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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) of
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended May 31, 1996
Commission file number 0-19433
[LOGO OF TSC]
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. [X]
THE AGGREGATE MARKET VALUE OF THE REGISTRANT'S VOTING STOCK HELD BY
NONAFFILIATES OF THE REGISTRANT (BASED UPON THE PER SHARE CLOSING PRICE OF
$26.75 ON AUGUST 9, 1996, AND, FOR THE PURPOSE OF THIS CALCULATION ONLY, THE
ASSUMPTION THAT ALL REGISTRANT'S DIRECTORS AND EXECUTIVE OFFICERS ARE
AFFILIATES) WAS APPROXIMATELY $393 MILLION.
THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S COMMON STOCK, PAR VALUE
PER SHARE $.01, AS OF AUGUST 9, 1996, WAS 15,269,093.
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 1996 ANNUAL MEETING OF
STOCKHOLDERS.
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TECHNOLOGY SOLUTIONS COMPANY
PART I.
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ITEM 1. BUSINESS
GENERAL
Technology Solutions Company ("TSC" or the "Company") provides strategic
business and management consulting and information technology 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 information technology 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 the full range of strategic business and management consulting
services and information technology services. The 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's
information technology ("IT") services address the entire spectrum of IT
consulting and 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.
In May 1996, the Company strengthened its service offerings through the
acquisition of Aspen Consultancy, Ltd. ("Aspen") and McLaughlin & Associates
("McLaughlin"). Aspen, a London-based consultancy, provides expertise in
customer service and call center consulting, including business strategy for
Pan-European and domestic European call centers, technology vision,
communications infrastructure and architecture. This acquisition accelerates the
Company's efforts to enter the European call center market as Aspen has an
established client base, a local team of experts, and in-depth knowledge of the
European call center market.
McLaughlin, the Company's second strategic acquisition, provides expertise in
high-end business and product strategy and management consulting services.
McLaughlin's business focuses principally on computer, telecommunications,
software and services firms. This acquisition adds significant expertise to the
Company's high-end strategic consulting services and provides the Company with
additional expertise to serve the growing telecommunications market space.
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TSC is organized into specific areas of business focus, called practice areas,
to better address the needs of its clients by providing specialized business and
systems knowledge. TSC believes that a structure based on focused practice areas
gives its clients access to very specialized industry and systems knowledge and
allows its employees the flexibility and opportunity to grow and develop.
The Company is currently organized into six practice areas: Call Center,
Enterprise Applications and Change & Learning Technologies (formerly known as
Applications and Training), Financial Services, Managed Health Care, McLaughlin
& Associates, and Products. Additionally, the Call Center and Enterprise
Applications and Learning Systems practice areas conduct business in
international markets.
Since its inception in May 1988, TSC has performed systems work for
approximately 300 corporations, including Aetna, ConAgra, Georgia-Pacific, The
Equitable, First Union Corporation, Goldman, Sachs & Co., The Chicago Board
Options Exchange (CBOE), Pfizer Pharmaceuticals, Cisco Systems, Pepsi, Square D
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 New York; Atlanta; and
the Dallas; and Philadelphia metropolitan areas. International offices are
located in Mexico City, Mexico; London, England; and Toronto, Canada.
STRATEGY
TSC's strategy is to offer the full range of strategic business and management
consulting and information technology consulting services. The 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.
TSC's information technology consulting services are offered in key application
areas within targeted vertical markets. 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, electronic commerce, sales process optimization, risk management,
supply chain reengineering, packaged software implementation, and other areas.
Projects undertaken in these areas improve a client's profitability and 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 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. Integral with much of TSC's information technology consulting work
is management consulting in the process redesign and reengineering areas.
Projects are comprised of a number of phases the total of which may
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span a time period of from nine to twelve months to several years. Major project
work may result in significant additional engagements with the same
organization.
TSC's strategy emphasizes the importance of project management, and industry-
specific and application knowledge. TSC dedicates an experienced, senior level
project manager (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 their ability to understand the business
objectives of their clients and to contribute to day-to-day operating
efficiencies. 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. This industry-specific approach
is reflected in TSC's organization into practice areas.
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 23 years of experience serves as project manager. This individual
works with ten experienced consultants averaging 18 years of experience to
create the foundation project team, which is then completed by pairing with the
client's staff.
TSC's strategy for the future focuses on several areas. The Company intends to
build on its growing strength as a full service business and technology
consulting firm, leverage its expertise in key vertical markets, continue its
national and international expansion, and continue to invest in its most
important asset, the employees of the Company. This strategy manifests itself in
near term plans for growing the customer relationship solutions business,
expanding the package application integration business, developing new industry
focuses and expanding consulting services and markets.
Customer Relationship Solutions
A major strategic focus for TSC is in the area of customer relationship
solutions. Frederick F. Reichheld, author of The Loyalty Effect: The Hidden
Force Behind Growth, Profits, and Lasting Value (Harvard Business School Press,
1996), noted: "On average, U.S. corporations now lose half their customers in
five years." This churn of the customer base is very costly to the firm. This
has caused companies to increasingly focus on customer service, and today
customer service is now the top information technology priority for many firms.
TSC believes that there is a significant difference between delivering customer
service and building customer relationship. In the past, American business has
interacted with its customers through largely reactive, transactional customer
service processes. In this model, the company responds to inquiries initiated by
the customer, and satisfaction ultimately results from the customer's own
efforts to request service from the company. These customer service groups are
usually viewed as an overhead cost that should be controlled. Thus, these
functions are typically managed with cost control and efficiency as the key
issues.
The next generation of business strategies can improve upon these conventional
ideas of customer service by implementing strategies based on a much broader
idea, that of the customer
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relationship. Interactions based upon the customer relationship model replace
the traditional reactive, transactional customer service experience with one
that attempts to anticipate customer needs, operates proactively and, thereby,
creates a long-term bond with the customer.
This model, based upon TSC's client experiences, delivers to the customer a
sense of uniqueness, created by relationship rules that recognize and act on
that uniqueness and a new model of customer influence. The result of this
approach is a relationship between the business and customer that secures the
customer's long-term patronage and loyalty.
The contrast between customer service and customer relationship might be
described as follows: customer service is usually a reactive function with a
goal of efficiency, while customer relationship is a powerful, continuous series
of proactive customer interactions. Its goal is long-term value.
The shift from a transaction orientation to one of customer focus is not as
obvious or easy as some people suggest. There are three key points in a customer
relationship solution: 1) the focus in the transition is the customer
relationship and how to strengthen it; 2) the strongest customer relationships
are built on recognizing and acting on the customer's uniqueness (this can be
accomplished in many ways); and 3) the key business statistic in this process--
the one that gives us a benchmark estimate of the potential in this strategy--is
customer value. Customer value is not merely customer retention or customer
profitability. Rather, it represents the optimal economic return that can be
anticipated from a customer over time by managing the relationship successfully.
It therefore considers the customer's current and potential lifetime value to
the organization.
TSC's work in the customer relationship 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 strategic business services
include high-end business strategy and vision development, performance
benchmarking, business case development, process redesign and reengineering, and
change management/benefits realization. Information technology services include
project management, technical architecture, logical and physical systems design,
systems integration, hardware and software selection, programming,
implementation, education and training.
Customer relationship solutions require significant systems integration work to
be successful. Every system requires integration with the clients existing
legacy systems. In addition, each solution includes a variety of hardware and
software products at both the server and workstation level that must be
successfully integrated along with the interface to the internal and external
communications networks.
CALL CENTER SYSTEMS
TSC is a recognized leader in the development of world-class call centers that
help clients build and enhance their relationships with their customers. This is
due to TSC's focus on helping its clients articulate their vision for the
customer relationship and then turning that vision into a
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practical strategy with a roadmap to a successful implementation. TSC has been
involved in the design, development, and implementation of a number of the
leading customer relationship call centers in the U.S.
These systems require computer telephony integration (CTI) as well as the
integration of imaging, intelligent call routing, scheduling and forecasting,
productivity tools, workflow, expert systems, customer contact databases, and
legacy systems plus a variety of automatic call distributor (ACD) telephone
switches, voice response units (VRUs), and predictive dialer hardware as well as
workstation, server, and database environments. TSC's experience in and
understanding of the complexities of integrating the variety of hardware and
software products and environments is a major reason for TSC's success as a
leader in building world-class customer relationship call centers.
Based on TSC's years of building world-class call centers in the U.S., TSC has
begun the international expansion of its call center business with operations
now in Mexico, Europe and in Canada.
To speed the growth of the U.S. and international call center business, TSC has
built and continues to update its Knowledge Center for the call center area. The
Knowledge Center provides TSC consultants working anywhere in the world on a
customer relationship call center project with access to a powerful suite of
observation and assessment tools, best practice models, quality assurance
measure, proven methodologies, successful rollout strategies and a technology
toolkit of software tools.
ELECTRONIC COMMERCE SYSTEMS
The emerging field of electronic commerce (EC) is a new focus area for TSC.
Electronic commerce is, according to Gartner Group, not a single technology or
tool; rather it is a combination of technologies, applications, processes, and
business strategies. It reduces the cost of creating, moving, managing, and
processing documents, transactions, and other forms of information exchanged
between entities. It reduces operational costs since information from trading
partners is more accessible, timely, and accurate when sent electronically--
ultimately improving the quality of decisions made by management and enhancing
relationships with business partners. It also increases revenue and profits by
providing additional channels to market and the ability to sell products and
services at a lower cost.
EC today encompasses such technologies as electronic data interchange (EDI), bar
coding, e-mail, the Internet and Intranets among others. EDI applications are
delivering strategic benefits and supporting specific company initiatives,
including Quick Response (QR), Efficient Consumer Response (ECR), and other
supply chain management efforts. E-mail and groupware products such as Lotus
Notes(R) and Microsoft Mail(R) are helping companies communicate across network
platforms, transmit time-sensitive information, and ultimately form virtual
corporations. Internet and Intranet applications are quickly becoming common at
companies.
