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FORM 10-K.—ITEM 14(a)(1) Thomas Group, Inc.

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

Commission file number 0-22010

THOMAS GROUP, INC.

(Exact name of registrant as specified in its charter)

Securities registered pursuant to Section 12(g) of the Act: Rights to purchase common stock

        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. ý Yes / No o

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

        As of April 8, 2002, the aggregate market value of the voting stock held by non-affiliates of the registrant was $4,218,038, based on the NASDAQ-NMS closing price of $1.50.

        As of April 8, 2002, the following number of shares of the registrant's stock were outstanding:

TABLE OF CONTENTS

PART I

ITEM 1. Business.

General

        Thomas Group, Inc. (the "Company"), established in 1978, is an international, professional services firm focusing on improving operations, competitiveness and financial performance of major corporate clients through process improvement and strategically aligning operations with technology. Recognized as a leading specialist in operations consulting, the Company creates and implements custom improvement strategies for sustained performance improvement. The Company's clients are typically large companies, many of whom are included in the Fortune or Global 1000.

        The Company's products are based on three fundamental principles: a metrics-driven process, attaining and sustaining significant results for clients and program implementation by consultants with senior management experience in industry.

        Since 1978, the Company has been developing and improving its Process Value Management ("PVM") methodology for achieving operational excellence. PVM is based on the Company's Total Cycle Time ("TCT") methods, first introduced in 1978, and supplements TCT with numerous process improvement tools the Company has developed over the last 24 years. PVM continues to contribute to the measurable improvement of hundreds of companies.

        During the Company's first ten years, it originated many of the fast-process methods that transform the processes, procedures and people within clients' organizations to create smooth, efficient and seamless operations. These methods quickly became standard operations for the electronics and semiconductor industries. Soon afterwards, they were being applied to general manufacturing, heavy industry and product inventory. In the late 1980s, in response to numerous client requests, the Company applied the fast-process tools and methods to non-manufacturing processes such as product development, sales, marketing and the strategic alignment of resources. The application of fast-process tools across the entire enterprise led to major process and productivity gains in "white collar" areas that had been ignored for years in the manufacturing plant, again delivering substantial gains for its clients. Today, the Company is involved with new tools, both proprietary and non-proprietary, to drive higher results. The Company is working to help link all of a corporation's strategic processes, not only across its internal functions, but also across entities and geographies.

Statement of Business

        The Company's business is helping its clients improve their bottom-line results using the Company's senior executives who work side-by-side with clients to remove barriers, increase productivity, change culture, and focus everyone on quickly satisfying customer needs. This has been the sole focus of the Company since our beginning in 1978.

Process Value Management

        The Company's PVM approach is based on its 24 years of experience with process improvement tools and methodologies that drive financial bottom-line results. The Company uses PVM to help an enterprise determine strategic business processes, assess their linkages and efficiencies, and prescribe short-and long-term enhancement programs that optimize customer satisfaction and shareholder value. The Company's staff of business professionals who apply PVM methodology are referred to by the Company as "Resultants." An initial client assignment might typically address one or more of these key processes that are dragging down performance. A long-term relationship might involve an implementation team of Resultants working with the corporation over a number of years to achieve a total transformation to the "Process Managed Enterprise".

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        Experience has taught us that:

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The Process Managed Enterprise is one in which its management focus and systems are centered on customers and managed around processes;



•

All businesses are made up of a series of linked processes. All processes, left unmanaged, naturally deteriorate over time;



•

In today's global economy, every business is part of a boundless process that runs seamlessly, from the initial business concept through all its applied resources to its end customer;



•

People, working in cross-functional teams, focusing on customer needs, are what make processes effective;



•

The customer is the final arbiter of the value of the process; and



•

The transformation process itself must deliver short-term operating results as well as long-term systemic business enhancements.

Total Cycle Time

        The Company's initial offering, TCT, centers on reducing cycle times and increasing first pass yield (quality), therefore improving overall productivity. Using the Company's methods, business process cycle times—the time from the beginning to the end of any business activity—can normally be reduced by up to 50% whether the process is engineering, manufacturing or sales.

