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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

Commission File Number 0-22010

THOMAS GROUP, INC.
(Exact name of registrant as specified in its charter)

5221 North O'Connor Boulevard
Suite 500
Irving, TX 75039-3714
(Address of principal executive offices, including zip code)

(972) 869-3400
(Registrant's telephone number, including area code)

NONE
(Former name, former address and former fiscal year, if changed since last report)

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ý    No o

        As of November 12, 2002 there were 9,555,309 shares of the registrant's common stock outstanding.

THOMAS GROUP, INC.

PART I—FINANCIAL INFORMATION

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ITEM 1—FINANCIAL STATEMENTS

THOMAS GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)
(Unaudited)

See accompanying notes to consolidated financial statements.

3

THOMAS GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share data)
(Unaudited)

See accompanying notes to consolidated financial statements.

4

THOMAS GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)
(Unaudited)

See accompanying notes to consolidated financial statements.

5

THOMAS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

          1.      The unaudited consolidated financial statements of Thomas Group, Inc. (the "Company") include all adjustments, which include only normal recurring adjustments, which are, in the opinion of management, necessary to present fairly the results of operations of the Company for the interim periods presented. The unaudited financial statements should be read in conjunction with the consolidated financial statements and notes thereto in the Company's Form 10-K for the 2001 fiscal year, filed with the Securities and Exchange Commission. The results of operations for the three and nine month periods ended September 30, 2002 are not necessarily indicative of the results of operations for the entire year ending December 31, 2002. Certain amounts from prior periods have been reclassified to conform with the 2002 presentation.

          2.      Financing Agreement and Liquidity Plan—On September 12, 2002 the Company and its senior lender signed an agreement to amend and restate certain terms of the Company's existing credit facility. The Company anticipates the amendments and restatements will be executed before November 30, 2002. As part of the revision of terms, the Company will maintain an $8.0 million credit facility consisting of a $5.0 million term note and a $3.0 million revolving note. Currently, the Company maintains a $7.5 million credit facility consisting of a $5.0 million term note and a $2.5 million revolving note.

        Advances on the revised revolving note will be limited to the lesser of $3.0 million or a borrowing base subject to 75% advance percentage applied to eligible accounts receivable. All United States assets of the Company and 100% of the outstanding capital voting stock of each foreign subsidiary will secure the $8.0 million credit facility. Interest on the term and revolving notes will be due monthly with all principal due on September 1, 2003, the revised termination date. All previous term note installment payments will be deferred until September 1, 2003.

        The senior lender will receive, as an amendment fee, warrants to purchase common stock of the Company in sufficient quantity to equal 4% of the Company's outstanding common stock (based on total shares outstanding prior to the $2.0 million equity transactions between the Company and General Chain and Mr. Edward P. Evans, plus full dilution protection in regard to those equity transactions). See "The Company's Liquidity Plan", below. The warrant will be exercisable for approximately 397,443 shares of the Company's common stock at an exercise price of $0.30 per share.

        The revised credit facility will require the Company to obtain additional equity or subordinated debt equal to $1.0 million by September 16, 2002 and $1.0 million by October 31, 2002. The Company was able to obtain the required amounts by the due dates.

        All prior financial covenants will be replaced with new financial covenants, which if breached, could result in acceleration of amounts owed under the credit facility. The revised financial covenants will require the Company to (1) maintain certain levels of tangible net worth, debt to tangible net worth ratio, minimum levels of EBITDA, (2) to avoid two consecutive fiscal quarters that generate operating losses, and (3) to restrict annual capital expenditures in excess of $300,000. The covenants will be tested monthly and take effect December 1, 2002. The senior lender has agreed to waive any events of default under the credit facility through September 30, 2002.

        Previously, the Company was required to pay the senior lender a $150,000 amendment fee, payable in two equal installments due September 15, 2002 and December 15, 2002. The revised credit facility will eliminate the amendment fee installment payments and will extend the due date for the amendment fee to September 1, 2003.

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        Under the previous credit facility, the term and revolving portions of the credit facility were callable on demand by the senior lender on April 30, 2003, providing the senior lender gave written notice of its intent to call 90 days prior to April 30, 2003. This provision will be eliminated in the revised credit facility.

