<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<FILENAME>d10q.txt
<DESCRIPTION>FORM 10-Q
<TEXT>
<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
________________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 2001
Commission file number 0-19433
[LOGO]
Technology Solutions Company
Incorporated in the State of Delaware
Employer Identification No. 36-3584201
205 North Michigan Avenue
Suite 1500
Chicago, Illinois 60601
(312) 228-4500
TSC (1) HAS FILED all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12 months and (2)
HAS BEEN subject to such filing requirements for the past 90 days.
As of November 2, 2001, there were outstanding 43,421,942 shares of TSC
Common Stock, par value $.01.
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<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
Index to Form 10-Q
===============================================================================
<TABLE>
<CAPTION>
Part I
------
Page
Number
------
<S> <C>
FINANCIAL INFORMATION (UNAUDITED)
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of
September 30, 2001 and December 31, 2000 .............................. 3
Consolidated Statements of Operations
for the Three Months and Nine Months Ended
September 30, 2001 and 2000............................................ 4
Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 2001 and 2000 ................. 5
Notes to Consolidated Financial Statements................................ 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS....................... 13
Part II
-------
Other Information
Item 6.................................................................... 21
SIGNATURES...................................................................... 22
</TABLE>
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Page 2
<PAGE>
PART I. FINANCIAL INFORMATION
===============================================================================
ITEM 1. Financial Statements
TECHNOLOGY SOLUTIONS COMPANY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
ASSETS
------
<TABLE>
<CAPTION>
September 30, December 31,
2001 2000
-------- -------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ................................................. $ 41,299 $ 40,574
Marketable securities ..................................................... 1,772 6,044
Marketable securities held in trust ....................................... 8,383 10,747
Receivables, less allowance for doubtful receivables
of $11,175 and $3,713 .................................................. 27,155 33,165
Deferred income taxes ..................................................... 9,598 10,211
Refundable income taxes ................................................... 3,053 3,241
Other current assets ...................................................... 2,144 2,734
--------- ---------
Total current assets ................................................... 93,404 106,716
COMPUTERS, FURNITURE AND EQUIPMENT, NET ........................................ 2,221 3,520
GOODWILL ....................................................................... -- 3,526
DEFERRED INCOME TAXES .......................................................... 13,304 7,438
LONG-TERM RECEIVABLES AND OTHER ................................................ 6,229 6,438
--------- ---------
Total assets ........................................................... $ 115,158 $ 127,638
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable .......................................................... $ 2,462 $ 1,116
Accrued compensation and related costs .................................... 14,817 16,043
Deferred compensation ..................................................... 8,383 10,747
Restructuring and other accruals .......................................... 3,102 2,687
Other current liabilities ................................................. 4,063 4,428
--------- ---------
Total current liabilities .............................................. 32,827 35,021
DEFERRED INCOME TAXES DUE TO FORMER SUBSIDIARY ................................. 6,204 6,244
COMMITMENTS AND CONTINGENCIES .................................................. -- --
--------- ---------
Total liabilities ...................................................... 39,031 41,265
--------- ---------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; shares authorized--
10,000,000; none issued ................................................ -- --
Common stock, $.01 par value; shares authorized--
100,000,000; shares issued-- 44,695,788 and 44,565,515 ................. 447 446
Capital in excess of par value ............................................ 122,628 122,935
Accumulated deficit ....................................................... (44,917) (35,552)
Treasury Stock, at cost, 1,027,546 and 567,901 shares ..................... (1,897) (1,295)
Accumulated other comprehensive (loss) income:
Unrealized holding loss, net ........................................... (169) (276)
Cumulative translation adjustment ...................................... 35 115
--------- ---------
Total stockholders' equity ............................................. 76,127 86,373
--------- ---------
Total liabilities and stockholders' equity ............................. $ 115,158 $ 127,638
========= =========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of this financial information.
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Page 3
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
------------- -------------
2001 2000 2001 2000
---- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
REVENUES ............................................................ $ 29,503 $ 31,044 $ 97,607 $ 100,480
--------- --------- --------- ---------
COSTS AND EXPENSES:
Project personnel ................................................. 15,724 17,486 51,771 50,980
Other project expenses ............................................ 3,279 5,704 12,089 15,312
Bad debt expense .................................................. 355 3,316 8,850 3,893
Management and administrative support ............................. 6,824 7,330 24,756 24,056
Goodwill amortization ............................................. -- 230 383 690
Restructuring and other (credits) charges ......................... -- (926) 7,768 3,775
Incentive compensation ............................................ 2,213 1,015 6,872 6,061
--------- --------- --------- ---------
28,395 34,155 112,489 104,767
--------- --------- --------- ---------
OPERATING INCOME (LOSS) ............................................. 1,108 (3,111) (14,882) (4,287)
--------- --------- --------- ---------
OTHER INCOME (EXPENSE):
Net investment income ............................................. 499 741 1,438 2,604
Interest expense .................................................. -- -- -- (14)
--------- --------- --------- ---------
499 741 1,438 2,590
--------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES ................................... 1,607 (2,370) (13,444) (1,697)
INCOME TAX PROVISION (BENEFIT) ...................................... 670 (853) (4,079) (530)
--------- --------- --------- ---------
NET INCOME (LOSS) ................................................... $ 937 $ (1,517) $ (9,365) $ (1,167)
========= ========= ========= =========
BASIC NET EARNINGS (LOSS)
PER COMMON SHARE .................................................. $ 0.02 $ (0.03) $ (0.21) $ (0.03)
========= ========= ========= =========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING ......................................... 43,951 44,456 44,142 44,152
========= ========= ========= =========
DILUTED NET EARNINGS (LOSS)
PER COMMON SHARE .................................................. $ 0.02 $ (0.03) $ (0.21) $ (0.03)
========= ========= ========= =========
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING ................................................ 45,033 44,456 44,142 44,152
========= ========= ========= =========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of this financial information.
