder, Employee agrees that during the Term of Employment and, in the case
of a termination Without Good Reason or for Cause, for a period of three years
after the date of such termination, Employee shall not engage in competition
with TGI in any manner or capacity (e.g., as an advisor, principal, agent,
partner, officer, director, shareholder, employee, member of any association or
otherwise) that materially adversely affects TGI, including without limitation,
rendering time based management counseling services, soliciting customers of
TGI for any competitor of TGI, or soliciting any employee of TGI to leave the
employ of TGI to work for or on behalf of any competitor of TGI (the
"Prohibited Activities"). Employee further agrees that, during the Term of
Employment, and, in the case of a termination Without Good Reason or for Cause,
for a period of three years after the date of such termination, Employee will
not assist or encourage any other person in carrying out any activity that
would be one of the Prohibited Activities if such activity were carried out by
Employee and, in particular, Employee agrees that he will not induce any
employee of TGI to carry out any such activity.
(b) The obligations of Employee under this
Section 7.1 shall apply to any geographic area in which TGI is competing. In
addition to the exclusion from Prohibited Activities set forth in Section
7.1(a) hereof, ownership by Employee, as a passive investment, of less than 5%
of the outstanding shares of capital stock of any corporation listed on a
national securities exchange or publicly traded in the over-the-counter market
shall not constitute a breach of this Section 7.1.
- 10 -
<PAGE> 11
7.2 Right to Work Product and Confidentiality.
(a) TGI and Employee each acknowledge that
performance of this Agreement may result in the discovery, creation or
development of inventions, combinations, methods, formulae, techniques,
processes, improvements, software designs, computer programs, strategies,
specific computer-related know-how, course materials, seminar materials,
computer models, customer lists, data and original works of authorship
(collectively, the "Work Product"). Employee agrees that Employee will
promptly and fully disclose to TGI any and all Work Product generated,
conceived, reduced to practice or learned by Employee, either solely or jointly
with others, during the Term of Employment, which in any way relates to the
business of TGI. Employee further agrees that neither Employee, nor any party
claiming through Employee will, other than in the performance of this
Agreement, make use of or disclose to others any proprietary information
relating to the Work Product.
(b) Employee agrees that, whether or not the
services performed by Employee hereunder are considered works made for hire or
an employment to invent, all Work Product discovered, created or developed
under this Agreement shall be and remain the sole property of TGI and its
assigns. Except as specifically set forth in writing and signed by both TGI
and Employee, Employee agrees that TGI shall have all copyright and patent
rights with respect to any Work Product discovered, created, or developed under
this Agreement without regard to the origin of the Work Product.
(c) If and to the extent that Employee may, under
applicable law, be entitled to claim any ownership interest in the Work
Product, Employee hereby transfers, grants, conveys, assigns and relinquishes
exclusively to TGI any and all right, title and interest it now has or may
hereafter acquire in and to the Work Product under patent, copyright, trade
secret and trademark law in perpetuity or for the longest period otherwise
permitted by law. Employee further agrees, as to the Work Product, to assist
TGI in every reasonable way to obtain and, from time to time, enforce patents,
copyrights, trade secrets and other rights and protection relating to said Work
Product, and to that end, Employee will execute all documents for use in
applying for and obtaining such patents, copyrights, trade secrets and other
rights and protection with respect to such Work Product as TGI may desire,
together with any assignments thereof to TGI or persons designated by it.
Employee's obligations to assist TGI in obtaining and enforcing patents,
copyrights, trade secrets and other rights and protection relating to the Work
Product shall continue beyond the Term of Employment.
(d) If and to the extent that any preexisting
rights of Employee are embodied or reflected in the Work Product, Employee
hereby grants to TGI the irrevocable, perpetual, non-exclusive, worldwide,
royalty-free right and license to (i) use, execute, reproduce, display, perform
and distribute copies of and prepare derivative works based upon such
preexisting rights and any derivative works thereof and (ii) authorize others
to do any or all of the foregoing.
(e) Employee acknowledges that much, if not all,
of the material and information related to the products, consulting techniques,
or other business affairs of TGI and its Affiliates, including, without
limitation, any and all Work Product discovered or created pursuant to
- 11 -
<PAGE> 12
this Agreement, and the business affairs of TGI's clients and customers which
have or will come into Employee's possession or knowledge in connection with
the performance of this Agreement, consists of confidential and proprietary
data of TGI and its Affiliates (collectively, "Confidential Information"),
disclosure of which to, or use by, third parties would be damaging to TGI or
its clients. Employee agrees to hold such Confidential Information in
strictest confidence and agrees not to release such information to any other
TGI employee unless such employee has a need for such knowledge. Employee
further agrees not to make use of Confidential Information for Employee's own
benefit or for the benefit of any third parties, other than for the performance
of this Agreement, and not to release or disclose the Confidential Information
to any other party either during or after the Term of Employment. In the event
of any breach of this confidentiality obligation, Employee acknowledges that
TGI would have no adequate remedy at law, since the harm caused by such a
breach would not be easily measured and compensated for in the form of damages,
and hereby waives its right to contest any equitable relief sought by TGI,
though not Employee's right to contest the question of whether a breach has
occurred, and Employee waives the requirement of any bond being posted as
security for such equitable relief.
8. General Provisions.
8.1 Notices. All notices, requests, demands, or other
communications with respect to this Agreement shall be in writing and shall be
personally delivered, telecopied, or mailed, postage prepaid, certified or
registered mail, or delivered by a nationally recognized express courier
service, charges prepaid, to the following addresses (or such other addresses
as the parties may specify from time to time in accordance with this Section
8.1):
Employee: Leland L. Grubb, Jr.
5215 North O'Connor Boulevard
Suite 2500
Irving, TX 75039
TGI: Thomas Group, Inc.
5215 North O'Connor Boulevard
Suite 2500
Irving, TX 75039
Any such notice shall, when sent in accordance with the preceding
sentence, be deemed to have been given and received (i) on the day personally
delivered or telecopied, (ii) on the third day following the date mailed, or
(iii) 24 hours after shipment by such courier service.
8.2 Entire Agreement. This Agreement, together with the
exhibits hereto, supersedes any and all other agreements, either oral or
written between the parties hereto with respect to the employment of Employee
by TGI and contains all of the covenants and agreements between the parties
with respect to such employment. Any modification of this Agreement will be
effective only if it is in writing signed by each of the parties hereto.
- 12 -
<PAGE> 13
8.3 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS.
8.4 Waiver of Breach. The waiver by either party of a
breach of any provision of this Agreement by the other party shall not operate
or be construed as a waiver of any subsequent breach.
8.5 Severability. The provisions of this Agreement are
severable, and if any one or more provisions may be determined to be judicially
unenforceable and/or invalid by a court of competent jurisdiction, in whole or
in part, the remaining provisions shall nevertheless be binding, enforceable
and in full force and effect.
8.6 Titles and Headings. The titles and headings of the
various sections hereof are intended solely for convenience of reference and
not intended for any purpose whatsoever to explain, modify or place any
construction upon any of the provisions of this Agreement.
8.7 Attorney's Fees. In the event any one or more of the
parties hereto bring suit against any other part hereto, based upon or arising
out of a breach or violation of this Agreement, each party hereto agrees that
each party who is successful on the merits, upon final adjudication from which
no further appeal can be taken or is taken within the time allowed by law,
shall be entitled to recover his or its reasonable attorneys' fees and expenses
from the party or parties which is or are (as the case may be) not successful.
8.8 Benefit and Assignment. This Agreement shall be
binding upon and inure to the benefit of the parties and their respective
successors and assigns; provided, however, that nothing contained in this
Section 8.8 shall impair Employee's rights under Section 6.2(g), if the
successor or assign of TGI became such upon the occurrence of a Change in
Control. Notwithstanding anything herein to the contrary, Employee shall not
assign any of his rights or obligations under this Agreement.
8.9 Counterparts. This Agreement may be executed in any
number of counterparts, each of which shall be an original, and all of which
shall together constitute one agreement.
8.10 Reliance on Authority of Person Signing Agreement.
Each individual signing this Agreement on behalf of a corporation warrants that
such execution has been duly authorized by the corporation for which he or she
is signing. The execution and performance of this Agreement by each party has
been duly authorized by all applicable laws and regulations and (in the case of
a corporation) all necessary corporate action, and this Agreement constitutes
the valid and enforceable obligation of each party in accordance with its
terms.
8.11 Amendments. Amendments to any section of this
Agreement shall not be effective unless agreed to in writing by the parties
hereto. This Agreement, including this provision against oral modification,
shall not be amended, modified or terminated except in a writing signed by each
of the parties to this Agreement, and no waiver of any provision of this
Agreement shall be effective unless in a writing duly signed by the party
sought to be bound.
- 13 -
<PAGE> 14
8.12 Waiver. No waiver of any provision of this Agreement
shall be deemed to operate as waiver of any past or future right.
9. Renewal Discussions. Unless Employee's employment hereunder
has been earlier terminated, the parties hereto agree that they will use their
reasonable best efforts to enter into discussions six months prior to the fifth
anniversary of the Effective Time (the "Fifth Anniversary") with respect to
whether and on what terms Employee's employment after such date, and the terms
thereof, this Agreement shall automatically terminate on such Fifth
Anniversary.
10. Certain Tax Provisions. Employee acknowledges and agrees
that all payments and benefits made or provided to Employee pursuant to the
terms hereof which are required by applicable federal, state or local laws to
be subject to withholding for income taxes, shall be so subject.
IN WITNESS WHEREOF, the parties hereto have executed this Employment
Agreement on January 2, 1996, to be effective as of the Effective Time.
EMPLOYEE:
------------------------------------------
LELAND L. GRUBB, JR.
THOMAS GROUP, INC.
By:
----------------------------------------
Name: PHILIP R. THOMAS
Title: Chairman and Chief Executive Officer
- 14 -
<PAGE> 15
Exhibit I, Page Solo
EXHIBIT I
Severance Benefit Payments
1. A lump sum payment in cash, not later than 20 days after the
termination of Employee's employment, in an amount equal to 1.5 times
Employee's average "Annualized Includible Compensation" (Annualized Includible
Compensation has been defined by the Board of Directors of TGI as the total
cash paid in Base Compensation, salary, Incentive compensation, profit sharing,
and incentive payments to Leland L. Grubb during the period consisting of the
preceding four full taxable years, plus the year in which termination occurred
[on an annualized basis], all after date of this Agreement); provided, however,
that the amount of this cash payment plus the value of any compensation paid to
Employee pursuant to 2 and 3 below that is subject to the provisions of Section
280G of the Code shall in no event exceed $100 less than 3.00 times Employee's
Annualized Includible Compensation, and the amount of TGI's cash payment to
Employee under this paragraph 1 of Exhibit I shall be adjusted accordingly to
achieve this result.
2. The unvested portion of stock options granted to Employee
shall become fully vested and immediately exercisable on the effective date of
such termination and shall be exercisable for the maximum period specified in
such options.
3. Employee shall continue to be covered by TGI's medical
insurance plan after termination of employment.
<PAGE> 1
EXHIBIT 10.12
================================================================================
FIRST AMENDED AND RESTATED
REVOLVING CREDIT LOAN AGREEMENT
BY AND BETWEEN
THOMAS GROUP, INC.
AND
COMERICA BANK-TEXAS
AS OF
DECEMBER 4, 1996
$20,000,000.00
================================================================================
<PAGE> 2
FIRST AMENDED AND RESTATED
REVOLVING CREDIT LOAN AGREEMENT
This FIRST AMENDED AND RESTATED REVOLVING CREDIT LOAN AGREEMENT (this
"AGREEMENT"), dated as of December 4, 1996, is among THOMAS GROUP, INC., a
Delaware corporation and COMERICA BANK-TEXAS, a Texas banking association
("LENDER").
RECITALS:
The Borrower (as defined herein) has requested that the Lender modify
and increase its existing credit facility so as to extend credit to the
Borrower in the form of revolving credit advances in an aggregate principal
amount not to exceed $20,000,000.00.
NOW, THEREFORE, in consideration of the foregoing premises and the
mutual covenants herein contained, the Borrower and the Lender hereby agree as
follows:
SECTION 1. DEFINITIONS
1.1. Definitions. As used in this Agreement, the following terms
shall have the respective meanings indicated below:
"ADJUSTED LIBOR RATE" shall mean, for any LIBOR Advance for
any Interest Period therefor, the rate per annum (rounded upwards, if
necessary, to the nearest 1/100 of 1%) determined by the Lender to be
equal to the LIBOR Rate for such LIBOR Advance for such Interest
Period divided by 1 minus the Reserve Requirement for such LIBOR
Advance for such Interest Period.
"ADVANCE" shall mean a Loan or an advance of funds by the
Lender to the Borrower pursuant to this Agreement.
"ADVANCE REQUEST FORM" shall mean a certificate, in the form
approved by the Lender, properly completed and signed by the Borrower
requesting an Advance.
"AGREEMENT" shall mean this First Amended and Restated
Revolving Credit Loan Agreement, which shall supersede in all respects
that certain Revolving Credit Loan Agreement dated as of January 4,
1994, as amended prior to this date.
"APPLICABLE RATE" shall mean: (a) during the period that an
Advance is a Prime Rate Advance, the Prime Rate; (b) during the period
that an Advance is a LIBOR Advance, the Adjusted LIBOR Rate plus the
Margin; and (c) during the period that an Advance is a Cost of Funds
Advance, the Cost of Funds Rate plus the Margin.
CREDIT AGREEMENT - Page 1
<PAGE> 3
"ASSESSMENT RATE" shall mean, at any time, the rate (rounded
upwards, if necessary, to the nearest 1/100 of 1%) then charged by the
Federal Deposit Insurance Corporation (or any successor) to the Lender
for deposit insurance for Dollar time deposits with the Lender at its
principal office in Dallas, Texas as determined by the Lender.
"AUTHORIZED OFFICER" shall mean each officer of the Borrower
who has been authorized by the Borrower to request Loans hereunder and
who has been furnished by the Borrower with the Security Code. The
Borrower shall provide the Lender with a list of Authorized Officers.
"BANKRUPTCY CODE" shall mean Title 11 of the United States
Code, as amended, or any successor act or code.
"BORROWER" shall mean collectively, Thomas Group, Inc., a
Delaware corporation, and each of the Constituent Entities.
"BUSINESS DAY" shall mean each day on which the Lender is
open to carry on its normal commercial lending business.
"CAPITALIZED SOFTWARE COST" shall mean the total capitalized
cost (net of accumulated amortization) associated with development of
software in accordance with GAAP.
"COMMITMENT" shall mean the Revolving Credit Commitment.
"CONTINUE," "CONTINUATION" and "CONTINUED" shall refer to
the continuation pursuant to Section 4.3 of a LIBOR Advance as a LIBOR
Advance from one Interest Period to the next Interest Period.
"CONTRACT RATE" shall mean, as of any date of determination,
the Applicable Rate.
"COST OF FUNDS ADVANCES" shall mean Advances the interest
rates on which are determined on the basis of the rates referred to in
the definition of "Cost of Funds Rate" in this Section 1.1.
"COST OF FUNDS RATE" shall mean the annual rate of interest
determined by the lender in its sole discretion at the time of any
Cost of Funds Rate Advance to be the cost to Lender of obtaining time
deposits of a one-year maturity or more, as requested by the Borrower.
The Lender will advise the Borrower of each determination of the Cost
of Funds Rate before the time of any such Advance.
"CONVERT," "CONVERSION" and "CONVERTED" shall refer to a
conversion pursuant to Section 4.3 of one Type of Advance into another
Type of Advance.
CREDIT AGREEMENT - Page 2
<PAGE> 4
"CURRENT RATIO" shall mean, as computed in accordance with
GAAP, the quotient of the Borrower's current assets divided by the
Borrower's current liabilities.
"DEBT" shall mean, as of any applicable date of
determination, all items of indebtedness, obligation or liability of a
Person, whether matured or unmatured, liquidated or unliquidated,
direct or indirect, absolute or contingent, joint or several, that
should be classified as balance sheet liabilities in accordance with
GAAP.
"DEBT RATIO" shall mean, at any particular time, the ratio
resulting as the quotient of (a) the Debt divided by (b) the Tangible
Net Worth.
"DEFAULT" shall mean a condition or event which, with the
giving of notice or the passage of time, or both, would result in an
Event of Default.
"DEFAULT RATE" shall mean the lesser of (i) the sum of the
Prime Rate in effect from day to day plus four percent (4%), or (ii)
the Maximum Legal Rate.
"EARNINGS TO INTEREST EXPENSE RATIO" shall mean the quotient
of the Borrower's EBITDA for the previous four calendar quarters
divided by the Borrower's Net Interest Expense for the same period.
"EBITDA" shall mean at any time, and for the previous four
calendar quarters then ending as computed in accordance with GAAP, (a)
the sum of the Borrower's consolidated net income, plus interest
expense, taxes, depreciation and amortization expense for the same
period, excluding (b) any gain or loss from the sale of any capital
assets.
"ENVIRONMENTAL LAWS" shall mean any and all federal, state,
and local laws, regulations, and requirements pertaining to the
environment, including, without limitation, the Comprehensive
Environmental Response, Compensation and Liability Act, as amended, 42
U.S.C. 9601 et seq., the Resource Conservation and Recovery Act, as
amended, 42 U.S.C. 6901 et seq., the Occupational Safety and Health
Act, as amended, 29 U.S.C. 651 et seq., the Clean Air Act, 42 U.S.C.
7401 et seq., the Clean Water Act as amended, 33 U.S.C. 1251 et seq.,
the Toxic Substances Control Act, as amended, 15 U.S.C. et seq., and
all similar laws, regulations, and requirements of any governmental
authority or agency having jurisdiction over Borrower or any of its
properties or assets, as such laws, regulations, and requirements may
be amended or supplemented from time to time.
"ERISA" shall mean the Employee Retirement Income Security
Act of 1974, as amended, or any successor act or code.
"EVENT OF DEFAULT" shall mean any of those conditions or
events listed in Section 11.1 of this Agreement.
CREDIT AGREEMENT - Page 3
<PAGE> 5
"FINANCIAL STATEMENTS" shall mean all those balance sheets,
earnings statements and other financial data which have been furnished
or will be furnished to the Lender for the purpose of, or in
connection with, this Agreement and the transactions contemplated
hereby.
"FINANCING STATEMENTS" shall mean UCC financing statements
describing the Lender as secured party and any of the companies making
up the Borrower as debtor, covering the Collateral and otherwise in
such form, for filing in such jurisdictions and with such filing
offices as the Lender shall reasonably deem necessary or advisable.
"FUNDED DEBT" shall mean all Debt (excluding Subordinated
Debt), as computed in accordance with GAAP, excluding accruals, trade
payables and deferred tax liabilities, and including Judgments which
in the aggregate exceed $25,000.
"FUNDED DEBT-TO-EARNINGS RATIO" shall mean, at any
particular time, the quotient of the Borrower's Funded Debt divided by
EBITDA.
"GAAP" shall mean, as of any applicable date of
determination, generally accepted accounting principles consistently
applied, as in effect on the date hereof except as otherwise agreed by
the Borrower and the Lender.
"GUARANTORS" shall mean each of the entities identified as a
guarantor on the signature page to this Agreement, each such entity
being a Guarantor for all purposes of this Agreement.
"GUARANTY" shall mean a guaranty in the form of Exhibit B
attached hereto; any Guarantors who have not previously executed a
Guaranty shall do so simultaneously with the execution of this
Agreement.
"HAZARDOUS SUBSTANCE" shall mean any substance, product,
waste, pollutant, material, chemical, contaminant, constituent, or
other material which is or becomes listed, regulated, or addressed
under any Environmental Law, including, without limitation, asbestos,
petroleum, and polychlorinated biphenyls.
"INDEBTEDNESS" shall mean all loans, advances and
indebtedness of the Borrower to the Lender under this Agreement,
together with all other indebtedness, obligations and liabilities
whatsoever of the Borrower to the Lender, whether matured or
unmatured, liquidated or unliquidated, direct or indirect, absolute or
contingent, joint or several, due or to become due, now existing or
hereafter arising.
"INTEREST PERIOD" shall mean:
(a) With respect to Prime Rate Advances,
each period commencing on the date such Advances are made or
Converted from LIBOR Advances and ending on the date of
payment or Conversion of such Advances.
CREDIT AGREEMENT - Page 4
<PAGE> 6
(b) With respect to any LIBOR Advances,
each period commencing on the date such Advances are made or
Converted from Prime Rate Advances or, in the case of each
subsequent, successive Interest Period applicable to a LIBOR
Advance, the last day of the next preceding Interest Period
with respect to such Advance, and ending on the numerically
corresponding day in the first, second, third or sixth
calendar month thereafter, as the Borrower may select as
provided in this Agreement, except that each such Interest
Period which commences on the last Business Day of a
calendar month (or on any day for which there is no
numerically corresponding day in the appropriate subsequent
calendar month) shall end on the last Business Day of the
appropriate subsequent calendar month.
(c) With respect to Cost of Funds
Advances, each period commencing on the date such Advances
are made or Converted from Prime Rate Advances and ending on
the last day of the period relating to each respective Cost
of Funds Advance.
