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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31, 1999
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
$9.0625 on March 10, 2000, and, for the purpose of this calculation only, the
assumption that all of registrant's directors and executive officers are
affiliates) was approximately $394 million.
The number of shares outstanding of the registrant's Common Stock, $.01 par
value per share, as of March 10, 2000 was 43,930,018.
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 2000 Annual Meeting of
Stockholders.
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Technology Solutions Company
PART I.
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ITEM 1. BUSINESS
General
Technology Solutions Company (TSC or the Company) offers end-to-end eBusiness
solutions to major corporations as well as mid-size firms and eBusiness start-
ups. These solutions encompass electronic commerce, electronic procurement,
electronic learning and knowledge management, supply chain management, web-
enabled Enterprise Resource Planning (ERP), core ERP and extended application
service provider services (ASP+). These services help clients in the
manufacturing, technology, health care, telecommunications, financial services,
and other industries transform their businesses, their internal business
processes and their relationships with customers, suppliers, distributors and
employees and help these organizations realize the full benefits of information
technology throughout the enterprise. 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 twelve months
ended December 31, 1999.
On February 15, 2000 TSC successfully completed the spin-off of its eLoyalty
division into a separate publicly traded company, eLoyalty Corporation. Prior to
the spin-off TSC was organized into two business segments which each had its own
business focus and service offering - Enterprise Solutions (E-Solutions) and
eLoyalty. eLoyalty is a global information technology services company focused
on providing enterprise-wide solutions across all customer access channels,
including the Internet. eLoyalty Corporation trades on the Nasdaq Stock
Market(R) under the symbol "ELOY". In recognition of the spin-off, this report
discusses the continuing operations of TSC: the E-Solutions business. For
discussion of certain forward-looking statements, refer to Assumptions
Underlying Certain Forward-Looking Statements and Factors That May Affect Future
Results.
TSC services span a wide range of eBusiness consulting and systems integration
services. TSC provides a full spectrum of eBusiness services, either in an end-
to-end integrated solution that cross functional boundaries in the client's
organization or as a point solution addressing a single functional area. These
services involve a full assessment of clients' eBusiness strategy and relevant
integrated needs. The Company will perform 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, package software implementation, systems
integration, change management, education, training, and support services.
Enterprise business processes that are automated with core ERP solutions provide
the foundation that allow companies to integrate their front-end web sites with
their core business processes
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(e.g., order entry, order fulfillment, and delivery), allowing them to increase
the benefits of eBusiness. TSC provides system integration services for core ERP
solutions from SAP, Oracle, PeopleSoft/Vantive and Baan. Historically, core ERP
solutions have been TSC's main offerings and currently represent over 75 percent
of the business by revenue.
Since January 1999, TSC has performed project work for over 250 corporations,
including 15 of the Fortune 50 companies and 25 of the Fortune 100 companies.
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 Atlanta, Georgia;
Dallas, Texas; New York, New York; and San Francisco, Soquel and Irvine,
California. International offices are located in Bogota, Colombia; London,
England; and Mexico City, Mexico.
Strategy
TSC's business strategy is to use core ERP systems as a "backbone" to develop
and integrate end-to-end eBusiness solutions that connect all phases of a
customer's business, from supplier order processing to customer delivery. The
Company will deliver all or part of an eBusiness solution to a client, but
emphasizes the advantage of a seamlessly integrated system with no manual or
paper processes to act as bottlenecks or opportunities to lose or inaccurately
enter data. The Company's goal is to anticipate market needs and apply proven
but leading-edge information technologies to deliver these eBusiness solutions.
TSC's clients are typically firms that range in size from $500 million to $5
billion in annual revenue. TSC also performs work at larger firms, often at
larger divisions or subsidiaries that fall into this market segment.
TSC's eBusiness solutions projects often begin with one or more eBusiness
assessments, basically a high-end consulting project. Examples of TSC's high-end
consulting work include: the development of an eProcurement 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.
Subsequent to the assessment stage, TSC typically develops an eBusiness strategy
with the client, assists in the selection of the appropriate platform and
architecture, plans the phases of the project and then moves into the
implementation stage. The implementation stage generally involves integrating
eBusiness infrastructure, web site content, business-to-business (B2B)
applications, business-to-consumer (B2C) applications, back office systems,
supply chain management systems and customer support systems. Post-
implementation, TSC can provide ongoing hosting and support for systems and
applications through its ASP+ services.
An increasing number of TSC's projects have an eBusiness component that extends
the enterprise beyond core ERP. TSC is placing significant emphasis on growing
these offerings and expects them to contribute an increasing percentage of total
Company revenue.
TSC's strategy is to focus on developing and maintaining relationships with its
customers within the client organization. With high-level sponsorship of its
projects, TSC believes that there is a
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higher level of commitment to complete the project and an increased opportunity
to expand the working relationship with the client to more extensive eBusiness
projects.
Business
TSC provides eBusiness services on a client-specific basis and is primarily
organized along geographically based regional lines. This organization allows
the Company to focus on each client's needs as well as to offer superior
application and industry expertise in high-growth markets such as financial
services and telecom and in high-growth application areas such as Supply Chain
Management, ASP+, and Knowledge Management. 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 eBusiness market. TSC has
implemented major new systems within manufacturing, distribution, retail,
transportation, telecommunications, banking, insurance, health care and
financial services firms.
Competitive Differentiation
Important factors in TSC's project work are project management as well as
industry-specific and application knowledge. TSC dedicates an experienced,
senior level project manager (often 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 solution, 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 currently have
significant activity in the local, state, and federal government segments of the
domestic systems integration market.
TSC works in close conjunction with client personnel, at the client site, on
projects. 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 resources. TSC
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endeavors to help each of 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, project management plans, best practice and benchmark
information 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, software, tools, templates, project management plans and best
practice and benchmark information 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:
Systems Integration and Project Management -- TSC works with the client to
design and develop an appropriate solution to meet the client's needs. TSC's
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, networking, and other components.
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.
Reusable Tools and Methodologies -- TSC has developed a number of methodologies,
templates and tools which are used in various areas of the strategic planning,
market analysis, business case, systems integration, project management, and
software package integration/implementation aspects of TSC's project work. These
methodologies, templates, and tools decrease the time required to implement a
system, as well as increase reliability and reduce client risk associated with a
particular project phase.
Change Management and Training -- TSC embeds a change management component in
its delivery of solutions, recognizing that the ability and speed of the people
in a client organization to adapt to new systems is a critical success factor.
Whether it is a package implementation or a large complex systems integration
project, employees at all levels of the client are affected. The failure of the
users to properly utilize the system can prevent the client from 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-
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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.
Practice Areas
TSC currently manages its business in one reportable segment, named E-Solutions.
However, E-Solutions is comprised of three practice areas: Digital Enterprise
Consulting; Knowledge Management; and ASP+. Each serves TSC customers in the
U.S. and international markets. TSC believes that offering these three bands of
services allows the company to serve clients in all aspects of their information
technology and eBusiness needs. This structure also allows its employees the
flexibility and opportunity to grow and develop. The three areas work in an
integrated manner that develops, shares and cross references methodologies,
tools, project management plans, benchmark information, templates and best
practices overall. All information related to client projects--including
proposals and project plans--is in knowledge databases that can be accessed by
TSC personnel working on projects throughout TSC.
TSC believes that within each of its practice areas, 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.
Digital Enterprise Consulting
The Digital Enterprise Consulting (DEC) practice area provides IT consulting and
business consulting services that help clients in developing and implementing
all aspects of their electronic business capabilities. Historically, TSC has
focused on implementing third-party application software packages, primarily in
the ERP area. TSC believes that those services provide a "backbone" for
additional eBusiness services that are more focused on external customers and
vendors, and the Company is now offering and providing those additional services
to both existing and new customers. The DEC practice area represented the
majority of TSC'S 1999 revenues.
For the back-end (or traditional) aspects of the DEC practice, TSC implements
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.
Within DEC, customers can take advantage of areas of expertise and resources
that fall under the following business elements:
Core ERP develops "backbone" automated structures that help businesses automate
and streamline human resources, manufacturing and financial processes and
systems. In addition to its consulting services associated with the ERP software
products offered by PeopleSoft, SAP, Oracle, and Baan, TSC is a "solution
assembler." TSC customers are adding specialized best-of-
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breed software applications to their existing ERP installations through the use
of TSC's Solution Assembly and Architecture services.
eBusiness Strategy and Planning provides consulting strategy, architecture and
system design services along with rapid eBusiness solution delivery
capabilities. Clients receive a rapid assessment of their Internet strategy by
benchmarking against industry best practices. Additionally, competitor
capabilities are evaluated to identify potential Internet-based opportunities,
and TSC makes process recommendations for the future. TSC 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 solutions.
eProcurement Solutions involves developing and implementing customized software
that brings buyers and sellers together in the electronic marketplace.
Oftentimes, TSC interfaces these solutions with existing customer systems. This
requires expertise in various third-party software packages that serve multiple
areas of a customer's business.
Supply Chain Management Solutions involves developing and implementing
customized software for our clients that create dynamic links between the
clients and their suppliers. This requires expertise in multiple third-party
software packages that serve numerous areas of a customer's business.
Change and Learning assists organizations in managing the human side of
implementing strategic change in a corporate environment through change
management services, customized educational programs, and multi-media resources
that help organizations achieve the greatest benefits from their strategic
investments. 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
and the business and the culture of the client.
In the area of change management, the services provided by TSC include:
Strategic Visioning; leadership of the change process; development and training
of the teams; development and deployment of a communications plan to ensure
consistent and clear messages about the project; and development of objectives
by employees that can be measured and attained.
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TSC's services in the education and training area include: the analysis of the
audience to be trained; the development of executive education programs,
including the linkage of performance measures to project goals; development of
customized education courses; development of specific educational courses that
highlight the business processes being implemented and explain their benefits;
development of customized skills training programs; and development of new
policies and procedures and the incorporation of these into training programs.
Knowledge Management
The Knowledge Management practice area is focused on harnessing the intellectual
capital of client companies. To do this, TSC employs knowledge management tools
and technologies ranging from sophisticated knowledge-based business processes
and web-based training to business intelligence.
In October 1999, TSC announced that it had acquired CourseNet Systems, Inc.
(CourseNet) an e-learning solutions delivery company. CourseNet expanded the
Knowledge Management practice to meet growing demand from clients. CourseNet's
XML-based software allows users to create and reuse "learning objects," which
can be integrated into multiple training programs with minimal effort. With this
software, TSC's Knowledge Management offering includes a suite of tools to
author, deliver, and administer online training, allowing companies to identify
experts, take online courses, collaborate in the development of new knowledge,
and share knowledge with the entire organization and even the entire supply
chain. TSC itself is using the solution and several other major companies are
implementing CourseNet programs.
ASP+
The Company has recently developed an ASP+ practice area. The ASP+ practice area
provides clients comprehensive hosting services for integrated eBusiness
solutions that include multiple applications and legacy systems. TSC's ASP+
services include solutions and development support, network services and data
centers, network operations support and help desk services. Some of these
services are provided directly by TSC while other services are provided by TSC's
ASP partners. ASP+ can support single or multiple applications ranging from
back-office ERP systems to Web site front ends. ASP+ support is priced on a
monthly fee and/or fee per use basis.
Sales
TSC utilizes a high-end relationship-selling model in most of its business
areas. The critical component in this selling model is TSC's Vice
President/Project Manager. The Project Managers 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
30 people). This sales organization is responsible for developing and qualifying
leads which come from a variety of sources. These sources include referrals from
current and former clients; leads from employees;
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contacts from industry research organizations; leads generated by attendance at
conferences and trade shows; and leads from marketing efforts, including TSC's
web site, telemarketing and advertising. 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 a proposed project that would
involve TSC, the salesperson brings a TSC Project Manager into the process to
develop a proposal and/or respond to the client RFP (request for proposal). At
this time, the Project Manager becomes TSC's primary interface 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 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.
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International
TSC's international operations have been focused in Latin America and Europe. In
each of these areas, ERP is the primary focus.
The Company's international operations accounted for 6 percent of revenues for
the year ended December 31, 1999, 4 percent of revenues for the seven month
transition period ended December 31, 1998, 5 percent of revenues for fiscal 1998
and 6 percent of revenues for fiscal 1997. Total staffing at the Company's
international operations was 68 as of December 31, 1999. For discussion of
certain risks related to the Company's International Operations, See Risks of
Conducting International Operations.
