UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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ý
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the Quarterly Period Ended March 31, 2009
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or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission File Number 0-22010
THOMAS GROUP, INC.
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction of
incorporation or organization)
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72-0843540
(I.R.S. Employer
Identification No.)
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5221 North O'Connor Boulevard, Suite 500
Irving, TX 75039-3714
(Address of principal executive offices, including zip code)
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(972) 869-3400
(Registrant's telephone number, including area code)
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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
ý
No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to
be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes
o
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definition of "large accelerated filer," and "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
o
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Accelerated filer
o
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Non-accelerated filer
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(Do not check if a smaller reporting company)
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Smaller reporting company
ý
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Indicate
by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2 of the Exchange
Act). Yes
o
No
ý
As of April 30, 2009, there were 10,675,294 shares of the registrant's common stock outstanding.
THOMAS GROUP, INC.
2
Table of Contents
PART I. FINANCIAL INFORMATION
ITEM 1Financial Statements
THOMAS GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
(Unaudited)
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March 31,
2009
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December 31,
2008
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ASSETS
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Current Assets
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Cash and cash equivalents
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$
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7,118
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$
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8,349
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Trade accounts receivable, net of allowance of $5 and $11 at March 31, 2009 and December 31, 2008, respectively
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1,607
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1,432
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Unbilled receivables
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385
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456
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Deferred tax asset, current, net of allowance of $10 and $16 at March 31, 2009 and December 31, 2008, respectively
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339
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466
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Income tax receivable
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3,322
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3,650
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Other current assets
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479
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559
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Total Current Assets
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13,250
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14,912
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Property and equipment, net of accumulated depreciation of $2,230 and $2,140 at March 31, 2009 and December 31, 2008, respectively
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790
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881
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Deferred tax asset, net of allowance of $48 and $44 at March 31, 2009 and December 31, 2008, respectively
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1,591
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1,330
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Other assets
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31
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31
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$
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15,662
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$
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17,154
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LIABILITIES AND STOCKHOLDERS' EQUITY
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Current Liabilities
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Accounts payable and accrued liabilities
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$
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809
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$
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892
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Accrued wages and benefits
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577
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740
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Income taxes payable
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97
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69
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Total Current Liabilities
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1,483
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1,701
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Other long-term obligations
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193
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202
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Total Liabilities
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1,676
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1,903
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Commitments and Contingencies
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Stockholders' Equity
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Common stock, $.01 par value; 25,000,000 shares authorized; 13,843,541 and 13,793,541 shares issued and 10,692,613 and 10,716,306 shares outstanding at
March 31, 2009 and December 31, 2008, respectively
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$
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138
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$
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138
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Additional paid-in capital
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31,403
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31,392
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Retained earnings
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6,001
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7,225
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Treasury stock, 3,150,928 and 3,077,235 shares at March 31, 2009 and December 31, 2008, respectively, at cost
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(23,556
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)
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(23,504
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)
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Total Stockholders' Equity
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13,986
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15,251
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$
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15,662
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$
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17,154
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See
accompanying notes to consolidated financial statements.
3
Table of Contents
THOMAS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
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Three Months Ended
March 31,
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2009
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2008
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Consulting revenue before reimbursements
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$
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2,920
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$
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12,040
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Reimbursements
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368
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398
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Total revenue
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3,288
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12,438
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Cost of sales before reimbursable expenses
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1,478
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6,047
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Reimbursable expenses
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368
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398
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Total cost of sales
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1,846
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6,445
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Gross profit
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1,442
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5,993
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Selling, general and administrative
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3,362
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5,531
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Operating income (loss)
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(1,920
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)
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462
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Interest income, net
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4
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119
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Other income, net
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6
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Income (loss) from operations before income taxes
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(1,910
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)
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581
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Income taxes
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(685
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)
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216
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Net income (loss)
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$
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(1,225
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)
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$
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365
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Earnings (loss) per share:
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Basic
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$
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(0.11
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)
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$
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0.03
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Diluted
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$
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(0.11
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)
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$
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0.03
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Weighted average shares:
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Basic
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10,678
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11,073
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Diluted
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10,678
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11,320
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See
accompanying notes to consolidated financial statements.
4
Table of Contents
THOMAS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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Three Months Ended
March 31,
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2009
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2008
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Cash Flows from Operating Activities:
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Net income (loss)
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$
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(1,225
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)
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$
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365
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Adjustments to reconcile net income to net cash provided by operating activities:
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Depreciation
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90
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119
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Amortization
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5
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Foreign currency translation loss
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(35
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)
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Stock based compensation expense
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57
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405
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Bad debt expense
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(5
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400
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Other
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31
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(24
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)
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Change in operating assets and liabilities:
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(Increase) decrease in trade accounts receivable
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(150
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)
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1,995
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(Increase) decrease in unbilled receivables
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71
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(9
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)
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(Increase) decrease in deferred tax asset
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(134
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)
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(193
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)
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(Increase) decrease in income tax receivable
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328
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(Increase) decrease in other assets
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80
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(225
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)
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Increase (decrease) in accounts payable and accrued liabilities
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(230
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)
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369
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Increase (decrease) in other liabilities
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(9
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)
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Increase (decrease) in income taxes payable
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27
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336
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Net cash provided by (used in) operating activities
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(1,104
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)
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3,543
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Cash Flows From Investing Activities
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Cash Flows From Financing Activities:
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Purchase of stock
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(52
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)
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Issuance of common stock
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1
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Dividends paid
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(1,104
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)
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Tax effect of option exercises
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(45
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)
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Net cash provided by (used in) financing activities
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(96
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)
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(1,104
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)
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Effect of exchange rate changes on cash
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(31
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)
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27
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Net change in cash
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(1,231
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)
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2,466
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Cash and cash equivalents
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Beginning of period
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8,349
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11,990
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End of period
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$
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7,118
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$
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14,456
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See
accompanying notes to consolidated financial statements.
5
Table of Contents
THOMAS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
Basis of Presentation
The unaudited consolidated financial statements of Thomas Group, Inc. include all
adjustments, which include only normal recurring adjustments, which are, in the opinion of management, necessary to present fairly our results of operations for the interim periods presented. The
unaudited financial statements should be read in conjunction with the consolidated financial statements and notes thereto in our Form 10-K for the 2008 fiscal year, filed with the
Securities and Exchange Commission. The results of operations for the three month period ended March 31, 2009 are not necessarily indicative of the results of operations for the entire year
ending December 31, 2009.
2.
Earnings Per Share
Basic earnings (loss) per share is based on the number of weighted average shares
outstanding. Diluted earnings (loss) per share includes the effect of dilutive securities such as stock options, stock warrants, and restricted stock awards expected to vest. The following table
reconciles basic earnings (loss) per share to diluted earnings (loss) per share under the provisions of Statement of Financial Accounting Standards No. 128,
Earnings Per
Share
.
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Three Months Ended March 31,
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2009
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2008
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In thousands, except per share data
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Numerator:
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Net income
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$
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(1,225
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)
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$
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365
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Denominator:
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Weighted average shares outstanding:
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Basic
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10,678
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11,073
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Effect of dilutive securities:
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Common stock options
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(2
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)
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9
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Restricted stock awards expected to vest
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409
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238
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Diluted
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11,085
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11,320
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Earnings (loss) per share:
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Basic
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$
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(0.11
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)
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$
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0.03
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Diluted
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$
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(0.11
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)
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$
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0.03
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Diluted
earnings (loss) per share is the same as basic earnings (loss) per share for the three month period ended March 31, 2009 because the effect of outstanding options and
unvested restricted stock would have been antidilutive due to the net loss.
Stock
options outstanding that are not included in the diluted earnings (loss) per share computation due to the antidilutive effects were approximately 45,844 for the three month period
ended March 31, 2009, and approximately 238,830 for the three month period ended March 31, 2008. Such options are excluded because their exercise prices exceed the average market value
of our common stock for the three month periods ended March 31, 2009 and March 31, 2008, respectively. We have not issued any stock options since January 2003.
