<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
---------
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended August 31, 1996
Commission file number 0-19433
[LOGO]
Technology Solutions Company
Incorporated in the State of Delaware
Employer Identification No. 36-3584201
205 North Michigan Avenue
Suite 1500
Chicago, Illinois 60601
(312) 228-4500
TSC (1) HAS FILED all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12 months, and (2)
HAS BEEN subject to such filing requirements for the past 90 days.
As of October 7, 1996, there were outstanding 15,543,808 shares of TSC Common
Stock par value $.01.
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<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
INDEX TO FORM 10-Q
================================================================================
PART I
<TABLE>
<CAPTION>
PAGE
NUMBER
------
FINANCIAL INFORMATION
<S> <C>
Introduction.............................................1
Consolidated Balance Sheets at
August 31, 1996 and May 31, 1996.......................2
Consolidated Statements of Income
For the Three Months Ended August 31, 1996 and 1995....3
Consolidated Statements of Cash Flows
For the Three Months Ended August 31, 1996 and 1995....4
Notes to Consolidated Financial Statements...............5
Management's Discussion and Analysis of Financial
Condition and Results of Operations....................8
PART II
OTHER INFORMATION
Items 1 to 6............................................10
Exhibit No. 11 -- Calculation of Earnings per Share.....12
SIGNATURES..............................................13
</TABLE>
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Page i
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
PART I. FINANCIAL INFORMATION
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INTRODUCTION
The financial information included herein has been prepared by Technology
Solutions Company ("TSC"), pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been omitted pursuant to such rules and
regulations. The quarterly financial information included herein is unaudited
but, in the opinion of TSC's Management, all adjustments, consisting only of
normal recurring accruals necessary for the fair presentation of the financial
position and results of operations and cash flows for such periods, have been
made. Audited financial statements for the year ended May 31, 1996 are included
in TSC's Annual Report on Form 10-K for the fiscal year ended May 31, 1996.
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Page 1
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
ASSETS
<TABLE>
<CAPTION>
August 31, May 31,
1996 1996
---------- -------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents..................................... $12,414 $12,990
Marketable securities......................................... 13,574 11,580
Receivables, less allowance for doubtful receivables of $2,445
and $1,870................................................... 28,957 23,537
Refundable income taxes....................................... 6,881 5,117
Deferred income taxes......................................... 1,842 1,194
Other current assets.......................................... 6,679 6,166
------- -------
Total current assets........................................ 70,347 60,584
COMPUTERS, FURNITURE AND EQUIPMENT, NET......................... 4,346 4,443
LONG-TERM INVESTMENTS........................................... 14,074 17,140
COST IN EXCESS OF NET ASSETS OF ACQUIRED
BUSINESS AND OTHER INTANGIBLES................................. 3,267 3,079
LONG-TERM RECEIVABLES AND OTHER................................. 4,069 4,191
------- -------
Total assets................................................ $96,103 $89,437
======= =======
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable.............................................. $ 1,736 $ 1,344
Accrued compensation and related costs........................ 7,590 11,621
Accrued legal costs........................................... 791 953
Capitalized lease obligations................................. 2,390 2,616
Deferred compensation......................................... 4,659 2,660
Other current liabilities..................................... 895 214
------- -------
Total current liabilities................................... 18,061 19,408
------- -------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; shares authorized --
10,000,000; none issued....................................... -- --
Common stock, $.01 par value; shares authorized --
50,000,000; shares issued -- 17,903,593...................... 179 179
Capital in excess of par value................................ 53,949 50,344
Retained earnings............................................. 38,108 35,983
Unrealized holding loss....................................... (684) (642)
------- -------
91,552 85,864
Less: Treasury Stock, at cost (2,573,169 and 3,014,045 shares). (13,510) (15,835)
------- -------
Total stockholders' equity.................................. 78,042 70,029
------- -------
Total liabilities and stockholders' equity.................. $96,103 $89,437
======= =======
</TABLE>
The accompanying notes are an integral part of this financial information.
