| TECHNOLOGY SOLUTIONS COMPANY 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 dlra18dtta1 million and dlra9dtta3 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 Page 7 _________________________________________________________________ [41]Table of Contents 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 |
| 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 |
| Page 8 _________________________________________________________________ [42]Table of Contents 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, eg, 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 Page 9 _________________________________________________________________ [43]Table of Contents • 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 23prca of our revenues before reimbursements and our top five clients accounted for 39prca of our revenues before reimbursements |
| In 2004, our top two clients accounted for 19prca of our revenues before reimbursements and our top five clients accounted for 38prca 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 |
| Page 10 _________________________________________________________________ [44]Table of Contents 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 |
| Page 11 _________________________________________________________________ [45]Table of Contents 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 |
| Our operating results have varied significantly from quarter to quarter in the past, and can be expected to continue to fluctuate, due to a variety of factors, many of which are beyond our control |
| Our stock price may be significantly affected by these factors, which include, but are not limited to: • changing conditions in the information technology market and in the US and global economies in general; • the number and timing of new clients and new projects for existing clients; • our ability to replace completed projects with new projects in a timely fashion; • differences in the number of billing days and/or holidays between quarters; • the number of vacation days and sick days taken by our employees in a particular quarter; • the utilization of our employees, and our ability to match available employee resources with client service requirements; • introductions or announcements of new service offerings; • changes in accounting rules, such as expensing employee stock option grants; • increased competition from low-priced overseas technology consultants; and • the costs related to meeting new regulations |
| The failure to meet the expectations of the investment community may cause our stock price to decline, possibly substantially |
| In addition, from time to time the stock market experiences significant price fluctuations that affect the market prices of equity securities of many companies and that often are unrelated to the operating performance of such companies |
| These broad market fluctuations may materially and adversely affect the price of our stock |
| A significant stock price decline could result in litigation, which could be costly, lengthy and divert management’s attention and resources from business operations |
| We operate in a highly competitive industry |
| The systems consulting and implementation market includes a large number of participants, is subject to rapid changes and is highly competitive |
| We compete with and face potential Page 12 _________________________________________________________________ [46]Table of Contents competition from many companies that have significantly greater financial, technical and marketing resources and greater name recognition than do we |
| We also compete with globally sourced, lower-cost service providers as well as smaller service providers with specific, more narrowly focused service offerings |
| Our clients primarily consist of companies with between dlra250 million to dlra2 billion in annual revenue or similar sized divisions of larger corporations and there are an increasing number of professional services firms seeking consulting engagements from that client base |
| We believe that our ability to compete depends in part on a number of factors outside our control, including the ability of our competitors to hire, retain and motivate project managers and staff, the long-term relationships that our major competitors may have with potential clients, the ownership by our competitors of software used by potential clients, the development by others of software that is competitive with our products and services and the price at which others offer comparable services |
| In addition, our clients could develop or acquire in-house expertise in services similar to those we provide, which would significantly reduce demand for our services |
| No assurance can be given that we will be able to maintain our existing client base, maintain or increase the level of revenue generated by our existing clients or be able to attract new clients |
| We may engage in strategic acquisitions, investments and dispositions |
| We may consider acquiring other businesses |
| There is no assurance that we will be able to identify suitable acquisitions or investment candidates |
| Even if we identify suitable candidates, we may not be able to make acquisitions or investments on commercially acceptable terms, if at all |
| The success of any acquisition will depend upon, among other things, the ability of management and our employees to integrate acquired personnel, operations, products and technologies into our organization effectively, to retain and motivate key personnel of acquired businesses and to retain clients of acquired firms |
| There can be no assurance that we will be able to identify suitable acquisition opportunities, consummate acquisitions or successfully integrate acquired personnel and operations |
