<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, 2000
Commission file number 0-19433
[LOGO]
Technology Solutions Company
Incorporated in the State of Delaware
Employer Identification No. 36-3584201
205 North Michigan Avenue
Suite 1500
Chicago, Illinois 60601
(312) 228-4500
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 28, 2000, there were outstanding 44,163,415
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, 2000 and December 31, 1999 3
Consolidated Statements of Operations
for the Three Months Ended
March 31, 2000 and 1999 4
Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 2000 and 1999 5
Notes to Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 12
Part II
OTHER INFORMATION
Item 6 18
SIGNATURES 19
EXHIBIT INDEX 20
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Page 2
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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
------
March 31, December 31,
2000 1999
--------- -----------
(unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 43,131 $ 81,002
Marketable securities 19,034 17,826
Receivables, less allowance for
doubtful receivables of $2,699 and $3,715 25,079 24,036
Deferred income taxes 8,755 9,969
Refundable income taxes 6,598 --
Other current assets 10,941 4,664
-------- --------
Total current assets 113,538 137,497
COMPUTERS, FURNITURE AND EQUIPMENT, NET 3,356 4,116
GOODWILL 4,216 4,446
LONG-TERM RECEIVABLES AND OTHER 3,088 2,788
NET ASSETS OF DISCONTINUED OPERATIONS -- 74,462
-------- --------
Total assets $124,198 $223,309
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 1,983 $ 2,995
Accrued compensation and related costs 11,215 18,453
Deferred compensation 12,098 10,322
Restructuring and other accruals 5,611 12,708
Other current liabilities 5,531 5,220
------- -------
Total current liabilities 36,438 49,698
------- -------
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 -- 44,064,023 and 43,354,725 441 434
Capital in excess of par value 120,897 110,455
(Accumulated deficit) and retained earnings (33,421) 63,704
Accumulated other comprehensive income (loss):
Unrealized holding loss, net (162) (131)
Cumulative translation adjustment 5 (851)
-------- --------
Total stockholders' equity 87,760 173,611
-------- --------
Total liabilities and stockholders' equity $124,198 $223,309
======== ========
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 OPERATIONS
(In thousands, except per share data)
For the Three
Months Ended
March 31,
------------------
2000 1999
------- -------
(unaudited)
REVENUES $33,182 $46,204
------- -------
COSTS AND EXPENSES:
Project personnel 16,113 26,242
Other project expenses 5,154 8,294
Management and administrative support 9,227 14,029
Goodwill amortization 230 72
Restructuring and other charges 4,701 10,522
Incentive compensation 2,113 2,468
------- -------
37,538 61,627
------- -------
OPERATING LOSS (4,356) (15,423)
------- -------
OTHER INCOME (EXPENSE):
Net investment income 1,124 871
Interest expense (8) (63)
------ -----
1,116 808
------ -----
LOSS FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES (3,240) (14,615)
INCOME TAX BENEFIT (1,299) (5,337)
------ ------
LOSS FROM CONTINUING OPERATIONS (1,941) (9,278)
INCOME FROM DISCONTINUED
OPERATIONS (net of income taxes) -- 2,608
------- -------
NET LOSS $(1,941) $(6,670)
======= =======
BASIC AND DILUTED NET (LOSS) EARNINGS
PER COMMON SHARE:
CONTINUING OPERATIONS $ (0.04) $ (0.22)
DISCONTINUED OPERATIONS -- 0.06
------- -------
NET LOSS PER COMMON SHARE $ (0.04) $ (0.16)
======= =======
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 43,803 41,007
======= =======
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
Three Months Ended
March 31,
-------------------
2000 1999
------- --------
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,941) $(6,670)
Restructuring and other charges 4,701 10,522
Adjustments to reconcile net loss to net
cash from operating activities:
Depreciation and amortization 1,330 2,527
Provisions for receivable valuation
allowances and reserves for possible losses 323 1,210
Gain on sale of investments -- (102)
Deferred income taxes 402 (1,331)
Changes in assets and liabilities:
Receivables (2,305) (9,114)
Purchases of trading securities related
to deferred compensation program (1,777) (2,177)
Refundable income taxes (1,879) --
Other current assets (6,408) 1,112
Accounts payable (1,004) (396)
Accrued compensation and related costs (7,229) (4,151)
Deferred compensation 1,777 2,177
Other current liabilities (8,553) (1,035)
Other assets (300) 2,021
------- ------
Net cash used in operating activities (22,863) (5,407)
------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of available-for-sale securities -- (1,500)
Proceeds from available-for-sale securities 500 2,070
Capital expenditures (611) (685)
Additional cash contribution to
eLoyalty Corporation (20,000) --
Cash used by discontinued operations (901) --
------- ------
Net cash used in investing activities (21,012) (115)