        For example, in a manufacturing setting, it might take 30 days from the time an order is received until the order is shipped. The Company first determines the baseline time of that process—the time currently expended doing the work. Based on the Company's best practices, a multiplier is used to move from baseline to "entitlement"—how fast the process should run with current resources. The Company's Resultants then work with client management to reduce the current rate to the entitlement by mapping the process, eliminating unnecessary steps, and removing process and cultural barriers.

        The key to TCT's success is the Resultants' ability to identify the right metrics to drive the business and the critical processes of the business. Many companies only look at results measures, such as return on net assets. The problem with results measures is that by the time their value is known, it is too late in the process to employ corrective measures. However, when predictive driver measures such as cycle time and first pass yield are used, clients can determine the trajectory of their business and make adjustments as needed.

        The Company uses a "cockpit chart" approach to capture the key measurements for a business and to ensure that the focus is on the appropriate processes that will drive results. Cockpit charts contain a balanced combination of results and driver measurements. In addition, these top-level measurements are hierarchical and represent the roll-up of the key processes.

        TCT remains a core of the Company's PVM methodology.

TTM—OPTTMIZE

        New product development is a particularly complex challenge for most enterprises. It requires not only coordinated participation from resources across the organization but also the successful blending of the creative and operational aspects of the development process. Additionally, there is a constant juggling act as multiple new product programs of differing length, cost, risk, complexity and resource requirements begin and end. Finally, there is the critical element of time: being second to market with a breakthrough innovation is too late, and in any event there can be no return on investment of any development activity until that new product enters the marketplace.

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        As is in all activities of the Process Managed Enterprise, time is of the essence. In the case of new product development, the management challenge is two dimensional: one dimension is managing the new product development process in terms of time, quality and cost, what the Company calls time to market ("TTM"); the other is assessing these programs in a portfolio context to maximize resource utilization and portfolio returns.

        The Company's solution to the TTM issue is to couple the Company's existing PVM process approach and measurements with a new, proprietary database tool that can be applied across new product development activities. This combination, called OPTTMIZE, improves new product project tracking, shortens new product introduction times, and quantifies new product portfolio performance.

        OPTTMIZE brings a new level of visibility, particularly in the area of time to market and constrained resources, with both data and tools that link process improvement to improved resource utilization, higher returns on investment, and reduced time to market.

Supply Chain Process Value

        Supply chain management ("SCM") has matured over the last decade. A milestone in the maturity of SCM, driven by the need for value control in today's competitive global environment, is the leading-edge concept that the demand side management within a supply chain has as much impact on value and cash management as does supply side management.

        This is an excellent example of recognizing the interconnectivity of processes and supports the need to shift from a functional to a process view of SCM. Thomas Group's own Supply Chain Process Value ("SCPV") offering within its overarching PVM approach, balances demand side management and supply side management while optimizing responsiveness, quality and value.

        The Company has helped hundreds of clients make a successful transition from functional organizations to efficient SCPV cross-functional teams. Using this PVM architecture, the Company analyzes the client's operations and supply chain network, then applies tools such as TCT and OPUS (described below) to drive down inventory levels, reduce delivery time and improve order accuracy. Ideally, this process links back into the client's suppliers and customers and drives additional benefits.

Inventory Optimization ("OPUS")

        Many enterprises are learning that reducing high inventory is as much a process challenge as a technological one. Specifically, long cycle time processes require high inventories, so reducing inventories without cycle time reductions necessarily creates stock outs and unpredictable service levels. Furthermore, unpredictable customer demand and supplier performance introduces supply chain risk that is similarly managed through higher inventory levels.

        To comprehensively optimize inventory (maximize availability, remove waste, increase controls and improve customer satisfaction while minimizing investment) requires an understanding of how these key factors interact in both time and risk to impact inventory at the part number level.

        The Company's approach to inventory optimization simultaneously addresses these risk and time variables through process management activities that are guided by a software tool called OPUS. OPUS optimizes inventory across six independent risk and time variables, allowing inventory parameters to be set by part number.

        This process approach, supported by the OPUS decision support tool, delivers inventory optimization in a relatively short amount of time.

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Summary

        Over the years, the Company has become a leader in implementing process improvement strategies that make companies faster and improve their competitiveness and financial performance. This ability to link and align a client organization's strategy, technology, people and processes offers a powerful and unique benefit to client companies faced with integrating their operations, internally and externally, throughout the value chain. The Company's strategic plan is to continually add value to its core PVM product offering and to expand its marketing reach through partnerships with industry leaders.

