Back to GetFilings.com
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-K
----------------
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31, 2000
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 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
$2.7500 on March 9, 2001, and, for the purpose of this calculation only, the
assumption that all of registrant's directors and executive officers are
affiliates) was approximately $120 million.
The number of shares outstanding of the registrant's Common Stock, $.01 par
value per share, as of March 9, 2001 was 44,133,838.
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 2001 Annual Meeting of
Stockholders.
================================================================================
Technology Solutions Company
PART I.
================================================================================
ITEM 1. BUSINESS
General
Technology Solutions Company (TSC) offers comprehensive information technology
(IT) solutions to large corporations and mid-size firms. These solutions, which
are typically web-enabled, include: Enterprise Resource Planning (ERP), digital
supply chain management, extended support, electronic learning and knowledge
management. Most of the primary ERP vendors have expanded their service
offerings to include capabilities, layered on the ERP backbone, that allow an
enterprise to become e-business enabled. TSC's client base is composed of
companies in the manufacturing, technology, health care, telecommunications,
financial services and other industries. The solutions TSC implements helps its
clients transform their organizations, their business processes and their
relationships with customers, partners, suppliers, distributors and employees to
help realize the full benefits of information technology throughout the extended
enterprise. TSC trades on the Nasdaq Stock Market(R) under the symbol "TSCC." 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, 2000.
On February 15, 2000, TSC distributed the common stock of eLoyalty Corporation
(eLoyalty) owned by the Company to the Company's stockholders (the Spin-Off).
eLoyalty operated within the Company prior to the Spin-Off and is now a
separate, publicly traded company. 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 IT consulting and systems integration services
including end-to-end integrated solutions that cross functional boundaries
within the client's organization and throughout the client's extended
enterprise. These services can involve a full assessment of a client's IT
strategy and relevant integration needs. The Company also performs the
following:
. 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
. Extended support services
================================================================================
Page 1
Enterprise business processes that are automated with core ERP solutions provide
the foundation that allow companies to integrate their extended enterprise with
their core business processes (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 50 percent of the business by
revenue.
During 2000, TSC performed project work for over 230 corporations, including
fourteen of the Fortune 50 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 offices in Atlanta, Georgia; Dallas,
Texas; New York, New York; and Carlsbad, Soquel and Irvine, California.
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 the many 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 significant
reduction in manual or paper processes that can act as bottlenecks or
opportunities to lose or inaccurately enter data. 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, or at large divisions or subsidiaries that
fall into this market segment. The Company's goal is to anticipate market needs
and apply proven, leading-edge information technologies to deliver these
eBusiness solutions.
TSC's IT 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 architecture and operations
management capabilities.
Subsequent to the assessment stage, TSC typically develops an IT 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
the following:
. eBusiness infrastructure . Web site content
. Business-to-business (B2B) applications . Business-to-consumer (B2C) applications
. Back office systems . Supply chain management systems
. Customer support systems
================================================================================
Page 2
Post-implementation, TSC can provide ongoing hosting and support for systems and
applications through its extended support services.
An increasing number of TSC's projects have an eBusiness component that extends
the enterprise beyond core ERP. TSC is placing 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 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 services on a client-specific basis. This 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 life
sciences and in application areas such as ERP, digital supply chain management,
extended support services, electronic learning 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 market. TSC has implemented major new systems within manufacturing,
distribution, retail, transportation, telecommunications, banking, insurance,
health care and financial services firms.
Business Segments
TSC currently manages its business in two reportable business segments, named
Digital Enterprise Consulting and Peer3. TSC serves customers in the U.S. and
international markets. TSC believes that offering complementary services allows
the Company to serve clients in their information technology, eBusiness, change
management and training needs. This structure also allows the Company's
employees the flexibility and opportunity to grow and develop. The two areas
work in an integrated manner that develops, shares and cross references
methodologies, tools, project management plans, benchmark information, templates
and best practices overall. Information related to certain projects--including
proposals and project plans--is maintained in knowledge databases that can be
accessed by TSC personnel working on projects throughout TSC.
Digital Enterprise Consulting
The Digital Enterprise Consulting (DEC) business segment provides IT consulting
and business consulting services that help clients in developing and
implementing 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 business segment
represented the majority of TSC'S 2000 revenues.
================================================================================
Page 3
Within DEC, customers can take advantage of areas of expertise and resources
that fall under the following areas:
Enterprise Operations is comprised of several areas that combine ERP and
technology back-office services with the solutions available from key partners
to meet the new demands of the market. Core ERP develops "backbone" automated
structures that help businesses automate and streamline human resources,
manufacturing and financial processes and systems. TSC implements the integrated
product family supplied by SAP AG and its U.S. subsidiary SAP America, Inc.; the
human resources, financial and manufacturing systems supplied by PeopleSoft,
Inc.; the Oracle Applications suite of client/server products developed by
Oracle Corporation; and the Baan integrated client/server product supplied by
Invensys Software and Systems Division of Invensys plc. In addition to its
consulting services associated with the core ERP software products, TSC is a
systems integrator. TSC customers are adding specialized best-of-breed software
applications to their existing ERP installations by leveraging TSC's
implementation and integration services.
Digital Supply Chain Management focuses on helping clients leverage new
technologies and processes that decrease operating costs and increase velocity
throughout their respective supply chains. It involves developing and
implementing both packaged applications and customized software for our clients
to 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. The key components of the Digital Supply Chain Management
offering include eProcurement, ePLM (Product Life-cycle Management) and Supply
Chain Planning and Execution.
Extended Support Services focuses on providing customer solutions and operations
support for an organization's application infrastructure. Some of these services
are provided directly by TSC while other services are provided by TSC's extended
support partners. Extended Support Services can support single or multiple
applications ranging from back-office ERP systems to Web site front ends.
Customer Interaction Solutions helps clients succeed through the integration of
customer-centric activities and are designed to support a range of business
functions from product development to marketing and sales. TSC helps customers
define and implement customer interaction strategies and direction to increase
market and customer share, maximize cost effective customer service and reduce
operating costs. TSC supports these business objectives by providing services
that include Business Intelligence, Customer Relationship Management and
eSales/Configuration.
Peer3
The Peer3 business segment 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 to
business intelligence.
================================================================================
Page 4
Additionally, through its Peer3 business segment, TSC offers its clients a
variety of training options. TSC's training programs can range from basic
"train the trainer" programs for a new client system to sophisticated multi-
media computer-based and web-based training programs that can be used for
training the users of the system, as well as detailed process and system
education.
In October 1999, TSC acquired CourseNet Systems, Inc. (CourseNet) a software
development and e-learning solutions delivery company. CourseNet's XML-based e-
learning 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 Peer3 business segment can now offer its customers a suite of
tools to author, deliver and administer online training, allowing these
companies to identify experts, take online courses, collaborate in the
development of new knowledge and share knowledge with the entire organization
and supply chain.
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 dedicated sales organization of approximately forty 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; 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.
When a potential client becomes 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 TSC Project Manager uses his extensive experience to
evaluate the potential project and develop an insightful proposal, which will
address the specific project request of the potential client. In the proposal,
TSC's Project Manager is able to provide insight and ideas resulting from TSC's
focus on delivering business benefits through technology.
TSC's business segments participate in a number of software vendor and industry
conferences and trade shows each year. These events serve to broaden TSC's
presence when its senior technical and management personnel participate in
speaking engagements and other conference events.
================================================================================
Page 5
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 twenty-five
years of experience) to manage the typical large project. TSC's professional
staff (which averages fifteen 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 one Vice President to eight professional staff
to one Vice President to fifteen professional staff. This compares to ratios of
one partner (Vice President equivalent) to approximately thirty professional
staff in many of the Big Five 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.
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. TSC 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 for the
following:
. To help improve the quality of the work performed by TSC
. To lower the cost of the implementation
. To reduce the time required to perform the work
. To create knowledge databases which contain proposals, project plans and
other information, that can be accessed by TSC personnel working on projects
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.
================================================================================
Page 6
Software Products Expertise -- Application software and other software products
are increasingly used to reduce development time and cut costs. TSC partners
with many of the leading third-party software vendors that serve the e-business
solutions marketplace.
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 offers a change management component
within 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-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.
Quality Assurance -- The Company maintains a quality assurance program pursuant
to which each project must have a quality assurance plan before the engagement
is commenced. The plan must include the conducting of formal reviews to assure
early identification and resolution of problems and other concerns to help
insure the successful completion and customer satisfaction with the project. The
knowledge gained through quality assurance reviews is spread throughout the
Company by continuous improvements in our implementation methodologies, thereby
helping the Company foresee and eliminate potential problems and concerns on
other projects.
In all of these areas 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.
================================================================================
Page 7
International
TSC has very limited international operations, representing five percent of
revenues for the year ended December 31, 2000. These international operations
are in Europe and focus on ERP. In addition, through March 31, 2000, TSC also
operated in Latin America. Total local staffing at the Company's international
operations was eight as of December 31, 2000. For discussion of certain risks
related to the Company's International Operations, see Risks of Conducting
International Operations.
Clients
TSC views its current clients as a valuable source of potential 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 business
segment that may be performing work at that client.
TSC's client focus is on global accounts and includes the middle-market segment
that the Company defines as firms having annual revenues of between $500 million
and $5 billion. TSC performs work at larger firms, often at large divisions or
subsidiaries that fall into this market segment. During the year ended December
31, 2000, TSC performed work at fourteen of the Fortune 50 companies. No client
accounted for ten percent or more of revenues during any of the periods
presented.
Personnel
As of December 31, 2000, TSC had a total professional staff of 630 (excluding
Infrastructure). The following table summarizes, as of December 31, 2000, the
experience levels of TSC's professional staff.
Average Relevant Experience (Years)
-------------------------------------
% of
Level Total Consulting Industry Total
----------------- ----- ---------- -------- -----
Vice Presidents 11% 9 16 25
Senior Principals 20% 6 15 21
Principals 28% 5 14 19
Senior Consultants 21% 4 9 13
Consultants 14% 2 6 8
Associate Consultants 6% 1 3 4
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.
================================================================================
Page 8
Infrastructure
As of December 31, 2000, TSC had a staff of 84 individuals who comprised the
infrastructure support function. The objective of the infrastructure 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; resource management; employee benefits; marketing; public and investor
relations; office operations; recruiting; training; internal communications;
internal technology applications; planning; quality assurance; and risk
management.
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.
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.
On September 22, 2000, the Company filed a provisional patent application
seeking protection of certain proprietary technologies and processes relating to
the e-learning software currently offered by TSC through its Peer3 business
segment. The Company intends to pursue this application until final action is
taken on it by the Patent and Trademark Office. However, there can be no
assurances that any patent will ultimately issue.