------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 4,481 1,480
Proceeds from employee stock purchase plan 1,265 1,164
Purchase of treasury stock -- (4,930)
------- ------
Net cash provided by (used in)
financing activities 5,746 (2,286)
------- ------
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS 258 920
------- ------
DECREASE IN CASH AND CASH EQUIVALENTS (37,871) (6,888)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 81,002 59,473
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $43,131 $52,585
======= =======
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 March 31, 2000,
the consolidated statements of operations for the three months
ended March 31, 2000 and 1999 and the consolidated statements of
cash flows for the three months ended March 31, 2000 and 1999
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, 2000 and for all
periods presented. All adjustments made, except those related to
restructuring and other charges, 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 Annual
Report on Form 10-K for the year ended December 31, 1999 filed
with the United States Securities and Exchange Commission (SEC)
on March 23, 2000.
Certain reclassifications have been made to prior periods to
conform to the current period classification.
NOTE 2 - THE COMPANY
TSC delivers business benefits through eBusiness consulting and
systems integration services that help clients transform their
businesses, their internal business processes and their
relationships with customers, suppliers, distributors and
employees and help these organizations realize the full benefits
of information technology throughout the enterprise. The
Company's clients generally are located throughout the United
States and in Europe.
On February 15, 2000, TSC distributed the common stock of
eLoyalty Corporation (eLoyalty) owned by the Company to the
Company's stockholders (the Spin-Off). eLoyalty operated within
the Company prior to the Spin-Off and is now a separate, publicly
traded company (see Note 7). Accordingly, the consolidated
statements of operations for the three months ended March 31,
1999 have been reclassified to report these operations as
discontinued operations. The consolidated statements of cash
flows for the three months ended March 31, 1999 have not been
restated on a discontinued operations basis. There were no
discontinued operations in the Company's results of operations
for the quarter ended March 31, 2000, as the Company has provided
for the estimated loss on distribution in its results of
operations for the year ended December 31, 1999.
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TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
===========================================================================
NOTE 3 - STOCK OPTIONS
As of March 31, 2000, options to purchase 10.8 million shares of
common stock were outstanding and options to purchase an
additional 3.9 million shares of common stock were available for
grant under the Technology Solutions Company 1996 Stock Incentive
Plan.
IMPACT OF THE FEBRUARY 15, 2000 SPIN-OFF ON TSC OPTIONS - At the
time of the eLoyalty Spin-Off (see Note 2), TSC options were
adjusted to reflect the impact of the Spin-Off. TSC option
holders (excluding eLoyalty employees and directors who are not
also a director of TSC) with options granted prior to June 22,
1999 had each of their pre-June 22, 1999 options converted into
both an adjusted TSC option and an eLoyalty option on a one-for-
one basis. The original strike price of the TSC option was split
into a strike price for (1) the adjusted TSC option and (2) the
eLoyalty option based on the relative trading values of the two
companies' common stock immediately after the Spin-Off.
Immediately after the Spin-Off, TSC stock traded at 16.5278
percent of the combined value of one share of TSC stock and one
share of eLoyalty stock. Accordingly, the strike price for the
adjusted TSC option was set at 16.5278 percent of the original
TSC option strike price and the eLoyalty option strike price was
set at 83.4722 percent of the original TSC option strike price.
TSC option holders (excluding eLoyalty employees and directors
who are not also a director of TSC) with options granted
subsequent to June 21, 1999 did not receive any eLoyalty options
in respect of post-June 21, 1999 TSC options but such options
were adjusted by reducing the strike price and increasing the
number of shares subject thereto. The adjustments were
calculated based on the relative trading values of TSC and
eLoyalty common stock immediately after the Spin-Off. The
adjusted strike price was determined by multiplying the original
strike price by 16.5278 percent. The adjusted number of shares
subject to each such option was determined by dividing the
original number of shares subject to the option by 16.5278
percent.
eLoyalty employees and directors who held TSC options forfeited
their TSC options at the time of the spin-off and, in return,
received additional eLoyalty options.
