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UNITED STATES
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, 1998
COMMISSION FILE NUMBER 0 - 19433
[LOGO]
TECHNOLOGY SOLUTIONS COMPANY
INCORPORATED IN THE STATE OF DELAWARE
EMPLOYER IDENTIFICATION NO. 36-3584201
205 NORTH MICHIGAN AVENUE, SUITE 1500, CHICAGO, ILLINOIS 60601
(312) 228-4500
SECURITIES REGISTERED PURSUANT TO
SECTION 12(G) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE PER SHARE
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INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE EACH REPORTS), AND (2) HAS BEEN SUBJECT TO
SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES /X/ NO / /
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO
THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION
STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY
AMENDMENT TO THIS FORM 10-K. / /
THE AGGREGATE MARKET VALUE OF THE REGISTRANT'S VOTING STOCK HELD BY
NONAFFILIATES OF THE REGISTRANT (BASED UPON THE PER SHARE CLOSING PRICE OF
$17.0625 ON AUGUST 13, 1998, AND, FOR THE PURPOSE OF THIS CALCULATION ONLY,
THE ASSUMPTION THAT ALL REGISTRANT'S DIRECTORS AND EXECUTIVE OFFICERS ARE
AFFILIATES) WAS APPROXIMATELY $671 MILLION.
THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S COMMON STOCK, PAR VALUE
PER SHARE $.01, AS OF AUGUST 13, 1998, WAS 40,417,438.
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 1998 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") is dedicated to
providing the full range of consulting services required to enable its
clients to utilize technology to improve their businesses at a strategic and
operational level. TSC provides information technology (IT) consulting,
strategy consulting, and change management services to help its clients
transform their internal business processes and their relationships with
customers, suppliers, distributors and employees. The Company provides
professional services globally to clients in a wide range of industries,
including financial services, communications, manufacturing, healthcare and
technology.
TSC services span a wide range of IT and strategic business services. TSC's
IT services address a broad spectrum of IT consulting from IT strategy
through systems integration, including the identification of areas of a
client's business that can benefit from computer technology, feasibility
studies, business case justification, business process redesign and
reengineering, benchmarking and best practices, project management,
architecture, logical and physical systems design, hardware and software
selection, programming, implementation, change management, education,
training, and benefits realization. TSC's strategic business services offered
include business strategic planning, value-based customer segmentation
analysis, and marketing research and analysis.
Since May 1988, TSC has performed project work for over 600 corporations,
including Aetna, Avantel, The Chicago Board Options Exchange, Cigna, Cisco
Systems, ConAgra, Georgia-Pacific, The Equitable, First Union Corporation,
Goldman, Sachs & Co., Pfizer Pharmaceuticals, The Prudential, Pepsi, Square D
Corporation, Swiss Bank Corporation, MCI, Ameritech, Zurich Kemper Life,
Atmos, Progressive and Whirlpool Corporation.
TSC is a corporation formed under the laws of the state of Delaware. Its
principal executive offices are located in Chicago, Illinois. In addition to
its Chicago office, the Company maintains domestic offices in Schaumburg and
Wheaton, Illinois; Atlanta, Georgia; New Canaan, Connecticut; Austin, Dallas,
Houston and Irving, Texas; Bellevue, Washington; Boston and Hudson,
Massachusetts; Brookfield and Wauwatosa, Wisconsin; Columbia, Maryland;
Minneapolis, Minnesota; New York, New York; and San Francisco, Soquel,
Sunnyvale and Irvine, California. International offices are located in
Bogota, Colombia; Cologne, Germany; London, England; Mexico City and
Monterrey, Mexico; Paris, France; Santiago, Chile; Sydney, Australia;
Toronto, Canada; and Zug, Switzerland.
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STRATEGY
TSC's business strategy is to offer a full range of IT and strategic business
consulting services targeting IT technology areas, specific software
packages, along with specific business processes or vertical markets, in
large middle-market firms located in major markets and countries around the
world. TSC's clients are typically firms that range in size from $500 million
to $5 billion in annual revenue.
TSC provides IT and strategic business consulting services with a focus on
higher-end consulting activities. These higher-end activities include, but
are not limited to, IT and business strategy, systems and network
architecture, systems design, valuation and segmentation analysis, business
case analysis, and project management. TSC's projects often begin with one or
more high-end consulting phases. Examples of TSC's high-end consulting work
include the development of a customer relationship strategy for a client, the
review of the client's current IT strategy and its consistency with the
business strategy of the firm, the assessment of the skills and capabilities
of the client's IT organization, and the architecture and design of a new
system, including the computing architecture, network architecture and the
architecture of the software and middleware applications that will be
integrated into the new system.
The nature of these high-end activities allows TSC's project managers and
senior level professionals to interface directly with senior client
personnel. The detailed understanding of the client's business and business
strategy developed in the strategy and architecture phases of the project,
combined with the many years of accumulated experience of the senior TSC
project personnel, allow TSC to bring to the client a creative solution.
TSC's goal is to deliver a creative solution that addresses the client's
needs and delivers business benefits.
TSC's strategy is to focus on developing and maintaining relationships with
its customers at the highest levels within the client organization. With
high-level sponsorship of its projects, TSC believes that there is a higher
level of commitment to complete the project and an increased opportunity to
expand the working relationship with the client to additional projects.
TSC encourages its clients with multi-national businesses to follow a
philosophy of system development and implementation in one country, with a
subsequent roll-out into the foreign operations of the firm. This philosophy
ensures that a common platform for these enterprise-wide systems is being
used to reduce costs and simplify support and maintenance. Consistent with
this philosophy, TSC's strategy is to expand its capabilities so that it will
be able to operate in major countries around the world in order to serve its
multi-national client base.
COMPETITIVE DIFFERENTIATION
Important factors in TSC's project work are project management and
industry-specific and application knowledge. TSC dedicates an experienced,
senior level project manager (typically a Vice President who averages 20
years of experience) to manage the typical large project. TSC's professional
staff (who averages 12 years of experience) has specialized application
skills and industry knowledge. This knowledge and experience is important not
only to the successful development and implementation of the computer system,
but also to the redesign and the restructuring of the business processes
utilizing the affected systems.
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TSC's project model is based on providing its clients with fewer, more
experienced personnel than might be provided by other firms. TSC's goal is to
operate with a ratio of Vice President/Project Manager to professional staff of
1 Vice President to 10 professional staff. This compares to ratios of 1 partner
(Vice President equivalent) to 30 professional staff in many of the Big 5
consulting/accounting firms. TSC believes that this project staffing model
reduces the risk of project failure and increases the consultants' ability to
successfully address the clients' needs by having a knowledgeable and
experienced project workforce.
The project work undertaken by TSC is generally performed 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 upon the level of expertise
of each individual.
TSC's business is focused on the commercial market. TSC does not have
significant activity in the local, state, and federal government segments of
the domestic systems integration market.
TSC typically does not perform turnkey projects in which all of the project
work is performed by the consultant. Rather, TSC works in close conjunction
with client personnel, at the client site, on the project. This partnering
with the client results in TSC providing the project management and other
high-end skills that might not be available in the client organization and
the client providing business and functional expertise as well as the
programmers and lower level technical resources. TSC endeavors to help its
clients increase the knowledge and skills of its IT organization and provides
the necessary knowledge transfer so that the client is better able to
maintain its new system.
The systems implemented by TSC often involve the integration of third-party
application software packages and many times include the development of
customized training materials. TSC's work at a client often encompasses work
performed by one or more of TSC's areas of business focus or service
offerings called "practice areas." The collaboration between TSC's practice
areas is an important way in which TSC leverages the expertise of its
sophisticated technical resources to solve client problems.
In many areas of its business, TSC has developed methodologies, software,
tools and other intellectual property which are used by TSC consultants in
their integration and implementation projects. The use of these
methodologies, software, tools, and other intellectual property helps improve
the quality of the work performed by TSC, as well as lower the cost of the
implementation and reduce the time required to perform the work.
TSC's professionals bring to each client engagement technical skills
experience, industry-specific and functional experience, significant
consulting project experience and expertise in the following areas:
BUSINESS CASES--TSC believes that one way in which it differentiates itself
in the business and technology consulting market is through its business case
justification process. The business case 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. The business case
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is used to relate the system functionality and associated costs to specific and
measurable benefits. TSC analyzes the impact of the proposed new technology in
financial terms, such as internal rate of return, payback, net present value,
cash flow, and financial income statement impact consistent with the internal
accounting procedures of the client.
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 as intended. TSC believes that application
software experience and software products will become increasingly important
to businesses seeking systems solutions in the future. TSC is familiar with
many third-party software products for the industries it serves and can, in
some cases, provide or utilize its own software tools.
REUSABLE TOOLS AND METHODOLOGIES--TSC has developed a number of
methodologies, templates, and tools which are used in various areas of the
strategic planning, market analysis, business case, systems integration,
project management, and software package integration/implementation aspects
of TSC's project work. These methodologies, templates and tools decrease the
time required to implement a system or develop an analysis, as well as
increase reliability and reduce client risk associated with a particular
project phase.
CHANGE MANAGEMENT AND TRAINING--TSC embeds a change management component in
its delivery of solutions, recognizing that the ability and speed of the
people in a client organization to adapt to new systems is a critical success
factor. Whether it is a package implementation or a large complex systems
integration project, employees at all levels of the client are affected. The
failure of the users to properly utilize the system can mean the difference
in the client obtaining the benefits originally specified for the project.
TSC's change management programs are designed to ensure the project's
successful implementation by reducing resistance, along with expanding the
client's understanding and commitment to the change necessitated by the
project.
TSC offers its clients a variety of training options in its project work.
TSC's training programs can range from basic "train the trainer" programs for
a new client system to sophisticated multi-media computer-based training
programs that can be used for training the users of the system as well as
detailed process and system education.
PRACTICE AREAS
TSC is organized into specific areas of business focus and service offering
expertise called practice areas. The services within each area of focus
involve the delivery of high quality professional services to similar classes
of customers. TSC believes that a structure based on
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focused practice areas addresses its clients' needs for very specialized
industry and systems knowledge and allows its employees the flexibility and
opportunity to grow and develop. Each practice area develops its own specific
methodologies, tools, project management plans, best practice and benchmark
information, templates, etc. This information is maintained, along with
proposals, project plans and other information, in knowledge databases that can
be accessed by practice area personnel working on projects throughout TSC.
The Company's principal areas of business focus and service offering
expertise, which serve TSC customers in the U.S. and international markets
include: Enterprise Applications, IT Strategy and Network Computing, Change
and Learning Technologies, Financial Services, OrTech Solutions, Enterprise
Customer Management, Enterprise Service Management and Telecommunications.
TSC believes that within each of its practice areas, it competes primarily on
the basis of the experience and expertise of its senior project managers, its
proven track record in applying new technologies and innovative business
solutions, its use of methodologies and implementation tools and the
creativity of its proposals and delivered work product. Price has not
typically been the primary factor in these major systems projects. More
price-sensitive projects have generally tended to be performed by low-cost
providers, such as contract programmers.
ENTERPRISE APPLICATIONS
The Enterprise Applications practice area undertakes projects which require
knowledge of many different third-party application software packages and may
involve the implementation of customized software to interface the new
application software with existing customer systems. Technologies common in
this practice area include client/server and cooperative processing
architectures, relational database technology, network integration, and
telecommunications.
The client focus within the Enterprise Applications practice area includes
semi-conductor, consumer packaged goods, electronics and other manufacturers;
engineering; health care; financial services; distribution and logistics;
aerospace and defense; and other firms where the installation of an
application software package developed by a third-party vendor is being
undertaken. Operational areas that the Enterprise Applications practice area
focus on include manufacturing planning and operations, logistics,
transportation, supply chain integration, inventory management, human
resources, accounting, and financial analysis and reporting.
The Enterprise Applications practice area is involved in systems integration
and package implementation projects involving the human resources, financial
and manufacturing systems supplied by PeopleSoft, Inc.; the integrated
client/server product family R/3 supplied by SAP AG and its U.S. subsidiary
SAP America, Inc.; the Baan IV integrated client/server product supplied by
Baan Company N.V. and its U.S. subsidiary Baan U.S.A., Inc.; the Oracle
Applications suite of client/server products developed by Oracle Corporation;
and the FinancialStream client/server financial packages supplied by Geac
Computer Systems Inc. Additionally, the Enterprise Applications practice area
provides services related to the evaluation of a client's current systems and
business issues and may perform analysis of software alternatives for clients.
In addition to its work with the products offered by PeopleSoft, SAP, Baan,
Oracle and Geac, TSC is expanding its business in this area to become a
"solution assembler." TSC believes that
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over the next several years, customers will begin to add specialized
best-of-breed software applications to their existing enterprise resource
planning (ERP) installations through the use of TSC's Solution Assembly and
Architecture services. This movement to a multi-vendor solution tailored to
specific client requirements is just beginning to appear in the marketplace. TSC
is actively working on establishing vendor alliances, further developing
implementation methodologies, expanding the consulting staff knowledge and skill
sets, and developing middleware and other tools to be used in the integration of
these specialized software applications with the ERP systems of the major
vendors.
IT STRATEGY AND NETWORK COMPUTING
In this era of rapidly changing industries, markets and technologies, many
companies are struggling with how to align IT with the other areas of their
businesses. Additionally, organizations in all industries are being
challenged to maximize the value of their IT investments. Several factors are
driving this increased focus on information technology: IT is recognized as
one of the primary enablers and constraints of business transformation and
growth; IT is a major means of competition; and companies are concerned about
wasteful spending on inappropriate or unsuccessful IT projects. TSC helps
companies respond to these challenges by leveraging practical, leading-edge
technologies to transform their business. TSC assists companies in aligning
their IT investments with their business strategies and transforming their IT
capabilities into the era of internet, extranets, and network computing.
TSC's services in the area of IT strategy encompass three areas: IT
assessment, IT strategy and IT transformation. IT assessment provides clients
with an objective, and an independent evaluation of their current IT
capabilities based on a balanced scorecard approach. IT strategy defines a
vision for applications, technology and IT capabilities that is aligned with
the client's business strategy to maximize the return on their IT
investments. A detailed plan and business case for implementing the IT vision
are developed. IT transformation services help our clients transform their IT
skills and capabilities to the network computing era through IT process
improvement, network and operations management engineering and consulting
services, organizational development, and IT outsourcing.
Computing architectures and the related communications infrastructure (the
"network") architecture are being simplified as the network architecture
moves to having no tiers. All of the personal computers, servers, legacy
applications, customer/supplier connections, etc. in these firms' computing
networks are connected through a private network that may encompass a variety
of LAN, WAN, intranet, extranet, and other communications infrastructure.
While the network architecture gets simplified, the computing architecture
becomes more complex. Security, database replication and other issues that
were not significant when the systems ran on a dedicated network and a
centralized mainframe computer now become very important.
As clients implement client/server computing systems and continue to utilize
their existing legacy systems for other business functions, the issues of an
integrated network and computing architecture become significant. The use of
the internet/intranet as a data communications vehicle presents issues for
clients from both the network and computing architecture standpoint.
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Similarly, the advent of thin-client network computing systems creates network
and computing architecture issues.
The IT Strategy and Network Computing practice area has significant
experience in the design and architecture of complex computing environments.
To its existing knowledge and experience base, TSC is expanding its expertise
to include the network computing architectures of Microsoft (Distributed
interNet Architecture--DNA), IBM (Network Computing Framework--NCF) and
Oracle (Networked Computing Architecture--NCA). TSC's network computing
solutions maximize return-on-investment on a business application basis by
optimizing the price/performance tradeoffs usually associated with critical
computing resources (processor, memory, and network). Additionally, TSC's
network computing work protects the client's investment in the legacy
application portfolio by introducing new functional capabilities through
renovation techniques. By using a renovation philosophy (re-use before you
buy, buy before you build), TSC is able to provide network computing
solutions faster and more cost effectively.