Competitive Strategy

        The Company's strategy is to maintain and enhance its position in the development and implementation of its PVM methodology. The Company's strategy includes the following key elements, many of which differentiate it from traditional providers of consulting services.

        Emphasize Results.    The Company may enter into incentive fee contracts, which make a portion of its revenue from a particular program contingent upon certain measurable results. The Company offers incentive fee contracts in cases where the client prefers that the Company share the risks to achieve entitled results or for clients who prefer to work on a gain-sharing basis. The Company's competitors generally charge fees based on time expended regardless of results. Thus. the Company's willingness to enter into incentive fee contracts demonstrates the Company's confidence that its programs will positively enhance the businesses of its clients and furthermore provides significant competitive differentiation and advantage.

        Target Large Clients and Multiple Program Opportunities.    The Company has focused its marketing efforts on companies with annual revenues greater than $400 million, preferably where sequential program opportunities exist. The Company believes larger clients provide greater revenue opportunities because such clients are likely to realize greater economic benefit from the Company's services and will be more likely to engage the Company in follow-on programs.

        Focus on Results Implementation and Continuous Improvement.    By applying PVM throughout the client's complete business or business unit and by working in close cooperation with the client's management, the Company believes it can more effectively drive operational performance improvements and their associated financial benefits. The Company stresses hands-on implementation of process improvements and focuses on implementation of prioritized changes that improve the client's business culture and processes. In addition to implementing change through its PVM plan, an essential element of a PVM program is "leaving behind" with the client the knowledge and skills needed for the client to continue to sustain continuous improvement. In contrast, traditional consulting firms often provide subject expertise in the form of written assessments or reports that focus on discrete functions or an isolated segment of a business.

        Experienced Professional Staff.    The Company employs professionals with extensive business management experience, often 20 years or more. Traditional consulting firms often hire recent business school graduates with expertise in a particular subject matter, rather than expertise in business management. The use of seasoned professionals significantly improves the ability of the Company to effectively implement its PVM methodologies and creates a significant competitive difference and advantage for the Company.

        Program Focus.    The Company focuses primarily on cultural and business process barriers rather than on subject matter barriers and functional units. The Company believes reductions in cultural and business process barriers have a greater impact on improving a client's performance.

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Clients

        The Company's clients are typically large, well-established manufacturing, project and service companies, or distinct business units of such companies, in the United States, Europe, and the Asia/Pacific region. Many of the Company's clients are Fortune or Global 1000 companies. The Company has worked for over 250 clients, including the following:

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        There can be no assurance that the Company will perform services for any of its previous clients in the future. In order to maintain and increase its revenues, the Company will need to add new clients or expand existing client relationships to include additional divisions or business units of such clients.

        The Company operates in one industry segment, but conducts its business primarily in three geographic areas: the United States, Europe and Asia/Pacific. Information regarding these areas follows:

        In 2001, three clients, Robert Bosch, Adam Opel and Acton Burnell, accounted for 37%, 11% and 11% of the Company's total revenue, respectively.

        In 2000, three clients, Robert Bosch, General Motors and Boston Scientific, accounted for 29%, 16% and 14% of the Company's total revenue, respectively.

        In 1999, three clients, General Motors, Robert Bosch and Delphi Delco, accounted for 21%, 15% and 12% of the Company's total revenue, respectively.

Contractual Arrangements

        The Company performs PVM services for clients pursuant to contracts, generally with terms of one to three years, or targeted process improvement programs that could last from three to six months. Clients compensate the Company for its services in the form of fixed fees or a combination of fixed and incentive fees (based on client improvements achieved). The Company's fee structure is based on a client's size, the complexity and geographic deployment of a client's business, the level of improvement opportunity available to a client and certain other factors.

        Fixed fees are recognized proportionately as revenue over the term of the contract as performance measures are achieved. Incentive (performance-oriented) revenue is recognized in the period for which performance improvement is being measured and is based on agreed-upon formulas relating to improvements in customer-specific measures. Factors such as a client's commitment to TCT, general business and economic cycles and a client's product position in the marketplace will affect the performance of the Company's clients, thus affecting the Company's revenue from incentive fee compensation. In 2001, 2000, and 1999, approximately 29%, 8% and 10%, respectively, of the Company's revenue was attributable to incentive fees.