___________________________
"Lotus Notes(R)" is a registered trademark of Lotus Development Corporation.
"Microsoft Mail(R)" is a registered trademark of Microsoft Corporation.
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TSC is helping companies embrace the benefits of EC to reduce costs, leverage
new market opportunities, and effectively communicate with their employees,
customers, and trading partners. Whether companies are using bar codes for
electronic receiving, unveiling an electronic catalog, or reengineering their
entire supply chain, TSC provides an objective and integrated EC solution.
When EC technology is integrated with applications within the overall business
process, only then can a new, radically different business model emerge. This is
a business model where customer service is paramount, 100 percent accuracy in
product delivery is the norm, order turnaround is measured in hours rather than
weeks, and products and services are available at multiple access points.
TSC's strategy in building an electronic commerce capability has been to
capitalize on its experience and to leverage the expertise behind these
experiences. For example, in the electronic supply chain area, TSC has built an
EDI infrastructure for a major client, which included an EDI assessment,
developed tactical organizational recommendations and a long-term EDI strategic
plan. This has reduced transaction time, improved problem tracking capabilities,
saved key relationships with multiple suppliers and laid the foundation for a
world-class EDI infrastructure.
For a leading computer manufacturer, TSC built an interactive catalog that
allows end users to review, shop and order office supplies directly from their
PCs. The interactive catalog expands market channels for participating office
supply distributors and positions the computer manufacturer as a value-added
provider. These and other early successes have given us the foundation to build
a significant core expertise in this attractive growth market.
SUPPLY CHAIN SYSTEMS
As companies embrace the business strategy that customer relationships which
attempt to treat a customer uniquely, and look at the customer value over the
long-term, they find that the systems that the customer must interface with are
not relationship oriented. In many large, multi-product businesses a client may
have to deal with several product-line order departments, located in different
cities using different order entry systems. Requesting information about a
shipment is equally difficult as the client must determine which of many access
points to contact regarding a given order.
Thus, companies focused on enhanced customer relationships are implementing
supply chain systems to create a single focus, single point of contact for the
relationship with the customer. Companies are embracing the idea of making it
easy for the customer to deal with their firm. These supply chain systems are
complex integration efforts as they must interface with a variety of existing
legacy systems in the various business units within the firm.
Projects in this area begin with establishing the business strategy and vision
followed by the development of the business case which details the costs,
benefits, the quantification of the payback and internal rate of return of the
project, and outlines accountabilities for project success. Because these
projects typically cross a number of product lines and business units, the
development of a prototype system in a rapid application development (RAD)
environment is critical to understanding the business issues within each area
affected.
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The supply chain systems developed by TSC allow the company to understand the
client relationship. This is done by giving all of the business units dealing
with that customer the opportunity to understand the nature, amount and
profitability of the business done with a particular client. With a supply chain
system in place many companies are creating relationship managers to put the
single point of contact into the sales process.
SALES PROCESS OPTIMIZATION SYSTEMS
Competitors who promise better service are making it difficult for companies to
retain their once stable customer accounts. Account profitability is difficult
to evaluate without reliable analyses. Significant customer buying patterns are
not easily recognized and cross-selling tools are difficult to use. These are
some of the problems facing management in today's business environment.
Most organizations today manage prospect and customer contact as a series of
transactions rather than looking at the customer's total relationship because
the company information systems lack integration that enables an organization to
find data and make it accessible for sales and management. In an optimized
setting, the customer's total relationship with the organization is accessible
not only to the sales force but to other departments that may interact with the
customer, such as customer service or distribution.
Simply automating the sales force is only part of the solution. TSC focuses
instead on sales process optimization. This model engages the entire
organization in the customer analysis, acquisition and retention process. The
organization is now focused on what the customer needs to know, when they need
to know it, and in what form. This highly personal value-added sales
infrastructure reduces the time needed to close deals. The model leverages the
sales force for its potential input to product development, marketing planning,
customer relationship management and corporate strategy.
TSC utilizes a discovery lab, an intensive, highly focused process that blends
break-through thinking and business process reengineering to examine the entire
sales and sales support process. A new sales and sales support process is
modeled which links the firms business strategies with the goal of maximizing
added value with each customer transaction. A business case for this vision is
developed which tests the feasibility of the strategy in a model of operations
and feasibility analysis. The business case weighs the costs against the
benefits to calculate payback and internal rate of return and it outlines
accountabilities for project success.
TSC then provides implementation services necessary to put the sales
optimization system in place. These include project management, technical and
business architecture, systems integration, hardware and software selection,
implementation, programming, benefits realization and education and training.
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Package Applications Integration
While focusing on large corporate projects, TSC recognizes that there is more
and more consulting and integration work being performed which involves
applications software from third-party vendors. TSC's staff includes many
individuals with corporate and consulting experience in numerous applications
software products. This corporate experience includes not only technical but
line management and industry-specific knowledge and experience. This broad base
of experience helps clients implementing applications software packages obtain
the maximum benefits from their new system. Additionally, TSC has dedicated
resources that specialize in the implementation of the R/3 product from SAP AG
and its U.S. subsidiary SAP America, Inc., the TRITON product offered by Baan
N.V. and its U.S. subsidiary Baan U.S.A., Inc., and the financial and human
resources applications of PeopleSoft, Inc. These three organizations are leaders
among developers of integrated business software, and implementation of their
software offers significant long-term revenue potential. TSC will, in fiscal
1997, expand its package application integration alliances.
In addition to package application implementation, TSC has also developed
sophisticated multi-media computer-based training (CBT) systems for clients.
These CBT applications cover custom client applications as well as CBT training
programs that reflect client specific implementations of third-party
applications software.
Telecommunications
The deregulation of the local telephone markets in the U.S. along with the
privatization of a number of European PTTs and the opening of these European
telephone markets to competition has created a significant opportunity for the
implementation of customer relationship solutions in the telecommunications
market. The development of other alternative carriers in the cellular, PCS, CDPD
and cable TV markets adds to the need for customer relationship systems in the
these markets.
Although a significant amount of effort has been and continues to be spent on
rewriting the billing and infrastructure systems in the telecommunications
industry, the telecommunications industry has not been focused on the customer
relationship as it provides service to its customers. In a more competitive
deregulated environment, however, customer service will become a differentiator.
Therein lies an opportunity for TSC, with its expertise in helping companies
transform their relationships with customers. The systems required for these
firms are large, complex systems which require a significant amount of
integration. Because of the size of these businesses and the transaction
volumes, the systems are not simple implementations but rather large, complex,
long duration integration projects. TSC has performed work at several Regional
Bell Operating Companies (RBOC's) in the past. TSC will, in fiscal year 1997,
begin to develop a new business focus (practice area) in the area of
telecommunications.
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Expansion of Services / Markets
The acquisition of McLaughlin & Associates was a major move in TSC's efforts to
expand its services. This moved TSC into the high-end strategic business and
management consulting services area. TSC intends to devote significant time and
effort to growing and expanding this consulting area. Other services that will
be expanded include the education and training area where additional focus will
be placed on growing the previously discussed CBT training systems area.
TSC's business focus is in the commercial market. TSC does not presently
participate in the state, local, and federal government segment of the systems
integration market. The 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 government segment of the market is characterized by slow and many times
erratic payment policies.
SERVICES
TSC provides strategic business and management consulting services and
information technology services to its clients. The 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's
information technology ("IT") services address the entire spectrum of IT
consulting and 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, 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.
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.
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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. TSC likes to start each project -- regardless of practice
area -- with a business case justification that clearly spells out the business
benefits that will result from the systems investment, along with the various
financial measurements of the benefits, including internal rate of return.
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 educates the
client about relevant technological options and recommends how the client can
best employ the technology to meet its objectives.
The business case relates the system functionality and all 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 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
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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/ORGANIZATIONAL EFFECTIVENESS/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 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 project change needs.
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 of the users of the system as well as detailed process
and system education.
CLIENTS
TSC's five largest clients in fiscal 1996 accounted for 21 percent, 6 percent,
6 percent, 6 percent, and 5 percent of total revenues, respectively; in fiscal
1995, the five largest clients accounted for 24 percent, 18 percent, 6 percent,
5 percent, and 4 percent of total revenues, respectively; and in fiscal 1994,
they accounted for 16 percent, 16 percent, 11 percent, 9 percent, and 5 percent
of total revenues, respectively. Clients that accounted for 10 percent or more
of revenues consisted of Georgia-Pacific in fiscal 1996; Georgia-Pacific and
ConAgra in fiscal 1995; and Pepsi-Cola Company, ConAgra, and Goldman Sachs & Co.
in fiscal 1994.
In fiscal 1996, fiscal 1995, and fiscal 1994, respectively, 75 percent, 80
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 is 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.
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PRACTICE AREAS
TSC is organized into specific practice areas to better focus on the needs of
its clients and the skills of its employees and to allow for the formation of
smaller, focused working groups for greater efficiency. TSC believes that a
small practice area structure gives its clients very specialized industry and
systems knowledge and allows its employees the flexibility and opportunity to
grow and develop.
During fiscal 1996, TSC was organized into five practice areas -- Applications
and Training (now known as Enterprise Applications and Change & Learning
Technologies), Call Center, Financial Services, Managed Health Care, and
Products. During fiscal 1997, a practice area will be added for the business
strategy and management consulting area as a result of the expertise acquired
with the acquisition of McLaughlin & Associates.
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 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.
The focus of the Call Center practice area includes companies involved in
consumer products, high technology, financial services, telecommunications,
media (including publishers and advertisers), direct marketing, and health care.
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 practice area targets firms with inbound/outbound call centers or
telemarketing centers which provide such functions as sales, service, technical
support, and customer inquiry.