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Page 4
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
For the
Nine Months Ended
September 30,
------------
2001 2000
---- ----
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................................. $(9,365) $ (1,167)
Restructuring and other charges.......................................... 7,768 3,775
Adjustments to reconcile net loss to net
cash from operating activities:
Depreciation and amortization......................................... 1,644 3,292
Provisions for receivable valuation allowances and
reserves for possible losses, net of recoveries..................... 8,850 3,893
Loss on sale of investments........................................... -- 9
Deferred income taxes................................................. (5,180) (41)
Changes in assets and liabilities:
Receivables......................................................... (3,065) (12,028)
Purchases of trading securities related to deferred
compensation plan, net of market adjustments...................... (83) (2,311)
Former employees' distributions from
deferred compensation plan........................................ 2,447 980
Refundable income taxes............................................. 187 (1,319)
Other current assets................................................ 8 1,065
Accounts payable.................................................... 1,363 (1,279)
Accrued compensation and related costs.............................. (1,113) (5,180)
Deferred compensation............................................... (2,364) 1,331
Restructuring and other accruals.................................... (2,886) (9,043)
Other current liabilities........................................... (292) (1,961)
Other assets........................................................ 338 (3,685)
------- --------
Net cash used in operating activities............................. (1,743) (23,669)
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from available-for-sale securities.............................. 4,425 1,225
Capital expenditures..................................................... (828) (1,613)
Additional cash contribution to eLoyalty Corporation..................... -- (20,000)
Cash used by discontinued operations..................................... -- (2,311)
------- --------
Net cash provided by (used in) investing activities............... 3,597 (22,699)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options.................................. 937 4,943
Proceeds from employee stock purchase plan............................... 877 2,175
Purchase of treasury stock............................................... (2,895) (573)
------- --------
Net cash (used in) provided by financing activities............... (1,081) 6,545
------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS..................................................... (48) 279
------- --------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS......................................................... 725 (39,544)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD...................................................... 40,574 81,002
------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD................................... $41,299 $ 41,458
======= ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of this financial information.
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Page 5
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 1 --BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Technology
Solutions Company and its subsidiaries (TSC or the Company). The consolidated
balance sheet as of September 30, 2001, the consolidated statements of
operations for the three and nine months ended September 30, 2001 and 2000 and
the consolidated statements of cash flows for the nine months ended September
30, 2001 and 2000 have been prepared by the Company without audit. In the
opinion of management, these financial statements include all adjustments
necessary to present fairly the financial position, results of operations and
cash flows as of September 30, 2001 and for all periods presented. All
adjustments made, except those related to restructuring and other charges, have
been of a normal and recurring nature. Certain information and footnote
disclosures normally included in the financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted.
The Company believes that the disclosures included are adequate and provide a
fair presentation of interim period results. Interim financial statements are
not necessarily indicative of financial position or operating results for an
entire year. It is suggested that these interim financial statements be read in
conjunction with the audited financial statements and the notes thereto included
in the Company's Annual Report on Form 10-K for the year ended December 31, 2000
filed with the United States Securities and Exchange Commission (SEC) on March
22, 2001.
NOTE 2 -- THE COMPANY
TSC delivers business benefits through information technology (IT) consulting
and systems integration services that help clients transform their businesses,
their internal business processes and their relationships with customers,
suppliers, distributors and employees and help these organizations realize the
full benefits of information technology throughout the enterprise. The Company's
clients generally are located throughout North America and in Europe.
On February 15, 2000, TSC distributed the common stock of eLoyalty Corporation
(eLoyalty) owned by the Company to the Company's stockholders (the Spin-Off).
eLoyalty operated within the Company prior to the Spin-Off and is now a
separate, publicly traded company. There were no discontinued operations in the
Company's results of operations for the nine months ended September 30, 2000, as
the Company provided for the estimated loss on distribution in its results of
operations for the year ended December 31, 1999. The total net assets
contributed to eLoyalty at the Spin-Off was $96.6 million which consisted of
current assets of $104.4 million, non-current assets of $18.7 million, current
liabilities of $28.0 million and other comprehensive loss of $1.5 million.