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Page 2
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
For the Three Months
Ended August 31,
----------------
1996 1995
---- ----
(unaudited)
<S> <C> <C>
REVENUES:
Professional fees.......................... $ 31,815 $ 20,732
Software and hardware products............. 347 --
----------- -----------
32,162 20,732
----------- -----------
COSTS AND EXPENSES:
Project personnel.......................... 16,077 10,063
Other project expenses..................... 4,793 2,503
Cost of products sold...................... 54 --
Management and administrative support...... 5,683 5,527
Incentive compensation..................... 2,404 1,398
----------- -----------
29,011 19,491
----------- -----------
OPERATING INCOME........................... 3,151 1,241
----------- -----------
OTHER INCOME (EXPENSE):
Net investment income...................... 520 500
Interest expense........................... (57) (33)
----------- -----------
463 467
----------- -----------
INCOME BEFORE INCOME TAXES................. 3,614 1,708
INCOME TAX PROVISION....................... 1,489 553
----------- -----------
NET INCOME................................. $ 2,125 $ 1,155
=========== ===========
EARNINGS PER COMMON SHARE.................. $ 0.13 $ 0.08
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON
AND COMMON EQUIVALENT SHARES OUTSTANDING.. 17,199,783 15,808,403
</TABLE>
The accompanying notes are an integral part of this financial information.
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Page 3
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
For the
Three Months Ended
August 31,
--------------------
1996 1995
--------- ---------
(unaudited)
<S> <C> <C>
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net income.............................................. $ 2,125 $ 1,155
Adjustments to reconcile net income to net
cash used in operating activities:
Provisions for receivable valuation allowances and
reserves for possible losses...................... 706 421
Deferred income taxes................................ (626) (5)
Depreciation and amortization........................ 725 614
Changes in assets and liabilities:
Receivables......................................... (6,126) (2,904)
Purchase of trading securities related to deferred
compensation program.............................. (1,999) (1,153)
Other current assets................................ (572) (1,308)
Accounts payable.................................... 392 (517)
Accrued compensation and related costs.............. (4,031) (1,623)
Income taxes payable/refundable..................... 1,768 718
Accrued legal costs................................. (162) (297)
Capitalized lease obligation........................ (226) 414
Deferred compensation funds from employees.......... 1,999 1,153
Other current liabilities........................... 681 (165)
------- -------
Net cash used in operating activities.......... (5,346) (3,497)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from held-to-maturity investments............... 3,020 3,015
Capital expenditures..................................... (438) (828)
Net assets of acquired business and other intangibles.... (332) --
Long-term receivables and other.......................... 122 5
------- -------
Net cash provided by investing activities...... 2,372 2,192
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options.................. 2,119 1,384
Proceeds from employee stock purchase plan............... 279 --
------- -------
Net cash provided by financing activities...... 2,398 1,384
------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.......... (576) 79
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD................................................ 12,990 7,595
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................. $12,414 $ 7,674
======= =======
</TABLE>
The accompanying notes are an integral part of this financial information.
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Page 4
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 1--THE COMPANY
Technology Solutions Company and subsidiaries ("TSC" or the "Company") delivers
business benefits through consulting and systems integration services that help
clients transform customer relationships and improve operations. The Company's
clients generally are located throughout the United States, Europe, Mexico, and
Canada.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The summary of significant accounting policies is presented to assist the reader
in understanding and evaluating TSC's consolidated financial statements. These
policies are in conformity with generally accepted accounting principles
consistently applied in all material respects.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION--The accompanying consolidated financial statements
include the accounts of Technology Solutions Company and its subsidiaries. All
significant intercompany accounts and transactions have been eliminated.
REVENUE RECOGNITION--The Company recognizes revenue on contracts as work is
performed primarily based on hourly billing rates. Out-of-pocket expenses are
presented net of amounts billed to clients in the accompanying statements of
income. Substantially all of the Company's revenues are generated from contracts
for consulting services. These contracts are performed in phases. Reserves for
possible losses on contracts, if any, are recognized in full when determined.
Revenue from licensing of software is recognized upon delivery of the product.
The Company does not presently have any significant maintenance contracts for
software licensed to clients. Revenue from hardware sales is recognized upon
delivery.
CASH AND CASH EQUIVALENTS--The Company considers all highly liquid investments
readily convertible into cash to be cash equivalents with original maturities of
three months or less. These short-term investments are carried at cost plus
accrued interest, which approximates market.
