<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-22010
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THOMAS GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 72-0843540
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5215 NORTH O'CONNOR BOULEVARD
SUITE 2500
IRVING, TEXAS 75039
(Address of principal executive offices,
including zip code)
(214) 869-3400
(Registrant's telephone number, including area code)
-----------
NONE
(Former name, former address and former fiscal year,
if changed since last report)
-----------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of October 31, 1997, the following number of shares of the registrant's
stock were outstanding:
<TABLE>
<CAPTION>
<S> <C>
Common Stock 5,950,589
Class B Common Stock 176,594
---------
Total 6,127,183
=========
</TABLE>
1
<PAGE> 2
THOMAS GROUP, INC.
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE NO.
<S> <C>
Item 1 - Financial Statements
Consolidated Balance Sheets, September 30, 1997 and December 31, 1996 ......................... 3
Consolidated Statements of Operations for the Three Months and Nine Months Ended
September 30, 1997 and 1996 ............................................................... 4
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1997 and
1996 ...................................................................................... 5
Notes to Consolidated Financial Statements .................................................... 6
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 9
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K .............................................................. 14
</TABLE>
2
<PAGE> 3
THOMAS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS September 30, December 31,
1997 1996
-------- --------
<S> <C> <C>
Current Assets
Cash and cash equivalents ........................................ $ 9,267 $ 5,711
Trade accounts receivable, net of allowances of $306 ............. 11,368 8,904
Unbilled receivables ............................................. 1,861 1,363
Accounts and notes receivable - affiliate ........................ 2,565 1,500
Other ............................................................ 2,730 3,944
-------- --------
Total Current Assets ........................................... 27,791 21,422
Net Property and Equipment ....................................... 8,429 7,641
Capitalized Software Development Costs ........................... 2,807 3,069
Other Assets ..................................................... 7,645 6,758
-------- --------
$ 46,672 $ 38,890
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued liabilities ......................... $ 5,312 $ 3,901
Income taxes payable ............................................. 2,609 1,420
Advance payments ................................................. 265 396
Current portion of long-term obligations ......................... 275 --
-------- --------
Total Current Liabilities ...................................... 8,461 5,717
Long-Term Obligations .............................................. 2,584 1,661
-------- --------
Total Liabilities .............................................. 11,045 7,378
-------- --------
Commitments and Contingencies
Stockholders' Equity
Common Stock, $.01 par value; 12,500,000 shares authorized;
6,259,842 and 6,179,117 shares issued .......................... 62 62
Class B Common Stock, $.01 par value; 1,200,000 shares
authorized; 176,594 and 185,189 shares issued and outstanding... 2 2
Additional paid-in capital ....................................... 21,320 20,143
Retained earnings ................................................ 19,079 15,570
Cumulative translation adjustment ................................ (417) (32)
Treasury stock, 312,391 and 295,991 shares of Common, at cost .... (4,419) (4,233)
-------- --------
Total Stockholders' Equity ..................................... 35,627 31,512
-------- --------
$ 46,672 $ 38,890
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
THOMAS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues ................................ $ 19,493 $ 17,327 $ 57,004 $ 56,478
Cost of Sales ..................... 11,605 11,817 35,089 35,722
---------- ---------- ---------- ----------
Gross Margin ............................ 7,888 5,510 21,915 20,756
Selling, General and Administrative.. 5,725 5,043 16,139 14,172
---------- ---------- ---------- ----------
Operating Income ........................ 2,163 467 5,776 6,584
Interest Income, Net .................... 35 90 103 224
---------- ---------- ---------- ----------
Income Before Income Taxes .............. 2,198 557 5,879 6,808
Income Taxes ............................ 897 212 2,369 2,676
---------- ---------- ---------- ----------
Net Income .............................. $ 1,301 $ 345 $ 3,510 $ 4,132
========== ========== ========== ==========
Earnings Per Common and Common
Equivalent Share .................... $ 0.20 $ 0.05 $ 0.56 $ 0.65
Weighted Average Shares and Share
Equivalents Outstanding ............. 6,392,031 6,339,616 6,308,096 6,368,045
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
THOMAS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
1997 1996
------- --------
<S> <C> <C>
Cash Flows From Operating Activities
Net income ............................................................................. $ 3,510 $ 4,132
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization ............................................... 2,889 2,320
Allowance for doubtful accounts ............................................. -- (104)
Provision for expatriate costs .............................................. 190 (106)
Other ....................................................................... (30) 225
Collection of income tax refund ............................................. 1,800 --
