Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-K
----------------
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended May 31, 1997
Commission file number 0 - 19433
[LOGO]
TECHNOLOGY SOLUTIONS COMPANY
Incorporated in the State of Delaware
Employer Identification No. 36-3584201
205 North Michigan Avenue, Suite 1500, Chicago, Illinois 60601
(312) 228-4500
Securities Registered Pursuant To
Section 12(G) Of The Act:
Common Stock, $.01 par value per share
Indicate by check mark whether the registrant (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 (or for such shorter period that the registrant was
required to file each reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
Of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of the registrant's voting stock held by
nonaffiliates of the registrant (based upon the per share closing price of
$25.00 on August 11, 1997, and, for the purpose of this calculation only, the
assumption that all registrant's directors and executive officers are
affiliates) was approximately $621 million.
The number of shares outstanding of the registrant's Common Stock, par value per
share $.01, as of August 11, 1997, was 25,475,532.
Documents Incorporated by Reference:
Information required by Part III (Items 10, 11, 12 and 13) of this document is
incorporated by reference to certain portions of registrant's definitive Proxy
Statement distributed in connection with its 1997 annual meeting of
stockholders.
TECHNOLOGY SOLUTIONS COMPANY
PART I.
===============================================================================
ITEM 1. BUSINESS
GENERAL
Technology Solutions Company ("TSC" or the "Company") provides information
technology (IT) and strategic business and management consulting services to
major corporations and financial institutions. These services help
manufacturing, technology, health care, telecommunications, financial services,
and other service industry clients transform their businesses, their internal
business processes and their relationships with customers, suppliers,
distributors and employees. The IT services provided by TSC help these clients
achieve clearly defined business benefits. As used herein the terms "TSC" or the
"Company," unless the context otherwise clearly requires, refer to Technology
Solutions Company and its subsidiaries.
TSC services span a wide range of IT services and strategic business and
management consulting services. TSC's IT services address a broad spectrum of IT
consulting from IT strategy through systems integration, including the
identification of areas of a client's business that can benefit from computer
technology, feasibility studies, business case justification, business process
redesign and reengineering, benchmarking and best practices, project management,
architecture, logical and physical systems design, hardware and software
selection, programming, implementation, change management, education, training,
and benefits realization. The Company's strategic business and management
consulting services offered include business strategic planning, market research
and analysis, new venture growth services, product and distribution channel
planning and organizational restructuring services.
Since its inception in May 1988, TSC has performed project work for
approximately 440 corporations, including Aetna, Avantel, The Chicago Board
Options Exchange, Cigna, Cisco Systems, ConAgra, Georgia-Pacific, The Equitable,
First Union Corporation, Goldman, Sachs & Co., Pfizer Pharmaceuticals, The
Prudential, Pepsi, Square D Corporation, Swiss Bank Corporation and Whirlpool
Corporation.
TSC is a corporation formed under the laws of the state of Delaware. Its
principal executive offices are located in Chicago, Illinois. In addition to its
Chicago office, the Company maintains domestic offices in Schaumburg, Illinois;
Atlanta, Georgia; New Canaan, Connecticut; Dallas, Texas; New York, New York;
Philadelphia, Pennsylvania; and San Francisco and Santa Cruz, California.
International offices are located in Mexico City, Mexico; Bogota, Colombia;
London, England; Cologne, Germany; Paris, France; and Toronto, Canada.
===============================================================================
Page 1
TSC'S BUSINESS
TSC offers a wide range of IT consulting services and strategic business and
management consulting services. TSC's IT consulting services are offered in key
application areas within targeted market areas. This specialization enables the
Company to offer superior application and industry expertise in attractive
growth areas such as customer relationship solutions, call center and customer
service reengineering, telecommunications, electronic commerce, sales process
optimization, risk management, supply chain reengineering, packaged software
implementation, networked computing and other areas. Projects in these areas are
typically undertaken to improve a client's profitability and typically have
attractive internal rates of return. TSC concentrates on large corporate
projects, because it believes that such projects offer maximum profit potential
and represent one of the fastest growing areas of the systems consulting and
integration market. TSC has implemented major new systems within manufacturing,
distribution, retail, transportation, telecommunications, banking, insurance,
health care and financial services firms.
Further contributing to the significant benefits that can be realized from these
new systems is the redesign and restructuring of the business processes of the
organization. Many of TSC's IT consulting project work includes consulting in
business process redesign and reengineering. Projects are comprised of a number
of phases, the total of which may span a time period of nine months to several
years. Major project work may result in significant additional engagements with
the same organization.
The Company's strategic business and management consulting services offered
include business strategic planning, market research and analysis, new venture
growth services, product and distribution channel planning and organizational
restructuring services. TSC has significant experience with strategic business
initiatives within computer, telecommunications, software and services firms.
Important factors in TSC's project work are project management and industry-
specific and application knowledge. TSC dedicates an experienced, senior level
project manager (usually a vice president) to manage the typical large project.
These individuals have many years of experience managing a variety of systems
projects. TSC's professional staff have specialized application skills and
industry knowledge which enhances TSC's ability to understand the business
objectives of the client and contributes to the efficient completion of the
project. This knowledge is important not only to the successful development of
the computer system but also to the redesign and the restructuring of the
business process utilizing the affected systems.
A key component in TSC's success is its project management model, which
leverages the expertise of TSC's staff in partnership with the client to build
the technology solution. In a typical TSC project, a TSC vice president
averaging 20 years of experience serves as project manager. This individual
works with TSC's experienced consultants averaging 12 years of experience to
create the foundation project team, which is then completed by pairing with the
client's staff.
TSC's business is focused on several broad areas of the IT marketplace. These
areas include the area of customer relationship solutions, telecommunications,
risk management, packaged software implementation (in particular, the ERP
packages), and networked computing, to name a few.
===============================================================================
Page 2
TSC's work in the customer relationship solutions area includes customer
relationship call center solutions as well as solutions encompassing electronic
commerce, supply chain, and sales process optimization. The systems implemented
by TSC often involve the integration of third-party applications software
packages and often include the development of custom training. TSC's work at a
client often encompasses work performed by one or more of TSC's
technical/vertical market areas of expertise (called "practice areas"). The
collaboration between TSC's practice areas is an important way in which TSC
leverages the expertise of its sophisticated technical resources to solve client
problems.
In many of the practice areas, TSC has developed methodologies, tools and other
intellectual property which are used by TSC consultants in their integration and
implementation projects. The use of these methodologies, tools, etc. help
improve the quality of the work performed by TSC as well as lower the cost of
the implementation and reduce the time required to perform the work.
TSC's business is focused on the commercial market. TSC does not presently
participate in the state, local, and federal government segment of the domestic
systems integration market. The domestic governmental segment historically has
been subject to more intense price competition due to the focus on lowest price
in the bidding process and limitations on profit margins in certain
procurements. Additionally, the domestic government segment of the market is
characterized by slow and many times erratic payment policies.
PRACTICE AREAS
TSC is organized into specific areas of technical and vertical market expertise
called practice areas. TSC believes that a structure based on focused practice
areas addresses its clients need for very specialized industry and systems
knowledge and allows its employees the flexibility and opportunity to grow and
develop. Each practice area develops its own specific methodologies, tools,
project management plans, best practice and benchmark information, templates,
etc. This information is maintained, along with proposals, project plans and
other information, in knowledge databases that can be accessed by practice area
personnel working on projects in all parts of the world.
The Company's principal areas of technical and vertical market expertise, which
serve TSC customers in the U.S. and international markets include: Advanced
Networked Computing, Business and IT Strategy, Call Center, Change and Learning
Technologies, Enterprise Applications, Financial Services, and
Telecommunications. Additionally, the Company has recently established several
smaller technical focus areas including OrTech Solutions Company and The Bentley
Group.
TSC believes that within each of its practice areas, it competes primarily on
the basis of the experience and expertise of its senior project managers, its
proven track record in applying new technologies and innovative business
solutions, its use of methodologies and implementation tools and the creativity
of its proposals and delivered work product. Price has not typically been the
primary factor in these major systems projects. More price-sensitive projects
have generally tended to be performed by low-cost providers, such as contract
programmers.
===============================================================================
Page 3
ADVANCED NETWORKED COMPUTING
The IT and computing marketplace is characterized today by multiple competing
architectures and vendors along with rapidly evolving technologies. At the
individual company level, these firms must leverage their legacy information,
applications and hardware platforms as well as their IT organizations.
Additionally, the marketplace is moving toward a model of "assembled solutions"
whereby software and hardware from a variety of vendors are integrated into a
well-functioning system.
Computing architectures and the related communications infrastructure (the
"network") architecture are being simplified from an architectural standpoint as
the network architecture moves to having no tiers. All of the PC's, servers,
legacy applications, customer/supplier connections, etc. in these firm's
computing network are connected through a private network that may encompass a
variety of LAN, WAN, Intranet, Extranet, and other communications
infrastructure. While the network architecture gets simplified, the computing
architecture becomes more complex. Security, database replication and other
issues that were not significant when the systems ran on a dedicated network and
a centralized mainframe computer now become very important.
As clients implement client/server computing systems and continue to utilize
their existing legacy systems for other business functions, the issues of an
integrated network and computing architecture become significant. The use of the
Internet/Intranet as a data communications vehicle presents issues for clients
from both the network and computing architecture standpoint. Similarly, the
advent of thin-client network computing systems creates network and computing
architecture issues.
The Advanced Networked Computing (ANC) practice area deploys computing
architectures which are the successor of client/server. ANC solutions maximize
return-on-investment on a business application by business application basis by
optimizing the price/performance tradeoffs usually associated with critical
computing resources (processor, memory, and network). Additionally, ANC protects
the client's investment in the legacy application portfolio by introducing new
functional capabilities through renovation techniques. By using a renovation
philosophy (re-use before you buy, buy before you build), TSC is able to provide
ANC solutions faster, more cost effectively, and with minimal risk.
ANC capitalizes on emerging technologies such as the Internet, data warehousing,
knowledge databases, mobile solutions, and distributed objects. This new
computing era is neither client-centric, server-centric, nor network-centric.
Instead, it strikes the appropriate balance between client, server, and network
in order to meet business requirements, end-user service level expectations
(response-time, throughput, and availability), corporate service, security and
quality objectives. It deploys business application solutions which may combine
multiple execution architecture types, including web-enabled function, multi-
tier client/server and batch.
The cumulative effect of combining state-of-market architectures such as batch,
on-line transaction processing (OLTP), client/server and data warehousing with
emerging architectures such as web-based function, distributed objects and
multi-media, results in business solutions which permit a company's employees,
as well as their customers and suppliers, to access
===============================================================================
Page 4
information and execute business functions anywhere, anytime. The benefits to
the client include lowered costs, improvements in service and quality, and
compressed time-to-market for new products and services.
BUSINESS AND IT STRATEGY
TSC's focus in the area of Business and IT Strategy is centered in two practice
areas. TSC provides strategic consulting services, including business strategic
planning, market research and analysis, new venture growth services, product
distribution channel planning, and organizational restructuring services through
its TSC Strategy Group. These strategic business and management consulting
services are provided to companies within the computer, telecommunications,
software, and services industries. TSC's strategic consulting staff has
extensive experience in providing these consulting services to firms such as
IBM, AT&T, GTE, Motorola, Digital Equipment and many of the regional Bell
operating companies.
TSC also provides strategy services in the area of IT Strategy and
Transformation. These services encompass three areas: IT assessment, IT strategy
and IT transformation. IT assessment provides clients with an objective,
independent evaluation of their current IT capabilities based on a balanced
scorecard approach. IT strategy defines a vision for applications, technology
and IT capabilities that is aligned with the client's business strategy to
maximize the return on their IT investments. A detailed plan and business case
for implementing the IT vision are developed. IT transformation services help
our clients transform their IT capabilities to the Networked Computing era
through IT process improvement, Networked Computing infrastructure engineering,
organizational development, and outsourcing consulting.
CALL CENTER
TSC's Call Center practice area is a recognized leader in the implementation of
customer relationship call center projects for consumer products, health care,
telecommunications, high technology, and financial services companies. Companies
utilizing TSC's services in the Call Center practice area do so because they
have come to believe, as does TSC, that superior customer service can be a
competitive differentiation and an important factor in retaining customers.
Companies who believe this also realize that attracting new customers is a very
costly exercise and that it is usually more cost-effective to retain existing
customers.
An important element in the current success and growth of this practice area is
TSC's ability to impart to its clients a vision of the future that will utilize
sophisticated voice and data technologies integrated into a seamless environment
at the call center customer service agent's workstation.
Projects in the Call Center practice area typically include the evaluation of
current call center operations, benchmarking and best practices analysis, system
design and architecture, and implementation involving a variety of hardware,
software and technologies, including the integration of voice and data
technology, artificial intelligence, imaging, client/server, and desktop tools.
The Call Center practice area targets firms with inbound/outbound call centers
or telemarketing centers which provide such functions as sales, service,
technical support, and customer inquiry. TSC's Call Center practice area
currently performs work in the U.S., Canada and Europe.
===============================================================================
Page 5
CHANGE AND LEARNING TECHNOLOGIES
The Change and Learning Technologies practice area is focused on assisting
organizations in managing the human side of implementing strategic change in a
corporate environment. The Change and Learning Technologies practice area
provides change management services, customized educational programs, and multi-
media resources that help organizations achieve the greatest benefits from their
strategic investments. Many of these projects are performed as part of major
system changes that have been undertaken at the client.
The success or failure of implementing major changes in an organization depends
upon the most essential element in every organization - the people. TSC provides
its clients with a single source for managing the "people" side of change. TSC
consultants and training specialists deliver change management, education and
training, and multimedia services specifically tailored to each client
environment. In all areas, TSC customizes the deliverables to the project, the
business and the culture of the client.
In the area of change management, the services provided by TSC include:
Strategic Visioning; leadership of the change process (Change Leadership);
development and training of the teams (Team Building); development and
deployment of a communications plan to ensure consistent and clear messages
about the project (Communications); and development of objectives by employees
that can be measured and attained (Team Covenant Training).
TSC's services in the education and training area include: the analysis of the
audience to be trained (Assessment); the development of executive education
programs, including the linkage of performance measures to project goals
(Executive Education and Flowdown); development of customized education courses
(General Education); development of specific educational courses that highlight
the business processes being implemented and explain their benefits (Business
Process Education); development of customized skills training programs (Skills
Training); and development of new policies and procedures and the incorporation
of these into training programs (Policies and Procedures Development).
TSC offers its clients a variety of multimedia services focused on training and
communication. These services delivered through the Company's Creative Delivery
Systems division include multimedia training systems that utilize 2D and 3D
graphics, custom video and audio, and all levels of animation. Creative Delivery
Systems also designs communication and training tools with delivery via various
mediums such as video, diskette, CD-ROM, the Internet or the client's Intranet.
The Company's multimedia application work extends to the development of Internet
and Intranet applications.
ENTERPRISE APPLICATIONS
The Enterprise Applications practice area undertakes projects which require
knowledge of many different third-party application software packages and may
involve the implementation of customized software to interface the new
application software with existing customer systems. Technologies common in this
practice area include client/server and cooperative processing architectures,
relational database technology, network integration, and telecommunications.
