<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 March 31, 1999
Commission file number 0-19433
[LOGO]
Technology Solutions Company
Incorporated in the State of Delaware
Employer Identification No. 36-3584201
205 North Michigan Avenue
Suite 1500
Chicago, Illinois 60601
(312) 228-4500
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 April 26, 1999, there were outstanding 41,365,386
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
March 31, 1999 and December 31, 1998 3
Consolidated Statements of Operations
for the Three Months Ended March 31, 1999 and 1998 4
Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 1999 and 1998 5
Notes to Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 14
Part II
OTHER INFORMATION
Item 6 22
SIGNATURES 23
EXHIBIT INDEX 24
Page 2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
TECHNOLOGY SOLUTIONS COMPANY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
ASSETS
------
March 31, December 31,
1999 1998
--------- -----------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 52,585 $ 59,473
Marketable securities 26,973 25,269
Receivables, less allowance
for doubtful receivables of $5,284 and $4,845 76,512 69,212
Deferred income taxes 16,583 15,297
Other current assets 11,886 13,764
-------- --------
Total current assets 184,539 183,015
COMPUTERS, FURNITURE AND EQUIPMENT, NET 8,836 9,372
COST IN EXCESS OF NET ASSETS OF ACQUIRED
BUSINESSES AND OTHER INTANGIBLES 15,901 17,901
LONG-TERM RECEIVABLES AND OTHER 6,559 8,811
-------- --------
Total assets $215,835 $219,099
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 2,836 $ 3,263
Accrued compensation and related costs 20,936 25,184
Deferred compensation 18,671 16,494
Restructuring accrual 8,280 --
Other current liabilities 3,861 5,913
-------- --------
Total current liabilities 54,584 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 - 41,269,396 413 412
Capital in excess of par value 91,507 94,886
Retained earnings 70,268 76,938
Accumulated other comprehensive loss:
Unrealized holding loss, net (32) (9)
Cumulative translation adjustment (905) (1,336)
-------- --------
161,251 170,891
Less: treasury stock, at cost (0 and 275,911 shares) -- (2,646)
-------- --------
Total stockholders' equity 161,251 168,245
-------- --------
Total liabilities and stockholders' equity $215,835 $219,099
======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of this financial information.
Page 3
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
--------------------
1999 1998
---- ----
(unaudited)
<S> <C> <C>
REVENUES:
Professional fees $76,935 $73,390
Software and hardware products -- 80
------- -------
76,935 73,470
------- -------
COSTS AND EXPENSES:
Project personnel 40,692 34,155
Other project expenses 12,060 10,187
Management and administrative support 18,833 15,529
Goodwill amortization 1,324 905
Restructuring charge 10,522 --
Incentive compensation 4,302 2,005
------- -------
87,733 62,781
------- -------
OPERATING (LOSS) INCOME (10,798) 10,689
------- -------
OTHER INCOME (EXPENSE):
Net investment income 852 696
Interest expense (44) (19)
------- -------
808 677
------- -------
(LOSS) INCOME BEFORE INCOME TAXES (9,990) 11,366
INCOME TAX (BENEFIT) PROVISION (3,320) 4,931
------- -------
NET (LOSS) INCOME $(6,670) $ 6,435
======= =======
(LOSS) EARNINGS PER COMMON SHARE $ (0.16) $ 0.16
======= =======
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 41,007 39,315
======= =======
(LOSS) EARNINGS PER COMMON SHARE
ASSUMING DILUTION $ (0.16) $ 0.15
======= =======
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 41,007 43,042
======= =======
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of this financial information.