This new computing era is neither client-centric, server-centric, nor
network-centric. Instead, it strikes the appropriate balance between client,
server, and network in order to meet business requirements, end-user service
level expectations (response-time, throughput, and availability), corporate
service, security and quality objectives. It deploys business application
solutions which may combine multiple execution architecture types, including
web-enabled function, multi-tier client/server and batch.
TSC's network computing projects capitalize on emerging technologies such as
the internet, data warehousing, knowledge databases, mobile solutions, and
distributed objects. TSC offers its clients the following services:
Development Services--Business application development from business case
development through business system construction, implementation and testing;
Technology Services--Infrastructure, network and systems management
technology services, and the creation of networked application development
environments; Electronic Commerce--Electronic marketing and sales,
fulfillment, engineering and administration through internet, extranet, and
intranet-enabled solutions; Information Management--Services in the area of
document management, engineering systems, and information management
infrastructure; and Data Warehousing--Design, development and implementation
services for sales and marketing, fulfillment, and procurement data
warehouses, as well as data warehouse infrastructure.
CHANGE AND LEARNING TECHNOLOGIES
The Change and Learning Technologies practice area is focused on assisting
organizations in managing the human side of implementing strategic change in
a corporate environment. The Change and Learning Technologies practice area
provides change management services, customized educational programs, and
multi-media resources that help organizations achieve the greatest benefits
from their strategic investments. Many of these projects are performed as
part of major system changes that have been undertaken at the client.
The success or failure of implementing major changes in an organization
depends upon the most essential element in every organization--the people.
TSC provides its clients with a single source for managing the "people" side
of change. TSC consultants and training specialists deliver change
management, education and training, and multi-media services specifically
tailored to each client
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environment. In all areas, TSC customizes the deliverables to the project, the
business and the culture of the client.
In the area of change management, the services provided by TSC include:
Strategic Visioning; leadership of the change process (Change Leadership);
development and training of the teams (Team Building); development and
deployment of a communications plan to ensure consistent and clear messages
about the project (Communications); and development of objectives by
employees that can be measured and attained (Team Covenant Training).
TSC's services in the education and training area include: an analysis of the
audience to be trained (Assessment); the development of executive education
programs, including the linkage of performance measures to project goals
(Executive Education and Flowdown); development of customized education
courses (General Education); development of specific educational courses that
highlight the business processes being implemented and explain their benefits
(Business Process Education); development of customized skills training
programs (Skills Training); and development of new policies and procedures
and the incorporation of these into training programs (Policies and
Procedures Development).
TSC offers its clients a variety of multi-media services focused on training
and communication. These services delivered through TSC's Creative Delivery
Systems include multi-media training systems that utilize 2D and 3D graphics,
custom video and audio, and all levels of animation. Creative Delivery
Systems also designs communication and training tools with delivery via
various media such as video, diskette, CD-ROM, the internet or the client's
intranet. TSC's multi-media application work extends to the development of
internet and intranet applications.
FINANCIAL SERVICES
The Financial Services practice area is focused on defining and implementing
systems for financial institutions in the areas of investment management and
risk management. Investment management systems are used by portfolio
managers, traders, and client relationship personnel to improve asset returns
and customer service. Risk management systems are used in banking and
corporate treasury functions for asset/liability management and to measure
and hedge interest rate, currency and commodity income and value risk. In
addition, the Financial Services practice area has experience in implementing
real-time global trading and back-office applications as well as executive
information systems in support thereof. TSC's 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 that are required to be reported to
government agencies.
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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.
ORTECH SOLUTIONS
OrTech Solutions Company (OrTech) is a commissioned sales representation firm
that represents Oracle Corporation (Oracle) in the sales of the Oracle
Applications suite of products to middle-market firms. Oracle, under this
program, has granted OrTech exclusive territories which include the states of
Texas, Oklahoma, Louisiana, Arkansas, Wisconsin, Illinois, Indiana, Michigan
and Ohio. All obligations related to the Oracle Applications suite of
products is retained by Oracle.
ENTERPRISE CUSTOMER MANAGEMENT
The Enterprise Customer Management (ECM) practice area is a recognized leader
in the implementation of customer relationship solutions for consumer
products, health care, telecommunications, high technology, and financial
services companies. Companies utilizing TSC's services in the ECM practice
area do so because they have come to believe, as does TSC, that superior
customer service can be a competitive differentiation and an important factor
in retaining customers. TSC works with its clients to optimize their customer
relationships by defining a vision and implementing a solution that helps
them understand who their customers are and how to maximize their interaction
with these customers. TSC is a leader in building innovative call center
solutions for clients around the world.
TSC's work with a client begins by first helping them define the customer
service vision. This vision, tied to the business goals and strategies of the
client, is the critical important first step in developing a customer
relationship focus. Powerful service visions build strong customer
relationships and deliver service levels that balance the customer's current
and potential value to client organization with the customer's needs,
leveraging the ability to generate revenue over time.
In addition to the business strategy work involved with the customer service
vision, TSC provides its customers with other services including value-based
customer segmentation analysis. A value-based segmentation analysis allows
the client to understand that some customers cost more to maintain and
retain, that customers have different preferences, that some customers are
more profitable than others and that increased knowledge about the customer
allows the client to influence customer behavior. The information obtained in
this analysis is then used to establish a customer relationship value model.
This model is used to segment customers based on value characteristics. This
segmentation information becomes another element in the "relationship rules"
that are used to define how a customer is handled in the ECM system.
Because of the nature of the technologies and the hardware and software
products involved in the typical call center project, the systems integration
issues are very complex, time consuming and
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expensive. TSC has developed a number of methodologies, tools and software
applications which it uses to reduce the project completion time, project risk
and project cost. TSC has established a Relationship Architecture Design and
Deployment Lab (the RADD Lab) which focuses on the deployment of leading-edge
ECM solutions through an innovative, highly-repeatable methodology approach.
The RADD Lab offers the ability to demonstrate ECM solutions which deploy
computer-telephony integration (CTI) middleware, graphical desktops, internet
technology, customer information systems, routing technology, call center
packages, sales force automation technology, enterprise service management
software, and enterprise packages including the CTI enablement of resource
packages such as SAP and PeopleSoft. Using the RADD Lab, clients are able to
explore innovative ECM solutions, prototype possible scenarios, conceptualize
design, and begin to architect a solution.
The RADD Lab also serves as the integration lab at which TSC can execute its
methodologies for specific components of the ECM solution. TSC uses the lab
to define, customize, and test components of the overall solution in a rapid,
reliable fashion. Additionally, the RADD Lab serves as the development
environment in which TSC creates technology solutions to unaddressed needs
within the ECM marketplace. Due to TSC's strong thought leadership and
implementation skill sets, TSC has been able to explore and create reusable
solutions to needs which do not currently have product fits within the
industry.
Projects in the ECM practice area typically include the evaluation of current
call center operations, benchmarking and best practices analysis, system
design and architecture, program and project management, 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. Additionally, the ECM practice area can
provide clients with architecture and design services for call center
facilities, call center operations consulting services, call center training
services and technical operations extended support services. TSC's ECM
practice area currently performs work in the U.S., Europe, Canada, and
Australia.
ENTERPRISE SERVICE MANAGEMENT
In June 1997, TSC acquired the common stock of The Bentley Company, Inc.
(which has been renamed The Bentley Group), a Boston-area based firm
specializing in business and operations consulting in the Enterprise Service
Management (ESM) area. ESM encompasses the business processes and systems
that relate to the customer service and field service and support functions.
Additionally, The Bentley Group has a business focus in software package
implementation for help desks, service and sales force automation. The
Bentley Group offers a wide range of consulting services for the internal and
external support organizations of Fortune 500 companies. These services
include sales and service business planning; help desk and customer service
assessment, design and implementation; and package implementation services.
TELECOMMUNICATIONS
In today's telecommunications marketplace, with the movement toward
deregulated local service markets, the incumbent local exchange carriers are
being forced to address business strategy,
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service, pricing and billing issues that they have not had to deal with in the
past. Additionally, the new local exchange carriers entering the market are in
need of the full range of business strategy and business systems to support
their new local service business. TSC's Telecommunications practice area is
focused upon assisting both the incumbent local exchange carriers as well as the
new local exchange carriers by providing strategy and implementation services to
support this new deregulated environment. The services offered by TSC cover four
main areas: Business Strategy/Business Management, Provider-to-Provider
(Wholesale), Provider-to-Customer (Retail), and Business Systems and Network
Operations.
TSC's expertise in the telecommunications market is also being drawn upon to
develop enterprise customer management systems for firms in this vertical
market. Telecom firms realize that there is a need for improved customer
service. Additionally, they realize that there is a need for a single view of
the customer which encompasses all of the services being purchased by the
customer across the wide range of services offered by the telecom firm.
Development of the enterprise customer management systems which support
customer focused business operation draws upon the experience and expertise
of TSC's Telecommunications and ECM practice area consultants.
TSC's local exchange market service offering includes consulting and
implementation services focused on business and service management processes.
The business and service management processes focus on customer care
(creating customer satisfaction), service development (compressing
time-to-market), and operations (improving service levels). TSC's services
are designed to help clients reduce the time required to introduce new
communications products, pricing and coverage; reduce operating costs; and
improve the quality of service to both their customers and their trading
partners.
TSC's consulting services in the local exchange market area consist of
business strategy development, requirements definition, implementation
planning, and economic justification. TSC's implementation services in the
local exchange market area consist of program/project management, systems
building and testing for the transaction systems supporting
Provider-to-Provider (Wholesale), Provider-to-Customer (Retail) and Business
Systems and Network Operations. These systems include pre-sale, support,
ordering, activation, billing and settlement systems.
TSC brings to each of these areas its strong competencies in project and
program management; management consulting; business and systems requirements
analysis; gap analysis; IT and operations architecture; distributed network
and systems management; and extensive experience in a variety of technology
areas. TSC's technology expertise includes the areas of: legacy renovation
and Operational Support Systems (OSS) overhaul; data warehousing; object
technology; convergent billing platforms; rules-based server and inference
engine technology; telecommunications; and extensive experience in the areas
of electronic data interface (EDI), electronic commerce, electronic bonding
interface, transport and messaging platforms.
SALES
TSC utilizes a high-end relationship selling model in most of its business
areas. The critical component in this selling model is TSC's Vice
President/Project Manager. The project managers
_______________________________________________________________________________
Page 11
are responsible for growing and enhancing the relationship between TSC and its
current clients. By developing a thorough knowledge of the client's business,
along with a close working relationship with the most senior members of the
client's management team, TSC's project managers are able to establish TSC as a
business partner with the client. By having a detailed knowledge of the mission,
vision and strategy of the client, TSC strives to be the preferred supplier of
IT and business consulting services to each client.
The Company has a relatively small, dedicated sales organization (less than
30 people across all of its business areas). This sales organization is
responsible for developing and qualifying leads which come from a variety of
sources. These sources include the cold calling done by the salesperson;
leads from employees; contacts from the industry research organizations;
leads generated by attendance at conferences and trade shows; leads from
marketing efforts, including TSC's web site, telemarketing and advertising;
and referrals from current and former clients. Additionally, all senior
personnel are encouraged to work their own network of contacts to develop
potential new business sources.
As the potential client becomes more serious about the proposed project that
would involve TSC, the salesperson brings a TSC project manager into the
process to develop the proposal and/or respond to the client RFP (request for
proposal). At this time, the project manager becomes the person that
interfaces with the potential client. The extensive experience of the TSC
project manager is used to evaluate the potential project and develop an
insightful proposal which will address the specific project request of the
potential client. The TSC project manager is often able to provide in the
proposal other insight and ideas which result from TSC's focus on delivering
business benefits through technology.
TSC's business units participate in a number of software vendor and industry
conferences and trade shows each year. These events serve to broaden TSC's
exposure as its senior technical and management personnel participate in
speaking engagements and other conference events.
INTERNATIONAL
TSC's international operations are focused in Latin America, Europe, Canada
and Australia. In each of these areas, the Company selected one of its
practice areas to be the initial focus on which to develop its sales, project
management, recruiting and infrastructure for the particular country or
region. After the new country has become established, TSC will allow other
practice areas to begin operation in that particular country.
TSC's first international operation was in Latin America. The Company's focus
in Latin America is with the Enterprise Applications practice area, with an
initial focus on the integration and implementation of the SAP R/3 product.
TSC began operations in Mexico in fiscal 1996. In fiscal 1997, TSC expanded
its operations into Colombia. In addition to offering SAP R/3 integration and
implementation services, TSC is now offering PeopleSoft integration and
implementation services, as well as training services to its customers in
Latin America.
TSC's European expansion was initially focused in the ECM practice area
(formerly known as the Call Center practice area) and its work in enterprise
customer management consulting and systems integration services. TSC began
its operations in Europe in the latter part of fiscal 1996
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Page 12
and acquired the London-based call center consulting firm Aspen Consultancy,
Ltd., in May 1996. During fiscal 1997, TSC also acquired a small Cologne-based
call center consulting firm, Geising International. Since that time, TSC has
added offices in Paris, France and Zug, Switzerland. TSC's project work has been
focused primarily on the banking, insurance, and telecommunications industries.
Beginning late in fiscal 1998, TSC began work to expand the Enterprise
Applications practice area into Europe with an initial focus on the PeopleSoft
and SAP package integration areas.
The ECM practice area was also the focus of TSC's expansion into the Canadian
market. During fiscal 1997, TSC opened a Toronto office and began project
work in the enterprise customer management consulting and systems integration
area. Project work has focused primarily on the banking and financial
services markets.
During fiscal 1998, TSC opened an office in Sydney, Australia in order to
enter the Australian market for enterprise customer management consulting and
systems integration services.
As the Company has developed its sales, project management, consulting staff
and infrastructure organizations in each of these markets, other TSC practice
areas have targeted these international markets for penetration.
CLIENTS
TSC's five largest clients in fiscal 1998 accounted for 4 percent, 4 percent,
3 percent, 3 percent, and 2 percent of total revenues, respectively; in
fiscal 1997, the five largest clients accounted for 8 percent, 7 percent, 5
percent, 4 percent, and 3 percent of total revenues, respectively; and in
fiscal 1996, they accounted for 21 percent, 6 percent, 6 percent, 6 percent,
and 5 percent of total revenues, respectively. No client accounted for 10
percent or more of revenues in either fiscal 1998 or fiscal 1997. In fiscal
1996, Georgia-Pacific accounted for 10 percent or more of revenues.
In fiscal 1998, fiscal 1997, and fiscal 1996, respectively, 73 percent, 78
percent and 75 percent of TSC's total revenues resulted from clients for whom
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 its current clients as a valuable source of additional work once a
project has commenced. TSC's project managers and relationship managers are
responsible for establishing the high-level client management contact and
relationships that will allow TSC to be considered for additional project
work at the particular client, regardless of the specific business group or
practice area that may be performing work at that client. During fiscal 1998,
over 60% of the Company's revenue came from clients where multiple TSC
practice areas were performing work.
TSC's client focus is on the large middle-market segment that the Company
defines as firms having annual revenues of between $500 million and $5
billion. TSC does perform work at larger firms, often at large divisions or
subsidiaries that fall into this market segment. During fiscal 1998, TSC
performed work at 14 of the Fortune 50 companies and 26 of the Fortune 100
companies.
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PERSONNEL
As of May 31, 1998, TSC had a total staff (including U.S. practice areas,
Latin America, Europe, Canada, Australia and Infrastructure) of 1,572. The
following table summarizes, as of May 31, 1998, the experience levels of
TSC's professional staff (other than those in Infrastructure).
