Technology Solutions Company (“TSC”) is a leading consulting firm delivering specialized technology-enabled business solutions to address clients’ business issues and challenges. TSC provides business process improvement and software solutions related to enterprise applications for PeopleSoft and SAP, customer relationship management (“CRM”) and digital healthcare technology. We focus on industries that have a strategic need for these solutions, primarily manufacturing, healthcare and financial services.
By combining industry know-how with best practices, methodologies and tools, our experienced teams assist clients in designing and deploying business, process and technology strategies. We focus on solutions with measurable value and on the transfer of knowledge to our clients. As a trusted advisor, TSC maintains high client satisfaction levels and long-term relationships based on our collaborative approach and a robust quality assurance program.
As used herein, the terms “TSC” or the “Company,” unless the context otherwise clearly requires, refers to Technology Solutions Company and its subsidiaries. TSC trades on the Nasdaq Stock Market ® under the symbol “TSCC.” TSC is incorporated under the laws of the state of Delaware and operates within one reportable business segment. This report discusses the twelve months ended December 31, 2005. The Company’s principal executive office is located in Chicago, Illinois.
Since its inception in May 1988, the Company has performed over 2,500 successful projects with more than 900 clients.
On October 25, 2005, a one-for-twenty reverse stock split of the Company’s common stock became effective. All share and per share data contained herein have been adjusted to reflect the one-for-twenty reverse stock split, except for Item 4. — Submission of Matters to a Vote of Security Holders.
This Form 10-K contains or may contain forward-looking statements concerning our financial position, results of operations, cash flows, business strategy, budgets, projected costs and plans and objectives of management for future operations as well as other statements. Forward-looking statements may be preceded by, followed by or include the words “may,” “will,” “should,” “could,” “would,” “potential,” “possible,” “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “hope,” “project” or similar expressions. These forward-looking statements involve significant risks and uncertainties. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, readers are cautioned that no
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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. We claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 for all forward-looking statements.
Forward-looking statements are not guarantees of performance. Forward-looking statements speak only as of the date on which they are made and, except as may be otherwise required by law, we do not undertake any obligation to update any forward-looking statement to reflect subsequent events or circumstances. If we do update or correct one or more forward-looking statements, readers, investors and others should not conclude that we will make additional updates or corrections with respect thereto or with respect to other forward-looking statements. The outcomes expressed or implied in these forward-looking statements could be affected by many important factors. Actual results may vary materially.
Services and Offerings
Technology Solutions Company brings specialized technology-enabled business solutions to the key processes and operations at the heart of successful organizations. Our expertise in enterprise applications ranges from finance and human resources to supply chain management. In customer relationship management, we look at the total customer experience to help our clients provide better service and greater value at every customer touch point. In digital imaging, TSC helps healthcare providers eliminate the high recurring expense of film, optimize processes and ensure that imaging systems work with one another and with other enterprise systems. Underlying all these solutions are our process adoption and training services to facilitate change management and knowledge transfer throughout the implementation process. ( See Figure 1)
Figure 1: TSC Consulting Practice Areas
| PeopleSoft | Customer | |||||||||||||
| SAP Enterprise | Enterprise | Relationship | Digital | |||||||||||
| Applications | Applications | Management | Healthcare | |||||||||||
• • • • • |
Enterprise Resource Planning Supply Chain Management Supplier Relationship Management Human Capital Management Service Parts Management |
• • • • • • |
Enterprise Resource Planning Supply Chain Management Human Capital Management Enterprise Performance Management Financials Upgrade Services & Strategy |
• • • • • |
Customer Experience Management Sales & Order Management Customer & Field Service Product Configuration Marketing & Campaign Management |
• • • |
Digital Imaging/Picture Archiving & Communication Systems Electronic Health Records Digital Systems Integration & Optimization |
|||||||
Process Adoption & Training
• • • |
Change Management Application & Operations Training eLearning |
• • |
Web & Multimedia Training Learning Management System Implementation |
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By utilizing experienced, collaborative teams who focus on speed-to-value, TSC helps clients deploy business, process and technology innovations. From IT strategy to project planning to implementation and training, our clients have access to knowledgeable resources at each stage of the engagement.
