-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VvF5QvdCl9f8iE1YsFodoDPZ3QNlB4wnCDnFMqd2mejAXmhHX8q5GG1Jps6OzRoz YuS+a/cFO99QgdJyAoVtAA== 0001047469-97-000624.txt : 19971015 0001047469-97-000624.hdr.sgml : 19971015 ACCESSION NUMBER: 0001047469-97-000624 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970831 FILED AS OF DATE: 19971014 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: TECHNOLOGY SOLUTIONS COMPANY CENTRAL INDEX KEY: 0000877645 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 363584201 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-19433 FILM NUMBER: 97694779 BUSINESS ADDRESS: STREET 1: 205 N MICHIGAN AVE STREET 2: SUITE 1500 CITY: CHICAGO STATE: IL ZIP: 60601 BUSINESS PHONE: 3122284500 MAIL ADDRESS: STREET 1: 205 NORTH MICHIGAN AVE STREET 2: SUITE 1500 CITY: CHICAGO STATE: IL ZIP: 60601 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549 FORM 10-Q ---------------- QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED AUGUST 31, 1997 COMMISSION FILE NUMBER 0-19433 [LOGO] TECHNOLOGY SOLUTIONS COMPANY INCORPORATED IN THE STATE OF DELAWARE EMPLOYER IDENTIFICATION NO. 36-3584201 205 NORTH MICHIGAN AVENUE SUITE 1500 CHICAGO, ILLINOIS 60601 (312) 228-4500 TSC (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS, AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. AS OF OCTOBER 8, 1997, THERE WERE OUTSTANDING 25,828,720 SHARES OF TSC COMMON STOCK, PAR VALUE $.01. TECHNOLOGY SOLUTIONS COMPANY INDEX TO FORM 10-Q - -------------------------------------------------------------------------------- PART I PAGE NUMBER ------ FINANCIAL INFORMATION (UNAUDITED) ITEM 1. FINANCIAL STATEMENTS Consolidated Balance Sheets as of August 31, 1997 and May 31, 1997. . . . . . . . . . . . . . . . . .3 Consolidated Statements of Income for the Three Months Ended August 31, 1997 and 1996 . . . . . . . .4 Consolidated Statements of Cash Flows for the Three Months Ended August 31, 1997 and 1996 . . . . . . . .5 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . .6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . 10 PART II OTHER INFORMATION Item 6. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 EXHIBIT INDEX. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 EXHIBIT 11--Statement Re Computation of Per Share Earnings . . . . . . 17 - -------------------------------------------------------------------------------- PAGE 2 PART I. FINANCIAL INFORMATION - -------------------------------------------------------------------------------- ITEM 1. FINANCIAL STATEMENTS TECHNOLOGY SOLUTIONS COMPANY CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share data) ASSETS ------ August 31, May 31, 1997 1997 -------- -------- (unaudited) CURRENT ASSETS: Cash and cash equivalents. . . . . . . . . . . . . $ 20,931 $ 27,951 Marketable securities. . . . . . . . . . . . . . . 19,036 15,988 Receivables, less allowance for doubtful receivables of $4,164 and $3,346. . . . . . . . . . . . . . 55,120 43,907 Refundable income taxes. . . . . . . . . . . . . . 77 1,398 Deferred income taxes. . . . . . . . . . . . . . . 8,700 7,234 Other current assets . . . . . . . . . . . . . . . 11,732 11,196 --------- --------- Total current assets. . . . . . . . . . . . . . 115,596 107,674 COMPUTERS, FURNITURE AND EQUIPMENT, NET. . . . . . . 7,443 6,416 LONG-TERM INVESTMENTS. . . . . . . . . . . . . . . . 5,831 8,118 COST IN EXCESS OF NET ASSETS OF ACQUIRED BUSINESSES AND OTHER INTANGIBLES . . . . . . . . . 16,229 3,521 LONG-TERM RECEIVABLES AND OTHER. . . . . . . . . . . 7,663 8,137 --------- --------- Total assets. . . . . . . . . . . . . . . . . . $ 152,762 $ 133,866 --------- --------- --------- --------- LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: Accounts payable . . . . . . . . . . . . . . . . . $ 1,004 $ 1,604 Accrued compensation and related costs . . . . . . 13,529 17,001 Capitalized lease obligations. . . . . . . . . . . 294 240 Deferred compensation. . . . . . . . . . . . . . . 10,708 6,842 Other current liabilities. . . . . . . . . . . . . 4,953 2,392 --------- --------- Total current liabilities . . . . . . . . . . . 30,488 28,079 --------- --------- STOCKHOLDERS' EQUITY: Preferred stock, $.01 par value; shares authorized -- 10,000,000; none issued . . . . . -- -- Common stock, $.01 par value; shares authorized -- 50,000,000; shares issued -- 26,855,247 . . . . 269 269 Capital in excess of par value . . . . . . . . . . 71,982 61,958 Retained earnings. . . . . . . . . . . . . . . . . 