-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KuUcasg9BngRclR4C6JxfcR8401Sy+SfXveR5phfuE8rdMflYcHPsUe+5VqABG52 a99koNzQQKrY8IdJXbBTTw== 0000877645-99-000007.txt : 19990817 0000877645-99-000007.hdr.sgml : 19990817 ACCESSION NUMBER: 0000877645-99-000007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TECHNOLOGY SOLUTIONS COMPANY CENTRAL INDEX KEY: 0000877645 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 363584201 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-19433 FILM NUMBER: 99692237 BUSINESS ADDRESS: STREET 1: 205 N MICHIGAN AVE STREET 2: SUITE 1500 CITY: CHICAGO STATE: IL ZIP: 60601 BUSINESS PHONE: 3122284500 MAIL ADDRESS: STREET 1: 205 NORTH MICHIGAN AVE STREET 2: SUITE 1500 CITY: CHICAGO STATE: IL ZIP: 60601 10-Q 1 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 June 30, 1999 Commission file number 0-19433 [ LOGO ] Technology Solutions Company Incorporated in the State of Delaware Employer Identification No. 36-3584201 205 North Michigan Avenue Suite 1500 Chicago, Illinois 60601 (312) 228-4500 TSC (1) HAS FILED all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) HAS BEEN subject to such filing requirements for the past 90 days. As of July 30, 1999, there were outstanding 41,913,666 shares of TSC Common Stock, par value $.01. TECHNOLOGY SOLUTIONS COMPANY Index to Form 10-Q ================================================================= Part I Page Number ------ FINANCIAL INFORMATION (UNAUDITED) ITEM 1. FINANCIAL STATEMENTS Consolidated Balance Sheets as of June 30, 1999 and December 31, 1998 3 Consolidated Statements of Operations for the Three Months and Six Months Ended June 30, 1999 and 1998 4 Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1999 and 1998 5 Notes to Consolidated Financial Statements 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 16 Part II OTHER INFORMATION Item 4 27 Item 6 27 SIGNATURES 28 EXHIBIT INDEX 29 Page 2 PART I. FINANCIAL INFORMATION =========================================================================== ITEM 1. Financial Statements TECHNOLOGY SOLUTIONS COMPANY CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share data) ASSETS ------ June 30, December 31, 1999 1998 --------- --------- (Unaudited) CURRENT ASSETS: Cash and cash equivalents $ 60,374 $ 59,473 Marketable securities 24,017 25,269 Receivables, less allowance for doubtful receivables of $5,834 and $4,845 84,303 69,212 Deferred income taxes 17,146 15,297 Other current assets 11,218 13,764 ------- ------- Total current assets 197,058 183,015 COMPUTERS, FURNITURE AND EQUIPMENT, NET 7,651 9,372 COST IN EXCESS OF NET ASSETS OF ACQUIRED BUSINESSES 14,630 17,901 LONG-TERM RECEIVABLES AND OTHER 6,583 8,811 -------- -------- Total assets $225,922 $219,099 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: Accounts payable $ 2,864 $ 3,263 Accrued compensation and related costs 29,347 25,184 Deferred compensation 16,482 16,494 Restructuring accrual 3,483 -- Other current liabilities 7,037 5,913 ------ ------ Total current liabilities 59,213 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 - 41,698,359 417 412 Capital in excess of par value 93,765 94,886 Retained earnings 74,187 76,938 Accumulated other comprehensive loss: Unrealized holding loss, net (61) (9) Cumulative translation adjustment (1,599) (1,336) ------- ------ 166,709 170,891 Less: treasury stock, at cost (0 and 275,911 shares) -- (2,646) ------- -------- Total stockholders' equity 166,709 168,245 -------- -------- Total liabilities and stockholders' equity $225,922 $219,099 ======== ======== The accompanying Notes to Consolidated Financial Statements are an integral part of this financial information. Page 3 TECHNOLOGY SOLUTIONS COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) For the Three For the Six Months Ended Months Ended June 30, June 30, ---------------- --------------- 1999 1998 1999 1998 ------- ------- ------- ------ (Unaudited) (Unaudited) REVENUES $78,411 $83,277 $155,346 $156,747 ------- ------- -------- -------- COSTS AND EXPENSES: Project personnel 37,750 38,285 78,442 72,440 Other project expenses 11,445 11,958 23,505 22,145 Management and administrative support 16,308 17,906 35,141 33,435 Goodwill amortization 1,249 972 2,573 1,877 Restructuring charge -- -- 10,522 -- Incentive compensation 5,405 2,400 9,707 4,405 ------ ------ ------- -------- 72,157 71,521 159,890 134,302 ------ ------ ------- -------- OPERATING INCOME (LOSS) 6,254 11,756 (4,544) 22,445 ------ ------ ------- ------- OTHER INCOME (EXPENSE): Net investment income 775 673 1,627 1,369 Interest expense (25) (21) (69) (40) --- --- ------ ----- 750 652 1,558 1,329 --- --- ------ ----- INCOME (LOSS) BEFORE INCOME TAXES 7,004 12,408 (2,986) 23,774 INCOME TAX PROVISION (BENEFIT) 3,085 4,986 (235) 9,917 ------ ------ ------- ------- NET INCOME (LOSS) $3,919 $ 7,422 $(2,751) $13,857 ====== ======= ======= ======= EARNINGS (LOSS) PER COMMON SHARE $ 0.09 $ 0.19 $ (0.07) $ 0.35 ====== ======= ======= ======= WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 41,554 39,855 41,281 39,645 ====== ======= ======= ======= EARNINGS (LOSS) PER COMMON SHARE ASSUMING DILUTION $ 0.09 $ 0.17 $(0.07) $ 0.32 ====== ======= ======= ======= WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING 42,920 43,568 41,281 43,370 ====== ======= ======= ======= The accompanying Notes to Consolidated Financial Statements are an integral part of this financial information. Page 4 TECHNOLOGY SOLUTIONS COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) For the Six Months Ended June 30, ----------------- 1999 1998 ------- ------- (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income $ (2,751) $ 13,857 Restructuring charge 10,522 -- Adjustments to reconcile net income (loss) to net cash from operating activities: Depreciation and amortization 4,898 4,177 Provisions for receivable valuation allowances and reserves for possible losses 2,846 912 (Gain) loss on sale of investments (102) 67 Deferred income taxes (1,982) 2,516 Changes in assets and liabilities: Receivables (18,946) (20,496) Purchases of trading securities related to deferred compensation program 12 (2,681) Refundable income taxes -- 1,202 Other current assets 1,610 (5,949) Accounts payable (332) 1,625 Accrued compensation and related costs 4,373 2,811 Deferred compensation funds from employees (12) 2,681 Other current liabilities (1,573) 4,938 Other assets 1,845 (1,495) ------- ------ Net cash provided by operating activities 408 4,165 ------- ------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of available-for-sale securities (1,500) (5,950) Proceeds from available-for-sale securities 2,820 3,705 Proceeds from held-to-maturity investments -- 1,320 Capital expenditures, net (938) (2,548) Net assets of acquired businesses and other assets -- (382) Capitalized lease obligation -- 4 Net cash provided by ------- ------ (used in) investing activities 382 (3,851) ------- ------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from exercise of stock options 2,164 2,544 Proceeds from employee stock purchase plan 2,132 2,244 Purchase of treasury stock (4,930) -- Net cash (used in) provided ------- ------ by financing activities (634) 4,788 ------- ------ EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 745 (63) ------- ------ INCREASE IN CASH AND CASH EQUIVALENTS 901 5,039 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 59,473 42,722 ------- ------- CASH AND CASH EQUIVALENTS, END OF PERIOD $60,374 $47,761 ======= ======= The accompanying Notes to Consolidated Financial Statements are an integral part of this financial information. Page 5 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 June 30, 1999, the consolidated statements of operations for the three months and six months ended June 30, 1999 and 1998 and the consolidated statements of cash flows for the six months ended June 30, 1999 and 1998 have been prepared by the Company without audit. In the opinion of management, these financial statements include all adjustments necessary to present fairly the financial position, results of operations and cash flows as of June 30, 1999 and for all periods presented. All adjustments made have been of a normal and recurring nature. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. The Company believes that the disclosures included are adequate and provide a fair presentation of interim period results. Interim financial statements are not necessarily indicative of financial position or operating results for an entire year. It is suggested that these interim financial statements be read in conjunction with the audited financial statements and the notes thereto included in the Company's Transition Report on Form 10-K for the seven month transition period ended December 31, 1998 filed with the United States Securities and Exchange Commission (SEC) on March 30, 1999. Certain reclassifications have been made to prior periods to conform to the current period classification. NOTE 2 - THE COMPANY TSC delivers business benefits through consulting and systems integration services that help clients transform customer relationships and improve operations. The Company's clients generally are located throughout the United States and in Europe, Latin America, Canada and Australia. NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION-The accompanying consolidated financial statements include the accounts of the Company and all of its subsidiaries. All significant intercompany transactions have been eliminated. Acquired businesses are included in the results of operations since their acquisition dates. FISCAL YEAR CHANGE-On November 22, 1998, the Company's Board of Directors voted to change the fiscal year of the Company from a fiscal year ending on the thirty-first day of May in each year to a calendar year ending on the thirty-first day of December in each year. REVENUE RECOGNITION-The Company derives substantially all of its revenues from information technology (IT), strategic business and management consulting, systems integration, programming, and packaged software integration and implementation services. The Company recognizes revenue on contracts as work is performed Page 6 TECHNOLOGY SOLUTIONS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) ================================================================= primarily based on hourly billing rates. Out-of-pocket expenses are presented net of amounts billed to clients in the accompanying consolidated statements of operations. Contracts are performed in phases. Losses on contracts, if any, are reserved in full when determined. 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. 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. FAIR VALUE OF FINANCIAL INSTRUMENTS-The carrying values of current assets and liabilities and long-term receivables approximated their fair values at June 30, 1999 and December 31, 1998. Investments pertaining to minor investments in companies for which fair value is not readily available are believed to approximate their carrying amount. Page 7 TECHNOLOGY SOLUTIONS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) ================================================================= STOCK-BASED COMPENSATION-The Company accounts for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. The Company recognizes no compensation expense for its stock option plan or employee stock purchase plan. 