===============================================================================
Page 6
The client focus within the Enterprise Applications practice area includes
semiconductor, consumer packaged goods, electronics and other manufacturers;
engineering; health care; financial services; distribution and logistics;
aerospace and defense; and other firms where the installation of an application
software package developed by a third-party vendor is being undertaken.
Operational areas that the Enterprise Applications practice area focus on
include manufacturing planning and operations, logistics, transportation, supply
chain integration, inventory management, human resources, accounting, and
financial analysis and reporting.
The Enterprise Applications practice area is involved in systems integration and
package implementation projects involving the human resources, financial and
manufacturing systems supplied by PeopleSoft, Inc.; the integrated client/server
product family R/3 supplied by SAP AG and its U.S. subsidiary SAP America, Inc.;
the Baan IV integrated client/server product supplied by Baan Company N.V. and
its U.S. subsidiary Baan U.S.A., Inc.; the Oracle Applications suite of
client/server products developed by Oracle Corporation; and the FinancialStream
client/server financial packages supplied by Geac Computer Systems Inc.
Additionally, the Enterprise Applications practice area provides services
related to the evaluation of a client's current systems and business issues and
may perform analysis of software alternatives for clients.
FINANCIAL SERVICES
The Financial Services practice area is focused on defining and implementing
systems for financial institutions in the areas of investment management and
risk management. Investment management systems are used by portfolio managers,
traders, and client relationship personnel to improve asset returns and customer
service. Risk management systems are used in banking and corporate treasury
functions for asset/liability management and to measure and hedge interest rate,
currency and commodity income and value risk. In addition, the Financial
Services practice area has experience in implementing real-time global trading
and back office applications as well as executive information systems in support
thereof. TSC clients within the Financial Services practice area include firms
in the capital markets, investment management services, insurance, and retail
and commercial banking industries.
These financial services firms must be able to collect, process, and
coordinate vast amounts of information to survive and prosper in an
increasingly competitive environment. The globalization and heightened
volatility of financial markets, combined with the introduction of
increasingly complex products and transactions, have intensified the need for
real-time, global, 24-hour integrated systems that can coordinate information
needs throughout the organization. In addition, regulatory requirements have
greatly expanded the types of information required to be reported to
government agencies.
As a result of their information needs, financial services companies have
historically relied heavily on computer technology and have come to view it
as an asset with the potential to positively affect their competitive
position. As their information needs are increasing, these firms are
undertaking more systems upgrades, refinements, and overhauls to address
those needs. Projects undertaken by TSC's Financial Services practice area
often use technologies, such as client/server and cooperative processing
architectures, relational database technology, imaging, network integration,
and telecommunications.
===============================================================================
Page 7
TELECOMMUNICATIONS
In today's telecommunications marketplace, with the movement toward deregulated
local service markets, the incumbent local exchange carriers are being forced to
address business strategy, service, pricing and billing issues that they have
not had to deal with in the past. Additionally, the new local exchange carriers
entering the market are in need of the full range of business strategy and
business systems to support their new local service business. TSC's
Telecommunications practice area is focused upon assisting both the current
incumbent local exchange carriers as well as the new local exchange carriers by
providing strategy and implementation services to support this new deregulated
environment. The services offered by TSC cover four main areas: Business
Strategy/Business Management, Provider-to-Provider (Wholesale), Provider-to-
Customer (Retail), and Business Systems and Network Operations.
TSC's service offering includes consulting and implementation services focused
on business and service management processes. The business and service
management processes focus on customer care (creating customer satisfaction),
service development (compressing time-to-market), and operations (improving
service levels). TSC's services are designed to help clients reduce the time
required to introduce new communications products, pricing and coverage; reduce
operating costs; and improve the quality of service to both their customers and
their trading partners.
TSC's consulting services consist of business strategy development, requirement
definition, implementation planning, and economic justification. TSC's
implementation services consist of program/project management, systems building
and testing for the transaction systems supporting Provider-to-Provider
(Wholesale), Provider-to-Customer (Retail) and Business Systems and Network
Operations. These systems include pre-sale, support, ordering, activation,
billing and settlement systems.
TSC brings to each of these areas its strong competencies in project and program
management; management consulting; business and systems requirements analysis;
gap analysis; IT and operations architecture; distributed network and systems
management and extensive experience in a variety of technology areas. TSC's
technology expertise includes the areas of: legacy renovation and OSS overhaul;
data warehousing; object technology; convergent billing platforms; rules-based
server and inference engine technology; telecommunications; and extensive
experience in the areas of EDI, electronic commerce, electronic bonding
interface, transport and messaging platforms.
ORTECH SOLUTIONS
During fiscal 1997, TSC established OrTech Solutions Company ("OrTech"). OrTech
is a commissioned sales representation firm that represents Oracle Corporation
("Oracle") in the sales of the Oracle Applications suite of products to middle
market firms. Oracle, under this program, has granted OrTech exclusive
territories which include the states of Texas, Oklahoma, Louisiana, Arkansas,
Wisconsin, Illinois and Indiana. All obligations related to the Oracle
Applications suite of products is retained by Oracle.
===============================================================================
Page 8
THE BENTLEY GROUP
In June 1997, TSC acquired the common stock of The Bentley Company, Inc. (which
has been renamed The Bentley Group), a Boston-area based firm specializing in
business and operations consulting in the area of customer service and field
service and support. Additionally, The Bentley Group has a business focus in
software package implementation for help desks and service and sales force
automation. The Bentley Group offers a wide range of consulting services for the
internal and external support organizations of Fortune 500 companies. These
services include sales and service business planning; help desk and customer
service assessment, design and implementation; and package implementation
services.
SERVICES
TSC provides IT services and strategic business and management consulting
services to its clients. TSC's IT services address a broad spectrum of IT
consulting from IT strategy through systems integration, including the
identification of areas of a client's business that can benefit from computer
technology, feasibility studies, business case justification, business process
redesign and reengineering, benchmarking and best practices, project management,
architecture, logical and physical systems design, hardware and software
selection, programming, implementation, change management, education, training,
and benefits realization. As a systems integrator, TSC assumes overall project
management responsibility, is the primary point of contact for the client, and
is able to deliver a comprehensive package of services and products. In
addition, TSC occasionally utilizes certain customized software packages that
may be sold separately or provided as part of a larger systems solution. The
Company's strategic business and management consulting services offered include
business strategic planning, market research and analysis, new venture growth
services, product and distribution channel planning and organizational
restructuring services.
TSC generally bills for project work on a time-and-materials basis. The size of
the team of TSC's professional staff assigned to a particular project varies
depending on the size of the project and the stage of implementation. TSC's
professional staff assigned to a project is billed out at various rates,
depending on the level of expertise of each individual.
The value of TSC's comprehensive package of services and resources is
particularly evident in the context of major systems projects. Successful
implementation of a major systems project requires a wide range of technical
skills, such as general management consulting and business process
reengineering, logical and physical design, implementation and training support,
and technical expertise in equipment, databases, programming, productivity
tools, methodologies, communications, and system design and maintenance. TSC can
provide these technical skills and, in addition, contribute significant
additional value to the project by offering expertise in the following areas:
BUSINESS CASES -- TSC believes that one way in which it differentiates itself in
the business and technology consulting market is through its business case
justification process. The business case justification spells out the business
benefits that will result from the systems investment, along with the various
financial measurements of the benefits. Based on the time allowed to perform
this analysis, access to client personnel, financial information and many other
factors, the business case may range from very simple to very detailed and
sophisticated.
===============================================================================
Page 9
The business case analyzes the client's current business objectives,
operational structure, and systems architecture, evaluating which areas will
bring the greatest return on the client's investment. During the process, TSC
will provide the client with information about relevant technological options
and recommendations on how the client can best employ the technology to meet
its objectives.
The business case can be used to relate the system functionality and
associated costs to specific and measurable benefits. TSC analyzes the impact
of the proposed new technology in financial terms, such as internal rate of
return, payback, net present value, cash flow, and financial income statement
impact, adapting to the internal accounting procedures of the client so the
resulting business case is in a format that the client can easily understand.
Three scenarios are typically included in TSC's business cases: conservative;
most likely; and best case.
The key elements of a complete TSC business case include: an executive
summary, project and system descriptions, a financial summary, alternative
approaches considered, quantifiable and non-quantifiable benefits, recurring
and nonrecurring costs, timing of the benefit or cost, and
post-implementation audit guidelines.
Large systems projects are bound to have problems, both anticipated and
unanticipated. TSC believes that a comprehensive business case with specific,
measurable results can help the project team to better work through the
problems and deliver an effective business solution.
SYSTEMS INTEGRATION AND PROJECT MANAGEMENT -- TSC identifies areas of a
client's business that can benefit from computer technology and works with
the client to design and develop an appropriate solution to meet the client's
needs. The project manager typically assumes overall project management
responsibility during the development and implementation phases, overseeing
the team assembled by TSC (which normally consists of a combination of TSC,
client, and vendor personnel) to implement the project and coordinate the
various hardware, software, telecommunications, and other components required.
SOFTWARE PRODUCTS EXPERTISE -- Application software and other software
products can reduce development time, cut costs, and increase the probability
that the system will perform the job it is intended to perform. TSC believes
that application software experience and software products will become
increasingly important to businesses seeking systems solutions in the future.
TSC is familiar with many third-party software products for the industries it
serves and can, in some cases, provide or utilize its own software tools.
REUSABLE TOOLS AND METHODOLOGIES -- TSC has developed a number of
methodologies, templates, and tools which are used in various areas of the
strategic planning, market analysis, business case, systems integration,
project management, and software package integration/implementation aspects
of TSC's project work. These methodologies, templates and tools decrease the
time required to implement a system or develop an analysis, as well as
increase reliability and reduce client risk associated with a particular
project phase.
CHANGE MANAGEMENT AND TRAINING -- TSC embeds a change management component in
its delivery of solutions, recognizing that the ability and speed of the
people in a client organization
===============================================================================
Page 10
to adapt to new systems is a critical success factor. Whether it is a package
implementation or a large complex systems integration project, employees at
all levels of the client are affected. The failure of the users to properly
utilize the system can mean the difference in the client obtaining the
benefits originally specified for the project. TSC's change management
programs are designed to ensure the project's successful implementation by
reducing resistance, along with expanding the client's understanding and
commitment to the change necessitated by the project.
TSC recognizes that this aspect of the implementation of a computer system is
much more than developing a training program. TSC believes that its approach of
using consultants trained in organizational development, counseling, and human
behavior is critical to developing a successful change management program. TSC's
change management staff has worked in counseling, health/mental health clinical
practice, and the design and presentation of high-impact interactive/activity-
based training programs.
TSC offers its clients a variety of training options in its project work. TSC's
training programs can range from basic "train the trainer" programs for a new
client system to sophisticated multi-media computer-based training programs that
can be used for training the users of the system as well as detailed process and
system education.
INTERNATIONAL
TSC's international operations are focused in Latin America, Europe and Canada.
In each of these areas, the Company has selected one of its practice areas to be
the initial focus on which to develop its sales, project management, recruiting
and infrastructure for the particular country or region. A discussion of
revenues, operating income, and identifiable assets contributed by these foreign
subsidiaries is provided in Note 14 of the consolidated financial statements.
TSC's first international operation was in Latin America. The Company's focus in
Latin America is with the Enterprise Applications practice area, with an initial
focus on the integration and implementation of the SAP R/3 product. TSC began
operations in Mexico in fiscal 1996. In fiscal 1997, the Company expanded its
operations into Colombia. In addition to offering SAP R/3 integration and
implementation services, the Company is now offering PeopleSoft integration and
implementation services as well as training services to its customers in Latin
America.
TSC's European expansion is focused on the Call Center practice area and its
work in enterprise customer management systems. TSC began its operations in
Europe in the latter part of fiscal 1996 and acquired the London-based call
center consulting firm Aspen Consultancy, Ltd., in May 1996. Since that time,
TSC has added offices in Cologne, Germany and Paris, France. During fiscal 1997,
TSC acquired a small Cologne-based call center consulting firm, Geising
International. TSC's project work has been focused primarily on the banking,
insurance, and telecommunications industries.
The Call Center practice area was also the focus of TSC's expansion into the
Canadian market. During fiscal 1997, TSC opened a Toronto office and began
project work in the enterprise customer management area. Project work has
focused primarily on the banking and financial services markets.
===============================================================================
Page 11
As the Company has developed its sales, project management, consulting staff and
infrastructure organizations in each of these markets, other TSC practice areas
have targeted these international markets for penetration.
CLIENTS
TSC's five largest clients in fiscal 1997 accounted for 8 percent, 7 percent,
5 percent, 4 percent, and 3 percent of total revenues, respectively; in fiscal
1996, the five largest clients accounted for 21 percent, 6 percent, 6 percent,
6 percent, and 5 percent of total revenues, respectively; and in fiscal 1995,
they accounted for 24 percent, 18 percent, 6 percent, 5 percent, and 4 percent
of total revenues, respectively. No clients accounted for 10 percent or more of
revenues in fiscal 1997. In fiscal 1996, Georgia-Pacific accounted for
10 percent or more of revenues, and in fiscal 1995, Georgia-Pacific and ConAgra
each accounted for 10 percent or more of revenues.
In fiscal 1997, fiscal 1996, and fiscal 1995, respectively, 78 percent,
75 percent and 80 percent of TSC's total revenues resulted from clients for
which work had been performed in the prior fiscal year. Although it is not
unusual for a client to contribute significant revenues over several years, no
assurance can be given that a client that contributes significant revenue in one
year will contribute significant revenue in following years.
TSC views existing clients as a valuable source of additional work once a
project has commenced. Such additional work frequently takes the form of an
expansion of the original project or an additional project related in some way
to the original project. In most cases, however, TSC does not expect to continue
work for its clients on a long-term basis because TSC works as a team with the
client to ensure that the maintenance of the system can be done in-house.
PERSONNEL
As of May 31, 1997, TSC had a total staff (including U.S. practice areas, Latin
America, Europe, Canada, and Infrastructure) of 1,102. The following table
summarizes, as of May 31, 1997, the experience levels of TSC's professional
staff (other than those in Infrastructure). Included among TSC's vice presidents
are its senior project managers.
AVERAGE RELEVANT EXPERIENCE
(YEARS)
---------------------------------
% OF
LEVEL TOTAL CONSULTING INDUSTRY TOTAL
----- ------ ---------- -------- -----
Vice Presidents 12% 10 10 20
Senior Principals 18% 8 10 18
Principals 26% 5 10 15
Senior Consultants 21% 4 8 12
Consultants 14% 2 4 6
Associate Consultants 9% 1 2 3
In order to accommodate typical project development lead times, TSC has found
that, from time to time, it must recruit and hire additional senior project
managers on the basis of anticipated demand for their services. There can be no
assurance that demand for TSC's services will materialize as anticipated.
===============================================================================
Page 12
Professional turnover continued at a manageable level in fiscal 1997. The
average professional turnover rate was 23 percent of which 26 percent was a
result of involuntary terminations.
INFRASTRUCTURE
As of May 31, 1997, TSC had a staff of 140 individuals who comprised the
Infrastructure support group. The objective of Infrastructure is to facilitate
local decision-making and support the autonomy of the practice areas and project
managers, while maintaining the internal structure necessary to support TSC's
goals. The functional areas within Infrastructure include: senior corporate
management; accounting; financial reporting; finance; legal; treasury; human
resources; employee benefits; marketing; public and investor relations; office
operations; recruiting support; manpower coordination; training; internal
communications; internal technology applications; planning; quality assurance;
insurance; and acquisitions. During fiscal 1997, TSC significantly increased the
number of infrastructure personnel in order to support the growth of the
business and the expansion of the number of offices.