Clients
The Company's five largest clients during the year ended December 31, 1999
accounted for 4 percent, 4 percent, 4 percent, 4 percent and 3 percent of total
revenues respectively; in the seven month transition period ended December 31,
1998 the five largest clients accounted for 5 percent, 5 percent, 3 percent, 3
percent, and 3 percent of total revenues, respectively; in fiscal 1998, the five
largest clients accounted for 6 percent, 4 percent, 3 percent, 3 percent, and 3
percent of total revenues, respectively; in fiscal 1997, they accounted for 11
percent, 5 percent, 5 percent, 5 percent and 5 percent of total revenues,
respectively. No client accounted for 10 percent or more of revenues during the
year ended December 31, 1999, the seven month transition period ended December
31, 1998 or fiscal 1998. In fiscal 1997, The Prudential accounted for 11 percent
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 global 2000 accounts and includes the 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 year
ended December 31, 1999, TSC performed work at 15 of the Fortune 50 companies
and 25 of the Fortune 100 companies.
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Personnel
As of December 31, 1999, TSC had a total staff of 599 (excluding Global Core
Services). The following table summarizes, as of December 31, 1999, the
experience levels of TSC's professional staff.
Average Relevant Experience (Years)
---------------------------------------
% of
Level Total Consulting Industry Total
----------- ----- ---------- -------- -----
Vice Presidents 11% 10 10 20
Senior Principals 19% 7 11 18
Principals 26% 6 10 16
Senior Consultants 22% 4 7 11
Consultants 18% 2 4 6
Associate Consultants 4% 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, 1999, TSC had a staff of 99 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 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; training; internal communications;
internal technology applications; planning; quality assurance; and insurance.
Intellectual Property Rights
Many 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 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 future software licenses upon terms
acceptable to the Company.
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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 the 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 eBusiness consulting and systems integration markets are highly competitive
and include participants from a variety of market segments. 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 these
categories. Among the more recognizable participants in the eBusiness consulting
and systems integration business are 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; PricewaterhouseCoopers LLP; and Sapient
Corporation. 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, train 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 eBusiness consulting and systems integration business also
face potential competition from in-house systems staff. In-house systems staffs
are often considered to be a lower cost alternative to outside systems firms. In
addition, the use of in-house staff permits the client to build skills for
maintaining and enhancing the system, as well as skills to implement future
systems. On the other hand, use of an in-house staff for a major systems project
often requires hiring a significant number of additional people with no
assurances that 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.
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Many participants in the eBusiness consulting and systems integration business
have significantly greater financial, technical, and marketing resources and
generate greater systems consulting and implementation revenues than does TSC.
TSC competes more frequently with Andersen Consulting for major systems
integration projects than with any other participant in the market. Andersen
Consulting has substantially greater revenues, employee headcount, and market
share than does TSC.
Executive Officers of the Registrant
The executive officers of TSC as of March 23, 2000 are as follows:
William H. Waltrip Chairman
Jack N. Hayden President and CEO
Timothy P. Dimond Senior Vice President and Chief Financial Officer
Paul R. Peterson Senior Vice President, General Counsel and Corporate Secretary
William H. Waltrip, age 62, 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.
Jack N. Hayden, age 52, has been President and Chief Executive Officer of the
Company since February 2000. He joined TSC in April 1992 as Senior Vice
President, served as interim Chief Financial Officer during late 1992 and early
1993, and assumed the role of Executive Vice President in July 1995. Mr. Hayden
served as Chief Executive Officer of Coleman Consulting Group, Inc., from
September 1998 to March 1999. He rejoined the TSC executive team in March 1999
as Group President of the E-Solutions business. Prior to coming to TSC, Mr.
Hayden held the position of Vice President - Operations, Commercial Transport
Division of McDonnell Douglas Corporation from 1990 to 1992. From 1989 to 1990,
he served as Vice President-Finance of McDonnell Douglas Corporation. From 1971
to 1989, he served in numerous manufacturing and procurement positions at
McDonnell Douglas Corporation.
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Timothy P. Dimond, age 40, joined TSC in 1994 as Corporate Controller and in
April 1999 assumed the role of Chief Financial Officer. In August 1998, he
assumed the role of Vice President of Finance and Chief Accounting Officer after
serving as the Vice President of Latin America Operations from 1996 to 1998.
From 1990 to 1994, he was Director of Financial Reporting for The Marmon Group,
Inc. From 1981 to 1990, he worked in the audit department of Ernst and Young
most recently as an audit manager.
Paul R. Peterson, age 58, 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.
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; Dallas, TX; New York, NY;
and San Francisco, Soquel and Irvine, CA. Additionally, TSC leases or shares
office premises in Bogota, Colombia; London, England; and Mexico City, Mexico.
TSC believes that these facilities are adequate for its current business needs
and that it will be able to obtain suitable space as needed.
ITEM 3. LEGAL PROCEEDINGS
The Company is party to lawsuits arising out of the normal course of business.
Management believes the final outcome of such litigation will not have a
material adverse effect on the Company's consolidated financial position,
results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter ended December
31, 1999.
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Technology Solutions Company
PART II.
- --------------------------------------------------------------------------------
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on The Nasdaq Stock Market(R) under the
symbol "TSCC." As of March 10, 2000, there were approximately 800 holders of
record of the Company's Common Stock. That number 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(R) for the Company's Common Stock for each quarter period in
the years ended December 31, 1999 and 1998.
Quarter Ended High Low
------------- ---- ---
March 31, 1998 $22.667 $13.834
June 30, 1998 $23.667 $16.834
September 30, 1998 $21.500 $ 9.000
December 31, 1998 $13.938 $ 6.125
March 31, 1999 $11.250 $ 6.375
June 30, 1999 $11.563 $ 6.500
September 30, 1999 $15.500 $ 9.625
December 31, 1999 $39.250 $13.813
On March 10, 2000, the last reported sale price on The Nasdaq Stock Market(R)
for the Company's Common Stock was $9.0625. This price reflects the effect of
the February 15, 2000 eLoyalty spin-off into a separate publicly traded company.
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
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has experienced significant price fluctuations that have particularly affected
the market prices of equity securities of many high technology and emerging
growth companies and that often have been unrelated to the operating performance
of such companies. These broad market fluctuations may materially and adversely
affect the market price of the Company's Common Stock. Following periods of
volatility in the market price of a company's securities, securities class
action litigation has often been instituted against such a company and its
officers and directors. Any such litigation against the Company could result in
substantial costs and a diversion of management's attention and resources, which
could have a material adverse effect on the Company's business, financial
condition, operating results and cash flows.
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 has been adjusted to reflect all of the Company's prior stock
splits as of December 31, 1999.
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Page 15
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 operations for the year ended December 31, 1999,
for the seven month transition period ended December 31, 1998 and for the years
ended May 31, 1998 and 1997 and the audited balance sheets as of December 31,
1999 and 1998 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 (loss)
earnings per common share and (loss) earnings per common share assuming
dilution.
Seven Month
For the Transition
Year Ended Period Ended
December 31, December 31, For the Year Ended May 31,
-------------- -------------- -----------------------------------------------------
1999 1998 1998 1997 1996 1995
---- ---- ---- ---- ---- ----
Consolidated Statement of
Operations Data:
Revenues $156,320 $126,839 $189,603 $122,063 $71,224 $59,686
Operating (loss) income $(20,697) $ 1,844 $ 22,471 $ 14,094 $(4,279) $ 1,391
(Loss) income from
continuing operations $(11,578) $ 1,954 $ 14,233 $ 9,758 $(1,018) $ 2,379
Income from
discontinued operations $ 5,133 $ 2,521 $ 6,787 $ 5,309 $ 5,592 $ 988
Loss on distribution of
discontinued operations $ (6,789) -- -- -- -- --
Net (loss) income $(13,234) $ 4,475 $ 21,020 $ 15,067 $ 4,574 $ 3,367
======== ======== ======== ======== ======= =======
(Loss) income per
common share from
continuing operations $ (0.27) $ 0.05 $ 0.37 $ 0.28 $ (0.03) $ 0.08
(Loss) income from
discontinued operations $ (0.04) $ 0.06 $ 0.17 $ 0.15 $ 0.18 $ 0.03
-------- -------- -------- -------- ------- -------
Net (loss) earnings
per common share* $ (0.31) $ 0.11 $ 0.54 $ 0.43 $ 0.15 $ 0.11
======== ======== ======== ======== ======= =======
(Loss) income per
common share from
continuing operations
assuming dilution $ (0.27) $ 0.04 $ 0.33 $ 0.25 $ (0.02) $ 0.06
(Loss) income from
discontinued operations
assuming dilution $ (0.04) $ 0.06 $ 0.16 $ 0.13 $ 0.15 $ 0.03
-------- -------- -------- -------- ------- -------
Net (loss) earnings
per common share
assuming dilution* $ (0.31) $ 0.10 $ 0.49 $ 0.38 $ 0.13 $ 0.09
======== ======== ======== ======== ======= =======
*Earnings per common share data have been restated to reflect all of the
Company's prior stock splits.
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Page 16
December 31, May 31,
----------------------------- ----------------------------------------------------------
1999 1998 1998 1997 1996 1995
---- ---- ---- ---- ---- ----
Consolidated Balance
Sheet Data:
Total assets.................. $223,309 $219,099 $197,148 $133,866 $89,437 $65,222
Long-term debt................ __ __ __ __ __ __
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Page 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CALENDAR 1999 COMPARED WITH CALENDAR 1998
On February 15, 2000 TSC successfully completed the spin-off of its eLoyalty
division into a separate publicly traded company. Previously on January 27,
2000, TSC received a favorable ruling from the Internal Revenue Service that the
spin-off of its eLoyalty division would be a tax free distribution of all of the
Company's eLoyalty shares to TSC's shareholders. Accordingly, this report
discusses the TSC consolidated statements of operations with eLoyalty's
operations presented on a discontinued operations basis.
Consolidated net revenues for the year ended December 31, 1999 decreased 27
percent to $156.3 million compared with $215.1 million for the same period last
year. This decrease was mainly due to a decline in the demand for certain TSC
services as a result of clients facing budgetary restraints as they focused on
Year 2000 issues. This has been evidenced by a reduction in new license sales by
package software vendors such as PeopleSoft and Baan. Historically, TSC's main
revenues consisted mainly of core Enterprise Resource Planning (ERP) solutions.
Prospectively, the Company expects its other eBusiness solution offerings to
experience greater future growth rates than core ERP.
Project personnel costs, which represent mainly professional salaries and
benefits, decreased to $81.6 million for the year ended December 31, 1999 from
$102.0 million for the same period last year, a decrease of 20 percent. The
decrease was mainly due to a decrease in professional headcount. Project
personnel costs as a percentage of net revenues increased to 52 percent for the
year ended December 31, 1999 from 47 percent for the same period last year due
to the decline in revenues and lower staff utilization in the first half of the
year. To reduce these costs and improve utilization, the Company streamlined and
refocused its business, which resulted in restructuring and other charges of
$17.5 million (as discussed further in this section).
Other project expenses consist of nonbillable expenses directly incurred for
client projects and business development. These expenses include 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 year ended December 31, 1999 were $25.3 million,
compared with $32.5 million in the comparable period last year, a decrease of
$7.2 million, or 22 percent. The decrease in other project expenses primarily
included the following: a decrease of $4.6 million in domestic practice area
development including marketing, business development, travel and sales
commissions; a decrease of $5.1 million in domestic hiring, training,
communication and computer expenses due to a decrease in average headcount; and
a decrease in various other costs of $0.6 million, which include items such as
depreciation expense, new employee costs and various other costs. These
decreases were offset by increases of $3.1 million in the provision for
valuation allowances and reserves for potential losses and international costs.
Other project expenses as a percentage of net revenues increased slightly to 16
percent for the year ended December 31, 1999 from 15 percent for the same period
last year.
