<PAGE>
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. )
Filed by the registrant /X/
Filed by a party other than the registrant / /
Check the appropriate box:
/ / Preliminary proxy statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive proxy statement
/ / Definitive additional materials
/ / Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12
TECHNOLOGY SOLUTIONS COMPANY
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person Filing Proxy Statement, if other than the Registrant)
Payment of filing fee (check the appropriate box):
/X/ No fee required
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11
(1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------
(2) Aggregate number of securities to which transactions apply:
------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11
------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------
(5) Total fee paid:
------------------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for which
the offsetting fee was paid previously. Identify the previous
filing by registration statement number or the form or schedule
and the date of its filing.
(1) Amount previously paid:
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(2) Form, schedule or registration statement no.:
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(3) Filing party:
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(4) Date filed:
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<PAGE>
[LOGO]
TECHNOLOGY SOLUTIONS COMPANY
205 NORTH MICHIGAN AVENUE
CHICAGO, ILLINOIS 60601
(312) 228-4500
DEAR STOCKHOLDER:
You are cordially invited to the 1997 Annual Meeting of Stockholders of
Technology Solutions Company, a Delaware corporation, at 10:00 a.m., Local
Time, on Thursday, October 9, 1997, at the offices of Bank of America
Illinois, 231 South LaSalle Street, Chicago, Illinois 60697.
The matters to be considered at the meeting are described in the
accompanying Proxy Statement. Regardless of your plans for attending in
person, it is important that your shares be represented at the meeting.
Therefore, please complete, sign, date and return the enclosed proxy card
in the enclosed, post-paid envelope. This will enable you to vote on the
business to be transacted whether or not you attend the meeting.
We hope that you can attend the 1997 Annual Meeting, but in any event,
please vote your shares by signing and returning your proxy card.
Sincerely,
/s/ William H. Waltrip
WILLIAM H. WALTRIP
CHAIRMAN
September 9, 1997
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
NOTICE OF 1997 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON OCTOBER 9, 1997
TO OUR STOCKHOLDERS
The 1997 Annual Meeting of Stockholders (the "Annual Meeting") of
Technology Solutions Company (the "Company") will be held at 10:00 a.m.,
Local Time, on Thursday, October 9, 1997, at the offices of Bank of America
Illinois, 231 South LaSalle Street, Chicago, Illinois 60697, for the
purpose of considering and acting upon the following matters:
1. To elect two directors to the Board of Directors each to serve
for a three-year term;
2. To ratify the appointment of Price Waterhouse LLP as independent
accountants for the Company for the fiscal year ending May 31,
1998; and
3. To transact such other business as may properly come before the
Annual Meeting or any adjournments thereof.
Only stockholders of record at the close of business on August 19, 1997,
are entitled to notice of, and to vote at, the Annual Meeting or any
adjournments thereof. A list of such stockholders will be available for
examination by any stockholder for any purpose germane to the Annual
Meeting, during normal business hours, at the principal executive office of
the Company, 205 North Michigan Avenue, Suite 1500, Chicago, Illinois
60601, for a period of ten days prior to the Annual Meeting.
Your attention is directed to the accompanying Proxy Statement. Whether or
not you plan to attend the Annual Meeting in person, you are urged to
complete, sign, date and return the enclosed proxy card in the enclosed,
post-paid envelope. If you attend the Annual Meeting and wish to vote in
person, you may withdraw your proxy and vote your shares personally.
By order of the Board of Directors,
Paul R. Peterson
Secretary
September 9, 1997
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
205 NORTH MICHIGAN AVENUE, SUITE 1500
CHICAGO, ILLINOIS 60601
PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
OCTOBER 9, 1997
TABLE OF CONTENTS
PAGE
----
General Information . . . . . . . . . . . . . . . . . . . . . . . . . 1
Election of Directors . . . . . . . . . . . . . . . . . . . . . . . . 2
Nominees for Director . . . . . . . . . . . . . . . . . . . . . . . . 2
Members of Board of Directors Continuing in Office. . . . . . . . . . 3
Directors' Meetings and Committees. . . . . . . . . . . . . . . . . . 5
Ratification of Appointment of Independent Accountants. . . . . . . . 7
Executive Officer Compensation. . . . . . . . . . . . . . . . . . . . 8
Other Transactions. . . . . . . . . . . . . . . . . . . . . . . . . . 12
Board Compensation Committee Report on Executive Compensation . . . . 13
Security Ownership of Directors and Management. . . . . . . . . . . . 15
Additional Information Relating to Voting Securities. . . . . . . . . 16
Performance Graph . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Stockholder Proposals . . . . . . . . . . . . . . . . . . . . . . . . 18
Section 16(a) Beneficial Ownership Reporting Compliance . . . . . . . 18
Annual Report to Stockholders . . . . . . . . . . . . . . . . . . . . 19
Other Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Technology Solutions Company 1997 Financial Report. . . . . . . Appendix 1
<PAGE>
GENERAL INFORMATION
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of Technology Solutions Company (the
"Company") for use at the 1997 Annual Meeting of Stockholders (the "Annual
Meeting") to be held at 10:00 a.m., Local Time, on Thursday, October 9,
1997, at the offices of Bank of America Illinois, 231 South LaSalle Street,
Chicago, Illinois 60697. The Company's principal executive office is
located at 205 North Michigan Avenue, Suite 1500, Chicago, Illinois 60601.
Each stockholder of record of Common Stock, $.01 par value, of the Company
(the "Common Stock") at the close of business on August 19, 1997 (the
"Record Date"), is entitled to vote at the Annual Meeting or any
adjournment thereof and will have one vote for each share of Common Stock
held on the Record Date. A majority of the shares entitled to vote will
constitute a quorum. On the Record Date there were 25,490,689 shares of
Common Stock outstanding.
If you are unable to attend the Annual Meeting, you may vote by proxy. The
proxy holders will vote your shares according to your instructions. If you
return a properly signed and dated proxy card but do not mark a choice on
one or more items, your shares will be voted in accordance with the
recommendations of the Board of Directors for such items as set forth in
this Proxy Statement. The proxy card gives authority to the proxy holders
to vote your shares in their discretion on any other matter presented at
the Annual Meeting or any adjournment thereof. A proxy may indicate that
all or a portion of the shares represented by that proxy are not being
voted by a stockholder with respect to a particular matter. Any such
non-voted shares will be considered present for the purpose of determining
the presence of a quorum.
You may revoke your proxy at any time prior to voting at the Annual Meeting
by delivering written notice to the Secretary of the Company, by submitting
a subsequently dated proxy or by attending and voting in person at the
Annual Meeting.
The Company will bear the cost of preparing, handling, printing and mailing
this Proxy Statement, the related proxy card and any additional material
which may be furnished to stockholders, as well as the actual expense
incurred by brokerage houses, fiduciaries and custodians in forwarding such
materials to beneficial owners of Common Stock held in their names. The
solicitation of proxies will be made by the use of the mail and through
direct communication with certain stockholders or their representatives by
certain officers, directors or employees of the Company who will receive no
additional compensation therefor. This Proxy Statement and the related
proxy card are expected to be first sent or given to stockholders on or
about September 9, 1997.
Effective August 1, 1997, the Company's Board of Directors approved a
three-for-two stock split of the Company's Common Stock, effected in the
form of a 50% stock dividend. All financial data included in this Proxy
Statement reflect the stock split.
- ---------------------------------------------------------------------------
-1-
<PAGE>
ELECTION OF DIRECTORS
The Board of Directors consists of six persons and is divided into three
staggered classes, each of which includes two members serving three-year
terms. The terms of the Class III Directors expire on the date of the
Annual Meeting. Each of the nominees for Class III Director, if elected,
will serve three years until the 2000 Annual Meeting of Stockholders and
until a successor has been elected and qualified. The current Class I and
II Directors will continue in office until the 1998 and 1999 Annual
Meetings of Stockholders, respectively.
Unless otherwise instructed, the proxy holders will vote the proxies
received by them for the two Class III nominees recommended by the Board of
Directors. Directors are elected by a plurality of the votes cast.
Stockholders may not cumulate their votes. The two nominees receiving the
highest number of votes will be elected. In the event that any nominee of
the Company is unable or declines to serve as a director at the time of the
Annual Meeting, the proxies will be voted for any nominee who shall be
designated by the present Board of Directors to fill the vacancy. It is not
expected that any nominee will be unable or will decline to serve as a
director. In the event that additional persons are nominated for election
as directors, the proxy holders intend to vote all proxies received by them
for the nominees recommended by the Board of Directors.
NOMINEES FOR DIRECTOR
CLASS III -- NOMINEES TO SERVE UNTIL 2000 ANNUAL MEETING OF STOCKHOLDERS:
JOHN R. PURCELL, age 65, has been a Director of the Company since July
1988. He has served as Chairman and Chief Executive Officer of Grenadier
Associates, Ltd., a venture banking, merger and acquisition consulting
firm, since 1989. Since February 1991, he has served as Chairman of
Donnelley Marketing, Inc., a direct marketing company. From 1987 until
1990, he served as Chairman of Mindscape, Inc., an educational
entertainment computer software company. From 1987 to 1989, Mr. Purcell
served as Chairman of Fairfield Publishing Company, a magazine publisher.
From 1982 until 1986, he served as Chairman and President of SFN Companies,
Inc., a communications company. He previously served as Executive Vice
President of CBS, Inc. and Senior Vice President, Finance of Gannett Co.,
Inc. He is also currently a Director of Bausch & Lomb, Inc., Omnicom Group
Inc., Repap Enterprises, Inc., and Journal Register Company.
WILLIAM H. WALTRIP, age 59, has been a Director of the Company since
December 1992 and Chairman of the Board since June 1993. Mr. Waltrip also
served as Chief Executive Officer from June 1993 to June 1995. Since
January 1996, Mr. Waltrip has served as the Chairman of the Board of
Directors and, during 1996, served as Chief Executive Officer of Bausch &
Lomb, Inc. From 1991 to 1993, he was Vice Chairman of Unifax, Inc., a
broad-line food service distributor. From 1985 to 1988, Mr. Waltrip was
President, Chief Operating Officer and a Director of IU International, a
diversified services company with major interests in transportation,
environmental services and distribution. From 1982 to 1985 he was
President, Chief Executive Officer and a Director of Purolator Courier
Corporation and from 1972 to 1982 he was President, Chief Operating Officer
and Director of Pan American World Airways, Inc. He is also currently
serving as a Director of Bausch & Lomb, Inc., the Teachers Insurance and
Annuity Association and Thomas & Betts Corporation.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE COMPANY'S
STOCKHOLDERS VOTE FOR ELECTION OF THE NOMINEES LISTED ABOVE.
- ---------------------------------------------------------------------------
-2-
<PAGE>
MEMBERS OF BOARD OF DIRECTORS CONTINUING IN OFFICE
CLASS I -- SERVING UNTIL 1998 ANNUAL MEETING OF STOCKHOLDERS:
JOHN T. KOHLER, age 50, is currently the President and Chief Executive
Officer of the Company and has been a Director of the Company since June
1994. He joined the Company as Senior Vice President in June 1992, was
promoted to Executive Vice President and named to the Office of the
Chairman in September 1993, became President and Chief Operating Officer in
January 1994 and became Chief Executive Officer in June 1995. From 1986 to
1992, he was Senior Vice President and Chief Information Officer of
Kimberly-Clark Corp. From 1983 to 1986, he was a partner and regional
practice director for the Midwest Region consulting practice of
Arthur Young. He is also currently serving as a Director of Follett
Corporation and Infosis Corp.
MICHAEL J. MCLAUGHLIN, age 47, joined TSC in May 1996 when TSC acquired the
operations of McLaughlin & Associates. Effective with the acquisition, he
assumed the role of Executive Vice President and was appointed to fill a
vacancy on the Company's Board of Directors. From 1992 to 1996, he was
President of McLaughlin & Associates. From 1972 to 1992, he worked for
Booz, Allen & Hamilton Inc., completing his tenure there as Global Practice
Leader for the computer and telecommunications practice.
- ---------------------------------------------------------------------------
-3-
<PAGE>
MEMBERS OF BOARD OF DIRECTORS CONTINUING IN OFFICE
CLASS II -- SERVING UNTIL 1999 ANNUAL MEETING OF STOCKHOLDERS:
MICHAEL J. MURRAY, age 53, has been a Director of the Company since July
1988. Since March 1997, Mr. Murray has been President of Global Wholesale
Bank, Bank of America. From 1995 to 1997, he served as Vice Chairman of
Bank of America Corporation, responsible for the U.S. and International
Groups. From 1994 to 1995 he served as Group Executive Vice President for
the U.S. Corporate Group of Bank of America NT & SA. From 1969 until its
merger with Bank of America in 1994, he was employed by Continental Bank
Corporation, most recently as Vice Chairman.
STEPHEN B. ORESMAN, age 65, has been a Director of the Company since July
1988. Since 1990, he has served as President of Saltash, Ltd., a management
consulting firm. He previously served as Senior Vice President of Booz,
Allen & Hamilton, Inc. and Chairman of Booz, Allen & Hamilton
International, both management consulting firms. He is also currently
serving as a Director of Cleveland-Cliffs Inc. and TriNet Corporate Realty
Trust, Inc.
- ---------------------------------------------------------------------------
-4-
<PAGE>
DIRECTORS' MEETINGS AND COMMITTEES
The Board of Directors held six regular meetings and two special meetings
during the fiscal year ended May 31, 1997 ("Fiscal 1997"). Each director
attended all of the meetings of the Board and committees thereof on which
he served.
The Board of Directors has an Audit Committee presently composed of Messrs.
Murray and Oresman. The Audit Committee reviews the results and scope of
the audit and other services provided by the Company's independent
accountants and recommends the appointment of independent accountants to
the Board of Directors. See "Ratification of Appointment of Independent
Accountants." The Audit Committee met three times during Fiscal 1997.
The Board of Directors has a Compensation Committee presently composed of
Messrs. Purcell and Murray. The Compensation Committee approves all
executive compensation and stock option grants. The Compensation Committee
met four times during Fiscal 1997.
Those directors who are not employees of the Company ("Outside Directors")
receive an annual fee of $25,000 plus reimbursement of expenses incurred in
attending meetings.
In addition, each Outside Director presently holds stock options issued under
the Technology Solutions Company 1993 Outside Directors Plan, as amended,
(the "1993 Plan"). The 1996 Plan replaces the 1993 Plan. No future awards
will be made under the 1993 Plan. Previous awards made under the 1993 Plan
are not affected. Shares subject to awards made under the 1993 Plan 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.
Under the 1996 Plan, any new Outside Director will receive an option to
purchase 18,000 shares of Common Stock with a per share exercise price equal
to the closing price of a share of Common Stock as reported on The Nasdaq
Stock Market -SM- on the day such stock option is granted. In addition to the
stock options already granted and options to be granted under the 1996 Plan
to each new Outside Director, an option to purchase 18,000 shares of Common
Stock will be granted to each Outside Director at the time that a previously
issued stock option granted under the 1993 Plan or the 1996 Plan to such person
becomes exercisable in full (assuming the person is an Outside Director at
that time and assuming there are sufficient options to purchase shares of
Common Stock available for issuance under the 1996 Plan). Each stock option
granted under the 1996 Plan becomes exercisable in thirty-six monthly
installments of 500 shares each, commencing on the last day of the calendar
month immediately following the grant of such option.