INTELLECTUAL PROPERTY RIGHTS
Software developed by TSC in connection with specific client engagements is
usually the property of the client. In certain of such situations, TSC has
obtained, and in the future may attempt to obtain a license from its client to
permit TSC to market the software for the joint benefit of the client and TSC.
There can be no assurance, however, that TSC will be able to negotiate software
licenses upon terms acceptable to TSC.
TSC regards the methodologies, tools, and software that it has developed as
proprietary and intends to protect its rights in such methodologies, tools and
software where appropriate with registered copyrights, patents, trademarks,
trade secret laws, and contractual restrictions on disclosure and transferring
title. There can be no assurance that any such steps taken by TSC in this regard
will be adequate to deter misappropriation of its proprietary rights or
independent third-party development of functionally equivalent products. "TSC"
is a registered service mark of Technology Solutions Company. TSC presently
holds no patents or registered copyrights on any of its methodologies, tools, or
software.
Although TSC believes that its services and products do not infringe on the
intellectual property right of others, there can be no assurance that such a
claim will not be asserted against TSC in the future.
COMPETITION
The IT and systems consulting business and the strategic and management
consulting business are highly competitive areas and include participants
from a variety of market segments. The IT and systems consulting business
participants include systems consulting and implementation firms, contract
programming companies, application software firms, the service groups of
computer equipment companies, facilities management companies, "Big Six"
accounting firms, and general management consulting firms. Thousands of firms
fall into one of these categories. Among the more recognizable participants
in the IT and systems consulting business are American Management Systems,
Inc.; Andersen Consulting, an affiliate of Arthur Andersen & Co.;
===============================================================================
Page 13
Booz, Allen & Hamilton Inc.; Cambridge Technology Partners, Inc.; Computer
Sciences Corporation; Coopers & Lybrand LLP; Deloitte & Touche LLP;
Electronic Data Systems Corporation; Ernst & Young LLP; IBM; KPMG Peat
Marwick LLP; and Price Waterhouse LLP. Recognizable participants in the
strategic business and management consulting business include firms such as
Andersen Consulting; Booz, Allen & Hamilton Inc.; McKinsey & Co.; and CSC
Index, an affiliate of Computer Sciences Corporation, among others.
TSC believes that its ability to compete depends in part on a number of factors
outside its control, including the ability of its competitors to hire, retain,
and motivate a significant number of senior project managers, the ownership by
competitors of software used by potential clients, the development by others of
software that is competitive with TSC's tools and services, and the price at
which others offer comparable services.
Participants in the systems consulting and implementation business also face
potential competition from in-house systems staff. In-house systems staff are
often considered to be a lower cost alternative to outside systems firms. In
addition, the use of in-house staff permits the client to build skills for
maintaining and enhancing the system, as well as skills to implement future
systems. On the other hand, use of an in-house staff for a major systems project
often requires hiring a significant number of additional people with no
assurances that such new hires can perform as needed. Furthermore, the increased
staff must often be re-deployed at the end of the project. Finally, clients
often have difficulty attracting highly skilled individuals because of salary
constraints.
Many participants in the systems consulting and implementation business have
significantly greater financial, technical, and marketing resources and generate
greater systems consulting and implementation revenues than does TSC. TSC
competes more frequently with Andersen Consulting for major systems integration
projects than with any other participant in the market. Andersen Consulting has
substantially greater revenues, employees, and market share than does TSC.
===============================================================================
Page 14
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of TSC are as follows:
William H. Waltrip Chairman
John T. Kohler President and CEO
James S. Carluccio Executive Vice President
Kelly D. Conway Executive Vice President
Jack N. Hayden Executive Vice President
Michael J. McLaughlin Executive Vice President
Martin T. Johnson Senior Vice President and Chief Financial Officer
Paul R. Peterson Senior Vice President, General Counsel and
Corporate Secretary
William H. Waltrip, age 59, has been a Director of the Company since December
1992 and Chairman of the Board since June 1993. Mr. Waltrip also served as Chief
Executive Officer from June 1993 to June 1995. Since January 1996, Mr. Waltrip
has served as the Chairman of the Board of Directors and, during 1996, served as
Chief Executive Officer of Bausch & Lomb, Inc. From 1991 to 1993, he was Vice
Chairman of Unifax, Inc., a broad-line food service distributor. From 1985 to
1988, Mr. Waltrip was President, Chief Operating Officer and a Director of IU
International, a diversified services company with major interests in
transportation, environmental services and distribution. From 1982 to 1985 he
was President, Chief Executive Officer and a Director of Purolator Courier
Corporation and from 1972 to 1982 he was President, Chief Operating Officer and
Director of Pan American World Airways, Inc. He is also currently serving as a
Director of Bausch & Lomb, Inc., the Teachers Insurance and Annuity Association
and Thomas & Betts Corporation.
John T. Kohler, age 50, is currently the President and Chief Executive Officer
of the Company and has been a Director of the Company since June 1994. He joined
the Company as Senior Vice President in June 1992, was promoted to Executive
Vice President and named to the Office of the Chairman in September 1993, became
President and Chief Operating Officer in January 1994 and became Chief Executive
Officer in June 1995. From 1986 to 1992, he was Senior Vice President and Chief
Information Officer of Kimberly-Clark Corp. From 1983 to 1986, he was a partner
and regional practice director for the Midwest Region consulting practice of
Arthur Young. He is also currently serving as a Director of Follett Corporation
and Infosis Corp.
James S. Carluccio, age 43, joined TSC in January 1992 and assumed his current
role as Executive Vice President in February 1994. From 1976 to 1992, he was
with Arthur Andersen & Co. and certain affiliates thereof, most recently as a
partner in Andersen Consulting's Advanced Systems Group in their New York
office. He is also currently serving as a Director of Toy Biz, Inc.
Kelly D. Conway, age 41, joined TSC in November 1993 as Senior Vice President
and assumed his current role as Executive Vice President in July 1995. Prior to
coming to TSC, he was a partner in the management consulting firm of Spencer,
Shenk and Capers from 1991 to 1993. From 1989 to 1991, he was President of
Telcom Technologies, a leading manufacturer of
===============================================================================
Page 15
automatic call distribution equipment. From 1984 to 1989, he held the positions
of Vice President of Finance and Vice President of Marketing for Telcom
Technologies. From 1980 to 1984, he was a consultant with Deloitte, Haskins and
Sells.
Jack N. Hayden, age 50, joined TSC in April 1992 as Senior Vice President and
assumed his current role as Executive Vice President in July 1995. He served as
interim CFO of TSC during late 1992 and early 1993. Prior to coming to TSC, he
held the position of Vice President - Operations, Commercial Transport Division
of McDonnell Douglas Corporation from 1990 to 1992. From 1989 to 1990, he served
as Vice President-Finance of McDonnell Douglas Corporation. From 1971 to 1989,
he served in numerous manufacturing and procurement positions at McDonnell
Douglas Corporation.
Michael J. McLaughlin, age 47, joined TSC in May 1996 when TSC acquired the
operations of McLaughlin & Associates. Effective with the acquisition, he
assumed the role of Executive Vice President and was appointed to fill a vacancy
on the Company's Board of Directors. From 1992 to 1996, he was President of
McLaughlin & Associates. From 1972 to 1992, he worked for Booz, Allen & Hamilton
Inc., completing his tenure there as Global Practice Leader for the computer and
telecommunications practice.
Martin T. Johnson, age 46, joined TSC in August 1993 as Vice President
responsible for business case development. In February 1994, he assumed the role
of Vice President and Chief Financial Officer. In June 1996, he was made a
Senior Vice President of the Company. From 1990 to 1993, he was Corporate
Controller of The Marmon Group, Inc., an autonomous association of over 70
independent member companies. From 1987 to 1990, he was Vice President-Finance
and Chief Financial Officer of COMNET Corporation, a publicly-held computer
software and computer services firm. From 1976 to 1987, he worked in a variety
of financial positions with Zenith Electronics Corporation, the final position
being Director, Internal Audit and Operations Analysis.
Paul R. Peterson, age 55, joined TSC in September 1992 as Vice President and
General Counsel and was appointed Corporate Secretary in October 1992. In June
1996, he was made a Senior Vice President of the Company. Prior to coming to
TSC, he worked for Bridgestone/Firestone, Inc. during the periods 1981 to 1984
and 1987 to 1992 where he held several positions including Divisional General
Counsel. His background also includes employment from 1984 to 1987 as a
corporate executive with Block Management Corporation, an H&R Block subsidiary
which managed Hyatt Legal Services. He also served at the Federal Trade
Commission as a senior executive from 1974 to 1981 and as a trial attorney from
1971 to 1974.
ITEM 2. PROPERTIES
TSC's principal executive offices are located at 205 North Michigan Avenue,
Suite 1500, Chicago, Illinois 60601. TSC's lease on these premises expires
July 31, 2004. TSC also leases facilities in Schaumburg (IL), Atlanta, New
Canaan (CT), Dallas, New York, Philadelphia, San Francisco and Santa Cruz (CA).
Additionally, TSC leases office premises in Mexico City, Mexico; Bogota,
Colombia; London, England; Cologne, Germany; Paris, France; and Toronto, Canada.
TSC believes that these facilities are adequate for its current business needs.
TSC expects that
===============================================================================
Page 16
additional space will be required as it expands its business and believes
that it will be able to obtain suitable space as needed.
ITEM 3. LEGAL PROCEEDINGS
The Company is party to lawsuits arising out of the normal course of business.
Management believes the final outcome of such litigation will not have a
material adverse effect on the Company's consolidated financial position or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter ended
May 31, 1997.
===============================================================================
Page 17
TECHNOLOGY SOLUTIONS COMPANY
PART II.
===============================================================================
ITEM 5. MARKET FOR THE REGISTRANTS' COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is listed on The Nasdaq Stock MarketSM under the
symbol "TSCC." As of August 11, 1997, there were approximately 675 holders of
record of the Company's Common Stock. The number of holders of Common Stock does
not include beneficial owners of Common Stock whose shares are held in the name
of banks, brokers, nominees or other fiduciaries.
The following table sets forth the range of high and low trade prices on The
Nasdaq Stock MarketSM for the Company's Common Stock for each quarter in fiscal
1996 and fiscal 1997.
QUARTER ENDED HIGH LOW
------------- ---- ---
August 31, 1995 $ 7.500 $ 4.055
November 30, 1995 $ 8.389 $ 6.555
February 29, 1996 $10.833 $ 7.278
May 31, 1996 $16.000 $10.222
August 31, 1996 $19.750 $12.583
November 30, 1996 $31.417 $18.667
February 28, 1997 $30.333 $19.750
May 31, 1997 $28.667 $14.250
On August 11, 1997, the last reported sale price on The Nasdaq Stock MarketSM
for the Company's Common Stock was $25.00.
The market price for the Common Stock may be significantly affected by factors
such as the announcement of new products or services by the Company or its
competitors, technological innovation by the Company, its competitors or other
vendors, quarterly variations in the Company's operating results or the
operating results of the Company's competitors, general conditions in the
Company's and its customers' markets, changes in the earnings estimates by
analysts or reported results that vary materially from such estimates. In
addition, the stock market has experienced significant price fluctuations that
have particularly affected the market prices of equity securities of many high
technology and emerging growth companies and that often have been unrelated to
the operating performance of such companies. These broad market fluctuations may
materially and adversely affect the market price of the Company's Common Stock.
Following periods of volatility in the market price of a company's securities,
securities class action litigation has often been instituted against such a
company and its officers and directors. Any such litigation against the Company
could result in substantial costs and a diversion of management's
===============================================================================
Page 18
attention and resources, which could have a material adverse effect on the
Company's business, operating results and financial condition.
In connection with the Company's pooling-of-interest combination with HRM
Resources, Inc. on March 1, 1997, the Company issued 561,039 unregistered shares
of Common Stock in reliance on Section 4(2) of the Securities Act of 1933. In
connection with the acquisition and merger of Goalsetters, Inc. into TSC on
September 30, 1996, the Company issued 6,427 unregistered shares of Common Stock
in reliance on Section 4(2) of the Securities Act of 1933.
The Company has never paid dividends on its Common Stock and currently intends
to retain all earnings, if any, for use in the expansion of its business and
other corporate purposes. Therefore, the Company does not anticipate paying any
dividends on its Common Stock in the foreseeable future. The declaration and
payment of dividends by the Company are subject to the discretion of the Board
of Directors.
All per share data have been adjusted to reflect the Company's three-for-two
stock splits effected as a 50 percent stock dividend effective July 30, 1996,
and August 1, 1997, respectively.
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes certain selected financial data which is derived
from the Company's audited financial statements. All the information should be
read in conjunction with the Company's audited financial statements and notes
thereto and with Management's Discussion and Analysis of Financial Condition and
Results of Operations, which are included elsewhere in this filing. TSC's
audited statements of income for the years ended May 31, 1997, 1996 and 1995 and
the audited balance sheets as of May 31, 1997 and 1996 are included elsewhere in
this filing, and the corresponding selected financial data set forth below is
qualified by reference to such audited financial statements. All amounts are in
thousands, except for earnings per common share.
FOR THE YEAR ENDED MAY 31,
------------------------------------------------------------------------------
1997 1996 1995 1994 1993
--------- -------- -------- --------- ---------
CONSOLIDATED STATEMENT OF
INCOME DATA:
Total revenues $ 165,088 $ 97,599 $ 65,817 $ 53,157 $ 62,475
Operating income (loss) $ 22,873 $ 4,864 $ 2,770 $ (3,142) $ 7,007
Net income $ 15,067 $ 4,574 $ 3,367 $ 35 $ 5,706
Earnings per common share* $ 0.57 $ 0.20 $ 0.16 $ 0.00 $ 0.21
*1993-1997 earnings per common share data have been restated to reflect the
three-for-two stock splits that were effected on August 1,
1997 and July 30, 1996, respectively.
AS OF MAY 31,
------------------------------------------------------------------------------
1997 1996 1995 1994 1993
--------- -------- -------- --------- ---------
CONSOLIDATED BALANCE
SHEET DATA:
Total assets $133,866 $89,437 $65,222 $69,340 $76,048
Long-term debt __ __ __ __ __
===============================================================================
Page 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FISCAL 1997 COMPARED WITH FISCAL 1996
Consolidated net revenues for the year ended May 31, 1997 increased 69 percent
to $165.1 million in fiscal 1997 compared to $97.6 million in fiscal 1996. The
principal source of the increase was the 52 percent increase in domestic
billable hours, as well as a 2 percent increase in average domestic hourly
billing rates. The increase in billable hours was attributable to the
significant growth in the overall information technology professional services
market combined with the Company's ability to increase the number of its
consulting staff, through both recruiting efforts and business combinations. The
increase in average hourly billing rates was primarily due to the impact of the
fiscal 1997 hiring efforts and the resulting change in the mix of personnel to
include a greater percentage of more senior personnel. Total Company headcount
increased 77 percent to 1102 at the end of fiscal 1997 compared to 622 at the
end of fiscal 1996. The total number of project managers increased to 118 at the
end of fiscal 1997 compared to 72 a year earlier. Additionally, in fiscal 1997,
the Company recorded international revenues of $20.2 million compared to
$3.2 million in fiscal 1996.
