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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-K
----------------
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM JUNE 1, 1998 TO DECEMBER 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
PREFERRED STOCK PURCHASE RIGHTS
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 SUCH 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
$7.625 ON MARCH 16, 1999, AND, FOR THE PURPOSE OF THIS CALCULATION ONLY,
THE ASSUMPTION THAT ALL OF REGISTRANT'S DIRECTORS AND EXECUTIVE OFFICERS
ARE AFFILIATES) WAS APPROXIMATELY $302 MILLION.
THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S COMMON STOCK, $.01
PAR VALUE PER SHARE, AS OF MARCH 16, 1999, WAS 41,196,360.
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 1999 ANNUAL
MEETING OF STOCKHOLDERS.
TECHNOLOGY SOLUTIONS COMPANY
PART I.
ITEM 1. BUSINESS
GENERAL
Technology Solutions Company ("TSC" or the "Company") provides information
technology (IT) consulting and strategic business consulting services to major
corporations. These services help manufacturing, technology, health care,
telecommunications, financial services, and other service industry clients
transform their businesses, their internal business processes and their
relationships with customers, suppliers, distributors and employees. As used
herein, the terms "TSC" or the "Company," unless the context otherwise clearly
requires, refer to Technology Solutions Company and its subsidiaries. This
report discusses the seven month transition period ended December 31, 1998, due
to the Company changing from a May 31 fiscal year-end to a fiscal year aligned
with the calendar year beginning January 1, 1999.
TSC services span a wide range of IT consulting and strategic business
consulting services. TSC's IT consulting services address a broad spectrum of
IT consulting from IT strategy through systems integration, including the
assessment of the IT situation in a client's organization, feasibility
studies, value analysis, business process redesign and reengineering,
benchmarking and best practices, project management, architecture, logical
and physical systems design, hardware and software selection, programming,
implementation, change management, education, training, and benefits
realization. The Company's strategic business consulting services offered
include business strategic planning, value-based customer segmentation
analysis, customer relationship management and marketing research and
analysis.
Since May 1988, TSC has performed project work for approximately 650
corporations, including Aetna, Avantel, The Chicago Board Options Exchange,
Cigna, Cisco Systems, ConAgra, Georgia-Pacific, The Equitable, First Union
Corporation, General Motors, Goldman, Sachs & Co., Pfizer Pharmaceuticals, The
Prudential, Pepsi, Square D Corporation, Swiss Bank Corporation, MCI, Ameritech,
Zurich Kemper Life, Atmos Energy, Progressive Insurance 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; 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, Mexico; Paris, France; Sydney, Australia; Toronto, Canada;
and Zug, Switzerland.
PAGE 1
STRATEGY
TSC's business strategy is to anticipate market needs and apply leading-edge
information technologies to deliver business solutions. TSC's strategic goal is
to combine current high interest areas such as enterprise customer management,
e-commerce and digital customer service, knowledge management, and operations
and network optimization with TSC's more mature offerings to seamlessly achieve
competitive advantage in the marketplace. TSC offers a full range of IT
consulting 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 consulting and strategic business consulting services with a
focus on higher-end consulting activities. These higher-end activities
include, but are not limited to, IT consulting and business strategy, systems
and network architecture, systems design, value and segmentation analysis,
and project management. TSC's projects often begin with one or more
higher-end consulting phases. Examples of TSC's higher-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 client's Internet
strategy, and the assessment of the client's computer network, computer
architecture and operations management capabilities. Additionally, TSC
provides design and architecture services for the computing environment, the
communications network and the software applications at the client.
The nature of these higher-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
rollout 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.
BUSINESS
TSC offers a wide range of IT consulting and strategic business consulting
services. TSC's IT consulting services are offered in key application areas
within targeted market areas. This specialization enables the Company to offer
superior application and industry expertise in
PAGE 2
attractive growth areas such as customer relationship solutions, call center and
customer service reengineering, telecommunications, electronic commerce,
Internet solutions, knowledge management, sales process optimization, risk
management, supply chain reengineering, packaged software implementation,
network and operations management and other areas. Projects in these areas are
typically undertaken to improve a client's profitability and typically have
attractive internal rates of return. TSC concentrates on large corporate
projects because it believes that such projects offer maximum profit potential
and represent one of the fastest growing areas of the systems consulting and
integration market. TSC has implemented major new systems within manufacturing,
distribution, retail, transportation, telecommunications, banking, insurance,
health care and financial services firms.
The Company offers strategic business consulting services in the areas of
business strategic planning, value-based customer segmentation analysis,
customer relationship management, and market research and analysis. TSC has
significant experience with strategic business initiatives within computer,
telecommunications, software and services firms.
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
(which averages 13 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.
TSC's project model is based on providing its clients with more experienced
personnel and less personnel per client than might be provided by other
firms. TSC's goal is to operate with a ratio of Vice President/Project
Manager to professional staff ranging from 1 Vice President to 5 professional
staff to 1 Vice President to 15 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 its 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 are
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 higher-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
PAGE 3
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.
In each of its areas of business, TSC has developed methodologies, software,
tools, templates and other intellectual property which are used by TSC
consultants to help improve the quality of the work performed by TSC, as well as
lower the cost of the implementation and reduce the time required to perform the
work. These methodologies, tools, project management plans, best practice and
benchmark information and templates are maintained, along with proposals,
project plans and other information, in knowledge databases that can be accessed
by our personnel working on projects throughout TSC.
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:
VALUE ANALYSIS/BUSINESS CASE -- TSC believes that one way in which it
differentiates itself in the business and technology consulting market is
through its value analysis/business case justification process. The value
analysis/business case analyzes the client's current business objectives,
operational structure, and systems architecture. It is then 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 projects include an assessment
phase in which TSC evaluates the client's specific business and IT situation.
TSC will then work 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
are increasingly used to reduce development time and cut costs. TSC is familiar
with many third-party software products for the industries it serves and on
occasion utilizes its own software tools on its client projects.
REUSABLE TOOLS AND METHODOLOGIES -- TSC has developed a number of methodologies,
templates, software applications, 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, software applications, and
tools decrease the time required to implement a system, as well as increase
reliability and reduce client risk associated with a particular project phase.
PAGE 4
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 and web-based training
programs that can be used for training the users of the system, as well as
detailed process and system education.
BUSINESS SEGMENTS
TSC is organized into two business segments which each have their own business
focus and service offering expertise -- Enterprise Solutions (ES) and Enterprise
Customer Management (ECM). Each serves TSC customers in the U.S. and
international markets. TSC believes that a structure based on these focused
business segments addresses its clients' needs for very specialized industry and
systems knowledge and allows its employees the flexibility and opportunity to
grow and develop. Each business segment develops its own specific methodologies,
tools, project management plans, best practice and benchmark information and
templates. This information is maintained, along with proposals, project plans
and other information, in knowledge databases that can be accessed by our
personnel working on projects throughout TSC.
TSC believes that within each of its business segments, it competes primarily on
the basis of the experience and expertise of its 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 SOLUTIONS
The Enterprise Solutions (ES) business segment provides IT consulting and
business consulting services that help clients in implementing third-party
application software packages, cost controls and related services to
implement strategic change in an organization. These services are provided by
the following areas of business focus, or "practice areas":
ENTERPRISE APPLICATIONS AND SUPPLY CHAIN MANAGEMENT
The Enterprise Applications and Supply Chain Management (EASCM) practice area
undertakes projects which require knowledge of many different third-party
application software packages and often involve the development and
implementation of customized software to interface the new application software
with existing customer systems.
PAGE 5
The EASCM 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 Oracle Applications suite of client/server products
developed by Oracle Corporation; and the Baan IV and Baan V integrated
client/server product supplied by Baan Company N.V. and its U.S. subsidiary
Baan U.S.A., Inc. Additionally, the EASCM 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 consulting services associated with the Enterprise Resource
Planning (ERP) software products offered by PeopleSoft, SAP, Oracle, and Baan,
TSC is expanding its services in this area to become a "solution assembler". TSC
believes that over the next several years, customers will begin to add
specialized best-of-breed software applications to their existing 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, developing implementation
methodologies, expanding the consulting staff knowledge and skill set, 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.
TSC has recently established vendor alliances with supply chain application
vendors i2 Technologies and Manugistics. Additionally, TSC's ECM business
segment is working with TSC's SAP integration group to provide TSC's ECM
solutions to SAP R/3 customers in Europe and the U.S.
INNOVATION TECHNOLOGY GROUP
Companies are struggling with how to utilize information technology to
transform and grow their businesses. TSC helps companies respond to this
challenge by leveraging practical, leading-edge technologies to assist in
this transformation. These services are being provided by the Innovation
Technologies Group (ITG) practice area. The ITG practice area is specifically
focused on delivering targeted service offerings into three high growth areas
of IT consulting: Internet Business Solutions (IBS); integrated Knowledge
Management (iKM); and Enterprise Systems Management (ESM).
TSC's IBS area provides assessment services using its Digital
Diagnosis-Trademark- assessment methodology. This service provides rapid
assessment of the client's Internet strategy by benchmarking against industry
best practices. Additionally, it provides evaluations of competitor
capabilities, helps to identify potential Internet-based opportunities, and
makes process recommendations for the future. IBS also provides E-business
strategy, architecture and system design services along with rapid solution
delivery capabilities. IBS utilizes its extensive experience in designing and
building systems that operate across multiple computing platforms and
communications technologies to develop state-of-the-art E-commerce and
Internet commerce solutions.
PAGE 6
The iKM area is focused on the practical application of knowledge management
tools and technologies ranging from data warehousing to more sophisticated
knowledge-based business processes. TSC provides its clients with an
assessment of their current state of knowledge management against relevant
industry best practices using iKM's Knowledge Quotient-Trademark- assessment
methodology. Knowledge Quotient-Trademark- also identifies the cost/value
trade-offs of implementing more complete knowledge management tools and
processes. With an understanding of industry best practices and the client's
current state, iKM can then assist the client in the development of a
knowledge management strategy along with the associated system architecture
and design needed to support the strategy. iKM also provides other data
warehousing and data management services including reporting and analysis
integration as well as ERP package extensions which integrate ERP system data
into the data warehouse.
The client/server systems that are being implemented today typically have
complex technical architecture issues and optimizing these systems at both
the computing architecture and network architecture level is critical to
their efficient operation. ESM addresses these issues by focusing on
optimizing the operations and network architecture for a client's enterprise
applications. ESM's client engagements typically begin with an assessment of
the client's network, computer architecture, and operations management
capabilities using ESM's Quick Scan-Trademark assessment methodology. Quick
Scan-Trademark- is a rapid assessment tool that also identifies gaps in
security and functionality as well as risk assessment in disaster scenarios.
With an understanding of the client's current situation, ESM then can assist
the client in developing the appropriate strategy, architecture and design
for the computing environment and network environment. ESM also provides
integration and implementation services for systems and network management
applications.
On March 30, 1999, the Company announced that it would selectively integrate the
consulting offerings of its ITG practice area with the EASCM practice area and
the ECM business segment. In both EASCM and ECM areas, the Company has seen
increasing activity in Internet and Internet commerce activity, increased use of
data warehousing and knowledge management systems and significant activity in
the systems and network design, architecture and management area. Because of
this, the Company has decided that the integration of the ITG consulting
offerings will more effectively utilize the Company's consulting personnel.
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. TSC consultants
and training specialists deliver change management, education and training, and
multi-media services specifically tailored to each client environment. In all
areas, TSC customizes the deliverables to the project, the business and the
culture of the client.
PAGE 7
In the area of change management, the services provided by TSC include:
Strategic Visioning; leadership of the change process (Change Leadership);
development and training of the teams (Team Building); development and
deployment of a communications plan to ensure consistent and clear messages
about the project (Communications); and development of objectives by employees
that can be measured and attained (Team Covenant Training).
TSC's services in the education and training area include: the analysis of the
audience to be trained (Assessment); the development of executive education
programs, including the linkage of performance measures to project goals
(Executive Education and Flowdown); development of customized education courses
(General Education); development of specific educational courses that highlight
the business processes being implemented and explain their benefits (Business
Process Education); development of customized skills training programs (Skills
Training); and development of new policies and procedures and the incorporation
of these into training programs (Policies and Procedures Development).
TSC offers its clients a variety of 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 clients within the Financial Services practice area include firms
in the capital markets, investment management services, insurance, and retail
and commercial banking industries.