MARKETABLE SECURITIES--The Company's marketable securities primarily consist
of preferred stocks. These preferred stocks, all of which are classified as
available-for-sale, are reported at fair value, with unrealized gains and losses
excluded from earnings and reported as a net aftertax amount in a separate
component of stockholders' equity until realized. The Company's investments
related to the executive deferred compensation plan are classified as trading
securities, with unrealized gains and losses included in net investment income.
Realized gains or losses are determined on the specific identification method.
COMPUTERS, FURNITURE AND EQUIPMENT--Computers, furniture and equipment are
stated at cost, less accumulated
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<PAGE>
Technology Solutions Company
And Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
================================================================================
depreciation. Depreciation is generally provided over five years or less, using
the straight-line method.
LONG TERM INVESTMENTS--The Company's long-term investments consist of
municipal bonds with maturities primarily through 1998. Since the Company has
the ability and intent to hold the bonds to maturity, the investments are
classified as held-to-maturity under the provisions of SFAS 115 and,
accordingly, are accounted for at cost, net of accumulated amortization.
Municipal bonds held by the Company are regarded as investment grade by
independent nationally recognized rating agencies.
INCOME TAXES--The Company files its federal and state income tax returns on a
calendar year basis. The current income tax provision represents the Company's
federal and state income taxes for the fiscal year as though tax returns were
filed on a fiscal year basis ending on May 31. Deferred income taxes are
provided for the temporary differences between the financial reporting basis and
the tax basis of the Company's assets and liabilities.
EARNINGS PER COMMON SHARE--Earnings per common share are computed by dividing
net income per the modified treasury stock method by the weighted average number
of common shares outstanding during each period presented, including common
share equivalents arising from the assumed exercise of stock options.
RECLASSIFICATIONS--Certain reclassifications have been made to the prior
period's financial statements to conform to the current period classification.
NOTE 3--STOCKHOLDERS' EQUITY
At August 31, 1996, after the issuance of 422,598 treasury shares from exercise
of stock options and 18,278 shares from purchases through the employee stock
purchase plan during the first quarter of fiscal 1997, the Company had a balance
of 2,573,169 shares of Treasury stock carried at $13.5 million.
On September 25, 1996, the Board of Directors rescinded previous resolutions
dated November 29, 1993 and September 22, 1994 to purchase Common Stock of the
Company by means of open market or privately negotiated transactions.
NOTE 4--STOCK OPTIONS
On September 26, 1996, the shareholders approved the Technology Solutions
Company 1996 Stock Incentive Plan (the "1996 Plan"). This plan replaces each of
the Technology Solutions Company Stock Option Plan (the "Original Plan"), the
Technology Solutions Company 1992 Stock Incentive Plan (the "1992 Plan") and the
Technology Solutions Company 1993 Outside Directors Stock Option Plan (the "1993
Plan and, together with the Original Plan and the 1992 Plan, the "Predecessor
Plans"). Effective September 26, 1996, no future awards will be made under any
of the Predecessor Plans. Previous awards made under the Predecessor Plans will
not be affected. Shares available for future awards under the Predecessor Plans
immediately prior
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<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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to the effectiveness of the 1996 Plan will thereafter become available solely
under the 1996 Plan.
During the first quarter of fiscal 1997, the Company authorized the grant to
employees, pursuant to the 1992 Plan, of options to purchase 934,000 shares of
the Company's Common Stock.
At August 31, 1996, options to purchase 5.1 million shares of common stock were
outstanding and options to purchase an additional 1.0 million shares of common
stock were available for grant under the Predecessor Plans. On September 26,
1996, the shareholders approved the addition of 1.0 million shares to the shares
available to be granted under the new 1996 Plan. Shares subject to awards made
under any of the Predecessor Plans will be available under the 1996 Plan, under
certain circumstances, to the extent that such shares are not issued or
delivered in connection with such awards.
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Page 7
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
==============================================================================
The following is a discussion of the changes in financial condition during the
first three months of fiscal 1997 and the results of operations for the first
quarter of fiscal 1997 compared with fiscal 1996.