        The Company includes in its business under commitment (backlog) signed client contracts with terms generally ranging from 12 to 18 months. Business under commitment was $32.6 million at December 31, 2001, of which approximately $19.6 million is expected to be realized within fiscal 2002.

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Competition

        Traditional consulting firms provide services similar in some respects to the services provided by the Company. Providers of such services include A.T. Kearney, Inc., Boston Consulting Group, McKinsey & Co., as well as several small firms that primarily focus on time-based management services. Many of the Company's competitors have greater personnel, financial, technical and marketing resources than the Company, and there can be no assurance the Company will be able to compete successfully with its existing competitors or with any new competitors.

        The Company believes the competitive factors most important to its business are the unique quality of its PVM methodology, the quality and character of its professional staff, its willingness to be compensated on an incentive basis, its reputation for achieving targeted results and its dedication to implementation of programs that deliver results. The Company believes that no significant competitors offer their clients the opportunity to base fees on the results achieved or emphasize hands-on implementation to the same extent as the Company.

        The Company believes its most significant "competitor" is the propensity for potential clients to "self-medicate" by attempting to implement changes in their businesses themselves in the belief they will achieve results comparable to those resulting from the Company's services without the assistance of outside professionals. The Company believes these attempts to self-medicate result in limited success. However, such attempts may substantially lengthen the Company's sales cycle and may, therefore, limit its business opportunities.

        Because the PVM methodology or related shorter term products are not capable of being patented, there can be no assurance the Company will not be subject to competition from others using substantially similar methodologies. However, the Company believes its base of knowledge, experience and clients provides it with a competitive advantage.

Intellectual Property

        The Company has secured federal registration for the service marks "Total Cycle Time®," "TCT®," "5 I's Process®" and "Cycles of Learning®." These registrations expire from August 2002 to January 2003. The Company has filed an application for federal service mark registration for several other marks important to its business. The Company has also made appropriate filings in several European countries to secure protection of its marks in those countries. The Company considers each of these service marks to be significant to its business.

        The Company's proprietary methodologies have been developed over 20 years at great expense, have required considerable effort on the part of skilled professionals, are not generally known and are considered trade secrets. In some circumstances, the Company grants clients a limited license to make internal use of certain of the Company's proprietary methodologies following completion of a program. The Company maintains its trade secrets in strict confidence and as part of its standard engagement.

        The Company has entered into nondisclosure and noncompete agreements with its current and former employees. There can be no assurance that such agreements will deter any employee of the Company from disclosing confidential information to third parties or from using such information to compete with the Company in the future.

Employees

        At March 31, 2002, the Company had a total of 211 employees, consisting of 104 full-time Resultants, 53 part-time Resultants and 54 sales and administrative employees. The Company's employees are not represented by a labor union and are not subject to any collective bargaining agreement. The Company considers its employee relations to be good.

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ITEM 2. Properties.

        The Company leases approximately 17,000 square feet of office space at its principal executive office in Irving, Texas, under leases that expire in July 2006. The Company also leases space for its offices in Troy, Michigan; Frankfurt, Germany; Singapore and Hong Kong. The Company believes these facilities are adequate for its current needs.

ITEM 3. Legal Proceedings.

        The Company has become subject to various other claims and other legal matters, such as collection matters initiated by the Company, in the course of conducting its business. The Company believes that neither such claims and other legal matters nor the cost of prosecuting and/or defending such claims and other legal matters will have a material adverse effect on the Company's consolidated results of operations, financial condition or cash flows. No claims are currently pending; however, no assurances can be given that future claims, if any, may not be material.

ITEM 4. Submission of Matters to a Vote of Security Holders.

        No matters were submitted to a vote of stockholders, through the solicitation of proxies or otherwise, during the quarter ended December 31, 2001.

PART II

ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters.

Market for Registrant's Common Equity

        The Company's common stock is traded on the NASDAQ National Market System under the symbol TGIS. The stock prices set forth below represent the highest and lowest sales prices per share of the Company's common stock as reported by the NASDAQ National Market System. The prices reported in the following table by the NASDAQ National Market System reflect inter-dealer prices without retail mark-up, mark-down or commissions.