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.
================================================================================
Page 9
Although the Company believes that its services and products do not infringe on
the intellectual property rights of others, there can be no assurance that
infringement claims will not be asserted against the Company in the future.
Competition
The IT consulting and 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 Accenture LLP; Booz, Allen & Hamilton Inc.; Cambridge
Technology Partners, Inc.; Computer Sciences Corporation; Arthur Andersen LLP;
Deloitte & Touche LLP; Electronic Data Systems Corporation; Cap Gemini Ernst &
Young; IBM; KPMG Consulting, Inc.; 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 IT 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.
Many participants in the IT 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 Accenture for major systems integration projects
than with any other participant in the market. Accenture has substantially
greater revenues, employee headcount, and market share than does TSC.
TSC believes that within each of its business segments, it competes primarily on
the basis of the experience and expertise of its project managers, its proven
track record in applying new technologies and innovative business solutions, its
use of methodologies and implementation tools and the creativity of its
proposals and delivered work product. Regarding price, TSC has similar rates as
our competitors, but typically performs the work in fewer hours because of our
more experienced consulting professionals.
================================================================================
Page 10
Executive Officers of the Registrant
The executive officers of TSC as of March 22, 2001 are as follows:
William H. Waltrip Chairman
Jack N. Hayden President and Chief Executive Officer
Laurence P. Birch Senior Vice President and Chief Financial Officer
Paul R. Peterson Senior Vice President, General Counsel and Corporate
Secretary
William H. Waltrip, age 63, 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, Thomas &
Betts Corporation and Charles River Laboratories International Inc.
Jack N. Hayden, age 54, 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. He served
as Chief Executive Officer of Coleman Consulting Group, Inc., from September
1998 to March 1999. He rejoined the TSC executive team as Group President in
March 1999. Prior to coming to TSC initially, he held the position of Vice
President--Operations, Commercial Transport Division of McDonnell Douglas
Corporation from 1990 to 1992. From 1989 to 1990, he served as Vice President--
Finance of McDonnell Douglas Corporation. From 1971 to 1989, he served in
numerous manufacturing and procurement positions at McDonnell Douglas
Corporation.
Laurence P. Birch, age 41, joined TSC as Chief Financial officer in December
2000. He was previously Chief Financial Officer of Brigade, Inc., an internet
support company based in San Francisco. Mr. Birch has also served as Chief
Financial Officer of Gateway Homecare, Inc.; Vice President/Business Operations
for MCI/Worldcom--Systemhouse Division; and in various financial positions with
Baxter Healthcare, Inc. Mr. Birch holds a Masters of Management degree from
Northwestern University, a Bachelors of Science degree in Finance from the
University of Illinois and is a Certified Public Accountant.
================================================================================
Page 11
Paul R. Peterson, age 59, 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, Georgia; Dallas, Texas; New
York, New York; and Carlsbad, Soquel and Irvine, California. TSC believes that
these facilities are adequate for its current business needs and that it will be
able to obtain suitable space as needed; however, the Company continues to
review its office leases for any cost saving opportunities.
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, 2000.
================================================================================
Page 12
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 9, 2001, there were approximately 300 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 calendar quarter
in the years ended December 31, 2000 and 1999.
Quarter Ended High Low
------------- ---- ---
March 31, 1999 $11.250(a) $6.375(a)
June 30, 1999 $11.563(a) $6.500(a)
September 30, 1999 $15.500(a) $9.625(a)
December 31, 1999 $39.250(a) $13.813(a)
March 31, 2000 $42.688(a) $6.500
June 30, 2000 $9.094 $4.000
September 30, 2000 $6.250 $1.813
December 31, 2000 $3.594 $1.375
(a) 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.
The prices presented in this table prior to February 15, 2000 do not reflect
the effect of the Spin-Off on the Company's stock price.
================================================================================
Page 13
On March 9, 2001, the last reported sale price on The Nasdaq Stock Market(R) for
the Company's Common Stock was $2.7500.
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, from time to time the stock market experiences significant price
fluctuations that affect the market prices of equity securities of many
companies and that often are 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.
================================================================================
Page 14
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 years ended December 31, 2000
and 1999, for the seven month transition period ended December 31, 1998 and for
the year ended May 31, 1998 and the audited balance sheets as of December 31,
2000 and 1999 are included elsewhere in this filing, and the corresponding
selected financial data set forth below should be read in conjunction with such
audited financial statements. All amounts are in thousands, except for basic and
diluted (loss) earnings per common share.
Seven Month
For the Years Transition
Ended December 31, Period Ended For the Years Ended May 31,
-------------------- December 31, --------------------------------
2000 1999 1998 1998 1997 1996
-------- -------- ------------ -------- -------- --------
Consolidated Statement of Operations Data:
Revenues $131,604 $156,320 $126,839 $189,603 $122,063 $ 71,224
Operating (loss) income (7,525) $(20,697) $ 1,844 $ 22,471 $ 14,094 $ (4,279)
(Loss) income from continuing operations (2,662) $(11,578) $ 1,954 $ 14,233 $ 9,758 $ (1,018)
Income from discontinued operations -- $ 5,133 $ 2,521 $ 6,787 $ 5,309 $ 5,592
Loss on distribution of discontinued operations -- $ (6,789) -- -- -- --
Net (loss) income $ (2,662) $(13,234) $ 4,475 $ 21,020 $ 15,067 $ 4,574
======== ======== ======== ======== ======== ========
Basic (loss) earnings per common share:
Continuing operations $ (0.06) $ (0.27) $ 0.05 $ 0.37 $ 0.28 $ (0.03)
Discontinued operations $ -- $ (0.04) $ 0.06 $ 0.17 $ 0.15 $ 0.18
-------- -------- -------- -------- -------- --------
Net (loss) earnings per common share* $ (0.06) $ (0.31) $ 0.11 $ 0.54 $ 0.43 $ 0.15
======== ======== ======== ======== ======== ========
Diluted (loss) earnings per common share:
Continuing operations $ (0.06) $ (0.27) $ 0.04 $ 0.33 $ 0.25 $ (0.02)
Discontinued operations $ -- $ (0.04) $ 0.06 $ 0.16 $ 0.13 $ 0.15
-------- -------- -------- -------- -------- --------
Net (loss) earnings per common share* $ (0.06) $ (0.31) $ 0.10 $ 0.49 $ 0.38 $ 0.13
======== ======== ======== ======== ======== ========
*Earnings per common share data have been restated to reflect all of the
Company's prior stock splits.
December 31, May 31,
-------------------------------- --------------------------------
2000 1999 1998 1998 1997 1996
-------- -------- -------- -------- -------- --------
Consolidated Balance Sheet Data:
Total assets ...................... $127,638 $223,309 $219,099 $197,148 $133,866 $ 89,437
Long-term debt .................... -- -- -- -- -- --
================================================================================
Page 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
On February 15, 2000 TSC completed the Spin-Off. Accordingly, this report
discusses the TSC consolidated statements of operations with eLoyalty's
operations presented on a discontinued operations basis. For the year ended
December 31, 2000, there were no discontinued operations in the Company's
results of operations, as the Company provided for the net loss on distribution
in its results of operations for the year ended December 31, 1999.
CALENDAR 2000 COMPARED WITH CALENDAR 1999
Consolidated net revenues for the year ended December 31, 2000 decreased 16
percent to $131.6 million compared with $156.3 million in the prior year. This
decrease was mainly due to a decline in the demand for Enterprise Resource
Planning (ERP) solutions which are provided by TSC's Digital Enterprise
Consulting (DEC) segment, as well as a decline in the demand for certain TSC
services as a result of clients facing budgetary constraints as they continued
to address Year 2000 issues during the first quarter. Historically, TSC's
revenues consisted mainly of core ERP solutions.
Project personnel costs, which represent mainly professional salaries and
benefits, decreased to $67.6 million for the year ended December 31, 2000 from
$81.6 million in the prior year, a decrease of 17 percent. The decrease was
mainly due to a decrease in average professional headcount as the Company
reduced project personnel costs by streamlining and refocusing its business,
which resulted in a restructuring charge of $10.5 million during the first
quarter of 1999 (as discussed further in this section). Project personnel costs
as a percentage of net revenues decreased to 51 percent for the year ended
December 31, 2000 from 52 percent in the prior year.
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, software development
costs and provisions for receivable valuation allowances. Other project expenses
for the year ended December 31, 2000 were $26.1 million, compared with $25.4
million in the prior year, an increase of $0.7 million, or 3 percent. The
increase in other project expenses was primarily attributable to an increase of
$4.4 million in marketing, selling, business development, software development
and travel expenses from increased selling and business development efforts, an
increase of $1.4 million in the provision for receivable valuation allowances
due to cash flow problems at dot-com clients and an increase in various other
costs of $0.6 million. As of December 31, 2000, the Company does not have
significant receivables from dot-com clients. The increases were partially
offset by a decrease of $3.6 million in domestic hiring, training, communication
and computer expenses due to a decrease in average headcount and a decrease in
international costs of $2.1 million as a result of the closure of the Latin
American operations during the first quarter of 2000 and the restructuring of
the European operations during the first half of 1999 (as discussed further in
this section). Other project expenses as a percentage of net revenues increased
to 20 percent for the year ended December 31, 2000 from 16 percent in the prior
year mainly due to increased selling and business development efforts and the
decline in revenues.
================================================================================
Page 16
Management and administrative support costs decreased $10.8 million to $31.7
million for the year ended December 31, 2000 from $42.5 million in the prior
year, a decrease of 25 percent. The decrease was mainly due to a decrease of
$14.2 million in corporate infrastructure costs over the prior year. This
decrease in infrastructure costs included the following: a decrease in the
internal systems and human resources areas of $5.1 million and a decrease in
corporate recruiting expenses of $0.7 million as a result of a reduction in
average headcount; a decrease in domestic office costs of $2.3 million due to
the closing of several offices as well as certain offices being transferred to
eLoyalty at the time of the Spin-Off; a decrease in legal expenses of $1.9
million; a decrease in corporate marketing expenses of $0.8 million; and a
decrease in various other costs of $3.4 million including corporate finance,
accounting, investor relations and international costs. As a result of the Spin-
Off, TSC and eLoyalty entered into a Shared Services Agreement pursuant to which
TSC provided to eLoyalty certain administrative services. The Company has
charged these services to eLoyalty since the Spin-Off and $3.8 million of the
decrease in infrastructure costs discussed above reflects this credit. In
addition, these decreases were offset by an increase in practice area management
and administrative costs of $3.4 million. This increase primarily resulted from
an increase in practice area support personnel of $2.8 million due to increased
selling efforts and an increase in various other costs of $1.9 million including
practice area selling, marketing and recruiting costs, offset by a decrease in
international costs of $1.3 million.