3.
Stock Based Compensation
Options to purchase shares of our common stock have been granted to directors,
officers and employees. The majority of the options granted become exercisable at the rate of 33% per year and generally expire ten years after the date of grant. At March 31, 2009, options to
purchase 45,844 shares of our common stock were outstanding and exercisable.
6
Table of Contents
THOMAS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Since
the adoption of our 2005 Omnibus Stock and Incentive Plan (the "2005 Omnibus Plan"), we have granted our employees restricted stock awards representing 880,000 shares of our common
stock pursuant to that plan. As of March 31, 2009, no awards remained outstanding and subject to restrictions. The 880,000 shares covered by such awards had either vested or been forfeited by
the award holders according to the terms of the respective awards. At March 31, 2009, 616,666 shares remain authorized and available for grant under the 2005 Omnibus Plan. The 2005 Omnibus Plan
will terminate on December 20, 2015.
On
March 1, 2008, in connection with his initial appointment as Executive Chairman, the Compensation Committee granted Michael McGrath an award of 100,000 restricted shares of our
common stock and approved a performance share award entitling Mr. McGrath to receive up to 350,000 shares of our common stock if certain conditions related to our profitability are satisfied.
The restricted share award was granted pursuant to the 2005 Omnibus Plan. The performance share award was approved pursuant to the 2008 Omnibus Plan.
On
March 10, 2008, in connection with his initial appointment as President and Chief Executive Officer, the Compensation Committee granted Earle Steinberg an award of 50,000
restricted shares of our common stock and approved a performance share award entitling Mr. Steinberg to receive up to 380,000 shares of our common stock if certain conditions related to
our profitability are satisfied. The initial restricted share award was granted pursuant to the 2005 Omnibus Plan. The performance share award was approved pursuant to the 2008 Omnibus Plan.
The
100,000 restricted shares granted to Mr. McGrath vested upon the date of grant. The 50,000 restricted shares granted to Mr. Steinberg vested on March 10, 2009.
The
performance share awards vest according to the agreements with each individual when and if we achieve certain established profit levels. The awards automatically terminate on the
first to occur of (i) the date when all the performance shares have been delivered, (ii) the date our Compensation Committee determines that the performance target for the final year has
not been met or (iii) the holder's termination of employment.
The
restricted share awards were valued on the date of grant using the closing price of our common stock on the NASDAQ Global Market on that date.
The
performance share awards are valued on the earliest date when all of the performance criteria and other required factors relating to the award are known. Compensation expense is
recognized over the applicable period of service. The fair value of performance share awards is determined based on the closing price of our common stock on the NASDAQ Global Market on the date when
all of the factors related to the award are known. Generally this is when the targets for annual performance are determined and approved by our Compensation Committee.
7
Table of Contents
THOMAS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
4.
Significant Clients
We had three clients who each accounted for more than 10% of our revenue in the three
month period ended March 31, 2009. One of those clients and two other clients each accounted for more than 10% of our revenue in the three month period ended March 31, 2008.
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Three Months Ended
March 31,
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2009
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2008
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Revenue ($thousands)
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Client A
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$
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1,109
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$
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743
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Client B
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$
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679
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$
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Client C
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$
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384
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$
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1,731
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|
Client D
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$
|
88
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$
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4,763
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Client E
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$
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$
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4,205
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|
|
|
% of revenue
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Client A
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34
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%
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|
6
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%
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Client B
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21
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%
|
|
|
|
Client C
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|
12
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%
|
|
14
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%
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Client D
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|
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3
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%
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|
38
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%
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Client E
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34
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%
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There
were no other clients from whom revenue exceeded 10% of total revenue in the three month periods ended March 31, 2009 and 2008, respectively.
5.
Concentration of Credit Risk
Financial instruments that potentially subject us to concentrations of credit
risk consist primarily of trade receivables. We encounter a certain amount of credit risk as a result of a concentration of receivables among a few significant customers. The trade receivables (in
dollars and as a percentage of total revenue) from such significant customers are set forth below:
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|
|
|
|
|
|
|
|
|
March 31, 2009
|
|
December 31, 2008
|
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|
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$thousands
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|
% of AR
|
|
$thousands
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|
% of AR
|
|
Client A
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|
$
|
349
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|
|
17
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%
|
$
|
314
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|
|
16
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%
|
Client B
|
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$
|
524
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|
26
|
%
|
$
|
192
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|
|
9
|
%
|
Client C
|
|
$
|
131
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|
6
|
%
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$
|
85
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|
|
4
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%
|
Client D
|
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$
|
27
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|
1
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%
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$
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27
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|
1
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%
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Client E
|
|
$
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|
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|
0
|
%
|
$
|
496
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|
|
24
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%
|
6.
Supplemental Disclosure of Cash Flow Information
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2009
|
|
2008
|
|
|
|
In thousands of dollars
|
|
Interest paid
|
|
$
|
3
|
|
$
|
3
|
|
Taxes paid
|
|
$
|
3
|
|
$
|
67
|
|
8
Table of Contents
THOMAS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
7.
Geographical Data
We provide services within one industry segment and conduct our business primarily in North
America and Europe with minimal activities elsewhere. Subsequent to March 31, 2008, we closed our office in the Asia/Pacific region. Any future business in that region will be handled out of
our offices in North America. Information regarding these areas follows:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2009
|
|
2008
|
|
|
|
In thousands of dollars
|
|
Revenue:
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
1,920
|
|
$
|
11,695
|
|
|
Europe
|
|
|
1,351
|
|
|
743
|
|
|
Other
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
3,288
|
|
$
|
12,438
|
|
|
|
|
|
|
|
Gross profit:
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
635
|
|
$
|
5,881
|
|
|
Europe
|
|
|
790
|
|
|
112
|
|
|
Other
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit
|
|
$
|
1,442
|
|
$
|
5,993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2009
|
|
December 31,
2008
|
|
|
|
In thousands of dollars
|
|
Long-lived assets:
|
|
|
|
|
|
|
|
North America
|
|
$
|
790
|
|
$
|
881
|
|
|
|
|
|
|
|
Total
|
|
$
|
790
|
|
$
|
881
|
|
|
|
|
|
|
|
8.
Property and Equipment
|
|
|
|
|
|
|
|
|
|
March 31,
2009
|
|
December 31,
2008
|
|
|
|
In thousands of dollars
|
|
Equipment
|
|
$
|
1,044
|
|
$
|
1,044
|
|
Furniture and fixtures
|
|
|
541
|
|
|
541
|
|
Leasehold improvements
|
|
|
989
|
|
|
989
|
|
Computer software
|
|
|
446
|
|
|
446
|
|
|
|
|
|
|
|
|
|
|
3,020
|
|
|
3,020
|
|
Less accumulated depreciation and amortization
|
|
|
(2,230
|
)
|
|
(2,140
|
)
|
|
|
|
|
|
|
|
|
$
|
790
|
|
$
|
881
|
|
|
|
|
|
|
|
There
were no investments in, or dispositions of, property and equipment during the three month period ended March 31, 2009.
9
Table of Contents
THOMAS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
9.
Stockholders' Equity
Options
A summary of the status of our stock options issued to employees for the three month period ended March 31, 2009 is presented
below. As of March 31, 2009, there were no unvested stock options or remaining stock-based compensation costs related to outstanding stock options.
|
|
|
|
|
|
|
|
|
Common Option Shares
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Outstanding at January 1, 2009
|
|
|
46,825
|
|
$
|
6.70
|
|
|
Granted
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(981
|
)
|
$
|
9.50
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2009
|
|
|
45,844
|
|
$
|
6.64
|
|
Options exercisable at March 31, 2009
|
|
|
45,844
|
|
$
|
6.64
|
|
Weighted average life of outstanding options (years)
|
|
|
|
|
|
1.59
|
|
Restricted Stock Awards
In March 2008, we granted a restricted stock award for 100,000 shares of our common stock to Michael E. McGrath, our Executive
Chairman, and a second restricted stock award for 50,000 shares to Earle Steinberg, our President and Chief Executive Officer. Each of these awards was granted pursuant to the 2005 Omnibus Plan.