Within its Call Center practice area, TSC believes it competes for projects
primarily on the basis of the reputation and experience of its senior project
managers, its expertise in leading-edge technologies, the creativity of the
customer service vision established with the client, and the strength and
quality of the call center architecture and design produced by TSC. The
influencing factors in these projects have typically been the experience and
creativity of the systems integrator, not the price.
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ENTERPRISE APPLICATIONS AND CHANGE & LEARNING TECHNOLOGIES
The Enterprise Applications and Change & Learning Technologies practice area
(formerly known as the Applications and Training practice area) undertakes
projects which require a knowledge of a number of different third-party
applications software packages and may involve the implementation of customized
software to interface the new applications 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.
The client focus within the Enterprise Applications and Change & Learning
Technologies practice includes commercial manufacturers, engineering companies,
health care, financial services, distribution and logistics companies, aerospace
and defense contractors, 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 and Change &
Learning Technologies practice area focus on include manufacturing planning and
operations, logistics, transportation, inventory management, human resources,
accounting, and financial analysis and reporting.
The Enterprise Applications and Change & Learning Technologies practice area is
involved in systems integration and package implementation projects involving
the human resources and financial packages supplied by PeopleSoft, Inc. and the
integrated client/server product family R/3 supplied by SAP AG and its U.S.
subsidiary SAP America, Inc. as well as the integrated client/server product
TRITON supplied by Baan Company N.V. and its U.S. subsidiary Baan U.S.A., Inc.
Additionally, the Enterprise Applications and Change & Learning Technologies
practice area provides services related to the evaluation of a client's current
systems and business issues and will perform analysis of software alternatives
for clients.
The Enterprise Applications and Change & Learning Technologies practice area is
also involved with the development of education and training programs for
clients. These training programs involve sophisticated user training programs,
typically utilizing computer-based-training techniques.
Within its Enterprise Applications and Change & Learning Technologies practice
area, TSC believes it competes for projects primarily on the basis of the
reputation and experience of its senior project managers and knowledge of a
variety of software applications, methodologies, and databases. Price
competition has been more common within the Enterprise Applications and Change &
Learning Technologies practice area than it has been in the Company's other
practice areas.
FINANCIAL SERVICES
The Financial Services practice area is focused on defining and implementing
systems for financial institutions in three core service areas: 1) Investment
Management systems used by portfolio managers, traders, and client relationship
personnel to improve asset returns and customer service; 2) Risk Management
systems used by banking and corporate treasury for asset/liability management,
to measure and hedge interest rate, currency and commodity income and value
risk;
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3) Sales Force Automation systems used by sales managers and sales persons to
achieve higher productivity from sales and target marketing. In addition, the
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.
TSC's experience indicates, however, that many financial services firms are not
able to fully address these needs with in-house systems staff. They also may
want to avoid significant permanent additions to their in-house staffs when
market conditions are uncertain, or for projects with short timeframes.
TSC believes that its Financial Services practice area 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, and
the creativity of its proposals. 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.
MANAGED HEALTH CARE
The Managed Health Care practice area concentrates on developing systems for
patient care, preventative care, and the control of specialist and hospital
expenses.
The Managed Health Care practice area can also provide workload and technology
evaluation and consulting services to clients seeking acquisitions in the health
care area.
The significant changes occurring in the health care field, from the
consolidation of health care practices, the growth in numbers of PPOs and HMOs,
the issues of health care cost control and cost containment, the development of
home-based care programs, and the push for some form of national health care,
all put pressure on health care organizations for more efficiency, greater
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productivity, and reduction in overhead. TSC believes that system improvements
can create operating effectiveness that will assist health care companies to
respond to these pressures.
TSC believes that, within its Managed Health Care practice area, it competes for
projects primarily on the basis of: the reputation and experience of its senior
project managers; its flexibility to adapt to and work with a number of
different methodologies, databases, software applications, and hardware
platforms; and the strength, creativity and overall quality of its client
presentations.
MCLAUGHLIN & ASSOCIATES
The McLaughlin & Associates practice area is involved in providing high-end
strategic consulting services, including business strategic planning, market
research and analysis, new venture growth services, product distribution channel
planning, and organizational restructuring services. These strategic business
and management consulting services are provided to companies within the
computer, telecommunications, software, and services industries.
McLaughlin & Associates has extensive experience in providing these high-end
consulting services to firms such as IBM, AT&T, GTE, Motorola, Digital Equipment
and many of the regional Bell operating companies.
TSC believes that, within its McLaughlin & Associates practice area, it competes
for projects primarily on the basis of the reputation and experience of its
senior project managers and strategy consultants; its methodologies and market
research models and databases; and the strength, creativity, and overall quality
of its strategic recommendations. The influencing factor in these strategic
consulting projects have typically been the experience and creativity of the
consultant, not the price.
PRODUCTS
TSC's Products practice area is involved in providing systems and business
consulting services to a wide variety of companies. The Products practice area
is broken into geographic regions in the United States. TSC clients are industry
leaders in packaged goods, pharmaceuticals, health care, retail, wholesale, mail
order, engineering, commercial manufacturing, transportation/logistics, and
textile and apparel. Typically, TSC works in the operational areas of the client
company that have the greatest business and competitive impact, such as customer
service, order processing, inventory and production management, pricing and
promotions, transportation and logistics. The Products practice area is focused
on project work in the electronic commerce, supply chain reengineering, order
entry, inventory management, distribution/logistics, sales process optimization,
and direct marketing areas.
Characteristics of the companies served include: a large customer base, an
extensive product line, significant transaction processing loads, and large
numbers (hundreds or thousands) of remote locations and staff to support. These
companies typically need systems that are highly reliable, with nearly
instantaneous response times to capitalize on a variety of sales opportunities.
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The staff in the Products practice area has extensive experience in the
electronic commerce, supply chain, and sales process optimization functional
areas. These functional areas involve the integration and implementation of
packaged software applications as well as the design, development, and
integration of custom software and middleware in the industries described above.
The Products practice area also is involved in a variety of other large-scale
custom systems integration projects that encompass other functional areas of a
business. Products practice area projects will often tap the technological
expertise of TSC's people in the areas of client/server and cooperative
processing architectures, relational database technology, network integration,
on-line telecommunications networks, and performance modeling techniques.
TSC believes that, within its Products practice area, it competes for projects
primarily on the basis of the reputation and experience of its senior project
managers, its flexibility to adapt to and work with a number of different
methodologies, databases and hardware platforms and equipment; the creativity
and overall quality of the business and systems consulting work delivered to its
clients; and the creativity and strength of its client presentations. Many of
the projects in this practice area have included competitive bidding for the
first phase of the project. But, the influencing factors in subsequent phases of
the project have typically been the experience and creativity of the systems
integrator, rather than price.
INTERNATIONAL
TSC initiated its international expansion during fiscal 1996. The revenues and
results of operations of TSC's international operations were not material for
the fiscal year.
During the first quarter of fiscal 1996, TSC established an office in Mexico
City, Mexico, and began recruiting personnel. This office was established to
support TSC's efforts in the area of implementation of the SAP R/3 product
family in Mexico. While initial efforts are being focused on the implementation
of the SAP products, TSC intends to eventually expand the focus of this office
to include other TSC services and practice areas.
In fiscal 1996, TSC also opened an office in London, England, to market in
Europe the Company's customer relationship call center services. In May 1996,
the Company strengthened its European customer relationship call center service
offerings through the acquisition of London-based Aspen Consultancy, Ltd. Aspen
provides expertise in customer service and call center strategy, vision
development and architecture. With this acquisition, the Company's efforts to
enter the European call center market have been accelerated.
Subsequent to the end of fiscal 1996, TSC announced that it has opened an office
in Toronto, Canada. This office supports TSC's efforts to expand its customer
relationship call center business into the Canadian market.
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PERSONNEL
As of May 31, 1996, TSC had a total staff (including U.S. practice areas,
Mexico, Europe, and Infrastructure) of 622. The following table summarizes, as
of May 31, 1996, 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 Age Average
Level Total Range Age Consulting Industry Total
- ----- ------ ----- ------- ---------- -------- -----
Vice Presidents 14% 29-58 44 10 13 23
Senior Principals 19% 30-63 43 9 13 22
Principals 29% 26-62 40 7 9 16
Senior Consultants 21% 24-58 33 4 7 11
Consultants 12% 23-48 30 3 2 5
Assoc. Consultants 5% 21-44 27 1 1 2
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.
TSC's success will depend in large part upon its ability to attract, retain, and
motivate highly skilled employees, particularly senior project managers and
other senior personnel. Qualified senior project managers are in particularly
great demand and are likely to remain a limited resource for the foreseeable
future. Thus, although TSC 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 TSC will be able to do so. Additionally, the loss of some or all of TSC's
senior project managers could have a material adverse impact on TSC, including
its ability to secure and complete engagements.
INFRASTRUCTURE
As of May 31, 1996, TSC had a staff of 68 individuals who comprised the
Infrastructure support group. The objective of Infrastructure is to facilitate
local decision-making and 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; finance; legal; treasury and financial reporting; human
resources; employee benefits; marketing; public and investor relations; office
operations; support of recruiting; manpower coordination; training; internal
communications; internal technology applications; planning; quality assurance;
insurance and acquisitions.
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
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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 rights of others, there can be no assurance that such a
claim will not be asserted against TSC in the future.
COMPETITION
The strategic business and management consulting and the information technology
and systems consulting business are highly competitive areas and include
participants from a variety of market segments. Recognizable participants in the
strategic business and management consulting market include firms such as
Andersen Consulting , an affiliate of Arthur Andersen & Co.; Booz, Allen &
Hamilton Inc.; McKinsey & Co.; and CSC Index, an affiliate of Computer Sciences
Corporation, among others. The information technology and systems consulting
market 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 information technology and systems consulting market are American Management
Systems, Inc.; Andersen Consulting, an affiliate of Arthur Andersen & Co.; 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.
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. TSC believes, however, that its prices
are generally competitive with its principal competitors and, to date, TSC has
been able to maintain its billing margins.