AVERAGE RELEVANT EXPERIENCE
(YEARS)
------------------------------------------------------
% OF
LEVEL TOTAL CONSULTING INDUSTRY TOTAL
- -------------------------------------------------------- --------- --------------- ------------- -----
Vice Presidents......................................... 12% 10 10 20
Senior Principals....................................... 16% 7 11 18
Principals.............................................. 26% 6 10 16
Senior Consultants...................................... 22% 4 7 11
Consultants............................................. 15% 2 4 6
Associate Consultants................................... 9% 1 2 3
In order to accommodate typical project development lead times, TSC has found
that, from time to time, it must recruit and hire additional senior project
managers on the basis of anticipated demand for their services. There can be
no assurance that demand for TSC's services will materialize as anticipated.
CORPORATE AND BUSINESS GROUP SUPPORT
As of May 31, 1998, TSC had a staff of 211 individuals who comprised the
corporate and business group support functions (Infrastructure). The
objective of the corporate and business group support functions is to
facilitate local decision-making and support the autonomy of the practice
areas and project managers, while maintaining the internal structure
necessary to support TSC's goals. The functional areas within this area
include: senior corporate management; accounting; financial reporting;
finance; tax; legal; treasury; human resources; employee benefits; marketing;
public and investor relations; office operations; recruiting support;
training; internal communications; internal technology applications;
planning; quality assurance; insurance; and acquisitions. During fiscal 1998,
TSC significantly increased the number of human resources, recruiting, field
office, and business support personnel. The increase in these areas is
directly related to the Company's increased staffing growth of new service
offerings and the Company's geographic expansion.
INTELLECTUAL PROPERTY RIGHTS
A majority of the Company's clients have required the Company, as a condition
of performing services for such clients, to grant to the clients all
proprietary and intellectual property rights with respect to the work product
resulting from the performance of such services, including the intellectual
property rights to any custom software developed by the Company for such
clients. Each such grant of proprietary and intellectual property rights
would limit the Company's ability to reuse work product components and work
product solutions with other clients. In a limited number of such situations,
the Company has obtained, and in the future may attempt to obtain, ownership
interest or a license from its clients to permit the Company to market custom
software
_______________________________________________________________________________
Page 14
for the joint benefit of the client and the Company. Such arrangements may be
nonexclusive or exclusive, and licensors to the Company may retain the right to
sell products and services that compete with those of the Company. There can be
no assurance, however, that the Company will be able to negotiate software
licenses upon terms acceptable to the Company.
The Company also develops certain foundation and application software tools
and products that are owned by the Company and licensed to its clients. The
Company regards such software as proprietary and intends to protect its
rights in such software, where appropriate, with registered copyrights,
patents, registered trademarks, trade secret laws and contractual
restrictions on disclosure and transferring title. To date, the Company has
not filed any applications for the registration of patents or copyrights on
any of its software. There can be no assurance that any such steps taken by
the Company in this regard will be adequate to deter misappropriation of its
proprietary rights or independent third party development of functionally
equivalent products. "TSC" is a registered service mark of Technology
Solutions Company.
In addition, the Company's success is dependent upon its specialized
expertise and methodologies. To protect such proprietary information, the
Company relies upon a combination of trade secret and common laws, employee
nondisclosure policies and third-party confidentiality agreements. However,
there can be no assurance that any such steps taken by the Company in this
regard will be adequate to deter misappropriation of its specialized
expertise and methodologies.
Although the Company believes that its services and products do not infringe
on the intellectual property rights of others, there can be no assurance that
such a claim will not be asserted against the Company in the future.
COMPETITION
The IT and systems consulting and the strategic business consulting areas are
highly competitive and include participants from a variety of market
segments. The IT and systems consulting business participants include systems
consulting and implementation firms, contract programming companies,
application software firms, the service groups of computer equipment
companies, facilities management companies, "Big Five" accounting firms, and
general management consulting firms. Thousands of firms fall into one of
these categories. Among the more recognizable participants in the IT and
systems consulting business are American Management Systems, Inc.; Andersen
Consulting; Booz, Allen & Hamilton Inc.; Cambridge Technology Partners, Inc.;
Computer Sciences Corporation; Arthur Andersen LLP; Deloitte & Touche LLP;
Electronic Data Systems Corporation; Ernst & Young LLP; IBM; KPMG Peat
Marwick LLP; and PricewaterhouseCoopers LLP. Recognizable participants in the
strategic business consulting field include firms such as Andersen
Consulting; Booz, Allen & Hamilton Inc.; McKinsey & Co.; and CSC Index, an
affiliate of Computer Sciences Corporation, among others.
TSC believes that its ability to compete depends in part on a number of
factors outside its control. These factors include 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.
_______________________________________________________________________________
Page 15
Participants in the systems consulting and implementation business also face
potential competition from in-house systems staff. In-house systems staff are
often considered to be a lower cost alternative to outside systems firms. In
addition, the use of in-house staff permits the client to build skills for
maintaining and enhancing the system, as well as skills to implement future
systems. On the other hand, use of an in-house staff for a major systems
project often requires hiring a significant number of additional people with
no assurances that such new hires can perform as needed. Furthermore, the
increased staff must often be re-deployed at the end of the project. Finally,
clients often have difficulty attracting highly skilled individuals because
of salary constraints.
Many participants in the systems consulting and implementation business have
significantly greater financial, technical, and marketing resources and
generate greater systems consulting and implementation revenues than does
TSC. TSC competes more frequently with Andersen Consulting for major systems
integration projects than with any other participant in the market. Andersen
Consulting has substantially greater revenues, employee headcount, and market
share than does TSC.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of TSC as of May 31, 1998 are as follows:
William H. Waltrip Chairman
John T. Kohler President and CEO
James S. Carluccio Executive Vice President and Chief Technology
Officer
Kelly D. Conway Executive Vice President
Jack N. Hayden (a) Executive Vice President
Martin T. Johnson Senior Vice President and Chief Financial Officer
Michael J. McLaughlin (b) Executive Vice President
Paul R. Peterson Senior Vice President, General Counsel and
Corporate Secretary
William H. Waltrip, age 60, has been a Director of the Company since December
1992 and Chairman of the Board since June 1993. Mr. Waltrip also served as
Chief Executive Officer from June 1993 to June 1995. Since January 1996, Mr.
Waltrip has served as the Chairman of the Board of Directors and, during
1996, served as Chief Executive Officer of Bausch & Lomb, Inc. From 1991 to
1993, he was Vice Chairman of Unifax, Inc., a broad-line food service
distributor. From 1985 to 1988, Mr. Waltrip was President, Chief Operating
Officer and a Director of IU International, a diversified services company
with major interests in transportation, environmental services and
distribution. From 1982 to 1985 he was President, Chief Executive Officer and
a Director of Purolator Courier Corporation and from 1972 to 1982 he was
President, Chief Operating Officer and Director of Pan American World
Airways, Inc. He is also currently serving
- ------------------------
(a) Jack N. Hayden resigned his position as Executive Vice President effective
August 5, 1998. He will remain as a part-time employee of the Company, on a
non-exclusive basis, until February 28, 1999.
(b) Michael J. McLaughlin resigned his position as Executive Vice President
effective June 15, 1998. In addition, he resigned his position as a member
of the Board of Directors effective July 15, 1998. He will remain as a
part-time employee of the Company, on a non-exclusive basis, until May 31,
1999.
_______________________________________________________________________________
Page 16
as a Director of Bausch & Lomb, Inc., the Teachers Insurance and Annuity
Association and Thomas & Betts Corporation.
John T. Kohler, age 51, is currently the President and Chief Executive
Officer of the Company and has been a Director of the Company since June
1994. He joined the Company as Senior Vice President in June 1992, was
promoted to Executive Vice President and named to the Office of the Chairman
in September 1993, became President and Chief Operating Officer in January
1994 and became Chief Executive Officer in June 1995. From 1986 to 1992, he
was Senior Vice President and Chief Information Officer of Kimberly-Clark
Corp. From 1983 to 1986, he was a partner and regional practice director for
the Midwest Region consulting practice of Arthur Young. He is also currently
serving as a Director of Follett Corporation and Infosis Corp.
James S. Carluccio, age 44, joined TSC in January 1992 and assumed his
current role as Chief Technology Officer in December 1997 and Executive Vice
President in February 1994. From 1976 to 1992, he was with Arthur Andersen &
Co. and certain affiliates thereof, most recently as a partner in Andersen
Consulting's Advanced Systems Group in their New York office. He is also
currently serving as a Director of Toy Biz, Inc.
Kelly D. Conway, age 42, 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 Vice
President of Finance and Vice President of Marketing for Telcom Technologies.
From 1980 to 1984, he was a consultant with Deloitte, Haskins and Sells. In
1998, he became a board member of Edify Corporation.
Jack N. Hayden, age 51, joined TSC in April 1992 as Senior Vice President and
assumed the role of Executive Vice President in July 1995, a position from
which he resigned effective August 5, 1998. He served as interim CFO of TSC
during late 1992 and early 1993. Prior to coming to TSC, he held the position
of Vice President--Operations, Commercial Transport Division of McDonnell
Douglas Corporation from 1990 to 1992. From 1989 to 1990, he served as Vice
President--Finance of McDonnell Douglas Corporation. From 1971 to 1989, he
served in numerous manufacturing and procurement positions at McDonnell
Douglas Corporation.
Michael J. McLaughlin, age 48, joined TSC in May 1996 when TSC acquired the
operations of McLaughlin & Associates. Effective with the acquisition, he
assumed the role of Executive Vice President, a position from which he
resigned effective June 15, 1998. He was appointed to fill a vacancy on the
Company's Board of Directors, a position from which he also resigned
effective July 15, 1998. From 1992 to 1996, he was President of McLaughlin &
Associates. From 1972 to 1992, he worked for Booz, Allen & Hamilton Inc.,
completing his tenure there as Global Practice Leader for the computer and
telecommunications practice.
Martin T. Johnson, age 47, joined TSC in August 1993 as Vice President
responsible for business case development. In February 1994, he assumed the
role of Vice President and Chief Financial Officer. In June 1996, he was made
a Senior Vice President of the Company. From 1990 to 1993,
_______________________________________________________________________________
Page 17
he was Corporate Controller of The Marmon Group, Inc., an autonomous association
of over 70 independent member companies. From 1987 to 1990, he was Vice
President--Finance and Chief Financial Officer of COMNET Corporation, a
publicly-held computer software and computer services firm. From 1976 to 1987,
he worked in a variety of financial positions with Zenith Electronics
Corporation, the final position being Director, Internal Audit and Operations
Analysis.
Paul R. Peterson, age 56, joined TSC in September 1992 as Vice President and
General Counsel and was appointed Corporate Secretary in October 1992. In
June 1996, he was made a Senior Vice President of the Company. Prior to
coming to TSC, he worked for Bridgestone/Firestone, Inc. during the periods
1981 to 1984 and 1987 to 1992 where he held several positions including
Divisional General Counsel. His background also includes employment from 1984
to 1987 as a corporate executive with Block Management Corporation, an H&R
Block subsidiary which managed Hyatt Legal Services. He also served at the
Federal Trade Commission as a senior executive from 1974 to 1981 and as a
trial attorney from 1971 to 1974.
ITEM 2. PROPERTIES
TSC's principal executive offices are located at 205 North Michigan Avenue,
Suite 1500, Chicago, Illinois 60601. TSC's lease on these premises expires
July 31, 2004. TSC also leases facilities in Atlanta, (GA); New Canaan, (CT);
Austin, Dallas, Houston and Irving, (TX); Bellevue, (WA); Boston and Hudson,
(MA); Brookfield and Wauwatosa, (WI); Columbia, (MD); Minneapolis, (MN); New
York, (NY); and San Francisco, Soquel, Sunnyvale and Irvine, (CA); and
Schaumburg and Wheaton, (IL). Additionally, TSC leases office premises in
Bogota, Colombia; Cologne, Germany; London, England; Mexico City and
Monterrey, Mexico; Paris, France; Santiago, Chile; Sydney, Australia;
Toronto, Canada; and Zug, Switzerland. TSC believes that these facilities are
adequate for its current business needs and will be able to obtain suitable
space as needed.
ITEM 3. LEGAL PROCEEDINGS
The Company is party to lawsuits arising out of the normal course of
business. Management believes the final outcome of such litigation will not
have a material adverse effect on the Company's consolidated financial
position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended May 31, 1998.
_______________________________________________________________________________
Page 18
TECHNOLOGY SOLUTIONS COMPANY
PART II.
_______________________________________________________________________________
ITEM 5. MARKET FOR THE REGISTRANTS' COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The Company's Common Stock is listed on The Nasdaq Stock Market-SM- under the
symbol "TSCC." As of August 13, 1998, there were approximately 935 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 1997 and fiscal 1998.
QUARTER ENDED HIGH LOW
- ------------------------------------------------------------------------ --------- ---------
August 31, 1996......................................................... $ 13.167 $ 8.389
November 30, 1996....................................................... $ 20.945 $ 12.445
February 28, 1997....................................................... $ 20.222 $ 13.167
May 31, 1997............................................................ $ 19.111 $ 9.500
August 31, 1997......................................................... $ 18.055 $ 14.667
November 30, 1997....................................................... $ 25.000 $ 13.500
February 28, 1998....................................................... $ 22.667 $ 13.833
May 31, 1998............................................................ $ 22.500 $ 16.833
On August 13, 1998, the last reported sale price on The Nasdaq Stock
Market-SM- for the Company's Common Stock was $17.0625.
The market price for the Common Stock may be significantly affected by
factors such as the announcement of new products or services by the Company
or its competitors, technological innovation by the Company, its competitors
or other vendors, quarterly variations in the Company's operating results or
the operating results of the Company's competitors, general conditions in the
Company's and its customers' markets, changes in the earnings estimates by
analysts or reported results that vary materially from such estimates. In
addition, the stock market has experienced significant price fluctuations
that have particularly affected the market prices of equity securities of
many high technology and emerging growth companies and that often have been
unrelated to the operating performance of such companies. These broad market
fluctuations may materially and adversely affect the market price of the
Company's Common Stock. Following periods of volatility in the market price
of a company's securities, securities class action litigation has often been
instituted against such a company and its officers and directors. Any such
litigation against the Company could result in substantial costs and a
diversion of management's attention
_______________________________________________________________________________
Page 19
and resources, which could have a material adverse effect on the Company's
business, operating results and financial condition.
The Company has never paid dividends on its Common Stock and currently
intends to retain all earnings for use in the expansion of its business and
other corporate purposes. The Company does not anticipate paying any
dividends on its Common Stock in the foreseeable future. The declaration and
payment of dividends by the Company are subject to the discretion of the
Board of Directors.
All per share data have been adjusted to reflect the Company's three-for-two
stock splits effected as a 50 percent stock dividend effective August 10,
1998, August 1, 1997 and July 30, 1996, respectively.
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes certain selected financial data which is
derived from the Company's audited financial statements. All the information
should be read in conjunction with the Company's audited financial statements
and notes thereto and with Management's Discussion and Analysis of Financial
Condition and Results of Operations, which are included elsewhere in this
filing. The Company's audited statements of income for the years ended May
31, 1998, 1997 and 1996 and the audited balance sheets as of May 31, 1998 and
1997 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 and earnings per common share assuming dilution.