In all cases, the TSC and eLoyalty option adjustments described
above were calculated to (1) preserve the intrinsic value of the
option as well as (2) preserve the ratio of the exercise price to
the fair market value of the stock subject to the option.
As a net result of these adjustments, the number of shares of TSC
common stock subject to options increased by 2.9 million at the
time of the Spin-Off.
NOTE 4 - LOSS PER COMMON SHARE
The Company discloses basic and diluted loss per share in the
consolidated statements of operations under the provisions of
Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings Per Share." Loss per common share assuming dilution is
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Page 7
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TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
===========================================================================
computed by dividing net loss by the weighted average number of
common shares outstanding during each period presented, plus the
dilutive effect of common equivalent shares arising from the
assumed exercise of stock options using the treasury stock
method. Common equivalent shares of 4,461 and 1,533 were not
included in the diluted loss per share calculation as they were
antidilutive for the three months ended March 31, 2000 and 1999,
respectively. Loss per common share is computed by dividing net
loss 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.
Reconciliation of Basic and Diluted Loss
Per Share for the Three Months Ended
-----------------------------------------------------------
(In thousands, except per share data)
March 31, 2000 March 31, 1999
------------------------- -------------------------
(unaudited) (unaudited)
Per Per
Net Common Net Common
Loss Shares Share Loss Shares Share
------ ------ ------- ------- ------ -------
Basic Loss
Per Share $(1,941) 43,803 $(0.04) $(6,670) 41,007 $(0.16)
====== ======
Effect of
Stock
Options -- -- -- --
------- ------ ------- ------
Diluted Loss
Per Share $(1,941) 43,803 $(0.04) $(6,670) 41,007 $(0.16)
======= ====== ====== ======= ====== ======
NOTE 5 - COMPREHENSIVE INCOME (LOSS)
The Company's comprehensive income (loss) was as follows:
For the Three
(In thousands) Months Ended
March 31,
--------------------
2000 1999
------- -------
Net Loss $(1,941) $(6,670)
Other Comprehensive Income (Loss):
Net Unrealized Holding Losses on
Available-for-Sale Securities, net of tax (31) (23)
Cumulative Translation Adjustment 13 431
------- -------
Other Comprehensive (Loss)Income (18) 408
------- -------
Total Comprehensive Loss $(1,959) $(6,262)
======= =======
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Page 8
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TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
===========================================================================
NOTE 6 - BUSINESS SEGMENTS
Effective January 1, 2000, the Company began reporting its
operations under three segments: Digital Enterprise Consulting
(DEC); Knowledge Management; and application service provider
services (ASP+). TSC serves customers in U.S. and international
markets. TSC believes that offering these three bands of services
allows the Company to serve clients in their information
technology and eBusiness needs. This structure also allows the
Company's employees the flexibility and opportunity to grow and
develop. The three areas work in an integrated manner that
develops, shares and cross references methodologies, tools,
project management plans, benchmark information, templates and
best practices overall. The DEC segment provides information
technology consulting and business consulting services that help
clients in developing and implementing all aspects of their
electronic business capabilities. The DEC segment includes TSC's
Enterprise Resource Planning (ERP) implementation practice. The
Knowledge Management segment is focused on harnessing the
intellectual capital of client companies. TSC's recently
developed segment, ASP+, provides clients comprehensive hosting
services for integrated eBusiness solutions that include multiple
applications and legacy systems. The financial information
presented below for the three months ended March 31, 1999 has
been adjusted to reflect the Company's current three reportable
segments.
There are no intersegment revenues. The Company currently
evaluates the performance of its segments and allocates resources
to them based on revenues and receivables.
The table below presents information about the reported revenues
and receivables of TSC (in thousands) for the three months ended
March 31, 2000 and 1999.