Goodwill amortization increased to $0.9 million for the year ended December 31,
2000 compared to $0.2 million in the prior year. This increase resulted from the
CourseNet Systems, Inc. (CourseNet) acquisition in the fourth quarter of 1999.
During the quarter ended March 31, 2000, the Company recorded a pre-tax charge
of $4.7 million for the closure of its Latin American operations. During the
quarter ended September 30, 2000, the Company collected $0.4 million of accounts
receivables previously written-off and, as a result, the cumulative charge has
been reduced to $4.3 million. As of December 31, 2000, the Company had used
approximately $4.0 million of this charge for cash payments of $2.8 million
related to severance costs for approximately 40 employees, lease terminations
and professional fees and $1.6 million in asset write-offs, offset by the
accounts receivables collections of $0.4 million. The remaining accrual balance
of $0.3 million as of December 31, 2000 represents professional fees, tax
charges and various other closure costs that are expected to be incurred by the
second quarter of 2001.
During the quarter ended December 31, 1999, the Company recorded $7.0 million in
restructuring and other charges associated with lease terminations of $3.0
million, former executive severance costs of $1.8 million, CourseNet acquisition
costs of $1.3 million and write-offs of other assets of $0.9 million. During the
quarter ended September 30, 2000, the Company determined that a portion of the
lease terminations became unnecessary due to changes in TSC office usage by TSC
and eLoyalty and, as a result, the cumulative charge has been reduced by $0.4
million to $6.6 million. As of December 31, 2000, the Company had used $4.2
million of these restructuring and other charges as a result of cash payments of
$1.8 million (paid during the quarter ended March 31, 2000) for executive
severance costs and $2.4 million in asset and other write-offs. The remaining
accrual balance of $2.4 million as of December 31, 2000 relates to
================================================================================
Page 17
amounts the Company is contractually obligated to pay through 2004 as a result
of lease terminations.
In addition, 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 employees, primarily consulting personnel. During the
quarter ended September 30, 2000, the Company determined that $0.1 million of
this charge was overestimated and, as a result, the cumulative charge has been
reduced to $10.4 million. The Company has used the full restructuring accrual of
$10.4 million for cash payments of $8.8 million ($1.0 million paid during the
year ended December 31, 2000) associated with the severance of approximately 270
employees and $1.6 million in asset write-offs and other costs.
Incentive compensation of $9.0 million was accrued during the year ended
December 31, 2000 compared to $9.9 million in the prior year. Incentive
compensation as a percentage of net revenues increased slightly to 7 percent for
the year ended December 31, 2000 compared to 6 percent in the prior year. This
increase resulted from the decision to retain staff with the necessary expertise
that the Company believes is needed in 2001. The Company expects to continue to
accrue incentive compensation throughout the 2001 calendar year.
Consolidated operating loss from continuing operations was $7.5 million for the
year ended December 31, 2000 compared to $20.7 million in the prior year. The
Company's operating loss for the year ended December 31, 2000 included a charge
for the closure of the Latin American operations of $4.3 million and $1.4
million in administrative costs with respect to the period prior to the Spin-Off
that would have been allocated to eLoyalty, offset by $0.5 million for the
adjustment of some previous restructuring and other charges (as discussed
previously in this section). The Company's operating loss for the year ended
December 31, 1999 included restructuring and other charges of $17.5 million and
$8.9 million in administrative costs with respect to the period prior to the
Spin-Off that would have been allocated to eLoyalty. Excluding these charges,
operating loss for the year ended December 31, 2000 was $2.3 million compared to
operating income of $5.7 million in the prior year. This decrease was mainly due
to the reduction in revenues offset by a reduction in overall costs.
Other income and expense for the year ended December 31, 2000 was $3.2 million
compared to $3.6 million in the prior year. The decrease is a result of lower
cash and cash equivalent balances during the year ended December 31, 2000
compared to the same period a year ago. The decrease in cash and cash equivalent
balances mainly resulted from the Spin-Off of eLoyalty and the costs associated
with the Spin-Off.
The Company's effective tax rate for the year ended December 31, 2000 was a tax
benefit of 38 percent compared to 32 percent for the same period a year ago. The
increase in the tax rate benefit mainly resulted from foreign tax rate
differences having minimal impact on the tax rate and non-taxable investments
having a larger impact on the tax rate during the year ended December 31, 2000
compared to the same period a year ago.
Weighted average number of common shares outstanding and weighted average number
of common and common equivalent shares outstanding increased due to the exercise
of stock
================================================================================
Page 18
options, the issuance of shares under the Company's employee stock purchase plan
and the purchase of common stock by two venture capital firms in August 1999
(see Note 12), partially offset by the repurchase of some outstanding shares.
CALENDAR 1999 COMPARED WITH CALENDAR 1998
Consolidated net revenues for the year ended December 31, 1999 decreased 27
percent to $156.3 million compared with $215.1 million in the prior year. This
decrease was mainly due to a decline in the demand for certain TSC services as a
result of clients facing budgetary constraints 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.
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 in the prior 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 in the prior 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
receivable valuation allowances. Other project expenses for the year ended
December 31, 1999 were $25.3 million, compared with $32.5 million in the prior
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
receivable valuation allowances 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 in the prior 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 in the prior
year, a decrease of 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 corporate
infrastructure costs over the previous year. The decrease in infrastructure
costs versus the same period in the prior year included the following: a
decrease in the internal systems and human resources areas of $1.3 million and a
decrease in corporate recruiting
================================================================================
Page 19
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 in the prior 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 acquisition costs of $1.3 million and write-
offs of other assets of $0.9 million.
Incentive compensation of $9.9 million was accrued during the year ended
December 31, 1999 compared to $8.3 million in the prior year. Incentive
compensation as a percentage of net revenues increased to 6 percent for the year
ended December 31, 1999 compared to 4 percent in the prior year. The increase
was primarily due to an increase in the bonus accrual for non-vice president
personnel.
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 year, 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 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 in the prior year. The increase is a result of higher
cash and cash equivalent balances for the year ended December 31, 1999 compared
to the same period in the prior year.
The Company's effective tax rate for the year ended December 31, 1999 was a 32
percent benefit compared to a 42 percent provision in the prior year. The tax
rate for the year ended December 31, 1999 was lower than in the previous year
because certain amounts related to the CourseNet
================================================================================
Page 20
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 in the prior
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 year. 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 SEVEN MONTH TRANSITION PERIOD ENDED DECEMBER 31, 1997
The seven month transition period ended December 31, 1998 is discussed due to
the Company changing from a May 31 fiscal year-end to a fiscal year aligned with
the calendar year beginning January 1, 1999.
Consolidated net revenues for the 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 in the prior year. These increases were slightly offset by
international revenues which declined approximately 6 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 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 receivable valuation
allowances. 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
================================================================================
Page 21
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
corporate infrastructure 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 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 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.
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
================================================================================
Page 22
this decrease was higher infrastructure 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 in the prior
year. 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 in the prior year.
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.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $18.1 million for the year ended
December 31, 2000 and net cash provided by operating activities was $27.1
million for the year ended December 31, 1999. Net cash used in operating
activities for the year ended December 31, 2000 included the net loss, an
increase in receivables and other unfavorable working capital activities, such
as accrued compensation and related costs and restructuring and other accruals,
partially offset by restructuring and other charges.
The Company believes that its cash and cash equivalents, marketable securities
and anticipated cash flows are sufficient to meet the Company's current cash
requirements.
Net cash used in investing activities was $27.8 million for the year ended
December 31, 2000. This reflects a $20.0 million capital contribution to
eLoyalty Corporation and $2.3 million of cash used by discontinued operations.
The Company received $1.2 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, 2000 were $2.7 million. The
Company currently has no material commitments for capital expenditures.
In addition, in connection with the eLoyalty Spin-Off, TSC option holders
(excluding eLoyalty employees and directors who were not also directors of TSC)
had each of their options granted prior to June 22, 1999 converted into one
adjusted TSC option and one eLoyalty option. When a Company employee exercises
an eLoyalty Corporation option, the employee may recognize taxable income (the
Option Deduction). The Company obtained a ruling from the Internal Revenue
Service (IRS) which provides that the Company is entitled to deduct the Option
================================================================================
Page 23
Deduction on its Federal Income Tax return. The net operating loss resulting
from the exercise of former subsidiary stock options represents the future tax
benefit attributable to this Option Deduction. As part of the Spin-Off, the
Company entered into a Tax Sharing and Disaffiliation Agreement (the Agreement)
with eLoyalty Corporation. Under the terms of the Agreement, the Company agreed
to reimburse eLoyalty for certain tax benefits attributable to this deduction
when the actual tax benefit is realized by the Company.
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 31, 2001. 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, 2000, 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, 2000.
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 TSC beginning January 1, 2001. 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 believes 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 24
ASSUMPTIONS UNDERLYING CERTAIN FORWARD-LOOKING STATEMENTS AND FACTORS THAT MAY
AFFECT FUTURE RESULTS
This Form 10-K contains or may contain 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. These
forward-looking statements involve significant risks and uncertainties. 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,
the Company's ability to accommodate a changing business environment, general
business and economic conditions in the Company's operating regions, market
conditions 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:
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
================================================================================
Page 25
inability to apply existing technologies and expertise to subsequent projects
could have a material adverse effect on the Company's business, operating
results and financial condition.
Management of Growth
The Company's business has 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 it's 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 may increase 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 may 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.
================================================================================
Page 26
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. 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. 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.
================================================================================
Page 27
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's clients primarily consist of Fortune 1000
and other large corporations and there are an increasing number of professional
services firms seeking systems consulting and implementation engagements from
that client base. The Company believes that its ability to compete depends in
part on a number of factors outside its control, including the ability of its
competitors to hire, retain and motivate a significant number of senior project
managers, the ownership by competitors of software used by potential clients,
the development by others of software that is competitive with the Company's
products and services, and the price at which others offer comparable services.
In addition, the Company's clients could develop or acquire in-house expertise
in services similar to those provided by the Company, which would significantly
reduce demand for the Company's
================================================================================
Page 28
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.
================================================================================
Page 29
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 if 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 may depend upon its ability to attract, develop
and retain a sufficient number of highly skilled, motivated local professional
employees in each of those foreign countries where it conducts operations.