Notwithstanding the foregoing: (a) each Interest Period which would
otherwise end on a day which is not a Business Day shall end on the
next succeeding Business Day (or, in the case of an Interest Period
for LIBOR Advances if such succeeding Business Day falls in the next
succeeding calendar month, on the next preceding Business Day); (b)
any Interest Period which would otherwise extend beyond the
Termination Date shall end on the Termination Date; (c) no more than
five (5) Interest Periods shall be in effect at the same time for any
Revolving Loan; (d) no Interest Period for any LIBOR Advances shall
have a duration of less than one (1) month; and (e) no Interest Period
may extend beyond a principal repayment date unless, after giving
effect thereto, the aggregate principal amount of the LIBOR Advances
having Interest Periods that end after such principal payment date
shall be equal to or less than the Advances to be outstanding
hereunder after such principal repayment date.
"JUDGMENTS" shall mean any judgment or decree against the
Borrower or any Guarantor which has or have become nonappealable and
which remains undischarged, unsatisfied by insurance and/or unstayed
for more than 30 days; also included shall be any writ of attachment
or garnishment against the property of the Borrower or any Guarantor
in any action(s) claiming more than $25,000 in the aggregate, which in
the time allowed by applicable law is neither released nor stayed nor
appealed nor bonded in a manner satisfactory to the Lender.
"LENDER" shall mean Comerica Bank-Texas, a Texas banking
association.
"LETTER OF CREDIT" shall mean any letter of credit issued by
the Lender for the account of the Borrower under this Agreement and
which, (i) in the case of commercial letters of credit, shall have
respective expirations not to exceed 90 days from date of issue, and
(ii) in the case of standby letters of credit, shall have respective
expirations not to exceed 365 days from date of issue, and (iii) in
the aggregate, as to all issued and
CREDIT AGREEMENT - Page 5
<PAGE> 7
outstanding letters of credit (and all drawn and unpaid letters of
credit) do not exceed $2,000,000.
"LIBOR ADVANCES" shall mean Advances the interest rates on
which are determined on the basis of the rates referred to in the
definition of "Adjusted LIBOR Rate" in this Section 1.1.
"LIBOR RATE" shall mean, for any LIBOR Advance for any
Interest Period therefor, the rate per annum (rounded upwards, if
necessary, to the nearest 1/100 of 1%) quoted by the Lender at
approximately 11:00 A.M. Dallas time (or as soon thereafter as
practicable) one Business Day prior to the first day of such Interest
period for the offering by the Lender to leading banks in the London
interbank market of Dollar deposits in immediately available funds
having a term comparable to such Interest Period and in an amount
comparable to the principal amount of the LIBOR Advance to which such
Interest Period relates.
"LOAN" shall mean a loan or Advance of funds by the Lender
pursuant to this Agreement.
"LOAN DOCUMENTS" shall mean this Agreement and all
promissory notes, security agreements, deeds of trust, assignments,
letters of credit, guaranties and other instruments, documents, and
agreements executed in connection with this Agreement, as such
instruments, documents and agreements may be amended, modified,
renewed, extended or supplemented from time to time. "LOAN DOCUMENT"
shall mean any one of the Loan Documents.
"MARGIN" shall mean an annual percentage rate which is
dependent upon the Funded Debt Ratio, changing at such times as
provided in this Agreement, and being determined as follows:
<TABLE>
<CAPTION>
Funded Debt Ratio Margin
----------------- ------
<S> <C> <C>
o greater than 1.5 to 1.0 2%
o less than or equal to 1.5 to 1.0,
but greater than 0.50 to 1.0 1.5%
o less than or equal to 0.5 to 1.0 1.0%
</TABLE>
"MAXIMUM LEGAL RATE" shall have the meaning specified in
Section 4.5 of this Agreement.
"NET INTEREST EXPENSE" shall mean at any time the Borrower's
interest expense for the immediately preceding twelve-month period,
net of interest income for the same period.
"NOTE" shall mean the Revolving Credit Note.
CREDIT AGREEMENT - Page 6
<PAGE> 8
"PBGC" shall mean the Pension Benefit Guaranty Corporation
or any Person succeeding to the present powers and functions of the
Pension Benefit Guaranty Corporation.
"PERMITTED LIENS" shall mean:
(a) Liens and encumbrances in favor of
the Lender;
(b) Liens for taxes, assessments or
other governmental charges incurred in the ordinary course
of business and not yet past due or being contested in good
faith by appropriate proceedings and for which adequate
reserves have been established as reflected by the balance
sheet of the Borrower at the time thereof;
(c) Liens of mechanics, materialmen,
carriers, warehousemen or other like statutory or common law
liens securing obligations incurred in good faith in the
ordinary course of business that are not yet due and
payable;
(d) Encumbrances consisting of zoning
restrictions, rights-of-way, easements or other restrictions
on the use of real property, none of which materially
impairs the use of such property by the Borrower or any
Subsidiary in the operation of the business for which it is
used and none of which is violated in any material respect
by any existing or proposed structure or land use;
(e) Existing liens described as a part
of Schedule 8.5 attached hereto;
(f) Purchase money liens not to exceed
$1,000,000 in the aggregate at any time;
(g) Liens upon assets which are acquired
by the Borrower pursuant to the provisions of Section 10.1,
so long as such liens do not extend to any assets other than
those acquired and so long as such liens do not extend to
any other entity affiliated with the Borrower.
"PERSON" shall mean any individual, corporation,
partnership, joint venture, association, trust, unincorporated
association, joint stock company, government, municipality, political
subdivision or agency or other entity.
"PRIME RATE" shall mean that annual rate of interest
designated by the Lender as its prime rate and which is changed by the
Lender from time to time. The Prime Rate may not necessarily be the
lowest rate charged by the Lender.
CREDIT AGREEMENT - Page 7
<PAGE> 9
"PRIME RATE ADVANCES" shall mean Advances that bear interest
at rates based upon the Prime Rate.
"REDUCTION DATES" shall mean each of the following dates:
December 31, 1998, 1999, 2000, 2001, 2002
March 31, 1999, 2000, 2001, 2002, 2003
June 30, 1999, 2000, 2001, 2002, 2003
September 30, 1999, 2000, 2001, 2002, 2003
"REGULATION D" shall mean Regulation D of the Board of
Governors of the Federal Reserve System as the same may be amended or
supplemented from time to time.
"REGULATORY CHANGE" shall mean, with respect to the Lender,
any change after the date of this Agreement in United States federal
or state, or foreign laws or regulations (including Regulation D) or
the adoption or making after such date of any interpretations,
directives, or requests applying to a class of banks including the
Lender of or under any United States federal or state, or any foreign,
laws or regulations (whether or not having the force of law) by any
court or governmental or monetary authority charged with the
interpretation or administration thereof.
"RESERVE REQUIREMENT" shall mean, for any LIBOR Advance for
any Interest Period therefor, the average maximum rate at which
reserves (including any marginal, supplemental or emergency reserves)
are required to be maintained during such Interest Period under
Regulation D by member banks of the Federal Reserve System in New York
City with deposits exceeding one billion Dollars against "Eurocurrency
Liabilities" as such term is used in Regulation D. Without limiting
the effect of the foregoing, the Reserve Requirement shall include any
other reserves required to be maintained by such member banks by
reason of any Regulatory Change against (g) any category of
liabilities which includes deposits by reference to which the Adjusted
LIBOR Rate is to be determined or (h) any category of extensions of
credit or other assets which include LIBOR Advances.
"REVOLVING CREDIT COMMITMENT" shall mean the obligation of
the Lender to make Revolving Credit Loans to the Borrower in an
aggregate principal amount at any time outstanding up to but not to
exceed $20,000,000, from the date of this Agreement through December
30, 1998, reduced automatically without notice by $1,000,000 on each
of the successive Reduction Dates thereafter.
"REVOLVING CREDIT LOAN" shall mean the single Advance of
funds made by the Lender to the Borrower pursuant to Section 2.
CREDIT AGREEMENT - Page 8
<PAGE> 10
"REVOLVING CREDIT NOTE" shall mean the promissory note of
the Borrower payable to the order of the Lender, in substantially the
form of Exhibit "D" hereto, and all extensions, renewals and
modifications thereof and substitutions therefor.
"SECURITY CODE" shall mean a code furnished by the Lender to
the Borrower, pursuant to Section 4.2 hereof, which an Authorized
Officer of the Borrower must deliver to the Lender upon making a
telephonic Loan request.
"SUBORDINATED DEBT" shall mean all unsecured Debt, the
payment of which has been subordinated in writing, in form and
substance satisfactory to the Lender.
"SUBSIDIARIES" shall mean any entity of which more than
fifty percent (50%) of the outstanding voting securities shall, as of
any applicable date of determination, be owned directly, or indirectly
through one or more intermediaries, by the Borrower.
"TANGIBLE NET WORTH" shall mean, as of any applicable date
of determination, the excess of (i) the book value of all assets of
Borrower and the Subsidiaries (other than patents, patent rights,
trademarks, trade names, franchises, purchase allocations to software,
copyrights, goodwill, and similar intangible assets) after all
appropriate deductions (including, without limitation, reserves for
doubtful receivables, obsolescence, depreciation and amortization),
all as determined on a consolidated basis in accordance with GAAP,
less (ii) all Debt of the Borrower and its Subsidiaries which, in
accordance with GAAP, would be required to be presented on their
consolidated balance sheet at such date.
"TERMINATION DATE" shall mean December 3, 2003.
"TYPE" shall mean any type of Advance (i.e., Prime Rate
Advance, Cost of Funds Advance or LIBOR Advance).
"UCC" shall mean the Uniform Commercial Code as in effect in
the State of Texas and as amended from time to time.
"UNUSED FACILITY FEE" shall mean on an annualized basis, a
fee equal to thirty seven and one-half one hundredths of one percent
(0.375%) of the difference, if any, between the Revolving Credit
Commitment and the daily outstanding principal balance of the
Revolving Credit Note for each calendar quarter, to be paid within ten
(10) days after presentment of each such computation thereof by the
Lender.
1.2. Accounting Terms. All accounting terms not specifically
defined in this Agreement shall be construed in accordance with GAAP. All
accounting terms and calculations herein with respect to the Borrower and the
Subsidiaries shall be made after elimination of all inter-company accounts and
transactions among them.
CREDIT AGREEMENT - Page 9
<PAGE> 11
1.3. Singular and Plural. Where the context herein requires, the
singular number shall be deemed to include the plural, and vice versa.
SECTION 2. REVOLVING CREDIT LOANS
2.1. Revolving Credit Commitment. Subject to the terms and
conditions of this Agreement, the Lender hereby agrees to make one or more
Revolving Credit Loans to the Borrower from time to time from the date hereof
to and including the Termination Date in an aggregate principal amount at any
time outstanding up to but not exceeding the amount of the Revolving Credit
Commitment as then in effect; provided, however that the Lender shall not be
obligated to make any Revolving Credit Loan which would cause the principal
balance of all outstanding Revolving Credit Loans, when added to the face
amount of all outstanding (and all drawn and unpaid) Letters of Credit to
exceed the Revolving Credit Commitment. Subject to the limitations and the
other terms and provisions of this Agreement, the Borrower may from time to
time borrow, repay and reborrow hereunder the amount of the Revolving Credit
Commitment by means of Prime Rate Advances, Cost of Funds Advances and LIBOR
Advances; provided that the Lender shall not have an obligation to make any
Revolving Credit Loan on a day which is not a Business Day.
2.2. Revolving Credit Note. The obligation of the Borrower to
repay the Revolving Credit Loans and interest thereon shall be evidenced by the
Revolving Credit Note executed by the Borrower, payable to the order of the
Lender in the principal amount of the Revolving Credit Commitment as originally
in effect and dated of even date herewith. The principal balance of Revolving
Credit Note shall in any event, subject to prior acceleration, be payable in
full on the Termination Date. Interest on the Revolving Credit Loans shall be
payable in accordance with Section 4.1. The Borrower shall pay to the Lender
the amount by which the unpaid principal balance of the Revolving Credit Loans
exceed the Revolving Credit Commitment, such payment to be made within one
Business Day after any such excess occurs.
2.3. Use of Proceeds. Proceeds of the Revolving Credit Loans
shall be used by the Borrower for working capital purposes and for acquisition
of companies in accordance with Section 10.3.
SECTION 3. LETTERS OF CREDIT
3.1. Letters of Credit.
(a) The Bank may, in its sole discretion, and upon
the request of Borrower from time to time, issue or cause to be issued
for the Borrower's account commercial or standby Letters of Credit.
Without intending to limit the Bank's discretion with respect to
Letters of Credit, the Bank will not issue or cause to be issued any
Letter of Credit if: (a) the maximum face amount of the requested
Letter of Credit, plus
CREDIT AGREEMENT - Page 10
<PAGE> 12
the amount of any drawn and unpaid Letters of Credit, plus the
aggregate undrawn face amount of all outstanding Letters of Credit
would exceed Two Million Dollars ($2,000,000); or (b) the maximum face
amount of the requested Letter of credit, plus the amount of any drawn
and unpaid Letters of Credit, plus the aggregate principal amount of
outstanding Revolving Loans, would exceed $20,000,000 at such time.
The Letters of Credit shall be governed by such Letter of Credit
applications and agreements as the Bank may require. All payments
made under any Letter of Credit and any related agreements shall be
paid in accordance with any reimbursement agreement which the Bank and
the Borrower may have executed, or, if not timely paid pursuant to any
such reimbursement agreement, all such amounts, at the sole discretion
of the Bank, be charged to the Borrower's Loan account as Revolving
Loans.
SECTION 4. GENERAL - ALL LOANS
4.1. Interest. The unpaid principal amount of the Advances shall
bear interest prior to maturity at a varying rate per annum equal from day to
day to the lesser of (a) the Maximum Rate, or (b) the Applicable Rate. If at
any time the Applicable Rate for any Advance shall exceed the Maximum Legal
Rate, thereby causing the interest accruing on such Advance to be limited to
the Maximum Legal Rate, then any subsequent reduction in the Applicable Rate
for such Advance shall not reduce the rate of interest on such Advance below
the Maximum Legal Rate until the aggregate amount of interest accrued on such
Advance equals the aggregate amount of interest which would have accrued on
such Advance if the Applicable Rate had at all times been in effect. Accrued
and unpaid interest on the Advances shall be due and payable as follows:
(a) in the case of Prime Rate Advances, (i) for the
Revolving Credit Note, on the first day of each month commencing
____________, 1996 and continuing on the same day of each successive
month thereafter up to and including maturity, whether by acceleration
or otherwise;
(b) in the case of each LIBOR Advance or Cost of
Funds Advance, monthly, on the first day of each month of each
Interest Period and on the last day of the Interest Period with
respect thereto, unless sooner accelerated, and then upon the
accelerated maturity;
(c) upon the payment or prepayment of any Advance or
the Conversion of any Advance to an Advance of another Type (but only
on the principal amount so paid, prepaid, or Converted); and
(d) on the Termination Date.
Notwithstanding the foregoing, any outstanding principal of any Advance and (to
the fullest extent permitted by law) any other amount payable by the Borrower
under this Agreement or any other Loan Document that is not paid in full when
due (whether at stated maturity, by acceleration, or otherwise) shall bear
interest at the Default Rate for the period from and including the due date
thereof to but excluding the date the same is paid in full. Interest payable
at the Default Rate shall be payable from time to time on demand.
CREDIT AGREEMENT - Page 11
<PAGE> 13
4.2. Borrowing Procedure.
(a) The Borrower shall give the Lender notice by
means of an Advance Request Form of each requested Advance at least
one (1) Business Day before the requested date of each LIBOR Advance
or Cost of Funds Advance, or, no later than the date of any requested
Prime Rate Advance, in each case specifying: (a) the requested date of
such Advance (which shall be a Business Day), (b) the amount of such
Advance, (c) the Type of the Advance, and (d) in the case of a LIBOR
Advance or Cost of Funds Advance, the duration of the Interest Period
for such Advance. The Lender at its option may accept telephonic
Advance requests by an Authorized Officer who provides the Lender with
the Security Code, provided that such acceptance shall not constitute
a waiver of the Lender's right to delivery of an Advance Request Form
in connection with subsequent Advances. Any telephonic request for an
Advance by the Borrower shall be promptly confirmed by submission of a
properly completed Advance Request Form to the Lender. Each LIBOR or
Cost of Funds Advance shall be in a minimum principal amount of
$500,000 and each Prime Rate Advance shall be in a minimum principal
amount of $100,000. Subject to the terms and conditions of this
Agreement, each Advance shall be made available to the Borrower by
depositing the same, in immediately available funds, in an account of
the Borrower maintained with the Lender at the principal office
designated by the Borrower. All notices under this Section shall be
irrevocable and shall be given not later than 2:00 P.M. Dallas, Texas
time on the day which is not less than the number of Business Days
specified above for such notice.
(b) Within the limitations set forth above, and upon
such terms and conditions as the Borrower and the Lender may agree
from time to time, the Lender will, at the request of the Borrower,
make Revolving Loans denominated in Deutsche Marks, up to the
equivalent (in the aggregate as to all such outstanding denominated
Loans) of U.S. $1,500,000. Such Loans must be repaid in Deutsche
Marks at the office designated by the Lender. The Borrower will
immediately reimburse the Lender for any loss of yield and foreign
exchange losses (and will pay such prepayment penalty as the Lender
establishes) for any prepayment of such Deutsche Mark Loans paid prior
to stated maturity.
4.3. Conversions and Continuations. The Borrower shall have the
right from time to time to Convert all or part of one Type of Advance
outstanding under any Note into another Type of Advance or to Continue all or
part of any LIBOR Advance or Cost of Funds Advance by giving the Lender written
notice at least one (1) Business Day before Conversion into a Prime Rate
Advance, and at least one (1) Business Day before Conversion into or
Continuation of a LIBOR Advance or a Cost of Funds Advance, specifying: (a) the
Conversion or Continuation date, (b) the amount of the Advance to be Converted
or Continued, (c) in the case of Conversions, the Type of Advance to be
Converted into, and (d) in the case of a Continuation of or Conversion into a
LIBOR Advance or a Cost of Funds Advance, the duration of the Interest Period
applicable thereto; provided, that (a) LIBOR Advances or a Cost of Funds
Advance may only be Converted on the last day of the Interest Period, and (b)
except
CREDIT AGREEMENT - Page 12
<PAGE> 14
for Conversions to Prime Rate Advances, no Conversions shall be made while an
Event of Default has occurred and is continuing. All notices given under this
Section shall be irrevocable and shall be given not later than 2:00 P.M.
Dallas, Texas time on the day which is not less than the number of Business
Days specified above for such notice. If the Borrower shall fail to give the
Lender the notice as specified above for Continuation or Conversion of a LIBOR
Advance or a Cost of Funds Advance prior to the end of the Interest Period with
respect thereto, such LIBOR Advance or Cost of Funds Advance shall
automatically be Converted into a Prime Rate Advance on the last day of the
Interest Period for such LIBOR Advance or Cost of Funds Advance.
4.4. Payment. All payments of principal, interest, and other
amounts to be paid by the Borrower under this Agreement or any other Loan
Document shall be paid to the Lender at the address set forth herein for the
delivery of notices to the Lender, in U.S. dollars (except as set forth above
for Deutsche Mark Loans) in immediately available funds, without setoff or
counterclaims, at or before 2:00 p.m. Dallas, Texas time on the date on which
such payment shall become due (each such payment made after such time on such
due date to be deemed to have been made on the next succeeding Business Day).
The Borrower shall, at the time of making each such payment, specify to the
Lender the sums payable by the Borrower under this Agreement and the other Loan
Documents to which such payment is to be applied (and in the event the Borrower
fails to so specify, or if an Event of Default has occurred and is continuing,
the Lender may apply such payment to the Indebtedness in such order and manner
as it may elect in its sole discretion). Whenever any payment under this
Agreement or any other Loan Document shall be stated to be due on a day that is
not a Business Day, such payment shall be deemed due on the next succeeding
Business Day, and such extension of time shall in such case be included in the
computation of the payment of interest.
4.5. Maximum Legal Rate. The following provisions shall control
this Agreement and each Note:
(a) No agreements, conditions, provision or
stipulations contained in this Agreement or in any other Loan
Document, or the occurrence of an Event of Default, or the exercise by
the Lender of the right to accelerate the payment of the maturity of
principal and interest on any Note, or to exercise any option
whatsoever contained in this Agreement or any other Loan Document, or
the arising of any contingency whatsoever, shall entitle the Lender to
collect, in any event, interest exceeding the maximum rate of
nonusurious interest allowed from time to time by applicable state or
federal laws as now or as may hereinafter be in effect (the "MAXIMUM
LEGAL RATE") and in no event shall the Borrower be obligated to pay
interest exceeding such Maximum Legal Rate, and all agreements,
conditions or stipulations, if any, which may in any event or
contingency whatsoever operate to bind, obligate or compel the
Borrower to pay a rate of interest exceeding the Maximum Legal Rate
shall be without binding force or effect, at law or in equity, to the
extent only of the excess of interest over such Maximum Legal Rate.
In the event any interest is charged in excess of the Maximum Legal
Rate (the "EXCESS"), the Borrower acknowledges and stipulates that any
such charge shall be the result of an accidental and bona fide error,
and such
CREDIT AGREEMENT - Page 13
<PAGE> 15
Excess shall be, first, applied to reduce the principal of any
obligations due, and, second, returned to the Borrower, it being the
intention of the parties hereto not to enter at any time into an
usurious or otherwise illegal relationship. The parties hereto
recognize that with fluctuations in the Contract Rate from time to
time announced by the Lender such an unintentional result could
inadvertently occur. By the execution of this Agreement, the Borrower
covenants that (a) the credit or return of any Excess shall constitute
the acceptance by the Borrower of such Excess, and (b) the Borrower
shall not seek or pursue any other remedy, legal or equitable, against
the Lender based, in whole or in part, upon the charging or receiving
of any interest in excess of the Maximum Legal Rate. For the purpose
of determining whether or not any Excess has been contracted for,
charged or received by the Lender, all interest at any time contracted
for, charged or received by the Lender in connection with the
Borrower's obligations shall be amortized, prorated, allocated and
spread during the entire term of this Agreement. If at any time the
rate of interest payable hereunder shall be computed on the basis of
the Maximum Legal Rate, any subsequent reduction in the Contract Rate
shall not reduce such interest thereafter payable hereunder below the
amount computed on the basis of the Maximum Legal Rate until the
aggregate amount of such interest accrued and payable under this
Agreement equals the total amount of interest which would have accrued
if such interest had been at all times computed solely on the basis of
the Contract Rate.
