<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------
FORM 10-Q
-----------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-22010
-----------
THOMAS GROUP, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 72-0843540
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
</TABLE>
5221 NORTH O'CONNOR BOULEVARD SUITE 500
IRVING, TX 75039-3714
(Address of principal executive offices, including zip code)
(972) 869-3400
(Registrant's telephone number, including area code)
-----------
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 April 30, 1999 the following number of shares of the registrant's
stock were outstanding:
<TABLE>
<S> <C>
Common Stock 4,896,219
Class B Common Stock 7,447
---------
Total 4,903,666
=========
</TABLE>
1
<PAGE> 2
THOMAS GROUP, INC.
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
PAGE NO.
<S> <C> <C>
Item 1 - Financial Statements
Consolidated Balance Sheets, March 31, 1999 and December 31, 1998........................................... 3
Consolidated Statements of Operations for the Three Months Ended March 31, 1999 and 1998.................... 4
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1999 and 1998.................... 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............................................................................ 13
</TABLE>
2
<PAGE> 3
ITEM I - FINANCIAL STATEMENTS
THOMAS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
ASSETS 1999 1998
--------- ------------
<S> <C> <C>
Current Assets
Cash and cash equivalents ................................................... $ 9,423 $ 6,376
Trade accounts receivable, net of allowances of $396 and $396 ............... 9,016 11,239
Unbilled receivables ........................................................ 542 740
Income tax receivable ....................................................... 1,427 --
Deferred tax asset .......................................................... 2,424 2,331
Other assets ................................................................ 609 405
-------- --------
Total Current Assets ..................................................... 23,441 21,091
-------- --------
Property and Equipment, net .................................................... 3,307 3,627
Deferred Tax Asset ............................................................. 267 2,519
Other Assets ................................................................... 3,876 4,394
-------- --------
$ 30,891 $ 31,631
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued liabilities .................................... $ 5,649 $ 6,028
Income taxes payable ........................................................ -- 602
Advance payments ............................................................ 97 532
Current maturities of long-term obligations ................................. 312 329
-------- --------
Total Current Liabilities ................................................ 6,058 7,491
Long-Term Obligations .......................................................... 2,993 2,928
-------- --------
Total Liabilities ........................................................ 9,051 10,419
-------- --------
Commitments and Contingencies
Stockholders' Equity
Common Stock, $.01 par value; 25,000,000 shares authorized;
6,551,155 and 6,536,416 shares issued and outstanding .................... 65 65
Additional paid-in capital .................................................. 22,850 22,699
Retained earnings ........................................................... 14,441 13,654
Accumulated other comprehensive income ...................................... (700) (482)
Treasury stock, 1,568,849 and 1,558,849 shares of Common, at cost ........... (14,816) (14,724)
-------- --------
Total Stockholders' Equity ............................................... 21,840 21,212
-------- --------
$ 30,891 $ 31,631
======== ========
</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
MARCH 31,
-----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Revenues .................................................................. $ 14,710 $ 15,646
Cost of sales ............................................................. 8,859 9,725
----------- -----------
Gross Profit .............................................................. 5,851 5,921
Selling, general and administrative ....................................... 4,577 5,276
----------- -----------
Operating Income .......................................................... 1,274 645
Interest income (expense), net ............................................ 37 29
----------- -----------
Income before Income Taxes ................................................ 1,311 674
Income taxes .............................................................. 524 269
----------- -----------
Income from continuing operations ......................................... 787 405
Discontinued Operations:
Loss from operations, net of income tax benefit of $495 in 1998 ........... -- (743)
----------- -----------
Net Income (Loss) ......................................................... $ 787 $ (338)
=========== ===========
Earnings (Loss) per common share Basic:
Income from continuing operations ......................................... $ 0.16 $ 0.07
Loss from discontinued operations ......................................... -- (0.12)
----------- -----------
Net Income (Loss) ......................................................... $ 0.16 $ (0.05)
=========== ===========
Diluted:
Income from continuing operations ......................................... $ 0.15 $ 0.07
Loss from discontinued operations ......................................... -- (0.12)