TSC's ability to procure engagements may be affected because various other
competitors own software packages that may be used by potential clients. To
date, however, TSC has not experienced significant limitations to its success in
winning engagements as a result of competitors owning any other software,
although such limitations could develop.
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Participants in the systems consulting and implementation business also face
potential competition from in-house systems staffs. In-house systems staffs are
often considered to be a lower cost alternative to outside systems firms. In
addition, use of in-house staffs permit 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
believes, however, that no competitor or competitors are dominant in the markets
in which it competes, although 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.
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 58, has been a Director of the Company since December
1992 and Chairman of the Board since June 29, 1993. Mr. Waltrip also served as
Chief Executive Officer from June 29, 1993 to June 29, 1995. Since January of
1996, Mr. Waltrip has served as the Chairman of the Board of Directors and Chief
Executive Officer of Bausch & Lomb, Inc. From 1991 to May 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.
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John T. Kohler, age 49, is currently the President and Chief Executive Officer
of the Company and has been a Director of the Company since June 23, 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 on January 29, 1994 and
became Chief Executive Officer on June 29, 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.
James S. Carluccio, age 42, joined TSC in January 1992 and assumed his current
role as Executive Vice President in February of 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 the New York, N.Y.
office.
Kelly D. Conway, age 39, 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 automatic call distribution
equipment. From 1984 to 1989, he held the positions of VP Finance and VP
Marketing for Telcom Technologies. From 1980 to 1984, he was a consultant with
Deloitte, Haskins and Sells.
Jack N. Hayden, age 49, 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. Prior to 1989, he
served in numerous manufacturing and procurement positions at McDonnell Douglas
Corporation since 1971.
Michael J. McLaughlin, age 46, joined TSC on May 31, 1996, when TSC acquired the
operations of McLaughlin & Associates. Effective with the acquisition, he
assumed the role of Executive Vice President and was elected to 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, completing
his tenure there as Global Practice Leader for the computer and
telecommunications practice.
Martin T. Johnson, age 45, joined TSC in August 1993 as a 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,
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.
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Paul R. Peterson, age 53, joined TSC in September 1992 as Vice President and
General Counsel. In June 1996, he was made a Senior Vice President of the
Company. Prior to coming to TSC, he held several positions with
Bridgestone/Firestone, Inc., including Divisional General Counsel during the
periods 1981 to 1984 and 1987 to 1992. 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, and service as a senior
executive from 1974 to 1981 and as a trial attorney from 1971 to 1974 with the
Federal Trade Commission.
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
(approximately 20,600 square feet) expires July 31, 2004. TSC also leases
facilities in New York, Atlanta and the Dallas and Philadelphia metropolitan
areas. Additionally, TSC leases office premises in Mexico City, Mexico, Toronto,
Canada; and London, England. TSC believes that these facilities are adequate for
its current business needs. TSC expects that 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 not a party to any litigation that is expected to have a material
adverse effect on the Company or its business.
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. In December
1993, Mr. Bergstein filed an amended complaint adding four of the Company's
current and former directors as defendants. On February 4, 1994, the Company
filed a Verified Answer, Defenses, Counterclaims and a Third Party Complaint
against Mr. Bergstein and former TSC vice president Christopher J. Moffitt. On
February 7, 1994, a Motion to Strike and Dismiss all counts except those
relating to the restrictive covenants of Mr. Bergstein's Employment Agreement
and the alleged breach of Mr. Bergstein's Employment Agreement was filed. In May
1994, the Chancery Court entered an order continuing the Motion to Strike and
Dismiss pending the future transfer to the Law Division of all counts except the
Count seeking a judicial declaration that the restrictive covenants were
invalid. In September 1994, following a hearing, the Court ruled that the
Company wrongfully terminated Mr. Bergstein, thereby breaching his Employment
Agreement and invalidating the restrictive covenants. The Court also denied the
Company's motion to enjoin Mr. Bergstein from breaching his restrictive
covenants and his fiduciary duties and granted a summary judgment in favor of
Mr. Moffitt. Acting on the motion previously filed by the Company, the Chancery
Court transferred the remaining counts to the Law Division. On October 27, 1994,
the Company filed a Notice of Interlocutory Appeal from the decision of the
Circuit Court. On May 11, 1995, an oral argument was held in the Appellate Court
of Illinois, First District, Fourth Division. On August 3, 1995, the Appellate
Court ruled on the appeal affirming the Circuit Court's finding that TSC
breached its Employment Agreement with
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Mr. Bergstein, reversing the Court's finding that Mr. Bergstein owed no
fiduciary duties, and reversing the Court's grant of summary judgment for Mr.
Moffitt. On December 29, 1994, the Company filed a Supplemental Motion to
Dismiss the remaining counts of Mr. Bergstein's Amended Complaint in the Law
Division. The Company's Motion to Strike and Dismiss filed on February 7, 1994,
together with the Supplemental Motion, were heard on March 29, 1995 and April 5,
1995 in the Law Division. An order was entered dismissing certain counts with
prejudice, dismissing others with leave to replead and denying the Company's
Motion with respect to other counts. On December 6, 1995, the Circuit Court of
Cook County, Law Division, granted the Company's motion for leave to file Third
Amended Verified Counterclaims and Third Party Complaint, adding former TSC vice
president Michael E. Mikolajczyk as a third party defendant. The Company filed
Defendant's Verified Answer to Third Amended Verified Complaint, Affirmative
Defenses and Third Amended Verified Counterclaims adding Mr. Mikolajczyk on
January 3, 1996. On March 12, 1996 the Company and the individual defendants
entered into a settlement agreement with Messers. 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 also is party to other various claims and legal actions which have
not been finally adjudicated. In the opinion of management, based on the advice
of legal counsel, all such matters are without merit or are of such kind that
the prospect of dispositions having a material adverse effect upon the financial
position of the Company are remote.
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,
1996.
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TECHNOLOGY SOLUTIONS COMPANY
PART II.
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ITEM 5. MARKET FOR THE REGISTRANTS' COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is listed on The Nasdaq Stock Market/SM/ under the
symbol "TSCC." As of August 9, 1996, there were approximately 307 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 Market/SM/ for the Company's Common Stock for each quarter in
fiscal 1995 and fiscal 1996.
Quarter Ended High Low
- ------------- ------- -------
August 31, 1994 $ 4.917 $ 3.167
November 30, 1994 $ 5.583 $ 4.083
February 28, 1995 $ 6.333 $ 4.833
May 31, 1995 $ 6.833 $ 5.667
August 31, 1995 $11.250 $ 6.083
November 30, 1995 $12.583 $ 9.833
February 29, 1996 $16.250 $10.917
May 31, 1996 $24.000 $15.333
On August 9, 1996, the last reported sale price on The Nasdaq Stock Market/SM/
for the Company's Common Stock was $26.750.
The market price of TSC's Common Stock has been, and may continue to be,
extremely volatile. Factors, such as significant announcements by TSC and its
competitors, quarterly fluctuations in TSC's operating results and general
conditions in TSC's and its clients' markets may have a significant impact on
the market price of TSC's Common Stock. Since inception, TSC has experienced
significant fluctuations in quarterly operating results. In addition, in recent
years the stock markets have experienced extreme price and volume fluctuations.
These fluctuations have had a substantial effect on the market prices for many
high technology companies, often unrelated to the operating performance of the
specific companies.
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. Any determination as to the payment of dividends in the future
will
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depend upon results of operations, capital requirements, restrictions in loan
agreements, if any, and such other factors as the Board of Directors may deem
relevant at the time.
All per share data have been adjusted to reflect the effect of the Company's
three-for-two stock split effective July 30, 1996.
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 fiscal years ended May 31, 1996, 1995 and
1994 and the audited balance sheets at May 31, 1996 and 1995 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,
--------------------------------------------
1996 1995 1994 1993 1992
------- ------- -------- ------- -------
STATEMENT OF CONSOLIDATED
INCOME DATA:
Total revenues $97,599 $65,817 $53,157 $62,475 $70,987
Operating income (loss) 4,864 2,770 (3,142) 7,007 18,627
Net income 4,574 3,367 35 5,706 12,059
Earnings per common share* $ 0.30 $ 0.24 $ 0.00 $ 0.31 $ 0.67
*1992-1996 earnings per share data have been restated to reflect the three-for-
two stock split that was effected on July 30, 1996.
At May 31,
-------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
CONSOLIDATED BALANCE SHEET DATA:
Total assets $89,437 $65,222 $69,340 $76,048 $75,570
Long-term debt - - - - -
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Page 24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FISCAL 1996 COMPARED WITH FISCAL 1995
Consolidated revenues for the Company, substantially all of which represent
professional fees, for the year ended May 31, 1996, were $97.6 million compared
with $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 is attributable to the high
growth in the overall 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 is 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 at May
31, 1995, to 622 at May 31, 1996. The total number of project managers at May
31, 1996 was 72 compared to 38 at May 31, 1995.
Project personnel costs (primarily professional salaries and benefits) increased
to $46.7 million in fiscal 1996 from $29.2 million in fiscal 1995. Project
personnel costs as a percentage of professional fees were approximately 48
percent and 44 percent in fiscal 1996 and fiscal 1995, respectively. Unassigned
labor costs increased during fiscal 1996 primarily due to the aggressive
recruitment and training programs combined with the timing of the assignment of
new staff to client engagements. The Company increases its personnel resources
in advance of commencing billable project work resulting in a time lag between
incurrence of personnel costs and revenue generated by these personnel.
TSC 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, personnel training,
travel, and provisions for valuation allowances and reserves for potential
losses on continuing projects. Other project expenses for fiscal 1996 were $13.0
million, as compared to $9.0 million for fiscal 1995. This increase is 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 nonbillable travel expenses is
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 is primarily related 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 has, 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 is $0.9 million in management and administrative costs from the
Company's new Mexican subsidiary. Expense accrued for the employee retention
program was
================================================================================
Page 25
$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 pre-tax charges for the final settlements
relating to outstanding securities litigation and litigation involving Company
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 upon receipts of final approval of the settlements.