(b) Unless preempted by federal law, the rate of
interest from time to time in effect hereunder shall not exceed the
"indicated rate ceiling" from time to time in effect under Chapter 1
of the Texas Credit Code (Vernon's Texas Civil Statutes), Section
(a)(1), Article 5069-1.04, as amended.
(c) The provisions of this Section shall be deemed
to be incorporated into every document or communication relating to
the Indebtedness which sets forth or prescribes any account, right or
claims or alleged account, right or claim of the Lender with respect
to the Borrower (or any other obligor in respect of the Indebtedness),
whether or not any provision of this Section is referred to therein.
All such documents and communications and all figures set forth
therein shall, for the sole purpose of computing the extent of the
obligations asserted by the Lender thereunder, be automatically
recomputed by the Borrower or any other obligor, and by any court
considering the same, to give effect to the adjustments or credits
required by this Section.
(d) If the applicable state or federal law is
amended in the future to allow a greater rate of interest to be
charged under this Agreement than is presently allowed by applicable
state or federal law, then the limitation of interest hereunder shall
be increased to the maximum rate of interest allowed by applicable
state or federal law, as amended, which increase shall be effective
hereunder on the effective date of such amendment, and all interest
charges owing to the Lender by reason thereof shall be payable upon
demand.
CREDIT AGREEMENT - Page 14
<PAGE> 16
(e) The provisions of Chapter 15 of the Texas Credit
Code (Vernon's Texas Civil Statutes), Article 5069-15, as amended, are
specifically declared by the parties hereto not to be applicable to
this Agreement or any other Loan Document or to the transactions
contemplated hereby or thereby.
4.6. Basis of Computation. The amount of all interest payable
hereunder shall be computed for the actual number of days elapsed on the basis
of a year consisting of 360 days.
4.7. Prepayments.
4.7.1. Mandatory Prepayments. The Borrower shall pay
to the Lender as a payment on the Revolving Credit Note the amount
required by the last sentence of Section 2.2 whenever an excess of the
Loan balance occurs as set forth therein, together with all interest
accrued and unpaid on the amount of such excess.
4.7.2. Optional Prepayments. The Borrower may, upon
same-day notice to the Lender in the case of Prime Rate Advances, and
at least one (1) Business Day prior notice to the Lender in the case
of LIBOR Advances or Cost of Funds Advances prepay the Advances in
whole at any time or from time to time in part without premium or
penalty but with accrued interest to the date of prepayment on the
amount so prepaid, provided that compensation under Section 5 hereof
shall be due if LIBOR Advances or Cost of Funds Advances are prepaid
prior to the last day of the Interest Period for such Advances, and
each partial prepayment shall be in the principal amount of $500,000
in the case of prepayments of LIBOR Advances or Cost of Funds
Advances,and $100,000 in the case of Prime Rate Advances or an
integral multiple thereof. All notices under this Section shall be
irrevocable and shall be given not later than 2:00 P.M. Dallas, Texas
time, on the day which is not less than the number of Business Days
specified above for such notice.
4.8. Early Termination. The Lender, at its sole discretion, may,
at any time after ______________, 2001, upon prior written notice to the
Borrower given at least ninety (90) days prior to each one-year anniversary of
this Note, declare all of the Revolving Credit Note principal balance due and
payable in full. All accrued and unpaid interest shall be due and payable one
hundred eighty (180) days following the anniversary date that occurs next
following the date of such notice from the Lender, and after any such call by
the Lender, the Lender shall have no obligation to make any further Advances.
SECTION 5. YIELD PROTECTION AND ILLEGALITY
5.1. Additional Costs.
(a) The Borrower shall pay to the Lender from time
to time such amounts as the Lender may reasonably determine to be
necessary to compensate it for any costs incurred by the Lender which
the Lender determines are attributable to its making or maintaining of
any LIBOR Advances or Cost of Funds Advances hereunder
CREDIT AGREEMENT - Page 15
<PAGE> 17
or its obligation to make any of such Advances hereunder, or any
reduction in any amount receivable by the Lender hereunder in respect
of any such Advances or such obligation (such increases in costs and
reductions in amounts receivable being herein called "ADDITIONAL
COSTS"), in any such event resulting from any Regulatory Change which:
(i) changes the basis of taxation of any
amounts payable to the Lender under this Agreement or the
Note in respect of any of such Advances (other than taxes
imposed on the overall net income of the Lender or its
lending office for any of such Advances by the jurisdiction
in which the Lender has its principal office or such lending
office);
(ii) imposes or modifies any reserve,
special deposit, minimum capital, capital ratio, or similar
requirement relating to any extensions of credit or other
assets of, or any deposits with or other liabilities or
commitments of, the Lender (with respect to such Advances);
or
(iii) imposes any other condition
affecting this Agreement or such Advances or any of such
extensions of credit or liabilities or commitments.
The Lender will notify the Borrower of any event occurring after the
date of this Agreement which will entitle the Lender to compensation
pursuant to this Section as promptly as practicable after it obtains
knowledge thereof and determines to request such compensation. The
Lender will furnish the Borrower with a certificate setting forth the
basis and the amount of each request of the Lender for compensation
under this Section. If the Lender requests compensation from the
Borrower under this Section, the Borrower may, by notice to the Lender
suspend the obligation of the Lender to make or Continue making, or
Convert Advances into, Advances of the Type with respect to which such
compensation is requested until the Regulatory Change giving rise to
such request ceases to be in effect (in which case the provisions of
Section 5.4 hereof shall be applicable).
(b) Without limiting the effect of the foregoing
provisions of this Section, in the event that, by reason of any
Regulatory Change, the Lender either (a) incurs Additional Costs based
on or measured by the excess above a specified level of the amount of
a category of deposits or other liabilities of the Lender which
includes deposits by reference to which the interest rate on LIBOR
Advances or Cost of Funds Advances is determined as provided in this
Agreement or a category of extensions of credit or other assets of the
Lender which includes LIBOR Advances or Cost of Funds Advances or (b)
becomes subject to restrictions on the amount of such a category of
liabilities or assets which it may hold, then, if the Lender so elects
by notice to the Borrower the obligation of the Lender to make or
Continue making, or Convert Advances into, Advances of such Type
hereunder shall be suspended until such
CREDIT AGREEMENT - Page 16
<PAGE> 18
Regulatory Change ceases to be in effect (in which case the provisions
of Section 5.4 hereof shall be applicable).
(c) Determinations and allocations by the Lender for
purposes of this Section of the effect of any Regulatory Change on its
costs of maintaining its obligations to make Advances or of making or
maintaining Advances or on amounts receivable by it in respect of
Advances, and of the additional amounts required to compensate the
Lender in respect of any Additional Costs, shall be conclusive,
provided that such determinations and allocations are made on a
reasonable basis.
5.2. Limitation on Types of Advances. Anything herein to the
contrary notwithstanding, if with respect to any LIBOR Advances or Cost of
Funds Advances for any Interest Period therefor:
(a) The Lender reasonably determines (which
determination shall be conclusive) that quotations of interest rates
for the relevant deposits, such as are referred to in the definition
of "LIBOR Rate" in Section 1.1 hereof, are not being provided in the
relative amounts or for the relative maturities for purposes of
determining the rate of interest for such Advances as provided in this
Agreement; or
(b) The Lender determines (which determination shall
be conclusive) that the relevant rates of interest on the basis of
which the rate of interest for such Advances for such Interest Period
is to be determined do not accurately reflect the cost to the Lender
of making or maintaining such Advances for such Interest Period;
then the Lender shall give the Borrower prompt notice thereof specifying the
relevant Type of Advances and the relevant amounts or periods, and so long as
such condition remains in effect, the Lender shall be under no obligation to
make additional Advances of such Type or to Convert Advances of any other Type
into Advances of such Type and the Borrower shall, on the last day(s) of the
then current Interest Period(s) for the outstanding Advances of the affected
Type, either prepay such Advances or Convert such Advances into another Type of
Advance in accordance with the terms of this Agreement.
5.3. Illegality. Notwithstanding any other provision of this
Agreement, in the event that it becomes unlawful for the Lender to (a) honor
its obligation to make LIBOR Advances or Cost of Funds Advances hereunder or
(b) maintain LIBOR Advances hereunder, then the Lender shall promptly notify
the Borrower thereof and the Lender's obligation to make or maintain such
Advances and to Convert other types of Advances into such Advances hereunder
shall be suspended until such time as the Lender may again make and maintain
such Advances (in which case the provisions of Section 5.4 hereof shall be
applicable).
5.4. Substitute Prime Rate Advances. If the obligation of the
Lender to make a LIBOR Advance or a Cost of Funds Advance shall be suspended
pursuant to Section 5.1, 5.2 or 5.3 hereof (Advances of such Type being herein
called "Affected Advances" and such Type being herein called the "Affected
Type"), all Advances which would be otherwise made by the
CREDIT AGREEMENT - Page 17
<PAGE> 19
Lender as Advances of the Affected Type shall be made instead as Prime Rate
Advances and all Advances which would otherwise be Converted into Advances of
the Affected Type shall be converted instead into (or shall remain as) Prime
Rate Advances (and, if an event referred to in Section 5.1, 5.2 or 5.3 hereof
has occurred and the Lender so requests by notice to the Borrower, all Affected
Advances of the Lender then outstanding shall be automatically Converted into
Prime Rate Advances on the date specified by the Lender in such notice) and, to
the extent that Affected Advances are so made as (or Converted into) Prime Rate
Advances, all payments and prepayments of principal which would otherwise be
applied to the Lender's Affected Advances shall be applied instead to its Prime
Rate Advances.
5.5. Compensation. The Borrower shall pay to the Lender, upon
the request of the Lender, such amount or amounts as shall be sufficient (in
the reasonable opinion of the Lender) to compensate it for any loss, cost, or
expense incurred by it as a result of:
(a) Any payment, prepayment or conversion of a LIBOR
Advance or a Cost of Funds Advance for any reason (including, without
limitation, the acceleration of outstanding Advances pursuant to this
Agreement) on a date other than the last day of an Interest Period for
such Advance; or
(b) Any failure by the Borrower for any reason
(including, without limitation, the failure of any conditions
precedent specified in this Agreement to be satisfied) to borrow,
Convert, or prepay any such Type of Advance on the date for such
borrowing, Conversion, or prepayment, specified in the relevant notice
of borrowing, prepayment, or Conversion under this Agreement.
Without limiting the effect of the preceding sentence, such compensation shall
include an amount equal to the excess, if any, of (i) the amount of interest
which otherwise would have accrued on the principal amount so paid or Converted
or not borrowed for the period from the date of such payment, Conversion, or
failure to borrow to the last day of the Interest Period for such Advance (or,
in the case of a failure to borrow, the Interest Period for such Advance which
would have commenced on the date specified for such borrowing) at the
applicable rate of interest for such Advance provided for herein, less the
applicable margin, over (ii) the interest component of the amount the Lender
would have bid in the London interbank market (if such Advance is a LIBOR
Advance) for Dollar deposits of leading banks and amounts comparable to such
principal amount and with maturities comparable to such period.
SECTION 6. SECURITY
6.1. Setoff. If an Event of Default shall have occurred and be
continuing, the Lender shall have the right to set off and apply against any
Indebtedness then due in such manner as the Lender may determine, at any time
and without notice to the Borrower, any and all deposits (general or special,
time or demand, provisional or final) or other sums at any time credited by or
owing from the Lender to the Borrower. The rights and remedies of the Lender
CREDIT AGREEMENT - Page 18
<PAGE> 20
hereunder are in addition to other rights and remedies (including, without
limitation, other rights or setoff) which the Lender may have.
SECTION 7. CONDITIONS PRECEDENT TO OBLIGATIONS OF LENDER
7.1. Conditions to First Loan. The obligations of the Lender
under this Agreement are subject to the occurrence, prior to or on the date of
the initial Loan hereunder, of each of the following conditions, any or all of
which may be waived in whole or in part by the Lender in writing:
7.1.1. Documents Executed and Filed. The Borrower
shall have executed (or caused to be executed) and delivered to the
Lender and, as appropriate, there shall have been signed for filing
with such filing offices as the Lender shall deem appropriate, such
documents and instruments as the Lender may require.
7.1.2. Certified Resolutions. The Borrower shall have
furnished to the Lender a copy of resolutions of the Board of
Directors of the Borrower authorizing the execution, delivery and
performance of this Agreement, the borrowings hereunder, the Notes and
all other Loan Documents, which shall have been certified by the
Secretary or Assistant Secretary of the Borrower as of the date
hereof.
7.1.3. Certificate of Good Standing and Other
Certificates. The Borrower shall have furnished to the Lender a
certificate of good standing, a certificate of existence, and a
certified copy of the organizational documents of Borrower, which
shall have been certified in each case by the agency issuing the same
as of a date reasonably near the date hereof. The Borrower shall also
have furnished to the Lender its bylaws.
7.1.4. Certificate of Incumbency. The Borrower shall
have furnished to the Lender a certificate of the Secretary or
Assistant Secretary of the Borrower, certified as of the date hereof,
as to the incumbency and signatures of such officers signing this
Agreement, the Notes and the other Loan Documents.
7.1.5. Payment of Fees. Evidence that the costs and
expenses (including reasonable attorneys' fees) incurred by the Lender
in connection with the preparation of this Agreement and the other
Loan Documents shall have been paid in full by the Borrower.
7.1.6. Approval of Lender Counsel. All actions,
proceedings, instruments and documents required to carry out the
transactions contemplated by this Agreement or incidental thereto and
all other related legal matters shall have been satisfactory to and
approved by legal counsel for the Lender, and said counsel shall have
been furnished with such certified copies of actions and proceedings
and such other instruments and documents as they shall have reasonably
requested.
CREDIT AGREEMENT - Page 19
<PAGE> 21
7.1.7. Other Information and Documentation. The Lender
shall have received such other information, certificates and executed
documents as it shall have reasonably requested.
7.2. Conditions to All Loans. The obligation of the Lender to
make any Loan (including any initial Advance) is subject to the occurrence,
prior to or on the requested date of each such Loan, of each of the following
conditions, any or all of which may be waived in whole or in part by the Lender
in writing:
7.2.1. Loan Request. The Lender shall have received a
written Advance Request Form, executed by the appropriate officer of
the Borrower and timely delivered as required by this Agreement.
7.2.2. No Default. As of such date:
(a) No Default or Event of Default shall
have then occurred and be continuing; and
(b) Each warranty or representation set
forth in Section 8 of this Agreement shall be true and
correct.
SECTION 8. WARRANTIES AND REPRESENTATIONS
The Borrower represents and warrants to the Lender:
8.1. Corporate Existence and Power. (a) The Borrower (each
entity comprising the Borrower) (i) is a corporation or partnership, as the
case may be, duly organized, validly existing and in good standing under the
laws of its state or country, as the case may be, of organization, (ii) has the
corporate power and authority to own its properties and assets and to carry out
its business as now being conducted and is qualified to do business and in good
standing in every jurisdiction wherein such qualification is necessary and
(iii) has the corporate and partnership power and authority to execute and
perform this Agreement, to borrow money in accordance with its terms, to
execute and deliver the Note and the other Loan Documents to be executed by
each respective entity and to do any and all other things required of it
hereunder.
8.2. Authorization and Approvals. As to the Borrower (each
entity comprising the Borrower), the execution, delivery and performance of
this Agreement, the borrowing hereunder and the execution and delivery of each
of the other Loan Documents contemplated hereby (a) have been duly authorized
by all requisite corporate action, (b) do not require registration with or
consent or approval of, or other action by, any federal, state or other
governmental authority or regulatory body, or, if such registration, consent or
approval is required, the same has been obtained and disclosed in writing to
the Lender, (c) will not violate any provision of law, any order of any court
or other agency of government, the articles of incorporation or bylaws of the
Borrower, any provision of any indenture, agreement or other
CREDIT AGREEMENT - Page 20
<PAGE> 22
instrument to which the Borrower is a party, or by which it or any of its
properties or assets are bound, (d) will not be in conflict with, result in a
breach of or constitute (with or without notice or passage of time) a default
under any indenture, agreement or other instrument, and (e) will not result in
the creation or imposition of any lien, charge or encumbrance of any nature
whatsoever upon any of its properties or assets other than in favor of the
Lender and as contemplated hereby.
8.3. Valid and Binding Agreement. This Agreement is, and each of
the other Loan Documents will be, when delivered, valid and binding obligations
of the Borrower, in each case enforceable in accordance with their respective
terms except as limited by insolvency, bankruptcy or similar laws and equitable
principles affecting the enforcement of creditors' rights generally.
8.4. Actions, Suits or Proceedings. Except as disclosed on
Schedule 8.4 or otherwise disclosed in writing to the Lender, there are no
actions, suits or proceedings, at law or in equity, and no proceedings before
any arbitrator or by or before any governmental commission, board, bureau or
other administrative agency, pending, or, to the best knowledge of the
Borrower, threatened against or affecting the Borrower, or any properties or
rights of the Borrower, which, if adversely determined, could materially impair
the right of the Borrower to carry on business substantially as now conducted
or could have a material adverse effect upon the financial condition of the
Borrower.
8.5. No Liens, Pledges, Mortgages or Security Interests. Except
for Permitted Liens, none of the Borrower's assets and properties is subject to
any mortgage, pledge, lien, security interest or other encumbrance of any kind
or character.
8.6. Accounting Principles. The Financial Statements have been
prepared on a consolidated basis in accordance with GAAP and fairly present the
financial condition of the Borrower as of the dates, and the results of its
operations for the periods, for which the same are furnished to the Lender. To
the best of Borrower's knowledge and belief, the Borrower has no material
contingent obligations, liabilities for taxes, long-term leases or unusual
forward or long-term commitments not disclosed by, or reserved against in, the
Financial Statements or otherwise disclosed in writing to the Lender.
8.7. No Adverse Changes. There has been no material adverse
change in the business, properties or condition (financial or otherwise) of the
Borrower since the date of the latest of the Financial Statements or otherwise
disclosed in writing to the Lender.
8.8. Conditions Precedent. As of the date of each Loan
hereunder, all appropriate conditions precedent referred to in this Agreement
shall have been satisfied (or waived in writing by the Lender).
8.9. Taxes. The Borrower has filed by the due date therefor all
federal, state and local tax returns and other reports required by law to be
filed and which are material to the conduct of their businesses, has paid or
caused to be paid all taxes, assessments and other
CREDIT AGREEMENT - Page 21
<PAGE> 23
governmental charges that are shown to be due and payable under such returns,
and has made adequate provision for the payment of such taxes, assessments or
other governmental charges which have accrued but are not yet payable. The
Borrower has no knowledge of any deficiency or assessment in a material amount
in connection with any taxes, assessments or other governmental charges not
adequately disclosed in the Financial Statements or otherwise disclosed in
writing to the Lender.
8.10. Compliance with Laws. The Borrower has complied with all
applicable laws, to the extent that failure to comply would materially
interfere with the conduct of its businesses.
8.11. Material Agreements. Except as disclosed on Schedule 8.11
or otherwise disclosed in writing to the Lender, the Borrower has no Debt or
any material contracts or commitments for Debt; to the best knowledge of the
Borrower has complied with the provisions of such contracts or commitments; and
to the best knowledge of Borrower, no party to such agreements is in default
thereunder, nor has there occurred any event which with notice or the passage
of time, or both, would constitute such a default.
8.12. Margin Stock. The Borrower is not engaged principally, or
as one of its important activities, in the business of extending credit for the
purpose of purchasing or carrying any "margin stock" within the meaning of
Regulation U of the Board of Governors of the Federal Reserve System, and no
part of the proceeds of any Loan hereunder will be used, directly or
indirectly, to purchase or carry any margin stock or to extend credit to others
for the purpose of purchasing or carrying any margin stock or for any other
purpose which might violate the provisions of Regulation G, T, U or X of the
said Board of Governors. The Borrower does not own any margin stock.
8.13. Pension Funding. The Borrower has not incurred any material
accumulated funding deficiency within the meaning of ERISA or any material
liability to the PBGC in connection with any employee benefit plan established
or maintained by the Borrower and no presently existing reportable event or
presently existing prohibited transaction, as defined in ERISA, has occurred
with respect to such plans.
8.14. Misrepresentation. No warranty or representation by the
Borrower contained herein or in any certificate or other document furnished by
the Borrower pursuant hereto contains any untrue statement of material fact or
omits to state a material fact necessary to make such warranty or
representation not misleading in light of the circumstances under which it was
made.
8.15. Loans and Representations. At the time of each Loan
request, the Borrower, unless otherwise disclosed to the Lender in writing,
shall be deemed to represent and warrant to the Lender, as an inducement to
having the Lender make the requested Loan, that as of the date of such Loan
request (a) all representations and warranties contained in this Agreement are
true and correct in all respects, and (b) no Default or Event of Default
exists.
