**UNITED STATES SECURITIES ANDEXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

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** **

**FORM 10-K/A**

 

| **ý**                         |   | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  [Fee Required]**                                                                                                                               |
|------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                               |   |                                                                                                                                                                                                                                    |
|                               |   | **FOR THE YEAR ENDED DECEMBER 31, 2002.**                                                                                                                                                                                          |
|                               |
| **OR**                             |
|                               |
| **o**                              |   | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  [No Fee Required]**                                                                                                                        |
|                               |   |                                                                                                                                                                                                                                    |
|                               |   | **FOR THE TRANSITION PERIOD  FROM                TO                  ** |
|                               |   |                                                                                                                                                                                                                                    |
| **Commission file number 0-22010** |

** **

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** **

**THOMAS GROUP, INC.**

(Exact name of registrant as specified in itscharter)

 

| **Delaware**                                                      |   | **72-0843540**                       |
|-------------------------------------------------------------------|--------|--------------------------------------|
| (State or other jurisdiction of  incorporation or organization)   |   | (I.R.S. Employer Identification No.) |
|                                                              |   |                                 |
| **5221 North O’Connor Boulevard,  Suite 500, Irving, Texas** |   | **75039-3714**                       |
| (Address of principal executive offices)                          |   | (Zip Code)                           |
|                                                              |   |                                 |
| **(972) 869-3400**                                                |   |                                 |
| (Registrant’s telephone number, including  area code)        |   |                                 |
| Securities registered pursuant to Section 12(b) of the Act:       |   |                                 |

 

| **Title  of each class**                                                                          |   | **Name  of each exchange on which registered** |
|---------------------------------------------------------------------------------------------------|--------|------------------------------------------------|
| Common stock, par value $.01 per share                                                            |   | OTC Bulletin Board                             |
|                                                                                              |   |                                           |
| Securities registered pursuant to Section 12(g) of the Act:  Rights to purchase common stock |

 

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Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorterperiod that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days. Yes ý/No o

 

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

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 126-2 of the Act). Yes o/No ý

 

As of April 10, 2003, the aggregate market value of the votingstock held by non-affiliates of the registrant was $1,836,271, based on the OTCBulletin Board closing price of $0.53.

 

As of April 10, 2003, there were 9,556,139 shares of theregistrant’s common stock outstanding.

 

 

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***EXPLANATORYNOTE***

 

Thomas Group, Inc. (the “Company”) hereby amends Items 1, 6, 7 and 8 ofits annual report on Form 10-K for the fiscal year ended December 31, 2002 inorder to reflect the proper accounting of leasehold improvements related to thesubleasing of office space in 2001. During 2001, the Company recognized a losson a contract related to the subleasing of its Reston, Virginia office space.This office space included leasehold improvements, the carrying value of whichwas overlooked in calculating the loss on the sublease transaction.

 

To correct this situation the Company has restated the financialstatements related to fiscal years ended 2002 and 2001.

 

Restatement of 2001 financial statements resulted in an increase toaccumulated deficit and a decrease to property and equipment totaling $503,000as of December 31, 2001. Basic and diluted loss per share increased $0.12 to$3.87 from $3.75 per share.

 

Restatement of 2002 financial statements resulted in an increase toaccumulated deficit and a decrease to property and equipment totaling $419,000as of December 31, 2002. Selling, general and administrative expense decreasedby $84,000 with a corresponding decrease to net loss due to the reversal ofdepreciation expense related to these leasehold improvements. Basic and dilutedloss per share decreased $0.02 to $1.39 from $1.41 per share.

 

The table below outlines the major line item adjustments related to therestatement of fiscal years ended 2002 and 2001.

 
|                                      |   | **2002**                                 |   | **2001**                 |   |
|-------------------------------------------|--------|------------------------------------------|--------|--------------------------|--------|
|                                      |   | **(As  Restated)**                       |   | **Previously  Reported** |   | **(As Restated)** |   | **Previously  Reported** |   |
|                                      |   | **In  thousands, except per share data** |   |
| Property equipment, net.                  |   | $                                        | 1,879  |                     | $      | 2,298 |   | $ | 2,999 |   | $ | 3,502 |   |
| Retained earnings (accumulated deficit)   |   | $                                        | (3,509 | )                        | $      | (3,090 | ) | $ | 4,209 |   | $ | 4,712 |   |
| Total stockholders’ equity (deficit) |   | $                                        | (2     | )                        | $      | 417 |   | $ | 4,888 |   | $ | 5,391 |   |
| Total assets                              |   | $                                        | 11,692 |                     | $      | 12,111 |   | $ | 21,252 |   | $ | 21,755 |   |
| Selling, general and administrative       |   | $                                        | 17,400 |                     | $      | 17,484 |   | $ | 25,723 |   | $ | 25,220 |   |
| Net loss                                  |   | $                                        | (7,718 | )                        | $      | (7,802 | ) | $ | (16,135 | ) | $ | (15,632 | ) |
| Loss per common share:                    |   |                                     |   |                     |   |   |   |   |   |
| Basic and diluted                         |   | $                                        | (1.39  | )                        | $      | (1.41 | ) | $ | (3.87 | ) | $ | (3.75 | ) |

 

Any items in the original filing not expressly changed by thisamendment shall be as set forth in the original filing.

 

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**TABLE OF CONTENTS**

 
| **PART I**                                 |                                                                                        |   |
|--------------------------------------------|---------------------------------------------------------------------------------------------|--------|
|                                       |                                                                                        |   |
| Item 1.                                    | Business                                                                                    |   |
| Item 2.                                    | Properties                                                                                  |   |
| Item 3.                                    | Legal  Proceedings                                                                          |   |
| Item 4.                                    | Submission  of Matters to a Vote of Security Holders                                        |   |
|                                       |                                                                                        |   |
| **PART II**                                |                                                                                        |   |
|                                       |                                                                                        |   |
| Item 5.                                    | Market  for Registrant’s Common Equity and Related Stockholder Matters                 |   |
| Item 6.                                    | Selected  Financial Data                                                                    |   |
| Item  7.                                   | Management’s  Discussion and Analysis of Financial Condition and Results Of Operations |   |
| Item  7A.                                  | Quantitative  and Qualitative Disclosure About Market Risk                                  |   |
| Item 8.                                    | Financial  Statements and Supplementary Data                                                |   |
| Item 9.                                    | Changes  in and Disagreements with Accountants on Accounting and Financial Disclosure       |   |
|                                       |                                                                                        |   |
| **PART III**                               |                                                                                        |   |
|                                       |                                                                                        |   |
| Item  10.                                  | Directors  and Executive Officers of the Company                                            |   |
| Item  11.                                  | Executive  Compensation                                                                     |   |
| Item  12.                                  | Security  Ownership of Certain Beneficial Owners and Management                             |   |
| Item  13.                                  | Certain  Relationships and Related Transactions                                             |   |
| Item  14.                                  | Controls  and Procedures                                                                    |   |
|                                       |                                                                                        |   |
| **PART IV**                                |                                                                                        |   |
|                                       |                                                                                        |   |
| Item  15.                                  | Exhibits,  Financial Statement Schedules, and Reports on Form 8-K                           |   |
|                                       | Signatures                                                                                  |   |
|                                       |                                                                                        |   |
| Index to Consolidated Financial Statements |                                                                                        |
|                                            |                                                                                             |        |  |

 

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**PARTI**

 

**ITEM 1.*****Business.***

 

**General**

 

Thomas Group, Inc. (the “Company”), a Delaware corporation,established in 1978, is an international, professional services firm focusingon improving operations, competitiveness and financial performance of majorcorporate clients through process improvement and strategically aligningoperations with technology. Recognized as a leading specialist in operationsconsulting, the Company creates and implements custom improvement strategiesfor sustained performance improvement. The Company’s clients are typicallylarge companies, many of whom are included in the Fortune or Global 1000.

 

The Company’s products are based on three fundamental principles: ametrics-driven process, attaining and sustaining significant results forclients and program implementation by consultants with senior managementexperience in industry.

 

Since 1978, the Company has been developing and improving its ProcessValue Management (“PVM”) methodology for achieving operational excellence. PVMis based on the Company’s Total Cycle Time (“TCT”) methods and supplements TCTwith numerous process improvement tools the Company has developed over the last25 years. PVM continues to contribute to the measurable operationalimprovement of hundreds of companies.

 

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

 

**Statement of Business**

 

The Company’s business is helping its clients improve their bottom-lineresults using the Company’s senior executives who work side-by-side withclients to remove barriers, increase productivity, change culture, and focus onquickly satisfying customer needs. This has been the primary focus of theCompany since our beginning in 1978.

 

**Process Value Management**

 

The Company’s PVM approach is based on its 25 years of experiencewith process improvement tools and methodologies that drive financialbottom-line results. The Company uses PVM to help an enterprise determinestrategic business processes, assess their linkages and efficiencies, andprescribe short and long-term enhancement programs that optimize customersatisfaction and shareholder value. The Company’s staff of businessprofessionals who apply PVM methodology are referred to by the Company as“Resultants.” An initial client assignment might typically address one or moreof these key processes that are dragging down performance. A long-termrelationship might involve an implementation team of Resultants working withthe corporation over a number of years to achieve a total transformation to the“Process Managed Enterprise.”

 

1

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Experience has taught us that:

 

•                                          TheProcess Managed Enterprise is one in which its management focus and systems arecentered on customers and managed around processes;

 

•                                          Allbusinesses are made up of a series of linked processes. All processes, leftunmanaged, naturally deteriorate over time;

 

•                                          Intoday’s global economy, every business is part of a boundless process that runsseamlessly, from the initial business concept through all its applied resourcesto its end customer;

 

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

 

•                                          Thecustomer is the final arbiter of the value of the process; and

 

•                                          Thetransformation process itself must deliver short-term operating results as wellas long-term systemic business enhancements.

 

**Total Cycle Time**

 

The Company’s initial offering, TCT, centers on reducing cycle timesand increasing first pass yield (quality), therefore improving overallproductivity. Using the Company’s methods, business process cycle times—thetime from the beginning to the end of any business activity—can normally bereduced by up to 50%, whether the process is engineering, manufacturing orsales.

 

For example, in a manufacturing setting, it might take 30 daysfrom the time an order is received until the order is shipped. The Companyfirst determines the baseline time of that process—the time currently expendeddoing the work. Based on the Company’s best practices, a multiplier is used tomove from baseline to “entitlement”—how fast the process should run withcurrent resources. The Company’s Resultants then work with client management toreduce the current rate to the entitlement by mapping the process, eliminatingunnecessary steps, and removing process and cultural barriers.

 

The key to TCT’s success is the Resultants’ ability to identify theright 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 thetime their value is known, it is too late in the process to employ correctivemeasures. However, when predictive *drivermeasures* such as cycle time and first pass yield are used, clientscan determine the trajectory of their business and make adjustments as needed.

 

The Company uses a “cockpit chart” approach to capture the keymeasurements for a business and to ensure that the focus is on the appropriateprocesses that will drive results. Cockpit charts contain a balancedcombination of results and driver measurements. In addition, these top-levelmeasurements 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 mostenterprises. It requires not only coordinated participation from resourcesacross the organization but also the successful blending of the creative andoperational aspects of the development process. Additionally, there is aconstant juggling act as multiple new product programs of differing length,cost, risk, complexity and resource requirements begin and end. Finally, thereis the critical element of time: being second to market with a breakthroughinnovation is too late, and in any event there can be no return on investmentof any development activity until that new product enters the marketplace.

 

As is in all activities of the Process Managed Enterprise, time is ofthe essence. In the case of new product development, the management challengeis two dimensional: one dimension is managing the new product developmentprocess in terms of time, quality and cost, what the Company calls time tomarket (“TTM”); the other is assessing these programs in a portfolio context tomaximize resource utilization and portfolio returns.

 

The Company’s solution to the TTM issue is to couple the Company’sexisting PVM process approach and measurements with a new, proprietary databasetool that can be applied across new product development activities. Thiscombination, called OPTTMIZE, improves new product project tracking, shortensnew product introduction times, and quantifies new product portfolioperformance.

 

2

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

 

**Supply Chain Process Value**

 

Supply chain management (“SCM”) has matured over the last decade. Amilestone in the maturity of SCM, driven by the need for value control intoday’s competitive global environment, is the leading-edge concept that thedemand side management within a supply chain has as much impact on value andcash management as does supply side management.

 

This is an excellent example of recognizing the interconnectivity ofprocesses and supports the need to shift from a functional to a process view ofSCM. Thomas Group’s own Supply Chain Process Value (“SCPV”) offering within itsoverarching PVM approach, balances demand side management and supply sidemanagement while optimizing responsiveness, quality and value.

 

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

 

**Inventory Optimization (“OPUS”)**

 

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

 

To comprehensively optimize inventory (maximize availability, removewaste, increase controls and improve customer satisfaction while minimizinginvestment) requires an understanding of how these key factors interact in bothtime and risk to impact inventory at the part number level.

 

The Company’s approach to inventory optimization simultaneouslyaddresses these risk and time variables through process management activitiesthat are guided by a software tool called OPUS. OPUS optimizes inventory acrosssix independent risk and time variables, allowing inventory parameters to beset by part number.

 

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

 

**Summary**

 

Over the years, the Company has become a leader in implementing processimprovement strategies that make companies faster and improve theircompetitiveness and financial performance. This ability to link and align aclient organization’s strategy, technology, people and processes offers apowerful and unique benefit to client companies faced with integrating theiroperations, internally and externally, throughout the value chain. TheCompany’s strategic plan is to continually add value to its core PVM productoffering and to expand its marketing reach through partnerships with industryleaders.

 

**Competitive Strategy**

 

The Company’s strategy is to maintain and enhance its position in thedevelopment and implementation of its PVM methodology. The Company’s strategyincludes the following key elements, many of which differentiate it fromtraditional providers of consulting services.

 

*Emphasize Results*.The Company may enter into incentive fee contracts, which make a portion of itsrevenue from a particular program contingent upon certain measurable results.The Company offers incentive fee contracts in cases where the client prefersthat the Company share the risks to achieve entitled results or for clients whoprefer to work on a gain-sharing basis. The Company’s competitors generallycharge fees based on time expended, regardless of results. Thus, the Company’swillingness to enter into incentive fee contracts demonstrates the Company’sconfidence that its programs will positively enhance the businesses of itsclients and furthermore provides significant competitive differentiation andadvantage.

 

3

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*Target Large Clients and Multiple ProgramOpportunities*. The Company has focused its marketingefforts on companies with annual revenues greater than $400 million,preferably where sequential program opportunities exist. The Company believeslarger clients provide greater revenue opportunities because such clients arelikely to realize greater economic benefit from the Company’s services and willbe more likely to engage the Company in follow-on programs.

 

*Focus on Results Implementation andContinuous Improvement*. By applying PVM throughout theclient’s complete business or business unit and by working in close cooperationwith the client’s management, the Company believes it can more effectivelydrive operational performance improvements and their associated financialbenefits. The Company stresses hands-on implementation of process improvementsand focuses on implementation of prioritized changes that improve the client’sbusiness culture and processes. In addition to implementing change through itsPVM plan, an essential element of a PVM program is “leaving behind” with theclient the knowledge and skills needed for the client to continue to sustaincontinuous improvement. In contrast, traditional consulting firms often providesubject expertise in the form of written assessments or reports that focus ondiscrete functions or an isolated segment of a business.

 

*Experienced Professional Staff*.The Company employs professionals with extensive business managementexperience, often 20 years or more. Traditional consulting firms oftenhire recent business school graduates with expertise in a particular subjectmatter, rather than expertise in business management. The use of seasonedprofessionals significantly improves the ability of the Company to effectively implementits PVM methodologies and creates a significant competitive difference andadvantage for the Company.

 

*Program Focus*. TheCompany focuses primarily on cultural and business process barriers rather thanon subject matter barriers and functional units. The Company believesreductions in cultural and business process barriers have a greater impact onimproving a client’s performance.

 

4

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**Clients**

 

The Company’s clients are typically large, well-establishedmanufacturing, project and service companies, or distinct business units ofsuch companies, in the North America, Europe, and Asia/Pacific regions. Many ofthe Company’s clients are Fortune or Global 1000 companies. The Company hasworked for over 250 clients, including the following:

 

**Aerospace**

Aerostructures

Bombardier

Delta Air Lines

Gulfstream

ITT Cannon

LSG Sky Chefs

Lufthansa Cargo

Lufthansa Technik

McDonnell Douglass

TRW

 

**Automotive**

Adam Opel

Audi

Brilliance China Automotive

Delco

Delphi

Detroit Diesel

GM

GM DELCO

GM/Warranty

Meritor

Osram

Robert Bosch

Saab

Siemens

 

**Apparel Manufacturer**

Esquel Group

Mast Lanka

Tristate Holdings

 

**Banking, Financial Services, Insurance**

DG Bank

Forethought Insurance

Olivetti

 

**Chemical**

Heraeus

Shipley

 

**Consumer Products**

Givaudan

HengAn

Hillenbrand

Kodak

Polaroid

Rand McNally

Robert Bosch

Rubbermaid

 

**Distribution**

ProSource

W.W. Grainger

 

**Electronics**

ABB

Berg

EDS

Euclid-Hitachi

Flat Panel Display

GTE Control Devices

Gemplus

Johnson Electric

Motorola

Osram

Philips

Texas Instruments

Western Digital

Yuasa Exide Batteries

 

**Healthcare**

Mallinckrodt

 

**Government**

FAA

CACI (formerly Acton Burnell)

United States Army

United States Navy

 

**Manufacturing/Industrial**

Breguet

Dover

Emerson

Kimberly Clark

L.E.K.—VIAD

Leeds & Northrup

Moore

Pawnee Industries

Pinnacle-lvey

Radium

Robert Bosch

Siemens

Stewart and Stevenson

Teledyne

Thrall

Xerox

 

**Mechancial Engineering**

ABB

Alstom Power

Dresser Waukesha

Dresser-Rand

GEA

Hilti

Schindler

 

**Medical Equipment Supplies**

Boston Scientific

Siemens Medical

GE Medical

 

**Specialty Retail**

Tuesday Morning

 

**Semiconductor**

Alcatel Mietec

AMI Microsystems

ASM Lithography

AT&T Semiconductor

Cypress Semiconductor

Fairchild Semiconductor

Ford Microelectronics

Hewlett Packard

Hyundai

IBM

LG Semiconductor

NCR

National Semiconductor

Matra MHS

Motorola

Philips Semiconductor

Rockwell

Signetics

ST Microelectronics

Taiwan Semiconductor

Trilogy

 

**Telecommunications**

Allen Telecom

 

**Utilities**

PECO

Siemens

Southern Indiana Gas & Electric

 

5

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There can be no assurance that the Company will perform services forany of its previous clients in the future. In order to maintain and increaseits revenues, the Company will need to add new clients or expand existingclient relationships to include additional divisions or business units of suchclients.

 

The Company operates in one industry segment, but conducts its businessprimarily in three geographic areas: North America, Europe and Asia/Pacific.Information regarding these areas follows:

 
|                                     |   | **North  America**           |   | **Europe** |   | **Asia/Pacific** |   | **Corporate** |   | **Total** |   |
|------------------------------------------|--------|------------------------------|--------|------------|--------|------------------|--------|---------------|--------|-----------|--------|
|                                     |   | **In  thousands of dollars** |   |
|                                     |   |                         |   |       |   |             |   |          |   |      |   |
| Year ended December 31, 2002:            |   |                         |   |       |   |             |   |          |   |      |   |
| Consulting revenue before reimbursements |   | $                            | 13,965 |       | $      | 13,475           |   | $             | 4,230  |      | $      | — |   | $ | 31,670 |   |
| Gross profit (loss)                      |   | $                            | 8,986  |       | $      | 4,405            |   | $             | (2,028 | )         | $      | — |   | $ | 11,363 |   |
| Long-lived assets (restated)             |   | $                            | 1,646  |       | $      | 162              |   | $             | 187    |      | $      | 113 |   | $ | 2,108 |   |
| Year ended December 31, 2001:            |   |                         |   |       |   |             |   |          |   |      |   |
| Consulting revenue before reimbursements |   | $                            | 12,314 |       | $      | 28,680           |   | $             | 10,676 |      | $      | — |   | $ | 51,670 |   |
| Gross profit (loss)                      |   | $                            | 9,871  |       | $      | 9,968            |   | $             | (1,387 | )         | $      | — |   | $ | 18,452 |   |
| Long-lived assets (restated)             |   | $                            | 2,124  |       | $      | 857              |   | $             | 266    |      | $      | 3,133 |   | $ | 6,380 |   |
| Year ended December 31, 2000:            |   |                         |   |       |   |             |   |          |   |      |   |
| Consulting revenue before reimbursements |   | $                            | 30,171 |       | $      | 29,040           |   | $             | 8,487  |      | $      | — |   | $ | 67,698 |   |
| Gross Profit                             |   | $                            | 17,381 |       | $      | 13,366           |   | $             | 496    |      | $      | — |   | $ | 31,243 |   |
| Long-lived assets                        |   | $                            | 2,909  |       | $      | 1,071            |   | $             | 17     |      | $      | 4,924 |   | $ | 8,921 |   |

 

In 2002, two clients, Robert Bosch and CACI (formerly Acton Burnell),accounted for 38% and 30% of the Company’s total consulting revenue beforereimbursements, respectively.

