Table of
Contents
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
x
|
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
|
|
For the Quarterly Period Ended September 30,
2009
|
|
or
|
|
o
|
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
|
|
|
For
the transition period from
to
|
Commission File Number 0-22010
THOMAS
GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
|
|
72-0843540
(I.R.S. Employer
Identification No.)
|
5221 North OConnor Boulevard, Suite 500
Irving, TX 75039-3714
(Address of principal executive offices, including zip code)
(972) 869-3400
(Registrants telephone number, including area code)
NONE
(Former name, former address
and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes
x
No
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.
Large accelerated filer
o
|
|
Accelerated filer
o
|
|
|
|
Non-accelerated filer
o
(Do not check if a smaller reporting company)
|
|
Smaller reporting company
x
|
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
x
As of November 13, 2009, there were 10,499,060 shares of the
registrants common stock outstanding.
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)
|
|
September 30,
2009
|
|
December 31,
2008
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
6,460
|
|
$
|
8,349
|
|
Trade
accounts receivable, net of allowance of $5 and $11 at September 30,
2009 and December 31, 2008, respectively
|
|
1,240
|
|
1,432
|
|
Unbilled
receivables
|
|
228
|
|
456
|
|
Deferred
tax asset, current, net of allowance of $5 and $16 at September 30, 2009
and December 31, 2008, respectively
|
|
155
|
|
466
|
|
Income
tax receivable
|
|
2,103
|
|
3,650
|
|
Other
current assets
|
|
405
|
|
559
|
|
Total
Current Assets
|
|
10,591
|
|
14,912
|
|
Property
and equipment, net of accumulated depreciation of $2,400 and $2,140 at
September 30, 2009 and December 31, 2008, respectively
|
|
612
|
|
881
|
|
Deferred
tax asset, net of allowance of $53 and $44 at September 30, 2009 and
December 31, 2008, respectively
|
|
1,666
|
|
1,330
|
|
Other
assets
|
|
31
|
|
31
|
|
|
|
$
|
12,900
|
|
$
|
17,154
|
|
LIABILITIES AND STOCKHOLDERS
EQUITY
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
|
$
|
817
|
|
$
|
892
|
|
Accrued
wages and benefits
|
|
345
|
|
740
|
|
Income
taxes payable
|
|
14
|
|
69
|
|
Total
Current Liabilities
|
|
1,176
|
|
1,701
|
|
Other
long-term obligations
|
|
151
|
|
202
|
|
Total
Liabilities
|
|
1,327
|
|
1,903
|
|
Commitments
and Contingencies
|
|
|
|
|
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Stockholders
Equity
|
|
|
|
|
|
Common
stock, $.01 par value; 25,000,000 shares authorized; 13,843,541 and
13,793,541 shares issued and 10,586,315 and 10,716,306 shares
outstanding at September 30, 2009 and December 31, 2008,
respectively
|
|
138
|
|
138
|
|
Additional
paid-in capital
|
|
31,460
|
|
31,392
|
|
Retained
earnings
|
|
3,623
|
|
7,225
|
|
Treasury
stock, 3,257,226 and 3,077,235 shares at September 30, 2009 and
December 31, 2008, respectively, at cost
|
|
(23,648
|
)
|
(23,504
|
)
|
Total
Stockholders Equity
|
|
11,573
|
|
15,251
|
|
|
|
$
|
12,900
|
|
$
|
17,154
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|
See accompanying notes to
condensed consolidated financial statements
3
Table
of Contents
THOMAS
GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In
thousands, except per share data)
(Unaudited)
|
|
Three Months Ended
September 30,
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|
Nine Months Ended
September 30,
|
|
|
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2009
|
|
2008
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|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
Consulting revenue before reimbursements
|
|
$
|
1,783
|
|
$
|
3,392
|
|
$
|
6,939
|
|
$
|
20,313
|
|
Reimbursements
|
|
315
|
|
440
|
|
1,067
|
|
1,334
|
|
Total revenue
|
|
2,098
|
|
3,832
|
|
8,006
|
|
21,647
|
|
Cost of sales before reimbursable expenses
|
|
1,071
|
|
2,298
|
|
3,898
|
|
11,246
|
|
Reimbursable expenses
|
|
315
|
|
440
|
|
1,067
|
|
1,334
|
|
Total cost of sales
|
|
1,386
|
|
2,738
|
|
4,965
|
|
12.580
|
|
Gross profit
|
|
712
|
|
1,094
|
|
3,041
|
|
9,067
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|
Selling, general and administrative
|
|
2,595
|
|
4,365
|
|
9,107
|
|
14,892
|
|
Operating loss
|
|
(1,883
|
)
|
(3,271
|
)
|
(6,066
|
)
|
(5,825
|
)
|
Interest income, net
|
|
|
|
56
|
|
6
|
|
258
|
|
Other income
|
|
302
|
|
|
|
329
|
|
|
|
Loss from continuing operations before income
taxes
|
|
(1,581
|
)
|
(3,215
|
)
|
(5,731
|
)
|
(5,567
|
)
|
Income tax benefit
|
|
(557
|
)
|
(930
|
)
|
(2,128
|
)
|
(1,755
|
)
|
Net loss
|
|
$
|
(1,024
|
)
|
$
|
(2,285
|
)
|
$
|
(3,603
|
)
|
$
|
(3,812
|
)
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
$
|
(0.10
|
)
|
$
|
(0.21
|
)
|
$
|
(0.34
|
)
|
$
|
(0.35
|
)
|
Diluted:
|
|
$
|
(0.10
|
)
|
$
|
(0.21
|
)
|
$
|
(0.34
|
)
|
$
|
(0.35
|
)
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
10,614
|
|
10,973
|
|
10,653
|
|
11,040
|
|
Diluted
|
|
10,614
|
|
10,973
|
|
10,653
|
|
11,040
|
|
See accompanying notes to
condensed consolidated financial statements.
