<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 NOVEMBER 30, 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 JANUARY 7, 1998, THERE WERE OUTSTANDING 26,161,163 SHARES OF TSC
COMMON STOCK, PAR VALUE $.01.
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
INDEX TO FORM 10-Q
- -------------------------------------------------------------------------------
PART I
PAGE
NUMBER
FINANCIAL INFORMATION (UNAUDITED)
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of
November 30, 1997 and May 31, 1997................................ 3
Consolidated Statements of Income
for the Three Months Ended and Six Months Ended
November 30, 1997 and 1996........................................ 4
Consolidated Statements of Cash Flows
for the Six Months Ended November 30, 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 1............................................................. 15
Item 4............................................................. 16
Item 6............................................................. 16
SIGNATURES............................................................ 17
EXHIBIT INDEX......................................................... 18
EXHIBIT 11--Statement Re Computation of Per Share Earnings............ 19
- -------------------------------------------------------------------------------
Page 2
<PAGE>
PART I. FINANCIAL INFORMATION
- -------------------------------------------------------------------------------
ITEM 1. FINANCIAL STATEMENTS
TECHNOLOGY SOLUTIONS COMPANY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
ASSETS
November 30, May 31,
1997 1997
----------- -------
(unaudited)
CURRENT ASSETS:
Cash and cash equivalents ....................... $ 31,979 $ 27,951
Marketable securities ........................... 19,088 15,988
Receivables, less allowance for doubtful
receivables of $3,855 and $3,346 ................ 56,783 43,907
Refundable income taxes ......................... 588 1,398
Deferred income taxes ........................... 9,088 7,234
Other current assets ............................ 12,209 11,196
--------- ---------
Total current assets ........................... 129,735 107,674
COMPUTERS, FURNITURE AND EQUIPMENT, NET .......... 8,395 6,416
LONG-TERM INVESTMENTS ............................ 4,818 8,118
COST IN EXCESS OF NET ASSETS OF ACQUIRED
BUSINESSES AND OTHER INTANGIBLES .............. 15,227 3,521
OTHER ASSETS ..................................... 11,627 8,137
--------- ---------
Total assets ................................... $169,802 $133,866
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ................................ $ 1,459 $ 1,604
Accrued compensation and related costs .......... 16,676 17,001
Capitalized lease obligations ................... 301 240
Deferred compensation ........................... 10,758 6,842
Other current liabilities ....................... 3,860 2,392
--------- ---------
Total current liabilities ..................... 33,054 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 ................... 79,041 61,958
Retained earnings ................................ 60,898 51,627
Unrealized holding loss .......................... (107) (319)
Cumulative translation adjustment ................ (556) (318)
--------- ---------
139,545 113,217
Less: Treasury Stock, at cost (796,539 and
2,123,660 shares) ............................. (2,797) (7,430)
--------- ---------
Total stockholders' equity ...................... 136,748 105,787
--------- ---------
Total liabilities and stockholders' equity ...... $169,802 $133,866
========= =========
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)
For the Three Months For the Six Months
Ended November 30, Ended November 30,
-------------------- ------------------
1997 1996 1997 1996
---- ---- ---- ----
(unaudited) (unaudited)
REVENUES:
Professional fees ................ $63,772 $39,521 $124,130 $71,336
Software and hardware products ... 124 -- 173 347
------- ------- -------- -------
63,896 39,521 124,303 71,683
------- ------- -------- -------
COSTS AND EXPENSES:
Project personnel ................ 29,305 17,746 57,456 33,823
Other project expenses ........... 8,841 5,266 18,035 10,059
Cost of products sold ............ -- -- -- 54
Management and administrative
support ........................ 12,913 7,685 24,758 13,296
Goodwill amortization ............ 929 275 1,806 347
Incentive compensation ........... 2,843 2,621 6,493 5,025
------- ------- -------- -------
54,831 33,593 108,548 62,604
------- ------- -------- -------
OPERATING INCOME .................. 9,065 5,928 15,755 9,079
------- ------- -------- -------
OTHER INCOME (EXPENSE):
Net investment income ............ 330 539 713 1,059
Interest expense ................. (21) (49) (30) (106)
------- ------- -------- -------
309 490 683 953
------- ------- -------- -------
INCOME BEFORE INCOME TAXES ........ 9,374 6,418 16,438 10,032
INCOME TAX PROVISION .............. 4,062 2,672 7,167 4,161
------- ------- -------- -------
NET INCOME ........................ $ 5,312 $ 3,746 $ 9,271 $ 5,871
======= ======= ======== =======
EARNINGS PER COMMON SHARE ......... $ 0.19 $ 0.14 $ 0.33 $ 0.23
======= ======= ======== =======
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON
EQUIVALENT SHARES
OUTSTANDING ...................... 28,622 26,583 28,281 26,100
======= ======= ======== =======
The accompanying Notes to Consolidated Financial Statements are an integral
part of this financial information.