 

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

 

In 2000, three clients, Robert Bosch, General Motors and BostonScientific, accounted for 29%, 16% and 14% of the Company’s total consultingrevenue before reimbursements, respectively.

 

**Contractual Arrangements**

 

The Company performs PVM services for clients pursuant to contracts,generally with terms of three months to one year, or targeted processimprovement programs that could last from three to six months. Clientscompensate the Company for its services in the form of fixed fees or a combinationof fixed and incentive fees (based on client improvements achieved). TheCompany’s fee structure is based on a client’s size, the complexity andgeographic deployment of a client’s business, the level of improvementopportunity available to a client and certain other factors.

 

Fixed fees are recognized proportionately as revenue over the term ofthe contract as performance measures are achieved. Incentive(performance-oriented) revenue is recognized in the period for whichperformance improvement is being measured and is based on agreed-upon formulasrelating to improvements in customer-specific measures. Factors such as aclient’s commitment to TCT, general business and economic cycles and a client’sproduct position in the marketplace will affect the performance of theCompany’s clients, thus affecting the Company’s revenue from incentive feecompensation. In 2002, 2001, and 2000, approximately 23%, 29% and 8%,respectively, of the Company’s revenue was attributable to incentive fees.

 

The Company includes in its business under commitment (backlog) signedclient contracts and United States government commitments with terms generallyranging from three months to one year. United States government commitmentsconsist of funds that are designated for the Company in the United Statesgovernment budget, and can only be removed by an act of the United StatesCongress. Typically, government agencies for whom a company performs consultingservices can only sign contracts for a one-year term even though the program isa budgeted expenditure for several years. The Company considers the UnitedStates government commitments to be equivalent to a signed commercial contract.Therefore, these programs are included in backlog. Business under commitmentwas $42.0 million at December 31, 2002, of which approximately$17.8 million is expected to be realized within fiscal 2003.

 

6

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**Competition**

 

Traditional consulting firms provide services similar in some respectsto the services provided by the Company. Providers of such services includeA.T. Kearney, Inc., Boston Consulting Group, McKinsey & Co., aswell as several small firms that primarily focus on time-based managementservices. Many of the Company’s competitors have greater personnel, financial,technical and marketing resources than the Company, and there can be noassurance the Company will be able to compete successfully with its existingcompetitors or with any new competitors.

 

The Company believes the competitive factors most important to itsbusiness are the unique quality of its PVM methodology, the quality andcharacter of its professional staff, its willingness to be compensated on anincentive basis, its reputation for achieving targeted results and its dedicationto implementation of programs that deliver results. The Company believes thatno significant competitors offer their clients the opportunity to base fees onthe results achieved or emphasize hands-on implementation to the same extent asthe Company.

 

The Company believes its most significant “competitor” is thepropensity for potential clients to “self-medicate” by attempting to implementchanges in their businesses themselves in the belief they will achieve resultscomparable to those resulting from the Company’s services without theassistance of outside professionals. The Company believes these attempts toself-medicate result in limited success. However, such attempts maysubstantially lengthen the Company’s sales cycle and may, therefore, limit its businessopportunities.

 

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

 

**Intellectual Property**

 

The Company has secured federal registration for the service marksTotal Cycle Time® and TCT®. These registrations expire from May 2005 toAugust 2012. The Company has filed an application for federal service markregistration for several other marks important to its business. The Company hasalso made appropriate filings in several European countries to secure protectionof its marks in those countries. The Company considers each of these servicemarks to be significant to its business.

 

The Company’s proprietary methodologies have been developed over25 years at great expense, have required considerable effort on the part ofskilled professionals, are not generally known and are considered tradesecrets. In some circumstances, the Company grants clients a limited license tomake internal use of certain of the Company’s proprietary methodologiesfollowing completion of a program. The Company maintains its trade secrets instrict confidence and as part of its standard engagement.

 

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

 

**Employees**

 

At April 10, 2003, the Company had a total of 126 employees, consistingof 64 full-time Resultants, 21 part-time Resultants and 41 sales andadministrative employees. The Company’s employees are not represented by alabor union and are not subject to any collective bargaining agreement. TheCompany considers its employee relations to be good.

 

**Securities and Exchange Commission**

 

The Company is required to file reports with the Securities andExchange Commission “SEC” pursuant to Section 13 or 15(d) of TheSecurities and Exchange Act of 1934. The Company routinely files certainreports to the SEC. These forms include:

 
| Form 10-K |   | Annual Report                                          |
|-----------|--------|--------------------------------------------------------|
| Form 10-Q |   | Quarterly Report                                       |
| Form 8-K  |   | Current Reports                                        |
| Form 4    |   | Statement of Beneficial Ownership of Securities        |
| Form 5    |   | Annual Statement of Beneficial Ownership of Securities |

 

7

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The public may read and copy any materials filed to the SEC by theCompany at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington,DC 20549. The public may obtain information on the operation of the PublicReference Room by calling the SEC at 1-800-SEC-0330. The Company’s filings tothe SEC are submitted electronically and can be accessed via the SEC’s websiteat (*http://www.sec.gov*).

 

**Company Website**

 

Information about the Company can be obtained by accessing theCompany’s website at (*http://www.thomasgroup.com*).

 

**ITEM 2.*****Properties.***

 

The Company leases approximately 17,000 square feet of office space atits principal executive office in Irving, Texas, under a lease that expires inJuly 2006. The Company also leases approximately 9,000 square feet ofoffice space in Troy, Michigan, under leases that expire in December 2006.The Company sub-leases approximately 12,000 square feet of office space inReston, Virginia, under a lease that expires in October 2007. In HongKong, the Company maintains approximately 3,700 square feet of office space,under a lease that expires in September 2004. The Company also leasesspace for its offices in Zug, Switzerland, Singapore and Shanghai. The Companybelieves these facilities are adequate for its current needs.

 

**ITEM 3.*****Legal Proceedings*.**

 

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

 

8

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**ITEM 4.*****Submission ofMatters to a Vote of Security Holders.***

 

The Company held its 2002 Annual Meeting of Stockholders onNovember 11, 2002. The matters described below were voted on at the AnnualMeeting, and the votes cast with respect to each matter and with respect to theelection of directors for each nominee were as indicated.

 

(1)                                  Proposal to electfive persons to serve as directors until the Company’s Year 2003 Annual Meetingof Stockholders or until their successors are duly elected and qualified:

*** ***
| **Name**                   |   | **For**   |   | **Withheld** |   |
|----------------------------|--------|-----------|--------|--------------|--------|
|                       |   |      |   |         |   |
| John R. Hamann             |   | 3,109,099 |   | 239,431      |   |
| General John T. Chain, Jr. |   | 3,110,899 |   | 237,631      |   |
| Richard A. Freytag         |   | 3,111,099 |   | 237,431      |   |
| James Dykes                |   | 3,111,001 |   | 237,529      |   |
| David Mathis               |   | 3,110,999 |   | 237,531      |   |

 

(2)                                  Proposal to vote on aproposal to amend the Company’s 1997 Stock Option Plan (the “1997 Plan”) to(a) permit the grant of options to non-employee directors of the Companypursuant to the 1997 Plan, (b) increase the number of shares authorizedfor issuance under the 1997 Plan from 750,000 shares to 1,250,000 shares, and(c) make certain other technical amendments:

 
| FOR:              |   | 1,383,309 |   |
|-------------------|--------|-----------|--------|
| AGAINST:          |   | 479,003   |   |
| ABSTAIN:          |   | 357       |   |
| BROKER NON-VOTES: |   | 1,485,861 |   |

 

(3)                                  Proposal to(a) increase the number of shares available for issuance under theNon-Employee Director Plan, and (b) permit the granting of options tonon-employee directors under the Company’s 1997 Plan:

 
| FOR:              |   | 1,370,629 |   |
|-------------------|--------|-----------|--------|
| AGAINST:          |   | 488,683   |   |
| ABSTAIN:          |   | 3,357     |   |
| BROKER NON-VOTES: |   | 1,485,861 |   |

 

(4)                                  Proposal to vote on aproposal to approve the conversion to common stock of two convertible promissorynotes in an aggregate principal amount of $2,000,000, issued by the Company toGeneral John T. Chain, Jr. and Edward P. Evans:

 
| FOR:              |   | 1,619,662 |   |
|-------------------|--------|-----------|--------|
| AGAINST:          |   | 238,750   |   |
| ABSTAIN:          |   | 4,257     |   |
| BROKER NON-VOTES: |   | 1,485,861 |   |

 

9

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**PARTII**

 

**ITEM 5.*****Market forRegistrant’s Common Equity and Related Stockholder Matters.***

 

**Market for Registrant’s Common Equity**

 

On August 28, 2002 the Company received a determination from aNASDAQ Listing Qualifications Panel effectively delisting the Company’s commonstock from trading on the NASDAQ National Market. Prior to August 29, 2002the Company’s common stock was traded on the NASDAQ National Market under thesymbol TGIS. Since August 29, 2002, the Company’s common stock has beentraded on the OTC Bulletin Board under the symbol TGIS.OB. The stock prices setforth below represent the highest and lowest sales prices per share of theCompany’s common stock as reported by the OTC Bulletin Board and the NASDAQNational Market. The prices reported in the following table reflectinter-dealer prices without retail mark-up, mark-down or commissions.

 

| **Quarter  Ended**      |   | **High** |   | **Low** |   |
|-------------------------|--------|----------|--------|---------|--------|
|                    |   |     |   |    |   |
| March 31, 2001     |   | $        | 7.75   |    | $      | 4.00 |   |
| June 30, 2001      |   | $        | 5.98   |    | $      | 4.90 |   |
| September 30, 2001 |   | $        | 5.25   |    | $      | 3.00 |   |
| December 31, 2001  |   | $        | 3.90   |    | $      | 1.53 |   |
| March 31, 2002     |   | $        | 2.99   |    | $      | 1.48 |   |
| June 30, 2002      |   | $        | 1.65   |    | $      | 0.30 |   |
| September 30, 2002 |   | $        | 0.52   |    | $      | 0.05 |   |
| December 31, 2002  |   | $        | 0.46   |    | $      | 0.13 |   |

 

**Holders of Record**

 

As of March 17, 2003 there were approximately 133 holders ofrecord of the Company’s common stock.

 

**Dividends**

 

The Company’s current credit facility prohibits the payment of cashdividends.

 

10

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**ITEM 6.*****Selected FinancialData.***

 

The following table sets forth selected historical financialinformation of the Company. This historical financial information has beenderived from the audited financial statements of the Company. This informationshould be read in conjunction with, and is qualified by, the consolidatedfinancial statements and notes thereto included in this and previous AnnualReports on Form 10-K.

*** ***
|                                                          |   | **Year  ended December 31,** |   |
|---------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                          |   | **2002  (Restated)**              |   | **2001  (Restated)** |   | **2000** |   | **1999** |   | **1998** |   |
|                                                          |   |                              |   |   |   |   |   |   |   |   |   |
| **Statement of  Operations Data:**                            |   |                              |   |   |   |   |   |   |   |   |   |
| Consulting revenue before reimbursements                      |   | $                                 | 31,670 |   | $ | 51,670 |   | $ | 67,698 |   | $ | 63,806 |   | $ | 68,361 |   |
| Operating expenses                                            |   | 39,007                            | (a)    | 61,874 | (c) | 63,357 | (e) | 54,111 |   | 68,069 | (f) |
| Operating income (loss)                                       |   | (7,337                            | )      | (10,204 | ) | 4,341 |   | 9,695 |   | 292 |   |
| Other income (expense), net                                   |   | (819                              | )      | 28 |   | 204 |   | 214 |   | (164 | ) |
| Income (loss) from continuing operations  before income taxes |   | (8,156                            | )      | (10,176 | ) | 4,545 |   | 9,909 |   | 128 |   |
| Income tax expense (benefit)                                  |   | (438                              | )(b)   | 5,959 | (d) | 1,818 |   | 3,765 |   | 37 |   |
| Income (loss) from continuing operations                      |   | (7,718                            | )      | (16,135 | ) | 2,727 |   | 6,144 |   | 91 |   |
| Discontinued operations:                                      |   |                              |   |   |   |   |   |   |   |   |   |
| Income (loss) from operations, net of  income tax             |   | —                            |   | — |   | 149 |   | — |   | (1,092 | ) |
| Loss on disposal, net of income tax                           |   | —                            |   | — |   | — |   | (2,330 | ) | (3,341 | ) |
| Net income (loss)                                             |   | $                                 | (7,718 | ) | $ | (16,135 | ) | $ | 2,876 |   | $ | 3,814 |   | $ | (4,342 | ) |
|                                                          |   |                              |   |   |   |   |   |   |   |   |   |
| Earnings (loss) per share:                                    |   |                              |   |   |   |   |   |   |   |   |   |
| Basic                                                         |   |                              |   |   |   |   |   |   |   |   |   |
| Income (loss) from continuing operations                      |   | $                                 | (1.39  | ) | $ | (3.87 | ) | $ | 0.59 |   | $ | 1.26 |   | $ | 0.02 |   |
| Income (loss) from discontinued operations                    |   | —                            |   | — |   | 0.03 |   | (0.48 | ) | (0.84 | ) |
| Net income (loss)                                             |   | $                                 | (1.39  | ) | $ | (3.87 | ) | $ | 0.62 |   | $ | 0.78 |   | $ | (0.82 | ) |
|                                                          |   |                              |   |   |   |   |   |   |   |   |   |
| Diluted                                                       |   |                              |   |   |   |   |   |   |   |   |   |
| Income (loss) from continuing operations                      |   | $                                 | (1.39  | ) | $ | (3.87 | ) | $ | 0.59 |   | $ | 1.25 |   | $ | 0.02 |   |
| Income (loss) from discontinued operations                    |   | —                            |   | — |   | 0.03 |   | (0.47 | ) | (0.84 | ) |
| Net income (loss)                                             |   | $                                 | (1.39  | ) | $ | (3.87 | ) | $ | 0.62 |   | $ | 0.78 |   | $ | (0.82 | ) |
|                                                          |   |                              |   |   |   |   |   |   |   |   |   |
| Weighted Average Shares                                       |   |                              |   |   |   |   |   |   |   |   |   |
| Basic                                                         |   | 5,538,520                         |   | 4,164,517 |   | 4,601,527 |   | 4,862,759 |   | 5,304,882 |   |
| Diluted                                                       |   | 5,538,520                         |   | 4,164,517 |   | 4,633,949 |   | 4,917,498 |   | 5,304,882 |   |

 

----

(a)                                  Includes $1.3 million of restructuring chargesfor insolvency proceedings related to the Company’s German subsidiary.

(b)                                 Includes$0.9 million of federal income tax refunds.

(c)                                  Includes$2.9 million of litigation settlement expense and $2.3 million ofseverance cost related to staff reductions during 2001 and $0.5 million ofleasehold improvement write downs related to a loss on a contract for subleasedoffice space.

(d)                                 Includes$3.3 million valuation allowance adjustment to the Company’s net deferredtax assets.

(e)                                  Includes$1.3 million of CEO transition costs and $0.7 million of litigationsettlement expense.

(f)                                    Includes restructuring charges of $9.7 millionand $0.8 million of severance cost related to the departure of threesenior level employees.

 

11

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|                                                 |   | **Year  ended December 31** |   |
|------------------------------------------------------|--------|-----------------------------|--------|
|                                                 |   | **2002  (Restated)**        |   | **2001  (Restated)** |   | **2000** |   | **1999** |   | **1998** |   |
|                                                 |   |                        |   |   |   |   |   |   |   |   |   |
| **Balance Sheet Data**                               |   |                        |   |   |   |   |   |   |   |   |   |
| Working capital                                      |   | $                           | 3,211  |   | $ | 5,392 |   | $ | 15,273 |   | $ | 19,359 |   | $ | 13,600 |   |
| Total assets                                         |   | $                           | 11,692 |   | $ | 21,252 |   | $ | 31,082 |   | $ | 32,865 |   | $ | 31,636 |   |
| Long-term obligations, including current  maturities |   | $                           | 6,398  |   | $ | 8,089 |   | $ | 3,357 |   | $ | 4,244 |   | $ | 3,257 |   |
| Total stockholders’ equity (deficit)            |   | $                           | (2     | ) | $ | 4,888 |   | $ | 21,412 |   | $ | 22,854 |   | $ | 21,212 |   |

 

**ITEM 7.****Management’s Discussion and Analysis of FinancialCondition and Results of Operations.**

 

The following discussion should be read in conjunction with theCompany’s Consolidated Financial Statements and the notes thereto and the otherinformation included in Item 15(a)(1) and (2) of this Annual Report onForm 10-K.

 

**Overview**

 

The Company derives the majority of its revenue from monthly fixed andincentive fees for the implementation of PVM and other business improvementprograms. Incentive fees are tied to improvements in a variety of clientperformance measures typically involving response time, asset utilization andproductivity. Due to the Company’s use of incentive fee contracts, variationsin revenue levels may cause fluctuations in quarterly results. Factors such asa client’s commitment to a PVM program, general economic and industryconditions 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 sizeof individual contracts relative to the annual revenues of the Company.

 

In addition to its domestic operations, the Company has operations andcontracts in its Europe and Asia/Pacific regions. The majority of contracts inthese 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. See Item7A.—”Quantitative and Qualitative Disclosure About Market Risk.”

 

*Critical Accounting Policies*

 

The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States requires management to makeestimates and assumptions that affect the amounts reported in the accompanyingfinancial statements and related footnotes. Management bases its estimates andassumptions on historical experience, observance of industry trends and variousother sources of information and factors. Actual results could differ fromthese estimates. Critical accounting policies are defined as those that arereflective of significant judgments and uncertainties, and potentially couldresult in materially different results under different assumptions andconditions.

 

*Revenue Recognition*

 

Revenue is recognized when realizable and earned generally as servicesare provided over the life of the contract. Incentive fee revenue is recognizedin the period in which the related improvements are achieved. Fixed fees arerecognized as they become billable per the terms of the contracts, whichgenerally represents effort expended to date on a contract on a percentage ofcompletion basis. In order to mitigate the risk of disputes arising over theachievement of performance improvements, which drive incentive fees, theCompany obtains customer agreement to these achievements prior to recognizingrevenue.

 

Contracts consisting of multiple elements result in revenue beingallocated to each element based on the relative fair value of each individualelement using vendor specific objective evidence. Revenue is recognized on eachelement as the criteria for revenue recognition are met for that particularelement.

 

12

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*Deferred Taxes*

 

For United States federal tax purposes, at December 31, 2002, theCompany had net operating loss carryovers of approximately $3.6 million,which begin to expire in 2021 and unused foreign tax credit carryovers of$2.8 million, which begin to expire in 2003. In Asia, the Company hasapproximately $11.8 million of net operating loss carryovers, whichcurrently do not have any statutory expiration date. Due to the uncertainty ofthe Company’s ability to utilize its net deferred tax assets, the Company hasprovided a valuation allowance of $7.1 million. If the Company generatesUnited States taxable income in future periods, reversal of the valuationallowance could have a significant positive impact on net income in the periodthat it becomes more likely than not that the net operating loss carryover willbe realized. Utilization of net operating loss carryforwards in the future maybe limited if changes in the Company’s stock ownership create a change ofcontrol as provided in Section 382 of the Internal Revenue Code of 1986,as amended.

 

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

 

|                                                          |   | **Percentage  Of Revenue  For Year Ended December 31,** |   |
|---------------------------------------------------------------|--------|--------------------------------------------------------------|--------|
|                                                          |   | **2002  (Restated)**                                         |   | **2001  (Restated)** |   | **2000** |   |
|                                                          |   |                                                         |   |   |   |   |   |
| Consulting revenue before reimbursements                      |   | 100.0                                                        | %      | 100.0 | % | 100.0 | % |
| Cost of sales before reimbursable expenses                    |   | 64.1                                                         | %      | 64.3 | % | 53.8 | % |
| Gross profit                                                  |   | 35.9                                                         | %      | 35.7 | % | 46.2 | % |
| Selling, general and administrative                           |   | 54.9                                                         | %      | 49.8 | % | 38.8 | % |
| Restructuring charges                                         |   | 4.1                                                          | %      | — |   | — |   |
| Litigation settlements                                        |   | —                                                       |   | 5.7 | % | 1.0 | % |
| Operating income (loss)                                       |   | (23.1                                                        | )%     | (19.8 | )% | 6.4 | % |
| Other income, (loss), net                                     |   | (2.6                                                         | )%     | 0.1 | % | 0.3 | % |
| Income (loss) from continuing operations  before income taxes |   | (25.7                                                        | )%     | (19.7 | )% | 6.7 | % |
| Income taxes (benefit)                                        |   | (1.4                                                         | )%     | 11.5 | % | 2.7 | % |
| Income (loss) from continuing operations                      |   | (24.3                                                        | )%     | (31.2 | )% | 4.0 | % |

 

**Results of Operations**

 

***2002Compared to 2001***

 

***Revenue***

 

During the first quarter of 2002, the Company adopted a FinancialAccounting Standards Board Staff announcement that requires certainreimbursements received for out-of-pocket expenses incurred be classified inthe income statement as revenue. The Company has presented revenue in twocomponents: consulting revenue before reimbursements or “net revenue” andreimbursements. Reimbursements reclassified to revenue for the years endedDecember 31, 2002, 2001, and 2000 were $1.6 million,$7.8 million and $9.3 million, respectively. In addition, cost ofsales has also been presented in two components: cost of sales beforereimbursable expenses or “net cost of sales” and reimbursable expenses.