Management and administrative support costs decreased $15.5 million to $42.5
million for the year ended December 31, 1999 from $58.0 million for the same
period last year, a decrease of
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27 percent. Approximately $4.8 million of this decrease is attributable to
reduced practice area management and administrative costs. This decrease
primarily resulted from a decline in travel and hiring costs of $1.5 million, a
decrease in international expenses of $1.4 million, a decrease in practice area
support personnel of $0.2 million and a decrease in various other domestic
management and administrative expenses of $1.7 million, which include items such
as practice area sales, amortization of software costs and other expenses. The
Company also had a decrease of $5.4 million in Global Core Service (GCS) costs
over last year. The decrease in GCS costs versus the same period last year
included the following: a decrease in the internal systems and human resources
areas of $1.3 million and a decrease in corporate recruiting expenses of $2.2
million as a result of a reduction in headcount; a decrease in international
expenses of $0.4 million; a decrease in domestic office costs of $1.0 million
due to the closing of several offices; and a decrease in legal expenses of $0.8
million, slightly offset by an increase in various other costs of $0.3 million.
In addition, the Company recorded expenses of $5.3 million during the year ended
December 31, 1998 resulting from decisions made 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 decreased to $0.2 million for the year ended December 31,
1999 compared to $0.4 million for the same period last year. This decrease
mainly results from the goodwill relating to the McLaughlin & Associates
acquisition being written off at the end of the first quarter of 1999.
On March 30, 1999, the Company announced that it was making a number of changes
to its business operations and, as a result, the Company recorded a
restructuring charge of $10.5 million associated with those changes and the
severance of approximately 300 people, primarily consulting personnel. The
restructuring charge was determined based on a plan prepared at the time the
restructuring actions were approved by management and the Board of Directors.
During the year ended December 31, 1999, the Company used $9.3 million of the
restructuring accrual as a result of cash paid during the year of $7.8 million
associated with the severance of approximately 270 employees and $1.5 million in
asset write-offs and other costs. In addition, during the quarter ended December
31, 1999, the Company recorded $7.0 million in restructuring and other costs
associated with lease terminations of $3.0 million, former executive severance
costs of $1.8 million, CourseNet Systems, Inc. (CourseNet) costs of $1.3 million
and write-offs of other assets of $0.9 million. The restructuring accrual
balance is considered adequate to cover the remaining committed restructuring
actions.
Incentive compensation of $9.9 million was accrued during the year ended
December 31, 1999 compared to $8.3 million for the same period last year.
Incentive compensation as a percentage of net revenues increased to 6 percent
for the year ended December 31, 1999 compared to 4 percent for the same period
last year. The increase was primarily due to an increase in the bonus accrual
for non-vice president personnel. The Company expects to continue to accrue
incentive compensation throughout the 2000 calendar year.
Consolidated operating loss from continuing operations was $20.7 million for the
year ended December 31, 1999 compared with consolidated operating income of
$13.9 million in the prior period, due to the reasons outlined above. Excluding
the restructuring and other charges, consolidated operating loss was $3.2
million during the year ended December 31, 1999. This
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Page 19
decrease was mainly due to a decrease in the demand for certain TSC services and
resulting lower utilization rates.
Other income and expense for the year ended December 31, 1999 was $3.6 million
compared to $2.9 million for the same period a year ago. The increase is a
result of higher cash and cash equivalent balances for the year ended December
31, 1999 compared to the same period a year ago.
The Company's effective tax rate for the year ended December 31, 1999 was a 32
percent benefit compared to a 42 percent provision for the same period a year
ago. The tax rate for the year ended December 31, 1999 was lower than in the
previous year because certain amounts related to the CourseNet acquisition, as
well as the goodwill amortization related to this acquisition, were not tax
deductible.
Income from discontinued operations from the eLoyalty division was $5.1 million
for the year ended December 31, 1999 compared with $6.7 million for the same
period last year. Excluding fees and other costs related to the eLoyalty
transaction of $4.4 million, income from discontinued operations for the year
ended December 31, 1999 was $9.5 million, an increase of 41 percent over the
prior period. This increase was primarily due to the increased demand for
eLoyalty services.
Weighted average number of common shares outstanding increased due to the
exercise of stock options, the issuance of shares under the Company's employee
stock purchase plan and the investment by the venture capital firms (see Note
12), partially offset by the repurchase of some outstanding shares. Weighted
average number of common and common equivalent shares outstanding decreased
because there were no adjustments for the effect of stock options as the
adjustment would have been anti-dilutive for the year.
THE SEVEN MONTH 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. In addition, on
February 15, 2000 TSC successfully completed the spin-off of its eLoyalty
division into a separate publicly traded company. Accordingly, this report
discusses the TSC consolidated statements of operations with eLoyalty's
operations presented on a discontinued operations basis.
Consolidated net revenues for the seven month transition period ended December
31, 1998 increased 25 percent to $126.8 million compared with $101.4 million for
the same period in the prior year. This increase was primarily due to continued
demand for consulting services that implement third-party application software
packages. Domestic revenue grew 27 percent due to the Company's ability to
generate additional revenue through an increased consulting staff, as well as an
overall 4 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 six percent.
Project personnel costs for the seven month transition period ended December 31,
1998, which represent mainly professional salaries and benefits, increased to
$61.5 million from $47.0 million
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Page 20
for the same period in the prior year, an increase of 31 percent. The increase
was partially due to an increase in professional headcount and was consistent
with the higher revenues reported during the seven month transition period ended
December 31, 1998. Project personnel costs as a percentage of net revenues
increased to 48 percent for the seven month transition period ended December 31,
1998 from 46 percent for the same period in the prior 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 seven month transition period ended December 31, 1998 were $19.8
million, compared with $14.2 million in the comparable period in the prior year,
an increase of $5.6 million, or 39 percent. The increase in other project
expenses primarily included the following: an increase of $2.5 million in
domestic hiring, training, communication and computer expenses associated with
increased headcount; an increase of $1.1 million associated with domestic
practice area development including marketing, business development, travel and
sales commissions; an increase in international costs of $1.2 million associated
with travel, marketing and business development expenses; and a net increase of
$0.8 million in various other costs which includes termination costs,
depreciation expense and various other costs. Other project expenses as a
percentage of net revenues increased to 16 percent in the seven month transition
period ended December 31, 1998 from 14 percent for the same period in the prior
year due mainly as a result of the items mentioned above.
Management and administrative support costs increased $13.4 million to $36.9
million for the seven month transition period ended December 31, 1998 from $23.5
million for the same period in the prior year, an increase of 57 percent.
Approximately $5.0 million of this increase was attributable to the increase in
Global Core Service (GCS) costs over the same period in the prior year, which
was necessary to support the growth in business. The increase in these costs
versus the same period in the prior year included: increased expenses in the
internal systems and human resources areas of $3.5 million; higher expenses of
$0.6 million related to the expansion of the Company's corporate recruiting
organization; higher marketing expenses of $0.8 million as a result of increased
corporate marketing efforts; and a net increase in various other costs of $0.1
million including corporate legal, accounting, finance and investor relations
costs. The Company also incurred an additional $3.1 million of practice area
management and administrative costs. These costs primarily included additional
domestic regional management and practice area support personnel of $1.0
million; international growth of $0.7 million; and various other domestic
management and administrative expenses of $1.4 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 seven month transition
period ended December 31, 1998. This results from decisions made during the
seven month 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 remained unchanged for the seven month transition period
ended December 31, 1998 compared to the same period in the prior year at $0.2
million.
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Incentive compensation of $6.7 million was accrued during the seven month
transition period ended December 31, 1998 compared to $5.6 million for the same
period in the prior 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.
Consolidated operating income from continuing operations was $1.8 million during
the seven month transition period ended December 31, 1998 compared with $10.8
million in the same period in the prior year. This decrease was mainly due to
increased practice area overhead as a result of various investments and higher-
than-average management turnover, offset in part by higher staff utilization and
higher billing rates compared to the prior period. Also contributing to this
decrease was higher GCS costs and expenses to sever certain management and
administrative employees and amortization expenses, as described above.
Net investment income for the seven month transition period ended December 31,
1998 was $1.7 million compared to $0.9 million for the same period a year ago.
The increase is a result of higher cash and cash equivalent balances for the
seven month transition period ended December 31, 1998 compared to the same
period a year ago.
The Company's effective tax rate increased slightly to 45 percent for the seven
month transition period ended December 31, 1998 compared to 43 percent in the
prior period.
Income from discontinued operations from the eLoyalty division increased to $2.5
million for the seven month transition period ended December 31, 1998 compared
to $2.3 million in the prior period, an increase of 9 percent. This increase was
due to the increased demand in eLoyalty services and an increase in revenues,
offset in part by investments in product development, expansion into Australia
and further investment spending in Europe.
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.
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FISCAL 1998 COMPARED WITH FISCAL 1997
On February 15, 2000 TSC successfully completed the spin-off of its eLoyalty
division into a separate publicly traded company. Accordingly, this report
discusses the TSC consolidated statements of operations with eLoyalty's
operations presented on a discontinued operations basis.
Consolidated net revenues for the year ended May 31, 1998 increased 55 percent
to $189.6 million compared with $122.1 million in fiscal 1997. This increase was
primarily due to continued demand for consulting services that implement third-
party application software packages. The Company's domestic revenue grew 58
percent and international revenue grew 18 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 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 $87.6 million from $58.6
million in fiscal 1997, an increase of 50 percent. The increase was primarily
due to an increase in professional headcount and was consistent with the higher
revenues reported in fiscal 1998. Project personnel costs as a percentage of net
revenues decreased to 46 percent for fiscal year 1998 compared to 48 percent in
fiscal 1997.
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 $27.0 million, compared with $15.9 million for fiscal 1997.
This change was partially due to increases in hiring, training, practice area
development and nonbillable travel expenses of $7.9 million as a result of
increased headcount and business development. Other project expenses as a
percentage of net revenues increased to 14 percent for fiscal 1998 compared to
13 percent in fiscal 1997.
Management and administrative support costs increased $19.0 million to $44.6
million for the year ended May 31, 1998 from $25.6 million for the year ended
May 31, 1997, an increase of 74 percent. Approximately $11.6 million of this
increase was attributable to the investment made in Global Core Services (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 of $2.6 million; increased expenses in the
internal systems and human resources areas of $3.9 million; higher expenses of
$1.4 million related to the expansion of the Company's corporate recruiting
organization; and higher marketing expenses of $0.9 million as a result of
increased corporate marketing efforts. The Company also incurred an additional
$7.4 million of practice area management and administrative costs. These costs
primarily included international growth of $1.1 million; additional domestic
regional management and practice area support personnel of $3.3 million; and
various other management and administrative expenses of
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Page 23
$3.0 million which include items such as practice area marketing, recruiting,
sales and other expenses.
Goodwill amortization remained unchanged for fiscal year 1998 compared to fiscal
year 1997 at $0.4 million.
Incentive compensation of $7.5 million was accrued for the year ended May 31,
1998 compared to $7.4 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.
Consolidated operating income from continuing operations increased 59 percent to
$22.5 million in fiscal 1998 compared with $14.1 million in fiscal 1997. This
increase was due to higher staff utilization and higher billing rates compared
to the prior period and were consistent with the increase in revenues. This
increase was partially offset by higher GCS costs, as described above.
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.
Income from discontinued operations from the eLoyalty division increased to $6.8
million for fiscal year 1998 compared to $5.3 million in the prior period, an
increase of 28 percent. This increase was primarily due to the increased demand
in eLoyalty services and an increase in eLoyalty revenues, offset in part by
investment programs and geographic expansion.
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.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $27.1 million for the year ended
December 31, 1999 compared to net cash provided by operating activities of $18.3
million in the prior year. Operating cash flow for the year ended December 31,
1999 included the restructuring and other charges and other favorable working
capital activities, such as depreciation and amortization expense, accrued
compensation and related costs and other current liabilities, offset by lower
net income.
Net cash used in investing activities was $18.8 million for the year ended
December 31, 1999 and reflects $13.5 million of cash held by discontinued
operations as of December 31, 1999. The Company purchased $1.5 million of
available-for-sale securities and received $2.8 million from the sale of
available-for-sale securities. The proceeds from available-for-sale securities
were transferred to cash and cash equivalents and reinvested in ongoing business
activities.
Capital expenditures for the year ended December 31, 1999 were $2.5 million.
Capital expenditures may continue at the current rate throughout the 2000
calendar year. The Company currently has no material commitments for capital
expenditures.
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Page 24
Net cash outlays related to net assets of acquired businesses and other assets
were $4.2 million for the year ended December 31, 1999. This represents the
October 29, 1999 acquisition of CourseNet.