Deferred taxes .............................................................. (839) (762)
Change in operating assets and liabilities
Trade accounts receivable .................................................. (2,710) 903
Unbilled receivables ....................................................... (498) 1,499
Other assets ............................................................... (499) (563)
Accounts payable and accrued liabilities ................................... 1,600 61
Advance payments ........................................................... (132) 77
Income taxes payable ....................................................... 1,492 (255)
------- --------
Net Cash Provided By Operating Activities ............................ 6,773 7,427
------- --------
Cash Flows Used In Investing Activities
Acquisition of subsidiary .............................................................. -- (2,308)
Decrease in short-term receivables...................................................... -- 598
Capital expenditures.................................................................... (2,498) (2,591)
Capitalization of software development cost............................................. (617) (1,431)
Acquisition of intangibles ............................................................. (150) (250)
------- --------
Net Cash Used In Investing Activities ................................ (3,265) (5,982)
------- --------
Cash Flows From Financing Activities
Purchase of treasury stock ............................................................. (186) (3,140)
Net proceeds from exercise of stock options ............................................ 397 195
Advances - computer line of credit ..................................................... 871 --
Repayment of other long-term obligations ............................................... -- (86)
Net advances to affiliates ............................................................. (865) (1,331)
Repayment of obligations to affiliates ................................................. -- (1,027)
------- --------
Net Cash Provided By (Used In) Financing Activities .................. 217 (5,389)
------- --------
Effect of Exchange Rate Changes on Cash ................................................ (169) (319)
------- --------
Net Increase (Decrease) In Cash and Cash Equivalents ..................................... 3,556 (4,263)
Cash and Cash Equivalents
Beginning of period ................................................................. 5,711 11,273
------- --------
End of period ....................................................................... $ 9,267 $ 7,010
======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
THOMAS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The unaudited consolidated financial statements include all adjustments,
which include only normal recurring adjustments, which are, in the opinion of
management, necessary to present fairly the results of operations of the company
for the interim periods presented. These financial statements should be read in
conjunction with the consolidated financial statements and notes thereto and
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in the company's 1996 Annual Report to Stockholders. The
results of operations for the three and nine month periods ended September 30,
1997 are not necessarily indicative of the results of operations for the entire
year ending December 31, 1997.
2. Earnings Per Share - Earnings per share amounts are based on the
weighted average number of shares and dilutive share equivalents outstanding
during the respective periods. Fully diluted earnings per share and share
equivalents are not presented because the result is not materially different.
3. Significant Clients - There were no clients from which the company
earned in excess of 10% of its total revenues in the nine months ended September
30, 1997. The company earned in excess of 10% of its total revenues from two
clients in the nine months ended September 30, 1996. Revenues from the two
significant clients in the nine months ended September 30, 1996 totaled $12.9
million or 23% of revenues.
4. Summary of Significant Accounting Policies
Unbilled Receivables - Fixed fees are recognized when earned, generally on
a straight line basis over the life of the contract. Although fixed fee
recognition generally coincides with billings, as an accommodation to its
clients the company may structure fixed fee billings to increase in the latter
stages of a program. In such instances, straight line recognition results in
unbilled receivables. Unbilled receivables are reduced as the program proceeds
to its latter stages and the cumulative billings more closely approximate
aggregate fees recognized.
Recent Accounting Standards - The Financial Accounting Standards Board
recently adopted Statement of Financial Accounting Standards No. 128, Earnings
Per Share (SFAS 128). SFAS 128 requires a calculation of book "Basic" and
"Diluted" earnings per share. Basic earnings per share includes no dilution. The
company will adopt the standard effective December 31, 1997. Implementation of
SFAS 128 in the first nine months of 1997 would not have had a material effect
on the reported earnings per share.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS
130), which establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income is defined
to include all changes in equity except those resulting from investments by
owners and distributions to owners. SFAS 130 is effective for financial
statements for periods beginning after December 15, 1997 and requires
comparative information for earlier years to be restated. Because of the recent
issuance of this standard, management has been unable to fully evaluate the
impact, if any, the standard may have on future financial statement disclosures.