 

Net revenue decreased $20.0 million, or 39%, to $31.7 millionin 2002, from $51.7 million in 2001. Fixed fee revenue was$24.3 million, or 77% of revenue in 2002, compared to $36.8 million,or 71% in 2001. Incentive fee revenue was $7.4 million, or 23% of revenuein 2002, compared to $14.9 million, or 29% in 2001.

 

North America region net revenue increased $1.7 million, or 14%,to $14.0 million in 2002, from $12.3 million in 2001. The increaserelates primarily to several United States government contracts signed in 2002.

 

Europe region net revenue decreased $15.2 million, or 53%, to $13.5 millionin 2002, from $28.7 million in 2001. The decrease is primarilyattributable to the completion of a significant contract, which producedrevenue of $19.2 million, in 2001, compared to $12.1 million in 2002.In addition, the Company’s German subsidiary, which was placed in insolvencyduring 2002, reflected a $6.8 million decrease in revenue when compared to2001.

 

13

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Asia/Pacific region net revenue decreased $6.5 million, or 61%, to$4.2 million in 2002, from $10.7 million in 2001. The decrease isattributable to the 2001 completion of several contracts that were not replacedin 2002 with contracts of a similar magnitude.

 

***GrossProfit***

 

Gross profit for 2002 decreased to $11.4 million and 36% of netrevenue, from $18.5 million and 36% of net revenue in 2001. The primaryreason for the decrease in gross profit was decreased net revenue of$20.0 million related to the adverse economic climate the Company’spotential and existing clients faced during 2002. The impact of this revenuedecrease offset the efficiencies gained by a reduction in net cost of sales of$12.9 million. The reduction in net cost of sales was achieved primarilythrough the Company reducing its direct labor cost by placing active employeesnot assigned to programs on furlough status.

 

***Selling,General and Administrative***

 

Selling, general and administrative expense decreased $8.3 million,or 32% to $17.4 million in 2002, from $25.7 million in 2001. Thedecrease is comprised of a $4.3 million reduction in personnel expense,$1.4 million reduction in facilities and equipment, and $3.0 millionin travel, telecommunications and other costs, offset by a $1.0 millionincrease in selling costs. The selling costs included personnel and travel cost.  In addition, 2001 contained $0.5 million ofleasehold improvement write downs related to a loss on a contract of subleasedoffice space, which did not recur in 2002.

 

***Restructuring***

 

On June 3, 2002, the Company filed a petition with the Germangovernment for insolvency of its German subsidiary, giving the insolvency courtcontrol of the subsidiary’s assets. This action was taken in response todeclining revenue and cash flows from the operations of its German subsidiaryduring 2001 and continuing through 2002. All existing German contracts werecompleted in the second quarter of 2002, and the German subsidiary had nosignificant future prospects. On September 1, 2002, the German insolvencycourt appointed an official receiver for the Company’s German subsidiary totake control of the subsidiary and liquidate its assets. The restructuringcharge of $1.3 million, of which $1.1 million is non-cash, has beenrecorded since the second quarter of 2002. In February of 2003, the Companyfiled a proof of claim with the insolvency court. The Company anticipates thatit will be several months before any resolution is determined with regard toassets of the Company’s former German subsidiary. The Company continues servingthe European market through its operations in Switzerland.

 

The loss from liquidation of the German subsidiary is presented in theconsolidated statements of operations and consolidated statements of cash flowsunder the caption “Restructuring charges” and “Loss from restructuringactivities”, respectively. The restructuring loss of $1.3 million consistsof $0.5 million of unrealized foreign currency losses, previouslyclassified under the caption “Accumulated other comprehensive loss” on theCompany’s consolidated balance sheet. See Note 3 to the Company’sconsolidated financial statements.

 

***IncomeTaxes***

 

The Company’s effective tax benefit rate for 2002 was 5% compared to aneffective tax rate of (62)% in 2001. The change in the Company’s effective taxrate reflects utilization of federal net operating losses of $1.3 million,in 2002 and an increase in the valuation allowance of $3.3 million in2001.

 

At December 31, 2001, the Company determined, based primarily onits recent history of operating losses in the United States, that it could nolonger consider the recovery of its net deferred tax assets as more likely thannot. Accordingly, the Company’s net deferred tax assets were reduced by avaluation allowance adjustment. While a valuation allowance is currentlyrequired for the Company’s net deferred tax assets, the assets remain availablefor use in the future to offset future income tax liabilities should sufficientamounts of United States and foreign income be generated in the carryforwardperiod.

 

Consistent with the Company’s position at December 31, 2001, theCompany recorded no tax benefits for operating losses generated in 2002.However, during 2002, Congress passed a law to allow companies the opportunityto carryback net operating losses five years versus the previous two-yearcarryback provision. This change allowed the Company to file for tax refundsfor the years 1996 and 1997 for which the related benefit and receivable ofapproximately $798,000 and $125,000 was recorded in the first and secondquarters of 2002, respectively. The Company realized an additional $46,000 ofstate tax refunds during 2002. The Company also recorded income tax expense onthe profits of its foreign operations of $531,000 in 2002. Utilization of netoperating loss carryforwards in the future may be limited if changes in theCompany’s stock ownership create a change in control as provided inSection 382 of the Internal Revenue Code of 1986, as amended.

 

14

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***2001 Compared to2000***

 

***Revenue***

 

Net revenue decreased $16.0 million, or 24%, to $51.7 millionin 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 revenuein 2001, compared to $5.7 million, or 8% in 2000.

 

North America region net revenue decreased $17.9 million, or 59%,to $12.3 million in 2001, from $30.2 million in 2000. The decreaserelates to three major contracts, operating primarily in 2000, which accountedfor net revenue of $16.3 million. Due to the general economic downturn,the Company was unable to replace this revenue with contracts of a similarmagnitude during 2001.

 

Europe region net revenue decreased $0.3 million, or 1%, to$28.7 million in 2001, from $29.0 million in 2000. The decrease isattributable to revenue from a significant client, which produced revenue of$19.2 million in 2001 compared to $19.8 million in 2000.

 

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

 

***GrossProfit***

 

Gross profit for 2001 decreased to $18.5 million and 36% of netrevenue, from $31.2 million and 46% of net revenue in 2000. The primaryreason for the decrease in gross profit margin was decreased net revenue of$16.0 million related to the adverse economic climate the Company’spotential and existing clients faced during 2001. This economic downturn forcedpotential and existing clients to delay and/or cancel programs. The impact ofthis revenue decrease on gross profit offset the efficiencies gained related toa $3.2 million decrease in net cost of sales. The decrease in net cost ofsales relates primarily to lower personnel cost due to staff reductions. Thedecrease in net cost of sales was negatively impacted by increased severancecost of $1.0 million as a result of these staff reductions.

 

***Selling,General and Administrative***

 

Selling, general and administrative expense decreased 2% to$25.7 million in 2001, from $26.2 million 2000. The decrease inselling, general and administrative relates to a $1.2 million reduction inpersonnel expense resulting from staff reductions during 2001, lower bad debtexpense of $0.5 million and a decrease in depreciation expense of$0.4 million. These cost decreases were offset by increased incentivecompensation expense of $1.1 million related to the Company’s incentiveplan, which was paid in the first two quarters of 2001 and a $0.5 million writedown of leasehold improvements related to a loss on a contract of subleasedoffice space.

 

***LitigationSettlements***

 

On March 16, 2001, the Company received notice of a claim fromBalanced Scorecard Collaborative, Inc. (“BSCol”), to mediate/arbitrate adispute regarding BSCol’s claim for unpaid fees under the parties’March 2000 agreement. The matter was not settled during an April 26,2001 mediation, and consequently was resolved by a proceeding before a neutralarbitration panel in Dallas, Texas, during the week of September 17, 2001,pursuant to an arbitration provision in the parties’ agreement. OnOctober 5, 2001, the Company received an adverse ruling from thearbitration panel. The decision of the arbitration panel awarded BSCol$2.4 million. The total cost of the litigation of $2.9 million,including legal fees of $0.5 million, is presented separately aslitigation settlement in the Company’s consolidated statements of operations.

 

During 2000, the Company was party to an arbitration proceeding withOverhead Door Corporation, a former client, to collect unpaid fees. The Companyreceived an adverse ruling from the arbitration panel. The total cost to theCompany, including legal fees, was $0.7 million and is presentedseparately as litigation settlement in the Company’s consolidated statements ofoperations.

 

***Income Taxes***

 

The Company’s effective tax rate for 2001 was (62)% compared to 40% in2000. The significant change in the Company’s effective tax rate reflectsadjustments to the valuation allowance on the Company’s net deferred taxassets. At December 31, 2001, the Company determined, based primarily onits recent history of operating losses in the United States, that it could nolonger consider the recovery of its net deferred tax assets as more likely thannot. Accordingly, the Company’s net deferred tax assets at the beginning of2001 were reduced by a valuation allowance adjustment of $3.3 million. Inaddition, net operating loss and tax credit carryforwards generated in 2001were also reduced by a valuation allowance such that no benefit for thosecarryforwards was recognized in 2001. While a valuation allowance is currentlyrequired for the Company’s net deferred tax assets, the assets remain availablefor use in the future to offset future

 

15

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incometax liabilities should sufficient amounts of United States and foreign incomebe generated in the carryforward periods.

 

***DiscontinuedOperations***

 

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

 

***QuarterlyResults***

 

The following table sets forth certain unaudited operating results foreach of the four quarters in the two years ended December 31, 2002. Thisinformation has been prepared on the same basis as the audited financialstatements and, in the opinion of the Company, includes all adjustments(consisting of normal recurring adjustments) necessary for a fair presentationof the information for the periods presented.

 
|                                                  |   | **2002  (Restated)  For the Three Months Ended** |   | **2001  For the Three Months Ended** |   |
|-------------------------------------------------------|--------|--------------------------------------------------|--------|--------------------------------------|--------|
|                                                  |   | **Mar. 31**                                      |   | **June 30**                          |   | **Sept. 30** |   | **Dec. 31** |   | **Mar. 31** |   | **June 30** |   | **Sept. 30** |   | **Dec. 31****(****Restated)** |   |
|                                                  |   | **In thousands, except per share data**          |   |
|                                                  |   |                                             |   |                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Consulting revenue before reimbursements              |   | $                                                | 8,288  |                                 | $      | 8,007 |   | $ | 6,825 |   | $ | 8,550 |   | $ | 16,360 |   | $ | 15,812 |   | $ | 10,121 |   | $ | 9,377 |   |
| Gross profit                                          |   | 1,460                                            |   | 2,895                                |   | 2,838 |   | 4,170 |   | 6,711 |   | 7,780 |   | 2,839 |   | 1,122 |   |
| Operating income (loss)                               |   | (4,281                                           | )      | (1,989                               | )(c)   | (1,608 | )(e) | 541 |   | 708 | (f) | 1,664 |   | (5,477 | )(g) | (7,099 | )(h) |
| Income (loss) from continuing operations              |   | (3,805                                           | )(b)   | (2,298                               | )(d)   | (1,739 | ) | 124 |   | 410 |   | 1,051 |   | (3,253 | ) | (14,343 | )(i) |
| Earnings (loss) per share from continuing  operations |   |                                             |   |                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                 |   | $                                                | (0.91  | )                                    | $      | (0.55 | ) | $ | (0.41 | ) | $ | 0.02 |   | $ | 0.10 |   | $ | 0.25 |   | $ | (0.78 | ) | $ | (3.46 | ) |
| Diluted                                               |   | $                                                | (0.91  | )                                    | $      | (0.55 | ) | $ | (0.41 | ) | $ | 0.02 |   | $ | 0.10 |   | $ | 0.25 |   | $ | (0.78 | ) | $ | (3.46 | ) |
| Weighted average shares                               |   |                                             |   |                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                 |   | 4,169                                            |   | 4,192                                |   | 4,192 |   | 7,107 |   | 4,184 |   | 4,158 |   | 4,165 |   | 4,151 |   |
| Diluted                                               |   | 4,169                                            |   | 4,192                                |   | 4,192 |   | 7,159 |   | 4,198 |   | 4,170 |   | 4,165 |   | 4,151 |   |
| Stock Price(a)                                        |   |                                             |   |                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |
| High                                                  |   | $                                                | 2.99   |                                 | $      | 1.65 |   | $ | 0.52 |   | $ | 0.46 |   | $ | 7.75 |   | $ | 5.98 |   | $ | 5.25 |   | $ | 3.90 |   |
| Low                                                   |   | $                                                | 1.48   |                                 | $      | 0.30 |   | $ | 0.05 |   | $ | 0.13 |   | $ | 4.00 |   | $ | 4.90 |   | $ | 3.00 |   | $ | 1.53 |   |
| Close                                                 |   | $                                                | 1.68   |                                 | $      | 0.49 |   | $ | 0.18 |   | $ | 0.45 |   | $ | 5.06 |   | $ | 5.25 |   | $ | 3.75 |   | $ | 2.25 |   |

 

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(a)                                  The stock prices setforth above represent the highest and lowest sales prices per share of theCompany’s common stock as reported by the OTC Bulletin Board since August 29,2002. Prior to August 29, 2002 the Company’s common stock was traded onNASDAQ. The prices reported by the OTC Bulletin Board and NASDAQ reflectinter-dealer prices without retail mark-up, mark-down or commissions, and maynot necessarily represent actual transactions.

(b)                                 Includes$0.8 million of federal income tax refunds.

(c)                                  Includes$0.4 million in restructuring charges.

(d)                                 Includes$0.1 million of federal income tax refunds.

(e)                                  Includes$0.8 million in restructuring charges.

(f)                                    Includes$0.8 million of severance cost related to staff reductions.

(g)                                 Includes$2.8 million of litigation settlement expense and $0.6 million ofseverance cost related to staff reductions.

(h)                                 Includes$0.9 million of severance cost related to staff reductions and $0.5million of leasehold improvement write downs related to a loss on a contractfor subleased office space.

(i)                                     Includes$3.3 million valuation allowance adjustment to the Company’s net deferredtax assets.

 

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***Liquidityand Capital Resources***

 

Cash used in operating activities was $4.7 million in 2002,compared to $7.8 million in 2001. The decreased use of cash in 2002 isprimarily attributable to a much smaller net operating loss in 2002.

 

Net cash used in investing activities decreased to $0.3 million in2002, from $1.1 million in 2001. The decrease is a result of lower capitalexpenditures in 2002. Capital expenditures in 2002 consisted of costs relatedto website design and leasehold improvements.

 

Net cash provided by financing activities was $3.6 million in2002, compared to $5.8 million in 2001. The decrease in cash provided byfinancing activities reflects the reduction in the Company’s bank creditfacility by the Company’s senior lender, from $15.0 million to$2.5 million during 2002. This line of credit reduction resulted in a$6.0 million reduction in net borrowings on the line of credit in 2002.This line of credit reduction was partially offset by $2.0 million ofsubordinated convertible debt and $1.5 million of subordinated debt frommembers of the Company’s Board of Directors and a stockholder in 2002.

 

During 2002, the Company’s ability to raise $1.5 million ofsubordinated debt and $2.0 million of subordinated convertible debt was akey factor in providing sufficient liquidity to maintain operations. TheCompany reached agreements with its current Chairman of the Board, General JohnT. Chain, Jr. and with Edward P. Evans, an existing stockholder of the Company,to infuse $1.0 million each, in the form of Subordinated Convertible Notesbearing interest at 6% annually. Upon stockholder approval at the Company’sAnnual Meeting of Stockholders held November 11, 2002, the principal andunpaid interest of $11,500 on the notes were converted to 5,364,002 shares ofcommon stock of the Company at a conversion price of $0.375 per share. Afterconversion of the notes and related interest, General Chain and Mr. Evanshold approximately 29% and 33% of the Company’s outstanding common stock,respectively.

 

Pursuant to the agreements with General Chain and Mr. Evans, eachreceived warrants for 434,899 shares of the Company’s common stock. If GeneralChain or Mr. Evans exercise their warrant, each could own an additional3.0% of the common stock (based on the fully diluted ownership of the Companyas of December 31, 2002), or approximately 32% and 36%, respectively, ofthe Company’s outstanding common stock. General Chain and Mr. Evans havesimilar Board designation rights and identical registration rights under the termsof the agreements.

 

The Company has a rights plan in place, pursuant to which, if certainpersons acquire more than 15% of the outstanding common stock of the Company,the Company’s stockholders may exercise a “right” to purchase additional sharesof common stock. If the 15% threshold is crossed, the rights are triggered andeach stockholder may purchase $200 in value of common stock for $100. Theeffect of the rights plan is to give the Company’s Board of Directors theopportunity to negotiate with potential third party acquirers in the event thatan attempt is made to take over the Company.

 

Because the issuance of common stock to General Chain andMr. Evans under the warrants or under the Subordinated Convertible Noteswould trigger the rights, the Company’s Board of Directors approved amendmentsto the Rights Agreement governing the rights plan. These amendments exemptedthe transactions with General Chain and Mr. Evans from the rights plan.These amendments were adopted by the Company’s Board of Directors onSeptember 13, 2002 and October 12, 2002 for the transactions withGeneral Chain and Mr. Evans, respectively.

 

In January and October of 1999, the Company announced two stockrepurchase plans for up to 250,000 and 500,000 shares, respectively. In Augustof 2000, the Company announced an additional stock repurchase plan of up to750,000 shares. During 1999, the Company purchased 289,150 shares at an averageprice of $8.41 per share. During 2000, the Company purchased 596,300 shares atan average price of $7.96 per share. During 2001, the Company purchased 109,100shares at an average price of $5.11 per share. During 2002, and throughApril 10, 2003, the Company had purchased no additional shares of treasurystock.

 

The Company has traditionally used cash flow from operations, periodicallysupplemented by borrowings under a bank line of credit, as its primary sourceof liquidity, when transferring funds among the Company’s foreign subsidiarieswas not efficient. Beginning in 2001, the Company experienced a significantdecline in revenue related to the downturn in the economy. The economicdownturn and subsequent revenue decline caused the Company not to be incompliance with certain covenants related to its then existing$15.0 million revolving credit facility. As a result, the Company’slender, in January of 2002, reduced the maximum allowable borrowings to$10.0 million, secured by the Company’s assets. On March 29, 2002,the lender restructured the Company’s credit facility to maximum allowableborrowings of $7.5 million, consisting of a $2.5 million revolvingline of credit and a $5.0 million term note. On November 29, 2002,the credit facility was increased to $8.0 million, consisting of a$3.0 million revolving line of credit and a $5.0 million term note.The terms of the November 29, 2002 amended credit facility extended thematurity date on both the term and revolving notes to September 1, 2003.Term note installment payments and a $150,000 amendment fee, related to theMarch 29, 2002 amendment, were deferred until the September 1, 2003maturity date. Pursuant to the amended credit facility, the senior lenderreceived, as an amendment fee, a warrant to purchase 397,443 shares of theCompany’s common stock at an exercise price of $0.30 per share. The warrantexpires November 26, 2007. On April 15, 2003, the Company and itssenior lender amended the credit facility to extend the maturity date on boththe term and

 

17

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revolving notes and payment of the$150,000 amendment fee to February 2, 2004. In addition, theApril 15, 2003 amended credit facility waived all financial covenantsthrough March 31, 2003, certain of which covenants had been breached as ofand prior to that date. In addition, the Company was required to make a$1.0 million term note payment prior to April 15, 2003, with whichthe Company has complied.

 

*$8.0 Million Credit Facility*

 

All United States assets of the Company and 100% of the outstandingcapital voting stock of each foreign subsidiary secure the entire$8.0 million credit facility. The $3.0 million revolving line ofcredit is subject to a borrowing base of 75% applied to the Company’s UnitedStates trade accounts receivable outstanding less than 90 days. The revolvingline of credit bears interest at prime plus 2%. The $5.0 million term notebears interest at prime plus 4%.

 

All prior financial covenants were replaced with new financialcovenants per the April 15, 2003 amended credit facility, which ifbreached, could result in acceleration of amounts owed under the amended creditfacility. The revised financial covenants require the Company to(1) maintain certain levels of tangible net worth, debt to tangible networth ratio, minimum levels of EBITDA, (2) to avoid two consecutive quartersthat generate operating losses, and (3) restrict annual capitalexpenditures to $300,000. The covenants are tested monthly beginningApril 30, 2003. Although retained earnings is not restricted by thisamended credit facility, the declaration or payment of dividends is prohibitedby the agreement.