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 December 30, 2000. 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, 1999, the Company was in compliance with these
financial ratio requirements. As of December 31, 1999, no borrowings had been
made under the Facility.
Subsequent to December 31, 1999 and in connection with the eLoyalty spin-off,
the Company contributed an additional $20.0 million of cash to eLoyalty
Corporation. In light of this recent transaction, the Company still retains
significant amounts of cash and cash equivalents and marketable securities to
provide ample liquidity to handle the Company's current cash requirements.
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, as amended is
effective for financial statements issued for periods ending after June 15,
2000. 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.
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ASSUMPTIONS UNDERLYING CERTAIN FORWARD-LOOKING STATEMENTS AND FACTORS THAT MAY
AFFECT FUTURE RESULTS
This Form 10-K includes or may include certain forward-looking statements that
involve risks and uncertainties. This Form 10-K contains certain forward-looking
statements concerning the Company's financial position, business strategy,
budgets, projected costs and plans and objectives of management for future
operations as well as other statements including words such as "anticipate,"
"believe," "plan," "estimate," "expect," "intend," and other similar
expressions. Although the Company believes its expectations reflected in such
forward-looking statements are based on reasonable assumptions, readers are
cautioned that no assurance can be given that such expectations will prove
correct and that actual results and developments may differ materially from
those conveyed in such forward-looking statements. Important factors that could
cause actual results to differ materially from the expectations reflected in the
forward-looking statements in this Form 10-K include, among others, the pace of
technological change, the Company's ability to manage growth and attract and
retain employees, general business and economic conditions in the Company's
operating regions, and competitive and other factors, all as more fully
described below. Such forward-looking statements speak only as of the date on
which they are made and the Company does not undertake any obligation to update
any forward-looking statement to reflect events or circumstances after the date
of this Form 10-K. If the Company does update or correct one or more forward-
looking statements, investors and others should not conclude that the Company
will make additional updates or corrections with respect thereto or with respect
to other forward-looking statements. The cautionary statements provided below
are being made pursuant to the provisions of the Private Securities Litigation
Reform Act of 1995 (the PSLRA) and with the intention of obtaining the benefits
of the "safe harbor" provisions of the PSLRA for any such forward-looking
information. Many of the factors discussed below, as well as other factors, have
also been discussed in prior filings made by the Company.
Factors which could cause the Company's actual financial and other results to
differ materially from any results that might be projected, forecast, estimated
or budgeted by the Company in the forward-looking statements include, but are
not limited to, the following:
Year 2000 Issue
The Year 2000 issue is a general term used to address a class of problems which
are caused by the inability of some 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 not experienced any
significant Year 2000 disruptions and none of the Company's suppliers or vendors
have experienced Year 2000 disruptions that have had a significant impact on the
Company.
The Company has conducted an assessment of its computer information systems by
inventorying related hardware and software systems and has determined the nature
and extent of the work required to ensure that its internal systems are Year
2000 compliant. The Company's internal systems can be grouped into three
principal categories - its accounting and human resources software, its legacy
systems that perform a variety of processes, and its office automation software
products. With respect to the suite of software products licensed by the Company
and
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Page 26
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 previously employed by the Company
was not Year 2000 compliant and, therefore, the Company has replaced the
production and development versions with newer ones that are Year 2000
compliant. The Company plans 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.
Other important internal business processes of the Company, such as time and
expense reporting and labor distribution (and their associated back-office
functions), are performed by legacy systems that have been re-written to be Year
2000 compliant. The remaining office automation products have been inventoried
and each vendor has been contacted for the product's Year 2000 status. All
identified products have either been upgraded with patches, entirely replaced,
determined to be Year 2000 compliant, or shown to possess no date-associated
functions within the product. The Company believes it has completed the
compliance project effort, and all of the identified systems were compliant as
of December 31, 1999. To date, the cost associated with replacing/upgrading
these systems, excluding labor costs, is less than $0.3 million, and the cost
for replacement of these systems was included in its operating and capital
budgets for calendar year 1999.
Vendors of the standard office automation 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 occurred during
the third and fourth quarters of the calendar year 1999.
Based on presently available information, the Company believes that any
necessary additional 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.
In addition to the Company's internal systems, the Company relies on third party
vendors in the conduct of its business. The Company has sought and received
assurances from its material vendors and suppliers that there will be no
interruption of service as a result of the Year 2000 issue.
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
================================================================================
Page 27
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 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.
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Page 28
Management of Growth
The Company's business has experienced periods of significant growth 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 achieve the rates of growth it has
experienced in the past.
The Company expects that it will need to further develop its financial and
management controls, reporting systems and procedures to accommodate future
growth. There can be no assurance that the Company will be able to develop such
controls, systems or procedures effectively or on a timely basis, and the
failure to do so could have a material adverse effect on the Company's business,
operating results and financial condition.
Ability to Attract and Retain Employees
The Company's business consists mainly of professional services and is
inherently labor intensive. The Company's success depends in large part upon its
ability to attract, retain and motivate highly skilled employees, particularly
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.
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Page 29
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, executive officers and Vice
Presidents that contain noncompetition, nondisclosure and nonsolicitation
covenants. The employment agreements with the 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,
can vary as a percentage of revenues over time. The Company attempts to reassign
employees who meet its performance requirements to other active projects when
they are no longer needed on a particular project. However, since the Company
generally recruits personnel in advance of the commencement of certain projects
in order to meet the needs of such projects, any cancellation or delays in the
anticipated projects could increase the unassigned labor costs and might cause a
material adverse effect upon the Company's business, operating results and
financial condition.
Cyclicality
Certain of the Company's customers and potential customers are in industries
that experience cyclical variations in profitability, which may in turn affect
their willingness or ability to fund systems projects such as those for which
the Company may be engaged. The Company's experience indicates, however, that
competitive pressures in cyclical industries sometimes compel businesses to
undertake systems projects even during periods of losses or reduced
profitability.
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Page 30
Quarterly Results May Fluctuate
The Company's results may fluctuate from quarter to quarter as a result of
various factors such as differences in the number of billing days and/or
holidays between quarters, the number of vacation days and sick days taken by
the Company's employees in a particular quarter, and varying weather conditions.
These and other factors can reduce revenues in a given quarter with a
corresponding adverse impact on the Company's margins.
Project Risks
Because of the project-based nature of the Company's work and the fact that many
of the projects undertaken by the Company are large projects, there is a risk of
a material adverse impact on operating results because of the unanticipated
suspension or cancellation of a large project or the financial difficulties of a
client. The suspension or cancellation of a project or the financial
difficulties of a client could result in a decrease in revenues, the need to
reassign staff, a potential dispute with a client regarding monies owed for
consulting work and expenses, and damage to TSC's reputation.
In addition, because many of the Company's projects are high profile, mission
critical projects for major clients, a failure or inability to meet a client's
expectations with respect to a major project undertaken by the Company could
damage its reputation and affect its ability to attract new business. Third
party products and services are integral to the success of certain Company
projects. To the extent that third parties do not deliver effective products and
services on a timely basis, the Company's project results could be negatively
impacted. Although the Company attempts to limit this risk in its engagement
arrangements with clients and maintains errors and omissions insurance, the
failure of a project could also result in significant financial exposure to the
Company.
Competition
The systems consulting and implementation market comprises a large number of
participants, is subject to rapid changes and is highly competitive. The Company
competes with and faces potential competition from a number of companies that
have significantly greater financial, technical and marketing resources and
greater name recognition than the Company. The Company also competes with
smaller service providers whose specific, more narrowly focused service
offerings may be more attractive to potential clients than the Company's multi-
dimensional approach. The Company may also compete for certain clients and
engagements with eLoyalty, which may have the benefit of contact relationships
established and client information procured while that business was still a
division of TSC. 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.
================================================================================
Page 31
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
Many 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, however, that
the Company will be able to negotiate future 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 the Company.
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Page 32
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.
Risks of Conducting International Operations
The Company engages in international operations. 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.
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Page 33
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.
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Page 34
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 2000 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.
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Page 35
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............................................ 37
- ---------------------------------
Financial Statements (Item 14(a)(1))
- ------------------------------------
Consolidated Balance Sheets as of December 31, 1999 and 1998............. 38
Consolidated Statements of Operations for the years ended
December 31, 1999 and 1998 (unaudited), for the seven month transition
period ended December 31, 1998 and for each of the two years in the
period ended May 31, 1998................................................ 39
Consolidated Statements of Changes in Stockholders' Equity for
the year ended December 31, 1999, for the seven month transition period
ended December 31, 1998 and for each of the two years in the period
ended May 31, 1998....................................................... 41
Consolidated Statements of Cash Flows for the years ended December 31,
1999 and 1998 (unaudited), for the seven month transition period ended
December 31, 1998 and for each of the two years in the period
ended May 31, 1998....................................................... 43
Notes to Consolidated Financial Statements............................... 44
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.
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Page 36
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Board of Directors and Stockholders
of Technology Solutions Company
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14 (a)(1) present fairly, in all material respects, the
financial position of Technology Solutions Company and its subsidiaries (the
"Company") at December 31, 1999 and 1998, and the results of their operations
and their cash flows for the year ended December 31, 1999, for the seven month
transition period ended December 31, 1998, and for each of the two years in the
period ended May 31, 1998, in conformity with accounting principles generally
accepted in the United States. In addition, in our opinion, the financial
statement schedule listed in the index appearing under Item 14 (a)(2), presents
fairly in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States 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.
/s/ PricewaterhouseCoopers LLP
February 15, 2000
Chicago, Illinois
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Page 37
Technology Solutions Company
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
ASSETS
------
December 31, December 31,
1999 1998
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents............................................... $ 81,002 $ 59,473
Marketable securities................................................... 17,826 25,269
Receivables, less allowance for doubtful receivables
of $3,715 and $4,845................................................. 24,036 69,212
Deferred income taxes................................................... 9,969 15,297
Other current assets.................................................... 4,664 13,764
-------- --------
Total current assets............................................... 137,497 183,015
COMPUTERS, FURNITURE AND EQUIPMENT, NET.................................. 4,116 9,372
GOODWILL................................................................. 4,446 17,901
LONG-TERM RECEIVABLES AND OTHER.......................................... 2,788 8,811
NET ASSETS OF DISCONTINUED OPERATIONS.................................... 74,462 --
-------- --------
Total assets....................................................... $223,309 $219,099
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable........................................................ $ 2,995 $ 3,263
Accrued compensation and related costs.................................. 18,453 25,184
Deferred compensation................................................... 10,322 16,494
Restructuring and other accruals........................................ 12,708 --
Other current liabilities............................................... 5,220 5,913
-------- --------
Total current liabilities.......................................... 49,698 50,854
-------- --------
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 -- 43,354,725 and 41,242,886............ 434 412
Capital in excess of par value.......................................... 110,455 94,886
Retained earnings....................................................... 63,704 76,938
Treasury stock, at cost, 0 and 275,911 shares........................... -- (2,646)
Accumulated Other Comprehensive Loss:
Unrealized holding loss, net....................................... (131) (9)
Cumulative translation adjustment.................................. (851) (1,336)
-------- --------
Total stockholders' equity......................................... 173,611 168,245
-------- --------
Total liabilities and stockholders' equity......................... $223,309 $219,099
======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part
of this financial information.