Acquisitions
The Company acquired two companies in 2004 in separate transactions. On December 31, 2004, the Company completed the acquisition of Zamba Corporation, which gives the Company a stronger position in the customer relationship management market. On October 5, 2004, TSC acquired the assets of Proceed North America LLC, an implementer of SAP ® Packaged Services. On March 15, 2006, TSC announced that it has acquired the consulting assets of Charter Consulting, Inc., which positions the Company to provide enhanced consulting value in strategic customer demand generation and operational effectiveness.
Clients
TSC’s business is primarily focused on the commercial market, serving clients based in the United States, but also supports global deployments and some international clients. The Company’s typical clients are companies with between $250 million to $2 billion in annual revenue or similar sized divisions of larger corporations. During 2005, TSC performed project work for 110 clients. During 2005, our top client represented 17 percent (Electro-Motive Diesel Inc.) of revenues before reimbursements. During 2004, our top client represented 10 percent (United Water Inc.) of revenues before reimbursements. During 2003, the top two clients represented 15 percent (Exxon Mobil Corp.) and 11 percent (Caterpillar Inc.) of revenues before reimbursements, respectively.
Competition
The IT/business consulting market is highly competitive and continually changing due to shifting business requirements and evolving technology. The Company’s revenue is primarily derived from companies with between $250 million to $2 billion in annual revenue, including Fortune 1000 companies, or similar sized divisions of larger corporations, and there is vigorous competition for these consulting engagements.
TSC’s competitors include international, national and regional consulting and implementation organizations, contract programming companies (including offshore groups), and the professional services divisions of application software firms. The firm also competes with clients’ internal IT resources. Many of TSC’s competitors have significantly greater financial, technical and marketing resources as well as greater name recognition.
Competition has intensified in recent years as a result of both economic and market pressures. Clients continue to try to minimize costs, negotiate lower prices, or perform IT services in-house. In addition, there has been increased competition within the industry.
TSC believes the principal competitive factors in the consulting industry include:
• Industry and technology expertise and the ability to deliver innovative service offerings
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• Quality of services and solutions, as well as the skills to achieve results on a timely basis and to add value to the client’s business
• Long-term client relationships, as well as a reputation for delivering successful projects
Competitive Differentiation
TSC believes that it differentiates itself from its competitors in four key areas:
• Intellectual capital, innovation and execution: TSC has a tradition of turning leading-edge ideas into real-world business strategies and processes for its clients. The Company’s industry, process and technology experts drive the development of innovative services to enhance our clients’ business and IT operations. TSC’s consulting staff utilizes continuous peer knowledge exchange to share best practices from current projects and from strategic relationships with software and technology providers. This intellectual capital forms the foundation of TSC’s value-add services, tools and methodologies.
• Experience-based delivery model: Our consultants plan, design and implement business solutions for our clients based on deep knowledge of industry processes and best practices, combined with expertise in current technologies and applications. Led by senior-level professionals with both industry and consulting experience, our engagement teams leverage our proven methodologies and tools to deploy specialized business solutions to our clients.
• Highly skilled, results-driven engagement teams: TSC has produced measurable benefits to its clients over the years through seasoned and experienced consulting professionals (with an average of more than 18 years experience); the use of proprietary implementation tools; the ability to apply new technologies and innovative business solutions; a flat project staffing model of more experienced personnel and less total personnel per project; and the quality of its work product.
• Objective advisor: TSC works with a variety of vendors to shape and implement our service offerings and can provide clients with objective advice in areas of applications, tools and technology.
Business Development
TSC employs several primary revenue generation approaches — through relationships cultivated by its client officers; through selling efforts of its business development professionals; through specialty services that address targeted industry and business concerns; and through intellectual capital and lead-generating marketing programs.
Strategic Relationships
The Company has strategic relationships with software and technology providers that complement and support its service offerings, including SAP ® and Oracle/PeopleSoft. TSC enters into these relationships to provide integrated, high-value solutions to clients and to leverage joint business development opportunities. TSC’s relationships are non-exclusive, and
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TSC remains independent from these providers thereby providing clients unbiased counsel and a broad spectrum of services to meet their business needs.