ORTECH SOLUTIONS
OrTech Solutions Company (OrTech), a wholly-owned subsidiary of TSC, 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 that include the states of Texas, Oklahoma, Louisiana, Arkansas,
Wisconsin, Illinois, Indiana, Michigan and Ohio. All obligations related to
the Oracle Applications suite of products are retained by Oracle.
PAGE 8
ENTERPRISE CUSTOMER MANAGEMENT
TSC provides IT consulting and strategic business consulting services that help
clients improve operations, transform customer relationships and build and
enhance customer loyalty. TSC's Enterprise Customer Management (ECM) business
segment is a recognized leader in the implementation of customer relationship
solutions for consumer products, health care, telecommunications, high
technology, media, and financial services companies. Companies utilizing TSC's
services in the ECM business segment 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 and building customer loyalty.
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 ECM solutions for clients.
TSC's work with an ECM 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 critically 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 the 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 clients with other services including value-based
customer segmentation analysis. A value-based customer 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 ECM project, the systems integration issues are very
complex, time consuming and 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 (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, Internet telephony,
customer information systems, routing technology, call center hardware and
software 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.
PAGE 9
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 business segment 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. Some of the consulting services offered to ECM clients are:
ECM STRATEGY ECM PROCESS & CHANGE
- Loyalty Research & Analysis - Customer Relationship Redesign
- Lifetime Customer Value - Workflow & Call Flow Enablement
- Stakeholder Alignment
CALL CENTER OPERATIONS - Change Management/Motivation
- Workforce Scheduling
- Performance Metrics FIELD SERVICE
- Organization Redesign - Field Service Strategy
- Agent Education/Training - Logistics
- Compensation - Contracts
SALES FORCE AUTOMATION CALL CENTER CONSOLIDATION
- - - Sales Channel Strategy - Site Analysis/Selection
-Sales Process Optimization - Build-out Project Management
-Implementation - Environment Design
The ECM business segment has begun offering services that help to establish a
more continuous, long-term relationship with its clients. These services
currently are in the extended support area. In extended support, the ECM
business segment provides technical operations support services to its clients
on a first call basis. Because of the complex technology integration issues
involved in the typical ECM system, it is often difficult to understand which of
the hardware or software products involved in the ECM system may be causing a
system problem. TSC's support services diagnose the problem and then call upon
the appropriate resources to resolve the client's ECM system problem.
TSC's ECM business segment currently performs work in the U.S., Europe, Canada,
and Australia.
PAGE 10
SALES
TSC utilizes a higher-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 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
(approximately 40 people across its business segments). 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 insight and ideas that result
from TSC's focus on delivering business benefits through technology.
TSC's business segments and practice areas 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
business segments to be the initial focus on which to develop its sales,
project management, consulting staff and infrastructure support organization
for the particular country or region.
The Company's international operations accounted for 10 percent of revenues for
the transition period ended December 31, 1998, 11 percent of fiscal 1998
revenues and 12 percent of fiscal 1997 revenues. Total staffing at the Company's
international operations was 255 as of December 31, 1998.
TSC's first international operation was in Latin America. The Company's focus
in Latin America is with the ES business segment, specifically the EASCM
practice area, with an initial focus on the
PAGE 11
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. TSC's project work in Latin America encompasses clients in the
telecommunications, utility and manufacturing industries.
TSC's European expansion was focused on the ECM business segment 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 and acquired the London-based call center consulting firm Aspen
Consultancy, Ltd., in May 1996. Since that time, TSC has added offices in
Cologne, Germany, Paris, France and Zug, Switzerland. During fiscal 1997, TSC
acquired a small Cologne-based call center consulting firm, Geising
International. TSC's European project work has been focused primarily on the
banking, insurance, and telecommunications industries. Late in fiscal 1998,
TSC expanded its EASCM practice area into Europe. On March 30, 1999, the
Company announced that its European business in this area would be
restructured to focus on European ERP implementations for TSC's U.S. clients.
The ECM business segment 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 ECM 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 ECM consulting and systems integration services.
CLIENTS
The Company's five largest clients during the transition period ended
December 31, 1998 accounted for 3 percent, 3 percent, 2 percent, 2 percent,
and 2 percent of total revenues, respectively; in fiscal 1998, the five
largest clients accounted for 4 percent, 4 percent, 3 percent, 3 percent, and
2 percent of total revenues, respectively; in fiscal 1997, they 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 during the transition period
ended December 31, 1998, fiscal 1998 or fiscal 1997. In fiscal 1996,
Georgia-Pacific accounted for 10 percent or more of revenues.
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.
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 the transition period
ended December 31, 1998, TSC performed work at 15 of the Fortune 50 companies
and 25 of the Fortune 100 companies.
PAGE 12
PERSONNEL
As of December 31, 1998, TSC has a total staff of 1,700. The following table
summarizes, as of December 31, 1998, the experience levels of TSC's
professional staff.
Average Relevant Experience
(Years)
--------------------------------------------------
% of
Level Total Consulting Industry Total
- - ----- ----- ---------- -------- -----
Vice Presidents 12% 10 10 20
Senior Principals 18% 7 11 18
Principals 26% 6 10 16
Senior Consultants 23% 4 7 11
Consultants 15% 2 4 6
Associate Consultants 6% 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 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.
GLOBAL CORE SERVICES
As of December 31, 1998, TSC had a staff of 242 individuals who comprised the
Global Core Services (GCS) support function. The objective of the GCS
function is to facilitate local decision-making and support the autonomy of
the business segments, 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; and insurance. During the transition period, TSC
increased the number of GCS support personnel. The increase in GCS support is
directly related to the Company's increased staffing growth.
INTELLECTUAL PROPERTY RIGHTS
A majority of the Company's clients have required that the Company grant to them
all proprietary and intellectual property rights with respect to the work
product resulting from the Company's performance of services, including the
intellectual property rights to any custom software developed by the Company for
them. Each grant of proprietary and intellectual property rights limits 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, an 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. These arrangements may be
nonexclusive or exclusive, and licensors to the Company may retain the
PAGE 13
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,
methodologies and products that are owned by the Company and licensed to its
clients. The Company regards these software tools, methodologies and products as
proprietary and intends to protect its rights, where appropriate, with
registered copyrights, patents, registered trademarks, trade secret laws and
contractual restrictions on disclosure and transferring title. There can be no
assurance that any of these steps taken by the Company 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 its proprietary information, the Company relies
upon a combination of trade secret and common law, employee nondisclosure
policies and third-party confidentiality agreements. However, there can be no
assurance that any of these steps taken by the Company 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
infringement claims will not be asserted against the Company in the future.
COMPETITION
The IT consulting and strategic business consulting areas are highly competitive
and include participants from a variety of market segments. The IT 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 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.
Participants in the IT consulting 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
PAGE 14
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 the new
hires will be able to 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 IT consulting 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 are as follows:
William H. Waltrip Chairman
John T. Kohler President and CEO
Kelly D. Conway Group President
Martin T. Johnson Senior Vice President and Chief Financial Officer
Paul R. Peterson Senior Vice President, General Counsel and Corporate
Secretary
William H. Waltrip, age 61, 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. From 1996 to 1998, he served as
the Chairman of the Board of Directors and, during 1996, he 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, he
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. From
1972 to 1982, he was President, Chief Operating Officer and Director of Pan
American World Airways, Inc. He is also currently serving as a Director of
Bausch & Lomb, Inc., the Teachers Insurance and Annuity Association and Thomas &
Betts Corporation.
John T. Kohler, age 52, 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.
Kelly D. Conway, age 42, joined TSC in November 1993 as Senior Vice President,
and assumed the position of Executive Vice President in July 1995 and his
current role as Group President in October 1998. Prior to coming to TSC, he was
a partner in the management consulting firm of
PAGE 15
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. He is also currently serving
as a director of Edify Corporation.
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, 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. In February 1998, he
became a member of the Issuer Affairs Committee of
The Nasdaq Stock Market -Registered Trademark-.
Paul R. Peterson, age 57, 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. From 1984 to 1987, he was 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.
PAGE 16
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; Minneapolis, MN; New York, NY; 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, Mexico; Paris, France; 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
No matters other than those described under the heading "SUBMISSION OF MATTERS
TO A VOTE OF SECURITY HOLDERS" in the Company's Quarterly Report on Form 10-Q
for the period ended November 30, 1998 were submitted to a vote of security
holders, through the solicitation of proxies or otherwise, for the transition
period ended December 31, 1998.
PAGE 17
TECHNOLOGY SOLUTIONS COMPANY
PART II.
ITEM 5. MARKET FOR THE REGISTRANTS' COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on The Nasdaq Stock Market -Registered
Trademark- under the symbol "TSCC." As of March 16, 1999, there were
approximately 1,324 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 -Registered Tradmark- for the Company's Common Stock for
each quarterly period in fiscal 1997 and fiscal 1998 for which the Company
filed a Quarterly Report on Form 10-Q, as well as the month ended December
31, 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
August 31, 1998 $23.667 $11.188
November 30, 1998 $15.063 $ 6.125
Month ended December 31, 1998 $10.875 $ 8.813
On March 16, 1999, the last reported sale price on The Nasdaq Stock Market
- - -Registered Tradmark-for the Company's Common Stock was $7.625.
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
PAGE 18
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 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 all of the Company's prior
stock splits, including the three-for-two stock split effected August 10, 1998.
PAGE 19
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes certain selected financial data that 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 transition period ended December
31, 1998 and for the years ended May 31, 1998, 1997 and 1996 and the audited
balance sheets as of December 31, 1998, 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.
Transition Period
Ended December 31, For the Year Ended May 31,
-------------------------------------------------------------------------------
1998 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ----
CONSOLIDATED STATEMENT OF
INCOME DATA:
Total revenues ........... $189,438 $271,875 $165,088 $ 97,599 $ 65,817 $ 53,157
Operating income (loss) .. $ 6,801 $ 34,385 $ 22,873 $ 4,864 $ 2,770 $ (3,142)
Net income ............... $ 4,475 $ 21,020 $ 15,067 $ 4,574 $ 3,367 $ 35
Earnings per common share* $ 0.11 $ 0.54 $ 0.43 $ 0.15 $ 0.11 $ 0.00
Earnings per common share
assuming dilution* ..... $ 0.10 $ 0.49 $ 0.38 $ 0.13 $ 0.09 $ 0.00
*1994-1998 earnings per common share data have been restated to reflect all of
the Company's prior stock splits, including the three-for-two stock split
effected August 10, 1998.
Transition Period
Ended December 31, For the Year Ended May 31,
---------------------------------------------------------------------------------
1998 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ----
CONSOLIDATED BALANCE
SHEET DATA:
Total assets ....... $219,099 $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
THE TRANSITION PERIOD ENDED DECEMBER 31, 1998 COMPARED WITH THE PRIOR PERIOD
ENDED DECEMBER 31, 1997
This report discusses the seven month transition period ended December 31, 1998,
due to the Company changing from a May 31 fiscal year-end to a fiscal year
aligned with the calendar year beginning January 1, 1999.
Consolidated net revenues for the transition period ended December 31, 1998
increased 32 percent to $189.4 million compared with $143.8 million for the same
period last year. Net revenues from the Enterprise Solutions (ES) business
contributed $123.9 million during the transition period compared to $101.3
million in the prior period, an increase of 22 percent. This increase was
primarily due to continued demand for consulting services that implement
third-party application software packages. Net revenues from the Enterprise
Customer Management (ECM) business contributed $65.5 million during the
transition period compared to $42.5 million in the prior period, an increase of
54 percent. This increase was due to the continued growth of the Company's ECM
business as ECM clients have shown an increased demand for consulting services
which provide integrated customer service solutions.
Both the ES and ECM businesses contributed to the total Company domestic
revenue growth due to the Company's ability to generate additional revenue
through an increased consulting staff, as well as an overall six percent
increase in average domestic billing rates compared to the same period a year
ago. These increases were slightly offset by international revenues which
declined approximately one percent.
Project personnel costs for the transition period ended December 31, 1998, which
represent mainly professional salaries and benefits, increased to $91.2 million
from $67.0 million for the same period last year, an increase of 36 percent. The
increase was partially due to an increase in professional headcount and was
consistent with the higher revenues reported during the transition period ended
December 31, 1998. Project personnel costs as a percentage of net revenues
increased to 48 percent for the transition period ended December 31, 1998 from
47 percent for the same period last year due to lower staff utilization.