During fiscal 1995 the Company entered into agreements with former company
executives resulting in a fiscal 1995 pretax charge of $1.6 million ($0.9
million after tax). The $1.6 million represented the settlement of a commission
arrangement, certain other issues and the surrender of options to acquire
1,207,500 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 is largely due to the increased
number of project managers and consultant staff in fiscal 1996 as compared to
fiscal 1995.
The Company's business is subject to certain variability due to the availability
of consulting staff, timing of client decisions and duration of project
consulting engagements. This variability can have a significant impact on
quarterly operating income on a period-to-period basis.
Investment income for fiscal 1996 and fiscal 1995 was $1.9 million.
The Company's effective tax rate differs from the statutory rate primarily due
to the significant amount of federally nontaxable investment income.
FISCAL 1995 COMPARED WITH FISCAL 1994
Revenues for the year ended May 31, 1995, were $65.8 million compared with $53.2
million in fiscal 1994. The principal source of the increase was a 27 percent
increase in billable hours, partially offset by a 2 percent decrease in average
hourly billing rates. This slight decrease in average hourly billing rates is
primarily due to the impact of fiscal 1995 hiring and the resulting change in
the mix of personnel to include a slightly greater percentage of less senior
personnel.
During fiscal 1995 total Company headcount increased 54 percent from 274 at May
31, 1994, to 423 at May 31, 1995. The total number of project managers at May
31, 1995, was 38 compared to 30 at May 31, 1994.
Project personnel costs increased to $29.2 million in fiscal 1995 from $24.5
million in fiscal 1994. Included in fiscal 1994 project personnel costs were
$0.9 million related to costs to complete a client project with no additional
revenue expected. Excluding the $0.9 million charge in fiscal 1994, project
personnel costs as a percentage of professional fees were approximately 44
percent and 45 percent in fiscal 1995 and 1994, respectively.
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Page 26
Other project expenses for fiscal 1995 were $9.0 million, as compared to $5.1
million for fiscal 1994. Contributing to this increase was a charge of $2.1
million in fiscal 1995 as compared to $1.1 million in fiscal 1994 for receivable
valuation allowances and reserves for potential losses on continuing projects.
In addition, hiring, training and related costs increased $1.7 million and
nonbillable travel costs increased $0.7 million in fiscal 1995 as compared to
fiscal 1994, reflecting the increased headcount in fiscal 1995.
Management and administrative support costs decreased to $18.5 million in fiscal
1995 from $22.3 million in fiscal 1994. In fiscal 1994 management and
administrative costs included additional reserves for estimated legal defense
expenses ($3.2 million), expenses incurred for the separation of former
executives ($3.1 million), estimated project completion costs ($1.1 million),
and other adjustments ($0.9 million). In addition, fiscal 1994 charges include
$1.3 million in expense accrued for the employee retention program that was
instituted during the fourth quarter of fiscal 1994. In fiscal 1995 management
and administrative costs include a full year charge of $4.4 million in expense
accrued for the employee retention program. In addition, management and
administrative labor increased $0.6 million in fiscal 1995 as compared to fiscal
1994, principally due to increased staffing.
During fiscal 1995 the Company entered into agreements with former company
executives resulting in a fiscal 1995 pretax charge of $1.6 ($0.9 million after
tax). The $1.6 million represented the settlement of a commission arrangement,
certain other issues and the surrender of 1,207,500 options to acquire company
stock.
Incentive compensation of $4.7 million was accrued for fiscal 1995 as compared
to $3.7 million in fiscal 1994. The increase is largely due to the increased
number of project managers and consultant staff in fiscal 1995 as compared to
fiscal 1994.
Investment income for fiscal 1995 of $1.9 million decreased from $2.3 million in
fiscal 1994, primarily due to lower cash and cash equivalent balances in fiscal
1995.
The Company's effective tax rate differs from the statutory rate primarily due
to the significant amount of federally nontaxable investment income.
The common equivalent shares increased during fiscal 1995 by approximately
587,810 shares. Of this increase, approximately 2,607,101 shares was
attributable to shares issuable upon the exercise of options, which shares were
antidilutive in fiscal 1994 and therefore were excluded from total common and
common equivalent shares outstanding for that year. Including such options,
common and common equivalent shares decreased from 18,131,762 in fiscal 1994 to
16,112,471 in fiscal 1995, due to treasury stock purchases and terminated
employee stock option forfeitures and surrenders partially offset by stock
options granted.
LIQUIDITY AND CAPITAL RESOURCES
The increase in cash and investments from May 31, 1995 is primarily due to $13.4
million provided by financing activities and $2.7 million from the executive
deferred compensation program (see Note 9 -- Executive Deferred Compensation
Plan), partially offset by $5.0 million used in operating activities, $3.1
million used in the acquisition of net assets and other intangibles
================================================================================
Page 27
from the purchase of two businesses and $3.7 million used for capital
expenditures. The $13.4 million from financing activities is largely
attributable to the exercise of options with respect to 1.6 million shares of
the Company's common stock during the fiscal year.
The Company used a net of $5.0 million in cash for operations primarily due to
increased sales in the fourth quarter of fiscal 1996 as compared to fiscal 1995
and the resulting increase in receivables. Cash generated by operations has
still been 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
operating cash requirements during temporary shortfalls in cash from timing
issues. At the end of fiscal 1996 the Company had no material commitments for
capital expenditures.
TSC's net working capital increased to $41.2 million on May 31, 1996, from $24.3
million on May 31, 1995. This increase is primarily due to increased receivables
of $9.8 million and increased cash and cash equivalents of $5.4 million.
Net receivables were $23.5 million and $13.7 million at May 31, 1996 and 1995,
respectively. The increase in receivables is primarily the result of the
increase in revenues. Receivables are net of $1.9 million and $1.8 million in
allowance for doubtful receivables at May 31, 1996 and 1995, respectively.
It is currently anticipated that cash and marketable securities will be used for
general corporate purposes, including capital expenditures, treasury stock
purchases and expansion of TSC's business as opportunities arise, including the
possibility of additional acquisitions. TSC has no specific plans with respect
to additional acquisitions and none have been identified, but TSC might consider
additional acquisition prospects if they were attractive to TSC and
complementary to its existing business. There can be no assurance, however, that
TSC will successfully identify, complete, or integrate any additional
acquisitions.
The Company's unused source of liquidity at the end of fiscal 1996 consisted of
a $5.0 million unsecured revolving credit facility (the "Facility"), with Bank
of America Illinois, which expires on September 6, 1996. 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
Facility requires, among other things, the Company to maintain certain financial
ratios. At May 31, 1996, the Company was in compliance with these financial
ratio requirements. As of May 31, 1996, 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 effect of the
Company's three-for-two stock split effective July 30, 1996.
IMPACT OF INFLATION AND BACKLOG
Inflation should not have a significant impact on TSC's income to the extent TSC
is able (as it has been to date) to raise its consulting rates commensurate with
its staff compensation rates. Because the majority of TSC's contracts may be
terminated on relatively short notice, TSC does not consider backlog to be
meaningful.
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Page 28
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), although not at the exceptional rates posted in
fiscal 1996. This lower growth rate should enable the Company to improve its
profit margins which have not been at targeted levels during the last two years
due to the impact of the employee retention program instituted in the third
quarter of fiscal 1994, the significant increase in sales and marketing expenses
and the impact of recruiting and assimilating into the organization the large
number of people hired in the last two years.
The Company faces a number of risks in continuing to expand, even at growth
rates lower than the 48 percent experienced in fiscal 1996. The major risks are
those of staffing and the delivery of a quality product that meets client
specification. TSC has a reputation for delivering its consulting assignments on
time and in accordance with the contracted specifications. TSC's projects
provide significant business benefits to the client. In order to meet its client
commitments, the Company must be able to recruit the consulting and project
management personnel required. Each year, it must also be able to train and
assimilate the large number of people that are required to support this growth
rate. Additionally, there must be a continuing stream of new projects so that
staff completing a given client assignment can be reassigned to new projects.
Additionally, the recruiting and staff assignment process must be geographically
focused.
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 the risk
of a material impact on operating results because of the unanticipated
suspension or cancellation of a large project. The suspension or cancellation of
a project 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. TSC operates in a rapidly
changing and highly competitive market. Additional risks not discussed herein
may emerge from time to time. The Company cannot predict such risks or assess
the impact, if any, such risks may have on its business. Consequently, the
Company's various forward-looking statements, made, or to be made, should not be
relied upon as a prediction of actual results.
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) and included elsewhere is this
filing.
ITEM 9. CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
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Page 29
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 1996 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 30
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...................................... 32
- ---------------------------------
Financial Statements (Item 14(a)(1))
- ------------------------------------
Consolidated Balance Sheets at May 31, 1996 and 1995............... 33
Consolidated Statements of Income for each of the three years
in the period ended May 31, 1996................................... 34
Consolidated Statements of Changes in Stockholders' Equity for
each of the three years in the period ended May 31, 1996........... 35
Consolidated Statements of Cash Flows for each of the three years
in the period ended May 31, 1996................................... 36
Notes to Consolidated Financial Statements......................... 37-48
Financial Statement Schedule (Item 14(a)(2))
- --------------------------------------------
Schedule II Valuation and Qualifying Accounts............ 49
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.