- ---------------------------------------------------------------------------
-5-
<PAGE>
DIRECTORS' MEETINGS AND COMMITTEES (CONTINUED)
The Company has entered into an employment agreement with Mr. William H.
Waltrip to serve as its Chairman of the Board Of Directors. The agreement
does not have a fixed expiration date and may be terminated by either party
on 90 days' written notice. If Mr. Waltrip is terminated by the Company, he
will be entitled to receive his salary, bonus and health insurance benefits
for a one-year period following such termination. If, following a change in
control of the Company (i) Mr. Waltrip's title, position, duties or salary
are diminished and he resigns within 90 days thereafter, or (ii) his
employment with the Company is terminated following his refusal to relocate
for a period in excess of six months to any location outside of the
metropolitan area where he resides, he will be entitled to receive his
salary, bonus and health insurance benefits for a one-year period following
such termination. Each of Mr. Waltrip's options to purchase Common Stock
that is not then fully exercisable will become exercisable in full upon a
change in control of the Company. If Mr. Waltrip's employment with the
Company is terminated because of his death or disability, he will be
entitled to receive his salary, bonus and health insurance benefits for a
one-year period following such termination. Mr. Waltrip's current annual
salary is $100,000.
The Board of Directors does not have a nominating committee. Selection of
nominees for the Board is made by the entire Board of Directors. The names
of potential nominees for the Company's Board should be directed to the
Company's Secretary, Paul R. Peterson, at 205 North Michigan Avenue, Suite
1500, Chicago, Illinois 60601.
- ---------------------------------------------------------------------------
-6-
<PAGE>
RATIFICATION OF APPOINTMENT
OF INDEPENDENT ACCOUNTANTS
The Board of Directors has appointed Price Waterhouse LLP as independent
accountants of the Company for the fiscal year ending May 31, 1998. If a
majority of the stockholders in attendance at the Annual Meeting, in person
or by proxy, fail to ratify the appointment, the appointment of other
independent accountants will be considered by the Board of Directors.
Abstentions will have the same effect as votes against the proposal. Shares
not voted by a broker acting as nominee because such broker lacks
discretionary authority to vote such shares will be considered as not being
in attendance for the vote on this proposal. Price Waterhouse LLP has
audited the Company's financial statements since the fiscal year ended May
31, 1991. Representatives of Price Waterhouse LLP are expected to be at the
Annual Meeting and will be available to respond to appropriate questions.
Price Waterhouse LLP will also have the opportunity to make a statement at
the Annual Meeting if they desire to do so.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE COMPANY'S
STOCKHOLDERS VOTE FOR APPROVAL OF THE PROPOSAL TO RATIFY THE APPOINTMENT OF
PRICE WATERHOUSE LLP AS INDEPENDENT ACCOUNTANTS FOR THE COMPANY FOR THE
FISCAL YEAR ENDING MAY 31, 1998.
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-7-
<PAGE>
EXECUTIVE OFFICER COMPENSATION
The following table (the "Compensation Table") sets forth summary
information concerning the compensation of each person who served as Chief
Executive Officer of the Company during Fiscal 1997 and the Company's four
other most highly compensated executive officers during Fiscal 1997
(collectively, the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
------------------------------------------------------
LONG-TERM
ANNUAL COMPENSATION
COMPENSATION AWARDS
- -------------------------------------------------------------------------------------------------------------------
SECURITIES
FISCAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS($) OPTIONS (#)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
John T. Kohler 1997 525,000 460,000 112,500
President and Chief Executive Officer(1) 1996 484,000 460,000 67,750
1995 425,000 425,000 168,750
- -------------------------------------------------------------------------------------------------------------------
James S. Carluccio 1997 450,000 230,000 45,000
Executive Vice President 1996 430,000 320,000 22,500
1995 400,000 390,000 --
- -------------------------------------------------------------------------------------------------------------------
Jack N. Hayden 1997 400,000 400,000 135,000
Executive Vice President 1996 360,000 402,500(2) 67,500
1995 300,000 308,000(2) 191,250
- -------------------------------------------------------------------------------------------------------------------
Kelly D. Conway 1997 400,000 225,000 132,750
Executive Vice President 1996 340,000 385,000(3) 213,750
1995 260,000 279,000(3) 103,500
- -------------------------------------------------------------------------------------------------------------------
Michael J. McLaughlin(4) 1997 400,000 -- --
Executive Vice President 1996 -- 150,000(4) 101,250(4)
1995 -- -- --
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
------------------------
(1) Mr. Kohler was named Chief Executive Officer on June 29, 1995.
(2) $52,500 of the Fiscal 1996 bonus and $70,000 of the Fiscal
1995 bonus represent the accrual charge to earnings under the
employee retention program announced by the Company in
February 1994. Under this program, substantially all employees
of the Company, excluding Messrs. Kohler and Carluccio were
awarded a special compensation of 50 percent of their February
1994 base salary if they remained with the Company for at
least two years. This special compensation vested 50 percent
on March 1, 1995, and 50 percent on March 1, 1996. Under the
terms of this program, Mr. Hayden received a total of
$140,000.
(3) $55,000 of the Fiscal 1996 bonus and $55,000 of the Fiscal
1995 bonus represent the accrual charge to earnings under the
employee retention program described in Note 2 above. Under
the terms of this program, Mr. Conway received a total of
$110,000.
(4) Mr. McLaughlin joined TSC on May 31, 1996 and received a
$150,000 hiring bonus and 101,250 stock options.
- ------------------------------------------------------------------------
-8-
<PAGE>
OPTION GRANTS
The following table sets forth information with respect to individual
grants of options that were made during Fiscal 1997 to each of the Named
Executive Officers and the potential realizable value of these options
assuming five percent and ten percent rates(1) of compound appreciation
in the market value of the Common Stock over the term of the option
grants. The table also relates those values to the gains that would be
realized by all holders of Common Stock if those rates of appreciation
were achieved. No stock appreciation rights were granted in Fiscal 1997.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUAL RATES OF STOCK
INDIVIDUAL GRANTS(2) PRICE APPRECIATION FOR OPTION TERM
- -----------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PERCENT OF
SECURITIES TOTAL
UNDERLYING OPTIONS EXERCISE
OPTIONS GRANTED TO PRICE EXPIRATION
NAME GRANTED (#) EMPLOYEES ($/SH) DATE 5% ($)(1) 10% ($)(1)
IN FISCAL
YEAR
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
John T. Kohler 112,500(3) 6% 14.2778 06/19/06 1,010,164 2,559,953
- -----------------------------------------------------------------------------------------------------------------------------------
James S. Carluccio 45,000(3) 2% 14.2778 06/19/06 404,065 1,023,981
- -----------------------------------------------------------------------------------------------------------------------------------
Jack N. Hayden 135,000(3) 7% 14.2778 06/19/06 1,212,196 3,071,943
- -----------------------------------------------------------------------------------------------------------------------------------
Kelly D. Conway 132,750(3) 7% 14.2778 06/19/06 1,191,993 3,020,744
- -----------------------------------------------------------------------------------------------------------------------------------
Michael J. McLaughlin -- -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Potential gain by all
common stock-
holders(4) -- -- -- -- $375,931,771 $952,684,919
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Amounts reflect assumed rates of appreciation set forth in the
Securities and Exchange Commission's executive compensation
disclosure rules. Actual gains, if any, on stock option exercises
depend on future performance of the Company's Common Stock and
overall stock market conditions. No assurance can be given that the
amounts reflected in these columns will be achieved.
(2) Upon a sale of substantially all of the business and assets of the
Company, the Board may accelerate the exercisability of these
options.
(3) Subject to option provisions regarding termination of employment, one
third of these options became exercisable on June 19, 1997, and 1/36
of these options become exercisable on the last day of each calendar
month for 24 months thereafter.
(4) The future hypothetical value of one share of Common Stock based on a
fair market value of $24.17 on May 31, 1997, and assumed rates of
appreciation of five percent and ten percent through June 19, 2006,
would be $39.37 and $62.69, respectively. The potential realizable
value for all holders of Common Stock is based on 24,731,730 shares
of Common Stock outstanding as of May 31, 1997.
- -------------------------------------------------------------------------------
-9-
<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-THE-MONEY
SHARES UNDERLYING UNEXERCISABLE OPTIONS AT MAY 31, 1997 ($)
ACQUIRED ON VALUE OPTIONS AT MAY 31, 1997 (#) ---------------------------------
NAME EXERCISE (#) REALIZED ($) ---------------------------- EXERCISABLE UNEXERCISED
EXERCISABLE UNEXERCISABLE ----------- -----------
----------- -------------
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
John T. Kohler 205,500 2,825,147 231,374 305,626 4,721,653 5,275,691
- ---------------------------------------------------------------------------------------------------------------------------------
James S. Carluccio 180,000 2,994,997 351,874 53,126 7,258,498 611,494
- ---------------------------------------------------------------------------------------------------------------------------------
Jack N. Hayden 37,500 798,543 16,874 350,626 337,949 5,988,815
- ---------------------------------------------------------------------------------------------------------------------------------
Kelly D. Conway 101,248 1,383,957 46,250 302,502 899,389 4,631,350
- ---------------------------------------------------------------------------------------------------------------------------------
Michael J. McLaughlin ---- ---- 33,750 67,500 287,813 575,626
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement with Mr. John T. Kohler to
serve as its President and Chief Executive Officer. The agreement does not have
a fixed expiration date and may be terminated by either party on 90 days'
written notice. If Mr. Kohler is terminated by the Company, he will be entitled
to receive his salary, bonus and health insurance benefits for a two-year
period following such termination, or until he is re-employed. If, following a
change in control of the Company (i) Mr. Kohler's title, position, duties or
salary are diminished and he resigns within 90 days thereafter, or (ii) his
employment with the Company is terminated following his refusal to relocate for
a period in excess of six months to any location outside of the metropolitan
area where he resides, he will be entitled to receive his salary, bonus and
health insurance benefits for a two-year period following such termination.
Each of Mr. Kohler's options to purchase Common Stock that is not then fully
exercisable will become exercisable in full upon a change in control of the
Company. If Mr. Kohler's employment with the Company is terminated because of
his death or disability, he will be entitled to receive his salary, bonus and
health insurance benefits for a one-year period following such termination. Mr.
Kohler's current annual salary is $550,000.
The Company has entered into an employment agreement with Mr. James S.
Carluccio to serve as an Executive Vice President. The agreement does not have
a fixed expiration date and may be terminated by the Company upon six month's
written notice (90 days' if Mr. Carluccio fails to perform satisfactorily his
assigned duties), and it may be terminated by Mr. Carluccio upon 90 days'
written notice. In addition, Mr. Carluccio is entitled to terminate the
agreement at any time during the three-month period following a change in
control of the Company or at any time during the 30-day period commencing six
months following the naming of a new Chief Executive Officer of the Company.
His current annual salary is $450,000. If the agreement is terminated by virtue
of Mr. Carluccio's death or disability, he will be entitled to receive a
lump-sum payment equal to his then current annual salary plus a pro-rated bonus
for the fiscal year to the date of termination.
- -------------------------------------------------------------------------------
-10-
<PAGE>
The Company has entered into an employment agreement with Mr. Jack N. Hayden to
serve as an Executive Vice President. The agreement does not have a fixed
expiration date and may be terminated by either party on 90 days' written
notice. If Mr. Hayden is terminated by the Company, he will be entitled to
receive his salary, bonus and health insurance benefits for a two-year period
following such termination, or until he is re-employed. If, following a change
in control of the Company (i) Mr. Hayden's title, position, duties or salary
are diminished and he resigns within 90 days thereafter, or (ii) his
employment with the Company is terminated following his refusal to relocate for
a period in excess of six months to any location outside of the metropolitan
area where he resides, he will be entitled to receive his salary, bonus and
health insurance benefits for a two-year period following such termination.
Each of Mr. Hayden's options to purchase Common Stock that is not then fully
exercisable will become exercisable in full upon a change in control of the
Company. If Mr. Hayden's employment with the Company is terminated because of
his death or disability, he will be entitled to receive his salary, bonus and
health insurance benefits for a one-year period following such termination. Mr.
Hayden's current annual salary is $460,000.
The Company has entered into an employment agreement with Mr. Kelly D. Conway
to serve as an Executive Vice President. The agreement does not have a fixed
expiration date and may be terminated by either party on 90 days' written
notice. If Mr. Conway is terminated by the Company, he will be entitled to
receive his salary, bonus and health insurance benefits for a two-year period
following such termination, or until he is re-employed. If, following a change
in control of the Company (i) Mr. Conway's title, position, duties or salary
are diminished and he resigns within 90 days thereafter, or (ii) his
employment with the Company is terminated following his refusal to relocate for
a period in excess of six months to any location outside of the metropolitan
area where he resides, he will be entitled to receive his salary, bonus and
health insurance benefits for a two-year period following such termination.
Each of Mr. Conway's options to purchase Common Stock that is not then fully
exercisable will become exercisable in full upon a change in control of the
Company. If Mr. Conway's employment with the Company is terminated because of
his death or disability, he will be entitled to receive his salary, bonus and
health insurance benefits for a one-year period following such termination. Mr.
Conway's current annual salary is $440,000.
The Company has entered into an employment agreement with Mr. Michael J.
McLaughlin to serve as an Executive Vice President. The agreement does not have
a fixed expiration date and may be terminated by either party on 90 days'
written notice. If Mr. McLaughlin is terminated by the Company, he will be
entitled to receive his salary, bonus and health insurance benefits for a
two-year period following such termination, or until he is re-employed. If,
following a change in control of the Company (i) Mr. McLaughlin's title,
position, duties or salary are diminished and he resigns within 90 days
thereafter, or (ii) his employment with the Company is terminated following
his refusal to relocate for a period in excess of six months to any location
outside of the metropolitan area where he resides, he will be entitled to
receive his salary, bonus and health insurance benefits for a two-year period
following such termination. Each of Mr. McLaughlin's options to purchase Common
Stock that is not then fully exercisable will become exercisable in full upon a
change in control of the Company. If Mr. McLaughlin's employment with the
Company is terminated because of his death or disability, he will be entitled
to receive his salary, bonus and health insurance benefits for a one-year
period following such termination. Mr. McLaughlin's current annual salary is
$400,000.
- -------------------------------------------------------------------------------
-11-
<PAGE>
OTHER TRANSACTIONS
On January 16, 1995, the Company made a loan of $300,000 to Mr. Kohler, which
was due and payable on January 16, 1997, and bore interest at the rate of 8.5
percent per annum. On July 11, 1995, Mr. Kohler paid $155,764 towards principal
and accrued interest on such loan. On July 29, 1996, Mr. Kohler made a payment
of $170,713, which paid in full the outstanding principal and accrued interest.
- -------------------------------------------------------------------------------
-12-
<PAGE>
BOARD COMPENSATION COMMITTEE REPORT
ON EXECUTIVE COMPENSATION
TSC'S COMPENSATION PHILOSOPHY
The Company recognizes that the success of a computer system design and
implementation consulting business is based on the performance of its
employees, and that its employees are the Company's primary asset. With that
understanding, the Compensation Committee of the Board of Directors (the
"Compensation Committee") applies the following operating principles in its
duties as administrator of the Company's Executive Compensation program:
1. Be competitive in all aspects of the compensation program and
consistently demonstrate a willingness to pay levels of compensation
that are necessary to attract and retain highly qualified executives.