Other project expenses consist of nonbillable expenses directly incurred for
client projects and business development 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 the transition period ended December 31, 1998 were $31.4 million, compared
with $21.6 million in the comparable period last year, an increase of $9.8
million, or 45 percent. The increase in other project expenses primarily
included the following: an increase of $4.0 million in domestic hiring,
training, communication and computer expenses associated with increased
headcount; an increase of $3.0 million associated with domestic practice area
development including marketing, business development, travel and sales
commissions; an increase in the provision for valuation allowances and reserves
for potential losses of $1.3 million; and an increase in international costs
of $1.0 million associated with travel, marketing and business development
expenses. Other project expenses as a percentage of net revenues increased to
PAGE 21
17 percent in the transition period ended December 31, 1998 from 15 percent for
the same period last year due mainly as a result of the items mentioned above.
Management and administrative support costs increased $17.5 million to $47.6
million for the transition period ended December 31, 1998 from $30.1 million for
the same period last year, an increase of 58 percent. Approximately $6.2 million
of this increase was attributable to the increase in Global Core Service costs
over last year, which was necessary to support the growth in business. The
increase in these costs versus the same period last year included: increased
expenses in the internal systems and human resources areas of $3.3 million;
higher expenses of $0.6 million related to the expansion of the Company's
corporate recruiting organization; higher marketing expenses of $0.9 million as
a result of increased corporate marketing efforts; international growth of $1.0
million from the expansion of offices over the prior period; and various other
costs of $0.4 million including corporate legal, accounting, finance and
investor relations costs. The Company also incurred an additional $6.0 million
of management and administrative costs associated primarily with increased
regional management and practice area support personnel. These costs primarily
included additional domestic regional management and practice area support
personnel of $2.6 million; international growth of $1.1 million; and various
other domestic management and administrative expenses of $2.3 million, which
include items such as practice area marketing, recruiting, sales and other
expenses. In addition, the Company recorded expenses of $5.3 million during the
transition period ended December 31, 1998. This results from decisions made
during the transition period to abandon an investment in an Internet-based
commerce software tool of $3.3 million and expenses to sever certain management
and administrative employees of $2.0 million.
Goodwill amortization increased to $2.7 million for the transition period ended
December 31, 1998 compared to $2.1 million for the same period last year. This
increase was due to the earn-out payments related to the acquisitions of The
Bentley Company, Inc. (Bentley) and Aspen Consultancy Ltd. (Aspen).
Incentive compensation of $9.7 million was accrued during the transition period
ended December 31, 1998 compared to $8.0 million for the same period last year.
The increase is due to increased headcount, at both the consulting staff and the
project manager levels. Incentive compensation as a percentage of net revenues
remained virtually unchanged between years at approximately 5 percent. The
Company expects to continue to accrue incentive compensation throughout the 1999
calendar year.
Consolidated operating income was $6.8 million during the transition period
compared with $15.0 million in the prior period, due to the reasons outlined
above. Operating income from the ES business was $25.3 million during the
transition period compared to $27.7 million in the prior period, a decrease
of nine percent. This decrease was mainly due to increased practice area
overhead as a result of various investments in the ES business and
higher-than-average management turnover, offset in part by higher staff
utilization and higher billing rates compared to the prior period. Operating
income from the ECM business was $12.2 million during the transition period
compared to $9.4 million in the prior period, an increase of 30 percent. This
increase was primarily due to the increased demand in ECM services which was
consistent with the increase in
PAGE 22
revenues, offset in part by investments in product development, expansion into
Australia and further investment spending in Europe compared to the prior
period.
GCS costs during the transition period were $30.7 million compared to $22.1
million in the prior period, an increase of 39 percent. The increase in GCS
costs for the transition period is further described in the discussion of
management and administrative support costs. Also included in this increase
were expenses to sever certain management and administrative employees and
higher goodwill and other amortization expenses.
Net investment income for the transition period ended December 31, 1998 was $1.8
million compared to $0.8 million for the same period a year ago. The increase is
a result of higher cash and cash equivalent balances for the transition period
ended December 31, 1998 compared to the same period a year ago.
The Company's effective tax rate for the transition period ended December 31,
1998 was 48 percent, a rate which was unusually high due to a smaller proportion
of pre-tax loss being generated in low tax-rate jurisdictions and a larger
proportion of pre-tax earnings being generated in foreign, high tax-rate
jurisdictions. Domestic pre-tax earnings were adversely impacted by the $5.3
million of expenses recorded in management and administrative support costs. The
effect of this was to lower domestic pre-tax earnings as a percentage of
consolidated pre-tax earnings. Therefore, since the Company's foreign earnings
are generally subject to higher tax rates (compared to U.S. rates) and the
foreign earnings represented an unusually high proportion of pre-tax earnings,
the consolidated effective tax rate was higher this period than in prior
periods. Excluding the $5.3 million of expenses described above, the Company's
effective tax rate for the transition period ended December 31, 1998 was 45
percent, comparable to the rate in the prior period of 44 percent.
Weighted average number of common shares outstanding 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.
On March 30, 1999, the Company announced that it was making a number of changes
to its business operations and would be incurring restructuring costs estimated
to be approximately $11.0 million to $12.0 million associated with those changes
and the severance of approximately 300 employees, primarily consulting
personnel. Additionally, the Company announced that it would be filing, with the
U.S. Internal Revenue Service, a request for a ruling that a proposed spin-off
of the Company's ECM business segment would qualify as a non-taxable
distribution for U.S. federal income tax purposes. The spin-off of the ECM
business segment may be preceded by a public offering of shares of common
stock representing a minority interest in a subsidiary of the Company to be
formed for the purpose of holding the assets of the ECM business.
Subsequent to December 31, 1998, the growth rate of the Company's ES business
segment has continued to decline principally due to slowing new license sales
of ERP software packages, client deferral of new IT projects, declining
custom development work and slow growth of the Company's ITG practice area.
The slowing of the ES business segment has resulted in the Company having an
excessive number of consulting personnel for its current
PAGE 23
and foreseeable level of business. As a result, the Company is reducing its
domestic ES consulting headcount, is restructuring the ERP implementation
business in Europe to focus on European ERP implementations for TSC's U.S.
clients, and is selectively merging the consulting offerings of its ITG
practice area with the EASCM practice area and the ECM business segment.
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. Net revenues from
the ES business contributed $189.6 million in fiscal 1998 compared to $122.1
million in fiscal 1997, an increase of 55 percent. This increase was primarily
due to continued demand for consulting services that implement third-party
application software packages. Net revenues from the ECM business contributed
$82.3 million in fiscal 1998 compared to $43.0 million in fiscal 1997, an
increase of 91 percent. This increase was due to the continued growth of the
Company's ECM business as a result of an increased demand for consulting
services which provide integrated customer service solutions.
Both the ES and ECM businesses contributed to total Company domestic revenue
growth of 66 percent and international revenue growth of 52 percent. The
Company's ability to generate additional revenue was 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 an overall seven percent increase in average domestic billing
rates, were the primary factors in revenue growth compared to fiscal 1997.
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 GCS over the prior fiscal
year, which was necessary to support the growth in business. The increase in
costs included: the opening and expansion of several domestic and international
offices
PAGE 24
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 included 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.
Fiscal 1998 investment programs included the establishment of new service
offerings including the RADD Lab for the ECM business segment, middle-market
ERP package integration, sales force automation and new software vendor
alliances. The Company continued its geographic expansion in international
and western U.S. geographic areas. The Company's strategy was to extend its
service offerings on a geographic basis, both domestically and
internationally, and to add new niche service offerings, such that the
Company continued its level of growth. The Company's investment spending was
directly related to this geographic and new service offering expansion. The
investment spending related to all of these activities involved the
absorption of salary, training, recruiting, selling, GCS and other costs and
resulted in lower operating margins. The costs associated with these programs
affected project personnel costs, other project expenses and management and
administrative 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 the prior year. This amount
reflects the Company's annual bonus payout for fiscal 1998 made shortly after
the end of the fiscal year. The Company continued to accrue incentive
compensation in the transition period ended December 31, 1998.
Consolidated operating income was $34.4 million in fiscal 1998 compared with
$22.9 million in fiscal 1997, due to the reasons outlined above. Operating
income from the ES business was $55.4 million in fiscal 1998 compared to
$35.7 million in fiscal 1997, an increase of 55 percent. These increases were
due to higher staff utilization and higher billing rates compared to the
prior period and were consistent with the increase in revenues. Operating
income from the ECM business was $20.6 million in fiscal 1998 compared to
$11.7 million in fiscal 1997, an increase of 77 percent. This increase was
primarily due to the increased demand in ECM services, which was consistent
with the increase in revenues, offset in part by the investment programs and
geographic expansion described above.
GCS costs for the year ended May 31, 1998 was $41.6 million compared to $24.5
million in the prior period, an increase of 70 percent. The increase in GCS
costs in fiscal 1998 compared to fiscal 1997 is further described above in
the discussion of management and administrative support
PAGE 25
costs. Also included in this increase were higher goodwill and other
amortization expenses and higher incentive compensation expense for GCS
employees.
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 percent
compared to 40 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 outstanding 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. Net
revenues from the ES business contributed $122.1 million in fiscal 1997 compared
to $71.2 million in fiscal 1996, an increase of 71 percent. This increase was
primarily due to continued demand for consulting services that implement
third-party application software packages. Net revenues from the ECM business
contributed $43.0 million in fiscal 1997 compared to $26.4 million in fiscal
1996, an increase of 63 percent. This increase was due to the continued growth
of the Company's ECM business as a result of an increased demand for consulting
services which provide integrated customer service solutions.
Both the ES and ECM businesses contributed to the total Company revenue
growth due to the Company's ability to generate revenue through an increase
of 52 percent in domestic billable hours, as well as an overall 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 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.
PAGE 26
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 was due to increased
headcount, at both the consulting staff and the project manager levels, and
Company profitability improvement. The Company continued to accrue incentive
compensation throughout fiscal 1998.
Fiscal 1996 results reflected 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.
Consolidated operating income was $22.9 million in fiscal 1997 compared with
$4.9 million in fiscal 1996, due to the reasons outlined above. Operating
income from the ES business was $35.7 million in fiscal 1997 compared to
$16.8 million in fiscal 1996, an increase of 113 percent. These increases
were due to higher staff utilization, higher billing rates and an increase in
billable hours compared to the prior period along with the continued demand
for consulting services. Operating income from the ECM business was $11.7
million in fiscal 1997 compared to $8.9 million in fiscal 1996, an increase
of 31 percent. This increase was primarily due to the increased demand in ECM
services, offset in part by the costs associated with the expansion of the
ECM business into Europe and Canada and costs related to various investment
programs.
GCS costs for the year ended May 31, 1997 was $24.5 million compared to $20.8
million in the prior period, an increase of 18 percent. The increase in GCS
costs in fiscal 1997 compared to
PAGE 27
fiscal year 1996 includes increases in international expenses and goodwill
and other amortization expenses, partially offset by no costs being incurred
in fiscal 1997 for the Company founders litigation settlement and shareholder
litigation settlement.
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 40 percent compared to 32
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.
Weighted average number of common shares outstanding and weighted average number
of common and common equivalent shares outstanding increased 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 $22.2 million and $12.8 million
for the periods ended December 31, 1998 and 1997, respectively. The increase
in net cash provided by operating activities for the transition period
compared to the prior period was due to higher depreciation and amortization
expense and favorable changes in working capital activities, such as other
currents assets, accounts payable and accrued compensation and related costs,
offset partially by lower net income.
The Company's significant amounts of cash, cash equivalents and marketable
securities have provided ample liquidity to handle the Company's current cash
requirements.
Net cash used in investing activities was $4.5 million for the transition period
ended December 31, 1998. The Company purchased $1.7 million of
available-for-sale securities and received $7.3 million from the sale of
available-for-sale securities. The Company, due to the maturity of several
held-to-maturity investments, received proceeds of $1.2 million during the
transition period ended December 31, 1998. The proceeds from both the
available-for-sale securities and the held-to-maturity investments were
transferred to cash and cash equivalents and reinvested in ongoing business
activities and other equity investments.
Capital expenditures for the transition period ended December 31, 1998 were $2.5
million. Capital expenditures may continue at the current rate throughout the
1999 calendar year. The Company currently has no material commitments for
capital expenditures.