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 June 30, 1999, options to purchase 9.6 million shares of common stock were outstanding and options to purchase an additional 0.6 million shares of common stock were available for grant under the Technology Solutions Company 1996 Stock Incentive Plan. eLoyalty Corporation, a wholly owned subsidiary of the Company, has adopted the eLoyalty Corporation 1999 Stock Incentive Plan (the "eLoyalty Plan"). The number of eLoyalty common shares initially available for all grants of awards over the term of the eLoyalty Plan is equal to approximately 12 percent of the aggregate number of eLoyalty common shares that would be issued and outstanding after the Asset Transfer (defined in Note 10) and after giving effect to the purchase of eLoyalty common shares by the unaffiliated investors described in Note 10. On July 1, 1999, options to purchase approximately 89 percent of the number of eLoyalty shares initially available for grant under the eLoyalty Plan were issued to certain Company employees, all of which have an exercise price representing the fair market value of an eLoyalty share on the date of grant. The eLoyalty Plan also provides that, in the event of a spin-off of eLoyalty, substitute options to purchase eLoyalty common shares ("Substitute Options") are available for issuance to holders of those options to purchase the Company's common shares ("Company Options") that were granted prior to June 22, 1999. The number of eLoyalty shares subject to Substitute Options will not exceed the total number of eLoyalty shares that would be distributed in the proposed spin-off with respect to shares of Company common stock equal in number to the shares subject to Company options immediately prior to the spin-off. The terms and conditions of each Substitute Option, such as the term and the schedule of exercisability, shall be the same as those of the Company Option to which the Substitute Option relates. NOTE 5 - CAPITAL STOCK During the quarter ended March 31, 1999, the Company repurchased 480,000 shares of the Company's outstanding Common Stock for $4.9 million under a 2,000,000 share repurchase program announced in November 1998. No shares were purchased during the quarter ended June 30, 1999. Page 8 TECHNOLOGY SOLUTIONS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) ================================================================= NOTE 6 - EARNINGS (LOSS) PER COMMON SHARE The Company discloses basic and diluted earnings (loss) per common share in the consolidated statements of operations under the provisions of SFAS No. 128, "Earnings Per Share." Earnings (loss) per common share assuming dilution is computed by dividing net income (loss) 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. Earnings (loss) per common share is computed by dividing net income (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 Earnings Per Share (In thousands, except per share data) ------------------------------------------------------------- For the Three Months Ended For the Three Months Ended June 30, 1999 June 30, 1998 -------------------------- -------------------------- Net Per Common Net Per Common Income Shares Share Income Shares Share ------ ------ ---------- ------ ------ ---------- Basic Earnings Per Share $3,919 41,554 $0.09 $7,422 39,855 $0.19 ===== ===== Effect of Stock Options -- 1,366 -- 3,713 ------ ------ ------ ------ Diluted Earnings Per Share $3,919 42,920 $0.09 $7,422 43,568 $0.17 ====== ====== ===== ====== ====== ===== Page 9 TECHNOLOGY SOLUTIONS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) =================================================================== Reconciliation of Basic and Diluted (Loss) Earnings Per Share (In thousands, except per share data) ------------------------------------------------------------- For the Six Months Ended For the Six Months Ended June 30, 1999 June 30, 1998 -------------------------- -------------------------- Net Per Common Net Per Common (Loss) Shares Share Income Shares Share ------ ------ ---------- ------ ------ ---------- Basic (Loss) Earnings Per Share $(2,751) 41,281 $(0.07) $13,857 39,645 $0.35 ===== ===== Effect of Stock Options -- -- -- 3,725 ------ ------ ------ ------ Diluted (Loss) Earnings Per Share $(2,751) 41,281 $(0.07) $13,857 43,370 $0.32 ====== ====== ===== ======= ====== ===== Page 10 TECHNOLOGY SOLUTIONS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) ================================================================ NOTE 7 - COMPREHENSIVE INCOME (LOSS) In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 130, "Reporting Comprehensive Income." The Company adopted SFAS No. 130 during the transition period ended December 31, 1998. This statement established new standards for reporting and displaying comprehensive income and its components in the financial statements. The Company's comprehensive income (loss) was as follows: For the Three Months Ended (In thousands) June 30, -------------------------- 1999 1998 ---------- --------- Net Income $3,919 $7,422 Accumulated Other Comprehensive (Loss) Income: Unrealized Holding Losses of Available-for-Sale Securities, Net of Tax (29) -- Cumulative Translation Adjustment,Net of Tax (694) 15 ------ ------ Other Comprehensive (Loss) Income (723) 15 ------ ------ Total Comprehensive Income $3,196 $7,437 ====== ====== For the Six Months Ended (In thousands) June 30, -------------------------- 1999 1998 ---------- --------- Net (Loss) Income $(2,751) $13,857 Accumulated Other Comprehensive (Loss) Income: Unrealized Holding (Losses) Gains of Available-for-Sale Securities, Net of Tax (52) 65 Cumulative Translation Adjustment,Net of Tax (263) (209) ------ ------- Other Comprehensive (Loss) (315) (144) ------- ------- Total Comprehensive (Loss) Income $(3,066) $13,713 ======= ======= Page 11 TECHNOLOGY SOLUTIONS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) ================================================================ NOTE 8 - BUSINESS SEGMENTS The Company is organized into two business segments which each have their own business focus and service offering expertise - Enterprise Solutions (E-Solutions) and eLoyalty. Each serves the Company's customers in the U.S. and international markets. The Company believes that a structure based on these focused business segments addresses its clients' needs for very specialized industry and systems knowledge and allows its employees the flexibility and opportunity to grow and develop. Each business segment develops its own specific methodologies, tools, project management plans, best practice and benchmark information and templates. The E-Solutions business segment 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 E-Solutions business segment has competencies in the areas of Enterprise Resource Planning (ERP); Supply Chain Management; e-business; Knowledge management including data warehousing and business intelligence; and Change and Learning Technologies. The eLoyalty 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 and corporate adjustments separately as corporate and Global Core Services (GCS). The objective of the GCS function is to facilitate local decision-making and support the autonomy of the business segments, practice areas and project managers, while maintaining the internal structure necessary to support TSC's goals. The functional areas within this area include: senior corporate management; accounting; financial reporting; finance; tax; legal; treasury; human resources; employee benefits; marketing; public and investor relations; office operations; recruiting support; training; internal communications; internal technology applications; planning; quality assurance; and insurance. GCS costs also include goodwill amortization. There are no intersegment revenues. The Company evaluates the performance of its segments and allocates resources to them based on revenues, operating income and receivables. Page 12 TECHNOLOGY SOLUTIONS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) ================================================================ The table below presents information about the reported revenue, operating income (loss) and receivables of TSC (in thousands) for the three months and six months ended June 30, 1999 and 1998. Corporate and Three Months Ended Global Core Consolidated June 30, 1999 E-Solutions eLoyalty Services(a) Total - ------------------ ----------- -------- ------------- ------------ Revenues $43,777 $34,634 $ -- $78,411 Operating income $10,281 $ 8,577 $ (12,604) $ 6,254 Receivables $44,217 $45,920 $ -- $90,137 Corporate and Three Months Ended Global Core Consolidated June 30, 1998 E-Solutions eLoyalty Services(a) Total - ------------------ ----------- -------- ------------- ------------ Revenues $57,938 $25,339 $ -- $83,277 Operating income $15,161 $ 5,885 $ (9,290) $11,756 Receivables $47,607 $24,591 $ -- $72,198 (a) Operating results include goodwill amortization of $1,249 and $972 for the three months ended June 30, 1999 and 1998, respectively. Corporate and Six Months Ended Global Core Consolidated June 30, 1999 E-Solutions eLoyalty Services(a) Total - ------------------ ----------- -------- ------------- ------------ Revenues $89,979 $65,367 $ -- $155,346 Operating income (loss) $15,512 $15,766 $ (35,822)(b) $ (4,544) Receivables $44,217 $45,920 $ -- $ 90,137 Corporate and Six Months Ended Global Core Consolidated June 30, 1998 E-Solutions eLoyalty Services(a) Total - ------------------ ----------- -------- ------------- ------------ Revenues $108,313 $48,434 $ -- $156,747 Operating income $26,706 $10,200 $ (14,461) $ 22,445 Receivables $47,607 $24,591 $ -- $ 72,198 (a) Operating results include goodwill amortization of $2,573 and $1,877 for the six months ended June 30, 1999 and 1998,respectively. (b) Operating results includes a restructuring charge of $10,522. Page 13 TECHNOLOGY SOLUTIONS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) ================================================================ The following is revenue and long-lived asset information by geographic area (in thousands): Three Months Ended United Foreign Consolidated June 30, 1999 States Subsidiaries Total - ------------------ -------- ------------ ------------ Revenues $ 69,148 $ 9,263 $ 78,411 Identifiable assets $192,473 $33,449 $225,922 Three Months Ended United Foreign Consolidated June 30, 1998 States Subsidiaries Total - ------------------ -------- ------------ ------------ Revenues $ 76,855 $ 6,422 $ 83,277 Identifiable assets $181,895 $19,840 $201,735 Six Months Ended United Foreign Consolidated June 30, 1999 States Subsidiaries Total - ------------------ -------- ------------ ------------ Revenues $136,949 $18,397 $155,346 Identifiable assets $192,473 $33,449 $225,922 Six Months Ended United Foreign Consolidated June 30, 1998 States Subsidiaries Total - ------------------ -------- ------------ ------------ Revenues $143,258 $13,489 $156,747 Identifiable assets $181,895 $19,840 $201,735 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. Page 14 TECHNOLOGY SOLUTIONS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) ================================================================ NOTE 9 - OTHER EVENTS On March 30, 1999, the Company announced a number of changes to its business operations and, as a result, the Company recorded a restructuring charge of $10.5 million associated with those changes and the severance of approximately 300 people, primarily consulting personnel. The restructuring charge was determined based on a plan prepared at the time the restructuring actions were approved by management and the Board of Directors. During the six months ended June 30, 1999, the Company used $7.0 million of the restructuring accrual as a result of $5.6 million of costs associated with the severance of approximately 240 employees and $1.4 million in asset write-offs and other costs. The restructuring accrual balance is considered adequate to cover the remaining committed restructuring actions. Additionally, the Company filed and received preliminary comments from the U.S. Internal Revenue Service regarding the proposed spin-off of the Company's eLoyalty business segment as a non- taxable distribution for U.S. federal income tax purposes. The Company expects to offer not more than 20 percent of the common shares of eLoyalty in an initial public offering (IPO) during the late fall of 1999, with the proposed tax-free distribution of the remaining eLoyalty shares held by the Company in a spin-off to follow at a later date (See Note 10). NOTE 10 - SUBSEQUENT EVENT On August 13, 1999, the Company sold 500,000 share of Common Stock (the "Company Shares") to unaffiliated investors in a private placement for cash proceeds of approximately $4.5 million. The investors have a single demand registration right with respect to the Company Shares, which expires twelve months after the date of the purchase. In addition, the investors have committed to purchase for $8.4 million approximately 5 percent of the number of common shares (the "eLoyalty Shares") of the Company's wholly owned subsidiary, eLoyalty Corporation, that would be issued and outstanding after the Company completes the proposed transfer to eLoyalty of the assets and liabilities of the business historically conducted as the Company's ECM division (the "Asset Transfer"). The agreement with the investors provides that the prosposed purchase of eLoyalty Shares is subject to the receipt of a favorable revenue ruling from the Internal Revenue Service with respect to the proposed tax-free spin-off of eLoyalty to the Company's stockholders, the consummation of the Asset Transfer and certain other customary conditions. The Company has agreed, pursuant to the agreement, to use commercially reasonable efforts to effect the Asset Transfer as soon as is reasonably practicable after receipt of a favorable revenue ruling. In the event the Asset Transfer is not so consummated and the invesors do not purchase the eLoyalty Shares, the Company could become obligated to make a liquidated damage payment of $1.2 million to the investors. Alternatively, if the investors purchase the eLoyalty Shares and the proposed initial public offering of eLoyalty common shares or the proposed spin-off of eLoyalty does not occur within one year after the date of the agreement, eLoyalty could become obligated to repurchase the eLoyalty Shares then held by the investors at a premium totaling $1.2 million over the price paid by the investors for such shares. The agreement further provides that, after the purchase of the eLoyalty Shares, a representative of each of the two investor groups will be appointed to the eLoyalty Board of Directors. Page 15 TECHNOLOGY SOLUTIONS COMPANY ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ================================================================= RESULTS OF OPERATIONS Three Months Ended June 30, 1999 Compared With Three Months Ended June 30, 1998 Consolidated net revenues for the quarter ended June 30, 1999 decreased 6 percent to $78.4 million compared with $83.3 million for the same period last year. Net revenues from the Enterprise Solutions (E-Solutions) business contributed $43.8 million during the quarter ended June 30, 1999 compared to $57.9 million in the prior period, a decrease of 24 percent. This decrease was mainly due to a decline in the demand for certain services of the E- Solutions business as a result of clients facing budgetary restraints as they focus on Year 2000 issues. This has been evidenced by a reduction in new license sales by the package software vendors such as PeopleSoft and Baan. Net revenues from the eLoyalty business contributed $34.6 million during the quarter ended June 30, 1999 compared to $25.3 million in the prior period, an increase of 37 percent. This improvement was due to an increased demand for eLoyalty consulting services. Project personnel costs, which represent mainly professional salaries and benefits, decreased slightly to $37.8 million for the quarter ended June 30, 1999 from $38.3 million for the same period last year, a decrease of 1 percent. The decrease was mainly due to a decrease in average professional headcount. Project personnel costs as a percentage of net revenues increased to 48 percent for the quarter ended June 30, 1999 from 46 percent for the same period last year due to lower staff utilization and the decline in E-Solutions revenues. 