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38
Technology Solutions Company
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Seven Month
For the Transition
Years Ended Period Ended For the Years
December 31, December 31, Ended May 31,
----------------------- ------------- --------------------
1999 1998 1998 1998 1997
---------- ----------- ------------- --------- ---------
(unaudited)
REVENUES................................. $156,320 $215,141 $126,839 $189,603 $122,063
-------- -------- -------- -------- --------
COSTS AND EXPENSES:
Project personnel...................... 81,575 101,978 61,459 87,582 58,561
Other project expenses................. 25,347 32,528 19,777 26,996 15,959
Management and administrative support.. 42,473 57,996 36,884 44,615 25,653
Goodwill amortization.................. 225 406 221 402 435
Restructuring and other charges........ 17,489 -- -- -- --
Incentive compensation................. 9,908 8,320 6,654 7,537 7,361
-------- -------- -------- -------- --------
177,017 201,228 124,995 167,132 107,969
-------- -------- -------- -------- --------
OPERATING (LOSS) INCOME.................. (20,697) 13,913 1,844 22,471 14,094
-------- -------- -------- -------- --------
OTHER INCOME (EXPENSE):
Net investment income.................. 3,705 2,967 1,710 2,041 2,280
Interest expense....................... (139) (60) (13) (21) (191)
-------- -------- -------- -------- --------
3,566 2,907 1,697 2,020 2,089
-------- -------- -------- -------- --------
(LOSS) INCOME FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES........ (17,131) 16,820 3,541 24,491 16,183
INCOME TAX (BENEFIT) PROVISION........... (5,553) 6,986 1,587 10,258 6,425
-------- -------- -------- -------- --------
(LOSS) INCOME FROM
CONTINUING OPERATIONS................. (11,578) 9,834 1,954 14,233 9,758
DISCONTINUED OPERATIONS:
Income from discontinued
operations (net of income taxes).... 5,133 6,732 2,521 6,787 5,309
Loss on distribution of discontinued
operations (net of income taxes).... (6,789) -- -- -- --
-------- -------- -------- -------- --------
(LOSS) INCOME FROM DISCONTINUED
OPERATIONS (net of income taxes).... (1,656) 6,732 2,521 6,787 5,309
-------- -------- -------- -------- --------
NET (LOSS) INCOME........................ $(13,234) $ 16,566 $ 4,475 $ 21,020 $ 15,067
======== ======== ======== ======== ========
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39
Technology Solutions Company
CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)
(In thousands, except per share data)
Seven Month
For the Transition
Years Ended Period Ended For the Years
December 31, December 31, Ended May 31,
--------------------- ------------ ----------------
1999 1998 1998 1998 1997
-------- ----------- ------------ ------- -------
(unaudited)
NET (LOSS) EARNINGS PER COMMON SHARE:
(LOSS) INCOME PER COMMON SHARE
FROM CONTINUING OPERATIONS.......... $ (0.27) $ 0.24 $ 0.05 $ 0.37 $ 0.28
(LOSS) INCOME FROM
DISCONTINUED OPERATIONS............. (0.04) 0.17 0.06 0.17 0.15
------- ------- ------- ------- -------
NET (LOSS) EARNINGS
PER COMMON SHARE.................... $ (0.31) $ 0.41 $ 0.11 $ 0.54 $ 0.43
======= ======= ======= ======= =======
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING............ 42,044 40,190 40,668 38,887 35,333
======= ======= ======= ======= =======
(LOSS) INCOME PER COMMON SHARE
FROM CONTINUING OPERATIONS
ASSUMING DILUTION................... $ (0.27) $ 0.23 $ 0.04 $ 0.33 $ 0.25
(LOSS) INCOME FROM DISCONTINUED
OPERATIONS ASSUMING DILUTION........ (0.04) 0.15 0.06 0.16 0.13
------- ------- ------- ------- -------
NET (LOSS) EARNINGS PER COMMON
SHARE ASSUMING DILUTION................ $ (0.31) $ 0.38 $ 0.10 $ 0.49 $ 0.38
======= ======= ======= ======= =======
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING................... 42,044 43,263 43,409 42,781 39,869
======= ======= ======= ======= =======
The accompanying Notes to Consolidated Financial Statements are an integral part
of this financial information.
================================================================================
40
Technology Solutions Company
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the year ended December 31, 1999, for the seven month transition period
ended December 31, 1998 and for the years ended May 31, 1998 and 1997 -- (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 (Loss)
---------- -------- ---------- --------- ----------- ------------- -------- -------------
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
=======
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
---------- ------- -------- -------- ---------- -------- -------- =======
================================================================================
Page 41
Technology Solutions Company
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CONTINUED)
For the year ended December 31, 1999, for the seven month transition period
ended December 31, 1998 and for the years ended May 31, 1998 and 1997 -- (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 (Loss)
----------- -------- ---------- --------- ----------- -------- --------- -------------
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
========
Purchase of 480,000 treasury shares..... -- -- -- -- (4,930) -- (4,930)
Issuance of 1,258,702 common stock
shares and 597,146 treasury shares
from exercise of stock options........ 1,258,702 13 8,814 -- 5,990 -- 14,817
Issuance of 353,137 common stock
shares and 158,765 treasury shares
from employee stock purchase plan..... 353,137 4 2,254 -- 1,586 -- 3,844
Issuance of 500,000 common stock
shares to venture capital firms....... 500,000 5 4,501 -- -- -- 4,506
Change in net unrealized holding
loss on available-for-sale securities. -- -- -- -- -- (122) (122) $ (122)
Net loss................................ -- -- -- (13,234) -- -- (13,234) (13,234)
Cumulative translation adjustment....... -- -- -- -- -- 485 485 485
----------- ------- -------- -------- --------- -------- --------- ----------
Balance as of December 31, 1999......... 43,354,725 $434 $110,455 $ 63,704 $ -- $ (982) $173,611 $(12,871)
=========== ======= ======== ======== ========= ======== ========= =========
The accompanying Notes to Consolidated Financial Statements are an integral part
of this financial information.
================================================================================
Page 42
Technology Solutions Company
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Seven Month
Transition
For the Years Period Ended For the Years
Ended December 31, December 31, Ended May 31,
---------------------- ------------- --------------------
1999 1998 1998 1998 1997
--------- ----------- ------------- --------- ---------
(Unaudited)
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net (loss) income........................................... $(13,234) $ 16,566 $ 4,475 $ 21,020 $ 15,067
Restructuring and other charges............................. 17,489 -- -- -- --
Adjustments to reconcile net (loss) income to net
cash from operating activities:
Depreciation and amortization............................ 10,154 14,076 10,725 7,107 4,442
Provisions for receivable valuation allowances and
reserves for possible losses........................... 5,909 2,748 2,913 1,897 2,712
(Gain) loss on sale of investments....................... (102) 19 13 (43) (17)
Deferred income taxes.................................... (6,216) (5,948) (7,837) (225) (2,692)
Changes in assets and liabilities:
Receivables............................................ (5,786) (22,953) 138 (28,031) (21,533)
Purchases of trading securities related to
deferred compensation program........................ (1,003) (5,397) (2,928) (6,724) (4,182)
Other current assets................................... 3,120 (2,151) 970 (95) (4,884)
Accounts payable....................................... 338 1,943 1,334 352 (73)
Accrued compensation and related costs................. 5,125 8,176 4,187 3,914 5,260
Deferred compensation.................................. 1,003 5,397 2,928 6,724 4,182
Other current liabilities.............................. 8,470 8,636 5,753 11,592 11,687
Other assets........................................... 1,849 (2,765) (502) (4,369) (3,456)
-------- -------- ------- -------- --------
Net cash provided by operating activities............ 27,116 18,347 22,169 13,119 6,513
-------- -------- ------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of available-for-sale securities................... (1,500) (7,675) (1,725) (10,250) (1,000)
Proceeds from available-for-sale securities................. 2,820 10,090 7,260 5,337 1,314
Proceeds from held-to-maturity investments.................. -- 2,520 1,200 6,910 8,890
Capital expenditures........................................ (2,464) (4,731) (2,499) (5,745) (6,057)
Net assets of acquired businesses and other assets.......... (4,166) (8,999) (8,618) (10,741) (1,127)
Cash held by discontinued operations........................ (13,462) -- -- -- --
-------- -------- ------- -------- --------
Net cash (used in) provided by investing activities.. (18,772) (8,795) (4,382) (14,489) 2,020
-------- -------- ------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options..................... 9,214 5,827 3,903 8,721 6,445
Proceeds from employee stock purchase plan.................. 3,844 4,476 2,231 3,688 1,805
Purchase of treasury shares................................. (4,930) (2,842) (2,842) -- --
Sale of common stock........................................ 4,506 -- -- -- --
Capitalized lease obligation................................ -- (70) (79) 71 (1,311)
-------- -------- ------- -------- --------
Net cash provided by financing activities............... 12,634 7,391 3,213 12,480 6,939
-------- -------- ------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS........................................ 551 (192) 15 (603) (511)
-------- -------- ------- -------- --------
INCREASE IN CASH AND CASH EQUIVALENTS.......................... 21,529 16,751 21,015 10,507 14,961
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD................. 59,473 42,722 38,458 27,951 12,990
-------- -------- ------- -------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD....................... $ 81,002 $ 59,473 $59,473 $ 38,458 $ 27,951
======== ======== ======= ======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part
of this financial information.
================================================================================
Page 43
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 eBusiness consulting and systems
integration services that help clients transform their businesses, their
internal business processes and their relationships with customers, suppliers,
distributors and employees and help these organizations realize the full
benefits of information technology throughout the enterprise. The Company's
clients generally are located throughout the United States and in Latin America
and Europe.
On February 15, 2000 TSC successfully completed its spin-off of its eLoyalty
division into a separate publicly traded company. Accordingly the consolidated
balance sheet as of December 31, 1999 and the consolidated statements of
operations for the years ended December 31, 1999 and 1998, the seven month
transition period ended December 31, 1998 and for the fiscal years ended May 31,
1998 and 1997 have been reclassified to report these operations as discontinued
operations. The consolidated balance sheet as of December 31, 1998 and
consolidated statements of cash flows have not been restated on a discontinued
operations basis.
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,
accounted for using the purchase method, are included in the results of
operations since their acquisition dates.
FISCAL YEAR CHANGE -- The Consolidated Financial Statements and Notes to the
Consolidated Financial Statements for the year ended December 31, 1999 represent
the first full calendar year since the Company changed from a May 31 fiscal year
end. The unaudited financial information for the year ended December 31, 1998 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 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 operations. Contracts
are performed in phases. Losses on contracts, if any, are reserved in full when
determined.
================================================================================
Page 44
Technology Solutions Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
================================================================================
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.
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 operations. 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. Leasehold
improvements are amortized on a straight-line basis over the shorter of the
estimated useful lives of the assets or the underlying lease term. Normal
maintenance and repair costs are expensed as incurred. The costs and related
accumulated depreciation or amortization of the assets sold or disposed of are
moved from the account and resulting gain or loss is included in operations.
The carrying value of computers, furniture and equipment is periodically
reviewed to assess recoverability based on undiscounted future cash flows.
GOODWILL -- Goodwill (the excess of cost over the fair market value of the net
identifiable tangible and intangible assets of businesses acquired) is amortized
on a straight-line basis, typically over a five-year period. Accumulated
amortization of goodwill as of December 31, 1999 and 1998 was $153 and $7,085,
respectively. The carrying value of goodwill is periodically reviewed to assess
recoverability based on undiscounted cash flows.
SOFTWARE DEVELOPMENT COSTS -- The Company capitalizes certain software
development costs incurred subsequent to the achievement of technological
feasibility and prior to the general release of the product for sale.
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.
================================================================================
Page 45
Technology Solutions Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
================================================================================
(LOSS) EARNINGS PER COMMON SHARE -- The Company discloses basic and diluted
(loss) earnings per share in the consolidated statements of operations under the
provisions of SFAS No. 128, "Earnings Per Share." (Loss) earnings per common
share assuming dilution is computed by dividing net (loss) income by the
weighted average number of common shares outstanding during each period
presented, plus the dilutive effect of common equivalent shares arising from the
assumed exercise of stock options using the treasury stock method. For 1999,
common equivalent shares of 2,277 were not included in the diluted loss per
share calculation as they were antidilutive. (Loss) earnings per common share is
computed by dividing net (loss) 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 as of
December 31, 1999.