Results of operations and financial position, however, will be unaffected by
implementation of this standard.
Reclassifications - Certain income statement amounts have been reclassified
from the previously reported financial statements in order to conform with the
current presentation.
6
<PAGE> 7
THOMAS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. 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. This note has been
amended to extend the due date to January 25, 1998. This note carries an
interest rate of prime plus 1/4.
A summary of receivables from affiliates follows:
<TABLE>
<CAPTION>
-----------------------------------------------
SEPTEMBER 30, 1997 DECEMBER 31, 1996
-------------------- -------------------
<S> <C> <C>
Philip R. Thomas - incentive compensation advances $ 2,565 $ 1,500
Other affiliates - long term 229 200
</TABLE>
6. Revolving Credit Agreement - The company maintains a $20 million
revolving credit agreement with Comerica Bank - Texas. This agreement expires in
December 2003 and includes a call option in December 2001. Additionally, terms
of the agreement provide for a $1 million per quarter reduction in any
outstanding balances after the first two years. Loans under this agreement bear
interest at the prime rate or other similar interest options. The company
utilized the credit line during the first nine months of 1997 to meet working
capital requirements. The average daily balance outstanding under the credit
line was $0.2 million and total interest paid, at an annual rate of 8.25%, was
less than $0.1 million.
7. Segment Data - Information regarding the company's two business segments
follows:
<TABLE>
<CAPTION>
BUSINESS
IMPROVEMENT
SERVICES SOFTWARE SOLUTIONS CORPORATE TOTAL
---------------------------------------------------------
<S> <C> <C> <C> <C>
THREE MONTHS ENDED:
SEPTEMBER 30, 1997
Sales to unaffiliated clients $18,456 $ 1,037 $ 19,493
Operating income (loss) $ 7,536 $(1,314) $ (4,059) $ 2,163
SEPTEMBER 30, 1996
Sales to unaffiliated clients $15,834 $ 1,493 $ 17,327
Operating income (loss) $ 4,521 $ (884) $ (3,170) $ 467
NINE MONTHS ENDED:
SEPTEMBER 30, 1997
Sales to unaffiliated clients $52,468 $ 4,536 $ 57,004
Operating income (loss) $19,432 $(3,307) $(10,349) $ 5,776
SEPTEMBER 30, 1996
Sales to unaffiliated clients $50,734 $ 5,744 $ 56,478
Operating income (loss) $17,144 $(1,038) $ (9,522) $ 6,584
</TABLE>
8. Software Development Costs - Due to declining sales at the company's
software subsidiaries, in April 1997 the company began an evaluation of
alternatives for one of the subsidiaries' software products. This evaluation has
led the company, beginning in the second quarter of 1997, to revise the
amortization period on this product from 36 to 21 months, which reflects the
company's estimate of the remaining economic life of the product. This
adjustment
7
<PAGE> 8
THOMAS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
to the amortization was the result of a strategic decision to focus the
subsidiaries' efforts on the alternatives to this product. The company intends
to continue to market, provide technical support and customization, and develop
minor enhancements to the existing product.
9. Supplemental Disclosure of Cash Flow Information
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1997 1996
---------- ----------
<S> <C> <C>
Interest paid $ 110 $ 22
Income taxes paid $ 1,660 $ 3,549
</TABLE>
8
<PAGE> 9
THOMAS GROUP, INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The company derives its revenues from monthly fixed and incentive (or
performance-oriented) fees for the implementation of Total Cycle Time(R)
programs. Performance-oriented fees are tied to improvements in a variety of
client performance measures typically involving response time, asset
utilization, productivity and profitability.