- -------------------------------------------------------------------------------
Page 4
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the
Six Months Ended
November 30,
--------------------
1997 1996
---- ----
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................... $ 9,271 $ 5,871
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization ............. 3,488 1,634
Provisions for receivable valuation
allowances and reserves for
possible losses ......................... 1,188 1,109
Gain on sale of investments ............... (48) --
Deferred income taxes ..................... 7,452 (2,367)
Changes in assets and liabilities:
Receivables ............................. (11,326) (15,794)
Purchases of trading securities related
to deferred compensation program ...... (3,916) (2,766)
Refundable income taxes ................. 810 5,784
Other current assets .................... (24) 68
Accounts payable ........................ (942) 593
Accrued compensation and related costs .. (339) (1,084)
Deferred compensation funds from employees 3,916 2,766
Other current liabilities ............... (1,941) 1,038
------- ------
Net cash provided by (used in)
operating activities ................. 7,589 (3,148)
------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of available-for-sale securities .... (1,500) --
Proceeds from available-for-sale securities .. 2,507 --
Proceeds from held-to-maturity investments ... 3,290 6,060
Capital expenditures, net .................... (2,530) (937)
Net assets of acquired businesses and
other intangibles .......................... (7,360) (1,277)
Other assets ................................. (5,267) (48)
Capitalized lease obligation ................. 61 (698)
------- ------
Net cash (used in) provided by
investing activities ....................... (10,799) 3,100
------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options ...... 6,386 4,090
Proceeds from employee stock purchase plan ... 1,440 580
------- ------
Net cash provided by financing activities .. 7,826 4,670
------- ------
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS ......................... (588) (19)
------- ------
INCREASE IN CASH AND CASH EQUIVALENTS ......... 4,028 4,603
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD .................................. 27,951 12,990
------- ------
CASH AND CASH EQUIVALENTS, END OF PERIOD ...... $31,979 $17,593
======= ======
The accompanying Notes to Consolidated Financial Statements are an integral
part of this financial information.
- -------------------------------------------------------------------------------
Page 5
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 and six months ended November 30,
1997 and 1996, the consolidated balance sheet as of November 30, 1997 and the
consolidated statements of cash flows for the six months ended November 30,
1997 and 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 November 30, 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 restatement 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 SIGNIFICANT 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 presented net of amounts billed to clients in
- -------------------------------------------------------------------------------
Page 6
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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 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,
"Accounting for Certain Investments in Debt and Equity Securities" 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
- -------------------------------------------------------------------------------
Page 7
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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 three and six months ended November 30, 1997 and 1996 would have been as
follows:
Three Months Ended
November 30,
1997 1996
--------------------
Basic earnings per share $0.20 $0.17
Diluted earnings per share $0.19 $0.14
Six Months Ended
November 30,
1997 1996
--------------------
Basic earnings per share $0.36 $0.26
Diluted earnings per share $0.33 $0.23
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.
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.
- -------------------------------------------------------------------------------
Page 8
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4--STOCK OPTIONS As of November 30, 1997, options to purchase 7.0
million shares of common stock were outstanding and options to purchase an
additional 1.8 million shares of common stock were available for grant under
the Technology Solutions Company 1996 Stock Incentive Plan.
NOTE 5--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 two years following
the close of the transaction. 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.
- -------------------------------------------------------------------------------
Page 9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TECHNOLOGY SOLUTIONS COMPANY
RESULTS OF OPERATIONS
THREE MONTHS ENDED NOVEMBER 30, 1997 COMPARED WITH THREE MONTHS ENDED
NOVEMBER 30, 1996
Consolidated net revenues for the second quarter ended November 30, 1997
increased 62 percent to $63.9 million compared to $39.5 million for the same
period last fiscal year. The increase resulted from domestic revenue growth
of 62 percent and international revenue growth of 60 percent. The source of
this growth is the continued strong demand for the Company's technology and
business consulting professional services in both the domestic and
international markets. The Company's ability to generate this revenue
increase is due to the Company's increased consulting staff recruiting
efforts and the additional consulting staff that joined the Company in
previously reported business combinations. Total Company headcount increased
69 percent to 1,410 at the end of the fiscal 1998 second quarter compared to
836 at the end of the same period in fiscal 1997. The total number of project
managers increased to 138 at the end of this quarter compared to 94 a year
earlier. The additional hours billed by this 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.