----------- -----------
Net Income (Loss) ......................................................... $ 0.15 $ (0.05)
=========== ===========
Weighted average shares:
Basic ..................................................................... 5,003,797 6,151,540
Diluted ................................................................... 5,083,908 6,256,634
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
THOMAS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Income from continuing operations .............................................................. $ 787 $ 405
Adjustments to reconcile income from continuing operations to net cash provided by
(used in) operating activities
Depreciation and amortization ........................................................ 473 513
Provision for doubtful accounts ...................................................... -- 119
Other ................................................................................ (10) 44
Deferred taxes ....................................................................... 2,159 1,709
Amortization of stock option grants .................................................. 73 73
Change in operating assets and liabilities
(Increase) decrease in trade accounts receivable ................................ 2,192 (1,800)
(Increase) decrease in income tax receivable .................................... (1,427) --
(Increase) decrease in unbilled receivables ..................................... 198 581
(Increase) decrease in other assets ............................................. 312 (1,965)
Increase (decrease) in accounts payable and accrued liabilities ................. (314) (711)
Increase (decrease) in advance payments ......................................... (377) (149)
Increase (decrease) in income taxes payable ..................................... (619) (669)
-------- --------
Net Cash Provided by (Used In) Operating Activities ........................ 3,447 (1,850)
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures ........................................................................... (151) (69)
-------- --------
Net Cash Used In Investing Activities ...................................... (151) (69)
CASH FLOWS FROM FINANCING ACTIVITIES
Advances to stockholder for treasury stock purchase ............................................ -- (10,604)
Purchase of treasury stock ..................................................................... (92) --
Proceeds from exercise of stock options ........................................................ 78 50
Other long-term obligations .................................................................... (17) 64
Advances - line of credit ...................................................................... -- 8,850
Repayment - line of credit ..................................................................... -- (7,095)
Net repayments from (advances to) affiliates ................................................... -- 2,274
-------- --------
Net Cash Used In Financing Activities ....................................... (31) (6,461)
Effect of Exchange Rate Changes on Cash ............................................................ (218) (94)
-------- --------
Net Cash Provided by Continuing Operations ......................................................... 3,047 (8,474)
-------- --------
DISCONTINUED OPERATIONS
Net cash used in operating activities .......................................................... -- (682)
-------- --------
Net Cash Used In Discontinued Operations .................................... -- (682)
-------- --------
Cash and Cash Equivalents:
Beginning of period ...................................................................... 6,376 11,254
-------- --------
End of period ............................................................................ $ 9,423 $ 2,098
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
THOMAS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The unaudited financial statements of Thomas Group, Inc. (the
"Company") include all adjustments, which include only normal recurring
adjustments, which are, in the opinion of management, necessary to present
fairly the results of operations of the Company for the interim periods
presented. The unaudited financial statements should be read in conjunction with
the consolidated financial statements and notes thereto in the Company's 1998
Annual Report to Stockholders. The results of operations for the three-month
period ended March 31, 1999 are not necessarily indicative of the results of
operations for the entire year ending December 31, 1999. Certain consolidated
financial statement amounts have been reclassified from the previously reported
financial statements in order to conform with the current presentation.
2. Discontinued Operations - On May 6, 1998, the Company announced its
plan to dispose of its Information Technologies business segment. The Company
recorded an after tax charge of approximately $2.9 million as the estimated loss
on disposal of the segment, including estimated operating losses during the
phase-out period, in the second quarter of 1998. The sale of the majority of the
assets of Thomas Group Information Technologies closed on August 31, 1998. No
proceeds were received at the time of the transaction, but the agreement
contains provisions for future payments to the Company if certain revenue
thresholds are met. In exchange, the Company was relieved of the liabilities
related to extended service contracts. Terms of the sale required a revision to
the estimated loss on disposal and an additional $0.4 million after tax charge
was recorded in the third quarter of 1998.