Page 4
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
For the
Three Months Ended
March 31,
------------------
1999 1998
---- ----
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $(6,670) $ 6,435
Restructuring charge 10,522 --
Adjustments to reconcile net (loss) income
to net cash from operating activities:
Depreciation and amortization 2,527 2,298
Provisions for receivable valuation allowances
and reserves for possible losses 1,210 177
(Gain) loss on sale of investments (102) 10
Deferred income taxes (1,331) 770
Changes in assets and liabilities:
Receivables (9,114) (12,788)
Purchases of trading securities related
to deferred compensation program (2,177) (1,061)
Refundable income taxes -- 1,146
Other current assets 1,112 (5,091)
Accounts payable (396) 644
Accrued compensation and related costs (4,151) 4,033
Deferred compensation funds from employees 2,177 1,061
Other current liabilities (1,035) 990
Other assets 2,021 (1,544)
------- -------
Net cash used in operating activities (5,407) (2,920)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of available-for-sale securities (1,500) (3,200)
Proceeds from available-for-sale securities 2,070 830
Proceeds from held-to-maturity investments -- 1,320
Capital expenditures, net (685) (1,075)
Net assets of acquired businesses and other assets -- (382)
Capitalized lease obligation -- (3)
------- -------
Net cash used in investing activities (115) (2,510)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 1,480 1,181
Proceeds from employee stock purchase plan 1,164 1,096
Purchase of treasury stock (4,930) --
------- -------
Net cash (used in) provided by
financing activities (2,286) 2,277
------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS 920 (132)
------- -------
DECREASE IN CASH AND CASH EQUIVALENTS (6,888) (3,285)
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD 59,473 42,722
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $52,585 $39,437
======= =======
</TABLE>
The accompanying Notes to Consolidated Financial
Statements are an integral part of this financial information.
Page 5
<PAGE>
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 March 31, 1999,
the consolidated statements of operations for the three months
ended March 31, 1999 and 1998, and the consolidated statements of
cash flows for the three months ended March 31, 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 March 31, 1999 and for all
periods presented. All adjustments made have been of a normal
recurring nature. Certain information and footnote disclosure
normally included in the financial statements prepared in
accordance with generally accepted accounting principles have
been condensed or omitted. The Company believes that the
disclosures included are adequate and provide a fair presentation
of interim period results. Interim financial statements are not
necessarily indicative of financial position or operating results
for an entire year. It is suggested that these interim financial
statements be read in conjunction with the audited financial
statements and the notes thereto included in the Company's
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.
Page 6
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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. Revenue
from licensing of software is recognized upon delivery of the
product. The Company does not presently have any significant
maintenance and support contracts for software licensed to
clients.
CASH AND CASH EQUIVALENTS--The Company considers all highly liquid
investments readily convertible into cash (with original
maturities of three months or less) to be cash equivalents. These
short-term investments are carried at cost plus accrued interest,
which approximates market.
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 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.
COST IN EXCESS OF NET ASSETS OF ACQUIRED BUSINESSES--The excess of
cost over the fair market value of the net identifiable assets of
businesses acquired (goodwill) is amortized on a straight-line
basis, typically over a five-year period.
SOFTWARE DEVELOPMENT COSTS--The Company capitalizes certain
software development costs once technological feasibility is
established in accordance with Statement of Financial Accounting
Standards (SFAS) No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed." Amortization
of software costs is the greater of the amount computed using the
(a) ratio of current revenues to the total current and
anticipated future revenues or (b) the straight-line method over
the estimated economic life of the product.
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 operations. The functional currencies
for the Company's foreign subsidiaries are their local
currencies.
Page 7
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
FAIR VALUE OF FINANCIAL INSTRUMENTS--The carrying values of
current assets and liabilities and long-term receivables
approximated their fair values at March 31, 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.
Accordingly, the Company recognizes no compensation expense for
its stock option plan or employee stock purchase plan.
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 March 31, 1999, options to purchase 8.6 million shares of
common stock were outstanding and options to purchase an
additional 1.8 million shares of common stock were available for
grant under the Technology Solutions Company 1996 Stock Incentive
Plan.
NOTE 5 -- CAPITAL STOCK
During the quarter ended March 31, 1999, 480,000 shares of the
Company's outstanding Common Stock were repurchased for $4.9
million under a 2,000,000 share repurchase program announced in
November 1998.
Page 8
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 6 -- (LOSS) EARNINGS PER COMMON SHARE
The Company discloses basic and diluted (loss) earnings per share
in the consolidated statements of operations under the provisions
of SFAS No. 128, "Earnings Per Share." (Loss) earnings per common
share assuming dilution is computed by dividing net (loss) income
by the weighted average number of common shares outstanding
during each period presented, including common equivalent shares
arising from the assumed exercise of stock options, where
appropriate. (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, including the three-for-two stock
split effected August 10, 1998.
<TABLE>
<CAPTION>
Reconciliation of Basic and Diluted (Loss) Earnings Per Share
- --------------------------------------------------------------
For the Three Months For the Three Months
Ended Ended
March 31, 1999 March 31, 1998
------------------------ -----------------------
Per Per
Net Common Net Common
(Loss) Shares(a) Share Income Shares Share
---- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Basic
(Loss)
Earnings
Per Share $(6,670) 41,007 $(0.16) $6,435 39,315 $0.16
====== =====
Effect of
Stock
Options -- -- -- 3,727
------- ------ ------ ------
Diluted
(Loss)
Earnings
Per Share $(6,670) 41,007 $(0.16) $6,435 43,042 $0.15
======= ====== ====== ====== ====== =====
</TABLE>
(a) Since the Company incurred a net loss for the three months
ended March 31, 1999, there were no adjustments for the
effect of stock options as the adjustments would have been
antidilutive.
Page 9
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 7 -- COMPREHENSIVE (LOSS) 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 a full set of general-purpose financial statements. The
Company's comprehensive (loss) income was as follows:
<TABLE>
<CAPTION>
For the Three
Months Ended March 31,
----------------------
1999 1998
---- ----
<S> <C> <C>
Net (Loss) Income $(6,670) $6,435
Accumulated Other Comprehensive Income (Loss):
Unrealized Holding (Losses) Gains of
Available-for-Sale Securities, Net of Tax (23) 65
Cumulative Translation Adjustment, Net of Tax 431 (224)
------- -----
Other Comprehensive Income (Loss) 408 (159)
------- ------
Total Comprehensive (Loss) Income $(6,262) $6,276
======= ======
</TABLE>
Page 10
<PAGE>
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 (ES) and Enterprise Customer Management
(ECM). Each serves the Company's customers in the U.S. and
international markets. The Company believes that a structure
based on these focused business segments addresses its clients'
needs for very specialized industry and systems knowledge and
allows its employees the flexibility and opportunity to grow and
develop. Each business segment develops its own specific
methodologies, tools, project management plans, best practice and
benchmark information and templates. The ES business segment
provides IT consulting and business services that help clients in
implementing third-party application software packages, cost
controls and related services to implement strategic change in an
organization. The ES business segment includes the following five
areas of business focus, or "practice areas" - Enterprise
Applications and Supply Chain Management, Innovation Technology
Group, Change and Learning Technologies, Financial Services
and OrTech Solutions. The ECM business segment provides IT
consulting and strategic business consulting services that help
clients improve operations, transform customer relationships and
build and enhance customer loyalty.
Segment data also includes disclosing corporate infrastructure
costs separately as Global Core Services (GCS). The objective of
the GCS function is to facilitate local decision-making and
support the autonomy of the 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 include
these general office expenses, as well as goodwill and other
amortization expenses.
There are no intersegment revenues. The Company evaluates the
performance of its segments and allocates resources to them based
on revenues, operating income and receivables.
Page 11
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The table below presents information about the reported revenue,
operating (loss) income and receivables of TSC for the three
months ended March 31, 1999 and 1998.
<TABLE>
<CAPTION>
Three Months Ended Global Core Consolidated
March 31, 1999 ES ECM Services(a) Total
- ------------------------- ------- ------- ------------ ----------
<S> <C> <C> <C> <C>
Revenues $46,204 $30,731 $ -- $ 76,935
Operating income (loss) $ 6,407 $ 7,189 $(24,394)(b) $(10,798)
Receivables $44,867 $36,929 $ -- $ 81,796
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Global Core Consolidated
March 31, 1998 ES ECM Services(a) Total
- ------------------------- ------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues $50,376 $23,094 $ -- $73,470
Operating income (loss) $15,822 $ 5,191 $(10,324) $10,689
Receivables $43,991 $21,157 $ -- $65,148
</TABLE>
(a)Operating income includes goodwill amortization of $1,324 and $905 and other
amortization expense of $270 and $274 for the three months ended
March 31, 1999 and 1998, respectively.
(b)Operating loss includes a restructuring charge of $10,522.
The following is revenue and long-lived asset information by
geographic area:
<TABLE>
<CAPTION>
Three Months Ended United Foreign Consolidated
March 31, 1999 States Subsidiaries Total
- ------------------------- -------- ------------ ------------
<S> <C> <C> <C>
Revenues $ 67,801 $9,134 $ 76,935
Identifiable assets $213,781 $2,054 $215,835
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended United Foreign Consoldiated
March 31, 1998 States Subsidiaries Total
- -------------------------- -------- ------------ ------------
<S> <C> <C> <C>
Revenues $ 66,403 $7,067 $ 73,470
Identifiable assets $181,868 $4,694 $186,562
</TABLE>
Foreign revenue is based on the country in which the legal
subsidiary is domiciled. Revenue from no single foreign country
was material to the consolidated revenues of the Company.
Page 12
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 9 -- OTHER EVENTS
On March 30, 1999, the Company announced that it was making a
number of changes to its business operations and as a result the
Company recorded a restructuring charge of $10.5 million
associated with those changes and the severance of approximately
300 people, primarily consulting personnel. Additionally, the
Company announced that it would be filing, with the U.S. Internal
Revenue Service, a request for a ruling that a proposed spin-off
of the Company's ECM business segment would qualify as a non-
taxable distribution for U.S. federal income tax purposes. The
spin-off of the ECM business segment may be preceded by a public
offering of shares of common stock representing a minority
interest in a subsidiary of the Company to be formed for the
purpose of holding the assets of the ECM business.
Page 13
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Three Months Ended March 31, 1999 Compared With Three Months
Ended March 31, 1998
Consolidated net revenues for the quarter ended March 31, 1999
increased 5 percent to $76.9 million compared with $73.5 million
for the same period last year. Net revenues from the Enterprise
Solutions (ES) business contributed $46.2 million during the
quarter ended March 31, 1999 compared to $50.4 million in the
prior period, a decrease of 8 percent. This decrease was
partially due to a decline in the demand for certain practice
areas of the ES 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
vendors, such as, PeopleSoft and Baan. Net revenues from the
Enterprise Customer Management (ECM) business contributed $30.7
million during the quarter ended March 31, 1999 compared to $23.1
million in the prior period, an increase of 33 percent. This
increase was due to the continued growth of the Company's ECM
business as ECM clients have shown an increased demand for
consulting services which provide integrated customer service
solutions.
Project personnel costs for the quarter ended March 31, 1999,
which represent mainly professional salaries and benefits,
increased to $40.7 million from $34.2 million for the same period
last year, an increase of 19 percent. The increase was mainly due
to an increase in average professional headcount of 8 percent and
an increase in average professional salary of 7 percent. Project
personnel costs as a percentage of net revenues increased to
53 percent for the quarter ended March 31, 1999 from 46 percent
for the same period last year due to lower staff utilization and
the decline in ES revenues. To reduce these costs and improve
utilization, the Company recorded a restructuring charge (as
discussed further in this section) which included costs to
streamline and refocus the ES business.
Other project expenses consist of nonbillable expenses directly
incurred for client projects and business development including
recruiting fees, sales and marketing expenses, personnel training
and provisions for valuation allowances and reserves for
potential losses on continuing projects. Other project expenses
for the quarter ended March 31, 1999 were $12.1 million, compared
with $10.2 million in the comparable period last year, an
increase of $1.9 million, or 18 percent. The increase in other
project expenses primarily included the following: an increase of
$1.1 million in domestic hiring, training, communication and
computer expenses associated with increased average headcount; an
increase in the provision for valuation allowances and reserves
for potential losses of $1.0 million; and an increase in
international costs of $0.5 million associated with travel,
marketing and business development expenses. These increases were
partially offset by a decrease of $0.6 million in domestic
practice area development including marketing, business
development, travel and sales commissions. Other project expenses
as a percentage of net revenues increased to 16 percent for the
quarter ended March 31, 1999 from 14 percent for the same period
last year mainly as a result of the items mentioned above.
Page 14
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Management and administrative support costs increased
$3.3 million to $18.8 million for the quarter ended March 31,
1999 from $15.5 million for the same period last year, an
increase of 21 percent. Approximately $2.2 million of this
increase was attributable to the increase in Global Core Service
costs over last year. The increase in these costs versus the same
period last year included: increased expenses in the internal
systems and human resources areas of $1.0 million; higher
marketing expenses of $0.4 million as a result of increased
corporate marketing efforts; and an increase of $1.0 million of
international expenses to support our international expansion.
These costs were slightly offset by a net decrease in various
other costs of $0.2 million including corporate legal, finance
and investor relations costs. The Company also incurred an
additional $1.1 million of management and administrative costs
associated primarily with increased regional management and
practice area support personnel. These costs primarily included
additional domestic regional management and practice area support
personnel of $0.6 million; international growth of $0.3 million;
and various other domestic management and administrative expenses
of $0.2 million, which include items such as practice area
marketing, recruiting, sales and other expenses.