Project personnel costs, which represent mainly professional salaries and
benefits, increased to $76.5 million in fiscal 1997 compared to $46.7 million in
fiscal 1996, an increase of 64 percent. This increase was due to additional
headcount and was consistent with the higher revenues reported in fiscal 1997.
Project personnel costs as a percentage of net revenues were 46 percent for
fiscal 1997 compared with project personnel costs as a percentage of net
revenues of 48 percent in fiscal 1996. This decrease was primarily the result of
more efficient utilization of professional staff offset in part by the time lag
between incurrence of project personnel costs and revenue generated by these
personnel.
The Company charges most of its project expenses directly to the client. Other
project expenses consist of nonbillable expenses directly incurred for client
projects and business development efforts including recruiting fees, sales and
marketing expenses, personnel training and provisions for valuation allowances
and reserves for potential losses on continuing projects. Other project expenses
for fiscal 1997 were $23.4 million, an increase of 80 percent from $13.0 million
in fiscal 1996. Other project expenses as a percentage of net revenues increased
slightly to 14 percent in fiscal 1997 compared to 13 percent in the prior year.
This change was due to increases in domestic hiring, training and nonbillable
travel expenses of $3.4 million as a result of increased headcount and business
development. In addition, travel related to various training activities in
fiscal 1997 increased compared to fiscal 1996, as well as an increase in
international expenses of $2.8 million. Also contributing to the change was an
addition to the provision for valuation allowances of $2.7 million due to the
increase in accounts receivable, as well as the inherently higher risks
associated with a larger customer base. The impact of the increase in other
project expenses as a percentage of net revenues was more than offset by the
higher utilization of professional staff, as well as a significant increase in
overall net revenues.
Management and administrative support costs increased 42 percent to
$32.1 million in fiscal 1997 compared to $22.6 million in fiscal 1996. The
increase of $9.5 million was primarily attributable to an increase in
international expenses of $6.3 million due to the expansion of foreign
operations;
===============================================================================
Page 20
growth in the regional practice area management; and travel and hiring costs
of $1.7 million, partially offset by various other operating costs. Goodwill
amortization of $0.8 million was recorded due to the purchase of four
businesses in fiscal years 1997 and 1996. During the first nine months of
fiscal 1996, $2.9 million was recorded for the employee retention program.
This program expired in February 1996, and, therefore, no amounts were
recorded in fiscal 1997.
Incentive compensation increased $2.8 million to $9.4 million in fiscal 1997
compared to $6.6 million in fiscal 1996. The increase is due to increased
headcount, at both the consulting staff and the project manager levels, and
Company profitability improvement. The Company expects to continue to accrue
incentive compensation throughout fiscal 1998.
Fiscal 1996 results reflect one-time pretax charges for the final settlement
relating to outstanding securities litigation and litigation involving the
Company's founders of $2.3 million and $0.9 million, respectively. The
securities litigation settlement called for a final payment of $4.6 million, of
which $2.3 million was covered by insurance and the remaining $2.3 million was
charged to fiscal 1996 operations.
Investment income in fiscal 1997, net of interest expense, was $2.1 million
compared to $1.9 million in fiscal 1996.
The Company's effective tax rate for fiscal 1997 was 39.7 percent compared to
32.4 percent in fiscal 1996. The increase in the effective tax rate was the
result of the reduction in the percentage of the Company's income coming from
nontaxable investment income in fiscal 1997. Management believes that the
existing levels of pretax earnings for financial reporting purposes will be
sufficient to generate the minimum amount of future taxable income necessary to
realize the deferred tax asset.
The increase in common and common equivalent shares outstanding was primarily
due to the exercise of stock options and the impact of the increase in the
Company's stock price on the calculation of common equivalent shares.
FISCAL 1996 COMPARED WITH FISCAL 1995
Consolidated net revenues for the Company increased 48 percent to $97.6 million
compared to $65.8 million in fiscal 1995. The principal source of the increase
was a 42 percent increase in billable hours, as well as a 2 percent increase in
average hourly billing rates. The increase in billable hours was attributable to
the significant growth in the information technology professional services
market combined with the Company's fiscal 1996 increase in consulting staff and
marketing efforts. The increase in average hourly billing rates was primarily
due to the impact of fiscal 1996 hiring and the resulting change in the mix of
personnel to include a greater percentage of more senior personnel. During
fiscal 1996 total Company headcount increased 47 percent from 423 as of
May 31, 1995 to 622 as of May 31, 1996. The total number of project managers as
of May 31, 1996 was 72 compared to 38 as of May 31, 1995.
Project personnel costs increased to $46.7 million in fiscal 1996 from
$29.2 million in fiscal 1995. Project personnel costs as a percentage of net
revenues were approximately 48 percent and 44 percent in fiscal 1996 and fiscal
1995, respectively. Unassigned labor costs increased during
===============================================================================
Page 21
fiscal 1996 due to the aggressive recruitment and training programs combined
with the timing of the assignment of new staff to client engagements.
Other project expenses for fiscal 1996 were $13.0 million, as compared to
$9.0 million for fiscal 1995. This increase was primarily related to an increase
in hiring, training and related expenses of $1.7 million and an increase in non-
billable travel expenses of $3.3 million in fiscal 1996 as compared to fiscal
1995. The increase in non-billable travel expenses was primarily due to travel
expenses associated with increased headcount and business development travel, as
well as travel related to training activities in fiscal 1996 as compared to
fiscal 1995.
Management and administrative support costs increased to $22.6 million in fiscal
1996 from $18.5 million in fiscal 1995. The increase of $4.1 million in fiscal
1996 as compared to fiscal 1995 was related primarily to increased regional
practice area management costs (salaries, travel and hiring costs) of
$2.1 million and increased marketing costs of $1.4 million. During fiscal 1995,
the Company established three new practice areas, enhanced its marketing
capabilities and, in fiscal 1996, added several new regional practice area
management Vice Presidents. In addition, charges for legal expenses increased
$1.5 million in fiscal 1996 as compared to fiscal 1995. Also included in fiscal
1996 costs were $0.9 million in management and administrative costs from the
Company's Mexican subsidiary. Expense accrued for the employee retention program
was $2.9 million and $4.4 million for fiscal 1996 and 1995, respectively. The
1996 amount represents the final charge related to the retention program. The
final annual payment for the retention program was made in March 1996.
Fiscal 1996 results reflect one-time pretax charges for the final settlement
relating to outstanding securities litigation and litigation involving the
Company's founders of $2.3 million and $0.9 million, respectively. The
securities litigation settlement called for a final payment of $4.6 million, of
which $2.3 million was covered by insurance and the remaining $2.3 million was
charged to fiscal 1996 operations.
During fiscal 1995, the Company entered into agreements with former Company
executives resulting in a fiscal 1995 pretax charge of $1.6 million. This amount
represented the settlement of a commission arrangement, certain other issues and
the surrender of options to acquire 1,811,250 shares of Company stock.
Incentive compensation of $6.6 million was accrued for fiscal 1996 as compared
to $4.7 million in fiscal 1995. The increase was due largely to the increased
number of project managers and consultant staff in fiscal 1996 compared to
fiscal 1995.
Investment income, net of interest expense, was $1.9 million for both fiscal
years 1996 and 1995.
The Company's effective tax rate differs from the statutory rate primarily due
to the significant percentage of total income resulting from federally
nontaxable investment income.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $9.7 million in fiscal 1997, an
increase of $10.6 million compared to net cash used in operating activities of
$(0.9) million in fiscal 1996.
===============================================================================
Page 22
Operating cash flow in fiscal 1997 was favorably impacted by higher net
income as a result of increased operating activities partially offset by
increased working capital requirements, especially the increase in net
receivables of $21.5 million. The increase in receivables is due to the
significant growth of the Company compared to the prior year, as well as the
lengthening of collection periods. The Company has classified a $3.8 million
trade receivable as long-term at May 31, 1997.
Cash generated by operations in fiscal 1997 was substantial and more than
adequate for the Company's cash needs. In addition, the Company's significant
amount of cash, cash equivalents and marketable securities has provided ample
liquidity to handle the Company's cash requirements.
Net cash used in investing activities in fiscal years 1997, 1996 and 1995 was
$2.5 million, $2.1 million and $1.1 million, respectively.
Proceeds from the sale of available-for-sale securities of $1.3 million were
used to purchase similar securities of $1.0 million. Proceeds of $8.9 million
were received by the Company due to the maturity of several held-to-maturity
investments in fiscal 1997. These proceeds were reinvested in working capital
requirements and expansion of the business.
Capital expenditures in fiscal years 1997, 1996 and 1995 were $6.1 million,
$3.7 million and $2.1 million, respectively. Capital expenditures are expected
to continue at the current rate in fiscal 1998 due to the Company's anticipated
expansion and growth. The Company expects that its future capital expenditures
will be financed through cash flows from operating activities. At the end of
fiscal 1997, the Company had no material commitments for capital expenditures.
Net cash outlays related to business acquisitions were $1.1 million in fiscal
1997 and $3.1 million in fiscal 1996.
Net cash provided by (used in) financing activities were $8.3 million,
$8.4 million and $(5.1) million in fiscal years 1997, 1996 and 1995,
respectively. The proceeds from the exercise of options with respect to
1.7 million shares of the Company's common stock generated $6.4 million in
fiscal 1997, a decrease from the $9.1 million generated in fiscal 1996 from the
exercise of options with respect to 2.4 million shares of the Company's common
stock. Increased participation and activity in the Employee Stock Purchase Plan
resulted in $1.8 million of proceeds in fiscal 1997 versus $0.4 million in
fiscal 1996.
Management anticipates that cash and marketable securities will be used for
general corporate purposes, including capital expenditures and the expansion of
the Company's business as opportunities arise, including the possibility of
additional acquisitions and business combinations. Subsequent to the end of
fiscal 1997, the Company acquired The Bentley Company, Inc. ("Bentley") for a
combination of cash and the Company's common stock. The transaction was
accounted for using the purchase method of accounting. Total consideration
paid for Bentley was approximately $12.7 million. Cash paid for Bentley totaled
$7.4 million and the Company also exchanged 29,535 shares of common stock of the
Company for all the issued and outstanding shares of Bentley and assumed the
employee stock options outstanding under
===============================================================================
Page 23
Bentley's stock option plan. The purchase price may be increased by
approximately $5.8 million if certain performance targets are met over the
next two years.
The Company has a $5.0 million unsecured line of credit facility (the
"Facility") with Bank of America Illinois. The agreement expires September
5, 1997. At the Company's election, loans made under the Facility bear interest
at either the Bank of America Illinois reference rate or at the Eurodollar rate
plus 0.75 percent. The unused line fee is 0.25 percent of the unused portion of
the commitment. The Facility requires, among other things, the Company to
maintain certain financial ratios. As of May 31, 1997, the Company was in
compliance with these financial ratio requirements. As of May 31, 1997, no
borrowings were made under the Facility. The Company intends to renew the
Facility upon its expiration.
All share and per share data have been adjusted to reflect the Company's three-
for-two stock splits effected as a 50 percent stock dividend effective
August 1, 1997 and July 30, 1996, respectively.
IMPACT OF INFLATION AND BACKLOG
Inflation should not have a significant impact on the Company's income to the
extent the Company is able to raise its consulting rates commensurate with its
staff compensation rates, which it has done successfully in the past. Because
the majority of the Company's contracts may be terminated on relatively short
notice, the Company does not consider backlog to be meaningful.
ACCOUNTING CHANGES
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based Compensation," as of May 31, 1997 and
implemented the disclosure provisions of this statement. While this statement
encourages companies to recognize expense for stock options at estimated fair
value based on an option pricing model, the Company has elected to disclose
proforma net income and earnings per share that would have been obtained under
this statement's approach for valuing and expensing stock options.
The Financial Accounting Standards Board ("FASB") issued SFAS No. 128, "Earnings
Per Share," in February 1997. This statement establishes new standards for
computing and presenting earnings per share. This statement is effective for
financial statements issued for periods ending after December 15, 1997; earlier
adoption is not permitted. Adoption of this statement will require the
presentation of basic and diluted earnings per share. If the statement had been
adopted, proforma basic and diluted earnings per share for the years ended
May 31, 1997, 1996 and 1995 would have been as follows:
YEAR ENDED
MAY 31,
-------------------------
1997 1996 1995
----- ----- -----
Basic earnings per share $0.64 $0.22 $0.17
Diluted earnings per share $0.57 $0.19 $0.14
===============================================================================
Page 24
The FASB has issued SFAS No. 130, "Reporting Comprehensive Income," in
June 1997. In addition to net income, comprehensive income includes items
recorded directly to stockholders' equity such as the income tax benefit
related to the exercise of certain stock options. This statement establishes
new standards for reporting and displaying comprehensive income and its
components in a full set of general-purpose financial statements. This
statement is effective for fiscal years beginning after December 15, 1997.
Adoption of this standard will only require additional financial statement
disclosure detailing the Company's comprehensive income.
In June 1997, the FASB also issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 establishes new standards
for reporting information about operating segments in interim and annual
financial statements. This statement is also effective for fiscal years
beginning after December 15, 1997. The Company is currently evaluating the
impact, if any, this statement will have on disclosures in the consolidated
financial statements.
ASSUMPTIONS UNDERLYING CERTAIN FORWARD-LOOKING STATEMENTS AND FACTORS THAT MAY
AFFECT FUTURE RESULTS
In the next few years, the Company expects growth in both revenues and profits
to continue at rates higher than the estimated industry growth rate of 16-
20 percent (source: Dataquest, 1996) although not at the exceptional rates
posted in fiscal 1997 and fiscal 1996. The foregoing statement contains, and
other information and statements provided by the Company from time to time may
contain, "forward-looking information." Such forward-looking information may
include information relating to anticipated growth in earnings per share,
anticipated returns on equity, anticipated growth in revenue, growth of client
base, anticipated operating costs and employment growth, anticipated reserves or
other expenses, or other matters. The cautionary statements provided below are
being made pursuant to the provisions of the Private Securities Litigation
Reform Act of 1995 (the "PSLRA") and with the intention of obtaining the
benefits of the "safe harbor" provisions of the PSLRA for any such forward-
looking information. Many of the following factors discussed below, as well as
other factors, have also been discussed in prior filings made by the Company.
Factors which could cause the Company's actual financial and other results to
differ materially from any results that might be projected, forecast, estimated
or budgeted by the Company in the forward-looking statements include, but are
not limited to the following:
RAPID TECHNOLOGICAL CHANGE
The systems consulting and implementation market has experienced rapid
technological advances and developments in recent years. Failure of the Company
to stay abreast of such advances and developments could materially adversely
affect its business. The Company additionally utilizes a number of different
technologies in developing and providing IT solutions for its customers. The
technologies used by the Company are developing rapidly and are characterized by
evolving industry standards in a wide variety of areas. While the Company
evaluates technologies on an ongoing basis and endeavors to utilize those that
are most effective in developing IT solutions for its customers, there can be no
assurance that the technologies utilized by the Company and the expertise gained
in those technologies will continue to be applicable in the future. There can be
no assurance that new technologies will be made available to the Company or that
such technologies
===============================================================================
Page 25
can be economically applied by the Company. The inability to apply existing
technologies and expertise to subsequent projects could have a material
adverse effect on the Company's business, operating results and financial
condition.