CREDIT AGREEMENT - Page 22
<PAGE> 24
SECTION 9. AFFIRMATIVE COVENANTS
From the date hereof until the Indebtedness is paid in full, the
Borrower covenants and agrees that as to the Borrower, it will:
9.1. Financial and Other Information.
9.1.1. Annual Financial Reports. Furnish to the Lender
in form satisfactory to the Lender not later than ninety (90) days
after the close of each fiscal year of Borrower, beginning with the
fiscal year ending December 31, 1996, on a consolidated and
consolidating basis, a balance sheet as at the close of each such
fiscal year, statements of income and statements of cash flow for each
such fiscal year of Borrower and the Subsidiaries, and such other
comments and financial details as are usually included in similar
reports. Such consolidated reports shall be audited in accordance
with GAAP by independent certified public accountants of recognized
standing selected by Borrower and acceptable to the Lender and shall
contain unqualified opinions as to the fairness of the statements
therein contained.
9.1.2. Monthly Financial Statements. Furnish to the
Lender not later than thirty (30) days after the close of each month
(except when the end of a month is also the end of a calendar quarter,
in which case 45 days after the end of such month), beginning with
reports for the month ending November 30, 1996, financial statements
containing the consolidated and consolidating balance sheet of
Borrower as of the end of each month, consolidated and consolidating
statements of income of Borrower up to the end of each month. These
statements shall be prepared on substantially the same accounting
basis as the statements required in Section 9.1.1 of this Agreement
and shall be in such detail as the Lender may require, and in the case
of the quarterly statements, the accuracy of the statements (subject
to year-end adjustments) shall be certified by an authorized officer
of the Borrower.
9.1.3. Quarterly Compliance Certificate. Furnish to
the Lender not later than the forty-fifth (45th) day of each month
next following the end of each fiscal quarter of the Borrower
(beginning September 30, 1996) a certificate, dated as of the end of
the month immediately prior to the due date for such Certificate, in a
form acceptable to the Lender, evidencing the Borrower's compliance
with Sections 9.5, 9.6, 9.7, 9.8 and 9.9 hereof, and an aging of all
accounts receivable.
9.1.4. Adverse Events. Promptly inform the Lender of
the occurrence of any Event of Default or Default, or of any
occurrence which has or could reasonably be expected to have a
materially adverse effect upon the Borrower's business, properties,
financial condition or ability to comply with its obligations
hereunder.
9.1.5. Management Letters; Securities Reports. Furnish
to the Lender, promptly upon receipt thereof, copies of all management
letters submitted to the Borrower by independent certified public
accountants in connection with any annual or
CREDIT AGREEMENT - Page 23
<PAGE> 25
interim audit of the books of the Borrower, and promptly, upon filing
or distributing the same, all forms 10Q, 10K and shareholder reports.
9.1.6. ERISA. Certify to the Lender annually on or
about each January 1, that the filings referred to in Section 9.10
have been made.
9.1.7. Other Information as Requested. Promptly
furnish to the Lender such other information regarding the operations,
business affairs and financial condition of the Borrower as the Lender
may reasonably request from time to time and permit the Lender, its
employees, attorneys and agents, to inspect all of the books, records
and properties of the Borrower at any reasonable time.
9.2. Insurance. Keep its insurable properties adequately insured
and maintain (a) insurance against fire and other risks customarily insured
against by companies engaged in the same or a similar business to that of the
Borrower, (b) necessary worker's compensation insurance, (c) public liability
and product liability insurance, and (d) such other insurance as may be
required by law or as may be reasonably required in writing by the Lender, all
of which insurance shall be in such amounts, containing such terms, in such
form, for such purposes and written by such companies as may be satisfactory to
the Lender in the reasonable exercise of its judgment. All such policies shall
contain a provision whereby they may not be canceled except upon thirty days'
prior written notice to the Lender. The Borrower will deliver to the Lender,
at the Lender's request, evidence satisfactory to the Lender that such
insurance has been so procured. If the Borrower fails to maintain satisfactory
insurance as herein provided, the Lender shall have the option to do so, and
the Borrower agrees to repay the Lender, with interest at three percent (3%)
per annum plus the Prime Rate, all amounts so expended by the Lender.
9.3. Taxes. Pay promptly and within the time that they can be
paid without interest or penalty all taxes, assessments and similar imposts and
charges of every kind and nature lawfully levied, assessed or imposed upon them
and their property, except to the extent being contested in good faith and for
which adequate reserves have been established on the balance sheet of the
Borrower. If the Borrower shall fail to pay such taxes and assessments by
their due date, the Lender shall have the option to do so, and the Borrower
agrees to repay the Lender, with interest at three percent (3%) per annum plus
the Prime Rate, all amounts so expended by the Lender.
9.4. Maintain Legal Existence and Business. Do or cause to be
done all things necessary to preserve and keep in full force and effect its
legal existence, rights and franchise and comply with all applicable laws;
continue to conduct and operate its business substantially as conducted and
operated during the present and preceding calendar year; at all times maintain,
preserve and protect all franchise and trade names and preserve all the
remainder of its property used or useful in the conduct of its business and
keep the same in good repair, working order and condition; and from time to
time make, or cause to be made, all needed and proper repairs, renewals,
replacements, betterments and improvements thereto so that the
CREDIT AGREEMENT - Page 24
<PAGE> 26
business carried on in connection therewith may be properly and advantageously
conducted at all times.
9.5. Tangible Net Worth. Maintain at all times a Tangible Net
Worth (plus Subordinated Debt) in an amount not less than $10,000,000.
9.6. Debt Ratio. Maintain at all times a Debt Ratio of not more
than 3.0 to 1.0.
9.7. Current Ratio. Maintain at all times a Current Ratio of not
less than 2.5 to 1.0.
9.8. Funded Debt-to-Earnings Ratio. Maintain at all times a
Funded Debt to Earnings Ratio of not more than 1.75 to 1.0.
9.9. Net Interest Expense Ratio. Maintain at all times a Net
Interest Expense Ratio of at least 4.0 to 1.0.
9.10. ERISA. (a) At all times meet the minimum funding
requirements of ERISA with respect to the Borrower's employee benefit plans
subject to such minimum funding requirements; (b) promptly after the Borrower
knows or has reason to know (i) of the occurrence of any event which would
constitute a reportable event or prohibited transaction under ERISA, or (ii)
that the PBGC or the Borrower has instituted or will institute proceedings to
terminate an employee pension plan, deliver to the Lender a certificate of the
chief financial officer of the Borrower setting forth details as to such event
or proceedings and the action which the Borrower proposes to take with respect
thereto, together with a copy of any notice of such event which may be required
to be filed with the PBGC; and (c) deliver to the Lender a copy of the annual
return (including all schedules and attachments) for each plan covered by
ERISA, and filed with the Internal Revenue Service by the Borrower, not later
than ten (10) days after receipt of a written request from the Lender for such
report.
9.11. Use of Loan Proceeds. Use the proceeds of the Loans
hereunder for the purposes set forth herein.
9.12. New Subsidiary Guarantees. At the time of formation of any
Subsidiary of any entity which comprises the Borrower deliver to the Lender a
written Guaranty of all Indebtedness.
9.13. Unused Facility Fee. Pay the Unused Facility Fee when due.
SECTION 10. NEGATIVE COVENANTS
From the date hereof until the Indebtedness is paid in full, the
Borrower and each Guarantor covenants and agrees (on a consolidated basis after
giving effect thereto) it will not:
10.1. Acquisitions. It is agreed that the Borrower may desire to
engage in the acquisition of stock and/or assets of other entities from time to
time (the "Acquisitions"). Such Acquisitions will be permitted, and Debt may
be assumed by the Borrower in connection
CREDIT AGREEMENT - Page 25
<PAGE> 27
therewith, so long as (i) the Acquisition(s) are related to the Borrower's
existing lines of business, (ii) no Event of Default exists at the time of such
Acquisition(s), (iii) the Acquisition(s) will not cause an Event of Default to
occur, (iv) any Debt to any seller must be unsecured, and (v) Acquisitions must
be reasonably projected to be accretive to positive earnings within twelve
months of closing the Acquisition.
10.2. Liens and Encumbrances. Create, incur, assume or suffer to
exist any mortgage, pledge, encumbrance, security interest, lien or charge of
any kind (including any charge upon property purchased or acquired under a
conditional sales or other title-retaining agreement or lease required to be
capitalized under GAAP) upon any of its property or assets, whether now owned
or hereafter acquired, other than Permitted Liens.
10.3. Indebtedness. Incur, create, assume or permit to exist any
Debt, except for (a) the Indebtedness, (b) indebtedness subordinated to the
prior payment in full of the Indebtedness upon terms and conditions approved in
writing by the Lender, (c) existing indebtedness to the extent set forth on
schedules to this Agreement, (d) indebtedness meeting the standards of Section
10.1, (e) indebtedness secured by Permitted Liens; (f) up to $5,000,000 (US) in
unsecured foreign currency borrowings from other lenders, having maturities, in
each case, of less than one year, (g) trade payables incurred in the ordinary
course of business, and (h) deferred taxes.
10.4. Extension of Credit. Make loans, advances or extensions of
credit to any Person, except for advances to officers and employees which at
any time do not exceed $1,700,000 in the aggregate.
10.5. Guarantee Obligations. Guarantee or otherwise, directly or
indirectly, in any way be or become responsible for obligations of any other
Person, whether by agreement to purchase the indebtedness of any other Person,
agreement for the furnishing of funds to any other Person through the
furnishing of goods, supplies or services, by way of stock purchase, capital
contribution, advance or loan, for the purpose of paying or discharging (or
causing the payment or discharge of) the indebtedness of any other Person, or
otherwise, except for the endorsement of negotiable instruments by the Borrower
in the ordinary course of business for deposit or collection if (as to any of
the foregoing) the amount for which the Borrower becomes obligated exceeds
$1,000,000 in the aggregate.
10.6. Subordinate Indebtedness. Subordinate any indebtedness due
to it from a Person to indebtedness of other creditors of such Person.
10.7. Property Transfer, Merger or Lease-Back. (a) Sell, lease,
transfer or otherwise dispose of all or, except as to the sale of Inventory or
unneeded Equipment in the ordinary course of business, any material part of its
properties and assets (whether in one transaction or in a series of
transactions), (b) change its name, consolidate with or merge into any other
corporation except in furtherance of any transaction permitted by Section 10.1,
permit another corporation to merge into it, acquire all or substantially all
the properties or assets of any other Person, enter into any reorganization or
recapitalization or reclassify its capital stock, or
CREDIT AGREEMENT - Page 26
<PAGE> 28
(c) enter into any sale-leaseback transaction, provided that Borrower and its
Subsidiaries may make transfers of assets among themselves so long as the liens
and security interests of the Lender in the Collateral at all times remain
perfected and in full force and effect.
10.8. Acquire Securities. Except as provided in Section 10.3,
purchase or hold beneficially any stock or other securities of, or make any
investment or acquire any interest whatsoever in, any other Person except for
investments:
(a) in commercial paper, maturing within 270 days
after acquisition thereof, which has the highest or second highest
credit rating given by either Standard & Poor's Corporation or Moody's
Investors Service, Inc.;
(b) in obligations, maturing within 12 months after
acquisition thereof, issued or unconditionally guaranteed by the
United States of America or an instrumentality or agency thereof and
entitled to the full faith and credit of the United States of America;
(c) in demand deposits, and time deposits (including
certificates of deposit) maturing within 12 months from the date of
deposit thereof, with any office of the Lender, any of the Lender's
affiliates, or any national or state bank or trust company which is
organized under the laws of the United States of America or any state
therein and which has capital, surplus and undivided profits of at
least $100,000,000; and
(d) in repurchase obligations of any bank or trust
company described in the above subsection (c) which relate to the
repurchase of obligations described in the above subsection (b).
10.9. Pension Plans. (a) Allow any fact, condition or event to
occur or exist with respect to an employee pension plan which would constitute
grounds for termination by the PBGC of any such plan or for the appointment by
a United States District Court of a trustee to administer any such plan, or (b)
permit any such plan to be the subject of termination proceedings (whether
voluntary or involuntary) from which termination proceedings there results a
liability of the Borrower to the PBGC which will have a materially adverse
effect upon the operations, business, property, assets, financial condition or
credit of the Borrower.
10.10. Misrepresentations. Furnish the Lender with any certificate
or other document that contains any untrue statement of a material fact or
omits to state a material fact necessary to make such certificate or document
not misleading in light of the circumstances under which it was furnished.
10.11. Margin Stock. Apply any of the proceeds of the Notes to the
purchase or carrying of any "margin stock" within the meaning of Regulation U
of the Board of Governors of the Federal Reserve System, or any regulations,
interpretations or rulings thereunder.
CREDIT AGREEMENT - Page 27
<PAGE> 29
10.12. Compliance with Environmental Laws. The Borrower will not
(i) use (or permit any tenant to use) any of its real property for the
handling, processing, storage, transportation, or disposal of any Hazardous
Substance except in all respects in compliance with Environmental Laws, (ii)
generate any Hazardous Substance except in all respects in compliance with
Environmental Laws, (iii) conduct any activity which is likely to cause a
release of any Hazardous Substance in violation of Environmental Law, or (iv)
otherwise conduct any activity or use any of its real property or assets in any
manner that is likely to violate any Environmental Law.
10.13. Capitalized Software Cost Limitation. Permit the addition
to Capitalized Software Cost at any time to exceed twenty percent (20%) of
EBITDA for the immediately preceding four (4) calendar quarters.
SECTION 11. EVENTS OF DEFAULT - ENFORCEMENT - APPLICATION OF PROCEEDS
11.1. Events of Default. The occurrence of any of the following
events shall constitute an Event of Default hereunder:
11.1.1. Failure to Pay Monies Due. If any principal of
or interest on any of the Indebtedness shall not be paid within one
Business Day after becoming due.
11.1.2. Misrepresentation. If any warranty or
representation of the Borrower in connection with or contained in this
Agreement, or if any financial data or other information now or
hereafter furnished to the Lender by or on behalf of the Borrower,
shall prove to be false or misleading in any material respect.
11.1.3. Noncompliance with Lender Agreement. If the
Borrower shall fail to perform any of its obligations and covenants
under, or shall fail to comply with any of the provisions of, this
Agreement or any other Loan Document or any other agreement with the
Lender to which it may be a party, and such failure is not remedied
within thirty (30) days after the Lender gives notice thereof to the
Borrower.
11.1.4. Other Defaults.
(a) If the Borrower shall default in the
due payment of any of its Indebtedness (other than under the
Loan Documents) or in the observance or performance of any
term, covenant or condition in any agreement or instrument
evidencing, securing or relating to such Indebtedness,
provided such indebtedness is in an aggregate principal
amount of $500,000 or more and such default shall be
continued for a period sufficient to permit acceleration of
the indebtedness.
11.1.5. Business Suspension, Bankruptcy, Etc. If the
Borrower shall voluntarily suspend transaction of its business; or if
the Borrower shall not pay its debts as they mature or shall make a
general assignment for the benefit of creditors; or
CREDIT AGREEMENT - Page 28
<PAGE> 30
proceedings in bankruptcy, or for reorganization or liquidation of the
Borrower, under the Bankruptcy Code or under any other state or
federal law for the relief of debtors shall be commenced by the
Borrower or shall be commenced against the Borrower and shall not be
discharged within thirty (30) days of commencement; or a receiver,
trustee or custodian shall be appointed for the Borrower or for any
substantial portion of its respective properties or assets.
11.1.6. Inadequate Funding or Termination of
Employee/Benefit Plan(s). If the Borrower shall fail by $25,000 or
more to meets its minimum funding requirements under ERISA (after
giving effect to any valid waiver of such requirements) with respect
to any employee benefit plan established or maintained by the
Borrower, or if any such plan shall be the subject of termination
proceedings (whether voluntary or involuntary) and there shall result
from such termination proceedings a liability of the Borrower (or any
subsidiary) to the PBGC of $25,000 or more.
11.1.7. Occurrence of Certain Reportable Events. If
there shall occur, with respect to any pension plan maintained by the
Borrower, any reportable event (within the meaning of section 4043(b)
of ERISA) which the Lender shall determine in good faith constitutes a
ground for the termination by the PBGC of any such plan, and if such
event continues for 60 days after the Lender gives written notice to
the Borrower, provided that termination of such plan or appointment of
such trustee would, in the opinion of the Lender, have a materially
adverse effect upon the operations, business, property, assets,
financial condition or credit of the Borrower.
11.2. Acceleration of Indebtedness. Upon the occurrence of any of
the Events of Default described in Section 11.1, the Lender may discontinue
Advances and/or all Indebtedness may be declared due and payable in full
forthwith at the option of the Lender without presentation, demand, protest,
notice of dishonor or other notice of any kind, all of which are hereby
expressly waived. Unless all of the Indebtedness is then fully paid, the
Lender shall have and may setoff against the Indebtedness any amount owing by
the Lender to the Borrower.
11.3. Application of Proceeds. The proceeds of any setoff
authorized by this Agreement shall be applied by the Lender, first upon all
reasonable expenses of collection and all reasonable attorneys' fees and legal
expenses incurred by the Lender; the balance of the proceeds of such sale or
other disposition shall be applied in the payment of the Indebtedness, first to
interest, then to principal; and the surplus, if any, shall be paid over to the
Borrower or to such other Person or Persons as may be entitled thereto under
applicable law. The Borrower shall remain liable for any deficiency, which the
Borrower shall pay to the Lender immediately upon demand.
11.4. Cumulative Remedies. The remedies provided for herein are
cumulative to the remedies for collection of the Indebtedness as provided by
law or by any mortgage, security agreement or other document contemplated
hereby. Nothing herein contained is intended, nor should it be construed, to
preclude the Lender from pursuing any other remedy for the recovery
CREDIT AGREEMENT - Page 29
<PAGE> 31
of any other sum to which the Lender may be or become entitled for the breach
of this Agreement by the Borrower.
SECTION 12. MISCELLANEOUS
12.1. Independent Rights. No single or partial exercise of any
right, power or privilege hereunder, or any delay in the exercise thereof,
shall preclude other or further exercise of the rights of the parties to this
Agreement.
12.2. Covenant Independence. Each covenant in this Agreement
shall be deemed to be independent of any other covenant, and an exception in
one covenant shall not create an exception in another covenant.
12.3. Waivers and Amendments. No forbearance on the part of the
Lender in enforcing any of its rights under this Agreement, nor any renewal,
extension or rearrangement of any payment or covenant to be made or performed
by the Borrower hereunder, shall constitute a waiver of any of the terms of
this Agreement or of any such right. No Default or Event of Default shall be
waived by the Lender except in writing signed and delivered by an officer of
the Lender, and no waiver of any Default or Event of Default shall operate as a
waiver of any other Default or Event of Default or of the same Default or Event
of Default on a future occasion. No other amendment, modification or waiver
of, or consent with respect to, any provision of this Agreement or the Note or
other documents contemplated hereby shall be effective unless the same shall be
in writing and signed and delivered by an officer of the Lender.
12.4. GOVERNING LAW. THIS AGREEMENT, AND EACH AND EVERY TERM AND
PROVISION HEREOF, SHALL BE CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAW OF THE
STATE OF TEXAS. IF ANY PROVISIONS OF THIS AGREEMENT SHALL FOR ANY REASON BE
HELD INVALID OR UNENFORCEABLE, SUCH INVALIDITY OR UNENFORCEABILITY SHALL NOT
AFFECT ANY OTHER PROVISION HEREOF, BUT THIS AGREEMENT SHALL BE CONSTRUED AS IF
SUCH INVALID OR UNENFORCEABLE PROVISION HAD NEVER BEEN CONTAINED HEREIN.
12.5. Survival of Warranties, Etc. All of the Borrower's
covenants, agreements, representations and warranties made in connection with
this Agreement and any document contemplated hereby shall survive the making of
Advances and the delivery of the Notes hereunder and shall be deemed to have
been relied upon by the Lender, notwithstanding any investigation heretofore or
hereafter made by the Lender. All statements contained in any certificate or
other document delivered to the Lender at any time by or on behalf of the
Borrower pursuant hereto or in connection with the transactions contemplated
hereby shall constitute representations and warranties by the Borrower in
connection with this Agreement.
12.6. Attorneys' Fees. The Borrower agrees that it will pay all
reasonable costs and expenses of the Lender in connection with the enforcement
of the Lender's rights and remedies
CREDIT AGREEMENT - Page 30
<PAGE> 32
under this Agreement and in connection with the preparation or making of any
amendments, modifications, waivers or consents with respect to this Agreement.
12.7. Payments on Saturdays, Etc. Whenever any payment to be made
hereunder or under the Notes shall be stated to be due on a Saturday, Sunday or
any other day which is not a Business Day, such payment shall be due on the
next succeeding Business Day, and such extension, if any, shall be included in
computing interest in connection with such payment.
12.8. Binding Effect. This Agreement shall inure to the benefit
of and shall be binding upon the parties hereto and their respective successors
and assigns; provided, however, the Borrower may not assign or transfer any
rights or obligations hereunder without the prior written consent of the
Lender.
12.9. Maintenance of Records. The Borrower will keep all of its
respective records concerning the Collateral and the Equipment at its principal
place of business. The Borrower will give the Lender prompt written notice of
any change in its respective principal place of business, or in the location of
said records.