 

At December 31, 2002, the $2.3 million outstanding under therevolving line of credit is classified as a current liability, while the$5.0 million term note is classified as $1.0 million of short-termdebt due to the repayment required and made on April 15, 2003 and$4.0 million of long-term debt due to its maturity date ofFebruary 2, 2004.

 

*The Company’s Liquidity Plan*

 

Recent operating results and the restructuring of the Company’s creditfacility give rise to concerns about the Company’s ability to generate cashflow from operations sufficient to make scheduled debt payments as they becomedue and to remain in compliance with its restrictive loan covenants. SinceMarch of 2002, the Company has been able to raise $1.5 million ofsubordinated debt from members of the Board of Directors and $2.0 millionof subordinated convertible debt, subsequently converted to common stock, froma member of its Board of Directors and a stockholder.

 

The Company’s need to raise additional equity or debt financing and theCompany’s ability to generate cash flow from operations sufficient to makescheduled payments on its debts as they become due will depend on its futureperformance and the Company’s ability to successfully implement business andgrowth strategies. Since the first quarter of 2001, the Company has implementedcost saving measures including staff reductions, downsizing and subleasing offacilities and has taken greater control over alliances with strategic businesspartners. The Company will take additional cost savings measures such as thosetaken recently, if necessary, to enhance its liquidity position. The Company’sperformance will also be affected by prevailing economic conditions. Many ofthese factors are beyond the  Company’scontrol. The recent conflict in Iraq, involving the United States military,could have an adverse effect on the Company’s liquidity due to the highconcentration of United States government contracts, which could result indelays in program operations. If future cash flows and capital resources areinsufficient to meet the Company’s debt obligations and commitments, theCompany may be forced to reduce or delay activities and capital expenditures,obtain additional equity capital or restructure or refinance its debt. In theevent that the Company is unable to do so, the Company may be left withoutsufficient liquidity and it may not be able to meet its debt servicerequirements. In such a case, an event of default would occur under the creditfacility and could result in all of the Company’s indebtedness becomingimmediately due and payable. As a result, the Company’s senior lender would beable to foreclose on the Company’s assets.

 

**Inflation**

 

Although the operations of the Company are influenced by generaleconomic conditions, the Company does not believe inflation had a materialeffect on the results of operations during the year ended December 31,2002. However, there can be no assurance the Company’s business will not beaffected by inflation in the future.

 

18

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**Risk Factors**

 

***The Company’srevenue and operating results may fluctuate significantly from quarter toquarter, and fluctuations in operating results could cause its stock price todecline.***

 

TheCompany’s revenue and operating results may vary significantly fromquarter-to-quarter due to a number of factors. In future quarters, operatingresults may be below the expectations of public market analysis or investors,and the price of its common stock may decline. Factors that could causequarterly fluctuations include:

 

•                                          thebeginning and ending of significant contracts during a quarter;

 

•                                          thenumber, size and scope of the engagements;

 

•                                          incentivefee contracts can create variations in revenue levels and may causefluctuations in quarterly results;

 

•                                          theextent to which Resultants can be reassigned efficiently from one engagement toanother;

 

•                                          fluctuationsin demand for services resulting from budget cuts, project delays, cyclicaldownturns or similar events, including the recent economic downturn and theevents of September 11, 2001;

 

•                                          thepossibility and subsequent duration of conflicts involving the United Statesmilitary could cause delays in program operations related to the Company’sgovernment clients;

 

•                                          clients’decisions to divert resources to other projects, which may limit clients’resources that would otherwise be allocated to services that the Company couldprovide; and

 

•                                          reductionsin the prices of services offered by competitors.

 

Because a significant portion of expenses are relatively fixed, avariation in the number of client engagements or the timing of the initiationor the completion of client engagements may cause significant variations inoperating results from quarter-to-quarter and could result in losses.

 

***The market in whichthe Company competes is intensely competitive and actions by competitors couldrender its services less competitive, causing revenue and income to decline.***

 

The ability to compete depends on a number of factors outside of theCompany’s control, including:

 

•                                          theprices at which others offer competitive services, including aggressive pricecompetition and discounting on individual engagements, which may becomeincreasingly prevalent due to worsening economic conditions;

 

•                                          theability of competitors to undertake more extensive marketing campaigns;

 

•                                          theextent, if any, to which competitors develop proprietary tools that improvetheir ability to compete;

 

•                                          theability of the Company’s customers to perform the services themselves; and

 

•                                          theextent of competitors’ responsiveness to customer needs.

 

The Company may not be able to compete effectively on these or otherfactors. If the Company is unable to compete effectively, market position, andtherefore revenue and profitability, would decline.

 

***The Company mustcontinually enhance its services to meet the changing needs of its customers orface the possibility of losing future business to competitors.***

 

Future success will depend upon the Company’s ability to enhanceexisting services and to introduce new services to meet the requirements ofcustomers in a rapidly developing and evolving market. Present or futureservices may not satisfy the needs of the market. If the Company is unable to anticipateor respond adequately to its customers’ needs, lost business may result andfinancial performance will suffer.

 

19

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***Internationalbusiness exposes the Company to various foreign statutory requirements, whichcould interfere with our business or operations and could result in increasedexpenses and declining profitability.***

 

International operations create special risks, including:

 

•                                          statutoryrequirements, which may impair the Company’s ability to expatriate foreignprofits to help fund domestic operations;

 

•                                          greaterdifficulties in managing and staffing foreign operations;

 

•                                          culturaldifferences that adversely affect utilization;

 

•                                          unexpectedchanges in trading policies, legal and regulatory requirements, tariffs andother foreign taxes;

 

•                                          greaterdifficulties in enforcing agreements with clients and collecting accountsreceivable;

 

•                                          thetax system of foreign countries, which may tax the Company’s foreign income athigher rates than in the United States and may subject foreign earnings towithholding requirements or tariffs, exchange controls or other restrictions;

 

•                                          legalrequirements and regulations of various foreign countries, which may makecompliance by the Company with such laws and regulations difficult and may makeenforcement of the Company’s intellectual property rights more difficult;

 

•                                          fluctuationsin currency exchange rates, which may affect demand for the Company’s servicesand may adversely affect the profitability in United States dollars of servicesprovided by the Company in foreign markets where payment for our services ismade in the local currency; and general economic conditions in the foreigncountries in which the Company operates, which could have an adverse impact onour earnings from operations in those countries.

 

***The Company isdependent on a limited number of key personnel, and the loss of theseindividuals could harm its competitive position and financial performance.***

 

The Company’s business consists primarily of the delivery ofprofessional services and, accordingly, its success depends upon the efforts,abilities, business generation capabilities and project execution of itsexecutive officers and Resultants. The Company’s success is also dependent uponthe managerial, operational and administrative skills of its executiveofficers. The loss of any executive officer or key Resultant or group ofResultants, or the failure of these individuals to generate business orotherwise perform at or above historical levels could result in a loss ofcustomers or revenue, and could therefore harm the Company’s financialperformance.

 

***If the Company failsto perform effectively on project engagements, its reputation, and thereforeits competitive position and financial performance, could be harmed.***

 

Many of the Company’s engagements come from existing clients or fromreferrals by existing clients. Therefore, growth is dependent on the Company’sreputation and on client satisfaction. The failure to perform services thatmeet a client’s expectations may damage the Company’s reputation and harm itsability to attract new business. Damage to the Company’s reputation arisingfrom client dissatisfaction could therefore harm financial performance.

 

***Inability to protectintellectual property could harm the Company’s competitive position andfinancial performance.***

 

Despite efforts to protect proprietary rights from unauthorized use ordisclosure, parties, including former employees or consultants, may attempt todisclose, obtain or use the Company’s solutions or technologies. The steps theCompany has taken may not prevent misappropriation of solutions ortechnologies, particularly in foreign countries where laws or law enforcementpractices may not protect proprietary rights as fully as in the United States.Unauthorized disclosure of proprietary information could make the Company’ssolutions and methodologies available to others and harm its competitiveposition.

 

20

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***The Company’srestructured credit facility could have an adverse effect on the Company’sfinancial health.***

 

The restructured credit facility may:

 

•                                          requirethe Company to dedicate a substantial portion of our cash flows to pay downdebt;

 

•                                          increasethe Company’s vulnerability to general adverse economic and industryconditions;

 

•                                          limitthe Company’s ability to fund future working capital and other generalcorporate requirements; and

 

•                                          limitthe Company’s flexibility in planning for, or reacting to, changes in theCompany’s business and the industry in which it operates.

 

The ability to make payments on and to refinance the Company’s debtwill depend on financial and operating performance, which may fluctuatesignificantly from quarter to quarter and is subject to prevailing economicconditions and to financial, business and other factors beyond the Company’scontrol.

 

There can be no assurance that the Company’s business will generatesufficient cash flow from operations or that future borrowings will beavailable to it under the restructured credit facility in an amount sufficientto enable it to pay debt or to fund other liquidity needs. The Company may needto refinance all or a portion of its debt on or before maturity. The Companycan give no assurance that it will be able to refinance any of its debt oncommercially reasonable terms or at all.

 

***The terms of theCompany’s debt contain a number of restrictive covenants, which restrict itsflexibility and which, if breached, could result in acceleration of amountsowed.***

 

The restructured credit facility contains covenants that limit theCompany’s flexibility. These covenants could materially and adversely affectthe ability to finance future operations or capital needs or to engage in otherbusiness activities that may be in the best interest of the Company. Thecovenants limit the ability to, among other things:

 

•                                          encumberassets;

 

•                                          raisenew debt;

 

•                                          merge,consolidate or dispose of a substantial part of assets;

 

•                                          engagein acquisitions, make loans, extend guarantees or enter into other investments;

 

•                                          incurindebtedness;

 

•                                          paydividends or make other distributions to stockholders or other parties; and

 

•                                          enterinto transactions with affiliates.

 

The restructured credit facility also contains covenants concerning themaintenance of minimum levels of tangible net worth, adhere to minimum ratiosof debt to tangible net worth, reach minimum levels of EBITDA, avoidconsecutive fiscal quarters that generate operating losses and restrict annualcapital expenditures to $300,000. The Company’s ability to comply with thesecovenants may be affected by events beyond the Company’s control, and it cannotbe sure that it will be able to comply. A breach of any of these covenantscould result in a default under the credit facility and, potentially, anacceleration of the obligation to repay the amounts owed.

 

**“Safe Harbor” Statement Under The PrivateSecurities Litigation Reform Act:**

 

With the exception of historical information, the matters discussed inthis report are “forward looking statements” as that term is defined inSection 21E of the Securities Exchange Act of 1934.

 

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While the Company believes its strategic plan is on target and thebusiness outlook remains strong, several important factors have beenidentified, including the risk factors set forth herein, which could causeactual results to differ materially from those predicted. By way of example:

 

•                                          Thecompetitive nature of the management consulting industry, in light of new entrantsinto the industry and the difficulty of differentiating the services offered topotential clients;

 

•                                          Thetime required by prospective clients to fully understand the value andcomplexity of a typical PVM program may result in an extended lead time toclose new business;

 

•                                          Performance-orientedfees are earned upon the achievement of improvements in a client’s business.The client’s commitment to a PVM program and general economic/industryconditions could impact a client’s business performance and consequently theCompany’s ability to forecast the timing and ultimate realization ofperformance-oriented fees;

 

•                                          Theability of the Company to productively re-deploy personnel during programtransition periods; and

 

•                                          Theability of the Company to create alliances and make acquisitions that areaccretive to earnings.

 

**ITEM 7A****. *Quantitative andQualitative Disclosure About Market Risk***

 

The Company invests cash balances in excess of operating requirementsin short-term securities, generally with maturities of 90 days or less.The Company’s credit agreement provides for borrowings which bear interest ofprime plus 2%, on the $3.0 million revolving portion and prime plus 4% onthe $5.0 million term portion. Since January 1, 1993, the prime ratehas fluctuated between 9.5% and 4.25%. Based on the volatility of the primerate in recent years, a 5 percentage point increase in interest rates wouldhave resulted in an additional $395,000 of additional interest expense in 2002.The Company had borrowings on its credit facility from time to time during2002, with an outstanding balance of $2.3 million at December 31,2002. Through April 10, 2003, the Company had additional borrowings of$4.1 million and repayments of $5.6 million. As of April 10,2002, the Company had $0.8 million of outstanding borrowings on thiscredit facility.

 

Due to the Company’s foreign operations in Europe and Asia, the Companyis exposed to transaction adjustments with respect to foreign currency. OnJanuary 1, 2001, the Company elected to change the functional currency ofits foreign subsidiaries to the United States dollar. Under United Statesdollar functional currency, the financial statements of foreign subsidiariesare remeasured from the recording currency to the United States dollar. The resultingremeasurement adjustment is recorded as foreign exchange gain or loss in thestatement of operations. There is no translation adjustment to the separatecomponent of stockholders’ equity or adjustment to comprehensive income. TheCompany incurred foreign exchange losses of $58,000 and $31,000 for the yearsended December 31, 2002 and 2001, respectively. At December 31, 2002,the effect of a 10% increase in foreign exchange rates would have resulted in a$125,000 foreign currency exchange loss on the Company’s non United Statesdenominated assets and a $114,000 foreign exchange gain on the Company’s nonUnited States denominated liabilities. As such, the net effect of a 10%increase in the Company’s foreign exchange rates, at December 31, 2002,would have been an $11,000 foreign currency exchange loss. The Company believesthat changing the functional currency of its foreign subsidiaries to the UnitedStates dollar combined with transacting business in countries withtraditionally stable currencies mitigates the effect of any near-term foreigncurrency transaction adjustments on the Company’s financial position, resultsof operations and cash flows.

 

The Company has not engaged in foreign currency hedging transactionsnor does the Company have any derivative financial instruments. However, goingforward, the Company will assess the need to enter into hedging transactions tolimit its risk due to fluctuations in exchange rates.

 

**ITEM 8****. Financial Statements and Supplementary Data**

 

See Index to Consolidated Financial Statements on page F-1.Supplementary quarterly financial information for the Company is included inItem 7. “Management’s Discussion and Analysis of Financial Condition andResults of Operations.”

 

**ITEM 9****. Changes in and Disagreements with Accountants onAccounting and Financial Disclosure.**

 

Not applicable.

 

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**PARTIII**

 

**ITEM 10****. Directors and Executive Officers of the Registrant.**

 

The information relating to the Company’s directors and nominees forelection as directors, and the information relating to executive officers ofthe Company, is incorporated herein by reference from the Company’s ProxyStatement (herein so called) for its 2003 Annual Meeting of Stockholders, whichwill be filed within 120 days of December 31, 2002.

 

**ITEM 11.****Executive Compensation.**

 

The discussion under “Executive Compensation” in the Company’s ProxyStatement for its 2003 Annual Meeting is incorporated herein by reference.

 

**ITEM 12.****Security Ownership of Certain Beneficial Owners andManagement.**

 

The discussion under “Security Ownership of Certain Beneficial Ownersand Management” in the Company’s Proxy Statement for its 2003 Annual Meeting isincorporated herein by reference.

 

The following table provides information related to the number ofshares to be issued upon exercise of all outstanding options, warrants andrights and the number of shares available for future issuance under theCompany’s equity compensation plans at December 31, 2002.

 

**EQUITY COMPENSATION PLAN INFORMATION**

 
|                                                        |   | **(a)**                                                                                             |   | **(b)**                                                                            |   | **(c)**                                                                                                                                               |    |
|-------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------|---------|
| **Plan  Category**                                          |   | **Number  of securities  to be issued upon exercise of  outstanding options,  warrants and rights** |   | **Weighted-average  exercise price of  outstanding options,  warrants and rights** |   | **Number  of securities  remaining available for  future issuance under  equity compensation plans  (excluding securities  reflected in column (a))** |    |
|                                                        |   |                                                                                                |   |                                                                               |   |                                                                                                                                                  |    |
| Equity compensation plans approved by  security holders     |   | 2,335,697                                                                                           | (1)(2) | $                                                                                  | 3.17   |                                                                                                                                                  | 504,332 |   |
| Equity compensation plans not approved by  security holders |   | N/A                                                                                                 |   | N/A                                                                                |   | N/A                                                                                                                                                   |    |
| Total                                                       |   | 2,335,697                                                                                           |   | $                                                                                  | 3.17   |                                                                                                                                                  | 504,332 |   |
|                                                             |        |                                                                                                     |        |                                                                                    |        |                                                                                                                                                       |         |  |  |

 

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(1)                                  These plans includethe Thomas Group, Inc. 1988, 1992 and 1997 Stock Option Plans and theNon-Employee Director Plan.

 

(2)                                  The number of sharesis subject to adjustments for changes resulting from stock dividends, stocksplits, recapitalizations and similar events.

 

**ITEM 13.****Certain Relationships and Related Transactions.**

 

The discussion under “Certain Transactions” in the Company’s ProxyStatement for its 2003 Annual Meeting is incorporated herein by reference.

 

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**ITEM 14****. Controls and Procedures**

 

It is the conclusion of the registrant’s principal executive officerand principal financial officer that the registrant’s disclosure controls (asdefined in Exchange Act rules 13a-14 and 15d-14), based on theirevaluation of these controls and procedures as of a date within 90 days ofthe filing of this annual report, are effective in timely alerting them to thematerial information relating to the Company required to be included in itsperiodic findings with the Securities and Exchange Commission. Managementnecessarily applied its judgment in assessing the costs and benefits of suchcontrols and procedures which, by their nature, can provide only reasonableassurance regarding management’s control objectives. The design of any systemof controls and procedures is based in part upon certain assumptions about thelikelihood of future events. There can be no assurance that any design will succeedin achieving its stated goals under all potential future conditions, regardlessof how remote.

 

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**PARTIV**

 

**ITEM 15****. Exhibits, Financial Statement Schedules, and Reportson Form 8-K.**

 

(a)(1)                    See Index to Consolidated FinancialStatements on page F-1.

 

(a)(2)                    All schedules for which provisionis made in the applicable accounting regulation of the Securities and ExchangeCommission are not required under the related instructions or are inapplicableand therefore have been omitted.

 

(a)(3)                    Documents filed as part of thisreport.

