<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 FEBRUARY 28, 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 APRIL 2, 1998, THERE WERE OUTSTANDING 26,427,567 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
February 28, 1998 and May 31, 1997 ............................ 3
Consolidated Statements of Income
for the Three Months Ended and Nine Months Ended
February 28, 1998 and 1997 .................................... 4
Consolidated Statements of Cash Flows
for the Nine Months Ended February 28, 1998 and 1997 .......... 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 .......................................................... 17
Item 6 .......................................................... 18
SIGNATURES ......................................................... 19
EXHIBIT INDEX ...................................................... 20
EXHIBIT 11--Statement Re Computation of Per Share Earnings ......... 21
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
<TABLE>
<CAPTION>
February 28, May 31,
1998 1997
------------ ----------------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ....................... $ 34,190 $ 27,951
Marketable securities ........................... 26,361 15,988
Receivables, less allowance for doubtful
receivables of $3,389 and $3,346 ............... 62,305 43,907
Refundable income taxes ......................... 627 1,398
Deferred income taxes ........................... 8,375 7,234
Other current assets ............................ 13,121 11,196
--------- ---------
Total current assets ....................... 144,979 107,674
COMPUTERS, FURNITURE AND EQUIPMENT, NET ........... 8,744 6,416
LONG-TERM INVESTMENTS ............................. 1,200 8,118
COST IN EXCESS OF NET ASSETS OF ACQUIRED
BUSINESSES AND OTHER INTANGIBLES ............... 14,550 3,521
OTHER ASSETS ...................................... 13,321 8,137
--------- ---------
Total assets ............................... $182,794 $133,866
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ................................ $ 1,259 $ 1,604
Accrued compensation and related costs .......... 19,677 17,001
Capitalized lease obligations ................... 70 240
Deferred compensation ........................... 11,903 6,842
Other current liabilities ....................... 4,378 2,392
--------- ---------
Total current liabilities .................. 37,287 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 .................. 82,175 61,958
Retained earnings ............................... 66,107 51,627
Unrealized holding loss ......................... (46) (319)
Cumulative translation adjustment ............... (1,180) (318)
--------- ---------
147,325 113,217
Less: Treasury Stock, at cost (517,035 and
2,123,660 shares) ............................. (1,818) (7,430)
--------- ---------
Total stockholders' equity ................. 145,507 105,787
--------- ---------
Total liabilities and stockholders' equity . $182,794 $133,866
--------- ---------
--------- ---------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an
integral part of this financial information.
Page 3
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended February 28, Ended February 28,
-------------------- -------------------
1998 1997 1998 1997
------- ------- ------- -------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
REVENUES:
Professional fees ......................... $67,297 $42,120 $191,427 $113,456
Software and hardware products ............ 107 226 280 573
------- ------- -------- --------
67,404 42,346 191,707 114,029
------- ------- -------- --------
COSTS AND EXPENSES:
Project personnel ......................... 31,393 20,135 88,849 53,958
Other project expenses .................... 9,343 6,178 27,378 16,237
Cost of products sold ..................... -- -- -- 54
Management and administrative support ..... 15,053 7,616 39,811 20,912
Goodwill amortization ..................... 867 470 2,673 817
Incentive compensation .................... 1,994 1,944 8,487 6,969
------- ------- -------- --------
58,650 36,343 167,198 98,947
------- ------- -------- --------
OPERATING INCOME ........................... 8,754 6,003 24,509 15,082
------- ------- -------- --------
OTHER INCOME (EXPENSE):
Net investment income ..................... 635 578 1,348 1,637
Interest expense .......................... (24) (40) (54) (146)
------- ------- -------- --------
611 538 1,294 1,491
------- ------- -------- --------
INCOME BEFORE INCOME TAXES ................. 9,365 6,541 25,803 16,573
INCOME TAX PROVISION ....................... 3,973 2,548 11,140 6,709
------- ------- -------- --------
NET INCOME ................................. $ 5,392 $ 3,993 $ 14,663 $ 9,864
------- ------- -------- --------
------- ------- -------- --------
EARNINGS PER COMMON SHARE .................. $ 0.21 $ 0.17 $ 0.57 $ 0.42
------- ------- -------- --------
------- ------- -------- --------
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING ................. 26,161 23,733 25,723 23,211
------- ------- -------- --------
------- ------- -------- --------
EARNINGS PER COMMON SHARE
ASSUMING DILUTION ......................... $ 0.19 $ 0.15 $ 0.52 $ 0.37
------- ------- -------- --------
------- ------- -------- --------
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON
EQUIVALENT SHARES
OUTSTANDING ............................... 28,643 26,841 28,383 26,367
------- ------- -------- --------
------- ------- -------- --------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an
integral part of this financial information.