12.10. Notices. All notices and communications provided for herein
or in any document contemplated hereby or required by law to be given shall be
effective when received or, upon sending by registered or certified mail,
postage prepaid, addressed as follows: (a) If to the Borrower, to: Leland
Grubb, Jr., 5215 North O'Connor, Suite 2500, Irving, Texas 75039, and (b) If to
the Lender, to: 8828 Stemmons Freeway, Suite 441, Dallas, Texas 75247, Attn:
David Terry, or to such other address as a party shall have designated to the
other in writing.
12.11. Counterparts. This Agreement may be signed in any number of
counterparts with the same effect as if the signatures were upon the same
instrument.
12.12. Headings. Article and section headings in this Agreement
are included for the convenience of reference only and shall not constitute a
part of this Agreement for any purpose.
12.13. INDEMNIFICATION. THE BORROWER HEREBY COVENANTS AND AGREES
TO INDEMNIFY, DEFEND AND HOLD HARMLESS THE LENDER AND ITS OFFICERS, DIRECTORS,
EMPLOYEES AND AGENTS FROM AND AGAINST ANY AND ALL CLAIMS, DAMAGES, LIABILITIES,
COSTS AND EXPENSES (INCLUDING WITHOUT LIMITATION, THE FEES AND OUT-OF-POCKET
EXPENSES OF COUNSEL) WHICH MAY BE INCURRED BY OR ASSERTED AGAINST THE LENDER OR
ANY SUCH OTHER INDIVIDUAL OR ENTITY IN CONNECTION WITH:
(a) ANY INVESTIGATION, ACTION OR PROCEEDING ARISING
OUT OF OR IN ANY WAY RELATING TO THIS AGREEMENT, THE NOTES, OR ANY
OTHER DOCUMENTS OR AGREEMENTS RELATING
CREDIT AGREEMENT - Page 31
<PAGE> 33
TO THE LOANS, OR ANY ACT OR OMISSION RELATING TO ANY OF THE FOREGOING;
(b) ANY TAXES (OTHER THAN FEDERAL OR STATE INCOME
TAXES); OR
(c) THE CORRECTNESS, VALIDITY OR GENUINENESS OF ANY
INSTRUMENTS OR DOCUMENTS THAT MAY BE RELEASED OR ENDORSED TO BORROWER
BY THE LENDER (WHICH SHALL AUTOMATICALLY BE DEEMED TO BE WITHOUT
RECOURSE TO THE LENDER IN ANY EVENT), OR THE EXISTENCE, CHARACTER,
QUANTITY, QUALITY, CONDITION, VALUE OR DELIVERY OF ANY GOODS
PURPORTING TO BE REPRESENTED BY ANY SUCH DOCUMENTS.
12.14. NO ORAL AGREEMENTS. THIS AGREEMENT, TOGETHER WITH THE OTHER
LOAN DOCUMENTS AS WRITTEN, REPRESENT THE FINAL AGREEMENTS BETWEEN THE LENDER
AND THE BORROWER AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS BETWEEN THE LENDER AND THE BORROWER.
12.15. Gender. Throughout this Agreement, the masculine shall
include the feminine and vice versa and the singular shall include the plural
and vice versa, unless the context of this Agreement indicates otherwise.
12.16. Severability of Provisions. Any provision of this
Agreement, the Notes or any other documents relating thereto that is prohibited
or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions of this Agreement, such Notes or such
other documents or affecting the validity or enforceability of such provision
in any other jurisdiction.
12.17. Assignment. The Lender shall have the absolute and
unrestricted right to sell, assign, transfer, or grant participation in, all or
any portion of the Loans, guaranties or other security relating thereto without
the consent of the Borrower to any federal or state agency, or to any bank
affiliate of the Bank, or, with the Borrower's consent (which shall not be
unreasonably withheld and shall not be required during the existence of an
Event of Default), to any commercial bank or to any other financial institution
or holding company of any of the foregoing; provided, however, no such action
on the part of the Lender shall have the effect of changing any of the
Borrower's obligations hereunder without the respective written consent or the
Borrower.
12.18. Waiver of Jury Trial. The Borrower and the Lender hereby
irrevocably waive the right to trial by jury with respect to any and all
actions or proceedings at any time in which Borrower and Lender are parties
arising out of this Agreement.
CREDIT AGREEMENT - Page 32
<PAGE> 34
12.19. Survival of Agreement. Notwithstanding anything to the
contrary contained in this Agreement, the provisions of this Agreement shall
remain in full force and effect until such time as all Indebtedness is paid in
full.
IN WITNESS WHEREOF, the Borrower and the Lender have caused this
Agreement to be executed by their duly authorized officers as of the day and
year first written above.
BORROWER:
THOMAS GROUP, INC.
By:
----------------------------------------
Name: Philip R. Thomas
Title: Chairman of the Board
GUARANTORS:
The undersigned Guarantors execute this Agreement for the limited purpose of
acknowledging their respective guarantees of the Indebtedness and to agree that
all provisions of Section 8 and Section 9 of the Agreement shall apply to each
of them, as well as to the Borrower:
THOMAS GROUP ACQUISITION CORP.,
a Delaware corporation
By:
----------------------------------------
Name: Philip R. Thomas
Title: Chairman of the Board
THOMAS GROUP OF LOUISIANA, INC.,
a Delaware corporation
By:
----------------------------------------
Name: Philip R. Thomas
Title: Chairman of the Board
CREDIT AGREEMENT - Page 33
<PAGE> 35
THOMAS GROUP (SWITZERLAND) GMBH,
a Swiss corporation
By:
----------------------------------------
Name: Philip R. Thomas
Title: Managing Director
THOMAS GROUP GMBH,
a German corporation
By:
----------------------------------------
Name: Philip R. Thomas
Title: Managing Director
BERMAC COMMUNICATIONS, INC.,
a Delaware corporation
By:
----------------------------------------
Name: Philip R. Thomas
Title: Chairman of the Board
THOMAS GROUP ASIA PRIVATE LIMITED,
a Singapore corporation
By:
----------------------------------------
Name: Philip R. Thomas
Title: Director
LENDER:
COMERICA BANK-TEXAS
By:
----------------------------------------
Name: David Terry
Title: Assistant Vice President
CREDIT AGREEMENT - Page 34
<PAGE> 1
EXHIBIT 11
PAGE 1 OF 3
THOMAS GROUP, INC.
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
PRIMARY EPS
Weighted Average Shares Outstanding ........................... 5,963,394 5,998,009 5,792,333
Weighted Average Options Outstanding (Table I) ................ 335,455 260,031 310,578
Weighted Average Warrants Outstanding (Table II) .............. -- -- --
========== ========== ==========
Weighted Average Shares and Share Equivalents Outstanding .....
6,298,849 6,258,040 6,102,911
========== ========== ==========
Net Income .................................................... $1,825,000 $6,755,000 $ 46,000
========== ========== ==========
Earnings Per Common and Common Equivalent Share ............... $ 0.29 $ 1.08 $ 0.01
========== ========== ==========
FULLY-DILUTED EPS
Weighted Average Shares Outstanding ........................... 5,963,394 5,998,009 5,792,333
Weighted Average Options Outstanding (Table I) ................ 312,497 348,768 309,921
Weighted Average Warrants Outstanding (Table II) .............. -- -- --
---------- ---------- ----------
Weighted Average Shares and Share Equivalents Outstanding .....
6,275,891 6,346,777 6,102,254
========== ========== ==========
Net Income .................................................... $1,825,000 $6,755,000 $ 46,000
========== ========== ==========
Earnings Per Common and Common Equivalent Share ............... $ 0.29 $ 1.06 $ 0.01
========== ========== ==========
</TABLE>
<PAGE> 2
EXHIBIT 11
PAGE 2 OF 3
THOMAS GROUP, INC.
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
TABLE I - WEIGHTED AVERAGE OPTIONS OUTSTANDING
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
PRIMARY EPS
Weighted Average Options Outstanding ....................... 1,255,309 1,240,951 1,415,634
Anti-Dilution Adjustment ................................... -- (520,368) --
------------ ------------ ------------
Adjusted Shares Outstanding ................................ 1,255,309 720,583 1,415,634
------------ ------------ ------------
Average Exercise Price ..................................... $ 9.437 $ 5.872 $ 8.437
------------ ------------ ------------
Exercise Proceeds .......................................... $ 11,846,466 $ 4,230,989 $ 11,943,643
============ ============ ============
Average FMV Per Share During Period ........................ $ 14.253 $ 11.024 $ 12.577
Shares Repurchased ......................................... (831,132) (383,795) (949,619)
Share Repurchased Assuming Utilization of Tax Benefit on
Exercise of Non-Qualified Options (1) .................. (88,722) (76,757) (155,437)
------------ ------------ ------------
Total Shares Repurchased ................................... (919,854) (460,552) (1,105,056)
------------ ------------ ------------
Incremental Shares from Options ............................ 335,455 260,031 310,578
============ ============ ============
FULLY-DILUTED EPS
Weighted Average Options Outstanding ....................... 1,255,309 1,240,951 1,415,634
Anti-Dilution Adjustment ................................... -- (6,734) --
------------ ------------ ------------
Adjusted Shares Outstanding ................................ 1,255,309 1,234,217 1,415,634
------------ ------------ ------------
Average Exercise Price ..................................... $ 9.437 $ 8.683 $ 8.437
------------ ------------ ------------
Exercise Proceeds .......................................... $ 11,846,466 $ 10,716,511 $ 11,943,643
============ ============ ============
FMV Per Share End of Period (2) ............................ $ 14.253 $ 13.500 $ 12.577
Shares Repurchased ......................................... (865,428) (787,256) (950,621)
Share Repurchased Assuming Utilization of Tax Benefit on
Exercise of Non-Qualified Options (1) .................. (77,384) (98,193) (155,092)
------------ ------------ ------------
Total Shares Repurchased ................................... (942,812) (885,449) (1,105,713)
------------ ------------ ------------
Incremental Shares from Options ............................ 312,497 348,768 309,921
============ ============ ============
</TABLE>
(1) Non-qualified options generate a tax deduction for the Company in the
amount of the employee's taxable gain, if any, on exercise. The savings in
taxes payable are also assumed to be used to purchase outstanding shares of
common stock.
(2) FMV at end of 1996 and 1994 was less than the average FMV during 1996 and
1994. The average FMV during 1996 and 1994 was, therefore, used in the
fully-diluted calculation.
<PAGE> 3
EXHIBIT 11
PAGE 3 OF 3
THOMAS GROUP, INC.
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
TABLE II - WEIGHTED AVERAGE WARRANTS OUTSTANDING
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1996 1995 1994
---------- ---------- --------------
<S> <C> <C> <C>
PRIMARY EPS
Weighted Average Warrants Outstanding ... 175,000 175,000 175,000
Exercise Price (1) ...................... $ 15.15 $ 15.15 $ 15.15
---------- ---------- --------------
Exercise Proceeds ....................... $2,651,250 $2,651,250 $ 2,651,250
========== ========== ==============
Average FMV Per Share During Period ..... $ 14.25 $ 11.024 $ 12.577
Shares Repurchased ...................... -- -- --
---------- ---------- --------------
Incremental Shares from Warrants ........ -- -- --
========== ========== ==============
FULLY-DILUTED EPS
Weighted Average Warrants Outstanding ... 175,000 175,000 175,000
Exercise Price (1) ...................... $ 15.15 $ 15.15 $ 15.15
---------- ---------- --------------
Exercise Proceeds ....................... $2,651,250 $2,651,250 $ 2,651,250
========== ========== ==============
FMV Per Share End of Period(2) .......... $ 14.25 $ 13.500 $ 12.577
Shares Repurchased ...................... -- -- --
---------- ---------- --------------
Incremental Shares from Warrants ........ -- -- --
========== ========== ==============
</TABLE>
- ---------------
(1) The exercise price is in excess of the average FMV per share during 1996,
1995 and 1994. The Warrants are therefore anti-dilutive and excluded from the
earnings per share calculation.
(2) FMV at end of 1996 and 1994 was less than the average FMV during 1996
and 1994. The average FMV during 1996 and 1994 was, therefore, used in the
fully-diluted calculation.
<PAGE> 1
EXHIBIT 13
SPEED DRIVEN RESULTS
THOMAS GROUP 1996 ANNUAL REPORT
<PAGE> 2
COMPANY PROFILE
Dallas-based Thomas Group is a global professional services company that
improves its clients' competitiveness by focusing on Speed Driven Results(SM).
In addition to Dallas, the company has regional headquarters in Detroit,
Frankfurt and Singapore.
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31,
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
REVENUES $ 72,029 $ 67,220 $ 52,460
NET INCOME 1,825 6,755 46
EARNINGS PER SHARE $ 0.29 $ 1.08 $ 0.01
WORKING CAPITAL $ 15,705 $ 20,001 $ 15,248
TOTAL ASSETS 38,890 40,157 27,567
TOTAL LONG-TERM OBLIGATIONS 1,661 1,101 937
TOTAL STOCKHOLDERS' EQUITY 31,512 31,051 22,277
AVERAGE SHARES OUTSTANDING 6,299 6,258 6,103
</TABLE>
<PAGE> 3
WHAT we do
Thomas Group works shoulder to shoulder with corporate leaders to achieve
levels of performance that appear improbable, transforming their organizations
into far more competitive firms that push ahead of the competition and stay
ahead.
When companies respond to problems with internal initiatives, they frequently
end up working on the symptoms instead of the root causes of
non-responsiveness. It is difficult for managers to step back, identify the
cultural barriers to competitiveness and remove them.
Thomas Group brings four marks of distinction that combine to help executives
solve their most challenging dilemmas.
RESULTS
Thomas Group helps clients produce dramatic top- and bottom-line results.
A holistic view drives performance improvements in areas such as product
development, working capital management, manufacturing, resource
utilization, customer responsiveness and growth.
METHODOLOGY
An approach called Speed Driven Results(SM) enables clients to simplify
and shorten business processes and eliminate non-value added steps. The
net effect includes accelerated results, optimal use of resources and
improved quality.
PEOPLE
The process of change is managed by Resultants(SM), not consultants. The
more than 190 Thomas Group Resultants(SM) are mature professionals who
have experienced profit-and-loss accountability. Resultants average 52
years of age with 20 years in senior management positions.
ACCOUNTABILITY
An incentive-based fee structure partners Thomas Group with its clients to
produce a win-win situation. A significant percentage of the Thomas Group
fee is based on quantifiable results.
Thomas Group defines improvement, then attains the improvement, sustains the
improvement and finally enhances the improvement measured in terms of top line,
bottom line and cash line performance.
Thomas Group is a RESULTING company based on the timeless concept of delivering
hard results using time as the driver versus the short-lived fads of the
consulting community.
ONE
<PAGE> 4
LETTER to our
SHAREHOLDERS
Since becoming a public company in 1993, we have experienced two highly
profitable years and two relatively disappointing years. Despite swings in our
financial results, we have continually focused on long-term profitable growth
and substantially increasing shareholder value. Part of my purpose in this
letter is to provide our stakeholders, which includes our employees, who all
have either stock or options, with a better understanding of what we have done
since the Initial Public Offering to increase long-term stakeholder value. I
will also share with you our vision for the company in the decade ahead as we
prepare for global leadership in the professional services industry.
Shortly after the IPO, we established Vision 2000, our internal view of where
we wanted Thomas Group to be early in the first decade of the 21st century.
Our vision was and continues to be defined in terms of company values, market
position, client perception, sales and profitability.
VALUES
We developed a statement formally reflecting our company values since its
formation in 1978.
"EXCELLENCE FROM RESULTS THROUGH INTEGRITY,
FAIRNESS, SHARING OUR SUCCESSES AND
CARING FOR INTERNAL & EXTERNAL RELATIONSHIPS"
All of us at Thomas Group live by and practice these values in our daily lives.
These values form a solid foundation for our long-term growth objectives and
represent our commitment to provide our clients with high value-added products
and services.
MISSION AND MARKET POSITION
We then established a Corporate Mission Statement that encapsulated our vision
for the future:
"BECOME THE WORLD'S LEADING SUPPLIER TO CORPORATIONS
AND BUSINESS ENTITIES OF SPEED DRIVEN RESULTS(SM)
THAT LINK AND INTEGRATE OUR CLIENT'S FUNCTIONAL PERFORMANCE TO
COMPETITIVENESS AND THE REAL CEO DILEMMAS."
Since Thomas Group's inception, our mission has been to develop RESULTING, a
new accountable approach to the management consulting industry. Our RESULTING
approach directly partners us
". . . our mission has been to develop RESULTING, a new
accountable approach to the management CONSULTING industry."
--Philip R. Thomas, Chairman and CEO
TWO
<PAGE> 5
"We want to be a highly coveted business RESOURCE known for a proven
track record of client RESULTS. We offer the most EXPERIENCED people
available, implementing the best change methodology existing today. "
--Philip R. Thomas, Chairman and CEO
with clients to achieve real results by enhancing their competitiveness. We
achieve this goal using the application of Speed Driven Results(SM). The
industry is now heading in the direction we predicted long ago: top management
teams are looking for more top-and-bottom line results and, most important,
service supplier compensation tied to these results.
Our ambitious objectives are natural extensions of our Mission Statement. We
want to be a highly coveted business resource known for a proven track record
of client results. We offer the most experienced people available, implementing
the best change methodology existing today. Business is the interaction of all
processes within an entity. To be successful, business requires a holistic and
global perspective, fast tools, and quick responses to market shifts,
competitive threats, and shifting political and economic climates. We want to
be known for our disciplined processes, flexibly applied in various focused
industries. We strive to be the most sought-after source of the best change
management business processes in the world.
CLIENT PERCEPTION
We want our clients to see us as we see ourselves: uniquely capable of
providing extremely high value products and services that contribute to solving
management dilemmas. Currently, we are directly teamed with the top management
of more than 30 diverse businesses whose combined sales exceed $20 billion.
STRATEGY
Having established our Vision, Values, Mission Statement and desired Client
Perception; we formulated our Strategy. This strategy included involving the
top 30 executives in the company plus a number of cross functional teams. The
specific strategy that evolved has five key thrusts. Each incorporates a set of
tactical actions to drive our performance and achieve our Vision. These thrusts
are: People, Processes, Products, Visibility and Relationships.
PEOPLE
We established procedures to ensure that our people are the best trained
and most experienced results oriented people in the consulting industry.
These are people with a Speed Driven Results(SM) focus who know their role
in the Thomas Group team and are held accountable for delivering high
value-added RESULTS to our clients. These are tough people who have run
businesses and have experienced profit and loss responsibility, able to
stand shoulder to shoulder with top management teams of leading
corporations and command respect through the results they deliver. These
are people who can work across geographic borders to deliver consistent
results to global clients. Our people help differentiate RESULTING from
Consulting.
THREE
<PAGE> 6
PROCESSES
In order for our Resultants(SM) to be consistently effective across a wide
range of industries, we continually revise our business processes of
defining, achieving, sustaining, and enhancing our clients' improvement
potential. Just as Resultants(SM) train clients to implement an ongoing
review and improvement process, Thomas Group continually evolves its
methodology to better meet the dynamic needs of its client base.
PRODUCTS
Thomas Group products are consistently and solidly built around change
implementation, using time as the driver. We have used these same
practices since we formed the company in 1978. Initially focusing on the
application of these processes to the semiconductor and electronics
industries from 1978-1986, we extended our range of applications to
include manufacturing, distribution, capital goods and service companies.
Having proven our methodology across many businesses, in 1996 we focused
our efforts on market segments where we can add significant value to our
clients and add to our high growth potential. We added expertise in
logistics with software products in distribution management. We also added
multi-media software products to provide distance learning and assistance
with product knowledge issues experienced by salespeople. We acquired
these software products to add breadth to our competitiveness solutions
and add significantly to our client base.
We also extended our product offerings by developing a Strategic
Implementation product. This product provides our clients with a Strategic
Process to rapidly respond to market shifts and fits the fundamentals of
our Resultant's(SM) implementation methodology.
VISIBILITY
We aim to increase our visibility to top management globally. Most
importantly, we recognize that the number one barrier to increased sales is
that not enough companies know who we are and what dramatic improvements
we offer. To address this issue we established a Growth Function in our
organization to increase potential clients' awareness of our capabilities
and desirability as a business partner. We developed a range of thrusts
that are rapidly increasing our visibility to corporations' top
management. In addition, we have opened an office in Asia that will allow
significant growth in 1997. We also established six global business units,
headed by experienced executives with industry credentials, to bring an
industry segment focus to our overall marketing initiatives.
FOUR
<PAGE> 7
". . . a BUSINESS PARTNER with
a disciplined METHODOLOGY that works."
--Philip R. Thomas, Chairman and CEO
RELATIONSHIPS
One advantage of our successful record over the last 19 years is the
establishment of a large number of positive relationships. In addition to
historical relationships, we have more than 200 senior professionals who
provide a wealth of senior-level contacts. We have defined a process that
enables us to capitalize on these long-term contacts and turn them into
new business. The business unit presidents of our six industry-focused
segments and our geographic business presidents have extensive
relationships that can accelerate our business growth.
WHAT HAPPENED IN 1996?
1996 was a year of tremendous progress coupled with tough decisions and
considerable belt-tightening. Financial results for the year were disappointing
due to many growth related issues and underperformance in our software
subsidiaries. We experienced delays in the revenue stream anticipated from our
automotive business unit. We also had delays in significant program starts and
in the receipt of incentives with our biggest existing European contract. While
delays, in general, should not materially affect our financial results, the
combination of the magnitude of the contract delays and the current size of our
company made a significant impact on 1996.