Mr. McGrath's share award was fully vested on the date of grant and Mr. Steinberg's share award vested on March 10, 2009. Mr. McGrath's share award was expensed at the date
of grant in March 2008, and Mr. Steinberg's share award was expensed over the applicable period of service ending March 10, 2009.
Also
in March 2008, we approved a performance share award entitling Mr. McGrath to receive up to 350,000 shares in the future, and a second performance share award entitling
Mr. Steinberg to receive up to 380,000 shares in the future if certain performance targets are satisfied. Each of these awards was made pursuant to the 2008 Omnibus Plan.
Mr. McGrath's award entitles him to receive such shares in annual increments over a three year period. Mr. Steinberg's award entitles him to receive such shares in annual increments over
a four year period. For these awards, each annual increment is expensed over the applicable year of service at the closing price on the NASDAQ Global Market on the date when there is mutual
understanding of the key terms and conditions affecting the performance award for that year. This date is generally in February each year when our Compensation Committee formally approves the
performance targets for the year. These performance share awards
10
Table of Contents
THOMAS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
vest
if certain performance targets are satisfied. A summary of the restricted stock award activity for the three month period ended March 31, 2009 is presented below.
|
|
|
|
|
Restricted Stock
|
|
Shares
|
|
Authorized awards at January 1, 2009 (1)
|
|
|
780,000
|
|
Vested (1)
|
|
|
(50,000
|
)
|
|
|
|
|
Authorized awards at March 31, 2009
|
|
|
730,000
|
(2)
|
|
|
|
|
Outstanding award grants at January 1, 2009 (1)
|
|
|
237,333
|
|
Awards granted
|
|
|
221,333
|
|
Vested (1)
|
|
|
(50,000
|
)
|
|
|
|
|
Outstanding grants at March 31, 2009
|
|
|
408,666
|
|
Authorized awards to be granted in future years
|
|
|
321,334
|
|
|
|
|
|
Authorized awards at March 31, 2009
|
|
|
730,000
|
(2)
|
|
|
|
|
-
(1)
-
Authorized
awards are future rights to shares, usually subject to conditions. Grants are authorized awards for which there is a mutual understanding of the
key terms and conditions affecting the award. Vested shares are shares on which all restrictions have lapsed under the terms of the award and that have been issued to the holder and constitute
outstanding common stock. A holder of vested shares has all rights, powers and privileges of a holder of unrestricted shares of our common stock.
-
(2)
-
Authorized
awards of 730,000 shares consist of 350,000 fully restricted shares approved for Mr. McGrath on March 1, 2008 and 380,000 fully
restricted shares approved for Mr. Steinberg on March 10, 2008. Of the 730,000 shares subject to these outstanding awards, as of March 31, 2009, a total of 408,666 had been
granted, but none had vested.
At
March 31, 2009 there was approximately $85,356 of stock based compensation costs related to unvested restricted stock awards to be recognized over the performance period of the
remainder of 2009. For 2009 these awards were valued at $0.51 per share.
10.
Income Taxes
We follow SFAS No. 109,
Accounting for Income
Taxes
, which requires use of the asset and liability method of accounting for deferred income taxes and providing deferred income taxes for all significant temporary
differences and FASB Interpretation No. 48 ("FIN 48"),
Accounting for Uncertainty in Income Taxes
, which prescribes a comprehensive model
for how companies should recognize, measure, present, and disclose in their financial statements uncertain tax positions taken or expected to be taken on a tax return.
Income
tax benefit of $685,000 for the three month period ended March 31, 2009 reflected an effective tax rate of 36%, compared to income tax expense of $216,000, or an effective
tax rate of 37%, for the three month period ended March 31, 2008. We had no FIN 48 liabilities as of March 31, 2009 or December 31, 2008.
11.
Financing Agreement and Liquidity
On December 15, 2006, we entered into a credit agreement with
JPMorgan Chase Bank, N.A. providing for a $5.5 million revolving line of credit maturing March 31, 2009 to be used as necessary for ongoing working capital needs and general corporate
purposes. We did not draw on this credit facility and at March 31, 2009 we chose to allow the credit facility to expire.
11
Table of Contents
THOMAS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
For
the three month periods ended March 31, 2009 and 2008, we had no borrowings or repayments on our credit facility and we had no outstanding balance on our credit facility as of
March 31, 2009 or December 31, 2008.
For
the last several years we have worked on engagements with two divisions of the U.S. Navy, each governed by a separate contractual agreement. One of these contracts expired
March 31, 2008 and the other expired April 30, 2008. For the quarter ended March 31, 2008 these two contracts represented approximately 72% of our revenue. The expiration of these
contacts resulted in a significant decline in revenue in 2008 compared to 2007, and a net loss for the year ended December 31, 2008 and for the quarter ended March 31, 2008.
Our
cash balance was $7,118,000 at March 31, 2009, and we expect to receive tax refunds from Federal income taxes of approximately $2.5 million during the second quarter of
2009. Based on our forecasts of results for 2009, we project that the cash balance plus the tax refund should provide sufficient liquidity to meet our needs through the end of 2009, although
circumstances may change to negatively impact our forecast. In this event, we could be required to seek other sources of liquidity during 2009. There can be no assurance that such additional liquidity
would be available, or available on terms acceptable to us.
12.
Issuer Repurchases of Shares
On March 6, 2008, we announced that our Board of Directors had
reactivated a common stock repurchase program authorizing us to repurchase up to 505,450 shares of our common stock from time to time, subject to market conditions. In October 2008, our Board of
Directors approved an expansion of our stock repurchase program, authorizing us to repurchase up to an additional 300,000 shares from time to time, subject to market conditions.
During
the first quarter of 2008, we established a written plan pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934, which provides for the purchase of
our common stock in support of our announced share repurchase program. During the first quarter of 2009, we repurchased 73,693 shares for a total cost of $52,071, or an average of $0.71 per share,
including commissions and fees.
Since
the reactivation of our common stock repurchase program in March 2008 and through April 30, 2009, we had repurchased 587,921 shares for a total cost of $1,050,446, or an
average of $1.79 per share, including commissions and fees. As of April 30, 2009, we had 217,529 shares remaining to be repurchased under this repurchase program.
13.
Recently Adopted Accounting Pronouncements
On January 1, 2008, we adopted SFAS No. 157,
Fair Value Measurement
except for nonfinancial assets and
nonfinancial liabilities. The objective of SFAS No. 157 is to increase consistency and
comparability in fair value measurements and to expand disclosures about fair value measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance
with generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair
value measurements and does not require any new fair value measurements. The adoption of this statement did not have a material effect on our reported financial position or results of operations. On
January 1, 2009 we adopted SFAS No. 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements
on a recurring basis (at least annually). The adoption of this additional provision of this statement did not have a material effect on our reported financial position or results of operations.
12
Table of Contents
THOMAS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
On
January 1, 2008, we adopted SFAS No. 159,
The Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an Amendment
of FASB Statement No. 115
. This statement permits entities to choose to measure many financial instruments and certain other items at fair value. Most of the provisions
of SFAS No. 159 apply only to entities that elect the fair value option. However, the amendment to SFAS No. 115,
Accounting for Certain Investments in Debt and
Equity Securities
applies to all entities with available-for-sale and trading securities. The adoption of this statement did not have a material effect
on our reported financial position or results of operations as we did not elect the fair value option for any eligible financial assets or liabilities not already carried at fair value.
14.