Net cash outlays related to net assets of acquired business and other assets
were $8.6 million for the transition period ended December 31, 1998. The net
cash outlay related to business acquisitions during the transition period ended
December 31, 1998 was due to $4.8 million in earn-out payments for the June 1997
acquisition of Bentley and $1.8 million in earn-out payments related to the May
1996 acquisition of Aspen. In addition, $2.0 million in investments were made in
other companies.
PAGE 28
The Company has a $10.0 million unsecured line of credit facility (the
"Facility") with Bank of America National Trust and Savings Association (Bank of
America). The agreement expires October 4, 1999. At the Company's election,
loans made under the Facility bear interest at either the Bank of America
reference rate or the applicable Eurodollar interest rate plus 0.75 percent. The
unused line fee is 0.125 percent of the unused portion of the commitment. The
Facility requires, among other things, the Company to maintain certain financial
ratios. As of December 31, 1998, the Company was in compliance with these
financial ratio requirements. As of December 31, 1998, no borrowings had been
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
On June 15, 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (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.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." The Company adopted SFAS No. 131 during the
transition period. SFAS No. 131 supercedes SFAS No. 14, "Financial Reporting for
Segments of a Business Enterprise," replacing the "industry segment" approach
with the "management" approach. The management approach designates the internal
organization that is used by management for making operating decisions and
assessing performance as the source of the Company's reportable segments. SFAS
No. 131 also requires disclosures about products and services, geographic areas,
and major customers. The adoption of SFAS No. 131 does not affect results of
operations or financial position but does affect the disclosure of segment
information.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
The Company adopted SFAS No. 130 during the transition period. The adoption of
SFAS No. 130 required reporting and displaying comprehensive income and its
components in a full set of general-purpose financial statements.
PAGE 29
ASSUMPTIONS UNDERLYING CERTAIN FORWARD-LOOKING STATEMENTS AND FACTORS THAT MAY
AFFECT FUTURE RESULTS
This Transition Report on Form 10-K includes or may include certain
forward-looking statements that involve risks and uncertainties. This Transition
Report on 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 Transition Report on 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 Transition Report on 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 is a general term used to address a class of problems which
are caused by the inability of computer programs to recognize various date
values around January 1, 2000. This class of problems 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 has conducted an assessment of its computer information systems and
has determined the nature and extent of the work required to ensure that its
internal systems are Year 2000 compliant. The majority of the software used by
the Company has been purchased as packaged software. A minimal customization
practice has been followed to support a more direct transition from an older
version of a packaged software application to a newer version of the same
application. The Company's internal systems can be grouped in two principal
categories - its accounting and human resources software and its legacy systems
that perform a variety of
PAGE 30
processes. With respect to the suite of software products licensed by the
Company and relied upon in the administration of accounting and human resources
functions, which was licensed by the Company in the first quarter of its 1997
fiscal year, the licensor has indicated that the version currently employed by
the Company will need to have patches applied in order for the software package
to be Year 2000 compliant. The Company intends to apply the presently available
patches for this purpose in the near-term, and plans also to apply future
patches to address the Year 2000 issue as they are made available. Based on
currently available information, the Company believes the expense associated
with these efforts will not be material. The Company expects that updates and
enhancements to this software package will be installed and operational prior to
January 1, 2000, and intends to seek assurances from the licensor to the effect
that these updates and enhancements will result in the software package becoming
Year 2000 compliant. The Company expects that additional issues concerning Year
2000 compliance will be reported by the licensor to the Company and updates will
be provided by the licensor. The Company has received the most recent updates
and enhancements pursuant to a software support service agreement presently in
place with the licensor, an agreement which is in effect and the Company does
not currently intend to terminate. Provided that the licensor gives such
assurances concerning the updates and enhancements to its software product
suite, the Company does not expect that it will incur additional expense aside
from the cost of the software support service agreement in order to bring its
accounting and human resources software package into Year 2000 compliance.
Other important internal business processes of the Company, such as time and
expense reporting and labor distribution, are performed by legacy systems that
are not Year 2000 compliant. In accordance with previously established plans to
integrate these functions with the accounting and human resources software
described above and to upgrade these systems with the intent of improving the
Company's ability to manage its increasingly multinational operations, the
Company presently plans to replace these legacy systems in calendar year 1999,
both to address the Year 2000 issue and to attempt to achieve business benefits.
The Company estimates that the cost associated with replacing these systems,
excluding labor costs, will be less than $0.3 million, and has provided for the
replacement of these systems in its operating and capital budgets for calendar
year 1999.
With the exception of the time and expense application software distributed to
field personnel, vendors of the standard software packages have been contacted
and patches and/or newer versions of the applications have been secured.
Distribution of the patches and newer versions of the software will occur in the
second and third quarters of the calendar year 1999.
Based on presently available information, the Company believes that any
necessary compliance efforts concerning its internal systems will not have a
material adverse effect on its business, operating results and financial
condition. However, if compliance efforts of which the Company is not currently
aware 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 estimates, the Year 2000 issue could have a material
adverse impact on the Company's business, operating results and financial
condition.
PAGE 31
In addition to the Company's internal systems, the Company relies on third party
vendors in the conduct of its business. For example, third party vendors handle
the payroll function for the Company, and the Company also relies on the
services of telecommunication companies, banks, utilities, and commercial
airlines, among others. The Company has sought assurances from its material
vendors and suppliers that there will be no interruption of service as a result
of the Year 2000 issue, and to the extent such assurances have not been given,
the Company is devising contingency plans to mitigate the effects on the conduct
of the Company's business in the event the Year 2000 issue results in the
unavailability of services. There can be no assurance that any contingency plans
developed by the Company will prevent any such service interruption on the part
of one or more of the Company's third party suppliers from having a material
adverse effect on the Company's business, operating results and financial
condition. In addition, the failure on the part of the accounting systems of the
Company's clients due to the Year 2000 issue could result in a delay in the
payment of invoices issued by the Company for services and expenses. A failure
of the accounting systems of a significant number of the Company's clients would
have a material adverse effect on the Company's business, operating results and
financial condition.
The Company has generally refrained from performing Year 2000 remediation
services for its clients. 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 also 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, relate the Company's liability to
the amount of fees paid 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
PAGE 32
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 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 other 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 increases in the number of employees, 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.
PAGE 33
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
project managers and other senior personnel, for its domestic and international
operations. Qualified project managers within and outside the United States are
in particularly great demand and are likely to remain a limited resource for the
foreseeable future. Several attributes of the Company's work environment pose
challenges to the Company's ability to attract and retain employees, including
(i) extensive travel requirements, (ii) the Company's intense work environment
and culture, (iii) the Company's standards for employee technical skills and job
performance, and (iv) the Company's practice of adjusting the number of
technical personnel to reflect active project levels. Although the Company
expects to continue to attract sufficient numbers of highly skilled employees
and to retain its existing 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 project 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, Group President, Executive
Officers and its Vice Presidents that contain noncompetition, nondisclosure and
nonsolicitation covenants. The employment agreements with the President, Group
President and Executive Officers 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 and other
expenses allocated to systems professionals not assigned to a specific project,
have gradually increased as a percentage
PAGE 34
of revenues over time. The Company attempts to reassign employees who meet its
performance requirements to other active projects when they are no longer needed
on a particular project. However, since the Company generally recruits personnel
in advance of the commencement of certain projects in order to meet the needs of
such projects, any cancellation or delays in the anticipated projects could
increase the unassigned labor costs and might cause a material adverse effect
upon the Company's business, operating results and financial condition.
CYCLICALITY
Certain of the Company's customers and potential customers are in industries
that experience cyclical variations in profitability, which may in turn affect
their willingness or ability to fund systems projects such as those for which
the Company may be engaged. The Company's experience indicates, however, that
competitive pressures in cyclical industries sometimes compel businesses to
undertake systems projects even during periods of losses or reduced
profitability.
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,
PAGE 35
technical and marketing resources and greater name recognition than the Company.
The Company also competes with smaller service providers whose specific, more
narrowly focused service offerings may be more attractive to potential clients
than the Company's multi-dimensional approach. The Company's clients primarily
consist of Fortune 1000 and other large corporations and there are an increasing
number of professional services firms seeking systems consulting and
implementation engagements from that client base. The Company believes that its
ability to compete depends in part on a number of factors outside its control,
including the ability of its competitors to hire, retain and motivate a
significant number of senior project managers, the ownership by competitors of
software used by potential clients, the development by others of software that
is competitive with the Company's products and services, and the price at which
others offer comparable services.
In addition, the Company's clients could develop or acquire in-house expertise
in services similar to those provided by the Company, which would significantly
reduce demand for the Company's services. No assurance can be given that the
Company will be able to maintain its existing client 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, operating
results and financial condition.
INTELLECTUAL PROPERTY RIGHTS
A majority of the Company's clients have required that the Company grant to them
all proprietary and intellectual property rights with respect to the work
product resulting from the Company's performance of services, including the
intellectual property rights to any custom software developed by the Company for
them. Each grant of proprietary and intellectual property rights limits 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. These 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,
PAGE 36
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,
methodologies and products that are owned by the Company and licensed to its
clients. The Company regards these software tools, methodologies and products as
proprietary and intends to protect its rights, where appropriate, with
registered copyrights, patents, registered trademarks, trade secret laws and
contractual restrictions on disclosure and transferring title. There can be no
assurance that any of these steps taken by the Company 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 it proprietary information, the Company relies
upon a combination of trade secret and common law, employee nondisclosure
policies and third-party confidentiality agreements. However, there can be no
assurance that any of these steps taken by the Company 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
infringement claims 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. 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 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 professional employees to
successfully compete internationally.
PAGE 37
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA
The financial statements and supplementary data required with respect to this
Item 8 are listed in Item 14(a)(1) and (a)(2) in this filing.
ITEM 9. CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PAGE 38
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 1999 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 39
TECHNOLOGY SOLUTIONS COMPANY
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
TECHNOLOGY SOLUTIONS COMPANY
CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
TABLE OF CONTENTS
REPORT OF INDEPENDENT ACCOUNTANTS.....................................................41
FINANCIAL STATEMENTS (ITEM 14(a)(1))
Consolidated Balance Sheets as of December 31, 1998, May 31, 1998
and 1997...................................................................42
Consolidated Statements of Income for the transition period ended
December 31, 1998 and prior period ended December 31, 1997
(unaudited), and for each of the three years in the
period ended May 31, 1998..................................................43
Consolidated Statements of Changes in Stockholders' Equity for the
transition period ended December 31, 1998, and for each
of the three years in the period ended May 31, 1998........................44
Consolidated Statements of Cash Flows for the transition period ended
December 31, 1998 and prior period ended December 31, 1997
(unaudited), and for each of the three years
in the period ended May 31, 1998...........................................46
Notes to Consolidated Financial Statements.................................47
FINANCIAL STATEMENT SCHEDULE (ITEM 14(a)(2))
Schedule II Valuation and Qualifying Accounts.............................72
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 40
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 present fairly, in all material respects, the financial
position of Technology Solutions Company and its subsidiaries (the "Company") at
December 31, 1998 and May 31, 1998 and 1997, and the results of their operations
and their cash flows for the seven month period ended December 31, 1998, and for
each of the three years in the period ended May 31, 1998, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
March 30, 1999
Chicago, Illinois
PAGE 41
TECHNOLOGY SOLUTIONS COMPANY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
ASSETS
December 31, May 31, May 31,
1998 1998 1997
--------- --------- ---------
CURRENT ASSETS:
Cash and cash equivalents ........................................... $ 59,473 $ 38,458 $ 27,951
Marketable securities ............................................... 25,269 27,973 15,988
Receivables, less allowance for doubtful receivables of
$4,845, $3,246 and $3,346 ...................................... 69,212 72,114 43,907
Refundable income taxes ............................................. -- -- 1,398
Deferred income taxes ............................................... 15,297 7,448 7,234
Other current assets ................................................ 13,764 12,750 11,196
--------- --------- ---------
Total current assets ........................................... 183,015 158,743 107,674
COMPUTERS, FURNITURE AND EQUIPMENT, NET ............................... 9,372 9,515 6,416
LONG-TERM INVESTMENTS ................................................. -- 1,200 8,118
COST IN EXCESS OF NET ASSETS OF ACQUIRED
BUSINESSES AND OTHER INTANGIBLES .................................... 17,901 13,535 3,521
LONG-TERM RECEIVABLES AND OTHER ....................................... 8,811 14,155 8,137
--------- --------- ---------
Total assets ................................................... $ 219,099 $ 197,148 $ 133,866
--------- --------- ---------
--------- --------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable .................................................... $ 3,263 $ 1,931 $ 1,604
Accrued compensation and related costs .............................. 25,184 20,982 17,001
Capitalized lease obligation ........................................ -- 79 240
Deferred compensation ............................................... 16,494 13,566 6,842
Other current liabilities ........................................... 5,913 4,784 2,392
--------- --------- ---------
Total current liabilities ...................................... 50,854 41,342 28,079
--------- --------- ---------
COMMITMENTS AND CONTINGENCIES ......................................... -- -- --
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; shares authorized --
10,000,000; none issued ....................................... -- -- --
Common stock, $.01 par value; shares authorized--
100,000,000; shares issued-- 41,242,886 ........................ 412 403 403
Capital in excess of par value ...................................... 94,886 85,089 61,824
Retained earnings ................................................... 76,938 72,463 51,627
Accumulated Other Comprehensive Loss:
Unrealized holding loss, net ................................... (9) (42) (319)
Cumulative translation adjustment .............................. (1,336) (1,209) (318)
--------- --------- ---------
170,891 156,704 113,217
Less: Treasury stock, at cost (275,911, 381,186,
and 3,185,490 shares, respectively) ......................... (2,646) (898) (7,430)
--------- --------- ---------
Total stockholders' equity ..................................... 168,245 155,806 105,787
--------- --------- ---------
Total liabilities and stockholders' equity ..................... $ 219,099 $ 197,148 $ 133,866
--------- --------- ---------
--------- --------- ---------
The accompanying Notes to Consolidated Financial Statements are an integral part
of this financial information.