We view this problem as an issue of growth. As we increase our revenue levels,
we will be able to absorb the occasional routine delay or disappointment. To
solve this issue we invested in establishing a Growth Organization, expanded
our New Business Acquisition Process and reorganized the company into stronger
market related segments. Additionally, we increased spending at Interlink
Technologies, one of our software subsidiaries, to improve market awareness of
its inventory software solution product and to increase the product's
applicability to a broader base of customers. We expect these 1996 investments
to contribute effectively to earnings in 1997.
Let me share with you some examples of the progress in 1996 I mentioned
earlier. The automotive business unit investment paid off late in the fourth
quarter with a significant Big Three automaker contract. In the first quarter
of 1997, we secured two contracts in the Asia/Pacific region through our newly
established Singapore office. Top management at Interlink has been refocused
and we expect this subsidiary to show improvement in 1997. Our European
business also shows signs of real improvement as contracts are signed and we
achieve our incentive revenues. Our Growth Organization and our New Business
Acquisition Process are accelerating the number of qualified potential clients,
and as it increases we improve our overall visibility in the marketplace.
FIVE
<PAGE> 8
WHERE ARE WE HEADED?
Vision 2000 established our goal of being a highly profitable, large company
early in the first decade of the 21st century. We expect to reach our goal of
exceeding a 25% growth rate (approximately twice the market) through the growth
of our Core Business and through selective acquisitions. The acquisitions must
provide geographic presence, compatible management methodologies, tools, and
clients and must be quickly accretive to earnings on a stand-alone, fully
absorbed cost of acquisition basis. Vision 2000 further sets a goal of being
the leader in changing the way consulting companies operate.
We realize what top management of global companies really needs in the decade
ahead-an outside, highly experienced, totally objective capability for teaming
in the drive for global competitiveness. They will need a business partner with
a disciplined methodology that works. They will need a company with a proven
track record that is prepared to tie its compensation to the results it
produces.
We intend to be the company that meets these market needs. We are now and
strive to continue to be different from consulting organizations. This
differentiation begins with our people and ends with our methodology and tools,
all of which are second to none. Our ability to Define, Achieve, Sustain and
Enhance dramatically improved results is the true differentiator.
/s/ PHILIP R. THOMAS,
Philip R. Thomas,
Chairman & CEO
[PICTURE OF PHILIP R. THOMAS]
SIX
<PAGE> 9
BUSINESS UNIT strategy
In September of 1996, we reorganized Thomas Group into 10 business units,
supported by New Business Acquisition, Implementation, and Support processes.
This is a substantial change from our historical geographical organization and
one we believe better positions us for rapid revenue and earnings growth.
Leading each business unit is a president, and you will have the opportunity to
get to know them in the pages that follow. Our business units are focused on
five specific areas of management responsibility:
o Market segment development to drive revenue growth
o Operating profit
o Positioning of our products to address specific market segment issues
o Working with clients in all phases of engagement to build enthusiasm,
trust, and credibility
o Management and process discipline
Our 10 business units fall into three categories:
<TABLE>
<CAPTION>
INDUSTRY GEOGRAPHY SOFTWARE
--------------------------------------------- ------------ ---------
<S> <C> <C> <C> <C>
AVIATION MANUFACTURING ELECTRONICS ASIA/PACIFIC BERMAC
AUTOMOTIVE EMERGING GROWTH SERVICE EUROPE INTERLINK
</TABLE>
Our 1997 operating plan and Vision 2000 growth strategy are implemented at the
business unit and process level. Our vision is to provide a targeted
competitiveness improvement product which is so compelling that it is in demand
by companies worldwide as the number one methodology for defining, attaining,
and sustaining dramatically improved results. On the following pages, we will
describe our strategies and unique advantages that enable Thomas Group to
deliver results worldwide.
/s/ ALEX W. YOUNG,
Alex W. Young,
President & COO
[PICTURE OF ALEX W. YOUNG]
SEVEN
<PAGE> 10
delivering RESULTS worldwide
For nearly 20 years, Thomas Group has helped company leaders transform their
organizations and realize their commitment to change. Using a proprietary
methodology focusing on Speed Driven Results(SM), Thomas Group professionals
help leaders define, achieve, sustain and enhance their ability to: 1)respond
to changing customer needs, and 2)outpace growing global competition.
In response to these business needs, the focus of Thomas Group's proprietary
approach is a holistic, enterprise-wide change methodology using Total Cycle
Time(SM). Total Cycle Time(SM) is the time elapsed from the moment a customer
expresses a need until the moment that need is fulfilled and encompasses all of
the macro processes within the business. It provides a single, quantifiable
context that aligns all activities of an organization with customer needs.
That context is time. Speeding up processes produces a higher first-pass yield,
which in turn produces higher quality as a byproduct. First-pass yield, a key
measure of Total Cycle Time(SM) improvements, prevents organizations from
falling into the trap of producing bad products faster. As first-pass yields
increase throughout an organization, a new level of efficiency and accuracy is
achieved without additional resource expenditures.
Through Total Cycle Time(SM) and first-pass yield improvements, clients
accelerate growth improve their responsiveness to customers, accelerate new
product design and introduction, increase quality and productivity, and
liberate cash tied up in inventory, equipment and operations.
Thomas Group has recently expanded its methodology to include Strategic
Implementation Services(SM). Using a proprietary approach that works in concert
with the company's existing Speed Driven Results(SM) methodology, this new
offering will enable Thomas Group clients to go beyond the performance to which
they were entitled and achieve their strategic best.
These unique methodologies are implemented by seasoned professionals who forge
dramatic change in the managerial mindset and corporate culture for embracing
change. These professional business managers, called Resultants(SM) for their
emphasis on producing client results, work with corporate leaders to cut
through symptoms to reach the few critical core business challenges inhibiting
improved responsiveness as well as revenue and earnings growth.
Thomas Group's vision is to provide a targeted competitiveness improvement
product that is so compelling that it is demanded by companies worldwide. To
successfully deliver this product on a global scale, Thomas Group has
implemented a new operating structure designed to broaden company's presence
before the world's corporate business leaders. This structure established 10
business
EIGHT
<PAGE> 11
". . . our CLIENTS are more comfortable knowing
we have a PRECISE understanding of their
business. . ."
--Alex W. Young, President and COO
units, selected because of the degree of opportunity they offered the company.
Six units have an industry focus, two have a geographic focus and two have a
technology focus. Business unit presidents, and the Resultants(SM) who support
them, are uniquely knowledgeable about the businesses and issues represented in
their segments.
INDUSTRY BUSINESS UNITS
Thomas Group's Speed Driven Results(SM) methodology has been successfully
applied during the past two decades with more than 200 engagements representing
a wide range of industries. The hallmark of this methodology is its versatility
in generating dramatic results for virtually any company whose corporate
leaders are committed to change.
Though the company's methodology is applicable to all businesses that are
committed to change, the automotive, aviation, electronics, emerging growth,
manufacturing and services sectors provide the greatest opportunity for Thomas
Group. The company's focus in these segments reflects a desire to further
establish an industry specific reputation and develop additional subject matter
expertise in industries where knowledge detail has become paramount.
"This facilitates the building of long-term relationships because our clients
are more comfortable knowing we have a precise understanding of their business
and are capable of solving their most pressing dilemmas," said Alex W. Young,
President and COO.
This industry-targeted structure has already facilitated contract wins for
Thomas Group. The automotive unit, for example, began work in the first quarter
of 1997 on a program for a Big Three automaker. The unit also has made inroads
with first- and second-tier automotive suppliers.
"The three most important objectives for companies in the automotive business
today are speed, globalization and integration," said Lee Grubb, President of
the automotive business unit and also chief financial officer of the company.
"Our experience shows that the best way to achieve these
[PICTURE OF LELAND L. GRUBB JR.]
LELAND L. GRUBB JR.
BUSINESS UNIT: Automotive
PREVIOUS EXPERIENCE: Chief Financial
Officer and Senior Vice President,
Detroit Diesel
[PICTURE OF R. WAYNE GILL]
R. WAYNE GILL
BUSINESS UNIT: Emerging Growth
PREVIOUS EXPERIENCE: Director of
Manufacturing Operations, Siemens
Transmission Systems
[PICTURE OF GEOFFREY W. PACKWOOD]
GEOFFREY W. PACKWOOD
BUSINESS UNIT: Services
PREVIOUS EXPERIENCE: President,
ISC, a contract programming
company for financial services
NINE
<PAGE> 12
"Thomas Group's Speed Driven Results(TM) METHODOLOGY
gives our client's a competitive advantage by eliminating
barriers to timely product improvements."
-Tom Popek, President of the Electronics business unit
objectives is to optimize the high-level business processes using time as the
driver throughout the entire organization."
Likewise, the aviation business unit, which serves an industry offering
significant potential growth for the company, signed a contract with a large
aircraft manufacturer early in 1997. "Aircraft manufacturers are integrating
complex operations with new partners as a result of mergers and joint ventures,
creating potential obstacles to efficient work practices," said Jimmy
Houlditch, head of the aviation business unit. "The premium placed on speed in
the aviation marketplace has never been greater. Thomas Group is an ideal
business partner for those who want to succeed."
Manufacturing companies face challenges on many fronts such as low-cost
competitors and high capital expenditure requirements. "Thomas Group's
methodologies enable manufacturers to attain and sustain higher production
levels with their existing infrastructure," said Bob Stephens, President of the
manufacturing business unit. "Increased effectiveness frees up capacity that
can be applied to achieving even greater results for our clients."
Thomas Group's roots are in the semiconductor industry, and the electronics
business unit leverages this experience. "The deluge of new products from every
competitor is fueling the need for shorter product development cycles. Thomas
Group's Speed Driven Results(TM) methodology gives our clients a competitive
advantage by eliminating barriers to timely product improvements," said Tom
Popek, President of the electronics business unit.
In addition to the success of the automotive aviation and manufacturing
business units, the electronics, emerging growth, and services business units
also have been awarded new contracts in the first quarter of 1997.
GEOGRAPHIC BUSINESS UNITS
Through its international offices in Frankfurt and Singapore, the company helps
corporate leaders around the globe achieve their vision for change on a
multinational scale. Business units in Asia
[PICTURE OF JIMMY C. HOULDITCH]
Jimmy C. Houlditch
Business Unit: Aviation
Previous Experience: Senior Vice
President, Texas Instruments;
Chief Operating Officer, Allied Signal
[PICTURE OF ROBERT W. STEPHENS]
Robert W. Stephens
Business Unit: Manufacturing
Previous Experience: Executive Vice
President, DSC Communications
[PICTURE OF THOMAS J. POPEK]
Thomas J. Popek
Business Unit: Electronics
Previous Experience: President
and Chief Operating Officer,
Silicon Solutions
TEN
<PAGE> 13
and Europe each have signed major contract commitments during the first quarter
of 1997.
The Asian market is an excellent opportunity for Thomas Group. "The Pacific Rim
is exceptionally rich in local enterprises poised for international expansion,
which will benefit greatly from our time-based management services," said Herby
Locke, President of Thomas Group's Asia/Pacific business unit.
In addition, the European market continues to grow in the management consulting
industry. "The market for our services is robust and we have now laid the
foundation for significant growth in 1997 and 1998," said Tom Williams,
President of Thomas Group's European business unit. Thomas Group has instituted
many changes in its European operations so that the organization is now capable
of long-term sustained growth.
SOFTWARE TECHNOLOGY BUSINESS UNITS
Thomas Group's software technology business units are focused on the delivery
of products that can integrate with the company's existing methodologies. One
example of this is Bermac Communication's SalesWare(TM) product. SalesWare
offers the opportunity to create an advanced opportunity management system that
can easily be imbedded into the client's own IT infrastructure. "Using Lotus
Notes as a platform, Bermac's new products can be implemented as a custom
application or as an `off-the-shelf' product. This product diversity adds fuel
to Thomas Group's Speed Driven Selling(TM) strategy," said Bill Jackson,
President of Thomas Group's software business units.
One of the tangible benefits of the Speed Driven Results(SM) methodology is
that it frees resources that had previously been tied up in inventory. To
further optimize inventory efficiencies, Thomas Group's Interlink Technologies
subsidiary offers WHSE-LINK(TM), a software solution to complex inventory
management problems. "WHSE-LINK(TM) provides instantaneous, real time
information on inventory from the time it's received through the time it's
shipped out," Jackson said.
[PICTURE OF HERBERT D. LOCKE]
Herbert D. Locke
Business Unit: Asia/Pacific
Previous Experience: President
of Asian Division, Texas Instruments
[PICTURE OF J. THOMAS WILLIAMS]
J. Thomas Williams
Business Unit: Europe
Previous Experience: Industrial
Facilities Policy Director,
U.S. Navy; Chief Financial Officer,
Long Beach Naval Shipyards
[PICTURE OF WILLIAM C. JACKSON]
William C. Jackson
Business Units: Bermac and Interlink
Previous Experience: President,
Office Products Division of Xerox
ELEVEN
<PAGE> 14
FINANCIAL section
<TABLE>
<CAPTION>
CONTENTS
<S> <C>
Selected Historical and Pro Forma Data 13
Management's Discussion and Analysis 14
Consolidated Balance Sheets 18
Consolidated Statements of Operations 19
Consolidated Statements of Stockholders' Equity 20
Consolidated Statements of Cash Flows 21
Notes to Consolidated Financial Statements 22
Report of Independent Public Accountants 34
</TABLE>
TWELVE
<PAGE> 15
selected Historical and PRO FORMA DATA
The following table sets forth selected historical and pro forma financial
information regarding the Company. This historical financial information has
been derived from the audited financial statements of the Company. This
information should be read in conjunction with, and is qualified by, the
consolidated financial statements and notes thereto included in this Annual
Report to Stockholders.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
PRO FORMA
IN THOUSANDS, EXCEPT SHARE DATA 1996 1995 1994 1993 1993 1992 1991
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Revenues $ 72,029 $ 67,220 $ 52,460 $ 44,586 $ 44,586 $ 36,635 $ 26,763
Operating Expenses 69,239 56,641 52,899 36,105 37,635 32,198 23,296
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating Income (Loss) 2,790 10,579 (439) 8,481 6,951 4,437 3,467
Net gain on securities sale -- -- 479 -- -- -- --
Interest income (expense) 252 524 105 (30) (77) (122) (157)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before Income Taxes 3,042 11,103 145 8,451 6,874 4,315 3,310
Income Taxes 1,217 4,348 99 3,254 2,644 1,725 1,250
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net Income $ 1,825 $ 6,755 $ 46 $ 5,197 $ 4,230 $ 2,590 $ 2,060
---------- ---------- ---------- ---------- ---------- ---------- ----------
Earnings per share $ 0.29 $ 1.08 $ 0.01 $ 1.00 $ 0.81 $ 0.57 $ 0.47
Weighted average shares
and share equivalents 6,298,849 6,258,040 6,102,911 5,222,843 5,222,843 4,542,347 4,428,919
BALANCE SHEET-YEAR END:
Working Capital $ 15,705 $ 20,001 $ 15,248 -- $ 18,245 $ 1,416 $ 1,753
Total Assets 38,890 40,157 27,567 -- 30,954 15,703 10,481
Long-term Obligations, Including
Current Maturities 1,661 1,101 1,029 -- 1,649 3,647 2,539
Redeemable Class A
Common Stock -- -- -- -- -- 5,000 5,000
Total Stockholders'
Equity (Deficit) 31,512 31,051 22,277 -- 21,662 (1,501) (3,494)
</TABLE>
1993 PRO FORMA ADJUSTMENTS
A number of changes took place on or prior to the August 1993 closing of the
company's initial public offering, including (i) termination of the company's
obligation to make payments to Electronic Data Systems Corporation, whether in
the form of interest, dividends or marketing fees, (ii) termination of the
management agreement with Thomas Group Holding Company, (iii) commencement of
an employment agreement with Mr. Thomas, and (iv) termination of royalty
payments to TC Operating, Inc. Due to these changes, historical results of
operations are not comparable prior to 1994 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.
THIRTEEN
<PAGE> 16
MANAGEMENT'S discussion and ANALYSIS
of financial condition and
RESULTS of OPERATIONS
OVERVIEW
Thomas Group derives the majority of its revenues from monthly fixed and
incentive (performance-oriented) fees for the implementation of Total Cycle
Time and other business improvement programs. Performance-oriented fees are
tied to improvements in a variety of client performance measures typically
involving response time, asset utilization, productivity, and profitability.
The company also provides, on a fixed fee basis, software solutions for certain
business processes.
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUES
FOR YEAR ENDED DECEMBER 31,
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Revenues 100.0 100.0 100.0
Cost of Sales 67.2 63.5 66.5
------ ------ ------
Gross Margin 32.8 36.5 33.5
Selling, General and Administrative 28.9 20.8 34.3
------ ------ ------
Operating Income (Loss) 3.9 15.7 (0.8)
Interest Income, net .3 .8 .2
Net Gain on Securities Sale -- -- .9
------ ------ ------
Income before Income Taxes 4.2 16.5 .3
------ ------ ------
Net Income 2.5 10.0 .1
------ ------ ------
</TABLE>
1996 COMPARED TO 1995
RESULTS OF OPERATIONS - The company reported net income of $1.8 million or
$0.29 per share, in 1996, a decrease of $5 million compared to $6.8 million or
$1.08 per share, in 1995. Weighted average shares and share equivalents
increased .7% compared to 1995.
Net income declined in 1996 as a result of delays in anticipated new
contract closings and increased spending on marketing, geographic expansion and
business unit development. Additionally, net income was further reduced by
losses at Interlink as that subsidiary increased spending on product
improvements and additional selling efforts.
REVENUES - Revenues were $72.0 million in 1996, a 7% increase from $67.2
million in 1995. Revenues from the Business Improvement segment increased 3% to
$63.4 million. Domestic revenues from this segment increased 25% to $45.4
million in 1996 due to additional contracts and improved program performance
while European revenues declined 32% to $18.4 million in 1996. The decline in
European revenues was a result of certain large programs ending before they
were replaced with new business. The European sales process was less effective
than the U.S. sales process in 1996. The disparity between their results led to
Europe's transition to the U.S. sales process. Revenues from the Asia/Pacific
region were $1.2 million in 1996. Incentive based revenues were 27% of total
revenue in 1996 and 1995.
Revenues from the Software Solutions segment increased 83% to $7 million
due to the inclusion of Interlink operations for a full year in 1996 compared
to five months in 1995. Bermac contributed revenues of $0.5 million in 1996.
The company earned in excess of 10% of its total revenues from each of
three clients in 1996, and from one client in 1995 and 1994. (See Note 10 of
the 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 $48.4 million, a 14% increase compared to $42.7 million in 1995.
In response to increased levels of domestic business, the opening of a
Singapore office and the establishment of industry focused business units, the
company hired additional Resultants and direct cost personnel during 1996.
During the fourth quarter of 1996, however, the company elected to scale back
its personnel levels, particularly in its European and software operations, and
incurred $0.5 million in related costs. The increase in the average number of
Resultants, the inclusion of Interlink operations for a full year, the
acquisition of Bermac, annual salary adjustments, and the additional cost of
fourth quarter personnel adjustments
FOURTEEN
<PAGE> 17
increased the compensation component of COS by $7.3 million or 26% over 1995.
Additionally, COS in 1996 includes $2.1 million of hardware purchases
compared to $1.6 million in 1995. A $3.1 million decrease in incentive
compensation expense partially offset the increases.
GROSS MARGIN - Gross margin decreased $1.0 million to $23.6 million or 32.8% of
revenues from $24.6 million or 36.5% of revenues in 1995. The decline in the
gross margin percentage is the result of several factors during 1996. First, in
conjunction with increases in domestic business improvement contracts and
several specific growth initiatives, the company hired a significant number of
Resultants and other direct personnel in the first nine months of 1996. As the
year progressed, company management made selective personnel reductions. The
one time costs of these adjustments further reduced margin for the year.
Second, company margins were further depressed by the decline in European
revenues coupled with delayed contract closings in the Asia/Pacific and
automotive business units. Third, margins in the Software Solutions segment
were less than 1% in 1996; significantly less than expected and less than
margins historically realized on Business Improvement programs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Selling, general and
administrative expenses (SG&A) consist of all operating expenses not directly
associated with the generation of revenue. A majority of SG&A expenses were for
corporate personnel (including certain officers), non-program-related travel
and entertainment, corporate facilities costs, and professional and legal
costs.
SG&A was $20.8 million or 28.9% of revenue in 1996, a 49% increase
compared to $14 million or 20.8% of revenue in 1995. The company's 1996 growth
initiatives were a major factor in the absolute increase in SG&A. The increased
costs coupled with the company's lengthy lead time to close a contract
contributed to the increase in SG&A as a percentage of revenue.
Most of the sales and marketing related cost increases occurred in the
second half of 1996 in conjunction with the decision to design an integrated
marketing strategy for the company. As this strategy was developed, and sales
and marketing headcounts increased, SG&A related personnel costs increased by
more than $2.3 million as compared to 1995. As part of this strategy, the
company focused on increasing its visibility in the marketplace and invested
an additional $2.1 million on this initiative in 1996.
Another part of the marketing strategy included the opening of a new
office in Singapore, the acquisition of Bermac Communications and increasing
Interlink's sales and marketing spending. The addition of these entities
contributed $2.2 million to the increase in 1996 SG&A expense.
OTHER - The company's effective tax rate was 40% in 1996 compared to 39% in
1995. The company has a deferred tax asset of $1.5 million at December 31,
1996. Management believes that current and future levels of taxable income will
be sufficient to realize the benefits of the deferred tax assets.