FINANCIAL CONDITION
Cash and cash equivalent balances decreased to $12.4 million at August 31, 1996
from $13.0 million at May 31, 1996. The $0.6 million first quarter decrease was
the result of the following ($ in millions):
<TABLE>
<CAPTION>
FIRST
QUARTER
<C> <S>
$ 2.1 Net income
(5.4) Client receivables
2.4 Accrual of first quarter fiscal 1997 bonuses
(6.4) Payment of fiscal 1996 bonus
1.8 Accrued taxes
2.1 Proceeds from exercise of stock options
.7 Depreciation and amortization
(0.9) Other
------
(3.6) Subtotal
------
3.0 Proceeds from investments
------
$ (0.6) Net decrease in cash and cash equivalents
======
</TABLE>
Net receivables increased $5.4 million from $23.5 million at May 31, 1996 to
$28.9 million at August 31, 1996. This increase is primarily the result of the
growth in existing clients, several new client engagements/projects, and a
lengthening of the collection period.
The $6.4 million bonus payments relate to the full fiscal year 1996. Performance
bonuses are generally paid by the Company on an annual basis during the first
quarter following the end of a fiscal year.
The Company entered into a new $5.0 million unsecured revolving credit facility
with Bank of America Illinois. The new agreement expires September 5, 1997. The
terms of the agreement are not materially different from the previous agreement.
RESULTS OF OPERATIONS
Consolidated revenues for the Company, substantially all of which represent
professional fees, for the quarter ended August 31, 1996, were $32.2 million
compared with $20.7 million for the same period last fiscal year. Partially
responsible for this increase was TSC's international expansion. Client
engagements outside the United States generated $5.0 million revenues during the
quarter. Domestic operations recorded a 29 percent increase in billable hours,
as well as a 6 percent increase in average hourly billing rates. The increase in
billable hours is attributable to the high growth in the overall information
technology professional services market combined with the Company's increase in
consulting staff and marketing efforts. The increase in average hourly billing
rates is primarily due to the impact of hiring and the resulting change in the
mix of personnel to include a greater percentage of more senior personnel.
Average headcount during the first quarter of fiscal 1997 was 695 compared to
the average during the first quarter of fiscal 1996 which was 450. Total Company
headcount at August 31, 1996 was 719 compared to 478 at August 31, 1995. The
total number of project managers at August 31, 1996 was 88 compared to 43 at
August 31, 1995.
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Page 8
<PAGE>
Technology Solutions Company
and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--
(Continued)
===============================================================================
First quarter project personnel costs (primarily professional salaries and
benefits) increased from $10.1 million in fiscal 1996 to $16.1 million in fiscal
1997. This increase is consistent with higher revenues and higher headcount in
the first quarter of fiscal 1997 as compared to fiscal quarter 1996.
TSC charges most of its project expenses directly to the client. Other project
expenses consist of nonbillable expenses directly incurred for client projects
and business development efforts including recruiting fees, personnel training,
travel, and provisions for valuation allowances and reserves for potential
losses on continuing projects. Other project expenses for the first quarter
fiscal 1997 compared with the first quarter fiscal 1996 increased $2.3 million,
from $2.5 million to $4.8 million. This increase is primarily related to an
increase in hiring, training and related costs of $0.7 million and an increase
in nonbillable travel costs of $0.9 million. The increase in nonbillable travel
expense is primarily due to travel expenses associated with increased client
proposal and business development activity, as well as travel related to
consultants training activity in first quarter 1997 as compared to the same
period in fiscal 1996.
Incentive compensation of $2.4 million was accrued for the first quarter of
fiscal 1997 while $1.4 million was accrued during the first quarter of fiscal
1996. This increase is entirely related to increased staffing levels. The
Company expects to continue to accrue incentive compensation throughout the
fiscal year.
The increase in common and common equivalent shares is due to the impact of
increased share price on common equivalent shares as calculated using the
modified treasury stock method, as well as the granting of additional options
and purchases of stock through the employee stock purchase plan.
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Page 9
<PAGE>
Technology Solutions Company
And Subsidiaries
PART II. OTHER INFORMATION
===============================================================================
ITEM 1 -- LEGAL PROCEEDINGS
None.
ITEM 2 -- CHANGES IN SECURITIES
None.
