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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, 1998
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 6, 1998, there were outstanding 40,803,660
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, 1998 and May 31, 1998 3
Consolidated Statements of Income
for the Three Months Ended August 31, 1998 and 1997 4
Consolidated Statements of Cash Flows
for the Three Months Ended August 31, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11
Part II
OTHER INFORMATION
Item 6 18
SIGNATURES 19
EXHIBIT INDEX 20
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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,
1998 1998
-------- -------
(unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 39,802 $ 38,458
Marketable securities 30,847 27,973
Receivables, less allowance
for doubtful receivables of $4,039 and $3,246 77,911 72,114
Deferred income taxes 7,892 7,448
Other current assets 15,229 12,750
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Total current assets 171,681 158,743
COMPUTERS, FURNITURE AND EQUIPMENT, NET 9,765 9,515
LONG-TERM INVESTMENTS -- 1,200
COST IN EXCESS OF NET ASSETS OF ACQUIRED
BUSINESSES AND OTHER INTANGIBLES 16,893 13,535
LONG-TERM RECEIVABLES AND OTHER 12,705 14,155
-------- --------
Total assets $211,044 $197,148
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 3,349 $ 1,931
Accrued compensation and related costs 18,551 20,982
Capitalized lease obligations -- 79
Deferred compensation 15,633 13,566
Other current liabilities 6,615 4,784
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Total current liabilities 44,148 41,342
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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 - 40,454,906 405 403
Capital in excess of par value 89,627 85,089
Retained earnings 78,023 72,463
Unrealized holding gain/(loss) 26 (42)
Cumulative translation adjustment (1,185) (1,209)
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166,896 156,704
Less: Treasury Stock, at
cost (0 and 381,186 shares) -- (898)
-------- --------
Total stockholders' equity 166,896 155,806
-------- --------
Total liabilities and stockholders' equity $211,044 $197,148
======== ========
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,
------------------
1998 1997
------- --------
(unaudited)
REVENUES:
Professional fees $85,561 $60,358
Software and hardware products 8 49
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85,569 60,407
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COSTS AND EXPENSES:
Project personnel 39,296 28,151
Other project expenses 13,219 9,194
Management and administrative support 17,765 11,845
Goodwill amortization 1,120 877
Incentive compensation 5,238 3,650
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76,638 53,717
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OPERATING INCOME 8,931 6,690
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OTHER INCOME (EXPENSE):
Net investment income 779 383
Interest expense (29) (9)
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750 374
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INCOME BEFORE INCOME TAXES 9,681 7,064
INCOME TAX PROVISION 4,121 3,105
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NET INCOME $ 5,560 $ 3,959
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EARNINGS PER COMMON SHARE $ 0.14 $ 0.11
======= =======
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 40,212 37,772
======= =======
EARNINGS PER COMMON SHARE
ASSUMING DILUTION $ 0.13 $ 0.09
======= =======
WEIGHTED AVERAGE NUMBER OF COMMON
AND COMMON EQUIVALENT SHARES OUTSTANDING 43,536 41,964
======= =======
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)
For the
Three Months Ended
August 31,
-------------------
1998 1997
------- ------
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,560 $ 3,959
Adjustments to reconcile net income to net
cash from operating activities:
Depreciation and amortization 2,741 1,582
Provisions for receivable valuation allowances
and reserves for possible losses 1,103 910
Loss (gain) on sale of investments 18 (37)
Deferred income taxes (428) (1,451)
Changes in assets and liabilities:
Receivables (7,020) (9,512)
Purchases of trading securities related
to defered compensation program (2,067) (3,866)
Refundable income taxes -- 1,320
Other current assets (399) (508)
Accounts payable 1,436 (1,382)
Accrued compensation and related costs (2,408) (3,494)
Deferred compensation funds from employees 2,067 3,866
Other current liabilities 4,487 4,055
Other assets (572) (1,047)
----- -----
Net cash provided by (used in)
operating activities 4,518 (5,605)
----- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of available-for-sale securities (1,725) --
Proceeds from available-for-sale securities 1,235 1,000
Proceeds from held-to-maturity investments 1,200 2,290
Capital expenditures, net (1,291) (1,201)
Net assets of acquired businesses
and other investments (5,467) (7,360)
Capitalized lease obligation (79) 54
----- -----
Net cash used in investing activities (6,127) (5,217)
----- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 1,515 3,528
Proceeds from employee stock purchase plan 1,208 655
----- -----
Net cash provided by financing activities 2,723 4,183
----- -----
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS 230 (381)
----- -----
INCREASE (DECREASE)IN CASH AND CASH EQUIVALENTS 1,344 (7,020)
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD 38,458 27,951
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $39,802 $20,931
======= =======
The accompanying Notes to Consolidated Financial Statements are an
integral part of this financial information.