NOTE 3 -- STOCK OPTIONS
As of September 30, 2001, options to purchase 10.1 million shares of common
stock were outstanding and options to purchase an additional 3.4 million shares
of common stock were available for grant under the Technology Solutions Company
1996 Stock Incentive Plan.
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Page 6
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
================================================================================
NOTE 4 -- CAPITAL STOCK
In September 2000, the Company announced its plan to repurchase up to a total of
3,000,000 shares of its outstanding common stock (the Repurchase Program). This
amount was increased to 5,000,000 in August 2001. During the nine months ended
September 30, 2001, the Company repurchased 1,530,927 common shares (901,577
during the quarter ended September 30, 2001) under the Repurchase Program for an
aggregate purchase price of $2,894,921. As of September 30, 2001 cumulative
purchases under the Repurchase Program were 2,564,027 common shares and
2,435,973 common shares were available for purchase.
NOTE 5 -- EARNINGS (LOSS) PER COMMON SHARE
The Company discloses basic and diluted earnings (loss) per share in the
consolidated statements of operations under the provisions of Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." Earnings
(loss) per common share assuming dilution is computed by dividing net earnings
(loss) by the weighted average number of common shares outstanding during each
period presented, plus the dilutive effect of common equivalent shares arising
from the assumed exercise of stock options using the treasury stock method.
Common equivalent shares of 3,290,000, 1,545,000 and 3,997,000 were not included
in the diluted loss per share calculation as they were antidilutive for the
three months ended September 30, 2000 and the nine months ended September 30,
2001 and 2000, respectively. Earnings (loss) per common share are computed by
dividing net income (loss) by the weighted average number of common shares
outstanding during each period presented.
Reconciliation of Basic and Diluted Earnings (Loss) Per Share for the Three
---------------------------------------------------------------------------
Months Ended
------------
(In thousands, except per share data)
September 30, 2001 September 30, 2000
----------------------------------------------------------
(unaudited) (unaudited)
Per Per
Net Common Net Common
Income Shares Share Loss Shares Share
------ ------ ----- ---- ------ -----
Basic Earnings (Loss)
Per Share $937 43,951 $0.02 $(1,517) 44,456 $(0.03)
===== ======
Effect of Stock
Options -- 1,082 -- --
---- ------- ------- ------
Diluted Earnings
(Loss) Per Share $937 45,033 $0.02 $(1,517) 44,456 $(0.03)
==== ======= ===== ======= ====== ======
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Page 7
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
================================================================================
Reconciliation of Basic and Diluted Loss Per Share for the Nine Months Ended
--------------------------------------------------------------------------------
(In thousands, except per share data)
September 30, 2001 September 30, 2000
--------------------------- ----------------------------
(unaudited) (unaudited)
Per Per
Net Common Net Common
Loss Shares Share Loss Shares Share
---- ------ ----- ---- ------ -----
Basic Loss
Per Share $(9,365) 44,142 $(0.21) $(1,167) 44,152 $(0.03)
====== ======
Effect of Stock
Options -- -- -- --
------- ------ ------- ------
Diluted Loss Per
Share $(9,365) 44,142 $(0.21) $(1,167) 44,152 $(0.03)
======= ====== ====== ======= ====== ======
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Page 8
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
================================================================================
NOTE 6 -- COMPREHENSIVE INCOME (LOSS)
The Company's comprehensive income (loss) was as follows:
<TABLE>
<CAPTION>
For the Three Months Ended
(In thousands) September 30,
--------------------------
2001 2000
----------- -----------
<S> <C> <C>
Net Income (Loss)................................................. $ 937 $ (1,517)
Other Comprehensive Income (Loss):
Net Unrealized Holding Gains (Losses) on
Available-for-Sale Securities, net of tax.................... 26 (15)
Translation Adjustment (95) (17)
----------- -----------
Other Comprehensive Loss ................................... (69) (32)
----------- -----------
Total Comprehensive Income (Loss)................................. $ 868 $ (1,549)
=========== ===========
For the Nine Months Ended
(In thousands) September 30,
--------------------------
2001 2000
----------- -----------
Net Loss.......................................................... $ (9,365) $ (1,167)
Other Comprehensive Income (Loss):
Net Unrealized Holding Gains (Losses) on
Available-for-Sale Securities, net of tax.................... 107 (96)
Translation Adjustment (80) 50
----------- -----------
Other Comprehensive Income (Loss)........................... 27 (46)
----------- -----------
Total Comprehensive Loss.......................................... $ (9,338) $ (1,213)
=========== ===========
</TABLE>
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Page 9
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
================================================================================
NOTE 7 -- BUSINESS SEGMENTS
Prior to June 2001, the Company was organized into two business segments,
Digital Enterprise Consulting (currently named Enterprise Commerce Management or
ECM) and Peer3. Effective June 4, 2001, the Company terminated the investment in
and closed the Peer3 software development operation within the Peer3 segment.
The Company retained the Change and Learning Management (CLM) business (which
was included in the Peer3 segment) and currently reports the CLM business within
ECM. ECM provides information technology consulting and business consulting
services that help clients develop and implement solutions that deliver business
benefits through technology. ECM includes TSC's Enterprise Management, Digital
Supply Chain Management, Extended Support Services and Change and Learning
Management practices.
The following is revenue and identifiable asset information by geographic area
(in thousands):
For and as of the Three Months United Foreign
Ended September 30, 2001 States Subsidiaries Total
------------------------------- ------ ------------ -----
Revenues $ 28,247 $1,256 $ 29,503
Identifiable assets $109,553 $5,605 $115,158
For and as of the Three Months United Foreign
Ended September 30, 2000 States Subsidiaries Total
------------------------------- ------ ------------ -----
Revenues $ 29,679 $1,365 $ 31,044
Identifiable assets $118,867 $3,900 $122,767
For and as of the Nine Months United Foreign
Ended September 30, 2001 States Subsidiaries Total
------------------------------- ------ ------------ -----
Revenues $ 91,810 $5,797 $ 97,607
Identifiable assets $109,553 $5,605 $115,158
For and as of the Nine Months United Foreign
Ended September 30, 2000 States Subsidiaries Total
------------------------------- ------ ------------ -----
Revenues $ 95,410 $5,070 $100,480
Identifiable assets $118,867 $3,900 $122,767
Foreign revenues and identifiable assets are based on the country in which the
legal subsidiary is domiciled. No single foreign country's revenues or
identifiable assets were material to the consolidated revenues or identifiable
assets of the Company.
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Page 10
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
================================================================================
NOTE 8 -- DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company adopted SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." In connection with a loan receivable, on June 30, 2000 the
Company paid $0.2 million and received a warrant to purchase up to 94,563 shares
of common stock of another company. The warrant is considered a derivative under
SFAS No. 133, therefore changes in fair market value are reported in the
Company's results of operations. The warrant will expire on June 30, 2008 and
has been written-down by $0.2 million.
NOTE 9 -- OTHER EVENTS
During the quarter ended June 30, 2001, the Company recorded $9.2 million in
restructuring and other charges comprised of $6.9 million relating to the
closure of the Peer3 software development operation and $2.3 million in
non-Peer3 severance related costs. The Peer3 charge included $3.0 million in
goodwill impairment, $0.9 million in asset write-offs, $0.6 million in costs
associated with lease terminations, $1.5 million in severance costs, $0.4
million in professional fees and $0.5 million in computer lease terminations,
commitments and other costs. As of September 30, 2001, the Company had made cash
payments of $0.8 million related to Peer3 severance costs of approximately 30
employees, $0.4 million in professional fees, $0.1 million in lease costs and
$0.3 million in other costs. The remaining accrual balance of $1.2 million
relates to lease terminations and severance costs and is expected to be utilized
by February 2003. The non-Peer3 severance charge of $2.3 million relates to $1.5
million in severance costs, $0.5 million in asset write-offs and $0.3 million in
other costs. As of September 30, 2001, the Company had used $1.3 million of this
charge for cash payments of $0.8 million related to the severance of
approximately 70 employees and $0.5 million in asset write-offs. The remaining
accrual balance of $1.0 million is expected to be utilized by the end of the
second quarter of 2002.
During the quarter ended March 31, 2000, the Company recorded a pre-tax charge
of $4.7 million for the closure of its Latin American operations. During the
quarter ended September 30, 2000, the Company collected $0.4 million of accounts
receivables previously written-off and, as a result, the cumulative charge was
reduced to $4.3 million. As of September 30, 2001, the Company had used
approximately $4.1 million of this charge for cash payments of $2.9 million
related to severance costs for approximately 40 employees, lease terminations
and professional fees ($0.1 million paid during the nine months ended September
30, 2001) and $1.6 million in asset write-offs, offset by the accounts
receivables collections of $0.4 million. The remaining accrual balance of $0.2
million as of September 30, 2001 represents professional fees, tax charges and
various other closure costs and is expected to be utilized by the end of 2001.
During the quarter ended December 31, 1999, the Company recorded $7.0 million in
restructuring and other charges associated with lease terminations of $3.0
million, former executive severance costs of $1.8 million, CourseNet Systems,
Inc. acquisition costs of $1.3 million and write-offs of other assets of $0.9
million. The Company determined that a portion of
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Page 11
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
================================================================================
the lease terminations became unnecessary due to changes in TSC office usage by
TSC and eLoyalty and also determined that the actual costs for these lease
terminations would be less than previously anticipated and, as a result, the
cumulative charge was reduced by $0.4 million to $6.6 million during the quarter
ended September 30, 2000 and by $1.5 million to $5.1 million during the quarter
ended March 31, 2001. As of September 30, 2001, the Company had made cash
payments of $1.8 million (paid during the quarter ended March 31, 2000) for
executive severance costs, and $0.2 million in lease costs (paid during the nine
months ended September 30, 2001). The remaining accrual balance of $0.7 million
as of September 30, 2001 relates to amounts that the Company is contractually
obligated to pay through 2004 as a result of lease terminations.
In addition, on March 30, 1999, the Company announced that it was making a
number of changes to its business operations and, as a result, the Company
recorded a restructuring charge of $10.5 million associated with those changes
and the severance of employees, primarily consulting personnel. During the
quarter ended September 30, 2000, the Company determined that $0.1 million of
this charge was overestimated and, as a result, the cumulative charge was
reduced to $10.4 million. The Company used the full restructuring accrual of
$10.4 million for cash payments of $8.8 million associated with the severance of
approximately 270 employees and $1.6 million in asset write-offs and other
costs.
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Page 12
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
RESULTS OF OPERATIONS
Three Months Ended September 30, 2001 Compared with Three Months Ended September
30, 2000
Consolidated net revenues for the quarter ended September 30, 2001 decreased 5
percent to $29.5 million compared with $31.0 million for the same period in the
prior year. This decrease was primarily due to an overall decline in the demand
for information technology services.
Project personnel costs, which represent mainly professional salaries and
benefits, decreased to $15.7 million for the quarter ended September 30, 2001
from $17.5 million for the same period in the prior year, a decrease of 10
percent. The decrease was mainly due to a decrease in professional headcount
resulting from the second quarter 2001 restructuring and other charges (as
discussed further in this section), slightly offset by annual salary increases.
Project personnel costs as a percentage of net revenues decreased to 53 percent
for the quarter ended September 30, 2001 from 56 percent for the same period in
the prior year due to these headcount reductions and the resulting higher staff
utilization.
Other project expenses consist of nonbillable expenses incurred for client
projects and business development. These expenses include recruiting fees, sales
and marketing expenses, personnel training, and software development costs.
Other project expenses decreased to $3.3 million for the quarter ended September
30, 2001 from $5.7 million for the same period in the prior year, a decrease of
$2.4 million, or 43 percent. This decrease was due to a decrease of $1.2 million
in travel costs as a result of lower headcount and the Company implementing more
effective cost controls throughout the period, a decrease of $0.7 million in
software development costs as a result of the closure of the Peer3 software
development operation in the second quarter of 2001 (as discussed further in
this section), a decrease of $0.2 million in other headcount related costs such
as hiring, training and communication expenses and a decrease of $0.3 million in
various other costs including international costs and sales commission expenses.
Other project expenses as a percentage of net revenues decreased to 11 percent
for the quarter ended September 30, 2001 from 18 percent for the same period in
the prior year as a result of the items mentioned above.
Bad debt expense decreased to $0.4 million for the quarter ended September 30,
2001 from $3.3 million for the same period in the prior year. During the quarter
ended September 30, 2000, the Company recorded $2.7 million of bad debt expense
mainly due to cash flow problems at dot-com clients.
Management and administrative support costs consist of practice area costs which
include support personnel, practice area selling, marketing and recruiting
costs; and infrastructure costs which include office costs, internal systems,
human resources, accounting, finance, tax, investor relations, legal, corporate
marketing and corporate recruiting. Management and administrative support costs
decreased $0.5 million to $6.8
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Page 13
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
================================================================================
million for the quarter ended September 30, 2001 from $7.3 million for the same
period in the prior year. This decrease included a decrease in practice area
management and administrative costs of $0.8 million, offset by an increase in
infrastructure costs of $0.3 million. The decrease in practice area management
and administrative costs included decreases in selling and marketing expenses
and recruiting costs. As a result of the Spin-Off (see Note 2), TSC and eLoyalty
entered into a Shared Services Agreement pursuant to which TSC provided to
eLoyalty certain administrative services. The Company charged these services to
eLoyalty and, as a result, infrastructure costs were reduced by $0.8 million
during the quarter ended September 30, 2000. There was no such offset during the
quarter ended September 30, 2001. Disregarding amounts billed to eLoyalty,
infrastructure costs decreased $0.5 million during the quarter ended September
30, 2001 compared to the same period in the prior year.
Goodwill amortization of $0.2 million was recorded during the quarter ended
September 30, 2000 as a result of a previous acquisition. During the quarter
ended June 30, 2001, the Company closed the Peer3 software development
operations and recorded a goodwill impairment charge of $3.0 million (as
discussed further in this section). Accordingly, there was no goodwill expense
for the quarter ended September 30, 2001.
During the quarter ended September 30, 2000, the Company reversed previously
incurred restructuring and other charges of $0.9 million. This reversal
reflected the collection of accounts receivable previously written off of $0.4
million, the reduction of previous charges for certain lease terminations of
$0.4 million and the reduction of previously taken severance charges of $0.1
million.