The following table sets forth the statements of operations as a percentage of
revenues.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------- ---------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues...................................... 100.0 100.0 100.0 100.0
Cost of Sales............................ 59.5 68.2 61.6 63.3
----- ----- ----- -----
Gross Margin................................... 40.5 31.8 38.4 36.7
Selling, General and Administrative...... 29.4 29.1 28.3 25.1
----- ----- ----- -----
Operating Income.............................. 11.1 2.7 10.1 11.6
Interest Income, Net.......................... .2 .5 .2 .4
----- ----- ----- -----
Income Before Income Taxes.................... 11.3 3.2 10.3 12.0
Income Taxes.................................. 4.6 1.2 4.2 4.7
----- ----- ----- -----
Net Income.................................... 6.7 2.0 6.1 7.3
===== ===== ===== =====
</TABLE>
The following table sets forth the company's revenues by geographic and industry
segment:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Business Improvement Programs
United States....................... $13,004 $11,132 $38,682 $35,368
Europe.............................. 3,908 4,281 10,556 14,360
Asia/Pacific........................ 1,544 421 3,230 1,006
------- ------- ------- -------
Total Business Improvement Programs.... 18,456 15,834 52,468 50,734
Software Solutions..................... 1,037 1,493 4,536 5,744
------- ------- ------- -------
Total Revenue.......................... $19,493 $17,327 $57,004 $56,478
======= ======= ======= =======
</TABLE>
9
<PAGE> 10
THOMAS GROUP, INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1996
REVENUE - Revenue increased 13% in the third quarter of 1997 over the third
quarter of 1996. Business Improvement Program revenue increased 17% over the
third quarter of 1996. This increase consisted of a $1.1 million (10%) increase
in fixed fee revenue and a $1.5 million (33%) increase in incentive revenue.
Fixed fee and incentive revenues represent 66% and 34%, respectively, of
Business Improvement Program revenue in the third quarter of 1997 and 71% and
29%, respectively, of Business Improvement Program revenue in the third quarter
of 1996.
The United States component of Business Improvement Program revenue increased
17% as a result of 1996 investments in business development. European Business
Improvement Program revenue declined 9% due to the strengthening of the U.S.
dollar against the Swiss Franc and German Mark. Asia/Pacific revenue increased
267% for the comparable quarters as a result of two new programs and the
expansion of an existing program in this region.
Revenue from Software Solutions decreased 30% in the third quarter of 1997 as
compared to the third quarter of 1996 primarily as a result of decreased closing
of software license contracts.
COST OF SALES - Cost of Sales includes all costs associated with the generation
of revenue. Such costs include certain personnel and facilities costs,
program-related travel and entertainment, and hardware costs.
Cost of sales was $11.6 million in the third quarter of 1997, a 2% decrease,
compared to $11.8 million in the third quarter of 1996. This decrease is
attributable to general cost containment measures undertaken in the beginning of
1997. These measures include the closing of two regional U.S. offices: Princeton
and San Jose.
GROSS MARGIN - Total company gross margin was 41% in the third quarter of 1997
compared to 32% in the third quarter of 1996. Business Improvement Program gross
margin was 45% in the third quarter of 1997 versus 36% in the third quarter of
1996. This improvement was primarily the result of higher incentive revenue as a
percentage of total revenue in the third quarter of 1997 compared to the third
quarter of 1996, as well as cost containment measures mentioned earlier.
Software Solutions gross margin was a negative 37% in the third quarter of 1997
and a negative 9% in the third quarter of 1996. This decrease is due primarily
to fewer license fee and hardware sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Selling, general and
administrative expenses consist of all operating expenses not directly
associated with the generation of revenue. A majority of selling, general, and
administrative expenses are for corporate personnel (including corporate
officers), non-program-related travel and entertainment, corporate facilities
costs, and professional and legal costs.
Selling, general and administrative expense as a percentage of total revenue
increased slightly to 30% in the third quarter of 1997 from 29% in the third
quarter of 1996: a $0.7 million quarter to quarter increase. This increase was
primarily the result of $0.3 million spending related to upgrading information
systems infrastructure and $0.4 million in CEO incentive compensation.
10
<PAGE> 11
THOMAS GROUP, INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
OTHER - The company's effective tax rate was 41% in the third quarter of 1997
and 38% in the third quarter of 1996.