PAGE 42
TECHNOLOGY SOLUTIONS COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Transition Prior
Period Ended Period Ended
December 31, December 31, For the Years Ended May 31,
----------- ------------ -------------------------------------------
(Unaudited)
1998 1997 1998 1997 1996
--------- --------- --------- --------- ---------
REVENUES:
Professional fees .................... $ 189,429 $ 143,648 $ 271,595 $ 164,238 $ 97,004
Software and hardware products ....... 9 201 280 850 595
--------- --------- --------- --------- ---------
189,438 143,849 271,875 165,088 97,599
--------- --------- --------- --------- ---------
COSTS AND EXPENSES:
Project personnel .................... 91,247 67,048 126,147 76,508 46,744
Other project expenses ............... 31,355 21,610 39,570 23,374 13,010
Cost of products sold ................ -- -- -- 54 476
Management and administrative support 47,641 30,134 57,508 32,074 22,605
Goodwill amortization ................ 2,671 2,074 3,603 811 --
Shareholder litigation settlement .... -- -- -- -- 2,345
Company founders litigation settlement -- -- -- -- 944
Incentive compensation ............... 9,723 7,957 10,662 9,394 6,611
--------- --------- --------- --------- ---------
182,637 128,823 237,490 142,215 92,735
--------- --------- --------- --------- ---------
OPERATING INCOME ........................ 6,801 15,026 34,385 22,873 4,864
--------- --------- --------- --------- ---------
OTHER INCOME (EXPENSE):
Net investment income ................ 1,826 873 2,059 2,295 2,073
Interest expense ..................... (44) (24) (62) (191) (169)
--------- --------- --------- --------- ---------
1,782 849 1,997 2,104 1,904
--------- --------- --------- --------- ---------
INCOME BEFORE INCOME TAXES .............. 8,583 15,875 36,382 24,977 6,768
INCOME TAX PROVISION .................... 4,108 6,947 15,362 9,910 2,194
--------- --------- --------- --------- ---------
NET INCOME .............................. $ 4,475 $ 8,928 $ 21,020 $ 15,067 $ 4,574
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
EARNINGS PER COMMON SHARE ............... $ 0.11 $ 0.23 $ 0.54 $ 0.43 $ 0.15
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING ............ 40,668 38,309 38,887 35,333 31,311
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
EARNINGS PER COMMON SHARE
ASSUMING DILUTION ................... $ 0.10 $ 0.21 $ 0.49 $ 0.38 $ 0.13
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING ................... 43,409 42,461 42,781 39,869 36,320
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
The accompanying Notes to Consolidated Financial Statements are an integral part
of this financial information.
PAGE 43
TECHNOLOGY SOLUTIONS COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the transition period ended December 31, 1998 and for the years ended
May 31, 1998, 1997 and 1996 -- (In thousands, except share data)
Accumulated
Common Stock Issued Capital in Other
------------------ Excess of Retained Treasury Comprehensive Comprehensive
Shares Amount Par Value Earnings Stock Loss Total Income
---------- ------ -------- ------- -------- ----- --------- --------
Balance as of May 31, 1995 ............ 26,855,390 $269 $ 43,971 $31,409 $(23,070) $(853) $ 51,726
Effect of August 10, 1998 three-for-two
stock split on May 31, 1995 balances 13,427,064 134 (134) -- -- -- --
Issuance of 3,596,871 treasury shares
from exercise of stock options ...... -- -- 6,085 -- 8,107 -- 14,192
Issuance of 87,854 treasury shares
from employee stock purchase plan ... -- -- 198 -- 200 -- 398
Change in net unrealized holding
loss on available-for-sale securities -- -- -- -- -- 211 211 $ 211
Net income ............................ -- -- -- 4,574 -- -- 4,574 4,574
Acquisition of 150,875 treasury shares -- -- -- -- (1,072) -- (1,072)
---------- ---- -------- ------- -------- ----- --------- --------
--------
Balance as of May 31, 1996 ............ 40,282,454 403 50,120 35,983 (15,835) (642) 70,029 $ 4,785
Issuance of 2,565,747 treasury shares
from exercise of stock options ...... -- -- 12,140 -- 6,001 -- 18,141
Issuance of 179,165 treasury shares
from employee stock purchase plan ... -- -- 1,396 -- 418 -- 1,814
Change in net unrealized holding
loss on available-for-sale securities -- -- -- -- -- 323 323 $ 323
Net income ............................ -- -- -- 15,067 -- -- 15,067 15,067
Cumulative translation adjustment ..... -- -- -- -- -- (318) (318) (318)
Issuance of 851,199 treasury shares
for business combinations ........... -- -- (1,832) 577 1,986 -- 731
---------- ---- -------- ------- -------- ----- --------- --------
Balance as of May 31, 1997 ............ 40,282,454 $403 $ 61,824 $51,627 $ (7,430) $(637) $ 105,787 $ 15,072
---------- ---- -------- ------- -------- ----- --------- --------
--------
PAGE 44
TECHNOLOGY SOLUTIONS COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CONTINUED)
For the transition period ended December 31, 1998 and for the years ended May
31, 1998, 1997 and 1996 -- (In thousands, except share data)
Common Stock Issued Capital in Accumulated Other
------------------ Excess of Retained Treasury Comprehensive Comprehensive
Shares Amount Par Value Earnings Stock Loss Total Income
---------- ------ --------- -------- ------- ------- --------- --------
Issuance of 2,429,116 treasury shares
from exercise of stock options ...... -- $-- $ 15,993 $ -- $ 5,660 $ -- $ 21,653
Issuance of 269,347 treasury shares
from employee stock purchase plan ... -- -- 3,070 -- 625 -- 3,695
Change in net unrealized holding
loss on available-for-sale securities -- -- -- -- -- 277 277 $ 277
Net income ............................ -- -- -- 21,020 -- -- 21,020 21,020
Cumulative translation adjustment ..... -- -- -- -- -- (891) (891) (891)
Issuance of 105,841 treasury shares
for business combinations ........... -- -- 4,202 (184) 247 -- 4,265
---------- ---- ------- -------- ------- ------- --------- --------
--------
Balance as of May 31, 1998 ............ 40,282,454 403 85,089 72,463 (898) (1,251) 155,806 $ 20,406
Issuance of 779,161 common stock
shares and 401,575 treasury shares
from exercise of stock options ...... 779,161 8 7,567 -- 1,094 -- 8,669
Issuance of 181,271 common stock
shares from employee stock purchase
plan ................................ 181,271 1 2,230 -- -- -- 2,231
Purchase of 296,300 treasury shares ... -- -- -- -- (2,842) -- (2,842)
Change in net unrealized holding
loss on available-for-sale securities. -- -- -- -- -- 33 33 $ 33
Net income ............................ -- -- -- 4,475 -- -- 4,475 4,475
Cumulative translation adjustment ..... -- -- -- -- -- (127) (127) (127)
---------- ---- ------- -------- ------- ------- --------- --------
Balance as of December 31, 1998 ....... 41,242,886 $412 $94,886 $ 76,938 $(2,646) $(1,345) $ 168,245 $ 4,381
---------- ---- ------- -------- ------- ------- --------- --------
---------- ---- ------- -------- ------- ------- --------- --------
The accompanying Notes to Consolidated Financial Statements are an integral part
of this financial information.
PAGE 45
TECHNOLOGY SOLUTIONS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Transition Prior
Period Ended Period Ended
December 31, December 31, For the Years Ended May 31,
----------- ------------ ------------------------------------
(Unaudited)
1998 1997 1998 1997 1996
-------- -------- -------- -------- --------
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income ............................................... $ 4,475 $ 8,928 $ 21,020 $ 15,067 $ 4,574
Adjustments to reconcile net income to net
cash from operating activities:
Depreciation and amortization ......................... 10,725 3,979 7,107 4,442 2,558
Provisions for receivable valuation allowances and
reserves for possible losses ........................ 2,913 1,611 1,897 2,712 1,339
Loss (gain) on sale of investments .................... 13 (52) (43) (17) (18)
Deferred income taxes ................................. (7,837) (2,179) (225) (2,692) (4,314)
Changes in assets and liabilities:
Receivables ......................................... 138 (4,461) (28,031) (21,533) (11,166)
Purchases of trading securities related to
deferred compensation program ..................... (2,928) (4,255) (6,724) (4,182) (2,660)
Refundable income taxes ............................. -- 826 1,398 49 1,074
Other current assets ................................ 970 279 (1,493) (4,933) (2,292)
Accounts payable .................................... 1,334 (1,016) 352 (73) 572
Accrued compensation and related costs .............. 4,187 (13) 3,914 5,260 2,849
Deferred compensation funds from employees .......... 2,928 4,255 6,724 4,182 2,660
Other current liabilities ........................... 5,753 7,749 11,592 11,687 3,886
Other assets ........................................ (502) (2,880) (4,369) (3,456) (1,319)
-------- -------- -------- -------- --------
Net cash provided by (used in) operating activities 22,169 12,771 13,119 6,513 (2,257)
-------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of available-for-sale securities ................ (1,725) (300) (10,250) (1,000) --
Proceeds from available-for-sale securities .............. 7,260 2,507 5,337 1,314 1,075
Proceeds from held-to-maturity investments ............... 1,200 5,590 6,910 8,890 4,015
Capital expenditures, net ................................ (2,499) (3,417) (5,745) (6,057) (3,651)
Net assets of acquired businesses and other assets ....... (8,618) (10,360) (10,741) (1,127) (3,079)
Capitalized lease obligation ............................. (79) 61 71 (1,311) 866
-------- -------- -------- -------- --------
Net cash (used in) provided by investing activities (4,461) (5,919) (14,418) 709 (774)
-------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options .................. 3,903 6,806 8,721 6,445 9,100
Proceeds from employee stock purchase plan ............... 2,231 1,440 3,688 1,805 398
Purchase of treasury shares .............................. (2,842) -- -- -- (1,072)
-------- -------- -------- -------- --------
Net cash provided by financing activities ......... 3,292 8,246 12,409 8,250 8,426
-------- -------- -------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS ..................................... 15 (327) (603) (511) --
-------- -------- -------- -------- --------
INCREASE IN CASH AND CASH EQUIVALENTS ....................... 21,015 14,771 10,507 14,961 5,395
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD .............. 38,458 27,951 27,951 12,990 7,595
-------- -------- -------- -------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD .................... $ 59,473 $ 42,722 $ 38,458 $ 27,951 $ 12,990
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
The accompanying Notes to Consolidated Financial Statements are an integral part
of this financial information.
PAGE 46
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, Canada and Australia.
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.
FISCAL YEAR CHANGE -- On November 22, 1998, the Company's Board of Directors
voted to change the fiscal year of the Company from a fiscal year ending on the
thirty-first day of May in each year to a calendar year ending on the
thirty-first day of December in each year. The seven month transition period of
June 1, 1998 through December 31, 1998 (transition period) precedes the start of
the new fiscal year. The unaudited financial information for the seven months
ended December 31, 1997 (prior period) is presented for comparative purposes and
includes any adjustments (consisting of normal, recurring adjustments) which
are, in the opinion of management, necessary for a fair presentation.