MANAGEMENT OF GROWTH
The Company's business has grown significantly since its inception, and the
Company anticipates future growth. The growth of the Company's business and the
expansion of its customer base have resulted in a corresponding growth in the
demands on the Company's management and personnel and its operating systems and
internal controls. Any future growth may further strain existing management
resources and operational, financial, human and management information systems
and controls, which may not be adequate to support the Company's operations.
The Company is currently increasing its expense levels as a result of a number
of factors, including substantial increases in the number of employees, the
opening of new offices, investments in equipment, training of employees and the
development of methodologies, tools, etc. An unexpected decline in revenues
without a corresponding and timely reduction in staffing and other expenses, or
a staffing increase that is not accompanied by a corresponding increase in
revenues, could have a material adverse effect on the Company's operating
results. There can be no assurance that the Company will be able to manage its
recent or future growth successfully. In addition, there can be no assurance
that the Company will continue to grow or sustain the rate of growth it has
experienced in the past.
The Company expects that it will need to develop further its financial and
management controls, reporting systems and procedures to accommodate future
growth. There can be no assurance that the Company will be able to develop such
controls, systems or procedures effectively or on a timely basis, and the
failure to do so would have a material adverse effect on the Company's business,
operating results and financial condition.
ABILITY TO ATTRACT AND RETAIN EMPLOYEES
The Company's business consists mainly of professional services and is
inherently labor intensive. The Company's success depends in large part upon its
ability to attract, retain and motivate highly skilled employees, particularly
senior project managers and other senior personnel, for its domestic and
international operations. Qualified senior project managers within and outside
the United States are in particularly great demand and are likely to remain a
limited resource for the foreseeable future. Several attributes of the Company's
work environment pose challenges to the Company's ability to attract and retain
employees, including, (i) extensive travel requirements, (ii) the Company's
intense work environment and culture, (iii) the Company's standards for employee
technical skills and job performance and (iv) the Company's practice of
adjusting the number of technical personnel to reflect active project levels.
Although the Company expects to continue to attract sufficient numbers of highly
skilled employees and to retain its existing senior project managers and other
senior personnel for the foreseeable future, there can be no assurance that the
Company will be able to do so. Failure to attract and retain key personnel could
have a material adverse effect upon the Company's business, operating results
and financial condition.
===============================================================================
Page 26
GROWTH BY ACQUISITION
The Company may grow in part by acquiring existing businesses. The success of
this plan depends upon, among other things, the ability of the Company and its
management to integrate acquired personnel, operations, products and
technologies into its organization effectively, to retain and motivate key
personnel of acquired businesses and to retain customers of acquired firms.
There can be no assurance that the Company will be able to identify suitable
acquisition opportunities, consummate acquisitions or successfully integrate
acquired personnel and operations into the Company. In addition, acquisitions by
the Company may involve certain other risks, including potentially dilutive
issuances of equity securities and the diversion of management's attention from
other business concerns.
DEPENDENCE ON KEY PERSONNEL
Although the Company does not believe that the loss of any particular individual
would have a material adverse impact on the Company, the loss of some or all of
the Company's senior managers could have a material adverse impact on the
Company, including its ability to secure and complete engagements. The Company
has employment agreements with its President, Executive Vice Presidents and its
Vice Presidents that contain noncompetition, nondisclosure and nonsolicitation
covenants. The employment agreements with the President and Executive Vice
Presidents do not have fixed expiration dates and may be terminated by either
the Company or the employee on 90 days' written notice. The employment
agreements with the other Vice Presidents generally have a fixed initial term
but are automatically renewed for successively one-year periods unless
terminated by either the Company or the employee on 90 days' written notice.
Other senior employees also have employment agreements that are generally
terminable by the Company or the employee upon 30 to 90 days' written notice.
UNASSIGNED LABOR COSTS
The Company's unassigned labor costs, which represent salaries of, and other
expenses allocated to, systems professionals not assigned to a specific project,
have gradually increased as a percentage of revenues over time. The Company
attempts to reassign employees who meet its performance requirements to other
active projects when they are no longer needed on a particular project. However,
since the Company generally recruits personnel in advance of the commencement of
certain projects in order to meet the needs of such projects, any cancellation
or delays in the anticipated projects could increase the unassigned labor costs
and might cause a material adverse effect upon the Company's business, operating
results and financial condition.
CYCLICALITY
Certain of the Company's customers and potential customers are in industries
that experience cyclical variations in profitability, which may in turn affect
their willingness or ability to fund systems projects such as those for which
the Company may be engaged. The Company's experience indicates, however, that
competitive pressures in cyclical industries sometimes compel businesses to
undertake systems projects even during periods of losses or reduced
profitability.
===============================================================================
Page 27
QUARTERLY RESULTS MAY FLUCTUATE
The Company's results may fluctuate from quarter to quarter as a result of
various factors such as differences in the number of billing days and/or
holidays between quarters, the number of vacation days and sick days taken by
the Company's employees in a particular quarter, and varying weather conditions.
These and other factors can reduce revenues in a given quarter with a
corresponding adverse impact on the Company's margins.
PROJECT RISKS
Because of the project based nature of the Company's work and the fact that many
of the projects undertaken by the Company are large projects, there is a risk of
a material adverse impact on operating results because of the unanticipated
suspension or cancellation of a large project or the financial difficulties of a
client. The suspension or cancellation of a project or the financial
difficulties of a client could result in a drop in revenues, the need to
reassign staff, a potential dispute with a client regarding monies owed for
consulting work and expenses, and a lessening of TSC's reputation.
In addition, because many of the Company's projects are high profile, mission
critical projects for major clients, a failure or inability to meet a client's
expectations with respect to a major project undertaken by the Company could
damage its reputation and affect its ability to attract new business. Third
party products and services are integral to the success of certain Company
projects. To the extent that third parties do not deliver effective products and
services on a timely basis, the Company's project results could be negatively
impacted. Although the Company attempts to limit this risk in its engagement
arrangements with clients and maintains errors and omissions insurance, the
failure of a project could also result in significant financial exposure to the
Company.
COMPETITION
The systems consulting and implementation market comprises a large number of
participants, is subject to rapid changes and is highly competitive. The Company
competes with and faces potential competition from a number of companies that
have significantly greater financial, technical and marketing resources and
greater name recognition than the Company. The Company also competes with
smaller service providers whose specific, more narrowly focused service
offerings may be more attractive to potential clients than the Company's multi-
dimensional approach. The Company's clients primarily consist of Fortune 1000
and other large corporations and there are an increasing number of professional
services firms seeking systems consulting and implementation engagements from
that client base. The Company believes that its ability to compete depends in
part on a number of factors outside its control, including the ability of its
competitors to hire, retain and motivate a significant number of senior project
managers, the ownership by competitors of software used by potential clients,
the development by others of software that is competitive with the Company's
products and services, and the price at which others offer comparable services.
In addition, the Company's clients could develop or acquire in-house expertise
in services similar to those provided by the Company, which would significantly
reduce demand for the Company's services. No assurance can be given that the
Company will be able to maintain its existing client
===============================================================================
Page 28
base, maintain or increase the level of revenue generated by its existing
clients or be able to attract new clients.
SUSCEPTIBILITY TO GENERAL ECONOMIC CONDITIONS
The Company's revenues and results of operations will be subject to fluctuations
based on the general economic conditions of the United States as well as the
foreign countries in which it operates. If there were to be a general economic
downturn or a recession in the United States or the foreign countries in which
it operates, then the Company expects that business enterprises would cut back
their spending on, or reduce their budget for, IT services. In the event of such
an economic downturn, there can be no assurance that the Company's business,
operating results and financial condition would not be materially and adversely
affected.
COST OVERRUNS
Although the Company's engagement contracts are generally on a time and
materials basis, some of its contracts are on a "not-to-exceed" or fixed-price
basis. The failure of the Company to complete a project to the client's
satisfaction within the "not-to-exceed" or fixed fee exposes the Company to
unrecoverable cost overruns, which could have a materially adverse effect on the
Company's business, results of operations and financial condition.
INTELLECTUAL PROPERTY RIGHTS
A majority of the Company's customers have required the Company, as a condition
to performing services for such customers, to grant to the customer all
proprietary and intellectual property rights with respect to the work product
resulting from the performance of such services, including the intellectual
property rights to any custom software developed by the Company for such
customer. Each such grant of proprietary and intellectual property rights would
limit the Company's ability to reuse work product components and work product
solutions with other customers. In a limited number of such situations, the
Company has obtained, and in the future may attempt to obtain, ownership
interest or a license from its customer to permit the Company to market custom
software for the joint benefit of the customer and the Company. Such
arrangements may be nonexclusive or exclusive, and licensors to the Company may
retain the right to sell products and services that compete with those of the
Company. There can be no assurance, however, that the Company will be able to
negotiate licenses upon terms acceptable to the Company.
The Company also develops certain foundation and application software tools and
products that are owned by the Company and licensed to its clients. The Company
regards such software as proprietary and protects its rights in such software
where appropriate with copyrights, trademarks, trade secret laws and contractual
restrictions on disclosure and transferring title. To date, the Company has not
filed any applications for the registration of patents or copyrights on any of
its software, although the Company does presently hold certain registered
trademarks for some of its software products. There can be no assurance that any
such steps taken by the Company in this regard will be adequate to deter
misappropriation of its proprietary rights or independent third party
development of functionally equivalent products.
===============================================================================
Page 29
In addition, the Company's success is dependent upon its specialized expertise
and methodologies. To protect such proprietary information, the Company relies
upon a combination of trade secret and common laws, employee nondisclosure
policies and third party confidentiality agreements. However, there can be no
assurance that any such steps taken by the Company in this regard will be
adequate to deter misappropriation of its specialized expertise and
methodologies.
Although the Company believes that its services and products do not infringe on
the intellectual property rights of others, there can be no assurance that such
a claim will not be asserted against the Company in the future.
RISKS OF CONDUCTING INTERNATIONAL OPERATIONS
The Company has been significantly increasing its international operations in
recent years and expects to continue to do so in the future. Because the cost of
doing business abroad is higher for U.S. businesses than the cost of doing
business domestically, the Company could experience a decline in its operating
margins as the significance of its international operations increases.
International operations and the provision of services in foreign markets are
subject to a number of special risks, including currency exchange rate
fluctuations, trade barriers, exchange controls, national and regional labor
strikes, political risks, additional security concerns and risks of increases in
duties, taxes and governmental royalties, as well as changes in laws and
policies governing operations of foreign-based companies. In addition, the
Company's continued success and future growth internationally will depend upon
its ability to attract, develop and retain a sufficient number of highly
skilled, motivated local professional employees in each of those foreign
countries where it conducts operations. Competition for such local personnel
qualified to deliver most of the Company's services is intense, and there can be
no assurance that the Company will be able to recruit, develop and retain a
sufficient number of highly skilled, motivated local professionals to compete
successfully internationally.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required with respect to this
Item 8 are listed in Item 14(a)(1) and (a)(2) in this filing.
ITEM 9. CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
===============================================================================
Page 30
TECHNOLOGY SOLUTIONS COMPANY
PART III.
===============================================================================
ITEM 10. DIRECTORS AND EXECUTIVE
OFFICERS OF THE REGISTRANT
The information contained under the headings "Election Of Directors," "Nominees
For Director," "Members of Board of Directors Continuing in Office" and "Section
16(a) Beneficial Ownership Reporting Compliance" in the Company's definitive
proxy statement for the Company's 1997 Annual Meeting of Stockholders (the
"Proxy Statement") and the information contained under the heading "Executive
Officers of The Registrant" in Item 1 hereof is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
Except for the information relating to Item 13 hereof and except for the
information referred to in Item 402(a)(8) of Regulation S-K, the information
contained under the headings "Executive Officer Compensation" and "Other
Transactions" in the Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The information contained under the headings "Security Ownership of Directors
and Management" and "Additional Information Relating to Voting Securities" in
the Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS
Except for the information relating to Item 11 hereof and except for the
information referred to in Item 402(a)(8) of Regulation S-K, the information
contained under the headings "Executive Officer Compensation" and "Other
Transactions" in the Proxy Statement is incorporated herein by reference.
===============================================================================
Page 31
TECHNOLOGY SOLUTIONS COMPANY
PART IV.
- -------------------------------------------------------------------------------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
TECHNOLOGY SOLUTIONS COMPANY
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
------------------------------------------------
CONTENTS
--------
REPORT OF INDEPENDENT ACCOUNTANTS ...................................... 33
FINANCIAL STATEMENTS (ITEM 14(a)(1))
Consolidated Balance Sheets as of May 31, 1997 and 1996 ............. 34
Consolidated Statements of Income for each of the three years
in the period ended May 31, 1997 .................................... 35
Consolidated Statements of Changes in Stockholders' Equity for
each of the three years in the period ended May 31, 1997 ............ 36
Consolidated Statements of Cash Flows for each of the three years
in the period ended May 31, 1997 .................................... 37
Notes to Consolidated Financial Statements .......................... 38
FINANCIAL STATEMENT SCHEDULE (ITEM 14(a)(2))
Schedule II Valuation and Qualifying Accounts ....................... 54
All other schedules have been omitted because the required information is
included in the financial statements or notes thereto or because they are not
required.
Page 32
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Board of Directors and Stockholders
of Technology Solutions Company
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14 (a)(1) and (2) on page 32 present fairly, in all
material respects, the financial position of Technology Solutions Company and
its subsidiaries (the "Company") at May 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the
period ended May 31, 1997, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
June 25, 1997
Chicago, Illinois
Page 33
TECHNOLOGY SOLUTIONS COMPANY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
ASSETS
MAY 31, MAY 31,
1997 1996
CURRENT ASSETS: ------------ -----------
Cash and cash equivalents ................................................. $ 27,951 $ 12,990
Marketable securities ..................................................... 15,988 11,580
Receivables, less allowance for doubtful receivables of $3,346 and $1,870 . 43,907 23,537
Refundable income taxes ................................................... 1,398 5,117
Deferred income taxes ..................................................... 7,234 1,194
Other current assets ...................................................... 11,196 6,166
-------- ----------
Total current assets ................................................. 107,674 60,584
COMPUTERS, FURNITURE AND EQUIPMENT, NET ....................................... 6,416 4,443
LONG-TERM INVESTMENTS ......................................................... 8,118 17,140
COST IN EXCESS OF NET ASSETS OF ACQUIRED
BUSINESSES AND OTHER INTANGIBLES .......................................... 3,521 3,079
LONG-TERM RECEIVABLES AND OTHER ............................................... 8,137 4,191
---------- ----------
Total assets ......................................................... $ 133,866 $ 89,437
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable .......................................................... $ 1,604 $ 1,344
Accrued compensation and related costs .................................... 17,001 11,621
Capitalized lease obligations ............................................. 240 2,616
Deferred compensation ..................................................... 6,842 2,660
Other current liabilities ................................................. 2,392 1,167
---------- ----------
Total current liabilities ............................................ 28,079 19,408
---------- ----------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; shares authorized --
10,000,000; none issued ............................................. -- --
Common stock, $.01 par value; shares authorized --
50,000,000; shares issued -- 26,855,390 .............................. 269 269
Capital in excess of par value ............................................ 61,958 50,254
Retained earnings ......................................................... 51,627 35,983
Unrealized holding loss ................................................... (319) (642)
Cumulative translation adjustment ......................................... (318) --
---------- ----------
113,217 85,864
Less: Treasury Stock, at cost (2,123,660 and 4,521,067 shares) ........... (7,430) (15,835)
---------- ----------
Total stockholders' equity ........................................... 105,787 70,029
---------- ----------
Total liabilities and stockholders' equity ........................... $133,866 $89,437
======== ========
The accompanying Notes to Consolidated Financial Statements are an integral
part of this financial information.