RESULTS OF OPERATIONS - Net income in the third quarter of 1997 was $1.3
million, or $0.20 per share, an increase of $1.0 million compared to $0.3
million, or $0.05 per share, in the third quarter of 1996.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1996
REVENUE - Revenue in the first nine months of 1997 was 1% higher than revenue in
the first nine months of 1996. Revenue from Business Improvement Programs
increased 3% from the first nine months of 1996. This increase consisted of a
$3.4 million (10%) increase in fixed fee revenue offset by a $1.6 million (9%)
decline in incentive revenue. Fixed fee and incentive revenues represent 73% and
27%, respectively, of Business Improvement Program revenue in the first nine
months of 1997, and 69% and 31% of Business Improvement Program revenue in the
first nine months of 1996.
United States Business Improvement Program revenue increased 9% as a result of
1996 investments in business development. European Business Improvement Program
revenue declined 26% due to fewer active programs and the strengthening of the
U.S. dollar against the Swiss Franc and German Mark. Asia/Pacific revenue
increased 221% in the first nine months of 1997 compared to the first nine
months of 1996 as the number and size of active programs increased.
Software Solutions revenue decreased 21% in the first nine months of 1997
compared to the first nine months of 1996 primarily as a result of lower
software license revenue.
COST OF SALES - Cost of sales was $35.1 million in the first nine months of 1997
compared to $35.7 million in the first nine months of 1996. This decrease is
attributable to improved cost control in the Business Improvement Program
segment which resulted in decreases of $0.9 million. This decrease was partially
offset by the Software Solutions segment increases of $0.2 million, comprised
primarily of hardware purchases.
GROSS MARGIN - Total company gross margin was 38% in the first nine months of
1997 compared to 37% in the first nine months of 1996. Business Improvement
Program gross margin was 43% in the first nine months of 1997 versus 40% in the
first nine months of 1996. This improvement was primarily the result of improved
cost control measures.
Software Solutions gross margin was a negative 16% for the first nine months of
1997 and a positive 12% in the first nine months of 1996. This decline was the
result of higher hardware content in Software Solutions revenue and the overall
decline in software business volume.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES - Selling, general and
administrative expense as a percentage of revenues increased to 28% in the first
nine months of 1997 from 25% in the first nine months of 1996. Selling, general
and administrative expense was $16.2 million in the first nine months of 1997, a
14% increase, compared to $14.2 million in the first nine months of 1996. This
$2.0 million increase was primarily the result of a $0.8 million increase in
business development expenses and a $0.8 million increase in information systems
spending.
11
<PAGE> 12
THOMAS GROUP, INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
OTHER - The company's effective tax rate was 40% in the first nine months of
1997 and 39% in the first nine months of 1996.
RESULTS OF OPERATIONS - Net income in the first nine months of 1997 was $3.5
million or $0.56 per share, a decrease of $0.6 million compared to $4.1 million
or $.65 per share in the first nine months of 1996.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased by $3.6 million in the first nine months of
1997 compared to a decrease of $4.3 million in the first nine months of 1996. A
discussion of the components of these changes follows:
CASH FLOWS FROM OPERATING ACTIVITIES - Net cash flow provided by operating
activities was $6.8 million. Significant items positively affecting operating
activities cash flow include: net income of $3.5 million; depreciation and
amortization of $2.9 million; collection of an income tax refund of $1.8
million; and increases in accounts payable of $1.6 million. The principal item
negatively affecting cash flow is a $2.7 million increase in trade accounts
receivable and the $0.5 million increase in unbilled receivables. The primary
cause of the increase in trade accounts receivable is the increase in quarterly
revenues in the third quarter of 1997 over the fourth quarter of 1996. Days
sales outstanding decreased from 50 days at December 31, 1996 to 43 days at
September 30, 1997.
CASH FLOWS FROM INVESTING ACTIVITIES - Capital expenditures of $2.5 million in
1997 have related primarily to computer hardware and network upgrades and office
infrastructure enhancements, while those in the first nine months of 1996
related primarily to CEO Center expansion. Capitalized software development
costs of $0.6 million in 1997 includes $0.3 million in purchased software and
$0.3 million in capitalized internal development costs. Capitalized software
development costs in the first nine months of 1996 are the result of a $1
million payment to the former owners of Interlink for developed software.
CASH FLOWS FROM FINANCING ACTIVITIES - Net cash flows from financing activities
was $0.2 million in the first nine months of 1997. In the first nine months of
1996, the company spent $3.1 million to purchase 226,600 treasury shares at an
average price per share of $13.68. Additionally, the company made a payment of
$1.0 million to an officer of the company for the purchase of a suite at Texas
Stadium and for prepaid rent for its CEO Center facility.