Recently Issued Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 160,
Non Controlling Interests in Consolidated Financial Statementsan amendment of
ARB 51
which is effective for fiscal years and interim
periods within those years beginning on or after December 15, 2008. SFAS No. 160 amends ARB 51 to establish accounting and reporting standards for the non controlling ownership
interest in a subsidiary and for the deconsolidation of a subsidiary. The adoption of this statement is not expected to have a material effect on our financial statements.
In
March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging Activitiesan amendment of FASB Statement
No. 133, as amended and interpreted
. SFAS No. 161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to
provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS
No. 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flows. SFAS
No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. Early adoption is permitted. The adoption of this statement
is not expected to have a material effect on our financial statements.
In
June 2008, the FASB issued FSP EITF 03-6-1,
Determining Whether Instruments Granted in Share-Based Payment Transactions are
Participating Securities
. FSP EITF 03-6-1 requires that unvested share-based payment awards which contain nonforfeitable rights to dividends or
dividend equivalents with common stocks should be included in the earnings allocation in computing earnings per share under FASB Statement No. 128,
Earnings per
Share
. FSP EITF 03-6-1 is effective for financial statements issued for fiscal years and interim periods beginning after November 15,
2008. We have no such instruments outstanding. The adoption of this FSP did not have a material effect on our financial statements.
13
Table of Contents
ITEM 2Management's Discussion and Analysis of Financial Condition and Results of Operations
"Safe Harbor" Statement Under The Private Securities Litigation Reform Act
Various sections contained or incorporated by reference in this Quarterly Report on Form 10-Q include
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation
Reform Act of 1995. Forward-looking statements may be identified by the context of the statement and generally arise when we are discussing our beliefs, estimates or expectations. Such statements may
contain the words "believe," "anticipate," "expect," "estimate," "intend," "project," "could," "should," "may," "will be," "will likely continue," "will likely result," or words or phrases of similar
meaning. These statements are not historical facts or guarantees of future
performance but instead represent only our belief at the time the statements were made regarding future events. In particular, statements under Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations contain forward-looking statements, including but not limited to statements regarding our expectations regarding the sufficiency of our liquidity sources
and the expected impact of legal proceedings with which we may become involved. All forward-looking statements are based largely on the expectations of management and are subject to a number of risks
and uncertainties which may cause actual results and outcomes to differ materially from what we express or forecast in these forward-looking statements. In evaluating these statements, you should
consider the risks and uncertainties discussed under Item 1A. Risk Factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008, as well as
the following list of some but not all of the factors that could cause actual results or events to differ materially from anticipated results or events:
-
-
further disruption in our relationships with major customers;
-
-
difficulty in expanding our commercial sector business or rebuilding our governmental sector business;
-
-
an inability to successfully implement sufficient cost containment initiatives;
-
-
the competitive environment of the industry in which we operate;
-
-
customer acceptance of our product and service offerings; and
-
-
an inability to attract, hire, develop, train and retain experienced consultants.
These
forward-looking statements and such risks, uncertainties and other factors speak only as of the date of this Quarterly Report on Form 10-Q, and we expressly
disclaim any obligation or
undertaking to disseminate any updates or revisions to any forward-looking statement contained herein, to reflect any change in our expectations with regard thereto, or any other change in events,
conditions or circumstances on which any such statement is based.
Current Market Conditions
The U.S. and worldwide economies are undergoing unprecedented upheaval, turmoil and uncertainty due in part to the curtailment or
reduction of credit available to both individuals and to businesses. It is difficult to predict the impact that these conditions will have on our operations since even the experts are having
difficulty agreeing upon the causes, the appropriate remedies, or the expected duration of this situation.
We
are in the business of helping clients improve profitability and reduce costs. While we expect the current economic environment to make our recovery more difficult in some respects,
we believe that successful companies will have to focus more efforts on reducing costs and improving profitability as achieving revenue growth and obtaining external funding become more challenging.
We believe that the nature of our product and service offerings and the value proposition that we offer to our clients
14
Table of Contents
place
us in a strong position to help those companies accelerate and magnify their internal efforts to reduce costs and improve profitability.
Significant Events
For several years prior to the second quarter of 2008, the vast majority of our revenue was derived from government contracts. In 2007,
85% of our revenue was derived from two contracts with the U.S. Navy. Those contracts expired in March and April 2008.
During
2008, we underwent significant changes, hiring a new management team, reorganizing into practice areas, renewing our focus on developing our commercial business and implementing
significant workforce and cost reductions. Although we have seen some early indications of positive results from these efforts, these are not quick "fixes" that will result in a short-term
return to profitability. We continue to manage aggressively to return to profitability, although there can be no assurances when or if we will achieve this goal. Ultimately our ability to return to
profitability will depend on our success in generating new revenues from new clients.
As
discussed below under the heading "Liquidity and Capital Resources," we have what we believe is a strong working capital position. We continue to believe that these combined resources
should be sufficient to allow us to return to profitability if our efforts identified above are successful.
Overview
We are a professional services firm that executes and implements process improvements and culture change management operations
strategies to produce improved operational and financial performance for our clients globally. We are a Delaware corporation founded in 1978 and headquartered in Irving, Texas.
Through
our proprietary Process Value Management, or PVM, methodology, our consultants refine processes throughout an organization to give our clients a
competitive advantage that increases revenues, lowers costs, and generates cash. With our more than 30 years of change management experience, innovation, and knowledge leadership, we have
demonstrated our ability to apply this methodology in a wide variety of organizations.
Process
Value Management is our proprietary methodology to identify, prioritize, and quantify the amount and timing of cross-functional business improvement opportunities. The PVM
approach and methodology is designed to help an organization increase overall effectiveness by focusing on performance drivers throughout the organization like speed (cycle time), quality (first pass
yield), and productivity. The PVM approach and methodology is widely applicable to almost all types of enterprises, including government entities, military organizations, for-profit
companies, and not-for-profit enterprises, to help drive sustainable improvements in operations and reduced costs.
For
marketing purposes, we are now organized into five practices. These practices, which focus our marketing efforts into client industry sectors, are
-
-
Aerospace and Defense Contractors,
-
-
Government (including all branches of the U.S. military),
-
-
Healthcare,
-
-
Transportation and Logistics, and
-
-
Industrial.
In
the future we may create additional practices as we see potential market opportunities in other areas. Our practice leaders and principals are responsible for sales and marketing to
prospective clients
15
Table of Contents
with
support from our business development staff. Our business development personnel are responsible for developing sales tools and assisting with proposals, as well as developing and extending
awareness of our brand "Thomas Group."
Through
the years, we have developed a number of service offerings that employ the PVM approach and methodology to drive productivity improvements within multiple areas of our clients'
enterprises. Although we continue to provide solutions to client problems in many areas of need, over the past year we have refined our offerings to focus our marketing more often on specific
solutions in
-
-
Culture and Change Management,
-
-
Finance and Administration,
-
-
Integrated Gross Margin Management,
-
-
Strategic Sourcing,
-
-
Marketing and Sales,
-
-
Operations,
-
-
Product and Service Innovation, and
-
-
Supply Chain Management.
Historically,
most of our clients have been large, diversified commercial or government enterprises in North America, Europe, South America and Asia. For several years prior to April
2008, however, the majority of our revenue was derived from engagements with the U.S. Navy, both directly and through an intermediary.
In
2009, we are focused on diversifying our client base by delivering our solutions in North America, both to the U.S. government and to commercial entities. We also expect to engage in
some business in Europe, and perhaps elsewhere, on an opportunistic basis.
While
we believe our methodologies are applicable to any organization, we have developed a significant amount of subject matter expertise relevant to specific industries and governmental
entities. Consequently, we can leverage our consultants' prior executive experiences to obtain business and determine appropriate client project teams. Our goal is to diversify our business among our
various practice areasGovernment, Aerospace and Defense Contractors, Transportation, Healthcare, and Industrial. We are actively pursuing new business in each of these areas.