Incentive compensation of $2.2 million was accrued during the quarter ended
September 30, 2001 compared to $1.0 million for the same period in the prior
year. Incentive compensation as a percentage of net revenues increased to 8
percent for the quarter ended September 30, 2001 from 3 percent for the same
period in the prior year. This increase was primarily a result of the Company
achieving more of its internal performance targets for the quarter ended
September 30, 2001 as compared to the same period in the prior year. The Company
expects to continue to accrue incentive compensation throughout the 2001
calendar year.
Consolidated operating income was $1.1 million for the quarter ended September
30, 2001 compared to consolidated operating loss of $3.1 million for the same
period in the prior year. The Company's operating loss for the quarter ended
September 30, 2000 included $0.9 million of credits relating to the prior period
restructuring and other charges. Excluding this credit, the operating loss for
the quarter ended September 30, 2000 was $4.0 million. This improvement in
operating income was mainly due to the decrease in project personnel costs,
other project expenses and bad debt expense, partially offset by a decline in
revenues.
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Page 14
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
================================================================================
Other income and expense for the quarter ended September 30, 2001 was $0.5
million compared to $0.7 million for the same period in the prior year. The
decrease is a result of lower cash and cash equivalent balances and lower
interest rates during the quarter ended September 30, 2001 compared to the same
period in the prior year.
The Company's effective tax rate for the quarter ended September 30, 2001 was a
tax provision of 42 percent compared to a tax benefit of 36 percent for the same
period in the prior year. The tax charge for the quarter ended September 30,
2001 is higher than the federal tax rate mainly due to the effect of state
income taxes.
Weighted average number of common shares outstanding decreased due to treasury
stock purchases, offset by 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 increased because there was
no adjustment for the effect of stock options as the adjustment would have been
anti-dilutive for the quarter ended September 30, 2000.
Nine Months Ended September 30, 2001 Compared with Nine Months Ended September
30, 2000
Consolidated net revenues for the nine months ended September 30, 2001 decreased
3 percent to $97.6 million compared with $100.5 million for the same period in
the prior year. This decrease was primarily due to an overall decline in the
demand for information technology services, offset by an increase in average
billing rates.
Project personnel costs increased slightly to $51.8 million for the nine months
ended September 30, 2001 from $51.0 million for the same period in the prior
year, an increase of 2 percent. The increase was mainly due to annual salary
increases, partially offset by lower average headcount resulting from second
quarter 2001 restructuring charges (as described further in this section).
Project personnel costs as a percentage of net revenues increased to 53 percent
for the nine months ended September 30, 2001 from 51 percent for the same period
in the prior year due to lower staff utilization during the first and second
quarters of 2001. As a result of these headcount reductions, utilization
improved during the quarter ended September, 30, 2001 compared to the same
period in the prior year.
Other project expenses decreased to $12.1 million for the nine months ended
September 30, 2001 from $15.3 million for the same period in the prior year, a
decrease of $3.2 million. This decrease was mainly due to a decrease of $2.6
million in travel costs as a result of lower average headcount and the Company
implementing more effective cost controls throughout the period and a decrease
of $0.6 million in various other costs including software development costs as a
result of the closure of the Peer3 software development operation in the second
quarter of 2001 and international expenses. Other project expenses as a
percentage of net revenues decreased to 12 percent for the nine months ended
September 30, 2001 from 15 percent for the same period in the prior year as a
result of
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Page 15
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
================================================================================
the items mentioned above.
Bad debt expense increased to $8.9 million for the nine months ended September
30, 2001 from $3.9 million for the same period in the prior year. The Company
recorded $7.6 million during the second quarter of 2001 and $2.7 million during
the third quarter of 2000 of bad debt expense mainly due to financial problems
at dot-com clients.
Management and administrative support costs increased to $24.8 million for the
nine months ended September 30, 2001 from $24.1 million for the same period in
the prior year. This increase included an increase in infrastructure costs of
$1.6 million offset by a decrease in practice area management and administrative
costs of $0.9 million. As a result of the Spin-Off, TSC and eLoyalty entered
into a Shared Services Agreement pursuant to which TSC provided to eLoyalty
certain administrative services. The Company charged these services to eLoyalty
and, as a result, infrastructure costs were reduced by $3.5 million during the
nine months ended September 30, 2000. There was no such offset during the nine
months ended September 30, 2001. Disregarding amounts billed to eLoyalty,
infrastructure costs decreased $1.9 million during the nine months ended
September 30, 2001 compared to the same period in the prior year. This decrease
included decreases in domestic office costs, internal systems and human
resources areas and corporate marketing expenses. The decrease in practice area
management and administrative costs of $0.9 million included decreases in
selling and marketing expenses, recruiting costs and international costs.
Goodwill amortization of $0.4 million was recorded during the nine months ended
September 30, 2001 compared to $0.7 million for the same period in the prior
year. During the quarter ended June 30, 2001, the Company closed the Peer3
software development operations and recorded a goodwill impairment charge of
$3.0 million (as discussed further in this section).