In 1994 the Board of Directors approved a stock repurchase plan for up to
250,000 shares. The company purchased 7,000 shares at an average price per share
of $10.71 in 1994 and 226,600 shares at an average price per share of $14.74 in
1996. The company completed the purchase of the remaining 16,400 shares in the
second quarter of 1997, at an average price per share of $11.37. The average
price per share of treasury shares at September 30, 1997 is $14.15.
12
<PAGE> 13
THOMAS GROUP, INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
The company has a $20 million revolving credit facility with Comerica Bank -
Texas. 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.
In addition the company has a $1.0 million credit facility with Comerica Bank -
Texas for the purchase of computer equipment. The company made draws of $0.9
million on this facility to purchase computer equipment.
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.
13
<PAGE> 14
THOMAS GROUP, INC.
PART II - OTHER INFORMATION
<TABLE>
<CAPTION>
SEQUENTIAL
PAGE NO.
<S> <C> <C>
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
11 - Statement Regarding Computation of Earnings Per Share.......................... 15
(b) Reports on Form 8-K for the Quarter Ending September 30, 1997 - None.
</TABLE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THOMAS GROUP, INC.
--------------------
Registrant
October 11, 1997 /s/ Philip R. Thomas
---------------- --------------------
Date Philip R. Thomas
Chairman and Chief Executive Officer
October 11, 1997 /s/ Mitchell D. Bohn
---------------- --------------------
Date Mitchell D. Bohn
Vice President, Chief Financial Officer
and Treasurer
(Chief Accounting Officer)
14
<PAGE> 15
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
11 Statement Regarding Computation of Earnings Per Share
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 11
PAGE 1 OF 3
THOMAS GROUP, INC.
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Primary EPS
Weighted Average Shares Outstanding .............. 6,102,645 5,938,132 6,085,812 5,965,086
Weighted Average Options Outstanding (Table I) ... 289,286 391,573 222,284 398,041
Weighted Average Warrants Outstanding (Table II).. 4,725 9,911 -- 4,918
---------- ---------- ---------- ----------
Weighted Average Shares and Share Equivalents
Outstanding .................................. 6,392,031 6,339,616 6,308,096 6,368,045
========== ========== ========== ==========
Net Income ....................................... $1,301,000 $ 345,000 $3,510,000 $4,132,000
========== ========== ========== ==========
Earnings Per Common and Common Equivalent Share... $ 0.20 $ 0.05 $ 0.56 $ 0.65
========== ========== ========== ==========
FULLY-DILUTED EPS
Weighted Average Shares Outstanding .............. 6,102,645 5,938,132 6,085,812 5,965,086
Weighted Average Options Outstanding (Table I) ... 326,048 391,248 314,021 406,172
Weighted Average Warrants Outstanding (Table II).. 6,311 9,911 3,154 4,918
---------- ---------- ---------- ----------
Weighted Average Shares and Share Equivalents
Outstanding .................................. 6,435,003 6,339,291 6,402,987 6,376,176
========== ========== ========== ==========
Net Income ....................................... $1,301,000 $ 345,000 $3,510,000 $4,132,000
========== ========== ========== ==========
Earnings Per Common and Common Equivalent Share... $ 0.20 $ 0.05 $ 0.55 $ 0.65
========== ========== ========== ==========
</TABLE>
15
<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>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- -------------------------------
1997 1996 1997 1996
------------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
PRIMARY EPS
Weighted Average Options Outstanding ............... 1,490,456 1,215,565 1,439,447 1,261,101
Average Exercise Price ............................. $ 9.649 $ 9.537 $ 9.645 $ 9.3545
------------ ------------ ------------ ------------
Exercise Proceeds .................................. $ 14,382,040 $ 11,592,984 $ 13,884,106 $ 11,797,008
============ ============ ============ ============
Average FMV Per Share During Period ................ $ 12.4241 $ 16.0595 $ 10.3837 $ 15.5881