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 June 30, 1999 were $11.4 million, compared with $11.9 million in the comparable period last year, a decrease of $0.5 million, or 4 percent. The decrease in other project expenses primarily included the following: a decrease of $0.9 million in domestic hiring, training, communication and computer expenses due to a decrease in average headcount and a decrease of $0.6 million in domestic practice area development including marketing, business development, travel and sales commissions. These decreases were offset by an increase in the provision for valuation allowances and reserves for potential losses of $0.9 million and an increase in international costs of $0.2 million associated with travel, marketing and business development expenses. Other project expenses as a percentage of net revenues remained virtually unchanged from the same period last year at approximately 14 percent. Management and administrative support costs decreased $1.6 million to $16.3 million for the quarter ended June 30, 1999 from $17.9 million for the same period last year, a decrease of 9 percent. Approximately $0.6 million of this decrease was attributable to the decrease in Global Core Service (GCS) costs over last year. The decrease in GCS costs versus the same period last year included: decreased expenses in the internal systems and human resources areas of $0.4 million; a decrease in corporate recruiting expenses of $0.4 million as a result of a reduction Page 16 TECHNOLOGY SOLUTIONS COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) ================================================================= in headcount; and a net decrease in various other costs of $0.3 million including corporate legal, finance and investor relations costs. These increases were offset by higher marketing expenses of $0.5 million as a result of increased corporate marketing efforts. The Company also had a decrease of $1.0 million of practice area management and administrative costs. This decrease primarily included a reduction of international expenses of $0.7 million and a reduction in various other domestic management and administrative expenses of $0.5 million, which included items such as recruiting, sales and other expenses. These decreases were partially offset by an increase in regional management and practice area support personnel of $0.2 million. Goodwill amortization increased to $1.2 million for the quarter ended June 30, 1999 compared to $1.0 million for the same period last year. This increase reflects the effect of the earn-out payments made during the seven month transition period ended December 31, 1998 related to the acquisitions of The Bentley Company, Inc. and Aspen Consultancy Ltd. Incentive compensation of $5.4 million was accrued during the quarter ended June 30, 1999 compared to $2.4 million for the same period last year. Incentive compensation as a percentage of net revenues increased to 7 percent for the quarter ended June 30, 1999 compared to 3 percent for the same period last year. The increase was due to an increase in the incentive compensation expense for non-vice president personnel to improve employee retention, as well as an increase in vice president incentive compensation expense as a result of the Company meeting its performance target for the quarter. The Company expects to continue to accrue incentive compensation throughout the 1999 calendar year. Consolidated operating income was $6.3 million for the quarter ended June 30, 1999 compared with consolidated operating income of $11.8 million in the prior period due to the reasons outlined above. Operating income from the E-Solutions business was $10.3 million during the quarter ended June 30, 1999 compared to $15.2 million in the prior period, a decrease of 32 percent. This decrease was mainly due to a decrease in the demand for certain services in the E-Solutions business, lower staff utilization and lower billing rates. Operating income from the eLoyalty business was $8.6 million during the quarter ended June 30, 1999 compared to $5.9 million in the prior period, an increase of 46 percent. This increase was primarily due to an increase in billing rates and the increased demand for eLoyalty services, which was consistent with its higher revenues, offset in part by investments in product development. Corporate and GCS costs for the quarter ended June 30, 1999 were $12.6 million compared to $9.3 million in the prior period, an increase of 36 percent. The increase in corporate and GCS costs primarily represents a change in the corporate adjustment for incentive compensation. (Note that all corporate adjustments are included in the GCS category.) For the quarter ended June 30, 1998, the Company did not meet certain internal performance targets and, accordingly, recorded a corporate adjustment to reduce the consolidated incentive compensation accrual. However, the Company fully met its internal performance targets in the corresponding 1999 period and, therefore, no incentive compensation adjustment was needed. Because the 1998 period Page 17 TECHNOLOGY SOLUTIONS COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) ================================================================= included an adjustment to reduce consolidated incentive compensation expense while the 1999 period included no such adjustment, the 1999 corporate and GCS total costs increased relative to the corresponding 1998 costs. In addition, goodwill amortization for the quarter ended June 30, 1999 increased from the prior period due to the earn-out payments made related to the acquisitions of The Bentley Company, Inc. and Aspen Consultancy Ltd. These increases were partially offset by the decrease in GCS costs described above in the discussion of management and administrative support costs. Net investment income for the quarter ended June 30, 1999 was $0.8 million compared to $0.7 million for the same period a year ago. The increase is a result of higher cash and cash equivalent balances for the quarter ended June 30, 1999 compared to the same period a year ago. The Company's effective tax rate for the quarter ended June 30, 1999 was 44 percent compared to 40 percent for the same period a year ago. The rate for the quarter ended June 30, 1999 was higher than the prior period due to a larger proportion of pre-tax earnings being generated in foreign, high tax-rate jurisdictions. Weighted average number of common shares outstanding increased primarily due to the exercise of stock options and the issuance of shares under the Company's employee stock purchase plan. Weighted average number of common and common equivalent shares outstanding decreased because the assumed exercise of certain stock options were considered to be antidilutive, and therefore, were excluded from the computation of diluted earnings per share. RESULTS OF OPERATIONS Six Months Ended June 30, 1999 Compared With Six Months Ended June 30, 1998 Consolidated net revenues for the six months ended June 30, 1999 was $155.3 million, essentially flat with the $156.7 million reported in the same period last year. Net revenues from the E- Solutions business contributed $90.0 million during the six months ended June 30, 1999 compared to $108.3 million in the prior period, a decrease of 17 percent. This decrease was partially due to a decline in the demand for certain services of the E-Solutions business as a result of clients facing budgetary restraints as they focus on Year 2000 issues. This has been evidenced by a reduction in new license sales by the package software vendors such as PeopleSoft and Baan. Net revenues from the eLoyalty business contributed $65.4 million during the six months ended June 30, 1999 compared to $48.4 million in the prior period, an increase of 35 percent. This improvement was due to an increased demand for eLoyalty consulting services. Project personnel costs, which represent mainly professional salaries and benefits, increased to $78.4 million for the six months ended June 30, 1999 from $72.4 million for the same period last year, an increase of 8 percent. The increase was mainly due to an increase in average professional salaries, partially offset by a decrease in professional headcount. Project personnel costs Page 18 TECHNOLOGY SOLUTIONS COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) ================================================================= as a percentage of net revenues increased to 50 percent for the six months ended June 30, 1999 from 46 percent for the same period last year due to lower staff utilization and the decline in E-Solutions revenues. To reduce these costs and improve utilization, the Company streamlined and refocused the E- Solutions business, which resulted in a restructuring charge of $10.5 million (as discussed further in this section). Other project expenses consist of nonbillable expenses directly incurred for client projects and business development 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 six months ended June 30, 1999 were $23.5 million, compared with $22.1 million in the comparable period last year, an increase of $1.4 million, or 6 percent. The increase in other project expenses primarily included the following: an increase in the provision for valuation allowances and reserves for potential losses of $1.9 million and an increase in international costs of $0.7 million associated with travel, marketing and business development expenses. These increases were partially offset by a decrease of $1.2 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 15 percent for the six months ended June 30, 1999 from 14 percent for the same period last year mainly as a result of the items mentioned above. Management and administrative support costs increased $1.7 million to $35.1 million for the six months ended June 30, 1999 from $33.4 million for the same period last year, an increase of 5 percent. Approximately $1.6 million of this increase was attributable to the increase in Global Core Service (GCS) costs over last year. The increase in GCS costs versus the same period last year included: increased expenses in the internal systems and human resources areas of $0.6 million; higher marketing expenses of $0.9 million as a result of increased corporate marketing efforts; and a net increase in various other costs of $0.3 million including corporate legal, finance and investor relations costs. These costs were slightly offset by a decrease in corporate recruiting expenses of $0.2 million as a result of a reduction in headcount. The Company also incurred a slight increase of $0.1 million in practice area management and administrative costs. These costs primarily included additional domestic regional management and practice area support personnel of $0.8 million offset by a decrease in international expenses of $0.4 million and a decrease in various other domestic management and administrative expenses of $0.3 million, which include items such as practice area marketing, recruiting, sales and other expenses. Goodwill amortization increased to $2.6 million for the six months ended June 30, 1999 compared to $1.9 million for the same period last year. This increase reflects the effect of the earn- out payments made during the seven month transition period ended December 31, 1998 related to the acquisitions of The Bentley Company, Inc. and Aspen Consultancy Ltd. On March 30, 1999, the Company announced that it was making a Page 19 TECHNOLOGY SOLUTIONS COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) ================================================================= 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 $9.7 million was accrued during the six months ended June 30, 1999 compared to $4.4 million for the same period last year. Incentive compensation as a percentage of net revenues increased to 6 percent for the six months ended June 30, 1999 compared to 3 percent for the same period last year. The increase was primarily due to an increase in the bonus accrual for non-vice president personnel, as well as an increase in vice president incentive compensation expense as a result of the Company meeting its performance targets for the six months ended June 30, 1999. The Company expects to continue