        There is no established public market for the Company's Class B common stock.

Holders of Record

        As of March 8, 2002 there were approximately 141 holders of record of the Company's common stock.

        As of March 8, 2002 there were 8 holders of the Company's Class B common stock.

Dividends

        The Company has not paid cash dividends on its common stock. The Company intends to retain future earnings to provide funds for use in the operation and expansion of the business, and accordingly, does not anticipate paying regular cash dividends on its common stock in the foreseeable future.

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ITEM 6. Selected Financial Data.

        The following table sets forth selected historical financial information of the Company. This historical financial information has been derived from the audited financial statements of the Company and, with respect to data for 1997 is adjusted for the reclassification of discontinued operations. This information should be read in conjunction with, and is qualified by, the consolidated financial statements and notes thereto included in this and previous Annual Reports on Form 10-K.

(a)

Includes $2.9 million of litigation settlement expense and $2.3 million of severance cost related to staff reductions during 2001.

(b)

Includes $3.3 million valuation allowance adjustment to the Company's net deferred tax assets.

(c)

Includes $1.3 million of CEO transition costs and $0.7 million of litigation settlement expense.

(d)

Includes restructuring charges of $9.7 million and $0.8 million of severance cost related to the departure of three senior level employees.

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ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

        The following discussion should be read in conjunction with the Company's Consolidated Financial Statements and the notes thereto and the other information included in Item 14(a)(1) and (2) of this Annual Report on Form 10-K.

Overview

        The Company derives the majority of its revenue from monthly fixed and incentive fees for the implementation of PVM and other business improvement programs. Incentive fees are tied to improvements in a variety of client performance measures typically involving response time, asset utilization and productivity. Due to the Company's use of incentive fee contracts, variations in revenue levels may cause fluctuations in quarterly results. Factors such as a client's commitment to a PVM program, general economic and industry conditions and other issues could affect a client's business performance, thereby affecting the Company's incentive fee revenue and quarterly earnings. Quarterly revenue and earnings of the Company may also be impacted by the size of individual contracts relative to the annual revenues of the Company.

        In addition to its domestic operations, the Company has operations and contracts in its Europe and Asia/Pacific regions. The majority of contracts in these regions have been denominated using the United States dollar. However, some of the Company's contracts are in the local currency of the client; therefore, the Company is exposed to currency fluctuation risks.

Discontinued Operations

        In 1998, the Company announced its plans to dispose of its Information Technologies business segment. The sale of the Company's Information Technologies assets closed on August 31, 1998. No proceeds were received at the time of the transaction, but the agreement included earn-outs that could have been earned over the next five years. In exchange, the Company was relieved of the liabilities related to extended service contracts. On September 30, 2001, the buyer of the Information Technologies segment sold those assets acquired, which contractually voided the Company's ability to earn amounts from the agreement's earn-out provisions. As such, the Company received no earn-outs from the agreement.

        During the third quarter of 1999, the Company recorded a $2.0 million after tax charge to discontinued operations as a result of the settlement of a lawsuit related to the Company's Information Technologies business segment. In December 1999, the Company recognized a $0.3 million after tax charge to discontinued operations due to additional legal costs.

        During the second quarter of 2000, the Company recognized an after tax gain of $0.1 million from discontinued operations as a result of reimbursement of legal fees in connection with prior litigation.

Critical Accounting Policies

        The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the amounts reported

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in the accompanying financial statements and related footnotes. 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. The Company believes the following critical accounting policies require management's most difficult, subjective and complex judgments.

Revenue Recognition

        Revenue is recognized when realizable and earned generally as services are provided over the life of the contract. Incentive fee revenue is recognized in the period in which the related improvements are achieved. Fixed fees are recognized as they become billable per the terms of the contracts, which generally represent effort expended to date on a contract on a percentage of completion basis. In order to mitigate the risk of disputes arising over the achievement of performance improvements, which drive incentive fees, the Company obtains customer agreement to these achievements prior to recognizing revenue.