Reconciliation of Basic and Diluted (Loss) Earnings Per Share for the Year Ended
- --------------------------------------------------------------------------------------------------------------
December 31, 1999 December 31, 1998
------------------------------------------- -----------------------------------------
(unaudited)
Per Per
Net Common Net Common
(Loss) Shares Share Income Shares Share
-------- -------- -------- -------- -------- --------
Basic (loss)
Earning Per Share $(13,234) 42,044 $(0.31) $16,566 40,190 $0.41
====== =====
Effect of Stock
Options -- -- -- 3,073
-------- ------ ------- ------
Diluted (Loss)
Earnings Per Share $(13,234) 42,044 $(0.31) $16,566 43,263 $0.38
======== ====== ====== ======= ====== =====
Reconciliation of Basic and Diluted Earnings Per Share
for the Seven Month Transition Period
Ended December 31, 1998
- -------------------------------------------------------
Per
Net Common
Income Shares Share
------ ------ ------
Basic EPS $4,475 40,668 $0.11
=====
Effect of Stock
Options -- 2,741
------ ------
Diluted EPS $4,475 43,409 $0.10
====== ====== =====
================================================================================
Page 46
Technology Solutions Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
================================================================================
Reconciliation of Basic and Diluted Earnings Per Share for the Fiscal Year Ended
- ---------------------------------------------------------------------------------------------------------
May 31, 1998 May 31, 1997
---------------------------------------- ----------------------------------------
Per Per
Net Common Net Common
Income Shares Share Income Shares Share
----------- ------------ ------------ ----------- ------------ ------------
Basic EPS $21,020 38,887 $0.54 $15,067 35,333 $0.43
===== =====
Effect of Stock
Options -- 3,894 -- 4,536
------- ------ ------- ------
Diluted EPS $21,020 42,781 $0.49 $15,067 39,869 $0.38
======= ====== ===== ======= ====== =====
FOREIGN CURRENCY TRANSLATION -- The functional currencies for the Company's
foreign subsidiaries are their local currencies. 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 operations.
FAIR VALUE OF FINANCIAL INSTRUMENTS -- The carrying values of current assets,
including marketable securities, and liabilities and long-term receivables
approximated their fair values at December 31, 1999 and 1998, respectively.
Investments in companies accounted for under the equity method for which fair
value are not readily available are believed to approximate their 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. Compensation costs for employee stock options is measured as
the excess, if any, of the quoted market price of the Company's common stock at
the date of grant over the amount an employee must pay to acquire the stock.
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, as amended is effective for financial
statements issued for periods ending after June 15, 2000. SFAS No. 133 requires
that all derivative instruments be recorded on the balance sheet at their fair
value. Changes in the fair value of derivatives are recorded each period in
current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the type
of hedge transaction. The Company anticipates that, due to its limited use of
derivative instruments, the adoption of SFAS No. 133 will not have a significant
effect on the Company's results of operations or its financial position.
================================================================================
Page 47
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 " 401(K)
Plan"). The 401(K) Plan allows employees to contribute up to 15 percent of their
annual compensation, subject to Internal Revenue Service statutory limitations.
Company contributions to the 401(K) Plan are discretionary. The Company
contributed $2,301, $1,806 and $1,234 to the 401(K) Plan in the year ended
December 31, 1999 and in fiscal 1998 and 1997, respectively. There were no
Company contributions during the seven month transition period ended December
31, 1998, although the Company accrued amounts during the seven month transition
period for the contribution made during the year ended December 31, 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 and
the disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS -- Certain reclassifications have been made to prior periods
to conform to the current period classification. These reclassifications had no
impact on net (loss) income or shareholders' equity.
NOTE 3 -- ACQUISITIONS
The following acquisitions are part of TSC's continuing operations.
On October 29, 1999, the Company acquired CourseNet Systems, Inc. (CourseNet) a
leader in the delivery of e-learning solutions. Total consideration was
approximately $5.2 million which consisted of $4.2 million in cash and the
Company's $1.0 million previous investment in CourseNet. Goodwill of
approximately $4.6 million resulted from the CourseNet acquisition and is being
amortized over a five year period.
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. This
combination was accounted for as a pooling of interests. The operations of HRM
were not material to the Company's consolidated operations.
================================================================================
Page 48
Technology Solutions Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
================================================================================
On February 15, 2000, TSC successfully completed the spin-off of its eLoyalty
division. The following acquisitions are part of the eLoyalty transaction and
are not considered part of TSC's continuing operations.
In June 1997, the Company acquired The Bentley Company, Inc. (Bentley). Bentley
specialized in business and operations consulting in the eLoyalty division 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 February 1997, the Company acquired Geising International, a German-based
business consulting firm in the eLoyalty division 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 approximately $1.0 million resulted from the
Geising International acquisition and is being amortized over five years.
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, December 31,
------------- -------------
1999 1998
------------- -------------
Amounts billed to clients............ $27,136 $70,662
Contracts in process................. 615 3,395
------- -------
27,751 74,057
Receivable valuation allowances and
reserves for possible losses........ (3,715) (4,845)
------- -------
$24,036 $69,212
======= =======
Amounts billed to clients represent professional fees and reimbursable project-
related expenses. Contracts in process represent unbilled professional fees,
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 49
Technology Solutions Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
================================================================================
NOTE 5 -- MARKETABLE SECURITIES AND LONG-TERM INVESTMENTS
Marketable securities are reported at fair value. The marketable securities
consist of preferred stocks of $7,504 classified as available-for-sale and
securities related to the Company's executive deferred compensation plan of
$10,322 classified as trading securities (see Note 10). As of December 31, 1999
and 1998, the gross unrealized holding gain relative to the preferred stocks was
$43 and $192 and the gross unrealized holding loss was $242 and $203,
respectively, and are presented net and after-tax in a separate component of
stockholders' equity. The Company recognized gains of $521, $134, $129 and $189
in its Statements of Operations for the year ended December 31, 1999, the seven
month transition period ended December 31, 1998 and for the fiscal years ended
May 31, 1998 and 1997, respectively, related to the trading securities. Since
the trading securities are related to the Company's executive deferred
compensation plan, a corresponding charge to earnings is included in the
Statements of Operations to recognize the Company's increased liability for the
deferred compensation plan.
Municipal bonds, included in long-term investments are presented at cost, net of
accumulated amortized premiums and discounts. All of these bonds reached
maturity during the seven month transition period ended December 31, 1998.
NOTE 6 -- COMPUTERS, FURNITURE AND EQUIPMENT
Computers, furniture and equipment consist of the following:
December 31, December 31,
------------- -------------
1999 1998
------------- -------------
Computers................. $ 13,183 $ 14,877
Furniture and equipment... 4,760 7,030
-------- --------
17,943 21,907
Accumulated depreciation.. (13,827) (12,535)
-------- --------
$ 4,116 $ 9,372
======== ========
Depreciation and amortization expense was $3,305, $2,215, $3,344, and $3,361 for
the year ended December 31, 1999, the seven month transition period ended
December 31, 1998 and for the fiscal years ended May 31, 1998 and 1997,
respectively.
================================================================================
Page 50
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, December 31,
------------ ------------
1999 1998
------------ ------------
Customer receivables........ $2,016 $2,016
Employee receivables........ 116 807
Capitalized software costs.. -- 132
Investments................. 450 5,010
Other....................... 206 846
------ ------
$2,788 $8,811
====== ======
Amortization expense associated with capitalized software available for resale
was $132, $4,158, $364 and $344 for the year ended December 31, 1999, the seven
month transition period ended December 31, 1998 and the fiscal years ended May
31, 1998 and 1997, respectively. Included in the amortization expense for the
seven month transition period ended December 31, 1998 was a charge to abandon an
investment in an Internet-based commerce software tool of $3.3 million. The
amounts capitalized for software costs were $139, $4,249 and $273 for the seven
month transition period ended December 31, 1998 and the fiscal years ended May
31, 1998 and 1997, respectively. No amounts were capitalized during the year
ended December 31, 1999.
NOTE 8 -- INCOME TAXES
The (benefit) provision for income taxes consists of the following:
Seven Month
For the Transition
Year Ended Period Ended For the Years
December 31, December 31, Ended May 31,
------------- ------------- ------------------
1999 1998 1998 1997
------------- ------------- -------- --------
Current:
Federal............ $(1,764) $ 8,923 $ 9,235 $ 7,498
State.............. (420) 1,972 2,238 2,512
Foreign............ 306 1,868 1,291 49
------- -------- ------- -------
Total current..... (1,878) 12,763 12,764 10,059
------- -------- ------- -------
Deferred:
Federal............ (986) (6,712) (843) (3,317)
State.............. (198) (1,385) (71) (577)
Foreign............ (2,491) (3,079) (1,592) 260
------- -------- ------- -------
Total deferred.... (3,675) (11,176) (2,506) (3,634)
------- -------- ------- -------
(Benefit) provision
for income taxes.... $(5,553) $ 1,587 $10,258 $ 6,425
======= ======== ======= =======
================================================================================
Page 51
Technology Solutions Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
================================================================================
Total income tax (benefit) provision differed from the amount computed by
applying the federal statutory income tax rate to income from continuing
operations due to the following:
Seven Month
For the Transition
Year Ended Period Ended For the Years
December 31, December 31, Ended May 31,
------------- ------------- ----------------------
1999 1998 1998 1997
------------- ------------- ---------- ----------
Federal tax (benefit) provision,
at statutory rate.................. $ (5,996) $ 1,239 $ 8,572 $ 5,664
State tax (benefit) provision,
net of Federal benefit............. (857) 257 1,242 1,151
Effect of foreign tax rate
differences........................ 509 6 29 (33)
Nontaxable investment income.......... (232) (144) (160) (532)
Nondeductible goodwill and
other acquisition related
charges........................... 581 21 47 (99)
Other................................. 442 208 528 274
-------- ------- -------- --------
Income tax (benefit) provision........ $ (5,553) $ 1,587 $ 10,258 $ 6,425
======== ======= ======== ========
Total income tax was allocated as follows:
Seven Month
For the Transition
Year Ended Period Ended For the Years
December 31, December 31, Ended May 31,
------------ ------------ ---------------------
1999 1998 1998 1997
-------- ------- -------- --------
(Loss) income from
continuing operations.................... $ (5,553) $ 1,587 $ 10,258 $ 6,425
Items charged directly to
stockholders' equity..................... (5,860) (4,956) (13,493) (11,605)
-------- ------- -------- --------
Total income tax...................... $(11,413) $(3,369) $ (3,235) $ (5,180)
======== ======= ======== ========
================================================================================
Page 52
Technology Solutions Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
================================================================================
Deferred tax assets and liabilities were comprised of the following:
For the Years Ended December 31,
--------------------------------
1999 1998
---- ----
Deferred tax assets:
Deferred compensation and bonuses.......................... $ 4,129 $ 6,925
Net operating loss and credits............................. 1,305 3,011
Receivable valuation allowances and reserves
for possible losses....................................... 1,736 2,061
Legal and other accruals................................... 1,666 3,100
Depreciation and amortization.............................. 184 1,523
Goodwill................................................... -- 1,221
Restructuring and other charges............................ 1,980 --
Other...................................................... 226 21
------- -------
Total deferred tax assets................................. 11,226 17,862
------- -------
Deferred tax liabilities:
Prepaid expenses........................................... (882) (2,296)
Capitalized software development costs..................... -- (53)
Other...................................................... (375) (216)
------- -------
Total deferred tax liabilities............................ (1,257) (2,565)
------- -------
Net deferred tax asset....................................... $ 9,969 $15,297
======= =======
(Loss) income before income taxes consisted of the following:
Seven Month
For the Transition
Year Ended Period Ended For the Years
December 31, December 31, Ended May 31,
------------ ------------ -----------------
1999 1998 1998 1997
---- ---- ---- ----
United States................................................ $ (9,854) $ 7,134 $25,355 $15,413
Foreign...................................................... (7,277) (3,593) (864) 770
-------- ------- ------- -------
Total........................................................ $(17,131) $ 3,541 $24,491 $16,183
======== ======= ======= =======
Income taxes paid during the year ended December 31, 1999, the seven month
transition period ended December 31, 1998 and for the fiscal years ended May 31,
1998 and 1997 were $1,192, $6,907, $1,864 and $135, respectively.
================================================================================
Page 53
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 December 30, 2000. 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, 1999, the Company was in
compliance with these financial ratio requirements. There was no borrowing under
the line of credit during the year ended December 31, 1999.
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 "Stock Purchase Plan"). The Stock Purchase Plan qualifies as
an "employee stock purchase plan" under Section 423 of the Internal Revenue Code
of 1986, as amended. The Stock Purchase Plan is administered by the Compensation
Committee of the Board of Directors. The Stock Purchase 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. The number of shares of the Company's Common Stock
purchased under the Stock Purchase Plan during the year ended December 31, 1999,
the seven month transition period ended December 31, 1998 and fiscal 1998 and
1997 were 511,902, 181,271, 269,347 and 179,165, respectively.