FOR THE YEAR ENDED MAY 31,
-------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- --------- --------- ---------
CONSOLIDATED STATEMENT OF INCOME DATA:
Total revenues.......................................... $ 271,875 $ 165,088 $ 97,599 $ 65,817 $ 53,157
Operating income (loss)................................. $ 34,385 $ 22,873 $ 4,864 $ 2,770 $ (3,142)
Net income.............................................. $ 21,020 $ 15,067 $ 4,574 $ 3,367 $ 35
Earnings per common share*.............................. $ 0.54 $ 0.43 $ 0.15 $ 0.11 $ 0.00
Earnings per common share assuming dilution*............ $ 0.49 $ 0.38 $ 0.13 $ 0.09 $ 0.00
- ------------------------
* 1994-1998 earnings per common share data have been restated to reflect the
three-for-two stock splits that were effected on July 30, 1996, August 1, 1997
and August 10, 1998, respectively.
AS OF MAY 31,
-------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- --------- --------- ---------
CONSOLIDATED BALANCE SHEET DATA:
Total assets............................................ $ 197,148 $ 133,866 $ 89,437 $ 65,222 $ 69,340
Long-term debt.......................................... -- -- -- -- --
_______________________________________________________________________________
Page 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FISCAL 1998 COMPARED WITH FISCAL 1997
Consolidated net revenues for the year ended May 31, 1998 increased 65
percent to $271.9 million compared with $165.1 million in fiscal 1997. The
increase resulted from domestic revenue growth of 66 percent and
international revenue growth of 52 percent. The source of this growth is the
continued strong demand for the Company's technology and business consulting
services in both the domestic and international markets. The Company's
ability to generate this additional revenue is due to the Company's increased
consulting staff from heightened recruiting efforts and the additional staff
that joined the Company in previously reported business combinations. The
additional hours billed by the increased consulting staff, combined with a
seven percent increase in domestic billing rates, were the primary factors in
revenue growth compared to the same period a year ago.
Project personnel costs for the year ended May 31, 1998, which represent
mainly professional salaries and benefits, increased to $126.1 million from
$76.5 million in fiscal 1997, an increase of 65 percent. The increase was
primarily due to a 41 percent increase in professional headcount and was
consistent with the higher revenues reported in fiscal 1998. Project
personnel costs as a percentage of net revenues remained unchanged between
years at 46 percent.
The Company charges most of its project expenses directly to the client.
Other project expenses consist of nonbillable expenses directly incurred for
client projects and business development efforts including recruiting fees,
sales and marketing expenses, personnel training and provisions for valuation
allowances and reserves for potential losses on continuing projects. Other
project expenses for fiscal 1998 were $39.6 million, compared with $23.4
million for fiscal 1997. This change was partially due to increases in
hiring, training and nonbillable travel expenses of $10.6 million as a result
of increased headcount and business development. Other project expenses as a
percentage of net revenues remained virtually unchanged between years at
approximately 14 percent.
Management and administrative support costs increased $25.4 million to $57.5
million for the year ended May 31, 1998 from $32.1 million for the year ended
May 31, 1997, an increase of 79 percent. Approximately $13.8 million of this
increase was attributable to the investment made in infrastructure over the
last year, which was necessary to support the growth in business. The
increase in costs versus the same period last year include: the opening and
expansion of several domestic and international offices of $5.5 million;
increased expenses in the internal systems and human resources areas of $3.7
million; higher expenses of $1.6 million related to the expansion of the
Company's corporate recruiting organization; and higher marketing expenses of
$1.0 million as a result of increased corporate marketing efforts. The
Company also incurred an additional $11.6 million of management and
administrative costs associated primarily with increased regional management
and practice area support personnel. These costs primarily include
international growth of $2.0 million; practice area support related to
acquisitions of $0.8 million; additional domestic regional management and
practice area support personnel of $3.9 million; and various other management
and administrative expenses of $4.9 million which include items such as
practice area marketing, recruiting, sales and other expenses.
_______________________________________________________________________________
Page 21
Fiscal 1998 investment programs have included the establishment of new
service offerings including the RADD Lab for the ECM practice area,
middle-market ERP package integration, sales force automation, and new
software vendor alliances. The Company is continuing its geographic expansion
in international and western U.S. geographic areas. The Company's strategy is
to extend its current service offerings on a geographic basis, both
domestically and internationally, and to add new niche service offerings,
such that the Company continues its current level of growth. The Company's
investment spending is directly related to this geographic and new service
offering expansion. The investment spending related to all of these
activities involves the absorption of salary, training, recruiting, selling,
infrastructure and other costs and will initially result in lower operating
margins. The costs associated with these programs will affect project
personnel costs, other project expenses and management and administration
support costs. The expansion into a new international market typically
involves costs and time similar to, but often higher than, a domestic
expansion.
Goodwill amortization increased to $3.6 million for the year ended May 31,
1998 compared to $0.8 million for the year ended May 31, 1997, primarily due
to the purchase of The Bentley Group.
Incentive compensation of $10.7 million was accrued for the year ended May
31, 1998 compared to $9.4 million for the same period last year. This amount
reflects the Company's annual bonus payout for fiscal 1998 made in the first
quarter of fiscal 1999. The Company expects to continue to accrue incentive
compensation in fiscal 1999.
Net investment income in fiscal 1998 was $2.0 million compared to $2.1
million a year earlier.
The Company's effective tax rate for the year ended May 31, 1998 was 42.2
percent compared to 39.7 percent for the year ended May 31, 1997. The
increase in the effective tax rate in fiscal 1998 was the result of the
increased non-deductible expenses for U.S. tax purposes and the increase in
the percentage of the Company's income from taxable investment income.
Weighted average number of common shares and weighted average number of
common and common equivalent shares outstanding increased primarily due to
the exercise of stock options and the issuance of shares under the Company's
employee stock purchase plan.
FISCAL 1997 COMPARED WITH FISCAL 1996
Consolidated net revenues for the year ended May 31, 1997 increased 69
percent to $165.1 million in fiscal 1997 compared to $97.6 million in fiscal
1996. The principal source of the increase was a 52 percent increase in
domestic billable hours, as well as a two percent increase in average
domestic hourly billing rates. The increase in billable hours was
attributable to the significant growth in the overall information technology
professional services market combined with the Company's ability to increase
the number of its consulting staff, through both recruiting efforts and
business combinations. The increase in average hourly billing rates was
primarily due to the impact of the fiscal 1997 hiring efforts and the
resulting change in the mix of personnel to include a greater percentage of
more senior personnel. Total Company headcount increased 77 percent to 1,102
at the end of fiscal 1997 compared to 622 at the end of fiscal 1996. The
total number of project managers increased to 118 at the end of fiscal 1997
compared to 72 a year
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earlier. Additionally, in fiscal 1997, the Company recorded international
revenues of $20.2 million compared to $3.2 million in fiscal 1996.
Project personnel costs, which represent mainly professional salaries and
benefits, increased to $76.5 million in fiscal 1997 compared to $46.7 million
in fiscal 1996, an increase of 64 percent. This increase was due to
additional headcount and was consistent with the higher revenues reported in
fiscal 1997. Project personnel costs as a percentage of net revenues were 46
percent for fiscal 1997 compared with project personnel costs as a percentage
of net revenues of 48 percent in fiscal 1996. This decrease was primarily the
result of more efficient utilization of professional staff offset in part by
the time lag between incurrence of project personnel costs and revenue
generated by these personnel.
The Company charges most of its project expenses directly to the client.
Other project expenses consist of nonbillable expenses directly incurred for
client projects and business development efforts including recruiting fees,
sales and marketing expenses, personnel training and provisions for valuation
allowances and reserves for potential losses on continuing projects. Other
project expenses for fiscal 1997 were $23.4 million, an increase of 80
percent from $13.0 million in fiscal 1996. Other project expenses as a
percentage of net revenues increased slightly to 14 percent in fiscal 1997
compared to 13 percent in the prior year. This change was due to increases in
domestic hiring, training and nonbillable travel expenses of $3.4 million as
a result of increased headcount and business development. In addition, travel
related to various training activities in fiscal 1997 increased compared to
fiscal 1996, as well as an increase in international expenses of $2.8
million. Also contributing to the change was an addition to the provision for
valuation allowances of $2.7 million due to the increase in accounts
receivable, as well as the inherently higher risks associated with a larger
customer base. The impact of the increase in other project expenses as a
percentage of net revenues was more than offset by the higher utilization of
professional staff, as well as a significant increase in overall net revenues.
Management and administrative support costs increased 42 percent to $32.1
million in fiscal 1997 compared to $22.6 million in fiscal 1996. The increase
of $9.5 million was primarily attributable to an increase in international
expenses of $6.3 million due to the expansion of foreign operations; growth
in the regional practice area management; and travel and hiring costs of $1.7
million, partially offset by various other operating costs. Goodwill
amortization of $0.8 million was recorded due to the purchase of four
businesses in fiscal years 1997 and 1996. During the first nine months of
fiscal 1996, $2.9 million was recorded for the employee retention program.
This program expired in February 1996, and, therefore, no amounts were
recorded in fiscal 1997.
Incentive compensation increased $2.8 million to $9.4 million in fiscal 1997
compared to $6.6 million in fiscal 1996. The increase is due to increased
headcount, at both the consulting staff and the project manager levels, and
Company profitability improvement. The Company expects to continue to accrue
incentive compensation throughout fiscal 1998.
Fiscal 1996 results reflect one-time pretax charges for the final settlement
relating to outstanding securities litigation and litigation involving the
Company's founders of $2.3 million and $0.9 million, respectively. The
securities litigation settlement called for a final payment of
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$4.6 million, of which $2.3 million was covered by insurance and the remaining
$2.3 million was charged to fiscal 1996 operations.
Investment income in fiscal 1997, net of interest expense, was $2.1 million
compared to $1.9 million in fiscal 1996.
The Company's effective tax rate for fiscal 1997 was 39.7 percent compared to
32.4 percent in fiscal 1996. The increase in the effective tax rate was the
result of the reduction in the percentage of the Company's income coming from
nontaxable investment income in fiscal 1997. Management believes that the
existing levels of pretax earnings for financial reporting purposes will be
sufficient to generate the minimum amount of future taxable income necessary
to realize the deferred tax asset.
The increase in common and common equivalent shares outstanding was primarily
due to the exercise of stock options and the impact of the increase in the
Company's stock price on the calculation of common equivalent shares.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $13.1 million for the year
ended May 31, 1998 compared to net cash provided by operating activities of
$6.5 million in fiscal 1997. Operating cash flow was favorably impacted by
higher net income as a result of increased operating activities partially
offset by an increase in net receivables of $28.0 million due to the growth
of the Company's revenues.
The Company's significant amount of cash, cash equivalents and marketable
securities has provided ample liquidity to handle the Company's current cash
requirements.
Net cash used in investing activities was $14.4 million for the year ended
May 31, 1998 compared to net cash provided by investing activities of $0.7
million for the same period last year. The Company purchased $10.2 million of
available-for-sale securities and received $5.3 million from the sale of
available-for-sale securities. Proceeds of $6.9 million were received by the
Company due to the maturity of several held-to-maturity investments for the
year ended May 31, 1998. The proceeds were transferred to cash and cash
equivalents and reinvested in ongoing business activities and other equity
investments.
Capital expenditures for the year ended May 31, 1998 were $5.7 million.
Capital expenditures may continue at the current rate in fiscal 1999 due to
the Company's anticipated growth. The Company currently has no material
commitments for capital expenditures.
Net cash outlays related to business acquisitions were $7.7 million for the
year ended May 31, 1998. The cash outlay was due primarily to a $7.4 million
payment in the first quarter of fiscal 1998 for the acquisition of The
Bentley Group (Bentley). Bentley was acquired for a combination of cash and
the Company's common stock. The transaction was accounted for using the
purchase method of accounting. Total consideration recorded for Bentley was
approximately $12.7 million. In addition to cash, the Company exchanged
44,303 shares of common stock of the Company for all the issued and
outstanding shares of Bentley and replaced the employee stock options
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outstanding under Bentley's stock option plan with the Company's stock options.
The purchase price may be increased by approximately $5.8 million if certain
performance targets are met over the next fiscal year. Additionally, a $0.3
million earn-out payment was made in the third quarter of fiscal 1998 related to
the acquisition of Aspen Consultancy in May 1996.
Other investing activity during fiscal 1998 was the Company's $3.0 million
minority investment in JGI, Inc. d/b/a JGI/Baan, a Baan software reseller and
service organization.
The Company has a $5.0 million unsecured line of credit facility (the
"Facility") with Bank of America Illinois. The agreement expires September 4,
1998. At the Company's election, loans made under the Facility bear interest
at either the Bank of America Illinois reference rate or at the Eurodollar
rate plus 0.75 percent. The unused line fee is 0.25 percent of the unused
portion of the commitment. The Facility requires, among other things, the
Company to maintain certain financial ratios. As of May 31, 1998, the Company
was in compliance with these financial ratio requirements. As of May 31,
1998, no borrowings were made under the Facility.
IMPACT OF INFLATION AND BACKLOG
Inflation should not have a significant impact on the Company's income to the
extent the Company is able to raise its consulting rates commensurate with
its staff compensation rates, which it has done successfully in the past.
Because the majority of the Company's contracts may be terminated on
relatively short notice, the Company does not consider backlog to be
meaningful.
NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income," in
June 1997. In addition to net income, comprehensive income includes items
recorded directly to stockholders' equity such as the income tax benefit
related to the exercise of certain stock options. This statement establishes
new standards for reporting and displaying comprehensive income and its
components in a full set of general-purpose financial statements. This
statement is effective for fiscal years beginning after December 15, 1997.
Adoption of this standard will only require additional financial statement
disclosure detailing the Company's comprehensive income.
In June 1997, the FASB also issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS No. 131 establishes new
standards for reporting information about operating segments in interim and
annual financial statements. This statement is also effective for fiscal
years beginning after December 15, 1997. The Company is currently evaluating
the impact, if any, this statement will have on disclosures in the
consolidated financial statements.
On June 15, 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 is effective for financial
statements issued for periods ending after June 15, 1999. SFAS No. 133
requires that all derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on
whether a derivative is designated as part of a hedge transaction and, if it
is, the type of hedge transaction. The Company
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anticipates that, due to its limited use of derivative instruments, the adoption
of SFAS No. 133 will not have a significant effect on the Company's results of
operations or its financial position.
ASSUMPTIONS UNDERLYING CERTAIN FORWARD-LOOKING STATEMENTS AND
FACTORS THAT MAY AFFECT FUTURE RESULTS
This Form 10-K includes or may include certain forward-looking statements
that involve risks and uncertainties. This Form 10-K contains certain
forward-looking statements concerning the Company's financial position,
business strategy, budgets, projected costs and plans and objectives of
management for future operations as well as other statements including words
such as "anticipate," "believe," "plan," "estimate," "expect," "intend," and
other similar expressions. Although the Company believes its expectations
reflected in such forward-looking statements are based on reasonable
assumptions, stockholders are cautioned that no assurance can be given that
such expectations will prove correct and that actual results and developments
may differ materially from those conveyed in such forward-looking statements.
Important factors that could cause actual results to differ materially from
the expectations reflected in the forward-looking statements in this Form
10-K include, among others, the pace of technological change, the Company's
ability to manage growth and attract and retain employees, general business
and economic conditions in the Company's operating regions, and competitive
and other factors, all as more fully described below. Such forward-looking
statements speak only as of the date on which they are made and the Company
does not undertake any obligation to update any forward-looking statement to
reflect events or circumstances after the date of this Form 10-K. If the
Company does update or correct one or more forward-looking statements,
investors and others should not conclude that the Company will make
additional updates or corrections with respect thereto or with respect to
other forward-looking statements. The cautionary statements provided below
are being made pursuant to the provisions of the Private Securities
Litigation Reform Act of 1995 (the PSLRA) and with the intention of obtaining
the benefits of the "safe harbor" provisions of the PSLRA for any such
forward-looking information. Many of the factors discussed below, as well as
other factors, have also been discussed in prior filings made by the Company.