We
perform services and provide solutions for clients pursuant to contracts that typically have terms of two weeks to one year or longer. We are compensated for our professional services
and solutions in one or more of three ways:
-
-
fixed fees,
-
-
task-based fees, or
-
-
incentive fees.
Our
fee type and structure for each client engagement depends on a number of variables, including the size of the client, the complexity and geographic dispersion of its business, the
extent of the opportunity for us to improve the client's processes and other factors. Our contracts are often cancelable by our clients upon as little as 30 days' notice. We do not report
bookings or backlog because we believe the uncertainties associated with cancelable contracts, particularly in our commercial business, may render such information misleading.
The
majority of our revenue is derived from fixed fee and task-based fee contracts.
16
Table of Contents
Fixed
fee revenue is recognized on the proportional performance model (which approximates the percentage completion method), based on direct labor hours expended and, when applicable,
the completed performance model. In order to calculate the completion ratio on a given project, time and effort to date are divided by the total estimated time and effort for the entire project. This
ratio is then multiplied by the total fixed fee to be earned on the project, resulting in the amount of revenue earned to date. A few of our fixed fee contracts, primarily assessments, are recognized
using the completed contract performance model as these contracts are generally one to six weeks in duration and conclude with a presentation or agreed upon deliverable to the clients' management.
Revenues attributable to fixed fees were 59% and 24% of consolidated revenue for the three month periods ended March 31, 2009 and 2008, respectively.
Task-based
fees are recognized as revenue when the relevant task is completed, usually on a monthly basis. Revenues attributable to task-based fees were 11% and
73% of consolidated revenue for each of the three month periods ended March 31, 2009 and 2008, respectively.
Incentive
fees are tied to improvements in a variety of client performance measures typically involving cycle time, asset utilization and productivity. Incentive fee revenue is
recognized in the period in which the related client improvements are achieved and we obtain the client's acceptance. Our incentive fee agreements with our clients define in advance the performance
improvement standards that will form the basis for the payment of incentive fees. In order to mitigate the risk of disputes arising over the achievement of performance improvements, which drive
incentive fees, we obtain customer agreement to these achievements prior to recognizing revenue. Typically these contracts are for commercial customers and they provide for a base fee and an
additional incentive fee earned according to a formula specified in the applicable contract. Incentive fees are affected by our clients' business performance and prevailing economic conditions.
Revenues attributable to incentive fees were 19% and 0% of consolidated revenue for the three month periods ended March 31, 2009 and 2008, respectively. As of April 30, 2009, we had
three contracts that provided for incentive fees. While incentive fees are not currently a significant portion of our revenue, earlier in our history they were more significant. As we attempt to
diversify our business to include more commercial work, incentive fees could again become a more significant portion of our revenue.
Reimbursement
revenue represents our clients' repayment of our mutually agreed upon travel expenses as incurred. All billable travel expenses are submitted to and approved by the client.
Revenues attributable to reimbursement were 11% and 3%, for the three month periods ended March 31, 2009 and 2008, respectively. For some clients, the fixed fee or task-based fee is
inclusive of travel. In these cases, the travel expense in included in cost of sales.
Consulting
contracts typically are awarded by both government entities and private organizations on the basis of either sole-source negotiations, that is, direct negotiation
between the client and a single vendor such as Thomas Group, or on the basis of competitive bidding, generally in response to a Request for Proposal. Whenever possible, we prefer to work under sole
source contract arrangements. Competitive bids can require extensive time, effort and cost to submit a qualified bid and the outcome is unpredictable. In many competitive bid situations, we compete
against far larger companies with far greater resources to devote to the proposal process. In some cases, we team with another company that has capabilities complementary to ours in order to increase
the competitiveness of our bid. In some other cases, we use an intermediary who has the capability to respond more effectively in this process. The current U.S. government administration has announced
plans to revamp the government contracting process. At this point it is not certain what impact this development may have on our ability to secure future contracts or when or if these changes will
become effective.
Contracts
related to these U.S. government engagements often are executed within the U.S. government's budget cycle and are fully funded for up to one year at a time. They may be renewed
annually for successive one-year periods if the life of the engagement extends beyond one fiscal year.
17
Table of Contents
For
our engagements with the U.S. government, we contract either directly with the government through our listing with the General Services Administration or we use an intermediary that acts as a
prime contractor providing contracting and administrative services for the majority of our government programs.
For
the last several years we have worked extensively on engagements with two divisions of the U.S. Navy, each governed by a separate contractual agreement. One of these contracts
expired March 31, 2008 and the other expired April 30, 2008. For the year ended December 31, 2007 these two contracts represented approximately 85% of our revenue, and for the
year ended December 31, 2008 they represented approximately 44% of our revenue. To date, we have not fully replaced the revenue that was previously generated through these expired government
contracts. We continue to work on smaller programs with the U.S. Navy as well as with the U.S. Air Force. We are actively working to expand our U.S government business with the entire U.S. military as
well as other departments within the U.S. government, and to expand our commercial business.
Cost
of sales represents the direct costs involved in providing services and solutions to our clients. The components include, but are not limited to, direct labor and benefit costs,
support costs such as telecommunications and computer costs, travel costs and other costs incurred in providing services and solutions to our clients.
Selling,
general and administrative expenses include the costs of all labor and other goods and services necessary for our selling and marketing efforts, human resource support,
accounting and finance services, legal and other professional services, facilities and equipment, information technology and telecommunications support and services, and other corporate functions.
Selling, general and administrative expenses also include depreciation and amortization on the fixed assets used to support these functions.
In
December 2005, we instituted our first annual dividend policy, which was subsequently increased to $0.30 per share annually in June 2006 and $0.40 per share annually in December 2006.
On February 19, 2008, our Board of Directors suspended the payment of future quarterly dividends.
Critical Accounting Policies
General
The preparation of financial statements in conformity with U.S.
generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the accompanying financial statements and related notes. Management
bases its estimates and assumptions on historical experience, observance of industry trends and various other sources of information and factors. Actual results could differ from these estimates.
Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and potentially could result in materially different results under different
assumptions and conditions.
Revenue Recognition
Revenue is recognized when realizable and earned, generally as services and solutions are provided over
the life of a contract. Fixed fee revenue is recognized using a proportional performance model (which approximates the percentage completion method), based on direct labor hours expended and, when
applicable, the completed performance model. Task-based, or deliverable-based, fees are recognized when the relevant task or deliverable is completed. Incentive fee revenue is recognized
in the period in which the related improvements are achieved and the client has agreed that performance improvements have in fact been achieved. Our incentive fee agreements with our clients define in
advance the performance improvement standards that will form the basis of our incentive fees earned.
Unbilled Receivables
Although fixed fee revenue recognition generally coincides with billings, as an accommodation to our
clients, we may structure fee billings in a different pattern. In such instances, amounts collectible for services provided but not yet billed are represented in unbilled receivables.
18
Table of Contents
Deferred Taxes
Income taxes are calculated using the asset and liability method required by Financial Accounting Standards
Board ("FASB") Statement No. 109,
Accounting for Income Taxes
("SFAS No. 109"). Deferred income taxes are recognized for the tax
consequences resulting from timing differences by applying enacted statutory tax rates applicable to future years. These timing differences are associated with differences between the financial and
the tax basis of existing assets and liabilities. Under SFAS No. 109, a statutory change in tax rates will be recognized immediately in deferred taxes and income. Net deferred taxes are
recorded both as a current deferred income tax asset and as other long-term liabilities based upon the classification of the related timing difference. A valuation allowance is recognized
if, based on the weight of available evidence, it is more likely than not that some portion or all of a deferred tax asset will not be realized. All available evidence, both positive and negative, is
considered when determining the need for a valuation allowance. Judgment is
used in considering the relative impact of negative and positive evidence. The weight given to the potential effect of negative and positive evidence is commensurate with the extent to which it can be
objectively verified. In accordance with SFAS No. 109, evidence, such as operating results during the most recent three-year period, is given more weight than our expectations of
future profitability, which are inherently uncertain.