International
TSC had limited international operations in 2005 and 2003 and no international operations in 2004. International operations represented less than one percent of revenues in 2005 and 2003 (see Note 14 in “Notes to Consolidated Financial Statements”). The international operations were in Canada during 2005 and in Europe during 2003. For additional information about certain risks related to the Company’s international operations, see further discussions in Item 1A. – Risk Factors.
Personnel
As of December 31, 2005, TSC had a total professional staff of 143 (excluding Infrastructure). The following table summarizes, as of December 31, 2005, the experience levels of TSC’s professional staff (excluding sales and marketing personnel).
| Average Relevant Experience (Years) | ||||||||||||||||
| % of | ||||||||||||||||
| Level | Total | Consulting | Industry | Total | ||||||||||||
Client Officers / Senior Vice Presidents |
8 | % | 15 | 9 | 24 | |||||||||||
Vice Presidents |
12 | % | 10 | 11 | 21 | |||||||||||
Managers |
22 | % | 9 | 12 | 21 | |||||||||||
Leads |
34 | % | 8 | 12 | 20 | |||||||||||
Analysts |
20 | % | 6 | 7 | 13 | |||||||||||
Associate Consultants |
4 | % | 1 | 2 | 3 | |||||||||||
Infrastructure
As of December 31, 2005, TSC had a staff of 25 individuals who comprised the corporate infrastructure support function. The services provided by infrastructure include: senior corporate management; accounting; financial reporting; finance; tax; legal; treasury; human resources; employee benefits; marketing; public and investor relations; office operations; staffing of our project personnel; recruiting; training; internal communications; internal technology applications; management of new business opportunities; planning; quality assurance; and risk management.
Intellectual Property Rights
Most of the Company’s clients require that the Company grant to them proprietary and intellectual property rights with respect to the work product resulting from the Company’s performance of services, including the intellectual property rights to any custom software developed by the Company for them. Each grant of proprietary and intellectual property rights limits the Company’s ability to reuse work product with other clients.
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In addition, the Company’s success is related to its specialized expertise and methodologies. To protect its proprietary information, the Company relies upon a combination of trade secret and common law, employee nondisclosure policies and third party confidentiality agreements. However, there can be no assurance that any of these steps taken by the Company will be adequate to deter misappropriation of its specialized expertise and methodologies.
Although the Company believes that its services and products do not infringe on the intellectual property rights of others, there can be no assurance that infringement claims will not be asserted against the Company in the future.
Executive Officers of the Registrant
| The executive officers of TSC are as follows: | ||
Carl F. Dill, Jr.
|
Chairman and Acting Chief Executive Officer | |
Philip J. Downey
|
Vice President — General Counsel and Corporate Secretary | |
Sandor Grosz
|
Vice President and Chief Financial Officer | |
Carl F. Dill, Jr., age 60, has been Acting Chief Executive Officer and Chairman of the Board of the Company since December 2005. He served as Lead Director of the Company from May 2005 to December 2005. He has been a Director of the Company since July 2001. Since June 2001, he has served as a strategic advisor to a number of high-tech and consulting businesses. From 1998 until 2001, he served as Vice President and Chief Information Officer of Time Warner, Inc. Mr. Dill served from 1982 until 1998 as Senior Vice President and Chief Information Officer for McDonald’s Corporation. He is also a Director of ThoughtWorks, Inc. and an advisory board member for Arxan Technologies, Inc.
Philip J. Downey, age 54, has been Vice President — General Counsel and Corporate Secretary since October 1, 2004. Mr. Downey joined TSC in December 1997 as Director of Taxes and was promoted to Vice President Tax and Tax Counsel in January 2000. Prior to joining TSC, he had over 24 years of tax and law experience, including Chief Operating Officer at Empire Carpet, Director of International Taxes for Quaker Oats, and five years with the Internal Revenue Service. He is a member of the Illinois Bar and a Certified Public Accountant.
Sandor Grosz, age 50, has been Vice President and Chief Financial Officer of Technology Solutions Company since October 1, 2004. Mr. Grosz joined TSC in March 1997 as International Controller and was promoted to the role of Corporate Controller in December 1997. From 1988 to 1997, he was Vice President of Finance for Management Consulting Group PLC, an international consulting firm. His prior experience includes public accounting and litigation support consulting, most recently as a Senior Audit Manager with KPMG Peat Marwick. He is a Certified Public Accountant.