        At September 30, 2002, the balance on the revolving note was $2.0 million. At November 12, 2002 the balance on the revolving note was $1.7 million. The revolving credit facility portion bears interest at prime plus 2%. The term loan portion bears interest at prime plus 4%.

The Company's Liquidity Plan

        Recent operating results and the terms of the Company's current indebtedness give rise to concerns about the Company's ability to generate cash flow from operations sufficient to make scheduled debt payments as they become due. As of September 30, 2002, the Company has obtained the following subordinated debt or equity:

*

General Chain's $1.0 million Subordinated Convertible Note, plus accrued interest, converted into 2,690,450 shares of common stock upon stockholder approval at the Company's Annual Meeting held November 11, 2002.

**

Mr. Evans' $1.0 million Subordinated Convertible Note, plus accrued interest, converted into 2,672,722 shares of common stock upon stockholder approval at the Company's Annual Meeting held November 11, 2002.

        Since March of 2002, the Company has been able to raise $1.5 million of subordinated debt from members of the Board of Directors. During September 2002, the Company reached an agreement with its current Chairman of the Board, General John T. Chain, Jr., to provide a $1.0 million Subordinated Convertible Note. This note was converted into 2,690,450 shares of common stock of the Company, after obtaining stockholder approval at the Company's Annual Meeting of Stockholders on November 11, 2002. During October 2002, the Company reached an agreement with Edward P. Evans, a stockholder of the Company, to provide an additional $1.0 million of equity in the form of a Subordinated Convertible Note, under substantially the same terms as the agreement with General Chain. Mr. Evans' note was converted into 2,672,722 shares of common stock of the Company after obtaining stockholder approval at the Company's Annual Meeting. After conversion of the notes, General Chain and Mr. Evans hold approximately, 29% and 33% of the Company's outstanding common stock, respectively. Pursuant to the agreement with General Chain and Mr. Evans, each received warrants for 434,899 shares of the Company's common stock. If General Chain and Mr. Evans each exercise their warrant, they could each own an additional 7.5% of the common stock (based on the fully diluted ownership of the Company as of September 20, 2002), or approximately 31% and 34%,

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respectively, of the Company's outstanding common stock. General Chain and Mr. Evans have similar Board designation rights and identical registration rights under the terms of the agreements.

        The Company has a rights plan in place, pursuant to which, if certain persons acquire more than 15% of the outstanding common stock of the Company, the Company's stockholders may exercise a "right" to purchase additional shares of common stock. If the 15% threshold is crossed, the rights are triggered and each stockholder may purchase $200 in value of common stock for $100. The effect of the rights plan is to give the Company's Board of Directors the opportunity to negotiate with potential third party acquirors in the event that an attempt is made to take over the Company.

        Because the issuance of common stock to General Chain and Mr. Evans under the warrants or under the Subordinated Convertible Notes would trigger the rights, the Company's Board of Directors approved amendments to the Rights Agreement governing the rights plan. These amendments exempt the transactions with General Chain and Mr. Evans from the rights plan. These amendments were adopted by the Company's Board of Directors on September 13, 2002 and October 12, 2002 for the transactions with General Chain and Mr. Evans, respectively.

        In addition to the Company's need to raise additional equity or debt financing, the Company's ability to generate cash flow from operations sufficient to make scheduled payments on its debts as they become due will depend on its future performance and the Company's ability to successfully implement business and growth strategies. Since the first quarter of 2001, the Company has implemented cost saving measures including staff reductions, downsizing and subleasing of facilities and has taken greater control over alliances with strategic business partners. The Company will take additional cost savings measures such as those taken recently, if necessary, to enhance its liquidity position. The Company's performance will also be affected by prevailing economic conditions. Many of these factors are beyond the Company's control. If future cash flows and capital resources are insufficient to meet the Company's debt obligations and commitments, the Company may be forced to reduce or delay activities and capital expenditures, obtain additional equity capital beyond what is required under its current credit facility or restructure or refinance its debt. In the event that the Company is unable to do so, the Company may be left without sufficient liquidity and it may not be able to meet its debt service requirements. In such a case, an event of default would occur under the credit facility and could result in all of the Company's indebtedness becoming immediately due and payable. As a result, the Company's senior lender would be able to foreclose on the Company's assets.