Page 4
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
For the
Nine Months Ended
February 28,
-----------------
1998 1997
---- ----
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................ $14,663 $ 9,864
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ........................... 5,217 3,036
Provisions for receivable valuation allowances and
reserves for possible losses ......................... 1,188 2,086
Gain on sale of investments ............................. (56) --
Deferred income taxes ................................... 10,084 2,200
Changes in assets and liabilities:
Receivables ........................................... (17,456) (17,783)
Purchases of trading securities related to deferred
compensation program ................................ (5,061) (3,588)
Refundable income taxes ............................... 771 3,389
Other current assets .................................. (2,177) (1,696)
Accounts payable ...................................... (329) (616)
Accrued compensation and related costs ................ 2,596 1,550
Deferred compensation funds from employees ............ 5,061 3,588
Other current liabilities ............................. (1,214) (738)
Other assets .......................................... (3,624) 337
-------- ------
Net cash provided by operating activities ........... 9,663 1,629
-------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of available-for-sale securities.................. (7,500) --
Proceeds from available-for-sale securities................ 2,507 --
Proceeds from held-to-maturity investments................. 6,910 8,140
Capital expenditures, net.................................. (3,975) (2,140)
Net assets of acquired businesses and other intangibles.... (7,742) (1,562)
Other assets............................................... (3,000) --
Capitalized lease obligation............................... 62 (1,065)
-------- ------
Net cash (used in) provided by investing activities . (12,738) 3,373
-------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options .................... 7,457 5,517
Proceeds from employee stock purchase plan ................. 2,542 1,192
-------- ------
Net cash provided by financing activities ........... 9,999 6,709
-------- ------
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS ....................................... (685) (273)
-------- ------
INCREASE IN CASH AND CASH EQUIVALENTS ....................... 6,239 11,438
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD .............. 27,951 12,990
-------- ------
CASH AND CASH EQUIVALENTS, END OF PERIOD .................... $34,190 $24,428
-------- ------
-------- ------
</TABLE>
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 nine months ended February 28,
1998 and 1997, the consolidated balance sheet as of February 28, 1998 and the
consolidated statements of cash flows for the nine months ended February 28,
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 February 28, 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, 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, including the restatement of earnings per
common share assuming dilution and weighted average number of common and
common equivalent 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 the
accompanying consolidated statements of
Page 6
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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 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.
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--The Company discloses basic and diluted earning
per share in the income statement under the provisions of SFAS No. 128,
"Earning Per Share." Earnings per common share assuming dilution is computed
by
Page 7
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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 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.
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--STOCK OPTIONS
As of February 28, 1998, options to purchase 6.8 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.
Page 8
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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 is being amortized over five years on a straight-line basis.
Total consideration recorded for Bentley was approximately $12.7 million.
Cash paid for Bentley totaled $7.4 million. In addition, the Company also
exchanged 29,535 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. 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>
TECHNOLOGY SOLUTIONS COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED FEBRUARY 28, 1998 COMPARED WITH THREE MONTHS ENDED FEBRUARY
28, 1997
Consolidated net revenues for the third quarter ended February 28, 1998
increased 59 percent to $67.4 million compared to $42.3 million for the same
period last fiscal year. The increase resulted from domestic revenue growth of
60 percent and international revenue growth of 49 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 53 percent to 1,511 at the end
of the fiscal 1998 third quarter compared to 989 at the end of the same period
in fiscal 1997. The total number of project managers increased to 158 at the
end of this quarter compared to 108 a year earlier. The additional hours billed
by this increased consulting staff, combined with a six percent increase in
domestic billing rates, were the primary factors in revenue growth compared to
the same period a year ago.
Third quarter project personnel costs, which represented mainly professional
salaries and benefits, increased to $31.4 million in fiscal 1998 from $20.1
million in fiscal 1997, an increase of 56 percent. The increase was due to
increased professional headcount and was consistent with the higher revenues
reported in the fiscal 1998 third quarter. Project personnel costs as a
percentage of net revenues were 47 percent for the third quarter of fiscal
1998, a slight decrease compared with project personnel costs as a percentage
of net revenues of 48 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 non-billable 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 third quarter of fiscal 1998 increased to $9.3 million
compared with $6.2 million during the third quarter of fiscal 1997. Other
project expenses as a percentage of net revenues were 14 percent for the
third quarter of fiscal 1998, a slight decrease compared with other project
expenses as a percentage of net revenues of 15 percent in the comparable
period of fiscal 1997.
