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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 quarterly period ended June 30, 2004 Commission file number 019433 (TECNOLOGY SOLUTIONS COMPANY) Technology Solutions Company Incorporated in the State of Delaware
 I.R.S. Employer Identification No. 36-3584201
 205 North Michigan Avenue
Suite 1500
Chicago, Illinois 60601
(312) 228-4500 Indicate by check mark whether the registrant (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 (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements
for the past 90 days. Yes ü No Indicate by check mark whether the registrant is an accelerated filer (as
defined by Exchange Act Rule
12b-2). Yes   No ü As of July 30, 2004, there were outstanding 40,898,902 shares of TSC
Common Stock, par value $.01.




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##### Table of Contents



TECHNOLOGY SOLUTIONS COMPANY Index to Form 10-Q PageNumberPart IFINANCIAL INFORMATION (UNAUDITED)ITEM 1. FINANCIAL STATEMENTSConsolidated Balance Sheets as of
June 30, 2004 and December 31, 2003
    
    
    3Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 2004 and 2003
    
    
    4Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2004 and 2003
    
    
    5Notes to Consolidated Financial Statements
    
    
    6ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    13ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
    
    
    25ITEM 4. CONTROLS AND PROCEDURES
    
    
    25Part IIOTHER INFORMATIONITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
    
    
    26ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS
    
    
    26ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
    
    
    26SIGNATURE
    
    
    28CEO CertificationCFO CertificationCertification of Michael R. GorsageCertification of Timothy P. Dimond
 Page 2




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PART I. FINANCIAL INFORMATION 
 ITEM 1. Financial Statements TECHNOLOGY SOLUTIONS COMPANY 
 CONSOLIDATED BALANCE SHEETS
  June 30,
    
    December 31,2004
    
    2003(unaudited)ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    34,766
    
    
    $
    41,104Marketable securities held in trust
    
    
    
    
    
    
    6,712Receivables, less allowance for doubtful receivables
of $298 and $239
    
    
    6,772
    
    
    
    5,802Other current assets
    
    
    1,257
    
    
    
    696Total current assets
    
    
    42,795
    
    
    
    54,314COMPUTERS, FURNITURE AND EQUIPMENT, NET
    
    
    384
    
    
    
    201LONG-TERM RECEIVABLES AND OTHER
    
    
    5,649
    
    
    
    5,654Total assets
    
    $
    48,828
    
    
    $
    60,169LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    424
    
    
    $
    330Accrued compensation and related costs
    
    
    4,083
    
    
    
    3,575Deferred compensation
    
    
    
    
    
    
    6,712Restructuring accruals
    
    
    1,018
    
    
    
    2,417Other current liabilities
    
    
    2,459
    
    
    
    2,744Total current liabilities
    
    
    7,984
    
    
    
    15,778COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS 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;
shares outstanding 40,898,902 and 40,818,469
    
    
    447
    
    
    
    447Capital in excess of par value
    
    
    121,931
    
    
    
    121,974Accumulated deficit
    
    
    (76,345
    )
    
    
    (72,735
    )Treasury stock, at cost, 3,796,886 and 3,877,319 shares
    
    
    (5,410
    )
    
    
    (5,525
    )Accumulated other comprehensive income:Cumulative translation adjustment
    
    
    221
    
    
    
    230Total stockholders equity
    
    
    40,844
    
    
    
    44,391Total liabilities and stockholders equity
    
    $
    48,828
    
    
    $
    60,169
 The accompanying Notes to Consolidated Financial Statements are an integral part of this financial information. Page 3




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TECHNOLOGY SOLUTIONS COMPANY 
 CONSOLIDATED STATEMENTS OF OPERATIONS
  For the Three
    
    For the SixMonths Ended
    
    Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003(unaudited)
    
    (unaudited)REVENUES:Revenues before reimbursements
    
    $
    7,667
    
    
    $
    9,756
    
    
    $
    16,302
    
    
    $
    24,937Reimbursements
    
    
    1,057
    
    
    
    1,184
    
    
    
    2,149
    
    
    
    2,5748,724
    
    
    
    10,940
    
    
    
    18,451
    
    
    
    27,511COSTS AND EXPENSES:Project personnel
    
    
    5,181
    
    
    
    7,865
    
    
    
    10,721
    
    
    
    16,828Other project expenses
    
    
    1,276
    
    
    
    1,306
    
    
    
    2,730
    
    
    
    2,978Reimbursable expenses
    
    
    1,057
    
    
    
    1,184
    
    
    
    2,149
    
    
    
    2,574Bad debt expense
    
    
    132
    
    
    
    136
    
    
    
    12
    
    
    
    257Management and administrative support
    
    
    3,409
    
    
    
    3,978
    
    
    
    6,787
    
    
    
    8,175Restructuring and other charges (credits)
    
    
    
    
    
    
    5,211
    
    
    
    (579
    )
    
    
    5,211Incentive compensation
    
    
    328
    
    
    
    
    
    
    
    556
    
    
    
    31111,383
    
    
    
    19,680
    
    
    
    22,376
    
    
    
    36,334OPERATING LOSS
    
    
    (2,659
    )
    
    
    (8,740
    )
    
    
    (3,925
    )
    
    
    (8,823
    )OTHER INCOME:Net investment income
    
    
    88
    
    
    
    133
    
    
    
    315
    
    
    
    447LOSS BEFORE INCOME TAXES
    
    
    (2,571
    )
    
    
    (8,607
    )
    
    
    (3,610
    )
    
    
    (8,376
    )INCOME TAX PROVISION
    
    
    
    
    
    
    16,519
    
    
    
    
    
    
    
    16,611NET LOSS
    
    $
    (2,571
    )
    
    $
    (25,126
    )
    
    $
    (3,610
    )
    
    $
    (24,987
    )BASIC NET LOSS
PER COMMON SHARE
    
    $
    (0.06
    )
    
    $
    (0.62
    )
    
    $
    (0.09
    )
    
    $
    (0.62
    )WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING
    
    
    40,860
    
    
    
    40,486
    
    
    
    40,840
    
    
    
    40,539DILUTED NET LOSS
PER COMMON SHARE
    
    $
    (0.06
    )
    
    $
    (0.62
    )
    
    $
    (0.09
    )
    
    $
    (0.62
    )WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING
    
    
    40,860
    
    
    
    40,486
    
    
    
    40,840
    
    
    
    40,539
 The accompanying Notes to Consolidated Financial Statements are an integral part of this financial information. Page 4




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TECHNOLOGY SOLUTIONS COMPANY 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
  For theSix Months EndedJune 30,2004
    
    2003(unaudited)CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (3,610
    )
    
    $
    (24,987
    )Restructuring and other (credits) charges
    
    
    (579
    )
    
    
    5,211Adjustments to reconcile net loss to net
cash from operating activities:Depreciation and amortization
    
    
    220
    
    
    
    269Provisions for receivable valuation allowances and
reserves for possible losses, net of recoveries
    
    
    12
    
    
    
    257Gain on sale of investments
    
    
    
    
    
    
    (9
    )Deferred income taxes
    
    
    
    
    
    
    16,543Changes in assets and liabilities:Receivables
    
    
    (983
    )
    
    
    4,122Sales (purchases) of trading securities related to deferred
compensation plan, net of market adjustments
    