2. Award stock options to executives in order to align management's and
stockholders' interests.
3. Provide variable compensation opportunities based on the financial
performance of the Company -- when objectives are met or exceeded,
the incentive awards can be attractive; when objectives are not met,
those rewards generally are not distributed.
4. Adhere to a compensation strategy that effectively balances short-
and long-term goals of the Company.
COMPENSATION POLICIES FOR EXECUTIVE OFFICERS
The Compensation Committee of the Board, presently comprised of two outside
board members, makes executive compensation decisions. In making these
decisions, the Compensation Committee considers recommendations made by the
Company's senior management team. Key components of the Company's executive
compensation program include:
1. Base salary -- designed to compensate executives competitively within
the industry.
2. Cash bonus/stock option awards -- designed to help provide a direct
link between executive compensation and the individual's role in
helping the Company attain annual performance measures.
The Compensation Committee believes this executive compensation program
effectively serves the interests of both the Company and its stockholders. The
Compensation Committee also believes the program allows the Company to attract
and retain outstanding executives, and motivate these executives to perform at
the highest levels.
- -------------------------------------------------------------------------------
-13-
<PAGE>
CEO COMPENSATION
Mr. John T. Kohler was named Chief Executive Officer on June 29, 1995. Mr.
Kohler's compensation is substantially related to the Company's performance
because his employment agreement provides for an annual bonus based, in part,
on the Company's achievement of certain revenue and profitability levels. In
Fiscal 1997, Mr. Kohler received a salary of $525,000 and also received 112,500
options. Mr. Kohler's salary and option award during fiscal 1997 reflect the
strategic importance of Mr. Kohler to the Company, his current contribution to
the Company and his anticipated future contributions toward achievement of the
Company's growth objectives.
The foregoing report has been furnished by the Compensation Committee.
The Compensation Committee of the Board of Directors
John R. Purcell
Michael J. Murray
- -------------------------------------------------------------------------------
-14-
<PAGE>
SECURITY OWNERSHIP OF DIRECTORS AND MANAGEMENT
The following table sets forth information as of July 31, 1997 concerning the
beneficial ownership of Common Stock for each Director, Named Executive Officer
and all Directors and executive officers as a group. Unless otherwise noted,
the listed persons have sole voting and investment powers with respect to the
shares held in their names, subject to community property laws if applicable.
The table does not include options which are not exercisable within 60 days.
NUMBER % OF TOTAL
OF OUTSTANDING
DIRECTOR NAME SHARES SHARES
- ------------- ------ ------
John T. Kohler 306,868(1) 1.1
Michael J. McLaughlin 45,002(2) *
Michael J. Murray 222,642(3) *
Stephen B. Oresman 53,476(4) *
John R. Purcell 594,001(5) 2.1
William H. Waltrip 156,373(6) *
NAMED
EXECUTIVE OFFICERS
- ------------------
John T. Kohler 306,868(1) 1.1
James S. Carluccio 371,759(7) 1.3
Jack N. Hayden 111,398(8) *
Kelly D. Conway 82,213(9) *
Michael J. McLaughlin 45,002(2) *
All Directors and Executive
Officers as a group (11 persons) 2,014,978(10) 7.0
- -------------------------
* less than one percent
(1) Includes 259,498 shares which Mr. Kohler has the right to acquire under
options which are currently exercisable or which will be exercisable
within 60 days.
(2) Includes 45,002 shares which Mr. McLaughlin has the right to acquire under
options which are currently exercisable or which will be exercisable
within 60 days.
(3) Includes 42,751 shares which Mr. Murray has the right to acquire under
options which are currently exercisable or which will be exercisable
within 60 days.
(4) Includes 15,751 shares which Mr. Oresman has the right to acquire under
options which are currently exercisable or which will be exercisable
within 60 days.
(5) Includes 42,751 shares which Mr. Purcell has the right to acquire under
options which are currently exercisable or which will be exercisable
within 60 days.
(6) Includes 156,373 shares which Mr. Waltrip has the right to acquire under
options which are currently exercisable or which will be exercisable
within 60 days.
(7) Includes 313,124 shares which Mr. Carluccio has the right to acquire under
options which are currently exercisable or which will be exercisable
within 60 days.
(8) Includes 106,873 shares which Mr. Hayden has the right to acquire under
options which are currently exercisable or which will be exercisable
within 60 days.
(9) Includes 74,500 shares which Mr. Conway has the right to acquire under
options which are currently exercisable or which will be exercisable
within 60 days.
(10) Includes 1,118,169 shares which executive officers and directors have the
right to acquire under options which are currently exercisable or which
will be exercisable within 60 days.
- -------------------------------------------------------------------------------
-15-
<PAGE>
ADDITIONAL INFORMATION RELATING TO VOTING SECURITIES
The following table sets forth the holders of Common Stock known to the
Company, through their forms 13-D and/or 13-G filings, to own beneficially more
than five percent of its Common Stock as of July 31, 1997.
NAME AND NUMBER
ADDRESS OF OF SHARES PERCENT
BENEFICIAL OWNER OWNED OF CLASS(1)
- ------------------------------ --------------- ------------
Putnam Investments, Inc.
One Post Office Square
Boston, MA 02109 2,766,840(2) 10.9%
Denver Investment Advisors LLC
1225 17th Street
Denver, CO 80202 1,938,298(3) 7.6%
Massachusetts Financial Services
500 Boyleston Street
Boston, MA 02116-3741 1,541,325(4) 6.1%
Pilgrim Baxter & Associates, LTD
1255 Drummers Lane
Suite 300
Wayne, PA 19087-1590 1,388,400(5) 5.5%
- -----------------------
(1) Calculated on the basis of the actual number of outstanding shares as of
July 31, 1997 in the amount of 25,432,930.
(2) Based on 13-D and 13-G filings, 550,665 shares have shared voting power
and 2,766,840 shares have shared dispositive power.
(3) Based on 13-D and 13-G filings, 1,284,675 shares have sole voting power
and 1,938,298 shares have sole dispositive power.
(4) Based on 13-D and 13-G filings, 1,387,050 shares have sole voting power
and 1,541,325 shares have sole dispositive power.
(5) Based on 13-D and 13-G filings, 1,388,400 shares have shared voting
power and 1,388,400 shares have sole dispositive power.
- -------------------------------------------------------------------------------
-16-
<PAGE>
PERFORMANCE GRAPH
The following graph compares the Company's cumulative total stockholder return
with the S&P Computer Software and Services index (the "S&P Index") and with
The Nasdaq Stock Market-SM- U.S. Index (the "Nasdaq Index"). The comparison is
based on the assumption that $100.00 was invested on May 31, 1992 in each of
the Company's Common Stock, the S&P Index and the Nasdaq Index.
Note: The stock price performance shown below is not necessarily indicative of
future price performance.
5 YEAR CUMULATIVE TOTAL RETURN SUMMARY
MAY 31, MAY 31, MAY 31, MAY 31, MAY 31, MAY 31,
1992 1993 1994 1995 1996 1997
------- ------- ------- ------- ------- -------
TECHNOLOGY SOLU ($) $100.00 $ 45.16 $ 25.27 $ 40.32 $152.15 $233.87
S & P Computer
Software/Services ($) $100.00 $134.10 $160.85 $226.19 $316.29 $528.96
NASDAQ US ($) $100.00 $120.30 $126.59 $150.68 $218.99 $246.74
- -----------------
(1) Total return assumes reinvestment of dividends.
- -------------------------------------------------------------------------------
-17-
<PAGE>
STOCKHOLDER PROPOSALS
Proposals of stockholders that are intended to be presented at the Company's
1998 Annual Meeting of Stockholders must be received by the Company no later
than May 12, 1998. Such proposals may be included in next year's Proxy
Statement if they comply with certain rules and regulations promulgated by the
Securities and Exchange Commission.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), requires the Company's officers and directors, and persons who own more
than 10 percent of a registered class of the Company's equity securities
("Reporting Persons") to file reports of ownership and changes in ownership
with the Securities and Exchange Commission. Reporting Persons are required by
Securities and Exchange Commission regulation to furnish the Company with
copies of all Section 16(a) forms they file. Based solely on its review of such
reports and written representations from certain Reporting Persons, the Company
has determined the following:
Messrs. Carluccio, Conway, Hayden, Kohler, McLaughlin, Waltrip, Martin T.
Johnson and Paul R. Peterson, each filed one late report of changes in
ownership, which, in each case, related to one transaction. Mr. McLaughlin's
initial report of ownership was also filed late.
- -------------------------------------------------------------------------------
-18-
<PAGE>
ANNUAL REPORT TO STOCKHOLDERS
A COPY OF THE 1997 ANNUAL REPORT OF THE COMPANY (WHICH INCLUDES CONDENSED
FINANCIAL DATA AND A LETTER TO STOCKHOLDERS) ACCOMPANIES THIS PROXY STATEMENT.
APPENDIX 1 TO THIS PROXY STATEMENT, TITLED "1997 FINANCIAL REPORT" CONTAINS ALL
OF THE FINANCIAL INFORMATION (INCLUDING THE COMPANY'S AUDITED FINANCIAL
STATEMENTS), AND CERTAIN GENERAL INFORMATION, PREVIOUSLY PUBLISHED IN THE
COMPANY'S ANNUAL REPORT AND REPORT ON FORM 10-K. APPENDIX 1 IS INCORPORATED
HEREIN BY REFERENCE. A COPY OF THE COMPANY'S REPORT ON FORM 10-K FOR THE FISCAL
YEAR ENDED MAY 31, 1997 FILED WITH THE SECURITIES AND EXCHANGE COMMISSION,
WITHOUT EXHIBITS, WILL BE PROVIDED WITHOUT CHARGE TO ANY STOCKHOLDER SUBMITTING
A REQUEST THEREFOR TO:
MARTIN T. JOHNSON
SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
TECHNOLOGY SOLUTIONS COMPANY
205 N. MICHIGAN AVENUE, SUITE 1500
CHICAGO, IL 60601
TELEPHONE: (312) 228-4500
OTHER BUSINESS
The Board of Directors knows of no other matters to be presented at the Annual
Meeting, but if any other matters should properly come before the Annual
Meeting, it is intended that the persons named in the accompanying proxy card
will vote on such matters in accordance with their best judgment.
- -------------------------------------------------------------------------------
-19-
<PAGE>
APPENDIX 1
TECHNOLOGY SOLUTIONS COMPANY
1997 FINANCIAL REPORT
CONTENTS
- -------------------------------------------------------------------------------
Business of TSC 1
Financial Statements and Notes 3
Report of Independent Accountants 23
Management's Discussion and Analysis of
Financial Condition and Results of Operations 24
Assumptions Underlying Certain Forward-Looking Statements
and Factors That May Affect Future Results 29
Five-Year Financial Summary 35
Selected Information on TSC Stock 36
Other Information 38
<PAGE>
BUSINESS OF TSC
Technology Solutions Company ("TSC" or the "Company") provides information
technology (IT) and strategic business and management consulting services to
major corporations and financial institutions. These services help
manufacturing, technology, health care, telecommunications, financial services,
and other service industry clients transform their businesses, their internal
business processes and their relationships with customers, suppliers,
distributors and employees. The IT services provided by TSC help these clients
achieve clearly defined business benefits. As used herein the terms "TSC" or
the "Company," unless the context otherwise clearly requires, refer to
Technology Solutions Company and its subsidiaries.
TSC services span a wide range of IT services and strategic business and
management consulting services. TSC's IT services address a broad spectrum of
IT consulting from IT strategy through systems integration, including the
identification of areas of a client's business that can benefit from computer
technology, feasibility studies, business case justification, business process
redesign and reengineering, benchmarking and best practices, project
management, architecture, logical and physical systems design, hardware and
software selection, programming, implementation, change management, education,
training, and benefits realization. The Company's strategic business and
management consulting services offered include business strategic planning,
market research and analysis, new venture growth services, product and
distribution channel planning and organizational restructuring services.
In June 1997, TSC acquired the common stock of The Bentley Company, Inc. (which
has been renamed The Bentley Group), a Boston-area based firm specializing in
business and operations consulting in the area of customer service and field
service and support. Additionally, The Bentley Group has a business focus in
software package implementation for help desks and service and sales force
automation. The Bentley Group offers a wide range of consulting services for
the internal and external support organizations of Fortune 500 companies. These
services include sales and service business planning; help desk and customer
service assessment, design and implementation; and package implementation
services.
During fiscal 1997, TSC established OrTech Solutions Company ("OrTech"). OrTech
is a commissioned sales representation firm that represents Oracle Corporation
("Oracle") in the sales of the Oracle Applications suite of products to middle
market firms. Oracle, under this program, has granted OrTech exclusive
territories which include the states of Texas, Oklahoma, Louisiana, Arkansas,
Wisconsin, Illinois and Indiana. All obligations related to the Oracle
Applications suite of products is retained by Oracle.
TSC's business is focused on several broad areas of the IT marketplace. These
areas include the area of customer relationship solutions, telecommunications,
risk management, packaged software implementation (in particular, the ERP
packages), and networked computing, to name a few.
Since its inception in May 1988, TSC has performed project work for
approximately 440 corporations, including Aetna, Avantel, The Chicago Board
Options Exchange, Cigna, Cisco Systems, ConAgra, Georgia-Pacific, The
Equitable, First Union Corporation, Goldman, Sachs &
- -------------------------------------------------------------------------------
PAGE 1
<PAGE>
Co., Pfizer Pharmaceuticals, The Prudential, Pepsi, Square D Corporation, Swiss
Bank Corporation and Whirlpool Corporation.
TSC is a corporation formed under the laws of the state of Delaware. Its
principal executive offices are located in Chicago, Illinois. In addition to
its Chicago office, the Company maintains domestic offices in Schaumburg,
Illinois; Atlanta, Georgia; New Canaan, Connecticut; Dallas, Texas; New York,
New York; Philadelphia, Pennsylvania; and San Francisco and Santa Cruz,
California. International offices are located in Mexico City, Mexico; Bogota,
Colombia; London, England; Cologne, Germany; Paris, France; and Toronto,
Canada.
- -------------------------------------------------------------------------------
PAGE 2
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
ASSETS
<TABLE>
<CAPTION>
May 31, May 31,
1997 1996
-------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 27,951 $12,990
Marketable securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,988 11,580
Receivables, less allowance for doubtful receivables of $3,346 and $1,870. . . 43,907 23,537
Refundable income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,398 5,117
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,234 1,194
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,196 6,166
-------- -------
Total current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . 107,674 60,584
COMPUTERS, FURNITURE AND EQUIPMENT, NET. . . . . . . . . . . . . . . . . . . . . 6,416 4,443
LONG-TERM INVESTMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,118 17,140
COST IN EXCESS OF NET ASSETS OF ACQUIRED
BUSINESSES AND OTHER INTANGIBLES . . . . . . . . . . . . . . . . . . . . . . . 3,521 3,079
LONG-TERM RECEIVABLES AND OTHER. . . . . . . . . . . . . . . . . . . . . . . . . 8,137 4,191
-------- -------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $133,866 $89,437
-------- -------
-------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,604 $ 1,344
Accrued compensation and related costs . . . . . . . . . . . . . . . . . . . . 17,001 11,621
Capitalized lease obligations. . . . . . . . . . . . . . . . . . . . . . . . . 240 2,616
Deferred compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,842 2,660
Other current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . 2,392 1,167
-------- -------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 28,079 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 -- 26,855,390 . . . . . . . . . . . . . . . . . . 269 269
Capital in excess of par value . . . . . . . . . . . . . . . . . . . . . . . . 61,958 50,254
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51,627 35,983
Unrealized holding loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . (319) (642)
Cumulative translation adjustment. . . . . . . . . . . . . . . . . . . . . . . (318) --
-------- -------
113,217 85,864
Less: Treasury Stock, at cost (2,123,660 and 4,521,067 shares). . . . . . . . (7,430) (15,835)
-------- -------
Total stockholders' equity. . . . . . . . . . . . . . . . . . . . . . . . . 105,787 70,029
-------- -------
Total liabilities and stockholders' equity. . . . . . . . . . . . . . . . . $133,866 $89,437
-------- -------
-------- -------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of this financial information.