Management and administrative support costs increased $7.4 million to $15.0
million in the third quarter of fiscal 1998 from $7.6 million in the third
quarter of fiscal 1997, an increase of 98 percent. Approximately $4.0 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, relocation or expansion of several domestic
and international offices; the upgrade of the Company's internal financial
and
Page 10
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (Continued)
communication systems; higher expenses related to the expansion of the
Company's internal recruiting organization; higher marketing expenses as a
result of increased practice area marketing efforts; increased legal costs
associated with the Company's international expansion and the growth of the
business; and increased non-billable travel costs necessary to support these
efforts. The Company also incurred an additional $3.4 million of management
and administrative costs associated primarily with increased regional
management and practice area support personnel.
Operating income increased $2.8 million to $8.8 million in the third quarter
of fiscal 1998 from $6.0 million in the third quarter of fiscal 1997, an
increase of 46 percent. This increase is attributable to the factors
described above and an adjustment to the Company's fringe rate accrual of
$0.6 million, offset by the investment spending described below.
During the third quarter of fiscal 1998, the Company increased its level of
investment spending to $4.3 million, nearly a 40 percent increase over the
second quarter of fiscal 1998 in several business areas, including middle
market ERP (Enterprise Resource Planning) package integration and
international and western US geographic expansion. The Company's strategy is
to extend its current service offerings on a geographic basis, both
domestically and internationally and to add new niche service offerings, such
that the Company continues its current level of growth. The Company's
investment spending is directly related to this geographic and new service
offering expansion. The investment spending related to all of these
activities involves the absorption of salary, training, recruiting, selling,
infrastructure and other costs and may result in lower than normal practice
area operating margins for a period of time that ranges from 12 to 24 months.
The expansion into a new international market typically involves costs and
time similar to, but often higher than, a domestic expansion.
Goodwill amortization increased to $0.9 million in the third quarter of
fiscal 1998 compared to $0.5 million in the third quarter of fiscal 1997
primarily due to the purchase of Bentley.
Incentive compensation of $2.0 million remained virtually unchanged in the
third quarter of fiscal 1998 compared to same period last year. The incentive
compensation accrual rate was adjusted in the third quarter of fiscal 1998 to
reflect the Company's current expectations of the annual bonus payout. The
Company expects to continue to accrue incentive compensation throughout
fiscal 1998.
Net investment income in the fiscal 1998 third quarter was $0.6 million
compared to $0.5 million a year earlier. The slight increase in investment
income is due to a combination of several new investments purchased in fiscal
1998 partially offset by investments maturing in fiscal 1998.
The Company's effective tax rate for the third quarter of fiscal 1998 was
42.4 percent compared to 39.0 percent for the third quarter of fiscal 1997.
The increase in the effective tax rate in the fiscal 1998 third quarter was
the result of the increase in the
Page 11
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (Continued)
percentage of the Company's income coming from taxable investment income and
increased non-deductible expenses for U.S. tax purposes. The tax provision
from the foreign operations remained virtually unchanged compared to the same
period last year.
Weighted average number of common shares outstanding increased primarily due
to the exercise of stock options and the issuance of shares under the
Company's employee stock purchase plan.
NINE MONTHS ENDED FEBRUARY 28, 1998 COMPARED WITH NINE MONTHS ENDED FEBRUARY
28, 1997
Consolidated net revenues for the nine months ended February 28, 1998
increased 68 percent to $191.7 million compared with $114.0 million for the
same period last fiscal year. The increase resulted from domestic revenue
growth of 66 percent and international revenue growth of 83 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 six percent increase in
domestic billing rates, were the primary factors in revenue growth compared
to the same period a year ago. The business combinations made by the Company
accounted for 13 percent of revenues for the nine months ended February 28,
1998 up from 5 percent for the same period in fiscal 1997.
Project personnel costs for the first nine months of fiscal 1998, which
represent mainly professional salaries and benefits, increased to $88.8
million in fiscal 1998 from $54.0 million in fiscal 1997, an increase of 65
percent. The increase was due to increased professional headcount and was
consistent with the higher revenues reported in the first nine months of
fiscal 1998. Project personnel costs as a percentage of net revenues were 46
percent in the first nine months of fiscal 1998, a slight decrease 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 nine months of fiscal 1998 were $27.4
million compared with $16.2 million for the first nine months of fiscal 1997.
Other project expenses as a percentage of net revenues remained unchanged
between years at approximately 14 percent.