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TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
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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 statements of income for the three
months ended August 31, 1998 and 1997, the consolidated balance
sheet as of August 31, 1998 and the consolidated statements of
cash flows for the three months ended August 31, 1998 and 1997
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, 1998 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, 1998 filed
with the United States Securities and Exchange Commission (SEC)
on August 28, 1998.
Certain previously reported amounts have been reclassified to
conform with the current period presentation, including the
restatement of earnings per common share, earnings per common
share assuming dilution, weighted average number of common shares
outstanding, and weighted average number of common and common
equivalent shares outstanding, to reflect all of the Company's
prior stock splits, including the three-for-two stock split
effected as a 50 percent stock dividend effective August 10,
1998.
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 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 (IT), strategic business and
management consulting, systems integration, programming, and
packaged software integration and implementation services. The
Company operates in one industry segment - providing IT and
strategic business consulting services to major companies. The
Company recognizes revenue on contracts as work is performed
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TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
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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
are classified as trading securities, with unrealized gains and
losses included in the Company's consolidated statements of
income. Realized gains or losses are determined on the specific
identification method.
COMPUTERS, FURNITURE AND EQUIPMENT-Computers, furniture and
equipment are carried at cost 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.
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 the consolidated statements of income.
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TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
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FAIR VALUE OF FINANCIAL INSTRUMENTS-The carrying values of
current assets and liabilities and long-term receivables
approximated their fair values at August 31, 1998 and May 31,
1998. Investments pertaining to a minor investment in a company
for which fair value is not readily available is believed to
approximate its carrying amount.
STOCK-BASED COMPENSATION-The Company accounts for stock-based
compensation using the intrinsic value method prescribed in
Accounting Principles Board (APB) Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations.
Accordingly, the Company recognizes no compensation expense for
its fixed stock option plan or employee stock purchase plan.
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 year and the
basis 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.
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TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
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NOTE 4-EARNINGS PER COMMON SHARE
The Company adopted SFAS No. 128, "Earnings Per Share," as of
February 28, 1998. The Company discloses basic and diluted
earnings per share in the consolidated statements of income under
the provisions of SFAS No. 128. Earnings per common share
assuming dilution is computed by dividing net income by the
weighted average number of common shares outstanding during each
period presented, including common equivalent shares arising from
the assumed exercise of stock options, where appropriate.
Earnings per common share is computed by dividing net income by
the weighted average number of common shares outstanding during
each period presented. All share and per share amounts have been
adjusted to reflect all of the Company's prior stock splits,
including the three-for-two stock split effective August 10,
1998.
Reconciliation of Basic and Diluted EPS
----------------------------------------------
August 31, 1998 August 31, 1997
--------------------- --------------------
Per Per
Net Common Net Common
Income Shares Share Income Shares Share
------ ------ ----- ------ ------ -----
Basic EPS $5,560 40,212 $0.14 $3,959 37,772 $0.11
===== =====
Effect of
Stock Options -- 3,324 -- 4,192
------ ------ ------ ------
Diluted EPS $5,560 43,536 $0.13 $3,959 41,964 $0.09
====== ====== ===== ====== ====== =====
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TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
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NOTE 5-STOCK OPTIONS
As of August 31, 1998, options to purchase 10.3 million shares of
common stock were outstanding and options to purchase an
additional 1.5 million shares of common stock were available for
grant under the Technology Solutions Company 1996 Stock Incentive
Plan.
NOTE 6-COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board (FASB)
issued SFAS No. 130, "Reporting Comprehensive Income." 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 and requires
reclassification of prior period financial statements. The
Company's comprehensive income consists of net income, foreign
currency translation adjustments and unrealized holding gains
(losses) of available-for-sale securities. Total comprehensive
income for the three months ended August 31, 1998 and 1997, was
$5,652 and $3,777, respectively. Foreign currency translation
adjustments, net of tax, amounted to $24 and $(140) for the three
months ended August 31, 1998 and August 31, 1997, respectively.