55,586 51,627 Unrealized holding loss. . . . . . . . . . . . . . (361) (319) Cumulative translation adjustment. . . . . . . . . (458) (318) --------- --------- 127,018 113,217 Less: Treasury Stock, at cost (1,352,814 and 2,123,660 shares) . . . . . . . . . . . . . (4,744) (7,430) --------- --------- Total stockholders' equity. . . . . . . . . . 122,274 105,787 --------- --------- Total liabilities and stockholders' equity . . . . $152,762 $133,866 --------- --------- --------- --------- The accompanying Notes to Consolidated Financial Statements are an integral part of this financial information. - -------------------------------------------------------------------------------- PAGE 3 TECHNOLOGY SOLUTIONS COMPANY CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data) For the Three Months Ended August 31, ---------------- 1997 1996 ---- ---- (unaudited) REVENUES: Professional fees. . . . . . . . . . . . . . . . . . $60,358 $31,815 Software and hardware products . . . . . . . . . . . 49 347 ------- ------- 60,407 32,162 ------- ------- COSTS AND EXPENSES: Project personnel. . . . . . . . . . . . . . . . . . 28,151 16,077 Other project expenses . . . . . . . . . . . . . . . 9,194 4,793 Cost of products sold. . . . . . . . . . . . . . . . -- 54 Management and administrative support. . . . . . . . 11,845 5,611 Goodwill amortization. . . . . . . . . . . . . . . . 877 72 Incentive compensation . . . . . . . . . . . . . . . 3,650 2,404 ------- ------- 53,717 29,011 ------- ------- OPERATING INCOME . . . . . . . . . . . . . . . . . . . 6,690 3,151 ------- ------- OTHER INCOME (EXPENSE): Net investment income. . . . . . . . . . . . . . . . 383 520 Interest expense . . . . . . . . . . . . . . . . . . (9) (57) ------- ------- 374 463 ------- ------- INCOME BEFORE INCOME TAXES . . . . . . . . . . . . . . 7,064 3,614 INCOME TAX PROVISION . . . . . . . . . . . . . . . . . 3,105 1,489 ------- ------- NET INCOME . . . . . . . . . . . . . . . . . . . . . . $ 3,959 $ 2,125 ------- ------- ------- ------- EARNINGS PER COMMON SHARE. . . . . . . . . . . . . . . $ 0.14 $ 0.09 ------- ------- ------- ------- WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING . . . . . . 27,976 25,800 ------- ------- ------- ------- The accompanying Notes to Consolidated Financial Statements are an integral part of this financial information. - -------------------------------------------------------------------------------- PAGE 4 TECHNOLOGY SOLUTIONS COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
For the Three Months Ended August 31, ------------------- 1997 1996 ---- ---- (unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,959 $ 2,125 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization. . . . . . . . . . . . . . . . . . 1,582 725 Provisions for receivable valuation allowances and reserves for possible losses. . . . . . . . . . . . . . . . . . 910 706 (Gain) on sale of investments. . . . . . . . . . . . . . . . . . (37) -- Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . 2,538 (626) Changes in assets and liabilities: Receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . (9,512) (6,126) Purchases of trading securities related to deferred compensation program. . . . . . . . . . . . . . . . . . . . . . (3,866) (1,999) Refundable income taxes. . . . . . . . . . . . . . . . . . . . . 1,320 1,768 Other current assets . . . . . . . . . . . . . . . . . . . . . . (508) (572) Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . (1,382) 392 Accrued compensation and related costs . . . . . . . . . . . . . (3,494) (4,031) Deferred compensation funds from employees . . . . . . . . . . . 3,866 1,999 Other current liabilities. . . . . . . . . . . . . . . . . . . . 66 519 ------- ------- Net cash used in operating activities . . . . . . . . . . . . . (4,558) (5,120) ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from available-for-sale securities . . . . . . . . . . . . 1,000 -- Proceeds from held-to-maturity investments. . . . . . . . . . . . . 2,290 3,020 Capital expenditures. . . . . . . . . . . . . . . . . . . . . . . . (1,201) (438) Net assets of acquired businesses and other intangibles . . . . . . (7,360) (332) Long-term receivables and other . . . . . . . . . . . . . . . . . . (1,047) 122 Capitalized lease obligation. . . . . . . . . . . . . . . . . . . . 54 (226) ------- ------- Net cash (used in) provided by investing activities . . . . . . (6,264) 2,146 ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from exercise of stock options . . . . . . . . . . . . . . 3,528 2,119 Proceeds from employee stock purchase plan. . . . . . . . . . . . . 655 279 ------- ------- Net cash provided by financing activities . . . . . . . . . . . 4,183 2,398 ------- ------- EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS. . . . . . . . . . . . . . . . . . . . . . . . (381) -- ------- ------- DECREASE IN CASH AND CASH EQUIVALENTS. . . . . . . . . . . . . . . . (7,020) (576) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,951 12,990 ------- ------- CASH AND CASH EQUIVALENTS, END OF PERIOD . . . . . . . . . . . . . . $20,931 $12,414 ------- ------- ------- ------- The accompanying Notes to Consolidated Financial Statements are an integral part of this financial information.