Second quarter project personnel costs, which represent mainly professional
salaries and benefits, increased to $29.3 million in fiscal 1998 from $17.7
million in fiscal 1997, an increase of 65 percent. The increase was due to
additional headcount and was consistent with the higher revenues reported in
the fiscal 1998 second quarter. Project personnel costs as a percentage of
net revenues were 46 percent for the second quarter of fiscal 1998, a slight
increase compared with project personnel costs as a percentage of net
revenues of 45 percent in the comparable period of fiscal 1997.
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 expenses, personnel training and provisions for valuation allowances
and reserves for potential losses on continuing projects. Other project
expenses for the second quarter of fiscal 1998 increased to $8.8 million
compared with $5.3 million during the second quarter of fiscal 1997. Other
project expenses as a percentage of net revenues were 14 percent for the
second quarter of fiscal 1998, a slight increase compared with other project
expenses as a percentage of net revenues of 13 percent in the comparable
period of fiscal 1997.
Management and administrative support costs increased $5.2 million to $12.9
million in the second quarter of fiscal 1998 from $7.7 million in the second
quarter of fiscal 1997. Approximately $2.7 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. These costs include
the opening or expansion of several domestic and international offices; the
upgrade of the
- -------------------------------------------------------------------------------
Page 10
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --
(CONTINUED)
Company's internal financial and communication systems; higher recruiting
expenses needed to develop the Company's internal recruiting organization;
higher marketing expenses as a result of heightened marketing efforts; and
increased non-billable travel costs necessary to support these efforts. The
Company also incurred an additional $2.5 million of management and
administrative costs associated primarily with increased regional management
and practice area support personnel.
Goodwill amortization increased to $0.9 million in the second quarter of
fiscal 1998 compared to $0.3 million in the second quarter of fiscal 1997
primarily due to the purchase of Bentley, for which $0.6 million of goodwill
amortization was recorded in the second quarter. Also contributing, to a
lesser extent, was the goodwill amortization of several other smaller
businesses purchased.
Incentive compensation increased to $2.8 million in the second quarter of
fiscal 1998 compared to $2.6 million for the same period last year. This
amount reflects the Company's current estimate of the annual bonus payout.
The Company expects to continue to accrue incentive compensation throughout
fiscal 1998.
Investment income in the fiscal 1998 second quarter was $0.3 million compared
to $0.5 million a year earlier. Investment income decreased as a result of
several investments maturing in fiscal 1998.
The Company's effective tax rate for the second quarter of fiscal 1998 was
43.3 percent compared to 41.6 percent in the second quarter of fiscal 1997.
The increase in the effective tax rate in the fiscal 1998 second 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.
SIX MONTHS ENDED NOVEMBER 30, 1997 COMPARED WITH SIX MONTHS ENDED NOVEMBER
30, 1996
Consolidated net revenues for the six months ended November 30, 1997
increased 73 percent to $124.3 million compared with $71.7 million for the
same period last fiscal year. The increase resulted from domestic revenue
growth of 74 percent and international revenue growth of 72 percent. The
source of this growth is the continued strong demand for the Company's
technology and business consulting professional services in both the domestic
and international markets. The Company's ability to generate this revenue
increase is due to the Company's increased consulting staff recruiting
efforts and the additional consulting staff that joined the Company in
previously reported business combinations. The additional hours billed by
this 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 first six months of fiscal 1998, which
represent mainly professional salaries and benefits,
- -------------------------------------------------------------------------------
Page 11
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --
(CONTINUED)
increased to $57.5 million in fiscal 1998 from $33.8 million in fiscal 1997,
an increase of 70 percent. The increase was due to additional headcount and
was consistent with the higher revenues reported in the first half of fiscal
1998. Project personnel costs as a percentage of net revenues were 46 percent
for fiscal 1998 compared with project personnel costs as a percentage of net
revenues of 47 percent in the comparable period of fiscal 1997.
