<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
----------------
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED AUGUST 31, 1997
COMMISSION FILE NUMBER 0-19433
[LOGO]
TECHNOLOGY SOLUTIONS COMPANY
INCORPORATED IN THE STATE OF DELAWARE
EMPLOYER IDENTIFICATION NO. 36-3584201
205 NORTH MICHIGAN AVENUE
SUITE 1500
CHICAGO, ILLINOIS 60601
(312) 228-4500
TSC (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS, AND (2) HAS BEEN
SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.
AS OF OCTOBER 8, 1997, THERE WERE OUTSTANDING 25,828,720 SHARES OF TSC COMMON
STOCK, PAR VALUE $.01.
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TECHNOLOGY SOLUTIONS COMPANY
INDEX TO FORM 10-Q
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PART I
PAGE
NUMBER
------
FINANCIAL INFORMATION (UNAUDITED)
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of
August 31, 1997 and May 31, 1997. . . . . . . . . . . . . . . . . .3
Consolidated Statements of Income
for the Three Months Ended August 31, 1997 and 1996 . . . . . . . .4
Consolidated Statements of Cash Flows
for the Three Months Ended August 31, 1997 and 1996 . . . . . . . .5
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . .6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . 10
PART II
OTHER INFORMATION
Item 6. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
EXHIBIT INDEX. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
EXHIBIT 11--Statement Re Computation of Per Share Earnings . . . . . . 17
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PART I. FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS
TECHNOLOGY SOLUTIONS COMPANY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
ASSETS
------
August 31, May 31,
1997 1997
-------- --------
(unaudited)
CURRENT ASSETS:
Cash and cash equivalents. . . . . . . . . . . . . $ 20,931 $ 27,951
Marketable securities. . . . . . . . . . . . . . . 19,036 15,988
Receivables, less allowance for doubtful receivables
of $4,164 and $3,346. . . . . . . . . . . . . . 55,120 43,907
Refundable income taxes. . . . . . . . . . . . . . 77 1,398
Deferred income taxes. . . . . . . . . . . . . . . 8,700 7,234
Other current assets . . . . . . . . . . . . . . . 11,732 11,196
--------- ---------
Total current assets. . . . . . . . . . . . . . 115,596 107,674
COMPUTERS, FURNITURE AND EQUIPMENT, NET. . . . . . . 7,443 6,416
LONG-TERM INVESTMENTS. . . . . . . . . . . . . . . . 5,831 8,118
COST IN EXCESS OF NET ASSETS OF ACQUIRED
BUSINESSES AND OTHER INTANGIBLES . . . . . . . . . 16,229 3,521
LONG-TERM RECEIVABLES AND OTHER. . . . . . . . . . . 7,663 8,137
--------- ---------
Total assets. . . . . . . . . . . . . . . . . . $ 152,762 $ 133,866
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable . . . . . . . . . . . . . . . . . $ 1,004 $ 1,604
Accrued compensation and related costs . . . . . . 13,529 17,001
Capitalized lease obligations. . . . . . . . . . . 294 240
Deferred compensation. . . . . . . . . . . . . . . 10,708 6,842
Other current liabilities. . . . . . . . . . . . . 4,953 2,392
--------- ---------
Total current liabilities . . . . . . . . . . . 30,488 28,079
--------- ---------
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 -- 26,855,247 . . . . 269 269
Capital in excess of par value . . . . . . . . . . 71,982 61,958
Retained earnings. . . . . . . . . . . . . . . . . 55,586 51,627
Unrealized holding loss. . . . . . . . . . . . . . (361) (319)
Cumulative translation adjustment. . . . . . . . . (458) (318)
--------- ---------
127,018 113,217
Less: Treasury Stock, at cost (1,352,814 and
2,123,660 shares) . . . . . . . . . . . . . (4,744) (7,430)
--------- ---------
Total stockholders' equity. . . . . . . . . . 122,274 105,787
--------- ---------
Total liabilities and stockholders' equity . . . . $152,762 $133,866
--------- ---------
--------- ---------
The accompanying Notes to Consolidated Financial Statements are an integral part
of this financial information.