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 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.
CASH AND CASH EQUIVALENTS -- The Company considers all highly liquid investments
readily convertible into cash (with original maturities of three months or less)
to be cash equivalents. These short-term investments are carried at cost plus
accrued interest, which approximates market.
PAGE 47
TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
MARKETABLE SECURITIES -- The Company's marketable securities primarily consist
of preferred stocks and trading securities. The 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 at cost and depreciated on a straight-line basis over their estimated
useful lives. Useful lives generally are five years or less.
COST IN EXCESS OF NET ASSETS OF ACQUIRED BUSINESSES -- The excess of cost over
the fair market value of the net identifiable assets of businesses acquired
(goodwill) is amortized on a straight-line basis, typically over a five-year
period. Accumulated amortization of goodwill as of December 31, 1998, May 31,
1998 and 1997 was $7,085, $4,414 and $811, respectively.
SOFTWARE DEVELOPMENT COSTS -- The Company capitalizes certain software
development costs once technological feasibility is established in accordance
with Statement of Financial Accounting Standards (SFAS) No. 86, "Accounting
for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed."
Amortization of software costs is the greater of the amount computed using
the (a) ratio of current revenues to the total current and anticipated future
revenues or (b) the straight-line method over the estimated economic life of
the product.
EARNINGS PER COMMON SHARE -- The Company discloses basic and diluted earnings
per share in the consolidated statements of income under the provisions of
SFAS No. 128, "Earnings Per Share." 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 all
of the Company's prior stock splits, including the three-for-two stock split
effected August 10, 1998.
PAGE 48
TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Reconciliation of Basic and Diluted EPS For the Transition Period Ended
- - ----------------------------------------------------------------------------------------------------------------
December 31, 1998 December 31, 1997
--------------------------------- ---------------------------------
(unaudited)
Per Per
Net Common Net Common
Income Shares Share Income Shares Share
------ ------ --------- ------ ------ ---------
Basic EPS $4,475 40,668 $ 0.11 $8,928 38,309 $ 0.23
--------- ---------
--------- ---------
Effect of
Stock
Options -- 2,741 -- 4,152
------ ----- ------ -----
Diluted EPS $4,475 43,409 $ 0.10 $8,928 42,461 $ 0.21
------ ------ --------- ------ ------ ---------
------ ------ --------- ------ ------ ---------
Reconciliation of Basic and Diluted EPS For the Fiscal Year Ended
- - ------------------------------------------------------------------------------------------------------------------------
May 31, 1998 May 31, 1997 May 31, 1996
---------------------------------- --------------------------------- --------------------------------
Per Per Per
Net Common Net Common Net Common
Income Shares Share Income Shares Share Income Shares Share
------- ------ -------- ------- ------ -------- ------ ------ -------
Basic EPS $21,020 38,887 $ 0.54 $15,067 35,333 $ 0.43 $4,574 31,311 $ 0.15
-------- -------- -------
-------- -------- -------
Effect of
Stock
Options -- 3,894 -- 4,536 -- 5,009
------- ------ ------- ------ ------ ------
Diluted EPS $21,020 42,781 $ 0.49 $15,067 39,869 $ 0.38 $4,574 36,320 $ 0.13
------- ------ -------- ------- ------ -------- ------ ------ -------
------- ------ -------- ------- ------ -------- ------ ------ -------
PAGE 49
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 end of period exchange rates. The
resulting translation adjustments are recorded as a component of stockholders'
equity. Income and expense items are translated at average exchange rates
prevailing during the period. Gains and losses from foreign currency
transactions of these subsidiaries are included in the consolidated statements
of income. The functional currencies for the Company's foreign subsidiaries are
their local currencies.
FAIR VALUE OF FINANCIAL INSTRUMENTS -- The carrying values of current assets
and liabilities and long-term receivables approximated their fair values at
December 31, 1998, May 31, 1998 and 1997, respectively. Investments
pertaining to minor investments in companies 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 stock option plan or Employee Stock Purchase Plan. See Note 13 for further
discussion and related disclosures.
NEW ACCOUNTING STANDARDS -- On June 15, 1998, the Financial Accounting Standards
Board (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.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." The Company adopted SFAS No. 131 during the
transition period. SFAS No. 131 supercedes SFAS No. 14, "Financial Reporting for
Segments of a Business Enterprise," replacing the "industry segment" approach
with the "management" approach. The management approach designates the internal
organization that is used by management for making operating decisions and
assessing performance as the source of the Company's reportable segments. SFAS
No. 131 also requires disclosures about products and services, geographic areas,
and major customers. The adoption of SFAS No. 131 does not affect results of
operations or financial position but does affect the disclosure of segment
information (see Note 14).
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
The Company adopted SFAS No. 130 during the transition period. The adoption of
SFAS No. 130 required reporting and displaying comprehensive income and its
components in a full set of general-purpose financial statements.
PAGE 50
TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
INCOME TAXES -- 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. There were no Company
contributions during the transition period, although the Company accrued amounts
during the transition period for a contribution to be made in calendar year
1999.
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 prior periods
to conform to the current period classification.
NOTE 3 -- ACQUISITIONS
In June 1997, the Company acquired The Bentley Company, Inc., (Bentley). Bentley
specializes in business and operations consulting in the ECM segment of the
Company's business. Total consideration aggregated $ 17.5 million, including
cash of $12.0 million (which includes $4.8 million of earn-out payments), 44,303
shares of the Company's Common Stock and stock options. Goodwill of
approximately $18.1 million resulted from the Bentley acquisition and is being
amortized over five years.
In March 1997, the Company combined with HRM Resources, Inc. (HRM) through the
exchange of the Company's Common Stock for all the issued and outstanding shares
of HRM. The Common Stock exchanged included 865,135 shares of unregistered
treasury stock. HRM was a technology implementation firm based in New York that
specialized in large-scale financial and human resources software packages. HRM
was included with the ES segment of the Company's business. This combination was
accounted for as a pooling of interests. The operations of HRM were not material
to the Company's consolidated operations.
In February 1997, the Company acquired Geising International, a German-based
business consulting firm in the ECM segment of the Company's business. Total
consideration included cash of $1.0 million and 37,962 shares of the Company's
Common Stock. Goodwill of
PAGE 51
TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
approximately $1.0 million resulted from the Geising International acquisition
and is being amortized over five years.
In May 1996, the Company acquired Aspen Consultancy Ltd., (Aspen). Aspen is a
U.K.-based consulting firm in the ECM segment of the Company's business. Total
cash consideration aggregated $3.4 million (including $2.1 million of earn-out
payments). Goodwill of approximately $3.5 million resulted from the Aspen
acquisition and is being amortized over a five year period.
In May 1996, the Company acquired McLaughlin & Associates (McLaughlin), a
consulting firm in the ES segment of the Company's business. Total cash
consideration aggregated approximately $2.0 million. Goodwill of approximately
$1.5 million resulted from the McLaughlin acquisition and is being amortized
over a five year period.
These acquisitions, except for the HRM combination, have been accounted for
under the purchase method and accordingly their results have been included in
the Company's results since the date of acquisition. Consolidated pro forma
information for these acquisitions has not been presented, as pro forma
results would not have been materially different from the Company's reported
results.
NOTE 4 -- RECEIVABLES
Receivables consist of the following:
December 31, May 31,
------------ -----------------------
1998 1998 1997
-------- -------- --------
Amounts billed to clients ......... $ 70,662 $ 71,773 $ 34,515
Contracts in process .............. 3,395 3,587 12,738
-------- -------- --------
74,057 75,360 47,253
Receivable valuation allowances and
reserves for possible losses ... (4,845) (3,246) (3,346)
-------- -------- --------
$ 69,212 $ 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.
PAGE 52
TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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. During the transition period
ended December 31, 1998 and the fiscal years ended May 31, 1998 and May 31,
1997, the gross unrealized holding gain of $192, $175 and $39, respectively, and
gross unrealized holding loss of $203, $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. All of these bonds reached maturity during the
transition period ended December 31, 1998. As of May 31, 1998 and 1997,
accumulated amortization was ($1) and $514, respectively.
These bonds had a market value at May 31, 1998 and 1997 of $1,202 and $8,184,
respectively.
NOTE 6 -- COMPUTERS, FURNITURE AND EQUIPMENT
Computers, furniture and equipment consist of the following:
December 31, May 31,
------------ -----------------------
1998 1998 1997
-------- -------- --------
Computers .............. $ 14,877 $ 13,410 $ 9,583
Furniture and equipment 7,030 6,137 3,324
-------- -------- --------
21,907 19,547 12,907
Accumulated depreciation (12,535) (10,032) (6,491)
-------- -------- --------
$ 9,372 $ 9,515 $ 6,416
-------- -------- --------
-------- -------- --------
Depreciation expense was $2,636, $3,652, $3,492 and $2,239 for the transition
period ended December 31, 1998 and for the fiscal years ended May 31, 1998,
1997, and 1996, respectively.
PAGE 53
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:
December 31, May 31,
------------ -------------------
1998 1998 1997
------- ------- ------
Customer receivables ..... $ 2,016 $ 2,016 $5,859
Employee receivables ..... 807 3,178 1,165
Capitalized software costs 132 4,788 801
Investments .............. 5,010 3,000 --
Other .................... 846 1,173 312
------- ------- ------
$ 8,811 $14,155 $8,137
------- ------- ------
------- ------- ------
In accordance with SFAS No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed," amortization expense
associated with capitalized software available for resale was $4,605, $718,
and $454 for the transition period ended December 31, 1998, and the fiscal
years ended May 31, 1998 and 1997, respectively. Included in the amortization
expense for the transition period ended December 31, 1998 was a charge to
abandon an investment in an Internet-based commerce software tool of $3.3
million. No amortization expense of capitalized software available for resale
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:
Transition
Period Ended
December 31, For the Years Ended May 31,
----------- ------------------------------------
1998 1998 1997 1996
-------- -------- -------- ------
Current:
Federal .............. $ 8,819 $ 11,831 $ 10,114 $1,054
State ................ 2,100 2,855 3,115 473
Foreign .............. 1,038 1,064 -- 220
-------- -------- -------- ------
Total current ..... 11,957 15,750 13,229 1,747
-------- -------- -------- ------
Deferred:
Federal .............. (4,771) 514 (3,061) 310
State ................ (1,108) 123 (540) 137
Foreign .............. (1,970) (1,025) 282 --
-------- -------- -------- ------
Total deferred .... (7,849) (388) (3,319) 447
-------- -------- -------- ------
Provision for income taxes $ 4,108 $ 15,362 $ 9,910 $2,194
-------- -------- -------- ------
-------- -------- -------- ------
PAGE 54
TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Total income tax provision differed from the amount computed by applying the
federal statutory income tax rate to income from continuing operations due to
the following:
Transition
Period Ended
December 31, For the Years Ended May 31,
------------ ------------------------------------
1998 1998 1997 1996
------- -------- ------- -------
Federal tax provision, at statutory rate .. $ 3,004 $ 12,734 $ 8,741 $ 2,301
State tax provision, net of Federal benefit 627 1,842 1,674 328
Effect of foreign tax rate differences .... 309 63 (91) 33
Nontaxable investment income .............. (144) (160) (532) (468)
Nondeductible goodwill .................... 191 219 51 --
Other ..................................... 121 664 67 --
------- -------- ------- -------
Income tax provision ...................... $ 4,108 $ 15,362 $ 9,910 $ 2,194
------- -------- ------- -------
------- -------- ------- -------
Total income tax was allocated as follows:
Transition
Period Ended
December 31, For the Years Ended May 31,
------------ -------------------------------------
1998 1998 1997 1996
------- -------- -------- -------
Income from continuing operations ..... $ 4,108 $ 15,362 $ 9,910 $ 2,194
Items charged directly to stockholders'
equity ............................. (4,956) (13,493) (11,605) (5,151)
------- -------- -------- -------
Total income tax ...................... $ (848) $ 1,869 $ (1,695) $(2,957)
------- -------- -------- -------
------- -------- -------- -------
PAGE 55
TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Deferred tax assets and liabilities were comprised of the following:
December 31, May 31,
------------ ----------------------
1998 1998 1997
-------- -------- -------
Deferred tax assets:
Deferred compensation and bonuses .......... $ 6,925 $ 5,507 $ 2,737
Net operating loss and credits ............. 3,011 340 3,503
Receivable valuation allowances and reserves
for possible losses ..................... 2,061 2,036 1,982
Legal and other accruals ................... 3,100 1,696 883
Depreciation and amortization .............. 1,523 393 393
Goodwill ................................... 1,221 -- --
Other ...................................... 21 615 195
-------- -------- -------
Total deferred tax assets ................ 17,862 10,587 9,693
-------- -------- -------
Deferred tax liabilities:
Prepaid expenses ........................... (2,296) (2,778) (1,968)
Capitalized software development costs ..... (53) (361) (91)
Other ...................................... (216) -- (400)
-------- -------- -------
Total deferred tax liabilities .......... (2,565) (3,139) (2,459)
-------- -------- -------
Net deferred tax asset ......................... $ 15,297 $ 7,448 $ 7,234
-------- -------- -------
-------- -------- -------
Income before income taxes consisted of the following:
Transition
Period Ended
December 31, For the Years Ended May 31,
------------ ----------------------------------
1998 1998 1997 1996
-------- -------- ------- ------
United States $ 12,542 $ 36,840 $23,910 $6,217
Foreign ..... (3,959) (458) 1,067 551
-------- -------- ------- ------
Total ....... $ 8,583 $ 36,382 $24,977 $6,768
-------- -------- ------- ------
-------- -------- ------- ------
Income taxes paid during the transition period ended December 31, 1998 and for
the fiscal years ended May 31, 1998, 1997 and 1996 were $6,907, $1,864, $135,
and $545, respectively.