Shares Repurchased (limited to 20% of shares
outstanding) ................................... (1,157,592) (722,240) (1,217,163) (744,668)
Shares Repurchased Assuming Utilization of Tax
Benefit on Exercise of Non-Qualified Options(1). (43,478) (102,077) (110,261)
------------ ------------ ------------ ------------
Total Shares Repurchased ........................... (1,201,070) (824,317) (1,217,163) (854,929)
------------ ------------ ------------ ------------
Incremental Shares from Options .................... 289,386 391,248 222,284 406,172
============ ============ ============ ============
FULLY-DILUTED EPS
Weighted Average Options Outstanding ............... 1,490,456 1,215,565 1,439,447 1,261,101
Average Exercise Price ............................. $ 9.649 $ 9.537 $ 9.645 $ 9.3545
------------ ------------ ------------ ------------
Exercise Proceeds .................................. $ 14,382,040 $ 11,592,984 $ 13,884,106 $ 11,797,008
============ ============ ============ ============
FMV Per Share End of Period ........................ $ 12.875 $ 16.0595 (2) $ 12.875 $ 16.0595 (2)
Shares Repurchased (limited to 20% of shares
outstanding) .................................. (1,116,591) (721,877) (1,078,759) (756,796)
Shares Repurchased Assuming Utilization of Tax
Benefit on Exercise of Non-Qualified
Options(1)..................................... (37,817) (102,114) (46,667) (106,265)
------------ ------------ ------------ ------------
Total Shares Repurchased ........................... (1,164,408) (823,991) (1,125,426) (863,061)
------------ ------------ ------------ ------------
Incremental Shares from Options .................... 326,048 391,573 314,021 398,041
============ ============ ============ ============
</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 period was less than the average FMV during the period.
Average FMV per share was therefore used for fully-diluted computation.
16
<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>
THREE MONTHS ENDED Nine Months Ended
SEPTEMBER 30, September 30,
-------------------------- --------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
PRIMARY EPS
Weighted Average Warrants Outstanding.. 225,000 175,000 200,000 175,000
Exercise Price ........................ $ 14.283 $ 15.15 $ 14.66 $ 15.15
---------- ---------- ---------- ----------
Exercise Proceeds ..................... $3,213,750 $2,651,250 $2,932,500 $2,651,250
========== ========== ========== ==========
Average FMV Per Share During Period ... $ 12.4241 $ 16.0595 $ 10.3837 $ 15.5881
Shares Repurchased .................... 45,275 165,089 -- 170,082
---------- ---------- ---------- ----------
Incremental Shares from Warrants ...... 4,725 9,911 -- 4,918
========== ========== ========== ==========
FULLY-DILUTED EPS
Weighted Average Warrants Outstanding.. 225,000 175,000 200,000 175,000
Exercise Price ........................ $ 14.283 $ 15.15 $ 14.66 $ 15.15
---------- ---------- ---------- ----------
Exercise Proceeds ..................... $3,213,750 $2,651,250 $2,932,500 $2,651,250
========== ========== ========== ==========
FMV Per Share End of Period ........... $ 12.875 $ 15.5881 (1) $ 12.875 $ 15.5881 (1)
Shares Repurchased .................... 43,689 165,089 21,846 170,082
---------- ---------- ---------- ----------
Incremental Shares from Warrants ...... 6,311 9,911 3,154 4,918
========== ========== ========== ==========
</TABLE>
17
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<CIK> 0000900017
<NAME> THOMAS GROUP, INC
<MULTIPLIER> 1,000
<CURRENCY> U. S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 9,267
<SECURITIES> 0
<RECEIVABLES> 11,674
<ALLOWANCES> 306
<INVENTORY> 0
<CURRENT-ASSETS> 27,791
<PP&E> 8,429
<DEPRECIATION> 0
<TOTAL-ASSETS> 46,672
<CURRENT-LIABILITIES> 8,461
<BONDS> 0
0
0
<COMMON> 62
<OTHER-SE> 35,565
<TOTAL-LIABILITY-AND-EQUITY> 46,672
<SALES> 0
<TOTAL-REVENUES> 57,004
<CGS> 35,089
<TOTAL-COSTS> 51,228
<OTHER-EXPENSES> (103)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 5,879
<INCOME-TAX> 2,369
<INCOME-CONTINUING> 3,510
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,510
<EPS-PRIMARY> 0.56
<EPS-DILUTED> 0
</TABLE>