During the quarter ended June 30, 2001, the Company recorded $9.2 million in
restructuring and other charges comprised of $6.9 million relating to the
closure of the Peer3 software development operation and $2.3 million in
non-Peer3 severance related costs. The Peer3 charge included $3.0 million in
goodwill impairment, $0.9 million in asset write-offs, $0.6 million in costs
associated with lease terminations, $1.5 million in severance costs, $0.4
million in professional fees and $0.5 million in computer lease terminations,
commitments and other costs. As of September 30, 2001, the Company had made cash
payments of $0.8 million related to Peer3 severance costs of approximately 30
employees, $0.4 million in professional fees, $0.1 million in lease costs and
$0.3 million in other costs. The remaining accrual balance of $1.2 million
relates to lease terminations and severance costs and is expected to be utilized
by February 2003. The non-Peer3 severance charge of $2.3 million relates to $1.5
million in severance costs, $0.5 million in asset write-offs and $0.3 million in
other costs. As of September 30, 2001, the
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Page 16
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
================================================================================
Company had used $1.3 million of this charge for cash payments of $0.8 million
related to the severance of approximately 70 employees and $0.5 million in asset
write-offs. The remaining accrual balance of $1.0 million is expected to be
utilized by the end of the second quarter of 2002.
During the quarter ended March 31, 2000, the Company recorded a pre-tax charge
of $4.7 million for the closure of its Latin American operations. During the
quarter ended September 30, 2000, the Company collected $0.4 million of accounts
receivables previously written-off and, as a result, the cumulative charge was
reduced to $4.3 million. As of September 30, 2001, the Company had used
approximately $4.1 million of this charge for cash payments of $2.9 million
related to severance costs for approximately 40 employees, lease terminations
and professional fees ($0.1 million paid during the nine months ended September
30, 2001) and $1.6 million in asset write-offs, offset by the accounts
receivables collections of $0.4 million. The remaining accrual balance of $0.2
million as of September 30, 2001 represents professional fees, tax charges and
various other closure costs and is expected to be utilized by the end of 2001.
In addition to the credit taken for the Latin America charge as discussed above,
during the nine months ended September 30, 2000, the Company reversed previously
incurred restructuring and other charges of $0.5 million. This reversal
reflected the reduction of previous charges for certain lease terminations of
$0.4 million and the reduction of previously taken severance charges of $0.1
million.
Incentive compensation of $6.9 million was accrued during the nine months ended
September 30, 2001 compared to $6.1 million for the same period in the prior
year. Incentive compensation as a percentage of net revenues increased to 7
percent for the nine months ended September 30, 2001 compared to 6 percent for
the same period in the prior year. This increase was primarily a result of the
Company achieving more of its internal performance targets for the nine months
ended September 30, 2001 as compared to the same period in the prior year. The
Company expects to continue to accrue incentive compensation throughout the 2001
calendar year.
Consolidated operating loss was $14.9 million for the nine months ended
September 30, 2001 compared to consolidated operating loss of $4.3 million for
the same period in the prior year. The Company's operating loss for the nine
months ended September 30, 2001 included $9.2 million of charges relating to the
closure of the Peer3 software development operation and non-Peer3 severance
costs, offset by a credit for prior year restructuring and other charges of $1.5
million. The Company's operating loss for the nine months ended September 30,
2000 included a charge for the closure of the Latin American operations of $4.7
million, offset by credits for prior restructuring and charges of $0.9 million.
Excluding these charges and credits, the operating loss for the nine months
ended September 30, 2001 was $7.1 million compared to $0.5 million for the same
period in the prior year. This decrease
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<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
================================================================================
was mainly due an increase in the bad debt expense and the decline in revenues,
offset by a decrease in other project expenses.
Other income and expense for the nine months ended September 30, 2001 was $1.4
million compared to $2.6 million for the same period in the prior year. The
decrease is a result of lower cash and cash equivalent balances and lower
interest rates during the nine months ended September 30, 2001 compared to the
same period in the prior year. The decrease in cash and cash equivalent balances
partially resulted from the Spin-Off of eLoyalty and the costs associated with
the Spin-Off.
The Company's effective tax rate for the nine months ended September 30, 2001
was a tax benefit of 30 percent compared to a tax benefit of 31 percent for the
same period in the prior year.
Weighted average number of common shares outstanding and weighted average number
of common and common equivalent shares outstanding decreased slightly due to
treasury stock purchases, offset by the exercise of stock options and the
issuance of shares under the Company's employee stock purchase plan.
On February 15, 2000 TSC completed the Spin-Off (see Note 2). For the nine
months ended September 30, 2000, there were no discontinued operations reported
for the Spin-Off in the Company's results of operations, as the Company provided
for the net loss on distribution in its results of operations for the year ended
December 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased $0.7 million during the nine months ended
September 30, 2001. The increase resulted from the proceeds from available-for
sale securities of $4.4 million (transferred from marketable securities) and the
exercise of stock options and issuance of employee stock purchase shares of $1.8
million, offset by treasury stock purchases of $2.9 million and cash paid for
restructuring and other charges of $2.9 million. Marketable Securities Held in
Trust relates to the Company's deferred compensation plan and is not generally
available for operations. Historically this was classified under Marketable
Securities.