1995 COMPARED TO 1994
RESULTS OF OPERATIONS - Net income in 1995 was $6.8 million, or $1.08 per
share, an increase of $6.7 million compared to $.05 million, or $.0l per share,
in 1994. Weighted average shares and share equivalents increased 3% compared
to 1994.
Net income in 1995 improved as a result of improved program productivity,
focused 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 from the Business Improvement segment increased 21%
to $63.4 million. Domestic revenue from this segment increased 35% to $40.1
million while European revenues increased 20% to 27.1 million. Incentive based
revenues were 27% of total revenues in 1995 compared to 29% in 1994. Revenues
from the Software Solutions segment were $3.8 million, reflecting five months
of operations for Interlink. (See Note 2 to the Consolidated Financial
Statements.) The company did not have a Software Solutions segment in 1994.
COST OF SALES - COS was $42.7 million in 1995, a 22% increase compared to $34.9
million in 1994. During 1995 the company experienced 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 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
FIFTEEN
<PAGE> 18
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 $1.6 million of Interlink hardware purchases which were
not present in 1994, and incentive compensation which is based on company
financial performance. Incentive compensation was $3.2 million in 1995 compared
to $1.1 million in 1994.
GROSS MARGIN - Gross margin was $24.6 million, representing 36.5% of revenues in
1995 compared to $17.6 million and 33.5% 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 - 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. In 1995 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 full year effects of various
expansion efforts undertaken in mid-1994. These 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 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.
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.
QUARTERLY RESULTS - The following table sets forth certain unaudited operating
results for each of the four quarters in the two years ended December 31, 1996.
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.
<TABLE>
<CAPTION>
1996 1995
FOR THE THREE MONTHS ENDED FOR THE THREE MONTHS ENDED
IN THOUSANDS, EXCEPT PER SHARE DATA 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 $ 19,256 $ 19,895 $ 17,327 $ 15,551 $72,029 $ 15,514 $ 16,320 $ 16,371 $ 19,015 $67,220
Operating Income (Loss) 2,614 3,503 467 (3,794) 2,790 1,965 2,984 2,495 3,135 10,579
Income (Loss) before
Income Taxes 2,690 3,561 557 (3,766) 3,042 2,020 3,133 2,615 3,335 11,103
Net Income (Loss) 1,615 2,172 345 (2,307) 1,825 1,212 1,880 1,590 2,073 6,755
Earnings (Loss) per share $ 0.25 $ 0.34 $ 0.05 $ (0.38) $ 0.29 $ 0.20 $ 0.30 $ 0.25 $ 0.33 $ 1.08
Weighted average shares
and share equivalents 6,386 6,396 6,340 6,008 6,299 6,027 6,265 6,365 6,284 6,258
-------- -------- -------- -------- ------- -------- -------- -------- -------- -------
STOCK PRICE (1)
High $ 15.75 $ 20.00 $ 18.63 $ 14.63 $ 20.00 $ 10.50 $ 11.00 $ 16.00 $ 16.00 $ 16.00
Low $ 12.00 $ 14.13 $ 14.00 $ 7.00 $ 7.00 $ 6.25 $ 9.50 $ 10.50 $ 11.75 $ 6.25
Close $ 14.25 $ 18.50 $ 14.00 $ 9.00 $ 9.00 $ 10.37 $ 10.50 $ 14.50 $ 13.50 $ 13.50
</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.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased by $5.6 million in 1996 compared to a $7.3
million increase in 1995 and a $6.8 million decrease in 1994. The major
components of these changes are discussed below.
CASH FLOWS FROM OPERATING ACTIVITIES - Operating activities provided positive
cash flows in 1996 of $6.3 million compared to positive cash flows of $10.5
million in 1995 and negative cash flows of $4.5 million in 1994. These
fluctuations are a direct result of fluctuations in profitability and the
timing of tax
SIXTEEN
<PAGE> 19
payments. Cash flows provided by operating activities in 1996 and 1995 were
used to fund capital additions and acquisitions. Accounts receivable balances
more than 30 days past due at year end were $1.1 million, compared to $1.4
million at December 31, 1995 and $0.7 million at December 31, 1994. Days sales
outstanding has also steadily improved from 81 days at the end of 1994 to 79
days at December 31, 1995 and 53 days at December 31, 1996.
CASH FLOWS FROM INVESTING ACTIVITIES - The use of cash for capital additions,
capitalized software development costs and business acquisitions comprise most
of the company's investing activities. Capital expenditures related primarily
to CEO Center capacity expansion and computer hardware upgrades in 1996, CEO
Center improvements in 1995, and corporate office, Dallas office and CEO Center
expansion as well as the move of the Frankfurt office in 1994. In April 1996
the company made a $1 million payment to the former owners of Interlink for
completed software development. The company anticipates 1997 capital
expenditures will not exceed $2 million and will be primarily related to
computer system upgrades and office infrastructure.
In 1996 the company used $2.3 million cash to acquire Bermac
Communications and in 1995 used $1.5 million cash to acquire Interlink
Technologies. In 1994, cash provided by investing activities was positively
impacted by a net $2.6 million associated with a securities sale in which
warrants were exercised for stock and stock simultaneously sold for cash.
CASH FLOWS FROM FINANCING ACTIVITIES - Cash flows used in financing activities
in 1996 were for the purchase of the company's stock for $3.3 million, the
settlement of 1995 amounts due to affiliates and certain 1996 advances to
affiliates.
On December 4, 1996 the company entered into a $20 million revolving
credit facility with Comerica Bank. This facility expires in December 2003 and
includes a call option in December 2001. Additionally, the terms provide for a
$1 million per quarter reduction in any outstanding balances after the first
two years. Loans under this agreement bear interest at the prime rate or other
options. This new agreement replaces the company's previous $6 million line of
credit agreement. During 1996, the company did not incur any borrowings under
this line of credit. At December 31, 1996 the company had only long-term
obligations associated with its deferred compensation plan.
As of February 28, 1997, the company has $1.1 million of borrowings
outstanding on this facility which were used for working capital purposes. The
company anticipates it may make limited use of its line of credit in the first
and second quarters of 1997.
In 1994 the Board of Directors approved a stock repurchase plan for up to
250,000 shares. The company purchased 7,000 shares in 1994, no shares in 1995,
and 226,600 shares in 1996 under this plan. The remaining 16,400 shares are
available to the company to purchase in the open market under this program.
FINANCIAL CONDITION - The company believes that its financial condition remains
strong and that it has the financial resources necessary to meet its needs.
Cash provided by operating activities and the company's credit facility should
be sufficient to meet short and long-term operational needs.
"Safe Harbor" Statement Under The Private Securities Litigation Reform Act:
With the exception of historical information, the matters discussed in this
report are "forward looking statements" as that term is defined in Section 21E
of the Securities Exchange Act of 1934.
While the company believes that its strategic plan is on target and the
business outlook remains strong, several important factors have been
identified, which could cause actual results to differ materially from those
predicted. By way of example:
o The competitive nature of the management consulting industry, in light of
new entrants into the industry and the difficulty of differentiating the
services offered to potential clients.
o The time required by prospective clients to fully understand the value and
complexity of a typical Total Cycle Time(R) (TCT) program may result in an
extended lead time to close new business.
o Performance-oriented fees are earned upon the achievement of improvements
in a client's business. The client's commitment to a TCT(R) program and
general economic/industry conditions could impact a client's business
performance and consequently the company's ability to forecast the timing
and ultimate realization of performance-oriented fees.
o The ability of the company to productively re-deploy personnel during
program transition periods.
o The ability of the company to create alliances and make acquisitions that
are accretive to earnings.
o The competitive nature of the software solutions industry and the speed at
which technology changes to meet customer needs.
SEVENTEEN
<PAGE> 20
CONSOLIDATED balance SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
IN THOUSANDS, EXCEPT PER SHARE DATA 1996 1995
-------- --------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 5,711 $ 11,273
Trade accounts receivable, net of allowances of $306 and $245 10,267 14,476
Accounts and notes receivable-affiliates 1,500 --
Other assets 3,944 2,257
-------- --------
Total Current Assets 21,422 28,006
Net Property and Equipment 7,641 6,547
Capitalized Software Development Costs 3,069 832
Other Assets 6,758 4,772
-------- --------
Total Assets $ 38,890 $ 40,157
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued liabilities $ 3,901 $ 4,229
Accounts payable-affiliates -- 1,027
Income taxes payable 1,420 2,428
Advance payments 396 294
Current maturities of long-term obligations -- 27
-------- --------
Total Current Liabilities 5,717 8,005
Long-Term Obligations 1,661 1,101
-------- --------
Total Liabilities 7,378 9,106
-------- --------
Commitments and Contingencies
Stockholders' Equity
Common Stock, $.01 par value; 12,500,000 shares authorized,
6,179,117 and 5,983,903 shares issued 62 60
Class B Common Stock, $.01 par value; 1,200,000 shares
authorized, 185,189 and 152,133 shares issued and outstanding 2 2
Additional Paid-in Capital 20,143 18,094
Retained Earnings 15,570 13,745
Cumulative Translation Adjustment (32) 283
Treasury Stock, 295,991 and 90,603 shares, at cost (4,233) (1,133)
-------- --------
Total Stockholders' Equity 31,512 31,051
-------- --------
Total Liabilities and Stockholders' Equity $ 38,890 $ 40,157
======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
EIGHTEEN
<PAGE> 21
consolidated statement of OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
IN THOUSANDS, EXCEPT SHARE DATA 1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Revenues $ 72,029 $ 67,220 $ 52,460
Cost of sales 48,401 42,651 34,901
---------- ---------- ----------
Gross Margin 23,628 24,569 17,559
Selling, general and administrative 20,838 13,990 17,998
---------- ---------- ----------
Operating Income (Loss) 2,790 10,579 (439)
Interest income, net 252 524 105
Net gain on securities sale -- -- 479
---------- ---------- ----------
Income before Income Taxes 3,042 11,103 145
Income taxes 1,217 4,348 99
---------- ---------- ----------
Net Income $ 1,825 $ 6,755 $ 46
========== ========== ==========
Earnings per common and common equivalent share $ 0.29 $ 1.08 $ 0.01
Weighted average shares and share equivalents 6,298,849 6,258,040 6,102,911
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
NINETEEN
<PAGE> 22
consolidated statement of
STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CLASS B ADDITIONAL
COMMON COMMON PAID-IN RETAINED TRANSLATION TREASURY
IN THOUSANDS, EXCEPT SHARE DATA STOCK STOCK CAPITAL EARNINGS ADJUSTMENT STOCK TOTAL
-------- -------- ---------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
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 -- -- -- -- -- (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 -- -- -- -- -- (12) (12)
Foreign currency translation adjustment -- -- -- -- 283 -- 283
Net income -- -- -- 6,755 -- -- 6,755
-------- -------- ---------- -------- ---------- -------- --------
December 31, 1995 60 2 18,094 13,745 283 (1,133) 31,051
Issuance of 195,949 and 180,02 shares
of Common Stock and of Class B 2 2 3,288 -- -- -- 3,292
Tax benefit of non-qualified
stock option exercises -- -- 619 -- -- -- 619
Redemption of 146,966 shares of Class B -- (2) (2,181) -- -- -- (2,183)
Purchase of 226,600 shares of
Common Stock -- -- -- -- -- (3,340) (3,340)
Reissuance of 19,742 shares of treasury
stock through 401(K) plan, at cost -- -- 52 -- -- 240 292
Discounted common stock options issued
under employee stock option plans -- -- 271 -- -- -- 271
Foreign currency translation adjustment -- -- -- -- (315) -- (315)
Net Income -- -- -- 1,825 -- -- 1,825
-------- -------- ---------- -------- ---------- -------- --------
December 31, 1996 $ 62 $ 2 $ 20,143 $ 15,570 $ (32) $ (4,233) $ 31,512
======== ======== ========== ======== ========== ======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
TWENTY
<PAGE> 23
consolidated statement of
CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
IN THOUSANDS 1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net income $ 1,825 $ 6,755 $ 46
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Depreciation and amortization 3,274 2,038 1,229
Net gain on securities sale -- -- (479)
Revenue earned in warrants -- -- (663)
Allowance for doubtful accounts 397 245 2,390
Provision for expatriate costs (151) (311) (417)
Other 298 -- 107
Deferred taxes (327) 621 (1,657)
Change in operating assets and liabilities
(Increase)/decrease trade accounts receivable 3,415 (2,143) (757)
(Increase)/decrease other assets (2,914) (496) (1,692)
Increase/(decrease) accounts payable and
accrued liabilities 538 1,528 922
Increase/(decrease) advance payments 106 (812) (2,392)
Increase/(decrease) income taxes payable (201) 3,032 (1,104)
-------- -------- --------
Net Cash Provided By (Used In)
Operating Activities 6,260 10,457 (4,467)
-------- -------- --------
Cash Flows From Investing Activities
Acquisition of subsidiary (2,308) (1,500) --
Decrease (increase) in short-term receivable 598 (572) --
Capital expenditures (3,109) (1,714) (3,805)
Exercise of warrants to acquire securities -- -- (2,625)
Proceeds from securities sale -- -- 5,226
Capitalization of software development costs (1,659) (83) --
Other (250) (230) --
-------- -------- --------
Net Cash Used In Investing Activities (6,728) (4,099) (1,204)
-------- -------- --------
Cash Flows From Financing Activities
Purchase of treasury stock (3,340) (12) (75)
Proceeds from sale of treasury stock 240 -- --
Proceeds from exercise of stock options 986 495 229
Repayment of other long-term obligations (90) (70) (219)
Repayment of obligations to affiliate (1,027) -- --
Net repayments from (advances to) affiliates (1,700) 592 (1,085)
-------- -------- --------
Net Cash Provided By (Used In) Financing Activities (4,931) 1,005 (1,150)
Effect of Exchange Rate Changes on Cash (163) (32) --
-------- -------- --------
Net Increase /(Decrease) In Cash and Cash Equivalents (5,562) 7,331 (6,821)
Cash and Cash Equivalents
Beginning of period 11,273 3,942 10,763
-------- -------- --------
End of period $ 5,711 $ 11,273 $ 3,942
======== ======== ========
</TABLE>
TWENTY ONE
<PAGE> 24
NOTES to CONSOLIDATED
FINANCIAL statements
NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) THE COMPANY - Thomas Group, Inc. (the "company") 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 in its core product is known as
Total Cycle Time and focuses on reducing the time spent on revenue-producing,
product development and administrative processes, resulting in operational and
financial improvements. The company also provides software solutions that focus
on reducing process cycle times for certain business processes.
(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) 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 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 - 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 as follows:
Furniture and fixtures 5-7 Years
Equipment 3-7 Years
Leasehold improvements 5-19 Years
(f) CAPITALIZED SOFTWARE DEVELOPMENT COSTS - Pursuant to Statement of Financial
Accounting Standards No. 86, "Accounting for the Costs of Computer Software to
be Sold, Leased, or Otherwise Marketed," issued by the Financial Accounting
Standards Board, the company is required to capitalize certain software
development and production costs once technological feasibility has been
achieved. The cost of purchased software is capitalized when related to a
product which has achieved technological feasibility or that has an alternative
future use. Capitalization of software development costs stops when the product
is available for sale. For the year ended December 31, 1996 the company
capitalized software costs amounting to $2.7 million. For the years ended
December 31, 1995 and 1994, the company capitalized $1.0 million and $0,
respectively. Software development costs incurred prior to achieving
technological feasibility are charged to research and development expense.
Capitalized software development and purchased software costs are reported
at the lower of unamortized cost or net realizable value. Commencing upon
initial product release, these costs are amortized based on the greater of (a)
the ratio of current gross revenues for the product to total current and
estimated future gross revenues for the product or (b) the straight-line method
over the estimated life, generally three to five years. Fully amortized
software costs are removed from the financial records. For the years ended
December 31, 1996, 1995, and 1994, the company recorded $0.6 million, $0.1
million and $0 of amortization of capitalized software costs, respectively.
Amortization of capitalized software costs is included in cost of sales in the
accompanying consolidated statement of operations.
(g) INTANGIBLES - The company amortizes costs in excess of net assets acquired
on a straight-line basis over the estimated benefit period, generally five to
ten years. Patents and licenses are generally amortized on a straight-line
basis over five years. The carrying value of goodwill, patents and licenses is
evaluated
TWENTY TWO
<PAGE> 25
periodically in relation to the operating performance and future undiscounted
net cash flows to the related business.
(h) REVENUES - The company derives its revenues from two primary sources: (1)
contracts for traditional Business Improvement programs and (2) contracts for
Software Solutions to specific business processes. Business Improvement program
contracts specify 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 at time intervals specified in each contract. Both
the company and the client agree to the measured improvements and the
corresponding incentive fees earned by the company, thereby completing the
earnings process. Fixed fees are recognized as revenue when earned, generally
on a straight line basis over the life of the contract. Revenues from Software
Solutions are generally recognized on either a straight line basis over the
life of the client agreement or upon the achievement of certain project
milestones. 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) 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." Provisions are made for estimated United States
and foreign income taxes, less available tax credits and deductions, which may
be incurred on the remittance of the company's share of foreign subsidiaries'
undistributed earnings.
(k) CASH AND CASH EQUIVALENTS - Cash equivalents consist of highly liquid
investments with original maturities of three months or less. At December 31,
1996, the company had approximately $1.1 million invested in tax-exempt funds
and certificates of deposit.
(l) 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.
(m) 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.
NOTE 2
ACQUISITIONS
Effective July 1, 1996 the company acquired substantially all of the assets of
Bermac Communications (Bermac) a multimedia software company, for approximately
$2.3 million in cash. The acquisition was funded with cash from operations and
accounted for under the purchase method of accounting. Terms of the acquisition
provide for additional payments of $0.7 million, of which $0.2 million is for
the completion of enhancements to software products and $0.5 million will be
treated as additional goodwill. Bermac's results of operations have been
included in the company's consolidated financial statements beginning July 1,
1996. Bermac's operations are not material in relation to the company's
consolidated financial statements; therefore, pro forma financial information
has not been presented.
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 unaudited pro forma consolidated results of operations for
the years ended December 31, 1995 and 1994, 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>
TWENTY THREE
<PAGE> 26
In connection with the Interlink 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 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
enhancements to Interlink's software products, (ii) the provision of consulting
and 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.
NOTE 3
OTHER ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
IN THOUSANDS 1996 1995
-------- --------
<S> <C> <C>
Investment in joint venture $ 100 $ 100
Prepaid expenses 1,974 1,389
Cash surrender value of key-man life insurance 726 554
Deferred compensation plan assets 1,360 690
Receivable from employees for computers -- 208
Deferred tax benefit 1,511 1,049
Goodwill, net 1,153 189
Other intangibles, net 191 257
Income tax receivable 2,252 --
Investment in Texas Stadium Suite 534 578
Notes receivable -- 519
Long-term receivables 706 1,184
Other 195 312
-------- --------
10,702 7,029
Less current portion (3,944) (2,257)
-------- --------
$ 6,758 $ 4,772
======== ========
</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.
TWENTY FOUR
<PAGE> 27
NOTE 4
PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
IN THOUSANDS 1996 1995
-------- --------
<S> <C> <C>
Equipment $ 6,800 $ 4,104
Furniture and fixtures 2,786 2,255
Leasehold improvements 5,280 4,115
Equipment under capital leases 395 395
Construction in process 6 1,065
Automobiles 176 176
-------- --------
15,443 12,110
Less accumulated depreciation and
amortization, including $384 and $372
respectively, relating to capital leases (7,802) (5,563)
-------- --------
$ 7,641 $ 6,547
======== ========
</TABLE>
NOTE 5
LONG-TERM OBLIGATIONS
<TABLE>
<CAPTION>
DECEMBER 31,
IN THOUSANDS 1996 1995
-------- --------
<S> <C> <C>
Capital lease obligations and other $ 301 $ 438
Deferred compensation plan 1,360 690
-------- --------
1,661 1,128
Less current portion -- (27)
-------- --------
$ 1,661 $ 1,101
======== ========
</TABLE>
Minimum lease payments required under non-cancelable operating leases
subsequent to December 31, 1996, are as follows:
<TABLE>
<CAPTION>
IN THOUSANDS OPERATING LEASES
- ------------ ----------------
<S> <C>
1997 2,753
1998 2,480
1999 1,358
2000 1,052
2001 926
Thereafter 1,578
--------
$ 10,147
========
</TABLE>
TWENTY FIVE
<PAGE> 28
The company leases office space, vehicles and various types of office
equipment. Rent expense related to operating leases totaled $3.1 million for
1996, $1.8 million for 1995, and $2.7 million for 1994 (which includes a $0.3
million charge for lease abandonment).