    
    6,712
    
    
    
    (506
    )Other current assets
    
    
    (560
    )
    
    
    (855
    )Accounts payable
    
    
    94
    
    
    
    78Accrued compensation and related costs
    
    
    507
    
    
    
    (4,053
    )Deferred compensation liability
    
    
    (6,712
    )
    
    
    506Restructuring accruals
    
    
    (820
    )
    
    
    (88
    )Other current liabilities
    
    
    (232
    )
    
    
    106Other assets
    
    
    5
    
    
    
    397Net cash used in operating activities
    
    
    (5,946
    )
    
    
    (3,009
    )CASH FLOWS FROM INVESTING ACTIVITIES:Proceeds from available-for-sale securities
    
    
    
    
    
    
    1,801Capital expenditures
    
    
    (404
    )
    
    
    (24
    )Net cash (used in) provided by investing activities
    
    
    (404
    )
    
    
    1,777CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from exercise of stock options
    
    
    1
    
    
    
    1Proceeds from employee stock purchase plan
    
    
    71
    
    
    
    129Purchase of Company stock for treasury
    
    
    
    
    
    
    (286
    )Net cash provided by (used in) financing activities
    
    
    72
    
    
    
    (156
    )EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS
    
    
    (60
    )
    
    
    297DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (6,338
    )
    
    
    (1,091
    )CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    
    
    41,104
    
    
    
    47,004CASH AND CASH EQUIVALENTS, END OF PERIOD
    
    $
    34,766
    
    
    $
    45,913
 The accompanying Notes to Consolidated Financial Statements are an integral part of this financial information. Page 5




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TECHNOLOGY SOLUTIONS COMPANY 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Unaudited)  NOTE 1  BASIS OF PRESENTATION The consolidated financial statements include the accounts of Technology
Solutions Company and its subsidiaries (TSC or the Company). The
consolidated balance sheet as of June 30, 2004, the consolidated statements of
operations for the three and six months ended June 30, 2004 and 2003 and the
consolidated statements of cash flows for the six months ended June 30, 2004
and 2003 have been prepared by the Company without audit. In the opinion of
management, these financial statements include all adjustments necessary to
present fairly the financial position, results of operations and cash flows as
of June 30, 2004 and for all periods presented. Certain information and
footnote disclosures normally included in the financial statements prepared in
accordance with accounting principles generally accepted in the United States
of America 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, 2003 filed with the United
States Securities and Exchange Commission (SEC) on March 19, 2004. NOTE 2  THE COMPANY Technology Solutions Company is a consulting company that focuses on rapid
results. TSC helps clients plan, select, install, upgrade and optimize the
software systems that run their business operations. TSCs range of services
include project planning, software selection, reengineering, implementation,
systems integration, upgrades, training, and outsourcing. The Companys clients
are primarily located throughout the United States but the Company also
supports global deployments. NOTE 3  NEW ACCOUNTING STANDARDS In January 2003, the Financial Accounting Standards Board (FASB) initially
issued Interpretation No. 46 (FIN 46), Consolidation of Variable Interest
Entities. FIN 46 was revised in December 2003, when the FASB issued FASB
Interpretation No. 46 (revised December 2003) (FIN 46R), Consolidation of
Variable Interest Entities. FIN 46R is an interpretation of Accounting
Research Bulletin No. 51, Consolidated Financial Statements, that replaces
FIN 46 and revises the requirements for consolidation by business enterprises
of variable interest entities with specific characteristics. The new
consolidation requirements related to variable interest entities are required
to be adopted no later than the first reporting period that ends after March
15, 2004 (as of March 31, 2004, for the Company). The Company does not have any
variable interest entities and, therefore, the adoption of the provisions of
FIN 46 did not have a material impact on the Companys results of operations or
financial position. Page 6




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TECHNOLOGY SOLUTIONS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Unaudited)
(Continued) NOTE 4  STOCK OPTIONS The Company accounts for stock-based compensation using the intrinsic value
method prescribed by Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations.
Compensation costs for employee stock options is measured as the excess, if
any, of the quoted market price of the Companys common stock at the date of
grant over the amount an employee must pay to acquire the stock. The following table illustrates the effect on net loss and loss per share if
the Company had applied the fair value recognition provisions of Statement of
Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation, to stock-based compensation. For the Three Months
    
    For the Six MonthsEnded June 30,
    
    Ended June 30,2004
    
    2003
    
    2004
    
    2003Net loss:As reported
    
    $
    (2,571
    )
    
    $
    (25,126
    )
    
    $
    (3,610
    )
    
    $
    (24,987
    )Less: Stock-based compensation expense
Determined under fair value method
for all
awards, net of related taxes (as
applicable)
    
    
    (458
    )
    
    
    (549
    )
    
    
    (943
    )
    
    
    (1,112
    )Pro forma
    
    $
    (3,029
    )
    
    $
    (25,675
    )
    
    $
    (4,553
    )
    
    $
    (26,099
    )Basic net loss per common share:As reported
    
    $
    (0.06
    )
    
    $
    (0.62
    )
    
    $
    (0.09
    )
    
    $
    (0.62
    )Pro forma
    
    $
    (0.07
    )
    
    $
    (0.63
    )
    
    $
    (0.11
    )
    
    $
    (0.64
    )Diluted net loss per common share:As reported
    
    $
    (0.06
    )
    
    $
    (0.62
    )
    
    $
    (0.09
    )
    
    $
    (0.62
    )Pro forma
    
    $
    (0.07
    )
    
    $
    (0.63
    )
    
    $
    (0.11
    )
    
    $
    (0.64
    )
 As of June 30, 2004 and 2003, options to purchase 11,089,246 and 8,446,806
shares of common stock were outstanding, respectively, and options to purchase
an additional 1,933,474 and 4,748,649 shares of common stock were available for
grant, respectively, under the Technology Solutions Company 1996 Stock
Incentive Plan. NOTE 5  CAPITAL STOCK The Company has a stock repurchase program, which allows for share repurchases
of up to 11,525,327 shares of outstanding Company common stock (the Repurchase
Program). During the six months ended June 30, 2004, the Company did not
purchase any shares. During the six months ended June 30, 2003, the Company
purchased 277,000 shares for $286. The Company has purchased an aggregate total
of 6,762,627 shares since the inception of this Repurchase Program in September
2000. As of June 30, 2004, there were 4,762,700 shares available to be
purchased under the Repurchase Program. Page 7




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TECHNOLOGY SOLUTIONS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Unaudited)
(Continued) The timing and size of any future stock repurchases are subject to market
conditions, stock prices, cash position and other cash requirements. NOTE 6  LOSS PER COMMON SHARE The Company discloses basic and diluted loss per share in the consolidated
statements of operations under the provisions of SFAS No. 128, Earnings Per
Share. Diluted loss per common share is computed by dividing net loss by the
weighted average number of common shares outstanding during each period
presented, plus the dilutive effect of common equivalent shares arising from
the assumed exercise of stock options using the treasury stock method. Common
equivalent shares of 977,914; 1,226,460; 960,485 and 951,277 were not included
in the diluted loss per share calculation as they were antidilutive for the
three and six months ended June 30, 2004 and June 30, 2003, respectively. Basic
loss per common share is computed by dividing net loss by the weighted average
number of common shares outstanding during each period presented. Reconciliation of basic and diluted loss per share for the three months ended: June 30, 2004
    