- -------------------------------------------------------------------------------
PAGE 3
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
<TABLE>
<CAPTION>
For the years ended May 31,
-----------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
REVENUES:
Professional fees. . . . . . . . . . . . . . . . $164,238 $97,004 $65,704
Software and hardware products . . . . . . . . . 850 595 113
-------- ------- -------
165,088 97,599 65,817
-------- ------- -------
COSTS AND EXPENSES:
Project personnel. . . . . . . . . . . . . . . . 76,508 46,744 29,204
Other project expenses . . . . . . . . . . . . . 23,374 13,010 8,991
Cost of products sold. . . . . . . . . . . . . . 54 476 110
Management and administrative support. . . . . . 32,074 22,605 18,501
Goodwill amortization. . . . . . . . . . . . . . 811 -- --
Shareholder litigation settlement. . . . . . . . -- 2,345 --
Company founders litigation settlement . . . . . -- 944 --
Former company executive settlements . . . . . . -- -- 1,590
Incentive compensation . . . . . . . . . . . . . 9,394 6,611 4,651
-------- ------- -------
142,215 92,735 63,047
-------- ------- -------
OPERATING INCOME . . . . . . . . . . . . . . . . . 22,873 4,864 2,770
-------- ------- -------
OTHER INCOME (EXPENSE):
Net investment income. . . . . . . . . . . . . . 2,295 2,073 1,958
Interest expense . . . . . . . . . . . . . . . . (191) (169) (28)
-------- ------- -------
2,104 1,904 1,930
-------- ------- -------
INCOME BEFORE INCOME TAXES . . . . . . . . . . . . 24,977 6,768 4,700
INCOME TAX PROVISION . . . . . . . . . . . . . . . 9,910 2,194 1,333
-------- ------- -------
NET INCOME . . . . . . . . . . . . . . . . . . . . $ 15,067 $ 4,574 $ 3,367
-------- ------- -------
-------- ------- -------
EARNINGS PER COMMON SHARE. . . . . . . . . . . . . $ 0.57 $ 0.20 $ 0.16
-------- ------- -------
-------- ------- -------
WEIGHTED AVERAGE NUMBER OF COMMON
AND COMMON EQUIVALENT SHARES
OUTSTANDING. . . . . . . . . . . . . . . . . . . 26,579 24,213 24,169
-------- ------- -------
-------- ------- -------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of this financial information.
- -------------------------------------------------------------------------------
PAGE 4
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the years ended May 31, 1997, 1996 and 1995
(In thousands, except share data)
<TABLE>
<CAPTION>
Common Stock Capital in Unrealized
-------------------- Excess of Retained Holding
Shares Amount Par Value Earnings Losses
---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
Balance as of May 31, 1994 . . . . . . . . . . . 17,903,593 $179 $44,035 $28,063 $(238)
Effect of August 1, 1997 three-for-two stock
split on May 31, 1994 balances . . . . . . . . 8,951,797 90 (90) -- --
Issuance of 61,614 treasury shares
from exercise of stock options . . . . . . . . -- -- 26 (21) --
Change in net unrealized holding
loss on available-for-sale securities. . . . . -- -- -- -- (615)
Net income . . . . . . . . . . . . . . . . . . . -- -- -- 3,367 --
Purchase of 2,025,000 treasury shares. . . . . . -- -- -- -- --
---------- ----- ---------- ---------- ---------
Balance as of May 31, 1995 . . . . . . . . . . . 26,855,390 269 43,971 31,409 (853)
Issuance of 2,397,914 treasury shares
from exercise of stock options . . . . . . . . -- -- 6,085 -- --
Issuance of 58,569 treasury shares
from employee stock purchase plan. . . . . . . -- -- 198 -- --
Change in net unrealized holding
loss on available-for-sale securities. . . . . -- -- -- -- 211
Net income . . . . . . . . . . . . . . . . . . . -- -- -- 4,574 --
Acquisition of 100,583 treasury shares . . . . . -- -- -- -- --
---------- ----- ---------- ---------- ---------
Balance as of May 31, 1996 . . . . . . . . . . . 26,855,390 269 50,254 35,983 (642)
Issuance of 1,710,498 treasury shares
from exercise of stock options . . . . . . . . -- -- 12,140 -- --
Issuance of 119,443 treasury shares
from employee stock purchase plan. . . . . . . -- -- 1,396 -- --
Change in net unrealized holding
loss on available-for-sale securities. . . . . -- -- -- -- 323
Net income . . . . . . . . . . . . . . . . . . . -- -- -- 15,067 --
Cumulative translation adjustment. . . . . . . . -- -- -- -- --
Issuance of 567,466 treasury shares
for business combinations. . . . . . . . . . . -- -- (1,832) 577 --
---------- ----- ---------- ---------- ---------
Balance as of May 31, 1997 . . . . . . . . . . . 26,855,390 $269 $61,958 $51,627 $(319)
---------- ----- ---------- ---------- ---------
---------- ----- ---------- ---------- ---------
<CAPTION>
Cumulative
Translation Treasury
Adjustment Stock Total
---------- -------- --------
<S> <C> <C> <C>
Balance as of May 31, 1994 . . . . . . . . . . . $ -- $(17,939) $ 54,100
Effect of August 1, 1997 three-for-two stock
split on May 31, 1994 balances . . . . . . . . -- -- --
Issuance of 61,614 treasury shares
from exercise of stock options . . . . . . . . -- 207 212
Change in net unrealized holding
loss on available-for-sale securities. . . . . -- -- (615)
Net income . . . . . . . . . . . . . . . . . . . -- -- 3,367
Purchase of 2,025,000 treasury shares. . . . . . -- (5,338) (5,338)
--------- ---------- ----------
Balance as of May 31, 1995 . . . . . . . . . . . -- (23,070) 51,726
Issuance of 2,397,914 treasury shares
from exercise of stock options . . . . . . . . -- 8,107 14,192
Issuance of 58,569 treasury shares
from employee stock purchase plan. . . . . . . -- 200 398
Change in net unrealized holding
loss on available-for-sale securities. . . . . -- -- 211
Net income . . . . . . . . . . . . . . . . . . . -- -- 4,574
Acquisition of 100,583 treasury shares . . . . . -- (1,072) (1,072)
--------- ---------- ----------
Balance as of May 31, 1996 . . . . . . . . . . . -- (15,835) 70,029
Issuance of 1,710,498 treasury shares
from exercise of stock options . . . . . . . . -- 6,001 18,141
Issuance of 119,443 treasury shares
from employee stock purchase plan. . . . . . . -- 418 1,814
Change in net unrealized holding
loss on available-for-sale securities. . . . . -- -- 323
Net income . . . . . . . . . . . . . . . . . . . -- -- 15,067
Cumulative translation adjustment. . . . . . . . (318) -- (318)
Issuance of 567,466 treasury shares
for business combinations. . . . . . . . . . . -- 1,986 731
--------- ---------- ----------
Balance as of May 31, 1997 . . . . . . . . . . . $(318) $ (7,430) $105,787
--------- ---------- ----------
--------- ---------- ----------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of this financial information.
- -------------------------------------------------------------------------------
PAGE 5
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
For the years ended May 31,
-----------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . $ 15,067 $ 4,574 $ 3,367
Adjustments to reconcile net income to net
cash from operating activities:
Depreciation and amortization . . . . . . . . . . . . . . 4,442 2,558 2,048
Provisions for receivable valuation allowances and
reserves for possible losses . . . . . . . . . . . . . . 2,712 1,339 2,059
(Gain) loss on sale of investments. . . . . . . . . . . . (17) (18) 67
Deferred income taxes . . . . . . . . . . . . . . . . . . 8,837 447 2,945
Changes in assets and liabilities:
Receivables. . . . . . . . . . . . . . . . . . . . . . . (21,533) (11,166) (6,925)
Purchases of trading securities related to deferred
compensation program. . . . . . . . . . . . . . . . . . (4,182) (2,660) --
Refundable income taxes. . . . . . . . . . . . . . . . . 49 1,074 557
Other current assets . . . . . . . . . . . . . . . . . . (4,933) (2,292) (662)
Accounts payable . . . . . . . . . . . . . . . . . . . . (73) 572 354
Accrued compensation and related costs . . . . . . . . . 5,260 2,849 1,630
Deferred compensation funds from employees . . . . . . . 4,182 2,660 --
Other current liabilities. . . . . . . . . . . . . . . . 158 (875) (4,542)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . (241) -- --
--------- --------- ---------
Net cash provided by (used in) operating activities . 9,728 (938) 898
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of available-for-sale securities . . . . . . . . . (1,000) -- (909)
Proceeds from available-for-sale securities . . . . . . . . 1,314 1,075 966
Proceeds from held-to-maturity investments. . . . . . . . . 8,890 4,015 --
Capital expenditures. . . . . . . . . . . . . . . . . . . . (6,057) (3,651) (2,101)
Net assets of acquired businesses and other intangibles . . (1,127) (3,079) --
Long-term receivables and other . . . . . . . . . . . . . . (3,215) (1,319) 178
Capitalized lease obligations . . . . . . . . . . . . . . . (1,311) 866 814
--------- --------- ---------
Net cash used in investing activities . . . . . . . . (2,506) (2,093) (1,052)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options . . . . . . . . . . 6,445 9,100 196
Proceeds from employee stock purchase plan. . . . . . . . . 1,805 398 --
Treasury stock. . . . . . . . . . . . . . . . . . . . . . . -- (1,072) (5,338)
--------- --------- ---------
Net cash provided by (used in) financing activities . 8,250 8,426 (5,142)
--------- --------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS. . . . . . . . . . . . . . . . . . . . (511) -- --
--------- --------- ---------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS. . . . . . . . . . . . . . . . . . . . . . 14,961 5,395 (5,296)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD. . . . . . . . 12,990 7,595 12,891
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD. . . . . . . . . . . $ 27,951 $ 12,990 $ 7,595
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of this financial information.
- -------------------------------------------------------------------------------
PAGE 6
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NOTE 1 -- THE COMPANY
Technology Solutions Company and subsidiaries (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 and in Europe, Latin America
and Canada.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION -- The accompanying consolidated financial
statements include the accounts of the Company and all of its subsidiaries. All
significant intercompany transactions have been eliminated. Acquired businesses
are included in the results of operations since their acquisition dates.
REVENUE RECOGNITION -- The Company derives substantially all of its revenues
from information technology, strategic business and management consulting,
systems integration, programming, and packaged software integration and
implementation services. The Company operates in one industry segment -
software development and integration services. 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 consolidated statements of income. Contracts are performed in
phases. Losses on contracts, if any, are reserved 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 and support
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 after-tax amount in a
separate component of stockholders' equity until realized. The Company's
investments related to the executive deferred compensation plan (See Note 10)
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.
- -------------------------------------------------------------------------------
PAGE 7
<PAGE>
COMPUTERS, FURNITURE AND EQUIPMENT -- Computers, furniture and equipment are
carried and depreciated on a straight-line basis over their estimated useful
lives. Useful lives generally are five years or less.
COST IN EXCESS OF NET ASSETS OF ACQUIRED BUSINESSES -- The excess of cost over
the fair market value of the net identifiable assets of businesses acquired
(goodwill) is amortized on a straight-line basis, typically over a five-year
period. Accumulated amortization of goodwill as of May 31, 1997 was $811.
SOFTWARE DEVELOPMENT COSTS -- The Company capitalizes certain software
development costs once technological feasibility is established in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 86--"Accounting
for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed."
Amortization of software costs is the greater of the amount computed using the
(a) ratio of current revenues to the total current and anticipated future
revenues or (b) the straight-line method over the estimated economic life of
the product.
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 No. 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.
EARNINGS PER COMMON SHARE -- Earnings per common share is computed by dividing
net income per the modified treasury stock method by the weighted average
number of common shares outstanding during each year presented, including
common share equivalents arising from the assumed exercise of stock options,
where appropriate. All share and per share amounts have been adjusted to
reflect the Company's three-for-two stock splits effective August 1, 1997 and
July 30, 1996, respectively.
FOREIGN CURRENCY TRANSLATION -- All assets and liabilities of foreign
subsidiaries are translated to U.S. dollars at fiscal year-end exchange rates.
Income and expense items are translated at average exchange rates prevailing
during the fiscal year. The resulting translation adjustments are recorded as a
component of stockholders' equity. The functional currencies for the Company's
foreign subsidiaries are their local currencies. Gains and losses from foreign
currency transactions of these subsidiaries are included in net income.
ACCOUNTING CHANGES -- The Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation," as of May 31, 1997 and implemented the disclosure
provisions of this statement. While this statement encourages companies to
recognize expense for stock options at estimated fair value based on an option
pricing model, the Company has elected to disclose the proforma net income and
earnings per share that would have been obtained under this statement's
- -------------------------------------------------------------------------------
PAGE 8
<PAGE>
approach for valuing and expensing stock options. See Note 13 for further
discussion and related disclosures.
The Financial Accounting Standards Board ("FASB") issued SFAS No. 128,
"Earnings Per Share," in February 1997. This statement establishes new
standards for computing and presenting earnings per share. This statement is
effective for financial statements issued for periods ending after December
15, 1997; earlier adoption is not permitted. Adoption of this statement will
require the presentation of basic and diluted earnings per share. If the
statement had been adopted, proforma basic and diluted earnings per share for
the years ended May 31, 1997, 1996 and 1995 would have been as follows:
Years Ended
May 31,
------------------------
1997 1996 1995
---- ---- ----
Basic earnings per share $0.64 $0.22 $0.17
Diluted earnings per share $0.57 $0.19 $0.14
INCOME TAXES -- The Company files its federal and state income tax returns on a
calendar year basis. The current income tax provision (benefit) represents the
Company's federal, state and foreign income taxes for the fiscal year as though
tax returns were filed on a fiscal year basis ending on May 31.
The Company uses an asset and liability approach to financial accounting and
reporting for income taxes. Deferred income taxes are provided when tax laws
and financial accounting standards differ with respect to the amount of income
for a year and the bases of assets and liabilities. The Company does not
provide U.S. deferred income taxes on earnings of foreign subsidiaries which
are expected to be indefinitely reinvested.
EMPLOYEE BENEFIT PLAN -- The Company has a 401(k) Savings Plan (the "Plan").
The Plan allows employees to contribute up to 15 percent of their annual
compensation, subject to Internal Revenue Service statutory limitations.
Company contributions to the Plan are discretionary. The Company contributed
$1,234 to the Plan in fiscal 1997.