Net cash used in operating activities was $1.7 million and $23.7 million for the
nine months ended September 30, 2001 and 2000, respectively. Net cash used in
operating activities for the nine months ended September 30, 2001 mainly
resulted from payments made for restructuring and other charges. Cash
commitments relating to remaining restructuring and other charges are $1.3
million in severance related costs and $1.8 million of other commitments and are
expected to be paid through 2004. The Company believes that its cash and cash
equivalents, marketable securities and anticipated cash flows are sufficient to
meet the Company's current cash requirements.
Net cash provided by investing activities was $3.6 million for the nine months
ended September 30, 2001. The Company received $4.4 million from the sale of
available-for-
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Page 18
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
================================================================================
sale securities. The proceeds from available-for-sale securities were
transferred to cash and cash equivalents. Capital expenditures for the nine
months ended September 30, 2001 were $0.8 million. The Company currently has no
material commitments for capital expenditures.
The Company has a $10.0 million unsecured line of credit facility (the Facility)
with Bank of America National Trust and Savings Association (Bank of America).
The agreement expires December 31, 2001. At the Company's election, loans made
under the Facility bear interest at either the Bank of America reference rate or
the applicable Eurodollar interest rate plus 0.75 percent. The unused line fee
is 0.125 percent of the unused portion of the commitment. The Facility requires,
among other things, the Company to maintain certain financial ratios. As of
September 30, 2001, the Company was in compliance with these financial ratio
requirements. There was no borrowing under the line of credit during the nine
months ended September 30, 2001.
NEW ACCOUNTING STANDARDS
On July 20, 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No.
141 is effective for any business combinations initiated after June 30, 2001.
SFAS No. 141 requires that all business combinations be accounted for under a
single method, the purchase method of accounting. Use of the
pooling-of-interests method is no longer permitted. SFAS No. 142 will be
effective for TSC January 1, 2002. Under SFAS No. 142, goodwill should no longer
be amortized to earnings, but instead be reviewed for impairment on at least an
annual basis. The Company anticipates that the adoption of SFAS No. 141 and SFAS
No. 142 will not have a significant effect on the Company's results of
operations or its financial position.
On August 15, 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 addresses the financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. SFAS No. 143 is required for
adoption for fiscal years beginning after June 14, 2002. The Company anticipates
that the adoption of SFAS No. 143 will not have a significant effect on the
Company's results of operations or its financial position.
On October 3, 2001, the FASB issued SFAS No.144, "Accounting for the impairment
or Disposal of Long-Lived Assets." The objectives of SFAS No. 144 are to address
the significant issues relating to the implementation of SFAS No. 121,
"Accounting for the Impairment of Long-lived Assets and for Long-Lived Assets to
Be Disposed Of," and to develop a single accounting model, based on the
framework established in SFAS No. 121, for long-lived assets to be disposed of
by sale, whether previously held and used or newly acquired. The Company
anticipates that the adoption of SFAS No. 144 will not have a significant effect
on the Company's results of operations or its financial position.
================================================================================
Page 19
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
================================================================================
This Form 10-Q contains or may contain certain forward-looking statements
concerning the Company's financial position, business strategy, budgets,
projected costs and plans and objectives of management for future operations as
well as other statements including words such as "anticipate," "believe,"
"plan," "estimate," "expect," "intend," and other similar expressions. These
forward-looking statements involve significant risks and uncertainties. Although
the Company believes its expectations reflected in such forward-looking
statements are based on reasonable assumptions, readers are cautioned that no
assurance can be given that such expectations will prove correct and that actual
results and developments may differ materially from those conveyed in such
forward-looking statements. Important factors that could cause actual results to
differ materially from the expectations reflected in the forward-looking
statements in this Form 10-Q include, among others, the pace of technological
change, the Company's ability to manage growth and attract and retain employees,
the Company's ability to accommodate a changing business environment, general
business and economic conditions in the Company's operating regions, market
conditions and competitive and other factors, all as more fully described in the
Company's Annual Report on Form 10-K for the year ended December 31, 2000 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 20
<PAGE>
TECHNOLOGY SOLUTIONS COMPANY
PART II. OTHER INFORMATION
================================================================================
ITEM 6--EXHIBITS AND REPORT ON FORM 8-K
(a) No reports on Form 8-K were filed during the quarter ended September
30, 2001.
All other items in Part II are either not applicable to the Company
during the quarter ended September 30, 2001, 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.
================================================================================
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<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on the 9th day of
November 2001.
TECHNOLOGY SOLUTIONS COMPANY
Date: November 9, 2001 By: /s/ LAURENCE P. BIRCH
-------------------- -----------------------------
Laurence P. Birch
Chief Financial Officer
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</TEXT>
</DOCUMENT>