- -------------------------------------------------------------------------------- PAGE 5 TECHNOLOGY SOLUTIONS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 1--BASIS OF PRESENTATION The consolidated financial statements include the accounts of Technology Solutions Company and its subsidiaries ("the Company"). The consolidated financial statements of income for the three months ended August 31, 1997 and August 31, 1996, the consolidated balance sheet as of August 31, 1997 and the consolidated statements of cash flows for the three months ended August 31, 1997 and August 31, 1996 have been prepared by the Company without audit. In the opinion of management, these financial statements include all adjustments necessary to present fairly the financial position, results of operations and cash flows as of August 31, 1997 and for all periods presented. All adjustments made have been of a normal recurring nature. Certain information and footnote disclosure normally included in the financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. The Company believes that the disclosures included are adequate and provide a fair presentation of interim period results. Interim financial statements are not necessarily indicative of financial position or operating results for an entire year. It is suggested that these interim financial statements be read in conjunction with the audited financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1997 filed with the Securities and Exchange Commission on August 25, 1997. Certain previously reported amounts have been reclassified to conform with the current period presentation, specifically the restate-ment of earnings per common share and weighted average number of common and common shares outstanding to reflect the three-for-two stock splits effected as a 50 percent stock dividend effective August 1, 1997 and July 30, 1996, respectively. NOTE 2--THE COMPANY The Company delivers business benefits through consulting and systems integration services that help clients transform customer relationships and improve operations. The Company's clients generally are located throughout the United States, and in Europe, Latin America, and Canada. NOTE 3--SUMMARY OF SIGNIFI-CANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION--The accompanying consolidated financial statements include the accounts of Technology Solutions Company and its subsidiaries. All significant intercompany transactions have been eliminated. Acquired businesses are included in the results of operations since their acquisition dates. REVENUE RECOGNITION--The Company derives substantially all of its revenues from information technology, strategic business and management consulting, systems integration, programming, and packaged software integration and implementation services. The Company operates in one industry segment--system integration services and consulting. The Company recognizes revenue on contracts as work is performed primarily based on hourly billing rates. Out-of-pocket expenses are - -------------------------------------------------------------------------------- PAGE 6 TECHNOLOGY SOLUTIONS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) - -------------------------------------------------------------------------------- presented net of amounts billed to clients in the accompanying consolidated statements of income. Contracts are performed in phases. Losses on contracts, if any, are reserved in full when determined. Revenue from licensing of software is recognized upon delivery of the product. The Company does not presently have any significant maintenance and support contracts for software licensed to clients. Revenue from hardware sales is recognized upon delivery. CASH AND CASH EQUIVALENTS--The Company considers all highly liquid investments readily convertible into cash to be cash equivalents with original maturities of three months or less. These short-term investments are carried at cost plus accrued interest, which approximates market. MARKETABLE SECURITIES--The Com-pany's marketable securities primarily consist of preferred stocks. These preferred