| In addition, any acquisitions we undertake may involve certain other risks, including consumption of available cash resources, potentially dilutive issuances of equity securities and the diversion of management’s attention from other business concerns |
| We may also need to make further investments to support the acquired company and may have difficulty identifying and acquiring the appropriate resources |
| There can be no assurance that any acquisitions we undertake will perform as expected |
| We may enter, on our own and through acquisitions, into new lines of business or initiate new service offerings |
| Our success in any such endeavor will depend upon, among other things, the ability of management to identify suitable opportunities, successfully implement sound business strategies and avoid the legal and business risks of any new line of business or service offering and/or an acquisition related thereto |
| In addition, any such undertakings may result in additional costs without an immediate increase in revenues and may divert management’s attention from the operation and growth of our core business |
| Page 13 _________________________________________________________________ [47]Table of Contents We may also decide to dispose of or otherwise exit businesses, which may result in the recording of accrued liabilities for special one-time charges, such as workforce reduction costs and closure of excess facilities |
| The market for information technology services is rapidly changing |
| The systems consulting and implementation market has been characterized by rapid technological advances and developments, including the development of new software products, applications and services |
| The introduction of new services can make existing services unmarketable |
| In order to remain competitive, we need to adapt to these rapidly changing technologies, to enhance our existing solutions and to introduce new solutions to address our clients’ changing demands |
| Our success will depend in part on our ability to stay abreast of these advances and developments and failure to do so could materially and adversely affect our business |
| We utilize a number of different technologies in developing and providing IT and customer relationship solutions for our clients |
| The technologies we use can change rapidly |
| While we evaluate technologies on an ongoing basis and endeavor to utilize those that are most effective in developing IT solutions for our clients, there can be no assurance that the technologies we utilize and the expertise we gain in those technologies will continue to be applicable in the future |
| There can be no assurance that new technologies will be made available to us or that we will be able to economically apply them |
| The inability to apply existing technologies and expertise to subsequent projects could have a material adverse effect on our business, operating results and financial condition |
| We may encounter difficulties in hiring and retaining the personnel required to deliver our services and manage our company |
| Our business consists mainly of professional services and is inherently labor intensive |
| Our success depends in large part upon our ability to attract, retain and motivate highly skilled employees, particularly project managers and other senior personnel |
| Several attributes of our work environment pose challenges to our ability to attract and retain employees, including extensive travel requirements, our intense work environment and culture, our high standards for employee technical skills and job performance, our historical practice of adjusting the number of technical personnel to reflect active project levels and the decline in demand for our services |
| In addition, the number of stock options available for grant to new and existing employees is subject to the limitations contained in our shareholder approved plans |
| These limitations could have an adverse impact on our ability to attract and retain the necessary professional personnel |
| The approval of our stockholders will be required to increase the number of available options |
| No assurance can be given that such approval would be granted if requested or that the number of options could otherwise be increased |
| Although we expect to continue to attract sufficient numbers of highly skilled employees and to retain many of our existing project managers and other senior personnel for the foreseeable future, there can be no assurance that we will be able to do so |
| Page 14 _________________________________________________________________ [48]Table of Contents We have employment agreements with our senior management employees that contain non-competition, non-disclosure and non-solicitation covenants |
| Our employment agreements generally do not have fixed expiration dates and may be terminated by either party |
| Most senior employees have employment agreements that are generally terminable by either party upon 30 to 90 days’ written notice |
| The loss of some or all of our management personnel or project managers could have a material adverse impact on our business, including our ability to secure and complete engagements |
| We may be subject to litigation from time to time |
| From time to time, we have been subject to litigation and we may be subject to litigation in the future |
| Where we can make a reasonable estimate of the probable liability relating to pending litigation, we record a related liability |
| As additional information becomes available, we assess the potential liability and revise estimates as appropriate |
| However, because of uncertainties relating to litigation, the amount of our estimates could be over or understated |
| Furthermore, in many cases, where we make an estimate the amount of our estimate could be wrong |
| In addition to the potential cost and use of cash, pending or future litigation could divert management’s attention and resources causing a material adverse impact on our results of operations and financial condition |