3. Earnings Per Share - Basic earnings per share is based on the number
of weighted average shares outstanding. Diluted earnings per share includes the
effect of dilutive securities The following illustrates the reconciliation of
the numerators and denominators of the basic and diluted earnings per share
computations:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1999
-----------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
BASIC EPS
Income available to common stockholders $ 787,000 5,003,797 $ 0.16
======
EFFECT OF DILUTIVE SECURITIES
Common stock options -- 80,111
--------- ---------
DILUTED EPS
Income available to common stockholders
plus assumed conversions $ 787,000 5,083,908 $ 0.15
========= ========= ======
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1998
-----------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
BASIC EPS
Income available to common stockholders $ (338,000) 6,151,540 $ (0.05)
=======
EFFECT OF DILUTIVE SECURITIES
Common stock options -- 105,094
---------- ----------
DILUTED EPS
Income available to common stockholders
plus assumed conversions $ (338,000) 6,256,634 $ (0.05)
========== ========== =======
</TABLE>
6
<PAGE> 7
THOMAS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. Deferred Taxes - As a result of the restructuring charges and losses
from discontinued operations recognized in the second quarter of 1998, the
Company maintains deferred tax assets of $2.7 million. Utilization of the
deferred tax asset and receivable is dependent on future taxable profits in
excess of existing taxable temporary differences. The asset has been recognized
because management believes it is more likely than not that the deferred tax
asset will be utilized in future years. This conclusion is based on the belief
that current and future levels of taxable income will be sufficient to realize
the benefits of the deferred tax asset on domestic operations.
5. Significant Clients - The Company recorded revenue in the amount of
$5.6 million, or 38% of total revenues, from one client during the three month
period ended March 31, 1999 as compared to $2.9 million, or 19% of total
revenues from one client during the comparable period of the prior year. There
were no other clients whose revenues exceeded 10% of total revenues in the
three-month periods ended March 31, 1999 or March 31, 1998.
6. Comprehensive Income - In the first quarter of 1998, the Company
adopted Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income", which establishes standards for reporting and display of
comprehensive income. Comprehensive income includes all changes in equity
(foreign currency translation) except those resulting from investments by owners
and distributions to owners.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------
In thousands of dollars 1999 1998
----------------------- ------------- -------------
<S> <C> <C>
Net Income $ 787 $ (338)
Change in other comprehensive income (218) (74)
--------- ---------
Comprehensive income (loss) $ 569 $ (412)
========= =========
</TABLE>
7. Revolving Credit Agreement - The Company maintains a $19 million
revolving credit agreement with Comerica Bank. This agreement expires in
December 2003 and includes a call option in December 2001. Additionally, terms
of the agreement provide for a $1 million per quarter reduction in available
credit after the first two years. Loans under this agreement bear interest at
the prime rate or other similar interest options. There has been no utilization
of the credit agreement during the first quarter of 1999. At March 31, 1998 the
balance due on the agreement was $1.8 million.
8. Litigation - The Company is subject to various claims and other
legal matters, described below, in the course of conducting its business. The
Company believes that neither such claims and other legal matters nor the cost
of prosecuting and/or defending such claims and other legal matters will have a
material adverse effect on the Company's consolidated results of operations,
financial condition or cash flows.
The Company was party to a legal action styled Creative Dimensions in
Management, Inc. v. Thomas Group, Inc., filed September 17, 1996 in the U.S.
District Court for the Eastern District of Pennsylvania. This matter arose out
of disputes under two agreements between the Company and Creative Dimensions in
Management, Inc. ("CDM"), a small private company with whom the Company had an
alliance. The Company contested CDM's $50 million claim and pursued its
counterclaims vigorously. On April 28, 1999 a judgment was entered in all
matters in favor of the Company.
In the case of Thomas Group, Inc. v. Blevins, et al., filed May 19, 1997 in the
U.S. District Court for the Northern District of Texas, and in the case styled
Blevins, et al. v. Thomas Group, Inc., et al., filed June 9, 1997 in the U.S.
District Court for the Northern District of Ohio, each party has asserted claims
arising out of the purchase agreement and consulting agreement in connection
with the Company's purchase of Interlink Technologies ("Interlink"). As a
7
<PAGE> 8
THOMAS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
result of losses sustained by its subsidiary, the Company asserted claims in the
Texas action against Ron Blevins and Mike Smith, the former owners of Interlink,
for breach of contract and fraudulent misrepresentation.
The Texas federal action was transferred to Ohio and consolidated with the Ohio
federal action. The trial date has been set for July 27, 1999. The Company
believes the former owners' claims have no merit, and it is the Company's
intention to vigorously pursue its own claims against the former owners of
Interlink, as well as vigorously defend against the former owners' claims.