stocks, all of which are classified as available-for-sale, are reported at fair value, with unrealized gains and losses excluded from earnings and reported as a net after-tax amount in a separate component of stockholders' equity until realized. The Company's investments related to the executive deferred compensation plan are classified as trading securities, with unrealized gains and losses included in net investment income. Realized gains or losses are determined on the specific identification method. COMPUTERS, FURNITURE AND EQUIPMENT--Computers, furniture and equipment are carried and depreciated on a straight-line basis over their estimated useful lives. Useful lives generally are five years or less. COST IN EXCESS OF NET ASSETS OF ACQUIRED BUSINESSES--The excess of cost over the fair market value of the net identifiable assets of businesses acquired (goodwill) is amortized on a straight-line basis, typically over a five-year period. SOFTWARE DEVELOPMENT COSTS--The Company capitalizes certain software development costs once technological feasibility is established in accordance with Statement of Financial Accounting Standards ("SFAS") No. 86--"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed." Amortization of software costs is the greater of the amount computed using the (a) ratio of current revenues to the total current and anticipated future revenues or (b) the straight-line method over the estimated economic life of the product. LONG-TERM INVESTMENTS--The Company's long-term investments consist of municipal bonds with maturities primarily through 1998. Since the Company has the ability and intent to hold the bonds to maturity, the investments are classified as held-to-maturity under the provisions of SFAS No. 115 and, accordingly, are accounted for at cost, net of accumulated amortization. Municipal bonds held by the Company are regarded as investment grade by independent nationally recognized rating agencies. EARNINGS PER COMMON SHARE--Earnings per common share is computed by dividing net income per the modified treasury stock method by the weighted average number of common shares outstanding during each period presented, including common share equivalents arising from the - -------------------------------------------------------------------------------- PAGE 7 TECHNOLOGY SOLUTIONS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) - -------------------------------------------------------------------------------- assumed exercise of stock options, where appropriate. All share and per share amounts have been adjusted to reflect the Company's three-for-two stock splits effective August 1, 1997 and July 30, 1996, respectively. FOREIGN CURRENCY TRANSLATION -- All assets and liabilities of foreign subsidiaries are translated to U.S. dollars at end-of-period exchange rates. Income and expense items are translated at average exchange rates prevailing during the period. The resulting translation adjustments are recorded as a component of stockholders' equity. The functional currencies for the Company's foreign subsidiaries are their local currencies. Gains and losses from foreign currency transactions of these subsidiaries are included in net income. NEW ACCOUNTING STANDARDS--The Financial Accounting Standards Board ("FASB") issued SFAS No. 128, "Earnings Per Share," in February 1997. This statement establishes new standards for computing and presenting earnings per share. This statement is effective for financial statements issued for periods ending after December 15, 1997; earlier adoption is not permitted. Adoption of this statement will require the presentation of basic and diluted earnings per share. If the statement had been adopted, proforma basic and diluted earnings per share for the quarter ended August 31, 1997 and 1996 would have been as follows: Three Months Ended August 31, ------------------ 1997 1996 ---- ---- Basic earnings per share $0.16 $0.09 Diluted earnings per share $0.14 $0.09 INCOME TAXES--The Company files its federal and state income tax returns on a calendar year basis. The current income tax provision represents the Company's federal, state, and foreign income taxes for the fiscal year as though tax returns were filed on a fiscal year basis ending on May 31. The Company uses an asset and liability approach to financial accounting and reporting for income taxes. Deferred income taxes are provided when tax laws and financial accounting standards differ with respect to the amount of income for a period and the bases of assets and liabilities. The Company does not provide U.S. deferred income taxes on earnings of foreign