4
Table
of Contents
THOMAS
GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In
thousands)
(Unaudited)
|
|
Nine Months Ended
September 30,
|
|
|
|
2009
|
|
2008
|
|
Cash Flows from Operating
Activities:
|
|
|
|
|
|
Net loss
|
|
$
|
(3,603
|
)
|
$
|
(3,812
|
)
|
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
|
|
|
|
|
|
Depreciation
|
|
269
|
|
370
|
|
Amortization
|
|
|
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14
|
|
Gain on disposal of assets
|
|
(5
|
)
|
|
|
Foreign currency translation gain
|
|
(64
|
)
|
(12
|
)
|
Stock based compensation expense
|
|
114
|
|
871
|
|
Bad debt expense
|
|
68
|
|
220
|
|
Other
|
|
(22
|
)
|
(6
|
)
|
Change in operating assets and liabilities:
|
|
|
|
|
|
(Increase) decrease in trade accounts receivable
|
|
181
|
|
7,883
|
|
(Increase) decrease in unbilled receivables
|
|
228
|
|
(425
|
)
|
(Increase) decrease in deferred tax asset
|
|
(25
|
)
|
229
|
|
(Increase) decrease in income tax receivable
|
|
1,548
|
|
(2,002
|
)
|
(Increase) decrease in other assets
|
|
154
|
|
(257
|
)
|
Increase (decrease) in accounts payable and
accrued liabilities
|
|
(487
|
)
|
(1,128
|
)
|
Increase (decrease) in other liabilities
|
|
(27
|
)
|
(3
|
)
|
Increase (decrease) in income taxes payable
|
|
(56
|
)
|
(904
|
)
|
Net cash provided by (used in) operating
activities
|
|
(1,727
|
)
|
1,038
|
|
|
|
|
|
|
|
Cash Flows From Investing
Activities:
|
|
|
|
|
|
Proceeds from sale of assets
|
|
5
|
|
|
|
Capital expenditures
|
|
|
|
(99
|
)
|
Net cash provided by (used in) investing
activities
|
|
5
|
|
(99
|
)
|
|
|
|
|
|
|
Cash Flows From Financing
Activities:
|
|
|
|
|
|
Purchase of stock
|
|
(145
|
)
|
(779
|
)
|
Issuance of common stock
|
|
1
|
|
|
|
Dividends paid
|
|
|
|
(1,163
|
)
|
Tax effect of stock award exercises
|
|
(45
|
)
|
(187
|
)
|
Net cash used in financing activities
|
|
(189
|
)
|
(2,129
|
)
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
22
|
|
6
|
|
|
|
|
|
|
|
Net change in cash
|
|
(1,889
|
)
|
(1,184
|
)
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
Beginning of period
|
|
8,349
|
|
11,990
|
|
End of period
|
|
$
|
6,460
|
|
$
|
10,806
|
|
See accompanying notes to
condensed consolidated financial statements.
5
Table of Contents
THOMAS
GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
Basis
of Presentation
The unaudited condensed 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 and nine month periods ended September 30,
2009 are not necessarily indicative of the results of operations for the entire
year ending December 31, 2009.
Management has evaluated subsequent events through November 13,
2009, which is the date that the Companys financial statements were
issued. No material subsequent events have occurred since September 30,
2009 that required recognition or disclosure in these financial statements.
2.
Liquidity
Our cash balance was $6,460,000
at September 30, 2009. Management believes that this cash balance should
provide sufficient liquidity to meet our needs through the end of 2009. If
circumstances change, 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.
3.
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 ASC 260,
Earnings Per Share.
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
In thousands, except
per share data
|
|
In thousands, except
per share data
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(1,024
|
)
|
$
|
(2,285
|
)
|
$
|
(3,603
|
)
|
$
|
(3,812
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
10,614
|
|
10,973
|
|
10,653
|
|
11,040
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
Common stock options
|
|
|
|
|
|
|
|
|
|
Restricted stock awards expected to vest
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
10,614
|
|
10,973
|
|
10,653
|
|
11,040
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.10
|
)
|
$
|
(0.21
|
)
|
$
|
(0.34
|
)
|
$
|
(0.35
|
)
|
Diluted
|
|
$
|
(0.10
|
)
|
$
|
(0.21
|
)
|
$
|
(0.34
|
)
|
$
|
(0.35
|
)
|
Diluted earnings (loss) per share is the same as basic earnings (loss)
per share for the three and nine months ended September 30, 2009 because
the effect of outstanding options and unvested restricted stock would have been
antidilutive due to the net loss.
Stock options and unvested restricted stock awards outstanding that are
not included in the diluted earnings (loss) per share computation due to the
antidilutive effects were approximately 432,666 for the three and nine months
ended September 30, 2009, and 253,869 for the three and nine months ended
September 30, 2008.
We have not issued any stock options since January 2003.
6
Table of Contents
THOMAS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4.
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 September 30, 2009, options
to purchase 24,000 shares of our common stock were outstanding and exercisable.
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. The
880,000 shares covered by such awards have either vested or been forfeited by
the award holders according to the terms of the respective awards. As of September 30,
2009, no awards remained outstanding and subject to restrictions. At September 30,
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, the Compensation and Corporate Governance
Committee of our Board of Directors (the Compensation Committee) and our
Board of Directors, upon the Compensation Committees recommendation, approved
a new incentive compensation plan titled the 2008 Omnibus Stock and Incentive Plan
for Thomas Group, Inc. (the 2008 Omnibus Plan). The 2008 Omnibus Plan
provides a means for us to grant awards to officers, employees or consultants
in the form of options, restricted shares, performance awards and stock
appreciation rights. A total of 1,000,000 shares of our common stock was
reserved for issuance pursuant to awards to be made under the 2008 Omnibus
Plan. At September 30, 2009, 270,000 shares remain authorized and
available for grant under the 2008 Omnibus Plan. The 2008 Omnibus Plan received
stockholder approval at our 2008 Annual Meeting of Stockholders held on June 26,
2008.
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 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 granted 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 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 granted 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 the Compensation
Committee determines that the performance target for the final year has not
been met or (iii) the holders 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. The fair value of performance share awards is determined based on
the closing price 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. When achievement of target is
determined to be probable, compensation expense is recognized over the
applicable period of service.
5.
Significant
Clients
We had four clients who each accounted for more than 10% of
our revenue in the three and nine month periods ended September 30, 2009.