- ------------------------------------------------------------------------------
Page 34
TECHNOLOGY SOLUTIONS COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
FOR THE YEARS ENDED MAY 31,
----------------------------------------------------
1997 1996 1995
--------- -------- ---------
REVENUES:
Professional fees . . . . . . . . . . . . . . . . . . $164,238 $97,004 $65,704
Software and hardware products . . . . . . . . . . . . 850 595 113
--------- -------- ---------
165,088 97,599 65,817
COSTS AND EXPENSES: --------- -------- ---------
Project personnel . . . . . . . . . . . . . . . . . . 76,508 46,744 29,204
Other project expenses . . . . . . . . . . . . . . . . 23,374 13,010 8,991
Cost of products sold . . . . . . . . . . . . . . . . 54 476 110
Management and administrative support . . . . . . . . 32,074 22,605 18,501
Goodwill amortization. . . . . . . . . . . . . . . . . 811 -- --
Shareholder litigation settlement. . . . . . . . . . . -- 2,345 --
Company founders litigation settlement . . . . . . . . -- 944 --
Former company executive settlements . . . . . . . . . -- -- 1,590
Incentive compensation . . . . . . . . . . . . . . . . 9,394 6,611 4,651
--------- -------- ---------
142,215 92,735 63,047
--------- -------- ---------
OPERATING INCOME . . . . . . . . . . . . . . . . . . . . . 22,873 4,864 2,770
--------- -------- ---------
OTHER INCOME (EXPENSE):
Net investment income. . . . . . . . . . . . . . . . . 2,295 2,073 1,958
Interest expense . . . . . . . . . . . . . . . . . . . (191) (169) (28)
--------- -------- ---------
2,104 1,904 1,930
--------- -------- ---------
INCOME BEFORE INCOME TAXES . . . . . . . . . . . . . . . . 24,977 6,768 4,700
INCOME TAX PROVISION . . . . . . . . . . . . . . . . . . . 9,910 2,194 1,333
--------- -------- ---------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . $ 15,067 $ 4,574 $ 3,367
=========== =========== ===========
EARNINGS PER COMMON SHARE. . . . . . . . . . . . . . . . . $ 0.57 $ 0.20 $ 0.16
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON
AND COMMON EQUIVALENT SHARES
OUTSTANDING. . . . . . . . . . . . . . . . . . . . . . 26,579 24,213 24,169
=========== =========== ===========
The accompanying Notes to Consolidated Financial Statements are an integral
part of this financial information.
- -------------------------------------------------------------------------------
Page 35
TECHNOLOGY SOLUTIONS COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the years ended May 31, 1997, 1996 and 1995
(In thousands, except share data)
COMMON STOCK CAPITAL IN
---------------------- EXCESS OF RETAINED
SHARES AMOUNT PAR VALUE EARNINGS
----------- ------ ----------- ---------
Balance as of May 31, 1994 . . . . . . . . 17,903,593 $179 $44,035 $28,063
Effect of August 1, 1997 three-for-two stock
split on May 31, 1994 balances . . . . . 8,951,797 90 (90) --
Issuance of 61,614 treasury shares
from exercise of stock options . . . . . -- -- 26 (21)
Change in net unrealized holding
loss on available-for-sale securities. . -- -- -- --
Net income . . . . . . . . . . . . . . . . -- -- -- 3,367
Purchase of 2,025,000 treasury shares. . . -- -- -- --
------------- ------ ---------- ---------
Balance as of May 31, 1995 . . . . . . . . 26,855,390 269 43,971 31,409
Issuance of 2,397,914 treasury shares
from exercise of stock options . . . . . -- -- 6,085 --
Issuance of 58,569 treasury shares
from employee stock purchase plan. . . . -- -- 198 --
Change in net unrealized holding
loss on available-for-sale securities. . -- -- -- --
Net income . . . . . . . . . . . . . . . . -- -- -- 4,574
Acquisition of 100,583 treasury shares . . -- -- -- --
------------- ------ ---------- ---------
Balance as of May 31, 1996 . . . . . . . . 26,855,390 269 50,254 35,983
Issuance of 1,710,498 treasury shares
from exercise of stock options . . . . . -- -- 12,140 --
Issuance of 119,443 treasury shares
from employee stock purchase plan. . . . -- -- 1,396 --
Change in net unrealized holding
loss on available-for-sale securities. . -- -- -- --
Net income . . . . . . . . . . . . . . . . -- -- -- 15,067
Cumulative translation adjustment. . . . . -- -- -- --
Issuance of 567,466 treasury shares
for business combinations. . . . . . . . -- -- (1,832) 577
------------- ------ ---------- ---------
Balance as of May 31, 1997 . . . . . . . . 26,855,390 $269 $61,958 $51,627
========== ===== ======== ========
UNREALIZED CUMULATIVE
HOLDING TRANSLATION TREASURY
LOSSES ADJUSTMENT STOCK TOTAL
---------- ----------- ----------
Balance as of May 31, 1994 . . . . . . . . $(238) $ -- $(17,939) $ 54,100
Effect of August 1, 1997 three-for-two stock
split on May 31, 1994 balances . . . . . -- -- -- --
Issuance of 61,614 treasury shares
from exercise of stock options . . . . . -- -- 207 212
Change in net unrealized holding
loss on available-for-sale securities. . (615) -- -- (615)
Net income . . . . . . . . . . . . . . . . -- -- -- 3,367
Purchase of 2,025,000 treasury shares. . . -- -- (5,338) (5,338)
--------- -------- ---------- ---------
Balance as of May 31, 1995 . . . . . . . . (853) -- (23,070) 51,726
Issuance of 2,397,914 treasury shares
from exercise of stock options . . . . . -- -- 8,107 14,192
Issuance of 58,569 treasury shares
from employee stock purchase plan. . . . -- -- 200 398
Change in net unrealized holding
loss on available-for-sale securities. . 211 -- -- 211
Net income . . . . . . . . . . . . . . . . -- -- -- 4,574
Acquisition of 100,583 treasury shares . . -- -- (1,072) (1,072)
--------- -------- ---------- ---------
Balance as of May 31, 1996 . . . . . . . . (642) -- (15,835) 70,029
Issuance of 1,710,498 treasury shares
from exercise of stock options . . . . . -- -- 6,001 18,141
Issuance of 119,443 treasury shares
from employee stock purchase plan. . . . -- -- 418 1,814
Change in net unrealized holding
loss on available-for-sale securities. . 323 -- -- 323
Net income . . . . . . . . . . . . . . . . -- -- -- 15,067
Cumulative translation adjustment. . . . . -- (318) -- (318)
Issuance of 567,466 treasury shares
for business combinations. . . . . . . . -- -- 1,986 731
--------- -------- ---------- ---------
Balance as of May 31, 1997 . . . . . . . . $(319) $(318) $(7,430) $105,787
========= ======== ========== ==========
The accompanying Notes to Consolidated Financial Statements are an integral
part of this financial information.
- -------------------------------------------------------------------------------
Page 36
TECHNOLOGY SOLUTIONS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
FOR THE YEARS ENDED MAY 31,
------------------------------------------------
1997 1996 1995
--------- ------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . $ 15,067 $ 4,574 $ 3,367
Adjustments to reconcile net income to net
cash from operating activities:
Depreciation and amortization . . . . . . . . . . . 4,442 2,558 2,048
Provisions for receivable valuation allowances and
reserves for possible losses . . . . . . . . . . . . 2,712 1,339 2,059
(Gain) loss on sale of investments. . . . . . . . . (17) (18) 67
Deferred income taxes . . . . . . . . . . . . . . . 8,837 447 2,945
Changes in assets and liabilities:
Receivables. . . . . . . . . . . . . . . . . (21,533) (11,166) (6,925)
Purchases of trading securities related to deferred
compensation program . . . . . . . . . . . (4,182) (2,660) --
Refundable income taxes. . . . . . . . . . . 49 1,074 557
Other current assets . . . . . . . . . . . . (4,933) (2,292) (662)
Accounts payable . . . . . . . . . . . . . . (73) 572 354
Accrued compensation and related costs . . . 5,260 2,849 1,630
Deferred compensation funds from employees . 4,182 2,660 --
Other current liabilities. . . . . . . . . . 158 (875) (4,542)
Other. . . . . . . . . . . . . . . . . . . . (241) -- --
--------- ------- -------
Net cash provided by (used in)
operating activities. . . . . . . . . . 9,728 (938) 898
--------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of available-for-sale securities. . . . . . . (1,000) -- (909)
Proceeds from available-for-sale securities. . . . . . 1,314 1,075 966
Proceeds from held-to-maturity investments . . . . . . 8,890 4,015 --
Capital expenditures . . . . . . . . . . . . . . . . . (6,057) (3,651) (2,101)
Net assets of acquired businesses and other intangibles (1,127) (3,079) --
Long-term receivables and other. . . . . . . . . . . . (3,215) (1,319) 178
Capitalized lease obligations. . . . . . . . . . . . . (1,311) 866 814
--------- ------- -------
Net cash used in investing activities . . (2,506) (2,093) (1,052)
--------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options. . . . . . . . 6,445 9,100 196
Proceeds from employee stock purchase plan . . . . . . 1,805 398 --
Treasury stock . . . . . . . . . . . . . . . . . . . . -- (1,072) (5,338)
--------- ------- -------
Net cash provided by (used in)
financing activities. . . . . . . . . . . 8,250 8,426 (5,142)
--------- ------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS . . . . . . . . . . . . . . . . . (511) -- --
--------- ------- -------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS . . . . . . . . . . . . . . . . . . . 14,961 5,395 (5,296)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD . . . . . . 12,990 7,595 12,891
--------- ------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD . . . . . . . . . $ 27,951 $12,990 $ 7,595
========= ======== =======
The accompanying Notes to Consolidated Financial
Statements are an integral part of this financial information.
===============================================================================
Page 37
TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
NOTE 1 -- THE COMPANY
Technology Solutions Company and subsidiaries (the "Company") delivers
business benefits through consulting and systems integration services that
help clients transform customer relationships and improve operations. The
Company's clients generally are located throughout the United States and in
Europe, Latin America and Canada.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION -- The accompanying consolidated financial
statements include the accounts of the Company and all of its subsidiaries.
All significant intercompany transactions have been eliminated. Acquired
businesses are included in the results of operations since their acquisition
dates.
REVENUE RECOGNITION -- The Company derives substantially all of its revenues
from information technology, strategic business, and management consulting,
systems integration, programming, and packaged software integration and
implementation services. The Company operates in one industry segment -
software development and integration services. The Company recognizes revenue
on contracts as work is performed primarily based on hourly billing rates.
Out-of-pocket expenses are presented net of amounts billed to clients in the
accompanying consolidated statements of income. Contracts are performed in
phases. Losses on contracts, if any, are reserved in full when determined.
Revenue from licensing of software is recognized upon delivery of the
product. The Company does not presently have any significant maintenance and
support contracts for software licensed to clients. Revenue from hardware
sales is recognized upon delivery.
CASH AND CASH EQUIVALENTS -- The Company considers all highly liquid
investments readily convertible into cash to be cash equivalents with
original maturities of three months or less. These short-term investments are
carried at cost plus accrued interest, which approximates market.
MARKETABLE SECURITIES -- The Company's marketable securities primarily
consist of preferred stocks. These preferred stocks, all of which are
classified as available-for-sale, are reported at fair value, with unrealized
gains and losses excluded from earnings and reported as a net after-tax
amount in a separate component of stockholders' equity until realized. The
Company's investments related to the executive deferred compensation plan
(See Note 10) are classified as trading securities, with unrealized gains and
losses included in net investment income. Realized gains or losses are
determined on the specific identification method.
===============================================================================
Page 38
TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
COMPUTERS, FURNITURE AND EQUIPMENT -- Computers, furniture and equipment are
carried and depreciated on a straight-line basis over their estimated useful
lives. Useful lives generally are five years or less.
COST IN EXCESS OF NET ASSETS OF ACQUIRED BUSINESSES -- The excess of cost
over the fair market value of the net identifiable assets of businesses
acquired (goodwill) is amortized on a straight-line basis, typically over a
five-year period. Accumulated amortization of goodwill as of May 31, 1997 was
$811.
SOFTWARE DEVELOPMENT COSTS -- The Company capitalizes certain software
development costs once technological feasibility is established in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 86--"Accounting
for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed."
Amortization of software costs is the greater of the amount computed using
the (a) ratio of current revenues to the total current and anticipated future
revenues or (b) the straight-line method over the estimated economic life of
the product.
LONG-TERM INVESTMENTS -- The Company's long-term investments consist of
municipal bonds with maturities primarily through 1998. Since the Company has
the ability and intent to hold the bonds to maturity, the investments are
classified as held-to-maturity under the provisions of SFAS No. 115 and,
accordingly, are accounted for at cost, net of accumulated amortization.
Municipal bonds held by the Company are regarded as investment grade by
independent nationally recognized rating agencies.
EARNINGS PER COMMON SHARE -- Earnings per common share is computed by
dividing net income per the modified treasury stock method by the weighted
average number of common shares outstanding during each year presented,
including common share equivalents arising from the assumed exercise of stock
options, where appropriate. All share and per share amounts have been
adjusted to reflect the Company's three-for-two stock splits effective
August 1, 1997 and July 30, 1996, respectively.
FOREIGN CURRENCY TRANSLATION -- All assets and liabilities of foreign
subsidiaries are translated to U.S. dollars at fiscal year-end exchange
rates. Income and expense items are translated at average exchange rates
prevailing during the fiscal year. The resulting translation adjustments are
recorded as a component of stockholders' equity. The functional currencies
for the Company's foreign subsidiaries are their local currencies. Gains and
losses from foreign currency transactions of these subsidiaries are included
in net income.
ACCOUNTING CHANGES -- The Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation," as of May 31, 1997 and implemented the disclosure
provisions of this statement. While this statement encourages companies to
recognize expense for stock options at estimated fair value based on an
option pricing model, the Company has elected to disclose the proforma net
income and earnings per share that would have been obtained under this
statement's
===============================================================================
Page 39
TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
approach for valuing and expensing stock options. See Note 13 for
further discussion and related disclosures.
The Financial Accounting Standards Board ("FASB") issued SFAS No. 128,
"Earnings Per Share," in February 1997. This statement establishes new
standards for computing and presenting earnings per share. This statement is
effective for financial statements issued for periods ending after December
15, 1997; earlier adoption is not permitted. Adoption of this statement will
require the presentation of basic and diluted earnings per share. If the
statement had been adopted, proforma basic and diluted earnings per share for
the years ended May 31, 1997, 1996 and 1995 would have been as follows:
YEARS ENDED
MAY 31,
------------------------
1997 1996 1995
----- ----- -----
Basic earnings per share $0.64 $0.22 $0.17
Diluted earnings per share $0.57 $0.19 $0.14
INCOME TAXES -- The Company files its federal and state income tax returns on
a calendar year basis. The current income tax provision (benefit) represents
the Company's federal, state and foreign income taxes for the fiscal year as
though tax returns were filed on a fiscal year basis ending on May 31.