PAGE 56
TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 9 -- LINE OF CREDIT
The Company has a $10.0 million unsecured line of credit facility (the
"Facility") with Bank of America. The agreement expires October 4, 1999. At the
Company's election, loans made under the Facility bear interest at either the
Bank of America reference rate or the applicable Eurodollar interest rate plus
0.75 percent. The unused line fee is 0.125 percent of the unused portion of the
commitment. The Facility requires, among other things, the Company to maintain
certain financial ratios. As of December 31, 1998, the Company was in compliance
with these financial ratio requirements. There was no borrowing under the line
of credit during the transition period.
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 elect to defer receipt of a portion of their compensation. 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.
NOTE 11 -- EMPLOYEE STOCK PURCHASE PLAN
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. Shares of the Company's Common Stock purchased
under the Plan during the transition period ended December 31, 1998 and the
fiscal years ended May 31, 1998 and 1997 were 181,271, 269,347 and 179,165
respectively.
NOTE 12 -- CAPITAL STOCK
During the transition period ended December 31, 1998, 296,300 shares of the
Company's outstanding Common Stock were repurchased for $2,842 under a 2,000,000
share repurchase program announced in November 1998.
On October 29, 1998, the Board of Directors declared a dividend distribution of
one Right for each outstanding share of the Company's Common Stock. The
description and terms of the
PAGE 57
TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Rights are set forth in a Rights Agreement between the Company and ChaseMellon
Shareholder Services, L.L.C., as Rights Agent (see Note 17).
On October 1, 1998, the Company's shareholders approved an increase in the
authorized number of shares of Common Stock of the Company from 50,000,000
shares to 100,000,000 shares.
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 effected August 10, 1998. The financial
statements and the relevant share and per share data included herein have
been adjusted to reflect the stock split.
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.
PAGE 58
TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 within
forty-two months from date of grant. Options available for grant were 1,583,934,
2,402,291 and 4,520,078 as of December 31, 1998, May 31, 1998 and 1997,
respectively.
On September 4, 1998, the Compensation Committee of the Board of Directors
approved the repricing of stock options issued under the 1996 Plan that had an
exercise price above $10.875, the closing price of the Company's Common Stock on
September 4, 1998. The repriced options have a grant date of September 4, 1998,
an exercise price of $10.875 and expire ten years from the date of grant. The
repriced options vest beginning one year from the date of grant and are fully
exercisable in three years from the date of grant.
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:
Transition
Period Ended
December 31, For the Years Ended May 31,
------------ ----------------------------------------
1998 1998 1997 1996
---- ---- ---- ----
Net income (loss):
As reported ............... $4,475 $21,020 $15,067 $4,574
Pro forma ................. $(1,119) $13,040 $11,018 $3,373
Earnings (loss) per share:
As reported ............... $0.11 $0.54 $0.43 $0.15
Pro forma ................. $(0.03) $0.34 $0.31 $0.11
Earnings (loss) per diluted share:
As reported ............... $0.10 $0.49 $0.38 $0.13
Pro forma ................. $(0.03) $0.30 $0.28 $0.09
PAGE 59
TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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:
Transition
Period Ended
December 31, For the Years Ended May 31,
------------ ------------------------------------------
1998 1998 1997 1996
------ ------ ------ ------
Expected volatility............................. 43.6%-49.8% 41.9%-44.1% 40.9%-51.4% 50.6%-52.0%
Risk-free interest rates........................ 4.1%-5.6% 5.3%-6.5% 5.3%-6.8% 5.3%-6.4%
Expected lives.................................. 4.5 years 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 60
TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the status of the Company's option plans is presented below:
Transition Period ended
December 31, For the years ended May 31,
------------------------ --------------------------------------------------------------------------------
1998 1998 1998 1998 1997 1997 1996 1996
---- ---- ---- ---- ---- ---- ---- ----
Weighted- Weighted- Weighted- Weighted-
Average Average Average Average
Exercise Exercise Exercise Exercise
Shares Prices Shares Prices Shares Prices Shares Prices
---------- ---------- ----------- ---------- ---------- --------- ---------- ---------
Outstanding at
beginning of year
9,845,695 $7.71 10,157,024 $5.03 10,450,710 $3.01 11,534,656 $2.30
Granted ............ 1,349,922 $18.58 2,466,222 $18.27 2,865,929 $10.93 2,931,020 $5.15
Exercised .......... (1,180,736) $3.31 (2,429,116) $18.85 (2,565,747) $15.02 (3,596,871) $6.54
Forfeited .......... (531,565) $13.88 (348,435) $9.72 (593,868) $8.50 (418,095) $2.31
---------- ----------- ---------- ----------
Outstanding at
end of year ..... 9,483,316 $8.05 9,845,695 $7.71 10,157,024 $5.03 10,450,710 $3.01
---------- ----------- ---------- ----------
---------- ----------- ---------- ----------
Exercisable at
end of year ..... 6,211,300 $5.70 4,815,339 $4.81 4,288,095 $3.01 4,804,506 $2.41
---------- ----------- ---------- ----------
---------- ----------- ---------- ----------
PAGE 61
TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Weighted-average fair value of options granted during the year:
Transition
Period Ended
December 31, For the Years Ended May 31,
------------- --------------------------------
1998 1998 1997 1996
---- ---- ---- ----
$8.15 $7.90 $5.24 $2.49
The following summarizes information about options outstanding as of
December 31, 1998:
Options Outstanding Options Exercisable
-------------------------------------- -------------------------
Average Weighted- Weighted-
Range of Remaining Average Average
Exercise Contractual Exercise Exercise
Prices Shares Life Prices Shares Prices
-------- -------- ---------- -------- -------- --------
$ 0.01-$ 3.00 3,520,328 9 years $ 2.19 3,495,627 $ 2.20
$ 3.01-$ 8.00 513,142 11 years $ 5.05 489,549 $ 5.05
$ 8.01-$10.00 2,015,755 7 years $ 9.38 1,400,913 $ 9.41
$10.01-$12.00 1,820,312 9 years $10.85 197,166 $10.67
$12.01-$15.00 189,227 9 years $13.43 69,000 $13.24
$15.01-$18.00 1,056,642 8 years $15.93 534,670 $15.91
$18.01-$23.00 367,910 8 years $21.82 24,375 $21.64
--------- ---------
9,483,316 9 years $ 8.05 6,211,300 $ 5.70
--------- ---------
--------- ---------
PAGE 62
TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14 -- BUSINESS SEGMENTS
The Company is organized into two business segments which each have their own
business focus and service offering expertise -- Enterprise Solutions (ES) and
Enterprise Customer Management (ECM). Each serves the Company's customers in the
U.S. and international markets. The Company believes that a structure based on
these focused business segments addresses its clients' needs for very
specialized industry and systems knowledge and allows its employees the
flexibility and opportunity to grow and develop. Each business segment develops
its own specific methodologies, tools, project management plans, best practice
and benchmark information and templates. The ES business segment provides IT
consulting and business services that help clients in implementing third-party
application software packages, cost controls and related services to implement
strategic change in an organization. The ES business segment includes the
following five areas of business focus, or "practice areas" -- Enterprise
Applications and Supply Chain Management, Innovation Technology Group, Change
and Learning Technologies, Financial Services and OrTech Solutions. The ECM
business segment provides IT consulting and strategic business consulting
services that help clients improve operations, transform customer relationships
and build and enhance customer loyalty.
Segment data also includes disclosing corporate infrastructure costs separately
as Global Core Services (GCS). The objective of the GCS function 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;
and insurance. GCS costs include these general office expenses, as well as
goodwill and other amortization expenses.
There are no intersegment revenues. The Company evaluates the performance of its
segments and allocates resources to them based on revenues, operating income and
receivables. The accounting policies of the segments are the same as
those described in the "Summary of Significant Accounting Policies."
PAGE 63
TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The table below presents information about the reported revenue, operating
income and receivables of TSC for the transition period ended December
31, 1998 and the fiscal years ended May 31, 1998, 1997 and 1996.
Transition period ended Global Core Consolidated
December 31, 1998 ES ECM Services(a) Total
- - -------------------------------------- -------- ------- ----------- ------------
Revenues $123,935 $65,503 $ -- $189,438
Operating income $ 25,262 $12,193 $(30,654) $ 6,801
Receivables $ 46,502 $27,555 $ -- $ 74,057
For the year ended Global Core Consolidated
May 31, 1998 ES ECM Services(a) Total
- - -------------------------------------- -------- ------- ----------- ------------
Revenues $189,603 $82,272 $ -- $271,875
Operating income $ 55,376 $20,613 $(41,604) $ 34,385
Receivables $ 51,762 $23,598 $ -- $ 75,360
For the year ended Global Core Consolidated
May 31, 1997 ES ECM Services(a) Total
- - -------------------------------------- -------- ------- ----------- ------------
Revenues $122,063 $43,025 $ -- $165,088
Operating income $ 35,682 $11,672 $(24,481) $ 22,873
Receivables $ 34,065 $13,188 $ -- $ 47,253
For the year ended Global Core Consolidated
May 31, 1996 ES ECM Services(a)(b) Total
- - -------------------------------------- -------- ------- ----------- ------------
Revenues $ 71,208 $26,391 $ -- $ 97,599
Operating income $ 16,760 $ 8,902 $(20,798) $ 4,864
Receivables $ 16,761 $ 8,646 $ -- $ 25,407
- - ---------------------------------
(a) Operating income includes goodwill amortization of $2,671, $3,603 and $811
and other amortization expense of $1,216, $1,135 and $795 for the
transition period ended December 31, 1998, and the fiscal years ended May
31, 1998 and 1997, respectively. There was no goodwill or other
amortization expenses for the fiscal year ended May 31, 1996.
(b) Includes a charge of $2.3 million related to shareholder litigation
settlement and a charge of $0.9 million related to Company founders
litigation settlement.
PAGE 64
TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is revenue and long-lived asset information by geographic area as
of and for the transition period ended December 31, 1998 and the fiscal years
ended May 31, 1998, 1997 and 1996.
Transition Period ended United Foreign
December 31, 1998 States Subsidiaries Consolidated
- - ----------------- ------ ------------ ------------
Revenues......................... $170,354 $19,084 $189,438
Identifiable assets.............. $215,753 $ 3,346 $219,099
For the year ended United Foreign
May 31, 1998 States Subsidiaries Consolidated
- - ------------ ------ ------------ ------------
Revenues......................... $241,101 $30,774 $271,875
Identifiable assets.............. $191,921 $ 5,227 $197,148
For the year ended United Foreign
May 31, 1997 States Subsidiaries Consolidated
- - ------------ ------ ------------ ------------
Revenues......................... $144,861 $20,227 $165,088
Identifiable assets.............. $129,457 $ 4,409 $133,866
For the year ended United Foreign
May 31, 1996 States Subsidiaries Consolidated
- - ------------ ------ ------------ ------------
Revenues......................... $ 94,381 $ 3,218 $ 97,599
Identifiable assets.............. $ 87,467 $ 1,970 $ 89,437
Foreign revenue is based on the country in which the legal subsidiary is
domiciled. Revenue from no single foreign country was material to the
consolidated revenues of the Company.