to accrue incentive compensation throughout the 1999 calendar year. Consolidated operating loss was $4.5 million for the six months ended June 30, 1999 compared with consolidated operating income of $22.4 million in the prior period, due to the reasons outlined above. Excluding the restructuring charge, consolidated operating income was $6.0 million during the six months ended June 30, 1999. Operating income from the E-Solutions business was $15.5 million during the six months ended June 30, 1999 compared to $26.7 million in the prior period, a decrease of 42 percent. This decrease was mainly due to a decrease in the demand for certain services in the E-Solutions business, lower staff utilization and lower billing rates. Operating income from the eLoyalty business was $15.8 million during the six months ended June 30, 1999 compared to $10.2 million in the prior period, an increase of 55 percent. This increase was primarily due to an increase in billing rates and the increased demand for eLoyalty services, which was consistent with its higher revenues, offset in part by investments in product development. Corporate and GCS costs for the six months ended June 30, 1999 were $35.8 million compared to $14.5 million in the prior period, an increase of 148 percent. The increase in corporate and GCS costs primarily represents the restructuring charge of $10.5 million as well as a change in the corporate adjustment for incentive compensation. For the six months ended June 30, 1998, the Company did not meet certain internal performance targets and, accordingly, recorded a corporate adjustment to reduce the consolidated incentive compensation accrual. However, the Company fully met its internal performance targets in the corresponding 1999 period and, therefore, no incentive compensation adjustment was needed. In addition, goodwill amortization for the six months ended June 30, 1999 increased from the prior period due to the earn-out payments related to the acquisitions of The Bentley Company, Inc. and Aspen Consultancy Ltd. Finally, GCS costs also increased due to an increase in management and administrative support costs, as previously described. Excluding the restructuring charge, GCS costs were $25.3 million for the six months ended June 30, 1999, an increase of 75 percent over the prior period. Net investment income for the six months ended June 30, 1999 was $1.6 million compared to $1.3 million for the same period a year ago. The increase is a result of higher cash and cash equivalent Page 20 TECHNOLOGY SOLUTIONS COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) ================================================================= balances for the six months ended June 30, 1999 compared to the same period a year ago. The Company's effective tax rate for the six months ended June 30, 1999 was an 8 percent benefit compared to a 42 percent provision for the same period a year ago. The rate for the six months ended June 30, 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 share adjustments for the effect of stock options as the assumed exercise of options would have been antidilutive. On March 30, 1999, the Company filed and received preliminary comments from the U.S. Internal Revenue Service regarding the proposed spin-off of the Company's eLoyalty business segment as a non-taxable distribution for U.S. federal income tax purposes. The Company expects to offer not more than 20 percent of the common shares of eLoyalty in an initial public offering (IPO) during the late fall of 1999, with the proposed tax-free distribution of the remaining eLoyalty shares held by the Company in a spin-off to follow at a later date. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities was $0.4 million and $4.2 million for the six months ended June 30, 1999 and 1998, respectively. Operating cash flow for the six months ended June 30, 1999 included the restructuring charge and other favorable working capital activities. This benefit was offset by an increase in net receivables of $18.9 million mainly due to the growth in eLoyalty's revenues as well as cash outlays related to the restructuring charge. The Company's significant amounts of cash, cash equivalents and marketable securities provide ample liquidity to handle the Company's current cash requirements. Net cash provided by investing activities was $0.4 million for the six months ended June 30, 1999. The Company purchased $1.5 million of available-for-sale securities and received $2.8 million from the sale of available-for-sale securities. The proceeds from available-for-sale securities were transferred to cash and cash equivalents and reinvested in ongoing business activities. Capital expenditures for the six months ended June 30, 1999 were $0.9 million. Capital expenditures may continue at the current rate throughout the 1999 calendar year. The Company currently has no material commitments for capital expenditures. Page 21 TECHNOLOGY SOLUTIONS COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) ================================================================= The Company has a $10.0 million unsecured line of credit facility (the "Facility") with Bank of America National Trust and Savings Association (Bank of America). The agreement expires October 4, 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 June 30, 1999, the Company was in compliance with these financial ratio requirements. As of June 30, 1999, no borrowings had been made under the Facility. NEW ACCOUNTING STANDARDS On June 15, 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 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. SUBSEQUENT EVENTS On August 13, 1999, the Company sold 500,000 share of Common Stock (the "Company Shares") to unaffiliated investors in a private placement for cash proceeds of approximately $4.5 million. The investors have a single demand registration right with respect to the Company Shares, which expires twelve months after the date of the purchase. In addition, the investors have committed to purchase for $8.4 million approximately 5 percent of the number of common shares (the "eLoyalty Shares") of the Company's wholly owned subsidiary, eLoyalty Corporation, that would be issued and outstanding after the Company completes the proposed transfer to eLoyalty of the assets and liabilities of the business historically conducted as the Company's ECM division (the "Asset Transfer"). The agreement with the investors provides that the prosposed purchase of eLoyalty Shares is subject to the receipt of a favorable revenue ruling from the Internal Revenue Service with respect to the proposed tax-free spin-off of eLoyalty to the Company's stockholders, the consummation of the Asset Transfer and certain other customary conditions. The Company has agreed, pursuant to the agreement, to use commercially reasonable efforts to effect the Asset Transfer as soon as is reasonably practicable after receipt of a favorable revenue ruling. In the event the Asset Transfer is not so consummated and the investors do not purchase the eLoyalty Shares, the Company could become obligated to make a liquidated damage payment of $1.2 million to the investors. Alternatively, if the investors purchase the eLoyalty Shares and the proposed initial public offering of eLoyalty common shares or the proposed spin-off of eLoyalty does not occur within one year after the date of the agreement, eLoyalty could become obligated to repurchase the eLoyalty Shares then held by the investors at a premium totaling $1.2 million over the price paid by the investors for such shares. The agreement further provides that, after the purchase of the eLoyalty Shares, a representative of each of the two investor groups will be appointed to the eLoyalty Board of Directors. OTHER MATTERS The Year 2000 issue is a general term used to address a class of problems which are caused by the inability of computer programs to recognize various date values around January 1, 2000. This class of problems could result in a system failure or miscalculations causing disruptions of operations such as, among others, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. The Company has conducted an assessment of its computer information systems by inventorying related hardware and software systems and has determined the nature and extent of the work required to ensure that its internal systems are Year 2000 compliant. The majority of the software used by the Company has been purchased as packaged software. A minimal customization practice has been followed to support a more direct transition from an older version of a packaged software application to a newer version of the same application. The Company's internal systems can be grouped into three principal categories - its accounting and human resources software, its legacy systems that perform a variety of processes, and its office automation software products. With respect to the suite of software products licensed by the Company and relied upon in the administration of accounting and human resources functions, which was licensed by the Company in the first quarter of its 1997 fiscal year, the licensor has indicated that the version currently employed by the Company is not currently Year 2000 compliant and, therefore, the Page 22 TECHNOLOGY SOLUTIONS COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) ================================================================= Company has replaced the production and development versions with newer ones that are Year 2000 compliant. The Company plans to apply future patches to address the Year 2000 issue as they are made available. Based on currently available information, the Company believes the expense associated with these efforts will not be material. The Company expects that additional issues concerning Year 2000 compliance will be reported by the licensor to the Company and updates will be provided by the licensor. The Company has received the most recent updates and enhancements pursuant to a software support service agreement presently in place with the licensor, an agreement which is in effect and that the Company does not currently intend to terminate. Provided that the licensor gives such assurances concerning the updates and enhancements to its software product suite, the Company does not expect that it will incur additional expense aside from the cost of the software support service agreement in order to bring its accounting and human resources software package into Year 2000 compliance. Other important internal business processes of the Company, such as time and expense reporting and labor distribution, (and their associated back-office functions), are performed by legacy systems that have been re-written to be Year 2000 compliant. The remaining office automation products have been inventoried and each vendor has been contacted for the product's Year 2000 status. All identified products have either been upgraded with patches, entirely replaced, determined to be Year 2000 compliant, or shown to possess no date-associated functions within the product. The Company estimates that it is nearly completed with the compliance project effort, and expects that the identified systems will be compliant as of December 30, 1999. The Company estimates that the cost associated with replacing/upgrading these systems, excluding labor costs, will be less than $0.3 million, and has provided for the replacement of these systems in its operating and capital budgets for calendar year 1999. Vendors of the standard 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 third and fourth 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 Page 23 TECHNOLOGY SOLUTIONS COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) ================================================================= airlines, among others. The Company has sought assurances from its material vendors and suppliers that there will be no interruption of service as a result of the Year 2000 issue, and to the extent such assurances have not been given, the Company is finalizing contingency plans to mitigate the effects on the conduct of the Company's business in the event the Year 2000 issue results in the unavailability of services. There can be no assurance that any contingency plans developed by the Company will prevent any such service interruption on the part of one or more of the Company's third party suppliers from having a material adverse effect on the Company's business, operating results and financial condition. In addition, the failure on the part of the accounting systems of the Company's clients due to the Year 2000 issue could result in a delay in the payment of invoices issued by the Company for services and expenses. A failure of the accounting systems of a significant number of the Company's clients would have a material adverse effect on the Company's business, operating results and financial condition. The Company has generally refrained from performing Year 2000 remediation services for its clients. It is possible, however, that former, present and future clients could assert that certain services performed by the Company from time to time involve, or are related to, the Year 2000 issue. The Company has recommended, implemented and customized various third party software packages for its clients, and to the extent that such software programs