In
addition to timing differences arising from operating assets and liabilities, we also record deferred tax assets for the tax benefits of net operating losses and foreign tax credits.
For United States federal tax purposes, at December 31, 2002, we had net operating loss carryovers of approximately $4.2 million. Under the limitations of Section 382 of the
Internal Revenue Code, discussed below, $0.7 million was used to offset United States taxable income in 2003. In 2004, $0.2 million expired under Section 382, but an
$8.1 million in United States net operating loss was generated, resulting in a balance of $11.4 million at December 31, 2004. In 2005, we used $8.1 million of the net
operating loss to offset United States taxable income and used $0.2 million of the net operating loss carryforward limited under Section 382, resulting in a net operating loss
carryforward balance of $3.1 million at December 31, 2005. In each of fiscal years 2006 and 2007, we used $0.2 million of the net operating loss carryforward balance, resulting in
a $2.9 million balance at December 31, 2006, and a $2.8 million balance at December 31, 2007 and December 31, 2008. As of March 31, 2009, we had a
$2.8 million net operating loss balance.
In
assessing the realizability of deferred tax assets, we considered whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. During
2006 we determined that a valuation allowance was appropriate on only approximately $117,000 of the net operating loss carryforward, due to annual limitations under Section 382. Therefore, we
removed $1.8 million of the valuation allowance. As of December 31, 2008, we reduced the valuation allowance by $59,000, resulting in a $58,000 balance at year end. As of
March 31, 2009, we had a valuation allowance of $58,000.
If
future analyses of the positive and negative evidence indicate that it is more likely than not that some portion or all of the net deferred tax asset will not be realized, a partial
or full valuation allowance may be required, which could have a negative effect on net income in the period that it becomes more likely than not that deferred tax assets will not be realized.
We
also follow the guidance under FASB Interpretation No. 48 ("FIN 48"),
Accounting for Uncertainty in Income Taxes
, which
prescribes a comprehensive model for how companies should recognize, measure, present, and disclose in their financial statements uncertain tax positions taken or expected to be taken on a tax return.
Tax law is subject to varied interpretation, and whether a tax position will ultimately be sustained may be uncertain. Under FIN 48, tax positions shall initially be recognized in the financial
statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions shall initially and subsequently be measured as the largest amount
of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and all relevant facts. FIN 48
19
Table of Contents
also
requires additional disclosures about unrecognized tax benefits associated with uncertain income tax positions and a reconciliation of the change in the unrecognized benefit. In addition,
FIN 48 requires interest to be recognized on the full amount of deferred benefits for uncertain tax positions. An income tax penalty is recognized as expense when the tax position does not meet
the minimum statutory threshold to avoid the imposition of a penalty. As of March 31, 2009, we did not have any FIN 48 liabilities or associated interest.
During
the second quarter of 2008, we received notice from the Internal Revenue Service ("IRS") that it was finalizing its review of our 2006 federal employment tax return and stock
option practice review. During 2007, we reported that certain grants of stock options made during the period under investigation were priced below fair market value, rather than at fair market value.
Consequently, certain grants intended to be classified as incentive stock options or "ISOs", requiring pricing at no less than fair market value on the date of grant, should have been classified as
nonqualified stock options, or "NSOs". Given the significant differences in the tax treatment between ISOs and NSOs, we may have underreported or underwithheld certain payroll taxes for those options
which were exercised during the period of review, August 1993 through December 2006, and therefore recorded an estimated tax liability of $0.1 million. In the third quarter of 2008 we entered
into a settlement agreement with the IRS and paid $68,000 in employment taxes and withholding related to our stock option granting practices. This payment was considered as additional compensation for
the named individuals. We were also required to report additional income to certain employees. As such, we claimed additional expense as an adjustment to our 2006 corporate tax return and claimed a
tax refund of $51,365, which was received after the end of the third quarter of 2008. In connection with this 2006 audit, other than this adjustment, no material adjustments have been proposed. We do
not anticipate any further impact on our financial statements as a result of this 2006 audit.
Stock Based Compensation
We account for stock based compensation arrangements in accordance with the provisions of Statement
of Financial Accounting Standard ("SFAS") No. 123(R),
Share Based Payment
. SFAS No. 123(R) requires us to measure all stock based
compensation awards at the grant date using a fair value method and to record expense in the financial statements over the requisite service period of the award. We estimate the fair value of options
using the Black-Scholes method, which considers a risk-free interest rate, volatility, expected life, forfeitures, and dividend rates. We use the U.S. 10-year Treasury Bond
yield to estimate the risk-free interest rate; and, our estimate of volatility is based on our historical stock price for a period of at least or equal to the expected life of award. Our
estimate of forfeitures considers the term of the awards granted and historical forfeiture experience and our estimate of the expected life of awards is based on the anticipated time the award is
held. The restricted stock awards
are valued on the date of grant using the closing price of our common stock on the NASDAQ Global Market on that date. Performance share awards are expensed over the applicable year(s) of service at
the closing price on the NASDAQ Global Market on the date when there is mutual understanding of the key terms and conditions affecting the performance award for the year(s).
Recently Adopted Accounting Pronouncements
On January 1, 2008, we adopted SFAS No. 157,
Fair Value Measurement
except for nonfinancial assets and
nonfinancial liabilities. The objective of SFAS No. 157 is to increase consistency and
comparability in fair value measurements and to expand disclosures about fair value measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance
with generally accepted accounting principles, and expands disclosures regarding fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair
value measurements and does not require any new fair value measurements. The adoption of this statement did not have a material effect on our reported financial position or results of operations. On
January 1, 2009 we adopted SFAS No. 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements
on a recurring basis (at least annually). The adoption of this additional
20
Table of Contents
provision
of this statement did not have a material effect on our reported financial position or results of operations.
On
January 1, 2008, we adopted SFAS No. 159,
The Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an Amendment
of FASB Statement No. 115
. This statement permits entities to choose to measure many financial instruments and certain other items at fair value. Most of the provisions
of SFAS No. 159 apply only to entities that elect the fair value option. However, the amendment to SFAS No. 115,
Accounting for Certain Investments in Debt and
Equity Securities
applies to all entities with available-for-sale and trading securities. The adoption of this statement did not have a material effect
on our reported financial position or results of operations as we did not elect the fair value option for any eligible financial assets or liabilities not already carried at fair value.
Recently Issued Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 160,
Non
Controlling Interests in Consolidated Financial Statementsan amendment of ARB 51
which is effective for fiscal years and interim periods within those years
beginning on or after December 15, 2008. SFAS No. 160 amends ARB 51 to establish accounting and reporting standards for the non controlling ownership interest in a subsidiary and for the
deconsolidation of a subsidiary. The adoption of this statement is not expected to have a material effect on our financial statements.
In
March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging Activitiesan amendment of FASB Statement
No. 133, as amended and interpreted
. SFAS No. 161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to
provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS
No. 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flows. SFAS
No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. Early adoption is permitted. The adoption of this statement
is not expected to have a material effect on our financial statements.
On
June 20, 2008, the Securities and Exchange Commission issued a press release announcing the approval of a one-year extension of the date by which smaller reporting
companies must comply with the auditor attestation requirements of internal control over financial reporting provided for in Section 404(b) of the Sarbanes-Oxley Act of 2002. We will now be
required to comply with Section 404(b) in our annual reports for fiscal years ending on or after December 15, 2009.
In
June 2008, the FASB issued FSP EITF 03-6-1,
Determining Whether Instruments Granted in Share-Based Payment Transactions are
Participating Securities
. FSP EITF 03-6-1 requires that unvested share-based payment awards which contain nonforfeitable rights to dividends or
dividend equivalents with common stocks should be included in the earnings allocation in computing earnings per share under FASB Statement No. 128,
Earnings per
Share
. FSP EITF 03-6-1 is effective for financial statements issued for fiscal years and interim periods beginning after November 15,
2008. We have no such instruments outstanding. The adoption of this FSP did not have a material effect on our financial statements.