ITEM 3 -- DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
TSC's 1996 Annual Meeting of Stockholders (the "Annual Meeting") was held
on September 26, 1996. The following actions were taken by a vote of TSC's
stockholders at the Annual Meeting:
1. Messrs. Michael J. Murray and Stephen B. Oresman were elected to serve
as members of TSC's Board of Directors receiving 11,658,710 and
9,899,922 votes in favor of election, respectively, and 522,495 and
2,281,283 votes withheld, respectively. In addition, the terms of
office for Messrs. Purcell and Waltrip continue until the 1997 Annual
Meeting, and Messrs. Chambers, Kohler and McLaughlin continue until the
1998 Annual Meeting.
2. The proposal to approve the Technology Solutions Company 1996 Stock
Incentive Plan was approved: 6,562,646 votes were cast for the
proposal; 4,290,025 votes were cast against the proposal; 43,006 votes
abstained and 1,285,528 votes represented broker non-votes.
3. The appointment of Price Waterhouse LLP as independent auditors for TSC
for its fiscal year ending May 31, 1996 was ratified: 12,176,795 votes
were cast for the ratification; 2,586 votes were cast against the
ratification and there were 1,824 votes abstained.
ITEM 5 -- OTHER INFORMATION
None.
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Page 10
<PAGE>
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 11 -- Computation of earnings per share
(b) During the quarter ended August 31, 1996, TSC filed two reports on
Form 8-K
The first report on Form 8-K was dated June 19, 1996. This report
contained information reported under Item 5 related to TSC's Board of
Directors approval of a 50 percent stock dividend distributed on July
30, 1996.
The second report on Form 8-K was dated June 26, 1996. This report
contained information reported under Item 7 related to summary
financial information for the fiscal year and fourth quarter ended May
31, 1996.
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Page 11
<PAGE>
EXHIBIT 11
Technology Solutions Company
and Subsidiaries
CALCULATION OF EARNINGS PER SHARE
(In thousands, except earnings per share)
<TABLE>
<CAPTION>
For the
Three Months Ended
August 31,
------------------
1996 1995
------- -------
(unaudited)
<S> <C> <C>
Net income per statements of income........... $ 2,125 $ 1,155
Earnings resulting from modified treasury
stock method............................ 35 71
------- -------
Net earnings per modified treasury
stock method................................ $ 2,160 $ 1,226
======= =======
Shares:
Weighted average shares outstanding......... 15,048 13,483
Common stock equivalents.................... 2,152 2,325
------- -------
Total....................................... 17,200 15,808
======= =======
Earnings per share............................ $ 0.13 $ 0.08
======= =======
</TABLE>
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Page 12
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, TSC has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TECHNOLOGY SOLUTIONS COMPANY
Date: October 14, 1996 By: /s/ Martin T. Johnson
---------------- -------------------------
Martin T. Johnson
Chief Financial and Accounting Officer
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Page 13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Consolidated
Balance Sheet and Consolidated Income Statement and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-START> JUN-01-1996
<PERIOD-END> AUG-31-1996
<CASH> 12,414
<SECURITIES> 13,574
<RECEIVABLES> 31,402
<ALLOWANCES> (2,445)
<INVENTORY> 0
<CURRENT-ASSETS> 70,347
<PP&E> 11,374
<DEPRECIATION> (7,028)
<TOTAL-ASSETS> 96,103
<CURRENT-LIABILITIES> 18,061
<BONDS> 0
<COMMON> 179
0
0
<OTHER-SE> 77,863
<TOTAL-LIABILITY-AND-EQUITY> 96,103
<SALES> 32,162
<TOTAL-REVENUES> 32,162
<CGS> 54
<TOTAL-COSTS> 20,164<F1>
<OTHER-EXPENSES> 8,087<F2>
<LOSS-PROVISION> 706
<INTEREST-EXPENSE> 57
<INCOME-PRETAX> 3,614
<INCOME-TAX> 1,489
<INCOME-CONTINUING> 2,125
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,125
<EPS-PRIMARY> .13
<EPS-DILUTED> .13
<FN>
<F1> Includes project personnel and other project expenses excluding loss
provision.
<F2> Includes management and administrative support and Incentive Compensation.
</FN>
</TABLE>