subsidiaries which are expected to be indefinitely reinvested. ESTIMATES AND ASSUMPTIONS--The preparation of financial statements in conformity with Generally Accepted Accounting Principles requires management to make assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NOTE 4--STOCKHOLDERS' EQUITY On June 26, 1997, the Board of Directors declared a three-for-two stock split to be effected as a 50 percent stock dividend for stockholders of record on July 10, 1997. The stock split was effective August 1, 1997. The financial statements and the relevant share and per share data included herein have been adjusted to reflect the stock split. As a result of the increase in issued shares, - -------------------------------------------------------------------------------- PAGE 8 TECHNOLOGY SOLUTIONS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) - -------------------------------------------------------------------------------- common stock has been increased and capital in excess of par has been decreased by $90. NOTE 5--STOCK OPTIONS On September 26, 1996, the Company's stockholders approved the Technology Solutions Company 1996 Stock Incentive Plan (the "1996 Plan"). The 1996 Plan replaces each of the Technology Solutions Company's Stock Option Plan (the "Original Plan"), the Technology Solutions Company 1992 Stock Incentive Plan (the "1992 Plan") and the Technology Solutions Company 1993 Outside Directors Stock Option Plan (the "1993 Plan" and together with the Original Plan and the 1992 Plan, the "Predecessor Plans"). With the approval of the 1996 Plan, no future awards will be made under the Predecessor Plans. Previous awards made under the Predecessor Plans are not affected. Shares subject to awards made under any of the Predecessor Plans will be available under the 1996 Plan, under certain circumstances, to the extent that such shares are not issued or delivered in connection with such awards. During the first quarter of fiscal 1998, the Company authorized the grant to employees, pursuant to the 1996 Plan, of options to purchase 1.4 million shares of the Company's common stock. As of August 31, 1997, options to purchase 7.4 million shares of common stock were outstanding and options to purchase an additional 1.9 million shares of common stock were available for grant under the 1996 Plan. NOTE 6--ACQUISITION OF THE BENTLEY COMPANY, INC. In June 1997, the Company acquired The Bentley Company, Inc., ("Bentley") for a combination of cash and the Company's common stock. The transaction was accounted for using the purchase method of accounting and goodwill was recorded and will be amortized over five years on a straight-line basis beginning June 1997. Total consideration recorded for Bentley was approximately $12.7 million. Cash paid for Bentley totaled $7.4 million and the Company also exchanged 29,535 shares of the Company's common stock for all the issued and outstanding stock of Bentley and assumed the employee stock options outstanding under Bentley's stock option plan. The purchase price may be increased by approximately $5.8 million if certain performance targets are met over the next two years. Goodwill recorded was approximately $12.8 million. Bentley is a Boston-area based firm specializing in business and operations consulting and software package integration in the area of customer service and field service and support. - -------------------------------------------------------------------------------- PAGE 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- TECHNOLOGY SOLUTIONS COMPANY RESULTS OF OPERATIONS THREE MONTHS ENDED AUGUST 31, 1997 COMPARED WITH THREE MONTHS ENDED AUGUST 31, 1996 The amounts shown in this Form 10-Q filing for earnings per share and common and common equivalent shares outstanding are different from the amounts indicated in the earnings release dated September 25, 1997 due to the recalculation of the number of stock options outstanding after the Company's August 1, 1997 stock split. The impact of this recalculation was to reduce earnings per share by $0.007. The recalculated earnings per share are $0.14 and the number of common and common equivalent shares outstanding are 27,975,688. Consolidated net revenues for the first quarter ended August 31, 1997 increased 88 percent to $60.4 million compared with $32.2 million for the same period last fiscal year. The principal source of the increase was a 53 percent increase in domestic billable hours, and, to a lesser extent, a slight increase in domestic hourly billing rates. The increase in billable hours was attributable to the significant growth in the overall 