Management and administrative support costs increased $18.9 million to $39.8
million in the first nine months of fiscal 1998 from $20.9 million in the
first nine months of fiscal 1997, an increase of 90 percent. Approximately
$10.5 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, relocation or expansion of
several domestic and international offices; the
Page 12
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (Continued)
upgrade of the Company's internal financial and communication systems; higher
expenses related to the expansion of the Company's internal recruiting
organization; higher marketing expenses as a result of increased practice
area marketing efforts; increased legal expenses associated with the
Company's international expansion and growth of the business; and increased
non-billable travel costs necessary to support these efforts. The Company
also incurred an additional $8.4 million of management and administrative
costs associated primarily with increased regional management and practice
area support personnel.
Operating income increased $9.4 million to $24.5 million in the third quarter
of fiscal 1998 from $15.1 million in the third quarter of fiscal 1997, an
increase of 63 percent. This increase is attributable to the factors
described above and an adjustment to the Company's fringe rate accrual of
$0.6 million, offset by the investment spending described below.
Fiscal 1998 investment programs have totaled more than 4.5 percent of
revenue. These programs have included the establishment of new service
offerings including RADD (Relationship, Architecture, Design and Deployment)
for the ECM (Enterprise Customer Management) market, middle market ERP
package integration, sales force automation, and new software vendor
alliances. The Company is continuing its geographic expansion in
international and western U.S. geographic areas. The Company's strategy is to
extend its current service offerings on a geographic basis, both domestically
and internationally, and to add new niche service offerings, such that the
Company continues its current level of growth. The Company's investment
spending is directly related to this geographic and new service offering
expansion. The investment spending related to all of these activities
involves the absorption of salary, training, recruiting, selling,
infrastructure and other costs and may result in lower than normal practice
area operating margins for a period of time that ranges from 12 to 24 months.
The expansion into a new international market typically involves costs and
time similar to, but often higher than, a domestic expansion.
Goodwill amortization increased to $2.7 million in the first nine months of
1998 compared to $0.8 million in the first nine months of fiscal 1997,
primarily due to the purchase of Bentley.
Incentive compensation of $8.5 million was accrued for the first nine months
of fiscal 1998 compared to $7.0 million for the same period last year. This
amount reflects the Company's current estimate of the annual bonus payout and
the accrual rate adjustment made in the third quarter of fiscal 1998. The
Company expects to continue to accrue incentive compensation throughout
fiscal 1998.
Net investment income in the fiscal 1998 first nine months was $1.3 million
compared to $1.5 million a year earlier. Investment income decreased as a
result of lower cash balances in the first and second quarters due to the
cash acquisition of The Bentley Company in June 1997 and the maturing of
several investments in fiscal 1998.
Page 13
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (Continued)
The Company's effective tax rate for the first nine months of fiscal 1998 was
43.2 percent compared to 40.5 percent for the first nine of fiscal 1997. The
increase in the effective tax rate in the fiscal 1998 first nine months was
the result of the increase in the percentage of the Company's income coming
from taxable 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.
Weighted average number of common 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 $9.7 million in the first nine
months of fiscal 1998 compared to net cash provided by operating activities
of $1.6 million in the first nine months of fiscal 1997. Operating cash flow
was favorably impacted by higher net income as a result of increased
operating activities. The increase in depreciation and amortization is a
result of the goodwill amortization from acquired businesses, and the
depreciation associated with the office expansion and the upgrade of the
Company's internal financial system. The tax benefit received from the
increased exercise of stock options compared to a year ago resulted in the
increase in deferred income taxes. Net cash provided by operating activities
was unfavorably affected by working capital requirements mainly an increase
in net receivables of $17.5 million due to the growth of the Company's
revenues.
The Company's significant amount of cash, cash equivalents and marketable
securities has provided ample liquidity to handle the Company's current cash
requirements.
Cash used in investing activities was $12.7 million in the first nine months
of fiscal 1998 compared to net cash provided by investing activities of $3.4
million for the same period last year. The Company purchased $7.5 million of
available-for-sale securities and received $2.5 million from the sale of
available-for-sale securities. Proceeds of $6.9 million were received by the
Company due to the maturity of several held-to-maturity investments in the
first nine months of fiscal 1998. The proceeds were transferred to cash and
cash equivalents and reinvested in on-going business activities and other
equity investments.
Capital expenditures in the first nine months of fiscal 1998 were $4.0
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 currently has no material commitments for capital expenditures.