Competition for such local personnel qualified to deliver most of the Company's
services is intense, and there can be no assurance that the Company will be able
to recruit, develop and retain a sufficient number of highly skilled, motivated
local professional employees to successfully compete internationally.
================================================================================
Page 30
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required with respect to this
Item 8 are listed in Item 14(a)(1) and (a)(2) in this filing.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
================================================================================
Page 31
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 2001 Annual Meeting of Stockholders (the
"Proxy Statement") and the information contained under the heading "Executive
Officers of the Registrant" in Item 1 hereof is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
Except for the information relating to Item 13 hereof and except for the
information referred to in Item 402(a)(8) of Regulation S-K, the information
contained under the headings "Executive Officer Compensation" and "Other
Transactions" in the Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained under the headings "Security Ownership of Directors
and Management" and "Additional Information Relating to Voting Securities" in
the Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Except for the information relating to Item 11 hereof and except for the
information referred to in Item 402(a)(8) of Regulation S-K, the information
contained under the headings "Executive Officer Compensation" and "Other
Transactions" in the Proxy Statement is incorporated herein by reference.
================================================================================
Page 32
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...................................... 34
- ---------------------------------
Financial Statements (Item 14(a)(1))
- ------------------------------------
Consolidated Balance Sheets as of December 31, 2000 and 1999....... 35
Consolidated Statements of Operations for the years ended
December 31, 2000 and 1999, for the seven month transition period
ended December 31, 1998 and for the year ended May 31, 1998........ 36
Consolidated Statements of Changes in Stockholders' Equity and
Comprehensive Income for the years ended December 31, 2000
and 1999, for the seven month transition period ended
December 31, 1998 and for the year ended May 31, 1998.............. 38
Consolidated Statements of Cash Flows for the years ended
December 31, 2000 and 1999, for the seven month transition period
ended December 31, 1998 and the for the year ended May 31, 1998.... 40
Notes to Consolidated Financial Statements......................... 41
Financial Statement Schedule (Item 14(a)(2))
- --------------------------------------------
Schedule II Valuation and Qualifying Accounts..................... 72
All other schedules have been omitted because the required information is
included in the financial statements or notes thereto or because they are not
required.
================================================================================
Page 33
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, 2000 and 1999, and the results of their operations
and their cash flows for the years ended December 31, 2000 and 1999, for the
seven month transition period ended December 31, 1998, and for the year ended
May 31, 1998, in conformity with accounting principles generally accepted in the
United States of America. 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 of America 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 our opinion.
PricewaterhouseCoopers LLP
January 27, 2001
Chicago, Illinois
================================================================================
Page 34
Technology Solutions Company
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
ASSETS
------
December 31, December 31,
2000 1999
-------- --------
CURRENT ASSETS:
Cash and cash equivalents.................................. $ 40,574 $ 81,002
Marketable securities...................................... 16,791 17,826
Receivables, less allowance for doubtful receivables
of $3,713 and $3,715..................................... 33,165 24,036
Deferred income taxes...................................... 10,211 9,969
Refundable income taxes.................................... 3,241 --
Other current assets....................................... 2,734 4,664
-------- --------
Total current assets..................................... 106,716 137,497
COMPUTERS, FURNITURE AND EQUIPMENT, NET..................... 3,520 4,116
GOODWILL.................................................... 3,526 4,446
DEFERRED INCOME TAXES....................................... 7,438 --
LONG-TERM RECEIVABLES AND OTHER............................. 6,438 2,788
NET ASSETS OF DISCONTINUED OPERATIONS....................... -- 74,462
-------- --------
Total assets............................................. $127,638 $223,309
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable........................................... $ 1,116 $ 2,995
Accrued compensation and related costs..................... 16,043 18,453
Deferred compensation...................................... 10,747 10,322
Restructuring and other accruals........................... 2,687 12,708
Other current liabilities.................................. 4,428 5,220
-------- --------
Total current liabilities................................ 35,021 49,698
-------- --------
DEFERRED INCOME TAXES DUE TO FORMER SUBSIDIARY.............. 6,244 --
COMMITMENTS AND CONTINGENCIES............................... -- --
-------- --------
Total liabilities......................................... 41,265 49,698
-------- --------
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 -- 44,565,515 and 43,354,725.. 446 434
Capital in excess of par value............................. 122,935 110,455
(Accumulated deficit) and retained earnings................ (35,552) 63,704
Treasury stock, at cost, 567,901 shares.................... (1,295) --
Accumulated other comprehensive (loss) income:
Unrealized holding loss, net............................. (276) (131)
Cumulative translation adjustment........................ 115 (851)
-------- --------
Total stockholders' equity............................... 86,373 173,611
-------- --------
Total liabilities and stockholders' equity............... $127,638 $223,309
======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part
of this financial information.
================================================================================
Page 35
Technology Solutions Company
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Seven Month
For the Transition
Years Ended Period Ended For the Year
December 31, December 31, Ended May 31,
-------------------- ------------ -------------
2000 1999 1998 1998
---- ---- ---- ----
REVENUES................................. $131,604 $156,320 $126,839 $189,603
-------- -------- -------- --------
COSTS AND EXPENSES:
Project personnel...................... 67,617 81,575 61,459 87,582
Other project expenses................. 26,091 25,347 19,777 26,996
Management and administrative support.. 31,682 42,473 36,884 44,615
Goodwill amortization.................. 920 225 221 402
Restructuring and other charges........ 3,775 17,489 -- --
Incentive compensation................. 9,044 9,908 6,654 7,537
-------- -------- -------- --------
139,129 177,017 124,995 167,132
-------- -------- -------- --------
OPERATING (LOSS) INCOME.................. (7,525) (20,697) 1,844 22,471
-------- -------- -------- --------
OTHER INCOME (EXPENSE):
Net investment income.................. 3,260 3,705 1,710 2,041
Interest expense....................... (14) (139) (13) (21)
-------- -------- -------- --------
3,246 3,566 1,697 2,020
-------- -------- -------- --------
(LOSS) INCOME FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES......... (4,279) (17,131) 3,541 24,491
INCOME TAX (BENEFIT) PROVISION........... (1,617) (5,553) 1,587 10,258
-------- -------- -------- --------
(LOSS) INCOME FROM
CONTINUING OPERATIONS.................. (2,662) (11,578) 1,954 14,233
DISCONTINUED OPERATIONS:
Income from discontinued
operations (net of income taxes)...... -- 5,133 2,521 6,787
Loss on distribution of discontinued
operations (net of income taxes)...... -- (6,789) -- --
-------- -------- -------- --------
(LOSS) INCOME FROM DISCONTINUED
OPERATIONS (net of income taxes)....... -- (1,656) 2,521 6,787
-------- -------- -------- --------
NET (LOSS) INCOME........................ $ (2,662) $(13,234) $ 4,475 $ 21,020
======== ======== ======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part
of this financial information.
================================================================================
Page 36
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 Year
December 31, December 31, Ended May 31,
--------------------- ------------ -------------
2000 1999 1998 1998
---- ---- ---- ----
BASIC (LOSS) EARNINGS
PER COMMON SHARE:
CONTINUING OPERATIONS......... $ (0.06) $ (0.27) $ 0.05 $ 0.37
DISCONTINUED OPERATIONS....... -- (0.04) 0.06 0.17
------- ------- ------- -------
NET (LOSS) EARNINGS
PER COMMON SHARE.............. $ (0.06) $ (0.31) $ 0.11 $ 0.54
======= ======= ======= =======
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING..... 44,139 42,044 40,668 38,887
======= ======= ======= =======
DILUTED (LOSS) EARNINGS
PER COMMON SHARE:
CONTINUING OPERATIONS......... $ (0.06) $ (0.27) $ 0.04 $ 0.33
DISCONTINUED OPERATIONS....... -- (0.04) 0.06 0.16
------- ------- ------- -------
NET (LOSS) EARNINGS
PER COMMON SHARE.............. $ (0.06) $ (0.31) $ 0.10 $ 0.49
======= ======= ======= =======
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING............ 44,139 42,044 43,409 42,781
======= ======= ======= =======
The accompanying Notes to Consolidated Financial Statements are an integral part
of this financial information.
================================================================================
Page 37
Technology Solutions Company
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
For the years ended December 31, 2000 and 1999, for the seven month transition period ended December 31, 1998
and for the year ended May 31, 1998 -- (In thousands, except share data)
Accumulated
Common Stock Issued Capital in Other
------------------- Excess of Retained Treasury Comprehensive Comprehensive
Shares Amount Par Value Earnings Stock Loss Total Income
---------- ------ ---------- -------- -------- ------------- -------- -------------
Balance as of May 31, 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
=======
Issuance of 779,161 common stock
Shares and 401,575 treasury shares
From exercise of stock options........ 779,161 8 7,567 -- 1,094 -- 8,669
Issuance of 181,271 common stock
Shares from employee stock purchase
Plan.................................. 181,271 1 2,230 -- -- -- 2,231
Purchase of 296,300 treasury shares.... -- -- -- -- (2,842) -- (2,842)
Change in net unrealized holding
loss on available-for-sale securities. -- -- -- -- -- 33 33 $ 33
Net income............................. -- -- -- 4,475 -- -- 4,475 4,475
Cumulative translation adjustment...... -- -- -- -- -- (127) (127) (127)
---------- ---- ------- ------- ------- ------- -------- -------
Balance as of December 31, 1998........ 41,242,886 $412 $94,886 $76,938 $(2,646) $(1,345) $168,245 $ 4,381
---------- ---- ------- ------- ------- ------- -------- =======
The accompanying Notes to Consolidated Financial Statements are an integral part
of this financial information.
================================================================================
Page 38
Technology Solutions Company
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(CONTINUED)
For the years ended December 31, 2000 and 1999, for the seven month transition period ended December 31, 1998
and for the year ended May 31, 1998 -- (In thousands, except share data)
Retained Accumulated
Common Stock Issued Capital in Earnings Other
------------------- Excess of (Accumulated Treasury Comprehensive Comprehensive
Shares Amount Par Value Deficit) Stock Loss Total Loss
---------- ------ ---------- ------------ -------- ------------- -------- -------------
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)
========
Purchase of 1,033,100 treasury shares.. -- -- -- -- (2,443) -- (2,443)
Issuance of 1,003,067 common stock
shares and 147,601 treasury shares
from exercise of stock options........ 1,003,067 10 10,860 -- 340 -- 11,210
Issuance of 207,723 common stock
shares and 317,598 treasury shares
from employee stock purchase plan..... 207,723 2 1,620 -- 808 -- 2,430
Change in net unrealized holding
loss on available-for-sale securities. -- -- -- -- -- (145) (145) $ (145)
Net loss............................... -- -- -- (2,662) -- -- (2,662) (2,662)
eLoyalty dividend...................... -- -- -- (96,594) -- -- (96,594) --
Closure of Latin American operations... -- -- -- -- -- 843 843 --
Cumulative translation adjustment...... -- -- -- -- -- 123 123 123
---------- ---- -------- -------- ------- ----- -------- --------
Balance as of December 31, 2000........ 44,565,515 $446 $122,935 $(35,552) $(1,295) $(161) $ 86,373 $ (2,684)
========== ==== ======== ======== ======= ===== ======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part
of this financial information.