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TECHNOLOGY SOLUTIONS COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
For the Three Months
Ended August 31,
----------------
1997 1996
---- ----
(unaudited)
REVENUES:
Professional fees. . . . . . . . . . . . . . . . . . $60,358 $31,815
Software and hardware products . . . . . . . . . . . 49 347
------- -------
60,407 32,162
------- -------
COSTS AND EXPENSES:
Project personnel. . . . . . . . . . . . . . . . . . 28,151 16,077
Other project expenses . . . . . . . . . . . . . . . 9,194 4,793
Cost of products sold. . . . . . . . . . . . . . . . -- 54
Management and administrative support. . . . . . . . 11,845 5,611
Goodwill amortization. . . . . . . . . . . . . . . . 877 72
Incentive compensation . . . . . . . . . . . . . . . 3,650 2,404
------- -------
53,717 29,011
------- -------
OPERATING INCOME . . . . . . . . . . . . . . . . . . . 6,690 3,151
------- -------
OTHER INCOME (EXPENSE):
Net investment income. . . . . . . . . . . . . . . . 383 520
Interest expense . . . . . . . . . . . . . . . . . . (9) (57)
------- -------
374 463
------- -------
INCOME BEFORE INCOME TAXES . . . . . . . . . . . . . . 7,064 3,614
INCOME TAX PROVISION . . . . . . . . . . . . . . . . . 3,105 1,489
------- -------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . $ 3,959 $ 2,125
------- -------
------- -------
EARNINGS PER COMMON SHARE. . . . . . . . . . . . . . . $ 0.14 $ 0.09
------- -------
------- -------
WEIGHTED AVERAGE NUMBER OF COMMON
AND COMMON EQUIVALENT SHARES OUTSTANDING . . . . . . 27,976 25,800
------- -------
------- -------
The accompanying Notes to Consolidated Financial Statements are an integral part
of this financial information.
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TECHNOLOGY SOLUTIONS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
For the
Three Months Ended
August 31,
-------------------
1997 1996
---- ----
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,959 $ 2,125
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . . 1,582 725
Provisions for receivable valuation allowances and
reserves for possible losses. . . . . . . . . . . . . . . . . . 910 706
(Gain) on sale of investments. . . . . . . . . . . . . . . . . . (37) --
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . 2,538 (626)
Changes in assets and liabilities:
Receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . (9,512) (6,126)
Purchases of trading securities related to deferred
compensation program. . . . . . . . . . . . . . . . . . . . . . (3,866) (1,999)
Refundable income taxes. . . . . . . . . . . . . . . . . . . . . 1,320 1,768
Other current assets . . . . . . . . . . . . . . . . . . . . . . (508) (572)
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . (1,382) 392
Accrued compensation and related costs . . . . . . . . . . . . . (3,494) (4,031)
Deferred compensation funds from employees . . . . . . . . . . . 3,866 1,999
Other current liabilities. . . . . . . . . . . . . . . . . . . . 66 519
------- -------
Net cash used in operating activities . . . . . . . . . . . . . (4,558) (5,120)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from available-for-sale securities . . . . . . . . . . . . 1,000 --
Proceeds from held-to-maturity investments. . . . . . . . . . . . . 2,290 3,020
Capital expenditures. . . . . . . . . . . . . . . . . . . . . . . . (1,201) (438)
Net assets of acquired businesses and other intangibles . . . . . . (7,360) (332)
Long-term receivables and other . . . . . . . . . . . . . . . . . . (1,047) 122
Capitalized lease obligation. . . . . . . . . . . . . . . . . . . . 54 (226)
------- -------
Net cash (used in) provided by investing activities . . . . . . (6,264) 2,146
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options . . . . . . . . . . . . . . 3,528 2,119
Proceeds from employee stock purchase plan. . . . . . . . . . . . . 655 279
------- -------
Net cash provided by financing activities . . . . . . . . . . . 4,183 2,398
------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS. . . . . . . . . . . . . . . . . . . . . . . . (381) --
------- -------
DECREASE IN CASH AND CASH EQUIVALENTS. . . . . . . . . . . . . . . . (7,020) (576)
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,951 12,990
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD . . . . . . . . . . . . . . $20,931 $12,414
------- -------
------- -------
The accompanying Notes to Consolidated Financial Statements are an integral part of this financial information.
</TABLE>
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TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 1--BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Technology
Solutions Company and its subsidiaries ("the Company"). The consolidated
financial statements of income for the three months ended August 31, 1997 and
August 31, 1996, the consolidated balance sheet as of August 31, 1997 and the
consolidated statements of cash flows for the three months ended August 31, 1997
and August 31, 1996 have been prepared by the Company without audit. In the
opinion of management, these financial statements include all adjustments
necessary to present fairly the financial position, results of operations and
cash flows as of August 31, 1997 and for all periods presented. All adjustments
made have been of a normal recurring nature. Certain information and footnote
disclosure normally included in the financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted.