        3.    Restructuring—On June 3, 2002, the Company filed a petition with the German government for insolvency of its German subsidiary, giving the insolvency court control of the subsidiary's assets. This action was taken in response to declining revenue and cash flows from the operations of its German subsidiary during 2001 and continuing through 2002. All existing German contracts were completed in the second quarter of 2002, and the German subsidiary had no significant future prospects. On September 1, 2002, the German insolvency court appointed an official receiver for the Company's German subsidiary. The non-cash restructuring charge for fixed assets recognized in the third quarter represents office equipment and furniture that the receiver is currently selling for cash. Creditors, including the Company, have until February 1, 2003 to submit proofs of claim to the insolvency court. On February 19, 2003, the receiver will hold a meeting to review creditor claims. The non-cash restructuring charge for accumulated other comprehensive loss recognized in the third quarter represents unrealized foreign currency losses accumulated prior to 2001. This amount had previously been classified as a separate component of stockholders' equity, and upon approval of the insolvency of

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the German subsidiary it was reclassified to the income statement. The Company continues serving the European market through its operations in Switzerland.

        The loss from liquidation of the German subsidiary is presented on the statements of operations and statements of cash flows under the captions "Restructuring charges" and "Loss from restructuring activities", respectively. The carrying amounts of the following assets and liabilities of the German subsidiary are included as part of the restructuring charge: (amounts in thousands)

        The Company has recorded no estimates for future expenses related to the insolvency petition and believes that any such expenses incurred would not have a material adverse effect on the consolidated results of operations, financial condition or cash flows of the Company.

        Results of operations of the German subsidiary for the three and nine month periods ended September 30, 2002 and 2001 were: (amounts in thousands)

        Cash flows of the German subsidiary for the three and nine month periods ended September 30, 2002 and 2001 were: (amounts in thousands)

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        4.    Earnings Per Share—Basic earnings per share is based on the number of weighted average shares outstanding. Diluted earnings per share includes the effect of dilutive securities such as stock options and warrants. The following table reconciles basic earnings per share to diluted earnings per share under the provisions of Statement of Financial Accounting Standards No. 128, "Earnings Per Share."

        Stock options outstanding in 2002 and 2001 that are not included in the diluted earnings per share computation due to the antidilutive effects are 1,204,984 and 937,270, respectively. Such options are excluded due to the Company incurring a net loss for all periods presented.

        5.    Significant Clients—The Company recorded revenue from Robert Bosch of $2.3 million and $10.0 million or 34% and 43% of revenue for the three and nine month periods ended September 30, 2002, respectively. Revenue for the same client totaled $3.0 million and $16.6 million or 30% and 39% of revenue for the three and nine month periods ended September 30, 2001.

        Revenue from Acton Burnell totaled $2.3 million and $6.7 million or 34% and 29% of revenue for the three and nine month periods ended September 30, 2002, respectively. Revenue for the same client totaled $1.9 million or 19% of revenue for the three month period ended September 30, 2001.

        Revenue from Opel totaled $1.2 million and $4.3 million or 12% and 10% of revenue for the three and nine month periods ended September 30, 2001, respectively.

        There were no other clients from whom revenue exceeded 10% of total revenue in the three and nine months ended September 30, 2002 and 2001, respectively.

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        6.    Comprehensive Income or Loss—Comprehensive income or loss includes all changes in equity (foreign currency translation), except those resulting from investments by owners and distributions to owners.

        7.    Legal Proceedings—The Company is subject to various claims and other legal matters, such as collection matters initiated by the Company, in the course of conducting its business. Due to the current liquidity condition of the Company, such claims and other legal matters or the cost of prosecuting and/or defending such claims and other legal matters could have a material adverse effect on the Company's consolidated results of operations, financial condition or cash flows.

        8.    Supplemental Disclosure of Cash Flow Information