Goodwill amortization increased to $1.3 million for the quarter
ended March 31, 1999 compared to $0.9 million for the same period
last year. This increase reflects the effect of the earn-out
payments made during the seven months ended December 31, 1998
related to the acquisitions of The Bentley Company, Inc. and
Aspen Consultancy Ltd.
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.
Incentive compensation of $4.3 million was accrued during the
quarter ended March 31, 1999 compared to $2.0 million for the
same period last year. Incentive compensation as a percentage of
net revenues increased to 6 percent for the quarter ended March
31, 1999 compared to 3 percent for the same period last year. The
increase was due to an increase in the bonus accrual for non-vice
president personnel, as well as the ECM business performing at
better than expected performance targets. In addition, incentive
compensation for the quarter ended March 31, 1998 was under the
Company's May 31, 1998 fiscal year end compensation targets,
based on ten months of performance, whereas incentive
compensation for the quarter ended March 31, 1999 was based on
three months of performance. The Company expects to continue to
accrue incentive compensation throughout the 1999 calendar year.
Page 15
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Consolidated operating loss was $10.8 million for the quarter
ended March 31, 1999 compared with consolidated operating income
of $10.7 million in the prior period, due to the reasons outlined
above. Excluding the restructuring charge, consolidated operating
loss was $0.3 million during the quarter ended March 31, 1999.
Operating income from the ES business was $6.4 million during the
quarter ended March 31, 1999 compared to $15.8 million in the
prior period, a decrease of 60 percent. This decrease was mainly
due to lower staff utilization, lower billing rates and a
decrease in the demand for certain practice areas in the ES
business. Operating income from the ECM business was $7.2 million
during the quarter ended March 31, 1999 compared to $5.2 million
in the prior period, an increase of 38 percent. This increase was
primarily due to an increase in billing rates and the increased
demand in ECM services, which was consistent with higher
revenues, offset in part by investments in product development
and expansion into Australia.
GCS costs for the quarter ended March 31, 1999 were $24.4 million
compared to $10.3 million in the prior period, an increase of 136
percent. The increase in GCS costs for the quarter ended March
31, 1999 is further described above in the discussion of
management and administrative support costs. Also included in
this increase were the restructuring charge of $10.5 million and
higher goodwill expenses. Excluding the restructuring charge, GCS
costs were $13.9 million for the quarter ended March 31, 1999, an
increase of 34 percent over the prior period.
Net investment income for the quarter ended March 31, 1999 was
$0.8 million compared to $0.7 million for the same period a year
ago. The increase is a result of gains recorded from the sale of
available-for-sale securities.
The Company's effective tax rate for the quarter ended March 31,
1999 was a 33 percent benefit compared to a 43 percent provision
for the same period a year ago. The rate for the quarter ended
March 31, 1999 was unusually low due to a portion of the foreign
restructuring charge being generated in lower tax-rate
jurisdictions. As the restructuring charge accounted for the pre-
tax loss, the consolidated effective tax rate was lower this
period than in the prior period.
Weighted average number of common shares outstanding increased
primarily due to the exercise of stock options and the issuance
of shares under the Company's employee stock purchase plan,
partially offset by the repurchase of treasury 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 adjustments would have been antidilutive.
On March 30, 1999, the Company announced that it would be filing,
with the U.S. Internal Revenue Service, a request for a ruling
that a proposed spin-off of the Company's ECM business segment
would qualify as a non-taxable distribution for U.S. federal
income tax purposes. The spin-off of the ECM business segment may
be preceded by a public offering of shares of common stock
representing a minority interest in a subsidiary of the Company
to be formed for the purpose of holding the assets of the ECM
business.
Page 16
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $5.4 million and $2.9
million for the quarters ended March 31, 1999 and 1998,
respectively. Net cash used in operating activities for the
quarter ended March 31, 1999 was due to the net loss and an
increase in receivables, offset by the restructuring charge.
The Company's significant amounts of cash, cash equivalents and
marketable securities have provided ample liquidity to handle the
Company's current cash requirements.
Net cash used in investing activities was $0.1 million for the
quarter ended March 31, 1999. The Company purchased $1.5 million
of available-for-sale securities and received $2.1 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 and
other equity investments.