ESTIMATES AND ASSUMPTIONS -- The preparation of financial statements in
conformity with Generally Accepted Accounting Principles requires management to
make assumptions that affect the reported amounts of 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.
RECLASSIFICATIONS -- Certain reclassifications have been made to the prior
period to conform to the current period classification.
- -------------------------------------------------------------------------------
PAGE 9
<PAGE>
NOTE 3 -- ACQUISITIONS
In March 1997, the Company combined with HRM Resources, Inc. through the
exchange of 561,039 shares of common stock of the Company for all the issued
and outstanding shares of HRM Resources. HRM Resources is a technology
implementation firm based in New York that specializes in large-scale financial
and human resources software packages. This transaction was accounted for as a
pooling of interests. The operations of HRM Resources were not material to the
Company's consolidated operations.
In February 1997, the Company acquired Geising International, a German-based
business consulting firm focused on customer relationship management services,
for $1,040. The results of Geising International operations have been combined
with those of the Company since the date of acquisition. The acquisition was
accounted for using the purchase method of accounting. Goodwill recorded
approximated $1,000. The operations of Geising International were not material
to the Company's consolidated operations.
In May 1996, the Company acquired Aspen Consultancy Ltd., a U.K.-based call
center consulting firm. Aspen Consultancy Ltd. became a wholly-owned subsidiary
of the Company. The acquisition was accounted for under the purchase method of
accounting. The purchase price was approximately $1,600 and will be increased
by approximately $2,400 if certain performance targets are met in fiscal years
1997, 1998 and 1999. Goodwill recorded approximated $1,600. The operations of
Aspen Consultancy were not material to the Company's consolidated operations.
In May 1996, the Company acquired McLaughlin & Associates, an Illinois-based
consulting firm. McLaughlin & Associates became a division of TSC. The purchase
price approximated $2,000. The acquisition was accounted for under the purchase
method of accounting. Goodwill recorded approximated $1,500. The operations of
McLaughlin & Associates were not material to the Company's consolidated
operations.
Consolidated proforma net income and earnings per share would not have been
materially different from the Company's reported amounts for fiscal 1997 and
fiscal 1996.
Goodwill for all acquisitions is amortized over five years on a straight-line
basis.
- -------------------------------------------------------------------------------
PAGE 10
<PAGE>
NOTE 4 -- RECEIVABLES
Receivables consist of the following:
May 31,
-----------------
1997 1996
---- ----
Amounts billed to clients. . . . . . . . . . $34,515 $16,260
Contracts in process . . . . . . . . . . . . 12,738 9,147
------- -------
47,253 25,407
Receivable valuation allowances and
reserves for possible losses. . . . . . . (3,346) (1,870)
------- -------
$43,907 $23,537
------- -------
------- -------
Amounts billed to clients represent professional fees and reimbursable
project-related expenses. Contracts in process represent unbilled professional
fees and project costs such as out-of-pocket expense, materials and
subcontractor costs. None of the amounts above are expected to be collected in
excess of one year from the balance sheet date. Amounts billed to clients are
unsecured and generally due within 30 days. Clients are generally billed in
arrears on a monthly basis. Contracts in process as of May 31, 1997 include
$11,119 for work performed during May 1997 that was not billed until June 1997.
NOTE 5 -- MARKETABLE SECURITIES AND LONG-TERM INVESTMENTS
Marketable securities, included in current assets and classified as
available-for-sale, are reported at fair value. As of May 31, 1997 and 1996,
the gross unrealized holding gain of $39 and $10, respectively, and gross
unrealized holding loss of $527 and $994, respectively, are presented net and
after-taxes in a separate component of stockholders' equity.
Municipal bonds included in long-term investments are presented at cost, net of
accumulated amortization as of May 31, 1997 and 1996 of $514 and $764,
respectively, and had a market value at May 31, 1997 and 1996 of $8,184 and
$17,267, respectively. The long-term investments as of May 31, 1997 are
expected to mature as follows: $6,890 in fiscal 1998; and $1,200 in fiscal
1999.
- -------------------------------------------------------------------------------
PAGE 11
<PAGE>
NOTE 6 -- COMPUTERS, FURNITURE AND EQUIPMENT
Computers, furniture and equipment consist of the following:
May 31,
-----------------
1997 1996
---- ----
Computers. . . . . . . . . . . . . . . . . . $ 9,583 $ 8,802
Furniture and equipment. . . . . . . . . . . 3,324 2,134
------- -------
12,907 10,936
Accumulated depreciation . . . . . . . . . . (6,491) (6,493)
------- -------
$ 6,416 $ 4,443
------- -------
------- -------
Depreciation expense was $3,492, $2,239 and $1,705 for the years ended
May 31, 1997, 1996 and 1995, respectively.
NOTE 7 -- LONG-TERM RECEIVABLES AND OTHER
Long-term receivables and other consist of the following:
May 31,
-----------------
1997 1996
---- ----
Customer receivables . . . . . . . . . . . . $ 5,859 $ 2,016
Employee receivables . . . . . . . . . . . . 1,165 747
Capitalized software costs . . . . . . . . . 801 663
Other. . . . . . . . . . . . . . . . . . . . 312 765
------- -------
$ 8,137 $ 4,191
------- -------
------- -------
In accordance with SFAS No. 86, amortization expense of capitalized software
costs of $454 was recorded in fiscal 1997. No amortization of capitalized
software costs was recorded in fiscal 1996.
- -------------------------------------------------------------------------------
PAGE 12
<PAGE>
NOTE 8 -- INCOME TAXES
The Company uses an asset and liability approach to financial accounting and
reporting for income taxes in accordance with SFAS No. 109, "Accounting for
Income Taxes." The provision for income taxes consists of the following:
For the years ended May 31,
---------------------------
Current: 1997 1996 1995
---- ---- ----
Federal . . . . . . . . . . . . . . . . $10,114 $1,054 $(1,104)
State . . . . . . . . . . . . . . . . . 3,115 473 (508)
Foreign . . . . . . . . . . . . . . . . -- 220 --
------- ------ -------
Total current. . . . . . . . . . . . 13,229 1,747 (1,612)
------- ------ -------
Deferred:
Federal . . . . . . . . . . . . . . . . (3,061) 310 2,017
State . . . . . . . . . . . . . . . . . (540) 137 928
Foreign . . . . . . . . . . . . . . . . 282 -- --
------- ------ -------
Total deferred . . . . . . . . . . . (3,319) 447 2,945
------- ------ -------
Provision for income taxes . . . . . . . . $ 9,910 $2,194 $ 1,333
------- ------ -------
------- ------ -------
Total provision for income taxes differed from the amount computed by applying
the federal statutory income tax rate to income from continuing operations due
to the following:
For the years ended May 31,
---------------------------
1997 1996 1995
---- ---- ----
Federal tax provision, at statutory rate . $8,741 $2,301 $1,598
State tax provision, net of Federal
benefit . . . . . . . . . . . . . . . . . 1,674 328 248
Effect of foreign tax rate differences . . (91) 33 --
Nontaxable investment income . . . . . . . (532) (468) (509)
Nondeductible goodwill . . . . . . . . . . 51 -- --
Other. . . . . . . . . . . . . . . . . . . 67 -- (4)
------ ------ ------
Provision for income taxes . . . . . . . . $9,910 $2,194 $1,333
------ ------ ------
------ ------ ------
Total income tax (benefit) provision was allocated as follows:
For the years ended May 31,
---------------------------
1997 1996 1995
---- ---- ----
Income from continuing operations. . . . . $ 9,910 $ 2,194 $1,333
Items charged directly to stockholders'
equity. . . . . . . . . . . . . . . . . (11,605) (5,151) (352)
------- ------- ------
Total tax (benefit) provision. . . . . . . $(1,695) $(2,957) $ 981
------- ------- ------
------- ------- ------
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PAGE 13
<PAGE>
Deferred tax assets and liabilities were comprised of the following:
May 31,
--------------
1997 1996
---- ----
Deferred tax assets:
Deferred compensation and bonuses . . . . . . . . . $ 2,737 $ 1,008
1990 stock options awarded. . . . . . . . . . . . . -- 15
Net operating loss and credits. . . . . . . . . . . 3,503 --
Receivable valuation allowances and reserves
for possible losses. . . . . . . . . . . . . . . 1,982 597
Legal and other accruals. . . . . . . . . . . . . . 883 814
Depreciation. . . . . . . . . . . . . . . . . . . . 393 394
Unrealized holding loss . . . . . . . . . . . . . . 195 343
------- -------
Total deferred tax assets . . . . . . . . . . . . 9,693 3,171
------- -------
Deferred tax liabilities:
Prepaid expenses. . . . . . . . . . . . . . . . . . (1,968) (1,372)
Capitalized software development costs. . . . . . . (91) (323)
Other . . . . . . . . . . . . . . . . . . . . . . . (400) (282)
------- -------
Total deferred tax liabilities. . . . . . . . . . (2,459) (1,977)
------- -------
Net deferred tax asset. . . . . . . . . . . . . . . $ 7,234 $ 1,194
------- -------
------- -------
The Company has federal net operating losses of $7,192 which will expire in
2011. In addition, the Company has an alternative minimum tax credit of $287
which is available to reduce future federal regular income taxes, if any, over
an indefinite period.
Income before income taxes consisted of the following:
For the years ended May 31,
---------------------------
1997 1996 1995
---- ---- ----
United States. . . . . . . . . . . . . . . $23,910 $6,217 $4,700
Foreign. . . . . . . . . . . . . . . . . . 1,067 551 --
------- ------ ------
Total. . . . . . . . . . . . . . . . . . . $24,977 $6,768 $4,700
------- ------ ------
------- ------ ------
Income taxes paid (received) during fiscal 1997, 1996 and 1995 were $135, $545
and $(2,172), respectively.
- -------------------------------------------------------------------------------
PAGE 14
<PAGE>
NOTE 9 -- LINE OF CREDIT
The Company has available a $5.0 million unsecured line of credit facility
which expires September 5, 1997. The borrowing rate is at either the bank's
reference rate or at the Eurodollar rate plus 0.75 percent and is based upon
the amount borrowed. The unused line fee is 0.25 percent of the unused portion
of the commitment. There was no borrowing under the line of credit during
fiscal 1997.
NOTE 10 -- EXECUTIVE DEFERRED COMPENSATION PLAN
Effective July 1, 1995, the Company instituted a nonqualified executive
deferred compensation plan. All Company executives (defined as Vice Presidents
and above) are eligible to participate in this voluntary program which permits
participants to annually elect to defer receipt of a portion of their
compensation. The plan allows participants to reduce their current taxable
income and also generate tax-deferred investment earnings. Investment earnings
(or losses) are credited to participants' accounts based on investment
allocation decisions determined by participants. Deferred contributions and
investment earnings are payable to participants upon various specified events,
including retirement, disability or termination. The accompanying balance sheet
includes the deferred compensation liability, including investment earnings
thereon, owed to participants. The accompanying balance sheet also includes the
investments, classified as trading securities, purchased by the Company with
the deferred funds. These investments remain assets of the Company and are
available to the general creditors of the Company in the event of the Company's
insolvency.
NOTE 11 -- EMPLOYEE STOCK PURCHASE PLAN
Effective November 1, 1995 the Company instituted the Technology Solutions
Company 1995 Employee Stock Purchase Plan (the "Plan"). The Plan qualifies as
an "employee stock purchase plan" under Section 423 of the Internal Revenue
Code of 1986, as amended. The Plan is administered by the Compensation
Committee of the Board of Directors. The Plan permits eligible employees to
purchase an aggregate of 1,125,000 shares of the Company's Common Stock. Shares
are purchased for the benefit of the participants at the end of each three
month purchase period. During the fiscal years ended May 31, 1997 and 1996,
119,443 and 58,569 shares of common stock were purchased under this plan,
respectively.
- -------------------------------------------------------------------------------
PAGE 15
<PAGE>
NOTE 12 -- STOCKHOLDERS' EQUITY
On June 26, 1997, the Board of Directors declared a three-for-two stock split
to be effected as a 50 percent stock dividend for stockholders of record on
July 10, 1997. The stock split was effective August 1, 1997. The financial
statements and the relevant share and per share data included herein have been
adjusted to reflect the stock split. As a result of the increase in issued
shares, common stock has been increased and capital in excess of par has been
decreased by $90.
NOTE 13 -- STOCK OPTIONS
On September 26, 1996, the Company's stockholders approved the Technology
Solutions Company 1996 Stock Incentive Plan (the "1996 Plan"). The 1996 Plan
replaces each of the Technology Solutions Company's 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"). With the approval of the 1996 Plan, no
future awards will be made under the Predecessor Plans. Previous awards made
under the Predecessor Plans are not affected. 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. A total of 1,580,159 shares of the
Company's common stock were available for grant on September 26, 1996 under the
Predecessor Plans. With the approval of the 1996 Plan, these shares became
available for grant under the 1996 Plan. On September 26, 1996, the
stockholders also approved the addition of 1,500,000 shares to the 1996 Plan.
Options granted under the 1996 Plan and the Predecessor Plans authorize the
grant of a variety of stock options and other awards if authorized by the
Company's Board of Directors at prices not less than the fair market value at
the date of grant. Options granted under the Predecessor Plans are generally
exercisable beginning one year after the date of grant and are fully
exercisable in three to four years from date of grant. Options granted under
the 1996 Plan are generally exercisable beginning twelve months after date of
grant and are fully exercisable in forty-two months from date of grant. Options
available for grant are 3,013,385 and 3,042,435 as of May 31, 1997 and 1996,
respectively.
- -------------------------------------------------------------------------------
PAGE 16
<PAGE>
Effective May 31, 1997, the Company has elected to disclose the proforma
effects of SFAS No. 123, "Accounting for Stock-Based Compensation." As allowed
under the provisions of this new statement, the Company will continue to apply
APB Opinion No. 25 and related interpretations in accounting for the stock
options awarded under the Company's 1996 Plan. Accordingly, no compensation
cost has been recognized for these stock options. Had compensation cost for the
Company's 1996 Plan and Employee Stock Purchase Plan been determined consistent
with SFAS No. 123, the Company's net income and earnings per share would have
been reduced to the proforma amounts indicated below:
1997 1996
----- -----
Net Income:
As reported. . . . . . . . . . . . . . . . . $15,067 $4,574
Pro forma. . . . . . . . . . . . . . . . . . $11,018 $3,373
Earnings per share:
As reported. . . . . . . . . . . . . . . . . $0.57 $0.20
Pro forma. . . . . . . . . . . . . . . . . . $0.41 $0.14
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
1997 1996
--------- ---------
Expected volatility . . . . . . . . . . . . . 40.9%-51.4% 50.6%-52.0%
Risk-free interest rates. . . . . . . . . . . 5.28%-6.84% 5.28%-6.39%
Expected lives. . . . . . . . . . . . . . . . 4.5 years 4.5 years
The Company has not paid and does not anticipate paying dividends; therefore,
the expected dividend yield is assumed to be zero.