The Company believes that the disclosures included are adequate and provide a
fair presentation of interim period results. Interim financial statements are
not necessarily indicative of financial position or operating results for an
entire year. It is suggested that these interim financial statements be read in
conjunction with the audited financial statements and the notes thereto included
in the Company's Annual Report on Form 10-K for the fiscal year ended May 31,
1997 filed with the Securities and Exchange Commission on August 25, 1997.
Certain previously reported amounts have been reclassified to conform with the
current period presentation, specifically the restate-ment of earnings per
common share and weighted average number of common and common shares outstanding
to reflect the three-for-two stock splits effected as a 50 percent stock
dividend effective August 1, 1997 and July 30, 1996, respectively.
NOTE 2--THE COMPANY
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 3--SUMMARY OF SIGNIFI-CANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION--The accompanying consolidated financial statements
include the accounts of Technology Solutions Company and 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--system integration
services and consulting. The Company recognizes revenue on contracts as work is
performed primarily based on hourly billing rates. Out-of-pocket expenses are
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TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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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 Com-pany'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 are classified as trading
securities, with unrealized gains and losses included in net investment income.
Realized gains or losses are determined on the specific identification method.
COMPUTERS, FURNITURE AND EQUIPMENT--Computers, furniture and equipment are
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.
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 period presented, including common share
equivalents arising from the
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TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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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 end-of-period exchange rates.
Income and expense items are translated at average exchange rates prevailing
during the period. 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.
NEW ACCOUNTING STANDARDS--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 quarter ended August 31, 1997 and 1996 would have been as follows:
Three Months Ended
August 31,
------------------
1997 1996
---- ----
Basic earnings per share $0.16 $0.09
Diluted earnings per share $0.14 $0.09
INCOME TAXES--The Company files its federal and state income tax returns on a
calendar year basis. The current income tax provision represents the Company's
federal, 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
period 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.
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.
NOTE 4--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,
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TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- --------------------------------------------------------------------------------
common stock has been increased and capital in excess of par has been decreased
by $90.
NOTE 5--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.
During the first quarter of fiscal 1998, the Company authorized the grant to
employees, pursuant to the 1996 Plan, of options to purchase 1.4 million shares
of the Company's common stock.
As of August 31, 1997, options to purchase 7.4 million shares of common stock
were outstanding and options to purchase an additional 1.9 million shares of
common stock were available for grant under the 1996 Plan.
NOTE 6--ACQUISITION OF THE BENTLEY COMPANY, INC.
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 June
1997. Total consideration recorded 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 and assumed the employee stock options outstanding under 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. Goodwill
recorded was approximately $12.8 million. Bentley is a Boston-area based firm
specializing in business and operations consulting and software package
integration in the area of customer service and field service and support.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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TECHNOLOGY SOLUTIONS COMPANY
RESULTS OF OPERATIONS
THREE MONTHS ENDED AUGUST 31, 1997 COMPARED WITH THREE MONTHS ENDED AUGUST 31,
1996
The amounts shown in this Form 10-Q filing for earnings per share and common and
common equivalent shares outstanding are different from the amounts indicated in
the earnings release dated September 25, 1997 due to the recalculation of the
number of stock options outstanding after the Company's August 1, 1997 stock
split. The impact of this recalculation was to reduce earnings per share by
$0.007. The recalculated earnings per share are $0.14 and the number of common
and common equivalent shares outstanding are 27,975,688.
Consolidated net revenues for the first quarter ended August 31, 1997 increased
88 percent to $60.4 million compared with $32.2 million for the same period last
fiscal year. The principal source of the increase was a 53 percent increase in
domestic billable hours, and, to a lesser extent, a slight increase in domestic
hourly billing rates. The increase in billable hours was attributable to the
significant growth in the overall 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. Also
contributing to higher revenues is the increase in the Company's sales and
marketing efforts. Total Company headcount increased 82 percent to 1,312 at the
end of the fiscal 1998 first quarter compared to 719 at the end of the fiscal
1997 first quarter. The total number of project managers increased to 127 at the
end of this quarter compared to 88 a year earlier. Additionally, the Company
recorded international revenues of $9.2 million in the first quarter of fiscal
1998 compared to $5.0 million for the same period last year. This increase is
due to the increased demand for consulting and systems integration services
outside the United States, as well as the Company's continued expansion of the
business into international markets.