may not be Year 2000 compliant, the Company could be subjected to claims as a result thereof. Since the Company's inception in 1988, it also has designed and developed software and systems for its clients. Due to the large number of such engagements undertaken by the Company over the years, there can be no assurance that all such software programs and systems will be Year 2000 compliant, which could also result in the assertion of claims against the Company. The Company's policy has been to endeavor to secure provisions in its client contracts that, among other things, disclaim implied warranties, limit the duration of the Company's express warranties, relate the Company's liability to the amount of fees paid by the client to the Company in connection with the project, and disclaim any liability arising from third party software that is implemented, customized or installed by the Company. There can be no assurance that the Company will be able to secure contractual protections in agreements concerning future projects, or that any contractual protections secured by the Company in agreements governing pending and completed projects will dissuade the other party thereto from asserting claims against the Company with respect to the Year 2000 issue. Due to the complexity of the Year 2000 issue, upon any failure of critical client systems or processes that may be directly or indirectly connected or related to systems or software designed, developed, customized or implemented by the Company as described above, the Company may be subjected to claims, regardless of whether the failure is related to the services provided by the Company. There can be no assurance that the Company would be able to establish that it did not cause or contribute to the failure of a critical client system or process. There also can be no assurance that the contractual protections, if any, secured by Page 24 TECHNOLOGY SOLUTIONS COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) ================================================================= 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 25 TECHNOLOGY SOLUTIONS COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) ================================================================= This Form 10-Q includes or may include certain forward-looking statements that involve risks and uncertainties. This Form 10-Q contains certain forward-looking statements concerning the Company's financial position, business strategy, budgets, projected costs and plans and objectives of management for future operations as well as other statements including words such as "anticipate," "believe," "plan," "estimate," "expect," "intend," and other similar expressions. Although the Company believes its expectations reflected in such forward-looking statements are based on reasonable assumptions, readers are cautioned that no assurance can be given that such expectations will prove correct and that actual results and developments may differ materially from those conveyed in such forward-looking statements. Important factors that could cause actual results to differ materially from the expectations reflected in the forward-looking statements in this Form 10-Q include, among others, the pace of technological change, the Company's ability to manage growth and attract and retain employees, general business and economic conditions in the Company's operating regions, market conditions and competitive and other factors, all as more fully described in the Company's Transition Report on Form 10-K for the transition period ended December 31, 1998 under Management's Discussion and Analysis of Financial Condition and Results of Operations "Assumptions Underlying Certain Forward-Looking Statements and Factors that May Affect Future Results" and elsewhere from time to time in the Company's other SEC reports. Such forward-looking statements speak only as of the date on which they are made and the Company does not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this Form 10-Q. If the Company does update or correct one or more forward-looking statements, investors and others should not conclude that the Company will make additional updates or corrections with respect thereto or with respect to other forward- looking statements. Actual results may vary materially. Page 26 TECHNOLOGY SOLUTIONS COMPANY PART II. OTHER INFORMATION =================================================================== ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS TSC's 1999 Annual Meeting of Stockholders (the "Annual Meeting") was held on April 28, 1999. Represented at the Annual Meeting, either in person or by proxy, were 36,181,406 voting shares. The following actions were taken by a vote of TSC's stockholders at the Annual Meeting: 1. Messrs. Michael J. Murray, Stephen B. Oresman and Raymond P. Caldiero were elected to serve as members of TSC's Board of Directors receiving 34,491,342, 30,027,000 and 34,485,842 votes in favor of election, respectively, and 1,690,064, 6,154,406 and 1,695,564 votes withheld, respectively. There were no votes against, abstentions or broker non-votes with respect to the election of any nominee named above. In addition, the terms of office for Messrs. Purcell and Waltrip continue until the 2000 Annual Meeting, and Messrs. Kohler and Zucchini continue until the 2001 Annual Meeting. 2. The appointment of PricewaterhouseCoopers LLP as independent auditors for TSC for its fiscal year ending December 31, 1999 was ratified: 36,110,559 votes were cast for the ratification; 53,929 votes were cast against the ratification and there were 16,918 abstentions. There were no votes withheld or broker non-votes. 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 June 30, 1999, the answer is negative, or a response has been previously reported and an additional report of the information is not required, pursuant to the instructions to Part II. Page 27 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 16th day of August 1999. TECHNOLOGY SOLUTIONS COMPANY Date: August 16, 1999 By: /s/ TIMOTHY P. DIMOND _____________________ Timothy P. Dimond Chief Financial Officer Page 28 TECHNOLOGY SOLUTIONS COMPANY EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION -------- ----------- 4.1 First Amendment to Technology Solutions Company 1996 Stock Incentive Plan 4.2 Technology Solutions Company Non-Statutory Stock Option Agreement 4.3 First Amendment to Technology Solutions Company 1995 Employee Stock Purchase Plan 10.1 Employment Agreement of Timothy P. Dimond 27 Financial Data Schedule Page 29 EX-4.1 2 Exhibit 4.1 AMENDMENT NUMBER ONE TO THE TECHNOLOGY SOLUTIONS COMPANY 1996 STOCK INCENTIVE PLAN WHEREAS, Technology Solutions Company (the "Company") has heretofore adopted and maintains the Technology Solutions Company 1996 Stock Incentive Plan (the "Plan"); and WHEREAS, the Company desires to amend the Plan in certain respects. NOW, THEREFORE, pursuant to the power of amendment contained in Section 6.2 of the Plan, the Plan is hereby amended as follows: 1. Effective as of the date hereof, Section 1.4 of the Plan is hereby amended by deleting the second sentence thereof, and inserting the following sentence in lieu thereof: For purposes of this Plan, references to employment shall also mean an agency or independent contractor relationship and references to employment by the Company shall also mean employment by a Subsidiary or such other employer designated in the Agreement evidencing the award. 2. Effective with respect to options granted on or after the date hereof, Sections 5.2 and 5.3 of the Plan are hereby deleted, and the following sections are inserted in lieu thereof: 5.2 Grants of Stock Options. Each Non-Employee Director shall be granted Non-Statutory Stock Options as follows: (a) Time of Grant. On the date on which a person is first elected or begins to serve as a Non-Employee Director (other than by reason of termination of employment), and, thereafter, if such person is then a Non-Employee Director, on the date that an option granted to such person pursuant to this Article V becomes exercisable in full in accordance with Section 5.2(b) hereunder, such person shall be granted an option to purchase 40,500 shares of Common Stock at a purchase price per share equal to the Fair Market Value of a share of Common Stock on the date of grant of such option. (b) Option Period and Exercisability. Except as otherwise provided herein, each option granted under this Article V (an "Automatic Non- Employee Director's Option") shall not be exercisable until the last day of the calendar month following the calendar month in which such option is granted (the "Initial Date of Exercisability"). Each Automatic Non-Employee Director's Option shall become exercisable as to 1,125 shares of Common Stock on the date of its Initial Date of Exercisability and as to an additional 1,125 shares of Common Stock on the last day of each of the next thirty-five calendar months following the Initial Date of Exercisability. An exercisable option, or portion thereof, may be exercised in whole or in part only with respect to whole shares of Common Stock. Automatic Non-Employee Director's Options shall be exercisable in accordance with Section 2.1(c). 5.3 Option Period and Termination of Directorship. (a) Term and Termination of Option. The maximum term of each Automatic Non- Employee Director's Option shall be the date which is 10 years after the date on which it was granted (the "Expiration Date"). Each Automatic Non- Employee Director's Option shall terminate, to the extent not exercised or earlier terminated pursuant to the terms of this Article V, on its Expiration Date. In no event may an Automatic Non- Employee Director's Option be exercised, in whole or in part, after it terminates. (b) Termination of Directorship Other than by Death, Disability or Retirement. If the holder of an Automatic Non-Employee Director's Option ceases to be a director of the Company for any reason other than death, Disability, or Retirement, the option shall remain exercisable with respect to the number of shares subject to such option that are exercisable upon the effective date of such holder's ceasing to be a director and may thereafter be exercised for a period of 90 days from the effective date of such holder's ceasing to be a director or until the Expiration Date, whichever period is shorter, after which the Automatic Non-Employee Director's Option shall terminate in its entirety. (c) Death. If the holder of an Automatic Non-Employee Director's Option ceases to be a director of the Company by reason of death, the option shall become exercisable as of the date of death with respect to any or all of the shares subject to such option and may thereafter be exercised for a period of one year from the date of death or until the Expiration Date, whichever period is shorter, after which the Automatic Non- Employee Director's Option shall terminate in its entirety. (d) Disability. If the holder of an Automatic Non-Employee Director's Option ceases to be a director of the Company by reason of Disability, the option shall become exercisable as of the effective date of such holder's ceasing to be a director with respect to any or all of the shares subject to such option and may thereafter be exercised for a period of 90 days from the effective date of such termination or until the Expiration Date, whichever period is shorter, after which the Automatic Non-Employee Director's Option shall terminate in its entirety. For purposes of this Article V, "Disability" shall mean the inability of an individual to fully perform the duties of a director of the Company for a continuous period in excess of 360 days, as determined by the Board in its sole discretion. (e) Retirement. If the holder of an Automatic Non-Employee Director's Option ceases to be a director of the Company by reason of retirement after such holder has completed five years of service as a director of the Company and is at least 55 years of age ("Retirement"), the option shall remain exercisable with respect to the number of shares subject to such option that are exercisable upon the effective date of such Retirement, and may thereafter be exercised for a period of two years from the effective date of such Retirement or until the Expiration Date, whichever period is shorter, after which the Automatic Non-Employee Director's Option shall terminate in its entirety. (f) Death After Termination of Directorship. If the holder of an Automatic Non- Employee Director's Option dies after he or she has ceased to be a director of the Company, the option shall be exercisable only to the extent that it is exercisable on the date of such holder's death and may thereafter be exercised only for that period of time for which the option is exercisable immediately prior to the holder's death pursuant to Sections 5.3(b) through (e). IN WITNESS WHEREOF, the Company has caused this instrument to be executed by its duly authorized officer on this 23rd day of July, 1999. Technology Solutions Company By: PAUL PETERSON ______________ EX-4.2 3 Exhibit 4.2 Technology Solutions Company Non-Statutory Stock Option Agreement Technology Solutions Company, a Delaware corporation (the "Company"), hereby grants to the employee whose name appears below (the "Employee"), pursuant to the provisions of the Technology