    June 30, 2003Shares
    
    Per
    
    
    
    
    
    Shares
    
    PerNet
    
    (In
    
    Common
    
    Net
    
    (In
    
    CommonLoss
    
    Thousands)
    
    Share
    
    Loss
    
    Thousands)
    
    ShareBasic loss per share
    
    $
    (2,571
    )
    
    
    40,860
    
    
    $
    (0.06
    )
    
    $
    (25,126
    )
    
    
    40,486
    
    
    $
    (0.62
    )Effect of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Diluted loss per share
    
    $
    (2,571
    )
    
    
    40,860
    
    
    $
    (0.06
    )
    
    $
    (25,126
    )
    
    
    40,486
    
    
    $
    (0.62
    )
 Reconciliation of basic and diluted loss per share for the six months ended: June 30, 2004
    
    June 30, 2003Shares
    
    Per
    
    
    
    
    
    Shares
    
    PerNet
    
    (In
    
    Common
    
    Net
    
    (In
    
    CommonLoss
    
    Thousands)
    
    Share
    
    Loss
    
    Thousands)
    
    ShareBasic loss per share
    
    $
    (3,610
    )
    
    
    40,840
    
    
    $
    (0.09
    )
    
    $
    (24,987
    )
    
    
    40,539
    
    
    $
    (0.62
    )Effect of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Diluted loss per share
    
    $
    (3,610
    )
    
    
    40,840
    
    
    $
    (0.09
    )
    
    $
    (24,987
    )
    
    
    40,539
    
    
    $
    (0.62
    )
 Page 8




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TECHNOLOGY SOLUTIONS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Unaudited)
(Continued) NOTE 7  COMPREHENSIVE (LOSS) INCOME The Companys comprehensive (loss) income was as follows: For the Three Months
    
    For the Six MonthsEnded June 30,
    
    Ended June 30,2004
    
    2003
    
    2004
    
    2003Net loss
    
    $
    (2,571
    )
    
    $
    (25,126
    )
    
    $
    (3,610
    )
    
    $
    (24,987
    )Other comprehensive income (loss):Net unrealized holding (loss) gain on
available-for-sale securities, net of tax
    
    
    
    
    
    
    (8
    )
    
    
    
    
    
    
    119Translation adjustment
    
    
    6
    
    
    
    242
    
    
    
    (9
    )
    
    
    263Other comprehensive income (loss)
    
    
    6
    
    
    
    234
    
    
    
    (9
    )
    
    
    382Total comprehensive loss
    
    $
    (2,565
    )
    
    $
    (24,892
    )
    
    $
    (3,619
    )
    
    $
    (24,605
    )
 NOTE 8  BUSINESS SEGMENTS The Company operates in a single business segment. The Companys clients are
primarily located throughout the United States but the Company also supports
global deployments. The following is revenue, including reimbursements, and
long-lived asset information by geographic area: For and as of the Three Months
    
    
    
    
    
    ForeignEnded June 30, 2004
    
    United States
    
    Subsidiary
    
    TotalRevenues
    
    $
    8,724
    
    
    
    
    
    
    $
    8,724Identifiable assets
    
    $
    48,622
    
    
    $
    206
    
    
    $
    48,828
 For and as of the Three Months
    
    
    
    
    
    ForeignEnded June 30, 2003
    
    United States
    
    Subsidiary
    
    TotalRevenues
    
    $
    10,874
    
    
    $
    66
    
    
    $
    10,940Identifiable assets
    
    $
    68,489
    
    
    $
    1,525
    
    
    $
    70,014
 For and as of the Six Months
    
    
    
    
    
    ForeignEnded June 30, 2004
    
    United States
    
    Subsidiary
    
    TotalRevenues
    
    $
    18,451
    
    
    
    
    
    
    $
    18,451Identifiable assets
    
    $
    48,622
    
    
    $
    206
    
    
    $
    48,828
 For and as of the Six Months
    
    
    
    
    
    ForeignEnded June 30, 2003
    
    United States
    
    Subsidiary
    
    TotalRevenues
    
    $
    27,155
    
    
    $
    356
    
    
    $
    27,511Identifiable assets
    
    $
    68,489
    
    
    $
    1,525
    
    
    $
    70,014
 Page 9




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TECHNOLOGY SOLUTIONS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Unaudited)
(Continued) 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. NOTE 9  OTHER EVENTS In the second quarter of 2003, the Company recorded $5,211 in restructuring and
other charges as a result of organizational changes announced in June 2003.
These charges consisted of the severance costs of professional personnel and
executives as well as office reductions and professional fees incurred in
connection with terminated negotiations with a party that had expressed
interest in acquiring the Company. During the three months ended March 31,
2004, this charge was reduced by $266 to $4,945 as the Company was able to
favorably terminate one of their office leases. As of June 30, 2004, there was
an accrual balance of $1,018. The Company expects to utilize this balance by
the end of 2005. The following table provides the components of this charge. Restructuring and Other
    
    
    
    
    
    Cash(1)
    
    Non-cash
    
    Balance as ofCharges  2003
    
    Charge
    
    Payments
    
    Usage
    
    June 30, 2004Severance costs
(approximately 30
employees)
    
    $
    3,917
    
    
    $
    3,077
    
    
    $
    33
    
    
    $
    807Office reductions
    
    
    921
    
    
    
    432
    
    
    
    2
    
    
    
    487Professional fees
    
    
    373
    
    
    
    383
    
    
    
    
    
    
    
    (10
    )Total original charge
    
    
    5,211
    
    
    
    3,892
    
    
    
    35
    
    
    
    1,2842004 adjustment
    
    
    (266
    )
    
    
    
    
    
    
    
    
    
    
    (266
    )Total
    
    $
    4,945
    
    
    $
    3,892
    
    
    $
    35
    
    
    $
    1,018
 (1)Net cash payments totaling $805 were made during the six
months ended June 30, 2004. In 2000, the Company recorded a pre-tax charge of $4,701 for the closure of its
Latin American operations. Subsequently in 2000, the Company collected $400 of
accounts receivable previously written-off and, as a result, the cumulative
charge was reduced to $4,301. This charge was further reduced by $181 to $4,120
during the three months ended March 31, 2004 as the Company completed the
closure of its Latin American operations and, accordingly, no further payments
are due. The following table provides the components of this charge. Page 10




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TECHNOLOGY SOLUTIONS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Unaudited)
(Continued) Cash(2)
    
    Non-cash
    
    Balance as ofLatin America Charge  2000
    
    Charge
    
    Payments
    
    Usage
    
    June 30, 2004Severance costs
(approximately 40
employees)
    
    $
    1,785
    
    
    $
    1,574
    
    
    $
    
    
    
    $
    211Other costs
    
    
    
    
    
    
    30
    
    
    
    
    
    
    
    (30
    )Asset write-offs
    
    
    2,916
    
    
    
    
    
    
    
    2,916
    
    
    
    Total original charge
    
    
    4,701
    
    
    
    1,604
    
    
    
    2,916
    
    
    
    181Accounts receivable
collections  2000
    
    
    (400
    )
    