*** ***
| **Exhibit  Number** |   | **Description**                                                                                                                                                                                                                                                                                           |
|---------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                                                                                                                                                                                                                                                                                                      |
| 3.1                 |   | Amended and Restated Certificate of Incorporation of the Company  filed August 13, 1993, with the State of Delaware Office of the Secretary of  State (filed as Exhibit 3.1 to the Company’s Annual Report on Form 10-K for  the year ended December 31, 1994 and incorporated herein by reference). |
| 3.2                 |   | Amended and Restated By-Laws (filed as Exhibit 3.5 to the Company’s  1993 Form S-1 (File no. 33-64492) and incorporated herein by reference).                                                                                                                                                        |
| 3.3                 |   | Amended and Restated By-Laws dated May 30, 2001 (filed as Exhibit 3.2  to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30,  2001 and incorporated herein by reference).                                                                                                    |
| 4.1                 |   | Specimen Certificate evidencing Common Stock (filed as Exhibit 4.1 to  the Company’s 1993 Form S-1 (file No. 33-64492) and incorporated herein by  reference).                                                                                                                                       |
| 4.2                 |   | Form of Warrant Certificate for the Purchase of Shares (SRG &  Associates, Ltd.) (filed as Exhibit 4.2 to the Company’s Annual Report on  Form 10-K for the year ended December 31, 1998 and incorporated herein by  reference).                                                                 |
| 4.3                 |   | Form of Warrant Certificate for the Purchase of Shares (Lyon  Securities, Inc.) (filed as Exhibit 4.3 to the Company’s Annual Report on  Form 10-K for the year ended December 31, 1998 and incorporated herein by  reference).                                                                      |
| 4.4                 |   | Rights Agreement dated July 9, 1998 (filed as Exhibit 4 to the  company’s Report on Form 8-K dated July 16, 1998 and incorporated herein by  reference).                                                                                                                                             |
| 4.5                 |   | Amendment No. 1 to Rights Agreement dated March 1, 1999 (filed as  Exhibit 4.4 to the Company’s Annual Report on Form 10-K for the year ended  December 31, 1998 and incorporated herein by reference).                                                                                              |
| 4.6                 |   | Amendment No. 2 to Rights Agreement dated August 12, 1999 (filed as  Exhibit 4.5 to the Company’s Quarterly Report on Form 10-Q for the quarter  dated June 30, 1999 and incorporated herein by reference).                                                                                          |
| 4.7                 |   | Warrant to Purchase Common Stock, dated September 20, 2002, issued to  John T. Chain, Jr. (filed as Exhibit 99.3 to the Company’s Form 8-K dated  October 3, 2002 and incorporated herein by reference).                                                                                             |
| 4.8                 |   | Registration Rights Agreement, dated September 20, 2002, by and  between the Company and John T. Chain, Jr. (filed as Exhibit 99.4 to the  Company’s Form 8-K dated October 3, 2002 and incorporated herein by  reference).                                                                     |
| 4.9                 |   | First Amendment to Rights Agreement, dated September 13, 2002,  between the Company and Computershare Trust Company, as rights agent (filed  as Exhibit 99.7 to the Company’s Form 8-K dated October 3, 2002 and  incorporated herein by reference).                                                 |
| 4.10                |   | Warrant to Purchase Common Stock, dated October 17, 2002, issued to  Edward P. Evans (filed as Exhibit 99.3 to the Company’s Form 8-K/A dated  October 22, 2002 and incorporated herein by reference).                                                                                               |

 

25

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| **Exhibit  Number** |   | **Description**                                                                                                                                                                                                                                                                      |
|---------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                                                                                                                                                                                                                                                                                 |
| 4.11                |   | Registration Rights Agreement, dated October 17, 2002, by and between  the Company and Edward P. Evans (filed as Exhibit 99.4 to the Company’s Form  8-K/A dated October 22, 2002 and incorporated herein by reference).                                                        |
| 4.12                |   | Second Amendment to Rights Agreement, dated October 17, 2002, between  the Company and Computershare Trust Company, as rights agent (filed as  Exhibit 99.7 to the Company’s Form 8-K/A dated October 22, 2002 and  incorporated herein by reference).                          |
| 4.13                |   | Amended and Restated Warrant, dated October 17, 2002, issued to John  T. Chain, Jr. (filed as Exhibit 99.9 to the Company’s Form 8-K/A dated  October 22, 2002 and incorporated herein by reference).                                                                           |
| 10.1                |   | Amended and Restated 1988 Stock Option Plan 9 (filed as Exhibit 10.2  to the Company’s Annual Report on Form 10-K for the year ended December 31,  1998 and incorporated herein by reference).                                                                                  |
| 10.2                |   | Amended and Restated 1992 Stock Option Plan (filed as Exhibit 10.3 to  the Company’s Annual Report on Form 10-K for the year ended December 31, 1998  and incorporated herein by reference).                                                                                    |
| 10.3                |   | Amended and Restated 1997 Stock Option Plan (filed as Exhibit 10.4 to  the Company’s Annual Report on Form 10-K for the year ended December 31, 1998  and incorporated herein by reference).                                                                                    |
| 10.4                |   | 401(k) Plan (filed as Exhibit 10.5 to the Company’s Annual Report on  Form 10-K for the year ended December 31, 1998 and incorporated herein by  reference).                                                                                                                    |
| 10.5                |   | First Amended and Restated Revolving Credit Loan Agreement dated  December 4, 1996 between Comerica Bank-Texas and the Company (filed as  Exhibit 10.6 to the Company’s Annual Report on Form 10-K for the year ended  December 31, 1998 and incorporated herein by reference). |
| 10.6                |   | Non-Employee Director Retainer Fee Plan (filed as Exhibit 10.12 to  the Company’s Annual Report on Form 10-K for the year ended December 31, 1998  and incorporated herein by reference).                                                                                       |
| 10.7                |   | Amendment No. 1 to Revolving Loan Agreement, dated April 1, 1999  between Comerica Bank-Texas and the Company (filed as Exhibit 10.14 to the  Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1999  and incorporated herein by reference).               |
| 10.8                |   | Employment Agreement between the Company and John R. Hamann dated  January 12, 2001 (filed as Exhibit 10.1 to the Company’s Quarterly Report on  Form 10-Q for the quarter ended March 31, 2001 and incorporated herein by  reference).                                         |
| 10.9                |   | Third Amendment to First Amended and Restated Revolving Credit loan  Agreement, dated March 29, 2002 between Comerica Bank-Texas and the Company  (filed as Exhibit 10.8 to the Company’s Form 8-K dated April 18, 2002 and  incorporated herein by reference).                 |
| 10.10               |   | Promissory Note between John T. Chain, Jr. and the Company dated  March 29, 2002, (filed as Exhibit 10.9 to the company’s Annual Report on Form  10-K for the year ended December 31, 2001 and incorporated herein by  reference).                                              |
| 10.11               |   | Promissory Note between John R. Hamann and the Company dated March  29, 2002, (filed as Exhibit 10.11 to the Company’s Annual Report on Form 10-K  for the year ended December 31, 2001 and incorporated herein by reference).                                                  |
| 10.12               |   | Promissory Note between John T. Chain. Jr. and the Company dated May  31, 2002, (filed as Exhibit 10.12 to the Company’s Annual Report  on Form 10-K for the year ended December  31, 2002 and incorporated herein by reference).                                          |
| 10.13               |   | Note and Warrant Purchase Agreement, dated September 20, 2002, by and  between the Company and General Chain (filed as Exhibit 99.1 to the Company’s  Form 8-K dated October 3, 2002 and incorporated herein by reference).                                                     |
| 10.14               |   | 6% Subordinated Convertible Promissory Note, dated September 20,  2002, issued to John T. Chain, Jr. in the principal amount of $1,000,000  (filed as Exhibit 99.2 to the Company’s Form 8-K dated October 3, 2002 and  incorporated herein by reference).                      |

 

26

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| **Exhibit  Number** |   | **Description**                                                                                                                                                                                                                                                                                               |
|---------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                                                                                                                                                                                                                                                                                                          |
| 10.15               |   | Subordination Agreement, dated September 20, 2002, by and among the  Company, John T. Chain, Jr. and Comerica Bank-Texas (filed as Exhibit 99.5 to  the Company’s Form 8-K dated October 3, 2002 and incorporated herein by  reference).                                                                 |
| 10.16               |   | Amended and Restated Note and Warrant Purchase Agreement, dated  October 17, 2002, by and between the Company, Edward P. Evans and John T.  Chain, Jr. (filed as Exhibit 99.1 to the Company’s Form 8-K/A dated October  22, 2002 and incorporated herein by reference).                                 |
| 10.17               |   | 6% Subordinated Convertible Promissory Note, dated October 17, 2002,  issued to Edward P. Evans in the principal amount of $1,000,000 (filed as  Exhibit 99.2 to the Company’s Form 8-K/A dated October 22, 2002 and  incorporated herein by reference).                                                 |
| 10.18               |   | Subordination Agreement, dated October 17, 2002, by and among the  Company, Edward P. Evans and Comerica Bank-Texas (filed as Exhibit 99.5 to  the Company’s Form 8-K/A dated October 22, 2002 and incorporated herein by  reference).                                                                   |
| 10.19               |   | Waiver and Consent Agreement, dated October 17, 2002, by and among  Edward P. Evans, John T. Chain, Jr. and the Company (filed as Exhibit 99.8 to  the Company’s Form 8-K/A dated October 22, 2002 and incorporated herein by  reference).                                                               |
| 10.20               |   | Second Amended and Restated Revolving Credit loan Agreement dated  November 26, 2002 between Comerica Bank-Texas and the Company (filed as  Exhibit 10.9 to the Company’s Form 8-K dated December 27, 2002 and  incorporated herein by reference).                                                       |
| 10.21               |   | Employment Agreement between the Company and John R. Hamann dated  December 21, 2002, (filed as Exhibit 10.21 to the Company’s Annual Report on  Form 10-K for the year ended December 31, 2002 and incorporated herein by  reference).                                                                  |
| 10.22               |   | Employment Agreement between the Company and James T. Taylor dated  December 21, 2002, (filed as Exhibit 10.22 to the Company’s Annual Report on  Form 10-K for the year ended December 31, 2002 and incorporated herein by  reference).                                                                 |
| 10.23               |   | First Amendment to Second Amended and Restated Revolving Credit Loan  Agreement dated April 15, 2003 between Comerica Bank-Texas and the  Company, (filed as Exhibit 10.23 to the Company’s Annual Report on Form 10-K  for the year ended December 31, 2002 and incorporated herein by reference). |
| 21                  |   | Subsidiaries of the Company, (filed as Exhibit 21 to the Company’s  Annual Report on Form 10-K for the year ended December 31, 2002 and incorporated  herein by reference).                                                                                                                              |
| *23.1               |   | Consent of Ernst & Young LLP                                                                                                                                                                                                                                                                              |
| 24                  |   | Power of Attorney (set forth on the signature page of this Form  10-K/A).                                                                                                                                                                                                                                     |
| *31.1               |   | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of  2002                                                                                                                                                                                                                                      |
| *31.2               |   | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                                                                                                                                                                                                                                     |
| *32.1               |   | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of  2002.                                                                                                                                                                                                                                     |
| *32.2               |   | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of  2002.                                                                                                                                                                                                                                     |

 

----

*                                         Filed herewith

 

(b)                                 Reports on Form 8-Kfor the quarter ending December 31, 2002:

 
| **Date of  Filing** |   | **Subject**                                                                                                                                                                               |
|---------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                                                                                                                                                                                      |
| October 3, 2002     |   | Documents outlining the agreements between General John T. Chain, Jr.  and the Company.                                                                                                   |
| October 23, 2002    |   | Amendments to documents outlining the agreements between General John  T. Chain, Jr. and the Company and documents outlining the agreements between  Mr. Edward P. Evans and the Company. |
| December 27, 2002   |   | Amended and Restated Revolving Credit Loan Agreement between Comerica  Bank-Texas and the Company.                                                                                        |

 

----

(c)                                  Exhibits—The responseto this portion of Item 14 is submitted as a separate section of this report.

 

(d)                                 Financial statementschedules—See Item 14 (a)(2) for the response to this portion of Item 14.

 

27

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**SIGNATURES**

 

Pursuant tothe requirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the Company has duly caused this Form 10-K to be signed on itsbehalf by the undersigned, thereunto duly authorized, in the City of Irving,State of Texas, on December 19, 2003.

 
|   | THOMAS GROUP, INC.        |
|--------|---------------------------|
|   |                      |
|   | By:                       | /s/ JOHN R. HAMANN |
|   | John R. Hamann            |
|   | *Chief Executive Officer* |

 

**POWER OF ATTORNEY**

 

Each individual whose signature appears below constitutes and appointsJohn R. Hamann such person’s true and lawful attorneys-in-fact and agents withfull power of substitution and resubstitution, for such person and in suchperson’s name, place, and stead, in any and all capacities, to sign any and allamendments to this Form 10-K and to file the same with all exhibits thereto,and all documents in connection therewith, with the Securities and ExchangeCommission, granting unto such attorneys-in-fact and agents, and each of them,full power and authority to do and perform each and every act and thingrequisite and necessary to be done in and about the premises, as fully to allintents and purposes as such person might or could do in person, herebyratifying and confirming all that such attorneys-in-fact and agents or any ofthem, or their substitute or substitutes, may lawfully do or cause to be doneby virtue hereof.

 

Pursuant to the requirements of Section 13 or 15(d) of theSecurities Exchange Act of 1934, this Form 10-K has been signed by thefollowing persons on behalf of the Registrant in the capacities and on thedates indicated.

 
| **Signature**          |   | **Capacity**                                         |   | **Date**          |
|------------------------|--------|------------------------------------------------------|--------|-------------------|
|                   |   |                                                 |   |              |
| /s/ JOHN R. HAMANN     |   | Chief Executive Officer, President, and Director     |   | December 19, 2003 |
| John R. Hamann         |   |                                                 |   |              |
|                   |   |                                                 |   |              |
| /s/ JAMES T. TAYLOR    |   | Executive Vice President and Chief Financial Officer |   | December 19, 2003 |
| James T. Taylor        |   |                                                 |   |              |
|                   |   |                                                 |   |              |
| /s/ JOHN T. CHAIN, JR. |   | Chairman of the Board                                |   | December 19, 2003 |
| John T. Chain, Jr.     |   |                                                 |   |              |
|                   |   |                                                 |   |              |
| /s/ RICHARD A. FREYTAG |   | Director                                             |   | December 19, 2003 |
| Richard A. Freytag     |   |                                                 |   |              |
|                   |   |                                                 |   |              |
| /s/ CHARLES M. HARPER  |   | Director                                             |   | December 19, 2003 |
| Charles M. Harper      |   |                                                 |   |              |
|                   |   |                                                 |   |              |
| /s/ DAVID B. MATHIS    |   | Director                                             |   | December 19, 2003 |
| David B. Mathis        |   |                                                 |   |              |

 

28

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**ANNUAL REPORT ON FORM 10-K**

**ITEM 8, and 15(a)(1) and (c)**

**LIST OF FINANCIAL STATEMENTS**

**CERTAIN EXHIBITS**

**FINANCIAL STATEMENTS**

**YEAR ENDED DECEMBER 31, 2002**

**THOMAS GROUP, INC.**

**DALLAS, TEXAS**

 

----

 

**FORM 10-K.—ITEM 15(a)(1)**

**Thomas Group, Inc.**

**INDEXTO CONSOLIDATED FINANCIAL STATEMENTS**

 

The following consolidated financial statements of ThomasGroup, Inc. are included in response to Item 8:

 
| Report of Independent Auditors                                                                                    |   |   |
|-------------------------------------------------------------------------------------------------------------------|--------|--------|
| Consolidated Balance Sheets as of December 31, 2002 and 2001                                                      |   |   |
| Consolidated Statements of Operations for  the fiscal years ended December 31, 2002, 2001 and 2000                |   |   |
| Consolidated Statements of Stockholders’  Equity for the fiscal years ended December 31, 2002, 2001 and 2000 |   |   |
| Consolidated Statements of Cash Flows for  the fiscal years ended December 31, 2002, 2001 and 2000                |   |   |
| Notes to Consolidated Financial Statements                                                                        |   |   |

 

F-1

----

 

**REPORT OF INDEPENDENT AUDITORS**

 

Board of Directors and Stockholders

Thomas Group, Inc.

 

We have audited the accompanying consolidated balance sheets of ThomasGroup, Inc. as of December 31, 2002 and 2001, and the relatedconsolidated statements of operations, stockholders’ equity and cash flows foreach of the three years in the period ended December 31, 2002. Thesefinancial statements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based onour audits.

 

We conducted our audits in accordance with auditing standards generallyaccepted in the United States. Those standards require that we plan and performthe audit to obtain reasonable assurance about whether the financial statementsare free of material misstatement. An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

 

In our opinion, the financial statements referred to above presentfairly, in all material respects, the consolidated financial position of ThomasGroup, Inc. at December 31, 2002 and 2001, and the consolidatedresults of their operations and their cash flows for each of the three years inthe period ended December 31, 2002, in conformity with accountingprinciples generally accepted in the United States.

 

As described in Note 1(b), the Company has restated its financialstatements for each of the two years in the period ended December 31, 2002, forthe correction of an error involving the overstatement of leaseholdimprovements.

 

ERNST & YOUNG LLP

 

Dallas, Texas

March 7, 2003, except for Note 2

as to which the date is April 15, 2003

 

F-2

----

 

**THOMASGROUP, INC. CONSOLIDATED BALANCE SHEETS**

 
|                                                                                                                                                                                            |   | **December  31,**                     |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|--------|
|                                                                                                                                                                                            |   | **2002  (Restated)**                  |   | **2001  (Restated)** |   |
|                                                                                                                                                                                            |   | **In  thousands,  except share data** |   |
|                                                                                                                                                                                            |   |                                  |   |   |   |
| **ASSETS**                                                                                                                                                                                      |   |                                  |   |   |   |
| Current Assets                                                                                                                                                                                  |   |                                  |   |   |   |
| Cash and cash equivalents                                                                                                                                                                       |   | $                                     | 2,332  |   | $ | 3,821 |   |
| Trade accounts receivable, net of  allowances of $45 and $640 at December 31, 2002 and 2001, respectively                                                                                       |   | 6,454                                 |   | 8,583 |   |
| Unbilled receivables                                                                                                                                                                            |   | 32                                    |   | 57 |   |
| Other assets                                                                                                                                                                                    |   | 766                                   |   | 2,411 |   |
| Total Current Assets                                                                                                                                                                            |   | 9,584                                 |   | 14,872 |   |
| Property and equipment, net                                                                                                                                                                     |   | 1,879                                 |   | 2,999 |   |
| Other assets                                                                                                                                                                                    |   | 229                                   |   | 3,381 |   |
|                                                                                                                                                                                            |   | $                                     | 11,692 |   | $ | 21,252 |   |
|                                                                                                                                                                                            |   |                                  |   |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                   |   |                                  |   |   |   |
| Current Liabilities                                                                                                                                                                             |   |                                  |   |   |   |
| Accounts payable and accrued liabilities                                                                                                                                                        |   | $                                     | 2,514  |   | $ | 5,088 |   |
| Income taxes payable                                                                                                                                                                            |   | 531                                   |   | 1,042 |   |
| Revolving line of credit                                                                                                                                                                        |   | 2,251                                 |   | 2,145 |   |
| Current portion of long-term debt                                                                                                                                                               |   | 1,000                                 |   | 1,200 |   |
| Current maturities of indebtedness to  related parties                                                                                                                                          |   | 71                                    |   | — |   |
| Current maturities of other long-term  obligations                                                                                                                                              |   | 6                                     |   | 5 |   |
| Total Current Liabilities                                                                                                                                                                       |   | 6,373                                 |   | 9,480 |   |
| Indebtedness to related parties                                                                                                                                                                 |   | 1,400                                 |   | — |   |
| Long-term debt                                                                                                                                                                                  |   | 3,901                                 |   | 3,800 |   |
| Other long-term obligations                                                                                                                                                                     |   | 20                                    |   | 3,084 |   |
| Total Liabilities                                                                                                                                                                               |   | 11,694                                |   | 16,364 |   |
| Commitments and Contingencies                                                                                                                                                                   |   |                                  |   |   |   |
| Stockholders’ Equity                                                                                                                                                                       |   |                                  |   |   |   |
| Common stock, $.01 par value; 25,000,000  shares authorized; 12,109,538 and 6,705,333 shares issued and 9,556,139 and  4,151,934 shares outstanding at December 31, 2002 and 2001, respectively |   | $                                     | 121    |   | $ | 67 |   |
| Additional paid-in capital                                                                                                                                                                      |   | 26,638                                |   | 24,433 |   |
| Retained earnings (accumulated deficit)                                                                                                                                                         |   | (3,509                                | )      | 4,209 |   |
| Accumulated other comprehensive loss                                                                                                                                                            |   | (793                                  | )      | (1,362 | ) |
| Treasury stock, 2,553,399 shares at  December 31, 2002 and 2001, respectively, at cost                                                                                                          |   | (22,459                               | )      | (22,459 | ) |
| Total Stockholders’ Equity (deficit)                                                                                                                                                       |   | (2                                    | )      | 4,888 |   |
|                                                                                                                                                                                            |   | $                                     | 11,692 |   | $ | 21,252 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

F-3

----

 

**THOMASGROUP, INC. CONSOLIDATED STATEMENTS OFOPERATIONS**

 
|                                                          |   | **Year  Ended December 31,**         |   |
|---------------------------------------------------------------|--------|--------------------------------------|--------|
|                                                          |   | **2002  (Restated)**                 |   | **2001  (Restated)** |   | **2000** |   |
|                                                          |   | **In  thousands, except share data** |   |
|                                                          |   |                                 |   |   |   |   |   |
| Consulting revenue before reimbursements                      |   | $                                    | 31,670 |   | $ | 51,670 |   | $ | 67,698 |   |
| Reimbursements                                                |   | 1,556                                |   | 7,775 |   | 9,309 |   |
| Total revenue                                                 |   | 33,226                               |   | 59,445 |   | 77,007 |   |
| Cost of sales before reimbursable expenses                    |   | 20,307                               |   | 33,218 |   | 36,455 |   |
| Reimbursable expenses                                         |   | 1,556                                |   | 7,775 |   | 9,309 |   |
| Total cost of sales                                           |   | 21,863                               |   | 40,993 |   | 45,764 |   |
| Gross profit                                                  |   | 11,363                               |   | 18,452 |   | 31,243 |   |
| Selling, general and administrative                           |   | 17,400                               |   | 25,723 |   | 26,218 |   |
| Restructuring charges                                         |   | 1,300                                |   | — |   | — |   |
| Litigation settlements                                        |   | —                               |   | 2,933 |   | 684 |   |
| Operating income (loss)                                       |   | (7,337                               | )      | (10,204 | ) | 4,341 |   |
| Other income (loss), net                                      |   | (819                                 | )      | 28 |   | 204 |   |
| Income (loss) from continuing operations  before income taxes |   | (8,156                               | )      | (10,176 | ) | 4,545 |   |
| Income taxes (benefit)                                        |   | (438                                 | )      | 5,959 |   | 1,818 |   |
| Income (loss) from continuing operations                      |   | (7,718                               | )      | (16,135 | ) | 2,727 |   |
| Discontinued Operations:                                      |   |                                 |   |   |   |   |   |
| Gain from operations, net of income tax of  $100              |   | —                               |   | — |   | 149 |   |
| Net income (loss)                                             |   | $                                    | (7,718 | ) | $ | (16,135 | ) | $ | 2,876 |   |
| Earnings (loss) per common share:                             |   |                                 |   |   |   |   |   |
| Basic:                                                        |   |                                 |   |   |   |   |   |
| Income (loss) from continuing operations                      |   | $                                    | (1.39  | ) | $ | (3.87 | ) | $ | 0.59 |   |
| Gain from discontinued operations                             |   | —                               |   | — |   | 0.03 |   |
| Net income (loss)                                             |   | $                                    | (1.39  | )) | $ | (3.87 | ) | $ | 0.62 |   |
| Diluted:                                                      |   |                                 |   |   |   |   |   |
| Income (loss) from continuing operations                      |   | $                                    | (1.39  | ) | $ | (3.87 | ) | $ | 0.59 |   |
| Gain from discontinued operations                             |   | —                               |   | — |   | 0.03 |   |
| Net income (loss)                                             |   | $                                    | (1.39  | ) | $ | (3.87 | ) | $ | 0.62 |   |
| Weighted average shares:                                      |   |                                 |   |   |   |   |   |
| Basic                                                         |   | 5,538,520                            |   | 4,164,517 |   | 4,601,527 |   |
| Diluted                                                       |   | 5,538,520                            |   | 4,164,517 |   | 4,633,949 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