Deferred Taxes

        For United States federal tax purposes, at December 31, 2001, the Company had net operating loss carryovers of approximately $4.4 million, which begin to expire in 2021 and unused foreign tax credit carryovers of $3.4 million, which begin to expire in 2003. In Asia, the Company has approximately $6.6 million of net operating loss carryovers, which currently do not have any statutory expiration date. Due to the uncertainty of the Company's ability to utilize its net deferred tax assets, the Company has provided a valuation allowance of $7.9 million. If the Company generates United States taxable income in future periods, reversal of the valuation allowance could have a significant positive impact on net income in the period that it becomes more likely than not that the net operating loss carryover will be recognized. Utilization of net operating loss carryforwards in the future may be limited if changes in the Company's stock ownership create a change of control as provided in Section 382 of the Internal Revenue Code of 1986, as amended.

        Unless otherwise stated, the discussion that follows pertains to continuing operations only.

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Results of Operations

2001 Compared to 2000

Revenue

        Revenue decreased $16.0 million, or 24%, to $51.7 million in 2001, from $67.7 million in 2000. Fixed fee revenue was $36.8 million, or 71% of revenue in 2001, compared to $62.0 million, or 92% in 2000. Incentive fee revenue was $14.9 million, or 29% of revenue in 2001, compared to $5.7 million, or 8% in 2000.

        United States region revenue decreased $17.9 million, or 59%, to $12.3 million in 2001, from $30.2 million in 2000. The decrease relates to three major contracts, operating primarily in 2000, which accounted for net revenue of $16.3 million. Due to the general economic downturn, the Company was unable to replace this revenue with contracts of a similar magnitude during 2001.

        Asia/Pacific region revenue increased $2.2 million, or 26%, to $10.7 million in 2001, from $8.5 million in 2000. The increase reflects revenue on new contracts in 2001 exceeding revenue on completed contracts during 2000 by $0.8 million. The growth in the Asia/Pacific region also reflects a $1.4 million revenue increase when comparing existing contracts from 2001 to 2000.

        Europe region revenue decreased $0.3 million, or 1%, to $28.7 million in 2001, from $29.0 million in 2000. The decrease is attributable to revenue from a significant client, which produced revenue of $19.2 million in 2001 compared to $19.6 million in 2000.

Gross Profit

        Gross profit for 2001 decreased to $18.5 million and 36% of revenue from $31.2 million and 46% of revenue in 2000. The primary reason for the decrease in gross profit margin was decreased revenue of $16.0 million related to the adverse economic climate the Company's potential and existing clients faced during 2001. This economic downturn forced potential and existing clients to delay and/or cancel programs. The impact of this revenue decrease on gross profit offset the efficiencies gained related to a $3.2 million decrease in cost of sales. The decrease in cost of sales relates primarily to lower personnel cost due to staff reductions. The decrease in cost of sales was negatively impacted by increased severance cost of $1.0 million as a result of these staff reductions.

Selling, General and Administrative

        Selling, general and administrative expense decreased 4% to $25.2 million in 2001, from $26.2 million 2000. The decrease in selling, general and administrative relates to a $1.2 million reduction in personnel expense resulting from staff reductions during 2001, lower bad debt expense of $0.5 million and a decrease in depreciation expense of $0.4 million. These cost decreases were offset by increased incentive compensation expense of $1.1 million related to the Company's incentive plan, which was paid in the first two quarters of 2001.

Litigation Settlements

        On March 16, 2001, the Company received notice of a claim from Balanced Scorecard Collaborative, Inc. ("BSCol"), to mediate/arbitrate a dispute regarding BSCol's claim for unpaid fees under the parties' March 2000 agreement. The matter was not settled during an April 26 mediation, and consequently was resolved by a proceeding before a neutral arbitration panel in Dallas, Texas, during the week of September 17, 2001, pursuant to an arbitration provision in the parties' agreement. On October 5, 2001, the Company received an adverse ruling from the arbitration panel. The decision of the arbitration panel awarded BSCol $2.4 million. The total cost of the litigation of $2.9 million,

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including legal fees of $0.5 million, is presented separately as litigation settlement in the Company's Consolidated Statements of Operations.