================================================================================
Page 39
Technology Solutions Company
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Seven Month
Transition
For the Years Period Ended For the Year
Ended December 31, December 31, Ended May 31,
------------------- ------------ -------------
2000 1999 1998 1998
---- ---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income........................................... $ (2,662) $(13,234) $ 4,475 $ 21,020
Restructuring and other charges............................. 3,775 17,489 -- --
Adjustments to reconcile net (loss) income to net
cash from operating activities:
Depreciation and amortization............................ 3,968 10,154 10,725 7,107
Provisions for receivable valuation allowances and
reserves for possible losses........................... 5,234 5,909 2,913 1,897
Loss (gain) on sale of investments....................... 9 (102) 13 (43)
Deferred income taxes.................................... (1,239) (6,216) (7,837) (225)
Changes in assets and liabilities:
Receivables............................................ (15,366) (5,786) 138 (28,031)
Purchases of trading securities related to
deferred compensation program........................ (425) (1,003) (2,928) (6,724)
Refundable income taxes................................ 2,164 -- -- --
Other current assets................................... 1,515 3,120 970 (95)
Accounts payable....................................... (1,866) 338 1,334 352
Accrued compensation and related costs................. (2,383) 5,125 4,187 3,914
Deferred compensation.................................. 425 1,003 2,928 6,724
Restructuring and other accruals....................... (9,095) 12,708 -- --
Other current liabilities.............................. (2,513) (4,238) 5,753 11,592
Other assets........................................... 326 1,849 (502) (4,369)
-------- -------- ------- --------
Net cash (used in) provided by operating activities.. (18,133) 27,116 22,169 13,119
-------- -------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of available-for-sale securities................... -- (1,500) (1,725) (10,250)
Proceeds from available-for-sale securities................. 1,225 2,820 7,260 5,337
Proceeds from held-to-maturity investments.................. -- -- 1,200 6,910
Capital expenditures........................................ (2,728) (2,464) (2,499) (5,745)
Net assets of acquired businesses and other assets.......... -- (4,166) (8,618) (10,741)
Loan receivable and warrant................................. (3,976) -- -- --
Additional cash contributed to eLoyalty Corporation......... (20,000) -- -- --
Cash used by discontinued operations........................ (2,311) (13,462) -- --
-------- -------- ------- --------
Net cash used in investing activities................ (27,790) (18,772) (4,382) (14,489)
-------- -------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options..................... 5,162 9,214 3,903 8,721
Proceeds from employee stock purchase plan.................. 2,409 3,844 2,231 3,688
Purchase of treasury stock.................................. (2,443) (4,930) (2,842) --
Sale of common stock........................................ -- 4,506 -- --
Capitalized lease obligation................................ -- -- (79) 71
-------- -------- ------- --------
Net cash provided by financing activities............... 5,128 12,634 3,213 12,480
-------- -------- ------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS........................................ 367 551 15 (603)
-------- -------- ------- --------
(DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS........................................ (40,428) 21,529 21,015 10,507
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD................. 81,002 59,473 38,458 27,951
-------- -------- ------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD....................... $ 40,574 $ 81,002 $59,473 $ 38,458
======== ======== ======= ========
The accompanying Notes to Consolidated Financial Statements are an integral part
of this financial information.
================================================================================
Page 40
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 information technology (IT) 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 Europe.
On February 15, 2000, TSC distributed the common stock of eLoyalty Corporation
(eLoyalty) owned by the Company to the Company's stockholders (the Spin-Off).
eLoyalty operated within the Company prior to the Spin-Off and is now a
separate, publicly traded company (see Note 20). Accordingly the consolidated
balance sheet as of December 31, 1999 and the consolidated statements of
operations for the year ended December 31, 1999, the seven month transition
period ended December 31, 1998 and for the fiscal year ended May 31, 1998 have
been reclassified to report these operations as discontinued operations. The
consolidated statements of cash flows for the year ended December 31, 1999, the
seven month transition period ended December 31, 1998 and for the year ended May
31, 1998 have not been restated on a discontinued operations basis. There were
no discontinued operations in the Company's results of operations for the year
ended December 31, 2000, as the Company provided for the estimated net loss on
distribution in its results of operations for year ended December 31, 1999.
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.
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 41
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 and comprehensive
income 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
removed from the balance sheet and resulting gain or loss is included in
operations. The carrying value of computers, furniture and equipment is reviewed
when ever events or circumstances indicate that impairment has occurred 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, 2000 and 1999 was $1,073 and $153,
respectively. The carrying value of goodwill is reviewed when ever events or
circumstances indicate that impairment has occurred 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 42
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." Diluted (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, plus the
dilutive effect of common equivalent shares arising from the assumed exercise of
stock options using the treasury stock method. For 2000 and 1999, common
equivalent shares of 3,654,000 and 2,277,000, respectively were not included in
the diluted loss per share calculation as they were antidilutive. Basic (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, 2000.
Reconciliation of Basic and
Diluted Earnings Per Share for the
Seven Month Transition Period
Ended December 31, 1998
-------------------------------------
Net Shares Per Common
Income (In thousands) Share
------ -------------- ----------
Basic Earnings Per Share $4,475 40,668 $0.11
=====
Effect of Stock Options -- 2,741
------ ------
Diluted Earnings Per Share $4,475 43,409 $0.10
====== ====== =====
Reconciliation of Basic and
Diluted Earnings Per Share for the
Fiscal Year Ended May 31, 1998
-------------------------------------
Net Shares Per Common
Income (In thousands) Share
------- -------------- ----------
Basic Earnings Per Share $21,020 38,887 $0.54
=====
Effect of Stock Options -- 3,894
------- ------
Diluted Earnings Per Share $21,020 42,781 $0.49
======= ====== =====
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 and comprehensive income. 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.
================================================================================
Page 43
Technology Solutions Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
================================================================================
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, 2000 and 1999, respectively.
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 Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133, as
amended is effective for TSC beginning January 1, 2001. 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 believes 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.
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 $2,016, $2,301 and $1,806 to the 401(K) Plan in the years ended
December 31, 2000 and 1999 and in fiscal 1998, 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.
================================================================================
Page 44
Technology Solutions Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
================================================================================
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 acquisition is 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.
On February 15, 2000, TSC successfully completed the Spin-Off. The following
acquisition is part of the eLoyalty transaction and is 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 was being
amortized over five years.
These acquisitions 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.
================================================================================
Page 45
Technology Solutions Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
================================================================================
NOTE 4 -- RECEIVABLES
Receivables consist of the following:
December 31, December 31,
------------- -------------
2000 1999
---- ----
Amounts billed to clients............ $36,287 $27,136
Contracts in process................. 591 615
------- -------
36,878 27,751
Receivable valuation allowances and
reserves for possible losses........ (3,713) (3,715)
------- -------
$33,165 $24,036
======= =======
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.
NOTE 5 -- MARKETABLE SECURITIES
Marketable securities are reported at fair value. The marketable securities
consist of preferred stocks of $6,044, classified as available-for-sale and
securities related to the Company's executive deferred compensation plan of
$10,747 classified as trading securities (see Note 10). As of December 31, 2000
and 1999, the gross unrealized holding gain relative to the preferred stocks was
$6 and $43 and the gross unrealized holding loss was $429 and $242,
respectively, and are presented net and after-tax in a separate component of
stockholders' equity and comprehensive income. The Company recognized gains of
$626, $521, $134 and $129 based on the specific identification method in its
statements of operations for the years ended December 31, 2000 and 1999, the
seven month transition period ended December 31, 1998 and for the fiscal year
ended May 31, 1998, 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.
================================================================================
Page 46
Technology Solutions Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
================================================================================
NOTE 6 -- COMPUTERS, FURNITURE AND EQUIPMENT
Computers, furniture and equipment consist of the following:
December 31, December 31,
------------ ------------
2000 1999
-------- --------
Computers................. $ 14,531 $ 13,183
Furniture and equipment... 5,088 4,760
-------- --------
19,619 17,943
Accumulated depreciation.. (16,099) (13,827)
-------- --------
$ 3,520 $ 4,116
======== ========
Depreciation and amortization expense was $3,048, $3,305, $2,215 and $3,344 for
the years ended December 31, 2000 and 1999, the seven month transition period
ended December 31, 1998 and for the fiscal year ended May 31, 1998,
respectively.
NOTE 7 -- LONG-TERM RECEIVABLES AND OTHER
Long-term receivables and other consist of the following:
December 31, December 31,
------------ ------------
2000 1999
------ ------
Customer receivable.......... $2,016 $2,016
Employee receivables......... 108 116
Loan receivable and warrant.. 3,976 --
Investments.................. -- 450
Other........................ 338 206
------ ------
$6,438 $2,788
====== ======
Capitalized software available for resale was fully amortized as of December 31,
1999. Amortization expense associated with capitalized software available for
resale was $132, $4,158 and $364 for the year ended December 31, 1999, the seven
month transition period ended December 31, 1998 and the fiscal year ended May
31, 1998, 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 and $4,249 for the seven month
transition period ended December 31, 1998 and the fiscal year ended May 31,
1998, respectively. No amounts were capitalized during the years ended December
31, 2000 and 1999.
In connection with the loan receivable, on June 30, 2000 the Company paid $200
and received a warrant to purchase up to 94,563 shares of common stock from the
borrower. The warrants will expire on June 30, 2008. Through December 31,
2000, changes in the fair value of this warrant
================================================================================
Page 47
Technology Solutions Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
================================================================================
were presented as a separate component of stockholders' equity and comprehensive
income. This warrant is considered a derivative under SFAS No. 133, "Accounting
for Derivative instruments and Hedging Activities." As required under SFAS No.
133, the Company will report any changes in the fair value of the warrant in the
statement of operations, beginning in the quarter ended March 31, 2001.