Unrealized holding gains (losses) of available-for-sale
securities amounted to $68 and $(42) for the three months ended
August 31, 1998 and August 31, 1997, respectively.
NOTE 7-SUBSEQUENT EVENT
On October 1, 1998, at the Company's Annual Meeting of
Stockholders, stockholders approved an increase in the authorized
number of shares of Common Stock of the Company from 50,000,000
shares to 100,000,000 shares.
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TECHNOLOGY SOLUTIONS COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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RESULTS OF OPERATIONS
Three Months Ended August 31, 1998 Compared With Three Months
Ended August 31, 1997
Consolidated net revenues for the quarter ended August 31, 1998
increased 42 percent to $85.6 million compared with $60.4 million
for the same period last fiscal year. The increase resulted from
domestic revenue growth of 53 percent, partially offset by a
decrease in international revenue of 22 percent due to the
completion of several projects. The source of the domestic
revenue growth is the continued strong demand for the Company's
technology and business consulting services. The Company's
ability to generate this additional revenue is also due to the
Company's increased consulting staff from heightened recruiting
efforts and the additional staff that joined the Company in
previously reported business combinations. The additional hours
billed by the increased consulting staff, combined with a five
percent increase in domestic billing rates, were the primary
factors in revenue growth compared to the same period a year ago.
Project personnel costs for the quarter ended August 31, 1998,
which represent mainly professional salaries and benefits,
increased to $39.3 million from $28.2 million for the same period
last fiscal year, an increase of 40 percent. The increase was
primarily due to a 28 percent increase in professional headcount
and was consistent with the higher revenues reported in the first
quarter of fiscal 1999. Project personnel costs as a percentage
of net revenues decreased slightly to 46 percent in the first
quarter of fiscal 1999 from 47 percent for the same period last
fiscal year.
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 the first quarter of fiscal 1999 were
$13.2 million, compared with $9.2 million in the comparable
period of fiscal 1998, an increase of $4.0 million, or 44
percent. The increase in other project expenses includes:
increases in domestic hiring, training and nonbillable travel
expenses of $1.4 million as a result of increased headcount and
business development; an increase in domestic practice area
selling costs of $1.0 million; an increase in other practice area
development costs of $0.2 million; and international growth of
$0.6 million. Other project expenses as a percentage of net
revenues remained unchanged between years at 15 percent.
Management and administrative support costs increased
$5.9 million to $17.7 million for the quarter ended August 31,
1998 from $11.8 million for the quarter ended August 31, 1997, an
increase of 50 percent. Approximately $2.9 million of this
increase was attributable to the investment made in
infrastructure over the last year, which was necessary to support
the growth in business. The increase in infrastructure costs
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TECHNOLOGY SOLUTIONS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
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versus the same period last year include: increased expenses in
the internal systems and human resources areas of $1.9 million;
higher expenses of $0.8 million related to the expansion of the
Company's corporate recruiting organization; and higher marketing
expenses of $0.2 million as a result of increased corporate
marketing efforts. The Company also incurred an additional $3.0
million of management and administrative costs associated
primarily with increased regional management and practice area
support personnel. These costs primarily include additional
domestic regional management and practice area support personnel
of $0.8 million; practice area support related to acquisitions of
$0.4 million; international growth of $0.2 million; and various
other management and administrative expenses of $1.6 million
which include items such as practice area marketing, recruiting,
sales and other expenses.
Goodwill amortization increased to $1.1 million for the quarter
ended August 31, 1998 compared to $0.9 million for the quarter
ended August 31, 1997 from the incremental goodwill due to the
earn-out payments for The Bentley Company, Inc., (Bentley) and
Aspen Consultancy Ltd.
Incentive compensation of $5.2 million was accrued for the
quarter ended August 31, 1998 compared to $3.6 million for the
same period last year. The increase is due to increased
headcount, at both the consulting staff and the project manager
levels, as well as the Company's improved profitability. The
Company expects to continue to accrue incentive compensation
throughout fiscal 1999.
Net investment income in the first quarter of fiscal 1998 was
$0.7 million compared to $0.4 million for the same period a year
ago. The increase is a result of higher cash and cash equivalent
balances for the first quarter of fiscal 1999 compared to the
same period a year ago.
The Company's effective tax rate for the quarter ended August 31,
1998 was 43 percent compared to 44 percent for the quarter ended
August 31, 1997. The decrease in the effective tax rate in the
first quarter of fiscal 1999 is a result of the change in foreign
earnings.