    
    (400
    )
    
    
    
    
    
    
    2004 adjustment
    
    
    (181
    )
    
    
    
    
    
    
    
    
    
    
    (181
    )Total
    
    $
    4,120
    
    
    $
    1,204
    
    
    $
    2,916
    
    
    $
    
 (2)There were no net cash payments during the six months
ended June 30, 2004. In 1999, the Company recorded $6,967 in restructuring and other charges
associated with lease terminations, former executive severance costs, CourseNet
Systems, Inc. acquisition costs and asset write-offs. On February 15, 2000, the
Company 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. The Company determined that a portion of 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 $2,036 to $4,931 during 2000, 2001 and 2002 and by $132
to $4,799 during the quarter ended March 31, 2004. During the quarter ended
June 30, 2004, the Company made the final payment on its remaining contractual
lease obligation. Accordingly, as of June 30, 2004, no further payments are due
on this charge. The following table provides the components of this charge. Restructuring and Other
    
    
    
    
    
    Cash(3)
    
    Non-cash
    
    Balance as ofCharges  1999
    
    Charge
    
    Payments
    
    Usage
    
    June 30, 2004Lease terminations
    
    $
    3,011
    
    
    $
    725
    
    
    $
    35
    
    
    $
    2,251Former executive
severance costs
    
    
    1,814
    
    
    
    1,747
    
    
    
    150
    
    
    
    (83
    )CourseNet Systems, Inc.
acquisition costs
    
    
    1,300
    
    
    
    
    
    
    
    1,300
    
    
    
    Asset write-offs
    
    
    842
    
    
    
    
    
    
    
    842
    
    
    
    Total original charge
    
    
    6,967
    
    
    
    2,472
    
    
    
    2,327
    
    
    
    2,1682000 adjustment
    
    
    (404
    )
    
    
    
    
    
    
    
    
    
    
    (404
    )2001 adjustment
    
    
    (1,488
    )
    
    
    
    
    
    
    
    
    
    
    (1,488
    )2002 adjustment
    
    
    (144
    )
    
    
    
    
    
    
    
    
    
    
    (144
    )2004 adjustment
    
    
    (132
    )
    
    
    
    
    
    
    
    
    
    
    (132
    )Total
    
    $
    4,799
    
    
    $
    2,472
    
    
    $
    2,327
    
    
    $
    
 (3)Net cash payments totaling $15 were made during the six
months ended June 30, 2004. Page 11




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TECHNOLOGY SOLUTIONS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Unaudited)
(Continued) NOTE 10  RELATED PARTY During the six months ended June 30, 2004 and 2003, the Company provided
services to Bausch & Lomb, Inc (B&L). One of the Companys directors, John R.
Purcell, and a former director, William H. Waltrip, also serve as directors for
B&L. The services performed related to B&Ls global IT integration project and
were awarded following a competitive bidding process. The amount of revenues
recognized for such services during the six months ended June 30, 2004 and 2003
represented 4 percent and 8 percent of the Companys total revenues before
reimbursements, respectively, and during the quarters ended June 30, 2004 and
2003 represented 3 percent and 3 percent of such revenues before
reimbursements, respectively. The net accounts receivable balances from these
services as of June 30, 2004 and December 31, 2003 were $85 and $272,
respectively. NOTE 11  SUBSEQUENT EVENT On August 9, 2004, the Company announced that they have entered into a
definitive merger agreement with ZAMBA Solutions (ZAMBA), under which the
Company will acquire ZAMBA. Under the terms of the transaction, which was
approved by both companies boards of directors, ZAMBA stockholders will
receive 0.15 shares of the TSCs common stock for each share of ZAMBA common
stock which they hold as of the effective date of the merger. As of June 30,
2004, there were 38,900,470 shares of ZAMBA common stock issued and
outstanding. Upon completion of the transaction, ZAMBA stockholders will own
approximately 12.5% of the Company. Page 12




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TECHNOLOGY SOLUTIONS COMPANY 
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS OVERVIEW On May 6, 2004, we announced that Michael R. Gorsage became our President and
Chief Executive Officer as well as a member of our Board of Directors. Stephen
B. Oresman, who was serving as our CEO, remains with the Company and is now our
Chairman of the Board. John R. Purcell resigned his position as Chairman of the
Board, but remains a member of our Board of Directors. On August 9, 2004, we announced that we have entered into a definitive merger
agreement with ZAMBA Solutions (ZAMBA), under which we will acquire ZAMBA
(the merger). Under the terms of the transaction, which was approved by both
companies boards of directors, ZAMBA stockholders will receive 0.15 shares of
our common stock for each share of ZAMBA common stock which they hold as of the
effective date of the merger. Upon completion of the transaction, ZAMBA
stockholders will own approximately 12.5% of the Company. Since we are not in
a position to know when the merger will close, any comments in regards to
prospective guidance is for our Company only and, accordingly, excludes any
revenues or costs arising from the merger. The results of our operations are affected by general economic conditions as
well as the level of economic activity and changes in the industries that we
serve. While the general economy and the information technology (IT)
consulting services market is improving, there is no assurance that these
improving conditions will result in an increase in our future revenues given
the fundamental changes in the IT service industry as set forth below. In
addition, increases in demand for our services generally tend to lag behind
economic cycles. Accordingly, any benefit to our business of any economic
recovery may take longer to realize. Beginning in the second half of 2003, we took steps to refocus and rebuild our
business. These steps included investing in a range of specialty services in
order to differentiate us from our competition and investing in marketing
initiatives to support these specialty services as well as maintaining our
project personnel headcount at a level to enable us to grow our business. We
continue to refocus our marketing and sales efforts as well as formulate new
service offerings. While our revenues in the second quarter of 2004 decreased
as compared to the first quarter, we expect quarterly revenues in the third
quarter to be flat or improve as compared to the second quarter of 2004. We
incurred an operating loss in the first two quarters of 2004 as well as all
four quarters during 2003 and we will likely continue to incur operating losses
during the remainder of 2004 as we continue our efforts to refocus and rebuild
our business. In addition to the challenges described above, we also believe that the
information technology services industry is undergoing some fundamental
changes, resulting in increased competitive pressure. These changes include
competition from application software firms as they continue to enhance
services and implementation capabilities to increase their revenue; offshore
application Page 13




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TECHNOLOGY SOLUTIONS COMPANY MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued) development and system consulting and support firms which typically have much
lower labor costs and billing rates; and the proliferation of Enterprise
Resource Planning (ERP) expertise within the IT departments of organizations,
reducing the need to engage outside consulting help. The availability of off
shore technical expertise has and will have an impact on the IT consulting
market. However, we believe the demand for high end technically competent
innovative consultants will increase over time. The complexity of corporate IT
functions is not diminishing. In addition, we believe that the up coming baby
boomer retirement will impact the supply of trained consultants in the market. Our business is also driven by the pace of technological change, our ability to
differentiate ourselves from our competitors through specialty services that
address targeted industry and business concerns, and the type and level of
spending by our clients in the areas in which we provide services. Many factors
can result in a deferral, reduction or cancellation of services requested by
our prospective or current clients including budget constraints, economic
conditions and perceived project progress, success or value. The economic
uncertainties of recent years has lead many corporations to reassess their IT
goals and budgets. This, combined with the lack of significant new technology
to stimulate spending, has had a further dampening impact on demand for our
services. However, we also believe that many companies have very old systems
and technology and that real time business decision making will fuel growth
in many of our markets. During periods of decreased demand, pricing pressures emerge as companies try
to minimize costs and negotiate lower prices for our services. Our ability to
successfully identify and prepare for these changes is a key driver of our
performance. Therefore, our strategy is to try to anticipate these trends and
identify cost-management initiatives that will allow us to manage costs
relative to expected revenues as well as identifying opportunities to increase
revenues. Although we remain committed to spending our funds wisely, there is a
point at which further cost cutting can be counter-productive. Project personnel costs constitute the majority of our operating costs. Since
project personnel costs are primarily driven by the cost of billable personnel,
mainly compensation and benefits, maintaining these costs at a reasonable and
predictable percentage of revenue is critical to our financial performance.
Project personnel costs as a percentage of revenues are driven by utilization
and average hourly billing rates. Utilization represents the percentage of time
our billable professionals spend on billable work. It is our strategy to try to
match our project personnel supply with demand. At times this requires us to
reduce headcount and reassign employees to other active projects when they are
no longer needed on a particular project. However, because of the mix of skills
needed and project duration, implementation of this strategy may be delayed at
times. Accordingly, any decline in revenues without a corresponding and timely
reduction in staffing, or a staffing increase that is not accompanied by a
corresponding increase in revenues, would have an adverse effect on our
business, operating results and financial condition, which could be material. Page 14




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TECHNOLOGY SOLUTIONS COMPANY MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued) REVENUES For presentation purposes, we show two components of revenues: 1) revenues
before reimbursements, which consists of revenue for performing consulting
services; and 2) reimbursements, consisting of reimbursements we receive from
clients for out-of-pocket expenses incurred. We believe revenues before
reimbursements is a more meaningful representation of our economic activity
since it excludes pass-through, zero-margin expense reimbursements. COSTS AND EXPENSES Project Personnel Project personnel costs consist primarily of professional salaries and
benefits. Other Project Expenses Other project expenses consist of the cost for subcontractors hired for use on
our client projects and billed to our clients; employee termination costs; and
nonbillable expenses incurred for client projects and business development.
Nonbillable expenses include recruiting fees, certain selling expenses, and
personnel training. Reimbursable Expenses Reimbursable expenses represent project related and other out-of-pocket
expenses that are reimbursable by the client. An equivalent amount is included
in revenues under the caption Reimbursements. Bad Debt Expense We maintain an allowance for doubtful receivables resulting from the failure of
our customers to make required payments. We also analyze our notes receivable,
which are included in Long-Term Receivables and Other on our Consolidated
Balance Sheet. Management and Administrative Support Management and administrative support costs consist of client officer costs and
infrastructure costs. Client officer costs include client officer salaries and
travel, marketing costs and recruiting costs. Infrastructure costs include
senior corporate management and our board of directors; 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. Incentive Compensation Incentive compensation, if any, is accrued at a set percentage of base salary,
which varies by level of employee, and adjusted to reflect the amounts needed
for active employees and for Page 15




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TECHNOLOGY SOLUTIONS COMPANY MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued) performance against targets, goals and objectives. Payments of incentive
compensation, if any, are performance based and are determined by both
objective (financial-based) and subjective measures. These objectives include
both quarterly and full fiscal year parameters. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The preparation of financial statements, in conformity with accounting
principles generally accepted in the United States of America, requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements, and the reported amounts of revenues
and expenses during the reporting period. Management bases its estimates on
historical experience and other assumptions, which it believes are reasonable.
If actual amounts are ultimately different from these estimates, the revisions
are included in the Companys results of operations for the period in which the
actual amounts become known. Accounting policies are considered critical when they require management to
make assumptions about matters that are highly uncertain at the time the
estimate is made and when different estimates than management reasonably could
have used have a material impact on the presentation of the Companys financial
condition, changes in financial condition or results of operations. Revenue Recognition We derive our revenues from a variety of information technology services,
including systems integration, packaged software integration and implementation
services, programming, training and extended support services. Our services are
contracted on either a time and materials basis or a fixed price basis. For our
time and materials contracts, we recognize revenues as work is performed,
primarily based on hourly billing rates. For our fixed price contracts, we
recognize revenues using the percentage-of-completion method, which is based on
the percentage of work performed in the period compared to the total estimated
work to be performed over the entire contract. Revenues are subject to revision
as the contract progresses to completion. Any revisions in the estimate are
charged to operations in the period in which the facts that give rise to the
revision become known. Contracts are performed in phases. Losses on contracts,
if any, are reserved in full when determined. Contract losses are determined by
the amount by which the estimated cost of the contract exceeds the estimated
total revenues that will be generated by the contract. Extended support
revenues are recognized as services are rendered. Allowance for Doubtful Receivables An allowance for doubtful receivables is maintained for potential credit
losses. When evaluating the adequacy of our allowance for doubtful receivables,
management specifically analyzes accounts receivable on a client by client
basis, including customer credit worthiness and current economic trends, and
records any necessary bad debt expense based on the best estimate of the facts
known to date. Should the facts regarding the collectability of receivables
change, the Page 16




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TECHNOLOGY SOLUTIONS COMPANY MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued) resulting change in the allowance would be charged or credited to income in the
period such determination is made. Such a change could materially impact our
financial position and results of operations. Accounting for Income Taxes We use an asset and liability approach to financial accounting and reporting
for income taxes. Deferred income taxes are provided using currently enacted
tax rates when tax laws and financial accounting standards differ with respect
to the amount of income for a year and the basis of assets and liabilities.
Significant management judgement is required in determining our provision for
income taxes, deferred tax assets and liabilities and any valuation allowance
recorded against our net deferred tax assets. We have generated certain
deferred tax assets as a result of operating losses and temporary differences
between book and tax accounting, as well as tax benefits resulting from the
exercise of employee stock options that were recorded as additional paid-in
capital in the period of exercise. Statement of Financial Accounting Standards
(SFAS) No. 109 Accounting for Income Taxes, requires the establishment of a
valuation allowance to reflect the likelihood of realization of deferred tax
assets. During 2003, we recorded a full valuation allowance against our
deferred tax assets. If the realization of our deferred tax assets in future
periods is considered more likely than not, an adjustment to our deferred tax
asset would increase net income in the period such determination is made. The
amount of deferred tax assets considered realizable is based on significant
estimates. Changes in these estimates could materially affect our financial
condition and results of operations in future periods. Stock-Based Compensation We account for stock-based compensation using the intrinsic value method
prescribed in Accounting Principles Board (APB) Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations. Compensation costs
for employee stock options is measured as the excess, if any, of the quoted
market price of the Companys common stock at the date of grant over the amount
an employee must pay to acquire the stock. THREE MONTHS ENDED JUNE 30, 2004 COMPARED WITH THREE MONTHS ENDED JUNE 30, 2003 Revenues Consolidated net revenues were $8.7 million for the three months ended June 30,
2004, a decrease of 20 percent from the same period in the prior year. Revenues
before reimbursements decreased 21 percent to $7.7 million from $9.8 million.
We believe that this decline in revenues was primarily due to decreased demand
for our services and an increase in competitive pricing arising out of the
continuing economic uncertainties, fundamental changes in the IT services
industry, and a decline in corporate information technology capital
expenditures as large and small companies reassessed their goals and budgets. Page 17




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TECHNOLOGY SOLUTIONS COMPANY MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued) During the three months ended June 30, 2004, two clients accounted for 22
percent of revenues before reimbursements (United Water Inc.  12 percent and
Caterpillar Inc.  10 percent). During the three months ended June 30, 2003,
two clients accounted for 29 percent of revenues before reimbursements
(ExxonMobil Corp.  17 percent and Caterpillar Inc.  12 percent). We added 8
new clients and 30 new projects during the three months ended June 30, 2004
compared to 15 new clients and 37 new projects during the same period in the
prior year. In addition, we performed work for 46 clients and 77 projects
during the three months ended June 30, 2004 compared to 53 clients and 93
projects during the same period in the prior year. During the three months ended June 30, 2004 and 2003, we provided services to
Bausch & Lomb, Inc (B&L). One of our directors, John R. Purcell, and a former
director, William H. Waltrip, also serve as directors for B&L. The services
performed related to B&Ls global IT integration project and were awarded
following a competitive bidding process. The amount of revenues recognized for
such services during the three months ended June 30, 2004 and 2003 represented
3 percent and 3 percent of our total revenues before reimbursements,
respectively. The net accounts receivable balances from these services as of
June 30, 2004 and December 31, 2003 were $85 thousand and $272 thousand,
respectively. Costs and Expenses Project personnel costs were $5.2 million for the three months ended June 30,
2004, a decrease of 34 percent from the same period in the prior year. This
decrease was largely attributable to staff reductions in response to our
declining revenues and our ongoing efforts to keep headcount and costs in line
with demand for our services, as described earlier in this item. Professional
domestic headcount decreased to 143 as of June 30, 2004 compared to 201 as of
June 30, 2003. Annualized voluntary turnover increased to 43 percent from 18
percent for the three months ended June 30, 2003. Project personnel costs as a
percentage of revenues before reimbursements decreased to 68 percent for the
three months ended June 30, 2004 from 81 percent from the same period in the
prior year primarily due to an increase in average hourly billing rates.
Average hourly billing rates increased 7 percent to $154. We believe the
improvement in average hourly billing rates reflects a firmer overall market as
well as the start of a shift in our services to higher value-added activities.
Staff utilization declined slightly to 60 percent from 62 percent for the three
months ended June 30, 2003. Other project expenses were $1.3 million for the three months ended June 30,
2004, almost unchanged from the same period in the prior year. While other
project expenses were almost unchanged in total, there was a $0.2 million
decrease in headcount related costs, which includes travel, computer and
communication costs, and a decrease in employee termination costs of $0.2
million. These reductions were partially offset by an increase in subcontractor
costs of $0.3 million and other project related costs, including commissions,
of $0.1 million. Other project expenses as a percentage of revenues before
reimbursements increased to 17 percent for the three months ended June 30, 2004
from 13 percent for the same period in the prior year mainly due to the
increased use of subcontractors for certain specialized skills. Page 18




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TECHNOLOGY SOLUTIONS COMPANY MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued) Bad debt expense was a $0.1 million for the three months ended June 30, 2004,
almost unchanged from the same period in the prior year. Management and administrative support costs decreased 14 percent to $3.4
million for the three months ended June 30, 2004 from $4.0 million in the same
period in the prior year. This decrease resulted from a decrease in labor costs
of $0.4 million, as we reduced headcount as a result of our organizational
changes during the quarter ended June 30, 2003 (as discussed further herein),
and a decrease in occupancy and telecommunication costs of $0.2 million as a
result of our office reductions during the quarter ended June 30, 2003 and a
new telecommunications contract. During the quarter ended June 30, 2003, we recorded $5.2 million in
restructuring and other charges as a result of organizational changes announced
in June 2003. These charges consisted of the severance costs of professional
personnel and executives and office reductions as well as professional fees
incurred in connection with terminated negotiations with a party that had
expressed interest in acquiring us. Incentive compensation expense was $0.3 million for the three months ended June
30, 2004. There was no incentive compensation expense in the same period in the
prior year. If the Company and our employees meet their 2004 quarterly and
annual quantitative and qualitative objectives, we expect to continue to accrue
incentive compensation during 2004. Operating Loss Consolidated operating loss was $2.7 million for the three months ended June
30, 2004 compared to $8.7 million for the same period in the prior year. Our
operating loss for 2004 included restructuring and other charges of $5.2
million. The decrease in the operating loss, excluding these restructuring and
other charges, mainly resulted from an improvement in our hourly billing rates
as well as reduction in our operating costs due to headcount reductions. Other Income Other income for the three months ended June 30, 2004 was just under $0.1
million compared to just over $0.1 million for the same period in the prior
year. Other income decreased as a result of lower cash balances as well as
lower interest rates year over year. Our cash and cash equivalents were
primarily invested in overnight money market type accounts. Average interest
rates were approximately 0.90 percent for the three months ended June 30, 2004
compared to approximately 1.12 percent during the same period in the prior
year. Income Tax Provision We did not recognize an income tax benefit for the three months ended June 30,
2004 since we recorded a full valuation allowance against our deferred taxes
during the three months ended June 30, 2003. Shares Outstanding Weighted average number of common shares outstanding and weighted average
number of Page 19




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TECHNOLOGY SOLUTIONS COMPANY MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued) common and common equivalent shares outstanding increased to 40,860,000 from
40,486,000 due to the issuance of shares under our employee stock purchase
plan and stock option plans. In addition, since the three months ended June 30,
2003, we have not repurchased any of our outstanding shares under our
previously announced repurchase program. During the three months ended June 30,
2003, we repurchased 34,300 shares of our Common Stock at an average price of
$1.02 per share. SIX MONTHS ENDED JUNE 30, 2004 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2003 Revenues Consolidated net revenues were $18.5 million for the six months ended June 30,
2004, a decrease of 33 percent from the same period in the prior year. Revenues
before reimbursements decreased 35 percent to $16.3 million from $24.9 million.
We believe that this decline in revenues was primarily due to decreased demand
for our services and an increase in competitive pricing arising out of the
continuing economic uncertainties, fundamental changes in the IT services
industry, and a decline in corporate information technology capital
expenditures as large and small companies reassessed their goals and budgets. Costs and Expenses Project personnel costs were $10.7 million for the six months ended June 30,
2004, a decrease of 36 percent from the same period in the prior year. This
decrease was largely attributable to staff reductions in response to our
declining revenues and our ongoing efforts to keep headcount and costs in line
with demand for our services, as described earlier in this item. Project
personnel costs as a percentage of revenues before reimbursements remained
relatively flat at 66 percent for the six months ended June 30, 2004 compared
to 67 percent from the same period in the prior year primarily as a result of
an improvement in our staff utilization. Average hourly billing rates decreased
9 percent to $147. The decline in average hourly billing rates primarily
reflects the increased competitive environment in the information technology
consulting market as well as lower rates for post-go-live activities. Staff
utilization improved to 66 percent from 63 percent for the six months ended
June 30, 2003. Other project expenses were $2.7 million for the six months ended June 30,
2004, a decrease of 8 percent from the same period in the prior year. The
decrease in other project expenses consisted of the following: a decrease in
headcount related costs of $0.5 million, which includes travel, computer and
communication costs, and a decrease in employee termination costs of $0.3
million. These reductions were partially offset by an increase in subcontractor
costs of $0.6 million. Other project expenses as a percentage of revenues
before reimbursements increased to 17 percent for the six months ended June 30,
2004 from 12 percent for the same period in the prior year mainly due to the
increased use of subcontractors for certain specialized skills. Bad debt expense was almost zero for the six months ended June 30, 2004
compared to an Page 20




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TECHNOLOGY SOLUTIONS COMPANY MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued) expense of $0.3 million for the same period in the prior year. This decrease
was a result of recoveries of previously reserved receivables as well as fewer
collection issues during the six months ended June 30, 2004. Management and administrative support costs decreased 17 percent to $6.8
million for the six months ended June 30, 2004 from $8.2 million in the same
period in the prior year. This decrease mainly resulted from a decrease in
labor costs of $1.3 million as we reduced headcount as a result of our
organizational changes during the quarter ended June 30, 2003. During the six months ended June 30, 2004, we reversed restructuring and other
charges of $0.6 million. This amount consisted of $0.3 million related to
certain lease terminations recorded during the three months ended June 30,
2003, $0.2 million related to the closure of our Latin American operations
recorded in 2000 and $0.1 million related to certain lease terminations
recorded in 1999. As described in more detail above in the comparison of the
three months ended June 30, 2004 and the three months ended June 30, 2003, in
the second quarter of 2003, we recorded $5.2 million in restructuring and other
charges as a result of organizational changes announced in June 2003. Incentive compensation expense was $0.6 million for the six months ended June
30, 2004 compared with $0.3 million in the same period in the prior year.
Incentive compensation as a percentage of revenues excluding reimbursements
increased to 3 percent during the six months ended June 30, 2004 compared to 1
percent in the same period in the prior year. If the Company and our employees
meet their 2004 quarterly and annual quantitative and qualitative objectives,
we expect to continue to accrue incentive compensation during 2004. Operating Loss Consolidated operating loss was $3.9 million for the six months ended June 30,
2004 compared to $8.8 million for the same period in the prior year. Our
operating loss for 2004 included restructuring and other credits of $0.6
million and our operating loss for 2003 included restructuring and other
charges of $5.2 million. The operating loss, excluding these credits and
charges, mainly resulted from the decline in revenues. Other Income Other income for the six months ended June 30, 2004 was $0.3 million compared
to $0.4 million for the same period in the prior year. This decrease was a
result of lower cash balances as well as lower interest rates year over year.
Our cash and cash equivalents were primarily invested in overnight money market
type accounts. Average interest rates were approximately 0.90 percent for the
six months ended June 30, 2004 compared to approximately 1.17 percent during
the same period in the prior year. Income Tax Provision We did not recognize an income tax benefit for the six months ended June 30,
2004 since we recorded a full valuation allowance against our deferred taxes in
2003. Page 21




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TECHNOLOGY SOLUTIONS COMPANY MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued) Shares Outstanding Weighted average number of common shares outstanding and weighted average
number of common and common equivalent shares outstanding increased to
40,840,000 from 40,539,000 due to the issuance of shares under our employee
stock purchase plan and stock option plans. In addition, since the three months
ended June 30, 2003, we have not repurchased any of our outstanding shares
under our previously announced repurchase program. During the six months ended
June 30, 2003, we repurchased 277,000 shares of our Common Stock at an average
price of $1.03 per share. LIQUIDITY AND CAPITAL RESOURCES Net cash used in operating activities was $5.9 million and $3.0 million for the
six months ended June 30, 2004 and 2003, respectively. Net cash used in
operating activities for the six months ended June 30, 2004 primarily related
to the loss for the six months ended June 30, 2003, net of the non-cash
restructuring and other credits, as well as payments related to the June 30,
2003 restructuring and other charges and our annual corporate insurance
payments. These restructuring credits and payments and corporate insurance
payments resulted in a decrease in the restructuring accruals and an increase
in other current assets, respectively. Days sales outstanding increased by 9 days to 70 days at June 30, 2004 as
compared to June 30, 2003, due to slower collections during the second quarter
of 2004. Cash commitments relating to remaining restructuring and other charges are $0.8
million in severance costs and $0.2 million in office costs. The anticipated
cash outflows for these restructuring and other charges are as follows: $0.3
million for the remaining quarters in 2004 and the remaining balance of $0.7
million in 2005. Other estimated future cash commitments include various office
facilities, property and office equipment under operating leases and other
costs that expire at various dates. In the second quarter of 2004, we renewed
one of our office leases and also signed a lease for a new office. The minimum
cash commitments under these non-cancelable operating leases and other
obligations with terms in excess of one year, net of restructuring and other
charges, are as follows: $0.3 million for the remaining quarters in 2004, $0.9
million in 2005, $0.8 million in 2006 and $0.4 million in 2007. In addition, we
have an annual commitment for telecommunications of $0.1 million for the
remaining quarters in 2004 and $0.1 million for 2005 and 2006. The Company has
no guarantees of third party debt as of June 30, 2004 or other off-balance
sheet commitments. Net cash used in investing activities was $0.4 million for the six months ended
June 30, 2004 for computer purchases. We currently have no material commitments
for capital expenditures. Net cash provided by financing activities was $0.1 million for the six months
ended June 30, 2004 and was provided by proceeds from our employee stock
purchase plan. Our primary sources of liquidity are our existing cash and cash equivalents.
Our cash and cash equivalents at June 30, 2004 were $34.8 million. Depending on
revenues and cash collections, Page 22




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TECHNOLOGY SOLUTIONS COMPANY MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued) we expect our cash and cash equivalent balance at September 30, 2004 to be
approximately $31 million to $32 million. While we will likely continue to
incur operating losses in 2004, we believe that our cash and cash equivalents
will be sufficient to meet our cash requirements. Our investment policy is to
maintain most of our cash and cash equivalents in highly liquid, large money
market type funds. This policy exposes us to short-term interest rate
fluctuations. Operating results and liquidity, including our ability to raise additional
capital if necessary, may be materially and adversely affected by continued low
demand for the Companys services. In addition, a number of other factors,
including general economic conditions, technological changes, competition and
other factors affecting the IT industry generally, and the suspension or
cancellation of a large project could have an adverse effect on future results
and liquidity. These aforementioned factors, as well as other factors, are more
fully described in the Companys Annual Report on Form 10-K for the year ended
December 31, 2003 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. We had a nonqualified deferred compensation plan. All Company executives
(defined as those at the level of Vice President and above) were eligible to
participate in this voluntary program, which permitted participants to defer
receipt of a portion of their compensation. We held deferred amounts in a
rabbi trust for the benefit of plan participants and investment earnings (or
losses) were credited to the participants accounts based on investment
allocation options selected by the participants. We did not guarantee these
investments or earnings thereon. These investments remained assets of the
Company and were available to the general creditors of the Company in the event
of our insolvency. On February 10, 2004, the Company announced that the
Compensation Committee of its Board of Directors decided to terminate the
Companys nonqualified executive deferred compensation plan. Because of
dwindling participation, coupled with recent and proposed changes in tax and
other legislation, the Compensation Committee decided the existence of the plan
was no longer a significant factor in attracting and retaining key executive
talent. Accordingly, the plan was terminated and all funds were distributed to
the participants in late February 2004. NEW ACCOUNTING STANDARDS In January 2003, the Financial Accounting Standards Board (FASB) initially
issued Interpretation No. 46 (FIN 46), Consolidation of Variable Interest
Entities. FIN 46 was revised in December 2003, when the FASB issued FASB
Interpretation No. 46 (revised December 2003) (FIN 46R), Consolidation of
Variable Interest Entities. FIN 46R is an interpretation of Accounting
Research Bulletin No. 51, Consolidated Financial Statements, that replaces
FIN 46 and revises the requirements for consolidation by business enterprises
of variable interest entities with specific characteristics. The new
consolidation requirements related to variable interest entities are required
to be adopted no later than the first reporting period that ends after March
15, 2004 (as of March 31, 2004, for the Company). We do not have any Page 23