F-4

----

 

**THOMASGROUP, INC. CONSOLIDATED STATEMENTSOF STOCKHOLDERS’ EQUITY**

 
|                                                                   |   | **Common  Stock**                    |   | **Additional  Paid-In-  Capital** |   | **Retained  Earnings  (Accumulated   Deficit)  (Restated)** |   | **Accumulated  Other  Comprehensive Income (Loss)** |   | **Treasury  Stock** |    | **Total** |   |
|------------------------------------------------------------------------|--------|--------------------------------------|--------|-----------------------------------|--------|-------------------------------------------------------------|--------|-----------------------------------------------------|--------|---------------------|---------|-----------|--------|
|                                                                   |   | **In  thousands, except share data** |   |
|                                                                   |   |                                 |   |                              |   |                                                        |   |                                                |   |                |    |      |   |
| **Balance as of  January 1, 2000**                                     |   | $                                    | 66     |                              | $      | 23,658                                                      |   | $                                                   | 17,468 |                | $       | (1,182    | )      | $ | (17,156 | ) | $ | 22,854 |   |
| Issuance of 56,203 shares of common stock                              |   | 1                                    |   | 549                               |   | —                                                      |   | —                                              |   | —              |    | 550       |   |
| Purchase of 569,300 shares of common stock                             |   | —                               |   | —                            |   | —                                                      |   | —                                              |   | (4,746              | )       | (4,746    | )      |
| Discounted common stock options under  employee stock option plans     |   | —                               |   | 58                                |   | —                                                      |   | —                                              |   | —              |    | 58        |   |
| Comprehensive income:                                                  |   |                                 |   |                              |   |                                                        |   |                                                |   |                |    |      |   |
| Foreign currency translation adjustment                                |   | —                               |   | —                            |   | —                                                      |   | (180                                                | )      | —              |    | (180      | )      |
| Net income                                                             |   | —                               |   | —                            |   | 2,876                                                       |   | —                                              |   | —              |    | 2,876     |   |
| Total comprehensive income                                             |   |                                 |   |                              |   |                                                        |   |                                                |   |                |    | 2,696     |   |
| **Balance as of  December 31, 2000**                                   |   | 67                                   |   | $                                 | 24,265 |                                                        | 20,344 |                                                | (1,362 | )                   | (21,902 | )         | 21,412 |   |
|                                                                   |   |                                 |   |                              |   |                                                        |   |                                                |   |                |    |      |   |
| Issuance of 46,066 shares of common stock                              |   | —                               |   | 172                               |   | —                                                      |   | —                                              |   | —              |    | 172       |   |
| Purchase of 109,100 shares of common stock                             |   | —                               |   | —                            |   | —                                                      |   | —                                              |   | (557                | )       | (557      | )      |
| Discounted common stock options under  employee stock option plans     |   | —                               |   | (4                                | )      | —                                                      |   | —                                              |   | —              |    | (4        | )      |
| Net and comprehensive loss                                             |   | —                               |   | —                            |   | (16,135                                                     | )      | —                                              |   | —              |    | (16,135   | )      |
| **Balance as of  December 31, 2001 (Restated)**                        |   | $                                    | 67     |                              | $      | 24,433                                                      |   | $                                                   | 4,209  |                | $       | (1,362    | )      | $ | (22,459 | ) | $ | 4,888 |   |
|                                                                   |   |                                 |   |                              |   |                                                        |   |                                                |   |                |    |      |   |
| Issuance of 5,404,205 shares of common  stock upon conversion of notes |   | 54                                   |   | 2,033                             |   | —                                                      |   | —                                              |   | —              |    | 2,087     |   |
| Discounted common stock options under  employee stock option plans     |   | —                               |   | (111                              | )      | —                                                      |   | —                                              |   | —              |    | (111      | )      |
| Warrants issued for 1,267,241 shares of  common stock                  |   | —                               |   | 283                               |   | —                                                      |   | —                                              |   | —              |    | 283       |   |
| Comprehensive loss:                                                    |   |                                 |   |                              |   |                                                        |   |                                                |   |                |    |      |   |
| Foreign currency translation adjustment  reclassified to net loss      |   | —                               |   | —                            |   | —                                                      |   | 569                                                 |   | —              |    | 569       |   |
| Net loss                                                               |   | —                               |   | —                            |   | (7,718                                                      | )      | —                                              |   | —              |    | (7,718    | )      |
|                                                                   |   |                                 |   |                              |   |                                                        |   |                                                |   |                |    |      |   |
| Total comprehensive loss                                               |   |                                 |   |                              |   |                                                        |   |                                                |   |                |    | (7,149    | )      |
| **Balance as of  December 31, 2002 (Restated)**                        |   | $                                    | 121    |                              | $      | 26,638                                                      |   | $                                                   | (3,509 | )                   | $       | (793      | )      | $ | (22,459 | ) | $ | (2 | ) |

 

See accompanying notes to consolidatedfinancial statements.

 

F-5

----

 

**THOMASGROUP, INC. CONSOLIDATED STATEMENTS OF CASHFLOWS**

 
|                                                                                                                       |   | **Year  Ended December 31,** |   |
|----------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|--------|
|                                                                                                                       |   | **2002  (Restated)**         |   | **2001  (Restated)** |   | **2000** |   |
|                                                                                                                       |   |                         |   |   |   |   |   |
| **Cash Flows from  Operating Activities:**                                                                                 |   |                         |   |   |   |   |   |
| Income (loss) from continuing operations                                                                                   |   | $                            | (7,718 | ) | $ | (16,135 | ) | $ | 2,727 |   |
| Adjustments to reconcile income (loss) from  continuing operations to net cash provided by (used in) operating activities: |   |                         |   |   |   |   |   |
| Depreciation                                                                                                               |   | 1,073                        |   | 1,206 |   | 1,342 |   |
| Amortization                                                                                                               |   | 213                          |   | 19 |   | 266 |   |
| Loss on sale of assets                                                                                                     |   | 16                           |   | 403 |   | 5 |   |
| Impairment of subleased assets                                                                                             |   | —                       |   | 503 |   | — |   |
| Bad debt                                                                                                                   |   | 56                           |   | 530 |   | 787 |   |
| Other                                                                                                                      |   | 69                           |   | 31 |   | 212 |   |
| Deferred taxes                                                                                                             |   | —                       |   | 3,339 |   | 1,314 |   |
| Amortization (cancellation) of stock option  grants                                                                        |   | (111                         | )      | (4 | ) | 58 |   |
| Loss from restructuring activities                                                                                         |   | 1,300                        |   | — |   | — |   |
| Change in operating assets and liabilities:                                                                                |   |                         |   |   |   |   |   |
| Decrease trade accounts receivable                                                                                         |   | 1,556                        |   | 1,460 |   | 381 |   |
| (Increase) decrease unbilled receivables                                                                                   |   | 24                           |   | 176 |   | (50 | ) |
| (Increase) decrease other assets                                                                                           |   | 1,610                        |   | 134 |   | (2,052 | ) |
| Increase (decrease) accounts payable and  accrued liabilities                                                              |   | (2,293                       | )      | 122 |   | 172 |   |
| Decrease advance payments                                                                                                  |   | —                       |   | — |   | (70 | ) |
| Increase (decrease) income taxes payable                                                                                   |   | (513                         | )      | 466 |   | (358 | ) |
| Net cash provided by (used in) operating  activities                                                                       |   | (4,718                       | )      | (7,750 | ) | 4,734 |   |
| **Cash Flows From  Investing Activities:**                                                                                 |   |                         |   |   |   |   |   |
| Proceeds from sale of assets                                                                                               |   | 49                           |   | 6 |   | — |   |
| Capital expenditures                                                                                                       |   | (371                         | )      | (1,079 | ) | (3,157 | ) |
| Net cash used in investing activities                                                                                      |   | (322                         | )      | (1,073 | ) | (3,157 | ) |
| **Cash Flows From  Financing Activities:**                                                                                 |   |                         |   |   |   |   |   |
| Issuance of subordinated convertible debt                                                                                  |   | 2,000                        |   | — |   | — |   |
| Purchase of treasury stock                                                                                                 |   | —                       |   | (557 | ) | (4,746 | ) |
| Proceeds from exercise of stock options                                                                                    |   | —                       |   | 172 |   | 418 |   |
| Issuance of related party indebtedness                                                                                     |   | 1,471                        |   | — |   | — |   |
| Repayments of other long-term obligations                                                                                  |   | (11                          | )      | — |   | (887 | ) |
| Net advances—line of credit                                                                                           |   | 105                          |   | 6,140 |   | 861 |   |
| Net cash provided by (used in) financing  activities                                                                       |   | 3,565                        |   | 5,755 |   | (4,354 | ) |
| Effect of exchange rate changes on cash                                                                                    |   | (14                          | )      | 258 |   | (539 | ) |
| Net cash used in continuing operations                                                                                     |   | (1,489                       | )      | (2,810 | ) | (3,316 | ) |
| **Discontinued  Operations:**                                                                                              |   |                         |   |   |   |   |   |
| Net cash provided by operating activities                                                                                  |   | —                       |   | — |   | 249 |   |
| Cash and cash equivalents                                                                                                  |   |                         |   |   |   |   |   |
| Beginning of year                                                                                                          |   | 3,821                        |   | 6,631 |   | 9,698 |   |
| End of year                                                                                                                |   | $                            | 2,332  |   | $ | 3,821 |   | $ | 6,631 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

F-6

----

 

**THOMAS GROUP, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS****DECEMBER 31, 2002**

 

**Note 1 *SummaryOf Significant Accounting Policies***

 

(a)                                  *The Company*—Thomas Group, Inc. (the“Company”) was incorporated under the laws of the State of Delaware inJune 1978 and provides management services designed to improve thecompetitiveness and profitability of its clients. The Company’s specificmethodology in its core product is known as PVM and focuses on reducing thetime spent on revenue-producing, product development and administrativeprocesses, resulting in operational and financial improvements.

 

(b)                                 *Prior Period Adjustment* - During 2001, the Company recognized a loss on acontract related to the subleasing of its Reston, Virginia office space. Thisoffice space included leasehold improvements, the carrying value of which wasoverlooked in calculating the loss on the sublease transaction.

 

To correct this situation the Company has restated the financialstatements related to fiscal years ended 2002 and 2001.

 

Restatement of 2001 financial statements resulted in an increase toaccumulated deficit and a decrease to property and equipment totaling $503,000as of December 31, 2001. Basic and diluted loss per share increased $0.12 to$3.87 from $3.75 per share.

 

Restatement of 2002 financial statements resulted in an increase toaccumulated deficit and a decrease to property and equipment totaling $419,000as of December 31, 2002. Selling, general and administrative expense decreasedby $84,000 with a corresponding decrease to net loss due to the reversal ofdepreciation expense related to these leasehold improvements. Basic and dilutedloss per share decreased $0.02 to $1.39 from $1.41 per share.

 

The table below outlines the major line item adjustments related to therestatement of fiscal years ended 2002 and 2001.

 
|                                      |   | **2002**                                 |   | **2001**                   |   |
|-------------------------------------------|--------|------------------------------------------|--------|----------------------------|--------|
|                                      |   | **As  Restated**                         |   | **Previously****Reported** |   | **As  Restated** |   | **Previously****Reported** |   |
|                                      |   | **In  thousands, except per share data** |   |
| Property equipment, net.                  |   | $                                        | 1,879  |                       | $      | 2,298 |   | $ | 2,999 |   | $ | 3,502 |   |
| Retained earnings (accumulated deficit)   |   | $                                        | (3,509 | )                          | $      | (3,090 | ) | $ | 4,209 |   | $ | 4,712 |   |
| Total stockholders’ equity (deficit) |   | $                                        | (2     | )                          | $      | 417 |   | $ | 4,888 |   | $ | 5,391 |   |
| Total assets                              |   | $                                        | 11,692 |                       | $      | 12,111 |   | $ | 21,252 |   | $ | 21,755 |   |
| Selling, general and administrative       |   | $                                        | 17,400 |                       | $      | 17,484 |   | $ | 25,723 |   | $ | 25,220 |   |
| Net loss                                  |   | $                                        | (7,718 | )                          | $      | (7,802 | ) | $ | (16,135 | ) | $ | (15,632 | ) |
| Loss per common share:                    |   |                                     |   |                       |   |   |   |   |   |
| Basic and diluted                         |   | $                                        | (1.39  | )                          | $      | (1.41 | ) | $ | (3.87 | ) | $ | (3.75 | ) |

 

(c)                                  *Basis Of Presentation—*The accompanyingconsolidated financial statements include the accounts of the Company and itswholly owned subsidiaries. All significant intercompany transactions andbalances have been eliminated. Certain amounts from prior years have beenreclassified to conform to the 2002 presentation.

 

(d)                                 *Earnings Per Share—*Earnings (loss) percommon share is presented in accordance with the provisions of the Statement ofFinancial Accounting Standards No. 128, “Earnings Per Share”(SFAS 128), which requires the presentation of “basic” and “diluted”earnings per share. Basic earnings (loss) per share is based on the weightedaverage shares outstanding. Diluted earnings per share includes the effect ofdilutive securities such as stock options and warrants.

 

F-7

----

 

The following table reconciles basic earnings per share to dilutedearnings per share under the provisions of SFAS 128.

 
|                              |   | **Income  (Loss)  (Numerator)**          |    | **Shares  (Denominator)** |   | **Per  Share  Amount** |   |
|-----------------------------------|--------|------------------------------------------|---------|---------------------------|--------|------------------------|--------|
|                              |   | **In  thousands, except per share data** |    |
|                              |   |                                     |    |                      |   |                   |   |
| **Year Ended December  31, 2002** |   |                                     |    |                      |   |                   |   |
| Basic loss per share (restated)   |   | $                                        | (7,718  | )                         | 5,539  |                   | $      | (1.39 | ) |
| Effect of dilutive securities:    |   |                                     |    |                      |   |                   |   |
| Options and warrants              |   | —                                   |    | —                    |   | —                 |   |
| Diluted loss per share (restated) |   | $                                        | (7,718  | )                         | 5,539  |                   | $      | (1.39 | ) |
|                              |   |                                     |    |                      |   |                   |   |
| **Year Ended December  31, 2001** |   |                                     |    |                      |   |                   |   |
| Basic loss per share (restated)   |   | $                                        | (16,135 | )                         | 4,165  |                   | $      | (3.87 | ) |
| Effect of dilutive securities:    |   |                                     |    |                      |   |                   |   |
| Options and warrants              |   | —                                   |    | —                    |   | —                 |   |
| Diluted loss per share (restated) |   | $                                        | (16,135 | )                         | 4,165  |                   | $      | (3.87 | ) |
|                              |   |                                     |    |                      |   |                   |   |
| **Year Ended December  31, 2000** |   |                                     |    |                      |   |                   |   |
| Basic earnings per share          |   | $                                        | 2,876   |                      | 4,602  |                   | $      | 0.62 |   |
| Effect of dilutive securities:    |   |                                     |    |                      |   |                   |   |
|                              |   |                                     |    |                      |   |                   |   |
| Options and warrants              |   | —                                   |    | 32                        |   | —                 |   |
| Diluted earnings per share        |   | $                                        | 2,876   |                      | 4,634  |                   | $      | 0.62 |   |

 

Total stock options and warrants outstanding in 2002, 2001 and 2000that are not included in the diluted earnings per share computation due to theantidilutive effects are approximately 2,336,000, 1,038,000 and 885,000,respectively. Such options and warrants are excluded due to the Companyincurring a net loss per share in that year or due to exercise prices exceedingthe average market value of the Company’s common stock in the applicableperiod.

 

(e) *Management’s Estimates AndAssumptions—*The presentation of financial statements in conformitywith accounting principles generally accepted in the United States requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenuesand expenses during the reporting period. Actual results could differ from thoseestimates. The Company reviews all significant estimates affecting thefinancial statements on a recurring basis and records the effect of anynecessary adjustments prior to their issuance.

 

(f) *Warrants*—During 2002,the Company executed a Warrant Purchase Agreement exercisable for 434,899shares of common stock to the Chairman of its Board of Directors inconsideration for a note in the amount of $1.0 million. The warrants wereissued with an exercise price of $0.30 per share and expire on September 20,2007. These warrants were valued at $0.30 based on the Black Scholes model. Inaddition, a Warrant Purchase Agreement exercisable for 434,899 shares of commonstock was granted to a stockholder in consideration for a note in the amount of$1.0 million. The warrants were issued with an exercise price of $0.30 pershare and expire on October 17, 2007. These warrants were valued at $0.30based on the Black Scholes model. In addition, a Warrant Purchase Agreementexercisable for 397,443 shares of common stock was granted to the Company’ssenior lender in consideration for amending its credit facility. The warrantswere issued with an exercise price of $0.30 and expire November 26, 2007.These warrants were valued at $0.37 based on the Black Scholes model.

 

The fair value of the warrants issued, in 2002, was $284,000 and wasinitially recorded as a reduction, or “discount”, of the related debt and acorresponding increase in additional paid in capital. The discount is beingaccreted to interest expense over the life of the debt. During 2002, $185,000was charged to interest expense. At December 31, 2002, $99,000 is stillrecorded as a reduction of long-term debt to be accreted over the remaininglife of the debt.

 

During 1997, the Company issued 225,000 warrants to purchase commonstock to a financial advisor of the Company. During 1998, 175,000 warrantsexpired. The remaining 50,000 warrants were re-priced at the exercise of $9.125per share, the market price on the date of re-pricing and extended theexpiration date to October 28, 2003.

 

F-8

----

 

(g) *Advertising—*TheCompany expenses the costs of advertising as incurred. Advertising expense was$0.3 million, $0.8 million and $1.9 million for the years endedDecember 31, 2002, 2001, and 2000, respectively.

 

(h) *Property And Equipment*—Propertyand equipment are stated at cost less accumulated depreciation. The Companyrecords impairment losses on long-lived assets used in operations when eventsand circumstances indicate that the assets might be impaired and theundiscounted cash flows estimated to be generated by those assets are less thanthe carrying amounts of those assets.

 

Depreciation is calculated on an accelerated declining balance orstraight-line basis over the estimated useful lives of the various assets asfollows:

 

| Furniture and fixtures |   | 5-7 Years  |   |
|------------------------|--------|------------|--------|
| Equipment              |   | 3-7 Years  |   |
| Leasehold improvements |   | 2-10 Years |   |
| Computer software      |   | 3 Years    |   |

 

(i) *Capitalized Software DevelopmentCosts*—The Company capitalized $0.3 million during 2002 and2001, respectively, of certain software development costs once technologicalfeasibility was achieved. Capitalization of software development costs ceasedwhen the product was available for sale. Software development costs incurredprior to achieving technological feasibility were charged to selling, generaland administrative expense. Amortization of previously capitalized softwaredevelopment costs were $0.2 million and $17,000 in 2002 and 2001,respectively. Unamortized software development costs were $0.4 million atDecember 31, 2002 and 2001, respectively. Estimated aggregate amortizationexpense is $0.2 million annually for the years ending December 31,2003 and 2004, respectively.

 

(j) *Revenue*—BusinessImprovement Program contracts specify fixed fees, or fixed fees plus incentivesbased on improvements achieved. Incentive (performance-oriented) revenue isrecognized in the period for which performance improvement is being measuredand is based on agreed-upon formulas relating to improvements incustomer-specific measures. Improvements are measured at time intervalsspecified in each contract. Fixed fees are recognized when earned, generally asservices are provided over the life of the contract.

 

(k) *Unbilled Receivables—*Fixedfees are recognized when earned, generally as services are provided over thelife of the contract. Although fixed fee recognition generally coincides withbillings, as an accommodation to its clients the Company may structure feebillings to increase in the latter stages of a program. In such instances,revenue recognition as services are provided results in unbilled receivables.

 

(l) *Advance Payments*—TheCompany occasionally receives advance payments of a portion of its fees.Advance payments are deferred upon receipt and recorded as revenue when earned.

 

(m) *Income Taxes*—Deferredincome taxes are provided for temporary differences between the financialstatement and income tax basis of assets and liabilities. Provisions are madefor estimated domestic and foreign income taxes, less available tax credits anddeductions, which may be incurred on the remittance of the Company’s share offoreign subsidiaries’ undistributed earnings.

 

(n) *Cash And Cash Equivalents*—Cashequivalents consist of highly liquid investments with original maturities ofthree months or less.