================================================================================
Page 54
Technology Solutions Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
================================================================================
NOTE 12 -- CAPITAL STOCK
During June 1999, the Company entered into an agreement with two venture capital
firms whereby these venture capital firms agreed to purchase 500,000 shares of
the Company's common stock. On August 13, 1999, Technology Crossover Ventures
and Sutter Hill Ventures funded to the Company cash proceeds of approximately
$4.5 million and the Company delivered 500,000 shares of Common Stock (the
"Company Shares") to the venture capital firms. The purchase price of $9.013 per
share was equal to the average last reported sales price for the ten consecutive
trading days ended June 25, 1999 (the date of the agreement). Both venture
capital firms have a single demand registration right with respect to the
Company Shares, which expires twelve months after the date of the purchase.
In November 1998, the Company announced a 2,000,000 share repurchase program.
During the year ended December 31, 1999 and during the seven month transition
period ended December 31, 1998 the Company repurchased 480,000 shares for $4,930
and 296,300 shares for $2,842, respectively under this plan.
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 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.
================================================================================
Page 55
Technology Solutions Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
================================================================================
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.
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 573,220
and 1,583,934 as of December 31, 1999 and 1998, 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
================================================================================
Page 56
Technology Solutions Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
================================================================================
Plan and Employee Stock Purchase Plan been determined consistent with SFAS No.
123, the Company's net (loss) income and (loss) earnings per share would have
been reduced to the pro forma amounts indicated below:
Seven Month
For the Transition
Year Ended Period Ended For the Years
December 31, December 31, Ended May 31,
------------- ------------- ----------------
1999 1998 1998 1997
------------- ------------- ------- -------
Net (loss) income:
As reported:
Continuing Operations.... $(11,578) $ 1,954 $14,233 $ 9,758
Discontinued Operations.. $ (1,656) $ 2,521 $ 6,787 $ 5,309
-------- ------- ------- -------
Total.................. $(13,234) $ 4,475 $21,020 $15,067
======== ======= ======= =======
Pro forma:
Continuing Operations.... $(15,214) $(1,609) $ 8,966 $ 6,984
Discontinued Operations.. $ (3,783) $ 490 $ 4,074 $ 4,034
-------- ------- ------- -------
Total.................. $(18,997) $(1,119) $13,040 $11,018
======== ======= ======= =======
(Loss) earnings per share:
As reported:
Continuing Operations.... $ (0.27) $ 0.05 $ 0.37 $ 0.28
Discontinued Operations.. $ (0.04) $ 0.06 $ 0.17 $ 0.15
-------- ------- ------- -------
Total.................. $ (0.31) $ 0.11 $ 0.54 $ 0.43
======== ======= ======= =======
Pro forma:
Continuing Operations.... $ (0.36) $ (0.04) $ 0.23 $ 0.20
Discontinued Operations.. $ (0.09) $ 0.01 $ 0.11 $ 0.11
-------- ------- ------- -------
Total.................. $ (0.45) $ (0.03) $ 0.34 $ 0.31
======== ======= ======= =======
(Loss) earnings per share
assuming dilution:
As reported:
Continuing Operations.... $ (0.27) $ 0.04 $ 0.33 $ 0.25
Discontinued Operations.. $ (0.04) $ 0.06 $ 0.16 $ 0.13
-------- ------- ------- -------
Total.................. $ (0.31) $ 0.10 $ 0.49 $ 0.38
======== ======= ======= =======
Pro forma:
Continuing Operations.... $ (0.36) $ (0.04) $ 0.21 $ 0.18
Discontinued Operations.. $ (0.09) $ 0.01 $ 0.09 $ 0.10
-------- ------- ------- -------
Total.................. $ (0.45) $ (0.03) $ 0.30 $ 0.28
======== ======= ======= =======
================================================================================
Page 57
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:
Seven Month
For the Transition
Year Ended Period Ended For the Years
December 31, December 31, Ended May 31,
------------- ------------- ------------------------
1999 1998 1998 1997
------------- ------------- ----------- -----------
Expected volatility....... 49.7%-54.2% 43.6%-49.8% 41.9%-44.1% 40.9%-51.4%
Risk-free interest rates.. 4.6%-6.3% 4.1%-5.6% 5.3%-6.5% 5.3%-6.8%
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 58
Technology Solutions Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
================================================================================
A summary of the status of the Company's option plans is presented below:
For the Year Ended Seven Month Transition Period
December 31, Ended December 31, For the Years Ended May 31,
---------------------------- ------------------------------- -------------------------------------------
1999 1999 1998 1998 1998 1998 1997 1997
---- ---- ---- ---- ---- ---- ---- ----
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 9,483,316 $ 8.05 9,845,695 $ 7.71 10,157,024 $ 5.03 10,450,710 $ 3.01
Granted 2,130,863 $10.65 1,349,922 $18.58 2,466,222 $18.27 2,865,929 $10.93
Exercised (1,855,848) $ 4.96 (1,180,736) $ 3.31 (2,429,116) $18.85 (2,565,747) $15.02
Forfeited (1,120,149) $12.29 (531,565) $13.88 (348,435) $ 9.72 (593,868) $ 8.50
---------- ---------- ---------- ----------
Outstanding at
end of year 8,638,182 $ 8.87 9,483,316 $ 8.05 9,845,695 $ 7.71 10,157,024 $ 5.03
========== ========== ========== ==========
Exercisable at
end of year 5,508,918 $ 7.36 6,211,300 $ 5.70 4,815,339 $ 4.81 4,288,095 $ 3.01
========== ============ ========== ==========
================================================================================
Page 59
Technology Solutions Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
================================================================================
Weighted-average grant date fair value of options granted during the year:
Seven Month
For the Transition
Year Ended Period Ended For the
December 31, December 31, Years Ended May 31,
----------- ------------ -------------------
1999 1998 1998 1997
---- ---- ---- ----
$5.08 $8.15 $7.90 $5.24
The following summarizes information about options outstanding as of December
31, 1999:
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 2,335,867 9 years $ 2.27 2,335,867 $ 2.27
$ 3.01-$ 8.00 566,896 10 years $ 5.62 400,899 $ 5.06
$ 8.01-$10.00 3,090,022 8 years $ 9.06 1,446,538 $ 9.36
$10.01-$12.00 1,222,271 9 years $10.86 471,514 $10.86
$12.01-$15.00 104,495 8 years $13.90 37,938 $14.46
$15.01-$18.00 770,981 7 years $15.88 639,471 $15.88
$18.01-$23.00 407,425 9 years $21.51 176,691 $21.95
$23.01-$36.00 140,225 10 years $31.19 -- $ --
--------- ---------
8,638,182 9 years $ 8.87 5,508,918 $ 7.36
========= =========
================================================================================
Page 60
Technology Solutions Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
================================================================================
IMPACT OF THE FEBRUARY 15, 2000 SPIN-OFF ON TSC OPTIONS -- At the time of the
eLoyalty spin-off, TSC options were appropriately adjusted to reflect the impact
of the spin-off. TSC option holders (excluding eLoyalty employees and directors)
with options granted prior to June 22, 1999 had each of their options converted
into both an adjusted TSC option and an eLoyalty Corporation option on a one-
for-one basis. The original strike price of the TSC option was split into a
strike price for (1) the adjusted TSC option and (2) the eLoyalty Corporation
option based on the relative trading values of the two companies' common stock
immediately after the spin. Immediately after the spin-off, TSC stock traded at
16.5278 percent of the combined value of one share of TSC stock and one share of
eLoyalty stock. Accordingly, the strike price for the adjusted TSC option was
set at 16.5278 percent of the original TSC option strike price while the
eLoyalty option strike price was set at 83.4722 percent of the original TSC
option strike price.
TSC option holders (excluding eLoyalty employees and directors) with options
granted subsequent to June 21, 1999 did not receive any eLoyalty Corporation
options but did have their TSC options adjusted by reducing the strike price and
increasing the number of options. The adjustments were calculated based on the
relative trading values of TSC and eLoyalty Common Stock immediately after the
spin. The adjusted strike price was determined by multiplying the original
strike price by 16.5278 percent. The adjusted number of options was determined
by dividing the original number of options by 16.5278 percent.
eLoyalty employees and directors who held TSC options forfeited their TSC
options at the time of the spin-off and, in return, received additional eLoyalty
options.
In all cases, the TSC and eLoyalty option adjustments described above were
calculated to (1) preserve the intrinsic value of the option as well as (2)
preserve the ratio of the exercise price to the fair market value of the stock
subject to the option.
As a net result of these adjustments, the number of TSC options outstanding
increased by approximately 2.9 million at the time of the spin-off.
The option share and price information contained in this footnote have not been
adjusted for the effects of the February 15, 2000 spin-off.
================================================================================
Page 61
Technology Solutions Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
================================================================================
NOTE 14 -- BUSINESS SEGMENTS
Prior to the spin-off of the eLoyalty division of TSC, the Company was organized
into two business segments which each had its own business focus and service
offering -- Enterprise Solutions (E-Solutions) and eLoyalty. Each served the
Company's customers in the U.S. and international markets. The Company believed
that a structure based on these focused business segments addressed its clients'
needs for very specialized industry and systems knowledge and allowed its
employees the flexibility and opportunity to grow and develop. Each business
segment developed its own specific methodologies, tools, project management
plans, best practice and benchmark information and templates. The E-Solutions
business segment now represents TSC's continuing operations and it has
specialized expertise in helping organizations access the ability of their
current systems to meet the changing and often increasing demands of business.
E-Solutions is a recognized leader in packaged software implementation and
integration, supply chain management, e-business and knowledge management. The
eLoyalty division is not a part of TSC's continuing operations. eLoyalty is a
global information technology services company focused on providing enterprise-
wide solutions across all customer access channels, including the Internet.
Prior to the spin-off of eLoyalty, the Company evaluated the performance of its
segments and allocated resources to them based partially on receivables. The
receivable balances before allowance for doubtful receivables for the E-
Solutions business segment was $27.8 million and $46.5 million at December 31,
1999 and 1998, respectively. Receivable balances for the eLoyalty division were
$46.1 million and $27.6 million at December 31, 1999 and 1998, respectively.
================================================================================
Page 62
Technology Solutions Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
================================================================================
The following is revenue and long-lived asset information by geographic area (in
thousands):
Net Assets of
For the year ended United Foreign Discontinued
December 31, 1999 States Subsidiaries Operations Total
- ----------------------- -------- ------------ ------------- --------
Revenues $147,377 $ 8,943 $ -- $156,320
Identifiable assets $143,030 $ 4,996 $75,283 $223,309
Seven month transition Net Assets of
period ended United Foreign Discontinued
December 31, 1998 States Subsidiaries Operations Total
- ----------------------- -------- ------------ ------------- --------
Revenues $121,385 $ 5,454 $ -- $126,839
Identifiable assets $190,738 $28,361 $ -- $219,099
Net Assets of
For the year ended United Foreign Discontinued
May 31, 1998 States Subsidiaries Operations Total
- ----------------------- -------- ------------ ------------- --------
Revenues $180,890 $ 8,713 $ -- $189,603
Identifiable assets $176,949 $20,199 $ -- $197,148
Net Assets of
For the year ended United Foreign Discontinued
May 31, 1997 States Subsidiaries Operations Total
- ----------------------- -------- ------------ ------------- --------
Revenues $114,672 $ 7,391 $ -- $122,063
Identifiable assets $117,110 $16,756 $ -- $133,866
Foreign revenue is based on the country in which the legal subsidiary is
domiciled. No single foreign country's revenue was material as defined by SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information,"
to the consolidated revenues of the Company.
================================================================================
Page 63
Technology Solutions Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
================================================================================
NOTE 15 -- MAJOR CLIENTS
The Company's five largest clients in the year ended December 31, 1999 accounted
for 4 percent, 4 percent, 4 percent, 4 percent and 3 percent of total revenues,
respectively; in the seven month transition period ended December 31, 1998 the
five largest clients accounted for 5 percent, 5 percent, 3 percent, 3 percent,
and 3 percent of total revenues, respectively; in fiscal 1998, the five largest
clients accounted for 6 percent, 4 percent, 3 percent, 3 percent, and 3 percent
of total revenues, respectively; in fiscal 1997, they accounted for 11 percent,
5 percent, 5 percent, 5 percent, and 5 percent of total revenues, respectively.