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Page 31
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 31 present fairly, in all material
respects, the financial position of Technology Solutions Company and its
subsidiaries (referred to as TSC or the Company in the accompanying consolidated
financial statements) at May 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
May 31, 1996, 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 26, 1996
Chicago, Illinois
================================================================================
Page 32
TECHNOLOGY SOLUTIONS COMPANY
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
ASSETS
------
May 31, May 31,
1996 1995
------- -------
CURRENT ASSETS:
Cash and cash equivalents................................................. $12,990 $ 7,595
Marketable securities..................................................... 11,580 9,714
Receivables, less allowance for doubtful receivables of $1,870 and $1,837. 23,537 13,710
Refundable income taxes................................................... 5,117 1,256
Deferred income taxes..................................................... 1,194 1,757
Other current assets...................................................... 6,166 3,813
------- -------
Total current assets 60,584 37,845
COMPUTERS, FURNITURE AND EQUIPMENT, NET.................................... 4,443 3,083
LONG-TERM INVESTMENTS...................................................... 17,140 21,422
COST IN EXCESS OF NET ASSETS OF ACQUIRED
BUSINESSES AND OTHER INTANGIBLES........................................... 3,079 --
LONG-TERM RECEIVABLES AND OTHER............................................ 4,191 2,872
------- -------
Total assets $89,437 $65,222
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable.......................................................... $ 1,344 $ 772
Accrued compensation and related costs.................................... 11,621 8,932
Accrued legal costs....................................................... 953 1,640
Capitalized lease obligations............................................. 2,616 1,750
Deferred compensation..................................................... 2,660 --
Other current liabilities................................................. 214 402
------- -------
Total current liabilities 19,408 13,496
------- -------
CONTINGENCIES (Note 15)
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 -- 17,903,593................................. 179 179
Capital in excess of par value............................................. 50,344 44,061
Retained earnings.......................................................... 35,983 31,409
Unrealized holding loss.................................................... (642) (853)
------- -------
85,864 74,796
Less: Treasury Stock, at cost (3,014,045 and 4,584,645 shares)............ (15,835) (23,070)
------- -------
Total stockholders' equity 70,029 51,726
------- -------
Total liabilities and stockholders' equity $89,437 $65,222
======= =======
The accompanying notes are an integral part of these financial statements.
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Page 33
TECHNOLOGY SOLUTIONS COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share and per share data)
For the year ended May 31,
-----------------------------------
1996 1995 1994
---- ---- ----
REVENUES:
Professional fees....................... $97,004 $65,704 $52,521
Software and hardware products.......... 595 113 636
------- ------- -------
97,599 65,817 53,157
------- ------- -------
COSTS AND EXPENSES:
Project personnel....................... 46,744 29,204 24,509
Other project expenses.................. 13,010 8,991 5,137
Cost of products sold................... 476 110 618
Management and administrative support... 22,605 18,501 22,297
Shareholder litigation settlement....... 2,345 -- --
Company founders litigation settlement.. 944 -- --
Former company executive settlements.... -- 1,590 --
Incentive compensation.................. 6,611 4,651 3,738
------- ------- -------
92,735 63,047 56,299
------- ------- -------
OPERATING INCOME (LOSS).................. 4,864 2,770 (3,142)
------- ------- -------
OTHER INCOME (EXPENSE):
Net investment income................... 2,073 1,958 2,359
Interest expense........................ (169) (28) (28)
------- ------- -------
1,904 1,930 2,331
------- ------- -------
INCOME (LOSS) BEFORE INCOME TAXES........ 6,768 4,700 (811)
INCOME TAX PROVISION (BENEFIT)........... 2,194 1,333 (846)
------- ------- -------
NET INCOME............................... $ 4,574 $ 3,367 $ 35
======= ======= =======
EARNINGS PER COMMON SHARE................ $0.30 $0.24 $0.00
======= ======= =======
WEIGHTED AVERAGE NUMBER OF COMMON
AND COMMON EQUIVALENT SHARES
OUTSTANDING............................ 16,142,027 16,112,471 15,524,661
========== ========== ==========
The accompanying notes are an integral part of these financial statements.
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Page 34
TECHNOLOGY SOLUTIONS COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the years ended May 31, 1996, 1995 and 1994
(In thousands, except share data)
Unrealized
Common Stock Capital in Holding
------------ Excess of Retained Gains and Treasury
Shares Amount Par Value Earnings (Losses) Stock Total
------ ------ --------- -------- ---------- -------- -------
Balance May 31, 1993, as previously reported.. 11,935,743 $119 $43,611 $30,201 $ -- $ (5,882) $68,049
Effect of July 30, 1996 three-for-two
stock split on May 31, 1993 balances........ 5,967,850 60 (60) -- -- -- --
Issuance of 527,526 treasury shares
from exercise of stock options.............. -- -- 484 (2,173) -- 3,008 1,319
Change in net unrealized holding
loss on available-for-sale securities....... -- -- -- -- (238) -- (238)
Net income.................................... -- -- -- 35 -- -- 35
Purchase of 1,854,923 treasury shares......... -- -- -- -- -- (10,065) (10,065)
Acquisition of 945,180 treasury shares........ -- -- -- -- -- (5,000) (5,000)
---------- ---- ------- ------- ------ -------- --------
Balance May 31, 1994.......................... 17,903,593 179 44,035 28,063 (238) (17,939) 54,100
Issuance of 41,076 treasury shares
from exercise of stock options.............. -- -- 26 (21) -- 207 212
Change in net unrealized holding
loss on available-for-sale securities....... -- -- -- -- (615) -- (615)
Net income.................................... -- -- -- 3,367 -- -- 3,367
Purchase of 1,350,000 treasury shares......... -- -- -- -- -- (5,338) (5,338)
---------- ---- ------- ------- ------ -------- --------
Balance May 31, 1995.......................... 17,903,593 179 44,061 31,409 (853) (23,070) 51,726
Issuance of 1,598,609 treasury shares
from exercise of stock options.............. -- -- 6,085 -- -- 8,107 14,192
Issuance of 39,046 treasury shares
from employee stock purchase plan........... -- -- 198 -- -- 200 398
Change in net unrealized holding
loss on available-for-sale securities....... -- -- -- -- 211 -- 211
Net income.................................... -- -- -- 4,574 -- -- 4,574
Acquisition of 67,055 treasury shares......... -- -- -- -- -- (1,072) (1,072)
---------- ---- ------- ------- ------ -------- --------
Balance May 31, 1996......................... 17,903,593 $179 $50,344 $35,983 $(642) $(15,835) $ 70,029
========== ==== ======= ======= ====== ======== ========
The accompanying notes are an integral part of these financial statements.
================================================================================
Page 35
TECHNOLOGY SOLUTIONS COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the year ended May 31,
-----------------------------
1996 1995 1994
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................. $ 4,574 $3,367 $ 35
Adjustments to reconcile net income to net
cash from operating activities:
Provisions for receivable valuation allowances and
reserves for possible losses............................ 1,339 2,059 1,078
Loss (gain) on sales of marketable securities............ (18) 67 (118)
Deferred compensation.................................... -- -- (662)
Deferred income taxes.................................... 447 2,945 (2,263)
Depreciation and amortization............................ 2,558 2,048 1,646
Changes in assets and liabilities:
Receivables............................................. (11,166) (6,925) (2,730)
Purchase of trading securities related to deferred
compensation program................................... (2,660) -- --
Other current assets.................................... (2,292) (662) (130)
Accounts payable........................................ 572 354 277
Accrued compensation and related costs.................. 2,849 1,630 5,164
Refundable income taxes................................. (3,861) 541 (1,642)
Accrued legal costs..................................... (687) (3,459) 1,082
Capitalized lease obligations........................... 866 814 936
Deferred compensation funds from employees.............. 2,660 -- --
Other current liabilities............................... (188) (1,083) 444
------- ------ ------
Net cash provided by (used in) operating activities.... (5,007) 1,696 3,117
------- ------ ------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchases of available-for-sale securities............... -- (909) (10,043)
Proceeds from available-for sale securities.............. 1,075 966 9,809
Proceeds from held-to-maturity investments............... 4,015 -- --
Loan to former company executives........................ -- -- (5,000)
Capital expenditures..................................... (3,651) (2,101) (1,002)
Net assets of acquired businesses and other intangibles.. (3,079) -- --
Long-term receivables and other.......................... (1,319) 178 765
------- ------ ------
Net cash used in investing activities................... (2,959) (1,866) (5,471)
------- ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options.................. 9,100 196 834
Refundable income taxes from exercise of stock options... 4,935 16 712
Proceeds from Employee Stock Purchase Plan............... 398 -- --
Treasury stock........................................... (1,072) (5,338) (10,065)
------- ------ ------
Net cash provided by (used in) financing activities..... 13,361 (5,126) (8,519)
------- ------ ------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS........................................... 5,395 (5,296) (10,873)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................ 7,595 12,891 23,764
------- ------ ------
CASH AND CASH EQUIVALENTS, END OF YEAR...................... $12,990 $ 7,595 $ 12,891
======= ======= ========
The accompanying notes are an integral part of these financial statements.
================================================================================
Page 36
TECHNOLOGY SOLUTIONS COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
NOTE 1 -- THE COMPANY
Technology Solutions Company and subsidiaries ("TSC" or 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. During the current
fiscal year the Company opened an office and began project work in Mexico. In
addition, the Company opened an office in London, England.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The summary of significant accounting policies is presented to assist the reader
in understanding and evaluating TSC's consolidated financial statements. These
policies are in conformity with generally accepted accounting principles
consistently applied in all material respects.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent 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.
PRINCIPLES OF CONSOLIDATION -- The accompanying consolidated financial
statements include the accounts of TSC and its subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
REVENUE RECOGNITION -- 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 statements of
income. Substantially all of the Company's revenues are generated from contracts
for consulting services. These contracts are performed in phases. Reserves for
possible losses on contracts, if any, are recognized 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 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.
================================================================================
Page 37
TECHNOLOGY SOLUTIONS COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
================================================================================
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 9) are classified
as trading securities, with unrealized gains and losses included in net
investment income. Realized gains or losses are determined on the specific
identification method.
COMPUTERS, FURNITURE AND EQUIPMENT -- Computers, furniture and equipment are
stated at cost, less accumulated depreciation. The cost of computers includes
hardware and software used for management and administrative purposes.