21
Table of Contents
Results of Operations
The following table sets forth the percentages of revenue for the identified items in our consolidated statements of
operations:
|
|
|
|
|
|
|
|
|
|
Three Months
Ended March 31,
|
|
|
|
2009
|
|
2008
|
|
Revenue
|
|
|
100.0
|
%
|
|
100.0
|
%
|
Cost of sales
|
|
|
56.1
|
%
|
|
51.8
|
%
|
|
|
|
|
|
|
Gross profit
|
|
|
43.9
|
%
|
|
48.2
|
%
|
Selling, general and administrative
|
|
|
102.3
|
%
|
|
44.5
|
%
|
|
|
|
|
|
|
Operating income
|
|
|
(58.4
|
)%
|
|
3.7
|
%
|
Interest income (expense), net
|
|
|
0.1
|
%
|
|
|
|
Other income (expense),
|
|
|
0.2
|
%
|
|
1.0
|
%
|
|
|
|
|
|
|
Income before income taxes
|
|
|
(58.1
|
)%
|
|
4.7
|
%
|
Income taxes
|
|
|
(20.8
|
)%
|
|
1.8
|
%
|
|
|
|
|
|
|
Net income
|
|
|
(37.3
|
)%
|
|
2.9
|
%
|
|
|
|
|
|
|
Three Month Period Ended March 31, 2009 Compared to the Three Month Period Ended March 31, 2008
Revenue
In the first quarter of 2009, total revenue decreased
$9.1 million, or 74%, to $3.3 million from $12.4 million in the first quarter of 2008. Task based revenue was $0.4 million, or 11% of revenue, in the first quarter of 2009,
compared to $9.0 million, or 72% of revenue, in the first quarter of 2008. Fixed fee revenue was $1.9 million, or 59% of revenue, in the first quarter of 2009, compared to
$3.0 million, or 24% of revenue, in the first quarter of 2008. Reimbursement revenues were $0.4 million, or 11% of revenue, in the first quarter of 2009 compared to $0.4 million,
or 3% of revenue, in the first quarter of 2008. Incentive revenue was $0.6 million, or 19% of revenue, in the first quarter of 2009. As of May 15, 2009, we had three active incentive
based contracts.
North
America region revenue decreased $9.8 million, or 84%, to $1.9 million in the first quarter of 2009, compared to $11.7 million in the first quarter of 2008.
The decrease in North America revenues for the first quarter of 2009 compared to the first quarter of 2008 is due primarily to a decrease in our government business, offset slightly by an increase in
our commercial business. The decrease in task based revenue, which is associated with our government contracts, is due primarily to the ending of some of our U.S. Navy programs following the
government's decision to consolidate these programs into a single contracting vehicle for which we were not named as a provider. The increase in fixed fee revenue, which is associated with our
commercial contracts, is due primarily to having a larger volume of our commercial contracts, along with the contracts having a higher contract value for the three month period ended March 31,
2009 compared to the three month period ended March 31, 2008.
Reimbursable revenues, which also are associated with our commercial contracts, increased due to the increases in commercial activity.
Our
South America region revenue was $17,000 during the first quarter of 2009. We had no revenue in South America in the first quarter of 2008.
During
the first quarter of 2009, we recorded $1.4 million in revenue from a client located in Europe, compared to $0.7 million in the first quarter of 2008. Although we
discontinued our Europe operations in 2006, we maintain a strategic relationship in Europe through which we may periodically obtain business.
22
Table of Contents
Gross Profit
Gross profit margins were 44% of revenue, or $1.4 million, in the first quarter of 2009, compared to 48%,
or $6.0 million, in the first quarter of 2008. Costs of sales consists of direct labor, travel, and other direct costs incurred by our consultants to provide services to our clients and to
complete client related projects, including training. The decrease in gross profit margin, as a percentage of revenue, is attributable to lower level of revenue in the first quarter of 2009 and to a
higher concentration of lower margin work.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the first quarter of 2009 were
$3.4 million, compared to $5.5 million in the first quarter of 2008. The $2.1 million decrease is related primarily to a $0.3 million decrease in stock-based compensation
during the first quarter of 2009, a $0.5 million decrease in sales commissions and executive bonus, a $0.3 million decrease in recruiting costs, a $0.2 million decrease in our use
of outside consultants, a $0.4 million decrease in bad debt expense, a $0.3 million decrease in payroll costs due to the decline in the number of consultants employed and a
$0.1 million decrease in other costs due to a decline in activity as compared to the same period in 2008.
Liquidity and Capital Resources
Cash and cash equivalents decreased by $1.2 million during the three month period ended March 31, 2009 compared to a
$2.5 million increase during the three month period ended March 31, 2008. The major components of these changes are discussed below:
Cash Flows from Operating Activities
Net cash used in operating activities was $1.1 million, compared to net cash
provided by operations of $3.5 million for the first quarter of 2008. This decrease is due primarily to our operating loss for the first quarter of 2009, a decrease in our accrued liabilities,
an increase in income tax receivable and a decrease in collection of our accounts receivable.
Cash Flows from Investing Activities
There was no cash used for investing activities during the three month periods ended
March 31, 2009 or March 31, 2008.
Cash Flows from Financing Activities
Cash used for financing activities for the three month period ended March 31, 2009
was $0.1 million including the $0.05 million purchase of stock under our stock repurchase plan, and the $0.05 million net tax effect of stock issuances compared to
$1.1 million in the three month period ended March 31, 2008, related to the payment of dividends for quarters ended after December 31, 2007.
Subsequent
to March 31, 2008, we announced a reduction in force affecting approximately one-third of our employees as a part of a restructuring plan approved by our
Board of Directors. We recorded a charge of approximately $0.5 million, net of tax effects, for one-time termination benefits related to employee severance and other benefits in our
second quarter 2008 operating results. We estimate that these activities removed approximately $6.0 million of annualized operating costs from our operating income. No other charges are
expected as a result of these actions. We paid the one-time termination benefits in the second quarter of 2008 from our operating cash.
On
March 6, 2008 we announced that our Board of Directors had reactivated a common stock repurchase program, authorizing us to repurchase up to 505,450 shares of our common stock
from time to time, subject to market conditions. In October 2008, our Board of Directors approved an expansion of our stock repurchase program, authorizing us to repurchase up to an additional 300,000
shares from time to time, subject to market conditions.
During
the first quarter of 2008, we established a written plan pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934, which provides for the purchase of
our common stock in support of our announced share repurchase program. During the first quarter of 2009, we repurchased 73,693 shares for a total of $52,071, or an average of $0.71 per share,
including commissions and fees.
23
Table of Contents
Since
the reactivation of our common stock repurchase program in March 2008 and through April 30, 2009, we had repurchased 587,921 shares for a total cost of $1,050,446, or $1.79
per share, including commissions and fees. As of April 30, 2009, we had 217,529 shares remaining to be repurchased under this repurchase program.
$5.5 million Credit Facility with JPMorgan Chase Bank, N.A.
On December 15, 2006, we entered into a credit
agreement with JPMorgan Chase Bank, N.A. to be used for ongoing working capital needs and general corporate purposes. We did not draw on this credit facility and at March 31, 2009 we had a zero
balance on the credit facility. The obligations under that credit facility were secured by first priority liens on all of our accounts and proceeds thereof. This credit facility also imposed certain
affirmative and negative covenants on our operations and business. This credit facility matured on March 31, 2009. Based on our projected forecast for 2009, we did not anticipate a continued
need for this credit facility and, therefore, we did not request a renewal or extension of this line of credit upon its expiration on March 31, 2009.