One of those clients and one other client each accounted for more than 10% of
our revenue in the three month periods ended September 30, 2008. Two of
those clients and two other clients each accounted for more than 10% of our
revenue in the nine month period ended September 30, 2008.
7
Table
of Contents
THOMAS
GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
Revenue ($ thousands)
|
|
Revenue ($ thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Client A
|
|
$
|
560
|
|
$
|
757
|
|
$
|
2,098
|
|
$
|
2,289
|
|
Client B
|
|
$
|
452
|
|
$
|
288
|
|
$
|
1,441
|
|
$
|
577
|
|
Client C
|
|
$
|
464
|
|
$
|
342
|
|
$
|
1,305
|
|
$
|
3,128
|
|
Client D
|
|
$
|
315
|
|
$
|
|
|
$
|
911
|
|
$
|
|
|
Client E
|
|
$
|
91
|
|
$
|
94
|
|
$
|
269
|
|
$
|
6,787
|
|
Client F
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
4,205
|
|
Client G
|
|
$
|
|
|
$
|
743
|
|
$
|
22
|
|
$
|
1,243
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
%
of revenue
|
|
%
of revenue
|
|
|
|
|
|
|
|
|
|
|
|
Client A
|
|
27
|
%
|
20
|
%
|
26
|
%
|
11
|
%
|
Client B
|
|
22
|
%
|
8
|
%
|
18
|
%
|
3
|
%
|
Client C
|
|
22
|
%
|
9
|
%
|
16
|
%
|
14
|
%
|
Client D
|
|
15
|
%
|
0
|
%
|
11
|
%
|
0
|
%
|
Client E
|
|
4
|
%
|
2
|
%
|
3
|
%
|
31
|
%
|
Client F
|
|
0
|
%
|
0
|
%
|
0
|
%
|
19
|
%
|
Client G
|
|
0
|
%
|
19
|
%
|
0
|
%
|
6
|
%
|
There were no other clients from whom revenue exceeded 10% of total
revenue in the three and nine month periods ended September 30, 2009 and
2008, respectively.
6.
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 accounts receivable) from such significant
customers are set forth below:
|
|
September 30,
2009
|
|
December 31,
2008
|
|
|
|
$ thousands
|
|
%
of AR
|
|
$ thousands
|
|
%
of AR
|
|
|
|
|
|
|
|
|
|
|
|
Client A
|
|
$
|
196
|
|
15
|
%
|
$
|
314
|
|
16
|
%
|
Client
B
|
|
$
|
358
|
|
27
|
%
|
$
|
192
|
|
9
|
%
|
Client
C
|
|
$
|
151
|
|
11
|
%
|
$
|
85
|
|
4
|
%
|
Client
D
|
|
$
|
216
|
|
16
|
%
|
$
|
|
|
0
|
%
|
Client
E
|
|
$
|
30
|
|
2
|
%
|
$
|
27
|
|
1
|
%
|
Client
F
|
|
$
|
|
|
0
|
%
|
$
|
|
|
0
|
%
|
Client
G
|
|
$
|
|
|
0
|
%
|
$
|
496
|
|
24
|
%
|
7.
Supplemental
Disclosure of Cash Flow Information
|
|
Nine Months Ended
September 30,
|
|
|
|
2009
|
|
2008
|
|
|
|
In thousands
|
|
Interest paid
|
|
$
|
3
|
|
$
|
10
|
|
Taxes paid
|
|
$
|
38
|
|
$
|
1,128
|
|
8.
Geographical
Data
We provide services within one industry segment and conduct our
business primarily in North America and Europe with only occasional activities
elsewhere. During the second quarter of 2008, we closed our office in the
8
Table
of Contents
THOMAS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
In thousands
|
|
In thousands
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
1,538
|
|
$
|
2,852
|
|
$
|
5,309
|
|
$
|
19,136
|
|
South America
|
|
|
|
|
|
17
|
|
|
|
Europe
|
|
560
|
|
980
|
|
2,680
|
|
2,511
|
|
Total revenue
|
|
$
|
2,098
|
|
$
|
3,832
|
|
$
|
8,006
|
|
$
|
21,647
|
|
Gross profit:
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
602
|
|
$
|
848
|
|
$
|
1,931
|
|
$
|
8,637
|
|
South America
|
|
|
|
|
|
17
|
|
|
|
Europe
|
|
110
|
|
246
|
|
1,093
|
|
430
|
|
Total gross profit
|
|
$
|
712
|
|
$
|
1,094
|
|
$
|
3,041
|
|
$
|
9,067
|
|
|
|
September 30,
2009
|
|
December 31,
2008
|
|
|
|
In thousands
|
|
Long-lived assets:
|
|
|
|
|
|
North America
|
|
$
|
612
|
|
$
|
881
|
|
Total
|
|
$
|
612
|
|
$
|
881
|
|
9.
Property
and Equipment
|
|
September 30,
2009
|
|
December 31,
2008
|
|
|
|
In thousands
|
|
Equipment
|
|
$
|
1,036
|
|
$
|
1,044
|
|
Furniture and fixtures
|
|
541
|
|
541
|
|
Leasehold improvements
|
|
989
|
|
989
|
|
Computer software
|
|
446
|
|
446
|
|
|
|
3,012
|
|
3,020
|
|
Less accumulated depreciation and amortization
|
|
(2,400
|
)
|
(2,139
|
)
|
|
|
$
|
612
|
|
$
|
881
|
|
During the three month period ended September 30, 2009, we
disposed of $9,000 of office equipment and realized a net gain of $5,000. There
were no investments in property and equipment during the three and nine month
periods ended September 30, 2009.
10.
Stockholders Equity
Options
A
summary of the status of our stock options issued to employees for the nine
month period ended September 30, 2009 is presented below. As of September 30,
2009, there were no unvested stock options or remaining stock-based
compensation costs related to outstanding stock options.