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PAGE 17
<PAGE>
A summary of the status of the Company's option plans is presented below:
<TABLE>
<CAPTION>
1997 1996
Weighted- Weighted-
Average Average
1997 Exercise 1996 Exercise
Shares Price Shares Price
--------- ---------- --------- -----------
<S> <C> <C> <C> <C>
Outstanding at beginning of year. . . . . . . . . 6,967,140 $ 4.52 7,689,771 $ 3.45
Granted . . . . . . . . . . . . . . . . . . . . . 1,910,619 $16.39 1,954,013 $ 7.72
Exercised . . . . . . . . . . . . . . . . . . . . (1,710,498) $22.53 (2,397,914) $ 9.81
Forfeited . . . . . . . . . . . . . . . . . . . . (395,912) $12.75 (278,730) $ 3.47
--------- ---------
Outstanding at end of year. . . . . . . . . . . . 6,771,349 $ 7.55 6,967,140 $ 4.52
--------- ---------
Exercisable at end of year. . . . . . . . . . . . 2,858,730 $ 4.51 3,203,004 $ 3.61
--------- ---------
Weighted-average fair value of
options granted during the year . . . . . . . $7.86 $3.73
</TABLE>
<TABLE>
<CAPTION>
The following summarizes information about options outstanding as of May 31, 1997:
Options Outstanding Options Exercisable
-------------------------------------- -------------------------
Average Weighted- Weighted-
Range of Remaining Average Average
Exercise Contractual Exercise Exercise
Prices Shares Life Prices Shares Prices
------------- --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
$ 0.19-$ 6.50 4,223,156 10 years $ 3.38 2,541,046 $ 3.76
$ 6.51-$10.00 423,814 10 years $ 7.90 190,374 $ 7.94
$10.01-$15.00 1,522,690 9 years $14.18 77,810 $13.57
$15.01-$30.00 601,689 9 years $19.80 49,500 $15.72
--------- ----------
6,771,349 9 years $ 7.55 2,858,730 $ 4.51
--------- ----------
--------- ----------
</TABLE>
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PAGE 18
<PAGE>
NOTE 14 -- REPORTING SEGMENTS
The Company operates in a single industry segment. The Company has operations
in the United States, Mexico, Colombia, Canada, the United Kingdom, Germany,
France, and Switzerland.
Identifiable assets of foreign subsidiaries are those assets related to the
operations of those subsidiaries. United States assets consist of all other
operating assets of the Company.
United Foreign
States Subsidiaries Consolidated
------ ------------ ------------
1997
Total net revenue. . . . $144,861 $ 20,227 $165,088
Operating income . . . . $ 21,856 $ 1,017 $ 22,873
Identifiable assets. . . $129,457 $ 4,409 $133,866
1996
Total net revenue. . . . $ 94,381 $ 3,218 $ 97,599
Operating income . . . . $ 4,324 $ 540 $ 4,864
Identifiable assets. . . $ 87,467 $ 1,970 $ 89,437
1995
Total net revenue. . . . $ 65,817 $ -- $ 65,817
Operating income . . . . $ 2,770 $ -- $ 2,770
Identifiable assets. . . $ 65,222 $ -- $ 65,222
NOTE 15 -- MAJOR CLIENTS
The Company's five largest clients in fiscal 1997 accounted for 8 percent,
7 percent, 5 percent, 4 percent, and 3 percent of total revenues, respectively;
in fiscal 1996, the five largest clients accounted for 21 percent, 6 percent,
6 percent, 6 percent, and 5 percent of total revenues, respectively; and in
fiscal 1995, they accounted for 24 percent, 18 percent, 6 percent, 5 percent,
and 4 percent of total revenues, respectively. No clients accounted for
10 percent or more of revenues in fiscal 1997. In fiscal 1996, one client
accounted for 10 percent or more of revenues, and in fiscal 1995, two clients
each accounted for 10 percent or more of revenues.
- -------------------------------------------------------------------------------
PAGE 19
<PAGE>
NOTE 16 -- LEASES
OPERATING LEASES
The Company leases various office facilities under operating leases expiring at
various dates through July 31, 2004. Additionally, the Company leases various
apartments and office equipment under operating leases expiring at various
dates. Rental expense for all operating leases approximated $3,217, $1,442 and
$948 for the years ended May 31, 1997, 1996, and 1995, respectively.
Future minimum rental commitments under noncancelable operating leases with
terms in excess of one year are as follows:
Fiscal Year Amount
----------- ------
1998. . . . . . . . $ 5,511
1999. . . . . . . . 2,449
2000. . . . . . . . 1,295
2001. . . . . . . . 1,135
2002. . . . . . . . 762
Thereafter. . . . . 1,152
-------
. . . . . . . . . . $12,304
-------
-------
CAPITAL LEASES
The Company's capital leases, which are included in computers, furniture, and
equipment, are as follows:
May 31,
--------------
1997 1996
---- ----
Gross portable computers . . . . . . . . . $ -- $ 3,765
Other capitalized equipment. . . . . . . . 101 102
Accumulated depreciation . . . . . . . . . (93) (1,635)
------- -------
$ 8 $ 2,232
------- -------
------- -------
The entire lease obligation related to the capital leases is classified in
current liabilities. Amortization of approximately $61, $1,100 and $400 in
fiscal years 1997, 1996 and 1995, respectively, related to these capital leases
is included in depreciation expense.
- -------------------------------------------------------------------------------
PAGE 20
<PAGE>
NOTE 17 -- LITIGATION
In September 1993, then Company director and vice-chairman Melvyn E. Bergstein
filed a complaint in the Circuit Court of Cook County, Chancery Division,
alleging, among other things, he was wrongfully terminated as an employee. As a
result of this alleged wrongful termination, Mr. Bergstein claimed that
restrictive covenants in his employment agreement were invalid, and that he had
incurred damages as a result of the alleged wrongful termination. On March
12, 1996 the Company and the individual defendants entered into a settlement
agreement with Messrs. Bergstein, Moffitt, and Mikolajczyk. In accordance with
the settlement agreement, all claims, counterclaims and third party claims were
dismissed with prejudice on March 14, 1996.
The Company is party to lawsuits arising out of the normal course of business.
Management believes the final outcome of such litigation will not have a
material adverse effect on the Company's consolidated financial position or
results of operations.
NOTE 18 -- SUBSEQUENT EVENTS
In June 1997, the Company acquired The Bentley Company, Inc., ("Bentley") for a
combination of cash and the Company's common stock. The transaction was
accounted for using the purchase method of accounting and goodwill was recorded
and will be amortized over five years on a straight-line basis beginning in
June 1997. Total consideration paid for Bentley was approximately
$12.7 million. Cash paid for Bentley totaled $7.4 million and the Company also
exchanged 29,535 shares of the Company's common stock for all the issued and
outstanding stock of Bentley. The purchase price may be increased by
approximately $5.8 million if certain performance targets are met over the next
two years. Goodwill recorded was approximately $12.8 million. Bentley is a
Boston-area based firm specializing in business and operations consulting in
the area of customer service and field service and support.
- -------------------------------------------------------------------------------
PAGE 21
<PAGE>
NOTE 19-- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
August 31, November 30, February 28, May 31,
Quarter Ended 1996 1996 1997 1997
- ------------- ---------- ------------ ------------ --------
Revenues $ 32,162 $ 39,521 $ 42,346 $ 51,059
Operating income $ 3,151 $ 5,928 $ 6,003 $ 7,791
Net income $ 2,125 $ 3,746 $ 3,993 $ 5,203
Earnings per share(A) $ 0.09 $ 0.14 $ 0.15 $ 0.19
August 31, November 30, February 29, May 31,
Quarter Ended 1995 1995(B) 1996(C) 1996
- ------------- ---------- ------------ ------------ --------
Revenues $ 20,732 $ 23,300 $ 25,466 $ 28,101
Operating income (loss) $ 1,241 $ (560) $ 552 $ 3,631
Net income $ 1,155 $ 43 $ 768 $ 2,608
Earnings per share(A) $ 0.05 $ 0.01 $ 0.03 $ 0.11
August 31, November 30, February 28, May 31,
Quarter Ended 1994 1994 1995(D) 1995
- ------------- ---------- ------------ ------------ --------
Revenues $ 13,436 $ 15,557 $ 17,215 $ 19,609
Operating income (loss) $ 576 $ 1,128 $ (362) $ 1,428
Net income $ 746 $ 1,107 $ 202 $ 1,312
Earnings per share(A) $ 0.03 $ 0.05 $ 0.02 $ 0.06
- --------------------
(A) All earnings per share data have been restated to reflect the
three-for-two stock splits that were effective on August 1, 1997 and
July 30, 1996, respectively.
(B) Includes a charge of $2.3 million related to shareholder litigation
settlement.
(C) Includes a charge of $0.9 million related to Company founders litigation
settlement.
(D) Includes a charge of $1.6 million related to agreements with former
company executives.
- -------------------------------------------------------------------------------
PAGE 22
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Board of Directors and Stockholders
of Technology Solutions Company
In our opinion, the consolidated financial statements listed in the index
appearing on pages 3-22 of the 1997 Financial Report present fairly, in all
material respects, the financial position of Technology Solutions Company and
its subsidiaries (the "Company") at May 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended May 31, 1997, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
Price Waterhouse LLP
June 25, 1997
Chicago, Illinois
- -------------------------------------------------------------------------------
PAGE 23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FISCAL 1997 COMPARED WITH FISCAL 1996
Consolidated net revenues for the year ended May 31, 1997 increased 69 percent
to $165.1 million in fiscal 1997 compared to $97.6 million in fiscal 1996. The
principal source of the increase was the 52 percent increase in domestic
billable hours, as well as a 2 percent increase in average domestic hourly
billing rates. The increase in billable hours was attributable to the
significant growth in the overall information technology professional services
market combined with the Company's ability to increase the number of its
consulting staff, through both recruiting efforts and business combinations.
The increase in average hourly billing rates was primarily due to the impact of
the fiscal 1997 hiring efforts and the resulting change in the mix of personnel
to include a greater percentage of more senior personnel. Total Company
headcount increased 77 percent to 1102 at the end of fiscal 1997 compared to
622 at the end of fiscal 1996. The total number of project managers increased
to 118 at the end of fiscal 1997 compared to 72 a year earlier. Additionally,
in fiscal 1997, the Company recorded international revenues of $20.2 million
compared to $3.2 million in fiscal 1996.
Project personnel costs, which represent mainly professional salaries and
benefits, increased to $76.5 million in fiscal 1997 compared to $46.7 million
in fiscal 1996, an increase of 64 percent. This increase was due to additional
headcount and was consistent with the higher revenues reported in fiscal 1997.
Project personnel costs as a percentage of net revenues were 46 percent for
fiscal 1997 compared with project personnel costs as a percentage of net
revenues of 48 percent in fiscal 1996. This decrease was primarily the result
of more efficient utilization of professional staff offset in part by the time
lag between incurrence of project personnel costs and revenue generated by
these personnel.
The Company 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, sales and
marketing expenses, personnel training and provisions for valuation allowances
and reserves for potential losses on continuing projects. Other project
expenses for fiscal 1997 were $23.4 million, an increase of 80 percent from
$13.0 million in fiscal 1996. Other project expenses as a percentage of net
revenues increased slightly to 14 percent in fiscal 1997 compared to 13 percent
in the prior year. This change was due to increases in domestic hiring,
training and nonbillable travel expenses of $3.4 million as a result of
increased headcount and business development. In addition, travel related to
various training activities in fiscal 1997 increased compared to fiscal 1996,
as well as an increase in international expenses of $2.8 million. Also
contributing to the change was an addition to the provision for valuation
allowances of $2.7 million due to the increase in accounts receivable, as well
as the inherently higher risks associated with a larger customer base. The
impact of the increase in other project expenses as a percentage of net
revenues was more than offset by the higher utilization of professional staff,
as well as a significant increase in overall net revenues.
Management and administrative support costs increased 42 percent to
$32.1 million in fiscal 1997 compared to $22.6 million in fiscal 1996. The
increase of $9.5 million was primarily attributable to an increase in
international expenses of $6.3 million due to the expansion of foreign
operations;
- -------------------------------------------------------------------------------
PAGE 24
<PAGE>
growth in the regional practice area management; and travel and hiring costs of
$1.7 million, partially offset by various other operating costs. Goodwill
amortization of $0.8 million was recorded due to the purchase of four
businesses in fiscal years 1997 and 1996. During the first nine months of
fiscal 1996, $2.9 million was recorded for the employee retention program. This
program expired in February 1996, and, therefore, no amounts were recorded in
fiscal 1997.
Incentive compensation increased $2.8 million to $9.4 million in fiscal 1997
compared to $6.6 million in fiscal 1996. The increase is due to increased
headcount, at both the consulting staff and the project manager levels, and
Company profitability improvement. The Company expects to continue to accrue
incentive compensation throughout fiscal 1998.
Fiscal 1996 results reflect one-time pretax charges for the final settlement
relating to outstanding securities litigation and litigation involving the
Company's founders of $2.3 million and $0.9 million, respectively. The
securities litigation settlement called for a final payment of $4.6 million, of
which $2.3 million was covered by insurance and the remaining $2.3 million was
charged to fiscal 1996 operations.
Investment income in fiscal 1997, net of interest expense, was $2.1 million
compared to $1.9 million in fiscal 1996.
The Company's effective tax rate for fiscal 1997 was 39.7 percent compared to
32.4 percent in fiscal 1996. The increase in the effective tax rate was the
result of the reduction in the percentage of the Company's income coming from
nontaxable investment income in fiscal 1997. Management believes that the
existing levels of pretax earnings for financial reporting purposes will be
sufficient to generate the minimum amount of future taxable income necessary to
realize the deferred tax asset.
The increase in common and common equivalent shares outstanding was primarily
due to the exercise of stock options and the impact of the increase in the
Company's stock price on the calculation of common equivalent shares.
FISCAL 1996 COMPARED WITH FISCAL 1995
Consolidated net revenues for the Company increased 48 percent to $97.6 million
compared to $65.8 million in fiscal 1995. The principal source of the increase
was a 42 percent increase in billable hours, as well as a 2 percent increase in
average hourly billing rates. The increase in billable hours was attributable
to the significant growth in the information technology professional services
market combined with the Company's fiscal 1996 increase in consulting staff and
marketing efforts. The increase in average hourly billing rates was primarily
due to the impact of fiscal 1996 hiring and the resulting change in the mix of
personnel to include a greater percentage of more senior personnel. During
fiscal 1996 total Company headcount increased 47 percent from 423 as of
May 31, 1995 to 622 as of May 31, 1996. The total number of project managers as
of May 31, 1996 was 72 compared to 38 as of May 31, 1995.
Project personnel costs increased to $46.7 million in fiscal 1996 from
$29.2 million in fiscal 1995. Project personnel costs as a percentage of net
revenues were approximately 48 percent and 44 percent in fiscal 1996 and fiscal
1995, respectively. Unassigned labor costs increased during
- -------------------------------------------------------------------------------
PAGE 25
<PAGE>
fiscal 1996 due to the aggressive recruitment and training programs combined
with the timing of the assignment of new staff to client engagements.
Other project expenses for fiscal 1996 were $13.0 million, as compared to
$9.0 million for fiscal 1995. This increase was primarily related to an
increase in hiring, training and related expenses of $1.7 million and an
increase in non-billable travel expenses of $3.3 million in fiscal 1996 as
compared to fiscal 1995. The increase in non-billable travel expenses was
primarily due to travel expenses associated with increased headcount and
business development travel, as well as travel related to training activities
in fiscal 1996 as compared to fiscal 1995.