As
of March 31, 2009, we had no material commitments for capital expenditures or off-balance sheet arrangements.
Our Liquidity Plan
In view of the expiration of our U.S. Navy contracts in 2008, our ability to generate cash from operations
will be determined primarily by our ability to generate substantial new revenue. Our ability to generate this required new revenue will be affected by prevailing economic conditions, among other
factors. We have taken steps to reduce our costs in many areas, and we will continue to do so to the maximum extent we believe is prudent. If future cash flows and capital resources are insufficient
to meet our obligations and commitments, we may be forced to reduce or delay activities and capital expenditures, or obtain additional equity capital or take other steps to refinance our business.
Our
ability to maintain gross margins, control costs and generate cash flow from operations in the future will determine our ability to arrange debt facilities in the future. We
regularly evaluate our business to enhance our liquidity position. We currently believe that our available working capital of $11.8 million at March 31, 2009 is sufficient to provide the
necessary resources to enable us to grow in 2009. Our cash balance at March 31, 2009 was $7.1 million, or $0.67 per diluted share. We expect to receive tax refunds in the first half of
2009 of approximately $2.5 million.
As
noted above, for the past several years, we have had a line of credit available to us, but we did not draw on it for over three years. Based on our current forecast of revenues and
expenses for 2009, we believe that we will not need to access a line of credit in 2009. In part to reduce costs, we notified the bank that we would not request an extension of our line of credit when
it expired on March 31, 2009.
Inflation
Although our operations are influenced by general economic conditions, we do not believe inflation had a material
effect on the results of operations during the three month period
ended March 31, 2009 or 2008. However, there can be no assurance our business will not be affected by inflation in the future.
24
Table of Contents
ITEM 3Quantitative and Qualitative Disclosure About Market Risk
There have been no material changes in circumstances affecting our exposure to interest rate or foreign exchange rate risk since
December 31, 2008.
ITEM 4Controls and Procedures
Based on the evaluation of our disclosure controls and procedures as of the end of the period covered by this quarterly report, Earle
Steinberg, our President and Chief Executive Officer, and Frank Tilley, our Vice President and Interim Chief Financial Officer, have concluded that, as of March 31, 2009, in their judgment, our
disclosure controls and procedures are effective to ensure that information required to be disclosed by us, including our subsidiaries, in the reports we file or submit under the Securities Exchange
Act of 1934, as amended, is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. Our disclosure controls and
procedures include controls and procedures designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is accumulated and communicated to our
management, including our President and Chief Executive Officer and Vice President and Interim Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Management necessarily applied its judgment in assessing the costs and benefits of such controls and procedures, which, by their nature, can provide only reasonable assurance regarding management's
control objectives. The design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events. There can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions, regardless of how remote.
There
were no changes in our internal controls over financial reporting during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our
internal controls over financial reporting.
25
Table of Contents
PART IIOTHER INFORMATION
ITEM 1Legal Proceedings
We may become subject to various claims and other legal matters, such as collection matters initiated by us in the ordinary course of
conducting our business. We believe neither such claims and legal matters nor the cost of prosecuting and/or defending such claims and legal matters will have a material adverse effect on our
consolidated results of operations, financial condition or cash flows. No material claims are currently pending; however, no assurances can be given that future claims, if any, will not be material.
ITEM 1ARisk Factors
There have been no material changes from the information previously reported under Item 1A of our Annual Report on
Form 10-K for the fiscal year ended December 31, 2008.
ITEM 2Unregistered Sales of Equity Securities and Use of Proceeds
On March 6, 2008 our Board of Directors reaffirmed our previously existing stock repurchase program and authorized the
repurchase of shares of our common stock. At that time a total of 505,450 shares representing approximately 5% of our outstanding shares remained subject to repurchase under the stock repurchase
program. On March 6, 2008 we entered into a Rule 10b5-1 repurchase plan to establish a systematic program authorizing a stockbroker to execute repurchases in accordance with
the terms of the Rule 10b5-1 plan. After a waiting period, repurchases commenced on April 7, 2008. In October 2008, our Board of Directors approved an expansion of our stock
repurchase program, authorizing us to repurchase an additional 300,000 shares from time to time, subject to market conditions.
The
following table details our repurchases of shares of our common stock during the three month period ended March 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
Total
Number of
Shares
Purchased
|
|
Average Price
Per Share,
Including
Commissions
|
|
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans
or Programs
|
|
Shares that
May Yet be Purchased
Under the Plans
or Programs
|
|
January 1 31, 2009
|
|
|
42,945
|
|
$
|
0.73
|
|
|
42,945
|
|
|
265,596
|
|
February 1 28, 2009
|
|
|
16,058
|
|
$
|
0.63
|
|
|
16,058
|
|
|
249,538
|
|
March 1 31, 2009(1)
|
|
|
14,690
|
(1)
|
$
|
0.70
|
|
|
14,690
|
(1)
|
|
234,848
|
|
|
Total
|
|
|
73,693
|
|
$
|
0.71
|
|
|
73,693
|
|
|
|
|
-
(1)
-
As
of March 31, 2009, transactions to purchase an additional 2,900 shares were not yet settled and these shares are still included as shares
outstanding as of March 31, 2009.
We
purchased these shares with our available cash.
As
of April 30, 2009, we had repurchased a total of 587,921 shares at an average total cost of $1.79 per share, including commissions and fees.
ITEM 3Defaults Upon Senior Securities
None.
ITEM 4Submission of Matters to a Vote of Security Holders
None.
26
Table of Contents
ITEM 5Other Information
None.
ITEM 6Exhibits
|
|
|
|
|
|
|
|
Exhibits
|
|
|
|
|
|
3.1
|
|
Amended and Restated Certificate of Incorporation of Thomas Group filed July 10, 1998, with the State of Delaware Office of the Secretary of State (filed as Exhibit 3.1 to our Annual Report on Form 10-K
for the year ended December 31, 1998 and incorporated herein by reference).
|
|
|
|
3.2
|
|
Amended and Restated By-Laws dated May 30, 2001 (filed as Exhibit 3.2 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2001 and incorporated herein by reference).
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3.3
|
|
Amendment No. 1 to Amended and Restated By-Laws dated March 25, 2009 (filed as Exhibit 3.1 to our Current Report on Form 8-K filed March 26, 2009 and incorporated herein by
reference).
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31.1
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Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) under the Securities Exchange Act of 1934.
|
|
|
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31.2
|
|
Certification of Chief Financial Officer pursuant to Rule 13a-14 (a) and Rule 15d-14(a) under the Securities Exchange Act of 1934.
|
|
|
|
32.1
|
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
32.2
|
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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27
Table of Contents
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.
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THOMAS GROUP, INC.
Registrant
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May 13, 2009
Date
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/s/ EARLE STEINBERG
Earle Steinberg
President and Chief Executive Officer
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28
Table of Contents
Thomas Group, Inc.
Form
Exhibit Index
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|
|
|
|
|
|
|
Exhibit
Number
|
|
Description
|
|
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3.1
|
|
Amended and Restated Certificate of Incorporation of Thomas Group filed July 10, 1998, with the State of Delaware Office of the Secretary of State (filed as Exhibit 3.1 to our Annual Report on Form 10-K
for the year ended December 31, 1998 and incorporated herein by reference).
|
|
|
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3.2
|
|
Amended and Restated By-Laws dated May 30, 2001 (filed as Exhibit 3.2 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2001 and incorporated herein by reference).
|
|
|
|
3.3
|
|
Amendment No. 1 to Amended and Restated By-Laws dated March 25, 2009 (filed as Exhibit 3.1 to our Current Report on Form 8-K filed March 26, 2009 and incorporated herein by
reference).
|
|
|
|
31.1
|
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) under the Securities Exchange Act of 1934.
|
|
|
|
31.2
|
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) under the Securities Exchange Act of 1934.
|
|
|
|
32.1
|
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
32.2
|
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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