NOTE 8 -- INCOME TAXES
The (benefit) provision for income taxes consists of the following:
Seven Month
For the Transition
Years Ended Period Ended For the Year
December 31, December 31, Ended May 31,
------------------ ------------ -------------
2000 1999 1998 1998
------- ------- -------- -------
Current:
Federal............ $(2,464) $(1,764) $ 8,923 $ 9,235
State.............. (352) (420) 1,972 2,238
Foreign............ 1,624 306 1,868 1,291
------- ------- -------- -------
Total current..... (1,192) (1,878) 12,763 12,764
------- ------- -------- -------
Deferred:
Federal............ (1,514) (986) (6,712) (843)
State.............. (216) (198) (1,385) (71)
Foreign............ 1,305 (2,491) (3,079) (1,592)
------- ------- -------- -------
Total deferred.... (425) (3,675) (11,176) (2,506)
------- ------- -------- -------
(Benefit) provision
for income taxes.... $(1,617) $(5,553) $ 1,587 $10,258
======= ======= ======== =======
================================================================================
Page 48
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
Years Ended Period Ended For the Year
December 31, December 31, Ended May 31,
------------------- ------------ -------------
2000 1999 1998 1998
------- -------- ------------ -------------
Current:
Federal tax (benefit)
provision at statutory rate........ $(1,498) $ (5,996) $ 1,239 $ 8,572
State tax (benefit) provision,
net of Federal benefit............. (467) (857) 257 1,242
Effect of foreign tax rate
differences........................ 16 509 6 29
Nontaxable investment income.......... (179) (232) (144) (160)
Nondeductible goodwill and
other acquisition
related charges.................... 322 581 21 47
Other................................. 189 442 208 528
------- -------- ------- --------
Income tax (benefit) provision........ $(1,617) $ (5,553) $ 1,587 $ 10,258
======= ======== ======= ========
Total income tax was allocated as follows:
Seven Month
For the Transition
Years Ended Period Ended For the Year
December 31, December 31, Ended May 31,
------------------- ------------- -------------
2000 1999 1998 1998
------- -------- ------------- -------------
(Loss) income from
continuing operations................ $(1,617) $ (5,553) $ 1,587 $ 10,258
Items charged directly to
stockholders' equity................. (6,247) (5,860) (4,956) (13,493)
------- -------- ------- --------
Total income tax.................. $(7,864) $(11,413) $(3,369) $ (3,235)
======= ======== ======= ========
================================================================================
Page 49
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,
--------------------------------
2000 1999
------- -------
Deferred tax assets:
Deferred compensation and bonuses.............. $ 2,953 $ 4,129
Net operating loss and credits................. 3,144 1,305
Net operating loss resulting from exercise of
former subsidiary stock options............... 7,254 --
Receivable valuation allowances and reserves
for possible losses........................... 1,254 1,736
Legal and other accruals....................... 2,331 1,666
Restructuring and other charges................ 963 1,980
Other.......................................... 240 410
------- -------
Total deferred tax assets..................... 18,139 11,226
------- -------
Deferred tax liabilities:
Prepaid expenses............................... (490) (882)
Other.......................................... -- (375)
------- -------
Total deferred tax liabilities................ (490) (1,257)
------- -------
Net deferred tax asset........................... $17,649 $ 9,969
======= =======
The Company has not provided a valuation allowance on its deferred tax assets as
it is more likely than not that they will be fully utilized. The net operating
loss expires in 2020. As discussed in Note 13, in connection with the eLoyalty
Spin-Off, TSC option holders (excluding eLoyalty employees and directors who
were not also directors of TSC) had each of their options granted prior to June
22, 1999 converted into one adjusted TSC option and one eLoyalty option. When a
Company employee exercises an eLoyalty Corporation option, the employee may
recognize taxable income (the Option Deduction). The Company obtained a ruling
from the Internal Revenue Service (IRS) which provides that the Company is
entitled to deduct the Option Deduction on its Federal Income Tax return. The
net operating loss resulting from the exercise of former subsidiary stock
options represents the future tax benefit attributable to this Option Deduction.
As part of the Spin-Off, the Company entered into a Tax Sharing and
Disaffiliation Agreement (the Agreement) with eLoyalty Corporation. Under the
terms of the Agreement, the Company agreed to reimburse eLoyalty for certain tax
benefits attributable to this deduction when the actual tax benefit is realized
by the Company. The long-term liability (deferred income taxes due to former
subsidiary) of $6.2 million represents this amount.
================================================================================
Page 50
Technology Solutions Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
================================================================================
(Loss) income before income taxes consisted of the following:
Seven Month
For the Transition
Years Ended Period Ended For the Year
December 31, December 31, Ended May 31,
-------------------- ------------ --------------
2000 1999 1998 1998
------- -------- ------- -------
United States.. $(1,382) $ (9,854) $ 7,134 $25,355
Foreign........ (2,897) (7,277) (3,593) (864)
------- -------- ------- -------
Total.......... $(4,279) $(17,131) $ 3,541 $24,491
======= ======== ======= =======
Income taxes paid during the year ended December 31, 1999, the seven month
transition period ended December 31, 1998 and for the fiscal year ended May 31,
1998 were $1,192, $6,907 and $1,864, respectively. No income taxes were paid
during the year ended December 31, 2000.
NOTE 9 -- LINE OF CREDIT
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 31, 2001. 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, 2000, 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, 2000. In connection with the Spin-Off, TSC 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
terminated on December 30, 2000.
================================================================================
Page 51
Technology Solutions Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
================================================================================
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 Technology Solutions Company 1995 Employee 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 3,687,500
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 years ended December 31, 2000
and 1999, the seven month transition period ended December 31, 1998 and for the
fiscal year ended May 31, 1998 were 525,321, 511,902, 181,271 and 269,347,
respectively. As of December 31, 2000, there were 1,932,640 shares available
under the Stock Purchase Plan.
================================================================================
Page 52
Technology Solutions Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
================================================================================
NOTE 12 -- CAPITAL STOCK
During the year ended December 31, 2000, the Company repurchased 1,033,100
shares of the Company's outstanding Common Stock for $2.4 million under a
3,000,000 share repurchase program announced in September 2000. As of December
31, 2000, 1,966,900 shares were available to be purchased under the share
repurchase program.
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.
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).
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 53
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. There were 2,572,354 and 573,220 options
available for grant as of December 31, 2000 and 1999, respectively.
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 who were not also directors of TSC) had each of their
options granted prior to June 22, 1999 converted into one adjusted TSC option
and one eLoyalty Corporation option. The original strike price of the TSC option
was split into a strike price for (1) the adjusted TSC option and (2) the
eLoyalty option based on the relative trading values of the two companies'
common stock immediately after the Spin-Off. 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
and 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 who were not also
directors of TSC) with options granted subsequent to June 21, 1999 did not
receive any eLoyalty options in respect of post-June 22, 1999 TSC options, but
such options were adjusted by reducing the strike price and increasing the
number of shares subject thereto. The adjustments were calculated based
================================================================================
Page 54
Technology Solutions Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
================================================================================
on the relative trading values of TSC and eLoyalty common stock immediately
after the Spin-Off. The adjusted strike price was determined by multiplying the
original strike price by 16.5278 percent. The adjusted number of shares subject
to each such option was determined by dividing the original number of shares
subject to the option by 16.5278 percent.
eLoyalty employees and directors (excluding eLoyalty directors who were also
directors of TSC) 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.
The option share and price information contained in this footnote has been
adjusted for the effects of the February 15, 2000 Spin-Off.
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 as their exercise prices were equal to the fair value of
the underlying stock on the dates of grant. Had compensation expense for the
Company stock option grants, including the option adjustments in connection with
the Spin-Off, 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 (increased) reduced to the pro forma amounts indicated on the
following page:
================================================================================
Page 55
Technology Solutions Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
================================================================================
Seven Month
For the Transition
Years Ended Period Ended For the Year
December 31, December 31, Ended May 31,
------------------ ------------- -------------
2000 1999 1998 1998
------- -------- ------- -------
Net (loss) income:
As reported:
Continuing Operations....... $(2,662) $(11,578) $ 1,954 $14,233
Discontinued Operations..... $ -- $ (1,656) $ 2,521 $ 6,787
------- -------- ------- -------
Total..................... $(2,662) $(13,234) $ 4,475 $21,020
======= ======== ======= =======
Pro forma:
Continuing Operations....... $(3,841) $(15,214) $(1,609) $ 8,966
Discontinued Operations..... $ -- $ (3,783) $ 490 $ 4,074
------- -------- ------- -------
Total..................... $(3,841) $(18,997) $(1,119) $13,040
======= ======== ======= =======
Basic (loss) earnings per share:
As reported:
Continuing Operations....... $ (0.06) $ (0.27) $ 0.05 $ 0.37
Discontinued Operations..... $ -- $ (0.04) $ 0.06 $ 0.17
------- -------- ------- -------
Total..................... $ (0.06) $ (0.31) $ 0.11 $ 0.54
======= ======== ======= =======
Pro forma:
Continuing Operations....... $ (0.09) $ (0.36) $ (0.04) $ 0.23
Discontinued Operations..... $ -- $ (0.09) $ 0.01 $ 0.11
------- -------- ------- -------
Total..................... $ (0.09) $ (0.45) $ (0.03) $ 0.34
======= ======== ======= =======
Diluted (loss) earnings per share:
As reported:
Continuing Operations....... $ (0.06) $ (0.27) $ 0.04 $ 0.33
Discontinued Operations..... $ -- $ (0.04) $ 0.06 $ 0.16
------- -------- ------- -------
Total..................... $ (0.06) $ (0.31) $ 0.10 $ 0.49
======= ======== ======= =======
Pro forma:
Continuing Operations....... $ (0.09) $ (0.36) $ (0.04) $ 0.21
Discontinued Operations..... $ -- $ (0.09) $ 0.01 $ 0.09
------- -------- ------- -------
Total..................... $ (0.09) $ (0.45) $ (0.03) $ 0.30
======= ======== ======= =======
================================================================================
Page 56
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
Years Ended Period Ended For the Year
December 31, December 31, Ended May 31,
----------------------- ------------- --------------
2000 1999 1998 1998
-------- ---------- ---------- ----------
Expected volatility....... 50% 49.7%-54.2% 43.6%-49.8% 41.9%-44.1%
Risk-free interest rates.. 5.6%-6.6% 4.6%-6.3% 4.1%-5.6% 5.3%-6.5%
Expected lives............ 3.8 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 57
Technology Solutions Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
================================================================================
A summary of the status of the Company's option plans is presented below:
Seven Month
For the Year Ended For the Year Ended Transition Period For the Year Ended
December 31, December 31, Ended December 31, May 31,
---------------------- ---------------------- ---------------------- ----------------------
2000 2000 1999 1999 1998 1998 1998 1998
---------- --------- ---------- --------- ---------- --------- ---------- ---------
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 8,638,182 $ 1.47 9,483,316 $ 1.33 9,845,695 $ 1.27 10,157,024 $ 0.83
Granted 3,024,579 $ 5.02 2,130,863 $ 1.76 1,349,922 $ 3.07 2,466,222 $ 3.02
Exercised (1,150,668) $ 1.36 (1,855,848) $ 0.82 (1,180,736) $ 0.55 (2,429,116) $ 3.12
Forfeited (2,502,889) $ 2.78 (1,120,149) $ 2.03 (531,565) $ 2.29 (348,435) $ 1.61
Forfeitures due to Spin-Off (3,238,448) $ 1.53 -- -- --
Adjustment due to Spin-Off 6,820,224 $ -- -- -- --
---------- ---------- ---------- ----------
Outstanding at end of year 11,590,980 $ 2.53 8,638,182 $ 1.47 9,483,316 $ 1.33 9,845,695 $ 1.27
========== ========== ========== ==========
Exercisable at end of year 5,610,433 $ 1.56 5,508,918 $ 1.22 6,211,300 $ 0.94 4,815,339 $ 0.79
========== ========== ========== ==========
================================================================================
Page 58
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 For the
Years Ended Period Ended Year Ended
December 31, December 31, May 31,
-------------- ------------ ----------
2000 1999 1999 1998
----- ----- ----- -----
$2.50 $0.84 $1.35 $1.35
The following summarizes information about options outstanding as of December
31, 2000:
Options Outstanding Options Exercisable
------------------------------------ ---------------------
Average Weighted- Weighted-
Range of Remaining Average Average
Exercise Contractual Exercise Exercise
Prices Shares Life Prices Shares Prices
----------- ---------- ----------- --------- --------- ---------
$0.01-$1.00 1,521,591 10 years $0.42 1,521,591 $0.42
$1.01-$1.50 4,676,964 9 years $1.47 2,313,913 $1.47
$1.51-$2.00 1,130,206 7 years $1.70 857,797 $1.67
$2.01-$3.00 1,023,600 9 years $2.42 413,485 $2.60
$3.01-$4.00 510,666 9 years $3.49 289,421 $3.53
$4.01-$5.00 97,000 10 years $4.65 -- $ --
$5.01-$6.00 2,174,003 9 years $5.40 202,126 $5.30
$6.01-$9.50 456,950 9 years $7.58 12,100 $9.00
---------- ---------
11,590,980 9 years $2.53 5,610,433 $1.56
========== =========
================================================================================
Page 59
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 E-Solutions
business segment 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, digital
supply chain management, extended support, electronic learning 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. 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 at December 31, 1999 were
$27.8 million for E-Solutions and $46.1 million for eLoyalty.