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. Also contributing to higher revenues is the increase in the Company's sales and marketing efforts. Total Company headcount increased 82 percent to 1,312 at the end of the fiscal 1998 first quarter compared to 719 at the end of the fiscal 1997 first quarter. The total number of project managers increased to 127 at the end of this quarter compared to 88 a year earlier. Additionally, the Company recorded international revenues of $9.2 million in the first quarter of fiscal 1998 compared to $5.0 million for the same period last year. This increase is due to the increased demand for consulting and systems integration services outside the United States, as well as the Company's continued expansion of the business into international markets. First quarter project personnel costs, which represent mainly professional salaries and benefits, increased to $28.2 million in fiscal 1998 from $16.1 million in fiscal 1997, an increase of 75 percent. The increase was due to additional headcount and was consistent with the higher revenues reported in the fiscal 1998 first quarter. Project personnel costs as a percentage of net revenues were 47 percent for the first quarter of fiscal 1998 compared with project personnel costs as a percentage of net revenues of 50 percent in the comparable period of fiscal 1997. 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 the revenue generated by these personnel. The Company charges most of its project expenses directly to the client. Other project expenses consist of nonbillable expenses directly incurred for client projects and business development efforts including recruiting fees, sales and marketing expenses, personnel training and provisions for valuation allowances and reserves for - -------------------------------------------------------------------------------- PAGE 10 potential losses on continuing projects. Other project expenses for the first quarter of fiscal 1998 increased $4.4 million to $9.2 million compared with $4.8 million during the first quarter of fiscal 1997. Other project expenses as a percentage of net revenues, however, remained unchanged between years at 15 percent. Management and administrative support costs increased $6.2 million to $11.8 million in the first quarter of fiscal 1998 from $5.6 million in the first quarter of fiscal 1997. This increase was primarily attributable to the costs associated with the expansion of the business and increased headcount levels. Infrastructure costs increased $2.0 million from the first quarter of fiscal 1997 due primarily to the opening and expansion of domestic and international facilities and increased internal systems and communications costs. Also contributing to increased management and administrative costs is higher recruiting expenses of $0.4 million due to the expansion of the Company's internal recruiting organization. Management costs associated with the Company's domestic and international practice areas increased $2.6 million primarily as a result of the growth of existing practice areas, addition of new practice areas and associated regional management, as well as increased sales and marketing efforts. Goodwill amortization increased to $0.9 million in the first quarter of fiscal 1998 compared to $0.1 million in the first quarter of fiscal 1997 primarily due to the purchase of Bentley, for which $0.6 million of goodwill amortization was recorded in the first quarter. Also contributing, to a lesser extent, was the goodwill amortization of several other smaller businesses purchased in fiscal years 1997 and 1996. Incentive compensation increased to $3.6 million in the first quarter of fiscal 1998 compared to $2.4 million for the same period last year. The increase is due to increased headcount, at both the consulting staff and the project manager levels, and the Company profitability improvement. The Company expects to continue to accrue incentive compensation throughout fiscal 1998. Investment income in the fiscal 1998 first quarter was $0.4 million compared to $0.5 million a year earlier. The Company's effective tax rate for the first quarter of fiscal 1998 was 44.0 percent compared to 41.2 percent in the first quarter of fiscal 1997. The increase in the effective tax rate in the fiscal 1998 first quarter was the result of the reduction in the percentage of the Company's income coming from nontaxable investment income, increased non-deductible expenses for U.S. tax purposes, and increased foreign earnings in higher tax rate jurisdictions compared to the same period last year. Management believes that