Weighted average number of common shares and weighted average
number of common and common equivalent shares outstanding
increased primarily due to the exercise of stock options and the
issuance of shares under the Company's employee stock purchase
plan.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $4.5 million for
the quarter ended August 31, 1998 compared to net cash used in
operating activities of $5.6 million in the comparable period of
fiscal 1997. Operating cash flow was favorably impacted by higher
net income and other favorable working capital activities which
were partially offset by an increase in net receivables of $7.0
million due to the growth of the Company's revenues.
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TECHNOLOGY SOLUTIONS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
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The Company's significant amount of cash, cash equivalents and
marketable securities has provided ample liquidity to handle the
Company's current cash requirements.
Net cash used in investing activities was $6.1 million for the
quarter ended August 31, 1998 compared to net cash used in
investing activities of $5.2 million for the same period last
year. The Company purchased $1.7 million of available-for-sale
securities and received $1.2 million from the sale of available-
for-sale securities. The Company, due to the maturity of several
held-to-maturity investments, received proceeds of $1.2 million
for the quarter ended August 31, 1998. The proceeds were
transferred to cash and cash equivalents and reinvested in
ongoing business activities and other equity investments.
Capital expenditures for the quarter ended August 31, 1998 were
$1.3 million. Capital expenditures may continue at the current
rate throughout fiscal 1999 due to the Company's anticipated
growth. The Company currently has no material commitments for
capital expenditures.
Net cash outlays related to business acquisitions and investments
were $5.5 million for the quarter ended August 31, 1998.
The net cash outlay related to business acquisitions was
primarily due to a $3.0 million earn-out payment made in the
first quarter of fiscal 1999 for the acquisition of Bentley
in June 1997. Bentley was acquired for a
combination of cash and the Company's common stock. The
transaction was accounted for using the purchase method of
accounting. Total consideration originally recorded for Bentley
was approximately $12.7 million. The initial cash paid for
Bentley totaled $7.4 million in the first quarter of fiscal 1998,
and the Company also exchanged 44,303 shares of the Company's
common stock for all the issued and outstanding stock of Bentley
and replaced the employee stock options outstanding under
Bentley's stock option plan with the Company's stock options.
Net cash outlays due to business acquisitions also included a
$1.5 million earn-out payment made in the first quarter of fiscal
1999 related to the acquisition of Aspen Consultancy Ltd., which
was originally acquired in May 1996. In addition, a $1.0 million
minority investment was made in NexCen Technologies, Inc. to
develop multimedia, customer call center software.
The Company has a $5.0 million unsecured line of credit facility
(the "Facility") with Bank of America Illinois. The agreement
expires October 4, 1999. At the Company's election, loans made
under the Facility bear interest at either the Bank of America
Illinois reference rate or a Eurodollar loan at the applicable
Eurodollar interest rate plus 0.75 percent. The unused line fee
is 0.125 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, 1998, the Company was
in compliance with these financial ratio requirements. As of
August 31, 1998, no borrowings had been made under the Facility.
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TECHNOLOGY SOLUTIONS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
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NEW ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." This
statement establishes new standards for reporting information
about operating segments and is effective for fiscal years
beginning after December 15, 1997.
On June 15, 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 is
effective for financial statements issued for periods ending
after June 15, 1999. SFAS No. 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives are recorded each period
in current earnings or other comprehensive income, depending on
whether a derivative is designated as part of a hedge transaction
and, if it is, the type of hedge transaction. The Company
anticipates that, due to its limited use of derivative
instruments, the adoption of SFAS No. 133 will not have a
significant effect on the Company's results of operations or its
financial position.
Other Matters
The Year 2000 issue concerns the possibility that computer
programs with date-sensitive software may recognize a date using
"00" as the year 1900, as opposed to the year 2000, because the
programs were written using two digits rather than four to define
the applicable year. This could result in a system failure or
miscalculations causing disruptions of operations such as, among
others, a temporary inability to process transactions, send
invoices, or engage in similar normal business activities.
The Company has conducted an assessment of its computer
information systems and is in the process of determining the
nature and extent of the work required, if any, to make its
internal systems Year 2000 compliant. The Company's internal
systems can be grouped in two principal categories, its
accounting and human resources software on the one hand, and
legacy systems that perform a variety of processes on the other.