The Company uses an asset and liability approach to financial accounting and
reporting for income taxes. Deferred income taxes are provided when tax laws
and financial accounting standards differ with respect to the amount of
income for a year and the bases of assets and liabilities. The Company does
not provide U.S. deferred income taxes on earnings of foreign subsidiaries
which are expected to be indefinitely reinvested.
EMPLOYEE BENEFIT PLAN -- The Company has a 401(k) Savings Plan (the "Plan").
The Plan allows employees to contribute up to 15 percent of their annual
compensation, subject to Internal Revenue Service statutory limitations.
Company contributions to the Plan are discretionary. The Company contributed
$1,234 to the Plan in fiscal 1997.
ESTIMATES AND ASSUMPTIONS -- The preparation of financial statements in
conformity with Generally Accepted Accounting Principles requires management
to make assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
RECLASSIFICATIONS -- Certain reclassifications have been made to the prior
period to conform to the current period classification.
===============================================================================
Page 40
TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3 -- ACQUISITIONS
In March 1997, the Company combined with HRM Resources, Inc. through the
exchange of 561,039 shares of common stock of the Company for all the issued
and outstanding shares of HRM Resources. HRM Resources is a technology
implementation firm based in New York that specializes in large-scale
financial and human resources software packages. This transaction was
accounted for as a pooling of interests. The operations of HRM Resources were
not material to the Company's consolidated operations.
In February 1997, the Company acquired Geising International, a German-based
business consulting firm focused on customer relationship management
services, for $1,040. The results of Geising International operations have
been combined with those of the Company since the date of acquisition. The
acquisition was accounted for using the purchase method of accounting.
Goodwill recorded approximated $1,000. The operations of Geising
International were not material to the Company's consolidated operations.
In May 1996, the Company acquired Aspen Consultancy Ltd., a U.K.-based call
center consulting firm. Aspen Consultancy Ltd. became a wholly-owned
subsidiary of the Company. The acquisition was accounted for under the
purchase method of accounting. The purchase price was approximately $1,600
and will be increased by approximately $2,400 if certain performance targets
are met in fiscal years 1997, 1998 and 1999. Goodwill recorded approximated
$1,600. The operations of Aspen Consultancy were not material to the
Company's consolidated operations.
In May 1996, the Company acquired McLaughlin & Associates, an Illinois-based
consulting firm. McLaughlin & Associates became a division of TSC. The
purchase price approximated $2,000. The acquisition was accounted for under
the purchase method of accounting. Goodwill recorded approximated $1,500. The
operations of McLaughlin & Associates were not material to the Company's
consolidated operations.
Consolidated proforma net income and earnings per share would not have been
materially different from the Company's reported amounts for fiscal 1997 and
fiscal 1996.
Goodwill for all acquisitions is amortized over five years on a straight-line
basis.
===============================================================================
Page 41
TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4 -- RECEIVABLES
Receivables consist of the following:
MAY 31,
---------------------
1997 1996
------- -------
Amounts billed to clients. . . . . $34,515 $16,260
Contracts in process . . . . . . . 12,738 9,147
------- -------
47,253 25,407
Receivable valuation allowances and
reserves for possible losses. . (3,346) (1,870)
------- -------
$43,907 $23,537
======= =======
Amounts billed to clients represent professional fees and reimbursable
project-related expenses. Contracts in process represent unbilled
professional fees and project costs such as out-of-pocket expense, materials
and subcontractor costs. None of the amounts above are expected to be
collected in excess of one year from the balance sheet date. Amounts billed
to clients are unsecured and generally due within 30 days. Clients are
generally billed in arrears on a monthly basis. Contracts in process as of
May 31, 1997 include $11,119 for work performed during May 1997 that was not
billed until June 1997.
NOTE 5 -- MARKETABLE SECURITIES AND LONG-TERM INVESTMENTS
Marketable securities, included in current assets and classified as
available-for-sale, are reported at fair value. As of May 31, 1997 and 1996,
the gross unrealized holding gain of $39 and $10, respectively, and gross
unrealized holding loss of $527 and $994, respectively, are presented net and
after-taxes in a separate component of stockholders' equity.
Municipal bonds included in long-term investments are presented at cost, net
of accumulated amortization as of May 31, 1997 and 1996 of $514 and $764,
respectively, and had a market value at May 31, 1997 and 1996 of $8,184 and
$17,267, respectively. The long-term investments as of May 31, 1997 are
expected to mature as follows: $6,890 in fiscal 1998; and $1,200 in fiscal
1999.
===============================================================================
Page 42
TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6 -- COMPUTERS, FURNITURE AND EQUIPMENT
Computers, furniture and equipment consist of the following:
MAY 31,
---------------------
1997 1996
------- -------
Computers. . . . . . . . . . . . . $ 9,583 $ 8,802
Furniture and equipment. . . . . . 3,324 2,134
------- -------
12,907 10,936
Accumulated depreciation . . . . . (6,491) (6,493)
------- -------
$ 6,416 $ 4,443
======= =======
Depreciation expense was $3,492, $2,239 and $1,705 for the years ended May
31, 1997, 1996 and 1995, respectively.
NOTE 7 -- LONG-TERM RECEIVABLES AND OTHER
Long-term receivables and other consist of the following:
MAY 31,
--------------------
1997 1996
------- ------
Customer receivables . . . . . . . $ 5,859 $ 2,016
Employee receivables . . . . . . . 1,165 747
Capitalized software costs . . . . 801 663
Other. . . . . . . . . . . . . . . 312 765
------- -------
$ 8,137 $ 4,191
======= =======
In accordance with SFAS No. 86, amortization expense of capitalized software
costs of $454 was recorded in fiscal 1997. No amortization of capitalized
software costs was recorded in fiscal 1996.
===============================================================================
Page 43
TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 8 -- INCOME TAXES
The Company uses an asset and liability approach to financial accounting and
reporting for income taxes in accordance with SFAS No. 109, "Accounting for
Income Taxes." The provision for income taxes consists of the following:
FOR THE YEARS ENDED MAY 31,
---------------------------
Current: 1997 1996 1995
------- ------ -------
Federal . . . . . . . . . . . . . . . $10,114 $1,054 $(1,104)
State . . . . . . . . . . . . . . . . 3,115 473 (508)
Foreign . . . . . . . . . . . . . . . -- 220 --
------- ------ -------
Total current. . . . . . . . . . . 13,229 1,747 (1,612)
------- ------ -------
Deferred:
Federal . . . . . . . . . . . . . . . (3,061) 310 2,017
State . . . . . . . . . . . . . . . . (540) 137 928
Foreign . . . . . . . . . . . . . . . 282 -- --
------- ------ -------
Total deferred . . . . . . . . . . (3,319) 447 2,945
------- ------ -------
Provision for income taxes . . . . . . . . $ 9,910 $2,194 $ 1,333
========= ====== =======
Total provision for income taxes differed from the amount computed by
applying the federal statutory income tax rate to income from continuing
operations due to the following:
FOR THE YEARS ENDED MAY 31,
---------------------------
1997 1996 1995
------- ------ -------
Federal tax provision, at statutory rate . . $8,741 $2,301 $1,598
State tax provision, net of Federal benefit. 1,674 328 248
Effect of foreign tax rate differences . . . (91) 33 --
Nontaxable investment income . . . . . . . . (532) (468) (509)
Nondeductible goodwill . . . . . . . . . . . 51 -- --
Other. . . . . . . . . . . . . . . . . . . . 67 -- (4)
------- ------ -------
Provision for income taxes . . . . . . . . . $9,910 $2,194 $1,333
======= ====== ======
Total income tax (benefit) provision was allocated as follows:
FOR THE YEARS ENDED MAY 31,
-----------------------------
1997 1996 1995
--------- ------- -------
Income from continuing operations. . . . . $ 9,910 $ 2,194 $1,333
Items charged directly to stockholders'
equity. . . . . . . . . . . . . . . . . (11,605) (5,151) (352)
--------- ------- -------
Total tax (benefit) provision. . . . . . . $ (1,695) $(2,957) $ 981
======== ======= =======
===============================================================================
Page 44
TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Deferred tax assets and liabilities were comprised of the following:
MAY 31,
------------------
1997 1996
------- -------
Deferred tax assets:
Deferred compensation and bonuses . . . . . . $ 2,737 $ 1,008
1990 stock options awarded. . . . . . . . . . -- 15
Net operating loss and credits. . . . . . . . 3,503 --
Receivable valuation allowances and reserves
for possible losses. . . . . . . . . . . . 1,982 597
Legal and other accruals. . . . . . . . . . . 883 814
Depreciation. . . . . . . . . . . . . . . . . 393 394
Unrealized holding loss . . . . . . . . . . . 195 343
------ ------
Total deferred tax assets . . . . . . . . . 9,693 3,171
------ ------
Deferred tax liabilities:
Prepaid expenses. . . . . . . . . . . . . . . (1,968) (1,372)
Capitalized software development costs. . . . (91) (323)
Other . . . . . . . . . . . . . . . . . . . . (400) (282)
------- -------
Total deferred tax liabilities. . . . . . . (2,459) (1,977)
------- -------
Net deferred tax asset. . . . . . . . . . . . $ 7,234 $ 1,194
======= =======
The Company has federal net operating losses of $7,192 which will expire in
2011. In addition, the Company has an alternative minimum tax credit of $287
which is available to reduce future federal regular income taxes, if any,
over an indefinite period.
Income before income taxes consisted of the following:
FOR THE YEARS ENDED MAY 31,
----------------------------
1997 1996 1995
------- ------ ------
United States. . . . . . . . . $23,910 $6,217 $4,700
Foreign. . . . . . . . . . . . 1,067 551 --
------- ------ ------
Total. . . . . . . . . . . . . $24,977 $6,768 $4,700
======= ====== ======
Income taxes paid (received) during fiscal 1997, 1996 and 1995 were $135,
$545 and $(2,172), respectively.
===============================================================================
Page 45
TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 9 -- LINE OF CREDIT
The Company has available a $5.0 million unsecured line of credit facility
which expires September 5, 1997. The borrowing rate is at either the bank's
reference rate or at the Eurodollar rate plus 0.75 percent and is based upon
the amount borrowed. The unused line fee is 0.25 percent of the unused
portion of the commitment. There was no borrowing under the line of credit
during fiscal 1997.
NOTE 10 -- EXECUTIVE DEFERRED COMPENSATION PLAN
Effective July 1, 1995, the Company instituted a nonqualified executive
deferred compensation plan. All Company executives (defined as Vice
Presidents and above) are eligible to participate in this voluntary program
which permits participants to annually elect to defer receipt of a portion of
their compensation. The plan allows participants to reduce their current
taxable income and also generate tax-deferred investment earnings. Investment
earnings (or losses) are credited to participants' accounts based on
investment allocation decisions determined by participants. Deferred
contributions and investment earnings are payable to participants upon
various specified events, including retirement, disability or termination.
The accompanying balance sheet includes the deferred compensation liability,
including investment earnings thereon, owed to participants. The accompanying
balance sheet also includes the investments, classified as trading
securities, purchased by the Company with the deferred funds. These
investments remain assets of the Company and are available to the general
creditors of the Company in the event of the Company's insolvency.
NOTE 11 -- EMPLOYEE STOCK PURCHASE PLAN
Effective November 1, 1995 the Company instituted the Technology Solutions
Company 1995 Employee Stock Purchase Plan (the "Plan"). The Plan qualifies as
an "employee stock purchase plan" under Section 423 of the Internal Revenue
Code of 1986, as amended. The Plan is administered by the Compensation
Committee of the Board of Directors. The Plan permits eligible employees to
purchase an aggregate of 1,125,000 shares of the Company's Common Stock.
Shares are purchased for the benefit of the participants at the end of each
three month purchase period. During the fiscal years ended May 31, 1997 and
1996, 119,443 and 58,569 shares of common stock were purchased under this
plan, respectively.
===============================================================================
Page 46
TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 12 -- STOCKHOLDERS' EQUITY
On June 26, 1997, the Board of Directors declared a three-for-two stock split
to be effected as a 50 percent stock dividend for stockholders of record on
July 10, 1997. The stock split was effective August 1, 1997. The financial
statements and the relevant share and per share data included herein have
been adjusted to reflect the stock split. As a result of the increase in
issued shares, common stock has been increased and capital in excess of par
has been decreased by $90.
NOTE 13 -- STOCK OPTIONS
On September 26, 1996, the Company's stockholders approved the Technology
Solutions Company 1996 Stock Incentive Plan (the "1996 Plan"). The 1996 Plan
replaces each of the Technology Solutions Company's Stock Option Plan (the
"Original Plan"), the Technology Solutions Company 1992 Stock Incentive Plan
(the "1992 Plan") and the Technology Solutions Company 1993 Outside Directors
Stock Option Plan (the "1993 Plan" and together with the Original Plan and
the 1992 Plan, the "Predecessor Plans"). With the approval of the 1996 Plan,
no future awards will be made under the Predecessor Plans. Previous awards
made under the Predecessor Plans are not affected. Shares subject to awards
made under any of the Predecessor Plans will be available under the 1996
Plan, under certain circumstances, to the extent that such shares are not
issued or delivered in connection with such awards. A total of 1,580,159
shares of the Company's common stock were available for grant on September
26, 1996 under the Predecessor Plans. With the approval of the 1996 Plan,
these shares became available for grant under the 1996 Plan. On September 26,
1996, the stockholders also approved the addition of 1,500,000 shares to the
1996 Plan.
Options granted under the 1996 Plan and the Predecessor Plans authorize the
grant of a variety of stock options and other awards if authorized by the
Company's Board of Directors at prices not less than the fair market value at
the date of grant. Options granted under the Predecessor Plans are generally
exercisable beginning one year after the date of grant and are fully
exercisable in three to four years from date of grant. Options granted under
the 1996 Plan are generally exercisable beginning twelve months after date of
grant and are fully exercisable in forty-two months from date of grant.
Options available for grant are 3,013,385 and 3,042,435 as of May 31, 1997
and 1996, respectively.
===============================================================================
Page 47
TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Effective May 31, 1997, the Company has elected to disclose the proforma
effects of SFAS No. 123, "Accounting for Stock-Based Compensation." As
allowed under the provisions of this new statement, the Company will continue
to apply APB Opinion No. 25 and related interpretations in accounting for the
stock options awarded under the Company's 1996 Plan. Accordingly, no
compensation cost has been recognized for these stock options. Had
compensation cost for the Company's 1996 Plan and Employee Stock Purchase
Plan been determined consistent with SFAS No. 123, the Company's net income
and earnings per share would have been reduced to the proforma amounts
indicated below:
1997 1996
----------- -----------
Net Income:
As reported. . . . . . . $15,067 $4,574
Pro forma. . . . . . . . $11,018 $3,373
Earnings per share:
As reported. . . . . . . $0.57 $0.20
Pro forma. . . . . . . . $0.41 $0.14
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions:
1997 1996
----------- -----------
Expected volatility. . . . . 40.9%-51.4% 50.6%-52.0%
Risk-free interest rates . . 5.28%-6.84% 5.28%-6.39%
Expected lives . . . . . . . 4.5 years 4.5 years
The Company has not paid and does not anticipate paying dividends; therefore,
the expected dividend yield is assumed to be zero.