Solutions Company 1996 Stock Incentive Plan (the "Plan"), an option to purchase from the Company the (the "Option") such number of shares of its Common Stock, $0.01 par value ("Stock"), as set forth below at the price per share set forth below but only upon and subject to the terms and conditions set forth herein, in the Plan, and in Annex I hereto. All terms and conditions set forth in Annex I and the Plan shall be deemed to be incorporated herein in their entirety. All capitalized terms used in this Agreement and not otherwise defined herein shall have the respective meanings assigned to them in Annex I or the Plan. The Option shall become null and void unless the Employee shall accept this Agreement by executing it in the space provided and returning it to the Company within 60 days after the Option Date (as defined below). Employee Name: _______________________ Number of Shares Subject to Option: _______________________ Exercise Price Per Share: _______________________ Exercise Provisions: (a) The Option shall become exercisable (i) on the first anniversary of the Option Date with respect to one-third of the number of shares subject to the Option on the Option Date, (ii) on the last day of each calendar month for 24 months thereafter, beginning the month following the first anniversary of the Option Date, with respect to an additional 1/36 of the number of shares subject to the Option on the Option Date, and (iii) as otherwise provided pursuant to paragraphs (b) through (g) of the Agreement or Section 6.8 of the Plan. (b) If, prior to the first anniversary of the Option Date, the Employee's employment by the Company terminates for any reason whatsoever (including, without limitation, involuntary termination by the Company) other than death or Disability, the Option shall terminate in its entirety upon the effective date of Employee's termination of employment. - 1 - (c) If, on or after the first anniversary of the Option Date, the Employee's employment by the Company terminates for any reason whatsoever (including, without limitation, involuntary termination by the Company) other than death, Disability, or Retirement, the Option shall remain exercisable with respect to the number of shares subject to the Option that are exercisable upon the effective date of the Employee's termination of employment and may thereafter be exercised for a period of 90 days from the effective date of the Employee's termination of employment or until the Expiration Date, whichever period is shorter, after which the Option shall terminate in its entirety. (d) If the Employee's employment by the Company terminates by reason of the Employee's death, the Option shall become exercisable as of the date of death with respect to any or all of the shares subject to the Option on the Option Date and may thereafter be exercised for a period of one year from the date of death or until the Expiration Date, whichever period is shorter, after which the Option shall terminate in its entirety. (e) If the Employee's employment by the Company terminates by reason of the Employee's Disability, the Option shall become exercisable with respect to any or all of the shares subject to the Option on the Option Date and may thereafter be exercised for a period of 90 days from the effective date of the Employee's termination of employment or until the Expiration Date, whichever period is shorter, after which the Option shall terminate in its entirety. For purposes of this Agreement, "Disability" shall mean the inability of an individual to fully perform the duties pertaining to his or her employment for a continuous period in excess of 360 days, as determined by the Board in its sole discretion. (f) If the Employee's employment by the Company terminates by reason of the Employee's retirement after the Employee has completed five years of service as an Employee of the Company and is at least 55 years of age ("Retirement"), the Option shall remain exercisable with respect to the number of shares subject to the Option that are exercisable upon the effective date of Employee's Retirement, and may thereafter be exercised for a period of two years from the effective date of the Employee's Retirement or until the Expiration Date, whichever period is shorter, after which the Option shall terminate in its entirety. (g) If the Employee dies following the termination of the Employee's employment by the Company, the Option shall be exercisable only to the extent that it is exercisable on the date of the Employee's death and may thereafter be exercised only for that period of time for which the Option is exercisable immediately prior to the Employee's death. General: This Agreement is subject to the provisions of the Plan, and shall be interpreted in accordance therewith. A copy of the Plan is available upon request by contacting the Company's Legal Department in the Chicago office. The Employee hereby acknowledges that he or she has read a copy of the Plan and the Prospectus. This Agreement may be executed in two counterparts each of which shall constitute one and the same instrument. - 2 - IN WITNESS WHEREOF, this Agreement has been executed this _____ day of _______________, 1999 (the "Option Date"). Accepted and agreed this ___ day of ________________, 1999 TECHNOLOGY SOLUTIONS COMPANY _____________________________ By:__________________________ Name: Name: Title: - 3 - Annex I to Stock Option Agreement 1. Meaning of Certain Terms. As used herein, the following terms shall have the meanings set forth below. "Board" shall mean the Board of Directors of the Company. "Code" shall mean the Internal Revenue Code of 1986, as amended. "Committee" shall mean the Committee designated by the Board, consisting of two or more members of the Board, each of whom shall be a "Non- Employee Director" within the meaning of Rule 16b-3 under the Exchange Act and an "outside director" within the meaning of section 162(m) of the Code. References to this "Agreement," the "Option" and "herein" shall be deemed to include the Stock Option Agreement and this Annex I to Stock Option Agreement taken as a whole. This Annex I and the Stock Option Agreement shall be deemed to be one and the same instrument. References herein to sections of the Code shall be deemed to refer to any successor section of the Code or any successor internal revenue law. The terms "employment" and "employment by the Company" shall have the meanings set forth in Section 1.4 of the Plan; provided however that "employment by the Company" shall also include employment by eLoyalty Corporation, its subsidiaries or affiliates or any successors thereto. 2. Time and Manner of Exercise of Option. 2.1. Term and Termination of Option. The maximum term of the Option shall be the date which is 10 years after the Option Date (the "Expiration Date"). The Option shall terminate, to the extent not exercised or earlier terminated pursuant to the terms of this Agreement, on its Expiration Date. In no event may the Option be exercised, in whole or in part, after it terminates. 2.2. Exercisability of Option. The Option shall become exercisable on the date or dates as set forth in this Agreement. 2.3. Procedure for Exercise; Payment of Purchase Price. Subject to the limitations set forth in this Agreement, the Option may be exercised by delivery of written notice to the Company specifying the number of shares to be purchased, accompanied by payment in full of the purchase price for such number of shares. The purchase price shall be payable either (A) in cash, (B) by delivery of Mature Shares having an aggregate Fair Market Value, determined as of the date of exercise, equal to the aggregate purchase price payable by reason of such exercise, (C) in cash by a broker-dealer acceptable to the Company to whom the Employee has submitted an irrevocable notice of exercise or (D) a combination of (A) and (B). The Company shall have sole discretion to disapprove of an election pursuant to any of clauses (B)-(D) and if the Employee is subject to Section 16 of the Exchange Act, the Company may require that the method of making such payment be in compliance with Section 16 and the rules and regulations thereunder. Any fraction of a share of Stock which would be required to pay such purchase price shall be disregarded and the remaining amount due shall be paid in cash by the Employee. No certificate representing Stock shall be delivered until the full purchase price therefor has been paid (or arrangement made for such payment to the Company's satisfaction). - 4 - 3. Additional Terms and Conditions of Option. 3.1. Nontransferability of Option. Neither the Option nor any right under this Agreement may be transferred by the Employee other than (i) by will or the laws of descent and distribution or (ii) to a Permitted Transferee, as hereinafter defined. During the Employee's lifetime the Option is exercisable only by the Employee or a Permitted Transferee. Upon the Employee's death, the Option may be exercised by the Employee's successor in interest in accordance with the terms and conditions of this Agreement. Any other transfer or any attempted assignment, pledge or hypothecation, whether or not by operation of law, shall be void. The Option shall not be subject to execution, attachment or other process, and no person shall be entitled to exercise any rights of the Employee hereunder or possess any rights hereunder by virtue of any attempted execution, attachment or other process. For purposes of this Agreement, a "Permitted Transferee" shall mean (i) the Employee's spouse, (ii) any of the Employee's lineal descendants, (iii) a trust or similar arrangement of which such spouse, a lineal descendant of the Employee, or one or more of such persons are the only current beneficiaries, or (iv) a charitable organization described in Section 170(c) of the Code, provided that such transferee has entered into a written agreement with the Company authorizing the Company to withhold shares of Stock which would otherwise be delivered to such person upon an exercise of the Option to pay any federal, state, local or other taxes which may be required to be withheld or paid in connection with such exercise in the event that the Employee does not provide for an arrangement satisfactory to the Company to assure that such taxes will be paid. 3.2. Investment Representation. The Employee hereby represents and covenants that (a) any share of Stock purchased upon exercise of the Option will be purchased for investment and not with a view to the distribution thereof within the meaning of the Securities Act of 1933, as amended (the "Securities Act") unless such purchase has been registered under the Securities Act or applicable state securities law; (b) any subsequent resale of any such shares shall be made either pursuant to an effective registration statement under the Securities Act and any applicable state securities laws, or pursuant to an exemption from registration under the Securities Act and such state securities laws; and (c) if requested by the Company, the Employee shall submit a written statement, in form satisfactory to counsel for the Company, to the effect that either representation (a) above is true and correct as of the date of purchase of any shares hereunder, or representation (b) above is true and correct as of the date of any resale of any such shares, as applicable. As a further condition precedent to any exercise of the Option, the Employee shall comply with all regulations and requirements of regulatory authority having control of or supervision over the issuance of the shares and, in connection therewith, shall execute any documents which the Company shall in its sole discretion deem necessary or advisable. Unless covered by an effective registration statement filed with the U.S. Securities and Exchange Commission, all certificates representing shares of Stock acquired pursuant to the exercise of the Option shall bear the following legend: - 5 - The shares represented by this certificate have been acquired for investment and have not been registered under the Securities Act of 1933. The shares may not be sold or transferred in the absence of such registration or exemption therefrom under said Act. 3.3. Withholding Taxes. As a condition precedent to any exercise of the Option, the Employee shall, upon request by the Company, pay to the Company in addition to the purchase price of the Stock, such amount of cash as the Company may be required, under all applicable federal, state or local laws or regulations, to withhold and pay over as income or other withholding taxes (the "Required Tax Payments") with respect to such exercise of the Option. If the Employee shall fail to advance such Required Tax Payments after request by the Company, the Company may, in its discretion, deduct any such Required Tax Payments from the amount to be paid hereunder, whether in Stock or in cash, or from any other amount then or thereafter payable by the Company to the Employee. 