Available Information
The Company maintains an Internet web site at http://www.techsol.com that includes a hypertext link to the Securities and Exchange Commission’s (SEC) web site where the Company’s Annual
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Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports are available without charge, as soon as reasonably practicable following the time that they are filed with or furnished to the SEC. The contents of our website are not incorporated herein by reference.
ITEM 1A. RISK FACTORS
We operate in an environment that is difficult to predict and that involves significant risks and uncertainties, many of which are beyond our control. These risks and uncertainties include, but are not limited to, those set forth below. Other risks and uncertainties not presently known to us or that are not currently believed to be important, if they materialize, also may adversely affect us. In particular, these risks and uncertainties could cause our actual financial, operating and other results to differ materially from any results that we might project, forecast, estimate or budget in our forward-looking statements.
We are subject to numerous risks currently affecting our business.
We are currently subject to many risks, including, without limitation:
• our ability to manage decreased revenue levels;
• our need to attract new business and increase revenues;
• our declining cash position;
• our ability to manage costs and headcount relative to expected revenues;
• our ability to successfully introduce new service offerings;
• our dependence on a limited number of clients for a large portion of our revenue;
• the potential loss of significant clients;
• our ability to attract new clients and sell additional work to existing clients;
• our ability to attract and retain employees;
• the rapidly changing nature of information technology services, including our ability to keep pace with technological and market changes and our ability to refine and add to existing service offerings;
• the decreasing level of options available for grants by us to attract new employees and to retain existing employees; and
• changing business, economic or market conditions and changes in competitive and other factors.
We must increase revenues and return to profitability in order to continue as a going concern.
We have experienced ongoing decreased demand for our services resulting in declining revenues and recurring operating losses. For the years ended December 31, 2005 and 2004 we had operating losses of $18.1 million and $9.3 million, respectively. We need to attract business from new clients through sales and marketing efforts and through specialty services that address targeted industry and business concerns in order to continue as a successful service provider.
We have introduced a number of new service offerings to address the need for increased revenues. The acquisition of Zamba formed the basis of our current CRM practice and our recent Charter acquisition is intended to form the basis of our Operational Excellence practice. In addition, our healthcare service offering is another example of our efforts to expand our base of services. No assurance can be given that these or any future service offerings will gain
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acceptance with our existing clients or any prospective clients. For example, in the past we have introduced service offerings in the consumer products and retail areas that have been less successful than anticipated and have been discontinued. The absence of successful new service offerings or substantial expansion of existing service lines will have an adverse impact on our future revenues. In addition, the introduction of unsuccessful service offerings may result in write-offs and other expenses that could adversely affect our operating performance and financial condition.
In recent years no major technological developments have been introduced that could replace the applications with respect to which we currently provide services and could render some of our existing expertise obsolete. If such developments occur there can be no assurance that we will have the technological expertise to provide services to address such developments or to replace services that become obsolete.
If we are unable to increase revenues and regain profitability, we will realize a decline in the quality of our services and products and our ability to retain key personnel and our business, financial condition and results of operations will suffer.
If we continue to experience operating losses, our cash resources will be depleted and additional sources of cash will be required if we are to continue as a going concern.
We expect to experience continued operating losses until revenues increase sufficiently to cover operating costs. Until such time, our operating losses and the associated cash requirements are expected to be funded from existing cash resources. If we are not successful in increasing revenues and eliminating negative cash flows, it will be necessary to raise additional capital to offset losses from operations. There can be no assurance that we will be able to obtain any financing or that, if we were to be successful in finding financing, it would be on favorable terms. Failure to obtain necessary cash resources will threaten our ability to continue as a going concern.
We must manage costs to match the level of demand for our services, and failure to do so will adversely affect our business.
