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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)

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

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

Yes ý    No o

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes o    No ý

        As of November 11, 2003 there were 9,555,662 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.

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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.

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THOMAS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

        1.     (a) Basis of Presentation—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 2002 fiscal year, filed with the Securities and Exchange Commission. The results of operations for the three and nine month periods ended September 30, 2003 are not necessarily indicative of the results of operations for the entire year ending December 31, 2003. Certain amounts from prior periods have been reclassified to conform with the 2003 presentation.

        (b)   Stock Based Compensation—The Company grants incentive and non-qualified stock options and has reserved 3,550,000 shares of common stock for issuance under its stock option plans. Options to purchase shares of the Company's common stock have been granted to directors, officers and employees. The majority of the options granted become exercisable at the rate of 20% per year, and generally expire ten years after the date of grant.

        The Company adopted the disclosure provisions of Statement of Financial Accounting Standards No. 123 (SFAS No. 123), "Accounting for Stock Based Compensation." This statement requires the Company to provide pro forma information regarding net income and net income per share as if compensation cost for the Company's stock options had been determined in accordance with the fair value method. The fair value of these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for 2003 and 2002:

        Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant date consistent with the provisions of SFAS No. 123, the Company's net income (loss) and income (loss) per share would have been reduced to the pro forma amounts indicated below:

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        (c)   Prior Period Adjustment—During 2001, the Company recognized a loss on a contract related to subleased office space. This office space included leasehold improvements, the carrying value of which exceeded its fair value, and was not recoverable at the time the contract was signed. The sublease loss recorded in 2001 failed to include the impairment of these improvements.

        The correction of this transaction, in the current period, resulted in an increase to accumulated deficit and a decrease to property and equipment totaling $355,000 as of September 30, 2003. Net income increased $64,000 due to decreased depreciation expense for the three and nine month periods ended September 30, 2003. Earnings per share increased $0.01 per basic and diluted share for the three and nine month periods ended September 30, 2003. Restatement of 2002 comparative financial statements resulted in an increase to accumulated deficit and a decrease to property and equipment totaling $419,000 as of December 31, 2002. Net loss decreased $21,000 and $63,000 for the three and nine month periods ended September 30, 2002. Loss per share decreased $0.01 and $0.02 per basic and diluted share for the three and nine month periods ended September 30, 2002.

        The restatement to correct this transaction affected fiscal years 2001 and 2002. The financial statements for fiscal years 2001 and 2002, filed with the Company's Form 10-K for the period ended December 31, 2002, should not be relied upon without taking into account the affects of this prior period adjustment, which is outlined in the table below.

        (d)   Reclassification—From 1996 to 1999 the Company recorded excessive compensation expense related to stock option grants in the amount of $285,000. The correction of these transactions decreased accumulated deficit by $285,000 with a corresponding decrease in additional paid-in capital.

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        2.     Financing Agreement—At September 30, 2003, the Company maintained a $6.9 million credit facility, consisting of a $3.9 million term note and a $3.0 million revolving line of credit. On November 6, 2003, the Company made a term note payment of $1.1 million effectively reducing the term note from $3.9 million to $2.8 million and the total credit facility from $6.9 million to $5.8 million. All United States assets of the Company and 100% of the outstanding capital voting stock of each foreign subsidiary secure the now $5.8 million credit facility. The $2.8 million term note bears interest at prime plus 4%. The $3.0 million revolving line of credit is subject to a borrowing base of 75% applied to the Company's United States and Canada trade accounts receivable outstanding less than 90 days. The revolving line of credit bears interest at prime plus 2%.

        The credit facility contains financial covenants, which if breached, could result in the acceleration of amounts owed under the credit facility. The financial covenants require the Company to (1) maintain certain levels of tangible net worth, debt to tangible net worth ratio, minimum levels of EBITDA, (2) avoid two consecutive quarters that generate operating losses, and (3) restrict annual capital expenditures to $300,000. As of September 30, 2003, the Company was not in compliance with certain of its debt covenants; however, the lender has waived all violations through November 30, 2003. Although retained earnings are not restricted by the credit facility, the declaration or payment of dividends is prohibited.

        Contained within the term note is a provision requiring the Company to make term note payments based on consolidated cash flow from operating activities. The Company is required to make a term note payment equal to 50% of consolidated cash flow from operating activities above stated quarterly targets. For the third quarter of 2003 the Company has made a term note payment of $1.1 million under this provision on November 6, 2003.

        At September 30, 2003 the Company had no borrowings outstanding under the revolving line of credit and $3.9 million outstanding on the term note classified as current liabilities, due to the maturity date of February 2, 2004.

        The Company used the revolving line of credit during the first nine months of 2003 to meet working capital requirements.

        3.     Liquidity Plan—Recent operating results and the restructuring of the Company's credit facility 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 and to remain in compliance with its restrictive loan covenants.

        The Company's need to raise additional equity or debt financing and its 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 in particular, its ability to successfully implement business and growth strategies. Currently, the Company has initiated negotiations with its senior lender to restructure its current $5.8 million credit facility prior to December 31, 2003. In addition, the Company is seeking financing alternatives to replace its current senior lender, as well as continuing the evaluation of the business on a daily basis to enhance its liquidity position. Such evaluation includes appropriate furlough of its unassigned workforce, staff reductions and the downsizing or subleasing of facilities when necessary.

        The Company's performance will also be affected by prevailing economic conditions. Many of these factors are beyond the Company's control. The Company currently seeks business opportunities in the European, Asia/Pacific and North American regions and is affected by prevailing economic

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conditions in these regions. In addition, recent conflicts throughout the world involving the United States military, could potentially have an adverse affect on the Company's liquidity due to the high concentration of United States government contracts, which could result in delays in program operations. 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 or restructure or refinance its debt. In the event 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 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.

        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 and warrants outstanding in 2002 that are not included in the diluted earnings per share computation due to the antidilutive effects are 1,673,816. Such options and warrants are excluded due to the Company incurring a net loss for all periods presented in 2002.

        5.     Significant Clients—The Company recorded revenue from CACI International of $3.6 million and $8.8 million or 44% and 39% of revenue for the three and nine month periods ended September 30, 2003. Revenue from CACI International 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.

        The Company recorded revenue from the United States Navy of $2.5 million and $7.4 million or 31% and 33% of revenue for the three and nine month periods ended September 30, 2003.

        In 2002, 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.

        There were no other clients from whom revenue exceeded 10% of total revenue in the three and nine month periods ended September 30, 2003 and 2002, 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. For the three and nine month periods ended September 30, 2003 and 2002, net income (loss) is the only component of comprehensive income.

        7.     Legal Proceedings—During the three months ended September 30, 2003, the Company became aware of past circumstances involving a former employee that management believes is likely to require recognition of a loss due to litigation or settlement costs in future periods. While the exact amount of this loss is not known, a reasonable estimate, based on information currently available is $150,000. This amount has been recognized as a loss in the current period and appears as a contingent liability on the balance sheet under the heading "Accounts payable and accrued liabilities". Recognition of this loss reduced net income by $150,000 and basic and diluted earnings per share by $0.02 and $0.01 for the three and nine month periods ended September 30, 2003, respectively.

        The Company is involved in various 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 legal matters nor the cost of prosecuting and/or defending such claims and legal matters will have a material adverse effect on the Company's 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, may not be material.

        8.     Supplemental Disclosure of Cash Flow Information

        9.     Segment Data—The Company operates in one industry segment, but conducts its business primarily in three geographic areas: North America, Europe and Asia/Pacific. Information regarding these areas follows: