<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
----------------
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 1999
Commission file number 0-19433
[LOGO]
Technology Solutions Company
Incorporated in the State of Delaware
Employer Identification No. 36-3584201
205 North Michigan Avenue
Suite 1500
Chicago, Illinois 60601
(312) 228-4500
TSC (1) HAS FILED all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months and (2) HAS BEEN subject to
such filing requirements for the past 90 days.
As of November 01, 1999, there were outstanding 42,893,218
shares of TSC Common Stock, par value $.01.
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
Index to Form 10-Q
- ---------------------------------------------------------------
Part I
Page
Number
------
FINANCIAL INFORMATION (UNAUDITED)
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of
September 30, 1999 and December 31, 1998 3
Consolidated Statements of Income
for the Three Months and Nine Months
Ended September 30, 1999 and 1998 4
Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 1999 and 1998 5
Notes to Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 18
Part II
OTHER INFORMATION
Item 2 30
Item 6 30
SIGNATURES 31
EXHIBIT INDEX 32
- ---------------------------------------------------------------
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PART I. FINANCIAL INFORMATION
===============================================================
ITEM 1. Financial Statements
TECHNOLOGY SOLUTIONS COMPANY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
ASSETS
------
September 30, December 31,
1999 1998
---------- ----------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 84,068 $ 59,473
Marketable securities 24,611 25,269
Receivables, less allowance
for doubtful receivables of $5,710 and $4,845 77,630 69,212
Deferred income taxes 18,279 15,297
Other current assets 10,599 13,764
------- -------
Total current assets 215,187 183,015
COMPUTERS, FURNITURE AND EQUIPMENT, NET 7,069 9,372
COST IN EXCESS OF NET ASSETS OF ACQUIRED BUSINESSES 13,397 17,901
LONG-TERM RECEIVABLES AND OTHER 6,639 8,811
-------- --------
Total assets $242,292 $219,099
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 2,766 $ 3,263
Accrued compensation and related costs 30,271 25,184
Deferred compensation 17,200 16,494
Restructuring accrual 2,121 --
Other current liabilities 9,121 5,913
------- -------
Total current liabilities 61,479 50,854
------- -------
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; shares authorized--
10,000,000; none issued -- --
Common stock, $.01 par value; shares authorized--
100,000,000; shares issued -- 42,858,978 429 412
Capital in excess of par value 103,915 94,886
Retained earnings 77,539 76,938
Accumulated other comprehensive loss:
Unrealized holding loss, net (75) (9)
Cumulative translation adjustment (995) (1,336)
-------- --------
180,813 170,891
Less: Treasury stock, at cost (0 and 275,911 shares) -- (2,646)
-------- --------
Total stockholders' equity 180,813 168,245
-------- --------
Total liabilities and stockholders' equity $242,292 $219,099
======== ========
The accompanying Notes to Consolidated Financial Statements are an integral
part of this financial information.
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TECHNOLOGY SOLUTIONS COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
--------------- -----------------
1999 1998 1999 1998
----- ----- ------ -----
(Unaudited) (Unaudited)
REVENUES $74,304 $84,493 $229,650 $241,240
------- ------- -------- --------
COSTS AND EXPENSES:
Project personnel 35,601 39,013 114,043 111,453
Other project expenses 11,816 13,430 35,321 35,575
Management and
administrative support 14,286 17,479 49,427 50,914
Goodwill amortization 1,248 1,161 3,821 3,038
Costs related to
eLoyalty transaction 1,117 -- 1,117 --
Restructuring charge -- -- 10,522 --
Incentive compensation 4,986 5,477 14,693 9,882
------- ------ ------- -------
69,054 76,560 228,944 210,862
------- ------ ------- -------
OPERATING INCOME 5,250 7,933 706 30,378
------- ------ ------- -------
OTHER INCOME (EXPENSE):
Net investment income 907 802 2,534 2,171
Interest expense (63) (33) (132) (73)
------- ------ ------- -------
844 769 2,402 2,098
------- ------ ------- -------
INCOME BEFORE INCOME TAXES 6,094 8,702 3,108 32,476
INCOME TAX PROVISION 2,742 3,593 2,507 13,510
------- ------ ------ -------
NET INCOME $ 3,352 $5,109 $ 601 $18,966
======= ====== ====== =======
EARNINGS PER COMMON SHARE $ 0.08 $ 0.13 $ 0.01 $ 0.48
======= ====== ====== =======
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 42,369 40,446 41,722 39,915
======= ====== ====== =======
EARNINGS PER COMMON SHARE
ASSUMING DILUTION $ 0.08 $ 0.12 $ 0.01 $ 0.44
======= ====== ====== =======
WEIGHTED AVERAGE NUMBER
OF COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING 44,422 43,347 43,239 43,352
======= ====== ====== =======
The accompanying Notes to Consolidated Financial Statements are an integral
part of this financial information.
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TECHNOLOGY SOLUTIONS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the
Nine Months Ended
September 30,
-----------------
1999 1998
------ ------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 601 $ 18,966
Restructuring charge 10,522 --
Adjustments to reconcile net income to net
cash from operating activities:
Depreciation and amortization 7,631 7,082
Provisions for receivable valuation
allowances and reserves for
possible losses 4,413 1,720
(Gain) loss on sale of investments (102) 25
Deferred income taxes (3,010) 1,410
Changes in assets and liabilities:
Receivables (13,507) (33,886)
Purchases of trading securities
related to deferred compensation program (706) (4,786)
Refundable income taxes -- 1,569
Other current assets 2,282 (7,687)
Accounts payable (446) 1,974
Accrued compensation and related costs 5,202 4,298
Deferred compensation funds from employees 706 4,786
Other current liabilities 9 2,909
Other assets 1,905 (837)
------- -------
Net cash provided by
(used in) operating activities 15,500 (2,457)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of available-for-sale securities (1,500) (7,675)
Proceeds from available-for-sale securities 2,820 4,065
Proceeds from held-to-maturity investments -- 2,520
Capital expenditures, net (1,847) (4,021)
Net assets of acquired businesses -- (4,849)
Capitalized lease obligation -- (70)
------- -------
Net cash used in investing activities (527) (10,030)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 5,990 4,282
Proceeds from employee stock purchase plan 3,017 3,452
Purchase of treasury stock (4,930) --
Investment by venture capital firms 4,506 --
------- -------
Net cash provided by financing activities 8,583 7,734
------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS 1,039 (1,425)
------- -------
INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS 24,595 (6,178)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 59,473 42,722
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $84,068 $36,544
======= =======
The accompanying Notes to Consolidated Financial Statements are an
integral part of this financial information.
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TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
=======================================================================
NOTE 1 -- BASIS OF PRESENTATION
The consolidated financial statements include the accounts of
Technology Solutions Company and its subsidiaries (TSC or the
Company). The consolidated balance sheet as of
September 30, 1999, the consolidated statements of income for the
three months and nine months ended September 30, 1999 and 1998
and the consolidated statements of cash flows for the nine months
ended September 30, 1999 and 1998 have been prepared by the
Company without audit. In the opinion of management, these
financial statements include all adjustments necessary to present
fairly the financial position, results of operations and cash
flows as of September 30, 1999 and for all periods presented. All
adjustments made have been of a normal and recurring nature.
Certain information and footnote disclosures normally included in
the financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted.
The Company believes that the disclosures included are adequate
and provide a fair presentation of interim period results.
Interim financial statements are not necessarily indicative of
financial position or operating results for an entire year. It is
suggested that these interim financial statements be read in
conjunction with the audited financial statements and the notes
thereto included in the Company's Transition Report on Form 10-K
for the seven month transition period ended December 31, 1998
filed with the United States Securities and Exchange Commission
(SEC) on March 30, 1999.Certain reclassifications have been made
to prior periods to conform to the current period classification.
NOTE 2 -- THE COMPANY
TSC delivers business benefits through consulting and systems
integration services that help clients transform customer
relationships and improve operations. The Company's clients
generally are located throughout the United States and in Europe,
Latin America, Canada and Australia.
NOTE 3 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION--The accompanying consolidated
financial statements include the accounts of the Company and all
of its subsidiaries. All significant intercompany transactions
have been eliminated. Acquired businesses are included in the
results of operations since their acquisition dates.
FISCAL YEAR CHANGE--On November 22, 1998, the Company's Board of
Directors voted to change the fiscal year of the Company from a
fiscal year ending on the thirty-first day of May in each year to
a calendar year ending on the thirty-first day of December in
each year.
REVENUE RECOGNITION--The Company derives substantially all of its
revenues from information technology (IT), strategic business and
management consulting, systems integration, programming, and
packaged software integration and implementation services. The
Company recognizes revenue on contracts as work is performed
primarily based on hourly billing rates. Out-of-pocket expenses
are presented net of amounts billed to clients in the
accompanying consolidated statements of income. Contracts are
performed in phases. Losses on contracts, if any, are reserved in
full when determined. Revenue from licensing of software is
recognized upon delivery of the product. The Company does not
presently have any significant maintenance and support contracts
for software licensed to clients.
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TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
==================================================================
CASH AND CASH EQUIVALENTS--The Company considers all highly liquid
investments readily convertible into cash (with original
maturities of three months or less) to be cash equivalents. These
short-term investments are carried at cost plus accrued interest,
which approximates market.
MARKETABLE SECURITIES--The Company's marketable securities
primarily consist of preferred stocks and trading securities. The
preferred stocks, all of which are classified as available-for-
sale, are reported at fair value, with unrealized gains and
losses excluded from earnings and reported as a net after-tax
amount in a separate component of stockholders' equity until
realized. The Company's investments related to the executive
deferred compensation plan are classified as trading securities,
with unrealized gains and losses included in the Company's
consolidated statements of income. Realized gains or losses are
determined on the specific identification method.
COMPUTERS, FURNITURE AND EQUIPMENT--Computers, furniture and
equipment are carried at cost and depreciated on a straight-line
basis over their estimated useful lives. Useful lives generally
are five years or less.
COST IN EXCESS OF NET ASSETS OF ACQUIRED BUSINESSES--The excess of
cost over the fair market value of the net identifiable assets of
businesses acquired (goodwill) is amortized on a straight-line
basis, typically over a five-year period.
FOREIGN CURRENCY TRANSLATION--All assets and liabilities of
foreign subsidiaries are translated to U.S. dollars at end of
period exchange rates. The resulting translation adjustments are
recorded as a component of stockholders' equity. Income and
expense items are translated at average exchange rates prevailing
during the period. Gains and losses from foreign currency
transactions of these subsidiaries are included in the
consolidated statements of income. The functional currencies for
the Company's foreign subsidiaries are their local currencies.
FAIR VALUE OF FINANCIAL INSTRUMENTS--The carrying values of
current assets and liabilities and long-term receivables
approximated their fair values at September 30, 1999 and
December 31, 1998. Investments pertaining to minor investments in
companies for which fair value is not readily available are
believed to approximate their carrying amount.
STOCK-BASED COMPENSATION--The Company accounts for stock-based
compensation using the intrinsic value method prescribed in
Accounting Principles Board (APB) Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations. The
Company recognizes no compensation expense for its stock option
plan or employee stock purchase plan.
- ------------------------------------------------------------------
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TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
==================================================================
INCOME TAXES--The Company uses an asset and liability approach to
financial accounting and reporting for income taxes. Deferred
income taxes are provided when tax laws and financial accounting
standards differ with respect to the amount of income for a year
and the basis of assets and liabilities. The Company does not
provide U.S. deferred income taxes on earnings of foreign
subsidiaries which are expected to be indefinitely reinvested.
ESTIMATES AND ASSUMPTIONS--The preparation of financial statements
in conformity with generally accepted accounting principles
requires management to make assumptions that affect the reported
amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.
NOTE 4 -- STOCK OPTIONS
As of September 30, 1999, options to purchase 8.9 million shares
of common stock were outstanding and options to purchase an
additional 0.8 million shares of common stock were available for
grant under the Technology Solutions Company 1996 Stock Incentive
Plan.
eLoyalty Corporation, a wholly owned subsidiary of the
Company, has adopted the eLoyalty Corporation 1999 Stock Incentive
Plan (the "eLoyalty Plan"). The number of eLoyalty Corporation common
shares initially available for all grants of awards over the term
of the eLoyalty Plan is equal to approximately 12 percent of the
aggregate number of eLoyalty Corporation common shares that would
be issued and outstanding immediately after the Asset Transfer
(defined in Note 9) and after giving effect to the purchase of
eLoyalty Corporation common shares by the unaffiliated venture
capital firms described in Note 9. As of September 30, 1999,
options to purchase approximately 96% of the number of eLoyalty
Corporation common shares initially available for grant under the
eLoyalty Plan had been issued, all of which have an exercise
price representing the fair market value of an eLoyalty
Corporation common share on the date of grant.
It is expected that the eLoyalty Plan will be amended to provide
that, in the event of a spin-off of eLoyalty Corporation,
substitute options to purchase eLoyalty Corporation common shares
(Substitute Options) will be granted to those holders of options
to purchase the Company's common shares (Company Options). The
Substitute Options will be granted as follows: (a) Company
Options held by persons who either become employed by eLoyalty
Corporation or become directors of eLoyalty Corporation (but do
not remain directors of the Company) immediately after the spin-
off will be converted solely into Substitute Options. The
Substitute Options will preserve the difference between the
market value of the stock subject to the Company Option and the
exercise price of the Company Option by adjusting the number of
shares purchasable and the exercise price, based on a comparison
of the trading price of the Company's common stock, including the
value of eLoyalty common stock and the trading price of eLoyalty
common stock on a "when-issued" basis. The Substitute Option will
take into account all employment with both the Company and
eLoyalty for purposes of determining when the option becomes
exercisable and when it terminates. All other terms of the
Substitute Option will be the same as the current Company Option.
- ------------------------------------------------------------------
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TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
==================================================================
(b) Company Options held by all other persons that were granted
prior to June 22, 1999 will be converted into Substitute Options
and adjusted Company Options. The Company Options will be
converted in a manner that preserves the aggregate exercise price
of each option, which will be allocated between the adjusted
Company Option and the Substitute Option based on a comparison of
the trading price of the Company's common stock, excluding the
value of eLoyalty common stock and the trading price of eLoyalty
common stock on a "when-issued" basis. Both options, when
combined, will preserve the intrinsic value of the existing
option, and each will preserve the ratio of the exercise price to
the fair market value of the stock subject to the option. The
terms and conditions of each Substitute Option, such as the term
and the schedule of exercisability, shall be the same as those of
the Company Option to which the Substitute Option relates. (c)
Company Options that were granted after June 21, 1999 will not be
adjusted as described above, but instead will continue solely as
an option to purchase shares of the Company's common stock. Each
of these options will be adjusted to reflect the spin-off, based
on a comparison of the trading price of the Company's common
stock, including the value of eLoyalty common stock, and the
trading price of the Company's common stock, excluding the value
of eLoyalty common stock and will preserve the intrinsic value of
the option and the ratio of the exercise price to the fair market
value of the stock.
NOTE 5 -- CAPITAL STOCK
During the quarter ended March 31, 1999, the Company repurchased
480,000 shares of the Company's outstanding Common Stock for $4.9
million under a 2,000,000 share repurchase program announced in
November 1998. As of September 30, 1999, 1,520,000 shares were
available to be purchased under the share repurchase program. No
shares were repurchased during the quarters ended June 30, 1999
or September 30, 1999.
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TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
==================================================================
NOTE 6 -- EARNINGS PER COMMON SHARE
The Company discloses basic and diluted earnings per common share
in the consolidated statements of income under the provisions of
SFAS No. 128, "Earnings Per Share." Earnings per common share is
computed by dividing net income by the weighted average number of
common shares outstanding during each period presented. Earnings
per common share assuming dilution is computed by dividing net
income by the weighted average number of common shares
outstanding during each period presented, including common
equivalent shares arising from the assumed exercise of stock
options, where appropriate. All share and per share amounts have
been adjusted to reflect all of the Company's prior stock splits.
Reconciliation of Basic and Diluted Earnings Per Share
(In thousands, except per share data)
-------------------------------------------------------
For the Three Months For the Three Months
Ended Ended
September 30, 1999 September 30, 1998
----------------------- ------------------------
Per Per
Net Common Net Common
Income Shares Share Income Shares Share
------- ------ ------ ------ ------ --------
Basic
Earnings
Per Share $3,352 42,369 $0.08 $5,109 40,446 $0.13
===== =====
Effect of
Stock
Options -- 2,053 -- 2,901
------ ------ ------ ------
Diluted
Earnings
Per Share $3,352 44,422 $0.08 $5,109 43,347 $0.12
====== ====== ===== ====== ====== =====
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TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
=====================================================================
Reconciliation of Basic and Diluted Earnings Per Share
(In thousands, except per share data)
---------------------------------------------------------
For the Nine Months For the Nine Months
Ended Ended
September 30, 1999 September 30, 1998
----------------------- -------------------------
Per Per
Net Common Net Common
Income Shares Share Income Shares Share
------- ------- ------ ------ ------ -------
Basic
Earnings
Per Share $601 41,722 $0.01 $18,966 39,915 $0.48
===== =====
Effect of
Stock
Options -- 1,517 -- 3,437
---- ------ ------- ------
Diluted
Earnings
Per Share $601 43,239 $0.01 $18,966 43,352 $0.44
==== ====== ===== ======= ====== =====
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TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
==================================================================
NOTE 7 -- COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board (FASB)
issued SFAS No. 130, "Reporting Comprehensive Income." The
Company adopted SFAS No. 130 during the transition period ended
December 31, 1998. This statement established new standards for
reporting and displaying comprehensive income and its components
in the financial statements. The Company's comprehensive income
was as follows:
For the Three
Months Ended
(In thousands) September 30,
------------------
1999 1998
------ ------
Net Income $3,352 $5,109
Accumulated Other Comprehensive Income (Loss):
Unrealized Holding (Losses) Gains on
Available-for-Sale Securities, Net of Tax (14) 68
Cumulative Translation Adjustment, Net of Tax 604 (1,562)
------ ------
Other Comprehensive Income (Loss) 590 (1,494)
------ ------
Total Comprehensive Income $3,942 $3,615
====== ======
For the Nine
Months Ended
(In thousands) September 30,
------------------
1999 1998
------ ------
Net Income $ 601 $18,966
Accumulated Other Comprehensive Income (Loss):
Unrealized Holding (Losses) Gains on
Available-for-Sale Securities, Net of Tax (66) 133
Cumulative Translation Adjustment, Net of Tax 341 (1,771)
------- -------
Other Comprehensive Income (Loss) 275 (1,638)
------- -------
Total Comprehensive Income $ 876 $17,328
======= =======
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TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
==================================================================
NOTE 8 -- BUSINESS SEGMENTS
The Company is organized into two business segments which each
have their own business focus and service offering expertise -
Enterprise Solutions (E-Solutions) and eLoyalty. Each serves the
Company's customers in the U.S. and international markets. The
Company believes that a structure based on these focused business
segments addresses its clients' needs for very specialized
industry and systems knowledge and allows its employees the
flexibility and opportunity to grow and develop. Each business
segment develops its own specific methodologies, tools, project
management plans, best practice and benchmark information and
templates. The E-Solutions business segment has specialized
expertise in helping organizations access the ability of their
current systems to meet the changing and often increasing demands
of business. E-Solutions is a recognized leader in packaged
software implementation and integration, supply chain management,
e-business and knowledge management. The eLoyalty business is a
leading global information technology services company focused on
providing enterprise-wide solutions across all customer access
channels, including the Internet, that are designed to result in
lasting and profitable customer relations for its clients.
Segment data also includes disclosing corporate infrastructure
costs and corporate adjustments separately as corporate and
Global Core Services (GCS). The objective of the GCS function is
to facilitate local decision-making and support the autonomy of
the business segments, practice areas and project managers, while
maintaining the internal structure necessary to support TSC's
goals. The functional areas within this area include: senior
corporate management; accounting; financial reporting; finance;
tax; legal; treasury; human resources; employee benefits;
marketing; public and investor relations; office operations;
recruiting support; training; internal communications; internal
technology applications; planning; quality assurance; and
insurance. GCS costs also include goodwill amortization.
There are no intersegment revenues. The Company evaluates the
performance of its segments and allocates resources to them based
on revenues, operating income and receivables.
- ------------------------------------------------------------------
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TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
================================================================================
The table below presents information about the reported revenue,
operating income (loss) and receivables of TSC (in thousands) for
the three months and nine months ended September 30, 1999 and
1998.
Corporate and
Three Months Ended Global Core Consolidated
September 30, 1999 E-Solutions eLoyalty Services (a) Total
- ------------------ ----------- -------- -------------- -----------
Revenues $36,278 $38,026 $ -- $ 74,304
Operating income $ 9,302 $10,168 $(14,220)(b) $ 5,250
Receivables $37,291 $46,049 $ -- $ 83,340
Corporate and
Three Months Ended Global Core Consolidated
September 30, 1998 E-Solutions eLoyalty Services (a) Total
- ------------------ ----------- -------- -------------- -----------
Revenues $57,260 $27,233 $ -- $ 84,493
Operating income $14,334 $ 5,695 $(12,096) $ 7,933
Receivables $53,222 $31,867 $ -- $ 85,089
(a) Operating results include goodwill amortization of $1,248 and $1,161
for the three months ended September 30, 1999 and 1998, respectively.
(b) Operating results include costs related to the eLoyalty
transaction of $1,117.
Corporate and
Nine Months Ended Global Core Consolidated
September 30, 1999 E-Solutions eLoyalty Services (a) Total
- ------------------ ----------- -------- -------------- -----------
Revenues $126,257 $103,393 $ -- $229,650
Operating income $ 24,814 $ 25,934 $(50,042)(b) $ 706
Receivables $ 37,291 $ 46,049 $ -- $ 83,340
Corporate and
Nine Months Ended Global Core Consolidated
September 30, 1998 E-Solutions eLoyalty Services (a) Total
- ------------------ ----------- -------- -------------- -----------
Revenues $165,573 $75,667 $ -- $241,240
Operating income $ 41,040 $15,895 $(26,557) $ 30,378
Receivables $ 53,222 $31,867 $ -- $ 85,089
(a) Operating results include goodwill amortization of $3,821 and $3,038
for the nine months ended September 30, 1999 and 1998, respectively.
(b) Operating results includes a restructuring charge of $10,522
and costs related to the eLoyalty transaction of $1,117.
- -------------------------------------------------------------------------------
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<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
======================================================================
The following is revenue and long-lived asset information by
geographic area (in thousands):
Three Months Ended United Foreign Consolidated
September 30, 1999 States Subsidiaries Total
- ------------------- -------- ------------ ------------
Revenues $ 64,692 $ 9,612 $ 74,304
Identifiable assets $206,334 $35,958 $242,292
Three Months Ended United Foreign Consolidated
September 30, 1998 States Subsidiaries Total
- ------------------- -------- ------------ ------------
Revenues $ 76,467 $ 8,026 $ 84,493
Identifiable assets $186,564 $23,715 $210,279
Nine Months Ended United Foreign Consolidated
September 30, 1999 States Subsidiaries Total
- ------------------- -------- ------------ ------------
Revenues $201,641 $28,009 $229,650
Identifiable assets $206,334 $35,958 $242,292
Nine Months Ended United Foreign Consolidated
September 30, 1998 States Subsidiaries Total
- ------------------- -------- ------------ ------------
Revenues $219,725 $21,515 $241,240
Identifiable assets $186,564 $23,715 $210,279
Foreign revenue is based on the country in which the legal
subsidiary is domiciled. No single foreign country's revenue was
material as defined by SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information," to the consolidated
revenues of the Company.
- ------------------------------------------------------------------
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<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
===================================================================
NOTE 9 -- OTHER EVENTS
On March 30, 1999, the Company announced 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 nine months ended September 30, 1999, the Company used
$8.4 million of the restructuring accrual as a result of $6.8
million of costs associated with the severance of approximately
270 employees and $1.6 million in asset write-offs and other
costs. The restructuring accrual balance is considered adequate
to cover the remaining committed restructuring actions.
On April 8, 1999, the Company filed a private letter ruling
request with the U.S. Internal Revenue Service (the IRS)
regarding the proposed spin-off of the Company's eLoyalty
business segment as a non-taxable distribution for U.S. federal
income tax purposes. On September 23, 1999, the Company announced
that it would accelerate the spin-off of its eLoyalty business
segment into a separate publicly traded company through a tax-
free distribution of all of the Company's eLoyalty Corporation
shares to TSC's shareholders. The Company determined that it was
not necessary for eLoyalty Corporation to conduct an initial
public offering (IPO) prior to effecting the spin-off, which will
permit the spin-off to occur in the first quarter of calendar
year 2000, subject to the receipt of a favorable IRS tax ruling
and other regulatory approvals. Accordingly, during the quarter
ended September 30, 1999, the Company expensed $1.1 million in
legal and accounting fees incurred in anticipation of the IPO.
During June 1999, the Company entered into an agreement with two
venture capital firms whereby these venture capital firms
purchased 500,000 shares of the Company's common stock. On August
13, 1999, Technology Crossover Ventures and Sutter Hill Ventures
funded to the Company cash proceeds of approximately $4.5 million
and the Company delivered 500,000 shares of Common Stock (the
"Company Shares") to the venture capital firms. The purchase
price of $9.013 per share was equal to the average last reported
sales price for the ten consecutive trading days ended June 25,
1999 (the date of the agreement). Both venture capital firms have
a single demand registration right with respect to the Company
Shares, which expires twelve months after the date of the
purchase.
In addition, Technology Crossover Ventures and Sutter Hill
Ventures have committed to purchase from eLoyalty Corporation for
$8.4 million approximately 5 percent of the number of eLoyalty
Corporation common shares (the "eLoyalty Shares") that would be
issued and outstanding after the Company completes the proposed
transfer to eLoyalty Corporation of the assets and liabilities of
the business historically conducted as the Company's eLoyalty
business segment (the "Asset Transfer"). The agreement with the
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Page 16
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
===================================================================
venture capital firms provides that the proposed purchase of the
eLoyalty Shares is subject to the receipt of a favorable revenue
ruling from the IRS with respect to the proposed tax-free spin-
off of eLoyalty Corporation to the Company's stockholders, the
consummation of the Asset Transfer and certain other customary
conditions. The Company has agreed, pursuant to the agreement, to
use commercially reasonable efforts to effect the Asset Transfer
as soon as is reasonably practicable after receipt of a favorable
revenue ruling. In the event the Asset Transfer is not so
consummated and the venture capital firms do not purchase the
eLoyalty Shares, the Company could become obligated to make a
liquidated damage payment of $1.2 million to the venture capital
firms. Alternatively, if the venture capital firms purchase the
eLoyalty Shares and the proposed spin-off of eLoyalty Corporation
does not occur by August 13, 2000, eLoyalty Corporation could
become obligated to repurchase the eLoyalty Shares then held by
the venture capital firms at a premium totaling $1.2 million over
the price paid by the venture capital firms for such shares. The
agreement further provides that, after the purchase of the
eLoyalty Shares, a representative of each of the two venture
capital firms groups will be appointed to the eLoyalty
Corporation Board of Directors.
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Page 17
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
===================================================================
RESULTS OF OPERATIONS
Three Months Ended September 30, 1999 Compared With Three Months
Ended September 30, 1998
Consolidated net revenues for the quarter ended September 30,
1999 decreased 12 percent to $74.3 million compared with
$84.5 million for the same period last year. Net revenues from
the Enterprise Solutions (E-Solutions) business contributed $36.3
million during the quarter ended September 30, 1999 compared to
$57.3 million in the prior period, a decrease of 37 percent. This
decrease was mainly due to a decline in the demand for certain
services of the E-Solutions business as a result of clients
facing budgetary restraints as they focus on Year 2000 issues.
This has been evidenced by a reduction in new license sales by
the package software vendors such as PeopleSoft and Baan. Net
revenues from the eLoyalty business contributed $38.0 million
during the quarter ended September 30, 1999 compared to $27.2
million in the prior period, an increase of 40 percent. This
improvement was due to an increased demand for eLoyalty
consulting services.
Project personnel costs, which represent mainly professional
salaries and benefits, decreased to $35.6 million for the quarter
ended September 30, 1999 from $39.0 million for the same period
last year, a decrease of 9 percent. The decrease was mainly due
to a decrease in average professional headcount. Project
personnel costs as a percentage of net revenues increased to
48 percent for the quarter ended September 30, 1999 from
46 percent for the same period last year due to the decline in E-
Solutions revenues.
Other project expenses consist of nonbillable expenses directly
incurred for client projects and business development. These
expenses include recruiting fees, sales and marketing expenses,
personnel training and provisions for valuation allowances and
reserves for potential losses on continuing projects. Other
project expenses for the quarter ended September 30, 1999 were
$11.8 million, compared with $13.4 million in the comparable
period last year, a decrease of $1.6 million, or 12 percent. The
decrease in other project expenses primarily included the
following: a decrease of $1.5 million in domestic hiring,
training, communication and computer expenses due to a decrease
in average headcount; a decrease in international costs of
$0.5 million associated with travel, marketing and business
development expenses; and a decrease of $0.4 million in various
other domestic project expenses which include items such as
amortization of software costs, depreciation expense and other
costs. These decreases were offset by an increase in the
provision for valuation allowances and reserves for potential
losses of $0.8 million. Other project expenses as a percentage of
net revenues remained unchanged from the same period last year at
16 percent.
Management and administrative support costs decreased
$3.2 million to $14.3 million for the quarter ended September 30,
1999 from $17.5 million for the same period last year, a decrease
of 18 percent. Approximately $0.1 million of this decrease was
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Page 18
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
===================================================================
attributable to the decrease in Global Core Service (GCS) costs
over last year. The decrease in GCS costs versus the same period
last year included the following: decreased expenses in the
internal systems and human resources areas of $0.5 million; a
decrease in corporate recruiting expenses of $0.3 million as a
result of a reduction in headcount; and a net decrease in various
other costs of $0.3 million. These decreases were offset by
higher marketing expenses of $1.0 million as a result of
increased corporate marketing efforts. The Company also had a
decrease of $3.1 million in practice area management and
administrative costs. This decrease primarily included a
reduction of international expenses of $0.6 million; a decrease
in regional management and practice area support personnel of
$0.5 million; and a reduction in various other domestic
management and administrative expenses of $2.0 million, which
included items such as practice area recruiting, sales, meetings
and other expenses.
Goodwill amortization remained virtually unchanged for the
quarter ended September 30, 1999 compared to the same period last
year at $1.2 million.
On April 8, 1999, the Company filed a private letter ruling
request with the U.S. Internal Revenue Service (the IRS)
regarding the proposed spin-off of the Company's eLoyalty
business segment as a non-taxable distribution for U.S. federal
income tax purposes. On September 23, 1999, the Company announced
that it would accelerate the spin-off of its eLoyalty business
segment into a separate publicly traded company through a tax-
free distribution of all of the Company's eLoyalty Corporation
shares to TSC's shareholders. The Company determined that it was
not necessary for eLoyalty Corporation to conduct an initial
public offering (IPO) prior to effecting the spin-off, which will
permit the spin-off to occur in the first quarter of calendar
year 2000, subject to the receipt of a favorable IRS tax ruling
and other regulatory approvals. Accordingly, during the quarter
ended September 30, 1999, the Company expensed $1.1 million in
legal and accounting fees incurred in anticipation of the IPO.
Incentive compensation of $5.0 million was accrued during the
quarter ended September 30, 1999 compared to $5.5 million for the
same period last year. The decrease was primarily due to the
reduction in headcount during the quarter ended September 30,
1999 compared to the same period last year. Incentive
compensation as a percentage of net revenues increased slightly
to 7 percent for the quarter ended September 30, 1999 compared to
6 percent for the same period last year. The Company expects to
continue to accrue incentive compensation throughout the 1999
calendar year.
Consolidated operating income was $5.3 million for the quarter
ended September 30, 1999 compared with consolidated operating
income of $7.9 million in the prior period due to the decline in
E-Solutions revenues and the costs related to the eLoyalty
transaction. Operating income from the E-Solutions business was
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Page 19
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
===================================================================
$9.3 million during the quarter ended September 30, 1999 compared to
$14.3 million in the prior period, a decrease of 35 percent. This
decrease was mainly due to a decrease in the demand for certain
services in the E-Solutions business and lower billing rates
partially offset by improved staff utilization. Operating income
from the eLoyalty business was $10.2 million during the quarter
ended September 30, 1999 compared to $5.7 million in the prior
period, an increase of 79 percent. This increase was primarily
due to the increased demand for eLoyalty services, as well as an
increase in staff utilization and was consistent with its higher
revenues.
Corporate and GCS costs for the quarter ended September 30, 1999
were $14.2 million compared to $12.1 million in the prior period,
an increase of 18 percent. The increase in corporate and GCS costs
primarily represents the costs related to the eLoyalty transaction
as well as an increase in the corporate adjustment for the
provision for receivable valuation allowances and reserves for
potential losses. (Note that all corporate adjustments are
included in the GCS category.) These increases were partially
offset by the slight decrease in GCS costs described above in the
discussion of management and administrative support costs.
Excluding the costs related to the eLoyalty transaction, GCS costs
were $13.1 million for the quarter ended September 30, 1999, an
increase of 8 percent over the prior period.
Other income and expense remained virtually unchanged at $0.8
million for the quarter ended September 30, 1999 compared to the
same period last year.
The Company's effective tax rate for the quarter ended
September 30, 1999 was 45 percent compared to 41 percent for the
same period a year ago. The rate for the quarter ended
September 30, 1999 was higher than the prior period due to a
larger proportion of pre-tax earnings being generated in foreign,
high tax-rate jurisdictions.
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 options, the issuance of
shares under the Company's employee stock purchase plan and the
investments by the venture capital firms (see Other Events).
RESULTS OF OPERATIONS
Nine Months Ended September 30, 1999 Compared With Nine Months
Ended September 30, 1998
Consolidated net revenues for the nine months ended September 30,
1999 decreased 5 percent to $229.7 million compared with $241.2
million for the same period last year. Net revenues from the E-
Solutions business contributed $126.3 million during the nine
months ended September 30, 1999 compared to $165.6 million in the
prior period, a decrease of 24 percent. This decrease was mainly
due to a decline in the demand for certain services of the E-
Solutions business as a result of clients facing budgetary
restraints as they focus on Year 2000 issues. This has been
- ------------------------------------------------------------------
Page 20
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
===================================================================
evidenced by a reduction in new license sales by the package
software vendors such as PeopleSoft and Baan. Net revenues from
the eLoyalty business contributed $103.4 million during the nine
months ended September 30, 1999 compared to $75.7 million in the
prior period, an increase of 37 percent. This improvement was due
to an increased demand for eLoyalty consulting services.
Project personnel costs, which represent mainly professional
salaries and benefits, increased to $114.0 million for the nine
months ended September 30, 1999 from $111.5 million for the same
period last year, an increase of 2 percent. The increase was
mainly due to an increase in average domestic professional
salaries, partially offset by a decrease in professional
headcount. Project personnel costs as a percentage of net
revenues increased to 50 percent for the nine months ended
September 30, 1999 from 46 percent for the same period last year
due to the decline in E-Solutions revenues. To reduce these
costs and improve utilization, the Company streamlined and
refocused the E-Solutions business, which resulted in a
restructuring charge of $10.5 million (as discussed further in
this section).
Other project expenses consist of nonbillable expenses directly
incurred for client projects and business development. These
expenses include recruiting fees, sales and marketing expenses,
personnel training and provisions for valuation allowances and
reserves for potential losses on continuing projects. Other
project expenses for the nine months ended September 30, 1999
were $35.3 million, compared with $35.6 million in the comparable
period last year, a decrease of $0.3 million, or 1 percent. The
decrease in other project expenses primarily included the
following: a decrease of $1.2 million in domestic practice area
development including marketing, business development, travel and
sales commissions; a decrease of $1.3 million in domestic hiring,
training, communication and computer expenses due to a decrease
in average headcount; and a decrease of $0.7 million in various
other domestic expenses which include items such as amortization
of software costs, depreciation expense and other costs. These
decreases were offset by an increase in the provision for
valuation allowances and reserves for potential losses of $2.7
million and an increase in international costs of $0.2 million
associated with travel, marketing and business development
expenses. Other project expenses as a percentage of net revenues
remained virtually unchanged from the same period last year at 15
percent.
Management and administrative support costs decreased
$1.5 million to $49.4 million for the nine months ended
September 30, 1999 from $50.9 million for the same period last
year, a decrease of 3 percent. Included in the net $1.5 million
decrease was a $3.0 million decrease attributable to reduced
practice area management and administrative costs. This decrease
primarily resulted from a decline in international expenses of
$1.0 million and a decrease in various other domestic management
and administrative expenses of $2.3 million, which include items
such as practice area recruiting, sales, amortization of software
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<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
===================================================================
costs, travel and other expenses partially offset by an increase
in practice area support personnel of $0.3 million. Offsetting
this improvement was an increase of $1.5 million in Global Core
Service (GCS) costs over last year. The increase in GCS costs
versus the same period last year included the following: higher
marketing expenses of $1.9 million as a result of increased
corporate marketing efforts and a net increase in various other
costs of $0.2 million. These increases were offset by a decrease
in corporate recruiting expenses of $0.6 million as a result of a
reduction in headcount.
Goodwill amortization increased to $3.8 million for the nine
months ended September 30, 1999 compared to $3.0 million for the
same period last year. This increase reflects the effect of the
earn-out payments made during the seven month transition period
ended December 31, 1998 related to the acquisitions of The
Bentley Company, Inc. and Aspen Consultancy Ltd.
On April 8, 1999, the Company filed a private letter ruling
request with the IRS regarding the proposed spin-off of the
Company's eLoyalty business segment as a non-taxable distribution
for U.S. federal income tax purposes. On September 23, 1999, the
Company announced that it would accelerate the spin-off of its
eLoyalty business segment into a separate publicly traded company
through a tax-free distribution of all of the Company's eLoyalty
Corporation shares to TSC's shareholders. The Company determined
that it was not necessary for eLoyalty Corporation to conduct an
initial public offering (IPO) prior to effecting the spin-off,
which will permit the spin-off to occur in the first quarter of
calendar year 2000, subject to the receipt of a favorable IRS tax
ruling and other regulatory approvals. Accordingly, during the
quarter ended September 30, 1999, the Company expensed $1.1 million
in legal and accounting fees incurred in anticipation of the IPO.
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
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 nine months ended
September 30, 1999, the Company used $8.4 million of the
restructuring accrual as a result of $6.8 million of costs
associated with the severance of approximately 270 employees and
$1.6 million in asset write-offs and other costs. The
restructuring accrual balance is considered adequate to cover the
remaining committed restructuring actions.
Incentive compensation of $14.7 million was accrued during the
nine months ended September 30, 1999 compared to $9.9 million for
the same period last year. Incentive compensation as a
percentage of net revenues increased to 6 percent for the nine
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<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
===================================================================
months ended September 30, 1999 compared to 4 percent for the
same period last year. The increase was primarily due to an
increase in vice president incentive compensation expense as a
result of the Company meeting its internal performance targets
for the nine months ended September 30, 1999, as well as an
increase in the bonus accrual for non-vice president personnel.
The Company expects to continue to accrue incentive compensation
throughout the 1999 calendar year.
Consolidated operating income was $0.7 million for the nine
months ended September 30, 1999 compared with consolidated
operating income of $30.4 million in the prior period, due to the
reasons outlined above. Excluding the restructuring charge and
the costs related to the eLoyalty transaction, consolidated
operating income was $12.3 million during the nine months ended
September 30, 1999. Operating income from the E-Solutions
business was $24.8 million during the nine months ended
September 30, 1999 compared to $41.0 million in the prior period,
a decrease of 40 percent. This decrease was mainly due to a
decrease in the demand for certain services in the E-Solutions
business and lower billing rates. Operating income from the
eLoyalty business was $25.9 million during the nine months ended
September 30, 1999 compared to $15.9 million in the prior period,
an increase of 63 percent. This increase was primarily due to the
increased demand for eLoyalty services, as well as increased
staff utilization and was consistent with its higher revenues.
Corporate and GCS costs for the nine months ended September 30,
1999 were $50.0 million compared to $26.6 million in the prior
period, an increase of 88 percent. The increase in corporate and
GCS costs includes the restructuring charge and the costs related
to the eLoyalty transaction. The increase also included an increase
in the corporate adjustment for receivable valuation allowances
and reserve for potential losses, as well as a change in the
corporate adjustment for incentive compensation. For the nine
months ended September 30, 1998, the Company did not meet certain
internal performance targets and, accordingly, recorded a
corporate adjustment to reduce the consolidated incentive
compensation accrual. However, the Company fully met its
internal performance targets in the corresponding 1999 period
and, therefore, no incentive compensation adjustment was needed.
In addition, goodwill amortization for the nine months ended
September 30, 1999 increased from the prior period due to the
earn-out payments related to the acquisitions of The Bentley
Company, Inc. and Aspen Consultancy Ltd. Finally, GCS costs also
increased due to an increase in management and administrative
support costs, as previously described. Excluding the
restructuring charge and the costs related to the eLoyalty
transaction, GCS costs were $38.4 million for the nine months
ended September 30, 1999, an increase of 45 percent over the
prior period.
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Page 23
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
===================================================================
Other income and expense for the nine months ended September 30,
1999 was $2.4 million compared to $2.1 million for the same
period a year ago. The increase is a result of higher cash and
cash equivalent balances for the nine months ended September 30,
1999 compared to the same period a year ago.
The Company's effective tax rate for the nine months ended
September 30, 1999 was 81 percent compared to 42 percent for the
same period a year ago. The tax rate for the nine months ended
September 30, 1999 was unusually high since a portion of the
restructuring charge was taken in foreign lower tax-rate
jurisdictions, thereby reducing the effective tax benefit of this
charge. Conversely, foreign taxable earnings were generated in
higher foreign tax-rate jurisdictions thereby increasing the
impact of the foreign tax rates on the overall tax charge. In
addition, lower taxable earnings during this period, as a result
of the restructuring charge and the costs related to the eLoyalty
transaction, resulted in non-tax deductible expenses being a
large component of the overall tax charge.
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 Other Events),
partially offset by the repurchase of outstanding shares.
Weighted average number of common and common equivalent shares
outstanding remained virtually unchanged for the quarter ended
September 30, 1999 compared to the same period last year.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $15.5 for the nine
months ended September 30, 1999 compared to net cash used in
operating activities of $2.5 million for the nine months ended
September 30, 1998. Operating cash flow for the nine months ended
September 30, 1999 included the restructuring charge and other
favorable working capital activities. This benefit was offset by
an increase in net receivables of $13.5 million mainly due to the
growth in eLoyalty's revenues as well as cash outlays related to
the restructuring charge and the costs related to the eLoyalty
transaction.
The Company's significant amounts of cash, cash equivalents and
marketable securities provide ample liquidity to handle the
Company's current cash requirements.
Net cash used in investing activities was $0.5 million for the
nine months ended September 30, 1999. The Company purchased
$1.5 million of available-for-sale securities and received
$2.8 million from the sale of available-for-sale securities. The
proceeds from available-for-sale securities were transferred to
cash and cash equivalents and reinvested in ongoing business
activities.
Capital expenditures for the nine months ended September 30, 1999
were $1.8 million. Capital expenditures may continue at the
current rate throughout the 1999 calendar year. The Company
currently has no material commitments for capital expenditures.
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Page 24
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
===================================================================
The Company has a $10.0 million unsecured line of credit facility
(the "Facility") with Bank of America National Trust and Savings
Association (Bank of America). The agreement expires
October 4, 2000. At the Company's election, loans made under the
Facility bear interest at either the Bank of America reference
rate or the applicable Eurodollar interest rate plus
0.75 percent. The unused line fee is 0.125 percent of the unused
portion of the commitment. The Facility requires, among other
things, the Company to maintain certain financial ratios. As of
September 30, 1999, the Company was in compliance with these
financial ratio requirements. As of September 30, 1999, no
borrowings had been made under the Facility.
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 by SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133," is
effective for financial statements issued for periods ending
after June 15, 2000. SFAS No. 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives are recorded each period
in current earnings or other comprehensive income, depending on
whether a derivative is designated as part of a hedge transaction
and, if it is, the type of hedge transaction. The Company
anticipates that, due to its limited use of derivative
instruments, the adoption of SFAS No. 133 will not have a
significant effect on the Company's results of operations or its
financial position.
OTHER EVENTS
During June 1999, the Company entered into an agreement with two
venture capital firms whereby these venture capital firms
purchased 500,000 shares of the Company's common stock. On August
13, 1999, Technology Crossover Ventures and Sutter Hill Ventures
funded to the Company cash proceeds of approximately $4.5 million
and the Company delivered 500,000 shares of Common Stock (the
"Company Shares") to the venture capital firms. The purchase
price of $9.013 per share was equal to the average last reported
sales price for the ten consecutive trading days ended June 25,
1999 (the date of the agreement). Both venture capital firms have
a single demand registration right with respect to the Company
Shares, which expires twelve months after the date of the
purchase.
In addition, Technology Crossover Ventures and Sutter Hill
Ventures have committed to purchase from eLoyalty Corporation for
$8.4 million approximately 5 percent of the number of eLoyalty
Corporation common shares (the "eLoyalty Shares") that would be
issued and outstanding after the Company completes the proposed
transfer to eLoyalty Corporation of the assets and liabilities of
the business historically conducted as the Company's eLoyalty
business segment (the "Asset Transfer"). The agreement with the
venture capital firms provides that the proposed purchase of the
eLoyalty Shares is subject to the receipt of a favorable revenue
ruling from the IRS with respect to the proposed tax-free spin-
off of eLoyalty Corporation to the Company's stockholders, the
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Page 25
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
===================================================================
consummation of the Asset Transfer and certain other customary
conditions. The Company has agreed, pursuant to the agreement, to
use commercially reasonable efforts to effect the Asset Transfer
as soon as is reasonably practicable after receipt of a favorable
revenue ruling. In the event the Asset Transfer is not so
consummated and the venture capital firms do not purchase the
eLoyalty Shares, the Company could become obligated to make a
liquidated damage payment of $1.2 million to the venture capital
firms. Alternatively, if the venture capital firms purchase the
eLoyalty Shares and the proposed spin-off of eLoyalty Corporation
does not occur by August 13, 2000, eLoyalty Corporation could
become obligated to repurchase the eLoyalty Shares then held by
the venture capital firms at a premium totaling $1.2 million over
the price paid by the venture capital firms for such shares. The
agreement further provides that, after the purchase of the
eLoyalty Shares, a representative of each of the two venture
capital firms groups will be appointed to the eLoyalty
Corporation Board of Directors.
OTHER MATTERS
The Year 2000 issue is a general term used to address a class of
problems which are caused by the inability of some computer
programs to recognize various date values around January 1, 2000.
This class of problems could result in a system failure or
miscalculations causing disruptions of operations such as, among
others, a temporary inability to process transactions, send
invoices, or engage in similar normal business activities.
The Company has conducted an assessment of its computer
information systems by inventorying related hardware and software
systems and has determined the nature and extent of the work
required to ensure that its internal systems are Year 2000
compliant. The majority of the software used by the Company has
been purchased as packaged software. A minimal customization
practice has been followed to support a more direct transition
from an older version of a packaged software application to a
newer version of the same application. The Company's internal
systems can be grouped into three principal categories - its
accounting and human resources software, its legacy systems that
perform a variety of processes, and its office automation
software products. With respect to the suite of software products
licensed by the Company and relied upon in the administration of
accounting and human resources functions, which was licensed by
the Company in the first quarter of its 1997 fiscal year, the
licensor has indicated that the version previously employed by
the Company was not Year 2000 compliant and, therefore, the
Company has replaced the production and development versions with
newer ones that are Year 2000 compliant. The Company plans to
apply future patches to address the Year 2000 issue as they are
made available. Based on currently available information, the
Company believes the expense associated with these efforts will
not be material. The Company expects that additional issues
concerning Year 2000 compliance will be reported by the licensor
to the Company and updates will be provided by the licensor. The
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Page 26
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
===================================================================
Company has received the most recent updates and enhancements
pursuant to a software support service agreement presently in
place with the licensor, an agreement which is in effect and that
the Company does not currently intend to terminate. Provided that
the licensor gives such assurances concerning the updates and
enhancements to its software product suite, the Company does not
expect that it will incur additional expense aside from the cost
of the software support service agreement in order to bring its
accounting and human resources software package into Year 2000
compliance.
Other important internal business processes of the Company, such
as time and expense reporting and labor distribution (and their
associated back-office functions), are performed by legacy
systems that have been re-written to be Year 2000 compliant. The
remaining office automation products have been inventoried and
each vendor has been contacted for the product's Year 2000
status. All identified products have either been upgraded with
patches, entirely replaced, determined to be Year 2000 compliant,
or shown to possess no date-associated functions within the
product. The Company estimates that it is nearly completed with
the compliance project effort, and expects that the identified
systems will be compliant as of December 31, 1999. The Company
estimates that the cost associated with replacing/upgrading these
systems, excluding labor costs, will be less than $0.3 million,
and has provided for the replacement of these systems in its
operating and capital budgets for calendar year 1999.
Vendors of the standard office automation software packages have
been contacted and patches and/or newer versions of the
applications have been secured. Distribution of the patches and
newer versions of the software occurred during the third quarter
of the calendar year 1999 and will continue to occur in the
fourth quarter of calendar year 1999.
Based on presently available information, the Company believes
that any necessary compliance efforts concerning its internal
systems will not have a material adverse effect on its business,
operating results and financial condition. However, if compliance
efforts of which the Company is not currently aware are required
and are not completed on time, or if the cost of any required
updating, modification or replacement of the Company's
information systems exceeds the Company's estimates, the Year
2000 issue could have a material adverse impact on the Company's
business, operating results and financial condition.