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TECHNOLOGY SOLUTIONS COMPANY MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued) variable interest entities and, therefore, the adoption of the provisions of
FIN 46 did not have a material impact on our results of operations or financial
position. This Form 10-Q contains or may contain certain 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 including words such as
anticipate, believe, plan, estimate, expect, intend, and other
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 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, our
ability to manage the pace of technological change including our ability to
refine and add to our service offerings to adapt to technological changes, our
ability to manage the current downturn in our business and in our industry and
the economy in general, our ability to manage our current decreased revenue
levels, our ability to attract new business and increase revenues, our ability
to attract and retain employees, our ability to accommodate a changing business
environment, general business and economic conditions in our operating regions,
market conditions and competitive and other factors, our ability to continue to
attract new clients and sell additional work to existing clients and our
ability to manage costs and headcount relative to expected revenues, all as
more fully described herein and in our Annual Report on Form 10-K for the year
ended December 31, 2003 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 our other SEC reports. Such forward-looking
statements speak only as of the date on which they are made and we do not
undertake any obligation to update any forward-looking statement to reflect
events or circumstances after the date of this Form 10-Q. If we do update or
correct one or more forward-looking statements, investors and others should not
conclude that we would make additional updates or corrections with respect
thereto or with respect to other forward-looking statements. Actual results may
vary materially. Page 24




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TECHNOLOGY SOLUTIONS COMPANY PART I. FINANCIAL INFORMATION (Continued)
 
 ITEM 3QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK TSC is exposed to interest rate fluctuations. Changes in interest rates affect
interest income and expense on cash and cash equivalents. The Companys cash
and cash equivalents are primarily invested in overnight money market type
accounts. Average interest rates were approximately 0.90 percent during the six
months ended June 30, 2004 compared to approximately 1.17 percent during the
same period in the prior year and approximately 0.90 percent during the three
months ended June 30, 2004 compared to 1.12 percent during the same period in
the prior year. Based on the cash and cash equivalents balances as of June 30,
2004 and 2003, a hypothetical 1.00 percent increase in interest rates would
have resulted in approximately $0.1 million in additional net investment income
during each of the quarters ended June 30, 2004 and 2003 and approximately $0.2
million during each of the six months ended June 30, 2004 and 2003. The financial statements of the Companys non-U.S. subsidiaries are remeasured
into U.S. dollars using the local currency as the functional currency. The
market risk associated with the foreign currency exchange rates is not material
in relation to the Companys consolidated financial position, results of
operations or cash flows. The Company does not have any significant accounts
payable, account receivable or commitments in a currency other than that of the
reporting units functional currency. The Company does not utilize derivative
financial instruments to manage the exposure in non-U.S. operations. 
 ITEM 4CONTROLS AND PROCEDURES The management of the Company, including the Chief Executive Officer and Chief
Financial Officer, have conducted an evaluation of the effectiveness of the
Companys disclosure controls and procedures pursuant to Exchange Act Rule
13a-15 (b) as of the end of the period covered by this quarterly report. Based
on that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Companys disclosure controls and procedures are effective
in ensuring that all material information relating to the Company that is
required to be included in the reports that the Company files with the SEC is
recorded, processed, summarized and reported within the time periods specified
in the SECs rules and forms. There have been no changes in the Companys
internal controls over financial reporting that were identified during the
evaluation that occurred during the Companys last fiscal quarter that have
materially affected, or are reasonably likely to materially affect, the
Companys internal control over financial reporting. Page 25




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TECHNOLOGY SOLUTIONS COMPANY 
 PART II. OTHER INFORMATION 
 ITEM 2CHANGES IN SECURITIES AND USE OF PROCEEDS  (e)
    
    The Company has a stock repurchase program, which
allows for share repurchases of up to 11,525,327 shares of
outstanding Company common stock (the Repurchase Program).
During the six months ended June 30, 2004, the Company did
not purchase any shares. The Company has purchased an
aggregate total of 6,762,627 shares since the inception of
this Repurchase Program in September 2000. As of June 30,
2004, there were 4,762,700 shares available to be purchased
under the Repurchase Program. The timing and size of any
future stock repurchases are subject to market conditions,
stock prices, cash position and other cash requirements. 
 ITEM 4SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Companys 2004 Annual Meeting of Stockholders (the Annual Meeting)
was held on May 6, 2004. Represented at the Annual Meeting, either in
person or by proxy, were 38,190,353 voting shares. The following action
was taken by a vote of the Companys stockholders at the Annual Meeting:
Mr. John R. Purcell was elected as a member of the Companys Board of
Directors receiving 37,476,652 votes in favor of election and 713,701
votes withheld. There were no votes against, abstentions or broker
non-votes with respect to the election of any nominee named. In
addition, the terms of office for Messrs. Raymond P. Caldiero and
Stephen B. Oresman continue until the 2005 Annual Meeting while those of
Messrs. Carl F. Dill, Jr. and Gerald Luterman continue until the 2006
Annual Meeting. 
 ITEM 6EXHIBITS AND REPORT ON FORM 8-K  (a)
    
    Exhibits Exhibit #
    
    Description of Document31.1*
    
    CEO Certification31.2*
    
    CFO Certification32.1*
    
    Certification of Michael R. Gorsage Pursuant to Section 1350 of
Chapter 63 of Title 18 of the United States Code.32.2*
    
    Certification of Timothy P. Dimond Pursuant to Section 1350 of
Chapter 63 of Title 18 of the United States Code.
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TECHNOLOGY SOLUTIONS COMPANY PART II. OTHER INFORMATION  (Continued)  (b)
    
    Reports on Form 8-KOne report on Form 8-K was filed during the quarter
ended June 30, 2004. This report, dated May 7, 2004,
announced the Companys appointment of a new CEO, the
financial results for the quarter ended March 31, 2004,
and the introduction of new service offerings.All other items in Part II are either not applicable to the
Company during the quarter ended June 30, 2004, 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.   *Filed herewith Page 27




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SIGNATURE Pursuant to the requirements 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. TECHNOLOGY SOLUTIONS COMPANYDate: August 12, 2004
    
    By:
    
    /s/ TIMOTHY P. DIMONDTimothy P. DimondChief Financial Officer
 Page 28