We regularly evaluate our business needs and the skill sets of our employees in order to balance our resources and costs. Any failure to effectively manage costs and resources will adversely affect our business. While we have taken steps to reduce our costs, we may be required to take further actions to reduce our costs if revenues are insufficient to support our cost structure. However, we may encounter limits to our ability to reduce our costs further. Accordingly, no assurance can be given that we will be able to implement additional cost reductions necessary to match declining demand. In addition, efforts to reduce our cost structure could adversely affect our ability to increase our future revenues. Any decline in demand without a corresponding and timely reduction in staffing and other expenses, or a staffing increase that is not accompanied by a corresponding increase in demand, could have a material adverse effect on our business, operating results and financial condition. Additionally, any future increase in demand without a corresponding increase in staffing may render us unable to maintain or improve our market share and/or strain or overwhelm existing management resources, operational resources, financial resources and management information systems. There can be no assurance that we will be able to successfully manage future fluctuation in demand.
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Our expense levels are based, in part, on expectations of future revenues. In addition, a significant percentage of our operating expenses, particularly rent and depreciation, is fixed. Accordingly, an unanticipated decrease in the number or average size of, or an unanticipated delay in the scheduling for, projects, or other decrease in revenues, could materially and adversely affect our operating results and otherwise adversely affect our operations.
An unanticipated termination or decrease in the size or scope of a major project, a client’s decision not to proceed with a project as anticipated or the completion during a quarter of a major client project could diminish employee utilization and have a material adverse effect on our business, financial condition and results of operations. Revenues and earnings may also fluctuate from quarter to quarter because of such factors as:
• the contractual terms and timing of completion of projects, including achievement of certain business results;
• any delays incurred in connection with projects;
• the adequacy of provisions for losses and bad debts;
• the accuracy of our estimates of resources required to complete ongoing projects;
• the loss of key highly skilled personnel necessary to complete projects;
• increases in expenditures to support new service offerings, e.g., acquisitions of people and technology; and
• general economic conditions.
We may not realize expected benefits from any restructuring initiatives.
In recent years, we have restructured our business and reduced our workforce in order to more closely match our expenses with out revenues. We may have to institute additional restructurings in the future to achieve incremental cost savings or to strategically realign our resources and service offerings. We cannot predict whether we will realize synergies and improved operating performance as a result of any such restructuring. We also cannot predict whether any restructuring will adversely affect our ability to retain key employees which, in turn, could adversely affect our operating results.
Our inability to achieve appropriate utilization rates or charge acceptable rates for our services could adversely affect our operating profit.
Our current operating profit margins are largely a function of the respective rates we are able to recover for our services and the utilization rate, or chargeability, of our professionals. Accordingly, if we are not able to achieve appropriate pricing for our services or an appropriate utilization rate for our professionals, our operating profit margin will suffer in the absence of corresponding cost reductions.
The rates we are able to recover for our services are affected by a number of factors, including:
• the demand for our services compared to the supply of consultants available to deliver the services;
• our clients’ perceptions of our ability to add value through our services;
• the sensitivity of our clients to changes in prices for our services;
• our reputation for delivering quality work in a timely manner;
• the introduction of new in-demand services or products by us or our competitors;
• our competitors’ pricing policies; and
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• the use of globally sourced, lower-cost service delivery capabilities by our competitors and our clients.
We face continuous pressure from several directions on the rates charged to clients. Many of our competitors, including larger consulting firms with greater financial and personnel resources, smaller consulting firms with lower cost structures and large consulting firms in offshore locations such as India that have access to pools of technical consultants at lower costs than consultants based in the United States, may be willing to provide the services at a lower cost than us.
Our utilization rates are affected by a number of factors, including:
• our ability to transition employees from completed projects to new engagements;
• our ability to enter into long-term contractual relationships with clients;
• our ability to accurately forecast demand for our services and thereby maintain an appropriate headcount;
• our ability to increase the ratio of billable employees to non-billable employees; and
• our ability to manage attrition.
We must balance our supply of consultants skilled in a particular service with the demand for that service. If the utilization rate of our consultants is very high it may be difficult to add new clients for these services. Conversely, if the utilization rate is too low the profitability of our business will be adversely impacted.
Any negative changes to our retention of consultants, utilization rates or billable rates could materially adversely affect our business, financial condition and results of operations.
A limited number of our clients comprise a large portion of our revenues and any decrease in revenues from these clients could have an adverse effect on our business, financial condition, operating results and prospects.