9
Table of Contents
THOMAS
GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Common Option Shares
|
|
Shares
|
|
Weighted Average
Exercise Price
|
|
Outstanding at January 1, 2009
|
|
46,825
|
|
$
|
6.70
|
|
Granted
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
Expired
|
|
(22,825
|
)
|
$
|
4.01
|
|
Outstanding at September 30, 2009
|
|
24,000
|
|
$
|
9.26
|
|
Options exercisable at September 30, 2009
|
|
24,000
|
|
$
|
9.26
|
|
Weighted average life of outstanding options
(years)
|
|
|
|
0.33
|
|
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. McGraths share award was fully
vested on the date of grant and Mr. Steinbergs share award vested on March 10,
2009. Mr. McGraths share award was
expensed at the date of grant in March 2008, and Mr. Steinbergs
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 pursuant to the 2008 Omnibus Plan. Mr. McGraths award
entitles him to receive such shares in annual increments over a three year
period. Mr. Steinbergs 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 and
Corporate Governance Committee of the Board of Directors formally approves the
performance targets for the year. These performance share awards vest if
certain performance targets are satisfied. A summary of the restricted stock award
activity for the nine month period ended September 30, 2009 is presented
below.
Restricted Stock
|
|
Shares
|
|
Authorized awards at January 1, 2009 (1)
|
|
780,000
|
|
Vested (1)
|
|
(50,000
|
)
|
Authorized awards at September 30, 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 September 30, 2009
|
|
408,666
|
|
Authorized awards to be granted in future years
|
|
321,334
|
|
Authorized awards at September 30, 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 September 30, 2009, a total of
408,666 have been granted, but none have vested.
At September 30, 2009 there was approximately $28,500 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
Table
of Contents
THOMAS
GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
11.
Income
Taxes
We follow ASC 740,
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 ASC 740-10-25,
Income Taxes
Recognition
, 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 $2.1 million for the nine month period ended September 30,
2009 reflected an effective tax rate of 37%, compared to income tax benefit of
$1.8 million, or an effective tax rate of 32%, for the nine month period ended September 30,
2008. We had no ASC 740 liabilities as of September 30, 2009 or December 31,
2008.
During the second quarter of 2009, we
received notice from the Internal Revenue Service that it is reviewing our 2007
Federal income tax return. In November 2009, we received a notice from the
Internal Revenue Service that we do not owe anything for our 2007 income taxes.
12.
Financing
Agreement
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.
For the nine month periods ended September 30, 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 September 30, 2009 or December 31,
2008.
13.
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 third quarter of 2009, we repurchased 48,294
shares for a total cost of $41,102, or an average of $0.85 per share, including
commissions and fees.
Since the reactivation of our common stock repurchase program in March 2008
and through September 30, 2009, we had repurchased 676,900 shares for a
total cost of $1,127,616, or an average of $1.67 per share, including
commissions and fees. As of September 30, 2009, we had 128,550 shares
remaining to be repurchased under this repurchase program.
14.
Recently
Adopted Accounting Pronouncements
On January 1, 2008, we
adopted ASC 820,
Fair Value Measurements and
Disclosures,
except for
nonfinancial assets and nonfinancial liabilities. The objective of ASC
820 is to increase consistency and comparability in fair value measurements and
to expand disclosures about fair value measurements. ASC 820 defines fair
value, establishes a framework for measuring fair value in accordance with
generally accepted accounting principles, and expands disclosures about fair
value measurements. ASC 820 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 ASC 820 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.
On January 1, 2008, we adopted ASC 825-10-25,
Financial Instruments,
which permits entities to choose to
measure many financial instruments and certain other items at fair value. Most
of the provisions of ASC 825-10-25 apply
only to entities that elect the fair value option. 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.
On January 1, 2009, we adopted ASC 810-10-65,
Consolidation.
The adoption of this statement did not have a material effect on our
financial statements because we have no less-than-wholly-owned subsidiaries
that would require non-controlling interest to be reclassified to equity.
11
Table of Contents
THOMAS
GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On January 1, 2009, we adopted ASC 260-10-45-60,
Participating Securities
and the Two-Class Method
. ASC 260-10-45 requires that unvested
share-based payment awards that contain nonforfeitable rights to dividends or
dividend equivalents with common stocks be included in the earnings allocation
in computing earnings per share (EPS) under ASC 260,
Earnings per Share
.
We have no such instruments outstanding. The adoption of this ASC did not have
a material effect on our financial statements.
In May 2009, we adopted the provisions of ASC 855,
Subsequent Events
, that establishes general standards of
accounting for and disclosure of events that occur after the balance sheet date
but before financial statements are issued or are available to be issued.
Specifically,
ASC
855 sets forth
the period after the balance sheet date during which management of a reporting
entity should evaluate events or transactions that may occur for potential
recognition or disclosure in the financial statements, the circumstances under
which an entity should recognize events or transactions occurring after the
balance sheet date in its financial statements, and the disclosures that an
entity should make about events or transactions that occurred after the balance
sheet date. The adoption of
ASC 855
had no impact on the financial statements.
Effective July 1, 2009, we adopted the provisions of ASC 105,
Generally Accepted Accounting Principles
.
ASC 105-10 establishes the
FASB Accounting
Standards Codification
(the Codification) as the source of
authoritative accounting principles recognized by the FASB to be applied by
nongovernmental entities in the preparation of financial statements in
conformity with U.S. GAAP. Rules and interpretive releases of the SEC
under authority of federal securities laws are also sources of authoritative U.S.
GAAP for SEC registrants. All guidance contained in the Codification carries an
equal level of authority. The Codification superseded all existing non-SEC
accounting and reporting standards. All other non-grandfathered, non-SEC
accounting literature not included in the Codification is non-authoritative.
The FASB will not issue new standards in the form of Statements, FASB Staff
Positions or Emerging Issues Task Force Abstracts. Instead, it will issue
Accounting Standards Updates (ASUs). The FASB will not consider ASUs as
authoritative in their own right. ASUs will serve only to update the
Codification, provide background information about the guidance and provide the
bases for conclusions on the change(s) in the Codification. References
made to FASB guidance throughout this document have been updated for the
Codification. The Codification does not change or alter existing GAAP,
therefore, the adoption of ASC 105 did not have a material impact on our
condensed consolidated financial statements.
15.