Other project expenses for the first half of fiscal 1998 were $18.0 million
compared with $10.1 million for the first half of fiscal 1997. Other project
expenses as a percentage of net revenues, however, remained unchanged between
years at approximately 14 percent.
Management and administrative support costs increased $11.5 million to $24.8
million in the first half of fiscal 1998 from $13.3 million in the first half
of fiscal 1997. Approximately $6.1 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. These costs include the opening
or expansion of several domestic and international offices; the upgrade of
the Company's internal financial and communication systems; higher recruiting
expenses needed to develop the Company's internal recruiting organization;
higher marketing expenses as a result of heightened marketing efforts; and
increased non-billable travel costs necessary to support these efforts. The
Company also incurred an additional $5.4 million of management and
administrative costs associated primarily with increased regional management
and practice area support personnel.
Goodwill amortization increased to $1.8 million in the first half of fiscal
1998 compared to $0.3 million in the first half of fiscal 1997, primarily due
to the purchase of Bentley, for which $1.3 million of goodwill amortization
was recorded in the first half of fiscal 1998. Also contributing, to a lesser
extent, was the goodwill amortization of several other smaller businesses
purchased.
Incentive compensation of $6.5 million was accrued for the first half of
fiscal 1998 compared to $5.0 million for the same period last year. This
amount reflects the Company's current estimate of the annual bonus payout.
The Company expects to continue to accrue incentive compensation throughout
fiscal 1998.
Net investment income in the fiscal 1998 first half was $0.7 million compared
to $1.0 million a year earlier. Investment income decreased as a result of
several investments maturing in fiscal 1998.
The Company's effective tax rate for the first half of fiscal 1998 was 43.6
percent compared to 41.5 percent in the first half of fiscal 1997. The
increase in the effective tax rate in the fiscal 1998 first half 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.
- -------------------------------------------------------------------------------
Page 12
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --
(CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $7.6 million in the first half
of fiscal 1998 compared to net cash used in operating activities of $3.1
million in the first half of fiscal 1997. Operating cash flow was favorably
impacted by higher net income as a result of increased operating activities.
This improvement was partially offset by increased working capital
requirements, especially the increase in net receivables of $11.3 million due
to the significant growth of the Company's revenues. 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 $10.8 million in the first half of
fiscal 1998 compared to net cash provided by investing activities of $3.1
million for the same period last year. Proceeds from the sale of
available-for-sale securities were $2.5 million and the Company purchased
$1.5 million of available-for-sale securities. Proceeds of $3.3 million were
received by the Company due to the maturity of several held-to-maturity
investments in the first half of fiscal 1998. These proceeds were reinvested
in expansion of the business and other equity investments.
Capital expenditures in the first half of fiscal 1998 were $2.5 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 two years following the close of the transaction.
The principal other investing activity during fiscal 1998 was the Company's
$3.0 million investment in The Janis Group, Inc., a Baan software and service
organization. The investment was accounted for using the cost method of
accounting.
- -------------------------------------------------------------------------------
Page 13
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --
(CONTINUED)
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 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 November 30, 1997, the
Company was in compliance with these financial ratio requirements. As of
November 30, 1997, no borrowings were made under the Facility.
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, THE SUCCESSFUL RESOLUTION OF LEGAL MATTERS, 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.
- -------------------------------------------------------------------------------
Page 14
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
PART II. OTHER INFORMATION
- --------------------------------------------------------------------------------
ITEM 1 -- LEGAL PROCEEDINGS
In October 1997, the Company's Canadian subsidiary, Technology
Solutions Canada, Ltd (TSC), filed a lawsuit in the Ontario Court
(General Division) against Unibex Software Inc. (Unibex), Global
Business Alliance, and Peter Sandiford and Mady Jalinous,
individually and as officers and directors of these companies. TSC is
seeking the payment of over US $6.6 million owed for services
rendered; a declaration that it owns the software developed; and
other relief. The money sought is owed for services rendered under a
services agreement ("Agreement") entered into in September 1996 under
which TSC assumed the obligation to provide consulting services for
the development of certain Internet software. In the Agreement,
Unibex agreed that in the event of certain breaches by Unibex, TSC
would be entitled to ownership of the software. TSC is claiming that
such breaches have occurred and, therefore, TSC is entitled to the
software. Unibex and the other defendants answered the complaint in
November 1997 denying any breaches of the Agreement. Additionally,
the defendants counterclaimed for CDN $235 million claiming TSC
intentionally and negligently represented and warranted that it had
the capability to undertake the development of the software knowing
it did not have the qualified and competent personnel to use on the
project. Although the outcome of the claims cannot be predicted with
certainty, management believes that the counterclaims are completely
without merit and intends to vigorously defend them. In any case,
management believes that TSC is protected by the terms of the
Agreement limiting liability to the fees paid and no fees have been
paid. Management further believes that the ultimate resolution of the
litigation should not have a material adverse effect on the Company's
financial condition or results of operations.