Additions, improvements, and major renewals are capitalized. Maintenance and
repairs are expensed as incurred. Depreciation is generally provided over five
years or less, using the straight-line method.
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 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.
CAPITALIZED LEASE OBLIGATIONS -- Capitalized lease obligations are primarily
related to certain portable computers which are leased under terms of up to
three years.
ACCOUNTING FOR STOCK-BASED COMPENSATION -- The Financial Accounting Standards
Board has issued SFAS No. 123, "Accounting for Stock-Based Compensation," which
becomes effective in 1996. This Statement establishes an alternative to the
Company's current method of accounting for compensation associated with stock
issued to employees. The Company does not intend to adopt the alternative method
established by SFAS No. 123 and will make the required footnote disclosures in
the financial statements for fiscal 1997.
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 and state and foreign income taxes for the fiscal year as
though tax returns were filed on a fiscal year basis ending on May 31.
Deferred income taxes are provided for the temporary differences between the
financial reporting basis and the tax basis of the Company's assets and
liabilities. The Company has adopted for all years presented Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes," which
provides for income taxes to be measured on an asset and liability approach.
================================================================================
Page 38
TECHNOLOGY SOLUTIONS COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
================================================================================
EMPLOYEE BENEFIT PLAN -- The Company has a Section 401(k) Savings Plan (the
Plan). The Plan allows employees to contribute up to 15 percent of their annual
compensation, subject to statutory limitations. Company contributions to the
Plan are discretionary. No Company contributions have been made to the Plan.
SOFTWARE DEVELOPMENT COSTS -- The Company capitalizes certain software
development costs once technological feasibility is established in accordance
with Statement of Financial Accounting Standards No. 86--"Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed."
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 in
May 1996 will be amortized on a straight-line basis, typically over a five-year
period.
EARNINGS PER COMMON SHARE -- Earnings per common share are 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 split effective July 30, 1996.
RECLASSIFICATIONS -- Certain reclassifications have been made to the prior
period to conform to the current period classification.
NOTE 3 -- ACQUISITIONS
In May 1996, the Company acquired Aspen Consultancy, a U.K.-based call center
consulting firm. Aspen Consultancy became a wholly-owned subsidiary of the
Company. The acquisition has been accounted for under the purchase method of
accounting. The purchase price was approximately $1,600 and could be increased
by approximately $2,400 if certain performance targets are met over the next
three years. Results for the period from acquisition through May 31, 1996 were
not material to the consolidated statements of income of Technology Solutions
Company. The excess of cost over fair value of net assets acquired approximated
$1,600.
In May 1996, the Company acquired McLaughlin & Associates, an Illinois based
consulting firm. McLaughlin & Associates became a division of Technology
Solutions Company. The purchase price approximated $2,000. The acquisition has
been accounted for under the purchase method of accounting. The excess of cost
over fair value of net assets acquired approximated $1,500.
Consolidated proforma net income and earnings per share, for both acquisitions,
would not have been materially different from the Company's reported amounts for
fiscal 1996.
================================================================================
Page 39
TECHNOLOGY SOLUTIONS COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
================================================================================
NOTE 4 -- RECEIVABLES
Receivables consist of the following:
May 31,
-----------------
1996 1995
---- ----
Amounts billed to clients............ $16,260 $10,687
Contracts in process................. 9,147 4,860
------- -------
25,407 15,547
Receivable valuation allowances and
reserves for possible losses....... (1,870) (1,837)
------- -------
$23,537 $13,710
======= =======
Contracts in process represent unbilled professional fees and unreimbursed
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 at May 31, 1996, include $8,084 for work
performed during May 1996 that was not billed until June 1996.
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. At May 31, 1996 and 1995, the gross
unrealized holding gain of $10 and $4 and gross unrealized holding loss of $994
and $1,313, 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 at May 31, 1996 and 1995 of $764 and $811,
respectively, and had a market value at May 31, 1996 and 1995 of $17,267 and
$21,493, respectively. The long term investments as of May 31, 1996 are expected
to mature as follows: $8,830 in fiscal 1997; $6,890 in fiscal 1998; and $1,200
in fiscal 1999.
================================================================================
Page 40
TECHNOLOGY SOLUTIONS COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
================================================================================
NOTE 6 -- COMPUTERS, FURNITURE AND EQUIPMENT
Computers, furniture and equipment consist of the following:
May 31,
--------------
1996 1995
---- ----
Computers................................ $ 8,802 $ 6,204
Furniture and equipment.................. 2,134 1,507
------- -------
10,936 7,711
Accumulated depreciation................. (6,493) (4,628)
------- -------
$ 4,443 $ 3,083
======= =======
Depreciation expense was $2,239, $1,705 and $1,327 for the years ended May 31,
1996, 1995 and 1994, respectively.
NOTE 7 -- INCOME TAXES
The provision (benefit) for income taxes consists of the following:
For the year ended May 31,
---------------------------
1996 1995 1994
---- ---- ----
Current:
Federal.................................. $1,054 $(1,104) $ 1,303
State.................................... 473 (508) 114
Foreign.................................. 220 -- --
Deferred:
Federal.................................. 310 2,017 (2,081)
State.................................... 137 928 (182)
------ ------ ------
$2,194 $1,333 $ (846)
====== ====== ======
Total income tax provision (benefit) differs from the amount computed by
applying the federal income tax rate of 34 percent to income before income taxes
for the following reasons:
For the year ended May 31,
--------------------------------
1996 1995 1994
--------- --------- ----------
Federal income taxes, at statutory rate.... $2,301 $ 1,598 $ (276)
State income taxes, net of federal benefit. 328 248 (45)
Foreign income taxes, net of
federal benefit.......................... 33 -- --
Nontaxable investment income............... (468) (509) (598)
Other...................................... -- (4) 73
------ ------- ------
$2,194 $ 1,333 $ (846)
====== ======= ======
================================================================================
Page 41
TECHNOLOGY SOLUTIONS COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
================================================================================
The tax effect of the principal temporary differences are as follows:
For the year ended May 31,
---------------------------
1996 1995 1994
---- ---- ----
Deferred compensation and bonuses.......... $(568) $ 111 $ (442)
Stock options exercised.................... 4 1 231
Receivable valuation allowances and
reserves for possible losses.............. (21) 112 (261)
Depreciation............................... (147) (95) (188)
Legal and other accruals................... 188 2,307 (1,687)
Prepaid expenses........................... 724 509 84
Capitalized software development costs..... 323 -- --
Other...................................... (56) -- --
----- ------ -------
$ 447 $2,945 $(2,263)
===== ====== =======
The net deferred tax asset is comprised of:
May 31,
----------------
1996 1995
---- ----
Deferred compensation and bonuses.......... $1,008 $ 440
1990 stock options awarded................. 15 19
Receivable valuation allowances and
reserves for possible losses.............. 597 576
Depreciation............................... 394 246
Legal and other accruals................... 814 1,002
Prepaid expenses........................... (1,372) (648)
Capitalized software development costs..... (323) --
Other...................................... (282) (337)
------- ------
851 1,298
Unrealized holding loss.................... 343 459
------ ------
$1,194 $1,757
====== ======
NOTE 8 -- LINE OF CREDIT
The Company has available a $5.0 million unsecured line of credit which expires
in September 1996. 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 1996.
================================================================================
Page 42
TECHNOLOGY SOLUTIONS COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
================================================================================
NOTE 9 -- 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 10 -- 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 750,000 shares of TSC Common Stock. Shares are purchased for the benefit of
the participants at the end of each three month purchase period. The first
purchase period of the Plan began on November 1, 1995 and ended on January 31,
1996. During the fiscal year ended May 31, 1996, 39,046 shares of common stock
were purchased under this plan.
NOTE 11 -- STOCKHOLDERS' EQUITY
During fiscal 1996, the Company acquired 67,055 treasury shares at a cost of
$1,072. During fiscal 1995, the Company repurchased 1,350,000 shares of its
common stock at a cost of $5,338. At May 31, 1996, after the fiscal 1996
issuance of 1,598,609 treasury shares as a result of the exercise of stock
options, and 39,046 treasury shares from the Employee Stock Purchase Plan, the
Company had 3,014,045 shares of Treasury stock carried at $15,835. Also, at May
31, 1996, the Company had authority to purchase an additional 1,282,945 shares
under the Company's stock repurchase program.
================================================================================
Page 43
TECHNOLOGY SOLUTIONS COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
================================================================================
On June 19, 1996, the Board of Directors declared a three-for-two common stock
split (to be effected as a stock dividend) for stockholders of record at July 1,
1996, to be effective July 30, 1996. The financial statements and relevant share
and per share data included herein have been adjusted to reflect the stock
split.
NOTE 12 -- STOCK OPTIONS
The Company's Original Option Plan ("1989 Plan") authorized the grant of
nonqualified employee stock options at prices not less than the fair market
value at the date of grant. A maximum of 6,693,338 shares of common stock may be
issued under the 1989 Plan. Options granted under this plan expire no more than
20 years from date of grant.
The Company's 1992 Stock Incentive Plan ("1992 Plan") authorized 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. A maximum of 4,852,500 shares of common stock may be issued under the
1992 Plan. Options granted under this plan expire no more than 20 years from
date of grant.
Options granted under these two plans are generally exercisable beginning one
year after date of grant and are fully exercisable in three to four years from
date of grant. Options available for grant are 1,872,290 and 2,917,145 as of May
31, 1996 and 1995, respectively.