In addition to the Company's internal systems, the Company relies
on third party vendors in the conduct of its business. For
example, third party vendors handle the payroll function for the
Company, and the Company also relies on the services of
telecommunication companies, banks, utilities, and commercial
airlines, among others. The Company has sought assurances from
its material vendors and suppliers that there will be no
interruption of service as a result of the Year 2000 issue, and
to the extent such assurances have not been given, the Company is
finalizing contingency plans to mitigate the effects on the
- ------------------------------------------------------------------
Page 27
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
===================================================================
conduct of the Company's business in the event the Year 2000
issue results in the unavailability of services. There can be no
assurance that any contingency plans developed by the Company
will prevent any such service interruption on the part of one or
more of the Company's third party suppliers from having a
material adverse effect on the Company's business, operating
results and financial condition. In addition, the failure on the
part of the accounting systems of the Company's clients due to
the Year 2000 issue could result in a delay in the payment of
invoices issued by the Company for services and expenses. A
failure of the accounting systems of a significant number of the
Company's clients would have a material adverse effect on the
Company's business, operating results and financial condition.
The Company has generally refrained from performing Year 2000
remediation services for its clients. It is possible, however,
that former, present and future clients could assert that certain
services performed by the Company from time to time involve, or
are related to, the Year 2000 issue. The Company has recommended,
implemented and customized various third party software packages
for its clients, and to the extent that such software programs
may not be Year 2000 compliant, the Company could be subjected to
claims as a result thereof. Since the Company's inception in
1988, it also has designed and developed software and systems for
its clients. Due to the large number of such engagements
undertaken by the Company over the years, there can be no
assurance that all such software programs and systems will be
Year 2000 compliant, which could also result in the assertion of
claims against the Company.
The Company's policy has been to endeavor to secure provisions in
its client contracts that, among other things, disclaim implied
warranties, limit the duration of the Company's express
warranties, relate the Company's liability to the amount of fees
paid by the client to the Company in connection with the project,
and disclaim any liability arising from third party software that
is implemented, customized or installed by the Company. There can
be no assurance that the Company will be able to secure
contractual protections in agreements concerning future projects,
or that any contractual protections secured by the Company in
agreements governing pending and completed projects will dissuade
the other party thereto from asserting claims against the Company
with respect to the Year 2000 issue.
Due to the complexity of the Year 2000 issue, upon any failure of
critical client systems or processes that may be directly or
indirectly connected or related to systems or software designed,
developed, customized or implemented by the Company as described
above, the Company may be subjected to claims, regardless of
whether the failure is related to the services provided by the
Company. There can be no assurance that the Company would be able
to establish that it did not cause or contribute to the failure
of a critical client system or process. There also can be no
assurance that the contractual protections, if any, secured by
the Company in connection with any past, present or future
clients will operate to insulate the Company from, or limit the
amount of, any liability arising from claims asserted against the
Company. If asserted, the resolution of such claims (and the
associated defense costs) could have a material adverse effect on
the Company's business, operating results and financial
condition.
- ------------------------------------------------------------------
Page 28
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
===================================================================
This Form 10-Q includes or may include certain forward-looking
statements that involve risks and uncertainties. This Form 10-Q
contains certain forward-looking statements concerning the
Company's financial position, business strategy, budgets,
projected costs and plans and objectives of management for future
operations as well as other statements including words such as
"anticipate," "believe," "plan," "estimate," "expect," "intend,"
and other similar expressions. Although the Company believes its
expectations reflected in such forward-looking statements are
based on reasonable assumptions, readers are cautioned that no
assurance can be given that such expectations will prove correct
and that actual results and developments may differ materially
from those conveyed in such forward-looking statements. Important
factors that could cause actual results to differ materially from
the expectations reflected in the forward-looking statements in
this Form 10-Q include, among others, the pace of technological
change, the Company's ability to manage growth and attract and
retain employees, general business and economic conditions in the
Company's operating regions, market conditions and competitive
and other factors, all as more fully described in the Company's
Transition Report on Form 10-K for the transition period ended
December 31, 1998 under Management's Discussion and Analysis of
Financial Condition and Results of Operations "Assumptions
Underlying Certain Forward-Looking Statements and Factors that
May Affect Future Results" and elsewhere from time to time in the
Company's other SEC reports. 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-Q. 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. Actual results may vary materially.
- ------------------------------------------------------------------
Page 29
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
PART II. OTHER INFORMATION
===================================================================
ITEM 2--CHANGES IN SECURITIES AND USE OF PROCEEDS
During June 1999, the Company entered into an agreement with two
venture capital firms whereby these venture capital firms
purchased 500,000 shares of the Company's common stock. On
August 13, 1999, Technology Crossover Ventures and Sutter Hill
Ventures funded to the Company cash proceeds of approximately
$4.5 million and the Company delivered 500,000 shares of Common
Stock (the "Company Shares") to the venture capital firms. The
purchase price of $9.013 per share was equal to the average last
reported sales price for the ten consecutive trading days ended
June 25, 1999 (the date of the agreement). Both venture capital
firms have a single demand registration right with respect to the
Company Shares, which expires twelve months after the date of the
purchase. The purchase and sale of the Company Shares to the
venture capital firms were exempt from registration under the
Securities Act pursuant to Section 4(2) thereof on the basis that
the transactions did not involve a public offering. The venture
capital firms represented their intention to acquire the Company
Shares for investment and not with a view toward the distribution
thereof, and appropriate legends have been affixed to the share
certificates issued to the venture capital firms.
ITEM 6--EXHIBITS AND REPORT ON FORM 8-K
(a) See Exhibit Index
All other items in Part II are either not applicable
to the Company during the quarter ended
September 30, 1999, the answer is negative, or a
response has been previously reported and an
additional report of the information is not
required, pursuant to the instructions to Part II.
- ------------------------------------------------------------------
Page 30
<PAGE>
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 12th day of November 1999.
TECHNOLOGY SOLUTIONS COMPANY
Date: November 12, 1999 By: /s/ TIMOTHY P. DIMOND
----------------- -----------------------
Timothy P. Dimond
Chief Financial Officer
- ------------------------------------------------------------------
Page 31
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------------------
27 Financial Data Schedule
- ------------------------------------------------------------------
Page 32
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 84,068
<SECURITIES> 24,611
<RECEIVABLES> 83,340
<ALLOWANCES> 5,710
<INVENTORY> 0
<CURRENT-ASSETS> 215,187
<PP&E> 23,118
<DEPRECIATION> 16,049
<TOTAL-ASSETS> 242,292
<CURRENT-LIABILITIES> 61,479
<BONDS> 0
0
0
<COMMON> 429
<OTHER-SE> 180,384
<TOTAL-LIABILITY-AND-EQUITY> 242,292
<SALES> 0
<TOTAL-REVENUES> 229,650
<CGS> 0
<TOTAL-COSTS> 224,531
<OTHER-EXPENSES> (2,534)
<LOSS-PROVISION> 4,413
<INTEREST-EXPENSE> 132
<INCOME-PRETAX> 3,108
<INCOME-TAX> 2,507
<INCOME-CONTINUING> 601
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 601
<EPS-BASIC> .01
<EPS-DILUTED> .01
</TABLE>