Recently
Issued Accounting Pronouncements
In October 2009, the
FASB issued Accounting Standard Update No. 2009-13 on Topic 605,
Revenue Recognition Multiple Deliverable Revenue
Arrangements a consensus of the FASB Emerging Issues Task Force.
The
objective of this Update is to address the accounting for multiple-deliverable
arrangements to enable vendors to account for products or services
(deliverables) separately rather than as a combined unit. Vendors often provide
multiple products or services to their customers. Those deliverables often are
provided at different points in time or over different time periods. This
Update provides amendments to the criteria in Subtopic 605-25 for separating
consideration in multiple-deliverable arrangements. The amendments in this
Update establish a selling price hierarchy for determining the selling price of
a deliverable. The selling price used for each deliverable will be based on
vendor specific objective evidence if available, third-party evidence if
vendor-specific objective evidence is not available, or estimated selling price
if neither vendor specific objective evidence nor third-party evidence is
available. The amendments in this Update also will replace the term fair value
in the revenue allocation guidance with selling price to clarify that the
allocation of revenue is based on entity-specific assumptions rather than
assumptions of a marketplace participant. This Update is effective for fiscal
years beginning on or after June 15, 2010. We are currently
evaluating the impact, if any, that this new accounting update may have on
our consolidated financial statements.
12
Table of Contents
ITEM 2Managements 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.
Managements 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 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 place us in a strong
position to help those companies accelerate and magnify their internal efforts
to reduce costs and improve profitability.
Prospective clients are more cautious in making commitments to new
engagements and may delay the commencement of projects. This has made our
efforts to grow our revenue more difficult than we had anticipated earlier in
the year.
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.
13
Table of
Contents
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. Despite our efforts to reduce costs, 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 revenue, 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 four 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, and
·
Transportation and Logistics
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 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,
14
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·
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 areas Government, Aerospace and Defense Contractors,
Transportation and Logistics, and Healthcare. 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 clients 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.
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 72% and 66% of
consolidated revenue for the three and nine month periods ended September 30,
2009, and 66% and 37% of consolidated revenue for the three and nine month
periods ended September 30, 2008.
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 12% of consolidated revenue for each of the three and nine month periods
ended September 30, 2009, and 15% and 55% of consolidated revenue for the
three and nine month periods ended September 30, 2008.
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 clients 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
15
Table of Contents
performance
and prevailing economic conditions. Revenues attributable to incentive fees
were 1% and 8% of consolidated revenue for the three and nine month periods
ended September 30, 2009, and 8% and 1% of consolidated revenue for the
three and nine month periods ended September 30, 2008. As of September 30,
2009, we had no 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 15% and 13%, for the three and nine month periods ended September 30,
2009 and 11% and 6% of consolidated revenue for the three and nine month
periods ended September 30, 2008. For some clients, the fixed fee or
task-based fee is inclusive of travel. In these cases, the travel expense is
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 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. governments 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. For our
engagements with the U.S. government, we use an intermediary that acts as a
prime contractor providing contracting and administrative services for the majority
of our government programs, or we contract either directly with the government
through our listing with the General Services Administration.
For several years we 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
replaced most of 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 of $0.20
per share annually, 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 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
16
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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.
Deferred Taxes
Income taxes
are calculated using the asset and liability method required by ASC 740-10-25,
Income Taxes
. 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 ASC 740-10, 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 ASC 740-10, 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 September 30, 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 September 30,
2009, we had a valuation allowance of $58,000.
Our assessment included a review of the critical assumptions affecting
the ultimate realizability of this deferred tax asset. In order for us to be able to utilize the tax
deductions that give rise to this deferred tax asset, we will need to generate
adequate profits in the future. As a result, and particularly in light of our
net losses in recent periods, it is managements view that the most critical
assumption affecting the realizability of this deferred tax asset is the
assumption that we will be able to return to sustained profitability. In order to achieve such profitability, we
will need to generate additional revenue from new clients and to continue the
recent success of reducing costs and operating with a lower cost structure. We believe that our 30-year history of
success in delivering high quality services to our clients, our recent efforts
to diversify our product and service offerings to appeal to a broader range of
potential customers, and our recent success at reducing and managing costs are
all positive factors in assessing the likelihood of our future
profitability. Although it is impossible
to predict with certainty when or if we will return to profitability,
management is committed to this outcome and believes that we will be able
ultimately to achieve this goal. Therefore, we have concluded as of this point
in time that it is more likely than not that we will be able to utilize this
deferred tax asset.
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 ASC 740-10-25, 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 ASC 740-10-25, tax positions are initially recognized in the
financial statements when it is more likely than not that the position will
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be
sustained upon examination by the tax authorities. Such tax positions are initially
and subsequently 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. ASC
740-10-25 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, ASC 740-10-25 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 September 30, 2009, we did not have any liabilities or
associated interest under ASC 740-10-25.
Stock Based Compensation
We account for
stock based compensation arrangements in accordance with the provisions of ASC
718,
Stock Compensation
. ASC
718-30 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).
Income Taxes
During the second quarter of 2009, we received notice from the Internal
Revenue Service that it is reviewing our 2007 Federal income tax return. In November 2009,
we received a notice from the Internal Revenue Service that we do not owe
anything for our 2007 income taxes.
Recently Adopted Accounting Pronouncements
On January 1,
2008, we adopted ASC 820,
Fair Value
Measurements and Disclosures,
except
for nonfinancial assets and nonfinancial liabilities. The objective of
ASC 820 is to increase consistency and comparability in fair value measurements
and to expand disclosures about fair value measurements. ASC 820 defines fair
value, establishes a framework for measuring fair value in accordance with
generally accepted accounting principles, and expands disclosures about fair
value measurements. ASC 820 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 ASC 820 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.
On January 1, 2008, we adopted ASC 825-10-25,
Financial Instruments,
which permits entities to choose to
measure many financial instruments and certain other items at fair value. Most
of the provisions of ASC 825-10-25 apply
only to entities that elect the fair value option. 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.
On January 1, 2009, we adopted ASC 810-10-65,
Consolidation
.
The adoption of this statement
did not have a material effect on our financial statements because we have no
less-than-wholly-owned subsidiaries that would require non-controlling interest
to be reclassified to equity.