The Company is party to a legal action styled Philip R. Thomas and Wayne
Heirtzler Thomas v. Thomas Group, Inc., before the U.S. District Court, Middle
District of Louisiana, consolidated with another action styled Thomas Group of
Louisiana, Inc. v. Philip R. Thomas and Wayne Heirtzler Thomas. Mr. and Mrs.
Thomas sought to "enforce leases" and seized, under a writ of sequestration,
movable assets at the Company's CEO Center in Louisiana. No damages were alleged
by Mr. and Mrs. Thomas. The second suit was filed against Mr. and Mrs. Thomas by
a subsidiary of the Company, seeking to dissolve the writ of sequestration and
asserting a claim for damages. A hearing was held on February 2, 1999 on the
motions of the Company and its subsidiary to dissolve the writ of sequestration,
and the court has lifted the sequestration order.
The Company is party to a legal proceeding with the former Chairman and CEO of
the Company, styled Thomas Group, Inc. v. Philip Thomas. The Company timely paid
Mr. Thomas all benefits due him under his written employment agreement,
including a $1.8 million severance payment, yet Mr. Thomas has demanded
additional compensation and retirement benefits. On December 18, 1998, the
Company initiated this proceeding before the American Arbitration Association in
Dallas, Texas pursuant to an arbitration clause in Mr. Thomas' employment
agreement. On December 31, 1998, Mr. Thomas filed suit in Dallas County District
Court in an action styled Philip R. Thomas v. Thomas Group, Inc. The Company
believes Mr. Thomas' claims have no merit, vigorously contests Mr. Thomas'
claims, has moved to stay the litigation based on the parties' written agreement
to arbitrate, and is seeking a determination that Mr. Thomas is owed nothing
further as a result of his employment relationship with the Company.
9. Supplemental Disclosure of Cash Flow Information
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------------
1999 1998
----- -----
<S> <C> <C>
Interest paid............................................................................... $ 13 $ 42
Income taxes paid........................................................................... $ 116 $ 950
</TABLE>
8
<PAGE> 9
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
UNLESS OTHERWISE STATED, THE DISCUSSION THAT FOLLOWS PERTAINS TO CONTINUING
OPERATIONS ONLY.
Thomas Group, Inc. (the "Company") derives the majority of its revenues from
monthly fixed and incentive (performance-oriented) fees for the implementation
of Total Cycle Time(R) programs. Performance-oriented fees are tied to
improvements in a variety of client performance measures typically involving
response time, asset utilization, productivity, and profitability.
The following table sets forth the percentages which items in the statement of
operations bear to revenues.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1999 1998
------- -------
<S> <C> <C>
Revenues............................................................................ 100.0% 100.0%
----- -----
Cost of sales...................................................................... 60.2 62.2
----- -----
Gross Margin........................................................................ 39.8 37.8
Selling, general and administrative................................................ 31.1 33.7
----- -----
Operating income.................................................................... 8.7 4.1
Interest income (expense), net..................................................... 0.3 0.2
----- -----
Income from continuing operations before income taxes............................... 9.0 4.3
Income taxes....................................................................... 3.6 1.7
----- -----
Net income from continuing operations............................................... 5.4% 2.6%
===== =====
</TABLE>
The Company operates in one industry segment, and conducts its business
primarily in three geographic areas, United States, Europe and Asia. Information
regarding these areas follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
In thousands of dollars MARCH 31,
----------------------- ----------------------
1999 1998
-------- --------
<S> <C> <C>
United States............................................................... $ 10,431 $ 10,655
Europe...................................................................... 2,867 4,113
Asia/Pacific................................................................ 1,412 878
-------- --------
Total....................................................................... $ 14,710 $ 15,646
======== ========
</TABLE>
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
Revenue - Revenue decreased $0.9 million (6.0%) in the first quarter of 1999
from the first quarter of 1998. This decrease consisted of a $1.1 million (8.8%)
increase in fixed fee revenue and a $2.0 million (58.0%) decrease in incentive
revenue. Fixed fee and incentive revenues represent 90.1% and 9.9%,
respectively, of revenue in the first quarter of 1999 and 77.9% and 22.1%,
respectively, of revenue in the first quarter of 1998.