For the Three Months Knowledge
Ended March 31, 2000 DEC Management ASP+ Total
- -------------------- -------- ----------- ----- --------
Revenues $ 29,185 $ 3,642 $ 355 $ 33,182
Receivables $ 23,672 $ 3,736 $ 370 $ 27,778
For the Three Months Knowledge
Ended March 31, 1999 DEC Management ASP+ Total
- -------------------- -------- -------- ----- ---------
Revenues $ 42,436 $ 3,768 $ -- $ 46,204
Receivables $ 39,927 $ 4,940 $ -- $ 44,867
==========================================================================
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TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
===========================================================================
The following is revenue and long-lived asset information by
geographic area (in thousands):
For the Three Months United Foreign
Ended March 31, 2000 States Subsidiaries Total
- -------------------- -------- ------------ --------
Revenues $ 30,961 $ 2,221 $ 33,182
Identifiable assets $122,565 $ 1,633 $124,198
For the Three Months United Foreign
Ended March 31, 1999 States Subsidiaries Total
- --------------------- ------- ------------ --------
Revenues $ 44,398 $ 1,806 $ 46,204
Identifiable assets $129,537 $ 7,452 $136,989
Foreign revenue is based on the country in which the legal
subsidiary is domiciled. No single foreign country's revenue was
material to the consolidated revenues of the Company.
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TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
===========================================================================
NOTE 7 - OTHER EVENTS
RESTRUCTURING AND OTHER CHARGES - During the quarter ended March
31, 2000, the Company recorded a pre-tax charge of $4.7 million
for the closure of its Latin American operations. During the
first quarter of 2000, the Company used approximately $3.7
million of this charge for cash payments of $2.1 million related
to severance costs for approximately 40 employees, lease
terminations and professional fees and $1.6 million in asset
write-offs. The remaining accrual balance of $1.0 million as of
March 31, 2000 is expected to be utilized by the fourth quarter
of 2000.
During the quarter ended December 31, 1999, the Company recorded
$7.0 million in restructuring and other charges associated with
lease terminations of $3.0 million, former executive severance
costs of $1.8 million, CourseNet Systems, Inc. (CourseNet)
acquisition costs of $1.3 million and write-offs of other assets
of $0.9 million. As of March 31, 2000, the Company used $4.1
million of these restructuring and other charges as a result of
cash payments of $1.8 million (paid during the quarter ended
March 31, 2000) for executive severance costs and $2.3 million in
asset and other write-offs. The remaining accrual balance of $2.9
million as of March 31, 2000 relates to lease terminations which
the Company is contractually obligated to pay through 2004.
In addition, on March 30, 1999, the Company announced that it was
making a number of changes to its business operations and, as a
result, the Company recorded a restructuring charge of $10.5
million associated with those changes and the severance of
employees, primarily consulting personnel. 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. To date, the Company has used $10.0 million of the
restructuring accrual as a result of cash paid of $8.4 million
($0.6 million during the quarter ended March 31, 2000) associated
with the severance of approximately 270 employees and $1.6
million in asset write-offs and other costs. The remaining
accrual balance of $0.5 million as of March 31, 2000 is expected
to be utilized by the second quarter of 2000. The restructuring
and other accruals balance is considered adequate to cover the
remaining committed restructuring actions.
SPIN-OFF - On February 15, 2000 TSC successfully completed the
Spin-Off. Previously, on January 27, 2000, TSC received a
favorable ruling from the Internal Revenue Service that the Spin-
Off would be a tax free distribution of all of the Company's
eLoyalty shares to TSC's shareholders. The total net assets
contributed to eLoyalty at the Spin-Off was $95.2 million which
consisted of current assets of $103.0 million, non-current assets
of $18.7 million, current liabilities of $28.0 million and other
comprehensive loss of $1.5 million.
TSC also has provided a short-term guarantee for a $10.0 million
revolving credit facility entered into by eLoyalty with Bank of
America National Trust and Savings Association. TSC received a
fee from eLoyalty. The guarantee will terminate on December 30,
2000.
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Page 11
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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, 2000 Compared with Three Months
Ended March 31, 1999
On February 15, 2000 TSC successfully completed the Spin-Off.
Accordingly, this report discusses the TSC consolidated
statements of operations with eLoyalty's operations presented on
a discontinued operations basis for the quarter ended March 31,
1999. For the quarter ended March 31, 2000, there were no
discontinued operations in the Company's results of operations,
as the Company has provided for the estimated loss on
distribution in its results of operations for the year ended
December 31, 1999.
Consolidated net revenues for the quarter ended March 31, 2000
decreased 28 percent to $33.2 million compared with $46.2 million
for the same period last year. This decrease was mainly due to a
decline in the demand for Enterprise Resource Planning (ERP)
solutions, as well as a decline in the demand for certain TSC
services as a result of clients facing budgetary restraints as
they continued to address Year 2000 issues during the first
quarter. The decline in the ERP business has been evidenced by a
reduction in new license sales by package software vendors such
as PeopleSoft and Baan. Historically, TSC's main revenues
consisted mainly of core ERP solutions. Prospectively, the
Company expects its other eBusiness solution offerings to
experience greater future growth rates than core ERP.
Project personnel costs, which represent mainly professional
salaries and benefits, decreased to $16.1 million for the quarter
ended March 31, 2000 from $26.2 million for the same period last
year, a decrease of 39 percent. The decrease was mainly due to a
decrease in professional headcount. Project personnel costs as a
percentage of net revenues decreased to 49 percent for the
quarter ended March 31, 2000 from 57 percent for the same period
last year as a result of improved staff utilization. The Company
reduced project personnel costs and improved utilization by
streamlining and refocusing its business, which resulted in a
restructuring charge during the first quarter of 1999 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 quarter ended March 31, 2000 were
$5.2 million, compared with $8.3 million in the comparable period
last year, a decrease of $3.1 million, or 38 percent. The
decrease in other project expenses primarily included the
following: a decrease of $2.3 million in domestic hiring,
training, communication and computer expenses due to a decrease
in headcount; a decrease of $0.7 million in the provision for
valuation allowances and reserves for potential losses; and a
decrease in international costs of $0.6 million. These decreases
were offset by an increase in various other costs of $0.5 million
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Page 12
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TECHNOLOGY SOLUTIONS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
==========================================================================
including practice area development costs. Other project expenses
as a percentage of net revenues decreased to 16 percent for the
quarter ended March 31, 2000 from 18 percent for the same period
last year.
Management and administrative support costs decreased
$4.8 million to $9.2 million for the quarter ended March 31, 2000
from $14.0 million for the same period last year, a decrease of
34 percent. The decrease was mainly due to a decrease of $4.6
million in corporate infrastructure or Global Core Service (GCS)
costs over the same period last year. This decrease in GCS costs
included the following: a decrease in the internal systems and
human resources areas of $1.4 million and a decrease in corporate
recruiting expenses of $0.9 million as a result of a reduction in
headcount; a decrease in domestic office costs of $0.8 million
due to the closing of several offices; a decrease in legal
expenses of $0.6 million; a decrease in marketing expenses of
$0.4 million; and a decrease in various other costs of $0.5
million including corporate finance, accounting and investor
relations costs. As a result of the Spin-Off, TSC and eLoyalty
entered into a Shared Services Agreement pursuant to which TSC
provides to eLoyalty certain administrative services. The
Company has charged these services to eLoyalty since the Spin-Off
and $0.9 million of the decrease in GCS costs discussed above
reflects this charge. In addition, practice area management and
administrative costs decreased by $0.2 million. This decrease
primarily resulted from a decrease in international expenses of
$0.5 million and a decrease in various other domestic management
and administrative costs of $0.5 million, which include items
such as practice area marketing, recruiting and other expenses.
These decreases were offset by an increase in practice area
support personnel of $0.8 million.
Goodwill amortization increased to $0.2 million for the quarter
ended March 31, 2000 compared to $0.1 million for the same period
last year. This increase resulted from the CourseNet Systems,
Inc. (CourseNet) acquisition.
During the quarter ended March 31, 2000, the Company recorded a
pre-tax charge of $4.7 million for the closure of its Latin
American operations. During the first quarter of 2000, the
Company used approximately $3.7 million of this charge for cash
payments of $2.1 million related to severance costs for
approximately 40 employees, lease terminations and professional
fees and $1.6 million in asset write-offs. The remaining accrual
balance of $1.0 million as of March 31, 2000 is expected to be
utilized by the fourth quarter of 2000.