Management and administrative support costs increased to $22.6 million in
fiscal 1996 from $18.5 million in fiscal 1995. The increase of $4.1 million in
fiscal 1996 as compared to fiscal 1995 was related primarily to increased
regional practice area management costs (salaries, travel and hiring costs) of
$2.1 million and increased marketing costs of $1.4 million. During fiscal 1995,
the Company established three new practice areas, enhanced its marketing
capabilities and, in fiscal 1996, added several new regional practice area
management Vice Presidents. In addition, charges for legal expenses increased
$1.5 million in fiscal 1996 as compared to fiscal 1995. Also included in fiscal
1996 costs were $0.9 million in management and administrative costs from the
Company's Mexican subsidiary. Expense accrued for the employee retention
program was $2.9 million and $4.4 million for fiscal 1996 and 1995,
respectively. The 1996 amount represents the final charge related to the
retention program. The final annual payment for the retention program was made
in March 1996.
Fiscal 1996 results reflect one-time pretax charges for the final settlement
relating to outstanding securities litigation and litigation involving the
Company's founders of $2.3 million and $0.9 million, respectively. The
securities litigation settlement called for a final payment of $4.6 million, of
which $2.3 million was covered by insurance and the remaining $2.3 million was
charged to fiscal 1996 operations.
During fiscal 1995, the Company entered into agreements with former Company
executives resulting in a fiscal 1995 pretax charge of $1.6 million. This
amount represented the settlement of a commission arrangement, certain other
issues and the surrender of options to acquire 1,811,250 shares of Company
stock.
Incentive compensation of $6.6 million was accrued for fiscal 1996 as compared
to $4.7 million in fiscal 1995. The increase was due largely to the increased
number of project managers and consultant staff in fiscal 1996 compared to
fiscal 1995.
Investment income, net of interest expense, was $1.9 million for both fiscal
years 1996 and 1995.
The Company's effective tax rate differs from the statutory rate primarily due
to the significant percentage of total income resulting from federally
nontaxable investment income.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $9.7 million in fiscal 1997, an
increase of $10.6 million compared to net cash used in operating activities of
$(0.9) million in fiscal 1996.
- -------------------------------------------------------------------------------
PAGE 26
<PAGE>
Operating cash flow in fiscal 1997 was favorably impacted by higher net income
as a result of increased operating activities partially offset by increased
working capital requirements, especially the increase in net receivables of
$21.5 million. The increase in receivables is due to the significant growth of
the Company compared to the prior year, as well as the lengthening of
collection periods. The Company has classified a $3.8 million trade receivable
as long-term at May 31, 1997.
Cash generated by operations in fiscal 1997 was substantial and more than
adequate for the Company's cash needs. In addition, the Company's significant
amount of cash, cash equivalents and marketable securities has provided ample
liquidity to handle the Company's cash requirements.
Net cash used in investing activities in fiscal years 1997, 1996 and 1995 was
$2.5 million, $2.1 million and $1.1 million, respectively.
Proceeds from the sale of available-for-sale securities of $1.3 million were
used to purchase similar securities of $1.0 million. Proceeds of $8.9 million
were received by the Company due to the maturity of several held-to-maturity
investments in fiscal 1997. These proceeds were reinvested in working capital
requirements and expansion of the business.
Capital expenditures in fiscal years 1997, 1996 and 1995 were $6.1 million,
$3.7 million and $2.1 million, respectively. Capital expenditures are expected
to continue at the current rate in fiscal 1998 due to the Company's anticipated
expansion and growth. The Company expects that its future capital expenditures
will be financed through cash flows from operating activities. At the end of
fiscal 1997, the Company had no material commitments for capital expenditures.
Net cash outlays related to business acquisitions were $1.1 million in fiscal
1997 and $3.1 million in fiscal 1996.
Net cash provided by (used in) financing activities were $8.3 million,
$8.4 million and $(5.1) million in fiscal years 1997, 1996 and 1995,
respectively. The proceeds from the exercise of options with respect to
1.7 million shares of the Company's common stock generated $6.4 million in
fiscal 1997, a decrease from the $9.1 million generated in fiscal 1996 from the
exercise of options with respect to 2.4 million shares of the Company's common
stock. Increased participation and activity in the Employee Stock Purchase Plan
resulted in $1.8 million of proceeds in fiscal 1997 versus $0.4 million in
fiscal 1996.
Management anticipates that cash and marketable securities will be used for
general corporate purposes, including capital expenditures and the expansion of
the Company's business as opportunities arise, including the possibility of
additional acquisitions and business combinations. Subsequent to the end of
fiscal 1997, the Company acquired The Bentley Company, Inc. ("Bentley") for a
combination of cash and the Company's common stock. The transaction was
accounted for using the purchase method of accounting. Total consideration paid
for Bentley was approximately $12.7 million. Cash paid for Bentley totaled
$7.4 million and the Company also exchanged 29,535 shares of common stock of
the Company for all the issued and outstanding shares of Bentley and assumed
the employee stock options outstanding under
- -------------------------------------------------------------------------------
PAGE 27
<PAGE>
Bentley's stock option plan. The purchase price may be increased by
approximately $5.8 million if certain performance targets are met over the next
two years.
The Company has a $5.0 million unsecured line of credit facility (the
"Facility") with Bank of America Illinois. The agreement expires September
5, 1997. At the Company's election, loans made under the Facility bear interest
at either the Bank of America Illinois reference rate or at the Eurodollar rate
plus 0.75 percent. The unused line fee is 0.25 percent of the unused portion of
the commitment. The Facility requires, among other things, the Company to
maintain certain financial ratios. As of May 31, 1997, the Company was in
compliance with these financial ratio requirements. As of May 31, 1997, no
borrowings were made under the Facility. The Company intends to renew the
Facility upon its expiration.
All share and per share data have been adjusted to reflect the Company's
three-for-two stock splits effected as a 50 percent stock dividend effective
August 1, 1997 and July 30, 1996, respectively.
IMPACT OF INFLATION AND BACKLOG
Inflation should not have a significant impact on the Company's income to the
extent the Company is able to raise its consulting rates commensurate with its
staff compensation rates, which it has done successfully in the past. Because
the majority of the Company's contracts may be terminated on relatively short
notice, the Company does not consider backlog to be meaningful.
ACCOUNTING CHANGES
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
123, "Accounting for Stock-Based Compensation," as of May 31, 1997 and
implemented the disclosure provisions of this statement. While this statement
encourages companies to recognize expense for stock options at estimated fair
value based on an option pricing model, the Company has elected to disclose
proforma net income and earnings per share that would have been obtained under
this statement's approach for valuing and expensing stock options.
The Financial Accounting Standards Board ("FASB") issued SFAS No. 128,
"Earnings Per Share," in February 1997. This statement establishes new
standards for computing and presenting earnings per share. This statement is
effective for financial statements issued for periods ending after December
15, 1997; earlier adoption is not permitted. Adoption of this statement will
require the presentation of basic and diluted earnings per share. If the
statement had been adopted, proforma basic and diluted earnings per share for
the years ended May 31, 1997, 1996 and 1995 would have been as follows:
Year Ended
May 31,
-------------------
1997 1996 1995
---- ---- ----
Basic earnings per share $0.64 $0.22 $0.17
Diluted earnings per share $0.57 $0.19 $0.14
- -------------------------------------------------------------------------------
PAGE 28
<PAGE>
The FASB has issued SFAS No. 130, "Reporting Comprehensive Income," in June
1997. In addition to net income, comprehensive income includes items recorded
directly to stockholders' equity such as the income tax benefit related to the
exercise of certain stock options. This statement establishes new standards for
reporting and displaying comprehensive income and its components in a full set
of general-purpose financial statements. This statement is effective for fiscal
years beginning after December 15, 1997. Adoption of this standard will only
require additional financial statement disclosure detailing the Company's
comprehensive income.
In June 1997, the FASB also issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 establishes new standards
for reporting information about operating segments in interim and annual
financial statements. This statement is also effective for fiscal years
beginning after December 15, 1997. The Company is currently evaluating the
impact, if any, this statement will have on disclosures in the consolidated
financial statements.
ASSUMPTIONS UNDERLYING CERTAIN FORWARD-LOOKING STATEMENTS AND FACTORS THAT MAY
AFFECT FUTURE RESULTS
In the next few years, the Company expects growth in both revenues and profits
to continue at rates higher than the estimated industry growth rate of
16-20 percent (source: Dataquest, 1996) although not at the exceptional rates
posted in fiscal 1997 and fiscal 1996. The foregoing statement contains, and
other information and statements provided by the Company from time to time may
contain, "forward-looking information." Such forward-looking information may
include information relating to anticipated growth in earnings per share,
anticipated returns on equity, anticipated growth in revenue, growth of client
base, anticipated operating costs and employment growth, anticipated reserves
or other expenses, or other matters. The cautionary statements provided below
are being made pursuant to the provisions of the Private Securities Litigation
Reform Act of 1995 (the "PSLRA") and with the intention of obtaining the
benefits of the "safe harbor" provisions of the PSLRA for any such
forward-looking information. Many of the following factors discussed below, as
well as other factors, have also been discussed in prior filings made by the
Company.
Factors which could cause the Company's actual financial and other results to
differ materially from any results that might be projected, forecast, estimated
or budgeted by the Company in the forward-looking statements include, but are
not limited to the following:
RAPID TECHNOLOGICAL CHANGE
The systems consulting and implementation market has experienced rapid
technological advances and developments in recent years. Failure of the Company
to stay abreast of such advances and developments could materially adversely
affect its business. The Company additionally utilizes a number of different
technologies in developing and providing IT solutions for its customers. The
technologies used by the Company are developing rapidly and are characterized
by evolving industry standards in a wide variety of areas. While the Company
evaluates technologies on an ongoing basis and endeavors to utilize those that
are most effective in developing IT solutions for its customers, there can be
no assurance that the technologies utilized by the Company and the expertise
gained in those technologies will continue to be applicable in the future.
There can be no assurance that new technologies will be made available to the
Company or that such technologies
- -------------------------------------------------------------------------------
PAGE 29
<PAGE>
can be economically applied by the Company. The inability to apply existing
technologies and expertise to subsequent projects could have a material adverse
effect on the Company's business, operating results and financial condition.
MANAGEMENT OF GROWTH
The Company's business has grown significantly since its inception, and the
Company anticipates future growth. The growth of the Company's business and the
expansion of its customer base have resulted in a corresponding growth in the
demands on the Company's management and personnel and its operating systems and
internal controls. Any future growth may further strain existing management
resources and operational, financial, human and management information systems
and controls, which may not be adequate to support the Company's operations.
The Company is currently increasing its expense levels as a result of a number
of factors, including substantial increases in the number of employees, the
opening of new offices, investments in equipment, training of employees and the
development of methodologies, tools, etc. An unexpected decline in revenues
without a corresponding and timely reduction in staffing and other expenses, or
a staffing increase that is not accompanied by a corresponding increase in
revenues, could have a material adverse effect on the Company's operating
results. There can be no assurance that the Company will be able to manage its
recent or future growth successfully. In addition, there can be no assurance
that the Company will continue to grow or sustain the rate of growth it has
experienced in the past.
The Company expects that it will need to develop further its financial and
management controls, reporting systems and procedures to accommodate future
growth. There can be no assurance that the Company will be able to develop such
controls, systems or procedures effectively or on a timely basis, and the
failure to do so would have a material adverse effect on the Company's
business, operating results and financial condition.
ABILITY TO ATTRACT AND RETAIN EMPLOYEES
The Company's business consists mainly of professional services and is
inherently labor intensive. The Company's success depends in large part upon
its ability to attract, retain and motivate highly skilled employees,
particularly senior project managers and other senior personnel, for its
domestic and international operations. Qualified senior project managers within
and outside the United States are in particularly great demand and are likely
to remain a limited resource for the foreseeable future. Several attributes of
the Company's work environment pose challenges to the Company's ability to
attract and retain employees, including, (i) extensive travel requirements,
(ii) the Company's intense work environment and culture, (iii) the Company's
standards for employee technical skills and job performance and (iv) the
Company's practice of adjusting the number of technical personnel to reflect
active project levels. Although the Company expects to continue to attract
sufficient numbers of highly skilled employees and to retain its existing
senior project managers and other senior personnel for the foreseeable future,
there can be no assurance that the Company will be able to do so. Failure to
attract and retain key personnel could have a material adverse effect upon the
Company's business, operating results and financial condition.
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PAGE 30
<PAGE>
GROWTH BY ACQUISITION
The Company may grow in part by acquiring existing businesses. The success of
this plan depends upon, among other things, the ability of the Company and its
management to integrate acquired personnel, operations, products and
technologies into its organization effectively, to retain and motivate key
personnel of acquired businesses and to retain customers of acquired firms.
There can be no assurance that the Company will be able to identify suitable
acquisition opportunities, consummate acquisitions or successfully integrate
acquired personnel and operations into the Company. In addition, acquisitions
by the Company may involve certain other risks, including potentially dilutive
issuances of equity securities and the diversion of management's attention from
other business concerns.
DEPENDENCE ON KEY PERSONNEL
Although the Company does not believe that the loss of any particular
individual would have a material adverse impact on the Company, the loss of
some or all of the Company's senior managers could have a material adverse
impact on the Company, including its ability to secure and complete
engagements. The Company has employment agreements with its President,
Executive Vice Presidents and its Vice Presidents that contain noncompetition,
nondisclosure and nonsolicitation covenants. The employment agreements with the
President and Executive Vice Presidents do not have fixed expiration dates and
may be terminated by either the Company or the employee on 90 days' written
notice. The employment agreements with the other Vice Presidents generally have
a fixed initial term but are automatically renewed for successively one-year
periods unless terminated by either the Company or the employee on 90 days'
written notice. Other senior employees also have employment agreements that are
generally terminable by the Company or the employee upon 30 to 90 days' written
notice.
UNASSIGNED LABOR COSTS
The Company's unassigned labor costs, which represent salaries of, and other
expenses allocated to, systems professionals not assigned to a specific
project, have gradually increased as a percentage of revenues over time. The
Company attempts to reassign employees who meet its performance requirements to
other active projects when they are no longer needed on a particular project.
However, since the Company generally recruits personnel in advance of the
commencement of certain projects in order to meet the needs of such projects,
any cancellation or delays in the anticipated projects could increase the
unassigned labor costs and might cause a material adverse effect upon the
Company's business, operating results and financial condition.
CYCLICALITY
Certain of the Company's customers and potential customers are in industries
that experience cyclical variations in profitability, which may in turn affect
their willingness or ability to fund systems projects such as those for which
the Company may be engaged. The Company's experience indicates, however, that
competitive pressures in cyclical industries sometimes compel businesses to
undertake systems projects even during periods of losses or reduced
profitability.
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PAGE 31
<PAGE>
QUARTERLY RESULTS MAY FLUCTUATE
The Company's results may fluctuate from quarter to quarter as a result of
various factors such as differences in the number of billing days and/or
holidays between quarters, the number of vacation days and sick days taken by
the Company's employees in a particular quarter, and varying weather
conditions. These and other factors can reduce revenues in a given quarter with
a corresponding adverse impact on the Company's margins.
PROJECT RISKS
Because of the project based nature of the Company's work and the fact that
many of the projects undertaken by the Company are large projects, there is a
risk of a material adverse impact on operating results because of the
unanticipated suspension or cancellation of a large project or the financial
difficulties of a client. The suspension or cancellation of a project or the
financial difficulties of a client could result in a drop in revenues, the need
to reassign staff, a potential dispute with a client regarding monies owed for
consulting work and expenses, and a lessening of TSC's reputation.