No client accounted for 10 percent or more of revenues during the year ended
December 31, 1999, the seven month transition period ended December 31, 1998 or
fiscal 1998. In fiscal 1997, The Prudential accounted for 11 percent 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 $7,826, $7,927 $9,789 and
$3,084 for the year ended December 31, 1999, for the seven month transition
period ended December 31, 1998 and for the fiscal years ended May 31, 1998 and
1997, respectively. Future minimum rental commitments under noncancelable
operating leases with terms in excess of one year are as follows:
Calendar Year Amount
------------- ------
2000............................. $3,124
2001............................. 1,116
2002............................. 509
2003............................. 289
2004............................. 168
------
$5,206
======
The Company had no capital leases as of December 31, 1999.
================================================================================
Page 64
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.
On February 9, 2000, the Rights Plan was amended to remove certain restrictions
on the ability of the Company to redeem or amend the Rights following specified
changes in the composition of the Board of Directors.
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 65
Technology Solutions Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
================================================================================
NOTE 18 -- COMPREHENSIVE INCOME
The Company's comprehensive income and related tax effects were as follows:
For the Year Ended Before-Tax Tax (Expense) Net-of-Tax
December 31, 1999 Amount Benefit Amount
- ----------------------- ----------- ------------- -----------
Change in unrealized holding loss on
available-for-sale securities:
Unrealized holding losses arising
during the period.................. $ (86) $ 30 $ (56)
Less: adjustment for gain
realized in net loss............... (102) 36 (66)
----- ---- -----
Net unrealized loss................... (188) 66 (122)
Cumulative translation adjustment..... 485 -- 485
----- ---- -----
Other comprehensive income............ $ 297 $ 66 $ 363
===== ==== =====
Seven Month 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)
===== ==== =====
================================================================================
Page 66
Technology Solutions Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
================================================================================
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)
===== ===== =====
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
===== ===== =====
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,
results of operations or cashflows.
================================================================================
Page 67
Technology Solutions Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
================================================================================
NOTE 20 -- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
March 31, June 30, September 30, December 31,
Quarter Ended 1999/(b)/ 1999 1999 1999/(c)/
- ------------- --------- -------- ------------- -------------
Revenues $ 46,204 $43,777 $36,278 $ 30,061
Operating (loss) income $(15,423) $ 1,170 $ 950 $ (7,394)
(Loss) income from
continuing operations $ (9,278) $ 1,080 $ 994 $ (4,374)
Income (loss) from
discontinued operations $ 2,608 $ 2,839 $ 2,358 $ (2,672)
Loss on distribution of
discontinued operations $ -- $ -- $ -- $ (6,789)
Net (loss) income $ (6,670) $ 3,919 $ 3,352 $(13,835)
======== ======= ======= ========
(Loss) income per
common share from
continuing operations/(a)/ $ (0.22) $ 0.02 $ 0.03 $ (0.10)
Income (loss) from
discontinued operations/(a)/ $ 0.06 $ 0.07 $ 0.05 $ (0.22)
-------- ------- ------- --------
Net (loss) earnings
per common share/(a)/ $ (0.16) $ 0.09 $ 0.08 $ (0.32)
======== ======= ======= ========
(Loss) income per common
share from continuing
operations assuming dilution/(a)/ $ (0.22) $ 0.02 $ 0.03 $ (0.10)
Income (loss) from discontinued
operations assuming dilution/(a)/ $ 0.06 $ 0.07 $ 0.05 $ (0.22)
-------- ------- ------- --------
Net (loss) earnings per common
share assuming dilution/(a)/ $ (0.16) $ 0.09 $ 0.08 $ (0.32)
======== ======= ======= ========
________________
(a) All earnings per share data have been restated to reflect all of the
Company's prior stock splits as of December 31, 1999.
(b) Includes a restructuring charge of $10.5 million.
(c) Includes restructuring and other charges of $7.0 million.
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Technology Solutions Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
================================================================================
March 31, June 30, September 30, December 31,
Quarter Ended 1998 1998 1998 1998
- ------------- --------- -------- ------------- -------------
Revenues $50,376 $57,938 $57,260 $49,567
Operating income (loss) $ 6,902 $ 7,342 $ 5,253 $(5,584)
Income (loss) from
continuing operations $ 4,213 $ 4,923 $ 3,682 $(2,984)
Income (loss) from
discontinued operations $ 2,222 $ 2,499 $ 1,427 $ 584
Net income (loss) $ 6,435 $ 7,422 $ 5,109 $(2,400)
======= ======= ======= =======
Income (loss) per
common share from
continuing operations/(a)/ $ 0.11 $ 0.12 $ 0.09 $ (0.08)
Income from
discontinued operations/(a)/ $ 0.05 $ 0.07 $ 0.04 $ 0.01
------- ------- ------- -------
Net earnings (loss)
per common share/(a)/ $ 0.16 $ 0.19 $ 0.13 $ (0.07)
======= ======= ======= =======
Income (loss) per common
share from continuing
operations assuming dilution/(a)/ $ 0.10 $ 0.11 $ 0.09 $ (0.08)
Income per common
share from discontinued
operations assuming dilution/(a)/ $ 0.05 $ 0.06 $ 0.03 $ 0.01
------- ------- ------- -------
Net earnings (loss) per common
share assuming dilution/(a)/ $ 0.15 $ 0.17 $ 0.12 $ (0.07)
======= ======= ======= =======
________________
(a) All earnings per share data have been restated to reflect all of the
Company's prior stock splits as of December 31, 1999.
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Technology Solutions Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
================================================================================
NOTE 21 -- OTHER EVENTS
On March 30, 1999, the Company announced that it was making a number of changes
to its business operations and, as a result, the Company recorded a
restructuring charge of $10.5 million associated with those changes and the
severance of approximately 300 people, primarily consulting personnel. The
restructuring charge was determined based on a plan prepared at the time the
restructuring actions were approved by management and the Board of Directors.
During the year ended December 31, 1999, the Company used $9.3 million of the
restructuring accrual as a result of cash paid during the year of $7.8 million
associated with the severance of approximately 270 employees and $1.5 million in
asset write-offs and other costs. In addition, during the quarter ended December
31, 1999 the Company recorded $7.0 million in restructuring and other costs
associated with lease terminations of $3.0 million, former executive severance
costs of $1.8 million, CourseNet Systems, Inc. (CourseNet) costs of $1.3 million
and write-offs of other assets of $0.9 million. The restructuring accrual
balance is considered adequate to cover the remaining committed restructuring
actions.
NOTE 22 -- SUBSEQUENT EVENTS
On February 15, 2000 TSC successfully completed the spin-off of its eLoyalty
division into a separate publicly traded company. Previously on January 27,
2000, TSC received a favorable ruling from the Internal Revenue Service that the
spin-off of its eLoyalty division would be a tax free distribution of all of the
Company's eLoyalty shares to TSC's shareholders. Operating results from
eLoyalty were as follows:
Seven Month
For the Transition
Year Ended Period Ended For the Years
December 31, December 31, Ended May 31,
------------- ------------ ----------------
1999 1998 1998 1997
---- ---- ---- ----
Revenues.............................. $140,465 $62,600 $82,272 $43,024
-------- ------- ------- -------
Income before income taxes............ $ 12,954 $ 5,042 $11,891 $ 8,795
Income tax provision.................. 7,821 2,521 5,104 3,486
-------- ------- ------- -------
Income from
discontinued operations............ 5,133 2,521 6,787 5,309
Loss on distribution of discontinued
operations before income taxes..... (7,336) -- -- --
Income tax benefit.................... (547) -- -- --
-------- ------- ------- -------
Loss on distribution of
discontinued operations............ (6,789) -- -- --
-------- ------- ------- -------
Total (loss) income from
discontinued operations............ $ (1,656) $ 2,521 $ 6,787 $ 5,309
======== ======= ======= =======
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Technology Solutions Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
================================================================================
The $6.8 million loss on distribution of discontinued operations represents fees
and other costs related to the eLoyalty transaction and the net loss incurred by
eLoyalty from January 1, 2000 through February 15, 2000. The net assets of
discontinued operations of $74,462 as of December 31, 1999 consists of current
assets of $77,915, non-current assets of $18,688, current liabilities of $22,988
and accumulated other comprehensive loss of $847.
In addition in connection with the spin-off, on February 15, 2000, Technology
Crossover Ventures and Sutter Hill Ventures purchased from eLoyalty Corporation
2.5 million common shares for $8.4 million. TSC also has provided a short-term
guarantee for a $10.0 million revolving credit facility entered into by eLoyalty
with Bank of America. TSC received a fee from eLoyalty. The guarantee will
terminate on December 30, 2000.
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Technology Solutions Company
================================================================================
Schedule II - Valuation and Qualifying Accounts
For the Year Ended December 31, 1999, the Seven Month Transition Period
Ended December 31, 1998 and for the Years Ended May 31, 1998 and 1997
(In thousands)
Balance at Net Assets of Balance at
Description of beginning Discontinued end of
Allowance and Reserves of year Operations Additions Deductions year
- ---------------------- ---------- ---------- --------- ---------- ----------
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
====== ====== ======= ======
December 31, 1999
- -----------------
Valuation allowances
and receivable reserves
for potential losses $4,845 $(2,084) $5,909 $(4,955) $3,715
====== ======= ====== ======= ======
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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
- --------- -----------------------
2.1* Reorganization Agreement with eLoyalty Corporation.
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.
4.1* Certificate of Designation of Series A Junior Participating
Preferred Stock.
4.2 Rights Agreement with ChaseMellon Shareholder Services, L.L.C.,
filed as exhibit 4 to TSC's current report on Form 8-K dated
October 29, 1998, is hereby incorporated by reference.
4.3* First Amendment to Rights agreement with ChaseMellon Shareholder
Services, L.L.C.
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.
______________
*Filed herewith
================================================================================
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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)
- ----------------------------------
10.03 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.
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 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.
10.09 Extension of Promissory Note of John T. Kohler, filed as Exhibit
10.13 to TSC's Transition Report on Form 10-K for the seven month
transition period ended December 31, 1998, is hereby incorporated
by reference.
10.10 Employment Agreement of Jack N. Hayden, filed as Exhibit 10.09 to
TSC's Annual Report on Form 10-K for the fiscal year ended May
31, 1996, is hereby incorporated by reference.
10.11 Letter of Understanding with Jack N. Hayden, filed as Exhibit
10.14 to TSC's Annual Report on Form 10-K for the fiscal year
ended May 31, 1998, is hereby incorporated by reference.
================================================================================
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)
- ----------------------------------
10.12* Separation Agreement and Limited Mutual Release from Employment
Agreement with John T. Kohler.
10.13* Letter Agreement with Jack N. Hayden.
10.14* Employment Agreement Amendment with Jack N. Hayden.
10.15* Employment Agreement Amendment with Paul R. Peterson.
10.16* Employment Agreement with Timothy P. Dimond.
10.17* Employment Agreement Amendment with Timothy P. Dimond.
10.18* Shared Services Agreement with Eloyalty Corporation.
21* Subsidiaries of the Company.
23* Consent of PricewaterhouseCoopers LLP.
27* Financial Data Schedule
Exhibits 10.01 through 10.17 listed above are the management contracts and
compensatory plans or arrangements required to be filed as exhibits hereto
pursuant to the requirements of Item 601 of Regulation S-K.
Item 14(b) Reports on Form 8-K
- --------------------------------
During the quarter ended December 31, 1999, the Company did not file any reports
on Form 8-K.
______________
*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 23rd day of March
2000.
TECHNOLOGY SOLUTIONS COMPANY
By: /s/ TIMOTHY P. DIMOND
-----------------------
Timothy P. Dimond
Chief Financial 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 23, 2000) Chairman,
- -----------------------------------------------
William H. Waltrip Officer and Director
/s/ JACK N. HAYDEN (March 23, 2000) President, Chief Executive
- -----------------------------------------------
Jack N. Hayden Officer and Director
/s/ TIMOTHY P. DIMOND (March 23, 2000) Chief Financial Officer and
- -----------------------------------------------
Timothy P. Dimond Principal Accounting Officer
/s/ RAYMOND P. CALDIERO (March 23, 2000) Director
- -----------------------------------------------
Raymond P. Caldiero
/s/ STEPHEN B. ORESMAN (March 23, 2000) Director
- -----------------------------------------------
Stephen B. Oresman
/s/ MICHAEL R. ZUCCHINI (March 23, 2000) 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).
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