Factors which could cause the Company's actual financial and other results to
differ materially from any results that might be projected, forecast,
estimated or budgeted by the Company in the forward-looking statements
include, but are not limited to, the following:
YEAR 2000 ISSUE
The Year 2000 issue describes the possibility that computer programs with
date-sensitive software may recognize a date using "00" as the year 1900, as
opposed to the year 2000, because the programs were written using two digits
rather than four to define the applicable year. This could result in a system
failure or miscalculations causing disruptions of operations such as, among
others, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities. The Company is in the process
of conducting an assessment of its computer information systems and is
commencing the necessary steps to determine the nature and extent of the work
required, if any, to make its internal systems Year 2000 compliant. These
steps may require the Company to modify, upgrade or replace some of its
internal systems. The Company continues to evaluate the estimated cost of
bringing all internal systems, equipment, and operations into Year 2000
compliance but has not yet finished determining the total cost, if any,
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of these compliance efforts. Based on currently available information, the
Company believes that any necessary compliance efforts will not have a
material adverse effect on its business, operating results and financial
condition. However, if compliance efforts are required and are not completed
on time, or if the cost of any required updating, modification or replacement
of the Company's information systems exceeds the Company's current estimates,
the Year 2000 issue could have a material adverse impact on the Company's
business, operating results and financial condition.
Generally speaking, the Company has deliberately refrained from performing
Year 2000 remediation services. It is possible, however, that former, present
and future clients could assert that certain services performed by the
Company from time to time involve or are related to the Year 2000 issue. The
Company has recommended, implemented and customized various third-party
software packages for its clients, and to the extent that such software
programs may not be Year 2000 compliant, the Company could be subjected to
claims as a result thereof. Since the Company's inception in 1988, it has
designed and developed software and systems for its clients. Due to the large
number of such engagements undertaken by the Company over the years, there
can be no assurance that all such software programs and systems will be Year
2000 compliant, which could also result in the assertion of claims against
the Company.
The Company's policy has been to endeavor to secure provisions in its client
contracts that, among other things, disclaim implied warranties, limit the
duration of the Company's express warranties, limit the Company's liability
to the amount of fees paid (or a multiple thereof) by the client to the
Company in connection with the project, and disclaim any liability arising
from third-party software that is implemented, customized or installed by the
Company. There can be no assurance that the Company will be able to secure
contractual protections in agreements concerning future projects, or that any
contractual protections secured by the Company in agreements governing
pending and completed projects, will dissuade the other party thereto from
asserting claims against the Company with respect to the Year 2000 issue.
Due to the complexity of the Year 2000 issue, upon any failure of critical
client systems or processes that may be directly or indirectly connected or
related to systems or software designed, developed, customized or implemented
by the Company as described above, the Company may be subjected to claims
regardless of whether the failure is related to the services provided by the
Company. There can be no assurance that the Company would be able to
establish that it did not cause or contribute to the failure of a critical
client system or process. There also can be no assurance that the contractual
protections, if any, secured by the Company in connection with any past,
present or future clients will operate to insulate the Company from, or limit
the amount of, any liability arising from claims asserted against the
Company. If asserted, the resolution of such claims (and the associated
defense costs) could have a material adverse effect on the Company's
business, operating results and financial condition.
RAPID TECHNOLOGICAL CHANGE
The systems consulting and implementation market has experienced rapid
technological advances and developments in recent years. Failure of the
Company to stay abreast of such advances and developments could materially
adversely affect its business. The Company additionally utilizes a
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number of different technologies in developing and providing IT solutions for
its customers. The technologies used by the Company are developing rapidly and
are characterized by evolving industry standards in a wide variety of areas.
While the Company evaluates technologies on an ongoing basis and endeavors to
utilize those that are most effective in developing IT solutions for its
customers, there can be no assurance that the technologies utilized by the
Company and the expertise gained in those technologies will continue to be
applicable in the future. There can be no assurance that new technologies will
be made available to the Company or that such technologies can be economically
applied by the Company. The inability to apply existing technologies and
expertise to subsequent projects could have a material adverse effect on the
Company's business, operating results and financial condition.
MANAGEMENT OF GROWTH
The Company's business has grown significantly since its inception, and the
Company anticipates future growth. The growth of the Company's business and
the expansion of its customer base have resulted in a corresponding growth in
the demands on the Company's management and personnel and its operating
systems and internal controls. Any future growth may further strain existing
management resources and operational, financial, human resources and
management information systems and controls, which may not be adequate to
support the Company's operations.
The Company is currently increasing its expense levels as a result of a
number of factors, including substantial increases in the number of
employees, the opening of new offices, investments in equipment, training of
employees and the development of methodologies, tools, etc. An unexpected
decline in revenues without a corresponding and timely reduction in staffing
and other expenses, or a staffing increase that is not accompanied by a
corresponding increase in revenues, could have a material adverse effect on
the Company's business, operating results and financial condition. There can
be no assurance that the Company will be able to manage its recent or future
growth successfully. In addition, there can be no assurance that the Company
will continue to grow or sustain the rate of growth it has experienced in the
past.
The Company expects that it will need to further develop its financial and
management controls, reporting systems and procedures to accommodate future
growth. There can be no assurance that the Company will be able to develop
such controls, systems or procedures effectively or on a timely basis, and
the failure to do so could have a material adverse effect on the Company's
business, operating results and financial condition.
ABILITY TO ATTRACT AND RETAIN EMPLOYEES
The Company's business consists mainly of professional services and is
inherently labor intensive. The Company's success depends in large part upon
its ability to attract, retain and motivate highly skilled employees,
particularly senior project managers and other senior personnel, for its
domestic and international operations. Qualified senior project managers
within and outside the United States are in particularly great demand and are
likely to remain a limited resource for the foreseeable future. Several
attributes of the Company's work environment pose challenges to the Company's
ability to attract and retain employees, including (i) extensive travel
requirements, (ii) the Company's intense work environment and culture, (iii)
the Company's standards for
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employee technical skills and job performance, and (iv) the Company's practice
of adjusting the number of technical personnel to reflect active project levels.
Although the Company expects to continue to attract sufficient numbers of highly
skilled employees and to retain its existing senior project managers and other
senior personnel for the foreseeable future, there can be no assurance that the
Company will be able to do so. Failure to attract and retain key personnel could
have a material adverse effect upon the Company's business, operating results
and financial condition.
GROWTH BY ACQUISITION
The Company may grow in part by acquiring existing businesses. The success of
any such acquisition will depend upon, among other things, the ability of the
Company and its management to integrate acquired personnel, operations,
products and technologies into its organization effectively, to retain and
motivate key personnel of acquired businesses and to retain customers of
acquired firms. There can be no assurance that the Company will be able to
identify suitable acquisition opportunities, consummate acquisitions or
successfully integrate acquired personnel and operations into the Company. In
addition, acquisitions by the Company may involve certain other risks,
including potentially dilutive issuances of equity securities and the
diversion of management's attention from other business concerns.
DEPENDENCE ON KEY PERSONNEL
Although the Company does not believe that the loss of any particular
individual would have a material adverse impact on the Company, the loss of
some or all of the Company's senior managers could have a material adverse
impact on the Company, including its ability to secure and complete
engagements. The Company has employment agreements with its President,
Executive Vice Presidents and its Vice Presidents that contain
noncompetition, nondisclosure and nonsolicitation covenants. The employment
agreements with the President and Executive Vice Presidents do not have fixed
expiration dates and may be terminated by either the Company or the employee
on 90 days' written notice. The employment agreements with the other Vice
Presidents generally have a fixed initial term but are automatically renewed
for successive one-year periods unless terminated by either the Company or
the employee on 90 days' written notice. Other senior employees also have
employment agreements that are generally terminable by the Company or the
employee upon 30 to 90 days' written notice.
UNASSIGNED LABOR COSTS
The Company's unassigned labor costs, which represent salaries of, and other
expenses allocated to systems professionals not assigned to a specific
project, have gradually increased as a percentage of revenues over time. The
Company attempts to reassign employees who meet its performance requirements
to other active projects when they are no longer needed on a particular
project. However, since the Company generally recruits personnel in advance
of the
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commencement of certain projects in order to meet the needs of such projects,
any cancellation or delays in the anticipated projects could increase the
unassigned labor costs and might cause a material adverse effect upon the
Company's business, operating results and financial condition.
CYCLICALITY
Certain of the Company's customers and potential customers are in industries
that experience cyclical variations in profitability, which may in turn
affect their willingness or ability to fund systems projects such as those
for which the Company may be engaged. The Company's experience indicates,
however, that competitive pressures in cyclical industries sometimes compel
businesses to undertake systems projects even during periods of losses or
reduced profitability.
QUARTERLY RESULTS MAY FLUCTUATE
The Company's results may fluctuate from quarter to quarter as a result of
various factors such as differences in the number of billing days and/or
holidays between quarters, the number of vacation days and sick days taken by
the Company's employees in a particular quarter, and varying weather
conditions. These and other factors can reduce revenues in a given quarter
with a corresponding adverse impact on the Company's margins.
PROJECT RISKS
Because of the project-based nature of the Company's work and the fact that
many of the projects undertaken by the Company are large projects, there is a
risk of a material adverse impact on operating results because of the
unanticipated suspension or cancellation of a large project or the financial
difficulties of a client. The suspension or cancellation of a project or the
financial difficulties of a client could result in a decrease in revenues,
the need to reassign staff, a potential dispute with a client regarding
monies owed for consulting work and expenses, and damage to TSC's reputation.
In addition, because many of the Company's projects are high profile, mission
critical projects for major clients, a failure or inability to meet a
client's expectations with respect to a major project undertaken by the
Company could damage its reputation and affect its ability to attract new
business. Third party products and services are integral to the success of
certain Company projects. To the extent that third parties do not deliver
effective products and services on a timely basis, the Company's project
results could be negatively impacted. Although the Company attempts to limit
this risk in its engagement arrangements with clients and maintains errors
and omissions insurance, the failure of a project could also result in
significant financial exposure to the Company.
COMPETITION
The systems consulting and implementation market comprises a large number of
participants, is subject to rapid changes and is highly competitive. The
Company competes with and faces potential competition from a number of
companies that have significantly greater financial, technical and marketing
resources and greater name recognition than the Company. The Company also
competes with smaller service providers whose specific, more narrowly focused
service offerings may be more attractive to potential clients than the
Company's multi-dimensional
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approach. The Company's clients primarily consist of Fortune 1000 and other
large corporations and there are an increasing number of professional
services firms seeking systems consulting and implementation engagements from
that client base. The Company believes that its ability to compete depends in
part on a number of factors outside its control, including the ability of its
competitors to hire, retain and motivate a significant number of senior
project managers, the ownership by competitors of software used by potential
clients, the development by others of software that is competitive with the
Company's products and services, and the price at which others offer
comparable services.
In addition, the Company's clients could develop or acquire in-house
expertise in services similar to those provided by the Company, which would
significantly reduce demand for the Company's services. No assurance can be
given that the Company will be able to maintain its existing client base,
maintain or increase the level of revenue generated by its existing clients
or be able to attract new clients.
SUSCEPTIBILITY TO GENERAL ECONOMIC CONDITIONS
The Company's revenues and results of operations will be subject to
fluctuations based on the general economic conditions of the United States as
well as the foreign countries in which it operates. If there were to be a
general economic downturn or a recession in the United States or the foreign
countries in which it operates, then the Company expects that business
enterprises would cut back their spending on, or reduce their budget for, IT
services. In the event of such an economic downturn, there can be no
assurance that the Company's business, operating results and financial
condition would not be materially adversely affected.
COST OVERRUNS
Although the Company's engagements are generally on a time-and-materials
basis, some of its projects are on a "not-to-exceed" or fixed-price basis.
The failure of the Company to complete a project to the client's satisfaction
within the "not-to-exceed" or fixed fee exposes the Company to unrecoverable
cost overruns, which could have a material adverse effect on the Company's
business, results of operations and financial condition.
INTELLECTUAL PROPERTY RIGHTS
A majority of the Company's clients have required the Company, as a condition
of performing services for such clients, to grant to the clients all
proprietary and intellectual property rights with respect to the work product
resulting from the performance of such services, including the intellectual
property rights to any custom software developed by the Company for such
clients. Each such grant of proprietary and intellectual property rights
would limit the Company's ability to reuse work product components and work
product solutions with other clients. In a limited number of such situations,
the Company has obtained, and in the future may attempt to obtain, ownership
interest or a license from its clients to permit the Company to market custom
software for the joint benefit of the client and the Company. Such
arrangements may be nonexclusive or exclusive, and licensors to the Company
may retain the right to sell products and services that compete with those of
the Company. There can be no assurance, however, that the Company will be
able to negotiate software licenses upon terms acceptable to the Company.
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The Company also develops certain foundation and application software tools
and products that are owned by the Company and licensed to its clients. The
Company regards such software as proprietary and intends to protect its
rights in such software, where appropriate, with registered copyrights,
patents, registered trademarks, trade secret laws and contractual
restrictions on disclosure and transferring title. To date, the Company has
not filed any applications for the registration of patents or copyrights on
any of its software. There can be no assurance that any such steps taken by
the Company in this regard will be adequate to deter misappropriation of its
proprietary rights or independent third party development of functionally
equivalent products.
In addition, the Company's success is dependent upon its specialized
expertise and methodologies. To protect such proprietary information, the
Company relies upon a combination of trade secret and common laws, employee
nondisclosure policies and third-party confidentiality agreements. However,
there can be no assurance that any such steps taken by the Company in this
regard will be adequate to deter misappropriation of its specialized
expertise and methodologies.
Although the Company believes that its services and products do not infringe
on the intellectual property rights of others, there can be no assurance that
such a claim will not be asserted against the Company in the future.
RISKS OF CONDUCTING INTERNATIONAL OPERATIONS
The Company has been significantly increasing its international operations in
recent years and expects to continue to do so in the future. Because the cost
of doing business abroad is typically higher for U.S. businesses than the
cost of doing business domestically, the Company could experience a decline
in its operating margins as the significance of its international operations
increases. International operations and the provision of services in foreign
markets are subject to a number of special risks, including currency exchange
rate fluctuations, trade barriers, exchange controls, national and regional
labor strikes, political risks, additional security concerns and risks of
increases in duties, taxes and governmental royalties, as well as changes in
laws and policies governing operations of foreign-based companies. In
addition, the Company's continued success and growth internationally will
depend upon its ability to attract, develop and retain a sufficient number of
highly skilled, motivated local professional employees in each of those
foreign countries where it conducts operations. Competition for such local
personnel qualified to deliver most of the Company's services is intense, and
there can be no assurance that the Company will be able to recruit, develop
and retain a sufficient number of highly skilled, motivated local
professionals to successfully compete internationally.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required with respect to this
Item 8 are listed in Item 14(a)(1) and (a)(2) in this filing.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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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 1998 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 33
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.............................................. 35
Financial Statements (Item 14(a)(1))
Consolidated Balance Sheets as of May 31, 1998 and 1997...................... 36
Consolidated Statements of Income for each of the three years in the period
ended May 31, 1998......................................................... 37
Consolidated Statements of Changes in Stockholders' Equity for each of the
three years in the period ended May 31, 1998............................... 38
Consolidated Statements of Cash Flows for each of the three years in the
period ended May 31, 1998.................................................. 39
Notes to Consolidated Financial Statements................................... 40
Financial Statement Schedule (Item 14(a)(2))
Schedule II--Valuation and Qualifying Accounts............................... 55
All other schedules have been omitted because the required information is
included in the financial statements or notes thereto or because they are not
required.