PAGE 65
TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 15 -- MAJOR CLIENTS
The Company's five largest clients during the transition period ended December
31, 1998 accounted for 3 percent, 3 percent, 2 percent, 2 percent, and 2 percent
of total revenues, respectively; in fiscal 1998, the five largest clients
accounted for 4 percent, 4 percent, 3 percent, 3 percent, and 2 percent of total
revenues, respectively; in fiscal 1997, they 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 during the transition period ended December 31, 1998, fiscal
1998 or fiscal 1997. In fiscal 1996, one customer in the ES business segment
accounted for 10 percent or more of revenues.
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
property and office equipment under operating leases expiring at various dates.
Rental expense for all operating leases approximated $8,396, $10,527, $3,217,
and $1,442 for the transition period ended December 31, 1998 and for the fiscal
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:
Calendar Year Amount
------------- ------
1999.................................. $ 7,454
2000.................................. 3,404
2001.................................. 1,619
2002.................................. 1,268
2003.................................. 1,053
Thereafter............................ 584
-------
$15,382
-------
-------
The Company had no capital leases as of December 31, 1998.
PAGE 66
TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 17 -- STOCKHOLDER RIGHTS PLAN
On October 29, 1998, the Board of Directors adopted a Stockholder Rights Plan
(the "Rights Plan"). The Rights Plan is intended to assure fair and equal
treatment for all of the Company's stockholders in the event of a hostile
takeover attempt.
Under the terms of the Rights Plan, each share of the Company's Common Stock has
associated with it one right. Each Right entitles the registered holder to
purchase from the Company one one-hundredth of a share of Series A Junior
Participating Preferred Stock, par value $.01 per share, at an exercise price of
$100 (subject to adjustment). The Rights become exercisable under certain
circumstances following the announcement that any person has acquired 15 percent
or more of the Company's Common Stock or the announcement that any person has
commenced a tender offer for 15 percent or more of the Company's Common Stock.
In general, the Company may redeem the Rights in whole, but not in part, at a
price of $.01 per Right at any time until ten days after any person has acquired
15 percent or more of the Company's Common Stock. The Rights will expire on
October 29, 2008, unless earlier redeemed by the Company or exchanged for other
shares of the Company's Common Stock.
Under specified conditions, each Right will entitle the holder to purchase the
Company's Common Stock at the exercise price (or if the Company is acquired in a
merger or other business combination, common stock of the acquiror) having a
current market value of two times the exercise price. The terms of the Rights
may be amended by the Company's Board of Directors.
PAGE 67
TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 18-- COMPREHENSIVE INCOME
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
This statement established new standards for reporting and displaying
comprehensive income and its components in a full set of general-purpose
financial statements. The Company's comprehensive income and related tax effects
were as follows:
Transition Period ended Before-Tax Tax (Expense) Net-of-Tax
December 31, 1998 Amount Benefit Amount
- - ----------------- ------ ------- ------
Change in unrealized holding loss on
available-for-sale securities:
Unrealized holding gains arising
during the period ............... $38 $(14) $24
Less: adjustment for loss
realized in net income .......... 13 (4) 9
----- ---- -----
Net unrealized gain ................ 51 (18) 33
Cumulative translation adjustment .. (127) -- (127)
----- ---- -----
Other comprehensive loss ........... $(76) $(18) $(94)
----- ---- -----
----- ---- -----
For the year ended Before-Tax Tax (Expense) Net-of-Tax
May 31, 1998 Amount Benefit Amount
- - ------------ ------ ------- ------
Change in unrealized holding loss on
available-for-sale securities:
Unrealized holding gains arising
during the period ............... $453 $(158) $295
Less: adjustment for gain
realized in net income ......... (27) 9 (18)
----- ----- -----
Net unrealized gain ................ 426 (149) 277
Cumulative translation adjustment .. (891) -- (891)
----- ----- -----
Other comprehensive loss ........... $(465) $(149) $(614)
----- ----- -----
----- ----- -----
PAGE 68
TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
For the year ended Before-Tax Tax (Expense) Net-of-Tax
May 31, 1997 Amount Benefit Amount
- - ------------ ------ ------- ------
Change in unrealized holding loss on
available-for-sale securities:
Unrealized holding gains arising
during the period ............... $505 $(178) $327
Less: adjustment for gain
realized in net income .......... (6) 2 (4)
----- ----- -----
Net unrealized gain ................ 499 (176) 323
Cumulative translation adjustment .. (318) -- (318)
----- ----- -----
Other comprehensive income ......... $181 $(176) $5
----- ----- -----
----- ----- -----
For the year ended Before-Tax Tax (Expense) Net-of-Tax
May 31, 1996 Amount Benefit Amount
- - ------------ ------ ------- ------
Change in unrealized holding loss on
available-for-sale securities:
Unrealized holding gains arising
during the period ............... $343 $(120) $223
Less: adjustment for gain
realized in net income .......... (18) 6 (12)
----- ----- -----
Net unrealized gain ................ 325 (114) 211
Cumulative translation adjustment .. -- -- --
----- ----- -----
Other comprehensive income ......... $325 $(114) $211
----- ----- -----
----- ----- -----
NOTE 19 -- 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.
PAGE 69
TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 20-- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
August 31, November 30,
Quarter Ended 1998 1998
- - ------------- ---------- ------------
Revenues $85,569 $ 81,472
Operating income $8,931 $1,018
Net income $5,560 $764
Earnings per common
share(a) $0.14 $0.02
Earnings per common
share assuming dilution(a) $0.13 $0.02
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 all of the
Company's prior stock splits, including the three-for-two stock split
effected August 10, 1998.
(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 70
TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 21 -- SUBSEQUENT EVENTS
On March 30, 1999, the Company announced that it was making a number of changes
to its business operations and would be incurring restructuring costs estimated
to be approximately $11.0 million to $12.0 million associated with those changes
and the severance of approximately 300 employees, primarily consulting
personnel. Additionally, the Company announced that it would be filing, with the
U.S. Internal Revenue Service, a request for a ruling that a proposed spin-off
of the Company's ECM business segment would qualify as a non-taxable
distribution for U.S. federal income tax purposes. The spin-off of the ECM
business segment may be preceded by a public offering of shares of the Common
Stock representing a minority interest in a subsidiary of the Company to be
formed for the purpose of holding the assets of the ECM business.
Subsequent to December 31, 1998, the growth rate of the Company's ES business
segment has continued to decline principally due to slowing new license sales
of ERP software packages, client deferral of new IT projects, declining
custom development work and slow growth of the Company's ITG practice area.
The slowing of the ES business segment has resulted in the Company having an
excessive number of consulting personnel for its current and foreseeable
level of business. As a result, the Company is reducing its domestic ES
consulting headcount, is restructuring the ERP implementation business in
Europe to focus on European ERP implementations for TSC's U.S. clients, and
is selectively merging the consulting offerings of its ITG practice area with
the EASCM practice area and the ECM business segment.
PAGE 71
TECHNOLOGY SOLUTIONS COMPANY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE TRANSITION PERIOD ENDED DECEMBER 31, 1998
AND 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
- - ---------------------- ------- --------- ---------- ----------
May 31, 1996
Valuation allowances
and receivable reserves
for potential losses $1,837 $1,339 $(1,306) $1,870
------ ------ ------- ------
------ ------ ------- ------
May 31, 1997
Valuation allowances
and receivable reserves
for potential losses $1,870 $2,712 $(1,236) $3,346
------ ------ ------- ------
------ ------ ------- ------
May 31, 1998
Valuation allowances
and receivable reserves
for potential losses $3,346 $1,897 $(1,997) $3,246
------ ------ ------- ------
------ ------ ------- ------
December 31, 1998
Valuation allowances
and receivable reserves
for potential losses $3,246 $2,913 $(1,314) $4,845
------ ------ ------- ------
------ ------ ------- ------
PAGE 72
TECHNOLOGY SOLUTIONS COMPANY
PART IV. (CONTINUED)
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K (CONTINUED)
ITEM 14(a)(3) EXHIBITS
The following documents are filed herewith or incorporated by reference and made
a part of this Report.
Exhibit # Description of Document
- - --------- -----------------------
3(i) Restated Certificate of Incorporation of Technology Solutions
Company, filed as Exhibit 3(i) to TSC's Quarterly Report on Form 10-Q
for the quarter ended November 30, 1998, is hereby incorporated by
reference.
3(ii) Bylaws of TSC, as amended, filed as Exhibit 3 to TSC's Current Report
on Form 8-K dated November 22, 1998, is hereby incorporated by
reference.
10.01 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.
10.02 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.
10.03 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.
10.04 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.
10.05 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.
PAGE 73
TECHNOLOGY SOLUTIONS COMPANY
PART IV. (CONTINUED)
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K (CONTINUED)
ITEM 14(a)(3) EXHIBITS (CONTINUED)
10.06 Employment Agreement of William H. Waltrip, filed as Exhibit 10.06 to
TSC's Annual Report on Form 10-K for the fiscal year ended May 31,
1996, is hereby incorporated by reference.
10.07 Employment Agreement of John T. Kohler, filed as Exhibit 10.07 to
TSC's Annual Report on Form 10-K for the fiscal year ended May 31,
1996, is hereby incorporated by reference.
10.08 Employment Agreement of 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.
10.09 Employment Agreement of Martin T. Johnson, filed as Exhibit 10.10 to
TSC's Annual Report on Form 10-K for the fiscal year ended May 31,
1998, is hereby incorporated by reference.
10.10 Employment Agreement of Paul R. Peterson, filed as Exhibit 10.11 to
TSC's Annual Report on Form 10-K for the fiscal year ended May 31,
1998, is hereby incorporated by reference.
10.11 Employment Agreement of James S. Carluccio, filed as Exhibit 10.13 to
TSC's Annual Report on Form 10-K for the fiscal year ended May 31,
1998, is hereby incorporated by reference.
10.12* Separation Agreement with James S. Carluccio.
10.13* Extension of Promissory Note of John T. Kohler.
- - --------------
*Filed herewith
PAGE 74
TECHNOLOGY SOLUTIONS COMPANY
PART IV. (CONTINUED)
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K (CONTINUED)
ITEM 14(a)(3) EXHIBITS (CONTINUED)
21* Subsidiaries of the Company.
23* Consent of PricewaterhouseCoopers LLP.
27* Financial Data Schedule
Exhibits 10.01 through 10.13 listed on the previous page 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
The Company did not file any additional reports on Form 8-K since filing the
November 30, 1998 Form 10-Q with the SEC.
- - --------------
*Filed herewith
PAGE 75
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 30TH DAY OF MARCH
1999.
TECHNOLOGY SOLUTIONS COMPANY
By: /S/ MARTIN T. JOHNSON By: /S/ TIMOTHY P. DIMOND
----------------------------- ------------------------------
Martin T. Johnson Timothy P. Dimond
CHIEF FINANCIAL OFFICER CHIEF ACCOUNTING OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT
HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT, IN
THE CAPACITIES AND ON THE DATE INDICATED.
SIGNATURE
/S/ WILLIAM H. WALTRIP (March 30, 1999) Chairman,
- - ------------------------------------------------------- Officer and Director
William H. Waltrip
/S/ JOHN T. KOHLER (March 30, 1999) President, Chief Executive
- - ------------------------------------------------------- Officer and Director
John T. Kohler
/S/ MARTIN T. JOHNSON (March 30, 1999) Chief Financial Officer
- - -------------------------------------------------------
Martin T. Johnson
/S/ TIMOTHY P. DIMOND (March 30, 1999) Chief Accounting Officer
- - -------------------------------------------------------
Timothy P. Dimond
/S/ RAYMOND P. CALDIERO (March 30, 1999) Director
- - -------------------------------------------------------
Raymond P. Caldiero
/S/ MICHAEL J. MURRAY (March 30, 1999) Director
- - -------------------------------------------------------
Michael J. Murray
/S/ STEPHEN B. ORESMAN (March 30, 1999) Director
- - -------------------------------------------------------
Stephen B. Oresman
/S/ JOHN R. PURCELL (March 30, 1999) Director
- - -------------------------------------------------------
John R. Purcell
/S/ MICHAEL R. ZUCCHINI (March 30, 1999) 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.)