The United States component of revenue decreased 2.1%, primarily as a result of
contract completions which exceeded the rate of new contracts being added in the
latter quarters of 1998. European revenue decreased 30.3% due to one significant
contract cancellation and reduced yield on certain other contracts in the
geographic region. Asia/Pacific revenue increased 60.8% for the comparable
quarters as a result of several new contracts attained since the
9
<PAGE> 10
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
first quarter of 1998. Due to economic conditions in the region, management does
not anticipate first quarter comparable growth in the Asia/Pacific region to be
representative of that which will be attained in subsequent quarters.
GROSS PROFIT - Gross profit was 39.8% of revenues in the first quarter of 1999
compared to 37.8% of revenues in the first quarter of 1998. This increase was
primarily the result of the use of part-time Resultants(SM) in 1999 who are
compensated only when they are working on client assignments. Average
Resultant(SM) headcount decreased from 169 in the first quarter of 1998 to 125
in the first quarter of 1999. The use of part-time professionals is intended to
reduce the volatility of the Company's profit margin in the event of a reduction
in the number of active contracts.
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
decreased to 31.1% in the first quarter of 1999 from 33.7% in the first quarter
of 1998, a $0.7 million quarter to quarter decrease. This decrease was partially
due to a $0.8 million charge in the first quarter of 1998 associated with the
departure of three senior-level executives. Legal expense for the quarter ended
March 31, 1999 increased $0.4 million over the comparable period of the prior
year, offset partially by reductions in payroll and other expenses.
DISCONTINUED OPERATIONS - In the second quarter of 1998, the Company announced
its plan to dispose of its Information Technologies business segment. The
Company recorded an after tax charge of approximately $2.9 million as the
estimated loss on disposal of the segment, including estimated operating losses
during the phase-out period. Terms of the sale required a revision to the
estimated loss on disposal and an additional $0.4 million after tax charge was
recorded in the third quarter of 1998. The Company realized a loss of $0.7
million net of tax in the first quarter of 1998 as a result of the operations of
the discontinued segment.
OTHER - The Company's effective tax rate was 40% in the first quarters of 1999
and 1998.
As a result of the restructuring charges and losses from discontinued operations
recognized in the second quarter of 1998, the Company maintains deferred tax
assets of $2.7 million and an income tax receivable of $1.4 million. The income
tax receivable is to be applied to current year tax liability. The deferred tax
asset is to be applied to future years' tax liabilities. Utilization of the
deferred tax asset and receivable is dependent on future taxable profits in
excess of existing taxable temporary differences. At a tax rate of 40% the
Company needs to realize pre-tax income of $10.3 million in the next five years
to fully realize the total tax benefit of $4.1 million. Assuming margins remain
equivalent to historical levels, business under commitment (backlog) at March
31, 1999 should produce income before taxes of approximately $6.1 million in the
next two years. Management believes that closing sufficient additional revenue
to generate $4.2 million of additional income before taxes in the next two years
is highly likely. The Company will continue in future periods to evaluate the
realizability of the tax assets and make necessary adjustments through charges
to expense should projected future taxable income be insufficient to realize the
benefit of the tax assets.
RESULTS OF OPERATIONS - Net income in the first quarter of 1999 was $0.8
million, or $0.15 per diluted share ($0.16 per basic share), an increase of $0.4
million compared to net income from continuing operations of $0.4 million, or
$0.07 per share, in the first quarter of 1998.
10
<PAGE> 11
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased by $3.0 million in the first quarter of 1999
compared to a $9.2 million decrease in the first quarter of 1998. The major
components of these changes are discussed below:
CASH FLOWS FROM OPERATING ACTIVITIES - Operating activities provided cash of
$3.4 million in the first quarter of 1999 compared to using cash of $1.9 million
in the first quarter of 1998. Accounts receivable balances more than 30 days
past due were $1.0 million at March 31, 1999, compared to $2.0 million at
December 31, 1998 and $1.8 million at March 31, 1998. Days sales outstanding
were 49 days at March 31, 1999 compared to 53 days at December 31, 1998.
CASH FLOWS FROM FINANCING ACTIVITIES - Cash flows used in financing activities
in the first quarter of 1998 were primarily for the purchase of outstanding
stock. In February 1998, the Company entered into a stock purchase agreement
with its Chairman and Chief Executive Officer to repurchase shares of common
stock for $8.2 million in cash and satisfaction of a $2.3 million debt to the
Company. Terms of the agreement called for independent determination of the
number of shares to be acquired. In April 1998 the number of shares was
determined to be 1.3 million, representing a discount to the market value during
the settlement period. Thereafter the Chairman and Chief Executive Officer
retired from his position with the Company.