______________________________________________________________________________
Page 34
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) on page 34 present fairly, in all material
respects, the financial position of Technology Solutions Company and its
subsidiaries (the "Company") at May 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the
period ended May 31, 1998, in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedule
listed in the index appearing under Item 14 (a)(2) on page 34 present fairly,
in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These
financial statements and financial statement schedule are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements and financial statement schedule 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.
PricewaterhouseCoopers LLP
June 29, 1998
Chicago, Illinois
______________________________________________________________________________
Page 35
TECHNOLOGY SOLUTIONS COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSETS
MAY 31, MAY 31,
1998 1997
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents............................................................... $ 38,458 $ 27,951
Marketable securities................................................................... 27,973 15,988
Receivables, less allowance for doubtful receivables of $3,246 and $3,346............... 72,114 43,907
Refundable income taxes................................................................. -- 1,398
Deferred income taxes................................................................... 7,448 7,234
Other current assets.................................................................... 12,750 11,196
---------- ----------
Total current assets.................................................................. 158,743 107,674
COMPUTERS, FURNITURE AND EQUIPMENT, NET................................................... 9,515 6,416
LONG-TERM INVESTMENTS..................................................................... 1,200 8,118
COST IN EXCESS OF NET ASSETS OF ACQUIRED BUSINESSES AND OTHER INTANGIBLES 13,535 3,521
LONG-TERM RECEIVABLES AND OTHER........................................................... 14,155 8,137
---------- ----------
Total assets.......................................................................... $ 197,148 $ 133,866
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable........................................................................ $ 1,931 $ 1,604
Accrued compensation and related costs.................................................. 20,982 17,001
Capitalized lease obligation............................................................ 79 240
Deferred compensation................................................................... 13,566 6,842
Other current liabilities............................................................... 4,784 2,392
---------- ----------
Total current liabilities............................................................. 41,342 28,079
---------- ----------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; shares authorized--10,000,000; none issued............. -- --
Common stock, $.01 par value; shares authorized--
50,000,000; shares issued--40,282,870................................................. 403 403
Capital in excess of par value.......................................................... 85,089 61,824
Retained earnings....................................................................... 72,463 51,627
Unrealized holding loss................................................................. (42) (319)
Cumulative translation adjustment....................................................... (1,209) (318)
---------- ----------
156,704 113,217
Less: Treasury stock, at cost (381,186 and 3,185,490 shares)............................ (898) (7,430)
---------- ----------
Total stockholders' equity............................................................ 155,806 105,787
---------- ----------
Total liabilities and stockholders' equity............................................ $ 197,148 $ 133,866
========== ==========
The accompanying Notes to Consolidated Financial Statements are an
integral part of this financial information.
______________________________________________________________________________
Page 36
TECHNOLOGY SOLUTIONS COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEARS ENDED MAY 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
REVENUES:
Professional fees.......................................................... $ 271,595 $ 164,238 $ 97,004
Software and hardware products............................................. 280 850 595
---------- ---------- ----------
271,875 165,088 97,599
---------- ---------- ----------
COSTS AND EXPENSES:
Project personnel.......................................................... 126,147 76,508 46,744
Other project expenses..................................................... 39,570 23,374 13,010
Cost of products sold...................................................... -- 54 476
Management and administrative support...................................... 57,508 32,074 22,605
Goodwill amortization...................................................... 3,603 811 --
Shareholder litigation settlement.......................................... -- -- 2,345
Company founders litigation settlement..................................... -- -- 944
Incentive compensation..................................................... 10,662 9,394 6,611
---------- ---------- ----------
237,490 142,215 92,735
---------- ---------- ----------
OPERATING INCOME............................................................. 34,385 22,873 4,864
---------- ---------- ----------
OTHER INCOME (EXPENSE):
Net investment income...................................................... 2,059 2,295 2,073
Interest expense........................................................... (62) (191) (169)
---------- ---------- ----------
1,997 2,104 1,904
---------- ---------- ----------
INCOME BEFORE INCOME TAXES................................................... 36,382 24,977 6,768
INCOME TAX PROVISION......................................................... 15,362 9,910 2,194
---------- ---------- ----------
NET INCOME................................................................... $ 21,020 $ 15,067 $ 4,574
========== ========== ==========
EARNINGS PER COMMON SHARE.................................................... $ 0.54 $ 0.43 $ 0.15
========== ========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING......................... 38,887 35,333 31,311
========== ========== ==========
EARNINGS PER COMMON SHARE ASSUMING DILUTION.................................. $ 0.49 $ 0.38 $ 0.13
========== ========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING... 42,781 39,869 36,320
========== ========== ==========
The accompanying Notes to Consolidated Financial Statements are an
integral part of this financial information.
______________________________________________________________________________
Page 37
TECHNOLOGY SOLUTIONS COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MAY 31, 1998, 1997 AND 1996--
(IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK CAPITAL IN
---------------------- EXCESS OF RETAINED UNREALIZED
SHARES AMOUNT PAR VALUE EARNINGS HOLDING LOSS
--------- ----------- ----------- ----------- -------------
Balance as of May 31, 1995....................................... 26,855,390 $ 269 $ 43,971 $ 31,409 $ (853)
Effect of August 10, 1998 three-for-two stock split on May 31,
1995 balances.................................................. 13,427,480 134 (134) -- --
Issuance of 3,596,871 treasury shares from exercise of stock
options........................................................ -- -- 6,085 -- --
Issuance of 87,854 treasury shares from employee stock purchase
plan........................................................... -- -- 198 -- --
Change in net unrealized holding loss on available-for-sale
securities..................................................... -- -- -- -- 211
Net income....................................................... -- -- -- 4,574 --
Acquisition of 150,875 treasury shares........................... -- -- -- -- --
--------- ----- ----------- ----------- -----
Balance as of May 31, 1996....................................... 40,282,870 403 50,120 35,983 (642)
Issuance of 2,565,747 treasury shares from exercise of stock
options........................................................ -- -- 12,140 -- --
Issuance of 179,165 treasury shares from employee stock purchase
plan........................................................... -- -- 1,396 -- --
Change in net unrealized holding loss on available-for-sale
securities..................................................... -- -- -- -- 323
Net income....................................................... -- -- -- 15,067 --
Cumulative translation adjustment................................ -- -- -- -- --
Issuance of 851,199 treasury shares for business combinations.... -- -- (1,832) 577 --
--------- ----- ----------- ----------- -----
Balance as of May 31, 1997....................................... 40,282,870 403 61,824 51,627 (319)
Issuance of 2,429,116 treasury shares from exercise of stock
options........................................................ -- -- 15,993 -- --
Issuance of 269,347 treasury shares from employee stock purchase
plan........................................................... -- -- 3,070 -- --
Change in net unrealized holding loss on available-for-sale
securities..................................................... -- -- -- -- 277
Net income....................................................... -- -- -- 21,020 --
Cumulative translation adjustment................................ -- -- -- -- --
Issuance of 105,841 treasury shares for business combinations.... -- -- 4,202 (184) --
--------- ----- ----------- ----------- -----
Balance as of May 31, 1998....................................... 40,282,870 $ 403 $ 85,089 $ 72,463 $ (42)
========== ===== ========== ========== =====
CUMULATIVE
TRANSLATION TREASURY
ADJUSTMENT STOCK TOTAL
----------- ----------- ---------
Balance as of May 31, 1995....................................... $ -- $ (23,070) $ 51,726
Effect of August 10, 1998 three-for-two stock split on May 31,
1995 balances.................................................. -- -- --
Issuance of 3,596,871 treasury shares from exercise of stock
options........................................................ -- 8,107 14,192
Issuance of 87,854 treasury shares from employee stock purchase
plan........................................................... -- 200 398
Change in net unrealized holding loss on available-for-sale
securities..................................................... -- -- 211
Net income....................................................... -- -- 4,574
Acquisition of 150,875 treasury shares........................... -- (1,072) (1,072)
----------- ----------- ---------
Balance as of May 31, 1996....................................... -- (15,835) 70,029
Issuance of 2,565,747 treasury shares from exercise of stock
options........................................................ -- 6,001 18,141
Issuance of 179,165 treasury shares from employee stock purchase
plan........................................................... -- 418 1,814
Change in net unrealized holding loss on available-for-sale
securities..................................................... -- -- 323
Net income....................................................... -- -- 15,067
Cumulative translation adjustment................................ (318) -- (318)
Issuance of 851,199 treasury shares for business combinations.... -- 1,986 731
----------- ----------- ---------
Balance as of May 31, 1997....................................... (318) (7,430) 105,787
Issuance of 2,429,116 treasury shares from exercise of stock
options........................................................ -- 5,660 21,653
Issuance of 269,347 treasury shares from employee stock purchase
plan........................................................... -- 625 3,695
Change in net unrealized holding loss on available-for-sale
securities..................................................... -- -- 277
Net income....................................................... -- -- 21,020
Cumulative translation adjustment................................ (891) -- (891)
Issuance of 105,841 treasury shares for business combinations.... -- 247 4,265
----------- ----------- ---------
Balance as of May 31, 1998....................................... $ (1,209) $ (898) $ 155,806
=========== =========== =========
The accompanying Notes to Consolidated Financial Statements are an integral part
of this financial information.
______________________________________________________________________________
Page 38
TECHNOLOGY SOLUTIONS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE YEARS ENDED MAY 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................................. $ 21,020 $ 15,067 $ 4,574
Adjustments to reconcile net income to net cash from operating
activities:...............................................................
Depreciation and amortization............................................. 7,107 4,442 2,558
Provisions for receivable valuation allowances and reserves for possible
losses.................................................................. 1,897 2,712 1,339
Gain on sale of investments............................................... (43) (17) (18)
Deferred income taxes..................................................... 12,566 8,837 447
Changes in assets and liabilities:
Receivables............................................................. (28,031) (21,533) (11,166)
Purchases of trading securities related to deferred compensation
program............................................................... (6,724) (4,182) (2,660)
Refundable income taxes................................................. 1,398 49 1,074
Other current assets.................................................... (1,493) (4,933) (2,292)
Accounts payable........................................................ 352 (73) 572
Accrued compensation and related costs.................................. 3,914 5,260 2,849
Deferred compensation funds from employees.............................. 6,724 4,182 2,660
Other current liabilities............................................... (1,199) 158 (875)
Other assets............................................................ (4,369) (3,215) (1,319)
Other................................................................... -- (241) --
---------- ---------- ----------
Net cash provided by (used in) operating activities................... 13,119 6,513 (2,257)
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of available-for-sale securities................................... (10,250) (1,000) --
Proceeds from available-for-sale securities................................. 5,337 1,314 1,075
Proceeds from held-to-maturity investments.................................. 6,910 8,890 4,015
Capital expenditures, net................................................... (5,745) (6,057) (3,651)
Net assets of acquired businesses and other intangibles..................... (7,741) (1,127) (3,079)
Other assets................................................................ (3,000) -- --
Capitalized lease obligation................................................ 71 (1,311) 866
---------- ---------- ----------
Net cash (used in) provided by investing activities................... (14,418) 709 (774)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options..................................... 8,721 6,445 9,100
Proceeds from employee stock purchase plan.................................. 3,688 1,805 398
Treasury stock.............................................................. -- -- (1,072)
---------- ---------- ----------
Net cash provided by financing activities............................. 12,409 8,250 8,426
---------- ---------- ----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS.................. (603) (511) --
---------- ---------- ----------
INCREASE IN CASH AND CASH EQUIVALENTS......................................... 10,507 14,961 5,395
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD................................ 27,951 12,990 7,595
---------- ---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD...................................... $ 38,458 $ 27,951 $ 12,990
========== ========== ==========
The accompanying Notes to Consolidated Financial Statements are an
integral part of this financial information.
______________________________________________________________________________
Page 39
TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 1--THE COMPANY
TSC delivers business benefits through consulting and systems integration
services that help clients transform customer relationships and improve
operations. The Company's clients generally are located throughout the United
States and in Europe, Latin America and Canada.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION--The accompanying consolidated financial
statements include the accounts of the Company and all of its subsidiaries.
All significant intercompany transactions have been eliminated. Acquired
businesses are included in the results of operations since their acquisition
dates.
REVENUE RECOGNITION--The Company derives substantially all of its revenues
from information technology, strategic business and management consulting,
systems integration, programming, and packaged software integration and
implementation services. The Company operates in one industry
segment--providing IT and strategic business consulting services to major
companies. The Company recognizes revenue on contracts as work is performed
primarily based on hourly billing rates. Out-of-pocket expenses are presented
net of amounts billed to clients in the accompanying consolidated statements
of income. Contracts are performed in phases. Losses on contracts, if any,
are reserved in full when determined. Revenue from licensing of software is
recognized upon delivery of the product. The Company does not presently have
any significant maintenance and support contracts for software licensed to
clients. Revenue from hardware sales is recognized upon delivery.
CASH AND CASH EQUIVALENTS--The Company considers all highly liquid
investments readily convertible into cash to be cash equivalents with
original maturities of three months or less. These short-term investments are
carried at cost plus accrued interest, which approximates market.
MARKETABLE SECURITIES--The Company's marketable securities primarily consist
of preferred stocks. These preferred stocks, all of which are classified as
available-for-sale, are reported at fair value, with unrealized gains and
losses excluded from earnings and reported as a net after-tax amount in a
separate component of stockholders' equity until realized. The Company's
investments related to the executive deferred compensation plan (see Note 10)
are classified as trading securities, with unrealized gains and losses
included in the Company's consolidated statements of income. Realized gains
or losses are determined on the specific identification method.
COMPUTERS, FURNITURE AND EQUIPMENT--Computers, furniture and equipment are
carried and depreciated on a straight-line basis over their estimated useful
lives. Useful lives generally are five years or less.
______________________________________________________________________________
Page 40
TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
COST IN EXCESS OF NET ASSETS OF ACQUIRED BUSINESSES--The excess of cost over
the fair market value of the net identifiable assets of businesses acquired
(goodwill) is amortized on a straight-line basis, typically over a five-year
period. Accumulated amortization of goodwill as of May 31, 1998 and 1997 was
$4,414 and $811, respectively.
SOFTWARE DEVELOPMENT COSTS--The Company capitalizes certain software
development costs once technological feasibility is established in accordance
with SFAS No. 86, "Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed." Amortization of software costs is the greater
of the amount computed using the (a) ratio of current revenues to the total
current and anticipated future revenues or (b) the straight-line method over
the estimated economic life of the product.
LONG-TERM INVESTMENTS--The Company's long-term investments consist of
municipal bonds with maturities primarily through calendar 1998. Since the
Company has the ability and intent to hold the bonds to maturity, the
investments are classified as held-to-maturity under the provisions of SFAS
No. 115 and, accordingly, are accounted for at cost, net of accumulated
amortization. Municipal bonds held by the Company are regarded as investment
grade by independent nationally recognized rating agencies.
EARNINGS PER COMMON SHARE--The Company adopted SFAS No. 128, "Earnings Per
Share," as of February 28, 1998. The Company discloses basic and diluted
earnings per share in the consolidated statements of income under the
provisions of SFAS No. 128. Earnings per common share assuming dilution is
computed by dividing net income by the weighted average number of common
shares outstanding during each period presented, including common equivalent
shares arising from the assumed exercise of stock options, where appropriate.
Earnings per common share is computed by dividing net income by the weighted
average number of common shares outstanding during each period presented. All
share and per share amounts have been adjusted to reflect the Company's
three-for-two stock splits effective August 10, 1998, August 1, 1997 and July
30, 1996, respectively.