3.4. Adjustments in the Event of Capitalization Changes. In the event of any stock split, stock dividend, recapitalization, reorganization, merger, consolidation, combination, exchange of shares, liquidation, spin-off or other similar change in capitalization or event, or any distribution to holders of Stock other than a regular cash dividend, the number and class of securities subject to the Option and the purchase price per security, shall be appropriately adjusted by the Committee. The Committee may adjust the Option using any method which it deems appropriate, which may be the same as or different than the method used to adjust other options granted under the Plan with respect to such change in capitalization or event. The decision of the Committee regarding any such adjustment shall be final, binding and conclusive. If any such adjustment would result in a fractional security being subject to the Option, the Company shall pay the Employee, in connection with the first exercise of the Option in whole or in part occurring after such adjustment, an amount in cash determined by multiplying (i) the fraction of such security (rounded to the nearest hundredth) by (ii) the excess, if any, of (A) the Fair Market Value on the exercise date over (B) the exercise price of the Option. 3.5. Compliance with Applicable Law. The Option is subject to the requirement that if at any time the Company determines that the listing, registration or qualification of the shares of Stock subject to the Option upon any securities exchange or under any law, or the consent or approval of any governmental body, or the taking of any other action is necessary or desirable as a condition of, or in connection with, the delivery of shares hereunder, such shares shall not be delivered unless such listing, registration, qualification, consent, approval or other action shall have been effected or obtained, free of any conditions not acceptable to the Company. The Company may require that certificates evidencing shares of Stock delivered pursuant to the Option bear a legend indicating that the sale, transfer or other disposition thereof by the holder is prohibited except in compliance with the Securities Act of 1933, as amended, and the rules and regulations thereunder. - 6 - 3.6. Indemnification. The Employee hereby covenants and agrees to indemnify and hold harmless the Company, its officers, directors, employees and agents from and against any loss, claim, damage and expense (including, without limitation, reasonable attorneys' fees) arising out of or based upon any breach or failure by the Employee to comply with any representation, warranty, covenant or agreement made by the Employee herein or in any other document furnished by the Employee in connection with this transaction. 3.7. Delivery of Certificates. Upon the exercise of the Option in whole or in part, the Company shall deliver one or more certificates representing the number of shares purchased against full payment therefor. The Company shall pay all original issue or transfer taxes and all fees and expenses incident to such delivery, except as otherwise provided in paragraph 3.3. 3.8. Option Confers No Rights as Stockholder. The Employee shall have no rights as a stockholder of the Company with respect to any shares of Stock or other equity security of the Company which is subject to the Option hereunder unless and until the Employee becomes a stockholder of record with respect to such shares of Stock or equity security. 3.9. Option Confers No Rights to Continue Employment. In no event shall the granting of the Option or its acceptance by the Employee confer upon the Employee any right to continued employment by the Company or any of its subsidiaries or affiliates or affect in any manner the right of the Company or any of its subsidiaries or affiliates to terminate the employment of the Employee at any time without liability hereunder. 3.10. Decisions of Committee. Subject to Section 1.3 of the Plan, the Committee shall have the right to resolve all questions which may arise in connection with the Option or its exercise. Any interpretation, determination or other action made or taken by the Committee regarding the Plan or this Agreement shall be final, binding and conclusive. 3.11. Company to Reserve Shares. The Company shall at all times prior to the expiration or termination of the Option reserve and keep available, either in its treasury or out of its authorized but unissued shares of Stock, the full number of shares subject to the Option from time to time. 4. Miscellaneous Provisions. 4.1. Designation as Nonqualified Stock Option. The Option is hereby designated as not constituting an "incentive stock option" within the meaning of section 422A of the Code; this Agreement shall be interpreted and treated consistently with such designation. 4.2. Successors. This Agreement shall be binding upon and inure to the benefit of any successor or successors of the Company and any person or persons who shall acquire any rights under paragraph 3.1. - 7 - 4.3. Notices. All notices, requests or other communications provided for in this Agreement shall be made in writing either (1) by actual delivery to the party entitled thereto, or (2) by mailing in the U.S. mails to the last known address of the party entitled thereto, via certified or registered mail, return receipt requested. The notice shall be deemed to be received in case (1) on the date of its actual receipt by the party entitled thereto, and in case (2) on the date of its mailing. 4.4. Governing Law. This Agreement, and all determinations made and actions taken pursuant thereto, to the extent not otherwise governed by the Code or the laws of the United States, shall be governed by the laws of the State of Delaware and construed in accordance therewith without giving effect to the principles of conflicts of laws. - 8 - EX-4.3 4 Exhibit 4.3 AMENDMENT NUMBER ONE TO THE TECHNOLOGY SOLUTIONS COMPANY 1995 EMPLOYEE STOCK PURCHASE PLAN WHEREAS, Technology Solutions Company (the "Company") has heretofore adopted and maintains the Technology Solutions Company 1995 Employee Stock Purchase Plan (the "Plan"), an employee stock purchase plan within the meaning of section 423 of the Internal Revenue Code of 1986, as amended (the "Code"); and WHEREAS, the Company desires to amend the Plan in certain respects in connection with the Company's proposed spin-off of its subsidiary, eLoyalty Corporation, to the stockholders of the Company. NOW, THEREFORE, pursuant to the power of amendment contained in Section 9(c) of the Plan, the Plan is hereby amended as follows, effective as of the first day of the first Purchase Period beginning after the date hereof: 1. Section 2 of the Plan is hereby amended (i) by deleting clause (a) of the first sentence thereof, and inserting the following clause in lieu thereof: (a) who has been continuously employed by the Participating Companies for at least three months, and (ii) by deleting the last sentence thereof, and inserting the following sentence in lieu thereof: In addition, the number of shares of Common Stock which may be purchased by any Eligible Employee during any Purchase Period shall not exceed 1,500, subject to adjustment pursuant to Section 14. 2. Section 4 of the Plan is hereby amended by adding the following at the end thereof: In the event of a pro rata distribution by the Company to its stockholders of all of the shares of the common stock of eLoyalty Corporation then owned by the Company (a "Spin-Off"), the Purchase Period then in effect under the Plan shall end as of the business day immediately preceding the record date of the Spin-Off. The amounts credited to the Purchase Accounts of all Participants as of such date shall be applied to purchase shares of Common Stock in accordance with Section 5 of the Plan, and such shares shall be considered issued and outstanding for purposes of the Spin-Off. Thereafter, a new Purchase Period shall begin on the first business day of each calendar quarter beginning after the record date of the Spin-Off and shall end on the last business day of each such calendar quarter. 3. Section 5 of the Plan is hereby amended (i) by deleting the first sentence of paragraph (i) of subsection (a) thereof, and inserting the following sentence in lieu thereof: To enroll in the Plan, an Eligible Employee shall execute and deliver a payroll deduction authorization (the "Authorization") to the Participating Company which is the employee's employer, or its designated agent, in the time and manner specified by the Committee. and (b) by adding the following sentence at the end of paragraph (ii) of subsection (a) thereof: Payroll deductions (and any other amount paid under the Plan) shall continue in accordance with such Authorization notwithstanding any transfer of employment between Participating Companies. 4. Section 6 of the Plan is hereby amended by deleting the reference to "clause (c) of the third paragraph of Section 9," where it appears therein, and by inserting a reference to "clause (iii) of Section 9(c)" in lieu thereof. 5. Section 7 of the Plan is hereby amended by deleting the last sentence of subsection (a) thereof, and inserting the following sentence in lieu thereof: A Participant will be issued a certificate for his or her shares upon the request of the Participant in accordance with procedures established by the Company. 6. Section 8 of the Plan is hereby amended (i) by deleting subsection (a) thereof, and inserting the following subsection in lieu thereof: (a) A Participant may elect at any time to terminate his or her participation in the Plan, provided such termination is received by the Company in writing prior to the last business day of the Purchase Period for which such termination is to be effective. Upon any such termination, the Company shall promptly deliver to such Participant cash in an amount equal to the balance to his or her credit in his or her Purchase Account on the date of such termination. At any time after such termination, the Participant may request the delivery to such Participant of one or more certificates for the number of whole shares of Common Stock held for his or her benefit, and the cash equivalent for any fractional share so held. Such cash equivalent shall be determined by multiplying the fractional share by the fair market value of a share of Common Stock on the last day of the Purchase Period immediately preceding such termination, determined as provided in Section 6. and (ii) by deleting subsections (b) and (c) thereof, and inserting the following subsection (b) in lieu thereof: (b) If the Participant dies, terminates his or her employment with the Participating Companies for any reason, or otherwise ceases to be an Eligible Employee (including, without limitation, as a result of a Participating Company ceasing to be a Subsidiary Company), his or her participation in the Plan shall immediately terminate. Upon such terminating event, the Company shall promptly deliver to such Participant or his or her legal representative, as the case may be, cash in an amount equal to the balance to his or her credit in his or her Purchase Account on the date of such termination. 7. Section 10 of the Plan is hereby amended by deleting the second sentence thereof. 8. Section 13 of the Plan is hereby amended by deleting the second sentence thereof. 9. Sections 14 and 15 of the Plan, and all references thereto, are hereby redesignated as Sections 15 and 16, respectively, and the following new Section 14 is added to the Plan: 14. Adjustment. In the event of any stock split, stock dividend, recapitalization, reorganization, merger, consolidation, combination, exchange of shares, liquidation, spin-off or other similar change in capitalization or event, or any distribution to holders of Common Stock other than a regular cash dividend, the maximum number and class of securities which may purchased under this Plan, the maximum number and class of securities that may be purchased by any Eligible Employee during any Purchase Period, and the purchase price per security shall be appropriately adjusted by the Committee. The decision of the Committee regarding any such adjustment shall be final, binding and conclusive. If any such adjustment would result in a fractional security being available under this Plan, such fractional security shall be disregarded. 10. Section 15 of the Plan (as heretofore redesignated) is hereby amended (i) by deleting subsection (a) thereof, and inserting the following subsection in lieu thereof: (a) Except as otherwise expressly provided herein, any Authorization, election, notice or document under the Plan from an Eligible Employee or Participant shall be delivered to the Company, the Participating Company that is the employer of such Eligible Employee, or their designated agents and, subject to any limitations specified in the Plan, shall be effective when so delivered. and (ii) by deleting subsection (d) thereof, and redesignating subsections (e) and (f), and all references thereto, as subsections (d) and (e), respectively. IN WITNESS WHEREOF, the Company has caused this instrument to be executed by its duly authorized officer on this 23rd day of July, 1999. Technology Solutions Company By: PAUL PETERSON _________________________ EX-10 5 Exhibit 10.1 EMPLOYMENT AGREEMENT Technology Solutions Company, doing business as TSC, and Timothy P. Dimond ("Employee") enter into this Employment Agreement ("Agreement") as of April 28, 1999. In consideration of the agreements and covenants contained in this Agreement, TSC and Employee agree as follows: 1. Employment Duties: TSC shall employ Employee as Senior Vice President and Chief Financial Officer. Employee shall have such responsibilities, duties and authority as the Chief Executive Officer may reasonably designate. The Chief Executive Officer may from time to time expand or contract such duties and responsibility and may enhance but not diminish Employee's title or position. Employee shall perform faithfully the duties assigned to him to the best of his ability and shall devote his full and undivided business time and attention to the transaction of TSC's business. 