Following is a summary of employee stock option activity:
Number of Shares Price Range
Under Option Per Share
----------------- --------------
Outstanding at May 31, 1993..... 5,306,258 $0.28 to 8.00
Awarded....................... 2,073,891 4.33 to 6.00
Exercised..................... (527,526) 0.28 to 5.33
Canceled...................... (1,682,541) 5.33 to 7.00
----------
Outstanding at May 31, 1994..... 5,170,082 0.28 to 8.00
Awarded....................... 1,369,275 3.79 to 5.96
Exercised..................... (41,076) 0.28 to 5.33
Canceled...................... (1,467,767) 3.79 to 6.00
----------
Outstanding at May 31, 1995..... 5,030,514 0.28 to 8.00
Awarded....................... 1,230,675 6.33 to 23.58
Exercised..................... (1,580,609) 0.74 to 8.00
Canceled...................... (185,820) 3.79 to 6.42
----------
Outstanding at May 31, 1996..... 4,494,760 0.28 to 23.58
==========
Exercisable at May 31, 1996..... 2,047,340 0.28 to 23.58
==========
================================================================================
Page 44
TECHNOLOGY SOLUTIONS COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
================================================================================
On December 16, 1993, the Company's stockholders approved the 1993 Outside
Directors Stock Option Plan, as amended (the "Outside Directors Plan"), which
provides for the granting of options to purchase 324,000 shares of common stock
at the fair market value at the date of grant. Options granted under this plan
are fully exercisable in three years from the date of grant. Options available
for grant are 156,000 and 228,000 at May 31, 1996 and 1995, respectively.
Following is a summary of the Outside Directors Plan activity:
Number of Shares Price Range
Under Option Per Share
------------ ---------
Outstanding at May 31, 1993..... 108,000 $ 9.75
Canceled...................... (12,000) 9.75
-------
Outstanding at May 31, 1994..... 96,000 9.75
No activity................... -- --
-------
Outstanding at May 31, 1995..... 96,000 9.75
Awarded....................... 72,000 13.00
Exercised..................... (18,000) 9.75
-------
Outstanding at May 31, 1996..... 150,000 9.75 to 13.00
=======
Exercisable at May 31, 1996..... 87,996 9.75 to 13.00
=======
NOTE 13 -- MAJOR CLIENTS
Revenues from clients that individually accounted for 10 percent or more of
revenues collectively, represented in the aggregate approximately 21 percent, 43
percent and 43 percent of revenues for the years ended May 31, 1996, 1995 and
1994, respectively.
In fiscal 1996 one client accounted for 21 percent of revenues. In fiscal 1995,
two clients accounted for 24 percent and 18 percent of revenues, respectively.
In fiscal 1994, three clients accounted for 16 percent, 16 percent, and 11
percent of revenues, respectively.
NOTE 14 -- 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
through December 1996. Rental expense for all operating leases approximated
$1,442, $948, and $870 for the years ended May 31, 1996, 1995, and 1994,
respectively.
================================================================================
Page 45
TECHNOLOGY SOLUTIONS COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
================================================================================
Future minimum rental commitments under noncancelable operating leases with
terms in excess of one year are as follows:
Fiscal Year Amount
----------- -------
1997............. $1,011
1998............. 934
1999............. 874
2000............. 870
2001............. 753
Thereafter....... 1,368
------
$5,810
======
CAPITAL LEASES
The Company leases certain portable computers and other equipment under lease
terms of three years or less. The related assets, which are included in
computers, furniture, and equipment, are recorded as follows:
May 31,
-------------
1996 1995
---- ----
Gross portable computers..... $ 3,765 $1,942
Other capitalized equipment.. 102 --
Accumulated depreciation..... (1,635) (489)
------- ------
$ 2,232 $1,453
======= ======
The future minimum payments under these capital leases are approximately $1,600
and $700 for fiscal years 1997 and 1998, respectively. The entire lease
obligation related to these capital leases is classified in current liabilities.
Amortization of approximately $1,100, $400 and $50 in fiscal years 1996, 1995
and 1994, respectively, related to these capital leases is included in
depreciation expense.
NOTE 15 -- CONTINGENCIES
During July 1992, the Company and certain officers and directors of the Company
were served with putative class action lawsuits which were subsequently
consolidated into one complaint alleging, among other things, a violation of
Rule 10b-5 of the Securities and Exchange Act arising out of the Company's
write-offs and increases in reserves for certain receivables in the fourth
quarter of fiscal 1992. On June 2, 1995, the Company entered into an agreement
to settle the litigation on a class-wide basis. The agreement was approved by
U.S. District Judge Blanche Manning on November 15, 1995.
================================================================================
Page 46
TECHNOLOGY SOLUTIONS COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
================================================================================
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 Messers. 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 various claims and legal actions which have not been
finally adjudicated. In the opinion of management, based on the advice of legal
counsel, all such matters are without merit or are of such kind that the
prospect of dispositions having a material adverse effect upon the financial
condition of the Company are remote.
NOTE 16 -- SUPPLEMENTAL CASH FLOW INFORMATION
For the year ended May 31,
--------------------------
1996 1995 1994
---- ---- ----
Cash paid (received) during the year for
income taxes (refunds)................................ $ 545 $(2,172) $2,294
Schedule of noncash investing and financing activities:
Settlement of loan to former Company executives
with Company common stock........................ $ -- $ -- $5,000
On December 1, 1993, the Company made a loan of $5,000 to former executives
pursuant to a loan agreement executed in conjunction with their consulting and
separation agreements with the Company. This loan was secured by shares of TSC
stock which were later surrendered to the Company in settlement of the loan.
================================================================================
Page 47
TECHNOLOGY SOLUTIONS COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
================================================================================
NOTE 17 -- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
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)/ $ 0.08 $ 0.01 $ 0.05 $ 0.16
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)/ $ 0.05 $ 0.08 $ 0.02 $ 0.09
August 31, November 30, February 28, May 31,
Quarter Ended 1993 1993 1994 1994/(E)/
- ------------- ---------- ------------ ------------ ---------
Revenues $13,763 $14,405 $11,861 $13,128
Operating income (loss) 2,187 435 876 (6,640)
Net income (loss) 1,777 841 944 (3,527)
Earnings (loss) per share/(A)/ $ 0.10 $ 0.05 $ 0.06 $ (0.23)
_________________________________
/(A)/ All earnings per share data have been restated to reflect the three-for-
two stock split that was effective on July 30, 1996.
/(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.
/(E)/ Includes a charge of $6.6 million which consists of $3.2 million in
estimated future litigation costs, $1.4 million in separation costs of
former executives, $1.1 million in estimated project completion costs, and
$0.9 million in other costs.
================================================================================
Page 48
TECHNOLOGY SOLUTIONS COMPANY
AND SUBSIDIARIES
===============================================================================
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED MAY 31, 1996, 1995 AND 1994
(IN THOUSANDS)
Balance at Balance at
Description of beginning end of
Allowance and Reserves of year Additions Deductions year
- ---------------------- ---------- --------- ---------- ----------
1994
Valuation allowance
and receivable reserves
for potential losses $1,068 $1,078 $ 426 $1,720
====== ====== ====== ======
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
====== ====== ====== ======
===============================================================================
Page 49
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 22ND DAY OF AUGUST
1996.
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 22, 1996) Chairman
- ------------------------------------------------ Officer and Director
William H. Waltrip
/s/ JOHN T. KOHLER (August 22, 1996) President, Chief Executive
- ------------------------------------------------ Officer and Director
John T. Kohler
/s/ MARTIN T. JOHNSON (August 22, 1996) Chief Financial and
- ------------------------------------------------ Accounting Officer
Martin T. Johnson
/s/ JEFFREY T. CHAMBERS (August 22, 1996) Director
- ------------------------------------------------
Jeffrey T. Chambers
/s/ MICHAEL J. MCLAUGHLIN (August 22, 1996) Director
- -----------------------------------------------
Michael J. McLaughlin
/s/ MICHAEL J. MURRAY (August 22, 1996) Director
- -----------------------------------------------
Michael J. Murray
/s/ STEPHEN B. ORESMAN (August 22, 1996) Director
- -----------------------------------------------
Stephen B. Oresman
/s/ JOHN R. PURCELL (August 22, 1996) 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.)
TECHNOLOGY SOLUTIONS COMPANY
AND SUBSIDIARIES
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 Lease for 205 North Michigan Avenue, filed as Exhibit 10.05 to TSC's
Registration Statement on Form S-1 (File No. 33-41824), is hereby
incorporated by reference.
10.02 Form of Employment Agreement, filed as Exhibit 10.01 to TSC's
Registration Statement on Form S-1 (File No. 33-41824), 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.
================================================================================
TECHNOLOGY SOLUTIONS COMPANY
AND SUBSIDIARIES
PART IV. (CONTINUED)
===============================================================================
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(CONTINUED)
Item 14(a)(3) Exhibits
10.06* Employment Agreement of William H. Waltrip.
10.07* Employment Agreement of John T. Kohler.
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.
10.10 Separation and Consulting Agreement of Albert D. Beedie, Jr., filed
as Exhibit 10.10 to TSC's Annual Report on Form 10-K for the fiscal
year ended May 31, 1994, is hereby incorporated by reference.
10.11 TSC 1994 Employee Retention Program, filed as Exhibit 10.12 to TSC's
Annual Report on Form 10-K for the fiscal year ended May 31, 1994, is
hereby incorporated by reference.
10.12* Employment Agreement of Kelly D. Conway
10.13 Agreement between Technology Solutions Company and Albert D.
Beedie,Jr. and Joyce M. Bennis dated December 1, 1994, filed as
Exhibit 10.13 to TSC's Annual Report on Form 10-K for the fiscal
year ended May 31, 1995, is hereby incorporated by reference.
10.14 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.
10.15 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.
===============================================================================
TECHNOLOGY SOLUTIONS COMPANY
AND SUBSIDIARIES
PART IV. (CONTINUED)
================================================================================
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(CONTINUED)
10.16* Employment Agreement of Michael J. McLaughlin.
11.01* Statement re Computation of Per Share Earnings.
21.01* Subsidiaries of the Company.
23.01* Consent of Price Waterhouse LLP.
Exhibits 10.02 through 10.16 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, 1996, TSC filed a report on Form 8-K dated
March 20, 1996. This report contained earnings and other information for the
third quarter of fiscal 1996.
______________
*Filed herewith