NOTE 6
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
<TABLE>
<CAPTION>
DECEMBER 31,
IN THOUSANDS 1996 1995
------ ------
<S> <C> <C>
Accounts payable and accrued liabilities $3,038 $2,989
Accrued payroll and bonuses 627 643
Accrued employee benefits 236 597
------ ------
$3,901 $4,229
====== ======
</TABLE>
NOTE 7
INCOME TAXES
Federal, state and foreign income tax net expense consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
IN THOUSANDS 1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Current tax expense
Federal $ 629 $1,861 $ 685
State 253 219 81
Foreign 711 1,647 990
------ ------ ------
1,593 3,727 1,756
------ ------ ------
Deferred tax expense (benefit)
Federal (336) 567 (1,483)
State (40) 54 (174)
------ ------ ------
(376) 621 (1,657)
------ ------ ------
$1,217 $4,348 $ 99
====== ====== ======
</TABLE>
The following reconciles income tax expense at the federal statutory rate to
the actual tax expense:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
IN THOUSANDS 1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Income taxes at statutory rate $1,034 $3,775 $ 50
Effect on taxes resulting from:
State taxes 49 273 (93)
Foreign taxes 87 264 39
Other (primarily
permanent differences) 47 36 103
------ ------ ------
$1,217 $4,348 $ 99
====== ====== ======
</TABLE>
TWENTY SIX
<PAGE> 29
Significant components of the company's net deferred tax assets
(liabilities) for federal and state income taxes are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
IN THOUSANDS 1996 1995
------ ------
<S> <C> <C>
Fixed assets $ 597 $ 195
Allowance for doubtful accounts 340 212
Foreign tax receivable 631 495
Computer software (382) 41
Research and development (58) (87)
Investment in affiliates (27) (27)
Accrued expenses 121 97
Goodwill 20 --
Deferred compensation 254 --
Other, net 15 123
------ ------
$1,511 $1,049
====== ======
</TABLE>
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>
YEAR ENDED DECEMBER 31,
IN THOUSANDS 1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Domestic sources $ 984 $ 6,726 $ (2,021)
Foreign sources 2,058 4,377 2,166
</TABLE>
NOTE 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 was $0.4
million, $0.3, and $0 million for 1996, 1995 and 1994, respectively.
In 1994, the company established a non-qualified deferred compensation
plan. Participation is limited to officers and key employees. Assets of the
plan were $1.4 million and accrued liabilities were $1.4 million at December
31, 1996 and are recorded in the long term section of the balance sheet.
The company has incentive compensation plans covering all full-time
employees and a separate incentive compensation program for certain key
executive officers, including Mr. Philip Thomas. Mr. Thomas' employment
agreement provides that, except for certain company-provided benefits, all of
his compensation is incentive-based. The aggregate incentive compensation paid
under these plans was $0, $3.2 million, and $1.1 million in 1996, 1995 and
1994, respectively. (See also Note 11 to the Consolidated Financial
Statements.)
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 current program also has contractual caps on the
total aggregate claims the company is obligated to fund in any plan year. The
company had an accrual for outstanding claims of approximately $0.1 million to
cover any loss incurred, including those not yet reported, through December 31,
1996.
NOTE 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
TWENTY SEVEN
<PAGE> 30
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. Payments of $0.2 million each were received in July 1996 and 1995.
The company has become subject to various claims and other legal matters
in the course of conducting its business. The company believes that such claims
and other legal matters should not have a material adverse effect on the
company's consolidated results of operations or financial condition.
NOTE 10
SEGMENT DATA AND SALES TO MAJOR CUSTOMERS
The company conducts its business primarily in two business segments, Business
Improvement Services and Software Solutions. Information regarding these two
segments follows:
<TABLE>
<CAPTION>
BUSINESS
IMPROVEMENT SOFTWARE
IN THOUSANDS SERVICES SOLUTIONS CORPORATE TOTAL
--------- --------- --------- --------
<S> <C> <C> <C> <C>
1996
Sales to unaffiliated clients $ 65,011 $ 7,018 $ -- $ 72,029
--------- --------- --------- --------
Operating income (loss) $ 20,898 $ (2,600) $ (15,508) $ 2,790
--------- --------- --------- --------
Identifiable assets $ 18,918 $ 6,590 $ 13,382 $ 38,890
1995
Sales to unaffiliated clients $ 63,392 $ 3,828 $ -- $ 67,220
--------- --------- --------- --------
Operating income (loss) $ 23,013 $ 370 $ (12,804) $ 10,579
--------- --------- --------- --------
Identifiable assets $ 22,979 $ 3,202 $ 13,976 $ 40,157
1994
Sales to unaffiliated clients $ 52,460 $ -- $ -- $ 52,460
--------- --------- --------- --------
Operating income (loss) $ 12,072 $ -- $ (12,511) $ (439)
--------- --------- --------- --------
Identifiable assets $ 15,436 $ -- $ 12,131 $ 27,567
</TABLE>
The company conducts its business primarily in three geographic areas,
North America, Europe and Asia. Information regarding these areas follows:
<TABLE>
<CAPTION>
IN THOUSANDS NORTH AMERICA EUROPE ASIA CORPORATE TOTAL
------------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
1996
Sales to unaffiliated clients $ 52,463 $ 18,357 $ 1,209 $ -- $ 72,029
--------- -------- -------- --------- --------
Operating income (loss) $ 14,956 $ 3,158 $ 184 $ (15,508) $ 2,790
--------- -------- -------- --------- --------
Identifiable assets $ 21,663 $ 3,693 $ 152 $ 13,382 $ 38,890
1995
Sales to unaffiliated clients $ 40,125 $ 27,095 $ -- $ -- $ 67,220
--------- -------- -------- --------- --------
Operating income (loss) $ 13,366 $ 10,017 $ -- $ (12,804) $ 10,579
--------- -------- -------- --------- --------
Identifiable assets $ 20,399 $ 5,782 $ -- $ 13,976 $ 40,157
1994
Sales to unaffiliated clients $ 29,792 $ 22,668 $ -- $ -- $ 52,460
--------- -------- -------- --------- --------
Operating income (loss) $ 1,373(1) $ 10,699 $ -- $ (12,511) $ (439)
--------- -------- -------- --------- --------
Identifiable assets $ 10,213 $ 5,223 $ -- $ 12,131 $ 27,567
</TABLE>
(1) INCLUDES $5.9 MILLION ALLOWANCE FOR DOUBTFUL ACCOUNTS.
TWENTY EIGHT
<PAGE> 31
The following table indicates those clients whose revenues were in excess
of 10% of consolidated revenues in any of the three years ended December 31,
1996. These clients are all in the Business Improvement services segment.
<TABLE>
<CAPTION>
IN THOUSANDS NORTH AMERICA % OF TOTAL EUROPE % OF TOTAL
------------- ---------- ------ ----------
<S> <C> <C> <C> <C>
Year Ended December 31, 1996
Client 1 $ 5,708 8% $ 1,937 3%
Client 2 $ 7,746 11% -- --
Client 3 $ 4,068 6% $ 5,305 7%
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%
</TABLE>
NOTE 11
RELATED PARTY TRANSACTIONS
PHILIP R. THOMAS - Principal Stockholder - Mr. Thomas did not earn incentive
compensation in 1996 and therefore executed a $1.5 million promissory note, due
September 25, 1997, for advances made to him. Mr. Thomas executed a similar
$1.1 million promissory note, repaid on September 5, 1995, for advances made to
him in 1994. These notes carry an interest rate of prime plus 1/4%.
The company has entered into a 25-year lease agreement with Mr. Thomas for
land on which the CEO Center is situated and a separate agreement to lease
guest accommodations situated on Mr. Thomas' adjacent property. These leases
provide for monthly payments of $12,960 through November 30, 2016. This rate
was determined by evaluating average occupancy rates and costs of comparable
facilities in the area. On December 31, 1995, the company prepaid the guest
accommodations lease in its entirety. The $0.9 million prepayment 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' 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.
Late in 1995, Mr. Thomas executed a $0.7 million promissory note to the
company, in connection with his guarantee of a client's account receivable.
On December 31, 1995 the note and all interest was prepaid and recorded as a
contribution to paid-in capital.
During 1994 the company engaged Integrated Security Systems, Inc.
("ISSI"), to supply security equipment and services at company offices.
Payments to ISSI totaled $0.4 million in 1994. Effective February 16, 1994,
ISSI entered into a five-year agreement with TGHC to provide the services of
Gerald K. Beckmann, director of the company, as chairman of the Board of ISSI
for $0.1 million annually. The agreement with TGHC was terminated effective May
1995. Mr. Thomas is the beneficial owner of 23.3% of ISSI's common stock.
The company has employed two sales executives whose focus is acquiring new
business through relationships in the investment banking community. Supporting
these executives, the company incurred costs of approximately $0.6 million,
$0.5 million and $0.4 million in 1996, 1995, and 1994, respectively. These
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. The
general partner of the Partnership a limited liability company, in which Mr.
Thomas, Mr. Beckmann, and Mr. Jim Dykes (company directors) 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 negotiating or approving contracts with any potential
client in which the Partnership holds or is negotiating an ownership interest.
TWENTY NINE
<PAGE> 32
OTHER AFFILIATES - In 1996 the company advanced Mr. Thomas Williams $0.2
million. Mr. Williams executed a promissory note due December 18, 2000. In
1994, the company advanced Mr. Beckmann $0.1 million. Mr. Beckmann executed
promissory notes due November 30, 1995 which were repaid, with interest, on
December 31, 1995. Mr. Williams' and Mr. Beckmann's notes carried an interest
rate equal to the rate the company would pay on its primary borrowing facility.
A summary of current receivables from affiliates follows:
<TABLE>
<CAPTION>
DECEMBER 31,
IN THOUSANDS 1996 1995
------ ------
<S> <C> <C>
Philip R. Thomas - incentive compensation advances $1,500 $ --
Other affiliates - long term $ 200 $ --
</TABLE>
A summary of transactions with affiliates follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
IN THOUSANDS 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Philip R. Thomas:
Real estate and other rentals paid to Mr. Thomas $262 $301 $332
Payments to ISSI for security systems -- 94 350
Payments to BERMAC for custom
computer software - prior to acquisition 388 139 592
Other Affiliates:
Loans to Gerald K. Beckmann -- -- 102
Loans to Thomas Williams 200 -- --
</TABLE>
NOTE 12
SELLING, GENERAL AND ADMINISTRATIVE
Included in 1994 SG&A expenses 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 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.
THIRTY
<PAGE> 33
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 remained current on their agreed-upon payment plan to the
company through July 1996 and then filed for bankruptcy protection. The
remaining receivable balance is fully reserved at December 31, 1996.
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. (See Note 11 to the Consolidated Financial Statements.)
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.
NOTE 13
FINANCING AGREEMENT
At December 31, 1996, the company maintained a $20 million revolving credit
agreement with Comerica bank which was increased on December 4, 1996 from a $6
million line of credit. 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 options. The company did not borrow funds under the revolving line of
credit agreements at any time during 1996. During 1996, 1995 and 1994 the
company paid no interest and paid commitment fees of $22,000, $23,000 and
$20,000, respectively.
NOTE 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.
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 1,367,625 Common Stock options outstanding at December 31, 1996,
271,319 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.
The company has elected to continue to account for stock options issued to
employees in accordance with APB opinion 25, "Accounting for Stock Issued to
Employees". In February 1996 the company granted options to officers and
employees at an exercise price lower than the market price of the stock at the
date of grant. The total related deferred compensation expense was $0.9 million
which will be recognized as the options vest. The total 1996 compensation cost
of $0.2 million was recorded as an increase in equity. 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.
Effective for the year ended December 31, 1996, the company was required
to adopt the disclosure portion of the Statement of Financial Accounting
Standard No. 123 (SFAS No. 123), "Accounting for Stock Based Compensation."
This statement requires the company to provide pro forma information regarding
net income applicable to common shareholders and net income per share as if
compensation cost for the company's stock options had been determined in
accordance with the fair value assumptions used for grants in 1996 and 1995 as
follows: dividend yield of 0% for all years; expected volatility of 65%; risk
free interest rates ranging from 5% to 7%; and expected lives ranging from 3.84
to 6 years. Had compensation
THIRTY ONE
<PAGE> 34
cost for the company's stock option plans been determined based on the fair
value at the grant date consistent with the provisions of SFAS No. 123, the
company's net income and earnings per share would have been reduced to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Net Income
As reported $1,825 $6,755
------ ------
Pro forma $1,245 $6,674
Earnings Per Share
As reported $ 0.29 $ 1.08
------ ------
Pro forma $ 0.20 $ 1.07
</TABLE>
A summary of the status of the Company's stock options to employees as of
December 31, 1996 and 1995 and changes in the years then ended is presented
below.
COMMON OPTION SHARES
<TABLE>
<CAPTION>
1996 1995
WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
---------- ---------------- ---------- ----------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 949,597 $10.16 1,004,686 $ 9.88
Granted 656,415 $ 9.60 180,000 $11.81
Exercised (196,120) $11.19 (170,251) $10.74
Forfeited (42,267) $ 9.11 (64,838) $ 8.86
---------- ------ ---------- ------
Outstanding at end of year 1,367,625 $ 9.78 949,597 $10.16
========== ====== ========== ======
Options exercisable at year end 680,761 $10.18 676,126 $10.67
========== ====== ========== ======
Weight average fair value of options
granted during the year $ 7.61 $ 7.27
</TABLE>
COMMON B OPTION SHARES
<TABLE>
<CAPTION>
1996 1995
WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
-------- ------ -------- ------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 203,202 $ 4.47 437,592 $ 2.81
Granted -- -- -- --
Exercised (180,622) $ 4.57 (223,790) $ 1.40
Forfeited (10,220) $ 1.57 (10,600) $ 1.90
-------- ------ -------- ------
Outstanding at end of year 12,360 $ 5.42 203,202 $ 4.47
======== ====== ======== ======
Options exercisable at year-end 12,360 $ 5.42 200,662 $ 4.46
======== ====== ======== ======
</TABLE>
THIRTY TWO
<PAGE> 35
The following table summarizes information about stock options outstanding
at December 31, 1996.
COMMON OPTIONS
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- -----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
CONTRACTUAL EXERCISE EXERCISE
EXERCISE PRICE OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
- ----------------- ----------- ----------- -------- ----------- --------
<C> <C> <C> <C> <C> <C>
$ 0.00 - $ 5.44 45,175 1.62 4.35 41,373 4.73
$ 6.00 - $ 7.94 614,167 6.61 7.42 193,807 6.73
$ 8.00 - $ 9.88 144,318 8.71 8.10 61,292 8.12
$ 10.00 - $ 13.75 384,276 2.95 12.13 324,262 12.32
$ 14.00 - $ 16.88 161,836 8.97 15.31 54,908 15.30
$ 17.00 - $ 19.13 17,853 9.49 18.52 5,119 18.54
--------- -------
1,367,625 680,761
========= =======
</TABLE>
COMMON B OPTIONS
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------- ------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
CONTRACTUAL EXERCISE EXERCISE
EXERCISE PRICE OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
- -------------- ----------- ----------- -------- ----------- --------
<C> <C> <C> <C> <C> <C>
$ 5.33 2,400 .02 5.33 2,400 5.33
$ 5.44 9,960 .17 5.44 9,960 5.44
------ ------
12,360 12,360
====== ======
</TABLE>
NOTE 15
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
IN THOUSANDS, EXCEPT SHARE DATA 1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Interest paid $ 1 $ 8 $ 62
Income taxes paid 4,176 1,920 2,255
Receipt of Class B Common Stock in payment of
exercise price of Common Stock options 273 1,845 330
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>
THIRTY THREE
<PAGE> 36
REPORT of Independent
public Accountants
[BDO LOGO]
Thomas Group, Inc.
Irving, Texas
We have audited the accompanying consolidated balance sheets of Thomas Group,
Inc. as of December 31, 1996 and 1995 and the related consolidated statements
of operations, stockholders' equity and cash flows for each of the three years
in the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Thomas
Group, Inc. at December 31, 1996 and 1995, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1996 in conformity with generally accepted accounting principles.
[BDO SIG]
Dallas, Texas
March 3, 1997
THIRTY FOUR
<PAGE> 37
CORPORATE INFORMATION
Corporate Headquarters Interlink Technologies, Inc.
5215 North O'Connor Boulevard 5221 North O'Connor Boulevard
Suite 2500 Suite 500
Irving, Texas 75039-3714 Irving, Texas 75039-3714
Telephone: (972) 869-3400 Telephone: (972) 501-3650
Fax: (972) 869-6501 Fax: (972) 501-3651
Dallas Office Germany
5221 North O'Connor Boulevard Thomas Group GmbH
Suite 500 Aculeum
Irving, Texas 75039-3714 Hahnstrasse 43
Telephone: (972) 869-4100 60528 Frankfurt am Main
Fax: (972) 401-4230 Germany
Telephone: + 49 (0) 69 665 38 0
Detroit Office Fax: + 49 (0) 69 665 38 299
201 W. Big Beaver Road
Suite 201 Singapore
Troy, Michigan 48084 Thomas Group Asia Pte. Ltd.
Telephone: (810) 528-5110 Level 36, Hong Leong Building
Fax: (810) 528-3271 16, Raffles Quay
Singapore 048581
CEO Center Republic of Singapore
3104 Highway 956 Telephone: + 65 321 8935
Ethel, Louisiana 70730 Fax: + 65 225 9060
Telephone: (504) 683-4557
Fax: (504) 683-4575
Bermac Communications, Inc.
5221 North O'Connor Boulevard
Suite 500
Irving, Texas 75039-3714
Telephone: (972) 501-3600
Fax: (972) 501-3601
THIRTY FIVE
<PAGE> 38
DIRECTORS AND EXECUTIVE OFFICERS J. Fred Bucy
Director
Philip R. Thomas Retired President and
Chairman of the Board and Chief Executive Officer
Chief Executive Officer Texas Instruments Incorporated
Alex W. Young Hollis L. Caswell
President, Chief Operating Officer Director
and Director Retired Senior Vice President,
Unisys Corp.
Leland L. Grubb, Jr.
Vice President John T. Chain
Chief Financial Officer Director
and Treasurer, Retired Executive Vice President
President, Automotive Business Unit Burlington Northern Railroad
Herbert D. Locke James E. Dykes
Vice President, Director
President President and
Asian/Pacific Business Unit Chief Operating Officer
Intellon Corporation
J. Thomas Williams
Vice President CORPORATE INFORMATION
President, European Business Unit TRANSFER AGENT
Harris Trust and Savings Bank
Roger A. Crabb 5050 Renaissance Tower
Legal Counsel and Secretary 1201 Elm Street
Dallas, Texas 75270
Donald J. Almquist Telephone: (214) 658-0200
Director Fax: (214) 658-0222
Retired Chairman, President and
Chief Executive Officer LEGAL COUNSEL
Delco Electronics Corporation Haynes & Boone, L.L.P.
901 Main Street
Gerald K. Beckmann 3100 NationsBank Plaza
Director Dallas, Texas 75202-3789
President and
Chief Executive Officer AUDITOR
Integrated Security Systems, Inc. BDO Seidman, L.L.P.
2323 Bryan Street
Suite 1800
Dallas, Texas 75201
FORM 10-K AND OTHER FINANCIAL
INFORMATION REQUESTS
A copy of the Annual Report on Form 10-K as filed with the Securities and
Exchange Commission and other financial information is available without charge
upon written request to Investor Relations, Thomas Group, Inc., 5215 N.
O'Connor Boulevard, Suite 2500, Irving, Texas 75039
ANNUAL MEETING
The Annual Meeting of Shareholders will be held on May 15, 1996 at 9:00 a.m.
Central Time in the Company's offices, 5215 N. O'Connor Boulevard, Suite 2500,
Irving, Texas 75039-3714
STOCK MARKET INFORMATION AND RELATED SHAREHOLDER MATTERS
The Company's Common Stock trades on the NASDAQ National Market System under
the symbol TGIS. At December 31, 1996, the company had approximately 133
holders of record of its Common Stock. The Company has paid no cash dividends
and the Company intends to retain future earnings in order to provide funds for
use in the operation and expansion of the business.
THIRTY SIX
<PAGE> 39
[THOMAS GROUP LOGO]
THIRTY SEVEN
<PAGE> 1
EXHIBIT 21
PAGE 1 OF 1
THOMAS GROUP, INC.
SUBSIDIARIES OF THE COMPANY
<TABLE>
<CAPTION>
SUBSIDIARY JURISDICTION OF INCORPORATION
- ---------- -----------------------------
<S> <C>
Thomas Group GmbH Germany
Thomas Group (Switzerland) GmbH Switzerland
Thomas Group of Louisiana, Inc. Delaware
Thomas Group Acquisition Corp. (dba Delaware
Interlink Technologies)
Thomas Group Asia Pte. Ltd. Singapore
Bermac Communications, Inc. Delaware
</TABLE>
<PAGE> 1
EXHIBIT 23
PAGE 1 OF 1
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Thomas Group, Inc.
Irving, Texas
We hereby consent to the incorporation by reference in the Prospectus
constituting a part of the Registration Statement on Form S-8/S-3 (Registration
No. 33-71752) of our report dated March 3, 1997, relating to the consolidated
financial statements of Thomas Group, Inc. appearing in the Company's Annual
Report on Form 10-K for the year ended December 31, 1996.
BDO SEIDMAN, LLP
Dallas, Texas
March 3, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000900017
<NAME> THOMAS GROUP, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 5,711
<SECURITIES> 0
<RECEIVABLES> 10,267
<ALLOWANCES> 306
<INVENTORY> 0
<CURRENT-ASSETS> 21,422
<PP&E> 7,641
<DEPRECIATION> 0
<TOTAL-ASSETS> 38,890
<CURRENT-LIABILITIES> 5,717
<BONDS> 0
0
0
<COMMON> 62
<OTHER-SE> 31,450
<TOTAL-LIABILITY-AND-EQUITY> 38,890
<SALES> 0
<TOTAL-REVENUES> 72,029
<CGS> 0
<TOTAL-COSTS> 48,401
<OTHER-EXPENSES> 20,836
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (252)
<INCOME-PRETAX> 3,042
<INCOME-TAX> 1,217
<INCOME-CONTINUING> 1,825
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,825
<EPS-PRIMARY> 0.29
<EPS-DILUTED> 0
</TABLE>