On January 1, 2009, we adopted ASC 260-10-45-60,
Participating Securities
and the Two-Class Method
. ASC 260-10-45 requires that unvested
share-based payment awards that contain nonforfeitable rights to dividends or
dividend equivalents with common stocks be included in the earnings allocation
in computing earnings per share (EPS) under ASC 260,
Earnings per Share
.
We have no such instruments outstanding. The adoption of this ASC did not have
a material effect on our financial statements.
In May 2009, we adopted the provisions of ASC 855,
Subsequent Events
, that establishes general standards of
accounting for and disclosure of events that occur after the balance sheet date
but before financial statements are issued or are available to be issued.
Specifically,
ASC
855 sets forth
the period after the balance sheet date during which management of a reporting
entity should evaluate events or transactions that may occur for potential
recognition or disclosure in the financial statements, the circumstances under
which an entity should recognize events or transactions occurring after the
balance sheet date in its financial statements, and the disclosures that an
entity should make about events or transactions that occurred after the balance
sheet date. The adoption of
ASC 855
had no impact on the financial statements.
Effective July 1, 2009, we adopted the provisions of ASC 105,
Generally Accepted Accounting Principles
.
ASC 105-10 establishes the
FASB Accounting
Standards Codification
(the Codification) as the source of
authoritative accounting principles
18
Table of Contents
recognized
by the FASB to be applied by nongovernmental entities in the preparation of
financial statements in conformity with U.S. GAAP. Rules and interpretive
releases of the SEC under authority of federal securities laws are also sources
of authoritative U.S. GAAP for SEC registrants. All guidance contained in the
Codification carries an equal level of authority. The Codification superseded
all existing non-SEC accounting and reporting standards. All other
non-grandfathered, non-SEC accounting literature not included in the
Codification is non-authoritative. The FASB will not issue new standards in the
form of Statements, FASB Staff Positions or Emerging Issues Task Force
Abstracts. Instead, it will issue Accounting Standards Updates (ASUs). The
FASB will not consider ASUs as authoritative in their own right. ASUs will
serve only to update the Codification, provide background information about the
guidance and provide the bases for conclusions on the change(s) in the
Codification. References made to FASB guidance throughout this document have
been updated for the Codification. The Codification does not change or alter
existing GAAP, therefore, the adoption of ASC 105 did not have a material
impact on our condensed consolidated financial statements.
Recently Issued Accounting Pronouncements
In October 2009, the
FASB issued Accounting Standard Update No. 2009-13 on Topic 605,
Revenue Recognition Multiple Deliverable Revenue
Arrangements a consensus of the FASB Emerging Issues Task Force.
The
objective of this Update is to address the accounting for multiple-deliverable
arrangements to enable vendors to account for products or services
(deliverables) separately rather than as a combined unit. Vendors often provide
multiple products or services to their customers. Those deliverables often are
provided at different points in time or over different time periods. This
Update provides amendments to the criteria in Subtopic 605-25 for separating
consideration in multiple-deliverable arrangements. The amendments in this
Update establish a selling price hierarchy for determining the selling price of
a deliverable. The selling price used for each deliverable will be based on
vendor specific objective evidence if available, third-party evidence if
vendor-specific objective evidence is not available, or estimated selling price
if neither vendor specific objective evidence nor third-party evidence is
available. The amendments in this Update also will replace the term fair value
in the revenue allocation guidance with selling price to clarify that the
allocation of revenue is based on entity-specific assumptions rather than
assumptions of a marketplace participant. This Update is effective for fiscal
years beginning on or after June 15, 2010. We are currently
evaluating the impact, if any, that this new accounting update may have on
our consolidated financial statements.
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 September 30,
|
|
Nine Months
Ended September 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Revenue
|
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
Cost of sales
|
|
66.1
|
%
|
71.5
|
%
|
62.0
|
%
|
58.1
|
%
|
Gross profit
|
|
33.9
|
%
|
28.5
|
%
|
38.0
|
%
|
41.9
|
%
|
Selling, general and administrative
|
|
123.7
|
%
|
113.9
|
%
|
113.8
|
%
|
68.8
|
%
|
Operating income (loss)
|
|
(89.8
|
)%
|
(85.4
|
)%
|
(75.8
|
)%
|
(26.9
|
)%
|
Interest income (expense), net
|
|
|
|
1.5
|
%
|
0.1
|
%
|
1.2
|
%
|
Other income (expense),
|
|
14.4
|
%
|
|
|
4.1
|
%
|
|
|
Income (loss) before income taxes
|
|
(75.4
|
)%
|
(83.9
|
)%
|
(71.6
|
)%
|
(25.7
|
)%
|
Income taxes
|
|
(26.5
|
)%
|
(24.3
|
)%
|
(26.6
|
)%
|
(8.1
|
)%
|
Net income (loss)
|
|
(48.9
|
)%
|
(59.6
|
)%
|
(45.0
|
)%
|
(17.6
|
)%
|
Three Month Period Ended September 30, 2009
Compared to the Three Month Period Ended September 30, 2008
Revenue
In the third
quarter of 2009, total revenues decreased $1.7 million, or 45%, to
$2.1 million from $3.8 million in the third quarter of 2008. Task
based revenue was $0.3 million, or 12% of revenue, in the third quarter of
2009, compared to $0.6 million, or 15% of revenue, in the third quarter of
2008. Fixed fee revenue was $1.5 million, or 72% of revenue, in the third
quarter of 2009, compared to $2.5 million, or 66% of revenue, in the third
quarter of 2008. Reimbursement revenues were $0.3 million, or 15% of
revenue, in the third quarter of 2009, compared to $0.4 million, or 11% of
revenue, in the third quarter of 2008. Incentive revenue was $0.03 million, or
1% of revenue, in the third quarter of 2009, compared to $0.3 million, or 8%
of revenue, in the third quarter of 2008. As of October 31, 2009, we had
no active incentive based contracts.