- -------------------------------------------------------------------------------
Page 15
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
PART II. OTHER INFORMATION -- (CONTINUED)
- --------------------------------------------------------------------------------
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
TSC's 1997 Annual Meeting of Stockholders (the "Annual Meeting") was
held on October 9, 1997. Represented at the Annual Meeting, either in
person or by proxy, were 22,720,172 voting shares. The following
actions were taken by a vote of TSC's stockholders at the Annual
Meeting:
1. Messrs. John R. Purcell and William H. Waltrip were elected to serve
as members of TSC's Board of Directors receiving 22,188,961 and
22,135,075 votes in favor of election, respectively, and 531,211
and 585,097 votes withheld respectively. There were no votes
against, abstentions or broker non-votes with respect to the
election of any nominee named above. In addition, the terms of
office for Messrs. Kohler and McLaughlin continue until the 1998
Annual Meeting, and Messrs. Murray and Oresman continue until the
1999 Annual Meeting.
2. The appointment of Price Waterhouse LLP as independent auditors for
TSC for its fiscal year ending May 31, 1998 was ratified: 22,621,650
votes were cast for the ratification; 92,120 votes were cast against
the ratification and there were 6,402 votes abstained. There were no
votes withheld or broker non-votes.
ITEM 6 -- EXHIBITS
(a) Exhibits
Exhibit 11
All other items in Part II are either not applicable to the
Company during the quarter ended November 30, 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.
- -------------------------------------------------------------------------------
Page 16
<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 January 1998.
TECHNOLOGY SOLUTIONS COMPANY
Date: January 14, 1998 By: /s/ Martin T. Johnson
---------------- ---------------------
Martin T. Johnson
Chief Financial Officer
- -------------------------------------------------------------------------------
Page 17
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
11 Statement re Computation of Per Share Earnings
27 Financial Data Schedule
- -------------------------------------------------------------------------------
Page 18
<PAGE>
EXHIBIT 11
TECHNOLOGY SOLUTIONS COMPANY
STATEMENT RE COMPUTATION
OF PER SHARE EARNINGS
(In thousands, except earnings per share)
For the For the
Three Months Ended Six Months Ended
November 30,(A) November 30, (A)
------------------ -----------------
1997 1996 1997 1996
---- ---- ---- ----
(unaudited) (unaudited)
Net earnings per modified treasury
stock method ...................... $ 5,312 $ 3,746 $ 9,271 $ 5,871
====== ====== ====== ======
Shares:
Weighted average shares outstanding . 25,838 23,341 25,507 22,954
Common stock equivalents ............ 2,784 3,242 2,774 3,146
------ ------ ------ ------
Total ............................... 28,622 26,583 28,281 26,100
====== ====== ====== ======
Earnings per share ................... $ 0.19 $ 0.14 $ 0.33 $ 0.23
====== ====== ====== ======
(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 19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> SEP-01-1997
<PERIOD-END> NOV-30-1997
<EXCHANGE-RATE> 1
<CASH> 31,979
<SECURITIES> 19,088
<RECEIVABLES> 60,638
<ALLOWANCES> 3,855
<INVENTORY> 0
<CURRENT-ASSETS> 129,735
<PP&E> 16,423
<DEPRECIATION> 8,028
<TOTAL-ASSETS> 169,802
<CURRENT-LIABILITIES> 33,054
<BONDS> 0
0
0
<COMMON> 269
<OTHER-SE> 136,479
<TOTAL-LIABILITY-AND-EQUITY> 169,802
<SALES> 173
<TOTAL-REVENUES> 124,303
<CGS> 0
<TOTAL-COSTS> 107,360
<OTHER-EXPENSES> (713)
<LOSS-PROVISION> 1,188
<INTEREST-EXPENSE> 30
<INCOME-PRETAX> 16,438
<INCOME-TAX> 7,167
<INCOME-CONTINUING> 9,271
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,271
<EPS-PRIMARY> 0.33
<EPS-DILUTED> 0.33
</TABLE>