RECONCILIATION OF BASIC AND DILUTED EPS
-------------------------------------------------------------------------
MAY 31, 1998 MAY 31, 1997
----------------------------------- -----------------------------------
NET PER COMMON NET PER COMMON
INCOME SHARES SHARE INCOME SHARES SHARE
--------- ----------- ----------- --------- ----------- -----------
Basic EPS........................... $ 21,020 38,887 $ 0.54 $ 15,067 35,333 $ 0.43
Effect of Stock Options............. -- 3,894 -- 4,536
--------- ----------- ----- --------- ----------- -----
Diluted EPS......................... $ 21,020 42,781 $ 0.49 $ 15,067 39,869 $ 0.38
--------- ----------- ----- --------- ----------- -----
MAY 31, 1996
-------------------------------------
NET PER COMMON
INCOME SHARES SHARE
--------- ----------- -----------
Basic EPS........................... $ 4,574 31,311 $ 0.15
Effect of Stock Options............. -- 5,009
--------- ----------- -----
Diluted EPS......................... $ 4,574 36,320 $ 0.13
--------- ----------- -----
______________________________________________________________________________
Page 41
TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOREIGN CURRENCY TRANSLATION--All assets and liabilities of foreign
subsidiaries are translated to U.S. dollars at fiscal year-end exchange
rates. Income and expense items are translated at average exchange rates
prevailing during the fiscal year. The resulting translation adjustments are
recorded as a component of stockholders' equity. The functional currencies
for the Company's foreign subsidiaries are their local currencies. Gains and
losses from foreign currency transactions of these subsidiaries are included
in the consolidated statements of income.
FAIR VALUE OF FINANCIAL INSTRUMENTS--The carrying values of current assets
and liabilities, long-term receivables and long-term investments approximated
their fair values at May 31, 1998 and 1997. Investments pertaining to a minor
investment in a company for which fair value is not readily available is
believed to approximate its carrying amount.
STOCK-BASED COMPENSATION--The Company accounts for stock-based compensation
using the intrinsic value method prescribed in Accounting Principles Board
(APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. Accordingly, the Company recognizes no compensation expense
for its fixed stock option plan or employee stock purchase plan. See Note 13
for further discussion and related disclosures.
NEW ACCOUNTING STANDARDS--In June 1997, the FASB issued SFAS No. 130,
"Reporting Comprehensive Income." In addition to net income, comprehensive
income includes items recorded directly to stockholders' equity such as the
income tax benefit related to the exercise of certain stock options. This
statement establishes new standards for reporting and displaying
comprehensive income and its components in a full set of general-purpose
financial statements. This statement is effective for fiscal years beginning
after December 15, 1997. Adoption of this standard will only require
additional financial statement disclosure detailing the Company's
comprehensive income.
In June 1997, the FASB also issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." This statement establishes new
standards for reporting information about operating segments in interim and
annual financial statements. This statement is also effective for fiscal
years beginning after December 15, 1997. The Company is currently evaluating
the impact, if any, this statement will have on disclosures in the
consolidated financial statements.
On June 15, 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 is effective for financial
statements issued for periods ending after June 15, 1999. SFAS No. 133
requires that all derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on
whether a derivative is designated as part of a hedge transaction and, if it
is, the type of hedge transaction. The Company anticipates that, due to its
limited use of derivative instruments, the adoption of SFAS No. 133 will not
have a significant effect on the Company's results of operations or its
financial position.
______________________________________________________________________________
Page 42
TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INCOME TAXES--The Company files its federal and state income tax returns on a
calendar year basis. The current income tax provision (benefit) represents
the Company's federal, state and foreign income taxes for the fiscal year as
though tax returns were filed on a fiscal year basis ending on May 31.
The Company uses an asset and liability approach to financial accounting and
reporting for income taxes. Deferred income taxes are provided when tax laws
and financial accounting standards differ with respect to the amount of
income for a year and the basis of assets and liabilities. The Company does
not provide U.S. deferred income taxes on earnings of foreign subsidiaries
which are expected to be indefinitely reinvested.
EMPLOYEE BENEFIT PLAN--The Company has a 401(k) Savings Plan (the "Plan").
The Plan allows employees to contribute up to 15 percent of their annual
compensation, subject to Internal Revenue Service statutory limitations.
Company contributions to the Plan are discretionary. The Company contributed
$1,806 and $1,234 to the Plan in fiscal 1998 and 1997, respectively.
ESTIMATES AND ASSUMPTIONS--The preparation of financial statements in
conformity with Generally Accepted Accounting Principles requires management
to make assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
RECLASSIFICATIONS--Certain reclassifications have been made to the prior
period to conform to the current period classification.
NOTE 3--ACQUISITIONS
In June 1997, the Company acquired The Bentley Company, Inc., (Bentley) for a
combination of cash and the Company's common stock. The transaction was
accounted for using the purchase method of accounting and goodwill was
recorded and is being amortized over five years on a straight-line basis.
Total consideration recorded for Bentley was approximately $12,704. Cash paid
for Bentley totaled $7,360. In addition, the Company also exchanged 44,303
shares of the Company's common stock for all the issued and outstanding stock
of Bentley and replaced the employee stock options outstanding under
Bentley's stock option plan with the Company's stock options. The purchase
price may be increased by approximately $5,785 if certain performance targets
are met over the next fiscal year. Goodwill recorded was approximately
$12,908. Bentley is a Boston-area based firm specializing in business and
operations consulting in the Enterprise Service Management (ESM) area. ESM
encompasses the business processes and systems that relate to the customer
service and field service and support functions.
______________________________________________________________________________
Page 43
TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In March 1997, the Company combined with HRM Resources, Inc. through the
exchange of common stock of the Company for all the issued and outstanding
shares of HRM Resources. The shares of common stock exchanged included
865,135 shares of unregistered treasury stock. HRM Resources was a technology
implementation firm based in New York that specialized in large-scale
financial and human resources software packages. This transaction was
accounted for as a pooling of interests. The operations of HRM Resources were
not material to the Company's consolidated operations.
In February 1997, the Company acquired Geising International, a German-based
business consulting firm focused on customer relationship management
services, for approximately $1,040. In June 1997, the Company issued 37,962
shares of treasury stock related to the purchase agreement. The results of
Geising International operations have been combined with those of the Company
since the date of acquisition. The acquisition was accounted for using the
purchase method of accounting. Goodwill recorded approximated $994. The
operations of Geising International were not material to the Company's
consolidated operations.
In May 1996, the Company acquired Aspen Consultancy Ltd., a U.K.-based call
center consulting firm. Aspen Consultancy Ltd. became a wholly-owned
subsidiary of the Company. The acquisition was accounted for under the
purchase method of accounting. The purchase price was approximately $1,600
and may be increased by approximately $1,900 if certain performance targets
are met in fiscal years 1998 and 1999. The Company recorded a $300 earn-out
payment in the third quarter of fiscal year 1998 related to the acquisition.
Goodwill recorded at acquisition date approximated $1,600. The operations of
Aspen Consultancy were not material to the Company's consolidated operations.
In May 1996, the Company acquired McLaughlin & Associates, an Illinois-based
consulting firm. McLaughlin & Associates became a division of TSC. The
purchase price approximated $2,000. The acquisition was accounted for under
the purchase method of accounting. Goodwill recorded approximated $1,500. The
operations of McLaughlin & Associates were not material to the Company's
consolidated operations.
Consolidated pro forma net income and earnings per share would not have been
materially different from the Company's reported amounts for fiscal years
1998, 1997 and 1996.
Goodwill for all acquisitions is amortized over five years on a straight-line
basis.
______________________________________________________________________________
Page 44
TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--RECEIVABLES
Receivables consist of the following:
MAY 31,
--------------------
1998 1997
--------- ---------
Amounts billed to clients............................................... $ 71,773 $ 34,515
Contracts in process.................................................... 3,587 12,738
--------- ---------
75,360 47,253
Receivable valuation allowances and reserves for
possible losses........................................................ (3,246) (3,346)
--------- ---------
$ 72,114 $ 43,907
========= =========
Amounts billed to clients represent professional fees and reimbursable
project-related expenses. Contracts in process represent unbilled
professional fees and project costs such as out-of-pocket expense, materials
and subcontractor costs. The amounts above are expected to be collected
within one year from the balance sheet date. Amounts billed to clients are
unsecured and generally due within 30 days.
NOTE 5--MARKETABLE SECURITIES AND LONG-TERM INVESTMENTS
Marketable securities, included in current assets and classified as
available-for-sale, are reported at fair value. As of May 31, 1998 and 1997,
the gross unrealized holding gain of $175 and $39, respectively, and gross
unrealized holding loss of $237 and $527, respectively, are presented net and
after-tax in a separate component of stockholders' equity.
Municipal bonds, included in long-term investments are presented at cost, net
of accumulated amortization of ($1) and $514 as of May 31, 1998 and 1997,
respectively. These bonds had a market value at May 31, 1998 and 1997 of
$1,202 and $8,184, respectively. Long-term investments of $1,200 as of May
31, 1998 are expected to mature in fiscal 1999.
NOTE 6--COMPUTERS, FURNITURE AND EQUIPMENT
Computers, furniture and equipment consist of the following:
MAY 31,
---------------------
1998 1997
---------- ---------
Computers.............................................................. $ 13,410 $ 9,583
Furniture and equipment................................................ 6,137 3,324
---------- ---------
19,547 12,907
Accumulated depreciation............................................... (10,032) (6,491)
---------- ---------
$ 9,515 $ 6,416
========== =========
Depreciation expense was $3,652, $3,492 and $2,239 for the years ended May
31, 1998, 1997, and 1996, respectively.
______________________________________________________________________________
Page 45
TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--LONG-TERM RECEIVABLES AND OTHER
Long-term receivables and other consist of the following:
MAY 31,
--------------------
1998 1997
--------- ---------
Customer receivables..................................................... $ 2,016 $ 5,859
Employee receivables..................................................... 3,178 1,165
Capitalized software costs............................................... 4,788 801
Investments.............................................................. 3,000 --
Other.................................................................... 1,173 312
--------- ---------
$ 14,155 $ 8,137
========= =========
In accordance with SFAS No. 86, amortization expense of capitalized software
costs of $718 and $454 was recorded in fiscal 1998 and fiscal 1997,
respectively. No amortization expense of capitalized software costs was
incurred in fiscal 1996.
NOTE 8--INCOME TAXES
The Company uses an asset and liability approach to financial accounting and
reporting for income taxes in accordance with SFAS No. 109, "Accounting for
Income Taxes." The provision for income taxes consists of the following:
FOR THE YEARS ENDED MAY 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
Current:
Federal..................................................... $ 11,831 $ 10,114 $ 1,054
State....................................................... 2,855 3,115 473
Foreign..................................................... 1,064 -- 220
--------- --------- ---------
Total current......................................... 15,750 13,229 1,747
--------- --------- ---------
Deferred:
Federal..................................................... 514 (3,061) 310
State....................................................... 123 (540) 137
Foreign..................................................... (1,025) 282 --
--------- --------- ---------
Total deferred........................................ (388) (3,319) 447
--------- --------- ---------
Provision for income taxes.................................... $ 15,362 $ 9,910 $ 2,194
========= ========= =========
______________________________________________________________________________
Page 46
TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Total provision for income taxes differed from the amount computed by
applying the federal statutory income tax rate to income from continuing
operations due to the following:
FOR THE YEARS ENDED MAY 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
Federal tax provision, at statutory rate........................ $ 12,734 $ 8,741 $ 2,301
State tax provision, net of Federal benefit..................... 1,842 1,674 328
Effect of foreign tax rate differences.......................... 63 (91) 33
Nontaxable investment income.................................... (160) (532) (468)
Nondeductible goodwill.......................................... 219 51 --
Other........................................................... 664 67 --
--------- --------- ---------
Provision for income taxes...................................... $ 15,362 $ 9,910 $ 2,194
========= ========= =========
Total income tax provision (benefit) was allocated as follows:
FOR THE YEARS ENDED MAY 31,
---------------------------------
1998 1997 1996
---------- ---------- ---------
Income from continuing operations........................... $ 15,362 $ 9,910 $ 2,194
Items charged directly to stockholders' equity.............. (13,493) (11,605) (5,151)
---------- ---------- ---------
Total tax provision (benefit)............................... $ 1,869 $ (1,695) $ (2,957)
========== ========== =========
Deferred tax assets and liabilities were comprised of the following:
MAY 31,
--------------------
1998 1997
--------- ---------
Deferred tax assets:
Deferred compensation and bonuses...................................... $ 5,507 $ 2,737
Net operating loss and credits......................................... 340 3,503
Receivable valuation allowances and reserves for possible losses....... 2,036 1,982
Legal and other accruals............................................... 1,696 883
Depreciation........................................................... 393 393
Unrealized holding loss................................................ 21 195
Other.................................................................. 594 --
--------- ---------
Total deferred tax assets........................................ 10,587 9,693
--------- ---------
Deferred tax liabilities:
Prepaid expenses....................................................... (2,778) (1,968)
Capitalized software development costs................................. (361) (91)
Other.................................................................. -- (400)
--------- ---------
Total deferred tax liabilities................................... (3,139) (2,459)
--------- ---------
Net deferred tax asset................................................. $ 7,448 $ 7,234
========= =========
______________________________________________________________________________
Page 47
TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Income before income taxes consisted of the following:
FOR THE YEARS ENDED MAY 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
United States................................................ $ 36,840 $ 23,910 $ 6,217
Foreign...................................................... (458) 1,067 551
--------- --------- ---------
Total........................................................ $ 36,382 $ 24,977 $ 6,768
========= ========= =========
Income taxes paid during fiscal 1998, 1997 and 1996 were $1,864, $135, and
$545, respectively.
NOTE 9--LINE OF CREDIT
The Company has available a $5.0 million unsecured line of credit facility
which expires September 4, 1998. 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 1998.
NOTE 10--EXECUTIVE DEFERRED COMPENSATION PLAN
Effective July 1, 1995, the Company instituted a nonqualified executive
deferred compensation plan. All Company executives (defined as Vice
Presidents and above) are eligible to participate in this voluntary program
which permits participants to annually elect to defer receipt of a portion of
their compensation. The executive deferred compensation 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 consolidated balance
sheets include the deferred compensation liability, including investment
earnings thereon, owed to participants. The accompanying consolidated balance
sheets also include 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.
______________________________________________________________________________
Page 48
TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--EMPLOYEE STOCK PURCHASE PLAN
Effective November 1, 1995, the Company instituted the Technology Solutions
Company 1995 Employee Stock Purchase Plan (the "Plan"). The Plan qualifies as
an "employee stock purchase plan" under Section 423 of the Internal Revenue
Code of 1986, as amended. The Plan is administered by the Compensation
Committee of the Board of Directors. The Plan permits eligible employees to
purchase an aggregate of 1,687,500 shares of the Company's Common Stock.
Shares are purchased for the benefit of the participants at the end of each
three month purchase period. During the fiscal years ended May 31, 1998 and
1997, 269,347 and 179,165 shares of common stock were purchased under the
Plan, respectively.
NOTE 12--STOCKHOLDERS' EQUITY
On June 29, 1998, the Board of Directors declared a three-for-two stock split
to be effected as a 50 percent stock dividend for stockholders of record on
July 16, 1998. The stock split was effective August 10, 1998. The financial
statements and the relevant share and per share data included herein have
been adjusted to reflect the stock split. As a result of the increase in
issued shares, common stock has been increased and capital in excess of par
has been decreased by $134.