===============================================================================
Page 48
TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A summary of the status of the Company's option plans is presented below:
1997 1996
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
1997 EXERCISE 1996 EXERCISE
SHARES PRICE SHARES PRICE
--------- ------ ---------- ----------
Outstanding at beginning of year. . . 6,967,140 $ 4.52 7,689,771 $ 3.45
Granted . . . . . . . . . . . . . . . 1,910,619 $16.39 1,954,013 $ 7.72
Exercised . . . . . . . . . . . . . . (1,710,498) $22.53 (2,397,914) $ 9.81
Forfeited . . . . . . . . . . . . . . (395,912) $12.75 (278,730) $ 3.47
---------- ----------
Outstanding at end of year. . . . . . 6,771,349 $ 7.55 6,967,140 $ 4.52
========== ==========
Exercisable at end of year. . . . . . 2,858,730 $ 4.51 3,203,004 $ 3.61
========== ==========
Weighted-average fair value of
options granted during the year. . $7.86 $3.73
The following summarizes information about options outstanding as of
May 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------- ------------------------
AVERAGE WEIGHTED- WEIGHTED-
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE CONTRACTUAL EXERCISE EXERCISE
PRICES SHARES LIFE PRICES SHARES PRICES
------------- --------- --------- ------- ----------- -------
$ 0.19-$ 6.50 4,223,156 10 years $ 3.38 2,541,046 $ 3.76
$ 6.51-$10.00 423,814 10 years $ 7.90 190,374 $ 7.94
$10.01-$15.00 1,522,690 9 years $14.18 77,810 $13.57
$15.01-$30.00 601,689 9 years $19.80 49,500 $15.72
--------- ---------
6,771,349 9 years $ 7.55 2,858,730 $ 4.51
========= =========
===============================================================================
Page 49
TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 14 -- REPORTING SEGMENTS
The Company operates in a single industry segment. The Company has operations
in the United States, Mexico, Colombia, Canada, the United Kingdom, Germany,
France, and Switzerland. Identifiable assets of foreign subsidiaries are
those assets related to the operations of those subsidiaries. United States
assets consist of all other operating assets of the Company.
UNITED FOREIGN
STATES SUBSIDIARIES CONSOLIDATED
-------- ------------ ------------
1997
Total net revenue $144,861 $20,227 $165,088
Operating income $ 21,856 $ 1,017 $ 22,873
Identifiable assets $129,457 $ 4,409 $133,866
1996
Total net revenue $ 94,381 $ 3,218 $ 97,599
Operating income $ 4,324 $ 540 $ 4,864
Identifiable assets $ 87,467 $ 1,970 $ 89,437
1995
Total net revenue $ 65,817 $ -- $ 65,817
Operating income $ 2,770 $ -- $ 2,770
Identifiable assets $ 65,222 $ -- $ 65,222
NOTE 15 -- MAJOR CLIENTS
The Company's five largest clients in fiscal 1997 accounted for 8 percent, 7
percent, 5 percent, 4 percent, and 3 percent of total revenues, respectively;
in fiscal 1996, the five largest clients accounted for 21 percent, 6 percent,
6 percent, 6 percent, and 5 percent of total revenues, respectively; and in
fiscal 1995, they accounted for 24 percent, 18 percent, 6 percent, 5 percent,
and 4 percent of total revenues, respectively. No clients accounted for 10
percent or more of revenues in fiscal 1997. In fiscal 1996, one client
accounted for 10 percent or more of revenues, and in fiscal 1995, two clients
each accounted for 10 percent or more of revenues.
===============================================================================
Page 50
TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 16 -- LEASES
OPERATING LEASES
The Company leases various office facilities under operating leases expiring
at various dates through July 31, 2004. Additionally, the Company leases
various apartments and office equipment under operating leases expiring at
various dates. Rental expense for all operating leases approximated $3,217,
$1,442 and $948 for the years ended May 31, 1997, 1996, and 1995,
respectively.
Future minimum rental commitments under noncancelable operating leases with
terms in excess of one year are as follows:
FISCAL YEAR AMOUNT
----------- -------
1998. . . . . . . . $5,511
1999. . . . . . . . 2,449
2000. . . . . . . . 1,295
2001. . . . . . . . 1,135
2002. . . . . . . . 762
Thereafter. . . . . 1,152
-------
$12,304
=======
CAPITAL LEASES
The Company's capital leases, which are included in computers, furniture, and
equipment, are as follows:
MAY 31,
-----------------
1997 1996
------ --------
Gross portable computers. . . . . $ -- $ 3,765
Other capitalized equipment . . . 101 102
Accumulated depreciation. . . . . (93) (1,635)
------- --------
$ 8 $ 2,232
======= ========
The entire lease obligation related to the capital leases is classified in
current liabilities. Amortization of approximately $61, $1,100 and $400 in
fiscal years 1997, 1996 and 1995, respectively, related to these capital
leases is included in depreciation expense.
===============================================================================
Page 51
TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 17 -- LITIGATION
In September 1993, then Company director and vice-chairman Melvyn E.
Bergstein filed a complaint in the Circuit Court of Cook County, Chancery
Division, alleging, among other things, he was wrongfully terminated as an
employee. As a result of this alleged wrongful termination, Mr. Bergstein
claimed that restrictive covenants in his employment agreement were invalid,
and that he had incurred damages as a result of the alleged wrongful
termination. On March 12, 1996 the Company and the individual defendants
entered into a settlement agreement with Messrs. Bergstein, Moffitt, and
Mikolajczyk. In accordance with the settlement agreement, all claims,
counterclaims and third party claims were dismissed with prejudice on
March 14, 1996.
The Company is party to lawsuits arising out of the normal course of
business. Management believes the final outcome of such litigation will not
have a material adverse effect on the Company's consolidated financial
position or results of operations.
NOTE 18 -- SUBSEQUENT EVENTS
In June 1997, the Company acquired The Bentley Company, Inc., ("Bentley") for
a combination of cash and the Company's common stock. The transaction was
accounted for using the purchase method of accounting and goodwill was
recorded and will be amortized over five years on a straight-line basis
beginning in June 1997. Total consideration paid for Bentley was
approximately $12.7 million. Cash paid for Bentley totaled $7.4 million and
the Company also exchanged 29,535 shares of the Company's common stock for
all the issued and outstanding stock of Bentley. The purchase price may be
increased by approximately $5.8 million if certain performance targets are
met over the next two years. Goodwill recorded was approximately $12.8
million. Bentley is a Boston-area based firm specializing in business and
operations consulting in the area of customer service and field service and
support.
===============================================================================
Page 52
TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 19-- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
August 31, November 30, February 28, May 31,
QUARTER ENDED 1996 1996 1997 1997
---------- ------------ ------------ --------
Revenues $32,162 $39,521 $42,346 $51,059
Operating income $ 3,151 $ 5,928 $ 6,003 $ 7,791
Net income $ 2,125 $ 3,746 $ 3,993 $ 5,203
Earnings per share(A) $ 0.09 $ 0.14 $ 0.15 $ 0.19
August 31, November 30, February 29, May 31,
QUARTER ENDED 1995 1995(B) 1996(C) 1996
---------- ------------ ------------ --------
Revenues $20,732 $23,300 $25,466 $28,101
Operating income (loss $ 1,241 $ (560) $ 552 $ 3,631
Net income $ 1,155 $ 43 $ 768 $ 2,608
Earnings per share(A) $ 0.05 $ 0.01 $ 0.03 $ 0.11
August 31, November 30, February 28, May 31,
QUARTER ENDED 1994 1994 1995(D) 1995
---------- ------------ ------------ ---------
Revenues $13,436 $15,557 $17,215 $19,609
Operating income (loss) $ 576 $ 1,128 $ (362) $ 1,428
Net income $ 746 $ 1,107 $ 202 $ 1,312
Earnings per share(A) $ 0.03 $ 0.05 $ 0.02 $ 0.06
- ---------------------
(A) All earnings per share data have been restated to reflect the
three-for-two stock splits that were effective on August 1, 1997 and
July 30, 1996, respectively.
(B) Includes a charge of $2.3 million related to shareholder litigation
settlement.
(C) Includes a charge of $0.9 million related to Company founders litigation
settlement.
(D) Includes a charge of $1.6 million related to agreements with former
company executives.
===============================================================================
Page 53
FINANCIAL STATEMENT
SCHEDULE
TECHNOLOGY SOLUTIONS COMPANY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED MAY 31, 1997, 1996 AND 1995
(IN THOUSANDS)
BALANCE AT BALANCE AT
DESCRIPTION OF BEGINNING END OF
ALLOWANCE AND RESERVES OF YEAR ADDITIONS DEDUCTIONS YEAR
- ---------------------- ---------- --------- ---------- -----------
1995
Valuation allowance
and receivable reserves
for potential losses $1,720 $2,059 $1,942 $1,837
====== ======= ======= ======
1996
Valuation allowance
and receivable reserves
for potential losses $1,837 $1,339 $1,306 $1,870
====== ======= ======= ======
1997
Valuation allowance
and receivable reserves
for potential losses $1,870 $2,712 $1,236 $3,346
====== ======= ======= ======
===============================================================================
Page 54
TECHNOLOGY SOLUTIONS COMPANY
PART IV. (CONTINUED)
===============================================================================
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K(Continued)
ITEM 14(a)(3) EXHIBITS
The following documents are filed herewith or incorporated by reference and
made a part of this Report.
EXHIBIT # DESCRIPTION OF DOCUMENT
3(i) Certificate of Incorporation of TSC, as amended, filed as
Exhibit 3.01 to TSC's Registration Statement on Form S-1 (File
No. 33-41824), is hereby incorporated by reference.
3(ii) Bylaws of TSC, as amended, filed as Exhibit 3.02 to TSC's
Registration Statement on Form S-1 (File No. 33-41824), are
hereby incorporated by reference.
10.01 Technology Solutions Company 1996 Stock Incentive Plan, as
amended, filed as Exhibit 4.3 to TSC's Registration Statement of
Form S-8 filed July 16, 1997, is hereby incorporated by
reference.
10.02 The Bentley Company Stock Option Plan, as amended, filed as
Exhibits 4.4 and 4.5 to TSC's Registration Statement on Form S-8
filed July 16, 1997, is hereby incorporated by reference.
10.03 Technology Solutions Company Original Option Plan, as amended,
filed as Exhibit 10.02 to TSC's Annual Report on Form 10-K for
the fiscal year ended May 31, 1992 is hereby incorporated by
reference.
10.04 Technology Solutions Company 1992 Stock Incentive Plan, filed as
Exhibit 10.03 to TSC's Annual Report on Form 10-K for the fiscal
year ended May 31, 1992, is hereby incorporated by reference.
10.05 1993 Outside Directors Stock Option Plan, as amended, filed as
Exhibit 10.05 to TSC's Annual Report on Form 10-K for the fiscal
year ended May 31, 1994, is hereby incorporated by reference.
===============================================================================
Page 55
TECHNOLOGY SOLUTIONS COMPANY
PART IV. (CONTINUED)
===============================================================================
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(Continued)
ITEM 14(a)(3) EXHIBITS (CONTINUED)
10.06 Employment Agreement of William H. Waltrip, filed as
Exhibit 10.06 to TSC's Annual Report on Form 10-K for the fiscal
year ended May 31, 1996, is hereby incorporated by reference.
10.07 Employment Agreement of John T. Kohler, filed as Exhibit 10.07
to TSC's Annual Report on Form 10-K for the fiscal year ended
May 31, 1996, is hereby incorporated by reference.
10.08 Employment Agreement of James S. Carluccio, filed as Exhibit 10.08
to TSC's Annual Report on Form 10-K for the fiscal year ended
May 31, 1994, is hereby incorporated by reference.
10.09 Employment Agreement of Jack N. Hayden, filed as Exhibit 10.09
to TSC's Annual Report on Form 10-K for the fiscal year ended
May 31, 1996, is hereby incorporated by reference.
10.10 Employment Agreement of Kelly D. Conway, filed as Exhibit 10.12
to TSC's Annual Report on Form 10-K for the fiscal year ended
May 31, 1996, is hereby incorporated by reference.
10.11 Employment Agreement of Martin T. Johnson, filed as Exhibit 10.14
to TSC's Annual Report on Form 10-K for the fiscal year ended
May 31, 1995, is hereby incorporated by reference.
10.12 Employment Agreement of Paul R. Peterson, filed as Exhibit 10.15
to TSC's Annual Report on Form 10-K for the fiscal year ended
May 31, 1995, is hereby incorporated by reference.
10.13 Employment Agreement of Michael J. McLaughlin, filed as
Exhibit 10.16 to TSC's Annual Report on Form 10-K for the fiscal
year ended May 31, 1996, is hereby incorporated by reference.
===============================================================================
Page 56
TECHNOLOGY SOLUTIONS COMPANY
PART IV. (CONTINUED)
===============================================================================
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K (CONTINUED)
ITEM 14(a)(3) EXHIBITS (CONTINUED)
11.01* Statement re Computation of Per Share Earnings.
21.01* Subsidiaries of the Company.
23.01* Consent of Price Waterhouse LLP.
Exhibits 10.01 through 10.13 listed above are the management
contracts and compensatory plans or arrangements required to be filed as
exhibits hereto pursuant to the requirements of Item 601 of Regulation S-K.
ITEM 14(b) REPORTS ON FORM 8-K
During the quarter ended May 31, 1997, the Company did not file any reports on
Form 8-K.
______________
*Filed herewith
===============================================================================
Page 57
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 25TH DAY
OF AUGUST 1997.
TECHNOLOGY SOLUTIONS COMPANY
By: /s/ MARTIN T. JOHNSON
------------------------
Martin T. Johnson
CHIEF FINANCIAL AND ACCOUNTING OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT, IN THE CAPACITIES AND ON THE DATE INDICATED.
SIGNATURE
/S/ WILLIAM H. WALTRIP (AUGUST 25, 1997) Chairman
- ------------------------------------------------------- Officer and Director
William H. Waltrip
/s/ JOHN T. KOHLER (AUGUST 25, 1997) President, Chief
- ------------------------------------------------------ Executive Officer
John T. Kohler and Director
/s/ MARTIN T. JOHNSON (AUGUST 25, 1997) Chief Financial and
- ------------------------------------------------------ Accounting Officer
Martin T. Johnson
/s/ MICHAEL J. MCLAUGHLIN (AUGUST 25, 1997) Director
- ------------------------------------------------------
Michael J. McLaughlin
/s/ MICHAEL J. MURRAY (AUGUST 25, 1997) Director
- ------------------------------------------------------
Michael J. Murray
/s/ STEPHEN B. ORESMAN (AUGUST 25, 1997) Director
- ------------------------------------------------------
Stephen B. Oresman
/s/ JOHN R. PURCELL (AUGUST 25, 1997) Director
- -------------------------------------------------------
John R. Purcell
(BEING THE PRINCIPAL EXECUTIVE OFFICERS, THE PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICERS AND A MAJORITY OF THE DIRECTORS OF TECHNOLOGY SOLUTIONS
COMPANY.)
===============================================================================
Page 61