In addition, because many of the Company's projects are high profile, mission
critical projects for major clients, a failure or inability to meet a client's
expectations with respect to a major project undertaken by the Company could
damage its reputation and affect its ability to attract new business. Third
party products and services are integral to the success of certain Company
projects. To the extent that third parties do not deliver effective products
and services on a timely basis, the Company's project results could be
negatively impacted. Although the Company attempts to limit this risk in its
engagement arrangements with clients and maintains errors and omissions
insurance, the failure of a project could also result in significant financial
exposure to the Company.
COMPETITION
The systems consulting and implementation market comprises a large number of
participants, is subject to rapid changes and is highly competitive. The
Company competes with and faces potential competition from a number of
companies that have significantly greater financial, technical and marketing
resources and greater name recognition than the Company. The Company also
competes with smaller service providers whose specific, more narrowly focused
service offerings may be more attractive to potential clients than the
Company's multi-dimensional approach. The Company's clients primarily consist
of Fortune 1000 and other large corporations and there are an increasing number
of professional services firms seeking systems consulting and implementation
engagements from that client base. The Company believes that its ability to
compete depends in part on a number of factors outside its control, including
the ability of its competitors to hire, retain and motivate a significant
number of senior project managers, the ownership by competitors of software
used by potential clients, the development by others of software that is
competitive with the Company's products and services, and the price at which
others offer comparable services.
In addition, the Company's clients could develop or acquire in-house expertise
in services similar to those provided by the Company, which would significantly
reduce demand for the Company's services. No assurance can be given that the
Company will be able to maintain its existing client
- -------------------------------------------------------------------------------
PAGE 32
<PAGE>
base, maintain or increase the level of revenue generated by its existing
clients or be able to attract new clients.
SUSCEPTIBILITY TO GENERAL ECONOMIC CONDITIONS
The Company's revenues and results of operations will be subject to
fluctuations based on the general economic conditions of the United States as
well as the foreign countries in which it operates. If there were to be a
general economic downturn or a recession in the United States or the foreign
countries in which it operates, then the Company expects that business
enterprises would cut back their spending on, or reduce their budget for, IT
services. In the event of such an economic downturn, there can be no assurance
that the Company's business, operating results and financial condition would
not be materially and adversely affected.
COST OVERRUNS
Although the Company's engagement contracts are generally on a time and
materials basis, some of its contracts are on a "not-to-exceed" or fixed-price
basis. The failure of the Company to complete a project to the client's
satisfaction within the "not-to-exceed" or fixed fee exposes the Company to
unrecoverable cost overruns, which could have a materially adverse effect on
the Company's business, results of operations and financial condition.
INTELLECTUAL PROPERTY RIGHTS
A majority of the Company's customers have required the Company, as a condition
to performing services for such customers, to grant to the customer all
proprietary and intellectual property rights with respect to the work product
resulting from the performance of such services, including the intellectual
property rights to any custom software developed by the Company for such
customer. Each such grant of proprietary and intellectual property rights would
limit the Company's ability to reuse work product components and work product
solutions with other customers. In a limited number of such situations, the
Company has obtained, and in the future may attempt to obtain, ownership
interest or a license from its customer to permit the Company to market custom
software for the joint benefit of the customer and the Company. Such
arrangements may be nonexclusive or exclusive, and licensors to the Company may
retain the right to sell products and services that compete with those of the
Company. There can be no assurance, however, that the Company will be able to
negotiate licenses upon terms acceptable to the Company.
The Company also develops certain foundation and application software tools and
products that are owned by the Company and licensed to its clients. The Company
regards such software as proprietary and protects its rights in such software
where appropriate with copyrights, trademarks, trade secret laws and
contractual restrictions on disclosure and transferring title. To date, the
Company has not filed any applications for the registration of patents or
copyrights on any of its software, although the Company does presently hold
certain registered trademarks for some of its software products. There can be
no assurance that any such steps taken by the Company in this regard will be
adequate to deter misappropriation of its proprietary rights or independent
third party development of functionally equivalent products.
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PAGE 33
<PAGE>
In addition, the Company's success is dependent upon its specialized expertise
and methodologies. To protect such proprietary information, the Company relies
upon a combination of trade secret and common laws, employee nondisclosure
policies and third party confidentiality agreements. However, there can be no
assurance that any such steps taken by the Company in this regard will be
adequate to deter misappropriation of its specialized expertise and
methodologies.
Although the Company believes that its services and products do not infringe on
the intellectual property rights of others, there can be no assurance that such
a claim will not be asserted against the Company in the future.
RISKS OF CONDUCTING INTERNATIONAL OPERATIONS
The Company has been significantly increasing its international operations in
recent years and expects to continue to do so in the future. Because the cost
of doing business abroad is higher for U.S. businesses than the cost of doing
business domestically, the Company could experience a decline in its operating
margins as the significance of its international operations increases.
International operations and the provision of services in foreign markets are
subject to a number of special risks, including currency exchange rate
fluctuations, trade barriers, exchange controls, national and regional labor
strikes, political risks, additional security concerns and risks of increases
in duties, taxes and governmental royalties, as well as changes in laws and
policies governing operations of foreign-based companies. In addition, the
Company's continued success and future growth internationally will depend upon
its ability to attract, develop and retain a sufficient number of highly
skilled, motivated local professional employees in each of those foreign
countries where it conducts operations. Competition for such local personnel
qualified to deliver most of the Company's services is intense, and there can
be no assurance that the Company will be able to recruit, develop and retain a
sufficient number of highly skilled, motivated local professionals to compete
successfully internationally.
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PAGE 34
<PAGE>
FIVE-YEAR FINANCIAL SUMMARY
<TABLE>
<CAPTION>
Year Ended May 31 1997 1996 1995 1994 1993
(In thousands, except per share data)
- ---------------------------------------------------------------------------------------------------------------------
OPERATING RESULTS
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues:
Professional fees $164,238 $ 97,004 $ 65,704 $ 52,521 $62,030
Software and hardware products 850 595 113 636 445
-------- -------- --------- -------- -------
165,088 97,599 65,817 53,157 62,475
-------- -------- --------- -------- -------
Costs and Expenses:
Project personnel 76,508 46,744 29,204 24,509 26,071
Other project expenses 23,374 13,010 8,991 5,137 6,083
Cost of products sold 54 476 110 618 557
Nonrecurring manufacturing practice costs -- -- -- -- 9,222
Nonrecurring other costs -- -- -- -- 805
Management and administrative support 32,074 22,605 18,501 22,297 11,761
Goodwill amortization 811 -- -- -- --
Shareholder litigation settlement -- 2,345 -- -- --
Company founders litigation settlement -- 944 -- -- --
Former company executive settlements -- -- 1,590 -- --
Incentive compensation 9,394 6,611 4,651 3,738 969
-------- -------- --------- -------- -------
142,215 92,735 63,047 56,299 55,468
-------- -------- --------- -------- -------
Operating Income (loss) 22,873 4,864 2,770 (3,142) 7,007
-------- -------- --------- -------- -------
Other Income 2,104 1,904 1,930 2,331 1,958
-------- -------- --------- -------- -------
Income (Loss) Before Income Taxes 24,977 6,768 4,700 (811) 8,965
Income Tax Provision (Benefit) 9,910 2,194 1,333 (846) 3,259
-------- -------- --------- -------- -------
Net Income $ 15,067 $ 4,574 $ 3,367 $ 35 $ 5,706
-------- -------- --------- -------- -------
-------- -------- --------- -------- -------
Earnings Per Common Share $ 0.57 $ 0.20 $ 0.16 $ 0.00 $ 0.21
-------- -------- --------- -------- -------
-------- -------- --------- -------- -------
Weighted Average Number of
Common and Common Equivalent
Shares Outstanding 26,579 24,213 24,169 23,287 28,901
-------- -------- --------- -------- -------
-------- -------- --------- -------- -------
FINANCIAL POSITION
- -----------------------------------------------------------------------------------------------------------------------
Total assets $133,866 $ 89,437 $ 65,222 $ 69,340 $76,048
Fixed assets, net $ 6,416 $ 4,443 $ 3,083 $ 2,687 $ 3,001
Working capital $ 79,595 $ 41,176 $ 24,349 $ 26,598 $41,603
Stockholders' equity $105,787 $ 70,029 $ 51,726 $ 54,100 $68,049
</TABLE>
- ---------------------
1993-1997 share data have been restated to reflect the three-for-two stock
splits effective on July 30, 1996, and August 1, 1997, respectively.
- -------------------------------------------------------------------------------
PAGE 35
<PAGE>
SELECTED INFORMATION ON TSC STOCK
The Company's Common Stock is listed on The Nasdaq Stock MarketSM under the
symbol "TSCC." As of August 11, 1997, there were approximately 675 holders of
record of the Company's Common Stock. The number of holders of Common Stock
does not include beneficial owners of Common Stock whose shares are held in the
name of banks, brokers, nominees or other fiduciaries.
The following table sets forth the range of high and low trade prices on The
Nasdaq Stock MarketSM for the Company's Common Stock for each quarter in fiscal
1996 and fiscal 1997.
Quarter Ended High Low
------------- ---- ---
August 31, 1995 $ 7.500 $ 4.055
November 30, 1995 $ 8.389 $ 6.555
February 29, 1996 $10.833 $ 7.278
May 31, 1996 $16.000 $10.222
August 31, 1996 $19.750 $12.583
November 30, 1996 $31.417 $18.667
February 28, 1997 $30.333 $19.750
May 31, 1997 $28.667 $14.250
On August 11, 1997, the last reported sale price on The Nasdaq Stock MarketSM
for the Company's Common Stock was $25.00.
The market price for the Common Stock may be significantly affected by factors
such as the announcement of new products or services by the Company or its
competitors, technological innovation by the Company, its competitors or other
vendors, quarterly variations in the Company's operating results or the
operating results of the Company's competitors, general conditions in the
Company's and its customers' markets, changes in the earnings estimates by
analysts or reported results that vary materially from such estimates. In
addition, the stock market has experienced significant price fluctuations that
have particularly affected the market prices of equity securities of many high
technology and emerging growth companies and that often have been unrelated to
the operating performance of such companies. These broad market fluctuations
may materially and adversely affect the market price of the Company's Common
Stock. Following periods of volatility in the market price of a company's
securities, securities class action litigation has often been instituted
against such a company and its officers and directors. Any such litigation
against the Company could result in substantial costs and a diversion of
management's attention and resources, which could have a material adverse
effect on the Company's business, operating results and financial condition.
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PAGE 36
<PAGE>
In connection with the Company's pooling-of-interest combination with HRM
Resources, Inc. on March 1, 1997, the Company issued 561,039 unregistered shares
of Common Stock in reliance on Section 4(2) of the Securities Act of 1933. In
connection with the acquisition and merger of Goalsetters, Inc. into TSC on
September 30, 1996, the Company issued 6,427 unregistered shares of Common Stock
in reliance on Section 4(2) of the Securities Act of 1933.
The Company has never paid dividends on its Common Stock and currently intends
to retain all earnings, if any, for use in the expansion of its business and
other corporate purposes. Therefore, the Company does not anticipate paying any
dividends on its Common Stock in the foreseeable future. The declaration and
payment of dividends by the Company are subject to the discretion of the Board
of Directors.
All per share data have been adjusted to reflect the Company's three-for-two
stock splits effected as a 50 percent stock dividend effective July 30, 1996,
and August 1, 1997, respectively.
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PAGE 37
<PAGE>
OTHER INFORMATION
TRANSFER AGENT AND REGISTRAR
ChaseMellon Shareholder Services
East Hartford, CT
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
Chicago, IL
STOCKHOLDER AND 10-K INFORMATION
Financial inquiries should be directed to Martin T. Johnson, Senior Vice
President and Chief Financial Officer, Technology Solutions Company, 205 North
Michigan Avenue, Suite 1500, Chicago, Illinois 60601. Telephone (312) 228-4500.
A complimentary copy of the Company's Annual Report on Form 10-K filed with the
Securities and Exchange Commission will be provided upon request.
ANNUAL MEETING
The annual stockholders meeting has been scheduled for October 9, 1997, in
Chicago, Illinois, for stockholders of record on August 19, 1997.
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PAGE 38
<PAGE>
PROXY
TECHNOLOGY SOLUTIONS COMPANY
ANNUAL MEETING OF STOCKHOLDERS TO BE HELD OCTOBER 9, 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned stockholder of Technology Solutions Company (the
"Company") does hereby acknowledge receipt of Notice of said Annual Meeting
and the accompanying Proxy Statement, and does hereby constitute and appoint
William H. Waltrip and John T. Kohler or either of them, with full power of
substitution, to vote all shares of stock of the Company that the undersigned
is entitled to vote, as fully as the undersigned could do if personally
present, at the Annual Meeting of Stockholders of the Company to be held on
October 9, 1997 at 10:00 a.m., Local Time, at the offices of Bank of America
Illinois, 231 S. LaSalle Street, Chicago, Illinois, and at any adjournment
thereof, as indicated on the reverse side.
(Please date and sign on reverse side)
- -------------------------------------------------------------------------------
^FOLD AND DETACH HERE^
<PAGE>
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED BY THE
UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR
THE TWO NOMINEES LISTED IN PROPOSAL 1, AND FOR THE PROPOSAL TO RATIFY THE
APPOINTMENT OF PRICE WATERHOUSE LLP. PLEASE MARK BOX / / OR /X/.
<TABLE>
<S> <C> <C> <C> <C>
1. The election of Class III Directors: INSTRUCTIONS: To withhold authority to vote 2. Proposal to ratify the appointment of
for any individual nominee, strike that Price Waterhouse LLP as independent
FOR all WITHHOLD nominee's name from the names listed below. accountants for the Company for the
nominees AUTHORITY fiscal year ending May 31, 1998.
listed for all nominees John R. Purcell and William H. Waltrip
listed FOR AGAINST ABSTAIN
/ / / / / / / / / /
3. As such proxies may in their discretion determine upon such other THIS PROXY SHALL BE VOTED IN ACCORDANCE WITH THE
matters as may properly come before the meeting. INSTRUCTIONS GIVEN AND, IN THE ABSENCE OF SUCH
INSTRUCTIONS, SHALL BE VOTED FOR THE NOMINEES
LISTED ABOVE AND IN FAVOR OF PROPOSALS 2 AND 3.
IF OTHER BUSINESS IS PRESENTED AT SAID MEETINGS.
THIS PROXY SHALL BE VOTED ON THOSE MATTERS IN
ACCORDANCE WITH THE BEST JUDGMENT OF THE NAMED
PROXIES.
You are urged to mark, sign, date and return
your proxy without delay in the return envelope
provided for that purpose, which requires no
postage if mailed in the United States.
------
| When signing the proxy, please take care to
| have the signature conform to the stockholder's
| name as it appears on this side of the proxy.
If shares are registered in the names of two
or more persons, each person should sign.
Executors, administrators, trustees and
guardians should so indicate when signing.
Corporations and partnerships should sign in
their full corporate or partnership names by
a duly authorized person.
Dated: __________________________________, 1997
_______________________________________________
Signature
_______________________________________________
Signature if held jointly
- ----------------------------------------------------------------------------------------------------------------------------------
^FOLD AND DETACH HERE^
</TABLE>