NOTE 13--STOCK OPTIONS
On September 26, 1996, the Company's stockholders approved the Technology
Solutions Company 1996 Stock Incentive Plan (the "1996 Plan"). The 1996 Plan
replaced each of the Technology Solutions Company's Stock Option Plan (the
"Original Plan"), the Technology Solutions Company 1992 Stock Incentive Plan
(the "1992 Plan") and the Technology Solutions Company 1993 Outside Directors
Stock Option Plan (the "1993 Plan" and together with the Original Plan and
the 1992 Plan, the "Predecessor Plans"). With the approval of the 1996 Plan,
no future awards will be made under the Predecessor Plans. Previous awards
made under the Predecessor Plans are not affected. Shares subject to awards
made under any of the Predecessor Plans will be available under the 1996
Plan, under certain circumstances, to the extent that such shares are not
issued or delivered in connection with such awards. A total of 2,370,239
shares of the Company's common stock were available for grant on September
26, 1996 under the Predecessor Plans. With the approval of the 1996 Plan,
these shares became available for grant under the 1996 Plan. On September 26,
1996, the stockholders also approved the addition of 2,250,000 shares to the
1996 Plan.
Options granted under the 1996 Plan and the Predecessor Plans authorize the
grant of a variety of stock options and other awards if authorized by the
Company's Board of Directors at prices not less than the fair market value at
the date of grant. Options granted under the Predecessor Plans are generally
exercisable beginning one year after the date of grant and are fully
exercisable in three to four years from date of grant. Options granted under
the 1996 Plan are generally exercisable beginning twelve months after date of
grant and are fully exercisable in forty-two months from date of grant.
Options available for grant are 2,402,291 and 4,520,078 as of May 31, 1998
and 1997, respectively.
______________________________________________________________________________
Page 49
TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company has elected to disclose the pro forma effects of SFAS No. 123,
"Accounting for Stock-Based Compensation." As allowed under the provisions of
this statement, the Company will continue to apply APB Opinion No. 25 and
related interpretations in accounting for the stock options awarded under the
Company's 1996 Plan. Accordingly, no compensation expense has been recognized
for these stock options. Had compensation expense for the Company's 1996 Plan
and Employee Stock Purchase Plan been determined consistent with SFAS No.
123, the Company's net income and earnings per share would have been reduced
to the pro forma amounts indicated below:
1998 1997 1996
--------- --------- ---------
Net Income:
As reported................................................. $ 21,020 $ 15,067 $ 4,574
Pro forma................................................... $ 13,040 $ 11,018 $ 3,373
Earnings per share:
As reported................................................. $ 0.54 $ 0.43 $ 0.15
Pro forma................................................... $ 0.33 $ 0.31 $ 0.11
Earnings per diluted share:
As reported................................................. $ 0.49 $ 0.38 $ 0.13
Pro forma................................................... $ 0.30 $ 0.28 $ 0.09
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions:
1998 1997 1996
----------------- ----------------- -----------------
Expected volatility................ 41.9%-44.1% 40.9%-51.4% 50.6%-52.0%
Risk-free interest rates........... 5.3%-6.5% 5.3%-6.8% 5.3%-6.4%
Expected lives..................... 4.5 years 4.5 years 4.5 years
The Company has not paid and does not anticipate paying dividends; therefore,
the expected dividend yield is assumed to be zero.
______________________________________________________________________________
Page 50
TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A summary of the status of the Company's option plans is presented below:
1998 1997 1996
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
1998 SHARES PRICE 1997 SHARES PRICE 1996 SHARES PRICE
------------ ----------- ------------ ----------- ------------ -----------
Outstanding at beginning of year..... 10,157,024 $ 5.03 10,450,710 $ 3.01 11,534,656 $ 2.30
Granted.............................. 2,466,222 $ 18.27 2,865,929 $ 10.93 2,931,020 $ 5.15
Exercised............................ (2,429,116) $ 18.85 (2,565,747) $ 15.02 (3,596,871) $ 6.54
Forfeited............................ (348,435) $ 9.72 (593,868) $ 8.50 (418,095) $ 2.31
------------ ------------ ------------
Outstanding at end of year........... 9,845,695 $ 7.71 10,157,024 $ 5.03 10,450,710 $ 3.01
============ ============ ============
Exercisable at end of year........... 4,815,339 $ 4.81 4,288,095 $ 3.01 4,804,506 $ 2.41
============ ============ ============
Weighted-average fair value of options granted during the year:
1998 1997 1996
------------ ------------ ------------
$ 7.90 $ 5.24 $ 2.49
The following summarizes information about options outstanding as of May 31,
1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------- ------------------------------------
AVERAGE WEIGHTED- WEIGHTED-
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE CONTRACTUAL EXERCISE EXERCISE
PRICES SHARES LIFE PRICES SHARES PRICES
- ----------------- ----------------- ----------------- ----------------- ----------------- -----------------
$0.10-$4.33 4,561,298 9 years $2.20 3,117,967 $2.44
$4.34-$6.66 436,553 10 years $5.31 300,554 $5.31
$6.67-$10.00 1,919,414 8 years $9.43 1,171,155 $9.42
$10.01-$30.00 2,928,430 9 years $15.52 225,663 $13.14
----------------- -----------------
9,845,695 9 years $7.71 4,815,339 $4.81
================= =================
______________________________________________________________________________
Page 51
TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14--REPORTING SEGMENTS
The Company operates in a single industry segment providing IT technology and
strategic business consulting services to major companies. The Company has
operations in the United States, Mexico, Colombia, Chile, Canada, the United
Kingdom, Germany, France, Switzerland, and Australia.
Identifiable assets of foreign subsidiaries are those assets related to the
operations of those subsidiaries. United States assets consist of all other
operating assets of the Company.
UNITED FOREIGN
STATES SUBSIDIARIES CONSOLIDATED
---------- ----------- ------------
1998
Revenues...................................................... $ 241,101 $ 30,774 $ 271,875
Operating income (loss)....................................... $ 34,961 $ (576) $ 34,385
Identifiable assets........................................... $ 191,921 $ 5,227 $ 197,148
1997
Revenues...................................................... $ 144,861 $ 20,227 $ 165,088
Operating income.............................................. $ 21,856 $ 1,017 $ 22,873
Identifiable assets........................................... $ 129,457 $ 4,409 $ 133,866
1996
Revenues...................................................... $ 94,381 $ 3,218 $ 97,599
Operating income.............................................. $ 4,324 $ 540 $ 4,864
Identifiable assets........................................... $ 87,467 $ 1,970 $ 89,437
NOTE 15--MAJOR CLIENTS
The Company's five largest clients in fiscal 1998 accounted for 4 percent, 4
percent, 3 percent, 3 percent, and 2 percent of total revenues, respectively;
in fiscal 1997, the five largest clients accounted for 8 percent, 7 percent,
5 percent, 4 percent, and 3 percent of total revenues, respectively; and in
fiscal 1996, they accounted for 21 percent, 6 percent, 6 percent, 6 percent,
and 5 percent of total revenues, respectively. No client accounted for 10
percent or more of revenues in either fiscal 1998 or fiscal 1997. In fiscal
1996, one client accounted for 10 percent or more of revenues.
______________________________________________________________________________
Page 52
TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16--LEASES
The Company leases various office facilities under operating leases expiring
at various dates through July 31, 2004. Additionally, the Company leases
various apartments and office equipment under operating leases expiring at
various dates. Rental expense for all operating leases approximated $10,527,
$3,217, and $1,442 for the years ended May 31, 1998, 1997, and 1996,
respectively. Future minimum rental commitments under noncancelable operating
leases with terms in excess of one year are as follows:
FISCAL YEAR AMOUNT
- ------------------------------------------------------ ---------
1999.................................................. $ 7,059
2000.................................................. 3,569
2001.................................................. 1,934
2002.................................................. 1,415
2003.................................................. 1,134
Thereafter............................................ 1,082
---------
$ 16,193
=========
The Company had no significant capital leases as of May 31, 1998.
NOTE 17--LITIGATION
The Company is party to lawsuits arising out of the normal course of
business. Management believes the final outcome of such litigation will not
have a material adverse effect on the Company's consolidated financial
position or results of operations.
NOTE 18--SUBSEQUENT EVENT
On June 25, 1998, the Board of Directors of the Company authorized, subject
to stockholder approval, an increase in the authorized number of shares of
common stock of the Company from 50,000,000 shares to 100,000,000 shares.
______________________________________________________________________________
Page 53
TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 19--SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
AUGUST 31, NOVEMBER 30, FEBRUARY 28, MAY 31,
QUARTER ENDED 1997 1997 1998 1998
- -------------------------------------------------------------- ----------- ------------ ------------ ---------
Revenues...................................................... $ 60,407 $ 63,896 $ 67,404 $ 80,168
Operating income.............................................. $ 6,690 $ 9,065 $ 8,754 $ 9,876
Net income.................................................... $ 3,959 $ 5,312 $ 5,392 $ 6,357
Earnings per common share(a).................................. $ 0.11 $ 0.13 $ 0.14 $ 0.16
Earnings per common share assuming dilution(a)................ $ 0.09 $ 0.12 $ 0.13 $ 0.15
AUGUST 31, NOVEMBER 30, FEBRUARY 28, MAY 31,
QUARTER ENDED 1996 1996 1997 1997
- -------------------------------------------------------------- ----------- ------------ ------------ ---------
Revenues...................................................... $ 32,162 $ 39,521 $ 42,346 $ 51,059
Operating income.............................................. $ 3,151 $ 5,928 $ 6,003 $ 7,791
Net income.................................................... $ 2,125 $ 3,746 $ 3,993 $ 5,203
Earnings per common share(a).................................. $ 0.06 $ 0.11 $ 0.12 $ 0.14
Earnings per common share assuming dilution(a)................ $ 0.06 $ 0.09 $ 0.10 $ 0.13
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 common share(a).................................. $ 0.04 $ 0.01 $ 0.02 $ 0.08
Earnings per common share assuming dilution(a)................ $ 0.03 $ 0.01 $ 0.02 $ 0.07
- ------------------------
(a) All earnings per share data have been restated to reflect the three-for-two
stock splits that were effective on July 30, 1996, August 1, 1997, and
August 10, 1998, respectively.
(b) Includes a charge of $2.3 million related to shareholder litigation
settlement.
(c) Includes a charge of $0.9 million related to Company founders litigation
settlement.
______________________________________________________________________________
Page 54
TECHNOLOGY SOLUTIONS COMPANY
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED MAY 31, 1998, 1997 AND 1996
(IN THOUSANDS)
BALANCE AT BALANCE AT
DESCRIPTION OF BEGINNING END OF
ALLOWANCE AND RESERVES OF YEAR ADDITIONS DEDUCTIONS YEAR
- ------------------------------------------------------------------ ----------- ----------- ----------- -----------
1996
Valuation allowances and receivable reserves for
potential losses................................................. $ 1,837 $ 1,339 $ (1,306) $ 1,870
=========== =========== =========== ===========
1997
Valuation allowances and receivable reserves for
potential losses................................................. $ 1,870 $ 2,712 $ (1,236) $ 3,346
=========== =========== =========== ===========
1998
Valuation allowances and receivable reserves for
potential losses................................................. $ 3,346 $ 1,897 $ (1,997) $ 3,246
=========== =========== =========== ===========
______________________________________________________________________________
Page 55
TECHNOLOGY SOLUTIONS COMPANY
PART IV.
______________________________________________________________________________
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(CONTINUED)
ITEM 14(a)(3) EXHIBITS
The following documents are filed herewith or incorporated by reference and
made a part of this Report.
EXHIBIT # DESCRIPTION OF DOCUMENT
- --------- -------------------------------------------------------------------------------------------------------
3(i) Certificate of Incorporation of TSC, as amended, filed as Exhibit 3.01 to TSC's Registration Statement
on Form S-1 (File No. 33-41824), is hereby incorporated by reference.
3(ii) Bylaws of TSC, as amended, filed as Exhibit 3.02 to TSC's Registration Statement on Form S-1 (File No.
33-41824), are hereby incorporated by reference.
10.01 Technology Solutions Company 1996 Stock Incentive Plan, as amended, filed as Exhibit 4.3 to TSC's
Registration Statement on Form S-8 filed July 16, 1997, is hereby incorporated by reference.
10.02 The Bentley Company Stock Option Plan, as amended, filed as Exhibits 4.4 and 4.5 to TSC's Registration
Statement on Form S-8 filed July 16, 1997, is hereby incorporated by reference.
10.03 Technology Solutions Company Original Option Plan, as amended, filed as Exhibit 10.02 to TSC's Annual
Report on Form 10-K for the fiscal year ended May 31, 1992, is hereby incorporated by reference.
10.04 Technology Solutions Company 1992 Stock Incentive Plan, filed as Exhibit 10.03 to TSC's Annual Report
on Form 10-K for the fiscal year ended May 31, 1992, is hereby incorporated by reference.
10.05 1993 Outside Directors Stock Option Plan, as amended, filed as Exhibit 10.05 to TSC's Annual Report on
Form 10-K for the fiscal year ended May 31, 1994, is hereby incorporated by reference.
______________________________________________________________________________
Page 56
TECHNOLOGY SOLUTIONS COMPANY
PART IV. (CONTINUED)
EXHIBIT # DESCRIPTION OF DOCUMENT
- --------- -------------------------------------------------------------------------------------------------------
10.06 Employment Agreement of William H. Waltrip, filed as Exhibit 10.06 to TSC's Annual Report on Form 10-K
for the fiscal year ended May 31, 1996, is hereby incorporated by reference.
10.07 Employment Agreement of John T. Kohler, filed as Exhibit 10.07 to TSC's Annual Report on Form 10-K for
the fiscal year ended May 31, 1996, is hereby incorporated by reference.
10.08 Employment Agreement of Jack N. Hayden, filed as Exhibit 10.09 to TSC's Annual Report on Form 10-K for
the fiscal year ended May 31, 1996, is hereby incorporated by reference.
10.09 Employment Agreement of Kelly D. Conway, filed as Exhibit 10.12 to TSC's Annual Report on Form 10-K for
the fiscal year ended May 31, 1996, is hereby incorporated by reference.
10.10* Employment Agreement of Martin T. Johnson.
10.11* Employment Agreement of Paul R. Peterson.
10.12* Employment Agreement of Michael J. McLaughlin.
10.13* Employment Agreement of James S. Carluccio.
10.14* Letter of Understanding with Jack N. Hayden.
- ------------------------
*Filed herewith
______________________________________________________________________________
Page 57
TECHNOLOGY SOLUTIONS COMPANY
PART IV (CONTINUED)
EXHIBIT # DESCRIPTION OF DOCUMENT
- --------- -------------------------------------------------------------------------------------------------------
21* Subsidiaries of the Company.
23* Consent of PricewaterhouseCoopers LLP.
27* Financial Data Schedule
- ------------------------
*Filed herewith
Exhibits 10.01 through 10.14 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, 1998, the Company did not file any reports
on Form 8-K.
______________________________________________________________________________
Page 58
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 28th day
of August 1998.
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 th e
Registrant, in the capacities and on the date indicated.
SIGNATURE
- ------------------------------
/s/ WILLIAM H. WALTRIP
- ------------------------------ (August 28, 1998) Chairman, Officer and
William H. Waltrip Director
/s/ JOHN T. KOHLER
- ------------------------------ (August 28, 1998) President, Chief Executive
John T. Kohler Officer and Director
/s/ MARTIN T. JOHNSON
- ------------------------------ (August 28, 1998) Chief Financial and
Martin T. Johnson Accounting Officer
/s/ RAYMOND P. CALDIERO
- ------------------------------ (August 28, 1998) Director
Raymond P. Caldiero
/s/ MICHAEL J. MURRAY
- ------------------------------ (August 28, 1998) Director
Michael J. Murray
/s/ STEPHEN B. ORESMAN
- ------------------------------ (August 28, 1998) Director
Stephen B. Oresman
/s/ JOHN R. PURCELL
- ------------------------------ (August 28, 1998) Director
John R. Purcell
/s/ MICHAEL R. ZUCCHINI
- ------------------------------ (August 28, 1998) Director
Michael R. Zucchini
(Being the principal executive officers, the principal financial and accounting
officers and a majority of the directors of Technology Solutions Company.)
______________________________________________________________________________
Page 61