2. Term of Employment: The term of employment covered by this Agreement shall commence as of the effective date of this Agreement and continue until terminated pursuant to Section 3 below. 3. Termination: TSC may terminate Employee's employment and this Agreement for any reason upon giving Employee 90 days notice of termination. TSC may make the termination effective at any time within the 90 day notice period. TSC must, however, continue Employee's normal salary, bonus, and health insurance benefits for a period of one year following the effective date of the termination unless Employee is terminated for Serious Misconduct. TSC may terminate Employee's employment and this Agreement immediately without notice and with no salary and benefit continuation if Employee engages in "Serious Misconduct". "Serious Misconduct" means embezzlement or misappropriation of corporate funds, other acts of dishonesty, significant activities materially harmful to TSC's reputation, willful refusal to perform or substantial disregard of Employee's assigned duties (including, but not limited to, refusal to travel or work the requested hours), or any significant violation of any statutory or common law duty of loyalty to TSC. If following a Change in Control (which is defined as (i) the acquisition by any individual, entity or group, of beneficial ownership (within the meaning of Rule 13 d-3 promulgated under the Securities Exchange Act of 1934) of 40% or more of the outstanding shares of the common stock of TSC; (ii) the approval of the stockholders of TSC of a merger, where immediately after the merger, persons who were the holders of a majority of TSC's outstanding common stock immediately prior to the merger fail to own at least a majority of the outstanding common stock of the surviving entity in substantially the same proportions as their holdings of TSC common stock immediately prior to the merger; (iii) the sale of substantially all the assets of - 1 - TSC other than to a corporation in which more that 60% of the outstanding shares are beneficially owned by the individuals and entities who are the beneficial owners of the Company stock prior to the acquisition, or (iv) the naming of a new CEO), Employee's title, position, duties, or salary is diminished and Employee resigns within 90 days after the diminishment becomes effective, or if Employee is ordered to relocate permanently to any location outside of the Chicago metropolitan area and employee declines and is terminated, Employee shall be entitled to Employee's normal salary, bonus, and health insurance benefits for a one-year period following his resignation or termination. If Employee dies or becomes permanently disabled and unable to continue to work at TSC, TSC must continue Employee's normal salary, bonus, and health insurance benefits for a period of one year following the date of his death or his permanent disability. Employee may terminate employment upon giving TSC 90 day notice. Upon receiving notice, TSC may waive its rights under this paragraph and make Employee's resignation effective immediately or anytime before the 90 day notice period ends. 4. Salary: As compensation for his services, TSC shall pay Employee a base salary in the amount listed in Exhibit A to this Agreement. Employee's base salary shall be subject to annual review and may, at the discretion of TSC's management, be increased from that listed in Exhibit A according to Employee's responsibilities, capabilities and performance during the preceding year. 5. Bonuses: TSC may elect to pay Employee annual bonuses. Payment of such bonuses, if any, shall be at the sole discretion of TSC. 6. Employee Benefits: During the employment period, Employee shall be entitled to participate in such employee benefit plans, including group pension, life and health insurance and other medical benefits, and shall receive all other fringe benefits, as TSC may make available to its Vice Presidents. 7. Business Expenses: TSC shall reimburse Employee for all reasonable and necessary business expenses incurred by Employee in performing his duties. Employee shall provide TSC with supporting documentation sufficient to satisfy reporting requirements of the Internal Revenue Service and TSC. TSC's determination as to reasonableness and necessary shall be final. 8. Noncompetition and Nondisclosure: Employee acknowledges that the successful development and marketing of TSC's professional services and products require substantial time and expense. Such efforts generate for TSC valuable and proprietary information ("confidential information") which gives TSC a business advantage over others who do not have such information. Confidential information of TSC and its clients and prospects includes, but is not limited to, the following: business strategies and plans; proposals; deliverables; prospects and customer lists; recruiting prospects and employee lists, methodologies; training materials; and computer software. Employee acknowledges that during the course of his employment, he will obtain knowledge of such confidential information. Accordingly, Employee agrees to undertake the following obligations which he acknowledges to be reasonably designed to protect TSC's legitimate business interests without unnecessarily or unreasonably restricting Employee's post-employment opportunities: - 2 - (a) Upon termination of employment for any reason, Employee shall return all TSC property, including but not limited to computer programs, files, notes, records, charts, or other documents or things containing in whole or in part any of TSC's confidential information; (b) During the course of his employment and subsequent to termination, Employee agrees to treat all such information as confidential and to take all necessary precautions against disclosure of such information to third parties during and after Employee's employment with TSC. Employee shall refrain from using or disclosing to any person, without the prior written approval of TSC's Chief Executive Officer any confidential information unless at that time the information has become generally and lawfully known to TSC's competitors; (c) Without limiting the obligations of paragraph 8(b), Employee shall not, for a period of one year following his termination for any reason, for himself or as an agent, partner or employee of any person, firm or corporation, engage in the practice of consulting or related services for any client of TSC for whom Employee performed services, or prospective TSC client to whom Employee submitted, or assisted in the submission of a proposal during the two year period preceding his termination; (d) During a one year period immediately following Employee's termination for any reason, Employee shall not induce or assist in the inducement of any TSC employee away from TSC's employ or from the faithful discharge of such employee's contractual and fiduciary obligations to serve TSC's interests with undivided loyalty; (e) For one year following his termination for any reason, Employee shall keep TSC currently advised in writing of the name and address of each business organization for which he acts as agent, partner, representative or employee. 9. Remedies: Employee recognizes and agrees that a breach of any or all of the provisions of paragraph 8 will constitute immediate and irreparable harm to TSC's business advantage, including but not limited to TSC's valuable business relations, for which damages cannot be readily calculated and for which damages are an inadequate remedy. Accordingly, Employee acknowledges that TSC shall therefore be entitled to an order enjoining any further breaches by the Employee. Employee agrees to reimburse TSC for all costs and expenses, including reasonable attorneys' fees, incurred by TSC in connection with the enforcement of its rights under any provision of this Agreement. - 3 - 10. Intellectual Property: During the employment period, Employee shall disclose to TSC all ideas, inventions and business plans which he develops during the course of his employment with TSC which relate directly or indirectly to TSC's business, including but not limited to any computer programs, processes, products or procedures which may, upon application, be protected by patent or copyright. Employee agrees that any such ideas, inventions or business plans shall be the property of TSC and that Employee shall at TSC's request and cost, provide TSC with such assurances as is necessary to secure a patent or copyright. 11. Assignment: Employee acknowledges that the services to be rendered pursuant to this Agreement are unique and personal. Accordingly, Employee may not assign any of his rights or delegate any of his duties or obligations under this Agreement. TSC may assign its rights, duties or obligations under this Agreement to a purchaser or transferee of all, or substantially all, of the assets of TSC. 12. Notices: All notices shall be in writing, except for notice of termination which may be oral if confirmed in writing within 14 days. Notices intended for TSC shall be sent by registered or certified mail addressed to it at 205 North Michigan Avenue, 15th Floor, Chicago, Illinois 60601 or its current principal office, and notices intended for Employee shall be either delivered personally to his or sent by registered or certified mail addressed to his last known address. 13. Entire Agreement: This Agreement constitutes the entire agreement between TSC and Employee. Neither Employee nor TSC may modify this Agreement by oral agreements, promises or representations. The parties may modify this Agreement only by a written instrument signed by the parties. 14. Applicable Law: This Agreement shall be governed by and construed in accordance with the laws of the State of Illinois. 15. Mediation of Disputes: Neither party shall initiate arbitration or other legal proceedings (except for any claim in equity under Sections 8(b), 8(c), or 8(d) of this Agreement), against the other party, or, in the case of TSC, any of its directors, officers, employees, agents, or representatives, relating in any way to this Agreement, to Employee's employment with TSC, the termination of his employment or any or all other claims that one party might have against the other party until 30 days after the party against whom the claim[s] is made ("respondent") receives written notice from the claiming party of the specific nature of any purported claim and the amount of any purported damages. Employee and TSC further agree that if respondent submits the claiming party's claim to the Center for Public Resources, 680 Fifth Avenue, New York, New York 10019, for nonbinding mediation prior to the expiration of such 30 day period, the claiming party may not institute arbitration or other legal proceedings against respondent until the earlier of a) the completion of nonbinding mediation efforts, or b) 90 days after the date on which the respondent received written notice of the claimant's claim. - 4 - 16. Binding Arbitration: Employee and TSC agree that all claims or disputes relating to his employment with TSC or the termination of such employment, and any and all other claims that Employee might have against TSC, any TSC director, officer, employee, agent, or representative, and any and all claims or disputes that TSC might have against Employee (except for any claim in equity under Sections 8(b), 8(c), or 8(d) of this Agreement) shall be resolved under the Expedited Commercial Rules of the American Arbitration Association. If either party pursues a claim and such claim results in an Arbitrator's decision, both parties agree to accept such decision as final and binding. 17. Severability: Whenever possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be prohibited by or invalid under applicable law, such provision will be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. 18. Employee acknowledges that he has read, understood and accepts the provisions of this Agreement. Technology Solutions Company Timothy P. Dimond By: JOHN T. KOHLER TIMOTHY P. DIMOND _________________________ ________________________ Position:___________________ Position: Senior Vice President and Chief Financial Officer Date:_______________________ Date: 4/28/99 - 5 - EXHIBIT A EMPLOYEE: Timothy P. Dimond POSITION: Senior Vice President and Chief Financial Officer BASE SALARY: $240,000 EFFECTIVE DATE: April 28, 1999 TIMOTHY P. DIMOND _______________________ Timothy P. Dimond _______________________ Date 4/28/99 JOHN T. KOHLER ____________________________ Technology Solutions Company _______________________ Date 4/28/99 - 6 - EX-27 6
5 1000 U.S. DOLLARS 6-MOS DEC-31-1999 APR-01-1999 JUN-30-1999 1 60,374 24,017 90,137 5,834 0 197,058 22,209 14,558 225,922 59,213 0 0 0 417 166,292 225,922 155,346 155,346 0 157,044 (1,627) 2,846 69 (2,986) (235) (2,751) 0 0 0 (2,751) (0.07) (0.07)
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