During the quarter ended December 31, 1999, the Company recorded
$7.0 million in restructuring and other charges associated with
lease terminations of $3.0 million, former executive severance
costs of $1.8 million, CourseNet
acquisition costs of $1.3 million and write-offs of other assets
of $0.9 million. As of March 31, 2000, the Company used $4.1
million of these restructuring and other charges as a result of
cash payments of $1.8 million (paid during the quarter ended
March 31, 2000) for executive severance costs and $2.3 million in
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Page 13
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
==========================================================================
asset and other write-offs. The remaining accrual balance of $2.9
million as of March 31, 2000 relates to lease terminations which
the Company is contractually obligated to pay through 2004.
In addition, on March 30, 1999, the Company announced that it was
making a number of changes to its business operations and, as a
result, the Company recorded a restructuring charge of $10.5
million associated with those changes and the severance of
employees, primarily consulting personnel. 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. To date, the Company has used $10.0 million of the
restructuring accrual as a result of cash paid of $8.4 million
($0.6 million during the quarter ended March 31, 2000) associated
with the severance of approximately 270 employees and $1.6
million in asset write-offs and other costs. The remaining
accrual balance of $0.5 million as of March 31, 2000 is expected
to be utilized by the second quarter of 2000.
Incentive compensation of $2.1 million was accrued during the
quarter ended March 31, 2000 compared to $2.5 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, 2000 compared to 5 percent for the same period last year. The
increase as a percentage of net revenues was primarily a result of
the Company achieving more of its internal performance targets
for the quarter ended March 31, 2000 as compared to the same
period a year ago. The Company expects to continue to accrue
incentive compensation throughout the year.
Consolidated operating loss from continuing operations was
$4.4 million for the quarter ended March 31, 2000 compared with a
consolidating operating loss of $15.4 million in the prior
period, due to the reasons outlined above. The Company's
operating loss for the quarter ended March 31, 2000 included a
charge for the closure of the Latin American operations of
$4.7 million and $1.4 million in administrative costs with
respect to the period prior to the Spin-Off that would have been
charged to eLoyalty if the Shared Services Agreement had been in
effect. The Company's operating loss for the quarter ended March
31, 1999 included restructuring and other charges of $10.5
million. Excluding these charges, operating income for the
quarter ended March 31, 2000 was $1.7 million compared to an
operating loss of $4.9 million for the quarter ended March 31,
1999. This increase was mainly due to the Company's focus on
more profitable operations and improved utilization rates.
Other income and expense for the quarter ended March 31, 2000 was
$1.1 million compared to $0.8 million for the same period a year
ago. The increase is a result of higher cash and cash equivalent
balances during the first half of the quarter ended March 31,
2000 compared to the same period a year ago.
The Company's effective tax rate for the quarter ended March 31,
2000 was a 40 percent benefit compared to a 37 percent benefit
for the same period a year ago. The tax benefit for the quarter
==========================================================================
Page 14
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
==========================================================================
ended March 31, 1999 was lower than in the current quarter since
a portion of the restructuring charges were related to foreign
jurisdictions with lower tax rates.
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
purchase of common stock by two venture capital firms in August
1999.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $22.9 million and $5.4
million for the quarters ended March 31, 2000 and 1999,
respectively. Net cash used in operating activities for the
quarter ended March 31, 2000 included the net loss and other
unfavorable working capital activities, such as refundable income
taxes, other current assets, accrued compensation and related
costs and other current liabilities, offset by restructuring and
other charges.
The Company believes that its cash and cash equivalents and
marketable securities are sufficient to handle the Company's
current cash requirements.
Net cash used in investing activities was $21.0 million for the
quarter ended March 31, 2000. This reflects a $20.0 million
capital contribution to eLoyalty Corporation and $0.9 million of
cash used by discontinued operations. The Company received
$0.5 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 quarter ended March 31, 2000 were
$0.6 million. Capital expenditures may continue at the current
rate throughout the 2000 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 December
30, 2000. At the Company's election, loans made under the
Facility bear interest at either the Bank of America reference
rate or the applicable Eurodollar interest rate plus
0.75 percent. The unused line fee is 0.125 percent of the unused
portion of the commitment. The Facility requires, among other
things, the Company to maintain certain financial ratios. As of
March 31, 2000, the Company was in compliance with these
financial ratio requirements. As of March 31, 2000, no borrowings
had been made under the Facility. In connection with the Spin-
Off, TSC also has provided a short-term guarantee for a $10.0
million revolving credit facility entered into by eLoyalty with
Bank of America. TSC received a fee from eLoyalty. The
guarantee will terminate on December 30, 2000.