the existing levels of pretax earnings for financial reporting purposes will be sufficient to generate the minimum amount of future taxable income necessary to realize the deferred tax asset. The increase in common and common equivalent shares outstanding was primarily due to the exercise of stock options and the impact of the increase in the Company's - -------------------------------------------------------------------------------- Page 11 stock price on the calculation of common equivalent shares. LIQUIDITY AND CAPITAL RESOURCES Net cash used in operating activities was $4.6 million in the first quarter of fiscal 1998 compared to net cash used in operating activities of $5.1 million in the first quarter of fiscal 1997. Operating cash flow in this quarter was impacted by higher net income as a result of increased operating activities, partially offset by increased working capital requirements, especially the increase in net receivables of $9.5 million due to the significant growth of the Company's quarterly revenues compared to the same period last year. Other working capital requirements included the payment of employee bonuses in the fiscal 1998 first quarter of $9.5 million and the decrease in accounts payable. The employee bonus payments relate to fiscal 1997 and are generally paid by the Company on an annual basis during the first quarter following the end of the fiscal year. The decrease in accounts payable is due mainly to the timing of the payments. The Company's significant amount of cash, cash equivalents and marketable securities has provided ample liquidity to handle the Company's cash requirements. Cash used in investing activities was $6.3 million in the first quarter of fiscal 1998 compared to net cash provided by investing activities of $2.1 million for the same period last year. Proceeds from the sale of available-for-sale securities were $1.0 million and proceeds of $2.3 million were received by the Company due to the maturity of several held-to-maturity investments in the first quarter of fiscal 1998. These proceeds were reinvested in working capital requirements and the expansion of the business. Capital expenditures in the first quarter of fiscal 1998 were $1.2 million. Capital expenditures are expected to continue at the current rate in fiscal 1998 due to the Company's anticipated expansion and growth. The Company expects that its future capital expenditures will be financed through cash flows from operating activities. The Company currently has no material commitments for capital expenditures. Net cash outlays related to business acquisitions were $7.4 million due to the first quarter acquisition of Bentley for a combination of cash and the Company's common stock. The transaction was accounted for using the purchase method of accounting. Total consideration recorded for Bentley was approximately $12.7 million. In addition to cash, the Company exchanged 29,535 shares of common stock of the Company for all the issued and outstanding shares of Bentley and assumed the employee stock options outstanding under Bentley's stock option plan. The purchase price may be increased by approximately $5.8 million if certain performance targets are met over the next two years. The Company has a $5.0 million unsecured line of credit facility (the "Facility") with Bank of America Illinois. The agreement expires September 5, 1998. At the Company's election, loans made under - -------------------------------------------------------------------------------- Page 12 the Facility bear interest at either the Bank of America Illinois reference rate or at the Eurodollar rate plus 0.75 percent. The unused line fee is 0.25 percent of the unused portion of the commitment. The Facility requires, among other things, the Company to maintain certain financial ratios. As of August 31, 1997, the Company was in compliance with these financial ratio requirements. As of August 31, 1997, no borrowings were made under the Facility. All share and per share data have been adjusted to reflect the Company's three-for-two stock splits effected as a 50 percent stock dividend effective August 1, 1997 and July 30, 1996, respectively. NEW ACCOUNTING STANDARDS The Financial Accounting Standards Board ("FASB") has issued Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income," in June 1997. In addition to net income, comprehensive income includes items recorded directly to stockholders' equity such as the income tax benefit related to the exercise of certain stock options. This statement establishes new standards for reporting and displaying comprehensive income and its