| Because of the increase in litigation risk associated with the technology markets, both directors and officers and errors and omissions insurance rates have increased significantly in the past several years |
| We may be subject to further rate increases for both types of insurance and, depending on insurance market conditions, may even have difficulty in obtaining such insurance |
| Following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted against that company and its officers and directors |
| Any such litigation against us could result in substantial costs and a diversion of management’s attention and resources, which could have a material adverse effect on our business, financial condition, operating results and cash flows |
| We are subject to numerous and changing economic and industry conditions |
| Our revenues and results of operations are subject to fluctuations based on the economic conditions in which we operate |
| During periods of economic uncertainty or downturn, businesses typically reduce or eliminate their spending on discretionary items such as the services we provide |
| Under these conditions, our business, operating results and financial condition could be materially adversely affected |
| Certain of our clients and potential clients are in industries that experience cyclical variations in profitability, which may in turn affect their willingness or ability to fund systems projects such as those for which we may be engaged |
| We are dependent on the products of third parties |
| Third party products and services are integral to the success of many of our projects |
| To the extent that third parties do not deliver effective products on a timely basis, our project results could be negatively impacted |
| Page 15 _________________________________________________________________ [49]Table of Contents We have limited intellectual property rights and they may not be adequate to protect our business |
| Although our success depends in part upon our specialized expertise and methodologies, it is not materially dependent upon proprietary technology that we own |
| To protect our proprietary information, we rely on a combination of trade secret and common law employee non-disclosure policies and third-party confidentiality agreements |
| However, there can be no assurance that any of these steps will be adequate to deter misappropriation of our specialized expertise and methodologies |
| Most of our clients have required that we grant to them all proprietary and intellectual property rights with respect to the work product resulting from our services, including the intellectual property rights to any custom software that we have developed for them |
| Each such grant limits our ability to reuse work product components and work product solutions with other clients |
| We sometimes develop certain foundation and application software tools, methodologies and products that we own and license to our clients |
| We regard these software tools, methodologies and products as proprietary and we intend to protect our rights, where appropriate, with registered copyrights, patents, registered trademarks, trade secret laws and contractual restrictions on disclosure and transferring title |
| However, there can be no assurance that any of these steps will be adequate to deter misappropriation of our proprietary rights or independent third party development of functionally equivalent products |
| Although we believe that our services and products do not infringe on the intellectual property rights of others, there can be no assurance that others will not assert infringement claims against us in the future |
| Any such claim asserted against us may harm our reputation, cost us money, prevent us from offering some services or solutions and divert management’s attention from the operation and growth of our business |
| Our rights plan as well as provisions of our Company’s charter and by-laws may discourage certain extraordinary transactions |
| We have adopted a stockholder rights plan which may discourage, delay or prevent a merger or acquisition |
| In addition, provisions of our Company’s charter and by-laws may have a similar effect |
| For example, our board of directors has the authority, without further action by our stockholders, to fix the rights and preferences and issue shares of preferred stock |
| We have engaged in limited international operations which are subject to special risks |
| We have engaged in limited international operations |
| Because the cost of doing business abroad is typically higher for United States businesses than the cost of doing business domestically, we could experience a decline in our operating margins if the significance of our international operations increases |
| International operations and the provision of services in foreign markets are subject to a number of special risks, including currency exchange rate fluctuations, trade barriers, exchange controls, national and regional labor strikes, political risks, additional security concerns and risks of increases in duties, taxes and governmental royalties, as well as changes in laws and policies governing operations of foreign-based companies |
| In addition, any success we experience internationally may depend upon our ability to attract, develop and retain a sufficient Page 16 _________________________________________________________________ [50]Table of Contents number of highly skilled, motivated local professional employees in each of those foreign countries where we conduct operations |
| Competition for such local personnel qualified to deliver our services can be intense, and there can be no assurance that we will be able to recruit, develop and retain a sufficient number of highly skilled, motivated local professional employees to compete successfully in the international market |