With respect to the suite of software products licensed by the
Company and relied upon in the administration of accounting and
human resources functions, which was licensed by the Company in
the first quarter of its 1997 fiscal year, the licensor has
indicated that the version currently employed by the Company
will, at a minimum, need to have patches applied in order for the
software package to be Year 2000 compliant. The Company intends
to apply the presently available patches for this purpose in the
near-term, and plans also to apply future patches to address the
Year 2000 issue as they are made available. Based on currently
available information, the Company believes the expense
associated with these efforts will be immaterial. The Company
expects that updates and enhancements to this software package
will be installed and operational prior to January 1, 2000, and
intends to seek assurances from the licensor to the effect that
these updates and enhancements will result in the software
package becoming Year 2000 compliant. The Company expects to
receive these updates and enhancements pursuant to a software
support services agreement presently in place with the licensor,
an agreement which the Company does not currently intend to
terminate. Provided that the licensor gives such assurances
concerning the updates and enhancements to its software product
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<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
- -----------------------------------------------------------------------
suite, the Company does not expect that it will incur additional
expense aside from the cost of the software support services
agreement in order to bring its accounting and human resources
software package into Year 2000 compliance.
Other important internal business processes of the Company, such
as time and expense reporting and labor distribution, are
performed by legacy systems that are not Year 2000 compliant. In
accordance with previously established plans to integrate these
functions with the accounting and human resources software
described above and to upgrade these systems with the intent of
improving the Company's ability to manage its increasingly
multinational operations, the Company presently plans to replace
these legacy systems in the current fiscal year, both to address
the Year 2000 issue and to attempt to achieve business benefits.
The Company estimates that the cost associated with replacing
these systems will be less than $1.0 million, and has provided
for the replacement of these systems in its operating and capital
budgets for the current fiscal year.
Based on presently available information, the Company believes
that any necessary compliance efforts concerning its internal
systems will not have a material adverse effect on its business,
financial condition, or results of operations. However, if
compliance efforts of which the Company is not currently aware
are required and are not completed on time, or if the cost of any
required updating, modification or replacement of the Company's
information systems exceeds the Company's estimates, the Year
2000 issue could have a material adverse impact on the Company's
business, operating results and financial condition.
In addition to the Company's internal systems, the Company relies
on third party vendors in the conduct of its business. For
example, third party vendors handle the payroll function for the
Company, and the Company also relies on the services of
telecommunication companies, banks, utilities, and commercial
airlines, among others. The Company plans to seek assurances
from its material vendors and suppliers that there will be no
interruption of service as a result of the Year 2000 issue, and
to the extent such assurances are not given, the Company intends
to devise contingency plans to ameliorate the effects on the
conduct of the Company's business in the event the Year 2000
issue results in the unavailability of services. There can be no
assurance that any contingency plans developed by the Company
will prevent any such service interruption on the part of one or
more of the Company's third party suppliers from having a
material adverse effect on the Company's business, operating
results and financial condition. In addition, the failure on the
part of the accounting systems of the Company's clients due to
the Year 2000 issue could result in a delay in the payment of
invoices issued by the Company for services and expenses. A
failure of the accounting systems of a significant number of the
Company's clients would have a material adverse effect on the
Company's business, operating results and financial condition.
The Company has generally refrained from performing Year 2000
remediation services for its clients. It is possible, however,
that former, present and future clients could assert that certain
services performed by the Company from time to time involve or
- -----------------------------------------------------------------------
Page 15
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
- -----------------------------------------------------------------------
are related to the Year 2000 issue. The Company has recommended,
implemented and customized various third-party software packages
for its clients, and to the extent that such software programs
may not be Year 2000 compliant, the Company could be subjected to
claims as a result thereof. Since the Company's inception in
1988, it also has designed and developed software and systems for
its clients. Due to the large number of such engagements
undertaken by the Company over the years, there can be no
assurance that all such software programs and systems will be
Year 2000 compliant, which could also result in the assertion of
claims against the Company.
The Company's policy has been to endeavor to secure provisions in
its client contracts that, among other things, disclaim implied
warranties, limit the duration of the Company's express
warranties, relate the Company's liability to the amount of fees
paid by the client to the Company in connection with the project,
and disclaim any liability arising from third-party software that
is implemented, customized or installed by the Company. There
can be no assurance that the Company will be able to secure
contractual protections in agreements concerning future projects,
or that any contractual protections secured by the Company in
agreements governing pending and completed projects, will
dissuade the other party thereto from asserting claims against
the Company with respect to the Year 2000 issue.