components in a full set of general-purpose financial statements. This statement is effective for fiscal years beginning after December 15, 1997. Adoption of this standard will only require additional financial statement disclosure detailing the Company's comprehensive income. In June 1997, the FASB also issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 establishes new standards for reporting information about operating segments in interim and annual financial statements. This statement is also effective for fiscal years beginning after December 15, 1997. The Company is currently evaluating the impact, if any, this statement will have on disclosures in the consolidated financial statements. ANY FORWARD-LOOKING STATEMENTS INCLUDED IN THIS FORM 10-Q REFLECT MANAGEMENT'S BEST JUDGMENT BASED ON FACTORS CURRENTLY KNOWN, INVOLVE RISKS AND UNCERTAINTIES INCLUDING THE SUCCESSFUL COMPLETION OF CLIENT PROJECTS AND THE DEVELOPMENT OF NEW CONSULTING SERVICES AND GEOGRAPHIC MARKETS, THE SUCCESSFUL INTEGRATION OF THE OPERATIONS OF RECENTLY ACQUIRED BUSINESSES AND BUSINESS COMBINATIONS, AND OTHER RISKS DETAILED IN THE COMPANY'S REPORT ON FORM 10-K FOR THE YEAR ENDED MAY 31, 1997, UNDER MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS' "ASSUMPTIONS UNDERLYING CERTAIN FORWARD-LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT FUTURE RESULTS" AND ELSEWHERE FROM TIME TO TIME IN THE COMPANY'S OTHER SEC REPORTS. ACTUAL RESULTS MAY VARY MATERIALLY. - -------------------------------------------------------------------------------- Page 13 TECHNOLOGY SOLUTIONS COMPANY PART II. OTHER INFORMATION - -------------------------------------------------------------------------------- ITEM 6 -- EXHIBITS AND REPORT ON FORM 8-K (a) Exhibits Exhibit 11 (b) During the quarter ended August 31, 1997, TSC filed one report on Form 8-K The report on Form 8-K was dated July 2, 1997. This report contained information reported under Item 7 related to summary financial information for the fiscal year and fourth quarter ended May 31, 1997 and information related to TSC's Board of Directors approval of a 50 percent stock dividend distributed on August 1, 1997. All other items in Part II are either not applicable to the Company during the quarter ended August 31, 1997, the answer is negative, or a response has been previously reported and an additional report of the information need not be made, pursuant to the instructions to Part II. - -------------------------------------------------------------------------------- Page 14 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 14th day of October 1997. TECHNOLOGY SOLUTIONS COMPANY Date: October 14, 1997 By: /s/ Martin T. Johnson -------------------- ----------------------------------- Martin T. Johnson Chief Financial Officer - -------------------------------------------------------------------------------- Page 15 TECHNOLOGY SOLUTIONS COMPANY EXHIBIT INDEX Exhibit Paper (P) or Number Description Electronic (E) - ------- ----------- -------------- 11 Statement re Computation of Per Share Earnings (E) 27 Financial Data Schedule (E) - -------------------------------------------------------------------------------- Page 16 EX-11 2 EXHIBIT 11 EXHIBIT 11 TECHNOLOGY SOLUTIONS COMPANY STATEMENT RE COMPUTATION OF PER SHARE EARNINGS (In thousands, except earnings per share) For the Three Months Ended August 31, (A) ------------------- 1997 1996 ---- ---- (unaudited) Net income per statements of income. . . . . . . $ 3,959 $ 2,125 Earnings resulting from modified treasury stock method . . . . . . . . . . . . . . . . . -- 35 -------- -------- Net earnings per modified treasury stock method. . . . . . . . . . . . . . . $ 3,959 $ 2,160 -------- -------- -------- -------- Shares: Weighted average shares outstanding. . . . . 25,181 22,572 Common stock equivalents . . . . . . . . . . 2,795 3,228 -------- -------- Total. . . . . . . . . . . . . . . . . . . . 27,976 25,800 -------- -------- -------- -------- Earnings per share . . . . . . . . . . . . . . $ 0.14 $ 0.09 -------- -------- -------- -------- (A) Share data and per share data have been restated to reflect the three-for-two stock splits that were effective on August 1, 1997 and July 30, 1996, respectively. - -------------------------------------------------------------------------------- PAGE 17 EX-27 3 EXHIBIT 27 FDS
5 1,000 U.S. DOLLARS 3-MOS MAY-31-1998 JUN-01-1997 AUG-31-1997 1 20,931 19,036 59,284 4,164 0 115,596 14,953 7,510 152,762 30,488 0 0 0 269 122,005 152,762 49 60,407 0 52,807 (383) 910 9 7,064 3,105 3,959 0 0 0 3,959 0.14 0.14
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