Effective January 1, 2000, the Company began reporting its operations under
three segments: Digital Enterprise Consulting (DEC); Knowledge Management
(currently named Peer3); and applications service provider services (ASP+ or
Extended Support). During the year ended December 31, 2000, the Company changed
the structure of its internal organization and now the Extended Support segment
is included in the DEC segment. The financial information stated below has been
adjusted to reflect the change to the Company's current two reportable segments.
TSC serves customers in U.S. and international markets. TSC believes that
offering these complementary services allows the Company to serve clients in
their information technology, eBusiness, change management and training needs.
This structure also allows the Company's employees the flexibility and
opportunity to grow and develop. The two areas work in an integrated manner that
develops, shares and cross references methodologies, tools, project management
plans, benchmark information, templates and best practices overall. The DEC
segment provides information technology consulting and business consulting
services that help clients in developing and implementing all aspects of their
electronic business capabilities. The DEC segment includes TSC's Enterprise
Operations, Digital Supply Chain Management, Extended Support and Customer
Interaction Solutions practices. The Peer3 segment is focused on harnessing the
intellectual capital of client companies.
There are no intersegment revenues. The Company currently evaluates the
performance of its segments and allocates resources to them based on revenues
and receivables.
================================================================================
Page 60
Technology Solutions Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
================================================================================
The table below presents information about the reported revenues and receivables
of TSC (in thousands).
For and as of the year
ended December 31, 2000 DEC Peer3 Total
- ----------------------- -------- ------- --------
Revenues $116,461 $15,143 $131,604
Receivables $ 31,917 $ 4,961 $ 36,878
For and as of the year
ended December 31, 1999 DEC Peer3 Total
- ----------------------- -------- ------- --------
Revenues $142,322 $13,998 $156,320
Receivables $ 23,425 $ 4,326 $ 27,751
For and as of the seven
month transition period
ended December 31, 1998 DEC Peer3 Total
- ----------------------- -------- ------- --------
Revenues $117,452 $ 9,387 $126,839
Receivables $ 43,100 $ 3,402 $ 46,502
For and as of the year
ended May 31, 1998 DEC Peer3 Total
- ---------------------- -------- ------- --------
Revenues $179,886 $ 9,717 $189,603
Receivables $ 50,075 $ 1,687 $ 51,762
=============================================================
Page 61
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 and as of the year United Foreign Discontinued
ended December 31, 2000 States Subsidiaries Operations Total
- ------------------------- -------- ------------ ------------- --------
Revenues $124,430 $ 7,174 $ -- $131,604
Identifiable assets $123,334 $ 4,304 $ -- $127,638
Net Assets of
For and as of the year United Foreign Discontinued
ended December 31, 1999 States Subsidiaries Operations Total
- ------------------------- -------- ------------ ------------- --------
Revenues $147,377 $ 8,943 $ -- $156,320
Identifiable assets $143,030 $ 4,996 $75,283 $223,309
For and as of the seven Net Assets of
month transition period United Foreign Discontinued
ended 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 and as of the year United Foreign Discontinued
ended May 31, 1998 States Subsidiaries Operations Total
- ------------------------- -------- ------------ ------------- --------
Revenues $180,890 $ 8,713 $ -- $189,603
Identifiable assets $176,949 $20,199 $ -- $197,148
Foreign revenue is based on the country in which the legal subsidiary is
domiciled. No single foreign country's revenue was material in any periods
presented.
================================================================================
Page 62
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, 2000 accounted
for eight percent, six percent, four percent, four percent and four percent of
total revenues, respectively; during the year ended December 31, 1999 the five
largest clients accounted for four percent, four percent, four percent, four
percent and three percent of total revenues, respectively; during the seven
month transition period ended December 31, 1998 the five largest clients
accounted for five percent, five percent, three percent, three percent, and
three percent of total revenues, respectively; during the year ended May 31,
1998, the five largest clients accounted for six percent, four percent, three
percent, three percent, and three percent of total revenues, respectively. No
client accounted for ten percent or more of revenues during any of the periods
presented.
NOTE 16 -- COMMITMENTS AND CONTINGENCIES
The Company leases various office facilities under operating leases expiring at
various dates through January 31, 2006. Additionally, the Company leases various
property and office equipment under operating leases expiring at various dates.
Rental expense for all operating leases approximated $4,876, $7,826, $7,927 and
$9,789 for the years ended December 31, 2000 and 1999, for the seven month
transition period ended December 31, 1998 and for the fiscal year ended May 31,
1998, respectively. Future minimum rental commitments under noncancelable
operating leases with terms in excess of one year are as follows:
Calendar Year Amount
- ------------- ------
2001.................... $3,053
2002.................... 2,454
2003.................... 1,535
2004.................... 1,064
2005.................... 433
Thereafter.............. 9
------
$8,548
======
Of the future minimum rental commitments, the Company has accrued as part of the
restructuring charges as discussed in Note 20 for $647, $659, $670 and $399 for
calendar years 2001, 2002, 2003 and 2004, respectively. The Company had no
capital leases as of December 31, 2000 and 1999.
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 63
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 64
Technology Solutions Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
================================================================================
NOTE 18 -- COMPREHENSIVE (LOSS) 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, 2000 Amount Benefit Amount
- -------------------------------------- ----------- ------------- ----------
Change in unrealized holding loss on
available-for-sale securities:
Unrealized holding losses arising
during the period.................. $(233) $82 $(151)
Less: adjustment for loss
realized in net loss............... 9 (3) 6
----- --- -----
Net unrealized loss................... (224) 79 (145)
Cumulative translation adjustment..... 123 -- 123
----- --- -----
Other comprehensive loss.............. $(101) $79 $ (22)
===== === =====
For the Year Ended Before-Tax Tax 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
===== === =====
================================================================================
Page 65
Technology Solutions Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
================================================================================
Seven Month Transition
Period Ended Before-Tax Tax Net-of-Tax
December 31, 1998 Amount Expense Amount
- ------------------------------------ ---------- ------- ----------
Change in unrealized holding loss on
available-for-sale securities:
Unrealized holding gains arising
during the period................ $ 38 $(14) $ 24
Less: adjustment for loss
realized in net income........... 13 (4) 9
----- ---- -----
Net unrealized gain................. 51 (18) 33
Cumulative translation adjustment... (127) - (127)
----- ---- -----
Other comprehensive loss............ $ (76) $(18) $ (94)
===== ==== =====
For the Year Ended Before-Tax Tax (Expense) Net-of-Tax
May 31, 1998 Amount Benefit Amount
- ------------------------------------ ----------- ------------- ----------
Change in unrealized holding loss on
available-for-sale securities:
Unrealized holding gains arising
during the period................ $ 453 $(158) $ 295
Less: adjustment for gain
realized in net income........... (27) 9 (18)
----- ----- -----
Net unrealized gain................. 426 (149) 277
Cumulative translation adjustment... (891) -- (891)
----- ----- -----
Other comprehensive loss............ $(465) $(149) $(614)
===== ===== =====
================================================================================
Page 66
Technology Solutions Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
================================================================================
NOTE 19 -- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
March 31, June 30, September 30, December 31,
Quarter Ended 2000/(a)/ 2000 2000/(b)/ 2000
- -------------------------- --------- ------- ------------- ------------
Revenues $33,182 $36,254 $31,044 $31,124
Operating (loss) income $(4,356) $ 3,180 $(3,111) $(3,238)
(Loss) income from
continuing operations $(1,941) $ 2,291 $(1,517) $(1,495)
Income from
discontinued operations $ -- $ -- $ -- $ --
Loss on distribution of
discontinued operations $ -- $ -- $ -- $ --
Net (loss) income $(1,941) $ 2,291 $(1,517) $(1,495)
======= ======= ======= =======
Basic (loss) earnings per
common share:
Continuing operations $ (0.04) $ 0.05 $ (0.03) $ (0.03)
Discontinued operations $ -- $ -- $ -- $ --
------- ------- ------- -------
Net (loss) earnings
per common share $ (0.04) $ 0.05 $ (0.03) $ (0.03)
======= ======= ======= =======
Diluted (loss) earnings per
common share:
Continuing operations $ (0.04) $ 0.05 $ (0.03) $ (0.03)
Discontinued operations $ -- $ -- $ -- $ --
------- ------- ------- -------
Net (loss) earnings
per common share $ (0.04) $ 0.05 $ (0.03) $ (0.03)
======= ======= ======= =======
- ----------------------
(a) Includes restructuring and other charges of $4.7 million.