Due to the complexity of the Year 2000 issue, upon any failure of
critical client systems or processes that may be directly or
indirectly connected or related to systems or software designed,
developed, customized or implemented by the Company as described
above, the Company may be subjected to claims regardless of
whether the failure is related to the services provided by the
Company. There can be no assurance that the Company would be able
to establish that it did not cause or contribute to the failure
of a critical client system or process. There also can be no
assurance that the contractual protections, if any, secured by
the Company in connection with any past, present or future
clients will operate to insulate the Company from, or limit the
amount of, any liability arising from claims asserted against the
Company. If asserted, the resolution of such claims (and the
associated defense costs) could have a material adverse effect on
the Company's business, operating results and financial
condition.
- -----------------------------------------------------------------------
Page 16
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
- -----------------------------------------------------------------------
This Form 10-Q includes or may include certain forward-looking
statements that involve risks and uncertainties. This Form 10-Q
contains certain forward-looking statements concerning the
Company's financial position, business strategy, budgets,
projected costs and plans and objectives of management for future
operations as well as other statements including words such as
"anticipate," "believe," "plan," "estimate," "expect," "intend,"
and other similar expressions. Although the Company believes its
expectations reflected in such forward-looking statements are
based on reasonable assumptions, stockholders are cautioned that
no assurance can be given that such expectations will prove
correct and that actual results and developments may differ
materially from those conveyed in such forward-looking
statements. Important factors that could cause actual results to
differ materially from the expectations reflected in the forward-
looking statements in this Form 10-Q include, among others, the
pace of technological change, the Company's ability to manage
growth and attract and retain employees, general business and
economic conditions in the Company's operating regions, and
competitive and other factors, all as more fully described in the
Company's Report on Form 10-K for the year ended May 31, 1998
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. Such forward-looking statements speak only as of the
date on which they are made and the Company does not undertake
any obligation to update any forward-looking statement to reflect
events or circumstances after the date of this Form 10-Q. If the
Company does update or correct one or more forward-looking
statements, investors and others should not conclude that the
Company will make additional updates or corrections with respect
thereto or with respect to other forward-looking statements.
Actual results may vary materially.
- -----------------------------------------------------------------------
Page 17
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
PART II. OTHER INFORMATION
- -----------------------------------------------------------------------
ITEM 6-EXHIBITS AND REPORT ON FORM 8-K
(a) Exhibit
Exhibit 27
(b) One report on Form 8-K was filed during the quarter
ended August 31, 1998.
The Report on Form 8-K was dated June 29, 1998. This report
contained information reported under Item 5 related to the
Company's Board of Directors' approval of a 50 percent stock
dividend distributed on August 10, 1998.
All other items in Part II are either not applicable
to the Company during the quarter ended August 31,
1998, 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.
- -----------------------------------------------------------------------
Page 18
<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 13th day of October 1998.
TECHNOLOGY SOLUTIONS COMPANY
Date: October 13, 1998 By: /s/ TIMOTHY P. DIMOND
---------------- ---------------------
Timothy P. Dimond
Chief Accounting Officer
- -----------------------------------------------------------------------
Page 19
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
27 Financial Data Schedule
- -----------------------------------------------------------------------
Page 20
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-START> JUN-01-1998
<PERIOD-END> AUG-31-1998
<CASH> 39,802
<SECURITIES> 30,847
<RECEIVABLES> 81,950
<ALLOWANCES> 4,039
<INVENTORY> 0
<CURRENT-ASSETS> 171,681
<PP&E> 20,792
<DEPRECIATION> 11,027
<TOTAL-ASSETS> 211,044
<CURRENT-LIABILITIES> 44,148
<BONDS> 0
0
0
<COMMON> 405
<OTHER-SE> 166,491
<TOTAL-LIABILITY-AND-EQUITY> 211,044
<SALES> 8
<TOTAL-REVENUES> 85,569
<CGS> 0
<TOTAL-COSTS> 75,535
<OTHER-EXPENSES> (779)
<LOSS-PROVISION> 1,103
<INTEREST-EXPENSE> 29
<INCOME-PRETAX> 9,681
<INCOME-TAX> 4,121
<INCOME-CONTINUING> 5,560
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,560
<EPS-PRIMARY> 0.14
<EPS-DILUTED> 0.13
</TABLE>