        During 2000, the Company was party to an arbitration proceeding with Overhead Door Corporation, a former client, to collect unpaid fees. The Company received an adverse ruling from the arbitration panel. The total cost to the Company, including legal fees, was $0.7 million and is presented separately as litigation settlement in the Company's Consolidated Statements of Operations.

Income Taxes

        The Company's effective tax rate for 2001 was (62)% compared to 40% in 2000. The significant change in the Company's effective tax rate reflects adjustments to the valuation allowance on the Company's net deferred tax assets. At December 31, 2001, the Company determined, based primarily on its recent history of operating losses in the United States, that it could no longer consider the recovery of its net deferred tax assets as more likely than not. Accordingly, the Company's net deferred tax assets at the beginning of 2001 were reduced by a valuation allowance adjustment of $3.3 million. In addition, net operating loss and tax credit carryforwards generated in 2001 were also reduced by a valuation allowance such that no benefit for those carryforwards was recognized in 2001. While a valuation allowance is currently required for the Company's net deferred tax assets, the assets remain available for use in the future to offset future income tax liabilities should sufficient amounts of United States and foreign income be generated in the carryforward periods.

Discontinued Operations

        During the second quarter of 2000, the Company recorded a $0.1 million after tax gain from discontinued operations for reimbursement of legal fees in connection with prior litigation.

2000 Compared to 1999

Revenue

        Revenue increased $3.9 million, or 6%, to $67.7 million in 2000, from $63.8 million in 1999. Fixed fees were $62.0 million, or 92% of revenue in 2000, compared to $57.6 million, or 90% in 1999. Incentive fees were $5.7 million, or 8% revenue in 2000, compared to $6.2 million, or 10% of revenue in 1999.

        United States region revenue decreased $9.7 million, or 24%, to $30.2 million in 2000 from $39.9 million in 1999. The decrease relates to the completion of two major contracts without replacing the revenue with contracts of a similar magnitude. These contracts provided revenue of $19.9 million in 1999 compared with $8.7 million in 2000.

        Asia/Pacific region revenue increased 54% to $8.5 million in 2000 from $5.5 million in 1999. This marks the second consecutive year in which Asia/Pacific revenues have grown at more than 50%. The improvement in revenue is attributable to a full year of revenue on new contracts attained during 1999. In addition, the Company replaced completed contracts with new business during 2000.

        Europe region revenue increased 58% to $29.0 million in 2000 from $18.4 million in 1999. The increase relates to a major contract, which produced revenue of $19.6 million in 2000 compared to $9.3 million in 1999.

Gross Profit

        Gross profit for 2000 increased to $31.2 million and 46% as a percentage of revenue from $28.2 million and 44% in 1999. The improvement in gross profit can be attributed to improved productivity on increased sales. The Company was able to improve margins by increasing revenue $3.9 million while incurring only a $0.9 million increase in cost of sales.

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Selling, General and Administrative

        Selling, general and administrative expenses increased 42% to $26.2 million in 2000, from $18.5 million in 1999. The increase relates primarily to approximately $4.2 million for personnel, travel, advertising and other professional fees associated with the start-up of the Company's new product offerings and formation of strategic alliances. The Company incurred expenses of $1.3 million related to the CEO change during the fourth quarter of 2000. The remaining increase in selling, general and administrative expense relates primarily to increased lease expense to replace the Company's laptop computers and administrative costs related to the Company's United States employees working overseas.

Litigation Settlement

        During 2000, the Company was party to an arbitration proceeding with Overhead Door Corporation, a former client, to collect unpaid fees. The Company received an adverse ruling from the arbitration panel. The total cost to the Company, including legal fees, was $0.7 million and is presented separately as litigation settlement in the Company's Consolidated Statements of Operations.

Income Taxes

        The Company's effective tax rate in 2000 was 40% compared to 38% in 1999. The increase in the Company's effective tax rate relates to adjustments made to properly reflect certain aspects of foreign taxable income and depreciation expense.

Discontinued Operations

        During the second quarter of 2000, the Company recorded a $0.1 million after tax gain from discontinued operations for reimbursement of legal fees in connection with prior litigation.

14

Quarterly Results

        The following table sets forth certain unaudited operating results for each of the four quarters in the two years ended December 31, 2001. This information has been prepared on the same basis as the audited financial statements and, in the opinion of the Company, includes all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the information for the periods presented.