(b) Includes restructuring and other credits of $0.9 million.
================================================================================
Page 67
Technology Solutions Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
================================================================================
March 31, June 30, September 30, December 31,
Quarter Ended 1999/(c)/ 1999 1999 1999/(d)/
- ------------- ---------- -------- ------------- ------------
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)
======== ======= ======= ========
Basic (loss) earnings per
common share:
Continuing operations $ (0.22) $ 0.02 $ 0.03 $ (0.10)
Discontinued operations $ 0.06 $ 0.07 $ 0.05 $ (0.22)
-------- ------- ------- --------
Net (loss) earnings
per common share $ (0.16) $ 0.09 $ 0.08 $ (0.32)
======== ======= ======= ========
Diluted (loss) earnings per
common share:
Continuing operations $ (0.22) $ 0.02 $ 0.03 $ (0.10)
Discontinued operations $ 0.06 $ 0.07 $ 0.05 $ (0.22)
-------- ------- ------- --------
Net (loss) earnings
per common share $ (0.16) $ 0.09 $ 0.08 $ (0.32)
======== ======= ======= ========
- -----------------
(c) Includes a restructuring charge of $10.5 million.
(d) Includes restructuring and other charges of $7.0 million.
================================================================================
Page 68
Technology Solutions Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
================================================================================
NOTE 20 -- OTHER EVENTS
RESTRUCTURING AND OTHER CHARGES -- During the quarter ended March 31, 2000, the
Company recorded a pre-tax charge of $4.7 million for the closure of its Latin
American operations. During the quarter ended September 30, 2000, the Company
collected $0.4 million of accounts receivables previously written-off and, as a
result, the cumulative charge has been reduced to $4.3 million. As of December
31, 2000, the Company had used approximately $4.0 million of this charge for
cash payments of $2.8 million related to severance costs for approximately 40
employees, lease terminations and professional fees and $1.6 million in asset
write-offs, offset by the accounts receivables collections of $0.4 million. The
remaining accrual balance of $0.3 million as of December 31, 2000 represents
professional fees, tax charges and various other closure costs that are expected
to be incurred by the second quarter of 2001.
During the quarter ended December 31, 1999, the Company recorded $7.0 million in
restructuring and other charges associated with lease terminations of $3.0
million, former executive severance costs of $1.8 million, CourseNet Systems
Inc. acquisition costs of $1.3 million and write-offs of other assets of $0.9
million. During the quarter ended September 30, 2000, the Company determined
that a portion of the lease terminations became unnecessary due to changes in
TSC office usage by TSC and eLoyalty and, as a result, the cumulative charge has
been reduced by $0.4 million to $6.6 million. As of December 31, 2000, the
Company had used $4.2 million of these restructuring and other charges as a
result of cash payments of $1.8 million (paid during the quarter ended March 31,
2000) for executive severance costs and $2.4 million in asset and other write-
offs. The remaining accrual balance of $2.4 million as of December 31, 2000
relates to amounts the Company is contractually obligated to pay through 2004 as
a result of lease terminations.
In addition, 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 employees, primarily consulting personnel. During the
quarter ended September 30, 2000, the Company determined that $0.1 million of
this charge was overestimated and, as a result, the cumulative charge has been
reduced to $10.4 million. The Company has used the full restructuring accrual of
$10.4 million for cash payments of $8.8 million ($1.0 million paid during the
year ended December 31, 2000) associated with the severance of approximately 270
employees and $1.6 million in asset write-offs and other costs.
================================================================================
Page 69
Technology Solutions Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
================================================================================
SPIN-OFF -- On February 15, 2000 TSC completed the Spin-Off. The total net
assets contributed to eLoyalty at the Spin-Off was $96.6 million which consisted
of current assets of $104.4 million, non-current assets of $18.7 million,
current liabilities of $28.0 million and accumulated other comprehensive loss of
$1.5 million. Operating results from eLoyalty prior to the Spin-Off were as
follows:
Seven Month
For the Transition
Year Ended Period Ended For the Year
December 31, December 31, Ended May 31,
------------ ------------ -------------
1999 1998 1998
---- ---- ----
Revenues.................... $140,465 $62,600 $82,272
-------- ------- -------
Income before income taxes.. $ 12,954 $ 5,042 $11,891
Income tax provision........ 7,821 2,521 5,104
-------- ------- -------
Income from
discontinued operations.. 5,133 2,521 6,787
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
======== ======= =======
================================================================================
Page 70
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 $74.5 million as of December 31, 1999 consists of
current assets of $77.9 million, non-current assets of $18.7 million, current
liabilities of $22.9 million and accumulated other comprehensive loss of $0.8
million.
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 provided a short-term
guarantee for a $10.0 million revolving credit facility entered into by eLoyalty
with Bank of America National Trust and Savings Association. TSC received a fee
from eLoyalty. The guarantee terminated on December 30, 2000.
At the time of the Spin-Off, TSC and eLoyalty entered into a Shared Services
Agreement pursuant to which TSC provided to eLoyalty certain administrative
services, such as, internal systems, accounting, resources management and
benefits. The Company has charged $3.8 million of these services during the year
ended December 31, 2000.
================================================================================
Page 71
Technology Solutions Company
================================================================================
Schedule II - Valuation and Qualifying Accounts
For the Years Ended December 31, 2000 and 1999, the Seven Month Transition
Period Ended December 31, 1998 and for the Year Ended May 31, 1998
(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, 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
====== ======= ====== ======= ======
December 31, 2000
- -----------------
Valuation allowances
and receivable reserves
for potential losses $3,715 $ -- $5,234 $(5,236) $3,713
====== ======= ====== ======= ======
================================================================================
Page 72
Technology Solutions Company
PART IV. (CONTINUED)
================================================================================
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(Continued)
Item 14(a)(3) Exhibits
- -----------------------
The following documents are filed herewith or incorporated by reference and made
a part of this Report.
Exhibit # Description of Document
- --------- ----------------------------------------------------------------------
2.1 Reorganization Agreement with eLoyalty Corporation, filed as Exhibit
2.1 to TSC's Annual Report on Form 10-K for the year ended December
31, 1999, is hereby incorporated by reference.
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, filed as Exhibit 4.1 to TSC's Annual Report on Form 10-K for
the year ended December 31, 1999, is hereby incorporated by reference.
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., filed as Exhibit 4.3 to TSC's Annual Report on Form
10-K for the year ended December 31, 1999, is hereby incorporated by
reference.
10.01 Technology Solutions Company Original Option Plan, as amended, filed
as Exhibit 10.02 to TSC's Annual Report on Form 10-K for the fiscal
year ended May 31, 1992, is hereby incorporated by reference.
10.02 Technology Solutions Company 1992 Stock Incentive Plan, filed as
Exhibit 10.03 to TSC's Annual Report on Form 10-K for the fiscal year
ended May 31, 1992, is hereby incorporated by reference.
================================================================================
Page 73
Technology Solutions Company
PART IV. (CONTINUED)
================================================================================
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(Continued)
Item 14(a)(3) Exhibits (Continued)
- ----------------------------------
10.03 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.
10.05 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, filed as Exhibit 10.12 to TSC's Annual
Report on Form 10-K for the year ended December 31, 1999, is hereby
incorporated by reference.
10.13 Letter agreement with Jack N. Hayden, filed as Exhibit 10.13 to TSC's
Annual Report on Form 10-K for the year ended December 31, 1999, is
hereby incorporated by reference.
10.14 Employment Agreement Amendment with Jack N. Hayden, filed as Exhibit
10.14 to TSC's Annual Report on Form 10-K for the year ended December
31, 1999, is hereby incorporated by reference.
10.15 Employment Agreement Amendment with Paul R. Peterson, filed as Exhibit
10.15 to TSC's Annual Report on Form 10-K for the year ended December
31, 1999, is hereby incorporated by reference.
10.16 Employment Agreement with Timothy P. Dimond, filed as Exhibit 10.16 to
TSC's Annual Report on Form 10-K for the year ended December 31, 1999,
is hereby incorporated by reference.
10.17 Employment Agreement Amendment with Timothy P. Dimond, filed as
Exhibit 10.17 to TSC's Annual Report on Form 10-K for the year ended
December 31, 1999, is hereby incorporated by reference.
10.18 Shared Services Agreement with eLoyalty Corporation, filed as Exhibit
10.18 to TSC's Annual Report on Form 10-K for the year ended December
31, 1999, is hereby incorporated by reference.
10.19* Employment Agreement with Laurence P. Birch.
10.20* Separation Agreement with Timothy P. Dimond.
================================================================================
Page 75
Technology Solutions Company
PART IV. (CONTINUED)
================================================================================
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(Continued)
Item 14(a)(3) Exhibits (Continued)
- ----------------------------------
21* Subsidiaries of the Company.
23* Consent of PricewaterhouseCoopers LLP.
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, 2000, the Company did not file any reports
on Form 8-K.
______________
*Filed herewith
================================================================================
Page 76
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized, on the 22nd day of March
2001.
TECHNOLOGY SOLUTIONS COMPANY
By: /s/ LAURENCE P. BIRCH
-----------------------
Laurence P. Birch
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 22, 2001) Chairman,
- ------------------------------------------------ Officer and Director
William H. Waltrip
/s/ JACK N. HAYDEN (March 22, 2001) President, Chief Executive
- ------------------------------------------------ Officer and Director
Jack N. Hayden
/s/ LAURENCE P. BIRCH (March 22, 2001) Chief Financial Officer and
- ------------------------------------------------ Principal Accounting Officer
Laurence P. Birch
/s/ RAYMOND P. CALDIERO (March 22, 2001) Director
- ------------------------------------------------
Raymond P. Caldiero
/s/ STEPHEN B. ORESMAN (March 22, 2001) Director
- -----------------------------------------------
Stephen B. Oresman
/s/ MICHAEL R. ZUCCHINI (March 22, 2001) Director
- -----------------------------------------------
Michael R. Zucchini
(Being the principal executive officers, the principal financial and accounting
officers and a majority of the directors of Technology Solutions Company).
================================================================================
Page 77