North America region revenue decreased $1.3 million, or 46%, to
$1.5 million in the third quarter of 2009, compared to $2.9 million
in the third quarter of 2008. The decrease in North America revenues for the
third quarter of 2009 compared to the third quarter of 2008 is due primarily to
a decrease in our government 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 governments decision to
consolidate these programs into a single contracting vehicle for which we were
not named as a provider. The decrease in fixed fee revenue, which is associated
with our commercial contracts, is due primarily to having a lower volume of
commercial contracts, along with the contracts having a lower contract value
for the three month period ended September 30, 2009 compared to
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the
three month period ended September 30, 2008. Reimbursable revenues, which
also are associated with our commercial contracts, decreased due to the
decrease in commercial activity.
Europe region revenue decreased $0.4 million, or 43%, to
$0.6 million in the third quarter of 2009, compared to $1.0 million
in the third quarter of 2008 due to completion of contracts with two clients.
Although we discontinued our Europe operations in 2006, we maintain a strategic
relationship in Europe through which we may periodically obtain business.
Gross Profit
Gross profit
margins were 34% of revenue, or $0.7 million, in the third quarter of
2009, compared to 29%, or $1.1 million, in the third 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 increase in the quarterly
gross margin is mainly related to a decrease in payroll under our variable cost
model and a decrease in unreimbursed travel related expenses in the third
quarter of 2009.
Selling, General and Administrative
Expenses
SG&A costs for the third
quarter of 2009 were $2.6 million, compared to $4.4 million in the third
quarter of 2008. The $1.8 million decrease is related primarily to a $0.2
million decrease in stock-based compensation during the second quarter of 2009,
a $0.6 million decrease in sales commissions and accrued executive bonus, a
$0.5 million decrease in payroll costs due to the decline in the number of
consultants employed, a $0.1 million decrease in travel related costs, and a
$0.4 million decrease in other costs due to a decline in activity as compared
to the same period in 2008.
For the three months ended September 30, 2009, we recorded bad
debt expense of $0.01 million compared to $0 for the three months ended September 30,
2008.
Other Income
Other income
for the third quarter of 2009 was $0.3 million, which included the collection
of a $0.2 million bad debt written off in 2008. We also received credits for
audit adjustments on insurance premiums of $0.1 million. We had no other income
during the third quarter of 2008.
Nine Month Period Ended September 30, 2009 Compared to the Nine
Month Period Ended September 30, 2008
Revenue
In the first
nine months of 2009, total revenues decreased $13.6 million, or 63%, to
$8.0 million from $21.6 million in the first nine months of 2008. Task
based revenue was $1.0 million, or 12% of revenue, in the first nine
months of 2009, compared to $12.0 million, or 55% of revenue, in the first
nine months of 2008. Fixed fee revenue was $5.3 million, or 66% of
revenue, in the first nine months of 2009, compared to $8.0 million, or
37% of revenue, in the first nine months of 2008. Reimbursement revenues were
$1.1 million, or 13% of revenue, in the first nine months of 2009,
compared to $1.3 million, or 6% of revenue, in the first nine months of
2008. Incentive revenue was $0.7 million, or 8% of revenue, in the first nine
months of 2009, compared to $0.3 million, or 1% of revenue, in the first
nine months of 2008. As of October 31, 2009, we had no active incentive
based contracts.
North America region revenue decreased $13.8 million, or 72%, to
$5.3 million in the first nine months of 2009, compared to
$19.1 million in the first nine months of 2008. The decrease in North America
revenues for the first nine months of 2009 compared to the first nine months of
2008 is due primarily to a decrease in our government 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
governments decision to consolidate these programs into a single contracting
vehicle for which we were not named as a provider. The decrease in fixed fee
revenue, which is associated with our commercial contracts, is due primarily to
having a lower volume of our commercial contracts, along with the contracts
having a lower contract value for the first nine months of 2009 compared to the
first nine months of 2008. Reimbursable revenues, which also are associated
with our commercial contracts, decreased due to the decrease in commercial
activity.
Our South America region revenue was $17,000 during the first nine
months of 2009. We had no revenue in South America during the first nine months
of 2008.
During the first nine months of 2009, we recorded $2.7 million in
revenue from clients located in Europe, compared to $2.5 million in revenue in
the first nine months of 2008 due to additional contracts early in the year.
Although we discontinued our Europe operations in 2006, we maintain a strategic
relationship in Europe through which we may periodically obtain business.
Gross Profit
Gross profit
margins were 38% of revenue, or $3.0 million, in the first nine months of
2009, compared to 42%, or $9.1 million, in the first nine months 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. Decrease in the year-to-date gross
margins is related to a lower level of revenue in 2009 and to a higher
concentration of higher margin client engagements in early 2008.
20
Table of
Contents
Selling, General and Administrative
Expenses
SG&A costs for the first
nine months of 2009 were $9.1 million compared to $14.9 million in the first
nine months of 2008. The $5.8 million decreases is primarily related to a
$1.7 million decrease in payroll costs due to the decline in the number of
consultants employed, a $0.4 million decrease in severance costs related to the
reduction in our labor force during the second quarter of 2008, a $0.8 million
decrease in stock-based compensation, a $1.3 million decrease in sales
commissions and accrued executive bonus, a $0.2 million decrease in travel
related costs, a $0.3 million decrease in recruiting costs, a $0.2 million
decrease in bad debt expense, a $0.2 million decrease in outside consultants
used due to the decline in activity, a $0.2 million decrease in rental costs, a
$0.1 million decrease in general insurance costs, and a $0.4 million
decline in other costs due to a decrease in activity and the number of
consultants employed as compared to prior year.
For the nine months ended September 30, 2009, we recorded bad debt
expense of $0.01 million compared to $0.2 million for the nine months ended September 30,
2008.
Other Income
Other income
for the first nine months of 2009 was $0.3 million which included the
collection of a $0.2 million bad debt written off in 2008. We also received
credits for audit adjustments on insurance premiums of $0.1 million. We had no
other income during the first nine months of 2009.
Liquidity and Capital Resources
Cash and cash equivalents decreased by $1.9 million during the
first nine months of 2009 compared to a $1.2 million decrease during the first
nine months of 2008. The major components of these changes are discussed below:
Cash Flows from Operating Activities
Net cash used
in operating activities was $1.7 million in the first nine months of 2009,
compared to net cash provided by operations of $1.0 million for the first nine
months of 2008. This decrease is due primarily to our net loss for the first
half of the year offset by the receipt of an income tax refund of $2.7 million
in 2009 for losses recorded in 2008.