We derive a significant portion of our revenue from a limited number of clients. During 2005, our top two clients accounted for 23% of our revenues before reimbursements and our top five clients accounted for 39% of our revenues before reimbursements. In 2004, our top two clients accounted for 19% of our revenues before reimbursements and our top five clients accounted for 38% of our revenues before reimbursements.
The loss of one or more of these clients could materially adversely affect our business, financial condition and results of operations. Although our large clients vary from time to time and long-term revenues do not rely on any one client, our revenues, results of operations and financial position could be materially adversely affected if we were to lose one or more of our top clients or if we were to fail to collect a large account receivable due from one of these clients.
It is also necessary to replace completed projects with new projects for the same clients or with projects from new clients. No assurance can be given that we will be able to successfully replace completed projects.
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Unanticipated cancellations or suspensions of projects could adversely affect our operating results.
Because of the project-based nature of our work and the fact that many of the projects we undertake are large, there is a risk of a material adverse impact on operating results if there is an unanticipated suspension or cancellation of a large project or a client refuses to pay fees and expenses when due. A project cancellation or suspension or a refusal or failure to pay can be based on any number of causes, many of which are beyond our control. These include financial difficulties of a client; a change in client priorities, client management or client strategies; and a change in client ownership. The suspension or cancellation of a project or a failure or refusal to pay fees and expenses when due could result in a decrease or adjustment in revenues, the need to reassign staff and damage to our reputation. Because many projects are high profile, mission critical projects for major clients, a failure or inability to meet a client’s expectations for the amounts budgeted, timing and deliverables for the projects we undertake could damage our reputation and adversely affect our ability to attract new business.
In addition, the contracts with many of our clients are short-term and our clients are able to reduce or cancel services without incurring any penalty. Unanticipated project cancellations could result in the loss of substantial anticipated revenues and could require us to maintain or terminate a significant number of underutilized employees, resulting in a higher number of unassigned people and/or higher severance expenses. Uncertainty in the economic environment may increase the probability that services may be reduced or canceled.
Certain of our engagements are on a fixed cost basis which results in additional operating risks.
We contract services on either a time-and-materials basis or a fixed price basis. Both forms of contracts require us to estimate the number of hours and materials required before entering into the contract. In the case of a time-and-materials contract, failure to achieve the estimated results could subject us to pricing pressures from clients (even though there is no legal obligation to complete the work within the estimates) or could lead to the loss of future work from the client. Failure to complete fixed-price contracts within the contractual parameters will expose us to unrecoverable cost overruns. In either case, these failures could have a material adverse effect on our business, operating results and financial condition.
On occasion, we may be subject to project risks arising in connection with incentive provisions in contracts with clients.
Certain clients may require payment incentives related to factors such as costs incurred, benefits produced, goals attained or adherence to schedule. In these contracts, payment of all or a portion of the fees owing to us will be contingent upon meeting revenue-enhancement, cost-saving or other contractually defined goals which are often complex and may often be dependent in some measure on the client’s actual levels of business activity. The insistence by our clients to include in contracts incentives related to additional revenues generated, costs incurred, benefits produced or adherence to schedule or other benchmarks could increase the variability of revenues and margins earned by us on such contracts.
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Our failure to perform services properly could result in substantial claims from clients.
Many of our projects involve technology applications or systems that are critical to the operations of a client’s business and handle very large volumes of transactions. Failure to deliver applications or systems to clients with the promised functionality or within the promised time frame, or to satisfy the required service levels for support and maintenance, could result in substantial claims from clients. While we take precautionary actions to create redundancy and back-up systems, any such failures could result in claims by clients for substantial damages. Although we attempt to limit the amount and type of our contractual liability for defects in the applications, systems or services provided, and carry errors and omission insurance coverage, there can be no assurance that these limitations and insurance coverage will be applicable and enforceable in all cases, and the failure of a project could expose us to significant financial exposure. Even if these limitations and insurance coverage are found to be applicable and enforceable, our liability to our clients for these types of claims could be material in amount and could affect our business, financial condition and results of operations.
Our operating results will likely fluctuate, which may cause volatility in our stock price.