The Company maintains a $19 million revolving credit agreement with Comerica
Bank. This agreement expires in December 2003 and includes a call option in
December 2001. Additionally, terms of the agreement provide for a $1 million per
quarter reduction in available credit in 1999 and 2000. Loans under this
agreement bear interest at the prime rate or other similar interest options.
There has been no utilization of the credit agreement during the first quarter
of 1999. The Company paid less than $0.1 million in the first quarter of 1999 in
commitment fees related to this agreement.
In February 1999, the Board of Directors of the Company approved a stock
repurchase plan for up to 250,000 shares of Common Stock of the Company. Shares
are purchased in the open market. During March 1999, the Company purchased
10,000 shares of stock at an average price of $9.22 per share. During April
1999, 90,000 additional shares were purchased at an average price of $8.73 per
share.
FINANCIAL CONDITION
The Company believes that its financial condition remains strong and that it has
the financial resources necessary to meet its needs. Cash provided by operating
activities and the Company's credit facility should be sufficient to meet short
and long-term operational needs.
YEAR 2000 ISSUES
The Company's internal business information systems are primarily comprised of
commercial application software products offered for license by Microsoft
Corporation and other recognized providers. Because these providers' products
are widely distributed commercially developed applications, the Company
anticipates these applications have been or will be brought into compliance by
the manufacturers. The Company has implemented new accounting and financial
reporting software that is Year 2000 compliant.
The Company does not anticipate any Year 2000 compliance issues to arise related
to its primary internal business information systems. Thomas Group is not aware
of any further material operational issues or costs associated with preparing
internal systems for the Year 2000. However, the Company utilizes other third
party network equipment, telecommunication products, and other third party
software products that may or may not be Year 2000 compliant.
11
<PAGE> 12
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Although the Company is currently taking steps to address the impact, if any, of
the Year 2000 issue surrounding such third party products, failure of any
critical technology to operate properly in the Year 2000 may have an adverse
impact on business operations or require the Company to incur unanticipated
expenses to remedy any problems.
The Company is unaware of any client who may be impacted by the Year 2000 issue.
A failure of a client to appropriately handle issues related to the Year 2000
might have an adverse impact on the financial results of the Company.
"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 (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
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.
12
<PAGE> 13
THOMAS GROUP, INC.
PART II - OTHER INFORMATION
<TABLE>
<CAPTION>
SEQUENTIAL
PAGE NO.
<S> <C>
Item 6 - Exhibits and Reports on Form 8-K.........................................................................
</TABLE>
(a) Exhibits
Reports on Form 8-K for the Quarter Ending March 31, 1999:
The Company filed a current report on Form 8-K dated April 8,
1999 related to the dismissal of its certifying accountants,
BDO Seidman, LLP and appointment of its new certifying
accountants, Ernst & Young, LLP.
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
<TABLE>
<S> <C>
May 14, 1999 /s/ J. Thomas Williams
-------------- ----------------------
Date J.Thomas Williams
Chief Executive Officer
May 14, 1999 /s/ Leland L. Grubb, Jr.
------------- ------------------------
Date Leland L. Grubb, Jr.
Vice President, Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
</TABLE>
13
<PAGE> 14
INDEX TO EXHIBIT
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 9,423
<SECURITIES> 0
<RECEIVABLES> 9,954
<ALLOWANCES> 396
<INVENTORY> 0
<CURRENT-ASSETS> 23,441
<PP&E> 3,307
<DEPRECIATION> 0
<TOTAL-ASSETS> 30,891
<CURRENT-LIABILITIES> 6,058
<BONDS> 0
0
0
<COMMON> 65
<OTHER-SE> 21,775
<TOTAL-LIABILITY-AND-EQUITY> 21,840
<SALES> 0
<TOTAL-REVENUES> 14,710
<CGS> 0
<TOTAL-COSTS> 8,859
<OTHER-EXPENSES> 4,577
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (37)
<INCOME-PRETAX> 1,311
<INCOME-TAX> 524
<INCOME-CONTINUING> 787
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 787
<EPS-PRIMARY> 0.16
<EPS-DILUTED> 0.15
</TABLE>