First quarter project personnel costs, which represent mainly professional
salaries and benefits, increased to $28.2 million in fiscal 1998 from $16.1
million in fiscal 1997, an increase of 75 percent. The increase was due to
additional headcount and was consistent with the higher revenues reported in the
fiscal 1998 first quarter. Project personnel costs as a percentage of net
revenues were 47 percent for the first quarter of fiscal 1998 compared with
project personnel costs as a percentage of net revenues of 50 percent in the
comparable period of fiscal 1997. 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 the 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
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potential losses on continuing projects. Other project expenses for the first
quarter of fiscal 1998 increased $4.4 million to $9.2 million compared with $4.8
million during the first quarter of fiscal 1997. Other project expenses as a
percentage of net revenues, however, remained unchanged between years at 15
percent.
Management and administrative support costs increased $6.2 million to $11.8
million in the first quarter of fiscal 1998 from $5.6 million in the first
quarter of fiscal 1997. This increase was primarily attributable to the costs
associated with the expansion of the business and increased headcount levels.
Infrastructure costs increased $2.0 million from the first quarter of fiscal
1997 due primarily to the opening and expansion of domestic and international
facilities and increased internal systems and communications costs. Also
contributing to increased management and administrative costs is higher
recruiting expenses of $0.4 million due to the expansion of the Company's
internal recruiting organization. Management costs associated with the Company's
domestic and international practice areas increased $2.6 million primarily as a
result of the growth of existing practice areas, addition of new practice areas
and associated regional management, as well as increased sales and marketing
efforts. Goodwill amortization increased to $0.9 million in the first quarter of
fiscal 1998 compared to $0.1 million in the first quarter of fiscal 1997
primarily due to the purchase of Bentley, for which $0.6 million of goodwill
amortization was recorded in the first quarter. Also contributing, to a lesser
extent, was the goodwill amortization of several other smaller businesses
purchased in fiscal years 1997 and 1996.
Incentive compensation increased to $3.6 million in the first quarter of fiscal
1998 compared to $2.4 million for the same period last year. The increase is due
to increased headcount, at both the consulting staff and the project manager
levels, and the Company profitability improvement. The Company expects to
continue to accrue incentive compensation throughout fiscal 1998.
Investment income in the fiscal 1998 first quarter was $0.4 million compared to
$0.5 million a year earlier.
The Company's effective tax rate for the first quarter of fiscal 1998 was 44.0
percent compared to 41.2 percent in the first quarter of fiscal 1997. The
increase in the effective tax rate in the fiscal 1998 first quarter was the
result of the reduction in the percentage of the Company's income coming from
nontaxable investment income, increased non-deductible expenses for U.S. tax
purposes, and increased foreign earnings in higher tax rate jurisdictions
compared to the same period last year. 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
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stock price on the calculation of common equivalent shares.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $4.6 million in the first quarter of
fiscal 1998 compared to net cash used in operating activities of $5.1 million in
the first quarter of fiscal 1997. Operating cash flow in this quarter was
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 $9.5 million due to the significant growth of
the Company's quarterly revenues compared to the same period last year. Other
working capital requirements included the payment of employee bonuses in the
fiscal 1998 first quarter of $9.5 million and the decrease in accounts payable.
The employee bonus payments relate to fiscal 1997 and are generally paid by the
Company on an annual basis during the first quarter following the end of the
fiscal year. The decrease in accounts payable is due mainly to the timing of the
payments.
The Company's significant amount of cash, cash equivalents and marketable
securities has provided ample liquidity to handle the Company's cash
requirements.
Cash used in investing activities was $6.3 million in the first quarter of
fiscal 1998 compared to net cash provided by investing activities of $2.1
million for the same period last year. Proceeds from the sale of
available-for-sale securities were $1.0 million and proceeds of $2.3 million
were received by the Company due to the maturity of several held-to-maturity
investments in the first quarter of fiscal 1998. These proceeds were reinvested
in working capital requirements and the expansion of the business.
Capital expenditures in the first quarter of fiscal 1998 were $1.2 million.
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. The Company currently has no material commitments for
capital expenditures.
Net cash outlays related to business acquisitions were $7.4 million due to the
first quarter acquisition of 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 recorded for Bentley was approximately $12.7
million. In addition to cash, the Company 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 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,
1998. At the Company's election, loans made under
- --------------------------------------------------------------------------------
Page 12
<PAGE>
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 August 31, 1997,
the Company was in compliance with these financial ratio requirements. As of
August 31, 1997, no borrowings were made under the Facility.
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.
NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standards ("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.