 

(o) *Concentration Of Credit Risk*—TheCompany provides its services primarily to a diverse group of large,well-established companies and does not require collateral on receivablebalances. At December 31, 2002, three clients, CACI (formerly ActonBurnell), Robert Bosch and the United States Navy, accounted for$4.8 million, or 74% of the Company’s total trade accounts receivable of$6.5 million. An allowance for doubtful accounts is provided when necessaryand is evaluated periodically on a client-by-client basis. Receivables writtenoff against the allowance totaled $0.2 million, $0 and $1.1 millionfor the years ended December 31, 2002, 2001, and 2000, respectively.

 

The Company is currently operating in Europe and Asia where potentialeconomic turmoil may result in significant fluctuations in the value of certainforeign currencies versus the United States dollar. The Company may experiencedifficulties expanding its operations or may encounter other collection issuesif economic conditions should change.

 

F-9

----

 

(p) *Foreign Currency Translation*—OnJanuary 1, 2001, the Company elected to change the functional currency ofits foreign subsidiaries to the United States dollar. This change resulted fromthe Company’s increased presence in the Europe and Asia/Pacific regions as wellas increased United States dollar denominated contracts in these regions. Dueto this growth, the Company’s contracts are serviced primarily by United Statesemployees. Under United States dollar functional currency, the financialstatements of foreign subsidiaries are remeasured from the recording currencyto the United States dollar. The resulting remeasurement adjustment is recordedas foreign exchange gain or loss in the statement of operations. There is notranslation adjustment to the separate component of stockholders’ equity oradjustment to comprehensive income. The effect of the change in functionalcurrency had no material impact on results of operations. The accumulation ofprior years’ translation adjustments remains on the balance sheet as a separatecomponent of stockholders’ equity until part, or all, of the respectiveentities are disposed. During 2000, the financial statements were preparedusing the local currency as the functional currency. All balance sheet accountsof foreign subsidiaries were translated at the current exchange rate as of theend of the accounting period. The resulting translation adjustment was recordedas a separate component of stockholders’ equity. Income statement items weretranslated at average currency exchange rates.

 

(q) *Comprehensive Income*—Comprehensiveincome includes all changes in equity except those resulting from investmentsby stockholders and distributions to stockholders.

 

(r) *Stockholder Rights Plan*—OnJuly 9, 1998, the Company announced the adoption of a Stockholder RightsPlan, intended to protect the Company from unfair or coercive takeoverattempts. The grant of the rights was made to stockholders of record as ofJuly 20, 1998. Periodically, the Stockholder Rights Plan is amended toexempt certain transactions from triggering the rights. During 2002, theStockholder Rights Plan was amended, on two separate occasions, regarding theconversion of two $1.0 million subordinated notes to common stock.

 

(s) *Stock Options And Warrants*—TheCompany accounts for its stock-based compensation plans in accordance withAccounting Principles Board Opinion No. 25, “Accounting for Stock Issued toEmployees” (APB 25) and related interpretations. The Company accounts forstock-based compensation for non-employees under the fair value methodprescribed by Statement of Financial Accounting Standards No. 123,“Accounting for Stock-Based Compensation.” Through December 31, 2002,there have been no significant grants to non-employees.

 

Effective July 1, 2000, the Company adopted InterpretationNo. 44, “Accounting for Certain Transactions Involving Stock Compensation”(“FIN 44”), an interpretation of APB 25, which requires changes to previouspractice regarding the accounting for certain stock compensation arrangements.FIN 44 does not change APB 25’s intrinsic value method, under whichcompensation expense is generally not recognized for stock option grants toemployees if the exercise price of the Company’s stock option grants equals orexceeds the fair market value of the underlying stock on the date of grant, butit has narrowed its application. Adoption of FIN 44 did not have a significanteffect on the Company’s results of operations for the year endedDecember 31, 2002.

 

The Company grants incentive and non-qualified stock options and hasreserved 3,550,000 shares of common stock for issuance under its stock optionplans. Options to purchase shares of the Company’s common stock have beengranted to directors, officers and employees. The majority of the optionsgranted become exercisable at the rate of 20% per year, and generally expireten years after the date of grant.

 

The Company adopted the disclosure provisions of Statement of FinancialAccounting Standards No. 123 (SFAS No. 123), “Accounting for StockBased Compensation.” This statement requires the Company to provide pro formainformation regarding net income and net income per share as if compensationcost for the Company’s stock options had been determined in accordance with thefair value method. The fair value of these options was estimated at the date ofgrant using a Black-Scholes option pricing model with the following weightedaverage assumptions for 2002, 2001, and 2000: dividend yield of 0%; expectedvolatility of 65%; risk free interest rate of 6%; and expected life of fiveyears. Had compensation cost for the Company’s stock option plans beendetermined based on the fair value at the grant date consistent with theprovisions of SFAS No. 123, the Company’s net income (loss) and earnings(loss) per share would have been reduced to the pro forma amounts indicatedbelow:

 

F-10

----

 

 

 
|                                                                                                             |   | **Year  Ended December 31,** |   |
|------------------------------------------------------------------------------------------------------------------|--------|------------------------------|--------|
|                                                                                                             |   | **2002  (Restated)**         |   | **2001  (Restated)** |   | **2000** |   |
|                                                                                                             |   | **In  thousands of dollars** |   |
|                                                                                                             |   |                         |   |   |   |   |   |
| Net income (loss), as reported                                                                                   |   | $                            | (7,718 | ) | $ | (16,135 | ) | $ | 2,876 |   |
| Deduct: Total stock-based employee  compensation expense determined under fair value based method for all awards |   | (144                         | )      | (328 | ) | (493 | ) |
| Adjusted net income (loss)                                                                                       |   | $                            | (7,862 | ) | $ | (16,463 | ) | $ | 2,383 |   |
|                                                                                                             |   |                         |   |   |   |   |   |
| Earnings (loss) per share                                                                                        |   |                         |   |   |   |   |   |
| As reported                                                                                                      |   |                         |   |   |   |   |   |
| Basic                                                                                                            |   | $                            | (1.39  | ) | $ | (3.87 | ) | $ | 0.62 |   |
| Diluted                                                                                                          |   | $                            | (1.39  | ) | $ | (3.87 | ) | $ | 0.62 |   |
| As adjusted                                                                                                      |   |                         |   |   |   |   |   |
| Basic                                                                                                            |   | $                            | (1.42  | ) | $ | (3.95 | ) | $ | 0.52 |   |
| Diluted                                                                                                          |   | $                            | (1.42  | ) | $ | (3.95 | ) | $ | 0.51 |   |

 

(t) *Fair Market Value Of FinancialInstruments*—The Company’s financial instruments include notespayable. The carrying value of these notes approximates market value becausethe borrowing rate is similar to other financial instruments with similarterms.

 

**Note 2 *FinancingAgreement and Liquidity***

 

The Company has traditionally used cash flow from operations, periodicallysupplemented by borrowings under a bank line of credit, as its primary sourceof liquidity, when transferring funds among the Company’s foreign subsidiarieswas not efficient. Beginning in 2001, the Company experienced a significantdecline in revenue related to the downturn in the economy. The economicdownturn and subsequent revenue decline caused the Company not to be incompliance with certain covenants related to its then existing$15.0 million revolving credit facility. As a result, the Company’slender, in January of 2002, reduced the maximum allowable borrowings to$10.0 million, secured by the Company’s assets. On March 29, 2002,the lender restructured the Company’s credit facility to maximum allowableborrowings of $7.5 million, consisting of a $2.5 million revolvingline of credit and a $5.0 million term note. On November 29, 2002,the credit facility was increased to $8.0 million, consisting of a$3.0 million revolving line of credit and a $5.0 million term note.The terms of the November 29, 2002 amended credit facility extended the maturitydate on both the term and revolving notes to September 1, 2003. Term noteinstallment payments and a $150,000 amendment fee, related to theMarch 29, 2002 amendment, were deferred until the September 1, 2003maturity date. Pursuant to the amended credit facility, the senior lenderreceived, as an amendment fee, a warrant to purchase 397,443 shares of theCompany’s common stock at an exercise price of $0.30 per share. The warrantexpires November 26, 2007. On April 15, 2003, the Company and itssenior lender amended the credit facility to extend the maturity date on boththe term and revolving notes and payment of the $150,000 amendment fee toFebruary 2, 2004. In addition, the April 15, 2003 amended creditfacility waived all financial covenants through March 31, 2003, certain ofwhich covenants had been breached as of and prior to that date. In addition,the Company was required to make a $1.0 million term note payment prior toApril 15, 2003, with which the Company has complied.

 

*$8.0 Million Credit Facility*

 

All United States assets of the Company and 100% of the outstandingcapital voting stock of each foreign subsidiary secure the entire$8.0 million credit facility. The $3.0 million revolving line ofcredit is subject to a borrowing base of 75% applied to the Company’s UnitedStates trade accounts receivable outstanding less than 90 days. Therevolving line of credit bears interest at prime plus 2%. The $5.0 millionterm note bears interest at prime plus 4%.

 

All prior financial covenants were replaced with new financialcovenants per the April 15, 2003 amended credit facility, which ifbreached, could result in acceleration of amounts owed under the amended creditfacility. The revised financial covenants require the Company to (1) maintaincertain levels of tangible net worth, debt to tangible net worth ratio, minimumlevels of EBITDA, (2) to avoid two consecutive quarters that generateoperating losses, and (3) restrict annual capital expenditures to$300,000. The covenants are tested monthly beginning April 30, 2003.Although retained earnings is not restricted by this amended credit facility,the declaration or payment of dividends is prohibited by the agreement.

 

F-11

----

 

At December 31, 2002, the $2.3 million outstanding under therevolving line of credit is classified as a current liability, while the$5.0 million term note is classified as $1.0 million of short-termdebt due to the repayment required and made on April 15, 2003 and$4.0 million of long-term debt due to its maturity date ofFebruary 2, 2004.

 

The Company utilized the credit line during 2002 to meet workingcapital requirements. Total interest expense was $157,000, $161,000 and$208,000 at an annual rate of 5.75% 4.09% and 11.97% for 2002, 2001 and 2000respectively. The Company incurred commitment fees on the unused portion of thecredit facility, totaling $3,000, $51,000 and $66,000 for 2002, 2001 and 2000respectively, at an interest rate of 0.375%. Total interest expense on this termloan was $334,000 in 2002.

 

Total interest expense for 2002 was $845,000, comprised of $491,000related to bank debt, $116,000 for related party debt, $185,000 related to theissuance of warrants and $53,000 to other parties.

 

Total interest expense for 2001 was $171,000, related to bank debt.

 

Total interest expense for 2000 was $215,000, related to bank debt.

 

*The Company’s Liquidity Plan*

 

Recent operating results and the restructuring of the Company’s creditfacility give rise to concerns about the Company’s ability to generate cashflow from operations sufficient to make scheduled debt payments as they becomedue and to remain in compliance with its restrictive loan covenants. SinceMarch of 2002, the Company has been able to raise $1.5 million of subordinateddebt from members of the Board of Directors and $2.0 million ofsubordinated convertible debt, subsequently converted to common stock, from amember of its Board of Directors and a stockholder.

 

The Company’s need to raise additional equity or debt financing and theCompany’s ability to generate cash flow from operations sufficient to makescheduled payments on its debts as they become due will depend on its futureperformance and the Company’s ability to successfully implement business andgrowth strategies. Since the first quarter of 2001, the Company has implementedcost saving measures including staff reductions, downsizing and subleasing offacilities and has taken greater control over alliances with strategic businesspartners. The Company will take additional cost savings measures such as thosetaken recently, if necessary, to enhance its liquidity position. The Company’sperformance will also be affected by prevailing economic conditions. Many ofthese factors are beyond the Company’s control. The recent conflict in Iraq,involving the United States military, could have an adverse effect on theCompany’s liquidity due to the high concentration of United States governmentcontracts, which could result in delays in program operations. If future cashflows and capital resources are insufficient to meet the Company’s debtobligations and commitments, the Company may be forced to reduce or delayactivities and capital expenditures, obtain additional equity capital orrestructure or refinance its debt. In the event that the Company is unable todo so, the Company may be left without sufficient liquidity and it may not beable to meet its debt service requirements. In such a case, an event of defaultwould occur under the credit facility and could result in all of the Company’sindebtedness becoming immediately due and payable. As a result, the Company’ssenior lender would be able to foreclose on the Company’s assets.

 

**Note 3 *Restructuring****.*

 

On June 3, 2002, the Company filed a petition with the Germangovernment for insolvency of its German subsidiary, giving the insolvency courtcontrol of the subsidiary’s assets. This action was taken in response todeclining revenue and cash flows from the operations of its German subsidiaryduring 2001 and continuing through 2002. All existing German contracts werecompleted in the second quarter of 2002, and the German subsidiary had nosignificant future prospects. On September 1, 2002, the German insolvencycourt appointed an official receiver for the Company’s German subsidiary. TheCompany continues serving the European market through its operations inSwitzerland.

 

The loss from liquidation of the German subsidiary is presented in theconsolidated statements of operations and consolidated statements of cash flowsunder the caption “Restructuring charges” and “Loss from restructuringactivities”, respectively. The carrying amounts of the following assets andliabilities of the German subsidiary are included as part of the restructuringcharge: *(amounts in thousands)*

 

F-12

----

 
|                                       |   | **Cash** |   | **Non-cash** |   | **Total** |   |
|--------------------------------------------|--------|----------|--------|--------------|--------|-----------|--------|
|                                       |   |     |   |         |   |      |   |
| Cash and cash equivalents                  |   | $        | 84     |         | — |      | 84     |   |
| Trade accounts receivable                  |   | —   |   | 404          |   | 404       |   |
| Other assets                               |   | —   |   | 152          |   | 152       |   |
| Property and equipment, net                |   | —   |   | 336          |   | 336       |   |
| Accounts payable and accrued liabilities   |   | 84       |   | (329         | )      | (245      | )      |
| Accumulated other comprehensive loss *(a)* |   | —   |   | 569          |   | 569       |   |
| Loss from restructuring activities         |   | $        | 168    |         | 1,132  |      | 1,300  |   |

 

----

*(a)**                               Thenon-cash restructuring charge for accumulated other comprehensive lossrecognized in the third quarter represents unrealized foreign currency lossesaccumulated prior to 2001. This amount had previously been classified as aseparate component of stockholders’ equity, and upon approval of the insolvencyof the German subsidiary, was charged to operations.*

 

The Company has recorded no estimates for future expenses related tothe insolvency petition and believes that any such expenses incurred would nothave 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 year endedDecember 31, 2002 and 2001 were: *(amountsin thousands)*

 
|                                |   | **2002** |   | **2001** |   |
|-------------------------------------|--------|----------|--------|----------|--------|
|                                |   |     |   |     |   |
| Net revenue                         |   | $        | 1,201  |     | $      | 7,951 |   |
| Net cost of sales                   |   | 1,063    |   | 4,503    |   |
| Gross profit                        |   | 138      |   | 3,448    |   |
| Selling, general and administrative |   | 1,046    |   | 2,671    |   |
| Operating income (loss)             |   | $        | (908   | )        | $      | 777 |   |

 

Cash flows of the German subsidiary for the year endedDecember 31, 2002 and 2001 were: *(amountsin thousands)*

 
|                                             |   | **2002** |   | **2001** |   |
|--------------------------------------------------|--------|----------|--------|----------|--------|
|                                             |   |     |   |     |   |
| Cash provided by (used in) operating  activities |   | $        | (51    | )        | $      | 216 |   |
| Cash provided by (used in) investing  activities |   | 10       |   | (64      | )      |
| Cash used in financing activities                |   | —   |   | (307     | )      |
| Effect of exchange rate changes on cash          |   | (81      | )      | (22      | )      |
| Cash used in continuing operations               |   | $        | (122   | )        | $      | (177 | ) |

 

**Note 4 *DiscontinuedOperations***

 

In 1998, the Company announced its plans to dispose of its InformationTechnologies business segment. The sale of the Company’s InformationTechnologies assets closed on August 31, 1998. No proceeds were receivedat the time of the transaction, but the agreement included earn-outs that couldhave been earned over the next five years. In exchange, the Company wasrelieved of the liabilities related to extended service contracts. OnSeptember 30, 2001, the buyer of the Information Technologies segment soldthose assets acquired, which contractually voided the Company’s ability to earnamounts from the agreement’s earn-out provisions. As such, the Company receivedno earn-outs from this agreement.

 

During the third quarter of 1999, the Company recorded a$2.0 million after tax charge to discontinued operations as a result ofthe settlement of a lawsuit related to the Company’s Information Technologiesbusiness segment. In December 1999, the Company recognized a$0.3 million after tax charge to discontinued operations due to additionallegal costs.

 

F-13

----

 

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

 

**Note 5 *OtherAssets***

*** ***
|                                        |   | **December  31,**            |   |
|---------------------------------------------|--------|------------------------------|--------|
|                                        |   | **2002**                     |   | **2001** |   |
|                                        |   | **In  thousands of dollars** |   |
|                                        |   |                         |   |   |   |
| Accounts receivable, employee               |   | $                            | 330    |   | $ | 307 |   |
| Deferred compensation plan assets (Note 10) |   | —                       |   | 3,001 |   |
| Prepaid expenses                            |   | 296                          |   | 656 |   |
| Current receivables                         |   | 36                           |   | 1,436 |   |
| Income tax receivable                       |   | 220                          |   | 254 |   |
| Investment in Texas Stadium Suite           |   | 113                          |   | 132 |   |
| Other                                       |   | —                       |   | 6 |   |
|                                        |   | 995                          |   | 5,792 |   |
| Less current portion                        |   | (766                         | )      | (2,411 | ) |
|                                        |   | $                            | 229    |   | $ | 3,381 |   |

 

**Note 6 *PropertyAnd Equipment***

 
|                                            |   | **December  31,**            |   |
|-------------------------------------------------|--------|------------------------------|--------|
|                                            |   | **2002  (Restated)**         |   | **2001  (Restated)** |   |
|                                            |   | **In  thousands of dollars** |   |
|                                            |   |                         |   |   |   |
| Equipment                                       |   | $                            | 3,979  |   | $ | 4,070 |   |
| Furniture and fixtures                          |   | 1,838                        |   | 3,378 |   |
| Leasehold improvements                          |   | 2,110                        |   | 2,051 |   |
| Computer software                               |   | 629                          |   | 369 |   |
| Equipment under capital leases                  |   | 29                           |   | 29 |   |
| Construction in process                         |   | —                       |   | 237 |   |
| Automobiles                                     |   | 19                           |   | 200 |   |
|                                            |   | $                            | 8,604  |   | 10,334 |   |
| Less accumulated depreciation and  amortization |   | (6,725                       | )      | (7,335 | ) |
|                                            |   | $                            | 1,879  |   | $ | 2,999 |   |

** **

**Note 7 *OtherLong-Term Obligations***

 
|                                            |   | **December  31,**             |   |
|-------------------------------------------------|--------|-------------------------------|--------|
|                                            |   | **2002**                      |   | **2001** |   |
|                                            |   | **In  thousands of  dollars** |   |
|                                            |   |                          |   |   |   |
| Capital lease                                   |   | $                             | 20     |   | $ | 27 |   |
| Deferred compensation plan liability (Note  10) |   | —                        |   | 3,001 |   |
| Deferred rent                                   |   | 6                             |   | 61 |   |
|                                            |   | 26                            |   | 3,089 |   |
| Less current portion                            |   | (6                            | )      | (5 | ) |
|                                            |   | $                             | 20     |   | $ | 3,084 |   |

 

F-14

----

 

**Note 8 *AccountsPayable And Accrued Liabilities***

 
|                        |   | **December  31,**            |   |
|-----------------------------|--------|------------------------------|--------|
|                        |   | **2002**                     |   | **2001** |   |
|                        |   | **In  thousands of dollars** |   |
|                        |   |                         |   |   |   |
| Accounts payable trade      |   | $                            | 519    |   | $ | 1,164 |   |
| Accrued payroll and bonuses |   | 684                          |   | 1,129 |   |
| Accrued severance           |   | 78                           |   | 960 |   |
| Accrued restructuring       |   | 100                          |   | 203 |   |
| Accrued employee benefits   |   | 128                          |   | 133 |   |
| Other accrued liabilities   |   | 1,005                        |   | 1,499 |   |
|                        |   | $                            | 2,514  |   | $ | 5,088 |   |

 

Annual severance in 2002, relates to staff reductions affecting fouremployees of the Company’s operations in Switzerland.

 

Accrued severance in 2001, relates to four staff reduction actionsaffecting 65 employees (primarily resultants) which resulted in severancecharges of $2.3 million of which $1.0 million remained accrued atDecember 31, 2001 and was paid in the first and second quarters of 2002.

 

At December 31, 2002 accrued restructuring relates to accruedlegal costs associated with the Company’s 2002 filing for insolvency of itsGerman subsidiary. At December 31, 2001, accrued restructuring relates toaccrued costs associated with leased office space in Germany that was vacatedin connection with the Company’s 1998 restructuring. This liability wasreversed during 2002 and included as part of the restructuring charge createdby the filing for insolvency of the Company’s German subsidiary.