Net cash outlays related to business acquisitions were $7.7 million for the
first nine months of fiscal 1998. The cash outlay was due primarily to a $7.4
million payment in the first quarter of fiscal 1998 for the acquisition of
Bentley. Bentley was acquired for a combination of cash and the Company's
common stock. The transaction was accounted for using the purchase method of
Page 14
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (Continued)
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
replaced the employee stock options outstanding under Bentley's stock option
plan with the Company's stock options. 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. Additionally, a $0.3
million earn-out payment was made in the third quarter of fiscal 1998 related
to the acquisition of Aspen Consultancy in May 1996.
Other investing activity during fiscal 1998 was the Company's $3.0 million
cash investment in The Janis Group, Inc., a Baan software and service
organization. The investment was accounted for using the cost method of
accounting.
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 February 28, 1998, the
Company was in compliance with these financial ratio requirements. As of
February 28, 1998, 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.
Page 15
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (Continued)
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 16
<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 Canada), 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. The lawsuit was filed
by TSC Canada seeking payment of over $6,000,000 (U.S.). TSC Canada was seeking
the payment for services rendered; a declaration that it owns the software
developed; and other relief. The money was for services rendered under a
services agreement ("Agreement") entered into in September 1996 under
which TSC Canada 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 Canada would be
entitled to ownership of the software. TSC Canada claimed that such breaches
had occurred and, therefore, TSC Canada 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
in November 1997 seeking payment of over $235,000,000 (CDN) in damages
claiming TSC Canada 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. TSC Canada and Unibex agreed to dismiss the claim and
counterclaim in consideration of a lump sum payment to TSC Canada for services
rendered and TSC Canada acquiring a license to the Unibex 2000 Software
platform. The settlement was announced on January 16, 1998.
Page 17
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
PART II. OTHER INFORMATION -- (Continued)
ITEM 6 -- EXHIBITS
(a) Exhibits
Exhibit 11
Exhibit 27
(b) No reports on Form 8-K were filed during the quarter ended
February 28, 1998.
All other items in Part II are either not applicable to the
Company during the quarter ended February 28, 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 14th day of April
1998.
TECHNOLOGY SOLUTIONS COMPANY
Date: April 14, 1998 By: /s/ Martin T. Johnson
----------------- --------------------------
Martin T. Johnson
Chief Financial Officer
Page 19
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
11 Statement re Computation of Per Share Earnings
27 Financial Data Schedule
</TABLE>
Page 20
<PAGE>
EXHIBIT 11
TECHNOLOGY SOLUTIONS COMPANY
STATEMENT RE COMPUTATION
OF PER SHARE EARNINGS
(In thousands, except earnings per share)
<TABLE>
<CAPTION>
For the For the
Three Months Ended Nine Months Ended
February 28, (A) February 28, (A)
----------------------- -----------------------
1998 1997 1998 1997
------ ------ ------ ------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net income $5,392 $3,993 $14,663 $9,864
------ ------- -------- -------
------ ------- -------- -------
Shares:
Weighted average shares outstanding 26,161 23,733 25,723 23,211
Common stock equivalents 2,482 3,108 2,660 3,156
------ ------- -------- -------
Total 28,643 26,841 28,383 26,367
------ ------- -------- -------
------ ------- -------- -------
Earnings per common share $ 0.21 $ 0.17 $ 0.57 $ 0.42
------ ------- -------- -------
------ ------- -------- -------
Earnings per common share assuming dilution $ 0.19 $ 0.15 $ 0.52 $ 0.37
------ ------- -------- -------
------ ------- -------- -------
</TABLE>
(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 21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> FEB-28-1998
<CASH> 34,190
<SECURITIES> 26,361
<RECEIVABLES> 65,694
<ALLOWANCES> 3,389
<INVENTORY> 0
<CURRENT-ASSETS> 144,979
<PP&E> 17,788
<DEPRECIATION> 9,044
<TOTAL-ASSETS> 182,794
<CURRENT-LIABILITIES> 37,287
<BONDS> 0
0
0
<COMMON> 269
<OTHER-SE> 145,238
<TOTAL-LIABILITY-AND-EQUITY> 182,794
<SALES> 280
<TOTAL-REVENUES> 191,707
<CGS> 0
<TOTAL-COSTS> 166,010
<OTHER-EXPENSES> (1,348)
<LOSS-PROVISION> 1,188
<INTEREST-EXPENSE> 54
<INCOME-PRETAX> 25,803
<INCOME-TAX> 11,140
<INCOME-CONTINUING> 14,663
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,663
<EPS-PRIMARY> 0.57
<EPS-DILUTED> 0.52
</TABLE>