ANY FORWARD-LOOKING STATEMENTS INCLUDED IN THIS FORM 10-Q REFLECT MANAGEMENT'S
BEST JUDGMENT BASED ON FACTORS CURRENTLY KNOWN, INVOLVE RISKS AND UNCERTAINTIES
INCLUDING THE SUCCESSFUL COMPLETION OF CLIENT PROJECTS AND THE DEVELOPMENT OF
NEW CONSULTING SERVICES AND GEOGRAPHIC MARKETS, THE SUCCESSFUL INTEGRATION OF
THE OPERATIONS OF RECENTLY ACQUIRED BUSINESSES AND BUSINESS COMBINATIONS, AND
OTHER RISKS DETAILED IN THE COMPANY'S REPORT ON FORM 10-K FOR THE YEAR ENDED MAY
31, 1997, UNDER MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS' "ASSUMPTIONS UNDERLYING CERTAIN FORWARD-LOOKING
STATEMENTS AND FACTORS THAT MAY AFFECT FUTURE RESULTS" AND ELSEWHERE FROM TIME
TO TIME IN THE COMPANY'S OTHER SEC REPORTS. ACTUAL RESULTS MAY VARY MATERIALLY.
- --------------------------------------------------------------------------------
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<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
PART II. OTHER INFORMATION
- --------------------------------------------------------------------------------
ITEM 6 -- EXHIBITS AND REPORT ON FORM 8-K
(a) Exhibits
Exhibit 11
(b) During the quarter ended August 31, 1997, TSC filed one report on
Form 8-K
The report on Form 8-K was dated July 2, 1997. This report contained
information reported under Item 7 related to summary financial
information for the fiscal year and fourth quarter ended May 31, 1997
and information related to TSC's Board of Directors approval of a 50
percent stock dividend distributed on August 1, 1997.
All other items in Part II are either not applicable to the Company during
the quarter ended August 31, 1997, the answer is negative, or a response
has been previously reported and an additional report of the information
need not be made, pursuant to the instructions to Part II.
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Page 14
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on the 14th day of October
1997.
TECHNOLOGY SOLUTIONS COMPANY
Date: October 14, 1997 By: /s/ Martin T. Johnson
-------------------- -----------------------------------
Martin T. Johnson
Chief Financial Officer
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Page 15
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
EXHIBIT INDEX
Exhibit Paper (P) or
Number Description Electronic (E)
- ------- ----------- --------------
11 Statement re Computation of Per Share Earnings (E)
27 Financial Data Schedule (E)
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Page 16
<PAGE>
EXHIBIT 11
TECHNOLOGY SOLUTIONS COMPANY
STATEMENT RE COMPUTATION
OF PER SHARE EARNINGS
(In thousands, except earnings per share)
For the
Three Months Ended
August 31, (A)
-------------------
1997 1996
---- ----
(unaudited)
Net income per statements of income. . . . . . . $ 3,959 $ 2,125
Earnings resulting from modified treasury
stock method . . . . . . . . . . . . . . . . . -- 35
-------- --------
Net earnings per modified treasury
stock method. . . . . . . . . . . . . . . $ 3,959 $ 2,160
-------- --------
-------- --------
Shares:
Weighted average shares outstanding. . . . . 25,181 22,572
Common stock equivalents . . . . . . . . . . 2,795 3,228
-------- --------
Total. . . . . . . . . . . . . . . . . . . . 27,976 25,800
-------- --------
-------- --------
Earnings per share . . . . . . . . . . . . . . $ 0.14 $ 0.09
-------- --------
-------- --------
(A) Share data and 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.
- --------------------------------------------------------------------------------
PAGE 17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> AUG-31-1997
<EXCHANGE-RATE> 1
<CASH> 20,931
<SECURITIES> 19,036
<RECEIVABLES> 59,284
<ALLOWANCES> 4,164
<INVENTORY> 0
<CURRENT-ASSETS> 115,596
<PP&E> 14,953
<DEPRECIATION> 7,510
<TOTAL-ASSETS> 152,762
<CURRENT-LIABILITIES> 30,488
<BONDS> 0
0
0
<COMMON> 269
<OTHER-SE> 122,005
<TOTAL-LIABILITY-AND-EQUITY> 152,762
<SALES> 49
<TOTAL-REVENUES> 60,407
<CGS> 0
<TOTAL-COSTS> 52,807
<OTHER-EXPENSES> (383)
<LOSS-PROVISION> 910
<INTEREST-EXPENSE> 9
<INCOME-PRETAX> 7,064
<INCOME-TAX> 3,105
<INCOME-CONTINUING> 3,959
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,959
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