 

**Note 9 *IncomeTaxes***

 

The domestic and foreign source components of income (loss) beforetaxes are as follows: 

 
|                    |   | **Year  Ended December 31,** |   |
|-------------------------|--------|------------------------------|--------|
|                    |   | **2002**                     |   | **2001** |   | **2000** |   |
|                    |   | **In  thousands of dollars** |   |
|                    |   |                         |   |   |   |   |   |
| Domestic sources        |   | $                            | (2,905 | ) | $ | (9,345 | ) | $ | (2,404 | ) |
| Foreign sources         |   | (5,335                       | )      | (328 | ) | 6,949 |   |
|                    |   | (8,240                       | )      | (9,673 | ) | 4,545 |   |
| Discontinued operations |   | —                       |   | — |   | 249 |   |
|                    |   | $                            | (8,240 | ) | $ | (9,673 | ) | $ | 4,794 |   |

 

The reconciliation of income tax from continuing operations computed atthe United States federal statutory tax rate to the Company’s effective incometax rate is as follows: 

 
|                                                                |   | **Year  Ended December 31,** |   |
|---------------------------------------------------------------------|--------|------------------------------|--------|
|                                                                |   | **2002**                     |   | **2001** |   | **2000** |   |
|                                                                |   | **In  thousands of dollars** |   |
|                                                                |   |                         |   |   |   |   |   |
| Income taxes (benefit) at statutory rate                            |   | $                            | (2,801 | ) | $ | (3,289 | ) | $ | 1,545 |   |
| Effect on taxes resulting from:                                     |   |                         |   |   |   |   |   |
| State taxes                                                         |   | (31                          | )      | 366 |   | 255 |   |
| Increase (decrease) in valuation allowance                          |   | (836                         | )      | 3,339 |   | 174 |   |
| Operating losses and tax credits generated  but not benefited       |   | —                       |   | 3,929 |   | — |   |
| Foreign income subject to current United  States taxation           |   | 866                          |   | 1,458 |   | 622 |   |
| Utilization of federal net operating  losses, less benefit received |   | 1,305                        |   | — |   | — |   |
| Unbenefited losses of foreign subsidiary                            |   | 699                          |   | 858 |   | — |   |
| Other (primarily permanent differences)                             |   | 360                          |   | (702 | ) | (778 | ) |
|                                                                |   | $                            | (438   | ) | $ | 5,959 |   | $ | 1,818 |   |

 

F-15

----

 

Federal, state and foreign income tax expense (benefit) consists of thefollowing: 

 
|                           |   | **Year  Ended December 31,** |   |
|--------------------------------|--------|------------------------------|--------|
|                           |   | **2002**                     |   | **2001** |   | **2000** |   |
|                           |   | **In  thousands of dollars** |   |
| Current tax expense (benefit): |   |                         |   |   |   |   |   |
| Federal                        |   | $                            | (923   | ) | $ | 328 |   | $ | 36 |   |
| State                          |   | (46                          | )      | 243 |   | 34 |   |
| Foreign                        |   | 531                          |   | 2,049 |   | 533 |   |
|                           |   | (438                         | )      | 2,620 |   | 603 |   |
| Deferred tax expense:          |   |                         |   |   |   |   |   |
| Federal                        |   | —                       |   | 3,066 |   | 958 |   |
| State                          |   | —                       |   | 273 |   | 357 |   |
|                           |   | —                       |   | 3,339 |   | 1,315 |   |
|                           |   | $                            | (438   | ) | $ | 5,959 |   | $ | 1,918 |   |

 

Income tax expense (benefit) is included in the consolidated financialstatements as follows: 

 
|                    |   | **Year  Ended December 31,** |   |
|-------------------------|--------|------------------------------|--------|
|                    |   | **2002**                     |   | **2001** |   | **2000** |   |
|                    |   | **In  thousands of dollars** |   |
|                    |   |                         |   |   |   |   |   |
| Continuing operations   |   | $                            | (438   | ) | $ | 5,959 |   | $ | 1,818 |   |
| Discontinued operations |   | —                       |   | — |   | 100 |   |
|                    |   | $                            | (438   | ) | $ | 5,959 |   | $ | 1,918 |   |

 

Significant components of the Company’s net deferred tax assets(liabilities) for federal and state income taxes are as follows:

 
|                                        |   | **December  31,**            |   |
|---------------------------------------------|--------|------------------------------|--------|
|                                        |   | **2002**                     |   | **2001** |   |
|                                        |   | **In  thousands of dollars** |   |
|                                        |   |                         |   |   |   |
| Deferred tax assets:                        |   |                         |   |   |   |
| Net operating loss carryforward             |   | $                            | 3,754  |   | $ | 2,964 |   |
| Foreign tax credit carryforward             |   | 2,762                        |   | 3,383 |   |
| Allowance for doubtful accounts             |   | 17                           |   | 166 |   |
| Restructuring expenses                      |   | 53                           |   | 17 |   |
| Accrued expenses                            |   | 325                          |   | 409 |   |
| Deferred compensation                       |   | —                       |   | 956 |   |
| Minimum tax credit carryforward             |   | 169                          |   | 169 |   |
| Charitable contribution carryforward        |   | 58                           |   | 51 |   |
|                                        |   | 7,138                        |   | 8,115 |   |
| Valuation allowance                         |   | (7,101                       | )      | (7,938 | ) |
| Total deferred tax assets                   |   | 37                           |   | 177 |   |
| Deferred tax liabilities:                   |   |                         |   |   |   |
| Unremitted earnings of foreign subsidiaries |   | —                       |   | (146 | ) |
| Fixed assets                                |   | (37                          | )      | (31 | ) |
| Total deferred tax liabilities              |   | (37                          | )      | (177 | ) |
| Net deferred tax asset                      |   | $                            | — |   | $ | — |   |

 

F-16

----

 

At December 31, 2002, the Company has approximately$3.6 million of federal net operating loss carryovers, which begin toexpire in 2021 and approximately $5.5 million of state net operating losscarryovers, which expire at various times. The Company also has approximately$11.8 million of Asian net operating loss carryovers which currently donot have any statutory expiration date. In addition, the Company has approximately$2.8 million of United States foreign tax credit carryovers that begin toexpire in 2003 and approximately $169,000 of United States minimum tax credits,which may be carried forward indefinitely.

 

At December 31, 2001, the Company determined, based primarily onits recent history of operating losses in the United States, that it could nolonger consider the recovery of its net deferred tax assets as more likely thannot. Accordingly, the Company’s net deferred tax assets at the beginning of2001 were reduced by a valuation allowance adjustment of $3.3 million. TheCompany reviewed the recovery probability at December 31, 2002, anddetermined that the recovery of its net deferred tax assets remainedquestionable. While a valuation allowance is currently required for theCompany’s net deferred tax assets, the assets remain available for use in thefuture to offset future income tax liabilities, should sufficient amounts ofUnited States and foreign income be generated in the carryforward periods.Utilization of net operating loss carryforwards in the future may be limited ifchanges in the Company’s stock ownership create a change in control as providedin Section 382 of the Internal Revenue Code of 1986, as amended.

 

**Note 10 *EmployeeBenefit Plans***

 

The Company sponsors a 401(k) retirement plan. The Company, at itsdiscretion, matches a portion of the participants’ contribution. Participantsare vested in the Company’s matching contribution after five years of full-timeservice and may join the plan January 1 and July 1. The Company didnot make a matching contribution in 2002. Matching contribution expense was$0.5 million for 2001 and $0.4 million for 2000, respectively.

 

In 1994, the Company established a non-qualified deferred compensationplan. In May of 2002, the plan was terminated and the participants’ entire fundbalances were distributed to them, net of required federal taxes. The federaltaxes were remitted directly to the Internal Revenue Service on behalf of theemployees. Participation was limited to officers and key employees. Assets andaccrued liabilities of the plan were $3.0 million at December 31,2001 and were recorded in the non-current other assets and other long-termobligations sections of the consolidated balance sheets. Amounts previously deferredunder the plan were deposited in a trust that qualified as a grantor trustunder the Internal Revenue Code of 1986, as amended. The Company’s obligationsunder the deferred compensation plan were unsecured general obligations of theCompany and rank equally with other unsecured general creditors of the Company.Assets of the deferred compensation plan were invested in various mutual fundsas directed by the plan participants. Adjustments to the fair value of themutual fund investments, which were classified as trading, were recorded inoperating expenses.

 

**Note 11 *Commitmentsand Contingencies***

 

On March 16, 2001, the Company received notice of a claim fromBalanced Scorecard Collaborative, Inc. (“BSCol”), to mediate/arbitrate adispute regarding BSCol’s claim for unpaid fees under the parties’March 2000 agreement. The matter was not settled during an April 26mediation, and consequently was resolved by a proceeding before a neutralarbitration panel in Dallas, Texas, during the week of September 17, 2001,pursuant to an arbitration provision in the parties’ agreement. OnOctober 5, 2001, the Company received an adverse ruling from thearbitration panel. The decision of the arbitration panel awarded BSCol$2.4 million. The total cost of the litigation of $2.9 million,including legal fees of $0.5 million, is presented separately aslitigation settlements in the Company’s consolidated statements of operations.

 

During 2000, the Company was party to an arbitration proceeding withOverhead Door Corporation, a former client, to collect unpaid fees. The Companyreceived an adverse ruling from the arbitration panel. The total cost to theCompany, including legal fees, was $0.7 million and is presentedseparately as litigation settlements in the Company’s consolidated statementsof operations.

 

The Company has become subject to various other claims and other legalmatters, such as collection matters initiated by the Company, in the course ofconducting its business. The Company believes that neither such claims andother legal matters nor the cost of prosecuting and/or defending such claimsand other legal matters will have a material adverse effect on the Company’sconsolidated results of operations, financial condition or cash flows.

 

The Company leases office space, vehicles and various types of officeequipment under non-cancelable operating leases. Rent expense related tooperating leases totaled $2.0 million for 2002, $2.6 million for 2001and $1.8 million for 2000.

 

F-17

----

 

Minimum lease payments required under non-cancelable operating leasearrangements subsequent to December 31, 2002, are as follows: 

 
|                         |   | **Operating  Leases**        |   |
|------------------------------|--------|------------------------------|--------|
|                         |   | **In  thousands of dollars** |   |
|                         |   |                         |   |
| 2003                         |   | $                            | 1,517  |   |
| 2004                         |   | 1,228                        |   |
| 2005                         |   | 1,038                        |   |
| 2006                         |   | 864                          |   |
| 2007                         |   | 310                          |   |
| Thereafter                   |   | —                       |   |
| Total minimum lease payments |   | 4,957                        |   |
| Sublease arrangements        |   | (1,731                       | )      |
| Net minimum lease payments   |   | $                            | 3,226  |   |

** **

**Note 12 *SegmentData And Sales To Major Customers***

 

The Company operates in one industry segment, but conducts its businessprimarily in three geographic areas: North America, Europe and Asia/Pacific.Information regarding these areas follows:

 
|                          |   | **North  America**           |   | **Europe** |   | **Asia/Pacific** |   | **Corporate** |   | **Total** |   |
|-------------------------------|--------|------------------------------|--------|------------|--------|------------------|--------|---------------|--------|-----------|--------|
|                          |   | **In  thousands of dollars** |   |
| Year ended December 31, 2002: |   |                         |   |       |   |             |   |          |   |      |   |
| Revenue                       |   | $                            | 13,965 |       | $      | 13,475           |   | $             | 4,230  |      | $      | — |   | $ | 31,670 |   |
| Gross profit (loss)           |   | $                            | 8,986  |       | $      | 4,405            |   | $             | (2,028 | )         | $      | — |   | $ | 11,363 |   |
| Long-lived assets (restated)  |   | $                            | 1,646  |       | $      | 162              |   | $             | 187    |      | $      | 113 |   | $ | 2,108 |   |
| Year ended December 31, 2001: |   |                         |   |       |   |             |   |          |   |      |   |
| Revenue                       |   | $                            | 12,314 |       | $      | 28,680           |   | $             | 10,676 |      | $      | — |   | $ | 51,670 |   |
| Gross profit (loss)           |   | $                            | 9,871  |       | $      | 9,968            |   | $             | (1,387 | )         | $      | — |   | $ | 18,452 |   |
| Long-lived assets (restated)  |   | $                            | 2,124  |       | $      | 857              |   | $             | 266    |      | $      | 3,133 |   | $ | 6,380 |   |
| Year ended December 31, 2000: |   |                         |   |       |   |             |   |          |   |      |   |
| Revenue                       |   | $                            | 30,171 |       | $      | 29,040           |   | $             | 8,487  |      | $      | — |   | $ | 67,698 |   |
| Gross profit                  |   | $                            | 17,381 |       | $      | 13,366           |   | $             | 496    |      | $      | — |   | $ | 31,243 |   |
| Long-lived assets             |   | $                            | 2,909  |       | $      | 1,071            |   | $             | 17     |      | $      | 4,924 |   | $ | 8,921 |   |

 

The following table indicates those clients whose revenues were inexcess of 10% of consolidated revenues in any of the three years endedDecember 31, 2002.

 
|                          |   | **United**States             |   | **% o**fTotal |   | **Europe** |   | **% of**Total |   |
|-------------------------------|--------|------------------------------|--------|---------------|--------|------------|--------|---------------|--------|
|                          |   | **In  thousands of dollars** |   |
|                          |   |                         |   |          |   |       |   |          |   |
| Year Ended December 31, 2002: |   |                         |   |          |   |       |   |          |   |
| CACI (formerly Acton Burnell) |   | $                            | 9,439  |          | 30     | %          | $      | —        |   | — |   |
| Robert Bosch                  |   | $                            | — |          | — |       | $      | 12,116        |   | 38 | % |
| Year Ended December 31, 2001: |   |                         |   |          |   |       |   |          |   |
| Robert Bosch                  |   | $                            | — |          | — |       | $      | 19,244        |   | 37 | % |
| Adam Opel                     |   | $                            | — |          | — |       | $      | 5,779         |   | 11 | % |
| Acton Burnell                 |   | $                            | 5,586  |          | 11     | %          | $      | —        |   | — |   |
| Year Ended December 31, 2000: |   |                         |   |          |   |       |   |          |   |
| Robert Bosch                  |   | $                            | — |          | — |       | $      | 19,602        |   | 29 | % |
| General Motors                |   | $                            | 5,248  |          | 8      | %          | $      | 5,346         |   | 8 | % |
| Boston Scientific             |   | $                            | 9,750  |          | 14     | %          | $      | —        |   | — |   |

 

The majority of foreign revenue was earned in Germany and Switzerlandfor all of the years presented.

 

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**Note 13 *RelatedParty Transactions***

 

The Company issued three promissory notes; two to its current Chairmanof the Board, General John T. Chain, Jr., and one to its Chief ExecutiveOfficer, John R. Hamann. The notes are subordinated to the Company’s seniorlender and their terms are summarized as follows: 

 
| **Name**                   |   | **Issue  Date** |   | **Date  Funded** |   | **Principal  &  Interest  Maturity Date** |   | **Semi-Annual  Interest Accrual  Dates** |   | **Interest  Rate** |   | **Principal  Amount** |      | **Current  Year  Interest Expense** |   |
|----------------------------|--------|-----------------|--------|------------------|--------|-----------------------------------------------|--------|------------------------------------------|--------|--------------------|--------|-----------------------|-----------|-------------------------------------|--------|
|                       |   |            |   |             |   |                                          |   |                                     |   |               |   |                  |      |                                |   |
| General John T. Chain, Jr. |   | 3/29/02         |   | 4/4/02           |   | 4/1/04                                        |   | Oct 1/Apr 1                              |   | Prime + 6          | %      | $                     | 1,000,000 |                                | $      | 83,525 |   |
| John R. Hamann             |   | 3/29/02         |   | 3/29/02          |   | 4/1/04                                        |   | Oct 1/Apr 1                              |   | Prime + 6          | %      | $                     | 92,000    |                                | $      | 7,112 |   |
| General John T. Chain, Jr. |   | 5/31/02         |   | 5/28/02          |   | 6/1/04                                        |   | Dec 1/Jun 1                              |   | Prime + 6          | %      | $                     | 400,000   |                                | $      | 25,682 |   |

 

On September 20, 2002, the Company issued a $1.0 millionsubordinated convertible note to its current Chairman of the Board, GeneralJohn T. Chain, Jr. On November 11, 2002, the note was converted into2,691,112 shares of the Company’s common stock at $0.375 per share uponapproval from stockholders at the Company’s annual meeting. In addition, asconsideration for the note, General Chain received a warrant to purchase434,899 shares of the Company’s common stock. The warrant included boarddesignation, anti-dilution and registration rights. The Company’s stockholderrights plan was amended on September 13, 2002 to exempt the transactionwith General Chain from the rights plan. After conversion of the note, GeneralChain owned 29% of the Company’s outstanding stock.

 

A family member of the Company’s CEO performed, on a contract basis,marketing services during 2002 and 2001. Fees and expenses related to theseservices were $92,000 in 2002 and $187,000 in 2001.

 

**Note 14 *CommonStock And Stock Options***

 

A summary of the status of the Company’s stock options to employees asof December 31, 2002, 2001 and 2000 and changes in the years then ended ispresented below.

 
|                                                       |   | **2002**   |   | **2001**                               |   | **2000**   |    |
|------------------------------------------------------------|--------|------------|--------|----------------------------------------|--------|------------|---------|
| **Common  Option****S****hares**                           |   | **Shares** |   | **Weighted  Average  Exercise  Price** |   | **Shares** |    | **Weighted  Average  Exercise  Price** |   | **Shares** |   | **Weighted  Average  Exercise  Price** |   |
|                                                       |   |       |   |                                   |   |       |    |   |   |   |   |   |   |
| Outstanding at beginning of year                           |   | 988,424    |   | $                                      | 8.58   |       | 868,316 |   | $ | 9.29 |   | 1,339,932 |   | $ | 10.15 |   |
| Granted                                                    |   | 496,364    |   | 2.00                                   |   | 222,900    |    | 5.17 |   | 88,400 |   | 9.24 |   |
| Exercised                                                  |   | (250       | )      | 1.13                                   |   | (13,238    | )       | 0.02 |   | (44,721 | ) | 11.00 |   |
| Forfeited                                                  |   | (466,082   | )      | 6.24                                   |   | (89,554    | )       | 8.28 |   | (515,295 | ) | 11.44 |   |
| Outstanding at end of year                                 |   | 1,018,456  |   | $                                      | 6.45   |       | 988,424 |   | $ | 8.58 |   | 868,316 |   | $ | 9.29 |   |
|                                                       |   |       |   |                                   |   |       |    |   |   |   |   |   |   |
| Options exercisable at year-end                            |   | 550,252    |   | $                                      | 8.47   |       | 566,073 |   | $ | 9.88 |   | 518,106 |   | $ | 9.94 |   |
| Weighted average grant-date fair value of  options granted |   |       |   | $                                      | 2.01   |       |    |   | $ | 5.25 |   |   |   | $ | 8.79 |   |

 

F-19

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The following table summarizes information about stock optionsoutstanding at December 31, 2002.

 
| **Common Options** |                | **Options  Outstanding** |                | **Options  Exercisable**                                    |   |
|--------------------|---------------------|--------------------------|---------------------|-------------------------------------------------------------|--------|
| **Exercise Price** |                | **Outstanding**          |                | **Weighted  Average  Remaining  Contractual  Life (Years)** |   | **Weighted Average** |   | **Shares** |   | **Weighted  Average** |   |
|               | **Exercise  Price** |                     | **Exercise  Price** | ** **                                                  |
| $ 0.50-7.94        |                |                     | 666,717             |                                                        | 7.69   |   | $ | 4.67 |   | 218,187 |   | $ | 6.53 |   |
| 8.00-9.94          |                |                     | 289,100             |                                                        | 5.23   |   | 9.22 |   | 283,107 |   | 9.21 |   |
| 10.09-13.75        |                |                     | 48,975              |                                                        | 5.48   |   | 11.43 |   | 35,294 |   | 11.47 |   |
| 14.25-19.13        |                |                     | 13,664              |                                                        | 3.61   |   | 16.46 |   | 13,664 |   | 16.46 |   |
| $ 0.50-19.13       |                |                     | 1,018,456           |                                                        | 6.83   |   | $ | 6.45 |   | 550,252 |   | $ | 8.47 |   |

 

**Note 15 *SupplementalDisclosure Of Cash Flow Information***

 
|              |   | **Year  Ended December 31,** |   |
|-------------------|--------|------------------------------|--------|
|              |   | **2002**                     |   | **2001** |   | **2000** |   |
|              |   | **In  thousands of dollars** |   |
|              |   |                         |   |   |   |   |   |
| Interest paid     |   | $                            | 522    |   | $ | 198 |   | $ | 215 |   |
| Income taxes paid |   | $                            | 1,079  |   | $ | 1,676 |   | $ | 1,602 |   |

 

During 2002, a non-cash conversion of $2.0 million of subordinatedconvertible notes were converted from debt to stockholders’ equity.

 

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