Capital expenditures for the quarter ended March 31, 1999 were
$0.7 million. Capital expenditures may continue at the current
rate throughout the 1999 calendar year. The Company currently has
no material commitments for capital expenditures.
The Company has a $10.0 million unsecured line of credit facility
(the "Facility") with Bank of America National Trust and Savings
Association (Bank of America). The agreement expires October
4, 1999. At the Company's election, loans made under the Facility
bear interest at either the Bank of America reference rate or the
applicable Eurodollar interest rate plus 0.75 percent. The unused
line fee is 0.125 percent of the unused portion of the
commitment. The Facility requires, among other things, the
Company to maintain certain financial ratios. As of March 31,
1999, the Company was in compliance with these financial ratio
requirements. As of March 31, 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 is effective for financial statements
issued for periods ending after June 15, 1999. SFAS No. 133
requires that all derivative instruments be recorded on the
balance sheet at their fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is
designated as part of a hedge transaction and, if it is, the type
of hedge transaction. The Company anticipates that, due to its
limited use of derivative instruments, the adoption of SFAS No.
133 will not have a significant effect on the Company's results
of operations or its financial position.
Page 17
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
OTHER MATTERS
The Year 2000 issue is a general term used to address a class of
problems which are caused by the inability of computer programs
to recognize various date values around January 1, 2000. This
class of problems could result in a system failure or
miscalculations causing disruptions of operations such as, among
others, a temporary inability to process transactions, send
invoices, or engage in similar normal business activities.
The Company has conducted an assessment of its computer
information systems and has determined the nature and extent of
the work required to ensure that its internal systems are Year
2000 compliant. The majority of the software used by the Company
has been purchased as packaged software. A minimal customization
practice has been followed to support a more direct transition
from an older version of a packaged software application to a
newer version of the same application. The Company's internal
systems can be grouped in two principal categories - its
accounting and human resources software and its legacy systems
that perform a variety of processes. With respect to the suite of
software products licensed by the Company and relied upon in the
administration of accounting and human resources functions, which
was licensed by the Company in the first quarter of its 1997
fiscal year, the licensor has indicated that the version
currently employed by the Company will need to have patches
applied in order for the software package to be Year 2000
compliant. The Company intends to apply the presently available
patches for this purpose in the near-term, and plans also to
apply future patches to address the Year 2000 issue as they are
made available. Based on currently available information, the
Company believes the expense associated with these efforts will
not be material. The Company expects that updates and
enhancements to this software package will be installed and
operational prior to January 1, 2000, and intends to seek
assurances from the licensor to the effect that these updates and
enhancements will result in the software package becoming Year
2000 compliant. The Company expects that additional issues
concerning Year 2000 compliance will be reported by the licensor
to the Company and updates will be provided by the licensor. The
Company has received the most recent updates and enhancements
pursuant to a software support service agreement presently in
place with the licensor, an agreement which is in effect and the
Company does not currently intend to terminate. Provided that the
licensor gives such assurances concerning the updates and
enhancements to its software product suite, the Company does not
expect that it will incur additional expense aside from the cost
of the software support service agreement in order to bring its
accounting and human resources software package into Year 2000
compliance.
Other important internal business processes of the Company, such
as time and expense reporting and labor distribution, are
performed by legacy systems that are not Year 2000 compliant. In
accordance with previously established plans to integrate these
functions with the accounting and human resources software
described above and to upgrade these systems with the intent of
Page 18
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
improving the Company's ability to manage its increasingly
multi-national operations, the Company presently plans to replace
these legacy systems in calendar year 1999, both to address the
Year 2000 issue and to attempt to achieve business benefits. The
Company estimates that the cost associated with replacing these
systems, excluding labor costs, will be less than $0.3 million,
and has provided for the replacement of these systems in its
operating and capital budgets for calendar year 1999.
With the exception of the time and expense application software
distributed to field personnel, vendors of the standard software
packages have been contacted and patches and/or newer versions of
the applications have been secured. Distribution of the patches
and newer versions of the software will occur in the second and
third quarters of the calendar year 1999.
Based on presently available information, the Company believes
that any necessary compliance efforts concerning its internal
systems will not have a material adverse effect on its business,
operating results and financial condition. However, if compliance
efforts of which the Company is not currently aware are required
and are not completed on time, or if the cost of any required
updating, modification or replacement of the Company's
information systems exceeds the Company's estimates, the Year
2000 issue could have a material adverse impact on the Company's
business, operating results and financial condition.