==========================================================================
Page 15
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
==========================================================================
NEW ACCOUNTING STANDARDS
On June 15, 1998, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No.
133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133, as amended is effective for financial
statements issued for periods ending after June 15, 2000. SFAS
No. 133 requires that all derivative instruments be recorded on
the balance sheet at their fair value. Changes in the fair value
of derivatives are recorded each period in current earnings or
other comprehensive income, depending on whether a derivative is
designated as part of a hedge transaction and, if it is, the type
of hedge transaction. The Company anticipates that, due to its
limited use of derivative instruments, the adoption of SFAS No.
133 will not have a significant effect on the Company's results
of operations or its financial position.
In December 1999, the United States Securities and Exchange
Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 101,
"Revenue Recognition in Financial Statements," which provides the
SEC's views in applying generally accepted accounting principles
to selected revenue recognition issues. Adoption of SAB No. 101
is required in the second quarter of fiscal year 2000. The
Company does not expect SAB No. 101 to have a material impact on
the Company's consolidated results of operations or financial
position.
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. The Company
has not experienced any significant Year 2000 disruptions and
none of the Company's suppliers or vendors have experienced Year
2000 disruptions that have had a significant impact on the
Company.
The Company has 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. The Company 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.
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
==========================================================================
Page 16
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
==========================================================================
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. 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.
This Form 10-Q includes or may include certain forward-looking
statements that involve risks and uncertainties. This Form 10-Q
contains or may contain certain forward-looking statements
concerning the Company's financial position, business strategy,
budgets, projected costs and plans and objectives of management
for future operations as well as other statements including words
such as "anticipate," "believe," "plan," "estimate," "expect,"
"intend," and other similar expressions. 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 Annual Report on Form 10-K for the
year ended December 31, 1999 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 17
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
PART II. OTHER INFORMATION
==========================================================================
ITEM 6 - EXHIBITS AND REPORT ON FORM 8-K
(a) See Exhibit Index
(b) Two reports on Form 8-K were filed during
the quarter ended March 31, 2000. The first Report
on Form 8-K was dated January 13, 2000. This report
contained information reported under Item 5 related
to the decision by the Board of Directors of the
Company to distribute the common stock of eLoyalty
Corporation owned by the Company to its
shareholders. The second report filed February 1,
2000 was an amendment to the 8-K filed on
January 13, 2000, which updated Technology Solutions
Company's Operating Results, excluding eLoyalty.
All other items in Part II are either not applicable
to the Company during the quarter ended March 31,
2000, 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 18
<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 15th day of May 2000.
TECHNOLOGY SOLUTIONS COMPANY
Date: May 15, 2000 By: /s/ TIMOTHY P. DIMOND
---------------------
Timothy P. Dimond
Chief Financial Officer
==========================================================================
Page 19
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------------------
27 Financial Data Schedule
===========================================================================
Page 20
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 43,131
<SECURITIES> 19,034
<RECEIVABLES> 27,778
<ALLOWANCES> 2,699
<INVENTORY> 0
<CURRENT-ASSETS> 113,538
<PP&E> 17,760
<DEPRECIATION> 14,404
<TOTAL-ASSETS> 124,198
<CURRENT-LIABILITIES> 36,438
<BONDS> 0
0
0
<COMMON> 441
<OTHER-SE> 87,319
<TOTAL-LIABILITY-AND-EQUITY> 124,198
<SALES> 0
<TOTAL-REVENUES> 33,182
<CGS> 0
<TOTAL-COSTS> 37,215
<OTHER-EXPENSES> (1,124)
<LOSS-PROVISION> 323
<INTEREST-EXPENSE> 8
<INCOME-PRETAX> (3,240)
<INCOME-TAX> (1,299)
<INCOME-CONTINUING> (1,941)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,941)
<EPS-BASIC> (0.04)
<EPS-DILUTED> (0.04)
</TABLE>