Cash Flows from Investing Activities
There was no cash used for investing
activities in the first nine months of 2009 compared to $0.1 million in the
first nine months of 2008, which consisted of computer and software purchases.
Cash Flows from Financing Activities
Cash used for
financing activities for the first nine months of 2009 was $0.2 million
consisting primarily of stock repurchases compared to $2.1 million in the first
nine months of 2008, related to the $1.2 million payment of dividends, the $0.8
million purchase of stock under our stock repurchase plan, and the $0.2 million
net tax effect of stock issuances.
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 third quarter of 2009, we repurchased 48,294
shares for a total of $41,102, or an average of $0.85 per share, including
commissions and fees.
Since the reactivation of our common stock repurchase program in March 2008
and through September 30, 2009, we had repurchased 676,900 shares for a
total cost of $1,127,616, or $1.67 per share, including commissions and fees.
As of September 30, 2009, we had 128,550 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
21
Table of Contents
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.
Our Liquidity Plan
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, 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 $9.4 million
at September 30, 2009 is sufficient to provide the necessary resources for
us in 2009. Our cash balance at September 30, 2009 was $6.5 million, or
$0.60 per diluted share. We anticipate that we will receive a refund of Federal
income taxes in 2010 from losses incurred in 2009. As of September 30, 2009 our current
income tax receivable is $2.1 million.
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 and nine month periods ended September 30, 2009 or 2008. However,
there can be no assurance our business will not be affected by inflation in the
future.
Commitments and Off-Balance Sheet
Arrangements
As of September 30, 2009, we had no material
commitments for capital expenditures or off-balance sheet arrangements.
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 September 30,
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 Commissions 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
managements 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.
PART IIOTHER INFORMATION
ITEM 1Legal Proceedings
During the second quarter of 2009, we
received notice from the Internal Revenue Service that it is reviewing our 2007
Federal income tax return. In November 2009, we received a notice from the
Internal Revenue Service that we do not owe anything for our 2007 income taxes.
22
Table of Contents
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
If we do not maintain compliance with the listing
requirements of the NASDAQ Global Market, our common stock could be delisted,
which could, among other things, reduce the price of our common stock and the
levels of liquidity available to our stockholders.
Our
securities could be delisted in the future if we do not maintain compliance
with applicable listing requirements. If our securities are delisted from the
NASDAQ Global Market and we are unable to satisfy the listing requirements of
the NASDAQ Capital Market, our securities would subsequently be transferred to
the National Quotation Service Bureau, or Pink Sheets. The trading of our
common stock on the Pink Sheets may reduce the price of our common stock and
the levels of liquidity available to our stockholders. In addition, the trading
of our common stock on the Pink Sheets will materially adversely affect our
access to the capital markets and our ability to raise capital through
alternative financing sources on terms acceptable to us or at all. Securities
that trade on the Pink Sheets are no longer eligible for margin loans, and a
company trading on the Pink Sheets cannot avail itself of federal preemption of
state securities or blue sky laws, which adds substantial compliance costs to
securities issuances, including pursuant to employee option plans, stock
purchase plans and private or public offerings of securities. If our securities
are delisted in the future and transferred to the Pink Sheets, there may also
be other negative implications, including the potential loss of confidence by
suppliers, customers and employees.
On October 16, 2008, NASDAQ, as part of its response to what it
views as extraordinary market conditions, temporarily suspended some of its
marketplace rules related to listing requirements. NASDAQ subsequently
extended these temporary changes on two occasions.
These
temporary suspensions expired on July 31, 2009, with enforcement of these rules reinstated
on August 3, 2009.
On
September 16, 2009, we received two NASDAQ Staff Deficiency Letters
indicating that we no longer comply with (i) the minimum bid price
requirements as set forth in Listing Rule 5450(a)(1) of the NASDAQ
Stock Market, which requires that listed securities maintain a minimum bid
price of $1.00 per share, and (ii) the minimum market value of publicly
held shares as set forth in Listing Rule 5450(b)(1)(C), which requires
that the market value of publicly held shares be at least $5,000,000.
In
accordance with Listing Rule 5810(c)(3)(A), NASDAQ has provided us a cure
period to regain compliance with the $1.00 minimum bid price rule no later
than March 15, 2010. In accordance with Listing Rule 5810(c)(3)(D),
NASDAQ has provided the Company a cure period to regain compliance with the
minimum market value rule no later than December 15, 2009.
If
we fail to meet the minimum market value rule by December 15, 2009,
we may apply for listing on the NASDAQ Capital Market prior to that date. If we
are listed on the NASDAQ Capital Market, we will still be required to regain
compliance with the $1.00 minimum bid price rule no later than March 15,
2010.
There have been no other 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 September 30, 2009:
23
Table of
Contents
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
|
|
July 1
31, 2009
|
|
|
|
$
|
|
|
|
|
176,844
|
|
August 1
30, 2009
|
|
39,694
|
|
$
|
0.84
|
|
39,694
|
|
137,150
|
|
September 1
30, 2009
|
|
8,600
|
|
$
|
0.90
|
|
8,600
|
|
128,550
|
|
Total
|
|
48,294
|
|
$
|
0.85
|
|
48,294
|
|
|
|
We purchased these shares with our available cash.
As of September 30, 2009, we had repurchased a total of 676,900
shares at an average total cost of $1.67 per share, including commissions and
fees since April 7, 2008.
ITEM 3Defaults Upon Senior Securities
None.
ITEM 4Submission of Matters to a Vote of Security
Holders
None.
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).
|
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.
|
24
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.
|
|
THOMAS GROUP, INC.
Registrant
|
|
|
|
November 13, 2009
|
|
/s/ EARLE STEINBERG
|
Date
|
|
Earle Steinberg
|
|
|
President and Chief Executive Officer
|
25
Table of Contents
Thomas Group, Inc.
Form
Exhibit Index
Exhibit
Number
|
|
Description
|
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).
|
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.
|
26
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