In addition to the Company's internal systems, the Company relies
on third party vendors in the conduct of its business. For
example, third party vendors handle the payroll function for the
Company, and the Company also relies on the services of
telecommunication companies, banks, utilities, and commercial
airlines, among others. The Company has sought assurances from
its material vendors and suppliers that there will be no
interruption of service as a result of the Year 2000 issue, and
to the extent such assurances have not been given, the Company is
devising contingency plans to mitigate the effects on the conduct
of the Company's business in the event the Year 2000 issue
results in the unavailability of services. There can be no
assurance that any contingency plans developed by the Company
will prevent any such service interruption on the part of one or
more of the Company's third party suppliers from having a
material adverse effect on the Company's business, operating
results and financial condition. In addition, the failure on the
part of the accounting systems of the Company's clients due to
the Year 2000 issue could result in a delay in the payment of
invoices issued by the Company for services and expenses. A
failure of the accounting systems of a significant number of the
Company's clients would have a material adverse effect on the
Company's business, operating results and financial condition.
The Company has generally refrained from performing Year 2000
remediation services for its clients. It is possible, however,
that former, present and future clients could assert that certain
services performed by the Company from time to time involve or
are related to the Year 2000 issue. The Company has recommended,
implemented and customized various third party
Page 19
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
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 20
<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, 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 21
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
PART II. OTHER INFORMATION
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 March 31,
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 22
<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 4th day of May 1999.
TECHNOLOGY SOLUTIONS COMPANY
Date: May 4, 1999 By: /s/ TIMOTHY P. DIMOND
Timothy P. Dimond
Chief Financial Officer
Page 23
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- ------------
10 Employment Agreement of Jack N. Hayden
27 Financial Data Schedule
Page 24
EXHIBIT 10
AGREEMENT
Technology Solutions Company, a Delaware corporation
doing business as TSC, and Jack N. Hayden ("Hayden") enter
into this agreement ("Agreement") as of February 26, 1999.
WHEREAS, Hayden has been employed by TSC since 1992 in
various positions and pursuant to several employment
agreements.
WHEREAS, on January 19, 1996, Hayden executed his
current employment agreement ("Employment Agreement") in
which TSC agreed to employ him as an Executive Vice
President.
WHEREAS, Hayden resigned his position as Executive Vice
President effective August 5, 1998, and entered into a
letter of understanding ("Letter") pursuant to which he
agreed, among other things, to continue to provide advisory
services to TSC as a part-time employee. The Letter provided
further that Hayden would terminate his employment with TSC
on February 28, 1999.
WHEREAS, Hayden and TSC have now agreed that he shall
not terminate his employment with TSC.
NOW THEREFORE, in consideration of the agreements and
covenants contained in this Agreement, TSC and Hayden agree
as follows:
1. Hayden will not terminate his employment with TSC
effective February 28, 1999.
2. Hayden will continue his part time employment pursuant
to the Letter until April 1, 1999 and on that date commence
his full-time employment pursuant to the Employment
Agreement subject to the following amendments:
(a) Hayden's position shall be changed to Group President.
(b) Hayden's new base salary shall be $480 thousand per
annum.
Technology Solutions Company Jack N. Hayden
By: John T. Kohler JACK N. HAYDEN
Position: President & CEO_
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 52,585
<SECURITIES> 26,973
<RECEIVABLES> 81,796
<ALLOWANCES> 5,284
<INVENTORY> 0
<CURRENT-ASSETS> 184,539
<PP&E> 22,695
<DEPRECIATION> 13,859
<TOTAL-ASSETS> 215,835
<CURRENT-LIABILITIES> 54,584
<BONDS> 0
0
0
<COMMON> 413
<OTHER-SE> 160,838
<TOTAL-LIABILITY-AND-EQUITY> 215,835
<SALES> 0
<TOTAL-REVENUES> 76,935
<CGS> 0
<TOTAL-COSTS> 86,523
<OTHER-EXPENSES> (852)
<LOSS-PROVISION> 1,210
<INTEREST-EXPENSE> 44
<INCOME-PRETAX> (9,990)
<INCOME-TAX> (3,320)
<INCOME-CONTINUING> (6,670)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,670)
<EPS-PRIMARY> (0.16)
<EPS-DILUTED> (0.16)
</TABLE>
